From 654c0e15965bb48c60a58260c3cd7568977194a3 Mon Sep 17 00:00:00 2001 From: dsc Date: Wed, 21 Dec 2011 19:12:39 -0800 Subject: [PATCH] Haikus. --- data/haikus/haikus-fav.txt | 279 + data/haikus/haikus-longest_chains.txt | 258 + data/haikus/haikus-no_overlap.txt |96309 +++++++++ data/haikus/haikus.txt |349012 +++++++++++++++++++++++++++++++++ data/state.json | 1 - 5 files changed, 445858 insertions(+), 1 deletions(-) create mode 100644 data/haikus/haikus-fav.txt create mode 100644 data/haikus/haikus-longest_chains.txt create mode 100644 data/haikus/haikus-no_overlap.txt create mode 100644 data/haikus/haikus.txt delete mode 100644 data/state.json diff --git a/data/haikus/haikus-fav.txt b/data/haikus/haikus-fav.txt new file mode 100644 index 0000000..19b6d72 --- /dev/null +++ b/data/haikus/haikus-fav.txt @@ -0,0 +1,279 @@ +On line 24: + Commission’s public + hearings, testimony, and + supporting research—that + + can be studied for + years to come. Much of what is + footnoted in this + + can be found on the + website. In addition, more + materials that + + cannot be released + yet for various reasons + will eventually + + made public through the + National Archives and Records + Administration. + + + +On line 26: + extraordinary + commitment and knowledge of + the members of the + + Commission who were + accorded the honor of + this public service. + + + +On line 40: + American people. + We are keenly aware of the + significance of + + +On line 46: + financial upheaval, + if you will—that wreaked havoc in + communities and + + neighborhoods across this + country. As this report goes + to print, there are more + + million Americans + who are out of work, cannot + find full-time work, + + up looking for work. + About four million families + have lost their homes to + + their mortgage payments. + Nearly trillion in household + wealth has vanished, with + + and life savings swept + away. Businesses, large and small, + have felt the sting of + + recession. There is + much anger about what has transpired, + and justifiably + + so. Many people who + abided by all the rules now + find themselves out of + + about their future prospects. + The collateral damage + of this crisis has + + been real people + and real communities. + The impacts of this + + are likely to be + felt for a generation. + And the nation faces + + so many Americans, + we began our exploration + with our own views and + + how the world’s strongest + financial system came to + the brink of collapse. + + + +On line 50: + said about the crisis. + Yet all of us have been deeply + affected by what + + we have learned in the + course of our inquiry. We have + been at various + + times fascinated, + surprised, and even shocked by what + we saw, heard, and read. + + + +On line 52: + the total collapse + of our financial system + and economy or + + +On line 20: + what caused the crisis. + In that sense, the Commission + has functioned somewhat + + + +On line 20: + the federal law + (the Troubled Asset Relief + Program, known as TARP) + + + +On line 467: + U.S. Congress that "the + apparent froth in housing + markets may have spilled + + + +On line 467: + Still, he reassured + legislators that the U.S. + economy was on + + + +On line 4799: + you get to the end + of the week, you go out and + you refinance that + + And then you get to + the end of another week + and you refinance + + + +On line 4815: + did not indicate + substantial deficiencies. + He wasn’t looking + + + +On line 4817: + a former senior + managing director at + Bear Stearns, said, "I guess + + + +On line 7855: + Firms and families + are still deleveraging and are + uncertain about both + + + +On line 4053: + the head of credit + trading at AIG Financial + Products, told Alan Frost, + + "every f***ing rating + agency we’ve spoken to [came] + out with more downgrades" + + + +On line 4053: + mark it. It’s, it’s, uh, + we’re [unintelligible] + f***ed basically." + + + +On line 4073: + that "[AIG] would be in + fine shape if Goldman wasn’t + hanging its head out + + + +On line 4073: + f***ing number that’s well + bigger than we ever planned + for." He acknowledged + + + +On line 5235: + referred to it as + "bullsh*t capital." Still, the + GSEs kept buying more + + + +On line 5949: + I think that was sort + of pie in the sky dreaming." + Geithner agreed, + + and told Reich so + bluntly. Reich told the FCIC + about a phone call from + + after the rescue. + "About all I can remember + is the foul language + + + +On line 5951: + Geithner telling + him. "‘You guys have handed me + a bag of sh*t.’ I + + + +On line 5957: + selecting a weak + federal regulator, + the Office of Thrift + + + +On line 4209: + Central Bank infused + billions of Euros into + overnight lending markets. + + + +On line 4243: + known as "breaking the + buck" and generally leads + to a fund’s collapse. + + + +On line 4245: + including large banks + such as Bank of America, + US Bancorp, and SunTrust, + + + +On line 4245: + US Bancorp, and SunTrust, + purchased SIV assets from their + money market funds. + + + +On line 4249: + which may include wealthy + investors who invest million + or more. Enhanced cash + + + diff --git a/data/haikus/haikus-longest_chains.txt b/data/haikus/haikus-longest_chains.txt new file mode 100644 index 0000000..49574eb --- /dev/null +++ b/data/haikus/haikus-longest_chains.txt @@ -0,0 +1,258 @@ +Longest Chains of Haikus + +- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - + + loans. Nevertheless, + subprime loans were necessary + for PMBS, because they + + generally bore + higher interest rates and + thus could support the + + yields that investors were + expecting. As subprime loans + were originated, + + Fannie and Freddie + were willing consumers of those + that might meet the AH + + goals; moreover, because + of their lower cost of funds, + they were able to buy + + the "best of the worst," + the highest quality among + the NTMs on off er. + + Th ese factors—the + need for higher yielding loans + and the ability + +- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - + + regulation got + out, industry lobbyists + would rush to complain + + to members of the + congressional committee + with jurisdiction + + over the financial + activity at issue. + According to Levitt, + + these members would then + "harass" the SEC with frequent + letters demanding + + answers to complex + questions and appearances of + officials before + + Congress. These requests + consumed much of the agency’s + time and discouraged + +- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - + + making sense. People + were paying inflated prices + for their homes, and they + + didn’t seem to have + enough income to pay for what + they had bought. Within + + a few years, when he + passed some of these same houses, + he saw that they were + + vacant. "For sale" signs + appeared on the front lawns. And + when he passed again, the + + yards were untended + and the grass was turning brown. + Next, the houses went + + into foreclosure, + and that’s when he noticed that + the empty houses + +- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - + + former senior vice + president, testified to + the FCIC. "When I left + + Moody’s, an analyst’s + worst fear was that he would do + something, or she, that + + would allow him or + her to be singled out for + jeopardizing Moody’s + + market share."123 Clarkson + denied having a "forceful" + management style, and + + his supervisor, + Raymond McDaniel, told the FCIC that + Clarkson was a "good + + manager."124 Former + team managing director + Gary Witt recalled that + +- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - + + billion) to billion) + without engendering the + substantial increase + + in delinquencies that + would ordinarily have + alarmed investors and brought + + the bubble to a + halt.46 Indeed, the absence of + delinquencies had the + + opposite eff ect. + As investors around the world saw + housing prices rise in + + the U.S. without any + signifi cant losses even among + subprime and other + + high-yielding loans, they + were encouraged to buy PMBS + that—although rated AAA—still off + +- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - + + at the Financial + Services Roundtable in early + "But we also don’t + + want to encourage + the abuses; indeed, we want + to do what we can + + to stop these abuses."49 + Fed General Counsel Scott + Alvarez told the FCIC, + + "There was concern that + if you put out a broad rule, + you would stop things that + + were not unfair and + deceptive because you were + trying to get at + + the bad practices and + you just couldn’t think of all + of the details you + +- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - + + an Industrial + Loan Company," November + pp. To approve such + + a proposal, the + Bank Holding Company Act + requires the Fed to + + determine that a + transaction "can reasonably + be expected to + + produce benefits + to the public, such as greater + convenience, increased + + competition, or + gains in efficiency, that + outweigh possible + + adverse effects, such + as undue concentration + of resources, decreased + +- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - + + PMBS. Losses of this + magnitude would certainly + be enough—when combined + + with other losses + on securities and loans + not related to + + mortgages—to call into + question the stability + of a large number + + of banks, investment + banks and other fi nancial + institutions in + + the U.S. and around the + world. However, there was one + other factor that + + exacerbated + the adverse eff ect of the + loss of a market + +- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - + + were generally + prime mortgages, did not suff er + substantial losses + + at the outset of + the mortgage meltdown, although + as the fi nancial + + crisis turned into + a recession and housing + prices continued to + + fall, losses among prime + mortgages began to approach + the level of prime + + mortgage losses that + had occurred in past housing + crises. However, those + +- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - + + true, in part, because + CRA loans are generally + loans to low income + + individuals; + as such, they are more likely + than loans to middle + + income borrowers + to be subprime and Alt-A loans + and thus sought aft er + + by FHA, Fannie and + Freddie and subprime lenders such + as Countrywide; this + + competition is + another reason why their + rates are likely to + diff --git a/data/haikus/haikus-no_overlap.txt b/data/haikus/haikus-no_overlap.txt new file mode 100644 index 0000000..947f07b --- /dev/null +++ b/data/haikus/haikus-no_overlap.txt @@ -0,0 +1,96309 @@ +Found 19940 haiku... + +On line 4: + current financial + and economic crisis in + the United States." In + +On line 4: + Commission presents to + the President, the Congress, + and the American + + people the results + of its examination + and its conclusions + + as to the causes + of the crisis. More than two + years after the worst + +On line 6: + financial crisis, + our economy, as well as + communities and + +On line 6: + the after-shocks. Millions + of Americans have lost their + jobs and their homes, and + +On line 6: + rebound. This report + is intended to provide + a historical + + accounting of what + brought our financial system + and economy to + +On line 8: + better understand + how this calamity came to be. + The Commission was + +On line 8: + as part of the Fraud + Enforcement and Recovery + Act (Public Law 111-21) + +On line 10: + by Congress and signed + by the President in May + This independent, + +On line 10: + panel was composed + of private citizens with + experience in + +On line 10: + banking, and consumer + protection. Six members of + the Commission were + +On line 10: + by the Democratic + leadership of Congress and + four members by the + +On line 12: + specific topics + for inquiry and called for the + examination + +On line 12: + collapse of major + financial institutions + that failed or would have + +On line 12: + the government. This + report fulfills these mandates. + In addition, the + +On line 12: + was instructed to + refer to the attorney + general of the + +On line 12: + any appropriate + state attorney general + any person that the + + Commission found may + have violated the laws + of the United States + +On line 12: + relation to the + crisis. Where the Commission + found such potential + +On line 12: + The Commission used + the authority it was + given to issue + +On line 12: + and the production + of documents, but in the + vast majority + +On line 14: + voluntarily + cooperated with this + inquiry. In the course + +On line 14: + millions of pages of + documents, interviewed more + than witnesses, and + +On line 14: + of public hearings + in New York, Washington, D.C., + and communities + +On line 14: + the country that were + hard hit by the crisis. The + Commission also + + drew from a large body + of existing work about the + crisis developed + +On line 14: + government agencies, + academics, journalists, legal + investigators, + +On line 16: + We have tried in this + report to explain in clear, + understandable terms + +On line 16: + complex financial + system worked, how the pieces fit + together, and how + +On line 16: + occurred. Doing so + required research into broad + and sometimes arcane + +On line 16: + risk management. To + bring these subjects out of the + realm of the abstract, + +On line 16: + Financial, Fannie + Mae, Goldman Sachs, Lehman Brothers, + Merrill Lynch, Moody’s, and + + Wachovia. We looked more + generally at the roles + and actions of scores + +On line 18: + We also studied + relevant policies put in + place by successive + +On line 18: + And importantly, + we examined the roles of + policy makers + +On line 18: + Corporation, the + Federal Reserve Board, the + Federal Reserve + +On line 18: + Housing and Urban + Development, the Office + of the Comptroller + + of the Currency, + the Office of Federal + Housing Enterprise + +On line 18: + its successor, the + Federal Housing Finance + Agency), the Office + +On line 18: + Supervision, the + Securities and Exchange + Commission, and the + + Treasury Department. + Of course, there is much work the + Commission did not + +On line 20: + it to delve into + what caused the crisis. In that + sense, the Commission + +On line 20: + other transportation + accidents so that knowledge + of the probable + +On line 20: + can help avoid future + accidents. Nor were we tasked + with evaluating + + the federal law + (the Troubled Asset Relief + Program, known as TARP) + +On line 20: + major financial + institutions. That duty + was assigned to the + +On line 22: + General for TARP. + This report is not the sole + repository of + + what the panel found. + A website will host a wealth + of information + +On line 24: + contain a stockpile + of materials—including + documents and emails, + +On line 24: + Commission’s public + hearings, testimony, and + supporting research—that + + can be studied for + years to come. Much of what is + footnoted in this + +On line 24: + can be found on the + website. In addition, more + materials that + + cannot be released + yet for various reasons + will eventually + +On line 24: + made public through the + National Archives and Records + Administration. + +On line 26: + extraordinary + commitment and knowledge of + the members of the + + Commission who were + accorded the honor of + this public service. + +On line 26: + from the perspectives + shared with commissioners by + thousands of concerned + +On line 26: + and emails. And we are + grateful to the hundreds of + individuals + +On line 26: + personal accounts + in extensive interviews, + testimony, and + + discussions with the + Commission. We want to thank + the Commission staff, + +On line 30: + particular, Wendy + Edelberg, our executive + director, for the + + professionalism, + passion, and long hours they brought + to this mission in + +On line 30: + report would not have + been possible without their + extraordinary + + dedication. With + this report and our website, + the Commission’s work + + comes to a close. We + present what we have found in the + hope that readers can + +On line 32: + this report to reach + their own conclusions, even as + the comprehensive + +On line 38: + record of this crisis + continues to be written. + CONCLUSIONS OF THE + +On line 40: + Commission has been + called upon to examine + the financial and + + economic crisis + that has gripped our country and + explain its causes + +On line 40: + American people. + We are keenly aware of the + significance of + +On line 40: + economic damage + that America has suffered + in the wake of the + +On line 42: + crisis since the Great + Depression. Our task was first + to determine what + +On line 42: + and how it happened + so that we could understand + why it happened. Here + +On line 42: + our conclusions. We + encourage the American + people to join us + +On line 42: + own assessments based + on the evidence gathered + in our inquiry. If + +On line 42: + from history, we + are unlikely to fully + recover from it. + + Some on Wall Street and + in Washington with a stake + in the status quo + + may be tempted to + wipe from memory the events + of this crisis, or + +On line 42: + unravel myths, and + help us understand how the + crisis could have been + + avoided. It is an + attempt to record history, + not to rewrite it, + +On line 44: + allow it to be + rewritten. To help our fellow + citizens better + +On line 44: + conclusions at the + end of chapters in Parts III, + IV, and V of this + + report. The subject + of this report is of no + small consequence to + +On line 46: + nation. The profound + events of and were neither bumps + in the road nor an + + accentuated + dip in the financial and + business cycles we + +On line 46: + come to expect in + a free market economic + system. This was a + +On line 46: + financial upheaval, + if you will—that wreaked havoc in + communities and + + neighborhoods across this + country. As this report goes + to print, there are more + +On line 48: + million Americans + who are out of work, cannot + find full-time work, + +On line 48: + up looking for work. + About four million families + have lost their homes to + +On line 48: + their mortgage payments. + Nearly trillion in household + wealth has vanished, with + +On line 48: + and life savings swept + away. Businesses, large and small, + have felt the sting of + +On line 48: + recession. There is + much anger about what has transpired, + and justifiably + + so. Many people who + abided by all the rules now + find themselves out of + +On line 48: + about their future prospects. + The collateral damage + of this crisis has + + been real people + and real communities. + The impacts of this + +On line 48: + are likely to be + felt for a generation. + And the nation faces + +On line 50: + so many Americans, + we began our exploration + with our own views and + +On line 50: + how the world’s strongest + financial system came to + the brink of collapse. + +On line 50: + our appointment to + this independent panel, + much had already been + +On line 50: + said about the crisis. + Yet all of us have been deeply + affected by what + + we have learned in the + course of our inquiry. We have + been at various + + times fascinated, + surprised, and even shocked by what + we saw, heard, and read. + +On line 52: + revelation. Much + attention over the past two + years has been focused + +On line 52: + the decisions by + the federal government + to provide massive + +On line 52: + financial system + and rescue large financial + institutions that + +On line 52: + important to fail. + Those decisions—and the deep + emotions surrounding + + them—will be debated + long into the future. But + our mission was to + + ask and answer this + central question: how did it + come to pass that in + +On line 52: + the total collapse + of our financial system + and economy or + +On line 52: + and an array of + companies, as millions of + Americans still lost + + their jobs, their savings, + and their homes1 In this report, + we detail the events + +On line 54: + the crisis. But a + simple summary, as we + see it, is useful + + at the outset. While + the vulnerabilities + that created the + +On line 54: + the making, it was + the collapse of the housing + bubble—fueled by + + low interest rates, + easy and available credit, scant + regulation, and + + toxic mortgages— that + was the spark that ignited + a string of events, which + +On line 56: + fall of Trillions of + dollars in risky mortgages had + become embedded + +On line 56: + as mortgage-related + securities were packaged, + repackaged, and sold to + +On line 56: + world. When the bubble + burst, hundreds of billions of + dollars in losses + +On line 56: + to those mortgages and + had borrowed heavily against + them. This happened not + +On line 56: + in the United States + but around the world. The losses + were magnified by + +On line 58: + crisis reached seismic + proportions in September + with the failure of + + Lehman Brothers and the + impending collapse of the + insurance giant + +On line 58: + International + Group (AIG). Panic fanned by a + lack of transparency + +On line 58: + interconnections + among institutions perceived + to be "too big to + + fail," caused the credit + markets to seize up. Trading + ground to a halt. The + +On line 58: + market plummeted. + The economy plunged into + a deep recession. + +On line 60: + financial system + we examined bears little + resemblance to that + +On line 60: + generation. The + changes in the past three decades alone + have been remarkable. + +On line 60: + markets have become + increasingly globalized. + Technology has + +On line 60: + and complexity + of financial instruments + and transactions. There + +On line 60: + costs of financing + than ever before. And the + financial sector + + itself has become + a much more dominant force + in our economy. + +On line 64: + the amount of debt held + by the financial sector + soared from trillion to + +On line 66: + doubling as a share + of gross domestic product. + The very nature of + +On line 66: + to publicly traded + corporations taking greater + and more diverse kinds + +On line 66: + risks. By the largest U.S. + commercial banks held of the + industry’s assets, + +On line 66: + more than double the + level held in On the eve + of the crisis in + +On line 66: + constituted of + all corporate profits in + the United States, up + +On line 66: + in Understanding + this transformation has been + critical to the + +On line 68: + Now to our major + findings and conclusions, which + are based on the facts + +On line 68: + in this report: they + are offered with the hope that + lessons may be learned to + +On line 70: + future catastrophe. + We conclude this financial + crisis was avoidable. + + The crisis was the + result of human action + and inaction, not + + of Mother Nature + or computer models gone + haywire. The captains + +On line 70: + the public stewards + of our financial system + ignored warnings and + +On line 70: + evolving risks within + a system essential to + the well-being of the + +On line 72: + public. Theirs was a + big miss, not a stumble. While + the business cycle + +On line 72: + this magnitude need + not have occurred. To paraphrase + Shakespeare, the fault lies + + not in the stars, but + in us. Despite the expressed + view of many on Wall + +On line 74: + in Washington that + the crisis could not have been + foreseen or avoided, + +On line 74: + were warning signs. The + tragedy was that they were ignored + or discounted. There + +On line 74: + risky subprime lending + and securitization, + an unsustainable + +On line 74: + in household mortgage + debt, and exponential growth + in financial firms’ + +On line 74: + red flags. Yet there was + pervasive permissiveness; + little meaningful + +On line 76: + taken to quell the + threats in a timely manner. + The prime example + +On line 76: + failure to stem the + flow of toxic mortgages, which + it could have done by + +On line 78: + mortgage-lending standards. + The Federal Reserve was + the one entity + +On line 78: + examination + is replete with evidence + of other failures: + +On line 78: + bought, and sold mortgage + securities they never + examined, did not + + care to examine, + or knew to be defective; + firms depended on + + tens of billions of + dollars of borrowing that + had to be renewed + + each and every night, + secured by subprime mortgage + securities; and + +On line 78: + blindly relied on + credit rating agencies as + their arbiters of risk. + +On line 78: + else could one expect + on a highway where there were + neither speed limits + +On line 80: + widespread failures in + financial regulation + and supervision + +On line 80: + devastating to + the stability of the + nation’s financial + + markets. The sentries + were not at their posts, in no + small part due to the + +On line 80: + self-correcting + nature of the markets and + the ability of + +On line 80: + to effectively + police themselves. More than years + of deregulation + +On line 80: + former Federal + Reserve chairman Alan Greenspan and + others, supported + +On line 80: + by the powerful + financial industry at + every turn, had stripped + + away key safeguards, which + could have helped avoid catastrophe. + This approach had opened + + up gaps in oversight + of critical areas with + trillions of dollars + +On line 82: + race to the weakest + supervisor. Yet we do + not accept the view + +On line 82: + regulators lacked + the power to protect the + financial system. + +On line 84: + had ample power + in many arenas and they chose + not to use it. To + +On line 84: + three examples: the + Securities and Exchange + Commission could have + +On line 84: + more capital and + halted risky practices at the + big investment banks. + +On line 86: + Federal Reserve + Bank of New York and other + regulators could + +On line 86: + down on Citigroup’s + excesses in the run-up to + the crisis. They did + +On line 86: + the runaway mortgage + securitization train. + They did not. In case + +On line 86: + the institutions + they oversaw as safe and sound + even in the face of + +On line 86: + downgrading them just + before their collapse. And where + regulators lacked + +On line 86: + Too often, they lacked + the political will—in + a political + +On line 86: + as the fortitude + to critically challenge + the institutions + +On line 88: + system occurred in + many instances as financial + markets evolved. But as + + the report will show, + the financial industry + itself played a key + + role in weakening + regulatory constraints + on institutions, + +On line 88: + and products. It did + not surprise the Commission + that an industry + +On line 88: + would exert pressure + on policy makers and + regulators. From + +On line 88: + individuals + and political action + committees in the + +On line 88: + made more than billion + in campaign contributions. + What troubled us was + + the extent to which + the nation was deprived of + the necessary strength + +On line 88: + independence of + the oversight necessary to + safeguard financial + +On line 90: + dramatic failures + of corporate governance + and risk management + +On line 90: + institutions were + a key cause of this crisis. + There was a view that + +On line 90: + self-preservation + inside major financial + firms would shield them from + + fatal risk-taking + without the need for a steady + regulatory + +On line 90: + argued, would stifle + innovation. Too many of + these institutions + +On line 90: + too much risk, with too + little capital, and with + too much dependence + +On line 90: + In many respects, this + reflected a funda-CONCLUSIONS OF THE + FINANCIAL CRISIS + +On line 90: + these institutions, + particularly the large + investment banks and + +On line 90: + lenders and creating, + packaging, repackaging, and + selling trillions of + +On line 92: + products. Like Icarus, they + never feared flying ever + closer to the sun. + +On line 94: + grew aggressively + through poorly executed + acquisition and + +On line 94: + more challenging. The + CEO of Citigroup told the + Commission that a + +On line 94: + billion position + in highly rated mortgage + securities would + + "not in any way have + excited my attention," + and the co-head of + +On line 94: + investment bank said + he spent "a small fraction of + of his time on those + +On line 96: + In this instance, too + big to fail meant too big to + manage. Financial + +On line 96: + instances. Too often, + risk management became risk + justification. + +On line 98: + short-term gain—without + proper consideration + of long-term consequences. + + Often, those systems + encouraged the big bet—where + the payoff on the + + upside could be huge + and the downside limited. + This was the case up + + and down the line—from + the corporate boardroom to + the mortgage broker + +On line 100: + examination + revealed stunning instances of + governance breakdowns + +On line 100: + read, among other things, + about AIG senior management’s + ignorance of the + +On line 100: + company’s billion + derivatives exposure + to mortgage-related + +On line 100: + Fannie Mae’s quest for + bigger market share, profits, + and bonuses, which led + + it to ramp up its + exposure to risky loans and + securities as + + the housing market + was peaking; and the costly + surprise when Merrill + +On line 100: + that the company + held billion in "super-senior" + and supposedly + +On line 102: + securities that + resulted in billions of + dollars in losses. + +On line 104: + a combination + of excessive borrowing, + risky investments, and + + lack of transparency + put the financial system + on a collision + +On line 104: + with crisis. Clearly, + this vulnerability + was related to + +On line 104: + and regulation, + but it is significant + enough by itself to + +On line 106: + our attention here. + In the years leading up to + the crisis, too many + +On line 106: + as too many households, + borrowed to the hilt, leaving + them vulnerable + +On line 106: + financial distress + or ruin if the value + of their investments + +On line 108: + even modestly. For + example, as of the five + major investment + + banks—Bear Stearns, Goldman Sachs, + Lehman Brothers, Merrill Lynch, and + Morgan Stanley—were + + operating with + extraordinarily thin + capital. By one + +On line 108: + measure, their leverage + ratios were as high as to + meaning for every + +On line 108: + in assets, there was + only in capital to + cover losses. Less + +On line 108: + a drop in asset + values could wipe out a firm. + To make matters worse, + +On line 108: + borrowing had to + be renewed each and every + day. For example, + +On line 108: + Stearns had billion in + equity and billion in + liabilities + +On line 108: + and was borrowing + as much as billion in the + overnight market. It was + +On line 108: + a small business with + in equity borrowing + million, with of that + + due each and every + day. One can’t really ask + "What were they thinking1" + + when it seems that too + many of them were thinking alike. + And the leverage was + +On line 110: + "window dressing" of + financial reports available + to the investing + + public. The kings of + leverage were Fannie Mae and + Freddie Mac, the two + +On line 112: + the end of Fannie’s + and Freddie’s combined leverage + ratio, including + +On line 114: + owned and guaranteed, + stood at to But financial + firms were not alone in + +On line 114: + the borrowing spree: + from to national mortgage + debt almost doubled, + +On line 114: + the amount of mortgage + debt per household rose more than + from to even while wages + +On line 114: + the housing downturn + hit, heavily indebted + financial firms and + +On line 116: + institutions was + exacerbated by the + risky assets they were + +On line 116: + debt. As the mortgage + and real estate markets + churned out riskier and + +On line 116: + securities, many + financial institutions + loaded up on them. + +On line 116: + the end of Lehman had + amassed billion in commercial + and residential + +On line 116: + securities, which + was almost twice what it held + just two years before, + + and more than four times + its total equity. And + again, the risk wasn’t + +On line 116: + taken on just by + the big financial firms, but + by families, too. + +On line 116: + mortgage borrowers + in and took out "option ARM" + loans, which meant they could + +On line 118: + make payments so low + that their mortgage balances rose + every month. Within + +On line 118: + financial system, + the dangers of this debt were + magnified because + + transparency was not + required or desired. Massive, + short-term borrowing, + +On line 118: + obligations unseen + by others in the market, + heightened the chances the + +On line 118: + rapidly unravel. + In the early part of the + 20th century, we + +On line 118: + protections—the + Federal Reserve as a + lender of last resort, + +On line 118: + deposit insurance, + ample regulations—to + provide a bulwark + +On line 118: + had regularly + plagued America’s banking + system in the 19th + +On line 118: + over the past 30-plus years, + we permitted the growth of + a shadow banking + +On line 118: + and laden with short-term + debt—that rivaled the size of + the traditional + +On line 118: + of over-the-counter derivatives—were + hidden from view, without the + protections we had + +On line 118: + financial meltdowns. + We had a 21st-century + financial system + + with 19th-century + safeguards. When the housing and + mortgage markets cratered, + +On line 120: + lack of transparency, + the extraordinary debt + loads, the short-term loans, + +On line 120: + risky assets all came + home to roost. What resulted + was panic. We had + +On line 122: + reaped what we had sown. + We conclude the government + was ill prepared for + +On line 122: + response added to the + uncertainty and panic + in the financial + +On line 122: + As part of our charge, + it was appropriate to + review government + +On line 122: + in response to the + developing crisis, not + just those policies or + +On line 122: + it, to determine + if any of those responses + contributed to or + + exacerbated + the crisis. As our report + shows, key policy + +On line 124: + Treasury Department, + the Federal Reserve Board, + and the Federal + +On line 124: + Bank of New York—who + were best positioned to watch + over our markets were + +On line 126: + ill prepared for the + events of and Other agencies + were also behind + +On line 126: + were hampered because + they did not have a clear grasp + of the financial + +On line 126: + charged with overseeing, + particularly as it + had evolved in the years + + leading up to the + crisis. This was in no small + measure due to the + +On line 126: + of transparency in + key markets. They thought risk had + been diversified + + when, in fact, it had + been concentrated. Time and + again, from the spring of + +On line 126: + an ad hoc basis + with specific programs to + put fingers in the + +On line 126: + comprehensive and + strategic plan for containment, + because they lacked a + +On line 126: + interconnections + in the financial markets. + Some regulators + + have conceded this + error. We had allowed the + system to race ahead + + of our ability + to protect it. While there was + some awareness of, or + +On line 128: + least a debate about, + the housing bubble, the record + reflects that senior + +On line 128: + officials did not + recognize that a bursting + of the bubble could + +On line 128: + threaten the entire + financial system. Throughout + the summer of both + + Federal Reserve + Chairman Ben Bernanke and Treasury + Secretary Henry + +On line 128: + that the turmoil in + the subprime mortgage markets + would be contained. When + + Bear Stearns’s hedge funds, which + were heavily invested + in mortgage-related + +On line 128: + implications of + the collapse. Despite the fact + that so many other + + funds were exposed to + the same risks as those hedge funds, + the Bear Stearns funds were + +On line 128: + be "relatively + unique." Days before the collapse + of Bear Stearns in March + +On line 130: + SEC Chairman Christopher + Cox expressed "comfort about the + capital cushions" + +On line 130: + big investment banks. + It was not until August + just weeks before the + +On line 130: + Mae and Freddie Mac, + that the Treasury Department + understood the full + +On line 130: + conditions of those + two institutions. And just + a month before Lehman’s + +On line 130: + Bank of New York was + still seeking information + on the exposures + +On line 132: + In addition, the + government’s inconsistent + handling of major + +On line 132: + rescue Bear Stearns and + then to place Fannie Mae and + Freddie Mac into + +On line 132: + Lehman Brothers and then + to save AIG—increased uncertainty + and panic in the + +On line 134: + we deeply respect and + appreciate the efforts + made by Secretary + +On line 134: + Bernanke, and Timothy + Geithner, formerly + president of the + +On line 134: + Bank of New York and + now treasury secretary, and + so many others who + +On line 134: + to stabilize our + financial system and our + economy in the + +On line 136: + a systemic breakdown + in accountability and + ethics. The integrity + +On line 136: + and the public’s trust in + those markets are essential + to the economic + +On line 136: + financial system + and our economy rely + on the notions of + +On line 136: + In our economy, + we expect businesses and + individuals + +On line 136: + pursue profits, at + the same time that they produce + products and services + +On line 138: + been the case in past + speculative booms and busts—we + witnessed an erosion + +On line 138: + exacerbated + the financial crisis. This + was not universal, + + but these breaches stretched + from the ground level to the + corporate suites. They + +On line 138: + in significant + financial consequences but + also in damage + +On line 138: + the trust of investors, + businesses, and the public + in the financial + +On line 140: + according to one + measure, that the percentage + of borrowers who + +On line 140: + just a matter of + months after taking a loan + nearly doubled from + +On line 140: + the summer of to + late This data indicates + they likely took out + +On line 140: + the capacity + or intention to pay. You + will read about mortgage + + brokers who were paid + "yield spread premiums" by lenders + to put borrowers + + into higher-cost + loans so they would get bigger + fees, often never + +On line 140: + mortgage fraud grew 20-fold + between and and then more than + doubled again between + +On line 142: + and One study places the + losses resulting from fraud + on mortgage loans made + +On line 144: + at billion. Lenders made + loans that they knew borrowers + could not afford and + +On line 144: + of the loans they were + originating could result + in "catastrophic + + consequences." Less than + a year later, they noted + that certain high-risk + +On line 144: + result not only + in foreclosures but also + in "financial and + + reputational + catastrophe" for the firm. But + they did not stop. And + +On line 146: + sampled loans they were + purchasing to package and + sell to investors. They + +On line 146: + a significant + percentage of the sampled + loans did not meet their + +On line 146: + of many prospectuses + provided to investors found + that this critical + + information was + not disclosed. THESE CONCLUSIONS + must be viewed in the + +On line 148: + to pin this crisis + on mortal flaws like greed and + CONCLUSIONS OF THE + +On line 148: + COMMISSION xxiii + hubris would be simplistic. It + was the failure to + +On line 150: + for human weakness + that is relevant to this + crisis. Second, we + +On line 150: + believe the crisis + was a result of human + mistakes, misjudgments, + +On line 150: + in systemic failures + for which our nation has paid + dearly. As you read + + this report, you will + see that specific firms and + individuals + +On line 150: + Yet a crisis of + this magnitude cannot be + the work of a few + + bad actors, and such + was not the case here. At the + same time, the breadth of + +On line 150: + is at fault"; many firms + and individuals did + not participate + +On line 152: + We do place special + responsibility with + the public leaders + + charged with protecting + our financial system, those + entrusted to run + +On line 152: + chief executives + of companies whose failures + drove us to crisis. + +On line 152: + of significant + responsibility and + obligation. Tone at + + the top does matter + and, in this instance, we were + let down. No one said + +On line 152: + must also accept + responsibility for + what we permitted + +On line 154: + unanimously, we + acquiesced to or embraced + a system, a set + +On line 160: + and actions, that gave + rise to our present predicament. THIS + REPORT DESCRIBES THE + +On line 160: + and the system that + propelled our nation toward + crisis. The complex + + machinery of our + financial markets has many + essential gears—some + +On line 160: + a critical role + as the crisis developed + and deepened. Here we + +On line 160: + our conclusions about + specific components of + the system that we + + believe contributed + significantly to the + financial meltdown. + +On line 162: + pipeline lit and spread + the flame of contagion and + crisis. When housing + + prices fell and mortgage + borrowers defaulted, the + lights began to dim + +On line 164: + toxic mortgages from + neighborhoods across America + to investors around the + + globe. Many mortgage lenders + set the bar so low that lenders + simply took eager + +On line 166: + disregard for a + borrower’s ability to + pay. Nearly one-quarter + +On line 166: + made in the first half + of were interest-only loans. + During the same year, + +On line 166: + originated by + Countrywide and Washington + Mutual had low- + +On line 168: + lending, including + predatory and fraudulent + practices, became more + +On line 168: + Federal Reserve + and other regulators + and authorities + + heard warnings from many + quarters. Yet the Federal + Reserve neglected + +On line 168: + mission "to ensure + the safety and soundness of + the nation’s banking + +On line 168: + financial system + and to protect the credit + rights of consumers." It + +On line 168: + build the retaining + wall before it was too late. + And the Office of + +On line 168: + the Office of Thrift + Supervision, caught up in + turf wars, preempted + + state regulators + from reining in abuses. While + many of these mortgages + + were kept on banks’ books, + the bigger money came from + global investors who + +On line 170: + cash into newly + created mortgage-related + securities. It + +On line 170: + regulators alike + that risk had been conquered: the + investors held highly + +On line 170: + they thought were sure to + perform; the banks thought they had + taken the riskiest + +On line 170: + firms making profits + and borrowing costs reduced. + But each step in the + +On line 170: + on the next step to + keep demand going. From the + speculators who + + flipped houses to the + mortgage brokers who scouted + the loans, to the lenders + +On line 170: + firms that created + the mortgage-backed securities, + collateralized + +On line 170: + obligations (CDOs), CDOs + squared, and synthetic CDOs: no + one in this pipeline + + of toxic mortgages + had enough skin in the game. They + all believed they could + + off-load their risks on + a moment’s notice to the + next person in line. + +On line 170: + wrong. When borrowers + stopped making mortgage payments, + the losses—amplified + +On line 170: + through the pipeline. As + it turned out, these losses were + concentrated in + +On line 172: + millions of mortgages + so efficiently has proven + to be difficult + +On line 172: + erected barriers + to modifying mortgages + so families can + +On line 174: + housing market and + financial institutions. + We conclude over-the-counter + +On line 174: + The enactment of + legislation in to ban + the regulation + +On line 174: + the federal and + state governments of over-the-counter + (OTC) derivatives + + was a key turning + point in the march toward the + financial crisis. + +On line 176: + to corporations, + to farmers, and to investors, + derivatives have + + been used to hedge against, + or speculate on, changes in + prices, rates, or indices + + or even on events such + as the potential defaults + on debts. Yet, without + +On line 176: + rapidly spiraled out + of control and out of sight, + growing to trillion + +On line 176: + and collateral + requirements; speculation; + interconnections + +On line 178: + in this market. OTC + derivatives contributed + to the crisis in + +On line 178: + sold to investors to + protect against the default or + decline in value + + of mortgage-related + securities backed by risky + loans. Companies sold + +On line 178: + tune of billion, in + AIG’s case—to investors in these + newfangled mortgage + +On line 178: + to launch and expand + the market and, in turn, to + further fuel the + +On line 180: + were essential to + the creation of synthetic + CDOs. These synthetic + +On line 180: + on the performance + of real mortgage-related + securities. They + +On line 180: + multiple bets on + the same securities and + helped spread them throughout + +On line 182: + system. Goldman Sachs + alone packaged and sold billion + in synthetic CDOs + +On line 182: + July CONCLUSIONS + OF THE FINANCIAL CRISIS + INQUIRY COMMISSION + +On line 184: + to May Synthetic + CDOs created by Goldman + referenced more than + +On line 186: + securities, and + of them were referenced at + least twice. This is apart + +On line 188: + in synthetic CDOs + created by other firms. + Finally, when the + +On line 188: + and crisis followed, + derivatives were in the + center of the storm. + +On line 188: + not been required to + put aside capital reserves + as a cushion for + + the protection it + was selling, was bailed out when + it could not meet its + +On line 188: + committed more than + billion because of concerns + that AIG’s collapse would + + trigger cascading + losses throughout the global + financial system. + +On line 188: + the existence of + millions of derivatives + contracts of all types + +On line 188: + panic, helping to + precipitate government + assistance to those + +On line 190: + conclude the failures + of credit rating agencies + were essential cogs + +On line 190: + wheel of financial + destruction. The three credit + rating agencies were + +On line 190: + of the financial + meltdown. The mortgage-related + securities at + +On line 190: + heart of the crisis + could not have been marketed + and sold without their + +On line 190: + regulatory + capital standards were hinged + on them. This crisis + + could not have happened + without the rating agencies. + Their ratings helped the + +On line 190: + market soar and their + downgrades through and wreaked havoc + across markets and firms. + + In our report, you + will read about the breakdowns at + Moody’s, examined by + +On line 192: + This compares with six + private-sector companies + in the United States + +On line 192: + early In alone, Moody’s + put its triple-A stamp of approval + on mortgage-related + +On line 192: + were disastrous: of + the mortgage securities + rated triple-A that year + + ultimately were + downgraded. You will also + read about the forces at + +On line 194: + behind the breakdowns + at Moody’s, including the flawed + computer models, + +On line 194: + from financial firms + that paid for the ratings, the + relentless drive for + + market share, the lack + of resources to do the job + despite record profits, + + and the absence of + meaningful public oversight. + And you will see that + + without the active + participation of the + rating agencies, the + +On line 194: + for mortgage-related + securities could not have + been what it became. + +On line 200: + ARE MANY COMPETING + VIEWS as to the causes of + this crisis. In this + +On line 200: + the Commission has + endeavored to address key + questions posed to us. + +On line 200: + availability and + excess liquidity, the + role of Fannie Mae + + and Freddie Mac (the + GSEs), and government housing + policy. First, as + +On line 200: + in our report, we + outline monetary policies + and capital flows + +On line 200: + years leading up to + the crisis. Low interest + rates, widely available + +On line 200: + international + investors seeking to put their + money in real + +On line 202: + a credit bubble. + Those conditions created + increased risks, which should + + have been recognized + by market participants, + policy makers, + +On line 202: + liquidity did + not need to cause a crisis. + It was the failures + +On line 202: + in excesses in + the mortgage and financial + markets—that were the + + principal causes + of this crisis. Indeed, the + availability of + +On line 204: + directions. Second, + we examined the role of + the GSEs, with Fannie + +On line 204: + government-sponsored + enterprises had a deeply + flawed business model + +On line 204: + corporations with + the implicit backing of + and subsidies from + +On line 206: + mortgage exposure + and market position were + significant. In + +On line 208: + and they decided + to ramp up their purchase and + guarantee of risky + +On line 208: + just as the housing + market was peaking. They used + their political + +On line 208: + for decades to ward off + effective regulation + and oversight—spending + +On line 210: + on lobbying from + to They suffered from many of + the same failures of + +On line 210: + management as the + Commission discovered in + other financial + +On line 212: + the third quarter of + the Treasury Department had + provided billion + +On line 214: + We conclude that these + two entities contributed + to the crisis, but + +On line 214: + maintained their value + throughout the crisis and did + not contribute to + + the significant + financial firm losses that + were central to the + + financial crisis. + The GSEs participated + in the expansion + +On line 216: + subprime and other + risky mortgages, but they followed + rather than led Wall Street + +On line 216: + other lenders in the + rush for fool’s gold. They purchased + the highest rated + +On line 216: + added helium to + the housing balloon, but their + purchases never + +On line 216: + majority of + the market. Those purchases + represented of + +On line 218: + non-GSE subprime mortgage-backed + securities in with the + share rising to in + +On line 218: + loans and related + securities in order + to meet stock market + +On line 218: + regain market share, + and to ensure generous + compensation for + + their executives + and employees—justifying + their activities + +On line 218: + the broad and sustained + public policy support + for homeownership. + +On line 220: + of the loans purchased + or guaranteed by Fannie + and Freddie. While they + +On line 220: + substantial losses, + delinquency rates for GSE loans + were substantially + +On line 220: + securitized by + other financial firms. For + example, data + +On line 220: + Commission for a + subset of borrowers with + similar credit + +On line 220: + below 660—show that by + the end of GSE mortgages were + far less likely to + +On line 222: + non-GSE securitized + mortgages: versus We also + studied at length how + +On line 222: + Development’s (HUD’s) + affordable housing goals for + the GSEs affected + +On line 222: + CONCLUSIONS OF THE + FINANCIAL CRISIS INQUIRY + COMMISSION xxvii risky + +On line 222: + on the evidence + and interviews with dozens of + individuals + +On line 222: + this subject area, we + determined these goals only + contributed marginally + +On line 224: + Fannie’s and Freddie’s + participation in those + mortgages. Finally, + +On line 224: + the matter of whether + government housing policies + were a primary + +On line 224: + for decades, government + policy has encouraged + homeownership through + +On line 224: + programs, and mandates. + These policies were put in place + and promoted by + +On line 224: + and Congresses—indeed, + both Presidents Bill Clinton + and George W. Bush set + +On line 226: + homeownership. In + conducting our inquiry, we + took a careful look + +On line 226: + noted above, and the + Community Reinvestment + Act (CRA). The CRA was + +On line 226: + enacted in to + combat "redlining" by banks—the + practice of denying + +On line 226: + individuals + and businesses in certain + neighborhoods without + +On line 226: + The CRA requires banks + and savings and loans to lend, + invest, and provide + +On line 228: + the CRA was not a + significant factor in + subprime lending or + +On line 228: + subprime lenders were not + subject to the CRA. Research + indicates only + +On line 228: + of high-cost loans—a + proxy for subprime loans—had any + connection to the + + law. Loans made by CRA-regulated + lenders in the neighborhoods in + which they were required + +On line 228: + were half as likely + to default as similar + loans made in the same + +On line 228: + by independent + mortgage originators not + subject to the law. + +On line 230: + this respect: As a + nation, we set aggressive + homeownership goals + +On line 230: + extend credit to + families previously + denied access to + +On line 230: + the philosophy + of opportunity was + being matched by the + +On line 230: + ground. Witness again the + failure of the Federal + Reserve and other + +On line 230: + irresponsible + lending. Homeownership peaked + in the spring of and + +On line 230: + began to decline. + From that point on, the talk of + opportunity + +On line 230: + tragically at + odds with the reality + of a financial + +On line 236: + disaster in the + making. WHEN THIS COMMISSION + began its work months + +On line 236: + some imagined that the + events of and their consequences + would be well behind + + us by the time we + issued this report. Yet more + than two years after + +On line 236: + an unprecedented + manner in our financial + markets, our country + +On line 236: + aftereffects of + the calamity. Our financial + system is, in many + + respects, still unchanged + from what existed on the + eve of the crisis. + +On line 236: + in the wake of the + crisis, the U.S. financial + sector is now more + +On line 236: + While we have not been + charged with making policy + recommendations, + + the very purpose of + our report has been to take + stock of what happened + +On line 236: + we can plot a new + course. In our inquiry, we found + dramatic breakdowns + +On line 236: + profound lapses in + regulatory oversight, + and near fatal flaws + +On line 238: + series of choices + and actions led us toward + a catastrophe for + +On line 238: + we were ill prepared. + These are serious matters + that must be addressed + +On line 238: + to restore faith in + our financial markets, to + avoid the next crisis, + +On line 238: + rebuild a system + of capital that provides + the foundation for + +On line 240: + shared prosperity. + The greatest tragedy would be to + accept the refrain + +On line 240: + no one could have seen + this coming and thus nothing + could have been done. If + +On line 242: + this notion, it will + happen again. This report should + not be viewed as the + + end of the nation’s + examination of this + crisis. There is still + +On line 244: + is our collective + responsibility. It + falls to us to make + +On line 261: + we want different + results. PART I Crisis on + the Horizon BEFORE + +On line 263: + examining the + worst financial meltdown since + the Great Depression, + +On line 263: + Financial Crisis + Inquiry Commission reviewed + millions of pages of + +On line 265: + people from all walks + of life—to find out how and + why it happened. In + +On line 265: + public officials + testified that they had been + blindsided by the + + crisis, describing + it as a dramatic and + mystifying turn + + of events. Even among those + who worried that the housing + bubble might burst, few—if + +On line 267: + the magnitude of + the crisis that would ensue. + Charles Prince, the former + +On line 267: + chief executive + officer of Citigroup + Inc., called the collapse + +On line 267: + housing prices "wholly + unanticipated."1 Warren + Buffett, the chairman + +On line 267: + of Berkshire Hathaway + Inc., which until was the largest + single shareholder + +On line 267: + Moody’s Corporation, + told the Commission that "very, + very few people could + +On line 267: + the bubble," which he + called a "mass delusion" shared by + million Americans."2 + +On line 267: + the chairman and chief + executive officer + of Goldman Sachs Group, + +On line 269: + likened the financial + crisis to a hurricane.3 + Regulators echoed + +On line 269: + similar refrain. + Ben Bernanke, the chairman of the + Federal Reserve + +On line 269: + told the Commission + a "perfect storm" had occurred + that regulators + +On line 269: + when asked about whether the + Fed’s lack of aggressiveness + in regulating + +On line 269: + market during the + housing boom was a failure, + Bernanke responded, "It + +On line 269: + indeed. I think it + was the most severe failure + of the Fed in this + +On line 269: + episode."4 Alan Greenspan, the Fed + chairman during the two decades + leading up to the + +On line 269: + Commission that it + was beyond the ability + of regulators + +On line 271: + cannot identify + the timing of a crisis, + or anticipate + + exactly where it + will be located or how + large the losses and + + spillovers will be."5 In fact, + there were warning signs. In the + decade preceding the + +On line 273: + there were many signs that + house prices were inflated, that + lending practices had + + spun out of control, + that too many homeowners were + taking on mortgages + + and debt they could ill + afford, and that risks to the + financial system + +On line 273: + were clanging inside + financial institutions, + regulatory + +On line 273: + organizations, + state law enforcement agencies, + and corporations + + throughout America, + as well as in neighborhoods + across the country. Many + +On line 273: + to avoid the train wreck. + While countless Americans joined + in the financial + +On line 273: + others were shouting + to government officials + in Washington and + +On line 273: + to what would become + a human disaster, not + just an economic + +On line 275: + "Everybody in the + whole world knew that the mortgage + bubble was there," said + +On line 275: + the former chairman + of the Securities and + Exchange Commission + +On line 275: + President George H. + W. Bush. "I mean, it wasn’t + hidden. You cannot + +On line 275: + at any of this and + say that the regulators + did their job. This was + +On line 275: + some hidden problem. + It wasn’t out on Mars or + Pluto or somewhere. + +On line 275: + It was right here. You + can’t make trillions of dollars’ + worth of mortgages and + +On line 277: + notice."6 Paul McCulley, a + managing director at + PIMCO, one of the + +On line 277: + money management + firms, told the Commission that + he and his colleagues + +On line 277: + to get worried about + "serious signs of bubbles" + in they therefore sent + +On line 279: + cities to do what he + called "old-fashioned shoe-leather research," + talking to real + +On line 279: + brokers, and local + investors about the housing and + mortgage markets. They + +On line 279: + outright degradation + of underwriting standards," + McCulley asserted, and + +On line 279: + shared what they had learned + when they got back home to the + company’s Newport + +On line 279: + when our group came back, + they reported what they saw, + and we adjusted + +On line 281: + those who remembered + the savings and loan crisis, + knew that age-old rules of + +On line 281: + cast aside. Arnold Cattani, + the chairman of Bakersfield, + California–based + +On line 281: + the Commission that + he grew uncomfortable with + the "pure lunacy" + +On line 281: + saw in the local + home-building market, fueled + by "voracious" Wall + +On line 281: + investment banks; he + thus opted out of certain + kinds of investments + +On line 283: + vice chairman and chief + executive officer + of Service 1st Bank + + of Nevada, told the + FCIC that the desire for a + "high and quick return" + + blinded people to + fiscal realities. "You + may recall Tommy + + Lee Jones in Men in + Black, where he holds a device + in the air, and with + +On line 283: + bright flash wipes clean the + memories of everyone + who has witnessed an + +On line 285: + event," he said.9 Unlike + so many other bubbles—tulip bulbs + in Holland in the + +On line 285: + South Sea stocks in the + 1700s, Internet stocks in the + late 1990s—this one involved + +On line 285: + the economy: the + family home. Homes are the + foundation upon + +On line 285: + economic structures + rest. Children usually go + to schools linked to their + +On line 285: + addresses; local + governments decide how much + money they can spend + + on roads, firehouses, + and public safety based on + how much property + + tax revenue they have; + house prices are tied to consumer + spending. Downturns in + +On line 289: + cause ripple effects + almost everywhere. When the + Federal Reserve + +On line 289: + mortgage rates fell, home + refinancing surged, climbing + from billion in to + +On line 289: + allowing people + to withdraw equity built + up over previous + + decades and to consume + more, despite stagnant wages. Home + sales volume started + +On line 289: + and average home + prices nationwide climbed, rising + in eight years by one + +On line 289: + measure and hitting + a national high of in + early Home prices in + +On line 289: + skyrocketed: prices + increased nearly two and one-half + times in Sacramento, + +On line 289: + example, in just + five years,12 and shot up by about + the same percentage + +On line 289: + Prices about doubled in + more than metropolitan + areas, including + +On line 289: + Poughkeepsie, San Diego, + and West Palm Beach.13 Housing starts + nationwide climbed from + +On line 291: + reached a record in the + spring of although it wouldn’t + rise an inch further + +On line 291: + machine kept churning + for another three years. By + refinancing their + +On line 293: + equity between + and including billion in + alone, more than seven + +On line 293: + speculators and + potential homeowners stood + in line outside new + +On line 293: + for a chance to buy + houses before the ground had + even been broken. By + +On line 293: + the first half of more + than one out of every ten + home sales was to an + +On line 293: + or someone buying + a second home.15 Bigger was + better, and even the + +On line 293: + ballooned in size; the + floor area of an average + new home grew by to + +On line 295: + decade from to Money + washed through the economy like + water rushing through + +On line 297: + Low interest rates + and then foreign capital + helped fuel the boom. + +On line 297: + real estate agents, + loan brokers, and appraisers + profited on Main + + Street, while investment + bankers and traders on Wall Street moved + even higher on the + + American earnings + pyramid and the share prices of + the most aggressive + +On line 297: + firms reached all-time + highs.16 Homeowners pulled cash out + of their homes to send + + their kids to college, + pay medical bills, install + designer kitchens with + +On line 297: + vacations, or launch + new businesses. They also + paid off credit cards, + +On line 297: + as personal debt + rose nationally. Survey + evidence shows that + +On line 297: + homeowners pulled out + cash to buy a vehicle + and over spent the cash + +On line 297: + tax payments, clothing, + gifts, and living expenses.17 + Renters used new forms of + +On line 297: + homes and to move to + suburban subdivisions, + erect-ing swing sets in + +On line 299: + backyards and enrolling + their children in local schools. + In an interview + +On line 299: + the longtime CEO of + Countrywide Financial—a lender + brought down by its risky + +On line 301: + rush" mentality + overtook the country during + these years, and that he + +On line 301: + swept up in it as + well: "Housing prices were rising + so rapidly—at a rate + +On line 301: + that I’d never seen + in my years in the business—that + people, regular + + people, average + people got caught up in the + mania of buying + + a house, and flipping + it, making money. It was + happening. They buy + +On line 303: + house, make and talk at + a cocktail party about it. + Housing suddenly + + went from being part + of the American dream to + house my family + + to settle down—it + became a commodity. + That was a change in + +On line 305: + the culture. It was + sudden, unexpected."18 On + the surface, it looked + +On line 305: + into investments + called securities, which kept + cash flowing from Wall + + Street into the U.S. + housing market—were tools that had + worked well for many years. + +On line 307: + going wrong. Like a + science fiction movie in which + ordinary household + +On line 307: + were being transformed. + The time-tested 30-year fixed-rate mortgage, + with a down payment, + +On line 307: + of style. There was a + burgeoning global demand + for residential + +On line 307: + securities that + offered seemingly solid + and secure returns. + +On line 307: + around the world clamored + to purchase securities + built on American + +On line 309: + estate, seemingly + one of the safest bets in the + world. Wall Street labored + +On line 309: + demand. Bond salesmen + earned multi-million-dollar + bonuses packaging + + and selling new kinds + of loans, offered by new kinds + of lenders, into new + + kinds of investment + products that were deemed safe but + possessed complex and + +On line 309: + changes—these financial + innovations, they said, had + lowered borrowing + +On line 309: + consumers and moved risks + away from the biggest and most + systemically + +On line 309: + in ways that were not + understood by either the + captains of finance + +On line 309: + the system’s public + stewards. In fact, some of the + largest institutions + +On line 309: + on what would prove to + be debilitating risks. + Trillions of dollars + + had been wagered on + the belief that housing prices + would always rise and + + that borrowers would + seldom default on mortgages, + even as their debt grew. + +On line 309: + loans had been bundled + into investment products + in ways that seemed to + +On line 309: + worlds—high-yield, risk-free—but + instead, in many cases, would + prove to be high-risk + + and yield-free. All this + financial creativity + was a lot "like cheap + +On line 311: + Mayo, a managing + director and financial + services analyst + +On line 311: + repackaged to sell at + a premium," he told the + Commission. "It might + + taste good for a while, + but then you get headaches later + and you have no idea + +On line 313: + really inside."19 + The securitization + machine began to + +On line 313: + these once-rare mortgage + products with their strange-sounding + names: Alt-A, subprime, I-O + +On line 313: + low-doc, no-doc, or + ninja (no income, no job, + no assets) loans; 2–28s + +On line 313: + piggyback second + mortgages; payment-option or + pick-a-pay adjustable + +On line 313: + variants on adjustable-rate + mortgages, called "exploding" ARMs, + featured low monthly + +On line 313: + at first, but payments + could suddenly double or + triple, if borrowers + +On line 313: + of different kinds + of mortgages available on the + market, confounding + +On line 313: + examine the fine + print, baffling conscientious + borrowers who tried + + to puzzle out their + implications, and opening + the door for those who + +On line 315: + in on the action. + Many people chose poorly. Some + people wanted to + + live beyond their means, + and by mid-2005, nearly one-quarter + of all borrowers + +On line 315: + them to defer the + payment of principal.20 Some + borrowers opted + +On line 315: + nontraditional + mortgages because that was the + only way they could + +On line 315: + foothold in areas such + as the sky-high California + housing market.21 Some + +On line 315: + and Georgia became + a particular target + for investors who used + +On line 315: + to acquire real + estate.22 Some were misled by + salespeople who came + +On line 315: + homes and persuaded + them to sign loan documents + on their kitchen tables. + +On line 315: + mortgage brokers who + earned more money placing them + in risky loans than in + + safe ones.23 With these loans, + buyers were able to bid up + the prices of houses + +On line 315: + if they didn’t have + enough income to qualify + for traditional + +On line 317: + these exotic loans + had existed in the past, + used by high-income, + +On line 317: + secure people as + a cash-management tool. Some + had been targeted + +On line 317: + they refinanced. But + the instruments began to + deluge the larger + +On line 317: + and The changed occurred + "almost overnight," Faith Schwartz, then an + executive at + +On line 317: + lender Option One and + later the executive + director of Hope + +On line 317: + "I would suggest most + every lender in the country + is in it, one way + +On line 319: + a lot of people + really understood the + potential hazards + + of these new loans. They + were new, they were different, + and the consequences + + were uncertain. But + it soon became apparent + that what had looked like + +On line 319: + the United States climbed + from trillion in to trillion + in The mortgage debt + +On line 319: + American households + rose almost as much in the + six years from to as + + it had over the course + of the country’s more than 200-year + history. The amount + +On line 319: + per household rose from + in to in With a simple + flourish of a pen + + on paper, millions + of Americans traded away + decades of equity + + tucked away in their homes. + Under the radar, the lending + and the financial + +On line 321: + mutated. In the + past, lenders had avoided making + unsound loans because + + they would be stuck with + them in their loan portfolios. + But because of the + +On line 321: + clear anymore who the + lender was. The mortgages would be + packaged, sliced, repackaged, + +On line 321: + securities to + an assortment of hungry + investors. Now even the + +On line 323: + find a buyer. More + loan sales meant higher profits + for everyone in + +On line 323: + that were expanding + mortgage originations. He + crisscrossed the nation, + +On line 325: + originators a + year in auditoriums + and classrooms. is clients + + included many of + the largest lenders—Countrywide, Ameriquest, and Ditech among + them. Most of their new + + hires were young, with no + mortgage experience, fresh + out of school and with + +On line 327: + "flipping burgers," he + told the FCIC. Given the right + training, however, + +On line 329: + could "easily" earn + millions.26 "I was a sales and + marketing trainer + + in terms of helping + people to know how to sell + these products to, in + +On line 329: + and unsuspecting + borrowers," he said. He taught + them the new playbook: + +On line 329: + to be concerned about + the quality of the loan, + whether it was suitable + + for the borrower + or whether the loan performed. In + fact, you were in a + +On line 329: + encouraged not to + worry about those macro issues." + He added, "I knew that + + the risk was being + shunted off. I knew that we + could be writing crap. + +On line 329: + in the end it was + like a game of musical + chairs. Volume might go + + down but we were not + going to be hurt."27 On Wall + Street, where many of these + +On line 331: + were packaged into + securities and sold to + investors around the globe, + + a new term was coined: + IBGYBG, "I’ll be gone, you’ll + be gone."28 It referred + + to deals that brought in + big fees up front while risking + much larger losses + +On line 331: + the future. And, for + a long time, IBGYBG worked + at every level. + +On line 333: + entered the pipeline + soon after borrowers signed + the documents and + + picked up their keys. Loans + were put into packages and + sold off in bulk to + +On line 333: + banks such as Merrill + Lynch, Bear Stearns, and Lehman Brothers, + and commercial banks + + and thrifts such as Citibank, + Wells Fargo, and Washington + Mutual. The firms + +On line 333: + mostly be stamped with + triple-A ratings by the credit + rating agencies, and + +On line 333: + riskier portions of + these securities—which would then + be sold to other + +On line 333: + would also receive + the coveted triple-A ratings + that investors believed + + attested to their + quality and safety. Some + investors would buy an + + invention from the + 1990s called a credit default + swap (CDS) to protect + +On line 333: + For every buyer + of a credit default swap, + there was a seller: + + as these investors made + opposing bets, the layers + of entanglement + +On line 335: + The instruments grew + more and more complex; CDOs were + constructed out of + +On line 335: + creating CDOs squared. + When firms ran out of real + product, they started + +On line 335: + but just of bets on + other mortgage products. Each + new permutation + +On line 335: + to extract more fees + and trading profits. And each + new layer brought in + +On line 335: + investors wagering + on the mortgage market—even well + after the market + + had started to turn. + So by the time the process was + complete, a mortgage + +On line 335: + in south Florida + might become part of dozens of + securities owned + +On line 335: + Treasury Secretary + Timothy Geithner, + the president of + +On line 335: + crisis, described the + resulting product as "cooked + spaghetti" that became + + hard to "untangle."29 + Ralph Cioffi spent several + years creating CDOs + +On line 337: + and a couple of + more years on the repurchase + or "repo" desk, which + +On line 337: + responsible for + borrowing money every + night to finance Bear + +On line 337: + Cioffi created + a hedge fund within Bear Stearns + with a minimum + +On line 337: + money—up to borrowed + for every from investors—to buy + CDOs. Cioffi’s first fund + +On line 337: + for investors in and + in 2005—after the annual + management fee and + +On line 337: + profit for Cioffi + and his Bear Stearns team—and grew + to almost billion + +On line 337: + of In the fall of + he created another, + more aggressive fund. + +On line 337: + This one would shoot for + leverage of up to to By + the end of the two + +On line 337: + in securities + issued by CDOs centered on + housing. As a CDO + +On line 339: + mortgage-related CDOs + for other investors. Cioffi’s + investors and others + +On line 341: + high-yielding mortgage + securities. That, in turn, + required high-yielding + +On line 341: + borrowers, urging + them to buy or refinance + homes. Direct-mail + +On line 341: + people’s mailboxes.30 + Dancing figures, depicting + happy homeowners, + +On line 341: + hook with calls from loan + officers offering the + latest loan products: + + One percent loan! (But + only for the first year.) No + money down! (Leaving + +On line 341: + if home prices fell.) No + income documentation + needed! (Mortgages soon + +On line 341: + industry itself.) + Borrowers answered the call, + many believing that + + with ever-rising prices, + housing was the investment + that couldn’t lose. In + +On line 343: + four intermingled + issues came into play that + made it difficult + + to acknowledge the + looming threats. First, efforts to + boost homeownership + +On line 343: + broad political + support—from Presidents Bill + Clinton and George W. + + Bush and successive + Congresses—even though in + reality the + +On line 343: + the spring of Second, + the real estate boom was + generating a + +On line 343: + of cash on Wall Street + and creating a lot of + jobs in the housing + +On line 343: + believed that even if + the housing market tanked, the + broader financial + +On line 345: + would hold up. As the + mortgage market began its + transformation in + + the late 1990s, consumer + advocates and front-line + local government + +On line 345: + among the first to spot + the changes: homeowners began + streaming into their + + offices to seek help + in dealing with mortgages they + could not afford to + +On line 345: + began raising the + issue with the Federal + Reserve and other + +On line 345: + general counsel + and policy director + of the Greenlining + +On line 345: + California-based + nonprofit housing group, told + the Commission that + +On line 345: + he began meeting + with Greenspan at least once a year + starting in each time + +On line 345: + to him the growth of + predatory lending practices + and discussing with him + +On line 347: + economic problems + they were creating.32 One of + the first places to see + +On line 347: + an entire market + was Cleveland, Ohio. From to home + prices in Cleveland rose + +On line 349: + median of to + while home prices nationally + rose about in those same + +On line 349: + years; at the same time, + the city’s unemployment rate, + ranging rom in to + +On line 351: + more or less tracked the + broader U.S. pattern. James Rokakis, + the longtime county + +On line 351: + of Cuyahoga County, + where Cleveland is located, + told the Commission + +On line 351: + the region’s housing + market was juiced by "flipping + on mega-steroids," with rings + +On line 351: + appraisers, and loan + originators earning fees + on each transaction + +On line 353: + Street. City officials + began to hear reports that + these activities + +On line 353: + propelled by new kinds + of nontraditional loans + that enabled investors + +On line 353: + buy properties with + little or no money down + and gave homeowners + +On line 353: + to refinance their + houses, regardless of whether + they could afford to + +On line 353: + the loans. Foreclosures + shot up in Cuyahoga County + from a year in to + +On line 353: + a year in Rokakis and + other public officials + watched as families + + who had lived for years + in modest residences lost + their homes. After they + +On line 353: + were ultimately + abandoned, vandalized, and then + stripped bare, as scavengers + +On line 355: + siding to sell for + scrap. "Securitization + was one of the most + + brilliant financial + innovations of the 20th + century," Rokakis told + +On line 355: + Commission. "It freed + up a lot of capital. + If it had been done + + responsibly, it + would have been a wondrous thing + because nothing is + +On line 357: + nothing safer, than the + American mortgage market. + It worked for years. But + +On line 359: + scam it."34 Officials + in Cleveland and other Ohio + cities reached out to the + +On line 359: + for help. They asked the + Federal Reserve, the one + entity with the + +On line 359: + risky lending practices + by all mortgage lenders, to use + the power it had + +On line 359: + in under the Home + Ownership and Equity + Protection Act (HOEPA) + +On line 359: + new mortgage lending + rules. In March Fed Governor + Edward Gramlich, an + +On line 359: + access to credit + but only with safeguards in + place, attended a + + conference on the + topic in Cleveland. He spoke + about the Fed’s power + +On line 359: + HOEPA, declared some of + the lending practices to be + "clearly illegal," + +On line 363: + enforcement measures."35 + Looking back, Rokakis remarked to + the Commission, "I + + naively believed they’d + go back and tell Mr. Greenspan and + presto, we’d have some new + +On line 363: + rules. I thought it would + result in action being + taken. It was kind + +On line 365: + Cleveland was looking + for help from the federal + government, other + +On line 365: + around the country were + doing the same. John Taylor, + the president of + +On line 365: + of community + leaders from Nevada, Michigan, + Maryland, Delaware, + +On line 365: + New Jersey, and Ohio, + went to the Office of Thrift + Supervision (OTS), + +On line 365: + loan institutions, + asking the agency to crack + down on what they called + +On line 367: + believed were putting both + borrowers and lenders at risk.37 + The California + +On line 367: + group based in Northern + California, also begged + regulators to + +On line 367: + officials told the + Commission. The nonprofit + group had reviewed the + +On line 367: + and discovered that + many individuals were + being placed into + + high-cost loans when + they qualified for better + mortgages and that many + + had been misled about + the terms of their loans.38 There were + government reports, + +On line 371: + Treasury Department + issued a joint report on + predatory lending + +On line 371: + that made a number + of recommendations for + reducing the risks + +On line 371: + to borrowers.39 In + December the Federal + Reserve Board used the + + HOEPA law to amend some + regulations; among the changes + were new rules aimed at + +On line 371: + refinancings over + a short period of time, + if they were not in + + the borrower’s best + interest.40 As it would turn + out, those rules covered + +On line 371: + only of subprime + loans. FDIC Chairman Sheila C. Bair, + then an assistant + + treasury secretary + in the administration + of President George + +On line 371: + Bush, characterized + the action to the FCIC as + addressing only + +On line 371: + a "narrow range of + predatory lending issues."41 + In Gramlich noted + +On line 371: + "increasing reports + of abusive, unethical + and in some cases, + +On line 373: + lending practices."42 Bair + told the Commission that this + was when "really + +On line 373: + on traditional + banks to follow suit.43 She said + that she and Gramlich + + considered seeking + rules to rein in the growth of + these kinds of loans, but + + Gramlich told her that + he thought the Fed, despite its + broad powers in this + + area, would not support + the effort. Instead, they sought + voluntary rules for + +On line 375: + but that effort fell + by the wayside as well.44 In + an environment + +On line 375: + standards declined. The + companies issuing these + loans made profits that + +On line 377: + rose sharply. In the top + nonprime lenders originated + billion in loans. Their + +On line 379: + billion in and then + billion in California, + with its high housing + +On line 379: + kind of lending. In + nearly billion, or of all + nontraditional + +On line 379: + nationwide, were made + in that state; California’s + share rose to by with + +On line 379: + growing to billion + or by in California + in just two years.46 In + +On line 379: + director of the + California Reinvestment + Coalition, testified + +On line 379: + the Commission. "We + estimated at that time + that the average + +On line 379: + California was + paying over more per month on + their mortgage payment + +On line 381: + result of having + received the subprime loan."47 Gail + Burks, president and + +On line 381: + Nevada Fair Housing, + Inc., a Las Vegas–based + housing clinic, told + +On line 381: + Commission she and + other groups took their concerns + directly to Greenspan + +On line 383: + time, describing to + him in person what she called + the "metamorphosis" + +On line 383: + industry. She told + him that besides predatory + lending practices such + + as flipping loans or + misinforming seniors about + reverse mortgages, she + +On line 385: + accounts.48 Lisa Madigan, + the attorney general + in Illinois, also + +On line 385: + Consumers complained that + they had been deceived into + taking out loans with + +On line 387: + fees. The company + was then packaging the loans + and selling them as + + securities to + Lehman Brothers, Madigan said. The + case was settled in + +On line 387: + received million. First + Alliance went out of business. + But other firms stepped + +On line 389: + to investigate + another fast-growing lender, + California-based + +On line 389: + nation’s largest subprime + lender, originating billion + in subprime loans in + + 2003—mostly refinances + that let borrowers take cash + out of their homes, but + +On line 391: + hefty fees that ate away + at their equity.50 Madigan + testified to the + +On line 391: + Ameriquest revealed that the + company engaged in the + kinds of fraudulent + +On line 391: + lenders subsequently + emulated on a wide + scale: inflating home + +On line 391: + interest rates on + borrowers’ loans or switching + their loans from fixed to + + adjustable interest + rates at closing; and promising + borrowers that they + + could refinance their + costly loans into loans with + better terms in just + + a few months or a + year, even when borrowers had + no equity to + + absorb another + refinance."51 Ed Parker, the + former head of Ameriquest’s + +On line 393: + the Commission that + he detected fraud at the + company within + +On line 393: + month of starting his + job there in January but + senior management + + did nothing with the + reports he sent. He heard that + other departments + +On line 395: + were complaining he + "looked too much" into the loans. + In November he + +On line 399: + from "manager" to + "supervisor," and was laid + off in May In late + +On line 399: + its loans. He received + about boxes of documents. + He pulled one file at + + random, and stared at + it. He pulled out another + and another. He + + noted file after + file where the borrowers were + described as "an-tiques + +On line 399: + he recalled in an + interview with the FCIC, a + disabled borrower + +On line 399: + his 80s who used a + walker was described in the + loan application + +On line 403: + being employed in + "light construction."53 "It didn’t + take Sherlock Holmes to + +On line 403: + out this was bogus," + Cox told the Commission. As + he tried to figure + +On line 403: + suggested that he + "look upstream." Cox suddenly + realized that the + +On line 405: + product to ship to + Wall Street to sell to investors. + "I got that it had + +On line 407: + "The lending pattern + had shifted."54 Ultimately, + states and the District + + of Columbia joined + in the lawsuit against Ameriquest, on + behalf of "more than + +On line 407: + million settlement. + But during the years when the + investigation + +On line 409: + way, between and Ameriquest + originated another + billion in loans,55 which + +On line 411: + investigation, + some federal officials + said they had followed + +On line 411: + Housing and Urban + Development, "we began + to get rumors" that + +On line 411: + firms were "running wild, + taking applications over + the Internet, not + +On line 411: + peoples’ income or + their ability to have a + job," recalled Alphonso + +On line 413: + the HUD secretary + from to in an interview + with the Commission. + +On line 413: + great deal of money + and there wasn’t a great deal + of oversight going + +On line 413: + he was the nation’s + top housing official at + the time, he placed much + +On line 415: + the blame on Congress.56 + Cox, the former Minnesota + prosecutor, and + + Madigan, the Illinois + attorney general, told + the Commission that + +On line 415: + the single biggest + obstacles to effective + state regulation + +On line 415: + chartered banks—including + Bank of America, Citibank, and + Wachovia—and the OTS, + +On line 415: + thrifts. The OCC and OTS + issued rules preempting states + from enforcing rules + +On line 417: + national banks and + thrifts.57 Cox recalled that in Julie + Williams, the chief counsel + +On line 419: + OCC, had delivered + what he called a "lecture" to + the states’ attorneys + +On line 419: + in a meeting in + Washington, warning them that + the OCC would "quash" them + + if they persisted + in attempting to control + the consumer practices + +On line 421: + institutions.58 Two + former OCC comptrollers, John + Hawke and John Dugan, told + +On line 421: + Commission that they + were defending the agency’s + constitutional + +On line 421: + entities. Because + state-chartered lenders had more lending + problems, they said, the + +On line 421: + to involve themselves + in federally chartered + institutions, an + +On line 421: + told the Commission + that national banks funded + of the largest subprime + +On line 421: + operating with + state charters, and that those banks + were the end market + +On line 421: + by the state-chartered firms. + She noted that the OCC was + "particularly + +On line 421: + in its efforts to + thwart state authority over + national lenders, and + + lax in its efforts + to protect consumers from the + coming crisis."60 Many + +On line 423: + in enforcing their + own lending regulations, + as did some cities. In + +On line 423: + Carolina–based Wachovia + Bank told state regulators + that it would not abide + + by state laws, because + it was a national bank + and fell under the + +On line 423: + Wachovia’s announcement, + and Wachovia sued Michigan. The + OCC, the American + +On line 423: + and the Mortgage Bankers + Association entered + the fray on Wachovia’s + +On line 423: + and the District of + Columbia aligned themselves with + Michigan. The legal + +On line 423: + four years. The Supreme Court + ruled in Wachovia’s favor on + April leaving the OCC + +On line 423: + were they negligent, + they were aggressive players + attempting to stop + +On line 425: + enforcement action[s]. + Those guys should have been on our + side."61 Nonprime lending + +On line 425: + surged to billion in + and then trillion in and its + impact began to + + be felt in more and + more places.62 Many of those loans were + funneled into the + + pipeline by mortgage + brokers—the link between + borrowers and the + +On line 425: + financed the mortgages—who + prepared the paperwork for + loans and earned fees from + +On line 425: + lenders for doing it. + More than new mortgage brokers + egan their jobs during + +On line 425: + than honorable in + their dealings with borrowers.63 + According to an + +On line 425: + investigative news + report published in between + and at least people + +On line 425: + entered the field in + Florida, for example, + including who had + +On line 425: + been convicted of + such crimes as fraud, bank robbery, + racketeering, and + + extortion.64 J. Thomas + Cardwell, the commissioner + of the Florida + +On line 425: + accountability + created a condition + in which fraud flourished."65 + +On line 425: + Association + of Mortgage Brokers, told the + Commission that while + + most mortgage brokers + looked out for borrowers’ best + interests and steered + +On line 425: + them away from risky loans, + about of the newcomers to + the field nationwide + +On line 425: + to do whatever + it took to maximize the + number of loans they + +On line 427: + home values grew even + faster between and the real + estate appraiser + +On line 427: + initially felt pride + that his birthplace, miles north of + Los Angeles, "had + +On line 427: + been discovered" by + other Californians. + The city, a farming + +On line 427: + industry center + in the San Joaquin Valley, was + drawing national + + attention for the + pace of its development. + Wide-open farm fields were plowed + +On line 429: + into thousands of + building lots. Home prices jumped in + Bakersfield in in + +On line 431: + more in Crabtree, an + appraiser for years, started + in and to think that + +On line 431: + making sense. People + were paying inflated prices + for their homes, and they + + didn’t seem to have + enough income to pay for what + they had bought. Within + + a few years, when he + passed some of these same houses, + he saw that they were + + vacant. "For sale" signs + appeared on the front lawns. And + when he passed again, the + + yards were untended + and the grass was turning brown. + Next, the houses went + + into foreclosure, + and that’s when he noticed that + the empty houses + +On line 433: + the new suburban + subdivisions. The Cleveland + phenomenon had + +On line 433: + Bakersfield, a place + far from the Rust Belt. Crabtree + watched as foreclosures + +On line 433: + Houses fell into + disrepair and neighborhoods + disintegrated. + +On line 435: + began studying the + market. In he ended up + identifying what + +On line 435: + in Bakersfield; some, + for instance, were allowing + insiders to siphon + +On line 435: + property transfer. + The transactions involved many + of the nation’s largest + +On line 435: + for example, was + listed for sale for and was + recorded as selling + +On line 435: + for with financing, + though the real estate agent + told Crabtree that it + +On line 435: + actually sold + for Crabtree realized that + the gap between the + +On line 435: + sales price and loan amount + allowed these insiders to + pocket The terms of + +On line 435: + The house went into + foreclosure and was sold in + a distress sale for + +On line 437: + began calling lenders + to tell them what he had found; + but to his shock, they + +On line 437: + reached one quality + assurance officer at + Fremont Investment + +On line 437: + nation’s eighth-largest subprime + lender. "Don’t put your nose where it + doesn’t belong," he + +On line 439: + story to state law + enforcement officials and + to the Federal + +On line 439: + Investigation. + "I was screaming at the top + of my lungs," he said. + +On line 439: + pace of enforcement + and at prosecutors’ lack + of response to a + +On line 441: + wreaking economic + havoc in Bakersfield.69 At + the Washington, D.C., + +On line 441: + the FBI, Chris Swecker, + an assistant director, + was also trying + +On line 441: + to pay attention + to mortgage fraud. "It has the + potential to be + + an epidemic," he + said at a news conference + in Washington in + +On line 441: + think we can prevent + a problem that could have as + much impact as the + +On line 443: + crisis."70 Swecker called + another news conference + in December to + +On line 443: + the same thing, this time + adding that mortgage fraud was a + "pervasive problem" + + that was "on the rise." + He was joined by officials + from HUD, the U.S. Postal + +On line 443: + Internal Revenue + Service. The officials told + reporters that real + +On line 443: + executives were + not doing enough to root out + mortgage fraud and that + +On line 445: + do more to "police + their own organizations."71 + Meanwhile, the number + +On line 447: + continued to swell. + Suspicious activity + reports, also known + +On line 447: + are reports filed by + banks to the Financial Crimes + Enforcement Network + +On line 447: + within the Treasury + Department. In November + the network published + +On line 447: + analysis that found + a 20-fold increase in mortgage + fraud reports between + +On line 447: + underreporting, + because two-thirds of all the loans + being created + + were originated + by mortgage brokers who were + not subject to any + +On line 447: + addition, many lenders + who were required to submit + reports did not in + + fact do so.73 "The claim + that no one could have foreseen + the crisis is false," + + said William K. Black, an + expert on white-collar crime + and a former staff + +On line 451: + Reform, Recovery + and Enforcement, created + by Congress in as + +On line 455: + served from February + to told the FCIC he could not + remember the press + + conferences or news + reports about mortgage fraud. Both + Gonzales and his + +On line 455: + Michael Mukasey, who served as + attorney general in + and told the FCIC that + +On line 455: + to them as a top + priority. "National + security was + +On line 457: + overriding" concern, + Mukasey said.75 To community + activists and local + +On line 457: + lending practices were + a matter of national + economic concern. + +On line 457: + the Empire Justice + Center in Rochester, New York, told + Fed Governors Bernanke, + +On line 457: + Susan Bies, and Roger + Ferguson in October + that she suspected + +On line 457: + and Lehman Brothers—were + producing such bad loans that + the very survival of + + the firms was put in + question. "We repeatedly + see false appraisals and + +On line 457: + Fed officials, who + were gathered at the public + hearing period + +On line 457: + She urged the Fed to + prod the Securities and + Exchange Commission + + to examine the + uality of the firms’ due + diligence; otherwise, + + she said, serious + questions could arise about whether they + could be forced to buy + + back bad loans that they + had made or securitized.76 + Maker told the board + +On line 459: + from a confluence + of financial events: flat or + declining incomes, + +On line 461: + and fraudulent loans + with overstated values.77 In + an interview with + +On line 461: + Fed officials seemed + impervious to what the + consumer advocates + +On line 461: + The Fed governors + politely listened and said + little, she recalled. + +On line 461: + had their economic + models, and their economic + models did not see + + this coming," she said. + "We kept getting back, ‘This is + all anecdotal.’"78 Soon + + nontraditional + mortgages were crowding other + kinds of products out + + of the market in + many parts of the country. More + mortgage borrowers + +On line 463: + out interest-only + loans, and the trend was far more + pronounced on the West + +On line 463: + of their easy credit + terms, nontraditional loans + enabled borrowers + +On line 463: + buy more expensive + homes and ratchet up the prices + in bidding wars. The + +On line 463: + pattern of higher + foreclosure rates frequently + appeared soon after. + + As home prices shot up + in much of the country, many + observers began to + +On line 465: + June the Economist + magazine’s cover story + posited that the day + + of reckoning was + at hand, with the headline "House + Prices: After the Fall." + +On line 465: + depicted a brick + plummeting out of the sky. + "It is not going + + to be pretty," the + article declared. "How the + current housing boom + +On line 465: + decide the course of + the entire world economy + over the next few years."80 + +On line 467: + month, Fed Chairman Greenspan + acknowledged the issue, telling + the Joint Economic + +On line 467: + of the U.S. Congress + that "the apparent froth in + housing markets may + +On line 467: + spilled over into the + mortgage markets."81 For years, he + had warned that Fannie + +On line 467: + Freddie Mac, bolstered + by investors’ belief that these + institutions had + +On line 467: + backing of the U.S. + government, were growing so + large, with so little + +On line 467: + for the financial + system. Still, he reassured + legislators that + + the U.S. economy + was on a "reasonably firm + footing" and that the + +On line 469: + be resilient if the + housing market turned sour. "The + dramatic increase + +On line 469: + the introduction + of other relatively + exotic forms of + +On line 469: + are developments + of particular concern," + he testified in + + June. To be sure, these + financing vehicles have + their appropriate + + uses. But to the + extent that some households may + be employing these + +On line 471: + that would otherwise + be unaffordable, their use + is beginning to + +On line 473: + to the pressures in + the marketplace. Although we + certainly cannot + +On line 473: + local markets, these + declines, were they to occur, + likely would not have + +On line 473: + banking and widespread + securitization of + mortgages makes it less + +On line 473: + would be impaired than + was the case in prior episodes + of regional house + +On line 475: + corrections.82 Indeed, + Greenspan would not be the only + one confident that + +On line 475: + downturn would leave the + broader financial system + largely unscathed. As + +On line 475: + after housing prices + had been declining for a + year, Bernanke testified + +On line 477: + "the problems in the + subprime market were likely + to be contained"—that is, + +On line 479: + economy.83 Some were + less sanguine. For example, + the consumer lawyer Sheila + +On line 481: + interest-only, a + proportion that was more than + twice the national + +On line 481: + "That’s insanity," + she told the Fed governors. + "That means we’re facing + + something down the road + that we haven’t faced before and + we are going to + + be looking at a + safety and soundness crisis."84 + On another front, + + some academics offered + pointed analyses as they raised + alarms. For example, + +On line 485: + the Yale professor + Robert Shiller, who along with Karl Case + developed the Case-Shiller + +On line 487: + the market appeared + in historical terms. Shiller + warned that the housing + +On line 489: + would likely burst.85 In + that same month, a conclave of + economists gathered + + at Jackson Lake Lodge + in Wyoming, in a conference + center nestled in + + Grand Teton National + Park. It was a "who’s who of + central bankers," recalled + +On line 491: + who was then on leave + from the University of + Chicago’s business school + +On line 491: + the chief economist + of the International + Monetary Fund. Greenspan + + was there, and so was + Bernanke. Jean-Claude Trichet, the president + of the European + + Central Bank, and Mervyn + King, the governor of the + Bank of England, were + +On line 495: + dignitaries.86 Rajan + presented a paper with + a provocative title: + +On line 495: + Development Made + the World Riskier1" He posited + that executives + +On line 495: + let off the hook for + any eventual losses—the + IBGYBG syn-drome. + +On line 495: + investment strategies + such as credit default swaps + could have disastrous + +On line 495: + became unstable, + and that regulatory + institutions might + + be unable to deal + with the fallout.87 He recalled + to the FCIC that he + + was treated with scorn. + Lawrence Summers, a former U.S. + treasury secretary + +On line 497: + then president of + Harvard University, called + Rajan a "Luddite," + +On line 497: + simply opposed to + technological change.88 "I + felt like an early + +On line 497: + had wandered into + a convention of half-starved + lions," Rajan wrote + +On line 499: + University of + Pennsylvania’s Wharton School, + prepared a research + +On line 499: + that the United States + could have a real estate + crisis similar + +On line 501: + suffered in Asia in + the 1990s. When she discussed her + work at another + +On line 501: + Hole gathering two + years later, it received a + chilly reception, she + +On line 501: + Commission. "It was + universally panned," she said, + and an economist + +On line 505: + were beginning to + highlight indications that + the real estate + +On line 505: + was weakening. Home + sales began to drop, and Fitch + Ratings reported + +On line 505: + mortgage delinquencies + were rising. That year, the hedge + fund manager Mark + +On line 505: + securities trade + group, that investors had become + "over optimistic" about + +On line 505: + market. "I see a + lot of irrationality," + he added. He said he + +On line 505: + different this time"—a + rationale commonly heard + before previous + +On line 507: + Some real estate + appraisers had also been + expressing concerns + +On line 509: + to a coalition of + appraisal organizations + circulated and + +On line 509: + petition; signed by + appraisers and including + the name and address + +On line 509: + assigning business + only to appraisers who + would hit the desired + +On line 509: + "The powers that be + cannot claim ignorance," the + appraiser Dennis + +On line 511: + Black of Port Charlotte, + Florida, testified to + the Commission.92 The + +On line 511: + veteran, told the + Commission that lenders had opened + subsidiaries to perform + +On line 511: + consumers and making + it easier to inflate + home values. The steep + +On line 511: + the un-merited and + inflated appraisals she was + seeing in Northern + +On line 511: + was headed for a + cataclysmic downturn. In she + laid off some of her + +On line 511: + in order to cut + her overhead expenses, in + anticipation + +On line 511: + the coming storm; two + years later, she shut down her + office and began + + working out of her + home.93 Despite all the signs that + the housing market + +On line 513: + slowing, Wall Street just + kept going and going—ordering + up loans, packaging + +On line 513: + By the third quarter + of home prices were falling and + mortgage delinquencies + +On line 513: + a combination + that spelled trouble for mortgage-backed + securities. But + +On line 513: + from the third quarter + of on, banks created and + sold some trillion in + +On line 515: + and more than billion + in mortgage-related CDOs.94 Not + everyone on Wall + +On line 515: + were urging caution, + as corporate governance + and risk management + +On line 517: + down. Reflecting on + the causes of the crisis, + Jamie Dimon, CEO of + +On line 517: + testified to the + FCIC, "I blame the management + teams and no one else."95 + +On line 519: + too many financial + firms, management brushed aside the + growing risks to their + +On line 519: + At Lehman Brothers, for + example, Michael Gelband, the + head of fixed income, + +On line 519: + his colleague Madelyn + Antoncic warned against taking + on too much risk in + +On line 519: + growing pressure to + compete aggressively against + other investment + +On line 519: + Antoncic, who was + the firm’s chief risk officer + from to was shunted + + aside: "At the senior + level, they were trying to + push so hard that the + + wheels started to come + off," she told the Commission. + She was reassigned + +On line 523: + on "philosophical + differences."97 At Citigroup, + meanwhile, Richard Bowen, a + +On line 523: + the consumer lending + group, received a promotion + in early when he + + was named business chief + under writer. He would go + on to oversee loan + +On line 523: + quality for over + billion a year of mortgages + underwritten and + + purchased by CitiFinancial. These + mortgages were sold to Fannie + Mae, Freddie Mac, and + +On line 523: + others. In June Bowen + discovered that as much as + of the loans that Citi + +On line 525: + meet Citi - group’s loan + guidelines and thus endangered + the company—if the + +On line 525: + were to default on + their loans, the investors could force + Citi to buy them back. + +On line 525: + the Commission that + he tried to alert top managers + at the firm by "email, + +On line 527: + and discussions"; but + though they expressed concern, it + "never translated + + into any action." + Instead, he said, "there was a + considerable push + +On line 527: + to increase market + share." Indeed, Bowen recalled, Citi + began to loosen its + +On line 527: + started to purchase + stated-income loans. "So we joined + the other lemmings + +On line 529: + for the cliff," he said + in an interview with the + FCIC.98 He finally + +On line 529: + his warnings to the + highest level he could reach—Robert + Rubin, the chairman + +On line 529: + the Executive + Committee of the Board of + Directors and a + + former U.S. treasury + secretary in the Clinton + administration, + + and three other bank + officials. He sent Rubin + and the others a + +On line 531: + the words "URGENT—READ + IMMEDIATELY" in the + subject line. Sharing + + his concerns, he stressed + to top managers that Citi faced + billions of dollars + +On line 531: + if investors were to + demand that Citi repurchase + the defective loans.99 + +On line 533: + told the Commission + in a public hearing in + April that Citibank handled + +On line 533: + Bowen matter promptly + and effectively. "I do + recollect this and + + that either I or + somebody else, and I truly + do not remember + + who, but either I + or somebody else sent it to + the appropriate + +On line 533: + that that was acted + on promptly and actions were + taken in response + +On line 533: + the bank undertook + an investigation in + response to Bowen’s claims + + and the system of + underwriting reviews was + revised.101 Bowen told the + +On line 535: + sending emails, he went + from supervising0 people + to supervising + +On line 535: + bonus was reduced, and + he was downgraded in his + performance review.102 + +On line 539: + a former Bear Stearns + executive, testified + to the FCIC that he + +On line 539: + to be on a shaky + foundation. "Their answer at + the time was, and this + +On line 539: + the thought that was—that was + homogeneous throughout Wall + Street’s analysts—was home + +On line 539: + always track income + growth and jobs growth. And they showed + me income growth on + +On line 539: + chart and jobs growth on + another, and said, ‘We don’t + see what you’re talking + + about because incomes + are still growing and jobs are + still growing.’ And I + +On line 539: + you obviously + don’t realize where the dog + is and where the tail + +On line 541: + what."103 ven those who had + profited from the growth of + nontraditional + + lending practices said + they became disturbed by what + was happening. Herb + +On line 541: + Corporation, which + was heavily loaded with + option ARM loans, wrote + +On line 541: + to officials at + the Federal Reserve, the + FDIC, the OTS, and the + +On line 541: + regulators were + "too dependent" on ratings + agencies and "there is + +On line 541: + high potential for + gaming when virtually + any asset can be + +On line 541: + and transformed into + a AAA-rated asset, and when a + multi-billion + +On line 543: + all too eager to + facilitate this alchemy."104 + Similarly, Lewis + +On line 545: + machine in the 1980s, + said he didn’t like what he + called "the madness" that + +On line 545: + descended on the + real estate market. Ranieri + told the Commission, + +On line 545: + was not the only + guy. I’m not telling you I was + John the Baptist. There + +On line 545: + of us, analysts + and others, wandering around + going ‘look at this + +On line 545: + it would be hard to + miss it."105 Ranieri’s own Houston-based Franklin + Bank Corporation + +On line 547: + under the weight of + the financial crisis in + November Other + +On line 547: + inside the business + also acknowledged that the + rules of the game were + +On line 547: + the word famously + used by Countrywide’s Mozilo + to describe one of + + the loan products his + firm was originating.106 "In + all my years in the + +On line 547: + have never seen a + more toxic [product]," he wrote + in an internal + + email.107 Others at the + bank argued in response that + they were offering + +On line 547: + of ours."108 Still, Mozilo + was nervous. "There was a time + when savings and loans + +On line 551: + doing it," he told + the other executives. + "They all went broke."109 In + +On line 553: + to take a look at + the changing mortgage market. + Sabeth Siddique, the + +On line 553: + for credit risk in + the Division of Banking + Supervision and + +On line 553: + Reserve Board, was charged + with investigating how + broadly loan patterns + +On line 553: + were changing. He took + the questions directly to + large banks in and asked + +On line 555: + of which kinds of loans + they were making. Siddique found + the information + +On line 555: + told the Commission.110 + In fact, nontraditional + loans made up percent + +On line 555: + at National City, + at Washington Mutual, + at CitiFinancial, and at Bank + +On line 555: + America. Moreover, + the banks expected that their + originations of + +On line 557: + would rise by in to + billion. The review also + noted the "slowly + +On line 557: + due to loosening + underwriting standards." In + addition, it found + +On line 557: + banks in had been of + the stated-income, minimal + documentation + +On line 557: + known as liar loans, which + had a particularly + great likelihood of + +On line 559: + sour.111 The reaction + to Siddique’s briefing was mixed. + Federal Reserve + +On line 559: + response by the Fed + governors and regional + board directors as + +On line 559: + people on the board + and regional presidents + just wanted to come + + to a different + answer. So they did ignore + it, or the full thrust + +On line 563: + the Commission.112 The + OCC was also pondering + the situation. + +On line 563: + comptroller of the + currency John C. Dugan told + the Commission that + +On line 563: + had come from below, + from bank examiners who + had become concerned + +On line 565: + The agency began + to consider issuing + "guidance," a kind of + +On line 565: + warning to banks, that + nontraditional loans could + jeopardize safety + +On line 565: + bank examiners. + Siddique said the OCC led the + effort, which became + +On line 567: + deliberations + over the potential guidance + also stirred debate + +On line 567: + critics feared it both + would stifle the financial + innovation that + +On line 567: + record profits to Wall + Street and the banks and would make + homes less affordable. + +On line 567: + the agencies—the + Fed, the OCC, the OTS, the FDIC, + and the National + +On line 567: + work together on + it, or it would unfairly + block one group of lenders + +On line 569: + regulatory + overreach. "The bankers pushed back," Bies + told the Commission. + +On line 569: + Congress pushed back. Some + of our internal people + at the Fed pushed back."115 + +On line 571: + represents mortgage + insurance companies, weighed + in on the other + +On line 571: + underwritten or + unsuitable mortgages and home + equity loans," the + +On line 571: + to regulators + in "The most recent market + trends show alarming signs + +On line 573: + risk-taking that puts + both lenders and consumers at risk."116 + In congressional + +On line 573: + downturns. "We take a + conservative position + on risk because of + +On line 573: + first loss position," + Simpson informed the Senate + Subcommittee on + +On line 573: + we also have a + historical perspective. + We were there when the + +On line 573: + turned sharply down during + the mid-1980s especially in + the oil patch and the + +On line 575: + in California + and the Northeast."117 Within the + Fed, the debate grew + +On line 575: + Siddique recalled. "It + got very personal," he told + the Commission. The + + ideological + turf war lasted more than a + year, while the number + +On line 577: + nontraditional + loans kept growing and growing.118 + Consumer advocates + +On line 577: + up the heat. In a + Fed Consumer Advisory + Council meeting in + +On line 577: + March Fed Governors + Bernanke, Mark Olson, and Kevin Warsh + were specifically + +On line 577: + warned of dangers that + nontraditional loans posed + to the economy. + +On line 577: + director of the + North Carolina Fair Housing + Center, raised concerns + +On line 577: + nontraditional + lending "may precipitate + a downward spiral + + that starts on the coast + and then creates panic in + the east that could have + +On line 579: + total economy + as well."119 At the next meeting + of the Fed’s Consumer + +On line 579: + June and attended + by Bernanke, Bies, Olson, and Warsh, + several consumer + +On line 579: + the Fed governors + alarming incidents that were + now occurring all + +On line 581: + and evaluation + at the Enterprise Corp. of + the Delta, in Jackson, + +On line 581: + by mortgage brokers + that property values were + being inflated + +On line 581: + profit for real + estate appraisers and loan + originators. Alan + +On line 581: + in Philadelphia, + reported a "huge surge in + foreclosures," noting + +On line 581: + up to half of the + borrowers he was seeing + with troubled loans had + +On line 581: + overcharged and given + high-interest rate mortgages + when their credit had + + qualified them for + lower-cost loans. Hattie B. + Dorsey, the president + +On line 583: + Development, said + she worried that houses were + being flipped back and + + forth so much that the + result would be neighborhood + "decay." Carolyn Carter + +On line 585: + authority to + "prohibit abuses in the + mortgage market."120 The + +On line 585: + Siddique, before Greenspan + left his post as Fed chairman + in January he + +On line 585: + indicated his + willingness to accept the + guidance. Ferguson + +On line 585: + the Fed board and the + regional Fed presidents + to get it done. Bies + + supported it, and + Bernanke did as well.121 More than a + year after the OCC + + had began discussing + the guidance, and after the + housing market had + +On line 587: + September as an + interagency warning + that affected banks, + +On line 587: + unions nationwide. Dozens + of states followed, directing + their versions of the + + guidance to tens of + thousands of state-chartered lenders and + mortgage brokers. Then, + +On line 589: + July long after + the risky, nontraditional + mortgage market had + +On line 589: + halt, the Federal + Reserve finally adopted + new rules under HOEPA + +On line 589: + curb the abuses about + which consumer groups had raised red + flags for years—including + +On line 591: + that borrowers have + the ability to repay + loans made to them. By + + that time, however, + the damage had been done. The + total value of + +On line 591: + trillion.122 There was a + mountain of problematic + securities, debt, + + and derivatives + resting on real estate + assets that were far + + less secure than they + were thought to have been. Just as + Bernanke thought the spillovers from + + a housing market + crash would be contained, so too + policymakers, + + regulators, and + financial executives + did not understand + +On line 593: + firms and markets had + become to the potential + contagion from these + +On line 593: + instruments. As the + housing market began to + turn, they scrambled to + +On line 593: + respond as losses + in one part of that system + would ricochet to + +On line 595: + end of most of the + subprime lenders had failed or been + acquired, including + +On line 595: + Financial, Ameriquest, and + American Home Mortgage. In + January Bank of + + America announced + it would acquire the ailing + lender Countrywide. It + +On line 595: + became clear that risk—rather + than being diversified + across the financial + + system, as had been + thought—was concentrated at + the largest financial + +On line 595: + risky mortgage assets + and dependent on fickle + short-term lending, was + + bought by JP Morgan + with government assistance + in the spring. Before + + the summer was over, + Fannie Mae and Freddie Mac + would be put into + +On line 599: + Brothers failed and the + remaining investment banks, + Merrill Lynch, Goldman + +On line 599: + confidence. AIG, with + its massive credit default + swap portfolio and + +On line 599: + was rescued by the + government. Finally, many + commercial banks and + + thrifts, which had their own + exposures to declining + mortgage assets and + + their own exposures + to short-term credit markets, + teetered. IndyMac had already + + failed over the summer; + in September, Washington + Mutual became + +On line 599: + bank failure in U.S. + history. In October, + Wachovia struck a deal + + to be acquired by + Wells Fargo. Citigroup and + Bank of America + +On line 599: + to stay afloat. Before + it was over, taxpayers had + committed trillions + +On line 599: + through more than two dozen + extraordinary programs + to stabilize the + +On line 601: + crisis that befell + the country in had been years + in the making. In + +On line 601: + Commission, former + Fed chairman Greenspan defended + his record and said most + +On line 601: + of his judgments had + been correct. "I was right of + the time but I was + +On line 601: + wrong of the time," he + told the Commission.123 Yet the + consequences of what + +On line 603: + in the run-up to the + crisis would be enormous. The + economic impact + +On line 603: + devastating. And + the human devasta-tion + is continuing. + +On line 603: + in November but + the underemployment rate, + which includes those who + +On line 603: + given up looking + for work and part-time workers + who would prefer to + +On line 603: + full-time, was above + And the share of unemployed + workers who have been + +On line 603: + of work for more than + six months was just above Of large + metropolitan + +On line 605: + were as lethal as many + had predicted, and it has + been estimated + +On line 605: + that ultimately + as many as million households + in the United States + +On line 605: + foreclosure. As of + foreclosure rates were highest + in Florida and + +On line 605: + Florida, nearly + of loans were in foreclosure, + and Nevada was not + +On line 605: + American mortgage + borrowers owed more on their + mortgages than their home + +On line 609: + was nearly Households + have lost trillion in wealth since + As Mark Zandi, the + +On line 609: + economist of Moody’s + Economy.com, testified + to the Commission, + +On line 611: + crisis has dealt a + very serious blow to the + U.S. economy. The + +On line 611: + the Great Recession: + the longest, broadest and most + severe downturn since + +On line 611: + the Great Depression + of the 1930s. The longer-term fallout + from the economic + +On line 611: + crisis is also + very substantial. It will take + years for employment + +On line 613: + on the years before + the crisis, the economist + Dean Baker said: "So + +On line 613: + absolute public + knowledge in the sense that we + knew the number of + + loans that were being + issued with zero down. Now, + do we suddenly + +On line 613: + we have that many more + people—who are capable + of taking on a + + loan with zero down + who we hink are going to + be able to pay that + +On line 613: + off—than was true years ago1 + I mean, what’s changed in the world1 + There were a lot of + +On line 613: + didn’t require any + investigation at all; + these were totally + +On line 615: + the data."127 Warren + Peterson, a home builder in + Bakersfield, felt that + +On line 615: + world changed to the day. + Peterson built homes in an + upscale neighborhood, + +On line 615: + Monday morning, he + would arrive at the office + to find a bevy of + +On line 615: + agents, sales contracts in + hand, vying to be the ones + chosen to purchase + + the new homes he was + building. The stream of traffic + was constant. On one + +On line 615: + in November he + was at the sales office and + noticed that not a + + single purchaser + had entered the building. He + called a friend, also + +On line 617: + home-building business, + who said he had noticed the + same thing, and asked him + +On line 628: + he thought about it. "It’s + over," his friend told Peterson.128 + PART II Setting the + +On line 642: + repos: "Unfettered + markets"............................................29 The savings and loan + crisis: "They put a + +On line 646: + regulators" The + financial crisis of and + was not a single + + event but a series + of crises that rippled through the + financial system + +On line 646: + Distress in one area + of the financial markets + led to failures in + +On line 646: + interconnections + and vulnerabilities + that bankers, government + +On line 646: + had missed or dismissed. + When subprime and other risky + mortgages—issued + + during a housing + bubble that many experts failed + to identify, and + +On line 648: + began to default + at unexpected rates, a + once-obscure market + +On line 648: + complex investment + securities backed by those + mortgages abruptly failed. + +On line 648: + the contagion spread, + investors panicked—and the danger + inherent in the + +On line 648: + became manifest. + Financial markets teetered on + the edge, and brand-name + +On line 648: + institutions were + left bankrupt or dependent + on the taxpayers + +On line 650: + survival. Federal + Reserve Chairman Ben Bernanke now + acknowledges that he + + missed the systemic risks. + "Prospective subprime losses were + clearly not large enough + +On line 650: + their own to account + for the magnitude of the + crisis," Bernanke told the + +On line 654: + economy."1 This part + of our report explores the + origins of risks as + + they developed in + the financial system over + recent decades. It is + +On line 654: + complex history + that could yield its own report. + Instead, we focus + +On line 654: + developments that + helped shape the events that shook our + financial markets + +On line 654: + economy. Detailed + books could be written about each + of them; we stick to + +On line 654: + understanding our + specific concern, which is + the recent crisis. + +On line 656: + the phenomenal + growth of the shadow banking + system—the investment + +On line 656: + most prominently, but + also other financial + institutions—that + +On line 656: + regulatory + apparatus that had been + put in place in the + +On line 657: + wake of the crash of + and the Great Depression. This + new system threatened + +On line 657: + once-dominant + traditional commercial + banks, and they took their + +On line 657: + their regulators + and to Congress, which slowly + but steadily removed + +On line 657: + and helped banks break out + of their traditional mold + and join the feverish + + growth. As a result, + two parallel financial + systems of enormous + +On line 657: + new competition + not only benefited + Wall Street but also + +On line 657: + help all Americans, + lowering the costs of their + mortgages and boosting + +On line 657: + returns on their 401(k)s. + Shadow banks and commercial + banks were codependent + +On line 659: + new activities + were very profitable—and, it turned + out, very risky. Second, + +On line 659: + the evolution of + financial regulation. + To the Federal + +On line 659: + granted greater license + to market participants + appeared to provide + +On line 659: + and more dynamic + alternative to the era + of traditional + +On line 659: + Former Fed chairman + Alan Greenspan put it this way: "The + market-stabilizing + +On line 659: + government structures."2 + In the Fed’s view, if problems + emerged in the shadow + +On line 659: + the large commercial + banks—which were believed to be well-run, + well-capitalized, + + and well-regulated + despite the loosening of + their restraints—could provide + +On line 659: + restore financial + stability. It did so + again and again in the + +On line 659: + up to the recent + crisis. And, understandably, + much of the country + + came to assume that + the Fed could always and would + always save the day. + + Third, we follow the + profound changes in the mortgage + industry, from the + +On line 661: + and servicing 30-year + loans to a new era in which + the idea was to sell + + the loans off as soon + as possible, so that they + could be packaged and + + sold to investors around + the world. New mortgage products + proliferated, + +On line 661: + market in which the + participants—mortgage brokers, + lenders, and Wall Street firms—had + + a greater stake in the + quantity of mortgages signed + up and sold than in + + their quality. We + also trace the history + of Fannie Mae and + +On line 663: + dominant forces in + providing financing to + support the mortgage + +On line 665: + for investors. Fourth, we + introduce some of the most + arcane subjects in + +On line 665: + national vocabu-lary + as the financial markets + unraveled through and + +On line 665: + rating agencies whose + own motives were conflicted. + This entire market + +On line 665: + to be divorced from + reality—and on ever-rising + housing prices. When that + +On line 665: + bubble also burst: + the securities almost + no one understood, + +On line 665: + by mortgages no lender + would have signed years earlier, + were the first dominoes + +On line 669: + sector. A basic + understanding of these four + developments will + +On line 669: + reader up to speed + in grasping where matters stood + for the financial + +On line 669: + system in the year + at the dawn of a decade of + promise and peril. + +On line 675: + REPOS: "UNFETTERED + MARKETS" For most of the 20th + century, banks and + +On line 675: + deposits and loaned that + money to home buyers or + businesses. Before + +On line 675: + institutions were + vulnerable to runs, when + reports or merely + +On line 675: + that a bank was in + trouble spurred depositors + to demand their cash. + +On line 675: + widespread, the bank might + not have enough cash on hand to + meet depositors’ + +On line 675: + Reserve System in + which acted as the lender of + last resort to banks. + +On line 677: + creation of the Fed + was not enough to avert bank runs + and sharp contrac-tions + +On line 677: + in the financial + markets in the 1920s and 1930s. + So in Congress passed + + the Glass-Steagall Act, which, among + other changes, established the + Federal Deposit + +On line 677: + bank deposits up to + $2,500—an amount that covered the vast + majority of + +On line 679: + deposits at the time; + that limit would climb to by + where it stayed until + +On line 681: + was raised to during + the crisis in October + Depositors no + +On line 681: + needed to worry + about being first in line at + a troubled bank’s door. + + And if banks were short + of cash, they could now borrow + from the Federal + + Reserve, even when they + could borrow nowhere else. The Fed, + acting as lender of + +On line 681: + ensure that banks would + not fail simply from a lack + of liquidity. + + With these backstops in + place, Congress restricted banks’ + activities to + +On line 683: + move intended to + help prevent bank failures, with + taxpayer dollars + +On line 683: + Furthermore, Congress + let the Federal Reserve + cap interest rates + +On line 685: + thrifts—also known as + savings and loans, or S&Ls— could + pay depositors. + +On line 685: + Regulation Q, + was also intended to + keep institutions + +On line 685: + by ensuring that + competition for deposits + did not get out of + +On line 687: + was stable as long + as interest rates remained + relatively steady, + + which they did during + the first two decades after World + War II. Beginning + +On line 687: + started to increase, + pushing up interest rates. + For example, the + +On line 687: + paid other banks for + overnight loans had rarely exceeded + in the decades before + +On line 687: + it reached However, + thanks to Regulation Q, + banks and thrifts were stuck + +On line 687: + roughly less than on + most deposits. Clearly, this was + an untenable bind + +On line 687: + depository + institutions, which could not + compete on the most + +On line 689: + of the interest + rate offered on a deposit. + Compete with whom1 In + +On line 689: + others persuaded + consumers and businesses to + abandon banks and thrifts + +On line 691: + find new businesses, + particularly after + the Securities + +On line 693: + commissions on stock + trades in created money + market mutual + +On line 693: + securities such + as Treasury bonds and highly + rated corporate + +On line 693: + the funds paid higher + interest rates than banks and + thrifts were allowed to + +On line 695: + with a different + mechanism: customers bought shares + redeemable daily at + +On line 695: + a stable value. + In Merrill Lynch introduced + something even more like + + a bank account: "cash + management accounts" allowed + customers to write checks. + +On line 697: + market mutual + funds quickly followed.5 These funds + differed from bank and + + thrift deposits in one + important respect: they were + not protected by + +On line 697: + higher interest + rates, and the stature of the funds’ + sponsors reassured + +On line 697: + promised to maintain the + full net asset value of + a share. The funds would + +On line 697: + buck," in Wall Street terms. + Even without FDIC insurance, + then, depositors + + considered these funds + almost as safe as deposits + in a bank or thrift. + + Business boomed, and so + was born a key player in + the shadow banking + +On line 697: + growing up beside + the traditional banking + system. Assets in + +On line 699: + market mutual + funds jumped from billion in to + more than billion in + +On line 701: + To maintain their edge + over the insured banks and thrifts, + the money market + +On line 701: + in, and they quickly + developed an appetite for + two booming markets: + +On line 703: + "commercial paper" + and "repo" markets. Through these + instruments, Merrill + +On line 703: + Morgan Stanley, and + other Wall Street investment + banks could broker and + +On line 703: + Commercial paper + was unsecured corporate + debt—meaning that it + +On line 705: + the corporation’s + promise to pay. These loans were + cheaper because they + +On line 705: + sometimes as short as + two weeks and, eventually, + as short as one day; + +On line 705: + "rolled them over" when the + loan came due, and then again and + again. Because only + +On line 705: + were able to issue + commercial paper, it was + considered a very + +On line 705: + companies such as + General Electric and IBM, + investors believed, would + + always be good for + the money. Corporations + had been issuing + +On line 705: + since the beginning + of the century, but the + practice grew much more + +On line 707: + the 1960s. This market, + though, underwent a crisis + that demonstrated that + + capital markets, + too, were vulnerable to + runs. Yet that crisis + +On line 707: + in the U.S., filed for + bankruptcy with million in + commercial paper + +On line 707: + railroad’s default caused + investors to worry about the + broader commercial + +On line 707: + market; holders of + that paper—the lenders—refused to + roll over their loans to + +On line 707: + commercial paper + market virtually shut + down. In response, the + +On line 707: + with almost million + in emergency loans and with + interest rate cuts.7 + +On line 707: + Fed’s actions enabled + the banks, in turn, to lend to + corporations so + +On line 707: + commercial paper—the + borrowers—typically + set up standby lines + +On line 707: + credit with major + banks to enable them to pay + off their debts should there + +On line 707: + another shock. These + moves reassured investors that + commercial paper + +On line 709: + a safe investment. + In the 1960s, the commercial + paper market jumped + +On line 709: + than sevenfold. Then + in the 1970s, it grew almost + fourfold. Among the largest + +On line 709: + market mutual + funds. It seemed a win-win-win deal: the + mutual funds could + +On line 709: + stable companies + could borrow more cheaply, and + Wall Street firms could earn + +On line 709: + fees for putting the deals + together. By commercial + paper had risen to + +On line 711: + less than billion in + The second major shadow + banking market that + +On line 711: + market for repos, + or repurchase agreements. Like + commercial paper, + +On line 711: + a long history, + but they proliferated + quickly in the 1970s. + +On line 711: + often sold Treasury + bonds with their relatively + low returns to banks + +On line 711: + while then investing + the cash proceeds of these sales + in securities + +On line 711: + The dealers agreed to + repurchase the Treasuries—often + within a day—at + +On line 711: + for which they sold them. + This repo transaction—in + essence a loan—made it + + inexpensive and + convenient for Wall Street firms + to borrow. Because + +On line 711: + the securities + dealers borrowed nearly the + full value of the + +On line 711: + a small "haircut." Like + commercial paper, repos + were renewed, or "rolled + +On line 711: + could be considered + "hot money"—because lenders could + quickly move in and + +On line 711: + these investments in + search of the highest returns, + they could be a risky + +On line 713: + repo market, too, + had vulnerabilities, + but it, too, had emerged + +On line 713: + stronger than ever. In + two major borrowers, the + securities firms + +On line 713: + losses for lenders. In + the ensuing fallout, the + Federal Reserve + +On line 713: + resort to support + a shadow banking market. + The Fed loosened the + + terms on which it lent + Treasuries to securities + firms, leading to a + +On line 715: + to a tri-party + arrangement in which a large + clearing bank acted + +On line 715: + borrower and lender, + essentially protecting + the collateral + +On line 715: + them in escrow.9 This + mechanism would have severe + consequences in and + +On line 715: + 1980s, however, these + new procedures stabilized + the repo market. + + The new parallel + banking system—with commercial + paper and repo + +On line 717: + a crucial catch: its + popularity came at + the expense of the + +On line 719: + this development + with growing alarm. According + to Alan Blinder, the + +On line 721: + vice chairman of the + Federal Reserve from to + "We were concerned as + +On line 721: + regulators with + the eroding competitive + position of banks, + +On line 721: + of course would threaten + ultimately their safety + and soundness, due to + +On line 721: + they were getting from + a variety of nonbanks—and + these were mainly Wall + +On line 721: + were taking deposits + from them, and getting into + the loan business to + + some extent. So, yeah, + it was a concern; you could + see a downward trend + +On line 725: + financial assets."10 + raditional and Shadow + Banking Systems The + + funding available through + the shadow banking system + grew sharply in the 2000s, + +On line 725: + the traditional + banking system in the years + before the crisis. + +On line 727: + that during the 1990s + the shadow banking system + steadily gained ground on + +On line 729: + sector for a brief + time after Banks argued that + their problems stemmed from + +On line 729: + Glass-Steagall Act. Glass-Steagall strictly + limited commercial banks’ + participation + +On line 729: + the securities + markets, in part to end the + practices of the 1920s, + +On line 729: + securities to + depositors. In Congress + also imposed new + + regulatory + requirements on banks owned by + holding companies, + +On line 729: + order to prevent + a holding company from + endangering any + +On line 731: + Bank supervisors + monitored banks’ leverage—their + assets relative + +On line 733: + by nearly every + financial institution, + amplifies returns. + +On line 733: + example, if an + investor uses of his own + money to purchase + +On line 733: + security that + increases in value by + he earns However, + +On line 733: + invests times as much + the same increase in value + yields a profit of + +On line 733: + investment. If the + investment sours, though, leverage + magnifies the loss + +On line 733: + much. A decline of + costs the unleveraged investor + leaving him with but + +On line 733: + wipes out the leveraged + investor’s An investor buying + assets worth times his + +On line 733: + of with the numbers + representing the total + money invested + +On line 735: + committed to the + deal. In bank supervisors + established the first + +On line 735: + liabilities—should + be at least of assets for + most banks. Capital, + +On line 735: + general, reflects + the value of shareholders’ + investment in the + +On line 737: + which bears the first risk + of any potential losses. + By comparison, + +On line 737: + leverage, unhindered + by oversight of their safety + and soundness or by + +On line 737: + requirements outside + of their broker-dealer subsidiaries, + which were subject to + + a net capital + rule. The main shadow banking + participants—the + + money market funds + and the investment banks that + sponsored many of them—were + + not subject to the + same supervision as banks + and thrifts. The money + +On line 739: + from federally + insured depositors but + principally from + + investors (in the case + of money market funds) or + commercial paper + +On line 741: + repo markets (in + the case of investment banks). + Both money market + +On line 741: + and securities + firms were regulated by + the Securities + +On line 741: + SEC, created in + was supposed to supervise + the securities + +On line 741: + investors. It was charged + with ensuring that issuers + of securities + + disclosed sufficient + information for investors, + and it required firms + +On line 741: + securities to + comply with procedural + restrictions such as + +On line 741: + separate accounts. + Historically, the SEC + did not focus on + +On line 741: + impose capital + requirements on broker-dealers + designed to protect + +On line 743: + Meanwhile, since deposit + insurance did not cover + such instruments as + +On line 743: + market mutual + funds, the government was not + on the hook. There was + +On line 743: + concern about a run. + In theory, the investors + had knowingly risked + + their money. If an + investment lost value, it + lost value. If a + +On line 743: + failed, it failed. As a + result, money market funds + had no capital + + or leverage standards. + "There was no regulation," + former Fed chairman + +On line 743: + Volcker told the + Financial Crisis Inquiry + Commission. "It was + +On line 743: + restricting the type + of securities in which + they could invest, the + +On line 743: + securities, and + the diversification + of their portfolios. + +On line 743: + ensure that investors’ + shares would not diminish in + value and would be + +On line 743: + against losses was the + implicit guarantee of + sponsors like Merrill + +On line 745: + with reputations + to protect. Increasingly, + the traditional + + world of banks and thrifts + was ill-equipped to keep up + with the parallel + +On line 745: + of the Wall Street firms. + The new shadow banks had few + constraints on raising + +On line 745: + investing money. + Commercial banks were at a + disadvantage and + +On line 745: + danger of losing + their dominant position. + Their bind was labeled + +On line 745: + system concluded + that policy makers, all + the way back to the + +On line 745: + only by capping + the interest rates they could + pay depositors + +On line 745: + critics argued, the + regulatory constraints + on industries across + +On line 745: + competition and + restricted innovation, + and the financial + +On line 747: + example of such + a hampered industry. Years + later, Fed Chairman + +On line 749: + the argument for + deregulation: "Those of us + who support market + +On line 749: + competitive forms + might argue that unfettered + markets create a + + degree of wealth that + fosters a more civilized + existence. I have + +On line 753: + that insight compelling."12 + THE SAVINGS AND LOAN CRISIS: + "THEY PUT A LOT OF + +On line 755: + continued to chafe + against the regulations still + in place. The playing + + field wasn’t level, + which "put a lot of pressure + on institutions + +On line 755: + higher-rate performing + assets," former SEC Chairman + Richard Breeden told the + +On line 757: + of pressure on their + regulators to allow + this to happen."13 The + +On line 757: + banks and the S&Ls went + to Congress for help. In the + Depository + +On line 757: + Monetary Control + Act repealed the limits on + the interest rates + +On line 757: + a significant + regulatory constraint + on banks and thrifts, it + +On line 757: + their competitive + advantage. Depositors + wanted a higher + +On line 757: + of return, which banks + and thrifts were now free to pay. + But the interest + + banks and thrifts could earn + off of mortgages and other + long-term loans was largely + + fixed and could not match + their new costs. While their deposit + base increased, they now + +On line 757: + faced an interest + rate squeeze. In the difference + in interest earned + + on the banks’ and thrifts’ + safest investments (one-year Treasury + notes) over interest + +On line 757: + deposits was almost + percentage points; by it was + only percentage + +On line 757: + The institutions + lost almost percentage points + of the advantage + +On line 757: + enjoyed when the rates + were capped.14 The legislation + had not done enough to + +On line 759: + facing the banks and + thrifts. That legislation was + followed in by the + + Garn-St. Germain Act, which + significantly broadened + the types of loans and + + investments that thrifts + could make. The act also gave + banks and thrifts broader + + scope in the mortgage + market. Traditionally, + they had relied on + +On line 759: + fixed-rate mortgages. But the + interest on fixed-rate mortgages + on their books fell short + + as inflation surged + in the mid-1970s and early 1980s + and banks and thrifts found + + it increasingly + difficult to cover the + rising costs of their + + short-term deposits. In + the Garn-St. Germain Act, Congress + sought to relieve this + +On line 759: + and adjustable-rate mortgages + (ARMs), even in states where state laws + forbade these loans. For + +On line 759: + term. Borrowers with + ARMs enjoyed lower mortgage + rates when interest + + rates decreased, but their + rates would rise when interest + rates rose. For banks and + + thrifts, ARMs offered an + interest rate that floated + in relationship + + to the rates they were + paying to attract money + from depositors. + + The floating mortgage + rate protected banks and S&Ls + from the interest + +On line 759: + by inflation, but + it effectively transferred + the risk of rising + +On line 761: + interest rates to + borrowers. Then, beginning + in the Federal + +On line 761: + banks to undertake + activities forbidden + under Glass-Steagall and its + +On line 761: + in "bank-ineligible" + activities, including + selling or holding + +On line 761: + of securities + that were not permissible + for national banks + + to invest in or + underwrite. At first, the Fed + strictly limited + +On line 761: + activities to + no more than of the assets + or revenue of any + +On line 761: + time, however, the + Fed relaxed these restrictions. + By bank-ineligible + +On line 761: + represent up to + of assets or revenues of + a securities + +On line 763: + Meanwhile, the OCC, the + regulator of banks with + national charters, + +On line 763: + equivalent to, or + a logical outgrowth of, + a recognized bank + +On line 763: + new activities + were underwriting as well + as trading bets and + +On line 763: + derivatives, on + the prices of certain assets. + Between and the OCC + +On line 763: + derivatives in + which banks might deal to include + those related to + +On line 765: + metals such as gold + and silver and equity + stocks Fed Chairman Greenspan + +On line 765: + regulators and + legislators supported + and encouraged this + +On line 765: + financial markets. + They argued that financial + institutions had + +On line 765: + regulate themselves + through improved risk management. + Likewise, financial + +On line 765: + would exert strong and + effective discipline through + analysts, credit + + rating agencies, and + investors. Greenspan argued that the + urgent question about + +On line 767: + the issue this way: + financial "modern-ization" was + needed to "remove + +On line 767: + limit choices and + options for the consumer of + financial services." + +On line 767: + more effectively + in their natural markets. + The result would be + +On line 769: + better services to + the public."17 During the 1980s + and early 1990s, banks + +On line 769: + higher interest + payments. They made loans to oil + and gas producers, + +On line 769: + leveraged buyouts of + corporations, and funded + developers of + + residential and + commercial real estate. + The largest commercial + +On line 769: + advanced money to + companies and governments + in "emerging markets," + +On line 769: + riskier than the banks’ + traditional lending. The + consequences appeared + +On line 769: + the real estate + markets, with a bubble and + massive overbuilding + + in residential + and commercial sectors in + certain regions. For + +On line 769: + example, house prices + rose per year in Texas from to + In California, + +On line 769: + rose annually + from to The bubble burst first + in Texas in and but + +On line 769: + trouble rapidly spread + across the Southeast to the mid-Atlantic + states and New England, + + then swept back across the + country to California + and Arizona. Before + +On line 769: + nationally by + from July to February + 199220—the first such fall since + +On line 771: + Depression—driven + by steep drops in regional + markets.21 In the 1980s, + +On line 771: + considerably less + than current interest rates, + spiraling defaults + +On line 771: + residential and + commercial real estate + loans, and losses on + + energy-related, + leveraged-buyout, and overseas loans, + the industry was + +On line 773: + commercial banks and + thrifts failed in what became known + as the S&L crisis + +On line 773: + 1980s and early 1990s. + By comparison, only + banks had failed between + +On line 773: + of federally + insured depository + institutions had + +On line 773: + required financial + assistance, affecting of + the banking system’s + +On line 773: + assets.23 More than bank + and S&L executives were + convicted of felonies.24 + +On line 773: + the government cleanup + was complete, the ultimate + cost of the crisis + +On line 775: + was billion.25 Despite + new laws passed by Congress in + and in response to + +On line 777: + deregulatory + movement focused in part on + continuing to + +On line 777: + study calling for the + elimination of the old + regulatory + +On line 777: + all geographic + restrictions on banking and + repeal of the Glass-Steagall + +On line 777: + The study urged Congress + to abolish these restrictions + in the belief that + +On line 777: + banks closely tied to + the capital markets would + be more profitable and + +On line 777: + competitive with + the largest banks from the United + Kingdom, Europe, and + +On line 777: + proposals would let + banks embrace innovation + and produce a "stronger, + + more diversified + financial system that will + provide important + +On line 779: + to the consumer and + important protections to + the taxpayer."26 The + +On line 779: + were insurance agents, + real estate brokers, and + smaller banks, who felt + +On line 779: + possibility + that the largest banks and their huge + pools of deposits would + +On line 779: + unleashed to compete + without restraint. The House of + Representatives + +On line 779: + proposal in but + similar proposals were + adopted by Congress + + later in the 1990s. + In dealing with the banking + and thrift crisis of + +On line 781: + early 1990s, Congress + was greatly concerned by a + spate of high-profile + +On line 781: + the nation’s 7th-largest bank; + in First Republic, number + in MCorp, number in + +On line 781: + England, number These + banks had relied heavily + on uninsured short-term + +On line 781: + vulnerable to + abrupt withdrawals once confidence + in their solvency + +On line 783: + covered by the FDIC + were protected from loss, but + regulators felt + + obliged to protect the + uninsured depositors—those whose + balances exceeded + +On line 783: + prevent potential + runs on even larger banks that + reportedly may + + have lacked sufficient + assets to satisfy their + obligations, such as + +On line 785: + Bank of America, + and Manufacturers Hanover.27 + During a hearing + +On line 785: + of Continental + Illinois, Comptroller of the + Currency C. Todd + +On line 787: + regulators would + not allow the largest "money + center banks" to fail.28 + +On line 787: + it had a catchy name. + Representative Stewart + McKinney of Connecticut + + responded, "We have + a new kind of bank. It is + called ‘too big to fail’—TBTF—and + +On line 789: + is a wonderful + bank."29 In during this era of + federal rescues + +On line 789: + banks, Drexel Burnham + Lambert—once the country’s fifth-largest + investment bank—failed. + + Crippled by legal + troubles and losses in its + junk bond portfolio, + +On line 789: + bankruptcy in the + securities industry + to date when lenders shunned + +On line 789: + and repo markets. + While creditors, including + other investment + +On line 789: + rattled and absorbed + heavy losses, the government + did not step in, and + +On line 789: + failure did not cause + a crisis. So far, it seemed + that among financial + +On line 791: + only commercial + banks were deemed too big to fail. + In Congress tried to + +On line 791: + Deposit Insurance + Corporation Improvement + Act (FDICIA), which sought + +On line 791: + early when a bank + or thrift got into trouble. + In addition, if + +On line 791: + had to resolve the + failed institution in a + manner that produced + +On line 791: + to the FDIC’s deposit + insurance fund. However, + the legislation + +On line 791: + exempted the FDIC + from the least-cost constraints + if it, the Treasury, + +On line 791: + institution posed + a "systemic risk" to markets. + The other loophole + +On line 791: + raised by some Wall Street + investment banks, Goldman Sachs + in particular: + +On line 791: + of commercial banks + to help securities firms + during previous + +On line 791: + for an amendment to + FDICIA to authorize the + Fed to act as lender + +On line 791: + banks by extending + loans collateralized by + the investment banks’ + +On line 795: + legislation sent + financial institutions + a mixed message: you + + are not too big to + fail—until and unless you are + too big to fail. So + +On line 795: + and shadow banking + industries—remained an open + question until the + +On line 807: + Mae and Freddie Mac: + "The whole army of lobbyists".............................38 + Structured finance: "It + +On line 809: + the risk"...................................................42 The growth of + derivatives: "By far the + most significant + +On line 813: + in finance during + the past decade" FANNIE MAE AND + FREDDIE MAC: "THE WHOLE + +On line 815: + crisis in the thrift + industry created an + opening for Fannie + +On line 815: + Freddie Mac, the two + massive government-sponsored + enterprises (GSEs) + +On line 817: + Congress to support + the mortgage market. Fannie + Mae (officially, + +On line 817: + the Great Depression + in to buy mortgages insured + by the Federal + +On line 817: + The new government + agency was authorized to + purchase mortgages that + +On line 817: + guaranteeing the + supply of mortgage credit + that banks and thrifts could + +On line 817: + homebuyers. Fannie + Mae either held the mortgages + in its portfolio + +On line 817: + often, resold them to + thrifts, insurance companies, + or other investors. + +On line 817: + War II, Fannie Mae + got authority to buy + home loans guaranteed + + by the Veterans + Administration (VA) as + well. This system worked + +On line 819: + weakness: Fannie Mae + bought mortgages by borrowing. + By Fannie’s mortgage + +On line 819: + portfolio had grown + to billion and its debt weighed + on the federal + +On line 819: + administration + and Congress reorganized + it as a publicly + +On line 819: + to take over Fannie’s + subsidized mortgage programs + and loan portfolio. + +On line 819: + insured mortgages, but + it was now a hybrid, a + "government-sponsored + +On line 819: + years later, in the + thrifts persuaded Congress to + charter a second + +On line 819: + (officially, the + Federal Home Loan Mortgage + Corporation), to + +On line 825: + help the thrifts sell their + mortgages. The legislation + also authorized + + Fannie and Freddie + to buy "conventional" fixed-rate + mortgages, which were not + +On line 829: + the FHA or the VA. + Conventional mortgages were + stiff competition + +On line 829: + because borrowers + could get them more quickly and + with lower fees. Still, + + the conventional + mortgages did have to conform + to the GSEs’ loan size + +On line 829: + and underwriting + guidelines, such as debt-to-income + and loan-to-value + +On line 833: + Mae generally + held the mortgages it purchased, + profiting from the + +On line 833: + spread—between its cost + of funds and the interest + paid on these mortgages. + +On line 833: + mortgages, in A lender + would assemble a pool of + mortgages and issue + +On line 833: + backed by the mortgage + pool. Those securities would + be sold to investors, + +On line 833: + timely payment of + principal and interest. + Ginnie charged a fee + +On line 835: + to issuers for this + guarantee. In Freddie got + into the business + +On line 835: + timely payment of + principal and interest. + In after a spike + +On line 837: + Fannie’s portfolio + of mortgages, Fannie followed. + During the 1980s and + +On line 837: + market expanded, + the GSEs grew in importance, + and the market share + + of the FHA and VA + declined. Fannie and Freddie + had dual missions, + +On line 839: + the mortgage market + and maximize returns for + shareholders. They did + +On line 839: + mortgages; they purchased + them—from banks, thrifts, and mortgage + companies—and either + +On line 839: + them. Congress granted + both enterprises special + privileges, such as + +On line 839: + from state and local + taxes and a billion line + of credit each from + +On line 839: + Federal Reserve + provided services such as + electronically + +On line 839: + payments for GSE debt + and securities as if + they were Treasury bonds. + +On line 839: + almost as low as + the Treasury paid. Federal + laws allowed banks, thrifts, + +On line 839: + and regulations + strictly limited the amount + of loans banks could make + +On line 839: + investments in the + debt obligations of other + firms. In addition, + +On line 839: + were required to hold + very little capital to + protect against losses: + +On line 839: + their guarantees of + mortgage-backed securities and + to back the mortgages + +On line 839: + of mortgages assets + under capital standards. + Such privileges led + +On line 839: + to believe that the + government implicitly + guaranteed the GSEs’ + +On line 839: + and debt and that GSE + securities were therefore + almost as safe as + + Treasury bills. As a + result, investors accepted + very low returns on + +On line 841: + funded by short-term + borrowings. For example, + thrifts generally + +On line 841: + their mortgages. Fannie + ought its mortgage portfolio + by borrowing short- + +On line 841: + interest rates to + quell inflation, Fannie, like + the thrifts, found that its + + cost of funding rose + while income from mortgages did + not. By the 1980s, the + +On line 841: + Development (HUD) + estimated Fannie had + a negative net + +On line 841: + primary business + was guaranteeing mortgage-backed + securities, not + +On line 841: + Freddie Mac avoided + taking the interest rate + risk that hit Fannie’s + +On line 843: + Congress provided + tax relief and HUD relaxed + Fannie’s capital + +On line 843: + a vibrant market + for home mortgages served the best + interests of the + +On line 843: + but the moves also + reinforced the impression + that the government + + would never abandon + Fannie and Freddie. Fannie + and Freddie would soon + +On line 843: + and either hold or + securitize mortgages worth + hundreds of billions, + +On line 843: + trillions, of dollars. + Among the investors were U.S. banks, + thrifts, investment funds, + +On line 845: + as well as central + banks and investment funds around + the world. Fannie and + +On line 847: + too big to fail. While + the government continued + to favor Fannie + +On line 847: + thrifts following the + savings and loan crisis. Thrifts + had previously + +On line 847: + the mortgage business + as large holders of mortgages. + In the Financial + +On line 847: + and Enforcement Act + of (FIRREA), Congress imposed + tougher, bank-style capital + +On line 847: + and regulations + on thrifts. By contrast, in the + Federal Housing + +On line 847: + Safety and Soundness + Act of Congress created + a supervisor + +On line 847: + Enterprise Oversight + (OFHEO), without legal powers + comparable to + +On line 847: + thrift supervisors + in enforcement, capital + requirements, funding, + +On line 847: + Crack-ing down on thrifts + while not on the GSEs was no + accident. The GSEs + +On line 847: + power during the + drafting of the law.3 "OFHEO was + structurally weak and + +On line 847: + designed to fail," said + Armando Falcon Jr., a + former director + +On line 849: + to the FCIC.4 All this + added up to a generous + federal subsidy. + +On line 849: + the value of that + subsidy at billion or more + and estimated + + that more than half of + these benefits accrued to + shareholders, not to + +On line 851: + worked as it always + does: the markets shifted to + the lowest-cost, + +On line 851: + requirements on thrifts, + it became increasingly + profitable for them to + + securitize with + or sell loans to Fannie and + Freddie rather than hold + +On line 853: + the loans. The stampede + was on. Fannie’s and Freddie’s + debt obligations and + +On line 855: + securities grew + from billion in to trillion + in and trillion in + +On line 857: + legislation that + transformed Fannie in also + authorized HUD to + +On line 857: + affordable housing + goals for Fannie: to "require + that a reasonable + +On line 857: + the national goal + of providing adequate + housing for low and + +On line 857: + but with reasonable + economic return to the + corporation."7 In + +On line 857: + to implement the + law and, after a barrage + of criticism from + +On line 857: + Federal Housing + Enterprises Financial + Safety and Soundness + +On line 857: + Congress extended + HUD’s authority to set + affordable housing + + goals for Fannie and + Freddie. Congress also changed + the language to say + +On line 857: + affordable housing, + "a reasonable economic + return may be less + + than the return earned + on other activities." + The law required HUD + +On line 859: + to maintain the sound + financial condition of + the enterprises." + + The act now ordered + HUD to set goals for Fannie + and Freddie to buy + +On line 859: + and moderate-income + housing, special affordable + housing, and housing + +On line 859: + rural areas, and + other underserved areas. + Congress instructed + +On line 859: + category as + a percentage of the GSEs’ + mortgage purchases. + +On line 861: + an initiative to + boost homeownership from to + of families by + +On line 861: + one component raised + the affordable housing goals + at the GSEs. Between + +On line 861: + and almost million + households entered the ranks of + homeowners, nearly + + twice as many as in + the previous two years. "But + we have to do a + + lot better," Clinton + said. "This is the new way home + for the American + + middle class. We have + got to raise incomes in this + country. We have got + +On line 863: + security for + people who are doing the + right thing, and we have + +On line 863: + people believe that + they can have some permanence + and stability + + in their lives even as + they deal with all the changing + forces that are out there + +On line 863: + economy."9 The push + to expand homeownership + continued under + +On line 863: + George W. Bush, who, for + example, introduced a + "Zero Down Payment + +On line 863: + that under certain + circumstances could remove the + down payment rule for + +On line 865: + Housing and Urban + Development from to and + now governor of + +On line 865: + means many things. There were + moderate income loans. These + were teachers, these were + + firefighters, these were + municipal employees, + these were people with + +On line 867: + who paid mortgages. These + were not subprime, predatory + loans at all."11 Fannie + +On line 869: + were problematic. + Former Fannie CEO Daniel Mudd + told the FCIC that "the + +On line 871: + structure required the + companies to maintain a + fine balance between + +On line 871: + financial goals and + what we call the mission goals + the root cause of the + +On line 871: + lies with their business + model."12 Former Freddie CEO + Richard Syron concurred: + +On line 873: + it’s a good business + model."13 Fannie and Freddie + accumulated + +On line 873: + and an implicit + government guarantee, and + because they had to + +On line 873: + with regulators, + affordable housing goals, and + capital standards + +On line 873: + the two reported + spending more than million on + lobbying, and their + +On line 873: + campaigns.14 The "Fannie + and Freddie political + machine resisted + +On line 873: + tactics," Falcon, who + regulated them from to + testified. "OFHEO was + +On line 873: + the director of + OFHEO and its successor, the + Federal Housing + +On line 875: + from through testified + that he argued for reform + from the moment he + +On line 875: + became director + and that the companies were + "allowed to be so + +On line 875: + they resisted the + very legislation that might + have saved them."16 Former + +On line 875: + a bipartisan + fashion through my offices. It’s + pretty amazing the + +On line 877: + number of people + that were in their employ."17 In + that army helped secure + +On line 877: + GSEs to count toward + their affordable housing goals + not just their whole loans + + but mortgage-related + securities issued by + other companies, + + which the GSEs wanted + to purchase as investments. + Still, Congressional + +On line 879: + Director June O’Neill + declared in that "the goals are + not difficult to + +On line 879: + and it is not clear + how much they have affected + the enterprises’ + +On line 879: + as the Federal + Housing Administration + devote a larger + +On line 879: + their mortgage lending + to targeted borrowers + and areas than do + + the enterprises."18 + Something else was clear: Fannie + and Freddie, with their + +On line 881: + and lax capital + requirements, were immensely + profitable throughout the + +On line 881: + 1990s. In Fannie had + a return on equity + of Freddie, That year, + +On line 881: + Fannie and Freddie + held or guaranteed more than + trillion of mortgages, + +On line 885: + by only billion + of shareholder equity.19 + STRUCTURED FINANCE: "IT + +On line 887: + T REDUCING THE + RISK" While Fannie and Freddie + enjoyed a near-monopoly + +On line 887: + securitizing + fixed-rate mortgages that were within + their permitted loan + +On line 887: + the 1980s the markets + began to securitize + many other types of + +On line 887: + other mortgages the + GSEs were not eligible + or willing to buy. + + The mechanism worked + the same: an investment bank, + such as Lehman Brothers + +On line 887: + a securities + affiliate of a bank), + bundled loans from a + + bank or other lender + into securities and + sold them to investors, + +On line 887: + by the principal + and interest payments from + the loans. Investors held + +On line 887: + more complicated + than the GSEs’ basic mortgage-backed + securities; the + +On line 887: + were not just mortgages + but equipment leases, credit + card debt, auto loans, + + and manufactured + housing loans. Over time, banks and + securities firms + +On line 887: + to mimic banking + activities outside the + regulatory + +On line 887: + For example, where + banks traditionally took + money from deposits + + to make loans and held + them until maturity, + banks now used money + + from the capital + markets—often from money + market mutual + +On line 887: + make loans, packaging + them into securities + to sell to investors. + + For commercial banks, + the benefits were large. By + moving loans off their + + books, the banks reduced + the amount of capital they + were required to hold + +On line 891: + generated cash + that could be used to make loans. + Banks could also keep + +On line 891: + securities on + their books as collateral + for borrowing, and + +On line 893: + an important source + of revenues. Lawrence Lindsey, a + former Federal + +On line 893: + of the National + Economic Council under + President George W. + + Bush, told the FCIC that + previous housing downturns + made regulators + +On line 893: + banks’ holding whole loans + on their books. "If you had a + regional real + +On line 893: + took down the banks in + that region along with it, which + exacerbated + + the downturn," Lindsey + said. "So we said to ourselves, + ‘How on earth do we + +On line 897: + key benefits to + investors: pooling and tranching. + If many loans were pooled + +On line 897: + securities could + also be sliced up and sold + in portions—known as + +On line 897: + buyers customize + their payments. Risk-averse investors + would buy tranches that + +On line 897: + off first in the event + of default, but had lower + yields. Return-oriented + + investors bought riskier + tranches with higher yields. Bankers + often compared it + + to a waterfall; + the holders of the senior + tranches—at the top of + +On line 899: + junior tranches. And + if payments came in below + expectations, those + +On line 903: + lenders, investment bankers, + and investors. Lenders earned fees for + originating and + +On line 903: + Investment banks earned + fees for issuing mortgage-backed + securities. These + + securities fetched + a higher price than if the + underlying loans + +On line 903: + investors’ needs, were more + diversified, and could be + easily traded. + +On line 903: + safer tranches got a + higher rate of return than + ultra-safe Treasury + +On line 903: + made them harder to + understand and to price than + individual + + loans. To determine + likely returns, investors had + to calculate the + +On line 903: + probabilities + that certain kinds of mortgages + might default, and to + +On line 903: + revenues that would be + lost because of those defaults. + Then investors had to + +On line 903: + the effect of the + losses on the payments to + different tranches. + +On line 905: + three leading credit + rating agencies—Moody’s, Standard Poor’s (S&P), + and Fitch—into key + +On line 905: + positioned between + the issuers and the investors + of securities. + +On line 905: + became common, the + credit rating agencies had + mainly helped investors + +On line 907: + that they needed to + secure favorable credit + ratings in order + +On line 907: + sell structured products + to investors. Investment banks + therefore paid handsome + +On line 907: + rating agencies to + obtain the desired ratings. + "The rating agencies + + were important tools + to do that because you know + the people that we + + were selling these bonds + to had never really + had any history + +On line 907: + They were looking for + an independent party + to develop an + + opinion," Jim Callahan + told the FCIC; Callahan is CEO + of PentAlpha, which services + +On line 909: + of the earliest + securitizations.21 With + these pieces in place—banks + +On line 909: + to shed assets and + transfer risk, investors ready to + put their money to + +On line 909: + and information + technology capable + of handling the job— + +On line 911: + market exploded. + By when the market was years + old, about billion worth + +On line 911: + beyond those done by + Fannie, Freddie, and Ginnie, + were outstanding (see + +On line 911: + billion of credit + card debt; nearly billion worth + of securities + +On line 913: + commercial banks; it + was also a lucrative + new line of business + +On line 913: + Wall Street investment + banks, with which the commercial + banks worked to create + +On line 913: + new securities. + Wall Street firms such as Salomon + Brothers and Morgan + +On line 913: + these complex markets + and relied increasingly + on quantitative + + analysts, called "quants." + As early as the 1970s, Wall + Street executives + +On line 913: + develop models + to predict how markets or + securities might + +On line 913: + importance of this + expertise. Scott Patterson, + author of The Quants, + +On line 915: + the FCIC that using + models dramatically + changed finance. "Wall Street + +On line 917: + Patterson said.23 The + increasing dependence on + mathematics let + + the quants create more + complex products and let their + managers say, and maybe + +On line 917: + that they could better + manage those products’ risk. JP + Morgan developed + +On line 917: + Risk" model (VaR), and + the industry soon adopted + different versions. + +On line 917: + predict with at least + certainty how much a firm + could lose if market + +On line 917: + assumptions based on + limited historical + data; for mortgage-backed + +On line 919: + modeling human + behavior was different + from the problems the + + quants had addressed in + graduate school. "It’s not like + trying to shoot a + +On line 919: + professor who worked + at Goldman Sachs for years, told + the Commission. "The + + way people feel about + gravity on a given + day isn’t going + +On line 921: + the way the rocket + behaves."25 Paul Volcker, Fed + chairman from to told + + the Commission that + regulators were concerned + as early as the + + late 1980s that once banks + began selling instead of + holding the loans they + +On line 921: + making, they would care + less about loan quality. Yet + as these instruments + +On line 921: + relied on the banks + to police their own risks. "It + was all tied up in + +On line 921: + hubris of financial + engineers, but the greater hubris + let markets take care + +On line 921: + said.26 Vincent Reinhart, + a former director of + the Fed’s Division + +On line 923: + in assessing risk.27 + Securitization "was + diversifying + +On line 925: + individual + can diversify your risk. + The system as a + +On line 927: + the risk. And that’s where + the confusion lies."28 THE GROWTH + OF DERIVATIVES: + +On line 929: + MOST SIGNIFICANT + EVENT IN FINANCE DURING THE + PAST DECADE" During the + +On line 929: + and complexity + became closely identified + with one element + +On line 929: + Derivatives are + financial contracts whose prices + are determined by, + +On line 929: + from, the value of + some underlying asset, + rate, index, r event. + + They are not used for + capital formation or + investment, as are + +On line 929: + they are instruments + for hedging business risk or + for speculating + +On line 929: + prices, interest rates, + and the like. Derivatives + come in many forms; the + +On line 929: + are over-the-counter-swaps and + exchange-traded futures and + options.29 They may be + + based on commodities + (including agricultural + products, metals, and + +On line 929: + currency rates, stocks + and indexes, and credit + risk. They can even be + +On line 931: + and commercial firms + use such derivatives. A + firm may hedge its price + + risk by entering + into a derivatives + contract that offsets + +On line 931: + recouped through gains on + the derivatives contract. + Institutional + +On line 931: + are risk-averse sometimes + use interest rate swaps to + reduce the risk to + +On line 931: + for floating payments + with risk-taking entities, + such as hedge funds. Hedge + +On line 931: + swaps for the purpose + of speculating, in hopes + of profiting on + + the rise or fall of + a price or interest rate. + The derivatives + +On line 933: + are organized as + exchanges or as over-the-counter (OTC) + markets, although some + + recent electronic + trading facilities blur + the distinctions. The + +On line 933: + Chicago Board of Trade, + where futures and options are + traded. Such exchanges + + are regulated + by federal law and play + a useful role in + +On line 933: + is, in revealing + the market’s view on prices of + commodities or rates + +On line 933: + investment banks—which act + as derivatives dealers, + buying and selling + +On line 933: + customers. Unlike the + futures and options exchanges, + the OTC market is + + neither centralized + nor regulated. Nor is + it transparent, and + +On line 933: + price discovery is + limited. No matter the + measurement—trading + +On line 933: + represent a very + significant sector of + the U.S. financial + +On line 935: + derivatives on + domestic agricultural + products. In Congress + +On line 935: + act to require that + futures and options contracts + on virtually + +On line 935: + be traded on a + regulated exchange, and + created a new + +On line 935: + the Commodity + Futures Trading Commission + (CFTC), to regulate + +On line 937: + market.30 Outside of + this regulated market, + an over-the-counter market + +On line 937: + The large financial + institutions acting as + OTC derivatives + + dealers worried that + the Commodity Exchange + Act’s requirement that + + trading occur on + a regulated exchange + might be applied to + +On line 937: + the products they were + buying and selling. In the + CFTC sought to address + +On line 939: + prohibitions against + fraud and manipulation.31 + As the OTC market + +On line 939: + the CFTC’s exemption, + a wave of significant + losses and scandals + +On line 939: + hit the market. Among + many examples, in Procter + Gamble, a leading + +On line 939: + products company, + reported a pretax loss + of million, the largest + +On line 939: + nonfinancial firm, + stemming from OTC interest + and foreign exchange + +On line 939: + derivatives sold + to it by Bankers Trust. Procter + Gamble sued Bankers Trust + +On line 939: + settled when Bankers Trust + forgave most of the money + that Procter Gamble + +On line 939: + it. That year, the CFTC + and the Securities and + Exchange Commission + +On line 939: + Bankers Trust million for + misleading Gibson Greeting + Cards on interest + +On line 939: + rate swaps resulting + in a mark-to-market loss + of million, larger + +On line 939: + announced it had lost + billion speculating in + OTC derivatives. + +On line 939: + for bankruptcy—the largest by + a municipality + in U.S. history. + +On line 939: + dealer, Merrill Lynch, + paid million to settle claims.32 + In response, the U.S. + +On line 939: + OTC derivatives + activity among major + dealers, concluding + +On line 939: + sudden failure or + abrupt withdrawal from trading + of any one of these + + large dealers could cause + liquidity problems in + the markets and could + +On line 939: + risks to the others, + including federally + insured banks and the + + financial system + as a whole."33 While Congress then + held hearings on the + +On line 939: + lobbying by the + OTC derivatives dealers + and opposition + +On line 941: + billion on copper + derivatives traded on + a London exchange. + +On line 941: + charged the company + with using derivatives + to manipulate + +On line 941: + to finance the scheme. + Sumitomo settled for + million in penalties + + and restitution. The + CFTC also charged Merrill Lynch + with knowingly and + +On line 943: + prices; it settled for + a fine of million.34 Debate + intensified in + +On line 943: + under Chairperson + Brooksley Born said the agency + would reexamine + +On line 943: + regulated the + OTC derivatives market, + given the market’s + +On line 943: + evolution and the + string of major losses since + The CFTC requested + +On line 945: + got them. Some came from + other regulators, who + took the unusual + +On line 945: + criticizing the + CFTC. On the day that the CFTC + issued a concept + +On line 945: + and SEC Chairman Arthur + Levitt issued a joint statement + denouncing the CFTC’s + +On line 945: + grave concerns about this + action and its possible + consequences. We are + +On line 945: + action may increase + the legal uncertainty + concerning certain + +On line 949: + derivatives. For + months, Rubin, Greenspan, Levitt, and Deputy + Treasury Secretary + +On line 949: + in testimony + to Congress and in other + public pronouncements. + +On line 949: + said: "Aside from safety + and soundness regulation + of derivatives + + dealers under the + banking and securities + laws, regulation + +On line 951: + unnecessary."36 In + September, the Federal + Reserve Bank of New + +On line 951: + of Long-Term Capital + Management (LTCM) by major + OTC erivatives dealers. + +On line 951: + An enormous hedge fund, + LTCM had amassed more than trillion + in notional amount + +On line 951: + of securities + on billion of capital + without the knowledge + +On line 951: + counterparties or + federal regulators.37 + Greenspan testified to + +On line 951: + that in the New York + Fed’s judgment, LTCM’s failure would + potentially have + +On line 951: + effects: a default + by LTCM "would not only have + a significant + +On line 951: + also in the process + could produce large losses, or + worse, for a number + +On line 951: + for other market + participants who were not + directly involved + +On line 955: + moratorium. Greenspan + continued to champion + derivatives and + +On line 955: + market. "By far the + most significant event in + finance during the + +On line 955: + development and + expansion of financial + derivatives," Greenspan + +On line 955: + Association + conference in March "The fact + that the OTC markets + +On line 955: + quite effectively + without the benefits of + [CFTC regulation] + +On line 955: + a strong argument + for development of a + less burdensome regime + +On line 957: + resignation—the + President’s Working Group on + Financial Markets, + +On line 957: + and Commodity + Futures Trading Commission + charged with tracking the + +On line 957: + view. The group issued + a report urging Congress + to deregulate OTC + +On line 959: + well.40 In December + in response, Congress passed and + President Clinton + +On line 959: + the Commodity + Futures Modernization Act + of (CFMA), which in + +On line 959: + deregulated the + OTC derivatives market + and eliminated + +On line 961: + the CFTC and the SEC. + The law also preempted + application of + +On line 961: + The SEC did retain + antifraud authority over + securities-based OTC + +On line 963: + all regulation + or oversight. Subsequently, + other laws enabled + +On line 963: + the expansion of + the market. For example, + under a amendment + +On line 963: + laws, derivatives + counterparties were given + the advantage over + +On line 963: + immediately + terminate their contracts and + seize collateral + +On line 965: + of bankruptcy. The + OTC derivatives market + boomed. At year-end when the + +On line 965: + OTC derivatives + outstanding globally was + trillion, and the gross + +On line 965: + market value was + trillion.41 In the seven and + a half years from then + +On line 965: + peaked, outstanding OTC + derivatives increased more + than sevenfold to + +On line 965: + a notional amount + of trillion; their gross market + value was trillion.42 + + Greenspan testified to + the FCIC that credit default + swaps—a small part of + +On line 967: + problems" during the + financial crisis.43 Rubin + testified that when + +On line 967: + he was "not opposed + to the regulation of + derivatives" and + + had personally + agreed with Born’s views, but that "very + strongly held views in + +On line 967: + to regulation" + were insurmountable.44 Summers + told the FCIC that while + +On line 967: + been foreseen years ago, + "by our regulatory + framework with respect + +On line 967: + was manifestly + inadequate," and that "the + derivatives that + +On line 967: + the most serious, + those associated with + credit default swaps, + +On line 969: + fold between and One + reason for the rapid growth of + the derivatives + +On line 969: + above, financial firms + may use derivatives to + hedge their risks. Such use + +On line 969: + derivatives can + lower a firm’s Value at + Risk as determined + +On line 969: + computer models. + In addition to gaining + this advantage in + + risk management, such + hedges can lower the amount of + capital that banks + +On line 969: + are required to hold, + thanks to a amendment to the + regulatory + +On line 971: + International + Capital Accord, or "Basel + I." Meeting in Basel, + +On line 971: + in the world’s central + banks and bank supervisors + adopted principles + +On line 971: + made adjustments to + implement them. Among the most + important was the + +On line 971: + looser than for all + other assets related + to corporate and + +On line 971: + holdings of Fannie’s + and Freddie’s securities + were less than for all + +On line 973: + assets except those + explicitly backed by the + U.S. government.47 These + +On line 973: + capital standards + accommodated the shift + to increased leverage. + +On line 973: + sought more favorable + capital treatment for their + trading, and the Basel + +On line 973: + adopted the Market + Risk Amendment to Basel I. This + provided that if + +On line 973: + market risks using + derivatives, they could hold + less capital against + +On line 975: + investment banks—increase + their leverage. For example, + entering into + + an equity swap + that mimicked the returns of + someone who owned the + +On line 975: + costs, but the amount of + collateral posted was + much smaller than the + +On line 975: + cost of purchasing + the stock directly. Often + no collateral + + was required at all. + Traders could use derivatives + to receive the same + + gains—or losses—as if + they had bought the actual + security, and + +On line 975: + a buyer’s initial + financial outlay.49 Warren + Buffett, the chairman + +On line 975: + to the FCIC about the + unique characteristics of + the derivatives + +On line 975: + view, the leverage in + the system." He went on to + call derivatives + +On line 975: + to understand—indeed, + he concluded, "I don’t think + I could manage" a + +On line 977: + derivative in + the financial crisis was + the credit default + +On line 977: + seller a little + potential upside at the + relatively small + +On line 977: + a potentially + large downside. The purchaser + of a CDS transferred + +On line 977: + the default risk of + an underlying debt. The + debt security + +On line 977: + be any bond or loan + obligation. The CDS buyer + made periodic + +On line 977: + seller during the + life of the swap. In return, + the seller offered + +On line 977: + "credit events" such as + a partial default. If a + credit event such as + +On line 979: + typically pay + the buyer the face value + of the debt. Credit + +On line 979: + as deregulated + OTC derivatives. This made + CDS very different + +On line 979: + policy. A car + owner can insure only + the car she owns—not + + her neighbor’s. But a + CDS purchaser can use it + to speculate on + + the default of a + loan the purchaser does not + own. These are often + +On line 981: + default swaps" and can + inflate potential losses + and corresponding + +On line 983: + on the default of + a loan or institution. + Before the CFMA + +On line 983: + uncertainty about + whether or not state insurance + regulators had + +On line 983: + authority over + credit default swaps. In June + in response to a + +On line 983: + letter from the law + firm of Skadden, Arps, Slate, Meagher + Flom, LLP, the New York + +On line 983: + determined that "naked" + credit default swaps did not + count as insurance + + and were therefore not + subject to regulation.51 + In addition, when + +On line 985: + sells a policy, + insurance regulators + require that it put + + aside reserves in case + of a loss. In the housing + boom, CDS were sold by + + firms that failed to put + up any reserves or initial + collateral or + +On line 985: + exposure. In the + run-up to the crisis, AIG, the + largest U.S. insurance + +On line 985: + one-half trillion dollar + position in credit risk + through the OTC market + +On line 985: + one dollar’s worth of + initial collateral or + making any other + +On line 985: + alone. The value of + the underlying assets + for CDS outstanding + +On line 987: + grew from trillion at + the end of to a peak of + trillion at the end + +On line 987: + A significant + portion was apparently + speculative or + +On line 989: + default swaps.54 Much of + the risk of CDS and other + derivatives was + + concentrated in + a few of the very largest banks, + investment banks, and + +On line 989: + derivatives. Among + U.S. bank holding companies, + of the notional + +On line 989: + millions of contracts, + were traded by just five large + institutions (in + +On line 989: + JPMorgan Chase, Citigroup, + Bank of America, Wachovia, + and HSBC)—many of the same + +On line 989: + crisis.56 The country’s + five largest investment banks were + also among the world’s + +On line 991: + the FCIC said they do + not track revenues and profits + generated by + + their derivatives + operations, some firms did + provide estimates. + +On line 991: + and of its revenues + from through were generated + by derivatives, + +On line 991: + including to of + the firm’s commodities business, + and half or more of + +On line 991: + its interest rate + and currencies business. From + May through November + +On line 993: + were derivative + transactions.57 When the nation’s + biggest financial + +On line 995: + find themselves straining + to understand an unknown + battlefield shaped by + + unseen exposures + and interconnections as + they fought to keep the + +On line 1005: + CONTENTS Expansion + of banking activities: + "Shatterer of Glass-Steagall" + +On line 1011: + Management: "That’s what + history had proved to them" + Dot-com crash: "Lay on + + more risk"......................................................................59 The wages of + finance: "Well, this one’s doing + it, so how can I + +On line 1023: + OF GLASSSTEAGALL" By the + mid-1990s, the parallel banking + system was booming, + +On line 1023: + largest commercial banks + appeared increasingly like + the large investment + +On line 1023: + telecommunications, + and information services + created economies of + +On line 1023: + more diversified, + innovative, efficient, + and better able to + +On line 1023: + that the largest banks were + not necessarily more + efficient but grew + +On line 1023: + commanding market + positions and creditors’ + perception they were + +On line 1023: + fail. As they grew, the + large banks pressed regulators, + state legislatures, + +On line 1023: + banks in every state, + and removed most restrictions + on opening branches + + in more than one state. + It preempted any state law + that restricted the + +On line 1025: + of out-of-state banks + to compete within the state’s + borders.1 Removing + +On line 1025: + consolidate the + banking industry. Between + and "megamergers" occurred + +On line 1025: + involving banks with + assets of more than billion + each. Meanwhile the largest + +On line 1025: + jumped from owning of + the industry’s assets to + From to the combined + +On line 1025: + the five largest U.S. banks—Bank + of America, Citigroup, + JP Morgan, Wachovia, + +On line 1025: + Wells Fargo—more than + tripled, from trillion to trillion.2 + And investment banks + +On line 1027: + acquired Shearson in + and Salomon Brothers in while + Paine Webber purchased + +On line 1027: + Kidder, Peabody in Two + years later, Morgan Stanley + merged with Dean Witter, + +On line 1027: + Bankers Trust purchased Alex. + Brown Sons. The assets of the + five largest investment + +On line 1027: + Sachs, Morgan Stanley, + Merrill Lynch, Lehman Brothers, and + Bear Stearns—quadrupled, from + +On line 1029: + in to trillion in + In the Economic Growth and + Regulatory + +On line 1029: + required federal + regulators to review + their rules every decade + +On line 1031: + Federal Deposit + Insurance Corporation’s + annual report + +On line 1031: + a photograph of + the vice chairman, John Reich; + the director of + +On line 1031: + using a chainsaw + and pruning shears to cut the + "red tape" binding a + +On line 1033: + Securities and + Exchange Commission chairman + Arthur Levitt told the FCIC + +On line 1033: + regulation got + out, industry lobbyists + would rush to complain + + to members of the + congressional committee + with jurisdiction + + over the financial + activity at issue. + According to Levitt, + + these members would then + "harass" the SEC with frequent + letters demanding + + answers to complex + questions and appearances of + officials before + + Congress. These requests + consumed much of the agency’s + time and discouraged + +On line 1033: + regulations. Levitt + described it as "kind of a + blood sport to make the + +On line 1035: + stupid or inept or + venal."5 However, others + said interference—at + +On line 1035: + the executive + branch—was modest. John Hawke, a + former comptroller + +On line 1035: + he found the Treasury + Department "exceedingly + sensitive" to his + +On line 1037: + its supporters were + also disin-clined to adopt + new regulations + +On line 1039: + with strong incentives + to protect shareholders, would + regulate themselves + +On line 1039: + truly impressive + improvement in methods of + risk measurement and + +On line 1039: + growing adoption of + these technologies by mostly + large banks and other + +On line 1039: + believed that markets + would self-regulate through the + activities of + +On line 1039: + and investors. "It is + critically important + to recognize that + +On line 1039: + market is ever + truly unregulated," + said Fed Chairman Alan + +On line 1039: + "The self-interest + of market participants + generates private + +On line 1039: + regulation. Thus, + the real question is not + whether a market should + +On line 1043: + or weakens private + regulation."8 Richard Spillenkothen, the + Fed’s director of + +On line 1043: + before management + weaknesses were reflected + in poor financial + +On line 1043: + might be viewed as i) + overly-intrusive, burdensome, + and heavy-handed, ii) an + +On line 1043: + availability, or + iii) inconsistent with the + Fed’s public posture."9 + +On line 1045: + and keep any agency + from becoming arbitrary + or inflexible, + +On line 1045: + makers pushed to keep + multiple regulators.10 + In Greenspan testified + +On line 1045: + consolidate bank + regulation: "The current + structure provides banks + +On line 1045: + regulator, an + effective test that provides + a limit on the + +On line 1045: + posture of any one + regulator. The pressure + of a potential + +On line 1045: + institutions has + inhibited excessive + regulation and + +On line 1045: + to the bias of a + regulatory agency + to overregulate."11 + +On line 1045: + the OTS and Office + of the Comptroller of the + Currency (OCC), were + +On line 1045: + the institutions + they regulated. As a + result, the larger + +On line 1045: + of institutions + that chose these regulators, + the greater their budget. + +On line 1047: + success and the tenor + of the times, the largest banks and + their regulators + +On line 1047: + to oppose limits + on banks’ activities or + growth. The barriers + +On line 1047: + banks and investment + banks had been crumbling, little + by little, and now + +On line 1047: + to remove the last + remnants of the restrictions + that separated + +On line 1049: + of after years of + opposing repeal of Glass-Steagall, + the Securities + +On line 1049: + such as Goldman Sachs + and Merrill Lynch—changed course. Because + restrictions on banks + +On line 1049: + the previous decade, + banks already had beachheads in + securities and + +On line 1049: + Despite numerous + lawsuits against the Fed and the + OCC, securities + +On line 1049: + of deregulation + through agency rulings.12 Edward + Yingling, the CEO of + +On line 1049: + organization), + said, "Because we had knocked so + many holes in the walls + +On line 1049: + investment banking + and insurance, we were able + to aggressively + +On line 1049: + their businesses—in some + cases more aggressively + than they could enter + +On line 1049: + industry, then the + insurance companies, and + finally the agents + + came over and said let’s + negotiate a deal and + work together."13 In + +On line 1051: + forced the issue by + seeking a merger with the + insurance giant + +On line 1051: + approved it, citing + a technical exemption + to the Bank Holding + +On line 1051: + Act,14 but Citigroup + would have to divest itself + of many Travelers + + assets within five + years unless the laws were changed. + Congress had to make + +On line 1051: + prepared to break up + the nation’s largest financial + firm1 Was it time to + + repeal the Glass-Steagall Act, + once and for all1 As Congress + began fashioning + +On line 1055: + legislation, the + banks were close at hand. In the + financial sector + +On line 1055: + individuals + and political action + committees (PACs) in + +On line 1055: + election cycle. From + through federal lobbying + by the financial + +On line 1057: + campaign donations + from individuals and + PACs topped billion.15 In + +On line 1057: + President Clinton + signed the Gramm-Leach-Bliley Act (GLBA), which + lifted most of the + +On line 1057: + Glass-Steagall-era restrictions. The + new law embodied many of + the measures Treasury + + had previously + advocated.16 The New York + Times reported that + + Citigroup CEO Sandy + Weill hung in his office "a + hunk of wood—at least + +On line 1059: + wide—etched with his portrait + and the words ‘The Shatterer + of Glass-Steagall.’"17 Now, as long + +On line 1059: + certain safety and + soundness conditions, they could + underwrite and sell + +On line 1059: + were no longer bound by + the Fed’s limit—their primary + regulator, the + +On line 1059: + the legislation + argued that the new holding + companies would be + +On line 1059: + safer (through a broader + diversification of + risks), more useful to + +On line 1059: + of one-stop shopping for + financial services), and more + competitive with + +On line 1059: + opponents warned that + allowing banks to combine + with securities + +On line 1059: + speculation and + could trigger a crisis like + the crash of John Reed, + +On line 1059: + FCIC that, in hindsight, + "the compartmentalization + that was created + +On line 1059: + be a positive + factor," making less likely + a "catastrophic + +On line 1061: + financial system.18 + To win the securities + industry’s support, + + the new law left in + place two exceptions that let + securities firms + +On line 1061: + and industrial + loan companies, a type of + depository + +On line 1061: + with stricter limits on + its activities. Through them, + securities firms + +On line 1061: + FDIC-insured deposits without + supervision by the Fed. + Some securities + +On line 1063: + industrial loan + company grew from less than + billion in assets + +On line 1065: + in to billion in + and to billion in Lehman’s thrift + grew from million in + +On line 1067: + in and its assets + rose as high as billion in + For institutions + +On line 1067: + colloquially + as "Fed-Lite." The Fed supervised + financial holding + +On line 1067: + across the various + subsidiaries owned by the holding + company. To avoid + +On line 1067: + to rely "to the + fullest extent possible" on + examinations + +On line 1067: + securities firms, + and insurance companies. + The expressed intent + +On line 1067: + Fed Chairman Ben Bernanke + told the FCIC that Fed-Lite "made it + difficult for any + +On line 1067: + the whole picture of + activities and risks of + large, complex banking + +On line 1069: + the Fed, would fail to + identify excessive risks + and unsound practices + +On line 1071: + companies such as + Citigroup and Wachovia.22 The + convergence of banks + +On line 1071: + between banking and + securities markets that + Fed Chairman Greenspan had + +On line 1071: + stability. He + compared it to a "spare tire": + if large commercial + +On line 1071: + ran into trouble, + their large customers could borrow + from investment banks + + and others in the + capital markets; if those + markets froze, banks could + +On line 1071: + lending provided + another source of credit + to home buyers and + + other borrowers + that softened a steep decline + in lending by thrifts + +On line 1071: + the crisis in Asian + financial markets in the + late 1990s further proved + + his point, Greenspan said.23 The + new regime encouraged growth and + consolidation + +On line 1073: + securities, and + insurance. The bank-centered + financial holding + + companies such as + Citigroup, JP Morgan, and + Bank of America + +On line 1073: + five" investment banks—Goldman + Sachs, Morgan Stanley, Merrill + Lynch, Lehman Brothers, and + +On line 1073: + loan syndication, + and trading in over-the-counter (OTC) + derivatives. The + +On line 1073: + holding companies + became major players in + investment banking. + + The strategies of the + largest commercial banks and their + holding companies + + came to more closely + resemble the strategies of + investment banks. Each + +On line 1073: + insured deposits, and + the investment banks enjoyed + less regulation. + + Both prospered from the + late 1990s until the outbreak + of the financial + +On line 1073: + that had helped make the + system less vulnerable + would be gone when the + + financial crisis + emerged—all the wheels of the system + would be spinning on + +On line 1079: + MANAGEMENT: "THAT’S WHAT + HISTORY HAD PROVED TO THEM" + In August Russia + +On line 1079: + Russia announced it + would restructure its debt and + postpone some payments. + +On line 1079: + investors dumped higher-risk + securities, including + those having nothing + + to do with Russia, + and fled to the safety of + U.S. Treasury bills and + +On line 1079: + deposits. In response, + the Federal Reserve cut + short-term interest + +On line 1079: + times in seven weeks.24 + With the commercial paper + market in turmoil, + + it was up to the + commercial banks to take up + the slack by lending + +On line 1079: + short-term paper. Banks + loaned billion in September + and October of + +On line 1081: + amount25—and helped prevent + a serious disruption + from becoming much + +On line 1083: + a slump. Not so for + Long-Term Capital Management, + a large U.S. hedge fund. + +On line 1083: + debt securities, + including the junk bonds and + emerging market debt + +On line 1083: + investors were dumping.26 + To buy these securities, + the firm had borrowed + +On line 1083: + investors’ equity;27 + lenders included Merrill Lynch, + JP Morgan, Morgan + +On line 1083: + Lehman Brothers, Goldman + Sachs, and Chase Manhattan. The + previous four years, + +On line 1087: + returns: and while the + S&P yielded an average + But leverage works both + + ways, and in just one + month after Russia’s partial + default, the fund lost + +On line 1087: + more than billion—or more + than of its nearly billion + in capital. Its + +On line 1089: + debt was about billion. + The firm faced insolvency.29 + If it were only + +On line 1089: + a matter of less + than billion, LTCM’s failure might + have been manageable. + +On line 1089: + entering into + derivatives contracts with + more than trillion in + +On line 1089: + derivatives.30 With + very little capital in + reserve, it threatened + +On line 1089: + in the opaque over-the-counter + market, the markets did not + know the size of its + +On line 1089: + that it had posted + very little collateral + against those positions. + +On line 1089: + noted then, if all + the fund’s counterparties had + tried to liquidate + +On line 1089: + would have created + "exaggerated" losses. + This was a classic + +On line 1089: + for a run: losses + were likely, but nobody knew + who would get burned. The + + Fed worried that with + financial markets already + fragile, these losses + +On line 1089: + spill over to investors + with no relationship to + LTCM, and credit and + +On line 1089: + markets might "cease to + function for a period + of one or more days + + and maybe longer."31 To avert + such a disaster, the Fed + called an emergency + + meeting of major + banks and securities firms + with large exposures + +On line 1091: + agreed to organize + a consortium to inject + billion into LTCM + +On line 1091: + in return for of + its stock.33 The firms contributed + between million and + +On line 1093: + securities and + derivatives followed. William + McDonough, then president + + of the New York Fed, + insisted "no Federal + Reserve official + +On line 1093: + were made."35 The rescue + involved no government funds. + Nevertheless, the + + Fed’s orchestration + raised a question: how far would + it go to forestall + +On line 1095: + saw as a systemic + crisis1 The Fed’s aggressive + response had precedents + +On line 1097: + decades. In the Fed had + supported the commercial + paper market; in + +On line 1097: + silver futures; in + the repo market; in the + stock market after + +On line 1097: + fell by percent in + three days. All provided a + template for future + +On line 1097: + interest rates and + encouraged financial firms + in the parallel + +On line 1097: + help ailing markets. + And sometimes it organized + a consortium of + +On line 1099: + several large banks + that they viewed as "too big to + fail" and protected + +On line 1099: + those banks, including + uninsured depositors. Their + rationale was that + +On line 1099: + banks were crucial to + the financial markets and + the economy, and + +On line 1099: + could not allow the + collapse of one arge bank to + trigger a panic + +On line 1101: + was a completely + different proposition to + argue that a hedge + +On line 1101: + big to fail because + its collapse might destabilize + capital markets. + +On line 1101: + rescue indicate + that the Fed was prepared to + protect creditors + +On line 1101: + any type of firm if + its collapse might threaten the + capital markets1 + +On line 1101: + Miller, the bankruptcy + counsel for Lehman Brothers when + it failed in told the + + FCIC that "they [hedge funds] + expected the Fed to save + Lehman, based on the Fed’s + + involvement in LTCM’s + rescue. That’s what history + had proved to them."37 For + + Stanley O’Neal, Merrill’s + CFO during the LTCM rescue, + the experience + + was "indelible." He + told the FCIC, "The lesson I + took away from it though + +On line 1105: + and panic and lack + of liquidity lasted + longer, there would have been + + a lot of firms across + the Street that were irreparably + harmed, and Merrill would + +On line 1107: + have been one of those."38 + Greenspan argued that the events of + had confirmed the spare + +On line 1107: + in a speech that the + successful resolution + of the crisis showed + +On line 1107: + financial sector + provides insurance against a + financial problem + +On line 1107: + Financial Markets + came to a less definite + conclusion. In a + +On line 1107: + its counterparties + had "underestimated + the likelihood that + +On line 1107: + and volatility spreads + would move in a similar + fashion in markets + +On line 1107: + the world at the same + time."40 Many financial firms would + make essentially + +On line 1107: + the Working Group, this + miscalculation raised an + important issue: + +On line 1107: + fostered a major + expansion in the volume + and, in some cases, + +On line 1107: + severe losses. This + shows the need for insuring + that decisions about + +On line 1109: + is explicitly + considered."41 The need for risk + management grew in + + the following decade. + The Working Group was already + concerned that neither + +On line 1109: + and the economy. + Nevertheless, it cautioned + that overreacting + + to threats such as LTCM + would diminish the dynamism + of the financial + +On line 1111: + real economy: + "Policy initiatives that + are aimed at simply + + reducing default + likelihoods to extremely + low levels might be + +On line 1111: + activity and + the intermediation + of risks that support + +On line 1113: + Group’s findings, the SEC + five years later would issue + a rule expanding + + the number of hedge + fund advisors—to include most + advisors—that needed + +On line 1113: + register with the + SEC. The rule would be struck down + in by the United + +On line 1113: + Court of Appeals for + the District of Columbia + after the SEC was + +On line 1115: + were relatively + calm after Glass-Steagall would be deemed + unnecessary, OTC + + derivatives would + be deregulated, and the + stock market and the + +On line 1115: + would continue to + prosper for some time. Like all + the others (with the + + exception of the + Great Depression), this crisis + soon faded into + +On line 1115: + memory. But not + before, in February Time + magazine featured + +On line 1115: + Larry Summers, and + Alan Greenspan on its cover as + "The Committee to + +On line 1115: + the World." Federal + Reserve Chairman Greenspan became + a cult hero—the "Maestro"—who + +On line 1119: + emergency since the + stock market crash.44 DOTCOM CRASH: + "LAY ON MORE RISK" The + + late 1990s was a good + time for investment banking. + Annual public + +On line 1119: + securities in + U.S. markets almost quadrupled, + from billion in to + +On line 1119: + Annual initial + public offerings of stocks + (IPOs) soared from billion + +On line 1119: + in to billion in + as banks and securities + firms sponsored IPOs for + +On line 1119: + telecommunications + companies—the dot-coms + and telecoms.45 A stock + + market boom ensued + comparable to the great + bull market of the + +On line 1119: + value of publicly + traded stocks rose from trillion + in December to + +On line 1119: + trillion in March The + boom was particularly + striking in recent + +On line 1119: + and telecom issues + on the NASDAQ exchange. Over + this period, the + +On line 1121: + skyrocketed from + to In the spring of the tech + bubble burst. The "new + +On line 1121: + telecoms had failed to + match the lofty expectations + of investors, who had + +On line 1121: + bullish—and, as it turned + out, sometimes deceptive—research + reports issued by + +On line 1121: + and securities + firms that had underwritten + the tech companies’ + +On line 1121: + offerings. Between + March and March the NASDAQ fell + by almost two-thirds. This + +On line 1121: + as the nation slipped + into recession. Investors + were further shaken + +On line 1121: + and other scandals + at prominent firms such as + Enron and World-com. + +On line 1121: + leading commercial + and investment banks settled + with regulators + +On line 1121: + improper practices + in the allocation of + IPO shares during the + +On line 1121: + spinning (doling out + shares in "hot" IPOs in return + for reciprocal + +On line 1121: + laddering (doling + out shares to investors who agreed + to buy more later + + at higher prices).47 The + regulators also found + that public research + +On line 1121: + New York’s attorney + general, the National + Association + +On line 1121: + state regulators + settled enforcement actions + against firms for million, + +On line 1123: + certain practices, and + instituted reforms.48 The + sudden collapses + +On line 1123: + of Enron and WorldCom + were shocking; with assets of + billion and billion, + +On line 1125: + Morgan, Merrill Lynch, + and other Wall Street banks paid + billions of dollars—although + +On line 1125: + no wrongdoing—for + helping Enron hide its debt + until just before + + its collapse. Enron + and its bankers had created + entities to do + + complex transactions + generating fictitious + earnings, disguised debt + +On line 1125: + banks had pressured their + analysts to write glowing + valuations of + + Enron. The scandal + cost Citigroup, JP Morgan, + CIBC, Merrill Lynch, and + +On line 1125: + settlements with the + SEC; Citigroup, JP Morgan, + CIBC, Lehman Brothers, and + +On line 1127: + Bank of America + paid another billion to + investors to settle + +On line 1127: + response, the Sarbanes-Oxley Act + of required the personal + certification + +On line 1127: + reports by CEOs and + CFOs; independent audit + committees; longer jail + + sentences and larger + fines for executives who + misstate financial + +On line 1129: + and protections for + whistleblowers. Some firms that lent + to companies that + +On line 1129: + stock market bust were + successfully hedged, having + earlier purchased + + credit default swaps + on these firms. Regulators + seemed to draw comfort + +On line 1131: + banks had succeeded + in transferring losses from + those relationships + +On line 1131: + investors through these and + other hedging transactions. + In November Fed + +On line 1131: + have effectively + spread losses" from defaults by + Enron and other + + large corporations. + Although he conceded the + market was "still too + +On line 1131: + to have been tested" + thoroughly, he observed that + "to date, it appears + +On line 1133: + following year, Fed + Vice Chairman Roger Ferguson + noted that "the most + +On line 1133: + fact regarding the + banking industry during + this period is + +On line 1135: + achieved unprecedented + stability and strong risk + management. The Wall + +On line 1135: + banks’ pivotal role in + the Enron debacle did + not seem to trouble + +On line 1135: + Fed officials. In + a memorandum to the + FCIC, Richard Spillenkothen described + +On line 1135: + Board of Governors + in which some Fed governors + received details of + +On line 1135: + "The message to some + supervisory staff was + neither ambiguous + + nor subtle," Spillenkothen wrote. + Earlier in the decade, he + remembered, senior + +On line 1135: + at the Fed had called + Enron an example of + a derivatives + +On line 1135: + regulated by + market discipline without + government oversight.52 + +On line 1137: + cut interest rates + aggressively in order + to contain damage + +On line 1137: + dot-com and telecom + bust, the terrorist attacks, + and the financial + +On line 1137: + In January the + federal funds rate, the overnight + bank-to-bank lending rate, + +On line 1139: + was By mid-2003, the Fed + had cut that rate to just the + lowest in half a + +On line 1139: + another year. In + addition, to offset the + market disruptions + +On line 1141: + financial markets + with money by purchasing + more than billion in + +On line 1141: + securities and + lending billion to banks. It + also suspended + + restrictions on bank + holding companies so the + banks could make large loans + +On line 1141: + these actions the Fed + prevented a protracted + liquidity crunch + +On line 1141: + in the financial + markets during the fall of + just as it had done + +On line 1143: + the stock market crash + and the Russian crisis. Why + wouldn’t the markets + + assume the central + bank would act again—and again save the + day1 Two weeks before + +On line 1143: + cut short-term rates in + January the Economist + anticipated + +On line 1145: + it: "the ‘Greenspan put’ is + once again the talk of Wall Street. + The idea is that the + + Federal Reserve + can be relied upon in + times of crisis to + +On line 1145: + the rescue, cutting + interest rates and pumping + in liquidity, + +On line 1145: + providing a floor + for equity prices."53 The "Greenspan + put" was analysts’ + + shorthand for investors’ + faith that the Fed would keep the + capital markets + +On line 1145: + no matter what. The + Fed’s policy was clear: to + restrain growth of an + + asset bubble, it + would take only small steps, such + as warning investors + + some asset prices might + fall; but after a bubble + burst, it would use all + +On line 1145: + bursting a bubble + would heavily damage the + economy. "Instead + +On line 1145: + trying to contain + a putative bubble by + drastic actions with + +On line 1145: + in when housing prices + were ballooning, "we chose to + focus on policies + + ‘to mitigate the + fallout when it occurs and, + hopefully, ease the + +On line 1147: + policy—allowing + unrestrained growth, then working + hard to cushion the + +On line 1147: + the question of "moral + hazard": did the policy + encourage investors + +On line 1147: + institutions to + gamble because their upside + was unlimited + +On line 1147: + their downside (at least + against catastrophic losses)1 + Greenspan himself warned about + +On line 1147: + a speech, noting that + higher asset prices were "in + part the indirect + +On line 1147: + investors accepting + lower compensation for + risk" and cautioning + +On line 1147: + liquidity can + readily disappear."55 Yet + the only real + +On line 1147: + would be an upward + march of the federal funds + rate that had begun + +On line 1147: + in the summer of + although, as he pointed out + in the same speech, this + +On line 1149: + And the markets were + undeterred. "We had convinced + ourselves that we were + +On line 1149: + Federal Reserve + governor and National + Economic Council + +On line 1151: + under President + George W. Bush Lawrence Lindsey told + the Commission. "And + +On line 1151: + should any rational + investor respond to a less + risky world1 They should lay + +On line 1155: + more risk."56 THE WAGES OF + FINANCE: "WELL, THIS ONE’S DOING + IT, SO HOW CAN I + +On line 1155: + DO IT1 As figure + demonstrates, for almost half a + century after + + the Great Depression, + pay inside the financial + industry and out + +On line 1155: + financial sector + compensation was more than + greater than in other + +On line 1157: + gap than before the + Great Depression. Until the + New York Stock Exchange, + +On line 1157: + required members to + operate as partnerships.57 + Peter J. Solomon, a + +On line 1157: + Lehman Brothers partner, + testified before the FCIC + that this profoundly + +On line 1157: + bank’s culture. Before + the change, he and the other + partners had sat in + +On line 1157: + room at headquarters, + not to socialize but to + "overhear, interact, + + and monitor" each + other. They were all on the + hook together. "Since + +On line 1157: + seriously," Solomon + said.58 Brian Leach, formerly + an executive + +On line 1157: + before it issued + stock and became a public + corporation: "When + + I first started at + Morgan Stanley, it was a + private company. + + When you’re a private + company, you don’t get paid + until you retire. + +On line 1157: + you get a good, you + know, year-to-year compensation." + But the big payout + + was "when you retire."59 + When the investment banks went + public in the 1980s + +On line 1159: + close relationship + between bankers’ decisions and + their compensation + +On line 1159: + shareholders’ money. + Talented traders and managers + once tethered to their + + firms were now free agents + who could play companies against + each other for more + +On line 1159: + up, commercial banks + did the same. Some included + "clawback" provisions + +On line 1159: + require the return + of compensation under + narrow circumstances, + +On line 1159: + proved too limited + to restrain the behavior + of traders and managers. + +On line 1161: + found that the real + value of executive + pay, adjusted for + +On line 1161: + the years after World + War II, lagging companies’ + increasing size.60 But + +On line 1163: + rate picked up during + the 1970s and rose faster each decade, + reaching a year from + +On line 1163: + to Much of the change + reflected higher earnings + in the financial + +On line 1163: + averaged million + annually, the highest + of any industry. + + Though base salaries differed + relatively little across + sectors, banking and + +On line 1163: + higher bonuses and + awarded more stock. And brokers + and dealers did by + +On line 1165: + more than million in + compensation.62 Both before + and after going + + public, investment + banks typically paid out + half their revenues in + +On line 1165: + compensation. For + example, Goldman Sachs spent + between and a year + +On line 1167: + and Merrill paid out + similar percentages in + and but gave in 2007—a + +On line 1169: + suffered dramatic + losses.63 As the scale, revenue, + and profitability + +On line 1169: + key employees. John + Gutfreund, reported to + be the highest-paid + +On line 1171: + on Wall Street in the + late 1980s, received million in + as CEO of Salomon + +On line 1173: + Stanley O’Neal’s package + was worth more than million in + the last full year he + +On line 1173: + was CEO of Merrill + Lynch.65 In Lloyd Blankfein, CEO at + Goldman Sachs, received + +On line 1173: + Richard Fuld, CEO of Lehman + Brothers, and Jamie Dimon, CEO + of JPMorgan Chase, received + +On line 1173: + million and million, + respectively.67 That year Wall + Street paid workers in + +On line 1173: + York roughly billion + in year-end bonuses alone.68 Total + compensation for + + the major U.S. banks + and securities firms was + estimated at + +On line 1175: + billion.69 Stock options + became a popular form + of compensation, + +On line 1175: + buy the company’s + stock in the future at some + predetermined price, + +On line 1175: + to reap rewards when + the stock price was higher than + that predetermined + +On line 1175: + In fact, the option + would have no value if the + stock price was below + +On line 1175: + price. Encouraging + the awarding of stock options + was legislation + +On line 1175: + while the downside was + simply to receive nothing + if the stock didn’t + +On line 1175: + predetermined price. + The same applied to plans that + tied pay to return + + on equity: they + meant that executives could + win more than they could + +On line 1177: + to increase both risk + and leverage, which could lead to + larger jumps in a + +On line 1179: + price. As these options + motivated financial + firms to take more risk + +On line 1179: + use more leverage, the + evolution of the system + provided the means. + +On line 1179: + commercial banks. OTC + derivatives allowing + for enormous leverage + + proliferated. + And risk management, thought to + be keeping ahead of + +On line 1181: + in the increasing + risks. The dangers of the new + pay structures were clear, + +On line 1181: + were powerless to + change it. Former Citigroup + CEO Sandy Weill told the + + Commission, "I think + if you look at the results + of what happened on + + Wall Street, it became, + Well, this one’s doing it, so + how can I not do + +On line 1181: + if I don’t do it, + then the people are going + to leave my place and + +On line 1181: + of an important + function in a broad base of + companies, I would + +On line 1183: + regulatory + entities, one source of checks + on excessive risk + +On line 1183: + challenges recruiting + financial experts who could + otherwise work in + + the private sector. + Lord Adair Turner, chairman of + the U.K. Financial + +On line 1185: + told the Commission, + "It’s not easy. This is like a + continual process + +On line 1185: + high-skilled people, and + the poachers are better paid + than the game-keepers."71 + +On line 1185: + said the same at an + FCIC hearing: "It’s just simply + never going to + + be the case that the + government can pay what Wall + Street can pay."72 Tying + +On line 1187: + to earnings also, + in some cases, created + the temptation to + +On line 1187: + the numbers. Former + Fannie Mae regulator + Armando Falcon + +On line 1187: + "Fannie began the + last decade with an ambitious + goal—double earnings + +On line 1187: + to [per share]. A large + part of the executives’ + compensation was + +On line 1187: + tied to meeting that + goal." Achieving it brought CEO Franklin + Raines million of his + +On line 1187: + million pay from to + However, Falcon said, the + goal "turned out to be + +On line 1187: + hiding risks. Fannie + and Freddie executives + worked hard to persuade + +On line 1187: + investment, while at + the same time covering up + the volatility and + +On line 1187: + of their own mortgage + portfolios and balance sheets." + Fannie’s estimate + +On line 1187: + of how many mortgage + holders would pay off was off + by million at year-end + +On line 1187: + which meant no bonuses. + So Fannie counted only + half the million on + + its books, enabling Raines + and other executives + to meet the earnings + +On line 1189: + chain, from people who + originated mortgages to + people on Wall Street + +On line 1189: + often the first link + in the process, FDIC Chairman Sheila + Bair told the FCIC that + +On line 1189: + based on the volume + of loans originated rather + than the performance + + and quality of + the loans made." She concluded, + "The crisis has shown + +On line 1189: + Formula-driven + compensation allows high + short-term profits to + +On line 1189: + into generous + bonus payments, without regard + to any longer-term risks."74 SEC + +On line 1189: + success, even if these + same decisions result in + significant long-term + + losses or failure + for investors and taxpayers."75 + FINANCIAL SECTOR + +On line 1193: + "I THINK WE OVERDID + FINANCE VERSUS THE REAL + ECONOMY" For about + +On line 1193: + beginning in the + early 1980s, the financial + sector grew faster than + +On line 1193: + the economy—rising + from about of gross domestic + product (GDP) to about + +On line 1193: + in the early 21st + century. In financial + sector profits were + +On line 1193: + about of corporate + profits. In they hit a high + of but fell back to + +On line 1193: + larger. JP Morgan’s + assets increased from billion + in to trillion in + +On line 1195: + annual growth rate + of Bank of America and + Citigroup grew by + +On line 1197: + respectively, with + Citigroup reaching trillion + in assets in (down + +On line 1197: + from trillion in and + Bank of America trillion. + The investment banks + +On line 1197: + Goldman’s assets grew + from billion in to trillion + by an annual + +On line 1201: + growth rate of At Lehman, + assets rose from billion to + billion, or Fannie + +On line 1201: + Fannie’s assets and + guaranteed mortgages increased + from trillion in to + +On line 1201: + or annually. + At Freddie, they increased from + trillion to trillion, + +On line 1203: + or a year.77 As they + grew, many financial firms added + lots of leverage. That + +On line 1203: + higher returns for + shareholders, and more money + for compensation. + + Increasing leverage + also meant less capital + to absorb losses. + +On line 1205: + and Freddie were the + most leveraged. The law set the + government-sponsored + +On line 1205: + requirement at of + assets plus of the mortgage-backed + securities they + +On line 1207: + So they could borrow + more than for each dollar of + capital used to + +On line 1207: + If they wanted to + own the securities, they + could borrow for each + +On line 1207: + capital. Combined, + Fannie and Freddie owned or + guaranteed trillion + +On line 1209: + at the end of against + just billion of capital, + a ratio of From + +On line 1209: + to in assets for + each dollar of capital, + for leverage ratios + +On line 1209: + between and:1. For some + banks, leverage remained roughly + constant. JP Morgan’s + +On line 1211: + reported leverage + was between and:1. Wells Fargo’s + generally ranged + +On line 1211: + between and Other + banks upped their leverage. Bank of + America’s rose + +On line 1211: + to in Citigroup’s + increased from to:1, then shot up + to by the end of + +On line 1211: + brought off-balance sheet + assets onto the balance + sheet. More than other + + banks, Citigroup held + assets off of its balance + sheet, in part to hold + +On line 1213: + bringing billion worth + of assets on balance sheet, + substantial assets + +On line 1215: + remained off. If those + had been included, leverage + in would have been or + +On line 1215: + Wells Fargo and Bank + of America, including + off-balance-sheet assets + +On line 1219: + have raised the leverage + ratios and respectively.78 + Because investment + +On line 1219: + not subject to the + same capital requirements + as commercial and + +On line 1219: + banks, they were given + greater latitude to rely + on their internal + +On line 1221: + and they reported + higher leverage. At Goldman + Sachs, leverage increased + +On line 1221: + in to in Morgan + Stanley and Lehman increased about + and%, respectively, + +On line 1223: + reached by the end of + Several investment banks + artificially + +On line 1223: + assets right before + the reporting period + and subsequently + + buying them back. As + the investment banks grew, their + business models changed. + +On line 1225: + of the investment + banks’ revenues and earnings was + generated by + +On line 1225: + and derivatives + activities. At Goldman, + revenues from trading + +On line 1227: + investments increased + from of the total in to + in At Merrill Lynch, + +On line 1229: + they generated + of revenue in up from in + At Lehman, similar + +On line 1231: + generated up + to of pretax earnings in + up from in At Bear + +On line 1231: + they accounted for + more than of pretax earnings + in some years after + +On line 1233: + losses in other + businesses.80 Between and debt + held by financial + +On line 1235: + companies grew from + trillion to trillion, more than + doubling from to of + +On line 1235: + told the FCIC that while + the financial sector must + play a "critical" + +On line 1235: + capital to the + most productive uses, it + was reasonable to + +On line 1235: + ask whether over the last + or years it had become too + large. Financial firms + +On line 1235: + companies borrowed + in the credit markets for + every borrowed by + +On line 1235: + were borrowing for + every "We have a lot more + debt than we used to + + have, which means we have + a much bigger financial + sector," said Snow. "I + +On line 1235: + versus the real + economy and got it a + little lopsided + +On line 1247: + so complicated + how is anybody going to + know1" Greater access to + +On line 1249: + business where we can + make some money".............72 Subprime lenders + in turmoil: "Adverse + +On line 1253: + market conditions"..................................74 + The regulators: "Oh, I + see" In the early + + 1980s, subprime lenders such + as Household Finance Corp. and + thrifts such as Long Beach + + Savings and Loan made + home equity loans, often + second mortgages, to + + borrowers who had + yet to establish credit + histories or had + +On line 1253: + and the like. Banks might + have been unwilling to lend + to these borrowers, + +On line 1253: + a subprime lender would + if the borrower paid a + higher interest + +On line 1253: + the extra risk. "No + one can debate the need for + legitimate non-prime + +On line 1253: + president of the + Nevada Fair Housing Center, + Inc., testified to + +On line 1257: + subprime mortgages, with + substantial collateral—the + house— weren’t as high + + as those for car loans, + and were much less than credit + cards. The advantages + +On line 1257: + over other forms of + debt were solidified in + with the Tax Reform + +On line 1257: + consumer loans but kept + the deduction for mortgage + interest payments. + +On line 1259: + the assessment of + risk, mortgage lenders (including + subprime lenders) relied + + on other factors + when underwriting mortgages. + As Tom Putnam, a + + Sacramento-based mortgage + banker, told the Commission, they + traditionally + +On line 1259: + the four C’s: credit + (quantity, quality, and + duration of the + +On line 1259: + income), capital + (sufficient liquid funds to + cover down payments, + +On line 1259: + costs, and reserves), and + collateral (value and + condition of the + +On line 1259: + how strength in one area, + such as collateral, might + offset weaknesses + +On line 1259: + such as credit. They + underwrote borrowers one + at a time, out of + + local offices. In + a few cases, such as CitiFinancial, + subprime lending firms + +On line 1261: + finance companies. + Without access to deposits, + they generally + +On line 1261: + themselves with short-term + lines of credit, or "warehouse + lines," from commercial + + or investment banks. + In many cases, the finance + companies did not + +On line 1261: + Some sold the loans to + the same banks extending the + warehouse lines. The banks + + would securitize + and sell the loans to investors + or keep them on their + +On line 1261: + other cases, the + finance company itself + packaged and sold the + +On line 1261: + partnering with the + banks extending the warehouse + lines. Meanwhile, the S&Ls + +On line 1267: + SO COMPLICATED + HOW IS ANYBODY GOING TO + KNOW1 Debt outstanding + +On line 1267: + markets tripled during + the 1980s, reaching trillion in + was securitized + +On line 1267: + as the single largest + component—a position + they maintained through the + +On line 1269: + In the 1990s mortgage + companies, banks, and Wall Street + securities firms + +On line 1269: + securitizing + mortgages (see figure And more + of them were subprime. + +On line 1271: + and other Wall Street + firms started packaging and + selling "non-agency" + + mortgages—that is, loans that + did not conform to Fannie’s + and Freddie’s standards. + +On line 1271: + handled by Fannie + and Freddie, the question was + not "will you get the + +On line 1271: + "when," former Salomon + Brothers trader and CEO of + PentAlpha Jim Callahan told + +On line 1271: + and that created + an opportunity for + S&P and Moody’s. As Lewis + +On line 1271: + pioneer in the + market, told the Commission, + when he presented + +On line 1271: + they asked, "‘This stuff is + so complicated how is + anybody going to + +On line 1271: + How are the buyers + going to buy1’" Ranieri said, "One + of the solutions + + was, it had to have + a rating. And that put the + rating services in + +On line 1273: + business."5 Non-agency + securitizations were + only a few years + + old when they received + a powerful stimulus + from an unlikely + + source: the federal + government. The savings and + loan crisis had left + +On line 1273: + with billion in loans + and real estate from failed + thrifts and banks. Congress + +On line 1275: + the Resolution + Trust Corporation (RTC) in + to offload mortgages + +On line 1275: + estate, and sometimes + the failed thrifts themselves, now owned + by the government. + +On line 1275: + RTC was able to sell + billion of these mortgages to + Fannie and Freddie, + +On line 1277: + did not meet the GSEs’ + standards. Some were what might be + called subprime today, + +On line 1279: + that later became + popular.6 RTC officials + soon concluded that + + they had neither the + time nor the resources to sell + off the assets in + + their portfolio one + by one and thrift by thrift. They + turned to the private + +On line 1279: + real estate and + financial professionals + to securitize + +On line 1279: + had securitized + billion in residential + mortgages.7 The RTC in + +On line 1279: + familiar with the + securitization of + these assets, mortgage + +On line 1279: + in hand. As figure + shows, subprime originations + increased from billion + +On line 1279: + to billion in The + proportion securitized + in the late 1990s peaked + +On line 1285: + the RTC and by Wall + Street were similar to the + Fannie and Freddie + +On line 1285: + first step was to get + principal and interest + payments from a group + +On line 1285: + securities (that + is, securitizations + not done by Fannie + +On line 1285: + Freddie), the payments + were then "tranched" in a way to + protect some investors + +On line 1287: + of principal and + interest in different + orders. Most of the + +On line 1287: + late 1980s and early + 1990s, used a rudimentary + form of tranching. There + + were typically + two tranches in each deal. The + less risky tranche received + +On line 1287: + guaranteed by an + insurance company. The + more risky tranche received + +On line 1287: + was not guaranteed, + and was usually kept by + the company that + +On line 1289: + mortgages. Within a + decade, securitizations + had become much more + +On line 1289: + they had more tranches, + each with different payment + streams and different + + risks, which were tailored + to meet investors’ demands. The + entire private-label + +On line 1289: + created, sold, and + bought the investments—would become + highly dependent + + on this slice-and-dice process, and + regulators and market + participants alike + +On line 1289: + it efficiently + allocated risk to those + best able and willing + +On line 1291: + that risk. To demonstrate + how this process worked, we’ll describe + a typical deal, + +On line 1291: + mortgage-backed bonds.9 In New + Century Financial, a + California-based + +On line 1291: + lender, originated + and sold subprime mortgages to + Citigroup, which sold + +On line 1291: + separate legal + entity that Citigroup + sponsored that would own + +On line 1291: + mortgages and issue + the tranches. The entity + purchased the loans with + + cash it had raised by + selling the securities + these loans would back. The + +On line 1291: + had been created + as a separate legal + structure so that the + + assets would sit off + Citigroup’s balance sheet, an + arrangement with tax + +On line 1293: + The mortgages carried + the rights to the borrowers’ + monthly payments, which + +On line 1293: + into tranches of + mortgage-backed securities; each + tranche gave investors a + +On line 1293: + priority claim + on the flow of payments from + the borrowers, and + +On line 1293: + repayment schedule. + The credit rating agencies + assigned ratings to + +On line 1295: + heavily on these + ratings. Tranches were assigned + letter ratings by + + the rating agencies + based on their riskiness. In + this report, ratings + +On line 1297: + presented in S&P’s + classification system, + which assigns ratings + +On line 1297: + highest rating for + the safest investments, referred + to here as triple-A), "AA" + +On line 1297: + and "BB," and further + distinguishes ratings with + and Anything rated + +On line 1297: + is considered "junk." + Moody’s uses a similar + system in which "Aaa" + + is highest, followed + by "Aa," "A," "Baa," "Ba," and so + forth. For example, + + an S&P rating of + BBB would correspond to a + Moody’s rating of Baa. + +On line 1301: + this Citigroup deal, + the four senior tranches—the + safest— were rated triple-A + +On line 1303: + the agencies. Below + the senior tranches and next + in line for payments + + were eleven "mezzanine" + tranches—so named because they sat + between the riskiest + +On line 1305: + the safest tranches. These + were riskier than the senior + tranches and, because + +On line 1305: + slowly, carried a + higher risk that an increase + in interest rates + +On line 1305: + the locked-in interest + payments less valuable. As a + result, they paid a + + correspondingly + higher interest rate. Three + of these tranches in + +On line 1305: + Citigroup deal were + rated AA, three were A, three + were BBB (the lowest + + investment-grade + rating), and two were BB, or + junk. The last to be + +On line 1309: + most junior tranche, called + the "equity," "residual," + or "first-loss" tranche, set up + +On line 1309: + whatever cash flow + was left over after all the + other investors had + +On line 1309: + This tranche would suffer + the first losses from any efaults + of the mortgages in + +On line 1309: + Commensurate with + this high risk, it provided + the highest yields (see + +On line 1309: + In the Citigroup + deal, as was common, this piece + of the deal was not + +On line 1309: + at all. Citigroup + and a hedge fund each held half + the equity tranche.10 + + While investors in the + lower-rated tranches received + higher interest + +On line 1311: + because they knew there + was a risk of loss, investors + in the triple-A tranches + +On line 1311: + not expect payments + from the mortgages to stop. This + expectation of + +On line 1311: + the firms structuring + securities focused on + achieving high ratings. + +On line 1311: + In the structure of + this Citigroup deal, which was + typical, million, + +On line 1315: + or was rated triple-A. + GREATER ACCESS TO LENDING: "A + BUSINESS WHERE WE CAN + +On line 1317: + hold, new computer + and modeling technologies + were reshaping the + +On line 1317: + data with loan-level + information on mortgage + performance became + +On line 1317: + widely available. Lenders + underwrote mortgages using + credit scores, such as + +On line 1317: + score, developed by + Fair Isaac Corporation. In + Freddie Mac rolled out + +On line 1317: + system for mortgage + underwriting for use by + lenders, and Fannie Mae + +On line 1317: + later. The days of + labori-ous, slow, and manual + underwriting of + + individual + mortgage applicants were over, + lowering cost and + +On line 1319: + on quantitative + expectations: Given the + borrower, the home, + +On line 1319: + would be on time1 What + was the probability + that borrowers would + +On line 1321: + the Community + Reinvestment Act (CRA). Congress + enacted the CRA + +On line 1321: + banks and thrifts served their + communities, in response + to concerns that banks + +On line 1321: + were refusing to + lend in certain neighborhoods + without regard to + +On line 1321: + creditworthiness + of individuals and + businesses in those + +On line 1323: + (a practice known as + redlining).11 The CRA called on banks + and thrifts to invest, + +On line 1323: + took in deposits, so + long as these activities + didn’t impair their + +On line 1323: + financial safety + and soundness. It directed + regulators to + +On line 1323: + or thrift applied for + regulatory approval + for mergers, to open + + new branches, or to + engage in new businesses.12 + The CRA encouraged + +On line 1325: + borrowers to whom + they may have previously + denied credit. While + +On line 1327: + loans made under the + CRA performed consistently + with the rest of the + +On line 1327: + was not riskier than + the banks’ other lending.13 "There + is little or no + + evidence that banks’ + safety and soundness have been + compromised by such + +On line 1327: + often report sound + business opportunities," + Federal Reserve + +On line 1331: + Alan Greenspan said of CRA + lending in Residential + Mortgage-Backed Securities + +On line 1333: + packaged subprime, Alt-A + and other mortgages into + securities. As + + long as the housing + market continued to boom, + these securities + +On line 1333: + perform. But when the + economy faltered and the + mortgages defaulted, + +On line 1335: + were left worthless. In + President Bill Clinton asked + regulators to + +On line 1335: + while responding to + industry complaints that the + regulatory + +On line 1335: + process for compliance + was too burdensome and too + subjective. In the + + Fed, Office of Thrift + Supervision (OTS), Office + of the Comptroller + +On line 1335: + Deposit Insurance + Corporation (FDIC) issued + regulations that + +On line 1335: + regulatory + focus from the efforts that + banks made to comply + +On line 1337: + observable numbers + that measured banks’ compliance + with the law. Former + + comptroller John Dugan + told FCIC staff that the impact + of the CRA had been + + lasting, because it + encouraged banks to lend to + people who in the + + past might not have had + access to credit. He said, + "There is a tremendous + + amount of investment + that goes on in inner cities + and other places to + +On line 1339: + are quite impressive. + And the bankers conversely say, + ‘This is proven to be + +On line 1339: + business where we can + make some money; not a lot, + but when you factor + +On line 1341: + in plus the good will + that we get from it, it kind + of works.’"15 Lawrence Lindsey, + +On line 1341: + Fed governor who + was responsible for the + Fed’s Division of + +On line 1341: + enforcement, told the + FCIC that improved enforcement + had given the banks + + an incentive to + invest in technology + that would make lending + +On line 1341: + models customized + to the market. Shadow banks + not covered by the + + CRA would use these same + credit scoring models, which + could draw on now more + +On line 1341: + to underwrite loans. + "We basically got a + cycle going which + +On line 1341: + historic data, show + the default rates on this type + of lending were very, + +On line 1341: + low," he said.16 Indeed, + default rates were low during + the prosper-ous 1990s, and + +On line 1341: + bankers, and lenders in the + shadow banking system took + note of this success. + +On line 1347: + Among nonbank mortgage + originators, the late 1990s + were a turning point. + +On line 1347: + disruption caused by + the Russian debt crisis and + the Long-Term Capital + + Management collapse, + the markets saw a "flight to + quality"—that is, a + + steep fall in demand + among investors for risky assets, + including subprime + +On line 1349: + in to in Meanwhile, + subprime originators saw + the interest rate + +On line 1349: + they could borrow in + credit markets skyrocket. + They were caught in a + + squeeze: borrowing costs + increased at the very moment + that their revenue stream + +On line 1349: + up.17 And some were caught + holding tranches of subprime + securities that + +On line 1351: + out to be worth far + less than the value they had + been assigned. Mortgage + +On line 1351: + short-term funding had + immediate problems. For + example, Southern + + Pacific Funding + (SFC), an Oregon-based subprime lender + that securitized + + its loans, reported + relatively positive + second-quarter results + +On line 1351: + in August Then, in + September, SFC notified + investors about "recent + +On line 1351: + conditions" in the + securities markets and + expressed concern about + +On line 1351: + viability + of securitization + in the foreseeable + +On line 1353: + week later, SFC filed + for bankruptcy protection. + Several other + +On line 1353: + financing from the + capital markets also + filed for bankruptcy + +On line 1353: + in and In the two + years following the Russian + default crisis, of + +On line 1355: + declared bankruptcy, + ceased operations, or sold + out to stronger firms.19 When + +On line 1357: + were sold, their buyers + would frequently absorb large + losses. First Union, a + +On line 1357: + bank headquartered in + North Carolina, incurred charges + of almost billion + +On line 1357: + it bought The Money + Store. First Union eventually + shut down or sold off + +On line 1359: + of The Money Store’s + operations. Conseco, a + leading insurance + +On line 1359: + lender. Disruptions in + the securitization + markets, as well as + +On line 1359: + eventually drove + Conseco into bankruptcy + in December At + +On line 1361: + bankruptcy in U.S. + history (after WorldCom and + Enron). Accounting + +On line 1361: + would also bring down + subprime lenders. Keystone, a small + national bank in + + West Virginia that made + and securitized subprime + mortgage loans, failed in + +On line 1361: + in the 1990s—Keystone retained + the riskiest "first-loss" residual + tranches for its own + +On line 1361: + far exceeded the + bank’s capital. But Keystone + assigned them grossly + +On line 1361: + bank in September + after discovering "fraud + committed by the + +On line 1361: + as executives + had overstated the value + of the residual + +On line 1361: + failure occurred at + Superior Bank, one of + the most aggressive + +On line 1361: + lenders. Like Keystone, it + too failed after having kept + and overvalued the + + first-loss tranches on its + balance sheet. Many of the lenders + that survived or were + + bought in the 1990s reemerged + in other forms. Long Beach was + the ancestor of + +On line 1363: + Mortgage (which was in + turn purchased by Washington + Mutual), two of + + the more aggressive + lenders during the first decade of + the new century. + +On line 1363: + to Citigroup, and + Household bought Beneficial + Mortgage before it + +On line 1365: + itself acquired by + HSBC in With the subprime + market disrupted, + +On line 1365: + billion in down from + billion two years earlier.21 + Over the next few years, + +On line 1367: + subprime lending and + securitization would + more than rebound. THE + +On line 1369: + I SEE" During the + 1990s, various federal + agencies had taken + +On line 1369: + regulatory + system was not well equipped to + respond consistently—and + +On line 1369: + protect borrowers. + State regulators, as well + as either the Fed + +On line 1369: + FDIC, supervised the + mortgage practices of state anks. + The OCC supervised + +On line 1369: + national banks. The + OTS or state regulators + were responsible + +On line 1369: + brokers, a growing + portion of the market, but + did not supervise + +On line 1371: + one entity was + unquestionably authorized + by Congress to write + + strong and consistent + rules regulating mortgages + for all types of lenders: + +On line 1371: + the Truth in Lending + Act of In the Fed adopted + Regulation Z + + for the purpose of + implementing the act. But + while Regulation + +On line 1373: + America’s many + financial regulators. + One sticking point was + + the supervision + of nonbank subsidiaries such as + subprime lenders. The Fed + +On line 1373: + enforce the consumer + protections embodied in + the Truth in Lending + +On line 1373: + with respect to these + nonbank lenders. Although the FTC + brought some enforcement + +On line 1373: + mortgage companies, + Henry Cisneros, a former + secretary of the + +On line 1373: + Housing and Urban + Development (HUD), worried + that its budget and + +On line 1373: + commensurate with + its mandate to supervise + these lenders. "We could have + + had the FTC oversee + mortgage contracts," Cisneros told + the Commission. "But + + the FTC is up to + their neck in work today with + what they’ve got. They don’t + +On line 1375: + staff to go out and + search out mortgage problems."23 Glenn + Loney, deputy director + +On line 1375: + of the Fed’s Consumer + and Community Affairs + Division from to + +On line 1377: + the FCIC that ever + since he joined the agency in + Fed officials had + +On line 1377: + whether they—in addition + to the FTC—should enforce rules for + nonbank lenders. But they + +On line 1377: + whether the Fed would be + stepping on congressional + prerogatives by + +On line 1377: + that legislation + had delegated to the + FTC. "A number of + + governors came in + and said, ‘You mean to say we + don’t look at these1’" Loney + + said. "And then we tried + to explain it to them, and + they’d say, ‘Oh, I see.’"24 + +On line 1377: + would not exert its + authority in this area, + nor others that came + +On line 1377: + under its purview in + with any real force until + after the housing + +On line 1379: + that gave the Fed new + responsibilities was + the Home Ownership + +On line 1379: + Protection Act (HOEPA), + passed by Congress and signed by + President Clinton + +On line 1379: + lending practices that + especially affected + low-income borrowers. + +On line 1379: + finance companies + who peddle high-rate, high-fee + home equity loans + + to cash-poor homeowners."25 + For example, a Senate + report highlighted + + the case of a 72-year-old + homeowner, who testified + at a hearing that + +On line 1379: + she paid more than in + upfront finance charges on a + second mortgage. In + +On line 1381: + refinance mortgage + loans, including prepayment + penalties, negative + + amortization, and + balloon payments with a term + of less than five years. + +On line 1381: + the property alone + and "without regard to the + consumers’ repayment + +On line 1383: + a small percentage + of mortgages were initially + subject to the HOEPA + +On line 1383: + interest rate and + fee levels for triggering + HOEPA’s coverage were + +On line 1383: + catch most subprime loans.28 + Even so, HOEPA specifically + directed the Fed + +On line 1383: + act more broadly to + "prohibit acts or practices + in connection with + +On line 1385: + loans] that [the Board] finds + to be unfair, deceptive + or designed to evade + +On line 1387: + provisions of this + [act]."29 In June two years after + HOEPA took effect, the + + Fed held the first set + of public hearings required + under the act. The + +On line 1387: + were Los Angeles, + Atlanta, and Washington, D.C. + Consumer advocates + +On line 1387: + home equity lenders. + A report summarizing + the hearings, jointly + +On line 1387: + Housing and Urban + Development and released + in July said that + +On line 1387: + acknowledged that some + abuses existed, blamed some + of these on mortgage + +On line 1387: + that the increasing + securitization of + subprime mortgages was + + likely to limit + the opportunity for + widespread abuses. The + +On line 1387: + equity loans must + comply with a series of + representations + +On line 1387: + include creditors’ + representations that they + have complied with strict + +On line 1387: + guidelines concerning + the borrower’s ability + to repay the loan."30 + + But in the years to + come, these representations + and warranties would prove + +On line 1391: + Fed continued not + to press its prerogatives. + In January it + +On line 1391: + examinations + of nonbank subsidiaries of bank + holding companies,"31 + +On line 1391: + be criticized by + a November General + Accounting Office + +On line 1391: + for creating a + "lack of regulatory + oversight."32 The July + +On line 1391: + While preparing draft + recommendations for the + report, Fed staff wrote + +On line 1391: + Fed’s Committee on + Consumer and Community + Affairs that "given + +On line 1391: + support substantive + limitations on market + behavior, the draft + + report discusses + various options but does + not advocate any + +On line 1393: + to addressing these + problems."34 In the end, although + the two agencies did + +On line 1393: + both the Fed and HUD + supported legislative bans + on balloon payments + +On line 1393: + lump-sum insurance + premiums, stronger enforcement + of current laws, and + +On line 1393: + as community + outreach efforts and consumer + education and + +On line 1395: + Congress did not act + on these recommendations. + The Fed-Lite provisions + +On line 1395: + the Gramm-Leach-Bliley Act affirmed + the Fed’s hands-off approach to + the regulation + + of mortgage lending. + Even so, the shakeup in the + subprime industry + +On line 1395: + the late 1990s had drawn + regulators’ attention + to at least some of + +On line 1395: + with this lending. For + that reason, the Federal + Reserve, FDIC, OCC, and + +On line 1397: + guidance on March his + guidance applied only to + regulated banks + + and thrifts, and even for + them it would not be binding + but merely laid out + +On line 1397: + in the equity + and asset-backed securities + market has caused some + +On line 1397: + subprime specialists + to exit the market, thus + creating increased + +On line 1397: + enter, or expand + their participation in, + the subprime lending + + business."35 The agencies + then identified key features + of subprime lending + + programs and the need + for increased capital, risk + management, and board + +On line 1399: + accounting issues, + notably the valuation + of any residual + + tranches held by the + securitizing firm. The + guidance went on to + + warn, "Institutions + that originate or purchase + subprime loans must take + +On line 1401: + protection laws and + regulations. Higher fees + and interest rates + +On line 1401: + predatory pricing. + An adequate compliance + management program + +On line 1401: + consumer protection + hazards associated + with subprime lending."36 + +On line 1403: + spring in response to + growing complaints about lending + practices, and at the + + urging of members + of Congress, HUD Secretary + Andrew Cuomo and + +On line 1403: + Summers convened the + joint National Predatory + Lending Task Force. It + + included members + of consumer advocacy + groups; industry trade + +On line 1403: + mortgage lenders, brokers, + and appraisers; local and + state officials; and + + academics. As the Fed + had done three years earlier, + this new entity + +On line 1403: + conducting hearings + in Atlanta, Los Angeles, + New York, Baltimore, + + and Chicago. The task + force found "patterns" of abusive + practices, reporting + +On line 1403: + too-frequent abuses in + the subprime lending market." + Questionable practices + +On line 1403: + of borrowers’ loans + in a short time), high fees and + prepayment penalties + +On line 1403: + borrowers’ losing + the equity in their homes, + and outright fraud and + +On line 1403: + The report cited + testimony regarding + incidents of forged + +On line 1405: + lenders often preyed on + the elderly, minorities, + and borrowers with + +On line 1405: + "limited access + to the mainstream financial + sector"—meaning the banks, + +On line 1405: + unions, which it viewed as + subject to more extensive + government oversight.37 + + Consumer protection + groups took the same message to + public officials. + +On line 1407: + interviews with and + testimony to the FCIC, + representatives + +On line 1407: + National Consumer + Law Center (NCLC), Nevada Fair + Housing Center, Inc., + + and California + Reinvestment Coalition each said + they had contacted + +On line 1407: + multiple times about + their concerns over unfair and + deceptive lending + +On line 1407: + "It was apparent + on the ground as early as + or that the market + +On line 1407: + being flooded with + inappropriate products," + Diane Thompson of + +On line 1409: + the Commission.39 The + HUD-Treasury task force recommended + a set of reforms + +On line 1409: + disclosure, improved + financial literacy, + strengthened enforcement, + +On line 1409: + also recognized + the downside of restricting + the lending practices + +On line 1409: + with less-than-prime credit a + chance at homeownership. It + was a dilemma. Gary + +On line 1409: + the report as a + senior Treasury official + and is currently + +On line 1409: + the Commodity + Futures Trading Commission, + told the FCIC that the + +On line 1409: + on Capitol Hill a + very short time. There wasn’t much + appetite or mood to + +On line 1411: + recommendations."40 + But problems persisted, and + others would take up + +On line 1411: + decade, "the really + poorly underwritten loans, + the payment shock loans" + +On line 1411: + to proliferate + outside the traditional + banking sector, said + +On line 1413: + as the assistant + secretary for financial + institutions from + +On line 1413: + testimony to + the Commission, she observed + that these poor-quality + +On line 1413: + banks and "created + negative competitive + pressure for the banks + +On line 1415: + to start following + suit." She added, [Subprime lending] + was started and the + +On line 1415: + of it occurred in + the nonbank sector, but it + clearly created + +On line 1415: + pressures on banks. I + think nipping this in the bud + in and with some strong + +On line 1415: + that just simply said + you’ve got to document + a customer’s income + +On line 1415: + sure they can repay + the loan, you’ve got to make + sure the income is + +On line 1415: + to pay the loans when + the interest rate resets, + just simple rules like + +On line 1417: + that could have done a + lot to stop this.41 After Bair + was nominated + + to her position + at Treasury, and when she was + making the rounds on + +On line 1417: + Sarbanes, chairman of + the Committee on Banking, + Housing, and Urban + +On line 1417: + told her about lending + problems in Baltimore, where + foreclosures were on + + the rise. He asked Bair + to read the HUD-Treasury report on + predatory lending, + +On line 1417: + the issue. Sarbanes + introduced legislation + to remedy the + +On line 1417: + mortgage industry + and within Congress, Bair told + the Commission. Bair + + decided to try + to get the industry to + adopt a set of "best + +On line 1417: + that would include a + voluntary ban on mortgages + that strip borrowers + +On line 1417: + their equity, and + would offer borrowers the + opportunity + + to avoid prepayment + penalties by agreeing instead + to pay a higher + + interest rate. She + reached out to Edward Gramlich, + a governor at + +On line 1417: + shared her concerns, to + enlist his help in getting + companies to abide + + by these rules. Bair said + that Gramlich didn’t talk out + of school but made it + +On line 1417: + the director of + the Division of Consumer + and Community + +On line 1417: + Fed, said that Gramlich + told the staff that Greenspan was not + interested in + +On line 1419: + regulation.43 When + Bair and Gramlich approached a + number of lenders about + +On line 1419: + voluntary rogram, + Bair said some originators + appeared willing to + +On line 1419: + But the Wall Street firms + that securitized the loans + resisted, saying + +On line 1421: + did not adhere to + the proposed best practices, she + recalled. The effort + + died.44 Of course, even as + these initiatives went nowhere, the + market did not stand + +On line 1425: + Subprime mortgages were + proliferating rapidly, + becoming mainstream + +On line 1427: + Originations were + increasing, and products were + changing. By three of + +On line 1427: + every four subprime + mortgages was a first mortgage, + and of those were used + +On line 1427: + Fifty-nine percent of + those refinancings were cash-outs,45 + helping to fuel + +On line 1438: + spending while whittling + away homeowners’ equity. + PART III The Boom and + +On line 1452: + stabilizing force" + Subprime loans: "Buyers will pay + a high premium" + +On line 1456: + regulatory + scrutiny" Federal rules: + "Intended to curb + +On line 1460: + abusive lending" States: + "Long-standing position"...........................................................................96 + Community-lending + +On line 1462: + pledges: "What we do is + reaffirm our intention" Bank + capital standards: + +On line 1464: + the economy had + grown straight quarters. Federal + Reserve Chairman Alan + +On line 1464: + companies were—or + at least to many observers at + the time, appeared to + +On line 1466: + managing risk. The + housing market was also + strong. Between and prices + +On line 1466: + an annual rate + of over the next five years, the + rate would hit Lower + +On line 1466: + mortgage borrowers + were partly the reason, as + was greater access to + +On line 1466: + left out—including + subprime borrowers. Lower + interest rates and + +On line 1466: + access to credit + were available for other types + of borrowing, too, + +On line 1468: + as credit cards and + auto loans. Increased access + to credit meant a + + more stable, secure + life for those who managed their + finances prudently. + +On line 1468: + meant families could + borrow during temporary + income drops, pay for + +On line 1468: + expenses, or buy + major appliances and cars. + It allowed other + +On line 1468: + to borrow and spend + beyond their means. Most of all, + it meant a shot at + +On line 1468: + benefits; and for + some, an opportunity + to speculate in + +On line 1470: + estate market. As + home prices rose, homeowners with + greater equity felt + + more financially + secure and, partly as a + result, saved less and + + less. Many others went + one step further, borrowing + against the equity. + +On line 1470: + between and mortgage + debt nationally nearly + doubled. Household debt + +On line 1470: + from of disposable + personal income in to + almost by mid-2006. More + + than three-quarters of + this increase was mortgage debt. + Part of the increase + +On line 1472: + new home purchases, + part from new debt on older + homes. Mortgage credit + + became more available + when subprime lending started + to grow again after + +On line 1474: + the major subprime + lenders failed or were purchased in + and Afterward, the + +On line 1474: + billion in assets, + paid billion for Associates + First Capital, the + + second-biggest subprime lender. + Still, subprime lending remained + only a niche, just + +On line 1476: + mortgages in Subprime + lending risks and questionable + practices remained a + +On line 1476: + the Home Ownership + and Equity Protection + Act (HOEPA). Although in + +On line 1476: + rules for a narrow + set of high-cost mortgages.3 + Following losses + +On line 1480: + beginning of the + economy was slowing, even + though unemployment + +On line 1480: + of To stimulate + borrowing and spending, the + Federal Reserve’s + +On line 1480: + Market Committee + lowered short-term interest + rates aggressively. + +On line 1480: + January in a + rare conference call between + scheduled meetings, it + +On line 1480: + benchmark federal + funds rate—at which banks lend to each + other overnight—by a + + half percentage point, + rather than the more typical + quarter point. Later + +On line 1482: + the committee cut + the rate another half point, + and it continued + +On line 1484: + throughout the year—11 times + in all—to the lowest in + years. In the end, the + +On line 1484: + recession of was + relatively mild, lasting + only eight months, from + + March to November, + and gross domestic product, + or GDP—the most common + +On line 1484: + the economy—dropped + by only Some policy + makers concluded + +On line 1484: + the economy had + reached the so-called end of the + business cycle, which + +On line 1484: + economists had been + predicting since before the + tech crash. "Recessions + +On line 1484: + less frequent and less + severe," said Ben Bernanke, then a + Fed governor, in + +On line 1484: + speech early in "Whether + the dominant cause of the + Great Moderation + +On line 1484: + structural change, improved + monetary policy, or + simply good luck is + +On line 1486: + question about which no + consensus has yet formed."4 With + the recession over + + and mortgage rates at + 40-year lows, housing kicked into + high gear—again. The + +On line 1486: + lose more than nonfarm + jobs in but make small gains in + construction. In states + +On line 1486: + with a total of + only more jobs, but with new + construction jobs. In + +On line 1486: + Florida, of net + job growth was in construction. + In builders started more + +On line 1486: + the late 1970s. From to + residential construction + contributed three times + +On line 1488: + to the economy + than it had contributed on + average since But + +On line 1488: + economy remained + sluggish, and employment gains + were frus-tratingly + +On line 1488: + began talking about + a "jobless recovery"—more + production without + +On line 1488: + in employment. For + those with jobs, wages stagnated. + Between and weekly + +On line 1488: + nonsupervisory + wages actually fell by + after adjusting + +On line 1488: + Faced with these challenges, + the Fed shifted perspective, + now considering + +On line 1488: + possibility + that consumer prices could fall, an + event that had worsened + +On line 1488: + quoted speech, Bernanke said + the chances of deflation were + "extremely small" for + +On line 1488: + First, the economy’s + natural resilience: "Despite + the adverse shocks of + +On line 1488: + system remains healthy + and well-regulated, and firm + and household balance + + sheets are for the most + part in good shape." Second, the + Fed would not allow + +On line 1488: + am confident that + the Fed would take whatever + means necessary to + +On line 1488: + in the United States. + [T]he U.S. government has a + technology, called + +On line 1488: + that allows it to + produce as many U.S. dollars + as it wishes at + +On line 1490: + short-term interest + rates low. During the strongest + U.S. companies could + +On line 1490: + commercial paper + market at an average + compared with just three + +On line 1490: + years earlier; rates + on three-month Treasury bills + dropped below in mid-2003 + +On line 1492: + from in Low rates cut + the cost of homeownership: + interest rates for + +On line 1492: + typical 30-year fixed-rate + mortgage traditionally + moved with the overnight fed + +On line 1494: + held (see figure By + creditworthy home buyers + could get fixed-rate mortgages + +On line 1494: + points lower than three + years earlier. The savings + were immediate + +On line 1494: + large. For a home bought + at the median price of + with a down payment, + +On line 1494: + mortgage payment would + be less than in Or to turn + the perspective around—as + +On line 1494: + many people did—for + the same monthly payment of + a homeowner could + +On line 1498: + up from a home to + a one.7 An adjustable-rate mortgage + (ARM) gave buyers even + +On line 1498: + affordable—unless + interest rates rose. In just + of prime borrowers + +On line 1498: + new mortgages chose ARMs; + in did. In the proportion + rose to Among subprime + +On line 1500: + borrowers, already + heavy users of ARMs, it rose from + around to As people + +On line 1500: + the housing market, + prices rose, and in hot markets + they really took + +On line 1500: + then annually + from to In California, + those numbers were even + +On line 1502: + bought for in was worth + nine years later. However, + soaring prices were not + + necessarily + the norm. In Washington State, + prices continued to + +On line 1502: + annually from + to annually from to + In Ohio, the numbers + +On line 1502: + Nationwide, home prices + rose annually from to + 2003—historically + +On line 1504: + steadily, peaking at + of households in Because so + many families were + + benefiting from + higher home values, household + wealth rose to nearly + +On line 1504: + income, up from five + times a few years earlier. + The top of households + +On line 1504: + by net worth, of whom + owned their homes, saw the value + of their primary + +On line 1504: + between and from to + (adjusted for inflation), + an increase of more + +On line 1504: + Median net worth + for all households in the top + after accounting + +On line 1504: + up from to between + and the median value + of their primary + +On line 1506: + residences rose from + to an increase of more than + Median net worth + +On line 1508: + the bottom was in + Historically, every + increase in housing + +On line 1508: + debated whether the + wealth increases would affect + spending more than in + + past years, because so + many homeowners at so many + levels of wealth saw + +On line 1508: + and because it was + easier and cheaper to + tap home equity. + + Higher home prices and + low mortgage rates brought a wave + of refinancing + +On line 1510: + prime mortgage market. + In alone, lenders refinanced over + million mortgages, more + +On line 1510: + four—an unprecedented + level.14 Many homeowners took + out cash while cutting + +On line 1510: + their interest rates. + From through cash-out refinancings + netted these households + +On line 1510: + an estimated + billion; homeowners accessed + another billion + +On line 1510: + home equity loans.15 + Some were typical second + liens; others were a + +On line 1510: + invention, the home + equity line of credit. + These operated + + much like a credit + card, letting the borrower + borrow and repay + + as needed, often + with the convenience of an + actual plastic + +On line 1512: + Survey of Consumer + Finances, of homeowners who + tapped their equity + +On line 1512: + such as medical + bills, taxes, electronics, and + vacations, or to + +On line 1512: + consolidate debt; + another used it for home + improvements; and the + +On line 1514: + A Congressional + Budget Office paper from + reported on the + + recent history: + "As housing prices surged in the + late 1990s and early + +On line 1516: + boosted their spending + faster than their income rose. That + was reflected in + +On line 1516: + Between and increased + consumer spending accounted + for between and of + +On line 1516: + year—rising above in + years when spending growth offset + declines elsewhere in + +On line 1516: + rate dropped from to Some + components of spending grew + remarkably fast: home + +On line 1516: + durables, recreational goods + and vehicles, spending at + restaurants, and health care. + +On line 1516: + consumer spending grew + faster than the economy, and + in some years it grew + +On line 1518: + disposable income. + Nonetheless, the economy + looked stable. By it + +On line 1518: + the brief recession + of and the dot-com bust, which + had caused the largest loss + + of wealth in ecades. With + new financial products like + the home equity + +On line 1518: + against which the Fed had + struck preemptively, did not + materialize. + +On line 1520: + a congressional + hearing in November Greenspan + acknowledged—at least + +On line 1520: + dot-com bubble burst, + the Fed cut interest rates + in part to promote + +On line 1520: + Greenspan argued that the + Fed’s low-interest-rate policy + had stimulated + +On line 1520: + by encouraging + home sales and housing starts with + "mortgage interest + +On line 1520: + that are at lows not + seen in decades." As Greenspan explained, + "Mortgage markets have + +On line 1520: + over the past two years + of economic distress by + facilitating + + the extraction of + some of the equity that + home - owners had + +On line 1522: + up."17 In February + he reiterated his + point, referring to + + "a large extraction + of cash from home equity."18 + SUBPRIME LOANS: "BUYERS + +On line 1526: + A HIGH PREMIUM" + The subprime market roared back + from its shakeout in + +On line 1526: + 1990s. The value of + subprime loans originated + almost doubled from + +On line 1528: + through to billion. In + of these were securitized; + in Low interest + +On line 1528: + spurred this boom, which would + have long-term repercussions, but so + did increasingly + +On line 1530: + borrowers, and the + scale of the firms entering + the market. Subprime + + was dominated + by a narrowing field of + ever-larger firms; the + +On line 1530: + marginal players + from the past decade had merged or + vanished. By the top + +On line 1532: + subprime lenders made of + all subprime loans, up from in + There were now three main + +On line 1532: + commercial banks and + thrifts, Wall Street investment banks, + and independent + +On line 1532: + City Bank, HSBC, and + Washington Mutual—spent + billions on boosting + +On line 1532: + units, acquiring firms, + or offering financing + to other mortgage + +On line 1532: + Almost always, these + operations were sequestered + in nonbank subsidiaries, + +On line 1534: + regulatory + no-man’s-land. When it came + to subprime lending, + + now it was Wall Street + investment banks that worried + about competition + +On line 1534: + commercial banks and + thrifts. Former Lehman president + Bart McDade told the FCIC + +On line 1534: + the banks had gained their + own securitization + skills and didn’t need + + the investment banks + to structure and distribute.21 + So the investment + +On line 1534: + a supply of loans + they could securitize and + sell to the growing + + legions of investors. + For example, Lehman Brothers, + the fourth-largest investment + +On line 1534: + including BNC and + Aurora.22 Bear Stearns, the fifth-largest, + ramped up its subprime + +On line 1534: + originators in + the United States, including + Encore. In Merrill + +On line 1536: + and Morgan Stanley + bought Saxon Capital; in + Goldman Sachs upped its + +On line 1538: + subprime lender. Meanwhile, + several independent + mortgage companies + +On line 1544: + plan concentrated + on "originating loans with + characteristics + +On line 1544: + which whole loan buyers + will pay a high premium."23 + Those "whole loan buyers" + + were the firms on Wall + Street that purchased loans and, most + often, bundled them + +On line 1544: + eager customers. In + New Century sold billion + in whole loans, up from + +On line 1544: + tenth to second place + among subprime originators. + Three-quarters went to + +On line 1544: + Suisse—but New + Century reassured its + investors that there were + +On line 1546: + prospective buyers."25 Ameriquest, + in particular, pursued + volume. According + +On line 1546: + company’s public + statements, it paid its account + executives less + +On line 1546: + competition, but + it encouraged them to make + up the difference + +On line 1546: + loans. "Our people make + more volume per employee + than the rest of the + +On line 1546: + Aseem Mital, CEO of + Ameriquest, said in The company + cut costs elsewhere in + +On line 1546: + The back office for + the firm’s retail division + operated in + +On line 1546: + told a reporter for + American Banker; the work was + divided into + +On line 1548: + and funding. Ameriquest used + its savings to undercut + by as much as what + +On line 1548: + firms, according to + an industry analyst’s + estimate. Between + +On line 1548: + loan origination + rose from an estimated + billion to billion + + annually. That + vaulted the firm from eleventh to + first place among subprime + +On line 1548: + "They are clearly the + aggressor," Countrywide CEO + Angelo Mozilo + +On line 1550: + told his investors in + By Countrywide was third on + the list. The subprime + +On line 1550: + involving them in + every link of the mortgage + chain: originating + +On line 1550: + loans, packaging them + into securities, and + finally selling + +On line 1550: + to investors. Others + concentrated on niches: + New Century, for + + example, mainly + originated mortgages for + immediate sale + + to other firms in + the chain. When originators + made loans to hold through + + maturity—an approach + known as originate-to-hold—they had + a clear incentive + +On line 1552: + mortgages to sell, for + securitization or + otherwise—known as + +On line 1552: + risked losses if the + loan defaulted. As long as + they made accurate + +On line 1552: + the only risk was + to their reputations if + a lot of their loans + + went bad—but during + the boom, loans were not going + bad. In total, this + +On line 1552: + carried more than half + of all mortgages before the + crisis, and a much + +On line 1554: + of subprime mortgages. + For decades, a version of the + originate-to-distribute + + model produced safe + mortgages. Fannie and Freddie + had been buying prime, + + conforming mortgages + since the 1970s, protected by + strict underwriting + +On line 1556: + But some saw that the + model now had problems. "If + you look at how many + + people are playing, + from the real estate agent + all the way through to + +On line 1556: + who is issuing + the security and the + underwriter and + +On line 1556: + underwriting group + and blah, blah, blah, then nobody + in this entire chain + +On line 1556: + an early leader + in securitization, + told the FCIC, ot the + +On line 1556: + other investment + bankers had expected. "None of + us wrote and said, ‘Oh, + + by the way, you have + to be responsible for + your actions,’" Ranieri said. + +On line 1560: + a mortgage broker. + These independent brokers, + with access to a + +On line 1560: + with borrowers to + complete the application + process. Using brokers + +On line 1560: + more rapid expansion, + with no need to build branches; + lowered costs, with no + + need for full-time + salespeople; and extended + geographic reach. + +On line 1562: + came as up-front fees—from + the borrower, from the lender, + or both—so the loan’s + +On line 1562: + These fees were often + paid without the borrower’s + knowledge. Indeed, many + +On line 1562: + brokers acted in + borrowers’ best interest.28 + One common fee paid + +On line 1562: + lender to the broker + was the "yield spread premium": + on higher-interest + +On line 1562: + the lending bank would + pay the broker a higher + premium, giving + + the incentive to + sign the borrower to the + highest possible + + rate. "If the broker + decides he’s going to try + and make more money + +On line 1562: + said Jay Jeffries, a + former sales manager for + Fremont Investment + +On line 1562: + the Commission. "We’ve + got a higher rate loan, we’re + paying the broker + +On line 1564: + yield spread premium."29 + In theory, borrowers + are the first defense + +On line 1564: + lending. By shopping + around, they should realize, for + example, if a + + broker is trying + to sell them a higher-priced loan + or to place them in + + a subprime loan when + they would qualify for a + less-expensive prime + +On line 1564: + But many borrowers + do not understand the most + basic aspects of + +On line 1564: + least of borrowers + with adjustable-rate mortgages did not + understand how much + +On line 1564: + one time, and more than + half underestimated + how high their rates could + +On line 1564: + over the years.30 The same + lack of awareness extended + to other terms of + +On line 1566: + documentation + provided to the lender. "Most + borrowers didn’t + + even realize that + they were getting a no-doc + loan," said Michael Calhoun, + + president of the + Center for Responsible + Lending. "They’d come in + +On line 1566: + their W-2 and end up + with a no-doc loan simply + because the broker + +On line 1566: + getting paid more and + the lender was getting paid more + and there was extra + +On line 1566: + left over for Wall Street + because the loan carried a + higher interest + +On line 1568: + And borrowers with + less access to credit are + particularly + +On line 1568: + equipped to challenge the + more experienced person + across the desk. "While many + +On line 1568: + they are pretty good + at dealing with day-to-day + financial matters, + +On line 1568: + expenses and fees: + overdrawing checking accounts, + making late credit + +On line 1568: + limits on credit + card charges," Annamaria Lusardi, + a professor of + +On line 1570: + Dartmouth College, told + the FCIC. "Comparing terms of + financial contracts + +On line 1570: + around before making + financial decisions are + not at all common + +On line 1572: + Recall our case study + securitization deal + discussed earlier—in which + +On line 1572: + New Century sold + mortgages to Citigroup, which + then sold them to the + +On line 1572: + trust, which then bundled + them into tranches for sale + to investors. Out of + +On line 1574: + those mortgages, brokers + originated on behalf + of New Century. + + For each, the brokers + received an average fee + from the borrowers + +On line 1574: + or of the loan amount. + On top of that, the brokers + also received yield + +On line 1574: + spread premiums from + New Century for of these + loans, averaging + +On line 1576: + brokers received more + than million in fees for the + loans.33 Critics argued + +On line 1576: + with this much money + at stake, mortgage brokers had + every incentive + + to seek "the highest + combination of fees and + mortgage interest + +On line 1576: + the market will bear."34 + Herb Sandler, the founder and CEO + of the thrift Golden + +On line 1576: + Corporation, told + the FCIC that brokers were the + "whores of the world."35 As + +On line 1576: + mortgage market boomed, + so did the brokers. Wholesale + Access, which tracks the + +On line 1576: + from to the number + of brokerage firms rose from + about to In brokers + +On line 1578: + loans; in they peaked at + JP Morgan CEO Jamie Dimon + testified to the + +On line 1578: + loans had more than twice + the losses of the loans that + JP Morgan itself + +On line 1580: + emerged, in subprime and + prime mortgages alike: inflated + appraisals. For the lender, + +On line 1580: + greater losses if a + borrower defaulted. But + for the borrower + + or for the broker + or loan officer who hired + the appraiser, an + +On line 1580: + value could make the + difference between closing + and losing the deal. + +On line 1580: + a home selling for + that an appraiser says is + actually worth + +On line 1582: + In this case, a bank + won’t lend a borrower, say, + to buy the home. The + +On line 1582: + Sure enough, appraisers + began feeling pressure. One + survey found that of + +On line 1582: + appraisers had felt + pressed to inflate the value + of homes; by this had + +On line 1582: + climbed to The pressure + came most frequently from the + mortgage brokers, but + +On line 1582: + from real estate + agents, lenders, and in many cases + borrowers themselves. + +On line 1582: + often, refusal to + raise the appraisal meant losing + the client.38 Dennis J. + + Black, president of + the Florida appraisal and + brokerage services + +On line 1582: + firm D. J. Black Co. + and an appraiser with years’ + experience, held + +On line 1582: + sessions all over the + country for the National + Association + +On line 1582: + Independent Fee + Appraisers. He heard complaints + from the appraisers + +On line 1582: + pressured to ignore + missing kitchens, damaged walls, and + inoperable + +On line 1582: + systems. Black told the + FCIC, "The story I have heard + most often is the + + client saying he could + not use the appraisal because + the value was [not] + + what they needed."39 The + client would hire somebody else. Changes + in regulations + +On line 1584: + appraiser with years’ + experience, explained in + testimony to + +On line 1584: + Federal Reserve, + Office of the Comptroller + of the Currency, + +On line 1584: + Federal Deposit + Insurance Corporation + loosened the appraisal + +On line 1586: + requirements for the + lenders they regulated by + raising from to the + +On line 1586: + home value at which + an appraisal from a licensed + professional was + +On line 1586: + Mann cited the lack + of oversight of appraisers, + noting, "We had a + +On line 1586: + Crabtree told the FCIC + that California’s Office + of Real Estate + +On line 1590: + to strengthen appraisals. + They recommended that an + originator’s loan + +On line 1592: + "appraisal management + company," First American + Corporation, to + +On line 1592: + Nevertheless, in + the New York State attorney + general sued First + +On line 1592: + improperly let + Washington Mutual’s loan + production staff "hand-pick + + appraisers who bring + in appraisal values high enough + to permit WaMu’s loans + +On line 1594: + and improperly + permit[ted] WaMu to pressure + appraisers to change + + appraisal values that + are too low to permit loans + to close."42 CITIGROUP: + +On line 1598: + originations grew, + Citigroup decided to + expand, with troubling + + consequences. Barely + a year after the Gramm-Leach-Bliley Act + validated its + +On line 1598: + Citigroup made its + next big move. In September + it paid billion for + + Associates First, then + the second-largest subprime lender in + the country (after + + Household Finance.). Such + a merger would usually + have required approval + +On line 1598: + bank regulators, + because Associates First owned + three small banks (in Utah, + + Delaware, and South + Dakota). But because these banks + were specialized, a + + provision tucked away + in Gramm-Leach-Bliley kept the Fed out of + the mix. The OCC, FDIC, + +On line 1600: + New York State banking + regulators reviewed the + deal. Consumer groups fought + +On line 1600: + citing a long record + of alleged lending abuses + by Associates First, + +On line 1600: + evaluate the forms. + "It’s simply unacceptable + to have the largest bank + + in America take + over the icon of predatory + lending," said Martin + +On line 1602: + in North Carolina.43 + Advocates for the merger + argued that a large + +On line 1602: + regulator could + reform the company, and + Citigroup promised to + +On line 1602: + suspending mortgage + purchases from close to two-thirds + of the brokers and + +On line 1602: + the banks that had sold + loans to Associates First. "We + were aware that brokers + + were at the heart of + that public discussion and + were at the heart of + +On line 1604: + Trade Commission, which + regulates independent + mortgage companies’ + +On line 1604: + that the company + had pressured borrowers to + refinance into + +On line 1604: + expensive mortgage + insurance. In Citigroup + reached a record million + + civil settlement + with the FTC over Associates’ + "systematic and + +On line 1606: + widespread deceptive + and abusive lending practices."45 + In the New York Fed + + used the occasion + of Citigroup’s next proposed + acquisition—European American Bank + +On line 1606: + New York—to launch its + own investigation of + CitiFinancial, which now contained + +On line 1606: + [Citigroup] approached + that transaction invited + regulatory + + scrutiny," former + Fed Governor Mark Olson + told the FCIC. "They bought + +On line 1606: + passel of problems + for themselves and it was at + least a two-year [issue]."46 + +On line 1608: + loans (usually for + borrowers in financial + trouble) into home + +On line 1608: + repay. Reviewing + lending practices from and the + Fed also accused + +On line 1608: + of selling credit + insurance to borrowers + without checking if + +On line 1608: + would qualify for + a mortgage without it. For + these violations + +On line 1608: + for impeding its + investigation, the Fed + in assessed million + +On line 1608: + said it expected + to pay another million + in restitution to + +On line 1614: + "INTENDED TO CURB + UNFAIR OR ABUSIVE LENDING" + As Citigroup was + +On line 1614: + predatory conduct. + It conducted its second + round of hearings on + +On line 1614: + Protection Act (HOEPA), + and subsequently the staff + offered two reform + + proposals. The first + would have effectively barred + lenders from granting any + +On line 1614: + limited set of + high-cost loans defined by + HOEPA—solely on the value + +On line 1614: + to the borrower’s + ability to repay. For + high-cost loans, the + +On line 1614: + to verify and + document the borrower’s + income and debt; for + +On line 1614: + documentation + standard was weaker, as the + lender could rely on + +On line 1614: + borrower’s payment + history and the like. The + staff memo explained this + +On line 1616: + Despite evidence + of predatory tactics from + their own hearings and + +On line 1616: + recently released + HUD-Treasury report, Fed officials + remained divided + +On line 1616: + strengthen borrower + protections. They grappled with + the same trade-off that the + +On line 1616: + recently noted. + "We want to encourage the + growth in the subprime + +On line 1616: + at the Financial + Services Roundtable in early + "But we also don’t + + want to encourage + the abuses; indeed, we want + to do what we can + + to stop these abuses."49 + Fed General Counsel Scott + Alvarez told the FCIC, + + "There was concern that + if you put out a broad rule, + you would stop things that + + were not unfair and + deceptive because you were + trying to get at + + the bad practices and + you just couldn’t think of all + of the details you + +On line 1616: + need. And if you did + think of all of the details, + you’d end up writing + + a rule that people + could get around very easily."50 + Greenspan, too, later said + +On line 1620: + prohibit certain + products might be harmful. "These + and other kinds of + +On line 1620: + ore broadly available."51 + Instead, at least for certain + violations of + +On line 1620: + laws, he suggested + another approach: "If there + is egregious fraud, if + +On line 1620: + egregious practice, one + doesn’t need supervision + and regulation, + +On line 1620: + law enforcement."52 But + the Federal Reserve would + not use the legal + +On line 1620: + system to rein in + predatory lenders. From to the + end of Greenspan’s tenure + +On line 1620: + Fed referred to the + Justice Department only + three institutions + +On line 1620: + First American Bank, + in Carpentersville, Illinois; Desert + Community Bank, + +On line 1620: + California; and + the New York branch of Société + Générale, a large French + +On line 1622: + After some wrangling, + in December the Fed did + modify HOEPA, but + +On line 1622: + the board highlighted + compromise: "The final rule + is intended to + +On line 1622: + or abusive lending + practices without unduly + interfering with + + the flow of credit, + creating unnecessary + creditor burden, + +On line 1622: + consumers’ options in + legitimate transactions." + The status quo would + +On line 1622: + had estimated + the percentage of subprime + loans covered by HOEPA + +On line 1622: + would increase from to + as much as under the new + regulations.53 But + + lenders changed the terms of + mortgages to avoid the new rules’ + revised interest + +On line 1622: + rate and fee triggers. + By late it was clear that the + new regulations + +On line 1622: + about of subprime loans.54 + Nevertheless, reflecting + on the Federal + +On line 1622: + Greenspan contended in + an FCIC interview that the + Fed had developed + +On line 1624: + rules that have held up + to this day.55 This was a missed + opportunity, + +On line 1624: + Chairman Sheila Bair, who + described the "one bullet" that + might have prevented + +On line 1624: + financial crisis: + "I absolutely would have + been over at the Fed + +On line 1624: + prescribing mortgage + lending standards across the board + for everybody, bank + +On line 1624: + mortgage unless you + have documented income + that the borrower + +On line 1626: + repay the loan."56 The + Fed held back on enforcement + and supervision, + +On line 1626: + too. While discussing HOEPA + rule changes in the staff of the + Fed’s Division of + +On line 1626: + and Community + Affairs also proposed a + pilot program to + +On line 1626: + holding companies’ + nonbank subsidiaries,57 such as CitiFinancial + and HSBC Finance, + +On line 1626: + influence in the + subprime market was growing. + The nonbank subsidiaries + +On line 1626: + by the Federal + Trade Commission, while the banks + and thrifts were overseen + +On line 1626: + holding company + regulator, the Fed had + the authority + +On line 1626: + for "compliance with + the [Bank Holding Company + Act] or any other + +On line 1628: + the Fed enforcement + authority in this area.58 + The Fed resisted + +On line 1628: + these companies, and + despite the support of Fed + Governor Gramlich, + + the initiative stalled. + Sandra Braunstein, then a staff + member in the Fed’s + +On line 1628: + and Community + Affairs Division and now + its director, told + +On line 1628: + other officials + were concerned that routinely + examining the + +On line 1628: + an uneven playing + field because the subsidiaries had + to compete with the + +On line 1628: + supervisory + authority (although the + Fed’s HOEPA rules applied + +On line 1628: + In an interview + with the FCIC, Greenspan went further, + arguing that with + +On line 1628: + Fed lacked sufficient + resources to examine the + nonbank subsidiaries. Worse, + +On line 1628: + misleading message + to the firms and the market; + if you examine + +On line 1628: + organization + incompletely, it tends to + put a sign in their + +On line 1630: + because it creates + a Good Housekeeping stamp.60 But + if resources were the + +On line 1630: + could have argued for + more. The Fed draws income from + interest on the + +On line 1630: + it owns, so it did + not have to ask Congress for + appropriations. + +On line 1632: + it could be subject + to a government audit + of its finances. In + +On line 1632: + same FCIC interview, + Greenspan recalled that he sat in + countless meetings on + + consumer protection, + but that he couldn’t pretend + to have the kind of + +On line 1634: + chaired the Fed’s consumer + subcommittee, favored tighter + supervision of + +On line 1634: + authority to + firms (such as independent + mortgage companies) + + whose lending practices + were not subject to routine + supervision, the + +On line 1634: + antagonize the + states." But without such oversight, + the mortgage business + + was "like a city with + a murder law, but no cops + on the beat."62 In an + +On line 1634: + Street Journal that he + privately urged Greenspan to clamp + down on predatory + + lending. Greenspan demurred + and, lacking support on the + board, Gramlich backed away. + +On line 1634: + told the Journal, "He + was opposed to it, so I + did not really + +On line 1638: + pursue it."63 (Gramlich + died in of leukemia, at age The + Fed’s failure to stop + + predatory practices + infuriated consumer + advocates and some + + members of Congress. + Critics charged that accounts of + abuses were brushed off + +On line 1638: + a law professor + at the University of + Connecticut who served + +On line 1638: + individual + consumers. "That is classic Fed + mindset," said McCoy. "If + + you cannot prove that + it is a broad-based problem + that threatens systemic + +On line 1638: + will be dismissed." It + frustrated Margot Saunders + of the National + +On line 1638: + Center: "I stood up + at a Fed meeting in and + said, ‘How many anecdotes + +On line 1638: + real1 How many tens + [of] thousands of anecdotes will + it take to convince + + you that this is a + trend1’"64 The Fed’s reluctance to + take action trumped the + +On line 1640: + report and reports + issued by the General + Accounting Office + +On line 1640: + subsidiaries until a + pilot program in July + under new chairman + + Ben Bernanke.66 The Fed did + not issue new rules under + HOEPA until July + +On line 1640: + rules banned deceptive + practices in a much broader + category of + +On line 1640: + without regard to + the borrower’s ability + o pay, and required + +On line 1640: + verify income + and assets.67 The rules would not + take effect until + +On line 1642: + October which was + too little, too late. Looking + back, Fed General + + Counsel Alvarez said + his institution succumbed + to the climate of + +On line 1642: + times. He told the FCIC, + "The mind-set was that there should be + no regulation; + +On line 1642: + take care of policing, + unless there already is an + identified problem. + +On line 1642: + in the reactive + mode because that’s what the mind-set + was of the ‘90s and + + the early 2000s." The + strong housing market also + reassured people. + +On line 1642: + the long history + of low mortgage default rates + and the desire to + +On line 1646: + become homeowners.68 + STATES: "LONGSTANDING POSITION" + As the Fed balked, many + + states proceeded on + their own, enacting "mini-HOEPA" laws + and undertaking + +On line 1648: + the OCC and the OTS. + In North Carolina led the + way, establishing + +On line 1648: + a fee trigger of + that is, for the most part any + mortgage with points and + +On line 1648: + more than of the loan + qualified as "high-cost + mortgage" subject to + +On line 1648: + regulations. This + was considerably lower + than the set by the + +On line 1648: + HOEPA regulations. + Other provisions addressed + an even broader class + +On line 1648: + mortgage loans under + and prohibiting repeated + refinancing, known + +On line 1652: + rules did not apply + to federally chartered + thrifts. In the Office + +On line 1652: + position" that its + regulations "occupy + the entire field of + +On line 1652: + from "a hodgepodge of + conflicting and over-lapping state + lending requirements," + +On line 1652: + OTS said, would let thrifts + deliver "low-cost credit + to the public free + +On line 1656: + would protect consumers.70 + Nevertheless, other states + copied North Carolina’s + +On line 1656: + in alone.71 By states and + the District of Columbia + would pass some form of + +On line 1656: + legislation. In + some cases, two or more states + teamed up to produce + +On line 1656: + Massachusetts, and + Minnesota recovered more + than million from First + +On line 1656: + Mortgage Company, + even though the firm had filed for + bankruptcy. Also + +On line 1658: + million in penalties + and restitution to consumers. + In a coalition of + +On line 1658: + states and the District + of Columbia settled with + Ameriquest for million and + +On line 1660: + the company to + follow restrictions on its + lending practices. As + +On line 1660: + see, however, these + efforts would be severely + hindered with respect + +On line 1660: + banks when the OCC in + officially joined the OTS + in constraining states + +On line 1660: + products served as an + implicit endorsement of + their legality," + +On line 1664: + testified to the + Commission.72 COMMUNITYLENDING + PLEDGES: "WHAT WE DO IS + +On line 1666: + more protection against + predatory lenders, they also + lobbied the banks to + + invest in and loan + to low- and moderate-income + communities. The + +On line 1666: + law, including the + Community Reinvestment + Act of in fact, they + +On line 1666: + outside the scope of + the CRA. For example, they + frequently involved + +On line 1666: + individuals + whose incomes exceeded those + covered by the CRA, + +On line 1666: + in geographic + areas not covered by the + CRA, or lending to + + minorities, on which + the CRA is silent. The banks would + either sign agreements + +On line 1666: + community groups + or else unilaterally + pledge to lend to and + +On line 1668: + communities or + populations. Banks often + made these commitments + + when courting public + opinion during the merger + mania at the turn + +On line 1668: + century. One of + the most notable promises was + made by Citigroup + +On line 1668: + billion lending and + investment commitment, some + of which would include + +On line 1670: + with FleetBoston Financial + Corporation in Bank of + America announced + +On line 1670: + its largest commitment + to date: billion over years. Chase + announced commitments + +On line 1670: + respectively, in + its mergers with Chemical + Bank and Bank One. The + +On line 1670: + an advocacy + group, eventually tallied + more than trillion in + +On line 1672: + of them.73 Although banks + touted these commitments in + press releases, the + +On line 1674: + could not verify + this lending happened.74 The FCIC + sent a series of + +On line 1674: + of America, JP + Morgan, Citigroup, and Wells + Fargo, the nation’s + +On line 1674: + largest banks, regarding + their "CRA and community + lending commitments." + +On line 1674: + banks indicated + they had fulfilled most promises. + According to the + +On line 1674: + much smaller than the + larger unilateral pledges + by the banks. Further, + +On line 1674: + categories than did + the CRA, including mortgages + to minority + +On line 1674: + example, only% + of the mortgages made under + JP Morgan’s billion + +On line 1674: + initiative" would have + fallen under the CRA.75 Bank + of America, which + +On line 1674: + and moderate-income + and minority lending + as satisfying + + its pledges, stated that + just over half were likely to + meet CRA requirements. + +On line 1676: + not very risky. This is + not surprising, because such + broad definitions + +On line 1676: + included loans to + borrowers with strong credit + histories—low ncome + +On line 1676: + and weak or subprime + credit are not the same. In + fact, Citigroup’s pledge + +On line 1676: + in mortgage lending + "consisted of entirely + prime loans" to low- and + +On line 1676: + and minority + borrowers. These loans performed + well.76 JP Morgan’s largest + +On line 1676: + a community + group was to the Chicago CRA + Coalition: billion in + +On line 1676: + and fewer than have + been 90-or-more-days delinquent, even + as of late Wachovia + +On line 1676: + mortgage loans between + and under its billion in + unilateral pledges: + +On line 1676: + about were ever more + than days delinquent over the life + of the loan, compared + +On line 1676: + result of Wachovia’s + lending concentration in + the relatively + + stable Southeast, and + partly a reflection of + the credit profile + +On line 1678: + years of the CRA, the + Federal Reserve Board, when + considering whether + +On line 1678: + approve mergers, gave + some weight to commitments made + to regulators. + +On line 1680: + February when the + board denied Continental + Bank’s application + +On line 1680: + not offset its poor + lending record.79 In April the FDIC, + OCC, and Federal + +On line 1680: + OTS) joined the Fed in + announcing that commitments + to regulators + +On line 1682: + documents, and its + public statements, show the Fed + never considered + +On line 1682: + community groups + in evaluating mergers + and acquisitions, + + nor did it enforce + them. As Glenn Loney, a former + Fed official, told + + Commission staff, "At + the very beginning, [we] said + we’re not going to + + be in a posture + where the Fed’s going to be + sort of coercing + +On line 1682: + banks into making + deals with community groups + so that they can get + +On line 1684: + through."81 In fact, the rules + implementing the changes to + the CRA made it clear + +On line 1684: + Federal Reserve + would not consider promises + to third parties or + +On line 1684: + prior agreements with + those parties. The rules state "an + institution’s record + +On line 1684: + these types of agreements + [with third parties] is not an + appropriate CRA + +On line 1684: + criterion."82 Still, + the banks highlighted past acts + and assurances for + +On line 1684: + the future. In for + example, when NationsBank said it + was merging with BankAmerica, + +On line 1684: + it also announced + a 10-year, billion initiative + that included pledges + +On line 1684: + housing, billion for + consumer lending, billion for + small businesses, and + +On line 1686: + respectively. This + merger was perhaps the most + controversial of + + its time because of + the size of the two banks. The + Fed held four public + +On line 1686: + and received more than + comments. Supporters touted + the community + +On line 1686: + opponents decried + its lack of specificity. The + Fed’s internal staff + +On line 1686: + approval repeated + the Fed’s insistence on not + considering these + +On line 1686: + be agreements between + private parties and has not + facilitated, + +On line 1686: + or enforced agreements + or specific portions of + agreements. NationsBank remains + +On line 1686: + the credit needs of + its entire community, + including [low- and + +On line 1688: + its public order + approving the merger, the + Federal Reserve + +On line 1688: + on to state that "an + applicant must demonstrate a + satisfactory + +On line 1688: + performance under + the CRA without reliance on + plans or commitments + +On line 1688: + for future action. + The Board believes that the CRA + plan—whether made as a + +On line 1688: + relevance in this + case without the demonstrated + record of performance + +On line 1690: + companies involved."84 + So were these commitments a + meaningful step, or + +On line 1690: + a gesture1 Lloyd Brown, + a managing director + at Citigroup, told + +On line 1690: + business.85 Speaking of + the merger with Countrywide, + Andrew Plepler, head + +On line 1690: + Corporate Social + Responsibility at + Bank of America, + +On line 1690: + the FCIC: "At a time + of mergers, there is a lot + of concern, sometimes, + + that one plus one will + not equal two in the eyes of + communities where + +On line 1690: + the acquired bank has + been investing. So, what we + do is reaffirm our + +On line 1690: + to continue to + lend and invest so that the + communities where + +On line 1690: + work will continue + to economically thrive." + He explained further + +On line 1690: + pledge amount was arrived + at by working "closely with + our business partners" + +On line 1690: + current levels of + business activity that + qualifies toward + +On line 1690: + lending goals into + the future to assure the + community that + +On line 1692: + investing practices + will continue.86 In essence, banks + promised to keep doing + +On line 1692: + they had been doing, + and community groups had + the assurance that + +On line 1696: + "ARBITRAGE" Although + the Federal Reserve had + decided against stronger + +On line 1696: + it internalized + the lessons of and when the first + generation of + +On line 1696: + at serious risk; + some, such as Keystone Bank and + Superior Bank, + +On line 1696: + when the values of + the subprime securitized + assets they held proved + + to be inflated. + In response, the Federal + Reserve and other + +On line 1698: + thrifts. In October + they introduced the "Recourse + Rule" governing how + +On line 1698: + bank needed to hold + against securitized assets. + If a bank retained + +On line 1698: + tranche of a mortgage + security, as Keystone, + Superior, and + + others had done, it + would have to keep a dollar + in capital for + + every dollar of + residual interest. That + seemed to make sense, since + +On line 1698: + in this instance, would + be the first to take losses + on the loans in the + +On line 1698: + the old rules, banks held + only in capital to + protect against losses + +On line 1698: + and others had been + allowed to seriously + understate their risks + +On line 1698: + not hold sufficient + capital. Ironically, + because the new rule + +On line 1698: + charge on residual + interests it increased banks’ + incentive to sell + +On line 1700: + that they were no longer + the first to lose when the loans + went bad. he Recourse + + Rule also imposed + a new framework for asset-backed + securities. The + +On line 1702: + would be directly + linked to the rating agencies’ + assessment of the + +On line 1702: + holding lower-rated + investments. For example, + invested in AAA + +On line 1702: + holding only in + capital (the same as for + securities backed + +On line 1702: + government-sponsored + enterprises). But the same + amount invested in + +On line 1704: + BB rating required + in capital, or times more. + Banks could reduce the + + capital they were + required to hold for a pool + of mortgages simply + +On line 1704: + securitizing + them, rather than holding them on + their books as whole loans. + +On line 1706: + If a bank kept in + mortgages on its books, it might + have to set aside about + +On line 1706: + against unexpected + losses and in reserves against + expected losses. + +On line 1706: + bank created a + mortgage-backed security, sold + that security + +On line 1708: + "Regulatory + capital arbitrage does + play a role in bank + +On line 1708: + making," said David Jones, + a Fed economist who wrote + an article about + +On line 1708: + the subject in in + an FCIC interview. But "it + is not the only + +On line 1710: + triple-A corporate bond + required in capital—five + times as much as the + +On line 1710: + the corporate bond, + it was ultimately backed + by real estate. + + The new requirements + put the rating agencies in + the driver’s seat. How + + much capital a + bank held depended in part + on the ratings of + + the securities + it held. Tying capital + standards to the views + + of rating agencies + would come in for criticism + after the crisis + +On line 1712: + crutch," former Treasury + Secretary Henry Paulson + testified to the + +On line 1712: + it was better than + the alternative—"to let + the banks rate their own + +On line 1714: + That alternative + "would be terrible," he said, + noting that banks had + +On line 1714: + lower capital + requirements on the grounds that + the rating agencies + +On line 1716: + which were, after all, + supposed to be among the safest + investments. Nor were + +On line 1716: + for ratings downgrades + due to expected losses, + which would require banks + +On line 1716: + post more capital. + And were downgrades to occur + at the moment the + + banks wanted to sell + their securities to raise + capital, there would + +On line 1720: + buyers. All these things + would occur within a few + years. The Commission + +On line 1722: + in significant + ways by major financial + institutions. Some + +On line 1722: + as Citigroup, Lehman + Brothers, and Morgan Stanley, + acquired subprime lenders. + +On line 1722: + addition, major + financial institutions + facilitated + + the growth in subprime + mortgage–lending companies + with lines of credit, + +On line 1724: + other mechanisms. + Regulators failed to rein + in risky home mortgage + +On line 1724: + particular, the + Federal Reserve failed to + meet its statutory + +On line 1730: + lending standards and + to protect against predatory + lending. THE MORTGAGE + +On line 1738: + Mortgages: "A good loan" + Federal regulators: + "Immunity from + +On line 1740: + benefit" Mortgage + securities players: "Wall + Street was very hungry + +On line 1744: + for our product" Moody’s: + "Given a blank check"..........................................................................118 Fannie + Mae and Freddie Mac: + +On line 1746: + in the marketplace"................122 + In commercial banks, thrifts, and + investment banks caught + +On line 1746: + and Freddie Mac in + securitizing home loans. + By they had taken + +On line 1748: + securitizing + prime mortgages below their loan + limits, but the wave + +On line 1748: + refinancing by + prime borrowers spurred by very + low, steady interest + +On line 1748: + out. Meanwhile, Wall Street + focused on the higher-yield loans + that the GSEs could not + +On line 1748: + large, called jumbo loans, + and nonprime loans that didn’t + meet the GSEs’ standards. + + The nonprime loans soon + became the biggest part of + the market—"subprime" + +On line 1748: + for borrowers with + weak credit and "Alt-A" loans, with + characteristics + +On line 1750: + borrowers with strong + credit.1 By and Wall Street was + securitizing + +On line 1750: + more loans than Fannie + and Freddie. In just two years, + private-label mortgage-backed + +On line 1750: + securities had + grown more than reaching trillion + in were subprime or + +On line 1752: + rating agencies—or were + encouraged or restricted + by regulations + +On line 1752: + hungered for Wall Street + mortgage securities backed + by higher-yield mortgages—those + +On line 1752: + borrowers, those with + nontraditional features, + those with limited + +On line 1752: + documentation + ("no-doc loans"), or those that failed + in some other way + +On line 1754: + as a factory + line," former Citigroup CEO + Charles Prince told the FCIC. + + "As more and more and + more of these subprime mortgages + were created as + +On line 1754: + not surprisingly + in hindsight, more and more of + it was of lower + +On line 1760: + at the end of that + process, the raw material + going into it + +On line 1760: + actually bad + quality, it was toxic + quality, and that + + is what ended up + coming out the other end + of the pipeline. Wall + +On line 1762: + origination and + securitization of + these mortgages also + +On line 1762: + access to deposits, + investment banks relied more + on money market + +On line 1762: + and other investors + for cash; commercial paper + and repo loans were + +On line 1762: + the main sources. With house + prices already up from to this + flood of money and + +On line 1762: + apparatus helped + boost home prices another from + the beginning of + +On line 1762: + peak in April 2006—even as + homeownership was falling. + The biggest gains over + +On line 1762: + period were in + the "sand states": places like the Los + Angeles suburbs + +On line 1768: + From June through June the + Federal Reserve kept the + federal funds rate + +On line 1768: + at to stimulate + the economy following + the recession. Over + + the next two years, as + deflation fears waned, the Fed + gradually raised + +On line 1770: + to in quarter-point + increases. In the view of + some, the Fed simply + +On line 1770: + and former under + secretary of treasury for + international + +On line 1770: + primarily on + this action. If the Fed had + followed its usual + +On line 1770: + in mortgages. "The boom + in housing construction starts + would have been much more + + mild, might not even call + it a boom, and the bust as + well would have been mild," + + Taylor said.4 Others + were more blunt: "Greenspan bailed out the + world’s largest equity + +On line 1770: + A. Fleckenstein, the + president of a Seattle-based + money management + +On line 1772: + Ben Bernanke and Alan Greenspan + disagree. Both the current and + former Fed chairman + +On line 1772: + that deciding to + purchase a home depends on + long-term interest rates + + on mortgages, not the + short-term rates controlled by the + Fed, and that short-term + +On line 1772: + long-term rates had become + de-linked. "Between and the fed funds + rate and the mortgage + +On line 1772: + in lock-step," Greenspan said.6 + When the Fed started to raise + rates in officials + + expected mortgage + rates to rise, too, slowing growth. + Instead, mortgage rates + +On line 1772: + for another year. + The construction industry + continued to build + +On line 1774: + rate of million starts + in January 2006—more than a + 30-year high. As Greenspan told + +On line 1774: + and—vulnerable + to financial problems in + the past—encouraged + +On line 1774: + saving. Investors in + these countries placed their savings + in apparently + +On line 1774: + in the United States. + Fed Chairman Bernanke called it a + "global savings glut."8 + + s the United States + ran a large current account + deficit, flows into the + +On line 1776: + unprecedented. Over + six years from to U.S. Treasury + debt held by foreign + +On line 1776: + official public + entities rose from trillion + to trillion; as a + + percentage of U.S. + debt held by the public, these + holdings increased from + +On line 1776: + Foreigners also + bought securities backed by + Fannie and Freddie, + +On line 1776: + with their implicit + government guarantee, seemed + nearly as safe as + +On line 1776: + Treasuries. As the Asian + financial crisis ended + in foreign holdings + +On line 1776: + steady at the level + of almost years earlier, + about billion. By 2000—just + +On line 1778: + of situation + where poor countries like China + were shipping money + +On line 1778: + so weak that they [were] + better off shipping [money] + to countries like the + +On line 1778: + own countries," former + Fed governor Frederic + Mishkin told the FCIC. "The + +On line 1780: + liquidity, which + helped lower long-term interest + rates."9 Foreign investors + +On line 1780: + safe as Treasuries and + GSE securities but with + a slightly higher + +On line 1780: + overseas demand drove + up prices for securitized + debt, it "created + +On line 1782: + the U.S. financial + system: to engineer ‘quasi’ + safe debt instruments + +On line 1782: + riskier assets and + selling the senior tranches," + Pierre-Olivier Gourinchas, an + +On line 1784: + University of + California, Berkeley, told + the FCIC.10 Paul Krugman, + + an economist at + Princeton University, told + the FCIC, "It’s hard to + +On line 1784: + bubble was financed + by large capital inflows. + So were Spanish and + + Irish and Baltic bubbles. + It’s a combination of, + in the narrow sense, + +On line 1786: + international + capital movements."11 It was + an ocean of money. + +On line 1790: + refinancing boom + was over, but originators + still needed mortgages + + to sell to the Street. + They needed new products that, + as prices kept rising, + +On line 1790: + homes more affordable + to still-eager borrowers. + The solution was + +On line 1790: + risks for borrowers. + "Holding a subprime loan has + become something of + +On line 1794: + subprime borrowers + used hybrid adjustable-rate mortgages + (ARMs) such as 2/28s and + +On line 1794: + whose low "teaser" rate + lasts for the first two or three + years, and then adjusts + +On line 1794: + dollar volume of + Alt-A securitization + rose almost from to + +On line 1794: + In general, these + loans made borrowers’ monthly + mortgage payments on + +On line 1794: + homes affordable—at least + initially. Popular Alt-A + products included + +On line 1796: + payment-option ARMs. + Option ARMs let borrowers + pick their payment each + +On line 1796: + amortization. If + the balance got large enough, the + loan would convert to + +On line 1796: + mortgage, increasing + the monthly payment—perhaps + dramatically. + +On line 1798: + first, second, and even + third mortgages—rose. Debt-to-income + ratios climbed, as did + +On line 1798: + for non-owner-occupied + properties. Fannie Mae and + Freddie Mac’s market + +On line 1798: + from of all mortgages + purchased in to in and down + to by Taking their + +On line 1800: + by the GSEs. In this + new market, originators + competed fiercely; + +On line 1800: + It was the biggest + mortgage originator from + until the market + +On line 1800: + failed, buckling under + a mortgage portfolio with + loans that its co-founder + +On line 1800: + "toxic," Mozilo would + describe his 40-year-old company + to the Commission + +On line 1800: + people buy homes and + prevented social unrest + by extending loans + +On line 1800: + discrimination: + "Countrywide was one of the + greatest companies + +On line 1800: + the history of + this country and probably + made more difference + +On line 1800: + to the integrity + of our society, than any + company in the + +On line 1800: + America."19 Lending + to home buyers was only + part of the business. + +On line 1800: + and COO David Sambol + told the Commission, as long + as a loan did not + +On line 1800: + from a financial + or reputation standpoint, + Countrywide was "a + +On line 1802: + The company sold + or securitized of the + trillion in mortgages + +On line 1804: + aggressive goal of + gaining "market dominance" + by capturing of + +On line 1804: + the origination + market.21 His share at the time + was But Countrywide + +On line 1804: + Ameriquest, New Century, + Washington Mutual, and + others all pursued + +On line 1804: + by originating + types of mortgages created + years before as niche + +On line 1804: + now transformed into + riskier, mass-market versions. + "The definition + +On line 1804: + a good loan changed from + ‘one that pays’ to ‘one that could + be sold,’" Patricia + + Lindsay, formerly + a fraud specialist at New + Century, told the + +On line 1808: + 2/28s and 3/27s: "Adjust + for the affordability" + Historically, + +On line 1808: + 3/27s, also known as + hybrid ARMs, let credit-impaired + borrowers repair + + their credit. During + the first two or three years, a + lower interest + +On line 1808: + they could make timely + payments. Eventually the + interest rates would + +On line 1808: + sharply, and payments ould + double or even triple, leaving + borrowers with few + +On line 1808: + had established their + creditworthiness, they could + refinance into + +On line 1808: + mortgage or one with + a better interest rate, + often with the same + + lender;23 if unable to + refinance, the borrower + was unlikely to + + be able to afford + the new higher payments and + would have to sell the + + home and repay the + mortgage. If they could not sell + or make the higher + +On line 1810: + payments, they would have + to default. But as house prices + rose after the 2/28s + +On line 1810: + 3/27s acquired a new + role: helping to get people + into homes or to + + move up to bigger + homes. "As homes got less and less + affordable, you would + +On line 1810: + affordability + in the mortgage because you + couldn’t really + +On line 1810: + the president of + Andrew Davidson Co. and a + veteran of the + +On line 1810: + markets, told the FCIC.24 + Lenders qualified borrowers + at low teaser rates, + +On line 1810: + little thought to what + might happen when rates reset. + Hybrid ARMs became + +On line 1812: + as the Leadership + Conference on Civil Rights + railed against 2/28s and 3/27s, + +On line 1812: + credit nor turned renters + into owners. David Berenbaum + from the National + +On line 1812: + Reinvestment Coalition + testified to Congress in + the summer of "The + +On line 1812: + exotic mortgage + lending such as and ARMs. These + exotic subprime + +On line 1812: + rates shoot up after + an introductory time + period."25 To their + +On line 1812: + simply a way for + lenders to strip equity from + low-income borrowers. + + The loans came with big + fees that got rolled into the + mortgage, increasing + +On line 1812: + the mortgage could be + larger than the home’s value + at the reset date. + + If the borrower + could not refinance, the lender + would foreclose—and then + +On line 1816: + Option ARMs: "Our most + profitable mortgage loan" When they + were originally + +On line 1816: + in the 1980s, option + ARMs were niche products, too, but + by they too became + + loans of choice because + their payments were lower than + more traditional + + mortgages. During the + housing boom, many borrowers + repeatedly made + +On line 1816: + payments required, adding + to the principal balance + of their loan every + +On line 1818: + early seller of + option ARMs was Golden West + Savings, an Oakland, + +On line 1818: + California–based + thrift founded in and acquired + in by Marion + +On line 1818: + and Herbert Sandler. + In the Sandlers merged Golden + West with World Savings; + +On line 1818: + branches under the + name World Savings Bank. The thrift + issued about billion + +On line 1820: + option ARMs between + and Unlike other mortgage + companies, Golden + +On line 1822: + onto them. Sandler + told the FCIC that Golden West’s + option ARMs—marketed as "Pick-a-Pay" + + loans—had the lowest + losses in the industry + for that product. Even + +On line 1822: + almost entirely + in option ARMs, Golden West’s + losses were low by + + industry standards. + Sandler attributed Golden + West’s performance to + +On line 1822: + diligence in running + simulations about what would + happen to its loans + + under various + scenarios—for example, + if interest rates + +On line 1822: + or down or if house + prices dropped even "For a quarter + of a century, + + it worked exactly + as the simulations showed + that it would," Sandler + +On line 1822: + "And we have never + been able to identify a + single loan that was + +On line 1822: + loss or foreclosure."27 + But after Wachovia acquired + Golden West in and + +On line 1822: + housing market soured, + charge-offs on the Pick-a-Pay portfolio + would suddenly jump + +On line 1824: + by September And + foreclosures would climb. Early + in the decade, banks and + +On line 1824: + their origination + of option ARM loans, changing + the product in ways + +On line 1824: + that made payment shocks + more likely. At Golden West, + after years, or if + +On line 1824: + principal balance + grew to of its original + size, the Pick-a-Pay mortgage + +On line 1824: + new fixed-rate mortgage. At + Countrywide and Washington + Mutual, the new + + loans would recast in + as little as five years, or + when the balance hit + +On line 1824: + the original size. + They also offered lower + teaser rates—as low + +On line 1824: + 1%—and loan-to-value + ratios as high as All of + these features raised the + +On line 1824: + that the borrower’s + required payment could rise more + sharply, more quickly, and + +On line 1826: + with less cushion. In + Washington Mutual was + the second-largest mortgage + + originator, just + ahead of Countrywide. It had + offered the option + +On line 1826: + and in as cited + by the Senate Permanent + Subcommittee on + +On line 1826: + conducted a study + "to explore what Washington + Mutual could do + +On line 1826: + sales of Option ARMs, + our most profitable mortgage loan."28 + A focus group made + + clear that few customers + were requesting option ARMs + and that "this is not + + a product that sells + itself."29 The study found "the best + selling point for the + + Option Arm" was to + show consumers "how much lower + their monthly payment + +On line 1826: + be by choosing the + Option Arm versus a fixed-rate + loan."30 The study also + +On line 1828: + many WaMu brokers "felt + these loans were ‘bad’ for customers."31 + One member of the + + focus group remarked, + "A lot of (Loan) Consultants + don’t believe in it + +On line 1828: + and don’t think [it’s] good + for the customer. You’re going + to have to change the + +On line 1830: + Despite these challenges, + option ARM originations + soared at Washington + +On line 1830: + in to billion in + when they were more than half of + WaMu’s originations + +On line 1830: + the thrift’s signature + adjustable-rate home loan product.33 The + average FICO + +On line 1832: + was around well into + the range considered "prime," and + about two-thirds were jumbo + +On line 1834: + Mae and Freddie Mac + were allowed to purchase or + guarantee.34 More than + +On line 1836: + Countrywide’s option + ARM business peaked at billion + in originations + +On line 1836: + quarter of about of + all its loans originated + that quarter.36 But it + +On line 1836: + get there. In July + Countrywide decided it + would lend up to of + +On line 1836: + up from and reduced + the minimum credit score + to as low as In + +On line 1836: + ratio (including + second liens) to he risk in + these loans was growing. + +On line 1836: + rose about the combined + loan-to-value ratio rose + about and debt-to-income + +On line 1836: + ratios had risen from + to borrowers were pledging + more of their income + +On line 1836: + option ARMs had low + documentation in The + percentage of these + +On line 1836: + and speculators—that + is, borrowers with no plans + to use the home as + +On line 1838: + residence—also rose. + These changes worried the lenders even + as they continued + +On line 1838: + loans. In September + and August Mozilo emailed to + senior management + +On line 1838: + reputational + catastrophe."40 Countrywide should + not market them to + +On line 1838: + he insisted. "Pay + option loans being used by + investors is a pure + +On line 1838: + spec[ulation] loan + and not the traditional + home loan that we have + +On line 1838: + managed throughout our + history," Mozilo wrote to + Carlos Garcia, CEO + + of Countrywide Bank. + Speculative investors "should + go to Chase or Wells + +On line 1840: + us. It is also + important for you and your + team to understand + +On line 1840: + of view that there is + nothing intrinsically + wrong with pay options + +On line 1840: + the quality of + borrowers who are being + offered the product + +On line 1840: + and the abuse by third + party originators. [I]f + you are unable to + +On line 1842: + growth of the Bank for + the time being."41 However, + Countrywide’s growth did + +On line 1842: + volume of option + ARMs retained on its balance + sheet, increasing from + +On line 1842: + in to billion in + and peaking in at billion.42 + Finding these loans very + +On line 1842: + billion with the bulk + from California, followed + by Florida.43 But + +On line 1842: + the end, these loans would + cause significant losses + during the crisis. + +On line 1844: + and WaMu as tough, "in + our face" competitors, John Stumpf, + the CEO, chairman, and + +On line 1844: + Wells Fargo, recalled + Wells’s decision not to write + option ARMs, even as + +On line 1846: + originated many + other high-risk mortgages. These + were "hard decisions + + to make at the time," + he said, noting "we did lose + revenue, and we did + +On line 1848: + Across the market, the + volume of option ARMs had + risen nearly fourfold + +On line 1850: + approximately + billion to billion. By then, + WaMu and Countrywide + +On line 1850: + were making only + the minimum payments and + that their mortgages were + +On line 1850: + The percentage of + Countrywide’s option ARMs that + were negatively + +On line 1850: + amortizing grew from + just in to in and then to + more than by At WaMu, + +On line 1850: + was in in and in + Declines in house prices added to + borrowers’ problems: + +On line 1850: + simply be eroded. + Increasingly, borrowers + would owe more on their + +On line 1850: + than their homes were worth + on the market, giving them + an incentive to + +On line 1852: + home and mortgage. Kevin + Stein, from the California + Reinvestment Coalition, + +On line 1854: + option ARMs were sold + inappropriately: "Nowhere + was this dynamic + +On line 1854: + summer of when the + Federal Reserve convened + HOEPA (Home Ownership + +On line 1854: + Act) hearings in San + Francisco. At the hearing, + consumers testified + +On line 1854: + being sold option + ARM loans in their primary + non-English language, only + +On line 1854: + be pressured to sign + English-only documents with + significantly + +On line 1854: + being unable to + make even their initial payments + because they had been + +On line 1856: + to so completely + by their brokers."47 Mona Tawatao, a + regional counsel + +On line 1856: + Services of Northern + California, described the + borrowers she was + +On line 1856: + as "people who got + steered or defrauded into + entering option + +On line 1856: + with teaser rates or + pick-a-pay loans forcing them + to pay into—pay + +On line 1856: + that they could never + pay off. Prevalent among these clients + are seniors, people + +On line 1856: + disabilities, and + limited English speakers + and seniors who are + +On line 1858: + going to have to + hold our nose" Another shift + would have serious + +On line 1858: + consequences. For decades, + the down payment for a prime + mortgage had been (in + +On line 1858: + the loan-to-value + ratio (LTV) had been As prices + continued to rise, + +On line 1858: + finding the cash to + put down became harder, and + from on, lenders began + +On line 1860: + smaller down payments. + There had always been a place + for borrowers with + +On line 1862: + down payments below + Typically, lenders required + such borrower to + +On line 1862: + mortgage insurance + for a monthly fee. If a + mortgage ended in + +On line 1862: + the lender whole. Worried + about defaults, the GSEs would not + buy or guarantee + +On line 1862: + borrower bought the + insurance. Unluckily + for many homeowners, + +On line 1862: + industry, and for + the financial system, lenders + devised a way to + +On line 1862: + rid of these monthly + fees that had added to the cost + of homeownership: + +On line 1864: + down payments that did + not require insurance. Lenders + had latitude in + +On line 1864: + In Congress ordered + federal regulators + to prescribe standards + + for real estate + lending that would apply to + banks and thrifts. The goal + +On line 1864: + reduce risk to the + deposit insurance funds and + enhance the safety + +On line 1864: + LTV standards, but chose + not to, leaving that to the + regulators. In + +On line 1866: + LTV ratios or for + documentation for home + mortgages.50 The agencies + +On line 1866: + a regulation + implementing LTV ratios + would constrict credit, + +On line 1866: + lending costs, reduce + lending flexibility, + impede economic + +On line 1868: + growth, and cause other + undesirable consequences."51 + In regulators + + revisited the + issue, as high LTV lending + was increasing. They + +On line 1868: + and limited a + bank’s total holdings of loans + with LTVs above that lacked + +On line 1868: + other protection; + they also reminded the + banks and thrifts that they + +On line 1870: + internal guidelines + to manage the risk of these + loans.52 High LTV lending + + soon became even more + common, thanks to the so-called + iggyback mortgage. + +On line 1870: + The lender offered a + first mortgage for perhaps of + the home’s value and + +On line 1870: + another or even + Borrowers liked these because + their monthly payments + +On line 1870: + mortgage insurance, + and the interest payments + were tax deductible. Lenders + +On line 1872: + potentially be + sold to the GSEs. At the same + time, the piggybacks + +On line 1872: + risks. A borrower + with a higher combined LTV + had less equity + +On line 1872: + home. In a rising + market, should payments become + unmanageable, the + +On line 1872: + a falling market, + the borrower might owe more + than the home was worth. + +On line 1872: + that many borrowers + would end up with negative + equity if house + +On line 1872: + especially if + the appraisal had overstated + the initial value. + +On line 1874: + lending helped address + a significant challenge + for companies like + +On line 1874: + Century, which were + big players in the market + for mortgages. Meeting + +On line 1874: + required finding new + borrowers, and homebuyers + without down payments + +On line 1874: + Yet among borrowers + with mortgages originated + in by September + +On line 1874: + piggybacks were four + times as likely as other + mortgage holders to + +On line 1874: + or more days delinquent. + When senior management at + New Century heard + + these numbers, the head + of the Secondary Marketing + Department asked for + +On line 1876: + Century increased + mortgages with piggybacks to + of loan production + +On line 1876: + the end of up from + only in They were not alone. + Across securitized + +On line 1876: + subprime mortgages, the + average combined LTV rose + from to between and + +On line 1878: + into mortgages—and + quickly—was to require less + information of + +On line 1880: + years earlier for + people with fluctuating + or hard-to-verify + +On line 1880: + as the self-employed, + or to serve longtime customers + with strong credit. Or + +On line 1880: + looked safe in other + respects. "If I’m making a + loan-to-value, I’m + +On line 1880: + going to get all + of the documentation," + Sandler of Golden + + West told the FCIC. The + process was too cumbersome and + unnecessary. He + +On line 1880: + teachers, accountants, + and engineers made—and if + he didn’t, he could + +On line 1880: + out. All he needed + was to verify that his + borrowers worked where + +On line 1880: + did. If he guessed wrong, + the loan-to-value ratio + still protected his + +On line 1882: + offer borrowers + the convenience of quicker + decisions and not + +On line 1882: + of paperwork. In + return, they charged a higher + interest rate. The + +On line 1882: + to low- and no-doc + loans skyrocketed from less + than to roughly of + +On line 1882: + outstanding loans.56 Among + Alt-A securitizations, + of loans issued in + +On line 1882: + had limited or + no documentation.57 As + William Black, a former + +On line 1882: + before the FCIC, the + mortgage industry’s own fraud + specialists described + +On line 1882: + income loans as "an + open ‘invitation to fraud’ + that justified the + +On line 1884: + industry term ‘liar’s + loans.’"58 Speaking of lending up + to at Citigroup, + +On line 1884: + Bowen, a veteran + banker in the consumer lending + group, told the FCIC, "A + + decision was made + that ‘We’re going to have to + hold our nose and start + +On line 1884: + stated product if + we want to stay in business.’"59 + Jamie Dimon, the CEO + +On line 1884: + told the Commission, + "In mortgage underwriting, + somehow we just missed, + +On line 1884: + know, that home prices don’t + go up forever and that + it’s not sufficient + +On line 1886: + income."60 In the end, + companies in subprime and + Alt-A mortgages had, in + + essence, placed all their chips + on black: they were betting that + home prices would never + +On line 1888: + rising. This was the + only scenario that would keep + the mortgage machine + +On line 1888: + The evidence is + present in our case study mortgage-backed + security, CMLTI + +On line 1890: + 2006-NC2, whose loans have many + of the characteristics + just described. The loans + +On line 1890: + deal were adjustable-rate and + fixed-rate residential mortgages + originated by + +On line 1892: + home price of in The + vast majority had a + 30-year maturity, + +On line 1894: + were originated + in May, June, and July just + after national + +On line 1894: + reportedly for + primary residences, with + for home purchases + +On line 1896: + were from all states and + the District of Columbia, + but more than a fifth + +On line 1898: + and more than a tenth + from Florida.62 About of the + loans were ARMs, and most + +On line 1898: + In a twist, many of + these hybrid ARMs had other + "affordability + +On line 1898: + more than of the ARMs + were interest-only—during + the first two or three + + years, not only would + borrowers pay a lower + fixed rate, they would not + +On line 1898: + pay any principal. + In addition, more than of + the ARMs were hybrid + +On line 1898: + balloon" loans, in which + the principal would amortize + over years—lowering the + +On line 1898: + payments even further, + but as a result leaving + the borrower with + +On line 1900: + end of the 30-year term. + The great majority of + the pool was secured + +On line 1900: + mortgages; of these, had + a piggyback mortgage on + the same property. + +On line 1900: + a result, more than + one-third of the mortgages in this + deal had a combined + +On line 1902: + ratio between and + Raising the risk a bit more, + of the mortgages were + + no-doc loans. The rest + were "full-doc," although their + documentation + +On line 1904: + fuller in some cases + than in others.63 In sum, the + loans bundled in this + +On line 1904: + high LTVs and little + documentation. And even + as many warned of this + +On line 1906: + not on the same page. + FEDERAL REGULATORS: + "IMMUNITY FROM + + MANY STATE LAWS IS A + SIGNIFICANT BENEFIT" + For years, some states had + +On line 1910: + the mortgage business, + especially to clamp down + on the predatory + +On line 1910: + proliferating + in the subprime market. The + national thrifts and + +On line 1910: + Thrift Supervision + (OTS) and the Office of the + Comptroller of the + +On line 1910: + to regulate those + national banks and thrifts. The + companies claimed that + +On line 1910: + one uniform set of + rules, they could not easily + do business across the + +On line 1910: + regulators agreed. + In August as the market + for riskier subprime + + and AltA loans grew, and + as lenders piled on more risk with + smaller down payments, + +On line 1910: + interest-only loans, + and payment-option loans, the + OCC fired a salvo. + +On line 1910: + rules for national + banks, nearly identical to + earlier OTS rules + +On line 1912: + thrifts to disregard + state consumer laws.64 Back in the + OTS had issued rules + +On line 1912: + for federally + regulated thrifts.65 In the + OTS referred to these + + rules in issuing + four opinion letters declaring + that laws in Georgia, + +On line 1912: + New Jersey, and New + Mexico did not apply + to national thrifts. + +On line 1912: + the New Mexico + opinion, the regulator + pronounced invalid New + +On line 1912: + on balloon payments, + negative amortization, + prepayment penalties, + +On line 1914: + to the borrower’s + ability to repay. The + Comptroller of the + +On line 1914: + it regulated, + offering preemption as + an inducement to + +On line 1916: + a national bank + charter. In a speech, before + the final OCC rules + +On line 1918: + many state laws" as "a + significant benefit + of the national + + charter—a benefit + that the OCC has fought hard over + the years to preserve."66 + + In an interview + that year, Hawke explained that the + potential loss of + +On line 1920: + OCC "was a matter + of concern."67 In August the + OCC issued its first + +On line 1920: + preemptive order, + aimed at Georgia’s mini-HOEPA statute, and + in January the + +On line 1920: + adopted a sweeping + preemption rule applying + to all state laws that + +On line 1920: + on national banks’ + ability to lend. Shortly + afterward, three large + +On line 1920: + with combined assets + of more than trillion said they + would convert from state + +On line 1922: + another point of + contention in the preemption + battle. In the OCC + +On line 1922: + regarding state-chartered + operating subsidiaries of + national banks. In + +On line 1922: + into subsidiaries and + asserted that the subsidiaries + were exempt from state + +On line 1924: + lending laws. Four states + challenged the regulation, + but the Supreme Court ruled + +On line 1928: + them in Once OCC and + OTS preemption was in place, + the two federal + +On line 1928: + lending practices by + national banks and thrifts and + their direct subsidiaries. + +On line 1928: + Dugan, who succeeded + Hawke, defended preemption, + noting that of all + + nonprime mortgages were + made by lenders that were subject + to state law. Well over + +On line 1928: + were made by mortgage + lenders that were exclusively + subject to state law."70 + +On line 1928: + of Illinois, flipped the + argument around, noting that + national banks and + +On line 1928: + heavily involved + in subprime lending. Using + different data, + +On line 1928: + and their subsidiaries were + responsible for almost + percent of subprime + +On line 1928: + mortgage loans, percent + of the Alt-A loans, and percent + of the pay-option and + + interest-only ARMs + that were sold." Madigan told the + FCIC: Even as the Fed + + was doing little + to protect consumers and our + financial system + +On line 1930: + lending, the OCC and + OTS were actively engaged + in a campaign to + +On line 1930: + efforts to avert the + coming crisis. In the wake + of the federal + +On line 1930: + push to curtail state + authority, many of the + largest mortgage-lenders shed + +On line 1930: + state licenses and + sought shelter behind the shield + of a national + +On line 1930: + I think that it is + no coincidence that the + era of expanded + +On line 1932: + nation’s history.71 + Comptroller Hawke offered the + FCIC a different + +On line 1932: + suggested that the + OCC’s actions on preemption + have been a grab for + +On line 1932: + to increasingly + aggressive initiatives at + the state level to + +On line 1938: + depended on a + complex supply chain, largely + funded through short-term + +On line 1938: + repo market—which would + become critical as the + financial crisis + +On line 1940: + securities but + by highly rated mortgage + securities backed + +On line 1940: + increasingly risky + loans. Independent mortgage + originators such + +On line 1940: + originate mortgages + from warehouse lines of credit + extended by banks, + +On line 1942: + paper programs, or + from money borrowed in the + repo market. For + +On line 1942: + multibillion-dollar + business. From to Citigroup + made available at any + +On line 1942: + one time as much as + billion in warehouse lines of + credit to mortgage + +On line 1942: + including million + to New Century and more + than billion to Ameriquest.73 + + Citigroup CEO Chuck + Prince told the FCIC he would not + have approved, had he + +On line 1944: + "I found out at the + end of my tenure, I did + not know it before, + +On line 1944: + had some warehouse lines + out to some originators. + And I think getting + +On line 1946: + products—is something + that I wasn’t comfortable + with and that I did + +On line 1946: + consistent with the + prescription I had laid down + for the company + +On line 1948: + to be involved in + originating these products."74 + As early as Moody’s + +On line 1948: + ball game."75 As asset-backed + commercial paper became + a popular method + +On line 1948: + mortgage business, it + grew from about one-quarter to about + one-half of commercial + +On line 1950: + paper sold between + and n only five mortgage + companies borrowed + +On line 1950: + borrowed billion.76 For + instance, Countrywide launched the + commercial paper + +On line 1952: + Park Granada in and + Park Sienna in By May + it was borrowing + +On line 1952: + through Park Granada and + billion through Park Sienna. + These programs would house + + subprime and other + mortgages until they were sold.78 + Commercial banks used + +On line 1956: + arbitrage. When banks + kept mortgages on their balance + sheets, regulators + +On line 1956: + required them to hold + in capital to protect + against loss. When banks put + +On line 1956: + such as commercial + paper programs, there was no + capital charge (in + +On line 1956: + small charge was imposed). + But to make the deals work for + investors, banks had to + +On line 1956: + which they earned a fee. + This liquidity support + meant that the bank would + +On line 1956: + commercial paper + that investors were unwilling + to buy when it came + +On line 1956: + renewal. During + the financial crisis these + promises had to be + + kept, eventually + putting substantial pressure on + banks’ balance sheets. When + +On line 1958: + the private group that + establishes standards for + financial reports, + +On line 1958: + the Enron scandal + by making it harder for + companies to get + +On line 1958: + for these programs, the + favorable capital rules + were in jeopardy. The + +On line 1958: + commercial paper + market stalled. Banks protested that + their programs differed + +On line 1958: + practices at Enron + and should be excluded from + the new standards. In + +On line 1958: + bank regulators + responded by proposing to + let banks remove these + +On line 1958: + introduced for the + first time a capital charge + amounting to at most + +On line 1958: + association, + called that charge "arbitrary," and + State Street Bank complained + +On line 1958: + announced a final + rule setting the charge at up + to or half the amount + +On line 1960: + the first proposal. + Growth in this market resumed. + Regulatory + + changes—in this case, changes + in the bankruptcy laws—also + boosted growth in the + +On line 1960: + transforming the types + of repo collateral. + Prior to repo + +On line 1960: + their collateral + following the borrower’s + bankruptcy only + +On line 1960: + In the Bankruptcy + Abuse Prevention and Consumer + Protection Act of + +On line 1960: + Congress expanded + that provision to include + many other assets, + + including mortgage + loans, mortgage-backed securities, + collateralized + +On line 1960: + reliant on highly + rated non-agency mortgage-backed + securities; but + +On line 1960: + in mid-2007, when banks and + investors became skittish about + the mortgage market, + +On line 1960: + they would prove to be + an unstable funding source + (see figure Once the + +On line 1960: + a greater share of the + tri-party repo market + than most people would + +On line 1960: + Darryll Hendricks, a + UBS executive and chair + of a New York Fed + +On line 1960: + force examining + the repo market after + the crisis, told the + +On line 1962: + worked in practice. Eight + banks and securities firms + provided most of + +On line 1962: + Century needed + to make the mortgages it would + sell to Citigroup. + + Most of the funds came + through repo agreements from a + set of banks—including + +On line 1964: + Barclays Capital, + a division of a U.K.-based + bank million); Bank of + +On line 1964: + million); and Bear Stearns + million).81 The financing was + provided when New + +On line 1964: + originated these + mortgages; so for about two months, + New Century owed + +On line 1964: + its own commercial + paper program. On August + Citigroup paid New + +On line 1964: + Century million + for the mortgages (and accrued + interest), and New + +On line 1966: + lenders after keeping + a million premium.82 The + investors in the deal + + Investors for mortgage-backed + securities came from all + over the globe; what made + +On line 1970: + were the customized + tranches catering to every + one of them. CMLTI 2006-NC2 + +On line 1970: + tranches, whose investors + are shown in figure Fannie + Mae bought the entire + +On line 1970: + a better return + than super-safe U.S. Treasuries.83 The + other triple-A-rated tranches, + +On line 1970: + worth million, went to + more than institutional + investors around the world, + +On line 1970: + risk globally.84 These + triple-A tranches represented + of the deal. Among the + + buyers were foreign + banks and funds in China, Italy, + France, and Germany; the + + Federal Home Loan + Bank of Chicago; the Kentucky + Retirement Systems; + + a hospital; and + JP Morgan, which purchased part + of the tranche using + +On line 1970: + securities-lending + operation.85 (In other + words, JP Morgan lent + +On line 1970: + its clients to other + financial institutions + in exchange for cash + +On line 1970: + and then put that cash + to work investing in this + deal. Securities + +On line 1972: + market.) The middle, + mezzanine tranches in this + deal constituted + +On line 1972: + the total value + of the security. If + losses rose above to + +On line 1972: + design the threshold + would increase over time), investors + in the residual + +On line 1972: + would be wiped out, and + the mezzanine investors would + start to lose money. + +On line 1972: + collateralized + debt obligations, or CDOs—discussed in + the next chapter—bought + +On line 1972: + of the mezzanine + tranches rated below triple-A + and nearly all those + +On line 1972: + below AA. Only + a few of the highest-rated + mezzanine tranches + +On line 1972: + not put into CDOs. + For example, Cheyne Finance + Limited purchased + +On line 1972: + the top mezzanine + tranche. Cheyne—a structured investment + vehicle (SIV)—would be + +On line 1972: + casualties of + the crisis, sparking panic + during the summer + +On line 1974: + which purchased million + of the second mezzanine + tranche,86 would be one of + + the BNP Paribas funds which + helped ignite the financial + crisis that summer.87 + +On line 1976: + investors seeking high + returns, such as hedge funds, would + buy the equity + + tranches of mortgage-backed + securities; they would be + the first to lose if + +On line 1976: + there were problems. These + investors anticipated + returns of or even + +On line 1976: + Citigroup retained + part of the residual or + "first-loss" tranches, sharing + +On line 1980: + very well" The business + of structuring, selling, and + distributing this deal, + +On line 1980: + the banks. The mortgage + originators profited + when they sold loans for + +On line 1980: + profit flowed down to + employees—particularly + those generating + +On line 1982: + volume. Part of the + million premium received + by New Century + +On line 1982: + analyzed went to + pay the many employees who + participated. + +On line 1982: + salespeople [who] were + the reason our loans came in + were compensated + +On line 1982: + the FCIC. And volume + mattered more than quality. + She noted, "Wall Street + +On line 1982: + very hungry for our + product. We had our loans sold + three months in advance, + + before they were even + made at one point."90 Similar + incentives were at + +On line 1984: + subprime division + of Washington Mutual, + which organized its + +On line 1984: + Incentive Plan by + volume. As WaMu showed in a + plan, "Home Loans Product + +On line 1986: + in higher margin + products (Option ARM, Alt A, + Home Equity, ubprime)," + +On line 1986: + sales force," and "maintain + a compensation structure + that supports the high + +On line 1988: + a security, + an underwriter, often + an investment bank, + +On line 1988: + For a billion deal + like CMLTI 2006-NC2, a fee would earn + Citigroup million. + +On line 1988: + Citigroup instead + kept parts of the residual + tranches. Doing so + +On line 1990: + yield large profits as + long as the deal performed as + expected. Options + +On line 1990: + banks, examined the + mortgage-backed securities sales + and trading desks at + +On line 1990: + from to It found that + associates had average + annual base salaries + +On line 1990: + of to from through but + received bonuses that could well + exceed their salaries. On + +On line 1990: + salaries and bonuses from + to Directors averaged + to At the top was + +On line 1990: + the head of the unit. + For example, in Dow Kim, + the head of Merrill’s + + Global Markets and + Investment Banking segment, + received a base salary + +On line 1992: + plus a million bonus, + a package second only + to Merrill Lynch’s CEO.95 + + MOODY’S: "GIVEN A BLANK + CHECK" The rating agencies were + essential to the + +On line 1996: + Issuers needed them + to approve the structure of + their deals; banks needed + +On line 1996: + markets needed their + ratings to determine loan + terms; some investors could + +On line 1996: + agencies’ judgment was + baked into collateral + agreements and other + + financial contracts. + To examine the rating + process, the Commission + +On line 1996: + Moody’s Investors Service, + the largest and oldest of the + three rating agencies. + +On line 1998: + finance products such + as mortgage-backed securities + made up close to half + +On line 2000: + and From to revenues + from rating such financial + instruments increased + + more than fourfold.97 But + the rating process involved many + conflicts, which would come + +On line 2002: + using models based, + in part, on periods of + relatively strong + +On line 2002: + in underwriting + standards or a dramatic + decline in home prices. + +On line 2002: + even develop a + model specifically to + take into account + +On line 2006: + securities.98 "In + the business forevermore" Credit + ratings have been linked + +On line 2006: + three-quarters of a + century.99 In the Office + of the Comptroller + +On line 2006: + the Currency let + banks report publicly traded + bonds with a rating + + of BBB or better + at book value (that is, the + price they paid for the + + bonds); lower-rated bonds + had to be reported at + current market prices, + +On line 2006: + on lower-rated bonds + held by insurers.100 But the + watershed event in + +On line 2006: + broker-dealers to base + them on credit ratings by + a "nationally + +On line 2006: + organization" + (NRSRO); at the time, that was Moody’s, + S&P, or Fitch. Ratings + +On line 2006: + built into banking + capital regulations + under the Recourse + +On line 2006: + less capital for + higher-rated securities. + For example, BBB + +On line 2006: + Banks in some countries + were subject to similar + requirements under + +On line 2006: + international + capital agreement, signed in + June although U.S. banks + +On line 2008: + also determined + whether investors could buy certain + investments at all. + +On line 2008: + SEC restricts money + market funds to purchasing + "securities that + +On line 2008: + credit ratings from + any two NRSROs in one of the + two highest short-term + +On line 2008: + or comparable + unrated securities."101 + The Department of + +On line 2008: + fund investments to + securities rated A + or higher. Credit + + ratings affect even + private transactions: contracts + may contain triggers + +On line 2008: + or entity be + downgraded. Triggers played an + important role in + +On line 2010: + the mortgage market, + the Secondary Mortgage Market + Enhancement Act of + +On line 2010: + state-chartered financial + institutions to invest + in mortgage-related + + securities if + the securities had high + ratings from at least + + one rating agency. + "Look at the language of the + original bill," Lewis + +On line 2012: + Ranieri told the FCIC. "It + requires a rating. It put + them in the business + + forevermore. It became + one of the biggest, if not + the biggest, business."102 + +On line 2012: + Kolchinsky, a former + Moody’s managing director, + would summarize the + +On line 2014: + "the rating agencies + were given a blank check."103 The + agencies themselves were + +On line 2016: + avoid regulation + for decades. Beginning in the + SEC had to approve + +On line 2016: + application to + become an NRSRO—but if approved, + a company faced + +On line 2018: + later, the SEC got + limited authority + to oversee NRSROs in + +On line 2020: + the Credit Rating + Agency Reform Act of That + law, taking effect + +On line 2020: + in June focused on + mandatory disclosure of + the rating agencies’ + +On line 2022: + or the procedures + and methodologies."104 Many investors, + such as some pension + +On line 2022: + ratings because they + had neither access to the + same data as the + +On line 2022: + analytical + ability to assess the + securities they + +On line 2026: + acknowledged, "Subprime + [residential mortgage–backed + securities] and + +On line 2026: + composition and + characteristics of the + loan collateral. + +On line 2026: + their home-work were + skeptical of these products + despite their ratings. + +On line 2026: + of Mission Bank in + Bakersfield, California, + described deciding + +On line 2028: + the bank’s holdings of + mortgage-backed securities and + CDOs: At one meeting, + +On line 2028: + getting difficult, + maybe in I asked the CFO what + the mechanical + +On line 2028: + securities, if + a borrower in Des Moines, + Iowa, defaulted. I + +On line 2028: + what it is if a + borrower in Bakersfield + defaults, and somebody + +On line 2028: + that mortgage. But as + a package security, + what happens1 And he + + couldn’t answer the + question. And I told him to + sell them, sell all of + + them, then, because we + didn’t understand it, and + I don’t know that we + +On line 2028: + to understand the + financial complexities; + didn’t want any part + +On line 2030: + rating agencies were + not liable for misstatements + in securities + +On line 2030: + ruled that their ratings + were opinions, protected by + the First Amendment. Moody’s + +On line 2030: + standard disclaimer reads + "The ratings are, and must be + construed solely as, + + statements of opinion + and not statements of fact or + recommendations + + to purchase, sell, or + hold any securities." Gary + Witt, a former team + +On line 2030: + director at Moody’s, + told the FCIC, "People expect + too much from ratings + +On line 2032: + always be based on + much more than just a rating."107 + "Everything but the + +On line 2032: + on the table" The + ratings were intended to + provide a means of + + comparing risks across + asset classes and time. In + other words, the risk + +On line 2032: + triple-A rated mortgage + security was supposed + to be similar + + to the risk of a + triple-A rated corporate bond. + Since the mid-1990s, Moody’s has + +On line 2034: + In Moody’s created + a new model, M3 Prime, to + rate prime, jumbo, and + +On line 2034: + Alt-A deals. Only in + the fall of when the housing + market had already + +On line 2034: + it develop its + model for rating subprime + deals, called M3 Subprime.108 + +On line 2036: + and legal factors, + and macroeconomic trends. The + M3 Prime model let + +On line 2036: + automate more of + the process. Although Moody’s did not + sample or review + +On line 2036: + issuer. Relying + on loan-to-value ratios, + borrower credit + +On line 2036: + loan terms and other + information, the model + simulated the + +On line 2038: + loan in scenarios, + including variations in + interest rates and + +On line 2038: + as well as home price + changes. On average, across the + scenarios, home prices + +On line 2038: + little weight on the + possibility prices would + fall sharply nationwide. + +On line 2038: + in developing + the model, told the FCIC, "There + may have been [state-level] + + components of this + real estate drop that the + statistics would have + +On line 2038: + down over this short but + multiple-year period, is + more stressful than the + +On line 2038: + for." Even as housing + prices rose to unprecedented + levels, Moody’s never + +On line 2038: + put greater weight on the + possibility of a + decline. According + +On line 2042: + position was that + there was not a national + housing bubble."110 When + +On line 2042: + on the deal convened + a rating committee of + other analysts + +On line 2042: + it and determine + the overall ratings for the + securities.111 Siegel + +On line 2042: + also integral: + "One common misperception + is that Moody’s credit + +On line 2042: + derived solely from + the application of a + mathematical + +On line 2042: + process or model. This + is not the case. The credit + rating process involves + +On line 2042: + of independent + judgment by members of the + rating committee. + +On line 2042: + majority view + of the committee’s members."112 + As Roger Stein, a Moody’s + +On line 2042: + director, noted, + "Overall, the model has to + contemplate events for + +On line 2044: + there is no data."113 + After rating subprime deals + with the model for + +On line 2046: + subprime mortgage–backed + securities. Like M3 Prime, + the subprime model + +On line 2046: + through scenarios.114 Moody’s + officials told the FCIC they + recognized that stress + +On line 2046: + most stressful scenario, + which reduced the portion of + each deal rated triple-A. + +On line 2046: + was manually + "calibrated" to be more + conservative to + + ensure predicted + losses were consistent with + analysts’ "expert + +On line 2046: + for example, as + one step, analysts took the + "single worst case" from + +On line 2048: + in order to add + deterioration.115 Moody’s + did not, however, + +On line 2048: + of the loans being + securitized. Fons described + this problem to the + + FCIC: "I sat on this + high-level Structured Credit + committee, which you’d + +On line 2048: + would be dealing with + such issues [of declining + mortgage-underwriting + +On line 2048: + and never once was + it raised to this group or put + on our agenda that + +On line 2048: + in quality that + was going into pools, the + impact possibly + +On line 2048: + ratings, other things. + We talked about everything but, + you know, the elephant + +On line 2050: + the table."116 To rate + CMLTI 2006-NC2, our sample deal, Moody’s + first used its model + +On line 2050: + pool. Those estimates, + in turn, determined how big + the junior tranches + +On line 2050: + the deal would have to + be in order to protect + the senior tranches + +On line 2050: + was similar to + another Citigroup deal + of New Century + +On line 2050: + rated earlier + and recommended the same + amount.117 Then the deal was + +On line 2050: + of loans, including + interest-only mortgages.118 For + its efforts, Moody’s was + +On line 2054: + an estimated + (S&P also rated this deal + and received As we + + will describe later, + three tranches of this deal would + be downgraded less + +On line 2054: + Moody’s mass downgrade on + July when housing prices had + declined by only + +On line 2054: + October the M4–M11 + tranches ere downgraded and + by all the tranches + +On line 2054: + been downgraded. Of + all mortgage-backed securities + it had rated triple-A + +On line 2054: + The consequences would + reverberate throughout the + financial system. + +On line 2060: + had violated + accounting rules and now faced + corrections and fines.122 + +On line 2060: + standards, purchasing + and guaranteeing riskier + loans, and increasing + +On line 2060: + their regulator, + the Office of Federal + Housing Enterprise + +On line 2060: + Freddie’s increasing + investments in risky mortgages + and securities. + +On line 2062: + accounting firms. The + company had been using + Arthur Andersen for + +On line 2062: + but when Andersen + got into trouble in the + Enron debacle + + (which put both Enron + and its accountant out of + business), Freddie switched + +On line 2062: + the company had + understated its earnings + by billion from through + +On line 2062: + quarter of in an + effort to smooth reported + earnings and promote + +On line 2062: + as "Steady Freddie," a + company of strong and steady + growth. Bonuses were tied + +On line 2064: + to the accounting + manipulations. Freddie’s + board ousted most top + +On line 2064: + CEO Leland Brendsel, + President and COO David Glenn, + and CFO Vaughn Clarke.124 In + +On line 2064: + risk management. In + January OFHEO directed + Freddie to maintain + +On line 2064: + requirement until + it reduced operational + risk and could produce + +On line 2066: + settle shareholder + lawsuits for million and pay + million in penalties + +On line 2068: + Fannie was next. In + September OFHEO discovered + violations of + +On line 2068: + rules that called into + question previous filings. + In OFHEO reported + +On line 2068: + earnings from through by + billion and that it, too, had + manipulated + +On line 2068: + in ways influenced + by compensation plans.125 OFHEO + made Fannie improve + +On line 2068: + accounting controls, + maintain the same capital + surplus imposed on + + Freddie, and improve + governance and internal + controls. Fannie’s board + +On line 2068: + Raines and others, and + the SEC required Fannie to + restate its results + +On line 2070: + actions for million + in penalties. Donald Bisenius, + an executive + +On line 2070: + at Freddie Mac, told + the FCIC that the accounting + issues distracted + +On line 2070: + the mortgage business, + taking "a tremendous amount of + management’s time and + +On line 2070: + less aggressive or + less competitive in the + marketplace [than] we + +On line 2074: + been."126 As the scandals + unfolded, subprime private + label mortgage–backed + +On line 2074: + securities (PLS) + issued by Wall Street increased + from billion in to + +On line 2078: + the value of Alt-A + mortgage–backed securities + increased from billion + +On line 2078: + billion. Starting in + for Freddie and for Fannie, + the GSEs—particularly Freddie—became + +On line 2078: + market. While private + investors always bought the most, + the GSEs purchased of + +On line 2078: + private-issued subprime + mortgage–backed securities + in The share peaked at + +On line 2078: + then fell back to in + The share for Alt-A mortgage–backed + securities was + + always lower.127 The + GSEs almost always bought the + safest, triple-A-rated tranches. From + +On line 2082: + purchases declined, + both in dollar amount and as + a percentage. These + +On line 2082: + profitable at first, but + as delinquencies increased in + and both GSEs began + +On line 2084: + from their purchases + of Alt-A securities. By + the third quarter of + +On line 2084: + total impairments + on securities totaled + billion at the two + +On line 2086: + to wipe out nearly + of their pre-crisis capital.128 + OFHEO knew about the GSEs’ + +On line 2088: + backed securities. + In its examination, + the regulator + +On line 2088: + Freddie’s purchases + of these securities. It + also noted that + +On line 2090: + mortgages with "higher + risk attributes which exceeded + the Enterprise’s + +On line 2090: + capabilities," + including "No Income/No Asset + loans" that introduced + +On line 2090: + mortgage insurers + were already seeing abuses + with these loans.129 But the + +On line 2090: + that the purchases + of mortgage-backed securities + and riskier mortgages + +On line 2090: + efforts to address + accounting and internal + deficiencies.130 OFHEO + +On line 2090: + nothing in Fannie’s + report about its purchases + of subprime and Alt-A + +On line 2092: + risk management was + deemed satisfactory.131 The + reasons for the GSEs’ + +On line 2092: + of subprime and Alt-A + mortgage–backed securities + have been debated. + +On line 2092: + push to fulfill their + higher goals for affordable + housing. The former + +On line 2092: + a working paper + submitted as part of his + testimony to + +On line 2094: + that when the GSEs were + pressed to "expand ‘affordable + housing commitments,’ + +On line 2094: + multifamily + purchases alone met each of + the goals; in other + +On line 2094: + enterprise would have + met its obligations without + buying subprime or + +On line 2096: + none of Fannie Mae’s + purchases of subprime or + Alt-A securities + +On line 2098: + submitted to HUD + to be counted toward the + goals. Before or less + +On line 2098: + purchases had to + satisfy the affordable + housing goals. In the + +On line 2098: + met the overall goals.133 + Securities purchases + did, in several + +On line 2098: + requiring the GSEs + to purchase or guarantee + loans to purchase homes. + +On line 2098: + Fannie missed one of + these subgoals and would have missed + a second without + +On line 2098: + purchases; in the + securities purchases + helped Fannie meet those + +On line 2100: + the FCIC show that from + through Freddie would have met the + affordable housing + +On line 2100: + of Alt-A or subprime + securities, but used the + securities to + +On line 2102: + Robert Levin, the former + chief business officer of + Fannie Mae, told the + +On line 2102: + was no trade-off [between + making money and hitting + goals], it was a very + + broad-brushed effort" that + could be characterized as + "win-win-win: money, goals, and + +On line 2104: + Winer, the head of + Fannie’s Business, Analysis, + and Decisions Group, + +On line 2104: + of triple-A tranches of + mortgage-backed securities backed + by subprime loans was + +On line 2104: + as an attractive + opportunity with good + returns. He said that + +On line 2104: + satisfied housing + goals, and that the goals became + a factor in the + +On line 2106: + of private label + securities. Overall, while + the mortgages behind + +On line 2106: + were often issued + to borrowers that could help + Fannie and Freddie + +On line 2106: + the mortgages behind + the Alt-A securities were + not. Alt-A mortgages were + + not generally + extended to lower-income + borrowers, and the + +On line 2106: + Alt-A loans—from counting + toward affordability + goals.138 Levin told the FCIC + +On line 2106: + the purchase of Alt-A + securities "did not have + a net positive + + effect on Fannie + Mae’s housing goals."139 Instead, they + had to be offset + +On line 2108: + and moderate-income + borrowers to meet the goals. + Fannie and Freddie + +On line 2108: + from to and also + bought and securitized greater + numbers of riskier + +On line 2110: + their shareholders, and + American taxpayers. The + Commission concludes + +On line 2110: + policy of the + Federal Reserve, along with + capital flows from + +On line 2110: + a housing bubble + could develop. However, + these conditions need + +On line 2110: + Federal Reserve + and other regulators + did not take actions + +On line 2110: + constrain the credit + bubble. In addition, the + Federal Reserve’s + +On line 2110: + encouraged rather than + inhibited the growth of + mortgage debt and the + +On line 2112: + accountability + and responsibility + throughout each level + +On line 2112: + securitizers, + credit rating agencies, and + investors, and ranged from + + corporate boardrooms + to individuals. Loans + were often premised on + + ever-rising home prices + and were made regardless of + ability to pay. + +On line 2114: + process created a + pipeline through which risky mortgages + were conveyed and sold + +On line 2116: + was essential to + the origination of the + burgeoning numbers + +On line 2116: + model undermined + responsibility and + accountability + +On line 2120: + Federal and state + rules required or encouraged + financial firms and + +On line 2120: + institutional + investors to make investments + based on the ratings + +On line 2120: + to undue reliance + on those ratings. However, + the rating agencies + +On line 2120: + regulator to + ensure the quality and + accuracy of + + their ratings. Moody’s, the + Commission’s case study in this + area, relied on flawed + +On line 2120: + issue erroneous + ratings on mortgage-related + securities, failed + +On line 2120: + perform meaningful + due diligence on the assets + underlying the + +On line 2120: + and continued to + rely on those models even + after it became + + obvious that the + models were wrong. Not only + did the federal + +On line 2122: + in risky mortgage-lending + practices, but the Office of + the Comptroller of + +On line 2132: + on this segment of + the mortgage market. THE CDO + MACHINE CONTENTS CDOs: + +On line 2134: + the investor" Bear Stearns’s + hedge funds: "It functioned fine up + until one day it + + just didn’t function".....................................................................................134 + Citigroup’s liquidity + puts: "A potential + +On line 2140: + goose for the entire + Street" Goldman Sachs: "Multiplied + the effects of the + +On line 2144: + collapse in subprime"..................142 + Moody’s: "Achieved through some alchemy" SEC: + "It’s going to be + + an awfully big + mess"..........................................................150 In the first decade of the + 21st century, a + +On line 2146: + financial product + called the collateralized + debt obligation, or + +On line 2146: + transformed the mortgage + market by creating a + new source of demand + +On line 2148: + tranches of mortgage-backed + securities.* Despite their + relatively high + +On line 2148: + be hard to sell. If + borrowers were delinquent or + defaulted, investors + +On line 2148: + these tranches were out + of luck because of where they + sat in the payments + + waterfall. Wall Street + came up with a solution: + in the words of one + + banker, they "created + the investor."1 That is, they built + new securities + +On line 2150: + would buy the tranches + that had become harder to + sell. Bankers would take those + +On line 2150: + BBB or A, from many + mortgage-backed securities and + repackage them into + +On line 2150: + Approximately + of these CDO tranches would be + rated triple-A despite + +On line 2150: + lower-rated tranches + of mortgage-backed securities. + CDO securities + +On line 2150: + be sold with their own + waterfalls, with the risk-averse + investors, again, paid first + +On line 2150: + they did in the case + of mortgage-backed securities, + the rating agencies + +On line 2150: + highest, triple-A ratings + to the securities at + the top (see figure + +On line 2152: + be transformed into + a new security that + is mostly rated + + triple-A. But math made it + so. *Throughout this book, unless + otherwise noted, + +On line 2154: + term "CDOs" to refer + to cash CDOs backed by asset-backed + securities (such + +On line 2156: + also known as ABS + CDOs. The securities firms + argued—and the rating + +On line 2156: + significant—that + if one security went + bad, the second had + + only a very small + chance of going bad at the + same time. And as long + +On line 2156: + limited, only + those investors at the bottom + would lose money. They + + would absorb the blow, + and the other investors would + continue to get + + paid. Relying on + that logic, the CDO machine + gobbled up the BBB + +On line 2158: + lower-rated tranches + of mortgage-backed securities, + growing from a bit + +On line 2158: + Between and as house + prices rose nationally and + trillion in mortgage-backed + +On line 2160: + securities were + created, Wall Street issued + nearly billion in + + CDOs that included + mortgage-backed securities as + collateral.2 With + +On line 2160: + demand loans for their + pools, and hundreds of billions + of dollars flooded + + the mortgage world. In + effect, the CDO became the + engine that powered + +On line 2160: + mortgage supply chain. + "There is a machine going," + Scott Eichel, a senior + +On line 2160: + at Bear Stearns, told a + financial journalist in + May "There is a lot + + of brain power to + keep this going."3 Everyone + involved in keeping + +On line 2162: + machine humming—the CDO + managers and underwriters + who packaged and sold + + the securities, + the rating agencies that gave + most of them sterling + +On line 2162: + protection against their + defaulting—collected fees + based on the dollar + +On line 2162: + of securities + sold. For the bankers who had put + these deals together, + +On line 2162: + the executives + of their companies, volume + equaled fees equaled bonuses. + + And those fees were in + the billions of dollars across + the market. But when + +On line 2164: + market went south, the + models on which CDOs were based + proved tragically + +On line 2164: + would default in large + numbers. This was not how it + was supposed to work. + +On line 2164: + in one region were + supposed to be offset by + successful loans in + + another region. + In the end, CDOs turned out to + be some of the most + +On line 2164: + financial crisis. + The greatest losses would be + experienced by + +On line 2164: + Lynch, and UBS, and by + financial guarantors such + as AIG, Ambac, and + + MBIA. These players had + believed their own models and + retained exposure + +On line 2164: + were understood to + be the least risky tranches of + the CDOs: those rated + +On line 2166: + or even "super-senior," + which were assumed to be safer + than triple-A-rated tranches. "The + +On line 2166: + ABS CDOs had been an + abomination," Patrick Parkinson, + currently the head + +On line 2168: + and regulation + at the Federal Reserve + Board, told the FCIC.4 CDOS: + +On line 2170: + assembled the first + rated collateralized + debt obligation in + +On line 2170: + The strategy made + sense—pooling many bonds reduced + investors’ exposure + +On line 2172: + enabled investors to + pick their preferred level of + risk and return. For + +On line 2172: + who created CDOs, + the key to profitability + of the CDO was the + +On line 2172: + the spread—the difference + between the interest that + the CDO received on + + the bonds or loans that + it held and the interest + that the CDO paid to + +On line 2172: + market bonds and bank + loans. When the liquidity + crisis of drove up + +On line 2172: + Securities saw + an opportunity and + launched a series of + +On line 2172: + "multisector" or + "ABS" securities were backed + by mortgages, mobile + +On line 2172: + leases, mutual + fund fees, and other asset + classes with predictable + +On line 2172: + The diversity + was supposed to provide yet + another layer + +On line 2174: + safety for investors. + Multisector CDOs went through + a tough patch when some + +On line 2174: + securities in + which they invested started + to perform poorly + +On line 2174: + 2002—particularly + those backed by mobile home loans + (after borrowers + +On line 2174: + leases (after and + mutual fund fees (after + the dot-com bust).5 The + +On line 2174: + many investment banks, + investors, and rating agencies + was that the wide range + +On line 2174: + had actually + contributed to the problem; + according to this + +On line 2174: + asset managers who + selected the portfolios + could not be experts + +On line 2176: + as aircraft leases + and mutual funds. So the + CDO industry turned + +On line 2176: + CDO managers believed + they understood, which seemed to + have a record of good + +On line 2176: + was considered a + safe investment. "Everyone + looked at the sector + +On line 2176: + construct works, but we + just need to find more stable + collateral," said + + Wing Chau, who ran two + firms, Maxim Group and Harding + Advisory, that + +On line 2176: + industry looked at + residential mortgage–backed + securities, Alt-A, + +On line 2178: + mortgages, and saw the + relative stability."6 + CDOs quickly became + + ubiquitous in the + mortgage business.7 Investors liked + the combination + +On line 2178: + bankers liked having a + new source of demand for the + lower tranches of + +On line 2178: + created. "We told + you these [BBB-rated securities] + were a great deal, and + +On line 2178: + great spreads, but nobody + stepped up," the Credit Suisse + banker Joe Donovan told + + a Phoenix conference + of securitization + bankers in February + +On line 2180: + we created the + investor."8 By creators of CDOs + were the dominant + +On line 2180: + tranches of mortgage-backed + securities, and their bids + significantly + +On line 2182: + By they were buying + "virtually all" of the + BBB tranches.9 Just as + +On line 2182: + provided the cash + to originate mortgages, now + CDOs would provide the + +On line 2182: + Also by mortgage-backed + securities accounted + for more than half of + +On line 2182: + collateral in + CDOs, up from in Sales of these + CDOs more than doubled + +On line 2184: + hundreds of billions + of dollars of subprime and + Alt-A mortgages. "It was + +On line 2186: + of effort" Five key + types of players were involved + in the construction + +On line 2186: + agencies, investors, and + financial guarantors. Each + took varying degrees + + of risk and, for a + time, profited handsomely. + Securities firms + +On line 2188: + the selection of + collateral, structured the + notes into tranches, + +On line 2188: + were responsible + for selling them to investors. + Three firms—Merrill Lynch, Goldman + +On line 2188: + the securities + arm of Citigroup—accounted + for more than of CDOs + +On line 2190: + were also major + participants.12 "We had sales + representatives + +On line 2190: + were to sell structured + products," Nestor Dominguez, the co-head + of Citigroup’s CDO + + desk, told the FCIC. "We + spent a lot of effort to + have people in place + +On line 2190: + educate, to pitch + structured products. So, it was + a lot of effort, + +On line 2192: + deals that they could sell. + Underwriting did entail + risks, however. The + + securities firm + had to hold the assets, such + as the BBB-rated tranches + +On line 2192: + CDOs. Typically, + during that period, the + securities firm + + took the risk that the + assets might lose value. "Our + business was to make + +On line 2194: + issue fees, [and to] + make sure that if the market + did have a downturn, + + we were somehow hedged," + Michael Lamont, the former + co-head for CDOs at + +On line 2194: + Bank, told the FCIC.14 Chris + Ricciardi, formerly + head of the CDO desk + +On line 2194: + Merrill Lynch, likewise + told the FCIC that he did not + track the performance + +On line 2194: + underwriting them.15 + Moreover, Lamont said it + was not his job to + +On line 2194: + agencies’ models had + the correct underlying + assumptions. That "was + +On line 2194: + brought to the table," + he said.16 In many cases, though, + underwriters helped + + CDO managers select + collateral, leading to + potential conflicts + +On line 2196: + on that later). The + role of the CDO manager + was to select the + + collateral, such + as mortgage-backed securities, + and in some cases + +On line 2196: + such as Chau’s to units + of large asset management + companies such as + +On line 2198: + Blackrock. CDO managers + received periodic fees + based on the dollar + + amount of assets in + the CDO and in some cases + on performance. On + +On line 2198: + percentage basis, + these may have looked small—sometimes + measured in tenths of + +On line 2198: + percentage point—but + the amounts were far from trivial. + For CDOs that focused + +On line 2198: + tended to be in + the range of to a million + dollars per year for + +On line 2198: + billion dollar deal. + For CDOs that focused on the + more junior tranches, + +On line 2200: + were often smaller, + fees would be to million per + year for a million + + deal.17 As managers did + more deals, they generated + more fees without much + +On line 2200: + "You’d hear statements like, + ‘Everybody and his uncle + now wants to be a + +On line 2200: + a structured finance + analyst at Nomura + Securities and + +On line 2200: + credit officer + at S&P, told the FCIC. "That was + an observation + +On line 2200: + several of the + industry conferences around + those times—the enormous + +On line 2202: + proliferation + of CDO managers— because it + was very lucrative."18 + +On line 2204: + industry-wide earned at + least billion in management + fees between and The + +On line 2204: + basic guidelines on + the collateral and the + structure of the CDOs—that + +On line 2204: + the sizes and returns + of the various tranches—in + close consultation + +On line 2204: + the riple-A rating made + those products appropriate + investments. Rating + +On line 2204: + for CDOs.20 For most deals, + at least two rating agencies + would provide ratings + + and receive those fees—although + the views tended to be in + sync. The CDO investors, + +On line 2206: + investors in mortgage-backed + securities, focused on + different tranches + +On line 2206: + for risk and return. + CDO underwriters such as + Citigroup, Merrill + + Lynch, and UBS often + retained the super-senior triple-A + tranches for reasons + +On line 2206: + also sold them to + commercial paper programs + that invested in + +On line 2208: + CDOs became the most + important class of investor + for the mezzanine + +On line 2208: + of the mezzanine + tranches—including those rated + A—and, especially, + +On line 2208: + BBB, the lowest and + riskiest investment-grade + rating—to other + + CDO managers, to be + packaged into other CDOs.22 + It was common for + +On line 2208: + to be structured with + or of their cash invested + in other CDOs; CDOs + +On line 2208: + as to of their cash + invested in other CDOs + were typically + +On line 2208: + notably AIG, played a + central role by issuing + swaps to investors in + +On line 2210: + reimburse them for + any losses on the tranches + in exchange for a + +On line 2210: + of premium-like + payments. This credit default + swap protection made + +On line 2210: + more attractive to + potential investors because + they appeared to be + + virtually risk + free, but it created huge + exposures for the + + credit default swap + issuers if significant + losses did occur. + +On line 2212: + the creation of CDOs, + as is customary on Wall + Street, was reflected + +On line 2212: + products soared during + the liquidity boom at + the beginning of + + the 21st century, + pretax profit for the five + largest investment banks + +On line 2212: + billion to billion; + total compensation at + these investment banks + +On line 2212: + for their employees + across the world rose from billion + to billion.23 A part + +On line 2212: + could be credited + to mortgage-backed securities, + CDOs, and various + +On line 2212: + mortgage and asset-backed + securities salespeople + should especially + +On line 2214: + for investment banks + reported in To see in + more detail how the + +On line 2214: + security, CMLTI + 2006-NC2. Earlier, we described + how most of the below-triple-A + + bonds issued in this + deal went into CDOs. One such + CDO was Kleros Real + + Estate Funding III, + which was underwritten by + UBS, a Swiss bank.25 The + +On line 2218: + Cohen Company; + that investment company + was headed by Chris + + Ricciardi, who + had earlier built Merrill’s + CDO business.26 Kleros III, + +On line 2218: + in purchased and held + million in securities + from the A-rated M5 + +On line 2220: + of other mortgage-backed + securities. In total, + it owned million of + +On line 2220: + of which were rated + BBB or lower, A, and the + rest higher than A. + +On line 2220: + fund those purchases, + Kleros III issued billion of + bonds to investors. As + +On line 2220: + was typical for + this type of CDO at the time, + roughly of the Kleros + + III bonds were triple-A-rated. At + least half of the below-triple-A tranches + issued by Kleros III + +On line 2224: + into other CDOs.27 + "Mother’s milk to the market" + The growth of CDOs had + +On line 2224: + the mortgage market + itself. CDO managers who were + eager to expand + +On line 2224: + assets that they were + managing—on which their income + was based—were willing + +On line 2224: + tranches of mortgage-backed + securities. This "CDO bid" + pushed up market prices + +On line 2226: + securities were + typically protected + from losses by bond + + insurers, who had + analyzed the deals as well. + Beginning in the + +On line 2228: + securities that + were structured with six or more + tranches and other + + features to protect + the triple-A investors became more + common, replacing + +On line 2228: + on bond insurance + to protect investors. By the + earlier forms of + +On line 2228: + had essentially + vanished, leaving the market + increasingly to + +On line 2230: + was a critical + development, given that + the focus of CDO + +On line 2230: + differed from that of + traditional investors. "The + CDO manager and + +On line 2230: + are not the same kind + of folks [as the monoline bond + insurers], who just + +On line 2234: + folks."28 Indeed, Chau, the + CDO manager, portrayed his + job as creating + +On line 2234: + that rating agencies + would approve and investors would + buy, and making sure + +On line 2234: + industry standards." + He said that he relied on + the rating agencies. + + "Unfortunately, + what lulled a lot of investors, + and I’m in that camp + + as well, what lulled us + into that sense of comfort + was that the rating + + stability was + so solid and that it was + so consistent. I + +On line 2234: + making everything + consistent."29 CDO production + was effectively + +On line 2238: + speak lovingly of + ‘the CDO bid.’ It is mother’s + milk to the market," + +On line 2238: + wrote in "Without it, + fewer asset-backed structures could + be built, and those that + + were would have to meet + a much more conservative + standard of design. + + The resulting pangs + of credit withdrawal would + certainly be felt + +On line 2240: + UBS’s Global CDO Group + agreed, noting that CDOs "have now + become bullies in + +On line 2240: + volume and the price + of mortgage-backed securities, + bids from CDOs had "an + +On line 2240: + economy that goes + well beyond the CDO market."31 + Without the demand + +On line 2240: + securities from + CDOs, lenders would have been able to + sell ewer mortgages, + + and thus they would have + had less reason to push so + hard to make the loans + +On line 2244: + inherent in CDOs" + The mortgage pipeline also + introduced leverage + + at every step. Most + financial institutions + thrive on leverage—that + +On line 2244: + investing borrowed + money. Leverage increases + profits in good times, + +On line 2244: + is of the low down + payment, high loan-to-value + ratio variety. + +On line 2244: + and CDOs created + further leverage because they + were financed with debt. + +On line 2244: + the CDOs were often + purchased as collateral + by those creating + +On line 2244: + of debt. Synthetic + CDOs consisting of credit + default swaps, described + + below, amplified + the leverage. The CDO, backed by + securities that + + were themselves backed by + mortgages, created leverage + on leverage, as Dan + +On line 2244: + mortgage department + head at Goldman Sachs, explained + to the FCIC.32 "People + +On line 2244: + either take leverage + individually, as + an institution, + +On line 2246: + take leverage within + the structure," Citigroup’s Dominguez + told the FCIC.33 Even the + +On line 2246: + bought the CDOs could use + leverage. Structured investment + vehicles—a type + +On line 2246: + triple-Arated securities—were + leveraged an average of + just under 14-to-1: in + +On line 2246: + these SIVs would hold in + assets for every dollar + of capital.34 The + +On line 2246: + would be financed with + debt. Hedge funds, which were common + purchasers, were also + +On line 2246: + highly leveraged in + the repo market, as we + will see. But it would + + become clear during + the crisis that some of the + highest leverage was + +On line 2246: + by companies such + as Merrill, Citigroup, and + AIG when they retained + + or purchased the triple-A + and super-senior tranches of + CDOs with little or + +On line 2248: + backing. Thus, in when + the homeownership rate was + peaking, and when new + +On line 2248: + refinancings, by + investors and speculators, + and by second home + +On line 2248: + trillions of dollars + of securities rested + on just two things: the + +On line 2248: + homeowners to make + the payments on their subprime + and Alt-A mortgages and + + the stability + of the market value of + homes whose mortgages were + + the basis of the + securities. Those dangers + were understood all + +On line 2248: + is inherent in + [asset-backed securities] CDOs," + Mark Klipsch, a banker + +On line 2248: + Raton conference + of securitization + bankers in October + +On line 2250: + While it was good for + short-term profits, losses could + be large later on. + +On line 2254: + "We’ll see some problems + down the road."35 BEAR STEARNS’S HEDGE FUNDS: + "IT FUNCTIONED FINE UP + + UNTIL ONE DAY IT + JUST DIDN’ T FUNCTION" Bear Stearns, + the smallest of the + +On line 2256: + started its asset + management business in when + it established Bear + +On line 2260: + Asset Management + (BSAM). Asset management brought + in steady fee income, + +On line 2262: + customers and required + little capital. BSAM played + a prominent role + + in the CDO business + as both a CDO manager + and a hedge fund that + +On line 2262: + and CDOs. At BSAM, by + the end of Ralph Cioffi was + managing CDOs with + +On line 2264: + billion in assets + and hedge funds with billion in + assets.36 Although Bear + +On line 2264: + supervision over + its business.37 The eventual + failure of Cioffi’s + +On line 2264: + mortgage-focused hedge + funds would be an important + event in early in + +On line 2266: + crisis. In Cioffi + launched his first fund at BSAM, the + High-Grade Structured Credit + +On line 2266: + and in he added the + High-Grade Structured Credit Strategies + Enhanced Leverage Fund. + +On line 2266: + funds purchased mostly + mortgage-backed securities or + CDOs, and used leverage + +On line 2268: + returns. The target + was for of assets to be + rated either AAA + +On line 2268: + AA. As Cioffi told + the FCIC, "The thesis behind + the fund was that the + +On line 2268: + markets offered yield + over and above what their ratings + suggested they should + +On line 2268: + Cioffi targeted + a leverage ratio of to + for the first High-Grade fund. + + For Enhanced Leverage, + Cioffi upped the ante, touting + the Enhanced Leverage + +On line 2268: + of the [High Grade] fund" + that targeted leverage of + to At the end of + +On line 2270: + the High-Grade fund contained + billion in assets (using + billion of his hedge + +On line 2270: + investors’ money and + billion in borrowed money). + The Enhanced Leverage + +On line 2274: + money).40 BSAM financed + these asset purchases by + borrowing in the + +On line 2274: + the FCIC identified + at least billion of repo + borrowing as of + +On line 2274: + funds that responded. + The respondents invested + at least billion in + +On line 2274: + or CDOs as of June + The ability to borrow + using the AAA and + + AA tranches of CDOs + as repo collateral + facilitated + +On line 2276: + securities. But + repo borrowing carried + risks: it created + +On line 2276: + leverage and it had + to be renewed frequently. + For example, an + +On line 2276: + stock on margin—meaning + with borrowed money—might have to + put up cents on the + +On line 2278: + other cents loaned by + his or her stockbroker, for + a leverage ratio + +On line 2278: + to A homeowner + buying a house might make a + down payment and take + +On line 2278: + out a mortgage for + the rest, a leverage ratio + of to By contrast, + +On line 2278: + allowed an investor + to buy a security + for much less out of + + pocket—in the case of + a Treasury security, + an investor may have + +On line 2278: + only borrowing + from a securities firm + to In the case of + +On line 2282: + security, an + investor might pay to With this + amount of leverage, a + +On line 2282: + the value of that + mortgage-backed security can + double the investor’s + +On line 2284: + the underlying + collateral could be sold + easily. But when + +On line 2284: + private-label mortgage-backed + securities would prove to + be very different + + from U.S. Treasuries. he + short-term nature of repo + money also makes + +On line 2288: + inherently risky + and unreliable: funding + that is offered at + +On line 2288: + terms today could be + gone tomorrow. Cioffi’s funds, + for example, took + +On line 2290: + that its repo lenders + would decide not to extend, + or "roll," the repo + +On line 2290: + on any given day. + Yet more and more, repo lenders + were loaning money + + to funds like Cioffi’s, + rolling the debt nightly, and not + worrying very much + +On line 2292: + real quality + of the collateral. The + firms loaning money + + to Cioffi’s hedge funds + were often also selling + them mortgage-related + +On line 2292: + and the hedge funds pledged + those same securities to + secure the loans.43 If + + the market value + of the collateral fell, + the repo lenders could + +On line 2292: + hedge fund to back the + repo loan. This dynamic + would play a pivotal + +On line 2292: + of many hedge funds in + 2007—most spectacularly in + the case of Cioffi’s + +On line 2292: + "The repo market, + I mean it functioned fine up + until one day it + + just didn’t function," + Cioffi told the FCIC. Up to + that point, his hedge funds + + could buy billions of + dollars of CDOs on borrowed + money because of + +On line 2292: + the market’s bullishness + about mortgage assets, he said. + "It became a more + +On line 2292: + more repo lenders, more + investors obviously. [It + had a] much broader + +On line 2296: + CDOs were a market + opportunity because + they were complex and + +On line 2296: + in the general + marketplace. In this was a + promising market with + +On line 2298: + risks. Cioffi and his + team not only bought CDOs, they + also created + +On line 2298: + managed other CDOs. + Cioffi would purchase mortgage-backed + securities, CDOs, + +On line 2298: + securities for + his hedge funds. When he had reached + his firm’s internal + +On line 2298: + he would repackage those + securities and sell CDO + securities to + + other customers. With + the proceeds, Cioffi would pay + off his repo lenders, + +On line 2300: + at the same time he + would acquire the equity + tranche of a new CDO.45 + +On line 2302: + created CDOs that + selected collateral + from his own hedge funds,46 + +On line 2302: + positioned on both + sides of the transaction. The + structure created + +On line 2302: + interest between + Cioffi’s obligation to his + hedge fund investors and + + his obligation to + his CDO investors; this was not + unique on Wall Street, and + +On line 2302: + the structure, and the + conflict of interest, to + potential investors.47 + + For example, a + critical question was at + what price the CDO should + + purchase assets from + the hedge fund: if the CDO paid + above-market prices for + +On line 2304: + the hedge fund investors + and disadvantage the CDO + investors. BSAM’s flagship + +On line 2304: + and III—were created + in rapid succession over and + with Citigroup as + +On line 2304: + composed of mortgage- + and asset-backed securities + that BSAM already owned, + + and BSAM retained the + equity position in + all three; all three were + +On line 2304: + asset-backed commercial + paper.48 Typical for the + industry at the + +On line 2304: + managing assets + and holding the equity + tranche, was between and + +On line 2304: + the underlying + collateral.49 Thanks to the + combination of + +On line 2304: + securities, CDOs, + and leverage, Cioffi’s funds earned + healthy returns for a + +On line 2304: + time: the High-Grade fund had + returns of in in and in + after fees.50 Cioffi + +On line 2304: + millions before the + hedge funds collapsed in Cioffi + was rewarded with + +On line 2304: + compensation worth + more than million from to In + the year the two hedge + +On line 2304: + made more than million + in total compensation. + Matt Tannin, his lead + +On line 2304: + compensation of + more than million from to Both + managers invested + +On line 2304: + of their own money + in the funds, and used this as + a selling point when + + pitching the funds to + others.52 But when house prices fell + and investors started + +On line 2306: + question the value + of mortgage-backed securities + in the same short-term + +On line 2306: + amplify losses + and quickly put his two hedge + funds out of business. + +On line 2312: + LIQUIDITY PUTS: + "A POTENTIAL CONFLICT OF + INTEREST" By the + + middle of the decade, + Citigroup was a market + leader in selling + +On line 2312: + types of trouble with + its regulators, and then-CEO + Charles Prince told the FCIC + +On line 2312: + those troubles took up + more than half his time.53 After + paying the million + +On line 2312: + to subprime mortgage + lending, Citigroup again got + into trouble, charged + +On line 2312: + company filed for + bankruptcy in 2001—use structured + finance transactions + +On line 2312: + to manipulate + its financial statements. In + July Citigroup + +On line 2314: + allegations and + also agreed, under formal + enforcement actions + + by the Federal + Reserve and Office of the + Comptroller of the + +On line 2316: + to overhaul its risk + management practices.54 By March + the Fed had seen enough: + +On line 2316: + legal compliance. + According to Prince, he had + already decided + +On line 2318: + growth."55 Robert Rubin, a + former treasury secretary + and former Goldman + +On line 2318: + time chairman of the + Executive Committee + of Citigroup’s board + +On line 2318: + recommended that + Citigroup increase its risk + taking—assuming, he told + +On line 2320: + was a natural + area for growth after the Fed + and then Congress had + +On line 2320: + commercial banks. One + opportunity among many + was the CDO business, + +On line 2322: + was just then taking + off amid the booming mortgage + market. In Citi’s CDO + +On line 2322: + was a tiny unit in + the company’s investment + banking arm, "eight guys + +On line 2322: + a Bloomberg" terminal, + in the words of Nestor Dominguez, then + co-head of the desk.57 + + Nevertheless, this + tiny operation under + the command of homas + + Maheras, co-CEO of the + investment bank, had become + a leader in the + +On line 2324: + for CDOs, creating + more than billion in and 2004—close + to one-fifth of the + + market in those years. + The eight guys had picked up on + a novel structure + +On line 2326: + by Goldman Sachs and + WestLB, a German bank. Instead + of issuing the + +On line 2326: + of the CDOs as long-term + debt, Citigroup structured them + as short-term asset-backed + + commercial paper.58 + Of course, using commercial + paper introduced + +On line 2326: + risk (not present when the + tranches were sold as long-term debt), + because the CDO would + +On line 2326: + days or weeks—for the + life of the CDO. But asset-backed + commercial paper + + was a cheap form of + funding at the time, and it + had a large base of + +On line 2326: + funds. To mitigate + the liquidity risk and + to ensure that the + +On line 2326: + their top ratings, Citibank + (Citigroup’s national bank + subsidiary) provided + +On line 2326: + puts. In selling the + liquidity put, for an + ongoing fee the + + bank would be on the + hook to step in and buy the + commercial paper + +On line 2326: + there were no buyers + when it matured or if the + cost of funding rose + +On line 2328: + predetermined amount.59 + The CDO team at Citigroup + had jumped into the + +On line 2328: + in July with a + billion CDO named Grenadier Funding + that included a + +On line 2328: + billion tranche backed by + a liquidity put from + Citibank.60 Over the next three + +On line 2328: + liquidity puts + on billion of commercial + paper issued by + +On line 2328: + more than any other + company. BSAM’s three Klio CDOs, + which Citigroup had + +On line 2328: + accounted for just + over billion of this total,62 + a large number that + + would not bode well for + the bank. But initially, this + "strategic initiative," + +On line 2330: + Dominguez called it, was very + profitable for Citigroup. The + CDO desk earned roughly + +On line 2330: + in structuring fees + for Citigroup’s investment + banking arm, or about + +On line 2330: + for a billion deal. + In addition, Citigroup + would generally + +On line 2330: + annually for + the liquidity puts.63 In + other words, for a + +On line 2330: + Citibank would receive to + million annually on + the liquidity + +On line 2330: + alone—practically free + money, it seemed, because the + trading desk believed + +On line 2332: + these puts would never + be triggered.64 In effect, the + liquidity put + +On line 2332: + another highly + leveraged bet: a contingent + liability + +On line 2332: + that would be triggered + in some circumstances. Prior + to the change in the + +On line 2332: + (discussed earlier), + Citigroup did not have to + hold any capital + +On line 2332: + contingencies. Rather, + it was permitted to use + its own risk models + + to determine the + appropriate capital + charge. But Citigroup’s + +On line 2332: + only a remote + possibility that the + puts would be triggered. + +On line 2332: + Following the rule + change, Citibank was required to hold + in capital against + +On line 2332: + amount of commercial + paper supported by the + liquidity put, + +On line 2332: + fee for the put, the + annual return on that + capital could still + +On line 2332: + Dominguez told the FCIC, the + triple-A or similar ratings, + the multiple fees, + +On line 2332: + requirements made the + liquidity puts "a much + better trade" for Citi’s + +On line 2334: + sheet.65 The events of would + reveal the fallacy of + those assumptions and + +On line 2334: + commercial paper + straight onto the bank’s balance + sheet, requiring it + +On line 2334: + with billion in cash + as well as more capital + to satisfy bank + +On line 2336: + liquidity puts + were approved by Citigroup’s + Capital Markets + + Approval Committee, + which was charged with reviewing + all new financial + +On line 2336: + Deeming them to be + low risk, the company based + its opinions on the + +On line 2336: + failed to consider + the liquidity risk posed + by a general + + market disruption.67 + The OCC, the supervisor + of Citigroup’s largest + +On line 2338: + bank sub - sidiary, was + aware that the bank had issued + the liquidity + +On line 2338: + terms of the OCC’s post-Enron + enforcement action focused + only on whether Citibank + + had a process in place + to review the product, and + not on the risks of + +On line 2340: + few large financial + institutions, such as AIG + Financial Products, + + BNP, WestLB of Germany, + and Société Générale of France, + wrote significant + +On line 2340: + of liquidity + puts on commercial paper + issued by CDOs.70 Bank + + of America, the + biggest commercial bank in + the United States, wrote + +On line 2342: + small deals through but did + billion worth in just before + the market crashed.71 When + +On line 2342: + participants were + not writing liquidity + puts, Dominguez stated that + + Société Générale and + BNP were big players in that + market. "You needed + + to be a bank with + a strong balance sheet, access + to collateral, + +On line 2346: + relationships with + collateral managers," he + said.72 The CDO desk stopped + +On line 2346: + liquidity puts + in early when it reached its + internal limits. + +On line 2346: + Citibank’s treasury function + had set a billion cap on + liquidity puts;74 + +On line 2346: + bringing the total + to billion.75 Risk management + had also set a + +On line 2346: + which included the + liquidity puts. Later, + in an October + +On line 2346: + Group criticized the + firm’s pricing of the puts, which + failed to consider + + the risk that investors + would not buy the commercial + paper protected + +On line 2346: + it came due, thereby + creating a billion cash + demand on Citibank.76 An + +On line 2346: + (believed to have been + drafted in also questioned + one of the practices + +On line 2346: + investment bank, which + paid traders on its CDO desk for + generating the + +On line 2348: + without regard to + later losses: "There is a + potential conflict + + of interest in + pricing the liquidity + put cheep [sic] so that + +On line 2348: + and more structuring + fee to be generated."77 + The result would be + +On line 2348: + severe that they would + help bring the huge financial + conglomerate to + + the brink of failure, + as we will see. AIG: "GOLDEN + GOOSE FOR THE ENTIRE + +On line 2352: + STREET" In American + International Group was + the largest insurance + +On line 2352: + as measured by stock + market value: a massive + conglomerate with + +On line 2354: + billion in assets, + employees in countries, and3 + subsidiaries. But to Wall + +On line 2354: + most valuable asset + was its credit rating: that + it was awarded the + +On line 2354: + possible rating—Aaa by + Moody’s since AAA by S&P since 983—was + crucial, because these + +On line 2354: + cheaply and deploy + the money in lucrative + investments. Only + +On line 2356: + in early carried + those ratings.78 Starting in AIG + Financial Products, + + a Connecticut-based unit + with major operations + in London, figured + + out a new way to + make money from those ratings. + Relying on the + + guarantee of its + parent, AIG, AIG Financial + Products became a + +On line 2356: + in notional amount. + Among other derivatives + activities, the + + unit issued credit + default swaps guaranteeing + debt obligations held + +On line 2356: + agreed to reimburse + the investor in such a debt + obligation in the + + event of any default. + The credit default swap (CDS) + is often compared + +On line 2356: + insurance, but when + an insurance company + sells a policy, + +On line 2356: + set aside a reserve + in case of a loss. Because + credit default swaps + +On line 2356: + such requirement was + applicable. In this case, + the unit predicted + +On line 2356: + with confidence that + there would be no realized + economic loss on + +On line 2356: + CDOs on which they wrote + CDS protection, and failed to + make any provisions + +On line 2358: + losses—a decision + that would prove fatal to AIG + in AIG Financial + +On line 2358: + huge business selling + CDS to European banks on + a variety of + +On line 2358: + assets, including + bonds, mortgage-backed securities, + CDOs, and other debt + +On line 2358: + For AIG, the fee for + selling protection via the + swap appeared well worth + + the risk. For the banks + purchasing protection, the + swap enabled them to + +On line 2358: + and thereby hold less + capital against its assets. + Purchasing credit + +On line 2358: + AIG could reduce the + amount of regulatory + capital that the + +On line 2360: + needed to hold against + an asset from to By AIG + had written billion + +On line 2360: + regulatory + capital benefits; most + were with European + +On line 2360: + for a variety + of asset types. That total + would rise to billion + +On line 2362: + The same advantages + could be enjoyed by banks in + the United States, where + +On line 2362: + capital standards + for banks’ holdings of mortgage-backed + securities and + +On line 2362: + investments under + the Recourse Rule in So a + credit default swap + +On line 2364: + could also lower + American banks’ capital + requirements. In and + +On line 2366: + AIG sold protection + on super-senior CDO tranches + valued at billion, + +On line 2368: + billion in In an + interview with the FCIC, one + AIG executive + +On line 2370: + Financial Products’ + principal swap salesman, Alan + Frost, as "the golden + +On line 2372: + for the entire Street."83 + AIG’s biggest customer in this + business was always + +On line 2372: + billions of dollars + of protection for Merrill + Lynch, Société Générale, + +On line 2372: + other firms. AIG "looked + like the perfect customer for + this," Craig Broderick, + +On line 2372: + chief risk officer, + told the FCIC. "They really + ticked all the boxes. + +On line 2372: + among the highest-rated + [corporations] around. They had + what appeared to be + +On line 2376: + this space, backed by a + long history of trading + in it."84 AIG also + +On line 2376: + imprimatur of its + pristine credit rating on + commercial paper + +On line 2376: + liquidity puts, + similar to the ones that + Citigroup’s bank wrote + +On line 2376: + many of its own deals, + guaranteeing it would buy + commercial paper + +On line 2376: + one else wanted it. + It entered this business in + by it had written + +On line 2378: + of liquidity + puts on commercial paper + issued by CDOs. AIG + +On line 2378: + also wrote more than + billion in CDS to protect + Société Générale against + +On line 2378: + on liquidity + puts that the French bank itself + wrote on commercial + +On line 2378: + issued by CDOs.85 "What + we would always try to do + is to structure a + +On line 2378: + where the transaction + was virtually riskless, + and get paid a small + +On line 2378: + director at AIG + Financial Products, told the + FCIC. "And we’re one of + + the few guys who can + do that. Because if you think + about it, no one wants + + to buy disaster + protection from someone who + is not going to + +On line 2380: + be around. That was AIGFP’s + sales pitch to the Street or to + banks."86 AIG’s business of + + offering credit + protection on assets of + many sorts, including + +On line 2380: + grew from billion in + to billion in and billion + in This business was + +On line 2380: + small part of the AIG + Financial Services business + unit, which included + +On line 2382: + billion in or of + AIG’s total. AIG did not post + any collateral + +On line 2382: + but unlike monoline + insurers, AIG Financial + Products agreed to post + +On line 2382: + the underlying + securities dropped, or if + the rating agencies + +On line 2382: + guarantors—insurance + companies such as MBIA and + Ambac that focused + +On line 2384: + paying out until + actual losses occurred. + The collateral + + posting terms in AIG’s + credit default swap contracts + would have an enormous + +On line 2386: + on the crisis about + to unfold. But during the + boom, these terms didn’t + +On line 2386: + The investors got their + triple-Arated protection, AIG got its + fees for providing + +On line 2386: + that insurance—about + of the notional amount of + the swap per year88—and the + +On line 2386: + In the case of the + London subsidiary that ran the + operation, the + +On line 2386: + bonus pool was of new + earnings.89 Financial Products + CEO Joseph J. Cassano + +On line 2386: + at the end of the + year.90 Between and the least amount + Cassano paid himself + +On line 2386: + the later years, his + compensation was sometimes + double that of the + +On line 2388: + By November the + company had reduced its + reported earnings + +On line 2388: + the five-year period + by billion.92 The board forced out + Maurice "Hank" Greenberg, + +On line 2388: + been CEO for years. New + York Attorney General + Eliot Spitzer prepared to + + bring fraud charges against him. + Greenberg told the FCIC, "When the + AAA credit rating + +On line 2392: + in spring it would have + been logical for AIG to + have exited or + + reduced its business + of writing credit default + swaps."93 But that didn’t + +On line 2392: + Financial Products + wrote another billion in + credit default swaps + +On line 2394: + tranches of DOs in + The company wouldn’t make + the decision to + +On line 2400: + THE EFFECTS OF THE + COLLAPSE IN SUBPRIME" Henry + Paulson, the CEO of + +On line 2400: + until he became + secretary of the Treasury + in testified to + + the FCIC that by the + time he became secretary + many bad loans already + + had been issued—"most + of the toothpaste was out of + the tube"— and that "there + +On line 2402: + Paulson provided + examples: "Subprime mortgages + went from accounting + +On line 2402: + originators from + the risk of the products they + originated." The + +On line 2402: + housing bubble that + eventually burst in far + more spectacular + +On line 2404: + bubbles."97 Under Paulson’s + leadership, Goldman Sachs had + played a central role + +On line 2404: + creation and sale of + mortgage securities. From + through the company + +On line 2404: + billions of dollars + in loans to mortgage lenders; most + went to the subprime + +On line 2404: + Long Beach, Fremont, New + Century, and Countrywide + through warehouse lines of + + credit, often in + the form of repos.98 During + the same period, + +On line 2404: + billion of loans from + these and other subprime loan + originators, which + +On line 2406: + totaling billion + (about a quarter were subprime), + and CDOs totaling + +On line 2406: + issued synthetic + or hybrid CDOs with a face + value of billion + +On line 2408: + Synthetic CDOs were + complex paper transactions + involving credit + +On line 2410: + cash CDO, synthetic + CDOs contained no actual + tranches of mortgage-backed + + securities, or + even tranches of other CDOs. + Instead, they simply + +On line 2410: + and thus were bets on + whether borrowers would pay their + mortgages. In the place + +On line 2410: + default swaps and did + not finance a single home + purchase. Investors in + +On line 2410: + included "funded" + long investors, who paid cash to + purchase actual + +On line 2410: + issued by the CDO; + "unfunded" long investors, who + entered into swaps + +On line 2410: + if the reference + securities performed; and + "short" investors, who bought + +On line 2410: + default swaps on the + reference securities, + making money if + +On line 2410: + securities failed. + While funded investors received + interest if the + +On line 2412: + if the reference + securities defaulted. + Unfunded investors, + +On line 2412: + waterfall, received + premium-like payments from + the CDO as long as + +On line 2412: + beyond a certain + point and if the CDO did not + have sufficient funds + +On line 2412: + the short investors. Short + investors, often hedge funds, bought + the credit default + +On line 2412: + the CDOs and paid those + premiums. Hybrid CDOs were + a combination + +On line 2414: + CDOs. Firms like Goldman + found synthetic CDOs cheaper + and easier to + +On line 2414: + than traditional + CDOs at the same time as the + supply of mortgages + + was beginning to + dry up. Because there were no + mortgage assets to + + collect and finance, + creating synthetic CDOs + took a fraction of + +On line 2418: + time. They also were + easier to customize, + because CDO managers + + and underwriters + could reference any mortgage-backed + security—they were + +On line 2418: + limited to the + universe of securities + available for them to + +On line 2420: + Figure provides an + example of how such a + deal worked. In Goldman + +On line 2420: + launched its first major + synthetic CDO, Abacus 2004-1—a + deal worth billion. About + +On line 2420: + the rest, commercial + mortgage–backed securities + (made up of bundled + +On line 2422: + real estate loans) + and other securities. + Goldman was the short + +On line 2422: + entire billion deal: + it purchased credit default + swap protection on + +On line 2422: + securities from + the CDO. The funded investors—IKB (a + German bank), the TCW + +On line 2424: + Wachovia—put up + a total of million to + purchase mezzanine + +On line 2426: + assets performed. If + the referenced assets did + not perform, Goldman, + +On line 2426: + as the short investor, + would receive the million.102 In + this sense, IKB, TCW, and + +On line 2426: + "long" investors, betting + that the referenced assets + would perform well, and + + Goldman was a "short" + investor, betting that they would + fail. The unfunded + + investors—TCW and GSC Partners + (asset management firms that + managed both hedge funds + +On line 2430: + up any money up + front; they received annual + premiums from the + +On line 2430: + pay the CDO if the + reference securities + failed and the CDO did + +On line 2432: + have enough funds to pay + the short investors.103 Goldman was + the largest unfunded + +On line 2432: + Goldman’s billion short + position more than offset + that exposure; about + +On line 2432: + long position by + buying credit protection + from AIG, in return + +On line 2432: + for an annual + payment of million.104 As a + result, by AIG was + +On line 2432: + unfunded investor + in the super-senior tranches + of the Abacus deal. + +On line 2434: + told, long investors in + Abacus 2004-1 stood to receive + millions of dollars + + if the reference + securities performed (just + as a bond investor + + makes money when a + bond performs). On the other + hand, Goldman stood to + +On line 2436: + gain nearly billion + if the assets failed. In the + end, Goldman, the short + +On line 2436: + in the Abacus 2004-1 + CDO, has received about million + while the long investors + +On line 2438: + lost just about all of + their investments. In April GSC + paid Goldman million + + as a result of + CDS protection sold by GSC + to Goldman on the + +On line 2440: + received million from + AIG Financial Products as + a result of the + +On line 2440: + protection it had + purchased against the super-senior + tranche. The same month it + +On line 2440: + received million from + TCW as a result of the + CDS purchased against the + +On line 2440: + junior mezzanine + tranches, and million from IKB + because of the CDS + +On line 2440: + purchased against the C + tranche. In April IKB paid Goldman + another million + +On line 2442: + as a result of + the CDS against the B tranche. Through + May Goldman received + +On line 2442: + from IKB, Wachovia, and + TCW as a result of the + credit default swaps + +On line 2442: + the A tranche. As was + common, some of the tranches + of Abacus 2004-1 found + +On line 2442: + way into other + funds and CDOs; for example, + TCW put tranches of + +On line 2444: + of its own CDOs. In + total, between July and + May Goldman packaged + +On line 2444: + and sold synthetic + CDOs, with an aggregate face + value of billion.105 + +On line 2444: + underwriting fee + was to of the deal totals, + Dan Sparks, the former + +On line 2444: + Goldman’s mortgage desk, + told the FCIC.106 Goldman would earn + profits from shorting + + many of these deals; on + others, it would profit by + facilitating + +On line 2444: + transaction between + the buyer and the seller + of credit default + +On line 2446: + protection. As we + will see, these new instruments + would yield substantial + + profits for investors + that held a short position + in the synthetic + +On line 2446: + is, investors betting + that the housing boom was a + bubble about to burst. + +On line 2446: + losses when housing + prices collapsed. When borrowers + defaulted on their + +On line 2446: + expecting cash from + the mortgage payments lost. And + investors betting on + +On line 2446: + securities via + synthetic CDOs also lost + (while those betting against + +On line 2446: + mortgages would gain).107 As + a result, the losses from + the housing collapse + +On line 2448: + Citigroup mortgage-backed + securities deal, CMLTI 2006-NC2. + Credit default swaps + +On line 2448: + it possible for + new market participants + to bet for or against + +On line 2448: + significantly + increased the demand for such + bets. For example, + +On line 2448: + about million worth of + bonds in the M9 (BBB-rated) tranche—one + of the mezzanine + +On line 2448: + Auriga, Volans, and + Neptune CDO IV all contained + credit default swaps + + in which the M9 tranche + was referenced. As long as + the M9 bonds performed, + + investors betting that + the tranche would fail (short investors) + would make regular + +On line 2448: + into the CDO, which + would be paid out to other + investors banking on + +On line 2448: + succeed (long investors). + If the M9 bonds defaulted, + then the long investors + + would make large payments + to the short investors. That is + the bet—and there were + +On line 2450: + more than million in + such bets in early on the + M9 tranche of this deal. + +On line 2450: + the basis of the + performance of million in + bonds, more than million + + could potentially + change hands. Goldman’s Sparks put it + succinctly to the + +On line 2450: + if there’s a problem + with a product, syn thetics + increase the impact.108 + +On line 2452: + amplification + of the M9 tranche was not unique. + A million tranche of + +On line 2452: + Glacier Funding CDO 2006-4A, + rated A, was referenced + in million worth of + +On line 2452: + synthetic CDOs. A + million tranche of the Soundview + Home Equity Loan + +On line 2454: + also rated A, + was referenced in million + worth of synthetic + +On line 2456: + A million tranche of + the Soundview Home Equity + Loan Trust 2006-EQ1, rated + +On line 2458: + worth of synthetic + CDOs.109 In total, synthetic + CDOs created by + +On line 2458: + Goldman referenced + mortgage securities, some + of them multiple + +On line 2458: + were referenced twice. + Indeed, one single mortgage-backed + security was + +On line 2460: + DOs created by + Goldman Sachs.110 Because of such + deals, when the housing + +On line 2462: + they also maintained + that their creation had "social + utility" because + +On line 2462: + enabled investors to + customize the exposures + they wanted in their + +On line 2462: + President and Chief + Operating Officer + Gary Cohn argued: "This + + is no different + than the tens of thousands of + swaps written every + +On line 2462: + U.S. dollar versus + another currency. Or, + more importantly, + +On line 2464: + U.S. Treasuries This is + the way that the financial + markets work."112 Others, + +On line 2464: + these deals. Patrick Parkinson, + the current director of + the Division of + +On line 2464: + Federal Reserve + Board, noted that synthetic + CDOs "multiplied the + +On line 2466: + of the collapse in + subprime."113 Other observers were + even harsher in their + + assessment. "I don’t + think they have social value," + Michael Greenberger, a + +On line 2466: + the University + of Maryland School of Law and + former director + + of the Division + of Trading and Markets at + the Commodity + +On line 2466: + Commission, told the + FCIC. He characterized the + credit default swap + +On line 2466: + a "casino." And he + testified that "the concept + of lawful betting + +On line 2466: + the question of whether + a homeowner would default + on a mortgage that + +On line 2466: + by either party, + has had a profound effect + on the American + +On line 2470: + taxpayers."114 MOODY’S: "ACHIEVED + THROUGH SOME ALCHEMY" The machine + churning out CDOs would + + not have worked without + the stamp of approval given + to these deals by the + +On line 2470: + often relied on + the rating agencies’ views rather + than conduct their own + + credit analysis. + Moody’s was paid according to + the size of each deal, + +On line 2470: + set at a half-million + dollars for a "standard" CDO + in and and as much + +On line 2474: + for a "complex" CDO.115 + In rating both synthetic + and cash CDOs, Moody’s faced + +On line 2474: + by the CDO (or its + synthetic equivalent) and, + second, gauging the + +On line 2474: + is, the likelihood + that the securities would + default at the same + + time.116 Imagine flipping + a coin to see how many times + it comes up heads. Each + +On line 2474: + others; that is, the + flips are uncorrelated. + Now, imagine a loaf + +On line 2474: + sliced bread. When there is + one moldy slice, there are likely + other moldy slices. The + +On line 2474: + each slice is highly + correlated with that of + the other slices. As + +On line 2474: + now understand, the + mortgage-backed securities in + CDOs were less like coins + +On line 2476: + bread. To estimate + the probability of + default, Moody’s relied + +On line 2476: + its own ratings of + the mortgage-backed securities + purchased by the CDOs.117 + +On line 2476: + did the agencies "look + through" the securities to + the underlying + +On line 2478: + been assigned by the + [mortgage-backed securities] group," + Gary Witt, formerly + +On line 2478: + for the CDO unit, told + the FCIC. This approach would lead + to problems for Moody’s—and + +On line 2478: + disintegrated + below us and we didn’t + react and we should + +On line 2478: + have. We had to be + looking for a problem. And + we weren’t looking."118 + + To determine the + likelihood that any given + security in + + the CDO would default, + Moody’s plugged in assumptions based + on those original + + ratings. This was no + simple task. Meanwhile, if the + initial ratings turned + +On line 2480: + poor underwriting, + fraud, or any other cause—to + poorly reflect the + +On line 2480: + blindly compounded + when mortgage-backed securities + were packaged into + +On line 2482: + securities in + the portfolio—always tricky, but + particularly + +On line 2482: + of CDOs consisting + of subprime and Alt-A mortgage-backed + securities that + +On line 2482: + history. So the + firm explicitly relied + on the judgment of + + its analysts. "In + the absence of meaningful + default data, it + +On line 2482: + based on actual + observations of defaults," + Moody’s acknowledged in + +On line 2484: + explanation of + its process.119 In plainer English, + Witt said, Moody’s didn’t + +On line 2484: + them up." He recalled, + "They went to the analyst + in each of the groups + +On line 2484: + they said, ‘Well, you know, + how related do you think + these types of [mortgage-backed + + securities] are1’"120 + This problem would become more + serious with the + +On line 2486: + CDOs in the middle + of the decade. Witt felt strongly + that Moody’s needed to + +On line 2488: + CDOs.121 He undertook + two initiatives to address + this issue. First, in + +On line 2488: + incorporated + correlation into the + model. However, + +On line 2488: + not applied to CDO + ratings for another year.122 + Second, he proposed + +On line 2490: + research initiative + in early to "look through" a + few CDO deals at the + +On line 2490: + securities and + to see if "the assumptions + that we’re making for + +On line 2490: + consistent with the + correlation assumptions + that we’re making for + +On line 2490: + received approval from + his superiors for this + investigation, + +On line 2492: + buying the software + he needed to conduct the + look-through analysis.123 In + +On line 2492: + based the new model + on trends from the previous + years, a period + +On line 2492: + prices were rising and + mortgage delinquencies were very + low—and a period + +On line 2492: + nontraditional + mortgage products had been a + very small niche. Then, Moody’s + +On line 2492: + adjustments based on + factors such as region, year + of origination, + +On line 2492: + For example, if + two mortgage-backed securities + were issued in the + +On line 2494: + region—say, Southern + California— Moody’s boosted + the correlation; + +On line 2494: + they shared a common + mortgage servicer, Moody’s boosted + it further. But at + +On line 2494: + the estimated + correlation of default, + which would improve the + +On line 2494: + estimated that + two mortgage-backed securities + would be less closely + +On line 2496: + card or auto loans.124 + The other major rating + agencies followed a + +On line 2496: + be dangerous. "The + complexity of structured + finance transactions + +On line 2496: + to situations + where investors tend to rely + more heavily on + +On line 2496: + than for other types + of rated securities. + On this basis, the + +On line 2496: + number of questions + with important potential + implications. One + +On line 2496: + question is whether tranched + instruments might result in + unanticipated + +On line 2498: + sponsored by the world’s + regulators and central + banks, warned in June CDO + +On line 2498: + and underwriters + relied on the ratings to + promote the bonds. For + +On line 2498: + CDO, they created + marketing material, + including a pitch + + book that investors used + to decide whether to subscribe + to a new CDO. Each + +On line 2498: + described the types of + assets that would make up the + portfolio without + + providing details.127 + Without exception, every + pitch book examined + +On line 2500: + the historical + "stability" of these new + products’ ratings with + +On line 2500: + of corporate bonds. + Statistics that made this case + included the fact + +On line 2500: + of these new products + did not experience any + rating changes over a + +On line 2500: + of corporate bonds + maintained their ratings. Over a + longer time period, + +On line 2500: + however, structured + finance ratings were not so + stable. Between and + +On line 2500: + triple-A-rated structured finance + securities retained their + original rating + +On line 2502: + sell CDOs using these + statistics in their pitch books + during and after + + mortgage defaults had + started to rise but before + the rating agencies + +On line 2502: + numbers of mortgage-backed + securities. Of course, each + pitch book did include + +On line 2502: + that "past performance + is not a guarantee of + future performance" + +On line 2504: + testified before + the House Financial Services + Committee, CDOs that + +On line 2504: + lower-rated tranches + of mortgage-backed securities + "are arcane structured + + finance products that + were designed specifically + to make dangerous, + +On line 2504: + through some alchemy and + some negligence in adapting + unrealistic + +On line 2506: + on behalf of the + ratings agencies. They convinced + investors that of a + +On line 2506: + subprime tranches were + the ratings equivalent of + U.S. Government bonds."129 + +On line 2508: + to fall nationwide + and defaults increased, it turned + out that the mortgage-backed + +On line 2508: + were in fact much more + highly correlated than + the rating agencies + + had estimated—that + is, they stopped performing at + roughly the same time. + +On line 2510: + of the CDOs. In of + U.S. CDO securities would + be downgraded. In + +On line 2514: + In late Moody’s would throw + out its key CDO assumptions + and replace them with + +On line 2516: + to three times higher + than used before the crisis.131 + In retrospect, it + +On line 2518: + that the agencies’ CDO + models made two key mistakes. + First, they assumed that + +On line 2518: + these securities + weren’t that different to + begin with. "There were + +On line 2520: + [the credit rating + agencies] did wrong," Federal + Reserve Chairman Ben + + Bernanke told the FCIC. "They + did not take into account + the appropriate + +On line 2522: + the categories of + mortgages."132 Second, the agencies + based their CDO ratings + +On line 2522: + the underlying + collateral. "The danger + with CDOs is when they + + are based on structured + finance ratings," Ann Rutledge, + a structured finance + + expert, told the FCIC. + "Ratings are not predictive + of future defaults; + +On line 2522: + only describe a + ratings management process, and + a mean and static + + expectation of + security loss."133 Of course, + rating CDOs was a + +On line 2524: + the rating agencies. + Including all types of CDOs—not + just those that were mortgage-related—Moody’s + +On line 2526: + deals in in in and + in the value of those deals + rose from billion in + +On line 2526: + in and billion in + The reported revenues of + Moody’s Investors Service + +On line 2528: + products—which included + mortgage-backed securities and + CDOs—grew from million in + +On line 2530: + corporate revenue. + The rating of asset-backed CDOs + alone contributed more + +On line 2530: + of the revenue from + structured finance.135 The boom years + of structured finance + +On line 2530: + company-wide surge in + revenue and profits. From to + the corporation’s + +On line 2534: + to billion and its + profit margin climbed from to + Yet the increase in + +On line 2534: + CDO group’s workload and + revenue was not paralleled + by a staffing increase. + +On line 2534: + were always playing + catch-up," Witt said.136 Moody’s "penny-pinching" + and "stingy" management + +On line 2534: + was insoluble. + Investment banks often hired + away our best people. + + As far as I can + remember, we were never + allocated funds + + to make counter offers," + Witt said. "We had almost no + ability to do + +On line 2534: + Kolchinsky, a former + team managing director + at Moody’s, told the FCIC + +On line 2534: + in the number of + deals rated was "huge but our + personnel did not + +On line 2534: + up accordingly." + By Kolchinsky recalled, "My role + as a team leader + +On line 2534: + crisis management. + Each deal was a crisis."138 When + personnel worked to + +On line 2534: + new methodology, + Witt said, "We had to kind of + do it in our spare + +On line 2536: + agencies worked closely + with CDO underwriters and + managers as each new + +On line 2536: + was devised. And the + rating agencies now relied + for a substantial + +On line 2536: + number of players. + Citigroup and Merrill alone + accounted for more + +On line 2538: + The ratings agencies’ + correlation assumptions + had a direct and + +On line 2538: + ow CDOs were structured: + assumptions of a lower + correlation made + +On line 2538: + easy-to-sell triple-A tranches + and smaller harder-to-sell BBB + tranches. Thus, as is + +On line 2538: + because issuers could + choose which rating agencies to + do business with, and + +On line 2538: + on the issuers for + their revenues, rating agencies + felt pressured to give + +On line 2540: + that they might remain + competitive. The pressure + on rating agency + +On line 2540: + was also intense + as a result of the high + turnover—a revolving door + + that often left raters + dealing with their old colleagues, + this time as clients. In + +On line 2540: + Yoshizawa, a Moody’s team + managing director for + U.S. derivatives + +On line 2540: + in was presented + with an organization + chart from July She + +On line 2542: + identified out of + analysts—about of the staff— who + had left Moody’s to work + +On line 2544: + or commercial banks.141 + Brian Clarkson, who oversaw + the structured finance + +On line 2544: + always a challenge, + for the simple reason that + the banks paid more. As + +On line 2544: + Moody’s employees were + prohibited from rating + deals by a bank or + +On line 2544: + institution, but + the responsibility + for notifying + + management of the + interview rested on the + employee. After + +On line 2544: + former employees + were barred from interacting + with Moody’s on the same + +On line 2544: + they had rated while + in its employ, but there were + no bans against working + + on other deals with + Moody’s.142 SEC: "IT’S GOING TO BE + AN AWFULLY BIG + +On line 2548: + The five major U.S. + investment banks expanded + their involvement in + +On line 2548: + mortgage and mortgage + securities industries + in the early 21st + +On line 2548: + formal government + regulation beyond their + broker-dealer subsidiaries. + +On line 2548: + In the European + Union told U.S. financial firms + that to continue + +On line 2548: + in Europe, they would + need a "consolidated" + supervisor by + +On line 2548: + company. The U.S. + commercial banks already met + that criterion— + +On line 2550: + supervisor was + the Federal Reserve—and + the Office of Thrift + +On line 2550: + oversight of AIG would + later also satisfy + the Europeans. The + + five investment banks, + however, did not meet the + standard: the SEC was + + supervising their + securities arms, but no + one supervisor + +On line 2550: + of these companies + on a consolidated + basis. Thus all five + + faced an important + decision: what agency would + they prefer as their + +On line 2552: + combined assets at + the five firms totaled trillion, + more than half of the + +On line 2552: + trillion of assets + held by the five largest U.S. bank + holding companies. + +On line 2552: + In the next three years + the investment banks’ assets + would grow to trillion. + +On line 2554: + the largest, followed by + Morgan Stanley and Merrill, + then Lehman and Bear. These + +On line 2554: + international + firms had transformed their business + models over the years. + +On line 2554: + activities on + top of their traditional + investment banking + +On line 2554: + Recall that at Bear + Stearns, trading and investments + accounted for more + +On line 2556: + some years after The + investment banks also owned + depository + +On line 2556: + they could provide FDIC-insured + accounts to their brokerage + customers; the deposits + +On line 2556: + limited funding. + These depositories took + the form of a thrift + +On line 2556: + an industrial + loan company (supervised + by the Federal + +On line 2556: + and Lehman, which had among + the largest of these subsidiaries, used + them to finance their + +On line 2558: + subsidiaries suggested + two obvious choices when + they found themselves in + +On line 2558: + If a firm chartered + its depository as + a commercial bank, + +On line 2558: + would be its holding + company supervisor; + if as a thrift, the + +On line 2558: + would do the job. But + the investment banks came up + with a third option. + + They lobbied the SEC + to devise a system of + regulation that + +On line 2560: + Consolidated + Supervised Entity (CSE) + program to oversee + +On line 2560: + holding companies + of investment banks and all + their subsidiaries. The CSE + +On line 2560: + large U.S. broker-dealer + subsidiaries already subject to + SEC regulation. + + However, this was + the SEC’s first foray into + supervising firms + +On line 2560: + soundness. The SEC did + not have express legislative + authority to + +On line 2560: + it proposed that the + CSE program be voluntary; + the SEC crafted the + +On line 2560: + program out of its + authority to make rules + for the broker-dealer + +On line 2560: + banks. The program would + apply to broker-dealers that + volunteered to be + +On line 2560: + consolidated + supervision under the + CSE program, or those + +On line 2560: + already were subject + to supervision by the + Fed at the holding + +On line 2560: + as JP Morgan and + Citigroup. The CSE program + would introduce a + +On line 2560: + of supervision + by SEC examiners. CSE + firms were allowed to + +On line 2560: + were holding against their + securities portfolios—a + methodology based + +On line 2560: + the "alternative + net capital rule," would be + similar to the + +On line 2562: + on the Market Risk + Amendment to the Basel rules—that large + commercial banks and + +On line 2564: + The traditional + net capital rule that had + governed broker-dealers + +On line 2564: + asset classes and + credit ratings, a bright-line + approach that gave firms + +On line 2564: + rules would allow the + investment banks to create + their own proprietary + + Value at Risk (VaR) + models to calculate their + regulatory + + capital—that is, the + capital each firm would have + to hold to protect + +On line 2564: + customers’ assets should + it experience losses + on its ecurities + +On line 2564: + SEC estimated + that the proposed new reliance + on proprietary VaR + +On line 2564: + reduce average + capital charges by The firms + would be required to + +On line 2564: + SEC an early-warning + notice if their tentative + net capital (net + +On line 2566: + capital minus + hard-to-sell assets) fell below + billion at any time. + +On line 2568: + securities firms + and argued that it therefore + was the natural + + supervisor of + their holding companies. In + a letter to the + +On line 2568: + the OTS was harshly + critical of the agency’s + proposal, which it + +On line 2570: + over savings and loan + holding companies that would + also be CSEs. The + + OTS argued that the + SEC was interfering with + the intentions of + +On line 2570: + Act, "carefully kept + the responsibility + for supervision + +On line 2570: + holding company + itself with the OTS or the + Federal Reserve + +On line 2570: + depending upon + whether the holding company + was a [thrift holding + + company] or a + bank holding company. This + was in recognition + + of the expertise + developed over the years by + these regulators + +On line 2570: + and the federal + deposit insurance funds by + depository + +On line 2570: + their affiliates." + The OTS declared: "We believe + that the SEC’s proposed + +On line 2570: + holding companies] + is unfounded and could pose + significant risks + +On line 2572: + and the federal + deposit insurance funds."144 In + contrast, the response + + from the financial + services industry to the + SEC proposal was + +On line 2572: + computation. Lehman + Brothers, for example, wrote + that it "applauds and + +On line 2572: + the Commission." JP + Morgan was supportive of + what it saw as an + +On line 2572: + rule that still governed + securities subsidiaries of + the commercial banks: + +On line 2572: + overstates the amount of + capital a broker-dealer + needs," the company + + wrote. Deutsche Bank found it + to be "a great stride towards + consistency with + +On line 2572: + executives at + the investment banks stated + that the firms preferred + +On line 2574: + familiar with their + core securities-related + businesses. In an + +On line 2574: + adopt the CSE program + and the new net capital + calculations that + +On line 2574: + banks volunteered for + this supervision, although + Merrill’s and Lehman’s thrifts + +On line 2574: + to be supervised + by the OTS. Several firms + delayed entry to + +On line 2576: + price movements. Harvey + Goldschmid, SEC commissioner + from to told FCIC staff + +On line 2576: + the CSE program was + created, SEC staff members + were concerned about how + +On line 2576: + had over the Wall Street + firms, including their hedge funds + and overseas subsidiaries. + + Once the CSE program + was in place, the SEC had "the + authority to + + look at everything."146 + SEC commissioners discussed + at the time the risks + + they were taking by + allowing firms to reduce + their capital. "If + +On line 2576: + goes wrong it’s going + to be an awfully big + mess," Goldschmid said at + +On line 2576: + we feel secure if + these drops in capital and + other things [occur] + + we really will + have investor protection1" In + response, Annette Nazareth, + + the SEC official + who would be in charge of the + program, assured the + + commissioners that + her division was up to + the challenge.147 The new + +On line 2578: + the SEC’s Office of + Prudential Supervision + and Risk Analysis, + +On line 2578: + staff of to within + the Division of Market + Regulation.148 In + +On line 2578: + CSE program had grown + to Still, only "monitors" + were responsible + +On line 2578: + the five investment + banks; monitors were assigned + to each firm, with some + +On line 2580: + CSE program was based + on the bank supervision + model, but the SEC + +On line 2580: + to do exactly + what bank examiners did.151 + For one thing, unlike + +On line 2580: + SEC never assigned + on-site examiners under + the CSE program; by + +On line 2582: + alone assigned more than + examiners full-time + at Citibank. According + + to Erik Sirri, the + SEC’s former director of + trading and markets, + +On line 2584: + a securities + firm traditionally had + no access to a + +On line 2584: + resort.152 (Of course, that + would change during the crisis.) + The investment banks + +On line 2584: + examinations, + during which staff reviewed the + firms’ systems and records + + and verified that + the firms had instituted + control processes. + +On line 2586: + from the start. The SEC + conducted an exam for + each investment bank + + when it entered the + program. The result of Bear + Stearns’s entrance exam, + +On line 2586: + deficiencies. For + example, examiners + were concerned that there + +On line 2586: + VaR limits and that + contingency funding plans + relied on overly + +On line 2586: + was aware of the firm’s + concentration of mortgage + securities and + +On line 2586: + SEC did not ask Bear + to change its asset balance, + decrease its leverage, + +On line 2588: + to SEC officials.154 + Then, because the CSE program + was preoccupied + +On line 2588: + its next annual + exam, during which the SEC + was supposed to be + +On line 2590: + did meet monthly with + all CSE firms, including Bear,155 + and it did conduct + +On line 2592: + worried that Bear was + too reliant on unsecured + commercial paper + +On line 2592: + and Bear reduced its + exposure to unsecured + commercial paper + +On line 2592: + increased its reliance + on secured repo lending.156 + Unfortunately, + +On line 2592: + billions of dollars + of that repo lending was + overnight funding that could + + disappear with no + warning. Ironically, in + the second week of + +On line 2594: + firm went into its + four-day death spiral, the SEC + was on-site conducting + +On line 2594: + first CSE exam since + Bear’s entrance exam more than + two years earlier.157 + +On line 2596: + at the investment + banks increased from to growth that + some critics have blamed + +On line 2596: + the SEC’s change in the + net capital rules. Goldschmid + told the FCIC that the + +On line 2598: + had been higher at + the five investment banks in + the late 1990s, then dropped + +On line 2598: + over the life of the + CSE program—a history + hat suggests that the + +On line 2598: + responsible for + the changes.159 In Sirri noted + that under the CSE + +On line 2598: + and, in some cases, + increased significantly" + over the program.160 Still, + +On line 2598: + Goldschmid, who left the + SEC in argued that the SEC + had the power to + +On line 2598: + in the investment + banks. He insisted, "There was + much more than enough moral + +On line 2600: + suasion and kind of + practical power that was + involved. The SEC has + +On line 2602: + ability to do + a lot if it uses its + power."161 Overall, the + +On line 2602: + was widely viewed as + a failure. From until the + financial crisis, + +On line 2602: + their spectacular + growth, relying heavily + on short-term funding. + +On line 2602: + "fundamentally + flawed from the beginning."162 Mary + Schapiro, the current SEC + +On line 2602: + "was not successful + in providing prudential + supervision."163 And, + +On line 2602: + chapters ahead, the SEC’s + inspector general would + be quite critical, + +On line 2602: + all five of the largest + independent investment + banks had either closed + + down (Lehman Brothers), merged + into other entities + (Bear Stearns and Merrill + + Lynch), or converted + to bank holding companies + to be supervised + +On line 2604: + Reserve (Goldman Sachs + and Morgan Stanley). For the + Fed, there would be a + +On line 2604: + shrinking over the course + of the decade, as JP Morgan + switched the charter of + + its banking subsidiary + to the OCC164 and as the OTS + and SEC promoted + +On line 2604: + "The OTS and SEC were + very aggressive in trying + to promote themselves + +On line 2604: + a regulator + in that environment and + wanted to be the + +On line 2604: + a Fed governor + from to "There was a lot of + competitiveness + +On line 2604: + January Fed staff + had prepared an internal + study to find out why + +On line 2604: + the investment banks + had chosen the Fed as its + consolidated + +On line 2604: + interviewed five firms + that already were supervised + by the Fed and four + +On line 2604: + had chosen the SEC. + According to the report, + the biggest reason + +On line 2608: + riskier portions (or + tranches) of mortgage-related + securities led + +On line 2608: + an enormous volume + of collateralized debt + obligations (CDOs). These + +On line 2608: + for nonprime mortgage + securitization and + contributed to the + +On line 2608: + important role in + doing so, including CDOs + squared, credit default + +On line 2608: + that invested in + mortgage-backed securities and + CDOs. Many of these risky + +On line 2608: + systemically + important institutions + and contributed to + +On line 2610: + near failure in the + financial crisis. Credit + default swaps, sold to + + provide protection + against default to purchasers of + the top-rated tranches + +On line 2610: + facilitated + the sale of those tranches by + convincing investors + +On line 2610: + low risk, but greatly + increased the exposure of + the sellers of the + +On line 2612: + swap protection to + the housing bubble’s collapse. + Synthetic CDOs, which + +On line 2612: + to continue and + expand even as the mortgage + market dried up and + +On line 2612: + speculators with + a means of betting on the + housing market. By + +On line 2612: + spread and amplified + exposure to losses when + the housing market + +On line 2614: + the continuing + securitization of + nonprime mortgages. There + + was a clear failure + of corporate governance + at Moody’s, which did not + +On line 2614: + of its ratings on + tens of thousands of mortgage-backed + securities and + +On line 2616: + The Securities + and Exchange Commission’s poor + oversight of the five + +On line 2616: + banks failed to restrict + their risky activities and + did not require them + +On line 2616: + failure or need for + government bailouts of all five + of the supervised + +On line 2626: + financial crisis. + ALL IN CONTENTS The bubble: + "A credit-induced boom".................................................................157 + +On line 2630: + and due diligence: "A + quality control issue + in the factory" + +On line 2636: + loans and commercial + real estate: "You’ve got + to get up and dance" + +On line 2642: + "moving" to "storage" + Fannie Mae and Freddie Mac: + "Two stark choices"............................................178 In + +On line 2642: + Warren Peterson + was paying as little as + for a 10,000-square-foot lot, + + about the size of three + tennis courts. The next year the + cost more than tripled to + +On line 2642: + had built between and + custom and semi-custom homes + a year. For a while, + +On line 2644: + was building as many + as And then came the crash. "I + have built exactly + +On line 2646: + new home since late he + told the FCIC five years later.1 + In the average + +On line 2646: + of California’s + agricultural center, the + San Joaquin Valley. That + +On line 2646: + jumped to almost by + June "By money seemed to be + coming in very fast + +On line 2646: + everywhere," said Lloyd + Plank, a Bakersfield real + estate broker. "They + + would purchase a house + in Bakersfield, keep it for + a short period + +On line 2646: + resell it. Sometimes + they would flip the house while it + was still in escrow, + +On line 2648: + and would still make to + Nationally, housing prices + jumped between and their + +On line 2650: + in more than in any + decade since at least It would be + catastrophically + +On line 2650: + machine kept churning + well into apparently + indifferent to + + the fact that housing + prices were starting to fall and + lending standards to + +On line 2650: + Newspaper stories + highlighted the weakness in + the housing market— + + even suggesting this + was a bubble that could burst + anytime. Checks were in + +On line 2658: + their own due diligence + on what they were buying. The + Federal Reserve + +On line 2658: + easier access + to credit were common in + other markets, too. + +On line 2658: + was flowing into + commercial real estate + and corporate loans. + + How to react to + what increasingly appeared + to be a credit + +On line 2660: + enterprises, such + as Lehman Brothers and Fannie + Mae, pushed deeper. All + + along the assembly + line, from the origination + of the mortgages to + +On line 2660: + marketing of the + mortgage-backed securities and + collateralized + +On line 2660: + (CDOs), many understood + and the regulators at + least suspected that + +On line 2662: + which would not perform + as advertised. THE BUBBLE: + "A CREDITINDUCED BOOM" + +On line 2664: + own loan quality + was deteriorating + and stripped power from + +On line 2664: + June presentation, + the Quality Assurance + staff reported they + +On line 2664: + errors, including + evidence of predatory + lending, legal and + +On line 2664: + violations, and + credit issues, in of the + loans they audited + +On line 2666: + December In Chief + Operating Officer + and later CEO Brad + +On line 2666: + recommended these + results be removed from the + statistical tools + +On line 2666: + performance, and in + the department was dissolved + and its personnel + +On line 2666: + deficiencies in + loan files; out of nine reviews + it conducted in + +On line 2666: + cut the department’s + budget, saying in a memo + that the "group was out + + of control and tries + to dictate business practices + instead of audit."6 + +On line 2668: + company struggled + with increasing requests that + it buy back soured loans + +On line 2668: + almost of its loans + were going into default + within the first three + +On line 2668: + with increasing loan + originations, without due + regard to the risks + +On line 2670: + securitizers, + and investors met at the ABS + East conference in + +On line 2670: + Raton, Florida, + to play golf, do deals, and talk + about the market. The + +On line 2670: + was still good, but even + the most optimistic could read + the signs. Panelists had + +On line 2672: + by "fundamentals" + such as increased demand1 Would + rising interest + + rates halt the arket1 + And was the CDO, because of + its ratings-driven + +On line 2674: + mortgage market18 The + numbers were stark. Nationwide, + house prices had never + +On line 2676: + national indices + masked important variations. + House prices in the four + +On line 2676: + California, had + dramatically larger + spikes—and subsequent + +On line 2676: + did the nation. If + there was a bubble, perhaps, + as Fed Chairman Alan + +On line 2676: + said, it was only + in certain regions. He told + a congressional + +On line 2676: + committee in June + that growth in nonprime mortgages + was helping to push + +On line 2676: + prices in some markets + to unsustainable levels, + "although a ‘bubble’ + +On line 2678: + prices for the nation + as a whole does not appear + likely."9 Globally, + +On line 2678: + jumped in many countries + around the world during the 2000s. + As Christopher Mayer, + +On line 2678: + to the Commission, + "What really sticks out is + how unremarkable + +On line 2678: + is relative to + our European peers."10 From to + price increases in + + the United Kingdom + and Spain were above those in the + United States, while price + +On line 2678: + France were just below. + In an International + Monetary Fund study + +On line 2678: + from more than one half + of the developed countries + analyzed had greater + +On line 2678: + appreciation + than the United States from late + through the third quarter + +On line 2678: + and yet some of these + countries did not suffer sharp + price declines.11 Notably, + +On line 2678: + home price increases + followed by a modest and + temporary decline + +On line 2678: + in Researchers at the + Federal Reserve Bank of + Cleveland attributed + + Canada’s experience + to tighter lending standards than + in the United States + +On line 2680: + structural differences + in the financial system.12 + Other countries, such + +On line 2682: + steep house price declines. + American economists and + policy makers + +On line 2682: + to explain the house + price increases. The good news + was the economy + +On line 2684: + and unemployment + was low. But, a Federal + Reserve study in May + +On line 2684: + cost of owning rather + than renting was much higher + than had been the case + +On line 2684: + historically: + home prices had risen from times the + annual cost of + +On line 2684: + times.13 In some cities, the + change was particularly + dramatic. From to + +On line 2684: + prices to rents rose in + Los Angeles, Miami, + and New York City by + +On line 2684: + index—which measures whether + a typical family + could qualify for + + a mortgage on a + typical home— had reached a + record low.15 But that was + +On line 2686: + based on the cost of + a traditional mortgage + with a down payment,16 + +On line 2686: + was no longer required. + Perhaps such measures were no + longer relevant, when + +On line 2686: + could make lower down + payments and obtain loans such + as payment-option + +On line 2686: + and interest-only + mortgages, with reduced initial + mortgage payments. Or + +On line 2688: + given homeowners’ + expectations of further + price gains. During a + +On line 2688: + Market Committee + (FOMC), composed of Federal + Reserve governors, + +On line 2688: + presidents, and the + Federal Reserve Bank of + New York president, + +On line 2688: + presentations on + mortgage risks and the housing + market. Members and + +On line 2688: + developing a + consensus on whether housing + prices were overvalued + +On line 2688: + and "it was hard for + many FOMC participants to + ascribe substantial + +On line 2688: + to the proposition + that overvaluation in + the housing market + +On line 2688: + the major systemic + risks that we now know it did," + according to a + +On line 2688: + Fed Chairman Ben Bernanke + to the FCIC. "The national + mortgage system might + +On line 2690: + not break," and "neither + borrowers nor lenders appeared + particularly + +On line 2690: + according to the + letter. In discussions about + nontraditional + +On line 2690: + mortgages are not an + especially sinister + development," and + +On line 2690: + cushioned by large down + payments." The presentation + also noted that + +On line 2690: + were rising on a + portion of interest-only + loans, the ratios for + +On line 2690: + that housing market + activity could be the + result of "solid + + fundamentals." Yet + another presentation + concluded that the + + impact of changes in + household wealth on spending would + be "perhaps only + + half as large as that + of the 1990s stock bubble." Most + FOMC participants + +On line 2692: + were "agnostics" on + housing, unwilling to risk + their reputations + +On line 2692: + finding support in + economic theory.18 Fed + Vice Chairman Donald + +On line 2694: + "Identification + [of a bubble] is a tricky + proposition because + +On line 2694: + driving asset prices + are directly observable," + Kohn said in a speech, + + citing research by + the European Central Bank. + "For this reason, any + +On line 2694: + by a central bank + that stocks or homes are overpriced + is inherently + +On line 2696: + to sound a louder + alarm. "The situation is + beginning to look + + like a credit-induced + boom in housing that could very + well result in a + +On line 2696: + Federal Deposit + Insurance Corporation + Chief Economist Richard + +On line 2698: + Brown wrote in a March + report. "During the past five + years, the average + +On line 2700: + U.S. home has risen in + value by while homes in the + fastest-growing markets + +On line 2700: + approximately + doubled in value." While this + increase might have been + +On line 2700: + fundamentals, "the + dramatic broadening of + the housing boom in + +On line 2700: + the influence of + systemic factors, including + the low cost and wide + + availability of + mortgage credit."20 A couple + of months later, Fed + +On line 2702: + that housing prices were + overvalued, but downplayed the + potential impacts + + of a downturn. Even + in the face of a large price + decline, they argued, + +On line 2702: + would not be widespread, + given the large equity + that many borrowers + +On line 2702: + in their homes. Structural + changes in the mortgage market + made a crisis less + +On line 2702: + financial system + seemed well capitalized. "Even + historically + +On line 2702: + declines in house prices + would be small relative to + the recent decline + +On line 2702: + wealth owing to the + stock market," the economists + concluded. "From a + +On line 2710: + only company + that ignored concerns about poor + loan quality. Across + +On line 2710: + mortgage industry, + with the bubble at its peak, + standards had declined, + +On line 2710: + no longer verified, + and warnings from internal + audit departments + +On line 2710: + patterns during the + savings and loan crisis, told + the Commission that + +On line 2710: + by one estimate, + in the mid-2000s, at least million + loans annually + + contained "some sort of + fraud," in part because of the + large percentage of + +On line 2712: + housing can entail + a borrower’s lying or + intentionally + +On line 2712: + deception to gain + financially from the sale + of a house. Illinois + +On line 2714: + mortgage products to + borrowers."24 In of cases, + according to the + +On line 2714: + involves industry + insiders.25 For example, + property flipping + +On line 2714: + real estate agents, + appraisers, and complicit + closing agents. In a + +On line 2714: + second," the buyer, + with the collusion of a + loan officer and + +On line 2714: + the knowledge of the + first mortgage lender, disguises + the existence of + + a second mortgage + to hide the fact that no down + payment has been made. + + "Straw buyers" allow + their names and credit scores to + be used, for a fee, + + by buyers who want + to conceal their ownership.26 + In one instance, two + +On line 2716: + South Florida were + indicted in for placing + ads between and in + +On line 2716: + were accused of then + stealing the identities of + hundreds of people + + who came for help and + using the information + to buy properties, + +On line 2716: + A. Ferrer told the + Commission it was "one of + the cruelest schemes" he + + had seen.27 Estimates + vary on the extent of fraud, + as it is seldom + +On line 2720: + business relations + at Inter - thinx, a fraud + detection service, + +On line 2720: + the FCIC that her firm + analyzed a large sample + of all loans from to + +On line 2720: + and found contained lies + or omissions significant + enough to rescind the + +On line 2720: + worth of fraudulent + loans from to resulted in + foreclosures, leading + +On line 2720: + losses of billion + for the holders. According + to Fulmer, experts + +On line 2720: + the percentage of + transactions involving less + significant forms + +On line 2724: + the radar, because many + borrowers made payments on + time. Ed Parker, the + + head of mortgage fraud + investigation at Ameriquest, + the largest subprime lender + +On line 2724: + FCIC that fraudulent + loans were very common at the + company. "No one + +On line 2724: + watching. The volume + was up and now you see the + fallout behind the + +On line 2724: + Markets at Fannie + Mae, told the Commission that + in one package of + +On line 2724: + his analysts found + one purchaser who had bought + properties, falsely + +On line 2724: + time as the owner + of only one property, + while another had + + bought five properties.30 + Fannie Mae’s detection of + fraud increased steadily + +On line 2724: + the housing bubble + and accelerated in + late according to + +On line 2724: + current director + of the company’s mortgage + fraud program. He said + +On line 2724: + seeing evidence + of fraud, Fannie demanded + that lenders such as Bank + +On line 2724: + Citigroup, and JP + Morgan Chase repurchase about + million in mortgages + +On line 2724: + million in "Lax or + practically non-existent + government oversight + +On line 2724: + thrive," said Henry N. + Pontell, a professor of + criminology + +On line 2724: + the University + of California, Irvine, in + testimony to + + the Commission.32 The + responsibility to + investigate and + +On line 2726: + to local, state and + federal law enforcement + officials. On the + + federal level, + the Federal Bureau of + Investigation + +On line 2726: + prosecution to + U.S. Attorneys, who are part + of the Department + + of Justice. Cases + may also involve other + agencies, including + +On line 2726: + U.S. Postal Inspection + Service, the Department of + Housing and Urban + +On line 2726: + The FBI, which has the + broadest jurisdiction of + any federal law + +On line 2726: + Chris Swecker began + noticing a rise in mortgage + fraud while he was the + +On line 2726: + charge of the Charlotte, + North Carolina, office from + to In that office + +On line 2726: + Mortgage for selling + fraudulent loans to Fannie + Mae, leading to the + +On line 2726: + prosecution of + the company’s owner, James + Edward McLean Jr., and + +On line 2728: + but then—without any + interference from Fannie—resold + them to Ginnie Mae.34 + +On line 2730: + Ginnie, Fannie paid + million of restitution to + the government. McLean + +On line 2730: + to the attention + of the FBI after buying + a luxury yacht + +On line 2730: + after Swecker was + promoted to assistant + FBI director for + +On line 2730: + turned a spotlight on + mortgage fraud. "The potential + impact of mortgage + +On line 2730: + clear," Swecker told a + congressional committee + in "If fraudulent + +On line 2730: + fraud is allowed to + become unrestrained, it will + ultimately place + +On line 2730: + institutions at + risk and have adverse effects + on the stock market."36 + +On line 2732: + Swecker pointed out + the inadequacies of + data regarding + +On line 2732: + that Congress mandate + a reporting system and + other remedies and + +On line 2732: + not. For example, + suspicious activity + reports, also known + +On line 2732: + reports filed by FDIC-insured + banks and their affiliates + to the Financial + +On line 2732: + Enforcement Network + FinCEN), a bureau within the + Treasury Department + +On line 2734: + and works closely with + law enforcement to combat + financial crimes. SARs + +On line 2734: + in a financial + transaction. But many mortgage + originators, such + +On line 2734: + New Century, and + Option One, were outside FinCEN’s + jurisdiction—and + +On line 2734: + investment banks, were + not subject to FinCEN review. + William Black testified + +On line 2734: + to the Commission + that an estimated of + nonprime mortgage loans + +On line 2734: + SARs. And as for those + institutions required to + do so, he believed + + he saw evidence + of underreporting in + that, he said, only + +On line 2734: + filed even a single + criminal referral for + alleged mortgage fraud + +On line 2736: + in the first half of + Countrywide, the nation’s largest + mortgage lender at the + +On line 2738: + activity in + its mortgage business in in + and in according + + to Francisco San + Pedro, the former senior + vice president of + +On line 2740: + investigations + at the company.38 But it + filed only SARs in + +On line 2742: + in Similarly, + in examining Bank of + America in its + +On line 2742: + regulator, the + Office of the Comptroller + of the Currency + +On line 2742: + activity for + which no report had been filed + with FinCEN. All met the + +On line 2742: + required management + to refine its processes + to ensure that SARs + +On line 2744: + and fraud analyst + at Wells Fargo, the second + largest mortgage lender from + +On line 2744: + the largest in told the + Commission that "hundreds and + hundreds and hundreds + +On line 2744: + identified within + Wells Fargo’s home equity + loan division were + + not reported to + FinCEN. And, she added, at least half + the loans she flagged for + +On line 2746: + objections.41 Despite + the underreporting, the + jump in mortgage fraud + +On line 2748: + drew attention. FinCEN + in November reported + a 20-fold increase in + +On line 2748: + SARs related to + mortgage fraud between and It + noted that two-thirds of + +On line 2748: + were originated + by mortgage brokers who were + not subject to any + +On line 2748: + standard or oversight.42 + Swecker unsuccessfully + asked legislators + + to compel all lenders + to forward information + about criminal fraud + + to regulators + and law enforcement agencies.43 + Swecker attempted + +On line 2750: + gain more funding to + combat mortgage fraud but was + resisted. Swecker + +On line 2750: + cut at either the + director level at the + FBI, at the Justice + + Department, or at + the Office of Management + and Budget. He called + +On line 2752: + his struggle for more + resources an "uphill slog."44 In + SARs related to + +On line 2754: + mortgage fraud were filed; + in there were The number kept + climbing, to in in + +On line 2756: + At the same time, top + FBI officials, focusing + on terrorist threats, + +On line 2758: + to white-collar crime + from in the fiscal year to + fewer than by That + +On line 2758: + mortgage fraud program + had only agents at any one + time to review more + +On line 2758: + than SARs filed with FinCEN. + In response to inquiries from + the FCIC, the FBI said + + that to compensate + for a lack of manpower, + it had developed + +On line 2758: + methods to detect + and combat mortgage fraud," such + as a computer + +On line 2760: + property flipping.46 + Robert Mueller, the FBI’s director + since said mortgage fraud + +On line 2760: + priorities," such + as terrorism. He told the + Commission that he + + hired additional + resources to fight fraud, but that + "we didn’t get what + + we had requested" + during the budget process. He + also said that the + + FBI allocated + additional resources to + reflect the growth in + +On line 2760: + fraud, but acknowledged + that those resources may have been + insufficient. "I + +On line 2760: + not going to tell + you that that is adequate + for what is out there," + + he said. In the wake + of the crisis, the FBI is + continuing to + + investigate fraud, + and Mueller suggested that some + prosecutions may + +On line 2762: + nation’s attorney + general from February + to September told + +On line 2762: + that while he might have + done more on mortgage fraud, in + hindsight he believed + +On line 2762: + more pressing: "I don’t + think anyone can credibly + argue that [mortgage + +On line 2762: + more important than + the war on terror. Mortgage + fraud doesn’t involve + + taking loss of life + so it doesn’t rank above the + priority of + +On line 2764: + Housing Enterprise + Oversight, the regulator + of the GSEs, released + + a report showing + a "significant rise in + the incidence of + +On line 2764: + in mortgage lending + in and the first half of OFHEO + stated it had been + + working closely with + law enforcement and was an + active member of + + the Department of + Justice Mortgage Fraud Working + Group.49 "The concern about + +On line 2764: + issue," Richard Spillenkothen, head + of banking supervision + and regulation + +On line 2764: + Fed from to told the + FCIC. "And we understood there + was an increasing + +On line 2766: + B. Mukasey, who served as + U.S. attorney general + from November to + +On line 2766: + the end of told the + Commission that he recalled + "receiving reports + +On line 2766: + mortgage failures and + of there being fraudulent + activity in + +On line 2766: + with flipping houses, + overvaluation, and the + like. I have a dim + + recollection of + outside people commenting + that additional + +On line 2766: + be devoted, and + there being speculation + about whether resources that + +On line 2766: + investigations + were somehow impeding fraud + investigations, + + which I thought was a + bogus issue." He said that + the department had + +On line 2768: + as terrorism, gang + violence, and southwestern + border issues.51 In + + letters to the FCIC, + the Department of Justice + outlined actions it + + undertook along with + the FBI to combat mortgage + fraud. For example, + +On line 2768: + Continued Action, + targeting a variety + of financial crimes, + +On line 2768: + the agency started + to publish an annual + mortgage fraud report. + +On line 2768: + following year, the + FBI and other federal + agencies announced a + +On line 2768: + produced indictments, + arrests, and convictions for + mortgage fraud. In the + +On line 2768: + cases and increased + personnel dedicated + to those efforts. And + +On line 2768: + Mortgage resulted + in mortgage fraud cases in + which defendants were + +On line 2770: + Attorneys offices + throughout the country.52 William Black + told the Commission + +On line 2770: + issue and allowed + it to worsen. "The FBI did + have severe limits," + +On line 2770: + and the problem was + compounded by the lack of + cooperation: + + "The terrible thing + that happened was that the FBI + got virtually + +On line 2770: + assistance from the + regulators, the banking + regulators and + +On line 2772: + FBI official, told + the Commission he had no + contact with banking + +On line 2774: + As mortgage fraud grew, + state agencies took action. In + Florida, Ellen Wilcox, + + a special agent with + the state Department of Law + Enforcement, teamed with + +On line 2774: + Agency to bring down + a criminal ring scamming + homeowners in the + +On line 2774: + Its key member was + Orson Benn, a New York–based + vice president of + +On line 2774: + of Ameriquest. Beginning + in investigators and + two prosecutors + +On line 2774: + repair contractors, + title companies, notaries, + and a convicted + +On line 2776: + case that involved some + loans.55 According to charging + documents in the + +On line 2776: + neighborhoods, looking + for elderly homeowners + they thought were likely + + to have substantial + equity in their homes. They + would suggest repairs + + or improvements to + the homes. The homeowners would + fill out paperwork, + + and insiders would + use the information to + apply for loans in + +On line 2776: + the ring would prepare + fraudulent loan documents, + including false W-2 + +On line 2776: + with information + about invented employment + and falsified salaries, + +On line 2776: + out home equity + loans in the homeowners’ names. + Each person involved + + in the transaction + would receive a fee for his + or her role; Benn, at + +On line 2776: + Argent, received a + kickback for each loan he helped + secure. When the loan + +On line 2776: + out to the bogus + home construction company + that had proposed the + +On line 2776: + would then disappear + with the proceeds. Some of the + homeowners never + + received a penny + from the refinancing on + their homes. Hillsborough + +On line 2776: + to say that scheduled + repairs had never been made + to their homes, and then + +On line 2776: + of equity as + well. Sixteen of defendants, + including Benn, have + +On line 2778: + or have pled guilty.56 Wilcox + told the Commission that the + "cost and length of these + + investigations + make them less attractive to + most investigative + +On line 2778: + their budgets based on + investigative statistics."57 + She said it has been + +On line 2778: + to follow up on + other cases because so + many of the subprime + +On line 2778: + of business, making + it difficult to track down + perpetrators and + +On line 2778: + Ameriquest, for example, + collapsed in although Argent, + and the company’s + + loan-servicing arm, were + bought by Citigroup that same + year. DISCLOSURE AND + +On line 2786: + QUALITY CONTROL + ISSUE IN THE FACTORY" + In addition to + +On line 2786: + the final years of + the bubble. After growing + for years, Alt-A lending + +On line 2786: + another from to + In particular, option + ARMs grew during that + +On line 2788: + for borrowers with + fixed-rate mortgages) grew Overall, by + no-doc or low-doc + +On line 2790: + loans made up of all + mortgages originated. Many + of these products would + + perform only if + prices continued to rise and + the borrower could + +On line 2792: + participant along + the securitization + pipeline should have had + +On line 2792: + in the quality + of every underlying + mortgage. In practice, + + their interests were + often not aligned. Two New York + Fed economists have + +On line 2792: + frictions" in mortgage + securitization—places + along the pipeline where + + one party knew more + than the other, creating + opportunities + + to take advantage.59 + For example, the lender who + originated the + +On line 2792: + for sale, earning a + commission, knew a great deal + about the loan and the + +On line 2792: + but had no long-term stake + in whether the mortgage was paid, + beyond the lender’s own + +On line 2794: + process. They described their + role as being "an umpire + in the market."60 But + +On line 2794: + security, nor + did they check to see that the + mortgages were what the + +On line 2796: + said they were. So the + integrity of the market + depended on two + +On line 2796: + First, firms purchasing + and securitizing the + mortgages would conduct + + due diligence reviews + of the mortgage pools, either + using third-party + +On line 2796: + rules, parties in the + securitization process + were expected to + + disclose what they were + selling to investors. Neither + of these checks performed + +On line 2800: + securitizers + undertook due diligence on + their own or through third + +On line 2800: + The originator + and the securitizer + negotiated + +On line 2800: + extent of the due + diligence investigation. + While the percentage + +On line 2802: + the pool examined + could be as high as it was + often much lower; + + according to some + observers, as the market grew + and originators + +On line 2802: + bargaining power + over the mortgage purchasers, and + samples were sometimes + +On line 2802: + requested that the + due diligence firm analyze + a random sample + +On line 2802: + mortgages from the pool; + others asked for a sampling + of those most likely + + to be deficient + in some way, in an effort + to efficiently + + detect more of the + problem loans. layton Holdings, + a Connecticut-based firm, + +On line 2804: + was a major provider + of third-party due diligence + services. As Clayton + +On line 2804: + Vicki Beal explained + to the FCIC, firms like hers were + "not retained by [their] + + clients to provide an + opinion as to whether a loan + is a good loan or + + a bad loan." Rather, they + were hired to identify, among + other things, whether the + +On line 2806: + to enable clients to + negotiate better prices + on pools of loans.63 The + +On line 2806: + the originator’s + standards, sometimes with overlays + or additional + +On line 2806: + provided by the + financial institutions + purchasing the loans)1 + +On line 2806: + values accurate164 + And, critically: to the + degree that a loan + + was deficient, did + it have any "compensating + factors" that offset + +On line 2806: + loan had a higher + loan-to-value ratio than + guidelines called for, did + +On line 2806: + as the borrower’s + higher income mitigate + that weakness1 The due + +On line 2806: + firm would then grade the + loan sample and forward the + data to its client. + +On line 2806: + securitizer + would negotiate a price + for the pool and could + +On line 2808: + loans that did not meet + the stated guidelines. Because + of the volume of + + loans examined by + Clayton during the housing + boom, the firm had a + + unique inside view of + the underwriting standards + that originators + +On line 2808: + willing to accept. + Loans were classified into + three groups: loans that met + +On line 2808: + (a Grade Event), those that + failed to meet guidelines but were + approved because of + +On line 2810: + (a Grade Event), and those + that failed to meet guidelines and + were not approved (a + +On line 2814: + Event). Overall, for the + months that ended June Clayton + rated of the loans + +On line 2814: + it analyzed as + Grade and another as Grade + 2—for a total of + +On line 2814: + guidelines outright or + with compensating factors. + The remaining of + +On line 2814: + the loans were Grade In + theory, the banks could have + refused to buy a + + loan pool, or, indeed, + they could have used the findings + of the due diligence + +On line 2814: + firm to probe the loans’ + quality more deeply. Over the + 18-month period, of + +On line 2814: + the loans that Clayton + found to be deficient—Grade 3—were "waived in" + by the banks. Thus of + + the loans sampled by + Clayton were accepted even + though the company + +On line 2816: + found a basis for + rejecting them (see figure + Referring to the + +On line 2816: + Keith Johnson, the + president of Clayton from + May to May told the + +On line 2816: + me says there [was] a + quality control issue + in the factory" + +On line 2816: + Johnson concluded + that his clients often waived in + loans to preserve their + +On line 2816: + of rejections might + lead the originator to + sell the loans to a + +On line 2816: + a sellers’ market. + "Probably the seller had + more power than the + +On line 2818: + FCIC.67 The high rate of + waivers following rejections + may not itself be + +On line 2818: + Beal testified. She + said that as originators’ + lending guidelines were + +On line 2818: + credit Rejected + Loans Waived in by Selected + Banks guidelines. "As you + + know, there was stated + income, they were telling us look + for reasonableness + +On line 2818: + one would expect more + rejections, and, after the + securitizer + +On line 2818: + at the rejected + loans, possibly more waivers. As + Moody’s Investors Service + +On line 2818: + a letter to the + FCIC, "A high rate of waivers from + an institution + + with extremely tight + underwriting standards could + result in a pool + + that is less risky than + a pool with no waivers from an + institution with + +On line 2818: + indicated that + the loans in the pools either + met guidelines outright + +On line 2818: + had compensating + factors, even though Clayton’s records + show that only a + + portion of the loans + were sampled, and that of those + that were sampled, a + +On line 2820: + percentage of Grade + Event loans were waived in. Johnson + said he approached the + +On line 2820: + agencies in and to + gauge their interest in the + exception-tracking + + product that Clayton + was developing. He said + he shared some of their + +On line 2820: + the agencies that the + data would benefit the + ratings process. "We went + +On line 2822: + and said, ‘Wouldn’t this + information be great for + you to have as you + + assign tranche levels + of isk1’" Johnson recalled. The + agencies thought the due + + diligence firm’s data + were "great," but they did not want + the information, + + Johnson said, because + it would presumably produce + lower ratings for + +On line 2828: + market was winding + down.70 When securitizers + did kick loans out of + +On line 2828: + some originators + simply put them into new + pools, presumably in + +On line 2828: + the next pool’s sampling. + The examiner’s report + for New Century + +On line 2828: + Investment Loan had + a policy of putting loans + into subsequent + +On line 2828: + they were kicked out three + times, the company’s former + regulatory + + compliance and risk + manager, Roger Ehrnman, told + the FCIC. As Johnson + + described the practice + to the FCIC, this was the "three + strikes, you’re out rule."72 Some + +On line 2830: + their own due diligence, + but seemed to devote only + limited resources + +On line 2830: + At Morgan Stanley, + the head of due diligence was + based not in New York + + but rather in Boca + Raton, Florida. He had, + at any one time, two + +On line 2830: + him directly—and they were + actually employees + of a personnel + + consultant, Equinox.73 Deutsche + Bank and JP Morgan likewise + also had only + +On line 2832: + diligence teams.74 Banks did + not necessarily have + better processes + + for monitoring + the mortgages that they purchased. + At an FCIC hearing + +On line 2832: + the mortgage business, + Richard Bowen, a whistleblower who + had been a senior + +On line 2832: + testified that his + team conducted quality + assurance checks on + +On line 2832: + Citigroup from a + network of lenders, including + both subprime mortgages + +On line 2832: + hold and prime mortgages + that it intended to sell + to Fannie Mae and + +On line 2834: + purchases, Bowen’s team + would review the physical + credit file of the + +On line 2834: + they were purchasing. + "During and I witnessed many + changes to the way the + +On line 2834: + evaluated for + these pools during the purchase + processes," Bowen said. + +On line 2834: + example, he said, + the chief risk officer in + Citigroup’s Consumer + +On line 2836: + business reversed large + numbers of underwriting + decisions from "turn + +On line 2838: + part of Bowen’s charge was + to supervise the purchase + of roughly billion + +On line 2838: + in prime loan pools, a + high percentage of which were + sold to Fannie Mae + + and Freddie Mac for + securitization. The + sampling provided + +On line 2838: + quality control + was supposed to include at + least of the loan pool + +On line 2838: + usually ignored." + Samples of were more likely, + and the loan samples + +On line 2838: + group did examine + showed extremely high rates of + noncompliance. "At + +On line 2838: + time that I became + involved, which was early to + mid-2006, we identified + +On line 2838: + to percent of the + files either had a ‘disagree’ + decision, or they + +On line 2840: + supervisor and + company executives + about the quality + + and underwriting + of mortgages that CitiMortgage purchased + and then sold to the + + GSEs. As discussed in + a later chapter, the GSEs + would later require + +On line 2840: + Citigroup to buy + back billion in loans as of + November finding + +On line 2842: + the loans Citigroup + had sold them did not conform + to GSE standards. SEC: + +On line 2846: + the room is that we + didn’t review the prospectus + supplements" By the + +On line 2846: + time the financial + crisis hit, investors held more + than trillion of non-GSE + +On line 2848: + billion of CDOs that + held mortgage-backed securities.77 + These securities + +On line 2850: + with practically + no SEC oversight. And only + a minority + +On line 2850: + ongoing public + reporting requirements. The + SEC’s mandate is to + +On line 2850: + disclosures so that + investors can make up their own + minds. In the case of + +On line 2850: + offerings of a + company’s shares, the work has + historically + +On line 2852: + other "offering + materials" prior to + sale.78 However, with + +On line 2852: + "shelf registration," + a method of registering + securities on + +On line 2852: + became much quicker + for mortgage-backed securities + ranked in the highest + +On line 2852: + the rating agencies. + The process allowed issuers to + file a base prospectus + +On line 2852: + issuer intended + to offer securities + in the future. The + +On line 2852: + offering’s terms. "The + elephant in the room is that + we didn’t review + +On line 2852: + in corporation + finance, Shelley Parratt, told + the FCIC.79 To improve + +On line 2852: + Regulation AB + in late The regulation + required that every + +On line 2852: + credit-granting or + underwriting criteria + used to originate + + or purchase the pool + assets, including, to the + extent known, any changes + +On line 2852: + criteria and the + extent to which such policies + and criteria are + +On line 2854: + be overridden."80 With + essentially no review + or oversight, how good + +On line 2854: + included disclaimers + to the effect that not all + mortgages would comply + +On line 2854: + the lending policies + of the originator: "On + a case-by-case basis + +On line 2854: + may determine that, + based upon compensating + factors, a prospective + + mortgage not strictly + qualifying under the + underwriting risk + +On line 2856: + an underwriting + exception."81 The disclosure + typically had + +On line 2858: + number" or perhaps + "a substantial portion of + the Mortgage Loans will + +On line 2858: + Bowen criticized the + extent of information + provided on loan + +On line 2858: + no disclosure made + to the investors with regard + to the quality + + of the files they were + purchasing."83 Such disclosures + were insufficient + +On line 2860: + know what criteria + the mortgages they were buying + actually did + +On line 2862: + meet. Only a small + portion—as little as to 3%—of + the loans in any deal + +On line 2862: + from Clayton shows that + a significant number + did not meet stated + +On line 2862: + have compensating + factors.84 On he loans in the + remainder of the + +On line 2864: + that were not sampled + (as much as Clayton and the + securitizers + +On line 2864: + information, but + one could reasonably expect + them to have many of + +On line 2864: + at the same rate, as + the sampled loans. Prospectuses + for the ultimate + +On line 2864: + this information, + or information on how + few loans were reviewed, + + raising the question + of whether the disclosures were + materially + +On line 2866: + violation of + the securities laws. CDOs + were issued under + +On line 2866: + framework from the one + that applied to many mortgage-backed + securities, and + +On line 2866: + rules. Underwriters + typically issued CDOs + under the SEC’s Rule + +On line 2868: + so-called qualified + institutional buyers + (QIBs); these included + + investors as diverse + as insurance companies + like MetLife, pension funds + +On line 2868: + California State + Teachers’ Retirement System, + and investment banks + +On line 2870: + U.S. investment banks + more competitive with their + foreign counterparts; + +On line 2870: + participants viewed + U.S. disclosure requirements + as more onerous than + +On line 2870: + significantly + expanded the market for + these securities + +On line 2870: + distributions which + complied with the rule would no + longer be considered + +On line 2870: + exemption with the + National Securities + Markets Improvements + +On line 2870: + that Denise Voigt Crawford, + a commissioner on the + Texas Securities + +On line 2870: + prohibit[ing] the states + from taking preventative + actions in areas + +On line 2870: + the current crisis."86 + Under this legislation, + state securities + + regulators were + preempted from overseeing + private placements such + +On line 2870: + In the absence of + registration requirements, + a new debt market + +On line 2870: + Rule 144A. This market + was liquid, since qualified + investors could freely trade + +On line 2872: + securities. But + debt securities when Rule + 144A was enacted + +On line 2872: + corporate bonds, very + different from the CDOs that + dominated the + +On line 2874: + been adequate, filed + numerous lawsuits under + federal and state + +On line 2878: + new mortgage products + had been on regulators’ + radar screens in the years + +On line 2880: + banks’ own internal + risk management systems.88 "As + internal systems + +On line 2880: + the basic thrust of + the examination process + should shift from largely + +On line 2880: + feedback that the bank + can use to enhance further + the quality of + +On line 2880: + its risk-management + systems," Chairman Greenspan had said + in Across agencies, there + +On line 2880: + approach, that a lighter + hand at regulation was + the appropriate + + way to regulate," + Eugene Ludwig, comptroller + of the currency + +On line 2880: + from to told the FCIC, + referring to the Gramm-Leach-Bliley Act + in The New York Fed, + +On line 2882: + "lessons-learned" analysis + after the crisis, pointed + to the mistaken + + belief that "markets + will always self-correct." + "A deference to + +On line 2882: + supervisors from + imposing prescriptive views + on banks," the report + +On line 2886: + capital standards. + Banks had complained for years that + the original Basel + +On line 2886: + did not allow them + sufficient latitude to + base their capital + +On line 2886: + with strong support from + the Fed, introduced the Basel + II capital regime + +On line 2886: + which would allow banks + to lower their capital + charges if they could show + +On line 2886: + sophisticated + approaches that it allowed, + Basel II reflected + + and reinforced the + supervisors’ risk-focused + approach. Spillenkothen said that + +On line 2886: + "acceptance of Basel + II premises," which he described + as displaying "an + +On line 2886: + accuracy of + complex quantitative risk + measurement techniques, + +On line 2886: + willingness (at least + in the early days of Basel + II) to tolerate + +On line 2886: + regulatory + capital in return for + the prospect of better + +On line 2888: + Regulators had + been taking notice of the + mortgage market for + +On line 2888: + mortgage products and + borrowers had changed during + and following the + + refinancing boom + of the previous year, and + they began work on + +On line 2888: + guidance to banks and + thrifts. But too little was done, + and too late, because + +On line 2888: + interagency + discord, industry pushback, + and a widely held + +On line 2890: + participants had + the situation well in + hand. "Within the board, + +On line 2890: + many of these loan types + had gotten to an extreme," + Susan Bies, then a + +On line 2890: + governor and chair + of the Federal Reserve + Board’s subcommittees + + on both safety and + soundness supervision and + consumer protection + + supervision, told + the FCIC. "So the main debate + within the board was + + how tightly [should we] + rein in the abuses that we + were seeing. So it + +On line 2894: + was more of ‘to a + degree.’"93 Indeed, in the same + June Federal Open + +On line 2894: + Committee meeting + described earlier, one FOMC + member noted that + +On line 2894: + and untested credit + default instruments had caused + some market turmoil." + +On line 2894: + participant was + concerned "that subprime lending + was an accident + +On line 2894: + third participant + noted the risks in mortgage + securities, the + +On line 2894: + information on + borrowers," adding, however, + that record profits and + +On line 2894: + capital levels + allayed those concerns. A fourth + participant said + +On line 2894: + "we could be seeing + the final gasps of house price + appreciation." + + The participant + expressed concern about "creative + financing" and was + +On line 2894: + of default ould be + higher than suggested by + the securities + +On line 2894: + backed, "could be making + the books of GSEs look better + than they really + + were." Fed staff replied that + the GSEs were not large purchasers + of private label + +On line 2896: + securities.94 In + the spring of the FOMC would again + discuss risks in the + +On line 2896: + markets and express + nervousness about the growing + "ingenuity" of + +On line 2896: + amortization loans + had the per-nicious effect of + stripping equity + +On line 2896: + and raised concerns about + nontraditional lending + practices that seemed based + + on the presumption + of continued increases + in home prices. John Snow, + +On line 2900: + treasury secretary, + told the FCIC that he called a + meeting in late or + +On line 2900: + proliferation + of poor lending practices. He + said he was struck that + +On line 2900: + to see a problem + at their own institutions. + "Nobody had a full + +On line 2900: + regulators was, + ‘Well, there may be a problem. + But it’s not in my + +On line 2900: + view,’" Snow told the FCIC. + Regulators responded + to Snow’s questions by + +On line 2900: + rates are very low. Our + institutions are very well + capitalized. Our + + institutions [have] + very low delinquencies. So we + don’t see any real + +On line 2904: + problem."95 In May the + banking agencies did issue + guidance on the risks + +On line 2904: + and home equity + loans. It cautioned financial + institutions about + +On line 2904: + loan-to-value and + debt-to-income ratios, lower + credit scores, greater use + +On line 2904: + and the increase in + transactions generated + through a loan broker + +On line 2904: + third party. While this + guidance identified many of + the problematic + +On line 2904: + engaged in by bank + lenders, it was limited to + home equity loans. + +On line 2906: + to first mortgages.96 In + examiners from the Fed + and other agencies + +On line 2908: + confidential "peer + group" study of mortgage practices + at six companies + +On line 2908: + that together had + originated trillion in + mortgages in almost + +On line 2908: + national total. + In the group were five banks whose + holding companies + +On line 2908: + and Wells Fargo—as well + as the largest thrift, Washington + Mutual.97 The study + +On line 2908: + in the volume of + these irresponsible loans, + very risky loans," Sabeth + +On line 2908: + head of credit risk + at the Federal Reserve + Board’s Division of + +On line 2908: + Supervision and + Regulation, told the FCIC.98 + A large percentage + +On line 2908: + their loans issued were + subprime and Alt-A mortgages, and + the underwriting + +On line 2910: + for these products had + deteriorated.99 Once + the Fed and other + +On line 2910: + had identified the + mortgage problems, they agreed to + express those concerns + + to the industry + in the form of nonbinding + guidance. "There was among + +On line 2912: + Board of Governors + folks, you know, some who felt that + if we just put out + + guidance, the banks would + get the message," Bies said.100 The + federal agencies + +On line 2914: + drafted guidance on + nontraditional mortgages + such as option ARMs, + +On line 2914: + comment in late The + draft guidance directed lenders + to consider a + +On line 2914: + the loan payment when + rates adjusted, rather than just + the lower starting + +On line 2916: + loans should be "used with + caution."101 Immediately, + the industry was + +On line 2916: + The American Bankers + Association said the + guidance "overstate[d] + +On line 2916: + the guidance required + them to assume "a worst case + scenario," that is, the + +On line 2916: + which borrowers would + have to make the full payment + when rates adjusted.103 + +On line 2916: + that "almost any form + of documentation can + be appropriate."104 + +On line 2918: + denied that better + disclosures were required to + protect borrowers + +On line 2918: + nontraditional + mortgages, arguing that they + were "not aware of any + +On line 2920: + supports the need for + further consumer protection + standards."105 The need for + +On line 2920: + was controversial + within the agencies, too. "We + got tremendous pushback + +On line 2920: + industry as well + as Congress as well as, you + know, internally," + +On line 2920: + the FCIC. "Because it + was stifling innovation, + potentially, and + +On line 2922: + American dream to + many people."106 The pressures to + weaken and delay + +On line 2922: + were strong and came from + many sources. Opposition by + the Office of Thrift + + Supervision helped + delay the mortgage guidance + for almost a year.107 + + Bies said, "There was some + real concern about if the + Fed tightened down on + +On line 2922: + regulated], whether + that would create an un-level + playing field [for] stand-alone + +On line 2922: + the mortgage market + was Congress. She recalled an + occasion when she + + testified about a + proposed rule and "members of + Congress [said] that we + +On line 2922: + going to deny + the dream of homeownership + to Americans if + + we put this new stronger + standard in place."108 When guidance + was put in place in + +On line 2926: + institutions switched + regulators in search of + more lenient treatment. + +On line 2926: + Countrywide applied + to switch regulators from + the Fed and OCC to + +On line 2926: + OTS. Countrywide’s move + came after several months + of evaluation + +On line 2926: + the benefits of + OTS regulation, many of + which were promoted + +On line 2926: + OTS itself over the + course of an "outreach effort" + initiated in + +On line 2928: + John Reich became + director of the agency. + Publicly, Countrywide + +On line 2928: + the decision to + switch to the OTS was driven + by the desire to + +On line 2930: + holding company.109 + However, other factors + came into play as + +On line 2930: + OCC’s top Countrywide + examiner told the FCIC + that Countrywide CEO + + Angelo Mozilo + and President and COO David + Sambol thought the OCC’s + +On line 2932: + property appraisals + would be "killing the business."110 An + internal July + +On line 2934: + OTS regulation + of holding companies is + not as intrusive + +On line 2934: + of the Federal + Reserve. In particular, + the OTS rarely conducts + + extensive onsite + examinations and when + they do conduct an + +On line 2934: + regulator than + the Federal Reserve."111 In + August Mozilo wrote + +On line 2934: + his executive + team, "It appears that the Fed + is now troubled by + +On line 2934: + the OTS is not. Since + pay options are a major + component of both + +On line 2934: + and profitability + the Fed may force us into + a decision faster + +On line 2934: + would like." Countrywide + Chief Risk Officer John McMurray + responded that "based + +On line 2934: + with the FRB and OTS, + the OTS appears to be both + more familiar and + +On line 2936: + ARMs."112 The OTS approved + Countrywide’s application + for a thrift charter + +On line 2942: + March LEVERAGED LOANS AND + COMMERCIAL REAL ESTATE: + "YOU’VE GOT TO GET + +On line 2944: + AND DANCE" The credit + bubble was not confined to + the residential + +On line 2944: + (typically loans + to below-investment-grade + companies to aid + +On line 2944: + dynamics, although + the effects were not as large + and damaging as + +On line 2944: + in residential + real estate. From to these + other two markets + +On line 2944: + by structured finance + products—commercial mortgage–backed + securities and + +On line 2944: + loan obligations (CLOs), + respectively—which were in + many ways similar + + to residential + mortgage-backed securities and + CDOs. And just as in + +On line 2944: + standards loosened, even + as the cost of borrowing + decreased,113 and trading + +On line 2946: + Historically, + leveraged loans had been made by + commercial banks; but + +On line 2946: + institutional + investors developed and grew + in the mid- to late + + 1990s.115 An "agent" bank would + originate a package of + loans to only one + + company and then + sell or syndicate the loans + in the package to + +On line 2946: + large nonbank investors. + The package generally + included loans with + +On line 2946: + lines of credit, which + would be syndicated to + banks; the rest were longer-term + +On line 2946: + syndicated to + nonbank, institutional + investors. Leveraged loan + +On line 2946: + doubled from to but + the rapid growth was in the longer-term + institutional + +On line 2946: + rather than in short-term + lending. By the longer-term leveraged + loans rose to billion, + +On line 2948: + up from billion in + Starting in the longer-term leveraged + loans were packaged in + + CLOs, which were rated + according to methodologies + similar to those + +On line 2948: + for CDOs. Like CDOs, CLOs + had tranches, underwriters, + and collateral + +On line 2948: + The market was less + than billion annually + from to but then it + +On line 2950: + Annual issuance + exceeded billion in and + peaked above billion in + +On line 2950: + through the third quarter + of more than of leveraged loans + were packaged into + + CLOs.117 As the market + for leveraged loans grew, credit + became looser and + +On line 2952: + became larger and + costs of borrowing declined. + Loans that in had paid + +On line 2952: + of percentage points + over an interbank lending + rate were refinanced + +On line 2952: + in early into + loans paying just percentage + points over that same rate. + + During the peak of + the recent leveraged buyout + boom, leveraged loans were + +On line 2954: + to defer paying + interest by issuing + new debt to cover + +On line 2954: + interest. Covenant-lite + loans exempted borrowers + from standard loan covenants + +On line 2954: + usually require + corporate firms to limit + their other debts and + +On line 2954: + those that specialized + in investing directly + in companies, found + +On line 2954: + cheaper to finance + their leveraged buyouts. Just as + home prices rose, so too + + did the prices of the + target companies. One of + the largest deals ever + +On line 2956: + on April by KKR, a + private equity firm. KKR + said it intended + +On line 2956: + Corporation, a + processor of electronic + data including + +On line 2956: + debit card payments, + for about billion. As part of + this transaction, KKR + +On line 2956: + in junk bonds and take + out another billion in + leveraged loans from a + +On line 2956: + Deutsche Bank, Goldman Sachs, + HSBC Securities, Lehman + Brothers, and Merrill + +On line 2958: + As late as July + Citigroup and others were + still increasing their + + leveraged loan business.120 + Citigroup CEO Charles Prince then + said of the business, + +On line 2958: + music stops, in terms + of liquidity, things will + be complicated. + + But as long as the + music is playing, you’ve + got to get up and + + dance. We’re still dancing." + Prince later explained to the + FCIC, "At that point in + +On line 2958: + interest rates had + been so low for so long, the + private equity + + firms were driving very + hard bargains with the banks. And + at that point in time + +On line 2958: + participating + in this lending business. It + was not credible + +On line 2958: + one institution + to unilaterally back + away from this leveraged + + lending business. It + was in that context that I + suggested that all + +On line 2960: + up lending standards + in the leveraged lending area."121 + The CLO market would + +On line 2960: + up in the summer + of during the financial + crisis, just as the + +On line 2960: + roughly billion in + outstanding commitments for + new loans; as demand + +On line 2960: + the secondary market + dried up, these loans ended up + on the banks’ balance + +On line 2962: + and industrial + properties—went through a bubble + similar to that + +On line 2962: + the housing market. + Investment banks created + commercial mortgage– + +On line 2964: + securities and + even CDOs out of commercial + real estate loans, + +On line 2964: + with residential + mortgages. And, just as houses + appreciated + +On line 2964: + from on, so too did + commercial real estate + values. Office prices + +On line 2966: + between and in the + central business districts of + the markets for which + +On line 2968: + available. The increase + was in Phoenix, in Tampa, in + Manhattan, and in + +On line 2970: + Angeles.123 Issuance + of commercial mortgage–backed + securities rose + +On line 2970: + reaching billion in + When securitization + markets contracted, + +On line 2970: + issued billion of + commercial mortgage CDOs, a + number that again dropped + +On line 2974: + came together on + July when the Blackstone Group + announced its plan to + +On line 2974: + buy Hilton—a hotel chain + with properties—for billion, + a premium over + + the share price. A year + later, one author described + this deal as "the apogee + +On line 2974: + private equity + firms to buy out companies + at often absurd + + overvaluations, + saddle them with massive debt, + and then pay themselves + +On line 2974: + fees for the trouble."125 + Twenty billion dollars in + financing came from + +On line 2974: + investment banks and + large commercial banks such as + Bank of America + + and Deutsche Bank.126 Bear Stearns + was increasingly active + in these markets. While + +On line 2976: + in residential + securitizations, it + ranked in the bottom + + half in commercial + securitizations.127 But + it was racing to + +On line 2978: + established Bear Stearns + as a global presence in + commercial real + +On line 2980: + originations more + than doubled between and And + then the market came + +On line 2980: + a halt. Although the + commercial real estate + mortgage market was + +On line 2980: + market—in commercial + real estate debt was less + than trillion, compared + +On line 2980: + for residential + mortgages129—it declined even + more steeply. From its peak, + +On line 2980: + real estate fell + roughly in value, and prices + have remained close to + + their lows. Losses on + commercial real estate + would be an issue + +On line 2980: + And potentially + for the taxpayer. When the + Federal Reserve + +On line 2980: + assume billion of + Bear’s illiquid assets in that + would include roughly + +On line 2980: + unsold portion of + the Hilton financing package.130 + And the commercial + +On line 2980: + estate market would + continue to decline long + after the housing + +On line 2984: + to stabilize. LEHMAN: + FROM "MOVING" TO "STORAGE" Even + as the market was + +On line 2986: + its peak, Lehman took on + more risk. On October when + commercial real + +On line 2986: + of its assets, Lehman + Brothers acquired a major + stake in Archstone Smith, + +On line 2988: + investment trust, for + billion. Archstone owned more than + apartments, including + +On line 2988: + under construction, + in over communities in + the United States. It + +On line 2990: + would generate more + than billion in profits over + years—projections based + +On line 2990: + assumptions, given + the state of the market at + that point. Both Lehman and + + Archstone were highly + leveraged: Archstone had little + cushion if its rent + + receipts should go down, + and Lehman had little cushion + if investments such + +On line 2990: + lose value.132 Although + the firm had proclaimed that "Risk + Management is at + +On line 2990: + core of Lehman’s business + model," the Executive + Committee simply + +On line 2990: + its risk officer, + Madelyn Antoncic, out of + the loop when it made + + this investment.133 Since + the late 1990s, Lehman had also + built a large mortgage + +On line 2992: + and a powerful + underwriting division + as well. Then, in its + +On line 2992: + Richard Fuld and other + executives explained to + their colleagues a new + +On line 2992: + an aggressive growth + strategy, including greater + risk and more leverage. + +On line 2994: + a "storage" business, + in which Lehman would make and hold + longer-term investments.134 By + +On line 2994: + firm’s risk policies and + limits—and warnings from risk + managers—and pursued + + its "countercyclical + growth strategy." It had worked + well during prior + +On line 2994: + dislocations, and + Lehman’s management assumed that + it would work again.135 Lehman’s + +On line 2994: + unit continued to + originate Alt-A loans after + the housing market + +On line 2994: + also continued + to securitize mortgage + assets for sale but + + was now holding more + of them as investments. Across + both the commercial + +On line 2994: + estate sectors, the + mortgage-related assets on + Lehman’s books increased from + +On line 2994: + in to billion in + This increase would be part of + Lehman’s undoing a + +On line 2996: + rapid growth. The SEC, Lehman’s + main regulator, knew of + the firm’s disregard + +On line 2996: + management. The SEC + knew that Lehman continued to + increase its holding + +On line 2996: + SEC reports obtained + by the FCIC.137 Nonetheless, Erik + Sirri, who led the + + SEC’s supervision + program, told the FCIC that it + would not have mattered + + if the agency had + fully recognized the risks + associated + +On line 2996: + To avoid serious + losses, Sirri maintained, Lehman + would have had to start + +On line 2996: + assets in Instead, + it kept buying, well into + the first quarter of + +On line 2998: + according to the + bankruptcy examiner, + Lehman understated + +On line 2998: + balance sheet before + each reporting period. + Martin Kelly, Lehman’s + +On line 2998: + balance sheet." Other + Lehman executives described + Repo transactions + +On line 2998: + of managing the + balance sheet as opposed to + legitimately + +On line 2998: + quarter-end." Bart McDade, who + became Lehman’s president and + chief operating + +On line 3000: + an email called Repo + transactions "another drug + we R on."139 Ernst Young + +On line 3000: + Lehman’s auditor, was + aware of the Repo practice + but did not question + +On line 3000: + failure to publicly + disclose it, despite being + informed in May by + +On line 3000: + improper. The Lehman + bankruptcy examiner + concluded that E&Y + +On line 3000: + investigate the + Repo allegations, took + no steps to question + +On line 3000: + non-disclosure by Lehman," + and that "colorable claims exist + that E&Y did not meet + +On line 3000: + investigating + Lee’s allegations and in + connection with its + + audit and review + of Lehman’s financial statements."140 + New York Attorney + +On line 3000: + accusing the firm + of facilitating a + "massive accounting + +On line 3002: + about its financial + condition.141 The Office of + Thrift Supervision + +On line 3002: + regulated Lehman + since through its jurisdiction + over Lehman’s thrift subsidiary. + +On line 3002: + regulator," the + OTS examiner told the + FCIC, "we in no way + + just assumed that [the + SEC] would do the right thing, so + we regulated + + and supervised the + holding company."142 Still, not + until July 2008—just + + a few months before + Lehman failed— would the OTS issue + a report warning + +On line 3004: + had made an "outsized + bet" on commercial real + estate—larger than + +On line 3004: + its peer firms, despite + Lehman’s smaller size; that Lehman was + "materially + + overexposed" to the + commercial real estate + sector; and that Lehman + +On line 3006: + failings in its risk + management process."143 FANNIE MAE + AND FREDDIE MAC: "TWO + +On line 3008: + STARK CHOICES" In while + Countrywide, Citigroup, Lehman, + and many others in + +On line 3008: + and CDO businesses + were going into overdrive, + executives at + +On line 3008: + two behemoth GSEs, + Fannie and Freddie, worried + they were being left + +On line 3008: + Fannie would not buy + the new mortgages, Countrywide + President and COO + +On line 3008: + the FCIC.144 Typical + of the market as a whole, + Countrywide sold of + +On line 3012: + in and in "The risk + in the environment has + accelerated + +On line 3012: + Lund, Fannie’s head of + single-family lending, + told fellow senior + +On line 3012: + planning meeting on + June In a bulleted list, + he ticked off changes in + +On line 3014: + concern about housing + bubbles, growing concerns about + borrowers taking + + on increased risks and + higher debt, [and] aggressive + risk layering."146 "We + +On line 3016: + two stark choices: stay + the course [or] meet the market + where the market is," + +On line 3016: + If Fannie Mae stayed + the course, it would maintain its + credit discipline, + +On line 3016: + the quality of + its book, preserve capital, + and intensify + +On line 3016: + company’s public + voice on concerns. However, + it would also face + +On line 3016: + declines in market + share, lower earnings, and a + weakening of key + +On line 3016: + relationships.147 It + was simply a matter of + relevance, former + + CEO Dan Mudd told the + FCIC: "If you’re not relevant, + you’re unprofitable, and + + you’re not serving the + mission. And there was danger + to profitability. + +On line 3018: + speaking more long term + than in any given quarter + or any given year. + +On line 3020: + saw significant + obstacles to meeting the + market. He noted + +On line 3020: + offered by Wall Street, + its unfamiliarity + with the new credit + + risks, worries that the + price of the mortgages wouldn’t + be worth the risk, and + + regulatory + concerns surrounding certain + products.149 At this and + + other meetings, Lund + recommended studying whether + the current market + +On line 3020: + were cyclical or more + permanent, but he also + recommended that + +On line 3020: + capabilities + to compete in any mortgage + environment."150 Citibank + +On line 3020: + a presentation + to Fannie’s board in July + warning that Fannie + + was increasingly + at risk of being marginalized, + and that "stay the course" + +On line 3020: + the second-largest seller + of mortgages to Fannie, Citibank + would benefit from + + such a move. Over the + next two years, Citibank would increase + its sales to Fannie + +On line 3020: + more than a quarter, + to billion in the fiscal + year, while more than tripling + +On line 3024: + of interest-only + mortgages, to billion.152 Lund told + the FCIC that in the + +On line 3024: + recommendation: + for the time being, Fannie + would "stay the course," while + +On line 3024: + capabilities + to compete with Wall Street in + nonprime mortgages.153 In + +On line 3024: + reports show that by + September the company + had already begun + +On line 3024: + its acquisitions + of riskier loans. By the end + of its Alt-A loans were + +On line 3028: + from billion in and + its interest-only mortgages + were billion in up + +On line 3028: + billion in (Note that + these categories can overlap. + For example, Alt-A + + loans may also lack + full documentation.) To + cover potential + +On line 3028: + had a total of + billion in capital at + the end of "Plans to + +On line 3028: + market share targets + resulted in strategies to + increase purchases + +On line 3028: + prudent credit risk + management and corporate + business objectives," + +On line 3028: + (the successor to + the Office of Federal + Housing Enterprise + +On line 3028: + Oversight) would write in + September on the eve of + the government takeover + +On line 3030: + Mae. "Since Fannie Mae + has grown its Alt-A portfolio + and other higher + +On line 3032: + adequate controls + in place."154 In its financial + statements, Fannie Mae’s + + disclosures about key + loan characteristics changed + over time, making it + +On line 3032: + of a "subprime" loan + was one originated by + a company or + +On line 3032: + Fannie Mae stated + that subprime loans accounted + for less than of its + +On line 3032: + during those years even + while it reported that of + its conventional, + +On line 3036: + portfolios quickly + with limited capital.156 + In CEO Richard Syron + +On line 3036: + Andrukonis, Freddie’s + longtime chief risk officer. + Syron said one of + +On line 3036: + the FCIC, "I had a + legitimate difference + of opinion on how + +On line 3036: + dangerous it was. + Now, as t turns out he was + able to foresee the + +On line 3036: + better than a lot + of the rest of us could."157 The + new risk officer, + +On line 3036: + to the FCIC staff that + he repeatedly made the + case for increasing + +On line 3036: + vice president for + single-family housing, + told FCIC staff that he + + did not recall such + discussions.159 Syron never + made Saksena part + +On line 3038: + of riskier loans and + securities in every + examination + +On line 3040: + never told the GSEs + to stop. Rather, year after year, + the regulator + +On line 3040: + both companies had + adequate capital, strong + asset quality, + +On line 3042: + active officers + and directors. In May at + the same time as it + +On line 3042: + penalty related + to deficiencies in its + accounting practices, + +On line 3042: + mortgage portfolio + to billion, the level on + December Two months + +On line 3042: + later, Freddie agreed + to limit the growth of its + portfolio to per + +On line 3042: + examination + reports for the year issued + to both companies + +On line 3042: + noted the growth in + purchases of risky loans and + non-GSE securities + +On line 3044: + examination + of Fannie was limited + in scope—focusing + + primarily on + the company’s efforts to + fix accounting and + +On line 3044: + of the extensive + resources needed to complete + a three-year special + +On line 3048: + report on Fannie + Mae detailed the "arrogant + and unethical + + corporate culture + where Fannie Mae employees + manipulated + +On line 3050: + trigger bonuses for + senior executives from + to OFHEO Director + + James Lockhart (who had + assumed that position the + month the report was + +On line 3050: + during the special + examination an email + from Mudd, then Fannie’s + +On line 3052: + to CEO Franklin Raines. Mudd + wrote, "The old political + reality [at + +On line 3054: + was that we always + won, we took no prisoners + we used to be able + +On line 3056: + or have written rules + that worked for us."165 Soon after + his arrival, Lockhart + +On line 3056: + for legislation + was obvious as OFHEO was + regulating two + +On line 3056: + institutions," he + told the FCIC.166 But no reform + legislation would + +On line 3058: + July and by then + it would be too late. "Increase + our penetration + +On line 3060: + After several + years during which Fannie Mae + purchased riskier loans + + and securities, + then-Chief Financial Officer + Robert Levin proposed a + +On line 3060: + subprime" at Fannie’s + January board meeting.167 In + the next month the board + +On line 3060: + and more aggressive + in its purchases. During + a summer retreat + + for Fannie’s senior + officers, as Stephen Ashley, + the chairman of the + +On line 3060: + Enrico Dallavecchia, + he declared that the new CRO + would not stand in the + +On line 3060: + of risk taking: "We + have to think differently + and creatively about + +On line 3060: + compliance, and about + controls. Historically + these have not been strong + +On line 3062: + suits of Fannie Mae. + Today’s thinking requires that + these areas become + + active partners with + the business units and be viewed + as tools that enable + +On line 3062: + and address market + needs. Enrico Dallavecchia was + not brought on-board to be + +On line 3066: + acquired billion of + loans; of those (including some + overlap), billion, or + +On line 3068: + and billion of Alt-A + non-GSE mortgage-backed securities.171 + The total amount of + +On line 3070: + larger multiples + of capital than before. + At least initially, + + while house prices were still + increasing, the strategic plan + to increase risk and + +On line 3070: + successful. Fannie + reported net income of + billion in and then + +On line 3070: + in In those two years, + CEO Mudd’s compensation + totaled million and + +On line 3072: + interim CFO and + then chief business officer, + received million.172 In + +On line 3072: + risk, "expand[ing] the + purchase and guarantee of + higher-risk mortgages to + +On line 3072: + competitive, and + be responsive to sellers’ + needs."173 It lowered its + +On line 3072: + products, offered to + a broader range of customers + than ever before, + +On line 3072: + for about of that year’s + purchases. Freddie Mac’s plan + also seemed to be + +On line 3072: + for and billion.174 CEO + Richard Syron’s compensation + totaled million for + +On line 3072: + and combined,175 while Chief + Operating Officer + Eugene McQuade received + +On line 3074: + Again, OFHEO was aware of + these developments. Its March + report noted that + +On line 3074: + to purchase higher-risk + products included a plan + to capture of the + +On line 3074: + OFHEO reported that + credit risk increased "slightly" + because of growth in + + subprime and other + nontraditional products. + But overall asset + + quality in its + single-family business + was found to be "strong," + + and the board members + were "qualified and active." + And, of course, Fannie + +On line 3078: + Similarly, OFHEO + told Freddie in that it had + weaknesses that raised + +On line 3078: + strength and financial + capacity made failure + unlikely.178 Freddie + +On line 3078: + a "significant + supervisory concern,"179 + and OFHEO noted the + +On line 3078: + higher-risk mortgages.180 But + again, as in previous years, + the regulator + +On line 3080: + asset quality + and credit risk management + were "strong."181 The GSEs charged + +On line 3080: + for guaranteeing + payments on GSE mortgage–backed + securities, and + +On line 3080: + Fannie’s practice of + charging less to guarantee + securities than + +On line 3080: + indicated was + appropriate. Mark Winer, + the head of Fannie’s + +On line 3080: + Group since May and the + person responsible for + odeling pricing fees, + +On line 3080: + Fannie Mae was not + charging fees for Alt-A mortgages + that adequately + + compensated for + the risk. Winer recalled that + Levin was critical + +On line 3080: + models, asking, "Can + you show me why you think you’re + right and everyone + +On line 3080: + to Todd Hempstead, the + senior vice president at + Fannie in charge of + +On line 3080: + western region.183 Mudd + acknowledged the difference + between the model + +On line 3080: + fee actually + charged and also told the FCIC + that the scarcity of + +On line 3082: + data for many loans + caused the model fee to be + unreliable.184 In + +On line 3082: + that would recommend + that Fannie be placed into + conservatorship, + + OFHEO would expressly + cite this practice as unsafe + and unsound: "During + +On line 3082: + and modeled loan fees + were higher than actual + fees charged, due to an + +On line 3082: + on growing market + share and competing with Wall + Street and the other + +On line 3086: + GSE."185 "Moving deeper + into the credit pool" By + the time housing prices + +On line 3086: + the second quarter + of delinquencies had started + to rise. During the + +On line 3086: + held in April Lund said + that dislocation in the + housing market was + +On line 3086: + Fannie to reclaim + market share. At the same time, + Fannie would support + +On line 3086: + Fannie’s market share + could increase to from about in + Indeed, in Fannie + +On line 3086: + ahead, purchasing more + high-risk loans.188 Fannie also + purchased billion of + +On line 3088: + non-GSE securities, + and billion of Alt-A.189 In June, + Fannie prepared its + +On line 3088: + strategic plan, titled + "Deepen Segments—Develop Breadth." The plan, which + mentioned Fannie’s "tough + +On line 3088: + debt market"—included + taking and managing "more + mortgage credit risk, + +On line 3088: + deeper into the + credit pool to serve a large + and growing part of + + the mortgage market." + Overall, revenues and earnings + were projected to + +On line 3090: + of the following + five years.190 Management told the + board that Fannie’s risk + + management function + had all the necessary means + and budget to act + + on the plan. Chief Risk + Officer Dallavecchia did not + agree, especially + +On line 3090: + in light of a planned + cut in his budget. In a + July email to CEO + + Mudd, Dallavecchia wrote that + he was very upset that he + had to hear at the + +On line 3090: + meeting that Fannie + had the "will and the money + to change our culture + + and support taking + more credit risk," given the + proposed budget cut + +On line 3092: + for his department + in after a reduction + in headcount in In + +On line 3092: + had written to Chief + Operating Officer + Michael Williams that Fannie + +On line 3092: + "one of the weakest + control processes" that he + "ever witnessed in + +On line 3092: + [his] career, was not + even close to having proper + control processes + + for credit, market + and operational risk," and + was "already back to + +On line 3092: + These deficiencies + indicated that "people + don’t care about the [risk] + + function or they don’t + get it."192 Mudd responded, "My + experience is + +On line 3096: + a very good venue for + conversation, venting or + negotiating." + + If Dallavecchia felt that + he had been dealt with in bad + faith, he should "address + +On line 3096: + to man," unless he + wanted Mudd "to be the one + to carry messages + + for you to your peers." + Mudd concluded, "Please come and + see me today face + + to face."193 Dallavecchia told + the FCIC that when he wrote this + email he was tired and + +On line 3096: + and that the view it + expressed was more extreme than + what he thought at the + +On line 3096: + guarantee higher-risk + mortgages in would report a + billion net loss for + +On line 3096: + by credit losses. + In Mudd’s compensation + totaled million and + +On line 3100: + also persisted + in increasing purchases + of riskier loans. A + + strategic plan from March + highlighted "pressure on the + franchise" and the "risk + + of falling below + our return aspirations."195 + The company would + +On line 3100: + to improve earnings + by entering adjacent + markets: "Freddie Mac + +On line 3100: + non-GSE participants + in nonprime," the strategy + document explained. + +On line 3100: + opportunity + to expand into markets + we have missed—Subprime and Alt-A."196 + +On line 3100: + OFHEO would note in its + examination report, + Freddie purchased and + +On line 3100: + characteristics, + including interest-only + loans, loans with FICO + +On line 3100: + than loans with higher + loan-to-value ratios, loans + with high debt-to-income + +On line 3100: + documentation. + Financial results in were + poor: a billion net + +On line 3100: + driven by credit + losses. The value of the + billion subprime and + +On line 3100: + securities book + suffered a billion decline + in market value.197 + +On line 3102: + housing goals: "GSEs cried + bloody murder forever" As + discussed earlier, + +On line 3102: + set goals for the GSEs + related to increasing + homeownership among + +On line 3102: + and borrowers in + underserved areas. Until + these goals were based on + +On line 3102: + were intended to + be only a modest reach + beyond the mortgages + +On line 3104: + normally purchase.198 + From to of GSE purchases + were required to meet + +On line 3104: + low-and moderate-income + borrowers. In the goal was + raised to Mudd said that + + as long as the goals + remained below half of the + GSEs’ lending, loans made + + in the normal course + of business would satisfy + the goals: "What comes in + +On line 3104: + through the natural + course of business will tend to + match the market, and + + therefore will tend to + meet the goals."200 Levin told the FCIC + that "there was a great + + deal of business that + came through normal channels that + met goals" and that most + +On line 3106: + that satisfied the + goals "would have been made anyway."201 + In HUD announced that + +On line 3106: + starting in of the + GSEs’ purchases would need to + satisfy the low- + +On line 3108: + and moderate-income + goals. The targets would reach in + and in Given the + + dramatic growth in + the number of riskier loans + riginated in + + the market, the new + goals were closer to where the + market really + +On line 3110: + But, as Mudd noted, + "When became ultimately, + then you have to work + +On line 3110: + more attention, and + create a preference for + those loans."203 Targeted + +On line 3110: + specifically to + meet the targets), while always + a small share of the + +On line 3112: + rose in importance. + Mudd testified that by when + the housing market + +On line 3112: + Fannie Mae could no + longer balance its obligations + to shareholders with + +On line 3112: + demands: "There may have + been no way to satisfy + of the myriad + + demands for Fannie + Mae to support all manner + of projects [or] housing + + goals which were set above + the origination levels + in the marketplace."204 + +On line 3116: + combined size of the + GSEs rose steadily from trillion + in to trillion in + +On line 3116: + GSEs needed to serve + in order to fulfill the + affordable housing + +On line 3116: + were stretching to meet + the higher goals, according + to a number of + + GSE executives, + OFHEO officials, and market + observers. Yet all but + + two of the dozens of + current and former Fannie + Mae employees and + +On line 3118: + the subject told the + FCIC that reaching the goals was + not the primary + +On line 3118: + the GSEs’ purchases + of riskier mortgages and of + subprime and Alt-A non-GSE + +On line 3118: + to originators’ + demands, and responding to + shareholder demands + +On line 3118: + increase market share + and profits, in addition + to fulfilling the + +On line 3118: + meeting affordable + housing goals and providing + liquidity to + +On line 3120: + For example, Levin + told the FCIC that while Fannie, + to meet its housing + + goals, did purchase some + subprime mortgages and mortgage-backed + securities it + + would otherwise have + passed up, Fannie was driven + to "meet the market" + +On line 3120: + reverse declining + market share. On the other + hand, he said that most + +On line 3120: + would not have counted + toward the goals, so those were + purchased solely to + +On line 3120: + Similarly, Lund + told the FCIC that the desire + for market share was + +On line 3120: + Fannie’s strategy + in Housing goals had been a + factor, but not the + + primary one.207 And + Dallavecchia likewise told the FCIC + that Fannie increased + +On line 3120: + purchases of Alt-A + loans to regain relevance + in the market and + +On line 3122: + customer needs.208 Hempstead, + Fannie’s principal contact + with Countrywide, told + +On line 3122: + that while housing goals + were one reason for Fannie’s + strategy, the main + +On line 3122: + Fannie entered the + riskier mortgage market was + that those were the types + +On line 3122: + originated in + the primary market.209 If + Fannie wanted to + +On line 3122: + large quantities of + loans, the company would need + to buy riskier loans. + +On line 3122: + vice president of + multifamily lending, + said much the same thing, + +On line 3122: + also wanted to + see market share and returns + rise.210 Former Fannie + +On line 3124: + chairman Stephen Ashley + told the FCIC that the change in + strategy in and + +On line 3124: + was owed to a "mix + of reasons," including the + desire to regain + + market share and the + need to respond to pressures + from originators + +On line 3124: + as to pressures from + real estate industry + advocates to be + + more engaged in the + marketplace.211 To ensure an + adequate supply + +On line 3128: + in case the goals were + not met in the normal course + of business, Fannie + +On line 3128: + for originators + and brokers.212 In addition, + as explained by Mike + +On line 3128: + responsible for + the goals, Fannie set lower + fees on loans that met + +On line 3128: + it would not purchase + mortgages that fell outside its + predetermined risk + +On line 3128: + that Fannie did not + shift eligibility + or underwriting + +On line 3128: + instead directed + its resources to marketing + and promotional + +On line 3128: + partnership offices. + "The effort was really + in the outreach as + + opposed to reduced + or diminished or loosened + standards," Ashley told + +On line 3130: + testified that the + GSEs invested in subprime + and Alt-A mortgages in + +On line 3130: + to increase profits + and regain market share and + that any impact on + +On line 3130: + attributed the GSEs’ + change in strategy to their + drive for profit and + + market share, as well + as the need to meet housing + goals. Noting that the + +On line 3130: + housing goals increased + markedly in he said in an + FCIC interview that + + the "goals were just one + reason, certainly not the + exclusive reason" + + for the change.217 These views + were corroborated by + numerous other + +On line 3132: + from the agency.218 The + former HUD official Mike + Price told the FCIC that + + while the "GSEs cried bloody + murder forever" when it + came to the goals, they + +On line 3132: + contribution to + increasing homeownership. + In addition, Price + +On line 3134: + HUD officials told + the FCIC that the GSEs never + claimed that meeting the + +On line 3136: + in an unsafe or + unsound condition.219 Indeed, + the law allowed both + +On line 3136: + Mac to fall short of + meeting housing goals that were + "infeasible" or + +On line 3136: + companies’ safety + and soundness.220 And while the GSEs + often exceeded + +On line 3136: + goals, in some cases + those targets were adjusted + downward by HUD or, + +On line 3136: + were simply missed by + the GSEs.221 For example, on + December Mudd wrote + +On line 3136: + Mae believes that the + low- and moderate-income and + special affordable + +On line 3136: + anticipated + such a communication, + stating, "In the event + + we reach a viewpoint + that achieving the goals this year + is ‘infeasible,’ + +On line 3138: + how best to address + the matter with HUD and will + continue to keep + +On line 3138: + accordingly."223 In + fact, both Fannie and Freddie + appealed to HUD to + +On line 3140: + complied and allowed + the GSEs to fall short without + any consequences.224 The + + impact of the goals + At least until HUD set new + affordable housing + +On line 3142: + for the GSEs only + supplemented their routine + purchases with a + +On line 3142: + and non-GSE mortgage–backed + securities needed to + meet their requirements. + + The GSEs knew that they + might not earn as much on these + targeted goal loans + +On line 3142: + non-goal-qualifying + loans purchased in the usual + course of business; on + +On line 3142: + administrative + and other costs related + to the housing goals. + +On line 3144: + In June Freddie Mac + staff made a presentation + to the Business and + + Risk Committee of + the Board of Directors on + the costs of meeting + +On line 3146: + goals. From to the cost + of the targeted goal loans + was effectively + +On line 3146: + more challenging and + cost Freddie money in the + multifamily + +On line 3146: + after did meeting + the multifamily and + single-family + +On line 3146: + cost the GSE money. + Still, only about of all loans + purchased by Freddie + +On line 3146: + between and were bought + "specifically because they + contribute to the + +On line 3146: + loans did have higher + than average expected + default rates, although + +On line 3146: + fee to guarantee + them. From through Freddie’s costs of + complying with the + +On line 3146: + averaged million + annually. The costs of + complying with these + +On line 3146: + took into account + three components: expected + revenues, expected + +On line 3146: + and foregone revenues + (based on an assumption of + what they might have earned + + elsewhere). These costs were + only computed on the + narrow set of loans + +On line 3146: + to achieve the goals, as + opposed to goal-qualifying + loans purchased in the + +On line 3148: + earnings averaged + just under billion per year + from to In Fannie + +On line 3148: + McKinsey and Citigroup + to determine whether it would + be worthwhile to give + +On line 3148: + and put constraints on + business practices, including + its mission goals. The + + final report to + Fannie Mae’s top management, + called Project Phineas, found that + +On line 3148: + the explicit cost + of compliance with the goals + from to was close to + +On line 3148: + hard to discern a + fundamental marginal + cost to meeting the + + housing goals on the + single family business + side."227 The report came + +On line 3150: + greater difficulty + of meeting the goals in the + refinancing boom: + + the large numbers of + homeowners refinancing, + in particular + +On line 3150: + and upper income, + necessarily reduced + the percentage of + +On line 3152: + qualify for the + goals. In calculating these + costs, the consultants + +On line 3152: + difference between + fees charged on goal-qualifying + loans and the higher + + fees suggested by + Fannie’s own models. But this + cost was not unique to + +On line 3152: + qualifying loans. + Across its portfolio, Fannie + charged lower fees than + +On line 3152: + models computed + for goals loans as well as for + non-goals loans. As a + +On line 3152: + Fannie’s discount was + actually smaller for + many goal-qualifying + +On line 3154: + for the others from + to Facing more aggressive + goals in and Fannie + +On line 3154: + loans. These included + mortgages acquired under the + My Community + +On line 3154: + looser standards, and + manufactured housing loans. + For these loans, Fannie + +On line 3154: + opportunity + cost (foregone revenues based on + an assumption of + + what they might have earned + elsewhere) along with the so-called + cash flow cost, or the + + difference between + their expected losses and + expected revenue + +On line 3154: + these loans. For as the + market was peaking, Fannie + Mae estimated + +On line 3154: + cash flow cost of the + loans to be million and the + opportunity + +On line 3154: + of the targeted + goals loans million, compared to + net income that year + +On line 3154: + of billion—a figure + that includes returns on the + goal-qualifying loans + +On line 3154: + course of business.228 The + targeted goals loans amounted + to billion, or of + +On line 3154: + single-family + mortgage purchases in As + the markets tightened + +On line 3154: + the middle of the + opportunity cost for + that year was forecast + +On line 3156: + Looking back at how + the targeted affordable + portfolio performed + +On line 3156: + at Freddie Mac took + the analysis of the goals’ + costs one step further. + +On line 3156: + While the outstanding + billion of these targeted + affordable loans was + +On line 3156: + portfolio, these were + relatively high-risk loans + and were expected + +On line 3156: + to account for of + total projected losses. + In fact, as of late + +On line 3156: + had accounted for + only of losses—meaning + that they had performed + +On line 3156: + whole portfolio. The + company’s major losses + came from loans acquired + +On line 3156: + the normal course of + business. The presentation + noted that many of + +On line 3158: + perform adequate + due diligence on the mortgages + they purchased and at + +On line 3158: + Potential investors + were not fully informed or + were misled about the + +On line 3158: + some mortgage-related + securities. These problems + appear to have been + + significant. The + Securities and Exchange + Commission failed to + +On line 3158: + securities from + its review, and preempted + states from applying + +On line 3158: + law to them, thereby + failing in its core mission + to protect investors. + +On line 3160: + to recognize the + cataclysmic danger posed by + the housing bubble + + to the financial + system and refused to take + timely action to + +On line 3160: + believing that it + could contain the damage from + the bubble’s collapse. + +On line 3162: + standards and practices + created conditions that + were ripe for mortgage + +On line 3172: + THE MADNESS CONTENTS + CDO managers: "We are not a + rent-a-manager" + +On line 3176: + Credit default swaps: + "Dumb question"..............................................................190 Citigroup: "I + do not believe we + +On line 3180: + powerless"..................................................195 AIG: "I’m + not getting paid enough to stand + on these tracks" Merrill: + +On line 3182: + "Whatever it takes" + Regulators: "Are undue + concentrations of + +On line 3186: + developing1" Moody’s: + "It was all about revenue"....................................................................206 The + collateralized + +On line 3186: + could have sputtered to + a natural end by the + spring of Housing prices + +On line 3186: + started to slow down + its business of insuring + subprime-mortgage CDOs. + +On line 3186: + that Wall Street didn’t + need its golden goose any more. + Securities firms + + were starting to take + on a significant share + of the risks from their + +On line 3186: + deals, without AIG as + the ultimate bearer of + the risk of losses + +On line 3186: + "That just seemed kind of + odd, given everything we + had seen and what we + +On line 3186: + Gary Gorton, a Yale + finance professor who had + designed AIG’s model + + for analyzing + its CDO positions, told the + FCIC.1 The CDO machine + +On line 3190: + promoters of CDOs, + Citigroup, Merrill Lynch, and + UBS— apparently + + did not accept or + perhaps even understand the + risks inherent in + + the products they were + creating. More and more, the + senior tranches were + +On line 3190: + securities firms, + the mezzanine tranches were + bought by other CDOs, + +On line 3190: + equity tranches + were bought by hedge funds that were + often engaged in + +On line 3190: + made money when the + CDOs performed, but could also + make money if the + +On line 3190: + These factors helped keep + the mortgage market going + long after house prices + +On line 3192: + ultimately bring + many of them to the brink of + failure. The subprime + +On line 3192: + pioneer Lewis Ranieri + called the willing suspension + of prudent standards + +On line 3198: + madness." He told the + FCIC, "You had the breakdown of + the standards, because + +On line 3200: + the checks and balances + that normally would have stopped + them."2 Synthetic CDOs + +On line 3200: + opportunities + for bullish and bearish investors + to bet for and against + +On line 3200: + that depended on + it. Synthetic CDOs also + made it easier + + for investment banks + and CDO managers to create + CDOs more quickly. But + +On line 3202: + sets of customers, each + with different interests. + And managers sometimes + +On line 3202: + in selecting the + collateral—including + those who were betting + +On line 3202: + collateral, as + a high-profile case launched by + the Securities + +On line 3204: + would eventually + illustrate.3 Regulators + reacted weakly. + +On line 3204: + recognized that CDOs + and credit default swaps (CDS) + could actually + + concentrate rather than + diversify risk, but they + concluded that Wall + +On line 3204: + issued guidance in + late warning banks of the risks + of complex structured + +On line 3204: + securities and + CDOs, because they saw the risks + of those products as + +On line 3208: + straightforward and well + understood.4 Disaster was + fast approaching. CDO + +On line 3210: + During the "madness," + when everyone wanted a + piece of the action, + +On line 3210: + declined, as demand + for mortgage-backed securities + drove up prices, squeezing + +On line 3210: + they made on CDOs. At + the same time, new CDO managers + were entering the + +On line 3210: + CDO manager who + frequently worked with Merrill + Lynch, said the fees fell + +On line 3210: + compensation could + be maintained by creating + and managing more + + new product. More than + had been the case three or four + years earlier, in + +On line 3212: + were influenced by + the underwriters—the + securities firms + +On line 3212: + and marketed the + deals. An FCIC survey of CDO + managers confirmed this + + point.6 Sometimes managers + were given a portfolio + constructed by the + + securities firm; + the managers would then choose the + mortgage assets from + +On line 3214: + in the first place—also + influenced the selection + of assets in many + +On line 3216: + rent-a-manager, + we actually select + our collateral," + +On line 3216: + securities firms + often had particular + CDO managers with whom + +On line 3216: + CDOs underwritten + by Merrill frequently bought + tranches of other + +On line 3218: + CDOs. According to + market participants, CDOs + stimulated greater + +On line 3218: + the greater demand in + turn affected the standards + for originating + +On line 3220: + underlying those + securities.8 As standards + fell, at least one firm + + opted out: PIMCO, + one of the largest investment + unds in the country, + +On line 3222: + whose CDO management + unit was one of the nation’s + largest in Early in + +On line 3222: + it announced that it + would not manage any new deals, + in part because of + +On line 3222: + credit quality + of mortgage-backed securities. + "There is an awful + +On line 3222: + sector," Scott Simon, + a managing director + at PIMCO, told the + +On line 3222: + audience at an + industry conference in + "You either take the + +On line 3222: + don’t—we’re not going + to hurt accounts or damage + our reputation + +On line 3222: + were being applied + to new types of subprime and + AltA loans with little + +On line 3222: + performance data.9 + Not everyone agreed with this + viewpoint. "Managers who + + are sticking in this + business are doing it right," + Armand Pastine, the + + chief operating + officer at Maxim Group, + responded at that + +On line 3222: + "To suggest that CDO + managers would pull out of an + economically + + viable deal for moral + reasons—that’s a cop-out."10 As was + typical for the + +On line 3222: + during the crisis, + two of Maxim’s eight mortgage-backed + CDOs, Maxim High Grade + +On line 3222: + I and Maxim High + Grade CDO II, would default on + interest payments + + to investors—including + investors holding bonds that had + originally been + +On line 3222: + triple-A—and the other six + would be downgraded to junk + status, including + +On line 3224: + also changed the CDOs: + in and CDO managers were less + likely to put their + + own money into + their deals. Early in the decade, + investors had taken + +On line 3224: + managers’ investment + in the equity tranche of + their own CDOs to be + + an assurance of + quality, believing that + if the managers were + +On line 3224: + the risk of loss, they + would have an incentive to + pick collateral + +On line 3224: + lost force as the amount + of managers’ investment per + transaction declined + +On line 3224: + Capital, provides + a good illustration of + this trend. ACA held of + +On line 3226: + the equity in + the CDOs it originated + in and and of two + +On line 3226: + it originated + in between and of deals in + and between and of + +On line 3228: + And synthetic CDOs, + as we will see, had no fail-safe + at all with regard + +On line 3228: + managers’ incentives. + By the very nature of the + credit default swaps + + bundled into these + synthetics, customers on the + short side of the deal + +On line 3232: + credit default swap, + a complex instrument that + mimicked the timing + +On line 3232: + which these new swaps were + bundled were much easier + to issue and sell. + +On line 3234: + a second major + development, introduced + in January the + +On line 3234: + credit default swaps + on mortgage-backed securities. + Known as the ABX.HE, + + it was really + a series of indices, meant + to act as a sort + +On line 3234: + Jones Industrial + Average for the nonprime + mortgage market, and + +On line 3234: + popular way to + bet on the performance of + the market. Every + +On line 3234: + securities in + each of five ratings-based tranches: + AAA, AA, A, BBB, and + +On line 3236: + Investors who believed + that the bonds in any given + category would + + fall behind in their + payments could buy protection + through credit default + + swaps. As demand for + protection rose, the index + would fall. The index + +On line 3238: + the confidence of + the market. Synthetic CDOs + proliferated, + +On line 3238: + it was much quicker + and easier for managers + to assemble a + +On line 3238: + CDO out of mortgage-backed + securities. "The beauty + in a way of the + + synthetic deals is + you can look at the entire + universe, you don’t have + + to go and buy the + cash bonds," said Laura Schwartz of + ACA Capital.14 There + +On line 3238: + no warehousing costs + or associated risks. + And they tended to + +On line 3238: + estimated that + the equity tranche on a + synthetic CDO could + +On line 3238: + typically yield + about while the equity tranche + of a typical + +On line 3240: + cash CDO could pay An + important driver in the + growth of synthetic + +On line 3240: + credit default swaps + on mortgage-backed securities. + Greg Lippmann, a Deutsche + +On line 3242: + trader, told the FCIC + that he often brokered these + deals, matching the "shorts" + +On line 3242: + minimizing any + risk for his own bank. Lippmann + said that between and + +On line 3244: + he brokered deals for + at least and maybe as many as + hedge funds that wanted + +On line 3244: + mezzanine tranches + of mortgage-backed securities. + Meanwhile, on the long + +On line 3244: + our CDS purchases + were from UBS, Merrill, and Citibank, + because they were the + +On line 3244: + [synthetic] CDOs."16 In + many cases, they were buying + those positions from + + Lippmann to put them + into synthetic CDOs; as + it would turn out, the + +On line 3244: + would retain much of + the risk of those synthetic + CDOs by keeping the + + super-senior and triple-A + tranches, selling below-triple-A tranches + largely to other + +On line 3246: + selling equity + tranches to hedge funds. Issuance + of synthetic CDOs + +On line 3246: + from billion in to + billion just one year later. + (We include all CDOs + +On line 3246: + or more synthetic + collateral; again, unless + otherwise noted, + +On line 3246: + to CDOs that include + mortgage-backed securities.) Even + CDOs that were labeled + +On line 3246: + of billion in CDOs + were issued in including + those labeled as cash, + +On line 3246: + or synthetic; the + FCIC estimates that of the + collateral was + +On line 3248: + with in and in The + advent of synthetic CDOs + changed the incentives + +On line 3248: + CDO managers and hedge + fund investors. Once short investors + were involved, the CDO + +On line 3248: + types of investors with + opposing interests: those + who would benefit + +On line 3248: + who would benefit + if the mortgage borrowers + stopped making payments + +On line 3250: + to perform. Even the + incentives of long investors + became conflicted. + +On line 3250: + sophisticated + investors to place bets against the + housing market or + +On line 3250: + more complex trading + strategies. Investors, usually + hedge funds, often used + +On line 3250: + default swaps to take + offsetting positions in + different tranches + +On line 3250: + security; that + way, hey could make some money + as long as the CDOs + + performed, but they stood + to make more money if the + entire market crashed. + +On line 3250: + survey of more than + hedge funds encompassing over + trillion in assets + +On line 3250: + early found this to + be a common strategy + among medium-size hedge + +On line 3250: + funds: of all the CDOs + issued in the second half + of more than half of + +On line 3250: + was being used in + the mortgage-backed securities + market as well. The + +On line 3252: + the largest hedge funds held + billion in equity and + other lower-rated + +On line 3254: + more than offset by + billion in short positions.19 + These types of trades changed + +On line 3254: + traditionally + had the greatest incentive + to monitor the + + credit risk of an + underlying portfolio. + With the advent of + +On line 3256: + default swaps, it was + no longer clear who—if anyone—had + that incentive. For + +On line 3258: + Merrill Lynch’s billion + Norma CDO, issued in The + equity investor, + +On line 3258: + Capital, a hedge + fund, was executing a + common strategy + +On line 3258: + the correlation + trade—it bought the equity tranche + while shorting other + + tranches in Norma + and other CDOs. According + to court documents, + +On line 3258: + was also involved + in selecting assets for + Norma.20 Magnetar + +On line 3258: + this transaction and + NIR Capital Management, + the CDO manager, + +On line 3258: + additional fees.21 + Magnetar’s counsel told the + FCIC that the million + +On line 3258: + discount in the form + of a rebate on the price + of the equity + +On line 3258: + positions purchased + by Magnetar and not a + payment received in + +On line 3258: + for good or services.22 + Court documents indicate + that Magnetar was + +On line 3258: + collateral, and + that NIR abdicated its + asset selection + +On line 3258: + had executed + approximately million + in trades for Norma + +On line 3260: + colleagues, "Dumb question. + Is Magnetar allowed to + trade for NIR1"23 Merrill + +On line 3260: + failed to disclose that + Magnetar was paid million + or that Magnetar + +On line 3262: + position that would + benefit from losses.24 The + counsel for Merrill’s + + new owner, Bank of + America, explained to the + FCIC that it was a + + common industry + practice for "the equity + investor in a CDO, + +On line 3264: + input during the + collateral selection + process[;] however, the + +On line 3264: + The letter did not + specifically mention the + Norma CDO. Bank of + +On line 3264: + produce documents + related to this issue + requested by the + +On line 3266: + instruments inside + synthetic CDOs. In April the + SEC charged Goldman Sachs + +On line 3266: + Management, had picked + the underlying assets + in a CDO when in + +On line 3266: + a short investor, the + Paulson Co. hedge fund, had played + a "significant + +On line 3266: + Goldman’s marketing + materials for Abacus + 2007-AC1, one of Goldman’s + +On line 3270: + deals.26 Ira Wagner, + the head of Bear Stearns’s CDO Group + in told the FCIC that + + he rejected the + deal when approached by Paulson + representatives. + + When asked about Goldman’s + contention that Paulson’s picking the + collateral was + +On line 3270: + collateral was + disclosed and because Paulson + was not well-known at + +On line 3270: + time, Wagner called + the argument "ridiculous." He + said that the structure + + encouraged Paulson + to pick the worst assets. While + acknowledging the + +On line 3270: + every synthetic + deal necessarily had + long and short investors, + +On line 3270: + investors select the + referenced collateral + as a serious + +On line 3272: + and for that reason + declined to participate.27 + ACA executives + +On line 3272: + the FCIC they were not + initially aware that the short + investor was involved + +On line 3272: + the collateral. + CEO Alan Roseman said that he + first heard of Paulson’s role + + when he reviewed the + SEC’s complaint.28 Laura Schwartz, who + was responsible + +On line 3272: + the deal at ACA, said + she believed that Paulson’s firm was + the investor taking + +On line 3272: + tranche and would therefore + have an interest in the + deal performing well. + + She said she would not + have been surprised that Paulson + would also have had + + a short position, + because the correlation + trade was common in + +On line 3274: + added, "To be honest, + [at that time,] until the SEC + testimony I + +On line 3274: + Paulson was only + short."29 Paulson told the FCIC that + any synthetic CDO + +On line 3274: + in "a pool that both + a buyer and seller of + protection could agree + +On line 3274: + [synthetic] CDO has + a buyer and seller of + protection. So for + +On line 3274: + that they didn’t want + to structure a CDO because + someone was buying + +On line 3276: + then you wouldn’t do + any CDOs."30 In July Goldman + Sachs settled the case, + +On line 3278: + "acknowledge[d] that the + marketing materials + for the ABACUS 2007-AC1 + + transaction contained + incomplete information. + In particular, + + it was a mistake + for the Goldman marketing + materials to + +On line 3282: + that the reference + portfolio was ‘selected + by’ ACA Management + +On line 3282: + without disclosing + the role of Paulson Co. Inc. + in the portfolio + +On line 3286: + that Paulson’s economic + interests were adverse to + CDO investors."31 The new + +On line 3286: + opportunity + for bearish investors to bet + against the housing boom. + + Home prices in the hottest + markets in California + and Florida had + +On line 3286: + was hard for skeptics + to believe that their upward + trajectory could + + continue. And if + it did not, the landing would + not be a soft one. + + Some spoke out publicly. + Others bet the bubble would + burst. Betting against CDOs + +On line 3288: + in some cases, a + bet against the rating agencies + and their models. Jamie + +On line 3288: + Hockett, principals + at the small investment firm + Cornwall Capital, + +On line 3288: + FCIC that they had warned + the SEC in that the agencies + were dangerously + + overoptimistic in their + assessment of mortgage-backed CDOs. + Mai and Hockett saw + +On line 3288: + rating agencies as + "the root of the mess," because + their ratings removed + + the need for buyers + to study prices and perform due + diligence, even as "there + +On line 3290: + of gaming going + on."32 Shorting CDOs was "pretty + attractive" because + +On line 3290: + of Paulson Co. told + the FCIC. Paulson established + a fund in June that + +On line 3290: + focused only on + shorting BBB-rated tranches. By the + end of Paulson Co.’s + +On line 3290: + Opportunities + fund, set up less han a year + earlier to bet + +On line 3292: + exclusively against + the subprime housing market, + was up "Each MBS tranche + +On line 3292: + California, in + Florida, in New York, and + when you aggregate + +On line 3292: + same geographic + diversification. To + us, there was not much + +On line 3292: + research convinced him + that if home prices were to stop + appreciating, + +On line 3292: + securities would + be at risk for downgrades. Should + prices drop CDO losses + +On line 3294: + small number of the + underlying loans were to + go into fore - + + closure, the losses + would render virtually + all of the riskier + + BBB-rated tranches worthless. + "The whole system worked fine as + long as everyone + + could refinance," Steve + Eisman, the founder of a fund + within FrontPoint Partners, + +On line 3296: + told the FCIC. The minute + refinancing stopped, "losses + would explode. By about + +On line 3296: + low-doc. You were at + max underwriting weakness + at max housing prices. + + And so the system + imploded. Everyone was + so levered there was + +On line 3296: + no ability to + take any pain."34 On October + James Grant wrote in his + +On line 3298: + processes" in which + "Wall Street transforms BBB-minus-rated mortgages + into AAA-rated tranches + +On line 3298: + by creating CDOs. + He estimated that even + the triple-A tranches of + +On line 3298: + would experience + some losses if national + home prices were to fall + +On line 3298: + or less within two + years; and if prices were to fall + investors of tranches + +On line 3300: + AA- or below would + be completely wiped out.35 In + Eisman and others + + were already looking + for the best way to bet on + this disaster by + +On line 3300: + efficient. Eisman + realized that he could pick + what he considered + +On line 3300: + most vulnerable + tranches of the mortgage-backed bonds + and bet millions of + +On line 3302: + that’s what he did. By + the end of Eisman had put + millions of dollars + +On line 3302: + short positions on + credit default swaps. It was, + he was sure, just a + +On line 3302: + of time. "Everyone + really did believe that + things were going to + + be okay," Eisman said. + "[I] thought they were certifi-able + lunatics."36 Michael Burry, + + another short who + became well-known after the + crisis hit, was a + +On line 3304: + fund, Scion Capital, + in Northern California’s + Silicon Valley, + +On line 3304: + heart, because he had + invested in homebuilder stocks + in But the closer + + he looked, the more he + wondered about the financing + that supported this + +On line 3304: + Burry decided + that some of the newfangled + adjustable rate mortgages + + were "the most toxic + mortgages" created. He told + the FCIC, "I watched those + +On line 3304: + as they migrated + down the credit spectrum to + the subprime market. + +On line 3304: + had increased on the + back of virtually no + accompanying + +On line 3304: + in wages and incomes, + I came to the judgment that + in two years there will + +On line 3304: + on housing when those + two-year [adjustable rate mortgages] seek + refinancing."37 By + +On line 3304: + bonds of financial + companies in the housing + market, including + + Fannie Mae, Freddie + Mac, and AIG. Eisman, Cornwall, + Paulson, and Burry + +On line 3306: + not alone in shorting + the housing market. In fact, + on one side of tens + +On line 3306: + billions of dollars + worth of synthetic CDOs were + investors taking short + +On line 3306: + of credit default + swaps illustrate the impact + of derivatives + + in introducing + new risks and leverage into + the system. Although + +On line 3306: + investors profited + spectacularly from the + housing crisis, they + +On line 3306: + a single subprime + loan or bought an actual + mortgage. In other + +On line 3306: + they owned. Instead, they + merely made side bets on the + risks undertaken + + by others. Paulson + told the FCIC that his research + indicated that + + if home prices remained + flat, losses would wipe out the + BBB-rated tranches; meanwhile, + +On line 3308: + time he could purchase + default swap protection on + them very cheaply.38 On + +On line 3308: + eventually be + battered. Burry acknowledged + to the FCIC, "There is + +On line 3308: + argument to be + made that you shouldn’t allow + what I did." But the + + problem, he said, was + not the short positions he + was taking; it was + + the risks that others + were accepting. "When I did + the shorts, the whole time + +On line 3310: + I was putting on the + positions there were people + on the other side + +On line 3310: + just eating them up. + I think it’s a catastrophe + and I think it was + +On line 3312: + default swaps greased the + CDO machine in several + ways. First, they allowed + +On line 3312: + managers to create + synthetic and hybrid CDOs + more quickly than they + +On line 3312: + they enabled investors + in the CDOs (including the + originating banks, + + such as Citigroup + and Merrill) to transfer the + risk of default to + +On line 3312: + default swap (such as + AIG and other insurance + companies). Third, they + + made correlation + trading possible. As the + FCIC survey revealed, + +On line 3312: + hedge fund purchases + of equity and other + junior tranches of + +On line 3312: + were done as part of + complex trading strategies.40 As + a result, credit + +On line 3312: + swaps were critical + to facilitate demand + from hedge funds for the + +On line 3312: + junior tranches of + mortgage-backed securities and + CDOs. Finally, they + +On line 3314: + make bets for or against + the housing market without + putting up much cash. On + + the other hand, it + can be argued that credit + default swaps helped end + +On line 3314: + could more easily + buy mortgage exposure for + their CDOs through credit + +On line 3314: + actual mortgage-backed + securities, demand for + credit default swaps + +On line 3314: + reduced the need to + originate high-yield mortgages. + In addition, some + +On line 3314: + participants have + contended that without the + ability to short + +On line 3314: + market via credit + default swaps, the bubble would + have lasted longer. As + +On line 3314: + will see, the declines + in the ABX index in late + would be one of the + + first harbingers of + market turmoil. "Once [pessimists] + can, in effect, sell + + short via the CDS, prices + must reflect their views and not + just the views of the + +On line 3316: + John Geanakoplos, a + Yale economics professor + and a partner in + + the hedge fund Ellington + Capital Management, which + both invested in + + and managed CDOs, told + the FCIC.41 CITIGROUP: "I DO + NOT BELIEVE WE WERE + + POWERLESS" While the + hedge funds were betting against the + housing market in + +On line 3320: + and Citigroup’s CDO + desk was pushing more money + to the center of + +On line 3322: + paper issued by + Citigroup’s CDOs—the bank’s treasury + department had put + +On line 3322: + the practice. To keep + doing deals, the CDO desk had + to find another + +On line 3322: + for the super-senior + tranches of the CDOs it was + underwriting—or it + +On line 3322: + find a way to get + the company to support + the CDO production + +On line 3322: + another billion + in super-senior exposures, + most between early + +On line 3322: + and August which it + otherwise would have been able + to sell into the + +On line 3322: + loss.42 It was also + increasingly financing + securities that + +On line 3322: + its CDO warehouse—that + is, securities that were + waiting to be put + +On line 3324: + securities was + not what securities firms + did. The adage "We are + +On line 3326: + securities, not + buying or retaining them. + However, as the + +On line 3326: + banks competed in + the securities business + in the late 1990s and + +On line 3326: + new century, they + often touted the "balance + sheet" that they could make + +On line 3326: + support the sale of + new securities. In this + regard, Citigroup + +On line 3326: + trillion commercial + bank whose deposits were insured + by the FDIC. While its + +On line 3326: + did the same, few did + so as aggressively or, + ultimately, with + +On line 3328: + the super-senior and + triple-A tranches of most of the + CDOs it created. + +On line 3328: + credit protection + from a monoline insurance + company such as + + Ambac. Because these + hedges were in place, Citigroup + presumed that the risk + +On line 3330: + had been neutralized. + Citigroup reported these + tranches at values + + for which they could not + be sold, raising questions about + their accuracy + +On line 3332: + the accuracy + of reported earnings. "As + everybody in any + +On line 3332: + growing, that means you’re + not pricing it correctly," + Richard Bookstaber, who had + +On line 3332: + of risk management + at Citigroup in the late + 1990s, told the FCIC. But + +On line 3332: + on the books at these + prices improved the finances for + creating the deal. + +On line 3332: + of the CDO business + by mispricing," Bookstaber said.43 + The company would + +On line 3332: + begin writing the + securities down toward + the market’s real + +On line 3334: + treatment. As we saw + in an earlier chapter, + under the Recourse + +On line 3334: + of the attractions + of triple-A-rated securities was + that banks were required + +On line 3336: + than against lower-rated + securities. And if the + bank held those assets + +On line 3336: + trading account (as + opposed to holding them as + a long-term investment), + +On line 3338: + better capital + treatment under the Market + Risk Amendment. That rule + +On line 3338: + banks to use their own + models to determine how + much capital to + +On line 3338: + varied according + to how much market prices moved. + Citigroup judged that + +On line 3338: + for the super-senior + tranches of synthetic CDOs + it held for trading + +On line 3338: + zero, because the + prices didn’t move much. As a + result, Citigroup + +On line 3340: + some synthetic CDOs; + that is, it sold protection + to the CDO. If the + +On line 3340: + underperformed, the + short investors would begin to + get paid. Money to + + pay them would come first + from wiping out long investors + who had bought tranches + + that were below triple-A. + Then, if the short investors were + still owed money, Citibank + +On line 3342: + pay. For taking on + this risk, Citi typically + received about to in + +On line 3342: + a billion-dollar + transaction, it would earn an + annual fee of + +On line 3344: + securities that + went into CDOs during the + ramp-up period, + + which could be as long + as six or nine months, before + it packaged and sold + +On line 3344: + CDO. Typically, + Citigroup’s securities + unit would set up a + +On line 3344: + funding line for the + CDO manager. During the + ramp-up period, + +On line 3344: + securities would + pay interest; depending + on the terms of the + +On line 3344: + that interest would + either go exclusively + to Citigroup or + +On line 3344: + the manager. For + the CDO desk, this frequently + represented a + +On line 3348: + facility had + relatively attractive + yields—often to more + + than the typical + bank borrowing rate—and it + was not uncommon + +On line 3350: + earn to million in + interest on a single + transaction.44 Traders on + +On line 3350: + desk would get credit + for those revenues at bonus time. + But Citigroup would + + also be on the + hook for any losses incurred + on assets stuck in + + the warehouse. When the + financial crisis deepened, + many CDO transactions + +On line 3352: + investment banks were + forced to write down the value + of securities + +On line 3352: + their warehouses. The + result would be substantial + losses across Wall Street. + +On line 3352: + cases, to offload + assets underwriters placed + collateral from + +On line 3356: + warehouses into + other CDOs. A factor that + made firm-wide hedging + +On line 3356: + Citigroup could have + various and offsetting + exposures to the + +On line 3356: + was possible, even + likely, that the CDO desk would + structure a given + +On line 3356: + ran into trouble, + the CDO immediately + would have to pay the + +On line 3356: + the underlying + collateral; if the CDO + ran out of money + +On line 3356: + pay, it would have to + draw on the division that + bought the unfunded + +On line 3356: + November after + Citigroup had reported + substantial losses + +On line 3356: + its CDO portfolio, + regulators would note that + the company did + +On line 3356: + good understanding + of its firmwide CDO exposures: + "The nature, origin, + +On line 3356: + of CDO exposure + were surprising to many in + senior management + +On line 3356: + liquidity put + exposure was not well known. + In particular, + +On line 3358: + risk inherent in + CDO positions."45 Citigroup’s + willingness to use + + its balance sheet to + support the CDO business had + the desired effect. + +On line 3358: + included mortgage- + acked securities in their + collateral in + +On line 3358: + CDO underwriters, + including all types of CDOs, + Citigroup rose from + +On line 3360: + fourteenth place in to + second place in according + to FCIC analysis + +On line 3362: + good for Citigroup’s + investment bank was also + lucrative for its + +On line 3362: + bankers. Thomas Maheras, the + co-CEO of the investment bank + who said he spent less + +On line 3364: + than million in salary + and bonus compensation in + Co-head of Global + +On line 3364: + Randolph Barker made + about million in that same year. + Citigroup’s chief risk + +On line 3364: + made million.47 Others + were also well rewarded. + The co-heads of the + +On line 3364: + global CDO business, + Nestor Dominguez and Janice Warne, each + made about million in + +On line 3366: + despite Citigroup’s + eventual large losses, no + compensation was + +On line 3366: + clawed back under this + policy. The Corporate + Library, which rates firms’ + +On line 3366: + Citigroup a C. + In early the Corporate + Library would downgrade + +On line 3366: + D, "reflecting a + high degree of governance + risk." Among the issues + +On line 3368: + that were poorly aligned + with shareholder interests.49 + Where were Citigroup’s + +On line 3368: + while the company + piled up tens of billions of + dollars of risk in + +On line 3368: + business1 Citigroup + had a complex corporate + structure and, as a + +On line 3368: + directed, relied + on others to monitor + the most important + +On line 3368: + Comptroller of the + Currency (OCC) supervised + the largest bank subsidiary, + +On line 3368: + securities firm, + Citigroup Global Markets. + Moreover, Citigroup + +On line 3368: + on the CDO desk on + an intricate transaction + could interact with + +On line 3370: + specific concerns. + Unlike the Fed and OCC, which + had risk management + +On line 3370: + these exams to look + for general weaknesses + in risk management. + + Unlike safety and + soundness regulators, who + concentrated on + +On line 3370: + from failing, the SEC + always kept its focus on + protecting investors. + +On line 3370: + recent review of + Citigroup’s securities + arm preceding the + +On line 3370: + the examiners + completed their report in + June In that exam, + + they told the FCIC, they + saw nothing "earth shattering," + but they did note key + +On line 3370: + internal pricing + and valuation controls, + for example, and + + a willingness to + allow traders to exceed their + risk limits.50 Unlike + +On line 3374: + the Fed and OCC did + maintain a continuous + on-site presence. During + +On line 3374: + CDOs boomed, the OCC team + regularly criticized + the company for + + its weaknesses in + risk management, including + specific problems + +On line 3378: + CDO business. "Earnings + and profitability growth have + taken precedence over + + risk management and + internal control," the OCC + told the company + +On line 3378: + stated, "The findings + of this examination + are disappointing, + +On line 3378: + far in excess of + management’s underlying + infrastructure and + +On line 3378: + peers at the other + Federal Reserve banks was + critical of the + +On line 3378: + of Citigroup. The + review concluded that the + Fed’s on-site Citigroup + +On line 3378: + supervisory + issues that detract from the + team’s continuous + +On line 3378: + the level of the + staffing within the Citi team has + not kept pace with the + +On line 3378: + the institution + has realized."53 That the Fed’s + examination + + of Citigroup did + not raise the concerns expressed + that same year by the + + OCC may illustrate + these problems. Four years later, + the next peer review + +On line 3380: + in the New York Fed’s + oversight of Citigroup.54 In + April the Fed raised the + + holding company’s + supervisory rating + from the previous + +On line 3380: + "satisfactory."55 + It lifted the ban on new + mergers imposed the + + previous year in + response to Citigroup’s many + regulatory + + problems.56 The Fed and + OCC examiners concurred + that the company + +On line 3380: + made "substantial progress" + in implementing CEO Charles + Prince’s plan to overhaul + +On line 3380: + Reserve enforcement + actions related to the + execution of + +On line 3380: + structured transactions + and controls."57 The following + year, Citigroup’s board + +On line 3382: + in justifying + his compensation increase.58 + The OCC noted in + +On line 3382: + that the lifting of + supervisory constraints + in had been a key + + turning point. "After + regulatory restraints + against significant + + acquisitions were + lifted, Citigroup embarked + on an aggressive + +On line 3384: + wrote to Vikram Pandit, + Prince’s replacement, in early + "Additionally, + +On line 3384: + removal of formal + and informal agreements, the + previous focus + +On line 3384: + and compliance gave + way to business expansion + and profits." Meanwhile, + + risk managers granted + exceptions to limits, and + increased exposure + + limits, instead of + keeping business units in check + as they had told the + + regulators.59 Well + after Citigroup sustained + large losses on its + +On line 3384: + criticize the firm + for using its commercial + bank to support its + +On line 3384: + "Senior management + allowed business lines largely + un-challenged access to + +On line 3384: + to pursue revenue + growth," the Fed wrote in an April + letter to Pandit. + +On line 3384: + share across numerous + products, including leveraged + finance and structured + +On line 3384: + balance sheet for its + ‘originate to distribute’ + strategy. Senior + +On line 3384: + potential balance + sheet implications of this + strategy in the + +On line 3384: + negative impact + of earnings volatility of + these businesses on + + the firm’s capital + position."60 eithner + told the Commission + + that he and others + in leadership positions + could have done more to + +On line 3388: + "I do not believe + we were powerless."61 AIG: "I’M + NOT GETTING PAID ENOUGH + +On line 3392: + TRACKS" Unlike their peers + at Citigroup, some senior + executives at + +On line 3392: + Financial Products + subsidiary had figured out that + the company was + + taking on too much + risk. Nonetheless, they did not + do enough about it. Doubts + +On line 3392: + default swaps that they + were originating emerged in + among AIG Financial + +On line 3392: + including Andrew + Forster and Gene Park. Park told the + FCIC that he witnessed + + Financial Products + CEO Joseph Cassano berating + a salesman over the + +On line 3392: + volume of credit + default swaps being written + by AIG Financial + +On line 3392: + there was already some + high-level uneasiness with + these deals. Told by a + +On line 3392: + the "multisector" + CDOs on which AIG was selling + credit default swaps + +On line 3392: + consisted mainly + of mortgage-backed securities + with less than subprime + + and Alt-A mortgages, Park + asked Adam Budnick, another + AIG employee, for + +On line 3392: + checked and returned to + say, according to Park, "‘I + can’t believe it. You + +On line 3392: + or Reviewing the + portfolio—and thinking about a + friend who had received + +On line 3392: + his new home after + losing his job—Park said, "This is + horrendous business. + +On line 3394: + We should get out of + it."62 In July Park’s colleague + Andrew Forster sent an + +On line 3394: + both to Alan Frost, the + AIG salesman primarily + responsible for + +On line 3394: + company’s booming + credit default swap business, + and to Gorton, who + + had engineered the + formula to determine + how much risk AIG was + + taking on each CDS + it wrote. "We are taking on + a huge amount of sub + +On line 3394: + mortgage exposure + here," Forster wrote. "Everyone we + have talked to says they + +On line 3394: + worried about deals with + huge amounts [of high-risk mortgage] + exposure yet I + +On line 3394: + with [high-risk mortgage] + concentrations currently. + Are these really + +On line 3396: + same risk as other + deals1"63 Park and others studied + the issue for weeks, + +On line 3396: + whether it made sense for + AIG to continue to write + protection on the + +On line 3396: + mortgage markets. The + general view of others + was that some of the + +On line 3396: + "were structured to fail, + [but] that all the borrowers + would basically + +On line 3398: + bailed out as long as + real estate prices went up."64 + The AIG consultant + + Gorton recalled a + meeting that he and others + from AIG had with one + +On line 3398: + analyst was so + optimistic about the housing + market that they thought + + he was "out of his + mind" and "must be on drugs or + something."65 Speaking of + +On line 3398: + potential decline + in the housing market, Park + related to the + +On line 3398: + the risks as he and + some of his colleagues saw them, + saying, "We weren’t + +On line 3398: + paid enough money to + take that risk. I’m not going + to opine on whether there’s + +On line 3398: + train on its way. I + just know that I’m not getting + paid enough to stand on + +On line 3400: + tracks."66 By February + Park and others persuaded + Cassano and Frost to + +On line 3404: + an email to Cassano + on February Park wrote: Joe, + Below summarizes + +On line 3404: + message we plan on + delivering to dealers + later this week with + +On line 3404: + ABS super senior + business going forward. We + feel that the CDO of + +On line 3404: + has increasingly + become less diverse over the + last year or so and + + is currently at + a state where deals are almost + totally reliant + +On line 3404: + and the potential + for higher rates we are no + longer as comfortable + +On line 3404: + on we would like to + see significant change in + the composition + +On line 3408: + of our ongoing + due diligence we are not as + comfortable with the + +On line 3408: + layers (namely BBB + and single A tranches) of + this asset class. We + + realize that this + is likely to take us out + of the CDO of ABS + +On line 3408: + in developing + the CDO of ABS market to + hopefully become + +On line 3408: + a collateral + perspective. With that in mind, + we will be open to + +On line 3408: + asset classes to + these structures or increasing + allocations to + +On line 3412: + with indifference. + "The day that you [AIG] drop out, + we’re going to have + +On line 3412: + other people who + are going to replace you," + Park says he was told + +On line 3412: + an investment banker + at another firm.68 In any + event, counterparties + +On line 3412: + Products continued + to write the credit default + swaps. While the bearish + +On line 3412: + the issue from the + summer of onward, the team + continued to work + +On line 3412: + in the pipeline, even + after February Overall, + they completed deals + +On line 3414: + July 2006—one of them + on a CDO backed by subprime + assets.69 By June AIG + +On line 3414: + swaps on billion in + multisector CDOs, five times + the billion held at + +On line 3414: + Park asserted that + neither he nor most others + at AIG knew at the + +On line 3414: + of the referenced + securities declined.71 Park + said their concern was + + simply that AIG would + be on the hook if subprime + and Alt-A borrowers + + defaulted in large + numbers. Cassano, however, + told the FCIC that he + +On line 3414: + about the possible + alls,72 but AIG’s SEC filings to + investors for mentioned + +On line 3416: + only if AIG were + downgraded. Still, AIG never + hedged more than million + +On line 3418: + subprime exposure.73 + Some of AIG’s counterparties + not only used AIG’s + + swaps to hedge other + positions but also hedged + AIG’s ability to + +On line 3418: + its contracts. As we + will see later, Goldman Sachs + hedged aggressively + +On line 3418: + CDS protection on + AIG and by shorting other + securities and + +On line 3418: + to counterbalance + the risk that AIG would fail to + pay up on its swaps + +On line 3420: + pull down the value + of mortgage-backed securities. + MERRILL: "WHATEVER + +On line 3422: + When Dow Kim became + co-president of Merrill Lynch’s + Global Markets and + +On line 3422: + in July he was + instructed to boost revenue, + especially in + +On line 3422: + in which Merrill lagged + behind its competitors.74 Kim + focused on the CDO + +On line 3424: + an integral part + of their trading strategy, + CEO Stanley O’Neal told + +On line 3424: + from Credit Suisse, + where Ricciardi’s group had sold + more CDOs than anyone + + else.76 Ricciardi + came through, lifting Merrill’s CDO + business from fifteenth + +On line 3428: + in to second place + behind only Citigroup + in and Goldman in + +On line 3428: + February he left + the bank to become CEO of + Cohen Company, + +On line 3428: + asset management + business; at Cohen he would + manage several + +On line 3430: + left, Kim instructed + the rest of the team to do + "whatever it takes" + + not just to maintain + market share but also to + take over the number + +On line 3430: + former employees + said in a complaint filed against + Merrill Lynch.78 Kim told + +On line 3430: + conversations but + that after Ricciardi + left, Merrill was still + +On line 3430: + globally and that + he, Kim, wanted people to + know that Merrill was + +On line 3432: + commit its people, + resources, and balance sheet to + achieve that goal.79 It was + +On line 3432: + Despite the loss of + its rainmaker, Merrill swamped + the competition, + +On line 3432: + a total billion + in mortgage-related CDOs in + while the second-ranked firm, + +On line 3432: + Morgan Stanley, did + only billion, and earning + another first-place + +On line 3432: + on the strength of the + CDO machine Ricciardi + had built—a machine + +On line 3436: + more than billion in + fees between and To keep its + CDO business going, + + Merrill pursued three + strategies, all of which involved + repackaging riskier + +On line 3436: + more attractively + or buying its own products + when no one else would. + +On line 3436: + Citigroup, Merrill + increasingly retained for + its own portfolio + +On line 3436: + creating, mainly + the super-senior tranches, and + it increasingly + +On line 3436: + the hard-to-sell BBB-rated and + other low-rated tranches of + its CDOs into its + +On line 3436: + used the cash sitting + in its synthetic CDOs to + purchase other CDO + + tranches. It had long + been standard practice for CDO + underwriters to + +On line 3440: + mezzanine tranches + to other CDO managers. Even + in the early days + +On line 3440: + mezzanine tranches + of other CDOs; the rating + agencies signed off on + +On line 3440: + practice when rating + each deal. But reliance on them + became heavier as + +On line 3440: + from traditional + investors waned, as it had for + the riskier tranches + +On line 3440: + The market came to + call traditional investors + the "real money," + +On line 3440: + distinguish them from + CDO managers who were buying + tranches just to put + +On line 3442: + their CDOs. Between and + the typical amount a CDO + could include of the + +On line 3444: + of other CDOs and + still maintain its ratings grew + from to according + +On line 3444: + CDO manager Wing + Chau.82 According to data + compiled by the FCIC, + +On line 3444: + tranches from CDOs rose + from an average of of + the collateral + +On line 3444: + mortgage-backed CDOs in to + by CDO-squared deals—those engineered + primarily from + +On line 3446: + of other CDOs—grew from + marketwide in to in and in + Merrill created + +On line 3448: + them.83 Still, there are clear + signs that few "real money" + investors remained in + +On line 3450: + CDO market by late + Consider Merrill: for the + ABS CDOs that Merrill + +On line 3450: + created and sold + from the fourth quarter of through + August nearly of + +On line 3450: + tranches were purchased + by CDO managers.84 The pattern + was similar for + +On line 3452: + determined that of + the mezzanine tranches sold + by the CDOs managed + +On line 3452: + purchased tranches in + Merrill’s Norma CDO. In the + most extreme case found + +On line 3454: + CDO managers were the + only purchasers of Merrill’s + Neo CDO.86 Marketwide, in + +On line 3454: + CDOs took in about of + the A tranches, of the Aa + tranches, and of the + + Baa tranches issued + by other CDOs, as rated + by Moody’s. (Moody’s rating + +On line 3456: + Aaa is equivalent + to S&P’s AAA, Aa to AA, Baa + to BBB, and Ba to + +On line 3456: + those numbers were and + respectively.87 Merrill and + other investment + +On line 3458: + buy the harder-to-sell + portions of the old ones. As + SEC attorneys told + +On line 3458: + FCIC, heading into + there was a Streetwide gentle-man’s + agreement: you buy my + +On line 3460: + I’ll buy yours.88 Merrill + and its CDO managers were the + biggest buyers of + +On line 3462: + own products. Merrill + created and sold CDOs from + to All but of these—134 + + CDOs—sold at least one tranche + into another Merrill + CDO. In Merrill’s deals, + +On line 3464: + average, of the + collateral packed into + the CDOs consisted + +On line 3464: + tranches of other + CDOs that Merrill itself had + created and sold. + +On line 3464: + but not the highest: + for Citigroup, another + big player in this + +On line 3468: + Managers defended + the practice. Chau, who managed + CDOs created and + +On line 3468: + and later Harding + Advisory and had worked + with Ricciardi + +On line 3468: + the early days of + multisector CDOs, told the + FCIC that plain mortgage-backed + +On line 3468: + relation to their + returns, even as the real + estate market sagged. + +On line 3468: + securities, they + were in demand, and that is + why CDO managers packed + + their securities + with other CDOs.90 And Merrill + continued to push + +On line 3470: + CDO business despite + signals that the market was + weakening. As late + +On line 3470: + as the spring of when + AIG stopped insuring even the + very safest, super-senior + +On line 3470: + Merrill and others, + it did not reconsider + its strategy. Cut + +On line 3472: + off from AIG, which had + already insured billion of + its CDO bonds91—Merrill was AIG’s + +On line 3472: + switched to the monoline + insurance companies for + protection. In the + +On line 3472: + Merrill management + noticed that Citigroup, its + biggest competitor + +On line 3472: + of CDOs onto its + own balance sheet at razor-thin + margins, and thus in + +On line 3472: + returns for investors + in the BBB-rated and equity + tranches. In response, + +On line 3472: + continued to ramp + up its CDO warehouses and + inventory; and + + in an effort to + compete and get deals done, it + increasingly took + +On line 3474: + positions without + insurance from AIG or the + monolines.92 This would not + +On line 3476: + of Merrill’s all-in + wager on the mortgage and + CDO businesses. Even + +On line 3476: + the first-place trophy + in the mortgage-related CDO + business in it had + +On line 3476: + that Lehman Brothers and + Bear Stearns had pioneered, which + required having a + +On line 3476: + step of the mortgage + business—originating + mortgages, bundling these loans + +On line 3476: + securities, and + selling all of them on Wall + Street. In September + +On line 3476: + bubble had started + to deflate and delinquencies + had begun to rise, + + Merrill announced it + would acquire a subprime lender, + First Franklin Financial + +On line 3476: + analysts because + the market for subprime loans + was souring in a + +On line 3476: + Mortgage Solutions + Inc., for which it provided + a warehouse line of + +On line 3476: + provided a line + of credit to Mortgage Lenders + Network.94 Both of those + + companies would cease + operations soon after + the First Franklin purchase.95 + +On line 3478: + did Merrill cut back + in September when one of + its own analysts + +On line 3478: + report warning that + this subprime exposure could + lead to a sudden + +On line 3478: + assets could dry up + quickly.96 That assessment was + not in line with the + +On line 3478: + Merrill did nothing. + Finally, at the end of + Kim instructed his + + people to reduce + credit risk across the board.97 As + it would turn out, they + +On line 3482: + pipeline was too large. + REGULATORS: "ARE UNDUE + CONCENTRATIONS OF + +On line 3484: + DEVELOPING1 As + had happened when they faced the + question of guidance + +On line 3484: + the rapidly changing + structured finance market the + regulators failed + +On line 3484: + action. They missed a + crucial opportunity. + On January one + +On line 3484: + collapse of Enron, + the U.S. Senate Permanent + Subcommittee on + +On line 3484: + immediately + initiate a one-time, joint + review of banks and + +On line 3484: + U.S. company’s use + of deceptive accounting + in its financial + +On line 3484: + The subcommittee + recommended the agencies + issue joint guidance + +On line 3484: + products, transactions + and practices" by June Four years + later, the banking + +On line 3484: + Risk Complex Structured + Finance Activities," a + document that was + +On line 3486: + all of nine pages long.99 + In the intervening years, + from to the banking + +On line 3486: + SEC issued two draft + statements for public comment. + The draft, issued the + +On line 3486: + the OCC, Fed, and SEC + had brought enforcement actions + against Citigroup and + +On line 3486: + manipulate its + financial statements, focused + on the policies and + +On line 3486: + have for managing + the structured finance business.100 + The aim was to avoid + +On line 3486: + institutions to + look out for customers that, like + Enron, were trying + +On line 3486: + regulatory + or financial reporting + requirements, evade tax + +On line 3488: + guidance as too broad, + prescriptive, and burdensome. + Several said it + +On line 3488: + cover many structured + finance products that did not + pose significant + +On line 3488: + Another said that + it "would disrupt the market + for legitimate + +On line 3488: + market for [complex + structured finance transactions] + in the United States + +On line 3490: + Two years later, in + May the agencies issued an + abbreviated + + draft that reflected + a more "principles-based" approach, + and again requested + +On line 3490: + of the requirements + were very similar to those + that the OCC and Fed + +On line 3492: + and JP Morgan in + the enforcement actions.102 When + the regulators + +On line 3492: + issued the final + guidance in January the + industry was more + +On line 3494: + to participants + in the financial markets, + have well-established track records, + +On line 3494: + considered [complex + structured finance transactions] + for purposes of + +On line 3494: + had been added after + the regulators received + comments on the draft. + +On line 3496: + did take note of the + potential risks of CDOs and + credit default swaps. + +On line 3498: + Basel Committee on + Banking Supervision’s Joint + Forum, which includes + +On line 3498: + around the world, issued + a comprehensive report + on these products. The + +On line 3498: + focused on whether banks + and other firms involved in + the CDO and credit + + default swap business + understood the credit isk + they were taking. It + +On line 3498: + to make sure that they + understood the nature of + the rating agencies’ + +On line 3498: + especially for + CDOs. And it further advised + them to make sure that + +On line 3498: + and the financial + guarantors—would be good for + that protection if + + it was needed.104 The + regulators also said + they had researched in + +On line 3500: + depth, for the CDO and + derivatives market, the + question "Are undue + +On line 3500: + risk developing1" + Their answer: probably not. + The credit risk was + +On line 3500: + monoline financial + guarantors appeared to know + what they were doing.105 + +On line 3504: + [Joint Forum’s Working + Group on Risk Assessment and + Capital] has not + + found evidence of + ‘hidden concentrations’ of + credit risk. There are + +On line 3504: + model focuses + on taking on credit risk. + Most important among + +On line 3504: + monoline financial + guarantors. Other market + participants seem + + to be fully aware + of the nature of these firms. + In the case of the + +On line 3504: + been a primary + business activity and + they have invested + +On line 3504: + in obtaining the + relevant expertise. While + obviously this + +On line 3504: + to experience + unanticipated problems + or to misjudge the + +On line 3504: + the catastrophic + or macroeconomic level. + It is also clear + +On line 3504: + are subjected to + regulatory, rating + agency, and market + +On line 3506: + learned from earlier + flare-ups in the CDO sector: "The + Working Group believes + +On line 3506: + it is important + for investors in CDOs to seek + to develop a + + sound understanding + of the credit risks involved + and not to rely + + solely on rating + agency assessments. In many + respects, the losses + +On line 3506: + CDOs have probably + been salutary in highlighting + the potential risks + +On line 3510: + MOODY’S: "IT WAS ALL ABOUT + REVENUE" Like other market + participants, Moody’s + +On line 3510: + the three dominant + rating agencies, was swept up + in the frenzy of + +On line 3510: + products market. The + tranching structure of mortgage-backed + securities and + +On line 3510: + guidelines set by the + agencies; without their models + and their generous + +On line 3510: + of triple-A ratings, there + would have been little investor + interest and few + +On line 3510: + the dollar value + of that business increased from + million to million; + +On line 3510: + of staff rating these + deals doubled. But over the same + period, while the + +On line 3510: + increased sevenfold, + staffing increased only From to + annual revenue + +On line 3512: + tied to CDOs grew from + million to million.108 When Moody’s + Corporation went + +On line 3512: + the investor Warren + Buffett’s Berkshire Hathaway held + of the company. + +On line 3512: + repurchases by + Moody’s Corporation, Berkshire + Hathaway’s holdings of + +On line 3514: + increased to over by + As of Berkshire Hathaway and + three other investors + +On line 3514: + combined of Moody’s. When + asked whether he was satisfied + with the internal + +On line 3514: + responded to the + FCIC that he knew nothing about + the management of + + Moody’s. "I had no idea. + I’d never been at Moody’s, I + don’t know where they are + +On line 3514: + that he invested + in the company because + the rating agency + +On line 3516: + and "the single-most + important decision in + evaluating a + +On line 3518: + pricing power."110 Many + former employees said that + after the public + +On line 3518: + culture changed—it went + "from [a culture] resembling + a university + +On line 3518: + department to one + which values revenues at all + costs," according to + +On line 3518: + also identified + a new focus on market + share directed by + +On line 3518: + Moody’s Investors Service + Brian Clarkson. Clarkson had + joined Moody’s in as a + +On line 3518: + co-chief operating + officer of the rating + agency in and then + +On line 3518: + Clarkson: "My kind of + working hypothesis was + that [former chairman + +On line 3518: + CEO] John Rutherford was + thinking, ‘I want to remake + the culture of this + +On line 3518: + to make that happen, + and he was successful in + that regard. And that + +On line 3518: + why Brian Clarkson’s + rise was so meteoric: he + was the enforcer who + +On line 3518: + culture to have more + focus on market share."113 The + former managing + +On line 3518: + responsible for + assembling an internal + history of Moody’s, + +On line 3518: + main problem was that + the firm became so focused, + particularly + + the structured area, on + revenues, on market share, and + the ambitions of + +On line 3518: + they willingly looked + the other way, traded the + firm’s reputation + + for short-term profits."114 + Moody’s Corporation Chairman + and CEO Raymond McDaniel + + did not agree with this + assessment, telling the FCIC that + he didn’t see "any + +On line 3520: + spin-off.115 Clarkson also + disputed this version of + events, explaining that + +On line 3520: + share was important + to Moody’s well before it was + an independent + +On line 3520: + company. "[The idea + that before Moody’s] was spun off + from Dun Bradstreet, it + +On line 3520: + of sleepy, academic + kind of company that was + in an ivory tower + +On line 3520: + explained. "I think [the + ivory tower] was really + a misnomer. I think + +On line 3522: + business."116 Clarkson and + McDaniel also adamantly disagreed + with the perception + +On line 3522: + concerns about market + share trumped ratings quality. + Clarkson told the FCIC + + that it was fine for + Moody’s to lose transactions if + it was for the "right + +On line 3522: + reason or it was + a credit reason, there’s not + a lot you can do + +On line 3522: + deal because you’re not + communicating, you’re not + being transparent, + +On line 3522: + the phone, that could be + problematic."117 McDaniel cited + unforeseen market + + conditions as the + reason that the models did + not accurately + +On line 3522: + credit uality.118 + He testified to the FCIC, + "We believed that our + + ratings were our best + opinion at the time that we + assigned them. As we + +On line 3522: + new information + and were able to update our + judgments based on the + +On line 3522: + information and + the trends we were seeing in + the housing market, + +On line 3524: + made what I think are + appropriate changes to our + ratings."119 Nonetheless, + +On line 3524: + did not seem to have + the same enthusiasm for + compliance as he + + did for market share + and profit, according to + those who worked with him. + + Scott McCleskey, a former + chief compliance officer + at Moody’s, recounted + + a story to the + FCIC about an evening when he and + Clarkson were dining + +On line 3524: + board of directors + after the company had + announced strong earnings, + +On line 3524: + of rating mortgage-backed + securities and CDOs. "So + Brian Clarkson comes + +On line 3524: + front of everybody + at the table, including + board members, and says + + literally, ‘How + much revenue did Compliance + bring in this quarter1 + +On line 3526: + Nothing. Nothing.’ For + him to say that in front of + the board, that’s just so + +On line 3526: + telling of how he felt + that he was bulletproof. For + him, it was all about + +On line 3526: + Clarkson told the FCIC + that he didn’t remember + this conversation + +On line 3528: + employees, Clarkson’s + management style left little + room for discussion + +On line 3528: + referred to Clarkson + as the "dictator" of Moody’s + and said that if he + +On line 3528: + employee to do + something, "either you comply + with his request or + +On line 3528: + for another job."122 + "When I joined Moody’s in late an + analyst’s worst fear + +On line 3528: + we would contribute + to the assignment of a + rating that was wrong," + +On line 3528: + former senior vice + president, testified to + the FCIC. "When I left + + Moody’s, an analyst’s + worst fear was that he would do + something, or she, that + + would allow him or + her to be singled out for + jeopardizing Moody’s + + market share."123 Clarkson + denied having a "forceful" + management style, and + + his supervisor, + Raymond McDaniel, told the FCIC that + Clarkson was a "good + + manager."124 Former + team managing director + Gary Witt recalled that + +On line 3530: + received a monthly + email from Clarkson "that outlined + basically my + +On line 3530: + market share in the + areas that I was in charge + of. I believe it + +On line 3530: + the deals that we did, + and then it would list the deals + like S&P and/or Fitch + + did that we didn’t + do that was in my area. And + at times, I would have + +On line 3530: + a written report + about—you know, look into what + was it about that deal, + + why did we not rate + it. So, you know, it was clear + that market share was + + important to him." + Witt acknowledged the pressures + that he felt as a + + manager: "When I + was an analyst, I just + thought about getting the + +On line 3530: + deals right. Once I [was + promoted to managing + director and] had + +On line 3530: + to meet, I had salaries + to pay, I started thinking + bigger picture. I + +On line 3530: + realizing, yes, + we do have shareholders and, + yes, they deserved to + +On line 3530: + money. We need to + get the ratings right first, that’s + the most important + +On line 3532: + thing; but you do have + to think about market share."125 Even + as far back as a + +On line 3532: + share was evident + in employee performance + evaluations. In + +On line 3532: + subordinates that + listed analysts and the + number and dollar + + volume of deals each + had "rated" or "NOT rated." + Clarkson’s instructions: + +On line 3532: + using this in PE’s + [performance evaluations] + and to give people + + a heads up on where + they stand relative to their + peers."126 Team managing + +On line 3532: + deals, received a base + salary, cash bonus, and stock options. + Their performance goals + + generally fell + into the categories of + market coverage, + +On line 3532: + and development + of analytical tools, + only one of which + + was impossible + to measure in real time + as compensation + + was being awarded: + ratings quality. It might + take years for the poor + + quality of a + rating to become clear as + the rated asset + +On line 3534: + failed to perform as + expected. In January + a derivatives + +On line 3534: + manager listed + his most important achievements + in a performance + +On line 3534: + the list: "Protected + our market share in the CDO + corporate cash flow + +On line 3536: + we missed only one + CLO [collateralized loan + obligation] from BofA + +On line 3538: + because of it’s [sic] + bizarre structure."127 More evidence + of Moody’s emphasis + + on market share was + provided by an email that + circulated in + +On line 3538: + of in the midst of + significant downgrades in + the structured finance + +On line 3538: + Yoshizawa asked her team’s + managing directors to + explain a market + +On line 3540: + from to Despite this + apparent emphasis on + market share, Clarkson + +On line 3540: + McDaniel, the chairman and + CEO of Moody’s Corporation, + elaborated: "I + + disagree that there was + a drive for market share. We + pay attention to + +On line 3540: + in the market. But + ratings quality, getting + the ratings to the + +On line 3542: + status, is paramount."130 + Whatever McDaniel’s or Clarkson’s + intended message, + +On line 3542: + market share. Former + team managing director + Witt recalled that the + + "smoking gun" moment + of his employment at Moody’s + occurred during a + +On line 3542: + "town hall" meeting in + the third quarter of with Moody’s + management and its + +On line 3542: + a presentation + about Moody’s financial outlook + for the year ahead, one + +On line 3542: + responded: "I was + interested, Ray, to hear + your belief that the + +On line 3542: + thing in the minds of + people in this room is the + financial outlook + +On line 3542: + the remainder of + the year. [M]y thinking is there’s + a much greater concern + +On line 3542: + franchise." He added, "I + think that the greater anxiety + being felt by the + +On line 3542: + people in this room + and by the analysts is + what’s going on with + +On line 3542: + ratings and what the + outlook is[,] specifically + the severe ratings + +On line 3542: + we’re dealing with and + uncertainty about what’s ahead + on that, the ratings + +On line 3542: + reputation was + just being absolutely + lacer-ated; and that + +On line 3542: + are standing here, and + they’re not even addressing—they’re + acting like it’s not + +On line 3542: + even happening, even + now that it’s already happened. + [T]hat just made it so + +On line 3542: + clear to me that the + balance was far too much on + the side of short-term + +On line 3544: + memorandum from + October sent to McDaniel, in + a section titled + +On line 3544: + Interest: Market + Share," Chief Credit Officer + Andrew Kimball xplained + + that "Moody’s has erected + safeguards to keep teams from too + easily solving + +On line 3544: + market share problem + by lowering standards." But + he observed that these + + protections were far + from fail-safe, as he detailed in + two area. First, "Ratings + +On line 3544: + are susceptible + to market share objectives)." + Second, "Methodologies + +On line 3546: + latitude within + those boundaries to register + market influence.)"134 + + Moreover, the pressure + for market share, combined with + complacency, may + +On line 3548: + Moody’s from creating + new models or updating + its assumptions, as + +On line 3548: + their competence and + the adequacy of their + procedures rather than + +On line 3548: + a run of good luck. + [O]ur years of success rating + RMBS [residential + +On line 3548: + merely fine-tune the + existing system—to make + it more efficient, + +On line 3550: + in fact, it often + makes success less certain."135 If + an issuer didn’t + +On line 3550: + a Moody’s rating on + a particular deal, it + might get a better + +On line 3550: + ratings agency. The + agencies were compensated + only for rated + +On line 3550: + effect, only for + the deals for which their ratings + were accepted by + +On line 3552: + from two directions: + in-house insistence on + increasing market + +On line 3552: + from the issuers and + investment bankers, who pushed for + better ratings with + +On line 3554: + Michalek, a former Moody’s + vice president and senior + credit officer, + +On line 3554: + to the FCIC, "The threat + of losing business to a + competitor, even if + +On line 3554: + the balance away from + an independent arbiter + of risk towards a + +On line 3554: + transfer."137 Witt agreed. When + asked if the investment banks + frequently threatened + +On line 3554: + they didn’t get their + desired rating, Witt replied, "Oh + God, are you kidding1 + + All the time. I mean, + that’s routine. I mean, they would + threaten you all of + +On line 3554: + the time. It’s like, ‘Well, + next time, we’re just going to + go with Fitch and S&P.’"138 + + Clarkson affirmed that + "it wouldn’t surprise me to + hear people say that" + +On line 3556: + employees.139 Former + managing director Fons + suggested that Moody’s + +On line 3556: + complaisant when it should + have been principled: "[Moody’s] knew + that they were being + + bullied into cav-ing + in to bank pressure from the + investment banks and + +On line 3558: + originators of + these things. Moody’s allow[ed] itself + to be bullied. And, + +On line 3558: + they willingly played + the game. They could have stood up + and said, ‘I’m sorry, + +On line 3558: + not—we’re not going to + sign off on this. We’re going + to protect investors. + +On line 3558: + to stop—you know, we’re + going to try to protect + our reputation. + + We’re not going to + rate these CDOs, we’re not going + to rate these subprime + +On line 3560: + in his October + memorandum: Ideally, + competition would + + be primarily + on the basis of ratings + quality, with a + +On line 3564: + three competitive + factors, rating quality + is proving the least + +On line 3564: + given the long tail + in measuring performance. + The real problem + +On line 3564: + not that the market + does underweights [sic] ratings + quality but rather + +On line 3564: + by awarding rating + mandates based on the lowest + credit enhancement + +On line 3564: + the highest rating. + Unchecked, competition on this + basis can place the + +On line 3564: + at risk. It turns out + that ratings quality has + surprisingly few + +On line 3564: + high ratings; investors + don’t want rating downgrades; and + bankers game the rating + +On line 3566: + few extra basis + points on execution.141 Moody’s + employees told the + + FCIC that one tactic + used by the investment bankers + to apply subtle + +On line 3566: + was to submit a + deal for a rating within + a very tight time frame. + +On line 3566: + who oversaw ratings + on CDOs, recalled the case of + a particular + +On line 3566: + the trouble on this + deal was, and this is crucial + about the market share, + + was that the banker gave + us hardly any notice and + any documents and + +On line 3566: + time to analyze + this deal. Because bankers knew that + we could not say no + + to a deal, could not + walk away from the deal because + of a market share, + + they took advantage + of that."142 For this CDO deal, the + bankers allowed only + + three or four days for + review and final judgment. + Kolchinsky emailed Yoshizawa + +On line 3568: + "egregiously pushed our + time limits (and analysts)."143 + Before the frothy days + + of the peak of the + housing boom, an agency took + six weeks or even two + +On line 3570: + a CDO.144 By Kolchinsky + described a very different + environment in + + the CDO group: "Bankers were + pushing more aggressively, + so that it became + +On line 3572: + quiet little group + to more of a machine."145 In + Moody’s gave triple-A ratings + +On line 3574: + securities each + and every working day.146 Such + pressure can be seen + +On line 3574: + email to Yoshizawa from + a managing director + in synthetic CDO + +On line 3574: + "I’m going to have + a major political + problem if we can’t + + make this [deal rating] + short and sweet because, even though + I always explain + +On line 3574: + investors that closing + is subject to Moody’s timelines, + they often choose not + +On line 3578: + ‘pitched’ by bankers, issuers, + investors—all with reasonable + arguments—whose views can + +On line 3578: + sometimes improving + it, other times degrading + it (we ‘drink the kool-aid’). + +On line 3578: + with strong internal + emphasis on market share + margin focus, this + +On line 3582: + ratings quality."148 + The SEC investigated + the rating agencies’ + +On line 3582: + in reporting its + findings to Moody’s in July + The SEC criticized + + Moody’s for, among other + things, failing to verify + the accuracy + +On line 3582: + leaving that work to + due diligence firms and other + parties; failing to + +On line 3582: + documentation + about how most deals were rated; + allowing ratings + +On line 3582: + to be compromised + by the complexity of + CDO deals; not hiring + +On line 3584: + pushing ratings out + the door with insufficient + review; failing to + +On line 3584: + its rating process for + mortgage-backed securities and + CDOs; and allowing + +On line 3586: + of interest to + affect rating decisions.149 + So matters stood in + +On line 3586: + the machine that had + been humming so smoothly and + so lucratively + +On line 3588: + seized up entirely. + The Commission concludes that + the credit rating + + agencies abysmally failed + in their central mission to + provide quality + +On line 3588: + securities for + the benefit of investors. + They did not heed many + +On line 3588: + housing and mortgage + sector. Moody’s, the Commission’s + case study in this area, + +On line 3588: + The business model + under which firms issuing + securities paid + +On line 3588: + the quality and + integrity of those ratings; + the rating agencies + + placed market share and + profit considerations + above the quality + +On line 3590: + the leveling off + and subsequent decline of + the housing market + +On line 3590: + collateralized + debt obligations (CDOs), CDOs squared, + and synthetic CDOs + +On line 3590: + unabated, greatly + expanding the exposure + to losses when the + +On line 3590: + exacerbating + the impact of the collapse + on the financial + +On line 3592: + fueled the market + for synthetic CDOs to bet + on the future of + +On line 3592: + synthetic products + had potential conflicts in + trying to serve the + +On line 3592: + of customers who were + betting mortgage borrowers + would continue to + + make their payments and + of customers who were betting + the housing market + + would collapse. There were + also potential conflicts + for underwriters + +On line 3594: + securities to + the extent they shorted the + products for their own + +On line 3604: + outside of their roles + as market makers. THE BUST + CONTENTS Delinquencies: + +On line 3610: + before"....................................................................221 CDOs: "Climbing + the wall of subprime worry"..................................................223 + Legal remedies: "On + + the basis of the + information"..............................................224 Losses: "Who + owns residential + +On line 3614: + What happens when a + bubble bursts1 In early it + became obvious + +On line 3614: + falling in regions + that had once boomed, that mortgage + originators were + +On line 3614: + and that more and more + families, especially + those with subprime and + +On line 3616: + unable to make their + mortgage payments. What was not + immediately + +On line 3616: + the housing crisis + would affect the financial + system that had helped + +On line 3616: + bubble. Were all those + mortgage-backed securities and + collateralized + +On line 3616: + on the balance sheets + of the world’s largest financial + institutions1 "The + +On line 3616: + concerns were just that + if people couldn’t value + the assets, then that + +On line 3616: + created questions + about the solvency of the + firms," William C. Dudley, + + now president of + the Federal Reserve Bank + of New York, told the + +On line 3618: + banking system were + supposed to distribute risk + efficiently among + +On line 3620: + would prove to be wrong. + Much of the risk from mortgage-backed + securities had + + actually been + taken by a small group of + systemically + +On line 3620: + with outsized holdings + of, or exposure to, the + super-senior and triple-A + +On line 3620: + CDOs. These companies + would ultimately bear great + losses, even though those + +On line 3624: + agencies to downgrade + first mortgage-backed securities, + then CDOs. Alarmed investors + + sent prices plummeting. + Hedge funds faced with margin calls + from their repo lenders + +On line 3624: + to sell at distressed + prices; many would shut down. Banks wrote + down the value of + +On line 3626: + their holdings by tens + of billions of dollars. The + summer of also + + saw a near halt in + many securitization + markets, including + +On line 3626: + the second quarter + of (already down from prior + quarters). That figure + +On line 3626: + to billion in the + third quarter and to only + billion in the fourth + +On line 3626: + issuance topped billion + in the second quarter, but + fell to billion in + +On line 3626: + of Once-booming + markets were now gone—only + billion in subprime + +On line 3628: + in the first half of + and almost none after that.2 + CDOs followed suit. From + +On line 3630: + a high of more than + billion in the first quarter + of worldwide issuance + +On line 3630: + securities as + collateral plummeted + to billion in the + +On line 3630: + third quarter of and + only billion in the fourth + quarter. And as the + +On line 3630: + a halt, investors no + longer trusted other structured + products.3 Over billion + +On line 3630: + loan obligations (CLOs), + or securitized leveraged + loans, were issued in + +On line 3630: + only billion were + issued in The issuance of + commercial real + +On line 3630: + estate mortgage–backed + securities plummeted + from billion in to + +On line 3632: + held up during the + turmoil in eventually + suffered in as the + +On line 3632: + small business loans, and + equipment leases all nearly + ceased in the third and + +On line 3636: + THE HOUSING MARKET" + Home prices rose nationally + in their third year of + +On line 3636: + double-digit growth. But + by the spring of as the sales + pace slowed, the number + + of months it would take + to sell off all the homes on + the market rose to + +On line 3638: + its highest level + in years. Nationwide, home prices + peaked in April Members + +On line 3638: + Reserve’s Federal + Open Market Committee (FOMC) + discussed housing prices + +On line 3638: + Chairman Ben Bernanke and + other members predicted + a decline in home + +On line 3638: + but were uncertain + whether the decline would be slow + or fast. Bernanke believed + + some correction in + the housing market would be + healthy and that the goal + +On line 3638: + the FOMC should be to + ensure the correction did + not overly affect + +On line 3640: + Economy.com, a + business unit separate from + Moody’s Investors Service, + + issued a report + authored by Chief Economist + Mark Zandi titled + +On line 3640: + The Outlook for the + U.S. Residential Real + Estate Market." He + +On line 3642: + to the following + conclusion: Nearly of the + nation’s metro areas + +On line 3642: + crash in house prices; a + double-digit peak-to-trough decline + in house prices. These sharp + +On line 3642: + expected along the + Southwest coast of Florida, + in the metro areas + +On line 3642: + and Nevada, in a + number of California + areas, throughout the + + broad Washington, D.C. + area, and in and around Detroit. + Many more metro areas + +On line 3642: + to experience + only house-price corrections + in which peak-to-trough price + +On line 3642: + declines remain in + the single digits. It is + important to note + +On line 3644: + various markets + are expected to extend + into and even With + +On line 3644: + nation’s housing stock + experiencing or about + to experience + +On line 3644: + declines, national + house prices are also set to + decline. Indeed, odds + +On line 3646: + Association + of Realtors announced that + the number of sales + +On line 3646: + of existing homes + had experienced the sharpest + fall in years. That year, + +On line 3648: + prices declined In they + would drop a stunning Overall, + by the end of prices + +On line 3648: + peak in Some cities saw + a particularly large + drop: in Las Vegas, + +On line 3648: + as of August home + prices were down from their peak. And + areas that never + +On line 3648: + have experienced + losses as well: home prices in + Denver have fallen + +On line 3650: + since their peak. In some + areas, home prices started to + fall as early as + +On line 3650: + late For example, + in Ocean City, New Jersey, where + many properties are + +On line 3650: + vacation homes, home + prices had risen since they topped out + in December and + +On line 3650: + in the first half of + By mid-2010, they would be% below + their peak. Prices topped out + +On line 3650: + in Sacramento in + October and are today + down nearly In most + +On line 3650: + for a bit longer. For + instance, in Tucson, Arizona, + prices kept increasing + +On line 3650: + much of climbing from + to their high point in August + and then fell only + +On line 3652: + by the end of the + year.8 One of the first signs of + the housing crash was + +On line 3652: + borrowers’ being + or more days delinquent within + the first year. Figures + +On line 3652: + provided to the + FCIC show that by the summer + of of loans less than + +On line 3652: + a year old were in + default. The figure would peak + in late at well above + +On line 3654: + out by borrowers + who never made a single + payment— went above of + +On line 3654: + early Responding + to questions about that data, + CoreLogic Chief Economist + +On line 3654: + payment default rate + "certainly correlates with + the increase in the + +On line 3654: + shares and the turn of + the housing market and the + sensitivity + +On line 3656: + loan products."10 Mortgages + in serious delinquency, + defined as those or + +On line 3656: + days past due or in + foreclosure, had hovered around + during the early + +On line 3658: + part of the decade, jumped + in and kept climbing. By the + end of of mortgage + +On line 3658: + By comparison, + serious delinquencies peaked + at in following + +On line 3660: + the country that had + experienced the biggest + housing booms. In the + +On line 3660: + Arizona, Nevada, and + Florida—serious delinquency + rose to in mid-2007 and + +On line 3660: + late double the rate + in other areas of the + country (see figure + +On line 3662: + (see figure Subprime + adjustable-rate mortgages began to + show increases in + +On line 3662: + in early even as + house prices were peaking; the rate + rose rapidly to in + +On line 3662: + late the delinquency + rate for subprime ARMs was Prime + ARMs did not weaken + +On line 3662: + at about the same time + as subprime fixed-rate mortgages. Prime + fixed-rate mortgages, which have + +On line 3662: + showed a slow increase + in serious delinquency + that coincided + +On line 3664: + of the recession + and of unemployment in + The FCIC undertook + +On line 3664: + of mortgages purchased + or guaranteed by the GSEs, + those securitized + +On line 3664: + of each year from through + The data contained mortgages + in four groups—loans that + +On line 3664: + subprime by issuers + (labeled SUB), loans sold into + private label Alt-A + +On line 3664: + either purchased or + guaranteed by the GSEs (GSE), + and loans guaranteed + +On line 3664: + group, in addition + to the more traditional + conforming GSE loans, + +On line 3664: + mortgages that the GSEs + identified as subprime and + Alt-A loans owing to + +On line 3666: + characteristics, + as discussed in earlier + chapters. Within each + +On line 3666: + the four groups, the FCIC + created subgroups based on + characteristics + + that could affect loan + performance: FICO credit + scores, loan-to-value + +On line 3666: + (LTVs), and mortgage size. + For example, one subgroup + would be GSE loans with + +On line 3666: + a balance below + (conforming to GSE loan size + limits), a FICO + +On line 3666: + and (a borrower + with below-average credit + history), and LTV + +On line 3666: + and Another group + would be Alt-A loans with the same + characteristics. + +On line 3666: + each year, the loans were + broken into different + subgroups—144 each for GSE, + +On line 3668: + demonstrates the results + of the examination. + The various bars + +On line 3668: + range of average + delinquencies for each of the + four groups examined, + +On line 3668: + the distribution + of delinquency rates within + the subgroups for each + +On line 3668: + black portion of each + bar represents the middle + on either side of + +On line 3668: + including both dark + and light shading, represents + the middle of the + + distribution of + average delinquency rates. + The bars exclude the + +On line 3668: + the extremes of each + end of the distribution. + For example, at + +On line 3668: + black portion of the + GSE bar spans a average + delinquency rate on + +On line 3668: + the low end and a + average delinquency rate + on the high end. The + +On line 3668: + full bar for the GSEs + spans average delinquency + rates from to That means + +On line 3668: + were in subgroups with + average delinquency rates + above In sharp contrast, + +On line 3670: + (SUB) spans average + delinquency rates between on + the low end and on + +On line 3670: + end, and the full bar + spans average delinquency + rates between and That + +On line 3672: + The worst-performing of + GSE loans are in subgroups with + rates of serious + +On line 3674: + to the best-performing + of SUB loans.16 By the end of + performance within + +On line 3676: + market had weakened. + The median delinquency + rate—the midpoints of the + +On line 3678: + black bars—rose from in to + for GSE loans, from to for SUB + loans, from to for Alt-A + +On line 3680: + at roughly for FHA + loans. The data illustrate + that in and GSE loans + +On line 3680: + or non-GSE, subprime and + Alt-A loans. That holds true even when + comparing loans in + +On line 3680: + that share the same key + characteristics with the + loans in privately + +On line 3680: + such as low FICO + scores. For example, among loans + to borrowers with + +On line 3684: + times as likely to + be seriously delinquent + as a GSE. In the + +On line 3684: + delinquency rates for + the non-GSE and GSE loans were and + These patterns are most + +On line 3686: + by some differences + not captured in these mortgages.17 + For instance, in the + +On line 3686: + borrowers tended + to make bigger down payments. + The FCIC’s data show + +On line 3686: + indicating that + the borrower made a down + payment of at least + +On line 3686: + relatively large + down payment would help offset + the effect of the + +On line 3686: + under The data + illustrate that non-agency + securitized loans + +On line 3686: + more likely to have + more than one risk factor and + thereby exhibit + +On line 3686: + risk layering, such + as low FICO scores on top + of small down payments. + +On line 3688: + Alt-A securities. + For example, in among loans + with an LTV above the + +On line 3688: + an average rate + of serious delinquency + of versus a rate + +On line 3688: + loans in private Alt-A + securities.18 These results + are also, in large + +On line 3690: + by differences in + risk layering. Others frame + the situation + +On line 3690: + to Ed Pinto, a + mortgage finance industry + consultant who was + +On line 3690: + credit officer + at Fannie Mae in the 1980s, + GSEs dominated + +On line 3690: + market for risky loans. + In written analyses reviewed + by the FCIC staff and + +On line 3690: + Commissioners as + well as in a number of + interviews, Pinto + +On line 3690: + has argued that the + GSE loans that had FICO scores + below a combined + +On line 3690: + as interest-only + payments were essentially + equivalent to those + +On line 3692: + labeled subprime and + Alt-A by issuers. Using strict + cutoffs on FICO + +On line 3692: + partly related + to mortgage performance (as + well as relying + + on a number of + other assumptions), Pinto + estimates that as + +On line 3692: + June of all mortgages + in the country—26.7 million of + them—were risky mortgages that + +On line 3692: + defines as subprime + or Alt-A. Of these, Pinto counts + million, or that were + +On line 3694: + GSEs.19 In contrast, the + GSEs categorize fewer + than million of their + + loans as subprime or + Alt-A.20 Importantly, as the + FCIC review shows, the + +On line 3696: + loans classified as + subprime or Alt-A in Pinto’s + analysis did not + +On line 3696: + as poorly as loans + in non-agency subprime or + Alt-A securities. + +On line 3696: + suggest that grouping + all of these loans together + is misleading. In + +On line 3696: + characteristics + such as high loan-to-value + ratios are not at + +On line 3696: + performance data + assembled and analyzed + by the FCIC show that + +On line 3696: + securitized loans + experienced much higher + rates of delinquency + +On line 3698: + In addition to + examining loans owned and + guaranteed by the + + GSEs, Pinto also + commented on the role of + the Community + +On line 3698: + Act (CRA) in causing + the crisis, declaring, "The pain + and hardship that CRA + +On line 3700: + to this view, two Fed + economists determined that + lenders actually + + made few subprime loans + to meet their CRA requirements. + Analyzing a + +On line 3702: + of nearly million + loans originated in they + found that only a + +On line 3702: + percentage of all + higher-cost loans as defined + by the Home Mortgage + + Disclosure Act had + any connection to the CRA. + These higher-cost loans + +On line 3702: + rough proxy for subprime + mortgages. Specifically, the + study found that only + +On line 3702: + or moderate-income + neighborhoods by banks and thrifts + (and their subsidiaries and + +On line 3704: + covered by the CRA. + The other of higher-cost + loans either were made + +On line 3704: + institutions that + did not receive CRA credit + for these loans or were + +On line 3704: + not covered by the + CRA. Using other data + sources, these economists + +On line 3704: + that CRA-related subprime loans + appeared to perform better + than other subprime + +On line 3704: + "Taken together, + the available evidence seems + to run counter to the + +On line 3704: + the CRA contributed + in any substantive way to + the current crisis," + +On line 3706: + come to similar + conclusions. For example, + two economists at + + the San Francisco + Fed, using a different + methodology and + +On line 3706: + of loans made by CRA-covered + lenders were located in low- + and moderate-income + +On line 3706: + not covered by the + CRA. Further, fewer than of + the loans made by CRA + +On line 3706: + communities were + higher priced, even at the peak + of the market. In + +On line 3706: + loans originated + by independent mortgage + companies in these + +On line 3706: + of the loans and the + borrowers, such as income + and credit score, the + +On line 3706: + loans made by CRA-covered lenders + in the low-and moderate-income + areas they serve were + +On line 3706: + similar loans made + by independent mortgage + companies, which are + +On line 3706: + are subject to less + regulatory oversight + in general. "While + +On line 3706: + this suggests that the + CRA, and particularly + its emphasis on + +On line 3706: + assessment area, helped + to ensure responsible + lending, even during + +On line 3708: + overall declines in + underwriting standards," they + concluded.23 Overall, + +On line 3708: + and CRA-covered banks and thrifts + accounted for at least of + all mortgage lending + +On line 3708: + mortgage companies + originated less than one-third + of all mortgages but + +On line 3708: + These affiliates + accounted for another + roughly of mortgage + +On line 3710: + but about of high-price + lending. Bank of America + provided the FCIC + +On line 3710: + its CRA-qualifying portfolio, + which represented only + of the bank’s mortgage + +On line 3710: + portfolio.25 In the + end of the first quarter of + of the bank’s billion + +On line 3710: + of residential + mortgages was nonperforming: + of the billion CRA-qualifying + +On line 3712: + nonperforming at + that date. John Reed, a former + CEO of Citigroup, + + when asked whether he thought + government policies such as + the CRA played a role + +On line 3714: + the crisis, said that + he didn’t believe THE BUST1 + banks would originate + +On line 3714: + policy allowed + it" unless the bank could sell + off the mortgage to + + Fannie or Freddie, + which had their own obligations + in this arena. He + + said, "It’s hard for me + to answer. If the reason + the regulators + +On line 3714: + jump up and down and + yell at the low-doc, no-doc + subprime mortgage was + + because they felt that + they, Congress had sort of pushed + in that direction, + + then I would say yes."26 + "You know, CRA could be a pain + in the neck," the banker + +On line 3716: + Ranieri told the FCIC. "But + you know what1 It always, in + my view, it always + + did much more good than + it did anything. You know, we + did a lot. CRA made + +On line 3716: + a difference." But + lenders including Countrywide + used pro-homeownership + +On line 3716: + "smokescreen" to do away + with underwriting standards + such as requiring + + down payments, he said. + "The danger is that it gives + air cover to all + +On line 3718: + kind of madness that + had nothing to do with the + housing goal."27 RATING + +On line 3720: + to the ratings of + mortgage-backed securities at + Moody’s were monitored + +On line 3720: + the same analysts + who had rated them in the + first place. In Nicolas + +On line 3720: + officer and team + managing director, was + charged with creating + +On line 3722: + team to monitor + previously rated deals.28 + In November the + +On line 3722: + team began to see + a rise in early payment + defaults in mortgages + +On line 3722: + Loan,29 and downgraded + several securities + with underlying + +On line 3722: + or put them on watch + for future downgrades. "This was + a very unusual + + situation as + never before had we put + on watch deals rated + +On line 3722: + same calendar year," + Weill later wrote to Raymond + McDaniel, the chairman and + +On line 3724: + Brian Clarkson, the + president of Moody’s Investors + Service.30 In early + +On line 3724: + report, overseen by + Weill, about the sharp increases + in early payment + +On line 3724: + were concentrated + in subprime mortgage pools. In + addition, more than + +On line 3724: + securitized in + the second quarter of were + days delinquent within + +On line 3724: + months, more than double + the rate a year earlier + The exact cause of + +On line 3724: + agency, though. "Moody’s is + currently assessing whether + this represents an + +On line 3726: + overall expected + loss."31 For the next few months, the + company published + +On line 3726: + the subprime mortgage + market. Over the next three months, + Moody’s took negative + +On line 3726: + Then, on July in + an unprecedented move, Moody’s + downgraded subprime + +On line 3726: + securities that + had been issued in and put + an additional + +On line 3726: + securities that + were affected, all rated + Baa and lower, made + +On line 3726: + securities that + Moody’s rated Baa in For the + time eing, there were no + +On line 3726: + with prolonged, slowing + home price appreciation" + and noted that about + +On line 3726: + contained mortgages from + one of four originators: + Fremont Investment + +On line 3728: + Corporation, and + WMC Mortgage Corp.32 Weill later + told the FCIC staff that + +On line 3728: + a mass announcement, + rather than downgrading a few + securities at + +On line 3728: + to avoid creating + confusion in the market.33 + A few days later, + +On line 3728: + tranches. These initial + downgrades were remarkable not + only because of + +On line 3728: + of securities + involved but also because + of the sharp rating + +On line 3728: + of four notches per + security, when one or + two notches was more + +On line 3728: + a single notch would + be a downgrade from AA to + AA-). Among the tranches + +On line 3730: + M10, and M11) of the + Citigroup deal that we have + been examining, + +On line 3732: + CMLTI 2006-NC2. By that point, + nearly of the original + loan pool had prepaid + +On line 3734: + but another were + or more days past due or in + foreclosure.34 Investors + +On line 3734: + were assessing their + own exposure, and guessing + at that of others, + +On line 3734: + to these assets. A + report from Bear Stearns Asset + Management detailed + +On line 3734: + exposure. One of + its CDOs, Tall Ships, had direct + exposure to our + +On line 3734: + sample deal, owning + million of the M7 and M8 + tranches. BSAM’s High-Grade hedge + +On line 3734: + had exposure through + a million credit default + swap position with + + Lehman referencing + the M8 tranche. And BSAM’s Enhanced + Leverage hedge fund owned + +On line 3734: + of the equity + in Independence CDO, which + in turn owned the M9 + + tranche of our sample + deal. In addition, these funds + had exposure through + +On line 3736: + holdings of other + CDOs that in turn owned tranches + of the Citigroup + +On line 3738: + Then, on October + Moody’s downgraded another + tranches billion) of + +On line 3738: + tranches billion) on + watch for potential downgrade. + Now the total of + +On line 3738: + Moody’s had rated. Of + the securities placed on + watch in October, + +On line 3740: + tranches billion) were + originally Aaa-rated and + billion) were Aa-rated. + +On line 3740: + the first months of of + the mortgage-backed security + deals issued in had + +On line 3742: + one tranche downgraded + or put on watch.36 By this point + in October, of + +On line 3744: + our case study deal CMLTI + 2006- NC2 were seriously + delinquent and some homes + +On line 3744: + M4 through M8 tranches + were downgraded as part of + the second wave of + +On line 3744: + Five additional + tranches would eventually + be downgraded in + +On line 3748: + downgrade of all the + Aaa mortgage-backed securities + tranches and all of + + the Baa tranches. For + those securities issued + in the second half + +On line 3750: + and Baa tranches were + downgraded. Of all THE BUST3 + tranches initially + +On line 3750: + investment grade—that + is, rated Baa3 or higher—76% + of those issued in + +On line 3752: + were downgraded to + junk, as were of those from CDOS: + "CLIMBING THE WALL OF + +On line 3754: + WORRY" In March Moody’s + reported that CDOs with high + concentrations of + + subprime mortgage–backed + securities could incur + "severe" downgrades.39 In + +On line 3754: + sent five days after + the report, Group Managing + Director of U.S. + +On line 3754: + Yuri Yoshizawa explained + to Moody’s Chairman McDaniel and to + Executive Vice + +On line 3754: + banks like Merrill, Citi, + and UBS still furiously + doing transactions + +On line 3754: + He believes that they + are creating and pricing + the CDOs in order + +On line 3754: + remove the assets + from the warehouses, but that + they are holding on + +On line 3756: + the CDOs in hopes that + they will be able to sell them + later."40 Several + + months later, in a + review of the CDO market + titled "Climbing the + +On line 3758: + noted, "Some of the + first quarter’s activity + [in was the result + +On line 3758: + feverishly working + to clear inventory and + reduce their balance + +On line 3758: + to the subprime class."41 + Even though Moody’s was aware that the + investment banks were + +On line 3758: + of the warehouses + and into CDOs—possibly regardless + of quality—the firm + + continued to rate + new CDOs using existing + assumptions. Former + + Moody’s executive + Richard Michalek testified to the + FCIC, "It was a case + + of, with respect to + why didn’t we stop and change + our methodology, + +On line 3760: + at Moody’s, at least while + I was there, that suggested + that the only thing + +On line 3760: + quickly getting a + new methodology in place + is quickly getting + +On line 3760: + methodology in + place and having to unwind + that and to fail to + +On line 3762: + July, McDaniel gave a + presentation to the board + on the company’s + +On line 3762: + plan. His slides had such + bleak titles as "Spotlight on + Mortgages: Quality + +On line 3762: + Continues to Erode," + "House Prices Are Falling "Mortgage + Payment Resets Are + +On line 3762: + the quality of + the underlying mortgages + was declining, Moody’s + +On line 3762: + ratings assumptions + until late September.44 Out + of billion in CDOs + +On line 3764: + subprime mortgage–backed + securities on July + were rated Aaa.45 Moody’s + +On line 3764: + borrowers might stay + current. However, in mid-September, + Eric Kolchinsky, a + +On line 3764: + learned that a survey + of servicers indicated + that very few troubled + +On line 3764: + being modified.46 + Worried that continuing + to rate CDOs without + + adjusting for known + deterioration in + the underlying + +On line 3764: + could expose Moody’s to + liability, Kolchinsky + advised Yoshizawa that + +On line 3768: + the FCIC that Yoshizawa + "admonished" him for making + the suggestion.47 y + +On line 3768: + the end of more than + of all tranches of CDOs had + been downgraded. Moody’s + +On line 3770: + downgraded nearly + all of the Aaa and all of + the Baa CDO tranches. + +On line 3772: + And, again, the downgrades + were large—more than of Aaa CDO + bonds and more than of + +On line 3776: + THE BASIS OF THE + INFORMATION" The housing + bust exposed the flaws + +On line 3776: + the mortgages that had + been made and securitized. + After the crisis + +On line 3776: + mortgage insurance + firms—closely examined the + representations + +On line 3776: + assure investors and + insurers that the mortgages + met stated guidelines. + +On line 3776: + securitizers’ + due diligence on the mortgage + pools underlying + +On line 3776: + their disclosure about + the characteristics of + those deals. As private + + mortgage insurance + companies found similar + deficiencies in + +On line 3778: + have denied claims to + an unprecedented extent. + Fannie and Freddie + +On line 3778: + warranties—that the loans + meet specified criteria. + They then checked samples + +On line 3778: + the loans to ensure + that these representations + and warranties were not + +On line 3778: + was a breach and the + loans were "ineligible" + for purchase, the GSE + +On line 3780: + the right to require + the seller to buy back the + loan—assuming, of course, + +On line 3782: + seller had not gone + bankrupt. As a result of + such sampling, during + +On line 3782: + the three years and eight + months ending August Freddie + and Fannie required + +On line 3782: + to repurchase loans + totaling billion. So far, + Freddie has received + +On line 3782: + sellers, and Fannie + has received billion—a total + of billion.49 The amount + +On line 3782: + is notable in that + it represents of billion + in credit-related + +On line 3784: + beginning of through + September In testing to + ensure compliance + +On line 3784: + its standards, Freddie + reviews a small percentage + of performing loans + +On line 3784: + a high percentage + of foreclosed loans (including + well over of all loans + +On line 3784: + default in the first + two years). In total, Freddie + reviewed billion of + +On line 3784: + (out of trillion in + loans acquired or guaranteed) + and found billion to + +On line 3786: + time an increasing + percentage were found to be + ineligible, + +On line 3788: + put back very few of + these performing loans to the + originators. Among + +On line 3788: + that of the delinquent + loans were ineligible, + as were of the loans + +On line 3788: + Most of these were put + back to originators—again, + in cases in which + +On line 3790: + if the reasons for + ineligibility + were sufficiently + + minor, the loans were + not put back. Overall, of the + delinquent loans and loans + +On line 3792: + foreclosure sampled + by Freddie, were put back. In + and Freddie put back + +On line 3792: + loan volumes to the + following lenders: Countrywide, + billion; Wells Fargo, + +On line 3792: + Chase Home Financial, + billion; Bank of America, + million; and Ally + +On line 3794: + Financial, million.53 + Using a method similar + to Freddie’s to test + +On line 3794: + and of the mortgages + originated since 2005—sampling + at the higher rates + +On line 3794: + for delinquent loans. From + through Fannie put back loans to + the following large + +On line 3794: + Morgan Chase, billion; + Citigroup, billion; SunTrust Bank, + million; and Ally + +On line 3794: + Financial, million.54 + In early January Bank + of America reached + + a deal with Fannie + and Freddie, settling the GSEs’ + claims with a payment + +On line 3796: + more than billion. Like + Fannie and Freddie, private + mortgage insurance + + (PMI) companies have + been finding significant + deficiencies in + +On line 3796: + They are refusing + to pay claims on some insured + mortgages that have gone + +On line 3796: + insurance protects + the holder of the mortgage + if a homeowner + +On line 3796: + on a loan, even though + the responsibility + for the premiums + +On line 3796: + homeowner. By the + end of PMI companies had + insured a total + +On line 3798: + mortgage losses.56 As + defaults and losses on the + insured mortgages have + + been increasing, the + PMI companies have seen a + spike in claims. As of + +On line 3798: + largest PMI companies, + which share of the market, had + rejected about of + +On line 3800: + claims (or billion of + billion) brought to them, because + of violations + +On line 3802: + Separate from their + purchase and guarantee of + mortgages, over the course + +On line 3802: + housing boom the GSEs + purchased billion of subprime + and Alt-A private-label + +On line 3802: + have recorded billion + in charges on securities + from January to + +On line 3802: + Frustrated with the + lack of information from + the securities’ + +On line 3802: + in many cases large + banks, on July the GSEs through + their regulator, + +On line 3802: + to various trustees + and servicers in transactions + in which the GSEs lost + +On line 3802: + violations, the + GSEs intend to demand that + the trustees recognize + + their rights (including + any rights to put loans back to + the originator + + or wholesaler).61 While this + strategy being followed + by the GSEs is based + +On line 3804: + contract law, other + investors are relying on + securities law + +On line 3804: + by inaccurate + or incomplete prospectuses; + and, in a number + +On line 3806: + they are winning. As + of mid-2010, court actions embroiled + almost all major + +On line 3806: + loan originators + and underwriters—there + were more than lawsuits + +On line 3806: + and warranties, by one + estimate.62 These lawsuits filed + in the wake of the + +On line 3806: + crisis include those + alleging "untrue statements + of material + +On line 3806: + or "material + isrepresentations" in + the registration + +On line 3806: + They generally + allege violations of + the Securities + +On line 3808: + Act of Both private + and government entities + have gone to court. For + +On line 3808: + sued units of Bank of + America, Wells Fargo, and + UBS Securities.63 + +On line 3808: + of inadequate + disclosure relating to + their sales of mortgage-backed + +On line 3810: + Stanley agreed to pay + million and Goldman Sachs agreed + to pay million.64 To + +On line 3810: + Bank of Chicago has + sued several defendants, + including Bank of + +On line 3810: + sued units of Morgan + Stanley, Citigroup, HSBC, + Goldman Sachs, Barclays, + +On line 3810: + of America, among + others, "on the basis of + the information + +On line 3814: + downgraded mortgage-backed + securities and CDOs, and + investors began to + +On line 3814: + market prices for these + securities plunged. Both the + direct losses as + + well as the marketwide + contagion and panic that + ensued would lead to + +On line 3814: + or near failure of + many large financial firms across + the system. The drop + +On line 3814: + the underlying + mortgages would actually + default (meaning that + + less cash would flow to + the investors) as well as the + more generalized + +On line 3814: + because they wanted + the assurance that they could + sell securities + + quickly to raise cash + if necessary. Potential + investors worried they + +On line 3814: + get stuck holding these + securities as market + participants looked + +On line 3816: + exposure to the + collapsing mortgage market. + As market prices dropped, + +On line 3816: + required firms to write + down their holdings to reflect + the lower market + +On line 3818: + first quarter of the + largest banks and investment banks + began complying + +On line 3818: + accounting rule and + for the first time reported + their assets in one + +On line 3818: + three valuation + categories: "Level assets," + which had observable + +On line 3818: + market prices, like stocks + on the stock exchange; "Level + assets," which were not + +On line 3818: + priced because they were + not actively traded; and + "Level assets," which + + were illiquid and had + no discernible market prices or + other inputs. To + +On line 3818: + value of Level + and in some cases Level + assets where market + + prices were unavailable, + firms used models that relied + on assumptions. Many + +On line 3818: + Level assets that + substantially exceeded + their capital. For + +On line 3820: + for the first quarter + of Bear Stearns reported about + billion in Level + +On line 3822: + capital; Morgan + Stanley re-THE BUST7 ported about + billion in Level + +On line 3824: + were required on many + securities even if there + were no actual + +On line 3824: + losses and in some + cases even if the firms did + not intend to sell + +On line 3824: + in part, on credit + rating agencies’ and investors’ + expectations that + +On line 3824: + default. But only + when those defaults came to pass + would holders of the + +On line 3824: + market value of + securities that did not + trade was difficult, + + was subjective, and + became a contentious issue + during the crisis. + +On line 3826: + and capital, and + triggered collateral calls. + These mark-to-market + +On line 3826: + received a good deal + of criticism in recent + years, as firms argued + +On line 3826: + the lower market + prices did not reflect market + values but rather fire-sale + + prices driven by forced + sales. Joseph Grundfest, when he was + a member of the + + SEC’s Committee on + Improvements to Financial + Reporting, noted + +On line 3826: + market prices "creates + situations where you have + to go out and raise + +On line 3826: + never really + there."66 But not valuing assets + based on market prices + + could mean that firms were + not recording losses required + by the accounting + +On line 3828: + capital. As the + mortgage market was crashing, + some economists and + +On line 3828: + estimated that + actual losses, also + known as realized + +On line 3828: + losses, on subprime + and Alt-A mortgages would total + to billion;67 so far, + +On line 3828: + by the figure has + turned out not to be much more + than that. As of year-end + +On line 3828: + total about billion.68 + Securities are impaired + when they have suffered + +On line 3828: + are expected to + suffer realized losses + imminently. While + +On line 3830: + numbers are small in + relation to the trillion + U.S. economy, the + +On line 3830: + mortgages themselves are + a pretty small asset class," + Fed Chairman Ben Bernanke + +On line 3830: + explaining how in + he and Treasury Secretary + Henry Paulson had + +On line 3830: + repercussions of the + emerging housing crisis. "You + know, the stock market + +On line 3830: + down every day more + than the entire value of + the subprime mortgages + +On line 3830: + the country. But what + created the contagion, + or one of the things + +On line 3830: + the contagion, was + that the subprime mortgages were + entangled in these + + huge securitized + pools."69 The large drop in market + prices of the mortgage + +On line 3832: + had large spillover effects + to the financial sector, + for a number of + +On line 3832: + discussed, when the prices + of mortgage-backed securities + and CDOs fell, many of + +On line 3832: + those securities + marked down the value of their + holdings—before they + + had experienced + any actual losses. In + addition, rather than + +On line 3834: + had concentrated + them. "Who owns residential + credit risk1" two Lehman + +On line 3834: + analysts asked in + a September report. The + answer: three-quarters + +On line 3834: + investment-grade + securities and has been + almost entirely + +On line 3834: + (CDO) holders."70 A set + of large, systemically + important firms with + +On line 3834: + or exposure to + these securities would be + found to be holding + +On line 3834: + little capital + to protect against potential + losses. And most of + +On line 3834: + companies would turn + out to be considered by + the authorities + +On line 3836: + fail in the midst of + a financial crisis. The + International + +On line 3836: + examined where the + declining assets were held + and estimated + +On line 3836: + write-downs would be. All + told, the IMF calculated + that roughly trillion + +On line 3836: + these, trillion were GSE + mortgage–backed securities; + the IMF expected + +On line 3836: + billion, but investors + holding these securities + would lose no money, + +On line 3836: + mortgage assets were + estimated to be prime + and nonprime mortgages + +On line 3836: + by the banks and the + GSEs. These were expected to + suffer as much as + +On line 3836: + estimated to + be mortgage-backed securities + and CDOs. Write-downs on + +On line 3836: + expected to be + billion. And, even more troubling, + more than one-half of these + +On line 3836: + were expected to + be borne by the investment + banks, commercial banks, + +On line 3836: + rest of the write-downs + from non-agency mortgage–backed + securities were + +On line 3836: + institutions such + as insurance companies, + pension funds, the GSEs, + +On line 3836: + funds. The October + report also expected + another billion + +On line 3836: + securities, CLOs, + leveraged loans, and other loans + and securities—with + + more than half coming + from commercial mortgage–backed + securities. Again, + + the commercial banks + and thrifts and investment banks + were expected to + +On line 3838: + (suggested by the + sizable revi-sions in the + IMF estimates) and + +On line 3838: + promote contagion. + Investors would realize they + did not know as much + + as they wanted to + know about the mortgage assets + that banks, investment + +On line 3838: + and other firms held + or to which they were exposed. + To an extent not + +On line 3838: + before the crisis, + financial institutions + had leveraged themselves + +On line 3838: + commercial paper, + with derivatives, and in + the short-term repo + +On line 3840: + by using mortgage-backed + securities and CDOs as + collateral. Lenders + +On line 3840: + of the assets that + those companies had posted + as collateral + +On line 3840: + the same time that they + were questioning the value + of those companies’ + +On line 3844: + highest-rated tranches + of mortgage-backed securities + were downgraded, and + +On line 3844: + balance sheets based on + declines in market value. + However, although + +On line 3844: + this could not be known + in at the end of most of + the triple-A tranches of + +On line 3844: + securities have + avoided actual losses + in cash flow through and + +On line 3846: + avoid significant + realized losses going + forward. Overall, for + +On line 3846: + mass downgrades, only + about of Alt-A and of subprime + securities had + +On line 3846: + "materially + impaired"—meaning that losses + were imminent or + +On line 3846: + (see figure For the + lower-rated Baa tranches, of + Alt-A and of subprime + +On line 3846: + securities were + impaired. In all, by the end + of billion worth of + +On line 3846: + outcome would be far + worse for CDO investors, whose fate + largely depended + +On line 3848: + lower-rated mortgage-backed + securities. More than of + Baa CDO bonds and of + +On line 3850: + were ultimately + impaired.72 The housing bust would + not be the end of + +On line 3850: + to the FCIC: "What I + did not recognize was the + extent to which the + +On line 3850: + it that were going + to amplify the initial + shock from subprime and + +On line 3852: + much bigger crisis."73 + The Commission concludes that + the collapse of the + +On line 3852: + bubble began the + chain of events that led to the + financial crisis. + +On line 3856: + vulnerable to + the downturn in the market + in The investment + +On line 3856: + had leverage ratios, + by one measure, of up to + to This means that for + +On line 3856: + they held only of + capital. Fannie Mae and + Freddie Mac (the GSEs) + +On line 3858: + many institutions + was even greater than reported + when one takes into + +On line 3858: + of Citigroup, and + derivatives positions + such as those of AIG. + +On line 3860: + contributed to, but + were not a primary cause + of, the financial + +On line 3862: + mortgage exposure + and market position were + significant, and + +On line 3862: + dramatic failures. + They participated in + the expansion of + +On line 3862: + mortgage lending and + declining mortgage standards, + adding significant + + demand for less-than-prime loans. + However, they followed, rather + than led, the Wall Street + +On line 3862: + The delinquency rates + on the loans that they purchased + or guaranteed were + + significantly + lower than those purchased and + securitized by + +On line 3864: + The Community + Reinvestment Act (CRA)—which requires + regulated banks + +On line 3864: + services consistent + with safety and soundness to + the areas where they + +On line 3864: + in subprime lending. + However, community + lending commitments + +On line 3864: + required by the CRA + were clearly used by lending + institutions for + +On line 3889: + CONTENTS Goldman: "Let’s + be aggressive distributing + things"..............................................235 Bear Stearns’s hedge funds: + +On line 3891: + pretty damn ugly"........................................238 + Rating agencies: "It can’t be + all of a sudden"..................................................242 + +On line 3895: + AIG: "Well bigger than + we ever planned for" Over the + course of the collapse + +On line 3895: + bubble and the abrupt + shutdown of subprime lending + led to losses for + +On line 3895: + institutions, runs + on money market funds, tighter + credit, and higher + +On line 3895: + steady, hovering just + below until the end of + the year, and oil prices + +On line 3895: + dramatically. + By the middle of home prices + had declined almost + +On line 3895: + their peak in Early + evidence of the coming + storm was the drop in + +On line 3897: + the ABX Index—a Dow + Jones–like index for credit + default swaps on BBB-tranches + +On line 3899: + issued in the first + half of That drop came after + Moody’s and S&P put on + +On line 3899: + backed by mortgages from + one originator: Fremont + Investment Loan.2 In + +On line 3899: + Sebring Capital + ceased operations. Senior + risk officers of + +On line 3899: + largest investment banks + told the Securities and + Exchange Commission + +On line 3899: + that they expected + to see further subprime lender + failures in "There is + + a broad recognition + that, with the refinancing + and real estate + +On line 3899: + business model of + many of the smaller subprime + originators is + + no longer viable," SEC + analysts told Director + Erik Sirri in a + +On line 3901: + became more and more + evident. In January, + Mortgage Lenders Network + +On line 3901: + funding mortgages and + accepting applications. + In February, New + +On line 3901: + credit losses and + HSBC, the largest subprime lender + in the United States, + +On line 3901: + billion increase in + its quarterly provision + for losses. In March, + +On line 3901: + after receiving + a cease and desist order + from the Federal + + Deposit Insurance + Corporation. In April, New + Century filed for + +On line 3903: + their operating + cash on short-term funding through + commercial paper + +On line 3903: + paper buyers and + banks became unwilling to + continue funding + + them, and repo lenders + became less and less willing + to accept subprime + + and Alt-A mortgages or + mortgage-backed securities as + collateral. They + +On line 3903: + gave them the option + of withholding funding on + short notice if they + + lost confidence in + the borrower. Another + sign of problems in + +On line 3905: + companies began + to report more detail about + their assets under + +On line 3905: + securities that + were becoming illiquid and + hard to value. The + +On line 3905: + sum of more illiquid + Level and assets at these + firms was "eye-popping + +On line 3905: + the amount of leverage + the banks and investment banks + had," according to + +On line 3905: + Chanos, a New York hedge + fund manager. Chanos said that + the new disclosures + +On line 3905: + large exposures from + securitizations. "You + clearly didn’t get + + the magnitude, and + the market didn’t grasp the + magnitude until + +On line 3905: + of when the figures + began to be published, and + then it was as if + +On line 3905: + bell, because almost + immediately upon + the publication + +On line 3905: + journalists began + writing about it, and hedge funds + began talking about + +On line 3907: + began speaking about + it in the marketplace."4 In + late and early some + + banks moved to reduce + their subprime exposures by + selling assets and + + buying protection + through credit default swaps. Some, + such as Citigroup + +On line 3907: + Merrill Lynch, reduced + mortgage exposure in some + areas of the firm + + but increased it in + others. Banks that had been busy + for nearly four years + +On line 3907: + collateralized + debt obligations (CDOs) scrambled + in about that many months + +On line 3907: + hedge whatever they + could. They now dumped these products + into some of the + +On line 3907: + Merrill Lynch, and UBS, + particularly, were forced + to retain larger + +On line 3907: + larger quantities + of the "super-senior" tranches + of these CDOs. The bankers + +On line 3909: + always hope— and many + apparently even believed—that + all would turn out well + +On line 3911: + these super seniors, + which were, in theory, the + safest of all. With such + +On line 3911: + market value of + mortgage assets, trades became + scarce and setting prices + +On line 3913: + subprime markets, they + misjudged the risks posed to the + financial system. + +On line 3913: + that investment banks + had credit exposure to + struggling subprime lenders + +On line 3913: + these exposures are + material."5 The Treasury + and Fed insisted + +On line 3913: + the spring and early + summer that the damage would + be limited. "The + +On line 3913: + broader economy + and financial markets of + the problems in the + +On line 3913: + market seems likely + to be contained,"6 Fed Chairman + Ben Bernanke testified + +On line 3913: + Congress on March That + same day, Treasury Secretary + Henry Paulson told + +On line 3915: + "From the standpoint of + the overall economy, my + bottom line is we’re + +On line 3919: + but it appears to + be contained."7 EARLY GOLDMAN: + "LET’S BE AGGRESSIVE + +On line 3919: + DISTRIBUTING THINGS" In + December following the + initial decline in + +On line 3919: + ABX BBB indices and + after consecutive days + of trading losses + + on its mortgage desk, + executives at Goldman + Sachs decided to + +On line 3919: + the value of its + mortgage-related products to + reflect the lower + + ABX prices, and began + posting daily losses for + this inventory.8 + +On line 3921: + internal report + on December regarding + "the major risk in + +On line 3921: + Mortgage business" to + Chief Financial Officer + David Viniar and Chief Risk + +On line 3921: + get "closer to home," + meaning that they wanted to + reduce their mortgage + + exposure: sell what + could be sold as is, repackage + and sell everything + + else.10 Kevin Gasvoda, the + managing director for + Goldman’s Fixed Income, + +On line 3921: + the sales team to sell + asset-backed security and + CDO positions, even + +On line 3921: + loss: "Pls refo-cus + on retained new issue bond + positions and move + + them out. There will be + big opportunities the + next several months + +On line 3921: + want to be hamstrung + based on old inventory. + Refocus efforts + +On line 3923: + move stuff out even if + you have to take a small loss."11 + In a December + +On line 3923: + ABX, the position + is reasonably sensible + but is just too big. + +On line 3925: + spend a little to + size it appropriately. + On everything else + +On line 3925: + message was let’s be + aggressive distributing things + because there will be + +On line 3925: + opportunities + as the market goes into + what is likely to + +On line 3925: + greater distress and we + want to be in position + to take advantage + +On line 3927: + the "everything else" + meant mortgage-related assets. + On December in + +On line 3927: + Goldman’s Stacy Bash-Polley, + a partner and the co-head + of fixed income sales, + + noted that the firm, + unlike others, had been able + to find buyers for + + the super-senior and + equity tranches of CDOs, + but the mezzanine + + tranches remained a + challenge. The "best target," she + said, would be to put + +On line 3927: + other CDOs: "We have + been thinking collectively + as a group about how + + to help move some of + the risk. While we have made great + progress moving the tail + +On line 3927: + and equity—we + think it is critical to + focus on the mezz + +On line 3927: + that has been built up + over the past few months. Given + some of the feedback + +On line 3927: + have received so far + [from investors,] it seems that cdo’s + maybe the best target + +On line 3927: + some of this risk but + clearly in limited size + (and timing right now + +On line 3929: + It was becoming + harder to find buyers for + these securities. + + Back in October, + Goldman Sachs traders had complained + that they were being + + asked to "distribute + junk that nobody was dumb enough + to take first time around."14 + + Despite the first of + Goldman’s business principles—that + "our clients’ interests + +On line 3929: + in its efforts to + reduce subprime exposure. + In a December + +On line 3929: + discussing a list of + customers to target for the + year, Goldman’s Fabrice + +On line 3929: + trading desk, said to + "focus efforts" on "buy and + hold rating-based buyers" + +On line 3929: + "sophisticated + hedge funds" that "will be on the + same side of the trade + +On line 3929: + we will."15 The "same of + side of the trade" as Goldman + was the selling or + +On line 3929: + the mortgage market + to continue to decline. + In January, Daniel + +On line 3929: + the head of Goldman’s + mortgage department, extolled + Goldman’s success in + +On line 3929: + the team had "structured + like mad and traveled the world, + and worked their tails off + +On line 3929: + some lemonade from some + big old lemons."16 Tourre acknowledged + that there was "more and + +On line 3929: + himself in the third + person—said he was "standing + in middle of all + + these complex, highly + levered, exotic trades he + created without + +On line 3931: + of those monstrosities."17 + On February Goldman CEO + Lloyd Blankfein questioned + +On line 3933: + million in losses + on residual positions + from old deals, asking, + + "Could/should we have cleaned + up these books before and are + we doing enough right + +On line 3935: + to sell off cats and + dogs in other books throughout + the division1"18 The + + numbers suggest that + the answer was yes, they had + cleaned up pretty well, + +On line 3935: + billions of dollars + of subprime exposure still + retained. In the first + +On line 3935: + its mortgage business + earned a record million, driven + primarily by + +On line 3935: + position on the + bellwether ABX BBB index, whose + drop the previous + + November had been + the red flag that got Goldman’s + attention. In the + +On line 3937: + products to its clients. + From December through August + it created and + +On line 3939: + of CDOs— including + billion of synthetic CDOs. + The firm used the cash + +On line 3939: + its own remaining + inventory of other + CDO securities + +On line 3941: + criticized—and sued—for + selling its subprime mortgage + securities to + +On line 3941: + finance expert at + R&R Consulting in New York, + reportedly called + +On line 3941: + most cynical use + of credit information + that I have ever + + seen," and compared it + to "buying fire insurance + on someone else’s house + +On line 3943: + arson."20 During a + FCIC hearing, Goldman CEO Lloyd + Blankfein was asked if + +On line 3943: + a proper, legal, + or ethical practice for + Goldman to sell clients + +On line 3945: + believed would default, + while simultaneously + shorting them. Blankfein + + responded, "I do + think that the behavior is + improper and we + +On line 3945: + have lost money"21 The + next day, Goldman issued a + press release declaring + +On line 3945: + improper. Blankfein + was responding to a lengthy + series of statements + +On line 3945: + by a question that + was predicated on the + assumption that a + +On line 3945: + selling a product + that it thought was going to + default. Mr. Blankfein + +On line 3945: + true, the practice would + be improper. Mr. Blankfein + does not believe, nor + +On line 3949: + say, that Goldman Sachs + had behaved improperly + in any way."22 EARLY + +On line 3949: + President and Chief + Operating Officer + Gary Cohn testified: + +On line 3951: + the two years of the + financial crisis, Goldman + Sachs lost billion in + +On line 3951: + its residential + mortgage–related business. We + did not bet against our + +On line 3953: + numbers underscore + that fact."23 Indeed, Goldman’s short + position was not + + the whole story. The + daily mortgage "Value at + Risk" measure, or VaR, + + which tracked potential + losses if the market moved + unexpectedly, + +On line 3955: + in the three months through + February. By February, + Goldman’s company-wide + +On line 3955: + bet on the mortgage + market’s continuing to + decline. Preferring + +On line 3955: + between March and May, + the mortgage securities + desk reduced its short + +On line 3955: + Index;24 between June + and August, it again reversed + course, increasing its + +On line 3957: + assets. The Basis + Yield Alpha Fund, a hedge fund + and Goldman client that + +On line 3957: + invested million + in Goldman’s Timberwolf CDO, + sued Goldman for fraud + +On line 3959: + The Timberwolf deal + was heavily criticized + by Senator Carl + +On line 3959: + Subcommittee on + Investigations during + an April hearing. The + +On line 3959: + that Goldman designed + Timberwolf to quickly fail + so that Goldman could + +On line 3959: + low-quality assets + and profit from betting against + the CDO. Within two + +On line 3959: + investment, Goldman + began making margin calls + on the deal. By the + +On line 3959: + of July it had + demanded more than million.25 + According to the + +On line 3959: + fund, Goldman’s demands + forced it into bankruptcy + in August 2007—Goldman + +On line 3961: + the liquidation. + Goldman denies Basis Yield + Alpha Fund’s claims, and + +On line 3961: + Blankfein dismissed the + notion that Goldman misled + investors. "I will tell + + you, we only dealt + with people who knew what they + were buying. And of + +On line 3961: + when you look after + the fact, someone’s going to + come along and say they + +On line 3963: + didn’t know," he told + the FCIC.26 In addition to + selling its subprime + +On line 3963: + to customers, the firm + took short positions using + credit default swaps; + +On line 3963: + short positions on + the ABX indices and on some + of the financial + +On line 3963: + its securities + after considering both + actual market + + trades and surveys of + how other institutions + valued the assets. + +On line 3963: + crisis unfolded, + Goldman marked mortgage-related + securities at + +On line 3963: + significantly + lower than those of other + companies. Goldman + +On line 3963: + similar assets. + In addition, Goldman’s marks + would get picked up by + +On line 3963: + in dealer surveys. + As a result, Goldman’s marks + could contribute to + +On line 3963: + companies recording + "mark-to-market" losses: that + is, the reported + +On line 3965: + their assets could fall + and their earnings would decline. + The markdowns of these + +On line 3965: + could also require + that companies reduce their + repo borrowings + +On line 3965: + sold credit default + swap protection. In a May + email, Craig Broderick, + +On line 3965: + was responsible + for tracking how much of the + company’s money + + was at risk,27 noted + to colleagues that the mortgage + group was "in the process + +On line 3965: + marks on their mortgage + portfolio [especially] + CDOs and CDO squared. This + + will potentially + have a big [profit and loss] + impact on us, but + +On line 3965: + derivatives, and + other products. We need to + survey our clients and + +On line 3965: + determining the + most vulnerable clients, knock + on implications, + + etc. This is getting + lots of 30th floor attention + right now."28 Broderick + +On line 3967: + right about the impact + of Goldman’s marks on clients and + counterparties. The + +On line 3967: + first significant + dispute about these marks began + in May it concerned + + the two high-flying, + mortgage-focused hedge funds run + by Bear Stearns Asset + +On line 3973: + (BSAM). BEAR STEARNS’S HEDGE FUNDS: + "LOOKS PRETTY DAMN UGLY" In + Ralph Cioffi and Matthew + +On line 3973: + structured CDOs at Bear + Stearns, were busy managing BSAM’s + High-Grade Structured Credit + +On line 3975: + Strategies Fund. When they + added the higher-leveraged, higher-risk + Enhanced Fund in they + +On line 3977: + By April internal + BSAM risk exposure reports + showed about of the High-Grade + + fund’s collateral + to be subprime mortgage–backed + CDOs, assets that were + +On line 3977: + a diary kept in + his personal email account + because he "didn’t + +On line 3979: + to use [his] work email + anymore," Tannin recounted + that in "a wave of + +On line 3979: + set over [him]" when he + realized that the Enhanced + Fund "was going to + + subject investors to + ‘blow up risk’" and "we could not + run the leverage as + +On line 3981: + as I had thought we + could."30 This "blow up risk," coupled + with bad timing, proved + +On line 3983: + Fund. Shortly after + the fund opened, the ABX BBB- + index started to + +On line 3983: + falling in the last + three months of then another + in January and + +On line 3983: + ABX. Investors began + to bail out of both Enhanced + and High-Grade. Cioffi and + +On line 3983: + Tannin stepped up their + marketing. On March Tannin + said in an email to + +On line 3983: + prudent opportunity—I am putting + in additional capital—I think + you should as well."31 On + +On line 3983: + March conference call, + Tannin and Cioffi assured + investors that both funds + +On line 3983: + of liquidity," + and they continued to use + the investment of + +On line 3983: + evidence of their + confidence.32 Tannin even said + he was increasing + +On line 3985: + investment, although, + according to the SEC, he + never did.33 Despite + +On line 3985: + avowals of confidence, + Cioffi and Tannin were in + full red-alert mode. In April, + +On line 3985: + redeemed million of + his own million investment + in Enhanced Leverage + +On line 3985: + transferred the funds to + a third hedge fund he managed.34 + They tried to sell the + +On line 3985: + by the hedge funds. They + had little success selling + them directly on + +On line 3987: + market,35 but there was + another way. In late May, + BSAM put together + +On line 3987: + a CDO-squared deal that would + take billion of CDO assets + off the hedge funds’ books. + +On line 3987: + billion, EARLY were + sold as commercial paper + to short-term investors + +On line 3991: + commercial paper + investors would refuse to roll over + this particular + +On line 3995: + more than billion on + this arrangement.37 is doomsday" + Nearly all hedge funds + + provide their investors + with market value reports, + at least monthly, based + +On line 3995: + readily traded + assets, such as stocks, at the + current trading price, + +On line 3995: + very slow markets were + marked by surveying price quotes + from other dealers, + +On line 3995: + and then arriving + at a final net asset + value. For mortgage-backed + +On line 3995: + marking assets was + an extremely important + exercise, because + + the market values + were used to inform investors + and to calculate + +On line 3995: + for internal risk + management purposes, and + because these assets + +On line 3995: + as collateral + for repo and other lenders. + Crucially, if the + +On line 3995: + hedge fund’s portfolio + declined, repo and other + lenders might require more + + collateral. In + April, JP Morgan told Alan Schwartz, + Bear Stearns’s co-president, + + that the bank would be + asking the BSAM hedge funds to + post additional + +On line 3997: + support its repo + borrowing.38 Dealer marks were + slow to keep up with + +On line 3997: + the ABX indices. Even + as the ABX BBB- index + recovered some in + +On line 3997: + March, rebounding marks + by broker-dealers finally + started to reflect + +On line 3997: + the lower values. + On April Goldman sent BSAM marks + ranging from cents to + +On line 3997: + on the dollar—meaning + that some securities were + worth as little as + +On line 3997: + initial value.39 On + Thursday, April in preparation + for an investor call + +On line 3997: + following week, BSAM + analysts informed Cioffi + and Tannin that in + +On line 3997: + value of the funds’ + portfolios had declined sharply.40 + On Sunday, Tannin + +On line 3997: + Cioffi’s personal + account arguing that both + hedge funds should be closed + +On line 3999: + and liquidated: + "Looks pretty damn ugly. If + we believe the runs + + [the analyst] has + been doing are ANYWHERE CLOSE + to accurate, I + +On line 3999: + should close the Funds now. + If [the runs] are correct then + the entire sub-prime + + market is toast."41 But + by the following Wednesday, + Cioffi and Tannin + +On line 3999: + on the same upbeat + page. At the beginning of + the conference call, + + Tannin told investors, + "The key sort of big picture + point for us at this + +On line 3999: + confidence that the + structured credit market and + the sub-prime market + +On line 3999: + in particular, + has not systemically + broken down; we’re very + +On line 3999: + exactly where we + are." Cioffi also assured + investors that the funds + +On line 3999: + likely finish the + year with positive returns.42 + On May the two hedge + +On line 3999: + funds had attracted + more than million in new funds, + but more than million + +On line 4001: + redeemed by investors.43 + That same day, Goldman sent BSAM + marks ranging from cents + +On line 4001: + cents on the dollar.44 + Cioffi disputed Goldman’s + marks as well as marks + +On line 4001: + from Lehman, Citigroup, + nd JP Morgan.45 On May in + a preliminary + +On line 4001: + told investors that the + net asset value of the + Enhanced Leverage Fund + +On line 4001: + In computing the + final numbers later that + month, he requested + +On line 4001: + Committee instead + use fair value marks based on + his team’s modeling, + +On line 4003: + were to million less + than losses using Goldman’s + marks.47 On June although + +On line 4003: + marks rather than to use + fair value. The committee + also noted that + +On line 4003: + the decline in net + asset value would be greater + than the estimate, + + because "many of the + positions that were marked down + received dealer marks + +On line 4005: + after release of + the estimate."48 The decline + was revised from to + +On line 4005: + Cioffi, a number + of factors contributed to + the April revision, + +On line 4005: + marks were one factor.49 + After these meetings, Cioffi + emailed one committee + +On line 4005: + is no market its + [sic] all academic anyway—19% + [value] is doomsday."50 + +On line 4007: + On June BSAM announced + the drop and froze redemptions. + "Canary in the mine + + shaft" When JP Morgan + contacted Bear’s co-president + Alan Schwartz in April about + +On line 4009: + call, Schwartz convened an + executive committee + meeting to discuss + + how repo lenders were + marking down positions and + making margin calls + +On line 4009: + the basis of those + new marks.51 In early June, Bear + met with BSAM’s repo + +On line 4009: + explain that BSAM lacked + cash to meet margin calls and + to negotiate + + a 60-day reprieve. Some + of these very same firms had sold + Enhanced and High-Grade some + + of the same CDOs and + other securities that + were turning out to + +On line 4009: + bad assets.52 Now all + refused Schwartz’s appeal; instead, + they made margin calls.53 + +On line 4009: + result, the two funds + had to sell collateral + at distressed prices to + + raise cash.54 Selling the + bonds led to a complete loss + of confidence by + +On line 4011: + Shortly after BSAM + froze redemptions, Merrill Lynch + seized more than million + +On line 4011: + posted by Bear for + its outstanding repo loans. + Merrill was able to + +On line 4011: + sell just million of + the seized collateral at + auction by July + +On line 4011: + at discounts to its + face value.55 Other repo + lenders were increasing + + their collateral + requirements or refusing + to roll over their loans.56 + +On line 4011: + run on both hedge funds + left both BSAM and Bear Stearns with + limited options. + +On line 4011: + management business, + Bear’s equity positions + in the two BSAM hedge + +On line 4011: + April Bear’s co-president + Warren Spector approved a + million investment + + into the Enhanced + Leverage Fund.57 Bear Stearns had no + legal obligation + + to rescue either + the funds or their repo lenders. + However, those lenders + +On line 4011: + investment banks that + Bear Stearns dealt with every day.58 + Moreover, any failure + +On line 4011: + related to Bear + Stearns could raise investors’ concerns + about the firm itself. + + Thomas Marano, the head + of the mortgage trading desk, + told FCIC staff that the + + constant barrage of + margin calls had created + chaos at Bear. In late + +On line 4013: + Stearns dispatched him to + engineer a solution + with Richard Marin, BSAM’s CEO. + + Marano now worked to + understand the portfolio, + including what it + +On line 4013: + a worst-EARLY case scenario + in which significant amounts + of assets had to + +On line 4013: + Stearns’s conclusion: High-Grade + still had positive value, + but Enhanced Leverage + +On line 4015: + not. On the basis + of that analysis, Bear Stearns + committed up to + +On line 4015: + ultimately loaned + billion—to take out the High-Grade + Fund repo lenders and + +On line 4017: + sole repo lender to + the fund; Enhanced Leverage was + on its own. During + + a June Federal + Open Market Committee (FOMC) + meeting, members were + +On line 4017: + the subprime market + and the BSAM hedge funds. The staff + reported that the + +On line 4017: + housing market." The + liquidation of subprime + securities at + +On line 4019: + two BSAM hedge funds was + compared to the troubles faced + by Long-Term Capital + +On line 4019: + Chairman Bernanke noted + that the problems the hedge funds + experienced were + + a good example + of how leverage can increase + liquidity risk, + +On line 4019: + in situations + in which counterparties were + not willing to give + +On line 4019: + time to liquidate + and possibly realize + whatever value + +On line 4019: + in the positions. + But it was also noted + that the BSAM hedge funds + +On line 4019: + be "relatively + unique" among sponsored funds in their + concentration in + + subprime mortgages.60 Some + members were concerned about the + lack of transparency + +On line 4021: + funds, the consequent + lack of market discipline + on valuations + +On line 4021: + funds because they were + outside its jurisdiction. + These facts caused members + +On line 4023: + be concerned about whether + they understood the scope of + the problem. During + +On line 4023: + size of the credit + derivatives market, its + lack of transparency + +On line 4025: + cloud in the background + of policy. Meanwhile, Bear + Stearns executives + +On line 4025: + supported the High-Grade + bailout did not expect to lose + money. However, + +On line 4025: + Cayne and Earl Hedin, the + former senior managing + director of Bear + +On line 4025: + and BSAM, were opposed, + because they did not want to + increase shareholders’ + + potential losses.61 + Their fears proved accurate. By + July, the two hedge + +On line 4027: + almost nothing: High-Grade + Fund was down Enhanced Leverage + Fund, On July both + + filed for bankruptcy. + Cioffi and Tannin would be + criminally charged + +On line 4027: + investors, but they were + acquitted of all charges in + November Civil + + charges brought by the SEC + were still pending as of the + date of this report. + +On line 4029: + back, Marano told the + FCIC, "We caught a lot of flak + for allowing the + +On line 4029: + we had no option."63 + In an internal email in + June, Bill Jamison of + +On line 4029: + Investors, one of the + largest of all mutual fund + companies, referred + +On line 4029: + the Bear Stearns hedge funds + as the "canary in the mine + shaft" and predicted + +On line 4029: + turmoil.64 As the two + funds were collapsing, repo + lending tightened across + + the board. Many repo + lenders sharpened their focus on + the valuation + +On line 4031: + margins on loans to + institutions that appeared + to be exposed to + + the mortgage market; + they often required Treasury + securities as + + collateral; in + many cases, they demanded + shorter lending terms.65 + +On line 4031: + securities and + CDOs were not considered the + "super-safe" investments + +On line 4033: + dealers—had only + recently believed. Cayne called + Spector into the + +On line 4035: + resign. On Sunday, + August Spector submitted + his resignation + +On line 4037: + to the board. RATING + AGENCIES: "IT CAN’ T BE ALL + OF A SUDDEN" While + + BSAM was wrestling with its + two ailing flagship hedge funds, + the major credit + +On line 4037: + downgrades and credit + watch warnings on an array + of residential + +On line 4037: + securities. These + announcements foreshadowed the + actual losses + +On line 4039: + placed tranches backed by + U.S. subprime collateral, + or some billion in + + securities, on + negative watch. S&P promised to + review every deal + +On line 4039: + downgraded mortgage-backed + securities issued in + backed by U.S. subprime + +On line 4039: + watch. These Moody’s downgrades + affected about billion in + securities. The + +On line 4039: + placed tranches of CDOs, + with original face value + of about billion, on + +On line 4039: + Two days after its + original announcement, S&P + downgraded of the + +On line 4041: + placed on negative + watch. Fitch Ratings, the smallest + of the three major + +On line 4043: + While the specific + securities downgraded + were only a small + +On line 4043: + the universe (less than + of mortgage-backed securities + issued in investors + +On line 4043: + downgrades might come. Many + investors were critical of + the rating agencies, + +On line 4043: + for their belated + reactions. By July by + one measure, housing + +On line 4043: + had already fallen + about nationally from their + peak at the spring of + +On line 4045: + conference call with + S&P, the hedge fund manager + Steve Eisman questioned + +On line 4045: + director of S&P’s + residential mortgage–backed + securities group. + + Eisman asked, "I’d like + to know why now. I mean, the + news has been out on + + subprime now for many, + many months. The delinquencies have + been a disaster + +On line 4045: + for many, many months. (Your) + ratings have been called into + question now for many, + + many months. I’d like to + understand why you’re making + this move today when + +On line 4045: + you—and why didn’t you + do this many, many months ago. I + mean, it can’t be that + + all of a sudden, + the performance has reached a + level where you’ve + +On line 4045: + S&P "took action as + soon as possible given + the information + + at hand."68 The ratings + agencies’ downgrades, in tandem + with the problems at + + Bear Stearns’s hedge funds, had + a further chilling effect + on the markets. The + +On line 4047: + July, confirming + and guaranteeing even more + problems for holders + +On line 4047: + Enacting the same + inexorable dynamic that + had taken down the + + Bear Stearns funds, repo + lenders increasingly required + other borrowers + +On line 4047: + as collateral + to put up more, because their + value was unclear + + or depressed. Many of + these borrowers sold assets + to meet these margin + +On line 4047: + calls, EARLY and each + sale had the potential to + further depress prices. + +On line 4047: + other assets in + more liquid markets, for which + prices were readily + + available, pushing prices + downward in those markets, too. + AIG: "WELL BIGGER THAN + + WE EVER PLANNED FOR" + Of all the possible losers + in the looming rout, + +On line 4051: + have been among the most + concerned. After several + years of aggressive + +On line 4051: + growth, AIG’s Financial + Products subsidiary had written + billion in over-the-counter + +On line 4051: + swap (CDS) protection + on super-senior tranches of + multisector CDOs + +On line 4053: + by subprime mortgages. + In a phone call made July + the day after the + + downgrades, Andrew Forster, + the head of credit trading + at AIG Financial + +On line 4053: + executive vice + president of Financial + Product’s Marketing + +On line 4053: + had to analyze + exposures because "every + f***ing rating agency + +On line 4053: + spoken to [came] out + with more downgrades" and that he + was increasingly + +On line 4053: + "About a month ago I + was like, you know, suicidal. + The problem that we’re + + going to face is + that we’re going to have just + enormous downgrades on + +On line 4053: + the stuff that we’ve got. + Everyone tells me that it’s + trading and it’s two + + points lower and all + the rest of it and how come + you can’t mark your book. + +On line 4053: + it’s definitely + going to give it renewed + focus. I mean we + +On line 4053: + mark it. It’s, it’s, uh, + we’re [unintelligible] + f***ed basically."69 + +On line 4055: + likely worried that + most of AIG’s credit default + swap contracts required + +On line 4055: + collateral be + posted to the purchasers, should + the market value + + of the referenced + securities decline by + a certain amount, or + + should rating agencies + downgrade AIG’s long-term debt. That is, + collateral calls + + could be triggered even + if there were no actual + cash losses in, for + +On line 4055: + CDOs upon which the + protection had been written. + Remarkably, top AIG + +On line 4055: + Officer Robert Lewis, + Chief Credit Officer Kevin + McGinn, and Financial + +On line 4055: + Division CFO Elias + Habayeb—told FCIC investigators + that they did not even + +On line 4055: + these terms of the swaps + until the collateral + calls started rolling in + +On line 4055: + who supervised AIG + on a consolidated + basis didn’t know + +On line 4055: + Frost, who was the chief + credit default swap salesman + at AIG Financial + +On line 4055: + did know about the terms, + and he said he believed they + were standard for the + +On line 4057: + the division’s CEO, + also knew about the terms.73 And + the counterparties + +On line 4057: + knew, of course. On the + evening of July Goldman Sachs, + which held billion of + +On line 4057: + super-senior credit + default swaps,74 sent news of the + first collateral + + call in the form of + an email from Goldman’s salesman + Andrew Davilman to + +On line 4059: + DAVILMAN: Sorry to + bother you on vacation. + Margin call coming + +On line 4063: + Want to give you a + heads up. FROST, minutes later: + On what1 DAVILMAN, one + +On line 4065: + later: 20bb billion] + of supersenior.75 he next + day, Goldman made the + +On line 4065: + purchased million of + five-year protection—in the form + of credit default + +On line 4069: + on its obligations.77 + Frost never responded to + Davilman’s email. And when + +On line 4069: + from vacation, he + was instructed to not have + any involvement in + +On line 4069: + wanted Forster to take + the lead on resolving the + dispute.78 AIG’s models + + showed there would be no + defaults on any of the bond + payments that AIG’s swaps + +On line 4071: + if market value + declined, irrespective of + any long-term cash losses.79 + +On line 4071: + estimated that + the average decline in + the market value + +On line 4073: + of the bonds was So, + first Bear Stearns’s hedge funds and now + AIG was getting hit + +On line 4073: + securities. Like + Cioffi and his colleagues at + Bear Stearns, Frost and his + +On line 4073: + disputed Goldman’s + marks. On July Forster was told + by another AIG + + trader that "[AIG] would + be in fine shape if Goldman + wasn’t hanging its + +On line 4073: + out there." The margin + call was "something that hit out + of the blue and it’s + +On line 4073: + f***ing number that’s well + bigger than we ever planned + for." He acknowledged + +On line 4073: + that dealers might say + the marks "could be anything from + to sort of, you know, + +On line 4075: + because of the lack + of trading but said Goldman’s + marks were "ridiculous."81 In + +On line 4075: + FCIC, Viniar said Goldman + had stood ready to sell mortgage-backed + securities to + + AIG at Goldman’s own + marks.82 AIG’s Forster stated that he + would not buy the bonds + +On line 4075: + to value its own + portfolio of similar + assets at the same + + price. Forster said, "In the + current environment I + still wouldn’t buy them + +On line 4075: + they could probably + go low we can’t mark any of + our positions, and + +On line 4075: + what saves us having + this enormous mark to market. + If we start buying + + the physical bonds + back then any accountant is + going to turn around + +On line 4075: + and say, well, John, you + know you traded at you must + be able to mark your + +On line 4077: + "was not budging" on + its collateral demands, + according to Tom + +On line 4077: + a conference call + with Goldman executives + on August "I played + +On line 4077: + had, legal wording, + market practice, intent of + the language, meaning + +On line 4077: + and also stressed the + potential damage to the + relationship and + + GS said that this has + gone to the ‘highest levels’ + at GS and they feel + +On line 4081: + ‘test case.’"84 Goldman Sachs + and AIG would continue to + argue about Goldman’s + +On line 4081: + would continue to + post collateral that would + fall short of Goldman’s + + demands and Goldman + would continue to purchase + CDS contracts against the + +On line 4081: + possibility + of AIG’s default. Over the next + months, more such disputes + + would cost AIG tens of + billions of dollars and help + lead to one of the + +On line 4085: + history. EARLY + The Commission concludes that + entities such as + + Bear Stearns’s hedge funds and + AIG Financial Products that + had significant + +On line 4085: + parent companies. + The commercial paper and + repo markets—two + +On line 4085: + in collateral + asset values and concern + about financial firms’ + +On line 4099: + FUNDING CONTENTS IKB + of Germany: "Real money + investors" Countrywide: + +On line 4105: + BNP Paribas: "The ringing + of the bell"...............................................................250 SIVs: "An oasis + of calm"......................................................................................252 Money funds + +On line 4107: + and other investors: + "Drink[ing] from a fire hose.........................253 In + the summer of as + +On line 4107: + securities crashed + and Bear’s hedge funds imploded, + broader repercussions + + from the declining + housing market were still not + clear. "I don’t think [the + +On line 4107: + mess] poses any threat + to the overall economy," + Treasury Secretary + +On line 4107: + were looking under + every rock for any sign of + hidden or latent + + subprime exposure. + In late July, they found it + in the market for + +On line 4107: + commercial paper + (ABCP), a crucial, usually + boring backwater + +On line 4109: + financing allowed + companies to raise money + by borrowing against + +On line 4109: + short-term assets. By + mid-2007, hundreds of billions out + of the trillion U.S. + + ABCP market were backed + by mortgage-related assets, + including some with + +On line 4111: + noted, the rating + agencies had given all of + these ABCP programs their + +On line 4111: + investment-grade + ratings, often because of + liquidity puts + +On line 4113: + commercial banks. When + the mortgage securities + market dried up and + +On line 4113: + market mutual + funds became skittish about broad + categories of ABCP, + +On line 4113: + banks would be required + under these liquidity + puts to stand behind + +On line 4113: + the assets onto + their balance sheets, transferring + losses back into + +On line 4113: + would support programs + they had sponsored even when they + had made no prior + + commitment to do + so. IKB OF GERMANY: "REAL + MONEY INVESTORS" The + +On line 4123: + the run on asset-backed + commercial paper was a + German SUMMER bank, + +On line 4123: + IKB Deutsche Industriebank + AG. Since its foundation in + IKB had focused on + +On line 4123: + but in the past decade, + management diversified. + In IKB created + +On line 4123: + commercial paper + program, called Rhineland, to purchase + a portfolio of + +On line 4123: + securities backed + by credit card receivables, + business loans, auto + + loans, and mortgages. It + made money by using less + expensive short-term + + commercial paper + to purchase higher-yielding long-term + securities, a + + strategy known as + "securities arbitrage." + By the end of June, + +On line 4123: + of which were CDOs and + CLOs (collateralized loan + obligations—that is, + +On line 4123: + leveraged loans). And at + least billion billion) of that + was protected by + +On line 4125: + through liquidity + puts.3 Importantly, German + regulators at + +On line 4125: + did not require IKB + to hold any capital to + offset potential + +On line 4127: + losses.4 As late as + June when so many were bailing + out of the structured + +On line 4127: + planning to expand + its off-balance-sheet holdings and + was willing to take + +On line 4129: + such as synthetic + CDOs.5 This attitude made IKB + a favorite of the + + investment banks and + hedge funds that were desperate + to take the short side + +On line 4131: + the deal. In early + when Goldman was looking for + buyers for Abacus + +On line 4131: + in part III, it looked + to IKB. An employee of + Paulson Co., the hedge + +On line 4131: + was taking the short + side of the deal, bluntly said + that "real money" + +On line 4131: + scenario," the Paulson + employee wrote in an email. + "In my opinion this + + situation is + due to the fact that rating + agencies, CDO managers + + and underwriters + have all the incentives to + keep the game going, + +On line 4135: + IKB subsequently + purchased million of the A1 + and A2 tranches of + +On line 4135: + the Abacus CDO and + placed them in Rhineland.7 It would lose + of that investment. + + In mid-2007, Rhineland’s asset-backed + commercial paper was held + by a number of + + American investors, + including the Montana Board + of Investments, the + +On line 4137: + the Robbinsdale Area + School District in suburban + Minneapolis. + +On line 4139: + that ratings downgrades + of mortgage-backed securities + would have only a + + limited impact + on its business.8 However, + within days, Goldman + +On line 4139: + which regularly + helped Rhineland raise money in the + commercial paper + + market, told IKB that + it would not sell any more Rhineland + paper to its clients. + +On line 4141: + On Friday, July + Deutsche Bank, recognizing that + the ABCP markets would + + soon abandon Rhineland and + that IKB would have to provide + substantial support + +On line 4141: + program, decided + that doing business with IKB + was too risky and cut + +On line 4141: + its credit lines. These + were necessary for IKB to + continue running + + its business. Deutsche Bank + also alerted the German + bank regulator + + to IKB’s critical + state. With the regulator’s + encouragement, IKB’s + +On line 4141: + largest shareholder, KfW + Bankengruppe, announced on July + that it would bail out + +On line 4143: + its liquidity + puts with KB. Rhineland’s commercial + paper investors were + + able to get rid of + the paper, and KfW took the + hit instead—with its + +On line 4145: + losses expected + to eventually reach The + IKB episode served notice + +On line 4145: + mortgage assets were + lurk-ing in the portfolios of + even risk-averse investors. + +On line 4145: + the short-term funding + markets—even those that were + not exposed to risky + +On line 4145: + was a recognition, + I’d say an acute recognition, + that potentially + + some of the asset-backed + commercial paper conduits + could have exposure + +On line 4145: + a result, investors + in general—without even + looking into the + +On line 4145: + assets—decided + ‘I don’t want to be in any + asset-backed commercial + +On line 4145: + don’t want to invest + in a fund that may have those + positions,’" Steven Meier, + +On line 4147: + at State Street Global + Advisors, testified to + the FCIC.10 From its peak + +On line 4147: + asset-backed commercial + paper market would decline + by almost billion + +On line 4151: + three days after the + IKB rescue, Countrywide CEO + Angelo Mozilo + + realized that his + company was unable to + roll its commercial + + paper or borrow + on the repo market. "When + we talk about [August + +On line 4151: + at Countrywide, that’s + our he said. "We worked seven + days a week trying + +On line 4151: + figure this thing out + and trying to work with the + banks. Our repurchase + +On line 4153: + billions and billions + of dollars."11 Mozilo emailed Lyle + Gramley, a former + +On line 4153: + credit markets is + now tending towards panic. + There is little to + + no liquidity + in the mortgage market with + the exception of + +On line 4155: + is not deemed to be + conforming either cannot + be sold into the + +On line 4157: + Eric Sieracki + told investors that Countrywide + had "significant + +On line 4157: + sources of our bank. It + is important to note that + the company has + +On line 4157: + commercial paper."13 + Moody’s reaffirmed its A3 ratings + and stable outlook + + on the company. + The ratings agencies and the + company itself + +On line 4161: + would quickly reverse + their positions. On August + Mozilo reported + +On line 4161: + the board during a + specially convened meeting + that, as the meeting + +On line 4161: + (both prime and non-prime) had + unexpectedly and with + almost no warning + +On line 4161: + and COO David Sambol + told the board, "Management can + only plan on a + +On line 4161: + week basis due to + the tenuous nature of + the situation." + + Mozilo reported + that although he continued + to negotiate + +On line 4161: + for alternative + sources of liquidity, the + "unprecedented and + +On line 4161: + secondary market could + force the company to draw + down on its backup + +On line 4163: + lines.14 Shortly after + the Countrywide board meeting, + the Fed’s Federal + +On line 4163: + Open Market SUMMER + Committee members discussed + the "considerable + +On line 4163: + market and that some + firms, including Countrywide, + were showing some strain. + + They noted that the + data did not indicate + a collapse of the + +On line 4163: + was imminent and + that, if the more optimistic + scenarios proved to + + be accurate, they + might look back and be surprised + that the financial + + events did not have a + stronger impact on the real + economy. But the + +On line 4163: + effects of subprime + developments could spread to + other sectors and + +On line 4163: + and duration of + the deterioration + of these markets. One + +On line 4163: + in a paraphrase of + a quote he attributed to + Winston Churchill, said that + +On line 4163: + of history would + exonerate those present if + they did not prepare + +On line 4165: + staff presentations.15 + Several days later, on + August Countrywide + +On line 4165: + that foreclosures and + delinquencies were up and that + loan production had + +On line 4165: + preceding month. A + company spokesman said layoffs + would be considered. + +On line 4165: + same day, Fed staff, who + had supervised Countrywide’s + holding company + +On line 4167: + the bank switched to a + thrift charter in March sent a + confidential memo + +On line 4169: + The company is + heavily reliant on an + originate-to-distribute + + model, and, given + current market conditions, + the firm is unable + +On line 4169: + its non-conforming + mortgages. Countrywide’s short-term + funding strategy + + relied heavily + on commercial paper (CP) + and, especially, + +On line 4169: + market conditions, + the viability of + that strategy is + +On line 4171: + ability of the + company to use [mortgage] + securities as + +On line 4171: + Those liquidity + pressures conceivably could lead + eventually to + +On line 4173: + provide assistance, + perhaps by waiving a Fed + rule and allowing + +On line 4173: + subsidiary to support + its holding company by + raising money from + +On line 4173: + through discount-window + lending, which would require the + Fed to accept risky + +On line 4173: + securities as + collateral, something it + never had done and + +On line 4173: + before the Board could + authorize lending to the + holding company + +On line 4173: + mortgage subsidiary," staff + wrote. "The Federal Reserve + had not lent to a + +On line 4175: + current circumstances + seemed highly improbable."17 + The following day, + +On line 4175: + recommended to + his board that the company + notify lenders of + +On line 4175: + intention to draw + down billion on backup lines + of credit.18 Mozilo + + and his team knew that + the decision could lead to + ratings owngrades. "The + + only option we + had was to pull down those lines," + he told the FCIC. "We + +On line 4175: + a pipeline of loans + and we either had to say + to the borrowers, + + the customers, ‘we’re out + of business, we’re not going + to fund’—and there’s great + +On line 4175: + that, litigation + risk, we had committed to + fund. When it’s between + +On line 4177: + your image, you hold + on to your ass."19 On the same + day that Countrywide’s + +On line 4177: + drawdown—but before + the company announced it + publicly, the Merrill + +On line 4177: + Kenneth Bruce, who had + reissued his "buy" rating on + the company’s stock + +On line 4177: + days earlier, switched + to "sell" with a "negative" + outlook because of + + Countrywide’s funding + pressures, adding, "if the market + loses confidence + + in its ability + to function properly, then + the model can break. + +On line 4177: + in a weak market, + then it is possible for + [Countrywide] to go + +On line 4179: + The next day, as news + of Bruce’s call spread, Countrywide + informed markets about + +On line 4179: + senior unsecured + debt rating to the lowest + tier of investment + +On line 4179: + grade. Countrywide shares + fell closing at for the year, + the company’s stock + +On line 4179: + was down The bad news + led to an old-fashioned bank + run. Mozilo singled + +On line 4179: + Los Angeles Times + article covering Bruce’s + report, which, he said, + +On line 4179: + "caused a run on our + bank of billion on Monday." + The article spurred + +On line 4179: + their funds by noting + specific addresses of + Countrywide branches + +On line 4179: + Mozilo told the FCIC. + A reporter "came out with a + photographer and, + + you know, interviewed + the people in line, and he + created— it was + +On line 4183: + horrible for us. + Totally unnecessary," + Mozilo said.21 Six days + +On line 4183: + on August, Bank of + America announced it would + invest billion for + +On line 4183: + nation’s biggest bank + would soon acquire the mortgage + lender. Mozilo told the + +On line 4183: + "There was never a + question about our survival"; he + said the investment + +On line 4185: + net loss of billion, + its first quarterly loss in + years. As charge-offs on its + +On line 4185: + raised provisions for + loan losses to million from + only million one + +On line 4185: + January Bank of + America issued a press + release announcing + +On line 4185: + approximately + billion. It said the combined + entity would stop + +On line 4187: + would expand programs + to help distressed borrowers. + BNP PARIBAS: "THE RINGING + + OF THE BELL" Meanwhile, + problems in U.S. financial + markets hit the largest + +On line 4189: + On August BNP Paribas + SA suspended redemptions + from three investment + +On line 4189: + had plunged in less than + two weeks. Total assets in + those funds were billion, + +On line 4189: + that amount in subprime + securities rated AA + or higher.23 The bank + + said it would also + stop calculating a fair + market value for + + the funds because "the + complete evaporation of + liquidity in + +On line 4189: + it impossible + to value certain assets + fairly regardless + +On line 4191: + "was the ringing of + the bell" for short-term funding + markets, Paul McCulley, a + +On line 4193: + the FCIC. "The buyers + went on a buyer strike and + simply weren’t rolling."25 + +On line 4193: + is, they stopped rolling over + their commercial paper and + instead demanded + +On line 4193: + payment on their loans. + On August the interest + rates for overnight lending + +On line 4195: + It would continue + rising unevenly, hitting + in August Figure + +On line 4199: + in response, lending + declined. In August alone, the + asset-backed commercial + +On line 4199: + On August subprime + lender American Home Mortgage’s + asset-backed commercial + +On line 4199: + program invoked its + privilege of postponing + repayment, trapping + +On line 4199: + Lenders quickly withdrew + from programs with similar + provisions, which shrank + +On line 4201: + market from billion + to billion between May and + August.26 The paper + +On line 4203: + as frequently as + possible. The average + maturity of + +On line 4203: + asset-backed commercial + paper in the United States + fell from bout days in + +On line 4203: + July to about days + by mid-September, though the overwhelming + majority was + +On line 4205: + issued for just to + days.27 Disruptions quickly spread + to other parts of + +On line 4205: + flight to quality, + investors dumped their repo and + commercial paper + + holdings and increased + their holdings in seemingly + safer money market + +On line 4205: + other’s potential + subprime exposures, scrambled + to amass funds for their + + own liquidity. + Banks became less willing to + lend to each other. + +On line 4205: + indicator of + interbank lending rates, called + the one-month LIBOR-OIS + +On line 4207: + that banks were concerned + about the credit risk involved + in lending to each + +On line 4207: + three-to fourfold + over historical values, + and by September + +On line 4209: + climbed by another + In it would peak much higher. + The panic in the + +On line 4209: + interbank markets + was met by immediate + government action. + +On line 4209: + On August the day + after BNP Paribas suspended + redemptions, the Fed + +On line 4209: + facilitate the + orderly functioning of + financial markets,"28 + + and the European + Central Bank infused billions + of Euros into + +On line 4209: + markets. On August + the Fed cut the discount rate + by basis points—from + +On line 4209: + be the first of many + such cuts aimed at increasing + liquidity. The + +On line 4209: + also extended + the term of discount-window + lending to days (from + + the usual overnight or + very short-term period) to + offer banks a more + + stable source of funds. + On the same day, the Fed’s FOMC + released a statement + +On line 4209: + continued market + deterioration and + promising that it was + + "prepared to act as + needed to mitigate the + adverse effects on + +On line 4213: + "AN OASIS OF CALM" + In August, the turmoil in + asset-backed commercial + +On line 4213: + market for structured + investment vehicles, or + SIVs, even though most of + +On line 4213: + programs had little + subprime mortgage exposure. + SIVs had a stable + +On line 4215: + in These investments + had weathered a number of + credit crises—even + +On line 4215: + through early summer + of as noted in a Moody’s + report issued on + +On line 4219: + "SIVs: An Oasis of + Calm in the Sub-prime Maelstrom."30 + Unlike typical + +On line 4219: + paper programs, SIVs + were funded primarily + through medium-term notes—bonds + +On line 4219: + in one to five years. + SIVs held significant amounts + of highly liquid + +On line 4219: + and marked those assets + to market prices daily or + weekly, which allowed + +On line 4221: + without explicit + liquidity support from + their sponsors. The SIV + +On line 4221: + and On the eve of + the crisis, there were SIVs with + almost billion in + +On line 4221: + was invested in + mortgage-backed securities or + in CDOs, but only + +On line 4227: + first SIVs to fail were + concentrated in subprime + mortgage– SUMMER backed + +On line 4227: + mortgage-related CDOs, + or both. These included Cheyne + Finance (managed by + +On line 4227: + structured by Barclays + Capital). Between August + and October, each + +On line 4229: + these four was forced to + restructure or liquidate. + Investors soon ran from + + even the safer SIVs. "The + media was quite happy to + sen-sationalize + + the collapse of the + next ‘leaking SIV’ or the next + ‘SIV-positive’ institution," + +On line 4229: + Henry Tabe told the + FCIC.32 The situation was + complicated by + +On line 4229: + of transparency. "In + a context of opacity + about where risk resides, + +On line 4229: + general distrust + has contaminated many + asset classes. What + +On line 4229: + been liquid is now + illiquid. Good collateral + cannot be sold or + +On line 4231: + wrote on September + Even high-quality assets + that had nothing to + + do with the mortgage + market were declining in + value. One SIV marked + +On line 4231: + a CDO to seven + cents on the dollar while it + was still rated triple-A.34 + +On line 4231: + managers sold assets. + But selling high-quality + assets into a + +On line 4231: + prices of these unimpaired + securities and pushed down + the market values + +On line 4233: + portfolios. By the + end of November, SIVs still + in operation + +On line 4233: + their portfolios, on + average.35 Sponsors rescued + some SIVs. Other SIVs + +On line 4233: + liquidated; some + investors had to wait a year + or more to receive + + payments and, even then, + recouped only some of their + money. In the case + +On line 4233: + Rhinebridge, investors lost + and only gradually + received their payments + +On line 4233: + the next year.36 Investors + in one SIV, Sigma, lost more + than As of fall not + +On line 4235: + single SIV remained + in its original form. The + subprime crisis had + +On line 4235: + resilient market in + which losses due to subprime + mortgage defaults had + +On line 4237: + if anything, modest + and localized. MONEY FUNDS + AND OTHER INVESTORS: + + "DRINKING FROM A FIRE + HOSE" The next dominoes were the + money market funds + +On line 4241: + Fidelity, Vanguard, + and Federated. Under + SEC regulations, + +On line 4241: + market funds that serve + retail investors must keep two + sets of accounting + +On line 4241: + reflecting the price + they paid for securities + and the other the + +On line 4241: + (the "shadow price," in + market parlance). However, + funds do not have to + +On line 4241: + shadow price unless + the fund’s net asset value + (NAV) has fallen by + +On line 4243: + below (to per share. + Such a decline in market + value is known as + + "breaking the buck" and + generally leads to a + fund’s collapse. It can + +On line 4243: + example, if just + of a fund’s portfolio is + in an investment + +On line 4245: + of its value. So + a fund manager cannot + afford big risks. But + +On line 4245: + were considered very + safe investments—they always + had been—and were widely + +On line 4245: + market funds. In fall + dozens of money market funds + faced losses on SIVs + +On line 4245: + asset-backed commercial + paper. To prevent their funds + from breaking the buck, + +On line 4245: + including large banks + such s Bank of America, + US Bancorp, and SunTrust, + + purchased SIV assets + from their money market funds.38 + Similar dramas + +On line 4247: + the money market + sector known as enhanced cash + funds. These funds serve not + +On line 4249: + but rather "qualified + purchasers," which may include wealthy + investors who invest + +On line 4249: + SEC regulations + and disclosure requirements. + Because they have much + + higher investment + thresholds than retail funds, and + because they face less + +On line 4249: + and higher returns. + Nonetheless, these funds also + aim to maintain a + +On line 4251: + net asset value. + As the market turned, some of + these funds did break the + +On line 4251: + of others stepped in + to support their value. The + billion GE Asset + +On line 4251: + fund that managed GE’s + own pension and employee + benefit assets, + +On line 4251: + the summer; it had + of its assets in mortgage-backed + securities. When + +On line 4251: + million and closed in + November investors redeemed + their interests at + +On line 4253: + largest enhanced cash fund, + with billion in assets at + its peak—after one of that + +On line 4257: + largest investors withdrew + billion in November An + interesting case + +On line 4257: + the Credit Suisse + Institutional Money + Market Prime Fund. The + +On line 4257: + "portals," which supplied + an estimated billion + to money market + + funds and other funds. + Investors used these portals to + quickly move their cash + +On line 4257: + higher return could + attract significant funds: + one money market + +On line 4257: + manager later + compared the use of portal + money to "drink[ing] + +On line 4257: + a fire hose."41 But the + money could vanish just as + quickly. The Credit + + Suisse fund posted + the highest returns in the + industry during + +On line 4257: + the months before the + liquidity crisis, and + increased its assets + +On line 4259: + summer of to more + than billion in the summer + of To deliver + +On line 4259: + focused on structured + finance products, including + CDOs and SIVs such as + +On line 4259: + When investors became + concerned about such assets, they + yanked about billion out + +On line 4261: + the fund in August + alone. Credit Suisse, the Swiss + bank that sponsored the + +On line 4261: + was forced to bail it + out, purchasing billion of + assets in August.42 + + The episode highlights the + risks of money market funds’ + relying on "hot + +On line 4261: + institutional + investors who move quickly in + and out of funds in + +On line 4263: + The losses on SIVs + and other mortgage-tainted + investments also + +On line 4263: + investment pools across + the country, some of which held + billions of dollars + +On line 4263: + districts, and other + government agencies with economies + of scale, investment + +On line 4265: + participation + is mandatory. With billion + in assets, Florida’s + + local government + investment pool was the largest + in the country, and + +On line 4265: + a highly liquid, + low-risk money market fund, with + securities like + +On line 4265: + state legislature + noted.43 But by November + because of ratings + +On line 4265: + the fund held at least + billion in securities + that no longer met the + +On line 4265: + state’s requirements. It + had more than billion in SIVs + and other distressed + +On line 4265: + securities, of + which about million had already + defaulted. And it + +On line 4265: + maturities that + stretched out as far as June In + early November, + +On line 4265: + of news reports, the + fund suffered a run. Local + governments withdrew + +On line 4265: + two weeks. Orange and + Pinellas counties pulled out their + entire investments. + +On line 4267: + withdrawals. Florida’s was + the hardest hit, but other + state investment pools + +On line 4269: + on SIVs and other + mortgage-related holdings. The + Commission concludes + +On line 4269: + the shadow banking + system was permitted to + grow to rival the + + commercial banking + system with inadequate + supervision and + +On line 4269: + That system was very + fragile due to high leverage, + short-term funding, risky + +On line 4269: + the mortgage market + collapsed and financial firms + began to abandon + +On line 4269: + commercial paper + and repo lending markets, + some institutions + +On line 4269: + operations failed + or, later in the crisis, + had to be rescued. + +On line 4269: + interconnections + created contagion, as + the crisis spread even + +On line 4269: + markets and firms that + had little or no direct + exposure to the + + mortgage market. In + addition, regulation + and supervision + +On line 4271: + thrifts to operate + with fewer constraints and to + engage in a wider + + range of financial + activities, including + activities in + +On line 4273: + banking system. The + financial sector, which grew + enormously in the + +On line 4273: + leading up to the + financial crisis, wielded + great political + +On line 4273: + institutional + supervision and market + regulation of + +On line 4273: + vulnerable to + the financial crisis and + exacerbated + +On line 4285: + TO EARLY BILLIONS + IN SUBPRIME LOSSES CONTENTS + Merrill Lynch: "Dawning + + awareness over the course + of the summer".................257 Citigroup: + "That would not in any + + way have excited + my attention"...................260 AIG’s dispute + with Goldman: "There could + +On line 4295: + never expected + losses"...................................................276 While a handful of + banks were bailing out + + their money market + funds and commercial paper + programs in the fall + +On line 4295: + loans, securities, + and derivatives, with no + end in sight. Among U.S. + + firms, Citigroup and + Merrill Lynch reported the + most spectacular + +On line 4295: + debt obligation (CDO) + businesses, writing down a + total of billion + +On line 4295: + respectively, by + the end of the year. Billions + more in losses were + +On line 4297: + America billion), + Morgan Stanley billion), JP + Morgan billion), and + +On line 4297: + hedge funds, and other + financial institutions + collectively had + +On line 4299: + discriminating + between firms perceived to be + relatively healthy + + and others about which + they were not so sure. Bear Stearns + and Lehman Brothers were + +On line 4299: + at the top of the + "suspect" list; by year-end the cost + of five-year protection + + against default on their + obligations in the credit + default swap market + +On line 4299: + respectively, and + annually for every + million, while the cost + +On line 4301: + relatively stronger + Goldman Sachs stood at Meanwhile, + the economy was + +On line 4301: + financial markets, + declining home prices, and oil + prices above a barrel, + +On line 4301: + Reserve lowered the + overnight bank borrowing rate from + earlier in the + +On line 4309: + to in September, + in October, and then in + December. LATE TO + +On line 4313: + EARLY MERRILL LYNCH: + "DAWNING AWARENESS OVER THE COURSE + OF THE SUMMER" On + +On line 4313: + when it announced that + third-quarter earnings would include + a billion loss on + +On line 4313: + CDOs and billion on + subprime mortgages—$7.9 billion in + total, the largest Wall + +On line 4313: + that point, and nearly + twice the billion loss that the + company had warned + +On line 4313: + expect just three weeks + earlier. Six days later, + the embattled CEO + + Stanley O’Neal, a 21-year + Merrill veteran, resigned. + Much of this write-down + +On line 4317: + from the firm’s holdings + of the super-senior tranches + of mortgage-related + + CDOs that Merrill had + previously thought to be + extremely safe. As + +On line 4319: + its management had + been "bullish on growth" and "bullish on + [the subprime] asset + +On line 4319: + the signs of trouble + were becoming difficult + even for Merrill to + + ignore. Two mortgage + originators to which the + firm had extended + +On line 4319: + lines failed: Ownit, in + which Merrill also had a + small equity stake, + +On line 4319: + Network. Merrill seized + the collateral backing + those loans: billion from + +On line 4321: + Mortgage Lenders, billion + from Ownit. Merrill, like many + of its competitors, + + started to ramp up + its sales efforts, packaging + its inventory + + of mortgage loans and + securities into CDOs + with new vigor. Its + +On line 4321: + was to reduce the + firm’s risk by getting those loans + and securities + + off its balance sheet. + Yet it found that it could not + sell the super-senior + +On line 4323: + CDOs at acceptable + prices; it therefore had to "take + down senior tranches + +On line 4323: + of tens of billions + of dollars of those tranches + on Merrill’s books. Dow + +On line 4323: + the co-president of + Merrill’s investment banking + segment, told FCIC staff + +On line 4323: + buildup of the retained + super-senior tranches in the + CDO positions was + +On line 4323: + actually part + of a strategy begun + in late to reduce + +On line 4323: + firm’s inventory + of subprime and Alt-A mortgages. + Sell the lower-rated + +On line 4323: + tranches, retain the + super-senior tranches: those had + been his instructions + +On line 4323: + managers at the end + of Kim recalled. He believed + that this strategy + + would reduce overall + credit risk. After all, the + super-senior tranches + +On line 4323: + of those investments.6 + To some degree, however, + the strategy was + +On line 4323: + were having trouble + selling these investments, and + some were even sold at + + a loss.7 Initially, + the strategy seemed to work. + By May, the amount of + +On line 4325: + securities to + be packaged into CDOs had + declined to billion + +On line 4325: + net amount in retained + super-senior CDO tranches had + increased from billion + +On line 4325: + in September to + billion by March and billion + by May.9 But as the + + mortgage market came + under increasing pressure + and as the market + +On line 4325: + super-senior tranches + crumbled, the strategy would + come back to haunt the + +On line 4327: + for 2007—net revenues of + billion—were its second-highest + quarterly results + +On line 4327: + for the Fixed Income, + Currencies and Commodities + business, which housed the + +On line 4327: + CDO positions. These + esults were announced during a + conference call with + +On line 4327: + event that investors and + analysts rely on to + obtain important + +On line 4327: + about the company + and that, like other public + statements, is subject + +On line 4329: + securities laws. + Merrill’s then-CFO Jeffrey Edwards + indicated that + +On line 4329: + dislocation in + the subprime market, because + "revenues from subprime + +On line 4329: + of our net revenues" + over the past five quarters, and + because Merrill’s "risk + +On line 4329: + better than ever, + and crucial to our success + in navigating + +On line 4329: + Providing further + assurances, he stated, "We + believe the issues + +On line 4331: + not negatively + impacted other sectors."10 + However, Edwards + +On line 4331: + increase in retained + super-senior CDO tranches or + the difficulty + +On line 4331: + those tranches, even at + a loss—though specific questions + on the subject were + +On line 4333: + first-quarter report with + another for the second + quarter that "enabled + +On line 4333: + company to achieve + record net revenues, net earnings + and net earnings per + +On line 4333: + share for the first half + of During the conference + call announcing the + +On line 4333: + analyst Glenn Schorr + of UBS, a large Swiss bank, asked + the CFO to provide + + some "color around myth + versus reality" on + Merrill’s exposure + +On line 4333: + CDO positions. As + he had three months earlier, + Edwards stressed Merrill’s + + risk management and + the fact that the CDO business + was a small part of + +On line 4333: + said that there had been + significant reductions + in Merrill’s retained + +On line 4333: + lower-rated segments + of the market, although he + did not disclose that + +On line 4335: + of Merrill’s retained + CDOs had reached billion by June. + Edwards declined to + + provide details about + the company’s exposure + to subprime mortgage + +On line 4335: + inventory of + mortgage-backed securities to + be packaged into + +On line 4335: + "We don’t disclose our + capital allocations + against any specific + +On line 4337: + broader group," Edwards + said.12 On July, after the + super-senior tranches + +On line 4337: + executives first + officially informed its + board about the buildup. At + +On line 4337: + presentation to + the board’s Finance Committee, + Dale Lattanzio, co-head + +On line 4337: + of the Fixed Income, + Currencies and Commodities + business, reported + +On line 4339: + a "net" exposure + of billion in CDO-related assets, + essentially all + +On line 4339: + with exposure to + the lower-rated asset class + significantly + +On line 4339: + was the amount of CDO + positions left after the + subtraction of the + +On line 4341: + guarantees in one + form or another—that Merrill + had purchased to pass + +On line 4341: + third parties willing + to provide that protection + and take that risk for + +On line 4343: + fee. AIG and the small + club of monoline insurers + were significant + + suppliers of these + guarantees, commonly done + as credit default + +On line 4343: + July Merrill had + begun to increase the amount + of CDS protection + +On line 4345: + told the committee, + "[Management] decided in + the beginning of + +On line 4345: + reduce exposure + to lower-rated assets in + the sub-prime asset + +On line 4345: + senior and super + senior tranches."14 Edwards did + not see any problems. + + As Kim insisted, + "Everyone at the firm and + most people in the + +On line 4349: + that super-senior was + super safe."15 LATE TO EARLY + Former CEO O’Neal told + +On line 4349: + the company was + retaining the super-senior + tranches of the CDOs + +On line 4349: + Finance Committee. + He was startled, if only + because he had been + +On line 4349: + the impression that + Merrill’s mortgage-backed-assets business + had been driven by + +On line 4349: + he had assumed that + if there were no new customers, + there would be no new + +On line 4349: + CDOs, why would Merrill + have to retain CDO tranches + on the balance sheet1 + +On line 4349: + said he was surprised + about the retained positions + but stated that the + +On line 4349: + and estimation + of potential losses were + not sufficient to + +On line 4349: + retained positions + had experienced only + million in losses.17 + + Over the next three months, + the market value of the + super-senior tranches + +On line 4351: + and losses ballooned; + O’Neal told the FCIC: "It was a + dawning awareness over + +On line 4351: + course of the summer + and through September as the + size of the losses + +On line 4353: + October Merrill + executives gave its board + a detailed account + +On line 4353: + of how the firm found + itself with what was by that + time billion in net + + exposure to the + super-senior tranches—down from + a peak in July + +On line 4353: + of billion because + the firm had increasingly + hedged, written off, and + +On line 4353: + its exposure. On + October Merrill announced + its third-quarter earnings: + +On line 4353: + of billion. Merrill + also reported—for the + first time—its billion net + +On line 4353: + CDO positions. Still, + in their conference call with + analysts, O’Neal and + + Edwards refused to + disclose the gross exposures, + excluding the hedges + + from the monolines and + AIG. "I just don’t want to get + into the details + + behind that," Edwards + said. "Let me just say that what + we have provided + +On line 4353: + the Securities + and Exchange Commission, by + September Merrill + +On line 4353: + accumulated + billion of "gross" retained CDO + positions, almost + +On line 4355: + reported during + the October conference + call.20 On October + +On line 4357: + O’Neal resigned, he left + with a severance package + worth million21—on top of + +On line 4359: + million in total + compensation he earned in + when his company + +On line 4359: + operations. Kim, + who oversaw the strategy + that left Merrill with + +On line 4359: + in losses, had left + in May after being paid + million for his work + +On line 4361: + a firm.22 By late the + viability of the + monoline insurers + +On line 4361: + from which Merrill had + purchased almost billion in + hedges had come into + +On line 4361: + rating agencies were + downgrading them, as we will + see in more detail + +On line 4361: + had told Merrill that + it would impose a punitive + capital charge on + +On line 4361: + might not be good for + all the protection purchased, + Merrill began to + +On line 4363: + allowances, starting with + billion on January By + the end of Merrill + +On line 4363: + total of billion + related to monolines and + had recorded total + +On line 4365: + billion of other + mortgage-related exposures. + ITIGROUP: "THAT WOULD + + NOT IN ANY WAY HAVE + EXCITED MY ATTENTION" + Five days after O’Neal’s + +On line 4369: + its total subprime + exposure was billion, which + was billion more than + +On line 4369: + told investors just three + weeks earlier. Citigroup + also announced it + +On line 4369: + to billion loss on + its subprime mortgage–related + holdings and that Chuck + +On line 4369: + resigning as its + CEO. Like O’Neal, Prince had learned late + of his company’s + +On line 4369: + CDO exposures. Prince + and Robert Rubin, chairman of + the Executive + +On line 4369: + Committee of the + board, told the FCIC that before + September they had + +On line 4369: + investment banking + division had sold some CDOs + with liquidity + +On line 4371: + super-senior tranches + of others.23 Prince told the FCIC + that even in hindsight + +On line 4371: + was difficult for + him to criticize any of + his team’s decisions. + +On line 4373: + had elevated + to my level that we were + putting on a trillion + +On line 4373: + balance sheet, billion + of triple-A-rated, zero-risk paper, that + would not in any way + +On line 4373: + attention," Prince said. + "It wouldn’t have been useful + for someone to come + +On line 4373: + and say, ‘Now, we have + got trillion on the balance + sheet of assets. I + + want to point out to + you there is a one in a + billion chance that this + +On line 4373: + billion could go south.’ + That would not have been useful + information. There + + is nothing I can + do with that, because there is + that level of chance + + on everything."24 In + fact, the odds were much higher + than that. Even before + +On line 4373: + the mass downgrades of + CDOs in late a triple-A tranche of + a CDO had a in + +On line 4375: + original rating.25 + Certainly, Citigroup was + a large and complex + +On line 4375: + organization. + That trillion balance sheet—and + trillion off-balance + +On line 4377: + sheet—was spread among more + than operating subsidiaries + in Prince insisted + +On line 4377: + to manage."26 But it + was an organization + in which one unit would + + decide to reduce + mortgage risk while another + unit increased it. And + +On line 4377: + management would not + be notified of billion + in concentrated + +On line 4379: + exposure— of the + company’s balance sheet and + more than a third of + +On line 4381: + Financial Control + Group had argued in that the + liquidity puts + + that Citigroup had + written on its CDOs had been + priced for investors too + +On line 4381: + in light of the risks.28 + Also, in early Susan + Mills, a managing + +On line 4381: + mortgages from other + companies and bundled them + for sale to investors—took + +On line 4381: + subprime market and + created a surveillance + group to track loans that + +On line 4381: + By mid-2006, her group saw + a deterioration + in loan quality + + and an increase in + early payment defaults—that + is, more borrowers + +On line 4381: + within a few months + of getting a loan. From to + Mills recalled before + +On line 4381: + the FCIC, the early + payment default rates nearly + tripled from to or In + +On line 4381: + diligence on what it + bought. However, neither Mills + nor other members + + of the unit shared any + of this information with + other divisions + +On line 4381: + in Citi-LATE TO EARLY + group, including the CDO desk.31 + Around March or April in + +On line 4383: + observed. "Management + acknowledged that, in looking + back, it should have made + +On line 4383: + throughout the firm. The + Global Consumer Group saw signs + of sub-prime issues + +On line 4383: + as did mortgage backed + securities traders, but CDO + structures business did + +On line 4387: + was] no dialogue + across businesses."33 Co-head of + the CDO desk Janice + + Warne told the FCIC that + she first saw weaknesses in + the underlying + +On line 4387: + In February, when + the ABX.HE.BBB- 06-2 fell to + below par, the CDO + +On line 4387: + on the financing + of mortgage securities + for inventory + +On line 4389: + produce CDOs.34 Shortly + thereafter, however, the same + ABX index started + +On line 4389: + rising to below + par in March and holding around + that level through May. + +On line 4389: + the CDO desk reversed + course and accelerated + its purchases of + + inventory in + April, according to Nestor Dominguez, + Warne’s co-head on the + +On line 4391: + Dominguez said he didn’t + see the market weakening + until the summer, + +On line 4393: + the index fell to + less than below par.36 Murray + Barnes, the Citigroup + +On line 4393: + officer assigned + to the CDO business, approved + the CDO desk’s request + +On line 4395: + collateral. Barnes + observed, in hindsight, that rather + than looking at the + +On line 4395: + opportunity, + Citigroup should have reassessed + its assumptions and + + examined whether the + decline in the ABX was a + sign of strain in the + +On line 4397: + manage its risk.37 The + risk management division + also increased the + +On line 4397: + CDO desk’s limits for + retaining the most senior + tranches from billion + +On line 4397: + to billion in the + first half of As at Merrill, + traders and risk managers + +On line 4397: + Citigroup believed + that the super-senior tranches + carried little risk.38 + +On line 4397: + Super Senior AAA + CDO exposure was perhaps + Citigroup’s ‘biggest + +On line 4397: + As management felt + comfortable with the credit + risk of these tranches, + +On line 4397: + positions on the + balance sheet. As the sub-prime + market began to + +On line 4397: + total about billion, + nearly half of Citigroup’s + capital at the + +On line 4397: + end of About billion + of that loss related to + protection purchased + +On line 4399: + insurers.40 Barnes’s + decision to increase the + CDO risk limits was + +On line 4399: + superior, Ellen + Duke. Barnes and Duke reported + to David Bushnell, the + + chief risk officer. + Bushnell—whom Prince called "the best + risk manager on + +On line 4399: + did not remember + specifically approving + the increase but that, + + in general, the + risk management function did + approve higher risk + +On line 4399: + when a business line + was growing.41 He described a + "firm-wide initiative" + +On line 4401: + Citigroup’s structured + products business.42 Perhaps what + is most remarkable + +On line 4401: + strategies employed by + the ecuritization and + CDO desks is that their + +On line 4401: + independent risk + meetings. Duke reflected that + she was not overly + +On line 4401: + when the issue came + up, saying she and her risk + team were "seduced by + +On line 4401: + the underlying + collateral."43 According + to Barnes, the CDO desk + +On line 4401: + CDOs’ underlying + collateral because it + lacked the "ability" + +On line 4401: + see loan performance + data, such as delinquencies + and early payment + +On line 4401: + unit in Citigroup’s + securitization desk + might have been able to + +On line 4401: + some insights based on + its own data.45 Barnes told the + FCIC that Citigroup’s + +On line 4401: + management tended + to be managed along business + lines, noting that he + +On line 4401: + what was happening + to the underlying loans. + He regretted not + +On line 4403: + to the consumer bank + to "get the pulse" of mortgage + origination.46 "That + + has never happened + since the Depression" Prince and + Rubin appeared to + +On line 4405: + up until the fall + of that any downside risk in + the CDO business was + +On line 4407: + "I don’t think anybody + focused on the CDOs. This was + one business in a + +On line 4407: + wasn’t one that had + any particular profile," + Rubin—in Prince’s words, a + +On line 4407: + important member + of [the] board"47—told the FCIC. "You + know, Tom Maheras was + + in charge of trading. + Tom was an extremely well + regarded trading + +On line 4407: + figure on the street. + And this is what traders do, they + handle these kinds of + +On line 4407: + Maheras, the co-head + of Citigroup’s investment + bank, told the FCIC that + +On line 4407: + spent "a small fraction + of of his time thinking about + or dealing with the + +On line 4409: + management function + was simply not very concerned + about housing market + + risks. According to + Prince, Bushnell and others told + him, in effect, "‘Gosh, + +On line 4409: + housing prices would have + to go down nationwide for + us to have, not a + + problem with [mortgage-backed + securities] CDOs, but for + us to have problems,’ + + and that has never + happened since the Depression."50 + Housing prices would be + +On line 4409: + down much less than when + Citigroup began having + problems because of + +On line 4411: + the liquidity + puts it had written. By June + national house prices + +On line 4411: + and about of subprime + adjustable-rate mortgages were delinquent. + Yet Citigroup still + + did not expect that + the liquidity puts could + be triggered, and it + +On line 4411: + On June Citigroup + made a presentation to + the SEC about subprime + +On line 4411: + in its CDO business. + The presentation noted + that Citigroup did + +On line 4411: + the liquidity + puts were not a concern: "The + risk of default is + +On line 4413: + [and] certain market + events must also occur for + us to be required + + to fund. Therefore, we + view these positions to be + even less risky than the + +On line 4415: + Super Senior Book."51 + Just a few weeks later, the + July failure of + + the two Bear Stearns hedge + funds spelled trouble. Commercial + paper written against + +On line 4415: + CDOs for which Bear Stearns + Asset Management was the + asset manager + +On line 4415: + on LATE TO EARLY + which Citigroup had issued + liquidity puts + +On line 4415: + puts would be triggered + if interest rates on the + asset-backed commercial + + paper rose above a + certain level. The Office + of the Comptroller + +On line 4417: + regulator of + Citigroup’s national bank + subsidiary, had expressed + +On line 4419: + apprehensions about + the liquidity puts in + But by the summer + +On line 4419: + of OCC Examiner-in-Charge John Lyons + told the FCIC, the OCC became + concerned. Buying the + +On line 4419: + drain billion of the + company’s cash and expose + it to possible + +On line 4419: + distress. But given + the rising rates, Lyons also + said Citigroup did + + not have the option + to wait. Over the next six months, + Citigroup purchased + +On line 4421: + been subject to its + liquidity puts.52 On a + July conference + +On line 4421: + CFO Gary Crittenden + told analysts and investors + that the company’s + +On line 4421: + fallen from billion + at the end of to billion + on June But he made + + no mention of the + super-senior exposures and + liquidity puts. + +On line 4421: + risk team did a nice + job of anticipating + that this was going + +On line 4421: + be a difficult + environment, and so set + about in a pretty + +On line 4421: + effort to reduce + our exposure over the last + six months,"53 he said. A + +On line 4421: + reiterated + that subprime exposure had + been cut: "So I think + +On line 4423: + anticipating + some market dislocation + here."54 By August, as + +On line 4423: + Citigroup’s CDO desk + was revaluing its super-senior + tranches, though it had + +On line 4423: + assigning value. + However, as the market + congealed, then froze, the + +On line 4423: + prices for these tranches + demanded a model. The + New York Fed later + +On line 4423: + for Super Senior + CDOs, based on fundamental + economic factors, + +On line 4423: + Citigroup’s current + validation methodologies + yet it was relied + +On line 4425: + exposures."55 Barnes, the + CDO risk officer, told the + FCIC that sometime that + +On line 4425: + CDO desk to express + his concerns about possible + losses on both the + +On line 4425: + CDO inventory + and the retained super-senior + tranches. The message + +On line 4425: + through. Nestor Dominguez told the + FCIC, "We began extensive + discussions about the + +On line 4425: + implications of + the dramatic decline of + the underlying + +On line 4425: + that would feed into + the super-senior positions."56 + Also at this time— + +On line 4427: + first time—such concerns + reached Maheras. He justified + his lack of prior + +On line 4427: + in inventory + and super-senior tranches by + pointing out "that the + +On line 4427: + competent managers + and by an independent + risk group and that I + +On line 4427: + properly apprised + of the general nature + of our work in this + +On line 4429: + attendant risks."57 The + exact dates are not certain, + but according to + +On line 4429: + he remembers a + discussion at a "Business + Heads" meeting about the + +On line 4429: + volatility on those + super-senior tranches in late + August or early + +On line 4429: + paper backing the + super-senior tranches of the + CDOs that BSAM managed.58 + + This was also when + Chairman and CEO Prince first heard + about the possible + +On line 4429: + "open positions" on + the super-senior CDO tranches + that Citigroup held: + +On line 4429: + wasn’t presented + at the time in a startling + fashion [but] hen it + +On line 4429: + bigger and bigger + and bigger, obviously, + over the next days."59 In + +On line 4429: + might range from million + to billion. This number was + recalculated + +On line 4431: + as to million in + mid-September, as the valuation + methodology was + +On line 4437: + ahead, those numbers would + skyrocket. "DEFCON calls" + To get a handle + +On line 4437: + liquidity puts, + starting on September Prince + convened a series + +On line 4439: + senior management + team; they included Rubin, + Maheras, Crittenden, + +On line 4439: + as well as Lou Kaden, + the chief administrative + officer.61 Rubin + +On line 4441: + in Korea during + the first meeting but Kaden kept + him informed.62 Rubin + +On line 4441: + emailed Prince: "According + to Lou, Tom [Maheras] never + did provide a clear + + and direct answer + on the super seniors. If + that is so, and the + + meeting did not bring + that to a head, isn’t that + deeply troubling not as + +On line 4441: + what happened—that is a + different question that is + also troubling—but + + as to providing + full and clear information + and analysis now." + +On line 4441: + disagreed, writing, "I + thought, for first mtg, it was good. + We weren’t trying + + to get to final + answers."63 A second meeting + was held September + +On line 4445: + Rubin was back in + the country. This meeting marked + the first time Rubin + +On line 4445: + and liquidity + put exposure. He later + commented, "As far + + as I was concerned + they were all one thing, because + if there was a put + +On line 4445: + circumstance might be, + you hadn’t fully disposed + of the risk."64 And, of + +On line 4445: + the circumstance was + not remote, since billions of + dollars in subprime + +On line 4447: + assets had already + come back onto Citigroup’s + books. Prince told the FCIC + +On line 4447: + Maheras had assured + him throughout the meetings and + the DEFCON calls + +On line 4447: + the super seniors + posed no risk to Citigroup, + even as the market + +On line 4447: + added that he became + increasingly uneasy with + Maheras’s assessment. + +On line 4447: + and said till his last + day at work [October ‘We + are never going + + to lose a penny + on these super seniors. We + are never going + +On line 4447: + to lose a penny + on these super seniors. And + as we went along and + +On line 4447: + really began + to have some very serious + concerns about what was + +On line 4449: + happen."65 Despite Prince’s + concerns, Citigroup remained + publicly silent about the + +On line 4449: + exposure from the + super-senior positions and + liquidity puts, + +On line 4451: + third-quarter earnings on + October On October + the rating agencies + +On line 4451: + first in a series + of downgrades on thousands of + securities. In + +On line 4451: + view, these downgrades were + "the precipitating event + in the financial + +On line 4451: + On the same day, Prince + restructured the investment + bank, a move that led + +On line 4453: + the resignation + of Maheras. Four days later, + the question of the + +On line 4453: + specifically raised + at the board of directors’ + Corporate Audit + +On line 4453: + and Risk Management + LATE TO EARLY Committee + meeting and brought up + + to the full board. A + presentation concluded + that "total sub-prime + + exposure in [the + investment bank] was $13bn with + an additional + +On line 4457: + Super Senior and + $27bn in Liquidity and + Par Puts."67 Citigroup’s + +On line 4457: + subprime exposure + was billion, nearly half of + its capital. The + +On line 4457: + of the super-senior- + and liquidity-put-related + exposure as he + +On line 4457: + told participants + that Citigroup had under + billion in subprime + +On line 4459: + A week later, on + Saturday, October Prince + learned from Crittenden + +On line 4459: + the board. He later + reflected, "When I drove home + and Gary called me and + +On line 4459: + it wasn’t going + to be two or million but + it was going to + +On line 4459: + never forget that + call. I continued driving, + and I got home, I + + walked in the door, I + told my wife, I said here’s what + I just heard and if + +On line 4461: + to be true, I am + resigning."69 On November + Citigroup revealed + +On line 4461: + accurate subprime + exposure—now estimated + at billion—and it + +On line 4461: + Though Prince had resigned, + he remained on Citigroup’s + payroll until the + + end of the year, and + the board of directors gave + him a generous + +On line 4461: + in cash and million + in stock, bringing his total + compensation to + +On line 4463: + sued Citigroup for + its delayed disclosures. To + resolve the charges, the + +On line 4465: + extensive level + of subprime exposure posed + by Super Senior + +On line 4465: + management, as well + as the independent Risk + Management function + +On line 4467: + and analyze these + risks in a timely fashion."71 + Prince’s replacements as + +On line 4467: + Pandit—were announced in + December. Rubin would stay + until January + +On line 4467: + having been paid more + than million from to during + his tenure at the + +On line 4467: + as chairman of the + Executive Committee, + a position that + +On line 4467: + the FCIC. "My agreement + with Citi provided that I’d + have no management + +On line 4469: + John Reed, former co-CEO + of Citigroup, attributed + the firm’s failures in + +On line 4469: + to a culture change + that occurred when the bank took + on Salomon Brothers + +On line 4471: + of the Travelers + merger. He said that Salomon + executives "were + +On line 4471: + used to taking big + risks" and "had a history + [of] making a lot + +On line 4473: + of money but then + getting into trouble."74 AIG’S + DISPUTE WITH GOLDMAN: + +On line 4477: + NEVER BE LOSSES" + Beginning on July when + Goldman’s Davilman sent + +On line 4477: + that disrupted the + vacation of AIG’s Alan Frost, + the dispute between + +On line 4477: + and AIG over the need + for collateral to back + credit default swaps + +On line 4477: + the attention of + the senior management of + both companies. For + +On line 4477: + day. It would pursue + AIG relentlessly with emands + for collateral + + based on marks that were + initially well below those + of other firms—while + +On line 4479: + burgeoning crisis. + The initial collateral + call was a shock to + +On line 4479: + executives, most + of whom had not even known that + the credit default + +On line 4481: + They had known there were + enormous exposures—$79 billion, + backed in large part by + +On line 4481: + subprime and Alt-A loans, + in compared with the parent + company’s total + +On line 4481: + said they had never + been concerned. "The mantra at [AIG + Financial Products] + +On line 4481: + always been (in my + experience) that there could + never be losses," + + Vice President of + Accounting Policy Joseph + St. Denis said.76 Then + +On line 4485: + first collateral + call. St. Denis told FCIC staff + that he was so "stunned" + +On line 4485: + news that he "had to + sit down."77 The collateral + provisions surprised + +On line 4487: + who had insisted + months earlier that AIG stop + writing the swaps. He + +On line 4487: + FCIC that "rule Number + at AIG FP" was to never + post collateral. + +On line 4487: + particularly + important in the credit + default swap business, + +On line 4489: + said, because it was + the only unhedged business + that AIG ran.78 But Jake + + Sun, the general + counsel of the Financial + Products subsidiary, who + +On line 4489: + executed, told + the FCIC that the provisions + were standard both at + +On line 4489: + the industry.79 Frost, + who was the first to learn of + the collateral + +On line 4489: + and said that other + financial institutions + also commonly + +On line 4489: + Micottis, the Paris-based + head of the AIG Financial + Products’ Enterprise + +On line 4491: + were indeed common + in derivatives contracts— + but surprising in + +On line 4491: + CDS contracts, which were + considered safe.81 Insurance + supervisors did + +On line 4491: + like MBIA and Ambac + to pay out except when the + insured entity + +On line 4491: + an actual loss, + and therefore those companies + were forbidden to + +On line 4491: + decline in market + value or unrealized + losses. Because AIG + +On line 4491: + regulated as + an insurance company, + it was not subject + +On line 4493: + prohibition. As + disturbing as the senior + AIG executives’ + +On line 4493: + inability to + assess the validity + of Goldman’s numbers. + +On line 4493: + Financial Products + did not have its own model + or otherwise try + +On line 4493: + CDO portfolio that + it guaranteed through credit + default swaps, nor did + +On line 4493: + exposure. Gene Park + explained that hedging was seen + as unnecessary + + in part because of + the mistaken belief that + AIG would have to pay + +On line 4493: + only if holders + of the super-senior tranches + incurred actual + + losses. He also + said that purchasing a hedge + from UBS, the Swiss bank, + + was considered, but + that Andrew Forster, the head of + credit trading at + +On line 4493: + Financial Products, + rejected the idea because + it would cost more than + +On line 4493: + Financial Products + was receiving to write the + CDS protection. "We’re + +On line 4495: + to pay a dime for + this," Forster told Park.82 Therefore, AIG + Financial Products + +On line 4495: + did not provide a + tool for monitoring the + CDOs’ market value. + +On line 4495: + by LATE TO EARLY + Gary Gorton, then a finance + professor at the + + University of + Pennsylvania’s Wharton School, + who began working + +On line 4495: + as a consultant + to AIG Financial Products + in and was close to + +On line 4495: + Cassano. The Gorton + model had determined with + confidence that the + +On line 4497: + of the super-senior + tranches of the CDOs insured + by AIG Financial + + Products would never + suffer real economic + losses, even in an + +On line 4497: + the worst post–World War II + recession. The company’s + auditors, PricewaterhouseCoopers (PwC), + +On line 4497: + the collateral + requirements, concluded that + "the risk of default + +On line 4497: + [AIG’s] portfolio has + been effectively removed + and as a result + +On line 4497: + the fair value of + the liability stream + on these positions + +On line 4497: + a risk management + perspective could reasonably + be considered to + +On line 4499: + zero."83 In speaking + with the FCIC, Cassano was adamant + that the "CDS book" was + + effectively hedged. + He said that AIG could never + suffer losses on + +On line 4499: + swaps, because the CDS + contracts were written only + on the super-senior + +On line 4499: + securities with + high "attachment points"—that is, many + securities in + +On line 4499: + would have to default + in order for losses to + reach the super-senior + + tranches—and because the + bulk of the exposure came + from loans made before + +On line 4499: + deteriorate.84 + Indeed, according to Gene + Park, Cassano put a + +On line 4499: + halt to a million + hedge, in which AIG had taken + a short position + + in the ABX index. + As Park explained, "Joe stopped that + because after we + +On line 4499: + put on the first the + market moved against us we were + losing money on + +On line 4501: + the million. Joe said, + ‘You know, I don’t think the world + is going to blow + +On line 4503: + don’t want to spend that + money. Stop it.’"85 Despite the + limited market + +On line 4503: + transparency in the + summer of Goldman used what + information there + +On line 4503: + information from + ABX and other indices, to + estimate what it + +On line 4503: + be realistic + prices. Goldman also spoke with + other companies + +On line 4503: + they assigned to the + securities. Finally, + Goldman looked to its + +On line 4503: + experience: in + most cases, when the bank bought + credit protection + + on an investment, + it turned around and sold credit + protection on the + + same investment to + other counterparties. These + deals yielded more price + +On line 4505: + Until the dispute + with Goldman, AIG relied on + the Gorton model, + +On line 4507: + So Goldman’s marks caught + AIG by surprise. When AIG pushed + back, Goldman almost + +On line 4509: + reduced its July + collateral demand from + billion to billion, + +On line 4509: + that underscored the + difficulty of finding + reliable market + +On line 4509: + new demand was still + too high, in AIG’s view, which was + corroborated + +On line 4509: + Goldman valued the + CDOs between and cents on the + dollar, while Merrill + +On line 4511: + same securities + between and cents.87 On August + Cassano told PwC that + + there was "little or + no price transparency" and that + it was "difficult + +On line 4511: + were indicative of + true market levels moving."88 + AIG managers did call + +On line 4511: + bonds to check their marks + in order to help its case + with Goldman, but those + +On line 4511: + the dealers would not + actually execute + transactions at the + +On line 4511: + above estimated + values do not represent + actual bids or + +On line 4511: + by Merrill Lynch" was + the disclaimer in a listing + of estimated + +On line 4511: + values provided + by Merrill to AIG.89 Goldman + Sachs disputed the + +On line 4515: + of such estimates. + "Without being flippant" On + August for the first + +On line 4515: + AIG executives + publicly disclosed the billion + in credit default + +On line 4515: + second-quarter earnings + call. They acknowledged that the + great majority + +On line 4515: + underlying bonds + thus insured—$64 billion—were backed + by subprime mortgages. + +On line 4515: + BBB-rated collateral. + On the call, Cassano maintained + that the exposures + +On line 4515: + no problem: "It is + hard for us, without being + flippant, to even see + +On line 4515: + scenario within any + kind of realm or reason that + would see us losing + +On line 4515: + concluded: "We see + no issues at all emerging. + We see no dollar + +On line 4515: + of [the CDO] business. + Any reasonable scenario that + anyone can draw, and + +On line 4515: + say reasonable, I + mean a severe recession + scenario that you can + +On line 4515: + out for the life of + the securities." Senior + Vice President and + +On line 4515: + that reassurance: + "We believe that it would take + declines in housing + +On line 4515: + to reach depression + proportions, along with default + frequencies never + +On line 4517: + AA investments would + be impaired."90 These assurances + focused on the risk + +On line 4517: + actual mortgage + defaults would create real + economic losses + +On line 4517: + company’s credit + default swap positions.91 But + more important at + +On line 4517: + the other tremendous + risks that AIG executives + had already discussed + +On line 4517: + demand for billion + in collateral; the clear + possibility + +On line 4517: + calls could jeopardize + AIG’s liquidity; or the + risk that AIG would be + +On line 4519: + to take an "enormous + mark" on its existing book, + the concern Forster had + +On line 4521: + The day after the + conference call, AIG posted + million in cash to + +On line 4521: + posting since Goldman + had requested the billion. + As Frost wrote to Forster + +On line 4521: + an August email, the + idea was "to get everyone + to chill out."92 For one + +On line 4521: + including Cassano, + had late-summer vacations + planned. Cassano signed off + +On line 4521: + on the million "good + faith deposit" before leaving + for a cycling trip + +On line 4521: + executed a + side letter making clear that + both disputed the + +On line 4523: + that had been doing + business together for decades + agreed to disagree. On + +On line 4523: + August Frost went to + Goldman’s offices to "start the + dialog," which had + + stalled while Cassano and + other key executives + were on vacation. + + Two days later, Frost + wrote to Forster: "Trust me. This is + not the last margin + +On line 4525: + call we are going + to debate."94 He was right. By + September Société + +On line 4525: + more commonly as + SocGen—had demanded million in + collateral on + + CDS it had purchased + from AIG Financial Products, + UBS had demanded + +On line 4525: + and Goldman had upped + its demand by million. The + SocGen demand was based + +On line 4525: + price provided by + Goldman, which AIG disputed. + Tom Athan, managing + +On line 4525: + AIG Fi-LATE TO EARLY + nancial Products, told Forster that + SocGen "received marks from + +On line 4525: + that would result in + big collateral calls but + SG disputed them + + with GS."95 Several + weeks later, Cassano told AIG + Financial Services + +On line 4525: + Habayeb that he believed + the SocGen margin call had been + "spurred by Goldman," and + +On line 4525: + "disputed the call + and [had] not heard from SocGen again + on that specific + +On line 4525: + of additional + downgrades affecting tens of + billions of dollars + +On line 4525: + subprime mortgage–backed + securities and CDOs. By + November Goldman’s + +On line 4525: + had almost doubled, + to billion. On November + Bensinger, the CFO, informed + +On line 4525: + Audit Committee + that Financial Products had + received margin calls + +On line 4527: + five counterparties + and was disputing every + single one.97 This stance + + was rooted in the + company’s continuing + belief that Goldman + +On line 4527: + low. AIG’s position + was corroborated, at + least in part, by the + +On line 4527: + point, Merrill Lynch and + Goldman made collateral + demands on the very + +On line 4527: + same CDS positions, + but Goldman’s marks were almost + lower than Merrill’s.98 + +On line 4529: + had executed, + market activity we + observed, price changes in + +On line 4529: + the current prices of + relevant liquid indices."99 + Trading in the ABX + +On line 4529: + from over trades per week + through the end of September + to less than per week + +On line 4529: + TABX, which focuses + on lower-rated tranches, dropped + from roughly trades per + +On line 4531: + through mid-July to almost + zero by mid-August.100 But Cassano + believed that the quick + +On line 4531: + the million deposit + confirmed that Goldman was not + as certain of its + + marks as it later + insisted. According to + Cassano, Michael Sherwood, + + co-CEO of Goldman Sachs + International, told him + that Goldman "didn’t + +On line 4531: + in glory during + this period" but that "the + market’s starting to + +On line 4531: + took those comments as + an implicit admission + that Goldman’s initial + +On line 4535: + had been aggressive.101 + "More love notes" In mid-August, Forster told + Frost in an email that + +On line 4535: + of aggressively + marking down assets to "cause + maximum pain to + + their competitors."102 PricewaterhouseCoopers, + which served as auditor for + both AIG and Goldman + +On line 4535: + that AIG had never + before marked these positions + to market. In the + +On line 4535: + demands piling up, + PwC prompted AIG to begin + developing a + +On line 4535: + of its own. Prior + to the Goldman margin call, + PwC had concluded + + that "compensating + controls" made up for AIG’s not + having a model. + +On line 4535: + from counterparties + that collateral was due.103 + In other words, one + +On line 4535: + management tools was + to learn of its own problems + from counterparties + +On line 4535: + have the ability + to mark their own positions + to market prices and + +On line 4537: + to develop a + valuation model was + not unanimous. In + + mid-September, Cassano and Forster + met with Habayeb and others to + discuss marking the + +On line 4539: + in AIG’s financial + statements. Cassano still thought the + valuation process + +On line 4539: + possibility + of defaults was "remote."104 He + sent Forster and others + +On line 4539: + requests from Habayeb as + "more love notes [asking us to + go through] the same drill + +On line 4539: + with PwC, AIG started + to evaluate the pricing + model for subprime + +On line 4539: + used by Moody’s. Cassano + considered the Moody’s model + only a "gut check" + +On line 4539: + coupled this model + with generic CDO tranche data + sold by JP Morgan + +On line 4539: + be relatively + representative of the + market. Of course, by + +On line 4539: + that this was not a + perfect solution, but AIG + and its auditors + + thought it could serve as + an interim step. The makeshift + model was up and + + running in the third + quarter. "Confident in our + marks" On November + +On line 4543: + AIG reported its + third-quarter earnings, it disclosed + that it was taking + +On line 4543: + through October of + approximately million + before tax [on that] + +On line 4545: + conference call, CEO + Sullivan assured investors + that the insurance + +On line 4545: + strong risk management." + He said, "AIG continues to + believe that it is + +On line 4547: + will be required to + make payments with respect to + these derivatives." + +On line 4547: + that AIG had "more than + enough resources to meet any of + the collateral + + calls that might come in."107 + While the company remained + adamant that there would be + +On line 4547: + economic losses + from the credit default swaps, + it used the newly + +On line 4547: + the relevance of + the model: it hadn’t been + validated in + +On line 4547: + earnings release, it + didn’t take into account + important structural + +On line 4547: + about the swap contracts, + and there were questions about the + quality of the + + data.108 AIG didn’t + mention those caveats on the call. + Two weeks later, on + +On line 4549: + Goldman demanded + an additional billion + in cash. AIG protested, + +On line 4551: + memo from Forster listing + the pertinent marks for the + securities from + +On line 4551: + Lynch, Calyon, Bank + of Montreal, and SocGen.110 The + marks varied widely, + +On line 4551: + as little as of + the bonds’ original value + to virtually + + full value. Goldman’s + estimated values were + much lower than those + +On line 4551: + other dealers. For + example, Goldman valued + one CDO, the Dunhill + +On line 4551: + at of par, whereas + Merrill valued it at of + par; the Orient Point + +On line 4553: + CDO was valued at + of par by Goldman but at + of par by Merrill. + +On line 4553: + marks validated + AIG’s long-standing contention + that "there is no one + +On line 4553: + more knowledge than the + others or with a better + deal flow of trades and + +On line 4553: + admit to LATE TO + EARLY ‘guesstimating’ pricing."111 + Cassano agreed. "No one + +On line 4553: + know how to discern + a market valuation + price from the current + +On line 4553: + Cassano wrote to a + colleague. "This information + is limited due + +On line 4555: + give indications + on these obligations."112 One week + later, Cassano called + +On line 4555: + London office and + demanded reimbursement + of billion. He told + +On line 4555: + executives that + independent third-party + pricing for of the + +On line 4555: + the CDOs on which AIG + FP had written CDS and AIG’s + own valuation + +On line 4557: + return the money.113 + Goldman refused, and instead + demanded more.114 By + +On line 4557: + there was relative + agreement within AIG and with + its auditor that + +On line 4557: + was inadequate + for valuing the super-senior + book.115 But there was no + +On line 4557: + on how that book should + be valued. Inputting generic + CDO collateral + +On line 4557: + would result in a + billion valuation loss; + using Goldman’s marks + +On line 4559: + would result in a + billion valuation loss, + which would wipe out the + +On line 4561: + On November PwC + auditors met with senior + executives from + +On line 4561: + to discuss the whole + situation. According + to PwC meeting notes, + +On line 4561: + that disagreements with + Goldman continued, and AIG + did not have data + +On line 4561: + marks. Forster recalled that + Sullivan said that he was + going to have a + + heart attack when he + learned that using Goldman’s marks + would eliminate the + +On line 4561: + profits.117 Sullivan + told FCIC staff that he did not + remember this part + + of the meeting.118 AIG + adjusted the number, and + in doing so it + +On line 4565: + president in charge + of models, came up with a + solution. Convinced + +On line 4565: + between the value + of the underlying bonds + and the value of + +On line 4567: + "negative basis + adjustment," which would reduce + the unrealized + +On line 4567: + loss estimate from + billion (Goldman’s figure) to + about billion. With their + +On line 4569: + to go. Several + documents given to the + FCIC by PwC, AIG, and + +On line 4569: + discussions during + and after the November + meeting. During a + +On line 4569: + (Financial Products + executives, including + Cassano and Forster, did + +On line 4569: + the valuation + of the credit default swap + portfolio, as well + +On line 4571: + collateral. AIG + Financial Products had paid + out billion without + +On line 4571: + Risk Management group. + Another issue was "the + way in which AIGFP [had] + +On line 4571: + PwC will not get any + more information until + after the investor + +On line 4573: + auditors laid out + their concerns about conflicting + strategies pursued by + +On line 4575: + subsidiaries. Notably, the + securities-lending subsidiary + had been purchasing + +On line 4575: + using cash raised by + lending securities that + AIG held on ehalf of + +On line 4575: + of through September + its holdings rose from billion + to billion. Meanwhile, + +On line 4575: + acting on its own + analysis, had decided + in to begin pulling + +On line 4575: + on writing credit + default swaps on CDOs. In PwC’s + view, in allowing + +On line 4575: + subsidiary to increase + exposure to subprime while + another subsidiary + +On line 4575: + market entirely, + the parent company’s risk + management failed. PwC + +On line 4575: + second quarter of + financial disclosures would + have been changed if the + +On line 4575: + "these items together + raised control concerns around risk + management which could + +On line 4575: + weakness."120 Kevin McGinn, AIG’s + chief credit officer, shared + these concerns about the + +On line 4577: + a November email, + McGinn wrote: "All units were apprised + regularly of + +On line 4577: + the housing market. + Some listened and responded; + others simply chose + +On line 4577: + then, to add insult + to injury, not to spot the + manifest signs." He + + concluded that this + was akin to "Nero playing the + fiddle while Rome burns."121 + + On the opposite + side, Sullivan insisted + to the FCIC that the + + conflicting strategies + in the securities-lending + business and at AIG + +On line 4577: + revealed that the two + subsidiaries adopted different + business models, and + +On line 4579: + did not constitute + a risk management failure.122 + On December six + +On line 4579: + conference call about + AIG’s risk management systems + and the company’s + +On line 4579: + risk we have taken + in the U.S. residential + housing sector is + +On line 4581: + structure. we believe + the probability that + it will sustain an + +On line 4581: + to zero. We are + confident in our marks and + the reasonableness + +On line 4581: + methods." Charlie Gates, + an analyst at Credit + Suisse, a Swiss bank, + +On line 4581: + about valuation + and collateral disputes + with counterparties + +On line 4581: + AIG had alluded + in its third-quarter financial + results. Cassano replied, + + "We have from time to + time gotten collateral + calls from people and + +On line 4581: + we say to them, well + we don’t agree with your numbers. + And they go, oh, and + + they go away. And you + say well what was that1 It’s like + a drive-by in a + +On line 4581: + And the other times + they sat down with us, and none + of this is hostile + + or anything, it’s all + very cordial, and we sit down + and we try and find + + the middle ground and + compare where we are."123 Cassano + did not reveal the + +On line 4583: + dollars posted to + other counterparties, and + the daily demands + + from Goldman and the + others for additional + cash. The analysts + + and investors on the + call were not informed about the + "negative basis + +On line 4583: + did not know that AIG’s + earnings were overstated by + billion—and they would + +On line 4587: + until February + "Material weakness" By + January AIG still + +On line 4587: + market price of the + securities on which it + had written credit + +On line 4587: + Nevertheless, on + January LATE TO EARLY + Cassano sent an email + +On line 4587: + and CFO David Viniar at + Goldman demanding that they + return billion of + +On line 4587: + billion posted.124 He + attached a spreadsheet showing + that AIG valued many + +On line 4587: + as if there had been + no decline in their value. + That was simply not + + credible, Goldman + executives told the FCIC.125 + Meanwhile, Goldman had + +On line 4587: + built up billion in + protection by purchasing + credit default swaps + +On line 4587: + AIG to cover the + difference between the amount + of collateral + +On line 4589: + they had demanded + and the amount that AIG had paid.126 + On February PwC + +On line 4589: + Willumstad, the chairman + of AIG’s board of directors. + They informed him that + +On line 4589: + "negative basis + adjustment" used to reach the + billion estimate + +On line 4589: + December investor + call had been improper and + unsupported, and + +On line 4589: + deficiency was + a material weakness + as of December + +On line 4589: + words, PwC would have to + announce that the numbers AIG + had already publicly + + reported were wrong. + Why the auditors waited + so long to make this + +On line 4591: + particularly + given that PwC had known about + the adjustment in + +On line 4593: + In the meeting with + Willumstad, the auditors were + broadly critical + +On line 4593: + they deemed unable to + compensate for Sullivan’s + weaknesses; and Lewis, + +On line 4593: + complex matters" had + contributed to the problems.128 + Despite PwC’s findings, + +On line 4593: + received million over + four years in compensation + from AIG, including + +On line 4593: + severance package + of million. When asked about these + figures at a FCIC + +On line 4593: + recollection of + those numbers whatsoever, + sir. I certainly + + don’t recall earning + that amount of money, sir."129 The + following day, PwC + +On line 4595: + auditors said they + could complete AIG’s audit, but + only if Cassano + +On line 4597: + not interfere in + the process." Retaining Cassano + was a "management + +On line 4597: + culture needed to + change at FP."130 On February + AIG disclosed in an + + SEC filing that its + auditor had identified + the material + +On line 4597: + it had reduced its + December valuation + loss estimates by + +On line 4597: + is, the difference + between the estimates of + billion and billion— + +On line 4601: + agencies responded + immediately. Moody’s and + S&P announced downgrades, + +On line 4601: + AIG on "Ratings Watch + Negative," suggesting that + a future downgrade + +On line 4603: + possible. AIG’s stock + declined for the day, closing + at At the end of + +On line 4603: + was demanding an + additional billion, and + had upped to billion + +On line 4603: + protection against an + AIG failure. On February + AIG disappointed + +On line 4603: + fourth-quarter and fiscal + year earnings. The company + reported a net + +On line 4603: + CDO credit default + swap exposure and more than + illion in losses + + relating to the + securities-lending business’s + mortgage-backed purchases. + + Along with the losses, + Sullivan announced Cassano’s + retirement, but the + + news wasn’t all bad + for the former Financial + Products chief: He made + +On line 4603: + Financial Products + in January of until + his retirement in + +On line 4605: + consulting agreement + after his retirement.131 In + March, the Office of + +On line 4605: + AIG and its subsidiaries, + downgraded the company’s + composite rating + +On line 4607: + still judged the threat to + overall viability + as remote.132 It did + +On line 4607: + of the company’s + financial condition for + another six months. + + By then, it would be + too late. FEDERAL RESERVE: + "THE DISCOUNT WINDOW + +On line 4615: + course of the fall, the + announcements by Citigroup, + Merrill, and others + +On line 4615: + clear that financial + institutions were going + to take serious + +On line 4615: + from their exposures + to the mortgage market. Stocks + of financial firms + +On line 4615: + end of November, + the S&P Financials Index + had lost more than for + +On line 4615: + November, asset-backed + commercial paper declined + about which meant that those + + assets had to be + sold or funded by other + means. Investment banks + +On line 4615: + tighter funding markets + and increasing cash pressures. + As a result, the + +On line 4615: + Reserve decided + that its interest rate cuts + and other measures + + since August had not + been sufficient to provide + liquidity and + +On line 4615: + Fed’s discount window + hadn’t attracted much bank + borrowing because + +On line 4615: + the stigma attached + to it. "The problem with the + discount window is + + that people don’t like + to use it because they view + it as a risk that + +On line 4615: + will be viewed as weak," + William Dudley, then head of the + capital markets + +On line 4617: + the New York Fed and + currently its president, + told the FCIC.133 Banks and + +On line 4617: + of liquidity; + in particular, during + the second half of + +On line 4617: + Federal Home Loan + Banks—which are government-sponsored + entities that lend + +On line 4619: + of March and the end + of December Washington + Mutual, the largest + +On line 4619: + borrowing from the + Federal Home Loan Banks from + billion to billion; + +On line 4619: + Countrywide increased + its borrowing from billion + to billion; Bank of + +On line 4619: + billion to billion. + The Federal Home Loan Banks + could thus be seen as + + the lender of next to + last resort for commercial + banks and thrifts—the + +On line 4621: + addition, the loss + of liquidity in the + financial sector + +On line 4621: + TO EARLY cult for + businesses and consumers to + get credit, raising + + the Fed’s concerns. From + July to October, the + percentage of loan + +On line 4621: + tightening standards + on prime mortgages increased from + to about Over that time, + + the percentage of + loan officers reporting + tightening standards + +On line 4621: + on loans to large and + midsize companies increased + from to its highest + +On line 4623: + wasn’t working as + hoped," Frederic Mishkin, a Fed + governor from to + +On line 4623: + they were extremely + controversial."136 The first of + these measures, announced + +On line 4623: + December was the + creation of the Term Auction + Facility (TAF). + +On line 4623: + was to reduce the + discount window stigma by + making the money + + available to all banks + at once through a regular + auction. The program + +On line 4623: + had some success, with + banks borrowing billion by + the end of the year. + + Over time, the Fed would + continue to tweak the TAF + auctions, offering + + more credit and longer + maturities. Another + Fed concern was that + +On line 4625: + and others who did + have cash would hoard it. Hoarding + meant foreign banks had + +On line 4625: + Those sales and fears of + more sales to come weighed on the + market prices of U.S. + + securities. In + response, the Fed and other + central banks around the + +On line 4625: + on December new + "currency swap lines" to help + foreign banks borrow + + dollars. Under this + mechanism, foreign central + banks swapped currencies + + with the Federal + Reserve—local currency + for U.S. dollars—and lent + +On line 4625: + foreign banks. "During + the crisis, the U.S. banks were + very reluctant to + +On line 4625: + liquidity to + European banks," Dudley said.137 + Central banks had used + +On line 4625: + the aftermath of + the attacks to bolster the + global financial + +On line 4627: + In late the swap lines + totaled billion. During the + financial crisis + +On line 4629: + seven years later, + they would reach billion. The Fed + hoped the TAF and the + +On line 4629: + lines would reduce strains + in short-term money markets, + easing some of the + +On line 4629: + pressure on other + struggling participants such + as investment banks. + + Importantly, it + wasn’t just the commercial + banks and thrifts but the + +On line 4629: + "Historically, + the Federal Reserve has + always tended to + +On line 4629: + that liquidity + provided to the banking + system can be [lent + +On line 4629: + institutions in + the nonbank sector. What we + saw in this crisis + +On line 4629: + that didn’t always + take place to the extent that + it had in the past. + +On line 4629: + think people going + in really had a full + understanding of + +On line 4631: + complexity of + the shadow banking system, + the role of [structured + +On line 4633: + explicitly or + implicitly."138 Burdened with + capital losses + +On line 4633: + to cover their own + funding commitments, the banks + were not stable enough + +On line 4633: + the void, even after + the Fed lowered interest + rates and began the + +On line 4635: + In January the + Fed cut rates again— and then again, + twice within two weeks, + +On line 4637: + highly unusual + move that brought the federal + funds rate from to he + +On line 4637: + also started plans + for a new program that would + use its emergency + + authority, the + Term Securities Lending + Facility, though + +On line 4639: + launched until March. "The + TLSF was more a view that the + liquidity that + + we were providing + to the banks through the TAF was + not leading to a + +On line 4639: + diminishment of + financing pressures elsewhere," + Dudley told the FCIC. + + "So maybe we should think + about bypassing the banking + system and [try] to + +On line 4641: + to the primary + dealer community more + directly."139 On March + +On line 4641: + the Fed increased the + total available in each of + the biweekly TAF + +On line 4641: + auctions from billion + to billion, and guaranteed + at least that amount for + +On line 4641: + months. The Fed also + liberalized its standard + for collateral. + +On line 4645: + backed securities, + as collateral. The Fed + expected to have + +On line 4647: + billion in such loans + outstanding at any given + time. Also at this + +On line 4647: + central bank began + contemplating a step that + was revo-lutionary: + +On line 4647: + over which the Fed had + no supervisory or + regulatory + +On line 4649: + similar to those + available to commercial banks. + MONOLINE INSURERS: + +On line 4651: + NEVER EXPECTED + LOSSES" Meanwhile, the rating + agencies continued + +On line 4651: + to downgrade mortgage-backed + securities and CDOs through + By January as + + a result of the + stress in the mortgage market, + S&P had downgraded + +On line 4651: + of residential + mortgage–backed securities + and tranches from CDOs. + + MBIA and Ambac, the + two largest monoline insurers, + had taken on a + +On line 4651: + products. Downgrades on + the products that they insured + brought the financial + +On line 4651: + companies into + question. After conducting + stress analysis, S&P + +On line 4651: + estimated in + February that Ambac would + need up to million + + in capital to + cover potential losses + on structured products.140 + +On line 4651: + charges would affect the + monolines’ own credit ratings, + which in turn could lead + +On line 4653: + of the products they + had guaranteed. Like many of + the monolines, ACA, the + +On line 4655: + smallest of them, kept + razor-thin capital— less than + million—against its + +On line 4655: + billion in credit + default swaps on CDOs. In late + ACA reported a + +On line 4655: + net loss of billion, + almost entirely due to + credit default swaps. + +On line 4657: + they and various + stakeholders—the rating + agencies, investors, and + +On line 4657: + the monolines never + would have to take a loss. As + Alan Roseman, CEO of + +On line 4659: + ACA, told FCIC staff: "We + never expected losses. + We were providing + +On line 4659: + we believed, to take + the volatility because we + didn’t have to post + +On line 4659: + market value to + our counterparty, number + one. Number two, we + +On line 4659: + told by the rating + agencies that LATE TO EARLY + rated us that that + +On line 4659: + variation was not + important to our rating, + from a financial + +On line 4661: + point of view at the + insurance company."141 In + early November, + +On line 4661: + use of the monolines + for hedging "a concern that + we also share."142 The + +On line 4661: + to minimize their + exposure to the monolines, + particularly + +On line 4661: + ACA. On December + S&P downgraded ACA to junk + status, rating the + +On line 4661: + CCC, which was fatal + for a company whose CEO + said that its "rating + +On line 4661: + like Merrill Lynch would + get virtually nothing + for the guarantees + + they had purchased from + ACA. Despite the stresses in + the market, the SEC + +On line 4663: + confined to ACA. A + January internal SEC + document said, "While + +On line 4663: + a clear sentiment + that capital raising will + need to continue, + +On line 4663: + that the guarantors + (with the exception of ACA) + are relatively + +On line 4663: + provides hope that event[s] + in this sector will unfold + in a manageable + +On line 4665: + the rating agencies + told the monolines that if they + wanted to retain + +On line 4665: + they would have to raise + capital. MBIA and Ambac + ultimately did + +On line 4667: + billion and billion, + respectively. Nonetheless, + S&P downgraded both + +On line 4667: + to AA in June As + the crisis unfolded, most + of the monolines stopped + +On line 4669: + is easy to follow: + in anticipation of + the monoline downgrades, + +On line 4669: + that had nothing to + do with the mortgage-backed markets, + including a set + +On line 4669: + investments known as + auction rate securities, + or ARS. An ARS is + +On line 4669: + interest rate is + reset at regularly + scheduled auctions held + +On line 4669: + one to seven weeks.145 + Existing investors can choose + to rebid for the + +On line 4669: + new investors can come + in. The debt is frequently + municipal bonds. + +On line 4671: + As of December + state and local governments + had issued billion + +On line 4671: + ARS, accounting for + half of the billion market. + The other half were + +On line 4671: + bundles of student + loans and debt of nonprofits + such as museums + +On line 4673: + hospitals. The key + point: these entities wanted + to borrow long-term but + + get the benefit + of lower short-term rates, and + investors wanted to + +On line 4673: + without tying up + their money for a long time. + Unlike commercial + +On line 4673: + this market had no + explicit liquidity + backstop from a bank, + +On line 4673: + was an implicit + backstop: often, if there were + not enough new buyers + +On line 4673: + the dealers running + these auctions, including firms + like UBS, Citigroup, + +On line 4673: + would step in and pick + up the shortfall. Because of + these interventions, + +On line 4675: + were only failures + between and early in more + than auctions. Dealers + +On line 4675: + to convince clients that + ARS were very liquid, short-term + instruments, even in + +On line 4677: + auction did fail, the + previous ARS investors would + be obligated + +On line 4677: + compensation, the + interest rates on the debt + would reset, often + +On line 4677: + but investors’ funds would + be trapped until new investors + or the ealer stepped + +On line 4677: + or the borrower + paid off the loan. ARS investors + were typically + +On line 4677: + risk averse and valued + liquidity, and so they + were willing to pay + +On line 4677: + the monolines’ growing + problems in the latter half + of affected the + + ARS market. Fearing + that the monolines would not be + able to perform on + +On line 4679: + were all that kept the + market going, but the stress + became too great. With + + their own problems to + contend with, the dealers were + unable to step in + +On line 4679: + ensure successful + auctions. In February, en + masse, they pulled up stakes. + +On line 4679: + The market collapsed + almost instantaneously. + On February in + +On line 4679: + dislocations of + the financial crisis, of + the ARS auctions failed; + +On line 4681: + the following week, + failed. Hundreds of billions of + dollars were trapped by + +On line 4683: + small businesses, and + charities—constituted + more than billion of + +On line 4683: + who chose to remain + in the market demanded + a premium to + +On line 4683: + and interest rate + resets, countless governments, + infrastructure projects, + +On line 4685: + on tight budgets were + slammed with interest rates of + or higher. Problems + +On line 4685: + the ARS market cost + Georgetown University, a + borrower, million.148 + +On line 4687: + New York State was stuck + with interest rates that soared + from about to more than + +On line 4687: + on billion of its + debt. The Port Authority + of New York and New + +On line 4687: + saw the interest + rate on its debt jump from to + in a single week + +On line 4689: + SEC received more than + investor complaints regarding + the failed ARS auctions. + +On line 4689: + led them to believe + that ARS were safe and liquid, + essentially the + +On line 4689: + accounts but with the + potential for a slightly + higher interest + +On line 4689: + also reported + that the frozen market blocked their + access to money + + for short-term needs such + as medical expenses, + college tuition, and, + +On line 4691: + some small businesses + and charities, payroll. By + the SEC had settled + +On line 4693: + including Bank of + America, RBC Capital + Markets, and Deutsche Bank + + to resolve charges that + the firms misled investors. As + a result, these and + +On line 4693: + other banks made more + than billion available to pay + off tens of thousands + +On line 4697: + of ARS investors.150 LATE + TO EARLY The Commission + concludes that some large + +On line 4697: + holding companies, + and insurance companies, + including Merrill + + Lynch, Citigroup, and + AIG, experienced massive + losses related + +On line 4701: + regulators—the + Securities and Exchange + Commission for the + +On line 4701: + investment banks and + the banking supervisors + for the bank holding + +On line 4701: + to adequately + supervise their safety and + soundness, allowing + +On line 4701: + take inordinate + risk in activities such + as nonprime mortgage + +On line 4701: + dealing and to hold + inadequate capital + and liquidity. + +On line 4715: + MARCH THE FALL OF BEAR + STEARNS CONTENTS "I requested + some forbearance" "We + +On line 4719: + suitably skeptical"...............................................................................282 + "Turn into a death spiral" + "Duty to protect + +On line 4723: + government would not + permit a higher number" + "It was heading to + +On line 4725: + black hole"..........................................................................290 After its + hedge funds failed in July Bear + Stearns faced more challenges + + in the second half + of the year. Taking out the + repo lenders to the + +On line 4725: + brought nearly billion + in subprime assets onto + Bear’s books, contributing + +On line 4725: + a billion write-down + on mortgage-related assets + in November. That + +On line 4725: + to scrutinize Bear + Stearns’s finances. Over the fall, Bear’s + repo lenders—mostly + +On line 4725: + required Bear to post + more collateral and pay + higher interest + +On line 4725: + rates. Then, in just one + week in March a run by these + lenders, hedge fund customers, + +On line 4727: + the biggest piece of + Bear Stearns’s most-profitable division, + its fixed-income business, + +On line 4729: + which generated + of the firm’s total revenues. + Growing fast was the + + Global Client Services + division, which included + Bear’s prime brokerage + +On line 4729: + Stearns was the second-biggest + prime broker in the country, + with a market share + +On line 4731: + origination through + securitization and + sale. It both acquired + +On line 4731: + created its own + captive originators to + generate mortgages + + that Bear bundled, turned + into securities, and + sold to investors.2 The + +On line 4733: + top-three underwriter + of private-label mortgage– backed + securities from + +On line 4733: + underwrote billion + in collateralized debt + obligations of all + +On line 4739: + more than double its + figure of billion. MARCH The + total included + +On line 4739: + CDOs that included + mortgage-backed securities, putting + it in the top in + + that business.4 As was + typical on Wall Street, the + company’s view was + +On line 4739: + the moving business, + not the storage business—that is, + it sought to provide + +On line 4741: + to clients rather than take + on long-term exposures of its + own.5 Bear expanded + +On line 4741: + that the market was + beginning to falter, as + did other firms such + +On line 4741: + as Citigroup and + Merrill. As early as May + Bear had lost million + +On line 4741: + defaults6 on mortgages + which occurred within days of + origination, which + +On line 4741: + rare in the decade. But + Bear persisted, assuming + the setback would be + +On line 4741: + February Bear even + acquired Encore Credit, its + third captive mortgage + + originator in + the United States, doubling its + capacity. The + +On line 4743: + markets and waiting + for them to turn around.7 Only + a month after the + +On line 4743: + the Securities + and Exchange Commission wrote + in an internal + +On line 4743: + market risk losses" + on its Alt-A mortgage assets.8 + The losses were small, + +On line 4743: + the SEC reported + that "risk managers note[d] that + these events reflect a + +On line 4745: + anticipated + in ex ante models of stress + events."9 "I REQUESTED + +On line 4747: + Vacationing on + Nantucket Island when the + two Bear-sponsored hedge funds + +On line 4747: + on July former + Bear treasurer Robert Upton + anticipated + +On line 4747: + the rating agencies + would downgrade the company, + raising borrowing + +On line 4747: + its operations + borrowing short-term in the + repo market; it + +On line 4747: + borrowed between and + billion overnight.10 Even a threat of + a downgrade by a + +On line 4749: + would make financing + more expensive, starting the + next morning. Investors, + +On line 4749: + scrutinized leverage + ratios, available at the end + of each quarter. By + +On line 4749: + Bear’s leverage ratio + had reached nearly to By the + end of Bear’s Level + +On line 4749: + assets difficult + to value and to sell—were + of its tangible + +On line 4749: + common equity; + thus, writing down these illiquid + assets by would wipe + +On line 4751: + tangible common + equity. At the end of + each quarter, Bear would + + lower its leverage + ratio by selling assets, + only to buy them + +On line 4751: + at the beginning + of the next quarter. Bear and + other firms booked these + +On line 4751: + as sales—even though + the assets didn’t stay off + the balance sheet for + +On line 4751: + order to reduce + the amount of the company’s + assets and lower + +On line 4751: + leverage ratio. Bear’s + former treasurer Upton + called the move "window + + dressing" and said it + ensured that creditors and + rating agencies were + +On line 4751: + the balance sheet was + approximately lower + than the average + + month-end balance over + the previous twelve months.12 To + forestall a downgrade, + +On line 4753: + Upton spoke with the + three main rating agencies, Moody’s, + Standard Poor’s, and Fitch, + +On line 4753: + August.13 Several + times in ncluding April and June—S&P + had confirmed Bear’s strong + +On line 4753: + in April that "Bear’s risk + profile is relatively + conservative" and + +On line 4753: + senior management + oversight and a strong culture + throughout the firm are + + the foundation of + Bear’s risk management process." On + June, Moody’s had also + +On line 4755: + management had learned + its lesson about governance + and risk management + +On line 4755: + the failure of the + two hedge funds and was going + to rely less on + +On line 4755: + not foresee that Bear’s + own repo lenders might refuse to + lend against risky mortgage + +On line 4757: + even against Treasuries. "I + requested some forbearance" + from S&P, Upton told + +On line 4757: + the FCIC.14 He did not + get it. On August just three + days after the two + +On line 4759: + base as it placed Bear + on a "negative outlook."15 + Asked how he felt about + +On line 4759: + Jimmy Cayne, Bear’s CEO + until said, "A negative + outlook can touch a + +On line 4761: + businesses. It was + like having a beautiful + child and they have a + + disease of some sort + that you never expect to + happen and it did. + + How did I feel1 Lousy."16 + To reassure investors that + no more shoes would drop, + + Bear invited them + on a conference call that + same day. The call did + +On line 4763: + By the end of the + day, Bear’s stock slid to below + its all-time high + +On line 4767: + reached earlier in + "WE WERE SUITABLY SKEPTICAL" + On Sunday, August + +On line 4767: + Bear had another + opportunity to make + its case: this time, with + +On line 4767: + supervisors who + visited the company + that Sunday were Michael + +On line 4769: + of the division + of market regulation. + The regulators + +On line 4769: + the mortgage market, + including the billion in + adjustable-rate mortgages on + +On line 4769: + books that were waiting + to be securitized. Bear + executives gave + +On line 4769: + that inventory + would shrink once investors returned + in September from + +On line 4769: + regulators are + not supposed to listen to + happy talk and go + +On line 4771: + smiling," Eichner + told the FCIC. "Thirteen billion + in ARMs is no joke." + +On line 4771: + not believe the Bear + executives were being + disingenuous. He + +On line 4773: + the upside.17 Alan Schwartz, + the co-president who later + succeeded Jimmy + +On line 4773: + Thomas Marano, head of + Global Mortgages and Asset + Backed Securities, + + seemed unconcerned. But + other executives were + leery. Wendy de Monchaux, + +On line 4773: + urged Marano to trim + the mortgage portfolio, as + did Steven Meyer, the + + co-head of stock sales + and trading.18 According to + Chief Risk Officer + + Michael Alix, former + chairman Alan Greenberg would say, + "the best hedge is a + +On line 4773: + sale."19 Bear finally + reduced the portfolio from + billion in the third + +On line 4773: + of to billion in + the fourth quarter, but it was + too little too late. + +On line 4777: + MARCH That summer, the + SEC felt Bear’s liquidity + was adequate for + +On line 4777: + insisted. After + the August meeting, the SEC + required that Bear Stearns + +On line 4777: + agency had grossly + underestimated the + possibility + +On line 4779: + updated the SEC + on Bear’s billion balance sheet, + with specifics on repo + +On line 4779: + commercial paper. + On September Bear Stearns raised + approximately + +On line 4779: + reports slowed to once + a week.21 The SEC’s inspector + general later + +On line 4779: + that they did not push + Bear to reduce leverage or + "make any efforts to + +On line 4779: + mortgages at Bear Stearns + had numerous shortcomings, + including lack of + +On line 4779: + backed securities" + and "persistent understaffing; + a proximity + + of risk managers to + traders suggesting a lack of + independence; turnover + + of key personnel + during times of crisis; and + the inability + +On line 4779: + unwillingness to + update models to reflect + changing circumstances."22 + + Michael Halloran, a + senior adviser to SEC + Chairman Christopher Cox, + + told the FCIC the SEC + had ample information + and authority + +On line 4781: + other financial + institutions were doing. + Halloran said that + +On line 4781: + as early as the + first quarter of he had asked + Erik Sirri, in charge + +On line 4781: + Entities program, + about Bear Stearns (and Lehman Brothers), + "Why can’t we make them + +On line 4781: + risk1" According to + Halloran, Sirri said the + SEC’s job was not to + + tell the banks how to + run their companies but to + protect their customers’ + + assets.23 "TURN INTO + A DEATH SPIRAL" In August, + after the rating + +On line 4785: + revised their outlook + on Bear, Cayne tried to obtain + lines of credit from + + Citigroup and JP + Morgan. Both banks acknowledged + Bear had always been + +On line 4785: + customer and maintained + they were interested in + helping.24 "We wanted + +On line 4785: + be belts-and-suspenders," + said CFO Samuel Molinaro, as Bear + attempted both to + +On line 4785: + money market funds. + But, Cayne told the FCIC, nothing + happened. "Why the [large] + +On line 4785: + to participate + and provide lines during that + period of time, + +On line 4787: + traditionally + seen as a riskier lifeline + than repo. Throughout + +On line 4787: + commercial paper + (from billion at the end of + to only billion + +On line 4787: + and replaced it with + secured repo borrowing + (which rose from billion + +On line 4787: + billion). But Bear Stearns’s + growing dependence on overnight + repo would create + + a different set + of problems. The tri-party + repo market used + +On line 4791: + escrow; and then lend + their own cash to borrowers + during the day. This + +On line 4791: + to as "unwinding" + the repo transaction; it + allows borrowers + +On line 4791: + the assets posted + as collateral every + day. The transaction + + is then "rewound" at + the end of the day, when the + lenders post cash to the + +On line 4793: + banks in return for + the new collateral. The + little-regulated + +On line 4793: + grown from billion in + average daily volume + in to trillion in + +On line 4793: + in and trillion by + early It had become a + very deep and liquid + +On line 4793: + most borrowers rolled + repo overnight, it was also + considered a very + +On line 4793: + because transactions + were overcollateralized + (loans were made for less + +On line 4793: + the general view + before the onset of the + financial crisis. + +On line 4795: + tri-party repo + borrowing, it became more + dependent on JP + + Morgan, the clearing + bank. A risk that was little + appreciated + +On line 4797: + before was that JP + Morgan and BNY Mellon could + face large losses if + +On line 4797: + defaulted during + the day. Essentially, JP + Morgan served as Bear’s + + daytime repo lender. + Even long-term repo loans have to + be unwound every + +On line 4799: + clearing bank, if not + by the lender. Seth Carpenter, + an officer at + +On line 4799: + Reserve Board, compared + it to a mortgage that has + to be refinanced + + every week: "Imagine + that your mortgage is only + a week. Instead of + +On line 4799: + got a one-week mortgage. + If everything’s going fine, + you get to the end + + of the week, you go + out and you refinance that + mortgage because you + +On line 4799: + have enough cash on hand + to pay off the whole mortgage. + And then you get to + +On line 4801: + end of another + week and you refinance that + mortgage. And that’s, for + +On line 4803: + fall, Federated + Investors, which had taken Bear + Stearns off its list of + +On line 4803: + commercial paper + counterparties, continued + to provide secured + +On line 4803: + another major + lender, limited its overall + exposure to Bear, + +On line 4803: + maturities.30 In + October, State Street Global + Advisors refused + +On line 4807: + were mortgage-related + securities and of these, + billion—more than Bear’s + +On line 4809: + Level assets. In + the fourth quarter of Bear Stearns + reported its first + +On line 4813: + The SEC concluded, + "Bear Stearns’ liquidity pool + remains stable."32 In + +On line 4813: + board had commissioned + the consultant Oliver Wyman + to review the firm’s + +On line 4813: + Case for Economic + Capital Development," + was presented on + +On line 4813: + February to the + management committee. Among + its conclusions: risk + +On line 4813: + not effectively + positioned to challenge front + office decisions," + +On line 4813: + and considered a + "low priority." Schwartz told + the FCIC the findings + + did not indicate + substantial deficiencies. + He wasn’t looking + +On line 4815: + positive feedback + from the consultants, because + the Wyman re-MARCH port was + +On line 4815: + to provide a road + map of what "the gold standard" + in risk management + +On line 4817: + January before + the report was completed, + Cayne resigned as CEO, + +On line 4817: + after receiving + million in compensation + from through He remained + +On line 4817: + chairman of the board. + Some senior executives + sharply criticized him + +On line 4817: + the board. Thomas Marano + told the FCIC that Cayne played a + lot of golf and bridge.35 + +On line 4817: + board, Paul Friedman, a + former senior managing + director at Bear + +On line 4817: + said, "I guess because + I’d never worked at a firm + with a real board, + + it never dawned on + me that at some point somebody + would have or should have + +On line 4817: + the board involved in + all of this," although he told + the FCIC that he made + + these comments in anger + and frustration in the wake + of Bear’s failure.36 In + +On line 4817: + final report on + Bear, the Corporate Library, + which researches and + +On line 4817: + company a "D," + reflecting "a high degree + of governance risk" + +On line 4817: + levels of concern + related to the board and + compensation."37 When + + asked if he had made + mistakes while at Bear Stearns, Cayne + told the FCIC, "I take + +On line 4819: + to walk away from the + responsibility."38 At + Bear, compensation + + was based largely on + the return on equity + in a given year. + +On line 4821: + executives, about + half of each bonus was paid in + cash, and about half in + + restricted stock that + vested over three years and had + to be held for five.39 + +On line 4821: + for the size of each + year’s compensation pool was + determined by a + +On line 4821: + plan and capital + accumulation plan for + senior managing + +On line 4821: + told the FCIC he set + his own compensation and + the compensation + +On line 4821: + five members of the + Executive Committee. + According to Cayne, + +On line 4823: + including the board, + questioned his decisions.40 For + even with its losses, + +On line 4823: + Bear Stearns paid out of + revenues in compensation. + Alix, who sat on + + the Compensation + Committee, told FCIC staff the + firm typically + +On line 4823: + that the percentage + increased in because revenues + fell—if management + +On line 4823: + proportionately, + he said, many employees might + have quit.41 Base salaries for + +On line 4823: + senior managers were + capped at with the remainder + of compensation + +On line 4825: + a discretionary mix + of cash, restricted stock, and + options.42 From through the + +On line 4827: + at Bear Stearns took home + over million in cash and over + billion from stock sales, + +On line 4829: + than a total of + billion. This exceeded the + annual budget + + for the SEC.43 Alan Schwartz, + who took over as CEO after + Cayne and had been a + +On line 4829: + of investing in + the mortgage sector, earned more + than million from to + +On line 4829: + Warren Spector, the + co-president responsible + for overseeing the + +On line 4829: + had failed, received more + than million during the same + period. Although + +On line 4829: + asked to resign, Bear + never asked him to return + any money. In Cayne, + +On line 4829: + Schwartz, and Spector each + earned more than times as much as + Alix, the chief risk + + officer.44 Cayne was + out, Schwartz was in, and Bear Stearns + continued hanging + +On line 4833: + in early Bear was + still able to fund its balance + sheet through repo loans, + + though the interest + rates the firm had to pay had + increased.45 Marano said + +On line 4833: + this increased cost would + signal to the market that + Bear was distressed, which + + could "make our problems + turn into a death spiral."46 + DUTY TO PROTECT + +On line 4835: + Treasurer Upton + reported an internal + accounting error + +On line 4835: + have less than billion + in liquidity—triggering + a report to the + +On line 4835: + the error, the SEC + reinstituted daily + reporting by the + +On line 4837: + its liquidity.47 + Lenders and customers were more and + more reluctant to + +On line 4837: + do business with the + company. On February + Bear Stearns had billion + + in mortgages, mortgage-backed + securities, and asset-backed + securities on + +On line 4837: + almost billion from + November. Nearly billion + were subprime or Alt-A + +On line 4839: + that were clients of Bear’s + prime brokerage services were + particularly + +On line 4839: + unable to return + their cash and securities. + Lou Lebedin, the head + +On line 4839: + Bear’s prime brokerage, + told the FCIC that hedge fund clients + occasionally + + inquired about the bank’s + financial condition in + the latter half of + +On line 4839: + that such inquiries picked + up at the beginning of + particularly + +On line 4839: + the cost increased of + purchasing credit default + swap protection on + +On line 4839: + started taking their + business elsewhere. "They felt there + were too many concerns + +On line 4839: + us and felt that this + was a short-term move," Lebedin + said. "Often they would + +On line 4839: + they’d be happy to + bring the business back, but that + they had the duty + +On line 4839: + protect their investors." + Renaissance Technologies, one + of Bear’s biggest prime + +On line 4839: + of its business. By + April, Lebedin’s prime brokerage + operation would + +On line 4839: + billion in assets + under management, down more + than from billion in + +On line 4841: + during the week of + March when SEC staff inspected + Bear’s liquidity + +On line 4843: + liquidity pool + ranged from billion to billion.49 + Bear opened for business + +On line 4843: + on Monday, March with + approximately billion + in cash reserves. The + +On line 4843: + downgraded mortgage-backed + securities issued by + Bear Stearns Alt-A Trust, a + +On line 4843: + the downgrades carried + abbreviated headlines + stating, "Moody’s Downgrades + +On line 4843: + said.50 Rumors flew and + counterparties panicked.51 Bear’s + liquidity pool + + began to dry up, + and the SEC was now concerned + that Bear was being + +On line 4843: + all directions.52 While + "everything rolled" during the + day—that is, Bear’s repo + + lenders renewed their commitments—SEC + officials worried that this + would "probably not + +On line 4847: + Fed announced it would + lend to investment banks and + other "primary + +On line 4847: + Term Securities + Lending Facility (TSLF) + would make available up + +On line 4847: + billion in Treasury + securities, accepting + as collateral + +On line 4849: + and non-GSE mortgage–backed + securities rated triple-A. + The hope was that lenders + +On line 4849: + lend to investment + banks if the collateral + was Treasuries rather than + +On line 4849: + securities. The + Fed also announced it would + extend loans from overnight + +On line 4851: + the relentless need + to unwind repos every + morning. With the TSLF, + +On line 4851: + would be setting a + new precedent by extending + emergency credit + +On line 4851: + under section of + the Federal Reserve Act + to determine that + +On line 4851: + were "unusual and + exigent circumstances." The + Fed had not invoked + +On line 4853: + authority since + the Great Depression; it was + the Fed’s first use of + + the authority + since Congress had expanded + the language of the + +On line 4853: + to allow the Fed + to lend to investment banks.54 + The Fed was taking + +On line 4853: + unusual step of + declaring its willingness to + soon open its checkbook + +On line 4855: + and whose financial + condition it had never + examined. But the + +On line 4855: + Fed would not launch the + TSLF until March more than two + weeks later—and it was + + not clear that Bear could + last that long. The following + day, Jim Embersit + +On line 4855: + Reserve Board checked on + Bear’s liquidity with the + SEC. The SEC said Bear + +On line 4855: + billion in cash—down + from about billion at the start + of the week—and was able + +On line 4855: + "The SEC indicates + that no notable losses have + been sustained and that + +On line 4857: + position of the + firm is ‘fine.’"55 Derivatives + counterparties were + +On line 4857: + be exposed to Bear. + In some cases they unwound + trades in which they faced + +On line 4857: + in others they made + margin or collateral + calls.56 In Bear’s last few + +On line 4857: + had substantially + increased its exposure to + derivatives. At + +On line 4857: + year Bear had trillion + in notional exposure + on derivatives + +On line 4857: + contracts, compared with + trillion at fiscal year-end and + trillion at the end + +On line 4859: + of Derivatives + counterparties who worried + about Bear’s ability + +On line 4859: + their payments could get + out of their derivative + positions with Bear + +On line 4859: + Assignments allow + counterparties to assign + their positions to + + someone else: if firm + X has a derivatives + contract with firm Y, + +On line 4859: + firm X can assign + its position to firm Z, + so that Z now is + +On line 4861: + counterparties to + get out of their exposure + to each other, but + + by bringing in a + third party: instead of X + facing Y, X faces + +On line 4861: + Y. Both assignments + and novations are routine + transactions on Wall + +On line 4861: + on Tuesday, Brian + Peters of the New York Fed + advised Eichner + + at the SEC that the + New York Fed was "seeing some + HFs [hedge funds] wishing + +On line 4863: + assign trades the clients + had done with Bear to other + CPs [counterparties] + + so that Bear ‘steps out.’"57 + Counterparties did not want + to have Bear Stearns as + +On line 4865: + more. Bear Stearns also + encountered difficulties + stepping into trades. + + Hayman Capital + Partners, a hedge fund in Texas + wanting to decrease + +On line 4865: + to subprime mortgages, + had decided to close out + a relatively + +On line 4865: + small million subprime + derivative position + with Goldman Sachs. Bear + +On line 4865: + best bid, so Hayman + expected to assign its + position to Bear, + + which would then become + Goldman’s counterparty in + the derivative. + +On line 4865: + Hayman notified + Goldman by a routine email + on Tuesday, March at + +On line 4867: + The reply minutes + later was unexpected: + "GS does not consent + +On line 4869: + this trade."58 hat startled + Kyle Bass, Hayman’s managing + partner. He told the + +On line 4869: + next morning offered + no details: "Our trading desk + would prefer to stay + +On line 4869: + not want to face Bear."60 + Adding to the mystery, minutes + later Goldman agreed + +On line 4869: + accept Bear Sterns as + the counterparty after + all.61 But the damage + +On line 4869: + The news hit the street + that Goldman had refused a + routine transaction + +On line 4869: + one of the other + big five investment banks. The + message: don’t rely + +On line 4871: + CEO Alan Schwartz hoped an + appearance on CNBC would + reassure markets. + +On line 4873: + about this incident, + Schwartz said he had no knowledge + of such a refusal + +On line 4873: + Cox told reporters his + agency was monitoring + capital levels + +On line 4875: + Bear Stearns and other + securities firms "on a + constant basis" and + + has "a good deal of + comfort about the capital + cushions at these firms + +On line 4877: + moment."63 Still, the run + on Bear accelerated. + Many investors believed + + the Fed’s announcement + about its new loan program was + directed at Bear + + Stearns, and they worried + about the facility’s not + being available for + +On line 4877: + weeks. On Wednesday, March + the SEC noted that Bear paid + another billion + +On line 4879: + Repo lenders who had + already tightened the terms for + their contracts over the + +On line 4879: + or five months shortened + the leash again, demanding more + collateral from + +On line 4881: + evening, Bear’s ability + to borrow in the repo + market was drying + +On line 4881: + important money + funds, including Fidelity + and Mellon, had told + + Bear after the close + of business Wednesday they "might + be hesitant to + +On line 4881: + The SEC said that though + they believed the amounts were "very + manageable (between + +On line 4881: + the withdrawals would not + send a helpful signal to + the market.67 But the + +On line 4881: + moot. Schwartz called New York + Fed President Timothy + Geithner that + +On line 4883: + event that some repo + lenders did pull away.68 Upton, the + treasurer, said that + + before that week, he + had never worried about the + disappearance of + +On line 4883: + lending. By Thursday, + he believed the end was near.69 + Bear executives + + informed the board that + the rumors were dissuading + counterparties from + +On line 4883: + calls, that billion in + repo was not going to + roll over, and that "there + + was a reasonable + chance that there would not be enough + cash to meet [Bear’s] needs."70 + + Some repo lenders were + already so averse to Bear that + they stopped lending to + +On line 4883: + FCIC.71 Derivatives + counterparties continued + to run from Bear. By + +On line 4885: + liquidity had + dwindled to a mere billion + (see figure Bear had + +On line 4885: + Executives and + regulators continued + to believe the firm + +On line 4885: + however. Former + SEC Chairman Cox testified + before the FCIC, "At + +On line 4885: + all times during the + week of March to up to and + including the time + +On line 4885: + to be acquired by + JP Morgan, Bear Stearns had a + capital cushion + +On line 4887: + what is required."72 "THE + GOVERNMENT WOULD NOT PERMIT + A HIGHER NUMBER" + +On line 4889: + On Thursday evening, March + Bear Stearns informed the SEC that + it would be "unable + +On line 4889: + on Friday."73 CEO Alan + Schwartz called JP Morgan CEO Jamie + Dimon to request + +On line 4889: + billion credit line. + Dimon turned him down,74 citing, + according to Schwartz, + +On line 4889: + own significant + exposure to the mortgage + market. Because Bear + +On line 4889: + of mortgage assets, + JP Morgan would not render + assistance without + + government support. + Schwartz spoke with Geithner + again. Schwartz insisted + +On line 4889: + liquidity, not + insufficient capital. + A series of calls + + between Schwartz, Dimon, + Geithner, and Treasury + Secretary Henry + + Paulson followed.75 To + address Bear’s liquidity + needs, the New York Fed + +On line 4889: + made a billion loan + to Bear Stearns through JP Morgan + on the morning of + +On line 4891: + Friday, March Standard + Poor’s lowered Bear’s rating three + levels to BBB. Moody’s + +On line 4891: + also downgraded + the company. By the end + of the day, Bear was + +On line 4893: + Its stock plummeted + closing below The markets + evidently viewed + +On line 4893: + sign of terminal + weakness. After markets closed + on Friday, Paulson + +On line 4893: + CEO Schwartz that the Fed + loan to JP Morgan would not + be available after + + the weekend. Without + that loan, Bear could not conduct + business. In fact, Bear + +On line 4893: + to find a buyer + before the Asian markets opened + Sunday night or the + + game would be over.76 Schwartz, + olinaro, Alix, and others + spent the weekend in + + due diligence meetings + with JP Morgan and other + potential buyers, + +On line 4897: + JP Morgan was the + only candidate with the + size and stature to make + +On line 4899: + within hours.77 As Bear + Stearns’s clearing bank for repo + trades, JP Morgan held + +On line 4899: + of Bear Stearns’s assets + as collateral and had + been assessing their + +On line 4901: + let JP Morgan move + more quickly. On Sunday, March + JP Morgan informed + +On line 4901: + Fed and the Treasury + that it was interested + in a deal if it + +On line 4901: + finding "unusual + and exigent circumstances" + as required under + +On line 4901: + Federal Reserve + Act, agreed to purchase billion + of Bear’s assets to + + get them off the firm’s + books through a new entity + called Maiden Lane LLC + +On line 4903: + other assets, and + hedges from Bear’s mortgage trading + desk—would be under New + + York Fed management. + To finance the purchases, + JP Morgan made a + +On line 4903: + subordinated + loan and the New York Fed lent + billion. Because of + +On line 4903: + loan, JP Morgan bore + the risk of the first billion + of losses; the Fed + +On line 4903: + any further losses + up to billion.80 The Fed’s loan + would be repaid as + + Maiden Lane sold the + collateral. On Sunday + night, with Maiden Lane + +On line 4905: + in place, JP Morgan + publicly announced a deal to + buy Bear Stearns for a + +On line 4905: + of Bear’s board meeting + indicate that JP Morgan + had considered but + +On line 4905: + it to "because the + government would not permit + a higher number. + +On line 4905: + Fed and the Treasury + Department would not support + a transaction where + +On line 4905: + equity holders + received any significant + consideration + + because of the ‘moral + hazard’ of the federal + government using + + taxpayer money + to ‘bail out’ the investment + bank’s stockholders."81 Eight + +On line 4907: + days later, on March + Bear Stearns and JP Morgan agreed + to increase the price + +On line 4907: + of the financial + institutions mergers and + acquisitions group + +On line 4907: + JP Morgan, told the + FCIC they increased the price to + make Bear shareholders’ + +On line 4907: + more likely.82 Bear CEO + Schwartz told the FCIC the increase + let Bear preserve the + +On line 4907: + extent possible + under the circumstances for + our shareholders, our + +On line 4911: + employees, and our + creditors."83 "IT WAS HEADING + TO A BLACK HOLE" The + +On line 4911: + and Eichner were + as stunned as everyone else + by the speed of Bear’s + +On line 4911: + Macchiaroli had had doubts + as far back as August, he + told the FCIC, but he + +On line 4911: + expected Bear would + be able to fund itself through + the repo market, + + albeit at higher + margins.84 Fed Chairman Ben Bernanke + later called the Bear + +On line 4913: + Stearns decision the + toughest of the financial + crisis. The trillion + +On line 4913: + repo market had + "really [begun] to break + down," Bernanke said. "As the + + fear increased," short-term + lenders began demanding more + collateral, "which + + was making it more + and more difficult for the + financial firms to + +On line 4913: + creating more and + more liquidity pressure + on MARCH them. And, it + + was heading sort of + to a black hole." He saw the + collapse of Bear Stearns + + as threatening to + freeze the tri-party repo + market, leaving the + +On line 4913: + with collateral + they would try to "dump on the + market. You would have + +On line 4915: + big crunch in asset + prices."85 "Bear Stearns, which is not that + big a firm, our view + +On line 4915: + important to save + it—you may disagree—but our + view was that because + +On line 4915: + so essentially + involved in this critical + repo financing + +On line 4915: + failure would have brought + down that market, which would have + had implications + + for other firms," Bernanke + told the FCIC.86 Geithner + explained the need for + +On line 4919: + acquisition by + JP Morgan as follows: "The + sudden discovery + +On line 4919: + to protect themselves + from financial risk were no + longer operative + +On line 4919: + triggered substantial + further dislocation in + markets. This would have + +On line 4919: + to liquidate the + collateral they held against + those positions and + +On line 4919: + attempt to replicate + those positions in already + very fragile markets."87 + +On line 4921: + FCIC that Bear had both + a liquidity problem + and a capital + + problem. "Could you just + imagine the mess we would have + had1 If Bear had gone + + there were hundreds, maybe + thousands of counterparties + that all would have grabbed + +On line 4921: + collateral, would + have started trying to sell + their collateral, + +On line 4921: + was huge fear about the + investment banking model + at that time." Paulson + +On line 4921: + if Bear had filed for + bankruptcy, "you would have had + Lehman going almost + + immediately + if Bear had gone, and just the + whole process would have just + + started earlier."88 + The Commission concludes the + failure of Bear Stearns + +On line 4923: + by its exposure + to risky mortgage assets, its + reliance on short-term + + funding, and its high + leverage. These were a result + of weak corporate + +On line 4923: + largely on return + on equity, creating + incentives to use + +On line 4925: + on short-term gains such + as annual growth goals. Bear + experienced runs + +On line 4925: + repo lenders, hedge fund + customers, and derivatives + counterparties and + +On line 4925: + considered it too + interconnected to fail. + Bear’s failure was in + +On line 4925: + the Securities + and Exchange Commission, which + did not restrict its + +On line 4925: + activities and + which allowed undue leverage + and insufficient + +On line 4939: + RISK CONCERNS CONTENTS + The Federal Reserve: "When + people got scared".................................................293 JP + +On line 4945: + stages of assessing + the potential systemic risk" + Banks: "The markets were + +On line 4947: + catastrophe—for the + time being. The Federal + Reserve had found new + + ways to lend cash to + the financial system, and + some investors and lenders + +On line 4947: + extraordinary + government intervention. + Investors began to + +On line 4947: + recession and more + about inflation, as the price + of oil continued + +On line 4949: + rise (hitting almost + per barrel in July). At + the beginning of + +On line 4951: + the stock market had + fallen almost from its peak + in the fall of Then, + +On line 4953: + in May the Dow Jones + climbed to within of the record + set in October + +On line 4953: + the prices of credit + default swaps—declined from the + highs of March and April. + +On line 4953: + hindsight, the markets + were surprisingly stable + and almost seemed to + +On line 4953: + a month after Bear + Stearns, leading all the way up + to September," said + +On line 4953: + Stanley’s treasurer.1 + Taking advantage of the + brief respite in investor + +On line 4953: + top ten American + banks and the four remaining + big investment banks, + +On line 4953: + just under billion + and billion, respectively, + in new equity + + by the end of June. + Despite this good news, bankers and + their regulators + + were haunted by the + speed of Bear Stearns’s demise. And they + knew that the other + +On line 4957: + in illiquid mortgage + securities and other + troubled assets. In + +On line 4957: + on Bear had exposed + the dangers of tri-party + repo agreements and + + the counterparty + risk caused by derivatives + contracts. And the word + +On line 4965: + on the street—despite + the assurances of Lehman CEO + Dick Fuld at MARCH TO + +On line 4965: + shareholder meeting + that "the worst is behind us"2—was + that Bear would not be + + the only failure. + THE FEDERAL RESERVE: "WHEN + PEOPLE GOT SCARED" The + +On line 4971: + potential failure + of the repo market—a + market that "grew very, + +On line 4971: + purview of it," former + Treasury Secretary Henry + Paulson would tell the + +On line 4971: + safe and durable source of + collateralized short-term + financing. It was + +On line 4971: + that Bear had shifted + approximately billion + of its unsecured + +On line 4971: + now it was clear that + repo funding could be just + as vulnerable + +On line 4973: + runs as were other + forms of short-term financing. + The repo runs of + +On line 4973: + devastated hedge + funds such as the two Bear Stearns + Asset Management + +On line 4973: + originators such + as Countrywide, had seized the + attention of the + +On line 4973: + participants and + regulators now better + appreciated + + how the quality + of repo collateral + had shifted over time + +On line 4975: + and Freddie Mac to + highly rated non-GSE mortgage– + backed securities + +On line 4975: + before the crisis, + this riskier collateral + accounted for as + +On line 4975: + April the Bankruptcy + Abuse Prevention and Consumer + Protection Act of + +On line 4975: + dramatically + expanded protections for + repo lenders holding + +On line 4975: + securities, that + was riskier than government + or highly rated + +On line 4975: + These protections gave + lenders confidence that they had + clear, immediate + +On line 4975: + declare bankruptcy. + Nonetheless, Jamie Dimon, the + CEO of JP Morgan, + +On line 4975: + the FCIC, "When people + got scared, they wouldn’t finance + the nonstandard stuff + +On line 4977: + ensure access to + the repo market. Repo + lenders cared just as much + + about the financial + health of the borrower as + about the quality + +On line 4977: + borrowers.7 Despite + the bankruptcy provisions + in the act, lenders were + +On line 4977: + risk the hassle of + seizing collateral, even + good collateral, + +On line 4979: + borrower. Steven Meier + of State Street testified to + the FCIC: "I would say + + the counterparties + are a first line of defense, + and we don’t want to + +On line 4979: + uncomfortable process + of having to liquidate + collateral."8 William + + Dudley of the New + York Fed told the FCIC, "At the + first sign of trouble, + +On line 4981: + tri-party repo + tend to run rather than take the + collateral that + +On line 4981: + So high-quality + collateral itself is + not sufficient when + +On line 4983: + an institution + gets in trouble."9 Moreover, if + a borrower in + +On line 4983: + funds—frequent lenders in + this market—may have to seize + collateral that + +On line 4983: + cannot legally own. + For example, a money + market fund cannot + +On line 4983: + Typically, if + a fund takes possession of + such collateral, + +On line 4983: + the securities + immediately, even—as + was the case during + +On line 4983: + crisis—into a + declining market. As a + result, funds simply + +On line 4983: + securities. In + the crisis, investors didn’t + consider secured + +On line 4983: + to be much better + than unsecured, according + to Darryll Hendricks, + +On line 4983: + and global head of + risk methodology at UBS, + as well as the head + +On line 4983: + private-sector task + force on the repo market + organized by the + +On line 4985: + noted, the Fed had + announced a new program, the + Term Securities + +On line 4985: + Facility (TSLF), + on the Tuesday before Bear’s + collapse, but it would + +On line 4985: + available until March + The TSLF would lend a total + of up to billion + +On line 4985: + affiliates of + the large commercial banks and + investment banks that + +On line 4985: + with the New York Fed, + such as Citigroup, Morgan + Stanley, or Merrill + +On line 4985: + return for Treasuries. + The primary dealers could + then use those Treasuries + +On line 4985: + collateral to + borrow cash in the repo + market. Like the Term + +On line 4985: + earlier, the TSLF + would run as a regular + auction to reduce + +On line 4985: + However, after + Bear’s collapse, Fed officials + recognized that the + + situation called + for a program that could be + up and running right + +On line 4987: + And they concluded + that the TSLF alone would not be + enough. So, the Fed would + + create another + program first. On the Sunday + of Bear’s collapse, the + +On line 4987: + cash, not Treasuries, to + investment banks and other + primary dealers + +On line 4987: + institutions—banks + and thrifts—received through the Fed’s + discount window. The + +On line 4987: + came "just about minutes" + too late for Bear, Jimmy Cayne, + its former CEO, told + +On line 4989: + the FCIC.11 Unlike the + TSLF, which would offer Treasuries + for days, the PDCF + +On line 4989: + loans in exchange for + collateral. In effect, + this program could serve + +On line 4989: + alternative to + the overnight tri-party repo + lenders, potentially + + providing hundreds + of billions of dollars of + credit. "So the idea + +On line 4989: + then was anything that + the dealer couldn’t finance—the + securities that + +On line 4989: + the discount window—if + they couldn’t get financing + in the market, they + + could get financing + from the Federal Reserve," + said Seth Carpenter, + +On line 4989: + the Division of + Monetary Affairs at the + Federal Reserve + +On line 4989: + way, you don’t have to + worry. And by providing + that support, other + +On line 4991: + that they’re going to + be able to get their money + back the next day."12 By + +On line 4991: + Reserve’s discount rate + and adding additional fees + for regular use, + +On line 4991: + Federal Reserve + encouraged dealers to use + the PDCF only + +On line 4991: + In its first week of + operation, this program + immediately + +On line 4991: + in cash to Bear Stearns + (as bridge financing until + the JP Morgan deal + +On line 4993: + of Citigroup, among + others. However, as the + immediate post-Bear + +On line 4993: + TO AUGUST after + April and ceased completely by + late July.13 Because + + the dealers feared that + markets would see reliance on + the PDCF as an + +On line 4993: + severe distress, the + facility carried a + stigma similar + + to the Fed’s discount + window. "Paradoxically, + while the PDCF was + +On line 4993: + loss of confidence + in an investment bank, use + of the PDCF was + +On line 4993: + both within Lehman, and + possibly by the broader + market, as an event + + that could trigger a + loss of confidence," noted + the Lehman bankruptcy + +On line 4995: + examiner.14 On + May the Fed broadened the kinds + of collateral + +On line 4995: + to include other + triple-A-rated asset-backed securities, + such as auto and + + credit card loans. In + June, the Fed’s Dudley urged in + an internal email + +On line 4997: + at least through the end + of the year. "PDCF remains + critical to the + +On line 4997: + of the [investment + banks]," he wrote. "Amounts don’t matter + here, it is the fact + +On line 4999: + Fed extended both + programs through January JP + MORGAN: "REFUSING + +On line 5003: + TO UNWIND WOULD BE + UNFORGIVABLE" The repo + run on Bear also + +On line 5003: + repo clearing banks—JP + Morgan, the main clearing bank + for Lehman and Merrill + + Lynch, as it had been + for Bear Stearns, and BNY Mellon, + the main clearing bank + +On line 5005: + Stanley—to the risks + they were taking. Before Bear’s + collapse, the market + +On line 5005: + colossal exposures + that the tri-party repo + market created + +On line 5005: + explained earlier, + the "unwind/rewind" mechanism + could leave JP Morgan + +On line 5005: + enormous "intraday" + exposure—an interim + exposure, but no + + less real for its + brevity. In an interview + with the FCIC, Dimon + + said that he had not + become fully aware of the + risks stemming from his + +On line 5005: + tri-party repo + clearing business until the + Bear crisis in A + +On line 5005: + bank had two concerns: + First, if repo lenders abandoned + an investment bank, + + it could be pressured + into taking over the role + of the lenders. Second, + +On line 5005: + bank defaulted, it + could be stuck with unwanted + securities. "If + +On line 5005: + intraday, we own + the securities and we + have to liquidate + + them. That’s a huge risk + to us," Dimon explained.17 To + address those risks in + +On line 5007: + for the first time both + JP Morgan and BNY Mellon + started to demand + +On line 5009: + investment banks—be + overcollateralized. The + Fed increasingly + +On line 5009: + systemic risk posed by + the two repo clearing banks. + In the chain-reaction + +On line 5011: + that it envisioned, + if either JP Morgan or + BNY Mellon chose not + + to unwind its trades + one morning, the money funds + and other repo + +On line 5011: + billions of dollars + in repo collateral. + Those lenders would then be + + in the difficult + position of having to + sell off large amounts of + + collateral in + order to meet their own cash + needs, an action that + + in turn might lead to + widespread fire sales of repo + collateral and + +On line 5013: + by lenders.18 The PDCF + provided overnight funding, in + case money market + + funds and other epo + lenders refused to lend as they + had in the case of + +On line 5013: + it did not protect + against clearing banks’ refusing + exposure to an + +On line 5015: + bank during the day. + On July Fed officials + circulated a + +On line 5015: + the two clearing banks + would become unwilling or + unable to unwind + + its trades.19 The plan would + allow the Fed to provide + troubled investment + +On line 5015: + such as Lehman Brothers, + with billion in tri-party + repo financing + +On line 5015: + covering for JP + Morgan or BNY Mellon if + the two clearing banks + +On line 5015: + or could not provide + that level of financing.20 + Fed officials made + +On line 5015: + for the proposal + in an internal memo: "Should + a dealer lose the + + confidence of its + investors or clearing bank, their + efforts to pull away + +On line 5015: + providing credit + could be disastrous for the + firm and also cast + + widespread doubt about the + instrument as a nearly + risk free, liquid overnight + + investment."21 But the + New York Fed’s new plan shouldn’t + be necessary as + +On line 5017: + as the PDCF was + there to back up the overnight lenders, + argued Patrick Parkinson, + + then deputy director + of the Federal Reserve + Board’s Division of + +On line 5019: + and Statistics. "We + should tell [JP Morgan] that with + the PDCF in place + +On line 5019: + is unnecessary + and would be unforgiveable," + he emailed Dudley and + +On line 5021: + A week later, on + July Parkinson wrote to Fed + Governor Kevin Warsh + + and Fed General + Counsel Scott Alvarez that JP + Morgan, because of + + its clearing role, was + "likely to be the first to + realize that the + +On line 5023: + investors that provide + tri-party financing to + [Lehman Brothers] are pulling + +On line 5023: + in which a clearing + bank’s refusal to unwind would + lead to a widespread + +On line 5025: + facilitated + Bear’s acquisition by JPMC," + he said.23 Still, it was + +On line 5025: + dissuade JP Morgan + from refusing to unwind + Lehman’s repos, Parkinson + +On line 5025: + Lehman’s collateral + was ineligible to + be funded by the + + PDCF, and because + Lehman could fail during the day + (before the repos + +On line 5025: + settled), JP Morgan + still faced significant risks. + Parkinson noted that + +On line 5025: + even if the Fed lent + as much as billion to Lehman, + the sum might not be + + enough to ensure the + firm’s survival in the absence + of an acquirer: + +On line 5025: + counterparties to + stop providing funding to + Lehman, the company + + would fail.24 THE FED AND + THE SEC: "WEAK LIQUIDITY + POSITION" Among the + +On line 5029: + one key measure of + liquidity risk was the + portion of total + +On line 5029: + liabilities + that the firms funded through the + repo market: to + +On line 5031: + for Lehman and Merrill + Lynch, to for Morgan Stanley, + and about for Goldman + +On line 5031: + the reliance on overnight + repo (which mature in one + day) or open repo + +On line 5031: + be terminated + at any time). Despite efforts + among the investment + +On line 5031: + reduce the portion + of their repo financing + that was overnight or open, + +On line 5031: + open repo funding + to total repo funding + still exceeded for + + all but Goldman Sachs. + Comparing the period + between March and May + + to the period + between July and August, + Lehman’s percentage fell + +On line 5031: + MARCH TO AUGUST from + to Merrill Lynch’s fell from to + Morgan Stanley’s fell + +On line 5033: + and Goldman’s fell from + to Another measure of + risk was the haircuts + +On line 5033: + loans—that is, the amount of + excess collateral that + lenders demanded for + + a given loan. Fed + officials kept tabs on the + haircuts demanded + + of investment banks, + hedge funds, and other repo + borrowers. As Fed + +On line 5035: + later noted, "With + lenders worrying that they could + lose money on the + +On line 5035: + as collateral, + haircuts increased—doubling for + some agency mortgage + +On line 5035: + significantly + even for borrowers with high + credit ratings and + +On line 5037: + collateral such + as Treasury securities."27 + On the day of Bear’s + +On line 5037: + an effort to get + a better understanding + of the investment + + banks, the New York Fed + and the SEC sent teams to work + on-site at Lehman Brothers, + +On line 5037: + and Morgan Stanley. + According to Erik Sirri, + director of the + +On line 5039: + assets, funding, and + capital.28 Fed Chairman Ben + Bernanke would testify + +On line 5039: + a House committee + that the Fed’s primary role + at the investment + +On line 5039: + banks in was not as + a regulator but as + a lender through the new + +On line 5039: + analyses: First, was each + investment bank liquid—did + it have access to + + the cash needed to + meet its commitments1 Second, + was it solvent—was + +On line 5041: + U.S. Treasury also + dispatched so-called SWAT teams to + the investment banks + +On line 5041: + in the spring of The + arrival of officials from + the Treasury and the + +On line 5041: + SEC had never had. + Historically, the SEC’s + primary concern + + with the investment + banks had been liquidity + risk, because these firms + +On line 5041: + the credit markets + for funding.31 The SEC already + required these firms to + +On line 5041: + designed to ensure + that they had sufficient cash + available to sustain + + themselves on a stand-alone + basis for a minimum + of one year without + +On line 5041: + unsecured funding + and without having to sell + a substantial amount + +On line 5041: + the run on Bear in + the repo market, the SEC’s + liquidity stress + +On line 5041: + known as stress tests—had + not taken account of the + possibility + + that a firm would lose + access to secured funding. + According to the + +On line 5041: + SEC never thought that + a situation would arise + where an investment + +On line 5041: + by high-quality + collateral including + Treasuries. He told the + +On line 5041: + financial crisis + worsened, the SEC began to + see liquidity + + and funding risks as + the most critical for the + investment banks, and + +On line 5041: + commercial paper + and an extension of the + maturities of + +On line 5043: + loans.32 The Fed and the + SEC collaborated in + developing two + +On line 5043: + the investment banks’ + ability to withstand a + potential run or + +On line 5043: + systemwide disruption + in the repo market. The + stress scenarios, called + + "Bear Stearns" and "Bear Stearns + Light," were developed jointly + with the remaining + +On line 5043: + investment banks. In + May, Lehman, for example, would + be billion short of + +On line 5043: + in the more stringent + Bear Stearns scenario and billion + short under Bear Stearns + +On line 5045: + The Fed conducted + another liquidity + stress analysis in + + June. While each firm ran + ifferent scenarios that + matched its risk profile, + +On line 5045: + between the tests. The + tests assumed that each firm would + lose of unsecured + +On line 5045: + and a fraction of + repo funding that would vary + with the quality + +On line 5045: + Morgan Stanley were + relatively sound. Merrill + Lynch and Lehman Brothers + +On line 5045: + the two banks came out + billion and billion short of + cash, respectively; + +On line 5045: + each had only of + the liquidity it would + need under the stress + +On line 5047: + assets" and noted + that "Merrill’s liquidity + pool is low, a fact + +On line 5049: + does not acknowledge." + As for Lehman Brothers, the Fed + concluded that "Lehman’s + + weak liquidity + position is driven by + its relatively + +On line 5049: + exposure to overnight + [commercial paper], combined + with significant + +On line 5051: + "less liquid assets" + included mortgage-related + securities—now + + devalued. Meanwhile, + Lehman ran stress tests of its own + and passed with billions + +On line 5053: + Although the SEC and + the Fed worked together on + the liquidity + +On line 5053: + tests, with equal access + to the data, each agency + has said that for months + +On line 5053: + told the bankruptcy + examiner that the SEC + had declined to share + +On line 5053: + reviews of the banks’ + liquidity positions + and exposures to + + commercial real + estate. The SEC’s response was + that the documents + +On line 5053: + "draft" form and had not + been reviewed or finalized. + Adding to the tension, + +On line 5053: + or expertise to + adequately evaluate + the data.37 This lack + +On line 5053: + remedied only by + a formal memorandum + of understanding + +On line 5055: + former SEC Chairman + Christopher Cox, "One reason the + MOU was needed was + +On line 5055: + Fed was reluctant + to share supervisory + information with + +On line 5055: + SEC, out of concern + that the investment banks would + not be forthcoming + +On line 5057: + if they thought they would + be referred to the SEC for + enforcement."38 The MOU + +On line 5059: + the collapse of Bear + Stearns. DERIVATIVES: "EARLY + STAGES OF ASSESSING + +On line 5063: + Fed’s Parkinson advised + colleagues in an internal + August email that the + + systemic risks of the + repo and derivatives + markets demanded + + attention: "We have + given considerable thought + to what might be done + +On line 5063: + under existing + authority are not very + attractive—lots of risk + + to Fed/taxpayer, + lots of moral hazard.) We still + are at the early + +On line 5063: + risk from close-out of OTC + derivatives transactions + by an investment + +On line 5065: + and identifying + potential mitigants."39 The + repo market was + +On line 5065: + but as discussed in + earlier chapters, it was + dwarfed by the global + +On line 5065: + notional amount of + the over-the-counter derivatives + market was trillion + +On line 5067: + trillion (see figure + Adequate information + about the risks in this + +On line 5067: + participants or + government regulators + like the Federal + +On line 5067: + were not subject to + reporting or disclosure + requirements and no + +On line 5067: + agency had oversight + responsibility. While + the Office of the + +On line 5067: + of the Currency + did report information + on derivatives + +On line 5067: + from commercial banks + and bank holding companies, + it did not collect + +On line 5067: + investment banks and + insurance companies like + AIG, which were also + +On line 5067: + crisis the lack of + such basic information + created heightened + +On line 5069: + relationships that + derivatives created + among the small number + +On line 5069: + large financial firms + that act as dealers in the + OTC derivatives + +On line 5069: + parties, such that one + party may have to make large + and unexpected + +On line 5071: + to the other based + on sudden price or rate changes + or loan defaults. If + +On line 5071: + is unable to make + those payments when they become + due, that failure may + +On line 5071: + may have offsetting + obligations to third parties + and depend on prompt + + payment. Indeed, most + OTC derivatives dealers + hedge their contracts with + + offsetting contracts; + thus, if they are owed payments + on one contract, they + +On line 5071: + offsetting contract, + creating the potential + for a series of + +On line 5071: + these contracts numbered + in the millions and allowed + a party to have + +On line 5071: + of sudden large and + devastating losses in + this market could pose + +On line 5073: + The Counterparty + Risk Management Policy + Group, led by former + +On line 5073: + York Fed President + E. Gerald Corrigan + and consisting of + +On line 5073: + warned that a backlog + in paperwork confirming + derivatives trades + +On line 5073: + corporate defaults + occur.40 With urging from New + York Fed President + +On line 5073: + Geithner, by + September major market + participants had + + significantly + reduced the backlog and had + ended the practice + + of assigning trades + to third parties without the + prior consent of + +On line 5075: + counterparties.41 Large + derivatives positions, + and the resulting + +On line 5075: + and operational + risks, were concentrated in + a very few firms. Among + +On line 5075: + institutions held + enormous OTC derivatives + positions as of + +On line 5077: + in notional amount + for JP Morgan, trillion for + Bank of America, + +On line 5077: + Citigroup, trillion + for Wachovia, and trillion for + HSBC. Goldman Sachs + +On line 5077: + companies in held + and trillion, respectively, + in notional amount + +On line 5079: + of In the current + and potential exposure + to derivatives + + at the top five U.S. + bank holding companies was + on average three + +On line 5081: + was even higher at + the investment banks. Goldman + Sachs, just after it + +On line 5081: + concentrations of + positions in the hands of + the largest bank holding + +On line 5081: + and investment banks + posed risks for the financial + system because of + +On line 5083: + By the summer of + outstanding amounts of some types + of derivatives + +On line 5083: + begun to decline + sharply. As we will see, over the + course of the second + +On line 5085: + problems for hedging + and price discovery. The Fed + was uneasy in part + +On line 5085: + counterparties had + played an important role in + the run on Bear Stearns. + +On line 5085: + by derivatives + counterparties to assign + their positions away + +On line 5085: + rumored refusal by + Goldman to accept Bear as + a derivatives + + counterparty—were + still a fresh memory across + Wall Street. Chris Mewbourne, + +On line 5085: + told the FCIC that the + ability to novate ceased + to exist and this + + was a key event in + the demise of Bear Stearns.43 Credit + derivatives in + +On line 5087: + were a serious + source of worry. Of greatest + interest were the + +On line 5087: + of credit default + swaps: the monoline insurers + and AIG, which back-MARCH TO + +On line 5087: + everyone, because + they guaranteed hundreds of + billions of dollars + +On line 5087: + products. As we have + seen, when their credit ratings + were downgraded, the + +On line 5087: + of all the assets + they guaranteed, including + municipal bonds + +On line 5087: + the conservative + institutional investors + in those markets. In + + the vernacular + of Wall Street, this outcome is + the knock-on effect; + +On line 5087: + the domino effect; + in the vernacular of + the Fed, systemic risk. + +On line 5091: + BANKS: "THE MARKETS WERE + REALLY, REALLY DICEY" + By the fall of signs + +On line 5091: + were beginning to + emerge among the commercial banks. + In the fourth quarter + +On line 5093: + of commercial banks’ + earnings declined to a 16- + year low, driven by + + write-downs on mortgage-backed + securities and CDOs and + by record provisions + +On line 5093: + as borrowers had + increasing difficulty + meeting their mortgage + +On line 5093: + greater difficulty + was anticipated. The + net charge-off rate—the ratio + +On line 5095: + to total loans—rose + to its highest level since + when the economy + +On line 5095: + recession. Earnings + continued to decline in + 2008—at first, more for big + +On line 5095: + securities, CDOs, + and collateralized loan + obligations. Declines + +On line 5095: + values required banks + to write down the value of + their holdings of these + +On line 5095: + As previously + noted, several of the + largest banks had also + +On line 5095: + activities, such + as money market funds and + commercial paper + +On line 5097: + assets onto their + balance sheets— assets that were + losing value fast. + +On line 5097: + begun to downgrade + the ratings of many smaller + banks in response to + + their high exposures + in residential real + estate construction, + +On line 5097: + went out of business + as financing dried up in + mid-2007. By the end of + +On line 5099: + on its "problem list"; + their combined assets totaled + billion.44 (When large banks + +On line 5099: + to be downgraded, + in early they stayed off the + FDIC’s problem list, as + + supervisors rarely + give the largest institutions + the lowest ratings.)45 + +On line 5101: + mortgages that did not + meet Fannie Mae’s or Freddie + Mac’s underwriting + +On line 5101: + mortgage size guidelines) + had also vanished in the + fourth quarter of Not + +On line 5101: + these nonconforming + loans prove harder to sell, but + they also proved less + +On line 5101: + to keep on balance + sheet, as house price forecasts looked + increasingly grim. + +On line 5101: + house prices had fallen + about for the year, depending + on the measure. In + +On line 5101: + the first quarter of + real estate loans in the + banking sector showed + +On line 5101: + smallest quarterly + increase since IndyMac reported + a decline in loan + +On line 5101: + for that quarter from + a year earlier, because + it had stopped making + +On line 5101: + thrift, discontinued + all remaining lending through + its subprime mortgage + +On line 5103: + channel in April But + those actions could not reduce + the subprime and Alt-A + + exposure that these + arge banks and thrifts already had. + And on these assets, + +On line 5105: + the banks to raise new + capital. In January + Citigroup secured + +On line 5105: + in capital from + Kuwait, Sin-gapore, Saudi Prince + Alwaleed bin Talal, + +On line 5105: + In April, Washington + Mutual raised billion from + an investor group led + +On line 5105: + Capital. Wachovia + raised billion in capital + at the turn of the + +On line 5105: + an additional + billion in April Despite the + capital raises, + +On line 5107: + significant part + of this period, starting + with August Roger Cole, + +On line 5107: + of the Division + of Banking Supervision + and Regulation + + at the Federal + Reserve Board, told the FCIC.47 The + same was true for the + +On line 5107: + director in risk + management manager in + the Office of Thrift + +On line 5107: + particularly + small, midsized thrifts—to keep up + with [how quickly the + +On line 5107: + occurred during the + crisis] and change their business + models and not get + +On line 5107: + without the chair when + the music stopped They got caught. + The rating downgrades + + started and by the + time the thrift was able to do + something about it, it + +On line 5109: + was too late Business + models can’t keep up with what + we saw in As the + +On line 5109: + commercial banks’ health + worsened in examiners + downgraded even large + +On line 5109: + These ratings downgrades + and enforcement actions came + late in the day—often + +On line 5109: + investigated, + regulators either did + not identify the + + problems early enough + or did not act forcefully + enough to compel the + +On line 5113: + to come up with a + new playbook" For Citigroup, + supervisors at + + the New York Fed, who + examined the bank holding + company, and at + +On line 5113: + the Comptroller of + the Currency, who oversaw + the national bank + + subsidiary, finally + downgraded the company + and its main bank to + +On line 5113: + satisfactory" + in April 2008—five months after the + firm’s announcement in + +On line 5113: + billions of dollars + in write-downs related to + its mortgage-related + +On line 5113: + supervisors put + the company under new + enforcement actions + +On line 5113: + May and June. Only + a year earlier, both the + Fed and the OCC had + +On line 5113: + after lifting all + remaining restrictions and + enforcement actions + +On line 5113: + transactions that it + had structured for Enron and + to the actions of + +On line 5113: + subsidiary CitiFinancial, discussed + in an earlier chapter. + "The risk management + +On line 5113: + assessment for is + reflective of a control + environment where + +On line 5113: + in its annual + inspection report on April + had noted. "During + +On line 5113: + were lifted. Board and + senior management remain + actively engaged + +On line 5115: + supervisors. In + November MARCH TO AUGUST + the New York Fed led + +On line 5115: + international + supervisors, the Senior + Supervisors Group, + +On line 5115: + largest firms to assess + lessons learned from the financial + crisis up to that + +On line 5117: + the toughest language + was reserved for Citigroup. + "The firm did not have + +On line 5117: + management. "Stress tests + were not designed for this type + of extreme market + +On line 5117: + that CDOs and leveraged + loans would be syndicated, + and that the credit + +On line 5119: + was negligible."50 + In retrospect, Citigroup + had two key problems: + +On line 5119: + risks and a lack of + proper infrastructure and + internal controls + +On line 5119: + to the creation of + CDOs. The OCC appears to have + identified some of + +On line 5119: + as early as but + did not effectively act + to rectify them. + +On line 5121: + OCC assessed both the + liquidity puts and the + super-senior tranches + +On line 5121: + part of its reviews + of the bank’s compliance with + the post-Enron enforcement + + action, but it did + not examine the risks of + these exposures. As + +On line 5121: + it did spot, the OCC + failed to take forceful steps to + require mandatory + +On line 5121: + assurances in that + the executives would strive + to meet the OCC’s goals + +On line 5123: + risk management. In + contrast, documents obtained + by the FCIC from the + +On line 5123: + examination + staff had any independent + knowledge of those two + +On line 5123: + Fed’s supervision + of Citigroup, conducted + by examiners + +On line 5123: + Banks (the December + Operations Review of + the New York Fed, which + +On line 5123: + four years), concluded: + The supervision program + for Citigroup has + +On line 5123: + less than effective. + Although the dedicated + supervisory + +On line 5123: + sound knowledge of the + organization, there have + been significant + +On line 5123: + the execution + of the supervisory + program. The team has + +On line 5123: + firm, as evidenced + by the double downgrades in + the firm’s financial + +On line 5123: + subcomponents at + year-end Additionally, the + supervisory + + program has lacked the + appropriate level of + focus on the firm’s + +On line 5123: + a result, there is + currently significant + work to be done in + +On line 5123: + areas. Moreover, the + team has lacked a disciplined + and proactive approach + +On line 5125: + issues.51 Timothy + Geithner, secretary + of the Treasury and + +On line 5125: + president of the + Federal Reserve Bank of + New York, reflected + +On line 5125: + of Citigroup, telling + the Commission, "I do not + think we did enough as + + an institution + with the authority we + had to help contain + +On line 5127: + that ultimately + emerged in that institution."52 + In January an + + OCC review of the + breakdown in the CDO business + noted that the risk + +On line 5127: + in the unit had grown + rapidly since after the OCC’s + and Fed’s ifting of + +On line 5127: + various control + problems at Citigroup. In + April the Fed and OCC + +On line 5127: + their overall ratings + of the company and its + largest bank subsidiary from + +On line 5127: + satisfactory), + reflecting weaknesses in + risk management that + +On line 5129: + now apparent to + the supervisors. Both Fed + and OCC officials + +On line 5129: + cited the Gramm-Leach-Bliley Act + of as an obstacle that + prevented each from + +On line 5129: + of the risks assumed + by large financial firms such + as Citigroup. The + +On line 5131: + it more difficult— + though not impossible—for + regulators to + +On line 5131: + direct purview into + other areas of a large + firm. Citigroup, for + +On line 5133: + from the Fed, OCC, SEC, + OTS, and state agencies. In May + and June Citigroup + +On line 5133: + memoranda of + understanding with both the + New York Fed and OCC + +On line 5133: + to resolve the risk + management weaknesses that + the events of had laid + +On line 5133: + the ensuing months, + Fed and OCC officials said, + they were satisfied + +On line 5133: + compliance with their + recommendations. Indeed, + in speaking to the + +On line 5133: + Manzari, the senior + relationship manager + for Citigroup at + +On line 5133: + York Fed from April to + September complimented + Citigroup on its + +On line 5133: + management, raising + capital from investors in + late and putting in place + + a number of much + needed "internal fixes." + However, Manzari + +On line 5133: + on, "Citi was trapped in + what was a pretty vicious + systemic event," and for + + regulators "it + was time to come up with a + new playbook."53 Wachovia: + +On line 5135: + West acquisition + was a mistake" At Wachovia, + which was supervised + +On line 5135: + as well as the OTS + and the Federal Reserve, + a end-of-year report showed + + that credit losses + in its subsidiary Golden West’s + portfolio of "Pick-a-Pay" + +On line 5135: + adjustable-rate mortgages, or + option ARMs, were expected + to rise to about of + +On line 5135: + portfolio for in + losses in this portfolio + had been less than It + +On line 5137: + would soon become clear + that the higher estimate + for was not high enough. + + The company would + hike its estimate of the + eventual losses + +On line 5139: + to by June and to% + by September. Facing these + and other growing + + concerns, Wachovia raised + additional capital. + Then, in April, Wachovia + +On line 5141: + a loss of million + for the first three months of the + year. Depositors + +On line 5141: + terms, increasing rates, + and reducing loan amounts.54 By + June, according to + +On line 5141: + management had launched + a liquidity crisis + management plan in + +On line 5141: + more adverse market + reaction to second-quarter + losses that would be + +On line 5143: + in July.55 On June + Wachovia’s board ousted CEO Ken + Thompson after he + +On line 5143: + had spent years at the + bank, of them at its helm.56 At + the end of the month, + +On line 5143: + announced that it would + stop originating Golden + West’s Pick-a-Pay products and + +On line 5143: + TO AUGUST waive all + fees and prepayment penalties + associated + +On line 5143: + Wachovia reported + an billion second-quarter loss. + The new CEO, Robert Steel, + + most recently an + undersecretary of the + treasury, announced a + + plan to improve the + bank’s financial condition: + raise capital, cut + +On line 5145: + the stock dividend, + and lay off to of the staff. + The rating agencies + + and supervisors + ignored those reassurances. + On the same day as + + the announcement, S&P + downgraded the bank, and the + Fed, after years of + +On line 5145: + showed losses that could + wipe out the recently raised + capital: losses + +On line 5145: + exceed billion, an + amount that could cause a further + ratings downgrade.57 The + +On line 5145: + directed Wachovia + to reevaluate and update + its capital plans + +On line 5145: + up to the summer + meltdown, the Fed now declared + that many of Wachovia’s + + problems were "long-term in + nature and result[ed] from + delayed investment + +On line 5147: + and a desire to + have business lines operate + autonomously."58 The Fed + +On line 5147: + criticized the board + and senior management for + "an environment + +On line 5147: + of all risk-taking + activities, including + deficiencies in + +On line 5147: + management had not + completely understood the + level of risk across + +On line 5147: + in certain nonbank + investments, and management + had delayed fixing + +On line 5147: + questioned investment + decisions.59 Nonetheless, the + Fed concluded that + +On line 5147: + market disruption, + management had minimized + exposure to overnight + +On line 5149: + markets. On August + the OCC downgraded Wachovia + Bank and assessed its + + overall risk profile + as "high." The OCC noted many + of the same issues + +On line 5149: + strong remarks about the + acquisition of Golden + West, identifying + +On line 5149: + foreclosures as the + heart of Wachovia’s problem. The + OCC noted that the + +On line 5151: + "acknowledged that the + Golden West acquisition + was a mistake."60 The + +On line 5151: + that the market was + focused on the company’s + weakened condition + + and that some large fund + providers had already limited + their exposure to + +On line 5151: + the Fed, however, + the OCC concluded that the + bank’s liquidity + +On line 5151: + undermined market + confidence.61 And, like the Fed, + the OCC approved of + +On line 5151: + new management and + a new, more hands-on oversight + role for the board of + +On line 5153: + Yet Wachovia’s problems + would continue, and in the + fall regulators + +On line 5155: + persistent lack of + progress" Washington Mutual, + often called WaMu, was + +On line 5155: + the largest thrift in the + country, with over billion in + assets at the end + +On line 5155: + the time, billion of + the home loans on its balance + sheet were option ARMs, + +On line 5155: + in California. + The reason WaMu liked option + ARMs was simple: in + +On line 5155: + as subprime loans, they + had generated returns + up to times those on + +On line 5155: + securities.62 But + that was then. WaMu was forced to + write off billion for + +On line 5155: + the fourth quarter of + and another billion in + the first quarter of + +On line 5157: + related to its + portfolio of option ARMs. + In response to these + +On line 5157: + Supervision, WaMu’s + regulator, requested + that the thrift address + +On line 5159: + asset quality, + earnings, and liquidity— + issues that the OTS + +On line 5159: + in the past but that + had not been reflected in + supervisory + + ratings. "It has been + hard for us to justify + doing much more than + +On line 5159: + have not really + been adversely impacted + in terms of losses,"63 + +On line 5159: + a email. Indeed, the + nontraditional mortgage + portfolio had been + +On line 5161: + very well through and But + with WaMu now taking losses, + the OTS determined + +On line 5161: + that its condition + required a downgrade in its + rating from a to + +On line 5163: + March, the OTS advised + that WaMu undertake "strategic + initiatives"— that is, + +On line 5163: + a buyer or raise + new capital. In April, WaMu + secured a billion + + investment from a + consortium led by the Texas + Pacific Group, a + + private equity + firm.65 But bad news continued + for thrifts. On July + +On line 5167: + largest-ever thrift to fail. + On July, WaMu reported + a billion loss in + +On line 5167: + the second quarter. + WaMu’s depositors withdrew + billion over the next + +On line 5167: + Home Loan Bank of San + Francisco—which, as noted, had + historically + +On line 5167: + served with the other + Federal Home Loan Banks as + an important source + +On line 5167: + and others—began + to limit WaMu’s borrowing + capacity. The + +On line 5169: + while maintaining the + overall rating at As the + insurer of many + +On line 5169: + deposits, the FDIC had + a stake in WaMu’s condition, + and it was not as + + generous as the + OTS in its assessment. It + had already dropped WaMu’s + +On line 5171: + March indicating + a "high level of concern."67 + The FDIC expressly + +On line 5171: + OTS’s decision to + maintain the overall rating, + recommending a + +On line 5171: + Ordinarily, + would have triggered a formal + enforcement action, + +On line 5171: + was forthcoming. In + an August interview, William + Isaac, who was chairman + +On line 5171: + that the OTS and FDIC + had competing interests. + OTS, as primary + + regulator, "tends + to want to see if they can + rehabilitate + +On line 5171: + bank and doesn’t want + to act precipitously + as a rule." On the + +On line 5171: + hand, "The FDIC’s job is + to handle the failures, and + it—generally + +On line 5173: + on the theory + that the sooner the problems + are resolved, the less + +On line 5175: + the cleanup will be."69 FDIC + Chairman Sheila Bair underscored + this tension, telling the + +On line 5175: + the underwriting + quality of WaMu’s mortgage + portfolio, and we + +On line 5175: + the OTS in terms of + going in and letting our + [FDIC] examiners + +On line 5179: + AUGUST The Treasury’s + inspector general would + later criticize + + OTS’s supervision + of Washington Mutual: + "We concluded that + +On line 5179: + sooner to force WaMu’s + management to correct the + problems identified + +On line 5179: + progress in correcting + OTS-identified weaknesses, we believe + OTS should have followed + +On line 5179: + policies and taken + formal enforcement action + rather than informal + + enforcement action."71 + Regulators: "A lot of + that pushback" In these + +On line 5183: + late to identify + the mistakes and problems of + commercial banks and + +On line 5183: + not react strongly + enough when they were identified. + In part, this failure + + reflects the nature + of bank examinations + conducted during + +On line 5183: + when institutions + were reporting profits. In + addition to their + +On line 5183: + working with banks to + assess the adequacy + of their systems. This + + function was, to a + degree, a reflection of + the supervisors’ + +On line 5183: + do not attempt to + restrict risk-taking but rather + determine whether banks + +On line 5183: + the risks they assume."72 + As the crisis developed, + bank regulators + +On line 5185: + to shift gears. Senior + supervisors told the FCIC + it was difficult + +On line 5185: + express their concerns + forcefully when financial + institutions were + +On line 5185: + record-level profits. The + Fed’s Roger Cole told the FCIC that + supervisors did + + discuss issues such + as whether banks were growing too + fast and taking too + +On line 5185: + risk, but ran into + pushback. "Frankly a lot of that + pushback was given + +On line 5185: + the firms by the fact + that—like a Citigroup was + earning to billion + + a quarter. And that + is really hard for a + supervisor to + +On line 5185: + money is flowing + out quarter after quarter + after quarter, and + +On line 5187: + very hard to challenge."73 + Supervisors also told + the FCIC that they feared + + aggravating a + bank’s already-existing problems. + For the large banks, the + +On line 5187: + a formal, public + supervisory action + taken under the + +On line 5187: + banking statutes marked a + severe regulatory + assessment of the + + bank’s risk practices, and + it was rarely employed for banks + that were determined + +On line 5189: + Richard Spillenkothen, the Fed’s head + of supervision until + early attributed + +On line 5189: + "a belief that the + traditional, nonpublic + (behind-the-scenes) approach to + + supervision was + less confrontational and more + likely to induce + + bank management to + cooperate; a desire + not to inject an + +On line 5189: + into what was felt + to be a constructive or + equable relationship + +On line 5189: + management; and a + fear that financial markets + would overreact to + +On line 5189: + actions, possibly + causing a run." Spillenkothen argued + that these concerns were + +On line 5189: + needed corrective + action. One of the lessons of + this crisis is that + +On line 5189: + working presumption + should be earlier and stronger + supervisory + + follow up."74 ouglas + Roeder, the OCC’s senior deputy + comptroller for Large + +On line 5191: + from to said that the + regulators were hampered + by inadequate + + information from + the banks but acknowledged that + regulators did + + not do a good job + of intervening at key + points in the run-up to + + the crisis. He said + that regulators, market + participants, and + +On line 5191: + markets work, noting, + "We underestimated + what systemic risk would + +On line 5193: + in the marketplace."75 + Regulators also blame + the complexity + +On line 5193: + supervisory + system in the United States. + The patchwork quilt of + +On line 5193: + banks to shop for the + most lenient regulator, + and the presence of + +On line 5193: + one supervisor + at an organization. + For example, a + +On line 5193: + supervising the + bank holding company, the + OCC supervising + +On line 5195: + supervising the + securities firm, and the + OTS supervising + +On line 5195: + thrift subsidiary—creating + the potential for both gaps + in coverage and + +On line 5195: + leaders have proposed + consolidation of the + supervisors to + +On line 5195: + system over the years. + Notably, Secretary Henry + Paulson released the + +On line 5197: + Structure" on March two + weeks after the Bear rescue, + in which he proposed + + getting rid of the + thrift charter, creating a + federal charter + +On line 5197: + only by the states), + and merging the SEC and CFTC. + The proposals did + +On line 5199: + banks and thrifts or their + poor corporate governance + and risk management, + + often maintaining + satisfactory ratings + on institutions + + until just before + their collapse. This failure was + caused by many factors, + +On line 5199: + were capable of + self-regulation, and that + regulators should + +On line 5201: + with activities + reported as profitable. Large + commercial banks and + +On line 5201: + such as Wachovia and + IndyMac, that had significant + exposure to risky + +On line 5203: + assets were subject + to runs by creditors and + depositors. The + +On line 5203: + too late the systemic + danger inherent in the + interconnections + +On line 5203: + unregulated + over-the-counter (OTC) derivatives + market and did not + +On line 5211: + the information + needed to act. SEPTEMBER + THE TAKEOVER OF FANNIE + + MAE AND FREDDIE MAC + CONTENTS "A good time to buy"...........................................................................................310 + "The only game in + +On line 5223: + game be cool"...............................................................................312 "The idea + strikes me as perverse" "It will + increase confidence"................................................................................315 + +On line 5227: + "Critical unsafe + and unsound practices" "They went + from zero to three + +On line 5231: + in between" "The worst-run + financial institution".................................................................321 + "Wasn’t done at my + +On line 5233: + pay grade"...........................................................................322 From the fall + of until Fannie Mae and + Freddie Mac were placed + +On line 5233: + conservatorship + on September government + officials struggled + +On line 5233: + enterprises and + their mission to support the + mortgage market. The + +On line 5233: + the mortgage market + was quickly weakening—home prices + were declining, loan + +On line 5233: + result, the values + of mortgage securities + were plummeting. Lenders + +On line 5233: + borrowers into + affordable mortgages if these + government-sponsored + + enterprises (GSEs) + would purchase the new loans. If + the GSEs bought more loans, + +On line 5233: + would stabilize the + market, but it would also + leave the GSEs with more + +On line 5235: + balance sheets. The GSEs + were highly leveraged—owning + and guaranteeing + +On line 5235: + trillion of mortgages + with capital of less than + When interviewed by + +On line 5235: + Treasury Secretary + Henry Paulson acknowledged + that after he was + +On line 5235: + on the GSEs upon + taking office in June he + believed that they were + +On line 5235: + happen" and that one + key problem was the legal + definition of + +On line 5235: + their regulator + lacked discretion to adjust; + indeed, he said that + +On line 5235: + referred to it as + "bullsh*t capital."1 Still, the + GSEs kept buying more + +On line 5235: + riskier mortgage loans + and securities, which by + fall constituted + +On line 5235: + The GSEs reported + billions of dollars of net + losses on these loans + +On line 5237: + beginning in the + third quarter of But many in + Treasury believed the + +On line 5237: + needed the GSEs to + provide liquidity to + the mortgage market + +On line 5237: + and guaranteeing + loans and securities at + a time when no one + +On line 5237: + would. Paulson told the + FCIC that after the housing + market dried up in + +On line 5237: + summer of the key + to getting through the crisis + was to limit the + +On line 5237: + ensure continued + mortgage funding, all of which + required that the GSEs + +On line 5237: + viable.2 However, + there were constraints on how many + loans the GSEs could fund; + +On line 5237: + agreed to portfolio + caps—limits on the loans and + securities they + +On line 5241: + surplus requirement. + So, even as each company + reported billions + +On line 5241: + their regulator, + the Office of Federal + Housing Enterprise + +On line 5241: + "From the fall of to + the conservatorships, it + was a tightrope with no + + safety net," former + OFHEO Director James Lockhart + testified to the + +On line 5241: + the balancing act + ultimately failed and both + companies were placed + +On line 5243: + conservatorship, + costing the U.S. taxpayers + billion—so far. "A + +On line 5245: + TIME TO BUY" In an + August letter to Lockhart, + Fannie Mae CEO Daniel + +On line 5245: + sought immediate + relief from the portfolio + caps required by the + +On line 5245: + have witnessed growing + evidence of turmoil in + virtually all + +On line 5245: + finance market," Mudd + wrote, and "the immediate + crisis in subprime + +On line 5245: + indicative of a + serious liquidity + event impacting the + +On line 5245: + credit market, not + just subprime."4 As demand for + purchasing loans dried + +On line 5245: + lenders like Countrywide + kept loans that they normally + securitized, and + +On line 5245: + under. A number + of firms told Fannie that they + would stop making loans + + if Fannie would not + buy them. Mudd argued that a + relaxed cap would let + +On line 5247: + liquidity. "A + moderate, percent increase + in the Fannie Mae + +On line 5247: + cap would provide us + with flexibility and + send a strong signal + + to the market that + the GSEs are able to address + liquidity events + +On line 5247: + crises." He maintained that + the consent agreement allowed + OFHEO to lift the cap + +On line 5249: + deficiencies— the + primary condition for + removing the cap. + + Finally, he stressed + that the GSEs’ charter required + Fannie to provide + +On line 5249: + stability to + the market. "Ultimately," + Mudd concluded, "this + +On line 5249: + market confidence + that the GSEs can fulfill their + stabilizing role + +On line 5251: + money. Because there + was less competition, the + GSEs could charge higher + +On line 5251: + pay less for loans and + securities they wanted + to own, enabling them + + (in theory) to + increase returns.6 Tom Lund, a + longtime Fannie Mae + +On line 5251: + FCIC that the market + moved in Fannie Mae’s favor + af-SEPTEMBER ter August as + +On line 5253: + dropped out and prices of + loans and securities fell. + Lund told FCIC staff that + +On line 5253: + liquidity shock, + Fannie had "more comfort that + the relationship + +On line 5253: + and price was correct."7 + Robert Levin, the company’s chief + business officer, + +On line 5255: + was a good time to + buy."8 On August OFHEO’s Lockhart + notified Fannie + +On line 5255: + the portfolio cap + would be "premature" but the + regulator would + +On line 5255: + the request under + "active consideration." + Lockhart wrote that he + + would not authorize + changes, because Fannie could still + guarantee mortgages + +On line 5255: + it couldn’t buy them + and because Fannie remained + a "significant + +On line 5255: + addition, Lockhart + noted that Fannie could not + prudently address + +On line 5255: + in the subprime and + Alt-A mortgage market, and the + company’s charter + + did not permit it + to address problems in the + market for jumbo + +On line 5255: + (mortgages larger than + the GSEs’ loan limit).9 Although + there had been progress in + +On line 5255: + work remained. Fannie + still had not filed financial + statements for or "a + +On line 5257: + unsettled markets."10 + As Lockhart testified to + the FCIC, "It became + +On line 5257: + clear by August that + the turmoil was too big for + the Enterprises + +On line 5257: + GSEs] to solve in a + safe and sound manner." He was + worried that fewer + + controls would mean more + losses. "They were fulfilling + their mission," Lockhart + + told the FCIC, "but they + had no power to do more + in a safe and sound + +On line 5257: + their mission is to + provide stability and + lessen market turmoil, + + there was nothing in + their capital structure" that + would allow them to + + do so.11 Lockhart had + worried about the financial + stability of + +On line 5259: + two GSEs and about OFHEO’s + ability to regulate + the behemoths from + +On line 5261: + the day he became + director in May and he + advocated for + +On line 5263: + his largely toothless + agency. Lockhart pushed for the + power to increase + +On line 5263: + and to limit growth, + and he sought authority + over mission goals set + +On line 5263: + of the Department + of Justice. His shopping list + also included + + the authority + to put Fannie and Freddie + into receivership, + + a power held by + bank regulators over banks, + and to liquidate + +On line 5263: + effect, to force a + government takeover—but because + it lacked funding to + +On line 5263: + deteriorate + even further before Lockhart + secured the powers + +On line 5267: + "THE ONLY GAME IN + TOWN" But Fannie and Freddie + were "the only game + +On line 5267: + the housing market + dried up in the summer of + Paulson told the FCIC. + +On line 5267: + by the spring of "[the + GSEs,] more than anyone, were the + engine we needed + +On line 5269: + Few doubted Fannie + and Freddie were needed to + support the struggling + + housing market. The + question was how to do so + safely.14 Purchasing + +On line 5269: + guaranteeing risky + mortgage-backed securities helped + make money available + + for borrowers, but + it could also result in + further losses for + +On line 5269: + two huge companies + later on. "There’s a real + trade-off," Lockhart said in + +On line 5269: + 2007—a trade-off made all the + more difficult by the state + of he GSEs’ balance + +On line 5269: + and securities + was swamping their reported + capital. By the + +On line 5269: + end of guaranteed + and portfolio mortgages with + FICO scores less than + +On line 5269: + Fannie Mae by more + than seven to one; Alt-A loans + and securities, + + by more than six to + one. Loans for which borrowers + did not provide full + +On line 5271: + to more than ten times + reported capital.16 In + mid-September, OFHEO relented + +On line 5271: + marginally loosened the + GSEs’ portfolio cap, from about + billion to billion. + +On line 5271: + Fannie to increase + the amount of mortgage loans and + securities it + +On line 5271: + per year—a power that + Freddie already had under + its agreement with OFHEO. + +On line 5271: + increases "because + the remediation process + is not yet finished, + +On line 5271: + safety and soundness + issues are not yet resolved, + and the criteria + +On line 5271: + Mae consent agreement + and Freddie Mac’s voluntary + agreement have not been + +On line 5273: + important to the + mortgage market. By the fourth + quarter of they were + +On line 5273: + new mortgages, nearly + twice the level. With trillion + in mortgages resting + +On line 5273: + "a withdrawal by + Freddie Mac and Fannie Mae + or even a drop in + +On line 5275: + have created a + self-fulfilling credit + crisis."18 In early + +On line 5275: + to temporarily + lift portfolio limits on + the GSEs by percent, + +On line 5275: + approximately + billion, most of which would be + designated for + +On line 5277: + "ill advised," were not + enacted.19 In November, + Fannie and Freddie + +On line 5279: + that it had billion + of capital to absorb + potential losses + +On line 5279: + assets and trillion + of guarantees on mortgage-backed + securities; if + +On line 5279: + exceeded it would + be insolvent. Freddie would + be insolvent if + +On line 5281: + validity of + their "reported" capital. + "IT’S A TIME GAME BE + +On line 5283: + first quarter, real + gross domestic product fell + at an annual + +On line 5283: + decline in consumer + spending since the early 1990s. + The unemployment + +On line 5283: + rate averaged in + the first three months of up from + a low of in spring + +On line 5283: + passed the Economic + Stimulus Act, which raised the + limits on the size + +On line 5285: + mortgages that Fannie + and Freddie could purchase, among + other measures. The + + push to get OFHEO to + loosen requirements on the GSEs + also continued. + +On line 5287: + capital surcharge; + such a stringent requirement, + he wrote Lockhart on + +On line 5291: + days later, Fannie + CEO Mudd reported losses + in the fourth quarter + +On line 5291: + of acknowledging + that Fannie was "working through + the toughest housing + +On line 5291: + a generation."21 + The company had issued + billion of preferred + +On line 5291: + had completed all + requirements of the consent + agreement with OFHEO, and + +On line 5291: + surplus requirement. + The next day, Freddie also + reported losses + +On line 5293: + the company had + raised billion of preferred stock. + As both companies + +On line 5293: + time, fulfilling a + condition of lifting the + restrictions imposed + +On line 5293: + announced that OFHEO would + remove the portfolio caps + on March He also + +On line 5293: + requirement, because + both companies had made progress + in satisfying + +On line 5293: + and had recently + raised capital through preferred + stock offerings. Mudd + +On line 5293: + the FCIC that he sought + relief from the capital + surplus requirement + +On line 5295: + Fannie fell short of + required capital levels.22 + On February the + +On line 5295: + growth limits, a New + York Fed analyst noted + to Treasury that the + +On line 5297: + market.23 Calls to ease + the surcharge also came from + the marketplace. Mike + +On line 5297: + Steel that a crisis + loomed in the credit markets + that only the GSEs + +On line 5297: + "We believe that we + are nearing a tipping point; + lack of transparency + +On line 5297: + asset class" and "a + dearth of buyers" foreshadowed + worse news, Farrell wrote. + +On line 5297: + capital surcharge + and passing legislation + to overhaul the GSEs + +On line 5297: + for them to provide + more stability, he said. + Farrell recognized + +On line 5297: + GSEs might believe their + return on capital would + be insufficient, + +On line 5297: + have to get past that + and focus on fulfilling + their charters," because + +On line 5297: + big picture is that + right now whatever is best + for the economy + +On line 5297: + the ROI [return on + investment] for Fannie and + Freddie shareholders."24 + +On line 5299: + Bear Stearns collapsed, Steel + reported to Mudd that he + had "encouraging" + + conversations with + Senator Richard Shelby, the + ranking member of + +On line 5299: + and Urban Affairs, + and Representative Frank, + chairman of the House + +On line 5301: + legislation and + capital relief for the + GSEs. He intended + +On line 5301: + with Senate Banking + Committee Chairman Christopher + Dodd. Confident that + +On line 5303: + GSEs to back up the + mortgage market, Mudd proposed + an "easier trade." + + If regulators + would eliminate the surcharge, + Fannie Mae would agree + +On line 5303: + new capital.25 In + a March email to Fannie chief + business officer + +On line 5303: + Levin, Mudd suggested + that the capital surplus + requirement might be + +On line 5303: + reduced without any + trade: "It’s a time game whether they + need us more or if + +On line 5305: + hit the capital + wall first. Be cool."26 n the next + day, March Treasury and + +On line 5305: + email enclosing an + alarming analysis: it claimed + that in reporting + +On line 5307: + which resembled one + offered in a March Barron’s + article, stated: + +On line 5309: + show the company + is currently insolvent. + Accounting fraud has + +On line 5309: + asset categories + (non-agency securities, + deferred tax assets, + +On line 5309: + understated. These + accounting shenanigans add up + to tens of billions + +On line 5311: + worth. Yet, the impact + of a tsunami of mortgage + defaults has yet to + +On line 5313: + income statement and + further annihilate its + capital. Such grim + +On line 5313: + to serve the housing + market while maximizing + shareholder returns. + + In trying to do + both, Fannie has done neither + well. With shareholder + +On line 5315: + government seizure of + the company is inevitable.27 + Given the turmoil + +On line 5315: + the Bear Stearns crisis, + Paulson said he wanted to + increase confidence + +On line 5315: + mortgage market by + having Fannie and Freddie + raise capital. Steel + +On line 5315: + him that Treasury, OFHEO, + and the Fed were preparing + plans to relax the + +On line 5317: + capital surcharges + in exchange for assurances + that the companies + +On line 5319: + capital. On March + Steel also reported to + his Treasury colleagues + +On line 5319: + then executive + vice president of the New + York Fed, wanted to + +On line 5321: + Freddie and Fannie. + Steel wrote that Dudley "leaned on + me hard" to make the + +On line 5321: + in conjunction with + dialing back the surcharge + and attempting to + +On line 5321: + worried about how this + might affect the federal + government’s balance + +On line 5321: + "I do not like that + and it has not been part of + my conversation + +On line 5321: + else. I view that as + a very significant move, + way above my pay grade + + to double the size + of the U.S. debt in one fell + swoop."28 "THE IDEA STRIKES ME + +On line 5325: + the Treasury huddled + with GSE executives to + discuss lowering + +On line 5325: + requirements if the + GSEs would raise more capital. + "The entire mortgage + +On line 5325: + was at risk," Lockhart + told the FCIC.29 The pushing and + tugging continued. + + Paulson told the FCIC + that personal commitments + from Mudd and Freddie + +On line 5325: + CEO Richard Syron to + raise capital cinched the deal.30 + Just days earlier, + +On line 5325: + on March Syron had + announced in a quarterly + call to investors that + +On line 5325: + capital. Fannie + and Freddie executives + prepared a draft press + + release before a + discussion with Lockhart and + Steel. It announced a + +On line 5325: + reduction in the + capital surcharge from to + Lockhart was not pleased; + +On line 5325: + com-SEPTEMBER mitment to raise + additional capital, + stating instead that + + the GSEs planned to raise + it "over time as needed."31 It + looked as if the GSEs + + were making the deal + with their fingers crossed. In an + email to Steel and the + +On line 5327: + of both entities, + Lockhart wrote: "The idea strikes me + as perverse, and I + + assume it would seem + perverse to the markets that + a regulator + +On line 5327: + agree to allow a + regulatee to increase + its very high mortgage + + credit risk leverage + (not to mention increasing + interest rate risk) + +On line 5327: + new capital." The + initial negotiations + had the GSEs raising + +On line 5327: + of capital for + each of reduction in the + surplus. Lockhart wrote + +On line 5327: + in frustration, "We + seem to have gone from to right + through to to now to + +On line 5329: + the deal, unaltered + in any material way, + on March OFHEO agreed to + +On line 5331: + capital restraint + from to Fannie and Freddie + pledged to "begin the + +On line 5331: + giving no concrete + commitment.33 Paulson told the + FCIC that the agreement, + + which included a + promise to raise capital, + was "a no-brainer," and + +On line 5333: + had no memory + of Lockhart ever having + called it "perverse."34 The + + market analyst + Joshua Rosner panned the deal. "We + view any reduction + + [in capital] as + a comment not only on + the GSEs but on the + + burgeoning panic + in Washington," he wrote. "If + this action results + +On line 5335: + the destabilizing + of the GSEs, OFHEO will go from + being the only + +On line 5335: + into trouble, to + a textbook example of + why regulators + +On line 5337: + pressure."35 Fannie would + keep its promise by raising + billion in preferred + +On line 5337: + Executive Vice + President Donald Bisenius + offered two reasons + +On line 5337: + hindsight, Fannie Mae + did not raise additional + capital. First was + +On line 5337: + shareholders. "I’m sure + [Fannie’s] investors are not very + happy," Bisenius told + +On line 5339: + downturn in house prices, + you wouldn’t raise capital."36 + Similarly, CEO + +On line 5341: + spoke of the downside + of raising capital on + August "Raising a + + lot more capital + at these kinds of prices could be + quite dilutive to + +On line 5341: + interest of our + shareholders."37 But Lockhart saw + it differently; + +On line 5341: + put "a good face on + Freddie’s inability to + raise capital." He + +On line 5341: + "[Syron] was getting + advice from his attorneys + about the high risk of + +On line 5341: + before releasing + [quarterly earnings] and our + lawyers could not disagree + +On line 5343: + accounting issues," + Lockhart told the FCIC.38 "IT WILL + INCREASE CONFIDENCE" + +On line 5345: + the two companies + announced further losses in + the first quarter. Even + +On line 5345: + the situation + deteriorated, on + June OFHEO rewarded + +On line 5345: + in new capital + by further lowering the + capital surcharge, + +On line 5345: + fell Freddie’s, The price + of protection on million + in Fannie’s debt through + +On line 5345: + credit default swaps + jumped to in June, up from in + May; between and it + +On line 5345: + In August, they both + reported more losses for + the second quarter. + +On line 5347: + after both Fannie + and Freddie became public + companies owned by + + shareholders, they had + continued to possess an + asset that is hard + +On line 5347: + full faith and credit + of the U.S. government. The + government worried + +On line 5347: + that it could not let + the trillion GSEs fail, because + they were the only + +On line 5347: + of liquidity + in the mortgage market and + because their failure + + would cause losses to + owners of their debt and their + guaranteed mortgage + +On line 5347: + GSEs before. It bailed + out Fannie when double-digit + inflation wrecked its + +On line 5349: + sheet in the early + 1980s, and it came through in the + mid-1980s for another + +On line 5351: + Corporation, was + given a helping hand. As + the market grappled + +On line 5351: + the fundamental + question of whether Fannie and + Freddie would be backed + + by the government, + the yield on the GSEs’ long-term bonds + rose. The difference + +On line 5351: + the rate that the GSEs + paid on their debt and rates on + Treasuries—a premium + +On line 5351: + that reflects investors’ + assessment of risk—widened in to + one-half a percentage + +On line 5351: + compared with the same + figure for other publicly + traded companies, + +On line 5351: + for the ultra-safe + GSEs. By June the spread had risen + over the level; by + +On line 5351: + the spread had nearly + doubled from its level to + just under making + +On line 5351: + more difficult and + costly for the GSEs to fund + their operations. + +On line 5351: + increased slightly over + this time period, while the + prices of private-label + +On line 5351: + dramatically + declined. For example, the + price of the FNCI7 + +On line 5351: + index of Fannie + mortgage–backed securities + with an average + +On line 5351: + price of the FNCI5 + index—Fannie securities with an + average coupon of + +On line 5353: + to during the same + time period. In July + and August Fannie + +On line 5353: + a liquidity + squeeze, because it was unable + to borrow against its + + own securities + to raise sufficient cash in + the repo market. + +On line 5355: + Its stock price dove to + less than a share. Fannie asked + the Fed for help.39 A + + senior adviser + in the Federal Reserve + Board’s Division of + +On line 5355: + Supervision and + Regulation gave the FCIC + a bleak account of + + the situation + at the two GSEs and noted + that "liquidity + +On line 5357: + so essential, so + the Federal Reserve agreed + to help provide it."40 + +On line 5359: + York Fed to extend + emergency loans to the GSEs + "should such lending prove + +On line 5361: + availability of + home mortgage credit during + a period of + + stress in financial + markets."41 Fannie and Freddie + would never tap the + +On line 5363: + Treasury laid out a + three-part legislative plan + to strengthen the GSEs + +On line 5363: + lines of credit with + the Treasury, authorizing + Treasury to inject + +On line 5363: + into the GSEs, and + replacing OFHEO with the new + Federal Housing + +On line 5363: + Agency (FHFA), with + the power to place the GSEs + into receivership. + +On line 5367: + needed "a bazooka" at + their disposal. SEPTEMBER + "You are not likely + +On line 5367: + take it out," Paulson + told legislators. "I just + say that by having + +On line 5367: + is unspecified, + it will increase confidence. + And by increasing + +On line 5367: + greatly reduce the + likelihood it will ever + be used."43 Fannie’s Mudd + + and Freddie’s Syron + praised the plan.44 At the end of + July, Congress passed + +On line 5369: + Act (HERA) of giving + Paulson his bazooka—the ability + to extend secured + +On line 5369: + of credit to the + GSEs, to purchase their mortgage + securities, and + +On line 5371: + inject capital. + The 261-page bill also strengthened + regulation of + +On line 5371: + GSEs by creating + FHFA, an independent + federal agency, + +On line 5371: + and compensation. + In addition, the bill raised + the federal debt + +On line 5371: + ceiling by billion + to trillion, providing funds + to operate the + +On line 5373: + Federal Reserve + Board consented in mid-July to + furnish emergency + +On line 5373: + of the Comptroller + of the Currency (OCC), along + with Morgan Stanley, + +On line 5373: + as an adviser + to Treasury, initiated + a review of the + +On line 5373: + Timothy Clark, who + oversaw the weeklong review + for the Fed, told the + +On line 5373: + that it was the first + time they ever had access + to information + +On line 5373: + the GSEs. He said that + previously, "The GSEs [saw] + the Fed as public + +On line 5373: + number one. There was + a battle between us and + them." Clark added, "We would + + deal with OFHEO, which was + also very guarded. So we + did not have access + + to info until + they wanted funding from us."45 + Although Fed and OCC + + personnel were at + the GSEs and conferring with + executives, Mudd + + told the FCIC that he + did not know of the agencies’ + involvement until + +On line 5377: + enterprises were + both in conservatorship.46 + The Fed and the OCC + +On line 5377: + that the problems were + worse than their suspicions and + reports from FHFA + +On line 5377: + led them to believe. + According to Clark, the Fed + found that the GSEs were + +On line 5377: + "underreserved," with + huge potential losses, and + their operations + +On line 5377: + and unsound."47 The OCC + rejected the forecasting + methodologies on which + +On line 5377: + and Freddie relied. + Using its own metrics, it + found insufficient + +On line 5377: + future losses and + identified significant + problems in credit + +On line 5377: + loss forecasting was + problematic, and that its + loan losses therefore + +On line 5377: + He added that Fannie + had overvalued its deferred + tax assets—because + +On line 5379: + had no value.48 Loss + projections calculated + by Morgan Stanley + +On line 5379: + Stanley concluded + that Fannie’s loss projection + methodology was + +On line 5381: + Fannie’s projections + did not. All told, the litany of + understatements and + +On line 5381: + OCC’s Bailey to a + firm conclusion. If the GSEs + were not insolvent + +On line 5381: + there," he told the FCIC.49 + Regulators also learned + that Fannie was not + +On line 5381: + off loans until they + were delinquent for two years, a + head-in-the-sand approach. Banks + +On line 5381: + charge off loans once they + are days delinquent. For these and + numerous other + +On line 5381: + Fannie and Freddie + earned rebukes. "Given he role + of the GSEs and their + +On line 5381: + Instead they appear + to significantly lag + the industry in + +On line 5385: + respects."50 "CRITICAL + UNSAFE AND UNSOUND PRACTICES" + Paulson told the FCIC + +On line 5385: + that although he learned + of the Fed and OCC findings + by August it took + +On line 5385: + three weeks to convince + Lockhart and FHFA that there + was a capital + + shortfall, that the GSEs + were not viable, and that they + should be placed under + + government control.51 + On August, FHFA informed + both Mudd and Syron + +On line 5385: + were "adequately + capitalized" under the + regulations, a + +On line 5385: + that was "certified + and represented as true + and correct by [GSE] + +On line 5385: + current level of + Fannie Mae’s capital" if + the housing market + +On line 5387: + grew gloomier. Fannie + informed Treasury on August + 25—and repeatedly + +On line 5387: + raising capital + was infeasible and that + the company was + +On line 5387: + Even Fannie’s "base-case + earnings forecast" pointed to + substantial pressure + +On line 5389: + September Lockhart + and FHFA agreed with Treasury + that the GSEs needed + +On line 5389: + That day, Syron and + Mudd received blistering midyear + reviews from FHFA. + +On line 5389: + opening paragraph of + each letter informed the CEOs + that their companies + + had been downgraded + to "critical concerns," and + that "the critical + +On line 5389: + unsound practices and + conditions that gave rise to + the Enterprise’s + +On line 5391: + bad situation + was expected to worsen. + The 21-page report sent + +On line 5391: + Fannie identified + sweeping concerns, including + failures by the board + +On line 5391: + senior management, + a significant drop in + the quality of + +On line 5391: + and securities + owned or guaranteed by the + GSE, insufficient + +On line 5391: + exclusive reliance + on short-term funding, and the + inability to + +On line 5391: + for their "imprudent + decisions" to "purchase or + guarantee higher + +On line 5391: + mortgage products." The + letter faulted Fannie for + purchasing high-risk + +On line 5391: + and for attempting + to increase market share by + competing with Wall + +On line 5391: + prudent credit risk + management and corporate + business objectives," + +On line 5391: + Using models that + underestimated this + risk, the GSE then charged + +On line 5391: + models suggested + were appropriate. FHFA + determined that these + +On line 5391: + fees were charged because + "focus was improperly + placed on market share + +On line 5397: + Wall Street and [Freddie + Mac]."55 SEPTEMBER Even after + internal reports + + pointed to market + problems, Fannie kept buying + and guaranteeing + + riskier loan products, + FHFA said. "Despite signs in + the latter half of + +On line 5399: + problems, management + continued activity + in risky programs, and + +On line 5399: + for Alt-A loans without + establishing limits."56 The + company also + +On line 5399: + by Alt-A and subprime + loans.57 Losses were likely to + be higher than the + +On line 5401: + had estimated, + FHFA found. FHFA also + noted "increasing + +On line 5401: + models it used to + forecast losses had not been + independently + + validated or + updated for several + years. FHFA judged that + +On line 5401: + would likely show a + "material increase." In + addition, Fannie + +On line 5401: + performance, FHFA + found this benefit to be + significantly + +On line 5403: + of that GSE’s safety + and soundness, but more severe + criticisms of its + +On line 5403: + the report noted + a significant lack of + market confidence, + +On line 5403: + ability to raise + capital." FHFA, for its + part, "lost confidence + +On line 5403: + other serious + misjudgments." According to + the regulator, + +On line 5403: + could not be relied + on, particularly in + light of their widespread + +On line 5403: + address criticisms. + In addition, FHFA said + that Freddie’s failure + +On line 5403: + capital despite + its assurances "invite[d]" + the conclusion that + +On line 5405: + about the capital + surcharge reduction.59 As in + its assessment of + +On line 5405: + and guarantee of + higher-risk loan products in and + in a declining + +On line 5405: + after being told + by the regulator in + that its purchases + +On line 5405: + subprime private-label + securities had outpaced + its risk management + +On line 5405: + Freddie bought billion + of subprime securities + in each subsequent + +On line 5407: + FHFA also found + that "aggressive" accounting + cast doubt on Freddie’s + + reported earnings + and capital. Despite "clear + signals" that losses + +On line 5407: + mortgage assets were + likely, Freddie waited to + record write-downs until + + the regulator + threatened to issue a cease + and desist order. + + Even then, one write-down + was reversed "just prior to + the issuance of the + +On line 5407: + credit losses would + "result in a substantial + dissipation of + +On line 5411: + capital."60 "THEY WENT + FROM ZERO TO THREE WITH NO + WARNING IN BETWEEN" + +On line 5413: + kind of criticisms + leveled in the September + letter. He said the + +On line 5413: + situation" then + was "inconsistent with what + you would consider + +On line 5413: + practice to be—like, + first warning: fix it; second + warning: fix it; third + +On line 5413: + ut of here. Instead, + they went from zero to three + with no warning in + + between."61 A review + of the examination + reports and other + +On line 5413: + FHFA to the FCIC + largely supports Mudd’s view + on this specific + +On line 5413: + examination + reports noted concerns about + increasing credit + +On line 5413: + remediation + of deficiencies required + by the May consent + +On line 5413: + do not include the + sweeping criticisms contained + in the September + +On line 5415: + were designated + "critical concerns," Mudd at + Fannie and Syron + +On line 5415: + government takeover. On + September FHFA Acting + Deputy Director Chris + +On line 5417: + was not a foregone + conclusion. Paulson, Lockhart, + and Bernanke met with Mudd, + +On line 5417: + persuade them to cede + control.63 Essentially the + GSEs faced a Hobson’s + +On line 5417: + take the horse offered + or none at all. "They had to + voluntarily + + agree to a consent + agreement," Lockhart told the FCIC. + The alternative, + + a hostile action, + invited trouble and "nasty + lawsuits," he noted. + +On line 5419: + made a very strong case + so the board of directors + did not have a choice."64 + +On line 5419: + the GSEs that he had + authority to inject + capital, but he + +On line 5421: + so unless they were + in conservatorship.65 Mudd + was "stunned and angry," + +On line 5421: + business, told the FCIC + that conservatorship came + as a surprise to + + everyone.67 Levin told + the FCIC that he never saw + a government seizure + +On line 5421: + that Fannie Mae was + or might become insolvent.68 + Interviewed in Mudd + +On line 5421: + the FCIC: "I did not + think in any way it was fair + for the government + + to have been in a + position of being in + the chorus for the + +On line 5421: + to add capital, + and then to inject itself + in the capital + +On line 5421: + reiterated + all the damning evidence + presented in the + +On line 5421: + earlier. Losses + at Fannie Mae for the year + were estimated + +On line 5421: + billion and billion.70 + Freddie Mac’s memorandum + differed only in + +On line 5421: + details. Its losses, + recorded at billion in the + first six months of were + +On line 5421: + projected to end + up between and billion by + the end of the year.71 + +On line 5423: + the boards had a choice, + the only realistic + option was assent. + +On line 5423: + agree to go in a + conservatorship anyway," + Syron told the FCIC. + +On line 5423: + "There was a very clear + message that the [September + letter was there as + + a mechanism to + bring about a result."72 Mudd agreed, + observing that "the + +On line 5423: + really to force + conservatorship."73 The boards + of both companies + + voted to accept + conservatorship. Both CEOs + were ousted, but the + +On line 5425: + persisted. As promised, + the Treasury was prepared to + take two direct steps + +On line 5425: + solvency. First, it + would buy up to billion of + senior preferred stock + +On line 5425: + the GSEs and extend + them short-term secured loans. In + addition, it pledged + +On line 5425: + from Wall Street firms and + others until the end of + Up front, Treasury bought + +On line 5427: + preferred stock with a + dividend. Each GSE also + gave Treasury warrants + +On line 5427: + representing of + shares outstanding. Existing + common and preferred + +On line 5427: + effectively wiped + out. The decline in value + of the preferred stock + +On line 5427: + held SEPTEMBER these + securities, contributing + to the failure of + +On line 5429: + capitalized" by + their regulators.74 Paulson + told the FCIC that he + +On line 5429: + "naive" enough to believe + that the action would halt the + crisis because it + +On line 5429: + a floor under the + housing market decline, and + provide confidence + + to the market." He + realized he was wrong on + the next day, when, as + +On line 5429: + "Lehman started to go."75 + Former Treasury Assistant + Secretary Neel Kashkari + +On line 5429: + "We thought that after + we stabilized Fannie and + Freddie that we bought + +On line 5429: + three months. But they were + such profound interventions, + stabilizing such + + a huge part of the + financial markets, that would + buy us some time. We + + were surprised that Lehman + then happened a week later, + that Lehman had to be + + taken over or it + would go into bankruptcy."76 + The firms’ failure was + +On line 5431: + event and increased the + magnitude of the crisis, + according to Fed + + Governor Kevin Warsh + and New York Fed General + Counsel Tom Baxter.77 + + Warsh also told the + FCIC that the events surrounding + the GSE takeover led to + +On line 5431: + underreported, + underappreciated + jolt to the system." + +On line 5431: + according to Warsh, + when the market grasped that it + had misunderstood + +On line 5431: + that the government + could have conceivably let them + fail, it "caused investors + + to panic about the + value of every asset, + to reassess every + + portfolio."78 FHFA + Director Lockhart described + the decision to + +On line 5433: + failure. Given that + the investment bank’s balance + sheet was about one-fifth + + the size of Fannie + Mae’s, he felt that the fallout + from Lehman’s bankruptcy + +On line 5435: + in comparison + to a GSE failure. He said, + "What happened after + +On line 5435: + GSE securities + included the Chinese and + Russian central banks, + +On line 5435: + them, owned more than half + a trillion dollars of these + securities, and + +On line 5435: + financial firms and + investment funds had even more + extensive holdings. + +On line 5435: + that U.S. banks owned more + than trillion in GSE debt and + securities—more + +On line 5437: + capital and of + their total assets at the + time.80 Testifying + +On line 5439: + the FCIC, Mudd claimed that + failure was all but inevitable. + "In the companies + +On line 5439: + from the twin shocks of + a housing crisis followed + by a financial + + crisis," he said. "A + monoline GSE structure asked to + perform multiple + +On line 5439: + cannot withstand a + multiyear home price decline + on a national + + scale, even without the + accompanying global + financial turmoil. + + The model allowed + a balance of business and + mission when home prices + +On line 5439: + prices crashed far beyond + the realm of historical + experience, it + +On line 5441: + and the Pendulum,’ + a choice between horrible + alternatives."81 "THE + +On line 5443: + When interviewed by + the FCIC, FHFA officials + were very critical + +On line 5443: + John Kerr, the FHFA + examiner (and an OCC + veteran) in charge + +On line 5443: + no words. He labeled + Fannie "the worst-run financial + institution" he + +On line 5443: + had seen in his years + as a bank regulator. + Scott Smith, who became + +On line 5443: + FHFA after that + agency replaced OFHEO, concurred; + in his view, Fannie’s + +On line 5443: + capabilities + were not particularly + well thought out, and lacked + +On line 5443: + variety of stress + scenarios. Both officials + noted Fannie’s weak + +On line 5443: + included hundreds + of market simulations + but scarcely any that + +On line 5443: + prices. To Austin Kelly, + an OFHEO examination + specialist, there was + + no relying on + Fannie’s numbers, because their + "processes were a + +On line 5443: + of spaghetti." Kerr and + a colleague said that that they + were struck that Fannie + +On line 5445: + was less tech-savvy than the + average community + bank.82 Nonetheless, OFHEO’s + +On line 5445: + criticisms. FHFA + officials conceded that + they had made mistakes + + in their oversight of + Fannie and Freddie. They paid + too much attention + +On line 5447: + did not react to + Fannie’s increasing credit + risk. Lockhart told the + +On line 5447: + that more resources should + have been dedicated to + assessing credit + +On line 5447: + mortgage assets and + guarantees.83 Current FHFA + Acting Director + + Edward DeMarco told the + FCIC that it would not pass the + "reasonable person + +On line 5447: + deny that OFHEO took + its eye off the ball by not + paying sufficient + +On line 5447: + on operational + risk, accounting and lack of + audited results.84 + +On line 5449: + Mudd and others, OFHEO’s + mistakes were not surprising. + Mudd told the FCIC that + +On line 5449: + "developing but + below average."85 Henry + Cisneros, a former + +On line 5449: + a similar view. + "OFHEO," Cisneros told the FCIC, "was + puny compared to what + +On line 5449: + Mac could muster in their + intelligence, their Ivy League + educations, their + + rocket scientists + in their place, their lobbyists, + their ability to + + work the Hill."86 The costs + of the bailouts have been enormous + and are expected + +On line 5451: + through the third quarter + of the two companies lost + billion, wiping out + +On line 5453: + combined capital + that they had reported at + the end of and the + +On line 5453: + capital raised by + Fannie in Treasury narrowed + the gap with billion + +On line 5453: + support. FHFA has + estimated that costs through + will range from billion + +On line 5453: + projected that the + economic cost of the GSEs’ + downfall, including + +On line 5453: + support as well as + actual dollar outlays, + could reach billion by + +On line 5457: + T DONE AT MY PAY + GRADE" Fannie’s two most senior + executives were + +On line 5457: + FCIC hearing how their + charter could have been changed to + make the company + +On line 5459: + approximately + million from to testified + that "the thing that would + +On line 5459: + the institution + more sound or have produced a + different outcome + +On line 5459: + have been for it to + have become over time a more + normal financial + +On line 5459: + capital, able to + be SEPTEMBER long or short + in the market, able + +On line 5459: + And if the trade for + that would have been, you know, a + cut in the so-called + + implicit ties with + the government, I think that + would have—that would have been + +On line 5459: + to answered only + that making such decisions + "wasn’t done at my + +On line 5461: + model of Fannie + Mae and Freddie Mac (the GSEs), + as private-sector, + +On line 5461: + government backing + and a public mission, was + fundamentally + + flawed. We find that the + risky practices of Fannie Mae—the + Commission’s case study + +On line 5461: + to its fall: practices + undertaken to meet Wall + Street’s expectations + +On line 5461: + regain market share, + and to ensure generous + compensation for + +On line 5461: + Development (HUD) + did contribute marginally to + these practices. The GSEs + +On line 5461: + activities, in + part, on the broad and sustained + public policy + +On line 5461: + at Fannie Mae, which, + combined with its excessive + leverage permitted + +On line 5463: + failure. Corporate + governance, including risk + management, failed at + +On line 5463: + skewed compensation + methodologies. The Office of + Federal Housing + + Enterprise Oversight + (OFHEO) lacked the authority + and capacity + +On line 5463: + legislation and + regulatory actions + that would have strengthened + + oversight of them and + restricted their risk-taking + activities. In + +On line 5465: + decision by the + federal government and + the GSEs to increase + +On line 5465: + risk to support the + collapsing mortgage market + was made despite the + +On line 5465: + the mortgage market, + they led to increased losses + at the GSEs, which were + +On line 5465: + by taxpayers, and + reflected the conflicted + nature of the GSEs’ + +On line 5467: + maintained their value + throughout the crisis and did + not contribute to + + the significant + financial firm losses that + were central to the + +On line 5479: + financial crisis. + SEPTEMBER THE BANKRUPTCY + OF LEHMAN CONTENTS "Get + +On line 5483: + conservatively + funded" "This is not sounding + good at all".......................................................................327 "Spook the + +On line 5489: + "Imagination hat" + "Heads of family" "Tell those + sons of bitches to + +On line 5493: + like it is going + to end pretty"..................................................335 "The only + alternative was + +On line 5497: + should be a simple + financial concept: if your + assets are worth more + +On line 5497: + liabilities, + you are solvent; if not, you + are in danger of + +On line 5497: + bankruptcy. But on + the afternoon of Friday, + September experts + +On line 5497: + the country’s biggest + commercial and investment + banks met at the Wall + +On line 5497: + of the Federal + Reserve to ponder the fate + of Lehman Brothers, and + +On line 5501: + whether or not the 157- + year-old firm was solvent. Only + two days earlier, + +On line 5501: + end of August. Over + the previous nine months, the + bank had lost billion + +On line 5501: + more than billion in + new capital, leaving it + with more reported + +On line 5503: + than it had a year + earlier. But this arithmetic + reassured hardly + +On line 5503: + investment bank. Fed + officials had been discussing + Lehman’s solvency for + +On line 5503: + the stakes were very high. + To resolve the question, the + Fed would not rely + +On line 5503: + questions about whether Lehman + was reporting assets at + market value. As + +On line 5503: + York Fed official + wrote to colleagues in July, + "Balance-sheet capital + +On line 5503: + too relevant if + you’re suffering a massive + run."1 If there is a + +On line 5503: + firm can only get + fire-sale prices for assets, even large + amounts of capital + +On line 5505: + disappear almost + overnight. The bankers thought Lehman’s real + estate assets were + +On line 5511: + Lehman’s unreliable + valuation methods, the + bankers had good reason + + for their doubts. None of + the bankers at the New York Fed + that weekend believed + +On line 5511: + billion in real + estate assets (excluding + real estate held + + for sale) on Lehman’s books + was an accurate figure. + If the assets were + +On line 5511: + only half that amount + (a likely scenario, given + market conditions), + +On line 5511: + then Lehman’s billion in + equity would be gone. In + a fire sale, some might + + sell for even less than + half their stated value. "What + does solvent mean1" JP + +On line 5513: + the FCIC asked if Lehman + had been solvent. "The answer + is, I don’t know. I + +On line 5513: + could not answer that + question."2 JP Morgan’s Chief Risk + Officer Barry + +On line 5513: + the FCIC that "from a + pure accounting standpoint, it + was solvent," although + + "it obviously + was financing its assets + on a very leveraged + +On line 5515: + former Lehman Brothers + CEO Richard Fuld insisted his + firm had been solvent: + +On line 5515: + no capital hole + at Lehman Brothers. At the end + of Lehman’s third quarter, + +On line 5515: + Fed Chairman Ben Bernanke + disagreed: "I believe it had + a capital hole." + +On line 5515: + Henry Paulson, and + SEC Chairman Christopher Cox agreed + it was "just way too + + big a hole. And my + own view is it’s very likely + that the company + +On line 5515: + insolvent, even, not + just illiquid."5 Others, such as + Bank of America + + CEO Ken Lewis, who that + week considered acquiring + Lehman with government + + support, had no doubts + either. He told the FCIC that + Lehman’s real estate + +On line 5517: + and other assets + had been overvalued by to + billion—a message he + +On line 5519: + a few days before + Lehman declared bankruptcy.6 It + had been quite a week; + +On line 5519: + quite a weekend. The + debate will continue over + the largest bankruptcy + +On line 5519: + nothing will change the + basic facts: a consortium + of banks would fail to + + agree on a rescue, + two last-minute deals would fall through, and + the government would + +On line 5519: + practical reasons, + for philosophical reasons, + and because, as Bernanke + + told the FCIC, if the + government had lent money, + "the firm would fail, and + + not only would we + be unsuccessful but we + would have saddled the + +On line 5521: + tens of billions of + dollars of losses."7 "GET MORE + CONSERVATIVELY + +On line 5523: + FUNDED" After the + demise of Bear Stearns in March most + observers—including Bernanke, + +On line 5523: + Geithner, and + Cox8—viewed Lehman Brothers as the next + big worry among the + +On line 5523: + large investment banks. + Geithner said he was + "consumed" with finding + +On line 5525: + Vice Chairman Donald + Kohn told Bernanke that in the wake + of Bear’s collapse, some + + institutional + investors believed it was a + matter not of whether + +On line 5525: + but when.10 One set of + numbers in particular + reinforced their doubts: + +On line 5527: + JP Morgan announced + its acquisition of Bear + Stearns, the market through + +On line 5527: + credit default swaps + on Lehman’s debt) put the cost of + insuring million + +On line 5527: + of Lehman’s five-year senior + debt at annually; for + Merrill Lynch, the cost + +On line 5529: + The chief concerns were + Lehman’s real estate–related + investments and its + +On line 5529: + on short-term funding + sources, including billion of + commercial paper + +On line 5529: + repos at the end + of the first quarter of There + were also concerns + +On line 5529: + about the firm’s more than + derivative contracts with + a myriad of + + counterparties.11 As + they did for all investments + banks, the Fed and SEC + +On line 5531: + withstand the kind of + run that had taken down Bear + Stearns1 Solvency and + + liquidity were + essential and related. + If money market + +On line 5531: + Lehman’s assets were worth + less than Lehman’s valuations, + they would withdraw funds, + +On line 5531: + more collateral, + and curtail lending. That could + force Lehman to sell its + +On line 5533: + and liquidity + virtually overnight. Bear proved + it could happen. "The + +On line 5533: + but the Fed, as a + consequence of its banking + mandate, had more of + +On line 5533: + Sirri, head of the + SEC’s Division of Trading + and Markets, told the + +On line 5533: + facto primary + regulator because of + its balance sheet, its + +On line 5533: + The SEC wanted to + be collaborative, and + so came to accept + + the Fed’s focus on + capital. However, as + time progressed, both saw + + the importance of + liquidity with respect + to the problems at + + the large investment + banks."12 In fact, both problems had + to be resolved. Bear’s + +On line 5535: + precipitated + Lehman’s "first real financing + difficulties" since + +On line 5535: + Treasurer Paolo + Tonucci told the FCIC.13 Over the + two weeks following + +On line 5535: + (PDCF),14 but had to + be careful to avoid seeming + overreliant on the + +On line 5537: + cash, which would signal + funding problems. Lehman built up + its liquidity + +On line 5537: + billion at the end + of May, but it and Merrill + performed the worst among + + the four investment + banks in the regulators’ + liquidity stress + +On line 5539: + the spring and summer + of Meanwhile, the company + was also working + +On line 5539: + estate held for sale) + from billion to billion at + the end of May and + +On line 5539: + billion at the end + of the summer. Second, it + raised new capital + +On line 5541: + stock and senior and + subordinated debt from + April through June Treasury + +On line 5541: + issues."15 But other + difficulties loomed. Fuld would + later describe Lehman’s + + main problem as one + of market confidence, and + he suggested that + +On line 5541: + investors taking "naked + short" positions (short selling + Lehman’s securities + +On line 5541: + them), hoping Lehman would + fail, and potentially even + helping it fail by + + eroding confidence. + "Bear went down on rumors and + a liquidity + +On line 5541: + "Immediately + there-SEPTEMBER after, the rumors and + the naked short sellers + + came after us."16 The + company pressed the SEC to + clamp down on the naked + +On line 5541: + Division of Risk, + Strategy and Financial + Innovation shared + +On line 5541: + the FCIC a study it + did concerning short selling. + As Chairman Mary Schapiro + +On line 5541: + manipulative + short selling was the cause of + the collapse of Bear + +On line 5541: + the difficulties + faced by other investment + banks during the fall + +On line 5541: + of The SEC to date + has not brought short selling charges + related to the + +On line 5543: + of these investment + banks.18 On March Lehman reported + better-than-expected + +On line 5543: + earnings of million + for the first quarter of Its + stock jumped nearly to + +On line 5543: + Portfolio.com called + Lehman’s write-downs "suspiciously + minuscule."19 In a + +On line 5543: + in May, David Einhorn + of Greenlight Capital, which + was then shorting Lehman’s + +On line 5543: + noted the bank’s large + portfolio of commercial + real estate loans + +On line 5543: + "There is good reason + to question Lehman’s fair value + calculations. I + +On line 5543: + that greater transparency + on these valuations would + not inspire market + +On line 5545: + reasons that observers + might have been skeptical of + management at Lehman. + +On line 5547: + Brothers’ [board], they had + an actress, a theatrical + producer, and an + +On line 5547: + and not one person + who understood financial + derivatives."21 The + +On line 5547: + Library gave Lehman a + D rating in June a grade + it downgraded to + +On line 5547: + On June Lehman announced + a preliminary billion + loss for its second + +On line 5547: + loss since it became + a public company in + The share price fell to + +On line 5547: + Three days later Lehman + announced it was replacing + Chief Operating + +On line 5547: + Joseph Gregory and + Chief Financial Officer + Erin Callan. The stock slumped + +On line 5551: + again, to "THIS IS NOT + SOUNDING GOOD AT ALL" After + Lehman reported its + +On line 5551: + final second-quarter + results on June the New York + Fed’s on-site monitor + +On line 5551: + Harlow, reported + that there had been "no adverse + information on + +On line 5551: + or unsecured [funds]."23 + The announced liquidity + numbers were better + +On line 5553: + capital numbers. + Nevertheless, Lehman’s lenders and + supervisors were + +On line 5553: + The next morning, William + Dudley, then head of the New + York Fed’s Markets Group + +On line 5553: + current president), + emailed Bernanke, Geithner, Kohn, + and others that the + +On line 5553: + extended because + it "remains critical to + the stability" + +On line 5553: + the PDCF, Lehman might + have experienced a full + blown liquidity + +On line 5555: + he wrote.24 Just one week + after the earnings release, + Harlow reported + +On line 5555: + difficulties. Four + financial institutions + had "trading issues" + +On line 5555: + Lehman and had reduced + their exposure to the firm, + including Natixis, + +On line 5557: + investment bank that + had already eliminated + all activity + + with Lehman. JP Morgan + reported that large pension + funds and some smaller + + Asian central banks were + reducing their exposures + to Lehman, as well as + +On line 5559: + to Merrill Lynch. And + Citigroup requested a + to billion "comfort + +On line 5559: + exposure to Lehman, + settling later for billion.25 + In an internal + +On line 5559: + Fontana, the head of risk + management in Citigroup’s + global financial + + institutions group, + wrote that "loss of confidence + [in Lehman] is huge at + +On line 5559: + adviser in the + Federal Reserve’s banking + supervision and + +On line 5561: + was short and direct: + "This is not sounding good at + all."27 On June results + +On line 5561: + the regulators’ + most recent stress test showed that + Lehman would need billion + +On line 5561: + more than the billion + in its liquidity pool + to survive a loss + +On line 5563: + secured borrowings.28 + Lehman’s borrowings in the overnight + commercial paper + +On line 5563: + billion at the end + of November to billion + at the end of May + +On line 5565: + that matured overnight and + were collateralized by + illiquid assets.29 As + +On line 5565: + securities, such + as illiquid mortgage-related + securities—which could + +On line 5565: + the PDCF and of + which investors were becoming + increasingly wary.30 + +On line 5567: + Lehman’s largest tri-party + repo lenders—notified JP + Morgan, Lehman’s clearing + +On line 5567: + with Lehman," because JP + Morgan was "unwilling to + negotiate in + +On line 5567: + Dreyfus, another + large money market fund and + a Lehman tri-party + + repo lender, also + pulled its repo line from the + firm.32 "SPOOK THE MARKET" + +On line 5571: + the Fed considered + the risks of the tri-party + repo market, it + + also mulled over more + specific measures to help + Lehman. The New York Fed + +On line 5571: + FDIC both rejected + the company’s proposal + to convert to a + +On line 5571: + a proposal which + Geithner told Fuld was + "gimmicky" and "[could not] + +On line 5571: + proposal by the + Fed’s Dudley followed the Bear + Stearns model: billion + +On line 5571: + Lehman’s assets would be + held by a new special-purpose + vehicle, financed + +On line 5571: + by billion of Lehman’s + equity and a billion + loan from the Fed. This + +On line 5571: + remove the illiquid + assets from the market and + potentially avert + + a fire sale that could + render Lehman insolvent.34 It + didn’t go anywhere. + + But when that idea was + floated in July, the need + for such action was + +On line 5573: + so by August. In + an August email to colleagues + at the Federal + +On line 5573: + the deputy director + of the Federal Reserve + Board’s Division of + +On line 5573: + significantly + harm financial markets and + the economy if + +On line 5573: + SEPTEMBER to more + accurately assess the + potential effects + +On line 5575: + not know nearly enough + about over-the-counter derivatives + activities at + +On line 5577: + total number of + OTC derivative contracts + they had, the total + +On line 5577: + of the contracts, and + their estimated market + value, but they did + + not publicly report + the terms of the contracts or + the counterparties. + + Thus, there was no way + to know who would be owed how + much and when payments + +On line 5577: + to analyze the + possible impact of a + Lehman bankruptcy on + +On line 5579: + financial markets. + Parkinson reviewed a standing + recommendation + + to form a "default + management group" of senior + executives of + +On line 5579: + recommendation + was from the private-sector + Counterparty Risk + +On line 5579: + Policy Group, the + same group that had alerted the + Fed to the backlog + +On line 5579: + accelerating + the formation of this group + while being careful + +On line 5579: + concerns about any one + market participant.36 On + August Parkinson emailed + +On line 5579: + York Fed officials + that he was worried that no + sensible game plan + +On line 5579: + be formulated + without more information.37 + He was informed that + +On line 5579: + two days earlier + to obtain derivative-related + information, that + + they still needed more + information, and that the + meeting had "caused a + +On line 5579: + which in turn required + assurances that requests for + information would + +On line 5581: + York Fed officials + were also "very reluctant" + to request copies of + +On line 5581: + Lehman’s derivatives + counterparties, because such + a request would send + + a "huge negative + signal."39 The formation of + the industry group + + seemed "less provocative," wrote + a New York Fed official, + but could still "spook the + +On line 5583: + information was + important, but attempting + to collect it was + +On line 5583: + difficulties in + unraveling the complex + dependencies among + +On line 5583: + Lehman subsidiaries and their + counterparties, which would keep + lawyers and accountants + +On line 5585: + busy for a long time.42 + On August Treasury’s Steve Shafran + informed Parkinson that + + Secretary Paulson + agreed on the need to collect + information on + +On line 5585: + derivatives.43 It + just had to be done in a + way that minimized + +On line 5585: + circulated a + draft letter requesting the + information from + +On line 5585: + would ask E. Gerald + Corrigan, the Goldman + Sachs executive + + and former New York + Fed president who had co-chaired + the Counterparty + +On line 5585: + report, to form an + industry group to advise + on information + +On line 5585: + troubled investment + bank. Parkinson, Shafran, and others + would also create + +On line 5585: + for an investment + bank failure at Secretary + Paulson’s request. Events over + +On line 5587: + week would render these + efforts moot. n September + executives from + +On line 5589: + executives at + JP Morgan, Lehman’s tri-party + repo clearing bank, + +On line 5589: + the third-quarter results + that it would announce two weeks + later. A billion + +On line 5589: + an investment by + Korea Development Bank + or others, the sale + +On line 5589: + of real estate + assets, and the division + of the company + +On line 5589: + bank" and "bad bank" with + private equity sponsors.45 + The executives + +On line 5591: + September more than + New York Fed officials were + notified of a + +On line 5591: + the next morning "to + continue the discussion + of near-term options for + +On line 5591: + nonbank." They received + a list documenting Lehman’s + tri-party repo + +On line 5591: + at roughly billion. + Before its collapse, Bear Stearns’s + exposure had been + +On line 5591: + that counterparties + provided of Lehman’s repo + financing, and that + +On line 5591: + provided by Lehman’s + clearing banks could become a + problem. Indeed, JP + + Morgan, Citigroup, + and Bank of America had + all demanded more + + collateral from + Lehman, with the threat they might "cut + off Lehman if they don’t + +On line 5593: + On Tuesday morning, + September news there would be + no investment from + +On line 5593: + Development Bank + shook the market. Lehman’s stock plunged + from the day before, + +On line 5593: + for an afternoon + call with Bernanke, Geithner + directed his staff + + to "put together + a quick ‘what’s different1 what’s + the same1’ list about [Lehman] + +On line 5595: + [Bear Stearns], as well as + about mid-March (then) vs. early Sept + (now)."47 The Fed’s Parkinson + +On line 5595: + Treasury’s Shafran about his + concerns that Lehman would announce + further losses the + +On line 5595: + week, that it might not + be able to raise equity, + and that even though its + +On line 5597: + had been, Lehman remained + vulnerable to a loss + of confidence.48 At + +On line 5597: + Paulson convened a + call with Cox, Geithner, + Bernanke, and Treasury staff + +On line 5597: + Lehman bankruptcy."49 At + P.M., Treasury Chief of Staff Jim + Wilkinson emailed Michelle Davis, + +On line 5597: + Treasury, to express + his distaste for government + assistance: "We need + +On line 5597: + to talk. I just can’t + stomach us bailing out lehman. + Will be horrible + +On line 5599: + the press don’t u think."50 + That same day, Fuld agreed to post + an additional + +On line 5601: + collateral to + JP Morgan. Lehman’s bankruptcy + estate would later + +On line 5601: + did so because of + JP Morgan’s improper threat + to withhold repo + +On line 5601: + to Lehman.51 Steven Black, JP + Morgan’s president, said he + requested billion + +On line 5601: + to post billion.52 He + did not believe the request + put undue pressure + + on Lehman. On Tuesday + night, executives of Lehman + and JP Morgan met + +On line 5601: + at Lehman’s request to + discuss options for raising + capital. The JP + +On line 5601: + Junior Varsity," + JP Morgan executives + reported to Black. + +On line 5601: + have no proposal + and are looking to us for + ideas/credit line to + + bridge them to the first + quarter when they intend to + split into good bank/bad + +On line 5601: + Black responded, "Let’s + give them an order for the + same drugs SEPTEMBER + +On line 5601: + have apparently + been taking to think we would + do something like that."53 + + The Lehman bankruptcy + estate has a different + view. It alleges Black + +On line 5601: + firm might be willing + to purchase Lehman preferred stock, + but instead sent over + +On line 5603: + risk managers to probe + Lehman’s confidential records and + plans.54 The bankruptcy + + estate alleges that + later that night, JP Morgan + demanded that Lehman + +On line 5603: + preannouncing its + third-quarter earnings at the next + morning. The amendments + +On line 5603: + and gave JP Morgan + additional control over + Lehman bank accounts.55 Again, + +On line 5603: + executed the + agreements because JP Morgan + executives led + +On line 5603: + believe its bank would + refuse to extend intraday + credit if Lehman did + +On line 5605: + do so. JP Morgan + denies this. Black told the FCIC, + "JPMC never told Lehman + +On line 5605: + would stop extending + credit and clearing if the + September Agreements + +On line 5605: + not executed + before the markets opened on + [Wednesday,] September + +On line 5607: + Before the market + opened on Wednesday, Lehman announced + its billion third-quarter + +On line 5607: + a billion write-down. + Four hours later, Matthew Rutherford, + an adviser to + + Treasury, emailed colleagues + that several large money + funds had reduced their + + exposure to Lehman, + although there was not yet "a + wholesale pull back of + +On line 5609: + the largest fund complex, + stressed that while they hadn’t made + any significant + +On line 5609: + were still in the process + of making decisions and + wanted to update + + me later in the + day," Rutherford wrote. By Friday, + Fidelity would have + +On line 5609: + to Lehman to less than + billion from over billion the + previous Friday; + +On line 5609: + to an FCIC survey + of market participants, + in the week prior + +On line 5609: + in March, Fidelity + had pulled its entire billion + repo line to that + +On line 5613: + Federal Reserve, + working groups were directed + to "spend the next few + +On line 5613: + BofA acquisition + transaction might look, how a + private consortium + +On line 5613: + equity investors + transaction might look, and how + a Fed takeout of + +On line 5613: + look."58 That day, New York + Fed Senior Vice President + Patricia Mosser + + circulated her + opinion on Dudley’s request + for "thoughts on how to + +On line 5613: + Lehman." She laid out three + options: find a buyer at + any price, wind down Lehman’s + +On line 5613: + into bankruptcy. + Regarding option Mosser + said it "should be done + +On line 5615: + requires minimal + temporary support. No more + Maiden Lane LLCs and + +On line 5615: + [the] Fed. Moral hazard + and reputation cost is + too high. If the Fed + +On line 5615: + in March in terms of + temporary liquidity + backstops is useless. + +On line 5615: + long run MUCH worse than + option Option bankruptcy, + would be "[a] mess on + +On line 5617: + level, but fixes + the moral hazard problem."59 n + Wednesday night, a New + +On line 5617: + circulated a + "Liquidation Consortium" + game plan to colleagues.60 + +On line 5617: + one room senior-level + representatives of Lehman’s + counterparties in + +On line 5617: + credit default swap, + and over-the-counter derivatives + markets—everyone + +On line 5617: + would suffer most if + Lehman failed—and have them explore joint + funding mechanisms + + to avert a failure. + According to the proposed + game plan, Secretary + +On line 5619: + the participants + they had until the opening + of business in Asia + +On line 5619: + following Monday + morning (Sunday night, New York + time) to devise a + +On line 5619: + The game plan stated + that "we should have in mind a + maximum number + + of how much we are + willing to finance before + the meeting starts, but + +On line 5621: + our willingness to + do so to the consortium."61 + Indeed, Paulson would + + tell the consortium + when it met two days later + that the government + +On line 5623: + let Lehman fail.62 Former + Bank of America CEO Ken + Lewis told the FCIC that + +On line 5623: + called him on Wednesday, + September and asked him to + take another look + + at acquiring Lehman, + assuring him that Fuld was + ready to deal. Paulson + +On line 5623: + for Fuld and Lewis to + discuss an acquisition + in July, but Fuld + +On line 5623: + been interested + in selling the entire firm + at that time. Because + + of this history, + Lewis expressed his concerns to + Paulson that Fuld would + + not want to sell the + entire company or would + not be willing to + +On line 5623: + a team of Bank of + America executives + began reviewing + +On line 5623: + books, and on the next + day, Fuld sounded optimistic + about a deal. But Bank + +On line 5623: + determined that Lehman’s + assets were overvalued, and + Lewis told Paulson there + +On line 5623: + Paulson told Lewis—as Lewis + informed the FCIC—to put on his + "imagination hat" + + and figure out a + deal. His insistence kept the + Bank of America + +On line 5623: + Friday, September + Lewis called Paulson to repeat + his assessment—no + + government support, + no deal. Apparently Fuld + had been kept out of + + the loop, and began + to call Lewis at home. Lewis’s wife + told Fuld that Lewis would + +On line 5625: + come to the phone and + to stop calling.63 On Thursday + September an email + +On line 5625: + McCabe, a Goldman Sachs + executive, to Dudley + and others set the + +On line 5625: + "It is not pretty, + This is getting pretty scary + and ugly again. They + + [Lehman] have much bigger + counter-party risk than Bear + did, especially + +On line 5625: + market is getting + very spooked, nervous. Also have + Aig, Wamu concerns. + + This is just spinning + out of control again. Just fyi, + this is shaping up + + as going to be + a rough day."64 Bernanke was informed + that if Lehman failed, "it + +On line 5627: + a much more complex + proposition to unwind their + positions than it + +On line 5627: + have been to unwind + the positions held by Bear + Stearns," because Lehman was + +On line 5629: + twice the size of Bear + Stearns."65 Some believed government + action was required. + +On line 5629: + a senior New York + Fed official, forwarded + to her colleagues an + +On line 5629: + fund manager Louis + Bacon suggesting the New + York Fed could "attempt + +On line 5629: + or support the LEH + situation" but noting + that "none of the above + +On line 5629: + the fundamental + problem, which is too many bad + assets that need to + +On line 5633: + outline of a plan + to create a "Lehman Default + Management Group," a + +On line 5633: + Lehman counterparties + and creditors who would make + plans to cope with a + +On line 5633: + bankruptcy. They would + agree to hold off on fully + exercising their + + rights to close out their + trades with Lehman; instead, they would + establish a process + +On line 5633: + midnight on Thursday, + Boesky notified colleagues that + panicked hedge funds had + +On line 5633: + they were "expecting + [a] full blown recession" and + that there was a "full + + expectation that + Leh goes, wamu and then ML + [Merrill Lynch]." They were + + "ALL begging, pleading + for a large scale solution + which spans beyond just + + LEH." Boesky compared the + level of panic to the + failure of Bear Stearns—"On + +On line 5635: + scale of to where is + Bear-Stearns-week-panic, I would put sentiment + today at a At + + almost the same time, + JP Morgan demanded that + Lehman post another + +On line 5635: + "by the opening of + business tomorrow in New + York"; if it didn’t, + +On line 5635: + would "exercise our + right to decline to extend + credit to you."69 JP + +On line 5637: + Dimon, President + Black, and CRO Zubrow had first made + the demand in a + +On line 5637: + call earlier that + evening to Lehman CEO Fuld, CFO Ian + Lowitt, and Treasurer + +On line 5637: + Tonucci told the JP + Morgan executives on + the call that Lehman could + +On line 5637: + the demand. Dimon + said Lehman’s difficulties in + coming up with the + +On line 5637: + were not JP Morgan’s + problem, Tonucci told the FCIC. + "They just wanted the + +On line 5639: + made the point that it’s + too much cash to mobilize. + There was no give on + + that. Again, they said ‘that’s + not our problem, we just want + the cash.’"71 When Tonucci + +On line 5643: + billion tomorrow, + Dimon replied, "Nothing, maybe we + will."72 Under normal + +On line 5643: + Tonucci would not have + tolerated this treatment, + but circumstances were + + far from normal. "JPM + as ‘clearing bank’ continues + to ask for more cash + + collateral. If + we don’t provide the cash, they + refuse to clear, we fail," + +On line 5643: + in an email to Lehman + executives on Friday, + September So Lehman + +On line 5643: + in cash only by + pulling virtually every + unencum-bered asset + +On line 5645: + posted billion of + collateral by Lehman was + "inappropriate" + +On line 5645: + was "illiquid" and "could + not be reasonably valued." + Moreover, Zubrow said the + +On line 5645: + shortfall was greater than + billion.74 Lehman’s former CEO, Fuld, + told the FCIC that he + +On line 5645: + to post the billion + because JP Morgan said it + would be returned to + + Lehman at the close of + business the following day.75 + The Lehman bankruptcy + + estate made the same + allegation. This dispute + is now the subject + +On line 5645: + litigation; the + Lehman bankruptcy estate is + suing JP Morgan + +On line 5649: + the billion—and the + original billion.76 "HEADS OF + FAMILY" Should Lehman + +On line 5649: + go bankrupt1 Within + the government, sentiments + varied. On Friday + +On line 5649: + Paulson headed to + New York to "sort through his Lehman + mess," Wilkinson wrote that + +On line 5649: + still "[couldn’t] imagine + a scenario where we put in + [government] money + +On line 5649: + Governor Warsh wrote, + in response to a colleague’s + hope the Fed would not + +On line 5649: + to protect some of + Lehman’s debt holders, "I hope we + don[’]t protect anything!"78 + + But on Friday, Fed + Chairman Bernanke was taking no + chances. He stayed behind + +On line 5649: + Washington, in case + he had to convene the Fed’s + board to exercise + +On line 5651: + emergency lending + powers.79 Early Friday evening, + Treasury Secretary + + Paulson summoned the + "heads of family"—the phrase used + by Harvey Miller, Lehman’s + + bankruptcy counsel, + to describe the CEOs of the + big Wall Street firms80—to + +On line 5651: + a private-sector + solution was the only + option to prevent + +On line 5651: + Lehman bankruptcy. The + people in the room needed + to come up with a + +On line 5651: + set of options to + help limit damage to the + system. A sudden + +On line 5651: + wind-down could harm the + capital markets and pose + the significant + +On line 5651: + precipitous drop + in asset prices, resulting + in collateral + +On line 5651: + liquidity: that + is, systemic risk. He could not + offer the prospect of + +On line 5651: + resolution of + the situation, as had + been done in for Long-Term + +On line 5651: + Management. Paulson + did offer the Fed’s help through + regulatory + + approvals and access + to lending facilities, + but emphasized that + +On line 5651: + would not provide "any + form of extraordinary + credit support."81 As + +On line 5651: + York Fed General + Counsel Tom Baxter told the + FCIC, Paulson made it + +On line 5653: + be no government + assistance, "not a penny."82 + H. Rodgin Cohen, + +On line 5653: + veteran Wall Street + lawyer who has represented + most of the major + +On line 5653: + that the government’s + "not a penny" posture was + a calculated + +On line 5653: + know exactly what + the government was thinking, + but my impression + +On line 5653: + they were playing a + game of chicken or poker + or whatever. It + +On line 5653: + politically + difficult to rescue Lehman. + There had been a lot + +On line 5653: + Bear Stearns. I believe + the government thought that it + could, with respect to + + a game of chicken, + persuade the private sector + to take a big chunk" + +On line 5655: + The Fed’s internal + liquidation consortium + game plan would seem to + +On line 5655: + it contemplated + a financial commitment, + even though that was not + +On line 5655: + be divulged.84 Moreover, + notwithstanding Paulson’s "not a + penny" statement, the + +On line 5655: + of the exchequer, + Alistair Darling, said that + Paulson told him that + +On line 5655: + regulatory + assistance to support a + transaction if it + +On line 5657: + consortium meeting + on Friday night, Citigroup + CEO Vikram Pandit asked + +On line 5657: + was also going + to talk about AIG. Timothy + Geithner said + +On line 5661: + on Lehman."86 "TELL THOSE SONS + OF BITCHES TO UNWIND" What + would happen if JP + +On line 5661: + refused to provide + intraday credit for Lehman + in the tri-party + +On line 5661: + market on Monday, + September The Fed had been + considering this + +On line 5661: + summer. As Parkinson + noted, the fundamental + problem was that even + +On line 5661: + for bankruptcy, the + SEC would want Lehman’s broker-SEPTEMBER dealer + to live on and would + +On line 5661: + to grab tri-party + collateral.87 Parkinson told + the FCIC staff that Zubrow + +On line 5661: + the weekend that JP + Morgan would not unwind Lehman’s + repos on Monday + +On line 5661: + Fed did not expand + the types of collateral + that could be financed + +On line 5661: + the PDCF lending + facility. Earlier + in the year, Parkinson + +On line 5661: + said that JP Morgan’s + refusal to unwind would be + unforgiveable. Now + +On line 5663: + told Geithner + to "tell those sons of bitches + to unwind."88 Merrill + +On line 5663: + told the FCIC that by + Saturday morning, the group + of executives + +On line 5663: + they were overvalued + by anywhere from to billion. + Thain thought that was more + +On line 5663: + executives would + be willing to finance and, + therefore, Thain believed + + Lehman would fail.89 If Lehman + failed, Thain believed, Merrill would + be next. So he had + + called Ken Lewis, the CEO + of Bank of America, and + they met later that + +On line 5663: + of America’s + New York corporate apartment. + By Sunday, the two + +On line 5663: + Bank of America + would acquire Merrill for per + share, payable in Bank of + + America stock. On + Saturday afternoon, Lehman’s + counsel provided + +On line 5665: + with a document + describing how Lehman’s default + on its obligations + +On line 5665: + of defaults through to + the [subsidiaries] which have large OTC + [derivatives] books."90 + +On line 5665: + other senior Fed + officials subsequently + participated + +On line 5665: + General Counsel + Scott Alvarez cautioned others + not to mention the + +On line 5665: + JP Morgan, because + he did not want to "suggest + Fed willingness to + +On line 5669: + or anyone else."92 By + Saturday night, however, + it appeared that the + + parade of horrors + that would result from a Lehman + bankruptcy had been + + avoided. An agreement + apparently had been reached. + Barclays would purchase + +On line 5669: + of assets financed + by the private consortium + (even though the bankers in + +On line 5669: + to Barclays, had told + Lehman President Bart McDade that + Barclays was willing + +On line 5669: + private consortium + agreement to assist the deal.93 + It seemed a deal would + +On line 5671: + completed.94 "THIS DOESN’ + T SEEM LIKE IT IS GOING + TO END PRETTY" But + +On line 5671: + terribly wrong. At + A.M., Barclays CEO John Varley + and President Robert + +On line 5671: + Authority (FSA) + had declined to approve the + deal.95 The issue boiled + +On line 5671: + to a guarantee—the + New York Fed required Barclays + to guarantee Lehman’s + +On line 5671: + from the sale until + the transaction closed, much as + JP Morgan had done + +On line 5671: + March.96 Under U.K. law, + the guarantee required a + Barclays shareholder + +On line 5671: + could take to days. Though + it could waive that requirement, + the FSA asserted + + that such a waiver + would be unprecedented, that + it had not heard about + +On line 5671: + until Saturday + night, and that Barclays did not + really want to + +On line 5673: + obligation anyway. + eithner pleaded with + FSA Chairman Callum + +On line 5673: + waive the shareholder + vote, but McCarthy wanted the New + York Fed to provide + +On line 5673: + instead of Barclays.97 + Otherwise, according to + the FSA, "Barclays would + +On line 5673: + had to provide a + (possibly unlimited) + guarantee, for an + +On line 5673: + covering prior + and future exposures and + liabilities + +On line 5673: + of all transactions + entered into prior to + the purchase, even in + +On line 5675: + For Paulson, such a + guarantee by the Fed was + unequivocally + + out of the question.99 + The guarantee could have put + the Fed on the hook + + for tens of billions + of dollars. If the run on + Lehman had continued + +On line 5677: + guarantee, Barclays’ + shareholders could reject the + acquisition, and + +On line 5679: + possession of an + insolvent bank. Baxter told + the FCIC that Barclays + + had known all along that + the guarantee was required, + because JP Morgan + + had to provide the + same type of guarantee when + it acquired Bear Stearns. + +On line 5679: + Baxter said he was + "stunned" at this development. + He believed that the + +On line 5679: + reason Barclays said + it could not guarantee Lehman’s + obligations was the + +On line 5681: + Treasury’s Wilkinson emailed + JP Morgan Investment Bank + CEO Jes Staley that + +On line 5681: + in a meeting with + Paulson and Geithner + and that things did not + +On line 5683: + doesn’t seem like it + is going to end pretty."101 + In another note + +On line 5683: + later, he added that + there would be no government + assistance: "No way + +On line 5683: + here writing the usg + coms [United States government + communications] + +On line 5683: + plan for orderly + unwind also just did a + call with the WH [White + +On line 5683: + and usg is united + behind no money. No way + in hell Paulson could + +On line 5685: + blink now we will know + more after this [CEO meeting] + this morning but I + + think we are headed + for winddown unless bar-clays + deal gets untangled."102 + + It did not. Paulson + made a last-ditch pitch to his U.K. + counterpart, Darling, + +On line 5687: + admitted that he + had vetoed the transaction: + "Yeah I did. Imagine + + if I had said yes + to a British bank buying a + very large American + +On line 5687: + bank which collapsed the + following week." He would have + found himself telling a + +On line 5687: + "Everybody sitting + in this room and your children + and your grandchildren + +On line 5687: + grandchildren would be + paying for years to come." That + Bank of America + +On line 5687: + taken itself out + of the picture may have played + a role in Darling’s + + decision: "My first + reaction was ‘If this is + such a good deal how + +On line 5687: + American bank is + going to go near it1’" So + Darling concluded + +On line 5687: + Barclays to accept + the guarantee, which could have + a grave impact on + +On line 5687: + was simply out of + the question: "I spoke to Hank + Paulson and said ‘Look, + +On line 5687: + way we could allow + a British bank to take over the + liability + + of an American + bank,’ which in effect meant the + British taxpayer was + + underwriting an + American bank."104 Following + that decision in + +On line 5689: + Brothers was, for all + practical purposes, dead. + Cohen, Lehman’s counsel + +On line 5689: + the time, told the FCIC, + "When Secretary Paulson came + out of the meeting + +On line 5689: + with Geithner + and Cox, they called Lehman’s presi-SEPTEMBER dent + and me over and said, + +On line 5689: + have the consortium, + but the British government won’t + do it. Darling said + +On line 5691: + he did not want the + U.S. cancer to spread to the + U.K.’"105 At around P.M., Lehman’s + +On line 5693: + others—reconvened + at Lehman’s offices to "digest + what obviously + +On line 5693: + that the New York Fed + would provide more flexible + terms for the PDCF + +On line 5693: + include expanding + the types of collateral + borrowers could use.106 + + McDade, Kirk, Lowitt, and Miller + returned to the New York Fed + building and met with + + the Fed’s Baxter and + Dudley, the SEC’s Sirri, and + others to discuss + +On line 5695: + to McDade and Kirk, the + government officials—led + by Baxter— made it + +On line 5695: + against the expanded + types of collateral, as + other firms could. The + + sentiment was clear + but the reasons were vague, McDade + told the FCIC. He said + +On line 5695: + to allow Lehman to + provide the expanded types + of collateral + +On line 5695: + the difference in + Lehman’s being able to obtain + the funding needed + +On line 5697: + open for business on + Monday.107 Baxter explained to + the FCIC, however, + +On line 5697: + the expanded types + of collateral.108 A New + York Fed email written + +On line 5697: + P.M. on that Sunday, + September stated that Lehman’s + counsel was informed + +On line 5697: + the expansion of + PDCF-eligible collateral but that + such collateral + + would not be available + to the broker-dealer if it + filed for bankruptcy.109 + +On line 5699: + meeting show that the + Fed rejected Lehman’s request + for an even broader + +On line 5699: + of collateral + to be eligible for + PDCF financing + + and preferred that Lehman’s + holding company—but not + the broker-dealer— file + +On line 5701: + bankruptcy and that + the broker-dealer "be wound down + in an orderly + +On line 5701: + a letter dated + September the New York Fed + informed Lehman Senior + +On line 5701: + that the broker-dealer + could finance expanded types + of collateral + +On line 5701: + the PDCF, but that + letter was not sent until + A.M. on September + +On line 5701: + filed for bankruptcy.111 + The Lehman broker-dealer borrowed + to billion from the + +On line 5703: + each day over the next + three days.112 As Kirk recounted + to the FCIC, during + +On line 5703: + Sunday meeting at + the New York Fed, government + officials stepped out + +On line 5703: + an hour and came back + to ask: "Are you planning on + filing bankruptcy + + tonight1"113 A surprised Miller + replied that "no one in the room + was authorized to + +On line 5703: + file the company, + only the Board could and the + Board had to be called + +On line 5703: + a meeting and have + a vote. There would be some lag + in terms of having + +On line 5703: + file it. There was a + practical issue that you + couldn’t get it done + +On line 5703: + directors of Lehman’s + U.K. subsidiary—LBIE—would be personally + liable if they did + +On line 5703: + bankruptcy by the + opening of business Monday. + As Kirk recalled, "They + +On line 5703: + told us ‘we would like + you to file tonight. It’s the right + thing to do, because + +On line 5703: + something else which we + can’t tell you that will happen + this evening. We would like + +On line 5703: + before the opening + of trading Monday morning.’"115 + The second event would + +On line 5703: + be the announcement + of Bank of America’s + acquisition of + +On line 5703: + bankruptcy would be + "Armageddon."116 Lehman had prepared + a presentation + +On line 5703: + a Lehman bankruptcy + would be catastrophic. It + would take at least five + +On line 5703: + years to resolve, cost + to billion, and cause major + disruptions in the + + United States and abroad.117 + Baxter told the FCIC, "I knew + that the consequences + + were going to be + bad; that wasn’t an issue. + Lehman was in denial + + at that point in time. + There was no way they believed + that this story ends + +On line 5705: + a Lehman bankruptcy + they kept thinking that they were + going to be bailed + +On line 5705: + the taxpayer of + the United States. And I’m not + trying to convince + +On line 5705: + that that belief was + a crazy belief because they + had seen that happen + +On line 5705: + the Bear case." Baxter’s + mission, however, was to + "try to get them to + +On line 5705: + weren’t going to + be rescued, and then focus + on what their real + + options were, which were + drift into Monday morning + with nothing done and + + then have chaos break out, + or alternatively file." + He concluded, "From + +On line 5705: + point of view, first thing + was to convince Harvey that + it was far better + +On line 5705: + pandemonium + break out. And then he had to + have discussions with + +On line 5705: + Lehman Board because they + had a fiduciary duty + to resolve what was + +On line 5707: + other stakeholders."118 + "The only alternative + was that Lehman had to + + fail," Miller testified + to the FCIC.119 He stated that + Baxter provided + +On line 5709: + government’s plan for + the fallout from bankruptcy, + but assured him that + + the situation + was under control. Then, Miller + told the FCIC, Baxter + +On line 5711: + Lehman delegation + to leave the Fed offices. "They + basically threw + +On line 5711: + said. Miller remembered + telling his colleagues as they left + the building, "‘I don’t + + think they like us.’" Miller + continued: We went back to + the headquarters, and + +On line 5715: + pandemonium + up there— it was like a scene + from [the film] It’s a + +On line 5715: + Wonderful Life with + the run on the savings and + loan crisis. [A]ll of + +On line 5717: + paparazzi running around. + There was a guy there in a + sort of a Norse god + +On line 5717: + with a helmet and + a picket sign saying "Down + with Wall Street." There were + +On line 5717: + in and out. Bart McDade + was reporting to the board + what had happened. Most + + of the board members + were stunned. Henry Kaufman, in + particular, was + + asking "How could this + happen in America1"120 The + group informed the board + +On line 5719: + the Barclays deal had + fallen apart. The government + had instructed the + +On line 5719: + file for bankruptcy. + SEC’s Cox called. With Tom Baxter + also on the line, + +On line 5719: + the situation + was serious and required + action. The board asked + +On line 5719: + was directing them + to file for bankruptcy. Cox + and Baxter conferred + +On line 5719: + few minutes, and then + answered that the decision + was the board’s to make. + +On line 5719: + board again asked if Cox + and Baxter were telling them to + file for bankruptcy. + +On line 5719: + that they believed the + gov-SEPTEMBER ernment’s position had + been made perfectly + + clear at the meeting + at the Fed earlier in + the day.121 Following + +On line 5721: + call, McDade advised the + board that Lehman would be unable + to obtain funding + +On line 5721: + file for bankruptcy. + The company filed at A.M. + on Monday morning.122 + +On line 5725: + FCIC that government + officials understood a + Lehman bankruptcy would + + be catastrophic: + We never had any doubt about + that. It was going + + to have huge impacts + on funding markets. It would + create a huge loss + + of confidence in + other financial firms. It + would create pressure + +On line 5727: + Merrill and Morgan + Stanley, if not Goldman, which + it eventually + +On line 5727: + would probably bring + the short-term money markets + into crisis, which + + we didn’t fully + anticipate; but, of course, + in the end it did + +On line 5727: + market mutual + funds under pressure. So there + was never any doubt + +On line 5727: + our minds that it would + be a calamity, catastrophe, + and that, you know, we + + should do everything + we could to save it.123 "What’s the + connection between + +On line 5729: + General Motors1" + he asked rhetorically. "Lehman + Brothers’ failure meant + +On line 5729: + commercial paper + that they used to finance went + bad." Bernanke noted that + +On line 5729: + particular one + named the Reserve Primary + Fund, held Lehman’s paper + + and suffered losses. + He explained that this "meant there + was a run in the + +On line 5729: + market mutual + funds, which meant the commercial + paper market spiked, + +On line 5731: + "As the financial + industry came under stress," + Paulson told the FCIC, + +On line 5731: + and when Lehman collapsed, + even major industrial + corporations found + +On line 5731: + difficult to sell + their paper. The resulting + liquidity crunch + +On line 5731: + relied on this short + term funding and had failed to + anticipate how + +On line 5733: + commercial paper + market could become in times + of stress."125 Harvey Miller + +On line 5733: + "the bankruptcy of + Lehman was a catalyst for + systemic consequences + +On line 5733: + the world. It fostered + a negative reaction + that endangered the + + viability + of the financial system. + As a result of + +On line 5733: + expectations of + the financial markets and + others, a major + + loss of confidence + in the financial system + occurred."126 On the day + +On line 5735: + for bankruptcy, the + Dow plummeted more than points; + billion in value + + from retirement plans, + government pension funds, and + other investment + +On line 5737: + and affiliates + with billion in assets and + liabilities, + +On line 5737: + contracts, llowing its + counterparties to have the + option of seizing + +On line 5737: + collateral and + terminating the contracts. + After the parent + +On line 5737: + company filed, about + insolvency proceedings + of its subsidiaries in + +On line 5737: + about claims—exceeding + billion—have been filed against Lehman + as of September + +On line 5737: + Miller told the FCIC that + Lehman’s bankruptcy "represents + the largest, most complex, + +On line 5737: + in the United States." + The costs of the bankruptcy + administration + +On line 5737: + billion; as of this + writing, the proceeding is + expected to last + +On line 5739: + least another two + years.128 In his testimony + before the FCIC, Bernanke + +On line 5741: + Lehman to fail were both + legal and practical. From + a legal standpoint, + +On line 5741: + are not allowed to + lend without a reasonable + expectation of + + repayment. The loan + has to be secured to the + satisfaction of + +On line 5741: + this was before TARP. + We had no ability to + inject capital + +On line 5741: + afternoon email from + Bernanke to Fed Governor Warsh + indicated that + +On line 5741: + more than billion in + capital assistance would + have been needed to + +On line 5741: + failure. "In case I + am asked: How much capital + injection would have + +On line 5743: + needed to keep LEH + alive as a going concern1 + I gather $12B or + +On line 5745: + guys together with + Fed liquidity support + was not enough."130 In March, + +On line 5745: + Fed had provided + a loan to facilitate + JP Morgan’s purchase + +On line 5745: + Act. But, even with this + authority, practical + considerations + +On line 5745: + in play. Bernanke explained + that Lehman had insufficient + collateral and + +On line 5745: + Fed, had it acted, + would have lent into a run: + "On Sunday night of + + that weekend, what was + told to me was that—and I have + every reason to + + believe—was that there + was a run proceeding on + Lehman, that is people + + were essentially + demanding liquidity + from Lehman; that Lehman did + +On line 5745: + enough collateral + to allow the Fed to lend + it enough to meet that + + run." Thus, "If we lent + the money to Lehman, all that + would happen would be + +On line 5747: + the run [on Lehman] would + succeed, because it wouldn’t + be able to meet the + + demands, the firm would + fail, and not only would we + be unsuccessful + +On line 5747: + we would [have] saddled + the [t]axpayer with tens of + billions of dollars + + of losses."131 The Fed + had no choice but to stand by + as Lehman went under, + +On line 5749: + As Bernanke acknowledged + to the FCIC, however, his + explanation for + +On line 5749: + the explanation + he offered days after the + bankruptcy—at that time, + +On line 5749: + that he believed the + market was prepared for the + event.132 On September + +On line 5749: + he testified: "The + failure of Lehman posed risks. But + the troubles at Lehman + +On line 5749: + and investors clearly + recognized—as evidenced, for + example, by the + +On line 5749: + insuring Lehman’s debt + in the market for credit + default swaps—that the + +On line 5749: + a significant + possibility. Thus, we + judged that investors and + +On line 5749: + had had time to take + pre-cautionary measures."133 In + addition, though the + + Federal Reserve + subsequently asserted + that it did not have + +On line 5749: + save Lehman because the + firm did not have sufficient + collateral to + +On line 5749: + secure a loan from + the Fed under section the + authority to + +On line 5749: + provision is very + broad. It requires not that loans + be fully secured + +On line 5749: + they be "secured to + the satisfaction of the + Federal Reserve + +On line 5749: + Counsel Scott Alvarez + concluded that requiring + loans under to be + +On line 5749: + fully secured would + "undermine the very purpose + of section which was + +On line 5749: + credit available in + unusual and exigent + circumstances to help + + restore economic + activity."135 To CEO Fuld + and others, the Fed’s + +On line 5751: + officials discussed + and dismissed many ideas in the + chaotic days leading + +On line 5751: + to the bankruptcy, + the Fed did not furnish to + the FCIC any written + +On line 5751: + Lehman lacked sufficient + collateral to secure + a loan under Fuld + +On line 5753: + FCIC that in fact, "Lehman + had adequate financeable + collateral. [O]n + +On line 5753: + bankruptcy filing, + Lehman financed itself and did + not need access to + +On line 5753: + that Sunday night was + a liquidity bridge. We + had the capital. + + Along with its excess + available collateral, Lehman + also could have used + +On line 5753: + its Neuberger Berman + subsidiary—as did AIG some two days + later." Fuld also + +On line 5753: + assertions about Lehman’s + capital hole. He told the + FCIC, "As of August + +On line 5757: + different from the + negative or billion ‘holes’ + claimed by some." Moreover, + +On line 5757: + maintained that Lehman would + have been saved if it had been + granted bank holding + +On line 5759: + the week after Lehman’s + bankruptcy.136 The Fed chairman + denied any bias against + +On line 5759: + his view, the only + real resolution short + of bankruptcy had + +On line 5759: + to find a buyer. + Bernanke said: "When the potential + buyers were unable + +On line 5759: + carry through—in the + case of Bank of America, + because they changed their + + minds and decided + they wanted to buy Merrill + instead; in the case + +On line 5759: + Barclays, [because they + withdrew] we essentially + had no choice and had + +On line 5761: + let it fail."137 During + the September meeting of + the Fed’s Federal + +On line 5761: + Market Committee, + some members stated that the + government should not + + have prevented Lehman’s + failure because doing so + would only strengthen + +On line 5761: + "too big to fail" and + erode market discipline. They + noted that letting + +On line 5761: + the only way to + provide credibility + to the assertion + +On line 5763: + firm was "too big to + fail" and one member stated + that the market was + +On line 5763: + firm could have a broad + and disruptive effect on + financial markets + +On line 5763: + Federal Reserve + did not have. Bernanke’s view was that + only a fiscal + +On line 5765: + wide-scale failure of + financial institutions.138 + Merrill’s Thain made it + +On line 5765: + Bank of America, + formerly Lehman’s potential + suitor. Thain blamed the + +On line 5765: + out Lehman on politicians + and regulators who feared + the political + +On line 5765: + of rescuing the + firm. "There was a tremendous amount + of criticism of + + what was done with Bear + Stearns so that JP Morgan would + buy them," Thain told he + +On line 5765: + a criticism of + bailing out Wall Street. It was + a combination + +On line 5765: + Street and a belief + that there needed to be a + reinforcement of + +On line 5765: + There was never a + discussion about the legal + ability of the + +On line 5765: + do this." He noted, + "There was never discussion + to the best of my + + recollection that + they couldn’t [bail out Lehman]. It + was only that they + +On line 5767: + told the FCIC that in + his opinion, "allowing Lehman + to go bankrupt was + +On line 5767: + biggest mistake of + the whole financial crisis." + He wished that he and + +On line 5767: + convince Paulson and + Geithner to prevent + Lehman’s failure: "As I + +On line 5767: + think about what I would + do differently after + that weekend is try + +On line 5769: + grab them and shake them + that they can’t let this happen. + They were not very much + +On line 5769: + mood to listen. They + were not willing to listen + to the idea that there + +On line 5769: + to be government + support. The group of us should + have just grabbed them and + + shaken them and said, + ‘Look, you guys could not do this.’ + But we didn’t, and + +On line 5771: + were not willing to + entertain that discussion."140 + FCIC staff asked Thain if + +On line 5771: + explicitly said + to Paulson, Geithner, + or anyone else, "You + + can’t let this happen." + Thain replied, "We didn’t do it + strongly enough. We said + +On line 5773: + to them, ‘Look, this is + going to be bad.’ But it + wasn’t like, ‘No you + +On line 5775: + of that select group, + JP Morgan’s Dimon, had a + different view. He + +On line 5775: + the FCIC, "I didn’t + think it was so bad. I hate + to say that. But I + +On line 5777: + it was almost the + same if on Monday morning + the government had + +On line 5777: + saved Lehman. You still would + have terrible things happen. + AIG was going to + + have their problems that + had nothing to do with Lehman. + You were still going + +On line 5777: + runs on the other + banks and you were going to + have absolute fear + +On line 5777: + the global markets. + Whether Lehman itself got saved or + not the crisis would + + have unfolded along + a different path, but it + probably would have + +On line 5779: + York Fed General + Counsel Baxter told the FCIC + that there would have been + +On line 5779: + Baxter put it, "I + think that if the Federal + Reserve had lent to + +On line 5779: + in a way that some + people think—without adequate + collateral and + +On line 5779: + hearing and other + hearings would have only been + about how we wasted + +On line 5783: + money."143 SEPTEMBER + The Commission concludes the + financial crisis + +On line 5785: + proportions with the + collapse of Lehman Brothers. Lehman’s + collapse demonstrated + +On line 5785: + contributed to the + failures or near failures of + the other four large + +On line 5785: + (OTC) derivatives + dealing), enormous leverage, and + reliance on short-term + +On line 5785: + While investment banks + tended to be initially + more vulnerable, + +On line 5785: + from many of the same + weaknesses, including their + involvement in the + +On line 5787: + Lehman, like other large + OTC derivatives dealers, + experienced runs + +On line 5787: + its derivatives + operations that played a + role in its failure. + +On line 5787: + complicated its + bankruptcy, and the impact + of its bankruptcy + +On line 5787: + other financial + institutions contributed + significantly + + to the severity + and depth of the financial + crisis. Lehman’s failure + + resulted in part + from significant problems + in its corporate + +On line 5789: + exacerbated + by compensation to its + executives and + +On line 5791: + to rescue Lehman for + a variety of reasons, + including the lack + + of a private firm + willing and able to acquire + it, uncertainty + +On line 5791: + and political + reaction, and erroneous + assumptions that Lehman’s + + failure would have a + manageable impact on the + financial system + +On line 5791: + After the fact, they + justified their decision + by stating that the + +On line 5793: + inconsistency + of federal government + decisions in not + +On line 5793: + Stearns and the GSEs, and + immediately before + rescuing AIG, added + +On line 5799: + uncertainty and + panic in the financial + markets. SEPTEMBER + +On line 5805: + AIG CONTENTS "Current + liquidity position + is precarious" + +On line 5811: + effect" "Like a gnat + on an elephant" Nine billion + dollars is a lot + + of money, but as + AIG executives and the + board examined their + +On line 5811: + sheet and pondered the + markets in the second week + of September they + +On line 5811: + were almost certain + billion in cash could not keep + the company alive + +On line 5811: + through the next week.1 The + AIG corporate empire held + more than trillion in + +On line 5811: + insurance subsidiaries + whose regulators did not + allow the cash to + +On line 5811: + up to the holding + company, much less out to + troubled subsidiaries such + +On line 5813: + liabilities, + especially those due in + the near future, were + +On line 5815: + much larger than the + billion on hand. On Friday, + September AIG was + +On line 5817: + facing challenges on + a number of fronts. It had + to fund billion of + +On line 5817: + on that day3 because + traditional investors—for + example, money + +On line 5817: + the company had + another billion coming + due the following + +On line 5817: + On another front, + the repo lenders—who had the + comfort of holding + +On line 5817: + billion in mostly + overnight funding)5—were nonetheless + becoming skittish + +On line 5817: + the perceived weakness + of the company and the + low quality of + +On line 5819: + securities.6 On + a third front, AIG had already + put up billions of + +On line 5819: + in collateral + to its credit default swap + counterparties. By + +On line 5821: + counterparties were + demanding billion, and AIG + had posted billion. + +On line 5821: + By September the + calls had soared to billion, and + AIG had paid billion—$7.6 + + billion to Goldman + alone—and it looked very likely + that AIG would need to + + post billions more in + the near future.7 That day, S&P + and Moody’s both warned of + +On line 5821: + coming downgrades to + AIG’s credit rating, which, if + they happened, would lead + +On line 5829: + downgrade would also + trigger liquidity puts + that SEPTEMBER AIG + +On line 5829: + commercial paper, + requiring AIG to come up + with another to + +On line 5833: + was increasingly + strained by its securities + lending business. As + +On line 5833: + securities, AIG + received cash from borrowers, + typically equal + +On line 5835: + to between and of + the market value of the + securities they + +On line 5835: + the value of the + securities.10 Furthermore, + AIG had invested + +On line 5835: + assets, whose value + had fallen. Since September + state regulators + +On line 5835: + of the New York State + Insurance Department (NYSID).11 + Still, by the end of + +On line 5835: + invested billion + in cash in mortgage-related + securities, which + +On line 5835: + value to billion. + By late August the parent + company had to + +On line 5835: + provide billion to + its struggling securities + lending subsidiary, and + +On line 5835: + the securities.12 + According to Dinallo, + the collateral + + call disputes between + AIG and its credit default + swap counterparties + +On line 5835: + an orderly wind + down of the securities + lending business, and + +On line 5837: + That Friday, AIG’s board + dispatched a team led by Vice + Chairman Jacob Frenkel + +On line 5837: + top officials at + the Federal Reserve Bank + of New York.14 Elsewhere + +On line 5837: + Paulson and New York + Fed President Timothy + Geithner were + +On line 5837: + Wall Street bankers that they + had the weekend to devise + a solution to + +On line 5837: + bankruptcy without + government assistance. Now + came this emergency + +On line 5837: + "Bottom line," the New + York Fed later reported + of that meeting, "[AIG’s] + +On line 5837: + [Financial Products] + have days before they are out + of liquidity."15 + + AIG posed a simple + question: how could it obtain + an emergency loan + +On line 5839: + Federal Reserve’s + authority1 Without a + solution, there was + +On line 5839: + this conglomerate, + despite more than trillion in + assets, would survive + +On line 5843: + IS PRECARIOUS" + AIG’s visit to the New York + Fed may have been an + + emergency, but it + should not have been a surprise. + With the Primary + +On line 5843: + investment banks that + qualified as primary + dealers; AIG did not + +On line 5845: + funding to even more + large institutions that were + systemically + +On line 5845: + to look closely at + two trillion-dollar holding + companies, AIG and + +On line 5845: + Capital. Both were + large participants in the + commercial paper + +On line 5847: + outstanding paper, + GE Capital with billion.16 + In ugust, the New York + +On line 5847: + up a team to study + the two companies’ funding + and liquidity + +On line 5849: + Supervision (OTS) + regulators to discuss + AIG.17 The OTS said that + +On line 5851: + comfortable with [the] + firm’s current liquidity + [and] confident that + + the firm could access + the capital markets with + no problem if it + +On line 5853: + New York Fed did not + agree. On August Kevin Coffey, + an analyst from + +On line 5853: + Financial Sector + Policy and Analysis + unit, wrote that despite + +On line 5853: + and liquidity + pressure" and "appears to need + to raise substantial + +On line 5853: + address the impact + of deteriorating + asset values on + + its capital and + available liquidity as + well as to address + +On line 5855: + funding mismatches."19 + Coffey listed six concerns: + AIG’s significant + +On line 5855: + on AIG Financial + Products’ credit default swap + book and related + +On line 5855: + margin calls, for which + AIG had posted billion in + collateral by + +On line 5855: + obligations due to + outstanding liquidity + puts; ratings-based triggers + +On line 5855: + collateral calls + if AIG were downgraded; and + limited standby + +On line 5855: + facilities to + manage sudden cash needs. He + noted Moody’s and S&P + +On line 5857: + and liquidity + following AIG’s second-quarter + earnings. The agencies + + warned they would downgrade + AIG if it did not address + these issues.20 Four days + +On line 5859: + echoed much of Coffey’s + internal analysis. The + report, "Don’t Buy AIG: + +On line 5859: + Downgrades, Capital + Raise on the Horizon," warned that + "we foresee billion + +On line 5859: + economic losses + from [AIG’s credit default swap] + book, which could result + +On line 5861: + resulting in a + significant shift in the + risk quality of + +On line 5861: + have seen this credit + overhang story before with + another stock in + +On line 5861: + and foresee outcomes + similar in nature but + on a much larger + +On line 5861: + referring to Bear + Stearns. Ira Selig, a manager + at the New York Fed, + +On line 5861: + the Goldman report + to Coffey and others. "The + bottom line: large scale + +On line 5861: + of collateral + could substantially weaken + AIG’s balance sheet," the + +On line 5863: + manager wrote.22 On + September the New York Fed’s + Danielle Vicente noted + +On line 5863: + worsened: "AIG’s current + liquidity position + is precarious + +On line 5863: + the substantial off + balance sheet liquidity + needs." Liquidating + +On line 5863: + liabilities + would mean substantial losses + and "potentially" + +On line 5863: + she wrote. Borrowing + against AIG’s securities through + the Fed’s PDCF might + +On line 5863: + while satisfying + immediate cash needs, but + Vicente questioned whether + +On line 5865: + "necessary for the + survival of the firm."23 Arguably, + however, AIG’s volatile + +On line 5865: + commitments—including + collateral calls, contract + terminations, and + +On line 5865: + liquidity puts—could + be as high as SEPTEMBER + billion if AIG was + +On line 5865: + in addition to + the to billion of cash it + had on hand at the + +On line 5867: + agencies waited to + see how AIG would address its + liquidity and + +On line 5867: + credit default swaps + and investment portfolios, + about rating agency + +On line 5867: + capital. Indeed, + Goldman’s August report on + AIG concluded that + +On line 5869: + rating agencies were + in denial about impending + losses.25 By early + +On line 5869: + no longer in denial. + At the Friday, September + meeting at the New + +On line 5871: + "facing serious + liquidity issues that + threaten[ed] its survival + +On line 5871: + downgrade, possibly + after a rating agency + meeting September + +On line 5871: + trigger billions of + dollars in collateral + calls, liquidity + +On line 5871: + AIG’s stock had fallen + significantly (shares hit + an intraday low + +On line 5871: + of Friday, down from + a close the day before) and + credit default swap + +On line 5871: + day,27 indicating + that protection on million + of AIG debt would cost + +On line 5871: + AIG reported it + was having problems with its + commercial paper, + +On line 5871: + roll only billion + of the billion that matured + on September In + +On line 5871: + and even refusing + to provide repo funding.29 + Assets were illiquid, + +On line 5871: + declined, borrowing + was restricted, and raising + capital was not + + viable. "SPILLOVER EFFECT" + The New York Fed knew that a + failure of AIG would + +On line 5875: + dramatic, far-reaching + consequences. By the evening of + September after + +On line 5875: + looked increasingly + realistic. Hayley Boesky + of the New York Fed + + emailed William Dudley and + others. "More panic from [hedge + funds]. Now focus is + +On line 5875: + AIG," she wrote. "I am + hearing worse than LEH. Every + bank and dealer has + + exposure to them."30 + Shortly before midnight, New + York Fed Assistant + +On line 5877: + emailed Geithner, + Dudley, and other senior + officials about AIG: + + "The key take-away is + that they are potentially + facing a severe + +On line 5877: + the course of the next + several (approx. days if + they are downgraded. + +On line 5877: + risk exposures are + concentrated among the largest + international + +On line 5877: + lines, derivatives, + securities lending, etc.) + meaning [there] could be + +On line 5879: + to those firms in the + event of AIG’s failure."31 New York + Fed officials met + +On line 5879: + Saturday morning, + and gathered additional + information about + +On line 5879: + according to New + York Fed General Counsel + Tom Baxter, it "seemed + +On line 5879: + sector solution + would materialize for + AIG."32 Indeed, Christopher + +On line 5879: + Flowers, head of J. + C. Flowers Co., a private + equity firm, had + +On line 5879: + AIG CEO Robert Willumstad + the prior Thursday, and the + two had called Warren + + Buffett to discuss + a possible deal. Willumstad + told the FCIC hat he + +On line 5879: + in contact with about + a dozen private equity + firms over the weekend.33 + + AIG executives + also worked with then-Superintendent Eric + Dinallo to help + +On line 5881: + that would have allowed + AIG’s regulated subsidiaries + to essentially + +On line 5881: + reported to AIG + executives during a + conference call on + +On line 5881: + particularly + optimistic [about financial + assistance], given + +On line 5883: + [the Fed’s] 13-3 lending + [authority]."34 And by the + end of the day on + +On line 5883: + to the Fed to be + pursuing private-sector + leads. "It was clear from + + the conversation + that Flowers [is] actively + involved in working + + with everything (AIG, + regulators, bankers, etc) in + putting together both + +On line 5883: + Patricia Mosser, + a senior vice president + at the New York Fed, + +On line 5885: + LaTorre and others.35 On + Sunday morning, September + Adam Ashcraft of the New + +On line 5885: + circulated a + memo, "Comment on Possible + 13-3 Lending to AIG," + + discussing the effect + of a fire sale by AIG on + asset markets.36 In + +On line 5885: + accompanying + email, Ashcraft wrote that the "threat" by + AIG to sell assets + + was "a clear attempt + to scare policymakers + into giving [AIG] + +On line 5885: + discount window, and + avoid making otherwise hard + but viable options: + + sell or hedge the CDO + risk (little to no impact + on capital), sell + +On line 5887: + or raise capital."37 + Before a P.M. meeting, LaTorre + sent an analysis, + +On line 5887: + and cons of lending + to AIG," to colleagues. The pros + included avoiding + + a messy collapse and + dislocations in markets + such as commercial + +On line 5887: + If AIG collapsed, it + could have a "spillover effect on + other firms involved + +On line 5889: + European banks that + had lowered credit risk—and, as + a result, lowered + +On line 5891: + by buying credit + default swaps from AIG would lose + that protection if + +On line 5893: + failed. AIG’s bankruptcy + would also affect other + companies because + +On line 5893: + a trillion over-the-counter + derivatives portfolio + of which trillion was + +On line 5893: + concentrated in + large counterparties. The memo + also noted that + +On line 5893: + an AIG failure "could + cause dislocations in CDS + market [that] could leave + +On line 5895: + significantly + unbalanced."38 The cons of a + bailout included a + + "chilling effect" on + private-sector solutions + thought to be under + +On line 5895: + a Fed loan would be + insufficient to keep AIG + afloat, "undermining + +On line 5895: + 13-3 lending as a + policy tool"; an increase + in moral hazard; the + + perception that it + would be "incoherent" to + lend to AIG and not + +On line 5895: + hole. LaTorre concluded, + "Without punitive terms, lending + [to AIG] could reward + +On line 5895: + which included AIG’s + unwillingness to sell or + hedge some of its CDO + +On line 5897: + LaTorre referred to had + hit a wall, however. By + Sunday afternoon, + +On line 5897: + by AIG’s board. Flowers + told the FCIC that under his + proposal, his firm + +On line 5897: + Allianz, the giant + insurance company, would + have each invested + +On line 5897: + stock of AIG subsidiaries. + With SEPTEMBER approval from + the NYSID, the subsidiaries + +On line 5897: + parent company, + and the parent company + would get access to + +On line 5899: + Fed. Then, Allianz would + take control of AIG almost + immediately. + +On line 5899: + that he was surprised + by AIG’s unwillingness to + negotiate. "I’m + +On line 5899: + saying it would have + worked or that it was perfect + as written, but it + + was astounding to + me that given what happened, + nobody bothered to + + check this [deal] out," he + said.40 Willumstad referred to the + Flowers deal as a + + "so-called offer"—he + did not consider it to + be a "serious + +On line 5901: + immediately." + With respect to the other + potential investors + +On line 5901: + the weekend, Willumstad + said that negotiations + were unsuccessful + +On line 5901: + required government + assistance—something Willumstad + had been assured by + + the "highest levels" + would not be forthcoming.41 On + Monday morning—after Lehman had + + declared bankruptcy, + and with no private-sector + solution on the + + horizon—the Fed + initiated an effort + to have JP Morgan + +On line 5903: + Sachs assemble a + syndicate of banks to lend + about billion to keep + +On line 5905: + In the afternoon, + the rating agencies announced + their assessments, which + +On line 5905: + than expected. All + three rating agencies announced + downgrades of AIG: S&P + + by three notches to + A-, and Moody’s and Fitch by two + notches to A2 and + +On line 5905: + downgrades triggered an + additional billion in + cash collateral + +On line 5905: + Financial Products’ + credit default swaps. Goldman + Sachs alone requested + +On line 5909: + hit billion, and AIG’s + payouts increased to billion.44 + The company’s stock + +On line 5909: + closing price of the + previous Friday—a fraction + of its all-time + +On line 5911: + not agree on a deal, + despite the expectations + of Fed officials. + +On line 5911: + morning of the 15th, + everyone decided that, + ‘we’ve got to protect + +On line 5911: + own balance sheet,’ and + the banks that were going to + provide the billion + + decided that they + were not going to," Baxter + told the FCIC.45 Sarah Dahlgren, + +On line 5911: + senior New York Fed + official, agreed with Baxter. + Lehman’s bankruptcy "was + +On line 5913: + told the Commission.46 + After the markets closed, AIG + informed the New York + +On line 5913: + access the short-term + commercial paper market.47 + Regulators spent + + the next several + hours preparing for a late-night + teleconference with + + Geithner. The + "Lead point," according to an + email circulated + +On line 5913: + monitoring group, + was that "the size, name, franchise + and market presence + +On line 5913: + and retail) [of AIG] + raise questions about potential + worldwide contagion, + +On line 5913: + this franchise become + impaired."48 Late that night, for the + second time since the + +On line 5913: + Federal Reserve + Board invoked section of the + Federal Reserve + + Act to bail out a + company. As it had done + for Bear Stearns, the New + +On line 5913: + with the support of + the Treasury, would rescue a + brand-name financial + +On line 5915: + The Federal Open + Market Committee was briefed + about AIG. Members were + + told that AIG faced a + liquidity crisis but + that it was unclear + +On line 5915: + addition, the staff + noted that money market + funds had even broader + +On line 5915: + than to Lehman and that + the parent company could + run out of money + + quite soon, even within + days.49 n Tuesday morning, the + Fed put a number + +On line 5917: + table: it would loan + billion so that AIG could meet + its immediate + +On line 5917: + The collateral + would be the assets of the + parent company + +On line 5917: + The Fed stated that + "a disorderly failure + of AIG could add to + +On line 5917: + higher borrowing + costs, reduced household wealth, and + materially + + weaker economic + performance."50 By Wednesday, a + share of AIG sold for + +On line 5919: + as little as The + previous eight years’ profits + of billion would be + +On line 5921: + billion loss for this + one year, But billion would soon + prove insufficient. + +On line 5921: + Treasury added billion + under its Troubled Asset + Relief Program (TARP).51 + +On line 5921: + the Congressional + Oversight Panel, taxpayer + funds committed to + +On line 5921: + billion. The panel + faulted the government for + deciding to bail + +On line 5921: + AIG too hastily: "With + AIG, the Federal Reserve + and Treasury broke new + + ground. They put the U.S. + taxpayer on the line for + the full cost and full + + risk of rescuing + a failing company."52 The + Treasury Department + +On line 5921: + report "overlooks the + basic fact that the global + economy was on + +On line 5921: + brink of collapse and + there were only hours in which + to make critical + +On line 5925: + "LIKE A GNAT ON AN + ELEPHANT" The Office of Thrift + Supervision has + +On line 5925: + Acting Director + Scott Polakoff testified that + supervisors failed + +On line 5927: + told the FCIC that as + late as September he had + "no clue—no idea—what [AIG’s] CDS + + liability + was."55 According to Mike Finn, + the director for + +On line 5929: + OTS’s northeast region, + the OTS’s authority to + regulate holding + +On line 5929: + safety and soundness + of the FDIC-insured subsidiary of AIG + and not to focus + +On line 5929: + impact on AIG of + an uninsured subsidiary like AIG + Financial Products.56 + +On line 5929: + the European Union’s + Financial Conglomerates + Directive (FCD)—responsibilities the + + OTS had actively + sought. The directive required + foreign companies + +On line 5931: + have the equivalent + of a "consolidated + supervisor" in + +On line 5931: + home country. Starting + in the OTS worked to persuade + the European Union + +On line 5931: + was capable of + serving as AIG’s "home country + consolidated + +On line 5931: + supervisor."57 In + the agency wrote: "AIG and its + subsidiaries are subject + +On line 5931: + supervision, OTS + will conduct continuous + on-site reviews of AIG + +On line 5931: + its subsidiaries."58 Yet even + Reich told FCIC staff that he + did not understand + +On line 5933: + under the FCD. The + former director said he + was never sure what + + authority the + OTS had over AIG Financial + Products, which he said + +On line 5937: + the OTS’s claim that it + lacked authority over AIG + Financial Products + +On line 5937: + its own actions: the + OTS did in fact examine + the subsidiary, albeit + +On line 5937: + Cassano, the head of + the subsidiary. Joseph Gonzales, + the examiner + +On line 5937: + April to November + told FCIC staff, "I overheard one + employee saying + + that Joe Cassano felt + that [the OTS was] overreaching + our scope by going + + into FP."60 The OTS + did not look carefully at + the credit default + +On line 5939: + AIG did describe the + nature of its super-senior + portfolio in its + +On line 5939: + reports at that time, + including the dollar amount + of total credit + + default swaps that it + had written. Gonzales said + that the OTS did not + +On line 5939: + about the CDS during + the period.61 After a + limited review + +On line 5939: + week before Goldman + sent AIG Financial Products + its first demand for + + collateral— the + OTS concluded that the risk + in the CDS book was + +On line 5941: + to be measured and + decided to put off a + more detailed review + +On line 5941: + The agency’s stated + reason was its limited + time and staff resources.63 + +On line 5943: + credit default swap + positions. Yet the OTS did + not initiate an + +On line 5943: + the credit default + swaps until September 2008—ten + days before AIG went + +On line 5943: + on October more + than a month after AIG failed. + It was, former OTS + +On line 5945: + "in hindsight, a bad + choice."64 Reich told the FCIC that + before AIG had not + + been a great concern. + He also acknowledged that + the OTS had never + +On line 5945: + Products unit, and thus + couldn’t regulate it. "At + the simplest level, + +On line 5945: + organization + like OTS cannot supervise + AIG, GE, Merrill Lynch, + +On line 5945: + and entities that + have worldwide offices. I would + be the first to say + +On line 5945: + that it has total + responsibility over + AIG and all of its + +On line 5947: + subsidiaries it’s like a + gnat on an elephant— there’s no + way." Reich said that + +On line 5947: + impractical and + unrealistic. I think + we thought we could grow + +On line 5949: + I think that was sort + of pie in the sky dreaming."65 + Geithner agreed, + + and told Reich so + bluntly. Reich told the FCIC + about a phone call from + +On line 5949: + after the rescue. + "About all I can remember + is the foul language + +On line 5949: + other end of the + line," Reich said. He recalled + Geithner telling + +On line 5953: + handed me a bag + of sh*t.’ I just listened."66 The + Commission concludes + +On line 5953: + was rescued by the + government primarily + because its enormous + +On line 5953: + capital reserves, + or hedging its exposure—a + profound failure in + +On line 5955: + deregulation of + over-the-counter (OTC) derivatives, + including credit + +On line 5955: + requirements that would + have lessened the likelihood + of AIG’s failure. The + + OTC derivatives + market’s lack of transparency + and of effective + +On line 5957: + exacerbated + the collateral disputes + of AIG and Goldman + +On line 5957: + regulatory + arbitrage by setting up + a major business + +On line 5957: + locating much of + the business in London, and + selecting a weak + +On line 5959: + (OTS). The OTS failed to + effectively exercise + its authority + +On line 5959: + affiliates: it + lacked the capability + to supervise an + +On line 5959: + and complexity + of AIG, did not recognize + the risks inherent + +On line 5959: + not understand its + responsibility to + oversee the entire + +On line 5961: + Financial Products. + Furthermore, because of the + deregulation of + +On line 5961: + from regulating + AIG’s sale of credit default + swaps even though they were + +On line 5961: + been regulated + as insurance contracts, AIG + would have been required + +On line 5961: + reserves, would not have + been able to enter into + contracts requiring + +On line 5961: + not have been able to + provide default protection + to speculators; + + thus AIG would have been + prevented from acting in + such a risky manner. + +On line 5963: + interconnected + with many large commercial banks, + investment banks, and + +On line 5963: + through counterparty + credit relationships on + credit default swaps + +On line 5963: + activities such + as securities lending + that its potential + + failure created + systemic risk. The government + concluded AIG was + +On line 5963: + and committed more + than billion to its rescue. + Without the bailout, AIG’s + +On line 5963: + and collapse could have + brought down its counterparties, + causing cascading + +On line 5973: + financial system. + CRISIS AND PANIC CONTENTS + Money market funds: + +On line 5975: + "Dealers weren’t even + picking up their phones" Morgan + Stanley: "Now we’re the + +On line 5981: + "It’s yours".........................................................................365 Wachovia: "At + the front end of the dominoes + as other dominoes + +On line 5985: + TARP: "Comprehensive + approach" AIG: "We needed to + stop the sucking chest + + wound in this patient".....................376 + Citigroup: "Let the world know + we will not pull a + +On line 5991: + "A shotgun wedding" + September 2008—the date of the + bankruptcy of Lehman + +On line 5991: + the takeover of Merrill + Lynch, followed within hours by + the rescue of AIG—marked + +On line 5991: + beginning of the + worst market disruption in + postwar American + + history and an + extraordinary rush to + the safest possible + +On line 5991: + that many other large + financial institutions + were on the edge of + + failure, and the Lehman + bankruptcy seemed to prove that + at least some of them + +On line 5993: + not have access to + the federal government’s + safety net. John Mack, + +On line 5993: + Stanley during the + crisis, told the FCIC, "In the + immediate wake + +On line 5993: + Morgan Stanley and + similar institutions + experienced a + +On line 5993: + bank,’ as investors lost + confidence in financial + institutions and + +On line 5995: + investment banking + business model came under + siege."1 "The markets were + +On line 5995: + bad, the volatility, + the illiquidity, some things + couldn’t trade at all, + +On line 5995: + completely locked, the + markets were in terrible + shape," JP Morgan CEO + +On line 5995: + recalled to the FCIC. + He thought the country could face + unemployment. "We + + could have survived it + in my opinion, but it would + have been terrible. + +On line 5995: + would have stopped lending, + marketing, investing and + probably laid off + +On line 5997: + done it in three weeks. + You get companies starting + to take actions like + +On line 5999: + Treasury Secretary + Timothy Geithner + told the FCIC, "You had + + people starting to + take their deposits out of very, + very strong banks, long way + + removed in distance + and risk and business from the + guys on Wall Street that + +On line 5999: + the epicenter of + the problem. And that is a + good measure, classic + +On line 5999: + an interview in + December Geithner + said that "none of [the + + biggest banks] would have + survived a situation + in which we had let + + that fire try to burn + itself out."4 Fed Chairman Ben + Bernanke told the FCIC, "As + +On line 6001: + that September and + October of was the worst + financial crisis + +On line 6001: + the Great Depression. + If you look at the firms that + came under pressure + +On line 6001: + period only + one was not at serious + risk of failure. So + +On line 6001: + of maybe the of the + most important financial + institutions in + +On line 6001: + the United States, were + at risk of failure within + a period of + +On line 6003: + week or two."5 As it + had on the weekend of Bear’s + demise, the Federal + +On line 6003: + announced new measures + on Sunday, September to + make more cash available + + to investment banks + and other firms. Yet again, it + lowered its standards + +On line 6003: + collateral that + investment banks and other + primary dealers + +On line 6003: + borrowing under + the two programs to support + repo lending, the + +On line 6003: + Term Securities + Lending Facility (TSLF).6 + And, providing a + +On line 6003: + borrow cash from their + insured depository + affiliates. The + + investment banks drew + liberally on the Fed’s + lending programs. By + +On line 6005: + end of September, + Morgan Stanley was getting + by on billion of + +On line 6007: + life support; Goldman + was receiving billion.7 But + the new measures did + +On line 6007: + market panic. Among + the first to be directly + affected were the + +On line 6007: + money market funds + and other institutions + that held Lehman’s billion + +On line 6007: + paper and made loans + to the company through the + tri-party repo + +On line 6007: + known exposure to + that jeopardy, including the + Reserve Management + +On line 6009: + Reserve Primary + Fund and Wachovia’s Evergreen + Investments. Other + +On line 6009: + direct connections + to Lehman included the hedge + funds, investment banks, + +On line 6011: + Lehman’s more than over-the-counter + derivatives contracts. For + example, Deutsche Bank, + +On line 6013: + and UBS together + had more than outstanding trades + with Lehman as of May + +On line 6015: + law to terminate + their derivatives contracts + with Lehman upon its + +On line 6015: + and to the extent + that Lehman owed them money on + the contracts they could + +On line 6015: + Lehman collateral + that they held. However, any + additional amount + + owed to them had to + be claimed in the bankruptcy + proceeding. If they + +On line 6015: + collateral with + Lehman, they would have to make a + claim for the return + +On line 6015: + collateral, and + disputes over valuation + of the contracts would + +On line 6015: + would delay payment + and most likely result in + losses. Moreover, any + +On line 6017: + these contracts were now + gone, increasing risk.8 Investors + also pulled out of + + funds that did not have + direct Lehman exposure. The + managers of these funds, + +On line 6017: + billion out of the + commercial paper market + in September and + + shifted billions of + dollars of repo loans to + safer collateral, + +On line 6017: + further pressure on + investment banks and other + finance companies + +On line 6019: + Interbank Lending + As concerns about the health of + bank counterparties + +On line 6019: + interest rates to + compensate for the risk. The + one-month LIBOR-OIS spread + + measures the part of + the interest rates banks paid + other banks that is + +On line 6019: + this credit risk. Strains + in the interbank lending + markets appeared just + +On line 6021: + the crisis began + in and then peaked during the + fall of pended on + +On line 6021: + paper market died, + the biggest corporations + in America thought + +On line 6021: + finished," Harvey Miller, + the bankruptcy attorney + for the Lehman estate, + + told the FCIC.10 Investors + and uninsured depositors + yanked tens of billions + +On line 6023: + of banks whose real + estate exposures might be + debilitating + +On line 6023: + Wachovia) in favor + of those whose real estate + exposures appeared + +On line 6023: + JP Morgan). Hedge funds + withdrew tens of billions of + dollars of assets + +On line 6023: + in custody at the + remaining investment banks + (Goldman Sachs, Morgan + +On line 6023: + Bank of America + acquisition wouldn’t close + for another three + +On line 6025: + commercial banks with + prime brokerage businesses + (JP Morgan, Credit + +On line 6025: + banks had more diverse + sources of liquidity than + the investment banks + +On line 6025: + well as large bases of + insured deposits. JP Morgan + and BNY Mellon, the + +On line 6025: + on their intraday + exposures, demanding more + collateral than + +On line 6025: + from the remaining + investment banks and other + primary dealers. + + Many banks refused to + lend to one another; the + cost of interbank + +On line 6027: + Monday, September + the Dow Jones Industrial + Average fell more + +On line 6027: + than points, or the largest + single-day point drop since the + terrorist attacks. + +On line 6029: + financial markets + and firms--when the Dow Jones fell + and financial stocks + +On line 6029: + fell For the month, the + S&P would lose billion of its + value, a decline + +On line 6031: + of 9%—the worst month since + September And specific + institutions would + +On line 6035: + direct hits. MONEY + MARKET FUNDS: "DEALERS WEREN’ T + EVEN PICKING UP THEIR + +On line 6037: + Reserve Primary + Fund had million invested + in Lehman’s commercial + +On line 6037: + Fund was the world’s first + money market mutual + fund, established in + +On line 6037: + in conservative + assets such as government + securities and + +On line 6037: + of deposit and had + for years enjoyed Moody’s and S&P’s + highest ratings for + +On line 6039: + and liquidity. + In March the fund had advised + investors that it had + +On line 6039: + underperformed" its + rivals, owing to a "more + conservative and + + risk averse manner" of + investing—"for example, + the Reserve Funds do + +On line 6039: + it quietly but + dramatically changed that + strategy. Within + +On line 6039: + commercial paper + grew from zero to one-half of + Reserve Primary’s + +On line 6039: + was the fastest-growing + money market fund complex + in the United States + +On line 6043: + 2008—doubling in the first + eight months of alone.12 Earlier + in Primary Fund’s + + managers had loaned Bear + Stearns money in the repo + market up to two + +On line 6043: + near-collapse, pulling its + money only after Bear + CEO Alan Schwartz appeared + +On line 6043: + days, Primary Fund + Portfolio Manager Michael + Luciano told the FCIC. + +On line 6043: + said he assumed that + the federal government + would similarly + +On line 6043: + if Lehman or one of + the other investment banks, + which were much larger + +On line 6043: + apparent systemic + risks, ran into trouble. These + firms, Luciano said, were + +On line 6045: + fail.13 On September + when Lehman declared bankruptcy, + the Primary Fund’s + +On line 6045: + fund’s total assets + of billion. That morning, the + fund was flooded with + +On line 6045: + custodian bank, + initially helped the fund meet + those requests, largely + + through an existing + overdraft facility, but + stopped doing so at + +On line 6045: + representatives + reportedly described State + Street’s action as "the + +On line 6045: + assurances from the + fund’s investment advisors, + Bruce Bent Sr. and Bruce + +On line 6047: + investors requested + an additional billion + later on Monday + +On line 6049: + Tuesday, September + Meanwhile, on Monday, the fund’s + board had determined + +On line 6049: + the Lehman paper was + worth cents on the dollar. That + appraisal had quickly + +On line 6049: + closed Tuesday, Reserve + Management publicly announced + that the value of + + its Lehman paper was + zero, "effective 4:00PM New + York time today." As + +On line 6049: + the fund broke the buck.16 + Four days later, the fund sought + SEC permission to + +On line 6051: + redemptions. Other + funds suffering similar + losses were propped up + +On line 6051: + asset management + unit, Evergreen Investments, + announced that it would + +On line 6051: + that held about million + in Lehman paper. On Wednesday, + BNY Mellon announced + +On line 6051: + Institutional + Cash Reserves fund and four of + its trademark Dreyfus + +On line 6051: + funds. BNY Mellon would + take an after-tax charge of + million because of + +On line 6051: + Over the next two years, + money market funds—36 based in + the United States, in + + Europe17—would receive + such assistance to keep their + funds from breaking the + +On line 6053: + the Primary Fund + broke the buck, the run took an + ominous turn: it even + +On line 6053: + market funds with no + direct Lehman exposure. This + lack of exposure + +On line 6053: + generally known, + since the SEC requires these funds + to report details + +On line 6053: + their investments at + least quarterly. Investors pulled + out simply because + +On line 6053: + feared that their fellow + investors would run first. "It was + overwhelmingly clear + + that we were staring + into the abyss—that there wasn’t + a bottom to this—as + + the outflows picked up + steam on Wednesday and Thursday," + Fed economist Patrick + + McCabe told the FCIC. "The + overwhelming sense was that this + was a catastrophe + + that we were watching + unfold."18 "We were really + cognizant of the fact + +On line 6057: + weren’t backstops in + the system that were resilient + at that time," the Fed’s + +On line 6057: + said. "Liquidity + crises, by their nature, invoke + rapid, emergent episodes—that’s what + +On line 6059: + By their nature, they + spread very quickly."19 An early + and significant + +On line 6059: + casualty was + Putnam Investments’ billion + Prime Money Market + +On line 6059: + on Wednesday with a + wave of redemption requests. + The fund, unable to + +On line 6059: + assets quickly enough, + halted redemptions. One week + later, it was sold + +On line 6061: + Investors. Within a + week, investors in prime money + market funds—funds that + +On line 6061: + in highly rated + securities—withdrew billion; + within three weeks, they + +On line 6061: + money was mostly + headed for other funds that + bought only Treasuries + +On line 6061: + was more money than + those funds could invest, and they + had to turn people + +On line 6061: + As a result of + the unprecedented demand + for Treasuries, the yield + +On line 6065: + on four-week Treasuries fell + close to levels not seen since + World War II. Money + + market mutual + funds needing cash to honor + redemptions sold their + +On line 6065: + illiquid investments. + Unfortunately, there was + little market to + +On line 6065: + in Money Market + Funds anecdotally that the + dealers weren’t even + +On line 6065: + phones. The funds had to + get rid of their paper; they + didn’t have anyone + + to give it to," McCabe + said.21 And holding unsecured + commercial paper + +On line 6067: + was now simply out + of the question: fund managers + wanted no part of + + the next Lehman. An FCIC + survey of the largest money + market funds found that + +On line 6067: + were unwilling to + purchase commercial paper + from financial firms + +On line 6067: + the week after Lehman. + Of the respondents, the five + with the most drastic + +On line 6067: + commercial paper + cut their holdings by half, from + billion to billion.22 + +On line 6067: + to unprecedented + increases in the rates on + commercial paper, + +On line 6067: + commercial paper + to pay their immediate + expenses such as + +On line 6067: + inventories. The + cost of commercial paper + borrowing spiked in + +On line 6067: + dramatically + surpassing the previous + highs in (see figure + +On line 6069: + a broad-based run on + commercial paper markets," + Geithner told + + the FCIC. "And so you + faced the prospect of some of the + largest companies in + +On line 6069: + and the United States + losing the capacity + to fund and access + +On line 6069: + markets."23 Three decades of + easy borrowing for those with + top-rated credit in + +On line 6069: + very liquid market + had disappeared almost overnight. + The panic threatened + +On line 6069: + of dollars in Cost + of Short-Term Borrowing cash and + assets every day + +On line 6069: + upon which consumers + rely—for example, to + use their credit cards + +On line 6069: + debit cards. "At that + point, you don’t need to map out + which particular + + mechanism—it’s not + relevant anymore—it’s + become systemic and + +On line 6071: + it needs to be stopped," + Palumbo said.24 The government + responded with two + +On line 6071: + lending programs on + Friday, September Treasury + would guarantee the + +On line 6071: + net asset value + of eligible money + market funds, for a + + fee paid by the funds.25 + And the Fed would provide loans + to banks to purchase + +On line 6071: + commercial paper + from money market funds.26 In + its first two weeks, this + +On line 6073: + money market funds. + With the financial sector + in disarray, the + +On line 6073: + a temporary ban + on short-selling on the stocks of + about banks, insurance + +On line 6075: + and securities + firms. This action, taken on + September followed + +On line 6075: + temporary ban put + in place over the summer on + naked short-selling—that is, + +On line 6075: + without arranging + to deliver it to the + buyer—of financial stocks + +On line 6077: + manipulation." + Meanwhile, Treasury Secretary + Henry Paulson and + +On line 6077: + they needed a more + systematic approach to + dealing with troubled + +On line 6077: + authority from + Congress for TARP. "One hing that + was constant about the + + crisis is that we + were always behind. It was + always morphing + + and manifesting + itself in ways we didn’t + expect," Neel Kashkari, then + +On line 6077: + secretary of the + treasury, told the FCIC. "So we + knew we’d get one shot + +On line 6077: + authority and + it was important that we + provided ourselves + +On line 6077: + flexibility. + We specifically designed + the authority + +On line 6077: + basically to + do whatever we needed + to do." Kashkari "spent the + +On line 6077: + weeks basically + living on Capitol Hill."27 As + discussed below, the + +On line 6081: + MORGAN STANLEY: "NOW + WE’RE THE NEXT IN LINE" Investors + scrutinized the two + +On line 6081: + large, independent + investment banks after the + failure of Lehman and + +On line 6081: + Stanley. On Monday, + September the annual + cost of protecting + +On line 6083: + Morgan Stanley debt + through credit default swaps jumped + to $682,000—from on Friday—about + + double the cost for + Goldman. "As soon as we come + in on Monday, we’re + +On line 6083: + the eye of the storm + with Merrill gone and Lehman gone," + John Mack, then Morgan + + Stanley’s CEO, said to + the FCIC. He later added, "Now + we’re the next in line."28 + +On line 6085: + the regulators’ + liquidity stress tests months + earlier. But the + +On line 6085: + Wong, Morgan Stanley’s + treasurer, heard early from + his London office + +On line 6085: + a counterparty + on derivatives trades.30 He + called those banks and they + + agreed to keep their trades + with Morgan Stanley, at least + for the time being. + +On line 6087: + through novations had + contributed to the demise of + Bear and Lehman. Repo + +On line 6089: + funds, likewise did not + panic immediately. + On Monday, only + +On line 6091: + of them requested + slightly more collateral.31 + But the relative + +On line 6091: + was fleeting. Morgan + Stanley immediately + became the target + +On line 6091: + hedge fund run. Before + the financial crisis, it + had typically + +On line 6091: + brokers like Morgan + Stanley who were worried about + their exposures to + +On line 6091: + fund clients. Now the roles + were reversed. The Lehman episode had + revealed that because + + prime brokers were able + to reuse clients’ assets to + raise cash for their own + +On line 6093: + could be frozen or lost + in bankruptcy proceedings.32 + To protect themselves, + +On line 6093: + of prime brokers in + bank holding companies, such + as JP Morgan; big + + foreign banks, such as + Deutsche Bank and Credit Suisse; + and custodian + +On line 6093: + Mellon and Northern + Trust, which they believed were safer + and more transparent. + + Fund managers told the + FCIC that some prime brokers took + aggressive measures + +On line 6095: + hedge fund customers from + demanding their assets. For + example, "Most [hedge + +On line 6095: + cash movement from [prime + brokers] primarily through + a fax," the hedge fund + +On line 6095: + Jonathan Wood told the FCIC. + "What tends to happen in very + stressful times is those + +On line 6095: + lost. I’m not sure that’s + just coincidental that + was collateral + +On line 6095: + whatever lending + [prime brokers] had against you and + they didn’t want to + +On line 6099: + [away]."33 Soon, hedge funds would + suffer unprecedented runs + by their own investors. + +On line 6099: + an FCIC survey of + hedge funds that survived, investor + redemption requests + +On line 6099: + of client funds in the + fourth quarter of This pummeled + the markets. Money + +On line 6101: + in hedge funds totaled + trillion, globally, at the + end of but because + +On line 6101: + their market impact + was several times larger. + Widespread redemptions + +On line 6101: + further depressing + market prices. Many hedge funds would + halt redemptions or + +On line 6105: + On Monday, hedge funds + requested about billion from + Morgan Stanley.36 Then, + +On line 6105: + on Tuesday morning, + Morgan Stanley announced a + profit of billion + +On line 6105: + the three months ended + August about the same as that + period a year + +On line 6107: + Mack had decided + to release the good news a + day early, but this + + move had backfired. "One + hedge fund manager said to + me after the fact + +On line 6109: + he thought preannounc-ing + earnings a day early was + a sign of weakness. + + So I guess it was, + because people certainly + continued to short + +On line 6109: + sell our stock—I don’t know + if they were shorting it but + they were certainly + +On line 6109: + the FCIC.37 Wong said, "We + were managing our funding + but really there + +On line 6109: + that were happening + as a result of the Lehman + bankruptcy that were + +On line 6109: + affect, really + ripple through and affect some + of our clients, our more + +On line 6111: + sophisticated + clients."38 The hedge fund run became + a billion torrent + + on Wednesday,39 the day + after AIG was bailed out and + the day that "many of + +On line 6111: + sophisticated + clients started to liq-uefy," as + Wong put it.40 Many of + +On line 6111: + borrowed billion from + the Fed’s PDCF on Tuesday, + billion on Wednesday, + +On line 6113: + triggered the event that + Fed policymakers had + worried about over the + + summer: an increase + in collateral calls by + the two tri-party + +On line 6113: + banks, JP Morgan and + BNY Mellon. As had happened + during the Bear episode, + +On line 6113: + became concerned about + their intraday exposures + to Morgan Stanley, + +On line 6113: + Goldman. On Sunday + of the Lehman weekend, the Fed + had lowered the bar + +On line 6113: + collateral that + it would take for overnight lending + through the PDCF. But + +On line 6113: + not designed to take + the place of the intraday + funding provided + +On line 6113: + JP Morgan and BNY + Mellon, and neither of them + wanted to accept + +On line 6113: + the lower-quality + collateral that the Fed + was accepting for + +On line 6113: + would not make those loans + to the three investment banks + without requiring + +On line 6115: + more collateral. + "Big intraday issues at + the clearing banks," the + +On line 6115: + Eichner informed + New York Fed colleagues in an + early Wednesday email. + +On line 6115: + and are asking for + cash/securities. Lots of + desk level noise around + +On line 6119: + Stanley] and [Merrill + Lynch] and taking the name. Not + pretty."41 "Taking the + +On line 6121: + a counterparty + on a trade. On Thursday, BNY + Mellon requested + +On line 6123: + in collateral + from Morgan Stanley. nd New + York Fed officials + +On line 6125: + Morgan was "thinking" + about requesting billion on + top of a billion + +On line 6125: + deposit.42 According + to a Fed examiner + at Citigroup, a + +On line 6125: + from that firm had said + that "Morgan [Stanley] is the + ‘deer in the headlights’ + +On line 6125: + significant stress + in Europe. It’s looking like + Lehman did a few weeks + +On line 6127: + Commercial paper + markets also seized up for + Morgan Stanley. From + +On line 6127: + Friday, September + to the end of September, + the amount of the firm’s + +On line 6127: + commercial paper + had fallen nearly and it + had rolled over only + +On line 6127: + comparison, on + average Morgan Stanley + rolled over about million + + every day in the + last two weeks of August.44 On + Saturday, Morgan + +On line 6129: + briefed the New York Fed + on the situation. By + this time, the firm had + +On line 6129: + billion in PDCF + funding and billion in TSLF + funding from the Fed.45 + +On line 6129: + billion to billion + in one week. Repo lenders had + pulled out billion and + +On line 6129: + had taken billion + out of Morgan Stanley’s prime + brokerage. That run + +On line 6129: + vastly exceeded + the company’s most severe + scenario in stress tests + +On line 6131: + one month earlier.46 + During the week, Goldman Sachs + had encountered a + +On line 6131: + liquidity pool + had fallen from about billion + on the previous + +On line 6131: + of the week, its Fed + borrowing totaled billion + from the PDCF and + +On line 6133: + Blankfein, Goldman’s CEO, + told the FCIC, We had tremendous + liquidity through + + the period. But + there were systemic events going + on, and we were very + +On line 6133: + you are asking me + what would have happened but for + the considerable + +On line 6133: + we were in—it was a + more nervous position than + we would have wanted + +On line 6133: + the government help. + We weren’t relying on + those mechanisms. I + +On line 6133: + good about it, but we + were going to bed every + night with more risk than + +On line 6133: + have, either for our + business or for the system + as a whole—risk, not + + certainty.47 Bernanke told + the FCIC that the Fed believed + the run on Goldman + + that week could lead to + its failure: "[Like JP Morgan,] + Goldman Sachs I would + +On line 6135: + also protected + themselves quite well on the whole. + They had a lot of + +On line 6135: + in the investment + banking category rather + than the commercial + +On line 6135: + category, when + that huge funding crisis hit + all the investment + + banks, even Goldman Sachs, + we thought there was a real + chance that they would go + + under."48 Although it + did not keep pace with Morgan + Stanley’s use of the + + Fed’s facilities, + Goldman Sachs would continue + to access the Fed’s + +On line 6135: + PDCF borrowing + to a high of billion in + October and its + +On line 6137: + both Morgan Stanley + and Goldman Sachs applied to + the Fed to become + +On line 6137: + companies. "In my + 30-year history, [Goldman and + Morgan Stanley] had + +On line 6137: + Federal Reserve + supervision—[but after + Lehman,] those franchises + +On line 6139: + they were next unless + they did something drastic. That + drastic thing was to + +On line 6139: + holding companies," + Tom Baxter, the New York Fed’s + general counsel, + +On line 6139: + the FCIC.49 The Fed, in + tandem with the Department + of Justice, approved + +On line 6139: + two applications + with extraordinary speed, + waiving the standard + +On line 6139: + company into + a national bank, subject + to supervision + +On line 6139: + of the Comptroller + of the Currency (OCC), and + Goldman converted + +On line 6139: + that was a member + of the Federal Reserve + System, subject to + + supervision by + the Fed and New York State. The + Fed would begin to + + supervise the two + new bank holding companies. + The two companies + +On line 6141: + emergency access + to the discount window for + terms of up to days.51 + +On line 6141: + more important, "I + think the biggest benefit + is it would show you + + that you’re important + to the system and the Fed + would not make you a + + holding company + if they thought in a very short + period of time + +On line 6141: + be out of business," + Mack told the FCIC. "It sends a + signal that these two + +On line 6143: + to survive."52 In a + show of confidence, Warren + Buffett invested + +On line 6143: + invested billion + in Morgan Stanley. Mack said + he had been waiting + +On line 6143: + confirmation of + Mitsubishi’s investment when, late + Sunday afternoon, + +On line 6143: + Bernanke, Geithner, + and Paulson. "Basically + they said they wanted + + me to sell the firm," + Mack told the FCIC. Less than an + hour later, Mitsubishi + +On line 6145: + its investment and + the regulators backed off.53 + Despite the weekend + +On line 6145: + the run on Morgan + Stanley continued. "Over the + course of a week, a + + decreasing number + of people [were] willing to + do new repos," Wong + + said. "They just couldn’t + lend anymore."54 By the end of + September, Morgan + +On line 6149: + But Morgan Stanley’s + liquidity depended + critically on + +On line 6149: + borrowing from two + Fed programs, billion from the + PDCF and billion + + from the TSLF. Goldman + Sachs’s liquidity pool had + recovered to about + +On line 6151: + backed by billion from + the PDCF and billion from + the TSLF. OVERTHECOUNTER + +On line 6153: + had been declining + as investors grew more concerned + about counterparty + +On line 6153: + of these markets slowed + to a crawl; in some cases, + there was no market + +On line 6153: + trades whatsoever. + A sharp and unprecedented + contraction of the + + market occurred.56 "The + OTC derivatives markets + came to a grinding + +On line 6155: + viability + of every participant + regardless of their + +On line 6155: + by liquidating + their positions in other + assets those swaps were + + designed to hedge." This + market was nregulated + and largely opaque, with + +On line 6155: + public reporting + requirements and little or + no price discovery. + +On line 6155: + participants in + the market became concerned + about the exposures + +On line 6155: + creditworthiness + of their counterparties and + the value of their + +On line 6157: + That uncertainly + caused an abrupt retreat from the + market. Badly hit + +On line 6157: + for derivatives + based on nonprime mortgages. Firms + had come to rely + +On line 6157: + indices to value + their nonprime mortgage assets. + The ABX.HE.BBB- 06-2, + +On line 6159: + whose decline in had + been an early bellwether for + the market crisis, + +On line 6159: + had been trading around + cents on the dollar since May. + But trading on this + +On line 6159: + had become so thin, + falling from an average + of about transactions + +On line 6161: + week from January + to September to fewer + than transactions per + +On line 6161: + week in October + that index values weren’t + informative.58 So, + +On line 6161: + was a valid price for + these assets1 Price discovery + was a guessing game, + +On line 6163: + it had been under + normal market conditions. + The contraction of + +On line 6163: + the valuation + of mortgage securities. + Derivatives had + +On line 6163: + used to manage all + manner of risk—the risk that + currency exchange + + rates would fluctuate, + the risk that interest rates + would change, the risk that + +On line 6163: + so that positions + could be adjusted daily + and at little cost. + +On line 6163: + everyone wanted + to reduce exposure to + everyone else. There + + was a rush for the + exits as participants + worked to get out of + +On line 6165: + was worried about the + risk inherent in the next + trade, there often was + +On line 6165: + next trade—and volume + fell further. The result was + a vicious circle + +On line 6167: + and efficient price + discovery, every firm’s risk + management became + +On line 6167: + The usual hedging + mechanisms were impaired. An + investor that wanted + + to trade at a loss + to get out of a losing + position might not + + find a buyer, and + those that needed hedges would find + them more expensive + +On line 6169: + of liquidity + in derivatives markets. + First, the number of + +On line 6169: + contracts in a broad + range of OTC derivatives + sharply declined. Since its + +On line 6169: + by federal statute + in December this market + had increased more than + +On line 6169: + to the end of the + year, however, outstanding + notional amounts of + +On line 6169: + period since the + Bank for International + Settlements began + +On line 6169: + Moreover, it occurred + during a period of + great volatility in + +On line 6169: + markets. At such a + time, firms usually turn to + the derivatives + + market to hedge their + increased risks—but now they fled + the market. The lack + + of liquidity + in derivatives markets + was also signaled + + by the higher prices + charged by OTC derivatives + dealers to enter + +On line 6171: + bear additional + risks when markets are illiquid, + and they pass the cost + + of those risks on to + market participants. The + cost is evident + + in the increased "bid-ask + spread"—the difference between the + price at which dealers + + were willing to buy + contracts (the bid price) and the + price at which they were + +On line 6171: + to sell them (the ask + price). As markets became less + liquid during the + +On line 6171: + worried that they might + be saddled with unwanted + exposure. As a + + result, they began + charging more to sell contracts + (raising their ask price), + +On line 6171: + In addition, they + offered less to buy contracts + (lowered their bid price), + +On line 6171: + uncreditworthy + counterparties. The increase + in the spread in these + + contracts meant that the + cost to a firm of hedging + its exposure to + +On line 6171: + or of another + firm also increased. The cost + of risk management + +On line 6175: + December when they + reached their height of trillion in + notional amount, and + +On line 6177: + latest figures as + of June when they had fallen + to trillion.60 In sum, + + the sharp contraction + in the OTC derivatives + market in the fall + +On line 6177: + unwind their contracts + or to effectively hedge + their business risks at + +On line 6177: + when uncertainty + in the financial system + made risk management + +On line 6181: + top priority. + WASHINGTON MUTUAL: "IT’S + YOURS" In the eight days + +On line 6181: + depositors pulled + billion out of Washington + Mutual, which now + +On line 6181: + imminent collapse. + WaMu had been the subject of + concern for some time + + because of its poor + mortgage-underwriting standards + and its exposures + +On line 6181: + the lowest-tier + investment-grade rating, + in July, and then + +On line 6183: + expected franchise + erosion."61 The Office of Thrift + Supervision (OTS) + + determined that the + thrift likely could not "pay its + obligations and meet + +On line 6185: + the bank on Thursday, + September appointing the + Federal Deposit + +On line 6185: + Corporation as + receiver; many unsecured + creditors suffered + +On line 6185: + losses. With assets + of billion as of June WaMu + thus became the largest + +On line 6185: + U.S. history to + fail—bigger than IndyMac, bigger + than any bank or thrift + +On line 6185: + in the 1980s and 1990s. + JP Morgan paid billion to + acquire WaMu’s banking + +On line 6185: + from the FDIC on the + same day; on the next day, WaMu’s + parent company + +On line 6187: + thrift) filed for Chapter + bankruptcy protection. FDIC + officials told the + + FCIC that they had known + in advance of WaMu’s troubles + and thus had time to + +On line 6187: + the transaction with + JP Morgan. JP Morgan CEO + Jamie Dimon said that + + his bank was already + examining WaMu’s assets + for purchase when FDIC + +On line 6187: + Sheila Bair called him and + asked, "Would you be prepared to + bid on WaMu1" "I said + + yes we would," Dimon + told the FCIC. "She called me up + literally the + +On line 6187: + next day and said—‘It’s yours.’ + I thought there was another + bidder, by the way, + +On line 6187: + otherwise I would + have bid a dollar—not billion], + but we wanted to + +On line 6189: + FDIC funds to protect + unsecured creditors, which + it could have done by + +On line 6189: + exception" under + the FDIC Improvement Act of + (Recall that FDICIA + + required that failing + banks be dismantled at the + least cost to the FDIC + +On line 6189: + the Fed, and Treasury + agree that a particular + company’s collapse + +On line 6189: + risk to the entire + financial system; it had + not been tested in + +On line 6189: + FDIC Chairman Bair stood + behind the decision. "I + absolutely do + + think that was the right + decision," she told the FCIC. + "WaMu was not a well-run + +On line 6191: + She characterized + the resolution of WaMu + as "successful."64 The + + FDIC’s decision would + be hotly debated. Fed + General Counsel + + Scott Alvarez told the + FCIC that he agreed with Bair that + "there should not have been + + intervention in + WaMu."65 But Treasury officials + felt differently: + + "We were saying that’s + great, we can all be tough, and + we can be so tough + +On line 6191: + financial system + into the Great Depression," + Treasury’s Neel Kashkari told + +On line 6191: + the FCIC. "And so, I + think, in my judgment that was + a mistake. [A]t that + + time, the economy + was in such a perilous state, + it was like playing + + with fire."66 WACHOVIA: "AT + THE FRONT END OF THE DOMINOES + AS OTHER DOMINOES + +On line 6197: + having bought Golden + West, was the largest holder of + payment-option ARMs, + +On line 6197: + that had helped bring down + WaMu and Countrywide. Concerns + about Wachovia—then the + +On line 6197: + escalating for + some time. On September the + Merrill analyst + +On line 6197: + the company’s stock + to "underperform," pointing + to weakness in its + +On line 6197: + executives met + Fed officials to ask for + an exemption from + + rules that limited + holding companies’ use of + insured deposits to + +On line 6199: + liquidity needs. + The Fed did not accede; staff + believed that Wachovia’s + + cash position was + strong and that the requested + relief was a "want" + +On line 6203: + But they changed their minds + after the Lehman bankruptcy, + immediately + +On line 6203: + conference calls to + discuss liquidity with + Wachovia management. + +On line 6203: + the Fed supported + the company’s request to + use insured deposits + +On line 6203: + Wells Fargo Chairman + Richard M. Kovacevich told Robert + Steel, Wachovia’s CEO and + +On line 6203: + be interested + in acquiring the besieged + bank, and the two agreed + +On line 6203: + later in the week. + The same day, Fed Governor + Kevin Warsh suggested + +On line 6203: + Steel also talk to + Goldman. As a former vice + chairman of Goldman, + +On line 6203: + easily approach + the firm, but the ensuing + conversations were + + short; Goldman was not + interested.68 Throughout the + following week, it + +On line 6205: + Wachovia needed to + merge with a stronger financial + institution. Then, + +On line 6205: + on September "raised + creditor concern about the + health of Wachovia," the + +On line 6205: + Alvarez told the FCIC. + "The day after the failure + of WaMu, Wachovia Bank + +On line 6205: + the withdrawal of + significant amounts from their + accounts," Alvarez said. + +On line 6205: + Wachovia. It appeared + likely that Wachovia would soon + become unable to + +On line 6205: + its operations."69 + Steel said, "As the day progressed, + some liquidity + +On line 6205: + intensified as + financial institutions + began declining + + to conduct normal + financing transactions with + Wachovia."70 David Wilson, + +On line 6207: + the Currency’s lead + examiner at Wachovia, + agreed. "The whole world changed" + + for Wachovia after + WaMu’s failure, he said.71 The FDIC’s + Bair had a slightly + + different view. WaMu’s + failure "was practically + a nonevent," she told + +On line 6207: + FCIC. "It was below + the fold if it was even on + the front page barely + +On line 6209: + given everything + else that was going on."72 The + run on Wachovia Bank, + +On line 6211: + fourth-largest commercial bank, + was a "silent run" by uninsured + depositors and + +On line 6211: + computers, rather than + by depositors standing + in lines outside bank + +On line 6211: + By noon on Friday, + September creditors were + refusing to roll + +On line 6211: + commercial paper + and brokered certificates of + deposit.74 The FDIC’s John + +On line 6211: + Wachovia lost billion + of deposits and billion of + commercial paper + + and repos that day.75 + By the end of the day on + Friday, Wachovia told + + the Fed that worried + creditors had asked it to + repay roughly half + +On line 6213: + its long-term debt—$50 billion + to billion.76 Wachovia "did not + have to pay all these + +On line 6213: + (they had not matured), + but would have difficulty + [borrowing from these + + lenders] going forward + given the reluctance to + repay early," Richard + + Westerkamp, the Richmond + Fed’s lead examiner at + Wachovia, told the FCIC.77 + +On line 6215: + one day, the value + of Wachovia’s 10-year bonds fell from + cents to cents on the + +On line 6215: + dollar, and the cost + of buying protection on + million of Wachovia + +On line 6217: + stock fell wiping out + billion in market value. + Comptroller of the + + Currency John Dugan, + whose agency regulated + Wachovia’s commercial + +On line 6217: + liquidity was + unstable.78 "Wachovia was at + the front end of the + +On line 6219: + other dominoes fell," + Steel told the FCIC.79 Government + officials were not + +On line 6219: + business on Monday, + September without a deal + in place.80 "Markets were + +On line 6219: + considerable strain + after the events involving + Lehman Brothers, AIG, and + +On line 6219: + the Fed’s Alvarez told + the FCIC. "There were fears that the + failure of Wachovia + +On line 6219: + investors to doubt the + financial strength of other + organizations + +On line 6221: + making it harder + for those institutions to + raise capital."81 Wells + +On line 6221: + buying Wachovia; by + Friday, Citigroup had as + well. Wachovia entered + +On line 6221: + both companies on + Friday and the two suitors + immediately + +On line 6223: + was whether the FDIC would + provide assistance in an + acquisition. Though + +On line 6223: + application of + the systemic risk exception + under FDICIA. Over + +On line 6223: + the ystemic risks if + the FDIC did not intervene + and if creditors + +On line 6225: + losses. The signs for + the bank were discouraging. + Given the recent + +On line 6225: + OCC predicted in + an internal analysis + that Wachovia could face + +On line 6225: + of additional + cash outflows the following + week—including, most + +On line 6227: + prominently, billion + of further deposit outflows, + as well as billion + +On line 6227: + customers. Yet Wachovia + had only billion in cash + and cash equivalents. + +On line 6227: + OCC estimated + that the company could use + its collateral + +On line 6227: + to raise another + billion through the Fed’s discount + window, the repo + +On line 6227: + and the Federal + Home Loan Banks, even those efforts + would bring the amount on + +On line 6231: + potential billion + outflow.84 During the weekend, + the Fed argued that + +On line 6233: + FDIC assistance if + necessary. Its analysis + focused on the firm’s + +On line 6235: + participants, and + stated that asset sales by + mutual funds could + + cause short-term funding + markets to "virtually + shut down."85 According + +On line 6237: + by the Richmond Fed, + mutual funds held billion + of Wachovia debt, which + +On line 6237: + systemic consequences"; + and investment banks, "already + weak and exposed to + +On line 6237: + of confidence," owned + billion of Wachovia’s billion + debt and deposits. These + +On line 6237: + PDCF, to support + operations in the event + of a Wachovia[-led] + +On line 6239: + In addition, Fed + staff argued that a Wachovia + failure would cause banks + +On line 6239: + Secretary Paulson + had recused himself from the + decision because + +On line 6239: + his ties to Steel, but + other members of Treasury + had "vigorously + +On line 6239: + saving Wachovia.88 White + House Chief of Staff Josh Bolten called + Bair on Sunday to + +On line 6241: + for the systemic risk + exception.89 At about P.M. on + Sunday, September + +On line 6241: + Wells’s Kovacevich told + Steel that he wanted more time + to review Wachovia’s + +On line 6241: + commercial real + estate holdings, and could not + make a bid before + +On line 6241: + if there were to be + no FDIC assistance. So Wells + and Citigroup came + + to the table with + proposals predicated + on such assistance. + +On line 6241: + to cover the first + billion of losses on a + pool of billion worth + +On line 6241: + of assets as well + as of subsequent losses, + if they grew large enough, + +On line 6241: + the FDIC’s losses at + billion. Citigroup wanted + the FDIC to cover + +On line 6241: + on a different, + and larger, pool of billion + worth of assets, but + +On line 6241: + of losses and an + additional billion a + year for three years, while + +On line 6241: + the FDIC billion in + Wachovia preferred stock and stock + warrants (rights to buy + +On line 6241: + a predetermined + price) as compensation; the + FDIC would cover any + +On line 6245: + be between billion + and billion. On the basis + of that analysis + +On line 6245: + of the offers, they + estimated that the Wells + proposal would cost + +On line 6245: + billion, whereas the + Citigroup proposal would + cost the FDIC nothing. + +On line 6245: + the FDIC would provide + assistance directly to + the bank so that it + +On line 6247: + survive as a stand-alone + entity.91 But the FDIC still + hadn’t decided + +On line 6247: + support the systemic + risk exception. Its board—which + included the heads + +On line 6247: + the OCC and OTS—met at + A.M. on Monday, September + to decide Wachovia’s + +On line 6247: + the markets opened.92 FDIC + Associate Director Miguel + Browne hewed closely to + +On line 6247: + analysis prepared + by the Richmond Fed: Wachovia’s + failure carried the + +On line 6247: + knocking down too many + dominoes in lines stretching in + too many directions + +On line 6247: + people, including + American taxpayers. He + also raised concerns + +On line 6247: + potential global + implications and reduced + confidence in the + +On line 6247: + remained reluctant + to intervene in private + financial markets + +On line 6247: + but ultimately + agreed. "Well, I think this is, you + know one option of + +On line 6247: + of not-very-good options," + she said at the meeting. "I + have acquiesced in + +On line 6247: + decision based on + the input of my colleagues, + and the fact the statute + +On line 6247: + makers a say in + this process. I’m not completely + comfortable with it + +On line 6247: + need to move forward + with something, clearly, because + this institution + +On line 6249: + in a tenuous + situation."93 To win the + approval of Bair and + +On line 6249: + OTS director who + served on the FDIC board), Treasury + ultimately agreed + +On line 6249: + step of funding all + government losses from the + proposed transaction.94 + + Without this express + commitment from Treasury, the + FDIC would have been the + +On line 6249: + to bear losses out + of its Deposit Insurance + Fund, which then held about + +On line 6249: + billion; normally, + help would have come from Treasury + only after that + + fund was depleted.95 + According to the minutes + of the meeting, Bair + +On line 6249: + that Treasury agree to + fund losses, given that "it + has vigorously + +On line 6253: + the winning bidder: + Citigroup. "It was the fog + of war," Bair told the + + FCIC. "The system was + highly unstable. Who was + going to take the + +On line 6255: + that Wachovia would have + a depository run + on Monday1"97 Wachovia’s + + board quickly voted + to accept Citigroup’s bid. + Wachovia, Citigroup, + +On line 6255: + executed an + exclusivity agreement + that prohibited + +On line 6257: + other potential + acquirers.98 In the midst of + the market turmoil, + +On line 6257: + Committee met at + the end of September at + about the time of the + +On line 6257: + invocation of + the systemic risk exception. + "The planned merger of + +On line 6257: + large institutions + led to some concern among FOMC + participants that + + bigger and bigger + firms were being created + that would be ‘too big + + to fail,’" according + a letter from Chairman Bernanke + to the FCIC. He added + +On line 6257: + this concern, and voiced + my hope that TARP would create + options other than + +On line 6257: + managing problems + at large institutions and + that subsequently, + +On line 6257: + regulatory + reform, we might develop + good resolution + +On line 6259: + fail."99 itigroup and + Wachovia immediately + began working on + +On line 6259: + the deal—even as Wachovia’s + stock fell to on September + the day that TARP was + +On line 6259: + by lawmakers. They + faced tremendous pressure from the + regulators and + +On line 6259: + markets to conclude + the transaction before the + following Monday, + +On line 6259: + not acquiring the + holding company, just the + bank, and Citigroup + + wanted to change some + of the original terms. Then + came a surprise: on + +On line 6259: + morning, October + Wells Fargo returned to the + table and made a + +On line 6259: + bid to buy all of + Wachovia for a share—seven + times Citigroup’s bid, + +On line 6261: + over the timing of + Wells Fargo’s new proposal, + particularly + + given IRS Notice + 2008-83. This administrative + ruling, issued just + +On line 6261: + write off the losses + of an acquired company + immediately, + +On line 6261: + spreading them over time. + Wells told the SEC that the IRS + ruling permitted + +On line 6261: + to reduce taxable + income by billion in the + first year following + +On line 6261: + acquisition rather + than by billion per year for + three years. However, + +On line 6261: + said this "was itself + not a major factor" in + its decision to + +On line 6261: + that Wells’s revised bid + reflected additional + due diligence, the point + +On line 6261: + made to Wachovia CEO + Steel at the time.101 But the FDIC’s + Bair said Kovacevich + + told her at the time + that the tax change had been a + factor leading to + +On line 6263: + Wells’s revised bid.102 On + Thursday, October three days + after accepting + +On line 6263: + offer, Wachovia’s board + convened an emergency P.M. + session to discuss + +On line 6265: + bid. The Wachovia board + voted unanimously in + favor. At about A.M. + +On line 6265: + General Counsel + Jane Sherburne, and FDIC Chairman + Bair called Citigroup + +On line 6265: + that Wachovia had signed + a definitive merger + agreement with Wells. Steel + +On line 6265: + notes. Pandit was stunned. + "He was disappointed. That’s + an understatement," + +On line 6265: + told the FCIC.103 Pandit + thought Citigroup and Wachovia + already had a deal. + +On line 6267: + Steel and Sherburne dropped + off the phone call, Pandit asked + Bair if Citigroup + +On line 6267: + keep its original + loss-sharing agreement to purchase + Wachovia if it matched + +On line 6267: + Wells’s offer of a + share. Bair said no, reasoning + that the FDIC was not + + going to stand in + the way of a private deal. + Nor was it the role + +On line 6267: + the agency to help + Citigroup in a bidding + war. She also told + + the FCIC that she had + concerns about Citigroup’s own + viability + +On line 6267: + acquired Wachovia for + that price. "In reality, + we didn’t know how + +On line 6267: + Citigroup was at + that point," Chairman Bair said. "Here + we were selling a + +On line 6269: + another troubled + institution. I think if + that deal had gone through, + +On line 6271: + to have been bailed out + again."104 Later Friday morning, + Wachovia announced the + +On line 6271: + the blessing of the + FDIC. "This agreement won’t require + even a penny from + +On line 6271: + FDIC," Kovacevich said + in the press release. Steel added + that the "deal enables + +On line 6271: + keep Wachovia intact + and preserve the value of + an integrated + +On line 6273: + support."105 On Monday, + October Citigroup filed + suit to enjoin Wells + +On line 6273: + acquisition of + Wachovia, but without success. + The Wells Fargo deal + +On line 6275: + would close at midnight + on December for per share. + IRS Notice 2008-83 was + +On line 6275: + later conducted + an investigation of + the circumstances of + +On line 6275: + reported that the + purpose of the notice was + to encourage strong + +On line 6275: + acquire weak banks by + removing limitations + on the use of tax + +On line 6275: + that the notice may + have been an improper change + of the tax code by + +On line 6275: + to change the tax code. + A congressional report + estimated that + +On line 6275: + the notice saved about + billion of tax revenues over + years.106 However, the + + Wells controller, Richard Levy, + told the FCIC that to date Wells + has not recognized + + any benefits from + the notice, because it has + not yet had taxable + + income to offset.107 + TARP: "COMPREHENSIVE APPROACH" + Ten days after the + +On line 6279: + provided nearly + billion to investment banks + and commercial banks + + through the PDCF and + TSLF lending facilities, + in an attempt to + +On line 6279: + the Fed and Treasury + had announced unprecedented + programs to support + + money market funds. + By the end of September, + the Fed’s balance sheet + +On line 6281: + had grown to trillion. + But the Fed was running out + of options. In the + +On line 6283: + could not replenish + financial institutions’ + capital, which was + +On line 6283: + on bad assets made + it difficult for investors + to determine which + + institutions could + survive, even with all the Fed’s + new backstops. In short, + +On line 6285: + financial system + was slipping away from its lender + of last resort. On + +On line 6285: + and Treasury proposed + what Secretary Paulson called + a "comprehensive + +On line 6285: + the mounting crisis + in the financial system + by purchasing the + +On line 6285: + weighing down many banks’ + balance sheets.108 In the early + hours of Saturday, + +On line 6285: + Morgan Stanley were + preparing to become bank + holding companies, + + Treasury sent Congress + a draft proposal of the + legislation for + +On line 6285: + It would give Treasury + the authority to spend + as much as billion + +On line 6287: + was not promising. For + example, Senate Banking + Committee Chairman + +On line 6287: + Dodd said on Tuesday, + "This proposal is stunning + and unprecedented + +On line 6287: + its scope—and lack + of detail, I might add." "There + are very few details + +On line 6287: + Member Richard Shelby + said. "Rather than establishing + a comprehensive, + +On line 6287: + crisis, I believe + this legislation merely + codifies Treasury’s + +On line 6289: + hoc approach."109 Paulson + told a Senate committee + on Tuesday, "Of course, + + we all believe that + the very best thing we can do + is make sure that the + + capital markets + are open and that enders are + continuing to + + lend. And so that is + what this overall program does, + it deals with that."110 Bernanke + +On line 6289: + the Joint Economic + Committee Wednesday: "I think + that this is the most + +On line 6289: + financial crisis + in the post-War period for + the United States, and + +On line 6289: + we have seen in many + previous examples of + different countries + + and different times, + choking up of credit is + like taking the lifeblood + +On line 6289: + from the economy."111 + He told the House Financial + Services Committee + +On line 6291: + the same day, "People + are saying, ‘Wall Street, what does + it have to do with + +On line 6291: + way they are thinking + about it. Unfortunately, + it has a lot to + + do with them. It will + affect their company, it + will affect their job, + + it will affect their + economy. That affects their + own lives, affects their + +On line 6291: + borrow and to save + and to save for retirement + and so on."112 By the + +On line 6291: + Sunday, September + as bankers and regulators + hammered out Wachovia’s + +On line 6293: + negotiators had + agreed on the outlines of a + deal. Senator Mel + +On line 6293: + secretary and then + a member of the Banking + Committee, told the + +On line 6295: + about a meeting with + Paulson and Bernanke that Sunday: + I just remember + +On line 6295: + Armageddon. The thing + that was the most frightening + about it is that even + + with them asking for + extraordinary powers, + that they were not at + +On line 6295: + prevent the kind of + financial disaster that + I think really + +On line 6295: + the Great Depression. + And obviously to a + person like myself + + I think you think, "Wow, + if these guys that are in the + middle of it and + +On line 6295: + the titles that they + hold believe this to be as + dark as they’re painting + +On line 6297: + it must be pretty + darned dark."113 Nevertheless, on + Monday, September + +On line 6297: + acquisition of + Wachovia, the House rejected + TARP by a vote of8 + +On line 6297: + The markets’ response + was immediate: the Dow + Jones Industrial + +On line 6299: + plunged points, or almost + To broaden the bill’s appeal, + TARP’s supporters made + + changes, including a + temporary increase in the + cap on FDIC’s deposit + +On line 6301: + from to per customer + account.114 On Wednesday evening, the + Senate voted in + +On line 6301: + by a margin of + to On Friday, October + the House agreed, to and + +On line 6301: + President George W. + Bush signed the law, which had grown + to pages. TARP’s stated + +On line 6303: + for the Federal + Government to purchase and + insure certain types + +On line 6303: + the purposes of + providing stability + to and preventing + +On line 6303: + financial system + and protecting taxpayers."115 + To provide oversight + +On line 6303: + billion program, the + legislation established + the Congressional + +On line 6305: + Program (SIGTARP). But + the markets continued to + deteriorate. + +On line 6305: + Monday, October + the Dow closed below for the + first time in four years; + +On line 6305: + by the end of the + week it was down almost points, + or below its peak + +On line 6305: + in October The + spread between the interest + rate at which banks lend + +On line 6305: + Treasuries—a closely watched + indicator of market + confidence—hit an + +On line 6305: + the dollar value + of outstanding commercial + paper issued by + +On line 6305: + and nonfinancial + companies had fallen by + billion in the month + + between Lehman’s failure + and TARP’s enactment. Even firms + that had survived the + +On line 6305: + disruptions in the + commercial paper markets + were now feeling the + +On line 6305: + October the Fed + created yet another + emergency program, + +On line 6305: + Commercial Paper + Funding Facility, to + purchase secured and + +On line 6305: + program, which allowed + firms to roll over their debt, would + be widely used by + +On line 6305: + and nonfinancial + firms. The three financial firms + that made the greatest + + use of the program + were foreign institutions: + UBS (which borrowed a + +On line 6305: + billion), and Barclays + billion). Other financial + firms included GE + +On line 6305: + Capital billion), + Prudential Funding billion), + and Toyota Motor + +On line 6305: + Verizon billion), + Harley-Davidson billion), McDonald’s, million) and + Georgia Transmission + +On line 6307: + million).117 Treasury was + already rethinking TARP. The + best way to structure + +On line 6307: + would the government + determine fair prices in an + illiquid market1 Would + +On line 6307: + holding these assets + agree to sell them at a fair + price if doing so + + would require them to + realize losses1 How could + the government avoid + +On line 6307: + would take time to solve, + and Treasury wanted to bring + stability to + +On line 6309: + as possible. The + key concern for markets and + regulators was + + that they weren’t sure + they understood the extent + of toxic assets + +On line 6309: + was allowed under + the TARP legislation, which + stated that Treasury, + +On line 6309: + stock, if they deemed such + purchases necessary to + promote financial + +On line 6309: + However, the new + proposal would pose a host + of new problems. By + +On line 6309: + become a major + shareholder in the private + financial sector. + +On line 6311: + Sunday, October + after agreeing to the terms + of the capital + +On line 6311: + and Geithner + selected a small group of + major financial + +On line 6311: + immediately + offer capital: the four + largest commercial bank + +On line 6311: + companies (Bank of + America, Citigroup, JP + Morgan, and Wells), the + + three remaining large + investment banks (Goldman and + Morgan Stanley, which + + were now bank holding + companies, and Merrill, which + Bank of America + + had agreed to acquire), + and two important clearing + and settlement banks + +On line 6311: + State Street). Together, + these nine institutions held + more than trillion in + +On line 6313: + all assets in U.S. + banks. Paulson summoned the firms’ + chief executives + +On line 6313: + to Washington on + Columbus Day, October Along + with Bernanke, Bair, Dugan, and + +On line 6313: + Paulson explained that + Treasury had set aside billion + from TARP to purchase + +On line 6313: + nstitutions under + the newly formed Capital + Purchase Program (CPP). + +On line 6313: + Treasury would purchase + senior preferred stock that would + pay a dividend + +On line 6313: + for the first five years; + the rate would rise to thereafter + to encourage the + +On line 6313: + pay the government + back. Firms would also have to + issue stock warrants + + to Treasury and agree + to abide by certain standards + for executive + + compensation and + corporate governance. The + regulators had + + already decided + to allocate half of these + funds to the nine firms + +On line 6315: + assembled that day: + billion each to Citigroup, + JP Morgan, and Wells; + +On line 6315: + to Merrill, Morgan + Stanley, and Goldman; billion + to BNY Mellon; and + +On line 6317: + Street. "We didn’t want + it to look or be like a + nationalization" + +On line 6317: + of nonvoting stock, + and the terms were intended + to be attractive.119 + + Paulson emphasized + the importance of the banks’ + participation + +On line 6317: + provide confidence + to the system. He told the + CEOs: "If you don’t take + +On line 6317: + tells you that you are + undercapitalized you + may not like the terms + + if you have to come + back to me."120 All nine firms took + the deal. "They made a + + coherent, I thought, + a cogent argument about + responding to this + +On line 6317: + dramatically + worse. It wasn’t leading to + a run on some of + +On line 6317: + but it was getting + worse in the marketplace," JP + Morgan’s Dimon told + + the FCIC.121 To further + reassure markets that it + would not allow the + +On line 6319: + institutions to + fail, the government also + announced two new FDIC + +On line 6321: + the next day. The first + temporarily guaranteed + certain senior debt + +On line 6321: + FDIC-insured institutions + and some holding companies. + This program was used + +On line 6321: + had billion in debt + backed by the FDIC outstanding + in January and + +On line 6323: + end of according + to public filings; Morgan + Stanley had billion + +On line 6323: + at the end of and + billion at the end of GE + Capital, one of + +On line 6323: + heaviest users of + the program, had billion of + FDIC-backed debt outstanding + +On line 6323: + end of and billion + at the end of Citigroup + had billion of FDIC + +On line 6325: + debt outstanding at + the end of and billion at + the end of JPMorgan Chase + +On line 6327: + billion outstanding + at the end of and billion + at the end of The + +On line 6327: + deposit insurance + to certain non-interest-bearing + deposits, like checking + +On line 6327: + Because of the risk + to taxpayers, the measures + required the Fed, the + +On line 6327: + Treasury to declare + a systemic risk exception + under FDICIA, as + +On line 6329: + to facilitate + Citigroup’s bid for Wachovia. + Later in the week, + +On line 6329: + to qualifying + "healthy" and "viable" banks, thrifts, and + holding companies, + +On line 6329: + firms had received.123 The + appropriate federal + regulator—the Fed, + + FDIC, OCC, or OTS— would + review applications and + pass them to Treasury + +On line 6331: + final approval. The + program was intended not + only to restore + + confidence in the + banking system but also + to provide banks with + +On line 6335: + mitigation."124 "The + whole reason for designing + the program was so + +On line 6335: + banks would take it, would + have the capital, and that + would lead to lending. + +On line 6335: + whole purpose," Paulson + told the FCIC. However, there + were no specific + +On line 6335: + banks to make loans to + businesses and households. "Right + after we announced + +On line 6335: + we had critics start + saying, ‘You’ve got to force + them to lend,’" Paulson + + said. Although he said + he couldn’t see how to do + this, he did concede + +On line 6335: + the program could have + been more effective in this + regard.125 The enabling + + legislation did + have provisions affecting + the compensation + +On line 6335: + shareholders. Over time, + these provisions would become + more stringent, and the + + following year, in + compliance with another + measure in the act + +On line 6335: + create the Office + of the Special Master for + TARP Executive + +On line 6337: + Program by the end + of ultimately, it would + invest billion in + +On line 6341: + institutions.126 In + the ensuing months, Treasury + would provide much of + +On line 6341: + loss guarantees), and + Bank of America billion). + On December it + +On line 6341: + make investments in + and loans to automobile + manufacturers + + and auto finance + companies, specifically + General Motors, + +On line 6343: + Chrysler Financial.127 On + January President Bush + notified Congress + +On line 6343: + that he intended + not to access the second + half of the billion + + in TARP funds, so that + he might "‘ensure that such funds + are available early’ + +On line 6345: + administration."128 + As of September 2010—two years + after TARP’s creation—Treasury had + +On line 6347: + billion in losses + had been incurred.129 About billion + of the outstanding + +On line 6347: + in the Capital + Purchase Program. Treasury still + held large stakes in GM + +On line 6347: + Ally Financial + (formerly known as GMAC; and + Chrysler Moreover, billion + +On line 6347: + remained invested + in AIG in addition to + billion of loans from + +On line 6347: + the New York Fed and + a billion non-TARP equity + investment by the + +On line 6347: + two of AIG’s foreign + insurance companies.130 By + December all nine + +On line 6347: + invited to the + initial Columbus Day meeting + had fully repaid + +On line 6349: + was only one of + more than two dozen emergency + programs totaling + +On line 6349: + in place during the + crisis to stabilize the + financial system + +On line 6349: + rescue specific + firms. Indeed, TARP was not even + the largest.132 Many of these + +On line 6349: + are discussed in this + and previous chapters. For + just some examples: + +On line 6351: + and PDCF programs + peaked at billion and billion, + respectively. Its + +On line 6351: + market funding peaked + at billion in January + and its Commercial + +On line 6351: + at billion, also + in January When it was + introduced, the FDIC’s + +On line 6351: + guarantee senior + debt for all FDIC-insured nstitutions + stood ready to backstop + +On line 6353: + trillion in agency + mortgage–backed securities.134 + AIG: "WE NEEDED TO + +On line 6357: + PATIENT" AIG would be + the first TARP recipient + that was not part of + +On line 6357: + Capital Purchase + Program. It still had two big + holes to fill, despite + +On line 6357: + the New York Fed. Its + securities-lending business + was underwater + +On line 6357: + despite payments in + September and October + of billion that the + +On line 6357: + loan had enabled; and + it still needed billion to + pay credit default + +On line 6359: + On November the + government announced that it + was restructuring + +On line 6359: + the New York Fed loan + and, in the process, Treasury would + purchase billion in + + AIG preferred stock. As + was done in the Capital + Purchase Program, in + +On line 6359: + for the equity + provided, Treasury received + stock warrants from AIG + +On line 6361: + day, the New York Fed + created two off-balance-sheet + entities to hold + +On line 6361: + associated + with securities lending + (Maiden Lane II) and + + CDS (Maiden Lane III). + Over the next month, the New York + Fed loaned Maiden Lane + +On line 6361: + that it could purchase + mortgage-backed securities from + AIG’s life insurance + +On line 6361: + subsidiaries. This enabled + those subsidiaries to pay back their + securities-lending + +On line 6361: + bringing to billion + the total payments AIG would + make with government + +On line 6363: + payments are listed + in figure Maiden Lane III + was created with + +On line 6363: + from the New York Fed + and an AIG investment of + billion, supported + +On line 6363: + went to buy CDOs from + of AIG Financial Products’ + CDS counterparties. + +On line 6363: + The CDOs had a face + value of billion, which AIG + Financial Products + +On line 6363: + guaranteed through its + CDS.136 Because AIG had already + posted billion in + +On line 6363: + collateral to + its counterparties, Maiden + Lane III paid billion + +On line 6363: + those counterparties, + providing them with the full + face amount of the CDOs + + in return for the + cancellation of their rights + under the CDS.137 A + + condition of this + transaction was that AIG waive + its legal claims against + +On line 6365: + those counterparties. + These payments are listed in + figure Goldman Sachs + +On line 6365: + received billion in + payments from Maiden Lane III + related to the + +On line 6365: + had purchased from AIG. + During the FCIC’s January + hearing, Goldman CEO + +On line 6365: + Blankfein testified + that Goldman Sachs would not have + lost any money if + +On line 6365: + had purchased credit + protection to cover the + difference between + +On line 6365: + by AIG.138 Documents + submitted to the FCIC by + Goldman after the + +On line 6365: + the firm owned billion + of credit protection in + the form of CDS on + +On line 6365: + million), which itself + had to be propped up by the + government, and Lehman + +On line 6365: + was bankrupt by the + time AIG was rescued.139 In an + FCIC hearing, Goldman + +On line 6367: + the billion of CDS + protection that it purchased + from AIG was part of + +On line 6367: + meaning that Goldman + sold billion in offsetting + protection to its + +On line 6369: + clients; it provided + information to the FCIC + indicating that + +On line 6369: + received from Maiden + Lane III was entirely paid + to its clients.141 Without + +On line 6371: + find the billion some + other way. oldman also + produced documents + +On line 6371: + that showed it received + billion from AIG related + to credit default + +On line 6371: + on CDOs that were not + part of Maiden Lane III. Of + that billion, billion + + was received after, + and thus made possible by, + the federal bailout + +On line 6371: + And most—$2.9 billion—of the + total was for proprietary + trades (that is, trades made + +On line 6371: + than on behalf of + a client) largely relating + to Goldman’s Abacus + +On line 6371: + CDOs. Thus, unlike the + billion received from AIG on + trades in which Goldman + +On line 6371: + owed the money to + its own counterparties, this + billion was retained + +On line 6373: + incur any losses + on their investments—because + AIG, once it was backed + +On line 6375: + government, paid claims + to CDS counterparties at + of face value—has + +On line 6375: + November SIGTARP + faulted the New York Fed for + failing to obtain + +On line 6375: + said that seven of + the top eight counterparties + had insisted on + +On line 6375: + that the New York Fed + had agreed because efforts to + obtain concessions + +On line 6377: + all counterparties + had little hope of success.143 + SIGTARP was highly + +On line 6377: + of the New York Fed’s + negotiations. From the + outset, it found, the + +On line 6377: + York Fed was poorly + prepared to assist AIG. To + prevent AIG’s failure, + +On line 6377: + York Fed had hastily + agreed to the billion bailout on + substantially the + +On line 6377: + negotiating + strategy for the outcome, + which it described as + +On line 6377: + transfer of "billions + of dollars of cash from the + Government to AIG’s + +On line 6377: + policy makers + contend that assistance to + AIG’s counterparties + +On line 6379: + not a relevant + consideration."145 In June + TARP’s Congressional + +On line 6379: + Panel criticized + the AIG bailout for having a + "poisonous" effect on + +On line 6379: + government’s failure + to require "shared sacrifice" + among AIG’s creditors + +On line 6379: + the government and + the markets, signaling an + implicit "too big + + to fail" guarantee + for certain firms. The report + said the New York Fed + +On line 6381: + would have led to an + instant ratings downgrade and + precipitated + + a run on AIG.147 New + York Fed officials told the + FCIC that they had very + + little bargaining + power with counterparties + who were protected + +On line 6381: + contracts. And, after + providing a billion loan, + the government could + +On line 6381: + "Counterparties said + ‘we got the collateral, + the contractual + +On line 6381: + been rescued by the + Fed, Uncle Sam’s behind you, + why would we let you + +On line 6381: + a contract you agreed + to1" New York Fed General + Counsel Tom Baxter + +On line 6381: + the FCIC. "And then the + question was, should we use our + regulatory + +On line 6381: + have been completely + inappropriate, an abuse + of power, and not + +On line 6383: + we were willing to + even contemplate."148 Sarah Dahlgren, who + was in charge of the + +On line 6383: + Lane III transaction + at the New York Fed, said the + government could not + +On line 6383: + was a financial + meltdown," she told the FCIC. "The + credibility + + of the United States + government was on the line."149 + SIGTARP acknowledged + + that the New York Fed + "felt ethically restrained + from threatening an + +On line 6383: + bankruptcy because + it had no actual plans + to carry out such + +On line 6383: + the counterparties’ + contractual rights with AIG," + which were "certainly + +On line 6385: + Geithner has + said he was confident that + full reimbursement + + was "absolutely" + the right decision. "We did + it in a way that + +On line 6385: + was not just least cost + to the taxpayer, best deal + for the taxpayer, + +On line 6387: + helped avoid much, much more + damage than would have happened + without that."151 New York + +On line 6387: + officials told the + FCIC that threats to AIG’s survival + continued after + +On line 6387: + the billion loan on + September "If you don’t fix + the [securities] + +On line 6387: + lending or the CDOs, + [AIG would] blow through the billion. + So we needed to + + stop the sucking chest + wound in this patient," Dahlgren said. + "It wasn’t just AIG—it + +On line 6389: + financial markets. + It kept getting worse and worse + and worse."153 Baxter told + + the FCIC that Maiden + Lane III stopped the "hemorrhage" + from AIG Financial + +On line 6393: + to counterparties + by drawing on the billion + government loan. In + + addition, because + Maiden Lane III received the + CDOs underlying + +On line 6393: + CDS, "as value comes + back in those CDOs, that’s value + that is going to + +On line 6393: + be first used to pay + off the Fed loan; the likely + outcome of Maiden + + Lane III is that we’re + going to be paid in full," + he said.154 In total, + +On line 6395: + the Fed and Treasury + had made available over billion + in assistance to + +On line 6395: + reduced to billion, + primarily through the sale + of AIG business units.156 + + CITIGROUP: "LET THE + WORLD KNOW THAT WE WILL NOT PULL + A LEHMAN" The failed bid + +On line 6401: + reflected badly + on Citigroup. Its stock fell + on October the + +On line 6403: + Wachovia announced that + it preferred Wells’s offer, and + another within + +On line 6403: + "Having agreed to do + the deal was a recognition + on our part that we + + needed it," Edward + "Ned" Kelly III, vice chairman + of Citigroup, told + +On line 6405: + "And if we needed + it and didn’t get it, what + did that imply for + +On line 6407: + firm going forward1"157 + Roger Cole, then head of banking + supervision at + +On line 6407: + acquisition as + a turning point, the moment + "when Citi really + +On line 6407: + [by the market] as + an indication of bad + management at Citi + + that they lost the deal, + and had it taken away from + them by a smarter, more + +On line 6407: + Wells Fargo team," Cole + told the FCIC. "And then here’s an + organization + +On line 6407: + doesn’t have the core + funding [insured deposits] that + we were assuming + +On line 6409: + that they would get by + that deal."158 Citigroup’s stock rose + the day after the + +On line 6409: + Day announcement that + it would receive government + capital, but the + +On line 6409: + did not last. Two days + later, Citigroup announced + a billion net loss + +On line 6409: + in subprime and Alt-A + mortgages, commercial real + estate investments, + +On line 6409: + and structured nvestment + vehicle (SIV) write-downs. The + bank’s stock fell in the + +On line 6409: + following week and, + by November hit single + digits for the first + +On line 6411: + time since The market’s + unease was heightened by press + speculation that + +On line 6411: + company’s board had + lost confidence in senior + management, Kelly + +On line 6411: + said.159 On November + the company announced that + the value of the + +On line 6411: + SIVs had fallen by + billion in the month since it + had released third-quarter + +On line 6411: + therefore going to + bring the remaining billion + in off-balance-sheet SIV + +On line 6411: + its books. Investors clipped + almost another off the + value of the stock, + +On line 6411: + its largest single-day + drop since the October stock + market crash. Two days + +On line 6413: + later, the stock closed + at Credit defaults swaps on + Citigroup reached a + +On line 6413: + to make perceptions + become a reality + for the bank: "[Investors] + +On line 6415: + spreads and say, ‘Is this + some place I really want + to put my money1’ + + And that’s not just in + terms of wholesale funding, that’s + people who also + +On line 6417: + watched the stock price, the + daily liquidity, and + the CDS spreads with alarm. + +On line 6417: + Kingdom’s Financial + Services Authority (FSA) + imposed a billion + +On line 6417: + London-based broker-dealer. + FDIC examiners knew that + this action would be + + "very damaging" to + the bank’s liquidity and + worried that the FSA + + or other foreign + regulators might impose + additional cash + + requirements in the + following week.162 By the close + of business Friday, + +On line 6417: + widespread concern that + if the U.S. government failed + to act, Citigroup + +On line 6417: + "crisis proportions." + Among regulators at the + FDIC and the Fed, there + + was no debate.163 Fed + Chairman Bernanke told the FCIC, "We + were looking at this + +On line 6417: + firm [in the fall of + and saying, ‘Citigroup is + not a very strong firm, + +On line 6417: + it’s only one firm + and the others are okay,’ but + not recognizing + + that that’s sort of like + saying, ‘Well, four out of your + five heart ventricles + +On line 6417: + the fifth one is lousy.’ + They’re all interconnected, + they all connect to + +On line 6419: + other; and, therefore, + the failure of one brings the + others down."164 The FDIC’s + +On line 6419: + colleague Michael Krimminger + on November: "Given that + the immediate + +On line 6419: + to address that is + by letting counterparties + know that they will be + +On line 6419: + both at the bank and + holding company level. + [T]he main point is to + +On line 6419: + the world know that we + will not pull a Lehman." Krimminger, + special adviser + +On line 6419: + FDIC chairman, agreed: "At + this stage, it is probably + appropriate to + + be clear and direct + that the US government will + not allow Citi to + +On line 6421: + own calculations + suggested that a drop in + deposits of just would + +On line 6421: + expect a outflow + of deposits per day. Unless + Citigroup received + +On line 6421: + injection of funds, + its coffers would be empty + before the weekend. + +On line 6421: + remained convinced that + the company was sound and + that the market was + +On line 6421: + Pandit argued, "This + was not a fundamental + situation, it + +On line 6421: + about the capital + we had, not about the funding + we had at that time, + +On line 6421: + with the stock price where + it was perception becomes + reality."166 All + +On line 6421: + were questioning what + everything was worth at the + time. [T]here was a flight + +On line 6421: + just to quality + and safety, but almost a + flight to certainty," + +On line 6423: + Pandit’s adviser, + told the FCIC.167 The FDIC dismissed + Citigroup’s request + +On line 6423: + liquidity" could + be quickly eliminated + as depositors + +On line 6423: + Officials also + believed the company did + not have sufficient + +On line 6423: + addition to the + billion from TARP, Citigroup + was already getting + +On line 6423: + by on substantial + government support. As of + November it had + +On line 6423: + collateralized + liquidity programs and + million under the + +On line 6423: + Facility. And + it had borrowed billion from + the Federal Home + +On line 6423: + would have a total + of billion in senior debt + guaranteed by the + +On line 6425: + guarantee program. + On Sunday, November FDIC + staff recommended + +On line 6425: + its board that a third + systemic risk exception be + made under FDICIA.168 + +On line 6425: + decided that a + proposed resolution had + to be announced over + +On line 6425: + weekend to buttress + investor confidence before + markets opened Monday. + +On line 6427: + staff.169 Regulators + were also concerned that the + economic effects + +On line 6427: + Citigroup failure + would undermine the impact + of the recently + +On line 6431: + Citigroup with an + additional billion in + TARP funds in exchange + +On line 6431: + with an dividend.171 + This injection of cash brought + the company’s TARP + +On line 6431: + of preferred stock and + the government’s guarantee + of certain assets.172 + +On line 6431: + Citigroup and the + government would identify + a billion pool of + + assets around which a + protective "ring fence" would be + placed. In effect, this + +On line 6431: + Citigroup and the + federal government. "There + was not a huge amount + +On line 6433: + in coming to that + billion] number," Citigroup’s + Kelly told the FCIC. + +On line 6433: + deal was structured to + "give the market comfort that + the catastrophic + + risk has been taken + off the table."173 When its terms + were finalized in + +On line 6433: + the guaranteed pool, + which contained mainly loans and + residential and + +On line 6435: + Citigroup assumed + responsibility for + the first billion in + +On line 6435: + materialize, + Treasury would absorb the first + billion using TARP + +On line 6435: + FDIC would absorb the + next billion from the Deposit + Insurance Fund (for + + which it had needed + to approve the systemic risk + exception), and the + +On line 6435: + balance. In return, + Citigroup agreed to grant the + government billion + +On line 6435: + as well as warrants + that gave the government the + option to purchase + + additional shares.174 + After analyzing the + uality of the + + protected assets, + FDIC staff projected that the + Deposit Insurance + + Fund would not incur + any losses.175 Once again, the FDIC + Board met late on a + +On line 6437: + Brief dissent on the + P.M. conference call came from + OTS Director John + + Reich, who questioned + why similar relief had + not been extended + + to OTS-supervised thrifts that failed + earlier. "There isn’t any + doubt in my mind that + + this is a systemic + situation," he said. But + he added, In hindsight, + + I think there have been + some systemic situations + prior to this one + +On line 6439: + were not classified + as such. The failure of IndyMac + pointed the focus + +On line 6439: + which was WaMu, and its + failure pointed to Wachovia, + and now we’re looking + +On line 6439: + Citi and I wonder + who’s next. I hope that all of + the regulators, + +On line 6439: + including Treasury + and the Fed, are looking at + these situations + +On line 6439: + fear there has been some + selective creativity + exercised in the + +On line 6439: + what is systemic and + what’s not and what’s possible + for the government + +On line 6441: + and what’s not.176 The FDIC + Board approved the proposal + unanimously. The + +On line 6441: + bell, and the markets + responded positively: + Citigroup’s stock price + +On line 6441: + almost closing at + The ring fence would stay in place + until December + +On line 6443: + repaying billion + in TARP funds. In December + Treasury announced the + +On line 6445: + of its final shares + of Citigroup’s common stock.177 + BANK OF AMERICA: + +On line 6447: + SHOTGUN WEDDING" With + Citigroup stabilized, the + markets would quickly + +On line 6447: + to the next domino: + Bank of America, which had + swallowed Countrywide + +On line 6447: + in the year and, on + September had announced it + was going to take + +On line 6447: + Merrill Lynch as well. + The merger would create the + world’s largest brokerage + +On line 6447: + reinforce Bank of + America’s position + as the country’s largest + + depository + institution. Given the + share prices of the two + +On line 6449: + time, the transaction + was valued at billion. But + the deal was not set + +On line 6449: + In the interim, + the companies continued + to operate as + +On line 6449: + CEO John Thain and Bank + of America CEO Ken Lewis + had represented + +On line 6449: + separately at + the Columbus Day meeting at + Treasury. Treasury would + +On line 6449: + the full billion in + Bank of America only + after the Merrill + +On line 6451: + October, Merrill + Lynch reported a net loss + for the third quarter + +On line 6453: + In its October + earnings press release, Merrill + Lynch described write-downs + +On line 6455: + told investors on the + conference call that Merrill’s + strategy was to + +On line 6455: + less than billion in + asset-backed-security CDOs and + no Alt-A positions + +On line 6455: + at all. "We’re down to + million in subprime on our + trading books," Thain said. + +On line 6457: + cut our non-U.S. mortgage + business positions in half."178 + The Fed approved the + +On line 6457: + November noting + that both Bank of America + and Merrill were well + + capitalized and + would remain so after the + merger, and that Bank + +On line 6457: + financial resources + to effect the proposal."179 + Shareholders of both + +On line 6459: + Bank of America + executives began to + have second thoughts, Lewis + +On line 6459: + FCIC. In mid-November, Merrill + Lynch’s after-tax losses for + the fourth quarter had + +On line 6459: + projected to reach + about billion; the projection + grew to about billion + +On line 6459: + December billion + by December and billion + by December Lewis + +On line 6459: + Merrill’s losses had + "accelerated pretty + dramatically."181 + +On line 6461: + the fourth quarter."182 In + a January conference + call, Lewis and CFO Joe + +On line 6461: + told investors that the + bank had not been aware of the + extent of Merrill’s + + fourth-quarter losses at + the time of the shareholder + vote. "It wasn’t an + +On line 6461: + not identifying + the assets," Ken Lewis said. "It + was that we did not + +On line 6461: + the significant + deterioration, which + happened in mid- to + + late December that + we saw."183 Merrill’s Thain contests + that version of events. + +On line 6461: + the FCIC that Merrill + provided daily profit + and loss reports to + +On line 6461: + of America and + that bank executives should + have known about losses + +On line 6463: + they occurred.184 The SEC + later brought an enforcement + action against Bank of + +On line 6463: + about billion of known + and expected Merrill Lynch + losses before the + +On line 6463: + the SEC’s complaint, these + insufficient disclosures + deprived shareholders + +On line 6463: + fairly evaluate + the merger. In February + Bank of America + +On line 6465: + would pay million to + settle the SEC’s action.185 On + December Lewis called + + Treasury Secretary + Paulson to inform him that + Bank of America + +On line 6465: + the material + adverse change (MAC) clause of the + merger agreement, which + +On line 6465: + renegotiate the + terms of the acquisition. + "The severity of + +On line 6465: + were high enough that we + should at least consider a + MAC," Lewis told the FCIC. + +On line 6465: + acceleration, + we thought, was beyond what should + be happening. And + + then secondly, you + had a major hole being + created in the + +On line 6467: + That afternoon, Lewis + flew from North Carolina to + Washington to meet + +On line 6467: + the Fed with Paulson + and Fed Chairman Bernanke. The two + asked Lewis to "stand down" + +On line 6469: + while they considered + the situation.187 Paulson + and Bernanke concluded + +On line 6469: + an attempt by Bank + of America to invoke + the MAC clause "was not + +On line 6469: + legally reasonable + option." They believed that Bank + of America would + +On line 6469: + action, and that the + attendant litigation + would likely result + +On line 6469: + of America still + being contractually + bound to acquire a + +On line 6469: + weaker Merrill Lynch. + Moreover, Bernanke thought the market + would lose faith in Bank + +On line 6469: + management, given + that review, preparation, nd + due diligence had been + +On line 6469: + officials also + believed that invoking the + clause would lead to a + +On line 6469: + result in further + deterioration at + the two companies.188 + +On line 6471: + Merrill nor its CEO, + John Thain, was informed of these + deliberations + +On line 6471: + of America. Lewis + told the FCIC that he didn’t + contact Merrill Lynch + +On line 6471: + "adversarial + relationship" if it could + be avoided.189 When Thain + +On line 6471: + of America had + contemplated putting the MAC + clause into effect, + +On line 6471: + success: "One of the + things we negotiated + very heavily was + +On line 6473: + [It] specifically + excluded market moves [and] + pretty much nothing + + happened to Merrill + in the fourth quarter other + than the market move."190 + +On line 6475: + December Paulson + informed Lewis that invoking + the clause would demonstrate + + a "colossal loss of + judgment" by the company. + Paulson reminded + +On line 6475: + regulator, had + the legal authority + to replace Bank of + +On line 6475: + they embarked on a + "destructive" strategy that + had "no reasonable + + legal basis."191 Bernanke + later told his general + counsel: "Though we did + +On line 6475: + order Lewis to go + forward, we did indicate + that we believed that + + going forward [with + the clause] would be detrimental + to the health (safety + +On line 6477: + of his company." + Congressman Edolphus Towns of + New York would later + + refer to the Bank + of America and Merrill + Lynch merger as "a + +On line 6479: + discuss a rescue + package similar to the + one for Citigroup, + +On line 6479: + preferred shares and an + asset pool similar to + Citigroup’s ring fence. + +On line 6479: + staff ’s analysis + was essentially the same + as it had been for + + Citigroup. Meanwhile, + Lewis decided to "deescalate" + the situation, + +On line 6479: + the secretary of + the treasury and the chairman + of the Fed say that + + invoking the MAC + would cause systemic risk, "then it + obviously gives + +On line 6481: + you pause."193 At a board + meeting on December Lewis + told his board that the + +On line 6481: + and Treasury believed + that a failed acquisition + would pose systemic risk + +On line 6481: + would lead to removal + of management and the board + at the insistence + + of the government, + and that the government would + provide assistance + + "to protect [Bank of + America] against the adverse + impact of certain + + Merrill Lynch assets," + although such assistance could + not be provided + +On line 6485: + time for the merger’s + close on January The board + decided not to + + exercise the MAC + and to proceed as planned, with + the understanding + + that the government’s + assistance would be "fully + documented" by + +On line 6485: + were announced in mid-January.195 + "Obviously if [the MAC + clause] actually + + would cause systemic risk + to the financial system, + then that’s not good for + +On line 6485: + America," Lewis told + the FCIC. "Which is finally + the conclusion that + +On line 6487: + and the board came to."196 + The merger was completed + on January with + +On line 6487: + of billion announced + in September had fallen + to billion, thanks to + +On line 6487: + decline in the stock + prices of the two companies + over the preceding + +On line 6487: + America received + the billion in capital + from TARP that had been + +On line 6491: + Merrill Lynch, adding to + the billion it had received + in October.197 In + +On line 6491: + investments, at the + end of Bank of America + and Merrill Lynch had + +On line 6493: + through the Term Auction + Facility and billion + through the PDCF and + +On line 6493: + previous fall, Bank + of America’s legacy + securities arm + +On line 6495: + had borrowed as much + as billion under TSLF and + as much as billion + +On line 6497: + end of the bank had + issued billion in senior + debt guaranteed by + +On line 6497: + FDIC under the debt + guarantee program.198 And it + had borrowed billion + + from the Federal + Home Loan Banks. Yet despite Bank + of America’s + + recourse to these many + supports, the regulators + worried that it would + +On line 6499: + the fourth-quarter earnings + were weak.199 The regulators + wanted to be ready + +On line 6499: + announce the details + of government support in + conjunction with Bank + + of America’s + disclosure of its fourth-quarter + performance. They had + + been working on the + details of that assistance + since late December,200 + +On line 6499: + of billion, was rolled + over every night, and Merrill + "legacy" businesses + +On line 6499: + one-notch downgrade in the + new Bank of America’s + credit rating would + +On line 6499: + common equity + was low and, given the stressed + market conditions, + +On line 6499: + most basic measure + of capital—worried the + market, which seemed to + +On line 6499: + midst of the crisis, + regulatory measures + of capital were + +On line 6501: + informative. On + January the Federal + Reserve and the FDIC, + +On line 6501: + on the terms:202 Treasury + would use TARP funds to purchase + billion of Bank of + +On line 6501: + an dividend. The + bank and the three pertinent + government agencies—Treasury, the + +On line 6501: + an asset pool of + billion, primarily from + the former Merrill + + Lynch portfolio, whose + losses the four entities + would share. The pool was + +On line 6501: + ring fence. In this case, + Bank of America would be + responsible for + +On line 6501: + on the pool, and the + government would cover of + any additional + +On line 6501: + Should the government + losses materialize, + Treasury would cover + +On line 6501: + up to a limit + of billion, and the FDIC up + to a limit of + +On line 6501: + Ninety percent of + any additional losses + would be covered by + +On line 6503: + The FDIC Board had a + conference call at P.M. on + Thursday, January + +On line 6503: + and voted for the + fourth time, unanimously, to + approve a systemic + +On line 6505: + morning, January + Bank of America disclosed + that Merrill Lynch had + +On line 6505: + a billion net loss + on real estate-related + write-downs and charges. It + +On line 6505: + announced the billion + TARP capital investment + and billion ring fence + + that the government + had provided. Despite the + government’s support, + +On line 6507: + of America’s + stock closed down almost from the + day before. ver the + + next several months + Bank of America worked with + its regulators + +On line 6507: + assets that would be + included in the asset + pool. Then, on May Bank + + of America asked + to exit the ring fence deal, + explaining that the + +On line 6507: + had determined that + losses would not exceed the + billion that Bank of + +On line 6507: + the company was + eventually allowed to + terminate the deal, + + it was compelled to + compensate the government + for the benefits + + it had received from + the market’s perception that + the government would + +On line 6509: + to pay a million + termination fee: million + to Treasury, million + +On line 6511: + million to the FDIC. + The Commission concludes that, + as massive losses + +On line 6511: + system in the fall + of many institutions failed, + or would have failed but + + for government bailouts. + As panic gripped the market, + credit markets seized + +On line 6511: + trading ground to a + halt, and the stock market plunged. + Lack of transparency + +On line 6511: + to the crisis: the + exposures of financial + institutions to + +On line 6511: + losses were unknown + to market participants, + and indeed many firms + +On line 6513: + exposures. The scale + and nature of the over-the-counter + (OTC) derivatives + +On line 6513: + fuel the panic + in the fall of millions of + contracts in this opaque + +On line 6513: + among a vast web of + financial institutions + through counterparty + +On line 6513: + thus exposing the + system to a contagion + of spreading losses + +On line 6513: + that were major OTC + derivatives dealers added + to uncertainty + +On line 6513: + the market. The "bank + runs" on these institutions + included runs on + +On line 6513: + operations through + novations, collateral + demands, and refusals + +On line 6515: + series of actions, + inactions, and misjudgments + left the country with + +On line 6515: + the total collapse + of our financial system + or spend trillions of + +On line 6515: + system and prevent + catastrophic damage to + the economy. In + +On line 6515: + government rescued + a number of financial + institutions deemed + +On line 6515: + big to fail"—so large + and interconnected with + other financial + +On line 6515: + important in one + or more financial markets + that their failure would + + have caused losses and + failures to spread to other + institutions. The + +On line 6517: + institutions through + failures and mergers during + the crisis, the U.S. + + financial sector + is now more concentrated + than ever in the + +On line 6517: + concentration places + greater responsibility + on regulators + +On line 6526: + effective oversight + of these institutions. PART + V The Aftershocks + +On line 6540: + CONTENTS Households "I’m + not eating. I’m not sleeping"...................................................390 + Businesses: "Squirrels + +On line 6546: + to close shortfalls" The + financial sector: "Almost + triple the level of + + three years earlier".....................400 + Panic and uncertainty + in the financial + +On line 6548: + into the longest + and deepest recession in + generations. The + +On line 6548: + squeeze in financial + markets cascaded throughout + the economy. In + +On line 6550: + the Commission, Bank + of America CEO Brian + Moynihan described the + +On line 6550: + of the financial + crisis on the economy: + "Over the course of the + + crisis, we, as an + industry, caused a lot of + damage. Never has + + it been clearer how + poor business judgments we have + made have affected + +On line 6550: + Street."1 Indeed, Main Street + felt the tremors as the upheaval + in the financial + +On line 6550: + dollars in household + wealth evaporated within + months, and reported + +On line 6552: + hit at its peak in + October As the housing + bubble deflated, + + families that had + counted on rising housing + values for cash and + +On line 6552: + became anchored to + mortgages that exceeded the + declining value + +On line 6552: + cumulatively + putting the brakes on economic + growth—the classic "paradox + +On line 6554: + thrift," described almost + a century ago by John + Maynard Keynes. In the + +On line 6554: + frozen, for financial + institutions, companies + found that cheap and easy + +On line 6554: + was gone for them, too. + It was tougher to borrow to + meet payrolls and to + +On line 6554: + businesses that had + neither credit nor customers + trimmed costs and laid off + +On line 6554: + Still today, credit + availability is tighter than + it was before the + + crisis. Without jobs, + people could no longer afford + their house payments. Yet + + even if moving could + improve their job prospects, they were + stuck with houses they + +On line 6556: + families entered + foreclosure and millions more + fell behind on their + +On line 6556: + simply walked away from + their devalued properties, + returning the keys + + to the banks—an action + that would destroy families’ + credit for years. The + +On line 6556: + foreclosed and abandoned + properties dragged home prices down + still more, depressing + +On line 6556: + surrounding real + estate in neighborhoods across + the country. Even those + + who stayed current on + their mortgages found themselves whirled + into the storm. Towns + +On line 6558: + several years had + come to expect and rely + on the housing boom + +On line 6558: + tax revenue vanish. + As their resources dwindled, these + communities found + + themselves saddled with + the municipal costs they + had taken on in + +On line 6558: + expand services for + a growing population. + Sinking housing prices + +On line 6560: + fire protection. At + FCIC hearings around the country, + regional experts + +On line 6560: + has been severe. From + to for example, banks in + Sacramento had stopped + +On line 6562: + Bankers still complain to + him not only that demand + from borrowers has + +On line 6562: + but also that they + may be subject to increased + regulatory + +On line 6562: + they do make new loans. + In September when the FCIC + held its Sacramento + +On line 6562: + was still languishing. + "Unless we begin to turn + around demand, unless + +On line 6562: + begin to turn around + the business situation, + the employment is + +On line 6562: + increase here in the + Sacramento area, and housing + is critical to + +On line 6566: + a vicious circle," + Williams testified.2 The effects + of the financial + +On line 6566: + individual + U.S. households and businesses, + big and small, and around + +On line 6566: + Policy makers + on the state, national, and + global levels are + +On line 6566: + with the aftermath, + as are the homeowners and + lenders now dealing with + +On line 6568: + complications that + entangle the foreclosure + process. HOUSEHOLDS: "I’M NOT + +On line 6570: + in December By + many measures, its effects on + the job market were + + the worst on record, as + reflected in the speed and + breadth of the falloff in + +On line 6570: + the rise of the ranks + of underemployed workers, + and the long stretches + +On line 6570: + time that millions of + Americans were and still are + surviving without + +On line 6570: + work. The economy + shed million jobs in 2008—the largest + annual plunge since + +On line 6570: + the United States had + lost another million jobs. + Through November the + +On line 6572: + jobs, putting only a + small dent in the declines. The + underemployment + +On line 6572: + those with part-time work + who would prefer full-time + jobs, and those who need + +On line 6574: + but say they are too + discouraged to search—increased + from in December + +On line 6576: + December reaching + in October This was the + highest level since + +On line 6576: + calculations for + that labor category + were first made in As + +On line 6576: + of November the + underemployment rate stood + at The average + +On line 6578: + individuals + spent unemployed spiked from weeks + in June to weeks in + +On line 6578: + June and weeks in June + Fifty-nine percent of all job + seekers, according + + to the most recent + government statistics, searched + for work for at least + +On line 6580: + labor market is + daunting across the board, but it + is especially + +On line 6580: + among African American + workers, whose jobless rate is + about percentage points + +On line 6580: + above the national + average; workers between + the ages of and years + +On line 6582: + the impact has been + especially severe in + certain professions: + + unemployment in + construction, for instance, climbed + to an average + +On line 6586: + averaged during + the first months of Real gross + domestic product, + +On line 6586: + output adjusted + for inflation, fell at an + annual rate of + +On line 6586: + in the third quarter + of and in the fourth quarter. + After falling again + +On line 6586: + in the first half of + and then modestly growing + in the second half, + +On line 6586: + average GDP for + the year was lower than in + the biggest drop since + +On line 6590: + market, Edward Lazear, + chairman of President George + W. Bush’s Council of + +On line 6590: + during the crisis, + told the Commission that the + financial crisis + + was linked with today’s + economic problems: "I think + most of it had to + +On line 6590: + through prevented firms + from investing in the way + that they otherwise + +On line 6590: + and I think that slows + the rehiring of workers + and still continues + +On line 6592: + problem in labor + markets."3 In June the nation + officially emerged + +On line 6592: + the recession that + had begun months earlier. + The good news still had + +On line 6592: + not reached many of the + million Americans who were + out of work, who could + +On line 6592: + full-time work, or + who had stopped looking for work + as of November + +On line 6592: + McDermott of Bakersfield + told the FCIC she started a + business refilling + + printer ink cartridges, + but in a tight economy, + she didn’t earn enough + + to make a living. + She said she had been searching + for a full-time + +On line 6594: + Households suffered the + impact of the financial + crisis not only + + in the job market + but also in their net worth + and their access to + +On line 6596: + Of the trillion lost + from to the first quarter of + in household net wealth—the + +On line 6596: + difference between + what households own and what they + owe—about trillion was + +On line 6596: + house prices, with much of + the remainder due to the + declining value + +On line 6596: + financial assets. + As a point of reference, + GDP in was trillion. + +On line 6596: + a separate point, + the amount of wealth lost in the + dot-com crash early + +On line 6596: + the decade was trillion, + with far fewer repercussions + for the economy + + as a whole. The painful + drop in real estate and + financial asset + +On line 6598: + values followed a + trillion run-up in household debt + from to Aided by + + the gains in home prices + and, to a lesser degree, + stock prices, households’ net + +On line 6600: + a peak of trillion + in the second quarter of + The collapse of the + +On line 6600: + stock markets erased much + of the gains from the run-up—while + household debt remained + +On line 6600: + exceeding even the + levels of As of the third + quarter of despite + +On line 6600: + stock and housing prices + and a decline in household + borrowing, household + +On line 6602: + totaled trillion, a + drop-off from its pinnacle just + three years earlier + +On line 6604: + Nationwide, home prices + dropped from their peak in to their + low point early in + +On line 6606: + The homeownership + rate declined from its peak of + in to as of the + +On line 6606: + fall of Because so + many American households own + homes, and because for + +On line 6606: + housing represents + their single most important + asset, these declines + +On line 6608: + via home equity + loans or cash-out refinancing + has fallen sharply. At + + an FCIC hearing in + Bakersfield, California, + Marie Vasile explained how + +On line 6608: + her family had + relocated miles into + the mountains to a + + rental house to help her + husband’s fragile health.5 Their old + home was put up for + + sale and languished on + the market, losing value. + Eventually, she + + and her husband found + buyers willing to take their + house in a "short sale"—that + +On line 6610: + a sale at a price + less than the balance of the + mortgage. But because + + the lender was acting + slowly to approve that deal, + they risked losing the + + sale and then going + into foreclosure. "To top + this all off," Vasile told + +On line 6612: + husband is in the + position of possibly + losing his job. So + + not only do I + have a house that I don’t know + what’s happening to, + + I don’t know if he’s + going to have a job come + December. This is + +On line 6612: + I can handle. I’m + not eating. I’m not sleeping." + Serious mortgage + +On line 6612: + are late days or more + or homes in the foreclosure + process—have spread since the + +On line 6612: + the eastern states in + the Midwest (Ohio, Indiana, + Illinois, Wisconsin, + +On line 6614: + in By fall this rate + had risen to Other regions + also endured high + +On line 6614: + so-called sand states, where + the housing crisis was the + worst. The third quarter + +On line 6616: + data company + CoreLogic identified the housing + markets with the worst + +On line 6616: + of "distressed" sales, which + include short sales and sales of + foreclosed properties. + + Las Vegas led the + list in mid-2010, with distressed sales + accounting for more + +On line 6616: + of all home sales.7 "The + state was overbuilt and some jobs + were predicated + + on a level of + growth and consumer spending that + seemed to evaporate + +On line 6616: + an economic and + marketing analyst who + follows the Nevada + +On line 6618: + testified to the + Commission.8 The performance + of the stock market + + in the wake of the + crisis also reduced wealth. + The Standard and Poor’s + +On line 6618: + a third in 2008—the largest + single-year decline since 1974—as big + institutional + +On line 6618: + they perceived as safe. + Individuals felt these + effects not only + +On line 6618: + their current budgets + but also in their prospects for + retirement. By one + +On line 6618: + retirement accounts + such as 401(k)s lost trillion, or + about a third of their + +On line 6618: + December While the + stock market has recovered + somewhat, the S&P as + +On line 6620: + was still about below + where it was at the start of + Similarly, stock + +On line 6620: + worldwide plummeted + more than in but rebounded + by in according + +On line 6622: + Index stock fund (which + represents a collection + of global stocks). The + +On line 6622: + fallout jeopardized + some public pension plans—many + of which were already + +On line 6622: + budget officials + warned that losses of billion, + unaddressed, could cause + +On line 6622: + and teachers—to go + bust in two decades. The state cut + retiree benefits + +On line 6622: + public pension funds + lost billion, or a fourth of + their value, in the + +On line 6622: + six months following + the downturn, in part because + of investments in + +On line 6624: + securities.11 Even + before the fall of consumer + confidence had been + + on a downward slope + for months. The Conference Board + reported in May + +On line 6624: + that its measure of + consumer confidence fell to + the lowest point since + +On line 6624: + plummeted to a + new low; it has recovered + somewhat since then but + +On line 6626: + nobody willing to + make a decision. nobody + willing to take a + +On line 6626: + in the economic + environment, and that goes + for both the state and + +On line 6626: + developer and + appraiser Gregory Bynum + testified at the + +On line 6628: + in wealth and by job + insecurity, households + have cut back on debt. + + Total credit card + debt expanded every year + for two decades until + +On line 6628: + peaked at billion at + the end of Almost two years + later, that total + +On line 6630: + billion. The actions + of banks have also played an + important role: since + +On line 6630: + standards, reduced lines + of credit on credit cards, + and increased fees and + +On line 6630: + interest rates. In + the third quarter of of banks + imposed standards on + + credit cards that were + tighter than those in place in the + previous quarter. + +On line 6632: + In the fourth quarter, + did so, meaning that many banks + tightened again. In fact, + +On line 6632: + banks tightened credit + card standards quarter after + quarter until the + +On line 6632: + summer of Only + in the latest surveys have + even a small numbers + + of banks begun to + loosen them.15 Faced with financial + difficulties, over + +On line 6634: + approximately + million in Together, the + decline in households’ + + financial resources, + banks’ tightening of lending + standards, and consumers’ + +On line 6636: + of confidence have + led to large cuts in spending. + Consumer spending, which + +On line 6636: + the United States makes + up more than two-thirds of GDP, fell + at an annual + +On line 6636: + rate of roughly in + the second half of and then + fell again in the first + +On line 6636: + half of Gains since then + have been modest. Spending on + cars and trucks fell by + +On line 6638: + end of and the spring + of in part because consumer + financing was less + +On line 6640: + as because of job + and wage losses. BUSINESSES: + "SQUIRRELS STORING NUTS" + +On line 6642: + When the financial + panic hit in September + business financing + +On line 6642: + Firms that could roll over + their commercial paper faced + higher interest + + rates and shorter terms. + Those that could not roll over their + paper relied on + +On line 6644: + bank loans—or used their + own cash reserves. Large firms, one + analyst said at + +On line 6644: + time, turned to their cash + balances like "squirrels storing + nuts." Jeff Agosta, an + +On line 6644: + the government not + supported the commercial + paper market, "We + + would have been eating + grasshoppers and living in tents. + Things could have been that + +On line 6644: + While his expression + was hyper-bolic, the fear + was very real. The + +On line 6644: + of credit and the + sharp drop in demand took its + toll on businesses. + +On line 6644: + U.S. companies filed + for bankruptcy protection. + That figure more than + +On line 6644: + to nearly in Firms’ + long-term plans suddenly had to + be reevaluated—the + +On line 6644: + decisions persist, + even though credit markets have + recovered somewhat. + +On line 6646: + for the banks, by mid-2007 + they had begun to restrict + access to credit + +On line 6646: + The Federal Open + Market Committee noted + this tightening when + +On line 6646: + September that it + was cutting the federal + funds rate. After the + +On line 6646: + companies such as + Gannett Corporation, FairPoint + Communications, + + and Duke Energy + drew down their existing lines + of credit because + +On line 6648: + worried about getting + shut out of credit markets.20 + Without access to + +On line 6648: + cash reserves dwindling, + and with uncertainty about + the economy high, + +On line 6648: + off workers or cut + their investments, inhibiting + growth and reducing + +On line 6648: + U.S. companies were + somewhat or very affected + by credit constraints, + +On line 6648: + headlines chronicled + the problems: scarce capital + forced midsize firms to + +On line 6648: + such as Merck and + Wyeth; and tech companies alike + laid off employees + +On line 6648: + the recession took + hold. Some businesses struggled + to cover payrolls + +On line 6650: + paper market to + resume functioning at more + normal rates and terms. + +On line 6652: + with the central bank’s + help, nearly of banks tightened + credit standards and + +On line 6654: + employ nearly of + the country’s private-sector + workforce, "loans to small + +On line 6654: + are especially + vital to our economy," + Federal Reserve + +On line 6654: + Elizabeth Duke told + Congress early in Unlike + the larger firms, which + +On line 6654: + disrupted all these + sources, making credit more scarce + and more expensive. + +On line 6656: + businesses by the + National Federation + of Independent + +On line 6656: + in of respondents + called credit "harder to get." + That figure compares + +On line 6660: + a previous peak, + at around during the credit + crunch of Fed Chairman + +On line 6660: + Ben Bernanke said in a + July speech that getting a + small business loan was + +On line 6660: + "very difficult." He + also noted that banks’ loans + to small businesses + +On line 6662: + from more than billion + in the second quarter of + to less than billion + +On line 6664: + factor—hesitancy + to take on more debt in an + anemic economy—is + +On line 6664: + behind some of the + statistics tracking lending + to small businesses. + +On line 6664: + Bankers of America, + C. R. Cloutier, president + and CEO of Midsouth + +On line 6664: + Lafayette, Louisiana, + told the FCIC, "Community + banks are willing to + +On line 6664: + return and survive. + However, quality loan + demand is down. I + +On line 6664: + customers are scared about + the economic climate and + are not borrowing. + +On line 6666: + demanding it."26 Still, + creditworthy borrowers + seeking loans face tighter + +On line 6666: + evidence suggest. + Historically, banks charged + a percentage point + + premium over their + funding costs on business loans, + but that premium + +On line 6668: + had hit points by year-end + and had continued to rise + in raising the costs + +On line 6670: + also declined when + the housing market collapsed. + During the boom, many + + business owners had + tapped the rising equity + in their homes, taking + +On line 6670: + home equity loans. + Seventeen percent of small + employers with a + +On line 6670: + housing prices declined, + their ability to use this + option was reduced + +On line 6670: + blocked altogether + by the lenders. Jerry Jost told + the FCIC he borrowed + +On line 6670: + daughter start a bridal + dress business in Bakersfield + several years ago. + +On line 6670: + his daughter’s business + languished. The Jost family + has exhausted its + +On line 6672: + reliable incomes.29 + The standards for credit card + loans, another source + +On line 6672: + financing for small + businesses, also became + more stringent. In the + +On line 6672: + Officer Survey, + a majority of banks + indicated that + +On line 6672: + small businesses were + tighter than "the longer-run average + level that prevailed + +On line 6672: + had continued to + tighten their terms on business + credit card loans to + +On line 6672: + businesses, for both + new and existing accounts, + since the end of But + +On line 6672: + the July update + of the Fed survey showed the + first positive signs + +On line 6672: + banks were easing up + on underwriting standards + for small businesses.31 + + In an effort to + assist small business lenders, the + Federal Reserve + +On line 6674: + in March created + the Term Asset-Backed Securities + Loan Facility + + (TALF), a program to + aid securitization + of loans, including + +On line 6676: + loans, student loans, and + small business loans. Another + federal effort + + aimed at improving + small businesses’ access to + credit was guidance + +On line 6676: + Federal Reserve + and other regulators, + advising banks to + +On line 6676: + to meet the credit + needs of "creditworthy small + business borrowers" + +On line 6676: + the assurances that + government supervisors + would not hinder those + +On line 6678: + Yet the prevailing + headwinds have been difficult + to overcome. Without + + access to credit, + many small businesses that had + depleted their cash + + reserves had trouble + paying bills, and bankruptcies + and loan defaults rose. + +On line 6678: + business loans increased + to in from in Overall, the + current state of the + +On line 6678: + business sector is + a critical factor in + the struggling labor + + market: ailing small + businesses have laid people + off in large numbers, + +On line 6682: + paper, were constrained + as well. The business finance + company CIT Group + +On line 6682: + was one such firm. Even + billion in additional + capital support + +On line 6682: + federal Troubled + Asset Relief Program (TARP) + program did not save + +On line 6682: + CIT from filing for + bankruptcy protection in + November Still, some + +On line 6682: + smaller businesses, + such as GE Capital, a + commercial lender with + +On line 6682: + offer financing. + GE Capital’s commercial + paper borrowing + +On line 6684: + of the company’s + borrowing did worsen. In + it registered to + +On line 6684: + up to billion in + commercial paper through one + government program + +On line 6684: + and issued billion + in long-term debt and billion in + commercial paper + + under another + program.34 That GE Capital + had trimmed commercial + +On line 6684: + paper before the + crisis to less than of its + total debt, or about + +On line 6684: + also softened the + effects of the crisis on + the company. "A + + decision was made + that it would be prudent for + us to reduce our + +On line 6684: + on the commercial + paper market, and we did," + Mark Barber, the deputy + +On line 6688: + of GE Company + and GE Capital, told the + Commission. The firm + +On line 6688: + more than billion in + cash on its balance sheet, with + billion in back-up + + bank lines of credit, + if needed.35 The decline in + global trade also + +On line 6690: + the U.S. economy + as well as economies across the world. + As the financial + +On line 6690: + in Europe and the + United States, exports collapsed + in nearly every + +On line 6690: + trading country.36 The + decline in exports shaved more + than percentage points + +On line 6692: + growth in the third and + fourth quarters of Recently, + exports have begun + +On line 6692: + to recover, and + as of the fall of they are + back near precrisis + +On line 6696: + MOVING" Commercial + real estate—offices, + stores, warehouses—also + + took a pounding, an + indicator both of the + sector’s reliance on + +On line 6696: + lending markets, which + were impaired by the crisis, + and of its role as + +On line 6696: + Companies do not + need more space if they go out + of business, lay off + + workers, or decide + not to expand. Weak demand, + in turn, lowers rents + +On line 6696: + give their big tenants + incentives to stay put. One + example: two huge + +On line 6696: + estate brokerages + with headquarters in New York + City received nine months’ + +On line 6698: + for signing leases + in and In fall commercial + vacancy rates were + +On line 6698: + still sky-high, with of all + office space unoccupied. + And the actual + +On line 6700: + "shadow vacancies"—a + couple of desks here, part of + a floor there—that tenants + +On line 6700: + before demand picks + back up. In the absence of + demand, banks remain + +On line 6700: + to lend to all but + the safest projects involving the + most creditworthy + +On line 6700: + their bad properties, + creating a log jam," one + developer told + +On line 6702: + moving."39 In Nevada, + where tourism and construction once + fed the labor force, + +On line 6702: + property took a + huge hit. Office vacancies + in Las Vegas are + +On line 6704: + their low of midway + through Vacancies in retail + commercial space in + +On line 6706: + with historical + vacancy rates of to The + economic downturn + +On line 6706: + retailers into + bankruptcy, emptying out + the anchor retail + +On line 6706: + centers. As demand + for vacant property fell, + land values in and + +On line 6708: + few developers + nationally could afford + to build or buy, right + +On line 6708: + of Lehman’s bankruptcy + meant that Monday Properties + came up short in its + +On line 6708: + across the river from + Washington, D.C. Potential + tenants wanted to + +On line 6708: + the developer + had financing; potential + lenders wanted to know + +On line 6708: + tenants. "It’s a bit + of a cart-and-horse situation," + said CEO Anthony + +On line 6708: + who in October + took the big risk of starting + construction on the + +On line 6708: + institutions put + commercial real estate + developers and + + commercial landlords + in binds when overex-tended banks + suddenly pulled out + +On line 6708: + loans. And when banks ailed + and were taken over by the + Federal Deposit + +On line 6708: + commercial landlords + overnight lost major bank tenants + and the long-term leases + +On line 6710: + that went with them.42 In + California, at least banks + have failed since Almost + +On line 6710: + real estate loans + were underwater as of + February meaning + +On line 6710: + market value of + the property. Commercial + real estate loans + +On line 6712: + commercial mortgages + were also securitized, + and by August the + +On line 6712: + rate on these packaged + mortgages neared 9%—the highest in + the history of + + the industry and + an ominous sign for real + estate a full two + +On line 6712: + after the height of + the financial storm.45 At the + end of the default + +On line 6714: + rate had been Near the + end of it was not at all + clear when or even if + +On line 6714: + had hit bottom. Green + Street Advisors of Newport + Beach, California, + +On line 6714: + tracks real estate + investment trusts, believed that + it reached its nadir in + +On line 6716: + between and has been + recovered, according to + Mike Kirby, Green Street’s + +On line 6718: + added, "values remain + roughly shy of their peak."47 That’s + one perspective. On + +On line 6718: + Service, whose REAL + Commercial Property Price + Index tracks sales of + +On line 6718: + buildings, says it is + too early to make a call. + Moody’s detected some + +On line 6718: + the spring and fall of + and Managing Director + Nick Levidy said, "We + +On line 6718: + real estate prices + to remain choppy until + transaction volumes + +On line 6718: + The largest commercial + real estate loan losses + are projected for + +On line 6718: + beyond, according + to a report issued by + the Congressional + +On line 6718: + Panel.49 And, looking + forward, nearly billion in + commercial real + +On line 6720: + debt will come due from + through GOVERNMENT: "STATES STRUGGLED + TO CLOSE SHORTFALLS" State + +On line 6722: + companies and their + workers but also state and + local governments + +On line 6722: + saw their tax revenue + fall—just when people who had lost + their jobs, or were in + +On line 6722: + services included + Medicaid, unemployment + compensation, and + +On line 6722: + mental health care, for + children, and for the homeless. + "At least states struggled + +On line 6722: + current fiscal year," + recently reported the + Center on Budget + +On line 6724: + Washington think tank.51 + "A critical aspect of + our situation + +On line 6724: + in Sacramento and + throughout the state is that these + increased demands for + +On line 6726: + occurring at a + time that resources are being + dramatically + +On line 6728: + Commission.52 Unlike + the federal government, + almost every state + +On line 6728: + produce a balanced + budget, so running a deficit + is not an option. + +On line 6728: + a senior fiscal + analyst with the Council + of State Governments, + + told the FCIC that the + budget shortfalls facing the + states "are staggering + + numbers. It’s not just + the big states; it’s almost all + states." He said the "great + +On line 6728: + occurring in state + finances means states are forced to + "reorient their whole + +On line 6728: + the kind of programs + and services they offer their + citizens."53 In the + +On line 6728: + fiscal year alone, which + started July states must come + up with billion in + +On line 6728: + or new revenue to + balance their budgets, one study + estimated.54 By + +On line 6728: + the fall of there was + some good news: revenue from some + taxes and fees in + + some states had started + to pick up, or at least slowed + their rate of decline.55 + +On line 6730: + Conference of State + Legislatures declared that + the states "are waiting + +On line 6730: + the economy will + sustain this nascent revenue growth. + And despite recent + +On line 6730: + improvements, more gaps + loom as states confront the phase + out of federal + +On line 6732: + tax increases and + growing spending pressures."56 Some + states were hit harder + +On line 6732: + particularly + affected by the crisis + or because they came + +On line 6732: + budget problems. In + New Jersey Governor Chris + Christie proposed chopping + +On line 6732: + a quarter—of the state + budget to eliminate a + deficit. California + +On line 6732: + the summer and fall + to close a billion shortfall, + an amount larger than + + the entire budgets + of some states. Nonetheless, the + state’s independent + +On line 6732: + analysis office + said in November that the + deficit had instead grown + +On line 6732: + to billion—$6 billion + in the billion budget for + this year and billion + +On line 6732: + year commencing in + June As people lost jobs, many + also lost their health + +On line 6734: + Americans into + the Medicaid program in + alone, an increase—the largest + +On line 6734: + early days of this + government health insurance + plan, according to + + the Kaiser Family + Foundation, a nonprofit + organization + +On line 6734: + research. Every state + showed an enrollment increase: + in nine states it was + +On line 6736: + of Medicaid with + the federal government. + Congress included + +On line 6738: + in the stimulus + package to help them with this + expense, and it has + +On line 6738: + the assistance through + June at a reduced level. + If the economy + + has not improved by + then, Kaiser predicts, paying for + this program will be + +On line 6740: + huge potential source + of trouble for the states.59 The + National League of + + Cities recently said + that U.S. cities are in their worst + fiscal shape in at + +On line 6740: + of a century + and probably have not yet + hit bottom—even after + +On line 6740: + straight years of falling + revenue.60 Because property + taxes are one of + +On line 6740: + source of revenue for + most local governments, and + because some local + +On line 6740: + values, their revenue + is likely to continue + to decline for at + +On line 6742: + years.61 "The effects of + a depressed real estate + market, low levels + +On line 6742: + confidence, and high + levels of unemployment + will likely play out + +On line 6742: + through and beyond," the + survey of cities reported. + The authors of the + +On line 6742: + survey projected + that revenue would fall in and + cities’ budgets would shrink + +On line 6742: + another the largest + cutbacks in the years for which + the group has published + + the report.62 nvestors now + look askance at once-solid + state and local bonds, + +On line 6744: + borrowing costs for + many states and making their task + of balancing the + + budget even harder. + Municipalities in + Florida, the state + +On line 6744: + third-highest rate of home + foreclosures, saw borrowing + costs rise when they sold + +On line 6746: + million in bonds in + September Impact at the + federal level + +On line 6748: + government’s response + to the financial crisis + and the ensuing + +On line 6750: + aggressive fiscal + and monetary policies in + history," said the + +On line 6750: + initiatives remain + controversial to this day, + with critics calling + +On line 6752: + ineffective or + both."63 The government’s fiscal + initiatives began + +On line 6752: + recession started: + the Economic Stimulus + Act of signed into + +On line 6752: + law in February, + provided roughly billion + in tax rebates for + +On line 6752: + tax incentives for + businesses. In October + at the height of the + +On line 6752: + and in early the + American Recovery and + Reinvestment Act of + +On line 6752: + was enacted to + stimulate the weakening + economy, costing + +On line 6754: + another billion + in tax cuts and government + spending. Beginning + +On line 6754: + rate cuts in mid-2007 through + the implementation of + the TALF in early + +On line 6754: + Federal Reserve + provided support to the + economy throughout + +On line 6754: + crisis. Aside from its + emergency lending programs + put in place during + +On line 6754: + the economy from + September to October + 2010—primarily by + +On line 6754: + as "quantitative + easing."64 And in November + officials announced + +On line 6756: + designed to keep long-term + and short-term interest rates + down. In October + +On line 6756: + reported that the + TARP program would cost far less + than the billion that + +On line 6758: + the fall of because + banks had begun to repay + the Treasury in In + +On line 6758: + Treasury said, TARP would + wind up costing about billion, + mostly owing to + +On line 6760: + the Congressional + Budget Office (CBO) put its + cost at billion.66 As + +On line 6762: + earlier, the CBO + projects that the economic cost + of the GSEs’ downfall, + +On line 6762: + the financial cost + of government support and + actual dollar + +On line 6764: + could reach billion by + Overall, as spending increased + and revenues declined + +On line 6764: + deficit grew from billion + in to trillion in And it + is estimated + +On line 6768: + to trillion in THE + FINANCIAL SECTOR: "ALMOST + TRIPLE THE LEVEL OF + +On line 6770: + YEARS EARLIER" While + the overall economy has + struggled, the story + +On line 6770: + financial sector + is somewhat different. Like + other sectors of + +On line 6770: + industry has cut + jobs. After growing steadily + for years, employment + +On line 6772: + on the financial + industry, such as Charlotte, + North Carolina, have + +On line 6772: + unemployment rate + in the Charlotte area rose from + in to a recent + +On line 6776: + February Between + January and December + banks have failed; most were + + small and medium-size + banks.68 The number of small banks + on the FDIC’s list of + +On line 6776: + institutions rose + from in the second quarter + of to in the third + +On line 6776: + a number of large + financial institutions + failed or nearly failed + +On line 6776: + the crisis, on the + whole they have done better since + the fall of Total + +On line 6776: + sector profits peaked + at billion in and then fell + to billion in the + +On line 6776: + lowest level since + the early 1990s. They have since + rebounded in and + +On line 6776: + Financial sector + profits were billion in and + reached an annual + +On line 6778: + billion in the fall + of Within the financial + sector, commercial + +On line 6778: + bank profits rose from + billion in the first quarter + of to billion in + +On line 6778: + the first quarter of + The gains were concentrated + among the larger banks.70 + +On line 6778: + banks with assets greater + than billion, profits more than + doubled, from billion + +On line 6780: + from the first quarter + of to the first quarter of + For commercial banks + +On line 6780: + less than billion in + assets, profits rose only + from less than billion + +On line 6782: + The securities + industry has reported + record profits and is + + once again distributing + large bonuses. Just for those who + work in New York City, + +On line 6782: + bonuses at Wall Street + securities firms in were + billion, up from the + +On line 6782: + percent to more than + After reporting billion + of losses during + +On line 6782: + reported that in + "industry profits reached a + record billion—almost triple + +On line 6792: + years earlier."74 THE + FORECLOSURE CRISIS CONTENTS + Foreclosures on the + +On line 6794: + rise: "Hard to talk about + any recovery" Initiatives + to stem foreclosures: + +On line 6796: + disregard" Flaws in + the process: "Speculation and + worst-case scenarios" + +On line 6802: + Neighborhood effects: + "I’m not leaving"..............................................................408 FORECLOSURES + ON THE RISE: "HARD TO + +On line 6804: + RECOVERY" Since the + housing bubble burst, about four + million families + +On line 6804: + homes to foreclosure1 + and another four and a + half million2 have slipped + +On line 6804: + economic damage + finally abates, foreclosures + may total between + +On line 6804: + has hurt families + and undermined home values + in entire zip codes, + +On line 6804: + support services, and + depleted state coffers. Even + if the economy + + began suddenly + booming the country would need + years to recover. + +On line 6806: + to the foreclosure + rate was historically + less than But the trend + +On line 6806: + the housing market + collapsed has been dramatic: + In of all houses, + +On line 6808: + out of received at + least one foreclosure filing.4 + In the fall of in + +On line 6808: + every outstanding + residential mortgage loans + in the United States + +On line 6808: + payment past due but + not yet in foreclosure—an + ominous warning that + +On line 6808: + may not have crested.5 + Distressed sales account for the + majority of + +On line 6812: + Returning to the + borrowers whose loans were pooled + into CMLTI 2006- NC2: + +On line 6812: + by September many + had moved or refinanced their + mortgages; by that point, + +On line 6812: + entered foreclosure + (mostly in Florida and + California), and + +On line 6812: + modifications. + Of the still active loans then, + were seriously + +On line 6814: + or currently in + foreclosure. The causes of + foreclosures have been + +On line 6814: + by many academics and + government agencies. Two events + are typically + +On line 6820: + unemployment or + other financial hardship, + or because mortgage + +On line 6820: + increase. And second + (in the opinion of many, now + the more important + +On line 6820: + home’s value becomes + less than the debt owed—in other + words, the borrower + +On line 6822: + "The evidence is + irrefutable," Laurie Goodman, a + senior managing + +On line 6822: + Amherst Securities, + told Congress in "Negative + equity is the + +On line 6822: + When the borrower + has negative equity, + unemployment acts + +On line 6822: + of many possible + catalysts, increasing the + probability + +On line 6824: + of default."8 After + falling from their peak in to + the spring of home prices + +On line 6826: + regions.9 Nationwide, + million households, or.5% of those + with mortgages, owe more + + on their mortgages than + the market value of their + house (see figure.1). In + +On line 6826: + Nevada, of homes with + mortgages are under water, + the highest rate in + +On line 6828: + prevalence and extent + of negative equity, + the phenomenon + +On line 6828: + defaults" has also + been on the rise: homeowners + purposefully walk + +On line 6828: + mortgage obligations + when they perceive that their homes + are worth less than what + +On line 6828: + owe and they believe + that the value will not be + going up anytime + +On line 6830: + the fall of three states + particularly hard hit + by foreclosures—California, Florida, + + and Nevada—reported some + recent improvement in the + initiation of + + foreclosures, but in + November Nevada’s rate was still + five times higher than + +On line 6830: + Foreclosure starts climbed + in states from their levels a + year earlier, with + +On line 6830: + has unemployment), + Indiana unemployment), + and South Carolina + +On line 6832: + to the Mortgage Bankers + Association. In Ohio, + the city of Cleveland + +On line 6832: + surrounding Cuyahoga + County are bulldozing blocks + of abandoned houses + + down to the dirt with + the aim of creating a + northeastern Ohio "bank" + +On line 6832: + for the future. To + do this, authorities seize + blighted properties + +On line 6832: + unpaid taxes, and + they take donations of homes + from the Department + +On line 6832: + Housing and Urban + Development, Fannie Mae, + and some private lenders.11 + + Now, the county finds + itself under increasing + duress, having endured + +On line 6834: + in After years of + high unemployment and a + fragile economy, + +On line 6834: + took vulnerable + residents and "shoved them over + the edge of the cliff," + +On line 6836: + Cuyahoga’s treasurer, + told the Commission.13 In a + spring survey, of the + + responding mayors + ranked the prevalence of nonprime + or subprime mortgages + +On line 6836: + first or second on + a list of factors causing + foreclosures in their + +On line 6836: + the mayors, said they + expected the foreclosure + problems to stay the + +On line 6838: + or worsen in their + cities over the next year.14 "There has + been no meaningful + +On line 6838: + inventory of + distressed properties found in + the housing market," + +On line 6838: + of Inside Mortgage + Finance Publications, told + a congressional + +On line 6838: + "It is hard to talk + about any recovery of the + housing market when + +On line 6842: + Many mortgage holders + find themselves underwater; + that is, owing more + +On line 6854: + Michigan, and Nevada. + SHARE OF LOANS WITH NEGATIVE + EQUITY, WA ME + + MT ND NA OR VT + ID MN NH NY SD MA WY + WI CT MI RI PA + + NV IA NJ NE OH + DE UT IL IN DC CA CO + WV MD VA KS MO + + KY NC TN AZ NM + OK AR SC MS AL GA U.S. + average TX LA + +On line 6964: + SOURCE: CoreLogic Figure.1 "There + was a fundamental change + in our financial + + services sector that + really is the reason + we’re in this crisis, + +On line 6964: + and is the reason + we’re seeing and will see in + total probably + +On line 6964: + we’re done, between and + million foreclosure filings + in this country," John + +On line 6964: + of the National + Community Reinvestment + Coalition, explained to + +On line 6964: + by the way, a few + hundred thousand people, even + a million people + +On line 6964: + into foreclosure, + you can kind of blame and say, + ‘Well they should have known + +On line 6964: + million American + families can’t all be wrong. + They can’t all be greedy + +On line 6972: + INITIATIVES TO STEM + FORECLOSURES: "PERSISTENTLY + DISREGARD" The same + + system that was so + efficient at creating + millions of mortgage + + loans over the past decade + has been ineffective at + resolving problems + +On line 6972: + market, including + the efforts of homeowners + to modify their + +On line 6972: + to encourage banks + to adjust interest rates, + spread loan payments over + +On line 6972: + mortgage debts. But to + date, federal auditors + and independent + +On line 6972: + watchdogs have given + the federal government’s + and the banks’ mortgage + +On line 6974: + The Home Affordable + Modification Program + (HAMP) is falling short + +On line 6974: + of the to million + families targeted for + help by the end of + +On line 6974: + program’s resources come + from the federal TARP funds.) + As of December + +On line 6974: + modification + of only mortgages.17 Meanwhile, + the banks report that + +On line 6974: + approved million loan + alterations of various + kinds, although many of + +On line 6974: + payments into a + new mortgage and thus result + in higher monthly + +On line 6976: + modification + and foreclosure assistance + programs is unclear. + +On line 6978: + just getting started. + New Jersey, for instance, will + begin a million + +On line 6978: + some residents who + face foreclosure because of + unemployment or + +On line 6980: + their mortgages.19 During + a series of hearings in + communities around + +On line 6980: + country affected + by the housing crisis, the + Commission heard from + +On line 6980: + difficulties they + had encountered in seeking + to modify their + +On line 6980: + homes. Borrowers who + have been paying down mortgages + for years and have built + +On line 6980: + to being turned down + for loan modifications, + because the lender would + +On line 6982: + that they simply sell + their homes. Kirsten Keefe, a senior + staff attorney with + + the Empire Justice + Center in Albany, New York, + brought this issue to + +On line 6982: + attention in March + Speaking to the Federal + Reserve Board’s Consumer + +On line 6982: + identified trends among + borrowers in New York who + tried to qualify + + for the government’s + HAMP program. "We are also + routinely hearing + +On line 6982: + are being denied + HAMP modifications," she + said.20 Diane Thompson, + +On line 6982: + Housing, and Urban + Affairs in November about + the challenges of the + +On line 6982: + borrowers have been + able to obtain permanent + modifications. + +On line 6982: + and that some servicers + persistently disregard + HAMP applications."21 + +On line 6984: + encourage banks to + view foreclosure as quicker, + cleaner, and often + +On line 6986: + modifying the + terms of existing mortgages.22 + or them, foreclosure + +On line 6986: + response to default + because, the data suggest, + many borrowers who + + receive temporary + or permanent forgiveness + on their terms will slide + + into default again.23 + Also, servicers may receive + substantial fees for + +On line 6986: + a mortgage through the + foreclosure process, creating + an incentive to + +On line 6988: + modification.24 + Frequently, there’s another + complication to + +On line 6988: + modification: + the second mortgages that were + layered onto first + +On line 6988: + sold by banks into + the securitization + machine. The second + +On line 6988: + by the same lenders who + typically service the + mortgage: that is, they + +On line 6988: + the monthly payments + and provide customer service + to borrowers. If + + a first mortgage is + modified or foreclosed on, + the entire value + +On line 6988: + the second mortgage + may be wiped out. Under these + circumstances, the lender + +On line 6988: + second lien has an + incentive to delay a + modification + +On line 6988: + a new loan that would + make the mortgage payments more + affordable to the + +On line 6990: + country’s leading banks + now hold on their books more than + billion in second + +On line 6990: + To the extent the + banks have reported these loans + as performing, the + +On line 6990: + marked down on their books. + The actual value of + these second mortgages + +On line 6990: + could be much less than + their billion-plus reported + value.27 The danger + +On line 6990: + servicer is holding + the second lien, the servicers + are looking after + +On line 6990: + keep up the payments + on their second mortgage when + they cannot afford + + to make payments on + both obligations. According + to Laurie Goodman, + +On line 6990: + modifications + to work, the holders of the + second mortgages will + +On line 6992: + modifications + difficult. For example, + there are competing + +On line 6994: + from a foreclosure + may be enough to pay off the + investors holding the + +On line 6994: + securities, while + the holders of the lower + tranches would likely + + be wiped out. As a + result, the holders of the + lower-rated tranches + +On line 6994: + modification, + if it produced more cash flow + than a foreclosure. + +On line 6996: + and public sectors + to address the foreclosure + crisis have focused + +On line 6996: + encouraging short + sales. In theory, short sales + should help borrowers, + +On line 6996: + dilapidated + homes that encourage crime; and + lenders avoid some of the + +On line 6996: + Nonetheless, such deals + frequently stall because the + process is cumbersome, + +On line 6996: + and eats up resources. + For example, lenders can be + reluctant to sign + +On line 6996: + on the buyer’s bid + because they are not sure that + the home is being + +On line 6996: + highest possible + price. In addition, when there + are two mortgages, the + +On line 7000: + the first and second + mortgages must both agree to the + resolution. FLAWS + +On line 7004: + AND WORSTCASE SCENARIOS" + In additional issues + have come to the fore, + +On line 7004: + revealed systemic flaws + in how lenders documented + and processed mortgages + +On line 7004: + procedural and + documentation problems + with foreclosure have + +On line 7004: + out in court cases + and academic studies for + years, but were ignored + +On line 7006: + of foreclosures rose + so dramatically. All + of the nation’s state + +On line 7006: + general banded + together in the fall of + to investigate + +On line 7006: + harmed by improper + foreclosures. For example, + lenders have relied on + +On line 7006: + who substituted + speed for accuracy by + signing, and sometimes + +On line 7006: + affidavits claiming + personal knowledge of facts + about mortgages that they + +On line 7006: + actually know + to be true. One such "robo-signer," + Jeffrey Stephan of GMAC, + +On line 7008: + affidavits in a + month— roughly per minute, in a + 40-hour workweek—making + +On line 7008: + highly unlikely + that he verified payment + histories in each + +On line 7008: + case of foreclosure.29 + In addition, a number + of court cases have + +On line 7008: + legal standing to + foreclose—that is, being the + entity with the + +On line 7010: + to repossess a + home.30 The problem of legal + standing arose because + +On line 7010: + speed up processing, + the financial industry + created Mortgage + +On line 7010: + Systems, Inc. (MERS), an + organization made up + of mortgage lenders. It + +On line 7010: + in servicing rights + and ownership interests + in mortgage loans. MERS + +On line 7010: + the "mortgagee of record" + on behalf of its members, + a status that is + + meant to give it the + legal right to foreclose if + the borrower fails + +On line 7010: + pay the loan. MERS has + registered million mortgages + since launching in and + +On line 7012: + outstanding as of + November The standing of + MERS or its designees + +On line 7012: + foreclose has been called + into question by courts and + academics, however.32 + +On line 7012: + Committee on the + foreclosure crisis, New York + State Supreme Court Justice + +On line 7012: + Winslow testified that + "standing has become such a + pervasive issue + +On line 7012: + I frequently use + the term ‘presumptive mortgagee + in foreclosure’" to + +On line 7014: + unrecorded transfers + of the legal ownership + of the [m]ortgage," it + +On line 7014: + whether MERS continued + to be the mortgagee after + subsequent sales of + + the loan, according + to Winslow.33 Moreover, courts have held + that MERS does not own + +On line 7014: + underlying note + and therefore cannot transfer + the note or the deed + + of trust, or foreclose + upon the property.34 Winslow + also highlighted + +On line 7016: + deficiencies in + MERS’ standing, many involving + sloppy paperwork: + +On line 7016: + gaps in the chain of + title, including printouts + of the title that + +On line 7016: + from information + provided previously; + retroactive assignments + +On line 7016: + notes and mortgages in + an effort to clean up the + paperwork problems + +On line 7016: + on assignments and + affidavits attesting to + the ownership of + + the note and mortgage; + and questionable notary stamps + on assignments.35 On + +On line 7018: + a bankruptcy court + ruled that the Bank of New York + could not foreclose on + +On line 7020: + loan it had purchased + from Countrywide, because MERS + had failed to endorse + + or deliver the + note to the Bank of New York + as required by the + +On line 7020: + it was customary + for Countrywide to maintain + possession of the + + note and related + loan documents when loans were + securitized.36 Across + +On line 7022: + market, some mortgage + securities holders have + sued the issuers of + +On line 7022: + succeed, investors that + own mortgage-backed securities + could force the issuers + +On line 7022: + then be the owners + of the securities and + would bear the risk of + +On line 7024: + a report issued + in November said it is + on the lookout for + +On line 7024: + pervasive and, more + importantly, throw into + doubt the ownership + +On line 7024: + foreclosed properties + but also pooled mortgages, the + consequences could be + +On line 7024: + This sentiment was + echoed by University of + Iowa law professor + + Katherine Porter who has + studied foreclosures and the + law: "It is lack of + +On line 7024: + be that is turning + the allegations into + a crisis. Lack of + +On line 7024: + feeds speculation + and worst-case scenarios."40 Adam + Levitin, a Georgetown + +On line 7024: + professor of law, + has estimated that the + claims could be in the + +On line 7026: + dollars, rendering + major U.S. banks insolvent.41 + NEIGHBORHOOD EFFECTS: + +On line 7028: + NOT LEAVING" For the + millions of Americans who + paid their bills, never + + flipped a house, and had + never heard of a CDO, the + financial crisis + +On line 7028: + bewildering, and + painful. A crisis that started + with a housing boom + +On line 7028: + a bubble has come + back full circle to forests of + "for sale" signs—but this + +On line 7028: + few buyers. Stores have + shuttered; employers have cut + jobs; hopes have fled. Too + +On line 7028: + Americans today + find themselves in suburban + ghost towns or urban + +On line 7028: + where properties are + vacant and construction cranes + do not lift a thing + +On line 7030: + never bought into + the madness, are also among + the victims as lenders + +On line 7030: + property after + landlords default on loans. Renters + can lose the roof over + +On line 7030: + heads as well as their + security deposits. In + Minneapolis, + +On line 7030: + testimony by + Deputy Assistant Secretary + Erika Poethig + +On line 7032: + Representatives + Subcommittee on Housing + and Community + + Opportunity.42 + For children, a repossessed + house—whether rented or + + bought—is destabilizing. + The impact of foreclosures + on children around the + +On line 7038: + enormous. One-third of the + children who experienced + homelessness after + +On line 7038: + did so because of + foreclosures of the housing + that their parents owned + +On line 7038: + a recent study.43 One + school official in Nevada + told the Commission + +On line 7038: + educational + system created by the + economic crisis.44 + +On line 7040: + resources. Coast to coast, + communities are trying + to stretch housing aid + +On line 7040: + help people displaced + by foreclosures. In Nevada, + for example, Clark + +On line 7040: + County, which contains + million people living in + and around Las Vegas, + +On line 7040: + cut its Financial + Housing Assistance program, + despite the clear needs + +On line 7040: + the community. + Gail Burks, the president and + chief executive + +On line 7040: + Nevada Fair Housing + Center, told the Commission + that her group finds that + +On line 7040: + through the foreclosure + process are in despair. "It’s very + stressful. There are times + +On line 7040: + the couples we are + helping end up divorcing, + sometimes before the + +On line 7042: + is over. We’ve also + seen threats of suicide."45 And the + stories continue. + +On line 7042: + from Discovery Bay, + California, testified + to the Commission + +On line 7042: + son-in-law refinanced their + mortgage into an adjustable-rate + mortgage. When the time + +On line 7042: + to adjust upward, + new financial troubles made + the payments more than + + the family could + afford. Because the market + value of the home + + was nearly equal to + their mortgage debt, the family’s + attempts to get the + + mortgage modified + were fruitless. They lined up a + buyer for a short + +On line 7044: + medical problems + created yet another + challenge, the couple + + and their four children + moved in with Mann. "The children + were relocated + +On line 7044: + schools, and the adults dealt + with the pain and emotional + suffering while they + +On line 7044: + trying to rebuild + their lives," Mann said. The couple + filed for bankruptcy. + + Two months after the + bankruptcy was completed, + the lender asked them if + +On line 7046: + mortgage.46 In Cape Coral, + Florida, Dawn Hunt and her + husband, a mailman, + + and their two children + live in an attractive ranch-style + home they bought for about + +On line 7046: + It was a quiet, + 20-year-old subdivision where most + of the residents + +On line 7046: + were homeowners. In + and builders rushed to the area and + threw up dozens of new + +On line 7048: + empty lots. Homebuilder + Comfort Homes of Florida + LLC broke ground for a + + house across the street from + the Hunts, but did not complete + it. This fall, the house + +On line 7050: + an empty shell. No + stucco was ever applied + to the concrete block + +On line 7050: + and the house had no + interior walls. A wasp + nest decorated + +On line 7050: + electrical box near + the front door. The untended + grass had grown four feet + +On line 7052: + spurs in the brush made + it difficult to approach + the property. Two + + doors down from the Hunts, + another house was also + vacant, left empty + +On line 7052: + family split up + and moved a year earlier. + They abandoned a car + + in the garage. The roof + leaked, and a blue plastic tarp + put in place to keep + +On line 7052: + out now flaps in the + breeze. The Hunts called the police + after vandals broke + +On line 7054: + one night; intruders + have been back twice more in the + daylight.47 ow of the + +On line 7054: + the Hunts’ neighborhood + are in default, are in the + foreclosure process, or + +On line 7054: + back by the bank.48 Most + of the other houses in + the community + + are occupied by + renters whose absentee landlords + bought the houses when + + the homeowners lost + their homes to their banks. The Hunts’ + house has lost two-thirds of + +On line 7054: + from the peak of the + market. Nonetheless, even though + the neighborhood is + +On line 7054: + as lovely as it + used to be, Dawn Hunt told the + FCIC, "I’m not leaving."49 + +On line 7056: + of the holders of + first and second mortgages and + of mortgage servicers; + +On line 7056: + policy makers, + regulators, financial + institutions, and + +On line 7056: + modifications. + The resulting disputes and + inaction have caused + +On line 7060: + housing market and + financial institutions. + Dissenting Statement + +On line 7086: + DOUGLAS HENNESSEY HOLTZ-EAKIN + Vice Chairman BILL THOMAS CAUSES + OF THE FINANCIAL + +On line 7092: + ECONOMIC CRISIS + CONTENTS Introduction.......................................................................................................413 How + Our Approach Differs + +On line 7096: + Stages of the Crisis..............................................................................................417 + The Ten Essential Causes + of the Financial + +On line 7098: + Crisis........................417 The Credit + Bubble: Global Capital + Flows, Underpriced Risk, + +On line 7102: + Reserve Policy.................................................................................419 + The Housing Bubble Turning + Bad Mortgages into + +On line 7106: + Toxic Financial + Assets Big Bank Bets and Why + Banks Failed................................................................427 Two Types of + +On line 7119: + Panic....................................................................................435 The System + Freezing INTRODUCTION We + have identified ten + +On line 7119: + that are essential + to explaining the crisis. + In this dissenting + +On line 7123: + We explain how our + approach differs from others’; + We briefly describe the + +On line 7125: + the crisis; We list + the ten essential causes + of the crisis; and + +On line 7129: + walk through each cause in + a bit more detail. We find + areas of agreement + +On line 7129: + unfortunately + the areas of disagreement + are significant + +On line 7131: + we dissent and present + our views in this report. We + wish to compliment + + the Commission staff + for their investigative work. + In many ways it helped + +On line 7133: + and conclusions. Due + to a length limitation + recently imposed + +On line 7133: + by six members of + the Commission,1 this report + focuses only + +On line 7133: + causes essential + to explaining the crisis. + We regret that the + + limitation means + that several important + topics that deserve + +On line 7141: + fuller discussion get + only a brief mention here. + DISSENTING STATEMENT + +On line 7145: + OUR APPROACH DIFFERS + FROM OTHERS’ During the course + of the Commission’s + +On line 7145: + frequent arguments + that there was a single cause + of the crisis. For + +On line 7145: + banking sector, or + unregulated over-the-counter + derivatives, or + + the greed of those in + the financial sector and + the political + + influence they had + in Washington. In each case, + these arguments, when + +On line 7147: + explanations, are + too simplistic because they + are incomplete. While + +On line 7147: + of these factors were + essential contributors + to the crisis, each + +On line 7149: + insufficient as + a standalone explanation. + The majority’s + +On line 7149: + opposite problem–it + is too broad. Not everything + that went wrong during + +On line 7149: + the crisis, and while + some causes were essential, + others had only + +On line 7149: + minor impact. Not + every regulatory + change related to + +On line 7149: + to the crisis was + a cause. The majority’s + almost 550-page report + + is more an account + of bad events than a focused + explanation of + +On line 7151: + happened and why. When + everything is important, + nothing is. As an + +On line 7151: + derivatives did + not in any meaningful way + cause or contribute + +On line 7151: + financial crisis. + Neither the Community + Reinvestment Act nor + +On line 7151: + of the Glass-Steagall firewall + was a significant cause. + The crisis can be + +On line 7153: + resorting to these + factors. We also reject + as too simplistic + +On line 7153: + hypothesis that + too little regulation + caused the crisis, as + +On line 7153: + as its opposite, + that too much regulation + caused the crisis. We + +On line 7153: + amount of financial + regulation should reflect + the need to address + +On line 7153: + example, high-risk, + nontraditional mortgage + lending by nonbank + +On line 7153: + contributing to the + financial crisis. Poorly + designed government + +On line 7153: + market outcomes and + contributed to the creation + of unsound mortgages + + as well. Countrywide’s + irresponsible lending + and AIG’s failure were + +On line 7153: + regulation and + supervision, while Fannie + Mae and Freddie Mac’s + +On line 7153: + purpose with private + gains and then socializing + the losses. Both the + +On line 7153: + government" and "too + much government" approaches + are too broad-brush to + + explain the crisis. + The majority says the + crisis was avoidable + +On line 7155: + the United States had + adopted across-the-board more restrictive + regulations, in + + conjunction with more + aggressive regulators + and supervisors. + + This conclusion by + the majority largely + ignores the global + +On line 7157: + For example: A + credit bubble appeared in + both the United States + +On line 7161: + factors common to + both regions. KEITH HENNESSEY, + DOUGLAS HOLTZ-EAKIN, House Price + + Appreciation + in Selected Countries, 2002-2008 + The United States was + +On line 7165: + of many countries to + experience rapid house price + growth INDEX United + +On line 7233: + Ireland SOURCES: Standard + and Poors, Nationwide, Banco + de España, AusStats, FNAIM, + +On line 7235: + the credit bubble + beyond housing. Credit spreads + declined not just for + +On line 7235: + asset classes like + commercial real estate. + This tells us to look + +On line 7237: + credit bubble as + an essential cause of the + U.S. housing bubble. + +On line 7237: + tells us that problems + with U.S. housing policy + or markets do not + +On line 7239: + by themselves explain + the U.S. housing bubble. There + were housing bubbles + +On line 7239: + the United Kingdom, + Spain, Australia, France and Ireland, + some more pronounced than + +On line 7239: + the United States. Some + nations with housing bubbles + relied little on + + American-style mortgage + securitization. A + good explanation + +On line 7239: + housing bubble should + also take into account + its parallels in + + other nations. This + leads us to explanations + broader than just U.S. + +On line 7241: + that while failures in + U.S. securitization + markets may be an + +On line 7243: + essential cause, we + must look for other things that + went wrong as well. Large + + financial firms failed + in Iceland, Spain, Germany, and + the United Kingdom, + + among others. Not all + of these firms bet solely on + U.S. housing assets, + +On line 7251: + regulatory + and supervisory regimes + than U.S. commercial + +On line 7251: + banks. In many cases + these European systems have + stricter regulation + +On line 7251: + the United States, and + still they faced financial firm + failures similar + +On line 7253: + those in the United + States. These facts tell us that our + explanation for + +On line 7253: + credit bubble should + focus on factors common + to both the United + +On line 7253: + and Europe, that the + credit bubble is likely + an essential cause + + of the U.S. housing + bubble, and that U.S. housing + policy is by + +On line 7253: + explanation of + the crisis. Furthermore, any + explanation that + +On line 7253: + heavily on a + unique element of the U.S. + regulatory + +On line 7253: + supervisory + system is likely to be + insufficient to + +On line 7253: + standards up our list + of causes, and it moves the + differences between + +On line 7255: + of U.S. commercial + and investment banks down that + list. Applying these + + international + comparisons directly to + the majority’s + +On line 7257: + these questions: If the + political influence + of the financial + +On line 7257: + in Washington was + an essential cause of the + crisis, how does that + +On line 7259: + Belgium, the Netherlands, + France, Spain, Switzerland, Ireland, and + Denmark1 How can the + +On line 7259: + housing bubbles in + Spain, Australia, and the United + Kingdom, countries with + +On line 7261: + different than that + in the United States1 How can + the corporate and + +On line 7261: + of investment banks + explain the decisions of + many U.S. commercial + + banks, several large + American university + endowments, and some + +On line 7261: + public employee + pension funds, not to mention + a number of large + +On line 7265: + and midsize German + banks, to take on too much U.S. + housing risk1 How did + +On line 7267: + precipitate bank + regulatory failures + across Europe1 Not all + +On line 7267: + factors identified + by the majority were + irrelevant; they + +On line 7269: + current financial + and economic crisis in + the United States." By + +On line 7269: + international + parallels, emphasizing + only arguments + +On line 7269: + causes and effects, + the majority’s report + is unbalanced and + + leads to incorrect + conclusions about what caused the + crisis. We begin + +On line 7275: + explanation by + briefly describing the stages of + the crisis. KEITH + +On line 7277: + OF THE CRISIS As + of December the United + States is still in an + +On line 7277: + itself in August + and ended in early The + primary features + + of that financial + crisis were a financial + shock in September + +On line 7277: + and panic triggered + a severe contraction in + lending and hiring + +On line 7279: + a recession that + began in December and + continued until + +On line 7279: + June and from which we + are only now beginning + to recover. While + +On line 7279: + the recession is + technically accurate, + it obscures a more + +On line 7279: + developments with + the broader economy. We + describe recent U.S. + +On line 7281: + five stages: A series + of foreshocks beginning in + August followed by + +On line 7281: + slowdown and then a + mild recession through August + as liquidity + +On line 7283: + institutions failed; + A severe financial shock + in September in + +On line 7283: + failed, nearly failed, or + changed their institutional + structure; triggering + +On line 7285: + financial panic + and the beginning of a + large contraction in + +On line 7287: + in the last few months + of followed by The end of + the financial shock, + +On line 7289: + and rescue at the + beginning of followed by + A continued and + +On line 7289: + contraction in the + real economy and the + beginning of the + +On line 7291: + period. As of + December the United States + is still in the last + +On line 7291: + financial system + is still recovering and + being restructured, + +On line 7291: + economy struggles + to return to sustained strong + growth. The remainder + +On line 7291: + comments focuses + on the financial crisis + in the first three stages + + by examining + its ten essential causes. + THE TEN ESSENTIAL + +On line 7297: + causes, global and + domestic, are essential + to explaining the + +On line 7299: + crisis. I. Credit + bubble. Starting in the late + 1990s, China, other + +On line 7301: + nations built up large + capital surpluses. They + loaned these savings to + + the United States and + Europe, causing interest + rates to fall. Credit + +On line 7301: + cost of borrowing + to finance risky investments + declined. A credit + +On line 7301: + in the United States + and Europe, the most notable + manifestation + +On line 7309: + in high-risk mortgages. + U.S. monetary policy + may have contributed + +On line 7311: + credit bubble but + did not cause it. II. Housing + bubble. Beginning + + in the late 1990s and + accelerating in the + 2000s, there was a large + +On line 7311: + housing bubble in + the United States. The bubble + was characterized + +On line 7311: + in house prices well above + the historical trend and + by rapid regional + +On line 7311: + and Florida. Many + factors contributed to the + housing bubble, the + +On line 7313: + enormous losses for + homeowners and investors. III. + Nontraditional + +On line 7313: + credit spreads, overly + optimistic assumptions about + U.S. housing prices, and + +On line 7313: + markets led to poor + origination practices and + combined to increase + +On line 7313: + flow of credit to + U.S. housing finance. Fueled + by cheap credit, firms + +On line 7313: + cases deceptive, + in many cases confusing, + and often beyond + +On line 7315: + to repay. At the + same time, many homebuyers and + homeowners did not + +On line 7315: + understand the terms + of their mortgages and to make + prudent financial + +On line 7317: + IV. Credit ratings + and securitization. + Failures in credit + +On line 7317: + bad mortgages into + toxic financial assets. + Securitizers + + lowered the credit + quality of the mortgages + they securitized. + +On line 7317: + securities and + their derivatives as safe + investments. Buyers + + failed to look behind + the credit ratings and do + their own due diligence. + +On line 7319: + risk. Managers of many + large and midsize financial + institutions in + +On line 7319: + housing risk. Some did + this knowingly by betting + on rising housing + + prices, while others paid + insufficient attention + to the potential + + risk of carrying + large amounts of housing risk on + their balance sheets. This + +On line 7319: + large but seemingly + manageable mortgage losses + to precipitate + +On line 7321: + of large financial + institutions. VI. Leverage + and liquidity + + risk. Managers of these + financial firms amplified + this concentrated + +On line 7321: + little capital + relative to the risks they + were carrying on + +On line 7321: + a hair trigger by + relying heavily on + short-term financing + +On line 7321: + commercial paper + markets for their day-to-day + liquidity. They + +On line 7321: + liquidity bets + that overnight money would always + be available. Both turned + +On line 7321: + several cases, + failed solvency bets triggered + liquidity crises, + + causing some of the + largest financial firms to fail + or nearly fail. Firms + +On line 7321: + HENNESSEY, DOUGLAS HOLTZ-EAKIN, + kets that made it difficult + for some to access + +On line 7323: + when needed. VII. Risk + of contagion. The risk of + contagion was an + +On line 7325: + financial system + was vulnerable because + policymakers + +On line 7325: + afraid of a large firm’s + sudden and disorderly + failure triggering + +On line 7327: + In other cases, + unrelated financial + institutions failed + +On line 7327: + similar failed bets + on housing. Unconnected + financial firms failed + + for the same reason + and at roughly the same time + because they had the + +On line 7327: + problem: large housing + losses. This common shock meant + that the problem was + +On line 7329: + this common shock. IX. + Financial shock and panic. + In quick succession + +On line 7329: + restructurings of + ten firms triggered a global + financial panic. + +On line 7329: + financial system + began to evaporate as + the health of almost + +On line 7331: + in the United States + and Europe was questioned. X. + Financial crisis + + causes economic + crisis. The financial shock + and panic caused a + + severe contraction + in the real economy. + The shock and panic + +On line 7333: + real economy + continues through today. We + now describe these ten + +On line 7335: + the crisis in more + detail. THE CREDIT BUBBLE: + GLOBAL CAPITAL + +On line 7339: + credit bubble in + the United States and Europe. + Credit spreads narrowed + +On line 7339: + cost of borrowing + to finance risky investments + declined relative + +On line 7339: + safe assets such as + U.S. Treasury securities. + The most notable of + + these risky investments + were high-risk mortgages. The U.S. + housing bubble was + +On line 7341: + visible effect + of the credit bubble but + not the only one. + +On line 7341: + and leveraged loans were + all boosted by the surplus + of inexpensive + +On line 7343: + explanations for + the credit bubble: global + capital flows, the + +On line 7347: + policy. Global + capital flows Starting in + the late 1990s, China, + +On line 7355: + less than they earned. As + DISSENTING STATEMENT China + and other Asian economies + +On line 7355: + their savings grew as + well. In addition, boosted + by high global oil + +On line 7355: + nations built up large + capital surpluses and + looked to invest in + +On line 7355: + of inexpensive + capital flowed into the + United States, making + +On line 7357: + Americans used the + cheap credit to make riskier + investments than in + +On line 7357: + dynamic was at + work in Europe. Germany saved, + and its capital + +On line 7359: + to Ireland, Italy, Spain + and Portugal. Fed Chairman + Ben Bernanke describes the + +On line 7359: + financial account + surplus growth (the mirror of + current account deficit + +On line 7359: + rose had greater house price + appreciation [from to + The relationship + +On line 7359: + statistically + and economically, and + about percent of the + +On line 7361: + countries is explained."2 + Global imbalances are an + essential cause of + +On line 7361: + crisis and the most + important macroeconomic + explanation. Steady + +On line 7363: + domestic lending, + especially in high-risk + mortgages. The repricing + +On line 7365: + capital can but + does not necessarily + have to lead to an + +On line 7365: + in risky investments. + Increased capital flows to + the United States and + + Europe cannot alone + explain the credit bubble. + We still don’t know whether + +On line 7367: + was the result of + rational or irrational + behavior. Investors + +On line 7367: + have changed, making them + willing to accept lower + returns for high-risk + +On line 7369: + may have adopted a + bubble mentality and + assumed that, while they + +On line 7369: + paying a higher + price for risky assets, they could + resell them later + +On line 7369: + more. Or they may have + mistakenly assumed that + the world had gotten + +On line 7369: + that the risk of bad + outcomes (especially in + U.S. housing markets) + +On line 7371: + of these reasons, over + a period of many years + leading up to the + +On line 7371: + grew willing to pay + more for risky assets. When the + housing bubble burst + + and the financial + shock hit, investors everywhere + reassessed what return + +On line 7371: + demand for a risky + investment, and therefore what + price they were willing + + to pay for a risky + asset. Credit spreads for all + types of risk around the + +On line 7371: + increased suddenly + and sharply, and the prices of risky + assets plummeted. + +On line 7371: + was most evident + in but not limited to + the U.S. market for + +On line 7371: + nontraditional + mortgages. The credit bubble + burst and caused tremendous + +On line 7375: + Federal Reserve + significantly affects + the availability + +On line 7375: + price of capital. + This leads some to argue that + the Fed contributed + +On line 7375: + increased demand for + risky in-KEITH HENNESSEY, DOUGLAS HOLTZ-EAKIN, + vestments by keeping + +On line 7375: + too long. Critics of + Fed policy argue that, + beginning under + +On line 7375: + and continuing + under Chairman Bernanke, the Fed + kept rates too low for + +On line 7377: + long and created + a bubble in housing. Dr. + John B. Taylor is + +On line 7377: + of this argument. + He argues that the Fed set + interest rates too + +On line 7377: + low in and that these + low rates fueled the housing + bubble as measured + + by housing starts. He + suggests that this Fed-created + housing bubble was + + the essential cause + of the financial crisis. + He further argues + + that, had federal + funds rates instead followed the + path recommended + +On line 7377: + Rule (a monetary + policy formula for + setting the funds rate), + +On line 7377: + boom and subsequent + bust would have been much smaller. + He also applies + + this analysis to + European economies and concludes + that similar forces + +On line 7379: + at play. Current Fed + Chairman Bernanke and former Fed + Chairman Greenspan disagree + +On line 7379: + Taylor’s analysis. + Chairman Bernanke argues that the + Taylor Rule is a + +On line 7379: + rule of thumb, but that + "simple policy rules" are + insufficient for + + making monetary + policy decisions.3 He + further argues that, + +On line 7379: + the construction of + the particular Taylor + Rule, the monetary + + policy stance of + the Fed may not have diverged + significantly + +On line 7379: + its historical + path. Former Chairman Greenspan adds + that the connection + +On line 7379: + interest rates and + house prices is weak—that even if + the Fed’s target for + +On line 7379: + lending between banks + was too low, this has little + power to explain + +On line 7383: + policy questions: + How heavily should the Fed + weigh a policy + +On line 7383: + set interest rates1 + Should monetary policy + be mostly rule-based or + +On line 7385: + discretionary1 If the + Fed thinks an asset bubble + is developing, + +On line 7387: + it use monetary + policy to try to pop + or prevent it1 Were + +On line 7389: + rates too low in Did + too-low federal funds rates cause + or contribute to + + the housing bubble1 + This debate is complex and + thus far unresolved. + +On line 7391: + policy does not + necessarily lead to + smaller credit spreads. + + There are open questions + about the link between short-term + interest rates and + +On line 7391: + housing starts are the + best measure of the housing + bubble, the timing + +On line 7391: + in the European + comparison, and whether the + magnitude of the + +On line 7391: + can be explained by + the gap between the Taylor + Rule prescription and + + historic rates. At the + same time, many observers argue + that Taylor is right + +On line 7391: + were too low during + this period, and therefore + that his argument + +On line 7393: + least plausible if + not provable. We conclude that + global capital + + flows and risk repricing + caused the credit bubble, and + we consider them + +On line 7393: + did not by itself + cause the credit bubble, nor + was it essential + +On line 7395: + and energy on + exploring these questions about + global capital + +On line 7403: + thousands of staff hours + on investigation, and + not nearly enough on + +On line 7407: + investigation + and analysis. Conclusions: + The credit bubble + +On line 7409: + an essential cause + of the financial crisis. + Global capital + +On line 7411: + price of capital + in the United States and much + of Europe. Over time, + +On line 7413: + they required for risky + investments. Their preferences + may have changed, they may + +On line 7413: + irrational bubble + mentality, or they may + have mistakenly + +On line 7415: + inflated prices for + risky assets. U.S. monetary + policy may have + + contributed to the + credit bubble but did not + cause it. THE HOUSING + + BUBBLE The housing + bubble had two components: + the actual homes + + and the mortgages that + financed them. We look briefly at + each component and + +On line 7421: + a housing bubble + in the United States—the + price of U.S. housing + + increased by more than + could be explained by market + developments. This + +On line 7425: + Nevada, Arizona, and + Florida. Conventional + wisdom is that a + +On line 7425: + to spot while you’re in + one, and painfully obvious + after it has burst. + + Even after the U.S. + housing bubble burst, there is + no consensus on + + what caused it. While we + still don’t know the relative + importance of the + +On line 7429: + Florida, Nevada, + and parts of California + all experienced + +On line 7429: + that far exceeded + the national average. + More people fueled + +On line 7431: + for houses. Land use + restrictions. In some areas, + local zoning rules + +On line 7431: + restrictions, as well + as natural barriers + to building, made it + +On line 7431: + new houses to meet + increased demand resulting + from population + +On line 7433: + supply is constrained + and demand increases, prices + go up. Over-optimism. + +On line 7433: + driving up prices, shared + expectations of future + price increases can + +On line 7435: + explanation of + a bubble. Easy financing. + Nontraditional + +On line 7435: + made it easier + for potential homebuyers + to borrow enough to + + buy more expensive + homes. This doesn’t mean they could + afford those homes or + +On line 7435: + payments in KEITH + HENNESSEY, DOUGLAS HOLTZ-EAKIN, the long + run, but only that + +On line 7437: + had insufficient + incentive to encourage + borrowers to get + + sustainable mortgages. + Some combination of the + first two factors may + +On line 7439: + in parts of the Sand + States, but these don’t explain the + nationwide increase + + in prices. The closely + related and nationwide + mortgage bubble was + +On line 7441: + most significant + manifestation of a + more generalized + + credit bubble in + the United States and Europe. + Mortgage rates were low + +On line 7441: + the risk of losses, + and risky borrowers, who in + the past would have been + +On line 7443: + found it possible + to obtain a mortgage.4 In + addition to the + +On line 7443: + nontraditional + mortgage products was a key + cause of this surge in + +On line 7443: + lending. Use of these + products increased rapidly from + the early part of + +On line 7443: + lowered the credit + quality of the mortgages + they would accept, and + +On line 7443: + rating agencies that + overrated the subsequent + securities and + +On line 7443: + increase in mortgages + that required little to no + documentation. + +On line 7445: + affordability + would normally have constrained + demand, but lenders and + +On line 7445: + products to paper + over this affordability + issue. These mortgage + + products included + interest-only adjustable rate + mortgages (ARMs), pay-option + +On line 7445: + monthly payments, and + negative amortization + products in which the + + initial payment did + not even cover interest + costs. These exotic + +On line 7445: + products would often + result in significant + reductions in the + +On line 7445: + with even a standard + ARM. Not surprisingly, they + were the mortgages of + +On line 7447: + borrowers focused + on minimizing initial + monthly payments. Fed + + Chairman Bernanke sums up + the situation this way: + "At some point, both lenders + +On line 7447: + became convinced that + house prices would only go up. + Borrowers chose, and + +On line 7447: + that they could not be + expected to service in + the longer term. They were + + provided these loans + on the expectation that + accumulating + +On line 7447: + mortgages. For a time, + rising house prices became a + self-fulfilling + +On line 7447: + but ultimately, + further appreciation + could not be sustained + +On line 7449: + explanation posits + a relationship between + the surge in housing + + prices and the surge in + mortgage lending. There is not + yet a consensus + +On line 7449: + the cause and which the + effect. They appear to have + been mutually + + reinforcing. In + understanding the growth of + nontraditional + +On line 7451: + to determine the + relative importance of + causal factors, but again + +On line 7453: + can at least list those + that are important: Nonbank + mortgage lenders like New + +On line 7453: + at the state level. + Weak disclosure standards and + underwriting rules + +On line 7461: + irresponsible + lenders to issue DISSENTING + STATEMENT mortgages that + +On line 7461: + probably never + be repaid. Federally + regulated bank + +On line 7463: + brokers were paid for + new originations but did + not ultimately + +On line 7463: + losses on poorly + performing mortgages. Mortgage + brokers therefore had + +On line 7465: + information about + borrowers. Many borrowers + neither understood + +On line 7465: + terms of their mortgage + nor appreciated the + risk that home values + +On line 7465: + others borrowed too + much and bought bigger houses + than they could ever + +On line 7467: + reasonably expect + to afford. All these factors + were supplemented + +On line 7467: + homeownership but + created hidden costs to + taxpayers and the + +On line 7467: + Elected officials + of both parties pushed housing + subsidies too far. + +On line 7469: + mortgage fraud problems. + Excruciating anecdotes + showed that mortgage fraud + +On line 7469: + the housing bubble. + There is no question that this + fraud did tremendous harm. + +On line 7469: + (like Florida), the + Commission was unable to + measure the impact + +On line 7471: + fraud relative to + the overall housing bubble. + The explosion of + +On line 7471: + for the creation of + so many bad mortgages. Lending + standards were lax enough + +On line 7471: + could remain within + the law but still generate + huge volumes of bad + +On line 7471: + housing bubble and + the crisis would have occurred + even if there had been + +On line 7471: + classify mortgage + fraud not as an essential + cause of the crisis + +On line 7473: + contributing factor + and a deplorable effect of + the bubble. Even if + +On line 7473: + of fraudulent loans + was not substantial enough to + have a large impact + +On line 7473: + have been a leading + indicator of deeper + structural problems in + +On line 7477: + in the late 1990s and + accelerating in the + 2000s, there was a large + +On line 7477: + housing bubble in + the United States. The bubble + was characterized + +On line 7477: + house prices well above the + historical trend and by + more rapid regional + +On line 7481: + primarily by + the broader credit bubble. + The causes of the + +On line 7481: + population growth, + land use restrictions, bubble + psychology, and + +On line 7483: + the mortgage bubble + and its relationship to + the housing bubble + +On line 7483: + underwriting rules + for bank and nonbank mortgage + lenders alike, the way in + +On line 7483: + mortgage brokers were + compensated, borrowers + who bought too much house + +On line 7483: + didn’t understand + or ignored the terms of their + mortgages, and elected + +On line 7483: + who over years piled on + layer upon layer of + government housing + +On line 7485: + subsidies. Mortgage + fraud increased substantially, + but the evidence + +On line 7487: + enough to conclude that + it was an essential cause. + TURNING BAD MORTGAGES + +On line 7489: + ASSETS The mortgage + securitization process + turned mortgages into + +On line 7489: + government-sponsored + enterprises (GSEs) Fannie + Mae and Freddie Mac, + +On line 7489: + capital to flow + from investors to homebuyers. + Without it, mortgage + +On line 7489: + be limited to + banks and other portfolio + lenders, supported by + +On line 7489: + makes homeownership + more affordable. It also + can diversify + +On line 7489: + different types of + lenders. If everything else is + working properly, + +On line 7491: + else was not working + properly. Some focus their + criticism on the + +On line 7491: + obligations (CDOs) were + engineered from different + bundled payment streams + +On line 7493: + securities. Some + argue that the conversion + of a bundle of + +On line 7493: + debt obligation, was + a problem. They argue that + complex financial + + derivatives caused + the crisis. We conclude that + the details of this + +On line 7493: + to understanding + the essential causes of + the crisis. If the + +On line 7493: + reconfiguring + streams of mortgage payments has + little effect. The + + total amount of risk + in a mortgage is unchanged + if the pieces are put + +On line 7495: + in a different + way. Unfortunately, the + system did not work + +On line 7497: + made things worse. Fannie + Mae and Freddie Mac, as well + as Countrywide and + +On line 7497: + credit quality + standards of the mortgages they + securitized.6 A + +On line 7497: + were generally + of poorer quality. This + turned a bad mortgage + +On line 7499: + worse security. + Mortgage originators took + advantage of these + +On line 7499: + standards and the easy + flow of credit to relax + the underwriting + + discipline in the + loans they issued. As long as + they could resell a + +On line 7507: + complexity of + housing-related assets and + the many steps between + +On line 7507: + the importance of + credit rating agencies and + made independent + +On line 7507: + more difficult. In + this respect, complexity + did contribute to + + the problem, but the + other problems listed here + are more important. + +On line 7509: + optimistic ratings + to the CDOs built from mortgage-backed + securities.7 By + +On line 7509: + rating these bundles + of mortgage-backed security + payments too highly, + +On line 7511: + financial assets. + Borrowers, originators, + securitizers, + + rating agencies, and + the ultimate buyers of + the securities + +On line 7511: + were packaged all failed + to exercise prudence and + perform due diligence + +On line 7513: + credit ratings. Many + financial institutions + chose to make highly + + concentrated bets + on housing prices. While in some + cases they did that + + with whole loans, they were + able to more easily and + efficiently do + +On line 7515: + domestically + and internationally, + gave pref-erential + +On line 7515: + to highly rated + debt, further empowering + the rating agencies + +On line 7517: + desirability + of mortgage-backed structured products. + There is a way that + + housing bets can be + magnified using a form + of derivative. + + A synthetic CDO + is a security whose + payments mimic that + +On line 7517: + a CDO that contains + real mortgages. This is a + "side bet" that allows + +On line 7517: + to assume the same + risk as if you held pieces of + actual mortgages. + +On line 7517: + to increase their bets + on housing, they were able to + use synthetic CDOs. + +On line 7517: + CDOs, however, are + zero-sum, since for every + investor making a + +On line 7517: + housing performance + will fall there must be other + investors with equal-sized + +On line 7519: + These are related + but different problems. While + many involve the word + + "derivative," it + is a mistake to bundle + them together and + + say, "Derivatives + or CDOs caused the crisis." In + each case, we assign + +On line 7519: + and institutions + rather than to the financial + instruments they used. + +On line 7523: + than "derivatives + and CDOs caused the financial + crisis," it is more + +On line 7525: + accurate to say: + Securitizers lowered + credit quality + +On line 7531: + investors and others + failed to perform sufficient + due diligence; KEITH + +On line 7533: + arbitrage toward + lower capital standards; + Some investors used these + +On line 7535: + diversify risk; + and Others used synthetic + CDOs to amplify + + their housing bets. The + dangerous imprecision + of the term "shadow + +On line 7537: + report begins with + an extensive discussion + of the failures of + +On line 7537: + it defines as a + "financial institutions + and activities + +On line 7537: + respects parallel + banking activities but + are subject to less + +On line 7537: + report suggests that + the shadow banking system + was a cause of the + + financial crisis. + "Shadow banking" is a term + used to represent + +On line 7539: + issues within the + financial system. Indeed, + "shadow banking" can + +On line 7539: + to any financial + activity that transforms + short-term borrowing + +On line 7539: + lending without a + government backstop. This term + can therefore include + +On line 7543: + as diverse as: The + tri-party repo market; + Structured Investment + +On line 7545: + other off-balance-sheet + entities used to increase + leverage; Fannie Mae + +On line 7549: + monoline insurers, + commercial paper, money + market mutual + + funds, and investment + banks. As discussed in other + parts of this paper, + + some of these items were + important causes of the + crisis. No matter + +On line 7551: + roles in causing or + contributing to the crisis, + however, they are + +On line 7551: + is a mistake to + group these issues and problems + together. Each should + + be considered on + its merits, rather than painting + a poorly defined + +On line 7553: + a common brush of + "too little regulation." + BIG BANK BETS AND WHY + +On line 7555: + FAILED The story so + far involves significant + lost housing wealth and + +On line 7555: + Yet even larger past + wealth losses did not bring the + global financial + + system to its knees. + The key differences in this + case were leverage and + +On line 7555: + and highly leveraged + financial institutions + in the United States + +On line 7555: + Europe. This leverage + magnified the effect of + a housing loss on + +On line 7555: + capital reserve, + and the concentration meant + these losses occurred + +On line 7563: + STATEMENT In effect, + many of the largest financial + institutions in + +On line 7563: + hundreds of smaller + ones, bet the survival of their + institutions on + + housing prices. Some did + this knowingly; others not. + Many investors made three + +On line 7567: + probability + that housing prices would decline + significantly; + +On line 7569: + different regions, + so that a local housing + bubble bursting in + +On line 7569: + would not happen at + the same time as one bursting + in Florida; and + +On line 7571: + defaults, in which an + underwater homeowner + voluntarily + +On line 7573: + mortgage. When housing + prices declined nationally + and quite severely + +On line 7573: + certain areas, these + flawed assumptions, magnified + by other problems + +On line 7573: + created enormous + financial losses for firms + exposed to housing + +On line 7575: + of the financial + and economic crisis was + appallingly bad risk + +On line 7575: + by the leaders of + some of the largest financial + institutions in + +On line 7575: + States and Europe. Each + failed firm that the Commission + examined failed in + +On line 7577: + because its leaders + poorly managed risk. Based on + testimony from + +On line 7577: + of the largest failed firms + and the Commission staff ’s + investigative work, + +On line 7577: + can group common risk + management failures into + several classes: + +On line 7579: + risk. Firm managers bet + massively on one type of + asset, counting on + + high rates of return + while comforting themselves that + their competitors were + +On line 7581: + same. Insufficient + capital. Some of the failed + institutions were + +On line 7585: + was financed with of + equity capital and + of debt. This made these + +On line 7585: + were going well, but + incredibly sensitive + to even a small loss, + +On line 7585: + a percent decline + in the market value of + these assets would leave + + them technically + insolvent. In some cases, + this increased leverage + +On line 7585: + In other cases, + firms used Structured Investment + Vehicles, asset-backed + +On line 7585: + conduits, and other + off-balance-sheet entities to + try to have it both + +On line 7585: + financial sector + and creates a financial + accident waiting + +On line 7585: + firms should have had much + larger capital cushions + and/or mechanisms + +On line 7587: + markets. Just as each + lacked sufficient capital + cushions, in each case + +On line 7587: + firm’s liquidity + cushion ran out within days. + The failed firms appear + +On line 7587: + strategies on the flawed + assumption that both the firm + and KEITH HENNESSEY, + +On line 7587: + would always be healthy + and functioning smoothly. By + failing to provide + +On line 7589: + put their firm’s survival + on a hair trigger. Poor risk + management systems. + +On line 7589: + of firms were unable + to easily aggregate + their housing risks across + + various business + lines. Once the market began + to decline, those firms + + that understood their + total exposure were able + to effectively + +On line 7589: + hedge their risk before + the market turned down too far. + Those that didn’t were + +On line 7591: + with toxic assets + in a disintegrating + market. Solvency + +On line 7593: + heard testimony + from the former heads of Bear + Stearns, Lehman, Citigroup, + + and AIG, among others. + A common theme pervaded + the testimony + +On line 7595: + of these witnesses: + We were solvent before the + liquidity run + +On line 7597: + information and + started an unjustified + liquidity run. + +On line 7599: + happened, given enough + time we would have recovered + and returned to a + +On line 7601: + position of strength. + Therefore, the firm failed because + we ran out of time, + +On line 7603: + each case, experts and + regulators contested + the former CEO’s "we + +On line 7603: + difficult to prove + otherwise, especially + because the answer + +On line 7603: + when solvency is + measured. After a few days + of selling assets + + at fire-sale prices during + a liquidity run, a + highly leveraged firm’s + + balance sheet will look + measurably worse. In each case, + whether or not the firm + +On line 7603: + that those pulling back from + doing business with the firm + were not irrational. + +On line 7603: + each of the cases + we examined, there were huge + financial losses + +On line 7605: + each case, the CEO was + willing to admit that he + had poorly managed + +On line 7605: + admit that his firm + was insolvent or nearly + so. In each case the + +On line 7605: + managers knew or should + have known that they were risking + the solvency and + +On line 7609: + the survival of their + firms. Conclusions: Managers of + many large and midsize + +On line 7609: + housing risk on their + balance sheets. In doing so + they turned a building + +On line 7609: + failing financial + institutions. Some did this + knowingly; others, + +On line 7621: + placed their firms on a + hair trigger by becoming + dependent upon + + short-term financing + from commercial paper and + repo markets for + +On line 7621: + failed solvency bets + that their housing investments + were solid, and failed + + liquidity bets + that overnight money would always + be there no matter + +On line 7621: + several cases, + failed solvency bets triggered + liquidity crises, + +On line 7623: + the largest financial + firms to fail or nearly fail. + "Investment banks caused + +On line 7625: + the Commission was + the relative importance + of a firm’s legal + +On line 7625: + institutions. For + example, Commissioners + agreed that investment + +On line 7625: + too lightly (barely) + regulated by the SEC + leading up to the + +On line 7625: + regulation of + these firms failed. As a result, + no regulator + +On line 7625: + or liquidity + buffers. There was agreement among + Commissioners that + +On line 7625: + contributing factor + to the failure of these firms. + The Commission split, + + however, on whether + the relatively weaker + regulation of + +On line 7627: + cause of the crisis. + Institutional structure + and differential + +On line 7627: + various types of + financial institutions + were less important + +On line 7627: + regulatory + regimes. Investment banks failed in + the United States, and + +On line 7627: + many commercial banks, + large and small, despite a stronger + regulatory + +On line 7627: + supervisory + regime. Wachovia, for example, + was a large insured + + depository + institution supervised + by the Fed, OCC, and + +On line 7627: + experienced a + liquidity run that led + to its near failure + +On line 7627: + of the FDIC’s systemic + risk exception. Insurance + companies failed as + + well, notably AIG and + the monoline bond insurers. + Banks with different + +On line 7629: + to be rescued in + the United Kingdom, Germany, + Iceland, Belgium, the + +On line 7629: + these nations had far + stricter regulatory and + supervisory + +On line 7629: + than the United States. + The bad loans in the United + Kingdom, Ireland, and + + Spain were financed by + federally-regulated + lenders–not by "shadow + +On line 7631: + Rather than attributing + the crisis principally + to differences in + +On line 7633: + more sense to look for + common factors: Different + types of financial + +On line 7635: + financial firms in + the United States and Europe + poorly managed their + +On line 7639: + liquidity risk. + KEITH HENNESSEY, DOUGLAS HOLTZ-EAKIN, + TWO TYPES OF SYSTEMIC + + FAILURE Government + policymakers were afraid + of large firms’ sudden + +On line 7641: + as a result. At + times, intervention itself + contributed to fear + +On line 7641: + uncertainty about + the stability of the + financial system. + +On line 7645: + two types of systemic + failure. Systemic failure type + one: contagion We + + begin by defining + contagion and too big to + fail. If financial + + firm X is a large + counterparty to other + firms, X’s sudden and + +On line 7649: + weaken the finances + of those other firms and cause + them to fail. We call + +On line 7649: + direct financial + link between firms, the failure + of one causes the + +On line 7649: + X is too big to + fail if policymakers + fear contagion so + +On line 7649: + are unwilling to + allow it to go bankrupt + in a sudden and + +On line 7649: + in large part based on + how much counterparty risk + other firms have to + +On line 7651: + may also act if + they worry about the effects + of a failed firm on + + a particular + financial market in which + that firm is a large + + participant. The + determination of too + big to fail rests in + +On line 7653: + policymakers + who must decide whether to "bail + out" a failing firm. + +On line 7653: + are uncertain about + the size of counterparty + credit risk or about + +On line 7653: + of an important + financial market, or if + broader market or + +On line 7655: + conditions make them + more risk averse. This logic can + explain the actions + +On line 7657: + cases in In March, + the Fed facilitated + JPMorgan’s purchase of Bear + +On line 7657: + by providing a + bridge loan and loss protection + on a pool of Bear’s + +On line 7657: + policymakers + were concerned about the failure + of Bear Stearns itself + +On line 7657: + direct effects on + other firms, their decision + to act was heightened + +On line 7657: + uncertainty about + potential broader market + instability + +On line 7657: + potential impact + of Bear Stearns’ sudden failure + on the tri-party + +On line 7659: + In September, the + Federal Housing Finance + Agency (FHFA) put + +On line 7659: + Mae and Freddie Mac + into conservatorship. + Policymakers + + in effect promised that + "the line would be drawn between + debt and equity," + +On line 7661: + such that equity + holders were wiped out but GSE + debt would be worth cents + +On line 7661: + dollar. They made this + decision because banking + regulators (and + +On line 7661: + treated Fannie and + Freddie debt as equivalent + to Treasuries. A bank + +On line 7661: + of its assets in + debt issued by General + Electric or AT&T, but + + can hold it all in + Fannie or Freddie debt. The + same is true for many + + other investors in + the United States and around the + world–they assumed that GSE + + debt was perfectly + safe and so they weighted it + too heavily in + +On line 7669: + DISSENTING STATEMENT + this counterparty risk faced + by many financial + + institutions meant + that any write-down of GSE debt + would trigger a chain + + of failures throughout + the financial system. In + addition, GSE debt + +On line 7669: + as collateral + in short-term lending markets, + and by extension, + +On line 7669: + would have led to a + sudden massive contraction + of credit beyond + +On line 7669: + occur. Finally, + mortgage markets depended + so heavily on + +On line 7671: + effectively halt + the creation of new mortgages. + All three reasons led + + policymakers + to conclude that Fannie Mae + and Freddie Mac were + +On line 7673: + too big to fail. In + September, the Federal + Reserve, with support + +On line 7673: + AIG, preventing it + from sudden disorderly + failure. They took this + +On line 7673: + was a huge seller + of credit default swaps to + a number of large + + financial firms, and + they were concerned that an AIG + default would trigger + +On line 7673: + those firms’ balance sheets, + forcing counterparties to + scramble to replace + +On line 7673: + and potentially + triggering a cascade of + failures. AIG also + + had important lines + of business in insuring + consumer and business + +On line 7673: + been threatened by a + failure of AIG’s financial + products division + +On line 7673: + decision to aid + AIG was also influenced + by the extremely + +On line 7675: + institutional + failures in prior days and + weeks. In November, + +On line 7675: + Treasury provided + assistance to Citigroup. + Regulators feared + +On line 7675: + would both undermine + confidence the financial + system gained after + +On line 7679: + to the failures of + Citi’s major counterparties. + Conclusion: The risk + +On line 7679: + financial system + was vulnerable because + policymakers + +On line 7679: + afraid of a large firm’s + sudden and disorderly + failure triggering + +On line 7681: + allow them to fail + suddenly. Systemic failure + type two: a common + +On line 7683: + flu, then a common + shock is like food poisoning. + A common factor + + affects a number + of firms in the same way, and + they all get sick at + + the same time. In a + common shock, the failure of + one firm may inform + + us about the breadth or + depth of the problem, but the + failure of one firm + +On line 7685: + not cause the failure + of another. The common + factor in this case + + was concentrated + losses on housing-related + assets in large and + +On line 7689: + in the United States + and some in Europe. KEITH + HENNESSEY, DOUGLAS HOLTZ-EAKIN, + +On line 7689: + financial sector. + Policymakers were not + just dealing with a + +On line 7691: + firm that might transmit + its failure to others. They + were dealing with a + +On line 7691: + large, midsize, and small + financial institutions + took large losses at + + roughly the same time. + Conclusion: Some financial + institutions failed + +On line 7695: + similar failed bets + on housing. Unconnected + financial firms were + + failing for the same + reason and at roughly the + same time because they + + had the same problem + of large housing losses. This + common shock meant the + +On line 7697: + this common shock. We + examine two frequently + debated topics + +On line 7701: + events of September + "The government should not have + bailed out Some argue + +On line 7703: + is too big to fail, + and that policymakers + erred when they "bailed out" + +On line 7703: + and Freddie, AIG, and + later Citigroup. In our + view, this misses the + +On line 7703: + were presented, for + example, with the news that + "AIG is about to fail" + + and counseled that its + sudden and disorderly + failure might trigger + +On line 7703: + preceding failures + of Fannie Mae and Freddie + Mac, the Merrill Lynch + +On line 7703: + Reserve Primary + Fund breaking the buck, market + confidence was on + +On line 7703: + chain reaction could + cause a run on the global + financial system. + +On line 7703: + just a run on a + bank, but a generalized + panic that might crash + +On line 7705: + is, the risk of an + event comparable to the + Great Depression. For + +On line 7705: + policymaker, + the calculus is simple: + if you bail out AIG + +On line 7705: + you’re wrong, you will have + wasted taxpayer money + and provoked public + + outrage. If you don’t + bail out AIG and you’re wrong, the + global financial + + system collapses. + It should be easy to see why + policymakers + + favored action–there + was a chance of being wrong + either way, and the + +On line 7705: + being wrong without + action were far greater than the + costs of being wrong + +On line 7711: + Geithner, and + Paulson should not have chosen + to let Lehman fail" This + +On line 7711: + the most frequently + discussed element of the + financial crisis. + +On line 7713: + make this case one must + argue: Bernanke, Geithner, + and Paulson had a + +On line 7715: + option available to + them other than Lehman filing + bankruptcy. They knew + +On line 7723: + considered it, and + rejected it. DISSENTING + STATEMENT They were wrong + +On line 7725: + to do so. They had + a reason for choosing to + allow Lehman to fail. + +On line 7727: + yet to find someone + who can make a plausible + case on all four counts. + + We think that these three + policymakers would have + saved Lehman if they thought + + they had a legal + and viable option to do + so. In hindsight, we + +On line 7727: + they were right at the + time–they did not have a legal + and viable option + +On line 7729: + have accused these three + of making a mistake. These + critics usually + + argue that these three + should have saved Lehman. When asked what + else they could have done, + + the critic’s usual + response is, "I don’t know, but + surely they could have + +On line 7731: + something. They chose not + to and caused the crisis." Those + who want to label + +On line 7733: + mistake are obliged to + suggest an alternate course + of action. The Fed’s + +On line 7733: + for Bear Stearns, and FDIC + and Treasury’s assistance for + Wachovia, followed a + +On line 7733: + each case, the failing + firm or the government found + a buyer, and the + +On line 7733: + the case of Bear Stearns, + the government subsidized + the purchase, and in + + the case of Wachovia, + the government made clear that + assistance would be + +On line 7733: + it were needed. The + specific mechanics of + the subsidy differed + +On line 7733: + two cases, but in + each bailout the key condition + was the presence of + + a willing buyer. + Lehman had no willing buyer. + Bank of America + +On line 7735: + other American + financial institution + was willing or able + +On line 7735: + For months, government + officials had tried and failed + to facilitate + +On line 7735: + of "Lehman weekend," the + most viable candidate was + the British bank Barclays. + + To make the purchase, + Barclays needed either a + shareholder vote, which + + would take several + weeks to execute, or the + permission of their + +On line 7737: + They could get neither + in the time available. Lehman was + therefore facing an + +On line 7739: + liquidity run + without a path to success. + There was no buyer. + +On line 7739: + might be a buyer, + some weeks in the future. Bernanke, + Geithner, and + +On line 7739: + confronted with the + question of whether to provide + an effectively + +On line 7741: + its disappearing + liquidity while Lehman searched + for a buyer. This + + loan would have to come + from the Fed, since before the + enactment of the + +On line 7741: + no authority + to provide such financing. + The law limits the + + Fed in these cases. + The Fed can only provide + secured loans. They were + + able to make this work + for Bear Stearns and AIG because + there were sufficient + +On line 7741: + collateral. Fed + officials argue that Lehman + had insufficient + + un-pledged assets to + secure the loan it would have + needed to survive. + +On line 7743: + to provide credit. + Was there another option1 + The Fed leaders would + +On line 7743: + had to direct the + staff to re-evaluate in + a more optimistic + +On line 7743: + analysis of Lehman’s + balance sheet to justify + a secured loan. They + +On line 7743: + have had to decide + to provide liquidity + support to KEITH + + HENNESSEY, DOUGLAS HOLTZ-EAKIN, + Lehman for an indefinite + time period while + +On line 7743: + searched for a buyer. + That asset revaluation + would later have come + +On line 7743: + the likely large and + potentially uncapped cost + to the taxpayer. + +On line 7743: + the meantime, other + creditors to Lehman could have + cashed out at cents on + +On line 7745: + leaving taxpayers + holding the bag for losses. + Fed Chairman Bernanke, his + + general counsel + Scott Alvarez, and New York Fed + general counsel + +On line 7745: + Jr. all argued in + sworn testimony that this + option would not have + +On line 7745: + suggested that it + also would have been unwise + because, in effect, + +On line 7745: + have been providing + an open-ended commitment to + allow Lehman to shop + +On line 7745: + Bernanke testified that + such a loan would merely waste + taxpayer money + + for an outcome that + was quite unlikely to change. + Based on their actions + +On line 7747: + policymakers + would have taken any available + option they thought was + + legal and viable. + This was an active team that + was in all cases + +On line 7747: + to reduce the risk + of catastrophic outcomes. + Fed Chairman Bernanke said + + that he "was very, very + confident that Lehman’s demise was + going to be a + +On line 7747: + it implausible + to conclude that they would have + broken pattern on + +On line 7747: + one case at such an + obviously risky moment + if they had thought they + +On line 7749: + it inconceivable + that policymakers could + be confronted with + + a situation + in which there was no legal + and viable course of + +On line 7753: + to avoid financial + catastrophe. In this case, that + is what happened. THE + + SHOCK AND THE PANIC + Conventional wisdom is + that the failure of + +On line 7755: + Brothers triggered the + financial panic. This is + because Lehman’s failure + +On line 7755: + the debate about whether + government officials could + have saved Lehman is so + +On line 7757: + The focus on Lehman’s + failure is too narrow. The + events of September + +On line 7759: + a chain of one firm + failure after another: + Sunday, September + +On line 7759: + FHFA put Fannie + Mae and Freddie Mac into + conservatorship. + +On line 7761: + This was followed by + "Lehman weekend at the New York + Fed," which was in fact + + broader than just Lehman. + At the end of that weekend, + Bank of America + +On line 7763: + buy Merrill Lynch, Lehman + was filing for bankruptcy, + and AIG was on the + +On line 7767: + Tuesday, September + the Reserve Primary Fund, + a money market + + mutual fund, "broke + the buck" after facing an + investor run. Its net + +On line 7771: + below meaning that + an investment in the fund + had actually + +On line 7771: + a money market + fund. On the same day, the Fed + approved an billion + +On line 7779: + from sudden failure. + DISSENTING STATEMENT Thursday, + September the Bush + +On line 7779: + appropriate funds + for a new Troubled Asset + Relief Program (TARP) + +On line 7783: + September the Fed + agreed to accept Goldman Sachs + and Morgan Stanley + +On line 7783: + putting them under the + Fed’s regulatory purview. + After this, there were + +On line 7787: + and later sold it + to JPMorgan. Monday, September + the TARP bill failed to + +On line 7789: + Citigroup. Wednesday, + October the Senate passed + a revised TARP bill. + +On line 7789: + days later, the House + passed it, and the President + signed it into law. + +On line 7791: + than Citigroup, bought + Wachovia. As the month progressed, + interbank lending + +On line 7791: + indicating the + heightened fear and threatening + a complete freeze of + +On line 7793: + panic was triggered + and then amplified by the + close succession of + + these events, and not just + by Lehman’s failure. Lehman was the + most unexpected + +On line 7793: + succession, but it’s + a mistake to attribute the + panic entirely + +On line 7793: + Lehman’s failure. There was + growing realization by + investors that mortgage + +On line 7797: + system, but nobody + knew precisely where they lay. + Conclusion: In quick + +On line 7797: + restructuring of + ten firms triggered a global + financial panic. + +On line 7797: + financial system + began to evaporate as + the health of almost + +On line 7799: + institution in + the United States and Europe + was questioned. We briefly + +On line 7803: + of these failures. The + Reserve Primary Fund The + role of the Reserve + +On line 7803: + mutual fund faced + escalating redemption + requests and had to + +On line 7803: + its holdings of Lehman + debt. On Tuesday, September + it broke the buck in + +On line 7803: + a disorganized + manner. Investors who withdrew + early recouped cents + +On line 7803: + the dollar, with the + remaining investors bearing + the losses. This spread + +On line 7803: + situated funds + might follow. By the middle + of the following + +On line 7805: + prime money market + mutual fund investors had + withdrawn billion. When + +On line 7805: + began to convert + their holdings to Treasuries and + cash. Corporations + +On line 7805: + short-term financing + suddenly had to draw down + their backstop lines of + + credit. No one had + expected these corporate + lines of credit to + +On line 7809: + would have to pull back + on other activities. + The role of Fannie + + Mae and Freddie Mac + in causing the crisis The + government-sponsored + +On line 7809: + and Freddie Mac were + elements of the crisis + in several ways: + +On line 7811: + They were part of the + securitization process + that lowered mortgage + +On line 7813: + credit quality + standards. As large financial + institutions whose + +On line 7813: + the too big to fail + problem. Policymakers + were unwilling to + +On line 7815: + because: Financial + institutions around the world + bore significant + +On line 7817: + counterparty risk + to them through holdings of GSE + debt; Certain funding + +On line 7821: + depended on their + continued existence. They + were by far the most + +On line 7823: + to the taxpayer + and are an ongoing cost. + There is vigorous + +On line 7823: + to "private label" + securitizers. There is + also vigorous + + debate about why these + two firms got involved in this + problem. We think both + +On line 7823: + are less important + than the multiple points of + contact Fannie Mae + +On line 7825: + enormous portfolios + of housing-related assets, + and the issuers of + + debt that was treated + like government debt by the + financial system. + +On line 7825: + Freddie Mac did not + by themselves cause the crisis, + but they contributed + +On line 7829: + number of ways. THE + SYSTEM FREEZING Following + the shock and panic, + +On line 7829: + with escalating + frictions. Some funding markets + collapsed entirely. + +On line 7829: + stabilized slowly + as the panic subsided + and the government + + stepped in to backstop + markets and firms. We highlight + three funding markets + +On line 7831: + funds market where banks + loan excess reserves to one + another overnight. Even + +On line 7839: + DISSENTING STATEMENT + banks were unable to get overnight + loans, compounding an + +On line 7841: + September repo + rates increased substantially, + and haircuts ballooned. + +On line 7843: + mortgages were no longer + acceptable collateral. + Commercial paper. + + The failure of Lehman + and the Reserve Primary + Fund breaking the buck + + sparked a run on prime + money market mutual + funds. Money market + +On line 7843: + investing in the + commercial paper market, + leading to a rapid + +On line 7845: + commercial paper. + The inability to find + funding, financial + +On line 7845: + markets for other + kinds of debt collapsed rapidly + in and still have not + + recovered fully, + cutting off a substantial + source of financing + +On line 7847: + credit cards, car loans, + student loans, and small business + loans. Decreased credit + +On line 7847: + housing bubble, and + additional wealth losses + from a declining + +On line 7847: + a sharp contraction + in consump-tion and output + and an increase in + +On line 7849: + contracted at an + annual rate of percent + in the third quarter + +On line 7851: + of percent in the + fourth quarter, and percent in + the first quarter of + +On line 7851: + contraction in the + fourth quarter of was the worst + in nearly three decades. + +On line 7851: + not previously + been directly affected + by the financial + +On line 7851: + new investments, while + families put spending plans + on hold. After the + + panic began, the + rate at which the economy + shed jobs jumped, going + +On line 7851: + from an average + of jobs lost per month in the + first three quarters of + +On line 7851: + to an average + of over jobs lost per month in + the fourth quarter of + +On line 7851: + the first quarter of + The economy continued + to lose jobs through most + +On line 7853: + in October and + remaining above percent for + the rest of and the + +On line 7855: + months of While the shock + and panic therefore appear + to have ended in + +On line 7855: + real economy + continues through today. Firms + and families are + +On line 7855: + deleveraging and are + uncertain about both future + economic growth and + +On line 7855: + final tragedy of the + financial and economic + crisis is that the + + needed recovery + is slow and looks to be so + for a while longer. NOTES + +On line 7859: + of the Commission + on December limited + dissenters to nine pages + +On line 7859: + No limits apply + to the official version + submitted to the + +On line 7861: + Congress. Ben S. Bernanke, + "Monetary Policy and + the Housing Bubble," + +On line 7863: + Georgia, January + (www.federalreserve.gov/ + newsevents/speech/bernanke20100103a.htm). + +On line 7869: + Ibid. KEITH HENNESSEY, + DOUGLAS HOLTZ-EAKIN, "Risky borrowers" + does not mean poor. While + + many risky borrowers + were low-income, a borrower + with unproven income + +On line 7871: + vacation home was + also risky. Bernanke, "Monetary + Policy and the + +On line 7871: + the motivations + of the different types of + securitizers + +On line 7871: + think that both types of + securitizers were in + part responsible + +On line 7871: + less important than + the existence of lower + standards and how this + +On line 7873: + by credit rating + agencies was an essential + cause of the crisis, + +On line 7873: + hypotheses include: + bad analytic models + that failed to account + +On line 7873: + industry model + that encouraged the rating + agencies to skew their + +On line 7873: + a lack of market + competition due to their + government-induced + +On line 7875: + the crisis, the three + key policymakers were + Treasury Secretary + +On line 7875: + Paulson, Federal + Reserve Chairman Ben Bernanke, and + Federal Reserve + +On line 7875: + New York President + Timothy Geithner. + Other officials + +On line 7875: + FHFA Director + Jim Lockhart’s GSE actions and + FDIC Chairman Sheila Bair’s + +On line 7875: + the fall of During + the financial recovery + and rebuilding stage + +On line 7875: + in early the three + key policymakers were + Treasury Secretary + +On line 7877: + Summers. Ben S. Bernanke, + testimony before the + FCIC, Hearing on Too + +On line 7883: + Federal Reserve, + September transcript, p. F + I NA N C IA + + L C R I S + I S I N Q U I + RY C OM M I + + S S I O N + D I S S E N T + I N G S TAT + + E M E N T + PETER J. WALLISON ARTHUR + F. BURNS FELLOW IN + +On line 7910: + INSTITUTE Contact: + pwallison@aei.org INTRODUCTION + Why a Dissent1 Th + +On line 7912: + question I have been + most frequently asked about the + Financial Crisis + +On line 7912: + Commission (the "FCIC" + or the "Commission") is why + Congress bothered to + + authorize it at + all. Without waiting for the + Commission’s insights + + into the causes + of the fi nancial crisis, + Congress passed and the + +On line 7912: + Act (DFA), far reaching + and highly consequential + regulatory + +On line 7912: + and the President + acted without seeking to + understand the true + +On line 7912: + of the President’s + chief of staff —"Never let a + good crisis go to + +On line 7912: + FCIC’s work was not the + full investigation to + which the American + +On line 7912: + useful purpose by + focusing attention again + on the fi nancial + + crisis and whether—with + some distance from it—we can draw + a more accurate + + assessment than the + media did with what is oft + en called the "fi rst + +On line 7912: + history." To avoid + the next fi nancial crisis, + we must understand + +On line 7912: + caused the one from which + we are now slowly emerging, + and take action to + + avoid the same mistakes + in the future. If there is + doubt that these lessons are + +On line 7912: + ongoing eff orts + to amend the Community + Reinvestment Act of + +On line 7912: + Congress, a group of + Democratic congressmembers + introduced HR Th + +On line 7914: + bill, which was lauded + by House Financial Services + Committee Chairman + + Barney Frank as his + "top priority" in the + lame duck session of + +On line 7914: + have extended the + CRA to all "U.S. nonbank fi + nancial companies," + +On line 7914: + thus would apply, to + even more of the national + economy, the same + +On line 7914: + social policy + mandates responsible for + the mortgage meltdown + + and the fi nancial + crisis. Fortunately, the + bill was not acted + +On line 7914: + it is unlikely + that supporters of H.R. will + have the power to + +On line 7914: + in the next Congress, + but in the future other + lawmakers with views + +On line 7914: + to Barney Frank’s may + seek to mandate similar + requirements. At that + +On line 7914: + the government’s use + of private entities for + social policy + + purposes will be + a full understanding of + how these policies were + +On line 7916: + majority erred + in assuming that it knew + the causes of the + +On line 7916: + of pursuing a + thorough study, the Commission’s + majority used + +On line 7916: + seek only the facts + that supported its initial + assumptions—that the + +On line 7916: + by "deregulation" + or lax regulation, greed + and recklessness on + +On line 7916: + fi nancial system + addicted to excessive + risk-taking. Th e + +On line 7918: + not seriously + investigate any other + cause, and did not eff + +On line 7928: + nancial crisis. Th + e majority’s report + covers in detail + + many elements of + the economy before the + fi nancial crisis + +On line 7930: + the authors did not + like, but generally failed + to show how practices + +On line 7930: + had gone on for many + years suddenly caused a world-wide + fi nancial crisis. + +On line 7930: + the majority’s + report turned out to be a + just so story about + +On line 7930: + fi nancial crisis, + rather than a report on what + caused the fi nancial + +On line 7934: + Caused the Financial + Crisis1 George Santayana is oft + en quoted for the + + aphorism that "Th ose + who cannot remember the + past are condemned to + +On line 7936: + it." Looking back on + the fi nancial crisis, we + can see why the study + +On line 7938: + why revisionist + histories are so easy to + construct. Th ere are + +On line 7942: + many factors that could + have caused an historical + event; the diffi cult + +On line 7944: + were the signifi cant + ones—the ones without which + history would have + +On line 7944: + diff erent. Using + this standard, I believe that + the sine qua non of + +On line 7944: + fi nancial crisis + was U.S. government housing + policy, which led + +On line 7944: + to the creation of + million subprime and other + risky loans—half of all + +On line 7946: + in the United States— + which were ready to default as + soon as the massive + + 1997-2007 housing bubble + began to defl ate. If + the U.S. government + +On line 7948: + fi nancial crisis + of would never have occurred. + Initiated by + +On line 7948: + pressed by HUD in both + the Clinton and George W. Bush + Administrations, + +On line 7948: + government’s housing + policy sought to increase + home ownership in + +On line 7948: + standards. In pursuit + of this policy, HUD used + (i) the aff ordable + +On line 7948: + government-sponsored + enterprises (GSEs) Fannie + Mae and Freddie Mac, + +On line 7948: + of the Federal + Housing Administration + (FHA), and (iii) a "Best + + Practices Initiative" + for subprime lenders and mortgage + banks, to encourage + +On line 7948: + and other high risk + lending. HUD’s key role in the + growth of subprime and + +On line 7950: + mortgage lending is + covered in detail in Part + III. Ultimately, + +On line 7950: + entities, as well + as insured banks covered by + the CRA, were compelled + +On line 7950: + mortgage borrowers + who were at or below the + median income + +On line 7952: + areas in which they + lived. Th is competition + caused underwriting + + standards to decline, + increased the numbers of weak + and high risk loans far + +On line 7954: + market would produce + without government infl + uence, and contributed + +On line 7956: + to the growth of the + 1997-2007 housing bubble. When the + bubble began to + + defl ate in mid-2007, + the low quality and high + risk loans engendered + +On line 7960: + ect of these defaults + was exacerbated by + the fact that few if + +On line 7962: + Freddie Mac had been + acquiring large numbers of + subprime and other + +On line 7964: + the unexpected + delinquencies and defaults that + began to appear + +On line 7964: + mid-2007, investors fl ed + the multi-trillion dollar + market for mortgage-backed + +On line 7966: + MBS backed by subprime + and other risky loans—to fractions + of their former prices. + +On line 7966: + required fi nancial + institutions to write down + the value of their + +On line 7968: + causing great investor + and creditor unease. Th + e mechanism by + +On line 7968: + were transmitted to + the fi nancial system as + a whole is covered + +On line 7970: + detail in Part II. + In this environment, the + government’s rescue + +On line 7970: + Bear Stearns in March of + temporarily calmed investor + fears but created + +On line 7970: + and other market + participants reasonably + believed aft er the + +On line 7970: + Bear that all large fi + nancial institutions would + also be rescued + + if they encountered + fi nancial diffi culties. + However, when Lehman + +On line 7972: + Bear—was allowed to + fail, market participants + were shocked; suddenly, + +On line 7972: + forced to consider + the fi nancial health of their + counterparties, many + +On line 7972: + appeared weakened by + losses and the capital + writedowns required by + +On line 7974: + accounting. Th is + caused a halt to lending and + a hoarding of cash—a + +On line 7980: + panic that we know + as the fi nancial crisis + of Weren’t Th ere + + Other Causes of + the Financial Crisis1 Many + other causes of + +On line 7982: + fi nancial crisis + have been cited, including + some in the report + +On line 7982: + but for the reasons + outlined below none of them + alone—or all in + +On line 7984: + explanation of + the crisis. Low interest + rates and a fl ow + + of funds from abroad. Claims + that various policies or + phenomena—such + + as low interest + rates in the early 2000s or + fi nancial fl ows + +On line 7984: + housing bubble, do + not adequately explain + either the bubble + + or the destruction + that occurred when the bubble + defl ated. Th + +On line 7988: + had housing bubbles + in the past—most recently + in the late 1970s and + +On line 7988: + 1980s—but when these bubbles + defl ated they did not + cause a fi nancial + +On line 7990: + housing bubbles in + the 2000s, some even larger than + the U.S. bubble, but + +On line 7990: + their bubbles defl + ated the housing losses + were small. Only in + +On line 7990: + did the defl ation + of the most recent housing + bubble cause a fi + +On line 7992: + and a serious + fi nancial crisis. Th e + reason for this is + + that only in the + U.S. did subprime and other + risky loans constitute + +On line 7992: + the bubble defl + ated. It wasn’t the size + of the bubble that + + was the key; it was + its content. Th e 1997-2007 U.S. + housing bubble was + +On line 7996: + a class by itself. + Nevertheless, demand by + investors for the high + +On line 7996: + off ered by subprime + loans stimulated the growth + of a market for + +On line 7998: + these loans. Th is was + an important element + in the fi nancial + +On line 7998: + although the number + of mortgages in this market + was considerably + +On line 7998: + the number fostered + directly by government + policy. Without + + the huge number of + defaults that arose out of U.S. + housing policy, + +On line 7998: + the mortgages in the + private market would not have + caused a fi nancial + +On line 8000: + regulation or + deregulation as a cause + of the fi nancial + + crisis are also + defi cient. First, no signifi + cant deregulation + +On line 8006: + occurred in the last + years. Th e repeal of a + Dissenting Statement + + portion of the Glass-Steagall + Act, frequently cited as + an example of + +On line 8010: + in the fi nancial + crisis.1 Th e repeal was + accomplished through the + +On line 8014: + Act of which allowed + banks to affi liate for + the fi rst time since + +On line 8014: + fi rms engaged in + underwriting or dealing + in securities. + +On line 8022: + trouble because of + a securities affi + liate. Th e banks + +On line 8022: + losses because they + held low quality mortgages + or MBS were engaged + +On line 8022: + permitted by Glass-Steagall; + the investment banks that got + into trouble—Bear Stearns, Lehman + + and Merrill Lynch—were + not affi liated with + large banks, although they + + had small bank affi + liates that do not appear + to have played any role + +On line 8026: + Federal Deposit + Insurance Corporation + Improvement Act of + +On line 8026: + the regulation + of banks and savings and loan + institutions (S&Ls) + +On line 8026: + debacle in the + late 1980s and early 1990s, and + it is noteworthy + + that FDICIA—the most stringent + bank regulation since the + adoption of deposit + +On line 8034: + banking business. Th + e large investment banks—Bear, Lehman, + Merrill, Goldman Sachs + + and Morgan Stanley—all + encountered diffi culty + in the fi nancial + +On line 8036: + and the Commission + majority’s report lays + much of the blame for + +On line 8036: + at the door of the + Securities and Exchange + Commission (SEC) for + +On line 8036: + them. It is true that + the SEC’s supervisory + process was weak, but many + +On line 8038: + S&Ls—stringently regulated + under FDICIA—also failed. Th is casts + doubt on the claim that + + if investment banks + had been regulated like + commercial banks— or + +On line 8040: + er insured deposits + like commercial banks—they would + not have encountered + +On line 8044: + diffi culties. Th + e reality is that + the business model + + of the investment + banks was quite diff erent from + banking; it was to + + fi nance a short-term + trading business with short-term + liabilities + +On line 8048: + en called repos). Th + is made them especially + vulnerable in + +On line 8048: + that occurred in but + it is not evidence that + the existence of + +On line 8048: + or the quality + of their regulation, was + a cause of the fi + +On line 8050: + crisis. Failures of + risk management. Claims that there + was a general + +On line 8050: + management in fi + nancial institutions or + excessive leverage + + or risk-taking are + part of what might be called a + "hindsight narrative." + + With hindsight, it is + easy to condemn managers for + failing to see the + +On line 8050: + the housing bubble + or the underpricing of + risk that now looks so + + clear. However, the + FCIC interviewed hundreds of + fi nancial experts, + + including senior + offi cials of major banks, + bank regulators + +On line 8054: + investors. It is not + clear that any of them—including + the redoubtable Warren + + Buff ett—were suffi + ciently confi dent about an + impending crisis + + that they put real + money behind their judgment. + Human beings have + +On line 8056: + to believe that things + will continue to go in + the direction they + + are going, and are + good at explaining why this + must be so. Blaming + + the crisis on the + failure to foresee it is + facile and of little + +On line 8060: + that virtually + all participants in the + fi nancial system + +On line 8060: + foresee this crisis—as + they failed to foresee every + other crisis—does + + not tell us anything + about why this crisis occurred + or what we should do + +On line 8062: + See, e.g., Peter J. + Wallison, "Deregulation + and the Financial + +On line 8070: + and structured products. + Securitization—oft en + pejoratively + +On line 8070: + the "originate to + distribute process"—has also + been blamed for the fi + + nancial crisis. But + securitization is + only a means of + +On line 8070: + was a cause of the + fi nancial crisis, so was + lending. Are we then + +On line 8072: + has been used to fi + nance car loans, credit card loans + and jumbo mortgages + +On line 8072: + eligible for + acquisition by Fannie + Mae and Freddie Mac. + + Th e problem was + not securitization + itself, it was the + + weak and high risk loans + that securitization + fi nanced. Under the + + category of + securitization, it + is necessary to + +On line 8078: + collateralized + debt obligations, known as CDOs. + Th ese instruments + +On line 8078: + assets" because they + were ultimately backed by + the subprime mortgages + +On line 8078: + in huge numbers when + the bubble defl ated, + and it was diffi + +On line 8080: + where those losses would + ultimately settle. CDOs, + accordingly, for + + all their dramatic + content, were just another + example of the + + way in which subprime + and other high risk loans were + distributed throughout + + the world’s fi nancial + system. Th e question still + remains why so many + +On line 8086: + Credit default swaps + and other derivatives. + Despite a diligent + + search, the FCIC never + uncovered evidence that + unregulated + + derivatives, and + particularly credit + default swaps (CDS), was + +On line 8090: + contributor to + the fi nancial crisis through + "interconnections". + +On line 8094: + only company + known to have failed because of + its CDS obligations + + was AIG, and that fi + rm appears to have been an + outlier. Blaming + +On line 8096: + fi nancial crisis + because one company did + not manage its risks + +On line 8096: + like blaming lending + generally when a bank + fails. Like everything + + else, derivatives + can be misused, but there is + no evidence that + +On line 8098: + generally. For + example, Lehman Brothers was + a major player + +On line 8098: + but the Commission + found no indication that + Lehman’s failure to meet + +On line 8098: + cant losses to any + other fi rm, including + those that had written + + CDS on Lehman itself. + Predatory lending. Th e + Commission’s report + +On line 8104: + predatory lending + for the large build-up of subprime + and other high risk + + mortgages in the fi + nancial system. Th is might + be a plausible + +On line 8106: + there were evidence + that predatory lending was + so widespread as to + +On line 8106: + volume of high risk + loans that were actually + originated. In + +On line 8108: + unscrupulous lenders take + advantage of unwitting + borrowers. Th is + +On line 8108: + loans were predatory + borrowers, or engaged in + mortgage fraud, because + +On line 8108: + took advantage of + low mortgage underwriting + standards to benefi + + t from mortgages they + knew they could not pay unless + rising housing prices + +On line 8110: + to sell or refi + nance. Th e Commission was + never able to shed + +On line 8110: + light on the extent + to which predatory lending + occurred. Substantial + +On line 8110: + activities by + some lenders and mortgage brokers, + but without giving + +On line 8110: + of how many such loans + were originated. Further, + the majority’s + +On line 8110: + acknowledge that most + of the buyers for subprime + loans were government + +On line 8110: + private companies + complying with government + aff ordable housing + +On line 8120: + Agreement1 Aft er the + majority’s report is + published, many people + +On line 8120: + was not possible + to achieve a bipartisan + agreement on the facts. + +On line 8120: + a surprise that I + am asking the same question. + If the Commission’s + +On line 8120: + an objective and + thorough investigation, + many of the points I + +On line 8120: + would have been known to + the other commissioners + before reading this + +On line 8120: + and perhaps would have + been infl uential with them. + Similarly, I + +On line 8120: + found facts that changed my + own view. But the Commission’s + investigation + +On line 8120: + or carried out in + a way that could ever have + garnered my support + +On line 8122: + members. One glaring + example will illustrate + the Commission’s lack + +On line 8124: + objectivity. + In March Edward Pinto, a + resident fellow + + at the American + Enterprise Institute (AEI) + who had served as chief + + credit offi cer + at Fannie Mae, provided + to the Commission + + staff a 70-page, fully + sourced memorandum on the + number of subprime + +On line 8128: + nancial crisis. In + that memorandum, Pinto + recorded that he had + +On line 8128: + later work showed that + there were approximately + million).2 Since there are + +On line 8128: + about million mortgages + in the U.S., Pinto’s research + indicated that, + + as the fi nancial + crisis began, half of all + U.S. mortgages were of + +On line 8128: + liable to default + when housing prices were no longer + rising. In August, + +On line 8128: + initial research with + a paper documenting + the eff orts of the + +On line 8132: + Th is research raised + important questions about the + role of government + + housing policy + in promoting the high risk + mortgages that played such + + a key role in both + the mortgage meltdown and the + fi nancial panic + +On line 8132: + investigation + of the causes of the fi + nancial crisis would + + have looked carefully + at this research, exposed it + to the members of + +On line 8132: + testimony, and + tested the accuracy + of Pinto’s research. + + But the Commission + took none of these steps. Pinto’s + research was never + +On line 8132: + the other members + of the FCIC, or even to the + commissioners who + +On line 8132: + considering the + role of housing policy + in the fi nancial + +On line 8134: + ignores hypotheses + about the causes of the fi + nancial crisis that + +On line 8134: + would have considered, + while focusing solely on + theories that have + +On line 8138: + currency but far + less plausibility. Th + is is not the way + + a serious and + objective inquiry should have + been carried out, but + +On line 8142: + Commission used its + resources and its mandate. Th + ere were many other + + defi ciencies. Th + e scope of the Commission’s + work was determined + +On line 8146: + of public hearings + that was handed to us in + early December + +On line 8148: + had never discussed + the possible causes of + the crisis, and we + + were never told why + those particular subjects + were important or + + were chosen as the + key issues for a set of + hearings that would form + +On line 8150: + memo), http://www.aei.org/paper/100174. + Edward Pinto, "Government + Housing Policies in + +On line 8156: + Financial Crisis: + A Forensic Study," http//ww.aei.org/docLib/Government-Housing-Policies-Financial-Crisis-Pinto-102110.pdf. Peter + J. Wallison of + +On line 8158: + Commission’s work. Th + e Commission members did + not get together + +On line 8160: + the causes of the + fi nancial crisis until + July, well aft er + +On line 8162: + it was too late to + direct the activities + of the staff Th e + +On line 8164: + of witnesses, and + the majority’s report + is full of statements + +On line 8166: + as "Smith told the FCIC + that…." However, unless the + meeting was public, + +On line 8166: + commissioners were + not told that an interview + would occur, did not + +On line 8166: + interviewed, were not + encouraged to attend, and + of course did not have + +On line 8166: + to question these sources + or understand the contexts + in which the quoted + +On line 8168: + is notably lacking + in their report; opinions in + general are not + +On line 8172: + for challenge. Th e + Commission’s authorizing + statute required that the + +On line 8174: + Commission report + on or before December + Th e original + + plan was for us to + start seeing draft s of the + report in April. We + + didn’t see any draft + s until November. We + were then given an + +On line 8176: + submit comments in + writing, but never had an + opportunity + +On line 8176: + wording as a group + or to know whether our comments + were accepted. We + + received a complete + copy of the majority’s + report, for the fi + +On line 8180: + time, on December + It was almost double-spaced + pages long. Th e date + +On line 8182: + for approval of the + report was eight days later, + on December Th + + at is not the way + to achieve a bipartisan + report, or the full + +On line 8190: + of any group that takes + the issues seriously. + Th is dissenting + +On line 8190: + is organized as + follows: Part I summarizes + the main points of the + +On line 8190: + how the failure of + subprime and other high risk + mortgages drove the growth + +On line 8190: + bubble and weakened + fi nancial institutions + around the world when these + + mortgages began to + default. Part III outlines in + detail the housing + +On line 8190: + approximately + one half of all U.S. mortgages + in were subprime or + +On line 8196: + low quality. Part + IV is a brief conclusion. + Dissenting Statement + +On line 8202: + were many contributing + factors, the housing bubble + of 1997-2007 would not have + +On line 8202: + its dizzying heights or + lasted as long, nor would the + fi nancial crisis + +On line 8202: + played by the housing + policies of the United States + government over the + +On line 8204: + by the middle of + there were approximately + million subprime and + +On line 8204: + outstanding—with an + aggregate value of over + trillion.4 Th ese were + +On line 8206: + in the past, and the + losses associated + with the delinquency + +On line 8206: + these mortgages fully + account for the weakness and + disruption of the + + fi nancial system + that has become known as the + fi nancial crisis. + + Most subprime and Alt-A + mortgages are high risk loans. A + subprime mortgage is + +On line 8208: + borrower who has + blemished credit, usually + signifi ed by a + +On line 8208: + has failed in Unless + otherwise indicated, + all estimates for + +On line 8208: + number of subprime + and Alt-A mortgages outstanding, + as well as the use + +On line 8208: + specifi c terms such + as loan to value ratios + and delinquency rates, + +On line 8208: + Institute. Pinto + is also a consultant + to the housing fi + +On line 8208: + industry and a + former chief credit offi + cer of Fannie Mae. + +On line 8210: + is posted on both + my and Pinto’s scholar pages + at AEI as follows: + +On line 8212: + http://www.aei.org/docLib/Pinto-Sizing-Total-Exposure.pdf, which accounts for + all million high risk loans; http://www.aei.org/docLib/ + Pinto-Sizing-Total-Federal-Contributions.pdf, which covers the + +On line 8212: + loans that were held or + guaranteed by federal + agencies and the four + +On line 8214: + made these loans under + CRA; and http:// www.aei.org/docLib/Pinto-High-LTV-Subprime-Alt-A.pdf, which covers + the acquisition + +On line 8216: + government agencies + from the early 1990s. Th e + information in + +On line 8220: + is fully cited + to original sources. Th ese + memoranda were + +On line 8220: + data exhibits to + a Pinto memorandum + submitted to the + +On line 8220: + in January and + revised and updated in + March (collectively, + +On line 8222: + "Triggers memo"). One of + the confusing elements + of any study of the + + mortgage markets is + the fact that the key defi + nitions have never + +On line 8222: + agreed upon. For many + years, Fannie Mae treated as + subprime loans only + +On line 8222: + Mortgage Finance, a + common source of data on + the mortgage market, + +On line 8222: + recorded as subprime + only those loans reported + as subprime by the + +On line 8222: + Fannie and Freddie. + Other loans were recorded as + prime, even if they had + + credit scores that would + have classifi ed them as + subprime. However, + +On line 8222: + score of less than is + generally regarded + as a subprime loan, + +On line 8222: + how originated. + Th at is the standard, for + example, used by + +On line 8226: + Comptroller of the + Currency. In this statement + and in Pinto’s work + +On line 8226: + subprime loans, and loans + to borrowers with FICO + scores of less than are + +On line 8226: + Fannie and Freddie + reported only a very + small percentage of + +On line 8226: + loans as subprime, so + in eff ect the subprime loans + acquired by Fannie + +On line 8226: + others in order + to derive something closer + to the number and + + principal amount of + the subprime loans outstanding + in the fi nancial + +On line 8226: + given time. One of + the important elements + of Edward Pinto’s + + work was to show that + Fannie and Freddie, for many + years prior to the + + fi nancial crisis, + were buying loans that should have + been classifi ed + + as subprime because + of the borrowers’ credit + scores and not simply + +On line 8226: + were originated + by subprime lenders. Fannie and + Freddie did not do + +On line 8228: + by the federal + government. Th is lack of + disclosure on the + +On line 8228: + of the GSEs appears + to have been a factor in + the failure of many + +On line 8238: + defl ated in + Dissenting Statement the past + to meet other fi + + nancial obligations. + Before changes in government + policy in the + +On line 8238: + 1990s, most borrowers + with FICO scores below did + not qualify as + +On line 8242: + had diffi culty + obtaining mortgage credit + other than through the + +On line 8244: + a relatively + small number of specialized + subprime lenders. An Alt-A + +On line 8244: + one that is defi + cient by its terms. It may have + an adjustable rate, lack + +On line 8244: + require payment of + interest only, or be + made to an investor + +On line 8246: + key defi ciency + in many Alt-A mortgages is a + high loan-to-value + +On line 8246: + a low downpayment. + A low downpayment for a + home may signify + + the borrower’s lack + of fi nancial resources, and + this lack of "skin in + +On line 8246: + en means a reduced + borrower commitment to + the home. Until they + +On line 8246: + subject to HUD’s aff + ordable housing requirements, + beginning in the + + early 1990s, Fannie + and Freddie seldom acquired + loans with these defi + + ciencies. Given the + likelihood that large numbers + of subprime and Alt-A + +On line 8248: + would default once the + housing bubble began to + defl ate in mid- + +On line 8248: + eff ects for the U.S. + economy and fi nancial + system—the key question + + for the FCIC was to + determine why, beginning + in the early 1990s, + +On line 8248: + deteriorate + so signifi cantly that it + was possible to + +On line 8252: + and Alt-A mortgages. Th + e Commission never made + a serious study + +On line 8252: + this question, although + understanding why and how + this happened must be + + viewed as one of the + central questions of the fi + nancial crisis. From + +On line 8254: + was limited to + validating the standard + narrative about the + +On line 8254: + crisis—that it was caused + by deregulation or lack + of regulation, + +On line 8254: + were either never + considered or were treated + only superfi + +On line 8254: + In criticizing + the Commission, this statement + is not intended + +On line 8254: + criticize the staff + which worked diligently and eff + ectively under + +On line 8256: + cult circumstances, and + did extraordinarily + fi ne work in the + +On line 8258: + were directed to + cover. Th e Commission’s + failures were failures + +On line 8266: + Resulted in an + Unprecedented Number of + Risky Mortgages Th ree + +On line 8266: + were primarily + responsible for the growth + of subprime and Alt-A + +On line 8266: + mortgages in the U.S. + economy between and and + for the decline in + +On line 8272: + ensued. Th e GSEs’ + Aff ordable Housing Mission. + Th e fact that high + +On line 8274: + mortgages formed almost + half of all U.S. mortgages by + the middle of was + + not a chance event, nor + did it just happen that banks + and other mortgage + +On line 8274: + decided on their + own to off er easy credit + terms to potential + +On line 8276: + beginning in the + 1990s. In Congress enacted + Title XIII of + +On line 8276: + Act), legislation + intended to give low and + Public Law 102-550, Stat. + +On line 8282: + October Peter + J. Wallison moderate + income7 borrowers + + better access to + mortgage credit through Fannie + Mae and Freddie Mac. + +On line 8284: + became a set of + regulations that required + Fannie and Freddie + +On line 8284: + reduce the mortgage + underwriting standards they + used when acquiring + +On line 8284: + from originators. + As the Senate Committee + report said at the + +On line 8286: + e purpose of [the + aff ordable housing] goals is + to facilitate + +On line 8286: + Mae and Freddie Mac + of an ongoing business + eff ort that will be + +On line 8290: + racial minorities and + inner-city residents."8 + Th e GSE Act, and + +On line 8290: + motion a series + of changes in the structure of + the mortgage market + +On line 8290: + particularly + the gradual degrading + of traditional + +On line 8290: + Accordingly, in + this dissenting statement, I + will refer to the + +On line 8290: + and Alt-A mortgages that + were acquired because of the + aff ordable housing + +On line 8290: + as well as other + subprime and Alt-A mortgages, as + non-traditional + +On line 8292: + Th e GSE Act was + a radical departure + from the original + +On line 8292: + the GSEs as managers + of a secondary market in + prime mortgages. Fannie + + Mae was established + as a government agency + in the New Deal era + +On line 8292: + mortgages from banks and + other loan originators, + providing them with + +On line 8292: + funds with which to make + additional mortgages. In + it was authorized + +On line 8292: + government-sponsored + enterprise (GSE)9—a shareholder-owned + company with a + +On line 8292: + mission to maintain + a liquid secondary market + in mortgages. Freddie + +On line 8292: + another GSE in + Fannie and Freddie carried + out this mission eff + +On line 8292: + 1990s, and in the process + established conservative + lending standards for + +On line 8292: + willing to purchase, + including such elements + as downpayments of + +On line 8296: + GSE Act, however, + created a new "mission" + for Fannie Mae and + +On line 8296: + to establish and + administer what was in + eff ect a mortgage + + quota system in + which a certain percentage + of all Fannie and + +On line 8296: + had to be loans to + low-and- moderate income (LMI) + borrowers—defi + + ned as persons with + income at or below the + median income + +On line 8298: + living in certain + low income communities. + Th e AH goals put + +On line 8298: + and Freddie into + direct competition with + the FHA, which was then + +On line 8298: + HUD that functions as + the federal government’s + principal subprime + +On line 8300: + as percent of area + median income (AMI) and + moderate income + +On line 8302: + as percent of AMI. + Report of the Committee + on Banking Housing + +On line 8302: + Aff airs, United States + Senate to accompany + S. Report 102-282, May + +On line 8304: + government sponsored + enterprises because they + had been chartered by + +On line 8304: + exemption from the + Securities Act of and + the Securities + +On line 8304: + Exchange Act of and + a line of credit at the + Treasury that signaled + +On line 8304: + capital markets + (which continued to call them + "Agencies") assumed that + + in the event of fi + nancial diffi culties the + government would stand + + behind them. Th is + implied government backing + gave them access to + +On line 8310: + that was lower cost + than any AAA borrower and + oft en only a + +On line 8316: + basis points over the + applicable Treasury rate. + Dissenting Statement + +On line 8320: + Over the next years, HUD + consistently enhanced and + enlarged the AH goals. + +On line 8320: + the GSE Act, Congress + had initially specifi ed + that percent of the + +On line 8324: + mortgage purchases + meet the AH goals. Th is was + increased to percent + +On line 8326: + and percent in By + the main LMI goal was percent, + and a special aff + +On line 8326: + subgoal had been added + requiring that percent of + the loans acquired by + +On line 8326: + the GSEs be made to + borrowers who were at or + below percent of + +On line 8326: + (AMI). Table page shows + that Fannie and Freddie met + the goals in almost + +On line 8330: + year between and Th + ere is very little data + available concerning + + Fannie and Freddie’s + acquisitions of subprime + and Alt-A loans in the + +On line 8332: + so it is diffi + cult to estimate the GSEs’ + year-by-year acquisitions + +On line 8332: + er the AH goals went + into eff ect. However, + Pinto estimates + +On line 8332: + these purchases at + approximately trillion + (see Table page As + +On line 8332: + Table page on June + immediately prior + to the onset of + +On line 8332: + nancial crisis, the + GSEs held or had guaranteed + million subprime and + +On line 8336: + was percent of their + total mortgage exposure + of million loans, which + +On line 8336: + the million mortgages + outstanding in the U.S. on + that date. Fannie and + +On line 8336: + far the dominant + players in the U.S. mortgage + market before the + +On line 8336: + set the standards for + the rest of the mortgage fi + nancing industry. + +On line 8340: + Reinvestment Act. In + the regulations under + the Community + +On line 8340: + Reinvestment Act (CRA)10 + were tightened. As initially + adopted in the CRA + +On line 8340: + banks and S&Ls reach out + to low-income borrowers in + communities they + +On line 8342: + new regulations, + made eff ective in for the + fi rst time required + +On line 8342: + communities and + to low-income borrowers.11 A + qualifying CRA + +On line 8342: + was one made to a + borrower at or below + percent of the AMI, + +On line 8342: + thus was similar + to the loans that Fannie and + Freddie were required + +On line 8344: + HUD’s AH goals. In the + National Community + Reinvestment Coalition + +On line 8344: + organization + for community activist + organizations, + +On line 8344: + approval for mergers + committed in agreements with + community groups + +On line 8346: + over trillion in CRA + loans.12 A substantial portion + of these commitments + + appear to have been + converted into mortgage + loans, and thus would have + +On line 8346: + substantially to + the number of subprime and + other high risk loans + +On line 8348: + in Part III, this was + not done. Accordingly, the + GSE Act put Fannie + +On line 8348: + FHA, and the banks that + were seeking CRA loans into + competition for + +On line 8348: + same mortgages—loans to + borrowers at or below + the applicable + +On line 8350: + Practices Initiative. + In HUD added another group + to this list when it + +On line 8350: + up a "Best Practices + Initiative," to which members + of the Mortgage Pub.L. + +On line 8364: + was explicitly + intended to encourage + a reduction in + +On line 8364: + to increase access + by low income borrowers + to mortgage credit. + +On line 8364: + was by far the largest + member of this group and by + the early 2000s was + + also competing, + along with others, for the same + NTMs sought by Fannie + +On line 8366: + and Freddie, FHA, and + the banks under the CRA With + all these entities + + seeking the same loans, + it was not likely that all + of them would fi nd + +On line 8366: + the traditional + mortgage lending standards that + Fannie and Freddie + + had established. It + also created ideal + conditions for a + +On line 8366: + since every one of + these competing entities + was seeking NTMs not + + for purposes of + profi t but in order to + meet an obligation + +On line 8368: + by the government. + Th e obvious way to + meet this obligation + +On line 8372: + 1990s, traditional + underwriting standards had + come to be seen as + +On line 8372: + ownership by LMI + families. In a Senate + Banking Committee + +On line 8372: + will respond to the + most conservative standards + unless [Fannie Mae + + and Freddie Mac] are + aggressive and convincing + in their eff orts to + +On line 8374: + historically + narrow underwriting."13 In + this light, it appears + + that Congress set out + deliberately in the + GSE Act not only + +On line 8374: + change the culture of + the GSEs, but also to set + up a mechanism + +On line 8374: + standards over time, so + that home ownership would be + more accessible + +On line 8374: + For example, the + legislation directed + the GSEs to study "Th + +On line 8376: + that—(A) establish a + downpayment requirement for + mortgagors of percent + +On line 8376: + less;14 (B) allow the + use of cash on hand as a + source of downpayments; + +On line 8376: + borrowers who have + a credit history of + delinquencies if the + +On line 8376: + the 12-month period + ending on the date of the + application for + +On line 8378: + understood at the + time. I have been unable to + fi nd any studies + +On line 8378: + in response to this + congressional direction, + but HUD treated these + +On line 8378: + use the AH goals as + a mechanism for eroding + the traditional + + standards. HUD was very + explicit about this, as shown + in Part II. In the + +On line 8378: + was accomplished by + gradually expanding + the requirements and + + enlarging the AH + goals over succeeding years, so + that the only way + +On line 8378: + Freddie could meet the + AH goals was by purchasing + increasing numbers + +On line 8378: + Because the GSEs were + the dominant players in + the mortgage market, + +On line 8378: + that were subject to + government control—FHA and the banks + Allen Fishbein, "Filling + +On line 8382: + the GSEs’ minimum + downpayment was percent, and + was accompanied + +On line 8384: + underwriting. Th + e congressional request + was to break through that + +On line 8394: + limitation. GSE + Act, Section 1354(a). Dissenting + Statement under CRA—to + +On line 8394: + lending in order + to fi nd the mortgages they + needed to comply + +On line 8396: + also true of the + mortgage banks—the largest of which + was Countrywide—that + +On line 8396: + bound to promote aff + ordable housing through HUD’s Best + Practices Initiative. + +On line 8398: + By the result of + these government programs was + an unprecedented + +On line 8398: + subprime and other + high risk mortgages in the U.S. + fi nancial system. + +On line 8398: + which agencies or fi + rms were holding the credit + risk of these mortgages- + +On line 8402: + fi nancial crisis + began. As Table makes clear, + government agencies, + +On line 8402: + or had guaranteed + million of the NTM loans that + were outstanding at + +On line 8404: + about million NTMs had + been distributed to investors + through the issuance of + +On line 8408: + private issuers such + as Countrywide and other + subprime lenders. Th e + + fact that the credit + risk of two-thirds of all the NTMs + in the fi nancial + +On line 8408: + by the government + or by entities acting + under government + +On line 8408: + the central role of + the government’s policies in + the development + + of the 1997-2007 housing + bubble, the mortgage meltdown + that occurred when the + +On line 8408: + fi nancial crisis + and recession that ensued. + Similarly, the + +On line 8408: + million NTMs were held + by investors and fi nancial + institutions in + + the form of PMBS shows + that this group of NTMs were less + important as a + +On line 8412: + report focuses + almost entirely on the + million PMBS, and is + +On line 8416: + the government’s role + in the fi nancial crisis. + Table Entity + +On line 8436: + Mac million trillion + FHA and other Federal* + million trillion CRA + +On line 8444: + HUD Programs million + trillion Total Federal + Government million + +On line 8454: + Other (including + subprime and million trillion + Alt-A PMBS issued by + +On line 8466: + Administration, + Federal Home Loan Banks and + others. To be sure, + +On line 8466: + eff orts to increase + home ownership through the AH + goals succeeded. Home + +On line 8466: + the U.S. increased from + approximately percent + in (where it had been + +On line 8468: + to over percent in + Almost everyone in and + out of government + +On line 8468: + goal In the process known + as securitization, + securities backed + +On line 8468: + a pool of mortgages + (mortgage-backed securities, or + MBS) and issued by + +On line 8470: + issued by the GSEs + or Ginnie Mae) or private + MBS (PMBS). See Edward + +On line 8474: + Exhibit to the + Triggers Memo, April p.4. http://www.aei.org/ + docLib/Pinto-Sizing-Total-Federal-Contributions.pdf. Census Bureau + +On line 8482: + data. Peter J. + Wallison of U.S. housing + policy—until the + +On line 8484: + costs became clear with + the collapse of the housing + bubble in Th en + +On line 8486: + elaborate process of + shift ing the blame began. The + Great Housing Bubble + +On line 8488: + Its Effects Figure + below, based on the data + of Robert J. Shiller, shows + + the dramatic growth + of the 1997-2007 housing bubble + in the United States. + +On line 8488: + home prices in the U.S. + had increased substantially + for ten years. Th e + +On line 8490: + in real dollar + terms had been almost percent, + ten times greater than any + +On line 8490: + bubble in modern + times. As discussed below, there + is good reason to + +On line 8490: + previous bubbles + because of the government’s + housing policies, which + +On line 8490: + increased the demand + for housing by funneling + more money into + +On line 8490: + and the government + had not promoted the growth + of subprime lending. + +On line 8498: + Shiller Th at the 1997-2007 + bubble lasted about twice as + long as the prior + +On line 8498: + in itself. Mortgage + quality declines as a + housing bubble grows + + and originators + try to structure mortgages that + will allow buyers + +On line 8498: + monthly payments for + more expensive homes; the fact + that the most recent + +On line 8500: + destructiveness when + it defl ated. Why did + this bubble last so + + long1 Housing bubbles + defl ate when delinquencies + and defaults begin + +On line 8500: + that the risks of a + collapse are mounting. One by + one, investors cash in + +On line 8500: + leave. Eventually, + the bubble tops out, those who + are still in the game + + run for the doors, and + a defl ation in prices sets + in. Generally, + +On line 8500: + the past, this process took + three or four years. In the case + of the most recent + +On line 8508: + it took ten. Th e + reason for this longevity is + that one Dissenting + +On line 8510: + participant in + the market was not in it + for profi t and was + + not worried about the + risks to itself or to those + it was controlling. + +On line 8510: + by making mortgage + credit available to low and + moderate income + +On line 8510: + institutions it + controlled or could infl uence + through regulation + +On line 8510: + keep pumping money + into housing long aft er + the bubble, left to + +On line 8512: + debating whether the + Fed’s monetary policy + in the early 2000s + +On line 8514: + rates too low for too + long. Naturally enough, Ben + Bernanke and Alan Greenspan have + +On line 8514: + that the Fed was not + at fault. On the other hand, + John Taylor, author + +On line 8514: + Taylor rule, contends + that the Fed’s violation + of the Taylor rule + +On line 8516: + principal cause of + the bubble. Raghuram Rajan, + a professor at + + the Chicago Booth School + of Business, argues that the + Fed’s low interest + +On line 8516: + bubble, but that the + Fed actually followed + this policy in + +On line 8516: + rather than defl ation.19 + Other theories blame huge + infl ows of funds + +On line 8516: + or from countries that + were recycling the dollars + they received from trade + +On line 8518: + with the U.S. Th ese + debates, however, may be + missing the point. It + +On line 8518: + where the funds that built + the bubble actually + originated; the + +On line 8518: + why they were transformed + into the NTMs that were prone + to failure as soon + +On line 8520: + great bubble defl + ated. Figure illustrates + clearly that the 1997-2007 + +On line 8520: + on a foundation + of million subprime and Alt-A + mortgages and shows the + +On line 8520: + the cumulative + growth in the dollar amount of + NTMs and the growth of + + the bubble over time. + It includes both GSE and CRA + contributions to + +On line 8520: + normal baseline of + percent,20 and estimated + CRA lending under + + the merger-related + commitments of the four large + banks—Bank of America, + +On line 8520: + Citibank and JPMorgan Chase—that, with + their predecessors, made most + of the commitments. + +On line 8520: + above, these commitments + were made in connection with + applications to + +On line 8522: + approvals of mergers + or acquisitions. Th e + dollar amounts involved + +On line 8522: + report by the NCRC,21 + and adjusted for announced + loans and likely rates + +On line 8526: + Bernanke testimony + before the FCIC, September + Alan Greenspan, in "Th e + +On line 8528: + Draft March Taylor, in + testimony before the + FCIC on October + +On line 8528: + Taylor, Getting Off + Track, Hoover Institution Press, + and Raghuram Rajan, + +On line 8532: + the World Economy, + Princeton University Press, + pp. 108-110. It appears + +On line 8532: + GSEs’ normal intake + of mortgages included about + percent that were made + +On line 8532: + were at or below + the median income in + the area in which they + +On line 8532: + eligible for + AH credit. It was only + when the AH goals rose + +On line 8532: + in that government + policy required the GSEs + to acquire more AH + + qualifying loans + than they would have purchased as + a matter of course. + +On line 8532: + the case of the CRA + contributions, the baseline + is and includes the + +On line 8532: + made by the four largest + banks and their predecessors + listed in the NCRC + + report, adjusted + for the loans actually + announced by the banks + +On line 8534: + er that date. In the + National Community + Reinvestment Coalition + +On line 8534: + amount of CRA loans that + banks had committed to make + in connection with + +On line 8536: + that these commitments + exceeded trillion. Th e + original report + +On line 8540: + s/report-silver-brown.pdf. A + portion of these commitments + were in fact fulfi + +On line 8540: + CRA qualifying + loans. A full discussion of + these commitments and + +On line 8548: + Section III. Peter + J. Wallison production + line also includes + +On line 8548: + almost trillion in + NTM lending by Countrywide + Financial under + +On line 8552: + Practices Initiative.22 + Figure Th e Eff ect of + Government Policies + + on the Growth of the + Bubble It is not true that + every bubble--even a + + large bubble-- has the + potential to cause a fi + nancial crisis when + +On line 8556: + ates. Th is is clear + in Table below, prepared + by Professor Dwight + + Jaff ee of the Haas + Business School at U.C. Berkley. Th + e table shows that + +On line 8558: + of which also had + large bubbles during the 1997-2007 + period—the losses + +On line 8558: + mortgage delinquencies + and defaults when these bubbles + defl ated were + + far lower than the + losses suff ered in the U.S. + when the 1997-2007 defl + +On line 8576: + Western Europe and + the United States Month Impaired + or Foreclosures Year + +On line 8640: + Belgium Denmark France + Ireland Italy Portugal Spain + Sweden UK U.S. All + +On line 8668: + for U.S. Data. Th + e underlying reasons + for the outcomes in + +On line 8668: + Banking Committee + in September by Dr. Michael + Lea, Director of + +On line 8668: + Corky McMillin Center for + Real Estate at San Diego + State University: + + Th e default and + foreclosure experience + of the U.S. market + +On line 8672: + been far worse than in + other countries. Serious + default rates remain + +On line 8672: + than percent in all + other countries and less than + percent in Australia + +On line 8672: + Of the countries in + this survey only Ireland, + Spain and the UK have + + seen a signifi cant + increase in mortgage default + during the crisis. + +On line 8676: + for this result. First + sub-prime lending was rare or + non-existent outside + +On line 8680: + U.S. Th e only + country with a signifi cant + subprime share was the + +On line 8680: + percent of mortgages + in Subprime accounted for + percent of mortgages + +On line 8680: + less than percent in + Australia and negligible + proportions elsewhere. + +On line 8682: + less "risk layering" + or off ering limited + documentation + +On line 8684: + or no downpayment. + Th ere was little "no doc" + lending…the proportion + + of loans with little + or no downpayment was less + than the U.S. and the + +On line 8684: + in house prices in most + countries was also less…[L]oans in + other developed + +On line 8686: + routinely go aft + er borrowers for defi + ciency judgments.24 Th + +On line 8688: + destructiveness of + the 1997-2007 bubble came from its + composition—the + +On line 8688: + its size is also + illustrated by data + on foreclosure starts + +On line 8688: + the Mortgage Bankers Dwight + M. Jaff ee, "Reforming the + U.S. Mortgage Market + +On line 8690: + rough Private Market + Incentives," Paper prepared + for presentation + +On line 8690: + Government Sponsored + Enterprises," Federal + Reserve Bank of St. + +On line 8692: + Table Dr. Michael J. + Lea, testimony before + the Subcommittee + + on Security + and International Trade + and Finance of the + +On line 8702: + Association + (MBA).25 Th is data allows + a comparison + +On line 8702: + the foreclosure starts + that have thus far come out of + the 1997-2007 bubble and + +On line 8702: + foreclosure starts in + the two most recent housing + bubbles (1977-1979 and 1985-1989) + +On line 8704: + Figure Aft er the + housing bubble that ended + in when almost all + + mortgages were prime loans + of the traditional type, + foreclosure starts in + +On line 8704: + ensuing downturn + reached a high point of only + percent in Aft er + +On line 8704: + the next bubble, which + ended in and in which a + high proportion of + +On line 8704: + the traditional + type, foreclosure starts reached a + high of percent in + +On line 8704: + aft er the collapse + of the 1997-2007 bubble—in which half + of all mortgages were + +On line 8704: + the unprecedented + level (thus far) of percent + in And this was true + +On line 8706: + orts to prevent or + delay foreclosures. All the + foregoing data + +On line 8706: + signifi cant for a + proper analysis of the + role of government + + policy and NTMs + in the fi nancial crisis. + What it suggests is + + that whatever eff + ect low interest rates or + money fl ows from + +On line 8706: + had in creating + the great U.S. housing bubble, + the defl ation of + +On line 8706: + bubble need not have + been destructive. It wasn’t + just the size of the + +On line 8708: + also the content. + Th e enormous delinquency + rates in the U.S. (see + +On line 8708: + developed countries + did not have the numbers of + NTMs that were present in + +On line 8710: + nancial system when + the bubble defl ated. + As shown in later + +On line 8710: + these mortgage defaults + were translated into huge + housing price declines + +On line 8710: + from there—through the PMBS they + were holding—into actual + or apparent fi + +On line 8710: + weakness in the banks + and other fi rms that held + these securities. + + Accordingly, if + the 1997-2007 housing bubble had + not been seeded with + +On line 8712: + it is likely that + the fi nancial crisis would + never have occurred. + +On line 8718: + government adopted + aff ordable housing policies, + mortgages of this kind + +On line 8720: + a conventional + mortgage—generally had + a fi xed rate, oft + +On line 8720: + en for or years, a + downpayment of to percent, + and was made to a + + borrower who had + a job, a steady income and + a good credit record. + + Before the GSE Act, + even subprime loans, although made + to borrowers with + +On line 8720: + involved substantial + downpayments or existing + equity in homes.27 + +On line 8724: + delinquency rates of + the NTMs that were outstanding + on June Th e grayed + +On line 8728: + virtually all + the NTMs. Th e contrast in + quality, based on + +On line 8728: + rates, between these loans + and Fannie and Freddie prime + loans in lines and is + +On line 8732: + Survey. See Pinto, + "Government Housing Policies + in the Lead-Up to the + +On line 8742: + November p.58, http://www.aei.org/docLib/Government-Housing-Policies-Financial-Crisis-Pinto-102110.pdf. + Id., p.42. Dissenting Statement + Table Delinquency + +On line 8750: + Delinquency Rate Days + and in Foreclosure) High Rate + Subprime (including + +On line 8766: + Freddie private MBS + holdings) Option Arm million + Alt-A (inc. Fannie/Freddie/FHLBs million† + +On line 8784: + holdings) Fannie Subprime/Atl-A/Nonprime + million Freddie Subprime/Alt-A/Nonprime million + Government million + +On line 8808: + Jumbo Prime million + Non-Agency Conforming Prime Fannie + Prime million Freddie + +On line 8818: + Loans million Includes + an estimated million + subprime (FICO<660) that + + were (i) not high rate + and (ii) non-prime CRA and HUD Best + Practices Initiative + +On line 8824: + are included in + the "CRA and HUD Programs" line + in Table Excludes + +On line 8828: + Fannie subprime/Alt-A/nonprime. Excludes + Freddie subprime/Alt-A/nonprime. Excludes loans owned + or securitized + +On line 8832: + and conforming prime + counted together. Total + delinquency data + +On line 8836: + Processing Services, + LPS Mortgage Monitor, June + Based on Fannie Mae + +On line 8836: + Converted from a + serious delinquency rate + days in foreclosure) + +On line 8836: + an estimated + Total Delinquency Rate days + and in foreclosure). + +On line 8838: + Converted from a + serious delinquency rate + days in foreclosure) + +On line 8838: + an estimated + Total Delinquency Rate days + and in foreclosure). + +On line 8842: + Origin and Growth of + Subprime PMBS It was only + in that the market + +On line 8842: + securities backed + by subprime loans or other + NTMs—reached billion. In that + +On line 8842: + year, the top fi ve + issuers were GMAC-RFC billion), + Lehman billion), CS First + +On line 8846: + Boston billion), Bank + of America billion) and + Ameriquest billion).29 Th e + +On line 8848: + issuances of PMBS that + year totaled billion, of which + billion in PMBS were + + issued by Wall Street + fi nancial institutions. + In subsequent years, + + as the market grew, + Wall Street institutions fell + behind the major + +On line 8848: + issuers, so that by + 2005—the biggest year for subprime + PMBS issuance—only Lehman + +On line 8848: + fi ve issuers and + Wall Street issuers as a group + were only percent + +On line 8854: + that year.30 Id., Figure + Inside Mortgage Finance, Th + e Mortgage Market + +On line 8864: + Statistical Annual—Vol. + II, p143. Id., p.140. Peter J. + Wallison One of + + the many myths about the + fi nancial crisis is that + Wall Street banks led the + + way into subprime + lending and the GSEs followed. + Th e Commission + +On line 8866: + this idea as a way + of explaining why Fannie + and Freddie acquired + +On line 8868: + NTMs. Th is notion + simply does not align with the + facts. Not only were + +On line 8868: + Street institutions + small factors in the subprime + PMBS market, but well + +On line 8868: + much bigger players + than the entire PMBS market + in the business of + +On line 8868: + acquiring NTM and + other subprime loans. Table + page shows that Fannie + +On line 8868: + had already acquired + at least billion in NTMs by + Obviously, the + + GSEs did not have to + follow anyone into NTM + or subprime lending; + +On line 8868: + that market before + Table also shows that in + when the entire PMBS + +On line 8868: + billion, Fannie and + Freddie acquired billion in + whole subprime mortgages + +On line 8868: + billion in other + NTMs, demonstrating again that the + GSEs were no strangers to + +On line 8870: + lending well before + the PMBS market began to + develop. Further + +On line 8870: + into subprime or + NTM lending is provided + by Fannie’s 10-K. Th + +On line 8874: + percent of Fannie’s + credit obligations (either + in portfolio or + +On line 8874: + FICO credit scores + below as of December + percent at the end + +On line 8874: + of and percent at + the end of So Fannie and + Freddie were active + + and major buyers + of subprime loans in years when + the PMBS market had + +On line 8874: + total issuances of + only billion and billion + In other words, it + +On line 8874: + be more accurate + to say that Wall Street followed + Fannie and Freddie + +On line 8874: + lending rather than vice + versa. At the same time, the + GSEs’ purchases of + +On line 8874: + loans throughout the 1990s + stimulated the growth of + the subprime lending + +On line 8874: + which ultimately + became the mainstay of the + subprime PMBS market + +On line 8876: + 2000s. was the biggest + year for PMBS subprime issuances, + and Ameriquest billion) and + +On line 8878: + billion) were the two + largest issuers in the top Th + ese numbers were still + + small in relation + to what Fannie and Freddie + had been buying since + +On line 8882: + in Th e total + in Table for Fannie and + Freddie between and + +On line 8882: + approximately + trillion for subprime loans and + over trillion for all + +On line 8884: + as a group. Because + subprime PMBS were rich in NTM + loans eligible + +On line 8884: + credit under HUD’s + AH goals, Fannie and Freddie + were also the largest + +On line 8884: + of subprime PMBS from + to acquiring percent of + the total issuances, + +On line 8884: + billion.32 In Table + above, which organizes mortgages + by delinquency rate, + +On line 8884: + these purchases are + included in line which had + the highest rate of + +On line 8888: + subprime—designated + as subprime by the lender when + originated—and thus had + +On line 8888: + and usually a + higher interest rate than + prime loans; many also + +On line 8890: + were responsible + for both the poor quality + of the subprime and + +On line 8890: + mortgages that backed the + PMBS and for the enormous size + to which this market + +On line 8894: + Th is was true not + only because Fannie and + Freddie 10-K, Table + +On line 8898: + http://www.sec.gov/Archives/edgar/data/310522/000095013303001151/ w84239e10vk.htm#031. See Table + of "High LTV, Subprime and Alt-A + Originations Over + + the Period 1992-2007 + and Fannie, Freddie, FHA and + VA’s Role" found at http://www.aei.org/docLib/Pinto-High-LTV-Subprime-Alt-A.pdf. + +On line 8906: + Dissenting Statement + stimulated the growth of + that market through their + +On line 8906: + of PMBS, but also + because the huge infl ow + of government or + +On line 8906: + into the housing + market turned what would have been + a normal housing + + bubble into a + bubble of unprecedented + size and duration. + +On line 8910: + is encouraged and + enabled unprecedented growth + in the PMBS market + +On line 8912: + of the AH goals, the + competition between the + GSEs and the FHA, the + + eff ect of HUD’s Best + Practices Initiative, and bank + lending under the + +On line 8912: + continuing fl + ow of funds into weaker + and weaker mortgages. + +On line 8916: + is had the eff ect + of extending the life of + the housing bubble + +On line 8918: + increasing its size. + Th e growth of the bubble + in turn disguised the + +On line 8918: + subprime mortgages it + contained; as housing prices rose, + subprime borrowers + +On line 8918: + were able to refi + nance their mortgages, using the + equity that had + +On line 8918: + in their homes solely + through rising home prices. Without + the continuous + +On line 8918: + have begun showing + up within a year or two, + bringing the subprime + +On line 8918: + market to a halt. + Instead, the bubble lasted + ten years, permitting + +On line 8920: + to grow until it + reached almost trillion. Second, + as housing prices rose + +On line 8920: + was necessary for + borrowers to seek riskier + mortgages so they could + + aff ord the monthly + payments on more expensive + homes. Th is gave rise + +On line 8922: + and riskier forms of + mortgage debt, such as option + ARMs (resulting in + +On line 8922: + and interest-only + mortgages. Mortgages of this kind + could be suitable for + + some borrowers, but + not for those who were only + eligible for + +On line 8922: + loans. Nevertheless, + subprime loans were necessary + for PMBS, because they + + generally bore + higher interest rates and + thus could support the + + yields that investors were + expecting. As subprime loans + were originated, + + Fannie and Freddie + were willing consumers of those + that might meet the AH + + goals; moreover, because + of their lower cost of funds, + they were able to buy + + the "best of the worst," + the highest quality among + the NTMs on off er. + + Th ese factors—the + need for higher yielding loans + and the ability + +On line 8926: + pay up for the loans + they wanted—drove private sector + issuers further out + + on the risk curve as + they sought to meet the demands + of investors who were + +On line 8928: + to subprime PMBS. From + the investors’ perspective, as + long as the bubble + +On line 8928: + were off ering the + high yields associated + with risk but were not + +On line 8934: + who testifi ed + before the Commission agreed + that the fi nancial + +On line 8934: + the mortgage meltdown + that began when the housing + bubble began to + +On line 8934: + of these witnesses, + however, including the + academics consulted + + by the Commission, + the representatives of + the rating agencies, + +On line 8936: + offi cers of fi + nancial institutions that + were ultimately + +On line 8936: + institutions and + even the renowned investor Warren + Buff ett,33 seems to have + +On line 8940: + dimensions See Buff + ett, testimony before + the FCIC, June Peter + +On line 8942: + Wallison of the + NTM problem or recognized + its signifi cance + +On line 8946: + Th e Commission + majority’s report notes + that "there were warning + +On line 8948: + Th ere always are + if one searches for them; they + are most visible + +On line 8948: + which the Commission + majority, and many of + the opinions it cites + +On line 8948: + engaged. However, + as Michael Lewis’s acclaimed book, Th + e Big Short, showed so + +On line 8952: + the fi nancial world + were actually willing + to bet money— even + +On line 8954: + favorable odds—that + the bubble would burst with huge + losses. Most seem to + + have assumed that NTMs + were present in the fi nancial + system, but not in + + unusually large + numbers. Even today, there are + few references in + +On line 8956: + number of NTMs that + had accumulated in + the U.S. fi nancial + +On line 8956: + before the meltdown + began. Yet this is by far + the most important + +On line 8956: + about the fi nancial + crisis. None of the other + factors off ered by + +On line 8956: + majority to + explain the crisis—lack of + regulation, poor + +On line 8956: + foresight, Wall Street greed + and compensation policies, + systemic risk caused by + + credit default swaps, + excessive liquidity + and easy credit—do + + so as plausibly + as the failure of a large + percentage of the + +On line 8958: + NTMs that existed + in the fi nancial system + in It appears that + +On line 8958: + destructiveness of + this bubble’s collapse because + of a chronic lack + + of information + about the composition of + the mortgage market. + +On line 8958: + for example, aft + er the defl ation of the + bubble had begun, + +On line 8960: + Brothers analysts + issued a highly detailed + report entitled + +On line 8960: + Owns Residential + Credit Risk1"34 In the tables + associated + + with the report, they + estimated the total + unpaid principal + +On line 8960: + balance of subprime + and Alt-A mortgages outstanding + at trillion, about half + +On line 8962: + number at the time. + Based on this assessment, when + they applied a stress + +On line 8962: + market under the + ‘stressed’ housing conditions could + be about billion, which + +On line 8962: + over a fi ve-to + six-year horizon." In the end, of + course, the losses were + +On line 8962: + accounting almost + immediately, rather than + over a fi ve to + +On line 8962: + failure of these two + analysts to recognize + the sheer size of the + +On line 8964: + market, even as late + as is the important point. + Along with most other + +On line 8964: + were not aware of the + true composition of the + mortgage market in + +On line 8964: + housing conditions + they applied, they projected + that the GSEs would suff + +On line 8964: + losses of billion + (net of mortgage insurance + coverage) and that + +On line 8966: + income would be more + than suffi cient to cover + these losses. Based on + +On line 8968: + Federal Housing + Finance Agency (FHFA), the + GSEs’ credit losses + +On line 8970: + the Lehman analysts’ + September estimate. Th + e analysts could + + only make such a + colossal error if they did + not realize that + +On line 8972: + the GSEs’ credit risk + portfolio consisted of + subprime and Alt-A loans + +On line 8972: + (see Table supra) or + that these weak loans would account + for about of the GSEs’ + +On line 8972: + 2007-34 Vikas Shilpiekandula + and Olga Gorodetski, "Who + Owns Resident a + +On line 8974: + Brothers Fixed Income + U.S. Securitized Products + Research, September + +On line 8982: + Dissenting Statement + It is also instructive + to compare the Lehman + +On line 8982: + of subprime loans would + suff er lifetime losses of + percent under "stressed" + +On line 8982: + later, more informed + estimates. In early for + example, Moody’s made + +On line 8982: + estimate for the + vintage and projected a + percent loss rate aft + +On line 8986: + had actually + occurred.36 Th e Lehman loss rate + projection suggests + + that the analysts + did not have an accurate + estimate of the + +On line 8986: + in Indeed, I have + not found any studies in the + period before + +On line 8988: + seemed to understand + how many NTMs were in the fi + nancial system at + +On line 8988: + It was only aft + er the fi nancial crisis, + when my AEI colleague, + +On line 8988: + information from + various unrelated + and disparate sources that + + the total number + of NTMs in the fi nancial + markets became clear. + +On line 8988: + a result, all loss + projections before Pinto’s + work were bound to be + +On line 8990: + of the Commission + majority’s report, which + criticizes fi rms, + +On line 8990: + and ratings agency + analysts for failure to + perceive the losses + +On line 8990: + hindsight. It appears + that information about the + composition of + + the mortgage market + was simply not known when the + bubble began to + +On line 8992: + Commission never + attempted a serious + study of what was known + +On line 8992: + mortgage market in + apparently satisfi + ed simply to blame + +On line 8992: + participants for + failing to understand the + risks that lay before + +On line 8996: + information was + actually available. Th + e mortgage market + +On line 8996: + investors. How could all + these people have missed something + as important as + +On line 8996: + have assumed in the + bubble years that Fannie and + Freddie continued + +On line 8996: + same conservative + underwriting policies they + had previously + +On line 8998: + Until Fannie and + Freddie were required to meet + HUD’s AH goals, they rarely + +On line 8998: + mortgages. Indeed, the + very defi nition of a + traditional prime + + mortgage was a loan + that Fannie and Freddie would + buy. Lesser loans were + + rejected, and were + ultimately insured by + FHA or made by a + +On line 9000: + small group of subprime + originators and investors. + Although anyone who + +On line 9000: + regulations, and + thought through their implications, + would have realized + +On line 9000: + must have been shift ing + their buying activities + to low quality + +On line 9000: + to uncover the + new buying pattern. Investors + believed that there was + + no signifi cant risk + in MBS backed by Fannie and + Freddie, since they were + +On line 9000: + In addition, the + GSEs were exempted by law + from having to fi + + le information + with the Securities and + Exchange Commission + +On line 9000: + free from disclosure + obligations and questions from + analysts about the + +On line 9002: + mortgages. When Fannie + voluntarily began + fi ling reports with + +On line 9002: + SEC in it disclosed + Fannie Mae, Second Quarter + Credit Supplement, + +On line 9006: + q2credit_summary.pdf. + "Moody’s Projects Losses of Almost + Half of Original + +On line 9012: + mortgages had FICO + scores of less than 660—the common + defi nition of + + a subprime loan. Th + ere are occasionally + questions about whether a + +On line 9016: + the appropriate + dividing line between prime + and subprime loans. Th + +On line 9018: + e federal bank + regulators use as the + dividing line,37 and + +On line 9018: + published for the fi + rst time with its 10-K, Fannie + included loans with + +On line 9018: + below to disclose + its exposure to loans that + were other than prime. + +On line 9018: + As of December + borrowers with a FICO + of less than had a + +On line 9018: + delinquency rate about + four times that for borrowers + with a FICO equal + +On line 9018: + or greater than compared + to Fannie did not point out + in its fi ling that + +On line 9018: + a FICO score of + less than was considered a + subprime loan. Although + +On line 9018: + Fannie was exposed + to billion in subprime loans + it reported in + +On line 9022: + its 10-K (not fi led + with the SEC until May that: + "Th e percentage + +On line 9022: + mortgage credit book + of business consisting of + subprime mortgage loans + +On line 9022: + Fannie Mae MBS backed + by subprime mortgage loans was + not material + +On line 9024: + as of December + 2005."[emphasis supplied]39 Fannie + was able to make this + + statement because it + defi ned subprime loans as + loans it purchased from + +On line 9028: + lenders. Th us, in its + 10-K report, Fannie stated: + "Subprime mortgage loans + +On line 9028: + originated by + lenders specializing in these + loans or by subprime + + divisions of large + lenders, using processes unique + to subprime loans. In + +On line 9028: + exposure, we have + classifi ed mortgage loans + as subprime if the + +On line 9028: + are originated + by one of these specialty + lenders or a subprime + + division of a + large lender."40[emphasis supplied] Th + e credit scores on + +On line 9030: + and the riskiness + associated with these + credit scores, were not + +On line 9030: + as late as its 10-K + report, Fannie was able to + make the following + +On line 9030: + likely that at that + point it held or guaranteed + enough subprime loans to + +On line 9032: + substantial number + of these loans were to default: + Subprime mortgage loans, + +On line 9032: + in our portfolio + or backing Fannie Mae MBS, + represented less + +On line 9034: + of and [emphasis + supplied] We estimate that + subprime mortgage loans + +On line 9034: + loans, represented + approximately of our + single-family + +On line 9034: + of business as of + December compared with and + as of December + +On line 9038: + ese statements could have + lulled market participants + and others—including + +On line 9040: + of Comptroller of + the Currency, Federal + Reserve, Federal + +On line 9044: + Offi ce of Th + rift Supervision advised + in its "Expanded + +On line 9046: + for Subprime Lending + Programs", published in http://www.federalreserve.gov/Boarddocs/SRletters/2001/sr0104a1.pdf that + "the term ‘subprime’ refers + +On line 9046: + borrowers. Subprime + borrowers typically + have weakened credit + +On line 9046: + that include payment + delinquencies and possibly + more severe problems + +On line 9046: + as charge-off s, judgments, + and bankruptcies." A FICO + score of or below + + was evidence of + "relatively high default + probability." + +On line 9052: + Derived from Table + Fannie Mae, 10-K report, fi + led May Fannie Mae, + +On line 9062: + pp. and Fannie Mae, + Form 10K, p.129. Fannie Mae, Form + 10K, p.130. Dissenting + +On line 9064: + Lehman analysts—into + believing that Fannie and + Freddie did not hold + +On line 9064: + had not guaranteed + substantial numbers of high + risk loans, and thus that + + there were many fewer + such loans in the fi nancial + system than in fact + + existed. Of course, + in the early 2000s there was + no generally + +On line 9066: + of the term "subprime," + so Fannie and Freddie could + defi ne it as + +On line 9066: + and the assumption + that the GSEs only made prime + loans continued to + +On line 9066: + supported by their + public disclosures. So when + Fannie and Freddie + +On line 9066: + aggregators they + did not report those mortgages + as subprime or Alt-A, + +On line 9066: + industry practice + by placing virtually + all the GSEs’ loans in + +On line 9066: + Fannie and Freddie’s + peculiar and self-serving + loan classifi cation + +On line 9066: + recipients of + information about the GSEs’ + mortgage positions + +On line 9066: + seemed to assume that + all these mortgages were prime loans, + as they had always + + been in the past, and + added them to the number of + prime loans outstanding. + +On line 9066: + Accordingly, by + there were approximately + million more NTMs in + +On line 9068: + prime loans—than most market + participants realized. + Appendix shows that + +On line 9068: + be percent higher + than expected if there were + million NTMs in the + +On line 9068: + fi nancial system + instead of million prime loans. + Appendix shows that + +On line 9068: + percent higher than + expected if the feedback + eff ect of mortgage + + delinquencies—causing + lower housing prices, in a + downward spiral—were + +On line 9070: + ese diff erences in + projected losses could have + misled the rating + +On line 9070: + into believing + that, even if the bubble were + to defl ate, the + +On line 9070: + on mortgage failures + would not be so substantial + as to have a more + + than local eff ect + and would not adversely aff + ect the AAA tranches + +On line 9074: + never looked into + this issue, or attempted + to determine what + +On line 9074: + to be the number + of subprime and other NTMs + outstanding in the + +On line 9074: + possible in the + Commission’s public hearings, + I asked analysts + +On line 9074: + many NTMs they believed + were outstanding before the + fi nancial crisis + + occurred. It was clear + from the responses that none + of the witnesses + +On line 9074: + ever considered + that question, and it appeared + that none suspected + + that the number was + large enough to substantially + aff ect losses aft + +On line 9076: + er the collapse of + the bubble. It was only + on November aft + +On line 9076: + been taken over by + the federal government, + that the company + +On line 9076: + in its 10-Q report + for the third quarter of that + it had classifi + +On line 9076: + Alt-A originators, + and not loans that were subprime + or Alt-A because of + +On line 9078: + its classifi cation + criteria, Fannie stated, + "[H]owever, we have + + other loans with some + features that are similar + to Alt-A and subprime + + loans that we have not + classifi ed as Alt-A or + subprime because they + +On line 9080: + cation criteria."43 Th + is hardly described the true + nature of Fannie’s + +On line 9084: + the issue of the + number of NTMs outstanding + before the crisis + +On line 9092: + Wallison never + addresses the question. HUD’s + role in pressing for + +On line 9092: + standards escaped the + FCIC’s attention entirely, + the GSEs’ AH goals are + + mentioned only in + passing, CRA is defended, + and neither HUD’s Best + + Practices Initiative + nor FHA’s activities are + mentioned at all. No + + reason is advanced + for the accumulation + of subprime loans in + +On line 9092: + idea—implicit in the + majority’s report—that + it was profi table. + +On line 9092: + the majority’s + report is Hamlet without + the prince of Denmark. + +On line 9094: + Commission’s entire + investigation seemed to + be directed at + + minimizing the + role of NTMs and the role of + government housing + + policy. In this + telling, the NTMs were a "trigger" + for the fi nancial + +On line 9094: + but once the collapse + of the bubble had occurred + the "weaknesses and + +On line 9096: + of the fi nancial + system— which had been there all + along—caused the crisis. + +On line 9100: + regulation of + the so-called "shadow banking + system" and over-the-counter + +On line 9100: + their baleful presence + hadn’t been noted until + the unprecedented + +On line 9104: + Conclusion What is + surprising about the many views + of the causes of + +On line 9104: + been published since the + Lehman bankruptcy, including + the Commission’s own + +On line 9104: + (i) a general + agreement that the bubble and + the mortgage meltdown + +On line 9104: + precipitating + causes—sometimes characterized + as the "trigger"—of the + +On line 9104: + how it came to be + that mortgage underwriting + standards declined to + +On line 9104: + point that the bubble + contained so many NTMs that were + ready to fail as soon + +On line 9104: + the bubble began + to defl ate. Instead of + thinking through what would + +On line 9104: + report—pivoted + immediately to blame + the "weaknesses and + +On line 9106: + considering whether + any system could have survived + such a blow. One of + +On line 9106: + examples of this + approach was presented by + Larry Summers, the + + head of the White House + economic council and one + of the President’s + +On line 9106: + advisers. In a + private interview with a + few of the members + + of the Commission + (I was not informed of the + interview), Summers + +On line 9106: + asked whether the mortgage + meltdown was the cause of the + fi nancial crisis. + + His response was that + the fi nancial crisis was + like a forest fi + + re and the mortgage + meltdown like a "cigarette + butt" thrown into a + +On line 9106: + dry forest. Was the + cigarette butt, he asked, the + cause of the forest + + fi re, or was it + the tinder dry condition + of the forest144 Th + +On line 9108: + the idea that it was + the tinder-dry forest. Th eir + central argument + +On line 9110: + crisis because of + the "vulnerabilities" + inherent in the + +On line 9116: + at the time—the absence + FCIC, Summers interview, p.77. + Dissenting Statement + +On line 9118: + regulation, lax + regulation, predatory + lending, greed on Wall + +On line 9118: + ineff ective risk + management, and excessive + leverage, among other + +On line 9120: + factors. One of the + majority’s singular + notions is that years + +On line 9120: + deregulation" had + "stripped away key safeguards" against a + crisis; this ignores + +On line 9120: + in the wake of the + S&L crisis, Congress adopted + the FDIC Improvement + +On line 9120: + by far the toughest + bank regulatory law + since the advent of + +On line 9120: + insurance and was + celebrated at the time + of its enactment + +On line 9120: + nally giving the + regulators the power + to put an end to + +On line 9124: + forest metaphor turns out + to be an excellent way + to communicate + +On line 9124: + erence between the + Commission’s report and this + dissenting statement. + +On line 9124: + a "cigarette butt" + was million high risk NTMs with + a total value + +On line 9124: + over trillion. Let’s use + a little common sense here: + trillion in high risk + +On line 9124: + "cigarette butt;" they + were more like an exploding + gasoline truck in that + +On line 9126: + Th e Commission’s + report blames the conditions + in the fi nancial + +On line 9126: + blame million subprime + and Alt-A mortgages—half of all + mortgages outstanding + + in the U.S. in 2008—and + a number that appears to + have been unknown to + +On line 9126: + at the time. No fi + nancial system, in my view, + could have survived the + +On line 9126: + large numbers of high + risk mortgages once the bubble + began to defl + + ate, and no market + could have avoided a panic + when it became clear + +On line 9126: + and delinquencies among + these mortgages far exceeded + anything that even the + +On line 9130: + Th is conclusion + has signifi cant policy + implications. If + +On line 9130: + nancial crisis was + caused by government housing + policies, then the Dodd-Frank + +On line 9134: + was to reduce or + eliminate the government’s + involvement in the + +On line 9134: + mortgage markets, not + to impose signifi cant new + regulation on + +On line 9140: + nancial system. Th + e balance of this statement + will outline (i) how + +On line 9140: + default among the NTMs + were transmitted as losses + to the fi nancial + +On line 9140: + summarized above caused + the accumulation of + an unprecedented + +On line 9146: + in the U.S. and around + the globe. II. HOW MILLION NTMS + PRECIPITATED + +On line 9148: + CRISIS Although the + Commission never defi + ned the fi nancial + +On line 9148: + to investigate, + it is necessary to do + so in order to + + know where to start and + stop. If, for example, the + fi nancial crisis + +On line 9148: + continuing, then + the eff ect of government + policies such as the + +On line 9150: + Repurchase Program + (TARP) should be evaluated. + However, it seems + +On line 9150: + the Commission to + concentrate on what caused the + unprecedented events + +On line 9150: + largely in the fall + of and for this purpose Ben + Bernanke’s defi nition + +On line 9154: + nancial crisis seems + most appropriate: Th e + credit boom began + +On line 9154: + surfaced with subprime + mortgages—mortgages off ered to + less-creditworthy + +On line 9154: + house prices in parts of + the country began to fall. + Mortgage delinquencies + +On line 9154: + and the downturn in + house prices intensifi ed, + trends that continue + + today. Investors, stunned + by losses on assets they + had believed to be + +On line 9154: + severe losses on + mortgages and other loans—cut + back their lending. Th + +On line 9158: + crisis deepened [in + September when the failure + or near-failure of + +On line 9158: + major fi nancial + fi rms caused many fi nancial + and credit markets + +On line 9160: + freeze up."45 In other + words, the fi nancial crisis + was the result of + +On line 9160: + losses suff ered by + fi nancial institutions + around the world when U.S. + +On line 9160: + in large numbers; the + crisis became more severe + in September when + +On line 9160: + several major + fi nancial fi rms—which held + or were thought to hold + +On line 9162: + nancial markets to + freeze up. Th is summary + encapsulates a + +On line 9162: + interconnected + events, but it makes clear that the + underlying cause + + of the fi nancial + crisis was a rapid decline + in the value of + +On line 9162: + c and widely held + asset: U.S. residential + mortgages. Th e next + +On line 9164: + is how, exactly, + these delinquencies and losses + caused the fi nancial + +On line 9168: + Th e following + discussion will show that it + was not all mortgages + +On line 9168: + securities that + were the source of the crisis, + but primarily + +On line 9170: + were generally + prime mortgages, did not suff er + substantial losses + + at the outset of + the mortgage meltdown, although + as the fi nancial + + crisis turned into + a recession and housing + prices continued to + + fall, losses among prime + mortgages began to approach + the level of prime + + mortgage losses that + had occurred in past housing + crises. However, those + +On line 9170: + losses on NTMs, which + reached levels of delinquency + and default between + +On line 9170: + the loans in question) + because the loans involved were + weaker as a class + +On line 9172: + in any previous + housing crisis. Th e fact + that they were also + +On line 9180: + in number than any + Speech at Morehouse College, April + Dissenting Statement + +On line 9184: + housing price declines + that fueled the fi nancial + crisis. How Failures + +On line 9188: + were Transmitted to + the Financial System When + the housing bubble + + began to defl + ate in mid-2007, delinquency rates + among NTMs began to + +On line 9188: + mortgages were weak and + high risk, their delinquency rates + were relatively + + low. Th is was a + consequence of the bubble + itself, which infl + + ated housing prices + so that homes could be sold with + no loss in cases + +On line 9190: + borrowers could not + meet their mortgage obligations. + Alternatively, + +On line 9190: + liberal appraisal + rules—created a form of + free equity in + + a home, allowing + the home to be refi nanced + easily, perhaps + + even at a lower + interest rate. However, + rising housing prices + + eventually reached + the point where even easy credit + terms could no longer keep + +On line 9190: + rolling, and at that point + the bubble fl attened and + weak mortgages became + + exposed for what they + were. As Warren Buff ett has + said, when the tide goes + +On line 9194: + who’s swimming naked. Th + e role of the government’s + housing policy + + is crucial at this + point. As discussed earlier, + if the government + +On line 9194: + not been directing + money into the mortgage + markets in order + +On line 9194: + in home ownership, + NTMs in the bubble would have + begun to default + +On line 9196: + originated. Th + e continuous infl + ow of government + +On line 9196: + government-backed funds, + however, kept the bubble + growing—not only + +On line 9196: + tended to suppress + the signifi cant delinquencies + and defaults that had + +On line 9198: + previous bubbles + to an end in only three + or four years. Th at + +On line 9200: + why PMBS based on NTMs + could become so numerous + and so risky without + +On line 9200: + the delinquencies and + defaults that caused earlier + bubbles to defl + +On line 9200: + time to continue + originations, Countrywide + and others were able + +On line 9200: + billion) to billion) + without engendering the + substantial increase + + in delinquencies that + would ordinarily have + alarmed investors and brought + + the bubble to a + halt.46 Indeed, the absence of + delinquencies had the + + opposite eff ect. + As investors around the world saw + housing prices rise in + + the U.S. without any + signifi cant losses even among + subprime and other + + high-yielding loans, they + were encouraged to buy PMBS + that—although rated AAA—still off + +On line 9202: + ered attractive yields. + In other words, as shown in + Figure government + +On line 9202: + policies—AH goals imposed on + the GSEs, the decline in FHA + lending standards, HUD’s + + pressure for reduced + underwriting standards among + mortgage bankers, and CRA + +On line 9204: + for insured banks— by + encouraging the growth of + the bubble, increased + +On line 9206: + worldwide demand for + subprime PMBS. Th en, in mid-2007, + the bubble began + +On line 9214: + e Mortgage Market + Statistical Annual—Volume II, MBS + database. Peter J. + +On line 9222: + The Defaults Begin + Th e best summary of + how the defl ation + +On line 9222: + housing bubble led + to the fi nancial crisis + was contained in the + +On line 9222: + testimony that + FDIC chair Sheila Bair delivered + to the FCIC in a + +On line 9224: + to experience + serious liquidity + challenges related + +On line 9224: + prices fell, recently + originated subprime and + non-traditional + + mortgage loans began + to default at record rates. Th + ese developments + +On line 9228: + securities and + related derivative + instruments held by + + major fi nancial + institutions in the U.S. + and around the world. Th + +On line 9234: + diffi culty in + determining the value + of mortgage-related + + assets and, therefore, + the balance-sheet strength of large banks + and non-bank fi nancial + +On line 9234: + these institutions + to become wary of lending + to one another, + + even on a short-term + basis.47 [emphasis supplied] + All the important + + elements of what + happened are in Chairman Bair’s + succinct statement: (i) + +On line 9236: + because of concerns + about the credit quality + of NTMs; (ii) housing + + prices fell; NTMs began + to default at record rates; (iii) + it was diffi cult + +On line 9240: + of MBS, and thus the + fi nancial condition of + the institutions + +On line 9240: + consequence of this + uncertainty—especially + aft er the failure + + of Lehman—fi nancial + institutions would not lend + to one another. + +On line 9246: + at phenomenon + was the fi nancial crisis. + Th e following + +On line 9246: + show how each of these + steps operated to bring + down the fi nancial + +On line 9250: + To understand the + transmission mechanism, it + is necessary to + +On line 9250: + the one hand, and the + MBS that were distributed by + government agencies + + such as FHA/Ginnie Mae and + the GSEs (referred to jointly + as "Agencies" in this + +On line 9252: + shown in Table by + the million NTMs in the U.S. + fi nancial system + +On line 9252: + as (i) whole mortgages, + (ii) MBS guaranteed by the + GSEs, or insured or + +On line 9252: + by a government + agency or a bank under + the CRA, or (iii) as + + PMBS securitized + by private fi rms such as + Countrywide. Th e + +On line 9254: + had an aggregate + unpaid principal balance + of more than trillion, + +On line 9254: + by PMBS consisted + of million mortgages with an + aggregate unpaid + +On line 9254: + mortgage delinquencies + and defaults multiplied in + the U.S. fi nancial + +On line 9254: + were transmitted to + fi nancial institutions + through their holdings of + +On line 9254: + this happen, and what + role was played by government + housing policy1 + +On line 9256: + and PMBS pass through to + investors the principal and + interest received + + on the mortgages in + a pool that backs an issue + of securities; + +On line 9256: + diff erence between + them is the way they protect + investors against credit + +On line 9256: + possibility + of losses in the event that + the mortgages in the + +On line 9260: + begin to default. + Th e Agencies insure or + place a guarantee + +On line 9260: + "Systemically + Important Institutions + and the Issue of + +On line 9266: + ‘Too-Big-to-Fail,’" Testimony + to the FCIC, September p.3. + Dissenting Statement + +On line 9270: + securities are + rated or considered to + be AAA. PMBS rely + +On line 9270: + classifi cation and + subordination system + known as "tranching" to + + provide some investors + in the pool with a degree + of assurance that + +On line 9270: + er losses because + of mortgage defaults. In the + tranching system, diff + + erent classes of + securities are issued + by the pool. Th e + +On line 9274: + classes to receive + payments of principal and + interest from the + + mortgages in the pool + are subordinated to + the rights of other + +On line 9274: + the superior + classes are more likely to + receive payment even + +On line 9278: + are some defaults among + the mortgages in the pool. Th + rough this mechanism, + +On line 9280: + approximately + percent of an issue of + PMBS could be rated + + AAA or AA, even if + the underlying mortgages + are NTMs that have a + +On line 9280: + rate of delinquency + than prime loans. In theory, + for example, if + + the historic rates of + loss on a pool of NTMs is, + say, fi ve percent, + +On line 9280: + ten percent of the + securities holders who + are in the classes + + rated lower than + AAA or AA. Of course, if the + losses are greater than + +On line 9280: + what happened as the + recent bubble began to + defl ate—they will + +On line 9280: + into the higher + classes and substantially + reduce their value.48 + +On line 9280: + whether, in or mortgage + delinquencies and defaults had + actually caused + +On line 9280: + losses in the AAA + tranches of PMBS, but the rate + at which delinquencies + + and defaults among NTMs + were occurring throughout the + fi nancial system + +On line 9284: + a matter of great + concern to investors. Th is + means that investors in + +On line 9286: + and government-backed + Agency MBS had diff erent + experiences when + +On line 9288: + began to defl + ate. Th ose who invested + in Agency MBS did + + not suff er losses + (the U.S. government has thus + far protected all + + investors in Agency + MBS), while those who invested + in PMBS were exposed + +On line 9288: + if the losses on + the underlying mortgages + were so great that they + + threatened to invade + the AAA and AA classes. Even + if no cash losses + + had actually + been suff ered, the holders of + PMBS would see a sharp + +On line 9288: + the market value + of their holdings as investors—shocked + by the large number + +On line 9288: + mortgages—fl ed the + asset-backed market. So when we + look for the direct + +On line 9288: + mortgage failures on + the fi nancial condition + of various fi + +On line 9288: + institutions in + the fi nancial crisis we + should look only to + +On line 9290: + by the Agencies. In + addition, the default and + delinquency ratios + +On line 9290: + ratios among the loans + held or guaranteed by the + Agencies. Many of the + +On line 9290: + backed the PMBS were the + self-denominated + subprime loans (that is, + + made by subprime lenders + explicitly to subprime + borrowers) and were + +On line 9290: + classifi ed in + the worst-performing categories + in Table In part, + +On line 9290: + of the NTMs held or + guaranteed by the Agencies + was due to the fact + + that the Agencies were + not buying for economic + purposes—to make profi + + ts—but only to + meet government requirements + such as the AH goals. + + Th ey did not want + or need the higher-yielding and + thus more risky mortgages + +On line 9292: + backed the PMBS, because + they did not need higher yields + in order to sell + +On line 9292: + MBS. In addition, + because of their lower cost + funding, the Agencies + +On line 9292: + pay more for the NTMs + they bought and thus could acquire + the "best of the worst." + +On line 9292: + thorough description + of the tranching system, and + many more details about + +On line 9292: + protecting senior + tranches, is contained in Gary + B. Gorton, Slapped By + +On line 9294: + Invisible Hand: + Th e Panic of Oxford + University Press, + +On line 9304: + Wallison PMBS are + Connected to All Other + NTMs Th rough Housing + +On line 9306: + not mean that only + the failure of the PMBS was + responsible for + +On line 9306: + nancial crisis. In + a sense, all mortgages are linked + to one another + +On line 9306: + and housing prices in + turn are highly sensitive + to delinquencies and + +On line 9308: + on mortgages. Th is + is a characteristic + of mortgages that is + +On line 9308: + credit card holder + defaults on his obligations + it has little eff + +On line 9308: + on a mortgage the + resulting foreclosure has + an eff ect on the + + value of all homes + in the vicinity and thus + on the quality + +On line 9310: + all mortgages on those + homes. Accordingly, the PMBS + were intimately + +On line 9310: + housing prices—to the + NTMs securitized by the + Agencies. Because there + +On line 9310: + so many more NTMs held + or securitized by the + Agencies (see Table + +On line 9310: + numbers—even + in cases where they had a + lower average + +On line 9310: + of delinquency and + default than the NTMs that backed + the PMBS—was the major + +On line 9310: + pressure on housing + prices throughout the United States. + Weakening housing + + prices, in turn, caused more + mortgage defaults, among both NTMs + in general and + +On line 9310: + particular NTMs + that were the collateral + for PMBS. In other + +On line 9310: + PMBS were weakened by + the delinquencies and defaults + among the much larger + + number of mortgages + held or guaranteed as MBS + by the Agencies. In + + reality, then, + the losses on the PMBS were + much higher than they + + would have been if the + government’s housing policies + had not brought into + +On line 9312: + NTMs that were failing + in unprecedented numbers. + Th ese failures drove + +On line 9316: + the PMBS. Finally, + the funds that the government + directed into + + the housing market + in pursuit of its social + policies enlarged the + +On line 9320: + it in time. Th e + longer housing bubbles grow, the + riskier the mortgages + +On line 9320: + lenders are constantly + trying to fi nd ways to + keep monthly mortgage + +On line 9320: + growing, the risks that + were building within it were + obscured. Borrowers + + who would otherwise + have defaulted on their loans, + bringing an end to + +On line 9320: + bubble, were able to + use the rising home prices to + refi nance, sometimes + +On line 9320: + rates relatively + low, investors did not have a + reason to exit + + the mortgage markets, + and the continuing fl + ow of funds into + +On line 9320: + mortgages allowed the + bubble to extend for an + unprecedented years. + +On line 9324: + is in turn enabled + the PMBS market to grow to + enormous size and thus + +On line 9324: + more calamitous eff ect + when it fi nally collapsed. + If the government + +On line 9324: + continuing source + of funding for the bubble + had not been pursued, + +On line 9324: + is doubtful that there + would have been a PMBS market + remotely as large + +On line 9324: + one that developed, + or that—when the housing bubble + collapsed—the losses to + +On line 9326: + would have been as great. + PMBS, as Securities, are + Vulnerable to + + Investor Sentiment + In addition to their link + to the Agencies’ NTMs + +On line 9328: + particularly + vulnerable to changes in + investor sentiment + +On line 9334: + of the crisis. Th + ere are many reasons for the + popularity + +On line 9342: + example, the Basel + regulations provided + that mortgages held in + +On line 9342: + their superior + liquidity compared to + whole mortgages—required + +On line 9342: + bank to hold only + percent risk-based capital, while + whole mortgages required + +On line 9346: + Th is made all forms + of MBS, including PMBS, much + less expensive to + + hold than whole mortgages. + In addition, mortgages in + securitized form + +On line 9346: + easily, and used + more readily as a source + of liquidity + +On line 9348: + of the benefi ts + of securitized mortgages + are also detriments + + when certain mortgage + market conditions prevail. + If housing values + +On line 9348: + on whole mortgages are + recognized only slowly + in bank fi nancial + +On line 9348: + the larger market. + PMBS, however, are far more + vulnerable to + +On line 9348: + sentiment than whole + mortgages held on bank balance + sheets. First, because they + +On line 9348: + information about + the underlying mortgages + than whole mortgages in + + the same principal + amount. PMBS markets tend to be + thin, because PMBS pools + +On line 9348: + one another. If + investors believe that mortgages + in general are + +On line 9348: + and delinquencies, they + may abandon the market for + all PMBS, causing the + +On line 9350: + PMBS price level to + fall precipitously. For + example, in his + +On line 9350: + the Invisible + Hand, Professor Gary Gorton + of Yale notes that the + +On line 9350: + index, initially + published in late for the fi + rst time gave investors + + a picture of how + others saw the value of + a selected group + + of PMBS pools. Th e + index showed steeply declining + values, which caused many + +On line 9354: + to withdraw from the + market. Gorton observed: "I + view the ABX indices + +On line 9354: + hitherto unknown + information, namely, the + aggregated view + + that subprime was worth + signifi cantly less…It is not + clear whether the housing + +On line 9354: + by the ability + to short the subprime housing + market or whether house + +On line 9354: + were going down and + the implications of this + were aggregated + +On line 9358: + indices"49 Whatever + the underlying reason, + as shown in Figure + +On line 9360: + what happened in the + fi nancial crisis. Th e + result was a crash + +On line 9362: + the MBS market as + investors fl ed what looked like + major oncoming + +On line 9370: + losses. Gorton, Slapped + by the Invisible Hand, + note pp.121-123. Peter J. + +On line 9380: + MBS market reacts + to the bubble’s defl ation + Source: Th ompson Reuters + +On line 9386: + profound adverse eff + ect on the liquidity + of all fi nancial + +On line 9386: + that were exposed to + PMBS. As noted above, one of + the benefi ts of + +On line 9386: + PMBS, especially + those with AAA ratings, was that + they were readily + +On line 9386: + they were considered + sound and secure investments, + carried on balance + +On line 9386: + par and suitable to + serve as collateral for + short term fi nancing + +On line 9386: + agreements, or "repos." + In a repo transaction, + a borrower sells + + a security + to a lender with an option + to repurchase it + +On line 9386: + provides the lender with + a return appropriate + for a secured loan. + +On line 9388: + lender assumes that if + its counterparty defaults + the collateral + +On line 9388: + high quality and + liquidity, it loses + much of its value + +On line 9390: + not actually + suff ered losses. Th is is + what happened to AAA-rated + + PMBS as housing prices + fi rst leveled off and then + began to fall in + +On line 9392: + in at rates no one + had expected. As discussed + more fully below, + +On line 9392: + lost their value for + liquidity purposes, + making it diffi + +On line 9396: + themselves using these + assets as collateral + for repos. Th is + +On line 9402: + Chairman Bair referred + in her testimony. Th + e near-failure of + +On line 9402: + example of how + the unexpected collapse + of the PMBS market + +On line 9402: + ultimately its + inability to survive + the resulting loss + +On line 9406: + staff ’s review of + the liquidity problems + of Bear Stearns showed that + + the loss of the PMBS + market was the single event + that was crippling for + +On line 9406: + eliminated a + major portion of the fi + rm’s liquidity + +On line 9410: + Dissenting Statement + pool—AAA-rated PMBS—as a useful source of + repo fi nancing. + +On line 9410: + prepared for hearings + on May and percent of Bear’s + short term funding was + +On line 9410: + secured and only + percent unsecured. "As of + January the FCIC + +On line 9412: + billion of Bear Stearns’ + repo collateral was + composed of agency + +On line 9412: + was in non-agency + securitized asset backed + securities [i.e., + +On line 9414: + and billion was in + whole loans."50 Th e Agency MBS + was unaff ected + + by the collapse of + the PMBS market, and could still + be used for funding. + +On line 9418: + about percent of Bear’s + readily available sources of + funding consisted + + of PMBS that became + unusable for repo fi + nancing when the PMBS + + market disappeared. + Th e loss of this source of + liquidity put + +On line 9420: + serious jeopardy; + rumors swept the market about + Bear’s condition, and + +On line 9422: + began withdrawing + funds. Bear’s offi cers told the + Commission that the + +On line 9422: + quarter—the quarter in + which it failed; ironically + they also told the + +On line 9424: + short term funding from + commercial paper to MBS + because they believed + +On line 9424: + would be more stable. + In the week beginning March + according to the + +On line 9424: + Bear had over billion + in cash reserves, but by March + the liquidity + +On line 9424: + fallen to billion.51 + It was clear that Bear—solvent + and profi table or + +On line 9424: + not survive a run + that was fueled by fear and + uncertainty about + +On line 9424: + liquidity and + the possibility of + its insolvency. + +On line 9426: + should be noted that + the Commission’s staff focused + on Bear because the + +On line 9426: + business model of + investment banks, which relied + on relatively + +On line 9428: + other short term fi + nancing, was inherently + unstable. Th e + + need to rescue Bear + was thought to be evidence + of this fact. Clearly, + +On line 9430: + ve independent + investment banks—Bear, Lehman Brothers, + Merrill Lynch, Morgan + +On line 9430: + fi nancial crisis. + Only two of them remain + independent fi + + rms, and those two are + now regulated as bank + holding companies + + by the Federal + Reserve. Nevertheless, it + is not clear that the + +On line 9430: + and Freddie which were + also regulated more + stringently than the + + investment banks but + not as stringently as banks. + Th e investment + +On line 9432: + the test created + by the mortgage meltdown and + the subsequent fi + + nancial crisis, but + neither did a large number + of insured banks— IndyMac, + +On line 9434: + largest—that were much more + heavily regulated + and, in addition, + +On line 9434: + ered insured deposits + and had access to the Fed’s + discount window if + +On line 9436: + to deal with runs. Th + e view of the Commission + majority, that + +On line 9438: + to the fi nancial + crisis, seems misplaced for this + reason. Th ey are + + better classifi + ed not as contributors + to the fi nancial + +On line 9440: + as victims of the + panic that ensued aft er + the housing bubble + + and the PMBS market + collapsed. Bear went down because + the delinquencies and + +On line 9442: + unprecedentedly + large number of NTMs caused the + collapse of the PMBS + +On line 9448: + Findings on Bear Stearns + (Preliminary Draft April p.16. + Id., p.45. Peter J. + +On line 9450: + usefulness of AAA-rated + PMBS as assets that Bear and + others relied on + + for both capital + and liquidity, and thus + raised questions about the + +On line 9450: + ability to meet + its obligations. Investment + banks like Bear Stearns were + + not commercial banks; + instead of using short term + deposits to hold long + +On line 9452: + hallmark of a bank— + their business model relied + on short-term funding + + to carry the short + term assets of a trading + business. Contrary to + +On line 9452: + majority, there + is nothing inherently + wrong with that business + +On line 9452: + could not survive an + unprecedented fi nancial + panic as severe + + as that which followed + the collapse in value of + an asset class as + + large and as liquid + as AAA-rated subprime PMBS. Mortgage + Defaults at Record Rates + +On line 9454: + also pointed to + the relationship between + the decline in the + +On line 9454: + balance sheet strength" of + fi nancial institutions + that held these assets. + +On line 9454: + the loss transmission + mechanism. Securitized + assets held by fi + +On line 9454: + institutions are + subject to the rules of fair + value accounting, + +On line 9456: + to market under + certain circumstances. Th us, + banks and other fi + +On line 9458: + institutions that + are holding securitized + mortgages in the form + +On line 9458: + be subject to large + accounting losses—but not + necessarily + +On line 9460: + Accordingly, once + large numbers of delinquencies + and losses started + +On line 9460: + up in the mortgage + markets generally and + in the mortgage pools + + that backed the PMBS, it + was not necessary for all + the losses to be + +On line 9460: + before the PMBS lost + substantial value. All that + was necessary was + +On line 9462: + these assets become + seriously impaired. Th + is is exactly + +On line 9462: + consequences for fi + nancial institutions that + held PMBS but also + +On line 9466: + that made them appear + unstable and possibly + insolvent. Th ese + +On line 9466: + anticipated. + As one Federal Reserve + study put it, "Th e + +On line 9468: + pressure on prices of + structured fi nance products across + the whole spectrum of + +On line 9468: + securities, even + those with only minimal + ties to the riskiest + + underlying assets…[I]n + addition to discounts from + higher expected + +On line 9468: + large mark-to-market + discounts are generated + by uncertainty + +On line 9468: + the quality of + the underlying assets, + by illiquidity, + + and by price volatility…Th is + illiquidity discount is + the main reason why + +On line 9470: + in most similar + analyses, is larger than the + expected credit + +On line 9472: + the spread refl ects + only anticipated + credit losses. As + +On line 9472: + dramatically + in Figure the collapse of + the market for PMBS + +On line 9474: + a seminal event + in the history of the + fi nancial crisis. + + Even though delinquencies + had only just begun to + show up in mortgage + +On line 9474: + pools, the absence of + a functioning Daniel Beltran, + Laurie Pounder and Charles + +On line 9476: + "Foreign Exposure + to Asset-Backed Securities of + U.S. Origin," Board of + + Governors of the + Federal Reserve System, + International + +On line 9484: + Discussion Papers + August pp. 11-14. Dissenting + Statement market meant + + that PMBS simply could + not be sold at anything but + distress prices. Th e + + inability of + fi nancial institutions + to liquidate their + +On line 9488: + accounting rules, and + was the crux of the crisis. + In eff ect, a whole + +On line 9488: + of assets—involving + almost trillion—came to be + called "toxic assets" + +On line 9488: + had to be written + down substantially on the + balance sheets of fi + +On line 9488: + world. Although this made + fi nancial institutions + look weaker than they + +On line 9488: + were, the PMBS they held, + despite being unmarketable + at that point, were in + +On line 9488: + still fl owing cash + at close to expected rates. + Instead of a slow + + decline in value— + which would have occurred if whole + mortgages were held on + +On line 9490: + and gradually + deteriorated in + quality—the loss of + + marketability of + these securities caused a + crash in value. Th + +On line 9494: + discuss the signifi + cance of mark-to-market + accounting in its + + report. Th is was + a serious lapse, given + the views of many that + +On line 9498: + an important role + in the fi nancial crisis. + Many commentators + +On line 9498: + that the resulting + impairment charges to balance + sheets reduced the GAAP + +On line 9498: + making them appear + fi nancially weaker than + they actually + + were if viewed on the + basis of the cash fl ows + they were receiving.53 + +On line 9502: + unanticipated + and unprecedented losses + started to appear + +On line 9502: + generally and + in the PMBS mortgage pools now + spread to fi nancial + +On line 9504: + losses. Th is process + was succinctly described in + an analysis of + +On line 9504: + accounting in the + fi nancial crisis issued + by the Institute + +On line 9506: + organization + of the world’s largest banks and fi + nancial fi rms: [O]ft + +On line 9508: + implementation + of fair-value accounting + adversely aff ect + + market sentiment, + in turn leading to further + write-downs, margin calls + +On line 9508: + capital impacts + in a downward spiral that + may lead to large-scale + +On line 9508: + re-sales of assets, and + destabilizing, pro-cyclical + feedback eff ects Th + +On line 9510: + to the conversion + of liquidity problems + into solvency + + problems.54 [emphasis + in the original] At least + one study attempted + +On line 9512: + Parisi-Capone estimated + the mark-to-market losses + on MBS backed by both + +On line 9514: + prime loans and NTMs. Th + eir estimate was slightly + over trillion, of which + +On line 9514: + banks and investment + banks were estimated to + have lost billion on + + a mark-to-market + basis.55 Th is would be a + dramatic loss if + +On line 9520: + it were realized. + In the U.S. banking system + had total assets + +On line 9520: + of trillion; the fi + ve largest investment banks had + FCIC Draft Staff Report, + +On line 9524: + Finance, "IIF Board of + Directors - Discussion + Memorandum on + +On line 9526: + Valuation in + Illiquid Markets," April p.1. Nouriel + Roubini and Elisa Parisi-Carbone, + +On line 9526: + Projected Loan and + Securities Losses in + U.S. Trillion of Which + +On line 9532: + Banks/Brokers," RGE Monitor, + January p.8. Peter J. + Wallison total + +On line 9532: + of trillion.56 If we + assume that the banks had a + leverage ratio of + +On line 9532: + 30-to-1, that would mean that + the equity capital + position of the + +On line 9532: + industry as a + whole would be about billion and + the same number for + +On line 9532: + the investment banks + would be about billion, for a + total of billion. + +On line 9534: + of the PMBS market + alone reduced the capital + positions of U.S. + +On line 9536: + a mark-to-market + basis. Th is does not mean + that any actual + +On line 9536: + were suff ered, only + that the assets concerned might + have to be written + + down or could not be + sold for the price at which they + were previously + +On line 9538: + fi rm’s balance sheet. + In addition, Roubini and + Parisi-Capone estimated + +On line 9538: + loss of billion on + unsecuritized subprime + and Alt-A mortgages.57 Th + +On line 9542: + market losses for + fi nancial institutions + outside the U.S. would + +On line 9542: + about percent of U.S. + losses, so there was likely + to be a major + +On line 9542: + banks and other fi + nancial institutions around + the world—depending, + +On line 9542: + at the time the PMBS + market stopped functioning. I + am not aware of any + + data showing the + mark-to-market eff ect of + the collapse of the + +On line 9542: + on other U.S. fi + nancial institutions, but + it can be assumed + + that they also suff + ered similar losses in + proportion to their + +On line 9544: + PMBS. Losses of this + magnitude would certainly + be enough—when combined + + with other losses + on securities and loans + not related to + + mortgages—to call into + question the stability + of a large number + + of banks, investment + banks and other fi nancial + institutions in + + the U.S. and around the + world. However, there was one + other factor that + + exacerbated + the adverse eff ect of the + loss of a market + +On line 9546: + Although accounting + rules did not require all PMBS + to be written down, + +On line 9546: + and counterparties + did not know which fi nancial + institutions were + + holding the weakest + assets and how much of their + assets would have to + +On line 9546: + it would reduce their + capital positions at + a time when investors + +On line 9548: + were anxious about their + stability. Th is was + the balance sheet eff + +On line 9550: + the third element + of Chairman Bair’s summary. + To summarize, then, + +On line 9550: + which the government’s + housing policies transmitted + losses—through PMBS—to the + +On line 9550: + institutions: (i) + the million NTMs acquired or + guaranteed by the + + Agencies were major + contributors to the growth + of the bubble and + +On line 9550: + extension in time; + (ii) the growth of the bubble + suppressed the losses + +On line 9550: + ordinarily + have brought the development + of NTM-backed PMBS to a + +On line 9550: + competition for + NTMs drove subprime lenders further + out the risk curve to + + fi nd high-yielding + mortgages to securitize, + especially when + +On line 9550: + loans did not appear + to be producing losses + commensurate with + +On line 9550: + the unprecedented + number of delinquencies and + defaults among all NTMs—the + +On line 9550: + majority of + which were held or guaranteed + by the Agencies—caused + +On line 9550: + to Timothy F. + Geithner, "Reducing + Systemic Risk in a + +On line 9550: + Financial System," + Remarks at the Economic + Club of New York, June + +On line 9560: + Projected Loan and + Securities Losses," p.7. + Dissenting Statement + +On line 9562: + accounting required + these institutions to write + down the value of + +On line 9562: + they held, as well as + their other mortgage-related + assets, reducing + +On line 9564: + their stability + and solvency. Government + Actions Create a + + Panic More than any + other phenomenon, the + fi nancial crisis + +On line 9566: + creditor panic. + In the classic study, Manias, + Panics and Crashes: + +On line 9566: + Financial Crises, Charles + Kindleberger and Robert Aliber + make a distinction + + between a remote + cause and a proximate cause + of a panic: "Causa + +On line 9566: + of any crisis is + the expansion of credit + and speculation, + + while causa proxima + is some incident that saps + the confi dence of + +On line 9566: + system and induces + investors to sell commodities, + stocks, real estate, + + bills of exchange, or + promissory notes and increase + their money holdings."58 + +On line 9566: + fi nancial panic + of it is reasonably clear + that the remote cause + + was the build-up of NTMs + in the fi nancial system, + primarily— as + + I have shown in this + analysis—as a result of + government housing + + policy. Th is + unprecedented increase in + weak and risky assets + + set the fi nancial + system up for a crisis + of some kind. Th e + +On line 9572: + into a full-fl + edged panic—the proximate + cause of the panic—was + +On line 9572: + action: the rescue + of Bear Stearns in March and the + subsequent failure + +On line 9572: + rescue Lehman Brothers + six months later. In terms of + its ultimate cost + +On line 9572: + the public, this was + one of the great policy + errors of all time, + + and the reasons for + the misjudgments that led to + it have not yet been + +On line 9576: + e lesson taught by + the rescue of Bear was that + all large fi nancial + +On line 9578: + rescued. Th e moral + hazard introduced by this + one act irreparably + + changed the position + of Lehman Brothers and every + other large fi rm + +On line 9578: + the world’s fi nancial + system. From that time forward, + (i) the critical + +On line 9578: + for more capital + became less critical; the + likelihood of a + + government bailout would + reassure creditors, so + there was no need to + +On line 9578: + further by raising + additional capital; + (ii) fi rms such as + + Lehman, that might have been + saved through an acquisition + by a larger fi + +On line 9578: + or an infusion + of fresh capital by a + strategic investor, drove + +On line 9578: + themselves waited for + the U.S. government to pick + up some of the cost, + +On line 9578: + it had with Bear—an + off er that never came in + Lehman’s case; and (iv) the + +On line 9578: + fund, apparently + assuming that Lehman would be + rescued, decided + +On line 9578: + it held; instead, with + devastating results for + the money market + + fund industry, it + waited to be bailed out on + the assumption that + +On line 9580: + be saved. But Lehman was + not saved, and its creditors + were not bailed out. At + +On line 9580: + large mark-to-market + losses among U.S. fi nancial + fi rms raised questions + +On line 9580: + institutions were + insolvent or unstable, + the demise of Lehman was + + a major shock. It + overturned all the rational + expectations about + +On line 9580: + government Charles P. + Kindleberger and Robert Aliber, + Manias, Panics, and + +On line 9580: + A History of + Financial Crises, 5th edition, + John Wiley Sons, Inc., + +On line 9586: + Wallison policies + that market participants + had developed aft + + er the Bear rescue. + With no certainty about who + was strong or who was + +On line 9586: + to U.S. government + securities. Banks—afraid that their + counterparties would + +On line 9586: + of their investments + or their corporate customers + would draw on lines of + + credit—began to + hoard cash. Banks wouldn’t lend to + other banks, even overnight. + +On line 9588: + Bair suggested, that + was the fi nancial crisis. + Everything aft er + +On line 9592: + simply cleaning up + the mess. Th is analysis + lays the principal + +On line 9592: + the unprecedented + number of NTMs that were brought + into the U.S. fi + +On line 9594: + government housing + policy. Th ese weak and + high risk loans helped to + +On line 9596: + the bubble, and when + the bubble defl ated + they defaulted in + +On line 9598: + losses in the PMBS + that were held by fi nancial + institutions in + +On line 9602: + stability. Th + e accumulation of + million subprime and + + Alt-A mortgages was not + a random event, or even the + result of major + + forces such as global + fi nancial imbalances or + excessively low + +On line 9602: + rates. Instead, these loans + and the bubble to which they + contributed were the + +On line 9606: + standards so that more + people could buy homes. While this + process was going on, + + everyone was pleased. + Homeownership in the U.S. + actually grew + +On line 9606: + But the result was + a fi nancial catastrophe + from which the U.S. has + +On line 9616: + still not recovered. + Dissenting Statement III. THE + U.S. GOVERNMENT’S ROLE + +On line 9624: + FOSTERING THE GROWTH + OF THE NTM MARKET Th e + preceding section + + of this dissenting + statement described the damage + that was done to the + +On line 9624: + number of defaults + and delinquencies that occurred + among the million NTMs + +On line 9624: + that were present there in + Given the damage they caused, + the most important + + question about the fi + nancial crisis is why so + many low quality + +On line 9624: + Another way to + state this question is to ask + why mortgage standards + +On line 9624: + so substantially + before and during the 1997-2007 + bubble, allowing + + so many NTMs to be + created. Th is massive + and unprecedented + +On line 9628: + standards had to have + a cause—some factor that was + present during the 1990s + +On line 9628: + thereaft er that was + not present in any earlier + period. Part III + +On line 9632: + e conventional + explanation for the fi + nancial crisis is + +On line 9632: + one given by Fed + Chairman Bernanke in the same speech + at Morehouse College + +On line 9634: + the outset of Part + II: Saving infl ows from + abroad can be benefi + +On line 9634: + infl ows invests + them well. Unfortunately, + that was not always + +On line 9634: + some other countries. + Financial institutions + reacted to the + +On line 9634: + of available funds by + competing aggressively + for borrowers, and, + + in the years leading + up to the crisis, credit + to both households and + +On line 9634: + and easy to obtain. + One important consequence + was a housing boom + + in the United States, + a boom that was fueled in + large part by a rapid + +On line 9634: + of this lending was + poorly done, involving, for + example, little + +On line 9636: + ability to make + the monthly payments. Lenders may + have become careless + +On line 9636: + like many people at + the time, expected that house + prices would continue + +On line 9636: + up equity in + their homes--and that credit would + remain easily + +On line 9636: + to refi nance if + necessary. Regulators + did not do enough to + + prevent poor lending, + in part because many of the + worst loans were made by + +On line 9636: + to little or no + federal regulation. + [Emphasis supplied]59 + + In other words, the + liquidity in the world + fi nancial market + +On line 9638: + banks to compete for + borrowers by lowering + their underwriting + +On line 9638: + Unregulated + originators made bad loans. + One has to ask: is + +On line 9638: + plausible that banks + would compete for borrowers + by lowering their + +On line 9640: + been competing for + years. Th at competition + involved off ering + +On line 9640: + most benefi ts to + potential borrowers. It + did not, however, + +On line 9650: + Dissenting Statement + or involve the weakening + of underwriting + +On line 9652: + the traditional + U.S. mortgage—were generally + or year amortizing + +On line 9652: + homebuyers who could + provide a downpayment of + at least 10-to-20 percent + +On line 9652: + had good credit records, + jobs and steady incomes. Because + of its inherent + + quality, this loan + was known as a prime mortgage. + Th ere were subprime + +On line 9656: + subprime lenders, but in + the early 1990s subprime lenders + were generally + + niche players that made + loans to people who could not + get traditional + +On line 9656: + loans; the number of + loans they generated was + relatively small + + and bore higher than + normal interest rates to + compensate for the + + risks of default. In + addition, mortgage bankers and + others relied on + +On line 9656: + insurance for loans + with low downpayments, impaired + credit and high debt + + ratios. Until the + 1990s, these NTMs were never more + than a fraction of + + the total number + of mortgages outstanding. Th + e reason that low + +On line 9658: + not generally + used is simple. Low standards + would result in large + +On line 9658: + mortgages defaulted, + and very few lenders wanted to + hold such mortgages. In + + addition, Fannie + and Freddie were the buyers + for most middle class + +On line 9658: + the United States, and + they were conservative in + their approach. Unless + +On line 9658: + originator made + a traditional mortgage + it was unlikely + +On line 9662: + another secondary + market buyer could be found + for it. Th is is + +On line 9662: + If you produce an + inferior product—whether it’s + a household cleaner, + +On line 9662: + or a loan—people + soon recognize the lack of + quality and you + +On line 9666: + business. Th is was + not the experience with + mortgages, which became + + weaker and riskier + as the 1990s and 2000s progressed. + Why did this happen1 + + In its report, the + Commission majority + seemed to assume that + +On line 9668: + of mortgages controlled + the quality of mortgages. + Much is made in the + +On line 9668: + so-called "originate + to distribute" idea, where an + originator is + + not supposed to care + about the quality of the + mortgages because they + +On line 9672: + be sold off Th e + originator, it is said, + has no "skin in the + +On line 9674: + e motivation + for making poor quality + mortgages in this telling + +On line 9674: + not only on the + origination but in each + of the subsequent + +On line 9678: + upside down. Mortgage + originators could make all + the low quality + + mortgages they wanted, + but they wouldn’t earn a dime + unless there was a + +On line 9682: + e real question, + then, is why there were buyers + for inferior + + mortgages and this, as + it turns out, is the same as + asking why mortgage + +On line 9682: + Professor Raghuram + Rajan notes in Fault Lines, "[A]s + brokers came to know + +On line 9682: + while, the problems were + hidden by growing house prices + and low defaults—easy + +On line 9682: + masked the problems caused + by easy credit—until house + prices stopped rising and + +On line 9684: + fl ood of defaults + burst forth."60 Who were these buyers1 + Table reporting + +On line 9684: + outstanding on June + identifi ed government + agencies and private + + organizations + required by the government + to acquire, hold or + +On line 9684: + securitize NTMs + as responsible for two-thirds + Raghuram G. Rajan, + +On line 9692: + Lines, p.44. Peter J. + Wallison of these mortgages, + about million. Th e + +On line 9694: + the private sector + as the securitizer + of the remaining + +On line 9694: + loans. In other words, + if we are looking for the + buyer of the NTMs + +On line 9694: + being created + by originators at the + local level, the + +On line 9698: + sector certainly + played a role, but it was a + subordinate one. + +On line 9698: + private sector did + was respond to demand—that’s what + the private sector + +On line 9698: + matter. Of its own + volition, it created + a demand that would + +On line 9702: + have been there. Th e + deterioration in + mortgage standards did + +On line 9702: + to the Commission + majority’s apparent + view—because banks and + +On line 9702: + suddenly started + to make defi cient loans; nor + was it because of + +On line 9706: + Fannie and Freddie, + mortgage banks and insured banks + of all kinds into + +On line 9706: + NTMs in order to + meet various government + requirements. Fannie + +On line 9706: + Freddie were subject + to increasingly stringent + aff ordable housing + + requirements; FHA was + tasked with insuring loans to + low-income borrowers + + that would not be made + unless insured; banks and S&Ls + were required by CRA + +On line 9706: + loans to the same group + of borrowers; mortgage bankers + who signed up for the + +On line 9706: + were required to make + the same kind of loans. Profi t + had nothing to do + +On line 9706: + these fi rms; they were + responding to government + direction. Under + +On line 9706: + should be no surprise + that underwriting standards + declined, as all of + +On line 9710: + In testimony + before the House Financial + Services Committee + +On line 9710: + Development, said + in reference to the GSEs: + "Seeing their market + +On line 9712: + share decline [between + and as a result of [a] + change of demand, the + +On line 9712: + made the decision + to widen their focus from safer + prime loans and begin + +On line 9712: + underwriting and + risk management standards along + the way. Th is would + +On line 9716: + companies themselves + –but ultimately also + for the American + +On line 9718: + Earlier, in a + "Report to Congress on the + Root Causes of the + +On line 9720: + Foreclosure Crisis," + in January HUD declared + "Th e serious + + fi nancial troubles + of the GSEs that led to their + being placed into + +On line 9722: + to the fact that the + GSEs were, indeed, overexposed + to unduly risky + + mortgage investments. + However, the evidence + suggests that the GSEs’ + +On line 9724: + or guarantee non-prime + loans was motivated much + more by eff orts to + +On line 9724: + need to satisfy + federal regulators." + [emphasis supplied] + + Finger-pointing in + Washington is endemic + when problems occur, + +On line 9726: + Report to Congress + on the Root Causes of the + Foreclosure Crisis + +On line 9736: + individuals + are constantly trying to + fi nd scapegoats for + +On line 9736: + bad decisions, but + HUD’s eff ort to blame Fannie + and Freddie for the + +On line 9738: + standard for running + from responsibility. + Contrast the statement + +On line 9738: + quoted above with this + statement by HUD in when it + was signifi cantly + +On line 9738: + goals: Lower-income and + minority families + have made major gains + + in access to the + mortgage market in the 1990s. + A variety of + +On line 9738: + including improved + housing aff ordability, + enhanced enforcement + +On line 9738: + more fl exible + mortgage underwriting, and + stepped-up enforcement of + +On line 9738: + observers believe that + one factor behind these gains + has been the improved + +On line 9738: + of Fannie Mae and + Freddie Mac under HUD’s aff + ordable lending goals. + +On line 9738: + increases in the + goals for 2001-03 will encourage + the GSEs to further + +On line 9740: + aff ordable lending.62 + [emphasis supplied] Or this + statement in when HUD + +On line 9740: + again increasing the + aff ordable housing goals for + Fannie and Freddie: + +On line 9742: + of Americans with + less than perfect credit or + who cannot meet some + +On line 9742: + requirements of the + prime market for reasons such + as inadequate + +On line 9742: + documentation, + limited downpayment or + cash reserves, or the + +On line 9742: + to take more cash out + in a refi nancing than + conventional loans + + allow, rely on + subprime lenders for access to + mortgage fi nancing. + +On line 9742: + the GSEs reach deeper + into the subprime market, + more borrowers will + +On line 9744: + liberal mortgage + fi nancing has contributed + to the increase in + + demand for housing. + During the 1990s, lenders have been + encouraged by HUD + +On line 9744: + regulators to + increase lending to low-income + and minority + +On line 9746: + government-sponsored + enterprises (GSE) housing + goals and fair lending + +On line 9746: + strongly encouraged + mortgage brokers and lenders to + market to low-income + +On line 9746: + or simply little + savings for a down payment. + Lenders have responded + +On line 9746: + low down payment loan + products and automated + underwriting, which + + has allowed them to + more carefully determine + the risk of the loan.64 + + [emphasis supplied] + Despite the recent eff ort + by HUD to deny + +On line 9748: + fostering the growth + of subprime and other high + risk mortgage lending, + +On line 9748: + in the early 1990s, + HUD led an ultimately + successful eff ort + +On line 9748: + standards in every + area of the mortgage market + where HUD had or could + +On line 9748: + administration + and extended almost to + the end of the Bush + +On line 9748: + involved FHA, which was + under the direct control + of HUD; Fannie Mae + +On line 9748: + Mac, which were subject + to HUD’s aff ordable housing + regulations; and + +On line 9750: + pursue HUD’s Issue + Brief: HUD’s Aff ordable Housing + Goals for Fannie Mae + +On line 9754: + and Freddie Mac, p.5. + Final Rule, http://fdsys.gpo.gov/fdsys/pkg/FR-2004-11-02/pdf/04-24101.pdf. HUD PDR, May + HUD Contract C-OPC-21895, Task + +On line 9754: + CHI-T0007, "Recent House Price + Trends and Homeownership Aff + ordability", p.85. + +On line 9760: + policies out of fear + that they would be brought under + the Community + +On line 9760: + not subject to HUD’s + jurisdiction, the new tighter + CRA regulations + +On line 9760: + became eff ective + in led to a process in which + community groups + +On line 9760: + obtain commitments + for substantial amounts of CRA-qualifying + mortgages and other + +On line 9762: + subprime borrowers + when banks were applying for + merger approvals.66 By + +On line 9762: + HUD believed it had + achieved the "revolution" it + was looking for: Over + +On line 9762: + past ten years, there has + been a ‘revolution in + aff ordable lending’ + +On line 9764: + historically + underserved households. Fannie + Mae and Freddie Mac + +On line 9764: + a substantial part + of this ‘revolution in + aff ordable lending’. + +On line 9764: + mid-to-late 1990s, they added + fl exibility to + their underwriting + + guidelines, introduced + new low-downpayment products, + and worked to expand + +On line 9764: + evaluating the + creditworthiness of loan + applicants. HMDA + +On line 9764: + to low income and + minority families + increased at much faster + +On line 9768: + nonminority + families.67[emphasis supplied] + Th is turned out to + +On line 9768: + an immense error + of policy. By even the + strongest supporters + +On line 9770: + as enforced by HUD + had recognized their error. + In an interview + +On line 9770: + and previously + the strongest congressional + advocate for aff + +On line 9770: + he had erred: "I hope + by next year we’ll have abolished + Fannie and Freddie + +On line 9770: + was a great mistake + to push lower-income people + into housing they + + couldn’t aff ord and + couldn’t really handle + once they had it." He + +On line 9772: + then added, "I had been + too sanguine about Fannie and + Freddie."68 The Decline + +On line 9776: + Standards Before the + enactment of the GSE Act + in and HUD’s adoption + +On line 9778: + review by Fannie + Mae of loans from October + to January over + +On line 9778: + ratios of percent + or less, while only percent + had LTV ratios of + +On line 9778: + lending was confi + ned primarily to FHA + (which was controlled by + +On line 9780: + who oft en sold the + mortgages they originated + to FHA. What caused these + +On line 9782: + majority, Steve + Cocheo, "Fair-lending pressure builds," ABA + Banking Journal, vol. + +On line 9788: + NCRC, CRA Commitments, + Federal Register,vol. + No. November Rules + +On line 9792: + and Regulations, + p.63585, http://fdsys.gpo. gov/fdsys/pkg/FR-2004-11-02/pdf/04-24101.pdf Larry + Kudlow, "Barney Frank + +On line 9802: + in author’s fi les. + Dissenting Statement echoing + Chairman Bernanke, seems to + +On line 9804: + originators, and + the desire for profi t. Th + e majority’s + +On line 9806: + off ers no other + explanation. However, + there is no diffi + +On line 9808: + of the reductions + in mortgage underwriting + standards for Fannie + + and Freddie, or for + the originators for whom + they were the buyers. + +On line 9810: + cally intended + to reduce underwriting + standards. Th e GSE + +On line 9812: + enabled HUD to put + Fannie and Freddie into + competition with + + FHA, and vice versa, + creating what became a + contest to lower + +On line 9814: + in a report, "FHA + loans constituted the largest + share of Countrywide’s + +On line 9818: + Freddie Mac began + accepting loans with higher + LTVs [loan-to-value + +On line 9820: + underwriting fl + exibilities."70 Under + the GSE Act, the HUD + +On line 9820: + aff ordable housing + goals for Fannie and Freddie. + Congress required that + + these goals include a + low and moderate income + goal and a special + +On line 9820: + ordable goal (discussed + below), both of which could be + adjusted in the + +On line 9820: + to consider in + establishing the goals were + national housing + +On line 9820: + "the ability of + the enterprises [Fannie + and Freddie] to lead + +On line 9824: + Th e Act also + established an interim + aff ordable housing + +On line 9824: + of percent for the + two-year period beginning + January Under + +On line 9824: + of the GSEs’ mortgage + purchases had to be aff + ordable housing loans, + +On line 9826: + to borrowers at + or below the AMI.71 Further, + the Act established + +On line 9828: + aff ordable" goal to + meet the "unaddressed needs of, + and aff ordable to, + + low-income families + in low-income areas and very + low-income families." + +On line 9830: + is category + was defi ned as follows: + "(i) percent shall be + +On line 9830: + low-income families + who live in census tracts in + which the median + +On line 9830: + exceed percent of + the area median income; + and (ii) percent shall + + be mortgages of very + low income families," which + were later defi + +On line 9830: + of AMI.72 Although the + GSE Act initially required + that the GSEs spend on + +On line 9830: + special aff ordable + mortgages "not less than percent + of the dollar amount + +On line 9830: + for the previous + year," HUD raised this requirement + substantially in + +On line 9832: + Ultimately, it + became the most diffi cult + aff ordable housing + +On line 9834: + Fannie and Freddie + to meet. Finally, the GSEs + were directed to: + +On line 9834: + assist primary + lenders to make housing credit + available in areas + +On line 9834: + depository + institutions to meet their + obligations under + +On line 9836: + the Community + Reinvestment Act of Th ere + will be more on the + +On line 9840: + mortgages later in + this section. Congress also + made clear in the act + + that its intention + was to call into question + the high quality + +On line 9840: + guidelines of the time. + It did so by directing + Fannie and Freddie + +On line 9842: + "examine— Fannie + Mae Foundation, "Making New + Markets: Case Study of + +On line 9856: + GSE Act, Section Id., + Section Id., Section Peter + J. Wallison Th + +On line 9858: + mortgages for houses + in mixed-use, urban center, and + predominantly + +On line 9862: + low-and moderate-income + families; Th e standards + employed by private + + mortgage insurers + and the extent to which such + standards inhibit + +On line 9868: + described in paragraph + and Th e implications + of implementing + +On line 9870: + (A) establish a + downpayment requirement for + mortgagors of percent + +On line 9870: + less; (B) allow the + use of cash on hand as a + source of downpayments; + +On line 9870: + borrowers who have + a credit history of + delinquencies if the + +On line 9870: + the 12-month period + ending on the date of the + application for + +On line 9872: + could not fi nd a + record of reports by Fannie + and Freddie required + + under this section + of the act, but it would have + been fairly clear to + + both companies, and + to HUD, what Congress wanted + in asking for these + + studies. Prevailing + underwriting standards were + inhibiting mortgage + + fi nancing for low + and moderate income (LMI) + families, and would + +On line 9872: + be substantially + relaxed in order to meet + the goals of the Act. + +On line 9872: + set out to assure + that downpayment requirements + were substantially + +On line 9872: + (eventually they + reached zero) and past credit + history became + +On line 9872: + much less important + issue when mortgages were made + (permitting subprime + +On line 9874: + to become far more + common). Until HUD enforced + the temporary AH + + goals originally + put in place by the GSE Act. + With the exception + + of the special aff + ordable requirements, which were + small at this point, these + +On line 9874: + were not burdensome. + In the ordinary course of + their business, the GSEs + + seem to have bought enough + mortgages made to borrowers + below the AMI to + +On line 9874: + the percent AH goal. + In however, HUD raised the + LMI goal to percent, + +On line 9874: + to and to percent + for subsequent years. In terms + of its eff ect on + + Fannie and Freddie, + HUD’s most important move at + this time was to set + +On line 9874: + and very low income + borrowers) of percent, which + increased to percent + +On line 9874: + in Eff orts to fi + nd loans to low or very low + income borrowers + +On line 9874: + percent and percent + of AMI, respectively) that + did not involve high + +On line 9878: + would prove diffi cult. + As early as November + even before the eff + + ect of these new and + higher goals, Fannie’s staff had + already recognized + +On line 9878: + Homebuyer Program + (CHBP), which featured a percent + loan-to-value (LTV) + +On line 9878: + signifi cant rates of + serious delinquency that + exceeded Fannie’s + +On line 9878: + expected rates by + 26percent in origination + year percent in and + +On line 9880: + its eff orts to erode + underwriting standards in + order to increase + +On line 9882: + entitled "Th e + National Homeownership + Strategy: Partners + +On line 9884: + American Dream." Th + e Strategy was prepared + by HUD, "under the + +On line 9886: + Secretary Henry + G. Cisneros, in response Id., + Section 1354(a). Fannie + +On line 9886: + Mae, "Opening Doors with + Fannie Mae’s Community + Lending Products," p.3. + +On line 9888: + Fannie Mae, Memo from + Credit Policy Staff to + Credit Policy + +On line 9898: + to a request from + President Clinton."77 Th e + fi rst paragraph of + +On line 9902: + e purpose of the + National Homeownership + Strategy is to + +On line 9904: + housing industry + organizations." Th e + Strategy paper + +On line 9904: + representatives + agreed to the formation of + working groups to help + +On line 9904: + clear that one of its + purposes was to increase + homeownership by + +On line 9904: + mortgage insurers, + and other members of the + partnership should work + +On line 9904: + fi nancing with high + loan-to-value ratios should + generally be + +On line 9904: + enhanced homebuyer + counseling and, where available, + supplemental sources + +On line 9904: + According to a + HUD summary, the purpose + of the Strategy + +On line 9906: + It continued: Th + e inability (either + real or perceived) + +On line 9906: + recognized as a + very serious barrier + to homeownership. + +On line 9910: + to a number of + initiatives designed to: Cut + transaction costs through + +On line 9914: + Reduce downpayment + requirements and interest + costs by making terms + +On line 9914: + and moderate-income + families, and creating + incentives to save + + for homeownership. + Increase the availability + of alternative + +On line 9916: + nancing products in + housing markets throughout the + country.80 [emphasis + +On line 9918: + and the National + Homeownership Strategy, + are especially + +On line 9918: + Table below, based + on a large sample of loans + from the 1990s, shows the + +On line 9918: + particularly + instructive to note that when + low downpayments (i.e., + + high LTVs) are combined + with low FICO scores (subprime + loans) the expected + +On line 9918: + For example, when + a loan with a FICO score + below is combined + +On line 9918: + with a downpayment + of fi ve percent, the risk + of default is times + +On line 9922: + it would be if the + downpayment were percent. HUD, + "Th e National + +On line 9930: + Chapter Action Th + e term "fl exible" has + a special meaning + +On line 9932: + it. See note supra. HUD, + Urban Policy Brief No.2, + August available at + +On line 9942: + hdbrf2.txt. Peter J. + Wallison Table High LTVs + enhance the risk of + +On line 9960: + Column Row FICO + Score LTV 71-80% LTV 81-90% LTV 91-95% + LTV Relation of + +On line 10022: + Column to Column + Row times Row 620-679 times Row 680-720 + times Row times Despite + +On line 10022: + requirements imposed + by the private sector as + one of the keys to + + the success of its + strategy to increase home + ownership through the + +On line 10022: + it had established + with the mortgage fi nancing + community: "Th + +On line 10030: + access to suffi + cient funds for a downpayment. + While members of the + +On line 10030: + already made signifi + cant strides in reducing this + barrier to home + +On line 10030: + purchase, more must be + done. In only percent of + home mortgages were made + +On line 10030: + with less than percent + downpayment. By August low + downpayment mortgage + +On line 10032: + loans had increased to + percent."82 [emphasis supplied] + HUD’s policy was + +On line 10032: + highly successful + in achieving the goals it sought. + In only one in + +On line 10032: + homebuyers bought a + home with a downpayment of + percent or less, but + +On line 10032: + by one in seven + buyers was providing a + downpayment at that + +On line 10032: + by the number was + less than one in three. Th e + gradual increase + +On line 10034: + LTVs and CLTVs (fi rst + and second loans combined to + produce a lower + +On line 10034: + under HUD’s policies + is shown in Figure Note the + date when HUD began + + to have some infl + uence over the downpayments that + the GSEs would accept. + +On line 10038: + increased its high LTV + (low downpayment) lending is + clearly described in + +On line 10040: + presentation to + HUD assistant secretary + Albert Trevino on + +On line 10040: + January "Analyses + of the market demonstrate the + greatest barrier + +On line 10040: + home ownership for + most renters are related to + wealth—the lack of money + +On line 10042: + grown considerably. + It is a key part of our + strategy to serve + +On line 10044: + and minority + borrowers." Th e fi gure + that accompanied + +On line 10046: + showed that Fannie’s home + purchase loans over percent LTV + had increased from one + +On line 10048: + in to percent in + "Deconstructing the Subprime + Debacle Using + +On line 10048: + of Underwriting + Quality and Economic + Conditions: A First + +On line 10056: + and America’s + Homebuyers," Presentation + to HUD Assistant + +On line 10068: + Percentage of Home + Purchase Volume with an LTV + or CLTV (Includes FHA + +On line 10070: + Combined Foreclosure + Start Rate for Conventional + and Government Loans + +On line 10072: + *Fannie‘s percentage + of home purchase loans with an + LTV or CLTV used as + +On line 10074: + conventional loans. + Sources: FHA Actuarial + Study, and HUD"s Offi + + ce of Policy + Development and Research + - Profi les of GSE + +On line 10080: + and in 2001-2004, and in + 2005-2007, and Fannie’s 10-K. Compiled + by Edward Pinto. + +On line 10084: + low downpayments and + delinquencies and defaults on + mortgages is shown in + +On line 10084: + compares the increase + in percent (or greater) CLTV or + LTV mortgages to the + +On line 10084: + in the foreclosure + start rate on all loans published + by the Mortgage Bankers + +On line 10088: + Delinquency Survey, + FHA Actuarial Study, + and HUD s Offi + + ce of Policy + Development and Research + - Profi les of GSE + +On line 10092: + and in 2001-2004, and in + 2005-2007, SMR’s "Piggyback Mortgage + Lending," and Fannie’s + +On line 10092: + used as the proxy on + the conventional market. + Compiled by Edward + +On line 10100: + Pinto. Peter J. + Wallison In HUD also + ruled that Fannie and + + Freddie could get AH + credit for buying PMBS that + were backed by loans to + +On line 10102: + lenders to create pools + of subprime mortgages that were + likely to be AH + +On line 10106: + ese were then sold through + Wall Street underwriters to + Fannie and Freddie, + +On line 10110: + which became the largest + buyers of these high risk PMBS + between and Th ese + +On line 10110: + pools were not bought for + profi t. As Adolfo Marzol, + Fannie’s Chief Credit + +On line 10112: + Offi cer, noted + to Fannie CEO Dan Mudd in + a memorandum, + +On line 10112: + "large private label + [PMBS] volumes were necessary + to achieve challenging + +On line 10114: + goals."86 Th ere is a + strong possibility that + by creating a + + market for PMBS backed + by NTMs Fannie and Freddie + enabled Wall Street—which had + +On line 10114: + securitizing + prime jumbo loans—to get its start + in developing + +On line 10116: + PMBS based on NTMs. HUD + pursued these policies throughout + the balance of the + +On line 10116: + Bush. Ultimately, + they would lead to the mortgage + meltdown in as vast + +On line 10116: + mortgages with low or + no downpayments and other + non-traditional + +On line 10116: + features suff used the + fi nancial system. But in + June, the dangers in + + HUD’s policies were not + recognized. As President + Clinton said in a + +On line 10116: + It will not require + legislation. It will not + add more federal + + programs or grow the + Federal bureaucracy."87 + Th e lesson here + +On line 10118: + the government can + accomplish a lot of its + goals without growing, + + as long as it has + the power to enlist the + private sector. Th + +On line 10122: + not mean, however, + as we have all now learned, that + the taxpayers will + + not ultimately + be faced with the costs. Th e + next signifi cant move + + in the AH goals was + made under HUD Secretary + Andrew Cuomo, and + +On line 10126: + it was a major + step. On July HUD issued + a press release with + +On line 10126: + the heading "Cuomo + Announces Action to Provide + trillion in Mortgages + +On line 10126: + Aff ordable Housing + for Million Families."88 Th + e release began: + +On line 10128: + the nation’s two largest + housing fi nance companies + to buy trillion in + +On line 10128: + over the next years to + provide aff ordable housing + for about million low-and + +On line 10132: + families." Th is + was followed by a quote from + President Clinton + +On line 10132: + the importance of + the initiative: "During the + last six and a half + +On line 10132: + and making housing + more aff ordable for all Americans…Today, + the homeownership + +On line 10134: + their homes. Today, we + take another signifi cant + step." Th e release + +On line 10134: + out that the AH goals + would be substantially raised + and that "[u]nder the + + higher goals, Fannie + Mae and Freddie Mac will buy + an additional + +On line 10134: + billion in mortgages + that will be used to provide + aff ordable housing + +On line 10134: + for million more low-and + moderate-income families + over the next years. Th + +On line 10138: + and families are + over and above the trillion in + mortgages for http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626.html. See + +On line 10140: + Mae, internal memo, + Adolfo Marzol to Dan Mudd, + "RE: Private Label + +On line 10144: + on the National + Homeownership Strategy, + June HUD Press Release, + +On line 10152: + HUD No. 99-131, July + Dissenting Statement million + families that would + +On line 10154: + the current goals had + been retained." Th e release + also noted that + + "Fannie Mae Chairman + Franklin D. Raines joined Cuomo at + the news conference + +On line 10156: + the HUD action. Raines + committed Fannie Mae to + reaching HUD’s increased + +On line 10160: + substantial increase + in the AH goals was expressed + in HUD’s discussion + + of the rule-making: + "To fulfi ll the intent + of [the GSE Act], the + +On line 10160: + lead the industry + in ensuring that access + to mortgage credit + +On line 10160: + for very low-, low- and + moderate-income families + and residents of + +On line 10160: + recognizes that, to + lead the mortgage industry + over time, the GSEs will + + have to stretch to reach + certain goals and close the gap + between the secondary + +On line 10164: + is consistent with + Congress’ recognition that ‘the + enterprises will + +On line 10170: + to stretch their eff orts + to achieve’ the goals."89 [emphasis + supplied] Th e new + +On line 10170: + AH goals announced in + were not fi nally issued + until October + +On line 10172: + Th eir specifi cs + were stunning and drove Fannie + and Freddie into + +On line 10174: + far more challenging + era. Th e basic goal, an + LMI requirement of + +On line 10176: + percent, was raised to + percent, and the special aff + ordable goal was raised + +On line 10176: + percent to percent. + As a result, percent of + the increase in goals + +On line 10176: + the low-and very-low income + category—where the risks + were the greatest. A + +On line 10180: + HUD memo summarized + the new rules:90 For each year from + through the goals are: Low- + +On line 10180: + and moderate-income + goal. At least percent of the + dwelling units fi nanced by + +On line 10180: + mortgage purchases + should be for families with + incomes no greater than + +On line 10180: + (AMI), defi ned as + median income for the + metropolitan + +On line 10182: + nonmetropolitan county. + Th e corresponding goal + was percent for 1997-2000. + +On line 10184: + Special aff ordable + goal. At least percent of the + dwelling units fi nanced by + +On line 10184: + purchases should be + for very low-income families + (those with incomes no + +On line 10184: + than percent of AMI) + or for low-income families + (those with incomes no + +On line 10184: + greater than percent of + LMI) in low-income areas. Th + e corresponding + +On line 10188: + goal was percent for + 1997-2000. Underserved areas goal. + At least percent of + +On line 10188: + fi nanced by each GSE’s + mortgage purchases should be + for units located + +On line 10188: + underserved areas. + Research by HUD and others + has demonstrated that + +On line 10188: + high-minority + census tracts have high mortgage + denial rates and low + +On line 10188: + origination rates, + and this forms the basis for + HUD’s defi nition + +On line 10190: + underserved areas. + Th e corresponding goal + was percent for 1997-2000. + +On line 10192: + stimulated strong + interest at the GSEs for + CRA loans, substantial + +On line 10194: + which were likely to + be goals-qualifying. Th + is is evident + +On line 10200: + HUD, Offi ce of + Policy Development + and Research, Issue + +On line 10208: + No. January p.3. + Peter J. Wallison just + aft er HUD announced + + the latest increase + in the AH goals for the GSEs: + Your CRA business is + +On line 10208: + done nearly billion + in specially targeted + CRA business—all with + + depositories + like yours. But that is just the + beginning. Before + +On line 10208: + decade is over, Fannie + Mae is committed to fi + nance over billion in + +On line 10210: + and over billion in + CRA business altogether… + We want your CRA loans + +On line 10210: + they help us meet our + housing goals… We will buy them + from your portfolios, + +On line 10210: + purchase CRA mortgages + you make right at the point of + origination... You + + can originate CRA + loans for our purchase with one + of our CRA-friendly products, + +On line 10210: + down Fannie Or we + have special community + lending products with + +On line 10214: + "CRA your way".91 Th e + percent level in the new + HUD regulations + + was a turning point. + Fannie and Freddie had to + stretch a bit to reach + +On line 10214: + previous goal of + percent, but percent was a + signifi cant challenge. + +On line 10214: + Fannie Mae’s mission + regulator, HUD, imposed + ever-higher housing + +On line 10218: + were very diffi cult + to meet during my tenure + as CEO [2005-2008]. Th e + +On line 10220: + deal of time, resources, + energy, and personnel + were dedicated + +On line 10220: + fi nding ways to + meet these goals. HUD increased the + goals aggressively + +On line 10220: + over time to the point + where they exceeded the mark, + requiring Fannie + +On line 10220: + purchasing loans to + underserved areas. Fannie + Mae had to devote + +On line 10220: + great deal of resources + to running its business to + satisfy HUD’s goals + + and subgoals.92 Mudd’s + point can be illustrated + with simple arithmetic. + +On line 10222: + had to acquire a + goal-qualifying loan. Although + about percent of prime + + loans were likely to + be goal-qualifying in any + event (because they were + +On line 10222: + borrowers at or + below the applicable + AMI), most prime loans were + +On line 10224: + Subprime and other + NTM loans were goals-rich, but not + every such loan was + +On line 10224: + Accordingly, in + order to meet a percent + goal, the GSEs had to + +On line 10224: + ever larger amounts + of goals-rich NTMs in order + to acquire suffi + +On line 10230: + loans. Th us, in a + presentation to HUD in + Fannie argued that + +On line 10230: + goal (which was under + consideration by HUD + at the time) it would + +On line 10230: + acquire percent more + subprime loans than the goal in + order to capture + +On line 10230: + with the special aff + ordable category at + percent in the GSEs + +On line 10230: + numbers of NTM loans + from borrowers who were at + or below percent + + of the AMI. Th is + requirement drove Fannie and + Freddie even further + +On line 10234: + risk territory + in search of loans that would meet + this subgoal. Jamie S. + +On line 10238: + Presented in the + FCIC’s June letter, Answer to + Question How infl + + uential were HUD’s aff + ordable housing guidelines in + Fannie Mae’s purchase + +On line 10238: + subprime and Alt-A loans1 + Were Alt-A loans "goals-rich"1 Were Alt-A + loans net positive + +On line 10248: + development, June + Dissenting Statement Most of + what was going on + + here was under the + radar, even for specialists in + the housing fi nance + +On line 10250: + paper published in + fi nancial analyst Josh + Rosner recognized + +On line 10250: + standards although he + did not recognize how many + loans were subject to + +On line 10250: + past decade Fannie Mae + and Freddie Mac have reduced + required down payments + +On line 10252: + loans that they purchase + in the secondary market. Th + ose requirements have + +On line 10252: + from to to and in + the past few months Fannie Mae + announced that it would + +On line 10252: + market. Although they + are buying low down payment + loans, those loans must be + + insured with ‘private + mortgage insurance’ (PMI). On + homes with PMI, even the + +On line 10254: + can now be borrowed + through unsecured loans, gift s + or subsidies. Th + +On line 10256: + not only can the + buyer put zero dollars + down to purchase a + + new house but also + that the mortgage can fi nance + the closing costs…. [I]t + +On line 10258: + a large portion of + the housing sector’s growth in + the 1990’s came from the + +On line 10262: + to greater leverage has + the potential to become + a vicious cycle + +On line 10266: + Th e last increase + in the AH goals occurred in + when HUD raised the LMI + +On line 10266: + goal to percent for + percent for percent for and + percent for Again, the + +On line 10266: + special aff ordable + category outstripped the + general LMI goal, + +On line 10268: + Freddie to acquire + additional risky NTMs. Th + is category + +On line 10270: + to percent over the + period. In the release + that accompanied + +On line 10274: + HUD declared: Millions + of Americans with less than + perfect credit or + + who cannot meet some + of the tougher underwriting + requirements of the + +On line 10274: + documentation, + limited downpayment or + cash reserves, or the + +On line 10274: + to take more cash out + in a refi nancing than + conventional loans + + allow, rely on + subprime lenders for access to + mortgage fi nancing. + +On line 10274: + the GSEs reach deeper + into the subprime market, + more borrowers will + +On line 10274: + greater stability + and standardization create.96 + [emphasis supplied] + +On line 10276: + indeed reach deeper + into the subprime market, + confi rming in + +On line 10276: + March presentation + to HUD, "Higher goals force us + deeper into FHA + +On line 10276: + Mae’s acquisitions + of goal-qualifying loans (which + were primarily + +On line 10276: + Alt-A) increased (i) for + very low income borrowers + from percent of their + +On line 10276: + special aff ordable + borrowers from percent in + to percent in and + +On line 10276: + includes the other + two categories) from percent + in to percent in + +On line 10278: + New Millennium: + A Home Without Equity + is Just a Rental With + +On line 10290: + p.29. http://fdsys.gpo.gov/fdsys/pkg/FR-2004-11-02/pdf/04-24101.pdf, p.63601. Fannie + Mae, "Th e HUD Housing Goals", + March HUD, Offi ce + +On line 10294: + Research, Profi les of + GSE Mortgage Purchases, 1992-2000, + 2001-2004, and 2005-2007. Peter + +On line 10302: + Fannie and Freddie + were suffi ciently in need + of subprime loans to + + meet the AH goals that + their CEOs, as the following + account shows, went to + +On line 10302: + meeting of mortgage + bankers to ask for more subprime + loan production: Th + +On line 10304: + top executives + of Freddie Mac and Fannie + Mae [Richard Syron and + +On line 10304: + made no bones about their + interest in buying loans + made to borrowers + +On line 10304: + province of nonprime + and other niche lenders. …Fannie + Mae Chairman and [CEO] + +On line 10304: + San Francisco that + his company’s lender-customers + ‘need to learn the best + +On line 10304: + the subprime market + and bring the best from the prime + market into [the + + subprime market].’ He + off ered praise for nonprime lenders + that, he said, ‘are some + + of the best marketers + in fi nancial services.’… We + have to push products + +On line 10304: + opportunities + to people who have lesser + credit quality," + +On line 10306: + he said.99 [emphasis + supplied] Accordingly, by + when HUD put new and + + tougher AH goals into + eff ect, Fannie and Freddie + were using every + +On line 10306: + the goals, including + subprime loans, Alt-A loans and the + purchase of PMBS. Some + +On line 10306: + majority, have + claimed that the GSEs bought NTM loans + and PMBS for profi t—that + +On line 10306: + instruments did not + assist Fannie and Freddie + in meeting the AH + +On line 10306: + therefore must have been + acquired because they were profi + table. However, + +On line 10306: + data in Table + furnished to the Commission + by Fannie Mae shows + +On line 10306: + categories of NTMs—subprime + loans (i.e., loans to borrowers + with FICO scores less + +On line 10306: + than Alt-A loans and PMBS + (called PLS for "Private Label + Securities" in + + the table)— fulfi + lled the AH goals or subgoals + for the years and in + +On line 10310: + goal.) Table also + shows, signifi cantly, that the + gradual increase + +On line 10310: + NTMs closely followed + the gradual increase in + the goals between and + +On line 10312: + Neil Morse, "Looking for + New Customers," Mortgage Banking, + December It may + + be signifi cant that + the chairman of Freddie Mac + at the time, Leland + +On line 10312: + not attend the press + conference or pledge support + for HUD’s new goals. Raines + +On line 10312: + have forgotten his + pledge to Secretary Cuomo + and his speech to the + + mortgage bankers when he + wrote in a letter to Th + e Wall Street Journal + +On line 10316: + fi nancial collapse + of Fannie and Freddie are + pretty clear and a + +On line 10318: + of public record. Th + e company managers, their + regulator and + +On line 10318: + Treasury have all said + that the losses which crippled + the companies were + +On line 10318: + caused by the purchase + of loans with lower credit + standards between and + +On line 10320: + credit standards in + order to regain market + share aft er Wall Street + +On line 10324: + credit standards in + Dissenting Statement Table + Nontraditional + +On line 10328: + Mortgages and the Aff + ordable Housing Goals Year Low + Moderate Special + +On line 10340: + ordable Underserved + Income Base Goal Base Goal Base + Goal Actual* Goal + +On line 10534: + Goal Actual* Goal + Credit Score Originations + Alt-A Originations + +On line 10752: + Backed by Subprime of + unit fi nanced that qualifi + ed for base goals. Not + +On line 10754: + housing goals scoring + in Table also shows that + ordinary subprime + + loans, Alt-A loans and PMBS + backed by subprime loans were not + always suffi cient + +On line 10760: + meet the AH goals. For + Fannie Mae, disk produced for + FCIC, April Th roughout + +On line 10762: + I have not discussed + the GSEs’ compliance with the + "Underserved Base Goal," + +On line 10764: + Goal applied mostly + to minorities and involved + a diff erent set + +On line 10768: + decisions than the + LMI goal and the Special Aff + ordable Goal. Peter + +On line 10770: + J. Wallison this + reason, Fannie developed + special categories + +On line 10770: + to supplement what + they were getting from higher + quality NTMs. Th + +On line 10774: + My Community + Mortgage (MCM) and Expanded + Approval (EA). In many + +On line 10774: + these two categories + enabled Fannie to meet the + AH goals, but at the + +On line 10774: + higher delinquency + rates than occurred among higher + quality NTMs they + +On line 10774: + progressed and the AH + goals increased, Fannie had to + acquire increasing + +On line 10774: + in these categories, + and as shown in Table these + increasing numbers + +On line 10776: + Loans Produced Higher + Delinquency Rates at Fannie + Mae Goals by Vintage + +On line 10800: + Rate Prior EA/MCM + Housing Goals EA/MCM Housing + Goals EA/MCM Housing + +On line 10814: + EA/MCM Housing Goals + Just how desperate Fannie + and Freddie were to + +On line 10814: + AH goals is revealed + by Fannie’s behavior in + As reported in + +On line 10816: + the American Banker + on May "A House Financial + Services Committee + +On line 10818: + shared with lawmakers + Th ursday accused Fannie + Mae and Freddie Mac + +On line 10818: + several years in + a series of dubious + transactions to meet + +On line 10820: + e report cited + several large transactions + entered into by + +On line 10820: + under which sellers + were allowed to repurchase + loans without recourse. + +On line 10820: + example, it said + that in September Fannie + bought the option to + +On line 10820: + up to billion of + multifamily mortgage + loans from Washington + +On line 10820: + million, the report + said. Under the agreement, the + GSE permitted WaMu + +On line 10822: + the loans…’ Th is was + the largest multifamily + transaction ever + +On line 10822: + by Fannie Mae and + was critical for Fannie + Mae to reach the aff + +On line 10824: + of what happened here + is contained in WaMu’s 10-K for + Freddie had engaged + +On line 10824: + in a similar + but larger transaction with + WaMu in reported + +On line 10824: + income increased in + compared with partially due + to fees paid to the + +On line 10824: + the Federal Home + Loan Mortgage Corporation + ("FHLMC" or Freddie Mac"). + +On line 10828: + Company received + million in nonrefundable + fees to induce the + +On line 10828: + of the benefi cial + interest in those loans in + the form of mortgage-backed + +On line 10828: + issued by Freddie + Mac. Since the Company has + the unilateral + + right to collapse the + securities aft er one + year, the Company + + has eff ectively + retained control over the loans. + Accordingly, the + + assets continue + to be accounted for and + reported as loans. + +On line 10830: + is transaction was + undertaken by Freddie + Mac in order to + +On line 10830: + fulfi lling its aff + ordable housing goals as set + by the Department + +On line 10832: + and Freddie were both + paying holders of mortgages + to temporarily + +On line 10832: + to them possession + of goal-qualifying loans that + the GSEs could use to + +On line 10832: + satisfy the AH + goals for the year Aft er the + end of the year, the + +On line 10834: + to House Financial + Services Committee, April Rob + Blackwell, "Two GSEs Cut + +On line 10840: + Corners to Hit Goals, + Report Says," American Banker, + May p.1. Dissenting + + Statement absolute + right to reacquire these loans. Th + ere can be little + +On line 10846: + early as Fannie + and Freddie were under so + much pressure to fi + +On line 10846: + that they needed to + meet their aff ordable housing + obligations that they + +On line 10848: + substantial sums to + window-dress their reports to + HUD. The Affordable + +On line 10852: + were the Sole Reason + That the GSEs’ Acquired So Many + NTMs Up to this point, + +On line 10852: + HUD’s policy was + to reduce underwriting + standards in order + +On line 10852: + make mortgage credit + more readily available to + low-income borrowers, + +On line 10852: + Fannie and Freddie + not only took the AH goals + seriously but + + were willing to go + to extraordinary lengths + to make sure that they + +On line 10854: + them. Nevertheless, + it seems to have become an + accepted idea in + +On line 10856: + including in the + Commission majority’s + report—that Fannie + +On line 10856: + and Freddie bought large + numbers of subprime and Alt-A + loans between and in + +On line 10856: + to recover the + market share they had lost to + subprime lenders such as + +On line 10856: + ts. Although there is + no evidence whatever + for this belief—and a + +On line 10856: + of evidence to + the contrary—it has become + another urban + +On line 10856: + repeated so oft + en in books, blogs and other + media that it has + +On line 10860: + of reality.103 + Th e formulations of + the idea vary a bit. + +On line 10862: + earlier, HUD has + claimed— absurdly, in light of + its earlier eff + +On line 10864: + to reduce mortgage + underwriting standards— that + the GSEs were "chasing + +On line 10864: + nonprime market" or + "chasing market share and profi + ts," principally + +On line 10868: + this is another + example of private greed + doing harm, but it + +On line 10870: + trying to evade its + own culpability for + using the AH goals + +On line 10872: + between and Th e + Commission majority + also adopted a + + version of this idea + in its report, blaming the + GSEs’ loosening of + +On line 10872: + on a desire to + please stock market analysts + and investors, as well + +On line 10872: + increase management + compensation. None of HUD’s + statements about its eff + +On line 10872: + make it into the + Commission majority’s + report, which relied + +On line 10872: + on the idea that the + GSEs’ underwriting standards + were reduced by their + + desire to "follow + Wall Street and other lenders in + [the] rush for fool’s gold." + + Th ese claims place the + blame for Fannie and Freddie’s + insolvency—and the + +On line 10874: + the U.S. fi nancial + system immediately + prior to the fi + +On line 10876: + rms’ managements. Th + ey absolve the government, + particularly + +On line 10880: + e GSEs’ managements + made plenty of mistakes—and + won’t be defended + + here—but taking risks + to compete for market share + was not something they + +On line 10880: + did. Because of the + AH goals, Fannie and See, e.g., + Barry Ritholtz, "Get Me + +On line 10880: + Nation, Bailouts, Credit, + Real Estate, Really, + Really Bad Calls, + +On line 10880: + Believe that Fannie + and Freddie Caused the Crash" Beat + the Press Blog, Center + +On line 10892: + Wallison Freddie + were major buyers of NTMs + well before Wall Street + +On line 10892: + rms and the subprime + lenders who came to dominate + the business entered + +On line 10892: + PMBS market in any + signifi cant way. Moreover, the + GSEs did not (indeed, + +On line 10892: + not) appreciably + increase their purchases of + NTMs during the years + +On line 10892: + share to the real + PMBS issuers, Countrywide and + other subprime lenders. + + Th e following + discussion addresses each + of the claims about the + +On line 10898: + motives in turn, and + in the end will show that the + only plausible + +On line 10900: + for their actions was + their eff ort to comply with + HUD’s AH goals. Did the + + GSEs acquire NTMs to + "compete for market share" with + Wall Street or others1 + +On line 10904: + e idea that Fannie + and Freddie were newcomers + to the purchase of + +On line 10904: + NTMs between and and + reduced their underwriting + standards so they could + + compete for market + share with Wall Street or others, + is wrong. As shown in + +On line 10904: + GSEs’ acquisition + of subprime loans and other + NTMs began in the + + 1990s, when they fi rst + became subject to the AH + goals. Research shows that, + + in contravention + of their earlier standards, + the GSEs began to + +On line 10904: + high loan-to-value + (LTV) mortgages in shortly aft + er the enactment + +On line 10904: + the GSE Act and the + imposition of the AH + goals, and by 2001—before + +On line 10904: + at least billion in + NTMs, including over billion + in subprime loans.104 Far + + from following Wall + Street or anyone else into + subprime loans between + +On line 10904: + the GSEs had become + the largest buyers of subprime + and other NTMs many + +On line 10904: + PMBS market began + to develop. Given these + facts, it would be more + + accurate to say + that Wall Street and the subprime + lenders who later came + +On line 10904: + market followed the + GSEs into subprime lending. + Table does not show + +On line 10904: + signifi cant increase + in the GSEs’ acquisition + of NTMs from to and + +On line 10904: + acquired during this + period actually + decreased. Th is is + + consistent with the + fact—outlined below—that the GSEs did + not make any special + +On line 10908: + ort to compete for + market share during these years. + Pinto, "Government + +On line 10908: + in the Lead-up to + the Financial Crisis: A + Forensic Study," Chart p.148, + +On line 10916: + Dissenting Statement + Table GSE Purchases of + Subprime and Alt-A loans + +On line 10964: + billions 1997-2007 Subprime + PMBS Subprime loans** Alt-A PMBS Unk. + Unk, Unk. Unk. Unk. Alt-A + +On line 10998: + Unk. Unk, Unk. Unk. Unk. + High LTV loans**** Total***** *Total + purchases of PMBS + +On line 10998: + 1997-2001 are known. Subprime + purchases for these years were + estimated based + +On line 11000: + constituted of + total PMBS purchases in + **Loans where borrower’s + +On line 11002: + FICO Fannie and + Freddie used their various + aff ordable housing + +On line 11002: + individual + lender variance programs (many times + in conjunction with + +On line 11002: + systems once these came + into general use in + the late-1990s) to approve + +On line 11002: + they generally + did not classify these loans + as Alt-A. Classifi + + cation as Alt-A started + in the early-1990s. Th ere is + an unknown number + +On line 11006: + expanded seller + contributions, etc. Th e + volume of these loans + +On line 11008: + not included. ****Loans + with an original LTV or + original combined + +On line 11010: + estimate loans with + CLTV.>90% is unavailable prior + to Amounts for 2003-2007 are + +On line 11014: + to account for the + impact of loans with a CLTV + Th ese estimates + +On line 11014: + based on disclosures + by Fannie and Freddie that + at the end of their + +On line 11014: + CLTV was and percent + respectively higher than + their exposure to + +On line 11014: + with an LTV Fannie + reports on p. of its 10-K + that of its entire + +On line 11014: + Its Original LTV + percentage (without counting + the impact of any + +On line 11014: + negotiated) + is Freddie reports on p60 + of its Q2:2008 Q that + +On line 11014: + its portfolio had + an original combined LTV + Its OLTV percentage + +On line 11016: + 2nd) is While Fannie + and Freddie purchased only + the fi rst mortgage, + + these loans had the same + or higher incidence of + default as a loan + +On line 11018: + *****Since loans may have more + than one characteristic, + they may appear in + +On line 11020: + one category. + Totals are not adjusted + to take this into + +On line 11024: + e claim that the GSEs + loosened their underwriting + standards in order + +On line 11024: + specifi cally with + "Wall Street" can be easily + dismissed—unless the + +On line 11024: + others who have made + this statement are including + Countrywide (which was + +On line 11024: + lenders in the term "Wall + Street." Assuming, however, + that the Commission + + majority and + other commentators have + been using the term + +On line 11024: + to apply to the + commercial and investment + banks that operate + +On line 11024: + fi nancial markets + of New York, the data shows + that Wall Street was not + +On line 11024: + cant participant + in the subprime PMBS market + between and or at + + any time before or + aft er those dates. Th e top + fi ve players in + +On line 11028: + RFC billion), and New + Century billion). Other + than Lehman, some other + +On line 11028: + fi rms were scattered + through the list of the top but + were not signifi cant + +On line 11030: + group. In the biggest + year for subprime issuances, the + fi ve leaders were + +On line 11030: + and the total for + all Wall Street institutions + was billion, or about + +On line 11038: + Wallison percent + of the billion issued that + year.106 In Lehman had dropped + +On line 11038: + of the top fi ve + and Countrywide had taken + over the leadership + + among the issuers, but + Wall Street’s share had not signifi + cantly changed. By the + +On line 11038: + middle of the PMBS + market had declined to such + a degree that the + + market share numbers + were meaningless. However, + in that year the GSEs’ + + market share in NTMs + increased because they had to + continue buying + +On line 11038: + had defaulted or + left the business—in order to + comply with the AH + +On line 11038: + Accordingly, if + Fannie had ever loosened + its lending standards + + to compete with some + group, that group was not Wall Street. + Th e next question + +On line 11042: + standards to compete + with Countrywide, Ameriquest and the + other subprime lenders + +On line 11042: + were the dominant + players in the PMBS market + between and Again, the + + answer seems clearly + to be no. Th e subprime + PMBS market was very + +On line 11046: + when for the fi rst + time it exceeded billion + and reached billion in + +On line 11046: + subprime PMBS issuances.107 + Yet, Table shows that in alone + the GSEs bought billion + +On line 11046: + more than the total + amount securitized by all + the subprime lenders and + +On line 11050: + e discussion of + internal documents that + follows will focus + +On line 11052: + it was from Fannie + that the Commission received + the most complete set + +On line 11054: + By the early 2000s, + Countrywide had succeeded + in creating an + +On line 11054: + and underwriting + NTMs through PMBS. Other subprime + lenders, as noted above, + + were also major + issuers, but they sold their PMBS + through Wall Street fi rms + +On line 11058: + underwriters. Th + e success of Countrywide + and other subprime + +On line 11058: + as distributors + of NTMs through PMBS was troubling + to Fannie for two + +On line 11058: + First, Countrywide had + been Fannie’s largest supplier + of subprime mortgages; + + the fact that it could + now securitize mortgages + it formerly sold + + to Fannie meant that + Fannie would have more diffi + culty fi nding + + subprime mortgages that + were AH goals-eligible. + In addition, the + +On line 11062: + support in Congress + depended heavily on + meeting the AH goals + +On line 11062: + "leading the market" + in lending to low income + borrowers. In and + +On line 11062: + administration + and a growing number of + Republicans in + + Congress were calling + for tighter regulation of + Fannie and Freddie, + +On line 11064: + and the GSEs needed + allies in Congress to hold + this off Th e fact + +On line 11066: + lenders were taking an + increasing market share in + these years—suggesting that + + the GSEs were no longer + the most important sources of + low income mortgage + + credit—was thus a + matter of great concern to + Fannie’s management. + + Without strong support + among the Democrats in Congress, there + was a signifi cant + +On line 11068: + regulatory + legislation. Th is was + expressed at Fannie + +On line 11070: + and provoked wide-ranging + consideration within + the fi rm about how + +On line 11072: + although Fannie had + strong reasons for wanting to + compete for market + +On line 11072: + did not have either + the operational Inside + Mortgage Finance, Th + +On line 11076: + e Mortgage Market + Statistical Annual—Volume II, pp. + and Inside Mortgage + +On line 11086: + capacity to + do so. In the end, Fannie + was unable to take + +On line 11086: + signifi cant action + during the key years and that + would regain market + +On line 11088: + the subprime lenders or + anyone else. Th ey reduced + their underwriting + +On line 11090: + necessary to keep + pace with the increasing AH + goals, but not to go + +On line 11092: + those requirements. In + a key memo dated June (the + "Crossroads" memo), Tom Lund, + +On line 11092: + Vice President for + Single Family Business, + addressed the question + + of Fannie’s loss of + market share and how this share + position could be + + regained. Th e date + of this memo is important. + It shows that even in + +On line 11094: + the middle of there + was still a debate going + on within Fannie + +On line 11094: + for market share with + Countrywide and the other + subprime issuers. No + +On line 11094: + competition had + actually begun. Lund + starts the discussion + +On line 11094: + by saying "We are + at a strategic crossroad…[his + ellipses] We face two + +On line 11094: + choices: Stay the Course + [or] Meet the Market Where the + Market Is". "Staying + +On line 11094: + followed up to that + point (except as necessary + to meet HUD’s AH goals). + +On line 11094: + the AH goals required, + but also by acquiring + much riskier mortgages + +On line 11094: + Fannie—which specialized + in fi xed rate mortgages—had + been buying up to + +On line 11098: + time. Th ese riskier + potential acquisitions + would have included + +On line 11098: + numbers of Option + ARMs (involving negative + amortization) and + +On line 11100: + (or "layered") risks with + which Fannie had no prior + experience. Th + +On line 11102: + price..[and] a value + proposition for subprime." His + conclusion was as + +On line 11104: + the Market’ today." + "Th erefore," Lund continued, + "we recommend that + + we: Pursue a ‘Stay + the Course’ strategy and test + whether market changes are + +On line 11106: + In the balance of + the Crossroads memo, Lund notes that + subprime and Alt-A loans + +On line 11106: + driving the "leakage" + of "goals rich" products to PMBS + issuers. He points out + + the severity of + the loss of market share, but + never suggests that + +On line 11106: + Fannie was unequipped + to compete with Countrywide + and others at that + +On line 11106: + to an internal + FCIC staff investigation, + dated March other + +On line 11110: + (Executive Vice + President and Chief Business + Offi cer), Kenneth + +On line 11110: + Vice President for + Housing and Community + Development), and + +On line 11110: + Business)—all concurred + that Fannie should follow Lund’s + recommendation + + to "stay the course." Th + ere is no indication + in any of Fannie’s + +On line 11116: + er June that Lund’s "Stay + the Course" recommendation + was ever changed or + +On line 11116: + Freddie were supposed + to have begun to acquire + large numbers of NTMs + +On line 11116: + to meet the AH goals) + in order to compete with + Countrywide or (in + +On line 11120: + some telling) Wall Street. Th + us, in June one year aft er + the Lund Crossroads memo, + +On line 11122: + then the chairman of + the board, told Fannie’s senior + executives: is + +On line 11122: + "Single Family + Guarantee Business: Facing + Strategic Crossroads" June + +On line 11128: + transition year. To + be sure, there are still issues + to resolve. Th e + +On line 11130: + demanding. And from + a strategy standpoint, it + is clear that until + +On line 11130: + have eliminated + operations and control + weaknesses, taking + +On line 11130: + more risk or opening + new lines of business will be + viewed dimly by our + +On line 11132: + have confi rmation + that Fannie’s top offi cials + did not believe that + +On line 11134: + fi rm was in any + position—in the middle + of 2006—to take on the + +On line 11134: + be necessary s + to compete with Countrywide + and other subprime + +On line 11136: + that were selling PMBS + backed by subprime and other + NTMs. Moreover, there is + +On line 11136: + that Fannie either + never tried or was never + fi nancially able + +On line 11136: + share with Countrywide + and other subprime lenders from + to For example, + +On line 11136: + fi nancial data, + published by OFHEO, its former + regulator, in + +On line 11164: + Earnings Performance: + Net Income billions) -2.1 Net + Interest Income + +On line 11200: + billions) Guarantee + Fees billions) Net Interest + margin Average + +On line 11234: + Return on Common + Equity -8.3 Dividend + Payout Ratio N/M + +On line 11236: + period from to + To understand the signifi + cance of this, it + +On line 11236: + mortgage business works. + Most of Fannie’s guarantee + business—the business + + that competed with + securitizations of + PMBS by Countrywide + +On line 11236: + others—was done with + wholesale sellers of mortgage + pools. In these deals, the + +On line 11236: + Countrywide or a + Wells Fargo, would assemble + a pool of mortgages + +On line 11236: + for a guaranty + mechanism that would off er + the best pricing. In + +On line 11236: + case of a Fannie + MBS, the key issue was the + GSEs’ guarantee fee, + +On line 11236: + how much of the profi + t the issuer would be able + to retain. In the + +On line 11236: + a PMBS issue, it + was the amount and cost of the + credit enhancement + + needed to attain + a AAA rating for a large + percentage of the + + securities backed + by the mortgage pool. Th e + issuer had a choice + +On line 11242: + Freddie or one of + the Wall Street underwriters. + Th us, if Fannie + + wanted to compete + with the private issuers for + subprime and other + +On line 11244: + was only one way + to do it—by reducing + its guarantee fees + + (called "G-fees" at Fannie + and Freddie) and in this way + making itself a + +On line 11246: + than using a Wall + Street underwriter. Th e + fact that Fannie does + + not appear to have + done so is strong evidence + that it never tried + +On line 11246: + compete for share with + Countrywide and the other + subprime issuers aft + +On line 11250: + date of the Crossroads + memo in June Th e OFHEO fi + nancial summary + +On line 11250: + shows that Fannie in + reality had very Stephen + B. Ashley Fannie + +On line 11252: + remarks at senior + management meeting, June OFHEO, + "Mortgage Markets and + +On line 11260: + Its net income and + its return on equity + were all declining + +On line 11260: + this period, and + a cut in its G-fees would have + hastened this decline. + + Finally, there are + Fannie’s own reports about its + acquisitions of + +On line 11262: + restated, covered + periods through and Fannie’s + acquisition of + +On line 11266: + subprime loans barely + increased from through Th ese are + the numbers: Table + +On line 11298: + Mae’s Acquisition + of Subprime Loans, 2004-2007 FICO + FICO 620-<660 Th ese + +On line 11298: + are consistent with + Fannie’s eff ort to comply + with the gradual + +On line 11298: + increase in the AH + goals during the years through they + are not consistent + +On line 11298: + to substantially + increase its purchases of + subprime mortgages in + + order to compete + with fi rms like Countrywide + that were growing their + +On line 11300: + subprime and other + loans. Finally, Fannie’s 10-K + (which, as restated + +On line 11300: + covered and contains + a statement similar to + that made in confi + +On line 11300: + eff ort to compete + for subprime loans (except as + necessary to meet + + the AH goals), and that + in fact it lost market share + by declining to + +On line 11302: + [I]n recent years, an + increasing proportion of + single-family + +On line 11302: + as interest-only + mortgages, negative-amortizing + mortgages and sub-prime + +On line 11302: + mortgages has decreased. + We did not participate + in large amounts of these + +On line 11302: + non-traditional + mortgages in and because we + determined that the + +On line 11302: + ered for these mortgages + oft en off ered insuffi + cient compensation + +On line 11304: + associated + with these mortgages. Th ese trends + and our decision + +On line 11306: + in large amounts of these + non-traditional mortgages + contributed to a + +On line 11306: + issuers during this + period, with our market + share decreasing from + +On line 11308: + losing market share + to Countrywide and others + in and Fannie did + +On line 11308: + acquire unusual + numbers of subprime loans in + order to regain + +On line 11308: + it continued to + acquire only the subprime + and other NTM loans + +On line 11310: + were necessary to + meet the AH goals. Th at the + AH goals were Fannie’s + +On line 11310: + NTMs is shown by the + fi rm’s actions aft er the + PMBS market collapsed + +On line 11310: + At that point, Fannie’s + market share began to rise + as Countrywide and + +On line 11310: + not continue to + issue PMBS. Nevertheless, + despite the losses + +On line 11310: + subprime loans that were + beginning to show up in + the markets, Fannie + +On line 11312: + taken over by the + government in Fannie Mae, + 10-K. Th ese totals + +On line 11316: + not include Fannie’s + purchases of subprime PMBS. + http://www.fanniemae.com/ir/pdf/sec/2004/2004_form10K.pdf;jsessionid=N3RRJCZPD5SOVJ2FQSH SFGI, p.141 and + +On line 11330: + p.127. Fannie Mae, 10-K, + p.37. Peter J. Wallison + September Th e + +On line 11330: + reckless behavior + is obvious—they were still + subject to the AH + +On line 11330: + which were increasing + through this period. If they + had only acquired + + these NTMs to compete + with Countrywide and others + for market share the + + competition was + already over; their competitors + had abandoned the fi + +On line 11332: + is that Fannie did + not—or could not—increase its + market share between + +On line 11332: + question that market + share was not the reason they + had acquired so many + +On line 11334: + the time they failed in + September Beleaguered by + accounting problems, + +On line 11334: + evaluate the risks + of the new kinds of mortgages + they would have to buy, + +On line 11334: + had no option but + to stay the course they had been + following for years. + +On line 11336: + Th e NTMs they bought + during the period from + to were acquired to + + comply with the AH + goals and not to increase their + market share—as much + +On line 11336: + have preferred to do + so. Fannie’s market share fi + nally did increase + +On line 11336: + in when the asset-backed + market collapsed, Countrywide + weakened, and neither + +On line 11336: + else could continue + to securitize mortgages. + In a report to + +On line 11336: + of directors on + October Mudd reported + that Fannie’s market + +On line 11336: + share, which was percent + of the whole market at the + beginning of had + +On line 11340: + Fannie and Freddie + were buying NTMs because they + were profi table. Th + +On line 11344: + addressed in the next + section. Did Fannie acquire + NTMs because these loans + +On line 11346: + table1 From time to + time, commentators on the + GSEs have suggested + + that the GSEs’ real + motive for acquiring NTMs + was not that they had + +On line 11350: + comply with the AH + goals, but that they were seeking + the profi ts these risky + +On line 11352: + produced. Th is could + have been true in the 1990s, but + aft er the major + +On line 11354: + AH goals in Fannie + began to recognize that + complying with the + +On line 11354: + was reducing the + fi rm’s profi tability. By + Fannie was asking + +On line 11358: + relief from the goals. + Th e following table, + drawn from a FHFA + + publication, shows + the applicable AH goals + over the period + +On line 11360: + success in meeting + them. Fannie Mae, Minutes of + a Meeting of the + +On line 11368: + Board of Directors, + October p.18. Dissenting + Statement Table GSEs’ + +On line 11400: + Success in Meeting + Aff ordable Housing Goals, 1996-2007 + Low Mod Housing Goals + +On line 11574: + Actual Freddie + Actual Underserved Goal + Fannie Actual + +On line 11630: + Freddie exceeded + the AH goals virtually + each year, but not by + + signifi cant margins. + Th ey simply kept pace with + the increases in + +On line 11634: + as these requirements + came into force over the years. + Th is alone suggests + +On line 11636: + they did not increase + their purchases in order + to earn profi ts. If + + that was their purpose + they would have substantially + exceeded the goals, + +On line 11636: + fi nancing costs and + low capital requirements) + allowed them to pay + + more for the mortgages + they wanted than any of their + competitors. As HUD + +On line 11638: + in "Because the GSEs + have a funding advantage + over other market + +On line 11640: + their competitors and + increase their market share."115 As + early as there were + +On line 11640: + at Fannie about how + the percent LMI goal—which HUD + had signaled as its + +On line 11642: + move—would be met. In + a June memorandum,116 four + Fannie staff members + +On line 11642: + categories of rules + changes that would enable Fannie + to meet the goals more + +On line 11642: + HUD to change the goals + accounting (what goes into + the numerator + +On line 11642: + (ii) enter other + businesses where the pickings + might be goals-rich, such + + as manufactured + housing and, signifi cantly, + Alt-A and subprime ("Eff + +On line 11642: + Alt-A and A-markets + (the highest grade of subprime + lending) should also + +On line 11642: + business that will have + a salutary eff ect on our + low-and moderate-income + +On line 11644: + and (iii) persuade HUD + to adopt diff erent methods + of goals scoring. By + +On line 11644: + was eff ectively + in competition with banks + that were required to + +On line 11644: + low-income borrowers + targeted in HUD’s AH goals. + Rather than selling their + + CRA loans to Fannie + and Freddie, banks and S&Ls had + begun to retain + +On line 11644: + loans in portfolio. + In a presentation in + November Barry + + Zigas, a Senior + Vice President of Fannie, + noted that "Our own + +On line 11650: + -65142. Bell, Kinney, Kunde + and Weech, through Zigas and Marks + internal memo Frank + +On line 11660: + Housing Goals Options," + June Peter J. Wallison + S&Ls’ holding loans in + +On line 11662: + is due in part to + below-market CRA products."117 + In other words, banks + + and S&Ls subject to + CRA were making mortgage loans + at below market + + interest rates, and + thus could not sell them without + taking losses. Th + +On line 11666: + for Fannie because + it meant that in order to + capture these loans they + + would have to increase + what they were willing to pay + for these loans. Doing + +On line 11668: + would underprice the + risks they would be assuming. + It is important + +On line 11668: + recognize what was + happening. Fannie, and the + banks and S&Ls under + +On line 11668: + were now competing + for the same kinds of NTMs, and + were doing so by + +On line 11668: + subsidies. Simply + as a result of supply + and demand, all of + +On line 11670: + to pay higher prices + for these increasingly risky + mortgages. Th e banks + +On line 11670: + S&Ls that acquired these + loans could not sell them, without + taking a loss, when + + market interest + rates were higher than the rates + on the mortgages. Th + +On line 11672: + indication in + the documents that the FCIC + received from Fannie + + that competition + for subprime loans among the GSEs, + banks, S&Ls, and FHA was + +On line 11672: + principal causes + of the mortgage meltdown and + thus the fi nancial + +On line 11674: + January Fannie + began planning for how to + confront HUD before + +On line 11674: + round of increases + in the AH goals, expected + to occur in In + +On line 11674: + "Action Plan for the + Housing Goals Rewrite," dated + January Fannie + +On line 11674: + number of options, + and concluded that "Fannie + should strongly oppose: + +On line 11676: + goals increases and + new subgoals." (Slide In March as + Fannie prepared for + + new increases in + the AH goals, its staff prepared + a presentation, + + perhaps for HUD or + for policy defense in + public forums. Th + +On line 11680: + that the goals should not + be increased signifi cantly + in Slide stated: In + +On line 11680: + exceeded all our + goals for the 9th straight year. But + it was probably + + the most challenging + environment we’ve ever + faced. Meeting the goals + +On line 11680: + heroic 4th quarter + eff orts on the part of many + across the company. + +On line 11684: + were cancelled. Th e + midnight oil burned. Moreover, the + challenge freaked out the + +On line 11684: + because the tenseness + around meeting the goals meant that + we considered not + +On line 11684: + our liquidity + function—and did deals at risks + and prices we would not + +On line 11686: + becoming clear that + continuing increases + in the AH goals were + + having a major + adverse eff ect on Fannie’s + profi tability. In + +On line 11688: + memorandum to + Brian Graham (another + Fannie offi cial), + +On line 11690: + Market Research and + Policy Development, + wrote: "Meeting the goals + +On line 11692: + diffi cult markets + imposes signifi cant costs + on the Company + +On line 11692: + as much for housing + goals attainment as for the + economics of the + +On line 11700: + Housing Goals Rewrite," + January Fannie Mae, "Th + e HUD Housing Goals," + +On line 11708: + Graham, "RE: Mission + Legislation," September + Dissenting Statement + +On line 11710: + Activities,"121 the + authors noted in slide that + AH goal costs had risen + +On line 11710: + in to in Slide is + entitled: "Meeting Future + HUD Goals Appear Quite + +On line 11710: + and Potentially + Costly" and reports, "Based on + experience where + + goal acquisition + costs (relative to Fannie + Mae model fees) cost + +On line 11710: + between per goals unit + in the fi rst quarter to + per unit in the fourth + +On line 11710: + meeting the shortfall + could cost the company $6.5-$36.5 + million to purchase + +On line 11714: + suffi cient units." Th + e presentation concludes + (slide "Cost of mission + +On line 11718: + likely averaged + approximately million + per year." Earlier, + + I noted the eff + orts of Fannie and Freddie + to window-dress their + +On line 11720: + that would comply with + the AH goals, while giving the + seller the option + +On line 11720: + to reacquire the loans + at a later time. In we + begin to see eff + +On line 11720: + same window-dressing + in another way--delaying + acquisitions of + + non-goal-eligible + loans so Fannie can meet the + AH goals in that year; + +On line 11720: + goal-compliance on + Fannie’s profi tability. In + a presentation + +On line 11722: + Barry Zigas, the + key Fannie offi cial on + aff ordable housing, + +On line 11724: + option." Under that + initiative, Fannie would ask + seven major lenders + +On line 11728: + goal computation + and thus bring Fannie nearer + to goal compliance + +On line 11730: + quarter of Th e + cost of the deferral alone + was estimated + +On line 11732: + entitled "Update + on Fannie Mae’s Housing Goals + Performance,"123 Fannie + + noted several + "Undesirable Tradeoff s + Necessary to Meet + +On line 11734: + included signifi + cant additional credit + risk, and negative + +On line 11734: + economics are well + below target returns; some + deals are producing + +On line 11734: + "G-fees may not cover + expected losses"). One of + the most noteworthy + +On line 11734: + "Liquidity to + Questionable Products: Buying + exotic product + +On line 11734: + continuation + of risky lending; many products + present with signifi cant + +On line 11734: + at risk of payment + shock and loss of equity; + potential need to + +On line 11736: + our responsible + lending policies to get goals + business." Much of the + +On line 11736: + that unscrupulous and + unregulated mortgage + originators tricked + +On line 11740: + into taking on + bad mortgages. Th e idea that + predatory lending + +On line 11740: + a major source of + the NTMs in the fi nancial + system in is a + +On line 11740: + element of the + Commission majority’s + report, although the + +On line 11742: + able to provide any + data to support this point. + Th is Fannie slide + +On line 11742: + dubbed "predatory" might + actually have been made + to comply with the + +On line 11746: + possibility + is suggested, too, in a + message sent in to + +On line 11746: + CEO, Richard Syron, by + Freddie’s chief risk manager, + David Andrukonis, when + +On line 11746: + considering whether + to authorize a "Ninja" + (no income/no jobs/no + + assets) product that + he ultimately approved. + Andrukonis argued + +On line 11750: + for the perception + and reality Fannie + Mae, "Costs and Benefi + +On line 11754: + Zigas, "Housing Goals + and Minority Lending," + September Fannie + +On line 11754: + "Update on Fannie + Mae’s Housing Goals Performance," + Presentation to + +On line 11760: + U.S. Department of + Housing and Development, + October Peter + +On line 11762: + J. Wallison of + predatory lending, with this + product is great."124 But + +On line 11762: + product was approved + by Freddie, probably for + the reason stated + +On line 11764: + another Freddie + employee: "Th e Alt-A [(low + doc/no doc)] business + +On line 11766: + a contribution + to our HUD goals."125 On May a + Fannie staff memo to + +On line 11766: + Committee revealed + the serious credit and + fi nancial problems + +On line 11766: + acquiring subprime + mortgages to meet the AH goals. + Th e memo describes + +On line 11768: + "product enhancements + from Freddie Mac, FHA, Alt-A and + subprime lenders have all + +On line 11768: + rich loans…On the issue + of seller contributions + [in which the seller + +On line 11768: + FHA has expanded + their guidelines by allowing + contributions for + +On line 11768: + up to that can be + used toward closing, prepaid + expenses, discount + + points and other fi + nancing concessions."126 Th e + memorandum is + + eye-opening for what + it says about the credit risks + Fannie had to take + +On line 11772: + to get the goals-rich + loans it needed to meet HUD’s + AH requirements for + +On line 11772: + Table below shows + the costs of NTMs in terms of + the guarantee fee + + (G-fee) "gap." (In order + to determine whether a loan + contributed to a + +On line 11772: + pricing model that + took into account credit + risk as well as a + + number of other + factors; a G-fee "gap" was the + diff erence between + + the G-fees required by + the pricing model for a + particular loan + + to contribute to + a return on equity + and a loan that did + +On line 11776: + Th e table in + this memo shows the results for + three subprime products + +On line 11776: + consideration, + a year fi xed rate mortgage + (FRM), a year ARM, and + +On line 11776: + and year fi xed rate + mortgages. For simplicity, + this analysis will + +On line 11776: + discuss only the + year fi xed rate product. Th + e table shows that + +On line 11778: + the year FRM, with a + zero downpayment should be + priced according to + +On line 11778: + model at a G-fee + of basis points. However, + the memo reports that + +On line 11778: + is actually + buying loans like that at a + price consistent with + +On line 11778: + an annual fee + of basis points, producing + a gap (or loss from + +On line 11780: + model) of basis + points. Th e reason the gap + is so large is shown + +On line 11782: + on that zero-down + mortgage was percent. Th e + table then goes on + +On line 11784: + other possible + loan alternatives, with the + following results: + +On line 11786: + Mac, internal email, + Donna Cogswell on behalf of + David Andrukonis to + +On line 11788: + Dick Syron, "RE: No + Income/No Asset (NINA) Mortgages," + September Freddie + + Mac, internal email + from Mike May to Dick Syron, + "FW: FINAL NINA + +On line 11790: + October Fannie + Mae, internal memo, Single + Family Business + +On line 11790: + Development to + Single Family Business + Credit Committee, + +On line 11796: + PMD Proposal for + Increasing Housing Goal Loans," + May p.6. Dissenting + +On line 11798: + Table Fannie Mae + Took Losses on Higher Risk + Mortgages Necessary + +On line 11812: + analysis for "base" + MCM Model Fee Average + Gap enhancement-not + +On line 11840: + Interest First (IF) + -91.50 Seller Contribution + (SC) -77.50 Temporary + +On line 11864: + B/D (BD) -80.50 Zero + Down (ZD) -68.50 Manufactured + Housing (MH) -189.50 From + + this report, it is + clear that in order to meet + the AH goals Fannie + + had to pay up for + goals-rich mortgages, taking a + huge credit risk along + +On line 11868: + way. Th e dismal + fi nancial results that were + developing at + +On line 11868: + result of the AH + goals were also described in + Fannie’s 10-K report + +On line 11868: + losses of revenue + and higher credit losses + as a result of + +On line 11870: + the mortgages required + by the AH goals: [W]e have made, + and continue to + +On line 11870: + cant adjustments to + our mortgage loan sourcing and + purchase strategies in + + an eff ort to meet + HUD’s increased housing goals and + new subgoals. Th ese + +On line 11872: + than our typical + transactions. We have also + relaxed some of our + +On line 11872: + our investments in + higher-risk mortgage loan products + that are more likely + +On line 11872: + HUD’s goals and subgoals, + which could increase our credit + losses. [emphasis + +On line 11876: + "lower expected + returns" were reported in + February in a + +On line 11876: + the FCIC received from + Fannie, which noted that for + the "cash fl ow cost" + +On line 11876: + goals was million while + the "opportunity cost" + was million.129 In a + +On line 11876: + HUD on the AH goals, + dated April Fannie described + these costs as follows: + +On line 11878: + [of meeting the goals] + are opportunity costs + of foregone revenue. + +On line 11878: + opportunity + cost was about million, whereas + the cash fl ow cost + +On line 11878: + was about million. If + opportunity cost was + our shareholders would + +On line 11880: + indiff erent to + the deal. Th e cash fl ow + cost is the implied + +On line 11882: + time, "Alignment Meetings"—in + which Fannie staff considered + how they would meet the + +On line 11882: + goals—were taking place + almost monthly (according + to the frequency + +On line 11882: + presentations to + Alignment meetings occur in + the documentary + +On line 11882: + an Alignment Meeting + on June on a "Housing Goals + Forecast," three plans were + +On line 11886: + for meeting the AH + goals, even Id., p.8. Fannie Mae, + 10-K, p.146. Fannie Mae, + +On line 11886: + minus expected + loss. Expected revenue is + what will be received + +On line 11886: + actually charged + minus the model fee—the fee + that Fannie’s model + +On line 11886: + mortgage of the same + quality in order to + earn a fair market + +On line 11892: + capital. Fannie + Mae, "Housing Goals Briefi ng for + HUD," April Peter J. + +On line 11894: + gone. One of the plans + was forecast to result in + opportunity + +On line 11894: + two plans resulted + in opportunity costs + of million.131 In a + +On line 11894: + Forecast meeting on + July a "Plan to Meet Base + Goals," which probably + +On line 11894: + meant the topline LMI goal + including all subgoals, was + placed at billion for + +On line 11896: + to Brian Montgomery, + Assistant Secretary of + Housing, Fannie CEO + +On line 11896: + of the fi nancial + and economic conditions + then prevailing in + +On line 11896: + absence of a PMBS + market and the increasing + number of mortgage + +On line 11898: + goals for be declared + "infeasible." He noted + that HUD also has + + an obligation to + "consider the fi nancial + condition of the + +On line 11900: + en he continued: + "Fannie Mae submits that the + company took all + + reasonable actions + to meet the subgoals that were + both fi nancially + +On line 11900: + contribute to the + achievement of the subgoals….In Fannie + Mae relaxed certain + +On line 11900: + standards and purchased + some higher risk mortgage loan + products in an eff + +On line 11904: + the housing goals. Th + e company continued + to purchase higher + +On line 11904: + eff orts to acquire + goals-rich loans are partially + responsible for + +On line 11908: + statement confi rms + two facts that are critical + on the question of + +On line 11908: + Fannie (and Freddie) + acquired so many high risk loans + in and earlier + +On line 11908: + rst, the companies + were trying to meet the AH + goals established by + + HUD and not because + these loans were profi table. It + also shows that the + +On line 11910: + of HUD and others— + including the Commission + majority in + +On line 11910: + blame the managements + of Fannie and Freddie for + purchasing the loans + +On line 11912: + ultimately dragged + them to insolvency is + misplaced. Finally, + +On line 11912: + July report, the + Federal Housing Finance + Agency (FHFA, the + +On line 11912: + new regulator, + replacing OFHEO), noted that + Fannie and Freddie + +On line 11912: + followed the practice + of cross-subsidizing the + subprime and Alt-A loans + +On line 11914: + they acquired: Although + Fannie Mae and Freddie Mac + consider model-derived + +On line 11914: + their guarantees on + some mortgages using higher + returns they expect + +On line 11914: + earn on guarantees + of other loans. In both and + cross-subsidization + +On line 11914: + single-family + guarantee fees charged by the + Enterprises was + +On line 11914: + categories. In each + case, there were cross-subsidies + from mortgages that posed + + lower credit risk + on average to loans that + posed higher credit + + risk. Th e greatest + estimated subsidies + generally went + +On line 11920: + highest-risk mortgages.134 Th + e higher risk mortgages were + the ones most needed + +On line 11920: + Fannie and Freddie + to meet the AH goals. Needless + to say, there is no + +On line 11920: + cross-subsidize the + G-fees of loans that are acquired + because they are profi + +On line 11922: + tability must be + excluded as reasons that + Fannie (and Freddie) + +On line 11924: + "Housing Goals Forecast," + Alignment Meeting, June Fannie + Mae, Forecast Meeting, + +On line 11926: + July slide Fannie + Mae letter, Daniel Mudd to Asst. + Secretary Brian + +On line 11928: + Montgomery, December + p.6. FHFA, Fannie Mae and + Freddie Mac Single + +On line 11938: + Dissenting Statement + Th e only remaining + motive—and the valid + +On line 11942: + one—was the eff ect of + the AH goals imposed by HUD. + In aft er its takeover + +On line 11942: + government, Fannie + Mae fi nally published a + credit supplement + +On line 11944: + an accounting of + its subprime and Alt-A credit + exposure. Th e + +On line 11946: + reproduced below + in order to provide a + picture of the kinds + +On line 11946: + loans Fannie acquired + in order to meet the AH + goals. Loans may appear + +On line 11946: + category, so + the table does not reveal + Fannie’s total net + +On line 11946: + each category, + nor does it include Fannie’s + holdings of non-Fannie MBS + +On line 11946: + PMBS, for which it did + not have loan level data. + Note the reference + +On line 11946: + to billion in the + column for subprime loans. As + noted earlier, + + Fannie classifi + ed as subprime only those + loans that it purchased + +On line 11946: + However, Fannie + included loans with FICO + scores of less than in + +On line 11946: + they are not prime loans + but without classifying + them formally as + +On line 11948: + credit supplement, + fi led in August Fannie + eliminated the + +On line 11948: + loans in Table and + reported that as of June + it held the credit + +On line 11950: + risk on NTMs with a + total unpaid principal + amount of trillion. Th + +On line 11954: + e average loan + amount was for a total of + million NTM loans.135 Th + + is number does not + include Fannie’s holdings of + subprime PMBS as to + +On line 11990: + J. Wallison g + o b n rmin s m o + an s. Ju nf tio + +On line 12028: + rm 10-K. o Lo an + siness. C u o t lo + f b e k o + +On line 12050: + dministra o im + s siness o u bpr an + ae’s F vernmen g + +On line 12080: + A Su Lo it b + f B o o ed k usin + o o o udes g + +On line 12102: + e cr annie M + F s it B o t-A an + rtgag Al ed Lo + +On line 12132: + ederal H hich + incl efer t e Cr d + nal mo es, r n + + V th T ss, w + tio rtgag A), the F o + s wi sine ven it + +On line 12184: + a o O u n + L atio C ed Original + L R FI nal M + +On line 12212: + f b airs (V ly + co tio k o tal cr V + o s Aff mi o + +On line 12242: + th T o n ven + tn s wi tio no it b + le-fa an Ra o + +On line 12266: + etera g n o L + ed Original L ily C + f V tio e cr + + f sin d t o + n am rma th o rtgag + nce o le-F s wi + +On line 12318: + g an a ala r + inf o O artmen in L + t. o C ly mo + +On line 12348: + S re. al b mi + p ltuu th le-fa rinci + ncemen siness. F + +On line 12374: + s wi g gric u + an O teristics o o + C f b L aid + +On line 12398: + p FI f A p + it enha o k arac t + o o h f the + + sin ed f un o + e o s it C it b + encies, such as the + + D e o an ed + tag artmen tag ther cr ed + terest-Only Lo ep ts ag + +On line 12476: + d o In e cr + n es: Cr ercen r i ercen + t o e a g + + d the D rtgag + e- s eatur n urs tiv + as a p rtizin an + + t F t as a + p ega Lo m a eco ly + mo N uc Amo d + +On line 12556: + lated u vernmeno + mi ro rogra ncemen k + le-fa o g o + +On line 12576: + .S. G ey P lender + r re calc ties P y K + s a li nce it + +On line 12632: + enha verall + B an aci O o y the + U ed sura r the + + sin fi le b b + ty F o ro g L ed + th cr l ino uni + +On line 12678: + o es f it P + sur rmin s wi p ed o + r in mm an atio + +On line 12706: + nf o it loss nce + o ed k l lo o ue + R ae Cr o al + + d C atio o C + teed o n f al sura f + cr it B o-V b + + n ed ue R g + a e o an-t m ra e + in o u nce o + + tag annie M s)* + nal Cr o-val usin n et + L d J tio atio + +On line 12800: + nce o an-t ala ark + n re gua rtgag illio + o ven ala ue R + +On line 12832: + a ercen on atio o + M al es es s a al + b al B ss ss + +On line 12862: + le F p nce (b + p ate O ue R o o + ark-t o-V C es es + + an ural H ry mo + ab ala ily C y R al + ss ss rime o it + +On line 12908: + it L o T p + am rinci e Original + L e M an-t e + +On line 12932: + FI t lo as a + p al B o-V o d ed + ed b rinci p + + uenc it L it L + ears 2005-2007 d <660n u rima + ed gle-F aid P p + + p verag an-t + verag ed ed ark L + verag nce r + + the R rinci in + n elinq n Y A o A + A o-o aid p ec + +On line 13022: + f S te e U + tio ress ted ted o-M ted al + Residence a p + + t-A, S p f D + aid P us D h h h + it Enha A) o + +On line 13062: + n udes p p O + O ed-ra f Cr f Q3 Cr + f Q4 Cr f Cr + + vernmen xp s o + n are o verag eig + eig ark-t eig C C + +On line 13112: + ed o cl A U + Sh A Serio Origina + W Original L + +On line 13148: + W M W FI FI + Fix P C Cr o o o + o Al U E G + +On line 13160: + noted earlier, + in its limited review + of the role of the + +On line 13160: + in the fi nancial + crisis, the Commission spent + most of its time and + + staff resources on a + review of Fannie Mae, and + for that reason this + +On line 13160: + not substantially + diff erent at Freddie Mac. + In a document + +On line 13160: + June entitled "Cost + of Freddie Mac’s Aff ordable + Housing Mission," a + +On line 13160: + were made that show the + experience of Freddie + was no diff erent + +On line 13162: + subsidy prior to + but since then subsidies have + averaged million + +On line 13170: + baseline) aff ordable + single-family loans, but + not enough to fully + +On line 13174: + loans accounted for + the disproportionate share + of our realized + +On line 13176: + was predicted by + our models. (slide In Freddie + Mac failed two subgoals, + +On line 13176: + was subsequently + deemed infeasible by the + regulator due + +On line 13176: + Mac failed six goals and + subgoals, fi ve of which were + deemed infeasible. + +On line 13176: + enforcement action + was taken regarding the + sixth missed goal because + +On line 13180: + nancial condition. + (slide Goal-qualifying loans tend + to be higher risk. + +On line 13180: + income correlates + with various risk factors + such as less wealth, less + +On line 13184: + ratios, or lower + credit scores. (slide Targeted + aff ordable loans have + +On line 13184: + expected default + probabilities... Over one-half + of targeted aff + +On line 13184: + higher expected + default probabilities + than the highest of + +On line 13186: + non-goal-qualifying + loans. (Slide Th e use of the + aff ordable housing + +On line 13188: + major policy + error committed by HUD + in two successive + +On line 13188: + must be recognized + as such if we are ever + to understand what + + caused the fi nancial + crisis. Ultimately, the + AH goals extended + +On line 13188: + bubble, infused it + with weak and high risk NTMs, caused + the insolvency + +On line 13188: + Fannie and Freddie, + and—together with other + elements of U.S. + +On line 13190: + the principal cause + of the fi nancial crisis + itself. When Congress + +On line 13192: + (HERA), it transferred the + responsibility for + administering + +On line 13192: + aff ordable housing + goals from HUD to FHFA. In + FHFA modifi + +On line 13192: + of their most troubling + elements. As Fannie had + noted, if the AH + +On line 13194: + goals-eligible + borrowers in the market, + they were being forced + +On line 13194: + allocate credit, + taking it from the middle + class and providing + +On line 13194: + borrowers. In eff + ect, there was a confl ict + between their mission + +On line 13194: + advance aff ordable + housing and their mission to + maintain a liquid + +On line 13200: + Committee, Board of + Directors, June Peter J. + Wallison market + + for most mortgages in + the U.S. Th e new FHFA + rule does not require + + the GSEs to purchase + more qualifying loans than + the percentage of + + the total market + that these loans constitute.137 Th + is does not solve all + + the major problems + with the AH goals. In the sense + that the goals enable + +On line 13208: + inherently a + form of government credit + allocation. More + + signifi cantly, the + competition among the GSEs, + FHA and the banks that + +On line 13208: + required under the + CRA to fi nd and acquire + the same kind of loans + + will continue to + cause the same underpricing + of risk on these loans + + that eventually + brought about the mortgage meltdown + and the fi nancial + + crisis. Th is is + discussed in the next section + and the section on + +On line 13218: + the GSEs and FHA for + Subprime and Alt-A Mortgages One + of the important + +On line 13218: + HUD’s management of + the AH goals was that it placed + Fannie and Freddie + +On line 13220: + competition with + FHA, an agency within HUD. + Th is was already + +On line 13222: + Fannie documents + cited above. Fannie treated + this as a confl + +On line 13222: + interest at HUD, + but there is a strong case that + this competition + + is exactly what + HUD and Congress wanted. It + is important to + +On line 13222: + the context in which + the GSE Act was enacted + in In Congress had + +On line 13222: + Credit Reform Act.138 + One of its purposes was + to capture in the + + government’s budget + the risks to the government + associated + + with loan guarantees, + and in eff ect it placed a + loose budgetary limit + +On line 13222: + FHA guarantees. For + those in Congress and at HUD + who favored increased + +On line 13222: + communities, this + consequence of the FCRA may + have been troubling. What + + had previously + been a free way to extend + support to groups who + +On line 13222: + downpayment and the + indicia of willingness + and ability to + + pay—now appeared to be + potentially restricted. + Requiring the GSEs + +On line 13222: + take up the mantle + of aff ordable housing would + have looked at the time + +On line 13224: + funds in the private + markets and were off -budget + entities. Looked at + + from this perspective, + it would make sense for Congress + and HUD to place the + +On line 13226: + in competition, + just as it made sense to put + Fannie and Freddie + + in competition + with one another for aff + ordable loans. With all + +On line 13226: + competing for the + same kinds of loans, and with HUD’s + control of both FHA’s + +On line 13226: + reducing mortgage + underwriting standards, as + a means of making + +On line 13226: + income borrowers, + provides ample evidence + of HUD’s motives for + +On line 13228: + Goals; Enterprise Book-Entry + Procedures; Final Rule, CFR + Parts and Federal + +On line 13230: + p.55892. Title V of + the Congressional Budget + Act of Under the + +On line 13230: + HUD must estimate + the annual cost of FHA’s + credit subsidy for + +On line 13238: + receipts reduced by + its estimated payments. + Dissenting Statement + +On line 13240: + now a part of HUD + and administered by the + Federal Housing + +On line 13240: + (who is also the + Assistant Secretary of + Housing), FHA insures + +On line 13240: + It was established + to provide fi nancing to + people who could not + +On line 13242: + bank-originated + conventional loan. Th e + loans it insured had + +On line 13244: + a maximum LTV + of percent in Th is went + to percent in and + +On line 13244: + its maximum LTV + remaining at percent, FHA + maintained average + +On line 13244: + for its borrowers + just below from to During + this period, the + + average FICO + score for a conventional + subprime borrower + +On line 13244: + began to increase + its percentage of loans with + low downpayments. Th + + is had the predictable + eff ect on its delinquency + rates, as shown in the + +On line 13248: + below prepared by + Edward Pinto with data + from FHA, the FDIC, and + +On line 13252: + market share vis-a vis + the GSEs began to decline. + According to GAO + +On line 13252: + in FHA’s market share + among lower-income borrowers + was percent while the + +On line 13252: + share was percent. By + FHA’s share was percent, while the + GSEs’ share was percent. + +On line 13252: + borrowers with its + Community Homebuyer + Program (CHBP). In a + +On line 13254: + Credit Policy + group compared Fannie’s then-proposed + CHBP program to FHA’s + +On line 13254: + 1-to-4 family loan + program (Section 203(b)) and showed + that most of Fannie’s + +On line 13256: + competitive or + better. Kerry D. Vandell, + "FHA Restructuring + +On line 13256: + Alternatives and + Implications," Fannie Mae + Housing Policy + +On line 13258: + 308-309 GAO, "Federal + Housing Administration: + Decline in Agency’s + +On line 13258: + Process Developments + of Other Mortgage Market + Participants," GAO-07-645, + +On line 13266: + June pp. and Peter + J. Wallison FHA also + appears to have tried + + to lead the GSEs. In + 1999—just before the AH goals for + Fannie and Freddie + +On line 13266: + to be raised—FHA almost + doubled its originations + of loans with LTVs equal + +On line 13266: + than percent, going + from percent in to percent + in It also off + +On line 13266: + standards in order + to attract subprime business. + Th e following + +On line 13268: + from a Quicken ad + in January (emphasis + in the original),142 + +On line 13268: + is likely to have + been based on an FHA program + as it existed + +On line 13270: + in Borrowers can + purchase with a minimum + down payment. Without + + FHA insurance, many + families can’t aff ord the + homes they want because + +On line 13270: + a major roadblock. + FHA down payments range from to + of the sale price and + + are signifi cantly + lower than the minimum + that many lenders require + + for conventional + or sub-prime loans. With FHA loans, + borrowers need as + +On line 13272: + as of the "total + funds" required. In addition + to the funds needed + +On line 13272: + payment, borrowers + also have to pay closing + costs, prepaid fees for + +On line 13272: + interest, as well + as escrow fees which include + mortgage insurance, + + hazard insurance, + and months worth of property + taxes. A FHA-insured home + +On line 13274: + loan can be structured + so borrowers don’t pay more + than of the total + +On line 13278: + e combined total + of out-of-pocket funds can be + a gift or loan from + +On line 13278: + to use gift s from + family members and non-profi + t groups to cover + + their down payment and + additional closing costs + and fees. In fact, even + +On line 13280: + from a relative + is acceptable. FHA’s credit + requirements are fl + +On line 13280: + Compared to credit + requirements established by + many lenders for other + + types of home loans, FHA + focuses only on a + borrower’s last 12-24 + +On line 13280: + credit history. + In addition, there is no + minimum FICO + +On line 13280: + - mortgage bankers look + at each application on + a case-by-case basis. + +On line 13282: + with NO established + credit to receive a loan + with this program. FHA + +On line 13282: + allow borrowers + to have of their gross income + attributed to their + +On line 13282: + payment combined with + existing debt. FHA program + allows borrowers + +On line 13284: + to carry and in + some circumstances, even more. It + is important to + +On line 13284: + remember that is + the year that HUD was planning + a big step-up in the + +On line 13284: + special aff ordable + category that would be + most competitive + +On line 13286: + Th e last major + increase in the percent of + FHA’s loans with LTVs equal + +On line 13286: + greater than percent had + occurred in the year before + the GSE Act imposed + +On line 13286: + AH goals on Fannie + and Freddie, and in eff ect + directed them to + +On line 13286: + loans Integrated + Financial Engineering, + "Actuarial + +On line 13286: + of the Federal + Housing Administration + Mutual Mortgage + +On line 13286: + Fund (Excluding HECMs) + for Fiscal Year prepared for + U.S. Department of + +On line 13290: + To Off er FHA Home + Mortgages Nationally On + Th e Internet + +On line 13290: + Intuit expands + home ownership nationwide, + off ering consumers + +On line 13300: + Dissenting Statement + equal to or greater than percent + rose suddenly from + +On line 13302: + percent to percent.143 + Again, FHA, under the control + of HUD, appears to + +On line 13302: + that would lead them to + reduce their underwriting + standards. Since FHA is + +On line 13302: + its actions cannot + be explained by a profi t + motive. Instead, it + +On line 13302: + that FHA reduced its + lending standards as part of + a HUD policy + +On line 13306: + the same direction. + Th e result of Fannie’s + competition with + +On line 13306: + in high LTV lending + is shown in the following + fi gure, which compares + + the respective shares + of FHA and Fannie in the + category of + +On line 13306: + with LTVs equal to or + greater than percent, including + Fannie loans with a + +On line 13310: + LTV equal to or greater + than percent. Figure Whether a + conscious policy + +On line 13310: + GSEs and FHA ensued + immediately aft er + the GSEs were given + +On line 13312: + in Th e fact that + FHA, an agency controlled by + HUD, substantially + +On line 13312: + increased the LTVs it + would accept in (just before + the GSEs were given + +On line 13312: + (just before the GSEs + were required to increase their + aff ordable housing + +On line 13312: + the interest of + creating competition + between FHA and the + +On line 13316: + Th e eff ect was + to drive down underwriting + standards, which HUD had + +On line 13322: + and Subprime Lenders in + Affordable Housing In HUD + began a program + +On line 13322: + year, GAO, "Federal + Housing Administration: + Decline in Agency’s + +On line 13322: + Process Developments + of Other Mortgage Market + Participants," GAO-07-645, + +On line 13328: + pp. and Peter J. + Wallison the Mortgage Bankers + Association + +On line 13328: + nancing fi rms not + otherwise regulated + by the federal + +On line 13328: + not subject to HUD’s + legal authority—agreed to + join a HUD program + +On line 13332: + Initiative."144 Th e + circumstances surrounding this + agreement are somewhat + + obscure, but at least + one contemporary account + suggests that the MBA + + signed up to avoid an + eff ort by HUD to cover + mortgage bankers under + +On line 13332: + up to that point had + only applied only to + government-insured + +On line 13336: + agreement with HUD. Th + e agreement consisted of + two parts: MBA’s agreement + +On line 13336: + fair-lending issues in + consultation with HUD and + a model best-practices + +On line 13336: + mortgage banks could use + to devise their own agreements + with HUD. Th e fi + +On line 13338: + such agreement, signed by + Countrywide Funding Corp., the + nation’s largest mortgage + +On line 13338: + summarized [below]. + Many have seen the MBA agreement + as a preemptive + +On line 13338: + against congressional + murmurings that mortgage banks + should be pulled under + +On line 13340: + umbrella of the + CRA.145 As the fi rst member + of the MBA to sign, + +On line 13340: + seen as assisting + low-income mortgage lending, and + it became one of + +On line 13340: + subprime lenders who were + to prosper enormously as + Fannie and Freddie + + began to look for + sources of the subprime loans that + would enable them to + +On line 13340: + meet the AH goals. By + there were MBA signatories + to HUD’s Best Practices + +On line 13344: + e companies and + associations that sign + "Best Practices" Agreements + +On line 13344: + Fair Housing Act, but + also make a concerted + eff ort to exceed + +On line 13344: + the signatories + agree to administer a + review process for loan + +On line 13344: + all applicants have + every opportunity + to qualify for + + a mortgage. Th ey + also assent to making + loans of any size so + + that all borrowers + may be served and to provide + information on + +On line 13350: + loan programs for which + an applicant qualifi + es…. Th e results + +On line 13352: + the initiative are + promising. As lenders discover + new, untapped markets, + +On line 13352: + minority and + low-income loans applications + and originations + +On line 13354: + and minority + groups has increased throughout the + nation.146 Countrywide + + was by far the most + important participant + in the HUD program. + +On line 13356: + dollar commitment" + to lend to minority + and low income HUD’s + +On line 13356: + Practices Initiative + was described this way by HUD: + "Since HUD has signed Fair + +On line 13356: + partnerships that are + considered on the leading + edge. Th e Agreements + + not only off er + an opportunity to + increase low-income and + +On line 13358: + opportunity + principles into mortgage + lending standards. Th + + ese banks and mortgage + lenders, as represented by + Countrywide Home Loans, + +On line 13362: + a commitment to + affi rmatively further + fair lending." Available + +On line 13370: + ABA Banking Journal, + vol. http://www. questia.com/googleScholar.qst1docId=5001707340. HUD, "Building + Communities and + +On line 13378: + Markets for the 21st + Century," FY Report p.75, + http:// www.huduser.org/publications/polleg/98con/NewMarkets.pdf. Dissenting + + Statement families, + which in part it fulfi lled + by selling subprime + +On line 13380: + and other NTMs to + Fannie and Freddie. In a + report, the Fannie + +On line 13380: + Mae and Freddie Mac + began accepting loans with + higher LTVs and greater + +On line 13380: + underwriting fl + exibilities."147 In late + a few months before + + its rescue by Bank + of America, Countrywide + reported that it + +On line 13386: + element of the + vast increase in NTMs between + and was the role of + +On line 13388: + CRA.149 Th e act, which + is applicable only + to federally + +On line 13390: + institutions, was + originally adopted in + Its purpose in part + +On line 13390: + authority when + examining fi nancial + institutions to + +On line 13390: + credit needs of the + local communities in + which they are chartered + +On line 13392: + the Act authorized + the bank regulators to + withhold approvals for + +On line 13392: + and acquisitions + and branch network expansion + if the applying + +On line 13394: + satisfactory + CRA rating. CRA did not have + a substantial eff + +On line 13394: + er its enactment + until the regulations + under the act were + +On line 13394: + mortgages that they would + not otherwise have made. In + this sense, the CRA and + + Fannie and Freddie’s + AH goals are cut from the same + cloth. Th ere were two + +On line 13400: + one with the broadest + applicability, is + a requirement that + + all insured banks make + CRA loans in their respective + assessment areas. + +On line 13400: + assessment areas. + Banks (usually privately) + complain that they are + +On line 13400: + the regulators + to make imprudent loans to + comply with CRA. One + +On line 13400: + bank in a report + to its shareholders: Under + the umbrella of + +On line 13400: + Reinvestment Act (CRA), + a tremendous amount of pressure + was put on banks by + +On line 13402: + neighborhoods. Th e + regulators were very heavy + handed regarding + + this issue. I will + not dwell on it here but they + required [redacted name] + +On line 13402: + lending practices to + meet certain CRA goals, even though + we argued the changes + +On line 13404: + the other hand, the + regulators defend the + act and their actions + +On line 13404: + claim that the CRA had + a role in the fi nancial + crisis. Th e most + +On line 13406: + defense is a speech + by former Fed Governor + Randall Kroszner on + +On line 13408: + "Questions and Answers + from Countrywide about Lending," + December available + +On line 13422: + December in which + he said in pertinent part: + Only percent of + + all the higher-priced loans + [those that were considered CRA + loans because they bore + + high interest rates + associated with their + riskier character] + +On line 13422: + lenders to lower-income + borrowers or neighborhoods + in their assessment + +On line 13422: + geographies that are + the primary focus for + CRA evaluation + +On line 13424: + result undermines + the assertion by critics + of the potential + +On line 13424: + a substantial role + for the CRA in the subprime + crisis. [emphasis + +On line 13428: + Th ere are two points + in this statement that require + elaboration. First, + + it assumes that all + CRA loans are high-priced loans. Th + is is incorrect. + +On line 13432: + banks, in order to + be sure of obtaining the + necessary number + + of loans to attain + a satisfactory CRA + rating, subsidized + +On line 13434: + interest rates than + their risk characteristics + would warrant. Th is + +On line 13436: + true, in part, because + CRA loans are generally + loans to low income + + individuals; + as such, they are more likely + than loans to middle + + income borrowers + to be subprime and Alt-A loans + and thus sought aft er + + by FHA, Fannie and + Freddie and subprime lenders such + as Countrywide; this + + competition is + another reason why their + rates are likely to + +On line 13436: + lending under CRA + in their assessment areas + has probably not + + had a major eff + ect on the overall presence + of subprime loans in + +On line 13436: + fi nancial system, + it is not the element + about CRA that raises + +On line 13436: + concerns about how CRA + operated to increase + the presence of NTMs + +On line 13438: + the U.S. fi nancial + system generally. Th + ere is another + +On line 13440: + CRA’s role in the fi + nancial crisis likely to + be considerably + +On line 13442: + more signifi cant. In + the Riegle-Neal Interstate Banking + and Branching Effi + +On line 13444: + rst time allowed banks + to merge across state lines under + federal law (as + +On line 13444: + compacts). Under these + circumstances, the enforcement + provisions of the + +On line 13444: + to federal bank + regulators for merger + approvals. In a speech, + +On line 13444: + Bernanke stated that aft + er the enactment of the + Riegle-Neal legislation, + +On line 13444: + comment process to protest + bank applications on CRA + grounds. In instances of + +On line 13444: + applications, the + Federal Reserve Board and + other agencies held + +On line 13444: + the public and the + applicants to comment on + the lending records of + +On line 13444: + In response to these + new pressures, banks began to + devote more resources + + to their CRA programs."152 + Th is modest description, + although accurate + + as far as it goes, + does not fully describe the + eff ect of the law + +On line 13448: + the application + process on bank lending practices. + In the umbrella + +On line 13450: + groups," the National + Community Reinvestment + Coalition, published a + +On line 13450: + which recounted the + substantial success of its + members in using + +On line 13450: + provided by the + bank application process to + obtain trillions of + +On line 13450: + lending commitments + from banks that had applied to + Randall Kroszner, Speech + +On line 13454: + December Ben S. + Bernanke, "Th e Community + Reinvestment Act: Its + +On line 13462: + Evolution and New + Challenges," March p2. Dissenting + Statement federal + +On line 13466: + merger approvals. Th + e opening section of the + report states (bolded + +On line 13468: + the original):153 Since + the passage of CRA in lenders + and community + +On line 13470: + income neighborhoods. + Lenders and community groups + will oft en sign these + +On line 13472: + merge with another + institution or expand + its services. Lenders must + + seek the approval of + federal regulators + for their plans to merge + +On line 13474: + e four federal + fi nancial institution + regulatory + +On line 13474: + scrutinize the CRA + records of lenders and will assess + the likely future + +On line 13476: + performance of lenders. + Th e application process, + therefore, provides an + +On line 13478: + for lenders to sign CRA + agreements with community + groups that will improve + +On line 13484: + extension of the + public comment period + during its merger + +On line 13484: + joint request by a + bank and community group. + In its commentary + + to Regulation + Y, the Board indicates that + this procedure was + +On line 13484: + to facilitate + discussions between banks and + community groups + +On line 13484: + programs that help serve + the convenience and needs of + the community. + + In its Corporate + Manual, the Offi ce + of the Comptroller + + of the Currency + states that it will not off er + the expedited + +On line 13486: + process to a lender that + does not intend to honor + a CRA agreement made + +On line 13492: + the institution + that it is acquiring. See + Note supra. Peter J. + +On line 13502: + summary list of + year-by-year commitments: Table Year + Annual Dollars + +On line 13698: + millions) millions) Th + e size of these commitments, + which far outstrip the + +On line 13698: + areas, suggests the + potential signifi cance + of the CRA as a + +On line 13698: + of the fi nancial + crisis. It is noteworthy + that the Commission + +On line 13698: + was not willing even + to consider the signifi + cance of the NCRC’s + +On line 13698: + In connection with + its only hearing on the + housing issue, and + +On line 13700: + any research had been + done on the NCRC statements, the + Commission published + +On line 13700: + absolving CRA of + any responsibility + for the fi nancial + +On line 13704: + crisis.154 FCIC, "Th e + Community Reinvestment + Act and the Mortgage + +On line 13716: + Staff Report, http:// www.fcic.gov/reports/pdfs/2010-0407-Preliminary_Staff + _Report_-_CRA_and_the_Mortgage_Crisis. pdf. Dissenting Statement + To understand CRA’s + +On line 13716: + fi nancial crisis, + the relevant statistic is + the trillion in bank + +On line 13720: + commitments that the + NCRC cited in its report. + (Th is document + +On line 13720: + are relevant to + this discussion were removed + from the NCRC website, + + www.ncrc.org, aft er + they received publicity + but can still be found + +On line 13720: + cooperated + with community groups by + withholding approvals + +On line 13720: + applications for + mergers and acquisitions + until an agreement + +On line 13720: + satisfactory + to the community groups + had been arranged. It + +On line 13722: + not want the severe + criticism from Congress that + would have followed their + +On line 13722: + community groups + in reaching agreements with and + getting commitments + +On line 13722: + banks that had applied + for these approvals. In statements + in connection with + +On line 13722: + approved the Fed has + said that commitments by the + bank participants + +On line 13722: + future CRA lending + have no infl uence on the + approval process. A Fed + +On line 13724: + cial also told the + Commission’s staff that the Fed + did not consider + +On line 13724: + in connection with + merger applications. Th + e Commission did + +On line 13726: + to verify this + statement, but accepted it + at face value from + +On line 13728: + Fed staff offi cial. + Nevertheless, there remains + no explanation + +On line 13728: + making these enormous + commitments in connection + with mergers, but not + + otherwise. Th e + largest of the commitments, in + terms of dollars, were + +On line 13732: + by four banks or their + predecessors—Bank of America, JPMorgan Chase, + Citibank, and Wells Fargo—in + +On line 13744: + Wallison Table + Announced CRA Commitments in + Connection with a + +On line 13748: + Four Largest Banks and Th + eir Predecessors Final + bank Acquired or merged + +On line 13760: + announcement of a + CRA commitment Wells Fargo + First Union acquired by + +On line 13778: + by b.) Wachovia JPMorgan + Chemical merges with m.) Chase + Manufacturers + +On line 13792: + Savings acquired by + b.) Washington Mutual + Dime acquired by b.) + +On line 13802: + Mutual Bank One + acquired by JPMorgan Chase b.) Bank + of Continental + +On line 13808: + acquired by Bank of + America b.) America + Bank of America + +On line 13816: + by NationsBank, b.) which kept + the Bank of America name). + Bank of Boston b.) + +On line 13836: + acquired by Fleet Fleet + b.) Citibank Travelers b.) b.) + Cal Fed b.) Compiled + +On line 13842: + enormous size of the + commitments reported by + NCRC, the key questions + +On line 13842: + of these commitments + were actually fulfi + lled by the banks that + +On line 13842: + them, (ii) where are these + loans today, and (iii) how are + these loans performing1 + +On line 13846: + of this issue, there + are only partial answers + to these questions. Were + +On line 13850: + e banks that made these + commitments apparently + came under pressure + + from community + groups to fulfi ll them. In + an interview by + +On line 13850: + Brad Bondi of the + Commission’s staff Josh Silver + of the NCRC noted + +On line 13852: + groups did follow up + these commitments. Bondi: Who + follows up…to make + +On line 13852: + that these banks honor + their voluntary agreements or + their unilateral + +On line 13860: + Dissenting Statement + Silver: Actually part + of some of these CRA + +On line 13860: + was meeting with the + bank two or three times a year + and actually + +On line 13862: + through, ‘Here’s what you’ve + promised. Here’s what you’ve loaned.’ Th + at would happen on + +On line 13862: + one-on-one basis with the + banks and the community + organizations.156 + + Nevertheless, when + the Commission staff asked the + four largest banks (Bank of + +On line 13864: + Citibank, JPMorgan Chase and Wells + Fargo) for data on whether + the merger-related + +On line 13864: + amount, most of the banks + supplied only limited + information. Th + +On line 13868: + that they did not have + the information or that + it was too diffi + + cult to get, and the + information they supplied + was sketchy at best. In + +On line 13874: + to the Commission + by the banks, in letters from + their counsel, refl + +On line 13874: + than they had claimed in + press releases to have made + in fulfi llment + + of their commitments. + Th e press release amounts were + JPMorgan Chase (including + +On line 13876: + billion), and Bank of + America billion), totaled + trillion in CRA loans + +On line 13876: + to the Commission + by Edward Pinto in the + Triggers memo.157 No Wells + +On line 13876: + but in response to + questions from the Commission + Wells provided a + + great deal of data + in spread sheets that could not be + interpreted or + +On line 13876: + further discussion + with representatives of + the bank. However, + +On line 13876: + terminated the + investigation of the + merger-related CRA + +On line 13876: + in August before + the necessary data could + be gathered. For this + +On line 13876: + Wells data could not + be unpacked, interpreted + in discussion with + +On line 13880: + Aft er I protested + the limited eff orts of + the Commission on + +On line 13880: + attempt to restart the + investigation of the + merger-related CRA + +On line 13880: + only one bank had + responded by the deadline + for submission of + +On line 13880: + dissenting statement. + As with the bank responses, + additional work + +On line 13880: + to understand the + information received, and + there was no time, and + +On line 13882: + Commission staff to + follow up. As a result + of the dilatory + +On line 13882: + of the Commission’s + investigation, it was + impossible to + +On line 13882: + actually made + under their merger-related + CRA commitments by + + the four banks and their + predecessors. Th is in + turn impeded any + +On line 13884: + ort to fi nd out + where these loans are today and + hence their delinquency + +On line 13884: + It appears that in + many instances the Commission + management constrained + +On line 13884: + and interviews and + by preventing the staff from + following up with + +On line 13886: + that failed to respond + adequately to requests + for data. Where are + + these mortgages today1 + Where these loans are today must + necessarily + + be a matter of + speculation. Some of the + banks told the FCIC staff + +On line 13886: + do not distinguish + between CRA loans and other + loans, and so could not + +On line 13886: + this information. + Under the GSE Act, Fannie + and Freddie had an + +On line 13888: + rmative obligation + to help banks to meet their CRA + obligations, and they + + undoubtedly served + as a buyer for the loans + made by the largest banks + +On line 13888: + their predecessors + pursuant to Interview of + Josh Silver of the + +On line 13890: + Coalition, June Edward + Pinto, Exhibit to the + Triggers memo, dated + +On line 13898: + http://www.aei.org/docLib/ Pinto-Sizing-Total-Federal-Contributions.pdf. Peter J. + Wallison the commitments. + In a press release + +On line 13898: + in for example, + Fannie reported that it + had acquired billion + +On line 13902: + percent of Fannie’s + AH acquisitions for that + year. In the Triggers + +On line 13902: + based on his research, + Pinto estimated that + Fannie and Freddie + +On line 13902: + about percent of all + CRA loans over the period + from to and that, of + + the balance, about 10-15 + percent were insured by FHA, + 10-15 percent were sold + +On line 13904: + and the rest remain + on the books of the banks that + originated the + +On line 13904: + likely unsaleable in + the secondary market because + they were made at rates + +On line 13904: + insurance—again, the + competition for these loans + among the GSEs, FHA and + +On line 13904: + inevitably raised their prices + and thus underpriced their risk. + To sell these loans, the + + banks holding them would + have to take losses, which many + are unwilling to + +On line 13906: + Mortgage Disclosure + Act HMDA), banks are required + to provide data + +On line 13906: + the Fed from which the + delinquency rates on loans that + have high interest + +On line 13906: + be calculated. + It was assumed that these were + the loans that might bear + +On line 13906: + Fannie and Freddie, + FHA, Countrywide and other + subprime lenders and banks + +On line 13906: + CRA are all seeking + the same loans—roughly speaking, + loans to borrowers + + at or below the + AMI—it is likely that these loans + when actually + +On line 13906: + bear concessionary + interest rates so that their + rate spread is not be + +On line 13906: + It’s just supply and + demand. Accordingly, the + banks that made CRA loans + +On line 13906: + obligation to record + and report their delinquency + rates, and as noted + + above several of + the large banks that made major + commitments recorded + + by the NCRC told FCIC + staff that they don’t keep records about + the performance of + +On line 13908: + loans apart from other + mortgages. However, in the + past few years, Bank of + + America has been + reporting the performance + of CRA loans in its + + annual report + to the SEC on form 10-K. For + example, the bank’s + +On line 13912: + of nonperforming + residential mortgage loans. + Th is portfolio + +On line 13914: + our residential + mortgage portfolio carries + risk mitigation + +On line 13914: + small portion of our + CRA portfolio is covered + by this protection."160 + + Th is could be an + approximation for the + delinquency rate on + + the merger-related + CRA loans that the four banks made + in fulfi lling their + +On line 13916: + but without defi + nitive information on + the number of loans + +On line 13918: + banks’ current holdings + it is impossible to + make this estimate + +On line 13918: + counsel, another + bank reported serious + delinquency rates on + +On line 13918: + made pursuant to its + merger-related commitments + ranging from percent + +On line 13920: + largest sample showing + a percent delinquency rate. + "Fannie Mae Passes + +On line 13920: + Trillion American + Dream Commitment; Leads Market + in Bringing Housing + +On line 13932: + mi_m0EIN/is_2003_March_18/ai_98885990/pg_3/1tag=content;col1. Triggers memo, p.47. + Bank of America, 10-K, p.57. + Dissenting Statement + +On line 13934: + of this issue is + necessary, including on + the role of the bank + + regulators, in + order to determine what + eff ect, if any, the + +On line 13934: + commitments to make + CRA loans might have had on the + number of NTMs in + +On line 13942: + Th is dissenting + statement argues that the U.S. + government’s housing + +On line 13944: + fi nancial crisis + of Th ese policies fostered + the development + +On line 13944: + a massive housing + bubble between and and the + creation of million + +On line 13944: + and Alt-A loans, many of + which were ready to default as + soon as the housing + + bubble began to + defl ate. Th e losses + associated + +On line 13948: + weak and high risk loans + caused either the real or + apparent weakness + + of the major fi + nancial institutions around + the world that held these + +On line 13948: + of regulation, + predatory lending or the + other factors that + +On line 13948: + the report of the + FCIC’s majority were not + determinative + +On line 13952: + implications of + this conclusion are signifi + cant. If the crisis + +On line 13952: + by eliminating + or changing the government + policies and programs + +On line 13952: + were primarily + responsible for the fi + nancial crisis, then + + there was no need for + the Dodd-Frank Wall Street Reform and + Consumer Protection + +On line 13952: + Act of adopted by + Congress in July and oft + en cited as one + +On line 13958: + regulation that + the Dodd-Frank Act imposes on + the U.S. economy + +On line 13958: + almost certainly + have a major adverse eff + ect on economic + + growth and job creation + in the United States during + the balance of this + +On line 13958: + that had to be paid + for preventing another + fi nancial crisis + +On line 13958: + it’s one that will have + to be borne. But if it was + not necessary to + + prevent another + crisis—and it would not have been + necessary if the + + crisis was caused by + actions of the government + itself—then the Dodd-Frank Act + +On line 13960: + Finally, if the + principal cause of the fi + nancial crisis was + + ultimately the + government’s involvement in + the housing fi nance + +On line 13968: + the future should be + adjusted accordingly. + Dissenting Statement + + Hypothetical + Losses in Two Scenarios + (No feedback) Scenario + +On line 13974: + was known to market + professional during the + 2nd half of Scenario + +On line 13982: + trillion; Losses on + Prime=1.2%% (assumes foreclosure rate + severity); Losses + +On line 13988: + Average size of + mortgage: Losses in Scenario + Number of mortgages: + +On line 13992: + million Subprime/Alt-A million + PMBS million FHA/VA=5.2 million) + Aggregate Value: + +On line 14000: + billion trillion prime + X billion trillion subprime/Alt-A X + billion Overall loss + +On line 14010: + Scenario Number of + mortgages: million Prime: million + Subprime/Alt-A: Original subprime/Alt-A: + +On line 14012: + million Other subprime/Alt-A: + million F&F (excludes million + already counted in + +On line 14012: + million other loans + not securitized (mostly + held by the large banks)) + +On line 14018: + Aggregate Value: + Prime= trillion X million); Subprime/Alt-A + trillion X million) + +On line 14020: + foreclosures: billion + trillion X billion trillion + X billion) Overall + +On line 14022: + for an increase of + Note: No allowance for feedback + eff ect—that is, fall + + in home prices as a + result of larger number + of foreclosures in + +On line 14030: + eff ect, losses would + Dissenting Statement be even + larger in Scenario + +On line 14030: + because a larger + number of foreclosures would + drive down housing prices + +On line 14034: + is feedback eff ect + will likely cause total fi + rst mortgage losses + +On line 14040: + Hypothetical + Losses in Two Scenarios + (with feedback) Scenario + +On line 14040: + was known to market + professional during the + 2nd half of Scenario + +On line 14050: + Scenario Losses on + prime=1.2%% (assumes foreclosure rate + severity); Losses + +On line 14052: + subprime Alt-A=14% ((assumes + foreclosure rate severity); + Losses on FHA/VA=5.25% + +On line 14056: + subprime Alt-A=25% (assumes + foreclosure rate severity); + Losses on FHA/VA + +On line 14058: + unknown subprime/Alt-A=15% (assumes + foreclosure rate severity) + Average size of + +On line 14062: + mortgage: Prime: trillion/39 + million) Subprime/Alt-A/FHA/VA: trillion/13 million + Losses in Scenario + +On line 14070: + of mortgages: million + Prime=40 million Subprime/Alt-A=7.7 million PMBS + FHA, and VA=5.2 million + +On line 14076: + Aggregate Value: + Prime trillion X million); Subprime/Alt-A=$1.7 + trillion X million) + +On line 14078: + FHA/VA= billion ($130,000x5.2 + million) Total expected + foreclosures: million + +On line 14084: + billion trillion prime + X billion trillion subprime/Alt-A X + billion billion X + +On line 14096: + Dissenting Statement + Losses in Scenario Number + of mortgages: million + +On line 14104: + million Original + subprime/Alt-A: million FHA/VA: million + Other subprime/Alt-A: million + +On line 14104: + million other loans + not securitized (mostly + held by the large banks)) + +On line 14110: + Value: Prime= trillion + X million); Original Subprime/Alt-A + trillion X million) + +On line 14112: + FHA/VA= billion ($130,000x5.2 + million) Other subprime/Alt-A: trillion + ($154,000X13 million Total + +On line 14112: + million X million=0.95 + million, X million=3.5 million, + X million=3.9 million) + +On line 14112: + foreclosures: billion + trillion X billion trillion + X billion billion + +On line 14120: + billion) Overall loss + percentage: for an increase + of APPENDIX A: + +On line 14128: + ABX.HE A series + of derivatives indices + constructed from the + +On line 14128: + subprime mortgage–backed + securities; akin to an + index like the Dow + +On line 14132: + whose interest rate + changes periodically + over time. affordable + +On line 14132: + Goals originally + set by the Department of + Housing and Urban + + Development (now + by the Federal Housing + Finance Agency) for + +On line 14132: + and Freddie Mac to + allocate a specified + part of their mortgage + +On line 14138: + rate securities. + asset-backed commercial paper + Short-term debt secured + +On line 14140: + instrument secured + by assets such as mortgages, + credit card loans or + + auto loans. auction + rate securities Long-term bonds + whose interest rate + +On line 14146: + holding company + Company that controls a + bank. broker-dealer A + +On line 14146: + the subsidiary of an + investment bank, that buys and + sells securities + +On line 14148: + itself and others. + capital Assets minus + liabilities; + +On line 14148: + owns minus what it + owes. Regulators often + require financial + +On line 14150: + minimum levels + of capital. Capital + Purchase Program TARP + + program providing + financial assistance to + 700-plus U.S. financial + +On line 14150: + through the purchase of + senior preferred shares in the + corporations on + + standardized terms. CDO + see collateralized debt + obligation. CDO squared + +On line 14158: + holds other CDOs. CDS + see credit default swap. CFTC + see Commodity + +On line 14162: + the riskier portions + of mortgage-backed securities. + commercial paper + +On line 14164: + created by the + Federal Reserve in to + purchase three-month + +On line 14166: + federal agency + that regulates trading in + futures and options. + +On line 14176: + depository + institutions to make loans + and provide services + +On line 14178: + Securities and + Exchange Commission program + created in and + +On line 14178: + terminated in + that provided voluntary + supervision for + +On line 14182: + bank conglomerates. + Counterparty A party + to a contract. CP + +On line 14188: + A type of credit + derivative allowing + a purchaser of + +On line 14188: + transfer loan default + risk to a seller of the + swap. The seller agrees + +On line 14188: + pay the purchaser + if a default event occurs. + The purchaser does + +On line 14190: + by the swap. credit + enhancement Insurance or + other protection + + that may be purchased + for a loan or pool of loans + to offset losses + +On line 14192: + the event of default. + credit loss Loss from delayed + payments or defaults + +On line 14194: + loans. credit rating + agency Private company + that evaluates the + +On line 14194: + of securities + and provides ratings on those + securities; the + +On line 14196: + are Fitch Ratings, Moody’s + Investors Service, and Standard + Poor’s. credit risk Risk + +On line 14198: + a borrower will + fail to repay the loan. CSE + Consolidated + +On line 14200: + of a borrower’s + ability to repay a + loan, generally + + calculated by + dividing the borrower’s + monthly debt payments + +On line 14202: + income. delinquency + rate The number of loans for + which borrowers fail + +On line 14206: + for enforcement of + laws and administration + of justice, led by + +On line 14208: + of the federal + government; prints and mints all + currency and coins, + +On line 14208: + U.S. government debt + instruments, supervises + national banks and + +On line 14208: + Its mission includes + protecting the integrity + of the financial + +On line 14210: + depository + institution Financial + institution, such + +On line 14210: + thrift (savings and loan), + or credit union, that accepts + deposits, including + +On line 14212: + insured by the FDIC. + derivative Financial + contract whose price is + +On line 14212: + from the value of + an underlying asset, + rate, index, or event. + +On line 14218: + mortgage market. FCIC + Financial Crisis Inquiry + Commission. FDIC see + + Federal Deposit + Insurance Corporation. + Federal Deposit + +On line 14220: + examining and + supervising some of those + institutions, and + +On line 14222: + Federal Housing + Administration Part of + the Department of + +On line 14224: + government-sponsored + enterprises; created + by the Housing and + +On line 14224: + as successor to + the Office of Federal + Housing Enterprise + +On line 14226: + Federal Housing + Finance Board. Federal Open + Market Committee + + Its members are the + Board of Governors of the + Federal Reserve + +On line 14230: + Glossary System and + certain of the presidents + of the Federal + +On line 14230: + market conditions + and implements monetary + policy through such + +On line 14232: + setting interest + rates. Federal Reserve Bank + of New York One of + +On line 14232: + regulating bank + holding companies in New + York State and nearby + + areas. Federal + Reserve U.S. central banking + system created + +On line 14234: + panics, consisting + of the Federal Reserve + Board in Washington, + +On line 14234: + DC, and Federal + Reserve Banks around the country; + its mission is to + +On line 14234: + policy through such + means as setting interest + rates, supervising + +On line 14240: + Federal Housing + Finance Agency. FICO score + A measure of a + +On line 14242: + money laundering, + terroristfinancing, and + other financial + +On line 14246: + FinCEN see Financial + Crimes Enforcement Network. FOMC + see Federal Open + +On line 14248: + foreclosure Legal + process whereby a mortgage lender + gains ownership of + +On line 14250: + defaulted mortgage. + Freddie Mac Nickname for the + Federal Home Loan + +On line 14252: + financing for the + home mortgage market. Ginnie + Mae Nickname for the + +On line 14254: + pools of VA and FHA + mortgages. Glass-Steagall Act Banking Act + of creating the + +On line 14254: + from underwriting + or dealing in most types of + securities, barred + +On line 14254: + affiliating + with securities firms, and + introduced other + +On line 14254: + reforms. In the Gramm-Leach-Bliley + Act repealed the provisions + of the Glass-Steagall Act that + +On line 14256: + corporation, such + as Fannie Mae and Freddie + Mac, created by + +On line 14258: + its charter. Gramm-Leach-Bliley Act + legislation that lifted + certain remaining + +On line 14262: + difference between + the value of an asset + and the amount borrowed + +On line 14264: + hedge In finance, a + way to reduce exposure + or risk by taking + +On line 14266: + offered investment + vehicle exempted from + most regulation + +On line 14270: + investors. HOEPA see Home + Ownership and Equity + Protection Act. Home + +On line 14270: + Federal Reserve + new responsibility + to address abusive + +On line 14272: + including measures + to reform and regulate + the GSEs; created + +On line 14276: + hybrid CDO A CDO + backed by collateral found + in both cash CDOs and + +On line 14280: + Assets that cannot + be easily or quickly + sold. interest-only + +On line 14288: + until the end of + the loan term. Appendix A: + Glossary leverage A + +On line 14288: + is used to purchase + assets; for example, a + leverage ratio of + +On line 14292: + that of assets were + purchased with of debt and of + capital. LIBOR + + London Interbank + Offered Rate, an interest + rate at which banks are + + willing to lend to + each other in the London + interbank market. + +On line 14296: + can be quickly and + easily converted to + cash. liquidity + +On line 14296: + contract allowing + one party to compel the + other to buy an + +On line 14298: + ratio Ratio of + the amount of a mortgage to + the value of the + +On line 14298: + percentage. "Combined" + loan-to-value includes all + debt secured by the + +On line 14302: + mortgages. LTV ratio + see loan-to-value ratio. + mark-to-market The + +On line 14302: + amount of an asset + is adjusted to reflect + the market value. + + monoline Insurance + company, such as AMBAC + and MBIA, whose single + +On line 14306: + is to guarantee + financial products. mortgage + servicer Company + +On line 14308: + modifications, + settlements, and foreclosure + proceedings. mortgage + +On line 14308: + evaluating the + credit characteristics + of a mortgage and + +On line 14310: + security Debt + instrument secured by a + pool of mortgages, whether + +On line 14314: + net asset value. + negative amortization + loan Loan that allows + + a borrower to + make monthly payments that do + not fully cover + +On line 14316: + unpaid interest + added to the principal of + the loan. net asset + +On line 14316: + asset minus any + associated costs; for + financial assets, + +On line 14318: + changes each trading day. + net charge-off rate Ratio of loan + losses to total + +On line 14320: + sponsored by private + companies other than a + government-sponsored + +On line 14320: + as Fannie Mae or + Freddie Mac); also known as + private-label mortgage-backed + +On line 14322: + the outstanding amount + of over-the-counter derivatives + contracts, based on the + +On line 14324: + referenced assets. + novation A process by which + counterparties may + +On line 14326: + positions. OCC see + Office of the Comptroller + of the Currency. + +On line 14328: + Housing Enterprise + Oversight Created in to + oversee financial + +On line 14328: + Mae and Freddie Mac; + its responsibilities + were assumed in by + + its successor, the + Federal Housing Finance + Agency. Office of + +On line 14330: + supervises all + national banks and certain + branches and agencies + + of foreign banks in + the United States. Office of + Thrift Supervision + +On line 14332: + that regulates all + federally chartered and + many state-chartered savings + +On line 14334: + loans/thrift institutions + and their holding companies. + OFHEO see Office of + +On line 14336: + Housing Enterprise + Oversight. originate-to-distribute + When lenders make loans with + +On line 14338: + opposed to holding + the loans through maturity. + originate-to-hold When + + lenders make loans with the + intention of holding them + through maturity, + +On line 14338: + opposed to selling + them to other financial + institutions or + +On line 14344: + investors. Appendix + A: Glossary origination + Process of making a + +On line 14348: + and providing the + funds. OTS see Office of Thrift + Supervision. par + + Face value of a + bond. payment-option adjustable-rate + mortgage (also called + +On line 14350: + Mortgages that allow + borrowers to pick the amount + of payment each month, + + possibly low enough + to increase the principal + balance. PDCF see + +On line 14356: + pooling Combining + and packaging a group of + loans to be held by + +On line 14358: + Program established + by the Federal Reserve + in March that allowed + +On line 14362: + overnight to finance their + securities. principal + Amount borrowed. private + +On line 14362: + on the payment of + a mortgage provided by + a private firm at + +On line 14364: + the lender. private-label + mortgage-backed securities see + non-agency mortgage-backed + +On line 14366: + agreement (repo) A + method of secured lending where + the borrower sells + +On line 14366: + as collateral + and agrees to repurchase them + at a higher price + +On line 14368: + a short period, + often within one day. SEC + see Securities + +On line 14370: + Commission. section + Section of the Federal + Reserve Act under + +On line 14370: + may make secured loans + to nondepository + institutions, such + +On line 14372: + under "unusual + and exigent" circumstances. + Securities and + +On line 14372: + protecting investors + by enforcing federal + securities laws, + +On line 14372: + regulating stock + and security options + exchanges and other + +On line 14372: + markets, the issuance + and sale of securities, + broker-dealers, other + +On line 14374: + Process of pooling debt + assets such as mortgages, car + loans, and credit card + +On line 14374: + separate legal + entity that then issues + a new financial + +On line 14376: + or security + for sale to investors. shadow + banking Financial + + institutions and + activities that in some + respects parallel + +On line 14378: + include mutual + funds, investment banks, and hedge + funds. short sale The sale + +On line 14380: + a home for less than + the amount owed on the mortgage. + short selling To sell + +On line 14380: + security in + the expectation of a + decline in value. + +On line 14384: + purpose vehicle + Entity created to + fulfill a narrow + +On line 14384: + holds a portfolio + of assets such as mortgage-backed + securities or + +On line 14388: + advantages. SPV see + special purpose vehicle. + structured investment + + vehicle Leveraged + special purpose vehicle, + funded through medium-term + +On line 14390: + in highly rated + securities. synthetic + CDO A CDO that holds + +On line 14390: + swaps that reference + assets (rather than holding cash + assets), allowing + + investors to make bets + for or against those referenced + assets. systemic risk + +On line 14392: + financial terms, that + which poses a threat to the + financial system. + +On line 14394: + Deposit Insurance + Corporation Improvement + Act (FDICIA) under + +On line 14396: + may commit its funds + to rescue a financial + institution. TAF + +On line 14398: + Facility. TALF + see Term Asset-Backed Securities + Loan Facility. + +On line 14408: + see Troubled Asset + Relief Program. Appendix + A: Glossary Term Asset-Backed + +On line 14408: + Loan Facility + Federal Reserve program, + supported by TARP + +On line 14408: + of asset-based loans such + as auto loans, student loans, + and small business loans. + +On line 14414: + made up to billion + in Treasury securities + available to banks or + +On line 14416: + directly with the + Federal Reserve. tranche From + the French, meaning a + +On line 14416: + to refer to the + different types of mortgage-backed + securities and + + CDO bonds that provide + specified priorities + and amounts of returns: + +On line 14416: + returns and therefore + the lowest risk/interest rate; + mezzanine tranches + +On line 14416: + levels of risk/return; + and "equity" (also known + as "residual" or + +On line 14418: + any remaining cash + flows. Troubled Asset Relief + Program Government + +On line 14418: + in October to + purchase or insure up to + billion in assets + +On line 14422: + Condition in which + a business does not have enough + capital to meet + +On line 14424: + entity. Write-downs + Reducing the value of + an asset as it + + is carried on a + firm’s balance sheet because the + market value has + +On line 14432: + APPENDIX B: LIST + OF HEARINGS AND WITNESSES + Public Meeting of + +On line 14438: + October Martin + Baily, Senior Fellow in + Economic Studies, + +On line 14438: + School of Management, + Massachusetts Institute + of Technology + +On line 14440: + S. Scott, Nomura + Professor and Director + of the Program on + +On line 14442: + Graduate School of + Arts and Sciences (Department + of Economics) and + +On line 14442: + International + and Public Affairs John B. + Taylor, Mary and Robert + + Raymond Professor + of Economics and the Bowen + H. and Janice Arthur + +On line 14442: + Zingales, Robert C. McCormack + Professor of Entrepreneurship + and Finance and the + +On line 14442: + G. Booth Faculty + Fellow, University of + Chicago Booth School of + +On line 14444: + Roundtable Discussion, + Washington, DC, November + David A. Moss, The John + +On line 14444: + Carmen M. Reinhart, + Professor of Economics + and Director of + +On line 14446: + International + Economics, University + of Maryland Public + +On line 14448: + January Session + Financial Institution + Representatives + +On line 14450: + of the Board and Chief + Executive Officer, + Goldman Sachs Group, Inc. + +On line 14454: + of the Board and Chief + Executive Officer, + JPMorgan Chase Co. John J. + +On line 14456: + of the Board, Morgan + Stanley Brian T. Moynihan, + Chief Executive + +On line 14456: + President, Bank of + America Corporation + Session Financial + +On line 14458: + Michael Mayo, Managing + Director and Financial + Services Analyst, + +On line 14462: + Kyle Bass, Managing + Partner, Hayman Advisors, + LP Peter J. Solomon, + +On line 14462: + and Chairman, Peter + J. Solomon Company Session + Financial Crisis + +On line 14472: + B: List of Hearings + and Witnesses Mark Zandi, + Chief Economist and + +On line 14472: + Moody’s Economy.com + Kenneth T. Rosen, Chair, Fisher + Center for Real + + Estate and Urban + Economics, University + of California, + +On line 14474: + Policy Counsel, + Center for Responsible + Lending C. R. "Rusty" + +On line 14476: + Community Bankers + Association Public + Hearing, Washington, + +On line 14478: + Investigations + into the Financial Crisis—Federal + Officials Eric + +On line 14478: + of Justice Sheila C. + Bair, Chairman, U.S. Federal + Deposit Insurance + +On line 14478: + L. Schapiro, Chairman, U.S. + Securities and Exchange + Commission Session + +On line 14478: + the Financial Crisis—State + and Local Officials Lisa + Madigan, Attorney + +On line 14482: + of Illinois John W. + Suthers, Attorney General, + State of Colorado Denise + +On line 14482: + and President, North + American Securities + Administrators + +On line 14486: + Alvarez Mortgage Fraud + Task Force Forum to Explore + the Causes of the + + Financial Crisis, + American University + Washington College + +On line 14488: + Bobins Professor of + Economics, University + of Chicago Session + +On line 14492: + Household Finances and + Financial Literacy + Annamaria Lusardi, + +On line 14492: + Research Forum to + Explore the Causes of the + Financial Crisis, + +On line 14494: + Washington College + of Law, Washington, DC, Day + February Session + +On line 14494: + Lending Practices and + Securitization Chris + Mayer, Paul Milstein + +On line 14494: + of Real Estate, + Columbia University; + Visiting Scholar + + at the Federal + Reserve Bank of New York and + Research Associate + +On line 14496: + Booth Professor of + Banking, Finance, and Real + Estate; Co-chair, Fisher + +On line 14496: + Estate and Urban + Economics, University + of California, + +On line 14496: + and Other Complex + Financial Instruments Markus + Brunnermeier, Edwards + +On line 14496: + Economics, Princeton + University Appendix + B: List of Hearings + +On line 14502: + Session Firm Structure + and Risk Management Anil Kashyap, + Edward Eagle Brown + +On line 14502: + and Finance and Richard + N. Rosett Faculty Fellow, + University of + +On line 14506: + Banking Gary Gorton, + Professor of Finance, School + of Management, Yale + +On line 14506: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 14508: + Rayburn House Office + Building, Room Washington, DC, + Day April Session The + + Federal Reserve + Alan Greenspan, Former Chairman, Board + of Governors of + +On line 14512: + Origination and + Securitization Richard + Bitner, Managing + +On line 14512: + Confessions of a + Subprime Lender: An Insider’s + Tale of Greed, Fraud, and + +On line 14512: + Bowen, Former Senior + Vice President and Business + Chief Underwriter, + +On line 14516: + Session Citigroup + Subprime-Related Structured Products and Risk + Management Murray + +On line 14516: + Former Managing + Director, Independent + Risk, Citigroup, Inc. + +On line 14520: + Bushnell, Former Chief + Risk Officer, Citigroup, + Inc. Nestor Dominguez, Former + +On line 14522: + Maheras, Former Co-chief + Executive Officer, + Citi Markets Banking + +On line 14522: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 14524: + House Office Building, + Room Washington, DC, Day April + Session Citigroup + + Senior Management + Charles O. Prince, Former Chairman + of the Board and Chief + +On line 14528: + Citigroup, Inc. Robert + Rubin, Former Chairman of + the Executive + +On line 14532: + Inc. Session Office + of the Comptroller of the + Currency John C. + +On line 14532: + Comptroller, Office + of the Comptroller of the + Currency John D. + +On line 14532: + Former Comptroller, + Office of the Comptroller + of the Currency + +On line 14532: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 14534: + House Office building, + Room Washington, DC, Day April + Session Fannie Mae + +On line 14536: + Executive Vice + President and Chief Business + Officer, Fannie + +On line 14536: + President and Chief + Executive Officer, + Fannie Mae Session + +On line 14536: + Housing Enterprise + Oversight James Lockhart, Former + Director, Office + +On line 14540: + Appendix B: List + of Hearings and Witnesses + Public Hearing on + +On line 14542: + Room Washington DC, + Day May Session Investment + Banks and the Shadow + +On line 14542: + System Paul Friedman, + Former Senior Managing + Director, Bear Stearns + +On line 14542: + Co-chief Operating + Officer, Bear Stearns Session + Investment Banks and + +On line 14542: + Banking System James + E. Cayne, Former Chairman and + Chief Executive + +On line 14542: + Bear Stearns Alan D. Schwartz, + Former Chief Executive + Officer, Bear Stearns + +On line 14544: + Regulation of + Investment Banks Charles Christopher + Cox, Former Chairman, + +On line 14544: + Securities and + Exchange Commission William H. + Donaldson, Former + +On line 14544: + U.S. Securities + and Exchange Commission H. + David Kotz, Inspector + +On line 14544: + U.S. Securities + and Exchange Commission Erik + R. Sirri, Former + +On line 14546: + Trading Markets, U.S. + Securities and Exchange + Commission Public + +On line 14548: + Washington DC, Day + May Session Perspective on + the Shadow Banking + +On line 14550: + Henry M. Paulson + Jr., Former Secretary, U.S. + Department of the + +On line 14552: + Department of the + Treasury; Former President, + Federal Reserve + +On line 14558: + Chief Executive + Officer, GE Capital + Mark S. Barber, Vice + +On line 14560: + Capital Paul A. + McCulley, Managing Director, + PIMCO Steven R. Meier, + +On line 14560: + Street Public Hearing + on Credibility of + Credit Ratings, the + +On line 14560: + Based on Those Ratings, + and the Financial Crisis, + The New School Arnhold + +On line 14560: + Lang Community + Student Center, West 13th Street, + 2nd Floor, New York, NY, + +On line 14564: + Kolchinsky, Former Team + Managing Director, US + Derivatives, Moody’s + +On line 14564: + Nicolas S. Weill, Group + Managing Director, Moody’s + Investors Service Gary + +On line 14564: + US Derivatives, + Moody’s Investors Service Session + Credit Ratings and + +On line 14566: + McDaniel, Chairman and Chief + Executive Officer, + Moody’s Corporation + +On line 14568: + President and Chief + Operating Officer, + Moody’s Investors Service + +On line 14570: + Mark Froeba, Former + Senior Vice President, US + Derivatives, Moody’s + +On line 14574: + Appendix B: List + of Hearings and Witnesses + Public Hearing on + +On line 14578: + Room Washington, DC, + Day June Session Overview of + Derivatives Michael + +On line 14580: + Chair Professor of + Finance, University of + Maryland Michael Masters, + +On line 14582: + Officer, Masters + Capital Management, LLC + Session American + +On line 14584: + International + Group, Inc. Financial Products + Robert E. Lewis, Senior + +On line 14584: + President and Chief + Risk Officer, American + International + +On line 14590: + and Derivatives + Craig Broderick, Managing + Director, Head of + + Credit, Market, and + Operational Risk, Goldman + Sachs Group, Inc. Gary D. + +On line 14592: + President and Chief + Operating Officer, + Goldman Sachs Group, Inc. + + Public Hearing on + the Role of Derivatives + in the Financial + +On line 14596: + Office Building, Room + Washington DC, Day July + Session American + +On line 14598: + Inc. and Goldman Sachs + Group, Inc. Steven J. Bensinger, Former + Executive Vice + +On line 14602: + International + Group, Inc. Financial Services + Elias F. Habayeb, Former + +On line 14604: + International + Group, Inc. Financial Services + David Lehman, Managing + +On line 14604: + Goldman Sachs Group, Inc + David Viniar, Executive Vice + President and Chief + +On line 14608: + Supervisors and + Regulators Eric R. + Dinallo, Former + +On line 14608: + Former Managing + Director for Complex and + International + +On line 14614: + Washington DC, Day + September Session Wachovia + Corporation Scott + +On line 14614: + Alvarez, General + Counsel, Board of Governors + of the Federal + +On line 14614: + John H. Corston, Acting + Deputy Director, Division + of Supervision + +On line 14616: + Federal Deposit + Insurance Corporation + Robert K. Steel, Former + +On line 14618: + and Executive + Vice President, Federal + Reserve Bank of New + +On line 14626: + Appendix B: List + of Hearings and Witnesses + Richard S. "Dick" Fuld Jr., + +On line 14628: + Partner, Weil, Gotshal + Manges, LLP Barry L. Zubrow, Chief + Risk Officer, JPMorgan + +On line 14632: + Room Washington DC, + Day September Session The + Federal Reserve + + Ben S. Bernanke, Chairman, + Board of Governors of the + Federal Reserve + +On line 14636: + Federal Deposit + Insurance Corporation + Sheila C. Bair, Chairman, + +On line 14636: + Federal Deposit + Insurance Corporation + Public Hearing on + + the Impact of the + Financial Crisis—Greater Bakersfield, + Kern County Board of + +On line 14646: + City Councilwoman, + Ward Session Local Banking + Arnold Cattani, Chairman, + + Mission Bank Steve Renock, + President and CEO, Kern Schools + Federal Credit + + Union D. Linn Wiley, + Vice Chairman, CVB Financial + Corporation and + +On line 14648: + Citizens Business + Bank Session Residential + and Community + +On line 14650: + Gregory D. Bynum, + President, Gregory D. + Bynum and Associates, + +On line 14656: + Inc. Session Local + Housing Market Gary Crabtree, + Principal Owner, + + Affiliated + Appraisers Lloyd Plank, Lloyd E. + Plank Real Estate + +On line 14666: + Preferred Jeannie McDermott, + Small Business Owner Session + Forum for Public + +On line 14674: + Stephen Urner Marvin + Dean Marie Vasile Public Hearing + on the Impact of + +On line 14674: + Financial Crisis—State of + Nevada, University of + Nevada, Las Vegas, + +On line 14676: + Student Union Building, + Las Vegas, NV, September + Session Economic + + Analysis of the + Impact of the Financial + Crisis on Nevada + +On line 14678: + Applied Analysis + Session The Impact of the + Financial Crisis + + on Businesses of + Nevada Steve Hill, Founder, Silver + State Materials + +On line 14680: + Immediate Past + Chairman, Las Vegas Chamber + of Commerce William E. + +On line 14680: + Vice Chairman and Chief + Executive Officer, + Service 1st Bank of + +On line 14684: + List of Hearings and + Witnesses Wally Murray, + President and Chief + +On line 14684: + Philip G. Satre, Chairman, + International Gaming + Technology (IGT); + +On line 14686: + NV Energy, Inc. + Session The Impact of the + Financial Crisis + +On line 14686: + Bogden, United States + Attorney, State of Nevada + Gail Burks, President + +On line 14686: + Officer, Nevada + Fair Housing Center Brian + Gordon, Principal, + +On line 14688: + Session The Impact + of the Financial Crisis + on Nevada Public + +On line 14690: + Counties David Fraser, + Executive Director, + Nevada League of Cities + +On line 14692: + School District Session + Forum for Public Comment + Public Hearing on + +On line 14692: + of the Financial + Crisis—Miami, Florida, Florida + International + +On line 14694: + Modesto A. Madique Campus, + Miami, FL, September + Session Overview of + + Mortgage Fraud William K. + Black, Associate Professor + of Economics and + +On line 14698: + Missouri–Kansas City Ann Fulmer, + Vice President of Business + Relations, Interthinx; + +On line 14700: + Fraud Prevention and + Awareness Coalition Henry N. + Pontell, Professor + +On line 14706: + Mortgage Fraud Task Force, + Miami-Dade Police Department Jack + Rubin, Senior Vice + +On line 14706: + Bank Ellen Wilcox, Special + Agent, Florida Department + of Law Enforcement + +On line 14706: + The Regulation, + Oversight, and Prosecution + of Mortgage Fraud in + +On line 14706: + Regulation, State + of Florida Wilfredo + A. Ferrer, United + +On line 14706: + of Florida R. + Scott Palmer, Special Counsel and + Chief of the Mortgage + +On line 14706: + Task Force, Office of + the Attorney General, + State of Florida + +On line 14708: + the Financial Crisis—Sacramento, + California Department + of Education, + +On line 14710: + September Session + Overview of the Sacramento + Housing and Mortgage + +On line 14712: + the Impact of the + Financial Crisis on the + Region Mark Fleming, + +On line 14716: + Fraud and Predatory + Lending in the Sacramento + Region Karen J. Mann, + +On line 14716: + and Chief Appraiser, + Mann and Associates Real + Estate Appraisers + +On line 14720: + President, Putnam + Housing Finance Consulting + Appendix B: List + +On line 14722: + Kevin Stein, Associate + Director, California + Reinvestment Coalition + +On line 14722: + Attorney, Eastern + District of California + Session The Mortgage + +On line 14722: + Vicki Beal, Senior + Vice President, Transaction + Management, Clayton + +On line 14724: + Professor of Law, + Chapman University School + of Law D. Keith + +On line 14726: + Mutual’s Long Beach + Mortgage Session The Impact + of the Financial + +On line 14726: + and Families Pam + Canada, Chief Executive + Officer, NeighborWorks Home + +On line 14728: + Center–Sacramento Region Mona Tawatao, + Regional Counsel, Legal + Services of Northern + +On line 14732: + Credit Union Public + Testimony Presented + Allen Carpenter Lovie + +On line 14742: + data come from the + sources listed below. Board of + Governors of the + +On line 14742: + international + capital flows, and the size + and activity + +On line 14742: + Economic output + (GDP), spending, wages, and sector + profit Bureau of + +On line 14748: + origination of + mortgages, issuance of mortgage-backed + securities and + +On line 14750: + outstanding Markit + Group: ABX-HE index Mortgage Bankers + Association + +On line 14752: + Mortgage delinquency + and foreclosure rates 10-Ks, 10-Qs, + and proxy statements filed + +On line 14754: + Company-specific + information Many of the + documents cited + +On line 14754: + pages, along with other + materials, are available + on www.fcic.gov. + +On line 14763: + Prince, testimony + before the FCIC, Hearing on + Subprime Lending and + +On line 14763: + Government-Sponsored Enterprises + (GSEs), day session Citigroup + Senior Management, + +On line 14765: + p. Warren Buffett, + testimony before the + FCIC, Hearing on the + +On line 14765: + Credit Ratings, the + Investment Decisions Made + Based on Those Ratings, + +On line 14765: + Credit Ratings and + the Financial Crisis, June + transcript, p. Warren + +On line 14767: + FCIC, May Lloyd Blankfein, + testimony before the + First Public Hearing + +On line 14767: + the FCIC, day panel + Financial Institution + Representatives, + +On line 14769: + transcript, p. Ben S. + Bernanke, closed-door session with FCIC, + November Ben S. + +On line 14769: + Financial Crisis, + day session The Federal + Reserve, September + +On line 14771: + p. Alan Greenspan, written + testimony for the FCIC, + Subprime Lending and + +On line 14779: + Enterprises (GSEs), + day session The Federal + Reserve, April p. Notes + +On line 14783: + to Chapter Richard C. + Breeden, interview by FCIC, + October Paul A. + + McCulley, testimony + before the FCIC, Hearing on + the Shadow Banking + +On line 14785: + the Financial Crisis—Greater + Bakersfield, session Local + Banking, September + +On line 14787: + the Impact of the + Financial Crisis—State of Nevada, + session The Impact + + of the Financial + Crisis on Businesses of + Nevada, September + +On line 14789: + The Mortgage Market + Statistical Annual, + vol. The Primary + +On line 14789: + Finance, p. "Mortgage + Product by Origination." + Data provided + +On line 14789: + Association + of Realtors: national + home price data from + +On line 14789: + sales of existing + homes, comparing second-quarter + and second-quarter the + +On line 14791: + national peak in + prices. Core-based statistical area + house prices for Sacramento–Arden–Arcade–Roseville CA + +On line 14793: + CoreLogic data. Data + provided by CoreLogic, Home Price + Index for Urban + +On line 14793: + calculated house + price growth from January to + peak of each market. + +On line 14793: + Prices increased at least + in cities, at least in cities, at + least in cities, at least + +On line 14795: + in cities, and more than + in cities. Updated data + provided by James + +On line 14797: + Alan Greenspan, whose data + originally appeared in + "Sources and Uses of + +On line 14799: + Series, Federal + Reserve Board, 2007-20 (March "Mortgage + Originations Rise + +On line 14799: + Half of Demand for + Interest Only, Option + ARM and Alt-A Products + + Increases," Mortgage + Bankers Association press + release, October + +On line 14801: + the weekly wage of + New York investment banker was + of the average + +On line 14803: + privately employed + worker, Federal Reserve + Survey of Consumer + +On line 14807: + by FCIC. Angelo + Mozilo, interview by FCIC, + September Michael Mayo, + +On line 14809: + Financial Market + Participants, January + transcript, p. "Mortgage + +On line 14811: + in First Half of MBA + press release, October Yuliya + Demyanyk and Yadav + +On line 14811: + ARMs: Popular Loans, + Poor Performance," Federal + Reserve Bank of St. + +On line 14813: + Bridges (Spring Ann Fulmer, + vice president of Business + Relations, Interthinx + +On line 14813: + Mortgage Fraud), and Ellen + Wilcox, special agent, Florida + Department of Law + +On line 14813: + Fraud in Miami), + testimony before the + FCIC, Hearing on the + +On line 14817: + Michael Calhoun, Center + for Responsible Lending, + interview by FCIC, + +On line 14821: + meeting, Thursday, March + Federal Reserve Board, "Mean + Value of Mortgages + +On line 14821: + for Families with + Holdings," in SCF Chartbook, June + tables updated + +On line 14827: + Cruise, interview by + FCIC, August Ibid. Robert Kuttner, + interview by FCIC, + +On line 14829: + FCIC, Hearing on the + Shadow Banking System, day + session Perspective + +On line 14831: + the Shadow Banking + System, May transcript, p. James + Ryan, chief marketing + + officer at CitiFinancial + and John Schachtel, executive + vice president of + +On line 14833: + CitiFinancial, interview by + FCIC, February These points were + made to the FCIC by + +On line 14833: + Kevin Stein, associate + director, California + Reinvestment Coalition, + +On line 14833: + the Hearing on the + Impact of the Financial + Crisis—Sacramento, session Mortgage + +On line 14833: + Fraud and Predatory + Lending in the Sacramento + Region, September + +On line 14833: + president and CEO, + Nevada Fair Housing Center, + at the Hearing on + +On line 14833: + the Impact of the + Financial Crisis—State of Nevada, + session The Impact + + of the Financial + Crisis on Nevada Real + Estate, September + +On line 14841: + June October March + October June October + Notes to Chapter Bob + +On line 14845: + interview by FCIC, + March James Rokakis, interview by + FCIC, November Ibid. + +On line 14847: + Edward M. Gramlich, + "Tackling Predatory Lending: + Regulation and + +On line 14855: + Stein, testimony + before the FCIC, transcript, pp. + U.S. Department of + +On line 14857: + Mortgage Lending" (June + Federal Reserve Board press + release, December + +On line 14859: + Sheila C. Bair, written + testimony for the FCIF, + First Public Hearing + +On line 14859: + day panel Current + Investigations into + the Financial Crisis—Federal + +On line 14863: + January Sheila C. + Bair, testimony before + the FCIC, First Public + +On line 14863: + day panel Current + Investigations into + the Financial Crisis—Federal + +On line 14867: + January transcript, + p. Sheila C. Bair, interview + by FCIC, March Mortgage + +On line 14871: + "Top B&C Lenders in Ibid., + "Subprime Origination by + State in and "Subprime + +On line 14875: + Stein, testimony + before the FCIC, September + transcript, p. Gail Burks, + +On line 14877: + interview by FCIC, + August Lisa Madigan, written + testimony for + +On line 14877: + Public Hearing of + the FCIC, day panel Current + Investigations + +On line 14879: + p. "Home Mortgage Lender + settled ‘Predatory Lending’ + Charges," Federal Trade + +On line 14881: + B&C Lenders in Madigan, + written testimony for + the FCIC, January + +On line 14885: + interview by FCIC, + May Prentiss Cox, interview + by FCIC, October + +On line 14893: + FCIC, October Cox, + interview; Madigan, written + testimony for + +On line 14897: + John D. Hawke Jr. and + John C. Dugan, written statements + for the FCIC, Hearing + +On line 14897: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 14897: + day session Office + of the Comptroller of the + Currency, April pp. + +On line 14903: + testimony for + the FCIC, January pp. Cox, + interview. Mortgage + +On line 14907: + by Product." Nonprime + Alt-A and subprime combined. Marc + S. Savitt, interview + +On line 14909: + by FCIC, November + Rob Barry, Matthew Haggman, and + Jack Dolan, "Ex-convicts + +On line 14911: + on the Impact of + the Financial Crisis—Miami, session + The Regulation, + +On line 14913: + Prosecution of + Mortgage Fraud in Miami, + September p. Savitt, + +On line 14917: + on the Impact of + the Financial Crisis— Greater + Bakersfield, session + +On line 14927: + Market, September + p. Ibid. Notes to Chapter Gary + Crabtree, interview + +On line 14927: + FCIC, August Crabtree, + written testimony for + the FCIC, September + +On line 14929: + "FBI Warns of Mortgage + Fraud ‘Epidemic’ from Terry + Frieden," CNN news report, + +On line 14931: + "FBI Vows to Crack Down + on Mortgage Fraud; Hot Real + Estate Market Drives + +On line 14933: + Says," Washington Post, + February Financial Crimes + Enforcement Network, + +On line 14933: + "Mortgage Loan Fraud: An + Industry Assessment Based + upon Suspicious + +On line 14935: + Enforcement Network, + "Annual Report: Fiscal + Year FinCEN response to + +On line 14937: + October William K. + Black, written testimony + for the FCIC, Hearing + +On line 14939: + of the Financial + Crisis— Miami, session + Overview of Mortgage + +On line 14949: + transcript, p. Ibid., p. + Ruhi Maker, interview by + FCIC, October Kirstin + +On line 14951: + Downey, "Many Buyers Opt + for Risky Mortgages," Washington + Post, May "After the + + Fall: Soaring house prices + have given a huge boost to + the world economy. + +On line 14953: + What happens when they + drop1" The Economist, June Fed + Chairman Alan Greenspan, "The + +On line 14957: + the Joint Economic + Committee, 109th Cong., 1st sess., + June Ibid. Fed Chairman + +On line 14959: + the Joint Economic + Committee, U.S. Congress, 110th + Cong., 1st sess., March Sheila + +On line 14961: + October transcript, + p. David Leonhardt, "Be Warned: Mr. + Bubble’s Worried Again," + +On line 14963: + New York Times, August + Raghuram Rajan, interview + by FCIC, November + +On line 14969: + Ibid. Ibid. Raghuram G. + Rajan, Fault Lines: How Hidden + Fractures Still Threaten + +On line 14971: + Economy (Princeton: + Princeton University Press, + p. Susan M. Wachter, + +On line 14977: + FCIC, Hearing on the + Impact of the Financial + Crisis— Miami, + +On line 14981: + FCIC, Hearing on the + Impact of the Financial + Crisis— Sacramento, + +On line 14981: + Fraud and Predatory + Lending in the Sacramento + Region, September + +On line 14985: + Annual, vol. The + Secondary Market, p. "Non-Agency MBS + Issuance by Type," and + +On line 14987: + FCIC staff estimates + based on analysis of Moody’s + SFDRS data. Jamie + +On line 14987: + the FCIC, day panel + Financial Institution + Representatives, + +On line 14991: + transcript, p. Madelyn + Antoncic, interview by + FCIC, July Anton + + R. Valukas, Report of + Examiner, In re Lehman + Brothers Holdings Inc., + +On line 14995: + Chapter Case No. 08-13555 + (JMP), (Bankr. S.D.N.Y.), March with n. + Richard Bowen, interview + +On line 15001: + Rubin, David Bushnell, + Gary Crittenden, and Bonnie + Howard, November Notes + +On line 15005: + on Subprime Lending + and Securitization + and Government-Sponsored Entities + +On line 15007: + Citigroup Senior + Management, April transcript, p. + Brad S. Karp, counsel + +On line 15007: + to FCIC, November + in response to FCIC request + of September for + +On line 15011: + Bowen’s November email, + p. Bowen, interview. J. Kyle + Bass, testimony + +On line 15013: + Financial Market + Participants, January + transcript, pp. Herbert + + M. Sandler, "Comment + on Joint ANPR for Proposed + Revision to the + +On line 15013: + the Comptroller of + the Currency, Federal + Deposit Insurance + +On line 15015: + and Office of Thrift + Supervision, January + Lewis Ranieri, interview + +On line 15017: + Angelo Mozilo, + email to Eric Sieracki, + April re: 1Q2006 Earnings. + +On line 15021: + Mozilo, email to David + Sambol, April subject: sub-prime + seconds. David Sambol, + +On line 15021: + Angelo Mozilo, + April re: Sub-prime seconds (cc + Kurland, McMurray, and Bartlett). + +On line 15023: + to David Sambol, April + subject: re: Sub-prime seconds + (cc Kurland, McMurray, and + +On line 15027: + Federal Reserve + document obtained by FCIC, + produced November + +On line 15031: + FDIC, October John + Dugan, testimony before + the FCIC, Hearing on + + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 15033: + of the Currency, + April transcript, Sabeth Siddique, + interviews by FCIC, + +On line 15037: + interview. Mortgage + Insurance Companies of + America, quoted + +On line 15039: + Mortgages; Firms Want More + Loan Restrictions," Washington + Post, August William A. + +On line 15039: + before the Senate + Subcommittee on Housing + and Transportation and + +On line 15043: + September Siddique, + interviews, October and + September Consumer + +On line 15049: + June transcript. Siddique, + interview, October Bies, + interview. There is + +On line 15049: + finance assets. The + FCIC’s estimate is based on + the amount of structured + +On line 15049: + unrated agency + RMBS, along with an estimate + for structured finance + +On line 15049: + not rated by Moody’s, + using as sources Fannie Mae + and Freddie Mac, Bloomberg, + + American CoreLogic Loan + Performance, Fitch Ratings, Moody’s, + S&P, Thomson Reuters, and + +On line 15051: + Greenspan, testimony + before the FCIC, Hearing on + Subprime Lending and + +On line 15051: + Enterprises (GSEs), + day session The Federal + Reserve, April transcript, + +On line 15053: + news release, second + quarter, Second-quarter figures + were an improvement + +On line 15055: + Mark Zandi, written + testimony for the FCIC, + First Public Hearing + +On line 15055: + the FCIC, day panel + Financial Crisis Impacts + on the Economy, + +On line 15059: + Warren Peterson, + testimony before the + FCIC, Hearing on the + +On line 15061: + and Community + Real Estate, September + transcript, pp. Warren + +On line 15076: + of Systemic Risk in + the Financial Crisis, day + session September + +On line 15078: + Greenspan, "The Evolution + of Banking in a Market + Economy," remarks + +On line 15080: + Private Enterprise + Education, Arlington, + Virginia, April Charles Calomiris + + and Gary Gorton, "The + Origins of Banking Panics: + Models, Facts, and Bank + + Regulation," in + Calomiris, U.S. Bank Deregulation + in Historical + +On line 15080: + Perspective (Cambridge: + Cambridge University Press, + pp. Prior to the + + end of the Civil + War, banks issued notes instead + of holding deposits. + +On line 15082: + Runs on that system + occurred in and (ibid., pp. R. + Alton Gilbert, "Requiem + + for Regulation + Q: What It Did and Why It + Passed Away," Federal + +On line 15084: + Reserve Bank of St. + Louis Review no. (February + FCIC, "Preliminary + +On line 15088: + Staff Report: Shadow + Banking and the Financial + Crisis," May pp. Arthur + +On line 15088: + Financial Services + Industry, Competition, + Consolidation, + +On line 15090: + Frederic S. Mishkin, + "Asymmetric Information + and Financial Crises: + +On line 15090: + Financial Markets + and Financial Crises, ed. R. + Glenn Hubbard (Chicago: + +On line 15090: + of Chicago Press, p. + Wilmarth, "The Transformation of + the U.S. Financial + +On line 15092: + Services Industry, + p. Federal Reserve Board + Flow of Funds Release, + +On line 15094: + table L.208. Accessed + December Kenneth Garbade, + "The Evolution of + +On line 15094: + Federal Reserve + Bank of New York Economic + Policy Review + +On line 15094: + Federal Reserve + Bank of New York uses the + repo market: it + + sets interest rates + by borrowing Treasuries from + and lending them to + +On line 15096: + firms, many of which are + units of commercial banks. Alan + Blinder, interview + +On line 15098: + by FCIC, September + Paul Volcker, interview + by FCIC, October + +On line 15100: + "International + Financial Risk Management," + remarks before the + +On line 15102: + Foreign Relations, + November Richard C. Breeden, + interview by FCIC, + +On line 15104: + October Wilmarth, "The + Transformation of the U.S. + Financial Services + +On line 15106: + Industry, p. and + n. Thereafter, banks were only + required to lend on + +On line 15106: + terms based upon what + the market was offering. + They also could not + +On line 15106: + lend more than of their + capital to one subsidiary + or more than to all + +On line 15106: + Dealing in Certain + Securities," Federal + Reserve Bulletin no. + +On line 15106: + Bank-Ineligible Activities + of Subsidiaries of Bank Holding + Companies Engaged + +On line 15108: + in Securities," + Federal Register no. + (Dec. Julie L. Williams and + +On line 15110: + of Banking: Looking + to the Future," Business Lawyer + (May Fed Chairman Alan + +On line 15110: + Financial Services, + H.R. the Financial Services + Competitiveness + +On line 15114: + 105th Cong., 1st sess., May + FCIC staff calculations. FCIC + staff calculations. + +On line 15116: + staff calculations + using First American/CoreLogic, National + HPI Single-Family Combined (SFC). + +On line 15118: + before showed no year-over-year + national house price decline. + First American/CoreLogic, National + +On line 15120: + HPI Single-Family Combined (SFC). + For a general overview + of the banking and + + thrift crisis of the + 1980s, see FDIC, History of + the Eighties: Lessons for + +On line 15120: + the Future, vol. An + Examination of the + Banking Crises of the + + 1980s and Early 1990s + (Washington, DC: Federal + Deposit Insurance + +On line 15128: + and federally + insured banks with billion in + assets and savings + +On line 15128: + closed or received FDIC + or FSLIC assistance. See + Federal Deposit + +On line 15132: + (Aug. pp. William K. Black, + Associate Professor of + Economics and Law, + +On line 15132: + the Impact of the + Financial Crisis, session + Overview of Mortgage + +On line 15132: + September p. And + see Kitty Calavita, Henry + N. Pontell, and Robert + +On line 15132: + Till-man, Big Money + Crime: Fraud and Politics in + the Savings and Loan + +On line 15134: + University of + California Press, p. FDIC, + History of the + +On line 15136: + Financial System: + Recommendations for Safer, + More Competitive + +On line 15138: + Subcommittee on + Economic Stabilization + of the Committee + +On line 15138: + Finance, and Urban + Affairs on the "Economic + Implications of + +On line 15144: + History of the + Eighties: Lessons for the Future, + George G. Kaufman, "Too + + Big to Fail in U.S. + Banking: Quo Vadis1" in Too Big + to Fail: Policies and + +On line 15146: + Bailouts, ed. Benton E. + Gup (Westport, CT: Praeger, p. FCIC, + "Preliminary Staff + +On line 15148: + hearing before the + House Committee on Banking, + Housing, and Urban + +On line 15163: + to Escape Attempt + at Tighter Regulation," Wall + Street Journal, June and + +On line 15165: + Armando Falcon + Jr., written testimony + for the FCIC, Hearing + +On line 15165: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 15167: + Federal Housing + Enterprise Oversight, April p. + Wayne Passmore, "The GSE + +On line 15167: + Ambiguity," + Federal Reserve Board Staff + Working Paper See + +On line 15169: + Estimates of the + Subsidies to the Housing + GSEs," April Federal + +On line 15171: + Report to Congress, + pp. Fannie Mae Charter Act + of §309(h), codified + +On line 15171: + Federal Housing + Enterprises Financial + Safety and Soundness + +On line 15171: + and replaced it with + more elaborate provisions. + Currently, the GSEs + +On line 15171: + borrowers as those + with income at or below + median income + +On line 15179: + on the National + Homeownership Strategy," + June President George + + W. Bush, "President’s + Remarks to the National + Association + +On line 15181: + Center, Columbus, Ohio, + October Andrew Cuomo, + interview by FCIC, + +On line 15183: + Mudd, testimony + before the FCIC, Hearing on + Subprime Lending and + +On line 15191: + Government-Sponsored Enterprises + (GSEs), day session Fannie Mae, + April transcript, pp. Notes + +On line 15195: + Chapter Richard Syron, + interview by FCIC, August + Senate Lobbying + +On line 15197: + Act Database (www.senate.gov/legislative/Public_Disclosure/ LDA_reports.htm); + figures on employees and + PACs compiled by the + +On line 15201: + April p. James Lockhart, + written testimony for + the FCIC, Hearing on + + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 15205: + Martinez, interview + by FCIC, September June E. + O’Neill, remarks before + +On line 15207: + Federal Housing + Finance Agency, Report to + Congress, tables and + +On line 15213: + Financial Markets + Association (SIFMA), + US ABS Outstanding. + +On line 15217: + interview by FCIC, + August Gillian Tett, Fool’s Gold: How + the Bold Dream of a + +On line 15217: + at J. P. Morgan + Was Corrupted by Wall Street + Greed and Unleashed a + +On line 15219: + Catastrophe (New York: + Free Press, pp. Emmanuel Derman, + interview by FCIC, + +On line 15225: + interview. Vincent + Reinhart, interview by FCIC, + September Lindsey, + +On line 15227: + futures contract is + a bilateral contract + in which one party, + + the long position, + is compensated if the + price or index or + + rate underlying + the contract rises while the + other party, the + +On line 15227: + is compensated + if it goes down. An options + contract grants the right + +On line 15227: + commodity or + financial instrument at + a particular + + price in the future; + the option holder derives + a benefit if + +On line 15227: + his or her favor. + In a swaps contract, the two + parties exchange streams + +On line 15229: + different benchmarks. + Securities options are + regulated by + +On line 15231: + Trading Commission, + Exemption for Certain Swap + Agreements, Final Rule, + +On line 15233: + the House Committee + on Banking and Financial + Services, 105th Cong., 2nd + +On line 15237: + System," GGD-94-133 (Report + to Congressional Requesters), + May Commodity + +On line 15237: + Trading Commission, + "Division of Enforcement" + (www.cftc.gov/anr/an-renf98.htm). + +On line 15239: + Statement by Treasury + Secretary Robert E. Rubin, + Federal Reserve + +On line 15239: + Chairman Alan Greenspan, and + Securities and Exchange + Commission Chairman + +On line 15241: + May Fed Chairman Alan + Greenspan, "The Regulation of + OTC Derivatives," + +On line 15241: + the House Committee + on Banking and Financial + Services, 105th Cong., 2nd + +On line 15243: + GAO, "Long-Term Capital + Management: Regulators + Need to Focus Greater + +On line 15243: + Systemic Risk," GAO/GGD-00-3 + (Report to Congressional + Requesters), October + +On line 15243: + of such contracts. Its + calculation is based on + the value of the + +On line 15243: + or rate that the swap + is based on. It therefore may + be of limited + + use in measuring + the potential exposure + of the parties to + +On line 15243: + For example, an + interest rate swap based on + changes in interest + +On line 15243: + on a million loan + would likely involve only + a small percentage + +On line 15245: + million notional + amount. On the other hand, price + changes on an oil swap + +On line 15245: + based on million worth + of oil could be even more than + the notional amount, + + depending on the + volatility in oil prices. For + credit default swaps, + +On line 15245: + detail later in + this volume, the notional + amount is usually + + a close measure of + the potential financial + exposure of the + +On line 15253: + issuer or seller + of the swap. Notes to Chapter + Fed Chairman Alan Greenspan, + +On line 15253: + Management," prepared + testimony before the + House Committee on + +On line 15255: + Financial Services, + 105th Cong., 2nd sess., October + Fed Chairman Alan Greenspan, + +On line 15255: + Futures Industry + Association, Boca + Raton, Florida, + +On line 15257: + the Commodity + Exchange Act," report of the + President’s Working + +On line 15259: + Markets, November + Gross market value is the + current price at which + +On line 15259: + sold or replaced on + the market. As such, that amount + reflects the current + +On line 15259: + a contract but does + not reflect the possible + future exposure + +On line 15263: + Greenspan, testimony + before the FCIC, Hearing on + Subprime Lending and + +On line 15263: + Government-Sponsored Entities (GSEs), + day session The Federal + Reserve, April transcript, + +On line 15265: + on Subprime Lending + and Securitization + and Government-Sponsored Entities + +On line 15267: + Senior Management, + April transcript, pp. Lawrence Summers, + interview by FCIC, + +On line 15271: + International + Economics, p. Final Rule—Amendment + to Regulations + +On line 15275: + on Basel, pp. For more + on derivatives, see FCIC, + "Preliminary Staff + +On line 15277: + June Warren Buffett, + testimony before the + FCIC, Hearing on the + +On line 15277: + Credit Ratings, the + Investment Decisions Made + Based on Those Ratings, + +On line 15279: + Credit Ratings and + the Financial Crisis, June + transcript, pp. Eric + +On line 15279: + Department, written + testimony for the FCIC, + Hearing on the Role + +On line 15279: + Supervisors and + Regulators, July p. + Rochelle Katz, State of New + +On line 15281: + Bertil Lundqvist, Skadden, Arps, + Slate, Meagher Flom, LLP, June Data + provided by AIG + +On line 15283: + International + Settlements, semiannual + OTC derivatives + +On line 15285: + CDS in September + was estimated to be + trillion at a time + +On line 15285: + was about trillion of + private-sector debt (written + testimony for + +On line 15287: + the FDIC, July p. + "AIGFP also participates + as a dealer in + +On line 15287: + wide variety of + financial derivatives + transactions" (AIG, Form + +On line 15287: + p. AIG’s notional + derivatives outstanding + were trillion at the + +On line 15287: + trillion of credit + derivatives, trillion of + currency swaps, and + +On line 15289: + staff calculations + using data from Office + of the Comptroller + +On line 15297: + call reports. Data + provided to the FCIC by + Goldman Sachs. Chapter + +On line 15300: + legislation, some + states had voluntarily + opened themselves up to + + out-of-state banks. FDIC, + History of the Eighties: + Lessons for the Future, + +On line 15300: + Examination + of the Banking Crises of the + 1980s and Early 1990s + +On line 15302: + DC: FDIC, p. These were + the largest banks as of See FCIC, + "Preliminary Staff + +On line 15306: + August p. Data + from SNL Financial (www.snl.com/). + Public Law 104-208, sec. + +On line 15308: + U.S.C. law in effect + as of January Arthur Levitt, + interview by FCIC, + +On line 15316: + October Notes to + Chapter John D. Hawke and John + Dugan, testimony + +On line 15316: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 15318: + the Comptroller of + the Currency, April transcript, + pp. Fed Vice Chairman + +On line 15318: + W. Ferguson Jr., + "The Future of Financial + Services—Revisited," remarks at the + +On line 15318: + Financial Services + Conference, University + of Massachusetts, + +On line 15320: + Fed Chairman Alan Greenspan, + "Government Regulation + and Derivative + +On line 15320: + at the Financial + Markets Conference of the + Federal Reserve + +On line 15322: + Bank of Atlanta, Coral + Gables, Florida, February + Richard Spillenkothen, "Notes on the + +On line 15322: + years preceding the + financial crisis by a + former director + +On line 15324: + and regulation + at the Federal Reserve + Board to May p. See + +On line 15324: + Department of the + Treasury, Modernizing the + Financial System + +On line 15324: + of arbitrary or + inflexible behavior. + Agency pluralism, + +On line 15324: + other hand, may be + useful, since it can bring to + bear on general + + bank supervision + the different perspectives + and experiences + +On line 15324: + each regulator, + and it subjects each one, where + consultation and + +On line 15326: + required, to the checks + and balances of the others’ + opinion." Fed Chairman + +On line 15326: + Greenspan, statement before + the Senate Committee on + Banking, Housing, and + +On line 15326: + 103rd Cong., 2nd sess., March + reprinted in the Federal + Reserve Bulletin, May + +On line 15330: + Governors of the + Federal Reserve System, + F.Supp. (D.D.C. Kathleen Day, + +On line 15330: + Depression-Era Law about to Be + Rewritten, the Future Remains + Unclear," Washington + +On line 15334: + in "The Making of + a Law," ABA Banking Journal, + December The two-year + +On line 15334: + in section 4(a)(2) of + the Bank Holding Company + Act. The Fed could have + +On line 15336: + three one-year extensions + of that exemption. FCIC staff + computations based + +On line 15336: + includes insurance + companies, commercial banks, + securities and + +On line 15338: + bankers and brokers. U.S. + Department of the Treasury, + Modernizing the + +On line 15338: + System (February + Fed Chairman Alan Greenspan, "H.R. the + Financial Services + +On line 15338: + the House Committee + on Banking and Financial + Services, 105th Cong., 1st + +On line 15340: + May Katrina + Brooker, "Citi’s Creator, Alone with + His Regrets," New York + +On line 15344: + Times, January John + Reed, interview by FCIC, March + FDIC Institution + +On line 15346: + Directory; SNL + Financial. Fed Governor + Laurence H. Meyer, + +On line 15346: + Implications of + Financial Modernization + Legislation for + +On line 15348: + Women in Housing + and Finance, Washington, D.C., + December Ben S. + +On line 15348: + Financial Crisis, + day session The Federal + Reserve, September + +On line 15352: + Review Fed Chairman + Alan Greenspan, "Lessons from the Global + Crises," remarks before + +On line 15354: + DC, September David + A. Marshall, "The Crisis of + and the Role of the + +On line 15356: + Chicago, Economic + Perspectives (1Q Commercial + and industrial + +On line 15356: + at all commercial + banks, monthly, seasonally + adjusted, from the + +On line 15356: + staff calculation + of average change in loans + outstanding over any + +On line 15358: + consecutive months + in and Franklin R. Edwards, "Hedge + Funds and the Collapse + +On line 15366: + Management," Journal + of Economic Perspectives + Notes to Chapter "Hedge + +On line 15366: + of Long-Term Capital + Management," Report of the + President’s Working + +On line 15368: + Group on Financial + Markets, April p. Edwards, "Hedge + Funds and the Collapse + +On line 15370: + of Long-Term Capital + Management," pp. and Bloomberg. Ibid., + pp. Roger Lowenstein, When + + Genius Failed: The Rise + and Fall of Long-Term Capital + Management (New York: + +On line 15374: + "Hedge Funds, Leverage, and + the Lessons of Long-Term Capital + Management," pp. William + +On line 15374: + McDonough, president of + the Federal Reserve Bank + of New York, statement + +On line 15374: + the House Committee + on Banking and Financial + Services, 105th Cong., 2nd + +On line 15376: + sess., October GAO, + "Long-Term Capital Management: + Regulators Need + +On line 15376: + Greater Attention on + Systemic Risk," GAO/GGD-00-3 (Report + to Congressional + +On line 15380: + and the Lessons of Long-Term + Capital Management," pp. + Lowenstein, When Genius + +On line 15382: + the House Committee + on Banking and Financial + Services, October + +On line 15384: + Brimmer, "Distinguished + Lecture on Economics in + Government: Central + +On line 15384: + Markets," Journal of + Economic Perspectives, no. + (Spring (lecture by a + +On line 15384: + interventions in + and and concluding that the + Fed had consciously + + assumed a "strategic + role as the ultimate source + of liquidity + +On line 15384: + Federal Reserve + Bank of New York Economic + Policy Review + +On line 15390: + interview by FCIC, + September Fed Chairman Alan + Greenspan, "Do efficient + + financial markets + mitigate financial crises1" + remarks before the + +On line 15390: + Conference of the + Federal Reserve Bank of + Atlanta, October + +On line 15396: + "Hedge Funds, Leverage, and + the Lessons of Long-Term Capital + Management," p. Ibid. + +On line 15402: + Ibid. Philip Goldstein, et + al. v. SEC, Opinion, Case No. + 04-1434 (D.C. Cir. June Time, + +On line 15402: + Bob Woodward, Maestro: + Greenspan’s Fed and the American + Boom (New York: Simon + +On line 15406: + Board of Governors + of the Federal Reserve + System, Federal + +On line 15406: + Flow of Funds Accounts + of the United States, 4th Qtr. + p. (Table L.213, line + +On line 15408: + SEC Chairman William H. + Donaldson, "Testimony + Concerning Global + +On line 15408: + Settlement," before + the Senate Committee on + Banking, Housing and + +On line 15410: + Affairs, 108th Cong., 1st + sess., May SEC, "SEC Fact Sheet on + Global Analyst + +On line 15410: + Research Settlements," + April Financial Industry + Regulatory + +On line 15412: + news release, "NASD Fines + Piper Jaffray Million for IPO + Spinning," July Arthur + +On line 15412: + Wilmarth Jr., "Conflicts of + Interest and Corporate + Governance Failures + +On line 15412: + Banks During the Stock + Market Boom of the 1990s: The + Cases of Enron + +On line 15414: + Theory Working + Paper Fed Chairman Alan Greenspan, + "International + +On line 15416: + Services—Revisited." Spillenkothen, "Notes on the + performance of prudential + supervision in + +On line 15418: + the years preceding + the financial crisis," p. + "First the Put; Then the + +On line 15426: + p. Notes to Chapter + Fed Chairman Alan Greenspan, "Risk and + Uncertainty in + +On line 15426: + at the Meetings of + the American Economic + Association, + +On line 15426: + Diego, California, + January See also Fed + Governor Ben S. + +On line 15428: + Association + of Business Economics, New + York, October Fed + +On line 15428: + Alan Greenspan, "Reflections + on Central Banking," remarks + at a symposium + +On line 15430: + Federal Reserve + Board of Kansas City, Jackson + Hole, Wyoming, August Lawrence + +On line 15432: + Lindsey, interview + by FCIC, September The NYSE + decided in to + +On line 15434: + be publicly traded. + See Andrew von Norden - + flycht, "The Demise of + + the Professional + Partnership1 The Emergence and + Diffusion of Publicly-Traded + +On line 15436: + Peter Solomon, written + testimony for the FCIC, + First Public Hearing + +On line 15438: + Financial Market + Participants, January + p. Brian R. Leach, + +On line 15440: + by FCIC, March p. Jian + Cai, Kent Cherny, and Todd Milbourn, + "Compensation and + +On line 15440: + Banking and Finance," + Federal Reserve Bank of + Cleveland Economic + +On line 15442: + Frydman and Raven + E. Saks, "Historical Trends + in Executive + +On line 15444: + "Compensation and + Risk Incentives in Banking + and Finance." Goldman + +On line 15448: + Sachs, and 10-K; Morgan + Stanley, 10-K; Merrill Lynch, and + 10-K. "Gutfreund’s Pay + +On line 15452: + Is Cut," New York Times, + December Merrill Lynch, Proxy + Statement," p. Goldman + +On line 15454: + of Shareholders," March + p. Blankfein received base salary + and a year-end bonus of + +On line 15458: + Brothers, "Proxy Statement + for Year-end p. JP Morgan Chase, + Proxy Statement," p. New + + York State Office of + the State Comptroller, "New York + City Securities + +On line 15458: + Industry Bonus Pool," + February The bonus pool is + for securities + +On line 15460: + (NAICS employees who + work in New York City. "Banks Set + for Record Pay, Top Firms + +On line 15462: + Award Billion for Up + WSJ Study Finds," WSJ.com, January + Sandy Weill, interview + +On line 15464: + by FCIC, October + Lord Adair Turner, interview + by FCIC, November + +On line 15466: + Financial Crisis, + day session The Federal + Reserve, September + +On line 15468: + p. Testimony + of Armando Falcon Jr., + former director + +On line 15468: + Federal Housing + Enterprise Oversight, written + testimony for + +On line 15468: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 15470: + Federal Housing + Enterprise Oversight, April pp. + Sheila C. Bair, written + +On line 15470: + Public Hearing of + the FCIC, day panel Current + Investigations + +On line 15472: + the Financial Crisis—Federal + Officials, January p. + Mary L. Schapiro, written + +On line 15472: + Public Hearing of + the FCIC, day panel Current + Investigations + +On line 15474: + the Financial Crisis—Federal + Officials, January p.18. + Bloomberg LLC, Financial + +On line 15474: + for JPM, Citigroup, + Bank of America, Goldman + Sachs, and Lehman Brothers. + +On line 15476: + SEC filings 10-K and + 10-Q; see the 10-K, p. Total + Assets and Fannie + +On line 15478: + held by Third Parties; + Federal Housing Finance + Agency, Report to + +On line 15482: + staff calculations. + SNL Financial Database and + SEC public filings. + +On line 15500: + John Snow, interview + by FCIC, October Ibid. Notes + to Chapter Chapter + +On line 15503: + the Impact of the + Financial Crisis—State of Nevada, + session The Impact + + of the Financial + Crisis on Nevada Real + Estate, September + +On line 15505: + p. Tom C. Putnam, + president, Putnam Housing + Finance Consulting, + +On line 15505: + FCIC, Hearing on the + Impact of the Financial + Crisis—Sacramento, session Mortgage + +On line 15505: + Fraud and Predatory + Lending in the Sacramento + Region, September + +On line 15507: + Board of Governors + of the Federal Reserve + System, Federal + +On line 15507: + of Funds Accounts of + the United States, release date, + December Table + + L.1: Credit Market + Debt Outstanding, and Table + L.126: Issuers of Asset-Backed + +On line 15509: + Securities (ABS) + Jim Callahan, interview by + FCIC, October Lewis + +On line 15511: + chairman of Salomon + Brothers, interview by FCIC, + July Federal + + Deposit Insurance + Corporation, "Managing + the Crisis: The FDIC + +On line 15517: + RTC Experience" + (August pp. Ibid., Ibid., pp. The + figures throughout this + +On line 15517: + calculations, based + on analysis of loan-level + data from Blackbox + +On line 15517: + PDS database; Moody’s CDO + EMS database; and Citigroup, + Fannie Mae Term Sheet, + +On line 15519: + Brad S. Karp, counsel + for Citigroup, letter to + FCIC, November p. + +On line 15521: + of its tranches are + as given by Standard Poor’s. + Technically, this + +On line 15521: + tranches below the + equity tranche, also held + by Citigroup and + +On line 15523: + fund. Fed Chairman Ben + S. Bernanke, "The Community + Reinvestment Act: Its + +On line 15523: + New Challenges," speech at + the Community Affairs + Research Conference, + +On line 15527: + Glenn Canner and Wayne + Passmore, "The Community + Reinvestment Act and + + the Profitability + of Mortgage-Oriented Banks," Working Paper, + Federal Reserve + +On line 15527: + and moderate-income + borrowers have income that + is at most of area + +On line 15529: + Alan Greenspan, "Economic + Development in Low- and + Moderate-Income Communities," + +On line 15533: + John Dugan, interview + by FCIC, March Lawrence B. Lindsey, + interview by FCIC, + +On line 15535: + "The Evolution of + the Subprime Mortgage Market," + Federal Reserve + +On line 15537: + of St. Louis Review + no. (January/February Southern Pacific + Funding Corp, Form 8-K, + +On line 15539: + as of according + to FCIC staff calculations + using data from + +On line 15539: + The Mortgage Market + Statistical Annual, + vol. The Primary + +On line 15539: + Md.: Inside Mortgage + Finance Publications, p. + "Top B&C Lenders in Thomas + +On line 15539: + for the Effects of + Securitization: Tools + for Analysis," Moody’s + +On line 15541: + Research, October + "FDIC Announces Receivership of + First National Bank + +On line 15541: + Federal Deposit + Insurance Corporation + and Office of the + +On line 15543: + Comptroller of the + Currency joint press release, + September FCIC staff + +On line 15545: + using data from + Inside MBS ABS. See Marc Savitt, + interview by FCIC, + +On line 15549: + November Henry + Cisneros, interview by FCIC, + October Glenn Loney, + +On line 15551: + interview by FCIC, + April Senate Committee on + Banking, Housing, and + +On line 15551: + Regulatory + Improvement Act of 103rd Cong., + 1st sess., October + +On line 15565: + S. Rep. p. Ibid., p. + Notes to Chapter U.S.C. 1639(h) Loans + were subject to HOEPA + + only if they hit + the interest rate trigger + or fee trigger: i.e., + +On line 15565: + rate for the loan was + more than percentage points above + the yield on Treasury + +On line 15565: + a comparable + maturity or if the + total charges paid by + +On line 15565: + borrower at or + before closing exceeded + or of the loan amount, + +On line 15569: + on Banking, Housing, + and Urban Affairs, S. Rep. + p. Ibid., p. Board of + + Governors of the + Federal Reserve System + and Department of + + Housing and Urban + Development, "Joint Report + Concerning Reform + +On line 15571: + the Real Estate + Settlement Procedures Act" + (July p. Griffith + +On line 15571: + and Community + Affairs, Board of Governors + of the Federal + + Reserve System, "To + the Officers and Managers + in Charge of Consumer + +On line 15573: + GAO, "Large Bank Mergers: + Fair Lending Review Could Be + Enhanced with Better + +On line 15575: + Honorable Bernard Sanders, + House of Representatives), + November p. Fed + +On line 15577: + and Community + Affairs, Board of Governors + of the Federal + +On line 15577: + memorandum to + the Committee on Consumer + and Community + +On line 15577: + concerning the Board’s + Report to the Congress on + the Truth in Lending + +On line 15579: + Estate Settlement + Procedures Acts," April p. Board + of Governors of + +On line 15579: + Deposit Insurance + Corporation, Office of + the Comptroller of + +On line 15579: + Thrift Supervision, + "Interagency Guidance + on Subprime Lending" + +On line 15583: + quotation, p. U.S. + Department of the Treasury + and U.S. Department + +On line 15587: + president and chief + executive officer, + Nevada Fair Housing + +On line 15587: + Inc., testimony + before the FCIC, Hearing on + the Impact of the + +On line 15587: + Financial Crisis—State of + Nevada, session The Impact + of the Financial + +On line 15587: + on Nevada Real + Estate, September transcript, + p. 242–43.See also Kevin + +On line 15587: + Reinvestment Coalition, + written testimony for + the FCIC, Hearing on + +On line 15587: + Fraud and Predatory + Lending in the Sacramento + Region, September + +On line 15587: + pp. See also his + testimony at the same + hearing, transcript, pp. + +On line 15587: + counsel, National + Consumer Law Center, Inc., and + Margot F. Saunders, + +On line 15587: + National Consumer + Law Center, Inc., interview + by FCIC, September + +On line 15589: + Thompson and Margot + F. Saunders, both of counsel, + National Consumer + +On line 15591: + Center, interview + by FCIC, September Gary Gensler, + interview by FCIC, + +On line 15593: + Bair, testimony + before the FCIC, First Public + Hearing of the FCIC, + +On line 15593: + day panel Current + Investigations into + the Financial Crisis—Federal + +On line 15597: + January transcript, + p. Sheila Bair, interview by + FCIC, March Sandra F. + +On line 15601: + by FCIC, April pp. Bair, + interview. Treasury and HUD, + "Curbing Predatory + +On line 15610: + Lending," p. Chapter + Figures represented the + compound average + +On line 15610: + staff calculations + from CoreLogic National Home Price + Index, Single-Family Combined + +On line 15612: + CoreLogic Loan Performance + HPI August Inside Mortgage + Finance, The Mortgage + +On line 15612: + Annual, vol. The + Primary Market (Bethesda, + Md.: Inside Mortgage + +On line 15612: + Finance, p. "Mortgage + Originations by Product." + Federal Reserve + +On line 15620: + press release, May Notes + to Chapter Fed Governor + Ben S. Bernanke, "The Great + +On line 15620: + Association, + Washington, D.C., February + See also Olivier + +On line 15620: + and John Simon, "The + Long and Large Decline in U.S. + Output Volatility," + +On line 15624: + Brookings Papers on + Economic Activity, + no. Fed Governor + +On line 15624: + "Deflation: Making + Sure ‘It’ Doesn’t Happen Here," + remarks before the + +On line 15626: + D.C., November FCIC + staff calculations from Board + of Governors of + +On line 15626: + Rate release, 3-month AA + Nonfinancial Commercial + Paper Rate, WCPN3M + +On line 15628: + U.S. Department of + Treasury, Daily Treasury Yield + Curve Rates, to Present. This + + example assumes + that the homeowner is able + to come up with a + +On line 15628: + payment to cover + of the higher-priced home. Here, the + difference would be + +On line 15630: + Agency, "Data on + the Risk Characteristics + and Performance of + +On line 15630: + and Financed in the + Secondary Market" (September + Table 2a: Share of + +On line 15630: + from through and Acquired + by the Enterprises or + Finances with Private-Label MBS + + by Loan-to-Value Ratio and + Borrower FICO Score at + Origination, Adjustable-Rate + +On line 15630: + Prime borrowers are + defined as those whose mortgages + are financed by the + +On line 15632: + government-sponsored + enterprises. Yuliya Demyanyk + and Otto Van Hemert, + +On line 15632: + (December table + Loan Characteristics at + Origination for + +On line 15634: + Different Vintages, + p. FCIC staff calculations + from CoreLogic/First American, + +On line 15634: + Price Index for Single-Family + Combined State HPI data, last + updated August + +On line 15634: + to the FCIC by CoreLogic. + Staff calculations of all + annual growth rates + +On line 15638: + Rates for the US to + Present. Brian K. Bucks, Arthur B. + Kennickell, and Kevin + + B. Moore, "Recent Changes + in US Family Finances: + Evidence from the + +On line 15638: + Survey of Consumer + Finances," Federal Reserve + Bulletin Tables 8A + +On line 15640: + A8. Congressional + Budget Office, "Housing Wealth + and Consumer Spending," + +On line 15644: + p. Mortgages may have + been refinanced more than once + in that year. FCIC staff + +On line 15644: + updated data + provided by Alan Greenspan and + James Kennedy, whose data + +On line 15644: + in "Sources and Uses + of Equity Extracted + from Homes," Finance and + +On line 15646: + Discussion Series, + Federal Reserve Board, 2007-20 + (March CBO, "Housing Wealth + +On line 15648: + and Consumer Spending," + p. Fed Chairman Alan Greenspan, "The + Economic Outlook," + +On line 15650: + the Congress," prepared + testimony before the + House Committee on + +On line 15656: + Bart McDade, interview + by FCIC, April Presentation + to the Lehman Board of + +On line 15660: + lenders during this time + period. New Century, + 10-K, March p. Final + +On line 15660: + J. Missal, Bankruptcy + Court Examiner, in RE: + New Century TRS + +On line 15662: + Chapter Case No. 07-10416 + (KJC), (Bankr. D.Del.), February p + New Century, 10-K, + +On line 15666: + quoted in Erick + Bergquist, "Under Scrutiny, Ameriquest + Details Procedures," + +On line 15674: + from Mortgage Market + Statistical Annual, + Notes to Chapter Lewis + +On line 15676: + M. Lacko and Janis + K. Pappalardo, "The Effect + of Mortgage Broker + +On line 15678: + Commission Bureau + of Economics Staff Report + (February p. Jay + +On line 15678: + the Impact of the + Financial Crisis—State of Nevada, + session The Impact + + of the Financial + Crisis on Nevada Real + Estate, September + +On line 15680: + Brian Bucks and Karen + Pence, "Do Borrowers Know Their + Mortgage Terms1" Journal + +On line 15686: + Capability," + report prepared for the FCIC, + February p. FCIC + +On line 15686: + estimates based on + analysis of Blackbox, S&P, + and IP Recovery, + +On line 15686: + Burton Hollifield, + and Patrik Sandas, in their + paper, "The Role of + +On line 15688: + Mortgage Brokers in + the Subprime Crisis," April William + C. Apgar and Allen + +On line 15688: + Organization + of Housing Finance and the + Changing Role of Community-Based + + Organizations," + working paper (Joint Center + for Housing Studies, + +On line 15690: + University, May + p. Herb Sandler, interview + by FCIC, September + +On line 15694: + Brokers (August pp. + Jamie Dimon, testimony + before the FCIC, First + +On line 15694: + of the FCIC, panel + Financial Institution + Representatives, + +On line 15698: + summary of the + National Appraisal Survey, + p. Dennis J. Black, + +On line 15700: + FCIC, Hearing on the + Impact of the Financial + Crisis— Miami, + +On line 15704: + FCIC, Hearing on the + Impact of the Financial + Crisis— Sacramento, + +On line 15704: + Fraud and Predatory + Lending in the Sacramento + Region, September + +On line 15708: + on the Impact of + the Financial Crisis— Greater + Bakersfield, session + +On line 15710: + Market, September + transcript, p. Complaint, People + of the State of New + +On line 15710: + Corporation and + First American eAppraiseIT (N.Y. Sup. + Ct. November pp. + +On line 15712: + Martin Eakes, quoted + in Richard A. Oppel Jr. and + Patrick McGeehan, "Along with a + +On line 15714: + Trouble1" New York Times, + October Pam Flaherty, + quoted in Erick + +On line 15716: + Settles FTC Charges against + the Associates Record-Setting Million + for Subprime Lending + +On line 15722: + Loan Abuse," The New York + Times, May Federal Reserve + Board internal staff + +On line 15724: + Predatory Lending," + December pp. Federal + Reserve Board, Morning + +On line 15724: + Equity Lending, + July opening remarks by + Governor Gramlich, + +On line 15728: + Alvarez, interview + by FCIC, March Alan Greenspan, written + testimony for + +On line 15728: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 15730: + (GSEs), day one, session + The Federal Reserve, April + p. Alan Greenspan, quoted + +On line 15730: + David Faber, And Then the + Roof Caved In: How Wall Street’s Greed + and Stupidity + +On line 15732: + Capitalism to + Its Knees (Hoboken, N.J.: Wiley, + pp. "Truth in Lending," + +On line 15740: + (quotation), Notes to + Chapter Robert B. Avery, Glenn + B. Canner, and Robert + +On line 15740: + under HMDA and + Its Application in Fair + Lending Enforcement," + +On line 15744: + by FCIC, March Sheila Bair, + testimony before the + FCIC, Hearing on Too + +On line 15744: + of Systemic Risk in + the Financial Crisis, day + session Federal + +On line 15746: + Deposit Insurance + Corporation, September + transcript, p. Dolores + +On line 15748: + of Nonbank Subsidiaries + of Bank Holding Companies," + August GAO, "Consumer + +On line 15748: + Agencies Face Challenges + in Combating Predatory + Lending," GAO (Report + +On line 15756: + FCIC, April Transcript pp. + Greenspan, interview. Ibid. Edward + M. Gramlich, "Booms and + +On line 15756: + The Case of Subprime + Mortgages," Federal Reserve + Bank of Kansas City + +On line 15758: + Economic Review + Edward Gramlich, quoted in + Greg Ip, "Did Greenspan Add + +On line 15758: + Woes1 Gramlich Says Ex-Colleague + Blocked Crackdown On Predatory + Lenders Despite Growing + +On line 15758: + Street Journal, June See + also Edmund L. Andrews, + "Fed Shrugged as Subprime + +On line 15760: + York Times, December + Patricia McCoy and Margot + Saunders, quoted in + +On line 15762: + Mounted on Subprime + Loan Abuses," Washington Post, + September GAO, "Large + +On line 15762: + Fair Lending Review + Could be Enhanced with Better + Coordination," + + GAO/GDD-00-16 (Report to the + Honorable Maxine Waters + and Honorable Bernard + +On line 15764: + Agencies Face Challenges + in Combating Predatory + Lending." "Federal + +On line 15764: + Announce Pilot Project + to Improve Supervision + of Subprime Mortgage + +On line 15766: + Lending," pp. "Higher-priced + mortgage loans" are defined in + the regulations + +On line 15766: + offer rates for a + comparable transaction" + (as published by the + +On line 15768: + at least for first-lien loans + or for subordinate-lien loans. + Alvarez, interview. + +On line 15770: + Raphael W. Bostic, Kathleen + C. Engel, Patricia A. + McCoy, Anthony Pennington-Cross, + + and Susan M. Wachter, + "State and Local Anti-Predatory Lending + Laws: The Effect of + +On line 15774: + Turmoil: Causes and + Consequences," testimony + before the Senate + +On line 15776: + Housing, and Urban + Affairs, 110th Cong., 1st sess., March + p. (Exhibit B), + +On line 15778: + Lisa Madigan, written + testimony for the FCIC, + First Public Hearing + +On line 15778: + day panel Current + Investigations into + the Financial Crisis—State + +On line 15782: + Reinvestment Coalition, + "CRA Commitments" Josh Silver, + NCRC, interview by + +On line 15784: + counsel for Bank of + America, letter to FCIC, + June p. Jessica + +On line 15784: + counsel for JPMorgan Chase, + letter to FCIC, December + Brad Karp, counsel for + +On line 15784: + letter to FCIC, March + in response to FCIC request; + Wells Fargo public + +On line 15786: + data provided + by Wells Fargo to the FCIC. + Karp, letter to FCIC, + +On line 15788: + March in response to + FCIC request. Carey, letter to + FCIC, December p. + +On line 15794: + Karp, counsel for JP + Morgan, letter to FCIC, May + p. Notes to Chapter + +On line 15796: + Agency, "Data on + the Risk Characteristics + and Performance of + +On line 15796: + all loans purchased or + securitized by the GSEs + or in private-label + +On line 15798: + data provided + by Wells Fargo covered of + loans. "Orders Issued + +On line 15800: + no. (April "Statement of + the Federal Financial + Supervisory + +On line 15800: + the Community + Reinvestment Act," Federal + Register (April This + +On line 15800: + Questions and Answers + Regarding Community + Reinvestment; Notice," + +On line 15806: + Disclosure; Final + Rules," Federal Register + no. (May Division + +On line 15806: + and Community + Affairs, memorandum to + Board of Governors, + +On line 15808: + "Order Approving + the Merger of Bank Holding + Companies," August + +On line 15812: + Lloyd Brown, interview + by FCIC, February Andrew + Plepler, interview + +On line 15816: + July Assuming + AAA tranche AA tranche A tranche BBB + tranche and equity + +On line 15818: + Another Meltdown," + March p. David Jones, interview + by FCIC, October + +On line 15818: + "Emerging Problems with + the Basel Capital Accord: + Regulatory + +On line 15820: + FCIC, Hearing on the + Shadow Banking System, day + session Perspective + +On line 15828: + the Shadow Banking + System, May transcript, p. Jones, + interview. Chapter + +On line 15831: + no or limited + documentation of the + borrower’s income, + +On line 15833: + or may be for an + investor-owned property. Inside + Mortgage Finance, The + +On line 15833: + The Secondary Market + (Bethesda, MD: Inside Mortgage + Finance, p. "Mortgage + +On line 15833: + Issuance" (showing Wall + St. securitizing a + third more than Fannie + +On line 15833: + and Freddie); p. "Non-Agency + MBS Issuance by Type." FCIC staff + calculations from + +On line 15837: + private label MBS). + Charles O. Prince, interview by + FCIC, March John Taylor, + +On line 15839: + September William A. + Fleckenstein and Frederick + Sheeham, Greenspan’s Bubbles: + +On line 15841: + Age of Ignorance + at the Federal Reserve + (New York: McGraw-Hill, p. Alan + +On line 15843: + Greenspan, "The Fed Didn’t + Cause the Housing Bubble," Wall + Street Journal, March See + +On line 15843: + Ben Bernanke, "Monetary + Policy and the Housing + Bubble," speech at the + +On line 15845: + January Alan Greenspan, + testimony before the + Senate Committee + + on Banking, Housing, + and Urban Affairs, 109th Cong., + 1st sess., February + +On line 15847: + Fed Chairman Ben S. + Bernanke, "The Global Saving Glut + and the U.S. Current + +On line 15849: + Economics, Richmond, + Virginia, March Frederic Mishkin, + interview by FCIC, + +On line 15851: + Gourinchas, written + testimony for the FCIC, + Forum to Explore + +On line 15857: + February pp. Paul + Krugman, interview by FCIC, + October Notes to + +On line 15861: + Wei Li, Keith Ernst, + and Kathleen Keest, "Losing Ground: + Foreclosures in the + +On line 15861: + Cost to Homeowners," + Center for Responsible + Lending, December + +On line 15863: + p. Mortgage Market + Statistical Annual, + vol. The Primary + +On line 15865: + Market, p. "Mortgage + Originations by Product." + Christopher Mayer, Karen + +On line 15867: + p. Mortgage Market + Statistical Annual, + "Non-Agency MBS Issuance by + +On line 15873: + for First Lien Guidance," + November Inside Mortgage + Finance. Countrywide, + +On line 15875: + (showing the growth in + Countrywide’s originations). + Angelo Mozilo, + +On line 15875: + Sub-prime Seconds. See + also Angelo Mozilo, + email to Sambol, Bartlett, + +On line 15875: + and Sieracki, re: + "Reducing Risk, Reducing + Cost," May Angelo + +On line 15879: + by FCIC. September + David Sambol, interview by + FCIC, September See + +On line 15879: + Investor Conference + Call, January transcript, p. + See also Jody Shenn, + +On line 15881: + to Boost Purchase Share," + American Banker, January + Patricia Lindsay, + +On line 15881: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 15883: + Origination and + Securitization, April + p. Andrew Davidson, + +On line 15889: + 110th Cong., 1st sess., June + Email and data attachment + from former Golden + +On line 15889: + to FCIC, subject: "re: + Golden West Estimated + Volume of Adjustable + +On line 15893: + I," August Exhibits + and in Senate Permanent + Subcommittee on + +On line 15893: + exhibits, Wall Street and + the Financial Crisis: The + Role of High Risk Home + +On line 15893: + Loans, 111th Cong., 2nd sess., + April (hereafter cited as PSI + Documents), PDF pp. + +On line 15901: + available at http://hsgac.senate.gov/public/_files/Financial_Crisis/041310Exhibits.pdf. PSI + Documents, Exhibits and pp. + Ibid., pp. Ibid., p. Ibid., + +On line 15905: + "Option ARM Credit + Risk," August PSI Document + Exhibit p. PSI + +On line 15909: + Document listing + Countrywide originations + by quarter from to + +On line 15911: + a maximum CLTV + of and minimum FICO + of and July Loan + +On line 15915: + FICO). Countrywide + Loan Program Guide, dated March + Federal Reserve, + +On line 15917: + Guidance," November + pp. Angelo Mozilo, email + to Carlos Garcia + +On line 15925: + Stan Kurland), Subject: + "Bank Assets," August Notes to + Chapter Angelo + +On line 15925: + to Carlos Garcia + (cc: Kurland), subject: "re: Fw: + Bank Assets," August + +On line 15931: + p. Form 10-K, p. F-45. + See Washington Mutual, + Form 10-K, p. John Stumpf, + +On line 15933: + interview by FCIC, + September Countrywide, Form + 10-K, p. F-45; Form 10-K, + +On line 15937: + p. Form 10-K, p. Kevin + Stein, testimony before + the FCIC, Sacramento + +On line 15937: + the Impact of the + Financial Crisis–San Francisco, + day session Mortgage + +On line 15937: + Fraud and Predatory + Lending in the Sacramento + Region, September + +On line 15941: + p. Mona Tawatao, in ibid., + p. Real Estate Lending + Standards, Federal + +On line 15945: + of the Comptroller + of the Currency, Board of + Governors of the + +On line 15945: + Deposit Insurance + Corporation, Office of + Thrift Supervision, + +On line 15947: + Standards: Final Rule," + SR January Office of + the Comptroller of + +On line 15947: + Deposit Insurance + Corporation, Office of + Thrift Supervision, + +On line 15949: + Lending," October + Final Report of Michael J. + Missal, Bankruptcy Court + +On line 15951: + No. 07-10416 (KJC), (Bankr. D.Del.), + February pp. Yuliya Demyanyk + and Otto Van Hemert, + +On line 15955: + Sandler, interview. + CoreLogic loan performance data + for subprime and Alt-A + +On line 15957: + data provided + to the FCIC. Christopher Mayer, + Karen Pence, and Shane M. + +On line 15959: + no. (Winter William Black, + testimony for the FCIC, + Miami Hearing + +On line 15959: + on the Impact of + the Financial Crisis, day + session Overview of + +On line 15965: + the FCIC, January + p. This particular deal + would be described as + +On line 15965: + credit enhancement + structure; see Gary Gorton, "The + Panic of paper + + presented at the + Federal Reserve Bank of + Kansas City’s Jackson + +On line 15967: + Conference, August + p. FCIC staff estimates based + on analysis of + +On line 15967: + from BlackBox, S&P, and Bloomberg. + The prospective loan pool for this + deal originally + +On line 15967: + contained mortgages. Eight + of these had been dropped from the + pool by the time the + +On line 15967: + may differ slightly + from those reported in the + deal prospectus because + +On line 15971: + on a pool of loans. + Ibid. Federal Register + (January The rules + +On line 15975: + Comptroller of the + Currency John Hawke, remarks + before Women in + +On line 15975: + Housing and Finance, + Washington, D.C., February + attached to OCC News + +On line 15977: + Release 2002-10, p. John + Hawke, quoted in Jess Bravin and + Paul Beckett, "Friendly + + Watchdog: Federal + Regulator Often Helps + Banks Fighting Consumers," + +On line 15979: + Bar-Gill and Elizabeth + Warren, "Making Credit Safer," + University of + +On line 15981: + Pennsylvania Law + Review 182-83, 192-94. See Watters + v. Wachovia Bank NA, + +On line 15983: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 15985: + the FCIC, day panel + Investigations into + the Financial Crisis—State + +On line 15993: + Local Officials, + January transcript, p. Notes + to Chapter John D. + +On line 15993: + testimony for + the FCIC, Public Hearing on + Subprime Lending and + +On line 15993: + Government-Sponsored Enterprises + (GSEs), day session Office of + the Comptroller of + +On line 15995: + Currency, April p. + Citigroup Warehouse Lines of + Credit with Mortgage + +On line 15997: + by Citigroup; staff + calculations. Charles O. Prince, + interview by FCIC, + +On line 16001: + Market in the Third + Quarter of February Moody’s + Review and Outlook: + +On line 16003: + Commercial Paper, + February Moody’s ABCP Reviews + of Park Granada and + +On line 16007: + Sienna. Moody’s ABCP + Program Review: Park Granada, + July Letters from + +On line 16007: + Forum (November + and State St. Bank (November + to the Office of + +On line 16011: + Thrift Supervision. + Darryll Hendricks, interview + by FCIC, August Citi + +On line 16013: + FCIC staff estimates + from prospectus and Citigroup + production dated + +On line 16017: + Mae Term Sheet. For the + more than institutional + investors around the world, + +On line 16017: + million figure is + based on FCIC staff estimates + that, in turn, were based + +On line 16019: + of Moody’s PDS database. + See Brad S. Karp, counsel for + Citigroup, letter + +On line 16019: + to FCIC, about senior + investors, October p. See + also Eric S. + +On line 16021: + Chase Co., letter to + FCIC, November Citigroup + letter to the FCIC, + +On line 16027: + S. Karp, letter to + FCIC, about mezzanine investors, + November p. The + + equity tranches + were not offered for public + sale but were retained + +On line 16029: + FCIC staff estimates + from prospectus and Citigroup + production dated + +On line 16033: + Lindsay, interview + by FCIC, March PSI Documents, + Exhibit 59a: "Long + +On line 16033: + and Exhibit 60a + (quoting page of WaMu Home Loans + Product Strategy + +On line 16035: + PowerPoint presentation). + John M. Quigley, "Compensation + and Incentives in + +On line 16037: + Berkeley Electronic + Press, October p. Barclays + Capital, Bear Stearns, + +On line 16037: + Paribas, Citigroup, Deutsche + Bank, Goldman Sachs, HSBC, JPMorgan, + Lehman Brothers, Morgan + +On line 16039: + average top-tier + pay worldwide in mortgages and + MBS sales and trading. + +On line 16039: + Report" (November + pp. and Options Group, Global + Financial Market + +On line 16043: + pp. See Merrill Lynch, + Proxy Statement, p. See FCIC staff + analysis of Moody’s + +On line 16045: + Form 10-Ks for years and + See FCIC staff calculations + based on Moody’s Form 10-Ks + +On line 16047: + Mortgages," September + FCIC staff estimate based on + analysis of Moody’s + +On line 16049: + databases. The ratings + from the three agencies measure + slightly different + +On line 16049: + Fitch base their ratings + on the probability + that a borrower + +On line 16049: + default; Moody’s bases its + ratings on the expected + loss to the investor. + +On line 16049: + differences, investors + and regulators tend to + view the ratings as + +On line 16049: + divided into + two categories: investment + grade securities + +On line 16049: + also referred to + as junk (for S&P; similar + levels for Moody’s are + +On line 16051: + to triple-A). Richard Cantor + and Frank Packer, "The Credit + Rating Industry," + +On line 16059: + FRBNY Quarterly + Review (Summer–Fall Notes to Chapter + Andrew J. Donahue, + +On line 16059: + Staff: Opening Remarks + before the Commission Open + Meeting," Washington, + +On line 16059: + also Lawrence J. White, + "Markets: The Credit Rating + Agencies," Journal of + +On line 16065: + the FCIC, Hearing on + the Credibility of + Credit Ratings, the + +On line 16065: + Based on Those Ratings, + and the Financial Crisis, + session The Ratings + +On line 16069: + See U.S.C. 78o-7(c)(2). Jerome S. + Fons, testimony before + the House Committee + +On line 16073: + on the Impact of + the Financial Crisis— Greater + Bakersfield, session + +On line 16075: + transcript, p. Gary Witt, + testimony before the + FCIC, Hearing on the + +On line 16075: + Credit Ratings, the + Investment Decisions Made + Based on Those Ratings, + +On line 16075: + and the Financial + Crisis, session The Ratings + Process, June transcript, p. + +On line 16077: + Moody’s Investors Service, + "Introducing Moody’s Mortgage + Metrics: Subprime Just + +On line 16079: + Moody’s Investors Service, + interview by FCIC, May "Moody’s + Mortgage Metrics: A + +On line 16085: + interview. Jay Siegel, + testimony before the + FCIC, Hearing on the + +On line 16085: + Credit Ratings, the + Investment Decisions Made + Based on Those Ratings, + +On line 16085: + and the Financial + Crisis, session The Ratings + Process, June transcript, p. + +On line 16089: + Stein, interview by + FCIC, May Moody’s Investors Service, + "Introducing Moody’s + +On line 16093: + interview. Jerome Fons, + interview by FCIC, April Moody’s + Rating Committee + +On line 16097: + FCIC staff estimates + based on analysis of Moody’s + PDS database. Invoice + +On line 16097: + Moody’s Investors Service + to Susan Mills, Citigroup + Global Markets Inc., + +On line 16101: + New Issue Billing Form, + Citigroup Mortgage Loan Trust + 2006-NC2, September FCIC + +On line 16101: + estimates based on + analysis of Moody’s SFDRS + data as of April + +On line 16103: + before the Senate + Banking Committee, 109th Cong., + 2nd sess., June "Freddie + +On line 16103: + Settle SEC Action + Relating to Multi-Billion Dollar + Accounting Fraud," SEC + +On line 16109: + the chart). OFHEO Special + Examination Report, + December In OFHEO + +On line 16109: + Examination + of Fannie Mae. OFHEO said that + management engaged + +On line 16109: + acts of misconduct, + involving well over a dozen + different forms of + +On line 16109: + principles. As in + the case of Freddie, OFHEO said + Fannie’s management + +On line 16109: + ambitious earnings-per-share + targets that were linked to their + own compensation. + +On line 16119: + third-quarter OFHEO Special + Examination Report, + September pp. Ibid., + +On line 16129: + Report to Congress," + June p. Notes to Chapter Alan + Greenspan, testimony + +On line 16129: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 16131: + Reserve, April transcript, + p. FHFA, "Mortgage Market + Note: Goals of Fannie + +On line 16131: + and Freddie Mac in + the Context of the Mortgage + Market: February + +On line 16133: + "FCIC calculations." + FHFA, Report to Congress, + pp. BlackRock Solutions, + +On line 16137: + December Robert Levin, + interview by FCIC, March Mark + Winer, interview + +On line 16139: + March John Weicher, + former FHA commissioner, + interview by FCIC, + +On line 16150: + March Letter from Robert + Levin to FCIC, June p. Chapter + Joe Donovan, Credit + +On line 16152: + staff calculations, + using data from the U.S. + Census, data in + +On line 16152: + and data in Moody’s + CDO Enhanced Monitoring + Service database. The + +On line 16154: + characteristics + that identified them as ABS + CDOs. Scott Eichel, quoted + +On line 16154: + Allison Pyburn, + "CDO Machine1 Managers, Mortgage + Companies, Happy + +On line 16158: + interview by FCIC, + March Jian Hu, "Assessing the + Credit Risk of CDOs + +On line 16158: + Analysts’ Challenges + and Solutions," Journal of + Structured Finance no. + +On line 16162: + Wing Chau, interview + by FCIC, November CDOs that + bought relatively + + senior tranches of + mortgage-backed securities were + known as high-grade; + +On line 16162: + that bought the BBB-rated and + other junior tranches were + known as mezzanine. + +On line 16164: + Donovan, quoted in + Gregory, "The ‘"What If ’s’ + in ABS CDOs." Laurie + +On line 16166: + NJ: John Wiley, p. + Hu, "Assessing the Credit + Risk of CDOs Backed by + +On line 16168: + Issuance dropped in to + billion and virtually + disappeared in FCIC + +On line 16170: + provided by Moody’s + CDO Enhanced Monitoring + System (EMS). FCIC staff + +On line 16172: + based on analysis + of Moody’s CDO EMS database. Nestor + Dominguez, interview by + +On line 16176: + FCIC, September Michael + Lamont, interview by + FCIC, September Chris + +On line 16180: + by FCIC, September + Lamont, interview. FCIC + staff calculations + +On line 16182: + CDO manager and + underwriter survey. Mark + Adelson, interview + +On line 16184: + by FCIC, October + FCIC staff calculations. Our + estimate assumes + +On line 16184: + of of the total + value of the deal—that is, the + lowest normally + +On line 16184: + the mortgage-focused + multisector CDOs in the + FCIC database. It does + +On line 16184: + as interest on + equity tranches retained + by the managers. CDO + +On line 16184: + to the FCIC survey + reported management fees + ranging from as low + +On line 16186: + "Summary of Key + Fee Provisions for Cash CDOs + as of January + +On line 16188: + prepared by Moody’s for + the FCIC. FCIC Hedge Fund Survey. + See FCIC website for + +On line 16192: + Bloomberg LLC, Financial + Analyst Function; Bear Stearns + Companies Inc., Form + +On line 16202: + Report," October + p. Notes to Chapter Moody’s, Kleros + Real Estate CDO + +On line 16202: + last updated May + 2008.The following discussion + of CMLTI 2006-NC2 relies + +On line 16208: + Moody’s CDO EMS database. + Ricciardi, interview. + For example, Kleros + +On line 16208: + were in Buckingham + CDO, Buckingham CDO II, and + Buckingham CDO III, + +On line 16214: + underwritten by + Barclays. Adelson, interview. + Chau, interview. James + +On line 16214: + Capital Structure" + (December in Mr. Market + Miscalculates: The + +On line 16222: + (POPS), January Dan + Sparks, interview by FCIC, June + Dominguez, interview. The + +On line 16222: + of the book value + of assets to equity + ranged from to times for + +On line 16222: + SIVs; the average + was times. Moody’s Investors Service, + "Moody’s Special Report: + +On line 16224: + Structured Investment + Vehicles," January p. + Mark Klipsch, quoted + +On line 16226: + Asset Management, + Collateral Manager + Presentation; Ralph + +On line 16226: + Cioffi, interview + by FCIC, October Bear Stearns + High-Grade Structured Credit + +On line 16226: + Fund, Ltd., financial + statements for the year ended + December (total + +On line 16226: + Fund, Ltd., financial + statements for the year ended + December (total + +On line 16228: + assets were James Cayne, + written testimony for + the FCIC, Hearing on + +On line 16228: + Banking System, day + session Investment Banks and + the Shadow Banking + +On line 16232: + AIMA’s Illustrative + Questionnaire for Due Diligence + of Bear Stearns High Grade + +On line 16232: + Strategies Fund; Bank of + America presentation + to Merrill Lynch’s Board + +On line 16234: + of Directors, "Bear + Steams Asset Management: What + Went Wrong." Bear Stearns High-Grade + +On line 16234: + ended December + Financial Statements, Bear Stearns + High-Grade Structured Credit + +On line 16234: + Fund, Ltd., financial + statements for the year ended + December BSAM fund + +On line 16236: + using data from + FCIC survey of hedge funds. The + hedge funds responding + +On line 16238: + had a total of + trillion in investments. IMF, + Global Financial + +On line 16240: + Report, April Table + page "Typical ‘Haircut’ or + Initial Margin." Alan + +On line 16248: + Schwartz, interview by + FCIC, April Cioffi, interview. + Ibid. Ibid. Bear Stearns High-Grade + +On line 16248: + stating that "the fund + is subject to conflicts of + interest." Bear Stearns + + High-Grade Structured Credit + Strategies Enhanced Leverage Fund, + L.P., Preliminary + +On line 16250: + stating that Klio I + collateral includes RMBS + and ABS and CDOs, Klio + +On line 16252: + RMBS and ABS and CDOs, + and Klio III collateral + includes RMBS and ABS + +On line 16266: + produced by Paul, Weiss, + Rifkind, Wharton Garrison, LLP. + Notes to Chapter Matt + +On line 16266: + Tannin, Bear Stearns, email + to Bella Borg-Brenner, Stillwater + Capital, March Greg + +On line 16268: + Quental, Bear Stearns, email + to Andrew Donnellan, Bear + Stearns, et al., June Charles + +On line 16270: + Prince, interview by + FCIC, March Regulators in + Japan and the United + +On line 16272: + Kingdom also came + down on the company in + and In September + +On line 16272: + Citibank’s ability to + operate branches in Japan + because of the bank’s + +On line 16272: + country, and in the + following year the United + Kingdom’s Financial + +On line 16272: + Citigroup million + for engaging in a bond + trading scheme labeled + +On line 16272: + Evil" by Citigroup + bond traders. Financial Services + Agency, Government + +On line 16274: + David Reilly, "Moving + the Market: Citigroup to + Take Million Hit in + +On line 16278: + Wall Street Journal, June + Prince, interview. Robert Rubin, + interview by FCIC, + +On line 16280: + March Dominguez, interview + by FCIC, March The CDO desk earned + revenues of million + +On line 16280: + Citigroup’s counsel, + letter to FCIC, March in re + the FCIC’s second and + +On line 16280: + Interrogatory + No. Janice Warne, interview + by FCIC, February + +On line 16280: + to FCIC, March "Response + to Interrogatory No. + Paul, Weiss, Citigroup’s + +On line 16284: + to FCIC, March "Response + to Interrogatory No. + Moody’s Investors Service, + + "CDOs with Short-Term Tranches: + Moody’s Approach to Rating Prime-1 + CDO Notes," February + +On line 16286: + p. Citigroup Inc., + Form 10-K, for the fiscal year + ended December + +On line 16296: + p. Dominguez, interview, + March Ibid.; Warne, interview. Dominguez, + interview, March Warne, + +On line 16298: + Committee, Coventree + Capital, "Liquidity + Put Option," draft as + +On line 16302: + of December p. + Ron Frake, interview by FCIC, + March "Formal Agreement" + +On line 16304: + Comptroller of the + Currency and Citibank, July + Moody’s Investors Service, + +On line 16304: + period ended + September p. Floyd Norris, + "As Bank Profits Grew, + +On line 16308: + Signs Went Unheeded," + New York Times, November Dominguez, + interview, March Paul, + +On line 16310: + counsel, letter to + FCIC, June "Responses of Nestor + Dominguez," p. OCC, "Subprime + +On line 16310: + Valuation and + Oversight Review—Conclusion Memorandum," + Memorandum from + +On line 16310: + Sullivan, RAD, and + Ron Frake, NBE, to John Lyons, Examiner-in-Charge, + Citibank, NA, January + +On line 16314: + Ibid. Tobias Brushammar + et al., memorandum to + Nestor Dominguez et al., "Re: + +On line 16314: + Liquidity Put + Valuation," October + pp. "Liquidity + +On line 16318: + "Liquidity Put + Discussion," produced by Citi. + Data provided + +On line 16322: + by Moody’s to the FCIC. + Gary Gorton, interview by + FCIC, May AIG, 10-K, p. + +On line 16322: + are assigned a "risk + weighting" or percentage that + is then multiplied + +On line 16324: + determine the amount + of risk-based capital. AIG, CDS + notional balances + +On line 16326: + through Q1, provided + to the FCIC. The total would + reach billion by (ibid.). + +On line 16336: + May Craig Broderick, + testimony before the + FCIC, Hearing on the + +On line 16336: + of Derivatives + in the Financial Crisis, + day session Goldman + +On line 16340: + pp. Moody’s, "CDOs with Short-Term + Tranches"; AIG, "Information + Pertaining to the + +On line 16344: + provided to the + FCIC. Park, interview. AIG, CDS + notional balances + +On line 16348: + year-end, through Q1. Alan Frost, + interview by FCIC, May AIG + Financial Products + +On line 16350: + Compensation Plan, + March p. Joseph Cassano, email to + All Users, re: Special + +On line 16356: + provided by AIG + to the FCIC. AIG, Form 8-K, filed + May "Fact Sheet on AIGFP," + +On line 16360: + by Hank Greenberg, p. + AIG, CDS notional balances + at year-end. Gene Park, email + + to Joseph Cassano, re: + "CDO of ABS Approach Going + Forward—Message to the Dealer + +On line 16362: + Henry M. Paulson + Jr., testimony before + the FCIC, Hearing on + +On line 16362: + System, day session + Perspective on the Shadow + Banking System, May + +On line 16364: + Henry M. Paulson + Jr., written testimony + for the FCIC, Hearing + +On line 16364: + System, day session + Perspective on the Shadow + Banking System, May + +On line 16366: + Goldman Sachs, and 10-K + (appendix 5a to Goldman’s + March letter to the + +On line 16370: + FCIC). Appendix 5c + to Goldman’s March letter to + the FCIC. Goldman’s March + +On line 16372: + letter to the FCIC, + p. (subprime securities). + "Protection Bought by + +On line 16372: + spreadsheet provided + by Goldman Sachs to the FCIC. + Specifically, IKB + +On line 16372: + purchased million of + Class A notes, million of Class + B notes, and million + +On line 16374: + C notes on June TCW + purchased million of Class A + notes in January + +On line 16376: + purchased million of + Class A notes in March See ibid., + Exhibit FCIC staff + +On line 16378: + data provided + by Goldman Sachs. "Protection + Bought by GS," spreadsheet. + +On line 16382: + FCIC calculations + based on data provided + by Goldman Sachs. FCIC + +On line 16386: + Sachs. Sparks, interview. + Of course, in theory the + net impact on the + +On line 16386: + system is not greater, + because there is a winner + for every loser + +On line 16390: + the derivatives + market. Sparks, interview. From + Goldman Sachs data + + provided to the + FCIC in a handout titled + "Amplification" + + and quoted at the + FCIC’s Hearing on the Role of + Derivatives in + +On line 16392: + Goldman Sachs Group, Inc. + and Derivatives, June FCIC + staff analysis based + +On line 16394: + data provided + by Goldman Sachs. Lloyd Blankfein, + chairman of the board + +On line 16394: + chief executive + officer, Goldman Sachs Group, + interview by FCIC, + +On line 16396: + Sparks, interview. Gary + Cohn, testimony before + the FCIC, Hearing on + +On line 16396: + of Derivatives + in the Financial Crisis, + day session Goldman + +On line 16400: + Parkinson, interview. + Michael Greenberger, before the + FCIC, Hearing on the + +On line 16400: + of Derivatives + in the Financial Crisis, + day session Overview + +On line 16406: + "Summary of Key + Provisions for Cash CDOs as + of January Gary + +On line 16406: + for the FCIC, Hearing + on Credibility of + Credit Ratings, the + +On line 16406: + on Those Ratings, and + the Financial Crisis, day + session The Ratings + +On line 16416: + to Chapter Ibid., Gary + Witt, testimony before + the FCIC, Hearing on + +On line 16416: + Credit Ratings, the + Investment Decisions Made + Based on those Ratings, + +On line 16418: + Financial Crisis, + day session The Ratings Process, + June transcript, pp. Moody’s + +On line 16418: + Service, "Moody’s Approach + to Rating Multisector + CDOs," September p. + +On line 16426: + FCIC, June p. Gary Witt, + follow-up interview by FCIC, + May Witt, interview, + +On line 16428: + For example, Moody’s + assumed that borrowers with + different credit + +On line 16428: + would not default at + the same time. The agency split + the securities + +On line 16428: + average FICO + score of the underlying + mortgages: prime (FICO + +On line 16428: + (FICO between and + and subprime (FICO under + Creating three FICO-based + +On line 16428: + subprime) resulted + in lower correlation + assumptions, because + +On line 16428: + securities in + different subcategories + were assumed to be + +On line 16428: + correlated. "Moody’s + Revisits Its Assumptions + Regarding Structured + +On line 16428: + Finance Default (and + Asset) Correlations for + CDOs," June pp. Gary Witt, + +On line 16430: + by FCIC, May Hedi + Katz, "U.S. Subprime RMBS in CDOs," + Fitch Special Report, + +On line 16430: + Quality," Standard + Poor’s Global Credit Portal + RatingsDirect, November p. + +On line 16432: + Mitchell, "Structured Finance: + Complexity, Risk and the + Use of Ratings," BIS + +On line 16434: + of CDO managers and + underwriters about the process + of creating and + +On line 16436: + rated triple-A between + and retained their original + rating years later, + +On line 16438: + were withdrawn. Kyle Bass, + testimony to the House + Financial Services + +On line 16438: + Government Sponsored + Enterprises, Hearing on + the Role of Credit + +On line 16442: + Policy Special + Comment, March p. Moody’s Investors + Service, "Announcement: + +On line 16444: + Its Key Assumptions + for Rating Structured Finance + CDOs," December Ben + +On line 16446: + Ann Rutledge, email to + FCIC, November Ann Rutledge + is a principal + + in R&R Consulting, + a coauthor of Elements + of Structured Finance + +On line 16446: + Moody’s Investor Service. + She and co-principal Sylvain + Raines first spoke to the + +On line 16450: + Special Report," the + following page headlines: U.S. + CDO Review Preview: + +On line 16450: + Levels Driven by + Resecuritization CDOs + and CLOs," February + +On line 16450: + CDO Review: Looking + Ahead to Record Year Follows Record + Year," February U.S. + +On line 16452: + Issuance Expected + in March Moody’s annual gross + revenues for ABS CDO + +On line 16452: + May See also Moody’s + Corporation 10-K, p. and + Moody’s Corporation, + +On line 16458: + FCIC, June transcript, p. + Witt, written testimony + for the FCIC, June p. + +On line 16464: + April Eric Kolchinsky, + interview by FCIC, April Witt, + interview, April FCIC + +On line 16470: + staff estimates based + on analysis of Moody’s CDO + EMS database. Notes to + +On line 16474: + by FCIC, May The chart + was labeled "Derivatives + (America)." Brian + +On line 16476: + Clarkson, interview + by FCIC, May Harvey Goldschmid, + interview by FCIC, + +On line 16478: + April Office of Thrift + Supervision, letter to + the SEC, February + +On line 16480: + Brothers, Inc., letter + to the SEC, March J.P. Morgan + Chase Co., letter to + +On line 16480: + the SEC, February + Deutsche Bank A.G. and Deutsche Bank Secs., + letter to the SEC, + +On line 16484: + February Harvey + Goldschmid, interview by FCIC, + April Closed meeting of + +On line 16486: + the Securities + and Exchange Commission, April + In the Division + +On line 16486: + Markets. For the sake + of simplicity, throughout + this report it is + +On line 16488: + the Division of + Market Regulation. Erik + Sirri, interview + +On line 16488: + April Although there are + more than SEC examiners, + collectively they + +On line 16488: + more than registered + representatives) as well + as other market + +On line 16492: + participants. Michael + Macchiaroli, interview by FCIC, + March The monitors + +On line 16492: + with senior business + and risk managers at each CSE + firm every month about + + general concerns + and risks the firms were seeing. + Written reports of + +On line 16492: + addition, the CSE + monitors met quarterly + with the treasury and + +On line 16494: + of each CSE firm to + discuss liquidity and + funding issues. Erik + +On line 16494: + Banking System, day + session SEC Regulation + of Investment Banks, + +On line 16496: + SEC memorandum, + Re: "CSE Examination + of Bear Stearns Co. Inc.," + +On line 16498: + Commission, Office + of Inspector General, + "SEC’s Oversight of Bear + +On line 16502: + No. 446-A, September + pp. Michael Macchiaroli, interview + by FCIC, April Robert Seabolt, + +On line 16504: + and Matthew Eichner, + October Matt Eichner, + interview by FCIC, + +On line 16508: + Entity Program," + p. Goldschmid, interview. GAO, + "Financial Markets + +On line 16508: + to Improve Oversight + of Leverage at Financial + Institutions," GAO-09-739 + +On line 16512: + Reform," remarks at + the National Economists + Club, Washington, D.C., + +On line 16518: + First Public Hearing + of the Financial Crisis + Inquiry Commission, + +On line 16518: + day panel Current + Investigations into + the Financial Crisis—Federal + +On line 16520: + transcript, p. The Fed + remained the supervisor + of JP Morgan at + +On line 16524: + by FCIC, October + Federal Reserve System, + "Financial Holding + +On line 16533: + Warren Peterson, + written testimony for + the FCIC, Hearing on + +On line 16537: + September pp. Gary + Crabtree, principal owner, + Affiliated + +On line 16545: + Market, September + p. Notes to Chapter Lloyd Plank, + Lloyd E. Plank Real + + Estate Consultants, + written testimony for + the FCIC, Hearing on + +On line 16547: + Market, September + p. CoreLogic Single Family + Combined (SFC) Home Price + +On line 16549: + accessed August FCIC + calculation of change from + January to April + +On line 16553: + Final Report of + Michael J. Missal, Bankruptcy Court + Examiner, In + +On line 16555: + Chapter Case No. 07-10416 + (KJC), (Bankr. D.Del), February pp. + (hereafter Missal). Ibid., p. + +On line 16559: + from Boca Raton: + Coverage from Selected + Sessions of ABS East + +On line 16563: + the Joint Economic + Committee, 109th Cong., 1st sess., + June Christopher Mayer, + +On line 16563: + testimony for + the FCIC, Forum to Explore + the Causes of the + +On line 16565: + pp. Antonio Fatás, + Prakash Kannan, Pau Rabanal, and + Alasdair Scott, "Lessons for + +On line 16567: + chapter James MacGee, "Why + Didn’t Canada’s Housing Market + Go Bust1" Federal + +On line 16569: + Economic Comment + (December Morris A. Davis, + Andreas Lehnert, and + +On line 16569: + F. Martin, "The Rent-Price + Ratio for the Aggregate + Stock of Owner-Occupied Housing," + +On line 16571: + Federal Reserve + Board Working Paper, May p. + Price data from CoreLogic + +On line 16571: + Index, Single-Family Combined. + Rent data is Bureau of + Labor Statistics, + +On line 16571: + Equivalent Rent for + Primary Residence; all + index figures are + +On line 16571: + Jan. Methods follow + from Federal Reserve Bank + of San Francisco + +On line 16573: + Realtors Housing + Affordability Index, + accessed from Bloomberg as + +On line 16575: + could not exceed of + the median family + monthly income. More + +On line 16575: + the methodology + can be found at National + Association + +On line 16579: + Chairman Phil Angelides, + December p. Kristopher S. + Gerardi, Christopher + + L. Foote, and Paul S. + Willen, "Reasonable People Did + Disagree: Optimism + + and Pessimism about the + U.S. Housing Market Before + the Crash," Federal + +On line 16581: + Public Policy + Discussion Paper No. 10-5, + August Donald L. + +On line 16581: + European Central + Bank Colloquium held in + honor of Otmar + +On line 16585: + Board of Governors, + memorandum from Josh Gallin + and Andreas Lehnert + +On line 16589: + to Vice Chairman [Roger] + Ferguson, "Talking Points on + House Prices," May p. Missal, + +On line 16591: + Black, testimony + before the FCIC, Hearing on + the Impact of the + +On line 16591: + Overview of Mortgage + Fraud, September transcript, p. + and email from William Black + +On line 16593: + December Reply + of Attorney General + Lisa Madigan (Illinois) + +On line 16595: + Financial Services + Subcommittee on Housing + and Community + +On line 16605: + Wilfredo Ferrer, + testimony before the + FCIC, Hearing on the + +On line 16607: + Florida, session + The Regulation, Oversight, + and Prosecution + +On line 16609: + the Impact of the + Financial Crisis—Miami, Florida, + session Overview of + +On line 16615: + interview by FCIC, + May David Gussmann, interview + by FCIC, March William H. + +On line 16619: + FCIC, Hearing on the + Impact of the Financial + Crisis— Miami, + +On line 16621: + of the Inspector + General, "The Internal + Effects of the FBI’s + +On line 16625: + September p. Chris + Swecker, interview by FCIC, + March Patrick Crowley, MortgageDaily.com, + +On line 16627: + Swecker, statement to + the House Financial Services + Subcommittee on + +On line 16629: + Opportunity, + October William Black, written + testimony for + +On line 16631: + the FCIC, September + p. Francisco San Pedro, + interview by FCIC, + +On line 16637: + OCC, letter to Bank + of America, June Darcy + Parmer, interview by + +On line 16639: + "Mortgage Loan Fraud: An + Industry Assessment Based + on SAR Analysis," + +On line 16641: + Financial Services + Subcommittee on Housing + and Community + +On line 16647: + April–June p. DOJ, letter + from Assistant Attorney + General Ronald Welch + +On line 16657: + Report," pp. Richard Spillenkothen, + interview by FCIC, March Michael + J. Mukasey, interview + +On line 16659: + by FCIC, October + DOJ response to FCIC request, + April see also DOJ + +On line 16661: + FCIC request, April William + Black, testimony before + the FCIC, September + +On line 16665: + of Law Enforcement, + testimony before the + FCIC, Hearing on the + +On line 16665: + p. "Participant + in Million Mortgage Fraud Scheme + Convicted by Polk + +On line 16667: + press release, August + Tenth Judicial Circuit in + and for Polk County, + + Florida, State of + Florida vs. Scott Almeida, + et al., OSWP No. + +On line 16671: + the FCIC, September + transcript, pp. Gary Gorton, "The + Panic of paper + + presented at the + Federal Reserve Bank of + Kansas City, Jackson + +On line 16673: + of Subprime Mortgage + Credit," Federal Reserve + Bank of New York Staff + +On line 16675: + No. March pp. Raymond + McDaniel, quoted in the transcript + of Moody’s Managing + +On line 16683: + president and chief + operating officer + of Clayton Holdings, + +On line 16685: + Inc., interview by + FCIC, September Frank Filipps, + interview by FCIC, + +On line 16687: + August Vicki Beal, + testimony before the + FCIC, Hearing on the + +On line 16687: + session The Mortgage + Securitization Chain: + From Sacramento to + +On line 16689: + also Martha Coakley, + Massachusetts Attorney + General, comment + +On line 16689: + regarding asset-backed + securities, Release No. + 33-9117; 34-61858; File No. S7-08-10, + +On line 16693: + D. Keith Johnson, + testimony before the + FCIC, Hearing on the + +On line 16695: + session The Mortgage + Securitization Chain: + From Sacramento to + +On line 16699: + transcript, pp. Ibid., p. + Beal, testimony before + the FCIC, September + +On line 16701: + p. John J. Goggins, + senior vice president and + general counsel, + +On line 16705: + Times Misconstruing + Commission Testimony," + September Johnson, + +On line 16711: + the FCIC, September + transcript, p. Tony Peterson, + interview by FCIC, + +On line 16713: + president in charge + of mortgage acquisition + due diligence, Deutsche Bank, + +On line 16713: + by FCIC, July William + Collins Buell VI, head of mortgage + acquisition, JP + +On line 16715: + September Richard M. + Bowen, written testimony + for the FCIC, Hearing + +On line 16715: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 16719: + FCIC, February FCIC + correspondence with Richard M. + Bowen. Inside Mortgage + +On line 16719: + The Secondary Market + (Bethesda, MD: Inside Mortgage + Finance, p. FCIC staff + +On line 16721: + based on analysis + of Moody’s CDO EMS database. See, + for example, James + +On line 16721: + Rule and Some Thoughts About + the Future," remarks to the + thirteenth annual + +On line 16723: + Association, + Hot Springs, Virginia, October + Shelley Parratt and + +On line 16725: + interview by the + FCIC, October C.F.R. Part 229.1111(a)(3), + "Pool Assets," revised + +On line 16727: + filed by Cambridge Place + Investment Management Inc., + dated July in + +On line 16727: + Management, Inc., v. + Morgan Stanley Co., Inc., Case + No. 10-27841, p. (hereafter + + Cambridge Complaint), and + Part V of complaint filed by + Federal Home Loan + +On line 16727: + County, Illinois (Chancery + Division), Federal Home + Loan Bank of Chicago + +On line 16729: + America Funding + Corp. et al., Case No. 10CH450B3, p. + Cambridge Complaint, pp. + +On line 16733: + president and chief + operating officer, + Clayton Holdings, Inc., + +On line 16735: + FCIC, June A QIB was + defined under Rule 144A to + include "entities, + + acting for its own + account or the accounts of + other qualified + +On line 16735: + buyers, that in the + aggregate owns and invests + on a discretionary + +On line 16735: + of issuers that are + not affiliated with + the entity." See + +On line 16741: + of Securities + to Institutions." Notes to + Chapter Dennis Voigt + +On line 16741: + before the FCIC, First + Public Hearing of the FCIC, + day session Current + +On line 16743: + Local Officials, + January p. Richard Breeden, + interview by FCIC, + +On line 16743: + See Public Law (Oct. + Rule 144A contained provisions + that ensured it did + + not expand to the + securities markets in + which retail investors + +On line 16747: + Supervision of + Large Complex Institutions," + October Alan Greenspan, + +On line 16747: + Evolution of Bank + Supervision," speech before + the American Bankers + +On line 16749: + Arizona, October + Eugene Ludwig, interview + by FCIC, September + +On line 16751: + Reserve Bank of New + York, "Report on Systemic Risk + and Supervision," + +On line 16753: + Rich Spillenkothen, "Notes on the + performance of prudential + supervision in + +On line 16753: + years preceding the + financial crisis by a + former director + +On line 16755: + and regulation + at the Federal Reserve + Board to May Susan + +On line 16757: + interview by FCIC, + October Bernanke, letter to + the FCIC, December + +On line 16761: + John Snow, interview + by FCIC, October Office + of the Comptroller + + of the Currency, + Board of Governors of the + Federal Deposit + +On line 16761: + Thrift Supervision, + and National Credit Union + Administration, + +On line 16763: + Management Guidance + for Home Equity Lending," + May Mortgage Market + +On line 16771: + Implications for + Guidance," PowerPoint, November Bies, + interview. Office + + of the Comptroller + of the Currency, Board of + Governors of the + +On line 16771: + Deposit Insurance + Corporation, Office of + Thrift Supervision, + +On line 16773: + Products," Federal + Register (December Paul + Smith, American Bankers + + Association, + letter to the Federal + Deposit Insurance + +On line 16773: + Board of Governors + of the Federal Reserve + System, Office of + +On line 16773: + Supervision, and + Office of the Comptroller + of the Currency, + +On line 16777: + from the American + Bankers Association (March + p. the American + +On line 16777: + Financial Services + Association (March p. + and Indymac Bank + +On line 16779: + (March p. The Housing + Policy Council of the + Financial Services + +On line 16781: + to the Office of + Thrift Supervision, March p. + Siddique, interview. + +On line 16783: + Appelbaum and Ellen + Nakashima, "Banking Regulator + Played Advocate Over + + Enforcer: Agency Let + Lenders Grow Out of Control, Then + Fail," Washington Post, + +On line 16787: + See, e.g. "Countrywide + Seeks to Become Savings Bank; + The Mortgage Lender Says + +On line 16787: + Apply to Convert + Its Charter So It Will Be + Regulated by + +On line 16789: + instead of Two," Los + Angeles Times, November + based on Bloomberg, Reuters. Kim + +On line 16791: + interview by FCIC, + August Countrywide, "Briefing + Paper: Meeting with + +On line 16799: + Chapter Angelo + Mozilo, email to John McMurray (cc + Dave Sambol, Carlos + +On line 16799: + Pay Options, August + John McMurray, email to Angelo + Mozilo (cc Kevin Bartlett, + +On line 16801: + Garcia, Dave Sambol, + re: Pay Options, August The + cost of borrowing + + is reflected by + credit spreads, the portion of + interest rates that + + compensate investors + for credit risk. Credit spreads + are the interest + +On line 16801: + above the so-called risk-free + interest rate, usually + measured in terms of + +On line 16805: + Loan Syndication + Trading Association, + "The US Loan Market + +On line 16807: + Loan Syndication + Trading Association, + "Financial Reform + +On line 16809: + and the Leveraged Loan + Market," presentation. Ibid., + Loan Syndication + +On line 16813: + April Michael Flaherty + and Dena Aubin, "For Private + Equity Market, + +On line 16817: + Charles Prince, quoted in + "Citigroup chief stays bullish on + buyouts," Financial + +On line 16817: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 16819: + Citigroup Senior + Management, April transcript, pp. + Roben Farzad, Matthew Goldstein, + +On line 16821: + Smart," Busi-nessWeek, September + Joseph Gyourko, "Understanding + Commercial Real + +On line 16821: + How Different from + Housing Is It1" NBER Working + Paper National + +On line 16823: + Economic Research, + February pp. CRE Finance + Council, Compendium + +On line 16827: + Exhibits Joe Keohane, + "Heartbreak Hotels," Portfolio, + November "Hilton Debt + +On line 16829: + Commercial Mortgage + Alert, February Tom Marano, + interview by FCIC, + +On line 16833: + Overview," Bear Stearns, March + p. Gyourko, "Understanding + Commercial Real + +On line 16835: + How Different from + Housing Is It1" p. New York + Federal Reserve + +On line 16835: + Lane LLC Holdings as + of Anton R. Valukas, Report + of Examiner, + +On line 16837: + In re Lehman Brothers + Holdings Inc., et al., Chapter + Case No. 08-13555 (JMP), (Bankr. + +On line 16841: + as Valukas). Ibid., Madelyn + Antoncic, "Lehman Brothers Risk + Management," August + +On line 16847: + by FCIC, July Valukas, + Antoncic, interview. Valukas, + Jody Shenn, "Lehman Said to + +On line 16849: + to Mortgage Market + through Aurora Unit (Update + Bloomberg, October SEC, + +On line 16851: + May July August + September October Erik + Sirri, interview + +On line 16857: + by FCIC, April Valukas, nn. + Valukas, The People of the State + of New York v. Ernst + +On line 16861: + LLP (N.Y. Sup. Ct. filed + Dec. Ronald Marcus, interview + by FCIC, July See + +On line 16861: + Marcus, OTS, "Report + of Examination Lehman + Brothers Holdings Inc.," + +On line 16871: + pp. Notes to Chapter + David Sambol, interview by + FCIC, September See + +On line 16871: + Form 10-K, February + p. See also Fannie Mae, + "Single-Family Conventional + +On line 16871: + "Single Family + Guarantee Business: Facing + Strategic Crossroads," June + +On line 16877: + Mudd, interview by + FCIC, March "Single Family + Guarantee Business: + +On line 16877: + "Single Family + Guaranty Business Strategic + Review Summary," + +On line 16879: + PowerPoint presentation, + July Citigroup, "Project Phineas: + Presentation to + +On line 16881: + Board of Directors," + executive summary, + July and "Single + +On line 16885: + by Fannie Mae. Tom + Lund, interview by FCIC, March + Christopher Dickerson + +On line 16885: + James B. Lockhart III, + "Proposed Appointment of the + Federal Housing + +On line 16887: + Association," + memorandum, September + p. Fannie Mae, 3Q + +On line 16889: + p. at Fannie Mae, + Form 10K, pp. By December + Freddie reported + +On line 16889: + of billion; billion + in loans to borrowers with + FICO scores below + +On line 16889: + high LTV; and billion + in loans for non-owner-occupied + homes. Federal Home + +On line 16891: + ended December + February p. Richard Syron, + interview by FCIC, + +On line 16899: + by FCIC, September + Saksena, interview. "OFHEO, + SEC Reach Settlement + +On line 16901: + Enterprise Oversight + press release, May "Freddie Mac + Voluntarily + +On line 16901: + Retained Portfolio," + Federal Home Loan Mortgage + Corporation press + +On line 16903: + OFHEO, Report of the + Special Examination + of Fannie Mae, May + +On line 16907: + James Lockhart, written + testimony for the FCIC, + Hearing on Subprime + +On line 16907: + Government-Sponsored Enterprises + (GSEs), day session Office of + Federal Housing + +On line 16911: + Enterprise Oversight, + April p. Ibid., p. Robert J. Levin, + Board of Director + +On line 16913: + PowerPoint presentation, + January Minutes of the + February meeting + +On line 16915: + Board of Directors + of Fannie Mae (approved on + April Stephen B. Ashley, + +On line 16915: + remarks prepared for + delivery at the Senior + Management Meeting, + +On line 16917: + National Mortgage + Association, Form 10-K, + for the fiscal year + +On line 16921: + data provided + by Fannie Mae. Federal + National Mortgage + +On line 16923: + National Mortgage + Association, Form 10-K, + May p. OFHEO, Report + +On line 16925: + Fannie Mae, May p. + Federal Home Loan Mortgage + Corporation, Form + +On line 16925: + 10-K, for the fiscal + year ended December filed + June pp. Federal + +On line 16929: + for the fiscal year + ended December filed March + pp. Notes to Chapter + +On line 16933: + Federal Home Loan + Mortgage Corporation, Proxy + Statement and Notice + +On line 16933: + Federal Home Loan + Mortgage Corporation, Proxy + Statement and Notice + +On line 16937: + (July Summary + Compensation Table, p. + (for figures). Ibid. OFHEO, + +On line 16945: + Examination + for Fannie Mae, May pp. Ibid., + p Ibid. Ibid., pp. Ibid. + +On line 16951: + interview by FCIC, + March Todd Hempstead, interview + by FCIC, March Daniel Mudd, + +On line 16955: + conservatorship + memo, September p. Minutes + of a Meeting of + +On line 16957: + the Fannie Mae Board + of Directors, April Minutes + of a Meeting of + +On line 16959: + Fannie Mae Board of + Directors, May Federal + National Mortgage + + Association, + Form 10-K, for the fiscal year + ended December + +On line 16963: + staff estimate based + on data provided by + Fannie Mae. "Deepen + +On line 16965: + Fannie Mae Strategic + Plan, Enrico Dallavecchia, email + to Daniel Mudd, "Budget + +On line 16967: + strategic investments," + July Enrico Dallavecchia, + email to Michael Williams, "RE:," + +On line 16969: + July Daniel Mudd, email + to Enrico Dallavecchia, "RE: + Budget and strategic + +On line 16973: + interview by FCIC, + March Freddie Mac, "Freddie Mac’s + Business Strategy, + +On line 16975: + Board of Directors + Meeting," March pp. Freddie Mac, + "Freddie Mac’s Business + +On line 16977: + March pp. OFHEO, Report + of Examination for + the Federal Home + +On line 16981: + "Mortgage Market Note + The Housing Goals of Fannie + Mae and Freddie Mac + +On line 16983: + to Provide Trillion + in Mortgages for Affordable + Housing for Million + +On line 16989: + Mudd, interview. Robert + Levin, interview by FCIC, March + "HUD Finalizes Rule + + on New Housing Goals + for Fannie Mae and Freddie + Mac," Department of + +On line 16991: + release, November + Mudd, testimony before + the FCIC, Hearing on + + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 16995: + session: Fannie Mae, + April transcript, pp. See FHFA, + "Annual Report + +On line 16997: + for mortgage assets + outstanding MBS guaranteed. + Total assets MBS + +On line 17001: + are slightly greater. OFHEO, + Report to Congress," April Robert + Levin, interview by + +On line 17001: + Levin, testimony + before the FCIC, Hearing on + Subprime Lending and + +On line 17003: + Government-Sponsored Enterprises + (GSEs), day session Fannie Mae, + April transcript, pp. Tom + +On line 17007: + interview by FCIC, + March Dallavecchia, interview. Todd + Hempstead, interview + +On line 17015: + by FCIC, March Kenneth + Bacon, interview by FCIC, + March Notes to Chapter + +On line 17021: + Ashley, interview + by FCIC, March Levin, interview. + Mike Quinn, interview + +On line 17025: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 17027: + Oversight, April transcript, + pp. .written testimony, + p. Lockhart, written + +On line 17027: + FCIC, April p. Lockhart, + testimony before the + FCIC, April transcript, pp. + +On line 17031: + by FCIC, March Edward + DeMarco, interview by FCIC, March + Maria Fernandez (with + + Alfred Pollard, Chris + Dickerson, Jeffrey Spohn, and + Jamie Newell), interview + +On line 17033: + FCIC, March Mike Price (with + Janice Kuhl, Paul Manchester, + Charlotte Reid, Alfred + +On line 17035: + interview by FCIC, + February Department of + Housing and Urban + +On line 17035: + the Federal Home + Loan Mortgage Corporation + (Freddie Mac) for the + +On line 17035: + and Amendments to HUD’s + Regulation of Fannie + Mae and Freddie Mac," + +On line 17037: + no. Nov. FHFA, "The + Housing Goals of Fannie Mae + and Freddie Mac in + +On line 17041: + to Brian Montgomery + re affordable housing goals, + December "Deepen + +On line 17043: + Montgomery, Federal + Housing Commissioner, to + Daniel Mudd, Fannie Mae, + +On line 17043: + Federal Housing + Commissioner, to Richard F. + Syron, Fannie Mae, + +On line 17045: + typed letter, April "Cost + of Freddie Mac’s Affordable + Housing Mission," PowerPoint + +On line 17049: + presentation, June + pp. Freddie’s net income was + billion in billion + +On line 17049: + in billion in net + loss of billion in and net + loss of billion in + +On line 17049: + Federal Home Loan + Mortgage Corporation, Form + 10-K, for the fiscal + +On line 17051: + Data and Other + Operating Measures, p. + (for figures). "Cost and + +On line 17057: + January "Fannie + Mae’s Housing Goals," Audit Team + briefing, May "Fannie + +On line 17059: + Management Report," + PowerPoint presentation, July + "Cost of Freddie Mac’s + +On line 17070: + Affordable Housing + Mission," PowerPoint presentation, + June pp. Chapter Gary + +On line 17074: + interview by FCIC, + May Lewis Ranieri, interview by + FCIC, July Complaint, + +On line 17076: + SEC v. Goldman Sachs + Co. and Fabrice Tourre (S.D.N.Y. + April Office of the + +On line 17076: + Treasury; Office of + Thrift Supervision, Treasury; + Board of Governors + + of the Federal + Reserve System; Federal + Deposit Insurance + +On line 17078: + (Notice of final + interagency statement), + January Wing Chau, + +On line 17080: + interview by FDIC, + November FCIC, Survey of + CDO Managers, Schedule + +On line 17090: + to Chapter As two + market observers would later + write, "Starting in CDOs + +On line 17090: + CDO investors became + the dominant class of agents + pricing credit risk + +On line 17090: + absence of restraints, + lenders started originating + unreasonably risky + +On line 17090: + and continued to + do so into Mark Adelson + and David Jacob, "The + +On line 17092: + and Lessons," January + p. Scott Simon, quoted in + Allison Pyburn, + +On line 17094: + p. Armand Pastine, + quoted in ibid. According + to the FCIC database, + +On line 17094: + did manage one more + new CDO, Costa Bella CDO, + which was issued in + +On line 17096: + December Source on + downgrades: Bloomberg. Source on events on + default: Moody’s Investors + + Service, "Moody’s downgrades + ratings of Notes issued by + Maxim High Grade CDO + +On line 17100: + April and "Moody’s downgrades + ratings of Notes issued by + Maxim High Grade CDO + +On line 17104: + April ACA Capital, + 10-K, p. "ISDA Publishes + Template for Credit + + Default Swaps on Asset-Backed + Securities with Pay As + You Go Settlement," + +On line 17106: + Under the terms of + the pay-as-you-go swap, if the + referenced mortgage-backed + +On line 17106: + principal payments, + the pay-as-you-go protection + seller is required + +On line 17106: + of the shortfall. For + long investors—the protection + provider under the swap—the + + advantage was the + leverage embedded in the + trade: they did not have + +On line 17106: + come up with the cash + up front for the principal + amount of the bond; they + +On line 17106: + quarterly swap fees + in return for accepting + the risk of loss if + +On line 17110: + a shortfall. Laura + Schwartz, interview by FCIC, May + Laurie S. Goodman, + +On line 17112: + Derivatives (Frank + J. Fabozzi Series) (Hoboken, NJ: + John Wiley, p. Greg + +On line 17114: + interview by FCIC, + May FCIC staff estimates based + on analysis of + +On line 17116: + FCIC Hedge Fund Survey. + From July through December + several hedge funds + +On line 17116: + in mortgage-related + CDO equity tranches and + almost billion of + +On line 17116: + mortgage-related CDO + equity tranche issuance. Please + see FCIC website for + +On line 17116: + information about + the hedge fund survey. Note: the + FCIC did not survey + + hedge funds that fully + liquidated or closed. These + funds may have purchased + +On line 17120: + FCIC Hedge Fund Survey. + See FCIC website for details. + Rabobank’s counsel, letter + +On line 17122: + Fried of the Supreme Court + of NY, May Norma Flow of + Funds, information + +On line 17126: + by Merrill Lynch. Steven + Ross, email to FCIC, December + See letter from Rabobank’s + +On line 17126: + counsel, letter to + Judge Fried, May the letter was + never filed with the + +On line 17132: + Lynch. Information + provided by Merrill Lynch, + December Complaint, + +On line 17134: + Goldman Sachs Co. and + Fabrice Tourre. Ira Wagner, + interview by FCIC, + +On line 17142: + Schwartz, interview. John + Paulson, interview by FCIC, + October "Goldman + +On line 17142: + Pay Record Million to + Settle SEC Charges Related + to Subprime Mortgage + +On line 17146: + July Jamie Mai and + Ben Hockett, interview by + FCIC, April Sihan Shu, + +On line 17150: + FCIC, September Steven + Eisman, interview by FCIC, + April James Grant, "Inside + +On line 17150: + Mortgage Machine," in + Mr. Market Miscalculates: + The Bubble Years and + +On line 17160: + Eisman, interview. + Notes to Chapter Michael Burry, + interview by FCIC, + +On line 17166: + Paulson, interview. + Burry, interview. FCIC Hedge + Fund Survey. See FCIC + +On line 17168: + Geanakoplos, written + testimony for the FCIC, + Forum to Explore + +On line 17168: + Financial Crisis, + day session Risk Taking and + Leverage, February + +On line 17170: + p. OCC, "Subprime CDO + Valuation and Oversight + Review—Conclusion Memorandum," + + memorandum from + Michael Sullivan, RAD, and Ron + Frake, NBE, to John Lyons, + +On line 17170: + NA, January p. + Paul, Weiss, Citigroup’s counsel, + letter to FCIC, June + +On line 17174: + "Responses of Nestor + Dominguez." Richard Bookstaber, interview + by FCIC, May "RMBS and + +On line 17174: + a Percentage of + Citi-CDO Portfolio Notionals," + produced by Citi for + +On line 17176: + Federal Reserve + Bank of New York, Federal + Reserve Board, Office + +On line 17178: + with Firms," November + p. FCIC staff estimates, based + on analysis of + +On line 17180: + Moody’s CDO EMS database. + Paul, Weiss, Citigroup’s counsel, + letter to FCIC, March + +On line 17180: + request, "Response to + Interrogatory no. Paul, + Weiss, letter to FCIC, + +On line 17182: + interrogatory + no. p. Nestor Dominguez, interview + by FCIC, March Paul, Weiss, + +On line 17186: + letter of March pp. + Board Analyst Profile for + Citigroup Inc., April + +On line 17188: + SEC staff (Sam Forstein, Tim + McGarey, Mary Ann Gadziala, Kim Mavis, Bob + Sollazo, Suzanne McGovern, + +On line 17190: + Comptroller of the + Currency, memorandum, + Examination + +On line 17192: + (CRM), January p. + Ronald Frake, Comptroller of the + Currency, letter + +On line 17196: + York Operations + Review, May p. Federal + Reserve Bank of New + +On line 17196: + Bank Supervision + Group, "Operations Review + Report," December + +On line 17200: + Findings," Citigroup + Inc., January 2004–December + April Citigroup Inc., + +On line 17204: + a reduction that + had been implemented when + the issues began + +On line 17206: + and then added a raise. + Citigroup, Proxy Statement, p. + Comptroller of the + +On line 17208: + Federal Reserve + Bank of New York, letter to + Vikram Pandit and the + +On line 17210: + FCIC, Hearing on the + Shadow Banking System, day + session Perspective + +On line 17212: + the Shadow Banking + System, May transcript, p. Gene + Park, interview by + +On line 17216: + FCIC, May Andrew Forster, + email to Gary Gorton, Alan Frost, + et al., July Park, + +On line 17222: + interview. Gorton, + interview. Park, interview. + Gene Park, email to Joseph + +On line 17232: + Park, interview. Notes + to Chapter Data supplied + by AIG. The CDO—RFC + +On line 17232: + according to the + AIG credit committee. A + review by FCIC staff + +On line 17238: + (Financial Figures + are as of June August p. + Park, interview. Joseph + +On line 17242: + Cassano, interview + by FCIC, June Park, interview. + Dow Kim, interview + +On line 17246: + by FCIC, September + Stanley O’Neal, interview by + FCIC, September Kim, + +On line 17250: + staff estimates based + on analysis of Moody’s CDO + EMS database. Complaint, + +On line 17256: + Merrill Lynch, No. (N.Y.S. + June paragraph Kim, interview. + FCIC analysis based + +On line 17258: + Moody’s CDO EMS database. + Presentation to Merrill + Lynch and Co. Board of + +On line 17262: + "Leveraged Finance and + Mortgage/CDO Review," October p. + Chau, interview. FCIC + +On line 17264: + staff analysis of + Moody’s CDO EMS database. FCIC staff + estimates based on + +On line 17266: + information not + provided for Robeco High + Grade CDO I. FCIC staff + +On line 17270: + EMS database. Data + supplied by Merrill Lynch. FCIC + staff analysis of + + Moody’s CDO EMS database. + The total value of Baa + tranches issued by + +On line 17270: + the FCIC database was + million in and billion in + Aa tranches, billion + +On line 17272: + in and billion in + A tranches, million in and + billion in FCIC staff + +On line 17274: + telephone discussion + with SEC staff, September FCIC + staff analysis of + +On line 17276: + CDO EMS database. Chau, + interview; for number of + the CDOs he managed, + +On line 17280: + December produced + by AIG. Presentation to + the Merrill Lynch Board, + +On line 17280: + Mortgage/CDO Review," p. Jeff + Kronthal, former head of + Merrill Lynch’s Global + +On line 17280: + Real Estate and + Structured Products, interview + by FCIC, September + +On line 17284: + Al Yoon, "Merrill’s Own + Subprime Warnings Unheeded," + Reuters, October SEC, + +On line 17288: + memo to Erik Sirri + and others, February p. + Ibid., p. Yoon, "Merrill’s + +On line 17290: + Own Subprime Warnings + Unheeded." Kim, interview. + Senate Permanent + + Subcommittee on + Investigations, Fishtail, + Bacchus, Sundance, and + +On line 17290: + by U.S. Financial + Institutions, 107th Cong., 2nd + sess., January S-Prt + +On line 17292: + Practices" (Notice of + final interagency + statement), January + +On line 17294: + (see n. above). Office + of the Comptroller of the + Currency, Treasury; + +On line 17294: + Thrift Supervision, + Treasury; Board of Governors + of the Federal + +On line 17294: + Federal Deposit + Insurance Corporation; + and Securities + +On line 17304: + statement with request + for public comments),May Ibid., pp. Notes + to Chapter John C. + +On line 17304: + of the Currency, + written testimony for + the FCIC, Hearing on + + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 17306: + Practices" (Notice of + final interagency + statement), January + +On line 17308: + p. Basel Committee + on Banking Supervision: + Joint Forum, "Credit + +On line 17316: + pp. SEC, Office of + Compliance Inspections and + Examinations, + +On line 17318: + the FCIC, Hearing on + the Credibility of + Credit Ratings, the + +On line 17318: + Those Ratings, and the + Financial Crisis, session + Credit Ratings and + +On line 17320: + interview by FCIC, + May Buffett, testimony + before the FCIC, June + +On line 17322: + p. Eric Kolchinsky, + written testimony for + the FCIC, Hearing on + +On line 17322: + Credit Ratings, the + Investment Decisions Made + Based on Those Ratings, + +On line 17324: + and the Financial + Crisis, session The Ratings + Process, June p. Brian + +On line 17326: + interview by FCIC, + May Gary Witt, interview by + FCIC, April John Rutherford + +On line 17326: + the president and + CEO of Moody’s Corporation + from the time of its + +On line 17328: + spin-off from Dun Bradstreet + in until he retired from + the firm in Jerome Fons, + +On line 17332: + interview by FCIC, + April Raymond McDaniel, interview + by FCIC, May Clarkson, + +On line 17338: + interview. Raymond + McDaniel, testimony before + the FCIC, Hearing on + +On line 17338: + Credit Ratings, the + Investment Decisions Made + Based on Those Ratings, + +On line 17340: + Credit Ratings and + the Financial Crisis, June + transcript, pp. Scott McCleskey, + +On line 17346: + the FCIC, Hearing on + the Credibility of + Credit Ratings, the + +On line 17346: + Based on Those Ratings, + and the Financial Crisis, + session The Credit + +On line 17350: + transcript, p. Clarkson, + interview; McDaniel, interview. + Witt, interview; Gary + +On line 17350: + the FCIC, Hearing on + the Credibility of + Credit Ratings, the + +On line 17350: + Based on those Ratings, + and the Financial Crisis, + Session The Credit + +On line 17352: + Brian Clarkson, email + to Ed Bankole, Pramila Gupta, + Michael Kanef, Andrew Kriegler, + +On line 17354: + AFG by analyst.xls," + July William May, email to Gus + Harris, subject: "RE: + +On line 17356: + and PEs," January + Yuri Yoshizawa, email to direct + report managing + +On line 17358: + directors, subject: + "3Q Market Coverage-CDO," October + Clarkson, interview. + +On line 17362: + McDaniel, interview. Witt, + testimony before the + FCIC, June transcript, pp. + +On line 17364: + Service: Managing + Director’s Town Hall Meeting, + September transcript, + +On line 17374: + policy issues + at Moody’s suggested by the + subprime/liquidity + +On line 17374: + ratings committee + to external pressures was + shown in the constant + +On line 17378: + obligation (CPDO) + scandal in Europe. Ibid., p. + David Teicher, project + +On line 17380: + Moody’s, interview by + FCIC, May Standard Poor’s, "Credit + FAQ: The Basics of + +On line 17382: + the FCIC, Hearing on + the Credibility of + Credit Ratings, the + +On line 17382: + Based on Those Ratings, + and the Financial Crisis, + session The Credit + +On line 17386: + Business Model, June + transcript, p. Witt, interview. + Clarkson, interview. + +On line 17392: + p. Eric Kolchinsky, + testimony before the + FCIC, Hearing on the + +On line 17392: + Credit Ratings, the + Investment Decisions Made + Based on Those Ratings, + +On line 17392: + and the Financial + Crisis, session The Ratings + Process, June transcript, pp. + +On line 17396: + Fu and Y Yoshizawa, + May Kolchinsky, testimony + before the FCIC, June + +On line 17400: + pp. Eric Kolchinsky, + interview by FCIC, April FCIC + staff estimates, based + +On line 17402: + analysis of Moody’s + SFDRS database. Riachra O’Driscoll, + email to Yuri Yoshizawa, + +On line 17404: + "Magnolia Class Ds," + April Kimball, memorandum, + "Credit policy + +On line 17406: + p. SEC, Office of + Compliance Inspections and + Examinations, + +On line 17415: + Moody’s Investors Services, + Inc.," p. Chapter William Dudley, + interview by FCIC, + +On line 17417: + The Secondary Market + (Bethesda, Md.: Inside Mortgage + Finance, p. "Non-Agency MBS + +On line 17419: + Issuance." Ben S. Bernanke, + chairman of the Federal + Reserve, letter to + +On line 17421: + Phil Angelides, chairman + of the FCIC, December Mark + Zandi, Celia Chen, and + +On line 17423: + Moody’s Economy.com, + October pp. CoreLogic Home Price + Index, Single-Family Combined + +On line 17427: + staff calculations, + January to January. + CoreLogic Census Bureau + + Statistical Area + (CBSA) Home Price Index, FCIC + staff calculations. + +On line 17429: + provided by Mark + Fleming, chief economist for + CoreLogic, in his written + +On line 17429: + FCIC, Hearing on the + Impact of the Financial + Crisis—Sacramento, session Overview + + of the Sacramento + Housing and Mortgage Markets + and the Impact of + +On line 17431: + Financial Crisis + on the Region, September + figures Mark Fleming, + +On line 17431: + FCIC, Hearing on the + Impact of the Financial + Crisis—Sacramento, session Overview + + of the Sacramento + Housing and Mortgage Markets + and the Impact of + +On line 17433: + Financial Crisis + on the Region, September + transcript, p. Mortgage + +On line 17435: + Delinquency Survey, + data provided to the + FCIC. Ibid., with FCIC staff + +On line 17437: + calculations. FCIC + staff analysis, "Analysis + of housing data," + +On line 17439: + FCIC by staff at the + Federal Reserve. Subprime + and Alt-A mortgages are + +On line 17439: + mortgages purchased or + guaranteed by Fannie Mae + or Freddie Mac. FHA + +On line 17441: + included mortgages + insured by the FHA or VA. + FCIC staff analysis. + +On line 17449: + Notes to Chapter A + recent analysis published + by FHFA comes to + +On line 17449: + See "Data on the + Risk Characteristics and + Performance of Single-Family + +On line 17451: + and Financed in the + Secondary Market," September + FCIC staff analysis, + +On line 17451: + of housing data + and comparison with Ed + Pinto’s analysis," + +On line 17451: + provided by the + Federal Reserve, Fannie + Mae and Freddie Mac + +On line 17451: + with a FICO score + below had an average + rate of serious + +On line 17451: + the GSEs stated that + the average serious + delinquency rates for + +On line 17451: + loans with FICO scores + less than in their guarantee + books was Fannie Mae + +On line 17453: + Credit Supplement, + p. Freddie Mac Fourth Quarter + Financial Results + +On line 17455: + p. In the sample + data provided by the + Federal Reserve, + +On line 17455: + Mae and Freddie Mac + mortgages with LTVs above had an + average rate of + +On line 17455: + the GSEs stated that + the average serious + delinquency rates for + +On line 17457: + Credit Supplement, + p. Freddie Mac Fourth Quarter + Financial Results + +On line 17459: + Federal Agency + Contributions to Subprime + and Alt-A Loans in U.S. + +On line 17459: + of Exhibit with + corrections through October + (www.aei.org/docLib/PintoFCICTriggersMemo.pdf). The million loans + +On line 17459: + total of million + mortgages in subprime or Alt-A + pools, which Pinto calls + +On line 17459: + FICO scores below + which he labels "subprime by + characteristic." + +On line 17459: + interest-only loans, + negative amortization + loans, or loans with an + +On line 17459: + second mortgage—greater + than which he collectively + refers to as "Alt-A by + + characteristic." + The last addi-tions include + an estimated + +On line 17461: + million loans insured + by the FHA and VA with an + LTV greater than out of + +On line 17461: + of roughly million + FHA and VA loans—and million loans + in bank portfolios + +On line 17461: + Credit Supplement, + p. Freddie Mac Fourth Quarter + Financial Results + +On line 17465: + March Edward Pinto, + "Yes, the CRA Is Toxic," City + Journal, Autumn Neil + +On line 17465: + Glenn Canner, "Did the + CRA Cause the Mortgage Market + Meltdown1" Federal + +On line 17465: + Board of Governors, + March The authors use the Home + Mortgage Disclosure + +On line 17465: + which cover roughly + of the mortgage market in + the United States—see Robert + + B. Avery, Kenneth + P. Brevoort, and Glenn B. Canner, + "Opportunities + +On line 17467: + in Using HMDA + Data," Journal of Real + Estate Research no. + +On line 17469: + California: The + Performance of CRA Lending + During the Subprime + +On line 17469: + November working + paper to be presented + at the Federal + +On line 17471: + and Mortgage Markets, + Washington, DC, December + FCIC, "Preliminary + +On line 17475: + Crisis," April Bank of + America response letter + to FCIC, August John + +On line 17479: + interview by FCIC, + March Lewis Ranieri, interview by + FCIC, July Nicolas + +On line 17483: + Weill, interview by + FCIC, May Ibid. Nicolas Weill, email + to Raymond McDaniel and + +On line 17487: + Report, January + pp. Moody’s Investors Service, "Moody’s + Downgrades Subprime First-lien + +On line 17491: + Research Announcement," + July Weill, interview. FCIC + staff estimates, based + +On line 17493: + on analysis of + Blackbox data. Data on + Bear Stearns provided + +On line 17501: + by JP Morgan to + the FCIC. Notes to Chapter Moody’s + Investors Service, "Moody’s + +On line 17501: + Downgrades billion of + Subprime First-Lien RMBS and Affirms + billion Aaa’s and Aa’s," + +On line 17503: + Report, October + pp. FCIC staff estimates, based + on analysis of + +On line 17505: + FCIC staff estimates, + based on analysis of Moody’s + SFDRS data as + +On line 17507: + Service, "The Impact + of Subprime Residential + Mortgage-Backed Securities + +On line 17509: + Special Comment, March + p. Yuri Yoshizawa, email to Noel + Kirnon and Raymond McDaniel, + +On line 17513: + Kolchinsky, subject: "CSFB + Pipeline information," March + Moody’s Investors Service, + +On line 17515: + Report, May p. Richard + Michalek, testimony before + the FCIC, Hearing on + +On line 17515: + Credit Ratings, the + Investment Decisions Made + Based on Those Ratings, + +On line 17517: + Model, June transcript, + pp. MCO Strategic Plan Overview," + presentation by + +On line 17521: + complaint, Chronology + Prepared by Eric Kolchinsky. + FCIC staff estimates + +On line 17521: + analysis of Moody’s + SFDRS; FCIC, "Preliminary + Staff Report: Credit + +On line 17523: + and the Financial + Crisis," June Eric Kolchinsky, + interview by FCIC, + +On line 17531: + Credit Ratings and + the Financial Crisis," pp. + Bingham McCutchen, Fannie + +On line 17531: + Mae counsel, letter + to FCIC, September (hereafter + "Bingham Letter"); O’Melveny + +On line 17531: + Meyers LLP, Freddie + Mac counsel, letter to FCIC, + September (hereafter + +On line 17533: + the Enterprises’ + Financial Performance: Third + Quarter tables and + +On line 17539: + Bingham Letter, Tab + Tab "Repurchase Collections + by Top Ten Sellers/Servicers." O’Melveny + +On line 17541: + "Bank of America + announces fourth-quarter actions with + respect to its home + +On line 17543: + January Mortgage + Insurance Companies of + America, Fact Book + +On line 17545: + (Insurance in Force) + p Documents produced for + the FCIC by United + +On line 17547: + Insurance, MGIC, + Genworth, RMIC, Triad, PMI, and + Radian. FCIC staff + + calculations based + on productions from Fannie + and Freddie. Figures + +On line 17549: + ARM Alt-A, and subprime + loans. FHFA, "Conservator’s + Report: Third Quarter + +On line 17549: + Accounting changes for + impairments have resulted + in offsetting gains + +On line 17551: + for PLS Documents," + Federal Housing Finance + Agency news release, + +On line 17553: + Burling LLP, Freddie + Mac counsel, letter to FCIC, + October see O’Melveny + +On line 17559: + Products," Part VII of + a NERA Insights Series, June + p. Defendants Wells + +On line 17559: + Corp. and Wells Fargo + Bank, N.A.’s Notice of Removal, + Charles Schwab Corp. v. BNP + +On line 17565: + Paribas Securities + Corp, et al., No. cv-10-4030 (N.D. Cal. + September Notes to + +On line 17567: + of Massachusetts, + "Attorney General Martha + Coakley and Goldman + +On line 17567: + Sachs Reach Settlement + Regarding Subprime Lending + Issues," May "Morgan + +On line 17569: + under Settlement + with AG Coakley’s Office," June + Complaint, Cambridge Place + +On line 17569: + v. Morgan Stanley + et al., No. 10-2741 (Mass. Super. + Ct. filed July p. + +On line 17573: + Sarah Johnson, "How Far + Can Fair Value Go1" CFO.com, May + Vikas Shilpiekandula and + + Olga Gorodetsky, "Who + Owns Residential Credit + Risk1" Lehman Brothers Fixed + +On line 17575: + U.S. Securitized + Products Research, September + Moody’s Investor Service, + +On line 17577: + Comment, September + Ben Bernanke, closed-door session with + the FCIC, November + +On line 17579: + Olga Gorodetsky, "Who + Owns Residential Credit + Risk1," September p. + +On line 17579: + Lehman analysts pegged + ultimate subprime and Alt-A + losses at billion. + + Those forecasts were based, + the analysts said, on a + scenario in which house + +On line 17579: + across the country. For + the securitization + figures, see Inside + +On line 17581: + Policy," Global + Financial Stability + Report, October + +On line 17583: + Global Financial + Stability Report, April + FCIC staff estimates, + +On line 17585: + and analysis of + Moody’s Structured Finance Default + Risk Service. Ben Bernanke, + +On line 17585: + Financial Crisis, + day session The Federal + Reserve, September + +On line 17594: + staff calculations + using data in worksheets + Markit ABX.HE. 06-1 + +On line 17596: + Research, CDO/CDS Update + The figures refer to the + BBB- index of + +On line 17600: + CDO/CDS Update p. SEC, + "Risk Management Reviews of + Consolidated + +On line 17602: + memo to Erik Sirri + and others, January Jim + Chanos, interview by + +On line 17604: + FCIC, October SEC, + "Risk Management Reviews of + Consolidated + +On line 17608: + March Henry Paulson, + quoted in Julie Haviv, "Bernanke + Allays Subprime Fears + +On line 17610: + Financial Crisis: + The Role of Investment Banks, + Senate Permanent + +On line 17612: + Subcommittee on + Investigation, 111th Cong., + 2nd sess., April pp. Michael + +On line 17612: + email to David Viniar and + Craig Broderick, December + Senate Permanent + +On line 17614: + pp. Daniel Sparks, email to + Tom Montag and Richard Ruzika, + December Senate + +On line 17616: + Gasvoda, email to Genevieve + Nestor and others, December + Senate Permanent + +On line 17620: + Investigations, + Exhibit Stacy Bash-Polley, email + to Michael Swenson and + +On line 17628: + Investigations, + Exhibit Notes to Chapter + Tetsuya Ishikawa, email to + +On line 17630: + Investigations, + Exhibit 170d. Fabrice Tourre, + email to Jonathan Egol and + +On line 17634: + Investigations, + Exhibit Fabrice Tourre, email + to Marine Serres, + +On line 17640: + using data from + GS Synthetic CDOs," produced + by Goldman Sachs. Gretchen + + Morgenson and Louise + Story, "Banks Bundled Bad Debt, + Bet Against It and Won," + +On line 17642: + York Times, December + Lloyd Blankfein, testimony + before the FCIC, First + +On line 17642: + FCIC, first day, panel + Financial Institution + Representatives, + +On line 17644: + January transcript, + pp. "Goldman Sachs Clarifies + Various Media + +On line 17646: + Hearing," Goldman Sachs + press release, January Gary + Cohn, testimony + +On line 17646: + the FCIC, Hearing on + the Role of Derivatives + in the Financial + +On line 17648: + session Goldman Sachs + Group, Inc. and Derivatives, + June transcript, p. Michael + +On line 17648: + statement, Hearing on + Wall Street and the Financial + Crisis: The Role of + +On line 17650: + pp. Complaint, Basis + Yield Alpha Fund v. Goldman + Sachs Group, Inc., et al. + +On line 17654: + January transcript, + p. Craig Broderick, written + testimony for + + the FCIC, Hearing on + the Role of Derivatives + in the Financial + +On line 17656: + Goldman Sachs Group, Inc. + and Derivatives, June p. + Craig Broderick, email + +On line 17658: + Exhibit High Grade + Risk Analysis, April p. High + Grade—Enhanced Leverage Q&/A, June + +On line 17658: + collateral in + our investment grade structures + collateralized + +On line 17660: + by "sub-prime" mortgages + is approximately On + the March investor call, + +On line 17660: + Tannin told investors + that "most of the CDOs that we + purchased are backed in + +On line 17662: + Call transcript, pp. Email + from matt.tannin@gmail.com to + matt.tannin@gmail.com, + +On line 17666: + Tannin, Bear Stearns, email + to Chavanne Klaus, MEAG New York, + March BSAM Conference + +On line 17668: + Call, April transcript, p. + Matt Tannin, Bear Stearns, email to + Klaus Chavanne, MEAG New + +On line 17668: + Matthew Tannin, email to + Steven Van Solkema, March Complaint, + SEC v. Cioffi, No. + +On line 17672: + (E.D.N.Y. June p. Jim + Crystal, Bear Stearns, email to Ralph + Cioffi (and others), + +On line 17674: + March Ralph Cioffi, Bear + Stearns, email to Ken Mak, Bear Stearns, + March Warren Spector, + +On line 17674: + FCIC, Hearing on the + Shadow Banking System, day + session Investment + +On line 17676: + Banks and the Shadow + Banking System, May transcript, + pp. Information + +On line 17680: + counsel to Bank of + America, September Ibid. + Alan Schwartz, interview + +On line 17680: + April Notably, as one + of only two tri-party + repo clearing banks, + +On line 17680: + more information + about BSAM’s lending obligations + than did most other + +On line 17680: + this superior + market knowledge later put + JP Morgan in a + +On line 17682: + step in and purchase + Bear Stearns virtually overnight. + Email from Goldman to + +On line 17684: + Van Solkema, Bear Stearns, + internal email, Summary + of CDO Analysis + +On line 17692: + Credit Model, April + Notes to Chapter Matt Tannin, + Bear Stearns, email from Gmail + +On line 17694: + to Ralph Cioffi, Bear + Stearns, at his Hotmail account, + April BSAM Conference + +On line 17698: + Call, April transcript. Iris + Semic, email to Matthew Tannin et + al., May Robert Ervin, email + +On line 17700: + May email from Goldman + (ficc-ops-cdopricing) to + rervin@bear.com, May BSAM + +On line 17700: + Pricing Committee + minutes, June Robert Ervin, email to + Greg Quental et al., + +On line 17700: + showing that losses + for the High Grade fund would be + if BSAM used the prices + +On line 17702: + desk was using, rather + than 11.45%—the loss without Lehman’s marks. + Email from "BSAM Hedge Fund + +On line 17704: + Management (Generic)," + May produced by JP Morgan. + BSAMFCIC-e0000013. An untitled + +On line 17704: + less; NAV estimate + reconciliation chart, + produced by JPMorgan, shows + +On line 17708: + Committee minutes, + June Ralph Cioffi, interview + by FCIC, October + +On line 17716: + Ralph Cioffi, email to + John Geissinger, June Schwartz, interview. + Ibid. Ibid.; CSE Program + +On line 17718: + to Erik Sirri and + others through Matthew Eichner, + July CSE Program + +On line 17720: + July Merrill Lynch + analysis, "Bear Stearns Asset + Mgm’t: What Went Wrong"; Paul + +On line 17720: + FCIC, April While most of + the Bear Stearns executives + interviewed by FCIC + +On line 17720: + did not recall the + percentage discount at which + the collateral + +On line 17720: + did believe that it + was significant (e.g., Robert + Upton, interview + +On line 17722: + April "While the High Grade + fund was not in default/had + not missed any margin + +On line 17722: + haircuts or not rolling + repo facilities." Bear + Stearns Packet dated + +On line 17722: + held on June produced + by the Securities and + Exchange Commission, + +On line 17726: + Mary Kay Scucci, April + Friedman, interview; Warren + Spector, interview + +On line 17728: + FCIC, March Sam Molinaro, + interview by FCIC, April Thomas + Marano, interview + +On line 17730: + Spector, interview + (on Marano’s being sent to + Marin). Fed Chairman Ben + +On line 17732: + to FCIC Chairman Phil + Angelides, December James Cayne, + interview by FCIC, + +On line 17734: + Consolidated + Supervised Entities," memo + to Erik Sirri and + +On line 17734: + Consolidated + Supervised Entities," memo + to Erik Sirri and + +On line 17738: + p. both produced by + SEC. Marano, interview. Bill + Jamison, internal + +On line 17740: + Federated. JPMorgan, + Directors Risk Policy + Committee, "Worldwide + +On line 17742: + the downgrades, see Moody’s + Investor Service, "Announcement: + Moody’s Downgrades Subprime + +On line 17744: + U.S. First-Lien Subprime RMBS + Classes Downgraded," July + p. Glenn Costello, "U.S. + +On line 17746: + Rating Surveillance + Update," Fitch Ratings, July + FCIC, "Preliminary + +On line 17748: + Staff Report: Credit + Ratings and the Financial + Crisis," June p. Steven + +On line 17750: + transcript, p. Andrew + Forster, telephone conversation, + July transcript, pp. + +On line 17758: + Martin Sullivan, + interview by FCIC, June Steve + Bensinger, interview by + +On line 17758: + Lewis, interview by + FCIC, June Kevin McGinn, interview + by FCIC, June Andrew + + Forster, Elias Habayeb, and Steve + Bensinger, testimony before + the FCIC, Hearing on + +On line 17758: + Derivatives in + the Financial Crisis, day + session American + +On line 17758: + International + Group, Inc. and Goldman Sachs Group, + Inc., July transcript, + +On line 17760: + former managing + director for Complex and + International + +On line 17760: + Thrift Supervision, + testimony before the + FCIC, Hearing on the + +On line 17760: + Financial Crisis, + day session Derivatives: + Supervisors and + +On line 17764: + transcript, pp. Alan Frost, + interview by FCIC, May Joseph + Cassano, interview + +On line 17766: + June "Information + Pertaining to the Multi-Sector CDS + Portfolio," produced + +On line 17768: + staff calculations. + Andrew Davilman, email to Alan + Frost, subject: "Sorry + +On line 17768: + bother you on"; Frost, + email to Davilman, subject: "Re: + Sorry to bother + +On line 17768: + on"; Davilman, email to + Frost, subject: "Re: Sorry to + bother you on"—all + +On line 17772: + to AIG Financial + Products Corp., July produced + by Goldman Sachs. AIG + +On line 17774: + 2006–December produced + by Goldman Sachs. Andrew Forster, + interview by FCIC, + +On line 17778: + Daniel Sparks, interview + by FCIC, May "Valuation + Pricing Related + +On line 17780: + Calls on Transactions + with AIG," produced by Goldman + Sachs. Jon Liebergall and + +On line 17782: + transcript, pp. David Viniar, + written testimony for + the FCIC, Hearing on + +On line 17782: + Derivatives in + the Financial Crisis, day + session American + +On line 17795: + Athan, email to Andrew + Forster, August Chapter Henry + Paulson, quoted in + +On line 17797: + Rout Doesn’t Threaten + Economy," Bloomberg, July Moody’s + Investors Service, "Moody’s + +On line 17797: + ABCP Program Index: + CP Outstanding as of Moody’s + Investors Service, "Moody’s + +On line 17799: + Overview: Rhineland Funding + Capital Corporation," + June As noted, in + +On line 17799: + capital charge for + liquidity puts equal to + of the base or Staff + +On line 17799: + by FCIC, September + See also Office of the + Comptroller of the + +On line 17801: + Treatment," August For + example, Citigroup would + have held million in + +On line 17801: + in liquidity + put exposure that it had + accumulated + +On line 17805: + CDOs it had issued. + IKB, Annual Report, June + p. Securities + +On line 17807: + Sachs Co. and Fabrice + Tourre, no. 10-CV-3229 (S.D.N.Y. April p. + IKB staff, interview + +On line 17807: + Securities and + Exchange Commission (plaintiff) + v. Goldman Sachs Co. + +On line 17807: + United States District + Court, Southern District of New + York, April at paragraph + +On line 17811: + the first quarter April-30 + June IKB press release, July + IKB staff, interview; + +On line 17811: + interview by FCIC, + November IKB, restated + Annual Report, + +On line 17813: + Meier, testimony + before the FCIC, Hearing on + the Shadow Banking + +On line 17821: + Banking System, May + transcript, p. Notes to Chapter + Angelo Mozilo, + +On line 17823: + LA-03370-A, November pp. + Angelo Mozilo, email to + Lyle Gramley, member + +On line 17823: + Board of Countrywide + Financial Corporation + (cc Michael Perry, chief + +On line 17825: + officer, IndyMac Bank), + August Eric Sieracki, + quoted in Mark DeCambre, + +On line 17827: + TheStreet.com, August "Minutes + of a Special Telephonic + Meeting of the Board + +On line 17829: + Fed Chairman Ben Bernanke, + letter to FCIC Chairman Phil + Angelides, December + +On line 17831: + Reserve Staff, memo to + Board of Governors of the + Federal Reserve + +On line 17835: + Ibid., pp. Countrywide + Financial Corporation, + Form 8-K, Exhibit + +On line 17835: + See also "Minutes + of a Special Telephonic + Meeting of the Boards + +On line 17837: + Corporation and + Countrywide Bank, FSB," August + Angelo Mozilo, + +On line 17839: + September Kenneth + Bruce, "Liquidity Is the + Achilles Heel," Merrill Lynch + +On line 17843: + August p. Mozilo, + interview; the article, + by E. Scott Reckard and + +On line 17843: + was titled "Credit + Crunch Imperils Lender: Worries + Grow about Countrywide’s + +On line 17845: + Angelo Mozilo, + quoted in "One on One with + Angelo Mozilo, + +On line 17845: + CEO of Countrywide + Financial," Nightly Business + Report, PBS, August + +On line 17845: + transcript; and in "CEO + Exclusive: Countrywide CEO, + Pt. The Call, CNBC, + +On line 17847: + interview by Maria + Bartiromo, August transcript, + p. Sebastian Boyd, + +On line 17849: + as Loan Losses Roil + Markets," Bloomberg, August "BNP Paribas + Investment Partners + + Temporally [sic] + Suspends the Calculation + of the Net Asset + +On line 17849: + the following funds: + Parvest Dynamic ABS, BNP + Paribas ABS EURIBOR + +On line 17853: + ABS EONIA," BNP Paribas + press release, August Paul A. + McCulley, testimony + +On line 17855: + Banking System, May + pp. Daniel M. Covitz, Nellie Liang, + and Gustavo A. + + Suarez, "The Evolution + of a Financial Crisis: + Panic in the Asset-Backed + +On line 17859: + Facilitate the + Orderly Functioning of + Financial Markets," + +On line 17863: + August Henry Tabe, + Moody’s Investors Service, "SIVs: An + Oasis of Calm in + +On line 17867: + Report, July p. + Ibid. Henry Tabe, interview + by FCIC, October + +On line 17869: + Liquidity: The + Path Toward Credit Market + Nor-malization," Moody’s + +On line 17875: + p. Information + provided to the FCIC by + Deloitte LLP’s counsel, + +On line 17877: + September Henry + Tabe, The Unravelling of + Structured Investment + +On line 17879: + Kent]: Thoth Capital, + p. The SEC indicated + it is aware of at + +On line 17879: + that were supported + by affiliates because + of SIV investments. + +On line 17879: + Securities and + Exchange Commission, "Money + Fund Reform" (Proposed + +On line 17887: + rule), June p. n. Notes + to Chapter Christopher Condon + and Rachel Layne, "GE Bond + +On line 17889: + Fund Investors Cash Out + After Losses from Subprime," + Bloomberg, November The + +On line 17889: + disclosed. See Shannon + D. Harrington and Sree Vidya + Bhaktavatsalam, "Bank + +On line 17889: + of America to + Liquidate Billion Cash Fund," + Bloomberg, December See + +On line 17889: + M. Grynbaum, "Mortgage + Crisis Forces the Closing of + a Fund," New York Times, + +On line 17891: + at Marshall Money + Market Funds, interview by + Crane Data, Money + +On line 17893: + Fund Intelligence, + January Credit Suisse + Institutional + +On line 17895: + December Note p. + Florida Legislature, + Office of Program + +On line 17899: + Memorandum, March + p. SBA report, "Update on + Sub-Prime Mortgage Meltdown + +On line 17908: + Bloomberg Professional, + Write downs and Credit Losses + vs. Capital Raised + +On line 17908: + data reported + for second half of Write-downs + are for losses to + +On line 17910: + holdings in structured + finance and mortgages. Roy C. + Smith, Paper Fortune$: + + Modern Wall Street: Where + It’s Been and Where It’s Going + (New York: St. Martin’s + +On line 17912: + Historical Prices + Index December CGS1U5; + CBSC1U5; and CLEH1U5. + +On line 17914: + refer to credit + default swaps on five-year senior + debt. Presentation + +On line 17918: + "Leveraged Finance and + Mortgage/CDO Review," October p. + Presentation to + +On line 17922: + interview by FCIC, + September Presentation + to Merrill Board of + +On line 17926: + pp. Presentation + to Merrill Lynch Risk Oversight + Committee, "Market + +On line 17928: + Update," September + p. Merrill Lynch, 1Q Earnings + Call transcript, April p. + +On line 17932: + 2Q Earnings Release, + July p. Merrill Lynch, 2Q + Earnings Call transcript, + +On line 17942: + Ibid. Kim, interview. + Stanley O’Neal, interview by + FCIC, September "ABS + +On line 17946: + Dale Lattanzio, July + p. O’Neal, interview. Merrill + Lynch, 3Q Earnings Call + +On line 17950: + chronology, Merrill + Lynch specific, p. Nancy + Moran and Rodney Yap, + +On line 17952: + Ranks No. on Payout + List, Group Says: Table (Update1)," + Bloomberg, November Kim + +On line 17954: + interview; Merrill + Lynch, Proxy Statement, April p. Charles + Prince, interview by + +On line 17958: + Rubin, interview + by FCIC, March Prince, interview. + Moody’s Investors Service, + +On line 17960: + Prince, testimony + before the FCIC, Hearing on + Subprime Lending and + +On line 17960: + Government-Sponsored Enterprises + (GSEs), day session Citigroup + Senior Management, + +On line 17970: + April transcript, p. Notes + to Chapter Prince, interview. + Tobias Brushammar, James + + Hua, Graham Jackson, + and Subra Viswanathan, Citigroup + memorandum to + + Nestor Dominguez, Janice Warne, + Michael Raynes, and Jo-Anne Williams, subject: + Liquidity Put + +On line 17972: + Xanthos, interview + by Financial Industry + Regulatory + +On line 17974: + (FINRA), March Susan + Mills, testimony before + the FCIC, hearing on + + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 17978: + Murray Barnes, former + managing director of + Independent Risk, + +On line 17980: + March Notes on Senior + Supervisors’ Meeting with + Firms, meeting between + +On line 17980: + Federal Reserve + Bank of New York, Federal + Reserve Board, Office + +On line 17982: + Japan FSA, November + p. Janice Warne, interview + by FCIC, February + +On line 17986: + Dominguez, interview by + FCIC, March Dominguez, interview. Nestor + Dominguez, testimony + +On line 17986: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 17988: + Structured Products and + Risk Management, April transcript, + pp. Barnes, interview. + +On line 17996: + staff calculations. + Prince, testimony before + the FCIC, April transcript, + +On line 18000: + interview by FCIC, + April Bushnell, interview. Ellen + "Bebe" Duke, Citigroup + +On line 18004: + Risk, interview by + FCIC, March Barnes, interview. James + Xanthos, interview + +On line 18008: + Regulatory + Authority (FINRA), March + Barnes, interview. Prince, + +On line 18010: + the Executive + Committee and adviser, + interview by FCIC, + +On line 18012: + Thomas Maheras, former + co-CEO of Citi Markets Banking, + interview by FCIC, + +On line 18020: + Business and Subprime + Exposure, June p. Paul, Weiss, + Citigroup’s counsel, + +On line 18024: + Q&A transcript, July + Complaint, Securities and + Exchange Commission + +On line 18026: + v. Citigroup Inc., + 1:10-cv-01277 (D.D.C), July Federal + Reserve Board of New + +On line 18026: + to Vikram Pandit and + the Board of the Directors + of Citigroup, April + +On line 18030: + Maheras, interview, + and testimony before + the FCIC, Hearing on + + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 18046: + Prince, interview; Charles + Prince, email to Robert Rubin, re, + September A.M. (on + +On line 18048: + Maheras and super + seniors). Robert Rubin, email to + Charles Prince, September + +On line 18050: + Charles Prince, email to Robert + Rubin, September P.M. Robert + Rubin, interview + +On line 18056: + Prince, interview. Ibid. + Citigroup, "Risk Management + Review: An Update + +On line 18062: + Earnings Call transcript, + October Prince, interview. + Paul, Weiss, Citigroup’s + +On line 18062: + the FCIC’s second and + third supplemental requests, + March Citigroup, Proxy + +On line 18064: + for fiscal year March + p. Federal Reserve Board + of New York, letter + +On line 18064: + to Vikram Pandit and + the Board of Directors of + Citigroup, April p. + +On line 18066: + staff calculations + from Citigroup proxy statements + (information for + +On line 18066: + Paul, Weiss (on behalf + of Citigroup), letter to + FCIC, March "Response to + +On line 18068: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 18070: + Citigroup Senior + Management, April transcript, pp. + John Reed, interview + +On line 18074: + Earnings Call credit + supplement, August Joseph St. + Denis, letter to + +On line 18078: + p. Joseph St. Denis, + interview by FCIC, April Gene + Park, interview by + +On line 18084: + Alan Frost, interview + by FCIC, May Pierre Micottis, + interview by FCIC, + +On line 18090: + 3Q07 review of AIG’s + super-senior CDS portfolio, + November p. Joseph + +On line 18094: + Cassano, interview + by FCIC, June Park, interview. + Goldman’s submissions + +On line 18094: + its valuation + and pricing related to + collateral calls + +On line 18100: + Andrew Forster, telephone + call to Jon Liebergall, July + transcript. PricewaterhouseCooper, memo to + +On line 18102: + AIGFP 2Q review files, + August Andrew Forster, email to + Joseph Cassano and Pierre + +On line 18104: + enclosing marks from + Merrill Lynch, AIG, Earnings Call + credit supplement, + +On line 18106: + estimates are based + on Federal Reserve Bank + of New York, "Maiden + +On line 18106: + Report," January + This probably isn’t a + complete list of their + + positions, because + not all CDO tranches are part + of the Maiden Lane + +On line 18106: + III portfolio. Of + the securities listed + in that document, + +On line 18106: + data on in Moody’s + CDO EMS database and Bloomberg. For + those securities, + +On line 18106: + downgrade and became + materially impaired + (i.e., were downgraded + +On line 18108: + suffered downgrades and + became materially + impaired. Alan Frost, email + +On line 18114: + Andrew Forster, August + Cassano, interview. Frost, email + to Forster, August Tom + +On line 18116: + email to Andrew Forster, + cc Adam Budnick, September + Joseph Cassano, email to + +On line 18124: + Elias Habayeb, November + Notes to Chapter Minutes of + the meeting of the + +On line 18126: + Audit Committee, + November p. Andrew Forster, + email to Joseph Cassano, + +On line 18128: + subject: GS Prices vs + Others, November Goldman, + submission to the + +On line 18128: + Pricing Related + to Initial Collateral + Calls on Transactions + +On line 18130: + with AIG," pp. Based on + staff analysis of data + provided to the + +On line 18130: + includes all tranches + of the ABX.HE 06-2. TABX is + constructed based on + +On line 18130: + obligations for the + 06-2 and 07-1 BBB and BBB- + tranches of the ABX. + +On line 18136: + Cassano, interview. + Andrew Forster, email to Alan Frost, + August Tim Ryan, PricewaterhouseCooper, + +On line 18140: + interview by FCIC, + June SEC staff briefing of FCIC + staff, June Joseph Cassano, + +On line 18140: + to Andrew Forster, Pierre + Micottis, James Bridgwater, + and Peter Robinson, + +On line 18142: + of meeting at AIGFP, + October See also PwC + audit team, memo re + +On line 18144: + 3Q07 review of AIG’s + super-senior CDS portfolio, + November pp. AIG, + +On line 18148: + Earnings Call transcript, + November pp. PwC audit + team memo, p. Goldman + +On line 18152: + Dooley, November + attaching memo from Andrew + Forster, "Collateral + +On line 18154: + Status." Andrew Forster, + "Collateral Call Status," + memo prepared for Joe + +On line 18156: + Cassano. Joe Cassano, + email to Bill Dooley, subject: + Collateral Calls, + +On line 18160: + Cassano, email to Bill + Dooley, subject: GS call back, + November Goldman + +On line 18162: + Financial Products + Corp., margin call, November + PwC audit team, memo, + +On line 18164: + meeting to discuss + super-senior valuations + and collateral + +On line 18166: + disputes, November + p. produced by PwC. Andrew + Forster, interview by + +On line 18170: + Martin Sullivan, + interview by FDIC, June PwC, + notes of meeting of + +On line 18178: + Paul Narayanan, November + Sullivan, interview. AIG + Investor Conference + +On line 18180: + December transcript, + pp. Joseph Cassano, email to Michael + Sherwood and David Viniar, + +On line 18182: + CDO Valuations, + January Andrew Davilman, + interview by FCIC, + +On line 18184: + interview by FCIC, + June "AIG/Goldman Sachs Collateral + Call Timeline," available + +On line 18188: + on FCIC website at + http://fcic.gov/ hearings/pdfs/2010–0701-AIG-Goldman-supporting-docs.pdf. PricewaterhouseCooper, memo + to AIG workpaper + +On line 18192: + Martin Sullivan, + testimony before the + FCIC, Hearing on the + +On line 18192: + Derivatives in + the Financial Crisis, day + session American + +On line 18196: + International + Group, Inc. and Derivatives, + June transcript, p. PricewaterhouseCooper, + +On line 18198: + the FCIC, Hearing on + the Role of Derivatives + in the Financial + +On line 18198: + session American + International Group, Inc. + and Derivatives, + +On line 18200: + Thrift Supervision, + letter to AIG General + Counsel and Board, March + +On line 18210: + Dudley, interview + by FCIC, October Notes to + Chapter Adam B. Ashcraft, + + Morten L. Bech, and W. + Scott Frame, "The Federal Home + Loan Bank System: The + + Lender of Next to Last + Resort1" Federal Reserve + Bank of New York Staff + +On line 18212: + Federal Reserve + Board, "October Senior Loan + Officer Opinion + +On line 18214: + Bank Lending Practices," + October Frederic Mishkin, + interview by FCIC, + +On line 18222: + October Dudley, + interview. Ibid. Ibid. Standard + Poor’s, "Detailed Results + +On line 18224: + of Subprime Stress Test + of Financial Guarantors," + RatingsDirect, February Alan + +On line 18228: + memo to Erik Sirri + and others, November p. + Roseman, interview, + +On line 18232: + memo to Erik Sirri + and others, January p. + Bill Lockyer, State + +On line 18232: + Report: Making the + Municipal Bond Market + Work for Taxpayers + +On line 18234: + Times (October p. + John J. McConnell and Alessio Saretto, + "Auction Failures and + +On line 18236: + School of Management, + Purdue University, April + p. Erik R. Sirri, + +On line 18238: + Exchange Commission, + "Municipal Bound Turmoil: + Impact on Cities, Towns + +On line 18238: + States," testimony + before the House Financial + Services Committee, + +On line 18240: + 2nd sess., March Georgetown + University, "Annual + Financial Report, + +On line 18244: + "The Sad Story of + Auction-Rate Securities, Barrons, + May "SEC Finalizes + +On line 18244: + Settlements with Bank + of America, RBC, and Deutsche + Bank," SEC press release, + +On line 18253: + Asset," Upper HedgeWorld + Prime Brokerage League Table, + accessible at + +On line 18253: + Zuckerman, "Hedge Funds, + Once a Windfall, Contribute + to Bear’s Downfall," Wall + +On line 18255: + Street Journal, March Jeff + Mayer and Thomas Marano, "Fixed + Income Overview," March + +On line 18259: + The Secondary Market + (Bethesda, MD: Inside Mortgage + Finance, pp. FCIC staff + +On line 18259: + based on Moody’s CDO EMS + database. Different numbers + are provided in + +On line 18261: + Jeff Mayer and Thomas + Marano, "Fixed Income Overview," + March p. Samuel Molinaro, + +On line 18263: + interview by FCIC, + April Michael Alix, interview + by FCIC, April SEC, "Risk + +On line 18267: + Colby and others, + May Robert Upton, interview + by FCIC, April SEC, "Risk + +On line 18271: + to Erik Sirri and + others, March Ibid. Bear Stearns, "Fitch + Presentation," PowerPoint + +On line 18275: + slides, August Upton, + interview. Bear Stearns, Form 10-K + for the year ended + +On line 18281: + Standard Poor’s, Global + Credit Portal RatingsDirect, "Research + Update: Bear Stearns Cos. + +On line 18295: + April Notes to Chapter + Matthew Eichner, interview + by FCIC, April Wendy de + +On line 18297: + FCIC, April Steven Meyer, + interview by FCIC, April Mike + Alix, interview + +On line 18303: + Timeline Regarding + Bear Stearns Companies Inc., April + produced by SEC. SEC + +On line 18309: + FCIC, Hearing on the + Shadow Banking System, day + session Investment + +On line 18309: + Banks and the Shadow + Banking System, May transcript, + p. Cayne, interview. + +On line 18315: + New York, "Tri-Party Repo + Infrastructure Reform," white + paper, May p. Seth + +On line 18317: + by FCIC, September + Information provided + by Federated + +On line 18319: + Goebel, Kevin Gaffney, and Norm + Lind (Fidelity employees), + interview by FCIC, + +On line 18323: + interview by FCIC, + March Timeline Regarding the + Bear Stearns Companies + +On line 18327: + pp. provided to + the FCIC. Alan Schwartz, interview + by FCIC, April Lucian + +On line 18331: + p. SNL Financial. + Thomas Marano, interview by + FCIC, April Paul Friedman, + +On line 18331: + in William Cohan, House + of Cards: A Tale of Hubris and + Wretched Excess on + +On line 18331: + York: Doubleday, p. + Although Friedman acknowledged + to the FCIC making + + the cited statements, + and many others as well, he + attributes them to anger + + and frustration over + Bear Stearns’s failure. Currently, + Friedman is employed + +On line 18331: + Securities, Inc., + where he works for Alan Schwartz, the + former president + +On line 18333: + Bear Stearns. Paul Friedman, + interview by FCIC, April The + Corporate Library, + +On line 18335: + Bear Stearns Companies + Inc.: Governance Profile," June + p. Cayne, interview. + +On line 18339: + Schwartz (interview by + FCIC) stated that bonuses for + individual + +On line 18339: + the Compensation + Committee, and the final + recommendation + +On line 18343: + for bonuses came from + the CEO. Alix, interview. + Bear Stearns, Performance + +On line 18343: + I-1 (provided to + the FCIC); Alix, interview. + The salary cap had been + +On line 18345: + from to in (Alix, + interview; Cayne, interview). + Bebchuk et al., "The + +On line 18345: + Table p. Table + p. Table p. The budget + authority for + +On line 18347: + in was million; in + it was billion. In Alix + received million in + +On line 18347: + compensation, Cayne + received more than million in + salary and bonus, and Schwartz + +On line 18347: + in salary and bonus. SNL + Financial; interviews with + Spector and Alix. + +On line 18353: + email to Alan Schwartz and + Richie Metrick, February Matthew + Eichner, email to + +On line 18359: + al., January Lou + Lebedin, interview by FCIC, + April Notes to Chapter + +On line 18367: + Stearns Companies Inc., + April produced by SEC. Upton, + interview. Minutes + +On line 18369: + Special Meeting of + Bear Stearns Board of Directors, + March Pat Lewis, Bear Stearns, + +On line 18371: + Matthew Eichner, Steven + Spurry, James Giles, and Kevin Silva, + March Matthew Eichner, + +On line 18373: + Brian Peters, March + David Fettig, "The History + of a Powerful + +On line 18375: + Federal Reserve + Bank of Minneapolis, + June James Embersit, + +On line 18377: + Deborah Bailey, + March In response to the FCIC’s + interrogatories, + +On line 18377: + Morgan produced a + list of all payments Bear Stearns + made to or received + +On line 18379: + OTC derivatives + counterparties from March through + March The spreadsheet was + +On line 18379: + in September by + Bear Stearns in response to a + request by the SEC + +On line 18379: + and Markets. The large + volume of novations away + from Bear Stearns during + +On line 18379: + the previous week + was confirmed by the New York + Federal Reserve + +On line 18379: + and Derivatives + Association. (New York + Federal Reserve + +On line 18381: + ISDA personnel, + interviews by FCIC, May and + Brian Peters, email + +On line 18383: + to Matthew Eichner, + March Stuart Smith, email to Bear + Stearns, March Marvin Woolard, + +On line 18387: + et al., March Kyle Bass, + interview by FCIC, April Bass, + interview. Debby + +On line 18389: + LaMoy, email to Faina Epshteyn, + March Faina Epshteyn, email to Debby + LaMoy, March Marvin Woolard, + +On line 18391: + Stuart Smith et al., + March CNBC video, Schwartz and CNBC’s + David Faber, original + +On line 18393: + air date March Yalman + Onaran, "Bear Stearns Investor Lewis May + Increase His Stake," Bloomberg + +On line 18395: + Matthew Eichner, email + to Erik Sirri, Robert Colby, + and Michael Macchiaroli, March + +On line 18397: + Minutes of Special + Meeting of Bear Stearns Board of + Directors, March pp. + +On line 18401: + Upton, interview. + Matthew Eichner, email to Erik + Sirri, Robert Colby, + +On line 18403: + and Michael Macchiaroli, March + Alan Schwartz, interview by FCIC; + Matthew Eichner, email + +On line 18405: + to Erik Sirri, Robert + Colby, and Michael Macchiaroli, March + Upton, interview. + +On line 18407: + Minutes of Special + Meeting of Bear Stearns Board of + Directors, March ("[Schwartz] + +On line 18407: + had been seventeen + billion dollars in cash with + a two billion eight + +On line 18407: + backstop, unsecured + line. The Board was told that twelve + to fifteen billion + + dollars had gone out + of TBSCI in the last two + days and that TBSCI + +On line 18409: + margin calls"). Upton, + interview; Goebel, Gaffney, and Lind, + interview; Steven Meier, + +On line 18411: + interview by FCIC, + March Michael Macchiaroli, interview + by FCIC, April Christopher + +On line 18411: + Banking System, day + session SEC Regulation + of Investment Banks, + +On line 18415: + Timeline Regarding + Bear Stearns Companies Inc., April + produced by SEC. Jamie + +On line 18417: + FCIC, October Alan + Schwartz, testimony before + the FCIC, Hearing on + +On line 18417: + Banking System, day + session Investment Banks and + the Shadow Banking + +On line 18421: + p. Schwartz, interview. + Schwartz., interview. Ibid.; Molinaro, + interview; Alix, + +On line 18425: + Chrin, interview by + FCIC, April Dimon, interview + by FCIC, October + +On line 18427: + of Directors, March + Federal Reserve, "Report + Pursuant to Section + +On line 18427: + Stabilization Act + of Loan to Facilitate + the Acquisition + +On line 18427: + Companies, Inc. by + JP Morgan Co.," pp. Ernst Young, + "Project LLC: Summary + +On line 18435: + Report," June p. Notes + to Chapter Contrary to what + is stated in the + +On line 18435: + board minutes (Special + Meeting of Bear Stearns Board of + Directors, March p. + +On line 18435: + staff interviewed Schwartz + he said that the a share price + came from JP Morgan, + +On line 18435: + Paulson. Schwartz also + told staff that because Bear did + not receive "a lot + +On line 18437: + it had to accept + JP Morgan’s offer of a + share. Chrin, interview. + +On line 18439: + Schwartz, testimony + before the FCIC, Hearing on + the Shadow Banking + +On line 18439: + session Investment + Banks and the Shadow Banking + System, May transcript, + +On line 18445: + Macchiaroli, interview. + Ben Bernanke, closed-door session with + FCIC, November Ibid. + +On line 18447: + Federal Reserve + Bank of New York, "Actions by + the New York Fed in + +On line 18449: + Banking, Housing, and + Urban Affairs, 110th Cong., 2nd + sess., April p. Henry + +On line 18449: + FCIC, Hearing on the + Shadow Banking System, day + session Perspective + +On line 18458: + Banking System, May + transcript, pp. Chapter David Wong, + interview by FCIC, + +On line 18460: + and Yalman Onaran, "Lehman’s + Fuld Says ‘Worst Is Behind Us’ + in Crisis (Update3), + +On line 18462: + April Henry Paulson, + testimony before the + FCIC, Hearing on the + +On line 18462: + System, day session + Perspective on the Shadow + Banking System, May + +On line 18464: + transcript, p. Viral + V. Acharya and T. Sabri Öncü, "The + Dodd-Frank Wall Street Reform + +On line 18464: + Protection Act and + a Little Known Corner of + Wall Street: The Repo + +On line 18468: + Street, July Sandie O’Connor, + JP Morgan, interview by + FCIC, March Jamie Dimon, + +On line 18470: + interview by FCIC, + October Adam Copeland, Antoine + Martin, Michael Walker, + +On line 18472: + Market Before the + Reforms," FRBNY Staff Report + No. November p. + +On line 18474: + Meier, testimony + before the FCIC, Hearing on + the Shadow Banking + +On line 18476: + the Shadow Banking + System, May transcript, p. William + Dudley, interview + +On line 18480: + by FCIC, October + Darryll Hendricks, interview + by FCIC, August James + + Cayne, testimony + before the FCIC, Hearing on + the Shadow Banking + +On line 18480: + session Investment + Banks and the Shadow Banking + System, May transcript, + +On line 18484: + Federal Reserve, + "Regulatory Reform: + Primary Dealer + +On line 18488: + R. Valukas, Report of + Examiner, In re Lehman + Brothers Holdings Inc., + +On line 18490: + et al., Chapter Case + No. 08-13555 (JMP), (Bankr. S.D.N.Y.), March + quotation, (hereafter + +On line 18500: + Hendricks, interview. + Lucinda Brickler, email to + Patrick Parkinson, July + +On line 18502: + memorandum to + Timothy Geithner, + July The billion + + figure is noted + in Patrick Parkinson, email to Ben + Bernanke et al., July + +On line 18508: + Patrick Parkinson, email to + Lucinda Brickler, July + Patrick Parkinson, email to + +On line 18518: + Bernanke et al., July + Ibid. Notes to Chapter Based on + chart in Federal + +On line 18522: + Largest Securities + Firms, August p. Ibid. Tobias + Adrian, Christopher Burke, + +On line 18524: + of New York, Current + Issues in Economics and + Finance no. (August + +On line 18528: + interview by FCIC, + April p. Fed Chair Ben Bernanke, "Lessons + from the Failure of + +On line 18530: + the House Financial + Services Committee, 111th Cong., + 2nd sess., April p. Valukas, + +On line 18530: + n. Examiner’s + Interview of Timothy + F. Geithner, + +On line 18536: + Nov. p. Valukas, Sirri, + interview. William Brodows and Til + Schuermann, Federal + +On line 18538: + Initial Assessment + of CSEs," May slides Federal + Reserve Bank of New + +On line 18546: + Liquidity Stress + Analysis," June p. Ibid., p. + Valukas, Ibid., Christopher Cox, + +On line 18548: + the House Financial + Services Committee, 111th Cong., + 2nd sess., April p. Patrick + +On line 18550: + Stability: A + Private Sector Perspective, + The Report of the + +On line 18552: + Meeting on Credit + Derivatives," September + Federal Reserve + +On line 18552: + Bank of New York, "Third + Industry Meeting Hosted + by the Federal + +On line 18554: + and Derivatives + Activities, First Quarter + Table the figures + +On line 18554: + the text are reached by + subtracting exchange traded + futures and options + +On line 18558: + derivatives. Chris + Mewbourne, interview by FCIC, + July This figure + +On line 18558: + a low in at the + height of the mortgage boom, of + billion in problem + +On line 18558: + under the Uniform + Financial Institutions + Rating System. FDIC + +On line 18558: + institutions—i.e., + the regulated banking + and thrift industry + +On line 18558: + Quarterly no. (March + Quarterly Banking Profile: + Second Quarter FDIC + +On line 18560: + Quarterly no. (June + By the problem list would swell + to banks, with assets + +On line 18560: + billion. Quarterly + Banking Profile: Fourth Quarter + FDIC Quarterly no. + +On line 18564: + Quarterly Banking + Profile: First Quarter p. Roger + Cole, interview by + +On line 18568: + interview with Michael + Solomon and Fred Phillips-Patrick, September + Federal Reserve + +On line 18570: + of New York, letter + to Charles Prince, April Federal + Reserve Bank of New + +On line 18572: + Reserve Board, "FRB New + York Operations Review: + Close Out Report," p. + +On line 18574: + FCIC, Hearing on the + Shadow Banking System, day + session Perspective + +On line 18576: + the Shadow Banking + System, May transcript, p. Steve + Manzari and Dianne + +On line 18578: + Dobbeck, interview by + FCIC, April Federal Reserve + Board, "Wachovia Case Study," + +On line 18584: + November and p. + Angus McBryde, interview by + FCIC, July Notes to + +On line 18586: + In addition, he + negotiated himself + three years of office + +On line 18586: + expense. Thompson had + previously received more + than million in salary + +On line 18586: + more than million in + his total compensation + from through exceeded + +On line 18588: + Federal Reserve + Bank of Richmond, letter to + Wachovia, July pp. + +On line 18594: + letter, pp. Ibid., pp. + Ibid., letter, p. Report of + Examination, + +On line 18598: + Directors meeting, + April p. Senate Permanent + Subcommittee on + + Investigations, + Wall Street and the Financial + Crisis: The Role of + +On line 18600: + High Risk Home Loans, 111th + Cong., 2nd sess., April Exhibits, p. + Senate Permanent + + Subcommittee on + Investigations, Wall Street + and the Financial + +On line 18600: + Crisis: Role of the + Bank Regulators, 111th Cong., + 2nd sess., April Exhibits, + +On line 18604: + Ivie, July Offices + of Inspector General, + Department of the + +On line 18604: + Federal Deposit + Insurance Corporation, + "Evaluation of + +On line 18606: + No. EVAL 10-002, April pp. + FDIC, Confidential Problem + Bank Memorandum, + +On line 18610: + Memorandum to + FDIC Regional Director, + September Treasury + +On line 18612: + Regulatory + Oversight of WaMu," pp. Quoted + in Damian Paletta, + +On line 18614: + Bank Regulators + to Use Warier Eye," Wall Street + Journal, August Sheila + +On line 18616: + Bair, interview by + FCIC, August Treasury and FDIC + IGs, "Evaluation + +On line 18618: + Currency, Large Bank + Supervision: Comptroller’s + Handbook, January + +On line 18622: + p. Cole, interview. + Rich Spillenkothen, "Observations and + Perspectives of the + +On line 18622: + and Regulation + at the Federal Reserve + Board from to on the + +On line 18622: + Years Preceding the + Financial Crisis," paper + prepared for the FCIC, + +On line 18626: + May p. Doug Roeder, + interview by FCIC, August + "Treasury Releases + +On line 18635: + release, March Chapter + Henry Paulson, interview + by FCIC, April Henry + +On line 18635: + Brink: Inside the Race + to Stop the Collapse of the + Global Financial + +On line 18639: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 18641: + Housing Enterprise + Oversight, April transcript, p. Daniel + Mudd, letter to James + +On line 18645: + Daniel Mudd, letter to + shareholders, in Fannie Mae, + Annual Report," + +On line 18651: + interview by FCIC, + March Robert Levin, interview by + FCIC, March James Lockhart, + +On line 18653: + to Daniel Mudd, August + p. James Lockhart, letter to + Senator Charles Schumer, + +On line 18655: + August James Lockhart, + written testimony for + the FCIC, Hearing on + + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 18663: + Federal Housing + Enterprise Oversight, April pp. + Notes to Chapter Ibid., + +On line 18667: + Tony Ryan, and Jeremiah + Norton, Treasury officials, + interview by FCIC, + +On line 18671: + OFHEO Plan, But Wishing + Otherwise," American Banker, + December Fannie + +On line 18673: + Flexibility + on Fannie Mae, Freddie Mac + Mortgage Portfolios," + +On line 18677: + for the FCIC, April p. + Ben Bernanke, quoted in Eric + Dash, "Fannie Mae to + +On line 18679: + Portfolio," New York + Times, September Senator + Charles E. Schumer, letter + +On line 18679: + OFHEO Director James + B. Lockhart III, February + Schumer continued, "If + + you have decided + that you will be keeping the + capital surcharge + +On line 18679: + place I would like an + explanation as to why + you think upholding + +On line 18679: + capital relief + that could better position + the GSEs to provide + +On line 18683: + Results," Fannie Mae + press release, February Daniel + Mudd, interview by + +On line 18687: + March Robert Steel, email to + Jeremiah Norton, February + Michael Farrell, email to + +On line 18691: + Steel, March Emails between + Robert K. Steel and Daniel Mudd, March + Daniel Mudd, email to Robert + +On line 18693: + and Its Consequences," + p. attachment to email from + Jason Thomas to Robert + +On line 18695: + March Robert Steel, email to + David Nason, Tony Ryan, Jeremiah + Norton, and Neel Kashkari, + +On line 18701: + interview by FCIC, + March Paulson, interview. James + Lockhart, email to Daniel + +On line 18705: + Steel, and Dick Syron, + subject: "Re: announcement draft," + March Ibid. "OFHEO, Fannie + +On line 18705: + Announce Initiative + to Increase Mortgage Market + Liquidity," OFHEO + +On line 18709: + release, March Paulson, + interview. Joshua Rosner, "OFHEO + Got Rolled," GrahamFisher Weekly + +On line 18713: + Bisenius, interview + by FCIC, September "Freddie + Mac CEO Richard Syron + +On line 18719: + Mudd, letters to James + Lockhart, August and August + Timothy P. Clark + +On line 18719: + Reserve Board) and Scott + Alvarez (general counsel, + Federal Reserve + +On line 18721: + by FCIC, February + "Board Grants Federal Reserve + Bank of New York the + +On line 18721: + and Freddie Mac Should + Such Lending Prove Necessary," + Federal Reserve + +On line 18725: + press release, July + Alvarez, interview. Treasury + Secretary Henry + +On line 18725: + Financial Markets + and the Regulatory + Responses to Them, + +On line 18727: + Banking, Housing, and + Urban Affairs, 110th Cong., 2nd + sess., July "Statement + +On line 18735: + Clark, interview Mudd, + interview. Clark, interview. + Susan Eckert, Kevin + +On line 18741: + Bailey, and other + OCC staff, interview by FCIC, + February Notes to + +On line 18745: + Chapter Ibid. Office + of the Comptroller of the + Currency, "Observations—Allowance Process + +On line 18749: + H. Mudd (President + and CEO of Fannie Mae), "Re: + Notice of Proposed + +On line 18749: + letter to Richard F. + Syron (President and CEO + of Freddie Mac), "Re: + +On line 18751: + Proposed Capital + Classification at June + August "Draft—Mid-year Letter," + +On line 18753: + Dickerson, letter + to Daniel H. Mudd, September + Dickerson to Mudd, + +On line 18755: + September with "Draft + Mid Year Letter" attached. "Draft—Mid-year + Letter" (Fannie), pp. + +On line 18767: + p. Ibid., pp. "Draft Mid + Year Letter" (Freddie), pp. Ibid., + p. Mudd, interview. + +On line 18769: + to James B. Lockhart + III, memorandum, "Proposed + Appointment of the + +On line 18769: + the Federal Home + Loan Mortgage Corporation," + September (hereafter + +On line 18769: + conservatorship + memorandum); Christopher H. + Dickerson to James + +On line 18769: + III, memorandum, + Proposed Appointment of the + Federal Housing + +On line 18769: + Association," + September (hereafter Fannie + conservatorship + +On line 18773: + Paulson, On the Brink, + p. Lockhart, testimony + before the FCIC, April + +On line 18777: + transcript, p. Paulson, + interview; Paulson, On the + Brink, p. Paulson, On + +On line 18785: + Levin, interview. Mudd, + interview. FHFA, Fannie + conservatorship + +On line 18791: + conservatorship + memorandum, pp. Syron, + interview. Daniel Mudd, + +On line 18791: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 18793: + day session Fannie + Mae, April transcript, p. Paul Nash, + FDIC, letter to FCIC, + +On line 18793: + questions to Sheila Bair’s + testimony during the + September hearing, + +On line 18799: + Kashkari, interview by + FCIC, November Tom Baxter, + interview by FCIC, + +On line 18803: + interview. Lockhart, + testimony before the + FCIC, April transcript, p. + +On line 18805: + System, Division + of Banking Supervision + and Regulation, + + memorandum to + the Board of Governors, "Stress + Scenarios on Bank + +On line 18807: + January p. Daniel + Mudd, written testimony + for the FCIC, Hearing + +On line 18807: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 18809: + day session Fannie + Mae, April p. John Kerr, Scott Smith, + Steve Corona (FHFA + +On line 18809: + and Alfred Pollard + (FHFA general counsel), + group interview by + +On line 18819: + March Notes to Chapter + Lockhart, interview. Edward + DeMarco, interview by + +On line 18823: + March Mudd, interview. + Henry Cisneros, interview + by FCIC, October + +On line 18827: + April transcript, p. Robert + Levin, testimony before + the FCIC, Hearing on + + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 18836: + day session Fannie + Mae, April transcript, p. Chapter + Joseph Sommer, counsel, + +On line 18836: + of New York, email to + Patrick M. Parkinson, deputy research + director, Board of + +On line 18836: + of the Federal + Reserve System, et al., "Re: + another option + +On line 18840: + Dimon, interview + by FCIC, October Barry + Zubrow, testimony + +On line 18840: + of Systemic Risk in + the Financial Crisis, day + session Lehman Brothers, + +On line 18842: + p. Richard S. Fuld Jr., + testimony before the + FCIC, Hearing on Too + +On line 18842: + of Systemic Risk in + the Financial Crisis, day + session Lehman Brothers, + +On line 18844: + p. See also Fuld’s + written testimony at + same hearing, p. Ben + +On line 18844: + Financial Crisis, + day session The Federal + Reserve, September + +On line 18848: + by FCIC, October + Bernanke, testimony before + the FCIC, September + +On line 18850: + the examiner + that the Federal Reserve, + the SEC, and "markets + +On line 18850: + Lehman as the next most + vulnerable investment + bank because of its + +On line 18850: + R. Valukas, Report of + Examiner, In re Lehman + Brothers Holdings Inc., + +On line 18852: + et al., Debtors, Chapter + Case No. 08-13555 (JMP), (Bankr. S.D.N.Y.), + March (hereafter cited + +On line 18854: + Valukas); see also and + n. and nn. and n. and n. + and and n. Paulson, + +On line 18858: + following Bear Stearns’s + near collapse, he considered + Lehman to be the "most + +On line 18858: + exposed" investment + bank, see also and n. and + n. and n. and n. + +On line 18858: + Cox reported that + after Bear Stearns collapsed, Lehman + was the SEC’s "number + +On line 18860: + and n. see also + Timothy Geithner, + quoted in Valukas, and + +On line 18866: + n. Donald L. Kohn, + email to Bernanke, "Re: Lehman," June Valukas, + and n. Harvey R. + +On line 18866: + bankruptcy counsel + for Lehman Brothers, interview + by FCIC, August Lehman + +On line 18870: + September p. Erik + R. Sirri, interview by + FCIC, April Paolo R. + +On line 18872: + interview by FCIC, + August Specifically, Lehman + drew billion on March + +On line 18872: + billion on March and + billion on March billion on + March and and billion + +On line 18872: + Robert Azerad, vice + president, Lehman Brothers, Q2—Liquidity + Position (June p. + +On line 18872: + bankruptcy, Lehman drew + billion, billion, and billion, + on September and + +On line 18872: + Fed in providing + financing. Valukas, See also + David Weisbrod, senior + +On line 18872: + and Securities + Services–Risk Management, JPMorgan Chase Co., + email to James Dimon + +On line 18874: + et al., "Re: TriParty Close," + September Thomas A. Russo, + former vice chairman + +On line 18874: + legal officer, + Lehman Brothers, email to Richard S. + Fuld Jr., forwarding + + article by John + Brinsley (originally sent + to Russo by Robert + +On line 18874: + Says Investment Banks + Making Progress in Raising Funds," + Bloomberg, June (quoting Robert + +On line 18884: + June Notes to Chapter + Richard S. Fuld Jr., interview + by FCIC, April Valukas, and + +On line 18884: + also Russo, email + to Fuld, "Fw: Rumors of hedge + fund putting together + +On line 18884: + to have another + run at Lehman," March (forwarding + discussions with SEC + +On line 18886: + Bruce Karpati, and Stephanie Shuler, + Division of Enforcement, + SEC, interview by + +On line 18888: + to question 13—from FCIC, + asked after the hearing on + January Jesse Eisinger, + + "The Debt Shuffle: Wall + Street Cheered Lehman’s Earnings, but There + Are Questions about Its + +On line 18890: + David Einhorn, Greenlight + Capital, "Private Profits + and Socialized Risk," + +On line 18890: + also David Einhorn, + "Accounting Ingenuity," + speech at Ira W. Sohn + +On line 18894: + Conference, May pp. + Nell Minow, interview by + FCIC, September Nell + +On line 18894: + the House Committee + on Oversight and Government + Reform, Hearing on + +On line 18896: + October Kirsten J. + Harlow, email to Timothy + Geithner et + +On line 18898: + Primary Dealer + Update: June June William Dudley, + email to Timothy + +On line 18900: + Harlow, email to Kevin + D. Coffey, examining + officer, FRBNY, + +On line 18902: + al., "On-Site Primary + Dealer Update: June June Thomas + Fontana, Citigroup, email + +On line 18904: + Tim Clark, Federal + Reserve, email to Kevin Coffey, + Federal Reserve, + +On line 18908: + Stress Analysis," June + Based on chart in Federal + Reserve Bank of New + +On line 18910: + Largest Securities + Firms," August p. Federal + Reserve Bank of New + +On line 18912: + and senior trader, + Federated Investors, Inc., + email to Gail Shanley, + +On line 18912: + Investors, Inc., et al., + "Re: Federated SubCustodial Agreement—JPMC’s + comments," July Charles + + Witek, Federated + Investors, Inc., email to George V. + Van Schaick, Lehman Brothers, + +On line 18912: + Federated SubCustodial + Agreement—JPMC’s comments," April Despite the + FRBNY’s observation, + +On line 18912: + fully terminate + its repo relationships + with Lehman. In fact, as + +On line 18912: + exposure to Lehman + was billion, as reported + in the Commission’s + +On line 18914: + Survey of money + market mutual funds. Patrick + M. Parkinson, email to + +On line 18916: + David Marshall, email to + Patrick M. Parkinson, July Valukas, + (quoting Timothy + +On line 18918: + Brothers, interview + by FCIC, April William Dudley, email + to Geithner + +On line 18920: + "Re: Lehman Good Bank/Bad Bank + idea discussed last night," July + Patrick M. Parkinson, email + +On line 18920: + Steven Shafran, Department + of the Treasury, et al., "Fw: + Gameplan and Status + +On line 18924: + Patrick M. Parkinson, email + to Steven Shafran, August Patrick M. + Parkinson, email to Arthur + +On line 18926: + Theodore Lubke, Til Schuermann, + and William Brodows, August William Brodows, + email to Patrick Parkinson, + +On line 18936: + Ibid. Ibid. Parkinson, email + to Steven Shafran, August Ibid. Steven + Shafran, email to Patrick M. + +On line 18942: + Parkinson, August Patrick + M. Parkinson, email to Theodore Lubke, + September Notes to + +On line 18946: + Emil Cornejo, senior + vice president, Department + of the Treasury, Lehman + +On line 18946: + Janet Birney, senior + vice president, Department + of the Treasury, Lehman + + Brothers, et al., "JP + Morgan Agenda forwarded + for our review. FYI," + +On line 18948: + Agenda, September + Meg McConnell, FRBNY, email to Arthur + Angulo et al., + +On line 18952: + "Meeting tomorrow + at September Ibid. Patrick M. + Parkinson, email to Steven + +On line 18954: + Shafran, "Re: now I am + on a conf call," September + Henry M. Paulson + +On line 18954: + Brink: Inside the Race + to Stop the Collapse of the + Global Financial + +On line 18954: + Rita C. Proctor, + assistant to the chairman, + Board of Governors + + of the Federal + Reserve, email to Donald L. + Kohn et al., "This evening’s + +On line 18956: + conference call will + take place at P.M. instead of + P.M.," September Jim + +On line 18958: + Wilkinson, email to Michele + Davis, September Barry Zubrow, + interview by FCIC, + +On line 18960: + Weiss, counsel to Steven + Black, letter to FCIC, August + written responses + +On line 18964: + to FCIC questions in + email of August p. John J. + Hogan, JPMorgan Chase Co., email + +On line 18964: + D. Black, September + P.M.; Steven Black, email to John Hogan, + September P.M. See + +On line 18966: + and n. and Complaint, + In re Lehman Brothers Holdings, + Inc., et al., against JPMorgan + +On line 18966: + Bank, N.A., Chapter Case + No. 08-13555 (JMP) (Bankr. S.D.N.Y. May + pp. (hereafter cited + +On line 18972: + as Lehman Complaint). Ibid. + Black responses, August p. + Matthew Rutherford, email to + +On line 18974: + Department of the + Treasury, et al., September + Mark VanDerWeide, assistant + + general counsel, + Board of Governors of the + Federal Reserve + +On line 18974: + to Scott G. Alvarez, + general counsel, Board of + Governors of the + +On line 18978: + Mosser, email to William + Dudley et al., "thoughts on Lehman," + September See Michael + + Nelson, counsel and + vice president, FRBNY, email + to Christine Cumming, + +On line 18980: + questions," September + (attaching game plan), See Patrick + M. Parkinson, email to + + Donald Kohn et al., + "Fw: revised Liquidation + Consortium gameplan + +On line 18982: + questions," September + (attaching game plan). Ibid.; Thomas + Baxter, interview + +On line 18986: + Ken Lewis, interview + by FCIC, October Susan + McCabe, Goldman Sachs Group, + +On line 18986: + email to William Dudley + et al., "Hope you have the Radar + screens on early this + +On line 18988: + morning," September + Rita C. Proctor, email to + Bernanke, "Fw: Financial + +On line 18990: + materials for + the conference call). Hayley + Boesky, vice president, + +On line 18990: + Group, FRBNY, email to + Meg McConnell et al., forwarding + Louis Bacon, email to + +On line 18992: + short-circuiting + the market," September A.M. + Email chain between Jamie + +On line 18992: + and Jeff Stehm, subject + "Fw Default Management Group + Sep 2008.doc," September + +On line 18994: + Hayley Boesky, email to + Debby Perelmuter, senior vice + president, FRBNY, + +On line 18996: + email to Paolo R. + Tonucci, "Fw: Letter to Lehman," + Sept. (attaching JPMorgan + +On line 18998: + September Notice + to Lehman Brothers Holdings Inc.). + Jane Buyers-Russo, email to Bryn + +On line 18998: + Thomas, executive + director, Broker Dealer + Group, JPMorgan Chase Co., et + +On line 19000: + "Re: Lehman Brothers TriParty + Collateral," September + Paolo R. Tonucci, + +On line 19010: + FCIC, August See Valukas, + and n. Notes to Chapter Lehman + Complaint, pp. paragraphs + +On line 19012: + Barry Zubrow, written + testimony for the FCIC, + Hearing on Too Big + +On line 19012: + of Systemic Risk in + the Financial Crisis, day + session Lehman Brothers, + +On line 19016: + September p. Richard + S. Fuld, interview by FCIC, + August Lehman Complaint, + +On line 19018: + to Abby Aderman, + Russell Reynolds Associates, "Re: + Paulson Statement on + +On line 19020: + Financial Markets + and Taxpayers," September + Kevin M. Warsh, e-mail + +On line 19020: + Board of Governors + of the Federal Reserve + System, September + +On line 19026: + Valukas, Harvey R. Miller, + interview by FCIC, August + Tom Baxter, "Speaking + +On line 19026: + attached to email from + Helen Ay-ala, NYFRB, to Steven Shafron, + Treasure, September + +On line 19030: + Baxter, interview + by FCIC, August H. Rodgin + Cohen, interview + +On line 19034: + August Parkinson, email + to Kohn et al., September + Financial Services + + Authority of + the United Kingdom, "Statement + of the Financial + +On line 19036: + the Lehman bankruptcy + examiner, pp. paragraph + Paulson, On the Brink, + +On line 19042: + repo thoughts for this + weekend," September Patrick M. + Parkinson, interview + +On line 19042: + see also Patrick M. + Parkinson, email to Lucinda + Brickler et al., "Re: + +On line 19044: + option we should present + re triparty1" July John + Thain, interview by + +On line 19046: + to Alejandro LaTorre, + assistant vice president, + Credit, Investment + +On line 19046: + FRBNY, "memo re: Lehman’s + inter-company default + scenario," September + +On line 19048: + Alvarez, email to Ben + Bernanke et al., "Re: Fw: today + at p.m. w/Chairman Bernanke, Vice + +On line 19052: + email to Mark VanDerWeide, "Re: + tri-party," September Bart + McDade, interview by + +On line 19058: + the Brink, p. Baxter, + interview; Robert Diamond, + interview by FCIC, + +On line 19062: + Brink, pp. Financial + Services Authority of + the United Kingdom, + +On line 19064: + the Lehman bankruptcy + examiner, p. paragraph + Paulson, On the Brink, + +On line 19070: + Jim Wilkinson, email to + Jes Staley, September A.M. + Jim Wilkinson, email to + +On line 19074: + Staley, September + A.M. Paulson, On the Brink, p. + Alistair Darling, + +On line 19074: + United Kingdom Press + Association, "Darling + Vetoed Lehman Bros Takeover," + +On line 19078: + H. Rodgin Cohen, + interview by FCIC, August + Bart McDade, interview + +On line 19084: + by FCIC, August McDade, + interview, August Baxter, + interview. Thomas C. + +On line 19084: + Baxter, letter to + FCIC, October attaching + Exhibit James P. + +On line 19086: + Kirk, interview. Ibid., + attaching Exhibit Lehman + Brothers Holdings Inc., + +On line 19088: + "Minutes of the Board + of Directors, September + p. Ibid., attaching + +On line 19096: + Exhibits and Notes to + Chapter On September LBI + borrowed billion from + +On line 19096: + of collateral; + on September LBI borrowed + billion against billion + +On line 19096: + collateral; and + on September LBI borrowed + billion against billion + +On line 19102: + collateral. See + Valukas, and nn. Kirk, interview. + Miller, interview. Kirk, + +On line 19104: + Miller, interview. In + his interview, Kirk told FCIC + staff that he thought there + +On line 19106: + were more than million + derivatives contracts. McDade, + interview, August + +On line 19110: + of Systemic Risk in + the Financial Crisis, day + session Lehman Brothers, + +On line 19118: + September p. Miller, + interview. Ibid. Ibid. Ben S. + Bernanke, closed-door session + +On line 19122: + Henry M. Paulson + Jr., written testimony + for the FCIC, Hearing + +On line 19122: + System, day session + Perspective on the Shadow + Banking System, May + +On line 19130: + p. Ibid., p. Ibid., pp. + Bernanke, testimony before + the FCIC, September + +On line 19132: + transcript, p. Ben Bernanke, + email to Kevin Warsh, member, Board + of Governors of + +On line 19134: + System, September + Bernanke, testimony before + the FCIC, September + +On line 19138: + Financial Markets," + testimony before the + Senate Committee + + on Banking, Housing, + and Urban Affairs, 110th Cong., + 2nd sess., September + +On line 19140: + 343(A), as added by act + of July Stat. and amended + by acts of August + +On line 19142: + "Authority of + the Federal Reserve to + provide extensions + +On line 19142: + connection with a + commercial paper funding + facility (CPFF)," + +On line 19146: + March p. Fuld, written + testimony for the FCIC, + September pp. Bernanke, + +On line 19148: + with FCIC. Ben S. Bernanke, + chairman of the Federal + Reserve, letter to + +On line 19154: + Phil Angelides, chairman + of the FCIC, December Thain, + interview. Ibid. Ibid. + +On line 19158: + Role of Systemic Risk + in the Financial Crisis, + day session Wachovia + +On line 19167: + Baxter, letter to + FCIC, October p. Chapter + Federal Reserve + +On line 19173: + of New York, notes about + AIG meeting, September Ibid. + Ibid. "AIG Commercial + +On line 19173: + Paper Outstanding + Maturities—week of Sept 15th," + September produced + +On line 19181: + Group, Inc., Form 10-Q for + the quarterly period + ended June Notes to + +On line 19185: + Chapter FRBNY, notes + about AIG meeting. Goldman Sachs + International, + +On line 19185: + Invoice (margin call) + to AIG Financial Products + Corp., July data + +On line 19185: + CDOs supplied by AIG + (see Timeline of Goldman Sachs/AIG + collateral calls, + +On line 19187: + available at the FCIC + website at http://fcic.gov/ + hearings/pdfs/2010–0701-AIG-Goldman-supporting-docs.pdf); FRBNY, notes about + +On line 19189: + to Christine Cumming, + Timothy Geithner, + William Dudley, et al., + +On line 19195: + Eric Dinallo, + testimony before the + FCIC, Hearing on the + +On line 19195: + Financial Crisis, + day session Derivatives: + Supervisors and + +On line 19205: + the FCIC, July pp. + FRBNY, notes about AIG meeting. + Ibid. "Systemic Impact + +On line 19207: + Alejandro LaTorre to + Timothy Geithner, + September FRBNY, + +On line 19207: + internal memo about + August meeting with the AIG + team of the Office + +On line 19217: + August Ibid. Goldman + Sachs, company update on + AIG, August Ira Selig, + +On line 19221: + AIG," August FRBNY, + internal document about + AIG, September Ibid. + +On line 19229: + August FRBNY, notes + about AIG meeting, September + Ibid. "AIG Commercial + +On line 19231: + Paper Outstanding + Maturities—week of Sept 15th," + September FRBNY, + +On line 19233: + notes about AIG meeting, + September Hayley Boesky, email + to Bill Dudley et + +On line 19237: + September FRBNY, + emails of September and Thomas + Baxter, interview + +On line 19241: + by FCIC, November + Patricia Mosser, email to + Alejandro LaTorre et + +On line 19243: + call, September P.M. + Patricia Mosser, email to + Alejandro Latorre + +On line 19245: + et al., September + P.M. FRBNY, internal memo + about AIG, September + +On line 19247: + to Alejandro LaTorre + et al., "AIG and the discount + window," September + +On line 19253: + email to Adam Ashcraft et + al., September Ibid. J. C. + Flowers, interview + +On line 19257: + by FCIC, October + Robert Willumstad, interview by + FCIC, November Ibid. + +On line 19263: + (Tab of the AIG/Goldman Sachs + collateral call timeline). + Baxter, interview. + +On line 19269: + See Sarah Dahlgren, FRBNY, + interview by FCIC, April Ibid. + Alexander J. Psomas, + +On line 19277: + AIG Monitoring + and Analysis, September + Notes to Chapter Fed + +On line 19281: + "The AIG Rescue, Its + Impact on Markets, and the + Government’s Exit + +On line 19285: + Ibid., executive + summary, pp. Treasury spokesman + Andrew Williams, quoted + +On line 19285: + Son, "AIG’s Rescue Had + ‘Poisonous’ Effect, U.S. Panel + Says (Update1)," Bloomberg, June + +On line 19287: + International + Group’s Impact on the Global + Economy: Before, + +On line 19289: + Government Sponsored + Enterprises, 111th Cong., 1st + sess., March John Reich, + +On line 19293: + the Congressional + Oversight Panel, May C. K. + Lee, interview by + +On line 19293: + Albinson, managing + director, OTS, and Danièle Nouy, + secrétaire général + +On line 19295: + Commission Bancaire, + April OTS, Memo to Commission + Bancaire regarding + +On line 19299: + January Reich, + interview. Joseph Gonzalez, + interview by FCIC, + +On line 19303: + Ibid. OTS, Targeted + Review of AIG Financial + Products Corp., July + +On line 19307: + Sachs collateral + call timeline, p. Brad Waring, + interview by FCIC, + +On line 19320: + Chapter John J. Mack, + written testimony for + the FCIC, First Public + +On line 19320: + the FCIC, day panel + Financial Institution + Representatives, + +On line 19324: + by FCIC, October + Timothy Geithner, + interview by FCIC, + +On line 19326: + quoted by Robert Schmidt, + "Geithner Slams Bonuses, + Says Banks Would Have Failed + +On line 19330: + the Fed broadened the + PDCF to match the types of + collateral that + +On line 19330: + in the tri-party + repo system, including + non-investment-grade + +On line 19330: + had been limited + to investment-grade debt + securities. The + +On line 19330: + and AAA-rated mortgage-backed and + asset-backed securities. The + Fed also increased + + both the frequency + of TSLF auctions, to weekly + instead of every + + two weeks, and their size. + Federal Reserve Board press + release, September + +On line 19332: + Goldman Sachs had a + billion balance in TSLF, and + a billion balance + +On line 19332: + Reform: Usage of + Federal Reserve Credit + and Liquidity + +On line 19334: + around derivative + transactions at the time of + bankruptcy. See Debtors’ + +On line 19334: + the Bankruptcy Code + to Establish Procedures + for the Settlement + +On line 19334: + of Prepetition + Derivatives Contracts, Lehman + Brothers Holdings Inc., + +On line 19334: + No. 08-13555 (Bankr. S.D.N.Y. + Nov. p. See also Anton + R. Valukas, Report of + +On line 19334: + Examiner, In + re Lehman Brothers Holdings Inc., + et al., Chapter Case + +On line 19334: + (JMP), (Bankr. S.D.N.Y.), March + By November a special + facility to + +On line 19334: + derivatives trades + with Lehman had successfully + terminated most + +On line 19334: + massive unresolved + claims relating to over-the-counter + derivatives in + +On line 19334: + of May banks had filed + more than billion in claims for + losses related + +On line 19336: + contracts with Lehman. See + Debtors’ Motion for an Order + pursuant to Notes to + +On line 19338: + the Bankruptcy Code + to Establish Procedures + for the Settlement + +On line 19338: + of Prepetition + Derivatives Contracts, Lehman + Brothers Holdings Inc., + +On line 19338: + et al., No. 08-13555 (Bankr. + S.D.N.Y. Nov. [Docket No. p. + Debtors’ Motion for an + + Order Approving + Consensual Assumption + and Assignment of + +On line 19338: + Brothers Holdings Inc., + et al., No. 08-13555 (Bankr. S.D.N.Y. + Jan. [Docket No.2561], p. + +On line 19340: + fund holdings of all + types of taxable commercial + paper decreased from + +On line 19340: + the end of August + to billion at the end of + September (data + +On line 19340: + by ICI/Crane to the FCIC). + BNY Mellon, in its role as + tri-party clearing + +On line 19340: + that Treasury-backed repos + rose from billion to billion + of its tri-party + +On line 19340: + March and December + (data provided by BNY + Mellon to the FCIC). + +On line 19344: + Miller, interview by + FCIC, August The Reserve Fund, + Semi-annual report + +On line 19346: + Reserve Management + Company Inc., Resrv Partners + Inc., Bruce Bent Sr., Bruce + +On line 19346: + II, and The Reserve + Primary Fund (S.D.N.Y. May + p. (para. "Fidelity, + +On line 19348: + Past Months," Crane Data + News Archives, September The + Reserve Primary + +On line 19352: + Complaint against Reserve + Management Company Inc., + pp. (paras. p. (para. The + +On line 19352: + "The Primary Fund: + Plan of Liquidation and + Distribution of + +On line 19354: + December p. SEC + Complaint, pp. (paras. The Reserve, + "The Primary Fund: + +On line 19356: + Complaint, p. (para. The + SEC notes that the Primary + Fund likely broke the + +On line 19356: + prior to A.M. on + September because of the + redemption requests + +On line 19358: + that owing to an + administrative error, + its NAV should have been + +On line 19362: + as between A.M. and + P.M. on September (pp. paras. + Moody’s Investors Service + +On line 19362: + Money Market Funds," + August p. "Moody’s Proposes + New Money Market + +On line 19364: + September Patrick McCabe + and Michael Palumbo, interview + by FCIC, September + +On line 19370: + and GSE debt—increased + by billion during the same + period. McCabe and + +On line 19372: + of money market + mutual funds. Holdings for + the five firms decreased + +On line 19374: + FCIC, Hearing on the + Shadow Banking System, day + session Perspective + +On line 19378: + Banking System, May + transcript, p. McCabe and Palumbo, + interview. "Treasury + +On line 19378: + for Money Market + Funds," Treasury Department press + release, September + +On line 19378: + M. Paulson Jr. to + make available as necessary + the assets of the + +On line 19378: + Stabilization Fund + (ESF) for up to billion to + guarantee payments + +On line 19378: + mutual funds. The + original objective of + the ESF, established + +On line 19378: + by the Gold Reserve + Act of was to stabilize + the value of the + +On line 19378: + of the Depression. + It authorized the treasury + secretary, with the + +On line 19380: + president, to "deal + in gold, foreign exchange, and + other instruments + +On line 19382: + international + financial stability. + The program was called + +On line 19382: + Commercial Paper + Money Market Mutual + Fund Liquidity + +On line 19386: + Facility (AMLF). + Neel Kashkari, interview by FCIC, + November John Mack, + +On line 19390: + Federal Reserve, + internal email, October + p. David Wong, email to + +On line 19398: + and SEC officials, + September Notes to Chapter + Jonathan Stewart, FRBNY, + +On line 19400: + One year later, the + Senior Supervisors Group—a + cross-agency task force + +On line 19400: + the causes of the + financial crisis—would write, + "Before the crisis + +On line 19400: + investment banks post-Lehman], + many broker-dealers considered + the prime brokerage + +On line 19400: + be either a source + of liquidity or a + liquidity-neutral + +On line 19402: + unanticipated." + Senior Supervisors Group, + "Risk Management Lessons + +On line 19404: + of October p. + Jonathan Wood, Whitebox Advisors, + interview by FCIC, + +On line 19406: + The FCIC surveyed hedge + funds that survived the crisis. + Those in the three largest + +On line 19406: + ranked by size received + investor redemption requests + averaging of + +On line 19406: + the fourth quarter of + (the first available redemption + date after the Lehman + +On line 19410: + IFSL Research, "Hedge + Funds April David Wong, treasurer + of Morgan Stanley, + +On line 19416: + interview by FCIC, + October Mack, interview. + Wong, interview. Patrice + +On line 19416: + Stanley), email to William + Brodows (Federal Reserve BNY) + et al., September + +On line 19416: + in an attachment. + Hedge fund values are the Prime + Brokerage Outflows + +On line 19422: + Wong, interview. Matthew + Eichner, internal email, + September Angela + +On line 19424: + Miknius, email to NY Bank + Sup, September Amy G. White, + internal NYFBR + +On line 19426: + "Liquidity and + Financing Activity: + "Liquidity and + +On line 19426: + "Liquidity and + Financing Activity: + reports to the New + +On line 19428: + Federal Reserve. + Morgan Stanley Corporate + Treasury, "Meeting with + +On line 19428: + Federal Reserve: + September attachment to + Morgan Stanley email + +On line 19428: + in attachment to + Morgan Stanley email to NYFRB, + September Amy White, + +On line 19430: + emails, September and + Lloyd Blankfein, testimony + before the FCIC, First + +On line 19430: + the FCIC, day panel + Financial Institution + Representatives, + +On line 19434: + January transcript, + pp. Bernanke, closed-door session. Thomas + Baxter, interview + +On line 19436: + by FCIC, April The switch + to bank holding company + status required a + +On line 19436: + change. Both Morgan and + Goldman already owned banks that + they had chartered as + + industrial loan + companies, a type of bank + that is allowed to + +On line 19436: + supervision over + the bank’s parent or other + affiliated + +On line 19442: + Risk: Getting Started," + last updated November + Mack, interview. Mack, + +On line 19448: + Wong, interview. Amy + G. White, internal FRBNY + email, September It + +On line 19448: + be borne in mind that + lack of regulation of + this market rendered + + it extremely opaque. + Shortcomings in transparency, + lack of reporting + +On line 19450: + limited data + collection by third parties + make it difficult + +On line 19452: + crisis. Michael Masters, + testimony before the + FCIC, Hearing on the + +On line 19452: + of Derivatives + in the Financial Crisis, + day session Overview + +On line 19456: + release, December + "OTC derivatives market + activity in + +On line 19462: + International + Settlements press release, May + p. Notes to Chapter + +On line 19464: + OTC Derivatives + Market Statistics," Bank of + International + +On line 19468: + Moody’s, "Moody’s downgrades WaMu + Ratings; outlook negative," + September "OTS Fact + +On line 19470: + OTS 08–046A, September + p. Jamie Dimon, interview + by FCIC, October + +On line 19472: + of Systemic Risk in + the Financial Crisis, day + session Federal + +On line 19472: + Deposit Insurance + Corporation, September + exchange between Bair + +On line 19474: + Holtz-Eakin, pp. Scott Alvarez, + testimony before the + FCIC, Hearing on Too + +On line 19474: + Role of Systemic Risk + in the Financial Crisis, + day Session Wachovia + +On line 19478: + p. Kashkari, interview. + Greg Feldberg, "Wachovia Case Study," + presentation at + +On line 19478: + Georgia, p. These rules, + embodied in section 23A + of the Federal + +On line 19478: + limit the support + that a depository + institution can + +On line 19478: + corporate structure; + they are aimed at protecting + FDIC-insured depositors + +On line 19478: + activities that + occur outside of the bank + itself. Exemptions + +On line 19478: + assets within the + federal safety net of + insured deposits; they + +On line 19480: + bank liquidity) + during times of market stress. + Robert Steel, interview + +On line 19482: + August Scott Alvarez, + written testimony for + the FDIC, September + +On line 19484: + p. Robert Steel, written + testimony before the + FCIC, Hearing on Too + +On line 19484: + Role of Systemic Risk + in the Financial Crisis, + day session Wachovia + +On line 19490: + interview by FCIC, + August Sheila Bair, interview + by FCIC, August Richard + +On line 19492: + interview by FCIC, + August Wachovia was unable + to roll billion of + + asset-backed commercial + paper that Friday; James Wigand + and Herbert Held, memo + +On line 19494: + John Corston, acting deputy + director, Division of + Supervision and + +On line 19494: + Role of Systemic Risk + in the Financial Crisis, + day Session Wachovia + +On line 19498: + Rich Westerkamp, email to + FCIC, November Westerkamp said + that the estimate + +On line 19498: + early redemption + requests was based on a phone + conversation with + +On line 19498: + in Wachovia’s treasury + department, describing their + conversations with + +On line 19502: + investors; the figures + were never verified. Bair, + interview. Robert Steel, + +On line 19504: + interview by FCIC, + August Bair, interview; Steel, + interview; FDIC staff, + +On line 19512: + testimony for + the FCIC, September p. Steel, + interview. Ibid. Wigand + +On line 19514: + memo to the FDIC board, + September pp. Federal + Reserve staff, memo to + +On line 19516: + NA," September p. + John A. Beebe, Market Risk Team + Leader, Federal + +On line 19518: + Burns, VP-LCBO, "Wachovia + Large Funds Providers," September pp. + Federal Reserve + +On line 19520: + Risk Exception for + Wachovia Bank, NA," September + p. Bair, interview; + +On line 19520: + Federal Deposit + Insurance Corporation + Board of Directors, + +On line 19530: + September p. Notes + to Chapter Bair, interview. + FDIC memo to the FDIC + +On line 19530: + Directors, p. Corston, + written testimony for + the FDIC, September + +On line 19532: + p. Specifically, + under Wachovia’s proposal, + the FDIC would provide + +On line 19532: + billion of loans, while + Wachovia would absorb the first + billion in losses + +On line 19532: + incur losses on + the balance of the billion. + To offset that risk, + +On line 19532: + proposed that the FDIC + receive billion in preferred + stock and warrants on + +On line 19534: + shares (FDIC memo to the + FDIC Board of Directors, p. + The FDIC board has five + +On line 19534: + of the currency, + the director of OTS, and + three other members + +On line 19534: + the president. In + Too Big to Fail: The Inside + Story of How Wall + + Street and Washington + Fought to Save the Financial + System from Crisis—and + +On line 19534: + (New York: Viking, Andrew + Ross Sorkin (p. wrote that before + the September FDIC + +On line 19534: + Reserve Governor + Geithner and other + officials had a + +On line 19534: + call with Bair (Paulson + recused himself) during which + Geithner urged + +On line 19534: + acquire Wachovia by + guaranteeing some of its + potential losses. + +On line 19534: + that allowing the + FDIC to take over Wachovia would + have the effect of + +On line 19534: + shareholders and bond + holders, which, he was convinced, + would only spook the + + markets. He was still + furious with Bair for the + way she had abruptly + +On line 19538: + Federal Deposit + Insurance Corporation + Board of Directors + +On line 19540: + September transcript, + pp. Minutes of telephonic + meeting of the FDIC + +On line 19542: + board, September p. + Ibid.; the billion figure is + as of September + +On line 19542: + staff, memo to the Board + of Directors, subject: "Third + Quarter CFO Report + +On line 19544: + the Board," November + p. Minutes of telephonic + meeting of the FDIC + +On line 19548: + board, September p. + Bair, interview. Steel, written + testimony for + +On line 19548: + September p. On + the board’s vote and the agreement + in principle, see + +On line 19548: + Affidavit of Robert + K. Steel, dated October + filed in Wachovia Corp. + +On line 19550: + v. Citigroup, Inc., + Case No. 08-cv-085093-SAS (S.D.N.Y.), pp. and + exhibit A. Fed + +On line 19552: + Chairman Phil Angelides, + December Wachtell, Lipton, Rosen + Katz, on behalf of + +On line 19554: + to Division of + Corporation Finance, SEC, + November p. Richard + +On line 19560: + by FCIC, August Bair, + interview. Steel, interview. + Bair, interview. In + +On line 19560: + disagreed. He felt that + the highest priority + was to transfer the + +On line 19560: + banks’ troubled assets + from the financial system + to the government. + +On line 19560: + FDIC-assisted acquisition + would have removed potential + losses on billion + +On line 19560: + from the financial + system by transferring those + potential losses + +On line 19562: + without Government + Assistance," Wells Fargo press + release, October + +On line 19564: + Treasury Office of + the Inspector General, + interview by FCIC, + +On line 19566: + M. Thorson, "Inquiry + Regarding IRS Notice 2008-83," + September pp. Richard + +On line 19570: + release, September + Senators Christopher J. Dodd + and Richard C. Shelby, + +On line 19570: + Banking, Housing, and + Urban Affairs, Turmoil in + U.S. Credit Markets: + +On line 19574: + before the Senate + Banking Committee, Turmoil + in the U.S. Credit + +On line 19576: + the Joint Economic + Committee, 110th Cong., 2nd sess., + September transcript. + +On line 19584: + Bernanke, testimony + before the House Financial + Services Committee, + +On line 19584: + Financial Services: + Exploring Solutions for + the Market Crisis, + +On line 19586: + September transcript, + p. Mel Martinez, interview + by FCIC, September + +On line 19588: + as the Emergency + Economic Stabilization + Act of was coupled + +On line 19588: + acts, including the + Energy Improvement and + Extension Act of + +On line 19588: + Tax Extenders and + Alternative Minimum + Tax Relief Act of + +On line 19588: + Domenici Mental Health + Parity and Addiction + Equity Act of + +On line 19588: + originally said + that the deposit insurance + cap would revert to + +On line 19588: + at the beginning + of but later extended + the deadline through the + +On line 19590: + The quotation is + part of the formal title + of Public Law 110-343, + +On line 19592: + officially named + the Emergency Economic + Stabilization Act + +On line 19594: + Term Funding Markets," + Federal Reserve Board press + release, October + +On line 19596: + CPFF complemented + the Fed’s other commercial + paper program, the + +On line 19596: + which was created + shortly after the Reserve + Primary Fund broke + + the buck. While the AMLF + targeted money market + mutual funds, the + +On line 19600: + "Commercial Paper + Funding Facility (CPFF)." + Ken Lewis from Bank of + +On line 19600: + from BNY Mellon, Vikram + Pandit from Citigroup, Lloyd + Blankfein from Goldman, + + Jamie Dimon from JP + Morgan, John Thain from Merrill, + John Mack from Morgan + +On line 19602: + Richard Kovacevich from + Wells. Paulson, testimony + before the FCIC, May + +On line 19602: + Former assistant + treasury secretary Phillip Swagel + argued, "There is no + +On line 19602: + accept government + capital" ("The Financial + Crisis: An Inside + +On line 19602: + Brookings Papers on + Economic Activity, + conference draft, Spring + +On line 19604: + pp. Henry Paulson, + On The Brink: Inside the Race + to Stop the Collapse + +On line 19608: + Guarantee Program + consisted of two programs, + the Temporary Debt + +On line 19608: + and the Transaction + Account Guarantee Program + (TAGP). The TDGP at its + +On line 19608: + guaranteed billion + in outstanding senior debt; + see "FDIC Announces Plan + +On line 19608: + Bank Liquidity," + FDIC press release, October + The TAGP guaranteed + +On line 19610: + billion in deposits + at the end of "Factsheet on + Capital Purchase + +On line 19614: + November Paulson, + testimony before the + FCIC, May transcript, p. + +On line 19620: + Congress," February + p. Congressional Oversight + Panel, "September + +On line 19624: + Retrospective," p. + "Taxpayers Receive Billion + in Proceeds Today + +On line 19624: + Citigroup Common + Stock," Treasury Department press + release, December + +On line 19632: + to Chapter Office + of the Special Inspector + General for the + +On line 19632: + October table + p. (obligation figures as + of October and + +On line 19634: + as of September + The money market funding + is through the Asset-backed + + Commercial Paper + Money Market Mutual + Fund Liquidity + +On line 19636: + Facility (AMLF); + FCIC staff calculations. Board + of Governors of + +On line 19638: + Securities (MBS) + Purchase Program." The Fed had + created the first + +On line 19638: + vehicle in March + to take billion in assets + off the balance sheet + +On line 19638: + Bear Stearns, as described + in chapter See "AIG RMBS LLC + Facility: Terms + +On line 19638: + Counterparties to + CDS, GIA and Securities + Lending Transactions," + +On line 19638: + AIG press release, March + Attachment D: Payments to + AIG Securities + +On line 19640: + of New York, "Maiden + Lane III: Transaction Overview"; + Federal Reserve + +On line 19640: + release, November + "AIG CDO LLC Facility: + Terms and Conditions," + +On line 19640: + Federal Reserve + Bank of New York press release, + December FRBNY, + +On line 19640: + Transactions." billion + was paid to counterparties + and billion was paid + +On line 19646: + January transcript, + pp. Data provided to + Goldman Sachs to the + +On line 19648: + the FCIC, Hearing on + the Role of Derivatives + in the Financial + +On line 19648: + session American + International Group, Inc. + and Goldman Sachs Group, + +On line 19652: + email to FCIC, July + Ibid.; and data provided + by Goldman Sachs to + +On line 19654: + Affecting Efforts + to Limit Payments to AIG + Counterparties," pp. + +On line 19656: + said counterparties + insisted on coverage + because concessions + +On line 19656: + in contravention + of their fiduciary duty + to their shareholders"; + +On line 19656: + obligations, given + the government assistance; + costs already incurred + +On line 19656: + AIG default "would be + exacerbated if they + were paid less than par + +On line 19656: + "contractually + entitled" to receive the + par value of the + +On line 19658: + words, the decision + to acquire a controlling + interest in one + +On line 19658: + world’s most complex and + most troubled corporations + was done with almost + +On line 19658: + of the terms of the + transaction or the impact + that those terms might have + +On line 19662: + on the future of + AIG" (ibid., p. Ibid., summary, + p. Congressional + +On line 19662: + Panel, "June Oversight + Report: The AIG Rescue, Its + Impact on Markets, + +On line 19664: + and the Government’s + Exit Strategy," June pp. + Suzanne Kapner, "US + +On line 19666: + Panel Attacks AIG + Rescue," Financial Times, June + Baxter, interview. + +On line 19670: + Sarah Dahlgren, interview + by FCIC, April SIGTARP, "Factors + Affecting Efforts + +On line 19672: + Counterparties," p. + Timothy Geithner, + quoted in Jody Shenn, + + Bob Ivry, and Alan Katz, + "AIG 100-Cents Fed Deal Driven by + France Belied by French + +On line 19674: + interview by FCIC, + April Michael Alix, Federal + Reserve Bank of New + +On line 19680: + Observations on + Assistance Provided AIG," + GAO-09–4907 (Testimony: + +On line 19680: + House Committee on + Financial Services), March p. + Federal Reserve + +On line 19688: + AIG, "What AIG Owes the + US Government," updated + September Notes to + +On line 19692: + Edward J. Kelly + III, interview by FCIC, March + Roger Cole, interview + +On line 19696: + Kelly, interview. + James R. Wigand and Herbert J. + Held, memorandum + +On line 19700: + Kelly, interview. + Mark D. Richardson, email to John + H. Corston, Jason C. + +On line 19700: + Cave, et al., subject: + "RE: CONFIDENTIAL—Citigroup—Deterioration of Stock Price and CDS + Spreads," November Mark + + D. Richardson, email, to + John H. Corston, Jason C. Cave, + et al., subject: "11-21-08 + +On line 19702: + Citi Liquidity + call notes," November Wigand and + Held, November memo + +On line 19706: + closed-door session. Arthur + J. Murton, email to John V. + Thomas, Michael H. Krimminger, + +On line 19706: + et al., subject: "RE: + Proposed Conduit," November + Michael H. Krimminger, email + + to Arthur J. Murton, + John V. Thomas, et al., subject: + "RE: Proposed Conduit," + +On line 19708: + the Troubled Asset + Relief Program, 111th Cong., 2nd + sess., March transcript, p. + +On line 19712: + Regulators’ Use + of Systemic Risk Exception + Raises Moral Hazard + +On line 19712: + the Provision," GAO-10–100 + (Report to Congressional + Committees), April p. + +On line 19716: + Held, memo to the FDIC + board regarding Citigroup, + pp. Department of + + the Treasury response + to Congressional Oversight + Panel, Questions for + +On line 19718: + p. Citigroup and + the Troubled Asset Relief + Program, March p. "Joint + + Statement by Treasury, + Federal Reserve, and the + FDIC on Citigroup," + +On line 19722: + on Citigroup." In + total, Citigroup received + almost billion in + +On line 19722: + from the November + government assistance. Half + of the capital + +On line 19722: + Treasury’s billion TARP + investment in Citigroup + preferred stock; billion + + of the capital + benefits were derived from + a change in the risk + +On line 19722: + of the ring-fenced assets. + In addition, Citigroup + issued Treasury and + +On line 19722: + the FDIC billion in + preferred stock as payment for + the guarantee on + +On line 19722: + ring fence; the result, + after accounting for the + insurance feature + +On line 19724: + billion increase in + capital for Citigroup. + Kelly, interview. + +On line 19726: + The warrants gave the + government the right to buy + million shares at a + +On line 19726: + the stock was trading + at (Congressional Oversight + Panel, "November + +On line 19726: + Report: Guarantees + and Contingent Payments in + TARP and Related + +On line 19728: + Programs," November + pp. FDIC Board of Directors + meeting, closed session, + +On line 19732: + Year Retrospective," + October p. "Taxpayers + receive billion in + +On line 19732: + today from final + sale of Treasury Department + Citigroup common + +On line 19734: + Reports Third Quarter + Net Loss from Continuing + Operations of + +On line 19736: + Federal Reserve + System, "Order Approving + Bank of America + +On line 19736: + an Industrial + Loan Company," November + pp. To approve such + + a proposal, the + Bank Holding Company Act + requires the Fed to + + determine that a + transaction "can reasonably + be expected to + + produce benefits + to the public, such as greater + convenience, increased + + competition, or + gains in efficiency, that + outweigh possible + + adverse effects, such + as undue concentration + of resources, decreased + +On line 19738: + competition." U.S.C. + 1843(j)(2)(A). Timothy J. Mayopoulous, + former general + +On line 19738: + Committee, Bank of + America and Merrill Lynch: + How Did a Private + +On line 19746: + Investigation: + Bank of America–Merrill Lynch, February + p. available from House + +On line 19746: + the Subcommittee + on Domestic Policy, + Bank of America + +On line 19746: + Merrill Lynch: How Did + A Private Deal Turn into + a Federal Bailout1 + +On line 19748: + 1st sess., June Bank of + America, 4Q Earnings Call + transcript, January + +On line 19754: + interview by FCIC, + September Complaint, SEC v. + Bank of America + +On line 19754: + Jan. Final Consent + Judgment As to Defendant + Bank of America + +On line 19758: + the Subcommittee + on Domestic Policy, + Bank of America + +On line 19758: + Merrill Lynch: How Did + a Private Deal Turn into + a Federal Bailout1 + +On line 19760: + the Subcommittee + on Domestic Policy, + Bank of America + +On line 19760: + Merrill Lynch: How Did + a Private Deal Turn into + a Federal Bailout1 + +On line 19766: + II, 111th Cong., 1st sess., + June p. Lewis, interview. Thain, + interview Paulson, + +On line 19768: + Oversight Committee, + July pp. Chairman Ben Bernanke, + email to General + +On line 19768: + Alvarez, "Re: Fw: BAC," + December available from House + Oversight Committee, + +On line 19768: + Merrill Lynch: How Did + a Private Deal Turn into + a Federal Bailout1 + +On line 19772: + Representative + Edolphus Towns, in ibid., p. Lewis, + interview. Minutes + +On line 19772: + a Special Meeting + of Board of Directors of + Bank of America + +On line 19774: + June p. Minutes of + a Special Meeting of the + Bank of America + +On line 19778: + December available + in ibid., p. Lewis, interview. + See Department of + +On line 19778: + Ending November + November In addition + to drawing on these + + funds, it was also + a "substantial user" of + the Fed’s various + +On line 19778: + programs. The holding + company and its subsidiaries + had already borrowed + +On line 19778: + billion through the Term + Auction Facility. It + had also borrowed + +On line 19778: + Commercial Paper + Funding Facility and + billion under the + +On line 19778: + borrowed another + billion from the Fed’s two Bear + Stearns–era repo-support + +On line 19778: + would experience + liquidity problems if + the fourth-quarter earnings + +On line 19780: + weak. The amount of FDIC-guaranteed + debt that can be issued by + each eligible + + entity, or its + cap, is based on the amount of + senior unsecured + +On line 19782: + debt outstanding as + of September FRB and OCC + staff, memorandum + +On line 19784: + Financial Market + Participants," January + p. Sheila C. Bair, FDIC + +On line 19784: + the Subcommittee + on Domestic Policy, + Bank of America + +On line 19784: + Merrill Lynch: How Did + a Private Deal Turn into + a Federal Bailout1 + +On line 19786: + Part V, 110th Cong., 1st + sess., December p. FRB and + OCC staff memo to Rick + +On line 19786: + Mitchell Glassman, Sandra + Thompson, Arthur Murton, and John + Thomas, memorandum + +On line 19786: + Board of Directors, + subject: Bank of America, + etc., January pp. + +On line 19796: + December p. Notes + to Chapter Glassman et al., + memo to the FDIC board, + +On line 19796: + January p. They + agreed to this split because of + the assets for the + +On line 19796: + depository + institutions and were not. + See closed meeting of + +On line 19798: + Board of Directors, + January transcript, p. Closed + meeting of the FDIC + +On line 19800: + January transcript, + p. According to the FDIC + staff, "Liquidity + +On line 19800: + and the volume of + counterparty transactions + involved. Without a + +On line 19800: + to fund ongoing + operations. [Economic + developments] point + +On line 19800: + financial market + turmoil of recent months and + impaired economic + + performance that could + be expected to worsen + further if BAC and + +On line 19800: + business and consumer + confidence." Glassman et al., + memo to the FDIC board, + +On line 19809: + testimony for + the FCIC, First Public Hearing + of the Financial + +On line 19811: + January p. Clarence + Williams, written testimony + for the FCIC, Hearing + +On line 19813: + Financial Crisis— + Sacramento, session Impact + of the Financial + +On line 19815: + September p. and + testimony before the + FCIC, transcript, pp. Ed + +On line 19817: + November Jeannie + McDermott, testimony before + the FCIC, Hearing on + +On line 19819: + Bakersfield, session + Forum for Public Comment, + September transcript, + +On line 19823: + before the FCIC, in + ibid., transcript, pp. "National + Delinquency Survey," + +On line 19825: + Fourth Quarter March p. + Third Quarter November p. + CoreLogic, "U.S. Housing and + +On line 19827: + August November + p. Jeremy Aguero, principal + analyst, Applied + +On line 19827: + the Impact of the + Financial Crisis—State of Nevada, + session Economic + + Analysis of the + Impact of the Financial + Crisis on Nevada, + +On line 19831: + available at www.urban.org/url.cfm1ID=901206. Steven + K. Paulson, "Auditors Say + Colorado Pension Plan + +On line 19833: + Associated + Press, August Charles S. Johnson, + "Montana Pension Funds + +On line 19835: + Growing but Haven’t Made + Up Losses," The Billings Gazette, May + The Conference Board + +On line 19839: + May The Conference + Board news release, December + Gregory D. Bynum, + +On line 19841: + on the Impact of + the Financial Crisis— Greater + Bakersfield, session + +On line 19843: + and Community + Real Estate, September + transcript, p. Board of + +On line 19843: + Governors of the + Federal Reserve System, + October Senior + +On line 19845: + Business and Non-business + Filings by Year Jeff Agosta, + conference call with + +On line 19851: + "Annual Business + and Non-Business Filings by Year Board + of Governors of + +On line 19851: + Federal Reserve + System, July Senior Loan + Officer Opinion + +On line 19853: + Practices, August p. + Liz Moyer, "Revolver at the + Heads," Forbes, October + +On line 19855: + Murillo Campello, John + R. Graham, and Campbell R. + Harvey, "The Real + +On line 19863: + Crisis," Journal of + Financial Economics Notes + to Chapter Board of + +On line 19863: + Governors of the + Federal Reserve System, + January Senior + +On line 19865: + Survey, fourth-quarter p. + Elizabeth Duke, governor, + Federal Reserve + +On line 19865: + "Small Business Lending," + testimony before the + House Committee on + +On line 19869: + Business Economic + Trends," December p. Ben Bernanke, + "Restoring the Flow of + +On line 19869: + Federal Reserve + Meeting Series: "Addressing + the Financing Needs + +On line 19871: + of Small Businesses," + Washington, DC, July C. + R. "Rusty" Cloutier, past + +On line 19871: + the FCIC, day panel + Financial Crisis Impacts + on the Economy, + +On line 19873: + Federal Reserve + Statistical Release, E.2 + Survey of Terms of + + Business Lending, E.2 + Chart Data: "Commercial and + Industrial Loan + +On line 19875: + Spreads over Intended + Federal Funds Rate, by Loan + Size," spread for all sizes. + +On line 19877: + a Deep Recession," + National Federation + of Independent + +On line 19881: + interview by FCIC, + August Board of Governors + of the Federal + +On line 19883: + Opinion Survey on + Bank Lending Practices, April Board + of Governors of + +On line 19885: + Opinion Survey on + Bank Lending Practices, July + Emily Maltby, "Small + +On line 19885: + Biz Loan Failure Rate + Hits CNN Money, February + "SBA Losses Climb in + +On line 19887: + CEO, GE Capital, + testimony before the + FCIC, Hearing on the + +On line 19889: + the Shadow Banking + System, May transcript, p. GE, + Annual Report, + +On line 19891: + p. Mark S. Barber, + testimony before the + FCIC, Hearing on the + +On line 19895: + International + Financial Statistics, World + Tables: Exports, World + +On line 19897: + Jane Levere, "Office + Deals, Months Apart, Show Market’s Move," + New York Times, August + +On line 19899: + Commercial Real + Estate Quarterly Market + Survey, December + +On line 19901: + Applied Analysis, + testimony before the + FCIC, Hearing on the + +On line 19901: + Financial Crisis—State of + Nevada, session The Impact + of the Financial + +On line 19903: + Crisis on Nevada + Real Estate, September + transcript, p. Anton + + Troianovski, "High Hopes as + Builders Bet on Skyscrapers," Wall Street + Journal, September + +On line 19905: + Ibid.; Gregory Bynum, + president, Gregory D. + Bynum Associates, Inc., + +On line 19907: + Federal Deposit + Insurance Commission, "Failed + Bank List," January + +On line 19909: + February Oversight + Report, "Commercial Real + Estate Losses and + +On line 19911: + TreppWire, "CMBS Delinquency + Rate Nears Up BPs in August + after Leveling + +On line 19913: + in July, Rate Now + Monthly Delinquency Report, + September p. Allen + +On line 19913: + Kenney, "CRE Mortgage + Default Rate to Double by + REIT.com, June See also + +On line 19917: + "Default Rates Reach 16-Year + High," Globe St., February Ibid. + Green Street Advisors, + +On line 19925: + Notes to Chapter "Moody’s/REAL + Commercial Property Price + Indices, December + +On line 19925: + Moody’s Investors Service + Special Report, December + Moody’s Investors Service, + +On line 19929: + Losses," February + Oversight Report, February + pp. Dr. Kenneth T. + +On line 19929: + Real Estate and + Economics, University + of California + +On line 19929: + in testimony + before the FCIC, First Public + Hearing of the FCIC, + +On line 19931: + Crisis Impacts on + the Economy, January + Elizabeth McNichol, Phil + +On line 19933: + on the Impact of + the Financial Crisis—Sacramento, session + The Impact of the + +On line 19935: + September transcript, + p. Sujit CanagaRetna, interview + by FCIC, November + +On line 19937: + "NCSL Fiscal Brief: + Projected State Revenue Growth + in FY and Beyond," + +On line 19941: + Analyst’s Office, + "The Budget: California’s + Fiscal Outlook." Kaiser + +On line 19943: + the Uninsured, "Hoping + for Economic Recovery, + Preparing for Health + +On line 19943: + Medicaid Spending, + Coverage and Policy + Trends," September pp. + +On line 19947: + Intensify in + Cities," October Christopher W. + Hoene and Michael A. Pagano, + +On line 19949: + Fiscal Conditions + in National League of Cities, + October p. Ibid., + +On line 19951: + pp. Alan S. Blinder + and Mark Zandi, "How the Great + Recession Was Brought + +On line 19953: + Donald L. Kohn, vice + chairman, Federal Reserve + Board of Governors, + +On line 19953: + Actions during the + Financial Crisis and Lessons + for the Future," speech + +On line 19957: + p. Congressional + Budget Office, "Report on + the Troubled Asset + +On line 19959: + November White House + Office of Management and + Budget, FY2011 Budget + +On line 19961: + Receipts, Outlays, and + Surpluses or Deficits Total + Budget Deficit. FDIC, "Failed + +On line 19963: + Bank List." "Quarterly + Banking Profile: Third Quarter + FDIC Quarterly no. + +On line 19967: + no. and "Quarterly + Banking Profile: First Quarter + FDIC Quarterly no. + +On line 19967: + Board of Governors + of the Federal Reserve + System, Profit and + +On line 19969: + Sheet Developments + at U.S. Commercial Banks in + FDIC, Statistics on + +On line 19969: + Income and Expense, + All Commercial Banks—Assets more than + $1B—National, Standard Report + +On line 19971: + Income and Expense, + All Commercial Banks—Assets less than + $100M and Assets $100M + +On line 19971: + logged as "Net income + attributable to bank." "Wall + Street Bonuses Rose Sharply + +On line 19973: + Comptroller Thomas P. + DiNapoli press release, February + N.Y. State Comptroller + +On line 19985: + "Economic Trends in + New York State," October Notes + to Chapter Chapter + +On line 19990: + FCIC calculations + based on estimates from Hope + Now and Moodys.com. Mortgage + +On line 19990: + Survey (the source for + the rest of the delinquency + and foreclosure rates + +On line 19992: + Gordon, Center for + Responsible Lending, "HAMP, + Servicer Abuses, and + +On line 19992: + COP Hearing on TARP + Foreclosure Mitigation + Programs, 111th Cong., 2nd + +On line 19992: + October pp. CRL + testimony based on Rod + Dubitsky, Larry + +On line 19992: + Million Foreclosures + Expected," Credit Suisse + (December and Jan + +On line 19992: + and Credit Losses: + Projections and Policy + Options," Goldman Sachs + +On line 19994: + Global Economics + Paper (January p. "RealtyTrac + Year-End Report Shows Record + +On line 19994: + U.S. Properties with + Foreclosure Filings in 2009—An + Increase of Percent + +On line 19996: + and Percent from RealtyTrac, + January "Delinquencies and + Loans in Foreclosure + +On line 19996: + Foreclosure Starts Rise + in Latest MBA National + Delinquency Survey," + +On line 19998: + release, November + Mark Fleming, chief economist, + CoreLogic, testimony + +On line 19998: + FCIC, Hearing on the + Impact of the Financial + Crisis—Sacramento, session Overview + + of the Sacramento + Housing and Mortgage Markets + and the Impact of + +On line 20000: + Financial Crisis + on the Region, September + transcript, p. FCIC staff + +On line 20002: + estimates based on + analysis of BlackBox data. + Laurie S. Goodman, + +On line 20002: + Private Sector and + Government Response to the + Mortgage Foreclosure + +On line 20004: + 1st sess., December + p. The index declined from + in April to in March + +On line 20006: + Quarterly Decline + in Negative Equity," + CoreLogic Inc., December + +On line 20008: + the second quarter + of Jim Rokakis, treasurer of + Cuyahoga County, Ohio, + +On line 20010: + and in "Ohio County + Foreclosure Filings Cuyahoga + County," Policy + +On line 20014: + Ohio. Rokakis, interview. + The United States Conference + of Mayors, "Impact + +On line 20014: + Crisis on Vacant + and Abandoned Properties in + Cities: A 77-City Survey," + +On line 20016: + June pp. Guy Cecala, + prepared testimony for + the Congressional + +On line 20016: + COP Hearing on TARP + Foreclosure Mitigation + Programs, 111th Cong., 2nd + +On line 20024: + Jersey Housing and + Mortgage Financing Agency, + approved September + +On line 20028: + testimony to + the Senate Committee on + Banking, Housing, and + +On line 20028: + Mortgage Servicing + from Modification to + Foreclosure, 111th Cong., + +On line 20030: + November p. See, + for example, National + Consumer Law Center, + + "Why Servicers Foreclose + When They Should Modify and + Other Puzzles of + +On line 20038: + Notes to Chapter Joseph + H. Evers, Office of the + Comptroller of the + +On line 20038: + COP Hearing on TARP + Foreclosure Mitigation + Programs, 111th Cong., 2nd + +On line 20038: + mortgage servicers have + modified loans since early + By the end of the + +On line 20038: + quarter of more than + of the modifications + were seriously + +On line 20038: + of foreclosure; and + had completed foreclosure. + The OCC examined + +On line 20038: + that were or more days + delinquent that were modified + during the second + +On line 20038: + modification, + of loans were delinquent by two + or more months; at nine + +On line 20038: + in arrears; at six + months, and at three months after + a loan change, nearly + +On line 20038: + OCC noted that more + recent modifications + have performed better + +On line 20042: + COP Hearing on TARP + Foreclosure Mitigation + Programs, 111th Cong., 2nd + +On line 20044: + sess., October p. + David J. Grais, partner with Grais + Ellsworth LLP, interview + +On line 20046: + Amherst Securities. + See PowerPoint presentation to + the Grais and Ellsworth LLP + +On line 20046: + Servicing Failures: + Protecting the Rights of RMBS + Investors," October + +On line 20054: + Financial Services + Committee, December See + Deposition of + +On line 20054: + Stephan, GMAC Mortgage LLC + v. Ann M. Neu a/k/a Ann Michelle + Perez, No. CA040805XXXX MB (Fla. + +On line 20056: + Cir. Ct. Dec. pp. See, + for example, Dwayne Ransom + Davis and Melisa Davis v. + + Countrywide Home Loans, + Inc.; Bank of America, N.A.; + BAC GP LLC; and BAC + +On line 20062: + Stability and + Foreclosure Mitigation," + November p. See, + +On line 20064: + Rdcv (Rutland Co. + Vt. Super. Ct. Oct. holding + that MERS did not have + +On line 20066: + foreclosure because + the note and mortgage had been + separated. The + +On line 20066: + F. Dana Winslow, written + testimony before the + House Committee on + +On line 20066: + Justice: Causes and + Effects of the Foreclosure + Crisis, 111th Cong., 2nd + +On line 20068: + sess., December pp. + Order, Objection to Claims + of Citibank, N.A. 4-6-10, (Bankr. + +On line 20068: + p. The order cites + In re Foreclosure Cases, + F. Supp. 2d (S.D. Oh. + +On line 20070: + In re Vargas, B.R. + (Bankr. C.D. Cal. Landmark Nat’l Bank + v. Kesler, P.3d (Kan. LaSalle + +On line 20072: + Sup. Ct. Winslow, written + testimony before the + House Committee on + +On line 20074: + pp. See John T. Kemp + v. Countrywide Home Loans, Inc., + Case No. 08-18700-JHW (D. N.J.), + +On line 20078: + pp. Grais, interview. + Adam J. Levitin, associate + professor of law, + +On line 20078: + University Law + Center, testimony to + Senate Committee + +On line 20078: + Banking, Housing, and + Urban Affairs, Problems in + Mortgage Servicing + +On line 20078: + Modification + to Foreclosure, 111th Cong., 2nd + sess., November p. + +On line 20082: + Panel, "November + Oversight Report," pp. Katherine + Porter, professor of + +On line 20084: + COP Hearing on TARP + Foreclosure Mitigation + Programs, October + +On line 20086: + p. Levitin, written + testimony before the + Senate Committee + +On line 20088: + Banking, Housing, and + Urban Affairs, p. Erika + Poethig, written + +On line 20088: + Subcommittee on + Housing and Community + Opportunity, + +On line 20088: + Foreclosure Crisis + on Public and Affordable + Housing in the Twin + +On line 20096: + sess., January p. + Notes to Chapter National + Association + +On line 20096: + and Youth (NAEHCY) and + First Focus, "A Critical + Moment: Child and Youth + +On line 20096: + Homelessness in Our + Nation’s Schools," July p. In + early NAEHCY and + +On line 20096: + Focus conducted + a survey of school districts. + When they were asked the + +On line 20096: + economic downturn, + attributed it to greater school + and community + +On line 20098: + Dr. Heath Morrison, + testimony before the + FCIC, Hearing on the + +On line 20100: + Nevada, session The + Impact of the Financial + Crisis on Nevada + +On line 20102: + transcript, pp. Gail Burks, + testimony before the + FCIC, Hearing on the + +On line 20102: + Financial Crisis—State of + Nevada, session The Impact + of the Financial + +On line 20104: + Crisis on Nevada + Real Estate, September + transcript, pp. Karen Mann, + +On line 20104: + and chief appraiser, + Mann and Associates Real + Estate Appraisers + +On line 20104: + FCIC, Hearing on the + Impact of the Financial + Crisis—Sacramento, session Mortgage + +On line 20104: + Fraud and Predatory + Lending in the Sacramento + Region, September + +On line 20106: + testimony, p. + Dawn Hunt, homeowner in Cape + Coral, FL, interview + +On line 20108: + by FCIC, December + Zip code default, foreclosures + and REO, S&P Global + +On line 20116: + RMBS database, July + Hunt, interview. INDEX The + index is available + diff --git a/data/haikus/haikus.txt b/data/haikus/haikus.txt new file mode 100644 index 0000000..8561bf6 --- /dev/null +++ b/data/haikus/haikus.txt @@ -0,0 +1,349012 @@ +Found 69802 haiku... + +On line 4: + current financial + and economic crisis in + the United States." In + +On line 4: + United States." In this + report, the Commission presents + to the President, + +On line 4: + Commission presents to + the President, the Congress, + and the American + +On line 4: + the President, the + Congress, and the American + people the results + +On line 4: + and the American + people the results of its + examination + +On line 4: + people the results + of its examination + and its conclusions + +On line 4: + the results of its + examination and its + conclusions as to + +On line 4: + examination + and its conclusions as to + the causes of the + +On line 6: + and its conclusions + as to the causes of the + crisis. More than two + +On line 6: + as to the causes + of the crisis. More than two + years after the worst + +On line 6: + to the causes of + the crisis. More than two years + after the worst of + +On line 6: + of the crisis. More + than two years after the worst + of the financial + +On line 6: + crisis. More than two + years after the worst of the + financial crisis, + +On line 6: + years after the worst + of the financial crisis, + our economy, as + +On line 6: + after the worst of + the financial crisis, our + economy, as well + +On line 6: + financial crisis, + our economy, as well as + communities and + +On line 6: + our economy, as + well as communities and + families across the + +On line 6: + and families across + the country, continues to + experience the + +On line 6: + the after-shocks. Millions + of Americans have lost their + jobs and their homes, and + +On line 6: + after-shocks. Millions of + Americans have lost their jobs + and their homes, and the + +On line 6: + of Americans have + lost their jobs and their homes, and + the economy is + +On line 6: + Americans have lost + their jobs and their homes, and the + economy is still + +On line 6: + have lost their jobs and + their homes, and the economy + is still struggling to + +On line 6: + their jobs and their homes, + and the economy is still + struggling to rebound. + +On line 6: + rebound. This report + is intended to provide + a historical + +On line 6: + is intended to + provide a historical + accounting of what + +On line 6: + a historical + accounting of what brought our + financial system + +On line 6: + accounting of what + brought our financial system + and economy to + +On line 6: + brought our financial + system and economy to + a precipice and to help + +On line 6: + to a precipice and to + help policy makers and + the public better + +On line 8: + better understand + how this calamity came to be. + The Commission was + +On line 8: + how this calamity came + to be. The Commission was + established as part + +On line 8: + be. The Commission + was established as part of + the Fraud Enforcement + +On line 8: + The Commission was + established as part of the + Fraud Enforcement and + +On line 8: + was established as + part of the Fraud Enforcement + and Recovery Act + +On line 8: + as part of the Fraud + Enforcement and Recovery + Act (Public Law 111-21) + +On line 8: + Fraud Enforcement and + Recovery Act (Public Law + 111-21) passed by Congress + +On line 8: + Act (Public Law 111-21) + passed by Congress and signed by + the President in + +On line 8: + (Public Law 111-21) passed + by Congress and signed by the + President in May + +On line 10: + by Congress and signed + by the President in May + This independent, + +On line 10: + by the President + in May This independent, + 10-member panel was + +On line 10: + President in May + This independent, 10-member + panel was composed + +On line 10: + panel was composed + of private citizens with + experience in + +On line 10: + with experience + in areas such as housing, + economics, finance, + +On line 10: + banking, and consumer + protection. Six members of + the Commission were + +On line 10: + Six members of the + Commission were appointed + by the Democratic + +On line 10: + were appointed by + the Democratic leadership + of Congress and four + +On line 10: + by the Democratic + leadership of Congress and + four members by the + +On line 12: + specific topics + for inquiry and called for the + examination + +On line 12: + for inquiry and called + for the examination + of the collapse of + +On line 12: + collapse of major + financial institutions + that failed or would have + +On line 12: + major financial + institutions that failed or + would have failed if not + +On line 12: + institutions that + failed or would have failed if not + for exceptional + +On line 12: + failed or would have failed + if not for exceptional + assistance from the + +On line 12: + have failed if not for + exceptional assistance + from the government. + +On line 12: + the government. This + report fulfills these mandates. + In addition, the + +On line 12: + This report fulfills + these mandates. In addition, + the Commission was + +On line 12: + In addition, the + Commission was instructed + to refer to the + +On line 12: + was instructed to + refer to the attorney + general of the + +On line 12: + to refer to the + attorney general of + the United States and + +On line 12: + any appropriate + state attorney general + any person that the + +On line 12: + the Commission found + may have violated the + laws of the United + +On line 12: + Commission found may + have violated the laws + of the United States + +On line 12: + have violated + the laws of the United States + in relation to + +On line 12: + violated the + laws of the United States in + relation to the + +On line 12: + the United States in + relation to the crisis. + Where the Commission + +On line 12: + relation to the + crisis. Where the Commission + found such potential + +On line 12: + found such potential + violations, it referred + those matters to the + +On line 12: + The Commission used + the authority it was + given to issue + +On line 12: + issue subpoenas + to compel testimony + and the production + +On line 12: + and the production + of documents, but in the + vast majority + +On line 12: + the production of + documents, but in the vast + majority of + +On line 12: + documents, but in + the vast majority of + instances, companies + +On line 12: + vast majority + of instances, companies and + individuals + +On line 14: + voluntarily + cooperated with this + inquiry. In the course + +On line 14: + cooperated + with this inquiry. In the course + of its research and + +On line 14: + with this inquiry. In + the course of its research and + investigation, + +On line 14: + course of its research + and investigation, the + Commission reviewed + +On line 14: + millions of pages of + documents, interviewed more + than witnesses, and + +On line 14: + interviewed more than + witnesses, and held days of + public hearings in + +On line 14: + witnesses, and held + days of public hearings in + New York, Washington, + +On line 14: + of public hearings + in New York, Washington, D.C., + and communities + +On line 14: + public hearings in + New York, Washington, D.C., and + communities across + +On line 14: + New York, Washington, + D.C., and communities across + the country that were + +On line 14: + York, Washington, D.C., + and communities across the + country that were hard + +On line 14: + and communities + across the country that were hard + hit by the crisis. + +On line 14: + communities across + the country that were hard hit + by the crisis. The + +On line 14: + the country that were + hard hit by the crisis. The + Commission also + +On line 14: + that were hard hit by + the crisis. The Commission + also drew from a + +On line 14: + hit by the crisis. + The Commission also drew + from a large body of + +On line 14: + drew from a large body + of existing work about the + crisis developed + +On line 14: + of existing work + about the crisis developed + by congressional + +On line 14: + government agencies, + academics, journalists, legal + investigators, + +On line 16: + academics, journalists, + legal investigators, + and many others. We + +On line 16: + journalists, legal + investigators, and many + others. We have tried + +On line 16: + investigators, + and many others. We have tried + in this report to + +On line 16: + We have tried in this + report to explain in clear, + understandable terms + +On line 16: + to explain in clear, + understandable terms how our + complex financial + +On line 16: + understandable terms + how our complex financial + system worked, how the + +On line 16: + complex financial + system worked, how the pieces fit + together, and how + +On line 16: + system worked, how the + pieces fit together, and how + the crisis occurred. + +On line 16: + pieces fit together, + and how the crisis occurred. + Doing so required + +On line 16: + together, and how + the crisis occurred. Doing + so required research + +On line 16: + and how the crisis + occurred. Doing so required + research into broad + +On line 16: + occurred. Doing so + required research into broad + and sometimes arcane + +On line 16: + risk management. To + bring these subjects out of the + realm of the abstract, + +On line 16: + management. To bring + these subjects out of the realm + of the abstract, we + +On line 16: + bring these subjects out + of the realm of the abstract, + we conducted case + +On line 16: + these subjects out of + the realm of the abstract, we + conducted case study + +On line 16: + Financial, Fannie + Mae, Goldman Sachs, Lehman Brothers, + Merrill Lynch, Moody’s, and + +On line 16: + Fannie Mae, Goldman + Sachs, Lehman Brothers, Merrill Lynch, + Moody’s, and Wachovia. We + +On line 16: + Mae, Goldman Sachs, Lehman + Brothers, Merrill Lynch, Moody’s, and + Wachovia. We looked more + +On line 16: + Lehman Brothers, Merrill + Lynch, Moody’s, and Wachovia. We looked + more generally + +On line 16: + Brothers, Merrill Lynch, + Moody’s, and Wachovia. We looked more + generally at + +On line 16: + Moody’s, and Wachovia. We + looked more generally at + the roles and actions + +On line 16: + and Wachovia. We looked + more generally at the + roles and actions of + +On line 16: + Wachovia. We looked more + generally at the roles + and actions of scores + +On line 18: + roles and actions of + scores of other companies. + We also studied + +On line 18: + We also studied + relevant policies put in + place by successive + +On line 18: + policies put in place + by successive Congresses and + administrations. + +On line 18: + successive Congresses + and administrations. And + importantly, we + +On line 18: + And importantly, + we examined the roles of + policy makers + +On line 18: + we examined the + roles of policy makers + and regulators, + +On line 18: + roles of policy + makers and regulators, + including at the + +On line 18: + Corporation, the + Federal Reserve Board, the + Federal Reserve + +On line 18: + Federal Reserve + Board, the Federal Reserve + Bank of New York, the + +On line 18: + Housing and Urban + Development, the Office + of the Comptroller + +On line 18: + Development, the + Office of the Comptroller + of the Currency, + +On line 18: + Comptroller of the + Currency, the Office of + Federal Housing + +On line 18: + of the Currency, + the Office of Federal + Housing Enterprise + +On line 18: + its successor, the + Federal Housing Finance + Agency), the Office + +On line 18: + Agency), the Office + of Thrift Supervision, the + Securities and + +On line 18: + Supervision, the + Securities and Exchange + Commission, and the + +On line 18: + Securities and + Exchange Commission, and the + Treasury Department. + +On line 20: + Exchange Commission, + and the Treasury Department. + Of course, there is much + +On line 20: + Commission, and the + Treasury Department. Of course, + there is much work the + +On line 20: + Treasury Department. + Of course, there is much work the + Commission did not + +On line 20: + Of course, there is much + work the Commission did not + undertake. Congress + +On line 20: + Commission did not + undertake. Congress did not + ask the Commission + +On line 20: + it to delve into + what caused the crisis. In that + sense, the Commission + +On line 20: + to delve into what + caused the crisis. In that sense, + the Commission has + +On line 20: + what caused the crisis. + In that sense, the Commission + has functioned somewhat + +On line 20: + caused the crisis. In + that sense, the Commission has + functioned somewhat like + +On line 20: + other transportation + accidents so that knowledge + of the probable + +On line 20: + accidents so that + knowledge of the probable + causes can help avoid + +On line 20: + of the probable + causes can help avoid future + accidents. Nor were + +On line 20: + can help avoid future + accidents. Nor were we tasked + with evaluating + +On line 20: + accidents. Nor were + we tasked with evaluating + the federal law + +On line 20: + the federal law + (the Troubled Asset Relief + Program, known as TARP) + +On line 20: + TARP) that provided + financial assistance to + major financial + +On line 20: + major financial + institutions. That duty + was assigned to the + +On line 22: + General for TARP. + This report is not the sole + repository of + +On line 22: + TARP. This report is + not the sole repository + of what the panel + +On line 22: + This report is not + the sole repository of + what the panel found. + +On line 22: + report is not the + sole repository of what + the panel found. A + +On line 22: + sole repository + of what the panel found. A + website will host a + +On line 22: + what the panel found. + A website will host a wealth + of information + +On line 22: + A website will host + a wealth of information + beyond what could be + +On line 22: + will host a wealth of + information beyond what + could be presented + +On line 24: + contain a stockpile + of materials—including + documents and emails, + +On line 24: + and emails, video of the + Commission’s public hearings, + testimony, and + +On line 24: + Commission’s public + hearings, testimony, and + supporting research—that + +On line 24: + testimony, and + supporting research—that can be + studied for years to + +On line 24: + supporting research—that + can be studied for years to + come. Much of what is + +On line 24: + can be studied for + years to come. Much of what is + footnoted in this + +On line 24: + for years to come. Much + of what is footnoted in + this report can be + +On line 24: + years to come. Much of + what is footnoted in this + report can be found + +On line 24: + come. Much of what is + footnoted in this report + can be found on the + +On line 24: + what is footnoted + in this report can be found + on the website. In + +On line 24: + can be found on the + website. In addition, more + materials that + +On line 24: + In addition, more + materials that cannot + be released yet for + +On line 24: + materials that + cannot be released yet for + various reasons + +On line 24: + cannot be released + yet for various reasons + will eventually + +On line 24: + yet for various + reasons will eventually + be made public through + +On line 24: + made public through the + National Archives and Records + Administration. + +On line 26: + National Archives + and Records Administration. + Our work reflects the + +On line 26: + extraordinary + commitment and knowledge of + the members of the + +On line 26: + and knowledge of the + members of the Commission + who were accorded + +On line 26: + Commission who were + accorded the honor of + this public service. + +On line 26: + who were accorded + the honor of this public + service. We also + +On line 26: + this public service. + We also benefited + immensely from the + +On line 26: + service. We also + benefited immensely + from the perspectives + +On line 26: + from the perspectives + shared with commissioners by + thousands of concerned + +On line 26: + thousands of concerned + Americans through their letters + and emails. And we are + +On line 26: + concerned Americans + through their letters and emails. And + we are grateful to + +On line 26: + and emails. And we are + grateful to the hundreds of + individuals + +On line 26: + individuals + and organizations that + offered expertise, + +On line 26: + personal accounts + in extensive interviews, + testimony, and + +On line 30: + and discussions with + the Commission. We want to + thank the Commission + +On line 30: + discussions with the + Commission. We want to thank + the Commission staff, + +On line 30: + particular, Wendy + Edelberg, our executive + director, for the + +On line 30: + director, for the + professionalism, passion, + and long hours they brought + +On line 30: + professionalism, + passion, and long hours they brought + to this mission in + +On line 30: + and long hours they brought + to this mission in service + of their country. This + +On line 30: + hours they brought to this + mission in service of their + country. This report + +On line 30: + brought to this mission + in service of their country. + This report would not + +On line 30: + to this mission in + service of their country. This + report would not have + +On line 30: + in service of their + country. This report would not + have been possible + +On line 30: + report would not have + been possible without their + extraordinary + +On line 32: + dedication. With + this report and our website, + the Commission’s work + +On line 32: + With this report and + our website, the Commission’s + work comes to a close. + +On line 32: + this report and our + website, the Commission’s work + comes to a close. We + +On line 32: + and our website, the + Commission’s work comes to a + close. We present what we + +On line 32: + the Commission’s work + comes to a close. We present what + we have found in the + +On line 32: + Commission’s work comes + to a close. We present what we + have found in the hope + +On line 32: + work comes to a close. + We present what we have found in + the hope that readers + +On line 32: + comes to a close. We + present what we have found in the + hope that readers can + +On line 32: + to a close. We present + what we have found in the hope + that readers can use + +On line 32: + a close. We present what + we have found in the hope that + readers can use this + +On line 32: + We present what we have + found in the hope that readers + can use this report + +On line 32: + present what we have found + in the hope that readers can + use this report to + +On line 32: + what we have found in + the hope that readers can use + this report to reach + +On line 32: + we have found in the + hope that readers can use this + report to reach their + +On line 32: + the hope that readers + can use this report to reach + their own conclusions, + +On line 32: + hope that readers can + use this report to reach their + own conclusions, even + +On line 32: + that readers can use + this report to reach their own + conclusions, even as + +On line 32: + this report to reach + their own conclusions, even as + the comprehensive + +On line 32: + their own conclusions, + even as the comprehensive + historical record + +On line 32: + the comprehensive + historical record of this + crisis continues + +On line 38: + record of this crisis + continues to be written. + CONCLUSIONS OF THE + +On line 38: + crisis continues + to be written. CONCLUSIONS + OF THE FINANCIAL + +On line 38: + continues to be + written. CONCLUSIONS OF THE + FINANCIAL CRISIS + +On line 38: + written. CONCLUSIONS + OF THE FINANCIAL CRISIS + INQUIRY COMMISSION + +On line 40: + Commission has been + called upon to examine + the financial and + +On line 40: + to examine the + financial and economic + crisis that has gripped + +On line 40: + the financial and + economic crisis that has + gripped our country and + +On line 40: + economic crisis + that has gripped our country and + explain its causes + +On line 40: + gripped our country and + explain its causes to the + American people. + +On line 40: + explain its causes + to the American people. + We are keenly aware + +On line 40: + its causes to the + American people. We are + keenly aware of the + +On line 40: + American people. + We are keenly aware of the + significance of + +On line 40: + We are keenly aware + of the significance of + our charge, given the + +On line 40: + economic damage + that America has suffered + in the wake of the + +On line 40: + that America has + suffered in the wake of the + greatest financial + +On line 40: + suffered in the wake + of the greatest financial + crisis since the Great + +On line 42: + wake of the greatest + financial crisis since the + Great Depression. Our + +On line 42: + crisis since the Great + Depression. Our task was first + to determine what + +On line 42: + Great Depression. Our + task was first to determine + what happened and how + +On line 42: + Depression. Our task + was first to determine what + happened and how it + +On line 42: + Our task was first to + determine what happened and + how it happened so + +On line 42: + what happened and how + it happened so that we could + understand why it + +On line 42: + and how it happened + so that we could understand + why it happened. Here + +On line 42: + how it happened so + that we could understand why + it happened. Here we + +On line 42: + it happened so that + we could understand why it + happened. Here we present + +On line 42: + we could understand + why it happened. Here we present + our conclusions. We + +On line 42: + our conclusions. We + encourage the American + people to join us + +On line 42: + We encourage the + American people to join + us in making their + +On line 42: + American people + to join us in making their + own assessments based + +On line 42: + us in making their + own assessments based on the + evidence gathered + +On line 42: + own assessments based + on the evidence gathered + in our inquiry. If + +On line 42: + assessments based on + the evidence gathered in + our inquiry. If we + +On line 42: + on the evidence + gathered in our inquiry. If + we do not learn from + +On line 42: + our inquiry. If we + do not learn from history, + we are unlikely + +On line 42: + inquiry. If we do + not learn from history, we + are unlikely to + +On line 42: + from history, we + are unlikely to fully + recover from it. + +On line 42: + we are unlikely + to fully recover from + it. Some on Wall Street + +On line 42: + are unlikely to + fully recover from it. + Some on Wall Street and + +On line 42: + fully recover + from it. Some on Wall Street and + in Washington with + +On line 42: + it. Some on Wall Street + and in Washington with a + stake in the status + +On line 42: + Some on Wall Street and + in Washington with a stake + in the status quo + +On line 42: + on Wall Street and in + Washington with a stake in + the status quo may + +On line 42: + and in Washington + with a stake in the status + quo may be tempted + +On line 42: + in Washington with + a stake in the status quo + may be tempted to + +On line 42: + Washington with a + stake in the status quo may + be tempted to wipe + +On line 42: + stake in the status + quo may be tempted to wipe + from memory the + +On line 42: + in the status quo + may be tempted to wipe from + memory the events + +On line 42: + quo may be tempted + to wipe from memory the + events of this crisis, + +On line 42: + may be tempted to + wipe from memory the events + of this crisis, or + +On line 42: + be tempted to wipe + from memory the events of + this crisis, or to + +On line 42: + wipe from memory + the events of this crisis, or + to suggest that no + +On line 42: + from memory the + events of this crisis, or to + suggest that no one + +On line 42: + events of this crisis, + or to suggest that no one + could have foreseen or + +On line 42: + or to suggest that + no one could have foreseen or + prevented them. This + +On line 42: + unravel myths, and + help us understand how the + crisis could have been + +On line 42: + help us understand + how the crisis could have been + avoided. It is an + +On line 42: + understand how the + crisis could have been avoided. + It is an attempt + +On line 42: + crisis could have been + avoided. It is an attempt + to record history, + +On line 42: + could have been avoided. + It is an attempt to record + history, not to + +On line 42: + avoided. It is an + attempt to record history, + not to rewrite it, + +On line 42: + an attempt to record + history, not to rewrite + it, nor allow it + +On line 42: + record history, not + to rewrite it, nor allow + it to be rewritten. + +On line 44: + history, not to + rewrite it, nor allow it + to be rewritten. To + +On line 44: + to rewrite it, nor + allow it to be rewritten. + To help our fellow + +On line 44: + it, nor allow it + to be rewritten. To help our + fellow citizens + +On line 44: + allow it to be + rewritten. To help our fellow + citizens better + +On line 44: + to be rewritten. To + help our fellow citizens + better understand + +On line 44: + conclusions at the + end of chapters in Parts III, + IV, and V of this + +On line 46: + end of chapters in + Parts III, IV, and V of this + report. The subject + +On line 46: + chapters in Parts III, + IV, and V of this report. + The subject of this + +On line 46: + Parts III, IV, and V + of this report. The subject + of this report is + +On line 46: + III, IV, and V of + this report. The subject of + this report is of + +On line 46: + IV, and V of this + report. The subject of this + report is of no + +On line 46: + report. The subject + of this report is of no + small consequence to + +On line 46: + this report is of + no small consequence to this + nation. The profound + +On line 46: + small consequence to + this nation. The profound events + of and were neither + +On line 46: + consequence to this + nation. The profound events of + and were neither bumps + +On line 46: + nation. The profound + events of and were neither bumps + in the road nor an + +On line 46: + bumps in the road nor + an accentuated dip + in the financial + +On line 46: + in the road nor an + accentuated dip in + the financial and + +On line 46: + accentuated + dip in the financial and + business cycles we + +On line 46: + in the financial + and business cycles we have + come to expect in + +On line 46: + the financial and + business cycles we have come + to expect in a + +On line 46: + come to expect in + a free market economic + system. This was a + +On line 46: + in a free market + economic system. This was + a fundamental + +On line 46: + system. This was a + fundamental disruption—a + financial upheaval, + +On line 46: + financial upheaval, + if you will—that wreaked havoc in + communities and + +On line 48: + communities and + neighborhoods across this country. + As this report goes + +On line 48: + and neighborhoods across + this country. As this report + goes to print, there are + +On line 48: + neighborhoods across this + country. As this report goes + to print, there are more + +On line 48: + across this country. As + this report goes to print, there + are more than million + +On line 48: + this report goes to + print, there are more than million + Americans who are + +On line 48: + goes to print, there are + more than million Americans + who are out of work, + +On line 48: + print, there are more than + million Americans who are + out of work, cannot + +On line 48: + million Americans + who are out of work, cannot + find full-time work, + +On line 48: + who are out of work, + cannot find full-time work, + or have given up + +On line 48: + out of work, cannot + find full-time work, or have + given up looking + +On line 48: + full-time work, or + have given up looking for + work. About four million + +On line 48: + work, or have given + up looking for work. About four + million families + +On line 48: + up looking for work. + About four million families + have lost their homes to + +On line 48: + work. About four million + families have lost their homes + to foreclosure and + +On line 48: + families have lost + their homes to foreclosure and + another four and + +On line 48: + homes to foreclosure + and another four and a + half million have slipped + +On line 48: + their mortgage payments. + Nearly trillion in household + wealth has vanished, with + +On line 48: + Nearly trillion in + household wealth has vanished, with + retirement accounts + +On line 48: + and life savings swept + away. Businesses, large and small, + have felt the sting of + +On line 48: + life savings swept away. + Businesses, large and small, have + felt the sting of a + +On line 48: + away. Businesses, large + and small, have felt the sting of + a deep recession. + +On line 48: + Businesses, large and + small, have felt the sting of a + deep recession. There + +On line 48: + and small, have felt the + sting of a deep recession. + There is much anger about + +On line 48: + small, have felt the sting + of a deep recession. There + is much anger about what + +On line 48: + have felt the sting of + a deep recession. There is + much anger about what has + +On line 48: + the sting of a deep + recession. There is much anger + about what has transpired, + +On line 48: + recession. There is + much anger about what has transpired, + and justifiably + +On line 48: + much anger about what has + transpired, and justifiably + so. Many people who + +On line 48: + about what has transpired, + and justifiably so. Many + people who abided + +On line 48: + and justifiably + so. Many people who abided + by all the rules now + +On line 48: + justifiably so. + Many people who abided by + all the rules now find + +On line 48: + so. Many people who + abided by all the rules now + find themselves out of + +On line 48: + abided by all the + rules now find themselves out of + work and uncertain + +On line 48: + by all the rules now + find themselves out of work and + uncertain about their + +On line 48: + rules now find themselves + out of work and uncertain + about their future prospects. + +On line 48: + now find themselves out + of work and uncertain about + their future prospects. The + +On line 48: + about their future prospects. + The collateral damage + of this crisis has + +On line 48: + their future prospects. The + collateral damage of + this crisis has been + +On line 48: + The collateral + damage of this crisis has + been real people + +On line 48: + this crisis has been + real people and real + communities. The + +On line 48: + been real people + and real communities. + The impacts of this + +On line 48: + people and real + communities. The impacts + of this crisis are + +On line 48: + communities. The + impacts of this crisis are + likely to be felt + +On line 48: + of this crisis are + likely to be felt for a + generation. And + +On line 48: + are likely to be + felt for a generation. + And the nation faces + +On line 48: + likely to be felt + for a generation. And + the nation faces no + +On line 50: + faces no easy path to + renewed economic strength. Like + so many Americans, + +On line 50: + so many Americans, + we began our exploration + with our own views and + +On line 50: + many Americans, we + began our exploration with + our own views and some + +On line 50: + our own views and some + preliminary knowledge about + how the world’s strongest + +On line 50: + how the world’s strongest + financial system came to + the brink of collapse. + +On line 50: + strongest financial + system came to the brink of + collapse. Even at the + +On line 50: + financial system + came to the brink of collapse. + Even at the time of + +On line 50: + came to the brink of + collapse. Even at the time of + our appointment to + +On line 50: + collapse. Even at the + time of our appointment to + this independent + +On line 50: + our appointment to + this independent panel, + much had already been + +On line 50: + this independent + panel, much had already been + written and said about + +On line 50: + already been written + and said about the crisis. Yet + all of us have been + +On line 50: + said about the crisis. + Yet all of us have been deeply + affected by what + +On line 50: + crisis. Yet all of + us have been deeply affected + by what we have learned + +On line 50: + Yet all of us have + been deeply affected by what + we have learned in the + +On line 50: + all of us have been + deeply affected by what we + have learned in the course + +On line 50: + of us have been deeply + affected by what we have + learned in the course of + +On line 50: + been deeply affected + by what we have learned in the + course of our inquiry. + +On line 50: + deeply affected by + what we have learned in the course + of our inquiry. We + +On line 50: + affected by what + we have learned in the course of + our inquiry. We have + +On line 50: + we have learned in the + course of our inquiry. We have + been at various + +On line 50: + have learned in the course + of our inquiry. We have been + at various times + +On line 50: + course of our inquiry. + We have been at various + times fascinated, + +On line 50: + been at various + times fascinated, surprised, + and even shocked by what + +On line 50: + at various times + fascinated, surprised, and + even shocked by what we + +On line 50: + times fascinated, + surprised, and even shocked by what + we saw, heard, and read. + +On line 50: + and even shocked by what + we saw, heard, and read. Ours has + been a journey of + +On line 50: + what we saw, heard, and + read. Ours has been a journey + of revelation. + +On line 52: + we saw, heard, and read. + Ours has been a journey of + revelation. Much + +On line 52: + read. Ours has been a + journey of revelation. + Much attention over + +On line 52: + revelation. Much + attention over the past two + years has been focused + +On line 52: + attention over the + past two years has been focused + on the decisions + +On line 52: + past two years has been + focused on the decisions + by the federal + +On line 52: + the decisions by + the federal government + to provide massive + +On line 52: + financial system + and rescue large financial + institutions that + +On line 52: + important to fail. + Those decisions—and the deep + emotions surrounding + +On line 52: + Those decisions—and + the deep emotions surrounding + them—will be debated + +On line 52: + decisions—and the + deep emotions surrounding them—will + be debated long + +On line 52: + them—will be debated + long into the future. But + our mission was to + +On line 52: + be debated long + into the future. But our + mission was to ask + +On line 52: + our mission was to + ask and answer this central + question: how did it + +On line 52: + to ask and answer + this central question: how did + it come to pass that + +On line 52: + ask and answer this + central question: how did it + come to pass that in + +On line 52: + this central question: + how did it come to pass that + in our nation was + +On line 52: + central question: how + did it come to pass that in + our nation was forced + +On line 52: + how did it come to + pass that in our nation was + forced to choose between + +On line 52: + did it come to pass + that in our nation was forced + to choose between two + +On line 52: + it come to pass that + in our nation was forced to + choose between two stark + +On line 52: + come to pass that in + our nation was forced to choose + between two stark and + +On line 52: + the total collapse + of our financial system + and economy or + +On line 52: + of our financial + system and economy or + inject trillions of + +On line 52: + and an array of + companies, as millions of + Americans still lost + +On line 54: + Americans still lost + their jobs, their savings, and their + homes1 In this report, + +On line 54: + still lost their jobs, their + savings, and their homes1 In this + report, we detail + +On line 54: + their jobs, their savings, + and their homes1 In this report, + we detail the events + +On line 54: + jobs, their savings, and + their homes1 In this report, we + detail the events of + +On line 54: + and their homes1 In this + report, we detail the events + of the crisis. But + +On line 54: + detail the events of + the crisis. But a simple + summary, as we + +On line 54: + events of the crisis. + But a simple summary, + as we see it, is + +On line 54: + the crisis. But a + simple summary, as we + see it, is useful + +On line 54: + simple summary, + as we see it, is useful + at the outset. While + +On line 54: + at the outset. While + the vulnerabilities + that created the + +On line 54: + that created the + potential for crisis were + years in the making, + +On line 54: + the making, it was + the collapse of the housing + bubble—fueled by + +On line 54: + was the collapse of + the housing bubble—fueled + by low interest + +On line 54: + the collapse of the + housing bubble—fueled by + low interest rates, + +On line 54: + bubble—fueled by + low interest rates, easy and + available credit, scant + +On line 54: + by low interest + rates, easy and available credit, + scant regulation, + +On line 54: + low interest rates, + easy and available credit, scant + regulation, and + +On line 54: + rates, easy and available + credit, scant regulation, + and toxic mortgages— + +On line 56: + available credit, scant + regulation, and toxic + mortgages— that was the + +On line 56: + regulation, and + toxic mortgages— that was the + spark that ignited + +On line 56: + toxic mortgages— that + was the spark that ignited + a string of events, which + +On line 56: + mortgages— that was the + spark that ignited a string + of events, which led to + +On line 56: + spark that ignited + a string of events, which led to + a full-blown crisis + +On line 56: + that ignited a + string of events, which led to a + full-blown crisis in + +On line 56: + string of events, which led + to a full-blown crisis in + the fall of Trillions + +On line 56: + of events, which led to + a full-blown crisis in the + fall of Trillions of + +On line 56: + fall of Trillions of + dollars in risky mortgages had + become embedded + +On line 56: + Trillions of dollars + in risky mortgages had become + embedded throughout + +On line 56: + as mortgage-related + securities were packaged, + repackaged, and sold to + +On line 56: + securities were + packaged, repackaged, and sold to + investors around the world. + +On line 56: + were packaged, repackaged, + and sold to investors around the + world. When the bubble + +On line 56: + packaged, repackaged, and + sold to investors around the world. + When the bubble burst, + +On line 56: + repackaged, and sold to + investors around the world. When the + bubble burst, hundreds + +On line 56: + sold to investors around + the world. When the bubble burst, + hundreds of billions + +On line 56: + world. When the bubble + burst, hundreds of billions of + dollars in losses + +On line 56: + bubble burst, hundreds + of billions of dollars in + losses in mortgages + +On line 56: + to those mortgages and + had borrowed heavily against + them. This happened not + +On line 56: + those mortgages and had + borrowed heavily against them. + This happened not just + +On line 56: + borrowed heavily + against them. This happened not just + in the United States + +On line 56: + heavily against them. + This happened not just in the + United States but around + +On line 56: + against them. This happened + not just in the United States + but around the world. The + +On line 56: + This happened not just + in the United States but around + the world. The losses + +On line 56: + happened not just in + the United States but around the + world. The losses were + +On line 56: + in the United States + but around the world. The losses + were magnified by + +On line 56: + States but around the world. + The losses were magnified + by derivatives + +On line 56: + but around the world. The + losses were magnified by + derivatives such + +On line 58: + crisis reached seismic + proportions in September + with the failure of + +On line 58: + in September with + the failure of Lehman Brothers + and the impending + +On line 58: + Lehman Brothers and the + impending collapse of the + insurance giant + +On line 58: + and the impending + collapse of the insurance + giant American + +On line 58: + giant American + International Group (AIG). + Panic fanned by a + +On line 58: + International + Group (AIG). Panic fanned by a + lack of transparency + +On line 58: + Group (AIG). Panic fanned + by a lack of transparency + of the balance sheets + +On line 58: + (AIG). Panic fanned by + a lack of transparency of + the balance sheets of + +On line 58: + interconnections + among institutions perceived + to be "too big to + +On line 58: + among institutions + perceived to be "too big to + fail," caused the credit + +On line 58: + perceived to be "too + big to fail," caused the credit + markets to seize up. + +On line 58: + to be "too big to + fail," caused the credit markets + to seize up. Trading + +On line 58: + be "too big to fail," + caused the credit markets to + seize up. Trading ground + +On line 58: + "too big to fail," caused + the credit markets to seize + up. Trading ground to + +On line 58: + big to fail," caused the + credit markets to seize up. + Trading ground to a + +On line 58: + fail," caused the credit + markets to seize up. Trading + ground to a halt. The + +On line 58: + credit markets to + seize up. Trading ground to a + halt. The stock market + +On line 58: + halt. The stock market + plummeted. The economy + plunged into a deep + +On line 58: + market plummeted. + The economy plunged into + a deep recession. + +On line 60: + financial system + we examined bears little + resemblance to that + +On line 60: + that of our parents’ + generation. The changes in + the past three decades alone + +On line 60: + generation. The + changes in the past three decades alone + have been remarkable. + +On line 60: + changes in the past three + decades alone have been remarkable. + The CONCLUSIONS OF + +On line 60: + in the past three decades + alone have been remarkable. The + CONCLUSIONS OF THE + +On line 60: + three decades alone have been + remarkable. The CONCLUSIONS + OF THE FINANCIAL + +On line 60: + markets have become + increasingly globalized. + Technology has + +On line 60: + and complexity + of financial instruments + and transactions. There + +On line 60: + complexity of + financial instruments and + transactions. There is + +On line 60: + costs of financing + than ever before. And the + financial sector + +On line 60: + than ever before. + And the financial sector + itself has become + +On line 60: + financial sector + itself has become a much + more dominant force + +On line 60: + itself has become + a much more dominant force + in our economy. + +On line 62: + has become a much + more dominant force in our + economy. From to + +On line 62: + much more dominant + force in our economy. From + to the amount of debt + +On line 62: + more dominant force + in our economy. From to + the amount of debt held + +On line 62: + dominant force in + our economy. From to the + amount of debt held by + +On line 62: + in our economy. + From to the amount of debt held + by the financial + +On line 62: + economy. From to + the amount of debt held by the + financial sector + +On line 64: + the amount of debt held + by the financial sector + soared from trillion to + +On line 64: + of debt held by the + financial sector soared from + trillion to trillion, + +On line 64: + financial sector + soared from trillion to trillion, + more than doubling as + +On line 64: + trillion to trillion, + more than doubling as a share + of gross domestic + +On line 64: + to trillion, more than + doubling as a share of gross + domestic product. + +On line 66: + doubling as a share + of gross domestic product. + The very nature of + +On line 66: + as a share of gross + domestic product. The very + nature of many Wall + +On line 66: + of many Wall Street firms + changed—from relatively staid + private partnerships + +On line 66: + to publicly traded + corporations taking greater + and more diverse kinds + +On line 66: + taking greater and more + diverse kinds of risks. By the + largest U.S. commercial + +On line 66: + greater and more diverse + kinds of risks. By the largest U.S. + commercial banks held + +On line 66: + kinds of risks. By the + largest U.S. commercial banks held + of the industry’s + +On line 66: + risks. By the largest U.S. + commercial banks held of the + industry’s assets, + +On line 66: + commercial banks held + of the industry’s assets, + more than double the + +On line 66: + of the industry’s + assets, more than double the + level held in On + +On line 66: + industry’s assets, + more than double the level + held in On the eve + +On line 66: + more than double the + level held in On the eve + of the crisis in + +On line 66: + level held in On + the eve of the crisis in + financial sector + +On line 66: + of the crisis in + financial sector profits + constituted of + +On line 66: + constituted of + all corporate profits in + the United States, up + +On line 66: + corporate profits + in the United States, up from + in Understanding + +On line 66: + in the United States, + up from in Understanding + this transformation + +On line 66: + the United States, up + from in Understanding this + transformation has + +On line 66: + in Understanding + this transformation has been + critical to the + +On line 68: + been critical to + the Commission’s analysis. + Now to our major + +On line 68: + Now to our major + findings and conclusions, which + are based on the facts + +On line 68: + our major findings + and conclusions, which are based + on the facts contained + +On line 68: + major findings and + conclusions, which are based on + the facts contained in + +On line 68: + and conclusions, which + are based on the facts contained + in this report: they + +On line 68: + conclusions, which are + based on the facts contained in + this report: they are + +On line 68: + which are based on the + facts contained in this report: + they are offered with + +On line 68: + are based on the facts + contained in this report: they + are offered with the + +On line 68: + the facts contained in + this report: they are offered + with the hope that lessons + +On line 68: + facts contained in this + report: they are offered with + the hope that lessons may + +On line 68: + in this report: they + are offered with the hope that + lessons may be learned to + +On line 68: + this report: they are + offered with the hope that lessons + may be learned to help + +On line 68: + they are offered with + the hope that lessons may be learned + to help avoid future + +On line 70: + to help avoid future + catastrophe. We conclude this + financial crisis + +On line 70: + future catastrophe. + We conclude this financial + crisis was avoidable. + +On line 70: + crisis was avoidable. + The crisis was the result + of human action + +On line 70: + The crisis was the + result of human action + and inaction, not + +On line 70: + result of human + action and inaction, not + of Mother Nature + +On line 70: + of Mother Nature + or computer models gone + haywire. The captains + +On line 70: + models gone haywire. + The captains of finance and + the public stewards + +On line 70: + the public stewards + of our financial system + ignored warnings and + +On line 70: + financial system + ignored warnings and failed to + question, understand, + +On line 70: + ignored warnings and + failed to question, understand, + and manage evolving + +On line 70: + evolving risks within + a system essential to + the well-being of the + +On line 70: + within a system + essential to the well-being + of the American + +On line 70: + essential to the + well-being of the American + public. Theirs was a + +On line 70: + to the well-being of + the American public. Theirs + was a big miss, not + +On line 70: + the well-being of the + American public. Theirs was + a big miss, not a + +On line 72: + of the American + public. Theirs was a big miss, + not a stumble. While + +On line 72: + public. Theirs was a + big miss, not a stumble. While + the business cycle + +On line 72: + was a big miss, not + a stumble. While the business + cycle cannot be + +On line 72: + a stumble. While the + business cycle cannot be + repealed, a crisis + +On line 72: + cycle cannot be + repealed, a crisis of this + magnitude need not + +On line 72: + this magnitude need + not have occurred. To paraphrase + Shakespeare, the fault lies + +On line 72: + need not have occurred. + To paraphrase Shakespeare, the fault + lies not in the stars, + +On line 72: + not have occurred. To + paraphrase Shakespeare, the fault lies + not in the stars, but + +On line 72: + occurred. To paraphrase + Shakespeare, the fault lies not in + the stars, but in us. + +On line 74: + To paraphrase Shakespeare, + the fault lies not in the stars, + but in us. Despite + +On line 74: + paraphrase Shakespeare, the + fault lies not in the stars, but + in us. Despite the + +On line 74: + Shakespeare, the fault lies + not in the stars, but in us. + Despite the expressed + +On line 74: + the fault lies not in + the stars, but in us. Despite + the expressed view of + +On line 74: + fault lies not in the + stars, but in us. Despite the + expressed view of many + +On line 74: + not in the stars, but + in us. Despite the expressed + view of many on Wall + +On line 74: + in the stars, but in + us. Despite the expressed view + of many on Wall Street + +On line 74: + the stars, but in us. + Despite the expressed view of + many on Wall Street and + +On line 74: + Despite the expressed + view of many on Wall Street and + in Washington that + +On line 74: + view of many on Wall + Street and in Washington that + the crisis could not + +On line 74: + of many on Wall Street + and in Washington that the + crisis could not have + +On line 74: + in Washington that + the crisis could not have been + foreseen or avoided, + +On line 74: + the crisis could not + have been foreseen or avoided, + there were warning signs. + +On line 74: + crisis could not have + been foreseen or avoided, there + were warning signs. The + +On line 74: + not have been foreseen + or avoided, there were warning + signs. The tragedy was that + +On line 74: + have been foreseen or + avoided, there were warning signs. + The tragedy was that they + +On line 74: + or avoided, there were + warning signs. The tragedy was that + they were ignored or + +On line 74: + were warning signs. The + tragedy was that they were ignored + or discounted. There + +On line 74: + warning signs. The tragedy + was that they were ignored or + discounted. There was + +On line 74: + tragedy was that they were + ignored or discounted. There + was an explosion + +On line 74: + that they were ignored + or discounted. There was an + explosion in risky + +On line 74: + or discounted. There + was an explosion in risky + subprime lending and + +On line 74: + risky subprime lending + and securitization, + an unsustainable + +On line 74: + subprime lending and + securitization, an + unsustainable rise + +On line 74: + an unsustainable + rise in housing prices, widespread + reports of egregious + +On line 74: + in household mortgage + debt, and exponential growth + in financial firms’ + +On line 74: + growth in financial + firms’ trading activities, + unregulated + +On line 74: + red flags. Yet there was + pervasive permissiveness; + little meaningful + +On line 76: + taken to quell the + threats in a timely manner. + The prime example + +On line 76: + to quell the threats in + a timely manner. The prime + example is the + +On line 76: + threats in a timely + manner. The prime example + is the Federal + +On line 76: + a timely manner. + The prime example is the + Federal Reserve’s + +On line 76: + The prime example + is the Federal Reserve’s + pivotal failure to + +On line 76: + example is the + Federal Reserve’s pivotal + failure to stem the + +On line 76: + failure to stem the + flow of toxic mortgages, which + it could have done by + +On line 76: + to stem the flow of + toxic mortgages, which it could + have done by setting + +On line 76: + the flow of toxic + mortgages, which it could have done + by setting prudent + +On line 76: + toxic mortgages, which + it could have done by setting + prudent mortgage-lending + +On line 76: + mortgages, which it could + have done by setting prudent + mortgage-lending standards. + +On line 78: + mortgage-lending standards. + The Federal Reserve was + the one entity + +On line 78: + Reserve was the one + entity empowered to + do so and it did + +On line 78: + the one entity + empowered to do so and + it did not. The record + +On line 78: + examination + is replete with evidence + of other failures: + +On line 78: + with evidence of + other failures: financial + institutions made, + +On line 78: + bought, and sold mortgage + securities they never + examined, did not + +On line 78: + securities they + never examined, did not + care to examine, + +On line 78: + examined, did not + care to examine, or knew + to be defective; + +On line 78: + care to examine, + or knew to be defective; + firms depended on + +On line 78: + to examine, or + knew to be defective; firms + depended on tens + +On line 78: + to be defective; + firms depended on tens of + billions of dollars + +On line 78: + firms depended on + tens of billions of dollars + of borrowing that + +On line 78: + depended on tens + of billions of dollars of + borrowing that had + +On line 78: + tens of billions of + dollars of borrowing that + had to be renewed + +On line 78: + billions of dollars + of borrowing that had to + be renewed each and + +On line 78: + of borrowing that + had to be renewed each and + every night, secured + +On line 78: + had to be renewed + each and every night, secured + by subprime mortgage + +On line 78: + each and every night, + secured by subprime mortgage + securities; and + +On line 78: + blindly relied on + credit rating agencies as + their arbiters of risk. + +On line 78: + on credit rating + agencies as their arbiters of + risk. What else could one + +On line 78: + rating agencies as + their arbiters of risk. What else + could one expect on + +On line 78: + as their arbiters of + risk. What else could one expect + on a highway where + +On line 78: + their arbiters of risk. + What else could one expect on + a highway where there + +On line 78: + arbiters of risk. What + else could one expect on a + highway where there were + +On line 78: + of risk. What else could + one expect on a highway + where there were neither + +On line 78: + risk. What else could one + expect on a highway where + there were neither speed + +On line 78: + else could one expect + on a highway where there were + neither speed limits + +On line 78: + on a highway where + there were neither speed limits + nor neatly painted + +On line 78: + a highway where there + were neither speed limits nor + neatly painted lines1 + +On line 80: + widespread failures in + financial regulation + and supervision + +On line 80: + and supervision + proved devastating to the + stability of + +On line 80: + devastating to + the stability of the + nation’s financial + +On line 80: + the stability + of the nation’s financial + markets. The sentries + +On line 80: + nation’s financial + markets. The sentries were not + at their posts, in no + +On line 80: + financial markets. + The sentries were not at their + posts, in no small part + +On line 80: + markets. The sentries + were not at their posts, in no + small part due to the + +On line 80: + The sentries were not + at their posts, in no small part + due to the widely + +On line 80: + were not at their posts, + in no small part due to the + widely accepted + +On line 80: + at their posts, in no + small part due to the widely + accepted faith in + +On line 80: + self-correcting + nature of the markets and + the ability of + +On line 80: + the markets and the + ability of financial + institutions to + +On line 80: + the ability of + financial institutions + to effectively + +On line 80: + to effectively + police themselves. More than years + of deregulation + +On line 80: + former Federal + Reserve chairman Alan Greenspan and + others, supported + +On line 80: + Alan Greenspan and others, + supported by successive + administrations + +On line 80: + by the powerful + financial industry at + every turn, had stripped + +On line 80: + every turn, had stripped + away key safeguards, which could have + helped avoid catastrophe. + +On line 80: + away key safeguards, which + could have helped avoid catastrophe. + This approach had opened + +On line 80: + key safeguards, which could + have helped avoid catastrophe. This + approach had opened up + +On line 80: + up gaps in oversight + of critical areas with + trillions of dollars + +On line 80: + areas with trillions + of dollars at risk, such as + the shadow banking + +On line 80: + trillions of dollars + at risk, such as the shadow + banking system and + +On line 80: + of dollars at risk, + such as the shadow banking + system and over-the-counter + +On line 82: + race to the weakest + supervisor. Yet we do + not accept the view + +On line 82: + supervisor. Yet + we do not accept the view + that regulators + +On line 82: + we do not accept + the view that regulators + lacked the power to + +On line 82: + not accept the view + that regulators lacked the + power to protect + +On line 82: + regulators lacked + the power to protect the + financial system. + +On line 82: + power to protect + the financial system. They + had ample power + +On line 82: + financial system. + They had ample power in + many arenas and they + +On line 84: + had ample power + in many arenas and they chose + not to use it. To + +On line 84: + ample power in + many arenas and they chose not + to use it. To give + +On line 84: + many arenas and they + chose not to use it. To give + just three examples: + +On line 84: + arenas and they chose + not to use it. To give just + three examples: the + +On line 84: + chose not to use it. + To give just three examples: + the Securities + +On line 84: + not to use it. To + give just three examples: the + Securities and + +On line 84: + three examples: the + Securities and Exchange + Commission could have + +On line 84: + Commission could have + required more capital and + halted risky practices + +On line 84: + could have required more + capital and halted risky + practices at the big + +On line 84: + more capital and + halted risky practices at the + big investment banks. + +On line 86: + risky practices at the + big investment banks. It did + not. The Federal + +On line 86: + big investment banks. + It did not. The Federal + Reserve Bank of New + +On line 86: + banks. It did not. The + Federal Reserve Bank of + New York and other + +On line 86: + Federal Reserve + Bank of New York and other + regulators could + +On line 86: + New York and other + regulators could have clamped + down on Citigroup’s + +On line 86: + regulators could + have clamped down on Citigroup’s + excesses in the + +On line 86: + down on Citigroup’s + excesses in the run-up to + the crisis. They did + +On line 86: + to the crisis. They + did not. Policy makers + and regulators + +On line 86: + the crisis. They did + not. Policy makers and + regulators could + +On line 86: + the runaway mortgage + securitization train. + They did not. In case + +On line 86: + In case after case + after case, regulators + continued to rate + +On line 86: + the institutions + they oversaw as safe and sound + even in the face of + +On line 86: + safe and sound even in + the face of mounting troubles, + often downgrading + +On line 86: + sound even in the face + of mounting troubles, often + downgrading them just + +On line 86: + the face of mounting + troubles, often downgrading + them just before their + +On line 86: + of mounting troubles, + often downgrading them just + before their collapse. + +On line 86: + downgrading them just + before their collapse. And where + regulators lacked + +On line 86: + before their collapse. + And where regulators lacked + authority, they + +On line 86: + regulators lacked + authority, they could have + sought it. Too often, + +On line 86: + Too often, they lacked + the political will—in + a political + +On line 86: + often, they lacked the + political will—in a + political and + +On line 86: + as the fortitude + to critically challenge + the institutions + +On line 86: + the fortitude to + critically challenge the + institutions and + +On line 86: + the institutions + and the entire system they + were entrusted to + +On line 88: + system occurred in + many instances as financial + markets evolved. But as + +On line 88: + in many instances as + financial markets evolved. But + as the report will + +On line 88: + financial markets + evolved. But as the report will + show, the financial + +On line 88: + the report will show, + the financial industry + itself played a key + +On line 88: + role in weakening + regulatory constraints + on institutions, + +On line 88: + regulatory + constraints on institutions, + markets, and products. + +On line 88: + and products. It did + not surprise the Commission + that an industry + +On line 88: + products. It did not + surprise the Commission that + an industry of + +On line 88: + Commission that an + industry of such wealth and + power would exert + +On line 88: + that an industry + of such wealth and power would + exert pressure on + +On line 88: + would exert pressure + on policy makers and + regulators. From + +On line 88: + regulators. From + to the financial sector + expended billion + +On line 88: + individuals + and political action + committees in the + +On line 88: + and political + action committees in the + sector made more than + +On line 88: + action committees + in the sector made more than + billion in campaign + +On line 88: + in the sector made + more than billion in campaign + contributions. What + +On line 88: + made more than billion + in campaign contributions. + What troubled us was + +On line 88: + more than billion in + campaign contributions. What + troubled us was the + +On line 88: + billion in campaign + contributions. What troubled + us was the extent + +On line 88: + contributions. What + troubled us was the extent + to which the nation + +On line 88: + troubled us was the + extent to which the nation + was deprived of the + +On line 88: + was the extent to + which the nation was deprived + of the necessary + +On line 88: + the extent to which + the nation was deprived of + the necessary strength + +On line 88: + extent to which the + nation was deprived of the + necessary strength and + +On line 88: + nation was deprived + of the necessary strength and + independence of + +On line 88: + the necessary strength + and independence of the + oversight necessary + +On line 88: + independence of + the oversight necessary to + safeguard financial + +On line 90: + safeguard financial + stability. We conclude + dramatic failures + +On line 90: + dramatic failures + of corporate governance + and risk management + +On line 90: + institutions were + a key cause of this crisis. + There was a view that + +On line 90: + of this crisis. There + was a view that instincts for + self-preservation + +On line 90: + view that instincts for + self-preservation inside + major financial + +On line 90: + self-preservation + inside major financial + firms would shield them from + +On line 90: + major financial + firms would shield them from fatal + risk-taking without + +On line 90: + firms would shield them from + fatal risk-taking without + the need for a steady + +On line 90: + fatal risk-taking + without the need for a steady + regulatory + +On line 90: + the need for a steady + regulatory hand, which, + the firms argued, would + +On line 90: + argued, would stifle + innovation. Too many of + these institutions + +On line 90: + innovation. Too + many of these institutions + acted recklessly, + +On line 90: + these institutions + acted recklessly, taking + on too much risk, with + +On line 90: + too much risk, with too + little capital, and with + too much dependence + +On line 90: + little capital, + and with too much dependence + on short-term funding. + +On line 90: + In many respects, this + reflected a funda-CONCLUSIONS OF THE + FINANCIAL CRISIS + +On line 90: + reflected a funda-CONCLUSIONS + OF THE FINANCIAL CRISIS + INQUIRY COMMISSION + +On line 90: + OF THE FINANCIAL + CRISIS INQUIRY COMMISSION + xix mental change in + +On line 90: + these institutions, + particularly the large + investment banks and + +On line 90: + lenders and creating, + packaging, repackaging, and + selling trillions of + +On line 92: + products. Like Icarus, they + never feared flying ever + closer to the sun. + +On line 94: + Like Icarus, they never + feared flying ever closer + to the sun. Many of + +On line 94: + Icarus, they never feared + flying ever closer to + the sun. Many of these + +On line 94: + feared flying ever + closer to the sun. Many of + these institutions + +On line 94: + closer to the sun. + Many of these institutions + grew aggressively + +On line 94: + grew aggressively + through poorly executed + acquisition and + +On line 94: + more challenging. The + CEO of Citigroup told the + Commission that a + +On line 94: + CEO of Citigroup + told the Commission that a + billion position + +On line 94: + told the Commission + that a billion position + in highly rated + +On line 94: + billion position + in highly rated mortgage + securities would + +On line 94: + in highly rated + mortgage securities would + "not in any way have + +On line 94: + "not in any way have + excited my attention," + and the co-head of + +On line 94: + my attention," and + the co-head of Citigroup’s + investment bank said + +On line 94: + and the co-head of + Citigroup’s investment bank + said he spent "a small + +On line 94: + investment bank said + he spent "a small fraction of + of his time on those + +On line 94: + said he spent "a small + fraction of of his time on + those securities. + +On line 94: + fraction of of his + time on those securities. + In this instance, too + +On line 94: + of of his time on + those securities. In this + instance, too big to + +On line 94: + those securities. + In this instance, too big to + fail meant too big to + +On line 96: + In this instance, too + big to fail meant too big to + manage. Financial + +On line 96: + big to fail meant too + big to manage. Financial + institutions and + +On line 96: + too big to manage. + Financial institutions + and credit rating + +On line 96: + instances. Too often, + risk management became risk + justification. + +On line 98: + short-term gain—without + proper consideration + of long-term consequences. + +On line 98: + gain—without proper + consideration of long-term + consequences. Often, + +On line 98: + Often, those systems + encouraged the big bet—where + the payoff on the + +On line 98: + systems encouraged + the big bet—where the payoff + on the upside could + +On line 98: + encouraged the big + bet—where the payoff on the + upside could be huge + +On line 98: + the payoff on the + upside could be huge and the + downside limited. + +On line 98: + upside could be huge + and the downside limited. + This was the case up + +On line 98: + could be huge and the + downside limited. This was + the case up and down + +On line 98: + and down the line—from + the corporate boardroom to + the mortgage broker + +On line 98: + down the line—from the + corporate boardroom to the + mortgage broker on + +On line 100: + examination + revealed stunning instances of + governance breakdowns + +On line 100: + read, among other things, + about AIG senior management’s + ignorance of the + +On line 100: + things, about AIG senior + management’s ignorance of + the terms and risks of + +On line 100: + company’s billion + derivatives exposure + to mortgage-related + +On line 100: + Fannie Mae’s quest for + bigger market share, profits, + and bonuses, which led + +On line 100: + for bigger market + share, profits, and bonuses, which + led it to ramp up + +On line 100: + bigger market share, + profits, and bonuses, which led + it to ramp up its + +On line 100: + profits, and bonuses, + which led it to ramp up its + exposure to risky + +On line 100: + led it to ramp up + its exposure to risky loans + and securities + +On line 100: + it to ramp up its + exposure to risky loans and + securities as + +On line 100: + exposure to risky + loans and securities as + the housing market + +On line 100: + the housing market + was peaking; and the costly + surprise when Merrill + +On line 100: + was peaking; and the + costly surprise when Merrill + Lynch’s top management + +On line 100: + costly surprise when + Merrill Lynch’s top management + realized that the + +On line 100: + when Merrill Lynch’s top + management realized that + the company held + +On line 100: + that the company + held billion in "super-senior" + and supposedly + +On line 102: + securities that + resulted in billions of + dollars in losses. + +On line 104: + billions of dollars + in losses. We conclude a + combination of + +On line 104: + a combination + of excessive borrowing, + risky investments, and + +On line 104: + combination of + excessive borrowing, risky + investments, and lack + +On line 104: + risky investments, and + lack of transparency put the + financial system + +On line 104: + lack of transparency + put the financial system + on a collision + +On line 104: + of transparency put + the financial system on + a collision course + +On line 104: + transparency put the + financial system on a + collision course with + +On line 104: + financial system + on a collision course with + crisis. Clearly, this + +On line 104: + with crisis. Clearly, + this vulnerability + was related to + +On line 104: + and regulation, + but it is significant + enough by itself to + +On line 104: + is significant + enough by itself to warrant + our attention here. + +On line 106: + significant enough + by itself to warrant our + attention here. In + +On line 106: + enough by itself to + warrant our attention here. + In the years leading + +On line 106: + itself to warrant + our attention here. In the + years leading up to + +On line 106: + our attention here. + In the years leading up to + the crisis, too many + +On line 106: + leading up to the + crisis, too many financial + institutions, as + +On line 106: + the crisis, too many + financial institutions, + as well as too many + +On line 106: + as too many households, + borrowed to the hilt, leaving + them vulnerable + +On line 106: + financial distress + or ruin if the value + of their investments + +On line 106: + of their investments + declined even modestly. For + example, as of + +On line 108: + even modestly. For + example, as of the five + major investment + +On line 108: + example, as of + the five major investment + banks—Bear Stearns, Goldman Sachs, + +On line 108: + banks—Bear Stearns, Goldman Sachs, + Lehman Brothers, Merrill Lynch, and + Morgan Stanley—were + +On line 108: + Lehman Brothers, Merrill + Lynch, and Morgan Stanley—were + operating with + +On line 108: + operating with + extraordinarily thin + capital. By one + +On line 108: + capital. By one + measure, their leverage ratios + were as high as to + +On line 108: + By one measure, their + leverage ratios were as high + as to meaning for + +On line 108: + measure, their leverage + ratios were as high as to + meaning for every + +On line 108: + leverage ratios were + as high as to meaning for + every in assets, + +On line 108: + ratios were as high + as to meaning for every + in assets, there was + +On line 108: + meaning for every + in assets, there was only + in capital to + +On line 108: + in assets, there was + only in capital to + cover losses. Less + +On line 108: + to cover losses. + Less than a drop in asset + values could wipe out + +On line 108: + losses. Less than a + drop in asset values could + wipe out a firm. To + +On line 108: + a drop in asset + values could wipe out a firm. + To make matters worse, + +On line 108: + in asset values + could wipe out a firm. To make + matters worse, much of + +On line 108: + could wipe out a firm. + To make matters worse, much of + their borrowing was + +On line 108: + firm. To make matters + worse, much of their borrowing + was short-term, in the + +On line 108: + To make matters worse, + much of their borrowing was + short-term, in the overnight + +On line 108: + borrowing had to + be renewed each and every + day. For example, + +On line 108: + be renewed each and + every day. For example, + at the end of Bear + +On line 108: + and every day. For + example, at the end of + Bear Stearns had billion + +On line 108: + example, at the + end of Bear Stearns had billion + in equity and + +On line 108: + Stearns had billion in + equity and billion in + liabilities + +On line 108: + liabilities + and was borrowing as much + as billion in the + +On line 108: + and was borrowing + as much as billion in the + overnight market. It was + +On line 108: + was borrowing as + much as billion in the overnight + market. It was the + +On line 108: + as much as billion + in the overnight market. It was + the equivalent of + +On line 108: + much as billion in + the overnight market. It was the + equivalent of a + +On line 108: + in the overnight market. + It was the equivalent of + a small business with + +On line 108: + the overnight market. It + was the equivalent of a + small business with in + +On line 108: + a small business with + in equity borrowing + million, with of that + +On line 108: + million, with of that + due each and every day. One + can’t really ask + +On line 108: + due each and every + day. One can’t really ask + "What were they thinking1" + +On line 108: + each and every day. + One can’t really ask "What + were they thinking1" when + +On line 108: + and every day. One + can’t really ask "What were + they thinking1" when it + +On line 108: + every day. One can’t + really ask "What were they + thinking1" when it seems + +On line 108: + One can’t really + ask "What were they thinking1" when + it seems that too many + +On line 108: + can’t really ask + "What were they thinking1" when it + seems that too many of + +On line 108: + really ask "What + were they thinking1" when it seems + that too many of them + +On line 108: + "What were they thinking1" + when it seems that too many of + them were thinking alike. + +On line 110: + were they thinking1" when + it seems that too many of them + were thinking alike. And + +On line 110: + they thinking1" when it + seems that too many of them were + thinking alike. And the + +On line 110: + when it seems that too + many of them were thinking alike. + And the leverage was + +On line 110: + seems that too many of + them were thinking alike. And the + leverage was often + +On line 110: + too many of them were + thinking alike. And the leverage + was often hidden—in + +On line 110: + "window dressing" of + financial reports available + to the investing + +On line 112: + financial reports + available to the investing + public. The kings of + +On line 112: + reports available to + the investing public. The + kings of leverage were + +On line 112: + to the investing + public. The kings of leverage + were Fannie Mae and + +On line 112: + public. The kings of + leverage were Fannie Mae and + Freddie Mac, the two + +On line 112: + kings of leverage were + Fannie Mae and Freddie Mac, + the two behemoth + +On line 112: + the end of Fannie’s + and Freddie’s combined leverage + ratio, including + +On line 114: + including loans they + owned and guaranteed, stood at + to But financial + +On line 114: + owned and guaranteed, + stood at to But financial + firms were not alone in + +On line 114: + and guaranteed, stood + at to But financial firms + were not alone in the + +On line 114: + firms were not alone in + the borrowing spree: from to + national mortgage + +On line 114: + the borrowing spree: + from to national mortgage + debt almost doubled, + +On line 114: + borrowing spree: from + to national mortgage debt + almost doubled, and + +On line 114: + national mortgage + debt almost doubled, and the + amount of mortgage debt + +On line 114: + debt almost doubled, + and the amount of mortgage debt + per household rose more + +On line 114: + almost doubled, and + the amount of mortgage debt per + household rose more than + +On line 114: + doubled, and the amount + of mortgage debt per household + rose more than from to + +On line 114: + the amount of mortgage + debt per household rose more than + from to even while wages + +On line 114: + amount of mortgage debt + per household rose more than from + to even while wages were + +On line 114: + debt per household rose + more than from to even while wages + were essentially + +On line 114: + to even while wages were + essentially stagnant. When + the housing downturn + +On line 114: + the housing downturn + hit, heavily indebted + financial firms and + +On line 116: + financial firms and + families alike were walloped. + The heavy debt taken + +On line 116: + firms and families + alike were walloped. The heavy debt + taken on by some + +On line 116: + institutions was + exacerbated by the + risky assets they were + +On line 116: + exacerbated + by the risky assets they were + acquiring with that + +On line 116: + by the risky assets + they were acquiring with that + debt. As the mortgage + +On line 116: + the risky assets they + were acquiring with that debt. + As the mortgage and + +On line 116: + they were acquiring + with that debt. As the mortgage + and real estate + +On line 116: + debt. As the mortgage + and real estate markets + churned out riskier and + +On line 116: + estate markets churned + out riskier and riskier loans + and securities, + +On line 116: + securities, many + financial institutions + loaded up on them. + +On line 116: + up on them. By the + end of Lehman had amassed billion + in commercial and + +On line 116: + the end of Lehman had + amassed billion in commercial + and residential + +On line 116: + and residential + real estate holdings and + securities, which + +On line 116: + securities, which + was almost twice what it held + just two years before, + +On line 116: + was almost twice what + it held just two years before, + and more than four times + +On line 116: + almost twice what it + held just two years before, and + more than four times its + +On line 116: + twice what it held just + two years before, and more than + four times its total + +On line 116: + two years before, and + more than four times its total + equity. And again, + +On line 116: + and more than four times + its total equity. And + again, the risk wasn’t + +On line 116: + again, the risk wasn’t + being taken on just by + the big financial + +On line 116: + risk wasn’t being + taken on just by the big + financial firms, but + +On line 116: + taken on just by + the big financial firms, but + by families, too. + +On line 116: + but by families, + too. Nearly one in mortgage + borrowers in and + +On line 116: + too. Nearly one in + mortgage borrowers in and + took out "option ARM" + +On line 116: + mortgage borrowers + in and took out "option ARM" + loans, which meant they could + +On line 116: + borrowers in and + took out "option ARM" loans, which + meant they could choose to + +On line 116: + and took out "option + ARM" loans, which meant they could choose + to make payments so + +On line 116: + took out "option ARM" + loans, which meant they could choose to + make payments so low + +On line 116: + out "option ARM" loans, + which meant they could choose to make + payments so low that + +On line 116: + ARM" loans, which meant they + could choose to make payments so + low that their mortgage + +On line 116: + which meant they could choose + to make payments so low that + their mortgage balances + +On line 116: + meant they could choose to + make payments so low that their + mortgage balances rose + +On line 118: + make payments so low + that their mortgage balances rose + every month. Within + +On line 118: + their mortgage balances + rose every month. Within the + financial system, + +On line 118: + balances rose every + month. Within the financial + system, the dangers + +On line 118: + every month. Within + the financial system, the + dangers of this debt + +On line 118: + financial system, + the dangers of this debt were + magnified because + +On line 118: + system, the dangers + of this debt were magnified + because transparency + +On line 118: + the dangers of this + debt were magnified because + transparency was not + +On line 118: + debt were magnified + because transparency was not + required or desired. + +On line 118: + magnified because + transparency was not required + or desired. Massive, + +On line 118: + transparency was not + required or desired. Massive, + short-term borrowing, + +On line 118: + obligations unseen + by others in the market, + heightened the chances the + +On line 118: + unseen by others + in the market, heightened the + chances the system could + +On line 118: + by others in the + market, heightened the chances the + system could rapidly + +On line 118: + market, heightened the + chances the system could rapidly + unravel. In the + +On line 118: + the chances the system + could rapidly unravel. In + the early part of + +On line 118: + chances the system could + rapidly unravel. In the + early part of the + +On line 118: + rapidly unravel. + In the early part of the + 20th century, we + +On line 118: + In the early part + of the 20th century, we + erected a series + +On line 118: + the 20th century, + we erected a series of + protections—the + +On line 118: + protections—the + Federal Reserve as a + lender of last resort, + +On line 118: + Federal Reserve + as a lender of last resort, + federal deposit + +On line 118: + Reserve as a lender + of last resort, federal + deposit insurance, + +On line 118: + as a lender of last + resort, federal deposit + insurance, ample + +On line 118: + resort, federal + deposit insurance, ample + regulations—to + +On line 118: + deposit insurance, + ample regulations—to + provide a bulwark + +On line 118: + insurance, ample + regulations—to provide + a bulwark against the + +On line 118: + had regularly + plagued America’s banking + system in the 19th + +On line 118: + plagued America’s + banking system in the 19th + century. Yet, over + +On line 118: + banking system in + the 19th century. Yet, over + the past 30-plus years, we + +On line 118: + the 19th century. + Yet, over the past 30-plus years, we + permitted the growth + +On line 118: + over the past 30-plus years, + we permitted the growth of + a shadow banking + +On line 118: + we permitted the + growth of a shadow banking + system—opaque and laden + +On line 118: + growth of a shadow + banking system—opaque and laden + with short-term debt—that + +On line 118: + banking system—opaque + and laden with short-term debt—that + rivaled the size of + +On line 118: + and laden with short-term + debt—that rivaled the size of + the traditional + +On line 118: + debt—that rivaled the + size of the traditional + banking system. Key + +On line 118: + of over-the-counter derivatives—were + hidden from view, without the + protections we had + +On line 118: + derivatives—were hidden from + view, without the protections + we had constructed + +On line 118: + the protections we + had constructed to prevent + financial meltdowns. + +On line 118: + financial meltdowns. + We had a 21st-century + financial system + +On line 120: + financial system + with 19th-century safeguards. + When the housing and + +On line 120: + with 19th-century + safeguards. When the housing and + mortgage markets cratered, + +On line 120: + When the housing and + mortgage markets cratered, the lack + of transparency, the + +On line 120: + mortgage markets cratered, + the lack of transparency, the + extraordinary + +On line 120: + lack of transparency, + the extraordinary debt + loads, the short-term loans, + +On line 120: + of transparency, the + extraordinary debt loads, + the short-term loans, and + +On line 120: + extraordinary + debt loads, the short-term loans, and + the risky assets all + +On line 120: + debt loads, the short-term + loans, and the risky assets all + came home to roost. What + +On line 120: + short-term loans, and the + risky assets all came home to + roost. What resulted + +On line 120: + risky assets all came + home to roost. What resulted + was panic. We had + +On line 120: + assets all came home + to roost. What resulted was + panic. We had reaped + +On line 120: + all came home to roost. + What resulted was panic. + We had reaped what we + +On line 120: + came home to roost. What + resulted was panic. We + had reaped what we had + +On line 122: + What resulted was + panic. We had reaped what we + had sown. We conclude + +On line 122: + panic. We had reaped + what we had sown. We conclude + the government was + +On line 122: + reaped what we had sown. + We conclude the government + was ill prepared for + +On line 122: + what we had sown. We + conclude the government was + ill prepared for the + +On line 122: + sown. We conclude the + government was ill prepared + for the crisis, and + +On line 122: + government was ill + prepared for the crisis, and + its inconsistent + +On line 122: + response added to the + uncertainty and panic + in the financial + +On line 122: + uncertainty and + panic in the financial + markets. As part of + +On line 122: + and panic in the + financial markets. As part + of our charge, it was + +On line 122: + financial markets. + As part of our charge, it was + appropriate to + +On line 122: + As part of our charge, + it was appropriate to + review government + +On line 122: + of our charge, it was + appropriate to review + government actions + +On line 122: + appropriate to + review government actions + taken in response + +On line 122: + in response to the + developing crisis, not + just those policies or + +On line 122: + not just those policies + or actions that preceded + it, to determine + +On line 122: + just those policies or + actions that preceded it, + to determine if + +On line 122: + it, to determine + if any of those responses + contributed to or + +On line 124: + exacerbated + the crisis. As our report + shows, key policy + +On line 124: + our report shows, key + policy makers—the + Treasury Department, + +On line 124: + Treasury Department, + the Federal Reserve Board, + and the Federal + +On line 124: + Reserve Board, and the + Federal Reserve Bank of + New York—who were best + +On line 124: + and the Federal + Reserve Bank of New York—who + were best positioned + +On line 124: + Federal Reserve + Bank of New York—who were best + positioned to watch + +On line 124: + Bank of New York—who + were best positioned to watch + over our markets were + +On line 124: + of New York—who were + best positioned to watch over + our markets were ill + +On line 124: + were best positioned + to watch over our markets were + ill prepared for the + +On line 124: + best positioned to + watch over our markets were ill + prepared for the events + +On line 126: + over our markets were + ill prepared for the events of + and Other agencies + +On line 126: + our markets were ill + prepared for the events of and + Other agencies were + +On line 126: + ill prepared for the + events of and Other agencies + were also behind + +On line 126: + prepared for the events + of and Other agencies were + also behind the + +On line 126: + for the events of and + Other agencies were also + behind the curve. They + +On line 126: + Other agencies were + also behind the curve. They + were hampered because + +On line 126: + also behind the + curve. They were hampered because + they did not have a + +On line 126: + behind the curve. They + were hampered because they did + not have a clear grasp + +On line 126: + were hampered because + they did not have a clear grasp + of the financial + +On line 126: + they did not have a + clear grasp of the financial + system they were charged + +On line 126: + a clear grasp of the + financial system they were + charged with overseeing, + +On line 126: + financial system + they were charged with overseeing, + particularly + +On line 126: + charged with overseeing, + particularly as it + had evolved in the years + +On line 126: + particularly + as it had evolved in the years + leading up to the + +On line 126: + as it had evolved in + the years leading up to the + crisis. This was in + +On line 126: + had evolved in the years + leading up to the crisis. + This was in no small + +On line 126: + in the years leading + up to the crisis. This was + in no small measure + +On line 126: + the years leading up + to the crisis. This was in + no small measure due + +On line 126: + years leading up to + the crisis. This was in no + small measure due to + +On line 126: + leading up to the + crisis. This was in no small + measure due to the + +On line 126: + up to the crisis. + This was in no small measure + due to the lack of + +On line 126: + crisis. This was in + no small measure due to the + lack of transparency + +On line 126: + This was in no small + measure due to the lack of + transparency in key + +On line 126: + no small measure due + to the lack of transparency + in key markets. They + +On line 126: + small measure due to + the lack of transparency in + key markets. They thought + +On line 126: + measure due to the + lack of transparency in key + markets. They thought risk + +On line 126: + due to the lack of + transparency in key markets. + They thought risk had been + +On line 126: + of transparency in + key markets. They thought risk had + been diversified + +On line 126: + transparency in key + markets. They thought risk had been + diversified when, + +On line 126: + key markets. They thought + risk had been diversified + when, in fact, it had + +On line 126: + markets. They thought risk + had been diversified when, + in fact, it had been + +On line 126: + when, in fact, it had + been concentrated. Time and + again, from the spring of + +On line 126: + in fact, it had been + concentrated. Time and again, + from the spring of on, + +On line 126: + concentrated. Time + and again, from the spring of on, + policy makers + +On line 126: + and again, from the spring + of on, policy makers + and regulators + +On line 126: + again, from the spring of + on, policy makers and + regulators were + +On line 126: + of on, policy + makers and regulators + were caught off guard as + +On line 126: + an ad hoc basis + with specific programs to + put fingers in the + +On line 126: + ad hoc basis with + specific programs to put + fingers in the dike. + +On line 126: + fingers in the dike. + There was no comprehensive + and strategic plan for + +On line 126: + the dike. There was no + comprehensive and strategic + plan for containment, + +On line 126: + comprehensive and + strategic plan for containment, + because they lacked a + +On line 126: + interconnections + in the financial markets. + Some regulators + +On line 126: + in the financial + markets. Some regulators + have conceded this + +On line 126: + Some regulators + have conceded this error. + We had allowed the + +On line 126: + have conceded this + error. We had allowed the + system to race ahead + +On line 128: + the system to race + ahead of our ability to + protect it. While there + +On line 128: + of our ability + to protect it. While there was + some awareness of, or + +On line 128: + our ability to + protect it. While there was some + awareness of, or at + +On line 128: + to protect it. While + there was some awareness of, or + at least a debate + +On line 128: + protect it. While there + was some awareness of, or at + least a debate about, + +On line 128: + was some awareness of, + or at least a debate about, + the housing bubble, + +On line 128: + some awareness of, or + at least a debate about, the + housing bubble, the + +On line 128: + least a debate about, + the housing bubble, the record + reflects that senior + +On line 128: + the housing bubble, + the record reflects that senior + public officials + +On line 128: + the record reflects that + senior public officials + did not recognize + +On line 128: + reflects that senior + public officials did not + recognize that a + +On line 128: + officials did not + recognize that a bursting + of the bubble could + +On line 128: + recognize that a + bursting of the bubble could + threaten the entire + +On line 128: + that a bursting of + the bubble could threaten the + entire financial + +On line 128: + threaten the entire + financial system. Throughout + the summer of both + +On line 128: + entire financial + system. Throughout the summer + of both Federal + +On line 128: + financial system. + Throughout the summer of both + Federal Reserve + +On line 128: + system. Throughout the + summer of both Federal + Reserve Chairman Ben + +On line 128: + Throughout the summer + of both Federal Reserve + Chairman Ben Bernanke and + +On line 128: + the summer of both + Federal Reserve Chairman + Ben Bernanke and Treasury + +On line 128: + of both Federal + Reserve Chairman Ben Bernanke and + Treasury Secretary + +On line 128: + Federal Reserve + Chairman Ben Bernanke and Treasury + Secretary Henry + +On line 128: + that the turmoil in + the subprime mortgage markets + would be contained. When + +On line 128: + the turmoil in the + subprime mortgage markets would + be contained. When Bear + +On line 128: + the subprime mortgage + markets would be contained. When + Bear Stearns’s hedge funds, which + +On line 128: + Bear Stearns’s hedge funds, which + were heavily invested + in mortgage-related + +On line 128: + implications of + the collapse. Despite the fact + that so many other + +On line 128: + the collapse. Despite + the fact that so many other + funds were exposed to + +On line 128: + collapse. Despite the + fact that so many other funds + were exposed to the + +On line 128: + the fact that so many + other funds were exposed to + the same risks as those + +On line 128: + that so many other + funds were exposed to the same + risks as those hedge funds, + +On line 128: + so many other funds + were exposed to the same risks + as those hedge funds, the + +On line 128: + many other funds were + exposed to the same risks as + those hedge funds, the Bear + +On line 128: + funds were exposed to + the same risks as those hedge funds, + the Bear Stearns funds were + +On line 128: + were exposed to the + same risks as those hedge funds, the + Bear Stearns funds were thought + +On line 128: + exposed to the same + risks as those hedge funds, the Bear + Stearns funds were thought to + +On line 128: + risks as those hedge funds, + the Bear Stearns funds were thought to + be "relatively + +On line 128: + as those hedge funds, the + Bear Stearns funds were thought to be + "relatively unique." + +On line 128: + the Bear Stearns funds were + thought to be "relatively + unique." Days before the + +On line 128: + Stearns funds were thought to + be "relatively unique." Days + before the collapse + +On line 128: + be "relatively + unique." Days before the collapse + of Bear Stearns in March + +On line 128: + "relatively unique." + Days before the collapse of + Bear Stearns in March SEC + +On line 130: + unique." Days before the + collapse of Bear Stearns in March + SEC Chairman Christopher + +On line 130: + collapse of Bear Stearns + in March SEC Chairman Christopher + Cox expressed "comfort + +On line 130: + in March SEC Chairman + Christopher Cox expressed "comfort + about the capital + +On line 130: + SEC Chairman Christopher + Cox expressed "comfort about the + capital cushions" + +On line 130: + Christopher Cox expressed + "comfort about the capital + cushions" at the big + +On line 130: + expressed "comfort about + the capital cushions" at + the big investment + +On line 130: + capital cushions" + at the big investment banks. + It was not until + +On line 130: + cushions" at the big + investment banks. It was not + until August just + +On line 130: + big investment banks. + It was not until August + just weeks before the + +On line 130: + It was not until + August just weeks before the + government takeover of + +On line 130: + until August just + weeks before the government + takeover of Fannie Mae + +On line 130: + just weeks before the + government takeover of Fannie + Mae and Freddie Mac, + +On line 130: + the government takeover + of Fannie Mae and Freddie + Mac, that the Treasury + +On line 130: + Mae and Freddie Mac, + that the Treasury Department + understood the full + +On line 130: + Mac, that the Treasury + Department understood the + full measure of the + +On line 130: + conditions of those + two institutions. And just + a month before Lehman’s + +On line 130: + just a month before + Lehman’s collapse, the Federal + Reserve Bank of New + +On line 130: + before Lehman’s collapse, + the Federal Reserve Bank + of New York was still + +On line 130: + Bank of New York was + still seeking information + on the exposures + +On line 132: + In addition, the + government’s inconsistent + handling of major + +On line 132: + rescue Bear Stearns and + then to place Fannie Mae and + Freddie Mac into + +On line 132: + then to place Fannie + Mae and Freddie Mac into + conservatorship, + +On line 132: + Freddie Mac into + conservatorship, followed + by its decision + +On line 132: + Lehman Brothers and then + to save AIG—increased uncertainty + and panic in the + +On line 134: + and then to save AIG—increased + uncertainty and panic + in the market. In + +On line 134: + in the market. In + making these observations, + we deeply respect and + +On line 134: + we deeply respect and + appreciate the efforts + made by Secretary + +On line 134: + appreciate the + efforts made by Secretary + Paulson, Chairman Bernanke, + +On line 134: + the efforts made by + Secretary Paulson, Chairman + Bernanke, and Timothy + +On line 134: + Bernanke, and Timothy + Geithner, formerly + president of the + +On line 134: + Bank of New York and + now treasury secretary, and + so many others who + +On line 134: + so many others who + labored to stabilize our + financial system + +On line 134: + to stabilize our + financial system and our + economy in the + +On line 136: + economy in the + most chaotic and challenging + of circumstances. We + +On line 136: + the most chaotic and + challenging of circumstances. + We conclude there was + +On line 136: + a systemic breakdown + in accountability and + ethics. The integrity + +On line 136: + systemic breakdown in + accountability and ethics. + The integrity of + +On line 136: + ethics. The integrity + of our financial markets + and the public’s trust in + +On line 136: + The integrity of + our financial markets and + the public’s trust in those + +On line 136: + and the public’s trust in + those markets are essential + to the economic + +On line 136: + essential to the + economic well-being of our + nation. The soundness + +On line 136: + financial system + and our economy rely + on the notions of + +On line 136: + In our economy, + we expect businesses and + individuals + +On line 136: + expect businesses + and individuals to + pursue profits, at + +On line 136: + pursue profits, at + the same time that they produce + products and services + +On line 136: + the same time that they + produce products and services + of quality and + +On line 136: + they produce products + and services of quality + and conduct themselves + +On line 136: + produce products and + services of quality and + conduct themselves well. + +On line 138: + been the case in past + speculative booms and busts—we + witnessed an erosion + +On line 138: + exacerbated + the financial crisis. This + was not universal, + +On line 138: + financial crisis. + This was not universal, but + these breaches stretched from + +On line 138: + was not universal, + but these breaches stretched from the + ground level to the + +On line 138: + but these breaches stretched + from the ground level to the + corporate suites. They + +On line 138: + the corporate suites. + They resulted not only + in significant + +On line 138: + in significant + financial consequences but + also in damage + +On line 138: + in damage to the + trust of investors, businesses, + and the public in + +On line 138: + damage to the trust + of investors, businesses, and + the public in the + +On line 138: + the trust of investors, + businesses, and the public + in the financial + +On line 140: + in the financial + system. For example, our + examination + +On line 140: + according to one + measure, that the percentage + of borrowers who + +On line 140: + one measure, that the + percentage of borrowers + who defaulted on + +On line 140: + just a matter of + months after taking a loan + nearly doubled from + +On line 140: + months after taking + a loan nearly doubled from + the summer of to + +On line 140: + after taking a + loan nearly doubled from the + summer of to late + +On line 140: + nearly doubled from + the summer of to late This + data indicates + +On line 140: + the summer of to + late This data indicates + they likely took out + +On line 140: + to late This data + indicates they likely took + out mortgages that they + +On line 140: + data indicates + they likely took out mortgages + that they never had + +On line 140: + they likely took out + mortgages that they never had + the capacity + +On line 140: + the capacity + or intention to pay. You + will read about mortgage + +On line 140: + or intention to + pay. You will read about mortgage + brokers who were paid + +On line 140: + pay. You will read about + mortgage brokers who were paid + "yield spread premiums" + +On line 140: + will read about mortgage + brokers who were paid "yield spread + premiums" by lenders + +On line 140: + brokers who were paid + "yield spread premiums" by lenders + to put borrowers + +On line 140: + who were paid "yield spread + premiums" by lenders to put + borrowers into + +On line 140: + "yield spread premiums" + by lenders to put borrowers + into higher-cost + +On line 140: + premiums" by lenders + to put borrowers into + higher-cost loans so + +On line 140: + to put borrowers + into higher-cost loans so + they would get bigger + +On line 140: + into higher-cost + loans so they would get bigger + fees, often never + +On line 140: + they would get bigger + fees, often never disclosed + to borrowers. The + +On line 140: + fees, often never + disclosed to borrowers. The + report catalogues + +On line 140: + mortgage fraud grew 20-fold + between and and then more than + doubled again between + +On line 142: + fraud grew 20-fold between + and and then more than doubled + again between and One + +On line 142: + grew 20-fold between and + and then more than doubled again + between and One study + +On line 142: + between and and then + more than doubled again between + and One study places the + +On line 142: + and and then more than + doubled again between and One + study places the losses + +On line 142: + more than doubled again + between and One study places the + losses resulting + +On line 142: + doubled again between + and One study places the losses + resulting from fraud + +On line 142: + between and One study + places the losses resulting + from fraud on mortgage + +On line 142: + and One study places the + losses resulting from fraud + on mortgage loans made + +On line 144: + resulting from fraud + on mortgage loans made between + and at billion. Lenders + +On line 144: + fraud on mortgage loans + made between and at billion. + Lenders made loans that they + +On line 144: + on mortgage loans made + between and at billion. Lenders + made loans that they knew + +On line 144: + loans made between and + at billion. Lenders made loans that + they knew borrowers + +On line 144: + made between and at + billion. Lenders made loans that they + knew borrowers could + +On line 144: + at billion. Lenders made + loans that they knew borrowers + could not afford and + +On line 144: + billion. Lenders made loans + that they knew borrowers could + not afford and that + +On line 144: + they knew borrowers + could not afford and that could + cause massive losses + +On line 144: + knew borrowers could + not afford and that could cause + massive losses to + +On line 144: + not afford and that + could cause massive losses to + investors in mortgage + +On line 144: + of the loans they were + originating could result + in "catastrophic + +On line 144: + originating could + result in "catastrophic + consequences." Less than + +On line 144: + in "catastrophic + consequences." Less than a year + later, they noted + +On line 144: + consequences." Less than + a year later, they noted + that certain high-risk + +On line 144: + a year later, they + noted that certain high-risk + loans they were making + +On line 144: + result not only + in foreclosures but also + in "financial and + +On line 144: + in foreclosures but + also in "financial and + reputational + +On line 146: + reputational + catastrophe" for the firm. But + they did not stop. And + +On line 146: + they did not stop. And + the report documents that + major financial + +On line 146: + sampled loans they were + purchasing to package and + sell to investors. They + +On line 146: + and sell to investors. + They knew a significant + percentage of the + +On line 146: + investors. They knew a + significant percentage + of the sampled loans + +On line 146: + a significant + percentage of the sampled + loans did not meet their + +On line 146: + percentage of the + sampled loans did not meet their + own underwriting + +On line 146: + sampled loans did not + meet their own underwriting + standards or those of + +On line 146: + of many prospectuses + provided to investors found + that this critical + +On line 148: + investors found that this + critical information + was not disclosed. THESE + +On line 148: + information was + not disclosed. THESE CONCLUSIONS + must be viewed in the + +On line 148: + THESE CONCLUSIONS must + be viewed in the context of + human nature and + +On line 148: + to pin this crisis + on mortal flaws like greed and + CONCLUSIONS OF THE + +On line 148: + crisis on mortal + flaws like greed and CONCLUSIONS + OF THE FINANCIAL + +On line 148: + on mortal flaws like + greed and CONCLUSIONS OF THE + FINANCIAL CRISIS + +On line 148: + greed and CONCLUSIONS + OF THE FINANCIAL CRISIS + INQUIRY COMMISSION + +On line 148: + CONCLUSIONS OF THE + FINANCIAL CRISIS INQUIRY + COMMISSION xxiii + +On line 148: + OF THE FINANCIAL + CRISIS INQUIRY COMMISSION + xxiii hubris would be + +On line 148: + COMMISSION xxiii + hubris would be simplistic. It + was the failure to + +On line 148: + be simplistic. It + was the failure to account + for human weakness + +On line 148: + simplistic. It was + the failure to account for + human weakness that + +On line 148: + was the failure to + account for human weakness + that is relevant + +On line 148: + failure to account + for human weakness that is + relevant to this + +On line 150: + for human weakness + that is relevant to this + crisis. Second, we + +On line 150: + that is relevant + to this crisis. Second, we + clearly believe the + +On line 150: + relevant to this + crisis. Second, we clearly + believe the crisis + +On line 150: + crisis. Second, we + clearly believe the crisis + was a result of + +On line 150: + Second, we clearly + believe the crisis was a + result of human + +On line 150: + we clearly believe + the crisis was a result + of human mistakes, + +On line 150: + believe the crisis + was a result of human + mistakes, misjudgments, + +On line 150: + mistakes, misjudgments, + and misdeeds that resulted + in systemic failures + +On line 150: + in systemic failures + for which our nation has paid + dearly. As you read + +On line 150: + failures for which our + nation has paid dearly. As + you read this report, + +On line 150: + for which our nation + has paid dearly. As you read + this report, you will + +On line 150: + which our nation has + paid dearly. As you read this + report, you will see + +On line 150: + has paid dearly. As + you read this report, you will + see that specific + +On line 150: + paid dearly. As you + read this report, you will see + that specific firms + +On line 150: + dearly. As you read + this report, you will see that + specific firms and + +On line 150: + this report, you will + see that specific firms and + individuals + +On line 150: + specific firms and + individuals acted + irresponsibly. + +On line 150: + individuals + acted irresponsibly. + Yet a crisis of + +On line 150: + Yet a crisis of + this magnitude cannot be + the work of a few + +On line 150: + a crisis of this + magnitude cannot be the + work of a few bad + +On line 150: + of this magnitude + cannot be the work of a + few bad actors, and + +On line 150: + magnitude cannot + be the work of a few bad + actors, and such was + +On line 150: + cannot be the work + of a few bad actors, and + such was not the case + +On line 150: + be the work of a + few bad actors, and such was + not the case here. At + +On line 150: + the work of a few + bad actors, and such was not + the case here. At the + +On line 150: + work of a few bad + actors, and such was not the + case here. At the same + +On line 150: + a few bad actors, + and such was not the case here. + At the same time, the + +On line 150: + few bad actors, and + such was not the case here. At + the same time, the breadth + +On line 150: + bad actors, and such + was not the case here. At the + same time, the breadth of + +On line 150: + actors, and such was + not the case here. At the same + time, the breadth of this + +On line 150: + and such was not the + case here. At the same time, the + breadth of this crisis + +On line 150: + such was not the case + here. At the same time, the breadth + of this crisis does + +On line 150: + was not the case here. + At the same time, the breadth of + this crisis does not + +On line 150: + not the case here. At + the same time, the breadth of this + crisis does not mean + +On line 150: + At the same time, the + breadth of this crisis does not + mean that "everyone + +On line 150: + the same time, the breadth + of this crisis does not mean + that "everyone is + +On line 150: + same time, the breadth of + this crisis does not mean that + "everyone is at + +On line 150: + breadth of this crisis + does not mean that "everyone + is at fault"; many firms + +On line 150: + of this crisis does + not mean that "everyone is + at fault"; many firms and + +On line 150: + is at fault"; many firms + and individuals did + not participate + +On line 150: + at fault"; many firms and + individuals did not + participate in + +On line 150: + individuals + did not participate in + the excesses that + +On line 152: + not participate + in the excesses that spawned + disaster. We do + +On line 152: + We do place special + responsibility with + the public leaders + +On line 152: + charged with protecting + our financial system, those + entrusted to run + +On line 152: + financial system, + those entrusted to run our + regulatory + +On line 152: + those entrusted to + run our regulatory + agencies, and the chief + +On line 152: + chief executives + of companies whose failures + drove us to crisis. + +On line 152: + executives of + companies whose failures drove + us to crisis. These + +On line 152: + of significant + responsibility and + obligation. Tone at + +On line 152: + and obligation. Tone + at the top does matter and, + in this instance, we + +On line 152: + obligation. Tone at + the top does matter and, in + this instance, we were + +On line 152: + Tone at the top does + matter and, in this instance, + we were let down. No + +On line 152: + the top does matter + and, in this instance, we were + let down. No one said + +On line 152: + top does matter and, + in this instance, we were let + down. No one said "no." + +On line 152: + does matter and, in + this instance, we were let down. + No one said "no." But + +On line 152: + matter and, in this + instance, we were let down. No + one said "no." But as + +On line 152: + in this instance, we + were let down. No one said "no." + But as a nation, + +On line 152: + this instance, we were + let down. No one said "no." But + as a nation, we + +On line 152: + instance, we were let + down. No one said "no." But as + a nation, we must + +On line 152: + let down. No one said + "no." But as a nation, we + must also accept + +On line 152: + must also accept + responsibility for + what we permitted + +On line 154: + what we permitted + to occur. Collectively, + but certainly not + +On line 154: + unanimously, we + acquiesced to or embraced + a system, a set + +On line 154: + we acquiesced to + or embraced a system, a + set of policies and + +On line 154: + to or embraced a + system, a set of policies + and actions, that gave + +On line 154: + a system, a set + of policies and actions, that + gave rise to our present + +On line 160: + a set of policies + and actions, that gave rise to + our present predicament. THIS + +On line 160: + and actions, that gave + rise to our present predicament. THIS + REPORT DESCRIBES THE + +On line 160: + to our present predicament. + THIS REPORT DESCRIBES THE EVENTS + and the system that + +On line 160: + THIS REPORT DESCRIBES + THE EVENTS and the system that + propelled our nation + +On line 160: + and the system that + propelled our nation toward + crisis. The complex + +On line 160: + propelled our nation + toward crisis. The complex + machinery of our + +On line 160: + toward crisis. The + complex machinery of our + financial markets + +On line 160: + complex machinery + of our financial markets + has many essential + +On line 160: + machinery of our + financial markets has many + essential gears—some + +On line 160: + of our financial + markets has many essential + gears—some of which played + +On line 160: + essential gears—some + of which played a critical + role as the crisis + +On line 160: + gears—some of which played + a critical role as the + crisis developed + +On line 160: + a critical role + as the crisis developed + and deepened. Here we + +On line 160: + crisis developed + and deepened. Here we render + our conclusions about + +On line 160: + Here we render our + conclusions about specific + components of the + +On line 160: + our conclusions about + specific components of + the system that we + +On line 160: + believe contributed + significantly to the + financial meltdown. + +On line 162: + pipeline lit and spread + the flame of contagion and + crisis. When housing + +On line 162: + lit and spread the flame + of contagion and crisis. + When housing prices fell + +On line 162: + and spread the flame of + contagion and crisis. When + housing prices fell and + +On line 162: + prices fell and mortgage + borrowers defaulted, the + lights began to dim + +On line 162: + mortgage borrowers + defaulted, the lights began + to dim on Wall Street. + +On line 164: + toxic mortgages from + neighborhoods across America + to investors around the + +On line 166: + from neighborhoods across + America to investors around + the globe. Many mortgage + +On line 166: + to investors around the + globe. Many mortgage lenders set the + bar so low that lenders + +On line 166: + globe. Many mortgage lenders + set the bar so low that lenders + simply took eager + +On line 166: + disregard for a + borrower’s ability to + pay. Nearly one-quarter + +On line 166: + made in the first half + of were interest-only loans. + During the same year, + +On line 166: + originated by + Countrywide and Washington + Mutual had low- + +On line 168: + Mutual had low- + or no-documentation + requirements. These trends + +On line 168: + lending, including + predatory and fraudulent + practices, became more + +On line 168: + Federal Reserve + and other regulators + and authorities + +On line 168: + regulators and + authorities heard warnings + from many quarters. Yet + +On line 168: + and authorities + heard warnings from many quarters. + Yet the Federal + +On line 168: + heard warnings from many + quarters. Yet the Federal + Reserve neglected + +On line 168: + Federal Reserve + neglected its mission "to + ensure the safety + +On line 168: + Reserve neglected + its mission "to ensure the + safety and soundness + +On line 168: + mission "to ensure + the safety and soundness of + the nation’s banking + +On line 168: + safety and soundness + of the nation’s banking and + financial system + +On line 168: + nation’s banking and + financial system and to + protect the credit + +On line 168: + financial system + and to protect the credit + rights of consumers." It + +On line 168: + protect the credit + rights of consumers." It failed to + build the retaining + +On line 168: + rights of consumers." It + failed to build the retaining + wall before it was + +On line 168: + of consumers." It failed + to build the retaining wall + before it was too + +On line 168: + It failed to build the + retaining wall before it + was too late. And the + +On line 168: + build the retaining + wall before it was too late. + And the Office of + +On line 168: + the retaining wall + before it was too late. And + the Office of the + +On line 168: + wall before it was + too late. And the Office of + the Comptroller of + +On line 168: + before it was too + late. And the Office of the + Comptroller of the + +On line 168: + was too late. And the + Office of the Comptroller + of the Currency + +On line 168: + late. And the Office + of the Comptroller of the + Currency and the + +On line 168: + the Office of Thrift + Supervision, caught up in + turf wars, preempted + +On line 168: + Supervision, caught + up in turf wars, preempted + state regulators + +On line 170: + wars, preempted state + regulators from reining + in abuses. While many + +On line 170: + state regulators + from reining in abuses. While + many of these mortgages + +On line 170: + regulators from + reining in abuses. While many + of these mortgages were + +On line 170: + reining in abuses. + While many of these mortgages were + kept on banks’ books, the + +On line 170: + in abuses. While many + of these mortgages were kept on + banks’ books, the bigger + +On line 170: + were kept on banks’ books, + the bigger money came from + global investors who + +On line 170: + the bigger money + came from global investors who + clamored to put their + +On line 170: + cash into newly + created mortgage-related + securities. It + +On line 170: + regulators alike + that risk had been conquered: the + investors held highly + +On line 170: + had been conquered: the + investors held highly rated + securities they + +On line 170: + held highly rated + securities they thought were + sure to perform; the + +On line 170: + they thought were sure to + perform; the banks thought they had + taken the riskiest + +On line 170: + were sure to perform; + the banks thought they had taken + the riskiest loans off + +On line 170: + sure to perform; the + banks thought they had taken the + riskiest loans off their + +On line 170: + perform; the banks thought + they had taken the riskiest + loans off their books; and + +On line 170: + thought they had taken + the riskiest loans off their books; + and regulators + +On line 170: + they had taken the + riskiest loans off their books; and + regulators saw + +On line 170: + riskiest loans off their + books; and regulators saw + firms making profits + +On line 170: + firms making profits + and borrowing costs reduced. + But each step in the + +On line 170: + on the next step to + keep demand going. From the + speculators who + +On line 170: + keep demand going. + From the speculators who + flipped houses to the + +On line 170: + speculators who + flipped houses to the mortgage + brokers who scouted + +On line 170: + flipped houses to the + mortgage brokers who scouted + the loans, to the lenders + +On line 170: + the mortgage brokers + who scouted the loans, to the + lenders who issued the + +On line 170: + the loans, to the lenders + who issued the mortgages, to + the financial firms + +On line 170: + loans, to the lenders who + issued the mortgages, to the + financial firms that + +On line 170: + lenders who issued the + mortgages, to the financial + firms that created + +On line 170: + firms that created + the mortgage-backed securities, + collateralized + +On line 170: + collateralized + debt obligations (CDOs), CDOs squared, + and synthetic CDOs: + +On line 170: + obligations (CDOs), CDOs + squared, and synthetic CDOs: no + one in this pipeline + +On line 170: + squared, and synthetic + CDOs: no one in this pipeline + of toxic mortgages + +On line 170: + and synthetic CDOs: + no one in this pipeline of + toxic mortgages had + +On line 170: + CDOs: no one in this + pipeline of toxic mortgages + had enough skin in the + +On line 170: + one in this pipeline + of toxic mortgages had enough + skin in the game. They + +On line 170: + in this pipeline of + toxic mortgages had enough skin + in the game. They all + +On line 170: + pipeline of toxic + mortgages had enough skin in the + game. They all believed + +On line 170: + of toxic mortgages + had enough skin in the game. They + all believed they could + +On line 170: + mortgages had enough skin + in the game. They all believed + they could off-load their + +On line 170: + had enough skin in the + game. They all believed they could + off-load their risks on + +On line 170: + in the game. They all + believed they could off-load their + risks on a moment’s + +On line 170: + game. They all believed + they could off-load their risks on + a moment’s notice + +On line 170: + They all believed they + could off-load their risks on a + moment’s notice to + +On line 170: + they could off-load their + risks on a moment’s notice + to the next person + +On line 170: + could off-load their risks + on a moment’s notice to + the next person in + +On line 170: + off-load their risks on + a moment’s notice to the + next person in line. + +On line 170: + risks on a moment’s + notice to the next person + in line. They were wrong. + +On line 170: + notice to the next + person in line. They were wrong. + When borrowers stopped + +On line 170: + next person in line. + They were wrong. When borrowers + stopped making mortgage + +On line 170: + in line. They were wrong. + When borrowers stopped making + mortgage payments, the + +On line 170: + wrong. When borrowers + stopped making mortgage payments, + the losses—amplified + +On line 170: + When borrowers stopped + making mortgage payments, the + losses—amplified by + +On line 170: + stopped making mortgage + payments, the losses—amplified + by derivatives—rushed through + +On line 170: + losses—amplified by + derivatives—rushed through the pipeline. + As it turned out, these + +On line 170: + through the pipeline. As + it turned out, these losses were + concentrated in + +On line 172: + millions of mortgages + so efficiently has proven + to be difficult + +On line 172: + erected barriers + to modifying mortgages + so families can + +On line 172: + to modifying + mortgages so families can + stay in their homes and + +On line 172: + can stay in their homes + and has created further + uncertainty about + +On line 174: + housing market and + financial institutions. + We conclude over-the-counter + +On line 174: + We conclude over-the-counter + derivatives contributed + significantly + +On line 174: + The enactment of + legislation in to ban + the regulation + +On line 174: + the regulation + by both the federal and + state governments of + +On line 174: + the federal and + state governments of over-the-counter + (OTC) derivatives + +On line 174: + federal and state + governments of over-the-counter (OTC) + derivatives was + +On line 174: + state governments of + over-the-counter (OTC) derivatives + was a key turning + +On line 174: + (OTC) derivatives + was a key turning point in + the march toward the + +On line 174: + was a key turning + point in the march toward the + financial crisis. + +On line 176: + in the march toward + the financial crisis. From + financial firms to + +On line 176: + to corporations, + to farmers, and to investors, + derivatives have + +On line 176: + to farmers, and to + investors, derivatives have + been used to hedge against, + +On line 176: + been used to hedge against, + or speculate on, changes in + prices, rates, or indices + +On line 176: + used to hedge against, or + speculate on, changes in prices, + rates, or indices or + +On line 176: + or speculate on, + changes in prices, rates, or indices + or even on events such + +On line 176: + speculate on, changes + in prices, rates, or indices or + even on events such as + +On line 176: + changes in prices, rates, or + indices or even on events such + as the potential + +On line 176: + prices, rates, or indices + or even on events such as the + potential defaults + +On line 176: + indices or even on + events such as the potential + defaults on debts. Yet, + +On line 176: + or even on events such + as the potential defaults + on debts. Yet, without + +On line 176: + even on events such as + the potential defaults on + debts. Yet, without any + +On line 176: + debts. Yet, without any + oversight, OTC derivatives + rapidly spiraled out + +On line 176: + rapidly spiraled out + of control and out of sight, + growing to trillion + +On line 176: + of control and out + of sight, growing to trillion + in notional amount. + +On line 176: + control and out of + sight, growing to trillion in + notional amount. This + +On line 176: + of sight, growing to + trillion in notional amount. + This report explains + +On line 176: + and collateral + requirements; speculation; + interconnections + +On line 178: + in this market. OTC + derivatives contributed + to the crisis in + +On line 178: + sold to investors to + protect against the default or + decline in value + +On line 178: + of mortgage-related + securities backed by risky + loans. Companies sold + +On line 178: + securities backed + by risky loans. Companies sold + protection—to the + +On line 178: + risky loans. Companies + sold protection—to the tune + of billion, in AIG’s + +On line 178: + sold protection—to + the tune of billion, in AIG’s + case—to investors in + +On line 178: + tune of billion, in + AIG’s case—to investors in these + newfangled mortgage + +On line 178: + newfangled mortgage + securities, helping to + launch and expand the + +On line 178: + to launch and expand + the market and, in turn, to + further fuel the + +On line 180: + to further fuel + the housing bubble. Second, + CDS were essential + +On line 180: + further fuel the + housing bubble. Second, CDS + were essential to + +On line 180: + the housing bubble. + Second, CDS were essential + to the creation of + +On line 180: + were essential to + the creation of synthetic + CDOs. These synthetic + +On line 180: + essential to the + creation of synthetic CDOs. + These synthetic CDOs + +On line 180: + on the performance + of real mortgage-related + securities. They + +On line 180: + securities. They + amplified the losses from + the collapse of the + +On line 180: + They amplified the + losses from the collapse of + the housing bubble + +On line 180: + multiple bets on + the same securities and + helped spread them throughout + +On line 180: + same securities + and helped spread them throughout the + financial system. + +On line 182: + spread them throughout the + financial system. Goldman + Sachs alone packaged and + +On line 182: + system. Goldman Sachs + alone packaged and sold billion + in synthetic CDOs + +On line 182: + and sold billion in + synthetic CDOs from July + CONCLUSIONS OF THE + +On line 182: + synthetic CDOs from + July CONCLUSIONS OF THE + FINANCIAL CRISIS + +On line 182: + July CONCLUSIONS + OF THE FINANCIAL CRISIS + INQUIRY COMMISSION + +On line 184: + CONCLUSIONS OF THE + FINANCIAL CRISIS INQUIRY + COMMISSION xxv to + +On line 184: + FINANCIAL CRISIS + INQUIRY COMMISSION xxv to + May Synthetic CDOs + +On line 184: + to May Synthetic + CDOs created by Goldman + referenced more than + +On line 186: + securities, and + of them were referenced at + least twice. This is apart + +On line 186: + is apart from how many + times these securities may + have been referenced + +On line 186: + apart from how many times + these securities may have + been referenced in + +On line 188: + in synthetic CDOs + created by other firms. + Finally, when the + +On line 188: + CDOs created by + other firms. Finally, when + the housing bubble + +On line 188: + and crisis followed, + derivatives were in the + center of the storm. + +On line 188: + derivatives were + in the center of the storm. + AIG, which had not been + +On line 188: + were in the center + of the storm. AIG, which had not + been required to put + +On line 188: + in the center of + the storm. AIG, which had not been + required to put aside + +On line 188: + the storm. AIG, which had + not been required to put aside + capital reserves + +On line 188: + not been required to + put aside capital reserves + as a cushion for + +On line 188: + been required to put + aside capital reserves as + a cushion for the + +On line 188: + put aside capital + reserves as a cushion for + the protection it + +On line 188: + a cushion for the + protection it was selling, + was bailed out when it + +On line 188: + for the protection + it was selling, was bailed out + when it could not meet + +On line 188: + the protection it + was selling, was bailed out when + it could not meet its + +On line 188: + it was selling, was + bailed out when it could not meet + its obligations. The + +On line 188: + its obligations. The + government ultimately + committed more than + +On line 188: + committed more than + billion because of concerns + that AIG’s collapse would + +On line 188: + billion because of + concerns that AIG’s collapse would + trigger cascading + +On line 188: + because of concerns + that AIG’s collapse would trigger + cascading losses + +On line 188: + that AIG’s collapse would + trigger cascading losses + throughout the global + +On line 188: + trigger cascading + losses throughout the global + financial system. + +On line 188: + losses throughout the + global financial system. + In addition, the + +On line 188: + the existence of + millions of derivatives + contracts of all types + +On line 188: + of derivatives + contracts of all types between + systemically + +On line 188: + panic, helping to + precipitate government + assistance to those + +On line 188: + to precipitate + government assistance to + those institutions. + +On line 190: + conclude the failures + of credit rating agencies + were essential cogs + +On line 190: + were essential cogs + in the wheel of financial + destruction. The three + +On line 190: + cogs in the wheel of + financial destruction. The + three credit rating + +On line 190: + wheel of financial + destruction. The three credit + rating agencies were + +On line 190: + destruction. The three + credit rating agencies were + key enablers of the + +On line 190: + of the financial + meltdown. The mortgage-related + securities at + +On line 190: + The mortgage-related + securities at the heart + of the crisis could + +On line 190: + heart of the crisis + could not have been marketed + and sold without their + +On line 190: + of the crisis could + not have been marketed and + sold without their seal + +On line 190: + the crisis could not + have been marketed and sold + without their seal of + +On line 190: + marketed and sold + without their seal of approval. + Investors relied on + +On line 190: + without their seal of + approval. Investors relied on + them, often blindly. + +On line 190: + regulatory + capital standards were hinged + on them. This crisis + +On line 190: + capital standards + were hinged on them. This crisis + could not have happened + +On line 190: + standards were hinged on + them. This crisis could not have + happened without the + +On line 190: + were hinged on them. This + crisis could not have happened + without the rating + +On line 190: + on them. This crisis + could not have happened without + the rating agencies. + +On line 190: + them. This crisis could + not have happened without the + rating agencies. Their + +On line 190: + crisis could not have + happened without the rating + agencies. Their ratings + +On line 190: + could not have happened + without the rating agencies. + Their ratings helped the + +On line 190: + happened without the + rating agencies. Their ratings + helped the market soar + +On line 190: + without the rating + agencies. Their ratings helped the + market soar and their + +On line 190: + the rating agencies. + Their ratings helped the market + soar and their downgrades + +On line 190: + rating agencies. Their + ratings helped the market soar + and their downgrades through + +On line 190: + agencies. Their ratings + helped the market soar and their + downgrades through and wreaked + +On line 190: + Their ratings helped the + market soar and their downgrades + through and wreaked havoc + +On line 190: + helped the market soar + and their downgrades through and wreaked + havoc across markets + +On line 190: + market soar and their + downgrades through and wreaked havoc + across markets and firms. + +On line 192: + their downgrades through and + wreaked havoc across markets and + firms. In our report, + +On line 192: + downgrades through and wreaked + havoc across markets and firms. + In our report, you + +On line 192: + through and wreaked havoc + across markets and firms. In our + report, you will read + +On line 192: + across markets and firms. + In our report, you will read + about the breakdowns at + +On line 192: + markets and firms. In + our report, you will read about + the breakdowns at Moody’s, + +On line 192: + firms. In our report, + you will read about the breakdowns + at Moody’s, examined + +On line 192: + In our report, you + will read about the breakdowns at + Moody’s, examined by + +On line 192: + our report, you will + read about the breakdowns at Moody’s, + examined by the + +On line 192: + you will read about the + breakdowns at Moody’s, examined + by the Commission + +On line 192: + read about the breakdowns + at Moody’s, examined by the + Commission as a + +On line 192: + at Moody’s, examined + by the Commission as a + case study. From to Moody’s + +On line 192: + examined by the + Commission as a case study. + From to Moody’s rated + +On line 192: + This compares with six + private-sector companies + in the United States + +On line 192: + six private-sector + companies in the United + States that carried this + +On line 192: + companies in the + United States that carried this + coveted rating + +On line 192: + in the United States + that carried this coveted + rating in early + +On line 192: + early In alone, Moody’s + put its triple-A stamp of approval + on mortgage-related + +On line 192: + were disastrous: of + the mortgage securities + rated triple-A that year + +On line 194: + ultimately were + downgraded. You will also + read about the forces at + +On line 194: + were downgraded. You + will also read about the forces + at work behind the + +On line 194: + You will also read + about the forces at work behind + the breakdowns at Moody’s, + +On line 194: + read about the forces at + work behind the breakdowns at + Moody’s, including the + +On line 194: + about the forces at work + behind the breakdowns at Moody’s, + including the flawed + +On line 194: + at work behind the + breakdowns at Moody’s, including + the flawed computer + +On line 194: + behind the breakdowns + at Moody’s, including the flawed + computer models, + +On line 194: + computer models, + the pressure from financial + firms that paid for the + +On line 194: + models, the pressure + from financial firms that paid + for the ratings, the + +On line 194: + from financial firms + that paid for the ratings, the + relentless drive for + +On line 194: + firms that paid for the + ratings, the relentless drive + for market share, the + +On line 194: + the relentless drive + for market share, the lack of + resources to do the + +On line 194: + drive for market share, + the lack of resources to do + the job despite record + +On line 194: + market share, the lack + of resources to do the job + despite record profits, + +On line 194: + of resources to do + the job despite record profits, + and the absence of + +On line 194: + the job despite record + profits, and the absence of + meaningful public + +On line 194: + and the absence of + meaningful public oversight. + And you will see that + +On line 194: + meaningful public + oversight. And you will see that + without the active + +On line 194: + oversight. And you will + see that without the active + participation + +On line 194: + without the active + participation of the + rating agencies, the + +On line 194: + rating agencies, the + market for mortgage-related + securities could + +On line 194: + for mortgage-related + securities could not have + been what it became. + +On line 200: + been what it became. + THERE ARE MANY COMPETING VIEWS + as to the causes + +On line 200: + what it became. THERE + ARE MANY COMPETING VIEWS as + to the causes of + +On line 200: + it became. THERE ARE + MANY COMPETING VIEWS as to + the causes of this + +On line 200: + ARE MANY COMPETING + VIEWS as to the causes of + this crisis. In this + +On line 200: + to the causes of + this crisis. In this regard, + the Commission has + +On line 200: + of this crisis. In + this regard, the Commission + has endeavored to + +On line 200: + the Commission has + endeavored to address key + questions posed to us. + +On line 200: + has endeavored to + address key questions posed to + us. Here we discuss + +On line 200: + availability and + excess liquidity, the + role of Fannie Mae + +On line 200: + role of Fannie Mae + and Freddie Mac (the GSEs), and + government housing + +On line 200: + and Freddie Mac (the + GSEs), and government housing + policy. First, as + +On line 200: + GSEs), and government + housing policy. First, as + to the matter of + +On line 200: + government housing + policy. First, as to the + matter of excess + +On line 200: + policy. First, as + to the matter of excess + liquidity: in + +On line 200: + as to the matter + of excess liquidity: + in our report, we + +On line 200: + in our report, we + outline monetary policies + and capital flows + +On line 200: + monetary policies + and capital flows during + the years leading up + +On line 200: + and capital flows + during the years leading up + to the crisis. Low + +On line 200: + flows during the years + leading up to the crisis. + Low interest rates, + +On line 200: + years leading up to + the crisis. Low interest + rates, widely available + +On line 200: + up to the crisis. + Low interest rates, widely + available capital, + +On line 200: + international + investors seeking to put their + money in real + +On line 200: + investors seeking to + put their money in real + estate assets in + +On line 200: + to put their money + in real estate assets + in the United States + +On line 200: + put their money in + real estate assets in + the United States were + +On line 200: + in real estate + assets in the United States + were prerequisites + +On line 202: + a credit bubble. + Those conditions created + increased risks, which should + +On line 202: + have been recognized + by market participants, + policy makers, + +On line 202: + liquidity did + not need to cause a crisis. + It was the failures + +On line 202: + not need to cause a + crisis. It was the failures + outlined above—including + +On line 202: + the failures outlined + above—including the failure to + effectively rein + +On line 202: + in excesses in + the mortgage and financial + markets—that were the + +On line 202: + markets—that were the + principal causes of this + crisis. Indeed, the + +On line 202: + principal causes + of this crisis. Indeed, the + availability of + +On line 202: + availability of + well-priced capital—both foreign + and domestic—is + +On line 204: + directions. Second, + we examined the role of + the GSEs, with Fannie + +On line 204: + we examined the + role of the GSEs, with Fannie + Mae serving as the + +On line 204: + the role of the GSEs, + with Fannie Mae serving as + the Commission’s case + +On line 204: + role of the GSEs, with + Fannie Mae serving as the + Commission’s case study + +On line 204: + GSEs, with Fannie Mae + serving as the Commission’s + case study in this area. + +On line 204: + government-sponsored + enterprises had a deeply + flawed business model + +On line 204: + enterprises had + a deeply flawed business model + as publicly traded + +On line 204: + a deeply flawed business + model as publicly traded + corporations with + +On line 204: + corporations with + the implicit backing of + and subsidies from + +On line 204: + with the implicit + backing of and subsidies + from the federal + +On line 204: + and subsidies from + the federal government + and with a public + +On line 206: + mortgage exposure + and market position were + significant. In + +On line 208: + market position + were significant. In and + they decided to + +On line 208: + were significant. + In and they decided to + ramp up their purchase + +On line 208: + significant. In + and they decided to ramp + up their purchase and + +On line 208: + and they decided + to ramp up their purchase and + guarantee of risky + +On line 208: + up their purchase and + guarantee of risky mortgages, + just as the housing + +On line 208: + guarantee of risky + mortgages, just as the housing + market was peaking. + +On line 208: + of risky mortgages, just + as the housing market was + peaking. They used their + +On line 208: + just as the housing + market was peaking. They used + their political + +On line 208: + market was peaking. + They used their political + power for decades to + +On line 208: + was peaking. They used + their political power + for decades to ward off + +On line 208: + for decades to ward off + effective regulation + and oversight—spending + +On line 210: + regulation and + oversight—spending million on + lobbying from to + +On line 210: + and oversight—spending + million on lobbying from + to They suffered from + +On line 210: + on lobbying from + to They suffered from many of + the same failures of + +On line 210: + of the same failures + of corporate governance + and risk management + +On line 210: + the same failures of + corporate governance and + risk management as + +On line 210: + management as the + Commission discovered in + other financial + +On line 212: + the third quarter of + the Treasury Department had + provided billion + +On line 212: + Treasury Department + had provided billion in + financial support + +On line 214: + We conclude that these + two entities contributed + to the crisis, but + +On line 214: + conclude that these two + entities contributed to + the crisis, but were + +On line 214: + to the crisis, but + were not a primary cause. + Importantly, GSE + +On line 214: + maintained their value + throughout the crisis and did + not contribute to + +On line 214: + throughout the crisis + and did not contribute to + the significant + +On line 214: + contribute to the + significant financial + firm losses that were + +On line 214: + the significant + financial firm losses that + were central to the + +On line 216: + were central to the + financial crisis. The GSEs + participated + +On line 216: + financial crisis. + The GSEs participated + in the expansion + +On line 216: + subprime and other + risky mortgages, but they followed + rather than led Wall Street + +On line 216: + other risky mortgages, + but they followed rather than led + Wall Street and other + +On line 216: + risky mortgages, but they + followed rather than led Wall Street + and other lenders in + +On line 216: + but they followed rather + than led Wall Street and other + lenders in the rush for + +On line 216: + they followed rather than + led Wall Street and other lenders + in the rush for fool’s + +On line 216: + followed rather than led + Wall Street and other lenders in + the rush for fool’s gold. + +On line 216: + than led Wall Street and + other lenders in the rush for + fool’s gold. They purchased + +On line 216: + Street and other lenders + in the rush for fool’s gold. They + purchased the highest + +On line 216: + other lenders in the + rush for fool’s gold. They purchased + the highest rated + +On line 216: + in the rush for fool’s + gold. They purchased the highest + rated non-GSE mortgage-backed + +On line 216: + gold. They purchased the + highest rated non-GSE mortgage-backed + securities and + +On line 216: + added helium to + the housing balloon, but their + purchases never + +On line 216: + the housing balloon, + but their purchases never + represented a + +On line 216: + but their purchases + never represented a + majority of + +On line 216: + majority of + the market. Those purchases + represented of + +On line 218: + non-GSE subprime mortgage-backed + securities in with the + share rising to in + +On line 218: + securities in + with the share rising to in + and falling back to + +On line 218: + with the share rising + to in and falling back to + by They relaxed their + +On line 218: + loans and related + securities in order + to meet stock market + +On line 218: + market analysts’ + and investors’ expectations + for growth, to regain + +On line 218: + regain market share, + and to ensure generous + compensation for + +On line 218: + their executives + and employees—justifying + their activities + +On line 218: + executives and + employees—justifying their + activities on + +On line 218: + activities on + the broad and sustained public + policy support + +On line 218: + the broad and sustained + public policy support + for homeownership. + +On line 220: + for homeownership. + The Commission also probed + the performance of + +On line 220: + homeownership. The + Commission also probed the + performance of the + +On line 220: + of the loans purchased + or guaranteed by Fannie + and Freddie. While they + +On line 220: + and Freddie. While they + generated substantial + losses, delinquency + +On line 220: + substantial losses, + delinquency rates for GSE loans + were substantially + +On line 220: + rates for GSE loans were + substantially lower than + loans securitized + +On line 220: + securitized by + other financial firms. For + example, data + +On line 220: + financial firms. For + example, data compiled + by the Commission + +On line 220: + example, data + compiled by the Commission + for a subset of + +On line 220: + Commission for a + subset of borrowers with + similar credit + +On line 220: + of borrowers with + similar credit scores—scores + below 660—show that by + +On line 220: + below 660—show that by + the end of GSE mortgages were + far less likely to + +On line 222: + non-GSE securitized + mortgages: versus We also + studied at length how + +On line 222: + mortgages: versus We + also studied at length how + the Department of + +On line 222: + also studied at + length how the Department of + Housing and Urban + +On line 222: + Development’s (HUD’s) + affordable housing goals for + the GSEs affected + +On line 222: + affordable housing + goals for the GSEs affected + their investment in + +On line 222: + GSEs affected their + investment in CONCLUSIONS + OF THE FINANCIAL + +On line 222: + CONCLUSIONS OF THE + FINANCIAL CRISIS INQUIRY + COMMISSION xxvii risky + +On line 222: + OF THE FINANCIAL + CRISIS INQUIRY COMMISSION + xxvii risky mortgages. Based + +On line 222: + FINANCIAL CRISIS + INQUIRY COMMISSION xxvii risky + mortgages. Based on the + +On line 222: + on the evidence + and interviews with dozens of + individuals + +On line 222: + individuals + involved in this subject area, + we determined these + +On line 222: + this subject area, we + determined these goals only + contributed marginally + +On line 222: + area, we determined + these goals only contributed + marginally to Fannie’s + +On line 224: + Fannie’s and Freddie’s + participation in those + mortgages. Finally, + +On line 224: + participation + in those mortgages. Finally, + as to the matter + +On line 224: + mortgages. Finally, + as to the matter of whether + government housing + +On line 224: + the matter of whether + government housing policies + were a primary + +On line 224: + government housing + policies were a primary + cause of the crisis: + +On line 224: + for decades, government + policy has encouraged + homeownership through + +On line 224: + programs, and mandates. + These policies were put in place + and promoted by + +On line 224: + were put in place and + promoted by several + administrations + +On line 224: + and Congresses—indeed, + both Presidents Bill Clinton + and George W. Bush set + +On line 224: + both Presidents Bill + Clinton and George W. Bush set + aggressive goals to + +On line 226: + and George W. Bush set + aggressive goals to increase + homeownership. In + +On line 226: + set aggressive goals + to increase homeownership. + In conducting our + +On line 226: + homeownership. In + conducting our inquiry, we + took a careful look + +On line 226: + took a careful look + at HUD’s affordable housing + goals, as noted above, + +On line 226: + a careful look at + HUD’s affordable housing goals, + as noted above, and + +On line 226: + careful look at HUD’s + affordable housing goals, as + noted above, and the + +On line 226: + noted above, and the + Community Reinvestment + Act (CRA). The CRA was + +On line 226: + the Community + Reinvestment Act (CRA). The CRA + was enacted in + +On line 226: + Reinvestment Act (CRA). + The CRA was enacted in + to combat "redlining" + +On line 226: + Act (CRA). The CRA was + enacted in to combat + "redlining" by banks—the + +On line 226: + CRA was enacted + in to combat "redlining" by + banks—the practice of + +On line 226: + enacted in to + combat "redlining" by banks—the + practice of denying + +On line 226: + individuals + and businesses in certain + neighborhoods without + +On line 226: + without regard to + their creditworthiness. The + CRA requires banks and + +On line 226: + The CRA requires banks + and savings and loans to lend, + invest, and provide + +On line 226: + loans to lend, invest, + and provide services to the + communities from + +On line 226: + and provide services + to the communities from + which they take deposits, + +On line 228: + the CRA was not a + significant factor in + subprime lending or + +On line 228: + a significant + factor in subprime lending + or the crisis. Many + +On line 228: + factor in subprime + lending or the crisis. Many + subprime lenders were not + +On line 228: + in subprime lending + or the crisis. Many subprime + lenders were not subject + +On line 228: + subprime lending or + the crisis. Many subprime lenders + were not subject to + +On line 228: + or the crisis. Many + subprime lenders were not subject + to the CRA. Research + +On line 228: + subprime lenders were not + subject to the CRA. Research + indicates only + +On line 228: + subject to the CRA. + Research indicates only + of high-cost loans—a + +On line 228: + indicates only + of high-cost loans—a proxy for + subprime loans—had any + +On line 228: + of high-cost loans—a + proxy for subprime loans—had any + connection to the + +On line 228: + loans—a proxy for subprime + loans—had any connection to + the law. Loans made by + +On line 228: + for subprime loans—had + any connection to the law. + Loans made by CRA-regulated lenders + +On line 228: + subprime loans—had any + connection to the law. Loans + made by CRA-regulated lenders in + +On line 228: + any connection to + the law. Loans made by CRA-regulated lenders + in the neighborhoods + +On line 228: + connection to the + law. Loans made by CRA-regulated lenders in + the neighborhoods in + +On line 228: + law. Loans made by CRA-regulated + lenders in the neighborhoods in + which they were required + +On line 228: + Loans made by CRA-regulated lenders + in the neighborhoods in which + they were required to + +On line 228: + made by CRA-regulated lenders in + the neighborhoods in which they + were required to lend + +On line 228: + by CRA-regulated lenders in the + neighborhoods in which they were + required to lend were + +On line 228: + the neighborhoods in + which they were required to lend + were half as likely + +On line 228: + neighborhoods in which + they were required to lend were + half as likely to + +On line 228: + required to lend were + half as likely to default + as similar loans + +On line 228: + were half as likely + to default as similar + loans made in the same + +On line 228: + likely to default + as similar loans made in + the same neighborhoods + +On line 228: + as similar loans + made in the same neighborhoods + by independent + +On line 228: + the same neighborhoods + by independent mortgage + originators not + +On line 228: + by independent + mortgage originators not + subject to the law. + +On line 230: + this respect: As a + nation, we set aggressive + homeownership goals + +On line 230: + a nation, we set + aggressive homeownership + goals with the desire + +On line 230: + we set aggressive + homeownership goals with the + desire to extend + +On line 230: + extend credit to + families previously + denied access to + +On line 230: + denied access to + the financial markets. Yet + the government failed + +On line 230: + to the financial + markets. Yet the government + failed to ensure that + +On line 230: + the philosophy + of opportunity was + being matched by the + +On line 230: + being matched by the + practical realities + on the ground. Witness + +On line 230: + ground. Witness again the + failure of the Federal + Reserve and other + +On line 230: + Reserve and other + regulators to rein in + irresponsible + +On line 230: + irresponsible + lending. Homeownership peaked + in the spring of and + +On line 230: + peaked in the spring of + and then began to decline. + From that point on, the + +On line 230: + in the spring of and + then began to decline. From + that point on, the talk + +On line 230: + the spring of and then + began to decline. From that + point on, the talk of + +On line 230: + began to decline. + From that point on, the talk of + opportunity + +On line 230: + From that point on, the + talk of opportunity + was tragically + +On line 230: + that point on, the talk + of opportunity was + tragically at + +On line 230: + tragically at + odds with the reality + of a financial + +On line 236: + reality of + a financial disaster + in the making. WHEN + +On line 236: + of a financial + disaster in the making. + WHEN THIS COMMISSION + +On line 236: + disaster in the + making. WHEN THIS COMMISSION + began its work months + +On line 236: + the making. WHEN THIS + COMMISSION began its work + months ago, some imagined + +On line 236: + WHEN THIS COMMISSION + began its work months ago, some + imagined that the events + +On line 236: + COMMISSION began + its work months ago, some imagined + that the events of and + +On line 236: + its work months ago, some + imagined that the events of and + their consequences would + +On line 236: + some imagined that the + events of and their consequences + would be well behind + +On line 236: + imagined that the events + of and their consequences would + be well behind us + +On line 236: + that the events of and + their consequences would be well + behind us by the + +On line 236: + and their consequences + would be well behind us by + the time we issued + +On line 236: + their consequences would + be well behind us by the + time we issued this + +On line 236: + would be well behind + us by the time we issued + this report. Yet more + +On line 236: + be well behind us + by the time we issued this + report. Yet more than + +On line 236: + behind us by the + time we issued this report. + Yet more than two years + +On line 236: + us by the time we + issued this report. Yet more + than two years after + +On line 236: + than two years after + the federal government + intervened in an + +On line 236: + an unprecedented + manner in our financial + markets, our country + +On line 236: + markets, our country + finds itself still grappling with + the aftereffects + +On line 236: + aftereffects of + the calamity. Our financial + system is, in many + +On line 236: + system is, in many + respects, still unchanged from what + existed on the + +On line 236: + in many respects, still + unchanged from what existed + on the eve of the + +On line 236: + respects, still unchanged + from what existed on the + eve of the crisis. + +On line 236: + still unchanged from what + existed on the eve of + the crisis. Indeed, + +On line 236: + from what existed + on the eve of the crisis. + Indeed, in the wake + +On line 236: + existed on the + eve of the crisis. Indeed, + in the wake of the + +On line 236: + on the eve of the + crisis. Indeed, in the wake + of the crisis, the + +On line 236: + the crisis. Indeed, + in the wake of the crisis, + the U.S. financial + +On line 236: + in the wake of the + crisis, the U.S. financial + sector is now more + +On line 236: + the crisis, the U.S. + financial sector is now + more concentrated + +On line 236: + financial sector + is now more concentrated + than ever in the + +On line 236: + sector is now more + concentrated than ever + in the hands of a + +On line 236: + While we have not been + charged with making policy + recommendations, + +On line 236: + the very purpose of + our report has been to take + stock of what happened + +On line 236: + very purpose of our + report has been to take stock + of what happened so + +On line 236: + our report has been + to take stock of what happened + so we can plot a + +On line 236: + report has been to + take stock of what happened so + we can plot a new + +On line 236: + has been to take stock + of what happened so we can + plot a new course. In + +On line 236: + been to take stock of + what happened so we can plot + a new course. In our + +On line 236: + stock of what happened + so we can plot a new course. + In our inquiry, we + +On line 236: + of what happened so + we can plot a new course. In + our inquiry, we found + +On line 236: + we can plot a new + course. In our inquiry, we found + dramatic breakdowns + +On line 236: + dramatic breakdowns + of corporate governance, + profound lapses in + +On line 236: + profound lapses in + regulatory oversight, + and near fatal flaws + +On line 236: + regulatory + oversight, and near fatal flaws + in our financial + +On line 238: + and near fatal flaws + in our financial system. + We also found that + +On line 238: + near fatal flaws in + our financial system. We + also found that a + +On line 238: + series of choices + and actions led us toward + a catastrophe for + +On line 238: + led us toward a + catastrophe for which we were + ill prepared. These are + +On line 238: + catastrophe for which + we were ill prepared. These are + serious matters + +On line 238: + for which we were ill + prepared. These are serious + matters that must be + +On line 238: + we were ill prepared. + These are serious matters + that must be addressed + +On line 238: + were ill prepared. These + are serious matters that + must be addressed and + +On line 238: + that must be addressed + and resolved to restore faith + in our financial + +On line 238: + to restore faith in + our financial markets, to + avoid the next crisis, + +On line 238: + restore faith in our + financial markets, to avoid + the next crisis, and + +On line 238: + avoid the next crisis, + and to rebuild a system + of capital that + +On line 238: + rebuild a system + of capital that provides + the foundation for + +On line 240: + the foundation for + a new era of broadly shared + prosperity. The + +On line 240: + for a new era of + broadly shared prosperity. + The greatest tragedy would + +On line 240: + shared prosperity. + The greatest tragedy would be to + accept the refrain + +On line 240: + The greatest tragedy would + be to accept the refrain + that no one could have + +On line 240: + greatest tragedy would be + to accept the refrain that + no one could have seen + +On line 240: + would be to accept + the refrain that no one could + have seen this coming + +On line 240: + be to accept the + refrain that no one could have + seen this coming and + +On line 240: + the refrain that no + one could have seen this coming + and thus nothing could + +On line 240: + refrain that no one + could have seen this coming and + thus nothing could have + +On line 240: + no one could have seen + this coming and thus nothing + could have been done. If + +On line 240: + one could have seen this + coming and thus nothing could + have been done. If we + +On line 240: + have seen this coming + and thus nothing could have been + done. If we accept + +On line 240: + seen this coming and + thus nothing could have been done. + If we accept this + +On line 240: + and thus nothing could + have been done. If we accept + this notion, it will + +On line 242: + could have been done. If + we accept this notion, it + will happen again. This + +On line 242: + done. If we accept + this notion, it will happen + again. This report should + +On line 242: + If we accept this + notion, it will happen again. + This report should not + +On line 242: + this notion, it will + happen again. This report should + not be viewed as the + +On line 242: + it will happen again. + This report should not be viewed + as the end of the + +On line 242: + as the end of the + nation’s examination + of this crisis. There + +On line 242: + end of the nation’s + examination of this + crisis. There is still + +On line 242: + examination + of this crisis. There is still + much to learn, much to + +On line 242: + of this crisis. There + is still much to learn, much to + investigate, and + +On line 244: + There is still much to + learn, much to investigate, + and much to fix. This + +On line 244: + is still much to learn, + much to investigate, and + much to fix. This is + +On line 244: + still much to learn, much + to investigate, and much + to fix. This is our + +On line 244: + is our collective + responsibility. It + falls to us to make + +On line 244: + It falls to us to + make different choices if + we want different + +On line 261: + we want different + results. PART I Crisis on + the Horizon BEFORE + +On line 263: + I Crisis on the + Horizon BEFORE OUR VERY EYES + In examining + +On line 263: + Horizon BEFORE OUR + VERY EYES In examining + the worst financial + +On line 263: + BEFORE OUR VERY EYES + In examining the worst + financial meltdown + +On line 263: + examining the + worst financial meltdown since + the Great Depression, + +On line 263: + financial meltdown + since the Great Depression, the + Financial Crisis + +On line 263: + Great Depression, the + Financial Crisis Inquiry + Commission reviewed + +On line 263: + Financial Crisis + Inquiry Commission reviewed + millions of pages of + +On line 265: + people from all walks + of life—to find out how and + why it happened. In + +On line 265: + walks of life—to find + out how and why it happened. + In public hearings + +On line 265: + of life—to find out + how and why it happened. In + public hearings and + +On line 265: + out how and why it + happened. In public hearings + and interviews, many + +On line 265: + public officials + testified that they had been + blindsided by the + +On line 265: + testified that they + had been blindsided by the + crisis, describing + +On line 265: + been blindsided by + the crisis, describing it + as a dramatic + +On line 265: + blindsided by the + crisis, describing it as + a dramatic and + +On line 265: + crisis, describing + it as a dramatic and + mystifying turn + +On line 265: + as a dramatic + and mystifying turn of + events. Even among those who + +On line 265: + of events. Even among those + who worried that the housing + bubble might burst, few—if + +On line 265: + among those who worried + that the housing bubble might + burst, few—if any—foresaw + +On line 265: + those who worried that + the housing bubble might burst, + few—if any—foresaw the + +On line 265: + the housing bubble + might burst, few—if any—foresaw the + magnitude of the + +On line 265: + bubble might burst, few—if + any—foresaw the magnitude + of the crisis that + +On line 267: + few—if any—foresaw the + magnitude of the crisis + that would ensue. Charles + +On line 267: + the magnitude of + the crisis that would ensue. + Charles Prince, the former + +On line 267: + that would ensue. Charles + Prince, the former chairman and + chief executive + +On line 267: + chief executive + officer of Citigroup + Inc., called the collapse + +On line 267: + housing prices "wholly + unanticipated."1 Warren + Buffett, the chairman + +On line 267: + the chairman and chief + executive officer + of Berkshire Hathaway + +On line 267: + of Berkshire Hathaway + Inc., which until was the largest + single shareholder + +On line 267: + which until was the + largest single shareholder of + Moody’s Corporation, + +On line 267: + until was the largest + single shareholder of Moody’s + Corporation, told + +On line 267: + single shareholder + of Moody’s Corporation, told + the Commission that + +On line 267: + Moody’s Corporation, + told the Commission that "very, + very few people could + +On line 267: + told the Commission + that "very, very few people could + appreciate the + +On line 267: + very few people could + appreciate the bubble," + which he called a "mass + +On line 267: + could appreciate + the bubble," which he called a + "mass delusion" shared by + +On line 267: + the bubble," which he + called a "mass delusion" shared by + million Americans."2 + +On line 267: + a "mass delusion" shared + by million Americans."2 Lloyd + Blankfein, the chairman + +On line 267: + million Americans."2 + Lloyd Blankfein, the chairman and + chief executive + +On line 267: + the chairman and chief + executive officer + of Goldman Sachs Group, + +On line 267: + Goldman Sachs Group, Inc., + likened the financial crisis + to a hurricane.3 + +On line 269: + likened the financial + crisis to a hurricane.3 + Regulators echoed + +On line 269: + Regulators echoed + a similar refrain. Ben + Bernanke, the chairman of + +On line 269: + echoed a similar + refrain. Ben Bernanke, the chairman + of the Federal + +On line 269: + similar refrain. + Ben Bernanke, the chairman of the + Federal Reserve + +On line 269: + refrain. Ben Bernanke, the + chairman of the Federal + Reserve Board since told + +On line 269: + the chairman of the + Federal Reserve Board since + told the Commission + +On line 269: + Federal Reserve + Board since told the Commission + a "perfect storm" had + +On line 269: + Reserve Board since told + the Commission a "perfect + storm" had occurred that + +On line 269: + told the Commission + a "perfect storm" had occurred + that regulators + +On line 269: + the Commission a + "perfect storm" had occurred that + regulators could + +On line 269: + storm" had occurred that + regulators could not have + anticipated; + +On line 269: + regulators could + not have anticipated; + but when asked about whether + +On line 269: + when asked about whether the + Fed’s lack of aggressiveness + in regulating + +On line 269: + asked about whether the Fed’s + lack of aggressiveness in + regulating the + +On line 269: + aggressiveness in + regulating the mortgage + market during the + +On line 269: + in regulating + the mortgage market during + the housing boom was + +On line 269: + regulating the + mortgage market during the + housing boom was a + +On line 269: + market during the + housing boom was a failure, + Bernanke responded, "It + +On line 269: + the housing boom was + a failure, Bernanke responded, + "It was, indeed. I + +On line 269: + housing boom was a + failure, Bernanke responded, "It + was, indeed. I think + +On line 269: + was a failure, Bernanke + responded, "It was, indeed. + I think it was the + +On line 269: + responded, "It was, + indeed. I think it was the + most severe failure + +On line 269: + "It was, indeed. I + think it was the most severe + failure of the Fed + +On line 269: + indeed. I think it + was the most severe failure + of the Fed in this + +On line 269: + was the most severe + failure of the Fed in this + particular episode."4 + +On line 269: + this particular + episode."4 Alan Greenspan, the Fed chairman + during the two decades + +On line 269: + episode."4 Alan Greenspan, the Fed + chairman during the two decades + leading up to the + +On line 269: + Greenspan, the Fed chairman + during the two decades leading + up to the crash, told + +On line 269: + during the two decades + leading up to the crash, told + the Commission that + +On line 269: + decades leading up to + the crash, told the Commission + that it was beyond + +On line 269: + leading up to the + crash, told the Commission that + it was beyond the + +On line 269: + Commission that it + was beyond the ability + of regulators + +On line 269: + the ability of + regulators to ever + foresee such a sharp + +On line 269: + regulators to + ever foresee such a sharp + decline. "History + +On line 271: + cannot identify + the timing of a crisis, + or anticipate + +On line 271: + the timing of a + crisis, or anticipate + exactly where it + +On line 271: + or anticipate + exactly where it will be + located or how + +On line 271: + exactly where it + will be located or how + large the losses and + +On line 273: + will be located + or how large the losses and + spillovers will be."5 In fact, + +On line 273: + be located or + how large the losses and spillovers + will be."5 In fact, there + +On line 273: + located or how + large the losses and spillovers will + be."5 In fact, there were + +On line 273: + how large the losses + and spillovers will be."5 In fact, there + were warning signs. In + +On line 273: + large the losses and + spillovers will be."5 In fact, there were + warning signs. In the + +On line 273: + and spillovers will be."5 In + fact, there were warning signs. In + the decade preceding + +On line 273: + spillovers will be."5 In fact, + there were warning signs. In the + decade preceding the + +On line 273: + fact, there were warning + signs. In the decade preceding + the collapse, there were + +On line 273: + there were warning signs. + In the decade preceding the + collapse, there were many + +On line 273: + warning signs. In the + decade preceding the collapse, + there were many signs that + +On line 273: + there were many signs that + house prices were inflated, that + lending practices had + +On line 273: + many signs that house prices + were inflated, that lending + practices had spun out + +On line 273: + prices were inflated, + that lending practices had spun + out of control, that + +On line 273: + were inflated, that + lending practices had spun out + of control, that too + +On line 273: + that lending practices + had spun out of control, that + too many homeowners + +On line 273: + lending practices had + spun out of control, that too + many homeowners were + +On line 273: + spun out of control, + that too many homeowners were + taking on mortgages + +On line 273: + of control, that too + many homeowners were taking + on mortgages and debt + +On line 273: + control, that too many + homeowners were taking on + mortgages and debt they + +On line 273: + many homeowners were + taking on mortgages and debt + they could ill afford, + +On line 273: + taking on mortgages + and debt they could ill afford, + and that risks to the + +On line 273: + mortgages and debt they + could ill afford, and that risks + to the financial + +On line 273: + and debt they could ill + afford, and that risks to the + financial system + +On line 273: + could ill afford, and + that risks to the financial + system were growing + +On line 273: + afford, and that risks + to the financial system + were growing unchecked. Alarm + +On line 273: + were clanging inside + financial institutions, + regulatory + +On line 273: + organizations, + state law enforcement agencies, + and corporations + +On line 273: + state law enforcement + agencies, and corporations + throughout America, + +On line 273: + enforcement agencies, + and corporations throughout + America, as well + +On line 273: + and corporations + throughout America, as well + as in neighborhoods + +On line 273: + throughout America, + as well as in neighborhoods + across the country. Many + +On line 273: + in neighborhoods across + the country. Many knowledgeable + executives saw + +On line 273: + to avoid the train wreck. + While countless Americans joined + in the financial + +On line 273: + Americans joined in + the financial euphoria + that seized the nation, + +On line 273: + others were shouting + to government officials + in Washington and + +On line 273: + in Washington and + within state legislatures, + pointing to what would + +On line 273: + to what would become + a human disaster, not + just an economic + +On line 275: + disaster, not just + an economic debacle. + "Everybody in the + +On line 275: + just an economic + debacle. "Everybody in + the whole world knew that + +On line 275: + "Everybody in the + whole world knew that the mortgage + bubble was there," said + +On line 275: + in the whole world knew + that the mortgage bubble was + there," said Richard Breeden, + +On line 275: + the whole world knew that + the mortgage bubble was there," + said Richard Breeden, the + +On line 275: + the mortgage bubble + was there," said Richard Breeden, the + former chairman of + +On line 275: + there," said Richard Breeden, + the former chairman of the + Securities and + +On line 275: + the former chairman + of the Securities and + Exchange Commission + +On line 275: + Exchange Commission + appointed by President + George H. W. Bush. "I + +On line 275: + President George H. + W. Bush. "I mean, it wasn’t + hidden. You cannot + +On line 275: + George H. W. Bush. "I + mean, it wasn’t hidden. You + cannot look at any + +On line 275: + W. Bush. "I mean, it + wasn’t hidden. You cannot + look at any of this + +On line 275: + "I mean, it wasn’t + hidden. You cannot look at + any of this and say + +On line 275: + it wasn’t hidden. + You cannot look at any of + this and say that the + +On line 275: + You cannot look at + any of this and say that the + regulators did + +On line 275: + at any of this and + say that the regulators + did their job. This was + +On line 275: + any of this and say + that the regulators did + their job. This was not + +On line 275: + of this and say that + the regulators did their + job. This was not some + +On line 275: + the regulators + did their job. This was not some + hidden problem. It + +On line 275: + did their job. This was + not some hidden problem. It + wasn’t out on Mars + +On line 275: + was not some hidden + problem. It wasn’t out on + Mars or Pluto or + +On line 275: + some hidden problem. + It wasn’t out on Mars or + Pluto or somewhere. + +On line 275: + problem. It wasn’t + out on Mars or Pluto or + somewhere. It was right + +On line 275: + It wasn’t out on + Mars or Pluto or somewhere. + It was right here. You + +On line 275: + wasn’t out on Mars + or Pluto or somewhere. It + was right here. You can’t + +On line 275: + on Mars or Pluto + or somewhere. It was right here. + You can’t make trillions + +On line 275: + Mars or Pluto or + somewhere. It was right here. You + can’t make trillions of + +On line 275: + Pluto or somewhere. + It was right here. You can’t make + trillions of dollars’ + +On line 275: + or somewhere. It was + right here. You can’t make trillions + of dollars’ worth of + +On line 275: + It was right here. You + can’t make trillions of dollars’ + worth of mortgages and + +On line 275: + was right here. You can’t + make trillions of dollars’ worth + of mortgages and not + +On line 275: + right here. You can’t make + trillions of dollars’ worth of + mortgages and not have + +On line 275: + You can’t make trillions + of dollars’ worth of mortgages + and not have people + +On line 277: + trillions of dollars’ + worth of mortgages and not have + people notice."6 Paul + +On line 277: + of dollars’ worth of + mortgages and not have people + notice."6 Paul McCulley, a + +On line 277: + worth of mortgages and + not have people notice."6 Paul + McCulley, a managing + +On line 277: + notice."6 Paul McCulley, a + managing director at + PIMCO, one of the + +On line 277: + McCulley, a managing + director at PIMCO, one + of the nation’s largest + +On line 277: + one of the nation’s + largest money management firms, + told the Commission + +On line 277: + of the nation’s largest + money management firms, told + the Commission that + +On line 277: + money management + firms, told the Commission that + he and his colleagues + +On line 277: + management firms, told + the Commission that he and + his colleagues began + +On line 277: + the Commission that + he and his colleagues began + to get worried about + +On line 277: + he and his colleagues + began to get worried about + "serious signs of + +On line 277: + colleagues began to + get worried about "serious + signs of bubbles" in + +On line 277: + to get worried about + "serious signs of bubbles" + in they therefore sent + +On line 279: + signs of bubbles" in + they therefore sent out credit + analysts to cities + +On line 279: + in they therefore sent + out credit analysts to + cities to do what he + +On line 279: + they therefore sent out + credit analysts to cities + to do what he called + +On line 279: + cities to do what he + called "old-fashioned shoe-leather research," + talking to real + +On line 279: + shoe-leather research," talking + to real estate brokers, + mortgage brokers, and + +On line 279: + to real estate + brokers, mortgage brokers, and + local investors about + +On line 279: + brokers, and local + investors about the housing and + mortgage markets. They + +On line 279: + and local investors + about the housing and mortgage + markets. They witnessed + +On line 279: + and mortgage markets. + They witnessed what he called "the + outright degradation + +On line 279: + They witnessed what he + called "the outright degradation + of underwriting + +On line 279: + outright degradation + of underwriting standards," + McCulley asserted, and + +On line 279: + of underwriting + standards," McCulley asserted, and + they shared what they had + +On line 279: + McCulley asserted, and + they shared what they had learned when + they got back home to + +On line 279: + asserted, and they + shared what they had learned when they + got back home to the + +On line 279: + and they shared what they + had learned when they got back home + to the company’s + +On line 279: + shared what they had learned + when they got back home to the + company’s Newport + +On line 279: + when they got back home + to the company’s Newport + Beach, California, + +On line 279: + to the company’s + Newport Beach, California, + headquarters. "And when + +On line 279: + when our group came back, + they reported what they saw, + and we adjusted + +On line 279: + our group came back, they + reported what they saw, and + we adjusted our + +On line 279: + reported what they + saw, and we adjusted our + risk accordingly," + +On line 279: + and we adjusted + our risk accordingly," McCulley + told the Commission. + +On line 279: + we adjusted our + risk accordingly," McCulley told + the Commission. The + +On line 281: + those who remembered + the savings and loan crisis, + knew that age-old rules of + +On line 281: + the savings and loan + crisis, knew that age-old rules of + prudent lending had + +On line 281: + loan crisis, knew that + age-old rules of prudent lending + had been cast aside. Arnold + +On line 281: + knew that age-old rules of + prudent lending had been cast + aside. Arnold Cattani, the + +On line 281: + age-old rules of prudent + lending had been cast aside. Arnold + Cattani, the chairman + +On line 281: + cast aside. Arnold Cattani, + the chairman of Bakersfield, + California–based + +On line 281: + the Commission that + he grew uncomfortable with + the "pure lunacy" + +On line 281: + Commission that he + grew uncomfortable with the + "pure lunacy" he + +On line 281: + grew uncomfortable + with the "pure lunacy" he + saw in the local + +On line 281: + lunacy" he saw + in the local home-building + market, fueled by + +On line 281: + saw in the local + home-building market, fueled + by "voracious" Wall + +On line 281: + home-building market, + fueled by "voracious" Wall + Street investment banks; + +On line 281: + investment banks; he + thus opted out of certain + kinds of investments + +On line 283: + thus opted out of + certain kinds of investments + by William Martin, the + +On line 283: + of certain kinds of + investments by William Martin, + the vice chairman and + +On line 283: + investments by William + Martin, the vice chairman and + chief executive + +On line 283: + vice chairman and chief + executive officer + of Service 1st Bank + +On line 283: + chief executive + officer of Service 1st + Bank of Nevada, told + +On line 283: + of Service 1st Bank + of Nevada, told the FCIC that + the desire for a + +On line 283: + Service 1st Bank of + Nevada, told the FCIC that the + desire for a "high + +On line 283: + 1st Bank of Nevada, + told the FCIC that the desire + for a "high and quick + +On line 283: + of Nevada, told the + FCIC that the desire for a + "high and quick return" + +On line 283: + FCIC that the desire + for a "high and quick return" + blinded people to + +On line 283: + the desire for a + "high and quick return" blinded + people to fiscal + +On line 283: + "high and quick return" + blinded people to fiscal + realities. "You + +On line 283: + blinded people to + fiscal realities. "You + may recall Tommy + +On line 283: + realities. "You + may recall Tommy Lee Jones + in Men in Black, where + +On line 283: + may recall Tommy + Lee Jones in Men in Black, where + he holds a device + +On line 283: + recall Tommy Lee + Jones in Men in Black, where he + holds a device in + +On line 283: + Tommy Lee Jones in + Men in Black, where he holds a + device in the air, + +On line 283: + Lee Jones in Men in + Black, where he holds a device + in the air, and with + +On line 283: + Jones in Men in Black, + where he holds a device in + the air, and with a + +On line 283: + in Men in Black, where + he holds a device in the + air, and with a bright + +On line 283: + Men in Black, where he + holds a device in the air, + and with a bright flash + +On line 283: + in Black, where he holds + a device in the air, and + with a bright flash wipes + +On line 283: + Black, where he holds a + device in the air, and with + a bright flash wipes clean + +On line 283: + a device in the + air, and with a bright flash wipes + clean the memories + +On line 283: + device in the air, + and with a bright flash wipes clean + the memories of + +On line 283: + air, and with a bright + flash wipes clean the memories + of everyone who + +On line 283: + and with a bright flash + wipes clean the memories of + everyone who has + +On line 283: + bright flash wipes clean the + memories of everyone + who has witnessed an + +On line 283: + the memories of + everyone who has witnessed + an alien event," he said.9 + +On line 285: + of everyone who + has witnessed an alien event," he + said.9 Unlike so many + +On line 285: + who has witnessed an + alien event," he said.9 Unlike so + many other bubbles—tulip + +On line 285: + has witnessed an alien + event," he said.9 Unlike so many + other bubbles—tulip bulbs + +On line 285: + event," he said.9 Unlike + so many other bubbles—tulip bulbs + in Holland in the + +On line 285: + he said.9 Unlike so + many other bubbles—tulip bulbs in + Holland in the 1600s, + +On line 285: + many other bubbles—tulip + bulbs in Holland in the 1600s, + South Sea stocks in the + +On line 285: + other bubbles—tulip bulbs + in Holland in the 1600s, South + Sea stocks in the 1700s, + +On line 285: + bulbs in Holland in + the 1600s, South Sea stocks in the + 1700s, Internet stocks + +On line 285: + in Holland in the + 1600s, South Sea stocks in the 1700s, + Internet stocks in + +On line 285: + in the 1600s, South Sea + stocks in the 1700s, Internet + stocks in the late 1990s—this + +On line 285: + the 1600s, South Sea stocks + in the 1700s, Internet stocks + in the late 1990s—this one + +On line 285: + South Sea stocks in the + 1700s, Internet stocks in the + late 1990s—this one involved + +On line 285: + Sea stocks in the 1700s, + Internet stocks in the late + 1990s—this one involved not + +On line 285: + 1700s, Internet stocks + in the late 1990s—this one involved + not just another + +On line 285: + in the late 1990s—this one + involved not just another + commodity but + +On line 285: + one involved not just + another commodity + but a building block + +On line 285: + the economy: the + family home. Homes are the + foundation upon + +On line 285: + economic structures + rest. Children usually go + to schools linked to their + +On line 285: + Children usually + go to schools linked to their home + addresses; local + +On line 285: + go to schools linked to + their home addresses; local + governments decide + +On line 285: + their home addresses; + local governments decide + how much money they + +On line 285: + addresses; local + governments decide how much + money they can spend + +On line 285: + governments decide + how much money they can spend + on roads, firehouses, + +On line 285: + how much money they + can spend on roads, firehouses, + and public safety + +On line 285: + much money they can + spend on roads, firehouses, and + public safety based + +On line 285: + on roads, firehouses, + and public safety based on + how much property + +On line 285: + roads, firehouses, and + public safety based on how + much property tax + +On line 285: + and public safety + based on how much property + tax revenue they have; + +On line 285: + public safety based + on how much property tax + revenue they have; house + +On line 285: + safety based on how + much property tax revenue + they have; house prices are + +On line 285: + how much property + tax revenue they have; house prices + are tied to consumer + +On line 285: + tax revenue they have; + house prices are tied to consumer + spending. Downturns in + +On line 285: + spending. Downturns in + the housing industry can + cause ripple effects + +On line 289: + cause ripple effects + almost everywhere. When the + Federal Reserve + +On line 289: + almost everywhere. + When the Federal Reserve + cut interest rates + +On line 289: + When the Federal + Reserve cut interest rates + early in the new + +On line 289: + mortgage rates fell, home + refinancing surged, climbing + from billion in to + +On line 289: + allowing people + to withdraw equity built + up over previous + +On line 289: + withdraw equity + built up over previous decades + and to consume more, + +On line 289: + equity built up + over previous decades and to + consume more, despite + +On line 289: + over previous decades + and to consume more, despite + stagnant wages. Home sales + +On line 289: + decades and to consume + more, despite stagnant wages. Home + sales volume started + +On line 289: + and to consume more, + despite stagnant wages. Home sales + volume started to + +On line 289: + consume more, despite + stagnant wages. Home sales volume + started to increase, + +On line 289: + stagnant wages. Home sales + volume started to increase, + and average home + +On line 289: + sales volume started + to increase, and average + home prices nationwide + +On line 289: + volume started to + increase, and average home + prices nationwide climbed, + +On line 289: + and average home + prices nationwide climbed, rising + in eight years by one + +On line 289: + prices nationwide climbed, + rising in eight years by one + measure and hitting + +On line 289: + rising in eight years + by one measure and hitting + a national high + +On line 289: + years by one measure + and hitting a national + high of in early + +On line 289: + by one measure and + hitting a national high + of in early Home + +On line 289: + measure and hitting + a national high of in + early Home prices in + +On line 289: + early Home prices in + many areas skyrocketed: + prices increased nearly + +On line 289: + prices in many areas + skyrocketed: prices increased + nearly two and one-half + +On line 289: + skyrocketed: prices + increased nearly two and one-half + times in Sacramento, + +On line 289: + increased nearly two + and one-half times in Sacramento, + for example, in + +On line 289: + two and one-half times in + Sacramento, for example, + in just five years,12 and + +On line 289: + times in Sacramento, + for example, in just five + years,12 and shot up by + +On line 289: + in Sacramento, for + example, in just five years,12 + and shot up by about + +On line 289: + example, in just + five years,12 and shot up by about + the same percentage + +On line 289: + up by about the same + percentage in Bakersfield, + Miami, and Key + +On line 289: + the same percentage + in Bakersfield, Miami, + and Key West. Prices about + +On line 289: + Prices about doubled in + more than metropolitan + areas, including + +On line 289: + Poughkeepsie, San Diego, + and West Palm Beach.13 Housing starts + nationwide climbed from + +On line 289: + San Diego, and West Palm + Beach.13 Housing starts nationwide + climbed from million in + +On line 289: + Diego, and West Palm Beach.13 + Housing starts nationwide climbed + from million in to + +On line 291: + reached a record in the + spring of although it wouldn’t + rise an inch further + +On line 291: + a record in the spring + of although it wouldn’t rise + an inch further even + +On line 291: + record in the spring of + although it wouldn’t rise an + inch further even as + +On line 291: + spring of although it + wouldn’t rise an inch further + even as the mortgage + +On line 291: + although it wouldn’t + rise an inch further even as + the mortgage machine + +On line 291: + wouldn’t rise an inch + further even as the mortgage + machine kept churning + +On line 291: + further even as the + mortgage machine kept churning + for another three + +On line 291: + machine kept churning + for another three years. By + refinancing their + +On line 293: + their homes, Americans + extracted trillion in home + equity between + +On line 293: + equity between + and including billion in + alone, more than seven + +On line 293: + including billion + in alone, more than seven times + the amount they took out + +On line 293: + billion in alone, more + than seven times the amount they + took out in Real + +On line 293: + speculators and + potential homeowners stood + in line outside new + +On line 293: + stood in line outside + new subdivisions for a + chance to buy houses + +On line 293: + new subdivisions + for a chance to buy houses + before the ground had + +On line 293: + for a chance to buy + houses before the ground had + even been broken. By + +On line 293: + chance to buy houses + before the ground had even been + broken. By the first + +On line 293: + buy houses before + the ground had even been broken. + By the first half of + +On line 293: + houses before the + ground had even been broken. By + the first half of more + +On line 293: + before the ground had + even been broken. By the first + half of more than one + +On line 293: + the ground had even been + broken. By the first half of + more than one out of + +On line 293: + had even been broken. + By the first half of more than + one out of every + +On line 293: + even been broken. By + the first half of more than one + out of every ten + +On line 293: + been broken. By the + first half of more than one out + of every ten home + +On line 293: + broken. By the first + half of more than one out of + every ten home sales + +On line 293: + By the first half of + more than one out of every + ten home sales was to + +On line 293: + the first half of more + than one out of every ten + home sales was to an + +On line 293: + half of more than one + out of every ten home sales + was to an investor, + +On line 293: + out of every ten + home sales was to an investor, + speculator, or + +On line 293: + ten home sales was to + an investor, speculator, + or someone buying + +On line 293: + home sales was to an + investor, speculator, or + someone buying a + +On line 293: + was to an investor, + speculator, or someone + buying a second + +On line 293: + or someone buying + a second home.15 Bigger was + better, and even the + +On line 293: + Bigger was better, + and even the structures themselves + ballooned in size; the + +On line 293: + was better, and even + the structures themselves ballooned + in size; the floor area + +On line 293: + better, and even the + structures themselves ballooned in + size; the floor area of + +On line 293: + the structures themselves + ballooned in size; the floor area + of an average + +On line 293: + ballooned in size; the + floor area of an average + new home grew by to + +On line 293: + in size; the floor area + of an average new home + grew by to square feet, + +On line 293: + size; the floor area of + an average new home grew + by to square feet, in + +On line 293: + the floor area of an + average new home grew by + to square feet, in the + +On line 293: + of an average + new home grew by to square feet, + in the decade from to + +On line 295: + average new home + grew by to square feet, in the + decade from to Money + +On line 295: + new home grew by to + square feet, in the decade from to + Money washed through the + +On line 295: + by to square feet, in + the decade from to Money washed + through the economy + +On line 295: + to square feet, in the + decade from to Money washed through + the economy like + +On line 295: + decade from to Money + washed through the economy like + water rushing through + +On line 297: + through a broken dam. + Low interest rates and then + foreign capital + +On line 297: + Low interest rates + and then foreign capital + helped fuel the boom. + +On line 297: + helped fuel the boom. + Construction workers, landscape + architects, real + +On line 297: + the boom. Construction + workers, landscape architects, + real estate agents, + +On line 297: + real estate agents, + loan brokers, and appraisers + profited on Main + +On line 297: + profited on Main + Street, while investment bankers and + traders on Wall Street moved + +On line 297: + Street, while investment + bankers and traders on Wall Street moved + even higher on the + +On line 297: + bankers and traders on Wall + Street moved even higher on the + American earnings + +On line 297: + on Wall Street moved even + higher on the American + earnings pyramid and + +On line 297: + Street moved even higher + on the American earnings + pyramid and the share + +On line 297: + even higher on the + American earnings pyramid + and the share prices of + +On line 297: + American earnings + pyramid and the share prices of + the most aggressive + +On line 297: + pyramid and the share + prices of the most aggressive + financial service + +On line 297: + firms reached all-time + highs.16 Homeowners pulled cash out + of their homes to send + +On line 297: + reached all-time highs.16 + Homeowners pulled cash out of + their homes to send their + +On line 297: + highs.16 Homeowners pulled + cash out of their homes to send + their kids to college, + +On line 297: + Homeowners pulled cash + out of their homes to send their + kids to college, pay + +On line 297: + cash out of their homes + to send their kids to college, + pay medical bills, + +On line 297: + to send their kids to + college, pay medical bills, + install designer + +On line 297: + their kids to college, + pay medical bills, install + designer kitchens with + +On line 297: + pay medical bills, + install designer kitchens with + granite counters, take + +On line 297: + install designer + kitchens with granite counters, take + vacations, or launch + +On line 297: + vacations, or launch + new businesses. They also + paid off credit cards, + +On line 297: + new businesses. They + also paid off credit cards, + even as personal + +On line 297: + as personal debt + rose nationally. Survey + evidence shows that + +On line 297: + rose nationally. + Survey evidence shows that + about of homeowners + +On line 297: + Survey evidence + shows that about of homeowners + pulled out cash to buy + +On line 297: + homeowners pulled out + cash to buy a vehicle + and over spent the cash + +On line 297: + pulled out cash to buy + a vehicle and over spent + the cash on a catch-all + +On line 297: + buy a vehicle + and over spent the cash on a + catch-all category + +On line 297: + the cash on a catch-all + category including + tax payments, clothing, + +On line 297: + tax payments, clothing, + gifts, and living expenses.17 + Renters used new forms of + +On line 297: + payments, clothing, gifts, + and living expenses.17 Renters + used new forms of loans + +On line 297: + living expenses.17 + Renters used new forms of loans to + buy homes and to move + +On line 297: + homes and to move to + suburban subdivisions, + erect-ing swing sets in + +On line 297: + move to suburban + subdivisions, erect-ing swing + sets in their backyards + +On line 297: + erect-ing swing sets in + their backyards and enrolling their + children in local + +On line 299: + sets in their backyards + and enrolling their children in + local schools. In an + +On line 299: + backyards and enrolling + their children in local schools. + In an interview + +On line 299: + an interview with + the Commission, Angelo + Mozilo, the longtime + +On line 299: + the longtime CEO of + Countrywide Financial—a lender + brought down by its risky + +On line 299: + CEO of Countrywide + Financial—a lender brought down by + its risky mortgages—said + +On line 301: + lender brought down by its + risky mortgages—said that a "gold + rush" mentality + +On line 301: + risky mortgages—said that + a "gold rush" mentality + overtook the country + +On line 301: + rush" mentality + overtook the country during + these years, and that he + +On line 301: + overtook the country + during these years, and that he + was swept up in it + +On line 301: + the country during + these years, and that he was swept + up in it as well: + +On line 301: + during these years, and + that he was swept up in it + as well: "Housing prices + +On line 301: + and that he was swept + up in it as well: "Housing + prices were rising so + +On line 301: + he was swept up in + it as well: "Housing prices were + rising so rapidly—at + +On line 301: + swept up in it as + well: "Housing prices were rising + so rapidly—at a rate + +On line 301: + up in it as well: + "Housing prices were rising so + rapidly—at a rate that + +On line 301: + as well: "Housing prices + were rising so rapidly—at a + rate that I’d never + +On line 301: + well: "Housing prices were + rising so rapidly—at a rate + that I’d never seen + +On line 301: + rising so rapidly—at + a rate that I’d never seen + in my years in the + +On line 301: + so rapidly—at a rate + that I’d never seen in my + years in the business—that + +On line 301: + that I’d never seen + in my years in the business—that + people, regular + +On line 301: + never seen in my + years in the business—that people, + regular people, + +On line 301: + in my years in the + business—that people, regular + people, average + +On line 301: + years in the business—that + people, regular people, + average people + +On line 301: + people, regular + people, average people + got caught up in the + +On line 301: + regular people, + average people got caught + up in the mania + +On line 301: + people, average + people got caught up in the + mania of buying + +On line 301: + average people + got caught up in the mania + of buying a house, + +On line 301: + people got caught up + in the mania of buying + a house, and flipping + +On line 301: + in the mania of + buying a house, and flipping + it, making money. + +On line 301: + buying a house, and + flipping it, making money. + It was happening. + +On line 303: + a house, and flipping + it, making money. It was + happening. They buy + +On line 303: + flipping it, making + money. It was happening. + They buy a house, make + +On line 303: + it, making money. + It was happening. They buy + a house, make and talk + +On line 303: + making money. It + was happening. They buy a + house, make and talk at + +On line 303: + was happening. They + buy a house, make and talk at + a cocktail party + +On line 303: + happening. They buy + a house, make and talk at a + cocktail party about + +On line 303: + house, make and talk at + a cocktail party about it. + Housing suddenly + +On line 303: + a cocktail party + about it. Housing suddenly + went from being part + +On line 303: + cocktail party about + it. Housing suddenly went + from being part of + +On line 303: + Housing suddenly + went from being part of the + American dream to + +On line 303: + went from being part + of the American dream to + house my family + +On line 303: + from being part of + the American dream to house + my family to + +On line 303: + of the American + dream to house my family + to settle down—it + +On line 303: + house my family + to settle down—it became + a commodity. + +On line 303: + my family to + settle down—it became a + commodity. That + +On line 303: + to settle down—it + became a commodity. + That was a change in + +On line 303: + down—it became a + commodity. That was a + change in the culture. + +On line 305: + That was a change in + the culture. It was sudden, + unexpected."18 On + +On line 305: + in the culture. It + was sudden, unexpected."18 + On the surface, it + +On line 305: + the culture. It was + sudden, unexpected."18 On + the surface, it looked + +On line 305: + into investments + called securities, which kept + cash flowing from Wall + +On line 305: + called securities, + which kept cash flowing from Wall + Street into the U.S. + +On line 305: + which kept cash flowing + from Wall Street into the U.S. + housing market—were tools + +On line 305: + cash flowing from Wall + Street into the U.S. housing + market—were tools that had + +On line 305: + from Wall Street into + the U.S. housing market—were tools + that had worked well for + +On line 305: + Wall Street into the + U.S. housing market—were tools that + had worked well for many + +On line 305: + Street into the U.S. + housing market—were tools that had + worked well for many years. + +On line 307: + U.S. housing market—were + tools that had worked well for many + years. But underneath, + +On line 307: + tools that had worked well + for many years. But underneath, + something was going + +On line 307: + had worked well for many + years. But underneath, something + was going wrong. Like + +On line 307: + worked well for many years. + But underneath, something was + going wrong. Like a + +On line 307: + years. But underneath, + something was going wrong. Like + a science fiction + +On line 307: + going wrong. Like a + science fiction movie in which + ordinary household + +On line 307: + science fiction movie + in which ordinary household + objects turn hostile, + +On line 307: + in which ordinary + household objects turn hostile, + familiar market + +On line 307: + were being transformed. + The time-tested 30-year fixed-rate mortgage, + with a down payment, + +On line 307: + being transformed. The + time-tested 30-year fixed-rate mortgage, with + a down payment, went + +On line 307: + transformed. The time-tested + 30-year fixed-rate mortgage, with a down + payment, went out of + +On line 307: + The time-tested 30-year fixed-rate + mortgage, with a down payment, + went out of style. There + +On line 307: + mortgage, with a down + payment, went out of style. There + was a burgeoning + +On line 307: + with a down payment, + went out of style. There was a + burgeoning global + +On line 307: + payment, went out of + style. There was a burgeoning + global demand for + +On line 307: + of style. There was a + burgeoning global demand + for residential + +On line 307: + global demand for + residential mortgage–backed + securities that + +On line 307: + securities that + offered seemingly solid + and secure returns. + +On line 307: + offered seemingly + solid and secure returns. + Investors around the world + +On line 307: + seemingly solid + and secure returns. Investors + around the world clamored + +On line 307: + solid and secure + returns. Investors around the world + clamored to purchase + +On line 307: + returns. Investors around + the world clamored to purchase + securities built + +On line 307: + around the world clamored + to purchase securities + built on American + +On line 307: + built on American + real estate, seemingly + one of the safest bets + +On line 307: + American real + estate, seemingly one of + the safest bets in the + +On line 309: + estate, seemingly + one of the safest bets in the + world. Wall Street labored + +On line 309: + one of the safest bets + in the world. Wall Street labored + mightily to meet + +On line 309: + safest bets in the world. + Wall Street labored mightily + to meet that demand. + +On line 309: + bets in the world. Wall + Street labored mightily to + meet that demand. Bond + +On line 309: + demand. Bond salesmen + earned multi-million-dollar + bonuses packaging + +On line 309: + bonuses packaging + and selling new kinds of loans, + offered by new kinds + +On line 309: + and selling new kinds + of loans, offered by new kinds + of lenders, into new + +On line 309: + selling new kinds of + loans, offered by new kinds of + lenders, into new kinds + +On line 309: + of loans, offered by + new kinds of lenders, into new + kinds of investment + +On line 309: + offered by new kinds + of lenders, into new kinds of + investment products + +On line 309: + of lenders, into new + kinds of investment products + that were deemed safe but + +On line 309: + into new kinds of + investment products that were + deemed safe but possessed + +On line 309: + kinds of investment + products that were deemed safe but + possessed complex and + +On line 309: + investment products + that were deemed safe but possessed + complex and hidden + +On line 309: + but possessed complex + and hidden risks. Federal + officials praised the + +On line 309: + changes—these financial + innovations, they said, had + lowered borrowing + +On line 309: + innovations, they + said, had lowered borrowing + costs for consumers and + +On line 309: + they said, had lowered + borrowing costs for consumers + and moved risks away from + +On line 309: + lowered borrowing + costs for consumers and moved risks + away from the biggest + +On line 309: + borrowing costs for + consumers and moved risks away from + the biggest and most + +On line 309: + consumers and moved risks + away from the biggest and most + systemically + +On line 309: + in ways that were not + understood by either the + captains of finance + +On line 309: + either the captains + of finance or the system’s + public stewards. In + +On line 309: + of finance or the + system’s public stewards. In + fact, some of the largest + +On line 309: + the system’s public + stewards. In fact, some of the + largest institutions + +On line 309: + stewards. In fact, some + of the largest institutions + had taken on what + +On line 309: + fact, some of the largest + institutions had taken + on what would prove to + +On line 309: + on what would prove to + be debilitating risks. + Trillions of dollars + +On line 309: + debilitating + risks. Trillions of dollars had + been wagered on the + +On line 309: + had been wagered on + the belief that housing prices + would always rise and + +On line 309: + been wagered on the + belief that housing prices would + always rise and that + +On line 309: + on the belief that + housing prices would always rise + and that borrowers + +On line 309: + would always rise and + that borrowers would seldom + default on mortgages, + +On line 309: + that borrowers would + seldom default on mortgages, + even as their debt grew. + +On line 309: + would seldom default + on mortgages, even as their debt + grew. Shaky loans had been + +On line 309: + as their debt grew. Shaky + loans had been bundled into + investment products + +On line 309: + grew. Shaky loans had been + bundled into investment + products in ways that + +On line 309: + loans had been bundled + into investment products + in ways that seemed to + +On line 309: + into investment + products in ways that seemed to + give investors the best + +On line 309: + products in ways that + seemed to give investors the best + of both worlds—high-yield, + +On line 309: + in ways that seemed to + give investors the best of both + worlds—high-yield, risk-free—but + +On line 309: + seemed to give investors + the best of both worlds—high-yield, + risk-free—but instead, in + +On line 309: + worlds—high-yield, risk-free—but + instead, in many cases, would + prove to be high-risk + +On line 309: + risk-free—but instead, in + many cases, would prove to be + high-risk and yield-free. + +On line 311: + many cases, would prove + to be high-risk and yield-free. + All this financial + +On line 311: + to be high-risk and + yield-free. All this financial + creativity was + +On line 311: + and yield-free. All this + financial creativity + was a lot "like cheap + +On line 311: + All this financial + creativity was a lot + "like cheap sangria," said + +On line 311: + Mayo, a managing + director and financial + services analyst + +On line 311: + financial services + analyst at Calyon + Securities (USA) + +On line 311: + repackaged to sell at + a premium," he told the + Commission. "It might + +On line 311: + at a premium," + he told the Commission. "It + might taste good for a + +On line 311: + a premium," he + told the Commission. "It might + taste good for a while, + +On line 311: + premium," he told + the Commission. "It might taste + good for a while, but + +On line 311: + told the Commission. + "It might taste good for a while, + but then you get headaches + +On line 311: + Commission. "It might + taste good for a while, but then + you get headaches later + +On line 311: + "It might taste good for + a while, but then you get headaches + later and you have + +On line 311: + taste good for a while, + but then you get headaches later + and you have no idea + +On line 311: + good for a while, but + then you get headaches later and + you have no idea what’s + +On line 311: + while, but then you get + headaches later and you have no + idea what’s really + +On line 313: + really inside."19 + The securitization + machine began to + +On line 313: + began to guzzle + these once-rare mortgage products + with their strange-sounding + +On line 313: + these once-rare mortgage + products with their strange-sounding + names: Alt-A, subprime, I-O + +On line 313: + strange-sounding names: Alt-A, + subprime, I-O (interest-only), + low-doc, no-doc, or + +On line 313: + I-O (interest-only), + low-doc, no-doc, or ninja + (no income, no job, + +On line 313: + low-doc, no-doc, or + ninja (no income, no job, + no assets) loans; 2–28s + +On line 313: + (no income, no job, + no assets) loans; 2–28s and 3–27s; + liar loans; piggyback + +On line 313: + 2–28s and 3–27s; liar loans; + piggyback second mortgages; + payment-option or + +On line 313: + piggyback second + mortgages; payment-option or + pick-a-pay adjustable + +On line 313: + pick-a-pay adjustable + rate mortgages. New variants on + adjustable-rate mortgages, called + +On line 313: + variants on adjustable-rate + mortgages, called "exploding" ARMs, + featured low monthly + +On line 313: + on adjustable-rate mortgages, + called "exploding" ARMs, featured + low monthly costs at + +On line 313: + adjustable-rate mortgages, called + "exploding" ARMs, featured low + monthly costs at first, + +On line 313: + called "exploding" ARMs, + featured low monthly costs at + first, but payments could + +On line 313: + featured low monthly + costs at first, but payments could + suddenly double + +On line 313: + monthly costs at first, + but payments could suddenly + double or triple, if + +On line 313: + at first, but payments + could suddenly double or + triple, if borrowers + +On line 313: + first, but payments could + suddenly double or triple, + if borrowers were + +On line 313: + double or triple, if + borrowers were unable to + refinance. Loans with + +On line 313: + triple, if borrowers + were unable to refinance. + Loans with negative + +On line 313: + of different kinds + of mortgages available on the + market, confounding + +On line 313: + of mortgages available + on the market, confounding + consumers who didn’t + +On line 313: + examine the fine + print, baffling conscientious + borrowers who tried + +On line 313: + the fine print, baffling + conscientious borrowers + who tried to puzzle + +On line 313: + who tried to puzzle + out their implications, and + opening the door for + +On line 313: + to puzzle out their + implications, and opening + the door for those who + +On line 313: + their implications, + and opening the door for those + who wanted in on + +On line 313: + implications, and + opening the door for those who + wanted in on the + +On line 315: + opening the door for + those who wanted in on the + action. Many people + +On line 315: + who wanted in on + the action. Many people chose + poorly. Some people + +On line 315: + in on the action. + Many people chose poorly. Some + people wanted to + +On line 315: + people chose poorly. + Some people wanted to live + beyond their means, and + +On line 315: + people wanted to + live beyond their means, and by + mid-2005, nearly one-quarter + +On line 315: + live beyond their means, + and by mid-2005, nearly one-quarter + of all borrowers + +On line 315: + of all borrowers + nationwide were taking out + interest-only loans + +On line 315: + them to defer the + payment of principal.20 Some + borrowers opted + +On line 315: + nontraditional + mortgages because that was the + only way they could + +On line 315: + because that was the + only way they could get a + foothold in areas such + +On line 315: + that was the only + way they could get a foothold in + areas such as the + +On line 315: + way they could get a + foothold in areas such as the + sky-high California + +On line 315: + foothold in areas such + as the sky-high California + housing market.21 Some + +On line 315: + and Georgia became + a particular target + for investors who used + +On line 315: + Georgia became a + particular target for + investors who used these + +On line 315: + a particular + target for investors who used + these loans to acquire + +On line 315: + target for investors + who used these loans to acquire + real estate.22 Some + +On line 315: + to acquire real + estate.22 Some were misled by + salespeople who came + +On line 315: + real estate.22 Some + were misled by salespeople + who came to their homes + +On line 315: + Some were misled by + salespeople who came to their + homes and persuaded + +On line 315: + who came to their homes + and persuaded them to sign + loan documents on + +On line 315: + came to their homes and + persuaded them to sign loan + documents on their + +On line 315: + homes and persuaded + them to sign loan documents + on their kitchen tables. + +On line 315: + and persuaded them + to sign loan documents on + their kitchen tables. Some + +On line 315: + their kitchen tables. Some + borrowers naively trusted + mortgage brokers who + +On line 315: + mortgage brokers who + earned more money placing them + in risky loans than in + +On line 315: + brokers who earned more + money placing them in risky + loans than in safe ones.23 + +On line 315: + who earned more money + placing them in risky loans than + in safe ones.23 With these + +On line 315: + money placing them + in risky loans than in safe ones.23 + With these loans, buyers + +On line 315: + placing them in risky + loans than in safe ones.23 With these + loans, buyers were able + +On line 315: + in risky loans than in + safe ones.23 With these loans, buyers + were able to bid up + +On line 315: + risky loans than in safe + ones.23 With these loans, buyers were + able to bid up the + +On line 315: + loans than in safe ones.23 + With these loans, buyers were able + to bid up the prices + +On line 315: + than in safe ones.23 With + these loans, buyers were able to + bid up the prices of + +On line 315: + safe ones.23 With these loans, + buyers were able to bid up + the prices of houses + +On line 315: + With these loans, buyers + were able to bid up the prices + of houses even if + +On line 315: + these loans, buyers were + able to bid up the prices of + houses even if they + +On line 315: + buyers were able to + bid up the prices of houses + even if they didn’t + +On line 315: + were able to bid up + the prices of houses even if + they didn’t have enough + +On line 315: + bid up the prices of + houses even if they didn’t + have enough income to + +On line 315: + of houses even if + they didn’t have enough income + to qualify for + +On line 315: + if they didn’t have + enough income to qualify + for traditional + +On line 315: + they didn’t have enough + income to qualify for + traditional loans. + +On line 317: + to qualify for + traditional loans. Some of + these exotic loans + +On line 317: + for traditional + loans. Some of these exotic + loans had existed + +On line 317: + traditional loans. + Some of these exotic loans + had existed in + +On line 317: + these exotic loans + had existed in the past, + used by high-income, + +On line 317: + in the past, used by + high-income, financially + secure people as + +On line 317: + secure people as + a cash-management tool. Some + had been targeted + +On line 317: + a cash-management + tool. Some had been targeted + to borrowers with + +On line 317: + had been targeted + to borrowers with impaired + credit, offering + +On line 317: + they refinanced. But + the instruments began to + deluge the larger + +On line 317: + larger market in + and The changed occurred "almost + overnight," Faith Schwartz, then an + +On line 317: + and The changed occurred + "almost overnight," Faith Schwartz, then an + executive at + +On line 317: + an executive + at the subprime lender Option + One and later the + +On line 317: + lender Option One and + later the executive + director of Hope + +On line 317: + "I would suggest most + every lender in the country + is in it, one way + +On line 317: + most every lender in + the country is in it, one + way or another."24 + +On line 319: + every lender in the + country is in it, one way + or another."24 At + +On line 319: + the country is in + it, one way or another."24 + At first not a lot + +On line 319: + country is in it, + one way or another."24 At + first not a lot of + +On line 319: + is in it, one way + or another."24 At first not + a lot of people + +On line 319: + a lot of people + really understood the + potential hazards + +On line 319: + people really + understood the potential + hazards of these new + +On line 319: + potential hazards + of these new loans. They were new, + they were different, + +On line 319: + of these new loans. They + were new, they were different, + and the consequences + +On line 319: + these new loans. They were + new, they were different, and + the consequences were + +On line 319: + different, and the + consequences were uncertain. + But it soon became + +On line 319: + and the consequences + were uncertain. But it soon + became apparent + +On line 319: + were uncertain. But + it soon became apparent + that what had looked like + +On line 319: + But it soon became + apparent that what had looked + like newfound wealth was + +On line 319: + became apparent + that what had looked like newfound + wealth was a mirage + +On line 319: + apparent that what + had looked like newfound wealth was + a mirage based on + +On line 319: + the United States climbed + from trillion in to trillion + in The mortgage debt + +On line 319: + United States climbed from + trillion in to trillion in + The mortgage debt of + +On line 319: + climbed from trillion in + to trillion in The mortgage + debt of American + +On line 319: + to trillion in The + mortgage debt of American + households rose almost + +On line 319: + in The mortgage debt + of American households rose + almost as much in + +On line 319: + debt of American + households rose almost as much + in the six years from + +On line 319: + American households + rose almost as much in the + six years from to as + +On line 319: + households rose almost + as much in the six years from + to as it had over + +On line 319: + rose almost as much + in the six years from to as + it had over the course + +On line 319: + almost as much in + the six years from to as it + had over the course of + +On line 319: + much in the six years + from to as it had over the + course of the country’s + +On line 319: + in the six years from + to as it had over the course + of the country’s more + +On line 319: + the six years from to + as it had over the course of + the country’s more than + +On line 319: + six years from to as + it had over the course of the + country’s more than 200-year + +On line 319: + to as it had over + the course of the country’s more + than 200-year history. + +On line 319: + as it had over the + course of the country’s more than + 200-year history. The + +On line 319: + it had over the course + of the country’s more than 200-year + history. The amount + +On line 319: + course of the country’s + more than 200-year history. The + amount of mortgage debt + +On line 319: + of the country’s more + than 200-year history. The amount + of mortgage debt per + +On line 319: + than 200-year history. + The amount of mortgage debt per + household rose from in + +On line 319: + history. The amount + of mortgage debt per household + rose from in to in + +On line 319: + amount of mortgage debt + per household rose from in to + in With a simple + +On line 319: + per household rose from + in to in With a simple + flourish of a pen + +On line 319: + rose from in to in + With a simple flourish of + a pen on paper, + +On line 319: + in to in With a + simple flourish of a pen + on paper, millions + +On line 319: + on paper, millions + of Americans traded away + decades of equity + +On line 319: + paper, millions of + Americans traded away decades + of equity tucked + +On line 321: + traded away decades of + equity tucked away in their + homes. Under the radar, + +On line 321: + decades of equity + tucked away in their homes. Under + the radar, the lending + +On line 321: + of equity tucked + away in their homes. Under the + radar, the lending and + +On line 321: + equity tucked away + in their homes. Under the radar, + the lending and the + +On line 321: + tucked away in their homes. + Under the radar, the lending + and the financial + +On line 321: + in their homes. Under + the radar, the lending and the + financial services + +On line 321: + Under the radar, the + lending and the financial + services industry + +On line 321: + financial services + industry had mutated. + In the past, lenders had + +On line 321: + mutated. In the + past, lenders had avoided making + unsound loans because + +On line 321: + In the past, lenders had + avoided making unsound loans + because they would be + +On line 321: + past, lenders had avoided + making unsound loans because + they would be stuck with + +On line 321: + had avoided making + unsound loans because they would + be stuck with them in + +On line 321: + unsound loans because + they would be stuck with them in + their loan portfolios. + +On line 321: + they would be stuck with + them in their loan portfolios. + But because of the + +On line 321: + would be stuck with them + in their loan portfolios. But + because of the growth + +On line 321: + because of the growth + of securitization, + it wasn’t even clear + +On line 321: + clear anymore who the + lender was. The mortgages would be + packaged, sliced, repackaged, + +On line 321: + who the lender was. The + mortgages would be packaged, sliced, + repackaged, insured, and + +On line 321: + lender was. The mortgages + would be packaged, sliced, repackaged, + insured, and sold as + +On line 321: + securities to + an assortment of hungry + investors. Now even the + +On line 321: + to an assortment + of hungry investors. Now even + the worst loans could find + +On line 321: + an assortment of + hungry investors. Now even the + worst loans could find a + +On line 323: + of hungry investors. + Now even the worst loans could find + a buyer. More loan + +On line 323: + hungry investors. Now + even the worst loans could find a + buyer. More loan sales + +On line 323: + even the worst loans could + find a buyer. More loan sales + meant higher profits + +On line 323: + the worst loans could find + a buyer. More loan sales meant + higher profits for + +On line 323: + find a buyer. More + loan sales meant higher profits + for everyone in + +On line 323: + a buyer. More loan + sales meant higher profits for + everyone in the + +On line 323: + loan sales meant higher + profits for everyone in + the chain. Business boomed + +On line 323: + that were expanding + mortgage originations. He + crisscrossed the nation, + +On line 323: + expanding mortgage + originations. He crisscrossed + the nation, coaching + +On line 325: + originators a + year in auditoriums + and classrooms. is clients + +On line 325: + and classrooms. is clients + included many of the largest + lenders—Countrywide, Ameriquest, and Ditech among + +On line 325: + is clients included + many of the largest lenders—Countrywide, Ameriquest, and + Ditech among them. Most of + +On line 325: + clients included many + of the largest lenders—Countrywide, Ameriquest, and Ditech + among them. Most of their + +On line 325: + included many of + the largest lenders—Countrywide, Ameriquest, and Ditech among + them. Most of their new + +On line 325: + many of the largest lenders—Countrywide, + Ameriquest, and Ditech among them. Most of + their new hires were young, + +On line 325: + of the largest lenders—Countrywide, Ameriquest, + and Ditech among them. Most of their + new hires were young, with + +On line 325: + the largest lenders—Countrywide, Ameriquest, and + Ditech among them. Most of their new + hires were young, with no + +On line 325: + lenders—Countrywide, Ameriquest, and Ditech among + them. Most of their new hires were + young, with no mortgage + +On line 325: + them. Most of their new + hires were young, with no mortgage + experience, fresh + +On line 325: + new hires were young, with + no mortgage experience, + fresh out of school and + +On line 325: + hires were young, with no + mortgage experience, fresh + out of school and with + +On line 325: + fresh out of school and + with previous jobs "flipping + burgers," he told the + +On line 327: + and with previous + jobs "flipping burgers," he told + the FCIC. Given the + +On line 327: + with previous jobs + "flipping burgers," he told the + FCIC. Given the right + +On line 327: + "flipping burgers," he + told the FCIC. Given the right + training, however, + +On line 327: + burgers," he told the + FCIC. Given the right training, + however, the best + +On line 327: + told the FCIC. Given + the right training, however, + the best of them could + +On line 329: + however, the best + of them could "easily" earn + millions.26 "I was a + +On line 329: + could "easily" earn + millions.26 "I was a sales and + marketing trainer + +On line 329: + millions.26 "I was a + sales and marketing trainer + in terms of helping + +On line 329: + "I was a sales and + marketing trainer in terms + of helping people + +On line 329: + sales and marketing + trainer in terms of helping + people to know how + +On line 329: + marketing trainer + in terms of helping people + to know how to sell + +On line 329: + trainer in terms of + helping people to know how + to sell these products + +On line 329: + in terms of helping + people to know how to sell + these products to, in + +On line 329: + helping people to + know how to sell these products + to, in some cases, + +On line 329: + to, in some cases, + frankly unsophisticated + and unsuspecting + +On line 329: + and unsuspecting + borrowers," he said. He taught + them the new playbook: + +On line 329: + playbook: "You had no + incentive whatsoever + to be concerned about + +On line 329: + to be concerned about + the quality of the loan, + whether it was suitable + +On line 329: + be concerned about the + quality of the loan, whether + it was suitable for + +On line 329: + the quality of + the loan, whether it was suitable + for the borrower + +On line 329: + quality of the + loan, whether it was suitable for + the borrower or + +On line 329: + whether it was suitable + for the borrower or whether + the loan performed. In + +On line 329: + it was suitable for + the borrower or whether the + loan performed. In fact, + +On line 329: + was suitable for the + borrower or whether the loan + performed. In fact, you + +On line 329: + for the borrower + or whether the loan performed. In + fact, you were in a + +On line 329: + the borrower or + whether the loan performed. In fact, + you were in a way + +On line 329: + whether the loan performed. + In fact, you were in a way + encouraged not to + +On line 329: + performed. In fact, you + were in a way encouraged + not to worry about + +On line 329: + In fact, you were in + a way encouraged not to + worry about those macro + +On line 329: + you were in a way + encouraged not to worry + about those macro issues." + +On line 329: + a way encouraged + not to worry about those macro + issues." He added, "I + +On line 329: + encouraged not to + worry about those macro issues." + He added, "I knew that + +On line 329: + not to worry about + those macro issues." He added, "I + knew that the risk was + +On line 329: + worry about those macro + issues." He added, "I knew that + the risk was being + +On line 329: + about those macro issues." + He added, "I knew that the risk + was being shunted + +On line 329: + those macro issues." He + added, "I knew that the risk was + being shunted off. + +On line 329: + issues." He added, "I + knew that the risk was being + shunted off. I knew + +On line 329: + He added, "I knew that + the risk was being shunted + off. I knew that we + +On line 329: + added, "I knew that the + risk was being shunted off. + I knew that we could + +On line 329: + "I knew that the risk + was being shunted off. I + knew that we could be + +On line 329: + the risk was being + shunted off. I knew that we + could be writing crap. + +On line 329: + was being shunted + off. I knew that we could be + writing crap. But in + +On line 329: + shunted off. I knew + that we could be writing crap. + But in the end it + +On line 329: + off. I knew that we + could be writing crap. But in + the end it was like + +On line 329: + I knew that we could + be writing crap. But in the + end it was like a + +On line 329: + knew that we could be + writing crap. But in the end + it was like a game + +On line 329: + be writing crap. But + in the end it was like a + game of musical + +On line 329: + writing crap. But in + the end it was like a game + of musical chairs. + +On line 329: + in the end it was + like a game of musical + chairs. Volume might go + +On line 329: + the end it was like + a game of musical chairs. + Volume might go down + +On line 329: + it was like a game + of musical chairs. Volume + might go down but we + +On line 329: + was like a game of + musical chairs. Volume might + go down but we were + +On line 329: + game of musical + chairs. Volume might go down but + we were not going + +On line 329: + of musical chairs. + Volume might go down but we + were not going to + +On line 331: + chairs. Volume might go + down but we were not going + to be hurt."27 On Wall + +On line 331: + Volume might go down + but we were not going to + be hurt."27 On Wall Street, + +On line 331: + might go down but we + were not going to be hurt."27 + On Wall Street, where many + +On line 331: + go down but we were + not going to be hurt."27 On + Wall Street, where many of + +On line 331: + down but we were not + going to be hurt."27 On Wall + Street, where many of these + +On line 331: + we were not going + to be hurt."27 On Wall Street, where + many of these loans were + +On line 331: + not going to be + hurt."27 On Wall Street, where many of + these loans were packaged + +On line 331: + Wall Street, where many of + these loans were packaged into + securities and + +On line 331: + these loans were packaged + into securities and + sold to investors around + +On line 331: + were packaged into + securities and sold to + investors around the globe, + +On line 331: + securities and + sold to investors around the globe, + a new term was coined: + +On line 331: + and sold to investors + around the globe, a new term was + coined: IBGYBG, "I’ll + +On line 331: + sold to investors around + the globe, a new term was coined: + IBGYBG, "I’ll be + +On line 331: + around the globe, a new + term was coined: IBGYBG, "I’ll + be gone, you’ll be gone."28 + +On line 331: + the globe, a new term + was coined: IBGYBG, "I’ll be + gone, you’ll be gone."28 It + +On line 331: + a new term was coined: + IBGYBG, "I’ll be gone, you’ll + be gone."28 It referred + +On line 331: + was coined: IBGYBG, + "I’ll be gone, you’ll be gone."28 It + referred to deals that + +On line 331: + IBGYBG, "I’ll be + gone, you’ll be gone."28 It referred + to deals that brought in + +On line 331: + "I’ll be gone, you’ll be + gone."28 It referred to deals that + brought in big fees up + +On line 331: + be gone, you’ll be gone."28 + It referred to deals that brought + in big fees up front + +On line 331: + gone, you’ll be gone."28 It + referred to deals that brought in + big fees up front while + +On line 331: + be gone."28 It referred + to deals that brought in big fees + up front while risking + +On line 331: + gone."28 It referred to + deals that brought in big fees up + front while risking much + +On line 331: + referred to deals that + brought in big fees up front while + risking much larger + +On line 331: + to deals that brought in + big fees up front while risking + much larger losses + +On line 331: + deals that brought in big + fees up front while risking much + larger losses in + +On line 331: + big fees up front while + risking much larger losses + in the future. And, + +On line 331: + up front while risking + much larger losses in the + future. And, for a + +On line 331: + much larger losses + in the future. And, for a + long time, IBGYBG + +On line 331: + larger losses in + the future. And, for a long + time, IBGYBG worked + +On line 331: + the future. And, for + a long time, IBGYBG worked + at every level. + +On line 333: + future. And, for a + long time, IBGYBG worked at + every level. Most + +On line 333: + And, for a long time, + IBGYBG worked at every + level. Most home loans + +On line 333: + long time, IBGYBG + worked at every level. Most + home loans entered the + +On line 333: + IBGYBG worked at + every level. Most home loans + entered the pipeline + +On line 333: + entered the pipeline + soon after borrowers signed + the documents and + +On line 333: + after borrowers + signed the documents and picked + up their keys. Loans were + +On line 333: + signed the documents + and picked up their keys. Loans were + put into packages + +On line 333: + the documents and + picked up their keys. Loans were put + into packages and + +On line 333: + and picked up their keys. + Loans were put into packages + and sold off in bulk + +On line 333: + picked up their keys. Loans + were put into packages and + sold off in bulk to + +On line 333: + banks such as Merrill + Lynch, Bear Stearns, and Lehman Brothers, + and commercial banks + +On line 333: + such as Merrill Lynch, + Bear Stearns, and Lehman Brothers, and + commercial banks and + +On line 333: + Lynch, Bear Stearns, and Lehman + Brothers, and commercial banks + and thrifts such as Citibank, + +On line 333: + and Lehman Brothers, and + commercial banks and thrifts such + as Citibank, Wells Fargo, + +On line 333: + and thrifts such as Citibank, + Wells Fargo, and Washington + Mutual. The firms + +On line 333: + as Citibank, Wells Fargo, + and Washington Mutual. + The firms would package + +On line 333: + Citibank, Wells Fargo, and + Washington Mutual. The + firms would package the + +On line 333: + mostly be stamped with + triple-A ratings by the credit + rating agencies, and + +On line 333: + with triple-A ratings by + the credit rating agencies, + and sold to investors. + +On line 333: + triple-A ratings by the + credit rating agencies, and + sold to investors. In + +On line 333: + the credit rating + agencies, and sold to investors. + In many cases, the + +On line 333: + agencies, and sold to + investors. In many cases, the + securities were + +On line 333: + riskier portions of + these securities—which would then + be sold to other + +On line 333: + these securities—which + would then be sold to other + investors. Most of these + +On line 333: + would then be sold to + other investors. Most of these + securities would + +On line 333: + to other investors. + Most of these securities + would also receive + +On line 333: + other investors. Most + of these securities would + also receive the + +On line 333: + would also receive + the coveted triple-A ratings + that investors believed + +On line 333: + the coveted triple-A + ratings that investors believed + attested to their + +On line 333: + attested to their + quality and safety. Some + investors would buy an + +On line 333: + to their quality + and safety. Some investors would + buy an invention + +On line 333: + their quality and + safety. Some investors would buy + an invention from + +On line 333: + investors would buy an + invention from the 1990s called + a credit default + +On line 333: + buy an invention + from the 1990s called a credit + default swap (CDS) to + +On line 333: + invention from the + 1990s called a credit default + swap (CDS) to protect + +On line 333: + to protect against the + securities’ defaulting. + For every buyer + +On line 333: + For every buyer + of a credit default swap, + there was a seller: + +On line 333: + every buyer of + a credit default swap, there + was a seller: as + +On line 333: + default swap, there was + a seller: as these investors + made opposing bets, + +On line 333: + was a seller: as + these investors made opposing + bets, the layers of + +On line 333: + as these investors made + opposing bets, the layers + of entanglement + +On line 335: + The instruments grew + more and more complex; CDOs were + constructed out of + +On line 335: + more and more complex; + CDOs were constructed out of + CDOs, creating CDOs + +On line 335: + and more complex; CDOs + were constructed out of CDOs, + creating CDOs squared. + +On line 335: + CDOs were constructed + out of CDOs, creating CDOs + squared. When firms ran out + +On line 335: + were constructed out + of CDOs, creating CDOs squared. + When firms ran out of + +On line 335: + of CDOs, creating + CDOs squared. When firms ran out of + real product, they + +On line 335: + creating CDOs squared. + When firms ran out of real + product, they started + +On line 335: + but just of bets on + other mortgage products. Each + new permutation + +On line 335: + to extract more fees + and trading profits. And each + new layer brought in + +On line 335: + extract more fees and + trading profits. And each new + layer brought in more + +On line 335: + more fees and trading + profits. And each new layer + brought in more investors + +On line 335: + trading profits. And + each new layer brought in more + investors wagering + +On line 335: + profits. And each new + layer brought in more investors + wagering on the + +On line 335: + new layer brought in + more investors wagering on + the mortgage market—even + +On line 335: + layer brought in more + investors wagering on the + mortgage market—even well + +On line 335: + brought in more investors + wagering on the mortgage + market—even well after + +On line 335: + investors wagering + on the mortgage market—even well + after the market + +On line 335: + the mortgage market—even + well after the market had + started to turn. So + +On line 335: + market—even well after + the market had started to + turn. So by the time + +On line 335: + after the market + had started to turn. So by + the time the process was + +On line 335: + market had started + to turn. So by the time the + process was complete, a + +On line 335: + had started to turn. + So by the time the process was + complete, a mortgage + +On line 335: + to turn. So by the + time the process was complete, a + mortgage on a home + +On line 335: + So by the time the + process was complete, a mortgage + on a home in south + +On line 335: + the process was complete, + a mortgage on a home in + south Florida might + +On line 335: + a mortgage on a + home in south Florida might + become part of dozens + +On line 335: + in south Florida + might become part of dozens of + securities owned + +On line 335: + securities owned + by hundreds of investors—or + parts of bets being + +On line 335: + Treasury Secretary + Timothy Geithner, + the president of + +On line 335: + Geithner, the + president of the New York + Federal Reserve + +On line 335: + crisis, described the + resulting product as "cooked + spaghetti" that became + +On line 335: + resulting product + as "cooked spaghetti" that became + hard to "untangle."29 + +On line 337: + hard to "untangle."29 + Ralph Cioffi spent several + years creating CDOs + +On line 337: + to "untangle."29 Ralph + Cioffi spent several years + creating CDOs for + +On line 337: + spent several years + creating CDOs for Bear Stearns + and a couple of + +On line 337: + years creating CDOs + for Bear Stearns and a couple + of more years on the + +On line 337: + CDOs for Bear Stearns and + a couple of more years on + the repurchase or + +On line 337: + and a couple of + more years on the repurchase + or "repo" desk, which + +On line 337: + a couple of more + years on the repurchase or + "repo" desk, which was + +On line 337: + responsible for + borrowing money every + night to finance Bear + +On line 337: + Cioffi created + a hedge fund within Bear Stearns + with a minimum + +On line 337: + within Bear Stearns with + a minimum investment + of million. As was + +On line 337: + with a minimum + investment of million. As + was common, he used + +On line 337: + money—up to borrowed + for every from investors—to buy + CDOs. Cioffi’s first fund + +On line 337: + CDOs. Cioffi’s first fund + was extremely successful; + it earned for investors + +On line 337: + Cioffi’s first fund was + extremely successful; it + earned for investors in + +On line 337: + for investors in and + in 2005—after the annual + management fee and + +On line 337: + in and in 2005—after + the annual management + fee and the slice of + +On line 337: + and in 2005—after the + annual management fee + and the slice of the + +On line 337: + management fee and + the slice of the profit for + Cioffi and his Bear + +On line 337: + fee and the slice of + the profit for Cioffi and + his Bear Stearns team—and + +On line 337: + and the slice of the + profit for Cioffi and his + Bear Stearns team—and grew + +On line 337: + profit for Cioffi + and his Bear Stearns team—and grew + to almost billion + +On line 337: + Cioffi and his Bear + Stearns team—and grew to almost + billion by the end + +On line 337: + his Bear Stearns team—and + grew to almost billion by + the end of In the + +On line 337: + Bear Stearns team—and grew + to almost billion by the + end of In the fall + +On line 337: + Stearns team—and grew to + almost billion by the end + of In the fall of + +On line 337: + to almost billion + by the end of In the fall + of he created + +On line 337: + of In the fall of + he created another, + more aggressive fund. + +On line 337: + In the fall of he + created another, more + aggressive fund. This + +On line 337: + of he created + another, more aggressive + fund. This one would shoot + +On line 337: + more aggressive fund. + This one would shoot for leverage + of up to to By + +On line 337: + aggressive fund. This + one would shoot for leverage of + up to to By the + +On line 337: + fund. This one would shoot + for leverage of up to to + By the end of the + +On line 337: + This one would shoot for + leverage of up to to By + the end of the two + +On line 337: + would shoot for leverage + of up to to By the end + of the two hedge funds + +On line 337: + shoot for leverage of + up to to By the end of + the two hedge funds had + +On line 337: + leverage of up to + to By the end of the two + hedge funds had billion + +On line 337: + up to to By the + end of the two hedge funds had + billion invested, + +On line 337: + to By the end of + the two hedge funds had billion + invested, half in + +On line 337: + of the two hedge funds + had billion invested, half + in securities + +On line 337: + in securities + issued by CDOs centered on + housing. As a CDO + +On line 337: + housing. As a CDO + manager, Cioffi also + managed another + +On line 339: + mortgage-related CDOs + for other investors. Cioffi’s + investors and others + +On line 341: + and others like them + wanted high-yielding mortgage + securities. That, + +On line 341: + high-yielding mortgage + securities. That, in turn, + required high-yielding + +On line 341: + required high-yielding + mortgages. An advertising + barrage bombarded + +On line 341: + borrowers, urging + them to buy or refinance + homes. Direct-mail + +On line 341: + homes. Direct-mail + solicita-tions flooded + people’s mailboxes.30 + +On line 341: + people’s mailboxes.30 + Dancing figures, depicting + happy homeowners, + +On line 341: + mailboxes.30 Dancing + figures, depicting happy + homeowners, boogied + +On line 341: + hook with calls from loan + officers offering the + latest loan products: + +On line 341: + from loan officers + offering the latest loan + products: One percent + +On line 341: + latest loan products: + One percent loan! (But only + for the first year.) No + +On line 341: + products: One percent + loan! (But only for the first + year.) No money down! + +On line 341: + One percent loan! (But + only for the first year.) No + money down! (Leaving + +On line 341: + only for the first + year.) No money down! (Leaving + no equity if + +On line 341: + first year.) No money + down! (Leaving no equity + if home prices fell.) No + +On line 341: + if home prices fell.) No + income documentation + needed! (Mortgages soon + +On line 341: + prices fell.) No income + documentation needed! + (Mortgages soon dubbed "liar + +On line 341: + industry itself.) + Borrowers answered the call, + many believing that + +On line 341: + Borrowers answered + the call, many believing that + with ever-rising prices, + +On line 341: + many believing that + with ever-rising prices, housing + was the investment + +On line 341: + believing that with + ever-rising prices, housing was + the investment that + +On line 343: + with ever-rising prices, + housing was the investment + that couldn’t lose. In + +On line 343: + prices, housing was the + investment that couldn’t lose. + In Washington, four + +On line 343: + the investment that + couldn’t lose. In Washington, + four intermingled + +On line 343: + lose. In Washington, + four intermingled issues + came into play that + +On line 343: + In Washington, four + intermingled issues came + into play that made + +On line 343: + four intermingled + issues came into play that + made it difficult + +On line 343: + issues came into + play that made it difficult + to acknowledge the + +On line 343: + made it difficult + to acknowledge the looming + threats. First, efforts to + +On line 343: + it difficult to + acknowledge the looming threats. + First, efforts to boost + +On line 343: + to acknowledge the + looming threats. First, efforts to + boost homeownership + +On line 343: + broad political + support—from Presidents Bill + Clinton and George W. + +On line 343: + Bush and successive + Congresses—even though in + reality the + +On line 343: + Congresses—even + though in reality the + homeownership rate + +On line 343: + in reality + the homeownership rate had + peaked in the spring of + +On line 343: + the homeownership + rate had peaked in the spring of + Second, the real + +On line 343: + the spring of Second, + the real estate boom was + generating a + +On line 343: + the real estate + boom was generating a + lot of cash on Wall + +On line 343: + real estate boom + was generating a lot + of cash on Wall Street + +On line 343: + was generating + a lot of cash on Wall Street + and creating a + +On line 343: + generating a + lot of cash on Wall Street and + creating a lot + +On line 343: + a lot of cash on + Wall Street and creating a + lot of jobs in the + +On line 343: + of cash on Wall Street + and creating a lot of + jobs in the housing + +On line 343: + and creating a + lot of jobs in the housing + industry at a + +On line 343: + lot of jobs in the + housing industry at a + time when performance + +On line 343: + housing industry + at a time when performance + in other sectors + +On line 343: + believed that even if + the housing market tanked, the + broader financial + +On line 345: + would hold up. As the + mortgage market began its + transformation in + +On line 345: + the late 1990s, consumer + advocates and front-line + local government + +On line 345: + front-line local + government officials were + among the first to spot + +On line 345: + among the first to spot + the changes: homeowners began + streaming into their + +On line 345: + first to spot the changes: + homeowners began streaming + into their offices + +On line 345: + the changes: homeowners + began streaming into their + offices to seek help + +On line 345: + into their offices + to seek help in dealing with + mortgages they could not + +On line 345: + their offices to seek + help in dealing with mortgages + they could not afford + +On line 345: + offices to seek help + in dealing with mortgages they + could not afford to + +On line 345: + help in dealing with + mortgages they could not afford + to pay. They began + +On line 345: + dealing with mortgages + they could not afford to pay. + They began raising + +On line 345: + mortgages they could not + afford to pay. They began + raising the issue + +On line 345: + they could not afford + to pay. They began raising + the issue with the + +On line 345: + afford to pay. They + began raising the issue + with the Federal + +On line 345: + to pay. They began + raising the issue with the + Federal Reserve + +On line 345: + began raising the + issue with the Federal + Reserve and other + +On line 345: + raising the issue + with the Federal Reserve + and other banking + +On line 345: + with the Federal + Reserve and other banking + regulators.31 Bob + +On line 345: + general counsel + and policy director + of the Greenlining + +On line 345: + director of the + Greenlining Institute, a + California-based + +On line 345: + California-based + nonprofit housing group, told + the Commission that + +On line 345: + nonprofit housing + group, told the Commission that + he began meeting + +On line 345: + housing group, told the + Commission that he began + meeting with Greenspan at + +On line 345: + told the Commission + that he began meeting with + Greenspan at least once a + +On line 345: + the Commission that + he began meeting with Greenspan + at least once a year + +On line 345: + he began meeting + with Greenspan at least once a year + starting in each time + +On line 345: + meeting with Greenspan at + least once a year starting in + each time highlighting + +On line 345: + with Greenspan at least once + a year starting in each time + highlighting to him + +On line 345: + year starting in each + time highlighting to him the + growth of predatory + +On line 345: + time highlighting to + him the growth of predatory + lending practices and + +On line 345: + to him the growth of + predatory lending practices + and discussing with him + +On line 345: + growth of predatory + lending practices and discussing + with him the social + +On line 347: + with him the social + and economic problems they + were creating.32 One + +On line 347: + him the social and + economic problems they were + creating.32 One of + +On line 347: + economic problems + they were creating.32 One of + the first places to see + +On line 347: + were creating.32 One + of the first places to see the + bad lending practices + +On line 347: + places to see the bad + lending practices envelop + an entire market + +On line 347: + an entire market + was Cleveland, Ohio. From to home + prices in Cleveland rose + +On line 347: + Ohio. From to home prices + in Cleveland rose climbing from + a median of + +On line 347: + From to home prices in + Cleveland rose climbing from a + median of to + +On line 347: + prices in Cleveland rose + climbing from a median + of to while home prices + +On line 347: + rose climbing from a + median of to while home + prices nationally + +On line 349: + median of to + while home prices nationally + rose about in those same + +On line 349: + of to while home prices + nationally rose about in + those same years; at the + +On line 349: + prices nationally + rose about in those same years; at + the same time, the city’s + +On line 349: + rose about in those same + years; at the same time, the city’s + unemployment rate, + +On line 349: + same years; at the same + time, the city’s unemployment + rate, ranging rom in + +On line 349: + years; at the same time, + the city’s unemployment rate, + ranging rom in to + +On line 349: + the same time, the city’s + unemployment rate, ranging + rom in to in more + +On line 349: + city’s unemployment + rate, ranging rom in to in + more or less tracked the + +On line 349: + rate, ranging rom in + to in more or less tracked the + broader U.S. pattern. + +On line 351: + rom in to in more + or less tracked the broader U.S. + pattern. James Rokakis, the + +On line 351: + to in more or less + tracked the broader U.S. pattern. + James Rokakis, the longtime + +On line 351: + more or less tracked the + broader U.S. pattern. James Rokakis, + the longtime county + +On line 351: + tracked the broader U.S. + pattern. James Rokakis, the longtime + county treasurer + +On line 351: + pattern. James Rokakis, the + longtime county treasurer + of Cuyahoga County, + +On line 351: + of Cuyahoga County, + where Cleveland is located, + told the Commission + +On line 351: + Cuyahoga County, where + Cleveland is located, told + the Commission that + +On line 351: + located, told the + Commission that the region’s + housing market was + +On line 351: + the Commission that + the region’s housing market + was juiced by "flipping + +On line 351: + Commission that the + region’s housing market was + juiced by "flipping on + +On line 351: + the region’s housing + market was juiced by "flipping + on mega-steroids," with rings + +On line 351: + housing market was + juiced by "flipping on mega-steroids," + with rings of real + +On line 351: + market was juiced by + "flipping on mega-steroids," with rings + of real estate + +On line 351: + "flipping on mega-steroids," + with rings of real estate + agents, appraisers, and + +On line 351: + with rings of real + estate agents, appraisers, and + loan originators + +On line 351: + appraisers, and loan + originators earning fees + on each transaction + +On line 351: + earning fees on each + transaction and feeding the + securitized loans + +On line 353: + each transaction and + feeding the securitized + loans to Wall Street. City + +On line 353: + Street. City officials + began to hear reports that + these activities + +On line 353: + hear reports that these + activities were being + propelled by new kinds + +On line 353: + propelled by new kinds + of nontraditional loans + that enabled investors + +On line 353: + nontraditional + loans that enabled investors to + buy properties with + +On line 353: + enabled investors to + buy properties with little + or no money down + +On line 353: + buy properties with + little or no money down + and gave homeowners + +On line 353: + money down and gave + homeowners the ability + to refinance their + +On line 353: + to refinance their + houses, regardless of whether + they could afford to + +On line 353: + regardless of whether + they could afford to repay + the loans. Foreclosures + +On line 353: + they could afford to + repay the loans. Foreclosures + shot up in Cuyahoga + +On line 353: + afford to repay + the loans. Foreclosures shot up + in Cuyahoga County + +On line 353: + the loans. Foreclosures + shot up in Cuyahoga County + from a year in to + +On line 353: + loans. Foreclosures shot + up in Cuyahoga County from + a year in to a + +On line 353: + Foreclosures shot up + in Cuyahoga County from a + year in to a year + +On line 353: + shot up in Cuyahoga + County from a year in to + a year in Rokakis and + +On line 353: + in Cuyahoga County + from a year in to a year + in Rokakis and other + +On line 353: + from a year in to + a year in Rokakis and other + public officials + +On line 353: + year in to a year + in Rokakis and other public + officials watched as + +On line 353: + a year in Rokakis and + other public officials + watched as families + +On line 353: + in Rokakis and other + public officials watched as + families who had + +On line 353: + as families who + had lived for years in modest + residences lost their + +On line 353: + who had lived for years + in modest residences lost + their homes. After they + +On line 353: + had lived for years in + modest residences lost their + homes. After they were + +On line 353: + After they were gone, + many homes were ultimately + abandoned, vandalized, + +On line 353: + they were gone, many homes + were ultimately abandoned, + vandalized, and then + +On line 353: + were ultimately + abandoned, vandalized, and then + stripped bare, as scavengers + +On line 353: + abandoned, vandalized, + and then stripped bare, as scavengers + ripped away their copper + +On line 353: + vandalized, and then + stripped bare, as scavengers ripped away + their copper pipes and + +On line 353: + stripped bare, as scavengers + ripped away their copper pipes and + aluminum siding to + +On line 353: + as scavengers ripped away + their copper pipes and aluminum + siding to sell for + +On line 355: + siding to sell for + scrap. "Securitization + was one of the most + +On line 355: + brilliant financial + innovations of the 20th + century," Rokakis told + +On line 355: + innovations of + the 20th century," Rokakis told + the Commission. "It + +On line 355: + the 20th century," + Rokakis told the Commission. "It + freed up a lot of + +On line 355: + Commission. "It freed + up a lot of capital. + If it had been done + +On line 355: + freed up a lot of + capital. If it had been + done responsibly, + +On line 355: + capital. If it + had been done responsibly, + it would have been a + +On line 355: + If it had been done + responsibly, it would have + been a wondrous thing + +On line 355: + done responsibly, + it would have been a wondrous + thing because nothing + +On line 355: + responsibly, it + would have been a wondrous thing + because nothing is + +On line 355: + it would have been a + wondrous thing because nothing + is more stable, there’s + +On line 355: + have been a wondrous + thing because nothing is more + stable, there’s nothing + +On line 355: + wondrous thing because + nothing is more stable, there’s + nothing safer, than the + +On line 355: + because nothing is + more stable, there’s nothing safer, + than the American + +On line 357: + nothing safer, than the + American mortgage market. + It worked for years. But + +On line 357: + than the American + mortgage market. It worked for + years. But then people + +On line 357: + mortgage market. It + worked for years. But then people + realized they could + +On line 359: + worked for years. But then + people realized they could + scam it."34 Officials + +On line 359: + scam it."34 Officials + in Cleveland and other Ohio + cities reached out to the + +On line 359: + and other Ohio cities + reached out to the federal + government for help. + +On line 359: + Ohio cities reached out to + the federal government + for help. They asked the + +On line 359: + for help. They asked the + Federal Reserve, the one + entity with the + +On line 359: + Federal Reserve, + the one entity with the + authority to + +On line 359: + risky lending practices + by all mortgage lenders, to use + the power it had + +On line 359: + lending practices by + all mortgage lenders, to use the + power it had been + +On line 359: + all mortgage lenders, to + use the power it had been + granted in under + +On line 359: + use the power it + had been granted in under + the Home Ownership + +On line 359: + the power it had + been granted in under the + Home Ownership and + +On line 359: + in under the Home + Ownership and Equity + Protection Act (HOEPA) + +On line 359: + the Home Ownership + and Equity Protection + Act (HOEPA) to issue + +On line 359: + Home Ownership and + Equity Protection Act + (HOEPA) to issue new + +On line 359: + Act (HOEPA) to issue + new mortgage lending rules. In + March Fed Governor + +On line 359: + new mortgage lending + rules. In March Fed Governor + Edward Gramlich, an + +On line 359: + Governor Edward + Gramlich, an advocate for + expanding access + +On line 359: + Edward Gramlich, an + advocate for expanding + access to credit + +On line 359: + access to credit + but only with safeguards in + place, attended a + +On line 359: + with safeguards in place, + attended a conference + on the topic in + +On line 359: + place, attended a + conference on the topic + in Cleveland. He spoke + +On line 359: + conference on the + topic in Cleveland. He spoke + about the Fed’s power + +On line 359: + on the topic in + Cleveland. He spoke about the Fed’s + power under HOEPA, + +On line 359: + topic in Cleveland. + He spoke about the Fed’s power + under HOEPA, declared + +On line 359: + in Cleveland. He spoke + about the Fed’s power under + HOEPA, declared some of + +On line 359: + Cleveland. He spoke about + the Fed’s power under HOEPA, + declared some of the + +On line 359: + He spoke about the Fed’s + power under HOEPA, declared + some of the lending + +On line 359: + about the Fed’s power + under HOEPA, declared some of + the lending practices + +On line 359: + HOEPA, declared some of + the lending practices to be + "clearly illegal," + +On line 359: + the lending practices + to be "clearly illegal," + and said they could be + +On line 361: + illegal," and said + they could be "combated with + legal enforcement + +On line 363: + enforcement measures."35 + Looking back, Rokakis remarked to + the Commission, "I + +On line 363: + back, Rokakis remarked to + the Commission, "I naively + believed they’d go back + +On line 363: + to the Commission, + "I naively believed they’d go + back and tell Mr. Greenspan + +On line 363: + the Commission, "I + naively believed they’d go back + and tell Mr. Greenspan and + +On line 363: + "I naively believed + they’d go back and tell Mr. Greenspan + and presto, we’d have some + +On line 363: + naively believed they’d + go back and tell Mr. Greenspan and + presto, we’d have some new + +On line 363: + believed they’d go back + and tell Mr. Greenspan and presto, we’d + have some new rules. I + +On line 363: + they’d go back and tell + Mr. Greenspan and presto, we’d have some + new rules. I thought it + +On line 363: + go back and tell Mr. + Greenspan and presto, we’d have some new + rules. I thought it would + +On line 363: + and tell Mr. Greenspan and + presto, we’d have some new rules. I + thought it would result + +On line 363: + tell Mr. Greenspan and presto, + we’d have some new rules. I thought + it would result in + +On line 363: + Greenspan and presto, we’d have + some new rules. I thought it would + result in action + +On line 363: + presto, we’d have some new + rules. I thought it would result + in action being + +On line 363: + some new rules. I thought + it would result in action + being taken. It + +On line 363: + rules. I thought it would + result in action being + taken. It was kind + +On line 363: + thought it would result + in action being taken. + It was kind of quaint."36 + +On line 365: + it would result in + action being taken. It + was kind of quaint."36 In + +On line 365: + in action being + taken. It was kind of quaint."36 + In when Cleveland was + +On line 365: + taken. It was kind + of quaint."36 In when Cleveland was + looking for help from + +On line 365: + kind of quaint."36 In when + Cleveland was looking for help + from the federal + +On line 365: + Cleveland was looking + for help from the federal + government, other + +On line 365: + looking for help from + the federal government, + other cities around the + +On line 365: + around the country were + doing the same. John Taylor, + the president of + +On line 365: + were doing the same. + John Taylor, the president + of the National + +On line 365: + president of the + National Community + Reinvestment Coalition, + +On line 365: + of community + leaders from Nevada, Michigan, + Maryland, Delaware, + +On line 365: + leaders from Nevada, + Michigan, Maryland, Delaware, + Chicago, Vermont, North + +On line 365: + Delaware, Chicago, + Vermont, North Carolina, New + Jersey, and Ohio, went + +On line 365: + New Jersey, and Ohio, + went to the Office of Thrift + Supervision (OTS), + +On line 365: + went to the Office + of Thrift Supervision (OTS), + which regulated + +On line 365: + loan institutions, + asking the agency to crack + down on what they called + +On line 365: + asking the agency + to crack down on what they called + "exploitative" practices + +On line 365: + agency to crack down + on what they called "exploitative" + practices they believed + +On line 365: + to crack down on what + they called "exploitative" practices + they believed were putting + +On line 365: + crack down on what they + called "exploitative" practices they + believed were putting both + +On line 365: + they called "exploitative" + practices they believed were putting + both borrowers and + +On line 367: + believed were putting both + borrowers and lenders at risk.37 + The California + +On line 367: + borrowers and lenders + at risk.37 The California + Reinvestment Coalition, + +On line 367: + group based in Northern + California, also begged + regulators to + +On line 367: + begged regulators + to act, CRC officials told + the Commission. The + +On line 367: + officials told the + Commission. The nonprofit + group had reviewed the + +On line 367: + and discovered that + many individuals were + being placed into + +On line 367: + into high-cost + loans when they qualified for + better mortgages and + +On line 367: + high-cost loans when + they qualified for better + mortgages and that many + +On line 367: + when they qualified + for better mortgages and that + many had been misled + +On line 367: + they qualified for + better mortgages and that many + had been misled about + +On line 367: + for better mortgages + and that many had been misled + about the terms of their + +On line 367: + better mortgages and + that many had been misled about + the terms of their loans.38 + +On line 371: + mortgages and that many + had been misled about the terms + of their loans.38 There were + +On line 371: + had been misled about + the terms of their loans.38 There were + government reports, + +On line 371: + the terms of their loans.38 + There were government reports, + too. The Department + +On line 371: + terms of their loans.38 There + were government reports, too. + The Department of + +On line 371: + Treasury Department + issued a joint report on + predatory lending + +On line 371: + a joint report on + predatory lending in June + that made a number + +On line 371: + that made a number + of recommendations for + reducing the risks + +On line 371: + to borrowers.39 In + December the Federal + Reserve Board used the + +On line 371: + In December the + Federal Reserve Board used + the HOEPA law to amend + +On line 371: + Federal Reserve + Board used the HOEPA law to amend + some regulations; + +On line 371: + Board used the HOEPA law + to amend some regulations; + among the changes were new + +On line 371: + used the HOEPA law to + amend some regulations; among + the changes were new rules + +On line 371: + the HOEPA law to amend + some regulations; among the + changes were new rules aimed + +On line 371: + HOEPA law to amend some + regulations; among the changes + were new rules aimed at + +On line 371: + refinancings over + a short period of time, + if they were not in + +On line 371: + a short period + of time, if they were not in + the borrower’s best + +On line 371: + of time, if they were + not in the borrower’s best + interest.40 As it + +On line 371: + they were not in the + borrower’s best interest.40 + As it would turn out, + +On line 371: + the borrower’s best + interest.40 As it would turn + out, those rules covered + +On line 371: + interest.40 As it + would turn out, those rules covered + only of subprime + +On line 371: + would turn out, those rules + covered only of subprime + loans. FDIC Chairman Sheila + +On line 371: + out, those rules covered + only of subprime loans. FDIC + Chairman Sheila C. Bair, + +On line 371: + rules covered only + of subprime loans. FDIC Chairman + Sheila C. Bair, then an + +On line 371: + only of subprime + loans. FDIC Chairman Sheila C. Bair, + then an assistant + +On line 371: + of subprime loans. FDIC + Chairman Sheila C. Bair, then an + assistant treasury + +On line 371: + loans. FDIC Chairman Sheila + C. Bair, then an assistant + treasury secretary + +On line 371: + Chairman Sheila C. Bair, + then an assistant treasury + secretary in the + +On line 371: + then an assistant + treasury secretary in the + administration + +On line 371: + treasury secretary + in the administration + of President George + +On line 371: + administration + of President George W. Bush, + characterized the + +On line 371: + of President George + W. Bush, characterized the + action to the FCIC + +On line 371: + Bush, characterized + the action to the FCIC as + addressing only + +On line 371: + the action to the + FCIC as addressing only + a "narrow range of + +On line 371: + FCIC as addressing + only a "narrow range of + predatory lending + +On line 371: + only a "narrow + range of predatory lending + issues."41 In Gramlich + +On line 371: + a "narrow range of + predatory lending issues."41 + In Gramlich noted + +On line 371: + predatory lending + issues."41 In Gramlich noted + again the "increasing + +On line 371: + issues."41 In Gramlich + noted again the "increasing + reports of abusive, + +On line 371: + "increasing reports + of abusive, unethical + and in some cases, + +On line 371: + reports of abusive, + unethical and in some + cases, illegal, + +On line 373: + unethical and + in some cases, illegal, + lending practices."42 Bair + +On line 373: + cases, illegal, + lending practices."42 Bair told the + Commission that this + +On line 373: + lending practices."42 Bair + told the Commission that this + was when "really + +On line 373: + practices."42 Bair told the + Commission that this was when + "really poorly + +On line 373: + Commission that this + was when "really poorly + underwritten loans, + +On line 373: + was when "really + poorly underwritten loans, + the payment shock loans" + +On line 373: + on traditional + banks to follow suit.43 She said + that she and Gramlich + +On line 373: + banks to follow suit.43 + She said that she and Gramlich + considered seeking + +On line 373: + She said that she and + Gramlich considered seeking + rules to rein in the + +On line 373: + that she and Gramlich + considered seeking rules to + rein in the growth of + +On line 373: + Gramlich considered + seeking rules to rein in the + growth of these kinds of + +On line 373: + considered seeking + rules to rein in the growth of + these kinds of loans, but + +On line 373: + seeking rules to rein + in the growth of these kinds of + loans, but Gramlich told + +On line 373: + rules to rein in the + growth of these kinds of loans, but + Gramlich told her that + +On line 373: + rein in the growth of + these kinds of loans, but Gramlich + told her that he thought + +On line 373: + in the growth of these + kinds of loans, but Gramlich told + her that he thought the + +On line 373: + the growth of these kinds + of loans, but Gramlich told her + that he thought the Fed, + +On line 373: + of these kinds of loans, + but Gramlich told her that he + thought the Fed, despite + +On line 373: + these kinds of loans, but + Gramlich told her that he thought + the Fed, despite its + +On line 373: + but Gramlich told her + that he thought the Fed, despite + its broad powers in + +On line 373: + Gramlich told her that + he thought the Fed, despite its + broad powers in this + +On line 373: + her that he thought the + Fed, despite its broad powers + in this area, would not + +On line 373: + thought the Fed, despite + its broad powers in this area, + would not support the + +On line 373: + Fed, despite its broad + powers in this area, would not + support the effort. + +On line 373: + its broad powers in + this area, would not support the + effort. Instead, they + +On line 373: + in this area, would not + support the effort. Instead, + they sought voluntary + +On line 373: + area, would not support + the effort. Instead, they sought + voluntary rules for + +On line 373: + support the effort. + Instead, they sought voluntary + rules for lenders, but that + +On line 373: + the effort. Instead, + they sought voluntary rules for + lenders, but that effort + +On line 373: + effort. Instead, they + sought voluntary rules for lenders, + but that effort fell + +On line 373: + they sought voluntary + rules for lenders, but that effort + fell by the wayside + +On line 373: + sought voluntary rules + for lenders, but that effort fell + by the wayside as + +On line 373: + voluntary rules for + lenders, but that effort fell by + the wayside as well.44 + +On line 375: + but that effort fell + by the wayside as well.44 In + an environment + +On line 375: + that effort fell by + the wayside as well.44 In an + environment of + +On line 375: + standards declined. The + companies issuing these + loans made profits that + +On line 375: + issuing these loans + made profits that attracted + envious eyes. New + +On line 375: + these loans made profits + that attracted envious + eyes. New lenders entered + +On line 375: + loans made profits that + attracted envious eyes. + New lenders entered the + +On line 377: + rose sharply. In the top + nonprime lenders originated + billion in loans. Their + +On line 377: + In the top nonprime + lenders originated billion + in loans. Their volume + +On line 377: + the top nonprime lenders + originated billion in + loans. Their volume rose + +On line 377: + lenders originated + billion in loans. Their volume + rose to billion in + +On line 377: + billion in loans. Their + volume rose to billion in + and then billion in + +On line 379: + Their volume rose to + billion in and then billion + in California, + +On line 379: + billion in and then + billion in California, + with its high housing + +On line 379: + in and then billion + in California, with its + high housing costs, was + +On line 379: + and then billion in + California, with its high + housing costs, was a + +On line 379: + in California, + with its high housing costs, was + a particular + +On line 379: + with its high housing + costs, was a particular + hotbed for this kind + +On line 379: + housing costs, was a + particular hotbed for + this kind of lending. + +On line 379: + kind of lending. In + nearly billion, or of all + nontraditional + +On line 379: + nearly billion, or + of all nontraditional + loans nationwide, were + +On line 379: + nationwide, were made + in that state; California’s + share rose to by with + +On line 379: + were made in that state; + California’s share rose to + by with these kinds of + +On line 379: + state; California’s + share rose to by with these kinds + of loans growing to + +On line 379: + share rose to by with + these kinds of loans growing to + billion or by in + +On line 379: + with these kinds of loans + growing to billion or by + in California + +On line 379: + growing to billion + or by in California + in just two years.46 In + +On line 379: + to billion or by + in California in just + two years.46 In those years, + +On line 379: + in California + in just two years.46 In those years, + "subprime and option + +On line 379: + just two years.46 In those + years, "subprime and option ARM + loans saturated + +On line 379: + director of the + California Reinvestment + Coalition, testified + +On line 379: + the Commission. "We + estimated at that time + that the average + +On line 379: + estimated at + that time that the average + subprime borrower + +On line 379: + California was + paying over more per month on + their mortgage payment + +On line 379: + paying over more per + month on their mortgage payment + as a result of + +On line 379: + over more per month on + their mortgage payment as a + result of having + +On line 379: + month on their mortgage + payment as a result of + having received the + +On line 379: + their mortgage payment + as a result of having + received the subprime + +On line 381: + result of having + received the subprime loan."47 Gail + Burks, president and + +On line 381: + received the subprime + loan."47 Gail Burks, president and + CEO of Nevada Fair + +On line 381: + the subprime loan."47 Gail + Burks, president and CEO of + Nevada Fair Housing, + +On line 381: + Nevada Fair Housing, + Inc., a Las Vegas–based + housing clinic, told + +On line 381: + told the Commission + she and other groups took their + concerns directly + +On line 381: + Commission she and + other groups took their concerns + directly to Greenspan + +On line 381: + she and other groups + took their concerns directly + to Greenspan at this time, + +On line 381: + groups took their concerns + directly to Greenspan at this + time, describing to + +On line 381: + directly to Greenspan + at this time, describing to + him in person what + +On line 383: + time, describing to + him in person what she called + the "metamorphosis" + +On line 383: + describing to him + in person what she called the + "metamorphosis" in + +On line 383: + person what she called + the "metamorphosis" in the + lending industry. + +On line 383: + "metamorphosis" in + the lending industry. She + told him that besides + +On line 383: + industry. She told + him that besides predatory + lending practices such + +On line 383: + told him that besides + predatory lending practices + such as flipping loans + +On line 383: + predatory lending + practices such as flipping loans + or misinforming + +On line 383: + such as flipping loans + or misinforming seniors + about reverse mortgages, + +On line 383: + as flipping loans or + misinforming seniors about + reverse mortgages, she + +On line 383: + or misinforming + seniors about reverse mortgages, + she also witnessed + +On line 385: + accounts.48 Lisa Madigan, + the attorney general + in Illinois, also + +On line 385: + in Illinois, also + spotted the emergence of a + troubling trend. She joined + +On line 385: + Consumers complained that + they had been deceived into + taking out loans with + +On line 385: + complained that they had + been deceived into taking + out loans with hefty fees. + +On line 387: + been deceived into + taking out loans with hefty fees. + The company was + +On line 387: + taking out loans with + hefty fees. The company was + then packaging the + +On line 387: + fees. The company + was then packaging the loans + and selling them as + +On line 387: + was then packaging + the loans and selling them as + securities to + +On line 387: + the loans and selling + them as securities to + Lehman Brothers, Madigan + +On line 387: + loans and selling them + as securities to Lehman + Brothers, Madigan said. + +On line 387: + as securities + to Lehman Brothers, Madigan said. + The case was settled + +On line 387: + securities to + Lehman Brothers, Madigan said. The + case was settled in + +On line 387: + Brothers, Madigan said. + The case was settled in and + borrowers received + +On line 387: + The case was settled + in and borrowers received + million. First Alliance + +On line 387: + was settled in and + borrowers received million. + First Alliance went out + +On line 387: + in and borrowers + received million. First Alliance + went out of business. + +On line 387: + received million. First + Alliance went out of business. + But other firms stepped + +On line 387: + First Alliance went out + of business. But other firms + stepped into the void.49 + +On line 389: + Alliance went out of + business. But other firms stepped + into the void.49 State + +On line 389: + out of business. But + other firms stepped into the + void.49 State officials + +On line 389: + business. But other + firms stepped into the void.49 State + officials from around + +On line 389: + to investigate + another fast-growing lender, + California-based + +On line 389: + nation’s largest subprime + lender, originating billion + in subprime loans in + +On line 391: + lender, originating + billion in subprime loans in + 2003—mostly refinances + +On line 391: + billion in subprime + loans in 2003—mostly refinances + that let borrowers + +On line 391: + in subprime loans in + 2003—mostly refinances that let + borrowers take cash + +On line 391: + 2003—mostly refinances + that let borrowers take cash + out of their homes, but + +On line 391: + refinances that let + borrowers take cash out of + their homes, but with hefty + +On line 391: + that let borrowers + take cash out of their homes, but + with hefty fees that ate + +On line 391: + let borrowers take + cash out of their homes, but with + hefty fees that ate away + +On line 391: + borrowers take cash + out of their homes, but with hefty + fees that ate away at + +On line 391: + cash out of their homes, + but with hefty fees that ate away + at their equity.50 + +On line 391: + of their homes, but with + hefty fees that ate away at their + equity.50 Madigan + +On line 391: + but with hefty fees that + ate away at their equity.50 + Madigan testified + +On line 391: + hefty fees that ate away + at their equity.50 Madigan + testified to the + +On line 391: + Ameriquest revealed that the + company engaged in the + kinds of fraudulent + +On line 391: + company engaged + in the kinds of fraudulent + practices that other + +On line 391: + engaged in the kinds + of fraudulent practices that + other predatory + +On line 391: + lenders subsequently + emulated on a wide + scale: inflating home + +On line 391: + emulated on + a wide scale: inflating home + appraisals; increasing + +On line 391: + wide scale: inflating + home appraisals; increasing the + interest rates on + +On line 391: + interest rates on + borrowers’ loans or switching + their loans from fixed to + +On line 391: + borrowers’ loans or + switching their loans from fixed to + adjustable interest + +On line 391: + switching their loans from + fixed to adjustable interest + rates at closing; and + +On line 391: + their loans from fixed to + adjustable interest rates at + closing; and promising + +On line 391: + adjustable interest + rates at closing; and promising + borrowers that they + +On line 391: + rates at closing; and + promising borrowers that they + could refinance their + +On line 391: + promising borrowers + that they could refinance their + costly loans into + +On line 391: + borrowers that they + could refinance their costly + loans into loans with + +On line 391: + they could refinance + their costly loans into loans + with better terms in + +On line 391: + could refinance their + costly loans into loans with + better terms in just + +On line 391: + costly loans into + loans with better terms in just + a few months or a + +On line 391: + loans into loans with + better terms in just a few + months or a year, even + +On line 391: + with better terms in + just a few months or a year, + even when borrowers + +On line 391: + better terms in just + a few months or a year, even + when borrowers had + +On line 391: + just a few months or + a year, even when borrowers + had no equity + +On line 391: + a few months or a + year, even when borrowers had + no equity to + +On line 393: + absorb another + refinance."51 Ed Parker, the + former head of Ameriquest’s + +On line 393: + the Commission that + he detected fraud at the + company within + +On line 393: + he detected fraud + at the company within + one month of starting + +On line 393: + detected fraud at + the company within one + month of starting his + +On line 393: + company within + one month of starting his job + there in January + +On line 393: + month of starting his + job there in January but + senior management + +On line 393: + senior management + did nothing with the reports + he sent. He heard that + +On line 393: + did nothing with the + reports he sent. He heard that + other departments + +On line 393: + reports he sent. He + heard that other departments + were complaining he + +On line 395: + other departments + were complaining he "looked too + much" into the loans. + +On line 395: + were complaining he + "looked too much" into the loans. + In November he + +On line 395: + complaining he "looked + too much" into the loans. In + November he was + +On line 395: + "looked too much" into + the loans. In November he + was downgraded from + +On line 397: + November he was + downgraded from "manager" + to "supervisor," + +On line 399: + from "manager" to + "supervisor," and was laid + off in May In late + +On line 399: + to "supervisor," + and was laid off in May In + late Prentiss Cox, then + +On line 399: + "supervisor," and + was laid off in May In late + Prentiss Cox, then a + +On line 399: + its loans. He received + about boxes of documents. + He pulled one file at + +On line 399: + received about boxes + of documents. He pulled one + file at random, and + +On line 399: + of documents. He + pulled one file at random, and + stared at it. He pulled + +On line 399: + documents. He pulled + one file at random, and stared + at it. He pulled out + +On line 399: + He pulled one file at + random, and stared at it. He + pulled out another + +On line 399: + random, and stared at + it. He pulled out another + and another. He + +On line 399: + pulled out another + and another. He noted + file after file where + +On line 399: + out another and + another. He noted file + after file where the + +On line 399: + and another. He + noted file after file where + the borrowers were + +On line 399: + noted file after + file where the borrowers were + described as "an-tiques + +On line 399: + file after file where + the borrowers were described + as "an-tiques dealers"—in + +On line 399: + after file where the + borrowers were described as + "an-tiques dealers"—in his + +On line 399: + the borrowers were + described as "an-tiques dealers"—in + his view, a blatant + +On line 399: + he recalled in an + interview with the FCIC, a + disabled borrower + +On line 399: + interview with the + FCIC, a disabled borrower + in his 80s who used + +On line 399: + the FCIC, a disabled + borrower in his 80s who + used a walker was + +On line 399: + borrower in his + 80s who used a walker was + described in the loan + +On line 399: + his 80s who used a + walker was described in the + loan application + +On line 399: + walker was described + in the loan application + as being employed + +On line 403: + being employed in + "light construction."53 "It didn’t + take Sherlock Holmes to + +On line 403: + in "light construction."53 + "It didn’t take Sherlock Holmes + to figure out this + +On line 403: + "light construction."53 "It + didn’t take Sherlock Holmes to + figure out this was + +On line 403: + didn’t take Sherlock + Holmes to figure out this was + bogus," Cox told the + +On line 403: + Holmes to figure out + this was bogus," Cox told the + Commission. As he + +On line 403: + out this was bogus," + Cox told the Commission. As + he tried to figure + +On line 403: + this was bogus," Cox + told the Commission. As he + tried to figure out + +On line 403: + was bogus," Cox told + the Commission. As he tried + to figure out why + +On line 403: + bogus," Cox told the + Commission. As he tried to + figure out why Ameriquest + +On line 403: + told the Commission. + As he tried to figure out + why Ameriquest would make such + +On line 403: + figure out why Ameriquest + would make such obviously + fraudulent loans, a + +On line 403: + suggested that he + "look upstream." Cox suddenly + realized that the + +On line 403: + he "look upstream." Cox + suddenly realized that + the lenders were simply + +On line 403: + the lenders were simply + generating product to + ship to Wall Street to + +On line 405: + product to ship to + Wall Street to sell to investors. + "I got that it had + +On line 405: + to ship to Wall Street + to sell to investors. "I got + that it had shifted," + +On line 405: + ship to Wall Street to + sell to investors. "I got that + it had shifted," Cox + +On line 405: + Wall Street to sell to + investors. "I got that it had + shifted," Cox recalled. + +On line 405: + sell to investors. "I + got that it had shifted," Cox + recalled. "The lending + +On line 405: + investors. "I got that + it had shifted," Cox recalled. + "The lending pattern + +On line 407: + "The lending pattern + had shifted."54 Ultimately, + states and the District + +On line 407: + lending pattern had + shifted."54 Ultimately, states + and the District of + +On line 407: + states and the District + of Columbia joined in the + lawsuit against Ameriquest, on + +On line 407: + of Columbia joined + in the lawsuit against Ameriquest, on + behalf of "more than + +On line 407: + joined in the lawsuit + against Ameriquest, on behalf of "more + than borrowers." The + +On line 407: + million settlement. + But during the years when the + investigation + +On line 407: + during the years when + the investigation was + under way, between + +On line 409: + investigation + was under way, between and + Ameriquest originated + +On line 409: + way, between and Ameriquest + originated another + billion in loans,55 which + +On line 409: + Ameriquest originated + another billion in loans,55 + which then flowed to Wall + +On line 411: + investigation, + some federal officials + said they had followed + +On line 411: + they had followed the + case. At the Department of + Housing and Urban + +On line 411: + Housing and Urban + Development, "we began + to get rumors" that + +On line 411: + "we began to get + rumors" that other firms were + "running wild, taking + +On line 411: + rumors" that other + firms were "running wild, taking + applications over + +On line 411: + firms were "running wild, + taking applications over + the Internet, not + +On line 411: + peoples’ income or + their ability to have a + job," recalled Alphonso + +On line 413: + Alphonso Jackson, the + HUD secretary from to in + an interview with + +On line 413: + the HUD secretary + from to in an interview + with the Commission. + +On line 413: + an interview with + the Commission. "Everybody + was making a great + +On line 413: + interview with the + Commission. "Everybody was + making a great deal + +On line 413: + with the Commission. + "Everybody was making a + great deal of money + +On line 413: + great deal of money + and there wasn’t a great deal + of oversight going + +On line 413: + deal of money and + there wasn’t a great deal of + oversight going on." + +On line 413: + and there wasn’t a + great deal of oversight going + on." Although he was + +On line 413: + there wasn’t a great + deal of oversight going on." + Although he was the + +On line 413: + he was the nation’s + top housing official at + the time, he placed much + +On line 413: + was the nation’s top + housing official at the + time, he placed much of + +On line 413: + nation’s top housing + official at the time, he + placed much of the blame + +On line 413: + housing official + at the time, he placed much of + the blame on Congress.56 + +On line 415: + official at the + time, he placed much of the blame + on Congress.56 Cox, the + +On line 415: + time, he placed much of + the blame on Congress.56 Cox, the + former Minnesota + +On line 415: + the blame on Congress.56 + Cox, the former Minnesota + prosecutor, and + +On line 415: + Madigan, the Illinois + attorney general, told + the Commission that + +On line 415: + the single biggest + obstacles to effective + state regulation + +On line 415: + to effective state + regulation of unfair + lending came from the + +On line 415: + chartered banks—including + Bank of America, Citibank, and + Wachovia—and the OTS, + +On line 415: + Bank of America, + Citibank, and Wachovia—and the OTS, + which regulated + +On line 415: + thrifts. The OCC and OTS + issued rules preempting states + from enforcing rules + +On line 415: + states from enforcing + rules against national banks and + thrifts.57 Cox recalled that + +On line 415: + from enforcing rules + against national banks and thrifts.57 + Cox recalled that in + +On line 417: + enforcing rules against + national banks and thrifts.57 Cox + recalled that in Julie + +On line 417: + rules against national + banks and thrifts.57 Cox recalled that + in Julie Williams, the chief + +On line 417: + national banks and + thrifts.57 Cox recalled that in Julie + Williams, the chief counsel + +On line 417: + recalled that in Julie + Williams, the chief counsel of the + OCC, had delivered + +On line 417: + that in Julie Williams, the + chief counsel of the OCC, had + delivered what he + +On line 419: + the chief counsel of + the OCC, had delivered what + he called a "lecture" + +On line 419: + chief counsel of the + OCC, had delivered what he + called a "lecture" to + +On line 419: + counsel of the OCC, + had delivered what he called + a "lecture" to the + +On line 419: + OCC, had delivered + what he called a "lecture" to + the states’ attorneys + +On line 419: + a "lecture" to the + states’ attorneys general, + in a meeting in + +On line 419: + in a meeting in + Washington, warning them that + the OCC would "quash" them + +On line 419: + Washington, warning + them that the OCC would "quash" them + if they persisted + +On line 419: + them that the OCC would + "quash" them if they persisted + in attempting to + +On line 419: + if they persisted + in attempting to control + the consumer practices + +On line 419: + they persisted in + attempting to control the + consumer practices of + +On line 419: + in attempting to + control the consumer practices + of nationally + +On line 421: + institutions.58 Two + former OCC comptrollers, John + Hawke and John Dugan, told + +On line 421: + John Hawke and John Dugan, + told the Commission that they + were defending the + +On line 421: + Commission that they + were defending the agency’s + constitutional + +On line 421: + were defending the + agency’s constitutional + obligation to block + +On line 421: + entities. Because + state-chartered lenders had more lending + problems, they said, the + +On line 421: + Because state-chartered lenders + had more lending problems, they + said, the states should have + +On line 421: + lenders had more lending + problems, they said, the states should + have been focusing + +On line 421: + more lending problems, + they said, the states should have been + focusing there rather + +On line 421: + problems, they said, the + states should have been focusing + there rather than looking + +On line 421: + said, the states should have + been focusing there rather than + looking to involve + +On line 421: + to involve themselves + in federally chartered + institutions, an + +On line 421: + in federally + chartered institutions, an + arena where they had + +On line 421: + told the Commission + that national banks funded + of the largest subprime + +On line 421: + the Commission that + national banks funded of + the largest subprime loan + +On line 421: + of the largest subprime + loan issuers operating + with state charters, and + +On line 421: + the largest subprime loan + issuers operating with + state charters, and that + +On line 421: + operating with + state charters, and that those banks + were the end market + +On line 421: + and that those banks were + the end market for abusive + loans originated + +On line 421: + that those banks were the + end market for abusive loans + originated by + +On line 421: + the end market for + abusive loans originated + by the state-chartered firms. + +On line 421: + by the state-chartered firms. + She noted that the OCC was + "particularly + +On line 421: + in its efforts to + thwart state authority over + national lenders, and + +On line 421: + state authority + over national lenders, and lax + in its efforts to + +On line 421: + over national lenders, + and lax in its efforts to + protect consumers from + +On line 423: + lax in its efforts + to protect consumers from the + coming crisis."60 Many + +On line 423: + to protect consumers + from the coming crisis."60 Many + states nevertheless + +On line 423: + protect consumers from + the coming crisis."60 Many states + nevertheless pushed + +On line 423: + the coming crisis."60 + Many states nevertheless pushed + ahead in enforcing + +On line 423: + coming crisis."60 Many + states nevertheless pushed ahead + in enforcing their + +On line 423: + in enforcing their + own lending regulations, + as did some cities. In + +On line 423: + regulations, as + did some cities. In Charlotte, North + Carolina–based Wachovia + +On line 423: + cities. In Charlotte, North + Carolina–based Wachovia Bank told + state regulators + +On line 423: + Carolina–based Wachovia + Bank told state regulators + that it would not abide + +On line 423: + Wachovia Bank told state + regulators that it would + not abide by state laws, + +On line 423: + state regulators + that it would not abide by state + laws, because it was + +On line 423: + regulators that + it would not abide by state laws, + because it was a + +On line 423: + that it would not abide + by state laws, because it was + a national bank + +On line 423: + it would not abide by + state laws, because it was a + national bank and + +On line 423: + by state laws, because + it was a national bank + and fell under the + +On line 423: + bank and fell under + the supervision of the + OCC. Michigan protested + +On line 423: + the supervision + of the OCC. Michigan protested + Wachovia’s announcement, + +On line 423: + Wachovia’s announcement, + and Wachovia sued Michigan. The + OCC, the American + +On line 423: + Wachovia sued Michigan. + The OCC, the American Bankers + Association, + +On line 423: + and the Mortgage Bankers + Association entered + the fray on Wachovia’s + +On line 423: + Association + entered the fray on Wachovia’s + side; the other states, + +On line 423: + entered the fray on + Wachovia’s side; the other states, + Puerto Rico, and + +On line 423: + on Wachovia’s side; the + other states, Puerto Rico, + and the District of + +On line 423: + and the District of + Columbia aligned themselves with + Michigan. The legal + +On line 423: + themselves with Michigan. + The legal battle lasted + four years. The Supreme Court + +On line 423: + four years. The Supreme Court + ruled in Wachovia’s favor on + April leaving the OCC + +On line 423: + years. The Supreme Court ruled + in Wachovia’s favor on April + leaving the OCC its + +On line 423: + in Wachovia’s favor + on April leaving the OCC its + sole regulator + +On line 423: + Wachovia’s favor on + April leaving the OCC its sole + regulator for + +On line 423: + on April leaving the + OCC its sole regulator + for mortgage lending. + +On line 423: + April leaving the OCC + its sole regulator for + mortgage lending. Cox + +On line 423: + were they negligent, + they were aggressive players + attempting to stop + +On line 423: + attempting to stop + any enforcement action[s]. Those + guys should have been on + +On line 425: + stop any enforcement + action[s]. Those guys should have been + on our side."61 Nonprime + +On line 425: + enforcement action[s]. + Those guys should have been on our + side."61 Nonprime lending + +On line 425: + Those guys should have been + on our side."61 Nonprime lending + surged to billion in + +On line 425: + guys should have been on + our side."61 Nonprime lending surged + to billion in and + +On line 425: + should have been on our + side."61 Nonprime lending surged to + billion in and then + +On line 425: + on our side."61 Nonprime + lending surged to billion in + and then trillion in + +On line 425: + side."61 Nonprime lending + surged to billion in and then + trillion in and its + +On line 425: + surged to billion in + and then trillion in and its + impact began to + +On line 425: + billion in and then + trillion in and its impact + began to be felt + +On line 425: + in and then trillion + in and its impact began + to be felt in more + +On line 425: + and then trillion in + and its impact began to + be felt in more and + +On line 425: + then trillion in and + its impact began to be + felt in more and more + +On line 425: + trillion in and its + impact began to be felt + in more and more places.62 + +On line 425: + in and its impact + began to be felt in more + and more places.62 Many of + +On line 425: + its impact began + to be felt in more and more + places.62 Many of those loans + +On line 425: + impact began to + be felt in more and more places.62 + Many of those loans were + +On line 425: + began to be felt + in more and more places.62 Many of + those loans were funneled + +On line 425: + to be felt in more + and more places.62 Many of those loans + were funneled into + +On line 425: + be felt in more and + more places.62 Many of those loans were + funneled into the + +On line 425: + in more and more places.62 + Many of those loans were funneled + into the pipeline + +On line 425: + more places.62 Many of those + loans were funneled into the + pipeline by mortgage + +On line 425: + pipeline by mortgage + brokers—the link between + borrowers and the + +On line 425: + brokers—the link + between borrowers and the + lenders who financed the + +On line 425: + between borrowers + and the lenders who financed the + mortgages—who prepared the + +On line 425: + financed the mortgages—who + prepared the paperwork for + loans and earned fees from + +On line 425: + the mortgages—who prepared + the paperwork for loans and + earned fees from lenders for + +On line 425: + the paperwork for + loans and earned fees from lenders for + doing it. More than + +On line 425: + loans and earned fees from + lenders for doing it. More than + new mortgage brokers + +On line 425: + and earned fees from lenders + for doing it. More than new + mortgage brokers egan + +On line 425: + lenders for doing it. + More than new mortgage brokers + egan their jobs during + +On line 425: + for doing it. More + than new mortgage brokers egan + their jobs during the + +On line 425: + doing it. More than + new mortgage brokers egan their + jobs during the boom, + +On line 425: + More than new mortgage + brokers egan their jobs during + the boom, and some were + +On line 425: + new mortgage brokers + egan their jobs during the boom, + and some were less than + +On line 425: + brokers egan their jobs + during the boom, and some were + less than honorable + +On line 425: + egan their jobs during + the boom, and some were less than + honorable in their + +On line 425: + during the boom, and + some were less than honorable + in their dealings with + +On line 425: + than honorable in + their dealings with borrowers.63 + According to an + +On line 425: + in their dealings with + borrowers.63 According to + an investigative + +On line 425: + According to an + investigative news report + published in between + +On line 425: + investigative news + report published in between + and at least people + +On line 425: + report published in + between and at least people + with criminal records + +On line 425: + in between and at + least people with criminal + records entered the field + +On line 425: + between and at least + people with criminal records + entered the field in + +On line 425: + at least people with + criminal records entered the + field in Florida, + +On line 425: + entered the field in + Florida, for example, + including who had + +On line 425: + in Florida, for + example, including who + had previously + +On line 425: + had previously + been convicted of such crimes + as fraud, bank robbery, + +On line 425: + been convicted of + such crimes as fraud, bank robbery, + racketeering, and + +On line 425: + of such crimes as fraud, + bank robbery, racketeering, + and extortion.64 J. + +On line 425: + such crimes as fraud, bank + robbery, racketeering, and + extortion.64 J. Thomas + +On line 425: + racketeering, and + extortion.64 J. Thomas Cardwell, + the commissioner + +On line 425: + extortion.64 J. Thomas + Cardwell, the commissioner + of the Florida + +On line 425: + accountability + created a condition + in which fraud flourished."65 + +On line 425: + a condition in + which fraud flourished."65 Marc S. Savitt, + a past president + +On line 425: + condition in which + fraud flourished."65 Marc S. Savitt, a + past president of + +On line 425: + which fraud flourished."65 Marc + S. Savitt, a past president + of the National + +On line 425: + Association + of Mortgage Brokers, told the + Commission that while + +On line 425: + of Mortgage Brokers, + told the Commission that while + most mortgage brokers + +On line 425: + Mortgage Brokers, told + the Commission that while most + mortgage brokers looked + +On line 425: + the Commission that + while most mortgage brokers looked + out for borrowers’ + +On line 425: + Commission that while + most mortgage brokers looked out + for borrowers’ best + +On line 425: + most mortgage brokers + looked out for borrowers’ best + interests and steered + +On line 425: + brokers looked out for + borrowers’ best interests + and steered them away from + +On line 425: + out for borrowers’ + best interests and steered them + away from risky loans, about + +On line 425: + for borrowers’ best + interests and steered them away + from risky loans, about of + +On line 425: + best interests and + steered them away from risky loans, about + of the newcomers + +On line 425: + interests and steered + them away from risky loans, about of + the newcomers to + +On line 425: + them away from risky loans, + about of the newcomers to + the field nationwide + +On line 425: + away from risky loans, about + of the newcomers to the + field nationwide were + +On line 425: + newcomers to the + field nationwide were willing + to do whatever + +On line 425: + to do whatever + it took to maximize the + number of loans they + +On line 425: + whatever it took + to maximize the number + of loans they made. He + +On line 425: + took to maximize + the number of loans they made. + He added that some loan + +On line 425: + the number of loans + they made. He added that some loan + origination firms, + +On line 425: + loans they made. He added + that some loan origination + firms, such as Ameriquest, were + +On line 427: + home values grew even + faster between and the real + estate appraiser + +On line 427: + estate appraiser + Gary Crabtree initially felt + pride that his birthplace, + +On line 427: + initially felt pride + that his birthplace, miles north of + Los Angeles, "had + +On line 427: + pride that his birthplace, + miles north of Los Angeles, + "had finally been + +On line 427: + been discovered" by + other Californians. + The city, a farming + +On line 427: + Californians. + The city, a farming and oil + industry center + +On line 427: + city, a farming and + oil industry center in + the San Joaquin Valley, + +On line 427: + a farming and oil + industry center in the + San Joaquin Valley, was + +On line 427: + industry center + in the San Joaquin Valley, was + drawing national + +On line 427: + drawing national + attention for the pace of + its development. + +On line 429: + attention for the + pace of its development. + Wide-open farm fields were plowed + +On line 429: + for the pace of its + development. Wide-open farm fields + were plowed under and + +On line 429: + development. Wide-open + farm fields were plowed under and + divided into + +On line 429: + were plowed under and + divided into thousands + of building lots. Home + +On line 429: + into thousands of + building lots. Home prices jumped in + Bakersfield in in + +On line 429: + of building lots. Home + prices jumped in Bakersfield in + in in and more in + +On line 431: + lots. Home prices jumped in + Bakersfield in in in and + more in Crabtree, an + +On line 431: + in Bakersfield in + in in and more in Crabtree, + an appraiser for + +On line 431: + Bakersfield in in + in and more in Crabtree, an + appraiser for years, + +On line 431: + in in in and more + in Crabtree, an appraiser + for years, started in + +On line 431: + in in and more in + Crabtree, an appraiser for + years, started in and + +On line 431: + more in Crabtree, an + appraiser for years, started + in and to think that + +On line 431: + appraiser for years, + started in and to think that + things were not making + +On line 431: + for years, started in + and to think that things were not + making sense. People + +On line 431: + to think that things were + not making sense. People were + paying inflated + +On line 431: + making sense. People + were paying inflated prices + for their homes, and they + +On line 431: + People were paying + inflated prices for their homes, + and they didn’t seem + +On line 431: + inflated prices for + their homes, and they didn’t seem + to have enough income + +On line 431: + prices for their homes, and + they didn’t seem to have enough + income to pay for + +On line 431: + homes, and they didn’t + seem to have enough income to + pay for what they had + +On line 431: + and they didn’t seem + to have enough income to pay + for what they had bought. + +On line 431: + didn’t seem to have + enough income to pay for what + they had bought. Within + +On line 431: + to have enough income + to pay for what they had bought. + Within a few years, + +On line 431: + enough income to pay + for what they had bought. Within + a few years, when he + +On line 431: + income to pay for + what they had bought. Within a + few years, when he passed + +On line 431: + to pay for what they + had bought. Within a few years, + when he passed some of + +On line 431: + pay for what they had + bought. Within a few years, when + he passed some of these + +On line 431: + for what they had bought. + Within a few years, when he + passed some of these same + +On line 431: + they had bought. Within + a few years, when he passed some + of these same houses, + +On line 431: + had bought. Within a + few years, when he passed some of + these same houses, he + +On line 431: + bought. Within a few + years, when he passed some of these + same houses, he saw + +On line 431: + Within a few years, + when he passed some of these same + houses, he saw that + +On line 431: + a few years, when he + passed some of these same houses, + he saw that they were + +On line 431: + years, when he passed some + of these same houses, he saw + that they were vacant. + +On line 431: + when he passed some of + these same houses, he saw that + they were vacant. "For + +On line 431: + he passed some of these + same houses, he saw that they + were vacant. "For sale" + +On line 431: + passed some of these same + houses, he saw that they were + vacant. "For sale" signs + +On line 431: + of these same houses, + he saw that they were vacant. + "For sale" signs appeared + +On line 431: + these same houses, he + saw that they were vacant. "For + sale" signs appeared on + +On line 431: + same houses, he saw + that they were vacant. "For sale" + signs appeared on the + +On line 431: + houses, he saw that + they were vacant. "For sale" signs + appeared on the front + +On line 431: + he saw that they were + vacant. "For sale" signs appeared + on the front lawns. And + +On line 431: + that they were vacant. + "For sale" signs appeared on the + front lawns. And when he + +On line 431: + they were vacant. "For + sale" signs appeared on the front + lawns. And when he passed + +On line 431: + were vacant. "For sale" + signs appeared on the front lawns. + And when he passed again, + +On line 431: + vacant. "For sale" signs + appeared on the front lawns. And + when he passed again, the + +On line 431: + "For sale" signs appeared + on the front lawns. And when he + passed again, the yards were + +On line 431: + appeared on the front + lawns. And when he passed again, the + yards were untended + +On line 431: + on the front lawns. And + when he passed again, the yards were + untended and the + +On line 431: + And when he passed again, + the yards were untended and + the grass was turning + +On line 431: + when he passed again, the + yards were untended and the + grass was turning brown. + +On line 431: + he passed again, the yards + were untended and the grass + was turning brown. Next, + +On line 431: + passed again, the yards were + untended and the grass was + turning brown. Next, the + +On line 431: + yards were untended + and the grass was turning brown. + Next, the houses went + +On line 431: + untended and the + grass was turning brown. Next, the + houses went into + +On line 431: + grass was turning brown. + Next, the houses went into + foreclosure, and that’s + +On line 431: + brown. Next, the houses + went into foreclosure, and + that’s when he noticed + +On line 431: + Next, the houses went + into foreclosure, and that’s + when he noticed that + +On line 431: + into foreclosure, + and that’s when he noticed that + the empty houses + +On line 431: + that’s when he noticed + that the empty houses were + being vandalized, + +On line 431: + he noticed that the + empty houses were being + vandalized, which pulled + +On line 431: + the empty houses + were being vandalized, which + pulled down values for + +On line 431: + empty houses were + being vandalized, which pulled + down values for the + +On line 433: + the new suburban + subdivisions. The Cleveland + phenomenon had + +On line 433: + subdivisions. The + Cleveland phenomenon had + come to Bakersfield, + +On line 433: + phenomenon had + come to Bakersfield, a place + far from the Rust Belt. + +On line 433: + Bakersfield, a place + far from the Rust Belt. Crabtree + watched as foreclosures + +On line 433: + Rust Belt. Crabtree watched + as foreclosures spread like an + infectious disease + +On line 433: + foreclosures spread like + an infectious disease through + the community. + +On line 433: + Houses fell into + disrepair and neighborhoods + disintegrated. + +On line 435: + began studying the + market. In he ended up + identifying what + +On line 435: + the market. In he + ended up identifying + what he believed were + +On line 435: + what he believed were + fraudulent transactions in + Bakersfield; some, for + +On line 435: + in Bakersfield; some, + for instance, were allowing + insiders to siphon + +On line 435: + property transfer. + The transactions involved many + of the nation’s largest + +On line 435: + of the nation’s largest + lenders. One house, for example, + was listed for sale + +On line 435: + the nation’s largest lenders. + One house, for example, was + listed for sale for + +On line 435: + for example, was + listed for sale for and was + recorded as selling + +On line 435: + listed for sale for + and was recorded as selling + for with financing, + +On line 435: + for sale for and was + recorded as selling for with + financing, though the + +On line 435: + recorded as selling + for with financing, though the + real estate agent + +On line 435: + for with financing, + though the real estate agent + told Crabtree that it + +On line 435: + agent told Crabtree that + it actually sold for + Crabtree realized + +On line 435: + it actually + sold for Crabtree realized + that the gap between + +On line 435: + actually sold + for Crabtree realized that + the gap between the + +On line 435: + realized that the + gap between the sales price and + loan amount allowed these + +On line 435: + the gap between the + sales price and loan amount allowed + these insiders to + +On line 435: + the sales price and loan + amount allowed these insiders + to pocket The terms + +On line 435: + sales price and loan amount + allowed these insiders to + pocket The terms of + +On line 435: + and loan amount allowed + these insiders to pocket + The terms of the loan + +On line 435: + these insiders to + pocket The terms of the loan + required the buyer + +On line 435: + pocket The terms of + the loan required the buyer + to occupy the + +On line 435: + of the loan required + the buyer to occupy + the house, but it was + +On line 435: + The house went into + foreclosure and was sold in + a distress sale for + +On line 437: + in a distress sale + for Crabtree began calling + lenders to tell them what + +On line 437: + a distress sale for + Crabtree began calling lenders + to tell them what he + +On line 437: + for Crabtree began + calling lenders to tell them what + he had found; but to + +On line 437: + began calling lenders + to tell them what he had found; + but to his shock, they + +On line 437: + calling lenders to tell + them what he had found; but to + his shock, they did not + +On line 437: + lenders to tell them what + he had found; but to his shock, + they did not seem to + +On line 437: + to tell them what he + had found; but to his shock, they + did not seem to care. + +On line 437: + tell them what he had + found; but to his shock, they did + not seem to care. He + +On line 437: + he had found; but to + his shock, they did not seem to + care. He finally + +On line 437: + had found; but to his + shock, they did not seem to care. + He finally reached + +On line 437: + found; but to his shock, + they did not seem to care. He + finally reached one + +On line 437: + his shock, they did not + seem to care. He finally + reached one quality + +On line 437: + reached one quality + assurance officer at + Fremont Investment + +On line 437: + Fremont Investment + Loan, the nation’s eighth-largest subprime + lender. "Don’t put your nose + +On line 437: + Investment Loan, the + nation’s eighth-largest subprime lender. "Don’t + put your nose where it + +On line 437: + nation’s eighth-largest subprime + lender. "Don’t put your nose where it + doesn’t belong," he + +On line 437: + eighth-largest subprime lender. "Don’t + put your nose where it doesn’t + belong," he was told.68 + +On line 439: + lender. "Don’t put your nose + where it doesn’t belong," he + was told.68 Crabtree took + +On line 439: + "Don’t put your nose where + it doesn’t belong," he was + told.68 Crabtree took his + +On line 439: + nose where it doesn’t + belong," he was told.68 Crabtree + took his story to + +On line 439: + it doesn’t belong," + he was told.68 Crabtree took his + story to state law + +On line 439: + belong," he was told.68 + Crabtree took his story to + state law enforcement + +On line 439: + story to state law + enforcement officials and + to the Federal + +On line 439: + officials and to + the Federal Bureau of + Investigation. + +On line 439: + Federal Bureau + of Investigation. "I + was screaming at the + +On line 439: + Investigation. + "I was screaming at the top + of my lungs," he said. + +On line 439: + screaming at the top + of my lungs," he said. He grew + infuriated + +On line 439: + of my lungs," he said. + He grew infuriated + at the slow pace of + +On line 439: + pace of enforcement + and at prosecutors’ lack + of response to a + +On line 439: + lack of response to + a problem that was wreaking + economic havoc + +On line 441: + a problem that was + wreaking economic havoc + in Bakersfield.69 At + +On line 441: + wreaking economic + havoc in Bakersfield.69 At + the Washington, D.C., + +On line 441: + the FBI, Chris Swecker, + an assistant director, + was also trying + +On line 441: + FBI, Chris Swecker, an + assistant director, was + also trying to + +On line 441: + to pay attention + to mortgage fraud. "It has the + potential to be + +On line 441: + to mortgage fraud. "It + has the potential to be + an epidemic," he + +On line 441: + mortgage fraud. "It has + the potential to be an + epidemic," he said + +On line 441: + potential to be + an epidemic," he said at + a news conference + +On line 441: + an epidemic," he + said at a news conference + in Washington in + +On line 441: + epidemic," he said + at a news conference in + Washington in "We + +On line 441: + he said at a news + conference in Washington + in "We think we can + +On line 441: + a news conference + in Washington in "We think + we can prevent a + +On line 441: + in Washington in + "We think we can prevent a + problem that could have + +On line 441: + in "We think we can + prevent a problem that could + have as much impact + +On line 441: + think we can prevent + a problem that could have as + much impact as the + +On line 441: + we can prevent a + problem that could have as much + impact as the S&L + +On line 441: + prevent a problem + that could have as much impact + as the S&L crisis."70 + +On line 443: + a problem that could + have as much impact as the + S&L crisis."70 Swecker + +On line 443: + problem that could have + as much impact as the S&L + crisis."70 Swecker called + +On line 443: + have as much impact + as the S&L crisis."70 Swecker + called another news + +On line 443: + crisis."70 Swecker called + another news conference + in December to + +On line 443: + called another news + conference in December + to say the same thing, + +On line 443: + news conference in + December to say the same + thing, this time adding that + +On line 443: + in December to + say the same thing, this time adding + that mortgage fraud was + +On line 443: + December to say + the same thing, this time adding that + mortgage fraud was a + +On line 443: + to say the same thing, + this time adding that mortgage fraud + was a "pervasive + +On line 443: + the same thing, this time + adding that mortgage fraud was a + "pervasive problem" + +On line 443: + adding that mortgage fraud + was a "pervasive problem" + that was "on the rise." + +On line 443: + that mortgage fraud was + a "pervasive problem" that + was "on the rise." He + +On line 443: + mortgage fraud was a + "pervasive problem" that was + "on the rise." He was + +On line 443: + "pervasive problem" + that was "on the rise." He was + joined by officials + +On line 443: + that was "on the rise." + He was joined by officials + from HUD, the U.S. Postal + +On line 443: + "on the rise." He was + joined by officials from HUD, + the U.S. Postal Service, + +On line 443: + the rise." He was joined + by officials from HUD, the + U.S. Postal Service, and + +On line 443: + rise." He was joined by + officials from HUD, the U.S. + Postal Service, and the + +On line 443: + joined by officials + from HUD, the U.S. Postal Service, + and the Internal + +On line 443: + officials from HUD, + the U.S. Postal Service, and the + Internal Revenue + +On line 443: + from HUD, the U.S. Postal + Service, and the Internal + Revenue Service. The + +On line 443: + Postal Service, and the + Internal Revenue Service. + The officials told + +On line 443: + Internal Revenue + Service. The officials told + reporters that real + +On line 443: + Revenue Service. The + officials told reporters that + real estate and + +On line 443: + that real estate + and banking executives + were not doing enough + +On line 443: + real estate and + banking executives were + not doing enough to + +On line 443: + executives were + not doing enough to root out + mortgage fraud and that + +On line 443: + were not doing enough + to root out mortgage fraud and + that lenders needed to + +On line 443: + not doing enough to + root out mortgage fraud and that + lenders needed to do + +On line 443: + doing enough to root + out mortgage fraud and that lenders + needed to do more + +On line 443: + to root out mortgage + fraud and that lenders needed to + do more to "police + +On line 443: + root out mortgage fraud + and that lenders needed to do + more to "police their + +On line 443: + out mortgage fraud and + that lenders needed to do more + to "police their own + +On line 443: + that lenders needed to + do more to "police their own + organizations."71 + +On line 445: + do more to "police + their own organizations."71 + Meanwhile, the number + +On line 445: + number of cases + of reported mortgage fraud + continued to swell. + +On line 447: + continued to swell. + Suspicious activity + reports, also known + +On line 447: + also known as SARs, + are reports filed by banks to + the Financial Crimes + +On line 447: + are reports filed by + banks to the Financial Crimes + Enforcement Network + +On line 447: + to the Financial + Crimes Enforcement Network (FinCEN), + a bureau within + +On line 447: + the Financial Crimes + Enforcement Network (FinCEN), a + bureau within the + +On line 447: + Enforcement Network + (FinCEN), a bureau within the + Treasury Department. + +On line 447: + within the Treasury + Department. In November + the network published + +On line 447: + network published an + analysis that found a 20-fold + increase in mortgage + +On line 447: + analysis that found + a 20-fold increase in mortgage + fraud reports between + +On line 447: + a 20-fold increase in + mortgage fraud reports between + and According to + +On line 447: + underreporting, + because two-thirds of all the loans + being created + +On line 447: + because two-thirds of all + the loans being created + were originated + +On line 447: + were originated + by mortgage brokers who were + not subject to any + +On line 447: + by mortgage brokers + who were not subject to any + federal standard + +On line 447: + brokers who were not + subject to any federal + standard or oversight.72 + +On line 447: + addition, many lenders + who were required to submit + reports did not in + +On line 449: + lenders who were required + to submit reports did not + in fact do so.73 "The + +On line 449: + who were required to + submit reports did not in + fact do so.73 "The claim + +On line 449: + required to submit + reports did not in fact do + so.73 "The claim that no + +On line 449: + to submit reports + did not in fact do so.73 "The + claim that no one could + +On line 449: + submit reports did + not in fact do so.73 "The claim + that no one could have + +On line 449: + reports did not in + fact do so.73 "The claim that no + one could have foreseen + +On line 449: + not in fact do so.73 + "The claim that no one could have + foreseen the crisis + +On line 449: + fact do so.73 "The claim + that no one could have foreseen + the crisis is false," + +On line 449: + do so.73 "The claim that + no one could have foreseen the + crisis is false," said + +On line 449: + "The claim that no one + could have foreseen the crisis + is false," said William K. + +On line 451: + claim that no one could + have foreseen the crisis is + false," said William K. Black, + +On line 451: + that no one could have + foreseen the crisis is false," + said William K. Black, an + +On line 451: + one could have foreseen + the crisis is false," said William + K. Black, an expert + +On line 451: + could have foreseen the + crisis is false," said William K. + Black, an expert on + +On line 451: + the crisis is false," + said William K. Black, an expert + on white-collar crime + +On line 451: + crisis is false," said + William K. Black, an expert on + white-collar crime and + +On line 451: + false," said William K. Black, + an expert on white-collar + crime and a former + +On line 451: + said William K. Black, an + expert on white-collar crime + and a former staff + +On line 451: + white-collar crime and + a former staff director + of the National + +On line 451: + Reform, Recovery + and Enforcement, created + by Congress in as + +On line 453: + Congress in as the + savings and loan crisis was + unfolding.74 Former + +On line 453: + as the savings and + loan crisis was unfolding.74 + Former attorney + +On line 455: + served from February + to told the FCIC he could not + remember the press + +On line 455: + to told the FCIC he + could not remember the press + conferences or news + +On line 455: + could not remember + the press conferences or news + reports about mortgage + +On line 455: + remember the press + conferences or news reports + about mortgage fraud. Both + +On line 455: + the press conferences + or news reports about mortgage + fraud. Both Gonzales + +On line 455: + press conferences or + news reports about mortgage fraud. + Both Gonzales and + +On line 455: + conferences or news + reports about mortgage fraud. Both + Gonzales and his + +On line 455: + or news reports about + mortgage fraud. Both Gonzales + and his successor + +On line 455: + reports about mortgage + fraud. Both Gonzales and his + successor Michael Mukasey, + +On line 455: + Both Gonzales and + his successor Michael Mukasey, who + served as attorney + +On line 455: + his successor Michael + Mukasey, who served as attorney + general in and + +On line 455: + Michael Mukasey, who served as + attorney general in + and told the FCIC that + +On line 455: + served as attorney + general in and told the + FCIC that mortgage fraud + +On line 455: + and told the FCIC that + mortgage fraud had never been + communicated + +On line 455: + to them as a top + priority. "National + security was + +On line 455: + top priority. + "National security + was an overriding" + +On line 457: + overriding" concern, + Mukasey said.75 To community + activists and local + +On line 457: + concern, Mukasey said.75 To + community activists and + local officials, + +On line 457: + activists and local + officials, however, the + lending practices were + +On line 457: + lending practices were + a matter of national + economic concern. + +On line 457: + the Empire Justice + Center in Rochester, New York, told + Fed Governors Bernanke, + +On line 457: + Center in Rochester, New + York, told Fed Governors Bernanke, + Susan Bies, and Roger + +On line 457: + Rochester, New York, told Fed + Governors Bernanke, Susan Bies, + and Roger Ferguson + +On line 457: + Susan Bies, and Roger + Ferguson in October + that she suspected + +On line 457: + and Lehman Brothers—were + producing such bad loans that + the very survival of + +On line 457: + producing such bad + loans that the very survival of + the firms was put in + +On line 457: + such bad loans that the + very survival of the firms was + put in question. "We + +On line 457: + the very survival of + the firms was put in question. + "We repeatedly + +On line 457: + very survival of the + firms was put in question. "We + repeatedly see + +On line 457: + the firms was put in + question. "We repeatedly + see false appraisals and + +On line 457: + see false appraisals and + false income," she told the Fed + officials, who were + +On line 457: + and false income," she + told the Fed officials, who + were gathered at the + +On line 457: + Fed officials, who + were gathered at the public + hearing period + +On line 457: + She urged the Fed to + prod the Securities and + Exchange Commission + +On line 457: + to examine the + uality of the firms’ due + diligence; otherwise, + +On line 457: + uality of the + firms’ due diligence; otherwise, + she said, serious + +On line 457: + diligence; otherwise, + she said, serious questions + could arise about whether they + +On line 457: + otherwise, she said, + serious questions could arise + about whether they could be + +On line 457: + she said, serious + questions could arise about whether they + could be forced to buy + +On line 457: + serious questions + could arise about whether they could be + forced to buy back bad + +On line 457: + questions could arise about + whether they could be forced to buy + back bad loans that they + +On line 457: + could arise about whether they + could be forced to buy back bad + loans that they had made + +On line 457: + arise about whether they could + be forced to buy back bad loans + that they had made or + +On line 457: + could be forced to buy + back bad loans that they had made + or securitized.76 + +On line 459: + back bad loans that they + had made or securitized.76 + Maker told the board + +On line 459: + loans that they had made + or securitized.76 Maker + told the board that she + +On line 459: + that they had made or + securitized.76 Maker told + the board that she feared + +On line 459: + told the board that she + feared an "enormous economic + impact" could result + +On line 459: + board that she feared an + "enormous economic impact" + could result from a + +On line 459: + from a confluence + of financial events: flat or + declining incomes, + +On line 459: + of financial events: + flat or declining incomes, + a housing bubble, + +On line 459: + financial events: flat + or declining incomes, a + housing bubble, and + +On line 459: + flat or declining + incomes, a housing bubble, + and fraudulent loans + +On line 461: + and fraudulent loans + with overstated values.77 In + an interview with + +On line 461: + fraudulent loans with + overstated values.77 In an + interview with the + +On line 461: + loans with overstated + values.77 In an interview + with the FCIC, Maker + +On line 461: + overstated values.77 + In an interview with the + FCIC, Maker said that + +On line 461: + In an interview + with the FCIC, Maker said that + Fed officials seemed + +On line 461: + with the FCIC, Maker + said that Fed officials seemed + impervious to + +On line 461: + Fed officials seemed + impervious to what the + consumer advocates + +On line 461: + impervious to + what the consumer advocates + were saying. The Fed + +On line 461: + The Fed governors + politely listened and said + little, she recalled. + +On line 461: + recalled. "They had their + economic models, and their + economic models + +On line 461: + had their economic + models, and their economic + models did not see + +On line 461: + economic models + did not see this coming," she + said. "We kept getting + +On line 461: + models did not see + this coming," she said. "We kept + getting back, ‘This is + +On line 461: + see this coming," she + said. "We kept getting back, ‘This + is all anecdotal.’"78 + +On line 463: + this coming," she said. + "We kept getting back, ‘This is + all anecdotal.’"78 Soon + +On line 463: + "We kept getting back, + ‘This is all anecdotal.’"78 Soon + nontraditional + +On line 463: + all anecdotal.’"78 Soon + nontraditional mortgages + were crowding other + +On line 463: + nontraditional + mortgages were crowding other + kinds of products out + +On line 463: + mortgages were crowding + other kinds of products out + of the market in + +On line 463: + were crowding other + kinds of products out of the + market in many parts + +On line 463: + kinds of products out + of the market in many parts + of the country. More + +On line 463: + products out of the + market in many parts of the + country. More mortgage + +On line 463: + of the market in + many parts of the country. More + mortgage borrowers + +On line 463: + country. More mortgage + borrowers nationwide took + out interest-only + +On line 463: + out interest-only + loans, and the trend was far more + pronounced on the West + +On line 463: + loans, and the trend was + far more pronounced on the West + and East Coasts.79 Because + +On line 463: + and the trend was far + more pronounced on the West and + East Coasts.79 Because of + +On line 463: + the trend was far more + pronounced on the West and East + Coasts.79 Because of their + +On line 463: + far more pronounced on + the West and East Coasts.79 Because + of their easy credit + +On line 463: + more pronounced on the + West and East Coasts.79 Because of + their easy credit terms, + +On line 463: + of their easy credit + terms, nontraditional loans + enabled borrowers + +On line 463: + nontraditional + loans enabled borrowers to + buy more expensive + +On line 463: + enabled borrowers + to buy more expensive homes + and ratchet up the + +On line 463: + buy more expensive + homes and ratchet up the prices + in bidding wars. The + +On line 463: + more expensive homes + and ratchet up the prices in + bidding wars. The loans + +On line 463: + and ratchet up the + prices in bidding wars. The loans + were also riskier, + +On line 463: + prices in bidding wars. + The loans were also riskier, + however, and a + +On line 463: + The loans were also + riskier, however, and a + pattern of higher + +On line 463: + pattern of higher + foreclosure rates frequently + appeared soon after. + +On line 465: + higher foreclosure + rates frequently appeared soon + after. As home prices + +On line 465: + frequently appeared + soon after. As home prices shot + up in much of the + +On line 465: + appeared soon after. + As home prices shot up in much + of the country, many + +On line 465: + soon after. As home + prices shot up in much of the + country, many observers + +On line 465: + As home prices shot up + in much of the country, many + observers began to + +On line 465: + prices shot up in much + of the country, many observers + began to wonder + +On line 465: + up in much of the + country, many observers began + to wonder if the + +On line 465: + of the country, many + observers began to wonder + if the country was + +On line 465: + many observers began + to wonder if the country + was witnessing a + +On line 465: + to wonder if the + country was witnessing a + housing bubble. On + +On line 465: + June the Economist + magazine’s cover story + posited that the day + +On line 465: + magazine’s cover + story posited that the day + of reckoning was + +On line 465: + posited that the day + of reckoning was at hand, + with the headline "House + +On line 465: + day of reckoning + was at hand, with the headline + "House Prices: After the + +On line 465: + of reckoning was + at hand, with the headline "House + Prices: After the Fall." + +On line 465: + reckoning was at + hand, with the headline "House Prices: + After the Fall." The + +On line 465: + After the Fall." The + illustration depicted + a brick plummeting + +On line 465: + depicted a brick + plummeting out of the sky. + "It is not going + +On line 465: + plummeting out of + the sky. "It is not going + to be pretty," the + +On line 465: + the sky. "It is not + going to be pretty," the + article declared. + +On line 465: + to be pretty," the + article declared. "How the + current housing boom + +On line 465: + article declared. + "How the current housing boom + ends could decide the + +On line 465: + the current housing + boom ends could decide the course + of the entire world + +On line 465: + boom ends could decide + the course of the entire world + economy over the + +On line 465: + decide the course of + the entire world economy + over the next few years."80 + +On line 467: + course of the entire + world economy over the next + few years."80 That same month, + +On line 467: + of the entire world + economy over the next few + years."80 That same month, Fed + +On line 467: + few years."80 That same month, + Fed Chairman Greenspan acknowledged + the issue, telling the + +On line 467: + years."80 That same month, Fed + Chairman Greenspan acknowledged the + issue, telling the Joint + +On line 467: + month, Fed Chairman Greenspan + acknowledged the issue, telling + the Joint Economic + +On line 467: + the issue, telling the + Joint Economic Committee + of the U.S. Congress + +On line 467: + issue, telling the Joint + Economic Committee of + the U.S. Congress that + +On line 467: + of the U.S. Congress + that "the apparent froth in + housing markets may + +On line 467: + U.S. Congress that "the + apparent froth in housing + markets may have spilled + +On line 467: + that "the apparent + froth in housing markets may + have spilled over into + +On line 467: + "the apparent froth + in housing markets may have + spilled over into the + +On line 467: + in housing markets + may have spilled over into the + mortgage markets."81 For + +On line 467: + spilled over into the + mortgage markets."81 For years, he + had warned that Fannie + +On line 467: + into the mortgage + markets."81 For years, he had warned + that Fannie Mae and + +On line 467: + mortgage markets."81 For + years, he had warned that Fannie + Mae and Freddie Mac, + +On line 467: + markets."81 For years, he + had warned that Fannie Mae and + Freddie Mac, bolstered + +On line 467: + years, he had warned that + Fannie Mae and Freddie Mac, + bolstered by investors’ + +On line 467: + had warned that Fannie + Mae and Freddie Mac, bolstered + by investors’ belief + +On line 467: + warned that Fannie Mae + and Freddie Mac, bolstered by + investors’ belief that + +On line 467: + Freddie Mac, bolstered + by investors’ belief that these + institutions had + +On line 467: + by investors’ belief + that these institutions had + the backing of the + +On line 467: + investors’ belief that + these institutions had the + backing of the U.S. + +On line 467: + backing of the U.S. + government, were growing so + large, with so little + +On line 467: + the U.S. government, + were growing so large, with so + little oversight, that + +On line 467: + were growing so large, + with so little oversight, that + they were creating + +On line 467: + for the financial + system. Still, he reassured + legislators that + +On line 467: + Still, he reassured + legislators that the U.S. + economy was on + +On line 467: + legislators that + the U.S. economy was on + a "reasonably firm + +On line 467: + the U.S. economy + was on a "reasonably firm + footing" and that the + +On line 467: + firm footing" and that + the financial system would + be resilient if the + +On line 467: + that the financial + system would be resilient if + the housing market + +On line 469: + be resilient if the + housing market turned sour. "The + dramatic increase + +On line 469: + housing market turned + sour. "The dramatic increase + in the prevalence of + +On line 469: + sour. "The dramatic + increase in the prevalence of + interest-only loans, + +On line 469: + the introduction + of other relatively + exotic forms of + +On line 469: + forms of adjustable rate + mortgages, are developments + of particular + +On line 469: + are developments + of particular concern," + he testified in + +On line 469: + developments of + particular concern," he + testified in June. + +On line 471: + of particular + concern," he testified in + June. To be sure, these + +On line 471: + testified in June. + To be sure, these financing + vehicles have their + +On line 471: + June. To be sure, these + financing vehicles have + their appropriate + +On line 471: + vehicles have their + appropriate uses. But + to the extent that + +On line 471: + their appropriate + uses. But to the extent + that some households may + +On line 471: + uses. But to the + extent that some households may + be employing these + +On line 471: + the extent that some + households may be employing + these instruments to + +On line 471: + some households may be + employing these instruments + to purchase a home + +On line 471: + that would otherwise + be unaffordable, their use + is beginning to + +On line 471: + would otherwise be + unaffordable, their use is + beginning to add + +On line 471: + be unaffordable, + their use is beginning to + add to the pressures + +On line 471: + unaffordable, their + use is beginning to add + to the pressures in + +On line 473: + is beginning to + add to the pressures in the + marketplace. Although + +On line 473: + to the pressures in + the marketplace. Although we + certainly cannot + +On line 473: + marketplace. Although + we certainly cannot rule + out home price declines, + +On line 473: + local markets, these + declines, were they to occur, + likely would not have + +On line 473: + banking and widespread + securitization of + mortgages makes it less + +On line 473: + would be impaired than + was the case in prior episodes + of regional house + +On line 473: + be impaired than was + the case in prior episodes of + regional house price + +On line 473: + than was the case in + prior episodes of regional + house price corrections.82 + +On line 475: + the case in prior + episodes of regional house price + corrections.82 Indeed, + +On line 475: + episodes of regional + house price corrections.82 Indeed, + Greenspan would not be the + +On line 475: + regional house price + corrections.82 Indeed, Greenspan would + not be the only + +On line 475: + corrections.82 Indeed, + Greenspan would not be the only + one confident that + +On line 475: + Greenspan would not be the + only one confident that + a housing downturn + +On line 475: + be the only one + confident that a housing + downturn would leave the + +On line 475: + confident that a + housing downturn would leave the + broader financial + +On line 475: + downturn would leave the + broader financial system + largely unscathed. As + +On line 475: + would leave the broader + financial system largely + unscathed. As late as + +On line 475: + broader financial + system largely unscathed. As + late as March after + +On line 475: + financial system + largely unscathed. As late as + March after housing + +On line 475: + unscathed. As late as + March after housing prices had + been declining for + +On line 475: + after housing prices + had been declining for a + year, Bernanke testified + +On line 477: + had been declining + for a year, Bernanke testified + to Congress that "the + +On line 477: + Bernanke testified to + Congress that "the problems in + the subprime market + +On line 477: + "the problems in the + subprime market were likely + to be contained"—that is, + +On line 477: + the subprime market + were likely to be contained"—that + is, he expected + +On line 477: + were likely to be + contained"—that is, he expected + little spillover to the + +On line 479: + is, he expected + little spillover to the broader + economy.83 Some were + +On line 479: + economy.83 Some were + less sanguine. For example, + the consumer lawyer Sheila + +On line 479: + Some were less sanguine. + For example, the consumer + lawyer Sheila Canavan, of + +On line 479: + were less sanguine. For + example, the consumer lawyer + Sheila Canavan, of Moab, + +On line 479: + For example, the + consumer lawyer Sheila Canavan, of + Moab, Utah, informed the + +On line 481: + interest-only, a + proportion that was more than + twice the national + +On line 481: + that was more than twice + the national average. + "That’s insanity," + +On line 481: + was more than twice the + national average. "That’s + insanity," she + +On line 481: + "That’s insanity," + she told the Fed governors. + "That means we’re facing + +On line 481: + the Fed governors. + "That means we’re facing something + down the road that we + +On line 481: + Fed governors. "That + means we’re facing something down + the road that we haven’t + +On line 481: + governors. "That means + we’re facing something down the + road that we haven’t faced + +On line 481: + "That means we’re facing + something down the road that we + haven’t faced before and + +On line 481: + we’re facing something + down the road that we haven’t faced + before and we are + +On line 481: + something down the road + that we haven’t faced before and + we are going to + +On line 481: + road that we haven’t faced + before and we are going + to be looking at + +On line 481: + faced before and we + are going to be looking + at a safety and + +On line 481: + we are going to + be looking at a safety + and soundness crisis."84 + +On line 483: + are going to be + looking at a safety and + soundness crisis."84 On + +On line 483: + be looking at a + safety and soundness crisis."84 + On another front, + +On line 483: + safety and soundness + crisis."84 On another front, + some academics offered + +On line 483: + On another front, + some academics offered pointed + analyses as they raised + +On line 485: + some academics offered + pointed analyses as they raised + alarms. For example, + +On line 485: + pointed analyses as + they raised alarms. For example, + in August the Yale + +On line 485: + as they raised alarms. For + example, in August the + Yale professor Robert + +On line 485: + For example, in + August the Yale professor + Robert Shiller, who along with + +On line 485: + the Yale professor + Robert Shiller, who along with Karl Case + developed the Case-Shiller + +On line 485: + Robert Shiller, who along with + Karl Case developed the Case-Shiller + Index, charted home + +On line 485: + who along with Karl Case + developed the Case-Shiller Index, + charted home prices to + +On line 485: + Karl Case developed + the Case-Shiller Index, charted home + prices to illustrate + +On line 485: + Case developed the + Case-Shiller Index, charted home prices + to illustrate how + +On line 485: + Case-Shiller Index, charted + home prices to illustrate how + precipitously + +On line 487: + the market appeared + in historical terms. Shiller + warned that the housing + +On line 487: + in historical + terms. Shiller warned that the housing + bubble would likely + +On line 489: + terms. Shiller warned that the + housing bubble would likely + burst.85 In that same month, + +On line 489: + the housing bubble + would likely burst.85 In that same + month, a conclave of + +On line 489: + would likely burst.85 In + that same month, a conclave of + economists gathered + +On line 489: + burst.85 In that same month, + a conclave of economists + gathered at Jackson + +On line 489: + same month, a conclave + of economists gathered at + Jackson Lake Lodge in + +On line 489: + economists gathered + at Jackson Lake Lodge in Wyoming, + in a conference + +On line 489: + at Jackson Lake Lodge + in Wyoming, in a conference + center nestled in + +On line 489: + in a conference + center nestled in Grand Teton + National Park. It + +On line 491: + center nestled in + Grand Teton National Park. It + was a "who’s who of + +On line 491: + nestled in Grand Teton + National Park. It was a + "who’s who of central + +On line 491: + Grand Teton National + Park. It was a "who’s who of + central bankers," recalled + +On line 491: + National Park. It + was a "who’s who of central + bankers," recalled Raghuram + +On line 491: + Park. It was a "who’s + who of central bankers," recalled + Raghuram Rajan, who + +On line 491: + was a "who’s who of + central bankers," recalled Raghuram + Rajan, who was then + +On line 491: + "who’s who of central + bankers," recalled Raghuram Rajan, + who was then on leave + +On line 491: + who of central bankers," + recalled Raghuram Rajan, who + was then on leave from + +On line 491: + who was then on leave + from the University of + Chicago’s business school + +On line 491: + the University + of Chicago’s business school while + serving as the chief + +On line 491: + of Chicago’s business + school while serving as the chief + economist of the + +On line 491: + school while serving as + the chief economist of the + International + +On line 491: + the chief economist + of the International + Monetary Fund. Greenspan + +On line 493: + International + Monetary Fund. Greenspan was there, + and so was Bernanke. Jean-Claude + +On line 493: + Monetary Fund. Greenspan + was there, and so was Bernanke. Jean-Claude + Trichet, the president + +On line 493: + was there, and so was + Bernanke. Jean-Claude Trichet, the president + of the European + +On line 493: + and so was Bernanke. Jean-Claude + Trichet, the president of the + European Central + +On line 493: + Trichet, the president + of the European Central + Bank, and Mervyn King, the + +On line 493: + of the European + Central Bank, and Mervyn King, the + governor of the + +On line 493: + Central Bank, and Mervyn + King, the governor of the + Bank of England, were + +On line 493: + Bank, and Mervyn King, the + governor of the Bank of + England, were among the + +On line 493: + governor of the + Bank of England, were among the + other dignitaries.86 + +On line 495: + Bank of England, were + among the other dignitaries.86 + Rajan presented + +On line 495: + dignitaries.86 Rajan + presented a paper with + a provocative title: + +On line 495: + provocative title: "Has + Financial Development + Made the World Riskier1" + +On line 495: + Development Made + the World Riskier1" He posited + that executives + +On line 495: + executives were + being overcompensated + for short-term gains but + +On line 495: + let off the hook for + any eventual losses—the + IBGYBG syn-drome. + +On line 495: + syn-drome. Rajan added + that investment strategies such + as credit default + +On line 495: + investment strategies + such as credit default swaps + could have disastrous + +On line 495: + default swaps could have + disastrous consequences if + the system became + +On line 495: + could have disastrous + consequences if the system + became unstable, + +On line 495: + became unstable, + and that regulatory + institutions might + +On line 497: + institutions might + be unable to deal with the + fallout.87 He recalled + +On line 497: + be unable to deal + with the fallout.87 He recalled + to the FCIC that he + +On line 497: + unable to deal with + the fallout.87 He recalled to + the FCIC that he was + +On line 497: + deal with the fallout.87 + He recalled to the FCIC that + he was treated with + +On line 497: + with the fallout.87 He + recalled to the FCIC that he + was treated with scorn. + +On line 497: + He recalled to the + FCIC that he was treated with + scorn. Lawrence Summers, a + +On line 497: + was treated with scorn. + Lawrence Summers, a former U.S. + treasury secretary + +On line 497: + Summers, a former + U.S. treasury secretary who + was then president + +On line 497: + secretary who was + then president of Harvard + University, called + +On line 497: + then president of + Harvard University, called + Rajan a "Luddite," + +On line 497: + simply opposed to + technological change.88 "I + felt like an early + +On line 497: + had wandered into + a convention of half-starved + lions," Rajan wrote + +On line 499: + a convention of + half-starved lions," Rajan wrote + later.89 Susan M. + +On line 499: + wrote later.89 Susan + M. Wachter, a professor of + real estate and + +On line 499: + University of + Pennsylvania’s Wharton School, + prepared a research + +On line 499: + prepared a research + paper in suggesting that + the United States could + +On line 499: + that the United States + could have a real estate + crisis similar + +On line 499: + United States could have + a real estate crisis + similar to that + +On line 499: + could have a real + estate crisis similar + to that suffered in + +On line 499: + a real estate + crisis similar to that + suffered in Asia in + +On line 501: + similar to that + suffered in Asia in the 1990s. + When she discussed her + +On line 501: + suffered in Asia in + the 1990s. When she discussed her + work at another + +On line 501: + in Asia in the 1990s. + When she discussed her work at + another Jackson + +On line 501: + When she discussed her + work at another Jackson + Hole gathering two + +On line 501: + she discussed her work + at another Jackson Hole + gathering two years + +On line 501: + Hole gathering two + years later, it received a + chilly reception, she + +On line 501: + gathering two years + later, it received a chilly + reception, she told + +On line 501: + later, it received + a chilly reception, she told + the Commission. "It + +On line 501: + a chilly reception, + she told the Commission. "It + was universally + +On line 501: + chilly reception, she + told the Commission. "It was + universally panned," + +On line 501: + Commission. "It was + universally panned," she said, + and an economist + +On line 501: + universally panned," + she said, and an economist + from the Mortgage Bankers + +On line 505: + were beginning to + highlight indications that + the real estate + +On line 505: + indications that + the real estate market + was weakening. Home + +On line 505: + the real estate + market was weakening. Home + sales began to drop, + +On line 505: + was weakening. Home + sales began to drop, and Fitch + Ratings reported + +On line 505: + Ratings reported + signs that mortgage delinquencies + were rising. That year, + +On line 505: + mortgage delinquencies + were rising. That year, the hedge + fund manager Mark + +On line 505: + That year, the hedge fund + manager Mark Klipsch of + Orix Credit Corp. told + +On line 505: + fund manager Mark + Klipsch of Orix Credit Corp. + told participants + +On line 505: + securities trade + group, that investors had become + "over optimistic" about + +On line 505: + trade group, that investors + had become "over optimistic" + about the market. "I + +On line 505: + group, that investors had + become "over optimistic" about + the market. "I see + +On line 505: + optimistic" about the + market. "I see a lot of + irrationality," + +On line 505: + market. "I see a + lot of irrationality," + he added. He said he + +On line 505: + said he was unnerved + because people were saying, + "It’s different this + +On line 505: + different this time"—a + rationale commonly heard + before previous + +On line 507: + Some real estate + appraisers had also been + expressing concerns + +On line 507: + estate appraisers + had also been expressing + concerns for years. From + +On line 509: + concerns for years. From + to a coalition of appraisal + organizations + +On line 509: + to a coalition of + appraisal organizations + circulated and + +On line 509: + petition; signed by + appraisers and including + the name and address + +On line 509: + signed by appraisers + and including the name and + address of each, it + +On line 509: + address of each, it + charged that lenders were pressuring + appraisers to place + +On line 509: + assigning business + only to appraisers who + would hit the desired + +On line 509: + business only to + appraisers who would hit the + desired price targets. + +On line 509: + appraisers who would + hit the desired price targets. + "The powers that be + +On line 509: + desired price targets. + "The powers that be cannot + claim ignorance," the + +On line 509: + "The powers that be + cannot claim ignorance," the + appraiser Dennis + +On line 509: + that be cannot claim + ignorance," the appraiser + Dennis J. Black of + +On line 511: + Black of Port Charlotte, + Florida, testified to + the Commission.92 The + +On line 511: + veteran, told the + Commission that lenders had opened + subsidiaries to perform + +On line 511: + Commission that lenders + had opened subsidiaries to perform + appraisals, allowing + +On line 511: + subsidiaries to perform + appraisals, allowing them to + extract extra fees + +On line 511: + consumers and making + it easier to inflate + home values. The steep + +On line 511: + it easier to + inflate home values. The steep + hike in home prices and + +On line 511: + inflate home values. + The steep hike in home prices and + the un-merited and + +On line 511: + The steep hike in home + prices and the un-merited and + inflated appraisals + +On line 511: + the un-merited and + inflated appraisals she was + seeing in Northern + +On line 511: + was headed for a + cataclysmic downturn. In she + laid off some of her + +On line 511: + cataclysmic downturn. + In she laid off some of her + staff in order to + +On line 511: + laid off some of her + staff in order to cut her + overhead expenses, + +On line 511: + in order to cut + her overhead expenses, in + anticipation + +On line 511: + overhead expenses, + in anticipation of + the coming storm; two + +On line 511: + anticipation + of the coming storm; two years + later, she shut down + +On line 511: + the coming storm; two + years later, she shut down her + office and began + +On line 511: + storm; two years later, + she shut down her office and + began working out + +On line 511: + years later, she shut + down her office and began + working out of her + +On line 513: + shut down her office + and began working out of + her home.93 Despite all + +On line 513: + down her office and + began working out of her + home.93 Despite all the + +On line 513: + began working out + of her home.93 Despite all the + signs that the housing + +On line 513: + working out of her + home.93 Despite all the signs that + the housing market + +On line 513: + of her home.93 Despite + all the signs that the housing + market was slowing, + +On line 513: + home.93 Despite all the + signs that the housing market + was slowing, Wall Street + +On line 513: + Despite all the signs + that the housing market was + slowing, Wall Street just + +On line 513: + signs that the housing + market was slowing, Wall Street + just kept going and + +On line 513: + market was slowing, + Wall Street just kept going and + going—ordering up loans, + +On line 513: + slowing, Wall Street just + kept going and going—ordering + up loans, packaging + +On line 513: + By the third quarter + of home prices were falling and + mortgage delinquencies + +On line 513: + falling and mortgage + delinquencies were rising, a + combination that + +On line 513: + a combination + that spelled trouble for mortgage-backed + securities. But + +On line 513: + that spelled trouble for + mortgage-backed securities. But + from the third quarter + +On line 513: + trouble for mortgage-backed + securities. But from the + third quarter of on, + +On line 513: + securities. But + from the third quarter of on, + banks created and + +On line 513: + from the third quarter + of on, banks created and + sold some trillion in + +On line 513: + third quarter of on, + banks created and sold some + trillion in mortgage-backed + +On line 513: + banks created and + sold some trillion in mortgage-backed + securities and + +On line 513: + and sold some trillion + in mortgage-backed securities + and more than billion + +On line 513: + sold some trillion in + mortgage-backed securities and + more than billion in + +On line 515: + and more than billion + in mortgage-related CDOs.94 Not + everyone on Wall + +On line 515: + in mortgage-related + CDOs.94 Not everyone on Wall + Street kept applauding, + +On line 515: + were urging caution, + as corporate governance + and risk management + +On line 515: + urging caution, as + corporate governance and + risk management were + +On line 517: + governance and risk + management were breaking down. + Reflecting on the + +On line 517: + and risk management + were breaking down. Reflecting + on the causes of + +On line 517: + risk management were + breaking down. Reflecting on + the causes of the + +On line 517: + down. Reflecting on + the causes of the crisis, + Jamie Dimon, CEO of + +On line 517: + Reflecting on the + causes of the crisis, Jamie + Dimon, CEO of JP + +On line 517: + of the crisis, Jamie + Dimon, CEO of JP Morgan + testified to the + +On line 517: + Jamie Dimon, CEO of + JP Morgan testified to + the FCIC, "I blame the + +On line 517: + CEO of JP Morgan + testified to the FCIC, "I + blame the management + +On line 517: + testified to the + FCIC, "I blame the management + teams and no one else."95 + +On line 519: + to the FCIC, "I blame + the management teams and no + one else."95 At too many + +On line 519: + blame the management + teams and no one else."95 At too + many financial firms, + +On line 519: + teams and no one else."95 + At too many financial firms, + management brushed aside + +On line 519: + one else."95 At too many + financial firms, management + brushed aside the growing + +On line 519: + too many financial + firms, management brushed aside the + growing risks to their + +On line 519: + firms, management brushed + aside the growing risks to their + firms. At Lehman Brothers, + +On line 519: + management brushed aside + the growing risks to their firms. + At Lehman Brothers, for + +On line 519: + aside the growing risks + to their firms. At Lehman Brothers, + for example, Michael + +On line 519: + risks to their firms. At + Lehman Brothers, for example, + Michael Gelband, the head + +On line 519: + to their firms. At Lehman + Brothers, for example, Michael + Gelband, the head of + +On line 519: + At Lehman Brothers, for + example, Michael Gelband, the + head of fixed income, + +On line 519: + Gelband, the head of + fixed income, and his colleague + Madelyn Antoncic + +On line 519: + fixed income, and his + colleague Madelyn Antoncic + warned against taking on + +On line 519: + his colleague Madelyn + Antoncic warned against taking + on too much risk in + +On line 519: + Madelyn Antoncic + warned against taking on too much + risk in the face of + +On line 519: + Antoncic warned against + taking on too much risk in + the face of growing + +On line 519: + warned against taking on + too much risk in the face of + growing pressure to + +On line 519: + taking on too much + risk in the face of growing + pressure to compete + +On line 519: + risk in the face of + growing pressure to compete + aggressively against + +On line 519: + growing pressure to + compete aggressively against + other investment + +On line 519: + Antoncic, who was + the firm’s chief risk officer + from to was shunted + +On line 519: + who was the firm’s chief + risk officer from to was + shunted aside: "At the + +On line 519: + chief risk officer + from to was shunted aside: "At + the senior level, + +On line 519: + risk officer from + to was shunted aside: "At the + senior level, they + +On line 519: + from to was shunted + aside: "At the senior level, + they were trying to + +On line 519: + to was shunted aside: + "At the senior level, they + were trying to push + +On line 519: + was shunted aside: "At + the senior level, they were + trying to push so + +On line 519: + aside: "At the senior + level, they were trying to + push so hard that the + +On line 519: + senior level, they + were trying to push so hard + that the wheels started + +On line 519: + were trying to push + so hard that the wheels started + to come off," she told + +On line 519: + trying to push so + hard that the wheels started to + come off," she told the + +On line 519: + push so hard that the + wheels started to come off," she + told the Commission. + +On line 519: + so hard that the wheels + started to come off," she told + the Commission. She + +On line 519: + wheels started to come + off," she told the Commission. + She was reassigned + +On line 519: + started to come off," + she told the Commission. She + was reassigned to + +On line 523: + on "philosophical + differences."97 At Citigroup, + meanwhile, Richard Bowen, a + +On line 523: + the consumer lending + group, received a promotion + in early when he + +On line 523: + consumer lending group, + received a promotion in + early when he was + +On line 523: + in early when he + was named business chief under + writer. He would go + +On line 523: + he was named business + chief under writer. He would + go on to oversee + +On line 523: + was named business chief + under writer. He would go + on to oversee loan + +On line 523: + chief under writer. + He would go on to oversee + loan quality for + +On line 523: + under writer. He + would go on to oversee loan + quality for over + +On line 523: + He would go on to + oversee loan quality for + over billion a year + +On line 523: + on to oversee loan + quality for over billion + a year of mortgages + +On line 523: + quality for over + billion a year of mortgages + underwritten and + +On line 523: + over billion a year + of mortgages underwritten + and purchased by CitiFinancial. + +On line 523: + billion a year of + mortgages underwritten and + purchased by CitiFinancial. These + +On line 523: + a year of mortgages + underwritten and purchased + by CitiFinancial. These mortgages + +On line 523: + underwritten and + purchased by CitiFinancial. These mortgages + were sold to Fannie + +On line 523: + purchased by CitiFinancial. These + mortgages were sold to Fannie + Mae, Freddie Mac, and + +On line 523: + CitiFinancial. These mortgages were + sold to Fannie Mae, Freddie + Mac, and others. In + +On line 523: + These mortgages were sold + to Fannie Mae, Freddie Mac, + and others. In June + +On line 523: + mortgages were sold to + Fannie Mae, Freddie Mac, and + others. In June Bowen + +On line 523: + sold to Fannie Mae, + Freddie Mac, and others. In + June Bowen discovered + +On line 523: + Fannie Mae, Freddie + Mac, and others. In June Bowen + discovered that as + +On line 523: + Mac, and others. In + June Bowen discovered that as + much as of the loans + +On line 523: + and others. In June + Bowen discovered that as much + as of the loans that + +On line 523: + others. In June Bowen + discovered that as much as + of the loans that Citi + +On line 523: + June Bowen discovered + that as much as of the loans + that Citi was buying + +On line 523: + Bowen discovered that + as much as of the loans that + Citi was buying were + +On line 523: + that as much as of + the loans that Citi was buying + were defective. They + +On line 523: + as much as of the + loans that Citi was buying were + defective. They did + +On line 523: + of the loans that Citi + was buying were defective. + They did not meet Citi + +On line 523: + the loans that Citi was + buying were defective. They + did not meet Citi - + +On line 525: + that Citi was buying + were defective. They did not + meet Citi - group’s loan + +On line 525: + meet Citi - group’s loan + guidelines and thus endangered + the company—if the + +On line 525: + loan guidelines and thus + endangered the company—if + the borrowers were + +On line 525: + thus endangered the + company—if the borrowers + were to default on + +On line 525: + the borrowers were + to default on their loans, the + investors could force Citi + +On line 525: + were to default on + their loans, the investors could force + Citi to buy them back. + +On line 525: + to default on their + loans, the investors could force Citi + to buy them back. Bowen + +On line 525: + default on their loans, + the investors could force Citi to + buy them back. Bowen told + +On line 525: + loans, the investors could + force Citi to buy them back. Bowen + told the Commission + +On line 525: + the investors could force + Citi to buy them back. Bowen told + the Commission that + +On line 525: + investors could force Citi + to buy them back. Bowen told the + Commission that he + +On line 525: + force Citi to buy them + back. Bowen told the Commission + that he tried to alert + +On line 525: + Citi to buy them back. + Bowen told the Commission that + he tried to alert top + +On line 525: + buy them back. Bowen told + the Commission that he tried + to alert top managers + +On line 525: + them back. Bowen told the + Commission that he tried to + alert top managers at + +On line 525: + the Commission that + he tried to alert top managers + at the firm by "email, + +On line 525: + that he tried to alert + top managers at the firm by + "email, weekly reports, + +On line 525: + to alert top managers + at the firm by "email, weekly + reports, committee + +On line 525: + at the firm by "email, + weekly reports, committee + presentations, and + +On line 525: + "email, weekly reports, + committee presentations, + and discussions"; but + +On line 527: + and discussions"; but + though they expressed concern, it + "never translated + +On line 527: + expressed concern, it + "never translated into + any action." Instead, + +On line 527: + "never translated + into any action." Instead, + he said, "there was a + +On line 527: + into any action." + Instead, he said, "there was a + considerable push + +On line 527: + Instead, he said, "there + was a considerable push + to build volumes, to + +On line 527: + he said, "there was a + considerable push to build + volumes, to increase + +On line 527: + considerable push + to build volumes, to increase + market share." Indeed, + +On line 527: + to increase market + share." Indeed, Bowen recalled, Citi + began to loosen its + +On line 527: + market share." Indeed, + Bowen recalled, Citi began to + loosen its own standards + +On line 527: + Indeed, Bowen recalled, + Citi began to loosen its own + standards during these + +On line 527: + started to purchase + stated-income loans. "So we joined + the other lemmings + +On line 527: + purchase stated-income + loans. "So we joined the other + lemmings headed for + +On line 527: + stated-income loans. "So + we joined the other lemmings + headed for the cliff," + +On line 527: + loans. "So we joined the + other lemmings headed for + the cliff," he said in + +On line 527: + the other lemmings + headed for the cliff," he said + in an interview + +On line 529: + for the cliff," he said + in an interview with the + FCIC.98 He finally + +On line 529: + the cliff," he said in + an interview with the FCIC.98 + He finally took + +On line 529: + cliff," he said in an + interview with the FCIC.98 He + finally took his + +On line 529: + in an interview + with the FCIC.98 He finally + took his warnings to + +On line 529: + an interview with + the FCIC.98 He finally took + his warnings to the + +On line 529: + He finally took + his warnings to the highest + level he could reach—Robert + +On line 529: + his warnings to the + highest level he could reach—Robert + Rubin, the chairman + +On line 529: + the Executive + Committee of the Board of + Directors and a + +On line 529: + Committee of the + Board of Directors and a + former U.S. treasury + +On line 529: + Board of Directors + and a former U.S. treasury + secretary in the + +On line 529: + former U.S. treasury + secretary in the Clinton + administration, + +On line 529: + secretary in the + Clinton administration, + and three other bank + +On line 531: + and three other bank + officials. He sent Rubin + and the others a + +On line 531: + bank officials. He + sent Rubin and the others + a memo with the words + +On line 531: + and the others a + memo with the words "URGENT—READ + IMMEDIATELY" + +On line 531: + the words "URGENT—READ + IMMEDIATELY" in the + subject line. Sharing + +On line 531: + IMMEDIATELY" + in the subject line. Sharing + his concerns, he stressed + +On line 531: + in the subject line. + Sharing his concerns, he stressed + to top managers that + +On line 531: + subject line. Sharing + his concerns, he stressed to top + managers that Citi faced + +On line 531: + Sharing his concerns, + he stressed to top managers that + Citi faced billions of + +On line 531: + his concerns, he stressed + to top managers that Citi faced + billions of dollars + +On line 531: + top managers that Citi + faced billions of dollars in + losses if investors + +On line 531: + billions of dollars + in losses if investors were + to demand that Citi + +On line 531: + dollars in losses + if investors were to demand + that Citi repurchase + +On line 531: + if investors were to + demand that Citi repurchase + the defective loans.99 + +On line 533: + to demand that Citi + repurchase the defective + loans.99 Rubin told the + +On line 533: + that Citi repurchase + the defective loans.99 Rubin + told the Commission + +On line 533: + Citi repurchase the + defective loans.99 Rubin told + the Commission in + +On line 533: + loans.99 Rubin told the + Commission in a public + hearing in April that + +On line 533: + told the Commission + in a public hearing in + April that Citibank handled + +On line 533: + the Commission in + a public hearing in April + that Citibank handled the + +On line 533: + Commission in a + public hearing in April that + Citibank handled the Bowen + +On line 533: + a public hearing + in April that Citibank handled the + Bowen matter promptly + +On line 533: + public hearing in + April that Citibank handled the Bowen + matter promptly and + +On line 533: + April that Citibank handled + the Bowen matter promptly and + effectively. "I + +On line 533: + Bowen matter promptly + and effectively. "I do + recollect this and + +On line 533: + and effectively. + "I do recollect this and + that either I or + +On line 533: + "I do recollect + this and that either I or + somebody else, and I + +On line 533: + recollect this and + that either I or somebody + else, and I truly + +On line 533: + that either I or + somebody else, and I truly + do not remember + +On line 533: + somebody else, and I + truly do not remember + who, but either I + +On line 533: + I truly do not + remember who, but either + I or somebody else + +On line 533: + not remember who, + but either I or somebody + else sent it to the + +On line 533: + who, but either I + or somebody else sent it to + the appropriate + +On line 533: + or somebody else sent + it to the appropriate + people, and I do + +On line 533: + that that was acted + on promptly and actions were + taken in response + +On line 533: + promptly and actions + were taken in response to + it."100 According to + +On line 533: + in response to it."100 + According to Citigroup, + the bank undertook + +On line 533: + the bank undertook + an investigation in + response to Bowen’s claims + +On line 533: + to Bowen’s claims and the + system of underwriting + reviews was revised.101 + +On line 535: + claims and the system + of underwriting reviews + was revised.101 Bowen told + +On line 535: + and the system of + underwriting reviews was + revised.101 Bowen told the + +On line 535: + of underwriting + reviews was revised.101 Bowen told + the Commission that + +On line 535: + reviews was revised.101 + Bowen told the Commission that + after he alerted + +On line 535: + revised.101 Bowen told the + Commission that after he + alerted management + +On line 535: + sending emails, he went + from supervising0 people + to supervising + +On line 535: + from supervising0 + people to supervising + only his bonus was + +On line 535: + bonus was reduced, and + he was downgraded in his + performance review.102 + +On line 539: + a former Bear Stearns + executive, testified + to the FCIC that he + +On line 539: + to the FCIC that he + told the Federal Reserve + that he believed the + +On line 539: + FCIC that he told the + Federal Reserve that he + believed the housing + +On line 539: + to be on a shaky + foundation. "Their answer at + the time was, and this + +On line 539: + a shaky foundation. + "Their answer at the time was, + and this was also + +On line 539: + shaky foundation. "Their + answer at the time was, and + this was also the + +On line 539: + "Their answer at the + time was, and this was also + the thought that was—that was + +On line 539: + the time was, and this + was also the thought that was—that + was homogeneous + +On line 539: + the thought that was—that was + homogeneous throughout Wall + Street’s analysts—was home + +On line 539: + was homogeneous + throughout Wall Street’s analysts—was + home prices always track + +On line 539: + Wall Street’s analysts—was + home prices always track income + growth and jobs growth. And + +On line 539: + Street’s analysts—was home + prices always track income growth + and jobs growth. And they + +On line 539: + analysts—was home prices + always track income growth and + jobs growth. And they showed + +On line 539: + home prices always track + income growth and jobs growth. And + they showed me income + +On line 539: + always track income + growth and jobs growth. And they showed + me income growth on + +On line 539: + income growth and jobs + growth. And they showed me income + growth on one chart and + +On line 539: + growth and jobs growth. And + they showed me income growth on + one chart and jobs growth + +On line 539: + and jobs growth. And they + showed me income growth on one + chart and jobs growth on + +On line 539: + they showed me income + growth on one chart and jobs growth + on another, and + +On line 539: + showed me income growth + on one chart and jobs growth on + another, and said, + +On line 539: + growth on one chart and + jobs growth on another, and + said, ‘We don’t see what + +On line 539: + on one chart and jobs + growth on another, and said, + ‘We don’t see what you’re + +On line 539: + chart and jobs growth on + another, and said, ‘We don’t + see what you’re talking + +On line 539: + growth on another, + and said, ‘We don’t see what you’re + talking about because + +On line 539: + another, and said, + ‘We don’t see what you’re talking + about because incomes + +On line 539: + ‘We don’t see what you’re + talking about because incomes + are still growing and + +On line 539: + see what you’re talking + about because incomes are still + growing and jobs are + +On line 539: + talking about because + incomes are still growing and + jobs are still growing.’ + +On line 539: + about because incomes + are still growing and jobs are + still growing.’ And I + +On line 539: + because incomes are + still growing and jobs are still + growing.’ And I said, + +On line 539: + growing and jobs are + still growing.’ And I said, well, + you obviously + +On line 539: + still growing.’ And I + said, well, you obviously + don’t realize where + +On line 539: + growing.’ And I said, + well, you obviously don’t + realize where the + +On line 539: + you obviously + don’t realize where the dog + is and where the tail + +On line 539: + obviously don’t + realize where the dog is + and where the tail is, + +On line 539: + don’t realize where + the dog is and where the tail + is, and what’s moving + +On line 539: + realize where the + dog is and where the tail is, + and what’s moving what."103 + +On line 541: + the dog is and where + the tail is, and what’s moving + what."103 ven those who had + +On line 541: + and where the tail is, + and what’s moving what."103 ven those + who had profited + +On line 541: + where the tail is, and + what’s moving what."103 ven those who + had profited from + +On line 541: + the tail is, and what’s + moving what."103 ven those who had + profited from the + +On line 541: + what."103 ven those who had + profited from the growth of + nontraditional + +On line 541: + profited from the + growth of nontraditional + lending practices said + +On line 541: + lending practices said + they became disturbed by what + was happening. Herb + +On line 541: + they became disturbed + by what was happening. Herb + Sandler, the co-founder + +On line 541: + was happening. Herb + Sandler, the co-founder of the + mortgage lender Golden + +On line 541: + Corporation, which + was heavily loaded with + option ARM loans, wrote + +On line 541: + which was heavily + loaded with option ARM loans, + wrote a letter to + +On line 541: + loaded with option + ARM loans, wrote a letter to + officials at the + +On line 541: + option ARM loans, wrote + a letter to officials + at the Federal + +On line 541: + to officials at + the Federal Reserve, the + FDIC, the OTS, and the + +On line 541: + officials at the + Federal Reserve, the FDIC, + the OTS, and the OCC + +On line 541: + at the Federal + Reserve, the FDIC, the OTS, and + the OCC warning that + +On line 541: + Reserve, the FDIC, the + OTS, and the OCC warning that + regulators were + +On line 541: + the OTS, and the OCC + warning that regulators + were "too dependent" + +On line 541: + regulators were + "too dependent" on ratings + agencies and "there is + +On line 541: + "too dependent" on + ratings agencies and "there is + a high potential + +On line 541: + and "there is a high + potential for gaming when + virtually any + +On line 541: + high potential for + gaming when virtually + any asset can be + +On line 541: + asset can be churned + through securitization + and transformed into + +On line 541: + and transformed into + a AAA-rated asset, and when a + multi-billion + +On line 541: + a AAA-rated asset, and + when a multi-billion + dollar industry + +On line 541: + asset, and when a + multi-billion dollar + industry is all + +On line 543: + all too eager to + facilitate this alchemy."104 + Similarly, Lewis + +On line 543: + to facilitate + this alchemy."104 Similarly, + Lewis Ranieri, a mortgage + +On line 543: + Lewis Ranieri, a mortgage + finance veteran who helped + engineer the Wall + +On line 545: + machine in the 1980s, + said he didn’t like what he + called "the madness" that + +On line 545: + 1980s, said he didn’t + like what he called "the madness" + that had descended + +On line 545: + said he didn’t like + what he called "the madness" that + had descended on + +On line 545: + he didn’t like what + he called "the madness" that had + descended on the + +On line 545: + "the madness" that had + descended on the real + estate market. Ranieri + +On line 545: + descended on the + real estate market. Ranieri + told the Commission, + +On line 545: + estate market. Ranieri + told the Commission, "I was + not the only guy. + +On line 545: + market. Ranieri told the + Commission, "I was not the + only guy. I’m not + +On line 545: + told the Commission, + "I was not the only guy. + I’m not telling you I + +On line 545: + the Commission, "I + was not the only guy. I’m + not telling you I was + +On line 545: + Commission, "I was + not the only guy. I’m not + telling you I was John + +On line 545: + was not the only + guy. I’m not telling you I was + John the Baptist. There + +On line 545: + not the only guy. + I’m not telling you I was John + the Baptist. There were + +On line 545: + the only guy. I’m + not telling you I was John the + Baptist. There were enough + +On line 545: + not telling you I was + John the Baptist. There were enough + of us, analysts + +On line 545: + telling you I was John + the Baptist. There were enough of + us, analysts and + +On line 545: + the Baptist. There were + enough of us, analysts and + others, wandering + +On line 545: + of us, analysts + and others, wandering around + going ‘look at this + +On line 545: + others, wandering + around going ‘look at this stuff,’ + that it would be hard + +On line 545: + around going ‘look at + this stuff,’ that it would be hard + to miss it."105 Ranieri’s own + +On line 545: + ‘look at this stuff,’ that + it would be hard to miss it."105 + Ranieri’s own Houston-based Franklin + +On line 545: + at this stuff,’ that it + would be hard to miss it."105 Ranieri’s + own Houston-based Franklin Bank + +On line 545: + it would be hard to + miss it."105 Ranieri’s own Houston-based Franklin + Bank Corporation + +On line 545: + would be hard to miss + it."105 Ranieri’s own Houston-based Franklin Bank + Corporation would + +On line 545: + own Houston-based Franklin Bank + Corporation would itself + collapse under the + +On line 547: + under the weight of + the financial crisis in + November Other + +On line 547: + inside the business + also acknowledged that the + rules of the game were + +On line 547: + the business also + acknowledged that the rules of + the game were being + +On line 547: + also acknowledged + that the rules of the game were + being changed. "Poison" + +On line 547: + acknowledged that the + rules of the game were being + changed. "Poison" was the + +On line 547: + the rules of the game + were being changed. "Poison" was + the word famously + +On line 547: + rules of the game were + being changed. "Poison" was the + word famously used + +On line 547: + the word famously + used by Countrywide’s Mozilo + to describe one of + +On line 547: + word famously used + by Countrywide’s Mozilo to + describe one of the + +On line 547: + used by Countrywide’s + Mozilo to describe one of + the loan products his + +On line 547: + Countrywide’s Mozilo + to describe one of the loan + products his firm was + +On line 547: + to describe one of + the loan products his firm was + originating.106 "In + +On line 547: + of the loan products + his firm was originating.106 + "In all my years in + +On line 547: + the loan products his + firm was originating.106 "In + all my years in the + +On line 547: + products his firm was + originating.106 "In all my + years in the business + +On line 547: + originating.106 "In + all my years in the business + I have never seen + +On line 547: + "In all my years in + the business I have never + seen a more toxic + +On line 547: + years in the business + I have never seen a more + toxic [product]," he + +On line 547: + the business I have + never seen a more toxic + [product]," he wrote in + +On line 547: + have never seen a + more toxic [product]," he wrote + in an internal + +On line 547: + never seen a more + toxic [product]," he wrote in + an internal email.107 + +On line 547: + more toxic [product]," + he wrote in an internal + email.107 Others at the + +On line 547: + toxic [product]," he + wrote in an internal email.107 + Others at the bank + +On line 547: + [product]," he wrote in + an internal email.107 Others + at the bank argued + +On line 547: + an internal email.107 + Others at the bank argued + in response that they + +On line 547: + email.107 Others at the + bank argued in response that + they were offering + +On line 547: + offering products + "pervasively offered in + the marketplace by + +On line 547: + of ours."108 Still, Mozilo + was nervous. "There was a time + when savings and loans + +On line 547: + ours."108 Still, Mozilo was + nervous. "There was a time when + savings and loans were + +On line 547: + Mozilo was nervous. + "There was a time when savings + and loans were doing + +On line 547: + nervous. "There was a + time when savings and loans were + doing things because + +On line 547: + time when savings and + loans were doing things because + their competitors were + +On line 547: + and loans were doing + things because their competitors + were doing it," he + +On line 547: + loans were doing things + because their competitors were + doing it," he told + +On line 551: + doing it," he told + the other executives. + "They all went broke."109 In + +On line 551: + all went broke."109 In late + regulators decided + to take a look at + +On line 553: + to take a look at + the changing mortgage market. + Sabeth Siddique, the + +On line 553: + Sabeth Siddique, the + assistant director for + credit risk in the + +On line 553: + for credit risk in + the Division of Banking + Supervision and + +On line 553: + in the Division + of Banking Supervision + and Regulation + +On line 553: + the Division of + Banking Supervision and + Regulation at + +On line 553: + Reserve Board, was charged + with investigating how + broadly loan patterns + +On line 553: + investigating + how broadly loan patterns were + changing. He took the + +On line 553: + were changing. He took + the questions directly to + large banks in and asked + +On line 553: + changing. He took the + questions directly to large + banks in and asked them + +On line 553: + He took the questions + directly to large banks in + and asked them how many + +On line 553: + questions directly + to large banks in and asked them + how many of which kinds + +On line 553: + directly to large + banks in and asked them how many + of which kinds of loans + +On line 553: + large banks in and asked + them how many of which kinds of + loans they were making. + +On line 555: + in and asked them how + many of which kinds of loans they + were making. Siddique + +On line 555: + and asked them how many + of which kinds of loans they were + making. Siddique found + +On line 555: + of which kinds of loans + they were making. Siddique found + the information + +On line 555: + which kinds of loans they + were making. Siddique found the + information he + +On line 555: + were making. Siddique + found the information he + received "very alarming," + +On line 555: + the information + he received "very alarming," he + told the Commission.110 + +On line 555: + information he + received "very alarming," he told + the Commission.110 In + +On line 555: + told the Commission.110 + In fact, nontraditional + loans made up percent + +On line 555: + the Commission.110 In + fact, nontraditional loans + made up percent of + +On line 555: + at National City, + at Washington Mutual, + at CitiFinancial, and at Bank + +On line 555: + National City, at + Washington Mutual, at + CitiFinancial, and at Bank of + +On line 555: + City, at Washington + Mutual, at CitiFinancial, and at + Bank of America. + +On line 555: + at CitiFinancial, and at Bank + of America. Moreover, the + banks expected that + +On line 555: + CitiFinancial, and at Bank of + America. Moreover, the banks + expected that their + +On line 555: + America. Moreover, + the banks expected that their + originations of + +On line 555: + the banks expected + that their originations of + nontraditional + +On line 555: + their originations + of nontraditional loans + would rise by in to + +On line 557: + would rise by in to + billion. The review also + noted the "slowly + +On line 557: + due to loosening + underwriting standards." In + addition, it found + +On line 557: + it found that two-thirds of + the nontraditional loans + made by the banks in + +On line 557: + found that two-thirds of the + nontraditional loans made + by the banks in had + +On line 557: + banks in had been of + the stated-income, minimal + documentation + +On line 557: + known as liar loans, which + had a particularly + great likelihood of + +On line 559: + particularly + great likelihood of going + sour.111 The reaction + +On line 559: + great likelihood of + going sour.111 The reaction + to Siddique’s briefing + +On line 559: + sour.111 The reaction + to Siddique’s briefing was mixed. + Federal Reserve + +On line 559: + Federal Reserve + Governor Bies recalled the + response by the Fed + +On line 559: + Reserve Governor + Bies recalled the response by + the Fed governors + +On line 559: + response by the Fed + governors and regional + board directors as + +On line 559: + Fed governors and + regional board directors + as divided from + +On line 559: + and regional board + directors as divided + from the beginning. + +On line 559: + people on the board + and regional presidents + just wanted to come + +On line 559: + just wanted to come + to a different answer. + So they did ignore + +On line 559: + wanted to come to + a different answer. So + they did ignore it, + +On line 559: + to a different + answer. So they did ignore + it, or the full thrust + +On line 559: + different answer. + So they did ignore it, or + the full thrust of it," + +On line 559: + answer. So they did + ignore it, or the full thrust + of it," she told the + +On line 559: + they did ignore it, + or the full thrust of it," she + told the Commission.112 + +On line 563: + did ignore it, or + the full thrust of it," she told + the Commission.112 The + +On line 563: + ignore it, or the + full thrust of it," she told the + Commission.112 The OCC + +On line 563: + or the full thrust of + it," she told the Commission.112 + The OCC was also + +On line 563: + thrust of it," she told + the Commission.112 The OCC was + also pondering + +On line 563: + the Commission.112 The + OCC was also pondering + the situation. + +On line 563: + also pondering + the situation. Former + comptroller of the + +On line 563: + the situation. + Former comptroller of the + currency John C. + +On line 563: + comptroller of the + currency John C. Dugan told + the Commission that + +On line 563: + the currency John + C. Dugan told the Commission + that the push had come + +On line 563: + currency John C. + Dugan told the Commission that + the push had come from + +On line 563: + John C. Dugan told the + Commission that the push had + come from below, from + +On line 563: + Commission that the + push had come from below, from + bank examiners + +On line 563: + had come from below, + from bank examiners who + had become concerned + +On line 563: + come from below, from + bank examiners who had + become concerned about + +On line 563: + bank examiners + who had become concerned about + what they were seeing + +On line 563: + examiners who + had become concerned about what + they were seeing in + +On line 565: + had become concerned + about what they were seeing in + the field.113 The agency + +On line 565: + concerned about what they + were seeing in the field.113 The + agency began to + +On line 565: + The agency began + to consider issuing + "guidance," a kind of + +On line 565: + warning to banks, that + nontraditional loans could + jeopardize safety + +On line 565: + nontraditional + loans could jeopardize safety + and soundness and would + +On line 565: + loans could jeopardize + safety and soundness and would + invite scrutiny + +On line 565: + jeopardize safety + and soundness and would invite + scrutiny by bank + +On line 565: + bank examiners. + Siddique said the OCC led the + effort, which became + +On line 567: + deliberations + over the potential guidance + also stirred debate + +On line 567: + potential guidance + also stirred debate within + the Fed, because some + +On line 567: + also stirred debate + within the Fed, because some + critics feared it both + +On line 567: + debate within the + Fed, because some critics feared + it both would stifle + +On line 567: + critics feared it both + would stifle the financial + innovation that + +On line 567: + both would stifle the + financial innovation + that was bringing record + +On line 567: + innovation that + was bringing record profits to + Wall Street and the banks + +On line 567: + that was bringing record + profits to Wall Street and the + banks and would make homes + +On line 567: + record profits to Wall + Street and the banks and would make + homes less affordable. + +On line 567: + banks and would make homes + less affordable. Moreover, all + the agencies—the + +On line 567: + and would make homes less + affordable. Moreover, all the + agencies—the Fed, + +On line 567: + affordable. Moreover, + all the agencies—the Fed, + the OCC, the OTS, the + +On line 567: + the agencies—the + Fed, the OCC, the OTS, the FDIC, + and the National + +On line 567: + the OTS, the FDIC, and + the National Credit Union + Administration—would + +On line 567: + National Credit + Union Administration—would need + to work together + +On line 567: + work together on + it, or it would unfairly + block one group of lenders + +On line 567: + together on it, + or it would unfairly block + one group of lenders from + +On line 567: + on it, or it would + unfairly block one group of + lenders from issuing + +On line 567: + unfairly block one + group of lenders from issuing + types of loans that were + +On line 567: + block one group of lenders + from issuing types of loans + that were available from + +On line 567: + lenders from issuing + types of loans that were available + from other lenders. The + +On line 569: + regulatory + overreach. "The bankers pushed back," Bies + told the Commission. + +On line 569: + bankers pushed back," Bies told + the Commission. "The members + of Congress pushed back. + +On line 569: + pushed back," Bies told the + Commission. "The members of + Congress pushed back. Some + +On line 569: + Congress pushed back. Some + of our internal people + at the Fed pushed back."115 + +On line 571: + represents mortgage + insurance companies, weighed + in on the other + +On line 571: + mortgage insurance + companies, weighed in on the + other side. "We are + +On line 571: + companies, weighed in + on the other side. "We are + deeply concerned about the + +On line 571: + on the other side. + "We are deeply concerned about the + contagion effect + +On line 571: + underwritten or + unsuitable mortgages and home + equity loans," the + +On line 571: + equity loans," the + trade association wrote + to regulators + +On line 571: + to regulators + in "The most recent market + trends show alarming signs + +On line 571: + regulators in + "The most recent market trends + show alarming signs of + +On line 571: + recent market trends + show alarming signs of undue + risk-taking that puts + +On line 571: + show alarming signs of + undue risk-taking that puts + both lenders and consumers + +On line 573: + risk-taking that puts + both lenders and consumers at risk."116 + In congressional + +On line 573: + both lenders and consumers + at risk."116 In congressional + testimony about + +On line 573: + downturns. "We take a + conservative position + on risk because of + +On line 573: + risk because of our + first loss position," Simpson + informed the Senate + +On line 573: + first loss position," + Simpson informed the Senate + Subcommittee on + +On line 573: + Simpson informed the + Senate Subcommittee on + Housing, Transportation + +On line 573: + we also have a + historical perspective. + We were there when the + +On line 573: + a historical + perspective. We were there when + the mortgage markets + +On line 573: + perspective. We were + there when the mortgage markets + turned sharply down during + +On line 573: + the mortgage markets + turned sharply down during the mid-1980s + especially in + +On line 573: + turned sharply down during + the mid-1980s especially in + the oil patch and the + +On line 573: + down during the mid-1980s + especially in the oil + patch and the early + +On line 575: + patch and the early + 1990s in California and + the Northeast."117 Within + +On line 575: + and the early 1990s + in California and the + Northeast."117 Within the + +On line 575: + in California + and the Northeast."117 Within the + Fed, the debate grew + +On line 575: + the Fed, the debate + grew heated and emotional, + Siddique recalled. "It + +On line 575: + Siddique recalled. "It + got very personal," he told + the Commission. The + +On line 575: + got very personal," + he told the Commission. The + ideological + +On line 575: + told the Commission. + The ideological turf + war lasted more than + +On line 575: + the Commission. The + ideological turf war + lasted more than a + +On line 575: + ideological + turf war lasted more than a + year, while the number + +On line 575: + war lasted more than + a year, while the number of + nontraditional + +On line 575: + while the number of + nontraditional loans kept + growing and growing.118 + +On line 577: + nontraditional + loans kept growing and growing.118 + Consumer advocates + +On line 577: + loans kept growing and + growing.118 Consumer advocates + kept up the heat. In + +On line 577: + growing and growing.118 + Consumer advocates kept up + the heat. In a Fed + +On line 577: + and growing.118 Consumer + advocates kept up the heat. + In a Fed Consumer + +On line 577: + up the heat. In a + Fed Consumer Advisory + Council meeting in + +On line 577: + Council meeting in + March Fed Governors Bernanke, Mark + Olson, and Kevin Warsh + +On line 577: + March Fed Governors + Bernanke, Mark Olson, and Kevin Warsh + were specifically + +On line 577: + Fed Governors Bernanke, + Mark Olson, and Kevin Warsh were + specifically and + +On line 577: + Bernanke, Mark Olson, and + Kevin Warsh were specifically + and publicly warned of + +On line 577: + specifically and + publicly warned of dangers that + nontraditional + +On line 577: + warned of dangers that + nontraditional loans posed + to the economy. + +On line 577: + director of the + North Carolina Fair Housing + Center, raised concerns + +On line 577: + nontraditional + lending "may precipitate + a downward spiral + +On line 577: + "may precipitate + a downward spiral that starts + on the coast and then + +On line 577: + a downward spiral + that starts on the coast and then + creates panic in + +On line 577: + that starts on the coast + and then creates panic in + the east that could have + +On line 577: + coast and then creates + panic in the east that could + have implications + +On line 577: + in the east that could + have implications on our + total economy + +On line 579: + have implications + on our total economy + as well."119 At the next + +On line 579: + total economy + as well."119 At the next meeting + of the Fed’s Consumer + +On line 579: + next meeting of the + Fed’s Consumer Advisory + Council, held in June + +On line 579: + June and attended + by Bernanke, Bies, Olson, and Warsh, + several consumer + +On line 579: + by Bernanke, Bies, Olson, + and Warsh, several consumer + advocates described + +On line 579: + the Fed governors + alarming incidents that were + now occurring all + +On line 579: + incidents that were + now occurring all over the + ountry. Edward Sivak, + +On line 579: + were now occurring + all over the ountry. Edward + Sivak, the director + +On line 579: + now occurring all + over the ountry. Edward Sivak, + the director of + +On line 579: + all over the ountry. + Edward Sivak, the director + of policy and + +On line 581: + and evaluation + at the Enterprise Corp. of + the Delta, in Jackson, + +On line 581: + at the Enterprise + Corp. of the Delta, in Jackson, + Mississippi, spoke + +On line 581: + Corp. of the Delta, in + Jackson, Mississippi, spoke + of being told by + +On line 581: + by mortgage brokers + that property values were + being inflated + +On line 581: + property values + were being inflated to + maximize profit + +On line 581: + values were being + inflated to maximize + profit for real + +On line 581: + profit for real + estate appraisers and loan + originators. Alan + +On line 581: + in Philadelphia, + reported a "huge surge in + foreclosures," noting + +On line 581: + reported a "huge + surge in foreclosures," noting + that up to half of + +On line 581: + surge in foreclosures," + noting that up to half of + the borrowers he + +On line 581: + up to half of the + borrowers he was seeing + with troubled loans had + +On line 581: + of the borrowers + he was seeing with troubled + loans had been overcharged + +On line 581: + the borrowers he + was seeing with troubled loans + had been overcharged and + +On line 581: + loans had been overcharged + and given high-interest + rate mortgages when their + +On line 581: + overcharged and given + high-interest rate mortgages + when their credit had + +On line 581: + high-interest rate + mortgages when their credit had + qualified them for + +On line 581: + rate mortgages when their + credit had qualified them + for lower-cost loans. + +On line 583: + qualified them for + lower-cost loans. Hattie B. + Dorsey, the president + +On line 583: + Development, said + she worried that houses were + being flipped back and + +On line 583: + said she worried that + houses were being flipped back + and forth so much that + +On line 583: + houses were being + flipped back and forth so much that + the result would be + +On line 583: + being flipped back and + forth so much that the result + would be neighborhood + +On line 583: + flipped back and forth so + much that the result would be + neighborhood "decay." + +On line 583: + forth so much that the + result would be neighborhood + "decay." Carolyn Carter + +On line 583: + much that the result + would be neighborhood "decay." + Carolyn Carter of the + +On line 583: + would be neighborhood + "decay." Carolyn Carter of the + National Consumer + +On line 585: + authority to + "prohibit abuses in the + mortgage market."120 The + +On line 585: + "prohibit abuses + in the mortgage market."120 The + balance was tipping. + +On line 585: + market."120 The balance + was tipping. According to + Siddique, before Greenspan + +On line 585: + Siddique, before Greenspan + left his post as Fed chairman + in January he + +On line 585: + left his post as Fed + chairman in January he + had indicated + +On line 585: + indicated his + willingness to accept the + guidance. Ferguson + +On line 585: + the Fed board and the + regional Fed presidents + to get it done. Bies + +On line 585: + and the regional + Fed presidents to get it + done. Bies supported + +On line 585: + the regional Fed + presidents to get it done. + Bies supported it, + +On line 585: + Fed presidents to + get it done. Bies supported + it, and Bernanke did as + +On line 585: + presidents to get + it done. Bies supported it, + and Bernanke did as well.121 + +On line 587: + to get it done. Bies + supported it, and Bernanke did + as well.121 More than a + +On line 587: + done. Bies supported + it, and Bernanke did as well.121 More + than a year after + +On line 587: + Bies supported it, + and Bernanke did as well.121 More than + a year after the + +On line 587: + supported it, and + Bernanke did as well.121 More than a + year after the OCC + +On line 587: + it, and Bernanke did as + well.121 More than a year after + the OCC had began + +On line 587: + Bernanke did as well.121 More + than a year after the OCC + had began discussing + +On line 587: + did as well.121 More than + a year after the OCC had + began discussing the + +On line 587: + well.121 More than a year + after the OCC had began + discussing the guidance, + +On line 587: + a year after the + OCC had began discussing the + guidance, and after + +On line 587: + had began discussing + the guidance, and after the + housing market had + +On line 587: + guidance, and after + the housing market had peaked, + it was issued in + +On line 587: + the housing market + had peaked, it was issued in + September as an + +On line 587: + September as an + interagency warning + that affected banks, + +On line 587: + interagency + warning that affected banks, + thrifts, and credit unions + +On line 587: + affected banks, thrifts, + and credit unions nationwide. + Dozens of states followed, + +On line 587: + banks, thrifts, and credit + unions nationwide. Dozens of states + followed, directing + +On line 587: + unions nationwide. Dozens + of states followed, directing + their versions of the + +On line 587: + Dozens of states followed, + directing their versions of + the guidance to tens + +On line 587: + followed, directing + their versions of the guidance + to tens of thousands + +On line 587: + their versions of the + guidance to tens of thousands + of state-chartered lenders and + +On line 587: + the guidance to tens + of thousands of state-chartered lenders + and mortgage brokers. + +On line 589: + guidance to tens of + thousands of state-chartered lenders and + mortgage brokers. Then, + +On line 589: + July long after + the risky, nontraditional + mortgage market had + +On line 589: + halt, the Federal + Reserve finally adopted + new rules under HOEPA + +On line 589: + Federal Reserve + finally adopted new rules + under HOEPA to curb + +On line 589: + Reserve finally + adopted new rules under HOEPA + to curb the abuses + +On line 589: + finally adopted + new rules under HOEPA to curb + the abuses about which + +On line 589: + new rules under HOEPA + to curb the abuses about which + consumer groups had raised + +On line 589: + under HOEPA to curb + the abuses about which consumer + groups had raised red flags + +On line 589: + curb the abuses about + which consumer groups had raised red + flags for years—including + +On line 589: + the abuses about which + consumer groups had raised red flags + for years—including a + +On line 589: + which consumer groups had + raised red flags for years—including + a requirement that + +On line 589: + had raised red flags for + years—including a requirement + that borrowers have + +On line 589: + for years—including a + requirement that borrowers + have the ability + +On line 591: + that borrowers have + the ability to repay + loans made to them. By + +On line 591: + borrowers have the + ability to repay loans + made to them. By that + +On line 591: + the ability to + repay loans made to them. By + that time, however, + +On line 591: + repay loans made to + them. By that time, however, + the damage had been + +On line 591: + to them. By that time, + however, the damage had + been done. The total + +On line 591: + that time, however, + the damage had been done. The + total value of + +On line 591: + The total value + of mortgage-backed securities + issued between and + +On line 591: + trillion.122 There was a + mountain of problematic + securities, debt, + +On line 591: + securities, debt, + and derivatives resting + on real estate + +On line 591: + and derivatives + resting on real estate + assets that were far + +On line 591: + resting on real + estate assets that were far + less secure than they + +On line 591: + estate assets that + were far less secure than they + were thought to have been. + +On line 593: + assets that were far + less secure than they were thought + to have been. Just as + +On line 593: + were far less secure + than they were thought to have been. + Just as Bernanke thought the + +On line 593: + far less secure than + they were thought to have been. Just + as Bernanke thought the spillovers + +On line 593: + less secure than they + were thought to have been. Just as + Bernanke thought the spillovers from + +On line 593: + secure than they were + thought to have been. Just as Bernanke + thought the spillovers from a + +On line 593: + than they were thought to + have been. Just as Bernanke thought the + spillovers from a housing + +On line 593: + were thought to have been. + Just as Bernanke thought the spillovers from + a housing market + +On line 593: + thought to have been. Just + as Bernanke thought the spillovers from a + housing market crash + +On line 593: + have been. Just as Bernanke + thought the spillovers from a housing + market crash would be + +On line 593: + Just as Bernanke thought the + spillovers from a housing market + crash would be contained, + +On line 593: + as Bernanke thought the spillovers + from a housing market crash + would be contained, so + +On line 593: + Bernanke thought the spillovers from + a housing market crash would + be contained, so too + +On line 593: + a housing market + crash would be contained, so too + policymakers, + +On line 593: + crash would be contained, + so too policymakers, + regulators, and + +On line 593: + regulators, and + financial executives + did not understand + +On line 593: + firms and markets had + become to the potential + contagion from these + +On line 593: + had become to the + potential contagion from + these risky financial + +On line 593: + these risky financial + instruments. As the housing + market began to + +On line 593: + instruments. As the + housing market began to + turn, they scrambled to + +On line 593: + the housing market + began to turn, they scrambled + to understand the + +On line 593: + to understand the + rapid deterioration + in the financial + +On line 593: + respond as losses + in one part of that system + would ricochet to + +On line 595: + in one part of that + system would ricochet to + others. By the end + +On line 595: + part of that system + would ricochet to others. + By the end of most + +On line 595: + of that system would + ricochet to others. By + the end of most of + +On line 595: + would ricochet to + others. By the end of most + of the subprime lenders + +On line 595: + to others. By the + end of most of the subprime + lenders had failed or been + +On line 595: + end of most of the + subprime lenders had failed or been + acquired, including + +On line 595: + failed or been acquired, + including New Century + Financial, Ameriquest, and + +On line 595: + acquired, including + New Century Financial, + Ameriquest, and American + +On line 595: + Financial, Ameriquest, and + American Home Mortgage. In + January Bank of + +On line 595: + Ameriquest, and American + Home Mortgage. In January + Bank of America + +On line 595: + January Bank of + America announced it would + acquire the ailing + +On line 595: + America announced + it would acquire the ailing + lender Countrywide. It + +On line 595: + it would acquire the + ailing lender Countrywide. It + soon became clear that + +On line 595: + became clear that risk—rather + than being diversified + across the financial + +On line 595: + across the financial + system, as had been thought—was + concentrated at + +On line 595: + system, as had been + thought—was concentrated at + the largest financial + +On line 595: + as had been thought—was + concentrated at the largest + financial firms. Bear + +On line 595: + risky mortgage assets + and dependent on fickle + short-term lending, was + +On line 595: + and dependent on + fickle short-term lending, was + bought by JP Morgan + +On line 595: + lending, was bought by + JP Morgan with government + assistance in the + +On line 599: + bought by JP Morgan + with government assistance + in the spring. Before + +On line 599: + by JP Morgan with + government assistance in + the spring. Before the + +On line 599: + assistance in the + spring. Before the summer was + over, Fannie Mae and + +On line 599: + in the spring. Before + the summer was over, Fannie + Mae and Freddie Mac + +On line 599: + the spring. Before the + summer was over, Fannie Mae + and Freddie Mac would + +On line 599: + the summer was over, + Fannie Mae and Freddie Mac + would be put into + +On line 599: + Brothers failed and the + remaining investment banks, + Merrill Lynch, Goldman + +On line 599: + Lynch, Goldman Sachs, and + Morgan Stanley, struggled as + they lost the market’s + +On line 599: + confidence. AIG, with + its massive credit default + swap portfolio and + +On line 599: + its massive credit + default swap portfolio and + exposure to the + +On line 599: + swap portfolio and + exposure to the subprime + mortgage market, was + +On line 599: + and exposure to + the subprime mortgage market, + was rescued by the + +On line 599: + was rescued by the + government. Finally, many + commercial banks and + +On line 599: + by the government. + Finally, many commercial + banks and thrifts, which had + +On line 599: + thrifts, which had their own + exposures to declining + mortgage assets and + +On line 599: + their own exposures + to short-term credit markets, + teetered. IndyMac had already + +On line 599: + own exposures to + short-term credit markets, teetered. + IndyMac had already failed + +On line 599: + to short-term credit + markets, teetered. IndyMac had already + failed over the summer; + +On line 599: + failed over the summer; + in September, Washington + Mutual became + +On line 599: + bank failure in U.S. + history. In October, + Wachovia struck a deal + +On line 599: + U.S. history. In + October, Wachovia struck a + deal to be acquired + +On line 599: + to be acquired by + Wells Fargo. Citigroup and + Bank of America + +On line 599: + be acquired by Wells + Fargo. Citigroup and Bank + of America fought + +On line 599: + Fargo. Citigroup + and Bank of America fought + to stay afloat. Before + +On line 599: + Citigroup and Bank + of America fought to stay + afloat. Before it was + +On line 599: + Bank of America + fought to stay afloat. Before it + was over, taxpayers + +On line 599: + of America fought + to stay afloat. Before it was + over, taxpayers had + +On line 599: + to stay afloat. Before + it was over, taxpayers had + committed trillions + +On line 599: + Before it was over, + taxpayers had committed + trillions of dollars + +On line 599: + was over, taxpayers + had committed trillions of + dollars through more than + +On line 599: + through more than two dozen + extraordinary programs + to stabilize the + +On line 599: + extraordinary + programs to stabilize the + financial system + +On line 599: + to stabilize the + financial system and to + prop up the nation’s + +On line 601: + crisis that befell + the country in had been years + in the making. In + +On line 601: + the country in had + been years in the making. In + testimony to + +On line 601: + had been years in the + making. In testimony + to the Commission, + +On line 601: + years in the making. + In testimony to the + Commission, former + +On line 601: + Commission, former + Fed chairman Greenspan defended + his record and said most + +On line 601: + defended his record + and said most of his judgments + had been correct. "I + +On line 601: + record and said most of + his judgments had been correct. + "I was right of the + +On line 601: + and said most of his + judgments had been correct. "I + was right of the time + +On line 601: + most of his judgments + had been correct. "I was right + of the time but I + +On line 601: + of his judgments had + been correct. "I was right of + the time but I was + +On line 601: + his judgments had been + correct. "I was right of the + time but I was wrong + +On line 601: + had been correct. "I + was right of the time but I + was wrong of the time," + +On line 601: + been correct. "I was + right of the time but I was + wrong of the time," he + +On line 601: + correct. "I was right + of the time but I was wrong + of the time," he told + +On line 601: + right of the time but + I was wrong of the time," he + told the Commission.123 + +On line 601: + of the time but I + was wrong of the time," he told + the Commission.123 Yet + +On line 601: + the time but I was + wrong of the time," he told the + Commission.123 Yet the + +On line 601: + I was wrong of the + time," he told the Commission.123 + Yet the consequences + +On line 601: + was wrong of the time," + he told the Commission.123 Yet + the consequences of + +On line 601: + wrong of the time," he + told the Commission.123 Yet the + consequences of what + +On line 601: + told the Commission.123 + Yet the consequences of what + went wrong in the run-up + +On line 601: + the Commission.123 Yet + the consequences of what went + wrong in the run-up to + +On line 601: + Commission.123 Yet the + consequences of what went wrong + in the run-up to the + +On line 601: + Yet the consequences + of what went wrong in the run-up + to the crisis would + +On line 601: + the consequences of + what went wrong in the run-up to + the crisis would be + +On line 603: + in the run-up to the + crisis would be enormous. The + economic impact + +On line 603: + devastating. And + the human devasta-tion + is continuing. + +On line 603: + continuing. The + officially reported + unemployment rate + +On line 603: + in November but + the underemployment rate, + which includes those who + +On line 603: + November but the + underemployment rate, which + includes those who have + +On line 603: + underemployment + rate, which includes those who have + given up looking + +On line 603: + rate, which includes those + who have given up looking + for work and part-time + +On line 603: + includes those who have + given up looking for work + and part-time workers + +On line 603: + given up looking + for work and part-time workers + who would prefer to + +On line 603: + part-time workers who + would prefer to be working + full-time, was above + +On line 603: + who would prefer to + be working full-time, was + above And the share of + +On line 603: + full-time, was above + And the share of unemployed + workers who have been + +On line 603: + was above And the share + of unemployed workers who + have been out of work + +On line 603: + above And the share of + unemployed workers who have + been out of work for + +On line 603: + share of unemployed + workers who have been out of + work for more than six + +On line 603: + unemployed workers + who have been out of work for + more than six months was + +On line 603: + workers who have been + out of work for more than six + months was just above Of + +On line 603: + of work for more than + six months was just above Of large + metropolitan + +On line 603: + six months was just above + Of large metropolitan + areas, Las Vegas, + +On line 603: + was just above Of large + metropolitan areas, + Las Vegas, Nevada, + +On line 605: + were as lethal as many + had predicted, and it has + been estimated + +On line 605: + as lethal as many had + predicted, and it has been + estimated that + +On line 605: + had predicted, and + it has been estimated + that ultimately + +On line 605: + predicted, and it + has been estimated that + ultimately as + +On line 605: + been estimated + that ultimately as many + as million households + +On line 605: + estimated that + ultimately as many as + million households in + +On line 605: + that ultimately + as many as million households + in the United States + +On line 605: + ultimately as + many as million households in + the United States may + +On line 605: + as many as million + households in the United States + may lose their homes to + +On line 605: + million households in + the United States may lose their + homes to foreclosure. + +On line 605: + the United States may + lose their homes to foreclosure. + As of foreclosure + +On line 605: + United States may lose + their homes to foreclosure. As + of foreclosure rates + +On line 605: + foreclosure. As of + foreclosure rates were highest + in Florida and + +On line 605: + rates were highest in + Florida and Nevada; in + Florida, nearly + +On line 605: + Florida, nearly + of loans were in foreclosure, + and Nevada was not + +On line 605: + American mortgage + borrowers owed more on their + mortgages than their home + +On line 605: + mortgage borrowers + owed more on their mortgages than + their home was worth. In + +On line 605: + borrowers owed more + on their mortgages than their home + was worth. In Nevada, + +On line 605: + on their mortgages than + their home was worth. In Nevada, + the percentage was + +On line 607: + than their home was worth. + In Nevada, the percentage + was nearly Households + +On line 607: + their home was worth. In + Nevada, the percentage was + nearly Households have + +On line 609: + was nearly Households + have lost trillion in wealth since + As Mark Zandi, the + +On line 609: + nearly Households have + lost trillion in wealth since As + Mark Zandi, the chief + +On line 609: + have lost trillion in + wealth since As Mark Zandi, the + chief economist of + +On line 609: + lost trillion in wealth + since As Mark Zandi, the chief + economist of Moody’s + +On line 609: + economist of Moody’s + Economy.com, testified + to the Commission, + +On line 609: + testified to the + Commission, "The financial + crisis has dealt a + +On line 609: + the Commission, "The + financial crisis has dealt + a very serious + +On line 611: + crisis has dealt a + very serious blow to the + U.S. economy. The + +On line 611: + a very serious + blow to the U.S. economy. + The immediate + +On line 611: + U.S. economy. The + immediate impact was + the Great Recession: + +On line 611: + the Great Recession: + the longest, broadest and most + severe downturn since + +On line 611: + the longest, broadest + and most severe downturn since + the Great Depression + +On line 611: + longest, broadest and + most severe downturn since the + Great Depression of + +On line 611: + severe downturn since + the Great Depression of the + 1930s. The longer-term fallout + +On line 611: + downturn since the Great + Depression of the 1930s. The + longer-term fallout from the + +On line 611: + the Great Depression + of the 1930s. The longer-term fallout + from the economic + +On line 611: + Depression of the + 1930s. The longer-term fallout from the + economic crisis + +On line 611: + of the 1930s. The longer-term + fallout from the economic + crisis is also + +On line 611: + economic crisis + is also very substantial. + It will take years for + +On line 611: + crisis is also + very substantial. It will take + years for employment + +On line 611: + substantial. It will + take years for employment to + regain its pre-crisis + +On line 613: + for employment to + regain its pre-crisis level."126 + Looking back on the + +On line 613: + on the years before + the crisis, the economist + Dean Baker said: "So + +On line 613: + the years before the + crisis, the economist Dean + Baker said: "So much + +On line 613: + before the crisis, + the economist Dean Baker + said: "So much of this + +On line 613: + Dean Baker said: "So + much of this was absolute + public knowledge in + +On line 613: + "So much of this was + absolute public knowledge + in the sense that we + +On line 613: + absolute public + knowledge in the sense that we + knew the number of + +On line 613: + knowledge in the sense + that we knew the number of + loans that were being + +On line 613: + in the sense that we + knew the number of loans that + were being issued + +On line 613: + the sense that we knew + the number of loans that were + being issued with + +On line 613: + knew the number of + loans that were being issued + with zero down. Now, + +On line 613: + the number of loans + that were being issued with + zero down. Now, do + +On line 613: + loans that were being + issued with zero down. Now, + do we suddenly + +On line 613: + were being issued + with zero down. Now, do we + suddenly think we + +On line 613: + issued with zero + down. Now, do we suddenly + think we have that many + +On line 613: + suddenly think we + have that many more people—who + are capable of + +On line 613: + we have that many more + people—who are capable + of taking on a + +On line 613: + more people—who are + capable of taking on + a loan with zero + +On line 613: + of taking on a + loan with zero down who we + hink are going to + +On line 613: + taking on a loan + with zero down who we hink + are going to be + +On line 613: + a loan with zero + down who we hink are going + to be able to pay + +On line 613: + loan with zero down + who we hink are going to + be able to pay that + +On line 613: + with zero down who + we hink are going to be + able to pay that off—than + +On line 613: + zero down who we + hink are going to be able + to pay that off—than was + +On line 613: + down who we hink are + going to be able to pay + that off—than was true years + +On line 613: + we hink are going + to be able to pay that off—than + was true years ago1 I + +On line 613: + hink are going to + be able to pay that off—than was + true years ago1 I mean, + +On line 613: + are going to be + able to pay that off—than was true + years ago1 I mean, what’s + +On line 613: + going to be able + to pay that off—than was true years + ago1 I mean, what’s changed + +On line 613: + to be able to pay + that off—than was true years ago1 I + mean, what’s changed in the + +On line 613: + be able to pay that + off—than was true years ago1 I mean, + what’s changed in the world1 + +On line 613: + able to pay that off—than + was true years ago1 I mean, what’s + changed in the world1 There + +On line 613: + to pay that off—than was + true years ago1 I mean, what’s changed + in the world1 There were + +On line 613: + pay that off—than was true + years ago1 I mean, what’s changed in + the world1 There were a + +On line 613: + that off—than was true years + ago1 I mean, what’s changed in the + world1 There were a lot + +On line 613: + off—than was true years ago1 + I mean, what’s changed in the world1 + There were a lot of + +On line 613: + was true years ago1 I + mean, what’s changed in the world1 There + were a lot of things + +On line 613: + true years ago1 I mean, + what’s changed in the world1 There were + a lot of things that + +On line 613: + ago1 I mean, what’s changed + in the world1 There were a lot + of things that didn’t + +On line 613: + mean, what’s changed in the + world1 There were a lot of things + that didn’t require + +On line 613: + what’s changed in the world1 + There were a lot of things that + didn’t require any + +On line 613: + There were a lot of + things that didn’t require any + investigation + +On line 613: + didn’t require any + investigation at all; + these were totally + +On line 615: + the data."127 Warren + Peterson, a home builder in + Bakersfield, felt that + +On line 615: + Peterson, a home + builder in Bakersfield, felt that + he could pinpoint when + +On line 615: + builder in Bakersfield, + felt that he could pinpoint when + the world changed to the + +On line 615: + in Bakersfield, felt + that he could pinpoint when the + world changed to the day. + +On line 615: + that he could pinpoint + when the world changed to the day. + Peterson built homes + +On line 615: + world changed to the day. + Peterson built homes in an + upscale neighborhood, + +On line 615: + upscale neighborhood, + and each Monday morning, he + would arrive at the + +On line 615: + Monday morning, he + would arrive at the office + to find a bevy of + +On line 615: + he would arrive at + the office to find a bevy + of real estate + +On line 615: + would arrive at the + office to find a bevy of + real estate agents, + +On line 615: + the office to find + a bevy of real estate + agents, sales contracts in + +On line 615: + office to find a + bevy of real estate agents, + sales contracts in hand, + +On line 615: + a bevy of real + estate agents, sales contracts in + hand, vying to be + +On line 615: + agents, sales contracts in + hand, vying to be the ones + chosen to purchase + +On line 615: + hand, vying to be + the ones chosen to purchase + the new homes he was + +On line 615: + be the ones chosen + to purchase the new homes he + was building. The stream + +On line 615: + the ones chosen to + purchase the new homes he was + building. The stream of + +On line 615: + chosen to purchase + the new homes he was building. + The stream of traffic + +On line 615: + purchase the new homes + he was building. The stream of + traffic was constant. + +On line 615: + the new homes he was + building. The stream of traffic + was constant. On one + +On line 615: + he was building. The + stream of traffic was constant. + On one Saturday + +On line 615: + was building. The stream + of traffic was constant. On + one Saturday in + +On line 615: + stream of traffic was + constant. On one Saturday + in November he + +On line 615: + was constant. On one + Saturday in November + he was at the sales + +On line 615: + On one Saturday + in November he was at + the sales office and + +On line 615: + in November he + was at the sales office and + noticed that not a + +On line 615: + and noticed that not + a single purchaser had + entered the building. + +On line 617: + that not a single + purchaser had entered the + building. He called a + +On line 617: + single purchaser + had entered the building. He + called a friend, also + +On line 617: + a friend, also in + the home-building business, who + said he had noticed + +On line 617: + friend, also in the + home-building business, who said + he had noticed the + +On line 617: + home-building business, + who said he had noticed the + same thing, and asked him + +On line 617: + business, who said he + had noticed the same thing, and + asked him what he thought + +On line 619: + said he had noticed + the same thing, and asked him what + he thought about it. "It’s + +On line 619: + he had noticed the + same thing, and asked him what he + thought about it. "It’s over," + +On line 619: + had noticed the same + thing, and asked him what he thought + about it. "It’s over," his + +On line 619: + noticed the same thing, + and asked him what he thought about + it. "It’s over," his friend + +On line 619: + thing, and asked him what + he thought about it. "It’s over," his + friend told Peterson.128 + +On line 625: + and asked him what he + thought about it. "It’s over," his friend + told Peterson.128 PART + +On line 625: + asked him what he thought + about it. "It’s over," his friend told + Peterson.128 PART II + +On line 628: + he thought about it. "It’s + over," his friend told Peterson.128 + PART II Setting the + +On line 628: + thought about it. "It’s over," + his friend told Peterson.128 PART + II Setting the Stage + +On line 640: + PART II Setting the + Stage SHADOW BANKING CONTENTS + Commercial paper + +On line 642: + repos: "Unfettered + markets"............................................29 The savings and loan + crisis: "They put a + +On line 642: + "Unfettered markets"............................................29 + The savings and loan crisis: + "They put a lot of + +On line 644: + markets"............................................29 The savings + and loan crisis: "They put a + lot of pressure on + +On line 644: + and loan crisis: "They + put a lot of pressure on + their regulators" + +On line 646: + loan crisis: "They put + a lot of pressure on their + regulators" The + +On line 646: + a lot of pressure + on their regulators" The + financial crisis + +On line 646: + regulators" The + financial crisis of and + was not a single + +On line 646: + financial crisis + of and was not a single + event but a series + +On line 646: + crisis of and was + not a single event but a + series of crises that + +On line 646: + of and was not a + single event but a series + of crises that rippled + +On line 646: + was not a single + event but a series of crises + that rippled through the + +On line 646: + single event but a + series of crises that rippled + through the financial + +On line 646: + event but a series + of crises that rippled through the + financial system + +On line 646: + of crises that rippled + through the financial system + and, ultimately, + +On line 646: + crises that rippled through + the financial system and, + ultimately, the + +On line 646: + Distress in one area + of the financial markets + led to failures in + +On line 646: + in one area of the + financial markets led to + failures in other + +On line 646: + of the financial + markets led to failures in + other areas by + +On line 646: + financial markets + led to failures in other + areas by way of + +On line 646: + led to failures in + other areas by way of + interconnections + +On line 646: + interconnections + and vulnerabilities + that bankers, government + +On line 646: + that bankers, government + officials, and others had + missed or dismissed. When + +On line 646: + had missed or dismissed. + When subprime and other risky + mortgages—issued + +On line 646: + mortgages—issued + during a housing bubble + that many experts failed + +On line 646: + during a housing + bubble that many experts failed + to identify, and + +On line 648: + failed to identify, + and whose consequences were not + understood— began + +On line 648: + began to default + at unexpected rates, a + once-obscure market + +On line 648: + unexpected rates, + a once-obscure market for + complex investment + +On line 648: + market for complex + investment securities + backed by those mortgages + +On line 648: + complex investment + securities backed by those + mortgages abruptly failed. + +On line 648: + securities backed + by those mortgages abruptly failed. + When the contagion + +On line 648: + those mortgages abruptly + failed. When the contagion spread, + investors panicked—and the + +On line 648: + the contagion spread, + investors panicked—and the danger + inherent in the + +On line 648: + investors panicked—and the + danger inherent in the + whole system became + +On line 648: + became manifest. + Financial markets teetered on + the edge, and brand-name + +On line 648: + markets teetered on the + edge, and brand-name financial + institutions were + +On line 648: + the edge, and brand-name + financial institutions + were left bankrupt or + +On line 648: + institutions were + left bankrupt or dependent + on the taxpayers + +On line 650: + or dependent on + the taxpayers for survival. + Federal Reserve + +On line 650: + the taxpayers for + survival. Federal Reserve + Chairman Ben Bernanke now + +On line 650: + survival. Federal + Reserve Chairman Ben Bernanke now + acknowledges that he + +On line 650: + Reserve Chairman Ben + Bernanke now acknowledges that he + missed the systemic risks. + +On line 650: + Chairman Ben Bernanke now + acknowledges that he missed the + systemic risks. "Prospective + +On line 650: + acknowledges that he + missed the systemic risks. "Prospective + subprime losses were + +On line 650: + he missed the systemic + risks. "Prospective subprime losses + were clearly not large + +On line 650: + missed the systemic risks. + "Prospective subprime losses were + clearly not large enough + +On line 650: + systemic risks. "Prospective + subprime losses were clearly + not large enough on their + +On line 650: + risks. "Prospective subprime + losses were clearly not large + enough on their own to + +On line 650: + subprime losses were + clearly not large enough on their + own to account for + +On line 650: + were clearly not large + enough on their own to account + for the magnitude + +On line 650: + clearly not large enough + on their own to account for + the magnitude of + +On line 650: + enough on their own to + account for the magnitude + of the crisis," Bernanke + +On line 650: + their own to account + for the magnitude of the + crisis," Bernanke told the + +On line 652: + for the magnitude + of the crisis," Bernanke told the + Commission. "Rather, the + +On line 654: + economy."1 This part + of our report explores the + origins of risks as + +On line 654: + part of our report + explores the origins of risks + as they developed + +On line 654: + our report explores + the origins of risks as they + developed in the + +On line 654: + explores the origins + of risks as they developed + in the financial + +On line 654: + the origins of risks + as they developed in the + financial system + +On line 654: + as they developed + in the financial system + over recent decades. It + +On line 654: + they developed in + the financial system over + recent decades. It is + +On line 654: + complex history + that could yield its own report. + Instead, we focus + +On line 654: + history that could + yield its own report. Instead, + we focus on four + +On line 654: + yield its own report. + Instead, we focus on four + key developments + +On line 654: + Instead, we focus + on four key developments + that helped shape the events + +On line 654: + we focus on four + key developments that helped + shape the events that shook + +On line 654: + focus on four key + developments that helped shape + the events that shook our + +On line 654: + developments that + helped shape the events that shook our + financial markets + +On line 654: + shape the events that shook + our financial markets and + economy. Detailed + +On line 654: + financial markets + and economy. Detailed books + could be written about + +On line 654: + economy. Detailed + books could be written about each + of them; we stick to + +On line 654: + books could be written + about each of them; we stick to + the essentials for + +On line 654: + about each of them; we + stick to the essentials for + understanding our + +On line 654: + understanding our + specific concern, which is + the recent crisis. + +On line 656: + specific concern, + which is the recent crisis. + First, we describe the + +On line 656: + which is the recent + crisis. First, we describe the + phenomenal growth + +On line 656: + the phenomenal + growth of the shadow banking + system—the investment + +On line 656: + growth of the shadow + banking system—the investment + banks, most prominently, + +On line 656: + most prominently, but + also other financial + institutions—that + +On line 656: + regulatory + apparatus that had been + put in place in the + +On line 656: + apparatus that + had been put in place in the + wake of the crash of + +On line 656: + been put in place in + the wake of the crash of and + the Great Depression. + +On line 657: + put in place in the + wake of the crash of and the + Great Depression. This + +On line 657: + in place in the wake + of the crash of and the Great + Depression. This new + +On line 657: + wake of the crash of + and the Great Depression. This + new system threatened + +On line 657: + of the crash of and + the Great Depression. This new + system threatened the + +On line 657: + the Great Depression. + This new system threatened the + once-dominant + +On line 657: + once-dominant + traditional commercial + banks, and they took their + +On line 657: + commercial banks, and + they took their grievances to their + regulators and + +On line 657: + took their grievances to + their regulators and to + Congress, which slowly + +On line 657: + their regulators + and to Congress, which slowly + but steadily removed + +On line 657: + but steadily removed + long-standing restrictions + and helped banks break out + +On line 657: + and helped banks break out + of their traditional mold + and join the feverish + +On line 657: + helped banks break out of + their traditional mold and + join the feverish growth. + +On line 657: + banks break out of their + traditional mold and join + the feverish growth. As + +On line 657: + their traditional + mold and join the feverish growth. + As a result, two + +On line 657: + the feverish growth. As + a result, two parallel + financial systems + +On line 657: + growth. As a result, + two parallel financial + systems of enormous + +On line 657: + financial systems + of enormous scale emerged. This new + competition not + +On line 657: + new competition + not only benefited + Wall Street but also + +On line 657: + competition not + only benefited Wall + Street but also seemed + +On line 657: + Wall Street but also + seemed to help all Americans, + lowering the costs + +On line 657: + help all Americans, + lowering the costs of their + mortgages and boosting + +On line 657: + lowering the costs + of their mortgages and boosting + the returns on their + +On line 657: + costs of their mortgages + and boosting the returns on + their 401(k)s. Shadow banks + +On line 657: + of their mortgages and + boosting the returns on their + 401(k)s. Shadow banks and + +On line 657: + boosting the returns + on their 401(k)s. Shadow banks and + commercial banks were + +On line 657: + returns on their 401(k)s. + Shadow banks and commercial + banks were codependent + +On line 657: + commercial banks were + codependent competitors. Their + new activities + +On line 659: + new activities + were very profitable—and, it turned + out, very risky. Second, + +On line 659: + activities were + very profitable—and, it turned out, + very risky. Second, we + +On line 659: + profitable—and, it turned + out, very risky. Second, we look + at the evolution + +On line 659: + the evolution of + financial regulation. + To the Federal + +On line 659: + granted greater license + to market participants + appeared to provide + +On line 659: + license to market + participants appeared to + provide a safer and + +On line 659: + appeared to provide + a safer and more dynamic + alternative to + +On line 659: + and more dynamic + alternative to the era + of traditional + +On line 659: + alternative to + the era of traditional + banking. More and more, + +On line 659: + Former Fed chairman + Alan Greenspan put it this way: "The + market-stabilizing + +On line 659: + put it this way: "The + market-stabilizing private + regulatory + +On line 659: + government structures."2 + In the Fed’s view, if problems + emerged in the shadow + +On line 659: + In the Fed’s view, if + problems emerged in the shadow + banking system, the + +On line 659: + if problems emerged in + the shadow banking system, + the large commercial + +On line 659: + problems emerged in the + shadow banking system, the + large commercial banks—which + +On line 659: + the shadow banking + system, the large commercial + banks—which were believed to + +On line 659: + the large commercial + banks—which were believed to be well-run, + well-capitalized, + +On line 659: + banks—which were believed to + be well-run, well-capitalized, + and well-regulated + +On line 659: + well-capitalized, + and well-regulated despite + the loosening of + +On line 659: + and well-regulated + despite the loosening of + their restraints—could provide + +On line 659: + restore financial + stability. It did so + again and again in the + +On line 659: + stability. It + did so again and again in the + decades leading up to + +On line 659: + did so again and again + in the decades leading up to + the recent crisis. + +On line 659: + so again and again in + the decades leading up to the + recent crisis. And, + +On line 659: + in the decades leading + up to the recent crisis. + And, understandably, + +On line 659: + the decades leading up + to the recent crisis. And, + understandably, much + +On line 659: + up to the recent + crisis. And, understandably, + much of the country + +On line 659: + the recent crisis. + And, understandably, much of + the country came to + +On line 659: + And, understandably, + much of the country came to + assume that the Fed + +On line 659: + much of the country + came to assume that the Fed + could always and would + +On line 659: + came to assume that + the Fed could always and would + always save the day. + +On line 661: + assume that the Fed + could always and would always + save the day. Third, we + +On line 661: + the Fed could always + and would always save the day. + Third, we follow the + +On line 661: + could always and would + always save the day. Third, we + follow the profound + +On line 661: + and would always save + the day. Third, we follow the + profound changes in the + +On line 661: + always save the day. + Third, we follow the profound + changes in the mortgage + +On line 661: + Third, we follow the + profound changes in the mortgage + industry, from the + +On line 661: + profound changes in the + mortgage industry, from the + sleepy days when local + +On line 661: + changes in the mortgage + industry, from the sleepy days + when local lenders took + +On line 661: + and servicing 30-year + loans to a new era in which + the idea was to sell + +On line 661: + servicing 30-year loans + to a new era in which the + idea was to sell the + +On line 661: + 30-year loans to a new + era in which the idea was to + sell the loans off as + +On line 661: + loans to a new era + in which the idea was to sell + the loans off as soon + +On line 661: + to a new era in + which the idea was to sell the + loans off as soon as + +On line 661: + era in which the idea + was to sell the loans off as + soon as possible, + +On line 661: + in which the idea was + to sell the loans off as soon + as possible, so + +On line 661: + which the idea was to + sell the loans off as soon as + possible, so that + +On line 661: + was to sell the loans + off as soon as possible, + so that they could be + +On line 661: + sell the loans off as + soon as possible, so that + they could be packaged + +On line 661: + the loans off as soon + as possible, so that they + could be packaged and + +On line 661: + loans off as soon as + possible, so that they could + be packaged and sold + +On line 661: + soon as possible, + so that they could be packaged + and sold to investors + +On line 661: + as possible, so + that they could be packaged and + sold to investors around + +On line 661: + possible, so that + they could be packaged and sold + to investors around the + +On line 661: + could be packaged and + sold to investors around the world. + New mortgage products + +On line 661: + sold to investors around + the world. New mortgage products + proliferated, + +On line 661: + New mortgage products + proliferated, and so + did new borrowers. + +On line 661: + proliferated, + and so did new borrowers. + Inevitably, this became + +On line 661: + market in which the + participants—mortgage brokers, + lenders, and Wall Street firms—had + +On line 661: + participants—mortgage + brokers, lenders, and Wall Street firms—had + a greater stake in the + +On line 661: + and Wall Street firms—had a + greater stake in the quantity + of mortgages signed up + +On line 661: + Wall Street firms—had a greater + stake in the quantity of + mortgages signed up and + +On line 661: + firms—had a greater stake in + the quantity of mortgages + signed up and sold than + +On line 661: + a greater stake in the + quantity of mortgages signed + up and sold than in + +On line 661: + the quantity of + mortgages signed up and sold than + in their quality. + +On line 663: + mortgages signed up and + sold than in their quality. + We also trace the + +On line 663: + up and sold than in + their quality. We also + trace the history + +On line 663: + and sold than in their + quality. We also trace + the history of + +On line 663: + their quality. We + also trace the history + of Fannie Mae and + +On line 663: + trace the history + of Fannie Mae and Freddie + Mac, publicly traded + +On line 663: + dominant forces in + providing financing to + support the mortgage + +On line 663: + forces in providing + financing to support the + mortgage market while + +On line 665: + for investors. Fourth, we + introduce some of the most + arcane subjects in + +On line 665: + national vocabu-lary + as the financial markets + unraveled through and + +On line 665: + as the financial + markets unraveled through and + Put simply and most + +On line 665: + rating agencies whose + own motives were conflicted. + This entire market + +On line 665: + market depended + on finely honed computer + models—which turned out + +On line 665: + to be divorced from + reality—and on ever-rising + housing prices. When that + +On line 665: + from reality—and on + ever-rising housing prices. When + that bubble burst, the + +On line 665: + bubble also burst: + the securities almost + no one understood, + +On line 665: + the securities + almost no one understood, + backed by mortgages no + +On line 665: + one understood, backed + by mortgages no lender would have + signed years earlier, + +On line 665: + understood, backed by + mortgages no lender would have signed + years earlier, were + +On line 665: + by mortgages no lender + would have signed years earlier, + were the first dominoes + +On line 665: + mortgages no lender would + have signed years earlier, were + the first dominoes to + +On line 665: + no lender would have signed + years earlier, were the first + dominoes to fall in + +On line 665: + signed years earlier, + were the first dominoes to fall + in the financial + +On line 665: + earlier, were the + first dominoes to fall in the + financial sector. + +On line 669: + were the first dominoes + to fall in the financial + sector. A basic + +On line 669: + sector. A basic + understanding of these four + developments will + +On line 669: + understanding of + these four developments will + bring the reader up + +On line 669: + four developments + will bring the reader up to + speed in grasping where + +On line 669: + will bring the reader + up to speed in grasping where + matters stood for the + +On line 669: + reader up to speed + in grasping where matters stood + for the financial + +On line 669: + where matters stood for + the financial system in + the year at the dawn + +On line 669: + matters stood for the + financial system in the + year at the dawn of + +On line 669: + for the financial + system in the year at the + dawn of a decade of + +On line 669: + financial system + in the year at the dawn of + a decade of promise + +On line 669: + system in the year + at the dawn of a decade of + promise and peril. + +On line 671: + the year at the dawn + of a decade of promise and + peril. COMMERCIAL + +On line 671: + at the dawn of a + decade of promise and peril. + COMMERCIAL PAPER + +On line 675: + REPOS: "UNFETTERED + MARKETS" For most of the 20th + century, banks and + +On line 675: + 20th century, banks + and thrifts accepted deposits + and loaned that money + +On line 675: + century, banks and + thrifts accepted deposits and + loaned that money to + +On line 675: + and thrifts accepted + deposits and loaned that money + to home buyers or + +On line 675: + deposits and loaned that + money to home buyers or + businesses. Before + +On line 675: + institutions were + vulnerable to runs, when + reports or merely + +On line 675: + vulnerable to + runs, when reports or merely + rumors that a bank + +On line 675: + to runs, when reports + or merely rumors that a + bank was in trouble + +On line 675: + runs, when reports or + merely rumors that a bank + was in trouble spurred + +On line 675: + or merely rumors + that a bank was in trouble + spurred depositors + +On line 675: + merely rumors that + a bank was in trouble spurred + depositors to + +On line 675: + that a bank was in + trouble spurred depositors + to demand their cash. + +On line 675: + was in trouble spurred + depositors to demand + their cash. If the run + +On line 675: + spurred depositors + to demand their cash. If the + run was widespread, the + +On line 675: + depositors to + demand their cash. If the run + was widespread, the bank + +On line 675: + to demand their cash. + If the run was widespread, the + bank might not have enough + +On line 675: + demand their cash. If + the run was widespread, the bank + might not have enough cash + +On line 675: + their cash. If the run + was widespread, the bank might not + have enough cash on hand + +On line 675: + cash. If the run was + widespread, the bank might not have + enough cash on hand to + +On line 675: + widespread, the bank might + not have enough cash on hand to + meet depositors’ + +On line 675: + cash on hand to meet + depositors’ demands: runs + were common before + +On line 675: + Reserve System in + which acted as the lender of + last resort to banks. + +On line 677: + in which acted as + the lender of last resort to + banks. But the creation + +On line 677: + which acted as the + lender of last resort to banks. + But the creation of + +On line 677: + acted as the lender + of last resort to banks. But + the creation of the + +On line 677: + lender of last resort + to banks. But the creation of + the Fed was not enough + +On line 677: + of last resort to + banks. But the creation of the + Fed was not enough to + +On line 677: + last resort to banks. + But the creation of the Fed + was not enough to avert + +On line 677: + resort to banks. But + the creation of the Fed was + not enough to avert bank + +On line 677: + banks. But the creation + of the Fed was not enough to + avert bank runs and sharp + +On line 677: + creation of the Fed + was not enough to avert bank runs + and sharp contrac-tions + +On line 677: + of the Fed was not + enough to avert bank runs and sharp + contrac-tions in the + +On line 677: + was not enough to avert + bank runs and sharp contrac-tions + in the financial + +On line 677: + enough to avert bank runs + and sharp contrac-tions in the + financial markets + +On line 677: + and sharp contrac-tions + in the financial markets + in the 1920s and 1930s. + +On line 677: + sharp contrac-tions in + the financial markets in + the 1920s and 1930s. So + +On line 677: + contrac-tions in the + financial markets in the + 1920s and 1930s. So in + +On line 677: + in the financial + markets in the 1920s and 1930s. + So in Congress passed + +On line 677: + financial markets + in the 1920s and 1930s. So in + Congress passed the Glass-Steagall + +On line 677: + markets in the 1920s + and 1930s. So in Congress passed + the Glass-Steagall Act, which, among + +On line 677: + in the 1920s and 1930s. + So in Congress passed the Glass-Steagall + Act, which, among other + +On line 677: + the 1920s and 1930s. So + in Congress passed the Glass-Steagall Act, + which, among other changes, + +On line 677: + So in Congress passed + the Glass-Steagall Act, which, among other + changes, established the + +On line 677: + the Glass-Steagall Act, which, among + other changes, established the + Federal Deposit + +On line 677: + which, among other changes, + established the Federal + Deposit Insurance + +On line 677: + Federal Deposit + Insurance Corporation. + The FDIC insured bank + +On line 677: + bank deposits up to + $2,500—an amount that covered the vast + majority of + +On line 677: + $2,500—an amount that covered + the vast majority of + deposits at the time; + +On line 677: + vast majority + of deposits at the time; that + limit would climb to + +On line 679: + deposits at the time; + that limit would climb to by + where it stayed until + +On line 679: + the time; that limit + would climb to by where it stayed + until it was raised + +On line 679: + limit would climb to + by where it stayed until it + was raised to during + +On line 679: + climb to by where it + stayed until it was raised to + during the crisis + +On line 681: + was raised to during + the crisis in October + Depositors no + +On line 681: + Depositors no + longer needed to worry about + being first in line + +On line 681: + no longer needed to + worry about being first in + line at a troubled + +On line 681: + needed to worry + about being first in line at + a troubled bank’s door. + +On line 681: + worry about being + first in line at a troubled + bank’s door. And if banks + +On line 681: + about being first in + line at a troubled bank’s door. + And if banks were short + +On line 681: + being first in line + at a troubled bank’s door. And + if banks were short of + +On line 681: + first in line at a + troubled bank’s door. And if banks + were short of cash, they + +On line 681: + line at a troubled + bank’s door. And if banks were short + of cash, they could now + +On line 681: + a troubled bank’s door. + And if banks were short of cash, + they could now borrow + +On line 681: + troubled bank’s door. And + if banks were short of cash, they + could now borrow from + +On line 681: + And if banks were short + of cash, they could now borrow + from the Federal + +On line 681: + banks were short of cash, + they could now borrow from the + Federal Reserve, + +On line 681: + of cash, they could now + borrow from the Federal + Reserve, even when they + +On line 681: + could now borrow from + the Federal Reserve, even + when they could borrow + +On line 681: + now borrow from the + Federal Reserve, even when + they could borrow nowhere + +On line 681: + Federal Reserve, + even when they could borrow nowhere + else. The Fed, acting + +On line 681: + Reserve, even when they + could borrow nowhere else. The Fed, + acting as lender of + +On line 681: + when they could borrow + nowhere else. The Fed, acting as + lender of last resort, + +On line 681: + they could borrow nowhere + else. The Fed, acting as lender + of last resort, would + +On line 681: + borrow nowhere else. The + Fed, acting as lender of last + resort, would ensure + +On line 681: + else. The Fed, acting + as lender of last resort, would + ensure that banks would + +On line 681: + Fed, acting as lender + of last resort, would ensure + that banks would not fail + +On line 681: + lender of last resort, + would ensure that banks would not + fail simply from a + +On line 681: + of last resort, would + ensure that banks would not fail + simply from a lack + +On line 681: + ensure that banks would + not fail simply from a lack + of liquidity. + +On line 683: + not fail simply from + a lack of liquidity. + With these backstops in + +On line 683: + fail simply from a + lack of liquidity. With + these backstops in place, + +On line 683: + With these backstops in + place, Congress restricted banks’ + activities to + +On line 683: + move intended to + help prevent bank failures, with + taxpayer dollars + +On line 683: + prevent bank failures, + with taxpayer dollars now + at risk. Furthermore, + +On line 683: + dollars now at risk. + Furthermore, Congress let the + Federal Reserve + +On line 683: + Furthermore, Congress + let the Federal Reserve + cap interest rates + +On line 683: + Federal Reserve + cap interest rates that banks + and thrifts—also known + +On line 683: + cap interest rates + that banks and thrifts—also known + as savings and loans, + +On line 683: + interest rates that + banks and thrifts—also known as + savings and loans, or + +On line 685: + thrifts—also known as + savings and loans, or S&Ls— could + pay depositors. + +On line 685: + loans, or S&Ls— could pay + depositors. This rule, known + as Regulation + +On line 685: + Regulation Q, + was also intended to + keep institutions + +On line 685: + also intended + to keep institutions safe + by ensuring that + +On line 685: + by ensuring that + competition for deposits + did not get out of + +On line 687: + that competition + for deposits did not get out + of hand.4 The system + +On line 687: + competition for + deposits did not get out of + hand.4 The system was + +On line 687: + for deposits did not + get out of hand.4 The system + was stable as long + +On line 687: + deposits did not get + out of hand.4 The system was + stable as long as + +On line 687: + not get out of hand.4 + The system was stable as + long as interest + +On line 687: + get out of hand.4 The + system was stable as long + as interest rates + +On line 687: + was stable as long + as interest rates remained + relatively steady, + +On line 687: + as interest rates + remained relatively steady, + which they did during + +On line 687: + relatively steady, + which they did during the first + two decades after World + +On line 687: + which they did during + the first two decades after World + War II. Beginning + +On line 687: + they did during the + first two decades after World War + II. Beginning in + +On line 687: + did during the first + two decades after World War II. + Beginning in the + +On line 687: + first two decades after + World War II. Beginning in + the late-1960s, however, + +On line 687: + Beginning in the + late-1960s, however, inflation + started to increase, + +On line 687: + started to increase, + pushing up interest rates. + For example, the + +On line 687: + up interest rates. + For example, the rates that + banks paid other banks + +On line 687: + interest rates. For + example, the rates that banks + paid other banks for + +On line 687: + rates. For example, + the rates that banks paid other + banks for overnight loans had + +On line 687: + For example, the + rates that banks paid other banks + for overnight loans had rarely + +On line 687: + the rates that banks paid + other banks for overnight loans had + rarely exceeded in + +On line 687: + paid other banks for + overnight loans had rarely exceeded + in the decades before + +On line 687: + other banks for overnight + loans had rarely exceeded in + the decades before when + +On line 687: + banks for overnight loans had + rarely exceeded in the decades + before when it reached + +On line 687: + had rarely exceeded + in the decades before when it + reached However, thanks + +On line 687: + rarely exceeded in + the decades before when it reached + However, thanks to + +On line 687: + in the decades before + when it reached However, thanks + to Regulation + +On line 687: + the decades before when + it reached However, thanks to + Regulation Q, + +On line 687: + it reached However, + thanks to Regulation Q, + banks and thrifts were stuck + +On line 687: + Q, banks and thrifts were + stuck offering roughly less + than on most deposits. + +On line 687: + roughly less than on + most deposits. Clearly, this was + an untenable bind + +On line 687: + an untenable bind + for the depository + institutions, which + +On line 687: + depository + institutions, which could not + compete on the most + +On line 687: + institutions, which + could not compete on the most + basic level of + +On line 687: + which could not compete + on the most basic level + of the interest + +On line 687: + could not compete on + the most basic level of + the interest rate + +On line 687: + on the most basic + level of the interest + rate offered on a + +On line 689: + of the interest + rate offered on a deposit. + Compete with whom1 In + +On line 689: + rate offered on a + deposit. Compete with whom1 In + the 1970s, Merrill Lynch, + +On line 689: + deposit. Compete with + whom1 In the 1970s, Merrill Lynch, + Fidelity, Vanguard, + +On line 689: + In the 1970s, Merrill + Lynch, Fidelity, Vanguard, and + others persuaded + +On line 689: + others persuaded + consumers and businesses to + abandon banks and thrifts + +On line 691: + to abandon banks and + thrifts for higher returns. These + firms—eager to find + +On line 691: + and thrifts for higher + returns. These firms—eager to + find new businesses, + +On line 691: + find new businesses, + particularly after + the Securities + +On line 693: + commissions on stock + trades in created money + market mutual + +On line 693: + trades in created + money market mutual + funds that invested + +On line 693: + securities such + as Treasury bonds and highly + rated corporate + +On line 693: + as Treasury bonds and + highly rated corporate + debt, and the funds paid + +On line 693: + rated corporate + debt, and the funds paid higher + interest rates than + +On line 693: + the funds paid higher + interest rates than banks and + thrifts were allowed to + +On line 695: + interest rates than + banks and thrifts were allowed to + pay. The funds functioned + +On line 695: + and thrifts were allowed + to pay. The funds functioned like + bank accounts, although + +On line 695: + thrifts were allowed to + pay. The funds functioned like bank + accounts, although with + +On line 695: + with a different + mechanism: customers bought shares + redeemable daily at + +On line 695: + mechanism: customers + bought shares redeemable daily at + a stable value. + +On line 695: + a stable value. + In Merrill Lynch introduced + something even more like + +On line 695: + a bank account: "cash + management accounts" allowed + customers to write checks. + +On line 695: + to write checks. Other + money market mutual + funds quickly followed.5 + +On line 697: + market mutual + funds quickly followed.5 These funds + differed from bank and + +On line 697: + funds quickly followed.5 + These funds differed from bank and + thrift deposits in one + +On line 697: + These funds differed from + bank and thrift deposits in one + important respect: + +On line 697: + and thrift deposits in + one important respect: they + were not protected + +On line 697: + thrift deposits in one + important respect: they were + not protected by + +On line 697: + higher interest + rates, and the stature of the funds’ + sponsors reassured + +On line 697: + interest rates, and + the stature of the funds’ sponsors + reassured them. The + +On line 697: + rates, and the stature of + the funds’ sponsors reassured + them. The fund sponsors + +On line 697: + reassured them. The + fund sponsors implicitly + promised to maintain the + +On line 697: + promised to maintain the + full net asset value of + a share. The funds would + +On line 697: + to maintain the full + net asset value of a + share. The funds would not + +On line 697: + maintain the full net + asset value of a share. + The funds would not "break + +On line 697: + the full net asset + value of a share. The funds + would not "break the buck," + +On line 697: + net asset value + of a share. The funds would not + "break the buck," in Wall + +On line 697: + asset value of + a share. The funds would not "break + the buck," in Wall Street + +On line 697: + value of a share. + The funds would not "break the buck," + in Wall Street terms. Even + +On line 697: + of a share. The funds + would not "break the buck," in Wall + Street terms. Even without + +On line 697: + a share. The funds would + not "break the buck," in Wall Street + terms. Even without FDIC + +On line 697: + would not "break the buck," + in Wall Street terms. Even without + FDIC insurance, then, + +On line 697: + buck," in Wall Street terms. + Even without FDIC insurance, + then, depositors + +On line 697: + FDIC insurance, then, + depositors considered + these funds almost as + +On line 697: + then, depositors + considered these funds almost + as safe as deposits + +On line 697: + considered these funds + almost as safe as deposits + in a bank or thrift. + +On line 697: + these funds almost as + safe as deposits in a bank + or thrift. Business boomed, + +On line 697: + funds almost as safe + as deposits in a bank or + thrift. Business boomed, and + +On line 697: + almost as safe as + deposits in a bank or thrift. + Business boomed, and so + +On line 697: + as safe as deposits + in a bank or thrift. Business + boomed, and so was born + +On line 697: + safe as deposits in + a bank or thrift. Business boomed, + and so was born a + +On line 697: + as deposits in a + bank or thrift. Business boomed, and + so was born a key + +On line 697: + in a bank or thrift. + Business boomed, and so was born + a key player in + +On line 697: + Business boomed, and so + was born a key player in + the shadow banking + +On line 697: + and so was born a + key player in the shadow + banking industry, + +On line 697: + key player in the + shadow banking industry, + the less-regulated + +On line 697: + banking industry, + the less-regulated market + for capital that + +On line 697: + growing up beside + the traditional banking + system. Assets in + +On line 697: + system. Assets in + money market mutual + funds jumped from billion + +On line 699: + Assets in money + market mutual funds jumped + from billion in to + +On line 699: + market mutual + funds jumped from billion in to + more than billion in + +On line 701: + funds jumped from billion + in to more than billion in + and trillion by To + +On line 701: + billion in to more + than billion in and trillion + by To maintain their + +On line 701: + than billion in and + trillion by To maintain their + edge over the insured + +On line 701: + in and trillion by + To maintain their edge over the + insured banks and thrifts, + +On line 701: + To maintain their edge + over the insured banks and thrifts, + the money market + +On line 701: + maintain their edge over + the insured banks and thrifts, the + money market funds + +On line 701: + money market funds + needed safe, high-quality + assets to invest + +On line 701: + market funds needed + safe, high-quality assets + to invest in, and + +On line 701: + in, and they quickly + developed an appetite for + two booming markets: + +On line 703: + two booming markets: + the "commercial paper" and + "repo" markets. Through + +On line 703: + "commercial paper" + and "repo" markets. Through these + instruments, Merrill + +On line 703: + paper" and "repo" + markets. Through these instruments, + Merrill Lynch, Morgan + +On line 703: + and "repo" markets. + Through these instruments, Merrill + Lynch, Morgan Stanley, + +On line 703: + "repo" markets. Through + these instruments, Merrill Lynch, + Morgan Stanley, and + +On line 703: + Through these instruments, + Merrill Lynch, Morgan Stanley, + and other Wall Street + +On line 703: + Merrill Lynch, Morgan + Stanley, and other Wall Street + investment banks could + +On line 703: + Morgan Stanley, and + other Wall Street investment + banks could broker and + +On line 703: + Stanley, and other + Wall Street investment banks could + broker and provide + +On line 703: + and other Wall Street + investment banks could broker + and provide (for a + +On line 703: + Wall Street investment + banks could broker and provide + (for a fee) short-term + +On line 703: + banks could broker and + provide (for a fee) short-term + financing to large + +On line 703: + and provide (for a + fee) short-term financing to + large corporations. + +On line 703: + Commercial paper + was unsecured corporate + debt—meaning that it + +On line 703: + debt—meaning that it + was backed not by a pledge of + collateral but + +On line 703: + it was backed not by + a pledge of collateral + but only by the + +On line 705: + the corporation’s + promise to pay. These loans were + cheaper because they + +On line 705: + promise to pay. These + loans were cheaper because they + were short-term—for less than + +On line 705: + These loans were cheaper + because they were short-term—for less + than nine months, sometimes + +On line 705: + were cheaper because + they were short-term—for less than nine + months, sometimes as short + +On line 705: + cheaper because they + were short-term—for less than nine months, + sometimes as short as + +On line 705: + sometimes as short as + two weeks and, eventually, + as short as one day; + +On line 705: + as short as one day; + the borrowers usually + "rolled them over" when the + +On line 705: + short as one day; the + borrowers usually "rolled + them over" when the loan + +On line 705: + day; the borrowers + usually "rolled them over" when + the loan came due, and + +On line 705: + "rolled them over" when the + loan came due, and then again and + again. Because only + +On line 705: + were able to issue + commercial paper, it was + considered a very + +On line 705: + considered a very + safe investment; companies + such as General + +On line 705: + companies such as + General Electric and IBM, + investors believed, would + +On line 705: + General Electric + and IBM, investors believed, would + always be good for + +On line 705: + always be good for + the money. Corporations + had been issuing + +On line 705: + since the beginning + of the century, but the + practice grew much more + +On line 705: + of the century, + but the practice grew much more + popular in the + +On line 707: + but the practice grew + much more popular in the + 1960s. This market, though, + +On line 707: + the 1960s. This market, + though, underwent a crisis + that demonstrated that + +On line 707: + though, underwent a + crisis that demonstrated that + capital markets, + +On line 707: + that demonstrated that + capital markets, too, were + vulnerable to + +On line 707: + capital markets, + too, were vulnerable to + runs. Yet that crisis + +On line 707: + runs. Yet that crisis + actually strengthened the + market. In the Penn + +On line 707: + in the U.S., filed for + bankruptcy with million in + commercial paper + +On line 707: + filed for bankruptcy + with million in commercial + paper outstanding. + +On line 707: + railroad’s default caused + investors to worry about the + broader commercial + +On line 707: + default caused investors + to worry about the broader + commercial paper + +On line 707: + to worry about the + broader commercial paper + market; holders of + +On line 707: + market; holders of + that paper—the lenders—refused to + roll over their loans to + +On line 707: + their loans to other + corporate borrowers. The + commercial paper + +On line 707: + commercial paper + market virtually shut + down. In response, the + +On line 707: + with almost million + in emergency loans and with + interest rate cuts.7 + +On line 707: + emergency loans and + with interest rate cuts.7 The + Fed’s actions enabled + +On line 707: + with interest rate + cuts.7 The Fed’s actions enabled + the banks, in turn, to + +On line 707: + interest rate cuts.7 + The Fed’s actions enabled the + banks, in turn, to lend + +On line 707: + Fed’s actions enabled + the banks, in turn, to lend to + corporations so + +On line 707: + the banks, in turn, to + lend to corporations so + that they could pay off + +On line 707: + banks, in turn, to lend + to corporations so that + they could pay off their + +On line 707: + to corporations + so that they could pay off their + commercial paper. + +On line 707: + commercial paper—the + borrowers—typically + set up standby lines + +On line 707: + set up standby lines + of credit with major banks + to enable them to + +On line 707: + up standby lines of + credit with major banks to + enable them to pay + +On line 707: + lines of credit with + major banks to enable them + to pay off their debts + +On line 707: + credit with major + banks to enable them to pay + off their debts should there + +On line 707: + banks to enable them + to pay off their debts should there + be another shock. + +On line 707: + to enable them to + pay off their debts should there be + another shock. These + +On line 707: + to pay off their debts + should there be another shock. + These moves reassured + +On line 707: + off their debts should there + be another shock. These moves + reassured investors + +On line 707: + another shock. These + moves reassured investors that + commercial paper + +On line 707: + reassured investors + that commercial paper was + a safe investment. + +On line 709: + paper was a safe + investment. In the 1960s, the + commercial paper + +On line 709: + a safe investment. + In the 1960s, the commercial + paper market jumped + +On line 709: + investment. In the + 1960s, the commercial paper + market jumped more than + +On line 709: + 1960s, the commercial + paper market jumped more than + sevenfold. Then in + +On line 709: + than sevenfold. Then + in the 1970s, it grew almost + fourfold. Among the largest + +On line 709: + Among the largest buyers + of commercial paper were + the money market + +On line 709: + market mutual + funds. It seemed a win-win-win deal: the + mutual funds could + +On line 709: + It seemed a win-win-win deal: + the mutual funds could earn + a solid return, + +On line 709: + the mutual funds + could earn a solid return, + stable companies + +On line 709: + stable companies + could borrow more cheaply, and + Wall Street firms could earn + +On line 709: + more cheaply, and Wall + Street firms could earn fees for putting + the deals together. + +On line 709: + cheaply, and Wall Street + firms could earn fees for putting the + deals together. By + +On line 709: + firms could earn fees for + putting the deals together. By + commercial paper + +On line 709: + fees for putting the deals + together. By commercial + paper had risen to + +On line 709: + the deals together. + By commercial paper had + risen to trillion from + +On line 709: + deals together. By + commercial paper had risen + to trillion from less + +On line 711: + commercial paper + had risen to trillion from less + than billion in The + +On line 711: + less than billion in + The second major shadow + banking market that + +On line 711: + market for repos, + or repurchase agreements. Like + commercial paper, + +On line 711: + paper, repos have + a long history, but they + proliferated + +On line 711: + a long history, + but they proliferated + quickly in the 1970s. + +On line 711: + history, but they + proliferated quickly + in the 1970s. Wall Street + +On line 711: + often sold Treasury + bonds with their relatively + low returns to banks + +On line 711: + Treasury bonds with their + relatively low returns + to banks and other + +On line 711: + to banks and other + conservative investors, while + then investing the + +On line 711: + while then investing + the cash proceeds of these sales + in securities + +On line 711: + then investing the + cash proceeds of these sales in + securities that + +On line 711: + proceeds of these sales + in securities that paid + higher interest + +On line 711: + in securities + that paid higher interest + rates. The dealers agreed + +On line 711: + securities that + paid higher interest rates. + The dealers agreed to + +On line 711: + The dealers agreed to + repurchase the Treasuries—often + within a day—at + +On line 711: + agreed to repurchase + the Treasuries—often within a + day—at a slightly + +On line 711: + within a day—at + a slightly higher price than + that for which they sold + +On line 711: + for which they sold them. + This repo transaction—in + essence a loan—made it + +On line 711: + inexpensive and + convenient for Wall Street firms + to borrow. Because + +On line 711: + to borrow. Because + these deals were essentially + collateralized + +On line 711: + the securities + dealers borrowed nearly the + full value of the + +On line 711: + the full value of + the collateral, minus + a small "haircut." Like + +On line 711: + the collateral, + minus a small "haircut." Like + commercial paper, + +On line 711: + a small "haircut." Like + commercial paper, repos + were renewed, or "rolled + +On line 711: + commercial paper, + repos were renewed, or "rolled + over," frequently. For + +On line 711: + repos were renewed, + or "rolled over," frequently. For + that reason, both forms + +On line 711: + "rolled over," frequently. + For that reason, both forms of + borrowing could be + +On line 711: + could be considered + "hot money"—because lenders could + quickly move in and + +On line 711: + money"—because lenders + could quickly move in and out + of these investments + +On line 711: + quickly move in and + out of these investments in + search of the highest + +On line 711: + move in and out of + these investments in search of + the highest returns, + +On line 711: + in and out of these + investments in search of the + highest returns, they + +On line 711: + these investments in + search of the highest returns, + they could be a risky + +On line 711: + investments in search + of the highest returns, they + could be a risky source + +On line 713: + search of the highest + returns, they could be a risky + source of funding. The + +On line 713: + the highest returns, + they could be a risky source of + funding. The repo + +On line 713: + returns, they could be + a risky source of funding. The + repo market, too, + +On line 713: + repo market, too, + had vulnerabilities, + but it, too, had emerged + +On line 713: + but it, too, had emerged + from an early crisis stronger + than ever. In two + +On line 713: + stronger than ever. In + two major borrowers, the + securities firms + +On line 713: + losses for lenders. In + the ensuing fallout, the + Federal Reserve + +On line 713: + resort to support + a shadow banking market. + The Fed loosened the + +On line 713: + a shadow banking + market. The Fed loosened the + terms on which it lent + +On line 713: + banking market. The + Fed loosened the terms on which + it lent Treasuries to + +On line 713: + The Fed loosened the + terms on which it lent Treasuries + to securities + +On line 713: + Fed loosened the terms + on which it lent Treasuries to + securities firms, + +On line 713: + terms on which it lent + Treasuries to securities + firms, leading to a + +On line 713: + it lent Treasuries to + securities firms, leading + to a 10-fold increase + +On line 715: + a 10-fold increase in + its securities lending. + Following this episode, + +On line 715: + to a tri-party + arrangement in which a large + clearing bank acted + +On line 715: + borrower and lender, + essentially protecting + the collateral + +On line 715: + them in escrow.9 This + mechanism would have severe + consequences in and + +On line 715: + 1980s, however, these + new procedures stabilized + the repo market. + +On line 717: + however, these new + procedures stabilized the + repo market. The + +On line 717: + the repo market. + The new parallel banking + system—with commercial + +On line 717: + The new parallel + banking system—with commercial + paper and repo + +On line 717: + a crucial catch: its + popularity came at + the expense of the + +On line 717: + of the banks and thrifts. + Some regulators viewed this + development with + +On line 719: + this development + with growing alarm. According + to Alan Blinder, the + +On line 719: + development with + growing alarm. According to + Alan Blinder, the vice + +On line 719: + alarm. According to + Alan Blinder, the vice chairman + of the Federal + +On line 721: + Alan Blinder, the vice + chairman of the Federal + Reserve from to "We + +On line 721: + the vice chairman of + the Federal Reserve from + to "We were concerned + +On line 721: + vice chairman of the + Federal Reserve from to + "We were concerned as + +On line 721: + Federal Reserve + from to "We were concerned as + bank regulators + +On line 721: + regulators with + the eroding competitive + position of banks, + +On line 721: + banks, which of course would + threaten ultimately their + safety and soundness, + +On line 721: + of course would threaten + ultimately their safety + and soundness, due to + +On line 721: + ultimately their + safety and soundness, due to + the competition + +On line 721: + safety and soundness, + due to the competition + they were getting from + +On line 721: + they were getting from + a variety of nonbanks—and + these were mainly Wall + +On line 721: + were getting from a + variety of nonbanks—and these + were mainly Wall Street + +On line 721: + from a variety + of nonbanks—and these were mainly + Wall Street firms, that were + +On line 721: + of nonbanks—and these were + mainly Wall Street firms, that were + taking deposits from + +On line 721: + were mainly Wall Street + firms, that were taking deposits + from them, and getting + +On line 721: + Wall Street firms, that were + taking deposits from them, and + getting into the + +On line 721: + were taking deposits + from them, and getting into + the loan business to + +On line 721: + taking deposits from + them, and getting into the + loan business to some + +On line 721: + from them, and getting + into the loan business to + some extent. So, yeah, + +On line 721: + getting into the + loan business to some extent. + So, yeah, it was a + +On line 721: + the loan business to + some extent. So, yeah, it was + a concern; you could + +On line 721: + loan business to some + extent. So, yeah, it was a + concern; you could see + +On line 721: + to some extent. So, + yeah, it was a concern; you + could see a downward + +On line 721: + some extent. So, yeah, + it was a concern; you could + see a downward trend + +On line 721: + extent. So, yeah, it + was a concern; you could see + a downward trend in + +On line 721: + was a concern; you + could see a downward trend in + the share of banking + +On line 721: + concern; you could see + a downward trend in the share + of banking assets + +On line 721: + downward trend in the + share of banking assets to + financial assets."10 + +On line 725: + financial assets."10 + raditional and Shadow + Banking Systems The + +On line 725: + raditional and + Shadow Banking Systems The + funding available through + +On line 725: + funding available through + the shadow banking system + grew sharply in the 2000s, + +On line 725: + banking system grew + sharply in the 2000s, exceeding + the traditional + +On line 725: + the 2000s, exceeding + the traditional banking + system in the years + +On line 725: + the traditional + banking system in the years + before the crisis. + +On line 727: + system in the years + before the crisis. Figure + shows that during the + +On line 727: + in the years before + the crisis. Figure shows that + during the 1990s the + +On line 727: + that during the 1990s + the shadow banking system + steadily gained ground on + +On line 727: + the shadow banking + system steadily gained ground on + the traditional + +On line 729: + sector for a brief + time after Banks argued that + their problems stemmed from + +On line 729: + a brief time after + Banks argued that their problems + stemmed from the Glass-Steagall Act. + +On line 729: + brief time after Banks + argued that their problems stemmed + from the Glass-Steagall Act. Glass-Steagall + +On line 729: + after Banks argued + that their problems stemmed from the + Glass-Steagall Act. Glass-Steagall strictly + +On line 729: + Glass-Steagall Act. Glass-Steagall strictly + limited commercial banks’ + participation + +On line 729: + the securities + markets, in part to end the + practices of the 1920s, + +On line 729: + markets, in part to + end the practices of the 1920s, + when banks sold highly + +On line 729: + of the 1920s, when banks + sold highly speculative + securities to + +On line 729: + securities to + depositors. In Congress + also imposed new + +On line 729: + depositors. In + Congress also imposed new + regulatory + +On line 729: + regulatory + requirements on banks owned by + holding companies, + +On line 729: + banks owned by holding + companies, in order to + prevent a holding + +On line 729: + holding companies, + in order to prevent a + holding company + +On line 729: + order to prevent + a holding company from + endangering any + +On line 729: + holding company + from endangering any of + its deposit-taking + +On line 731: + endangering any + of its deposit-taking banks. + Bank supervisors + +On line 731: + Bank supervisors + monitored banks’ leverage—their + assets relative + +On line 733: + leverage—their assets + relative to equity— + because excessive + +On line 733: + by nearly every + financial institution, + amplifies returns. + +On line 733: + example, if an + investor uses of his own + money to purchase + +On line 733: + investor uses of + his own money to purchase + a security + +On line 733: + his own money to + purchase a security + that increases in + +On line 733: + security that + increases in value by + he earns However, + +On line 733: + he earns However, + if he borrows another + and invests times as + +On line 733: + earns However, if + he borrows another and + invests times as much + +On line 733: + invests times as much + the same increase in value + yields a profit of + +On line 733: + times as much the same + increase in value yields a + profit of double + +On line 733: + profit of double + his out-of-pocket investment. + If the investment + +On line 733: + investment. If the + investment sours, though, leverage + magnifies the loss + +On line 733: + If the investment + sours, though, leverage magnifies + the loss just as much. + +On line 733: + the investment sours, + though, leverage magnifies the + loss just as much. A + +On line 733: + magnifies the loss + just as much. A decline of + costs the unleveraged + +On line 733: + much. A decline of + costs the unleveraged investor + leaving him with but + +On line 733: + decline of costs the + unleveraged investor leaving + him with but wipes out + +On line 733: + costs the unleveraged + investor leaving him with but + wipes out the leveraged + +On line 733: + unleveraged investor + leaving him with but wipes out + the leveraged investor’s + +On line 733: + investor leaving him + with but wipes out the leveraged + investor’s An investor + +On line 733: + leaving him with but + wipes out the leveraged investor’s + An investor buying + +On line 733: + with but wipes out the + leveraged investor’s An investor + buying assets worth + +On line 733: + wipes out the leveraged + investor’s An investor buying + assets worth times his + +On line 733: + leveraged investor’s An + investor buying assets worth + times his capital + +On line 733: + investor’s An investor + buying assets worth times his + capital has a + +On line 733: + buying assets worth + times his capital has a + leverage ratio of + +On line 733: + assets worth times his + capital has a leverage + ratio of with the + +On line 733: + of with the numbers + representing the total + money invested + +On line 733: + the total money + invested compared to the + money the investor + +On line 733: + invested compared + to the money the investor + has committed to + +On line 735: + committed to the + deal. In bank supervisors + established the first + +On line 735: + liabilities—should + be at least of assets for + most banks. Capital, + +On line 735: + at least of assets + for most banks. Capital, in + general, reflects + +On line 735: + assets for most banks. + Capital, in general, + reflects the value + +On line 735: + general, reflects + the value of shareholders’ + investment in the + +On line 735: + reflects the value + of shareholders’ investment + in the bank, which bears + +On line 737: + which bears the first risk + of any potential losses. + By comparison, + +On line 737: + bears the first risk of + any potential losses. By + comparison, Wall + +On line 737: + of any potential + losses. By comparison, + Wall Street investment + +On line 737: + potential losses. + By comparison, Wall Street + investment banks could + +On line 737: + leverage, unhindered + by oversight of their safety + and soundness or by + +On line 737: + of their safety and + soundness or by capital + requirements outside + +On line 737: + or by capital + requirements outside of their + broker-dealer subsidiaries, + +On line 737: + requirements outside + of their broker-dealer subsidiaries, + which were subject to + +On line 737: + of their broker-dealer + subsidiaries, which were subject to + a net capital + +On line 739: + broker-dealer subsidiaries, + which were subject to a net + capital rule. The + +On line 739: + which were subject to + a net capital rule. The + main shadow banking + +On line 739: + a net capital + rule. The main shadow banking + participants—the + +On line 739: + rule. The main shadow + banking participants—the + money market funds + +On line 739: + main shadow banking + participants—the money + market funds and the + +On line 739: + participants—the + money market funds and the + investment banks that + +On line 739: + money market funds + and the investment banks that + sponsored many of them—were + +On line 739: + and the investment + banks that sponsored many of them—were + not subject to the + +On line 739: + the investment banks + that sponsored many of them—were not + subject to the same + +On line 739: + banks that sponsored many + of them—were not subject to the + same supervision + +On line 739: + that sponsored many of + them—were not subject to the same + supervision as + +On line 739: + of them—were not subject + to the same supervision + as banks and thrifts. The + +On line 739: + not subject to the + same supervision as banks + and thrifts. The money + +On line 739: + subject to the same + supervision as banks and + thrifts. The money in + +On line 739: + supervision as + banks and thrifts. The money in + the shadow banking + +On line 739: + from federally + insured depositors but + principally from + +On line 739: + but principally + from investors (in the case of + money market funds) + +On line 739: + investors (in the case + of money market funds) or + commercial paper + +On line 739: + the case of money + market funds) or commercial + paper and repo + +On line 739: + of money market + funds) or commercial paper + and repo markets + +On line 739: + money market funds) + or commercial paper and + repo markets (in + +On line 739: + commercial paper + and repo markets (in the + case of investment + +On line 741: + repo markets (in + the case of investment banks). + Both money market + +On line 741: + case of investment + banks). Both money market funds + and securities + +On line 741: + of investment banks). + Both money market funds and + securities firms + +On line 741: + Both money market + funds and securities firms + were regulated + +On line 741: + money market funds + and securities firms were + regulated by + +On line 741: + and securities + firms were regulated by + the Securities + +On line 741: + securities firms + were regulated by the + Securities and + +On line 741: + were regulated + by the Securities and + Exchange Commission. + +On line 741: + the Securities + and Exchange Commission. But + the SEC, created + +On line 741: + Securities and + Exchange Commission. But the + SEC, created in + +On line 741: + SEC, created in + was supposed to supervise + the securities + +On line 741: + to supervise the + securities markets to + protect investors. It + +On line 741: + investors. It was charged + with ensuring that issuers + of securities + +On line 741: + with ensuring that + issuers of securities + disclosed sufficient + +On line 741: + disclosed sufficient + information for investors, + and it required firms + +On line 741: + for investors, and it + required firms that bought, sold, and + brokered transactions + +On line 741: + required firms that bought, + sold, and brokered transactions + in securities + +On line 741: + securities to + comply with procedural + restrictions such as + +On line 741: + as keeping customers’ + funds in separate accounts. + Historically, + +On line 741: + separate accounts. + Historically, the SEC + did not focus on + +On line 741: + SEC did not focus + on the safety and soundness + of securities + +On line 741: + did not focus on + the safety and soundness of + securities firms, + +On line 741: + on the safety and + soundness of securities + firms, although it did + +On line 741: + impose capital + requirements on broker-dealers + designed to protect + +On line 743: + designed to protect + their clients. Meanwhile, since deposit + insurance did not + +On line 743: + Meanwhile, since deposit + insurance did not cover + such instruments as + +On line 743: + such instruments as + money market mutual + funds, the government + +On line 743: + market mutual + funds, the government was not + on the hook. There was + +On line 743: + mutual funds, the + government was not on the + hook. There was little + +On line 743: + funds, the government + was not on the hook. There was + little concern about + +On line 743: + government was not + on the hook. There was little + concern about a run. + +On line 743: + not on the hook. There + was little concern about a + run. In theory, + +On line 743: + on the hook. There was + little concern about a run. + In theory, the + +On line 743: + concern about a run. + In theory, the investors + had knowingly risked + +On line 743: + run. In theory, + the investors had knowingly + risked their money. If + +On line 743: + In theory, the + investors had knowingly risked + their money. If an + +On line 743: + knowingly risked their + money. If an investment + lost value, it lost + +On line 743: + risked their money. If + an investment lost value, + it lost value. If + +On line 743: + their money. If an + investment lost value, it + lost value. If a + +On line 743: + If an investment + lost value, it lost value. + If a firm failed, it + +On line 743: + an investment lost + value, it lost value. If + a firm failed, it failed. + +On line 743: + lost value, it lost + value. If a firm failed, it + failed. As a result, + +On line 743: + value. If a firm + failed, it failed. As a result, + money market funds + +On line 743: + If a firm failed, it + failed. As a result, money + market funds had no + +On line 743: + failed, it failed. As a + result, money market funds + had no capital + +On line 743: + had no capital + or leverage standards. "There was + no regulation," + +On line 743: + or leverage standards. + "There was no regulation," + former Fed chairman + +On line 743: + Volcker told the + Financial Crisis Inquiry + Commission. "It was + +On line 743: + told the Financial + Crisis Inquiry Commission. + "It was kind of a + +On line 743: + Financial Crisis + Inquiry Commission. "It was + kind of a free ride."11 + +On line 743: + restricting the type + of securities in which + they could invest, the + +On line 743: + of securities + in which they could invest, the + duration of those + +On line 743: + securities, and + the diversification + of their portfolios. + +On line 743: + their portfolios. These + requirements were supposed to + ensure that investors’ + +On line 743: + ensure that investors’ + shares would not diminish in + value and would be + +On line 743: + that investors’ shares would + not diminish in value + and would be available + +On line 743: + in value and would + be available anytime—important + reassurances, but + +On line 743: + against losses was the + implicit guarantee of + sponsors like Merrill + +On line 745: + like Merrill Lynch with + reputations to protect. + Increasingly, the + +On line 745: + with reputations + to protect. Increasingly, + the traditional + +On line 745: + reputations to + protect. Increasingly, the + traditional world + +On line 745: + world of banks and thrifts + was ill-equipped to keep up + with the parallel + +On line 745: + of banks and thrifts was + ill-equipped to keep up with + the parallel world + +On line 745: + was ill-equipped to + keep up with the parallel + world of the Wall Street + +On line 745: + ill-equipped to keep + up with the parallel world + of the Wall Street firms. + +On line 745: + with the parallel + world of the Wall Street firms. The + new shadow banks had + +On line 745: + the parallel world + of the Wall Street firms. The new + shadow banks had few + +On line 745: + of the Wall Street firms. + The new shadow banks had few + constraints on raising + +On line 745: + new shadow banks had + few constraints on raising and + investing money. + +On line 745: + banks had few constraints + on raising and investing + money. Commercial + +On line 745: + investing money. + Commercial banks were at a + disadvantage and + +On line 745: + danger of losing + their dominant position. + Their bind was labeled + +On line 745: + Their bind was labeled + "disintermediation," + and many critics of + +On line 745: + system concluded + that policy makers, all + the way back to the + +On line 745: + to the Depression, + had trapped depository + institutions in + +On line 745: + only by capping + the interest rates they could + pay depositors + +On line 745: + critics argued, the + regulatory constraints + on industries across + +On line 745: + competition and + restricted innovation, + and the financial + +On line 745: + innovation, and + the financial sector was + a prime example + +On line 747: + example of such + a hampered industry. Years + later, Fed Chairman + +On line 747: + of such a hampered + industry. Years later, Fed + Chairman Greenspan described + +On line 747: + later, Fed Chairman + Greenspan described the argument + for deregulation: + +On line 749: + the argument for + deregulation: "Those of us + who support market + +On line 749: + deregulation: "Those + of us who support market + capitalism in + +On line 749: + who support market + capitalism in its more + competitive forms + +On line 749: + competitive forms + might argue that unfettered + markets create a + +On line 749: + forms might argue that + unfettered markets create + a degree of wealth + +On line 749: + unfettered markets + create a degree of wealth + that fosters a more + +On line 749: + markets create a + degree of wealth that fosters + a more civilized + +On line 749: + degree of wealth that + fosters a more civilized + existence. I have + +On line 749: + wealth that fosters a + more civilized existence. + I have always found + +On line 749: + that fosters a more + civilized existence. I + have always found that + +On line 753: + have always found that + insight compelling."12 THE SAVINGS + AND LOAN CRISIS: "THEY + +On line 753: + that insight compelling."12 + THE SAVINGS AND LOAN CRISIS: + "THEY PUT A LOT OF + +On line 753: + compelling."12 THE SAVINGS + AND LOAN CRISIS: "THEY PUT A + LOT OF PRESSURE ON + +On line 753: + AND LOAN CRISIS: "THEY + PUT A LOT OF PRESSURE ON + THEIR REGULATORS" + +On line 755: + continued to chafe + against the regulations still + in place. The playing + +On line 755: + the regulations + still in place. The playing field + wasn’t level, which + +On line 755: + in place. The playing + field wasn’t level, which "put + a lot of pressure + +On line 755: + place. The playing field + wasn’t level, which "put a + lot of pressure on + +On line 755: + field wasn’t level, + which "put a lot of pressure + on institutions + +On line 755: + wasn’t level, which + "put a lot of pressure on + institutions to + +On line 755: + a lot of pressure + on institutions to get + higher-rate performing + +On line 755: + on institutions + to get higher-rate performing + assets," former SEC + +On line 755: + higher-rate performing + assets," former SEC Chairman + Richard Breeden told the + +On line 755: + assets," former SEC + Chairman Richard Breeden told the + FCIC. "And they put a + +On line 755: + former SEC Chairman + Richard Breeden told the FCIC. "And + they put a lot of + +On line 755: + Chairman Richard Breeden + told the FCIC. "And they put a + lot of pressure on + +On line 755: + told the FCIC. "And they + put a lot of pressure on + their regulators + +On line 755: + the FCIC. "And they put + a lot of pressure on their + regulators to + +On line 757: + of pressure on their + regulators to allow + this to happen."13 The + +On line 757: + their regulators + to allow this to happen."13 + The banks and the S&Ls + +On line 757: + regulators to + allow this to happen."13 The + banks and the S&Ls went + +On line 757: + to allow this to + happen."13 The banks and the S&Ls + went to Congress for + +On line 757: + banks and the S&Ls went + to Congress for help. In the + Depository + +On line 757: + Monetary Control + Act repealed the limits on + the interest rates + +On line 757: + repealed the limits + on the interest rates that + depository + +On line 757: + on the interest + rates that depository + institutions could + +On line 757: + a significant + regulatory constraint + on banks and thrifts, it + +On line 757: + regulatory + constraint on banks and thrifts, it + could not restore their + +On line 757: + their competitive + advantage. Depositors + wanted a higher + +On line 757: + wanted a higher + rate of return, which banks and + thrifts were now free to + +On line 757: + a higher rate of + return, which banks and thrifts were + now free to pay. But + +On line 757: + of return, which banks + and thrifts were now free to pay. + But the interest + +On line 757: + return, which banks and + thrifts were now free to pay. But + the interest banks + +On line 757: + and thrifts were now free + to pay. But the interest + banks and thrifts could earn + +On line 757: + thrifts were now free to + pay. But the interest banks + and thrifts could earn off + +On line 757: + were now free to pay. + But the interest banks and + thrifts could earn off of + +On line 757: + free to pay. But the + interest banks and thrifts could + earn off of mortgages + +On line 757: + But the interest + banks and thrifts could earn off of + mortgages and other + +On line 757: + interest banks and + thrifts could earn off of mortgages + and other long-term loans + +On line 757: + banks and thrifts could earn + off of mortgages and other + long-term loans was largely + +On line 757: + and thrifts could earn off + of mortgages and other long-term + loans was largely fixed + +On line 757: + thrifts could earn off of + mortgages and other long-term loans + was largely fixed and + +On line 757: + off of mortgages and + other long-term loans was largely + fixed and could not match + +On line 757: + mortgages and other + long-term loans was largely fixed and + could not match their new + +On line 757: + and other long-term loans + was largely fixed and could not + match their new costs. While + +On line 757: + other long-term loans was + largely fixed and could not match + their new costs. While their + +On line 757: + long-term loans was largely + fixed and could not match their new + costs. While their deposit + +On line 757: + loans was largely fixed + and could not match their new costs. + While their deposit base + +On line 757: + largely fixed and could + not match their new costs. While their + deposit base increased, + +On line 757: + fixed and could not match + their new costs. While their deposit + base increased, they now + +On line 757: + and could not match their + new costs. While their deposit base + increased, they now faced + +On line 757: + their new costs. While their + deposit base increased, they now + faced an interest + +On line 757: + costs. While their deposit + base increased, they now faced an + interest rate squeeze. + +On line 757: + base increased, they now + faced an interest rate squeeze. + In the difference + +On line 757: + increased, they now faced + an interest rate squeeze. In + the difference in + +On line 757: + faced an interest + rate squeeze. In the difference + in interest earned + +On line 757: + an interest rate + squeeze. In the difference in + interest earned on + +On line 757: + on the banks’ and thrifts’ + safest investments (one-year Treasury + notes) over interest + +On line 757: + the banks’ and thrifts’ safest + investments (one-year Treasury notes) + over interest paid + +On line 757: + safest investments (one-year + Treasury notes) over interest + paid on deposits was + +On line 757: + notes) over interest + paid on deposits was almost + percentage points; by + +On line 757: + deposits was almost + percentage points; by it was + only percentage + +On line 757: + only percentage + points. The institutions lost + almost percentage + +On line 757: + percentage points. The + institutions lost almost + percentage points of + +On line 757: + The institutions + lost almost percentage points + of the advantage + +On line 757: + institutions lost + almost percentage points of + the advantage they + +On line 757: + almost percentage + points of the advantage they + had enjoyed when the + +On line 757: + advantage they had + enjoyed when the rates were capped.14 + The legislation + +On line 757: + enjoyed when the rates + were capped.14 The legislation + had not done enough to + +On line 757: + when the rates were capped.14 + The legislation had not + done enough to reduce + +On line 757: + the rates were capped.14 The + legislation had not done + enough to reduce the + +On line 757: + The legislation + had not done enough to reduce + the competitive + +On line 757: + had not done enough to + reduce the competitive + pressures facing the + +On line 757: + done enough to reduce + the competitive pressures + facing the banks and + +On line 759: + facing the banks and + thrifts. That legislation was + followed in by the + +On line 759: + by the Garn-St. Germain + Act, which significantly + broadened the types of + +On line 759: + Garn-St. Germain Act, which + significantly broadened + the types of loans and + +On line 759: + significantly + broadened the types of loans and + investments that thrifts + +On line 759: + the types of loans and + investments that thrifts could make. + The act also gave + +On line 759: + investments that thrifts + could make. The act also gave + banks and thrifts broader + +On line 759: + that thrifts could make. The + act also gave banks and thrifts + broader scope in the + +On line 759: + The act also gave + banks and thrifts broader scope in + the mortgage market. + +On line 759: + banks and thrifts broader + scope in the mortgage market. + Traditionally, + +On line 759: + scope in the mortgage + market. Traditionally, + they had relied on + +On line 759: + the mortgage market. + Traditionally, they had + relied on 30-year, fixed-rate + +On line 759: + relied on 30-year, fixed-rate + mortgages. But the interest + on fixed-rate mortgages on + +On line 759: + on 30-year, fixed-rate mortgages. + But the interest on fixed-rate + mortgages on their books + +On line 759: + fixed-rate mortgages. But the + interest on fixed-rate mortgages + on their books fell short + +On line 759: + the interest on + fixed-rate mortgages on their books fell + short as inflation + +On line 759: + interest on fixed-rate + mortgages on their books fell short + as inflation surged + +On line 759: + fixed-rate mortgages on their + books fell short as inflation + surged in the mid-1970s and + +On line 759: + on their books fell short + as inflation surged in the + mid-1970s and early 1980s + +On line 759: + their books fell short as + inflation surged in the mid-1970s + and early 1980s and + +On line 759: + short as inflation + surged in the mid-1970s and early + 1980s and banks and thrifts + +On line 759: + as inflation surged + in the mid-1970s and early 1980s + and banks and thrifts found + +On line 759: + inflation surged in + the mid-1970s and early 1980s and + banks and thrifts found it + +On line 759: + it increasingly + difficult to cover the + rising costs of their + +On line 759: + cover the rising + costs of their short-term deposits. + In the Garn-St. Germain + +On line 759: + rising costs of their + short-term deposits. In the Garn-St. + Germain Act, Congress + +On line 759: + costs of their short-term + deposits. In the Garn-St. Germain + Act, Congress sought to + +On line 759: + short-term deposits. In + the Garn-St. Germain Act, Congress + sought to relieve this + +On line 759: + In the Garn-St. Germain + Act, Congress sought to relieve + this interest rate + +On line 759: + sought to relieve this + interest rate mismatch by + permitting banks and + +On line 759: + this interest rate + mismatch by permitting banks + and thrifts to issue + +On line 759: + and adjustable-rate mortgages + (ARMs), even in states where state laws + forbade these loans. For + +On line 759: + in states where state laws + forbade these loans. For consumers, + interest-only and + +On line 759: + laws forbade these loans. + For consumers, interest-only + and balloon mortgages + +On line 759: + forbade these loans. For + consumers, interest-only and + balloon mortgages made + +On line 759: + term. Borrowers with + ARMs enjoyed lower mortgage + rates when interest + +On line 759: + Borrowers with ARMs + enjoyed lower mortgage rates + when interest rates + +On line 759: + ARMs enjoyed lower + mortgage rates when interest + rates decreased, but their + +On line 759: + lower mortgage rates + when interest rates decreased, + but their rates would rise + +On line 759: + rates when interest + rates decreased, but their rates would + rise when interest + +On line 759: + when interest rates + decreased, but their rates would rise + when interest rates + +On line 759: + rates decreased, but their + rates would rise when interest + rates rose. For banks and + +On line 759: + decreased, but their rates + would rise when interest rates + rose. For banks and thrifts, + +On line 759: + their rates would rise when + interest rates rose. For banks + and thrifts, ARMs offered + +On line 759: + interest rates rose. + For banks and thrifts, ARMs offered + an interest rate + +On line 759: + rose. For banks and thrifts, + ARMs offered an interest + rate that floated in + +On line 759: + thrifts, ARMs offered an + interest rate that floated + in relationship + +On line 759: + interest rate that + floated in relationship + to the rates they were + +On line 759: + rate that floated in + relationship to the rates + they were paying to + +On line 759: + in relationship + to the rates they were paying + to attract money + +On line 759: + relationship to + the rates they were paying to + attract money from + +On line 759: + to the rates they were + paying to attract money + from depositors. + +On line 759: + paying to attract + money from depositors. + The floating mortgage + +On line 759: + The floating mortgage + rate protected banks and S&Ls + from the interest + +On line 759: + floating mortgage rate + protected banks and S&Ls from + the interest rate + +On line 759: + banks and S&Ls from the + interest rate squeeze caused by + inflation, but it + +On line 759: + the interest rate + squeeze caused by inflation, but + it effectively + +On line 759: + by inflation, but + it effectively transferred + the risk of rising + +On line 759: + it effectively + transferred the risk of rising + interest rates to + +On line 761: + interest rates to + borrowers. Then, beginning + in the Federal + +On line 761: + banks to undertake + activities forbidden + under Glass-Steagall and its + +On line 761: + in "bank-ineligible" + activities, including + selling or holding + +On line 761: + including selling + or holding certain kinds of + securities that + +On line 761: + holding certain kinds + of securities that were + not permissible + +On line 761: + of securities + that were not permissible + for national banks + +On line 761: + securities that + were not permissible for + national banks to + +On line 761: + permissible for + national banks to invest + in or underwrite. + +On line 761: + to invest in or + underwrite. At first, the Fed + strictly limited + +On line 761: + underwrite. At first, + the Fed strictly limited + these bank-ineligible + +On line 761: + activities to + no more than of the assets + or revenue of any + +On line 761: + to no more than of + the assets or revenue of + any subsidiary. Over time, + +On line 761: + than of the assets + or revenue of any subsidiary. + Over time, however, + +On line 761: + of the assets or + revenue of any subsidiary. Over + time, however, the + +On line 761: + or revenue of any + subsidiary. Over time, however, + the Fed relaxed these + +On line 761: + any subsidiary. Over time, + however, the Fed relaxed + these restrictions. By + +On line 761: + time, however, the + Fed relaxed these restrictions. + By bank-ineligible + +On line 761: + represent up to + of assets or revenues of + a securities + +On line 763: + Meanwhile, the OCC, the + regulator of banks with + national charters, + +On line 763: + regulator of + banks with national charters, + was expanding the + +On line 763: + equivalent to, or + a logical outgrowth of, + a recognized bank + +On line 763: + or a logical + outgrowth of, a recognized + bank power."16 Among these + +On line 763: + new activities + were underwriting as well + as trading bets and + +On line 763: + activities were + underwriting as well as + trading bets and hedges, + +On line 763: + trading bets and hedges, + known as derivatives, on + the prices of certain + +On line 763: + bets and hedges, known as + derivatives, on the prices + of certain assets. + +On line 763: + derivatives, on + the prices of certain assets. + Between and the OCC + +On line 763: + of certain assets. + Between and the OCC broadened + the derivatives + +On line 763: + Between and the OCC + broadened the derivatives + in which banks might deal + +On line 763: + the OCC broadened the + derivatives in which banks + might deal to include + +On line 763: + derivatives in + which banks might deal to include + those related to + +On line 763: + which banks might deal to + include those related to + debt securities + +On line 765: + metals such as gold + and silver and equity + stocks Fed Chairman Greenspan + +On line 765: + gold and silver and + equity stocks Fed Chairman + Greenspan and many other + +On line 765: + equity stocks Fed + Chairman Greenspan and many other + regulators and + +On line 765: + Fed Chairman Greenspan and + many other regulators + and legislators + +On line 765: + regulators and + legislators supported + and encouraged this + +On line 765: + and encouraged this + shift toward deregulated + financial markets. + +On line 765: + financial markets. + They argued that financial + institutions had + +On line 765: + institutions had + strong incentives to protect + their shareholders and + +On line 765: + regulate themselves + through improved risk management. + Likewise, financial + +On line 765: + would exert strong and + effective discipline through + analysts, credit + +On line 765: + analysts, credit + rating agencies, and investors. + Greenspan argued that the + +On line 765: + rating agencies, and + investors. Greenspan argued that the + urgent question about + +On line 765: + urgent question about + government regulation + was whether it strengthened + +On line 767: + the issue this way: + financial "modern-ization" was + needed to "remove + +On line 767: + this way: financial + "modern-ization" was needed to + "remove outdated + +On line 767: + limit choices and + options for the consumer of + financial services." + +On line 767: + financial services." + Removing the barriers + "would permit banking + +On line 767: + more effectively + in their natural markets. + The result would be + +On line 767: + effectively in + their natural markets. The + result would be a + +On line 767: + in their natural + markets. The result would be + a more efficient + +On line 767: + markets. The result + would be a more efficient + financial system + +On line 767: + result would be a + more efficient financial + system providing + +On line 769: + better services to + the public."17 During the 1980s + and early 1990s, banks + +On line 769: + the public."17 During + the 1980s and early 1990s, banks + and thrifts expanded + +On line 769: + the 1980s and early + 1990s, banks and thrifts expanded + into higher-risk loans + +On line 769: + higher interest + payments. They made loans to oil + and gas producers, + +On line 769: + interest payments. + They made loans to oil and gas + producers, financed + +On line 769: + They made loans to oil + and gas producers, financed + leveraged buyouts of + +On line 769: + and gas producers, + financed leveraged buyouts of + corporations, and + +On line 769: + leveraged buyouts of + corporations, and funded + developers of + +On line 769: + of corporations, + and funded developers + of residential + +On line 769: + corporations, and + funded developers of + residential and + +On line 769: + residential and + commercial real estate. + The largest commercial + +On line 769: + commercial real + estate. The largest commercial + banks advanced money + +On line 769: + advanced money to + companies and governments + in "emerging markets," + +On line 769: + in "emerging markets," + such as countries in Asia and + Latin America. Those + +On line 769: + riskier than the banks’ + traditional lending. The + consequences appeared + +On line 769: + the real estate + markets, with a bubble and + massive overbuilding + +On line 769: + in residential + and commercial sectors in + certain regions. For + +On line 769: + sectors in certain + regions. For example, house + prices rose per year in + +On line 769: + in certain regions. + For example, house prices rose + per year in Texas from + +On line 769: + certain regions. For + example, house prices rose per + year in Texas from to + +On line 769: + example, house prices + rose per year in Texas from to + In California, + +On line 769: + per year in Texas from + to In California, prices + rose annually + +On line 769: + year in Texas from to + In California, prices rose + annually from + +On line 769: + In California, + prices rose annually from + to The bubble burst + +On line 769: + California, prices + rose annually from to + The bubble burst first + +On line 769: + rose annually + from to The bubble burst first + in Texas in and but + +On line 769: + annually from + to The bubble burst first in + Texas in and but the + +On line 769: + from to The bubble + burst first in Texas in and but + the trouble rapidly + +On line 769: + to The bubble burst + first in Texas in and but the + trouble rapidly spread + +On line 769: + bubble burst first in + Texas in and but the trouble + rapidly spread across the + +On line 769: + burst first in Texas in + and but the trouble rapidly + spread across the Southeast + +On line 769: + first in Texas in and + but the trouble rapidly spread + across the Southeast to + +On line 769: + in Texas in and but + the trouble rapidly spread across + the Southeast to the + +On line 769: + Texas in and but the + trouble rapidly spread across the + Southeast to the mid-Atlantic + +On line 769: + and but the trouble + rapidly spread across the Southeast + to the mid-Atlantic states and + +On line 769: + trouble rapidly spread + across the Southeast to the mid-Atlantic + states and New England, + +On line 769: + rapidly spread across the + Southeast to the mid-Atlantic states and + New England, then swept + +On line 769: + across the Southeast to + the mid-Atlantic states and New England, + then swept back across the + +On line 769: + Southeast to the mid-Atlantic + states and New England, then swept + back across the country + +On line 769: + states and New England, + then swept back across the country + to California + +On line 769: + and New England, then + swept back across the country to + California and + +On line 769: + then swept back across the + country to California + and Arizona. Before + +On line 769: + across the country to + California and Arizona. + Before the crisis + +On line 769: + California and + Arizona. Before the crisis + ended, house prices had + +On line 769: + Before the crisis + ended, house prices had declined + nationally by + +On line 769: + nationally by + from July to February + 199220—the first such fall since + +On line 769: + first such fall since the + Depression—driven by steep + drops in regional + +On line 771: + Depression—driven + by steep drops in regional + markets.21 In the 1980s, + +On line 771: + regional markets.21 + In the 1980s, with the mortgages + in their portfolios + +On line 771: + 1980s, with the mortgages + in their portfolios paying + considerably less + +On line 771: + considerably less + than current interest rates, + spiraling defaults + +On line 771: + residential and + commercial real estate + loans, and losses on + +On line 771: + commercial real + estate loans, and losses on + energy-related, + +On line 771: + energy-related, + leveraged-buyout, and overseas loans, + the industry was + +On line 773: + the industry was + shattered.22 Almost commercial + banks and thrifts failed in + +On line 773: + was shattered.22 Almost + commercial banks and thrifts failed + in what became known + +On line 773: + commercial banks and + thrifts failed in what became known + as the S&L crisis + +On line 773: + banks and thrifts failed in + what became known as the S&L + crisis of the 1980s + +On line 773: + failed in what became + known as the S&L crisis of + the 1980s and early + +On line 773: + in what became known + as the S&L crisis of the + 1980s and early 1990s. + +On line 773: + what became known as + the S&L crisis of the 1980s + and early 1990s. By + +On line 773: + as the S&L crisis + of the 1980s and early 1990s. + By comparison, + +On line 773: + 1980s and early 1990s. + By comparison, only + banks had failed between + +On line 773: + and early 1990s. By + comparison, only banks + had failed between and + +On line 773: + between and By one-sixth + of federally insured + depository + +On line 773: + of federally + insured depository + institutions had + +On line 773: + required financial + assistance, affecting of + the banking system’s + +On line 773: + the banking system’s + assets.23 More than bank and S&L + executives were + +On line 773: + assets.23 More than bank + and S&L executives were + convicted of felonies.24 + +On line 773: + executives were + convicted of felonies.24 By the + time the government + +On line 773: + convicted of felonies.24 + By the time the government + cleanup was complete, the + +On line 773: + felonies.24 By the time the + government cleanup was complete, + the ultimate cost + +On line 773: + the government cleanup + was complete, the ultimate + cost of the crisis + +On line 773: + government cleanup was + complete, the ultimate cost + of the crisis was + +On line 775: + the ultimate cost + of the crisis was billion.25 + Despite new laws passed + +On line 775: + cost of the crisis + was billion.25 Despite new laws + passed by Congress in + +On line 775: + of the crisis was + billion.25 Despite new laws passed + by Congress in and + +On line 775: + was billion.25 Despite + new laws passed by Congress in + and in response to + +On line 775: + billion.25 Despite new + laws passed by Congress in and + in response to the + +On line 777: + passed by Congress in + and in response to the S&L + crisis that toughened + +On line 777: + and in response to + the S&L crisis that toughened + supervision of + +On line 777: + to the S&L crisis + that toughened supervision + of thrifts, the impulse + +On line 777: + deregulatory + movement focused in part on + continuing to + +On line 777: + study calling for the + elimination of the old + regulatory + +On line 777: + all geographic + restrictions on banking and + repeal of the Glass-Steagall + +On line 777: + banking and repeal + of the Glass-Steagall Act. The study urged + Congress to abolish + +On line 777: + of the Glass-Steagall Act. The + study urged Congress to abolish + these restrictions in + +On line 777: + the Glass-Steagall Act. The study + urged Congress to abolish these + restrictions in the + +On line 777: + The study urged Congress + to abolish these restrictions + in the belief that + +On line 777: + study urged Congress to + abolish these restrictions in + the belief that large + +On line 777: + restrictions in the + belief that large nationwide + banks closely tied to + +On line 777: + the belief that large + nationwide banks closely tied + to the capital + +On line 777: + banks closely tied to + the capital markets would + be more profitable and + +On line 777: + closely tied to the + capital markets would be + more profitable and more + +On line 777: + capital markets + would be more profitable and more + competitive with + +On line 777: + would be more profitable + and more competitive with + the largest banks from the + +On line 777: + more profitable and more + competitive with the largest + banks from the United + +On line 777: + competitive with + the largest banks from the United + Kingdom, Europe, and + +On line 777: + with the largest banks from + the United Kingdom, Europe, + and Japan. The report + +On line 777: + banks from the United + Kingdom, Europe, and Japan. The + report contended + +On line 777: + the United Kingdom, + Europe, and Japan. The report + contended that its + +On line 777: + Kingdom, Europe, and + Japan. The report contended + that its proposals + +On line 777: + Europe, and Japan. The + report contended that its + proposals would let + +On line 777: + proposals would let + banks embrace innovation + and produce a "stronger, + +On line 777: + more diversified + financial system that will + provide important + +On line 777: + financial system + that will provide important + benefits to the + +On line 779: + to the consumer and + important protections to + the taxpayer."26 The + +On line 779: + protections to the + taxpayer."26 The biggest banks + pushed Congress to adopt + +On line 779: + were insurance agents, + real estate brokers, and + smaller banks, who felt + +On line 779: + agents, real estate + brokers, and smaller banks, who + felt threatened by the + +On line 779: + brokers, and smaller + banks, who felt threatened by the + possibility + +On line 779: + banks, who felt threatened + by the possibility + that the largest banks and + +On line 779: + who felt threatened by + the possibility that + the largest banks and their + +On line 779: + felt threatened by the + possibility that the + largest banks and their huge + +On line 779: + possibility + that the largest banks and their huge + pools of deposits would + +On line 779: + the largest banks and their + huge pools of deposits would be + unleashed to compete + +On line 779: + banks and their huge pools + of deposits would be unleashed + to compete without + +On line 779: + huge pools of deposits + would be unleashed to compete + without restraint. The + +On line 779: + of deposits would be + unleashed to compete without + restraint. The House of + +On line 779: + unleashed to compete + without restraint. The House of + Representatives + +On line 779: + without restraint. The + House of Representatives + rejected Treasury’s + +On line 779: + proposal in but + similar proposals were + adopted by Congress + +On line 779: + in but similar + proposals were adopted by + Congress later in + +On line 781: + by Congress later + in the 1990s. In dealing with + the banking and thrift + +On line 781: + later in the 1990s. + In dealing with the banking + and thrift crisis of + +On line 781: + In dealing with the + banking and thrift crisis of + the 1980s and early + +On line 781: + with the banking and + thrift crisis of the 1980s and + early 1990s, Congress + +On line 781: + thrift crisis of the + 1980s and early 1990s, Congress + was greatly concerned + +On line 781: + crisis of the 1980s + and early 1990s, Congress was + greatly concerned by + +On line 781: + early 1990s, Congress + was greatly concerned by a + spate of high-profile + +On line 781: + greatly concerned by + a spate of high-profile bank + bailouts. In federal + +On line 781: + the nation’s 7th-largest bank; + in First Republic, number + in MCorp, number in + +On line 781: + nation’s 7th-largest bank; in + First Republic, number in + MCorp, number in Bank + +On line 781: + in First Republic, + number in MCorp, number in + Bank of New England, + +On line 781: + Republic, number + in MCorp, number in Bank of + New England, number + +On line 781: + in MCorp, number in + Bank of New England, number + These banks had relied + +On line 781: + England, number These + banks had relied heavily + on uninsured short-term + +On line 781: + vulnerable to + abrupt withdrawals once confidence + in their solvency + +On line 781: + confidence in their + solvency evaporated. + Deposits covered by + +On line 783: + covered by the FDIC + were protected from loss, but + regulators felt + +On line 783: + FDIC were protected + from loss, but regulators + felt obliged to protect + +On line 783: + were protected from + loss, but regulators felt + obliged to protect the + +On line 783: + regulators felt + obliged to protect the uninsured + depositors—those whose + +On line 783: + obliged to protect the + uninsured depositors—those whose + balances exceeded + +On line 783: + prevent potential + runs on even larger banks that + reportedly may + +On line 783: + runs on even larger + banks that reportedly may + have lacked sufficient + +On line 783: + even larger banks that + reportedly may have lacked + sufficient assets + +On line 783: + reportedly may + have lacked sufficient assets + to satisfy their + +On line 783: + have lacked sufficient + assets to satisfy their + obligations, such as + +On line 785: + Bank of America, + and Manufacturers Hanover.27 + During a hearing + +On line 785: + a hearing on the + rescue of Continental + Illinois, Comptroller + +On line 785: + of Continental + Illinois, Comptroller of the + Currency C. Todd + +On line 785: + Currency C. Todd + Conover stated that federal + regulators would + +On line 785: + Todd Conover stated that + federal regulators + would not allow the + +On line 787: + regulators would + not allow the largest "money + center banks" to fail.28 + +On line 787: + would not allow the + largest "money center banks" to + fail.28 This was a new + +On line 787: + largest "money center + banks" to fail.28 This was a new + regulatory + +On line 787: + it had a catchy name. + Representative Stewart + McKinney of Connecticut + +On line 787: + Representative + Stewart McKinney of Connecticut + responded, "We have + +On line 787: + McKinney of Connecticut + responded, "We have a new + kind of bank. It is + +On line 787: + responded, "We have + a new kind of bank. It is + called ‘too big to fail’—TBTF—and + +On line 787: + "We have a new kind + of bank. It is called ‘too big + to fail’—TBTF—and it is a + +On line 787: + new kind of bank. It + is called ‘too big to fail’—TBTF—and it + is a wonderful + +On line 787: + kind of bank. It is + called ‘too big to fail’—TBTF—and it is + a wonderful bank."29 + +On line 789: + of bank. It is called + ‘too big to fail’—TBTF—and it is a + wonderful bank."29 In + +On line 789: + is called ‘too big to + fail’—TBTF—and it is a wonderful + bank."29 In during this + +On line 789: + called ‘too big to fail’—TBTF—and + it is a wonderful bank."29 + In during this era + +On line 789: + ‘too big to fail’—TBTF—and it + is a wonderful bank."29 In + during this era of + +On line 789: + is a wonderful + bank."29 In during this era of + federal rescues + +On line 789: + bank."29 In during this + era of federal rescues + of large commercial + +On line 789: + In during this era + of federal rescues of + large commercial banks, + +On line 789: + era of federal + rescues of large commercial + banks, Drexel Burnham + +On line 789: + banks, Drexel Burnham + Lambert—once the country’s fifth-largest + investment bank—failed. + +On line 789: + Burnham Lambert—once + the country’s fifth-largest investment + bank—failed. Crippled by + +On line 789: + investment bank—failed. + Crippled by legal troubles + and losses in its + +On line 789: + Crippled by legal + troubles and losses in its + junk bond portfolio, + +On line 789: + by legal troubles + and losses in its junk bond + portfolio, the firm + +On line 789: + and losses in its + junk bond portfolio, the firm + was forced into the + +On line 789: + losses in its junk + bond portfolio, the firm was + forced into the largest + +On line 789: + junk bond portfolio, + the firm was forced into the + largest bankruptcy in + +On line 789: + bond portfolio, the + firm was forced into the largest + bankruptcy in the + +On line 789: + bankruptcy in the + securities industry + to date when lenders shunned + +On line 789: + date when lenders shunned it + in the commercial paper + and repo markets. + +On line 789: + when lenders shunned it in + the commercial paper and + repo markets. While + +On line 789: + and repo markets. + While creditors, including + other investment + +On line 789: + rattled and absorbed + heavy losses, the government + did not step in, and + +On line 789: + did not step in, and + Drexel’s failure did not cause + a crisis. So far, + +On line 789: + and Drexel’s failure + did not cause a crisis. So + far, it seemed that among + +On line 789: + failure did not cause + a crisis. So far, it seemed + that among financial + +On line 789: + crisis. So far, it + seemed that among financial firms, + only commercial + +On line 789: + So far, it seemed that + among financial firms, only + commercial banks were + +On line 789: + that among financial + firms, only commercial banks + were deemed too big to + +On line 789: + among financial firms, + only commercial banks were + deemed too big to fail. + +On line 791: + only commercial + banks were deemed too big to fail. + In Congress tried to + +On line 791: + banks were deemed too big + to fail. In Congress tried to + limit this "too big + +On line 791: + deemed too big to fail. + In Congress tried to limit + this "too big to fail" + +On line 791: + to fail. In Congress + tried to limit this "too big + to fail" principle, + +On line 791: + In Congress tried to + limit this "too big to fail" + principle, passing + +On line 791: + Deposit Insurance + Corporation Improvement + Act (FDICIA), which sought + +On line 791: + early when a bank + or thrift got into trouble. + In addition, if + +On line 791: + or thrift got into + trouble. In addition, if + an institution + +On line 791: + addition, if an + institution did fail, the + FDIC had to resolve + +On line 791: + had to resolve the + failed institution in a + manner that produced + +On line 791: + failed institution + in a manner that produced + the least cost to the + +On line 791: + institution in + a manner that produced the + least cost to the FDIC’s + +On line 791: + to the FDIC’s deposit + insurance fund. However, + the legislation + +On line 791: + fund. However, the + legislation contained two + important loopholes. + +On line 791: + exempted the FDIC + from the least-cost constraints + if it, the Treasury, + +On line 791: + from the least-cost + constraints if it, the Treasury, + and the Federal + +On line 791: + least-cost constraints + if it, the Treasury, and the + Federal Reserve + +On line 791: + constraints if it, the + Treasury, and the Federal + Reserve determined + +On line 791: + if it, the Treasury, + and the Federal Reserve + determined that the + +On line 791: + institution posed + a "systemic risk" to markets. + The other loophole + +On line 791: + a "systemic risk" to + markets. The other loophole + addressed a concern + +On line 791: + risk" to markets. The + other loophole addressed a + concern raised by some + +On line 791: + markets. The other + loophole addressed a concern + raised by some Wall Street + +On line 791: + raised by some Wall Street + investment banks, Goldman Sachs + in particular: + +On line 791: + of commercial banks + to help securities firms + during previous + +On line 791: + securities firms + during previous market + disruptions, such as + +On line 791: + during previous + market disruptions, such as + Drexel’s failure. Wall + +On line 791: + previous market + disruptions, such as Drexel’s + failure. Wall Street firms + +On line 791: + for an amendment to + FDICIA to authorize the + Fed to act as lender + +On line 791: + amendment to FDICIA + to authorize the Fed to + act as lender of last + +On line 791: + to act as lender of + last resort to investment + banks by extending + +On line 791: + act as lender of last + resort to investment banks + by extending loans + +On line 791: + banks by extending + loans collateralized by + the investment banks’ + +On line 795: + the investment banks’ + securities.30 In the end, + the legislation + +On line 795: + legislation sent + financial institutions + a mixed message: you + +On line 795: + institutions a + mixed message: you are not too + big to fail—until and + +On line 795: + a mixed message: you + are not too big to fail—until + and unless you are + +On line 795: + mixed message: you are + not too big to fail—until and + unless you are too + +On line 795: + you are not too big + to fail—until and unless you + are too big to fail. + +On line 795: + are not too big to + fail—until and unless you are + too big to fail. So + +On line 795: + too big to fail. So + the possibility of + bailouts for the biggest, + +On line 795: + big to fail. So the + possibility of bailouts + for the biggest, most + +On line 795: + and shadow banking + industries—remained an open + question until the + +On line 807: + Mae and Freddie Mac: + "The whole army of lobbyists".............................38 + Structured finance: "It + +On line 807: + Freddie Mac: "The whole + army of lobbyists".............................38 Structured + finance: "It wasn’t + +On line 807: + army of lobbyists".............................38 + Structured finance: "It wasn’t + reducing the risk"...................................................42 + +On line 809: + finance: "It wasn’t + reducing the risk"...................................................42 The growth + of derivatives: + +On line 809: + the risk"...................................................42 The growth of + derivatives: "By far the + most significant + +On line 811: + most significant + event in finance during the + past decade" FANNIE MAE + +On line 811: + significant event + in finance during the past + decade" FANNIE MAE AND + +On line 813: + in finance during + the past decade" FANNIE MAE AND + FREDDIE MAC: "THE WHOLE + +On line 813: + the past decade" FANNIE + MAE AND FREDDIE MAC: "THE WHOLE + ARMY OF LOBBYISTS" + +On line 815: + past decade" FANNIE MAE + AND FREDDIE MAC: "THE WHOLE ARMY + OF LOBBYISTS" The + +On line 815: + MAE AND FREDDIE MAC: + "THE WHOLE ARMY OF LOBBYISTS" + The crisis in the + +On line 815: + AND FREDDIE MAC: "THE + WHOLE ARMY OF LOBBYISTS" The + crisis in the thrift + +On line 815: + MAC: "THE WHOLE ARMY OF + LOBBYISTS" The crisis in + the thrift industry + +On line 815: + crisis in the thrift + industry created an + opening for Fannie + +On line 815: + for Fannie Mae and + Freddie Mac, the two massive + government-sponsored + +On line 815: + Freddie Mac, the two + massive government-sponsored + enterprises (GSEs) + +On line 815: + enterprises (GSEs) + created by Congress to + support the mortgage + +On line 817: + Congress to support + the mortgage market. Fannie + Mae (officially, + +On line 817: + the Great Depression + in to buy mortgages insured + by the Federal + +On line 817: + Depression in to + buy mortgages insured by the + Federal Housing + +On line 817: + buy mortgages insured + by the Federal Housing + Administration + +On line 817: + The new government + agency was authorized to + purchase mortgages that + +On line 817: + government agency + was authorized to purchase + mortgages that adhered + +On line 817: + guaranteeing the + supply of mortgage credit + that banks and thrifts could + +On line 817: + mortgage credit that + banks and thrifts could extend to + homebuyers. Fannie + +On line 817: + homebuyers. Fannie + Mae either held the mortgages + in its portfolio + +On line 817: + Mae either held the + mortgages in its portfolio + or, less often, resold + +On line 817: + often, resold them to + thrifts, insurance companies, + or other investors. + +On line 817: + War II, Fannie Mae + got authority to buy + home loans guaranteed + +On line 817: + II, Fannie Mae got + authority to buy home + loans guaranteed by + +On line 817: + got authority + to buy home loans guaranteed + by the Veterans + +On line 819: + by the Veterans + Administration (VA) as + well. This system worked + +On line 819: + Administration + (VA) as well. This system worked + well, but it had a + +On line 819: + system worked well, but + it had a weakness: Fannie + Mae bought mortgages by + +On line 819: + weakness: Fannie Mae + bought mortgages by borrowing. + By Fannie’s mortgage + +On line 819: + by borrowing. By + Fannie’s mortgage portfolio + had grown to billion + +On line 819: + portfolio had grown + to billion and its debt weighed + on the federal + +On line 819: + to billion and its + debt weighed on the federal + government.1 To get + +On line 819: + and its debt weighed on + the federal government.1 + To get Fannie’s debt + +On line 819: + its debt weighed on the + federal government.1 To + get Fannie’s debt off + +On line 819: + administration + and Congress reorganized + it as a publicly + +On line 819: + it as a publicly + traded corporation and + created a new + +On line 819: + to take over Fannie’s + subsidized mortgage programs + and loan portfolio. + +On line 819: + insured mortgages, but + it was now a hybrid, a + "government-sponsored + +On line 819: + years later, in the + thrifts persuaded Congress to + charter a second + +On line 819: + Congress to charter + a second GSE, Freddie Mac + (officially, the + +On line 819: + (officially, the + Federal Home Loan Mortgage + Corporation), to + +On line 825: + the Federal Home + Loan Mortgage Corporation), + to help the thrifts sell + +On line 825: + Federal Home Loan + Mortgage Corporation), to + help the thrifts sell their + +On line 825: + Corporation), to + help the thrifts sell their mortgages. + The legislation + +On line 825: + help the thrifts sell their + mortgages. The legislation + also authorized + +On line 825: + thrifts sell their mortgages. + The legislation also + authorized Fannie + +On line 825: + The legislation + also authorized Fannie + and Freddie to buy + +On line 827: + also authorized + Fannie and Freddie to buy + "conventional" fixed-rate + +On line 827: + Fannie and Freddie + to buy "conventional" fixed-rate + mortgages, which were not + +On line 827: + and Freddie to buy + "conventional" fixed-rate mortgages, + which were not backed by + +On line 827: + buy "conventional" + fixed-rate mortgages, which were not backed + by the FHA or the + +On line 827: + "conventional" fixed-rate + mortgages, which were not backed by + the FHA or the VA. + +On line 829: + fixed-rate mortgages, which were + not backed by the FHA or the + VA. Conventional + +On line 829: + the FHA or the VA. + Conventional mortgages were + stiff competition + +On line 829: + because borrowers + could get them more quickly and + with lower fees. Still, + +On line 829: + with lower fees. Still, + the conventional mortgages + did have to conform + +On line 829: + lower fees. Still, the + conventional mortgages did + have to conform to + +On line 829: + the conventional + mortgages did have to conform + to the GSEs’ loan size + +On line 829: + did have to conform + to the GSEs’ loan size limits + and underwriting + +On line 829: + GSEs’ loan size limits + and underwriting guidelines, + such as debt-to-income + +On line 829: + loan size limits and + underwriting guidelines, such + as debt-to-income and + +On line 829: + and underwriting + guidelines, such as debt-to-income + and loan-to-value + +On line 829: + as debt-to-income and + loan-to-value ratios. The + GSEs purchased only + +On line 833: + Mae generally + held the mortgages it purchased, + profiting from the + +On line 833: + profiting from the + difference—or spread—between + its cost of funds and + +On line 833: + the difference—or + spread—between its cost of funds + and the interest + +On line 833: + spread—between its cost + of funds and the interest + paid on these mortgages. + +On line 833: + its cost of funds and + the interest paid on these + mortgages. The and laws + +On line 833: + the interest paid + on these mortgages. The and laws + gave Ginnie, Fannie, + +On line 833: + interest paid on + these mortgages. The and laws gave + Ginnie, Fannie, and + +On line 833: + these mortgages. The and + laws gave Ginnie, Fannie, and + Freddie another + +On line 833: + mortgages, in A lender + would assemble a pool of + mortgages and issue + +On line 833: + would assemble a + pool of mortgages and issue + securities backed + +On line 833: + a pool of mortgages + and issue securities + backed by the mortgage + +On line 833: + pool of mortgages and + issue securities backed + by the mortgage pool. + +On line 833: + backed by the mortgage + pool. Those securities would + be sold to investors, + +On line 833: + by the mortgage pool. + Those securities would be + sold to investors, with + +On line 833: + be sold to investors, + with Ginnie guaranteeing + timely payment of + +On line 833: + timely payment of + principal and interest. + Ginnie charged a fee + +On line 833: + of principal and + interest. Ginnie charged a + fee to issuers for + +On line 835: + interest. Ginnie + charged a fee to issuers for + this guarantee. In + +On line 835: + to issuers for this + guarantee. In Freddie got + into the business + +On line 835: + for this guarantee. + In Freddie got into the + business of buying + +On line 835: + into the business + of buying mortgages, pooling + them, and then selling + +On line 835: + timely payment of + principal and interest. + In after a spike + +On line 835: + of principal and + interest. In after a + spike in interest + +On line 835: + In after a spike + in interest rates caused large + losses on Fannie’s + +On line 837: + Fannie’s portfolio + of mortgages, Fannie followed. + During the 1980s and + +On line 837: + market expanded, + the GSEs grew in importance, + and the market share + +On line 837: + expanded, the GSEs + grew in importance, and the + market share of the + +On line 837: + grew in importance, + and the market share of the + FHA and VA declined. + +On line 839: + importance, and the + market share of the FHA and + VA declined. Fannie + +On line 839: + and the market share + of the FHA and VA declined. + Fannie and Freddie + +On line 839: + of the FHA and VA + declined. Fannie and Freddie + had dual missions, + +On line 839: + dual missions, both + public and private: support + the mortgage market + +On line 839: + the mortgage market + and maximize returns for + shareholders. They did + +On line 839: + maximize returns + for shareholders. They did not + originate mortgages; + +On line 839: + for shareholders. They + did not originate mortgages; + they purchased them—from + +On line 839: + shareholders. They did + not originate mortgages; they + purchased them—from banks, + +On line 839: + did not originate + mortgages; they purchased them—from + banks, thrifts, and mortgage + +On line 839: + mortgages; they purchased + them—from banks, thrifts, and mortgage + companies—and either + +On line 839: + purchased them—from banks, + thrifts, and mortgage companies—and + either held them in + +On line 839: + banks, thrifts, and mortgage + companies—and either held them + in their portfolios + +On line 839: + companies—and either + held them in their portfolios + or securitized + +On line 839: + them. Congress granted + both enterprises special + privileges, such as + +On line 839: + both enterprises + special privileges, such as + exemptions from state + +On line 839: + special privileges, + such as exemptions from state + and local taxes + +On line 839: + such as exemptions + from state and local taxes + and a billion line + +On line 839: + as exemptions from + state and local taxes and + a billion line of + +On line 839: + from state and local + taxes and a billion line + of credit each from + +On line 839: + local taxes and + a billion line of credit + each from the Treasury. + +On line 839: + of credit each from + the Treasury. The Federal + Reserve provided + +On line 839: + Federal Reserve + provided services such as + electronically + +On line 839: + provided services + such as electronically + clearing payments for + +On line 839: + electronically + clearing payments for GSE debt + and securities + +On line 839: + payments for GSE debt + and securities as if + they were Treasury bonds. + +On line 839: + securities as + if they were Treasury bonds. So + Fannie and Freddie + +On line 839: + if they were Treasury + bonds. So Fannie and Freddie + could borrow at rates + +On line 839: + bonds. So Fannie and + Freddie could borrow at rates + almost as low as + +On line 839: + almost as low as + the Treasury paid. Federal + laws allowed banks, thrifts, + +On line 839: + as the Treasury paid. + Federal laws allowed banks, + thrifts, and investment + +On line 839: + and regulations + strictly limited the amount + of loans banks could make + +On line 839: + limited the amount + of loans banks could make to a + single borrower + +On line 839: + of loans banks could make + to a single borrower + and restricted their + +On line 839: + make to a single + borrower and restricted + their investments in + +On line 839: + investments in the + debt obligations of other + firms. In addition, + +On line 839: + debt obligations of + other firms. In addition, + unlike banks and thrifts, + +On line 839: + firms. In addition, + unlike banks and thrifts, the GSEs + were required to hold + +On line 839: + were required to hold + very little capital to + protect against losses: + +On line 839: + to hold very little + capital to protect against + losses: only to + +On line 839: + their guarantees of + mortgage-backed securities and + to back the mortgages + +On line 839: + of mortgages assets + under capital standards. + Such privileges led + +On line 839: + capital standards. + Such privileges led investors + and creditors to + +On line 839: + to believe that the + government implicitly + guaranteed the GSEs’ + +On line 839: + and debt and that GSE + securities were therefore + almost as safe as + +On line 839: + GSE securities + were therefore almost as safe + as Treasury bills. As + +On line 839: + securities were + therefore almost as safe as + Treasury bills. As a + +On line 839: + were therefore almost + as safe as Treasury bills. As + a result, investors + +On line 839: + almost as safe as + Treasury bills. As a result, + investors accepted + +On line 839: + as safe as Treasury + bills. As a result, investors + accepted very low + +On line 839: + Treasury bills. As a + result, investors accepted + very low returns on + +On line 839: + low returns on GSE-guaranteed + mortgage-backed securities and + GSE debt obligations. + +On line 841: + funded by short-term + borrowings. For example, + thrifts generally + +On line 841: + For example, thrifts + generally used customer + deposits to fund their + +On line 841: + thrifts generally + used customer deposits to fund + their mortgages. Fannie + +On line 841: + generally used + customer deposits to fund their + mortgages. Fannie ought + +On line 841: + their mortgages. Fannie + ought its mortgage portfolio + by borrowing short- + +On line 841: + mortgages. Fannie ought + its mortgage portfolio by + borrowing short- and + +On line 841: + short- and medium-term. In + when the Fed increased short-term + interest rates to + +On line 841: + interest rates to + quell inflation, Fannie, like + the thrifts, found that its + +On line 841: + to quell inflation, + Fannie, like the thrifts, found that + its cost of funding + +On line 841: + inflation, Fannie, + like the thrifts, found that its cost + of funding rose while + +On line 841: + Fannie, like the thrifts, + found that its cost of funding + rose while income from + +On line 841: + like the thrifts, found that + its cost of funding rose while + income from mortgages + +On line 841: + thrifts, found that its cost + of funding rose while income + from mortgages did not. + +On line 841: + found that its cost of + funding rose while income from + mortgages did not. By + +On line 841: + its cost of funding + rose while income from mortgages + did not. By the 1980s, + +On line 841: + cost of funding rose + while income from mortgages did + not. By the 1980s, the + +On line 841: + rose while income from + mortgages did not. By the 1980s, + the Department of + +On line 841: + mortgages did not. By + the 1980s, the Department of + Housing and Urban + +On line 841: + Development (HUD) + estimated Fannie had + a negative net + +On line 841: + (HUD) estimated + Fannie had a negative + net worth of billion.2 + +On line 841: + had a negative + net worth of billion.2 Freddie + emerged unscathed because + +On line 841: + net worth of billion.2 + Freddie emerged unscathed because + unlike Fannie then, + +On line 841: + primary business + was guaranteeing mortgage-backed + securities, not + +On line 841: + was guaranteeing + mortgage-backed securities, not + holding mortgages in + +On line 841: + Freddie Mac avoided + taking the interest rate + risk that hit Fannie’s + +On line 841: + avoided taking the + interest rate risk that hit + Fannie’s portfolio. + +On line 843: + Congress provided + tax relief and HUD relaxed + Fannie’s capital + +On line 843: + tax relief and HUD + relaxed Fannie’s capital + requirements to help + +On line 843: + HUD relaxed Fannie’s + capital requirements to + help the company + +On line 843: + a vibrant market + for home mortgages served the best + interests of the + +On line 843: + for home mortgages served + the best interests of the + country, but the moves + +On line 843: + mortgages served the best + interests of the country, + but the moves also + +On line 843: + the best interests + of the country, but the moves + also reinforced + +On line 843: + of the country, but + the moves also reinforced + the impression that + +On line 843: + the country, but the + moves also reinforced the + impression that the + +On line 843: + but the moves also + reinforced the impression + that the government + +On line 843: + the impression that + the government would never + abandon Fannie and + +On line 843: + that the government + would never abandon Fannie + and Freddie. Fannie + +On line 843: + the government would + never abandon Fannie and + Freddie. Fannie and + +On line 843: + would never abandon + Fannie and Freddie. Fannie + and Freddie would soon + +On line 843: + Fannie and Freddie. + Fannie and Freddie would soon + buy and either hold + +On line 843: + Fannie and Freddie + would soon buy and either hold + or securitize + +On line 843: + and either hold or + securitize mortgages worth + hundreds of billions, + +On line 843: + hundreds of billions, + then trillions, of dollars. Among + the investors were U.S. + +On line 843: + trillions, of dollars. + Among the investors were U.S. banks, + thrifts, investment funds, + +On line 843: + Among the investors were + U.S. banks, thrifts, investment funds, + and pension funds, as + +On line 843: + the investors were U.S. + banks, thrifts, investment funds, and + pension funds, as well + +On line 843: + banks, thrifts, investment + funds, and pension funds, as well + as central banks and + +On line 843: + funds, and pension funds, + as well as central banks and + investment funds around + +On line 845: + as well as central + banks and investment funds around + the world. Fannie and + +On line 845: + as central banks and + investment funds around the world. + Fannie and Freddie + +On line 845: + banks and investment + funds around the world. Fannie and + Freddie had become + +On line 845: + investment funds around + the world. Fannie and Freddie + had become too big + +On line 847: + around the world. Fannie + and Freddie had become too + big to fail. While the + +On line 847: + Fannie and Freddie + had become too big to fail. + While the government + +On line 847: + too big to fail. While + the government continued + to favor Fannie + +On line 847: + big to fail. While the + government continued to + favor Fannie and + +On line 847: + thrifts following the + savings and loan crisis. Thrifts + had previously + +On line 847: + the mortgage business + as large holders of mortgages. + In the Financial + +On line 847: + of mortgages. In the + Financial Institutions + Reform, Recovery, + +On line 847: + and Enforcement Act + of (FIRREA), Congress imposed + tougher, bank-style capital + +On line 847: + Congress imposed tougher, + bank-style capital requirements + and regulations + +On line 847: + and regulations + on thrifts. By contrast, in the + Federal Housing + +On line 847: + Federal Housing + Enterprises Financial + Safety and Soundness + +On line 847: + Safety and Soundness + Act of Congress created + a supervisor + +On line 847: + Congress created + a supervisor for the + GSEs, the Office of + +On line 847: + a supervisor + for the GSEs, the Office of + Federal Housing + +On line 847: + Enterprise Oversight + (OFHEO), without legal powers + comparable to + +On line 847: + (OFHEO), without legal + powers comparable to + those of bank and thrift + +On line 847: + thrift supervisors + in enforcement, capital + requirements, funding, + +On line 847: + requirements, funding, + and receivership. Crack-ing down + on thrifts while not on + +On line 847: + Crack-ing down on thrifts + while not on the GSEs was no + accident. The GSEs + +On line 847: + on thrifts while not on + the GSEs was no accident. + The GSEs had shown their + +On line 847: + while not on the GSEs + was no accident. The GSEs + had shown their immense + +On line 847: + power during the + drafting of the law.3 "OFHEO was + structurally weak and + +On line 847: + the drafting of the + law.3 "OFHEO was structurally weak + and almost designed + +On line 847: + drafting of the law.3 + "OFHEO was structurally weak and + almost designed to + +On line 847: + of the law.3 "OFHEO was + structurally weak and almost + designed to fail," said + +On line 847: + "OFHEO was structurally + weak and almost designed to + fail," said Armando + +On line 847: + structurally weak and + almost designed to fail," said + Armando Falcon + +On line 847: + designed to fail," said + Armando Falcon Jr., a + former director + +On line 847: + Armando Falcon + Jr., a former director + of the agency, to + +On line 849: + former director + of the agency, to the FCIC.4 + All this added up to + +On line 849: + to the FCIC.4 All this + added up to a generous + federal subsidy. + +On line 849: + All this added up to + a generous federal + subsidy. One study put + +On line 849: + to a generous + federal subsidy. One study + put the value of + +On line 849: + subsidy. One study put + the value of that subsidy + at billion or more + +On line 849: + the value of that + subsidy at billion or more + and estimated + +On line 849: + subsidy at billion + or more and estimated + that more than half of + +On line 849: + that more than half of + these benefits accrued to + shareholders, not to + +On line 851: + worked as it always + does: the markets shifted to + the lowest-cost, + +On line 851: + requirements on thrifts, + it became increasingly + profitable for them to + +On line 851: + profitable for them to + securitize with or sell + loans to Fannie and + +On line 851: + to securitize + with or sell loans to Fannie + and Freddie rather than + +On line 851: + securitize with + or sell loans to Fannie and + Freddie rather than hold + +On line 851: + with or sell loans to + Fannie and Freddie rather than + hold on to the loans. + +On line 853: + loans to Fannie and + Freddie rather than hold on to + the loans. The stampede + +On line 853: + Fannie and Freddie + rather than hold on to the loans. + The stampede was on. + +On line 853: + Freddie rather than hold + on to the loans. The stampede + was on. Fannie’s and + +On line 853: + rather than hold on to + the loans. The stampede was on. + Fannie’s and Freddie’s + +On line 853: + the loans. The stampede + was on. Fannie’s and Freddie’s + debt obligations and + +On line 853: + was on. Fannie’s and + Freddie’s debt obligations and + outstanding mortgage-backed + +On line 855: + securities grew + from billion in to trillion + in and trillion in + +On line 857: + from billion in to + trillion in and trillion in + The legislation + +On line 857: + and trillion in The + legislation that transformed + Fannie in also + +On line 857: + legislation that + transformed Fannie in also + authorized HUD to + +On line 857: + transformed Fannie in + also authorized HUD to + prescribe affordable + +On line 857: + Fannie in also + authorized HUD to prescribe + affordable housing + +On line 857: + authorized HUD to + prescribe affordable housing + goals for Fannie: to + +On line 857: + affordable housing + goals for Fannie: to "require + that a reasonable + +On line 857: + the national goal + of providing adequate + housing for low and + +On line 857: + but with reasonable + economic return to the + corporation."7 In + +On line 857: + the corporation."7 + In HUD tried to implement + the law and, after + +On line 857: + corporation."7 In + HUD tried to implement the + law and, after a + +On line 857: + to implement the + law and, after a barrage + of criticism from + +On line 857: + implement the law + and, after a barrage of + criticism from the + +On line 857: + the law and, after + a barrage of criticism + from the GSEs and the + +On line 857: + after a barrage + of criticism from the GSEs + and the mortgage and + +On line 857: + from the GSEs and the + mortgage and real estate + industries, issued + +On line 857: + Federal Housing + Enterprises Financial + Safety and Soundness + +On line 857: + Safety and Soundness + Act, Congress extended HUD’s + authority to + +On line 857: + Congress extended + HUD’s authority to set + affordable housing + +On line 857: + HUD’s authority + to set affordable housing + goals for Fannie and + +On line 857: + affordable housing + goals for Fannie and Freddie. + Congress also changed + +On line 857: + goals for Fannie and + Freddie. Congress also changed + the language to say + +On line 857: + changed the language to + say that in the pursuit of + affordable housing, + +On line 857: + affordable housing, + "a reasonable economic + return may be less + +On line 857: + than the return earned + on other activities." + The law required HUD + +On line 857: + the return earned on + other activities." The + law required HUD to + +On line 859: + to maintain the sound + financial condition of + the enterprises." + +On line 859: + condition of the + enterprises." The act now + ordered HUD to set + +On line 859: + the enterprises." + The act now ordered HUD to + set goals for Fannie + +On line 859: + enterprises." The + act now ordered HUD to set + goals for Fannie and + +On line 859: + The act now ordered + HUD to set goals for Fannie + and Freddie to buy + +On line 859: + act now ordered HUD + to set goals for Fannie and + Freddie to buy loans + +On line 859: + ordered HUD to set + goals for Fannie and Freddie + to buy loans for low- + +On line 859: + goals for Fannie and + Freddie to buy loans for low- + and moderate-income + +On line 859: + to buy loans for low- + and moderate-income housing, + special affordable + +On line 859: + and moderate-income + housing, special affordable + housing, and housing + +On line 859: + affordable housing, + and housing in central cities, + rural areas, and + +On line 859: + rural areas, and + other underserved areas. + Congress instructed + +On line 859: + areas, and other + underserved areas. Congress + instructed HUD to + +On line 859: + category as + a percentage of the GSEs’ + mortgage purchases. + +On line 861: + a percentage of + the GSEs’ mortgage purchases. + In President Bill + +On line 861: + of the GSEs’ mortgage + purchases. In President + Bill Clinton announced + +On line 861: + an initiative to + boost homeownership from to + of families by + +On line 861: + initiative to boost + homeownership from to of + families by and + +On line 861: + boost homeownership + from to of families by + and one component + +On line 861: + homeownership from + to of families by and + one component raised + +On line 861: + of families by + and one component raised the + affordable housing + +On line 861: + one component raised + the affordable housing goals + at the GSEs. Between + +On line 861: + component raised the + affordable housing goals at + the GSEs. Between and + +On line 861: + at the GSEs. Between + and almost million households + entered the ranks of + +On line 861: + Between and almost + million households entered the + ranks of homeowners, + +On line 861: + and almost million + households entered the ranks of + homeowners, nearly + +On line 861: + households entered the + ranks of homeowners, nearly + twice as many as in + +On line 861: + ranks of homeowners, + nearly twice as many as in + the previous two + +On line 863: + nearly twice as many + as in the previous two + years. "But we have to + +On line 863: + twice as many as in + the previous two years. "But + we have to do a + +On line 863: + as many as in the + previous two years. "But we + have to do a lot + +On line 863: + the previous two + years. "But we have to do a + lot better," Clinton + +On line 863: + previous two years. + "But we have to do a lot + better," Clinton said. + +On line 863: + years. "But we have to + do a lot better," Clinton + said. "This is the new + +On line 863: + "But we have to do + a lot better," Clinton said. + "This is the new way + +On line 863: + we have to do a + lot better," Clinton said. "This + is the new way home + +On line 863: + have to do a lot + better," Clinton said. "This is + the new way home for + +On line 863: + lot better," Clinton + said. "This is the new way home + for the American + +On line 863: + said. "This is the new + way home for the American + middle class. We have + +On line 863: + is the new way home + for the American middle + class. We have got to + +On line 863: + the new way home for + the American middle class. + We have got to raise + +On line 863: + for the American + middle class. We have got to + raise incomes in this + +On line 863: + middle class. We have + got to raise incomes in this + country. We have got + +On line 863: + We have got to raise + incomes in this country. We + have got to increase + +On line 863: + country. We have got + to increase security + for people who are + +On line 863: + have got to increase + security for people + who are doing the + +On line 863: + security for + people who are doing the + right thing, and we have + +On line 863: + who are doing the + right thing, and we have got to + make people believe + +On line 863: + are doing the right + thing, and we have got to make + people believe that + +On line 863: + right thing, and we have + got to make people believe + that they can have some + +On line 863: + we have got to make + people believe that they can + have some permanence + +On line 863: + people believe that + they can have some permanence + and stability + +On line 863: + have some permanence + and stability in their + lives even as they deal + +On line 863: + some permanence and + stability in their lives + even as they deal with + +On line 863: + and stability + in their lives even as they deal + with all the changing + +On line 863: + stability in + their lives even as they deal with + all the changing forces + +On line 863: + in their lives even as + they deal with all the changing + forces that are out there + +On line 863: + their lives even as they + deal with all the changing forces + that are out there in + +On line 863: + lives even as they deal + with all the changing forces that + are out there in this + +On line 863: + as they deal with all + the changing forces that are out + there in this global + +On line 863: + with all the changing + forces that are out there in this + global economy."9 + +On line 863: + the changing forces that + are out there in this global + economy."9 The push + +On line 863: + forces that are out there + in this global economy."9 + The push to expand + +On line 863: + economy."9 The push + to expand homeownership + continued under + +On line 863: + The push to expand + homeownership continued + under President + +On line 863: + George W. Bush, who, for + example, introduced a + "Zero Down Payment + +On line 863: + who, for example, + introduced a "Zero Down + Payment Initiative" + +On line 863: + that under certain + circumstances could remove the + down payment rule for + +On line 863: + certain circumstances + could remove the down payment + rule for first-time home + +On line 865: + rule for first-time home + buyers with FHA-insured mortgages.10 In + describing the GSEs’ + +On line 865: + Housing and Urban + Development from to and + now governor of + +On line 865: + Development from + to and now governor of + New York, told the FCIC, + +On line 865: + means many things. There were + moderate income loans. These + were teachers, these were + +On line 865: + There were moderate + income loans. These were teachers, + these were firefighters, + +On line 865: + moderate income + loans. These were teachers, these were + firefighters, these were + +On line 865: + firefighters, these were + municipal employees, + these were people with + +On line 865: + were people with jobs + who paid mortgages. These were not + subprime, predatory + +On line 867: + who paid mortgages. These + were not subprime, predatory + loans at all."11 Fannie + +On line 867: + paid mortgages. These were + not subprime, predatory loans + at all."11 Fannie and + +On line 867: + predatory loans at + all."11 Fannie and Freddie were + now crucial to the + +On line 867: + at all."11 Fannie and + Freddie were now crucial to + the housing market, + +On line 869: + were problematic. + Former Fannie CEO Daniel Mudd + told the FCIC that "the + +On line 871: + Former Fannie CEO + Daniel Mudd told the FCIC that "the + GSE structure required + +On line 871: + Daniel Mudd told the FCIC + that "the GSE structure required + the companies to + +On line 871: + structure required the + companies to maintain a + fine balance between + +On line 871: + to maintain a fine + balance between financial + goals and what we call + +On line 871: + fine balance between + financial goals and what we + call the mission goals + +On line 871: + financial goals and + what we call the mission goals + the root cause of the + +On line 871: + goals and what we call + the mission goals the root cause + of the GSEs’ troubles + +On line 871: + and what we call the + mission goals the root cause of + the GSEs’ troubles lies + +On line 871: + we call the mission + goals the root cause of the GSEs’ + troubles lies with their + +On line 871: + the mission goals the + root cause of the GSEs’ troubles + lies with their business + +On line 871: + of the GSEs’ troubles + lies with their business model."12 + Former Freddie CEO + +On line 871: + lies with their business + model."12 Former Freddie CEO + Richard Syron concurred: + +On line 873: + Syron concurred: "I + don’t think it’s a good business + model."13 Fannie and + +On line 873: + concurred: "I don’t think + it’s a good business model."13 + Fannie and Freddie + +On line 873: + it’s a good business + model."13 Fannie and Freddie + accumulated + +On line 873: + model."13 Fannie and + Freddie accumulated + political clout + +On line 873: + accumulated + political clout because + they depended on + +On line 873: + and an implicit + government guarantee, and + because they had to + +On line 873: + and because they had + to deal with regulators, + affordable housing + +On line 873: + with regulators, + affordable housing goals, and + capital standards + +On line 873: + affordable housing + goals, and capital standards + imposed by Congress + +On line 873: + goals, and capital + standards imposed by Congress + and HUD. From to the + +On line 873: + the two reported + spending more than million on + lobbying, and their + +On line 873: + campaigns.14 The "Fannie + and Freddie political + machine resisted + +On line 873: + tactics," Falcon, who + regulated them from to + testified. "OFHEO was + +On line 873: + the director of + OFHEO and its successor, the + Federal Housing + +On line 875: + from through testified + that he argued for reform + from the moment he + +On line 875: + testified that he + argued for reform from the + moment he became + +On line 875: + that he argued for + reform from the moment he + became director + +On line 875: + argued for reform + from the moment he became + director and that + +On line 875: + from the moment he + became director and that + the companies were + +On line 875: + became director + and that the companies were + "allowed to be so + +On line 875: + were "allowed to be + so politically strong + that for many years they + +On line 875: + they resisted the + very legislation that might + have saved them."16 Former + +On line 875: + resisted the very + legislation that might have + saved them."16 Former HUD + +On line 875: + very legislation + that might have saved them."16 Former + HUD secretary Mel + +On line 875: + that might have saved them."16 + Former HUD secretary Mel + Martinez described to + +On line 875: + have saved them."16 Former + HUD secretary Mel Martinez + described to the FCIC + +On line 875: + a bipartisan + fashion through my offices. It’s + pretty amazing the + +On line 875: + through my offices. It’s + pretty amazing the number + of people that were + +On line 875: + It’s pretty amazing + the number of people that + were in their employ."17 + +On line 877: + pretty amazing the + number of people that were + in their employ."17 In + +On line 877: + amazing the number + of people that were in their + employ."17 In that army + +On line 877: + number of people + that were in their employ."17 In + that army helped secure + +On line 877: + GSEs to count toward + their affordable housing goals + not just their whole loans + +On line 877: + to count toward their + affordable housing goals not + just their whole loans but + +On line 877: + but mortgage-related + securities issued by + other companies, + +On line 877: + which the GSEs wanted + to purchase as investments. + Still, Congressional + +On line 877: + Still, Congressional + Budget Office Director + June O’Neill declared in + +On line 879: + Director June O’Neill + declared in that "the goals are + not difficult to + +On line 879: + O’Neill declared in that + "the goals are not difficult + to achieve, and it is + +On line 879: + declared in that "the + goals are not difficult to + achieve, and it is not + +On line 879: + in that "the goals are + not difficult to achieve, and + it is not clear how + +On line 879: + that "the goals are not + difficult to achieve, and it + is not clear how much + +On line 879: + difficult to achieve, + and it is not clear how much + they have affected + +On line 879: + and it is not clear + how much they have affected + the enterprises’ + +On line 879: + as the Federal + Housing Administration + devote a larger + +On line 879: + their mortgage lending + to targeted borrowers + and areas than do + +On line 879: + mortgage lending to + targeted borrowers and + areas than do the + +On line 881: + and areas than do + the enterprises."18 Something + else was clear: Fannie + +On line 881: + areas than do the + enterprises."18 Something else + was clear: Fannie and + +On line 881: + the enterprises."18 + Something else was clear: Fannie + and Freddie, with their + +On line 881: + Something else was clear: + Fannie and Freddie, with their + low borrowing costs + +On line 881: + Fannie and Freddie, + with their low borrowing costs + and lax capital + +On line 881: + and lax capital + requirements, were immensely + profitable throughout the + +On line 881: + immensely profitable + throughout the 1990s. In Fannie + had a return on + +On line 881: + 1990s. In Fannie had + a return on equity + of Freddie, That year, + +On line 881: + of Freddie, That year, + Fannie and Freddie held or + guaranteed more than + +On line 881: + That year, Fannie and + Freddie held or guaranteed + more than trillion of + +On line 881: + Fannie and Freddie + held or guaranteed more than + trillion of mortgages, + +On line 881: + and Freddie held or + guaranteed more than trillion + of mortgages, backed by + +On line 881: + or guaranteed more + than trillion of mortgages, backed + by only billion + +On line 881: + guaranteed more than + trillion of mortgages, backed by + only billion of + +On line 885: + by only billion + of shareholder equity.19 + STRUCTURED FINANCE: "IT + +On line 887: + T REDUCING THE + RISK" While Fannie and Freddie + enjoyed a near-monopoly + +On line 887: + securitizing + fixed-rate mortgages that were within + their permitted loan + +On line 887: + fixed-rate mortgages that were + within their permitted loan + limits, in the 1980s + +On line 887: + that were within their + permitted loan limits, in + the 1980s the markets + +On line 887: + loan limits, in the + 1980s the markets began to + securitize many + +On line 887: + the 1980s the markets + began to securitize + many other types of + +On line 887: + other mortgages the + GSEs were not eligible + or willing to buy. + +On line 887: + or willing to buy. + The mechanism worked the same: + an investment bank, + +On line 887: + willing to buy. The + mechanism worked the same: an + investment bank, such + +On line 887: + The mechanism worked + the same: an investment bank, + such as Lehman Brothers + +On line 887: + mechanism worked the + same: an investment bank, such + as Lehman Brothers or + +On line 887: + same: an investment + bank, such as Lehman Brothers or + Morgan Stanley (or + +On line 887: + a securities + affiliate of a bank), + bundled loans from a + +On line 887: + affiliate of + a bank), bundled loans from a + bank or other lender + +On line 887: + bundled loans from a + bank or other lender into + securities and + +On line 887: + bank or other lender + into securities and + sold them to investors, + +On line 887: + investors, who received + investment returns funded + by the principal + +On line 887: + by the principal + and interest payments from + the loans. Investors held + +On line 887: + the principal and + interest payments from the + loans. Investors held or + +On line 887: + payments from the loans. + Investors held or traded these + securities, which + +On line 887: + loans. Investors held or + traded these securities, + which were often more + +On line 887: + more complicated + than the GSEs’ basic mortgage-backed + securities; the + +On line 887: + than the GSEs’ basic + mortgage-backed securities; the + assets were not just + +On line 887: + GSEs’ basic mortgage-backed + securities; the assets + were not just mortgages + +On line 887: + securities; the + assets were not just mortgages + but equipment leases, + +On line 887: + were not just mortgages + but equipment leases, credit + card debt, auto loans, + +On line 887: + not just mortgages but + equipment leases, credit card + debt, auto loans, and + +On line 887: + but equipment leases, + credit card debt, auto loans, + and manufactured + +On line 887: + card debt, auto loans, + and manufactured housing + loans. Over time, banks and + +On line 887: + and manufactured + housing loans. Over time, banks and + securities firms + +On line 887: + securities firms + used securitization + to mimic banking + +On line 887: + to mimic banking + activities outside the + regulatory + +On line 887: + For example, where + banks traditionally took + money from deposits + +On line 887: + traditionally + took money from deposits to + make loans and held them + +On line 887: + to make loans and held + them until maturity, + banks now used money + +On line 887: + make loans and held them + until maturity, banks + now used money from + +On line 887: + used money from the + capital markets—often + from money market + +On line 887: + from the capital + markets—often from money + market mutual + +On line 887: + make loans, packaging + them into securities + to sell to investors. + +On line 891: + loans, packaging them + into securities to + sell to investors. For + +On line 891: + For commercial banks, + the benefits were large. By + moving loans off their + +On line 891: + the benefits were + large. By moving loans off their + books, the banks reduced + +On line 891: + benefits were large. + By moving loans off their books, + the banks reduced the + +On line 891: + By moving loans off + their books, the banks reduced the + amount of capital + +On line 891: + moving loans off their + books, the banks reduced the amount + of capital they + +On line 891: + books, the banks reduced + the amount of capital they + were required to hold + +On line 891: + the banks reduced the + amount of capital they were + required to hold as + +On line 891: + were required to hold + as protection against losses, + thereby improving + +On line 891: + generated cash + that could be used to make loans. + Banks could also keep + +On line 891: + be used to make loans. + Banks could also keep parts of + the securities + +On line 891: + used to make loans. Banks + could also keep parts of the + securities on + +On line 891: + securities on + their books as collateral + for borrowing, and + +On line 893: + an important source + of revenues. Lawrence Lindsey, a + former Federal + +On line 893: + former Federal + Reserve governor and the + director of the + +On line 893: + of the National + Economic Council under + President George W. + +On line 893: + Economic Council + under President George W. + Bush, told the FCIC that + +On line 893: + under President + George W. Bush, told the FCIC that + previous housing + +On line 893: + Bush, told the FCIC that + previous housing downturns + made regulators + +On line 893: + housing downturns made + regulators worry about + banks’ holding whole loans + +On line 893: + made regulators + worry about banks’ holding whole + loans on their books. "If + +On line 893: + banks’ holding whole loans + on their books. "If you had a + regional real + +On line 893: + on their books. "If you + had a regional real + estate downturn it + +On line 893: + books. "If you had a + regional real estate + downturn it took down + +On line 893: + had a regional + real estate downturn it + took down the banks in + +On line 893: + took down the banks in + that region along with it, which + exacerbated + +On line 893: + that region along with + it, which exacerbated + the downturn," Lindsey + +On line 893: + region along with it, + which exacerbated the + downturn," Lindsey said. + +On line 893: + exacerbated + the downturn," Lindsey said. "So + we said to ourselves, + +On line 893: + the downturn," Lindsey + said. "So we said to ourselves, + ‘How on earth do we + +On line 893: + downturn," Lindsey said. + "So we said to ourselves, ‘How + on earth do we get + +On line 893: + Lindsey said. "So we + said to ourselves, ‘How on earth + do we get around this + +On line 893: + said. "So we said to + ourselves, ‘How on earth do we + get around this problem1’ + +On line 893: + we said to ourselves, + ‘How on earth do we get around + this problem1’ And the + +On line 893: + ourselves, ‘How on earth + do we get around this problem1’ + And the answer was, + +On line 895: + ‘How on earth do we + get around this problem1’ And the + answer was, ‘Let’s have + +On line 897: + key benefits to + investors: pooling and tranching. + If many loans were pooled + +On line 897: + pooling and tranching. + If many loans were pooled into + one security, + +On line 897: + If many loans were pooled + into one security, + a few defaults would + +On line 897: + securities could + also be sliced up and sold + in portions—known as + +On line 897: + also be sliced up + and sold in portions—known as + tranches—which let buyers + +On line 897: + sliced up and sold in + portions—known as tranches—which let + buyers customize + +On line 897: + buyers customize + their payments. Risk-averse investors + would buy tranches that + +On line 897: + their payments. Risk-averse + investors would buy tranches that + paid off first in the + +On line 897: + tranches that paid off + first in the event of default, + but had lower yields. + +On line 897: + off first in the event + of default, but had lower + yields. Return-oriented + +On line 897: + of default, but had + lower yields. Return-oriented + investors bought riskier + +On line 897: + but had lower yields. + Return-oriented investors bought + riskier tranches with + +On line 897: + yields. Return-oriented + investors bought riskier tranches + with higher yields. Bankers + +On line 897: + investors bought riskier + tranches with higher yields. Bankers + often compared it + +On line 897: + bought riskier tranches + with higher yields. Bankers often + compared it to a + +On line 897: + tranches with higher + yields. Bankers often compared it + to a waterfall; + +On line 897: + compared it to a + waterfall; the holders of + the senior tranches—at + +On line 897: + to a waterfall; + the holders of the senior + tranches—at the top of + +On line 897: + the holders of the + senior tranches—at the top of + the waterfall—were + +On line 897: + senior tranches—at the + top of the waterfall—were + paid before the more + +On line 899: + junior tranches. And + if payments came in below + expectations, those + +On line 899: + And if payments came + in below expectations, + those at the bottom + +On line 899: + if payments came in + below expectations, those + at the bottom would + +On line 899: + expectations, those + at the bottom would be the + first to be left high + +On line 903: + lenders, investment bankers, + and investors. Lenders earned fees for + originating and + +On line 903: + Investment banks earned + fees for issuing mortgage-backed + securities. These + +On line 903: + fees for issuing + mortgage-backed securities. These + securities fetched + +On line 903: + These securities + fetched a higher price than if + the underlying + +On line 903: + securities fetched + a higher price than if the + underlying loans + +On line 903: + investors’ needs, were more + diversified, and could be + easily traded. + +On line 903: + diversified, and + could be easily traded. + Purchasers of the safer + +On line 903: + easily traded. + Purchasers of the safer tranches + got a higher rate + +On line 903: + safer tranches got a + higher rate of return than + ultra-safe Treasury + +On line 903: + got a higher rate + of return than ultra-safe + Treasury notes without + +On line 903: + ultra-safe Treasury + notes without much extra risk—at + least in theory. + +On line 903: + made them harder to + understand and to price than + individual + +On line 903: + understand and to + price than individual + loans. To determine + +On line 903: + individual + loans. To determine likely + returns, investors had + +On line 903: + loans. To determine + likely returns, investors had + to calculate the + +On line 903: + probabilities + that certain kinds of mortgages + might default, and to + +On line 903: + kinds of mortgages might + default, and to estimate + the revenues that would + +On line 903: + might default, and to + estimate the revenues that + would be lost because + +On line 903: + revenues that would be + lost because of those defaults. + Then investors had to + +On line 903: + would be lost because + of those defaults. Then investors + had to determine + +On line 903: + be lost because of + those defaults. Then investors had + to determine the + +On line 903: + of those defaults. Then + investors had to determine + the effect of the + +On line 903: + Then investors had to + determine the effect of + the losses on the + +On line 903: + had to determine + the effect of the losses + on the payments to + +On line 903: + the effect of the + losses on the payments to + different tranches. + +On line 905: + three leading credit + rating agencies—Moody’s, Standard Poor’s (S&P), + and Fitch—into key + +On line 905: + rating agencies—Moody’s, Standard + Poor’s (S&P), and Fitch—into key + players in the process, + +On line 905: + Standard Poor’s (S&P), and + Fitch—into key players in + the process, positioned + +On line 905: + positioned between + the issuers and the investors + of securities. + +On line 905: + became common, the + credit rating agencies had + mainly helped investors + +On line 905: + mainly helped investors + evaluate the safety of + municipal and + +On line 907: + that they needed to + secure favorable credit + ratings in order + +On line 907: + needed to secure + favorable credit ratings + in order to sell + +On line 907: + favorable credit + ratings in order to sell + structured products to + +On line 907: + ratings in order + to sell structured products to + investors. Investment + +On line 907: + sell structured products + to investors. Investment banks + therefore paid handsome + +On line 907: + products to investors. + Investment banks therefore paid + handsome fees to the + +On line 907: + handsome fees to the + rating agencies to obtain + the desired ratings. + +On line 907: + rating agencies to + obtain the desired ratings. + "The rating agencies + +On line 907: + obtain the desired + ratings. "The rating agencies + were important tools + +On line 907: + ratings. "The rating + agencies were important tools + to do that because + +On line 907: + "The rating agencies + were important tools to do + that because you know + +On line 907: + rating agencies were + important tools to do that + because you know the + +On line 907: + were important tools + to do that because you know + the people that we + +On line 907: + important tools to + do that because you know the + people that we were + +On line 907: + to do that because + you know the people that we + were selling these bonds + +On line 907: + do that because you + know the people that we were + selling these bonds to + +On line 907: + the people that we + were selling these bonds to had + never really + +On line 907: + were selling these bonds + to had never really + had any history + +On line 907: + selling these bonds to + had never really had + any history in + +On line 907: + never really + had any history in the + mortgage business. They + +On line 907: + had any history + in the mortgage business. They + were looking for an + +On line 907: + They were looking for + an independent party + to develop an + +On line 907: + an independent + party to develop an + opinion," Jim Callahan + +On line 907: + to develop an + opinion," Jim Callahan told the + FCIC; Callahan is CEO + +On line 907: + opinion," Jim Callahan + told the FCIC; Callahan is CEO + of PentAlpha, which services + +On line 907: + of PentAlpha, which services + the securitization + industry, and years + +On line 909: + of the earliest + securitizations.21 With + these pieces in place—banks + +On line 909: + pieces in place—banks that + wanted to shed assets and + transfer risk, investors + +On line 909: + place—banks that wanted + to shed assets and transfer + risk, investors ready to + +On line 909: + to shed assets and + transfer risk, investors ready to + put their money to + +On line 909: + transfer risk, investors + ready to put their money to + work, securities + +On line 909: + put their money to + work, securities firms poised + to earn fees, rating + +On line 909: + and information + technology capable + of handling the job— + +On line 911: + of handling the job— + the securitization + market exploded. + +On line 911: + market exploded. + By when the market was years + old, about billion worth + +On line 911: + old, about billion worth + of securitizations, + beyond those done by + +On line 911: + beyond those done by + Fannie, Freddie, and Ginnie, + were outstanding (see + +On line 911: + billion of credit + card debt; nearly billion worth + of securities + +On line 913: + commercial banks; it + was also a lucrative + new line of business + +On line 913: + banks; it was also + a lucrative new line of + business for the Wall + +On line 913: + a lucrative new + line of business for the Wall + Street investment banks, + +On line 913: + lucrative new line + of business for the Wall Street + investment banks, with + +On line 913: + of business for the + Wall Street investment banks, with + which the commercial + +On line 913: + business for the Wall + Street investment banks, with which + the commercial banks + +On line 913: + Wall Street investment + banks, with which the commercial + banks worked to create + +On line 913: + Street investment banks, + with which the commercial banks + worked to create the + +On line 913: + investment banks, with + which the commercial banks worked + to create the new + +On line 913: + which the commercial + banks worked to create the new + securities. Wall + +On line 913: + worked to create the + new securities. Wall Street + firms such as Salomon + +On line 913: + new securities. + Wall Street firms such as Salomon + Brothers and Morgan + +On line 913: + as Salomon Brothers + and Morgan Stanley became + major players in + +On line 913: + and Morgan Stanley + became major players in + these complex markets + +On line 913: + these complex markets + and relied increasingly + on quantitative + +On line 913: + increasingly on + quantitative analysts, + called "quants." As early + +On line 913: + analysts, called "quants." + As early as the 1970s, Wall + Street executives + +On line 913: + early as the 1970s, + Wall Street executives had + hired quants—analysts + +On line 913: + develop models + to predict how markets or + securities might + +On line 913: + importance of this + expertise. Scott Patterson, + author of The Quants, + +On line 913: + of this expertise. + Scott Patterson, author of + The Quants, told the FCIC + +On line 913: + this expertise. Scott + Patterson, author of The + Quants, told the FCIC that + +On line 915: + the FCIC that using + models dramatically + changed finance. "Wall Street + +On line 917: + Patterson said.23 The + increasing dependence on + mathematics let + +On line 917: + mathematics let + the quants create more complex + products and let their + +On line 917: + let the quants create + more complex products and let + their managers say, and + +On line 917: + the quants create more + complex products and let their + managers say, and maybe + +On line 917: + more complex products + and let their managers say, and + maybe even believe, that + +On line 917: + complex products and + let their managers say, and maybe + even believe, that they + +On line 917: + let their managers say, + and maybe even believe, that they + could better manage + +On line 917: + their managers say, and + maybe even believe, that they could + better manage those + +On line 917: + and maybe even believe, + that they could better manage + those products’ risk. JP + +On line 917: + that they could better + manage those products’ risk. JP + Morgan developed + +On line 917: + could better manage + those products’ risk. JP Morgan + developed the first + +On line 917: + manage those products’ + risk. JP Morgan developed + the first "Value at + +On line 917: + developed the first + "Value at Risk" model (VaR), + and the industry + +On line 917: + Risk" model (VaR), and + the industry soon adopted + different versions. + +On line 917: + different versions. + These models purported to + predict with at least + +On line 917: + versions. These models + purported to predict with + at least certainty + +On line 917: + predict with at least + certainty how much a firm + could lose if market + +On line 917: + at least certainty + how much a firm could lose if + market prices changed.24 But + +On line 917: + certainty how much + a firm could lose if market + prices changed.24 But models + +On line 917: + how much a firm could + lose if market prices changed.24 But + models relied on + +On line 917: + could lose if market + prices changed.24 But models relied + on assumptions based + +On line 917: + lose if market prices + changed.24 But models relied on + assumptions based on + +On line 917: + assumptions based on + limited historical + data; for mortgage-backed + +On line 917: + data; for mortgage-backed + securities, the models + would turn out to be + +On line 919: + modeling human + behavior was different + from the problems the + +On line 919: + different from the + problems the quants had addressed + in graduate school. + +On line 919: + problems the quants had + addressed in graduate school. + "It’s not like trying + +On line 919: + the quants had addressed + in graduate school. "It’s not + like trying to shoot + +On line 919: + quants had addressed in + graduate school. "It’s not like + trying to shoot a + +On line 919: + in graduate school. + "It’s not like trying to shoot + a rocket to the + +On line 919: + graduate school. "It’s + not like trying to shoot a + rocket to the moon + +On line 919: + "It’s not like trying + to shoot a rocket to the + moon where you know the + +On line 919: + not like trying to + shoot a rocket to the moon + where you know the law + +On line 919: + like trying to shoot + a rocket to the moon where + you know the law of + +On line 919: + to shoot a rocket + to the moon where you know the + law of gravity," + +On line 919: + shoot a rocket to + the moon where you know the law + of gravity," Emanuel + +On line 919: + professor who worked + at Goldman Sachs for years, told + the Commission. "The + +On line 919: + worked at Goldman Sachs + for years, told the Commission. + "The way people feel + +On line 919: + at Goldman Sachs for + years, told the Commission. "The + way people feel about + +On line 919: + Sachs for years, told the + Commission. "The way people + feel about gravity + +On line 919: + Commission. "The way + people feel about gravity + on a given day + +On line 919: + way people feel about + gravity on a given + day isn’t going + +On line 919: + feel about gravity + on a given day isn’t + going to affect + +On line 919: + gravity on a + given day isn’t going + to affect the way + +On line 919: + on a given day + isn’t going to affect + the way the rocket + +On line 919: + given day isn’t + going to affect the way + the rocket behaves."25 + +On line 921: + going to affect + the way the rocket behaves."25 + Paul Volcker, Fed + +On line 921: + the way the rocket + behaves."25 Paul Volcker, Fed + chairman from to told + +On line 921: + the Commission that + regulators were concerned + as early as the + +On line 921: + that regulators + were concerned as early as + the late 1980s that once + +On line 921: + regulators were + concerned as early as the + late 1980s that once banks + +On line 921: + as early as the + late 1980s that once banks began + selling instead of + +On line 921: + the late 1980s that once + banks began selling instead + of holding the loans + +On line 921: + late 1980s that once banks + began selling instead of + holding the loans they + +On line 921: + banks began selling + instead of holding the loans + they were making, they + +On line 921: + instead of holding + the loans they were making, they + would care less about loan + +On line 921: + holding the loans they + were making, they would care less + about loan quality. + +On line 921: + making, they would care + less about loan quality. Yet + as these instruments + +On line 921: + they would care less about + loan quality. Yet as these + instruments became + +On line 921: + relied on the banks + to police their own risks. "It + was all tied up in + +On line 921: + the banks to police + their own risks. "It was all tied + up in the hubris of + +On line 921: + police their own risks. + "It was all tied up in the + hubris of financial + +On line 921: + "It was all tied up + in the hubris of financial + engineers, but the + +On line 921: + tied up in the hubris + of financial engineers, + but the greater hubris let + +On line 921: + hubris of financial + engineers, but the greater hubris + let markets take care + +On line 921: + hubris let markets take + care of themselves," Volcker + said.26 Vincent Reinhart, + +On line 921: + let markets take care + of themselves," Volcker said.26 + Vincent Reinhart, a + +On line 921: + said.26 Vincent Reinhart, + a former director of + the Fed’s Division + +On line 921: + Vincent Reinhart, a + former director of the + Fed’s Division of + +On line 921: + former director + of the Fed’s Division of + Monetary Affairs, + +On line 921: + the Fed’s Division + of Monetary Affairs, told + the Commission that + +On line 921: + Fed’s Division of + Monetary Affairs, told the + Commission that he + +On line 923: + in assessing risk.27 + Securitization "was + diversifying + +On line 925: + individual + can diversify your risk. + The system as a + +On line 925: + diversify your + risk. The system as a whole, + though, cannot reduce + +On line 925: + risk. The system as + a whole, though, cannot reduce + the risk. And that’s where + +On line 925: + The system as a + whole, though, cannot reduce the + risk. And that’s where the + +On line 925: + a whole, though, cannot + reduce the risk. And that’s where + the confusion lies."28 + +On line 927: + the risk. And that’s where + the confusion lies."28 THE GROWTH + OF DERIVATIVES: + +On line 927: + risk. And that’s where the + confusion lies."28 THE GROWTH OF + DERIVATIVES: "BY + +On line 929: + MOST SIGNIFICANT + EVENT IN FINANCE DURING THE + PAST DECADE" During the + +On line 929: + PAST DECADE" During the + financial crisis, leverage + and complexity + +On line 929: + and complexity + became closely identified + with one element + +On line 929: + one element of + the story: derivatives. + Derivatives are + +On line 929: + Derivatives are + financial contracts whose prices + are determined by, + +On line 929: + financial contracts + whose prices are determined by, + or "derived" from, the + +On line 929: + contracts whose prices are + determined by, or "derived" + from, the value of + +On line 929: + determined by, or + "derived" from, the value of + some underlying + +On line 929: + from, the value of + some underlying asset, + rate, index, r event. + +On line 929: + the value of some + underlying asset, rate, + index, r event. They + +On line 929: + some underlying + asset, rate, index, r event. + They are not used for + +On line 929: + event. They are not used + for capital formation + or investment, as + +On line 929: + They are not used for + capital formation or + investment, as are + +On line 929: + or investment, as + are securities; rather, they + are instruments for + +On line 929: + are securities; + rather, they are instruments for + hedging business risk + +On line 929: + they are instruments + for hedging business risk or + for speculating + +On line 929: + are instruments for + hedging business risk or for + speculating on + +On line 929: + business risk or for + speculating on changes in + prices, interest rates, + +On line 929: + prices, interest rates, + and the like. Derivatives + come in many forms; the + +On line 929: + interest rates, and + the like. Derivatives come + in many forms; the most + +On line 929: + Derivatives come + in many forms; the most common + are over-the-counter-swaps and + +On line 929: + come in many forms; the + most common are over-the-counter-swaps + and exchange-traded + +On line 929: + are over-the-counter-swaps and + exchange-traded futures and + options.29 They may be + +On line 929: + based on commodities + (including agricultural + products, metals, and + +On line 929: + currency rates, stocks + and indexes, and credit + risk. They can even be + +On line 929: + stocks and indexes, + and credit risk. They can even + be tied to events such + +On line 929: + and indexes, and + credit risk. They can even be + tied to events such as + +On line 929: + and credit risk. They + can even be tied to events such + as hurricanes or + +On line 929: + They can even be tied + to events such as hurricanes + or announcements of + +On line 931: + and commercial firms + use such derivatives. A + firm may hedge its price + +On line 931: + commercial firms use + such derivatives. A firm + may hedge its price risk + +On line 931: + derivatives. A + firm may hedge its price risk by + entering into + +On line 931: + firm may hedge its price + risk by entering into + a derivatives + +On line 931: + risk by entering + into a derivatives + contract that offsets + +On line 931: + recouped through gains on + the derivatives contract. + Institutional + +On line 931: + are risk-averse sometimes + use interest rate swaps to + reduce the risk to + +On line 931: + reduce the risk to + their investment portfolios + of inflation and + +On line 931: + for floating payments + with risk-taking entities, + such as hedge funds. Hedge + +On line 931: + floating payments with + risk-taking entities, such + as hedge funds. Hedge funds + +On line 931: + entities, such as + hedge funds. Hedge funds may use these + swaps for the purpose + +On line 931: + hedge funds. Hedge funds may + use these swaps for the purpose + of speculating, + +On line 931: + funds. Hedge funds may use + these swaps for the purpose of + speculating, in + +On line 931: + swaps for the purpose + of speculating, in hopes + of profiting on + +On line 931: + for the purpose of + speculating, in hopes of + profiting on the + +On line 931: + of speculating, + in hopes of profiting on + the rise or fall of + +On line 931: + speculating, in + hopes of profiting on the + rise or fall of a + +On line 931: + hopes of profiting + on the rise or fall of a + price or interest + +On line 931: + of profiting on + the rise or fall of a price + or interest rate. + +On line 933: + profiting on the + rise or fall of a price or + interest rate. The + +On line 933: + the rise or fall of + a price or interest rate. + The derivatives + +On line 933: + or interest rate. + The derivatives markets + are organized as + +On line 933: + are organized as + exchanges or as over-the-counter (OTC) + markets, although some + +On line 933: + or as over-the-counter (OTC) + markets, although some recent + electronic trading + +On line 933: + markets, although some + recent electronic trading + facilities blur + +On line 933: + recent electronic + trading facilities blur + the distinctions. The + +On line 933: + facilities blur + the distinctions. The oldest + U.S. exchange is the + +On line 933: + blur the distinctions. + The oldest U.S. exchange is + the Chicago Board of + +On line 933: + the distinctions. The + oldest U.S. exchange is the + Chicago Board of Trade, + +On line 933: + Chicago Board of Trade, + where futures and options are + traded. Such exchanges + +On line 933: + futures and options + are traded. Such exchanges are + regulated by + +On line 933: + are regulated + by federal law and play + a useful role in + +On line 933: + regulated by + federal law and play a + useful role in price + +On line 933: + by federal law + and play a useful role in + price discovery—that + +On line 933: + federal law and + play a useful role in price + discovery—that is, + +On line 933: + and play a useful + role in price discovery—that + is, in revealing + +On line 933: + play a useful role + in price discovery—that is, + in revealing the + +On line 933: + is, in revealing + the market’s view on prices of + commodities or rates + +On line 933: + investment banks—which act + as derivatives dealers, + buying and selling + +On line 933: + as derivatives + dealers, buying and selling + contracts with customers. + +On line 933: + dealers, buying and + selling contracts with customers. + Unlike the futures + +On line 933: + selling contracts with + customers. Unlike the futures + and options exchanges, + +On line 933: + customers. Unlike the + futures and options exchanges, + the OTC market is + +On line 933: + Unlike the futures + and options exchanges, the OTC + market is neither + +On line 933: + futures and options + exchanges, the OTC market is + neither centralized + +On line 933: + neither centralized + nor regulated. Nor is + it transparent, and + +On line 933: + nor regulated. + Nor is it transparent, and + thus price discovery + +On line 933: + regulated. Nor + is it transparent, and thus + price discovery is + +On line 933: + price discovery is + limited. No matter the + measurement—trading + +On line 933: + measurement—trading + volume, dollar volume, risk + exposure—derivatives + +On line 933: + represent a very + significant sector of + the U.S. financial + +On line 935: + derivatives on + domestic agricultural + products. In Congress + +On line 935: + Congress amended the + act to require that futures + and options contracts + +On line 935: + act to require that + futures and options contracts + on virtually + +On line 935: + be traded on a + regulated exchange, and + created a new + +On line 935: + the Commodity + Futures Trading Commission + (CFTC), to regulate + +On line 937: + Commission (CFTC), to + regulate and supervise + the market.30 Outside + +On line 937: + market.30 Outside of + this regulated market, + an over-the-counter market + +On line 937: + an over-the-counter market + began to develop and + grow rapidly in the + +On line 937: + market began to + develop and grow rapidly + in the 1980s. The large + +On line 937: + The large financial + institutions acting as + OTC derivatives + +On line 937: + dealers worried that + the Commodity Exchange + Act’s requirement that + +On line 937: + the Commodity + Exchange Act’s requirement that + trading occur on + +On line 937: + trading occur on + a regulated exchange + might be applied to + +On line 937: + a regulated + exchange might be applied to + the products they were + +On line 937: + might be applied to + the products they were buying + and selling. In the + +On line 937: + be applied to the + products they were buying and + selling. In the CFTC + +On line 937: + the products they were + buying and selling. In the + CFTC sought to address + +On line 937: + they were buying and + selling. In the CFTC sought to + address these concerns + +On line 939: + prohibitions against + fraud and manipulation.31 + As the OTC market + +On line 939: + the CFTC’s exemption, + a wave of significant + losses and scandals + +On line 939: + exemption, a wave + of significant losses + and scandals hit the + +On line 939: + and scandals hit the + market. Among many examples, + in Procter Gamble, + +On line 939: + hit the market. Among + many examples, in Procter + Gamble, a leading + +On line 939: + products company, + reported a pretax loss + of million, the largest + +On line 939: + loss of million, the + largest derivatives loss by + a nonfinancial + +On line 939: + of million, the largest + derivatives loss by a + nonfinancial firm, + +On line 939: + largest derivatives + loss by a nonfinancial + firm, stemming from OTC + +On line 939: + nonfinancial firm, + stemming from OTC interest + and foreign exchange + +On line 939: + foreign exchange rate + derivatives sold to it + by Bankers Trust. Procter + +On line 939: + derivatives sold + to it by Bankers Trust. Procter + Gamble sued Bankers Trust + +On line 939: + sold to it by Bankers + Trust. Procter Gamble sued Bankers + Trust for fraud—a suit + +On line 939: + Trust. Procter Gamble + sued Bankers Trust for fraud—a suit + settled when Bankers Trust + +On line 939: + Gamble sued Bankers Trust + for fraud—a suit settled when + Bankers Trust forgave most + +On line 939: + Trust for fraud—a suit + settled when Bankers Trust forgave + most of the money + +On line 939: + settled when Bankers Trust + forgave most of the money + that Procter Gamble + +On line 939: + Bankers Trust forgave most + of the money that Procter + Gamble owed it. That + +On line 939: + forgave most of the + money that Procter Gamble + owed it. That year, the + +On line 939: + most of the money + that Procter Gamble owed it. + That year, the CFTC and + +On line 939: + of the money that + Procter Gamble owed it. That + year, the CFTC and the + +On line 939: + that Procter Gamble + owed it. That year, the CFTC and + the Securities + +On line 939: + Procter Gamble owed + it. That year, the CFTC and the + Securities and + +On line 939: + it. That year, the CFTC + and the Securities and + Exchange Commission + +On line 939: + year, the CFTC and the + Securities and Exchange + Commission (SEC) fined + +On line 939: + the Securities + and Exchange Commission (SEC) + fined Bankers Trust million + +On line 939: + Securities and + Exchange Commission (SEC) fined + Bankers Trust million for + +On line 939: + Exchange Commission + (SEC) fined Bankers Trust million for + misleading Gibson + +On line 939: + Bankers Trust million for + misleading Gibson Greeting + Cards on interest + +On line 939: + misleading Gibson + Greeting Cards on interest + rate swaps resulting + +On line 939: + Cards on interest + rate swaps resulting in a + mark-to-market loss + +On line 939: + rate swaps resulting + in a mark-to-market loss + of million, larger + +On line 939: + swaps resulting in + a mark-to-market loss of + million, larger than + +On line 939: + million, larger than + Gibson’s prior-year profits. In + late Orange County, + +On line 939: + announced it had lost + billion speculating in + OTC derivatives. + +On line 939: + for bankruptcy—the largest by + a municipality + in U.S. history. + +On line 939: + bankruptcy—the largest by a + municipality in + U.S. history. Its + +On line 939: + dealer, Merrill Lynch, + paid million to settle claims.32 + In response, the U.S. + +On line 939: + to settle claims.32 In + response, the U.S. General + Accounting Office + +On line 939: + claims.32 In response, the + U.S. General Accounting + Office issued a + +On line 939: + OTC derivatives + activity among major + dealers, concluding + +On line 939: + dealers, concluding + that "the sudden failure or + abrupt withdrawal from + +On line 939: + sudden failure or + abrupt withdrawal from trading + of any one of these + +On line 939: + or abrupt withdrawal + from trading of any one of + these large dealers could + +On line 939: + abrupt withdrawal from + trading of any one of these + large dealers could cause + +On line 939: + from trading of any + one of these large dealers could + cause liquidity + +On line 939: + these large dealers could + cause liquidity problems + in the markets and + +On line 939: + large dealers could cause + liquidity problems in + the markets and could + +On line 939: + cause liquidity + problems in the markets and + could also pose risks + +On line 939: + in the markets and + could also pose risks to the + others, including + +On line 939: + risks to the others, + including federally + insured banks and the + +On line 939: + others, including + federally insured banks + and the financial + +On line 939: + insured banks and the + financial system as a + whole."33 While Congress then + +On line 939: + financial system + as a whole."33 While Congress then + held hearings on the + +On line 939: + lobbying by the + OTC derivatives dealers + and opposition + +On line 939: + OTC derivatives + dealers and opposition + by Fed Chairman Greenspan. + +On line 941: + billion on copper + derivatives traded on + a London exchange. + +On line 941: + exchange. The CFTC charged + the company with using + derivatives to + +On line 941: + charged the company + with using derivatives + to manipulate + +On line 941: + derivatives to + manipulate copper prices, + including using + +On line 941: + to finance the scheme. + Sumitomo settled for + million in penalties + +On line 941: + settled for million + in penalties and restitution. + The CFTC also charged + +On line 941: + and restitution. The + CFTC also charged Merrill Lynch + with knowingly and + +On line 943: + prices; it settled for + a fine of million.34 Debate + intensified in + +On line 943: + in In May, the CFTC + under Chairperson Brooksley + Born said the agency + +On line 943: + under Chairperson + Brooksley Born said the agency + would reexamine + +On line 943: + Born said the agency + would reexamine the way + it regulated + +On line 943: + said the agency would + reexamine the way it + regulated the + +On line 943: + reexamine the + way it regulated the + OTC derivatives + +On line 943: + regulated the + OTC derivatives market, + given the market’s + +On line 943: + OTC derivatives + market, given the market’s + rapid evolution and + +On line 943: + market, given the + market’s rapid evolution and + the string of major + +On line 943: + given the market’s + rapid evolution and the string + of major losses + +On line 943: + evolution and the + string of major losses since + The CFTC requested + +On line 945: + major losses since + The CFTC requested comments. + It got them. Some came + +On line 945: + got them. Some came from + other regulators, who + took the unusual + +On line 945: + Some came from other + regulators, who took the + unusual step of + +On line 945: + the unusual step + of publicly criticizing + the CFTC. On the day + +On line 945: + unusual step of + publicly criticizing the + CFTC. On the day that + +On line 945: + criticizing the + CFTC. On the day that the CFTC + issued a concept + +On line 945: + the day that the CFTC + issued a concept release, + Treasury Secretary + +On line 945: + issued a concept + release, Treasury Secretary + Robert Rubin, Greenspan, and + +On line 945: + and SEC Chairman Arthur + Levitt issued a joint statement + denouncing the CFTC’s + +On line 945: + Arthur Levitt issued a + joint statement denouncing the + CFTC’s move: "We have grave + +On line 945: + denouncing the CFTC’s + move: "We have grave concerns about + this action and its + +On line 945: + the CFTC’s move: "We have + grave concerns about this action + and its possible + +On line 945: + grave concerns about this + action and its possible + consequences. We are + +On line 945: + about this action and + its possible consequences. + We are very concerned + +On line 945: + this action and its + possible consequences. We + are very concerned about + +On line 945: + consequences. We are + very concerned about reports that + the CFTC’s action may + +On line 945: + action may increase + the legal uncertainty + concerning certain + +On line 945: + increase the legal + uncertainty concerning + certain types of OTC + +On line 945: + certain types of OTC + derivatives."35 They proposed + a moratorium + +On line 949: + derivatives. For + months, Rubin, Greenspan, Levitt, and Deputy + Treasury Secretary + +On line 949: + months, Rubin, Greenspan, Levitt, + and Deputy Treasury Secretary + Lawrence Summers opposed + +On line 949: + Rubin, Greenspan, Levitt, and + Deputy Treasury Secretary Lawrence + Summers opposed the + +On line 949: + in testimony + to Congress and in other + public pronouncements. + +On line 949: + to Congress and in + other public pronouncements. + As Alan Greenspan said: "Aside + +On line 949: + in other public + pronouncements. As Alan Greenspan said: + "Aside from safety and + +On line 949: + said: "Aside from safety + and soundness regulation + of derivatives + +On line 949: + of derivatives + dealers under the banking + and securities + +On line 949: + dealers under the + banking and securities + laws, regulation + +On line 949: + regulation of + derivatives transactions + that are privately + +On line 951: + unnecessary."36 In + September, the Federal + Reserve Bank of New + +On line 951: + of Long-Term Capital + Management (LTCM) by major + OTC erivatives dealers. + +On line 951: + Management (LTCM) by + major OTC erivatives dealers. + An enormous hedge fund, + +On line 951: + (LTCM) by major OTC + erivatives dealers. An enormous + hedge fund, LTCM had amassed + +On line 951: + major OTC erivatives + dealers. An enormous hedge fund, + LTCM had amassed more than + +On line 951: + OTC erivatives dealers. + An enormous hedge fund, LTCM had + amassed more than trillion + +On line 951: + erivatives dealers. An + enormous hedge fund, LTCM had amassed + more than trillion in + +On line 951: + An enormous hedge fund, + LTCM had amassed more than trillion + in notional amount + +On line 951: + enormous hedge fund, LTCM + had amassed more than trillion in + notional amount of + +On line 951: + amassed more than trillion + in notional amount of OTC + derivatives and + +On line 951: + of securities + on billion of capital + without the knowledge + +On line 951: + counterparties or + federal regulators.37 + Greenspan testified to + +On line 951: + regulators.37 Greenspan + testified to Congress that + in the New York Fed’s + +On line 951: + that in the New York + Fed’s judgment, LTCM’s failure would + potentially have + +On line 951: + judgment, LTCM’s failure + would potentially have had + systemic effects: a + +On line 951: + would potentially + have had systemic effects: a + default by LTCM "would + +On line 951: + effects: a default + by LTCM "would not only have + a significant + +On line 951: + not only have a + significant distorting + impact on market + +On line 951: + also in the process + could produce large losses, or + worse, for a number + +On line 951: + losses, or worse, for + a number of creditors + and counterparties, + +On line 951: + for other market + participants who were not + directly involved + +On line 953: + participants who + were not directly involved + with LTCM."38 Nonetheless, + +On line 953: + were not directly + involved with LTCM."38 Nonetheless, + just weeks later, in + +On line 955: + moratorium. Greenspan + continued to champion + derivatives and + +On line 955: + derivatives and + advocate deregulation + of the OTC market + +On line 955: + market. "By far the + most significant event in + finance during the + +On line 955: + most significant + event in finance during the + past decade has been the + +On line 955: + development and + expansion of financial + derivatives," Greenspan + +On line 955: + Association + conference in March "The fact + that the OTC markets + +On line 955: + OTC markets function + quite effectively without + the benefits of + +On line 955: + markets function quite + effectively without the + benefits of [CFTC + +On line 955: + quite effectively + without the benefits of + [CFTC regulation] + +On line 955: + the benefits of + [CFTC regulation] provides + a strong argument + +On line 955: + benefits of [CFTC + regulation] provides a + strong argument for + +On line 955: + [CFTC regulation] + provides a strong argument + for development + +On line 955: + a strong argument + for development of a + less burdensome regime + +On line 955: + strong argument for + development of a less + burdensome regime for + +On line 955: + for development + of a less burdensome regime + for exchange-traded + +On line 957: + burdensome regime for + exchange-traded financial + derivatives."39 The + +On line 957: + resignation—the + President’s Working Group on + Financial Markets, + +On line 957: + President’s Working + Group on Financial Markets, + a committee of + +On line 957: + and Commodity + Futures Trading Commission + charged with tracking the + +On line 957: + view. The group issued + a report urging Congress + to deregulate OTC + +On line 957: + OTC derivatives + broadly and to reduce CFTC + regulation of + +On line 959: + well.40 In December + in response, Congress passed and + President Clinton + +On line 959: + response, Congress passed + and President Clinton signed + the Commodity + +On line 959: + the Commodity + Futures Modernization Act + of (CFMA), which in + +On line 959: + Act of (CFMA), which + in essence deregulated the + OTC derivatives + +On line 959: + deregulated the + OTC derivatives market + and eliminated + +On line 959: + OTC derivatives + market and eliminated + oversight by both the + +On line 961: + the CFTC and the SEC. + The law also preempted + application of + +On line 961: + also preempted + application of state laws + on gaming and on + +On line 961: + The SEC did retain + antifraud authority over + securities-based OTC + +On line 963: + all regulation + or oversight. Subsequently, + other laws enabled + +On line 963: + the expansion of + the market. For example, + under a amendment + +On line 963: + laws, derivatives + counterparties were given + the advantage over + +On line 963: + counterparties were + given the advantage over + other creditors + +On line 963: + immediately + terminate their contracts and + seize collateral + +On line 965: + their contracts and seize + collateral at the time + of bankruptcy. The + +On line 965: + collateral at + the time of bankruptcy. The + OTC derivatives + +On line 965: + of bankruptcy. The + OTC derivatives market + boomed. At year-end when the + +On line 965: + OTC derivatives + market boomed. At year-end when the + CFMA was passed, the + +On line 965: + market boomed. At year-end + when the CFMA was passed, the + notional amount of + +On line 965: + when the CFMA was + passed, the notional amount of + OTC derivatives + +On line 965: + OTC derivatives + outstanding globally was + trillion, and the gross + +On line 965: + trillion, and the gross + market value was trillion.41 + In the seven and + +On line 965: + and the gross market + value was trillion.41 In the + seven and a half + +On line 965: + gross market value + was trillion.41 In the seven + and a half years from + +On line 965: + market value was + trillion.41 In the seven and + a half years from then + +On line 965: + value was trillion.41 + In the seven and a half + years from then until + +On line 965: + was trillion.41 In the + seven and a half years from + then until June when + +On line 965: + In the seven and + a half years from then until + June when the market + +On line 965: + the seven and a + half years from then until June + when the market peaked, + +On line 965: + a half years from then + until June when the market + peaked, outstanding OTC + +On line 965: + then until June when + the market peaked, outstanding + OTC derivatives + +On line 965: + peaked, outstanding OTC + derivatives increased more + than sevenfold to + +On line 965: + OTC derivatives + increased more than sevenfold + to a notional + +On line 965: + a notional amount + of trillion; their gross market + value was trillion.42 + +On line 967: + of trillion; their gross + market value was trillion.42 + Greenspan testified to + +On line 967: + market value was + trillion.42 Greenspan testified to + the FCIC that credit + +On line 967: + value was trillion.42 + Greenspan testified to the FCIC + that credit default + +On line 967: + Greenspan testified to + the FCIC that credit default + swaps—a small part of + +On line 967: + problems" during the + financial crisis.43 Rubin + testified that when + +On line 967: + financial crisis.43 + Rubin testified that when + the CFMA passed he + +On line 967: + Rubin testified + that when the CFMA passed he + was "not opposed to + +On line 967: + that when the CFMA + passed he was "not opposed to + the regulation + +On line 967: + when the CFMA passed + he was "not opposed to the + regulation of + +On line 967: + he was "not opposed + to the regulation of + derivatives" and + +On line 967: + the regulation + of derivatives" and had + personally agreed + +On line 967: + of derivatives" + and had personally agreed + with Born’s views, but that + +On line 967: + derivatives" and + had personally agreed with + Born’s views, but that "very + +On line 967: + had personally + agreed with Born’s views, but that "very + strongly held views in + +On line 967: + with Born’s views, but that + "very strongly held views in the + financial services + +On line 967: + but that "very strongly + held views in the financial + services industry + +On line 967: + to regulation" + were insurmountable.44 Summers + told the FCIC that while + +On line 967: + regulation" were + insurmountable.44 Summers told + the FCIC that while risks + +On line 967: + the FCIC that while risks + could not necessarily + have been foreseen years + +On line 967: + FCIC that while risks could + not necessarily have + been foreseen years ago, + +On line 967: + that while risks could not + necessarily have been + foreseen years ago, "by + +On line 967: + been foreseen years ago, + "by our regulatory + framework with respect + +On line 967: + was manifestly + inadequate," and that "the + derivatives that + +On line 967: + inadequate," and + that "the derivatives that + proved to be by far + +On line 967: + "the derivatives + that proved to be by far the + most serious, those + +On line 967: + that proved to be by + far the most serious, those + associated + +On line 967: + the most serious, + those associated with + credit default swaps, + +On line 969: + with credit default + swaps, increased fold between and + One reason for the + +On line 969: + credit default swaps, + increased fold between and One + reason for the rapid + +On line 969: + default swaps, increased + fold between and One reason + for the rapid growth of + +On line 969: + fold between and One + reason for the rapid growth of + the derivatives + +On line 969: + for the rapid growth of + the derivatives market + was the capital + +On line 969: + above, financial firms + may use derivatives to + hedge their risks. Such use + +On line 969: + financial firms may + use derivatives to hedge + their risks. Such use of + +On line 969: + use derivatives + to hedge their risks. Such use of + derivatives can + +On line 969: + their risks. Such use of + derivatives can lower + a firm’s Value at + +On line 969: + derivatives can + lower a firm’s Value at + Risk as determined + +On line 969: + computer models. + In addition to gaining + this advantage in + +On line 969: + In addition to + gaining this advantage in + risk management, such + +On line 969: + this advantage in + risk management, such hedges can + lower the amount of + +On line 969: + in risk management, + such hedges can lower the amount + of capital that + +On line 969: + risk management, such + hedges can lower the amount of + capital that banks + +On line 969: + such hedges can lower + the amount of capital that + banks are required to + +On line 969: + hedges can lower the + amount of capital that banks + are required to hold, + +On line 969: + can lower the amount + of capital that banks are + required to hold, thanks + +On line 969: + amount of capital + that banks are required to hold, + thanks to a amendment + +On line 969: + of capital that + banks are required to hold, thanks + to a amendment to + +On line 969: + capital that banks + are required to hold, thanks to + a amendment to the + +On line 969: + are required to hold, + thanks to a amendment to the + regulatory + +On line 969: + thanks to a amendment + to the regulatory + regime known as the Basel + +On line 971: + International + Capital Accord, or "Basel + I." Meeting in Basel, + +On line 971: + Capital Accord, + or "Basel I." Meeting in Basel, + Switzerland, in the world’s + +On line 971: + Accord, or "Basel I." + Meeting in Basel, Switzerland, in + the world’s central banks + +On line 971: + or "Basel I." Meeting + in Basel, Switzerland, in the world’s + central banks and bank + +On line 971: + in the world’s central + banks and bank supervisors + adopted principles + +On line 971: + world’s central banks and + bank supervisors adopted + principles for banks’ + +On line 971: + bank supervisors + adopted principles for banks’ + capital standards, + +On line 971: + made adjustments to + implement them. Among the most + important was the + +On line 971: + to implement them. + Among the most important was + the requirement that + +On line 971: + implement them. Among + the most important was the + requirement that banks + +On line 971: + the most important + was the requirement that banks + hold more capital + +On line 971: + most important was + the requirement that banks hold + more capital against + +On line 971: + was the requirement + that banks hold more capital + against riskier assets. + +On line 971: + looser than for all + other assets related + to corporate and + +On line 971: + holdings of Fannie’s + and Freddie’s securities + were less than for all + +On line 971: + were less than for all + other assets except those + explicitly backed + +On line 973: + assets except those + explicitly backed by the + U.S. government.47 These + +On line 973: + explicitly backed + by the U.S. government.47 These + international + +On line 973: + capital standards + accommodated the shift + to increased leverage. + +On line 973: + accommodated + the shift to increased leverage. + In large banks sought more + +On line 973: + increased leverage. In + large banks sought more favorable + capital treatment + +On line 973: + sought more favorable + capital treatment for their + trading, and the Basel + +On line 973: + the Basel Committee + on Banking Supervision + adopted the Market + +On line 973: + adopted the Market + Risk Amendment to Basel I. This + provided that if + +On line 973: + Market Risk Amendment + to Basel I. This provided + that if banks hedged their + +On line 973: + Risk Amendment to Basel + I. This provided that if + banks hedged their credit + +On line 973: + Amendment to Basel I. + This provided that if banks + hedged their credit or + +On line 973: + This provided that + if banks hedged their credit or + market risks using + +On line 973: + market risks using + derivatives, they could hold + less capital against + +On line 973: + derivatives, they + could hold less capital against + their exposures from + +On line 975: + investment banks—increase + their leverage. For example, + entering into + +On line 975: + an equity swap + that mimicked the returns of + someone who owned the + +On line 975: + swap that mimicked the + returns of someone who owned + the actual stock + +On line 975: + of someone who owned + the actual stock may have + had some upfront costs, + +On line 975: + someone who owned the + actual stock may have had + some upfront costs, but + +On line 975: + owned the actual + stock may have had some upfront + costs, but the amount of + +On line 975: + costs, but the amount of + collateral posted was + much smaller than the + +On line 975: + of collateral + posted was much smaller than + the upfront cost of + +On line 975: + much smaller than the + upfront cost of purchasing + the stock directly. + +On line 975: + cost of purchasing + the stock directly. Often + no collateral + +On line 975: + of purchasing the + stock directly. Often no + collateral was + +On line 975: + the stock directly. + Often no collateral + was required at all. + +On line 975: + no collateral + was required at all. Traders could + use derivatives + +On line 975: + collateral was + required at all. Traders could use + derivatives to + +On line 975: + was required at all. + Traders could use derivatives + to receive the same + +On line 975: + use derivatives + to receive the same gains—or + losses—as if they had + +On line 975: + to receive the same + gains—or losses—as if they had + bought the actual + +On line 975: + gains—or losses—as if + they had bought the actual + security, and + +On line 975: + if they had bought the + actual security, + and with only a + +On line 975: + security, and + with only a fraction of + a buyer’s initial + +On line 975: + a buyer’s initial + financial outlay.49 Warren + Buffett, the chairman + +On line 975: + the chairman and chief + executive officer + of Berkshire Hathaway + +On line 975: + to the FCIC about the + unique characteristics of + the derivatives + +On line 975: + view, the leverage in + the system." He went on to + call derivatives + +On line 975: + the leverage in the + system." He went on to call + derivatives "very + +On line 975: + the system." He went + on to call derivatives + "very dangerous stuff," + +On line 975: + to understand—indeed, + he concluded, "I don’t think + I could manage" a + +On line 977: + manage" a complex + derivatives book.50 key OTC + derivative in + +On line 977: + derivative in + the financial crisis was + the credit default + +On line 977: + financial crisis + was the credit default swap + (CDS), which offered the + +On line 977: + seller a little + potential upside at the + relatively small + +On line 977: + a potentially + large downside. The purchaser + of a CDS transferred + +On line 977: + potentially large + downside. The purchaser of + a CDS transferred to + +On line 977: + purchaser of a + CDS transferred to the seller + the default risk of + +On line 977: + CDS transferred to the + seller the default risk of + an underlying + +On line 977: + the default risk of + an underlying debt. The + debt security + +On line 977: + default risk of an + underlying debt. The debt + security could + +On line 977: + an underlying + debt. The debt security + could be any bond or + +On line 977: + underlying debt. + The debt security could + be any bond or loan + +On line 977: + be any bond or loan + obligation. The CDS buyer + made periodic + +On line 977: + The CDS buyer made + periodic payments to + the seller during + +On line 977: + seller during the + life of the swap. In return, + the seller offered + +On line 977: + the seller offered + protection against default or + specified "credit + +On line 977: + offered protection + against default or specified + "credit events" such as + +On line 977: + "credit events" such as + a partial default. If a + credit event such as + +On line 977: + such as a partial + default. If a credit event + such as a default + +On line 977: + a partial default. + If a credit event such as + a default occurred, + +On line 977: + partial default. If + a credit event such as a + default occurred, the + +On line 977: + If a credit event + such as a default occurred, + the CDS seller would + +On line 977: + such as a default + occurred, the CDS seller would + typically pay + +On line 979: + typically pay + the buyer the face value + of the debt. Credit + +On line 979: + the face value of + the debt. Credit default swaps + were often compared + +On line 979: + face value of the + debt. Credit default swaps were + often compared to + +On line 979: + as deregulated + OTC derivatives. This made + CDS very different + +On line 979: + deregulated OTC + derivatives. This made CDS + very different from + +On line 979: + OTC derivatives. + This made CDS very different + from insurance in + +On line 979: + derivatives. This + made CDS very different from + insurance in at + +On line 979: + very different from + insurance in at least two + important respects. + +On line 979: + policy. A car + owner can insure only + the car she owns—not + +On line 979: + A car owner can + insure only the car she + owns—not her neighbor’s. + +On line 981: + owner can insure + only the car she owns—not + her neighbor’s. But a + +On line 981: + only the car she + owns—not her neighbor’s. But a + CDS purchaser can + +On line 981: + her neighbor’s. But a + CDS purchaser can use it + to speculate on + +On line 981: + neighbor’s. But a CDS + purchaser can use it to + speculate on the + +On line 981: + a CDS purchaser + can use it to speculate + on the default of + +On line 981: + CDS purchaser can + use it to speculate on + the default of a + +On line 981: + purchaser can use + it to speculate on the + default of a loan + +On line 981: + it to speculate + on the default of a loan + the purchaser does + +On line 981: + to speculate on + the default of a loan the + purchaser does not + +On line 981: + the default of a + loan the purchaser does not + own. These are often + +On line 981: + default of a loan + the purchaser does not own. + These are often called + +On line 981: + the purchaser does + not own. These are often called + "naked credit default + +On line 981: + purchaser does not + own. These are often called "naked + credit default swaps" + +On line 981: + are often called "naked + credit default swaps" and can + inflate potential + +On line 981: + default swaps" and can + inflate potential losses + and corresponding + +On line 981: + inflate potential + losses and corresponding + gains on the default + +On line 981: + potential losses + and corresponding gains on + the default of a + +On line 981: + corresponding gains + on the default of a loan + or institution. + +On line 983: + on the default of + a loan or institution. + Before the CFMA + +On line 983: + default of a loan + or institution. Before + the CFMA was passed, + +On line 983: + uncertainty about + whether or not state insurance + regulators had + +On line 983: + about whether or not state + insurance regulators + had authority + +On line 983: + regulators had + authority over credit + default swaps. In June + +On line 983: + had authority + over credit default swaps. In + June in response to + +On line 983: + authority over + credit default swaps. In June + in response to a + +On line 983: + over credit default + swaps. In June in response to + a letter from the + +On line 983: + credit default swaps. + In June in response to a + letter from the law + +On line 983: + default swaps. In June + in response to a letter + from the law firm of + +On line 983: + In June in response + to a letter from the law + firm of Skadden, Arps, + +On line 983: + June in response to + a letter from the law firm + of Skadden, Arps, Slate, + +On line 983: + in response to a + letter from the law firm of + Skadden, Arps, Slate, Meagher + +On line 983: + to a letter from + the law firm of Skadden, Arps, + Slate, Meagher Flom, LLP, the + +On line 983: + a letter from the + law firm of Skadden, Arps, Slate, + Meagher Flom, LLP, the New + +On line 983: + letter from the law + firm of Skadden, Arps, Slate, Meagher + Flom, LLP, the New York + +On line 983: + law firm of Skadden, + Arps, Slate, Meagher Flom, LLP, the New + York State Insurance + +On line 983: + Flom, LLP, the New York + State Insurance Department + determined that "naked" + +On line 983: + York State Insurance + Department determined that + "naked" credit default + +On line 983: + determined that "naked" + credit default swaps did not + count as insurance + +On line 983: + credit default swaps + did not count as insurance + and were therefore not + +On line 983: + default swaps did not + count as insurance and were + therefore not subject + +On line 983: + count as insurance + and were therefore not subject + to regulation.51 + +On line 985: + as insurance and + were therefore not subject to + regulation.51 In + +On line 985: + and were therefore not + subject to regulation.51 + In addition, when + +On line 985: + In addition, when + an insurance company + sells a policy, + +On line 985: + sells a policy, + insurance regulators + require that it put + +On line 985: + require that it put + aside reserves in case of a + loss. In the housing + +On line 985: + it put aside reserves + in case of a loss. In the + housing boom, CDS were + +On line 985: + aside reserves in case + of a loss. In the housing + boom, CDS were sold by + +On line 985: + reserves in case of + a loss. In the housing boom, + CDS were sold by firms + +On line 985: + in case of a loss. + In the housing boom, CDS were + sold by firms that failed + +On line 985: + case of a loss. In + the housing boom, CDS were sold + by firms that failed to + +On line 985: + of a loss. In the + housing boom, CDS were sold by + firms that failed to put + +On line 985: + loss. In the housing + boom, CDS were sold by firms that + failed to put up any + +On line 985: + the housing boom, CDS + were sold by firms that failed to + put up any reserves + +On line 985: + housing boom, CDS were + sold by firms that failed to put + up any reserves or + +On line 985: + boom, CDS were sold by + firms that failed to put up any + reserves or initial + +On line 985: + firms that failed to put + up any reserves or initial + collateral or + +On line 985: + reserves or initial + collateral or to hedge + their exposure. In + +On line 985: + exposure. In the + run-up to the crisis, AIG, the + largest U.S. insurance + +On line 985: + crisis, AIG, the largest + U.S. insurance company, + would accumulate + +On line 985: + one-half trillion dollar + position in credit risk + through the OTC market + +On line 985: + credit risk through the + OTC market without being + required to post one + +On line 985: + through the OTC market + without being required to + post one dollar’s worth + +On line 985: + one dollar’s worth of + initial collateral or + making any other + +On line 985: + making any other + provision for loss.52 AIG was + not alone. The value + +On line 985: + alone. The value of + the underlying assets + for CDS outstanding + +On line 985: + for CDS outstanding + worldwide grew from trillion at + the end of to a + +On line 985: + outstanding worldwide + grew from trillion at the end + of to a peak of + +On line 987: + grew from trillion at + the end of to a peak of + trillion at the end + +On line 987: + trillion at the end + of to a peak of trillion + at the end of A + +On line 987: + end of to a peak + of trillion at the end of + A significant + +On line 987: + A significant + portion was apparently + speculative or + +On line 989: + speculative or + naked credit default swaps.54 Much + of the risk of CDS + +On line 989: + default swaps.54 Much of + the risk of CDS and other + derivatives was + +On line 989: + of the risk of CDS + and other derivatives + was concentrated + +On line 989: + the risk of CDS and + other derivatives was + concentrated in + +On line 989: + derivatives was + concentrated in a few + of the very largest banks, + +On line 989: + was concentrated + in a few of the very largest + banks, investment banks, + +On line 989: + concentrated in + a few of the very largest banks, + investment banks, and + +On line 989: + in a few of the + very largest banks, investment banks, + and others—such as AIG + +On line 989: + of the very largest banks, + investment banks, and others—such + as AIG Financial + +On line 989: + investment banks, and + others—such as AIG Financial + Products, a unit of + +On line 989: + derivatives. Among + U.S. bank holding companies, + of the notional + +On line 989: + holding companies, + of the notional amount of + OTC derivatives, + +On line 989: + of the notional + amount of OTC derivatives, + millions of contracts, + +On line 989: + millions of contracts, + were traded by just five large + institutions (in + +On line 989: + were traded by just + five large institutions (in + JPMorgan Chase, Citigroup, + +On line 989: + traded by just five + large institutions (in JPMorgan + Chase, Citigroup, Bank + +On line 989: + institutions (in + JPMorgan Chase, Citigroup, Bank of + America, Wachovia, + +On line 989: + JPMorgan Chase, Citigroup, + Bank of America, Wachovia, + and HSBC)—many of the same + +On line 989: + Chase, Citigroup, Bank + of America, Wachovia, and + HSBC)—many of the same firms + +On line 989: + Citigroup, Bank of + America, Wachovia, and HSBC)—many + of the same firms that + +On line 989: + America, Wachovia, + and HSBC)—many of the same firms that + would find themselves in + +On line 989: + and HSBC)—many of the same + firms that would find themselves in + trouble during the + +On line 989: + crisis.56 The country’s + five largest investment banks were + also among the world’s + +On line 989: + The country’s five largest + investment banks were also + among the world’s largest OTC + +On line 989: + largest investment banks + were also among the world’s largest + OTC derivatives + +On line 991: + the FCIC said they do + not track revenues and profits + generated by + +On line 991: + not track revenues and + profits generated by + their derivatives + +On line 991: + their derivatives + operations, some firms did + provide estimates. + +On line 991: + provide estimates. + For example, Goldman Sachs + estimated that + +On line 991: + and of its revenues + from through were generated + by derivatives, + +On line 991: + by derivatives, + including to of the firm’s + commodities business, + +On line 991: + including to of + the firm’s commodities business, + and half or more of + +On line 991: + the firm’s commodities + business, and half or more of + its interest rate + +On line 991: + its interest rate + and currencies business. From + May through November + +On line 991: + business. From May through + November billion, or of + the billion of trades + +On line 993: + were derivative + transactions.57 When the nation’s + biggest financial + +On line 993: + transactions.57 When the + nation’s biggest financial + institutions were + +On line 993: + the nation’s biggest + financial institutions + were teetering on + +On line 995: + find themselves straining + to understand an unknown + battlefield shaped by + +On line 995: + to understand an + unknown battlefield shaped by + unseen exposures + +On line 995: + unseen exposures + and interconnections as + they fought to keep the + +On line 1005: + CONTENTS Expansion + of banking activities: + "Shatterer of Glass-Steagall" + +On line 1009: + "Shatterer of Glass-Steagall" + Long-Term Capital Management: + "That’s what history + +On line 1011: + Management: "That’s what + history had proved to them" + Dot-com crash: "Lay on + +On line 1013: + "That’s what history + had proved to them" Dot-com crash: + "Lay on more risk"......................................................................59 The + +On line 1013: + what history had + proved to them" Dot-com crash: "Lay + on more risk"......................................................................59 The wages + +On line 1013: + history had proved + to them" Dot-com crash: "Lay on + more risk"......................................................................59 The wages of + +On line 1013: + proved to them" Dot-com + crash: "Lay on more risk"......................................................................59 The wages + of finance: "Well, this + +On line 1013: + to them" Dot-com crash: + "Lay on more risk"......................................................................59 The wages of + finance: "Well, this one’s + +On line 1013: + Dot-com crash: "Lay on + more risk"......................................................................59 The wages of finance: + "Well, this one’s doing + +On line 1013: + crash: "Lay on more risk"......................................................................59 + The wages of finance: "Well, this + one’s doing it, so + +On line 1013: + "Lay on more risk"......................................................................59 The + wages of finance: "Well, this one’s + doing it, so how + +On line 1013: + more risk"......................................................................59 The wages of + finance: "Well, this one’s doing + it, so how can I + +On line 1013: + The wages of finance: + "Well, this one’s doing it, so + how can I not do + +On line 1013: + wages of finance: "Well, + this one’s doing it, so how + can I not do it1" + +On line 1015: + this one’s doing it, + so how can I not do it1" + Financial sector + +On line 1017: + how can I not do + it1" Financial sector growth: + "I think we overdid + +On line 1023: + OF GLASSSTEAGALL" By the + mid-1990s, the parallel banking + system was booming, + +On line 1023: + parallel banking + system was booming, some of + the largest commercial + +On line 1023: + booming, some of the + largest commercial banks appeared + increasingly like + +On line 1023: + largest commercial banks + appeared increasingly like + the large investment + +On line 1023: + investment banks, and + all of them were becoming + larger, more complex, + +On line 1023: + telecommunications, + and information services + created economies of + +On line 1023: + created economies of + scale and scope in finance and + thereby justified + +On line 1023: + more diversified, + innovative, efficient, + and better able to + +On line 1023: + better able to serve + the needs of an expanding + economy. Others + +On line 1023: + to serve the needs of + an expanding economy. + Others contended + +On line 1023: + that the largest banks were + not necessarily more + efficient but grew + +On line 1023: + efficient but grew + because of their commanding + market positions + +On line 1023: + commanding market + positions and creditors’ + perception they were + +On line 1023: + market positions + and creditors’ perception + they were too big to + +On line 1023: + they were too big to + fail. As they grew, the large banks + pressed regulators, + +On line 1023: + were too big to fail. + As they grew, the large banks pressed + regulators, state + +On line 1023: + fail. As they grew, the + large banks pressed regulators, + state legislatures, + +On line 1023: + As they grew, the large + banks pressed regulators, state + legislatures, and + +On line 1023: + regulators, state + legislatures, and Congress + to remove almost + +On line 1023: + banks in every state, + and removed most restrictions + on opening branches + +On line 1023: + in every state, and + removed most restrictions on + opening branches in + +On line 1023: + in more than one state. + It preempted any state law + that restricted the + +On line 1023: + state. It preempted + any state law that restricted + the ability of + +On line 1025: + of out-of-state banks + to compete within the state’s + borders.1 Removing + +On line 1025: + consolidate the + banking industry. Between + and "megamergers" occurred + +On line 1025: + banking industry. + Between and "megamergers" occurred + involving banks with + +On line 1025: + Between and "megamergers" + occurred involving banks with + assets of more than + +On line 1025: + and "megamergers" occurred + involving banks with assets + of more than billion + +On line 1025: + occurred involving + banks with assets of more than + billion each. Meanwhile + +On line 1025: + involving banks with + assets of more than billion + each. Meanwhile the largest + +On line 1025: + with assets of more + than billion each. Meanwhile the + largest jumped from owning + +On line 1025: + assets of more than + billion each. Meanwhile the largest + jumped from owning of + +On line 1025: + jumped from owning of + the industry’s assets to + From to the combined + +On line 1025: + assets to From to + the combined assets of the + five largest U.S. banks—Bank of + +On line 1025: + From to the combined + assets of the five largest U.S. + banks—Bank of America, + +On line 1025: + the five largest U.S. banks—Bank + of America, Citigroup, + JP Morgan, Wachovia, + +On line 1025: + five largest U.S. banks—Bank of + America, Citigroup, JP + Morgan, Wachovia, and + +On line 1025: + Morgan, Wachovia, and + Wells Fargo—more than tripled, from + trillion to trillion.2 + +On line 1025: + Wells Fargo—more than + tripled, from trillion to trillion.2 + And investment banks + +On line 1025: + Fargo—more than tripled, + from trillion to trillion.2 And + investment banks were + +On line 1025: + tripled, from trillion to + trillion.2 And investment banks + were growing bigger, + +On line 1027: + acquired Shearson in + and Salomon Brothers in while + Paine Webber purchased + +On line 1027: + and Salomon Brothers + in while Paine Webber purchased + Kidder, Peabody in Two + +On line 1027: + Brothers in while Paine + Webber purchased Kidder, Peabody + in Two years later, + +On line 1027: + in while Paine Webber + purchased Kidder, Peabody in Two + years later, Morgan + +On line 1027: + purchased Kidder, Peabody + in Two years later, Morgan + Stanley merged with Dean + +On line 1027: + Kidder, Peabody in Two + years later, Morgan Stanley + merged with Dean Witter, + +On line 1027: + in Two years later, + Morgan Stanley merged with Dean + Witter, and Bankers Trust + +On line 1027: + years later, Morgan + Stanley merged with Dean Witter, + and Bankers Trust purchased + +On line 1027: + Morgan Stanley merged + with Dean Witter, and Bankers Trust + purchased Alex. Brown Sons. + +On line 1027: + merged with Dean Witter, + and Bankers Trust purchased Alex. Brown + Sons. The assets of + +On line 1027: + with Dean Witter, and + Bankers Trust purchased Alex. Brown Sons. + The assets of the + +On line 1027: + Dean Witter, and Bankers + Trust purchased Alex. Brown Sons. The + assets of the five + +On line 1027: + Bankers Trust purchased Alex. + Brown Sons. The assets of the + five largest investment + +On line 1027: + Trust purchased Alex. Brown + Sons. The assets of the five + largest investment banks—Goldman + +On line 1027: + purchased Alex. Brown Sons. + The assets of the five largest + investment banks—Goldman Sachs, + +On line 1027: + Sons. The assets of + the five largest investment banks—Goldman + Sachs, Morgan Stanley, + +On line 1027: + largest investment banks—Goldman + Sachs, Morgan Stanley, Merrill + Lynch, Lehman Brothers, and + +On line 1027: + investment banks—Goldman Sachs, + Morgan Stanley, Merrill Lynch, + Lehman Brothers, and Bear + +On line 1027: + Sachs, Morgan Stanley, + Merrill Lynch, Lehman Brothers, and + Bear Stearns—quadrupled, from + +On line 1027: + Lynch, Lehman Brothers, and + Bear Stearns—quadrupled, from trillion + in to trillion in + +On line 1029: + Lehman Brothers, and Bear + Stearns—quadrupled, from trillion in + to trillion in In + +On line 1029: + Bear Stearns—quadrupled, from + trillion in to trillion in + In the Economic + +On line 1029: + in to trillion in + In the Economic Growth and + Regulatory + +On line 1029: + Regulatory + Paperwork Reduction Act + required federal + +On line 1029: + required federal + regulators to review + their rules every decade + +On line 1031: + Federal Deposit + Insurance Corporation’s + annual report + +On line 1031: + Deposit Insurance + Corporation’s annual + report included + +On line 1031: + annual report + included a photograph + of the vice chairman, + +On line 1031: + report included + a photograph of the vice + chairman, John Reich; + +On line 1031: + a photograph of + the vice chairman, John Reich; + the director of + +On line 1031: + photograph of the + vice chairman, John Reich; the + director of the + +On line 1031: + of the vice chairman, + John Reich; the director + of the Office of + +On line 1031: + the vice chairman, John + Reich; the director of + the Office of Thrift + +On line 1031: + using a chainsaw + and pruning shears to cut the + "red tape" binding a + +On line 1031: + pruning shears to cut + the "red tape" binding a large + stack of documents + +On line 1033: + Securities and + Exchange Commission chairman + Arthur Levitt told the FCIC + +On line 1033: + Exchange Commission + chairman Arthur Levitt told the FCIC + that once word of a + +On line 1033: + Commission chairman + Arthur Levitt told the FCIC that once + word of a proposed + +On line 1033: + Arthur Levitt told the FCIC + that once word of a proposed + regulation got + +On line 1033: + FCIC that once word of + a proposed regulation + got out, industry + +On line 1033: + regulation got + out, industry lobbyists + would rush to complain + +On line 1033: + lobbyists would rush + to complain to members of + the congressional + +On line 1033: + to members of the + congressional committee + with jurisdiction + +On line 1033: + over the financial + activity at issue. + According to Levitt, + +On line 1033: + activity at + issue. According to Levitt, + these members would then + +On line 1033: + issue. According + to Levitt, these members would then + "harass" the SEC with + +On line 1033: + According to Levitt, + these members would then "harass" + the SEC with frequent + +On line 1033: + these members would then + "harass" the SEC with frequent + letters demanding + +On line 1033: + "harass" the SEC with + frequent letters demanding + answers to complex + +On line 1033: + the SEC with frequent + letters demanding answers + to complex questions + +On line 1033: + letters demanding + answers to complex questions + and appearances of + +On line 1033: + answers to complex + questions and appearances of + officials before + +On line 1033: + complex questions and + appearances of officials + before Congress. These + +On line 1033: + and appearances of + officials before Congress. + These requests consumed + +On line 1033: + officials before + Congress. These requests consumed + much of the agency’s + +On line 1033: + Congress. These requests + consumed much of the agency’s + time and discouraged + +On line 1033: + These requests consumed + much of the agency’s time and + discouraged it from + +On line 1033: + the agency’s time and + discouraged it from making + regulations. Levitt + +On line 1033: + and discouraged it + from making regulations. + Levitt described it as + +On line 1033: + discouraged it from + making regulations. Levitt + described it as "kind + +On line 1033: + regulations. Levitt + described it as "kind of a + blood sport to make the + +On line 1033: + Levitt described it as + "kind of a blood sport to make + the particular + +On line 1033: + "kind of a blood sport + to make the particular + agency look stupid or + +On line 1033: + a blood sport to make + the particular agency + look stupid or inept + +On line 1033: + blood sport to make the + particular agency look + stupid or inept or + +On line 1035: + stupid or inept or + venal."5 However, others + said interference—at + +On line 1035: + However, others + said interference—at least from + the executive + +On line 1035: + said interference—at + least from the executive + branch—was modest. John + +On line 1035: + the executive + branch—was modest. John Hawke, a + former comptroller + +On line 1035: + branch—was modest. John + Hawke, a former comptroller + of the currency, + +On line 1035: + modest. John Hawke, a + former comptroller of the + currency, told the + +On line 1035: + he found the Treasury + Department "exceedingly + sensitive" to his + +On line 1035: + sensitive" to his + agency’s independence. His + successor, John Dugan, + +On line 1037: + its supporters were + also disin-clined to adopt + new regulations + +On line 1039: + with strong incentives + to protect shareholders, would + regulate themselves + +On line 1039: + regulate themselves + by carefully managing + their own risks. In a + +On line 1039: + truly impressive + improvement in methods of + risk measurement and + +On line 1039: + growing adoption of + these technologies by mostly + large banks and other + +On line 1039: + believed that markets + would self-regulate through the + activities of + +On line 1039: + activities of + analysts and investors. "It + is critically + +On line 1039: + and investors. "It is + critically important + to recognize that + +On line 1039: + is critically + important to recognize + that no market is + +On line 1039: + recognize that no + market is ever truly + unregulated," + +On line 1039: + market is ever + truly unregulated," + said Fed Chairman Alan + +On line 1039: + is ever truly + unregulated," said Fed + Chairman Alan Greenspan in + +On line 1039: + unregulated," + said Fed Chairman Alan Greenspan in + "The self-interest + +On line 1039: + "The self-interest + of market participants + generates private + +On line 1039: + generates private + market regulation. Thus, + the real question + +On line 1039: + regulation. Thus, + the real question is not + whether a market should + +On line 1039: + the real question + is not whether a market should + be regulated. + +On line 1041: + real question is + not whether a market should be + regulated. ather, + +On line 1041: + not whether a market + should be regulated. ather, + the real question + +On line 1041: + whether a market should + be regulated. ather, the + real question is + +On line 1043: + or weakens private + regulation."8 Richard Spillenkothen, the + Fed’s director of + +On line 1043: + the Fed’s director + of Banking Supervision + and Regulation + +On line 1043: + Fed’s director of + Banking Supervision and + Regulation from + +On line 1043: + before management + weaknesses were reflected + in poor financial + +On line 1043: + were reflected in + poor financial performance, + might be viewed as i) + +On line 1043: + in poor financial + performance, might be viewed as + i) overly-intrusive, + +On line 1043: + might be viewed as i) + overly-intrusive, burdensome, + and heavy-handed, ii) an + +On line 1043: + i) overly-intrusive, + burdensome, and heavy-handed, ii) + an undesirable + +On line 1043: + availability, or + iii) inconsistent with the + Fed’s public posture."9 + +On line 1045: + iii) inconsistent + with the Fed’s public posture."9 + To create checks and + +On line 1045: + with the Fed’s public + posture."9 To create checks and + balances and keep any + +On line 1045: + Fed’s public posture."9 + To create checks and balances + and keep any agency + +On line 1045: + public posture."9 To + create checks and balances and + keep any agency from + +On line 1045: + and keep any agency + from becoming arbitrary + or inflexible, + +On line 1045: + makers pushed to keep + multiple regulators.10 + In Greenspan testified + +On line 1045: + consolidate bank + regulation: "The current + structure provides banks + +On line 1045: + bank regulation: + "The current structure provides + banks with a method of + +On line 1045: + structure provides banks + with a method of shifting their + regulator, an + +On line 1045: + banks with a method of + shifting their regulator, + an effective test + +On line 1045: + regulator, an + effective test that provides + a limit on the + +On line 1045: + a limit on the + arbitrary position or + excessively rigid + +On line 1045: + posture of any one + regulator. The pressure + of a potential + +On line 1045: + institutions has + inhibited excessive + regulation and + +On line 1045: + has inhibited + excessive regulation + and acted as a + +On line 1045: + to the bias of a + regulatory agency + to overregulate."11 + +On line 1045: + to overregulate."11 + Further, some regulators, + including the OTS + +On line 1045: + the OTS and Office + of the Comptroller of the + Currency (OCC), were + +On line 1045: + of the Comptroller + of the Currency (OCC), were + funded largely by + +On line 1045: + of the Currency + (OCC), were funded largely by + assessments from the + +On line 1045: + the institutions + they regulated. As a + result, the larger + +On line 1045: + larger the number + of institutions that chose + these regulators, + +On line 1045: + of institutions + that chose these regulators, + the greater their budget. + +On line 1047: + regulators, the + greater their budget. Emboldened + by success and the + +On line 1047: + the greater their budget. + Emboldened by success and + the tenor of the times, + +On line 1047: + budget. Emboldened + by success and the tenor of + the times, the largest banks + +On line 1047: + success and the tenor + of the times, the largest banks and + their regulators + +On line 1047: + the largest banks and their + regulators continued + to oppose limits + +On line 1047: + to oppose limits + on banks’ activities or + growth. The barriers + +On line 1047: + growth. The barriers + separating commercial + banks and investment + +On line 1047: + banks and investment + banks had been crumbling, little + by little, and now + +On line 1047: + and investment banks + had been crumbling, little by + little, and now seemed + +On line 1047: + been crumbling, little + by little, and now seemed the + time to remove the + +On line 1047: + crumbling, little by + little, and now seemed the time + to remove the last + +On line 1047: + by little, and now + seemed the time to remove the + last remnants of the + +On line 1047: + and now seemed the time + to remove the last remnants + of the restrictions + +On line 1047: + now seemed the time to + remove the last remnants of + the restrictions that + +On line 1047: + to remove the last + remnants of the restrictions + that separated + +On line 1049: + of after years of + opposing repeal of Glass-Steagall, + the Securities + +On line 1049: + such as Goldman Sachs + and Merrill Lynch—changed course. Because + restrictions on banks + +On line 1049: + Sachs and Merrill Lynch—changed + course. Because restrictions on + banks had been slowly + +On line 1049: + the previous decade, + banks already had beachheads in + securities and + +On line 1049: + Despite numerous + lawsuits against the Fed and the + OCC, securities + +On line 1049: + lawsuits against the Fed + and the OCC, securities + firms and insurance + +On line 1049: + of deregulation + through agency rulings.12 Edward + Yingling, the CEO of + +On line 1049: + through agency rulings.12 + Edward Yingling, the CEO of + the American Bankers + +On line 1049: + Edward Yingling, the + CEO of the American Bankers + Association + +On line 1049: + organization), + said, "Because we had knocked so + many holes in the walls + +On line 1049: + investment banking + and insurance, we were able + to aggressively + +On line 1049: + their businesses—in some + cases more aggressively + than they could enter + +On line 1049: + aggressively than + they could enter ours. So first + the securities + +On line 1049: + they could enter ours. + So first the securities + industry, then the + +On line 1049: + industry, then the + insurance companies, and + finally the agents + +On line 1049: + then the insurance + companies, and finally + the agents came over and + +On line 1049: + agents came over and said + let’s negotiate a deal + and work together."13 + +On line 1051: + came over and said let’s + negotiate a deal and + work together."13 In + +On line 1051: + let’s negotiate + a deal and work together."13 + In Citicorp forced the + +On line 1051: + work together."13 In + Citicorp forced the issue by + seeking a merger + +On line 1051: + forced the issue by + seeking a merger with the + insurance giant + +On line 1051: + seeking a merger + with the insurance giant + Travelers to form + +On line 1051: + with the insurance + giant Travelers to form + Citigroup. The Fed + +On line 1051: + giant Travelers + to form Citigroup. The Fed + approved it, citing + +On line 1051: + approved it, citing + a technical exemption + to the Bank Holding + +On line 1051: + exemption to the + Bank Holding Company Act,14 + but Citigroup would + +On line 1051: + Holding Company + Act,14 but Citigroup would have + to divest itself + +On line 1051: + Act,14 but Citigroup + would have to divest itself + of many Travelers + +On line 1051: + Citigroup would have + to divest itself of many + Travelers assets + +On line 1051: + would have to divest + itself of many Travelers + assets within five + +On line 1051: + Travelers assets + within five years unless the + laws were changed. Congress + +On line 1051: + assets within five + years unless the laws were changed. + Congress had to make + +On line 1051: + five years unless the + laws were changed. Congress had to + make a decision: + +On line 1051: + years unless the laws + were changed. Congress had to make + a decision: Was + +On line 1051: + unless the laws were + changed. Congress had to make a + decision: Was it + +On line 1051: + laws were changed. Congress + had to make a decision: + Was it prepared to + +On line 1051: + were changed. Congress had + to make a decision: Was + it prepared to break + +On line 1051: + changed. Congress had to + make a decision: Was it + prepared to break up + +On line 1051: + prepared to break up + the nation’s largest financial + firm1 Was it time to + +On line 1051: + break up the nation’s + largest financial firm1 Was it + time to repeal the + +On line 1051: + up the nation’s largest + financial firm1 Was it time + to repeal the Glass-Steagall + +On line 1051: + largest financial firm1 + Was it time to repeal the + Glass-Steagall Act, once and for + +On line 1051: + financial firm1 Was + it time to repeal the Glass-Steagall + Act, once and for all1 + +On line 1055: + firm1 Was it time to + repeal the Glass-Steagall Act, once and + for all1 As Congress + +On line 1055: + it time to repeal + the Glass-Steagall Act, once and for all1 + As Congress began + +On line 1055: + repeal the Glass-Steagall Act, + once and for all1 As Congress + began fashioning + +On line 1055: + once and for all1 As + Congress began fashioning + legislation, the + +On line 1055: + As Congress began + fashioning legislation, + the banks were close at + +On line 1055: + began fashioning + legislation, the banks were + close at hand. In the + +On line 1055: + legislation, the + banks were close at hand. In the + financial sector + +On line 1055: + were close at hand. In + the financial sector spent + million lobbying + +On line 1055: + individuals + and political action + committees (PACs) in + +On line 1055: + election cycle. From + through federal lobbying + by the financial + +On line 1057: + campaign donations + from individuals and + PACs topped billion.15 In + +On line 1057: + PACs topped billion.15 In + November Congress passed and + President Clinton + +On line 1057: + President Clinton + signed the Gramm-Leach-Bliley Act (GLBA), which + lifted most of the + +On line 1057: + Clinton signed the Gramm-Leach-Bliley + Act (GLBA), which lifted most + of the remaining + +On line 1057: + (GLBA), which lifted + most of the remaining Glass-Steagall-era + restrictions. The new + +On line 1057: + of the remaining + Glass-Steagall-era restrictions. The new law + embodied many of + +On line 1057: + Glass-Steagall-era restrictions. The + new law embodied many of + the measures Treasury + +On line 1057: + restrictions. The new + law embodied many of the + measures Treasury had + +On line 1057: + new law embodied + many of the measures Treasury + had previously + +On line 1057: + many of the measures + Treasury had previously + advocated.16 The + +On line 1057: + had previously + advocated.16 The New York + Times reported that + +On line 1057: + advocated.16 The + New York Times reported that + Citigroup CEO Sandy + +On line 1057: + York Times reported + that Citigroup CEO Sandy Weill + hung in his office + +On line 1057: + Times reported that + Citigroup CEO Sandy Weill hung + in his office "a + +On line 1057: + that Citigroup CEO + Sandy Weill hung in his office + "a hunk of wood—at + +On line 1057: + Citigroup CEO Sandy + Weill hung in his office "a + hunk of wood—at least + +On line 1057: + Sandy Weill hung in his + office "a hunk of wood—at + least feet wide—etched with his + +On line 1057: + hung in his office + "a hunk of wood—at least feet + wide—etched with his portrait + +On line 1057: + in his office "a + hunk of wood—at least feet wide—etched + with his portrait and + +On line 1057: + his office "a hunk + of wood—at least feet wide—etched with + his portrait and the + +On line 1057: + office "a hunk of + wood—at least feet wide—etched with his + portrait and the words + +On line 1057: + of wood—at least feet + wide—etched with his portrait and the + words ‘The Shatterer + +On line 1057: + wood—at least feet wide—etched + with his portrait and the words + ‘The Shatterer of + +On line 1059: + wide—etched with his portrait + and the words ‘The Shatterer + of Glass-Steagall.’"17 Now, as long + +On line 1059: + with his portrait and + the words ‘The Shatterer of + Glass-Steagall.’"17 Now, as long as + +On line 1059: + his portrait and the + words ‘The Shatterer of Glass-Steagall.’"17 + Now, as long as bank + +On line 1059: + words ‘The Shatterer + of Glass-Steagall.’"17 Now, as long as bank + holding companies + +On line 1059: + of Glass-Steagall.’"17 Now, as long + as bank holding companies + satisfied certain + +On line 1059: + certain safety and + soundness conditions, they could + underwrite and sell + +On line 1059: + conditions, they could + underwrite and sell banking, + securities, and + +On line 1059: + underwrite and sell + banking, securities, and + insurance products + +On line 1059: + were no longer bound by + the Fed’s limit—their primary + regulator, the + +On line 1059: + limit—their primary + regulator, the SEC, set + their only boundaries. + +On line 1059: + regulator, the + SEC, set their only boundaries. + Supporters of the + +On line 1059: + the legislation + argued that the new holding + companies would be + +On line 1059: + argued that the new + holding companies would be + more profitable (due to + +On line 1059: + holding companies + would be more profitable (due to + economies of scale and scope), + +On line 1059: + companies would be + more profitable (due to economies of + scale and scope), safer (through + +On line 1059: + would be more profitable + (due to economies of scale and scope), + safer (through a broader + +On line 1059: + safer (through a broader + diversification of + risks), more useful to + +On line 1059: + of one-stop shopping for + financial services), and more + competitive with + +On line 1059: + financial services), + and more competitive with + large foreign banks, which + +On line 1059: + opponents warned that + allowing banks to combine + with securities + +On line 1059: + with securities + firms would promote excessive + speculation and + +On line 1059: + speculation and + could trigger a crisis like + the crash of John Reed, + +On line 1059: + and could trigger a + crisis like the crash of John + Reed, former co-CEO of + +On line 1059: + the crash of John Reed, + former co-CEO of Citigroup, + acknowledged to the + +On line 1059: + John Reed, former co-CEO + of Citigroup, acknowledged + to the FCIC that, in + +On line 1059: + FCIC that, in hindsight, + "the compartmentalization + that was created + +On line 1059: + that, in hindsight, "the + compartmentalization that + was created by + +On line 1059: + was created by + Glass-Steagall would be a positive + factor," making less + +On line 1059: + be a positive + factor," making less likely + a "catastrophic + +On line 1059: + making less likely + a "catastrophic failure" + of the financial + +On line 1061: + a "catastrophic + failure" of the financial + system.18 To win the + +On line 1061: + financial system.18 + To win the securities + industry’s support, + +On line 1061: + system.18 To win the + securities industry’s + support, the new law + +On line 1061: + the securities + industry’s support, the new + law left in place two + +On line 1061: + industry’s support, + the new law left in place two + exceptions that let + +On line 1061: + the new law left in + place two exceptions that let + securities firms + +On line 1061: + exceptions that let + securities firms own thrifts + and industrial + +On line 1061: + securities firms + own thrifts and industrial + loan companies, a + +On line 1061: + and industrial + loan companies, a type of + depository + +On line 1061: + loan companies, a + type of depository + institution with + +On line 1061: + with stricter limits on + its activities. Through them, + securities firms + +On line 1061: + activities. Through + them, securities firms could + access FDIC-insured deposits + +On line 1061: + FDIC-insured deposits without + supervision by the Fed. + Some securities + +On line 1063: + industrial loan + company grew from less than + billion in assets + +On line 1065: + company grew from + less than billion in assets + in to billion in + +On line 1065: + from less than billion + in assets in to billion + in and to billion + +On line 1065: + less than billion in + assets in to billion in + and to billion in + +On line 1065: + billion in assets + in to billion in and to + billion in Lehman’s thrift + +On line 1065: + in assets in to + billion in and to billion + in Lehman’s thrift grew from + +On line 1065: + in to billion in + and to billion in Lehman’s thrift + grew from million in + +On line 1065: + to billion in and + to billion in Lehman’s thrift grew + from million in to + +On line 1065: + in and to billion + in Lehman’s thrift grew from million + in to billion in + +On line 1065: + and to billion in + Lehman’s thrift grew from million in + to billion in and + +On line 1065: + to billion in Lehman’s + thrift grew from million in to + billion in and its + +On line 1065: + in Lehman’s thrift grew from + million in to billion in + and its assets rose + +On line 1065: + thrift grew from million + in to billion in and its + assets rose as high + +On line 1067: + in to billion in + and its assets rose as high + as billion in For + +On line 1067: + in and its assets + rose as high as billion in + For institutions + +On line 1067: + For institutions + regulated by the Fed, + the new law also + +On line 1067: + colloquially + as "Fed-Lite." The Fed supervised + financial holding + +On line 1067: + holding companies + as a whole, looking only + for risks that cut across + +On line 1067: + across the various + subsidiaries owned by the holding + company. To avoid + +On line 1067: + avoid duplicating + other regulators’ work, + the Fed was required + +On line 1067: + to rely "to the + fullest extent possible" on + examinations + +On line 1067: + examinations + and reports of those agencies + regarding subsidiaries + +On line 1067: + securities firms, + and insurance companies. + The expressed intent + +On line 1067: + Fed Chairman Ben Bernanke + told the FCIC that Fed-Lite "made it + difficult for any + +On line 1067: + FCIC that Fed-Lite "made it + difficult for any single + regulator to + +On line 1067: + it difficult for + any single regulator + to reliably see + +On line 1067: + difficult for any + single regulator to + reliably see the + +On line 1067: + the whole picture of + activities and risks of + large, complex banking + +On line 1069: + activities and + risks of large, complex banking + institutions."21 ndeed, + +On line 1069: + risks of large, complex + banking institutions."21 ndeed, + the regulators, + +On line 1069: + the Fed, would fail to + identify excessive risks + and unsound practices + +On line 1069: + fail to identify + excessive risks and unsound + practices building up + +On line 1069: + excessive risks and + unsound practices building up + in nonbank subsidiaries + +On line 1071: + companies such as + Citigroup and Wachovia.22 The + convergence of banks + +On line 1071: + The convergence of + banks and securities firms + also undermined + +On line 1071: + between banking and + securities markets that + Fed Chairman Greenspan had + +On line 1071: + and securities + markets that Fed Chairman Greenspan + had considered a + +On line 1071: + that Fed Chairman Greenspan + had considered a source of + stability. He + +On line 1071: + Greenspan had considered + a source of stability. + He compared it to + +On line 1071: + had considered a + source of stability. He + compared it to a + +On line 1071: + stability. He + compared it to a "spare tire": + if large commercial + +On line 1071: + it to a "spare tire": + if large commercial banks ran + into trouble, their + +On line 1071: + large commercial banks + ran into trouble, their large + customers could borrow + +On line 1071: + ran into trouble, + their large customers could borrow + from investment banks + +On line 1071: + into trouble, their + large customers could borrow from + investment banks and + +On line 1071: + their large customers could + borrow from investment banks + and others in the + +On line 1071: + banks and others in + the capital markets; if + those markets froze, banks + +On line 1071: + and others in the + capital markets; if those + markets froze, banks could + +On line 1071: + in the capital + markets; if those markets froze, + banks could lend using + +On line 1071: + lending provided + another source of credit + to home buyers and + +On line 1071: + another source of + credit to home buyers and + other borrowers + +On line 1071: + other borrowers + that softened a steep decline + in lending by thrifts + +On line 1071: + that softened a steep + decline in lending by thrifts + and banks. The system’s + +On line 1071: + decline in lending + by thrifts and banks. The system’s + resilience following + +On line 1071: + by thrifts and banks. The + system’s resilience following + the crisis in Asian + +On line 1071: + the crisis in Asian + financial markets in the + late 1990s further proved + +On line 1073: + financial markets + in the late 1990s further proved + his point, Greenspan said.23 The + +On line 1073: + the late 1990s further + proved his point, Greenspan said.23 The new + regime encouraged growth + +On line 1073: + late 1990s further proved + his point, Greenspan said.23 The new regime + encouraged growth and + +On line 1073: + his point, Greenspan said.23 The + new regime encouraged growth and + consolidation + +On line 1073: + securities, and + insurance. The bank-centered + financial holding + +On line 1073: + companies such as + Citigroup, JP Morgan, and + Bank of America + +On line 1073: + JP Morgan, and Bank + of America could compete + directly with the + +On line 1073: + of America could + compete directly with the + "big five" investment + +On line 1073: + five" investment banks—Goldman + Sachs, Morgan Stanley, Merrill + Lynch, Lehman Brothers, and + +On line 1073: + investment banks—Goldman Sachs, + Morgan Stanley, Merrill Lynch, + Lehman Brothers, and Bear + +On line 1073: + loan syndication, + and trading in over-the-counter (OTC) + derivatives. The + +On line 1073: + holding companies + became major players in + investment banking. + +On line 1073: + The strategies of the + largest commercial banks and their + holding companies + +On line 1073: + largest commercial banks + and their holding companies + came to more closely + +On line 1073: + came to more closely + resemble the strategies of + investment banks. Each + +On line 1073: + Each had advantages: + commercial banks enjoyed greater + access to insured + +On line 1073: + insured deposits, and + the investment banks enjoyed + less regulation. + +On line 1073: + the investment banks + enjoyed less regulation. + Both prospered from the + +On line 1073: + less regulation. + Both prospered from the late 1990s + until the outbreak + +On line 1073: + Both prospered from the + late 1990s until the outbreak + of the financial + +On line 1073: + until the outbreak + of the financial crisis + in However, Greenspan’s + +On line 1073: + of the financial + crisis in However, Greenspan’s + "spare tire" that had helped + +On line 1073: + financial crisis + in However, Greenspan’s "spare tire" + that had helped make the + +On line 1073: + that had helped make the + system less vulnerable + would be gone when the + +On line 1073: + make the system less + vulnerable would be gone + when the financial + +On line 1073: + vulnerable would + be gone when the financial + crisis emerged—all the wheels + +On line 1073: + would be gone when the + financial crisis emerged—all the + wheels of the system + +On line 1073: + financial crisis + emerged—all the wheels of the system + would be spinning on + +On line 1075: + wheels of the system + would be spinning on the same + axle. LONGTERM CAPITAL + +On line 1077: + would be spinning on + the same axle. LONGTERM CAPITAL + MANAGEMENT: "THAT’S WHAT + +On line 1077: + on the same axle. LONGTERM + CAPITAL MANAGEMENT: "THAT’S + WHAT HISTORY HAD + +On line 1079: + MANAGEMENT: "THAT’S WHAT + HISTORY HAD PROVED TO THEM" + In August Russia + +On line 1079: + "THAT’S WHAT HISTORY + HAD PROVED TO THEM" In August + Russia defaulted + +On line 1079: + HISTORY HAD PROVED + TO THEM" In August Russia + defaulted on part + +On line 1079: + TO THEM" In August + Russia defaulted on part + of its national + +On line 1079: + Russia announced it + would restructure its debt and + postpone some payments. + +On line 1079: + would restructure its + debt and postpone some payments. + In the aftermath, + +On line 1079: + debt and postpone some + payments. In the aftermath, + investors dumped higher-risk + +On line 1079: + investors dumped higher-risk + securities, including + those having nothing + +On line 1079: + those having nothing + to do with Russia, and fled + to the safety of + +On line 1079: + having nothing to + do with Russia, and fled to + the safety of U.S. + +On line 1079: + to do with Russia, + and fled to the safety of + U.S. Treasury bills and + +On line 1079: + do with Russia, and + fled to the safety of U.S. + Treasury bills and FDIC-insured + +On line 1079: + Russia, and fled to + the safety of U.S. Treasury + bills and FDIC-insured deposits. + +On line 1079: + fled to the safety + of U.S. Treasury bills and FDIC-insured + deposits. In response, + +On line 1079: + U.S. Treasury bills and + FDIC-insured deposits. In response, the + Federal Reserve + +On line 1079: + bills and FDIC-insured deposits. + In response, the Federal + Reserve cut short-term + +On line 1079: + deposits. In response, + the Federal Reserve cut + short-term interest + +On line 1079: + Federal Reserve + cut short-term interest rates + three times in seven + +On line 1079: + Reserve cut short-term + interest rates three times in + seven weeks.24 With the + +On line 1079: + short-term interest + rates three times in seven weeks.24 + With the commercial + +On line 1079: + interest rates three + times in seven weeks.24 With the + commercial paper + +On line 1079: + times in seven weeks.24 + With the commercial paper + market in turmoil, + +On line 1079: + seven weeks.24 With the + commercial paper market + in turmoil, it was + +On line 1079: + With the commercial + paper market in turmoil, + it was up to the + +On line 1079: + paper market in + turmoil, it was up to the + commercial banks to + +On line 1079: + in turmoil, it was + up to the commercial banks + to take up the slack + +On line 1079: + turmoil, it was up + to the commercial banks to + take up the slack by + +On line 1079: + it was up to the + commercial banks to take up + the slack by lending + +On line 1079: + commercial banks to + take up the slack by lending + to corporations + +On line 1079: + take up the slack by + lending to corporations + that could not roll over + +On line 1079: + slack by lending to + corporations that could not + roll over their short-term + +On line 1079: + short-term paper. Banks + loaned billion in September + and October of + +On line 1081: + in September and + October of 1998—about times the + usual amount25—and helped + +On line 1081: + amount25—and helped prevent + a serious disruption + from becoming much + +On line 1083: + from becoming much + worse. The economy avoided + a slump. Not so for + +On line 1083: + becoming much worse. + The economy avoided a + slump. Not so for Long-Term + +On line 1083: + a slump. Not so for + Long-Term Capital Management, + a large U.S. hedge fund. + +On line 1083: + slump. Not so for Long-Term + Capital Management, a + large U.S. hedge fund. LTCM + +On line 1083: + debt securities, + including the junk bonds and + emerging market debt + +On line 1083: + junk bonds and emerging + market debt that investors were + dumping.26 To buy these + +On line 1083: + investors were dumping.26 + To buy these securities, + the firm had borrowed + +On line 1083: + dumping.26 To buy these + securities, the firm had + borrowed for every + +On line 1083: + borrowed for every + of investors’ equity;27 lenders + included Merrill + +On line 1083: + investors’ equity;27 + lenders included Merrill Lynch, + JP Morgan, Morgan + +On line 1083: + Lehman Brothers, Goldman + Sachs, and Chase Manhattan. The + previous four years, + +On line 1087: + returns: and while the + S&P yielded an average + But leverage works both + +On line 1087: + while the S&P yielded + an average But leverage + works both ways, and in + +On line 1087: + the S&P yielded an + average But leverage works + both ways, and in just + +On line 1087: + an average But + leverage works both ways, and in + just one month after + +On line 1087: + works both ways, and in + just one month after Russia’s + partial default, the + +On line 1087: + ways, and in just one + month after Russia’s partial + default, the fund lost + +On line 1087: + month after Russia’s + partial default, the fund lost + more than billion—or more + +On line 1087: + partial default, the + fund lost more than billion—or more + than of its nearly + +On line 1087: + default, the fund lost + more than billion—or more than of + its nearly billion + +On line 1087: + more than billion—or more + than of its nearly billion + in capital. Its + +On line 1087: + than billion—or more than + of its nearly billion in + capital. Its debt + +On line 1087: + than of its nearly + billion in capital. Its + debt was about billion. + +On line 1087: + its nearly billion + in capital. Its debt was + about billion. The firm + +On line 1087: + nearly billion in + capital. Its debt was about + billion. The firm faced + +On line 1087: + in capital. Its + debt was about billion. The firm + faced insolvency.29 + +On line 1089: + capital. Its debt + was about billion. The firm faced + insolvency.29 If + +On line 1089: + debt was about billion. + The firm faced insolvency.29 + If it were only + +On line 1089: + was about billion. The + firm faced insolvency.29 If + it were only a + +On line 1089: + billion. The firm faced + insolvency.29 If it were + only a matter + +On line 1089: + insolvency.29 If + it were only a matter + of less than billion, + +On line 1089: + it were only a + matter of less than billion, + LTCM’s failure might have + +On line 1089: + a matter of less + than billion, LTCM’s failure might + have been manageable. + +On line 1089: + matter of less than + billion, LTCM’s failure might have + been manageable. But + +On line 1089: + billion, LTCM’s failure + might have been manageable. But + the firm had further + +On line 1089: + LTCM’s failure might have + been manageable. But the firm + had further leveraged + +On line 1089: + entering into + derivatives contracts with + more than trillion in + +On line 1089: + with more than trillion + in notional amount—mostly + interest rate and + +On line 1089: + derivatives.30 With + very little capital in + reserve, it threatened + +On line 1089: + in the opaque over-the-counter + market, the markets did not + know the size of its + +On line 1089: + over-the-counter market, the + markets did not know the size + of its positions + +On line 1089: + market, the markets + did not know the size of its + positions or the + +On line 1089: + markets did not know + the size of its positions + or the fact that it + +On line 1089: + not know the size of + its positions or the fact + that it had posted + +On line 1089: + know the size of its + positions or the fact that + it had posted very + +On line 1089: + that it had posted + very little collateral + against those positions. + +On line 1089: + it had posted very + little collateral against + those positions. As + +On line 1089: + collateral against + those positions. As the Fed + noted then, if all + +On line 1089: + positions. As the + Fed noted then, if all the + fund’s counterparties + +On line 1089: + noted then, if all + the fund’s counterparties had + tried to liquidate + +On line 1089: + would have created + "exaggerated" losses. + This was a classic + +On line 1089: + "exaggerated" + losses. This was a classic + setup for a run: + +On line 1089: + losses. This was a + classic setup for a run: + losses were likely, + +On line 1089: + classic setup for + a run: losses were likely, + but nobody knew who + +On line 1089: + for a run: losses + were likely, but nobody knew + who would get burned. The + +On line 1089: + a run: losses were + likely, but nobody knew who + would get burned. The Fed + +On line 1089: + losses were likely, + but nobody knew who would get + burned. The Fed worried + +On line 1089: + but nobody knew who + would get burned. The Fed worried + that with financial + +On line 1089: + burned. The Fed worried + that with financial markets + already fragile, these + +On line 1089: + Fed worried that with + financial markets already + fragile, these losses + +On line 1089: + that with financial + markets already fragile, these + losses would spill over + +On line 1089: + fragile, these losses + would spill over to investors with + no relationship + +On line 1089: + spill over to investors + with no relationship to + LTCM, and credit and + +On line 1089: + to LTCM, and credit + and derivatives markets + might "cease to function + +On line 1089: + LTCM, and credit and + derivatives markets might + "cease to function for + +On line 1089: + and derivatives + markets might "cease to function + for a period + +On line 1089: + markets might "cease to + function for a period + of one or more days + +On line 1089: + might "cease to function + for a period of one + or more days and maybe + +On line 1089: + "cease to function for + a period of one or + more days and maybe longer."31 + +On line 1091: + to function for a + period of one or more + days and maybe longer."31 To + +On line 1091: + for a period + of one or more days and maybe + longer."31 To avert such a + +On line 1091: + of one or more days + and maybe longer."31 To avert such a + disaster, the Fed + +On line 1091: + and maybe longer."31 To avert + such a disaster, the Fed + called an emergency + +On line 1091: + longer."31 To avert such a + disaster, the Fed called an + emergency meeting + +On line 1091: + such a disaster, + the Fed called an emergency + meeting of major + +On line 1091: + disaster, the Fed + called an emergency meeting + of major banks and + +On line 1091: + called an emergency + meeting of major banks and + securities firms + +On line 1091: + meeting of major + banks and securities firms + with large exposures + +On line 1091: + of major banks and + securities firms with large + exposures to LTCM.32 + +On line 1091: + and securities + firms with large exposures to + LTCM.32 On September + +On line 1091: + agreed to organize + a consortium to inject + billion into LTCM + +On line 1091: + a consortium to + inject billion into LTCM + in return for of + +On line 1091: + to inject billion + into LTCM in return for + of its stock.33 The firms + +On line 1091: + billion into LTCM + in return for of its stock.33 + The firms contributed + +On line 1091: + in return for of + its stock.33 The firms contributed + between million and + +On line 1091: + The firms contributed + between million and million + each, although Bear Stearns + +On line 1091: + million and million + each, although Bear Stearns declined + to participate.34 + +On line 1093: + securities and + derivatives followed. William + McDonough, then president + +On line 1093: + followed. William McDonough, then + president of the New York + Fed, insisted "no + +On line 1093: + president of the + New York Fed, insisted "no + Federal Reserve + +On line 1093: + of the New York Fed, + insisted "no Federal + Reserve official + +On line 1093: + Federal Reserve + official pressured anyone, + and no promises were + +On line 1093: + were made."35 The rescue + involved no government funds. + Nevertheless, the + +On line 1093: + funds. Nevertheless, + the Fed’s orchestration raised + a question: how far + +On line 1093: + Nevertheless, the + Fed’s orchestration raised a + question: how far would + +On line 1093: + Fed’s orchestration + raised a question: how far would + it go to forestall + +On line 1093: + orchestration raised + a question: how far would it + go to forestall what + +On line 1093: + raised a question: how + far would it go to forestall + what it saw as a + +On line 1093: + question: how far would + it go to forestall what it + saw as a systemic + +On line 1093: + how far would it go + to forestall what it saw as + a systemic crisis1 + +On line 1095: + far would it go to + forestall what it saw as a + systemic crisis1 The + +On line 1095: + to forestall what it + saw as a systemic crisis1 + The Fed’s aggressive + +On line 1095: + saw as a systemic + crisis1 The Fed’s aggressive + response had precedents + +On line 1095: + a systemic crisis1 + The Fed’s aggressive response + had precedents in the + +On line 1095: + The Fed’s aggressive + response had precedents in the + previous two decades. + +On line 1097: + had precedents in the + previous two decades. In the + Fed had supported + +On line 1097: + decades. In the Fed had + supported the commercial + paper market; in + +On line 1097: + market; in dealers + in silver futures; in the + repo market; in + +On line 1097: + silver futures; in + the repo market; in the + stock market after + +On line 1097: + stock market after + the Dow Jones Industrial + Average fell by + +On line 1097: + after the Dow Jones + Industrial Average + fell by percent in + +On line 1097: + fell by percent in + three days. All provided a + template for future + +On line 1097: + interest rates and + encouraged financial firms + in the parallel + +On line 1097: + in the parallel + banking and traditional + banking sectors to + +On line 1097: + help ailing markets. + And sometimes it organized + a consortium of + +On line 1097: + it organized a + consortium of financial + institutions to + +On line 1099: + several large banks + that they viewed as "too big to + fail" and protected + +On line 1099: + that they viewed as "too + big to fail" and protected + creditors of those + +On line 1099: + "too big to fail" and + protected creditors of + those banks, including + +On line 1099: + those banks, including + uninsured depositors. Their + rationale was that + +On line 1099: + depositors. Their + rationale was that major + banks were crucial to + +On line 1099: + Their rationale was + that major banks were crucial + to the financial + +On line 1099: + banks were crucial to + the financial markets and + the economy, and + +On line 1099: + to the financial + markets and the economy, + and regulators + +On line 1099: + and the economy, + and regulators could not + allow the collapse + +On line 1099: + and regulators + could not allow the collapse + of one arge bank to + +On line 1099: + could not allow the + collapse of one arge bank to + trigger a panic + +On line 1099: + trigger a panic + among uninsured depositors + that might lead to more + +On line 1099: + panic among uninsured + depositors that might lead + to more bank failures. + +On line 1101: + was a completely + different proposition to + argue that a hedge + +On line 1101: + argue that a hedge + fund could be considered too + big to fail because + +On line 1101: + a hedge fund could be + considered too big to fail + because its collapse + +On line 1101: + big to fail because + its collapse might destabilize + capital markets. + +On line 1101: + rescue indicate + that the Fed was prepared to + protect creditors + +On line 1101: + indicate that the + Fed was prepared to protect + creditors of any + +On line 1101: + the Fed was prepared + to protect creditors of + any type of firm if + +On line 1101: + Fed was prepared to + protect creditors of any + type of firm if its + +On line 1101: + prepared to protect + creditors of any type of + firm if its collapse + +On line 1101: + protect creditors + of any type of firm if its + collapse might threaten + +On line 1101: + any type of firm if + its collapse might threaten the + capital markets1 + +On line 1101: + firm if its collapse + might threaten the capital + markets1 Harvey Miller, + +On line 1101: + markets1 Harvey Miller, + the bankruptcy counsel for + Lehman Brothers when it + +On line 1101: + Miller, the bankruptcy + counsel for Lehman Brothers when + it failed in told the + +On line 1101: + bankruptcy counsel + for Lehman Brothers when it failed + in told the FCIC that + +On line 1101: + Lehman Brothers when it + failed in told the FCIC that "they + [hedge funds] expected + +On line 1101: + Brothers when it failed + in told the FCIC that "they [hedge + funds] expected the + +On line 1101: + failed in told the FCIC + that "they [hedge funds] expected + the Fed to save Lehman, + +On line 1101: + in told the FCIC that + "they [hedge funds] expected the + Fed to save Lehman, based + +On line 1101: + told the FCIC that "they + [hedge funds] expected the Fed + to save Lehman, based on + +On line 1101: + the FCIC that "they [hedge + funds] expected the Fed to + save Lehman, based on the + +On line 1101: + FCIC that "they [hedge funds] + expected the Fed to save + Lehman, based on the Fed’s + +On line 1101: + [hedge funds] expected + the Fed to save Lehman, based on + the Fed’s involvement + +On line 1101: + funds] expected the + Fed to save Lehman, based on the + Fed’s involvement in + +On line 1101: + expected the Fed + to save Lehman, based on the Fed’s + involvement in LTCM’s + +On line 1101: + the Fed to save Lehman, + based on the Fed’s involvement + in LTCM’s rescue. That’s + +On line 1101: + Fed to save Lehman, based + on the Fed’s involvement in + LTCM’s rescue. That’s what + +On line 1101: + Lehman, based on the Fed’s + involvement in LTCM’s rescue. + That’s what history + +On line 1103: + involvement in LTCM’s + rescue. That’s what history + had proved to them."37 For + +On line 1103: + in LTCM’s rescue. That’s + what history had proved to + them."37 For Stanley O’Neal, + +On line 1103: + what history had + proved to them."37 For Stanley O’Neal, + Merrill’s CFO during + +On line 1103: + Stanley O’Neal, Merrill’s + CFO during the LTCM rescue, + the experience + +On line 1105: + CFO during the LTCM + rescue, the experience + was "indelible." He + +On line 1105: + the experience + was "indelible." He told the + FCIC, "The lesson I + +On line 1105: + experience was + "indelible." He told the FCIC, + "The lesson I took + +On line 1105: + was "indelible." He + told the FCIC, "The lesson I + took away from it though + +On line 1105: + "indelible." He told + the FCIC, "The lesson I took + away from it though was + +On line 1105: + He told the FCIC, "The + lesson I took away from it + though was that had the + +On line 1105: + the FCIC, "The lesson + I took away from it though was + that had the market + +On line 1105: + FCIC, "The lesson I + took away from it though was that + had the market seizure + +On line 1105: + "The lesson I took + away from it though was that had + the market seizure and + +On line 1105: + I took away from it + though was that had the market + seizure and panic and + +On line 1105: + took away from it though + was that had the market seizure + and panic and lack + +On line 1105: + away from it though was + that had the market seizure and + panic and lack of + +On line 1105: + and panic and lack + of liquidity lasted + longer, there would have been + +On line 1105: + panic and lack of + liquidity lasted longer, + there would have been a + +On line 1105: + of liquidity + lasted longer, there would have been + a lot of firms across + +On line 1105: + longer, there would have been + a lot of firms across the Street + that were irreparably + +On line 1105: + there would have been a + lot of firms across the Street that + were irreparably harmed, + +On line 1105: + would have been a lot + of firms across the Street that were + irreparably harmed, and + +On line 1105: + a lot of firms across + the Street that were irreparably + harmed, and Merrill would + +On line 1105: + lot of firms across the + Street that were irreparably harmed, + and Merrill would have + +On line 1105: + of firms across the Street + that were irreparably harmed, and + Merrill would have been + +On line 1105: + across the Street that were + irreparably harmed, and Merrill + would have been one of + +On line 1107: + were irreparably harmed, + and Merrill would have been one + of those."38 Greenspan argued + +On line 1107: + irreparably harmed, and + Merrill would have been one of + those."38 Greenspan argued that + +On line 1107: + and Merrill would have + been one of those."38 Greenspan argued + that the events of had + +On line 1107: + would have been one of + those."38 Greenspan argued that the events + of had confirmed the + +On line 1107: + have been one of those."38 + Greenspan argued that the events of + had confirmed the spare + +On line 1107: + been one of those."38 Greenspan + argued that the events of had + confirmed the spare tire + +On line 1107: + those."38 Greenspan argued that + the events of had confirmed the + spare tire theory. + +On line 1107: + Greenspan argued that the + events of had confirmed the spare + tire theory. He + +On line 1107: + argued that the events + of had confirmed the spare tire + theory. He said + +On line 1107: + events of had confirmed + the spare tire theory. He + said in a speech that + +On line 1107: + of had confirmed the + spare tire theory. He said + in a speech that the + +On line 1107: + in a speech that the + successful resolution + of the crisis showed + +On line 1107: + the crisis showed that + "diversity within the + financial sector + +On line 1107: + financial sector + provides insurance against a + financial problem + +On line 1107: + insurance against a + financial problem turning + into economy-wide + +On line 1107: + Financial Markets + came to a less definite + conclusion. In a + +On line 1107: + Markets came to a + less definite conclusion. + In a report, the + +On line 1107: + a less definite + conclusion. In a report, + the group noted that + +On line 1107: + In a report, the + group noted that LTCM and its + counterparties had + +On line 1107: + its counterparties + had "underestimated + the likelihood that + +On line 1107: + the likelihood that + liquidity, credit, and + volatility spreads would + +On line 1107: + and volatility spreads + would move in a similar + fashion in markets + +On line 1107: + in a similar + fashion in markets across the + world at the same time."40 + +On line 1107: + fashion in markets + across the world at the same time."40 + Many financial firms + +On line 1107: + the world at the same + time."40 Many financial firms would + make essentially + +On line 1107: + world at the same time."40 + Many financial firms would make + essentially the + +On line 1107: + time."40 Many financial + firms would make essentially + the same mistake a + +On line 1107: + Many financial firms + would make essentially the + same mistake a decade + +On line 1107: + essentially the + same mistake a decade later. + For the Working Group, + +On line 1107: + the Working Group, this + miscalculation raised an + important issue: + +On line 1107: + important issue: + "As new technology has + fostered a major + +On line 1107: + fostered a major + expansion in the volume + and, in some cases, + +On line 1107: + major expansion + in the volume and, in some + cases, the leverage + +On line 1107: + in the volume and, + in some cases, the leverage + of transactions, some + +On line 1107: + and, in some cases, + the leverage of transactions, + some existing risk + +On line 1107: + severe losses. This + shows the need for insuring + that decisions about + +On line 1107: + that decisions about + the appropriate level + of capital for + +On line 1107: + decisions about the + appropriate level of + capital for risky + +On line 1109: + is explicitly + considered."41 The need for risk + management grew in + +On line 1109: + considered."41 The need + for risk management grew in + the following decade. + +On line 1109: + for risk management + grew in the following decade. + The Working Group was + +On line 1109: + the following decade. + The Working Group was already + concerned that neither + +On line 1109: + The Working Group was + already concerned that neither + the markets nor their + +On line 1109: + was already concerned + that neither the markets nor + their regulators + +On line 1109: + already concerned that + neither the markets nor their + regulators were + +On line 1109: + neither the markets + nor their regulators were + prepared for tail risk—an + +On line 1109: + and the economy. + Nevertheless, it cautioned + that overreacting + +On line 1109: + Nevertheless, it + cautioned that overreacting + to threats such as LTCM + +On line 1109: + to threats such as LTCM + would diminish the dynamism + of the financial + +On line 1109: + the dynamism of the + financial sector and the + real economy: + +On line 1111: + real economy: + "Policy initiatives that + are aimed at simply + +On line 1111: + initiatives that are + aimed at simply reducing + default likelihoods + +On line 1111: + reducing default + likelihoods to extremely + low levels might be + +On line 1111: + activity and + the intermediation + of risks that support + +On line 1113: + Group’s findings, the SEC + five years later would issue + a rule expanding + +On line 1113: + findings, the SEC five + years later would issue a + rule expanding the + +On line 1113: + five years later would + issue a rule expanding + the number of hedge + +On line 1113: + would issue a rule + expanding the number of + hedge fund advisors—to + +On line 1113: + the number of hedge + fund advisors—to include most + advisors—that needed + +On line 1113: + advisors—to include + most advisors—that needed to + register with the + +On line 1113: + advisors—that needed + to register with the SEC. + The rule would be struck + +On line 1113: + register with the + SEC. The rule would be struck down + in by the United + +On line 1113: + with the SEC. The rule + would be struck down in by the + United States Court of + +On line 1113: + SEC. The rule would be + struck down in by the United + States Court of Appeals + +On line 1113: + The rule would be struck + down in by the United States + Court of Appeals for + +On line 1113: + rule would be struck down + in by the United States Court + of Appeals for the + +On line 1113: + struck down in by the + United States Court of Appeals + for the District of + +On line 1113: + United States Court of + Appeals for the District of + Columbia after + +On line 1113: + Court of Appeals for + the District of Columbia + after the SEC was + +On line 1115: + the SEC was sued by + an investment advisor + and hedge fund.43 Markets + +On line 1115: + SEC was sued by an + investment advisor and + hedge fund.43 Markets were + +On line 1115: + were relatively + calm after Glass-Steagall would be deemed + unnecessary, OTC + +On line 1115: + calm after Glass-Steagall would + be deemed unnecessary, OTC + derivatives would + +On line 1115: + deemed unnecessary, + OTC derivatives would be + deregulated, and + +On line 1115: + OTC derivatives + would be deregulated, and + the stock market and + +On line 1115: + derivatives would + be deregulated, and the + stock market and the + +On line 1115: + stock market and the + economy would continue + to prosper for some + +On line 1115: + and the economy + would continue to prosper + for some time. Like all + +On line 1115: + the economy would + continue to prosper for + some time. Like all the + +On line 1115: + would continue to + prosper for some time. Like all + the others (with the + +On line 1115: + to prosper for some + time. Like all the others (with + the exception of + +On line 1115: + prosper for some time. + Like all the others (with the + exception of the + +On line 1115: + Like all the others + (with the exception of the + Great Depression), this + +On line 1115: + (with the exception + of the Great Depression), this + crisis soon faded + +On line 1115: + exception of the + Great Depression), this crisis + soon faded into + +On line 1115: + Great Depression), this + crisis soon faded into + memory. But not + +On line 1115: + soon faded into + memory. But not before, + in February Time + +On line 1115: + memory. But not + before, in February Time + magazine featured + +On line 1115: + But not before, in + February Time magazine + featured Robert Rubin, + +On line 1115: + magazine featured + Robert Rubin, Larry Summers, + and Alan Greenspan on its + +On line 1115: + featured Robert Rubin, + Larry Summers, and Alan Greenspan + on its cover as + +On line 1115: + Larry Summers, and + Alan Greenspan on its cover as + "The Committee to + +On line 1115: + Greenspan on its cover + as "The Committee to Save + the World." Federal + +On line 1115: + its cover as "The + Committee to Save the World." + Federal Reserve + +On line 1115: + as "The Committee + to Save the World." Federal + Reserve Chairman Greenspan + +On line 1115: + Committee to Save + the World." Federal Reserve + Chairman Greenspan became + +On line 1115: + the World." Federal + Reserve Chairman Greenspan became + a cult hero—the "Maestro"—who + +On line 1115: + Reserve Chairman Greenspan + became a cult hero—the "Maestro"—who + had handled every + +On line 1115: + became a cult hero—the + "Maestro"—who had handled every + emergency since the + +On line 1115: + cult hero—the "Maestro"—who had + handled every emergency + since the stock market + +On line 1119: + emergency since the + stock market crash.44 DOTCOM CRASH: + "LAY ON MORE RISK" The + +On line 1119: + since the stock market + crash.44 DOTCOM CRASH: "LAY ON MORE + RISK" The late 1990s was + +On line 1119: + the stock market crash.44 + DOTCOM CRASH: "LAY ON MORE RISK" + The late 1990s was a + +On line 1119: + market crash.44 DOTCOM + CRASH: "LAY ON MORE RISK" The late + 1990s was a good time + +On line 1119: + "LAY ON MORE RISK" The + late 1990s was a good time for + investment banking. + +On line 1119: + RISK" The late 1990s was + a good time for investment + banking. Annual + +On line 1119: + late 1990s was a good + time for investment banking. + Annual public + +On line 1119: + securities in + U.S. markets almost quadrupled, + from billion in to + +On line 1119: + almost quadrupled, from + billion in to trillion in + Annual initial + +On line 1119: + in to trillion in + Annual initial public + offerings of stocks + +On line 1119: + Annual initial + public offerings of stocks + (IPOs) soared from billion + +On line 1119: + public offerings + of stocks (IPOs) soared from billion + in to billion in + +On line 1119: + offerings of stocks + (IPOs) soared from billion in to + billion in as banks + +On line 1119: + (IPOs) soared from billion + in to billion in as banks + and securities + +On line 1119: + soared from billion in + to billion in as banks and + securities firms + +On line 1119: + in to billion in + as banks and securities + firms sponsored IPOs for + +On line 1119: + to billion in as + banks and securities firms + sponsored IPOs for new + +On line 1119: + telecommunications + companies—the dot-coms + and telecoms.45 A stock + +On line 1119: + companies—the + dot-coms and telecoms.45 A stock + market boom ensued + +On line 1119: + dot-coms and telecoms.45 + A stock market boom ensued + comparable to + +On line 1119: + A stock market boom + ensued comparable to + the great bull market + +On line 1119: + market boom ensued + comparable to the great + bull market of the + +On line 1119: + comparable to + the great bull market of the + 1920s. The value of + +On line 1119: + the great bull market + of the 1920s. The value of + publicly traded stocks + +On line 1119: + bull market of the + 1920s. The value of publicly + traded stocks rose from + +On line 1119: + value of publicly + traded stocks rose from trillion + in December to + +On line 1119: + traded stocks rose from + trillion in December to + trillion in March The + +On line 1119: + stocks rose from trillion + in December to trillion + in March The boom was + +On line 1119: + in December to + trillion in March The boom was + particularly + +On line 1119: + trillion in March The + boom was particularly + striking in recent + +On line 1119: + in March The boom was + particularly striking + in recent dot-com + +On line 1119: + particularly + striking in recent dot-com + and telecom issues + +On line 1119: + in recent dot-com + and telecom issues on the + NASDAQ exchange. Over + +On line 1119: + and telecom issues + on the NASDAQ exchange. Over + this period, the + +On line 1119: + NASDAQ exchange. Over + this period, the NASDAQ + skyrocketed from + +On line 1121: + Over this period, + the NASDAQ skyrocketed + from to In the spring + +On line 1121: + this period, the + NASDAQ skyrocketed from + to In the spring of + +On line 1121: + skyrocketed from + to In the spring of the tech + bubble burst. The "new + +On line 1121: + to In the spring of + the tech bubble burst. The "new + economy" dot-coms + +On line 1121: + the tech bubble burst. + The "new economy" dot-coms + and telecoms had failed + +On line 1121: + tech bubble burst. The + "new economy" dot-coms and + telecoms had failed to + +On line 1121: + telecoms had failed to + match the lofty expectations + of investors, who had + +On line 1121: + failed to match the lofty + expectations of investors, + who had relied on + +On line 1121: + lofty expectations + of investors, who had relied + on bullish—and, as it + +On line 1121: + expectations of + investors, who had relied on + bullish—and, as it turned + +On line 1121: + bullish—and, as it turned + out, sometimes deceptive—research + reports issued by + +On line 1121: + by the same banks and + securities firms that had + underwritten the + +On line 1121: + and securities + firms that had underwritten + the tech companies’ + +On line 1121: + had underwritten + the tech companies’ initial + public offerings. + +On line 1121: + the tech companies’ + initial public offerings. + Between March and March + +On line 1121: + offerings. Between + March and March the NASDAQ fell + by almost two-thirds. This + +On line 1121: + and March the NASDAQ + fell by almost two-thirds. This slump + accelerated + +On line 1121: + as the nation slipped + into recession. Investors + were further shaken + +On line 1121: + into recession. + Investors were further shaken + by revelations + +On line 1121: + Investors were further + shaken by revelations + of accounting frauds + +On line 1121: + and other scandals + at prominent firms such as + Enron and World-com. + +On line 1121: + prominent firms such + as Enron and World-com. Some + leading commercial + +On line 1121: + leading commercial + and investment banks settled + with regulators + +On line 1121: + with regulators + over improper practices in + the allocation + +On line 1121: + regulators over + improper practices in the + allocation of + +On line 1121: + improper practices + in the allocation of + IPO shares during the + +On line 1121: + IPO shares during the + bubble—for spinning (doling + out shares in "hot" IPOs + +On line 1121: + spinning (doling out + shares in "hot" IPOs in return + for reciprocal + +On line 1121: + IPOs in return for + reciprocal business) and + laddering (doling + +On line 1121: + laddering (doling + out shares to investors who agreed + to buy more later + +On line 1121: + (doling out shares to + investors who agreed to buy more + later at higher + +On line 1121: + out shares to investors + who agreed to buy more later + at higher prices).47 The + +On line 1121: + at higher prices).47 The + regulators also found + that public research + +On line 1121: + New York’s attorney + general, the National + Association + +On line 1121: + Association + of Securities Dealers + (now FINRA), and state + +On line 1121: + state regulators + settled enforcement actions + against firms for million, + +On line 1121: + enforcement actions + against firms for million, forbade + certain practices, and + +On line 1123: + certain practices, and + instituted reforms.48 The + sudden collapses + +On line 1123: + reforms.48 The sudden + collapses of Enron and + WorldCom were shocking; with + +On line 1123: + of Enron and WorldCom + were shocking; with assets of + billion and billion, + +On line 1125: + Morgan, Merrill Lynch, + and other Wall Street banks paid + billions of dollars—although + +On line 1125: + dollars—although admitted + no wrongdoing—for helping + Enron hide its debt + +On line 1125: + no wrongdoing—for + helping Enron hide its debt + until just before + +On line 1125: + helping Enron hide + its debt until just before + its collapse. Enron + +On line 1125: + until just before + its collapse. Enron and its + bankers had created + +On line 1125: + its collapse. Enron + and its bankers had created + entities to do + +On line 1125: + complex transactions + generating fictitious + earnings, disguised debt + +On line 1125: + banks had pressured their + analysts to write glowing + valuations of + +On line 1125: + analysts to write + glowing valuations of + Enron. The scandal + +On line 1125: + Enron. The scandal + cost Citigroup, JP Morgan, + CIBC, Merrill Lynch, and + +On line 1125: + cost Citigroup, JP + Morgan, CIBC, Merrill Lynch, and + other financial + +On line 1125: + Morgan, CIBC, Merrill + Lynch, and other financial + institutions more + +On line 1125: + settlements with the + SEC; Citigroup, JP Morgan, + CIBC, Lehman Brothers, and + +On line 1125: + SEC; Citigroup, JP + Morgan, CIBC, Lehman Brothers, and + Bank of America + +On line 1127: + Brothers, and Bank of + America paid another + billion to investors + +On line 1127: + Bank of America + paid another billion to + investors to settle + +On line 1127: + another billion + to investors to settle class + action lawsuits.49 In + +On line 1127: + settle class action + lawsuits.49 In response, the Sarbanes-Oxley + Act of required the + +On line 1127: + response, the Sarbanes-Oxley Act + of required the personal + certification + +On line 1127: + reports by CEOs and + CFOs; independent audit + committees; longer jail + +On line 1127: + CFOs; independent + audit committees; longer jail + sentences and larger + +On line 1127: + committees; longer jail + sentences and larger fines for + executives who + +On line 1127: + sentences and larger + fines for executives who + misstate financial + +On line 1127: + and larger fines for + executives who misstate + financial results; + +On line 1127: + executives who + misstate financial results; + and protections for + +On line 1129: + misstate financial + results; and protections for + whistleblowers. Some firms + +On line 1129: + and protections for + whistleblowers. Some firms that lent + to companies that + +On line 1129: + for whistleblowers. Some + firms that lent to companies + that failed during the + +On line 1129: + whistleblowers. Some firms + that lent to companies that + failed during the stock + +On line 1129: + Some firms that lent to + companies that failed during + the stock market bust + +On line 1129: + companies that failed + during the stock market bust + were successfully + +On line 1129: + stock market bust were + successfully hedged, having + earlier purchased + +On line 1129: + successfully hedged, + having earlier purchased + credit default swaps + +On line 1131: + earlier purchased + credit default swaps on these + firms. Regulators + +On line 1131: + credit default swaps + on these firms. Regulators + seemed to draw comfort + +On line 1131: + default swaps on these + firms. Regulators seemed to + draw comfort from the + +On line 1131: + firms. Regulators + seemed to draw comfort from the + fact that major banks + +On line 1131: + Regulators seemed + to draw comfort from the fact + that major banks had + +On line 1131: + seemed to draw comfort + from the fact that major banks + had succeeded in + +On line 1131: + banks had succeeded + in transferring losses from + those relationships + +On line 1131: + had succeeded in + transferring losses from those + relationships to + +On line 1131: + transferring losses + from those relationships to + investors through these and + +On line 1131: + relationships to + investors through these and other + hedging transactions. + +On line 1131: + investors through these and + other hedging transactions. + In November Fed + +On line 1131: + and other hedging + transactions. In November + Fed Chairman Greenspan said + +On line 1131: + have effectively + spread losses" from defaults by + Enron and other + +On line 1131: + Enron and other + large corporations. Although + he conceded the + +On line 1131: + large corporations. + Although he conceded the + market was "still too + +On line 1131: + was "still too new to + have been tested" thoroughly, + he observed that "to + +On line 1131: + "still too new to have + been tested" thoroughly, he + observed that "to date, + +On line 1131: + to have been tested" + thoroughly, he observed that + "to date, it appears + +On line 1133: + observed that "to date, + it appears to have functioned + well."50 The following + +On line 1133: + it appears to have + functioned well."50 The following + year, Fed Vice Chairman + +On line 1133: + following year, Fed + Vice Chairman Roger Ferguson + noted that "the most + +On line 1133: + year, Fed Vice Chairman + Roger Ferguson noted that + "the most remarkable + +On line 1133: + Fed Vice Chairman Roger + Ferguson noted that "the + most remarkable fact + +On line 1133: + "the most remarkable + fact regarding the banking + industry during + +On line 1133: + fact regarding the + banking industry during + this period is + +On line 1133: + this period is + its resilience and retention + of fundamental + +On line 1133: + period is its + resilience and retention of + fundamental strength."51 + +On line 1135: + achieved unprecedented + stability and strong risk + management. The Wall + +On line 1135: + stability and + strong risk management. The Wall + Street banks’ pivotal role + +On line 1135: + management. The Wall + Street banks’ pivotal role in the + Enron debacle + +On line 1135: + banks’ pivotal role in + the Enron debacle did + not seem to trouble + +On line 1135: + role in the Enron + debacle did not seem to + trouble senior Fed + +On line 1135: + debacle did not + seem to trouble senior Fed + officials. In a + +On line 1135: + not seem to trouble + senior Fed officials. In + a memorandum + +On line 1135: + Fed officials. In + a memorandum to the + FCIC, Richard Spillenkothen described + +On line 1135: + officials. In a + memorandum to the FCIC, + Richard Spillenkothen described a + +On line 1135: + a memorandum + to the FCIC, Richard Spillenkothen described + a presentation + +On line 1135: + memorandum to + the FCIC, Richard Spillenkothen described a + presentation to + +On line 1135: + FCIC, Richard Spillenkothen described + a presentation to the + Board of Governors + +On line 1135: + Richard Spillenkothen described a + presentation to the Board + of Governors in + +On line 1135: + Board of Governors + in which some Fed governors + received details of + +On line 1135: + Governors in which + some Fed governors received + details of the banks’ + +On line 1135: + details of the banks’ + complicity "coolly" and + were "clearly unimpressed" + +On line 1135: + "The message to some + supervisory staff was + neither ambiguous + +On line 1135: + supervisory + staff was neither ambiguous + nor subtle," Spillenkothen wrote. + +On line 1135: + nor subtle," Spillenkothen wrote. + Earlier in the decade, he + remembered, senior + +On line 1135: + Spillenkothen wrote. Earlier + in the decade, he remembered, + senior economists + +On line 1135: + Earlier in the + decade, he remembered, senior + economists at the + +On line 1135: + decade, he remembered, + senior economists at the + Fed had called Enron + +On line 1135: + senior economists + at the Fed had called Enron + an example of + +On line 1135: + at the Fed had called + Enron an example of + a derivatives + +On line 1135: + regulated by + market discipline without + government oversight.52 + +On line 1137: + discipline without + government oversight.52 The Fed + cut interest rates + +On line 1137: + government oversight.52 + The Fed cut interest rates + aggressively in + +On line 1137: + cut interest rates + aggressively in order + to contain damage + +On line 1137: + aggressively in + order to contain damage + from the dot-com and + +On line 1137: + to contain damage + from the dot-com and telecom + bust, the terrorist + +On line 1137: + dot-com and telecom + bust, the terrorist attacks, + and the financial + +On line 1137: + and telecom bust, the + terrorist attacks, and the + financial market + +On line 1137: + bust, the terrorist + attacks, and the financial + market scandals. In + +On line 1137: + financial market + scandals. In January the + federal funds rate, + +On line 1137: + In January the + federal funds rate, the overnight + bank-to-bank lending rate, + +On line 1139: + the federal funds + rate, the overnight bank-to-bank lending + rate, was By mid-2003, the + +On line 1139: + federal funds rate, + the overnight bank-to-bank lending rate, + was By mid-2003, the Fed + +On line 1139: + rate, the overnight bank-to-bank + lending rate, was By mid-2003, the + Fed had cut that rate + +On line 1139: + overnight bank-to-bank lending + rate, was By mid-2003, the Fed had + cut that rate to just + +On line 1139: + bank-to-bank lending rate, + was By mid-2003, the Fed had cut + that rate to just the + +On line 1139: + lending rate, was By + mid-2003, the Fed had cut that rate + to just the lowest + +On line 1139: + rate, was By mid-2003, the + Fed had cut that rate to just + the lowest in half + +On line 1139: + was By mid-2003, the Fed + had cut that rate to just the + lowest in half a + +On line 1139: + the Fed had cut that + rate to just the lowest in + half a century, + +On line 1139: + Fed had cut that rate + to just the lowest in half + a century, where + +On line 1139: + had cut that rate to + just the lowest in half a + century, where it + +On line 1139: + just the lowest in + half a century, where it + stayed for another + +On line 1139: + the lowest in half + a century, where it stayed + for another year. + +On line 1139: + lowest in half a + century, where it stayed for + another year. In + +On line 1139: + half a century, + where it stayed for another + year. In addition, + +On line 1139: + a century, where + it stayed for another year. + In addition, to + +On line 1139: + another year. In + addition, to offset the + market disruptions + +On line 1141: + financial markets + with money by purchasing + more than billion in + +On line 1141: + by purchasing more + than billion in government + securities and + +On line 1141: + more than billion in + government securities + and lending billion + +On line 1141: + securities and + lending billion to banks. It + also suspended + +On line 1141: + lending billion to + banks. It also suspended + restrictions on bank + +On line 1141: + also suspended + restrictions on bank holding + companies so the + +On line 1141: + restrictions on bank + holding companies so the + banks could make large loans + +On line 1141: + the banks could make large + loans to their securities + affiliates. With + +On line 1141: + these actions the Fed + prevented a protracted + liquidity crunch + +On line 1141: + liquidity crunch + in the financial markets + during the fall of + +On line 1141: + in the financial + markets during the fall of + just as it had done + +On line 1141: + financial markets + during the fall of just as + it had done during + +On line 1141: + during the fall of + just as it had done during + the stock market crash + +On line 1141: + the fall of just as + it had done during the stock + market crash and the + +On line 1141: + of just as it had + done during the stock market + crash and the Russian + +On line 1143: + it had done during + the stock market crash and the + Russian crisis. Why + +On line 1143: + done during the stock + market crash and the Russian + crisis. Why wouldn’t + +On line 1143: + the stock market crash + and the Russian crisis. Why + wouldn’t the markets + +On line 1143: + market crash and the + Russian crisis. Why wouldn’t + the markets assume + +On line 1143: + Russian crisis. Why + wouldn’t the markets assume + the central bank would + +On line 1143: + wouldn’t the markets + assume the central bank would + act again—and again save the + +On line 1143: + the markets assume + the central bank would act again—and + again save the day1 Two + +On line 1143: + markets assume the + central bank would act again—and again + save the day1 Two weeks + +On line 1143: + assume the central + bank would act again—and again save the + day1 Two weeks before + +On line 1143: + the central bank would + act again—and again save the day1 Two + weeks before the Fed + +On line 1143: + central bank would act + again—and again save the day1 Two weeks + before the Fed cut + +On line 1143: + bank would act again—and again + save the day1 Two weeks before + the Fed cut short-term + +On line 1143: + would act again—and again save + the day1 Two weeks before the + Fed cut short-term rates + +On line 1143: + act again—and again save the + day1 Two weeks before the Fed + cut short-term rates in + +On line 1143: + save the day1 Two weeks + before the Fed cut short-term + rates in January + +On line 1143: + cut short-term rates in + January the Economist + anticipated + +On line 1143: + anticipated + it: "the ‘Greenspan put’ is once again + the talk of Wall Street. + +On line 1145: + it: "the ‘Greenspan put’ is + once again the talk of Wall Street. + The idea is that the + +On line 1145: + put’ is once again the + talk of Wall Street. The idea is + that the Federal + +On line 1145: + once again the talk of + Wall Street. The idea is that the + Federal Reserve + +On line 1145: + Street. The idea is that + the Federal Reserve can + be relied upon + +On line 1145: + The idea is that the + Federal Reserve can be + relied upon in + +On line 1145: + Federal Reserve + can be relied upon in + times of crisis to + +On line 1145: + relied upon in + times of crisis to come to + the rescue, cutting + +On line 1145: + times of crisis to + come to the rescue, cutting + interest rates and + +On line 1145: + the rescue, cutting + interest rates and pumping + in liquidity, + +On line 1145: + interest rates and + pumping in liquidity, + thus providing a + +On line 1145: + in liquidity, + thus providing a floor for + equity prices."53 The + +On line 1145: + providing a floor + for equity prices."53 The "Greenspan + put" was analysts’ + +On line 1145: + for equity prices."53 + The "Greenspan put" was analysts’ + shorthand for investors’ + +On line 1145: + put" was analysts’ + shorthand for investors’ faith that + the Fed would keep the + +On line 1145: + shorthand for investors’ + faith that the Fed would keep the + capital markets + +On line 1145: + investors’ faith that the + Fed would keep the capital + markets functioning + +On line 1145: + capital markets + functioning no matter what. + The Fed’s policy + +On line 1145: + no matter what. The + Fed’s policy was clear: to + restrain growth of an + +On line 1145: + The Fed’s policy + was clear: to restrain growth of + an asset bubble, + +On line 1145: + Fed’s policy was + clear: to restrain growth of an + asset bubble, it + +On line 1145: + was clear: to restrain + growth of an asset bubble, + it would take only + +On line 1145: + clear: to restrain growth + of an asset bubble, it + would take only small + +On line 1145: + to restrain growth of + an asset bubble, it would + take only small steps, + +On line 1145: + restrain growth of an + asset bubble, it would take + only small steps, such + +On line 1145: + asset bubble, it + would take only small steps, such + as warning investors + +On line 1145: + would take only small + steps, such as warning investors + some asset prices might + +On line 1145: + take only small steps, + such as warning investors some + asset prices might fall; + +On line 1145: + steps, such as warning + investors some asset prices might + fall; but after a + +On line 1145: + as warning investors + some asset prices might fall; but + after a bubble + +On line 1145: + investors some asset + prices might fall; but after a + bubble burst, it would + +On line 1145: + some asset prices might + fall; but after a bubble + burst, it would use all + +On line 1145: + asset prices might fall; + but after a bubble burst, + it would use all the + +On line 1145: + might fall; but after + a bubble burst, it would use + all the tools available + +On line 1145: + fall; but after a + bubble burst, it would use all + the tools available to + +On line 1145: + a bubble burst, it + would use all the tools available + to stabilize the + +On line 1145: + would use all the tools + available to stabilize the + markets. Greenspan argued + +On line 1145: + bursting a bubble + would heavily damage the + economy. "Instead + +On line 1145: + heavily damage + the economy. "Instead of + trying to contain + +On line 1145: + economy. "Instead + of trying to contain a + putative bubble + +On line 1145: + "Instead of trying + to contain a putative + bubble by drastic + +On line 1145: + trying to contain + a putative bubble by + drastic actions with + +On line 1145: + actions with largely + unpredictable consequences," he + said in when housing + +On line 1145: + in when housing prices + were ballooning, "we chose to + focus on policies + +On line 1145: + were ballooning, "we + chose to focus on policies + ‘to mitigate the + +On line 1145: + "we chose to focus + on policies ‘to mitigate + the fallout when it + +On line 1145: + focus on policies + ‘to mitigate the fallout + when it occurs and, + +On line 1145: + ‘to mitigate the + fallout when it occurs and, + hopefully, ease the + +On line 1145: + the fallout when it + occurs and, hopefully, ease + the transition to + +On line 1147: + policy—allowing + unrestrained growth, then working + hard to cushion the + +On line 1147: + then working hard to + cushion the impact of a + bust—raised the question + +On line 1147: + cushion the impact + of a bust—raised the question + of "moral hazard": did + +On line 1147: + the question of "moral + hazard": did the policy + encourage investors + +On line 1147: + institutions to + gamble because their upside + was unlimited + +On line 1147: + gamble because their + upside was unlimited + while the full power + +On line 1147: + their downside (at least + against catastrophic losses)1 + Greenspan himself warned about + +On line 1147: + downside (at least against + catastrophic losses)1 Greenspan + himself warned about this + +On line 1147: + Greenspan himself warned about + this in a speech, noting that + higher asset prices + +On line 1147: + about this in a speech, + noting that higher asset + prices were "in part the + +On line 1147: + a speech, noting that + higher asset prices were "in + part the indirect + +On line 1147: + noting that higher + asset prices were "in part the + indirect result + +On line 1147: + higher asset prices + were "in part the indirect + result of investors + +On line 1147: + investors accepting + lower compensation for + risk" and cautioning + +On line 1147: + liquidity can + readily disappear."55 Yet + the only real + +On line 1147: + disappear."55 Yet the + only real action would + be an upward march + +On line 1147: + real action would + be an upward march of the + federal funds rate + +On line 1147: + would be an upward + march of the federal funds + rate that had begun + +On line 1147: + be an upward march + of the federal funds rate + that had begun in + +On line 1147: + an upward march of + the federal funds rate that + had begun in the + +On line 1147: + the federal funds + rate that had begun in the + summer of although, + +On line 1147: + rate that had begun + in the summer of although, + as he pointed out + +On line 1147: + that had begun in + the summer of although, as + he pointed out in + +On line 1147: + had begun in the + summer of although, as he + pointed out in the + +On line 1147: + in the summer of + although, as he pointed out + in the same speech, this + +On line 1149: + speech, this had little + effect. And the markets were + undeterred. "We had + +On line 1149: + And the markets were + undeterred. "We had convinced + ourselves that we were + +On line 1149: + were undeterred. "We + had convinced ourselves that we + were in a less risky + +On line 1149: + undeterred. "We had + convinced ourselves that we were + in a less risky world," + +On line 1149: + convinced ourselves that + we were in a less risky world," + former Federal + +On line 1149: + ourselves that we were + in a less risky world," former + Federal Reserve + +On line 1149: + we were in a less + risky world," former Federal + Reserve governor + +On line 1149: + Federal Reserve + governor and National + Economic Council + +On line 1149: + Reserve governor + and National Economic + Council director + +On line 1149: + Council director + under President George W. + Bush Lawrence Lindsey told + +On line 1151: + under President + George W. Bush Lawrence Lindsey told + the Commission. "And + +On line 1151: + W. Bush Lawrence Lindsey + told the Commission. "And how + should any rational + +On line 1151: + Lawrence Lindsey told the + Commission. "And how should any + rational investor + +On line 1151: + told the Commission. + "And how should any rational + investor respond to + +On line 1151: + Commission. "And how + should any rational investor + respond to a less + +On line 1151: + should any rational + investor respond to a less + risky world1 They should lay + +On line 1151: + rational investor + respond to a less risky world1 + They should lay on more + +On line 1153: + investor respond to + a less risky world1 They should lay + on more risk."56 THE WAGES + +On line 1155: + to a less risky world1 + They should lay on more risk."56 THE + WAGES OF FINANCE: "WELL, + +On line 1155: + a less risky world1 They + should lay on more risk."56 THE WAGES + OF FINANCE: "WELL, THIS + +On line 1155: + less risky world1 They should + lay on more risk."56 THE WAGES OF + FINANCE: "WELL, THIS ONE’S + +On line 1155: + world1 They should lay on + more risk."56 THE WAGES OF FINANCE: + "WELL, THIS ONE’S DOING + +On line 1155: + They should lay on more + risk."56 THE WAGES OF FINANCE: "WELL, + THIS ONE’S DOING IT, + +On line 1155: + should lay on more risk."56 + THE WAGES OF FINANCE: "WELL, THIS + ONE’S DOING IT, SO + +On line 1155: + lay on more risk."56 THE + WAGES OF FINANCE: "WELL, THIS ONE’S + DOING IT, SO HOW + +On line 1155: + more risk."56 THE WAGES OF + FINANCE: "WELL, THIS ONE’S DOING + IT, SO HOW CAN I + +On line 1155: + THE WAGES OF FINANCE: + "WELL, THIS ONE’S DOING IT, SO + HOW CAN I NOT DO + +On line 1155: + WAGES OF FINANCE: "WELL, + THIS ONE’S DOING IT, SO HOW + CAN I NOT DO IT1 + +On line 1155: + OF FINANCE: "WELL, THIS + ONE’S DOING IT, SO HOW CAN + I NOT DO IT1 As + +On line 1155: + THIS ONE’S DOING IT, + SO HOW CAN I NOT DO IT1 + As figure demonstrates, + +On line 1155: + ONE’S DOING IT, SO + HOW CAN I NOT DO IT1 As + figure demonstrates, for + +On line 1155: + SO HOW CAN I NOT + DO IT1 As figure demonstrates, + for almost half a + +On line 1155: + I NOT DO IT1 As + figure demonstrates, for almost + half a century + +On line 1155: + DO IT1 As figure + demonstrates, for almost half a + century after + +On line 1155: + demonstrates, for almost + half a century after + the Great Depression, + +On line 1155: + the Great Depression, + pay inside the financial + industry and out + +On line 1155: + industry and out + was roughly equal. Beginning + in they diverged. By + +On line 1155: + financial sector + compensation was more than + greater than in other + +On line 1155: + other businesses—a + considerably larger gap + than before the Great + +On line 1157: + gap than before the + Great Depression. Until the + New York Stock Exchange, + +On line 1157: + than before the Great + Depression. Until the New + York Stock Exchange, a + +On line 1157: + required members to + operate as partnerships.57 + Peter J. Solomon, a + +On line 1157: + Peter J. Solomon, a + former Lehman Brothers partner, + testified before + +On line 1157: + Solomon, a former Lehman + Brothers partner, testified + before the FCIC that + +On line 1157: + Lehman Brothers partner, + testified before the FCIC + that this profoundly + +On line 1157: + before the FCIC that + this profoundly affected + the investment bank’s + +On line 1157: + that this profoundly + affected the investment + bank’s culture. Before + +On line 1157: + bank’s culture. Before + the change, he and the other + partners had sat in + +On line 1157: + Before the change, he + and the other partners had + sat in a single + +On line 1157: + the change, he and the + other partners had sat in + a single room at + +On line 1157: + the other partners + had sat in a single room + at headquarters, not + +On line 1157: + other partners had + sat in a single room at + headquarters, not to + +On line 1157: + sat in a single + room at headquarters, not to + socialize but to + +On line 1157: + room at headquarters, + not to socialize but to + "overhear, interact, + +On line 1157: + not to socialize + but to "overhear, interact, + and monitor" each + +On line 1157: + "overhear, interact, + and monitor" each other. + They were all on the + +On line 1157: + and monitor" each + other. They were all on the + hook together. "Since + +On line 1157: + the hook together. + "Since they were personally + liable as partners, + +On line 1157: + together. "Since they + were personally liable + as partners, they took + +On line 1157: + seriously," Solomon + said.58 Brian Leach, formerly + an executive + +On line 1157: + Leach, formerly an + executive at Morgan + Stanley, described to + +On line 1157: + an executive + at Morgan Stanley, described + to FCIC staff Morgan + +On line 1157: + before it issued + stock and became a public + corporation: "When + +On line 1157: + stock and became a + public corporation: "When + I first started at + +On line 1157: + became a public + corporation: "When I first + started at Morgan + +On line 1157: + corporation: "When + I first started at Morgan + Stanley, it was a + +On line 1157: + I first started at + Morgan Stanley, it was a + private company. + +On line 1157: + started at Morgan + Stanley, it was a private + company. When you’re + +On line 1157: + Morgan Stanley, it + was a private company. + When you’re a private + +On line 1157: + company. When you’re + a private company, you + don’t get paid until + +On line 1157: + When you’re a private + company, you don’t get paid + until you retire. + +On line 1157: + private company, + you don’t get paid until you + retire. I mean, you + +On line 1157: + company, you don’t + get paid until you retire. + I mean, you get a + +On line 1157: + get paid until you + retire. I mean, you get a + good, you know, year-to-year + +On line 1157: + retire. I mean, you + get a good, you know, year-to-year + compensation." But + +On line 1157: + you get a good, you + know, year-to-year compensation." + But the big payout + +On line 1157: + get a good, you know, + year-to-year compensation." But + the big payout was + +On line 1157: + good, you know, year-to-year + compensation." But the big + payout was "when you + +On line 1159: + But the big payout + was "when you retire."59 When the + investment banks went + +On line 1159: + payout was "when you + retire."59 When the investment + banks went public in + +On line 1159: + was "when you retire."59 + When the investment banks went + public in the 1980s + +On line 1159: + you retire."59 When the + investment banks went public + in the 1980s and 1990s, + +On line 1159: + the 1980s and 1990s, the + close relationship between + bankers’ decisions and + +On line 1159: + 1980s and 1990s, the close + relationship between bankers’ + decisions and their + +On line 1159: + close relationship + between bankers’ decisions and + their compensation + +On line 1159: + bankers’ decisions and + their compensation broke down. + They were now trading + +On line 1159: + decisions and their + compensation broke down. They + were now trading with + +On line 1159: + compensation broke + down. They were now trading with + shareholders’ money. + +On line 1159: + shareholders’ money. + Talented traders and managers + once tethered to their + +On line 1159: + money. Talented + traders and managers once tethered + to their firms were now + +On line 1159: + Talented traders and + managers once tethered to their + firms were now free agents + +On line 1159: + traders and managers once + tethered to their firms were now + free agents who could play + +On line 1159: + once tethered to their + firms were now free agents who could + play companies against + +On line 1159: + tethered to their firms + were now free agents who could play + companies against each + +On line 1159: + their firms were now free + agents who could play companies + against each other for + +On line 1159: + firms were now free agents + who could play companies against + each other for more + +On line 1159: + free agents who could play + companies against each other + for more money. To + +On line 1159: + companies against each + other for more money. To + keep them from leaving, + +On line 1159: + against each other for + more money. To keep them from + leaving, firms began + +On line 1159: + up, commercial banks + did the same. Some included + "clawback" provisions + +On line 1159: + same. Some included + "clawback" provisions that would + require the return + +On line 1159: + "clawback" provisions + that would require the return + of compensation + +On line 1159: + require the return + of compensation under + narrow circumstances, + +On line 1159: + proved too limited + to restrain the behavior + of traders and managers. + +On line 1161: + the behavior of + traders and managers. Studies have + found that the real + +On line 1161: + managers. Studies have + found that the real value + of executive + +On line 1161: + found that the real + value of executive + pay, adjusted for + +On line 1161: + executive pay, + adjusted for inflation, + grew only a year + +On line 1161: + pay, adjusted for + inflation, grew only a + year during the years + +On line 1161: + for inflation, grew + only a year during the + years after World War + +On line 1161: + the years after World + War II, lagging companies’ + increasing size.60 But + +On line 1161: + World War II, lagging + companies’ increasing size.60 + But the rate picked up + +On line 1161: + lagging companies’ + increasing size.60 But the rate + picked up during the + +On line 1161: + increasing size.60 But + the rate picked up during the + 1970s and rose faster each + +On line 1161: + size.60 But the rate picked + up during the 1970s and rose + faster each decade, reaching + +On line 1163: + But the rate picked up + during the 1970s and rose faster + each decade, reaching a + +On line 1163: + rate picked up during + the 1970s and rose faster each decade, + reaching a year from + +On line 1163: + up during the 1970s + and rose faster each decade, reaching + a year from to Much + +On line 1163: + during the 1970s and + rose faster each decade, reaching a + year from to Much of + +On line 1163: + the 1970s and rose faster + each decade, reaching a year from + to Much of the change + +On line 1163: + each decade, reaching a + year from to Much of the change + reflected higher + +On line 1163: + to Much of the change + reflected higher earnings + in the financial + +On line 1163: + higher earnings in + the financial sector, where + by executives’ + +On line 1163: + financial sector, + where by executives’ pay + averaged million + +On line 1163: + averaged million + annually, the highest + of any industry. + +On line 1163: + annually, the + highest of any industry. + Though base salaries differed + +On line 1163: + industry. Though base + salaries differed relatively + little across sectors, + +On line 1163: + Though base salaries differed + relatively little across + sectors, banking and + +On line 1163: + little across sectors, + banking and finance paid much + higher bonuses and + +On line 1163: + across sectors, banking + and finance paid much higher + bonuses and awarded + +On line 1163: + banking and finance + paid much higher bonuses and + awarded more stock. And + +On line 1163: + and finance paid much + higher bonuses and awarded + more stock. And brokers + +On line 1163: + higher bonuses and + awarded more stock. And brokers + and dealers did by + +On line 1163: + more stock. And brokers + and dealers did by far the + best, averaging + +On line 1163: + stock. And brokers and + dealers did by far the best, + averaging more + +On line 1163: + and dealers did by + far the best, averaging + more than million in + +On line 1165: + more than million in + compensation.62 Both before + and after going + +On line 1165: + compensation.62 Both + before and after going + public, investment + +On line 1165: + before and after + going public, investment + banks typically + +On line 1165: + public, investment + banks typically paid out + half their revenues in + +On line 1165: + banks typically + paid out half their revenues in + compensation. For + +On line 1165: + in compensation. + For example, Goldman Sachs + spent between and a + +On line 1165: + compensation. For + example, Goldman Sachs spent + between and a year + +On line 1165: + spent between and a + year between and when Morgan + Stanley allotted + +On line 1167: + year between and when + Morgan Stanley allotted + between and Merrill + +On line 1167: + and Merrill paid out + similar percentages in + and but gave in 2007—a + +On line 1169: + and but gave in 2007—a + year it suffered dramatic + losses.63 As the scale, + +On line 1169: + gave in 2007—a year it + suffered dramatic losses.63 + As the scale, revenue, + +On line 1169: + suffered dramatic + losses.63 As the scale, revenue, + and profitability + +On line 1169: + the scale, revenue, and + profitability of the firms + grew, compensation + +On line 1169: + key employees. John + Gutfreund, reported to + be the highest-paid + +On line 1171: + on Wall Street in the + late 1980s, received million in + as CEO of Salomon + +On line 1171: + Street in the late 1980s, + received million in as CEO + of Salomon Brothers.64 + +On line 1171: + received million in + as CEO of Salomon Brothers.64 + Stanley O’Neal’s package + +On line 1171: + million in as CEO + of Salomon Brothers.64 Stanley + O’Neal’s package was worth + +On line 1173: + of Salomon Brothers.64 + Stanley O’Neal’s package was worth + more than million in + +On line 1173: + Stanley O’Neal’s package + was worth more than million in + the last full year he + +On line 1173: + O’Neal’s package was worth + more than million in the last + full year he was CEO + +On line 1173: + package was worth more + than million in the last full + year he was CEO of + +On line 1173: + worth more than million + in the last full year he was + CEO of Merrill Lynch.65 + +On line 1173: + more than million in + the last full year he was CEO + of Merrill Lynch.65 In + +On line 1173: + than million in the + last full year he was CEO of + Merrill Lynch.65 In Lloyd + +On line 1173: + in the last full year + he was CEO of Merrill Lynch.65 + In Lloyd Blankfein, CEO + +On line 1173: + the last full year he + was CEO of Merrill Lynch.65 In + Lloyd Blankfein, CEO at + +On line 1173: + year he was CEO of + Merrill Lynch.65 In Lloyd Blankfein, + CEO at Goldman Sachs, + +On line 1173: + was CEO of Merrill + Lynch.65 In Lloyd Blankfein, CEO at + Goldman Sachs, received + +On line 1173: + of Merrill Lynch.65 In + Lloyd Blankfein, CEO at Goldman + Sachs, received million;66 + +On line 1173: + Merrill Lynch.65 In Lloyd + Blankfein, CEO at Goldman Sachs, + received million;66 Richard + +On line 1173: + Lynch.65 In Lloyd Blankfein, + CEO at Goldman Sachs, received + million;66 Richard Fuld, CEO + +On line 1173: + Lloyd Blankfein, CEO at + Goldman Sachs, received million;66 + Richard Fuld, CEO of Lehman + +On line 1173: + CEO at Goldman Sachs, + received million;66 Richard Fuld, CEO + of Lehman Brothers, and + +On line 1173: + Sachs, received million;66 + Richard Fuld, CEO of Lehman Brothers, + and Jamie Dimon, CEO + +On line 1173: + received million;66 Richard + Fuld, CEO of Lehman Brothers, and + Jamie Dimon, CEO of + +On line 1173: + Richard Fuld, CEO of Lehman + Brothers, and Jamie Dimon, CEO + of JPMorgan Chase, received + +On line 1173: + of Lehman Brothers, and + Jamie Dimon, CEO of JPMorgan Chase, + received about million + +On line 1173: + received about million + and million, respectively.67 + That year Wall Street paid + +On line 1173: + million and million, + respectively.67 That year Wall + Street paid workers in + +On line 1173: + Wall Street paid workers + in New York roughly billion + in year-end bonuses alone.68 + +On line 1173: + paid workers in New + York roughly billion in year-end + bonuses alone.68 Total + +On line 1173: + York roughly billion + in year-end bonuses alone.68 Total + compensation for + +On line 1173: + in year-end bonuses alone.68 + Total compensation for + the major U.S. banks + +On line 1173: + for the major U.S. + banks and securities firms + was estimated + +On line 1173: + the major U.S. banks + and securities firms was + estimated at + +On line 1175: + and securities + firms was estimated at + billion.69 Stock options + +On line 1175: + estimated at + billion.69 Stock options became + a popular form + +On line 1175: + billion.69 Stock options + became a popular form + of compensation, + +On line 1175: + popular form of + compensation, allowing + employees to buy + +On line 1175: + of compensation, + allowing employees to + buy the company’s + +On line 1175: + buy the company’s + stock in the future at some + predetermined price, + +On line 1175: + in the future at + some predetermined price, and + thus to reap rewards + +On line 1175: + the future at some + predetermined price, and thus + to reap rewards when + +On line 1175: + some predetermined + price, and thus to reap rewards + when the stock price was + +On line 1175: + to reap rewards when + the stock price was higher than + that predetermined + +On line 1175: + reap rewards when the + stock price was higher than that + predetermined price. + +On line 1175: + stock price was higher + than that predetermined price. + In fact, the option + +On line 1175: + price was higher than + that predetermined price. In + fact, the option would + +On line 1175: + was higher than that + predetermined price. In fact, + the option would have + +On line 1175: + that predetermined + price. In fact, the option would + have no value if + +On line 1175: + predetermined price. + In fact, the option would have + no value if the + +On line 1175: + In fact, the option + would have no value if the + stock price was below + +On line 1175: + fact, the option would + have no value if the stock + price was below that + +On line 1175: + the option would have + no value if the stock price + was below that price. + +On line 1175: + have no value if + the stock price was below that + price. Encouraging + +On line 1175: + no value if the + stock price was below that price. + Encouraging the + +On line 1175: + was below that price. + Encouraging the awarding + of stock options was + +On line 1175: + price. Encouraging + the awarding of stock options + was legislation + +On line 1175: + was legislation + making compensation in + excess of million + +On line 1175: + while the downside was + simply to receive nothing + if the stock didn’t + +On line 1175: + downside was simply + to receive nothing if the + stock didn’t rise to + +On line 1175: + to receive nothing + if the stock didn’t rise to + the predetermined + +On line 1175: + receive nothing if + the stock didn’t rise to the + predetermined price. + +On line 1175: + if the stock didn’t + rise to the predetermined + price. The same applied + +On line 1175: + the stock didn’t rise + to the predetermined price. + The same applied to + +On line 1175: + stock didn’t rise to + the predetermined price. The + same applied to plans + +On line 1175: + didn’t rise to the + predetermined price. The same + applied to plans that + +On line 1175: + predetermined price. + The same applied to plans that + tied pay to return + +On line 1175: + The same applied to + plans that tied pay to return + on equity: they + +On line 1175: + same applied to plans + that tied pay to return on + equity: they meant + +On line 1175: + tied pay to return + on equity: they meant that + executives could + +On line 1175: + on equity: they + meant that executives could + win more than they could + +On line 1175: + equity: they meant + that executives could win + more than they could lose. + +On line 1177: + that executives + could win more than they could lose. + These pay structures had + +On line 1177: + executives could + win more than they could lose. These + pay structures had the + +On line 1177: + could win more than they + could lose. These pay structures had + the unintended + +On line 1177: + to increase both risk + and leverage, which could lead to + larger jumps in a + +On line 1177: + both risk and leverage, + which could lead to larger jumps + in a company’s + +On line 1177: + risk and leverage, which + could lead to larger jumps in + a company’s stock + +On line 1177: + and leverage, which could + lead to larger jumps in a + company’s stock price. + +On line 1179: + could lead to larger + jumps in a company’s stock + price. As these options + +On line 1179: + price. As these options + motivated financial + firms to take more risk + +On line 1179: + use more leverage, the + evolution of the system + provided the means. + +On line 1179: + the evolution of + the system provided the + means. Shadow banking + +On line 1179: + commercial banks. OTC + derivatives allowing + for enormous leverage + +On line 1179: + for enormous leverage + proliferated. And risk + management, thought to + +On line 1179: + proliferated. + And risk management, thought to + be keeping ahead of + +On line 1179: + And risk management, + thought to be keeping ahead of + these developments, + +On line 1179: + risk management, thought + to be keeping ahead of these + developments, would + +On line 1179: + thought to be keeping + ahead of these developments, + would fail to rein in + +On line 1179: + to be keeping ahead + of these developments, would + fail to rein in the + +On line 1181: + in the increasing + risks. The dangers of the new + pay structures were clear, + +On line 1181: + the increasing risks. + The dangers of the new pay + structures were clear, but + +On line 1181: + were clear, but senior + executives believed they + were powerless to + +On line 1181: + were powerless to + change it. Former Citigroup + CEO Sandy Weill told the + +On line 1181: + to change it. Former + Citigroup CEO Sandy Weill told + the Commission, "I + +On line 1181: + Citigroup CEO Sandy + Weill told the Commission, "I + think if you look at + +On line 1181: + CEO Sandy Weill told the + Commission, "I think if you + look at the results + +On line 1181: + Commission, "I think + if you look at the results + of what happened on + +On line 1181: + if you look at the + results of what happened on + Wall Street, it became, + +On line 1181: + look at the results + of what happened on Wall Street, + it became, Well, this + +On line 1181: + at the results of + what happened on Wall Street, it + became, Well, this one’s + +On line 1181: + of what happened on + Wall Street, it became, Well, this + one’s doing it, so + +On line 1181: + what happened on Wall + Street, it became, Well, this one’s + doing it, so how + +On line 1181: + Wall Street, it became, + Well, this one’s doing it, so + how can I not do + +On line 1181: + Street, it became, Well, + this one’s doing it, so how + can I not do it, + +On line 1181: + it became, Well, this + one’s doing it, so how can + I not do it, if + +On line 1181: + became, Well, this one’s + doing it, so how can I + not do it, if I + +On line 1181: + Well, this one’s doing + it, so how can I not do + it, if I don’t do + +On line 1181: + this one’s doing it, + so how can I not do it, + if I don’t do it, + +On line 1181: + one’s doing it, so + how can I not do it, if + I don’t do it, then + +On line 1181: + doing it, so how + can I not do it, if I + don’t do it, then the + +On line 1181: + it, so how can I + not do it, if I don’t do + it, then the people + +On line 1181: + so how can I not + do it, if I don’t do it, + then the people are + +On line 1181: + can I not do it, + if I don’t do it, then the + people are going + +On line 1181: + not do it, if I + don’t do it, then the people + are going to leave + +On line 1181: + do it, if I don’t + do it, then the people are + going to leave my + +On line 1181: + if I don’t do it, + then the people are going + to leave my place and + +On line 1181: + I don’t do it, then + the people are going to + leave my place and go + +On line 1181: + it, then the people + are going to leave my place + and go someplace else.’" + +On line 1181: + to leave my place and + go someplace else.’" Managing + risk "became less of + +On line 1181: + leave my place and go + someplace else.’" Managing risk + "became less of an + +On line 1181: + and go someplace else.’" + Managing risk "became less + of an important + +On line 1181: + of an important + function in a broad base of + companies, I would + +On line 1183: + in a broad base of + companies, I would guess."70 And + regulatory + +On line 1183: + companies, I would + guess."70 And regulatory + entities, one source + +On line 1183: + regulatory + entities, one source of checks + on excessive risk + +On line 1183: + entities, one source + of checks on excessive risk + taking, had challenges + +On line 1183: + one source of checks on + excessive risk taking, had + challenges recruiting + +On line 1183: + challenges recruiting + financial experts who could + otherwise work in + +On line 1183: + financial experts + who could otherwise work in + the private sector. + +On line 1185: + could otherwise work + in the private sector. Lord + Adair Turner, chairman + +On line 1185: + otherwise work in + the private sector. Lord Adair + Turner, chairman of + +On line 1185: + the private sector. + Lord Adair Turner, chairman of + the U.K. Financial + +On line 1185: + Turner, chairman of + the U.K. Financial Services + Authority, told + +On line 1185: + the U.K. Financial + Services Authority, told + the Commission, "It’s + +On line 1185: + told the Commission, + "It’s not easy. This is like a + continual process + +On line 1185: + "It’s not easy. This is + like a continual process + of, you know, high-skilled + +On line 1185: + easy. This is like a + continual process of, you + know, high-skilled people + +On line 1185: + high-skilled people, and + the poachers are better paid + than the game-keepers."71 + +On line 1185: + poachers are better + paid than the game-keepers."71 Bernanke + said the same at an + +On line 1185: + better paid than the + game-keepers."71 Bernanke said the same + at an FCIC hearing: + +On line 1185: + said the same at an + FCIC hearing: "It’s just simply + never going to + +On line 1185: + an FCIC hearing: "It’s + just simply never going + to be the case that + +On line 1185: + FCIC hearing: "It’s just + simply never going to + be the case that the + +On line 1185: + just simply never + going to be the case that + the government can + +On line 1185: + going to be the + case that the government can + pay what Wall Street can + +On line 1187: + be the case that the + government can pay what Wall + Street can pay."72 Tying + +On line 1187: + government can pay + what Wall Street can pay."72 Tying + compensation to + +On line 1187: + pay what Wall Street can + pay."72 Tying compensation + to earnings also, + +On line 1187: + what Wall Street can pay."72 + Tying compensation to + earnings also, in + +On line 1187: + to earnings also, + in some cases, created + the temptation to + +On line 1187: + the temptation to + manipulate the numbers. + Former Fannie Mae + +On line 1187: + to manipulate + the numbers. Former Fannie + Mae regulator + +On line 1187: + the numbers. Former + Fannie Mae regulator + Armando Falcon + +On line 1187: + Former Fannie Mae + regulator Armando + Falcon Jr. told the + +On line 1187: + "Fannie began the + last decade with an ambitious + goal—double earnings + +On line 1187: + with an ambitious + goal—double earnings in years + to [per share]. A large + +On line 1187: + to [per share]. A large + part of the executives’ + compensation was + +On line 1187: + was tied to meeting + that goal." Achieving it brought CEO + Franklin Raines million of + +On line 1187: + tied to meeting that + goal." Achieving it brought CEO Franklin + Raines million of his + +On line 1187: + that goal." Achieving it + brought CEO Franklin Raines million of + his million pay from + +On line 1187: + goal." Achieving it brought + CEO Franklin Raines million of his + million pay from to + +On line 1187: + it brought CEO Franklin Raines + million of his million pay + from to However, + +On line 1187: + CEO Franklin Raines million + of his million pay from to + However, Falcon + +On line 1187: + of his million pay + from to However, Falcon + said, the goal "turned out + +On line 1187: + his million pay from + to However, Falcon said, + the goal "turned out to + +On line 1187: + million pay from to + However, Falcon said, the + goal "turned out to be + +On line 1187: + the goal "turned out to + be un-achievable without breaking + rules and hiding risks. + +On line 1187: + be un-achievable without + breaking rules and hiding risks. + Fannie and Freddie + +On line 1187: + hiding risks. Fannie + and Freddie executives + worked hard to persuade + +On line 1187: + Fannie and Freddie + executives worked hard to + persuade investors that + +On line 1187: + investment, while at + the same time covering up + the volatility and + +On line 1187: + same time covering + up the volatility and risks + of their own mortgage + +On line 1187: + of their own mortgage + portfolios and balance sheets." + Fannie’s estimate + +On line 1187: + Fannie’s estimate + of how many mortgage holders + would pay off was off + +On line 1187: + of how many mortgage + holders would pay off was off + by million at year-end + +On line 1187: + mortgage holders would + pay off was off by million + at year-end which meant no + +On line 1187: + holders would pay off + was off by million at year-end + which meant no bonuses. + +On line 1187: + pay off was off by + million at year-end which meant no + bonuses. So Fannie + +On line 1187: + was off by million + at year-end which meant no bonuses. + So Fannie counted + +On line 1187: + million at year-end which + meant no bonuses. So Fannie + counted only half + +On line 1187: + which meant no bonuses. + So Fannie counted only + half the million on + +On line 1187: + meant no bonuses. So + Fannie counted only half + the million on its + +On line 1187: + So Fannie counted + only half the million on + its books, enabling Raines + +On line 1187: + the million on its + books, enabling Raines and other + executives to + +On line 1187: + its books, enabling Raines + and other executives + to meet the earnings + +On line 1189: + chain, from people who + originated mortgages to + people on Wall Street + +On line 1189: + who originated + mortgages to people on Wall + Street who packaged them + +On line 1189: + Wall Street who packaged + them into securities. + Regarding mortgage + +On line 1189: + often the first link + in the process, FDIC Chairman Sheila + Bair told the FCIC that + +On line 1189: + first link in the process, + FDIC Chairman Sheila Bair told the + FCIC that their "standard + +On line 1189: + Bair told the FCIC that + their "standard compensation + practice was based on + +On line 1189: + FCIC that their "standard + compensation practice was + based on the volume + +On line 1189: + based on the volume + of loans originated rather + than the performance + +On line 1189: + on the volume of + loans originated rather than + the performance and + +On line 1189: + loans originated + rather than the performance and + quality of the + +On line 1189: + than the performance + and quality of the loans + made." She concluded, + +On line 1189: + the performance and + quality of the loans made." + She concluded, "The + +On line 1189: + and quality of + the loans made." She concluded, + "The crisis has shown + +On line 1189: + quality of the + loans made." She concluded, "The + crisis has shown that + +On line 1189: + Formula-driven + compensation allows high + short-term profits to + +On line 1189: + allows high short-term + profits to be translated + into generous + +On line 1189: + into generous + bonus payments, without regard + to any longer-term risks."74 SEC + +On line 1189: + bonus payments, without + regard to any longer-term risks."74 SEC + Chairman Mary Schapiro told + +On line 1189: + without regard to + any longer-term risks."74 SEC Chairman Mary + Schapiro told the FCIC, "Many + +On line 1189: + regard to any longer-term + risks."74 SEC Chairman Mary Schapiro told + the FCIC, "Many major + +On line 1189: + success, even if these + same decisions result in + significant long-term + +On line 1191: + losses or failure + for investors and taxpayers."75 + FINANCIAL SECTOR + +On line 1193: + failure for investors + and taxpayers."75 FINANCIAL + SECTOR GROWTH: "I THINK + +On line 1193: + "I THINK WE OVERDID + FINANCE VERSUS THE REAL + ECONOMY" For about + +On line 1193: + FINANCE VERSUS THE + REAL ECONOMY" For about + two decades, beginning + +On line 1193: + VERSUS THE REAL + ECONOMY" For about two decades, + beginning in the + +On line 1193: + REAL ECONOMY" + For about two decades, beginning + in the early 1980s, + +On line 1193: + beginning in the + early 1980s, the financial + sector grew faster than + +On line 1193: + in the early 1980s, + the financial sector grew + faster than the rest of + +On line 1193: + the early 1980s, the + financial sector grew faster + than the rest of the + +On line 1193: + financial sector + grew faster than the rest of the + economy—rising from + +On line 1193: + faster than the rest of + the economy—rising from about + of gross domestic + +On line 1193: + the economy—rising + from about of gross domestic + product (GDP) to about + +On line 1193: + domestic product + (GDP) to about in the early + 21st century. In + +On line 1193: + (GDP) to about in the + early 21st century. In + financial sector + +On line 1193: + in the early 21st + century. In financial + sector profits were + +On line 1193: + sector profits were + about of corporate profits. + In they hit a high + +On line 1193: + profits were about of + corporate profits. In they + hit a high of but + +On line 1193: + about of corporate + profits. In they hit a high + of but fell back to + +On line 1193: + corporate profits. + In they hit a high of but + fell back to in on + +On line 1193: + profits. In they hit + a high of but fell back to + in on the eve of + +On line 1193: + hit a high of but + fell back to in on the eve + of the financial + +On line 1193: + high of but fell back + to in on the eve of the + financial crisis. + +On line 1193: + fell back to in on + the eve of the financial + crisis. The largest firms + +On line 1193: + to in on the eve + of the financial crisis. + The largest firms became + +On line 1193: + larger. JP Morgan’s + assets increased from billion + in to trillion in + +On line 1195: + annual growth rate + of Bank of America and + Citigroup grew by + +On line 1195: + growth rate of Bank of + America and Citigroup + grew by and a year, + +On line 1195: + of America and + Citigroup grew by and a + year, respectively, + +On line 1197: + respectively, with + Citigroup reaching trillion + in assets in (down + +On line 1197: + Citigroup reaching + trillion in assets in (down + from trillion in and + +On line 1197: + trillion in assets + in (down from trillion in and + Bank of America + +On line 1197: + in assets in (down + from trillion in and Bank of + America trillion. + +On line 1197: + from trillion in and + Bank of America trillion. + The investment banks + +On line 1197: + Goldman’s assets grew + from billion in to trillion + by an annual + +On line 1197: + from billion in to + trillion by an annual + growth rate of At Lehman, + +On line 1197: + in to trillion by + an annual growth rate of + At Lehman, assets rose + +On line 1197: + to trillion by an + annual growth rate of At + Lehman, assets rose from + +On line 1197: + by an annual + growth rate of At Lehman, assets + rose from billion to + +On line 1199: + annual growth rate + of At Lehman, assets rose from + billion to billion, + +On line 1201: + growth rate of At Lehman, + assets rose from billion to + billion, or Fannie + +On line 1201: + At Lehman, assets rose + from billion to billion, or + Fannie and Freddie + +On line 1201: + billion to billion, + or Fannie and Freddie grew + quickly, too. Fannie’s + +On line 1201: + billion, or Fannie + and Freddie grew quickly, too. + Fannie’s assets and + +On line 1201: + Fannie’s assets and + guaranteed mortgages increased + from trillion in to + +On line 1201: + mortgages increased from + trillion in to trillion in + or annually. + +On line 1201: + or annually. + At Freddie, they increased from + trillion to trillion, + +On line 1203: + Freddie, they increased + from trillion to trillion, or + a year.77 As they grew, + +On line 1203: + trillion to trillion, + or a year.77 As they grew, many + financial firms added + +On line 1203: + or a year.77 As they + grew, many financial firms added + lots of leverage. That + +On line 1203: + a year.77 As they grew, + many financial firms added lots + of leverage. That meant + +On line 1203: + grew, many financial + firms added lots of leverage. That + meant potentially + +On line 1203: + higher returns for + shareholders, and more money + for compensation. + +On line 1203: + shareholders, and more + money for compensation. + Increasing leverage + +On line 1203: + and more money for + compensation. Increasing + leverage also meant + +On line 1203: + for compensation. + Increasing leverage also + meant less capital + +On line 1203: + Increasing leverage + also meant less capital + to absorb losses. + +On line 1205: + leverage also meant + less capital to absorb + losses. Fannie and + +On line 1205: + meant less capital + to absorb losses. Fannie + and Freddie were the + +On line 1205: + less capital to + absorb losses. Fannie and + Freddie were the most + +On line 1205: + to absorb losses. + Fannie and Freddie were the + most leveraged. The law + +On line 1205: + and Freddie were the + most leveraged. The law set the + government-sponsored + +On line 1205: + requirement at of + assets plus of the mortgage-backed + securities they + +On line 1205: + of assets plus of + the mortgage-backed securities + they guaranteed. So + +On line 1205: + assets plus of the + mortgage-backed securities they + guaranteed. So they + +On line 1207: + So they could borrow + more than for each dollar of + capital used to + +On line 1207: + borrow more than for + each dollar of capital + used to guarantee + +On line 1207: + used to guarantee + mortgage-backed securities. If + they wanted to own + +On line 1207: + If they wanted to + own the securities, they + could borrow for each + +On line 1207: + they could borrow for + each dollar of capital. + Combined, Fannie and + +On line 1207: + for each dollar of + capital. Combined, Fannie + and Freddie owned or + +On line 1207: + capital. Combined, + Fannie and Freddie owned or + guaranteed trillion + +On line 1207: + Fannie and Freddie + owned or guaranteed trillion + of mortgage-related + +On line 1207: + owned or guaranteed + trillion of mortgage-related + assets at the end + +On line 1207: + guaranteed trillion + of mortgage-related assets + at the end of against + +On line 1209: + at the end of against + just billion of capital, + a ratio of From + +On line 1209: + the end of against just + billion of capital, a + ratio of From to + +On line 1209: + of against just billion + of capital, a ratio + of From to large banks + +On line 1209: + against just billion of + capital, a ratio of + From to large banks and + +On line 1209: + of From to large banks + and thrifts generally had + to in assets for + +On line 1209: + From to large banks and + thrifts generally had to + in assets for each + +On line 1209: + to in assets for + each dollar of capital, + for leverage ratios + +On line 1209: + of capital, for + leverage ratios between and:1. + For some banks, leverage + +On line 1209: + ratios between and:1. + For some banks, leverage remained + roughly constant. JP + +On line 1209: + between and:1. For some + banks, leverage remained roughly + constant. JP Morgan’s + +On line 1209: + For some banks, leverage + remained roughly constant. JP + Morgan’s reported + +On line 1209: + banks, leverage remained + roughly constant. JP Morgan’s + reported leverage + +On line 1211: + roughly constant. JP + Morgan’s reported leverage + was between and:1. Wells + +On line 1211: + reported leverage + was between and:1. Wells Fargo’s + generally ranged + +On line 1211: + was between and:1. Wells + Fargo’s generally ranged + between and Other + +On line 1211: + generally ranged + between and Other banks upped + their leverage. Bank of + +On line 1211: + between and Other + banks upped their leverage. Bank of + America’s rose + +On line 1211: + their leverage. Bank of + America’s rose from in + to in Citigroup’s + +On line 1211: + America’s rose + from in to in Citigroup’s + increased from to:1, then + +On line 1211: + rose from in to in + Citigroup’s increased from to:1, + then shot up to by + +On line 1211: + to in Citigroup’s + increased from to:1, then shot up + to by the end of + +On line 1211: + Citigroup’s increased + from to:1, then shot up to by + the end of when Citi + +On line 1211: + from to:1, then shot up + to by the end of when Citi + brought off-balance sheet + +On line 1211: + up to by the end + of when Citi brought off-balance + sheet assets onto + +On line 1211: + to by the end of + when Citi brought off-balance sheet + assets onto the + +On line 1211: + the end of when Citi + brought off-balance sheet assets + onto the balance + +On line 1211: + brought off-balance sheet + assets onto the balance + sheet. More than other + +On line 1211: + assets onto the + balance sheet. More than other + banks, Citigroup held + +On line 1211: + the balance sheet. More + than other banks, Citigroup + held assets off of + +On line 1211: + balance sheet. More than + other banks, Citigroup held + assets off of its + +On line 1211: + sheet. More than other + banks, Citigroup held assets + off of its balance + +On line 1211: + More than other banks, + Citigroup held assets off + of its balance sheet, + +On line 1211: + banks, Citigroup held + assets off of its balance + sheet, in part to hold + +On line 1211: + held assets off of + its balance sheet, in part to + hold down capital + +On line 1213: + its balance sheet, in + part to hold down capital + requirements. In even + +On line 1213: + in part to hold down + capital requirements. In + even after bringing + +On line 1213: + hold down capital + requirements. In even after + bringing billion worth + +On line 1213: + bringing billion worth + of assets on balance sheet, + substantial assets + +On line 1213: + substantial assets + remained off. If those had been + included, leverage + +On line 1213: + assets remained off. + If those had been included, + leverage in would have + +On line 1215: + remained off. If those + had been included, leverage + in would have been or + +On line 1215: + would have been or about + higher. In comparison, + at Wells Fargo and + +On line 1215: + been or about higher. + In comparison, at Wells + Fargo and Bank of + +On line 1215: + Wells Fargo and Bank + of America, including + off-balance-sheet assets + +On line 1219: + have raised the leverage + ratios and respectively.78 + Because investment + +On line 1219: + the leverage ratios + and respectively.78 Because + investment banks were + +On line 1219: + and respectively.78 + Because investment banks were + not subject to the + +On line 1219: + not subject to the + same capital requirements + as commercial and + +On line 1219: + the same capital + requirements as commercial + and retail banks, they + +On line 1219: + as commercial and + retail banks, they were given + greater latitude to + +On line 1219: + and retail banks, they + were given greater latitude + to rely on their + +On line 1219: + banks, they were given + greater latitude to rely + on their internal + +On line 1219: + they were given greater + latitude to rely on + their internal risk + +On line 1221: + and they reported + higher leverage. At Goldman + Sachs, leverage increased + +On line 1221: + leverage increased from + in to in Morgan Stanley + and Lehman increased about + +On line 1221: + in to in Morgan + Stanley and Lehman increased about + and%, respectively, + +On line 1223: + and Lehman increased about + and%, respectively, and both + reached by the end of + +On line 1223: + reached by the end of + Several investment banks + artificially + +On line 1223: + artificially + lowered leverage ratios by + selling assets right + +On line 1223: + assets right before + the reporting period + and subsequently + +On line 1225: + buying them back. As + the investment banks grew, their + business models changed. + +On line 1225: + the investment banks + grew, their business models changed. + Traditionally, + +On line 1225: + of the investment + banks’ revenues and earnings was + generated by + +On line 1225: + and derivatives + activities. At Goldman, + revenues from trading + +On line 1225: + At Goldman, revenues + from trading and principal + investments increased + +On line 1225: + revenues from trading + and principal investments + increased from of the + +On line 1227: + investments increased + from of the total in to + in At Merrill Lynch, + +On line 1227: + from of the total + in to in At Merrill Lynch, + they generated + +On line 1227: + of the total in + to in At Merrill Lynch, they + generated of + +On line 1227: + to in At Merrill + Lynch, they generated of + revenue in up from + +On line 1229: + At Merrill Lynch, they + generated of revenue + in up from in At + +On line 1229: + they generated + of revenue in up from in + At Lehman, similar + +On line 1229: + up from in At Lehman, + similar activities + generated up + +On line 1231: + generated up + to of pretax earnings in + up from in At Bear + +On line 1231: + of pretax earnings + in up from in At Bear Stearns, + they accounted for + +On line 1231: + pretax earnings in + up from in At Bear Stearns, they + accounted for more + +On line 1231: + in up from in At + Bear Stearns, they accounted for + more than of pretax + +On line 1231: + from in At Bear Stearns, + they accounted for more than + of pretax earnings + +On line 1231: + in At Bear Stearns, they + accounted for more than of + pretax earnings in + +On line 1231: + they accounted for + more than of pretax earnings + in some years after + +On line 1231: + more than of pretax + earnings in some years after + because of pretax + +On line 1231: + of pretax earnings + in some years after because + of pretax losses + +On line 1231: + pretax earnings in + some years after because of + pretax losses in + +On line 1231: + earnings in some years + after because of pretax + losses in other + +On line 1233: + after because of + pretax losses in other + businesses.80 Between + +On line 1233: + losses in other + businesses.80 Between and debt + held by financial + +On line 1233: + businesses.80 Between + and debt held by financial + companies grew from + +On line 1233: + Between and debt held + by financial companies + grew from trillion to + +On line 1235: + held by financial + companies grew from trillion + to trillion, more than + +On line 1235: + companies grew from + trillion to trillion, more than + doubling from to of + +On line 1235: + grew from trillion to + trillion, more than doubling from + to of GDP. Former + +On line 1235: + trillion to trillion, + more than doubling from to of + GDP. Former Treasury + +On line 1235: + more than doubling from + to of GDP. Former Treasury + Secretary John Snow + +On line 1235: + to of GDP. Former + Treasury Secretary John Snow + told the FCIC that while + +On line 1235: + told the FCIC that while + the financial sector must + play a "critical" + +On line 1235: + the FCIC that while the + financial sector must play + a "critical" role + +On line 1235: + financial sector + must play a "critical" role + in allocating + +On line 1235: + capital to the + most productive uses, it + was reasonable to + +On line 1235: + the most productive + uses, it was reasonable + to ask whether over the + +On line 1235: + productive uses, + it was reasonable to ask + whether over the last or + +On line 1235: + it was reasonable + to ask whether over the last or + years it had become + +On line 1235: + was reasonable to + ask whether over the last or years + it had become too + +On line 1235: + reasonable to ask + whether over the last or years it + had become too large. + +On line 1235: + to ask whether over the + last or years it had become + too large. Financial + +On line 1235: + ask whether over the last + or years it had become too + large. Financial firms + +On line 1235: + whether over the last or + years it had become too large. + Financial firms had + +On line 1235: + last or years it had + become too large. Financial + firms had grown mainly + +On line 1235: + it had become too + large. Financial firms had grown + mainly by simply + +On line 1235: + firms had grown mainly + by simply lending to each + other, he said, not + +On line 1235: + companies borrowed + in the credit markets for + every borrowed by + +On line 1235: + were borrowing for + every "We have a lot more + debt than we used to + +On line 1235: + for every "We have + a lot more debt than we used + to have, which means we + +On line 1235: + every "We have a + lot more debt than we used to + have, which means we have + +On line 1235: + "We have a lot more + debt than we used to have, which + means we have a much + +On line 1235: + a lot more debt than + we used to have, which means we + have a much bigger + +On line 1235: + debt than we used to + have, which means we have a much + bigger financial + +On line 1235: + we used to have, which + means we have a much bigger + financial sector," + +On line 1235: + have, which means we have + a much bigger financial + sector," said Snow. "I + +On line 1235: + means we have a much + bigger financial sector," + said Snow. "I think we + +On line 1235: + have a much bigger + financial sector," said Snow. + "I think we overdid + +On line 1235: + financial sector," + said Snow. "I think we overdid + finance versus the + +On line 1235: + said Snow. "I think we + overdid finance versus the + real economy + +On line 1235: + "I think we overdid + finance versus the real + economy and got + +On line 1235: + versus the real + economy and got it a + little lopsided + +On line 1247: + so complicated + how is anybody going to + know1" Greater access to + +On line 1247: + anybody going to + know1" Greater access to lending: + "A business where we + +On line 1247: + know1" Greater access to + lending: "A business where we + can make some money".............72 + +On line 1249: + access to lending: + "A business where we can make + some money".............72 Subprime + +On line 1249: + business where we can + make some money".............72 Subprime lenders + in turmoil: "Adverse + +On line 1253: + market conditions"..................................74 + The regulators: "Oh, I + see" In the early + +On line 1253: + The regulators: + "Oh, I see" In the early + 1980s, subprime lenders such + +On line 1253: + regulators: "Oh, + I see" In the early 1980s, + subprime lenders such as + +On line 1253: + "Oh, I see" In the + early 1980s, subprime lenders such + as Household Finance + +On line 1253: + In the early 1980s, + subprime lenders such as Household + Finance Corp. and thrifts + +On line 1253: + early 1980s, subprime + lenders such as Household Finance + Corp. and thrifts such as + +On line 1253: + 1980s, subprime lenders such + as Household Finance Corp. and + thrifts such as Long Beach + +On line 1253: + lenders such as Household + Finance Corp. and thrifts such as + Long Beach Savings and + +On line 1253: + as Household Finance + Corp. and thrifts such as Long Beach + Savings and Loan made + +On line 1253: + Corp. and thrifts such as + Long Beach Savings and Loan made + home equity loans, + +On line 1253: + as Long Beach Savings + and Loan made home equity + loans, often second + +On line 1253: + Savings and Loan made + home equity loans, often + second mortgages, to + +On line 1253: + made home equity + loans, often second mortgages, + to borrowers who + +On line 1253: + home equity loans, + often second mortgages, to + borrowers who had + +On line 1253: + second mortgages, to + borrowers who had yet to + establish credit + +On line 1253: + borrowers who had + yet to establish credit + histories or had + +On line 1253: + yet to establish + credit histories or had + troubled financial + +On line 1253: + credit histories + or had troubled financial + histories, sometimes + +On line 1253: + and the like. Banks might + have been unwilling to lend + to these borrowers, + +On line 1253: + the like. Banks might have + been unwilling to lend to + these borrowers, but + +On line 1253: + like. Banks might have been + unwilling to lend to these + borrowers, but a + +On line 1253: + have been unwilling + to lend to these borrowers, + but a subprime lender + +On line 1253: + been unwilling to + lend to these borrowers, but + a subprime lender would + +On line 1253: + unwilling to lend + to these borrowers, but a + subprime lender would if + +On line 1253: + to these borrowers, + but a subprime lender would if + the borrower paid + +On line 1253: + these borrowers, but + a subprime lender would if the + borrower paid a + +On line 1253: + a subprime lender would + if the borrower paid a + higher interest + +On line 1253: + if the borrower + paid a higher interest + rate to offset the + +On line 1253: + borrower paid a + higher interest rate to + offset the extra + +On line 1253: + interest rate to + offset the extra risk. "No + one can debate the + +On line 1253: + the extra risk. "No + one can debate the need for + legitimate non-prime + +On line 1253: + "No one can debate + the need for legitimate + non-prime (subprime) lending + +On line 1253: + debate the need for + legitimate non-prime (subprime) + lending products," Gail + +On line 1253: + for legitimate + non-prime (subprime) lending products," + Gail Burks, president + +On line 1253: + legitimate non-prime + (subprime) lending products," Gail + Burks, president of + +On line 1253: + non-prime (subprime) lending + products," Gail Burks, president + of the Nevada Fair + +On line 1253: + president of the + Nevada Fair Housing Center, + Inc., testified to + +On line 1255: + Nevada Fair Housing + Center, Inc., testified to + the FCIC.1 Interest + +On line 1255: + Fair Housing Center, + Inc., testified to the FCIC.1 + Interest rates on + +On line 1255: + Inc., testified to + the FCIC.1 Interest rates on + subprime mortgages, with + +On line 1257: + subprime mortgages, with + substantial collateral—the + house— weren’t as high + +On line 1257: + collateral—the house— + weren’t as high as those for + car loans, and were much + +On line 1257: + house— weren’t as high + as those for car loans, and were + much less than credit + +On line 1257: + weren’t as high as + those for car loans, and were much + less than credit cards. + +On line 1257: + as those for car loans, + and were much less than credit + cards. The advantages + +On line 1257: + those for car loans, and + were much less than credit cards. + The advantages of + +On line 1257: + for car loans, and were + much less than credit cards. The + advantages of a + +On line 1257: + and were much less than + credit cards. The advantages + of a mortgage over + +On line 1257: + much less than credit + cards. The advantages of a + mortgage over other + +On line 1257: + than credit cards. The + advantages of a mortgage + over other forms of + +On line 1257: + over other forms of + debt were solidified in + with the Tax Reform + +On line 1257: + other forms of debt + were solidified in with + the Tax Reform Act, + +On line 1257: + were solidified + in with the Tax Reform Act, + which barred deducting + +On line 1257: + Tax Reform Act, which + barred deducting interest + payments on consumer + +On line 1257: + consumer loans but kept + the deduction for mortgage + interest payments. + +On line 1259: + interest payments. + In the 1980s and into the + early 1990s, before + +On line 1259: + the assessment of + risk, mortgage lenders (including + subprime lenders) relied + +On line 1259: + on other factors + when underwriting mortgages. + As Tom Putnam, a + +On line 1259: + when underwriting + mortgages. As Tom Putnam, a + Sacramento-based mortgage + +On line 1259: + As Tom Putnam, a + Sacramento-based mortgage banker, told + the Commission, they + +On line 1259: + Sacramento-based mortgage + banker, told the Commission, they + traditionally + +On line 1259: + told the Commission, + they traditionally lent + based on the four C’s: + +On line 1259: + the four C’s: credit + (quantity, quality, and + duration of the + +On line 1259: + credit (quantity, + quality, and duration + of the borrower’s + +On line 1259: + income), capital + (sufficient liquid funds to + cover down payments, + +On line 1259: + costs, and reserves), and + collateral (value and + condition of the + +On line 1259: + and collateral + (value and condition of + the property).2 Their + +On line 1259: + of the property).2 + Their decisions depended + on judgments about how + +On line 1259: + the property).2 Their + decisions depended on + judgments about how strength + +On line 1259: + how strength in one area, + such as collateral, might + offset weaknesses + +On line 1259: + such as credit. They + underwrote borrowers one + at a time, out of + +On line 1259: + one at a time, out + of local offices. In a + few cases, such as + +On line 1259: + at a time, out of + local offices. In a few + cases, such as CitiFinancial, + +On line 1259: + time, out of local + offices. In a few cases, + such as CitiFinancial, subprime + +On line 1259: + of local offices. + In a few cases, such as + CitiFinancial, subprime lending + +On line 1259: + local offices. In + a few cases, such as CitiFinancial, + subprime lending firms + +On line 1259: + offices. In a few + cases, such as CitiFinancial, subprime + lending firms were part + +On line 1259: + In a few cases, + such as CitiFinancial, subprime lending + firms were part of a + +On line 1259: + a few cases, such + as CitiFinancial, subprime lending firms + were part of a bank + +On line 1259: + cases, such as CitiFinancial, + subprime lending firms were part + of a bank holding + +On line 1259: + firms were part of a + bank holding company, but + most—including Household, + +On line 1261: + finance companies. + Without access to deposits, + they generally + +On line 1261: + Without access to + deposits, they generally + funded themselves with + +On line 1261: + access to deposits, + they generally funded + themselves with short-term + +On line 1261: + they generally + funded themselves with short-term + lines of credit, or + +On line 1261: + themselves with short-term + lines of credit, or "warehouse + lines," from commercial + +On line 1261: + lines of credit, or + "warehouse lines," from commercial + or investment banks. + +On line 1261: + or "warehouse lines," from + commercial or investment + banks. In many cases, + +On line 1261: + lines," from commercial + or investment banks. In many + cases, the finance + +On line 1261: + or investment banks. + In many cases, the finance + companies did not + +On line 1261: + banks. In many cases, + the finance companies did + not keep the mortgages. + +On line 1261: + In many cases, the + finance companies did not + keep the mortgages. Some + +On line 1261: + cases, the finance + companies did not keep the + mortgages. Some sold the + +On line 1261: + finance companies + did not keep the mortgages. Some + sold the loans to the + +On line 1261: + companies did not + keep the mortgages. Some sold the + loans to the same banks + +On line 1261: + not keep the mortgages. + Some sold the loans to the same + banks extending the + +On line 1261: + Some sold the loans to + the same banks extending the + warehouse lines. The banks + +On line 1261: + same banks extending + the warehouse lines. The banks would + securitize and + +On line 1261: + warehouse lines. The banks + would securitize and sell + the loans to investors + +On line 1261: + would securitize + and sell the loans to investors + or keep them on their + +On line 1261: + loans to investors or + keep them on their balance sheets. + In other cases, + +On line 1261: + to investors or keep + them on their balance sheets. In + other cases, the + +On line 1261: + them on their balance + sheets. In other cases, the + finance company + +On line 1261: + their balance sheets. In + other cases, the finance + company itself + +On line 1261: + other cases, the + finance company itself + packaged and sold the + +On line 1261: + packaged and sold the + loans—often partnering with + the banks extending + +On line 1261: + partnering with the + banks extending the warehouse + lines. Meanwhile, the S&Ls + +On line 1261: + banks extending the + warehouse lines. Meanwhile, the S&Ls + that originated + +On line 1261: + lines. Meanwhile, the S&Ls + that originated subprime + loans generally + +On line 1267: + SO COMPLICATED + HOW IS ANYBODY GOING TO + KNOW1 Debt outstanding + +On line 1267: + COMPLICATED HOW + IS ANYBODY GOING TO KNOW1 + Debt outstanding in + +On line 1267: + IS ANYBODY GOING + TO KNOW1 Debt outstanding in + U.S. credit markets + +On line 1267: + ANYBODY GOING TO + KNOW1 Debt outstanding in U.S. + credit markets tripled + +On line 1267: + GOING TO KNOW1 Debt + outstanding in U.S. credit + markets tripled during + +On line 1267: + markets tripled during + the 1980s, reaching trillion in + was securitized + +On line 1267: + reaching trillion in + was securitized mortgages + and GSE debt. Later, + +On line 1267: + as the single largest + component—a position + they maintained through the + +On line 1269: + through the financial + crisis.3 In the 1990s mortgage + companies, banks, and + +On line 1269: + In the 1990s mortgage + companies, banks, and Wall Street + securities firms + +On line 1269: + securities firms + began securitizing + mortgages (see figure + +On line 1269: + securitizing + mortgages (see figure And more + of them were subprime. + +On line 1269: + (see figure And more + of them were subprime. Salomon + Brothers, Merrill Lynch, + +On line 1269: + of them were subprime. + Salomon Brothers, Merrill Lynch, + and other Wall Street + +On line 1271: + and other Wall Street + firms started packaging and + selling "non-agency" + +On line 1271: + selling "non-agency" + mortgages—that is, loans that did not + conform to Fannie’s + +On line 1271: + mortgages—that is, loans that + did not conform to Fannie’s + and Freddie’s standards. + +On line 1271: + did not conform to + Fannie’s and Freddie’s standards. + Selling these required + +On line 1271: + conform to Fannie’s + and Freddie’s standards. Selling + these required investors + +On line 1271: + Fannie’s and Freddie’s + standards. Selling these required + investors to adjust + +On line 1271: + standards. Selling these + required investors to adjust + expectations. With + +On line 1271: + handled by Fannie + and Freddie, the question was + not "will you get the + +On line 1271: + Fannie and Freddie, + the question was not "will you + get the money back" + +On line 1271: + question was not "will + you get the money back" but + "when," former Salomon + +On line 1271: + you get the money + back" but "when," former Salomon + Brothers trader and + +On line 1271: + the money back" but + "when," former Salomon Brothers + trader and CEO of + +On line 1271: + "when," former Salomon + Brothers trader and CEO of + PentAlpha Jim Callahan told + +On line 1271: + Brothers trader and + CEO of PentAlpha Jim Callahan told + the FCIC.4 With these new + +On line 1271: + and that created + an opportunity for + S&P and Moody’s. As Lewis + +On line 1271: + that created an + opportunity for S&P + and Moody’s. As Lewis Ranieri, + +On line 1271: + opportunity + for S&P and Moody’s. As Lewis Ranieri, + a pioneer in + +On line 1271: + for S&P and Moody’s. As + Lewis Ranieri, a pioneer in + the market, told the + +On line 1271: + Moody’s. As Lewis Ranieri, a + pioneer in the market, + told the Commission, + +On line 1271: + pioneer in the + market, told the Commission, + when he presented + +On line 1271: + they asked, "‘This stuff is + so complicated how is + anybody going to + +On line 1271: + complicated how + is anybody going to know1 + How are the buyers + +On line 1271: + is anybody going + to know1 How are the buyers + going to buy1’" Ranieri + +On line 1271: + going to know1 How + are the buyers going to + buy1’" Ranieri said, "One of + +On line 1271: + How are the buyers + going to buy1’" Ranieri said, "One + of the solutions + +On line 1271: + the buyers going + to buy1’" Ranieri said, "One of the + solutions was, it + +On line 1271: + going to buy1’" Ranieri + said, "One of the solutions + was, it had to have + +On line 1271: + buy1’" Ranieri said, "One of + the solutions was, it had + to have a rating. + +On line 1271: + Ranieri said, "One of the + solutions was, it had to + have a rating. And + +On line 1271: + solutions was, it + had to have a rating. And + that put the rating + +On line 1271: + was, it had to have + a rating. And that put the + rating services in + +On line 1273: + rating. And that put + the rating services in the + business."5 Non-agency + +On line 1273: + business."5 Non-agency + securitizations were + only a few years + +On line 1273: + a few years old when + they received a powerful + stimulus from an + +On line 1273: + old when they received + a powerful stimulus + from an unlikely + +On line 1273: + when they received a + powerful stimulus from + an unlikely source: + +On line 1273: + an unlikely source: + the federal government. + The savings and loan + +On line 1273: + source: the federal + government. The savings and + loan crisis had left + +On line 1273: + The savings and loan + crisis had left Uncle Sam + with billion in loans + +On line 1273: + and loan crisis had + left Uncle Sam with billion + in loans and real + +On line 1273: + left Uncle Sam with + billion in loans and real + estate from failed thrifts + +On line 1273: + with billion in loans + and real estate from failed + thrifts and banks. Congress + +On line 1273: + in loans and real + estate from failed thrifts and banks. + Congress established + +On line 1273: + estate from failed thrifts + and banks. Congress established + the Resolution + +On line 1275: + the Resolution + Trust Corporation (RTC) in + to offload mortgages + +On line 1275: + Resolution Trust + Corporation (RTC) in to + offload mortgages and + +On line 1275: + Trust Corporation + (RTC) in to offload mortgages + and real estate, + +On line 1275: + Corporation (RTC) + in to offload mortgages and + real estate, and + +On line 1275: + (RTC) in to offload + mortgages and real estate, + and sometimes the failed + +On line 1275: + offload mortgages and + real estate, and sometimes + the failed thrifts themselves, + +On line 1275: + mortgages and real + estate, and sometimes the failed + thrifts themselves, now owned + +On line 1275: + estate, and sometimes + the failed thrifts themselves, now owned + by the government. + +On line 1275: + and sometimes the failed + thrifts themselves, now owned by the + government. While the + +On line 1275: + the failed thrifts themselves, + now owned by the government. + While the RTC was able + +On line 1275: + failed thrifts themselves, now + owned by the government. While + the RTC was able to + +On line 1275: + thrifts themselves, now owned + by the government. While the + RTC was able to sell + +On line 1275: + government. While the + RTC was able to sell billion + of these mortgages to + +On line 1275: + RTC was able to sell + billion of these mortgages to + Fannie and Freddie, + +On line 1275: + able to sell billion + of these mortgages to Fannie + and Freddie, most did + +On line 1275: + to sell billion of + these mortgages to Fannie and + Freddie, most did not + +On line 1277: + mortgages to Fannie + and Freddie, most did not meet + the GSEs’ standards. Some + +On line 1277: + and Freddie, most did + not meet the GSEs’ standards. Some + were what might be called + +On line 1277: + did not meet the GSEs’ + standards. Some were what might be + called subprime today, + +On line 1277: + the GSEs’ standards. Some + were what might be called subprime + today, but others + +On line 1279: + that later became + popular.6 RTC officials + soon concluded that + +On line 1279: + soon concluded that + they had neither the time nor + the resources to sell + +On line 1279: + concluded that they + had neither the time nor the + resources to sell off + +On line 1279: + that they had neither + the time nor the resources to + sell off the assets + +On line 1279: + they had neither the + time nor the resources to sell + off the assets in + +On line 1279: + had neither the time + nor the resources to sell off + the assets in their + +On line 1279: + time nor the resources + to sell off the assets in + their portfolio one + +On line 1279: + nor the resources to + sell off the assets in their + portfolio one by + +On line 1279: + sell off the assets + in their portfolio one by + one and thrift by thrift. + +On line 1279: + off the assets in + their portfolio one by one + and thrift by thrift. They + +On line 1279: + the assets in their + portfolio one by one and + thrift by thrift. They turned + +On line 1279: + their portfolio one + by one and thrift by thrift. They + turned to the private + +On line 1279: + by one and thrift by + thrift. They turned to the private + sector, contracting + +On line 1279: + thrift. They turned to the + private sector, contracting + with real estate + +On line 1279: + real estate and + financial professionals + to securitize + +On line 1279: + professionals to + securitize some of the + assets. By the time + +On line 1279: + securitize some + of the assets. By the time + the RTC concluded + +On line 1279: + had securitized + billion in residential + mortgages.7 The RTC in + +On line 1279: + familiar with the + securitization of + these assets, mortgage + +On line 1279: + in hand. As figure + shows, subprime originations + increased from billion + +On line 1279: + from billion in to + billion in The proportion + securitized in + +On line 1279: + to billion in The + proportion securitized + in the late 1990s peaked + +On line 1285: + the RTC and by Wall + Street were similar to the + Fannie and Freddie + +On line 1285: + Fannie and Freddie + securitizations. The + first step was to get + +On line 1285: + first step was to get + principal and interest + payments from a group + +On line 1285: + to get principal + and interest payments from + a group of mortgages + +On line 1285: + get principal and + interest payments from a + group of mortgages to + +On line 1285: + payments from a group + of mortgages to flow into + a single pool. But + +On line 1285: + group of mortgages to + flow into a single pool. + But in "private-label" + +On line 1285: + securities (that + is, securitizations + not done by Fannie + +On line 1285: + not done by Fannie + or Freddie), the payments were + then "tranched" in a way + +On line 1285: + done by Fannie or + Freddie), the payments were then + "tranched" in a way to + +On line 1285: + Fannie or Freddie), + the payments were then "tranched" in + a way to protect + +On line 1285: + Freddie), the payments + were then "tranched" in a way to + protect some investors + +On line 1285: + payments were then "tranched" + in a way to protect some + investors from losses. + +On line 1285: + were then "tranched" in a + way to protect some investors + from losses. Investors + +On line 1285: + then "tranched" in a way + to protect some investors from + losses. Investors in + +On line 1287: + of principal and + interest in different + orders. Most of the + +On line 1287: + orders. Most of the + earliest private-label deals, + in the late 1980s and + +On line 1287: + of the earliest + private-label deals, in the late + 1980s and early 1990s, + +On line 1287: + late 1980s and early + 1990s, used a rudimentary + form of tranching. There + +On line 1287: + 1980s and early 1990s, + used a rudimentary form + of tranching. There were + +On line 1287: + of tranching. There were + typically two tranches + in each deal. The less + +On line 1287: + were typically + two tranches in each deal. The + less risky tranche received + +On line 1287: + each deal. The less risky + tranche received principal and + interest payments + +On line 1287: + less risky tranche received + principal and interest + payments first and was + +On line 1287: + received principal + and interest payments first + and was usually + +On line 1287: + guaranteed by an + insurance company. The + more risky tranche received + +On line 1287: + tranche received payments + second, was not guaranteed, + and was usually + +On line 1287: + was not guaranteed, + and was usually kept by + the company that + +On line 1287: + and was usually + kept by the company that + originated the + +On line 1289: + mortgages. Within a + decade, securitizations + had become much more + +On line 1289: + had become much more + complex: they had more tranches, + each with different + +On line 1289: + they had more tranches, + each with different payment + streams and different + +On line 1289: + had more tranches, each + with different payment streams + and different risks, + +On line 1289: + more tranches, each with + different payment streams and + different risks, which + +On line 1289: + each with different + payment streams and different + risks, which were tailored + +On line 1289: + different payment + streams and different risks, which + were tailored to meet + +On line 1289: + streams and different + risks, which were tailored to meet + investors’ demands. The + +On line 1289: + different risks, which + were tailored to meet investors’ + demands. The entire + +On line 1289: + risks, which were tailored + to meet investors’ demands. The + entire private-label + +On line 1289: + were tailored to meet + investors’ demands. The entire + private-label mortgage + +On line 1289: + created, sold, and + bought the investments—would become + highly dependent + +On line 1289: + bought the investments—would + become highly dependent + on this slice-and-dice process, and + +On line 1289: + on this slice-and-dice process, and + regulators and market + participants alike + +On line 1289: + and regulators + and market participants + alike took for granted + +On line 1289: + regulators and + market participants alike + took for granted that + +On line 1289: + it efficiently + allocated risk to those + best able and willing + +On line 1291: + allocated risk + to those best able and willing + to bear that risk. To + +On line 1291: + risk to those best able + and willing to bear that risk. + To demonstrate how this + +On line 1291: + to those best able and + willing to bear that risk. To + demonstrate how this process + +On line 1291: + best able and willing + to bear that risk. To demonstrate + how this process worked, we’ll + +On line 1291: + and willing to bear + that risk. To demonstrate how this + process worked, we’ll describe + +On line 1291: + willing to bear that + risk. To demonstrate how this process + worked, we’ll describe a + +On line 1291: + that risk. To demonstrate + how this process worked, we’ll describe + a typical deal, + +On line 1291: + risk. To demonstrate how + this process worked, we’ll describe a + typical deal, named + +On line 1291: + worked, we’ll describe a + typical deal, named CMLTI 2006-NC2, + involving million + +On line 1291: + typical deal, named + CMLTI 2006-NC2, involving million + in mortgage-backed bonds.9 In + +On line 1291: + mortgage-backed bonds.9 In New + Century Financial, a + California-based + +On line 1291: + California-based + lender, originated and sold + subprime mortgages to + +On line 1291: + lender, originated + and sold subprime mortgages to + Citigroup, which sold + +On line 1291: + sold subprime mortgages + to Citigroup, which sold them + to a separate + +On line 1291: + to Citigroup, which + sold them to a separate + legal entity + +On line 1291: + separate legal + entity that Citigroup + sponsored that would own + +On line 1291: + legal entity + that Citigroup sponsored that + would own the mortgages + +On line 1291: + Citigroup sponsored + that would own the mortgages and + issue the tranches. + +On line 1291: + would own the mortgages + and issue the tranches. The + entity purchased + +On line 1291: + mortgages and issue + the tranches. The entity + purchased the loans with + +On line 1291: + issue the tranches. + The entity purchased the + loans with cash it had + +On line 1291: + purchased the loans with + cash it had raised by selling + the securities + +On line 1291: + cash it had raised by + selling the securities + these loans would back. The + +On line 1291: + raised by selling the + securities these loans would + back. The entity + +On line 1291: + securities these + loans would back. The entity + had been created + +On line 1291: + back. The entity + had been created as a + separate legal + +On line 1291: + had been created + as a separate legal + structure so that the + +On line 1291: + created as a + separate legal structure + so that the assets + +On line 1291: + as a separate + legal structure so that the + assets would sit off + +On line 1291: + legal structure so + that the assets would sit off + Citigroup’s balance + +On line 1291: + that the assets would + sit off Citigroup’s balance + sheet, an arrangement + +On line 1291: + the assets would sit + off Citigroup’s balance sheet, + an arrangement with + +On line 1291: + assets would sit off + Citigroup’s balance sheet, an + arrangement with tax + +On line 1293: + The mortgages carried + the rights to the borrowers’ + monthly payments, which + +On line 1293: + monthly payments, which + the Citigroup entity + divided into + +On line 1293: + into tranches of + mortgage-backed securities; each + tranche gave investors a + +On line 1293: + tranche gave investors a + different priority + claim on the flow of + +On line 1293: + priority claim + on the flow of payments from + the borrowers, and + +On line 1293: + claim on the flow of + payments from the borrowers, + and a different + +On line 1293: + the borrowers, and + a different interest + rate and repayment + +On line 1293: + repayment schedule. + The credit rating agencies + assigned ratings to + +On line 1293: + The credit rating + agencies assigned ratings to + most of these tranches + +On line 1295: + heavily on these + ratings. Tranches were assigned + letter ratings by + +On line 1295: + ratings. Tranches were + assigned letter ratings by + the rating agencies + +On line 1297: + letter ratings by + the rating agencies based on + their riskiness. In + +On line 1297: + the rating agencies + based on their riskiness. In + this report, ratings + +On line 1297: + rating agencies based + on their riskiness. In this + report, ratings are + +On line 1297: + presented in S&P’s + classification system, + which assigns ratings + +On line 1297: + highest rating for + the safest investments, referred + to here as triple-A), "AA" + +On line 1297: + rating for the safest + investments, referred to here + as triple-A), "AA" (less safe + +On line 1297: + the safest investments, + referred to here as triple-A), "AA" + (less safe than AAA), "A," + +On line 1297: + investments, referred + to here as triple-A), "AA" (less safe + than AAA), "A," "BBB," and + +On line 1297: + and "BB," and further + distinguishes ratings with + and Anything rated + +On line 1297: + is considered "junk." + Moody’s uses a similar + system in which "Aaa" + +On line 1299: + system in which "Aaa" + is highest, followed by "Aa," + "A," "Baa," "Ba," and so + +On line 1299: + is highest, followed + by "Aa," "A," "Baa," "Ba," and so + forth. For example, + +On line 1299: + highest, followed by + "Aa," "A," "Baa," "Ba," and so forth. + For example, an + +On line 1299: + by "Aa," "A," "Baa," "Ba," + and so forth. For example, + an S&P rating of + +On line 1299: + "Aa," "A," "Baa," "Ba," and + so forth. For example, an + S&P rating of BBB + +On line 1299: + "A," "Baa," "Ba," and so + forth. For example, an S&P + rating of BBB would + +On line 1299: + forth. For example, + an S&P rating of BBB would + correspond to a + +On line 1299: + an S&P rating of + BBB would correspond to a + Moody’s rating of Baa. + +On line 1299: + S&P rating of BBB + would correspond to a Moody’s + rating of Baa. In + +On line 1299: + BBB would correspond + to a Moody’s rating of Baa. + In this Citigroup + +On line 1299: + would correspond to + a Moody’s rating of Baa. In + this Citigroup deal, + +On line 1299: + correspond to a + Moody’s rating of Baa. In this + Citigroup deal, the + +On line 1299: + to a Moody’s rating + of Baa. In this Citigroup + deal, the four senior + +On line 1299: + rating of Baa. In + this Citigroup deal, the four + senior tranches—the + +On line 1301: + this Citigroup deal, + the four senior tranches—the + safest— were rated triple-A + +On line 1301: + Citigroup deal, the + four senior tranches—the safest— + were rated triple-A by + +On line 1301: + deal, the four senior + tranches—the safest— were rated + triple-A by the agencies. + +On line 1303: + senior tranches—the + safest— were rated triple-A by the + agencies. Below the + +On line 1303: + tranches—the safest— were + rated triple-A by the agencies. + Below the senior + +On line 1303: + safest— were rated triple-A + by the agencies. Below the + senior tranches and + +On line 1303: + rated triple-A by the + agencies. Below the senior + tranches and next in + +On line 1303: + triple-A by the agencies. + Below the senior tranches + and next in line for + +On line 1303: + the agencies. Below + the senior tranches and next + in line for payments + +On line 1303: + agencies. Below the + senior tranches and next in + line for payments were + +On line 1303: + the senior tranches + and next in line for payments + were eleven "mezzanine" + +On line 1303: + and next in line for + payments were eleven "mezzanine" + tranches—so named because + +On line 1303: + in line for payments + were eleven "mezzanine" tranches—so + named because they sat + +On line 1303: + were eleven "mezzanine" + tranches—so named because they sat + between the riskiest + +On line 1303: + "mezzanine" tranches—so + named because they sat between + the riskiest and the + +On line 1303: + tranches—so named because + they sat between the riskiest + and the safest tranches. + +On line 1305: + named because they sat + between the riskiest and the + safest tranches. These were + +On line 1305: + they sat between the + riskiest and the safest tranches. + These were riskier than + +On line 1305: + riskiest and the safest + tranches. These were riskier than + the senior tranches + +On line 1305: + the safest tranches. These + were riskier than the senior + tranches and, because + +On line 1305: + the senior tranches + and, because they paid off more + slowly, carried a + +On line 1305: + and, because they paid + off more slowly, carried a + higher risk that an + +On line 1305: + slowly, carried a + higher risk that an increase + in interest rates + +On line 1305: + a higher risk that + an increase in interest + rates would make the locked-in + +On line 1305: + risk that an increase + in interest rates would make + the locked-in interest + +On line 1305: + in interest rates + would make the locked-in interest + payments less valuable. + +On line 1305: + the locked-in interest + payments less valuable. As a + result, they paid a + +On line 1305: + payments less valuable. + As a result, they paid a + correspondingly + +On line 1305: + As a result, they + paid a correspondingly + higher interest + +On line 1305: + result, they paid a + correspondingly higher + interest rate. Three + +On line 1305: + correspondingly + higher interest rate. Three + of these tranches in + +On line 1305: + higher interest + rate. Three of these tranches in + the Citigroup deal + +On line 1305: + Three of these tranches + in the Citigroup deal were + rated AA, three were + +On line 1305: + these tranches in the + Citigroup deal were rated + AA, three were A, three + +On line 1305: + in the Citigroup + deal were rated AA, three were + A, three were BBB (the + +On line 1305: + Citigroup deal were + rated AA, three were A, three + were BBB (the lowest + +On line 1305: + rated AA, three were + A, three were BBB (the lowest + investment-grade + +On line 1305: + A, three were BBB (the + lowest investment-grade + rating), and two were + +On line 1305: + were BBB (the lowest + investment-grade rating), + and two were BB, or + +On line 1307: + investment-grade + rating), and two were BB, or + junk. The last to be + +On line 1307: + and two were BB, or + junk. The last to be paid was + the most junior tranche, + +On line 1307: + two were BB, or junk. + The last to be paid was the + most junior tranche, called + +On line 1307: + were BB, or junk. The + last to be paid was the most + junior tranche, called the + +On line 1307: + junk. The last to be + paid was the most junior tranche, + called the "equity," + +On line 1309: + most junior tranche, called + the "equity," "residual," + or "first-loss" tranche, set up + +On line 1309: + junior tranche, called the + "equity," "residual," or + "first-loss" tranche, set up to + +On line 1309: + "first-loss" tranche, set up to + receive whatever cash flow + was left over after + +On line 1309: + set up to receive + whatever cash flow was left + over after all the + +On line 1309: + whatever cash flow + was left over after all the + other investors had + +On line 1309: + was left over after + all the other investors had + been paid. This tranche would + +On line 1309: + over after all the + other investors had been paid. + This tranche would suffer + +On line 1309: + other investors had + been paid. This tranche would suffer + the first losses from + +On line 1309: + investors had been paid. + This tranche would suffer the first + losses from any efaults + +On line 1309: + had been paid. This tranche + would suffer the first losses + from any efaults of the + +On line 1309: + This tranche would suffer + the first losses from any efaults + of the mortgages in + +On line 1309: + tranche would suffer the + first losses from any efaults of + the mortgages in the + +On line 1309: + would suffer the first + losses from any efaults of the + mortgages in the pool. + +On line 1309: + first losses from any + efaults of the mortgages in the + pool. Commensurate + +On line 1309: + losses from any efaults + of the mortgages in the pool. + Commensurate with + +On line 1309: + efaults of the mortgages + in the pool. Commensurate + with this high risk, it + +On line 1309: + mortgages in the pool. + Commensurate with this high + risk, it provided + +On line 1309: + Commensurate with + this high risk, it provided + the highest yields (see + +On line 1309: + with this high risk, it + provided the highest yields + (see figure In the + +On line 1309: + risk, it provided + the highest yields (see figure + In the Citigroup + +On line 1309: + it provided the + highest yields (see figure In + the Citigroup deal, + +On line 1309: + the highest yields (see + figure In the Citigroup + deal, as was common, + +On line 1309: + yields (see figure In + the Citigroup deal, as was + common, this piece of + +On line 1309: + In the Citigroup + deal, as was common, this piece + of the deal was not + +On line 1309: + Citigroup deal, as + was common, this piece of the + deal was not rated + +On line 1309: + was common, this piece + of the deal was not rated + at all. Citigroup + +On line 1309: + common, this piece of + the deal was not rated at + all. Citigroup and + +On line 1309: + of the deal was not + rated at all. Citigroup + and a hedge fund each + +On line 1309: + deal was not rated + at all. Citigroup and a + hedge fund each held half + +On line 1309: + was not rated at + all. Citigroup and a hedge + fund each held half the + +On line 1309: + at all. Citigroup + and a hedge fund each held half + the equity tranche.10 + +On line 1311: + all. Citigroup and + a hedge fund each held half the + equity tranche.10 While + +On line 1311: + and a hedge fund each + held half the equity tranche.10 + While investors in the + +On line 1311: + fund each held half the + equity tranche.10 While investors + in the lower-rated + +On line 1311: + While investors in the + lower-rated tranches received + higher interest + +On line 1311: + lower-rated tranches + received higher interest + rates because they knew + +On line 1311: + because they knew there + was a risk of loss, investors + in the triple-A tranches + +On line 1311: + they knew there was a + risk of loss, investors in the + triple-A tranches did not + +On line 1311: + risk of loss, investors + in the triple-A tranches did not + expect payments from + +On line 1311: + in the triple-A tranches + did not expect payments from + the mortgages to stop. + +On line 1311: + the triple-A tranches did + not expect payments from the + mortgages to stop. This + +On line 1311: + not expect payments + from the mortgages to stop. This + expectation of + +On line 1311: + mortgages to stop. This + expectation of safety + was important, so + +On line 1311: + expectation of + safety was important, so + the firms structuring + +On line 1311: + the firms structuring + securities focused on + achieving high ratings. + +On line 1311: + focused on achieving + high ratings. In the structure + of this Citigroup + +On line 1311: + In the structure of + this Citigroup deal, which was + typical, million, + +On line 1311: + this Citigroup deal, + which was typical, million, + or was rated triple-A. + +On line 1313: + Citigroup deal, which + was typical, million, or + was rated triple-A. GREATER + +On line 1315: + or was rated triple-A. + GREATER ACCESS TO LENDING: "A + BUSINESS WHERE WE CAN + +On line 1315: + triple-A. GREATER ACCESS TO + LENDING: "A BUSINESS WHERE WE + CAN MAKE SOME MONEY" + +On line 1317: + hold, new computer + and modeling technologies + were reshaping the + +On line 1317: + were reshaping the + mortgage market. In the mid-1990s, + standardized data + +On line 1317: + data with loan-level + information on mortgage + performance became + +On line 1317: + information on + mortgage performance became + more widely available. + +On line 1317: + widely available. Lenders + underwrote mortgages using + credit scores, such as + +On line 1317: + such as the FICO + score, developed by Fair Isaac + Corporation. In + +On line 1317: + score, developed by + Fair Isaac Corporation. In + Freddie Mac rolled out + +On line 1317: + system for mortgage + underwriting for use by + lenders, and Fannie Mae + +On line 1317: + later. The days of + labori-ous, slow, and manual + underwriting of + +On line 1317: + underwriting of + individual mortgage + applicants were over, + +On line 1317: + individual + mortgage applicants were over, + lowering cost and + +On line 1317: + mortgage applicants + were over, lowering cost and + broadening access + +On line 1319: + were over, lowering + cost and broadening access + to mortgages. This new + +On line 1319: + over, lowering cost + and broadening access to + mortgages. This new process + +On line 1319: + on quantitative + expectations: Given the + borrower, the home, + +On line 1319: + would be on time1 What + was the probability + that borrowers would + +On line 1319: + would prepay their loans, + either because they sold their + homes or refinanced + +On line 1321: + the Community + Reinvestment Act (CRA). Congress + enacted the CRA + +On line 1321: + Reinvestment Act (CRA). + Congress enacted the CRA + in to ensure that + +On line 1321: + Congress enacted + the CRA in to ensure that + banks and thrifts served their + +On line 1321: + banks and thrifts served their + communities, in response + to concerns that banks + +On line 1321: + were refusing to + lend in certain neighborhoods + without regard to + +On line 1321: + without regard to + the creditworthiness of + individuals + +On line 1321: + creditworthiness + of individuals and + businesses in those + +On line 1323: + and businesses in + those neighborhoods (a practice + known as redlining).11 The + +On line 1323: + businesses in those + neighborhoods (a practice known + as redlining).11 The CRA + +On line 1323: + in those neighborhoods + (a practice known as redlining).11 + The CRA called on banks + +On line 1323: + those neighborhoods (a + practice known as redlining).11 The + CRA called on banks and + +On line 1323: + (a practice known as + redlining).11 The CRA called on banks + and thrifts to invest, + +On line 1323: + The CRA called on banks + and thrifts to invest, lend, and + service areas where + +On line 1323: + called on banks and thrifts + to invest, lend, and service + areas where they took + +On line 1323: + and thrifts to invest, + lend, and service areas where + they took in deposits, + +On line 1323: + thrifts to invest, lend, + and service areas where they + took in deposits, so + +On line 1323: + to invest, lend, and + service areas where they took + in deposits, so long + +On line 1323: + took in deposits, so + long as these activities + didn’t impair their + +On line 1323: + financial safety + and soundness. It directed + regulators to + +On line 1323: + regulators to + consider CRA performance + whenever a bank + +On line 1323: + to consider CRA + performance whenever a + bank or thrift applied + +On line 1323: + or thrift applied for + regulatory approval + for mergers, to open + +On line 1323: + regulatory + approval for mergers, to open + new branches, or to + +On line 1323: + for mergers, to open + new branches, or to engage + in new businesses.12 + +On line 1325: + mergers, to open new + branches, or to engage in + new businesses.12 The + +On line 1325: + new branches, or to + engage in new businesses.12 + The CRA encouraged + +On line 1325: + in new businesses.12 + The CRA encouraged banks to + lend to borrowers + +On line 1325: + new businesses.12 The + CRA encouraged banks to lend + to borrowers to + +On line 1325: + businesses.12 The CRA + encouraged banks to lend to + borrowers to whom + +On line 1325: + The CRA encouraged + banks to lend to borrowers + to whom they may have + +On line 1325: + borrowers to whom + they may have previously + denied credit. While + +On line 1327: + loans made under the + CRA performed consistently + with the rest of the + +On line 1327: + made under the CRA + performed consistently with + the rest of the banks’ + +On line 1327: + with the rest of the + banks’ portfolios, suggesting + CRA lending was not + +On line 1327: + the banks’ portfolios, + suggesting CRA lending was + not riskier than the + +On line 1327: + was not riskier than + the banks’ other lending.13 "There + is little or no + +On line 1327: + than the banks’ other + lending.13 "There is little or + no evidence that + +On line 1327: + is little or no + evidence that banks’ safety + and soundness have been + +On line 1327: + or no evidence + that banks’ safety and soundness + have been compromised + +On line 1327: + no evidence that + banks’ safety and soundness have + been compromised by + +On line 1327: + evidence that banks’ + safety and soundness have been + compromised by such + +On line 1327: + that banks’ safety and + soundness have been compromised + by such lending, and + +On line 1327: + been compromised by + such lending, and bankers often + report sound business + +On line 1327: + such lending, and bankers + often report sound business + opportunities," + +On line 1327: + often report sound + business opportunities," + Federal Reserve + +On line 1327: + opportunities," + Federal Reserve Chairman + Alan Greenspan said of CRA + +On line 1331: + Reserve Chairman Alan + Greenspan said of CRA lending in + Residential Mortgage-Backed + +On line 1331: + Alan Greenspan said of CRA + lending in Residential + Mortgage-Backed Securities + +On line 1333: + Mortgage-Backed Securities + Financial institutions + packaged subprime, Alt-A + +On line 1333: + packaged subprime, Alt-A + and other mortgages into + securities. As + +On line 1333: + and other mortgages + into securities. As + long as the housing + +On line 1333: + securities. As + long as the housing market + continued to boom, + +On line 1333: + long as the housing + market continued to boom, + these securities + +On line 1333: + market continued + to boom, these securities + would perform. But when + +On line 1333: + perform. But when the + economy faltered and the + mortgages defaulted, + +On line 1333: + economy faltered + and the mortgages defaulted, + lower-rated tranches + +On line 1335: + were left worthless. In + President Bill Clinton asked + regulators to + +On line 1335: + In President Bill + Clinton asked regulators + to improve banks’ CRA + +On line 1335: + regulators to + improve banks’ CRA performance + while responding to + +On line 1335: + while responding to + industry complaints that the + regulatory + +On line 1335: + regulatory + review process for compliance + was too burdensome + +On line 1335: + process for compliance + was too burdensome and too + subjective. In the + +On line 1335: + was too burdensome + and too subjective. In the + Fed, Office of Thrift + +On line 1335: + and too subjective. + In the Fed, Office of Thrift + Supervision (OTS), + +On line 1335: + Fed, Office of Thrift + Supervision (OTS), Office + of the Comptroller + +On line 1335: + Supervision (OTS), + Office of the Comptroller + of the Currency + +On line 1335: + of the Comptroller + of the Currency (OCC), and + Federal Deposit + +On line 1335: + Deposit Insurance + Corporation (FDIC) issued + regulations that + +On line 1335: + regulatory + focus from the efforts that + banks made to comply + +On line 1335: + the efforts that banks + made to comply with the CRA + to their actual + +On line 1335: + comply with the CRA + to their actual results. + Regulators and + +On line 1337: + observable numbers + that measured banks’ compliance + with the law. Former + +On line 1337: + numbers that measured + banks’ compliance with the law. + Former comptroller + +On line 1337: + banks’ compliance with + the law. Former comptroller + John Dugan told FCIC staff + +On line 1337: + compliance with the + law. Former comptroller John + Dugan told FCIC staff that + +On line 1337: + with the law. Former + comptroller John Dugan told FCIC + staff that the impact + +On line 1337: + Former comptroller + John Dugan told FCIC staff that the + impact of the CRA + +On line 1337: + comptroller John Dugan + told FCIC staff that the impact + of the CRA had been + +On line 1337: + Dugan told FCIC staff that + the impact of the CRA had + been lasting, because + +On line 1337: + told FCIC staff that the + impact of the CRA had been + lasting, because it + +On line 1337: + the impact of the + CRA had been lasting, because + it encouraged banks + +On line 1337: + impact of the CRA + had been lasting, because it + encouraged banks to + +On line 1337: + CRA had been lasting, + because it encouraged banks + to lend to people + +On line 1337: + been lasting, because + it encouraged banks to lend + to people who in + +On line 1337: + lasting, because it + encouraged banks to lend to + people who in the + +On line 1337: + it encouraged banks + to lend to people who in + the past might not have + +On line 1337: + encouraged banks to + lend to people who in the + past might not have had + +On line 1337: + lend to people who + in the past might not have had + access to credit. + +On line 1337: + people who in the + past might not have had access + to credit. He said, + +On line 1337: + in the past might not + have had access to credit. + He said, "There is a + +On line 1337: + past might not have had + access to credit. He said, + "There is a tremendous + +On line 1337: + not have had access + to credit. He said, "There is + a tremendous amount of + +On line 1337: + access to credit. + He said, "There is a tremendous + amount of investment + +On line 1337: + to credit. He said, + "There is a tremendous amount of + investment that goes + +On line 1337: + "There is a tremendous + amount of investment that goes + on in inner cities + +On line 1337: + is a tremendous amount + of investment that goes on + in inner cities and + +On line 1337: + amount of investment + that goes on in inner cities + and other places to + +On line 1337: + of investment that + goes on in inner cities and + other places to build + +On line 1337: + in inner cities and + other places to build things that + are quite impressive. + +On line 1339: + places to build things that + are quite impressive. And the + bankers conversely say, + +On line 1339: + to build things that are + quite impressive. And the bankers + conversely say, ‘This + +On line 1339: + are quite impressive. + And the bankers conversely say, + ‘This is proven to be + +On line 1339: + quite impressive. And + the bankers conversely say, ‘This + is proven to be a + +On line 1339: + the bankers conversely + say, ‘This is proven to be a + business where we can + +On line 1339: + conversely say, ‘This + is proven to be a business + where we can make some + +On line 1339: + say, ‘This is proven to + be a business where we can + make some money; not + +On line 1339: + ‘This is proven to be + a business where we can make + some money; not a + +On line 1339: + is proven to be a + business where we can make some + money; not a lot, + +On line 1339: + to be a business + where we can make some money; + not a lot, but when + +On line 1339: + be a business where + we can make some money; not + a lot, but when you + +On line 1339: + business where we can + make some money; not a lot, + but when you factor + +On line 1339: + where we can make some + money; not a lot, but when + you factor that in + +On line 1339: + make some money; not + a lot, but when you factor + that in plus the good + +On line 1339: + some money; not a + lot, but when you factor that + in plus the good will + +On line 1339: + money; not a lot, + but when you factor that in + plus the good will that + +On line 1339: + not a lot, but when + you factor that in plus the + good will that we get + +On line 1339: + a lot, but when you + factor that in plus the good + will that we get from + +On line 1339: + but when you factor + that in plus the good will that + we get from it, it + +On line 1339: + when you factor that + in plus the good will that we + get from it, it kind + +On line 1339: + you factor that in + plus the good will that we get + from it, it kind of + +On line 1339: + factor that in plus + the good will that we get from + it, it kind of works.’"15 + +On line 1341: + in plus the good will + that we get from it, it kind + of works.’"15 Lawrence Lindsey, + +On line 1341: + plus the good will that + we get from it, it kind of + works.’"15 Lawrence Lindsey, a + +On line 1341: + good will that we get + from it, it kind of works.’"15 Lawrence + Lindsey, a former + +On line 1341: + from it, it kind of + works.’"15 Lawrence Lindsey, a former + Fed governor who + +On line 1341: + it, it kind of works.’"15 + Lawrence Lindsey, a former Fed + governor who was + +On line 1341: + works.’"15 Lawrence Lindsey, a + former Fed governor who + was responsible + +On line 1341: + Fed governor who + was responsible for the + Fed’s Division of + +On line 1341: + Fed’s Division of + Consumer and Community + Affairs, which oversees + +On line 1341: + enforcement, told the + FCIC that improved enforcement + had given the banks + +On line 1341: + the FCIC that improved + enforcement had given the + banks an incentive + +On line 1341: + had given the banks + an incentive to invest + in technology + +On line 1341: + given the banks an + incentive to invest in + technology that + +On line 1341: + an incentive to + invest in technology + that would make lending + +On line 1341: + that would make lending + to lower-income borrowers + profitable by such means + +On line 1341: + models customized + to the market. Shadow banks + not covered by the + +On line 1341: + market. Shadow banks + not covered by the CRA would + use these same credit + +On line 1341: + not covered by the + CRA would use these same credit + scoring models, which + +On line 1341: + the CRA would use these + same credit scoring models, + which could draw on now + +On line 1341: + CRA would use these same + credit scoring models, which + could draw on now more + +On line 1341: + could draw on now more + substantial historical + lending data for + +On line 1341: + to underwrite loans. + "We basically got a + cycle going which + +On line 1341: + "We basically + got a cycle going which + particularly + +On line 1341: + historic data, show + the default rates on this type + of lending were very, + +On line 1341: + show the default rates + on this type of lending were + very, very low," he said.16 + +On line 1341: + default rates on this + type of lending were very, very + low," he said.16 Indeed, + +On line 1341: + rates on this type of + lending were very, very low," he + said.16 Indeed, default + +On line 1341: + type of lending were + very, very low," he said.16 Indeed, + default rates were low + +On line 1341: + lending were very, very + low," he said.16 Indeed, default + rates were low during + +On line 1341: + very, very low," he said.16 + Indeed, default rates were low + during the prosper-ous + +On line 1341: + low," he said.16 Indeed, + default rates were low during + the prosper-ous 1990s, and + +On line 1341: + default rates were low + during the prosper-ous 1990s, and + regulators, bankers, + +On line 1341: + and regulators, + bankers, and lenders in the shadow + banking system took + +On line 1341: + bankers, and lenders in the + shadow banking system took + note of this success. + +On line 1343: + lenders in the shadow + banking system took note of + this success. SUBPRIME + +On line 1347: + Among nonbank mortgage + originators, the late 1990s + were a turning point. + +On line 1347: + originators, the + late 1990s were a turning point. + During the market + +On line 1347: + turning point. During + the market disruption caused + by the Russian debt + +On line 1347: + disruption caused by + the Russian debt crisis and + the Long-Term Capital + +On line 1347: + debt crisis and the + Long-Term Capital Management + collapse, the markets + +On line 1347: + Management collapse, + the markets saw a "flight to + quality"—that is, a + +On line 1347: + collapse, the markets + saw a "flight to quality"—that + is, a steep fall in + +On line 1347: + the markets saw a + "flight to quality"—that is, a + steep fall in demand + +On line 1347: + markets saw a "flight + to quality"—that is, a steep + fall in demand among + +On line 1347: + "flight to quality"—that + is, a steep fall in demand + among investors for risky + +On line 1347: + is, a steep fall in + demand among investors for risky + assets, including + +On line 1347: + steep fall in demand + among investors for risky assets, + including subprime + +On line 1349: + in to in Meanwhile, + subprime originators saw + the interest rate + +On line 1349: + originators saw + the interest rate at which + they could borrow in + +On line 1349: + saw the interest + rate at which they could borrow + in credit markets + +On line 1349: + rate at which they could + borrow in credit markets + skyrocket. They were + +On line 1349: + they could borrow in + credit markets skyrocket. + They were caught in a + +On line 1349: + in credit markets + skyrocket. They were caught in + a squeeze: borrowing + +On line 1349: + skyrocket. They were + caught in a squeeze: borrowing + costs increased at the + +On line 1349: + They were caught in a + squeeze: borrowing costs increased + at the very moment + +On line 1349: + were caught in a squeeze: + borrowing costs increased at + the very moment that + +On line 1349: + squeeze: borrowing costs + increased at the very moment + that their revenue stream + +On line 1349: + costs increased at the + very moment that their revenue + stream dried up.17 And some + +On line 1349: + increased at the very + moment that their revenue stream + dried up.17 And some were + +On line 1349: + the very moment that + their revenue stream dried up.17 And + some were caught holding + +On line 1349: + their revenue stream dried + up.17 And some were caught holding + tranches of subprime + +On line 1349: + up.17 And some were caught + holding tranches of subprime + securities that + +On line 1349: + caught holding tranches + of subprime securities + that turned out to be + +On line 1349: + holding tranches of + subprime securities that + turned out to be worth + +On line 1349: + tranches of subprime + securities that turned out + to be worth far less + +On line 1349: + securities that + turned out to be worth far less + than the value they + +On line 1349: + that turned out to be + worth far less than the value + they had been assigned. + +On line 1351: + out to be worth far + less than the value they had + been assigned. Mortgage + +On line 1351: + to be worth far less + than the value they had been + assigned. Mortgage lenders + +On line 1351: + less than the value + they had been assigned. Mortgage + lenders that depended + +On line 1351: + than the value they + had been assigned. Mortgage lenders + that depended on + +On line 1351: + they had been assigned. + Mortgage lenders that depended + on liquidity + +On line 1351: + short-term funding had + immediate problems. For + example, Southern + +On line 1351: + example, Southern + Pacific Funding (SFC), an + Oregon-based subprime lender + +On line 1351: + Pacific Funding + (SFC), an Oregon-based subprime lender + that securitized + +On line 1351: + its loans, reported + relatively positive + second-quarter results + +On line 1351: + in August Then, in + September, SFC notified + investors about "recent + +On line 1351: + notified investors + about "recent adverse market + conditions" in the + +On line 1351: + conditions" in the + securities markets and + expressed concern about + +On line 1351: + the securities + markets and expressed concern + about "the continued + +On line 1351: + markets and expressed + concern about "the continued + viability + +On line 1351: + viability + of securitization + in the foreseeable + +On line 1353: + in the foreseeable + future."18 A week later, SFC + filed for bankruptcy + +On line 1353: + week later, SFC filed + for bankruptcy protection. + Several other + +On line 1353: + Several other + nonbank subprime lenders that were + also dependent + +On line 1353: + financing from the + capital markets also + filed for bankruptcy + +On line 1353: + capital markets + also filed for bankruptcy + in and In the two + +On line 1353: + bankruptcy in and + In the two years following + the Russian default + +On line 1353: + in and In the two + years following the Russian + default crisis, of + +On line 1353: + two years following + the Russian default crisis, + of the top subprime + +On line 1353: + years following the + Russian default crisis, of + the top subprime lenders + +On line 1353: + of the top subprime + lenders declared bankruptcy, ceased + operations, or + +On line 1355: + declared bankruptcy, + ceased operations, or sold + out to stronger firms.19 When + +On line 1355: + ceased operations, + or sold out to stronger firms.19 When + these firms were sold, their + +On line 1355: + to stronger firms.19 When these + firms were sold, their buyers would + frequently absorb + +On line 1355: + When these firms were sold, + their buyers would frequently + absorb large losses. + +On line 1357: + were sold, their buyers + would frequently absorb large + losses. First Union, a + +On line 1357: + absorb large losses. + First Union, a large regional + bank headquartered in + +On line 1357: + bank headquartered in + North Carolina, incurred charges + of almost billion + +On line 1357: + billion after it + bought The Money Store. First Union + eventually shut + +On line 1357: + it bought The Money + Store. First Union eventually + shut down or sold off + +On line 1357: + bought The Money Store. + First Union eventually shut + down or sold off most + +On line 1357: + The Money Store. First + Union eventually shut down + or sold off most of + +On line 1357: + Money Store. First Union + eventually shut down or + sold off most of The + +On line 1359: + sold off most of The + Money Store’s operations. + Conseco, a leading + +On line 1359: + of The Money Store’s + operations. Conseco, a + leading insurance + +On line 1359: + lender. Disruptions in + the securitization + markets, as well as + +On line 1359: + eventually drove + Conseco into bankruptcy + in December At + +On line 1359: + drove Conseco into + bankruptcy in December + At the time, this was + +On line 1359: + At the time, this was + the third-largest bankruptcy in U.S. + history (after + +On line 1361: + bankruptcy in U.S. + history (after WorldCom and + Enron). Accounting + +On line 1361: + would also bring down + subprime lenders. Keystone, a small + national bank in + +On line 1361: + bring down subprime lenders. + Keystone, a small national + bank in West Virginia + +On line 1361: + subprime lenders. Keystone, + a small national bank in + West Virginia that made + +On line 1361: + a small national + bank in West Virginia that made + and securitized + +On line 1361: + bank in West Virginia + that made and securitized + subprime mortgage loans, + +On line 1361: + West Virginia that made + and securitized subprime + mortgage loans, failed in + +On line 1361: + in the 1990s—Keystone retained + the riskiest "first-loss" residual + tranches for its own + +On line 1361: + retained the riskiest + "first-loss" residual tranches for + its own account. These + +On line 1361: + for its own account. + These holdings far exceeded + the bank’s capital. + +On line 1361: + its own account. These + holdings far exceeded the + bank’s capital. But + +On line 1361: + far exceeded the + bank’s capital. But Keystone + assigned them grossly + +On line 1361: + bank’s capital. But + Keystone assigned them grossly + inflated values. + +On line 1361: + Keystone assigned them + grossly inflated values. + The OCC closed the bank + +On line 1361: + bank in September + after discovering "fraud + committed by the + +On line 1361: + as executives + had overstated the value + of the residual + +On line 1361: + had overstated the + value of the residual + tranches and other + +On line 1361: + failure occurred at + Superior Bank, one of + the most aggressive + +On line 1361: + Superior Bank, + one of the most aggressive + subprime mortgage lenders. + +On line 1361: + Bank, one of the most + aggressive subprime mortgage + lenders. Like Keystone, it + +On line 1361: + lenders. Like Keystone, it + too failed after having kept + and overvalued the + +On line 1361: + Like Keystone, it too + failed after having kept and + overvalued the first-loss + +On line 1361: + it too failed after + having kept and overvalued + the first-loss tranches on + +On line 1363: + and overvalued the + first-loss tranches on its balance + sheet. Many of the lenders + +On line 1363: + overvalued the first-loss + tranches on its balance sheet. + Many of the lenders that + +On line 1363: + the first-loss tranches on + its balance sheet. Many of the + lenders that survived or + +On line 1363: + first-loss tranches on its + balance sheet. Many of the lenders + that survived or were + +On line 1363: + on its balance sheet. + Many of the lenders that survived + or were bought in the + +On line 1363: + its balance sheet. Many + of the lenders that survived or + were bought in the 1990s + +On line 1363: + balance sheet. Many of + the lenders that survived or were + bought in the 1990s reemerged + +On line 1363: + Many of the lenders that + survived or were bought in the + 1990s reemerged in other + +On line 1363: + the lenders that survived + or were bought in the 1990s reemerged + in other forms. Long + +On line 1363: + lenders that survived or + were bought in the 1990s reemerged in + other forms. Long Beach + +On line 1363: + survived or were bought + in the 1990s reemerged in other + forms. Long Beach was the + +On line 1363: + were bought in the 1990s + reemerged in other forms. Long Beach + was the ancestor + +On line 1363: + bought in the 1990s reemerged + in other forms. Long Beach was + the ancestor of + +On line 1363: + in the 1990s reemerged in + other forms. Long Beach was the + ancestor of Ameriquest + +On line 1363: + reemerged in other forms. + Long Beach was the ancestor + of Ameriquest and Long Beach + +On line 1363: + other forms. Long Beach + was the ancestor of Ameriquest + and Long Beach Mortgage + +On line 1363: + forms. Long Beach was the + ancestor of Ameriquest and Long + Beach Mortgage (which was + +On line 1363: + the ancestor of + Ameriquest and Long Beach Mortgage (which + was in turn purchased + +On line 1363: + ancestor of Ameriquest + and Long Beach Mortgage (which was + in turn purchased by + +On line 1363: + Mortgage (which was in + turn purchased by Washington + Mutual), two of + +On line 1363: + the more aggressive + lenders during the first decade of + the new century. + +On line 1363: + lenders during the first + decade of the new century. + Associates First was + +On line 1363: + to Citigroup, and + Household bought Beneficial + Mortgage before it + +On line 1365: + itself acquired by + HSBC in With the subprime + market disrupted, + +On line 1365: + acquired by HSBC + in With the subprime market + disrupted, subprime + +On line 1365: + billion in down from + billion two years earlier.21 + Over the next few years, + +On line 1365: + down from billion two + years earlier.21 Over the next + few years, however, + +On line 1365: + years earlier.21 Over + the next few years, however, + subprime lending and + +On line 1367: + subprime lending and + securitization would + more than rebound. THE + +On line 1369: + would more than rebound. + THE REGULATORS: "OH, I + SEE" During the 1990s, + +On line 1369: + I SEE" During the + 1990s, various federal + agencies had taken + +On line 1369: + taken increasing + notice of abusive subprime + lending practices. But + +On line 1369: + regulatory + system was not well equipped to + respond consistently—and + +On line 1369: + system was not well + equipped to respond consistently—and + on a national + +On line 1369: + protect borrowers. + State regulators, as well + as either the Fed + +On line 1369: + regulators, as + well as either the Fed or + the FDIC, supervised + +On line 1369: + well as either the + Fed or the FDIC, supervised + the mortgage practices + +On line 1369: + as either the Fed + or the FDIC, supervised the + mortgage practices of + +On line 1369: + FDIC, supervised the + mortgage practices of state anks. + The OCC supervised + +On line 1369: + mortgage practices of + state anks. The OCC supervised + the national banks. + +On line 1369: + of state anks. The OCC + supervised the national + banks. The OTS or state + +On line 1369: + OCC supervised the + national banks. The OTS or + state regulators + +On line 1369: + national banks. The + OTS or state regulators + were responsible + +On line 1369: + brokers, a growing + portion of the market, but + did not supervise + +On line 1371: + the market, but did + not supervise them.22 Despite + this diffusion of + +On line 1371: + did not supervise + them.22 Despite this diffusion + of authority, + +On line 1371: + not supervise them.22 + Despite this diffusion of + authority, one + +On line 1371: + one entity was + unquestionably authorized + by Congress to write + +On line 1371: + strong and consistent + rules regulating mortgages + for all types of lenders: + +On line 1371: + and consistent rules + regulating mortgages for + all types of lenders: the + +On line 1371: + for all types of lenders: + the Federal Reserve, through + the Truth in Lending + +On line 1371: + all types of lenders: the + Federal Reserve, through the + Truth in Lending Act + +On line 1371: + the Truth in Lending + Act of In the Fed adopted + Regulation Z + +On line 1371: + Act of In the Fed + adopted Regulation Z + for the purpose of + +On line 1371: + for the purpose of + implementing the act. But + while Regulation + +On line 1371: + implementing the + act. But while Regulation + Z applied to all + +On line 1373: + America’s many + financial regulators. + One sticking point was + +On line 1373: + the supervision + of nonbank subsidiaries such as + subprime lenders. The Fed + +On line 1373: + nonbank subsidiaries such + as subprime lenders. The Fed had + the legal mandate + +On line 1373: + as subprime lenders. The + Fed had the legal mandate + to supervise bank + +On line 1373: + Fed had the legal + mandate to supervise bank + holding companies, + +On line 1373: + enforce the consumer + protections embodied in + the Truth in Lending + +On line 1373: + Truth in Lending Act + with respect to these nonbank + lenders. Although the FTC + +On line 1373: + in Lending Act with + respect to these nonbank lenders. + Although the FTC brought + +On line 1373: + with respect to these + nonbank lenders. Although the FTC + brought some enforcement + +On line 1373: + nonbank lenders. Although + the FTC brought some enforcement + actions against mortgage + +On line 1373: + Although the FTC brought + some enforcement actions against + mortgage companies, + +On line 1373: + mortgage companies, + Henry Cisneros, a former + secretary of the + +On line 1373: + Housing and Urban + Development (HUD), worried + that its budget and + +On line 1373: + that its budget and + staff were not commensurate + with its mandate to + +On line 1373: + commensurate with + its mandate to supervise + these lenders. "We could have + +On line 1373: + these lenders. "We could have + had the FTC oversee mortgage + contracts," Cisneros told + +On line 1373: + had the FTC oversee + mortgage contracts," Cisneros told + the Commission. "But + +On line 1373: + contracts," Cisneros told + the Commission. "But the FTC + is up to their neck + +On line 1373: + told the Commission. + "But the FTC is up to their + neck in work today + +On line 1373: + the Commission. "But + the FTC is up to their neck + in work today with + +On line 1373: + Commission. "But the + FTC is up to their neck in + work today with what + +On line 1373: + "But the FTC is up + to their neck in work today + with what they’ve got. They + +On line 1373: + the FTC is up to + their neck in work today with + what they’ve got. They don’t + +On line 1373: + FTC is up to their + neck in work today with what + they’ve got. They don’t have + +On line 1373: + is up to their neck + in work today with what they’ve + got. They don’t have the + +On line 1373: + up to their neck in + work today with what they’ve got. + They don’t have the staff + +On line 1373: + to their neck in work + today with what they’ve got. They + don’t have the staff to + +On line 1373: + neck in work today + with what they’ve got. They don’t have + the staff to go out + +On line 1373: + in work today with + what they’ve got. They don’t have the + staff to go out and + +On line 1373: + work today with what + they’ve got. They don’t have the staff + to go out and search + +On line 1373: + today with what they’ve + got. They don’t have the staff to + go out and search out + +On line 1373: + with what they’ve got. They + don’t have the staff to go out + and search out mortgage + +On line 1373: + they’ve got. They don’t have + the staff to go out and search + out mortgage problems."23 + +On line 1375: + got. They don’t have the + staff to go out and search out + mortgage problems."23 Glenn + +On line 1375: + don’t have the staff to + go out and search out mortgage + problems."23 Glenn Loney, deputy + +On line 1375: + staff to go out and + search out mortgage problems."23 Glenn + Loney, deputy director + +On line 1375: + to go out and search + out mortgage problems."23 Glenn Loney, + deputy director of + +On line 1375: + go out and search out + mortgage problems."23 Glenn Loney, deputy + director of the + +On line 1375: + out mortgage problems."23 + Glenn Loney, deputy director of + the Fed’s Consumer and + +On line 1375: + of the Fed’s Consumer + and Community Affairs + Division from to + +On line 1375: + Division from to + told the FCIC that ever since + he joined the agency + +On line 1377: + the FCIC that ever + since he joined the agency in + Fed officials had + +On line 1377: + FCIC that ever since + he joined the agency in Fed + officials had been + +On line 1377: + he joined the agency + in Fed officials had been + debating whether they—in + +On line 1377: + in Fed officials + had been debating whether they—in + addition to the + +On line 1377: + had been debating + whether they—in addition to the + FTC—should enforce rules for + +On line 1377: + whether they—in addition + to the FTC—should enforce rules for + nonbank lenders. But they + +On line 1377: + addition to the + FTC—should enforce rules for nonbank + lenders. But they worried + +On line 1377: + to the FTC—should enforce + rules for nonbank lenders. But they + worried about whether the + +On line 1377: + FTC—should enforce rules for + nonbank lenders. But they worried + about whether the Fed would + +On line 1377: + rules for nonbank lenders. + But they worried about whether the + Fed would be stepping + +On line 1377: + for nonbank lenders. But + they worried about whether the Fed + would be stepping on + +On line 1377: + But they worried about + whether the Fed would be stepping + on congressional + +On line 1377: + whether the Fed would be + stepping on congressional + prerogatives by + +On line 1377: + that legislation + had delegated to the + FTC. "A number of + +On line 1377: + had delegated + to the FTC. "A number of + governors came in + +On line 1377: + the FTC. "A number + of governors came in and + said, ‘You mean to say + +On line 1377: + FTC. "A number of + governors came in and said, + ‘You mean to say we + +On line 1377: + of governors came + in and said, ‘You mean to say + we don’t look at these1’" + +On line 1377: + governors came in + and said, ‘You mean to say we + don’t look at these1’" Loney + +On line 1377: + came in and said, ‘You + mean to say we don’t look at + these1’" Loney said. "And then + +On line 1377: + in and said, ‘You mean + to say we don’t look at these1’" + Loney said. "And then we + +On line 1377: + and said, ‘You mean to + say we don’t look at these1’" Loney + said. "And then we tried + +On line 1377: + said, ‘You mean to say + we don’t look at these1’" Loney said. + "And then we tried to + +On line 1377: + mean to say we don’t + look at these1’" Loney said. "And then + we tried to explain + +On line 1377: + to say we don’t look + at these1’" Loney said. "And then we + tried to explain it + +On line 1377: + say we don’t look at + these1’" Loney said. "And then we tried + to explain it to + +On line 1377: + we don’t look at these1’" + Loney said. "And then we tried to + explain it to them, + +On line 1377: + look at these1’" Loney said. + "And then we tried to explain + it to them, and they’d + +On line 1377: + at these1’" Loney said. "And + then we tried to explain it + to them, and they’d say, + +On line 1377: + these1’" Loney said. "And then + we tried to explain it to + them, and they’d say, ‘Oh, + +On line 1377: + Loney said. "And then we + tried to explain it to them, + and they’d say, ‘Oh, I + +On line 1377: + said. "And then we tried + to explain it to them, and + they’d say, ‘Oh, I see.’"24 + +On line 1377: + "And then we tried to + explain it to them, and they’d + say, ‘Oh, I see.’"24 The + +On line 1377: + tried to explain it + to them, and they’d say, ‘Oh, I + see.’"24 The Federal + +On line 1377: + explain it to them, + and they’d say, ‘Oh, I see.’"24 The + Federal Reserve + +On line 1377: + and they’d say, ‘Oh, I + see.’"24 The Federal Reserve + would not exert its + +On line 1377: + see.’"24 The Federal + Reserve would not exert its + authority in + +On line 1377: + would not exert its + authority in this area, + nor others that came + +On line 1377: + its authority + in this area, nor others that + came under its purview + +On line 1377: + authority in + this area, nor others that came + under its purview in + +On line 1377: + this area, nor others + that came under its purview in + with any real force + +On line 1377: + nor others that came + under its purview in with any + real force until + +On line 1377: + that came under its + purview in with any real force + until after the + +On line 1377: + under its purview in + with any real force until + after the housing + +On line 1377: + its purview in with any + real force until after + the housing bubble + +On line 1379: + force until after + the housing bubble burst. The + legislation that + +On line 1379: + that gave the Fed new + responsibilities was + the Home Ownership + +On line 1379: + Home Ownership and + Equity Protection Act + (HOEPA), passed by Congress + +On line 1379: + Protection Act (HOEPA), + passed by Congress and signed by + President Clinton + +On line 1379: + passed by Congress and + signed by President Clinton + to address growing + +On line 1379: + signed by President + Clinton to address growing + concerns about abusive + +On line 1379: + lending practices that + especially affected + low-income borrowers. + +On line 1379: + finance companies + who peddle high-rate, high-fee + home equity loans + +On line 1379: + who peddle high-rate, + high-fee home equity loans + to cash-poor homeowners."25 + +On line 1379: + to cash-poor homeowners."25 + For example, a Senate + report highlighted + +On line 1379: + For example, a + Senate report highlighted + the case of a 72-year-old + +On line 1379: + a Senate report + highlighted the case of a + 72-year-old homeowner, who + +On line 1379: + highlighted the case + of a 72-year-old homeowner, who + testified at a + +On line 1379: + the case of a 72-year-old + homeowner, who testified + at a hearing that + +On line 1379: + 72-year-old homeowner, who + testified at a hearing + that she paid more than + +On line 1379: + testified at a + hearing that she paid more than + in upfront finance + +On line 1379: + at a hearing that + she paid more than in upfront + finance charges on a + +On line 1379: + hearing that she paid + more than in upfront finance + charges on a second + +On line 1379: + that she paid more than + in upfront finance charges on + a second mortgage. + +On line 1379: + she paid more than in + upfront finance charges on a + second mortgage. In + +On line 1379: + in upfront finance + charges on a second mortgage. + In addition, the + +On line 1379: + charges on a second + mortgage. In addition, the + monthly payments on + +On line 1381: + refinance mortgage + loans, including prepayment + penalties, negative + +On line 1381: + prepayment penalties, + negative amortization, + and balloon payments + +On line 1381: + penalties, negative + amortization, and balloon + payments with a term + +On line 1381: + amortization, and + balloon payments with a term + of less than five years. + +On line 1381: + balloon payments with + a term of less than five years. + The legislation + +On line 1381: + of less than five years. + The legislation also + prohibited lenders + +On line 1381: + the property alone + and "without regard to the + consumers’ repayment + +On line 1383: + consumers’ repayment + ability, including the + consumers’ current and + +On line 1383: + a small percentage + of mortgages were initially + subject to the HOEPA + +On line 1383: + the HOEPA restrictions, + because the interest rate + and fee levels for + +On line 1383: + interest rate and + fee levels for triggering + HOEPA’s coverage were + +On line 1383: + and fee levels for + triggering HOEPA’s coverage + were set too high to + +On line 1383: + for triggering HOEPA’s + coverage were set too high + to catch most subprime + +On line 1383: + were set too high to + catch most subprime loans.28 Even so, + HOEPA specifically + +On line 1383: + catch most subprime loans.28 + Even so, HOEPA specifically + directed the Fed + +On line 1383: + act more broadly to + "prohibit acts or practices + in connection with + +On line 1385: + to "prohibit acts + or practices in connection + with [mortgage loans] that + +On line 1385: + "prohibit acts or + practices in connection with + [mortgage loans] that [the + +On line 1385: + acts or practices in + connection with [mortgage loans] + that [the Board] finds to + +On line 1385: + loans] that [the Board] finds + to be unfair, deceptive + or designed to evade + +On line 1385: + that [the Board] finds to + be unfair, deceptive or + designed to evade the + +On line 1385: + finds to be unfair, + deceptive or designed to + evade the provisions + +On line 1387: + designed to evade the + provisions of this [act]."29 In + June two years after + +On line 1387: + provisions of this + [act]."29 In June two years after + HOEPA took effect, the + +On line 1387: + this [act]."29 In June two + years after HOEPA took effect, + the Fed held the first + +On line 1387: + [act]."29 In June two years + after HOEPA took effect, the + Fed held the first set + +On line 1387: + two years after HOEPA + took effect, the Fed held the + first set of public + +On line 1387: + Fed held the first set + of public hearings required + under the act. The + +On line 1387: + first set of public + hearings required under the + act. The venues were Los + +On line 1387: + were Los Angeles, + Atlanta, and Washington, D.C. + Consumer advocates + +On line 1387: + Consumer advocates + reported abuses by home + equity lenders. A + +On line 1387: + home equity lenders. + A report summarizing + the hearings, jointly + +On line 1387: + summarizing the + hearings, jointly issued with + the Department of + +On line 1387: + Housing and Urban + Development and released + in July said that + +On line 1387: + said that mortgage lenders + acknowledged that some abuses + existed, blamed some + +On line 1387: + acknowledged that some + abuses existed, blamed some + of these on mortgage + +On line 1387: + existed, blamed some + of these on mortgage brokers, + and suggested that + +On line 1387: + that the increasing + securitization of + subprime mortgages was + +On line 1387: + of subprime mortgages + was likely to limit the + opportunity + +On line 1387: + likely to limit + the opportunity for + widespread abuses. The + +On line 1387: + The report stated, + "Creditors that package and + securitize their + +On line 1387: + equity loans must + comply with a series of + representations + +On line 1387: + include creditors’ + representations that they + have complied with strict + +On line 1387: + guidelines concerning + the borrower’s ability + to repay the loan."30 + +On line 1389: + to repay the loan."30 + But in the years to come, these + representations + +On line 1389: + But in the years to + come, these representations + and warranties would prove + +On line 1389: + in the years to come, + these representations and + warranties would prove to + +On line 1391: + representations + and warranties would prove to be + inaccurate. Still, + +On line 1391: + and warranties would prove + to be inaccurate. Still, + the Fed continued + +On line 1391: + warranties would prove to + be inaccurate. Still, the + Fed continued not + +On line 1391: + Fed continued not + to press its prerogatives. + In January it + +On line 1391: + prerogatives. In + January it formalized + its long-standing + +On line 1391: + it formalized its + long-standing policy + of "not routinely + +On line 1391: + examinations + of nonbank subsidiaries of bank + holding companies,"31 + +On line 1391: + of nonbank subsidiaries + of bank holding companies,"31 + a decision that + +On line 1391: + nonbank subsidiaries of + bank holding companies,"31 a + decision that would + +On line 1391: + holding companies,"31 + a decision that would be + criticized by a + +On line 1391: + be criticized by + a November General + Accounting Office + +On line 1391: + for creating a + "lack of regulatory + oversight."32 The July + +On line 1391: + While preparing draft + recommendations for the + report, Fed staff wrote + +On line 1391: + Fed staff wrote to the + Fed’s Committee on Consumer + and Community + +On line 1391: + Fed’s Committee on + Consumer and Community + Affairs that "given + +On line 1391: + support substantive + limitations on market + behavior, the draft + +On line 1391: + limitations on + market behavior, the draft + report discusses + +On line 1391: + market behavior, + the draft report discusses + various options + +On line 1391: + report discusses + various options but does + not advocate any + +On line 1391: + does not advocate + any particular approach + to addressing these + +On line 1393: + any particular + approach to addressing these + problems."34 In the end, + +On line 1393: + to addressing these + problems."34 In the end, although + the two agencies did + +On line 1393: + these problems."34 In the + end, although the two agencies + did not agree on the + +On line 1393: + problems."34 In the end, + although the two agencies did + not agree on the full + +On line 1393: + In the end, although + the two agencies did not agree + on the full set of + +On line 1393: + the two agencies did + not agree on the full set of + recommendations + +On line 1393: + both the Fed and HUD + supported legislative bans + on balloon payments + +On line 1393: + and HUD supported + legislative bans on balloon + payments and advance + +On line 1393: + on balloon payments + and advance collection of + lump-sum insurance + +On line 1393: + lump-sum insurance + premiums, stronger enforcement + of current laws, and + +On line 1393: + as community + outreach efforts and consumer + education and + +On line 1393: + and counseling. But + Congress did not act on these + recommendations. + +On line 1395: + Congress did not act + on these recommendations. + The Fed-Lite provisions + +On line 1395: + did not act on these + recommendations. The Fed-Lite + provisions under + +On line 1395: + recommendations. + The Fed-Lite provisions under + the Gramm-Leach-Bliley Act affirmed + +On line 1395: + provisions under + the Gramm-Leach-Bliley Act affirmed the Fed’s + hands-off approach to + +On line 1395: + the Gramm-Leach-Bliley Act affirmed + the Fed’s hands-off approach to + the regulation + +On line 1395: + Gramm-Leach-Bliley Act affirmed the + Fed’s hands-off approach to the + regulation of + +On line 1395: + Fed’s hands-off approach + to the regulation of + mortgage lending. Even + +On line 1395: + the regulation + of mortgage lending. Even so, + the shakeup in the + +On line 1395: + of mortgage lending. + Even so, the shakeup in the + subprime industry + +On line 1395: + Even so, the shakeup + in the subprime industry + in the late 1990s had + +On line 1395: + so, the shakeup in + the subprime industry in + the late 1990s had drawn + +On line 1395: + the late 1990s had drawn + regulators’ attention + to at least some of + +On line 1395: + to at least some of + the risks associated + with this lending. For + +On line 1395: + at least some of the + risks associated with + this lending. For that + +On line 1395: + with this lending. For + that reason, the Federal + Reserve, FDIC, OCC, and + +On line 1395: + Reserve, FDIC, OCC, and + OTS jointly issued subprime + lending guidance on + +On line 1397: + guidance on March his + guidance applied only to + regulated banks + +On line 1397: + his guidance applied + only to regulated + banks and thrifts, and even + +On line 1397: + applied only to + regulated banks and thrifts, + and even for them it + +On line 1397: + regulated banks + and thrifts, and even for them it + would not be binding + +On line 1397: + and thrifts, and even for + them it would not be binding + but merely laid out + +On line 1397: + thrifts, and even for them + it would not be binding but + merely laid out the + +On line 1397: + for them it would not + be binding but merely laid + out the criteria + +On line 1397: + merely laid out the + criteria underlying + regulators’ bank + +On line 1397: + in the equity + and asset-backed securities + market has caused some + +On line 1397: + market has caused some + non-bank subprime specialists to + exit the market, + +On line 1397: + subprime specialists + to exit the market, thus + creating increased + +On line 1397: + enter, or expand + their participation in, + the subprime lending + +On line 1399: + lending business."35 The + agencies then identified key + features of subprime + +On line 1399: + business."35 The agencies + then identified key features + of subprime lending + +On line 1399: + then identified key + features of subprime lending + programs and the need + +On line 1399: + programs and the need + for increased capital, risk + management, and board + +On line 1399: + the need for increased + capital, risk management, + and board and senior + +On line 1399: + increased capital, + risk management, and board and + senior management + +On line 1399: + risk management, and + board and senior management + oversight. They further + +On line 1399: + accounting issues, + notably the valuation + of any residual + +On line 1399: + tranches held by the + securitizing firm. The + guidance went on to + +On line 1399: + securitizing + firm. The guidance went on to + warn, "Institutions + +On line 1399: + firm. The guidance went + on to warn, "Institutions + that originate or + +On line 1399: + warn, "Institutions + that originate or purchase + subprime loans must take + +On line 1399: + that originate or + purchase subprime loans must take + special care to avoid + +On line 1399: + or purchase subprime + loans must take special care to + avoid violating + +On line 1399: + purchase subprime loans + must take special care to avoid + violating fair + +On line 1399: + must take special care + to avoid violating fair + lending and consumer + +On line 1401: + protection laws and + regulations. Higher fees + and interest rates + +On line 1401: + predatory pricing. + An adequate compliance + management program + +On line 1401: + consumer protection + hazards associated + with subprime lending."36 + +On line 1403: + subprime lending."36 In + spring in response to growing + complaints about lending + +On line 1403: + lending."36 In spring in + response to growing complaints + about lending practices, + +On line 1403: + spring in response to + growing complaints about lending + practices, and at the + +On line 1403: + response to growing + complaints about lending practices, + and at the urging + +On line 1403: + growing complaints about + lending practices, and at the + urging of members + +On line 1403: + and at the urging + of members of Congress, HUD + Secretary Andrew + +On line 1403: + urging of members + of Congress, HUD Secretary + Andrew Cuomo and + +On line 1403: + Summers convened the + joint National Predatory + Lending Task Force. It + +On line 1403: + included members + of consumer advocacy + groups; industry trade + +On line 1403: + mortgage lenders, brokers, + and appraisers; local and + state officials; and + +On line 1403: + state officials; and + academics. As the Fed had done + three years earlier, + +On line 1403: + academics. As the Fed + had done three years earlier, + this new entity + +On line 1403: + As the Fed had done + three years earlier, this new + entity took to + +On line 1403: + three years earlier, + this new entity took to + the field, conducting + +On line 1403: + earlier, this new + entity took to the field, + conducting hearings + +On line 1403: + this new entity + took to the field, conducting + hearings in Atlanta, + +On line 1403: + conducting hearings + in Atlanta, Los Angeles, + New York, Baltimore, + +On line 1403: + Angeles, New York, + Baltimore, and Chicago. The + task force found "patterns" + +On line 1403: + New York, Baltimore, + and Chicago. The task force found + "patterns" of abusive + +On line 1403: + and Chicago. The task + force found "patterns" of abusive + practices, reporting + +On line 1403: + practices, reporting + "substantial evidence of + too-frequent abuses in + +On line 1403: + too-frequent abuses in + the subprime lending market." + Questionable practices + +On line 1403: + of borrowers’ loans + in a short time), high fees and + prepayment penalties + +On line 1403: + in a short time), high + fees and prepayment penalties + that resulted in + +On line 1403: + fees and prepayment + penalties that resulted in + borrowers’ losing + +On line 1403: + borrowers’ losing + the equity in their homes, + and outright fraud and + +On line 1403: + and outright fraud and + abuse involving deceptive + or high-pressure + +On line 1403: + outright fraud and abuse + involving deceptive or + high-pressure sales + +On line 1403: + The report cited + testimony regarding + incidents of forged + +On line 1405: + lenders often preyed on + the elderly, minorities, + and borrowers with + +On line 1405: + on the elderly, + minorities, and borrowers + with lower incomes + +On line 1405: + "limited access + to the mainstream financial + sector"—meaning the banks, + +On line 1405: + mainstream financial + sector"—meaning the banks, thrifts, and + credit unions, which it + +On line 1405: + sector"—meaning the banks, + thrifts, and credit unions, which it + viewed as subject to + +On line 1405: + banks, thrifts, and credit + unions, which it viewed as subject + to more extensive + +On line 1405: + unions, which it viewed as + subject to more extensive + government oversight.37 + +On line 1407: + to more extensive + government oversight.37 Consumer + protection groups took + +On line 1407: + government oversight.37 + Consumer protection groups took + the same message to + +On line 1407: + Consumer protection + groups took the same message to + public officials. + +On line 1407: + took the same message + to public officials. In + interviews with and + +On line 1407: + interviews with and + testimony to the FCIC, + representatives + +On line 1407: + testimony to + the FCIC, representatives + of the National + +On line 1407: + National Consumer + Law Center (NCLC), Nevada Fair + Housing Center, Inc., + +On line 1407: + and California + Reinvestment Coalition each said + they had contacted + +On line 1407: + Reinvestment Coalition + each said they had contacted + Congress and the four + +On line 1407: + multiple times about + their concerns over unfair and + deceptive lending + +On line 1407: + times about their concerns + over unfair and deceptive + lending practices.38 "It + +On line 1407: + lending practices.38 "It + was apparent on the ground + as early as or + +On line 1407: + "It was apparent + on the ground as early as + or that the market + +On line 1407: + was apparent on + the ground as early as or + that the market for + +On line 1407: + the ground as early + as or that the market for + low-income consumers was + +On line 1407: + as early as or + that the market for low-income + consumers was being + +On line 1407: + being flooded with + inappropriate products," + Diane Thompson of + +On line 1409: + of the NCLC told the + Commission.39 The HUD-Treasury task force + recommended a + +On line 1409: + the Commission.39 The + HUD-Treasury task force recommended + a set of reforms + +On line 1409: + Commission.39 The HUD-Treasury + task force recommended a + set of reforms aimed + +On line 1409: + set of reforms aimed + at protecting borrowers + from the most egregious + +On line 1409: + disclosure, improved + financial literacy, + strengthened enforcement, + +On line 1409: + also recognized + the downside of restricting + the lending practices + +On line 1409: + of restricting the + lending practices that offered + many borrowers with + +On line 1409: + the lending practices + that offered many borrowers + with less-than-prime credit a + +On line 1409: + lending practices that + offered many borrowers with + less-than-prime credit a chance + +On line 1409: + with less-than-prime credit a + chance at homeownership. It + was a dilemma. Gary + +On line 1409: + less-than-prime credit a chance + at homeownership. It was + a dilemma. Gary Gensler, + +On line 1409: + credit a chance at + homeownership. It was a + dilemma. Gary Gensler, who + +On line 1409: + homeownership. It + was a dilemma. Gary Gensler, who + worked on the report + +On line 1409: + a dilemma. Gary Gensler, + who worked on the report as + a senior Treasury + +On line 1409: + Gary Gensler, who worked on + the report as a senior + Treasury official + +On line 1409: + the report as a + senior Treasury official + and is currently + +On line 1409: + official and is + currently the chairman of + the Commodity + +On line 1409: + the Commodity + Futures Trading Commission, + told the FCIC that the + +On line 1409: + Trading Commission, + told the FCIC that the report’s + recommendations + +On line 1409: + told the FCIC that the + report’s recommendations + "lasted on Capitol + +On line 1409: + FCIC that the report’s + recommendations "lasted + on Capitol Hill a + +On line 1409: + on Capitol Hill a + very short time. There wasn’t much + appetite or mood to + +On line 1409: + time. There wasn’t much + appetite or mood to take these + recommendations."40 + +On line 1411: + recommendations."40 + But problems persisted, and + others would take up + +On line 1411: + problems persisted, + and others would take up the + cause. Through the early + +On line 1411: + and others would take + up the cause. Through the early + years of the new decade, + +On line 1411: + others would take up + the cause. Through the early years + of the new decade, "the + +On line 1411: + take up the cause. Through + the early years of the new + decade, "the really + +On line 1411: + decade, "the really + poorly underwritten loans, + the payment shock loans" + +On line 1411: + shock loans" continued + to proliferate outside + the traditional + +On line 1411: + to proliferate + outside the traditional + banking sector, said + +On line 1413: + banking sector, said + FDIC Chairman Sheila Bair, who served + at Treasury as the + +On line 1413: + as the assistant + secretary for financial + institutions from + +On line 1413: + institutions from + to In testimony to + the Commission, she + +On line 1413: + testimony to + the Commission, she observed + that these poor-quality + +On line 1413: + the Commission, she + observed that these poor-quality + loans pulled market share + +On line 1413: + banks and "created + negative competitive + pressure for the banks + +On line 1415: + pressure for the banks + and thrifts to start following + suit." She added, [Subprime + +On line 1415: + for the banks and thrifts + to start following suit." She + added, [Subprime lending] + +On line 1415: + the banks and thrifts to + start following suit." She added, + [Subprime lending] was + +On line 1415: + to start following + suit." She added, [Subprime lending] + was started and the + +On line 1415: + suit." She added, [Subprime + lending] was started and the + lion’s share of it + +On line 1415: + added, [Subprime lending] + was started and the lion’s + share of it occurred + +On line 1415: + [Subprime lending] was + started and the lion’s share + of it occurred in + +On line 1415: + of it occurred in + the nonbank sector, but it + clearly created + +On line 1415: + clearly created + competitive pressures on + banks. I think nipping + +On line 1415: + pressures on banks. I + think nipping this in the bud + in and with some strong + +On line 1415: + banks. I think nipping + this in the bud in and with + some strong consumer rules + +On line 1415: + this in the bud in + and with some strong consumer rules + applying across the + +On line 1415: + bud in and with some + strong consumer rules applying + across the board that just + +On line 1415: + with some strong consumer + rules applying across the board + that just simply said + +On line 1415: + that just simply said + you’ve got to document + a customer’s income + +On line 1415: + got to document + a customer’s income to make + sure they can repay + +On line 1415: + to document a + customer’s income to make sure + they can repay the + +On line 1415: + a customer’s income + to make sure they can repay + the loan, you’ve got + +On line 1415: + customer’s income to + make sure they can repay the + loan, you’ve got to + +On line 1415: + sure they can repay + the loan, you’ve got to make + sure the income is + +On line 1415: + the loan, you’ve got + to make sure the income is + sufficient to pay + +On line 1415: + got to make sure the + income is sufficient to + pay the loans when the + +On line 1415: + sure the income is + sufficient to pay the loans + when the interest + +On line 1415: + to pay the loans when + the interest rate resets, + just simple rules like + +On line 1415: + pay the loans when the + interest rate resets, just + simple rules like that + +On line 1415: + when the interest + rate resets, just simple rules + like that could have done + +On line 1415: + the interest rate + resets, just simple rules like + that could have done a + +On line 1417: + just simple rules like + that could have done a lot to + stop this.41 After Bair + +On line 1417: + simple rules like that + could have done a lot to stop + this.41 After Bair was + +On line 1417: + that could have done a + lot to stop this.41 After Bair + was nominated + +On line 1417: + could have done a lot + to stop this.41 After Bair was + nominated to + +On line 1417: + to stop this.41 After + Bair was nominated to + her position at + +On line 1417: + to her position + at Treasury, and when she was + making the rounds on + +On line 1417: + was making the rounds + on Capitol Hill, Senator + Paul Sarbanes, chairman + +On line 1417: + making the rounds on + Capitol Hill, Senator Paul + Sarbanes, chairman of + +On line 1417: + Sarbanes, chairman of + the Committee on Banking, + Housing, and Urban + +On line 1417: + the Committee on + Banking, Housing, and Urban + Affairs, told her about + +On line 1417: + on Banking, Housing, + and Urban Affairs, told her + about lending problems + +On line 1417: + Banking, Housing, and + Urban Affairs, told her about + lending problems in + +On line 1417: + and Urban Affairs, + told her about lending problems + in Baltimore, where + +On line 1417: + told her about lending + problems in Baltimore, where + foreclosures were on + +On line 1417: + lending problems in + Baltimore, where foreclosures + were on the rise. He + +On line 1417: + in Baltimore, where + foreclosures were on the rise. + He asked Bair to read + +On line 1417: + where foreclosures were + on the rise. He asked Bair to + read the HUD-Treasury report + +On line 1417: + foreclosures were on + the rise. He asked Bair to read + the HUD-Treasury report on + +On line 1417: + the rise. He asked Bair + to read the HUD-Treasury report on + predatory lending, + +On line 1417: + the issue. Sarbanes + introduced legislation + to remedy the + +On line 1417: + mortgage industry + and within Congress, Bair told + the Commission. Bair + +On line 1417: + and within Congress, + Bair told the Commission. Bair + decided to try + +On line 1417: + Congress, Bair told the + Commission. Bair decided + to try to get the + +On line 1417: + told the Commission. + Bair decided to try to + get the industry + +On line 1417: + the Commission. Bair + decided to try to get + the industry to + +On line 1417: + Bair decided to + try to get the industry + to adopt a set of + +On line 1417: + decided to try + to get the industry to + adopt a set of "best + +On line 1417: + to try to get the + industry to adopt a set + of "best practices" that + +On line 1417: + the industry to + adopt a set of "best practices" + that would include a + +On line 1417: + to adopt a set of + "best practices" that would include + a voluntary ban + +On line 1417: + adopt a set of "best + practices" that would include a + voluntary ban on + +On line 1417: + of "best practices" that + would include a voluntary + ban on mortgages that + +On line 1417: + "best practices" that would + include a voluntary ban + on mortgages that strip + +On line 1417: + that would include a + voluntary ban on mortgages + that strip borrowers + +On line 1417: + voluntary ban on + mortgages that strip borrowers + of their equity, + +On line 1417: + that strip borrowers + of their equity, and would + offer borrowers + +On line 1417: + their equity, and + would offer borrowers the + opportunity + +On line 1417: + opportunity + to avoid prepayment penalties + by agreeing instead + +On line 1417: + to avoid prepayment + penalties by agreeing instead + to pay a higher + +On line 1417: + penalties by agreeing + instead to pay a higher + interest rate. She + +On line 1417: + agreeing instead to + pay a higher interest + rate. She reached out to + +On line 1417: + instead to pay a + higher interest rate. She + reached out to Edward + +On line 1417: + to pay a higher + interest rate. She reached out + to Edward Gramlich, + +On line 1417: + interest rate. She + reached out to Edward Gramlich, + a governor at + +On line 1417: + reached out to Edward + Gramlich, a governor at + the Fed who shared her + +On line 1417: + to Edward Gramlich, + a governor at the Fed + who shared her concerns, + +On line 1417: + Edward Gramlich, a + governor at the Fed who + shared her concerns, to + +On line 1417: + a governor at + the Fed who shared her concerns, + to enlist his help + +On line 1417: + governor at the + Fed who shared her concerns, to + enlist his help in + +On line 1417: + shared her concerns, to + enlist his help in getting + companies to abide + +On line 1417: + to enlist his help + in getting companies to + abide by these rules. Bair + +On line 1417: + enlist his help in + getting companies to abide + by these rules. Bair said + +On line 1417: + getting companies + to abide by these rules. Bair said + that Gramlich didn’t + +On line 1417: + to abide by these rules. + Bair said that Gramlich didn’t + talk out of school but + +On line 1417: + abide by these rules. Bair + said that Gramlich didn’t talk + out of school but made + +On line 1417: + by these rules. Bair said + that Gramlich didn’t talk out + of school but made it + +On line 1417: + these rules. Bair said that + Gramlich didn’t talk out of + school but made it clear + +On line 1417: + Bair said that Gramlich + didn’t talk out of school but + made it clear to her + +On line 1417: + that Gramlich didn’t + talk out of school but made it + clear to her that the + +On line 1417: + Gramlich didn’t talk + out of school but made it clear + to her that the Fed + +On line 1417: + didn’t talk out of + school but made it clear to her + that the Fed avenue + +On line 1417: + talk out of school but + made it clear to her that the + Fed avenue wasn’t + +On line 1417: + school but made it clear + to her that the Fed avenue + wasn’t going to + +On line 1417: + made it clear to her + that the Fed avenue wasn’t + going to happen.42 + +On line 1417: + the director of + the Division of Consumer + and Community + +On line 1417: + the Division of + Consumer and Community + Affairs at the Fed, + +On line 1417: + and Community + Affairs at the Fed, said that + Gramlich told the staff + +On line 1417: + Fed, said that Gramlich + told the staff that Greenspan was not + interested in + +On line 1419: + staff that Greenspan was not + interested in increased + regulation.43 When + +On line 1419: + not interested + in increased regulation.43 + When Bair and Gramlich + +On line 1419: + regulation.43 When + Bair and Gramlich approached a + number of lenders about + +On line 1419: + When Bair and Gramlich + approached a number of lenders + about the voluntary + +On line 1419: + and Gramlich approached + a number of lenders about the + voluntary rogram, + +On line 1419: + approached a number + of lenders about the voluntary + rogram, Bair said some + +On line 1419: + voluntary rogram, + Bair said some originators + appeared willing to + +On line 1419: + But the Wall Street firms + that securitized the loans + resisted, saying + +On line 1419: + that securitized + the loans resisted, saying + that they were concerned + +On line 1419: + securitized the + loans resisted, saying that + they were concerned about + +On line 1421: + did not adhere to + the proposed best practices, she + recalled. The effort + +On line 1423: + proposed best practices, + she recalled. The effort died.44 + Of course, even as these + +On line 1423: + practices, she recalled. + The effort died.44 Of course, even + as these initiatives + +On line 1423: + The effort died.44 Of + course, even as these initiatives + went nowhere, the market + +On line 1423: + effort died.44 Of course, + even as these initiatives went + nowhere, the market did + +On line 1423: + died.44 Of course, even as + these initiatives went nowhere, the + market did not stand + +On line 1425: + these initiatives went + nowhere, the market did not stand + still. Subprime mortgages + +On line 1425: + initiatives went nowhere, + the market did not stand still. + Subprime mortgages were + +On line 1425: + the market did not + stand still. Subprime mortgages were + proliferating + +On line 1425: + Subprime mortgages were + proliferating rapidly, + becoming mainstream + +On line 1427: + Originations were + increasing, and products were + changing. By three of + +On line 1427: + changing. By three of + every four subprime mortgages + was a first mortgage, + +On line 1427: + By three of every + four subprime mortgages was a + first mortgage, and of + +On line 1427: + three of every four + subprime mortgages was a first + mortgage, and of those + +On line 1427: + every four subprime + mortgages was a first mortgage, + and of those were used + +On line 1427: + mortgages was a first + mortgage, and of those were used + for refinancing + +On line 1427: + of those were used for + refinancing rather than a + home purchase. Fifty-nine + +On line 1427: + Fifty-nine percent of + those refinancings were cash-outs,45 + helping to fuel + +On line 1427: + those refinancings + were cash-outs,45 helping to fuel + consumer spending while + +On line 1438: + spending while whittling + away homeowners’ equity. + PART III The Boom and + +On line 1452: + stabilizing force" + Subprime loans: "Buyers will pay + a high premium" + +On line 1456: + regulatory + scrutiny" Federal rules: + "Intended to curb + +On line 1458: + "Intended to curb + unfair or abusive lending" + States: "Long-standing + +On line 1460: + abusive lending" States: + "Long-standing position"...........................................................................96 + Community-lending + +On line 1462: + Community-lending + pledges: "What we do is reaffirm + our intention" Bank + +On line 1462: + pledges: "What we do is + reaffirm our intention" Bank + capital standards: + +On line 1462: + do is reaffirm our + intention" Bank capital + standards: "Arbitrage" + +On line 1464: + capital standards: + "Arbitrage" By the end of + the economy had + +On line 1464: + the economy had + grown straight quarters. Federal + Reserve Chairman Alan + +On line 1464: + had grown straight quarters. + Federal Reserve Chairman + Alan Greenspan argued the + +On line 1464: + Federal Reserve + Chairman Alan Greenspan argued the + financial system + +On line 1464: + companies were—or + at least to many observers at + the time, appeared to + +On line 1464: + many observers at the + time, appeared to be—profitable, + diversified, and, + +On line 1464: + the time, appeared to + be—profitable, diversified, + and, executives + +On line 1466: + managing risk. The + housing market was also + strong. Between and prices + +On line 1466: + market was also + strong. Between and prices rose at + an annual rate + +On line 1466: + strong. Between and prices + rose at an annual rate + of over the next five + +On line 1466: + Between and prices rose + at an annual rate of + over the next five years, + +On line 1466: + and prices rose at an + annual rate of over the + next five years, the rate + +On line 1466: + an annual rate + of over the next five years, the + rate would hit Lower + +On line 1466: + of over the next five + years, the rate would hit Lower + interest rates for + +On line 1466: + years, the rate would hit + Lower interest rates for + mortgage borrowers + +On line 1466: + mortgage borrowers + were partly the reason, as + was greater access to + +On line 1466: + reason, as was greater + access to mortgage credit + for households who had + +On line 1466: + access to mortgage + credit for households who had + traditionally + +On line 1466: + left out—including + subprime borrowers. Lower + interest rates and + +On line 1466: + subprime borrowers. + Lower interest rates and + broader access to + +On line 1466: + borrowers. Lower + interest rates and broader + access to credit + +On line 1466: + Lower interest + rates and broader access to + credit were available + +On line 1466: + access to credit + were available for other types + of borrowing, too, + +On line 1466: + available for other + types of borrowing, too, such + as credit cards and + +On line 1468: + types of borrowing, + too, such as credit cards and + auto loans. Increased + +On line 1468: + borrowing, too, such + as credit cards and auto + loans. Increased access + +On line 1468: + too, such as credit + cards and auto loans. Increased + access to credit + +On line 1468: + as credit cards and + auto loans. Increased access + to credit meant a + +On line 1468: + cards and auto loans. + Increased access to credit + meant a more stable, + +On line 1468: + auto loans. Increased + access to credit meant a + more stable, secure + +On line 1468: + Increased access to + credit meant a more stable, + secure life for those + +On line 1468: + to credit meant a + more stable, secure life for + those who managed their + +On line 1468: + more stable, secure + life for those who managed their + finances prudently. + +On line 1468: + for those who managed + their finances prudently. It + meant families could + +On line 1468: + meant families could + borrow during temporary + income drops, pay for + +On line 1468: + could borrow during + temporary income drops, pay + for unexpected + +On line 1468: + temporary income + drops, pay for unexpected + expenses, or buy + +On line 1468: + for unexpected + expenses, or buy major + appliances and cars. + +On line 1468: + expenses, or buy + major appliances and cars. + It allowed other + +On line 1468: + It allowed other + families to borrow and + spend beyond their means. + +On line 1468: + other families + to borrow and spend beyond + their means. Most of all, + +On line 1468: + to borrow and spend + beyond their means. Most of all, + it meant a shot at + +On line 1468: + spend beyond their means. + Most of all, it meant a shot + at homeownership, + +On line 1468: + beyond their means. Most + of all, it meant a shot at + homeownership, with + +On line 1468: + of all, it meant a + shot at homeownership, with + all its benefits; + +On line 1468: + all, it meant a shot + at homeownership, with all + its benefits; and + +On line 1468: + it meant a shot at + homeownership, with all its + benefits; and for + +On line 1468: + benefits; and for + some, an opportunity + to speculate in + +On line 1470: + estate market. As + home prices rose, homeowners with + greater equity felt + +On line 1470: + greater equity felt + more financially secure + and, partly as a + +On line 1470: + more financially + secure and, partly as a + result, saved less and + +On line 1470: + secure and, partly + as a result, saved less and + less. Many others went + +On line 1470: + and, partly as a + result, saved less and less. Many + others went one step + +On line 1470: + result, saved less and + less. Many others went one step + further, borrowing + +On line 1470: + saved less and less. Many + others went one step further, + borrowing against the + +On line 1470: + less. Many others went + one step further, borrowing + against the equity. + +On line 1470: + Many others went one + step further, borrowing against + the equity. The + +On line 1470: + borrowing against the + equity. The effect was + unprecedented debt: + +On line 1470: + between and mortgage + debt nationally nearly + doubled. Household debt + +On line 1470: + from of disposable + personal income in to + almost by mid-2006. More + +On line 1470: + personal income + in to almost by mid-2006. More + than three-quarters of + +On line 1470: + to almost by mid-2006. + More than three-quarters of this + increase was mortgage + +On line 1470: + than three-quarters of + this increase was mortgage debt. + Part of the increase + +On line 1470: + three-quarters of this + increase was mortgage debt. Part + of the increase was + +On line 1470: + was mortgage debt. Part + of the increase was from new + home purchases, part + +On line 1470: + mortgage debt. Part of + the increase was from new home + purchases, part from + +On line 1470: + Part of the increase + was from new home purchases, + part from new debt on + +On line 1470: + the increase was from + new home purchases, part from + new debt on older + +On line 1470: + increase was from new + home purchases, part from new + debt on older homes. + +On line 1472: + new home purchases, + part from new debt on older + homes. Mortgage credit + +On line 1472: + part from new debt on + older homes. Mortgage credit + became more available + +On line 1472: + debt on older homes. + Mortgage credit became more + available when subprime + +On line 1472: + older homes. Mortgage + credit became more available + when subprime lending + +On line 1472: + credit became more + available when subprime lending + started to grow again + +On line 1472: + became more available + when subprime lending started + to grow again after + +On line 1472: + available when subprime + lending started to grow again + after many of the + +On line 1472: + when subprime lending + started to grow again after + many of the major + +On line 1472: + lending started to + grow again after many of the + major subprime lenders + +On line 1472: + started to grow again + after many of the major + subprime lenders failed or + +On line 1472: + grow again after many + of the major subprime lenders + failed or were purchased + +On line 1472: + again after many of + the major subprime lenders failed + or were purchased in + +On line 1472: + after many of the + major subprime lenders failed or + were purchased in and + +On line 1474: + the major subprime + lenders failed or were purchased in + and Afterward, the + +On line 1474: + billion in assets, + paid billion for Associates + First Capital, the + +On line 1474: + second-biggest subprime lender. + Still, subprime lending remained + only a niche, just + +On line 1474: + Still, subprime lending + remained only a niche, just + of new mortgages in + +On line 1476: + remained only a + niche, just of new mortgages in + Subprime lending risks + +On line 1476: + a niche, just of new + mortgages in Subprime lending + risks and questionable + +On line 1476: + just of new mortgages + in Subprime lending risks and + questionable practices + +On line 1476: + mortgages in Subprime + lending risks and questionable + practices remained a + +On line 1476: + in Subprime lending + risks and questionable practices + remained a concern. + +On line 1476: + risks and questionable + practices remained a concern. + Yet the Federal + +On line 1476: + questionable practices + remained a concern. Yet the + Federal Reserve + +On line 1476: + the Home Ownership + and Equity Protection + Act (HOEPA). Although in + +On line 1476: + Home Ownership and + Equity Protection Act + (HOEPA). Although in the + +On line 1476: + rules for a narrow + set of high-cost mortgages.3 + Following losses + +On line 1476: + set of high-cost + mortgages.3 Following losses + by several banks + +On line 1480: + beginning of the + economy was slowing, even + though unemployment + +On line 1480: + was slowing, even though + unemployment remained at + a 30-year low of To + +On line 1480: + of To stimulate + borrowing and spending, the + Federal Reserve’s + +On line 1480: + Market Committee + lowered short-term interest + rates aggressively. + +On line 1480: + January in a + rare conference call between + scheduled meetings, it + +On line 1480: + a rare conference + call between scheduled meetings, + it cut the benchmark + +On line 1480: + call between scheduled + meetings, it cut the benchmark + federal funds rate—at + +On line 1480: + scheduled meetings, it + cut the benchmark federal + funds rate—at which banks lend + +On line 1480: + meetings, it cut the + benchmark federal funds rate—at + which banks lend to each + +On line 1480: + it cut the benchmark + federal funds rate—at which banks + lend to each other + +On line 1480: + benchmark federal + funds rate—at which banks lend to each + other overnight—by a + +On line 1480: + funds rate—at which banks lend + to each other overnight—by a + half percentage point, + +On line 1480: + rate—at which banks lend to + each other overnight—by a half + percentage point, rather + +On line 1480: + lend to each other + overnight—by a half percentage + point, rather than the more + +On line 1480: + other overnight—by a + half percentage point, rather than + the more typical + +On line 1482: + half percentage point, + rather than the more typical + quarter point. Later + +On line 1482: + the more typical + quarter point. Later that month, + the committee cut + +On line 1482: + quarter point. Later + that month, the committee cut + the rate another + +On line 1482: + point. Later that month, + the committee cut the rate + another half point, + +On line 1482: + the committee cut + the rate another half point, + and it continued + +On line 1482: + the rate another + half point, and it continued + cutting throughout the + +On line 1482: + another half point, + and it continued cutting + throughout the year—11 times + +On line 1484: + throughout the year—11 times + in all—to the lowest in + years. In the end, the + +On line 1484: + year—11 times in all—to + the lowest in years. In the + end, the recession + +On line 1484: + times in all—to the + lowest in years. In the end, + the recession of + +On line 1484: + lowest in years. In + the end, the recession of + was relatively + +On line 1484: + end, the recession + of was relatively mild, + lasting only eight + +On line 1484: + recession of was + relatively mild, lasting + only eight months, from + +On line 1484: + relatively mild, + lasting only eight months, from + March to November, + +On line 1484: + lasting only eight + months, from March to November, + and gross domestic + +On line 1484: + only eight months, from + March to November, and gross + domestic product, + +On line 1484: + March to November, + and gross domestic product, + or GDP—the most common + +On line 1484: + to November, and + gross domestic product, or + GDP—the most common gauge + +On line 1484: + November, and gross + domestic product, or GDP—the + most common gauge of + +On line 1484: + domestic product, + or GDP—the most common gauge of + the economy—dropped + +On line 1484: + the economy—dropped + by only Some policy + makers concluded + +On line 1484: + the economy had + reached the so-called end of the + business cycle, which + +On line 1484: + had reached the so-called + end of the business cycle, + which some economists + +On line 1484: + reached the so-called end + of the business cycle, which + some economists had + +On line 1484: + the so-called end of + the business cycle, which some + economists had been + +On line 1484: + end of the business + cycle, which some economists + had been predicting + +On line 1484: + economists had been + predicting since before the + tech crash. "Recessions + +On line 1484: + since before the tech + crash. "Recessions have become + less frequent and less + +On line 1484: + tech crash. "Recessions + have become less frequent and + less severe," said Ben + +On line 1484: + crash. "Recessions have + become less frequent and less + severe," said Ben Bernanke, + +On line 1484: + less frequent and less + severe," said Ben Bernanke, then a + Fed governor, in + +On line 1484: + less severe," said Ben + Bernanke, then a Fed governor, + in a speech early + +On line 1484: + severe," said Ben Bernanke, + then a Fed governor, in + a speech early in + +On line 1484: + said Ben Bernanke, then a + Fed governor, in a speech + early in "Whether the + +On line 1484: + a Fed governor, + in a speech early in "Whether + the dominant cause + +On line 1484: + Fed governor, in + a speech early in "Whether the + dominant cause of + +On line 1484: + speech early in "Whether + the dominant cause of the + Great Moderation + +On line 1484: + early in "Whether the + dominant cause of the Great + Moderation is + +On line 1484: + dominant cause of + the Great Moderation is + structural change, improved + +On line 1484: + structural change, improved + monetary policy, or + simply good luck is + +On line 1484: + simply good luck is + an important question about + which no consensus + +On line 1486: + question about which no + consensus has yet formed."4 With + the recession over + +On line 1486: + no consensus has + yet formed."4 With the recession + over and mortgage rates + +On line 1486: + consensus has yet + formed."4 With the recession over + and mortgage rates at + +On line 1486: + the recession over + and mortgage rates at 40-year lows, + housing kicked into + +On line 1486: + and mortgage rates at + 40-year lows, housing kicked into + high gear—again. The + +On line 1486: + at 40-year lows, housing + kicked into high gear—again. + The nation would lose + +On line 1486: + 40-year lows, housing kicked + into high gear—again. The + nation would lose more + +On line 1486: + lose more than nonfarm + jobs in but make small gains in + construction. In states + +On line 1486: + nonfarm jobs in but + make small gains in construction. + In states where bubbles + +On line 1486: + in but make small gains + in construction. In states where + bubbles soon appeared, + +On line 1486: + in construction. In + states where bubbles soon appeared, + construction picked up + +On line 1486: + with a total of + only more jobs, but with new + construction jobs. In + +On line 1486: + of only more jobs, + but with new construction jobs. + In Florida, of + +On line 1486: + only more jobs, but + with new construction jobs. In + Florida, of net + +On line 1486: + construction jobs. In + Florida, of net job growth + was in construction. + +On line 1486: + Florida, of net + job growth was in construction. + In builders started more + +On line 1486: + in construction. In + builders started more than million + single-family + +On line 1486: + builders started more than + million single-family + dwellings, a rate unseen + +On line 1486: + the late 1970s. From to + residential construction + contributed three times + +On line 1486: + contributed three times + more to the economy than + it had contributed + +On line 1488: + to the economy + than it had contributed on + average since But + +On line 1488: + on average since + But elsewhere the economy + remained sluggish, and + +On line 1488: + since But elsewhere the + economy remained sluggish, + and employment gains + +On line 1488: + economy remained + sluggish, and employment gains + were frus-tratingly + +On line 1488: + employment gains were + frus-tratingly small. Experts + began talking about + +On line 1488: + began talking about + a "jobless recovery"—more + production without + +On line 1488: + production without + a corresponding increase + in employment. For + +On line 1488: + in employment. For + those with jobs, wages stagnated. + Between and weekly + +On line 1488: + stagnated. Between + and weekly private nonfarm, + nonsupervisory + +On line 1488: + and weekly private + nonfarm, nonsupervisory + wages actually + +On line 1488: + nonsupervisory + wages actually fell by + after adjusting + +On line 1488: + wages actually + fell by after adjusting + for inflation. Faced + +On line 1488: + actually fell + by after adjusting for + inflation. Faced with + +On line 1488: + Faced with these challenges, + the Fed shifted perspective, + now considering + +On line 1488: + with these challenges, the + Fed shifted perspective, now + considering the + +On line 1488: + now considering + the possibility that + consumer prices could fall, + +On line 1488: + possibility + that consumer prices could fall, an + event that had worsened + +On line 1488: + that consumer prices could + fall, an event that had worsened + the Great Depression + +On line 1488: + event that had worsened + the Great Depression seven + decades earlier. While + +On line 1488: + quoted speech, Bernanke said + the chances of deflation were + "extremely small" for + +On line 1488: + Bernanke said the chances of + deflation were "extremely + small" for two reasons. + +On line 1488: + for two reasons. First, + the economy’s natural + resilience: "Despite the + +On line 1488: + First, the economy’s + natural resilience: "Despite + the adverse shocks of + +On line 1488: + resilience: "Despite the + adverse shocks of the past year, + our banking system + +On line 1488: + of the past year, our + banking system remains healthy + and well-regulated, + +On line 1488: + system remains healthy + and well-regulated, and firm + and household balance + +On line 1488: + and well-regulated, + and firm and household balance + sheets are for the most + +On line 1488: + well-regulated, and + firm and household balance sheets + are for the most part + +On line 1488: + and household balance + sheets are for the most part in + good shape." Second, the + +On line 1488: + household balance sheets + are for the most part in good + shape." Second, the Fed + +On line 1488: + sheets are for the most + part in good shape." Second, the + Fed would not allow + +On line 1488: + are for the most part + in good shape." Second, the Fed + would not allow it. + +On line 1488: + for the most part in + good shape." Second, the Fed would + not allow it. "I + +On line 1488: + the most part in good + shape." Second, the Fed would not + allow it. "I am + +On line 1488: + in good shape." Second, + the Fed would not allow it. + "I am confident + +On line 1488: + good shape." Second, the + Fed would not allow it. "I + am confident that + +On line 1488: + shape." Second, the Fed + would not allow it. "I am + confident that the + +On line 1488: + not allow it. "I + am confident that the Fed + would take whatever + +On line 1488: + allow it. "I am + confident that the Fed would + take whatever means + +On line 1488: + am confident that + the Fed would take whatever + means necessary to + +On line 1488: + in the United States. + [T]he U.S. government has a + technology, called + +On line 1488: + [T]he U.S. government + has a technology, called + a printing press (or, + +On line 1488: + that allows it to + produce as many U.S. dollars + as it wishes at + +On line 1488: + to produce as many + U.S. dollars as it wishes + at essentially + +On line 1488: + produce as many U.S. + dollars as it wishes at + essentially no + +On line 1490: + short-term interest + rates low. During the strongest + U.S. companies could + +On line 1490: + rates low. During the + strongest U.S. companies could + borrow for days in + +On line 1490: + commercial paper + market at an average + compared with just three + +On line 1490: + average compared + with just three years earlier; + rates on three-month + +On line 1490: + three years earlier; + rates on three-month Treasury + bills dropped below in + +On line 1490: + years earlier; rates + on three-month Treasury bills + dropped below in mid-2003 + +On line 1490: + earlier; rates on + three-month Treasury bills dropped + below in mid-2003 from + +On line 1492: + rates on three-month + Treasury bills dropped below in + mid-2003 from in Low rates + +On line 1492: + three-month Treasury + bills dropped below in mid-2003 from + in Low rates cut the + +On line 1492: + dropped below in mid-2003 + from in Low rates cut the cost + of homeownership: + +On line 1492: + from in Low rates cut + the cost of homeownership: + interest rates for + +On line 1492: + typical 30-year fixed-rate + mortgage traditionally + moved with the overnight fed + +On line 1494: + overnight fed funds rate, and + from to this relationship + held (see figure By + +On line 1494: + held (see figure By + creditworthy home buyers + could get fixed-rate mortgages + +On line 1494: + creditworthy home + buyers could get fixed-rate mortgages + for percentage points + +On line 1494: + home buyers could get + fixed-rate mortgages for percentage + points lower than three + +On line 1494: + buyers could get fixed-rate + mortgages for percentage points + lower than three years + +On line 1494: + get fixed-rate mortgages for + percentage points lower than + three years earlier. + +On line 1494: + points lower than three + years earlier. The savings + were immediate + +On line 1494: + lower than three years + earlier. The savings were + immediate and + +On line 1494: + years earlier. The + savings were immediate + and large. For a home + +On line 1494: + were immediate + and large. For a home bought at + the median price + +On line 1494: + immediate and + large. For a home bought at the + median price of + +On line 1494: + large. For a home bought + at the median price of + with a down payment, + +On line 1494: + For a home bought at + the median price of with + a down payment, the + +On line 1494: + at the median + price of with a down payment, + the monthly mortgage + +On line 1494: + price of with a down + payment, the monthly mortgage + payment would be less + +On line 1494: + with a down payment, + the monthly mortgage payment + would be less than in + +On line 1494: + a down payment, the + monthly mortgage payment would + be less than in Or + +On line 1494: + payment, the monthly + mortgage payment would be less + than in Or to turn + +On line 1494: + mortgage payment would + be less than in Or to turn + the perspective around—as + +On line 1494: + be less than in Or + to turn the perspective around—as + many people did—for + +On line 1494: + less than in Or to + turn the perspective around—as many + people did—for the + +On line 1494: + turn the perspective + around—as many people did—for the + same monthly payment + +On line 1494: + the perspective around—as + many people did—for the same + monthly payment of + +On line 1494: + many people did—for + the same monthly payment of + a homeowner could + +On line 1494: + people did—for the + same monthly payment of a + homeowner could move + +On line 1496: + same monthly payment + of a homeowner could move + up from a home to + +On line 1496: + monthly payment of + a homeowner could move up + from a home to a + +On line 1498: + of a homeowner + could move up from a home to + a one.7 An adjustable-rate + +On line 1498: + homeowner could move + up from a home to a one.7 + An adjustable-rate mortgage + +On line 1498: + up from a home to + a one.7 An adjustable-rate mortgage + (ARM) gave buyers even + +On line 1498: + a home to a one.7 + An adjustable-rate mortgage (ARM) gave + buyers even lower + +On line 1498: + An adjustable-rate mortgage + (ARM) gave buyers even lower + initial payments or + +On line 1498: + (ARM) gave buyers even + lower initial payments or + made a larger house + +On line 1498: + affordable—unless + interest rates rose. In just + of prime borrowers + +On line 1498: + interest rates rose. + In just of prime borrowers + with new mortgages chose + +On line 1498: + rose. In just of prime + borrowers with new mortgages + chose ARMs; in did. In + +On line 1498: + prime borrowers with + new mortgages chose ARMs; in did. + In the proportion + +On line 1498: + borrowers with new + mortgages chose ARMs; in did. In + the proportion rose + +On line 1498: + new mortgages chose ARMs; + in did. In the proportion + rose to Among subprime + +On line 1498: + chose ARMs; in did. In + the proportion rose to Among + subprime borrowers, + +On line 1498: + the proportion rose + to Among subprime borrowers, + already heavy users of + +On line 1498: + rose to Among subprime + borrowers, already heavy users + of ARMs, it rose from + +On line 1500: + subprime borrowers, + already heavy users of ARMs, it + rose from around to As + +On line 1500: + borrowers, already + heavy users of ARMs, it rose from + around to As people + +On line 1500: + already heavy users of + ARMs, it rose from around to As + people jumped into + +On line 1500: + users of ARMs, it rose + from around to As people jumped + into the housing + +On line 1500: + ARMs, it rose from around + to As people jumped into + the housing market, + +On line 1500: + it rose from around to + As people jumped into the + housing market, prices + +On line 1500: + to As people jumped + into the housing market, + prices rose, and in hot + +On line 1500: + people jumped into + the housing market, prices rose, + and in hot markets + +On line 1500: + the housing market, + prices rose, and in hot markets + they really took + +On line 1500: + housing market, prices + rose, and in hot markets they + really took off + +On line 1500: + prices rose, and in hot + markets they really took + off (see figure In + +On line 1500: + really took off + (see figure In Florida, + average home prices + +On line 1500: + then annually + from to In California, + those numbers were even + +On line 1500: + California, those + numbers were even higher: and + In California, + +On line 1502: + were even higher: and + In California, a house + bought for in was worth + +On line 1502: + even higher: and In + California, a house bought + for in was worth nine + +On line 1502: + bought for in was worth + nine years later. However, + soaring prices were not + +On line 1502: + soaring prices were not + necessarily the norm. + In Washington State, + +On line 1502: + necessarily + the norm. In Washington State, + prices continued to + +On line 1502: + annually from + to annually from to + In Ohio, the numbers + +On line 1502: + to annually + from to In Ohio, the numbers + were and Nationwide, + +On line 1502: + annually from + to In Ohio, the numbers were + and Nationwide, home + +On line 1502: + In Ohio, the numbers + were and Nationwide, home prices + rose annually + +On line 1502: + Ohio, the numbers were + and Nationwide, home prices rose + annually from + +On line 1502: + Nationwide, home prices + rose annually from to + 2003—historically + +On line 1502: + rose annually + from to 2003—historically + high, but well under + +On line 1502: + annually from + to 2003—historically high, + but well under the + +On line 1504: + steadily, peaking at + of households in Because so + many families were + +On line 1504: + at of households in + Because so many families + were benefiting + +On line 1504: + many families were + benefiting from higher + home values, household + +On line 1504: + benefiting from + higher home values, household + wealth rose to nearly + +On line 1504: + higher home values, + household wealth rose to nearly + six times income, up + +On line 1504: + home values, household + wealth rose to nearly six times + income, up from five + +On line 1504: + household wealth rose to + nearly six times income, up + from five times a few + +On line 1504: + to nearly six times + income, up from five times a + few years earlier. + +On line 1504: + income, up from five + times a few years earlier. + The top of households + +On line 1504: + up from five times a + few years earlier. The top + of households by net + +On line 1504: + from five times a few + years earlier. The top of + households by net worth, + +On line 1504: + few years earlier. + The top of households by net + worth, of whom owned their + +On line 1504: + years earlier. The + top of households by net worth, + of whom owned their homes, + +On line 1504: + earlier. The top + of households by net worth, of + whom owned their homes, saw + +On line 1504: + The top of households + by net worth, of whom owned their + homes, saw the value + +On line 1504: + top of households by + net worth, of whom owned their homes, + saw the value of + +On line 1504: + of households by net + worth, of whom owned their homes, saw + the value of their + +On line 1504: + by net worth, of whom + owned their homes, saw the value + of their primary + +On line 1504: + saw the value of + their primary residences + rise between and from + +On line 1504: + the value of their + primary residences rise + between and from to + +On line 1504: + of their primary + residences rise between and + from to (adjusted + +On line 1504: + between and from to + (adjusted for inflation), + an increase of more + +On line 1504: + to (adjusted for + inflation), an increase of + more than Median + +On line 1504: + an increase of more + than Median net worth for + all households in the + +On line 1504: + increase of more than + Median net worth for all + households in the top + +On line 1504: + Median net worth + for all households in the top + after accounting + +On line 1504: + for all households in + the top after accounting + for other housing + +On line 1504: + after accounting + for other housing value + and assets, as well + +On line 1504: + up from to between + and the median value + of their primary + +On line 1504: + and the median + value of their primary + residences rose from + +On line 1504: + of their primary + residences rose from to an + increase of more than + +On line 1506: + residences rose from + to an increase of more than + Median net worth + +On line 1506: + from to an increase + of more than Median net + worth for households in + +On line 1506: + to an increase of + more than Median net worth + for households in the + +On line 1508: + the bottom was in + Historically, every + increase in housing + +On line 1508: + Historically, + every increase in housing + wealth boosted consumer + +On line 1508: + debated whether the + wealth increases would affect + spending more than in + +On line 1508: + the wealth increases + would affect spending more than + in past years, because + +On line 1508: + wealth increases would + affect spending more than in + past years, because so + +On line 1508: + would affect spending + more than in past years, because + so many homeowners + +On line 1508: + affect spending more + than in past years, because so + many homeowners at + +On line 1508: + more than in past years, + because so many homeowners + at so many levels + +On line 1508: + in past years, because + so many homeowners at so + many levels of wealth + +On line 1508: + past years, because so + many homeowners at so many + levels of wealth saw + +On line 1508: + so many homeowners + at so many levels of wealth + saw increases and + +On line 1508: + many levels of wealth + saw increases and because + it was easier + +On line 1508: + levels of wealth saw + increases and because it + was easier and + +On line 1508: + saw increases and + because it was easier + and cheaper to tap + +On line 1508: + and because it was + easier and cheaper to + tap home equity. + +On line 1510: + and cheaper to tap + home equity. Higher home + prices and low mortgage + +On line 1510: + cheaper to tap home + equity. Higher home prices + and low mortgage rates + +On line 1510: + Higher home prices and + low mortgage rates brought a wave + of refinancing + +On line 1510: + low mortgage rates brought + a wave of refinancing + to the prime mortgage + +On line 1510: + rates brought a wave of + refinancing to the prime + mortgage market. In + +On line 1510: + refinancing to + the prime mortgage market. In + alone, lenders refinanced + +On line 1510: + prime mortgage market. + In alone, lenders refinanced over + million mortgages, more + +On line 1510: + more than one in four—an + unprecedented level.14 Many + homeowners took out + +On line 1510: + four—an unprecedented + level.14 Many homeowners took + out cash while cutting + +On line 1510: + out cash while cutting + their interest rates. From through + cash-out refinancings + +On line 1510: + their interest rates. + From through cash-out refinancings + netted these households + +On line 1510: + netted these households + an estimated billion; + homeowners accessed + +On line 1510: + an estimated + billion; homeowners accessed + another billion + +On line 1510: + billion; homeowners + accessed another billion + via home equity + +On line 1510: + homeowners accessed + another billion via home + equity loans.15 Some + +On line 1510: + home equity loans.15 + Some were typical second + liens; others were a + +On line 1510: + Some were typical + second liens; others were a + newer invention, + +On line 1510: + typical second + liens; others were a newer + invention, the home + +On line 1510: + second liens; others + were a newer invention, + the home equity + +On line 1510: + liens; others were a + newer invention, the home + equity line of + +On line 1510: + invention, the home + equity line of credit. + These operated + +On line 1510: + equity line of + credit. These operated + much like a credit + +On line 1510: + line of credit. These + operated much like a + credit card, letting + +On line 1510: + much like a credit + card, letting the borrower + borrow and repay + +On line 1510: + credit card, letting + the borrower borrow and + repay as needed, + +On line 1510: + borrow and repay + as needed, often with the + convenience of an + +On line 1510: + repay as needed, + often with the convenience + of an actual + +On line 1510: + as needed, often + with the convenience of an + actual plastic + +On line 1512: + with the convenience + of an actual plastic + card. According to + +On line 1512: + the convenience of + an actual plastic card. + According to the + +On line 1512: + of an actual + plastic card. According to + the Fed’s Survey of + +On line 1512: + actual plastic + card. According to the Fed’s + Survey of Consumer + +On line 1512: + Survey of Consumer + Finances, of homeowners who + tapped their equity + +On line 1512: + of Consumer Finances, + of homeowners who tapped their + equity used that + +On line 1512: + their equity used + that money for expenses + such as medical + +On line 1512: + equity used that + money for expenses such + as medical bills, + +On line 1512: + such as medical + bills, taxes, electronics, and + vacations, or to + +On line 1512: + to consolidate + debt; another used it for + home improvements; and + +On line 1512: + consolidate debt; + another used it for home + improvements; and the + +On line 1512: + debt; another used + it for home improvements; and + the rest purchased more + +On line 1514: + A Congressional + Budget Office paper from + reported on the + +On line 1516: + from reported on + the recent history: "As + housing prices surged in + +On line 1516: + recent history: + "As housing prices surged in the + late 1990s and early + +On line 1516: + "As housing prices surged + in the late 1990s and early + 2000s, consumers boosted + +On line 1516: + housing prices surged in + the late 1990s and early 2000s, + consumers boosted their + +On line 1516: + prices surged in the late + 1990s and early 2000s, consumers + boosted their spending + +On line 1516: + in the late 1990s and + early 2000s, consumers boosted + their spending faster than + +On line 1516: + 1990s and early 2000s, + consumers boosted their spending + faster than their income + +On line 1516: + early 2000s, consumers + boosted their spending faster than + their income rose. That + +On line 1516: + boosted their spending + faster than their income rose. That + was reflected in + +On line 1516: + faster than their income + rose. That was reflected in + a sharp drop in the + +On line 1516: + income rose. That was + reflected in a sharp drop + in the personal + +On line 1516: + reflected in a + sharp drop in the personal + savings rate."16 Between + +On line 1516: + in a sharp drop in + the personal savings rate."16 + Between and increased + +On line 1516: + Between and increased + consumer spending accounted + for between and of + +On line 1516: + spending accounted + for between and of GDP growth + in any year—rising + +On line 1516: + between and of GDP + growth in any year—rising above + in years when spending + +On line 1516: + of GDP growth in any + year—rising above in years when + spending growth offset + +On line 1516: + year—rising above in + years when spending growth offset + declines elsewhere in + +On line 1516: + in years when spending + growth offset declines elsewhere + in the economy. + +On line 1516: + declines elsewhere in + the economy. Meanwhile, the + personal saving + +On line 1516: + rate dropped from to Some + components of spending grew + remarkably fast: home + +On line 1516: + to Some components + of spending grew remarkably + fast: home furnishings + +On line 1516: + Some components of + spending grew remarkably fast: + home furnishings and + +On line 1516: + durables, recreational goods + and vehicles, spending at + restaurants, and health care. + +On line 1516: + goods and vehicles, + spending at restaurants, and health + care. Overall consumer + +On line 1516: + spending at restaurants, + and health care. Overall consumer + spending grew faster than + +On line 1516: + and health care. Overall + consumer spending grew faster than + the economy, and + +On line 1516: + consumer spending grew + faster than the economy, and + in some years it grew + +On line 1516: + spending grew faster than + the economy, and in some + years it grew faster than + +On line 1516: + the economy, and + in some years it grew faster than + real disposable + +On line 1518: + in some years it grew + faster than real disposable + income. Nonetheless, + +On line 1518: + disposable income. + Nonetheless, the economy + looked stable. By it + +On line 1518: + income. Nonetheless, + the economy looked stable. + By it had weathered + +On line 1518: + the economy looked + stable. By it had weathered + the brief recession + +On line 1518: + stable. By it had + weathered the brief recession + of and the dot-com + +On line 1518: + By it had weathered + the brief recession of and + the dot-com bust, which + +On line 1518: + it had weathered the + brief recession of and the + dot-com bust, which had + +On line 1518: + the brief recession + of and the dot-com bust, which + had caused the largest loss + +On line 1518: + brief recession of + and the dot-com bust, which had + caused the largest loss of + +On line 1518: + recession of and + the dot-com bust, which had caused + the largest loss of wealth + +On line 1518: + of and the dot-com + bust, which had caused the largest loss + of wealth in ecades. With + +On line 1518: + and the dot-com bust, + which had caused the largest loss of + wealth in ecades. With new + +On line 1518: + which had caused the largest + loss of wealth in ecades. With new + financial products + +On line 1518: + the largest loss of wealth + in ecades. With new financial + products like the home + +On line 1518: + of wealth in ecades. With + new financial products like + the home equity + +On line 1518: + wealth in ecades. With new + financial products like the + home equity line + +On line 1518: + financial products + like the home equity line + of credit, households + +On line 1518: + products like the home + equity line of credit, + households could borrow + +On line 1518: + the home equity + line of credit, households could + borrow against their homes + +On line 1518: + against which the Fed had + struck preemptively, did not + materialize. + +On line 1520: + preemptively, did + not materialize. At + a congressional + +On line 1520: + a congressional + hearing in November Greenspan + acknowledged—at least + +On line 1520: + Greenspan acknowledged—at + least implicitly—that after + the dot-com bubble + +On line 1520: + acknowledged—at least + implicitly—that after the + dot-com bubble burst, + +On line 1520: + dot-com bubble burst, + the Fed cut interest rates + in part to promote + +On line 1520: + bubble burst, the Fed + cut interest rates in part + to promote housing. + +On line 1520: + cut interest rates + in part to promote housing. + Greenspan argued that the + +On line 1520: + interest rates in + part to promote housing. Greenspan + argued that the Fed’s + +On line 1520: + Greenspan argued that the + Fed’s low-interest-rate policy + had stimulated + +On line 1520: + argued that the Fed’s + low-interest-rate policy had + stimulated the + +On line 1520: + by encouraging + home sales and housing starts with + "mortgage interest + +On line 1520: + home sales and housing + starts with "mortgage interest + rates that are at lows + +On line 1520: + sales and housing starts + with "mortgage interest rates + that are at lows not + +On line 1520: + and housing starts with + "mortgage interest rates that + are at lows not seen + +On line 1520: + that are at lows not + seen in decades." As Greenspan explained, + "Mortgage markets have + +On line 1520: + at lows not seen in + decades." As Greenspan explained, "Mortgage + markets have also + +On line 1520: + not seen in decades." As + Greenspan explained, "Mortgage markets + have also been a + +On line 1520: + decades." As Greenspan explained, + "Mortgage markets have also + been a powerful + +On line 1520: + "Mortgage markets have + also been a powerful + stabilizing force + +On line 1520: + have also been a + powerful stabilizing + force over the past two + +On line 1520: + over the past two years + of economic distress by + facilitating + +On line 1520: + economic distress + by facilitating the + extraction of some + +On line 1520: + facilitating + the extraction of some of + the equity that + +On line 1522: + the extraction of + some of the equity that + home - owners had + +On line 1522: + extraction of some + of the equity that home + - owners had built + +On line 1522: + of the equity + that home - owners had built + up."17 In February + +On line 1522: + the equity that + home - owners had built up."17 + In February he + +On line 1522: + home - owners had + built up."17 In February he + reiterated + +On line 1522: + up."17 In February + he reiterated his + point, referring to + +On line 1522: + In February he + reiterated his point, + referring to "a + +On line 1522: + reiterated + his point, referring to "a + large extraction of + +On line 1522: + point, referring to + "a large extraction of cash + from home equity."18 + +On line 1524: + "a large extraction + of cash from home equity."18 + SUBPRIME LOANS: "BUYERS + +On line 1524: + extraction of cash + from home equity."18 SUBPRIME + LOANS: "BUYERS WILL PAY + +On line 1524: + from home equity."18 + SUBPRIME LOANS: "BUYERS WILL PAY + A HIGH PREMIUM" + +On line 1526: + SUBPRIME LOANS: "BUYERS + WILL PAY A HIGH PREMIUM" + The subprime market + +On line 1526: + "BUYERS WILL PAY A + HIGH PREMIUM" The subprime + market roared back from + +On line 1526: + A HIGH PREMIUM" + The subprime market roared back + from its shakeout in + +On line 1526: + HIGH PREMIUM" The + subprime market roared back from + its shakeout in the + +On line 1526: + subprime market roared + back from its shakeout in the + late 1990s. The value + +On line 1526: + shakeout in the late + 1990s. The value of subprime + loans originated + +On line 1526: + 1990s. The value of + subprime loans originated + almost doubled from + +On line 1526: + value of subprime + loans originated almost + doubled from through to + +On line 1528: + loans originated + almost doubled from through to + billion. In of these + +On line 1528: + almost doubled from + through to billion. In of these + were securitized; + +On line 1528: + through to billion. In + of these were securitized; + in Low interest + +On line 1528: + to billion. In of + these were securitized; in + Low interest rates + +On line 1528: + billion. In of these + were securitized; in Low + interest rates spurred + +On line 1528: + were securitized; + in Low interest rates spurred + this boom, which would have + +On line 1528: + securitized; in + Low interest rates spurred this + boom, which would have long-term + +On line 1528: + in Low interest + rates spurred this boom, which would have + long-term repercussions, but + +On line 1528: + Low interest rates + spurred this boom, which would have long-term + repercussions, but so + +On line 1528: + spurred this boom, which would + have long-term repercussions, but so + did increasingly + +On line 1530: + borrowers, and the + scale of the firms entering + the market. Subprime + +On line 1530: + the market. Subprime + was dominated by a + narrowing field of + +On line 1530: + was dominated + by a narrowing field of + ever-larger firms; the + +On line 1530: + by a narrowing + field of ever-larger firms; the + marginal players + +On line 1530: + field of ever-larger + firms; the marginal players + from the past decade had + +On line 1530: + of ever-larger firms; + the marginal players from + the past decade had merged + +On line 1530: + ever-larger firms; the + marginal players from the + past decade had merged or + +On line 1530: + firms; the marginal + players from the past decade had + merged or vanished. By + +On line 1530: + marginal players + from the past decade had merged or + vanished. By the top + +On line 1530: + players from the past + decade had merged or vanished. By + the top subprime lenders + +On line 1530: + from the past decade had + merged or vanished. By the top + subprime lenders made of + +On line 1530: + had merged or vanished. + By the top subprime lenders made + of all subprime loans, + +On line 1530: + merged or vanished. By + the top subprime lenders made of + all subprime loans, up + +On line 1530: + or vanished. By the + top subprime lenders made of all + subprime loans, up from + +On line 1532: + By the top subprime + lenders made of all subprime loans, + up from in There were + +On line 1532: + the top subprime lenders + made of all subprime loans, up + from in There were now + +On line 1532: + top subprime lenders made + of all subprime loans, up from + in There were now three + +On line 1532: + subprime lenders made of + all subprime loans, up from in + There were now three main + +On line 1532: + all subprime loans, up + from in There were now three main + kinds of companies + +On line 1532: + subprime loans, up from + in There were now three main kinds + of companies in + +On line 1532: + now three main kinds of + companies in the subprime + origination and + +On line 1532: + commercial banks and + thrifts, Wall Street investment banks, + and independent + +On line 1532: + investment banks, and + independent mortgage lenders. + Some of the biggest + +On line 1532: + City Bank, HSBC, and + Washington Mutual—spent + billions on boosting + +On line 1532: + on boosting subprime + lending by creating new + units, acquiring firms, + +On line 1532: + units, acquiring firms, + or offering financing + to other mortgage + +On line 1532: + Almost always, these + operations were sequestered + in nonbank subsidiaries, + +On line 1532: + operations were + sequestered in nonbank subsidiaries, + leaving them in a + +On line 1532: + sequestered in nonbank + subsidiaries, leaving them in a + regulatory + +On line 1534: + subsidiaries, leaving them + in a regulatory + no-man’s-land. When + +On line 1534: + regulatory + no-man’s-land. When it came + to subprime lending, + +On line 1534: + no-man’s-land. When + it came to subprime lending, + now it was Wall Street + +On line 1534: + it came to subprime + lending, now it was Wall Street + investment banks that + +On line 1534: + subprime lending, now + it was Wall Street investment + banks that worried about + +On line 1534: + now it was Wall Street + investment banks that worried + about competition + +On line 1534: + banks that worried about + competition posed by the + largest commercial banks + +On line 1534: + about competition + posed by the largest commercial + banks and thrifts. Former + +On line 1534: + competition posed + by the largest commercial banks + and thrifts. Former Lehman + +On line 1534: + commercial banks and + thrifts. Former Lehman president + Bart McDade told the FCIC + +On line 1534: + banks and thrifts. Former + Lehman president Bart McDade told + the FCIC that the banks + +On line 1534: + and thrifts. Former Lehman + president Bart McDade told the + FCIC that the banks had + +On line 1534: + the banks had gained their + own securitization + skills and didn’t need + +On line 1534: + banks had gained their own + securitization skills + and didn’t need the + +On line 1534: + and didn’t need the + investment banks to structure + and distribute.21 So + +On line 1534: + the investment banks + to structure and distribute.21 + So the investment + +On line 1534: + investment banks to + structure and distribute.21 So + the investment banks + +On line 1534: + a supply of loans + they could securitize and + sell to the growing + +On line 1534: + the growing legions + of investors. For example, + Lehman Brothers, the fourth-largest + +On line 1534: + legions of investors. + For example, Lehman Brothers, + the fourth-largest investment + +On line 1534: + including BNC and + Aurora.22 Bear Stearns, the fifth-largest, + ramped up its subprime + +On line 1534: + BNC and Aurora.22 + Bear Stearns, the fifth-largest, ramped up its + subprime lending arm + +On line 1534: + Bear Stearns, the fifth-largest, ramped + up its subprime lending arm + and eventually + +On line 1534: + originators in + the United States, including + Encore. In Merrill + +On line 1536: + and Morgan Stanley + bought Saxon Capital; in + Goldman Sachs upped its + +On line 1536: + Saxon Capital; + in Goldman Sachs upped its stake + in Senderra Funding, + +On line 1536: + in Goldman Sachs upped + its stake in Senderra Funding, + a small subprime lender. + +On line 1538: + its stake in Senderra + Funding, a small subprime lender. + Meanwhile, several + +On line 1538: + subprime lender. Meanwhile, + several independent + mortgage companies + +On line 1544: + plan concentrated + on "originating loans with + characteristics + +On line 1544: + "originating loans + with characteristics for + which whole loan buyers + +On line 1544: + which whole loan buyers + will pay a high premium."23 + Those "whole loan buyers" + +On line 1544: + whole loan buyers will + pay a high premium."23 Those + "whole loan buyers" were + +On line 1544: + loan buyers will pay + a high premium."23 Those "whole + loan buyers" were the + +On line 1544: + buyers will pay a + high premium."23 Those "whole loan + buyers" were the firms + +On line 1544: + a high premium."23 + Those "whole loan buyers" were the + firms on Wall Street that + +On line 1544: + premium."23 Those "whole + loan buyers" were the firms on + Wall Street that purchased + +On line 1544: + Those "whole loan buyers" + were the firms on Wall Street that + purchased loans and, most + +On line 1544: + loan buyers" were the + firms on Wall Street that purchased + loans and, most often, + +On line 1544: + were the firms on Wall + Street that purchased loans and, most + often, bundled them + +On line 1544: + firms on Wall Street that + purchased loans and, most often, + bundled them into + +On line 1544: + Wall Street that purchased + loans and, most often, bundled + them into mortgage-backed + +On line 1544: + loans and, most often, + bundled them into mortgage-backed + securities. They + +On line 1544: + bundled them into + mortgage-backed securities. They + were eager customers. + +On line 1544: + eager customers. In + New Century sold billion + in whole loans, up from + +On line 1544: + In New Century + sold billion in whole loans, up + from billion three years + +On line 1544: + sold billion in whole + loans, up from billion three years + before,24 launching the + +On line 1544: + up from billion three + years before,24 launching the firm + from tenth to second + +On line 1544: + from billion three years + before,24 launching the firm from + tenth to second place + +On line 1544: + tenth to second place + among subprime originators. + Three-quarters went to + +On line 1544: + Three-quarters went to + two securitizing firms—Morgan + Stanley and Credit + +On line 1544: + Suisse—but New + Century reassured its + investors that there were + +On line 1546: + investors that there were + "many more prospective buyers."25 Ameriquest, + in particular, + +On line 1546: + prospective buyers."25 Ameriquest, + in particular, pursued + volume. According + +On line 1546: + in particular, + pursued volume. According + to the company’s + +On line 1546: + volume. According + to the company’s public + statements, it paid its + +On line 1546: + According to the + company’s public statements, + it paid its account + +On line 1546: + company’s public + statements, it paid its account + executives less + +On line 1546: + statements, it paid its + account executives less + per mortgage than the + +On line 1546: + less per mortgage than + the competition, but it + encouraged them to + +On line 1546: + competition, but + it encouraged them to make + up the difference + +On line 1546: + it encouraged them + to make up the difference + by underwriting + +On line 1546: + encouraged them to + make up the difference by + underwriting more + +On line 1546: + up the difference + by underwriting more loans. + "Our people make more + +On line 1546: + loans. "Our people make + more volume per employee + than the rest of the + +On line 1546: + make more volume per + employee than the rest of + the industry," Aseem + +On line 1546: + per employee than + the rest of the industry," + Aseem Mital, CEO of + +On line 1546: + employee than the + rest of the industry," Aseem + Mital, CEO of Ameriquest, + +On line 1546: + than the rest of the + industry," Aseem Mital, CEO + of Ameriquest, said in The + +On line 1546: + of the industry," + Aseem Mital, CEO of Ameriquest, said + in The company + +On line 1546: + the industry," Aseem + Mital, CEO of Ameriquest, said in + The company cut + +On line 1546: + Aseem Mital, CEO of + Ameriquest, said in The company + cut costs elsewhere in + +On line 1546: + Mital, CEO of Ameriquest, + said in The company cut + costs elsewhere in the + +On line 1546: + cut costs elsewhere in + the origination process, too. + The back office for + +On line 1546: + costs elsewhere in the + origination process, too. The + back office for the + +On line 1546: + The back office for + the firm’s retail division + operated in + +On line 1546: + for the firm’s retail + division operated + in assembly-line + +On line 1546: + told a reporter for + American Banker; the work was + divided into + +On line 1548: + and funding. Ameriquest used + its savings to undercut + by as much as what + +On line 1548: + Ameriquest used its savings + to undercut by as much + as what competing + +On line 1548: + to undercut by + as much as what competing + originators charged + +On line 1548: + firms, according to + an industry analyst’s + estimate. Between + +On line 1548: + loan origination + rose from an estimated + billion to billion + +On line 1548: + billion to billion + annually. That vaulted + the firm from eleventh to + +On line 1548: + annually. That + vaulted the firm from eleventh to + first place among subprime + +On line 1548: + vaulted the firm from + eleventh to first place among subprime + originators. "They + +On line 1548: + from eleventh to first place + among subprime originators. + "They are clearly the + +On line 1548: + "They are clearly the + aggressor," Countrywide CEO + Angelo Mozilo + +On line 1550: + told his investors in + By Countrywide was third on + the list. The subprime + +On line 1550: + was third on the list. + The subprime players followed + diverse strategies. Lehman + +On line 1550: + involving them in + every link of the mortgage + chain: originating + +On line 1550: + every link of the + mortgage chain: originating + and funding the loans, + +On line 1550: + of the mortgage chain: + originating and funding + the loans, packaging + +On line 1550: + loans, packaging them + into securities, and + finally selling + +On line 1550: + to investors. Others + concentrated on niches: + New Century, for + +On line 1550: + concentrated on + niches: New Century, for + example, mainly + +On line 1550: + example, mainly + originated mortgages for + immediate sale + +On line 1552: + immediate sale + to other firms in the chain. + When originators + +On line 1552: + to other firms in + the chain. When originators + made loans to hold through + +On line 1552: + firms in the chain. When + originators made loans to + hold through maturity—an + +On line 1552: + made loans to hold through + maturity—an approach known as + originate-to-hold—they had + +On line 1552: + maturity—an approach + known as originate-to-hold—they had + a clear incentive + +On line 1552: + a clear incentive + to underwrite carefully + and consider the + +On line 1552: + clear incentive to + underwrite carefully and + consider the risks. + +On line 1552: + mortgages to sell, for + securitization or + otherwise—known as + +On line 1552: + or otherwise—known + as originate-to-distribute—they + no longer risked losses + +On line 1552: + otherwise—known as + originate-to-distribute—they no + longer risked losses if + +On line 1552: + risked losses if the + loan defaulted. As long as + they made accurate + +On line 1552: + loan defaulted. As + long as they made accurate + representations + +On line 1552: + the only risk was + to their reputations if + a lot of their loans + +On line 1552: + only risk was to + their reputations if a + lot of their loans went + +On line 1552: + their reputations + if a lot of their loans went + bad—but during the + +On line 1552: + a lot of their loans + went bad—but during the boom, + loans were not going + +On line 1552: + lot of their loans went + bad—but during the boom, loans + were not going bad. + +On line 1552: + went bad—but during + the boom, loans were not going + bad. In total, this + +On line 1552: + the boom, loans were not + going bad. In total, this + originate-to-distribute + +On line 1552: + bad. In total, this + originate-to-distribute pipeline + carried more than half + +On line 1552: + carried more than half + of all mortgages before the + crisis, and a much + +On line 1552: + more than half of all + mortgages before the crisis, + and a much larger + +On line 1552: + half of all mortgages + before the crisis, and a + much larger piece of + +On line 1554: + before the crisis, + and a much larger piece of + subprime mortgages. For + +On line 1554: + the crisis, and a + much larger piece of subprime + mortgages. For decades, a + +On line 1554: + and a much larger + piece of subprime mortgages. For + decades, a version of + +On line 1554: + a much larger piece + of subprime mortgages. For decades, + a version of the + +On line 1554: + of subprime mortgages. + For decades, a version of the + originate-to-distribute + +On line 1554: + For decades, a version + of the originate-to-distribute + model produced safe + +On line 1554: + a version of the + originate-to-distribute model + produced safe mortgages. + +On line 1554: + originate-to-distribute + model produced safe mortgages. + Fannie and Freddie + +On line 1554: + model produced safe + mortgages. Fannie and Freddie + had been buying prime, + +On line 1554: + mortgages. Fannie and + Freddie had been buying prime, + conforming mortgages + +On line 1556: + had been buying prime, + conforming mortgages since the + 1970s, protected by + +On line 1556: + conforming mortgages + since the 1970s, protected by + strict underwriting + +On line 1556: + 1970s, protected by + strict underwriting standards. + But some saw that the + +On line 1556: + But some saw that the + model now had problems. "If + you look at how many + +On line 1556: + saw that the model + now had problems. "If you look + at how many people + +On line 1556: + that the model now + had problems. "If you look at + how many people are + +On line 1556: + now had problems. "If + you look at how many people + are playing, from the + +On line 1556: + "If you look at how + many people are playing, from + the real estate + +On line 1556: + you look at how many + people are playing, from the + real estate agent + +On line 1556: + at how many people + are playing, from the real + estate agent all the + +On line 1556: + people are playing, + from the real estate agent + all the way through to + +On line 1556: + are playing, from the + real estate agent all the + way through to the guy + +On line 1556: + real estate agent + all the way through to the guy + who is issuing + +On line 1556: + all the way through to + the guy who is issuing + the security + +On line 1556: + the way through to the + guy who is issuing the + security and + +On line 1556: + who is issuing + the security and the + underwriter and + +On line 1556: + the security + and the underwriter and + the underwriting + +On line 1556: + security and + the underwriter and the + underwriting group + +On line 1556: + the underwriter + and the underwriting group + and blah, blah, blah, then + +On line 1556: + underwriting group + and blah, blah, blah, then nobody + in this entire chain + +On line 1556: + and blah, blah, blah, then + nobody in this entire chain + is responsible + +On line 1556: + this entire chain is + responsible to anybody," + Lewis Ranieri, an early + +On line 1556: + an early leader + in securitization, + told the FCIC, ot the + +On line 1556: + FCIC, ot the outcome + he and other investment + bankers had expected. + +On line 1556: + ot the outcome he + and other investment bankers + had expected. "None + +On line 1556: + the outcome he and + other investment bankers had + expected. "None of + +On line 1556: + other investment + bankers had expected. "None of + us wrote and said, ‘Oh, + +On line 1556: + investment bankers had + expected. "None of us wrote + and said, ‘Oh, by the + +On line 1556: + bankers had expected. + "None of us wrote and said, ‘Oh, + by the way, you have + +On line 1556: + had expected. "None + of us wrote and said, ‘Oh, by + the way, you have to + +On line 1556: + expected. "None of + us wrote and said, ‘Oh, by the + way, you have to be + +On line 1556: + of us wrote and said, + ‘Oh, by the way, you have to + be responsible + +On line 1556: + us wrote and said, ‘Oh, + by the way, you have to be + responsible for + +On line 1556: + ‘Oh, by the way, you + have to be responsible + for your actions,’" Ranieri + +On line 1556: + by the way, you have + to be responsible for + your actions,’" Ranieri said. + +On line 1558: + the way, you have to + be responsible for your + actions,’" Ranieri said. "It + +On line 1560: + actions,’" Ranieri said. "It + was pretty self-evident."27 + The starting point for + +On line 1560: + said. "It was pretty + self-evident."27 The starting + point for many mortgages + +On line 1560: + a mortgage broker. + These independent brokers, + with access to a + +On line 1560: + These independent + brokers, with access to a + variety of lenders, + +On line 1560: + brokers, with access + to a variety of lenders, + worked with borrowers + +On line 1560: + with borrowers to + complete the application + process. Using brokers + +On line 1560: + the application + process. Using brokers allowed + more rapid expansion, + +On line 1560: + application process. + Using brokers allowed more + rapid expansion, with + +On line 1560: + process. Using brokers + allowed more rapid expansion, + with no need to build + +On line 1560: + more rapid expansion, + with no need to build branches; + lowered costs, with no + +On line 1560: + expansion, with no + need to build branches; lowered + costs, with no need for + +On line 1560: + with no need to build + branches; lowered costs, with no + need for full-time + +On line 1560: + need for full-time + salespeople; and extended + geographic reach. + +On line 1562: + geographic reach. + For brokers, compensation + generally came + +On line 1562: + came as up-front fees—from + the borrower, from the lender, + or both—so the loan’s + +On line 1562: + the borrower, from + the lender, or both—so the loan’s + performance mattered + +On line 1562: + the lender, or both—so + the loan’s performance mattered + little. These fees were + +On line 1562: + or both—so the loan’s + performance mattered little. + These fees were often + +On line 1562: + the loan’s performance + mattered little. These fees were + often paid without + +On line 1562: + These fees were often + paid without the borrower’s + knowledge. Indeed, many + +On line 1562: + knowledge. Indeed, many + borrowers mistakenly + believed the mortgage + +On line 1562: + brokers acted in + borrowers’ best interest.28 + One common fee paid + +On line 1562: + in borrowers’ best + interest.28 One common fee + paid by the lender to + +On line 1562: + best interest.28 One + common fee paid by the lender + to the broker was + +On line 1562: + fee paid by the lender + to the broker was the "yield + spread premium": on + +On line 1562: + lender to the broker + was the "yield spread premium": + on higher-interest + +On line 1562: + to the broker was + the "yield spread premium": on + higher-interest loans, + +On line 1562: + "yield spread premium": + on higher-interest loans, the + lending bank would pay + +On line 1562: + higher-interest loans, + the lending bank would pay the + broker a higher + +On line 1562: + the lending bank would + pay the broker a higher + premium, giving + +On line 1562: + pay the broker a + higher premium, giving + the incentive to + +On line 1562: + higher premium, + giving the incentive to + sign the borrower + +On line 1562: + premium, giving + the incentive to sign the + borrower to the + +On line 1562: + the incentive to + sign the borrower to the + highest possible + +On line 1562: + sign the borrower + to the highest possible + rate. "If the broker + +On line 1562: + borrower to the + highest possible rate. "If + the broker decides + +On line 1562: + highest possible + rate. "If the broker decides + he’s going to try + +On line 1562: + rate. "If the broker + decides he’s going to try + and make more money + +On line 1562: + the broker decides + he’s going to try and make + more money on the + +On line 1562: + broker decides he’s + going to try and make more + money on the loan, + +On line 1562: + decides he’s going + to try and make more money + on the loan, then he’s + +On line 1562: + he’s going to try + and make more money on the + loan, then he’s going + +On line 1562: + going to try and + make more money on the loan, + then he’s going to + +On line 1562: + to try and make more + money on the loan, then he’s + going to raise the + +On line 1562: + and make more money + on the loan, then he’s going + to raise the rate," said + +On line 1562: + make more money on + the loan, then he’s going to + raise the rate," said Jay + +On line 1562: + money on the loan, + then he’s going to raise the + rate," said Jay Jeffries, + +On line 1562: + said Jay Jeffries, a + former sales manager for + Fremont Investment + +On line 1562: + Jeffries, a former + sales manager for Fremont + Investment Loan, to + +On line 1562: + sales manager for + Fremont Investment Loan, to + the Commission. "We’ve + +On line 1562: + Fremont Investment + Loan, to the Commission. "We’ve + got a higher rate + +On line 1562: + Investment Loan, to + the Commission. "We’ve got a + higher rate loan, we’re + +On line 1562: + the Commission. "We’ve + got a higher rate loan, we’re + paying the broker + +On line 1562: + higher rate loan, we’re + paying the broker for that + yield spread premium."29 + +On line 1564: + yield spread premium."29 + In theory, borrowers + are the first defense + +On line 1564: + spread premium."29 In + theory, borrowers are + the first defense against + +On line 1564: + defense against abusive + lending. By shopping around, they + should realize, for + +On line 1564: + lending. By shopping + around, they should realize, for + example, if a + +On line 1564: + shopping around, they should + realize, for example, + if a broker is + +On line 1564: + should realize, for + example, if a broker + is trying to sell + +On line 1564: + for example, if + a broker is trying to + sell them a higher-priced + +On line 1564: + example, if a + broker is trying to sell + them a higher-priced loan + +On line 1564: + broker is trying + to sell them a higher-priced loan + or to place them in + +On line 1564: + trying to sell them + a higher-priced loan or to place + them in a subprime + +On line 1564: + sell them a higher-priced + loan or to place them in a + subprime loan when they + +On line 1564: + loan or to place them + in a subprime loan when they + would qualify for + +On line 1564: + or to place them in + a subprime loan when they would + qualify for a + +On line 1564: + in a subprime loan + when they would qualify for + a less-expensive + +On line 1564: + a subprime loan when + they would qualify for a + less-expensive prime + +On line 1564: + would qualify for + a less-expensive prime loan. + But many borrowers + +On line 1564: + qualify for a + less-expensive prime loan. But + many borrowers do + +On line 1564: + a less-expensive + prime loan. But many borrowers + do not understand + +On line 1564: + less-expensive prime + loan. But many borrowers do + not understand the + +On line 1564: + But many borrowers + do not understand the most + basic aspects of + +On line 1564: + do not understand + the most basic aspects of + their mortgage. A study + +On line 1564: + not understand the + most basic aspects of their + mortgage. A study by + +On line 1564: + basic aspects of + their mortgage. A study by two + Federal Reserve + +On line 1564: + least of borrowers + with adjustable-rate mortgages did not + understand how much + +On line 1564: + with adjustable-rate mortgages + did not understand how much + their interest rates + +On line 1564: + adjustable-rate mortgages did + not understand how much their + interest rates could + +On line 1564: + did not understand + how much their interest rates + could reset at one + +On line 1564: + not understand how + much their interest rates could + reset at one time, + +On line 1564: + one time, and more than + half underestimated + how high their rates could + +On line 1564: + time, and more than half + underestimated how + high their rates could reach + +On line 1564: + high their rates could reach + over the years.30 The same lack of + awareness extended + +On line 1564: + over the years.30 The same + lack of awareness extended + to other terms of + +On line 1564: + the years.30 The same lack + of awareness extended to + other terms of the + +On line 1564: + terms of the loan—for + example, the level of + documentation + +On line 1566: + documentation + provided to the lender. "Most + borrowers didn’t + +On line 1566: + provided to the + lender. "Most borrowers didn’t + even realize that + +On line 1566: + lender. "Most borrowers + didn’t even realize that + they were getting a + +On line 1566: + borrowers didn’t + even realize that they were + getting a no-doc + +On line 1566: + even realize that + they were getting a no-doc + loan," said Michael Calhoun, + +On line 1566: + they were getting a + no-doc loan," said Michael Calhoun, + president of the + +On line 1566: + loan," said Michael Calhoun, + president of the Center + for Responsible + +On line 1566: + president of the + Center for Responsible + Lending. "They’d come in + +On line 1566: + of the Center for + Responsible Lending. "They’d + come in with their W-2 + +On line 1566: + for Responsible + Lending. "They’d come in with their + W-2 and end up with + +On line 1566: + come in with their W-2 + and end up with a no-doc + loan simply because + +On line 1566: + in with their W-2 and + end up with a no-doc loan + simply because the + +On line 1566: + their W-2 and end up + with a no-doc loan simply + because the broker + +On line 1566: + with a no-doc loan + simply because the broker + was getting paid more + +On line 1566: + loan simply because + the broker was getting paid + more and the lender was + +On line 1566: + because the broker + was getting paid more and the + lender was getting paid + +On line 1566: + getting paid more and + the lender was getting paid more + and there was extra + +On line 1566: + paid more and the lender + was getting paid more and there + was extra yield left + +On line 1566: + more and the lender was + getting paid more and there was + extra yield left over + +On line 1566: + the lender was getting + paid more and there was extra + yield left over for Wall + +On line 1566: + lender was getting paid + more and there was extra yield + left over for Wall Street + +On line 1566: + getting paid more and + there was extra yield left over + for Wall Street because + +On line 1566: + paid more and there was + extra yield left over for Wall + Street because the loan + +On line 1566: + there was extra yield + left over for Wall Street because + the loan carried a + +On line 1566: + extra yield left over + for Wall Street because the loan + carried a higher + +On line 1566: + left over for Wall Street + because the loan carried a + higher interest + +On line 1568: + for Wall Street because + the loan carried a higher + interest rate."31 And + +On line 1568: + the loan carried a + higher interest rate."31 And + borrowers with less + +On line 1568: + higher interest + rate."31 And borrowers with less + access to credit + +On line 1568: + And borrowers with + less access to credit are + particularly + +On line 1568: + access to credit + are particularly ill + equipped to challenge the + +On line 1568: + equipped to challenge the + more experienced person + across the desk. "While many + +On line 1568: + more experienced + person across the desk. "While many + [consumers] believe they + +On line 1568: + person across the desk. + "While many [consumers] believe they + are pretty good at + +On line 1568: + they are pretty good + at dealing with day-to-day + financial matters, + +On line 1568: + expenses and fees: + overdrawing checking accounts, + making late credit + +On line 1568: + and fees: overdrawing + checking accounts, making late + credit card payments, + +On line 1568: + making late credit + card payments, or exceeding + limits on credit + +On line 1568: + limits on credit + card charges," Annamaria Lusardi, + a professor of + +On line 1570: + of economics at + Dartmouth College, told the FCIC. + "Comparing terms of + +On line 1570: + Dartmouth College, told + the FCIC. "Comparing terms of + financial contracts + +On line 1570: + FCIC. "Comparing terms + of financial contracts and + shopping around before + +On line 1570: + around before making + financial decisions are + not at all common + +On line 1572: + Recall our case study + securitization deal + discussed earlier—in which + +On line 1572: + discussed earlier—in which + New Century sold mortgages + to Citigroup, which + +On line 1572: + which New Century + sold mortgages to Citigroup, + which then sold them to + +On line 1572: + New Century sold + mortgages to Citigroup, which + then sold them to the + +On line 1572: + which then sold them to + the securitization + trust, which then bundled + +On line 1572: + then sold them to the + securitization trust, + which then bundled them + +On line 1572: + trust, which then bundled + them into tranches for sale + to investors. Out of + +On line 1572: + which then bundled them + into tranches for sale to + investors. Out of those + +On line 1574: + bundled them into + tranches for sale to investors. + Out of those mortgages, + +On line 1574: + them into tranches + for sale to investors. Out of + those mortgages, brokers + +On line 1574: + for sale to investors. + Out of those mortgages, brokers + originated on + +On line 1574: + those mortgages, brokers + originated on behalf + of New Century. + +On line 1574: + originated on + behalf of New Century. + For each, the brokers + +On line 1574: + of New Century. + For each, the brokers received + an average fee + +On line 1574: + New Century. For + each, the brokers received an + average fee from + +On line 1574: + For each, the brokers + received an average fee + from the borrowers + +On line 1574: + the brokers received + an average fee from the + borrowers of or + +On line 1574: + an average fee + from the borrowers of or + of the loan amount. On + +On line 1574: + average fee from + the borrowers of or of + the loan amount. On top + +On line 1574: + the borrowers of + or of the loan amount. On top + of that, the brokers + +On line 1574: + or of the loan amount. + On top of that, the brokers + also received yield + +On line 1574: + amount. On top of that, + the brokers also received + yield spread premiums + +On line 1574: + On top of that, the + brokers also received yield + spread premiums from + +On line 1574: + the brokers also + received yield spread premiums + from New Century + +On line 1574: + spread premiums from + New Century for of these + loans, averaging + +On line 1574: + premiums from New + Century for of these loans, + averaging each. + +On line 1574: + New Century for + of these loans, averaging + each. In total, the + +On line 1576: + brokers received more + than million in fees for the + loans.33 Critics argued + +On line 1576: + million in fees for + the loans.33 Critics argued that + with this much money + +On line 1576: + in fees for the loans.33 + Critics argued that with this + much money at stake, + +On line 1576: + loans.33 Critics argued + that with this much money at + stake, mortgage brokers + +On line 1576: + Critics argued that + with this much money at stake, + mortgage brokers had + +On line 1576: + argued that with this + much money at stake, mortgage + brokers had every + +On line 1576: + with this much money + at stake, mortgage brokers had + every incentive + +On line 1576: + much money at stake, + mortgage brokers had every + incentive to seek + +On line 1576: + incentive to seek + "the highest combination + of fees and mortgage + +On line 1576: + to seek "the highest + combination of fees and + mortgage interest + +On line 1576: + combination of + fees and mortgage interest + rates the market will + +On line 1576: + of fees and mortgage + interest rates the market + will bear."34 Herb Sandler, + +On line 1576: + mortgage interest + rates the market will bear."34 Herb + Sandler, the founder and + +On line 1576: + interest rates the + market will bear."34 Herb Sandler, + the founder and CEO of + +On line 1576: + the market will bear."34 + Herb Sandler, the founder and CEO + of the thrift Golden + +On line 1576: + market will bear."34 Herb + Sandler, the founder and CEO of + the thrift Golden West + +On line 1576: + founder and CEO of the + thrift Golden West Financial + Corporation, told + +On line 1576: + Corporation, told + the FCIC that brokers were the + "whores of the world."35 As + +On line 1576: + FCIC that brokers were + the "whores of the world."35 As the + housing and mortgage + +On line 1576: + brokers were the "whores + of the world."35 As the housing + and mortgage market + +On line 1576: + the "whores of the world."35 + As the housing and mortgage + market boomed, so did + +On line 1576: + As the housing and + mortgage market boomed, so did + the brokers. Wholesale + +On line 1576: + mortgage market boomed, + so did the brokers. Wholesale + Access, which tracks the + +On line 1576: + market boomed, so did + the brokers. Wholesale Access, + which tracks the mortgage + +On line 1576: + so did the brokers. + Wholesale Access, which tracks the + mortgage industry, + +On line 1576: + Wholesale Access, which + tracks the mortgage industry, + reported that from + +On line 1576: + which tracks the mortgage + industry, reported that + from to the number + +On line 1576: + from to the number + of brokerage firms rose from + about to In brokers + +On line 1576: + of brokerage firms + rose from about to In brokers + originated of + +On line 1578: + firms rose from about to + In brokers originated + of loans; in they peaked + +On line 1578: + rose from about to In + brokers originated of + loans; in they peaked at + +On line 1578: + loans; in they peaked at + JP Morgan CEO Jamie Dimon + testified to the + +On line 1578: + peaked at JP Morgan + CEO Jamie Dimon testified + to the FCIC that his + +On line 1578: + at JP Morgan CEO + Jamie Dimon testified to + the FCIC that his firm + +On line 1578: + loans had more than twice + the losses of the loans that + JP Morgan itself + +On line 1580: + the losses of the + loans that JP Morgan itself + originated.37 As + +On line 1580: + loans that JP Morgan + itself originated.37 As + the housing market + +On line 1580: + emerged, in subprime and + prime mortgages alike: inflated + appraisals. For the lender, + +On line 1580: + greater losses if a + borrower defaulted. But + for the borrower + +On line 1580: + for the borrower + or for the broker or loan + officer who hired + +On line 1580: + or for the broker + or loan officer who hired + the appraiser, an + +On line 1580: + or loan officer + who hired the appraiser, an + inflated value + +On line 1580: + hired the appraiser, + an inflated value could + make the difference + +On line 1580: + value could make the + difference between closing + and losing the deal. + +On line 1580: + make the difference + between closing and losing + the deal. Imagine a + +On line 1580: + between closing and + losing the deal. Imagine a + home selling for that + +On line 1580: + and losing the deal. + Imagine a home selling for + that an appraiser + +On line 1580: + a home selling for + that an appraiser says is + actually worth + +On line 1580: + that an appraiser + says is actually worth + only In this case, + +On line 1580: + appraiser says is + actually worth only + In this case, a bank + +On line 1582: + In this case, a bank + won’t lend a borrower, say, + to buy the home. The + +On line 1582: + this case, a bank won’t + lend a borrower, say, to + buy the home. The deal + +On line 1582: + case, a bank won’t lend + a borrower, say, to buy + the home. The deal dies. + +On line 1582: + a bank won’t lend a + borrower, say, to buy the + home. The deal dies. Sure + +On line 1582: + a borrower, say, + to buy the home. The deal dies. + Sure enough, appraisers + +On line 1582: + the home. The deal dies. + Sure enough, appraisers began + feeling pressure. One + +On line 1582: + The deal dies. Sure enough, + appraisers began feeling + pressure. One survey + +On line 1582: + Sure enough, appraisers + began feeling pressure. One + survey found that of + +On line 1582: + One survey found that + of the appraisers had felt + pressed to inflate the + +On line 1582: + of the appraisers + had felt pressed to inflate the + value of homes; by + +On line 1582: + appraisers had felt + pressed to inflate the value + of homes; by this had + +On line 1582: + pressed to inflate the + value of homes; by this had + climbed to The pressure + +On line 1582: + inflate the value + of homes; by this had climbed to + The pressure came most + +On line 1582: + value of homes; by + this had climbed to The pressure + came most frequently + +On line 1582: + of homes; by this had + climbed to The pressure came most + frequently from the + +On line 1582: + climbed to The pressure + came most frequently from the + mortgage brokers, but + +On line 1582: + mortgage brokers, but + appraisers reported it + from real estate + +On line 1582: + from real estate + agents, lenders, and in many cases + borrowers themselves. + +On line 1582: + estate agents, lenders, and + in many cases borrowers + themselves. Most often, + +On line 1582: + agents, lenders, and in many + cases borrowers themselves. + Most often, refusal + +On line 1582: + cases borrowers + themselves. Most often, refusal + to raise the appraisal + +On line 1582: + themselves. Most often, + refusal to raise the appraisal + meant losing the client.38 + +On line 1582: + often, refusal to + raise the appraisal meant losing + the client.38 Dennis J. + +On line 1582: + to raise the appraisal + meant losing the client.38 Dennis + J. Black, president + +On line 1582: + raise the appraisal meant + losing the client.38 Dennis J. + Black, president of + +On line 1582: + meant losing the client.38 + Dennis J. Black, president + of the Florida + +On line 1582: + Black, president of + the Florida appraisal and + brokerage services + +On line 1582: + Florida appraisal + and brokerage services firm + D. J. Black Co. and + +On line 1582: + brokerage services + firm D. J. Black Co. and an + appraiser with years’ + +On line 1582: + firm D. J. Black Co. + and an appraiser with years’ + experience, held + +On line 1582: + held continuing + education sessions all + over the country for + +On line 1582: + sessions all over the + country for the National + Association + +On line 1582: + Independent Fee + Appraisers. He heard complaints + from the appraisers + +On line 1582: + heard complaints from the + appraisers that they had been + pressured to ignore + +On line 1582: + from the appraisers + that they had been pressured to + ignore missing kitchens, + +On line 1582: + appraisers that they + had been pressured to ignore + missing kitchens, damaged + +On line 1582: + pressured to ignore + missing kitchens, damaged walls, and + inoperable + +On line 1582: + systems. Black told the + FCIC, "The story I have heard + most often is the + +On line 1582: + the FCIC, "The story + I have heard most often is + the client saying he + +On line 1582: + FCIC, "The story I + have heard most often is the + client saying he could + +On line 1582: + "The story I have + heard most often is the client + saying he could not + +On line 1582: + have heard most often + is the client saying he could + not use the appraisal + +On line 1582: + most often is the + client saying he could not use + the appraisal because + +On line 1582: + often is the client + saying he could not use the + appraisal because the + +On line 1582: + is the client saying + he could not use the appraisal + because the value + +On line 1582: + client saying he could + not use the appraisal because + the value was [not] + +On line 1582: + saying he could not + use the appraisal because the + value was [not] what + +On line 1582: + not use the appraisal + because the value was [not] + what they needed."39 The + +On line 1582: + the appraisal because + the value was [not] what they + needed."39 The client would + +On line 1582: + because the value + was [not] what they needed."39 The + client would hire somebody + +On line 1584: + the value was [not] + what they needed."39 The client would + hire somebody else. Changes + +On line 1584: + value was [not] what + they needed."39 The client would hire + somebody else. Changes in + +On line 1584: + what they needed."39 The + client would hire somebody else. Changes + in regulations + +On line 1584: + client would hire somebody + else. Changes in regulations + reinforced the trend + +On line 1584: + appraiser with years’ + experience, explained in + testimony to + +On line 1584: + years’ experience, + explained in testimony + to the FCIC. In the + +On line 1584: + testimony to + the FCIC. In the Federal + Reserve, Office of + +On line 1584: + to the FCIC. In the + Federal Reserve, Office + of the Comptroller + +On line 1584: + Federal Reserve, + Office of the Comptroller + of the Currency, + +On line 1584: + the Comptroller of + the Currency, Office of + Thrift Supervision, + +On line 1584: + Comptroller of the + Currency, Office of Thrift + Supervision, and + +On line 1584: + Currency, Office + of Thrift Supervision, and + Federal Deposit + +On line 1584: + Federal Deposit + Insurance Corporation + loosened the appraisal + +On line 1584: + Deposit Insurance + Corporation loosened the + appraisal requirements + +On line 1584: + loosened the appraisal + requirements for the lenders they + regulated by + +On line 1586: + requirements for the + lenders they regulated by + raising from to the + +On line 1586: + by raising from to + the minimum home value + at which an appraisal + +On line 1586: + raising from to the + minimum home value at + which an appraisal from + +On line 1586: + home value at which + an appraisal from a licensed + professional was + +On line 1586: + professional was + required. In addition, Mann + cited the lack of + +On line 1586: + Mann cited the lack + of oversight of appraisers, + noting, "We had a + +On line 1586: + the lack of oversight + of appraisers, noting, "We + had a vast increase + +On line 1586: + lack of oversight of + appraisers, noting, "We had + a vast increase of + +On line 1586: + appraisers, noting, + "We had a vast increase of + licensed appraisers + +On line 1586: + had a vast increase + of licensed appraisers in + [California] in + +On line 1586: + Crabtree told the FCIC + that California’s Office + of Real Estate + +On line 1586: + that California’s + Office of Real Estate + Appraisers had eight + +On line 1586: + Office of Real + Estate Appraisers had eight + investigators + +On line 1590: + to strengthen appraisals. + They recommended that an + originator’s loan + +On line 1590: + They recommended + that an originator’s loan + production staff not + +On line 1592: + originator’s loan + production staff not select + appraisers. That led + +On line 1592: + "appraisal management + company," First American + Corporation, to + +On line 1592: + to choose appraisers. + Nevertheless, in the New + York State attorney + +On line 1592: + Nevertheless, in + the New York State attorney + general sued First + +On line 1592: + improperly let + Washington Mutual’s loan + production staff "hand-pick + +On line 1592: + loan production staff + "hand-pick appraisers who bring in + appraisal values high + +On line 1592: + staff "hand-pick appraisers + who bring in appraisal values + high enough to permit + +On line 1592: + "hand-pick appraisers who + bring in appraisal values high + enough to permit WaMu’s + +On line 1592: + appraisers who bring + in appraisal values high enough + to permit WaMu’s loans + +On line 1592: + who bring in appraisal + values high enough to permit + WaMu’s loans to close, and + +On line 1592: + to permit WaMu’s loans + to close, and improperly + permit[ted] WaMu to + +On line 1594: + and improperly + permit[ted] WaMu to pressure + appraisers to change + +On line 1594: + permit[ted] WaMu to + pressure appraisers to change + appraisal values that + +On line 1594: + appraisers to change + appraisal values that are too + low to permit loans + +On line 1596: + appraisal values that + are too low to permit loans + to close."42 CITIGROUP: + +On line 1596: + to permit loans to + close."42 CITIGROUP: "INVITED + REGULATORY + +On line 1598: + originations grew, + Citigroup decided to + expand, with troubling + +On line 1598: + expand, with troubling + consequences. Barely a year + after the Gramm-Leach-Bliley Act + +On line 1598: + consequences. Barely + a year after the Gramm-Leach-Bliley Act + validated its + +On line 1598: + Act validated + its merger with Travelers, + Citigroup made its + +On line 1598: + Citigroup made its + next big move. In September + it paid billion for + +On line 1598: + its next big move. In + September it paid billion + for Associates First, + +On line 1598: + In September it + paid billion for Associates + First, then the second-largest + +On line 1598: + Associates First, then + the second-largest subprime lender in + the country (after + +On line 1598: + the second-largest subprime + lender in the country (after + Household Finance.). Such + +On line 1598: + Household Finance.). Such + a merger would usually + have required approval + +On line 1598: + have required approval + from the Federal Reserve + and the other bank + +On line 1598: + bank regulators, + because Associates First owned + three small banks (in Utah, + +On line 1598: + because Associates + First owned three small banks (in Utah, + Delaware, and South + +On line 1598: + First owned three small banks + (in Utah, Delaware, and South + Dakota). But because + +On line 1598: + three small banks (in Utah, + Delaware, and South Dakota). + But because these banks + +On line 1598: + Utah, Delaware, and + South Dakota). But because these + banks were specialized, + +On line 1598: + Delaware, and South + Dakota). But because these banks + were specialized, a + +On line 1598: + Dakota). But because + these banks were specialized, a + provision tucked away + +On line 1598: + because these banks were + specialized, a provision + tucked away in Gramm-Leach-Bliley kept + +On line 1598: + banks were specialized, + a provision tucked away in + Gramm-Leach-Bliley kept the Fed out + +On line 1598: + were specialized, a + provision tucked away in Gramm-Leach-Bliley + kept the Fed out of + +On line 1598: + a provision tucked + away in Gramm-Leach-Bliley kept the Fed out + of the mix. The OCC, + +On line 1598: + provision tucked away + in Gramm-Leach-Bliley kept the Fed out of + the mix. The OCC, FDIC, + +On line 1598: + tucked away in Gramm-Leach-Bliley kept + the Fed out of the mix. The + OCC, FDIC, and New York + +On line 1598: + away in Gramm-Leach-Bliley kept the + Fed out of the mix. The OCC, + FDIC, and New York State + +On line 1598: + Gramm-Leach-Bliley kept the Fed out + of the mix. The OCC, FDIC, and + New York State banking + +On line 1600: + New York State banking + regulators reviewed the + deal. Consumer groups fought + +On line 1600: + the deal. Consumer groups + fought it, citing a long record + of alleged lending + +On line 1600: + citing a long record + of alleged lending abuses + by Associates First, + +On line 1600: + by Associates First, + including high prepayment + penalties, excessive + +On line 1600: + evaluate the forms. + "It’s simply unacceptable + to have the largest bank + +On line 1600: + to have the largest bank + in America take over the + icon of predatory + +On line 1600: + in America take + over the icon of predatory + lending," said Martin + +On line 1600: + icon of predatory + lending," said Martin Eakes, founder + of a nonprofit + +On line 1600: + lending," said Martin + Eakes, founder of a nonprofit + community lender + +On line 1602: + in North Carolina.43 + Advocates for the merger + argued that a large + +On line 1602: + argued that a large + bank under a rigorous + regulator could + +On line 1602: + regulator could + reform the company, and + Citigroup promised to + +On line 1602: + suspending mortgage + purchases from close to two-thirds + of the brokers and + +On line 1602: + purchases from close + to two-thirds of the brokers and + half the banks that had + +On line 1602: + from close to two-thirds of + the brokers and half the banks + that had sold loans to + +On line 1602: + two-thirds of the brokers + and half the banks that had sold + loans to Associates + +On line 1602: + of the brokers and + half the banks that had sold loans + to Associates First. + +On line 1602: + the brokers and half + the banks that had sold loans to + Associates First. "We + +On line 1602: + and half the banks that + had sold loans to Associates + First. "We were aware that + +On line 1602: + the banks that had sold + loans to Associates First. "We + were aware that brokers + +On line 1602: + banks that had sold loans + to Associates First. "We were + aware that brokers were + +On line 1602: + that had sold loans to + Associates First. "We were aware + that brokers were at + +On line 1602: + loans to Associates + First. "We were aware that brokers + were at the heart of + +On line 1602: + to Associates First. + "We were aware that brokers were + at the heart of that + +On line 1602: + aware that brokers were + at the heart of that public + discussion and were + +On line 1602: + were at the heart of + that public discussion and + were at the heart of + +On line 1602: + at the heart of that + public discussion and were + at the heart of a + +On line 1602: + heart of that public + discussion and were at the + heart of a lot of + +On line 1602: + discussion and were + at the heart of a lot of + the [controversial] + +On line 1602: + heart of a lot of + the [controversial] cases," + said Pam Flaherty, + +On line 1602: + of a lot of the + [controversial] cases," said + Pam Flaherty, a + +On line 1604: + Trade Commission, which + regulates independent + mortgage companies’ + +On line 1604: + that the company + had pressured borrowers to + refinance into + +On line 1604: + expensive mortgage + insurance. In Citigroup + reached a record million + +On line 1604: + reached a record million + civil settlement with the + FTC over Associates’ + +On line 1604: + civil settlement + with the FTC over Associates’ + "systematic and + +On line 1606: + widespread deceptive + and abusive lending practices."45 + In the New York Fed + +On line 1606: + and abusive lending + practices."45 In the New York Fed + used the occasion + +On line 1606: + practices."45 In the New + York Fed used the occasion + of Citigroup’s next + +On line 1606: + used the occasion + of Citigroup’s next proposed + acquisition—European American Bank + +On line 1606: + the occasion of + Citigroup’s next proposed acquisition—European + American Bank on + +On line 1606: + of Citigroup’s next + proposed acquisition—European American Bank + on Long Island, New + +On line 1606: + New York—to launch its + own investigation of + CitiFinancial, which now contained + +On line 1606: + CitiFinancial, which now contained + Associates First. "The manner + in which [Citigroup] + +On line 1606: + [Citigroup] approached + that transaction invited + regulatory + +On line 1606: + scrutiny," former + Fed Governor Mark Olson + told the FCIC. "They bought + +On line 1606: + Mark Olson told the + FCIC. "They bought a passel of + problems for themselves + +On line 1606: + told the FCIC. "They bought + a passel of problems for + themselves and it was + +On line 1606: + "They bought a passel + of problems for themselves and + it was at least a + +On line 1606: + bought a passel of + problems for themselves and it + was at least a two-year + +On line 1606: + passel of problems + for themselves and it was at + least a two-year [issue]."46 + +On line 1606: + themselves and it was + at least a two-year [issue]."46 The + Fed eventually + +On line 1608: + a two-year [issue]."46 The + Fed eventually accused + Citi - Financial + +On line 1608: + two-year [issue]."46 The Fed + eventually accused Citi + - Financial of + +On line 1608: + loans (usually for + borrowers in financial + trouble) into home + +On line 1608: + for borrowers in + financial trouble) into + home equity loans + +On line 1608: + financial trouble) + into home equity loans + without properly + +On line 1608: + repay. Reviewing + lending practices from and the + Fed also accused + +On line 1608: + lending practices from + and the Fed also accused + the unit of selling + +On line 1608: + practices from and the + Fed also accused the unit + of selling credit + +On line 1608: + and the Fed also + accused the unit of selling + credit insurance + +On line 1608: + of selling credit + insurance to borrowers + without checking if + +On line 1608: + without checking if + they would qualify for a + mortgage without it. + +On line 1608: + checking if they would + qualify for a mortgage + without it. For these + +On line 1608: + would qualify for + a mortgage without it. For + these violations + +On line 1608: + qualify for a + mortgage without it. For these + violations and + +On line 1608: + a mortgage without + it. For these violations + and for impeding + +On line 1608: + mortgage without it. + For these violations and + for impeding its + +On line 1608: + for impeding its + investigation, the Fed + in assessed million + +On line 1608: + in assessed million + in penalties. The company + said it expected + +On line 1608: + assessed million in + penalties. The company said + it expected to + +On line 1608: + said it expected + to pay another million + in restitution to + +On line 1612: + in restitution to + borrowers.47 FEDERAL RULES: + "INTENDED TO CURB + +On line 1614: + "INTENDED TO CURB + UNFAIR OR ABUSIVE LENDING" + As Citigroup was + +On line 1614: + UNFAIR OR ABUSIVE + LENDING" As Citigroup was + buying Associates + +On line 1614: + OR ABUSIVE LENDING" + As Citigroup was buying + Associates First in + +On line 1614: + predatory conduct. + It conducted its second + round of hearings on + +On line 1614: + It conducted its + second round of hearings on + the Home Ownership + +On line 1614: + hearings on the Home + Ownership and Equity + Protection Act (HOEPA), + +On line 1614: + Protection Act (HOEPA), + and subsequently the staff + offered two reform + +On line 1614: + and subsequently + the staff offered two reform + proposals. The first + +On line 1614: + offered two reform + proposals. The first would have + effectively barred + +On line 1614: + proposals. The first + would have effectively barred + lenders from granting any + +On line 1614: + effectively barred + lenders from granting any mortgage—not + just the limited + +On line 1614: + lenders from granting any + mortgage—not just the limited + set of high-cost + +On line 1614: + limited set of + high-cost loans defined by + HOEPA—solely on the value + +On line 1614: + HOEPA—solely on the value + of the collateral and + without regard to + +On line 1614: + to the borrower’s + ability to repay. For + high-cost loans, the + +On line 1614: + high-cost loans, the + lender would have to verify + and document the + +On line 1614: + to verify and + document the borrower’s + income and debt; for + +On line 1614: + and document the + borrower’s income and debt; + for other loans, the + +On line 1614: + borrower’s income + and debt; for other loans, the + documentation + +On line 1614: + and debt; for other + loans, the documentation + standard was weaker, + +On line 1614: + for other loans, the + documentation standard + was weaker, as the + +On line 1614: + documentation + standard was weaker, as the + lender could rely on + +On line 1614: + the lender could rely + on the borrower’s payment + history and the + +On line 1614: + borrower’s payment + history and the like. The + staff memo explained this + +On line 1614: + history and the + like. The staff memo explained this + would mainly "affect + +On line 1614: + and the like. The staff + memo explained this would mainly + "affect lenders who make + +On line 1616: + Despite evidence + of predatory tactics from + their own hearings and + +On line 1616: + recently released + HUD-Treasury report, Fed officials + remained divided + +On line 1616: + remained divided + on how aggressively to + strengthen borrower + +On line 1616: + strengthen borrower + protections. They grappled with + the same trade-off that the + +On line 1616: + grappled with the same + trade-off that the HUD-Treasury report had + recently noted. + +On line 1616: + the same trade-off that the + HUD-Treasury report had recently + noted. "We want to + +On line 1616: + that the HUD-Treasury report + had recently noted. "We + want to encourage + +On line 1616: + the HUD-Treasury report had + recently noted. "We want + to encourage the + +On line 1616: + recently noted. + "We want to encourage the + growth in the subprime + +On line 1616: + at the Financial + Services Roundtable in early + "But we also don’t + +On line 1616: + Financial Services + Roundtable in early "But we + also don’t want to + +On line 1616: + Services Roundtable in + early "But we also don’t + want to encourage + +On line 1616: + we also don’t want + to encourage the abuses; + indeed, we want to + +On line 1616: + want to encourage + the abuses; indeed, we want + to do what we can + +On line 1616: + to encourage the + abuses; indeed, we want to + do what we can to + +On line 1616: + the abuses; indeed, + we want to do what we can + to stop these abuses."49 + +On line 1616: + abuses; indeed, we + want to do what we can to + stop these abuses."49 Fed + +On line 1616: + want to do what we + can to stop these abuses."49 Fed + General Counsel + +On line 1616: + what we can to stop + these abuses."49 Fed General + Counsel Scott Alvarez + +On line 1616: + to stop these abuses."49 + Fed General Counsel Scott + Alvarez told the FCIC, + +On line 1616: + General Counsel + Scott Alvarez told the FCIC, "There + was concern that if + +On line 1616: + Counsel Scott Alvarez + told the FCIC, "There was concern + that if you put out + +On line 1616: + Scott Alvarez told the + FCIC, "There was concern that if + you put out a broad + +On line 1616: + Alvarez told the FCIC, + "There was concern that if you + put out a broad rule, + +On line 1616: + told the FCIC, "There was + concern that if you put out + a broad rule, you would + +On line 1616: + FCIC, "There was concern + that if you put out a broad + rule, you would stop things + +On line 1616: + "There was concern that + if you put out a broad rule, + you would stop things that + +On line 1616: + was concern that if + you put out a broad rule, you + would stop things that were + +On line 1616: + concern that if you + put out a broad rule, you would + stop things that were not + +On line 1616: + that if you put out + a broad rule, you would stop things + that were not unfair + +On line 1616: + if you put out a + broad rule, you would stop things that + were not unfair and + +On line 1616: + broad rule, you would stop + things that were not unfair and + deceptive because + +On line 1616: + that were not unfair + and deceptive because you + were trying to get + +On line 1616: + were not unfair and + deceptive because you were + trying to get at + +On line 1616: + deceptive because + you were trying to get at + the bad practices and + +On line 1616: + you were trying to + get at the bad practices and + you just couldn’t think + +On line 1616: + were trying to get + at the bad practices and you + just couldn’t think of + +On line 1616: + trying to get at + the bad practices and you just + couldn’t think of all + +On line 1616: + to get at the bad + practices and you just couldn’t + think of all of the + +On line 1616: + at the bad practices + and you just couldn’t think of + all of the details + +On line 1616: + the bad practices and + you just couldn’t think of all + of the details you + +On line 1616: + bad practices and you + just couldn’t think of all of + the details you would + +On line 1616: + practices and you just + couldn’t think of all of the + details you would need. + +On line 1616: + and you just couldn’t + think of all of the details + you would need. And if + +On line 1616: + you just couldn’t think + of all of the details you + would need. And if you + +On line 1616: + just couldn’t think of + all of the details you would + need. And if you did + +On line 1616: + couldn’t think of all + of the details you would need. + And if you did think + +On line 1616: + think of all of the + details you would need. And if + you did think of all + +On line 1616: + all of the details + you would need. And if you did + think of all of the + +On line 1616: + the details you would + need. And if you did think of + all of the details, + +On line 1616: + details you would need. + And if you did think of all + of the details, you’d + +On line 1616: + you would need. And if + you did think of all of the + details, you’d end up + +On line 1616: + need. And if you did + think of all of the details, + you’d end up writing + +On line 1616: + And if you did think + of all of the details, you’d + end up writing a + +On line 1616: + if you did think of + all of the details, you’d end + up writing a rule + +On line 1616: + you did think of all + of the details, you’d end up + writing a rule that + +On line 1616: + think of all of the + details, you’d end up writing + a rule that people + +On line 1616: + all of the details, + you’d end up writing a rule + that people could get + +On line 1616: + of the details, you’d + end up writing a rule that + people could get around + +On line 1616: + you’d end up writing + a rule that people could get + around very easily."50 + +On line 1618: + end up writing a + rule that people could get around + very easily."50 Greenspan, + +On line 1618: + up writing a rule + that people could get around very + easily."50 Greenspan, too, + +On line 1618: + a rule that people + could get around very easily."50 + Greenspan, too, later said + +On line 1618: + rule that people could + get around very easily."50 Greenspan, + too, later said that + +On line 1618: + that people could get + around very easily."50 Greenspan, too, + later said that to + +On line 1618: + around very easily."50 + Greenspan, too, later said that to + prohibit certain + +On line 1620: + later said that to + prohibit certain products + might be harmful. "These + +On line 1620: + prohibit certain + products might be harmful. "These + and other kinds of + +On line 1620: + certain products might + be harmful. "These and other + kinds of loan products, + +On line 1620: + "These and other kinds + of loan products, when made to + borrowers meeting + +On line 1620: + ore broadly available."51 + Instead, at least for certain + violations of + +On line 1620: + Instead, at least for + certain violations of + consumer protection + +On line 1620: + at least for certain + violations of consumer + protection laws, he + +On line 1620: + laws, he suggested + another approach: "If there + is egregious fraud, if + +On line 1620: + egregious practice, one + doesn’t need supervision + and regulation, + +On line 1620: + supervision and + regulation, what one needs + is law enforcement."52 + +On line 1620: + regulation, what + one needs is law enforcement."52 + But the Federal + +On line 1620: + law enforcement."52 But + the Federal Reserve would + not use the legal + +On line 1620: + Reserve would not use + the legal system to rein + in predatory lenders. + +On line 1620: + the legal system + to rein in predatory lenders. + From to the end of + +On line 1620: + legal system to + rein in predatory lenders. From + to the end of Greenspan’s + +On line 1620: + system to rein in + predatory lenders. From to the + end of Greenspan’s tenure + +On line 1620: + rein in predatory + lenders. From to the end of Greenspan’s + tenure in the Fed + +On line 1620: + predatory lenders. From + to the end of Greenspan’s tenure + in the Fed referred + +On line 1620: + end of Greenspan’s tenure + in the Fed referred to the + Justice Department + +On line 1620: + Greenspan’s tenure in the + Fed referred to the Justice + Department only + +On line 1620: + Fed referred to the + Justice Department only + three institutions + +On line 1620: + First American Bank, + in Carpentersville, Illinois; Desert + Community Bank, + +On line 1620: + Community Bank, + in Victorville, California; + and the New York branch + +On line 1620: + California; and + the New York branch of Société + Générale, a large French + +On line 1622: + the New York branch of + Société Générale, a large French + bank. Fed officials + +On line 1622: + Société Générale, a + large French bank. Fed officials + rejected the staff + +On line 1622: + After some wrangling, + in December the Fed did + modify HOEPA, but + +On line 1622: + the board highlighted + compromise: "The final rule + is intended to + +On line 1622: + "The final rule is + intended to curb unfair + or abusive lending + +On line 1622: + or abusive lending + practices without unduly + interfering with + +On line 1622: + the flow of credit, + creating unnecessary + creditor burden, + +On line 1622: + consumers’ options in + legitimate transactions." + The status quo would + +On line 1622: + in legitimate + transactions." The status quo + would change little. Fed + +On line 1622: + The status quo would + change little. Fed economists + had estimated + +On line 1622: + status quo would change + little. Fed economists had + estimated the + +On line 1622: + had estimated + the percentage of subprime + loans covered by HOEPA + +On line 1622: + estimated the + percentage of subprime loans + covered by HOEPA would + +On line 1622: + the percentage of + subprime loans covered by HOEPA + would increase from to + +On line 1622: + subprime loans covered + by HOEPA would increase from to + as much as under + +On line 1622: + loans covered by HOEPA + would increase from to as much + as under the new + +On line 1622: + HOEPA would increase from + to as much as under the + new regulations.53 + +On line 1622: + would increase from to + as much as under the new + regulations.53 But + +On line 1622: + as much as under + the new regulations.53 But + lenders changed the terms of + +On line 1622: + as under the new + regulations.53 But lenders changed + the terms of mortgages + +On line 1622: + regulations.53 But + lenders changed the terms of mortgages + to avoid the new rules’ + +On line 1622: + lenders changed the terms of + mortgages to avoid the new rules’ + revised interest + +On line 1622: + the terms of mortgages + to avoid the new rules’ revised + interest rate and + +On line 1622: + mortgages to avoid the + new rules’ revised interest + rate and fee triggers. + +On line 1622: + to avoid the new rules’ + revised interest rate and + fee triggers. By late + +On line 1622: + revised interest + rate and fee triggers. By late + it was clear that the + +On line 1622: + rate and fee triggers. + By late it was clear that the + new regulations + +On line 1622: + and fee triggers. By + late it was clear that the new + regulations would + +On line 1622: + late it was clear that + the new regulations would + end up covering + +On line 1622: + was clear that the new + regulations would end up + covering only + +On line 1622: + regulations would + end up covering only + about of subprime loans.54 + +On line 1622: + about of subprime loans.54 + Nevertheless, reflecting + on the Federal + +On line 1622: + reflecting on the + Federal Reserve’s efforts, + Greenspan contended in + +On line 1622: + Federal Reserve’s + efforts, Greenspan contended in + an FCIC interview + +On line 1622: + Greenspan contended in + an FCIC interview that the + Fed had developed + +On line 1622: + contended in an + FCIC interview that the Fed + had developed a + +On line 1622: + an FCIC interview + that the Fed had developed + a set of rules that + +On line 1622: + FCIC interview that + the Fed had developed a + set of rules that have + +On line 1622: + interview that the + Fed had developed a set + of rules that have held + +On line 1624: + Fed had developed + a set of rules that have held + up to this day.55 This + +On line 1624: + had developed a + set of rules that have held up + to this day.55 This was + +On line 1624: + developed a set + of rules that have held up to + this day.55 This was a + +On line 1624: + rules that have held up + to this day.55 This was a missed + opportunity, + +On line 1624: + to this day.55 This was + a missed opportunity, + says FDIC Chairman Sheila + +On line 1624: + this day.55 This was a + missed opportunity, says + FDIC Chairman Sheila Bair, + +On line 1624: + day.55 This was a missed + opportunity, says FDIC + Chairman Sheila Bair, who + +On line 1624: + Chairman Sheila Bair, who + described the "one bullet" that + might have prevented + +On line 1624: + might have prevented + the financial crisis: "I + absolutely would + +On line 1624: + financial crisis: + "I absolutely would have + been over at the Fed + +On line 1624: + the Fed writing rules, + prescribing mortgage lending + standards across the board + +On line 1624: + prescribing mortgage + lending standards across the board + for everybody, bank + +On line 1624: + lending standards across + the board for everybody, bank + and nonbank, that you + +On line 1624: + everybody, bank and + nonbank, that you cannot make + a mortgage unless + +On line 1624: + mortgage unless you + have documented income + that the borrower + +On line 1624: + have documented + income that the borrower + can repay the loan."56 + +On line 1626: + the borrower can + repay the loan."56 The Fed held + back on enforcement + +On line 1626: + repay the loan."56 The + Fed held back on enforcement + and supervision, + +On line 1626: + back on enforcement + and supervision, too. While + discussing HOEPA rule changes + +On line 1626: + and supervision, + too. While discussing HOEPA rule changes + in the staff of the + +On line 1626: + supervision, too. + While discussing HOEPA rule changes in + the staff of the Fed’s + +On line 1626: + too. While discussing HOEPA + rule changes in the staff of the + Fed’s Division of + +On line 1626: + in the staff of the + Fed’s Division of Consumer + and Community + +On line 1626: + and Community + Affairs also proposed a + pilot program to + +On line 1626: + holding companies’ + nonbank subsidiaries,57 such as CitiFinancial + and HSBC Finance, + +On line 1626: + nonbank subsidiaries,57 such + as CitiFinancial and HSBC Finance, + whose influence in + +On line 1626: + as CitiFinancial and HSBC + Finance, whose influence in + the subprime market + +On line 1626: + HSBC Finance, whose + influence in the subprime + market was growing. + +On line 1626: + influence in the + subprime market was growing. + The nonbank subsidiaries + +On line 1626: + subsidiaries were subject + to enforcement actions by + the Federal Trade + +On line 1626: + by the Federal + Trade Commission, while the banks + and thrifts were overseen + +On line 1626: + the Federal Trade + Commission, while the banks and + thrifts were overseen by + +On line 1626: + Trade Commission, while + the banks and thrifts were overseen + by their primary + +On line 1626: + the banks and thrifts were + overseen by their primary + regulators. As + +On line 1626: + holding company + regulator, the Fed had + the authority + +On line 1626: + authority to + examine nonbank subsidiaries + for "compliance with + +On line 1626: + for "compliance with + the [Bank Holding Company + Act] or any other + +On line 1628: + the Fed enforcement + authority in this area.58 + The Fed resisted + +On line 1628: + The Fed resisted + routine examinations + of these companies, + +On line 1628: + these companies, and + despite the support of Fed + Governor Gramlich, + +On line 1628: + despite the support + of Fed Governor Gramlich, + the initiative stalled. + +On line 1628: + of Fed Governor + Gramlich, the initiative stalled. + Sandra Braunstein, then + +On line 1628: + Governor Gramlich, + the initiative stalled. Sandra + Braunstein, then a staff + +On line 1628: + the initiative stalled. + Sandra Braunstein, then a staff + member in the Fed’s + +On line 1628: + Braunstein, then a staff + member in the Fed’s Consumer + and Community + +On line 1628: + member in the Fed’s + Consumer and Community + Affairs Division + +On line 1628: + in the Fed’s Consumer + and Community Affairs + Division and now + +On line 1628: + and Community + Affairs Division and now + its director, told + +On line 1628: + Affairs Division + and now its director, told + the FCIC that Greenspan and + +On line 1628: + Division and now + its director, told the FCIC + that Greenspan and other + +On line 1628: + other officials + were concerned that routinely + examining the + +On line 1628: + examining the + nonbank subsidiaries could create + an uneven playing + +On line 1628: + an uneven playing + field because the subsidiaries had + to compete with the + +On line 1628: + had to compete with + the independent mortgage + companies, over which + +On line 1628: + supervisory + authority (although the + Fed’s HOEPA rules applied + +On line 1628: + (although the Fed’s HOEPA + rules applied to all lenders).59 In + an interview with + +On line 1628: + HOEPA rules applied to + all lenders).59 In an interview + with the FCIC, Greenspan went + +On line 1628: + applied to all lenders).59 + In an interview with the + FCIC, Greenspan went further, + +On line 1628: + In an interview + with the FCIC, Greenspan went further, + arguing that with + +On line 1628: + arguing that with + or without a mandate, the + Fed lacked sufficient + +On line 1628: + Fed lacked sufficient + resources to examine the + nonbank subsidiaries. Worse, + +On line 1628: + misleading message + to the firms and the market; + if you examine + +On line 1628: + organization + incompletely, it tends to + put a sign in their + +On line 1628: + incompletely, it + tends to put a sign in their + window that it was + +On line 1628: + it tends to put a + sign in their window that it + was examined by + +On line 1628: + tends to put a sign + in their window that it was + examined by the + +On line 1628: + sign in their window + that it was examined by + the Fed, and partial + +On line 1630: + because it creates + a Good Housekeeping stamp.60 But + if resources were the + +On line 1630: + Housekeeping stamp.60 But + if resources were the issue, + the Fed chairman could + +On line 1630: + But if resources were + the issue, the Fed chairman + could have argued for + +On line 1630: + if resources were the + issue, the Fed chairman could + have argued for more. + +On line 1630: + were the issue, the + Fed chairman could have argued + for more. The Fed draws + +On line 1630: + could have argued for + more. The Fed draws income from + interest on the + +On line 1630: + for more. The Fed draws + income from interest on + the Treasury bonds it + +On line 1630: + Fed draws income from + interest on the Treasury + bonds it owns, so it + +On line 1630: + from interest on + the Treasury bonds it owns, so + it did not have to + +On line 1630: + interest on the + Treasury bonds it owns, so it + did not have to ask + +On line 1630: + on the Treasury bonds + it owns, so it did not have + to ask Congress for + +On line 1630: + it owns, so it did + not have to ask Congress for + appropriations. + +On line 1630: + have to ask Congress + for appropriations. It + was always mindful, + +On line 1632: + it could be subject + to a government audit + of its finances. In + +On line 1632: + could be subject to + a government audit of + its finances. In the + +On line 1632: + be subject to a + government audit of its + finances. In the same + +On line 1632: + government audit + of its finances. In the same + FCIC interview, Greenspan + +On line 1632: + of its finances. In + the same FCIC interview, Greenspan + recalled that he sat + +On line 1632: + same FCIC interview, + Greenspan recalled that he sat in + countless meetings on + +On line 1632: + Greenspan recalled that he + sat in countless meetings on + consumer protection, + +On line 1632: + countless meetings on + consumer protection, but that + he couldn’t pretend + +On line 1632: + consumer protection, + but that he couldn’t pretend + to have the kind of + +On line 1632: + but that he couldn’t + pretend to have the kind of + expertise on this + +On line 1632: + couldn’t pretend to + have the kind of expertise + on this subject that + +On line 1632: + pretend to have the + kind of expertise on this + subject that the staff + +On line 1634: + kind of expertise + on this subject that the staff + had.61 Gramlich, who chaired + +On line 1634: + of expertise on + this subject that the staff had.61 + Gramlich, who chaired the + +On line 1634: + chaired the Fed’s consumer + subcommittee, favored tighter + supervision of + +On line 1634: + supervision of + all subprime lenders—including + units of banks, thrifts, bank + +On line 1634: + authority to + firms (such as independent + mortgage companies) + +On line 1634: + mortgage companies) + whose lending practices were not + subject to routine + +On line 1634: + whose lending practices + were not subject to routine + supervision, the + +On line 1634: + antagonize the + states." But without such oversight, + the mortgage business + +On line 1634: + states." But without such + oversight, the mortgage business + was "like a city with + +On line 1634: + oversight, the mortgage + business was "like a city with + a murder law, but + +On line 1634: + mortgage business was + "like a city with a murder + law, but no cops on + +On line 1634: + business was "like a + city with a murder law, but + no cops on the beat."62 + +On line 1634: + was "like a city with + a murder law, but no cops + on the beat."62 In an + +On line 1634: + city with a murder + law, but no cops on the beat."62 + In an interview + +On line 1634: + with a murder law, + but no cops on the beat."62 In + an interview in + +On line 1634: + law, but no cops on + the beat."62 In an interview + in Gramlich told the + +On line 1634: + but no cops on the + beat."62 In an interview in + Gramlich told the Wall + +On line 1634: + on the beat."62 In an + interview in Gramlich told + the Wall Street Journal + +On line 1634: + Street Journal that he + privately urged Greenspan to clamp + down on predatory + +On line 1634: + privately urged Greenspan + to clamp down on predatory + lending. Greenspan demurred + +On line 1634: + urged Greenspan to clamp down + on predatory lending. Greenspan + demurred and, lacking + +On line 1634: + lending. Greenspan demurred + and, lacking support on the + board, Gramlich backed away. + +On line 1634: + demurred and, lacking + support on the board, Gramlich + backed away. Gramlich told + +On line 1634: + support on the board, + Gramlich backed away. Gramlich told + the Journal, "He was + +On line 1634: + the board, Gramlich backed + away. Gramlich told the Journal, + "He was opposed to + +On line 1634: + board, Gramlich backed away. + Gramlich told the Journal, "He + was opposed to it, + +On line 1634: + backed away. Gramlich told + the Journal, "He was opposed + to it, so I did + +On line 1634: + away. Gramlich told the + Journal, "He was opposed to + it, so I did not + +On line 1634: + told the Journal, "He + was opposed to it, so I + did not really + +On line 1634: + was opposed to it, + so I did not really + pursue it."63 (Gramlich + +On line 1636: + to it, so I did + not really pursue it."63 + (Gramlich died in of + +On line 1638: + did not really + pursue it."63 (Gramlich died in + of leukemia, at age The + +On line 1638: + pursue it."63 (Gramlich + died in of leukemia, at age The + Fed’s failure to stop + +On line 1638: + (Gramlich died in of + leukemia, at age The Fed’s failure + to stop predatory + +On line 1638: + died in of leukemia, at + age The Fed’s failure to stop + predatory practices + +On line 1638: + age The Fed’s failure + to stop predatory practices + infuriated + +On line 1638: + to stop predatory + practices infuriated + consumer advocates + +On line 1638: + predatory practices + infuriated consumer + advocates and some + +On line 1638: + infuriated + consumer advocates and some + members of Congress. + +On line 1638: + advocates and some + members of Congress. Critics + charged that accounts of + +On line 1638: + members of Congress. + Critics charged that accounts of + abuses were brushed off + +On line 1638: + accounts of abuses + were brushed off as anecdotal. + Patricia McCoy, a + +On line 1638: + a law professor + at the University of + Connecticut who served + +On line 1638: + individual + consumers. "That is classic Fed + mindset," said McCoy. "If + +On line 1638: + mindset," said McCoy. "If + you cannot prove that it is + a broad-based problem + +On line 1638: + McCoy. "If you cannot + prove that it is a broad-based + problem that threatens + +On line 1638: + you cannot prove that + it is a broad-based problem + that threatens systemic + +On line 1638: + prove that it is a + broad-based problem that threatens + systemic consequences, + +On line 1638: + it is a broad-based + problem that threatens systemic + consequences, then you + +On line 1638: + problem that threatens + systemic consequences, then you + will be dismissed." It + +On line 1638: + systemic consequences, + then you will be dismissed." It + frustrated Margot + +On line 1638: + will be dismissed." It + frustrated Margot Saunders + of the National + +On line 1638: + frustrated Margot + Saunders of the National + Consumer Law Center: + +On line 1638: + Margot Saunders of + the National Consumer Law + Center: "I stood up + +On line 1638: + National Consumer + Law Center: "I stood up at + a Fed meeting in + +On line 1638: + Center: "I stood up + at a Fed meeting in and + said, ‘How many anecdotes + +On line 1638: + "I stood up at a + Fed meeting in and said, ‘How + many anecdotes makes it + +On line 1638: + at a Fed meeting + in and said, ‘How many anecdotes + makes it real1 How + +On line 1638: + a Fed meeting in + and said, ‘How many anecdotes makes + it real1 How many + +On line 1638: + Fed meeting in and + said, ‘How many anecdotes makes it + real1 How many tens + +On line 1638: + in and said, ‘How many + anecdotes makes it real1 How + many tens [of] thousands + +On line 1638: + ‘How many anecdotes makes + it real1 How many tens [of] + thousands of anecdotes + +On line 1638: + real1 How many tens + [of] thousands of anecdotes will + it take to convince + +On line 1638: + many tens [of] thousands + of anecdotes will it take to + convince you that this + +On line 1638: + thousands of anecdotes + will it take to convince you + that this is a trend1’"64 + +On line 1640: + of anecdotes will it + take to convince you that this + is a trend1’"64 The Fed’s + +On line 1640: + it take to convince + you that this is a trend1’"64 The + Fed’s reluctance to + +On line 1640: + take to convince you + that this is a trend1’"64 The Fed’s + reluctance to take + +On line 1640: + you that this is a + trend1’"64 The Fed’s reluctance to + take action trumped the + +On line 1640: + that this is a trend1’"64 + The Fed’s reluctance to take + action trumped the HUD-Treasury + +On line 1640: + is a trend1’"64 The Fed’s + reluctance to take action + trumped the HUD-Treasury report + +On line 1640: + The Fed’s reluctance + to take action trumped the HUD-Treasury + report and reports + +On line 1640: + reluctance to take + action trumped the HUD-Treasury report + and reports issued + +On line 1640: + action trumped the HUD-Treasury + report and reports issued + by the General + +On line 1640: + report and reports + issued by the General + Accounting Office + +On line 1640: + reports issued by + the General Accounting + Office in and The + +On line 1640: + subsidiaries until a + pilot program in July + under new chairman + +On line 1640: + until a pilot + program in July under + new chairman Ben Bernanke.66 + +On line 1640: + pilot program in + July under new chairman + Ben Bernanke.66 The Fed did + +On line 1640: + in July under + new chairman Ben Bernanke.66 The Fed + did not issue new + +On line 1640: + July under new + chairman Ben Bernanke.66 The Fed did + not issue new rules + +On line 1640: + chairman Ben Bernanke.66 The + Fed did not issue new rules + under HOEPA until + +On line 1640: + Ben Bernanke.66 The Fed did + not issue new rules under + HOEPA until July + +On line 1640: + Bernanke.66 The Fed did not + issue new rules under HOEPA + until July a + +On line 1640: + not issue new rules + under HOEPA until July + a year after the + +On line 1640: + under HOEPA until + July a year after the + subprime market had + +On line 1640: + HOEPA until July + a year after the subprime + market had shut down. + +On line 1640: + rules banned deceptive + practices in a much broader + category of + +On line 1640: + practices in a much + broader category of + "higher-priced mortgage loans"; + +On line 1640: + in a much broader + category of "higher-priced + mortgage loans"; moreover, + +On line 1640: + category of + "higher-priced mortgage loans"; moreover, + they prohibited + +On line 1640: + without regard to + the borrower’s ability + o pay, and required + +On line 1640: + ability o pay, + and required companies to + verify income + +On line 1640: + o pay, and required + companies to verify + income and assets.67 + +On line 1640: + required companies + to verify income and + assets.67 The rules would + +On line 1640: + verify income + and assets.67 The rules would not + take effect until + +On line 1640: + income and assets.67 + The rules would not take effect + until October + +On line 1640: + and assets.67 The rules + would not take effect until + October which was + +On line 1640: + The rules would not take + effect until October + which was too little, + +On line 1640: + would not take effect + until October which was + too little, too late. + +On line 1642: + October which was + too little, too late. Looking + back, Fed General + +On line 1642: + too little, too late. + Looking back, Fed General + Counsel Alvarez said + +On line 1642: + Counsel Alvarez said + his institution succumbed + to the climate of + +On line 1642: + his institution + succumbed to the climate of + the times. He told the + +On line 1642: + to the climate of + the times. He told the FCIC, "The + mind-set was that there should + +On line 1642: + the climate of the + times. He told the FCIC, "The mind-set + was that there should be + +On line 1642: + climate of the times. + He told the FCIC, "The mind-set was + that there should be no + +On line 1642: + times. He told the FCIC, + "The mind-set was that there should be + no regulation; + +On line 1642: + He told the FCIC, "The + mind-set was that there should be no + regulation; the + +On line 1642: + "The mind-set was that there + should be no regulation; + the market should take + +On line 1642: + mind-set was that there should + be no regulation; the + market should take care + +On line 1642: + no regulation; + the market should take care of + policing, unless there + +On line 1642: + take care of policing, + unless there already is an + identified problem. + +On line 1642: + policing, unless there + already is an identified + problem. We were in + +On line 1642: + there already is an + identified problem. We were + in the reactive + +On line 1642: + identified problem. + We were in the reactive + mode because that’s what + +On line 1642: + problem. We were in + the reactive mode because + that’s what the mind-set was + +On line 1642: + in the reactive + mode because that’s what the mind-set + was of the ‘90s and + +On line 1642: + the reactive mode + because that’s what the mind-set was + of the ‘90s and the + +On line 1642: + mode because that’s what + the mind-set was of the ‘90s and + the early 2000s." The + +On line 1642: + because that’s what the + mind-set was of the ‘90s and the + early 2000s." The strong + +On line 1642: + that’s what the mind-set was + of the ‘90s and the early + 2000s." The strong housing + +On line 1642: + the mind-set was of the + ‘90s and the early 2000s." The + strong housing market + +On line 1642: + ‘90s and the early + 2000s." The strong housing market + also reassured + +On line 1642: + the early 2000s." The + strong housing market also + reassured people. + +On line 1642: + strong housing market + also reassured people. + Alvarez noted the + +On line 1642: + also reassured + people. Alvarez noted the + long history of + +On line 1642: + the long history + of low mortgage default rates + and the desire to + +On line 1642: + long history of + low mortgage default rates and + the desire to help + +On line 1642: + default rates and the + desire to help people who + traditionally + +On line 1646: + become homeowners.68 + STATES: "LONGSTANDING POSITION" + As the Fed balked, many + +On line 1646: + As the Fed balked, many + states proceeded on their own, + enacting "mini-HOEPA" laws + +On line 1646: + states proceeded on + their own, enacting "mini-HOEPA" laws + and undertaking + +On line 1648: + the OCC and the OTS. + In North Carolina led the + way, establishing + +On line 1648: + OCC and the OTS. In + North Carolina led the way, + establishing a + +On line 1648: + In North Carolina + led the way, establishing + a fee trigger of + +On line 1648: + North Carolina led + the way, establishing a + fee trigger of that + +On line 1648: + Carolina led the + way, establishing a fee + trigger of that is, + +On line 1648: + way, establishing + a fee trigger of that is, + for the most part any + +On line 1648: + a fee trigger of + that is, for the most part any + mortgage with points and + +On line 1648: + trigger of that is, + for the most part any mortgage + with points and fees at + +On line 1648: + is, for the most part + any mortgage with points and fees + at origination + +On line 1648: + for the most part any + mortgage with points and fees at + origination of + +On line 1648: + any mortgage with points + and fees at origination + of more than of the + +On line 1648: + mortgage with points and + fees at origination of + more than of the loan + +On line 1648: + more than of the loan + qualified as "high-cost + mortgage" subject to + +On line 1648: + regulations. This + was considerably lower + than the set by the + +On line 1648: + the set by the Fed’s + HOEPA regulations. Other + provisions addressed + +On line 1648: + HOEPA regulations. + Other provisions addressed + an even broader class + +On line 1648: + provisions addressed + an even broader class of loans, + banning prepayment + +On line 1648: + an even broader class + of loans, banning prepayment + penalties for mortgage + +On line 1648: + mortgage loans under + and prohibiting repeated + refinancing, known + +On line 1652: + rules did not apply + to federally chartered + thrifts. In the Office + +On line 1652: + did not apply to + federally chartered thrifts. + In the Office of + +On line 1652: + the Office of Thrift + Supervision reasserted + its "long-standing + +On line 1652: + position" that its + regulations "occupy + the entire field of + +On line 1652: + the entire field of + lending regulation for + federal savings + +On line 1652: + from "a hodgepodge of + conflicting and over-lapping state + lending requirements," + +On line 1652: + over-lapping state lending + requirements," the OTS said, would + let thrifts deliver + +On line 1652: + requirements," the OTS + said, would let thrifts deliver + "low-cost credit to + +On line 1652: + OTS said, would let thrifts + deliver "low-cost credit + to the public free + +On line 1652: + "low-cost credit to + the public free from undue + regulatory + +On line 1652: + the public free from + undue regulatory + duplication and + +On line 1656: + would protect consumers.70 + Nevertheless, other states + copied North Carolina’s + +On line 1656: + in alone.71 By states and + the District of Columbia + would pass some form of + +On line 1656: + and the District of + Columbia would pass some form + of anti-predatory + +On line 1656: + of anti-predatory + lending legislation. In + some cases, two or + +On line 1656: + legislation. In + some cases, two or more states + teamed up to produce + +On line 1656: + some cases, two or + more states teamed up to produce + large settlements: in + +On line 1656: + cases, two or more + states teamed up to produce large + settlements: in for + +On line 1656: + or more states teamed up + to produce large settlements: + in for example, + +On line 1656: + more states teamed up to + produce large settlements: in + for example, a + +On line 1656: + Massachusetts, and + Minnesota recovered more + than million from First + +On line 1656: + than million from First + Alliance Mortgage Company, + even though the firm had + +On line 1656: + Mortgage Company, + even though the firm had filed for + bankruptcy. Also + +On line 1656: + though the firm had filed + for bankruptcy. Also that + year, Household Finance— + +On line 1658: + million in penalties + and restitution to consumers. + In a coalition of + +On line 1658: + and restitution to + consumers. In a coalition of + states and the District + +On line 1658: + coalition of states and + the District of Columbia + settled with Ameriquest for + +On line 1658: + states and the District + of Columbia settled with + Ameriquest for million and + +On line 1658: + Ameriquest for million and + required the company to + follow restrictions + +On line 1658: + million and required + the company to follow + restrictions on its + +On line 1660: + the company to + follow restrictions on its + lending practices. As + +On line 1660: + restrictions on its + lending practices. As we will + see, however, these + +On line 1660: + its lending practices. + As we will see, however, + these efforts would be + +On line 1660: + practices. As we will + see, however, these efforts + would be severely + +On line 1660: + see, however, these + efforts would be severely + hindered with respect + +On line 1660: + severely hindered + with respect to national + banks when the OCC in + +On line 1660: + banks when the OCC in + officially joined the OTS + in constraining states + +On line 1660: + in officially + joined the OTS in constraining + states from taking such + +On line 1660: + products served as an + implicit endorsement of + their legality," + +On line 1664: + testified to the + Commission.72 COMMUNITYLENDING + PLEDGES: "WHAT WE DO IS + +On line 1664: + to the Commission.72 + COMMUNITYLENDING PLEDGES: "WHAT WE + DO IS REAFFIRM OUR + +On line 1666: + DO IS REAFFIRM OUR + INTENTION" While consumer groups + unsuccessfully + +On line 1666: + more protection against + predatory lenders, they also + lobbied the banks to + +On line 1666: + against predatory lenders, + they also lobbied the banks + to invest in and + +On line 1666: + predatory lenders, they + also lobbied the banks to + invest in and loan + +On line 1666: + lobbied the banks to + invest in and loan to low- + and moderate-income + +On line 1666: + invest in and loan + to low- and moderate-income + communities. The + +On line 1666: + law, including the + Community Reinvestment + Act of in fact, they + +On line 1666: + fact, they were often + outside the scope of the CRA. + For example, they + +On line 1666: + outside the scope of + the CRA. For example, they + frequently involved + +On line 1666: + scope of the CRA. For + example, they frequently + involved lending to + +On line 1666: + individuals + whose incomes exceeded those + covered by the CRA, + +On line 1666: + covered by the CRA, + lending in geographic + areas not covered + +On line 1666: + by the CRA, lending + in geographic areas + not covered by the + +On line 1666: + the CRA, lending in + geographic areas not + covered by the CRA, + +On line 1666: + in geographic + areas not covered by the + CRA, or lending to + +On line 1666: + areas not covered + by the CRA, or lending to + minorities, on which + +On line 1666: + covered by the CRA, + or lending to minorities, + on which the CRA is + +On line 1666: + the CRA, or lending + to minorities, on which the + CRA is silent. The banks + +On line 1666: + CRA, or lending to + minorities, on which the CRA + is silent. The banks would + +On line 1666: + minorities, on which + the CRA is silent. The banks would + either sign agreements + +On line 1666: + the CRA is silent. The + banks would either sign agreements + with community + +On line 1666: + CRA is silent. The banks + would either sign agreements with + community groups + +On line 1666: + community groups + or else unilaterally + pledge to lend to and + +On line 1666: + to and invest in + specific communities + or populations. + +On line 1668: + communities or + populations. Banks often + made these commitments + +On line 1668: + populations. Banks + often made these commitments + when courting public + +On line 1668: + made these commitments + when courting public opinion + during the merger + +On line 1668: + when courting public + opinion during the merger + mania at the turn + +On line 1668: + during the merger + mania at the turn of the + 21st century. One + +On line 1668: + mania at the turn + of the 21st century. One + of the most notable + +On line 1668: + at the turn of the + 21st century. One of the + most notable promises + +On line 1668: + the turn of the 21st + century. One of the most + notable promises was + +On line 1668: + century. One of + the most notable promises was + made by Citigroup + +On line 1668: + most notable promises + was made by Citigroup soon + after its merger + +On line 1668: + made by Citigroup + soon after its merger with + Travelers in a + +On line 1668: + billion lending and + investment commitment, some + of which would include + +On line 1668: + would include mortgages. + Later, Citigroup made a + billion commitment + +On line 1670: + with FleetBoston Financial + Corporation in Bank of + America announced + +On line 1670: + Corporation in + Bank of America announced + its largest commitment + +On line 1670: + Bank of America + announced its largest commitment + to date: billion over + +On line 1670: + America announced + its largest commitment to date: + billion over years. Chase + +On line 1670: + its largest commitment + to date: billion over years. Chase + announced commitments + +On line 1670: + date: billion over years. + Chase announced commitments of + billion and billion, + +On line 1670: + respectively, in + its mergers with Chemical + Bank and Bank One. The + +On line 1670: + Bank and Bank One. The + National Community + Reinvestment Coalition, + +On line 1670: + an advocacy + group, eventually tallied + more than trillion in + +On line 1670: + group, eventually + tallied more than trillion in + commitments from to + +On line 1670: + more than trillion in + commitments from to mortgage + lending made up a + +On line 1670: + in commitments from + to mortgage lending made up + a significant + +On line 1672: + of them.73 Although banks + touted these commitments in + press releases, the + +On line 1672: + in press releases, + the NCRC says it and other + community groups + +On line 1672: + the NCRC says it and + other community groups + could not verify + +On line 1674: + could not verify + this lending happened.74 The FCIC + sent a series of + +On line 1674: + this lending happened.74 + The FCIC sent a series of + requests to Bank of + +On line 1674: + happened.74 The FCIC sent + a series of requests to + Bank of America, + +On line 1674: + series of requests + to Bank of America, JP + Morgan, Citigroup, + +On line 1674: + of requests to Bank + of America, JP Morgan, + Citigroup, and Wells + +On line 1674: + of America, JP + Morgan, Citigroup, and Wells + Fargo, the nation’s + +On line 1674: + Citigroup, and Wells + Fargo, the nation’s four largest + banks, regarding their + +On line 1674: + largest banks, regarding + their "CRA and community + lending commitments." + +On line 1674: + banks indicated + they had fulfilled most promises. + According to the + +On line 1674: + much smaller than the + larger unilateral pledges + by the banks. Further, + +On line 1674: + the banks. Further, the + pledges generally covered + broader categories + +On line 1674: + categories than did + the CRA, including mortgages + to minority + +On line 1674: + the CRA, including + mortgages to minority + borrowers and to + +On line 1674: + example, only% + of the mortgages made under + JP Morgan’s billion + +On line 1674: + initiative" would have + fallen under the CRA.75 Bank + of America, which + +On line 1674: + have fallen under + the CRA.75 Bank of America, + which would count all low- + +On line 1674: + fallen under the + CRA.75 Bank of America, which + would count all low- and + +On line 1674: + and moderate-income + and minority lending + as satisfying + +On line 1674: + moderate-income and + minority lending as + satisfying its + +On line 1674: + and minority + lending as satisfying + its pledges, stated that + +On line 1674: + as satisfying + its pledges, stated that just over + half were likely to + +On line 1674: + satisfying its + pledges, stated that just over half + were likely to meet + +On line 1674: + its pledges, stated that + just over half were likely to + meet CRA requirements. + +On line 1676: + pledges, stated that just + over half were likely to meet + CRA requirements. Many + +On line 1676: + stated that just over + half were likely to meet CRA + requirements. Many of + +On line 1676: + over half were likely + to meet CRA requirements. Many + of these loans were not + +On line 1676: + half were likely to + meet CRA requirements. Many of + these loans were not very + +On line 1676: + were likely to meet + CRA requirements. Many of these + loans were not very risky. + +On line 1676: + likely to meet CRA + requirements. Many of these loans + were not very risky. This + +On line 1676: + requirements. Many of + these loans were not very risky. This + is not surprising, + +On line 1676: + not very risky. This is + not surprising, because such + broad definitions + +On line 1676: + included loans to + borrowers with strong credit + histories—low ncome + +On line 1676: + borrowers with strong + credit histories—low ncome + and weak or subprime + +On line 1676: + histories—low ncome + and weak or subprime credit + are not the same. In + +On line 1676: + and weak or subprime + credit are not the same. In + fact, Citigroup’s pledge + +On line 1676: + not the same. In fact, + Citigroup’s pledge of billion + in mortgage lending + +On line 1676: + In fact, Citigroup’s + pledge of billion in mortgage + lending "consisted + +On line 1676: + pledge of billion in + mortgage lending "consisted + of entirely prime + +On line 1676: + in mortgage lending + "consisted of entirely + prime loans" to low- and + +On line 1676: + prime loans" to low- and + moderate-income households, low- + and moderate-income + +On line 1676: + and minority + borrowers. These loans performed + well.76 JP Morgan’s largest + +On line 1676: + borrowers. These loans + performed well.76 JP Morgan’s largest + commitment to a + +On line 1676: + loans performed well.76 JP + Morgan’s largest commitment to + a community + +On line 1676: + largest commitment to + a community group was + to the Chicago CRA + +On line 1676: + a community + group was to the Chicago CRA + Coalition: billion in + +On line 1676: + to the Chicago CRA + Coalition: billion in loans over + years. Of loans issued + +On line 1676: + Chicago CRA Coalition: + billion in loans over years. Of + loans issued between + +On line 1676: + Coalition: billion in + loans over years. Of loans issued + between and fewer + +On line 1676: + billion in loans over + years. Of loans issued between + and fewer than have + +On line 1676: + and fewer than have + been 90-or-more-days delinquent, even + as of late Wachovia + +On line 1676: + fewer than have been + 90-or-more-days delinquent, even as + of late Wachovia made + +On line 1676: + 90-or-more-days delinquent, + even as of late Wachovia made + billion in mortgage + +On line 1676: + delinquent, even as of + late Wachovia made billion in + mortgage loans between + +On line 1676: + as of late Wachovia + made billion in mortgage loans + between and under + +On line 1676: + Wachovia made billion + in mortgage loans between and + under its billion + +On line 1676: + mortgage loans between + and under its billion in + unilateral pledges: + +On line 1676: + in unilateral + pledges: only about were ever + more than days delinquent + +On line 1676: + unilateral pledges: + only about were ever more + than days delinquent over + +On line 1676: + pledges: only about were + ever more than days delinquent + over the life of the + +On line 1676: + about were ever more + than days delinquent over the life + of the loan, compared + +On line 1676: + were ever more than + days delinquent over the life of + the loan, compared with + +On line 1676: + ever more than days + delinquent over the life of the + loan, compared with an + +On line 1676: + days delinquent over the + life of the loan, compared with + an estimated + +On line 1676: + loan, compared with an + estimated national + average of The + +On line 1676: + result of Wachovia’s + lending concentration in + the relatively + +On line 1676: + concentration in + the relatively stable + Southeast, and partly + +On line 1676: + the relatively + stable Southeast, and partly + a reflection of + +On line 1676: + stable Southeast, and + partly a reflection of + the credit profile + +On line 1676: + a reflection of + the credit profile of many + of these borrowers. + +On line 1678: + the credit profile + of many of these borrowers. + During the early + +On line 1678: + profile of many of + these borrowers. During the + early years of the + +On line 1678: + years of the CRA, the + Federal Reserve Board, when + considering whether + +On line 1678: + Federal Reserve + Board, when considering whether + to approve mergers, + +On line 1678: + considering whether + to approve mergers, gave some + weight to commitments + +On line 1678: + approve mergers, gave + some weight to commitments made + to regulators. + +On line 1680: + weight to commitments + made to regulators. This + changed in February + +On line 1680: + to commitments made + to regulators. This changed + in February when + +On line 1680: + commitments made to + regulators. This changed in + February when the + +On line 1680: + February when the + board denied Continental + Bank’s application + +On line 1680: + not offset its poor + lending record.79 In April the FDIC, + OCC, and Federal + +On line 1680: + lending record.79 In April + the FDIC, OCC, and Federal + Home Loan Bank Board (the + +On line 1680: + In April the FDIC, OCC, + and Federal Home Loan Bank + Board (the precursor + +On line 1680: + April the FDIC, OCC, and + Federal Home Loan Bank Board + (the precursor of + +On line 1680: + and Federal Home + Loan Bank Board (the precursor + of the OTS) joined the + +On line 1680: + Federal Home Loan + Bank Board (the precursor of + the OTS) joined the Fed + +On line 1680: + OTS) joined the Fed in + announcing that commitments + to regulators + +On line 1680: + that commitments to + regulators about lending + would be considered + +On line 1682: + documents, and its + public statements, show the Fed + never considered + +On line 1682: + statements, show the Fed + never considered pledges to + community groups + +On line 1682: + never considered + pledges to community groups + in evaluating + +On line 1682: + community groups + in evaluating mergers + and acquisitions, + +On line 1682: + in evaluating + mergers and acquisitions, + nor did it enforce + +On line 1682: + and acquisitions, + nor did it enforce them. As + Glenn Loney, a former + +On line 1682: + acquisitions, nor + did it enforce them. As Glenn + Loney, a former Fed + +On line 1682: + nor did it enforce + them. As Glenn Loney, a former + Fed official, told + +On line 1682: + them. As Glenn Loney, a + former Fed official, told + Commission staff, "At + +On line 1682: + Fed official, told + Commission staff, "At the very + beginning, [we] said + +On line 1682: + told Commission staff, + "At the very beginning, [we] + said we’re not going + +On line 1682: + Commission staff, "At + the very beginning, [we] said + we’re not going to + +On line 1682: + the very beginning, + [we] said we’re not going to + be in a posture + +On line 1682: + very beginning, [we] + said we’re not going to be + in a posture where + +On line 1682: + beginning, [we] said + we’re not going to be in + a posture where the + +On line 1682: + said we’re not going + to be in a posture where + the Fed’s going to + +On line 1682: + we’re not going to + be in a posture where the + Fed’s going to be + +On line 1682: + not going to be + in a posture where the Fed’s + going to be sort + +On line 1682: + be in a posture + where the Fed’s going to be + sort of coercing + +On line 1682: + in a posture where + the Fed’s going to be sort + of coercing banks + +On line 1682: + where the Fed’s going + to be sort of coercing + banks into making + +On line 1682: + the Fed’s going to + be sort of coercing banks + into making deals + +On line 1682: + sort of coercing + banks into making deals with + community groups + +On line 1682: + banks into making + deals with community groups + so that they can get + +On line 1682: + into making deals + with community groups so + that they can get their + +On line 1682: + with community + groups so that they can get their + applications through."81 + +On line 1684: + through."81 In fact, the rules + implementing the changes to + the CRA made it clear + +On line 1684: + implementing the + changes to the CRA made it clear + that the Federal + +On line 1684: + the CRA made it clear + that the Federal Reserve + would not consider + +On line 1684: + made it clear that the + Federal Reserve would not + consider promises + +On line 1684: + Federal Reserve + would not consider promises + to third parties or + +On line 1684: + consider promises + to third parties or enforce + prior agreements with + +On line 1684: + to third parties or + enforce prior agreements with + those parties. The rules + +On line 1684: + prior agreements with + those parties. The rules state "an + institution’s record + +On line 1684: + with those parties. The + rules state "an institution’s + record of fulfilling + +On line 1684: + those parties. The rules + state "an institution’s record + of fulfilling these + +On line 1684: + parties. The rules state + "an institution’s record of + fulfilling these types + +On line 1684: + "an institution’s + record of fulfilling these types + of agreements [with third + +On line 1684: + record of fulfilling + these types of agreements [with third + parties] is not an + +On line 1684: + these types of agreements + [with third parties] is not an + appropriate CRA + +On line 1684: + criterion."82 Still, + the banks highlighted past acts + and assurances for + +On line 1684: + the banks highlighted + past acts and assurances for + the future. In for + +On line 1684: + assurances for the + future. In for example, + when NationsBank said it was + +On line 1684: + for the future. In + for example, when NationsBank said + it was merging with + +On line 1684: + the future. In for + example, when NationsBank said it + was merging with BankAmerica, + +On line 1684: + In for example, + when NationsBank said it was merging + with BankAmerica, it also + +On line 1684: + example, when NationsBank + said it was merging with BankAmerica, + it also announced + +On line 1684: + was merging with BankAmerica, + it also announced a 10-year, + billion initiative + +On line 1684: + it also announced + a 10-year, billion initiative + that included pledges + +On line 1684: + also announced a + 10-year, billion initiative that + included pledges of + +On line 1684: + that included pledges + of billion for affordable + housing, billion for + +On line 1684: + pledges of billion for + affordable housing, billion + for consumer lending, + +On line 1684: + housing, billion for + consumer lending, billion for + small businesses, and + +On line 1684: + for consumer lending, + billion for small businesses, + and and billion for + +On line 1684: + small businesses, and + and billion for economic + and community + +On line 1686: + respectively. This + merger was perhaps the most + controversial of + +On line 1686: + merger was perhaps + the most controversial of + its time because of + +On line 1686: + was perhaps the most + controversial of its time + because of the size + +On line 1686: + most controversial + of its time because of the + size of the two banks. + +On line 1686: + controversial of + its time because of the size + of the two banks. The + +On line 1686: + its time because of + the size of the two banks. The + Fed held four public + +On line 1686: + because of the size + of the two banks. The Fed held + four public hearings + +On line 1686: + the size of the two + banks. The Fed held four public + hearings and received + +On line 1686: + of the two banks. The + Fed held four public hearings + and received more than + +On line 1686: + Fed held four public + hearings and received more than + comments. Supporters + +On line 1686: + four public hearings + and received more than comments. + Supporters touted + +On line 1686: + and received more than + comments. Supporters touted + the community + +On line 1686: + the community + investment commitment, while + opponents decried + +On line 1686: + opponents decried + its lack of specificity. The + Fed’s internal staff + +On line 1686: + approval repeated + the Fed’s insistence on not + considering these + +On line 1686: + insistence on not + considering these promises: + "The Board considers + +On line 1686: + considering these + promises: "The Board considers + CRA agreements to be + +On line 1686: + these promises: "The Board + considers CRA agreements to + be agreements between + +On line 1686: + be agreements between + private parties and has not + facilitated, + +On line 1686: + facilitated, + monitored, judged, required, or + enforced agreements or + +On line 1686: + or enforced agreements + or specific portions of + agreements. NationsBank remains + +On line 1686: + portions of agreements. + NationsBank remains obligated + to meet the credit + +On line 1686: + agreements. NationsBank remains + obligated to meet the + credit needs of its + +On line 1686: + the credit needs of + its entire community, + including [low- and + +On line 1686: + including [low- and + moderate-income] areas, with + or without private + +On line 1688: + its public order + approving the merger, the + Federal Reserve + +On line 1688: + order approving + the merger, the Federal + Reserve mentioned the + +On line 1688: + Federal Reserve + mentioned the commitment but + then went on to state + +On line 1688: + on to state that "an + applicant must demonstrate a + satisfactory + +On line 1688: + performance under + the CRA without reliance on + plans or commitments + +On line 1688: + CRA without reliance + on plans or commitments for + future action. The + +On line 1688: + plans or commitments + for future action. The Board + believes that the CRA + +On line 1688: + for future action. + The Board believes that the CRA + plan—whether made as a + +On line 1688: + believes that the CRA + plan—whether made as a plan or + as an enforceable + +On line 1688: + plan—whether made as a + plan or as an enforceable + commitment—has no + +On line 1688: + a plan or as an + enforceable commitment—has + no relevance in + +On line 1688: + relevance in this + case without the demonstrated + record of performance + +On line 1690: + of performance of + the companies involved."84 So + were these commitments + +On line 1690: + performance of the + companies involved."84 So were + these commitments a + +On line 1690: + companies involved."84 + So were these commitments a + meaningful step, or + +On line 1690: + involved."84 So were these + commitments a meaningful + step, or only a + +On line 1690: + these commitments a + meaningful step, or only + a gesture1 Lloyd Brown, + +On line 1690: + a meaningful step, + or only a gesture1 Lloyd + Brown, a managing + +On line 1690: + a gesture1 Lloyd Brown, + a managing director + at Citigroup, told + +On line 1690: + gesture1 Lloyd Brown, a + managing director at + Citigroup, told the + +On line 1690: + Brown, a managing + director at Citigroup, + told the FCIC that most + +On line 1690: + told the FCIC that most + of the commitments would have + been fulfilled in the + +On line 1690: + business.85 Speaking of + the merger with Countrywide, + Andrew Plepler, head + +On line 1690: + Corporate Social + Responsibility at + Bank of America, + +On line 1690: + Bank of America, + told the FCIC: "At a time of + mergers, there is a + +On line 1690: + America, told the + FCIC: "At a time of mergers, + there is a lot of + +On line 1690: + the FCIC: "At a time + of mergers, there is a lot + of concern, sometimes, + +On line 1690: + FCIC: "At a time of + mergers, there is a lot of + concern, sometimes, that + +On line 1690: + a time of mergers, + there is a lot of concern, + sometimes, that one plus + +On line 1690: + of mergers, there is + a lot of concern, sometimes, + that one plus one will + +On line 1690: + mergers, there is a + lot of concern, sometimes, that + one plus one will not + +On line 1690: + there is a lot of + concern, sometimes, that one plus + one will not equal two + +On line 1690: + a lot of concern, + sometimes, that one plus one will + not equal two in the + +On line 1690: + of concern, sometimes, + that one plus one will not equal + two in the eyes of + +On line 1690: + that one plus one will + not equal two in the eyes of + communities where + +On line 1690: + will not equal two in + the eyes of communities + where the acquired bank + +On line 1690: + not equal two in the + eyes of communities where + the acquired bank has + +On line 1690: + equal two in the eyes + of communities where the + acquired bank has been + +On line 1690: + of communities + where the acquired bank has been + investing. So, what + +On line 1690: + where the acquired bank + has been investing. So, what + we do is reaffirm + +On line 1690: + the acquired bank has + been investing. So, what we + do is reaffirm our + +On line 1690: + has been investing. + So, what we do is reaffirm + our intention to + +On line 1690: + So, what we do is + reaffirm our intention to + continue to lend + +On line 1690: + do is reaffirm our + intention to continue + to lend and invest + +On line 1690: + to continue to + lend and invest so that the + communities where + +On line 1690: + to lend and invest + so that the communities + where we live and work + +On line 1690: + lend and invest so + that the communities where + we live and work will + +On line 1690: + work will continue + to economically thrive." + He explained further + +On line 1690: + will continue to + economically thrive." He + explained further that + +On line 1690: + explained further that + the pledge amount was arrived at + by working "closely + +On line 1690: + pledge amount was arrived + at by working "closely with + our business partners" + +On line 1690: + amount was arrived at + by working "closely with our + business partners" who + +On line 1690: + by working "closely + with our business partners" who + project current levels + +On line 1690: + working "closely with + our business partners" who project + current levels of + +On line 1690: + current levels of + business activity that + qualifies toward + +On line 1690: + qualifies toward + community lending goals + into the future + +On line 1690: + lending goals into + the future to assure the + community that + +On line 1692: + investing practices + will continue.86 In essence, banks + promised to keep doing + +On line 1692: + continue.86 In essence, + banks promised to keep doing what + they had been doing, + +On line 1692: + promised to keep doing + what they had been doing, and + community groups + +On line 1692: + they had been doing, + and community groups had + the assurance that + +On line 1692: + had been doing, and + community groups had the + assurance that they + +On line 1694: + community groups + had the assurance that they + would. BANK CAPITAL + +On line 1694: + had the assurance + that they would. BANK CAPITAL + STANDARDS: "ARBITRAGE" + +On line 1696: + assurance that they + would. BANK CAPITAL STANDARDS: + "ARBITRAGE" Although + +On line 1696: + "ARBITRAGE" Although + the Federal Reserve had + decided against stronger + +On line 1696: + had decided against + stronger protections for consumers, + it internalized + +On line 1696: + decided against stronger + protections for consumers, it + internalized the + +On line 1696: + stronger protections for + consumers, it internalized + the lessons of and when + +On line 1696: + it internalized + the lessons of and when the first + generation of + +On line 1696: + of and when the first + generation of subprime + lenders put themselves at + +On line 1696: + first generation + of subprime lenders put themselves + at serious risk; + +On line 1696: + generation of + subprime lenders put themselves at + serious risk; some, + +On line 1696: + of subprime lenders put + themselves at serious risk; + some, such as Keystone + +On line 1696: + at serious risk; + some, such as Keystone Bank and + Superior Bank, + +On line 1696: + as Keystone Bank and + Superior Bank, collapsed + when the values of + +On line 1696: + when the values of + the subprime securitized + assets they held proved + +On line 1696: + they held proved to be + inflated. In response, the + Federal Reserve + +On line 1696: + to be inflated. + In response, the Federal + Reserve and other + +On line 1698: + thrifts. In October + they introduced the "Recourse + Rule" governing how + +On line 1698: + In October they + introduced the "Recourse Rule" + governing how much + +On line 1698: + they introduced the + "Recourse Rule" governing how + much capital a + +On line 1698: + bank needed to hold + against securitized assets. + If a bank retained + +On line 1698: + needed to hold against + securitized assets. If + a bank retained an + +On line 1698: + against securitized + assets. If a bank retained + an interest in + +On line 1698: + assets. If a bank + retained an interest in + a residual tranche + +On line 1698: + tranche of a mortgage + security, as Keystone, + Superior, and + +On line 1698: + security, as + Keystone, Superior, and + others had done, it + +On line 1698: + Superior, and + others had done, it would have + to keep a dollar + +On line 1698: + others had done, it + would have to keep a dollar + in capital for + +On line 1698: + it would have to keep + a dollar in capital + for every dollar + +On line 1698: + would have to keep a + dollar in capital for + every dollar of + +On line 1698: + for every dollar + of residual interest. + That seemed to make sense, + +On line 1698: + every dollar of + residual interest. That + seemed to make sense, since + +On line 1698: + interest. That seemed + to make sense, since the bank, in + this instance, would be + +On line 1698: + That seemed to make sense, + since the bank, in this instance, + would be the first to + +On line 1698: + seemed to make sense, since + the bank, in this instance, would + be the first to take + +On line 1698: + make sense, since the bank, + in this instance, would be the + first to take losses + +On line 1698: + sense, since the bank, in + this instance, would be the first + to take losses on + +On line 1698: + since the bank, in this + instance, would be the first to + take losses on the + +On line 1698: + in this instance, would + be the first to take losses + on the loans in the + +On line 1698: + this instance, would be + the first to take losses on + the loans in the pool. + +On line 1698: + would be the first to + take losses on the loans in + the pool. Under the + +On line 1698: + be the first to take + losses on the loans in the + pool. Under the old + +On line 1698: + to take losses on + the loans in the pool. Under + the old rules, banks held + +On line 1698: + losses on the loans + in the pool. Under the old + rules, banks held only + +On line 1698: + in the pool. Under + the old rules, banks held only + in capital to + +On line 1698: + the old rules, banks held + only in capital to + protect against losses + +On line 1698: + and others had been + allowed to seriously + understate their risks + +On line 1698: + had been allowed to + seriously understate + their risks and to not + +On line 1698: + to seriously + understate their risks and to + not hold sufficient + +On line 1698: + not hold sufficient + capital. Ironically, + because the new rule + +On line 1698: + charge on residual + interests it increased banks’ + incentive to sell + +On line 1700: + that they were no longer + the first to lose when the loans + went bad. he Recourse + +On line 1700: + they were no longer the + first to lose when the loans went + bad. he Recourse Rule + +On line 1700: + no longer the first to + lose when the loans went bad. he + Recourse Rule also + +On line 1700: + the first to lose when + the loans went bad. he Recourse + Rule also imposed + +On line 1700: + first to lose when the + loans went bad. he Recourse Rule + also imposed a + +On line 1700: + the loans went bad. he + Recourse Rule also imposed + a new framework for + +On line 1700: + went bad. he Recourse + Rule also imposed a new + framework for asset-backed + +On line 1702: + Rule also imposed + a new framework for asset-backed + securities. The + +On line 1702: + securities. The + capital requirement would + be directly linked + +On line 1702: + would be directly + linked to the rating agencies’ + assessment of the + +On line 1702: + the tranches. Holding + securities rated AAA + or AA required far + +On line 1702: + holding lower-rated + investments. For example, + invested in AAA + +On line 1702: + holding only in + capital (the same as for + securities backed + +On line 1702: + for securities + backed by government-sponsored + enterprises). But + +On line 1702: + government-sponsored + enterprises). But the same + amount invested in + +On line 1702: + enterprises). But + the same amount invested in + anything with a BB + +On line 1704: + BB rating required + in capital, or times more. + Banks could reduce the + +On line 1704: + in capital, or + times more. Banks could reduce the + capital they were + +On line 1704: + or times more. Banks could + reduce the capital they + were required to hold + +On line 1704: + Banks could reduce the + capital they were required + to hold for a pool + +On line 1704: + capital they were + required to hold for a pool + of mortgages simply + +On line 1704: + of mortgages simply + by securitizing them, + rather than holding them + +On line 1704: + mortgages simply by + securitizing them, rather + than holding them on + +On line 1704: + securitizing + them, rather than holding them on + their books as whole loans. + +On line 1706: + them, rather than holding + them on their books as whole loans. + If a bank kept in + +On line 1706: + than holding them on + their books as whole loans. If a + bank kept in mortgages + +On line 1706: + holding them on their + books as whole loans. If a bank + kept in mortgages on + +On line 1706: + them on their books as + whole loans. If a bank kept in + mortgages on its books, + +On line 1706: + their books as whole loans. + If a bank kept in mortgages + on its books, it might + +On line 1706: + books as whole loans. If + a bank kept in mortgages on + its books, it might have + +On line 1706: + as whole loans. If a + bank kept in mortgages on its + books, it might have to + +On line 1706: + whole loans. If a bank + kept in mortgages on its books, + it might have to set + +On line 1706: + loans. If a bank kept + in mortgages on its books, it + might have to set aside + +On line 1706: + If a bank kept in + mortgages on its books, it might + have to set aside about + +On line 1706: + kept in mortgages on + its books, it might have to set + aside about including + +On line 1706: + in mortgages on its + books, it might have to set aside + about including in + +On line 1706: + its books, it might have + to set aside about including + in capital against + +On line 1706: + have to set aside about + including in capital + against unexpected + +On line 1706: + against unexpected + losses and in reserves against + expected losses. + +On line 1706: + and in reserves against + expected losses. But if + the bank created + +On line 1706: + losses. But if the + bank created a mortgage-backed + security, sold + +On line 1706: + bank created a + mortgage-backed security, sold + that security + +On line 1708: + "Regulatory + capital arbitrage does + play a role in bank + +On line 1708: + arbitrage does play + a role in bank decision + making," said David Jones, + +On line 1708: + in bank decision + making," said David Jones, a Fed + economist who wrote + +On line 1708: + making," said David Jones, + a Fed economist who wrote + an article about + +On line 1708: + a Fed economist + who wrote an article about + the subject in in + +On line 1708: + Fed economist who + wrote an article about the + subject in in an + +On line 1708: + wrote an article + about the subject in in an + FCIC interview. But + +On line 1708: + an article about + the subject in in an FCIC + interview. But "it + +On line 1708: + the subject in in + an FCIC interview. But "it + is not the only + +On line 1708: + subject in in an + FCIC interview. But "it is + not the only thing + +On line 1710: + an FCIC interview. + But "it is not the only + thing that matters."88 And + +On line 1710: + FCIC interview. But + "it is not the only thing + that matters."88 And a + +On line 1710: + triple-A corporate bond + required in capital—five + times as much as the + +On line 1710: + as the triple-A mortgage-backed + security. Unlike the + corporate bond, it + +On line 1710: + the corporate bond, + it was ultimately backed + by real estate. + +On line 1712: + corporate bond, it + was ultimately backed by + real estate. The + +On line 1712: + was ultimately + backed by real estate. The + new requirements put + +On line 1712: + ultimately backed + by real estate. The new + requirements put the + +On line 1712: + by real estate. + The new requirements put the + rating agencies in + +On line 1712: + The new requirements + put the rating agencies in + the driver’s seat. How + +On line 1712: + new requirements put + the rating agencies in the + driver’s seat. How much + +On line 1712: + the rating agencies + in the driver’s seat. How much + capital a bank + +On line 1712: + in the driver’s seat. + How much capital a bank + held depended in + +On line 1712: + the driver’s seat. How + much capital a bank held + depended in part + +On line 1712: + How much capital + a bank held depended in + part on the ratings + +On line 1712: + much capital a + bank held depended in part + on the ratings of + +On line 1712: + capital a bank + held depended in part on + the ratings of the + +On line 1712: + bank held depended + in part on the ratings of + the securities + +On line 1712: + held depended in + part on the ratings of the + securities it + +On line 1712: + on the ratings of + the securities it held. + Tying capital + +On line 1712: + the securities + it held. Tying capital + standards to the views + +On line 1712: + standards to the views + of rating agencies would come + in for criticism + +On line 1712: + of rating agencies + would come in for criticism + after the crisis + +On line 1712: + agencies would come in + for criticism after the + crisis began. It + +On line 1712: + criticism after + the crisis began. It was + "a dangerous crutch," + +On line 1712: + crutch," former Treasury + Secretary Henry Paulson + testified to the + +On line 1712: + Treasury Secretary + Henry Paulson testified + to the Commission.89 + +On line 1712: + testified to the + Commission.89 However, the + Fed’s Jones noted it + +On line 1712: + it was better than + the alternative—"to let + the banks rate their own + +On line 1714: + their own exposures." + That alternative "would be + terrible," he said, + +On line 1714: + That alternative + "would be terrible," he said, + noting that banks had + +On line 1714: + "would be terrible," + he said, noting that banks had + been coming to the + +On line 1714: + be terrible," he + said, noting that banks had been + coming to the Fed + +On line 1714: + he said, noting that + banks had been coming to the + Fed and arguing + +On line 1714: + said, noting that banks + had been coming to the Fed + and arguing for + +On line 1714: + had been coming to + the Fed and arguing for + lower capital + +On line 1714: + lower capital + requirements on the grounds that + the rating agencies + +On line 1716: + which were, after all, + supposed to be among the safest + investments. Nor were + +On line 1716: + all, supposed to be + among the safest investments. Nor + were they prepared for + +On line 1716: + Nor were they prepared + for ratings downgrades due to + expected losses, + +On line 1716: + for ratings downgrades + due to expected losses, + which would require banks + +On line 1716: + ratings downgrades due + to expected losses, which + would require banks to + +On line 1716: + expected losses, + which would require banks to post + more capital. And + +On line 1716: + would require banks to + post more capital. And were + downgrades to occur + +On line 1716: + post more capital. + And were downgrades to occur + at the moment the + +On line 1716: + more capital. And + were downgrades to occur at + the moment the banks + +On line 1716: + And were downgrades to + occur at the moment the + banks wanted to sell + +On line 1716: + the banks wanted to + sell their securities to + raise capital, there + +On line 1716: + banks wanted to sell + their securities to raise + capital, there would + +On line 1716: + their securities + to raise capital, there would + be no buyers. All + +On line 1716: + securities to + raise capital, there would be + no buyers. All these + +On line 1716: + to raise capital, + there would be no buyers. All + these things would occur + +On line 1716: + capital, there would + be no buyers. All these things + would occur within + +On line 1720: + buyers. All these things + would occur within a few + years. The Commission + +On line 1720: + would occur within + a few years. The Commission + concludes that there was + +On line 1720: + within a few years. + The Commission concludes that + there was untrammeled + +On line 1722: + in significant + ways by major financial + institutions. Some + +On line 1722: + major financial + institutions. Some firms, such + as Citigroup, Lehman + +On line 1722: + institutions. Some + firms, such as Citigroup, Lehman + Brothers, and Morgan + +On line 1722: + as Citigroup, Lehman + Brothers, and Morgan Stanley, + acquired subprime lenders. + +On line 1722: + addition, major + financial institutions + facilitated + +On line 1722: + the growth in subprime + mortgage–lending companies + with lines of credit, + +On line 1724: + other mechanisms. + Regulators failed to rein + in risky home mortgage + +On line 1724: + particular, the + Federal Reserve failed to + meet its statutory + +On line 1724: + Reserve failed to meet + its statutory obligation + to establish and + +On line 1724: + meet its statutory + obligation to establish + and maintain prudent + +On line 1730: + lending standards and + to protect against predatory + lending. THE MORTGAGE + +On line 1734: + predatory lending. + THE MORTGAGE MACHINE CONTENTS + Foreign investors: "An + +On line 1734: + THE MORTGAGE MACHINE + CONTENTS Foreign investors: "An + irresistible profit + +On line 1738: + Mortgages: "A good loan" + Federal regulators: + "Immunity from + +On line 1740: + benefit" Mortgage + securities players: "Wall + Street was very hungry + +On line 1742: + players: "Wall Street was + very hungry for our product" + Moody’s: "Given a blank + +On line 1744: + Street was very hungry + for our product" Moody’s: "Given + a blank check"..........................................................................118 Fannie + +On line 1744: + was very hungry for + our product" Moody’s: "Given a + blank check"..........................................................................118 Fannie Mae + +On line 1744: + very hungry for our + product" Moody’s: "Given a blank + check"..........................................................................118 Fannie Mae and + +On line 1744: + for our product" Moody’s: + "Given a blank check"..........................................................................118 Fannie + Mae and Freddie Mac: + +On line 1744: + "Given a blank check"..........................................................................118 + Fannie Mae and Freddie Mac: + "Less competitive + +On line 1746: + in the marketplace"................122 + In commercial banks, thrifts, and + investment banks caught + +On line 1746: + In commercial banks, + thrifts, and investment banks caught + up with Fannie Mae + +On line 1746: + commercial banks, thrifts, + and investment banks caught up + with Fannie Mae and + +On line 1746: + thrifts, and investment + banks caught up with Fannie Mae + and Freddie Mac in + +On line 1746: + and Freddie Mac in + securitizing home loans. + By they had taken + +On line 1748: + securitizing + prime mortgages below their loan + limits, but the wave + +On line 1748: + mortgages below their + loan limits, but the wave of + home refinancing + +On line 1748: + loan limits, but the + wave of home refinancing + by prime borrowers + +On line 1748: + limits, but the wave + of home refinancing by + prime borrowers spurred + +On line 1748: + refinancing by + prime borrowers spurred by very + low, steady interest + +On line 1748: + borrowers spurred by + very low, steady interest rates + petered out. Meanwhile, + +On line 1748: + low, steady interest + rates petered out. Meanwhile, Wall + Street focused on the + +On line 1748: + out. Meanwhile, Wall Street + focused on the higher-yield loans + that the GSEs could not + +On line 1748: + Wall Street focused on + the higher-yield loans that the GSEs + could not purchase and + +On line 1748: + on the higher-yield loans + that the GSEs could not purchase + and securitize—loans + +On line 1748: + the higher-yield loans that + the GSEs could not purchase and + securitize—loans too + +On line 1748: + that the GSEs could not + purchase and securitize—loans + too large, called jumbo + +On line 1748: + GSEs could not purchase + and securitize—loans too large, + called jumbo loans, and + +On line 1748: + large, called jumbo loans, + and nonprime loans that didn’t + meet the GSEs’ standards. + +On line 1748: + called jumbo loans, and + nonprime loans that didn’t meet + the GSEs’ standards. The + +On line 1748: + and nonprime loans that + didn’t meet the GSEs’ standards. + The nonprime loans soon + +On line 1748: + loans that didn’t meet + the GSEs’ standards. The nonprime + loans soon became the + +On line 1748: + didn’t meet the GSEs’ + standards. The nonprime loans soon + became the biggest + +On line 1748: + meet the GSEs’ standards. + The nonprime loans soon became + the biggest part of + +On line 1748: + the GSEs’ standards. The + nonprime loans soon became the + biggest part of the + +On line 1748: + The nonprime loans soon + became the biggest part of + the market—"subprime" + +On line 1748: + became the biggest + part of the market—"subprime" + loans for borrowers + +On line 1748: + the biggest part of + the market—"subprime" loans for + borrowers with weak + +On line 1748: + the market—"subprime" + loans for borrowers with weak + credit and "Alt-A" loans, + +On line 1748: + for borrowers with + weak credit and "Alt-A" loans, with + characteristics + +On line 1748: + weak credit and "Alt-A" + loans, with characteristics + riskier than prime loans, + +On line 1750: + borrowers with strong + credit.1 By and Wall Street was + securitizing + +On line 1750: + By and Wall Street was + securitizing one-third more + loans than Fannie and + +On line 1750: + securitizing + one-third more loans than Fannie and + Freddie. In just two + +On line 1750: + more loans than Fannie + and Freddie. In just two years, + private-label mortgage-backed + +On line 1750: + and Freddie. In just + two years, private-label mortgage-backed + securities had + +On line 1750: + two years, private-label + mortgage-backed securities had + grown more than reaching + +On line 1750: + private-label mortgage-backed + securities had grown more + than reaching trillion + +On line 1750: + securities had + grown more than reaching trillion + in were subprime or + +On line 1752: + rating agencies—or were + encouraged or restricted + by regulations + +On line 1752: + or restricted by + regulations to buy them. + And with yields low on + +On line 1752: + by regulations + to buy them. And with yields low + on other highly + +On line 1752: + hungered for Wall Street + mortgage securities backed + by higher-yield mortgages—those + +On line 1752: + mortgages—those loans made to + subprime borrowers, those with + nontraditional + +On line 1752: + borrowers, those with + nontraditional features, + those with limited + +On line 1752: + those with limited + or no documentation + ("no-doc loans"), or those + +On line 1752: + limited or no + documentation ("no-doc + loans"), or those that failed + +On line 1752: + documentation + ("no-doc loans"), or those that failed + in some other way + +On line 1752: + loans"), or those that failed + in some other way to meet + strong underwriting + +On line 1754: + as a factory + line," former Citigroup CEO + Charles Prince told the FCIC. + +On line 1754: + a factory line," + former Citigroup CEO Charles + Prince told the FCIC. "As + +On line 1754: + former Citigroup + CEO Charles Prince told the FCIC. "As + more and more and more + +On line 1754: + Citigroup CEO Charles + Prince told the FCIC. "As more and + more and more of these + +On line 1754: + Charles Prince told the FCIC. + "As more and more and more of + these subprime mortgages + +On line 1754: + Prince told the FCIC. "As + more and more and more of these + subprime mortgages were + +On line 1754: + "As more and more and + more of these subprime mortgages + were created as + +On line 1754: + more and more and more + of these subprime mortgages were + created as raw + +On line 1754: + more of these subprime + mortgages were created as + raw material + +On line 1754: + not surprisingly + in hindsight, more and more of + it was of lower + +On line 1754: + surprisingly in + hindsight, more and more of it + was of lower and + +On line 1754: + hindsight, more and more + of it was of lower and + lower quality. + +On line 1754: + more and more of it + was of lower and lower + quality. And at + +On line 1754: + it was of lower + and lower quality. And + at the end of that + +On line 1760: + was of lower and + lower quality. And at + the end of that process, + +On line 1760: + lower and lower + quality. And at the end + of that process, the raw + +On line 1760: + at the end of that + process, the raw material + going into it + +On line 1760: + actually bad + quality, it was toxic + quality, and that + +On line 1760: + bad quality, it + was toxic quality, and + that is what ended + +On line 1760: + quality, it was + toxic quality, and that + is what ended up + +On line 1760: + quality, and that + is what ended up coming + out the other end + +On line 1760: + that is what ended + up coming out the other + end of the pipeline. + +On line 1760: + is what ended up + coming out the other end + of the pipeline. Wall + +On line 1762: + origination and + securitization of + these mortgages also + +On line 1762: + access to deposits, + investment banks relied more + on money market + +On line 1762: + money market funds + and other investors for cash; + commercial paper + +On line 1762: + and other investors + for cash; commercial paper + and repo loans were + +On line 1762: + other investors for + cash; commercial paper and + repo loans were the + +On line 1762: + for cash; commercial + paper and repo loans were + the main sources. With house + +On line 1762: + paper and repo + loans were the main sources. With house + prices already up from + +On line 1762: + repo loans were the + main sources. With house prices already + up from to this flood + +On line 1762: + were the main sources. With + house prices already up from to + this flood of money + +On line 1762: + the main sources. With house + prices already up from to this + flood of money and + +On line 1762: + main sources. With house prices + already up from to this flood + of money and the + +On line 1762: + flood of money and + the securitization + apparatus helped + +On line 1762: + apparatus helped + boost home prices another from + the beginning of + +On line 1762: + prices another from + the beginning of until + the peak in April 2006—even + +On line 1762: + another from the + beginning of until the + peak in April 2006—even as + +On line 1762: + the beginning of + until the peak in April 2006—even + as homeownership + +On line 1762: + peak in April 2006—even as + homeownership was falling. + The biggest gains over + +On line 1762: + as homeownership + was falling. The biggest gains + over this period + +On line 1762: + homeownership was + falling. The biggest gains over + this period were + +On line 1762: + falling. The biggest + gains over this period were + in the "sand states": places + +On line 1762: + The biggest gains over + this period were in the + "sand states": places like the + +On line 1762: + biggest gains over this + period were in the "sand + states": places like the Los + +On line 1762: + over this period + were in the "sand states": places like + the Los Angeles + +On line 1762: + period were in + the "sand states": places like the Los + Angeles suburbs + +On line 1762: + were in the "sand states": + places like the Los Angeles + suburbs Las Vegas + +On line 1766: + Angeles suburbs + Las Vegas and Orlando + FOREIGN INVESTORS: "AN + +On line 1768: + From June through June the + Federal Reserve kept the + federal funds rate + +On line 1768: + June the Federal + Reserve kept the federal + funds rate low at to + +On line 1768: + at to stimulate + the economy following + the recession. Over + +On line 1768: + to stimulate the + economy following the + recession. Over the + +On line 1768: + Over the next two years, + as deflation fears waned, the + Fed gradually + +On line 1768: + the next two years, as + deflation fears waned, the Fed + gradually raised + +On line 1770: + Fed gradually + raised rates to in quarter-point + increases. In the + +On line 1770: + to in quarter-point + increases. In the view of + some, the Fed simply + +On line 1770: + increases. In the + view of some, the Fed simply + kept rates too low too + +On line 1770: + the view of some, the + Fed simply kept rates too low + too long. John Taylor, + +On line 1770: + view of some, the Fed + simply kept rates too low too + long. John Taylor, a + +On line 1770: + some, the Fed simply + kept rates too low too long. John + Taylor, a Stanford + +On line 1770: + simply kept rates too + low too long. John Taylor, a + Stanford economist + +On line 1770: + and former under + secretary of treasury for + international + +On line 1770: + primarily on + this action. If the Fed had + followed its usual + +On line 1770: + this action. If the + Fed had followed its usual + pattern, he told the + +On line 1770: + in mortgages. "The boom + in housing construction starts + would have been much more + +On line 1770: + mortgages. "The boom in + housing construction starts would + have been much more mild, + +On line 1770: + "The boom in housing + construction starts would have been + much more mild, might not + +On line 1770: + housing construction + starts would have been much more mild, + might not even call it + +On line 1770: + construction starts would + have been much more mild, might not + even call it a boom, + +On line 1770: + starts would have been much + more mild, might not even call it + a boom, and the bust + +On line 1770: + would have been much more + mild, might not even call it a + boom, and the bust as + +On line 1770: + have been much more mild, + might not even call it a boom, + and the bust as well + +On line 1770: + been much more mild, might + not even call it a boom, and + the bust as well would + +On line 1770: + much more mild, might not + even call it a boom, and the + bust as well would have + +On line 1770: + more mild, might not even + call it a boom, and the bust + as well would have been + +On line 1770: + mild, might not even call + it a boom, and the bust as + well would have been mild," + +On line 1770: + not even call it a + boom, and the bust as well would + have been mild," Taylor + +On line 1770: + even call it a boom, + and the bust as well would have + been mild," Taylor said.4 + +On line 1770: + it a boom, and the + bust as well would have been mild," + Taylor said.4 Others + +On line 1770: + boom, and the bust as + well would have been mild," Taylor + said.4 Others were more + +On line 1770: + and the bust as well + would have been mild," Taylor said.4 + Others were more blunt: + +On line 1770: + bust as well would have + been mild," Taylor said.4 Others + were more blunt: "Greenspan bailed + +On line 1770: + as well would have been + mild," Taylor said.4 Others were + more blunt: "Greenspan bailed out + +On line 1770: + well would have been mild," + Taylor said.4 Others were more + blunt: "Greenspan bailed out the + +On line 1770: + have been mild," Taylor + said.4 Others were more blunt: "Greenspan + bailed out the world’s largest + +On line 1770: + Taylor said.4 Others + were more blunt: "Greenspan bailed out the + world’s largest equity + +On line 1770: + said.4 Others were more + blunt: "Greenspan bailed out the world’s largest + equity bubble + +On line 1770: + were more blunt: "Greenspan bailed + out the world’s largest equity + bubble with the world’s + +On line 1770: + "Greenspan bailed out the world’s + largest equity bubble with + the world’s largest real + +On line 1770: + A. Fleckenstein, the + president of a Seattle-based + money management + +On line 1772: + president of a + Seattle-based money management + firm.5 Ben Bernanke and Alan + +On line 1772: + a Seattle-based money + management firm.5 Ben Bernanke and + Alan Greenspan disagree. Both + +On line 1772: + Ben Bernanke and Alan Greenspan + disagree. Both the current and + former Fed chairman + +On line 1772: + and Alan Greenspan disagree. + Both the current and former + Fed chairman argue + +On line 1772: + Alan Greenspan disagree. Both + the current and former Fed + chairman argue that + +On line 1772: + Both the current and + former Fed chairman argue + that deciding to + +On line 1772: + Fed chairman argue + that deciding to purchase + a home depends on + +On line 1772: + chairman argue that + deciding to purchase a + home depends on long-term + +On line 1772: + that deciding to + purchase a home depends on + long-term interest rates + +On line 1772: + to purchase a home + depends on long-term interest + rates on mortgages, not + +On line 1772: + home depends on long-term + interest rates on mortgages, + not the short-term rates + +On line 1772: + long-term interest rates + on mortgages, not the short-term + rates controlled by the + +On line 1772: + interest rates on + mortgages, not the short-term rates + controlled by the Fed, + +On line 1772: + on mortgages, not the + short-term rates controlled by the + Fed, and that short-term + +On line 1772: + not the short-term rates + controlled by the Fed, and that + short-term and long-term rates + +On line 1772: + rates controlled by the + Fed, and that short-term and long-term + rates had become de-linked. + +On line 1772: + Fed, and that short-term + and long-term rates had become de-linked. + "Between and the fed + +On line 1772: + that short-term and long-term + rates had become de-linked. "Between + and the fed funds rate + +On line 1772: + short-term and long-term rates + had become de-linked. "Between and + the fed funds rate and + +On line 1772: + long-term rates had become + de-linked. "Between and the fed funds + rate and the mortgage + +On line 1772: + rates had become de-linked. + "Between and the fed funds rate + and the mortgage rate + +On line 1772: + become de-linked. "Between + and the fed funds rate and the + mortgage rate moved in + +On line 1772: + de-linked. "Between and the + fed funds rate and the mortgage + rate moved in lock-step," + +On line 1772: + "Between and the fed + funds rate and the mortgage rate + moved in lock-step," Greenspan + +On line 1772: + and the fed funds rate + and the mortgage rate moved in + lock-step," Greenspan said.6 When + +On line 1772: + fed funds rate and the + mortgage rate moved in lock-step," + Greenspan said.6 When the Fed + +On line 1772: + rate and the mortgage + rate moved in lock-step," Greenspan said.6 + When the Fed started + +On line 1772: + and the mortgage rate + moved in lock-step," Greenspan said.6 When + the Fed started to + +On line 1772: + the mortgage rate moved + in lock-step," Greenspan said.6 When the + Fed started to raise + +On line 1772: + mortgage rate moved in + lock-step," Greenspan said.6 When the Fed + started to raise rates + +On line 1772: + in lock-step," Greenspan said.6 + When the Fed started to raise + rates in officials + +On line 1772: + When the Fed started + to raise rates in officials + expected mortgage + +On line 1772: + started to raise rates + in officials expected + mortgage rates to rise, + +On line 1772: + rates in officials + expected mortgage rates to + rise, too, slowing growth. + +On line 1772: + expected mortgage + rates to rise, too, slowing growth. + Instead, mortgage rates + +On line 1772: + slowing growth. Instead, + mortgage rates continued to + fall for another + +On line 1772: + growth. Instead, mortgage + rates continued to fall for + another year. The + +On line 1772: + for another year. + The construction industry + continued to build + +On line 1772: + year. The construction + industry continued to + build houses, peaking + +On line 1772: + build houses, peaking + at an annualized rate + of million starts in + +On line 1774: + rate of million starts + in January 2006—more than a + 30-year high. As Greenspan told + +On line 1774: + starts in January + 2006—more than a 30-year high. As Greenspan + told Congress in this + +On line 1774: + in January 2006—more + than a 30-year high. As Greenspan told + Congress in this was + +On line 1774: + 2006—more than a 30-year high. + As Greenspan told Congress in this + was a "conundrum."7 + +On line 1774: + than a 30-year high. As + Greenspan told Congress in this was + a "conundrum."7 One + +On line 1774: + Greenspan told Congress in + this was a "conundrum."7 One + theory pointed + +On line 1774: + and—vulnerable + to financial problems in + the past—encouraged + +On line 1774: + financial problems + in the past—encouraged strong + saving. Investors in + +On line 1774: + saving. Investors in + these countries placed their savings + in apparently + +On line 1774: + apparently safe + and high-yield securities + in the United States. + +On line 1774: + in the United States. + Fed Chairman Bernanke called it a + "global savings glut."8 + +On line 1776: + States. Fed Chairman Bernanke + called it a "global savings + glut."8 s the United + +On line 1776: + Fed Chairman Bernanke called + it a "global savings glut."8 + s the United States + +On line 1776: + Chairman Bernanke called it + a "global savings glut."8 s + the United States ran + +On line 1776: + "global savings glut."8 + s the United States ran a + large current account + +On line 1776: + s the United States + ran a large current account + deficit, flows into the + +On line 1776: + United States ran a + large current account deficit, flows + into the country + +On line 1776: + large current account + deficit, flows into the country + were unprecedented. + +On line 1776: + current account deficit, + flows into the country were + unprecedented. Over + +On line 1776: + deficit, flows into the + country were unprecedented. + Over six years from to + +On line 1776: + unprecedented. Over + six years from to U.S. Treasury + debt held by foreign + +On line 1776: + six years from to U.S. + Treasury debt held by foreign + official public + +On line 1776: + to U.S. Treasury debt + held by foreign official + public entities + +On line 1776: + Treasury debt held by + foreign official public + entities rose from + +On line 1776: + foreign official + public entities rose from + trillion to trillion; + +On line 1776: + official public + entities rose from trillion + to trillion; as a + +On line 1776: + public entities + rose from trillion to trillion; + as a percentage + +On line 1776: + entities rose from + trillion to trillion; as a + percentage of U.S. + +On line 1776: + rose from trillion to + trillion; as a percentage + of U.S. debt held by + +On line 1776: + to trillion; as a + percentage of U.S. debt held + by the public, these + +On line 1776: + a percentage of + U.S. debt held by the public, + these holdings increased + +On line 1776: + percentage of U.S. + debt held by the public, these + holdings increased from + +On line 1776: + U.S. debt held by the + public, these holdings increased + from to Foreigners + +On line 1776: + held by the public, + these holdings increased from to + Foreigners also + +On line 1776: + these holdings increased + from to Foreigners also + bought securities + +On line 1776: + holdings increased from + to Foreigners also bought + securities backed + +On line 1776: + from to Foreigners + also bought securities + backed by Fannie and + +On line 1776: + Foreigners also + bought securities backed by + Fannie and Freddie, + +On line 1776: + securities backed + by Fannie and Freddie, which, + with their implicit + +On line 1776: + with their implicit + government guarantee, seemed + nearly as safe as + +On line 1776: + safe as Treasuries. As + the Asian financial crisis + ended in foreign + +On line 1776: + Treasuries. As the Asian + financial crisis ended + in foreign holdings + +On line 1776: + in foreign holdings + of GSE securities held + steady at the level + +On line 1776: + foreign holdings of + GSE securities held steady + at the level of + +On line 1776: + steady at the level + of almost years earlier, + about billion. By 2000—just + +On line 1776: + at the level of + almost years earlier, about + billion. By 2000—just two + +On line 1778: + about billion. By 2000—just + two years later— foreigners + owned billion in GSE + +On line 1778: + 2000—just two years later— + foreigners owned billion in + GSE securities; + +On line 1778: + of situation + where poor countries like China + were shipping money + +On line 1778: + situation where + poor countries like China were + shipping money to + +On line 1778: + where poor countries like + China were shipping money + to advanced countries + +On line 1778: + shipping money to + advanced countries because their + financial systems + +On line 1778: + so weak that they [were] + better off shipping [money] + to countries like the + +On line 1778: + they [were] better off + shipping [money] to countries + like the United States + +On line 1778: + better off shipping + [money] to countries like the + United States rather than + +On line 1778: + off shipping [money] + to countries like the United + States rather than keeping + +On line 1778: + shipping [money] to + countries like the United States + rather than keeping it + +On line 1778: + [money] to countries + like the United States rather than + keeping it in their + +On line 1778: + like the United States + rather than keeping it in their + own countries," former + +On line 1778: + the United States rather + than keeping it in their own + countries," former Fed + +On line 1778: + own countries," former + Fed governor Frederic + Mishkin told the FCIC. "The + +On line 1778: + Frederic Mishkin told + the FCIC. "The system was awash + with liquidity, + +On line 1778: + the FCIC. "The system + was awash with liquidity, + which helped lower long-term + +On line 1780: + liquidity, which + helped lower long-term interest + rates."9 Foreign investors + +On line 1780: + rates."9 Foreign investors + sought other high-grade debt + almost as safe as + +On line 1780: + investors sought other + high-grade debt almost as + safe as Treasuries and + +On line 1780: + safe as Treasuries and + GSE securities but with + a slightly higher + +On line 1780: + GSE securities + but with a slightly higher + return. They found the + +On line 1780: + but with a slightly + higher return. They found the + triple-A assets pour-ing from + +On line 1780: + higher return. They + found the triple-A assets pour-ing from + the Wall Street mortgage + +On line 1780: + overseas demand drove + up prices for securitized + debt, it "created + +On line 1782: + the U.S. financial + system: to engineer ‘quasi’ + safe debt instruments + +On line 1782: + financial system: + to engineer ‘quasi’ safe debt + instruments by bundling + +On line 1782: + to engineer ‘quasi’ + safe debt instruments by bundling + riskier assets and + +On line 1782: + safe debt instruments + by bundling riskier assets and + selling the senior + +On line 1782: + instruments by bundling + riskier assets and selling + the senior tranches," + +On line 1782: + riskier assets and + selling the senior tranches," + Pierre-Olivier Gourinchas, an + +On line 1782: + selling the senior + tranches," Pierre-Olivier Gourinchas, an + economist at the + +On line 1784: + University of + California, Berkeley, told + the FCIC.10 Paul Krugman, + +On line 1784: + the FCIC.10 Paul Krugman, + an economist at Princeton + University, told + +On line 1784: + an economist at + Princeton University, told + the FCIC, "It’s hard to + +On line 1784: + the FCIC, "It’s hard to + envisage us having had + this crisis without + +On line 1784: + bubble was financed + by large capital inflows. + So were Spanish and + +On line 1784: + was financed by large + capital inflows. So were + Spanish and Irish and + +On line 1784: + by large capital + inflows. So were Spanish and + Irish and Baltic bubbles. + +On line 1784: + capital inflows. + So were Spanish and Irish and + Baltic bubbles. It’s a + +On line 1784: + So were Spanish and + Irish and Baltic bubbles. It’s a + combination of, + +On line 1784: + Irish and Baltic bubbles. + It’s a combination of, + in the narrow sense, + +On line 1784: + and Baltic bubbles. It’s + a combination of, in + the narrow sense, of + +On line 1784: + Baltic bubbles. It’s a + combination of, in the + narrow sense, of a + +On line 1784: + combination of, + in the narrow sense, of a + less regulated + +On line 1784: + in the narrow sense, + of a less regulated + financial system + +On line 1786: + international + capital movements."11 It was + an ocean of money. + +On line 1788: + capital movements."11 + It was an ocean of money. + MORTGAGES: "A GOOD LOAN" + +On line 1790: + It was an ocean of + money. MORTGAGES: "A GOOD LOAN" + The refinancing + +On line 1790: + refinancing boom + was over, but originators + still needed mortgages + +On line 1790: + originators still + needed mortgages to sell to + the Street. They needed + +On line 1790: + needed mortgages to + sell to the Street. They needed + new products that, as + +On line 1790: + to sell to the Street. + They needed new products that, + as prices kept rising, + +On line 1790: + sell to the Street. They + needed new products that, as + prices kept rising, could + +On line 1790: + needed new products + that, as prices kept rising, could + make expensive homes + +On line 1790: + homes more affordable + to still-eager borrowers. + The solution was + +On line 1790: + risks for borrowers. + "Holding a subprime loan has + become something of + +On line 1794: + subprime borrowers + used hybrid adjustable-rate mortgages + (ARMs) such as 2/28s and + +On line 1794: + adjustable-rate mortgages (ARMs) + such as 2/28s and 3/27s—mortgages whose + low "teaser" rate lasts + +On line 1794: + (ARMs) such as 2/28s and + 3/27s—mortgages whose low "teaser" rate + lasts for the first two + +On line 1794: + as 2/28s and 3/27s—mortgages + whose low "teaser" rate lasts for + the first two or three + +On line 1794: + 2/28s and 3/27s—mortgages whose + low "teaser" rate lasts for the + first two or three years, + +On line 1794: + and 3/27s—mortgages whose low + "teaser" rate lasts for the first + two or three years, and + +On line 1794: + whose low "teaser" rate + lasts for the first two or three + years, and then adjusts + +On line 1794: + dollar volume of + Alt-A securitization + rose almost from to + +On line 1794: + rose almost from to + In general, these loans made + borrowers’ monthly + +On line 1794: + In general, these + loans made borrowers’ monthly + mortgage payments on + +On line 1794: + borrowers’ monthly + mortgage payments on ever + more expensive homes + +On line 1794: + homes affordable—at least + initially. Popular Alt-A + products included + +On line 1794: + products included + interest-only mortgages and + payment-option ARMs. + +On line 1796: + payment-option ARMs. + Option ARMs let borrowers + pick their payment each + +On line 1796: + ARMs. Option ARMs let + borrowers pick their payment + each month, including + +On line 1796: + amortization. If + the balance got large enough, the + loan would convert to + +On line 1796: + If the balance got + large enough, the loan would convert + to a fixed-rate mortgage, + +On line 1796: + mortgage, increasing + the monthly payment—perhaps + dramatically. + +On line 1798: + first, second, and even + third mortgages—rose. Debt-to-income + ratios climbed, as did + +On line 1798: + ratios climbed, as did + loans made for non-owner-occupied + properties. Fannie + +On line 1798: + for non-owner-occupied + properties. Fannie Mae and + Freddie Mac’s market + +On line 1798: + properties. Fannie + Mae and Freddie Mac’s market + share shrank from of all + +On line 1798: + Mae and Freddie Mac’s + market share shrank from of all + mortgages purchased in + +On line 1798: + Freddie Mac’s market + share shrank from of all mortgages + purchased in to in + +On line 1798: + Mac’s market share shrank + from of all mortgages purchased + in to in and down + +On line 1798: + market share shrank from + of all mortgages purchased in + to in and down to + +On line 1798: + from of all mortgages + purchased in to in and down + to by Taking their + +On line 1798: + all mortgages purchased + in to in and down to by + Taking their place were + +On line 1798: + purchased in to in + and down to by Taking their + place were private-label + +On line 1800: + by the GSEs. In this + new market, originators + competed fiercely; + +On line 1800: + In this new market, + originators competed + fiercely; Countrywide + +On line 1800: + fiercely; Countrywide + Financial Corporation + took the crown.18 It was + +On line 1800: + It was the biggest + mortgage originator from + until the market + +On line 1800: + the biggest mortgage + originator from until + the market collapsed + +On line 1800: + the market collapsed + in Even after Countrywide + nearly failed, buckling + +On line 1800: + failed, buckling under + a mortgage portfolio with + loans that its co-founder + +On line 1800: + buckling under a + mortgage portfolio with loans + that its co-founder and + +On line 1800: + that its co-founder and + CEO Angelo Mozilo once + called "toxic," Mozilo + +On line 1800: + its co-founder and CEO + Angelo Mozilo once called + "toxic," Mozilo would + +On line 1800: + "toxic," Mozilo would + describe his 40-year-old company + to the Commission + +On line 1800: + 40-year-old company to + the Commission as having + helped million people + +On line 1800: + company to the + Commission as having helped + million people buy + +On line 1800: + people buy homes and + prevented social unrest + by extending loans + +On line 1800: + discrimination: + "Countrywide was one of the + greatest companies + +On line 1800: + "Countrywide was one + of the greatest companies + in the history + +On line 1800: + companies in the + history of this country + and probably made + +On line 1800: + the history of + this country and probably + made more difference + +On line 1800: + history of this + country and probably made + more difference to + +On line 1800: + probably made more + difference to society, + to the integrity + +On line 1800: + to the integrity + of our society, than any + company in the + +On line 1800: + the history of + America."19 Lending to home + buyers was only + +On line 1800: + America."19 Lending + to home buyers was only + part of the business. + +On line 1800: + part of the business. + Countrywide’s President and + COO David Sambol told + +On line 1800: + and COO David Sambol + told the Commission, as long + as a loan did not + +On line 1800: + COO David Sambol told + the Commission, as long as + a loan did not harm + +On line 1800: + David Sambol told the + Commission, as long as a + loan did not harm the + +On line 1800: + told the Commission, + as long as a loan did not + harm the company + +On line 1800: + the Commission, as + long as a loan did not harm + the company from + +On line 1800: + Commission, as long + as a loan did not harm the + company from a + +On line 1800: + as long as a loan + did not harm the company + from a financial + +On line 1800: + long as a loan did + not harm the company from + a financial or + +On line 1800: + from a financial + or reputation standpoint, + Countrywide was "a + +On line 1802: + The company sold + or securitized of the + trillion in mortgages + +On line 1802: + or securitized + of the trillion in mortgages + it originated + +On line 1804: + aggressive goal of + gaining "market dominance" + by capturing of + +On line 1804: + by capturing of + the origination market.21 + His share at the time + +On line 1804: + capturing of the + origination market.21 His + share at the time was + +On line 1804: + the origination + market.21 His share at the time + was But Countrywide + +On line 1804: + market.21 His share at + the time was But Countrywide + was not unique: Ameriquest, New + +On line 1804: + share at the time was + But Countrywide was not unique: + Ameriquest, New Century, + +On line 1804: + Ameriquest, New Century, + Washington Mutual, and + others all pursued + +On line 1804: + by originating + types of mortgages created + years before as niche + +On line 1804: + as niche products, but + now transformed into riskier, + mass-market versions. + +On line 1804: + now transformed into + riskier, mass-market versions. + "The definition + +On line 1804: + riskier, mass-market + versions. "The definition + of a good loan changed + +On line 1804: + mass-market versions. + "The definition of a + good loan changed from ‘one + +On line 1804: + "The definition + of a good loan changed from ‘one + that pays’ to ‘one that + +On line 1804: + definition of + a good loan changed from ‘one that + pays’ to ‘one that could + +On line 1804: + a good loan changed from + ‘one that pays’ to ‘one that could + be sold,’" Patricia + +On line 1804: + loan changed from ‘one that + pays’ to ‘one that could be sold,’" + Patricia Lindsay, + +On line 1804: + ‘one that pays’ to ‘one + that could be sold,’" Patricia + Lindsay, formerly + +On line 1804: + pays’ to ‘one that could + be sold,’" Patricia Lindsay, + formerly a fraud + +On line 1804: + be sold,’" Patricia + Lindsay, formerly a fraud + specialist at New + +On line 1804: + Lindsay, formerly + a fraud specialist at New + Century, told the + +On line 1806: + fraud specialist at + New Century, told the FCIC.22 + 2/28s and 3/27s: "Adjust + +On line 1806: + specialist at New + Century, told the FCIC.22 2/28s + and 3/27s: "Adjust for + +On line 1808: + 2/28s and 3/27s: "Adjust + for the affordability" + Historically, + +On line 1808: + affordability" + Historically, 2/28s or + 3/27s, also known as + +On line 1808: + 3/27s, also known as + hybrid ARMs, let credit-impaired + borrowers repair + +On line 1808: + known as hybrid ARMs, + let credit-impaired borrowers + repair their credit. + +On line 1808: + borrowers repair + their credit. During the first + two or three years, a + +On line 1808: + their credit. During + the first two or three years, a + lower interest + +On line 1808: + first two or three years, + a lower interest rate + meant a manageable + +On line 1808: + they could make timely + payments. Eventually the + interest rates would + +On line 1808: + the interest rates + would rise sharply, and payments ould + double or even triple, + +On line 1808: + sharply, and payments ould + double or even triple, leaving + borrowers with few + +On line 1808: + ould double or even + triple, leaving borrowers with + few alternatives: + +On line 1808: + double or even triple, + leaving borrowers with few + alternatives: if + +On line 1808: + leaving borrowers + with few alternatives: if + they had established + +On line 1808: + few alternatives: + if they had established their + creditworthiness, + +On line 1808: + had established their + creditworthiness, they could + refinance into + +On line 1808: + refinance into + a similar mortgage or + one with a better + +On line 1808: + mortgage or one with + a better interest rate, + often with the same + +On line 1808: + lender;23 if unable to + refinance, the borrower + was unlikely to + +On line 1808: + was unlikely to + be able to afford the new + higher payments and + +On line 1808: + be able to afford + the new higher payments and + would have to sell the + +On line 1808: + able to afford the + new higher payments and would + have to sell the home + +On line 1808: + to afford the new + higher payments and would have + to sell the home and + +On line 1808: + higher payments and + would have to sell the home and + repay the mortgage. + +On line 1808: + payments and would have + to sell the home and repay + the mortgage. If they + +On line 1808: + would have to sell the + home and repay the mortgage. + If they could not sell + +On line 1808: + have to sell the home + and repay the mortgage. If + they could not sell or + +On line 1808: + to sell the home and + repay the mortgage. If they + could not sell or make + +On line 1808: + home and repay the + mortgage. If they could not sell + or make the higher + +On line 1808: + repay the mortgage. + If they could not sell or make + the higher payments, + +On line 1808: + mortgage. If they could + not sell or make the higher + payments, they would have + +On line 1808: + they could not sell or + make the higher payments, they + would have to default. + +On line 1810: + could not sell or make + the higher payments, they would + have to default. But + +On line 1810: + not sell or make the + higher payments, they would have + to default. But as + +On line 1810: + higher payments, they + would have to default. But as + house prices rose after + +On line 1810: + payments, they would have + to default. But as house prices + rose after the 2/28s + +On line 1810: + have to default. But + as house prices rose after the + 2/28s and 3/27s acquired + +On line 1810: + to default. But as + house prices rose after the 2/28s + and 3/27s acquired a + +On line 1810: + default. But as house + prices rose after the 2/28s and + 3/27s acquired a new + +On line 1810: + house prices rose after + the 2/28s and 3/27s acquired a + new role: helping to + +On line 1810: + prices rose after the + 2/28s and 3/27s acquired a new + role: helping to get + +On line 1810: + 2/28s and 3/27s acquired + a new role: helping to get + people into homes + +On line 1810: + 3/27s acquired a new + role: helping to get people + into homes or to + +On line 1810: + a new role: helping + to get people into homes + or to move up to + +On line 1810: + role: helping to get + people into homes or to + move up to bigger + +On line 1810: + people into homes + or to move up to bigger + homes. "As homes got less + +On line 1810: + into homes or to + move up to bigger homes. "As + homes got less and less + +On line 1810: + or to move up to + bigger homes. "As homes got less + and less affordable, + +On line 1810: + move up to bigger + homes. "As homes got less and less + affordable, you would + +On line 1810: + bigger homes. "As homes + got less and less affordable, + you would adjust for + +On line 1810: + you would adjust for + the affordability in + the mortgage because + +On line 1810: + would adjust for the + affordability in the + mortgage because you + +On line 1810: + affordability + in the mortgage because you + couldn’t really + +On line 1810: + the president of + Andrew Davidson Co. and a + veteran of the + +On line 1810: + of Andrew Davidson + Co. and a veteran of + the mortgage markets, + +On line 1810: + Andrew Davidson Co. + and a veteran of the + mortgage markets, told + +On line 1810: + Davidson Co. and a + veteran of the mortgage + markets, told the FCIC.24 + +On line 1810: + a veteran of + the mortgage markets, told the + FCIC.24 Lenders qualified + +On line 1810: + the mortgage markets, + told the FCIC.24 Lenders qualified + borrowers at low + +On line 1810: + markets, told the FCIC.24 + Lenders qualified borrowers + at low teaser rates, + +On line 1810: + FCIC.24 Lenders qualified + borrowers at low teaser + rates, with little thought + +On line 1810: + borrowers at low + teaser rates, with little thought + to what might happen + +On line 1810: + rates, with little thought + to what might happen when rates + reset. Hybrid ARMs + +On line 1810: + little thought to what + might happen when rates reset. + Hybrid ARMs became + +On line 1810: + to what might happen + when rates reset. Hybrid ARMs + became the workhorses + +On line 1810: + might happen when rates + reset. Hybrid ARMs became + the workhorses of the + +On line 1812: + as the Leadership + Conference on Civil Rights + railed against 2/28s and 3/27s, + +On line 1812: + credit nor turned renters + into owners. David Berenbaum + from the National + +On line 1812: + David Berenbaum from the + National Community + Reinvestment Coalition + +On line 1812: + from the National + Community Reinvestment + Coalition testified + +On line 1812: + Reinvestment Coalition + testified to Congress in + the summer of "The + +On line 1812: + Coalition testified + to Congress in the summer + of "The industry + +On line 1812: + of "The industry + has flooded the market with + exotic mortgage + +On line 1812: + exotic mortgage + lending such as and ARMs. These + exotic subprime + +On line 1812: + such as and ARMs. These + exotic subprime mortgages + overwhelm borrowers + +On line 1812: + exotic subprime + mortgages overwhelm borrowers + when interest rates + +On line 1812: + rates shoot up after + an introductory time + period."25 To their + +On line 1812: + time period."25 To + their critics, they were simply + a way for lenders to + +On line 1812: + period."25 To their + critics, they were simply a + way for lenders to strip + +On line 1812: + To their critics, they + were simply a way for lenders + to strip equity + +On line 1812: + their critics, they were + simply a way for lenders to + strip equity from + +On line 1812: + simply a way for + lenders to strip equity from + low-income borrowers. + +On line 1812: + a way for lenders to + strip equity from low-income + borrowers. The loans + +On line 1812: + to strip equity + from low-income borrowers. The + loans came with big fees + +On line 1812: + strip equity from + low-income borrowers. The loans + came with big fees that + +On line 1812: + low-income borrowers. + The loans came with big fees that + got rolled into the + +On line 1812: + borrowers. The loans + came with big fees that got rolled + into the mortgage, + +On line 1812: + The loans came with big + fees that got rolled into the + mortgage, increasing + +On line 1812: + came with big fees that + got rolled into the mortgage, + increasing the chances + +On line 1812: + that got rolled into + the mortgage, increasing the + chances that the mortgage + +On line 1812: + got rolled into the + mortgage, increasing the chances + that the mortgage could + +On line 1812: + mortgage, increasing + the chances that the mortgage could + be larger than the + +On line 1812: + the mortgage could be + larger than the home’s value + at the reset date. + +On line 1812: + larger than the home’s + value at the reset date. + If the borrower + +On line 1812: + than the home’s value + at the reset date. If the + borrower could not + +On line 1812: + at the reset date. + If the borrower could not + refinance, the lender + +On line 1812: + If the borrower + could not refinance, the lender + would foreclose—and then + +On line 1812: + the borrower could + not refinance, the lender would + foreclose—and then own + +On line 1812: + could not refinance, + the lender would foreclose—and then + own the home in a + +On line 1812: + refinance, the lender + would foreclose—and then own the + home in a rising + +On line 1814: + then own the home in + a rising real estate + market. Option ARMs: + +On line 1816: + Option ARMs: "Our most + profitable mortgage loan" When they + were originally + +On line 1816: + profitable mortgage loan" + When they were originally + introduced in the + +On line 1816: + in the 1980s, option + ARMs were niche products, too, but + by they too became + +On line 1816: + the 1980s, option ARMs + were niche products, too, but by + they too became loans + +On line 1816: + 1980s, option ARMs were + niche products, too, but by they + too became loans of + +On line 1816: + option ARMs were niche + products, too, but by they too + became loans of choice + +On line 1816: + ARMs were niche products, + too, but by they too became + loans of choice because + +On line 1816: + were niche products, too, + but by they too became loans + of choice because their + +On line 1816: + products, too, but by + they too became loans of choice + because their payments + +On line 1816: + they too became loans + of choice because their payments + were lower than more + +On line 1816: + loans of choice because + their payments were lower than + more traditional + +On line 1816: + more traditional + mortgages. During the housing + boom, many borrowers + +On line 1816: + mortgages. During the + housing boom, many borrowers + repeatedly made + +On line 1816: + payments required, adding + to the principal balance + of their loan every + +On line 1818: + required, adding to the + principal balance of their + loan every month. An + +On line 1818: + principal balance + of their loan every month. An + early seller of + +On line 1818: + loan every month. An + early seller of option + ARMs was Golden West + +On line 1818: + early seller of + option ARMs was Golden West + Savings, an Oakland, + +On line 1818: + California–based + thrift founded in and acquired + in by Marion + +On line 1818: + thrift founded in and + acquired in by Marion + and Herbert Sandler. + +On line 1818: + in by Marion + and Herbert Sandler. In the + Sandlers merged Golden + +On line 1818: + and Herbert Sandler. + In the Sandlers merged Golden + West with World Savings; + +On line 1818: + Sandlers merged Golden + West with World Savings; Golden + West Financial Corp., + +On line 1818: + branches under the + name World Savings Bank. The thrift + issued about billion + +On line 1818: + World Savings Bank. The + thrift issued about billion in + option ARMs between + +On line 1820: + Bank. The thrift issued + about billion in option ARMs + between and Unlike + +On line 1820: + option ARMs between + and Unlike other mortgage + companies, Golden + +On line 1820: + and Unlike other + mortgage companies, Golden + West held onto them. + +On line 1822: + mortgage companies, + Golden West held onto them. + Sandler told the FCIC + +On line 1822: + onto them. Sandler + told the FCIC that Golden West’s + option ARMs—marketed as "Pick-a-Pay" + +On line 1822: + them. Sandler told the + FCIC that Golden West’s option + ARMs—marketed as "Pick-a-Pay" loans—had + +On line 1822: + Sandler told the FCIC + that Golden West’s option ARMs—marketed + as "Pick-a-Pay" loans—had the + +On line 1822: + FCIC that Golden West’s + option ARMs—marketed as "Pick-a-Pay" loans—had + the lowest losses + +On line 1822: + option ARMs—marketed as "Pick-a-Pay" + loans—had the lowest losses + in the industry + +On line 1822: + ARMs—marketed as "Pick-a-Pay" loans—had + the lowest losses in the + industry for that + +On line 1822: + loans—had the lowest + losses in the industry + for that product. Even + +On line 1822: + the lowest losses + in the industry for that + product. Even in 2005—the + +On line 1822: + in the industry + for that product. Even in 2005—the + last year prior to + +On line 1822: + the industry for + that product. Even in 2005—the last + year prior to its + +On line 1822: + for that product. Even + in 2005—the last year prior to + its acquisition + +On line 1822: + that product. Even in + 2005—the last year prior to its + acquisition by + +On line 1822: + almost entirely + in option ARMs, Golden West’s + losses were low by + +On line 1822: + losses were low by + industry standards. Sandler + attributed Golden + +On line 1822: + industry standards. + Sandler attributed Golden + West’s performance to + +On line 1822: + to its diligence in + running simulations about + what would happen to + +On line 1822: + diligence in running + simulations about what would + happen to its loans + +On line 1822: + simulations about + what would happen to its loans + under various + +On line 1822: + under various + scenarios—for example, + if interest rates + +On line 1822: + if interest rates + went up or down or if house + prices dropped even "For a + +On line 1822: + rates went up or down + or if house prices dropped even "For + a quarter of a + +On line 1822: + or down or if house + prices dropped even "For a quarter + of a century, + +On line 1822: + down or if house prices + dropped even "For a quarter of + a century, it + +On line 1822: + or if house prices dropped + even "For a quarter of a + century, it worked + +On line 1822: + prices dropped even "For a + quarter of a century, + it worked exactly + +On line 1822: + even "For a quarter + of a century, it worked + exactly as the + +On line 1822: + of a century, + it worked exactly as the + simulations showed + +On line 1822: + it worked exactly + as the simulations showed + that it would," Sandler + +On line 1822: + worked exactly as + the simulations showed that + it would," Sandler said. + +On line 1822: + exactly as the + simulations showed that it + would," Sandler said. "And + +On line 1822: + the simulations + showed that it would," Sandler said. + "And we have never + +On line 1822: + simulations showed + that it would," Sandler said. "And + we have never been + +On line 1822: + that it would," Sandler + said. "And we have never been + able to identify + +On line 1822: + it would," Sandler said. + "And we have never been able + to identify a + +On line 1822: + "And we have never + been able to identify a + single loan that was + +On line 1822: + have never been able + to identify a single + loan that was delinquent + +On line 1822: + a single loan that + was delinquent because of the + structure of the loan, + +On line 1822: + loan that was delinquent + because of the structure of + the loan, much less a + +On line 1822: + was delinquent because + of the structure of the loan, + much less a loss or + +On line 1822: + loss or foreclosure."27 + But after Wachovia acquired + Golden West in and + +On line 1822: + But after Wachovia + acquired Golden West in and + the housing market + +On line 1822: + acquired Golden West + in and the housing market + soured, charge-offs on the Pick-a-Pay + +On line 1822: + housing market soured, + charge-offs on the Pick-a-Pay portfolio + would suddenly jump + +On line 1822: + the Pick-a-Pay portfolio + would suddenly jump from to + by September And + +On line 1822: + would suddenly jump + from to by September And + foreclosures would climb. + +On line 1824: + by September And + foreclosures would climb. Early + in the decade, banks and + +On line 1824: + banks and thrifts such as + Countrywide and Washington + Mutual increased + +On line 1824: + their origination + of option ARM loans, changing + the product in ways + +On line 1824: + origination of + option ARM loans, changing the + product in ways that + +On line 1824: + of option ARM loans, + changing the product in ways + that made payment shocks + +On line 1824: + ways that made payment + shocks more likely. At Golden + West, after years, or + +On line 1824: + that made payment shocks + more likely. At Golden West, + after years, or if + +On line 1824: + shocks more likely. At + Golden West, after years, or + if the principal + +On line 1824: + likely. At Golden + West, after years, or if the + principal balance + +On line 1824: + Golden West, after + years, or if the principal + balance grew to of + +On line 1824: + principal balance + grew to of its original + size, the Pick-a-Pay mortgage + +On line 1824: + balance grew to of + its original size, the Pick-a-Pay + mortgage would recast + +On line 1824: + its original size, + the Pick-a-Pay mortgage would recast + into a new fixed-rate + +On line 1824: + mortgage would recast + into a new fixed-rate mortgage. + At Countrywide and + +On line 1824: + new fixed-rate mortgage. At + Countrywide and Washington + Mutual, the new + +On line 1824: + At Countrywide and + Washington Mutual, the + new loans would recast + +On line 1824: + new loans would recast + in as little as five years, + or when the balance + +On line 1824: + loans would recast in + as little as five years, or + when the balance hit + +On line 1824: + would recast in as + little as five years, or when + the balance hit just + +On line 1824: + little as five years, + or when the balance hit just + of the original + +On line 1824: + as five years, or when + the balance hit just of the + original size. They + +On line 1824: + when the balance hit + just of the original size. + They also offered + +On line 1824: + the original size. + They also offered lower + teaser rates—as low + +On line 1824: + rates—as low as 1%—and + loan-to-value ratios as + high as All of these + +On line 1824: + 1%—and loan-to-value + ratios as high as All of + these features raised the + +On line 1824: + high as All of these + features raised the chances that the + borrower’s required + +On line 1824: + of these features raised + the chances that the borrower’s + required payment could + +On line 1824: + features raised the chances + that the borrower’s required + payment could rise more + +On line 1824: + raised the chances that the + borrower’s required payment + could rise more sharply, more + +On line 1824: + that the borrower’s + required payment could rise more + sharply, more quickly, and + +On line 1824: + borrower’s required + payment could rise more sharply, more + quickly, and with less + +On line 1826: + required payment could + rise more sharply, more quickly, and + with less cushion. In + +On line 1826: + more quickly, and with + less cushion. In Washington + Mutual was the + +On line 1826: + with less cushion. In + Washington Mutual was + the second-largest mortgage + +On line 1826: + the second-largest mortgage + originator, just ahead of + Countrywide. It had + +On line 1826: + originator, just + ahead of Countrywide. It had + offered the option + +On line 1826: + ahead of Countrywide. + It had offered the option + ARM since and in as + +On line 1826: + Countrywide. It had + offered the option ARM since + and in as cited + +On line 1826: + the option ARM since + and in as cited by the + Senate Permanent + +On line 1826: + and in as cited + by the Senate Permanent + Subcommittee on + +On line 1826: + conducted a study + "to explore what Washington + Mutual could do + +On line 1826: + a study "to explore + what Washington Mutual + could do to increase + +On line 1826: + study "to explore what + Washington Mutual could + do to increase sales + +On line 1826: + Mutual could do + to increase sales of Option + ARMs, our most profitable + +On line 1826: + could do to increase + sales of Option ARMs, our most + profitable mortgage loan."28 + +On line 1826: + sales of Option ARMs, + our most profitable mortgage loan."28 + A focus group made + +On line 1826: + of Option ARMs, our + most profitable mortgage loan."28 A + focus group made clear + +On line 1826: + most profitable mortgage + loan."28 A focus group made clear + that few customers were + +On line 1826: + loan."28 A focus group + made clear that few customers were + requesting option + +On line 1826: + clear that few customers + were requesting option ARMs + and that "this is not + +On line 1826: + that few customers were + requesting option ARMs and + that "this is not a + +On line 1826: + option ARMs and that + "this is not a product that + sells itself."29 The study + +On line 1826: + and that "this is not + a product that sells itself."29 + The study found "the best + +On line 1826: + is not a product + that sells itself."29 The study found + "the best selling point + +On line 1826: + not a product that + sells itself."29 The study found "the + best selling point for + +On line 1826: + a product that sells + itself."29 The study found "the best + selling point for the + +On line 1826: + that sells itself."29 The + study found "the best selling point + for the Option Arm" + +On line 1826: + sells itself."29 The study + found "the best selling point for + the Option Arm" was + +On line 1826: + itself."29 The study found + "the best selling point for the + Option Arm" was to + +On line 1826: + found "the best selling + point for the Option Arm" was + to show consumers "how + +On line 1826: + "the best selling point + for the Option Arm" was to + show consumers "how much + +On line 1826: + for the Option Arm" + was to show consumers "how much + lower their monthly + +On line 1826: + Option Arm" was to + show consumers "how much lower + their monthly payment + +On line 1826: + was to show consumers + "how much lower their monthly + payment would be by + +On line 1826: + show consumers "how much + lower their monthly payment + would be by choosing + +On line 1826: + "how much lower their + monthly payment would be by + choosing the Option + +On line 1826: + monthly payment would + be by choosing the Option + Arm versus a fixed-rate + +On line 1826: + be by choosing the + Option Arm versus a fixed-rate + loan."30 The study also + +On line 1826: + choosing the Option + Arm versus a fixed-rate loan."30 The + study also revealed + +On line 1826: + Option Arm versus + a fixed-rate loan."30 The study also + revealed that many WaMu + +On line 1826: + Arm versus a fixed-rate + loan."30 The study also revealed + that many WaMu brokers + +On line 1828: + versus a fixed-rate loan."30 + The study also revealed that + many WaMu brokers "felt + +On line 1828: + a fixed-rate loan."30 The study + also revealed that many WaMu + brokers "felt these loans + +On line 1828: + loan."30 The study also + revealed that many WaMu brokers + "felt these loans were ‘bad’ + +On line 1828: + also revealed that + many WaMu brokers "felt these loans + were ‘bad’ for customers."31 + +On line 1828: + many WaMu brokers "felt + these loans were ‘bad’ for customers."31 + One member of the + +On line 1828: + these loans were ‘bad’ for + customers."31 One member of the + focus group remarked, + +On line 1828: + were ‘bad’ for customers."31 + One member of the focus + group remarked, "A lot + +On line 1828: + ‘bad’ for customers."31 One + member of the focus group + remarked, "A lot of + +On line 1828: + One member of the + focus group remarked, "A lot + of (Loan) Consultants + +On line 1828: + focus group remarked, + "A lot of (Loan) Consultants + don’t believe in it + +On line 1828: + remarked, "A lot of + (Loan) Consultants don’t believe + in it and don’t think + +On line 1828: + of (Loan) Consultants + don’t believe in it and don’t + think [it’s] good for the + +On line 1828: + don’t believe in it + and don’t think [it’s] good for the + customer. You’re going + +On line 1828: + in it and don’t think + [it’s] good for the customer. You’re + going to have to + +On line 1828: + and don’t think [it’s] good + for the customer. You’re going + to have to change the + +On line 1828: + think [it’s] good for the + customer. You’re going to have + to change the mindset."32 + +On line 1830: + good for the customer. + You’re going to have to change + the mindset."32 Despite + +On line 1830: + for the customer. You’re + going to have to change the + mindset."32 Despite these + +On line 1830: + customer. You’re going + to have to change the mindset."32 + Despite these challenges, + +On line 1830: + You’re going to have + to change the mindset."32 Despite + these challenges, option + +On line 1830: + going to have to + change the mindset."32 Despite these + challenges, option ARM + +On line 1830: + to change the mindset."32 + Despite these challenges, option + ARM originations + +On line 1830: + Despite these challenges, + option ARM originations + soared at Washington + +On line 1830: + originations soared + at Washington Mutual + from billion in to + +On line 1830: + soared at Washington + Mutual from billion in + to billion in when + +On line 1830: + in to billion in + when they were more than half of + WaMu’s originations + +On line 1830: + to billion in when + they were more than half of WaMu’s + originations and + +On line 1830: + when they were more than + half of WaMu’s originations + and had become the + +On line 1830: + they were more than half + of WaMu’s originations and + had become the thrift’s + +On line 1830: + the thrift’s signature + adjustable-rate home loan product.33 The + average FICO + +On line 1830: + home loan product.33 The + average FICO score was + around well into the + +On line 1832: + average FICO + score was around well into the + range considered "prime," + +On line 1832: + was around well into + the range considered "prime," and + about two-thirds were jumbo + +On line 1834: + Mae and Freddie Mac + were allowed to purchase or + guarantee.34 More than + +On line 1836: + guarantee.34 More than + half were in California.35 + Countrywide’s option + +On line 1836: + More than half were in + California.35 Countrywide’s + option ARM business + +On line 1836: + Countrywide’s option + ARM business peaked at billion + in originations + +On line 1836: + in originations + in the second quarter of + about of all its loans + +On line 1836: + quarter of about of + all its loans originated + that quarter.36 But it + +On line 1836: + quarter.36 But it had + to relax underwriting + standards to get there. + +On line 1836: + it had to relax + underwriting standards to + get there. In July + +On line 1836: + get there. In July + Countrywide decided it + would lend up to of + +On line 1836: + it would lend up to + of a home’s appraised value, + up from and reduced + +On line 1836: + would lend up to of + a home’s appraised value, up + from and reduced the + +On line 1836: + up from and reduced + the minimum credit score + to as low as In + +On line 1836: + ratio (including + second liens) to he risk in + these loans was growing. + +On line 1836: + (including second + liens) to he risk in these loans + was growing. From to + +On line 1836: + growing. From to the + average loan-to-value + ratio rose about the + +On line 1836: + rose about the combined + loan-to-value ratio rose + about and debt-to-income + +On line 1836: + ratio rose about and + debt-to-income ratios had risen + from to borrowers + +On line 1836: + debt-to-income ratios + had risen from to borrowers + were pledging more of + +On line 1836: + ratios had risen from + to borrowers were pledging + more of their income + +On line 1836: + were pledging more of + their income to their mortgage + payments. Moreover, of + +On line 1836: + option ARMs had low + documentation in The + percentage of these + +On line 1836: + documentation + in The percentage of these + loans made to investors + +On line 1836: + in The percentage + of these loans made to investors + and speculators—that + +On line 1836: + The percentage of + these loans made to investors and + speculators—that is, + +On line 1836: + of these loans made to + investors and speculators—that + is, borrowers with + +On line 1836: + and speculators—that + is, borrowers with no plans + to use the home as + +On line 1836: + speculators—that is, + borrowers with no plans to + use the home as their + +On line 1836: + with no plans to use + the home as their primary + residence—also rose. + +On line 1838: + use the home as their + primary residence—also + rose. These changes worried + +On line 1838: + as their primary + residence—also rose. These changes + worried the lenders even + +On line 1838: + residence—also rose. + These changes worried the lenders even + as they continued + +On line 1838: + These changes worried the + lenders even as they continued + to make the loans. In + +On line 1838: + the lenders even as they + continued to make the loans. + In September and + +On line 1838: + they continued to + make the loans. In September + and August Mozilo + +On line 1838: + continued to make + the loans. In September and + August Mozilo emailed + +On line 1838: + loans. In September + and August Mozilo emailed to + senior management + +On line 1838: + and August Mozilo + emailed to senior management + that these loans could bring + +On line 1838: + management that these + loans could bring "financial and + reputational + +On line 1838: + reputational + catastrophe."40 Countrywide should + not market them to + +On line 1838: + not market them to + investors, he insisted. "Pay + option loans being + +On line 1838: + he insisted. "Pay + option loans being used by + investors is a pure + +On line 1838: + a pure commercial + spec[ulation] loan and not + the traditional + +On line 1838: + spec[ulation] loan + and not the traditional + home loan that we have + +On line 1838: + managed throughout our + history," Mozilo wrote to + Carlos Garcia, CEO + +On line 1840: + history," Mozilo + wrote to Carlos Garcia, CEO + of Countrywide Bank. + +On line 1840: + CEO of Countrywide + Bank. Speculative investors + "should go to Chase or + +On line 1840: + of Countrywide Bank. + Speculative investors "should + go to Chase or Wells + +On line 1840: + Bank. Speculative + investors "should go to Chase or + Wells not us. It is + +On line 1840: + investors "should go to + Chase or Wells not us. It is + also important + +On line 1840: + "should go to Chase or + Wells not us. It is also + important for you + +On line 1840: + Chase or Wells not us. + It is also important + for you and your team + +On line 1840: + or Wells not us. It + is also important for + you and your team to + +On line 1840: + us. It is also + important for you and your + team to understand + +On line 1840: + important for you + and your team to understand + from my point of view + +On line 1840: + for you and your team + to understand from my point + of view that there is + +On line 1840: + of view that there is + nothing intrinsically + wrong with pay options + +On line 1840: + wrong with pay options + loans themselves, the problem is + the quality of + +On line 1840: + the quality of + borrowers who are being + offered the product + +On line 1840: + borrowers who are + being offered the product + and the abuse by third + +On line 1840: + offered the product + and the abuse by third party + originators. [I]f + +On line 1840: + and the abuse by third + party originators. [I]f + you are unable to + +On line 1840: + [I]f you are unable + to find sufficient product + then slow down the growth + +On line 1840: + you are unable to + find sufficient product then + slow down the growth of + +On line 1840: + are unable to find + sufficient product then slow + down the growth of the + +On line 1840: + to find sufficient + product then slow down the growth + of the Bank for the + +On line 1842: + growth of the Bank for + the time being."41 However, + Countrywide’s growth did + +On line 1842: + for the time being."41 + However, Countrywide’s growth + did not slow. Nor did + +On line 1842: + being."41 However, + Countrywide’s growth did not slow. + Nor did the volume + +On line 1842: + growth did not slow. Nor + did the volume of option + ARMs retained on its + +On line 1842: + volume of option + ARMs retained on its balance + sheet, increasing from + +On line 1842: + on its balance sheet, + increasing from billion in + to billion in and + +On line 1842: + sheet, increasing from + billion in to billion in + and peaking in at + +On line 1842: + from billion in to + billion in and peaking in + at billion.42 Finding + +On line 1842: + in to billion in + and peaking in at billion.42 + Finding these loans very + +On line 1842: + in and peaking in + at billion.42 Finding these loans + very profitable, through WaMu + +On line 1842: + loans very profitable, through + WaMu also retained option + ARMs—more than billion with + +On line 1842: + very profitable, through WaMu + also retained option ARMs—more + than billion with the + +On line 1842: + billion with the bulk + from California, followed + by Florida.43 But + +On line 1842: + from California, + followed by Florida.43 But + in the end, these loans + +On line 1842: + But in the end, these + loans would cause significant + losses during the + +On line 1842: + the end, these loans would + cause significant losses + during the crisis. + +On line 1844: + during the crisis. + Mentioning Countrywide and + WaMu as tough, "in our + +On line 1844: + and WaMu as tough, "in + our face" competitors, John Stumpf, + the CEO, chairman, and + +On line 1844: + our face" competitors, + John Stumpf, the CEO, chairman, and + president of Wells + +On line 1844: + Wells Fargo, recalled + Wells’s decision not to write + option ARMs, even as + +On line 1844: + Wells’s decision not + to write option ARMs, even as + it originated + +On line 1844: + decision not to + write option ARMs, even as it + originated many + +On line 1844: + to write option ARMs, + even as it originated + many other high-risk + +On line 1846: + originated many + other high-risk mortgages. These + were "hard decisions + +On line 1846: + high-risk mortgages. These + were "hard decisions to make + at the time," he said, + +On line 1846: + mortgages. These were "hard + decisions to make at the + time," he said, noting + +On line 1846: + were "hard decisions + to make at the time," he said, + noting "we did lose + +On line 1846: + decisions to make + at the time," he said, noting + "we did lose revenue, + +On line 1846: + to make at the time," + he said, noting "we did lose + revenue, and we did + +On line 1848: + time," he said, noting + "we did lose revenue, and we + did lose volume."44 Across + +On line 1848: + he said, noting "we + did lose revenue, and we did + lose volume."44 Across the + +On line 1848: + did lose revenue, and + we did lose volume."44 Across the + market, the volume + +On line 1848: + we did lose volume."44 + Across the market, the volume + of option ARMs had + +On line 1848: + did lose volume."44 Across + the market, the volume of + option ARMs had risen + +On line 1848: + Across the market, the + volume of option ARMs had + risen nearly fourfold + +On line 1850: + option ARMs had risen + nearly fourfold from to from + approximately + +On line 1850: + nearly fourfold from + to from approximately + billion to billion. + +On line 1850: + fourfold from to from + approximately billion + to billion. By then, + +On line 1850: + approximately + billion to billion. By then, + WaMu and Countrywide + +On line 1850: + billion. By then, WaMu + and Countrywide had plenty + of evidence that + +On line 1850: + WaMu and Countrywide + had plenty of evidence + that more borrowers + +On line 1850: + and Countrywide had + plenty of evidence that + more borrowers were + +On line 1850: + were making only + the minimum payments and + that their mortgages were + +On line 1850: + payments and that their + mortgages were negatively + amortizing—which meant + +On line 1850: + The percentage of + Countrywide’s option ARMs that + were negatively + +On line 1850: + Countrywide’s option + ARMs that were negatively + amortizing grew from + +On line 1850: + option ARMs that were + negatively amortizing + grew from just in to + +On line 1850: + were negatively + amortizing grew from just in + to in and then to + +On line 1850: + amortizing grew from + just in to in and then to + more than by At WaMu, + +On line 1850: + grew from just in to + in and then to more than by + At WaMu, it was in + +On line 1850: + from just in to in + and then to more than by At + WaMu, it was in in + +On line 1850: + just in to in and + then to more than by At WaMu, + it was in in and + +On line 1850: + in to in and then + to more than by At WaMu, it + was in in and in + +On line 1850: + in and then to more + than by At WaMu, it was in + in and in Declines + +On line 1850: + and then to more than + by At WaMu, it was in in + and in Declines in + +On line 1850: + then to more than by + At WaMu, it was in in and + in Declines in house + +On line 1850: + to more than by At + WaMu, it was in in and in + Declines in house prices + +On line 1850: + than by At WaMu, it + was in in and in Declines + in house prices added to + +On line 1850: + WaMu, it was in in + and in Declines in house prices + added to borrowers’ + +On line 1850: + was in in and in + Declines in house prices added to + borrowers’ problems: + +On line 1850: + simply be eroded. + Increasingly, borrowers + would owe more on their + +On line 1850: + borrowers would owe + more on their mortgages than their + homes were worth on the + +On line 1850: + more on their mortgages + than their homes were worth on the + market, giving them + +On line 1850: + than their homes were worth + on the market, giving them + an incentive to + +On line 1850: + their homes were worth on + the market, giving them an + incentive to walk + +On line 1850: + worth on the market, + giving them an incentive + to walk away from both + +On line 1850: + the market, giving + them an incentive to walk + away from both home and + +On line 1852: + them an incentive + to walk away from both home and + mortgage. Kevin Stein, from + +On line 1852: + to walk away from both + home and mortgage. Kevin Stein, from + the California + +On line 1852: + home and mortgage. Kevin + Stein, from the California + Reinvestment Coalition, + +On line 1854: + Reinvestment Coalition, + testified to the FCIC that + option ARMs were sold + +On line 1854: + option ARMs were sold + inappropriately: "Nowhere + was this dynamic + +On line 1854: + was this dynamic + more clearly on display than + in the summer of + +On line 1854: + this dynamic more + clearly on display than in + the summer of when + +On line 1854: + summer of when the + Federal Reserve convened + HOEPA (Home Ownership + +On line 1854: + HOEPA (Home Ownership + and Equity Protection + Act) hearings in San + +On line 1854: + Act) hearings in San + Francisco. At the hearing, + consumers testified + +On line 1854: + the hearing, consumers + testified to being sold + option ARM loans in + +On line 1854: + being sold option + ARM loans in their primary + non-English language, only + +On line 1854: + be pressured to sign + English-only documents with + significantly + +On line 1854: + being unable to + make even their initial payments + because they had been + +On line 1854: + unable to make even + their initial payments because + they had been lied to + +On line 1854: + their initial payments + because they had been lied to + so completely by + +On line 1856: + because they had been + lied to so completely by + their brokers."47 Mona Tawatao, + +On line 1856: + to so completely + by their brokers."47 Mona Tawatao, a + regional counsel + +On line 1856: + by their brokers."47 Mona + Tawatao, a regional counsel + with Legal Services + +On line 1856: + their brokers."47 Mona Tawatao, + a regional counsel with + Legal Services of + +On line 1856: + Services of Northern + California, described the + borrowers she was + +On line 1856: + she was assisting + as "people who got steered or + defrauded into + +On line 1856: + as "people who got + steered or defrauded into + entering option + +On line 1856: + steered or defrauded + into entering option + ARMs with teaser rates + +On line 1856: + into entering + option ARMs with teaser rates + or pick-a-pay loans + +On line 1856: + with teaser rates or + pick-a-pay loans forcing them + to pay into—pay + +On line 1856: + loans forcing them to + pay into—pay loans that they + could never pay off. + +On line 1856: + to pay into—pay + loans that they could never pay + off. Prevalent among these + +On line 1856: + pay into—pay loans + that they could never pay off. + Prevalent among these clients + +On line 1856: + that they could never + pay off. Prevalent among these clients + are seniors, people + +On line 1856: + they could never pay + off. Prevalent among these clients are + seniors, people of + +On line 1856: + pay off. Prevalent among + these clients are seniors, people + of color, people + +On line 1856: + off. Prevalent among these + clients are seniors, people of + color, people with + +On line 1856: + these clients are seniors, + people of color, people + with disabilities, + +On line 1856: + disabilities, and + limited English speakers + and seniors who are + +On line 1856: + limited English + speakers and seniors who are + African American and + +On line 1858: + are African American + and Latino."48 Underwriting + standards: "We’re going + +On line 1858: + going to have to + hold our nose" Another shift + would have serious + +On line 1858: + would have serious + consequences. For decades, the down + payment for a prime + +On line 1858: + consequences. For decades, + the down payment for a prime + mortgage had been (in + +On line 1858: + decades, the down payment + for a prime mortgage had been + (in other words, the + +On line 1858: + been (in other words, + the loan-to-value ratio + (LTV) had been As prices + +On line 1858: + the loan-to-value + ratio (LTV) had been As prices + continued to rise, + +On line 1858: + ratio (LTV) had been + As prices continued to rise, + finding the cash to + +On line 1858: + (LTV) had been As prices + continued to rise, finding + the cash to put down + +On line 1858: + prices continued to + rise, finding the cash to put + down became harder, + +On line 1858: + continued to rise, + finding the cash to put down + became harder, and + +On line 1858: + finding the cash to + put down became harder, and + from on, lenders began + +On line 1860: + began accepting + smaller down payments. There had + always been a place + +On line 1860: + smaller down payments. + There had always been a place + for borrowers with + +On line 1860: + There had always been + a place for borrowers with + down payments below + +On line 1862: + down payments below + Typically, lenders required + such borrower to + +On line 1862: + to purchase private + mortgage insurance for a + monthly fee. If a + +On line 1862: + mortgage insurance + for a monthly fee. If a + mortgage ended in + +On line 1862: + fee. If a mortgage + ended in foreclosure, the + mortgage insurance + +On line 1862: + the lender whole. Worried + about defaults, the GSEs would not + buy or guarantee + +On line 1862: + the GSEs would not buy + or guarantee mortgages with + down payments below + +On line 1862: + borrower bought the + insurance. Unluckily + for many homeowners, + +On line 1862: + many homeowners, for + the housing industry, and + for the financial + +On line 1862: + industry, and for + the financial system, lenders + devised a way to + +On line 1862: + for the financial + system, lenders devised a way + to get rid of these + +On line 1862: + financial system, + lenders devised a way to get + rid of these monthly + +On line 1862: + system, lenders devised + a way to get rid of these + monthly fees that had + +On line 1862: + lenders devised a way + to get rid of these monthly + fees that had added to + +On line 1862: + devised a way to + get rid of these monthly fees + that had added to the + +On line 1862: + a way to get rid + of these monthly fees that had + added to the cost of + +On line 1862: + rid of these monthly + fees that had added to the cost + of homeownership: + +On line 1862: + fees that had added to + the cost of homeownership: + lower down payments + +On line 1862: + had added to the cost + of homeownership: lower + down payments that did + +On line 1862: + added to the cost of + homeownership: lower down + payments that did not + +On line 1864: + down payments that did + not require insurance. Lenders + had latitude in + +On line 1864: + insurance. Lenders had + latitude in setting down + payments. In Congress + +On line 1864: + In Congress ordered + federal regulators + to prescribe standards + +On line 1864: + ordered federal + regulators to prescribe + standards for real + +On line 1864: + regulators to + prescribe standards for real + estate lending that + +On line 1864: + to prescribe standards + for real estate lending + that would apply to + +On line 1864: + prescribe standards for + real estate lending that + would apply to banks + +On line 1864: + for real estate + lending that would apply to + banks and thrifts. The goal + +On line 1864: + reduce risk to the + deposit insurance funds and + enhance the safety + +On line 1864: + LTV standards, but chose + not to, leaving that to the + regulators. In + +On line 1864: + to, leaving that to + the regulators. In the + end, regulators + +On line 1866: + LTV ratios or for + documentation for home + mortgages.50 The agencies + +On line 1866: + mortgages.50 The agencies + explained: "A significant + number of commenters + +On line 1866: + The agencies explained: + "A significant number + of commenters expressed + +On line 1866: + a regulation + implementing LTV ratios + would constrict credit, + +On line 1866: + lending costs, reduce + lending flexibility, + impede economic + +On line 1866: + costs, reduce lending + flexibility, impede + economic growth, and + +On line 1868: + growth, and cause other + undesirable consequences."51 + In regulators + +On line 1868: + In regulators + revisited the issue, + as high LTV lending + +On line 1868: + revisited the + issue, as high LTV lending + was increasing. They + +On line 1868: + issue, as high LTV + lending was increasing. They + tightened reporting + +On line 1868: + and limited a + bank’s total holdings of loans + with LTVs above that lacked + +On line 1868: + bank’s total holdings + of loans with LTVs above that lacked + mortgage insurance + +On line 1868: + with LTVs above that lacked + mortgage insurance or some + other protection; + +On line 1868: + other protection; + they also reminded the + banks and thrifts that they + +On line 1868: + banks and thrifts that they + should establish internal + guidelines to manage + +On line 1870: + internal guidelines + to manage the risk of these + loans.52 High LTV lending + +On line 1870: + guidelines to manage + the risk of these loans.52 High LTV + lending soon became + +On line 1870: + to manage the risk + of these loans.52 High LTV lending + soon became even more + +On line 1870: + the risk of these loans.52 + High LTV lending soon became + even more common, thanks + +On line 1870: + risk of these loans.52 High + LTV lending soon became even + more common, thanks to + +On line 1870: + of these loans.52 High LTV + lending soon became even more + common, thanks to the + +On line 1870: + loans.52 High LTV lending + soon became even more common, + thanks to the so-called + +On line 1870: + lending soon became + even more common, thanks to the + so-called iggyback + +On line 1870: + soon became even more + common, thanks to the so-called + iggyback mortgage. + +On line 1870: + common, thanks to the + so-called iggyback mortgage. + The lender offered a + +On line 1870: + The lender offered a + first mortgage for perhaps of + the home’s value and + +On line 1870: + lender offered a first + mortgage for perhaps of the + home’s value and a + +On line 1870: + mortgage for perhaps + of the home’s value and a + second mortgage for + +On line 1870: + of the home’s value + and a second mortgage for + another or even + +On line 1870: + another or even + Borrowers liked these because + their monthly payments + +On line 1870: + or even Borrowers + liked these because their monthly + payments were often + +On line 1870: + Borrowers liked these + because their monthly payments + were often cheaper + +On line 1870: + mortgage insurance, + and the interest payments + were tax deductible. Lenders + +On line 1870: + insurance, and the + interest payments were tax + deductible. Lenders liked them + +On line 1870: + and the interest + payments were tax deductible. Lenders + liked them because the + +On line 1870: + interest payments + were tax deductible. Lenders liked them + because the smaller + +On line 1870: + were tax deductible. Lenders + liked them because the smaller + first mortgage—even without + +On line 1872: + potentially be + sold to the GSEs. At the same + time, the piggybacks + +On line 1872: + to the GSEs. At the + same time, the piggybacks added + risks. A borrower + +On line 1872: + the GSEs. At the same + time, the piggybacks added risks. + A borrower with + +On line 1872: + GSEs. At the same time, + the piggybacks added risks. A + borrower with a + +On line 1872: + time, the piggybacks + added risks. A borrower with + a higher combined + +On line 1872: + the piggybacks added + risks. A borrower with a + higher combined LTV + +On line 1872: + risks. A borrower + with a higher combined LTV + had less equity + +On line 1872: + A borrower with + a higher combined LTV had + less equity in + +On line 1872: + borrower with a + higher combined LTV had less + equity in the + +On line 1872: + higher combined LTV + had less equity in the + home. In a rising + +On line 1872: + combined LTV had less + equity in the home. In + a rising market, + +On line 1872: + had less equity + in the home. In a rising + market, should payments + +On line 1872: + equity in the + home. In a rising market, + should payments become + +On line 1872: + home. In a rising + market, should payments become + unmanageable, the + +On line 1872: + unmanageable, the + borrower could always sell + the home and come out + +On line 1872: + the borrower could + always sell the home and come + out ahead. However, + +On line 1872: + a falling market, + the borrower might owe more + than the home was worth. + +On line 1872: + the borrower might + owe more than the home was worth. + Piggyback loans—which + +On line 1872: + that many borrowers + would end up with negative + equity if house + +On line 1872: + up with negative + equity if house prices fell, + especially if + +On line 1872: + especially if + the appraisal had overstated + the initial value. + +On line 1874: + lending helped address + a significant challenge + for companies like + +On line 1874: + a significant + challenge for companies like + New Century, which + +On line 1874: + like New Century, + which were big players in the + market for mortgages. + +On line 1874: + Century, which were + big players in the market + for mortgages. Meeting + +On line 1874: + required finding new + borrowers, and homebuyers + without down payments + +On line 1874: + down payments were a + relatively untapped source. + Yet among borrowers + +On line 1874: + Yet among borrowers + with mortgages originated + in by September + +On line 1874: + among borrowers with + mortgages originated in + by September those + +On line 1874: + in by September + those with piggybacks were four + times as likely as + +On line 1874: + September those with + piggybacks were four times as + likely as other + +On line 1874: + piggybacks were four + times as likely as other + mortgage holders to + +On line 1874: + four times as likely + as other mortgage holders + to be or more days + +On line 1874: + likely as other + mortgage holders to be or + more days delinquent. When + +On line 1874: + as other mortgage + holders to be or more days + delinquent. When senior + +On line 1874: + mortgage holders to + be or more days delinquent. When + senior management + +On line 1874: + holders to be or + more days delinquent. When senior + management at New + +On line 1874: + or more days delinquent. + When senior management at + New Century heard + +On line 1874: + more days delinquent. When + senior management at New + Century heard these + +On line 1874: + senior management + at New Century heard these + numbers, the head of + +On line 1874: + New Century heard + these numbers, the head of the + Secondary Marketing + +On line 1874: + these numbers, the head + of the Secondary Marketing + Department asked for + +On line 1874: + head of the Secondary + Marketing Department asked + for "thoughts on what to + +On line 1874: + Secondary Marketing + Department asked for "thoughts on + what to do with this + +On line 1876: + Century increased + mortgages with piggybacks to + of loan production + +On line 1876: + piggybacks to of + loan production by the end + of up from only + +On line 1876: + loan production by + the end of up from only + in They were not alone. + +On line 1876: + production by the + end of up from only in + They were not alone. Across + +On line 1876: + the end of up from + only in They were not alone. + Across securitized + +On line 1876: + only in They were + not alone. Across securitized + subprime mortgages, the + +On line 1876: + subprime mortgages, the + average combined LTV rose + from to between and + +On line 1878: + average combined + LTV rose from to between and + Another way to + +On line 1878: + combined LTV rose from + to between and Another + way to get people + +On line 1878: + into mortgages—and + quickly—was to require less + information of + +On line 1880: + years earlier for + people with fluctuating + or hard-to-verify + +On line 1880: + fluctuating or + hard-to-verify incomes, such + as the self-employed, + +On line 1880: + as the self-employed, + or to serve longtime customers + with strong credit. Or + +On line 1880: + the self-employed, or + to serve longtime customers with + strong credit. Or lenders + +On line 1880: + self-employed, or to + serve longtime customers with strong + credit. Or lenders might + +On line 1880: + serve longtime customers + with strong credit. Or lenders might + waive information + +On line 1880: + with strong credit. Or + lenders might waive information + requirements if the + +On line 1880: + looked safe in other + respects. "If I’m making a + loan-to-value, I’m + +On line 1880: + going to get all + of the documentation," + Sandler of Golden + +On line 1880: + to get all of the + documentation," Sandler + of Golden West told + +On line 1880: + documentation," + Sandler of Golden West told + the FCIC. The process was + +On line 1880: + Sandler of Golden + West told the FCIC. The process was + too cumbersome and + +On line 1880: + West told the FCIC. The + process was too cumbersome and + unnecessary. He + +On line 1880: + too cumbersome and + unnecessary. He already + had a good idea how + +On line 1880: + unnecessary. He + already had a good idea how + much money teachers, + +On line 1880: + teachers, accountants, + and engineers made—and if + he didn’t, he could + +On line 1880: + if he didn’t, he + could easily find out. All + he needed was to + +On line 1880: + he could easily + find out. All he needed was + to verify that + +On line 1880: + could easily find + out. All he needed was to + verify that his + +On line 1880: + out. All he needed + was to verify that his + borrowers worked where + +On line 1880: + was to verify + that his borrowers worked where + they said they did. If + +On line 1880: + to verify that + his borrowers worked where they + said they did. If he + +On line 1880: + verify that his + borrowers worked where they said + they did. If he guessed + +On line 1880: + did. If he guessed wrong, + the loan-to-value ratio + still protected his + +On line 1882: + offer borrowers + the convenience of quicker + decisions and not + +On line 1882: + the convenience of + quicker decisions and not + having to provide + +On line 1882: + quicker decisions + and not having to provide + tons of paperwork. + +On line 1882: + and not having to + provide tons of paperwork. + In return, they charged + +On line 1882: + of paperwork. In + return, they charged a higher + interest rate. The + +On line 1882: + In return, they charged + a higher interest rate. + The idea caught on: from + +On line 1882: + return, they charged a + higher interest rate. The + idea caught on: from to + +On line 1882: + they charged a higher + interest rate. The idea caught + on: from to low- and + +On line 1882: + higher interest + rate. The idea caught on: from to + low- and no-doc loans + +On line 1882: + rate. The idea caught on: + from to low- and no-doc loans + skyrocketed from + +On line 1882: + to low- and no-doc + loans skyrocketed from less + than to roughly of + +On line 1882: + low- and no-doc loans + skyrocketed from less than + to roughly of all + +On line 1882: + loans skyrocketed + from less than to roughly of + all outstanding loans.56 + +On line 1882: + skyrocketed from + less than to roughly of all + outstanding loans.56 Among + +On line 1882: + outstanding loans.56 Among + Alt-A securitizations, + of loans issued in + +On line 1882: + had limited or + no documentation.57 As + William Black, a former + +On line 1882: + a former banking + regulator, testified + before the FCIC, the + +On line 1882: + before the FCIC, the + mortgage industry’s own fraud + specialists described + +On line 1882: + mortgage industry’s + own fraud specialists described + stated income loans + +On line 1882: + industry’s own fraud + specialists described stated + income loans as "an + +On line 1882: + specialists described + stated income loans as "an + open ‘invitation + +On line 1882: + income loans as "an + open ‘invitation to fraud’ + that justified the + +On line 1882: + open ‘invitation + to fraud’ that justified the + industry term ‘liar’s + +On line 1884: + fraud’ that justified + the industry term ‘liar’s loans.’"58 + Speaking of lending + +On line 1884: + industry term ‘liar’s + loans.’"58 Speaking of lending up + to at Citigroup, + +On line 1884: + Speaking of lending + up to at Citigroup, Richard + Bowen, a veteran + +On line 1884: + of lending up to + at Citigroup, Richard Bowen, a + veteran banker in + +On line 1884: + at Citigroup, Richard + Bowen, a veteran banker in + the consumer lending + +On line 1884: + Citigroup, Richard Bowen, + a veteran banker in the + consumer lending group, + +On line 1884: + Bowen, a veteran + banker in the consumer lending + group, told the FCIC, "A + +On line 1884: + banker in the consumer + lending group, told the FCIC, "A + decision was made + +On line 1884: + lending group, told the + FCIC, "A decision was made + that ‘We’re going to + +On line 1884: + group, told the FCIC, "A + decision was made that ‘We’re + going to have to + +On line 1884: + FCIC, "A decision + was made that ‘We’re going to + have to hold our nose + +On line 1884: + "A decision was + made that ‘We’re going to have + to hold our nose and + +On line 1884: + decision was made + that ‘We’re going to have to + hold our nose and start + +On line 1884: + that ‘We’re going to + have to hold our nose and start + buying the stated + +On line 1884: + going to have to + hold our nose and start buying + the stated product + +On line 1884: + have to hold our nose + and start buying the stated + product if we want + +On line 1884: + hold our nose and start + buying the stated product + if we want to stay + +On line 1884: + and start buying the + stated product if we want + to stay in business.’"59 + +On line 1884: + stated product if + we want to stay in business.’"59 + Jamie Dimon, the CEO + +On line 1884: + if we want to stay + in business.’"59 Jamie Dimon, the + CEO of JP Morgan, + +On line 1884: + we want to stay in + business.’"59 Jamie Dimon, the CEO + of JP Morgan, told + +On line 1884: + business.’"59 Jamie Dimon, + the CEO of JP Morgan, told + the Commission, "In + +On line 1884: + told the Commission, + "In mortgage underwriting, + somehow we just missed, + +On line 1884: + somehow we just missed, + you know, that home prices don’t go + up forever and + +On line 1884: + know, that home prices don’t + go up forever and that + it’s not sufficient + +On line 1884: + that home prices don’t go + up forever and that it’s + not sufficient to + +On line 1884: + home prices don’t go up + forever and that it’s not + sufficient to have + +On line 1884: + up forever and + that it’s not sufficient to + have stated income."60 + +On line 1886: + forever and that + it’s not sufficient to have + stated income."60 In + +On line 1886: + it’s not sufficient + to have stated income."60 In + the end, companies + +On line 1886: + not sufficient to + have stated income."60 In the + end, companies in + +On line 1886: + income."60 In the end, + companies in subprime and + Alt-A mortgages had, in + +On line 1886: + the end, companies + in subprime and Alt-A mortgages + had, in essence, placed all + +On line 1886: + end, companies in + subprime and Alt-A mortgages had, + in essence, placed all their + +On line 1886: + in subprime and Alt-A + mortgages had, in essence, placed all + their chips on black: they + +On line 1886: + and Alt-A mortgages had, + in essence, placed all their chips on + black: they were betting + +On line 1886: + Alt-A mortgages had, in + essence, placed all their chips on black: + they were betting that + +On line 1886: + mortgages had, in essence, + placed all their chips on black: they + were betting that home + +On line 1886: + essence, placed all their chips + on black: they were betting that + home prices would never + +On line 1886: + placed all their chips on + black: they were betting that home + prices would never stop + +On line 1886: + their chips on black: they + were betting that home prices would + never stop rising. + +On line 1888: + black: they were betting + that home prices would never stop + rising. This was the + +On line 1888: + were betting that home + prices would never stop rising. + This was the only + +On line 1888: + prices would never stop + rising. This was the only + scenario that would keep + +On line 1888: + rising. This was the + only scenario that would keep + the mortgage machine + +On line 1888: + scenario that would keep + the mortgage machine humming. + The evidence is + +On line 1888: + the mortgage machine + humming. The evidence is + present in our case study + +On line 1888: + The evidence is + present in our case study mortgage-backed + security, CMLTI + +On line 1888: + is present in our case + study mortgage-backed security, + CMLTI 2006-NC2, whose loans have + +On line 1888: + present in our case study + mortgage-backed security, CMLTI + 2006-NC2, whose loans have many + +On line 1888: + our case study mortgage-backed + security, CMLTI 2006-NC2, whose + loans have many of the + +On line 1888: + security, CMLTI + 2006-NC2, whose loans have many of the + characteristics + +On line 1890: + 2006-NC2, whose loans have many + of the characteristics + just described. The loans + +On line 1890: + deal were adjustable-rate and + fixed-rate residential mortgages + originated by + +On line 1890: + fixed-rate residential + mortgages originated by + New Century. They + +On line 1892: + home price of in The + vast majority had a + 30-year maturity, + +On line 1892: + price of in The vast + majority had a 30-year + maturity, and + +On line 1894: + were originated + in May, June, and July just + after national + +On line 1894: + May, June, and July + just after national home + prices had peaked. More than + +On line 1894: + June, and July just + after national home prices + had peaked. More than were + +On line 1894: + after national + home prices had peaked. More than were + reportedly for + +On line 1894: + reportedly for + primary residences, with + for home purchases + +On line 1896: + residences, with for + home purchases and for cash-out + refinancings. The + +On line 1896: + for home purchases + and for cash-out refinancings. + The loans were from all + +On line 1896: + home purchases and + for cash-out refinancings. The + loans were from all states + +On line 1896: + purchases and for + cash-out refinancings. The loans + were from all states and + +On line 1896: + were from all states and + the District of Columbia, + but more than a fifth + +On line 1896: + from all states and the + District of Columbia, but + more than a fifth came + +On line 1896: + but more than a fifth + came from California and + more than a tenth from + +On line 1898: + and more than a tenth + from Florida.62 About of the + loans were ARMs, and most + +On line 1898: + more than a tenth from + Florida.62 About of the loans + were ARMs, and most of + +On line 1898: + tenth from Florida.62 + About of the loans were ARMs, and + most of these were 2/28s + +On line 1898: + from Florida.62 About + of the loans were ARMs, and most + of these were 2/28s or + +On line 1898: + Florida.62 About of + the loans were ARMs, and most of + these were 2/28s or 3/27s. + +On line 1898: + About of the loans were + ARMs, and most of these were 2/28s + or 3/27s. In a twist, + +On line 1898: + of the loans were ARMs, + and most of these were 2/28s or + 3/27s. In a twist, many + +On line 1898: + the loans were ARMs, and + most of these were 2/28s or 3/27s. + In a twist, many of + +On line 1898: + loans were ARMs, and most + of these were 2/28s or 3/27s. In + a twist, many of these + +On line 1898: + ARMs, and most of these + were 2/28s or 3/27s. In a twist, + many of these hybrid + +On line 1898: + and most of these were + 2/28s or 3/27s. In a twist, many + of these hybrid ARMs + +On line 1898: + most of these were 2/28s + or 3/27s. In a twist, many of + these hybrid ARMs had + +On line 1898: + In a twist, many of + these hybrid ARMs had other + "affordability + +On line 1898: + these hybrid ARMs had + other "affordability + features" as well. For + +On line 1898: + more than of the ARMs + were interest-only—during + the first two or three + +On line 1898: + than of the ARMs were + interest-only—during the + first two or three years, + +On line 1898: + first two or three years, + not only would borrowers + pay a lower fixed + +On line 1898: + two or three years, not + only would borrowers pay + a lower fixed rate, + +On line 1898: + years, not only would + borrowers pay a lower + fixed rate, they would not + +On line 1898: + would borrowers pay + a lower fixed rate, they would + not have to pay any + +On line 1898: + pay a lower fixed + rate, they would not have to pay + any principal. In + +On line 1898: + fixed rate, they would not + have to pay any principal. + In addition, more + +On line 1898: + rate, they would not have + to pay any principal. In + addition, more than + +On line 1898: + not have to pay any + principal. In addition, + more than of the ARMs + +On line 1898: + pay any principal. + In addition, more than of + the ARMs were hybrid + +On line 1898: + In addition, more + than of the ARMs were hybrid + balloon" loans, in which + +On line 1898: + more than of the ARMs + were hybrid balloon" loans, in + which the principal + +On line 1898: + than of the ARMs were + hybrid balloon" loans, in which + the principal would + +On line 1898: + balloon" loans, in which + the principal would amortize + over years—lowering the + +On line 1898: + which the principal + would amortize over years—lowering + the monthly payments + +On line 1898: + the principal would + amortize over years—lowering the + monthly payments even + +On line 1898: + over years—lowering the + monthly payments even further, + but as a result + +On line 1898: + payments even further, + but as a result leaving + the borrower with + +On line 1898: + result leaving the + borrower with a final + principal payment + +On line 1898: + borrower with a + final principal payment + at the end of the + +On line 1900: + end of the 30-year term. + The great majority of + the pool was secured + +On line 1900: + of the 30-year term. The + great majority of the + pool was secured by + +On line 1900: + the 30-year term. The great + majority of the pool + was secured by first + +On line 1900: + great majority + of the pool was secured by + first mortgages; of these, + +On line 1900: + majority of + the pool was secured by first + mortgages; of these, had + +On line 1900: + pool was secured by + first mortgages; of these, had a + piggyback mortgage + +On line 1900: + mortgages; of these, had + a piggyback mortgage on + the same property. + +On line 1900: + piggyback mortgage + on the same property. As + a result, more than + +On line 1900: + mortgage on the same + property. As a result, + more than one-third of the + +On line 1900: + the same property. + As a result, more than one-third + of the mortgages in + +On line 1900: + same property. As + a result, more than one-third of + the mortgages in this + +On line 1900: + property. As a + result, more than one-third of the + mortgages in this deal + +On line 1900: + a result, more than + one-third of the mortgages in this + deal had a combined + +On line 1902: + ratio between and + Raising the risk a bit more, + of the mortgages were + +On line 1902: + between and Raising + the risk a bit more, of the + mortgages were no-doc + +On line 1902: + and Raising the risk + a bit more, of the mortgages + were no-doc loans. The + +On line 1902: + Raising the risk a + bit more, of the mortgages were + no-doc loans. The rest + +On line 1904: + a bit more, of the + mortgages were no-doc loans. The + rest were "full-doc," + +On line 1904: + more, of the mortgages + were no-doc loans. The rest were + "full-doc," although + +On line 1904: + no-doc loans. The rest + were "full-doc," although their + documentation + +On line 1904: + "full-doc," although + their documentation was + fuller in some cases + +On line 1904: + documentation + was fuller in some cases than + in others.63 In sum, + +On line 1904: + fuller in some cases + than in others.63 In sum, the + loans bundled in this + +On line 1904: + in some cases than + in others.63 In sum, the loans + bundled in this deal + +On line 1904: + in others.63 In sum, + the loans bundled in this deal + mirrored the market: + +On line 1904: + the loans bundled in + this deal mirrored the market: + complex products with + +On line 1904: + bundled in this deal + mirrored the market: complex + products with high LTVs + +On line 1904: + this deal mirrored the + market: complex products with + high LTVs and little + +On line 1904: + high LTVs and little + documentation. And even + as many warned of this + +On line 1904: + warned of this toxic + mix, the regulators were + not on the same page. + +On line 1906: + not on the same page. + FEDERAL REGULATORS: + "IMMUNITY FROM + +On line 1910: + MANY STATE LAWS IS A + SIGNIFICANT BENEFIT" + For years, some states had + +On line 1910: + the mortgage business, + especially to clamp down + on the predatory + +On line 1910: + predatory mortgages + proliferating in the + subprime market. The + +On line 1910: + proliferating + in the subprime market. The + national thrifts and + +On line 1910: + the subprime market. + The national thrifts and banks + and their federal + +On line 1910: + The national thrifts + and banks and their federal + regulators—the + +On line 1910: + Thrift Supervision + (OTS) and the Office of the + Comptroller of the + +On line 1910: + of the Currency + (OCC), respectively—resisted + the tates’ efforts to + +On line 1910: + to regulate those + national banks and thrifts. The + companies claimed that + +On line 1910: + national banks and + thrifts. The companies claimed that + without one uniform + +On line 1910: + thrifts. The companies + claimed that without one uniform + set of rules, they could + +On line 1910: + The companies claimed + that without one uniform set + of rules, they could not + +On line 1910: + claimed that without one + uniform set of rules, they could + not easily do + +On line 1910: + one uniform set of + rules, they could not easily + do business across the + +On line 1910: + set of rules, they could + not easily do business + across the country, and + +On line 1910: + of rules, they could not + easily do business across + the country, and the + +On line 1910: + not easily do + business across the country, and + the regulators + +On line 1910: + regulators agreed. + In August as the market + for riskier subprime + +On line 1910: + In August as the + market for riskier subprime + and AltA loans grew, and + +On line 1910: + as the market for + riskier subprime and AltA loans + grew, and as lenders piled + +On line 1910: + market for riskier + subprime and AltA loans grew, and + as lenders piled on more + +On line 1910: + for riskier subprime + and AltA loans grew, and as lenders + piled on more risk with + +On line 1910: + subprime and AltA loans + grew, and as lenders piled on more + risk with smaller down + +On line 1910: + and AltA loans grew, and + as lenders piled on more risk with + smaller down payments, + +On line 1910: + loans grew, and as lenders + piled on more risk with smaller + down payments, reduced + +On line 1910: + piled on more risk with + smaller down payments, reduced + documentation + +On line 1910: + interest-only loans, + and payment-option loans, the + OCC fired a salvo. + +On line 1910: + and payment-option + loans, the OCC fired a salvo. + The OCC proposed strong + +On line 1910: + loans, the OCC fired a + salvo. The OCC proposed strong + preemption rules for + +On line 1910: + fired a salvo. The + OCC proposed strong preemption + rules for national + +On line 1910: + a salvo. The OCC + proposed strong preemption rules + for national banks, + +On line 1910: + rules for national + banks, nearly identical to + earlier OTS rules + +On line 1910: + rules that empowered + nationally chartered thrifts + to disregard state + +On line 1912: + thrifts to disregard + state consumer laws.64 Back in the + OTS had issued rules + +On line 1912: + state consumer laws.64 Back + in the OTS had issued rules + saying federal + +On line 1912: + for federally + regulated thrifts.65 In the + OTS referred to these + +On line 1912: + regulated thrifts.65 + In the OTS referred to these + rules in issuing + +On line 1912: + In the OTS referred + to these rules in issuing + four opinion letters + +On line 1912: + referred to these rules + in issuing four opinion + letters declaring that + +On line 1912: + rules in issuing + four opinion letters declaring + that laws in Georgia, + +On line 1912: + in issuing four + opinion letters declaring that + laws in Georgia, New + +On line 1912: + four opinion letters + declaring that laws in Georgia, + New York, New Jersey, + +On line 1912: + declaring that laws in + Georgia, New York, New Jersey, + and New Mexico + +On line 1912: + that laws in Georgia, + New York, New Jersey, and New + Mexico did not + +On line 1912: + Georgia, New York, New + Jersey, and New Mexico + did not apply to + +On line 1912: + New Jersey, and New + Mexico did not apply + to national thrifts. + +On line 1912: + did not apply to + national thrifts. In the New + Mexico opinion, + +On line 1912: + national thrifts. In + the New Mexico opinion, + the regulator + +On line 1912: + the New Mexico + opinion, the regulator + pronounced invalid New + +On line 1912: + pronounced invalid New + Mexico’s bans on balloon + payments, negative + +On line 1912: + on balloon payments, + negative amortization, + prepayment penalties, + +On line 1912: + payments, negative + amortization, prepayment + penalties, loan flipping, + +On line 1912: + penalties, loan flipping, + and lending without regard + to the borrower’s + +On line 1914: + to the borrower’s + ability to repay. The + Comptroller of the + +On line 1914: + Comptroller of the + Currency took the same line + on the national + +On line 1914: + it regulated, + offering preemption as + an inducement to + +On line 1916: + as an inducement + to use a national bank + charter. In a speech, + +On line 1916: + inducement to use + a national bank charter. + In a speech, before + +On line 1916: + a national bank + charter. In a speech, before + the final OCC rules + +On line 1916: + charter. In a speech, + before the final OCC rules + were passed, Comptroller + +On line 1916: + In a speech, before + the final OCC rules were passed, + Comptroller John D. + +On line 1918: + the final OCC rules + were passed, Comptroller John D. + Hawke Jr. pointed to + +On line 1918: + many state laws" as "a + significant benefit + of the national + +On line 1918: + of the national + charter—a benefit that the + OCC has fought hard over + +On line 1918: + national charter—a + benefit that the OCC has + fought hard over the years + +On line 1918: + charter—a benefit + that the OCC has fought hard over + the years to preserve."66 + +On line 1918: + benefit that the + OCC has fought hard over the years + to preserve."66 In an + +On line 1918: + that the OCC has fought + hard over the years to preserve."66 + In an interview + +On line 1918: + the OCC has fought hard + over the years to preserve."66 In + an interview that + +On line 1918: + OCC has fought hard over + the years to preserve."66 In an + interview that year, + +On line 1918: + hard over the years to + preserve."66 In an interview + that year, Hawke explained + +On line 1918: + the years to preserve."66 + In an interview that year, + Hawke explained that the + +On line 1918: + In an interview + that year, Hawke explained that the + potential loss of + +On line 1918: + that year, Hawke explained + that the potential loss of + regulatory + +On line 1918: + that the potential + loss of regulatory + market share for the + +On line 1918: + potential loss of + regulatory market + share for the OCC "was + +On line 1920: + OCC "was a matter + of concern."67 In August the + OCC issued its first + +On line 1920: + matter of concern."67 + In August the OCC issued + its first preemptive + +On line 1920: + the OCC issued its + first preemptive order, aimed + at Georgia’s mini-HOEPA statute, + +On line 1920: + OCC issued its first + preemptive order, aimed at + Georgia’s mini-HOEPA statute, and + +On line 1920: + preemptive order, + aimed at Georgia’s mini-HOEPA statute, and + in January the + +On line 1920: + at Georgia’s mini-HOEPA statute, + and in January the OCC + adopted a sweeping + +On line 1920: + adopted a sweeping + preemption rule applying + to all state laws that + +On line 1920: + sweeping preemption + rule applying to all state + laws that interfered + +On line 1920: + applying to all + state laws that interfered with + or placed conditions + +On line 1920: + on national banks’ + ability to lend. Shortly + afterward, three large + +On line 1920: + banks’ ability to + lend. Shortly afterward, three + large banks with combined + +On line 1920: + afterward, three large + banks with combined assets of + more than trillion said + +On line 1920: + large banks with combined + assets of more than trillion + said they would convert + +On line 1920: + with combined assets + of more than trillion said they + would convert from state + +On line 1920: + assets of more than + trillion said they would convert + from state charters to + +On line 1920: + trillion said they would + convert from state charters to + national charters, + +On line 1920: + they would convert from + state charters to national + charters, which increased + +On line 1922: + another point of + contention in the preemption + battle. In the OCC + +On line 1922: + point of contention in + the preemption battle. In + the OCC had adopted + +On line 1922: + of contention in the + preemption battle. In the + OCC had adopted a + +On line 1922: + OCC had adopted a + regulation preempting + state law regarding + +On line 1922: + regarding state-chartered + operating subsidiaries of + national banks. In + +On line 1922: + of national banks. + In response, several large + national banks moved + +On line 1922: + into subsidiaries and + asserted that the subsidiaries + were exempt from state + +On line 1922: + and asserted that + the subsidiaries were exempt from + state mortgage lending + +On line 1922: + asserted that the + subsidiaries were exempt from state + mortgage lending laws. + +On line 1924: + subsidiaries were exempt + from state mortgage lending laws. + Four states challenged the + +On line 1924: + lending laws. Four states + challenged the regulation, + but the Supreme Court ruled + +On line 1924: + laws. Four states challenged + the regulation, but the + Supreme Court ruled against them + +On line 1924: + Four states challenged the + regulation, but the Supreme + Court ruled against them in + +On line 1928: + the regulation, + but the Supreme Court ruled against them + in Once OCC and OTS + +On line 1928: + but the Supreme Court ruled + against them in Once OCC and OTS + preemption was in + +On line 1928: + Court ruled against them in + Once OCC and OTS preemption + was in place, the two + +On line 1928: + them in Once OCC and + OTS preemption was in place, + the two federal + +On line 1928: + lending practices by + national banks and thrifts and + their direct subsidiaries. + +On line 1928: + national banks and + thrifts and their direct subsidiaries. + Comptroller John Dugan, + +On line 1928: + thrifts and their direct + subsidiaries. Comptroller John Dugan, + who succeeded Hawke, + +On line 1928: + Dugan, who succeeded + Hawke, defended preemption, + noting that of all + +On line 1928: + preemption, noting + that of all nonprime mortgages + were made by lenders that + +On line 1928: + noting that of all + nonprime mortgages were made by + lenders that were subject + +On line 1928: + that of all nonprime + mortgages were made by lenders that + were subject to state + +On line 1928: + nonprime mortgages were + made by lenders that were subject + to state law. Well over + +On line 1928: + mortgages were made by + lenders that were subject to state + law. Well over half were + +On line 1928: + were made by lenders that + were subject to state law. Well + over half were made by + +On line 1928: + lenders that were subject + to state law. Well over half were + made by mortgage lenders + +On line 1928: + that were subject to + state law. Well over half were made + by mortgage lenders that + +On line 1928: + were subject to state + law. Well over half were made by + mortgage lenders that were + +On line 1928: + state law. Well over half + were made by mortgage lenders that + were exclusively + +On line 1928: + were made by mortgage + lenders that were exclusively + subject to state law."70 + +On line 1928: + mortgage lenders that were + exclusively subject to + state law."70 Lisa Madigan, + +On line 1928: + state law."70 Lisa Madigan, + the attorney general + of Illinois, flipped the + +On line 1928: + of Illinois, flipped the + argument around, noting that + national banks and + +On line 1928: + flipped the argument + around, noting that national + banks and thrifts, and their + +On line 1928: + that national banks + and thrifts, and their subsidiaries, were + heavily involved + +On line 1928: + heavily involved + in subprime lending. Using + different data, + +On line 1928: + different data, + she contended: "National + banks and federal + +On line 1928: + and their subsidiaries were + responsible for almost + percent of subprime + +On line 1928: + responsible for + almost percent of subprime + mortgage loans, percent + +On line 1928: + almost percent of + subprime mortgage loans, percent + of the Alt-A loans, and + +On line 1928: + percent of subprime + mortgage loans, percent of the + Alt-A loans, and percent + +On line 1928: + of subprime mortgage + loans, percent of the Alt-A loans, + and percent of the + +On line 1928: + mortgage loans, percent + of the Alt-A loans, and percent + of the pay-option and + +On line 1928: + of the Alt-A loans, and + percent of the pay-option and + interest-only ARMs + +On line 1928: + of the pay-option and + interest-only ARMs that were + sold." Madigan told the + +On line 1930: + and interest-only + ARMs that were sold." Madigan told + the FCIC: Even as the + +On line 1930: + interest-only ARMs + that were sold." Madigan told the + FCIC: Even as the Fed + +On line 1930: + that were sold." Madigan + told the FCIC: Even as the Fed + was doing little + +On line 1930: + were sold." Madigan told + the FCIC: Even as the Fed was + doing little to + +On line 1930: + Madigan told the FCIC: + Even as the Fed was doing + little to protect + +On line 1930: + told the FCIC: Even as + the Fed was doing little + to protect consumers + +On line 1930: + the FCIC: Even as the + Fed was doing little to + protect consumers and + +On line 1930: + the Fed was doing + little to protect consumers + and our financial + +On line 1930: + was doing little + to protect consumers and our + financial system + +On line 1930: + to protect consumers + and our financial system + from the effects of + +On line 1930: + and our financial + system from the effects of + predatory lending, + +On line 1930: + lending, the OCC and + OTS were actively engaged + in a campaign to + +On line 1930: + the OCC and OTS were + actively engaged in a + campaign to thwart state + +On line 1930: + OTS were actively + engaged in a campaign to + thwart state efforts to + +On line 1930: + actively engaged + in a campaign to thwart state + efforts to avert the + +On line 1930: + in a campaign to + thwart state efforts to avert the + coming crisis. In + +On line 1930: + campaign to thwart state + efforts to avert the coming + crisis. In the wake + +On line 1930: + to thwart state efforts + to avert the coming crisis. + In the wake of the + +On line 1930: + efforts to avert the + coming crisis. In the wake + of the federal + +On line 1930: + coming crisis. In + the wake of the federal + regulators’ push + +On line 1930: + In the wake of the + federal regulators’ + push to curtail state + +On line 1930: + push to curtail state + authority, many of the + largest mortgage-lenders shed + +On line 1930: + authority, many + of the largest mortgage-lenders shed + their state licenses + +On line 1930: + the largest mortgage-lenders + shed their state licenses and + sought shelter behind + +On line 1930: + largest mortgage-lenders shed + their state licenses and sought + shelter behind the + +On line 1930: + state licenses and + sought shelter behind the shield + of a national + +On line 1930: + sought shelter behind + the shield of a national + charter. And I think + +On line 1930: + behind the shield of + a national charter. And + I think that it is + +On line 1930: + national charter. + And I think that it is no + coincidence that + +On line 1930: + I think that it is + no coincidence that the + era of expanded + +On line 1932: + nation’s history.71 + Comptroller Hawke offered the + FCIC a different + +On line 1932: + suggested that the + OCC’s actions on preemption + have been a grab for + +On line 1932: + that the OCC’s actions + on preemption have been a + grab for power, the + +On line 1932: + the OCC’s actions on + preemption have been a grab + for power, the fact + +On line 1932: + preemption have been + a grab for power, the fact + is that the agency + +On line 1932: + have been a grab for + power, the fact is that the + agency has simply + +On line 1932: + grab for power, the + fact is that the agency has + simply responded + +On line 1932: + to increasingly + aggressive initiatives at + the state level to + +On line 1932: + level to control + the banking activities + of federally + +On line 1938: + depended on a + complex supply chain, largely + funded through short-term + +On line 1938: + supply chain, largely + funded through short-term lending + in the commercial + +On line 1938: + chain, largely funded + through short-term lending in the + commercial paper + +On line 1938: + funded through short-term + lending in the commercial + paper and repo + +On line 1938: + through short-term lending + in the commercial paper + and repo market—which + +On line 1938: + short-term lending in + the commercial paper and + repo market—which would + +On line 1938: + repo market—which would + become critical as the + financial crisis + +On line 1938: + become critical + as the financial crisis + began to unfold + +On line 1940: + critical as the + financial crisis began + to unfold in These + +On line 1940: + securities but + by highly rated mortgage + securities backed + +On line 1940: + by highly rated + mortgage securities backed + by increasingly + +On line 1940: + increasingly risky + loans. Independent mortgage + originators such + +On line 1940: + originate mortgages + from warehouse lines of credit + extended by banks, + +On line 1940: + mortgages from warehouse + lines of credit extended + by banks, from their own + +On line 1942: + paper programs, or + from money borrowed in the + repo market. For + +On line 1942: + from money borrowed + in the repo market. For + commercial banks such + +On line 1942: + the repo market. + For commercial banks such as + Citigroup, warehouse + +On line 1942: + multibillion-dollar + business. From to Citigroup + made available at any + +On line 1942: + From to Citigroup + made available at any one time + as much as billion + +On line 1942: + to Citigroup made + available at any one time as + much as billion in + +On line 1942: + made available at any + one time as much as billion + in warehouse lines of + +On line 1942: + at any one time as + much as billion in warehouse + lines of credit to + +On line 1942: + one time as much as + billion in warehouse lines of + credit to mortgage + +On line 1942: + including million + to New Century and more + than billion to Ameriquest.73 + +On line 1944: + to New Century + and more than billion to Ameriquest.73 + Citigroup CEO Chuck + +On line 1944: + and more than billion + to Ameriquest.73 Citigroup CEO Chuck + Prince told the FCIC he + +On line 1944: + more than billion to + Ameriquest.73 Citigroup CEO Chuck Prince + told the FCIC he would + +On line 1944: + than billion to Ameriquest.73 + Citigroup CEO Chuck Prince told + the FCIC he would not + +On line 1944: + to Ameriquest.73 Citigroup + CEO Chuck Prince told the FCIC he + would not have approved, + +On line 1944: + Ameriquest.73 Citigroup CEO + Chuck Prince told the FCIC he would + not have approved, had + +On line 1944: + Citigroup CEO Chuck + Prince told the FCIC he would not + have approved, had he + +On line 1944: + CEO Chuck Prince told the + FCIC he would not have approved, + had he known. "I found + +On line 1944: + Chuck Prince told the FCIC + he would not have approved, had + he known. "I found out + +On line 1944: + Prince told the FCIC he + would not have approved, had he + known. "I found out at + +On line 1944: + told the FCIC he would + not have approved, had he known. + "I found out at the + +On line 1944: + the FCIC he would not + have approved, had he known. "I + found out at the end + +On line 1944: + FCIC he would not have + approved, had he known. "I found + out at the end of + +On line 1944: + not have approved, had + he known. "I found out at the + end of my tenure, + +On line 1944: + have approved, had he + known. "I found out at the end + of my tenure, I + +On line 1944: + approved, had he known. + "I found out at the end of + my tenure, I did + +On line 1944: + he known. "I found out + at the end of my tenure, + I did not know it + +On line 1944: + "I found out at the + end of my tenure, I did + not know it before, + +On line 1944: + found out at the end + of my tenure, I did not + know it before, that + +On line 1944: + out at the end of + my tenure, I did not know + it before, that we + +On line 1944: + at the end of my + tenure, I did not know it + before, that we had + +On line 1944: + of my tenure, I + did not know it before, that + we had some warehouse + +On line 1944: + my tenure, I did + not know it before, that we + had some warehouse lines + +On line 1944: + tenure, I did not + know it before, that we had + some warehouse lines out + +On line 1944: + it before, that we + had some warehouse lines out to + some originators. + +On line 1944: + before, that we had + some warehouse lines out to some + originators. And + +On line 1944: + had some warehouse lines + out to some originators. + And I think getting + +On line 1944: + some warehouse lines out + to some originators. And + I think getting that + +On line 1944: + warehouse lines out to + some originators. And I + think getting that close + +On line 1944: + originators. And + I think getting that close to + the origination + +On line 1946: + I think getting that + close to the origination + function— being that + +On line 1946: + getting that close to + the origination function— + being that involved + +On line 1946: + products—is something + that I wasn’t comfortable + with and that I did + +On line 1946: + wasn’t comfortable + with and that I did not view + as consistent with + +On line 1946: + with and that I did + not view as consistent with + the prescription I + +On line 1946: + and that I did not + view as consistent with the + prescription I had + +On line 1946: + consistent with the + prescription I had laid down + for the company + +On line 1946: + prescription I had + laid down for the company + not to be involved + +On line 1948: + to be involved in + originating these products."74 + As early as Moody’s + +On line 1948: + originating these + products."74 As early as Moody’s + called the new asset-backed + +On line 1948: + products."74 As early + as Moody’s called the new asset-backed + commercial paper + +On line 1948: + early as Moody’s called + the new asset-backed commercial + paper (ABCP) programs + +On line 1948: + as Moody’s called the new + asset-backed commercial paper + (ABCP) programs "a whole + +On line 1948: + ball game."75 As asset-backed + commercial paper became + a popular method + +On line 1948: + commercial paper + became a popular method + to fund the mortgage + +On line 1948: + paper became a + popular method to fund the + mortgage business, it + +On line 1948: + popular method to + fund the mortgage business, it + grew from about one-quarter + +On line 1948: + mortgage business, it + grew from about one-quarter to about + one-half of commercial + +On line 1948: + business, it grew from + about one-quarter to about one-half of + commercial paper + +On line 1948: + grew from about one-quarter + to about one-half of commercial + paper sold between + +On line 1950: + about one-quarter to about + one-half of commercial paper + sold between and n + +On line 1950: + one-half of commercial + paper sold between and n + only five mortgage + +On line 1950: + paper sold between + and n only five mortgage + companies borrowed + +On line 1950: + companies borrowed + a total of billion through + asset-backed commercial + +On line 1950: + borrowed billion.76 For + instance, Countrywide launched the + commercial paper + +On line 1950: + instance, Countrywide + launched the commercial paper + programs Park Granada + +On line 1952: + Countrywide launched the + commercial paper programs + Park Granada in and + +On line 1952: + commercial paper + programs Park Granada in and + Park Sienna in + +On line 1952: + Park Granada in and + Park Sienna in By May + it was borrowing + +On line 1952: + in By May it was + borrowing billion through Park + Granada and billion + +On line 1952: + borrowing billion + through Park Granada and billion + through Park Sienna. + +On line 1952: + through Park Granada and + billion through Park Sienna. + These programs would house + +On line 1952: + through Park Sienna. + These programs would house subprime + and other mortgages + +On line 1952: + These programs would house + subprime and other mortgages + until they were sold.78 + +On line 1954: + would house subprime and + other mortgages until they + were sold.78 Commercial + +On line 1954: + subprime and other + mortgages until they were sold.78 + Commercial banks used + +On line 1954: + mortgages until they + were sold.78 Commercial banks used + commercial paper, + +On line 1956: + arbitrage. When banks + kept mortgages on their balance + sheets, regulators + +On line 1956: + kept mortgages on their + balance sheets, regulators + required them to hold + +On line 1956: + required them to hold + in capital to protect + against loss. When banks put + +On line 1956: + hold in capital + to protect against loss. When banks + put mortgages into + +On line 1956: + against loss. When banks put + mortgages into off-balance-sheet + entities such as + +On line 1956: + such as commercial + paper programs, there was no + capital charge (in + +On line 1956: + programs, there was no + capital charge (in a small + charge was imposed). But + +On line 1956: + no capital charge + (in a small charge was imposed). + But to make the deals + +On line 1956: + capital charge (in + a small charge was imposed). But + to make the deals work + +On line 1956: + charge (in a small charge + was imposed). But to make the + deals work for investors, + +On line 1956: + (in a small charge was + imposed). But to make the deals + work for investors, banks + +On line 1956: + small charge was imposed). + But to make the deals work for + investors, banks had to + +On line 1956: + was imposed). But to + make the deals work for investors, + banks had to provide + +On line 1956: + banks had to provide + liquidity support to + these programs, for which + +On line 1956: + which they earned a fee. + This liquidity support + meant that the bank would + +On line 1956: + the bank would purchase, + at a previously set + price, any commercial + +On line 1956: + would purchase, at a + previously set price, any + commercial paper + +On line 1956: + commercial paper + that investors were unwilling + to buy when it came + +On line 1956: + buy when it came up + for renewal. During the + financial crisis + +On line 1956: + renewal. During + the financial crisis these + promises had to be + +On line 1956: + financial crisis + these promises had to be kept, + eventually putting + +On line 1956: + these promises had to + be kept, eventually putting + substantial pressure + +On line 1958: + kept, eventually + putting substantial pressure on + banks’ balance sheets. When + +On line 1958: + eventually putting + substantial pressure on banks’ + balance sheets. When the + +On line 1958: + the private group that + establishes standards for + financial reports, + +On line 1958: + financial reports, + responded to the Enron + scandal by making + +On line 1958: + reports, responded + to the Enron scandal by + making it harder + +On line 1958: + the Enron scandal + by making it harder for + companies to get + +On line 1958: + scandal by making + it harder for companies + to get off-balance-sheet + +On line 1958: + for these programs, the + favorable capital rules + were in jeopardy. The + +On line 1958: + jeopardy. The asset-backed + commercial paper market + stalled. Banks protested that + +On line 1958: + commercial paper + market stalled. Banks protested that + their programs differed + +On line 1958: + stalled. Banks protested that + their programs differed from the + practices at Enron + +On line 1958: + programs differed from + the practices at Enron and + should be excluded + +On line 1958: + practices at Enron + and should be excluded from + the new standards. In + +On line 1958: + new standards. In bank + regulators responded + by proposing to let + +On line 1958: + bank regulators + responded by proposing to + let banks remove these + +On line 1958: + by proposing to let + banks remove these assets from + their balance sheets when + +On line 1958: + let banks remove these + assets from their balance sheets + when calculating + +On line 1958: + introduced for the + first time a capital charge + amounting to at most + +On line 1958: + time a capital + charge amounting to at most of + the liquidity + +On line 1958: + to at most of the + liquidity support banks + provided to the + +On line 1958: + association, + called that charge "arbitrary," and + State Street Bank complained + +On line 1958: + announced a final + rule setting the charge at up + to or half the amount + +On line 1958: + final rule setting + the charge at up to or half + the amount of the first + +On line 1958: + setting the charge at + up to or half the amount of + the first proposal. + +On line 1958: + the charge at up to + or half the amount of the first + proposal. Growth in + +On line 1958: + up to or half the + amount of the first proposal. + Growth in this market + +On line 1958: + or half the amount of + the first proposal. Growth in + this market resumed. + +On line 1960: + the first proposal. + Growth in this market resumed. + Regulatory + +On line 1960: + Growth in this market + resumed. Regulatory + changes—in this case, changes + +On line 1960: + this market resumed. + Regulatory changes—in + this case, changes in the + +On line 1960: + Regulatory + changes—in this case, changes in the + bankruptcy laws—also + +On line 1960: + changes—in this case, changes + in the bankruptcy laws—also + boosted growth in the + +On line 1960: + this case, changes in the + bankruptcy laws—also boosted + growth in the repo + +On line 1960: + in the bankruptcy + laws—also boosted growth in the + repo market by + +On line 1960: + laws—also boosted growth + in the repo market by + transforming the types + +On line 1960: + transforming the types + of repo collateral. + Prior to repo + +On line 1960: + the types of repo + collateral. Prior to + repo lenders had clear + +On line 1960: + repo lenders had clear + and immediate rights to + their collateral + +On line 1960: + their collateral + following the borrower’s + bankruptcy only + +On line 1960: + In the Bankruptcy + Abuse Prevention and Consumer + Protection Act of + +On line 1960: + Abuse Prevention and + Consumer Protection Act of + Congress expanded + +On line 1960: + Consumer Protection + Act of Congress expanded + that provision to + +On line 1960: + Congress expanded + that provision to include + many other assets, + +On line 1960: + that provision to + include many other assets, + including mortgage + +On line 1960: + including mortgage + loans, mortgage-backed securities, + collateralized + +On line 1960: + collateralized + debt obligations, and certain + derivatives. The + +On line 1960: + reliant on highly + rated non-agency mortgage-backed + securities; but + +On line 1960: + rated non-agency + mortgage-backed securities; but + beginning in mid-2007, + +On line 1960: + securities; but + beginning in mid-2007, when banks + and investors became + +On line 1960: + in mid-2007, when banks and + investors became skittish about + the mortgage market, + +On line 1960: + they would prove to be + an unstable funding source + (see figure Once the + +On line 1960: + be an unstable + funding source (see figure Once + the crisis hit, these + +On line 1960: + Once the crisis hit, + these "illiquid, hard-to-value + securities made + +On line 1960: + a greater share of the + tri-party repo market + than most people would + +On line 1960: + tri-party repo + market than most people would + have wanted," Darryll + +On line 1960: + repo market than + most people would have wanted," + Darryll Hendricks, a + +On line 1960: + most people would have + wanted," Darryll Hendricks, a + UBS executive + +On line 1960: + Darryll Hendricks, a + UBS executive and chair + of a New York Fed + +On line 1960: + executive and + chair of a New York Fed task + force examining + +On line 1960: + chair of a New York + Fed task force examining + the repo market + +On line 1960: + New York Fed task force + examining the repo + market after the + +On line 1960: + force examining + the repo market after + the crisis, told the + +On line 1962: + market after the + crisis, told the Commission.80 + Our sample deal, CMLTI + +On line 1962: + the crisis, told the + Commission.80 Our sample deal, + CMLTI 2006-NC2, shows how these + +On line 1962: + told the Commission.80 + Our sample deal, CMLTI 2006-NC2, shows + how these funding and + +On line 1962: + worked in practice. Eight + banks and securities firms + provided most of + +On line 1962: + provided most of + the money New Century + needed to make the + +On line 1962: + most of the money + New Century needed to + make the mortgages it + +On line 1962: + of the money New + Century needed to make + the mortgages it would + +On line 1962: + Century needed + to make the mortgages it would + sell to Citigroup. + +On line 1964: + to make the mortgages + it would sell to Citigroup. + Most of the funds came + +On line 1964: + make the mortgages it + would sell to Citigroup. Most + of the funds came through + +On line 1964: + mortgages it would sell + to Citigroup. Most of the + funds came through repo + +On line 1964: + to Citigroup. Most + of the funds came through repo + agreements from a set + +On line 1964: + Most of the funds came + through repo agreements from a + set of banks—including + +On line 1964: + Barclays Capital, + a division of a U.K.-based + bank million); Bank of + +On line 1964: + a division of + a U.K.-based bank million); Bank of + America million); + +On line 1964: + a U.K.-based bank million); + Bank of America million); + and Bear Stearns million).81 + +On line 1964: + U.K.-based bank million); Bank + of America million); and + Bear Stearns million).81 The + +On line 1964: + Bank of America + million); and Bear Stearns million).81 + The financing was + +On line 1964: + million); and Bear Stearns + million).81 The financing was + provided when New + +On line 1964: + Bear Stearns million).81 The + financing was provided + when New Century + +On line 1964: + provided when New + Century originated + these mortgages; so for + +On line 1964: + when New Century + originated these mortgages; + so for about two months, + +On line 1964: + originated these + mortgages; so for about two months, + New Century owed + +On line 1964: + so for about two months, + New Century owed these banks + approximately + +On line 1964: + New Century owed + these banks approximately + million secured by + +On line 1964: + its own commercial + paper program. On August + Citigroup paid New + +On line 1964: + paper program. On + August Citigroup paid New + Century million + +On line 1964: + August Citigroup + paid New Century million + for the mortgages (and + +On line 1964: + Citigroup paid New + Century million for the + mortgages (and accrued + +On line 1964: + paid New Century + million for the mortgages (and + accrued interest), + +On line 1964: + Century million + for the mortgages (and accrued + interest), and New + +On line 1964: + for the mortgages (and + accrued interest), and New + Century repaid + +On line 1966: + lenders after keeping + a million premium.82 The + investors in the deal + +On line 1968: + keeping a million + premium.82 The investors in + the deal Investors for + +On line 1968: + in the deal Investors + for mortgage-backed securities + came from all over the + +On line 1968: + the deal Investors for + mortgage-backed securities came + from all over the globe; + +On line 1968: + Investors for mortgage-backed + securities came from all + over the globe; what made + +On line 1968: + over the globe; what made + securitization work + were the customized + +On line 1970: + were the customized + tranches catering to every + one of them. CMLTI 2006-NC2 + +On line 1970: + to every one of + them. CMLTI 2006-NC2 had tranches, whose + investors are shown in + +On line 1970: + of them. CMLTI 2006-NC2 had + tranches, whose investors are shown + in figure Fannie + +On line 1970: + 2006-NC2 had tranches, whose + investors are shown in figure + Fannie Mae bought the + +On line 1970: + tranches, whose investors + are shown in figure Fannie + Mae bought the entire + +On line 1970: + whose investors are shown + in figure Fannie Mae bought + the entire million + +On line 1970: + investors are shown in + figure Fannie Mae bought the + entire million triple-A-rated + +On line 1970: + are shown in figure + Fannie Mae bought the entire + million triple-A-rated A1 tranche, + +On line 1970: + in figure Fannie + Mae bought the entire million + triple-A-rated A1 tranche, which paid + +On line 1970: + figure Fannie Mae + bought the entire million triple-A-rated + A1 tranche, which paid a + +On line 1970: + Fannie Mae bought the + entire million triple-A-rated A1 tranche, + which paid a better + +On line 1970: + Mae bought the entire + million triple-A-rated A1 tranche, which paid + a better return + +On line 1970: + entire million triple-A-rated + A1 tranche, which paid a better + return than super-safe + +On line 1970: + a better return + than super-safe U.S. Treasuries.83 The + other triple-A-rated tranches, + +On line 1970: + return than super-safe + U.S. Treasuries.83 The other triple-A-rated + tranches, worth million, + +On line 1970: + super-safe U.S. Treasuries.83 + The other triple-A-rated tranches, worth + million, went to more + +On line 1970: + other triple-A-rated tranches, + worth million, went to more than + institutional + +On line 1970: + worth million, went to + more than institutional + investors around the world, + +On line 1970: + institutional + investors around the world, spreading + the risk globally.84 + +On line 1970: + world, spreading the risk + globally.84 These triple-A tranches + represented of + +On line 1970: + risk globally.84 These + triple-A tranches represented + of the deal. Among the + +On line 1970: + represented of + the deal. Among the buyers were + foreign banks and funds + +On line 1970: + of the deal. Among the + buyers were foreign banks and + funds in China, Italy, + +On line 1970: + deal. Among the buyers + were foreign banks and funds in + China, Italy, France, and + +On line 1970: + buyers were foreign + banks and funds in China, Italy, + France, and Germany; the + +On line 1970: + China, Italy, France, and + Germany; the Federal Home + Loan Bank of Chicago; + +On line 1970: + France, and Germany; the + Federal Home Loan Bank of + Chicago; the Kentucky + +On line 1970: + Federal Home Loan + Bank of Chicago; the Kentucky + Retirement Systems; + +On line 1970: + Bank of Chicago; the + Kentucky Retirement Systems; + a hospital; and + +On line 1970: + a hospital; and + JP Morgan, which purchased part + of the tranche using + +On line 1970: + hospital; and JP + Morgan, which purchased part of + the tranche using cash + +On line 1970: + which purchased part of + the tranche using cash from its + securities-lending + +On line 1970: + the tranche using cash + from its securities-lending + operation.85 (In + +On line 1970: + securities-lending + operation.85 (In other + words, JP Morgan lent + +On line 1970: + operation.85 (In + other words, JP Morgan lent + securities held + +On line 1970: + (In other words, JP + Morgan lent securities + held by its clients to + +On line 1970: + its clients to other + financial institutions + in exchange for cash + +On line 1970: + cash collateral, + and then put that cash to work + investing in this + +On line 1970: + and then put that cash + to work investing in this + deal. Securities + +On line 1970: + to work investing + in this deal. Securities + lending was a large, + +On line 1972: + market.) The middle, + mezzanine tranches in this + deal constituted + +On line 1972: + mezzanine tranches + in this deal constituted + about of the total + +On line 1972: + tranches in this deal + constituted about of the + total value of + +On line 1972: + constituted about + of the total value of + the security. + +On line 1972: + the total value + of the security. If + losses rose above to + +On line 1972: + the security. + If losses rose above to (by + design the threshold + +On line 1972: + If losses rose above + to (by design the threshold + would increase over time), + +On line 1972: + above to (by design + the threshold would increase over + time), investors in the + +On line 1972: + design the threshold + would increase over time), investors + in the residual + +On line 1972: + would increase over time), + investors in the residual + tranches would be wiped + +On line 1972: + over time), investors in + the residual tranches would + be wiped out, and the + +On line 1972: + would be wiped out, and + the mezzanine investors would + start to lose money. + +On line 1972: + lose money. Creators + of collateralized debt + obligations, or CDOs—discussed + +On line 1972: + collateralized + debt obligations, or CDOs—discussed in + the next chapter—bought + +On line 1972: + obligations, or CDOs—discussed + in the next chapter—bought most + of the mezzanine + +On line 1972: + next chapter—bought most + of the mezzanine tranches + rated below triple-A + +On line 1972: + of the mezzanine + tranches rated below triple-A + and nearly all those + +On line 1972: + rated below triple-A + and nearly all those rated + below AA. Only + +On line 1972: + below AA. Only + a few of the highest-rated + mezzanine tranches + +On line 1972: + Only a few of + the highest-rated mezzanine + tranches were not put + +On line 1972: + of the highest-rated + mezzanine tranches were not + put into CDOs. For + +On line 1972: + not put into CDOs. + For example, Cheyne Finance + Limited purchased + +On line 1972: + For example, Cheyne + Finance Limited purchased + million of the top + +On line 1972: + Finance Limited + purchased million of the top + mezzanine tranche. Cheyne—a + +On line 1972: + purchased million of + the top mezzanine tranche. Cheyne—a + structured investment + +On line 1972: + the top mezzanine + tranche. Cheyne—a structured investment + vehicle (SIV)—would be + +On line 1972: + casualties of + the crisis, sparking panic + during the summer + +On line 1974: + during the summer + of Parvest ABS Euribor, + which purchased million + +On line 1974: + which purchased million + of the second mezzanine + tranche,86 would be one of + +On line 1974: + purchased million of + the second mezzanine tranche,86 + would be one of the + +On line 1974: + mezzanine tranche,86 would + be one of the BNP Paribas funds + which helped ignite the + +On line 1974: + be one of the BNP + Paribas funds which helped ignite the + financial crisis + +On line 1974: + the BNP Paribas funds which + helped ignite the financial + crisis that summer.87 + +On line 1976: + financial crisis + that summer.87 Typically, + investors seeking high + +On line 1976: + investors seeking high + returns, such as hedge funds, would + buy the equity + +On line 1976: + seeking high returns, + such as hedge funds, would buy the + equity tranches + +On line 1976: + returns, such as hedge + funds, would buy the equity + tranches of mortgage-backed + +On line 1976: + equity tranches + of mortgage-backed securities; + they would be the first + +On line 1976: + tranches of mortgage-backed + securities; they would be + the first to lose if + +On line 1976: + securities; they + would be the first to lose if + there were problems. These + +On line 1976: + the first to lose if + there were problems. These investors + anticipated + +On line 1976: + there were problems. These + investors anticipated + returns of or even + +On line 1976: + returns of or even + Citigroup retained part of + the residual or + +On line 1976: + Citigroup retained + part of the residual or + "first-loss" tranches, sharing + +On line 1976: + retained part of the + residual or "first-loss" tranches, + sharing the rest with + +On line 1976: + residual or "first-loss" + tranches, sharing the rest with + Capmark Financial + +On line 1978: + tranches, sharing the + rest with Capmark Financial + Group.88 "Compensated + +On line 1980: + very well" The business + of structuring, selling, and + distributing this deal, + +On line 1980: + structuring, selling, + and distributing this deal, and + the thousands like it, + +On line 1980: + and distributing this + deal, and the thousands like it, + was lucrative for + +On line 1980: + distributing this deal, + and the thousands like it, was + lucrative for the + +On line 1980: + deal, and the thousands + like it, was lucrative for + the banks. The mortgage + +On line 1980: + the banks. The mortgage + originators profited + when they sold loans for + +On line 1980: + when they sold loans for + securitization.89 Some + of this profit flowed + +On line 1980: + profit flowed down to + employees—particularly + those generating + +On line 1982: + those generating + mortgage volume. Part of the + million premium + +On line 1982: + volume. Part of the + million premium received + by New Century + +On line 1982: + Part of the million + premium received by New + Century for the + +On line 1982: + premium received + by New Century for the + deal we analyzed + +On line 1982: + by New Century + for the deal we analyzed + went to pay the many + +On line 1982: + analyzed went to + pay the many employees who + participated. + +On line 1982: + the many employees + who participated. "The + originators, the + +On line 1982: + participated. + "The originators, the loan + officers, account + +On line 1982: + salespeople [who] were + the reason our loans came in + were compensated + +On line 1982: + reason our loans came + in were compensated very + well," New Century’s + +On line 1982: + the FCIC. And volume + mattered more than quality. + She noted, "Wall Street + +On line 1982: + noted, "Wall Street was + very hungry for our product. + We had our loans sold + +On line 1982: + Street was very hungry + for our product. We had our + loans sold three months in + +On line 1982: + very hungry for our + product. We had our loans sold + three months in advance, + +On line 1982: + for our product. We + had our loans sold three months in + advance, before they + +On line 1982: + product. We had our + loans sold three months in advance, + before they were even + +On line 1982: + We had our loans sold + three months in advance, before + they were even made at + +On line 1982: + had our loans sold three + months in advance, before they + were even made at one + +On line 1982: + our loans sold three months + in advance, before they were + even made at one point."90 + +On line 1984: + three months in advance, + before they were even made at + one point."90 Similar + +On line 1984: + before they were even + made at one point."90 Similar + incentives were at + +On line 1984: + were even made at one + point."90 Similar incentives + were at work at Long + +On line 1984: + even made at one point."90 + Similar incentives were + at work at Long Beach + +On line 1984: + one point."90 Similar + incentives were at work at + Long Beach Mortgage, the + +On line 1984: + incentives were at + work at Long Beach Mortgage, the + subprime division + +On line 1984: + subprime division + of Washington Mutual, + which organized its + +On line 1984: + which organized its + Incentive Plan by volume. + As WaMu showed in a + +On line 1984: + Incentive Plan by + volume. As WaMu showed in a + plan, "Home Loans Product + +On line 1984: + Plan by volume. As + WaMu showed in a plan, "Home Loans + Product Strategy," + +On line 1984: + volume. As WaMu showed + in a plan, "Home Loans Product + Strategy," the goals + +On line 1984: + WaMu showed in a plan, + "Home Loans Product Strategy," + the goals were also + +On line 1986: + in higher margin + products (Option ARM, Alt A, + Home Equity, ubprime)," + +On line 1986: + products (Option ARM, + Alt A, Home Equity, ubprime)," + "recruit and leverage + +On line 1986: + (Option ARM, Alt A, + Home Equity, ubprime)," "recruit + and leverage seasoned + +On line 1986: + Home Equity, ubprime)," + "recruit and leverage seasoned + Option ARM sales force," + +On line 1986: + sales force," and "maintain + a compensation structure + that supports the high + +On line 1988: + that supports the high + margin product strategy."91 + After structuring + +On line 1988: + a security, + an underwriter, often + an investment bank, + +On line 1988: + an underwriter, + often an investment bank, + marketed and sold + +On line 1988: + For a billion deal + like CMLTI 2006-NC2, a fee would earn + Citigroup million. + +On line 1988: + 2006-NC2, a fee would earn + Citigroup million. In this + case, though, Citigroup + +On line 1988: + Citigroup million. + In this case, though, Citigroup + instead kept parts of + +On line 1988: + Citigroup instead + kept parts of the residual + tranches. Doing so + +On line 1988: + of the residual + tranches. Doing so could yield + large profits as long + +On line 1988: + tranches. Doing so + could yield large profits as long + as the deal performed + +On line 1990: + yield large profits as + long as the deal performed as + expected. Options + +On line 1990: + banks, examined the + mortgage-backed securities sales + and trading desks at + +On line 1990: + and trading desks at + commercial and investment + banks from to It found + +On line 1990: + at commercial and + investment banks from to It + found that associates + +On line 1990: + from to It found that + associates had average + annual base salaries + +On line 1990: + found that associates + had average annual + base salaries of to from + +On line 1990: + that associates had + average annual base + salaries of to from through + +On line 1990: + annual base salaries + of to from through but received + bonuses that could well + +On line 1990: + base salaries of to from + through but received bonuses that + could well exceed their + +On line 1990: + salaries of to from through + but received bonuses that could + well exceed their salaries. + +On line 1990: + of to from through but + received bonuses that could well + exceed their salaries. On + +On line 1990: + from through but received + bonuses that could well exceed + their salaries. On the next + +On line 1990: + but received bonuses + that could well exceed their salaries. + On the next rung, vice + +On line 1990: + bonuses that could well + exceed their salaries. On the next + rung, vice presidents + +On line 1990: + exceed their salaries. On + the next rung, vice presidents + averaged base salaries + +On line 1990: + salaries. On the next rung, + vice presidents averaged + base salaries and bonuses + +On line 1990: + On the next rung, vice + presidents averaged base + salaries and bonuses from + +On line 1990: + salaries and bonuses from + to Directors averaged + to At the top was + +On line 1990: + and bonuses from to + Directors averaged to + At the top was the + +On line 1990: + from to Directors + averaged to At the top + was the head of the + +On line 1990: + averaged to At + the top was the head of the + unit. For example, + +On line 1990: + the top was the head + of the unit. For example, + in Dow Kim, the head + +On line 1990: + top was the head of + the unit. For example, in + Dow Kim, the head of + +On line 1990: + the head of the unit. + For example, in Dow Kim, + the head of Merrill’s + +On line 1990: + For example, in + Dow Kim, the head of Merrill’s + Global Markets and + +On line 1990: + Dow Kim, the head of + Merrill’s Global Markets and + Investment Banking + +On line 1990: + Global Markets and + Investment Banking segment, + received a base salary + +On line 1992: + Investment Banking + segment, received a base salary + of plus a million + +On line 1992: + a base salary of plus + a million bonus, a package + second only to + +On line 1992: + plus a million bonus, + a package second only + to Merrill Lynch’s CEO.95 + +On line 1994: + a million bonus, a + package second only to + Merrill Lynch’s CEO.95 MOODY’S: + +On line 1994: + a package second + only to Merrill Lynch’s CEO.95 + MOODY’S: "GIVEN A BLANK + +On line 1996: + to Merrill Lynch’s CEO.95 + MOODY’S: "GIVEN A BLANK CHECK" The + rating agencies were + +On line 1996: + CEO.95 MOODY’S: "GIVEN A + BLANK CHECK" The rating agencies + were essential to + +On line 1996: + MOODY’S: "GIVEN A BLANK + CHECK" The rating agencies were + essential to the + +On line 1996: + BLANK CHECK" The rating + agencies were essential to + the smooth functioning + +On line 1996: + The rating agencies + were essential to the smooth + functioning of the + +On line 1996: + Issuers needed them + to approve the structure of + their deals; banks needed + +On line 1996: + the structure of their + deals; banks needed their ratings + to determine the + +On line 1996: + structure of their deals; + banks needed their ratings to + determine the amount + +On line 1996: + deals; banks needed their + ratings to determine the + amount of capital + +On line 1996: + needed their ratings + to determine the amount of + capital to hold; + +On line 1996: + markets needed their + ratings to determine loan + terms; some investors could + +On line 1996: + determine loan terms; + some investors could buy only + securities with + +On line 1996: + terms; some investors could + buy only securities + with a triple-A rating; + +On line 1996: + some investors could buy + only securities with + a triple-A rating; and + +On line 1996: + agencies’ judgment was + baked into collateral + agreements and other + +On line 1996: + financial contracts. + To examine the rating + process, the Commission + +On line 1996: + the rating process, the + Commission focused on Moody’s + Investors Service, the + +On line 1996: + Commission focused + on Moody’s Investors Service, the + largest and oldest of + +On line 1996: + Moody’s Investors Service, + the largest and oldest of the + three rating agencies. + +On line 1998: + Investors Service, the + largest and oldest of the three + rating agencies. The + +On line 1998: + Service, the largest and + oldest of the three rating + agencies. The rating + +On line 1998: + largest and oldest of + the three rating agencies. The + rating of structured + +On line 1998: + oldest of the three + rating agencies. The rating + of structured finance + +On line 1998: + finance products such + as mortgage-backed securities + made up close to half + +On line 2000: + made up close to half + of Moody’s rating revenues in + and From to revenues + +On line 2000: + up close to half of + Moody’s rating revenues in and + From to revenues from + +On line 2000: + and From to revenues + from rating such financial + instruments increased + +On line 2000: + more than fourfold.97 But + the rating process involved many + conflicts, which would come + +On line 2000: + But the rating process + involved many conflicts, which would + come into focus + +On line 2000: + involved many conflicts, + which would come into focus + during the crisis. + +On line 2002: + many conflicts, which would + come into focus during + the crisis. To do + +On line 2002: + conflicts, which would come + into focus during the + crisis. To do its + +On line 2002: + which would come into + focus during the crisis. + To do its work, Moody’s + +On line 2002: + come into focus + during the crisis. To do + its work, Moody’s rated + +On line 2002: + using models based, + in part, on periods of + relatively strong + +On line 2002: + on periods of + relatively strong credit + performance. Moody’s did + +On line 2002: + relatively strong + credit performance. Moody’s did + not sufficiently + +On line 2002: + in underwriting + standards or a dramatic + decline in home prices. + +On line 2002: + dramatic decline + in home prices. And Moody’s did not + even develop a + +On line 2002: + prices. And Moody’s did not + even develop a model + specifically to + +On line 2002: + even develop a + model specifically to + take into account + +On line 2006: + securities.98 "In + the business forevermore" Credit + ratings have been linked + +On line 2006: + three-quarters of a + century.99 In the Office + of the Comptroller + +On line 2006: + century.99 In the + Office of the Comptroller + of the Currency + +On line 2006: + Comptroller of the + Currency let banks report + publicly traded bonds + +On line 2006: + the Currency let + banks report publicly traded + bonds with a rating + +On line 2006: + Currency let banks + report publicly traded bonds + with a rating of + +On line 2006: + banks report publicly + traded bonds with a rating + of BBB or better + +On line 2006: + traded bonds with a + rating of BBB or better + at book value (that + +On line 2006: + bonds with a rating + of BBB or better at book + value (that is, the + +On line 2006: + a rating of BBB + or better at book value + (that is, the price they + +On line 2006: + rating of BBB or + better at book value (that + is, the price they paid + +On line 2006: + of BBB or better + at book value (that is, the + price they paid for the + +On line 2006: + BBB or better at + book value (that is, the price + they paid for the bonds); + +On line 2006: + at book value (that + is, the price they paid for the + bonds); lower-rated bonds + +On line 2006: + book value (that is, + the price they paid for the bonds); + lower-rated bonds had + +On line 2006: + the price they paid for + the bonds); lower-rated bonds had + to be reported + +On line 2006: + price they paid for the + bonds); lower-rated bonds had to + be reported at + +On line 2006: + the bonds); lower-rated + bonds had to be reported + at current market + +On line 2006: + bonds); lower-rated bonds + had to be reported at + current market prices, + +On line 2006: + to be reported + at current market prices, which + might be lower. In + +On line 2006: + be reported at + current market prices, which might + be lower. In the + +On line 2006: + on lower-rated bonds + held by insurers.100 But the + watershed event in + +On line 2006: + watershed event in + federal regulation + occurred in when the + +On line 2006: + broker-dealers to base + them on credit ratings by + a "nationally + +On line 2006: + organization" + (NRSRO); at the time, that was Moody’s, + S&P, or Fitch. Ratings + +On line 2006: + at the time, that was + Moody’s, S&P, or Fitch. Ratings are + also built into + +On line 2006: + time, that was Moody’s, S&P, + or Fitch. Ratings are also + built into banking + +On line 2006: + built into banking + capital regulations + under the Recourse + +On line 2006: + banking capital + regulations under the + Recourse Rule, which, since + +On line 2006: + the Recourse Rule, which, + since has permitted banks to + hold less capital + +On line 2006: + Recourse Rule, which, since + has permitted banks to hold + less capital for + +On line 2006: + less capital for + higher-rated securities. + For example, BBB + +On line 2006: + Banks in some countries + were subject to similar + requirements under + +On line 2006: + countries were subject + to similar requirements + under the Basel II + +On line 2006: + international + capital agreement, signed in + June although U.S. banks + +On line 2006: + banks had not fully + implemented the advanced + approaches allowed + +On line 2008: + also determined + whether investors could buy certain + investments at all. + +On line 2008: + SEC restricts money + market funds to purchasing + "securities that + +On line 2008: + "securities that + have received credit ratings + from any two NRSROs in + +On line 2008: + credit ratings from + any two NRSROs in one of the + two highest short-term + +On line 2008: + any two NRSROs in one + of the two highest short-term + rating categories + +On line 2008: + of the two highest + short-term rating categories + or comparable + +On line 2008: + or comparable + unrated securities."101 + The Department of + +On line 2008: + fund investments to + securities rated A + or higher. Credit + +On line 2008: + or higher. Credit + ratings affect even private + transactions: contracts + +On line 2008: + ratings affect even + private transactions: contracts + may contain triggers + +On line 2008: + may contain triggers + that require the posting of + collateral or + +On line 2008: + or entity be + downgraded. Triggers played an + important role in + +On line 2008: + an important role + in the financial crisis + and helped cripple AIG. + +On line 2010: + in the financial + crisis and helped cripple AIG. + Importantly for + +On line 2010: + the mortgage market, + the Secondary Mortgage Market + Enhancement Act of + +On line 2010: + market, the Secondary + Mortgage Market Enhancement + Act of permitted + +On line 2010: + Enhancement Act of + permitted federal- and + state-chartered financial + +On line 2010: + state-chartered financial + institutions to invest + in mortgage-related + +On line 2010: + institutions to + invest in mortgage-related + securities if + +On line 2010: + securities if + the securities had high + ratings from at least + +On line 2010: + the securities + had high ratings from at least + one rating agency. + +On line 2010: + securities had + high ratings from at least one + rating agency. "Look + +On line 2010: + had high ratings from + at least one rating agency. + "Look at the language + +On line 2010: + high ratings from at + least one rating agency. "Look + at the language of + +On line 2010: + ratings from at least + one rating agency. "Look at + the language of the + +On line 2010: + at least one rating + agency. "Look at the language + of the original + +On line 2010: + one rating agency. + "Look at the language of the + original bill," Lewis + +On line 2010: + agency. "Look at the + language of the original + bill," Lewis Ranieri told the + +On line 2012: + "Look at the language + of the original bill," Lewis + Ranieri told the FCIC. "It + +On line 2012: + the language of the + original bill," Lewis Ranieri told + the FCIC. "It requires + +On line 2012: + of the original + bill," Lewis Ranieri told the FCIC. "It + requires a rating. + +On line 2012: + original bill," Lewis + Ranieri told the FCIC. "It requires + a rating. It put + +On line 2012: + bill," Lewis Ranieri told the + FCIC. "It requires a rating. + It put them in the + +On line 2012: + Ranieri told the FCIC. "It + requires a rating. It put + them in the business + +On line 2012: + the FCIC. "It requires + a rating. It put them in + the business forevermore. + +On line 2012: + FCIC. "It requires a + rating. It put them in the + business forevermore. It + +On line 2012: + requires a rating. + It put them in the business + forevermore. It became + +On line 2012: + a rating. It put + them in the business forevermore. + It became one of + +On line 2012: + rating. It put them + in the business forevermore. It + became one of the + +On line 2012: + It put them in the + business forevermore. It became + one of the biggest, + +On line 2012: + them in the business + forevermore. It became one of + the biggest, if not + +On line 2012: + business forevermore. It + became one of the biggest, + if not the biggest, + +On line 2012: + forevermore. It became + one of the biggest, if not + the biggest, business."102 + +On line 2012: + became one of the + biggest, if not the biggest, + business."102 As Eric + +On line 2012: + one of the biggest, + if not the biggest, business."102 + As Eric Kolchinsky, + +On line 2012: + of the biggest, if + not the biggest, business."102 As + Eric Kolchinsky, a + +On line 2012: + biggest, if not the + biggest, business."102 As Eric + Kolchinsky, a former + +On line 2012: + Kolchinsky, a former + Moody’s managing director, + would summarize the + +On line 2012: + would summarize the + situation, "the rating + agencies were given + +On line 2014: + "the rating agencies + were given a blank check."103 The + agencies themselves were + +On line 2014: + agencies themselves were + able to avoid regulation + for decades. Beginning + +On line 2016: + themselves were able to + avoid regulation for decades. + Beginning in the + +On line 2016: + avoid regulation + for decades. Beginning in the + SEC had to approve + +On line 2016: + regulation for + decades. Beginning in the SEC + had to approve a + +On line 2016: + had to approve a + company’s application + to become an NRSRO—but + +On line 2016: + application to + become an NRSRO—but if approved, + a company faced + +On line 2016: + NRSRO—but if approved, a + company faced no further + regulation. More + +On line 2016: + a company faced + no further regulation. + More than years later, + +On line 2016: + company faced no + further regulation. More + than years later, the + +On line 2018: + later, the SEC got + limited authority + to oversee NRSROs in + +On line 2018: + SEC got limited + authority to oversee + NRSROs in the Credit + +On line 2020: + to oversee NRSROs in + the Credit Rating Agency + Reform Act of That + +On line 2020: + NRSROs in the Credit + Rating Agency Reform Act + of That law, taking + +On line 2020: + the Credit Rating + Agency Reform Act of That + law, taking effect + +On line 2020: + Agency Reform Act + of That law, taking effect + in June focused on + +On line 2020: + taking effect in + June focused on mandatory + disclosure of the + +On line 2020: + in June focused on + mandatory disclosure of + the rating agencies’ + +On line 2020: + disclosure of the + rating agencies’ methodologies; + however, the law + +On line 2020: + the rating agencies’ + methodologies; however, the + law barred the SEC from + +On line 2022: + or the procedures + and methodologies."104 Many investors, + such as some pension + +On line 2022: + the procedures and + methodologies."104 Many investors, such + as some pension funds + +On line 2022: + some pension funds and + university endowments, + relied on credit + +On line 2022: + ratings because they + had neither access to the + same data as the + +On line 2022: + had neither access + to the same data as the + rating agencies nor + +On line 2022: + to the same data + as the rating agencies nor + the capacity + +On line 2022: + the same data as + the rating agencies nor the + capacity or + +On line 2022: + the rating agencies + nor the capacity or + analytical + +On line 2022: + analytical + ability to assess the + securities they + +On line 2024: + the securities + they were purchasing. As Moody’s + former managing + +On line 2024: + they were purchasing. + As Moody’s former managing + director Jerome Fons + +On line 2026: + acknowledged, "Subprime + [residential mortgage–backed + securities] and + +On line 2026: + composition and + characteristics of the + loan collateral. + +On line 2026: + their home-work were + skeptical of these products + despite their ratings. + +On line 2026: + skeptical of these + products despite their ratings. + Arnold Cattani, chairman + +On line 2026: + products despite their + ratings. Arnold Cattani, chairman + of Mission Bank in + +On line 2026: + of Mission Bank in + Bakersfield, California, + described deciding + +On line 2026: + deciding to sell + the bank’s holdings of mortgage-backed + securities and + +On line 2028: + the bank’s holdings of + mortgage-backed securities and + CDOs: At one meeting, + +On line 2028: + holdings of mortgage-backed + securities and CDOs: At + one meeting, when things + +On line 2028: + one meeting, when things + started getting difficult, + maybe in I asked the + +On line 2028: + getting difficult, + maybe in I asked the CFO what + the mechanical + +On line 2028: + maybe in I asked the + CFO what the mechanical + steps were in mortgage-backed + +On line 2028: + securities, if + a borrower in Des Moines, + Iowa, defaulted. I + +On line 2028: + if a borrower + in Des Moines, Iowa, defaulted. + I know what it is + +On line 2028: + a borrower in + Des Moines, Iowa, defaulted. I + know what it is if + +On line 2028: + borrower in Des + Moines, Iowa, defaulted. I know + what it is if a + +On line 2028: + what it is if a + borrower in Bakersfield + defaults, and somebody + +On line 2028: + Bakersfield defaults, + and somebody has that mortgage. + But as a package + +On line 2028: + and somebody has that + mortgage. But as a package + security, what + +On line 2028: + that mortgage. But as + a package security, + what happens1 And he + +On line 2028: + what happens1 And he + couldn’t answer the question. + And I told him to + +On line 2028: + he couldn’t answer + the question. And I told him + to sell them, sell all + +On line 2028: + couldn’t answer the + question. And I told him to + sell them, sell all of + +On line 2028: + answer the question. + And I told him to sell them, + sell all of them, then, + +On line 2028: + the question. And I + told him to sell them, sell all + of them, then, because + +On line 2028: + question. And I told + him to sell them, sell all of + them, then, because we + +On line 2028: + And I told him to + sell them, sell all of them, then, + because we didn’t + +On line 2028: + him to sell them, sell + all of them, then, because we + didn’t understand + +On line 2028: + sell them, sell all of + them, then, because we didn’t + understand it, and + +On line 2028: + of them, then, because + we didn’t understand it, + and I don’t know that + +On line 2028: + them, then, because we + didn’t understand it, and + I don’t know that we + +On line 2028: + because we didn’t + understand it, and I don’t + know that we had the + +On line 2028: + understand it, and + I don’t know that we had the + capability + +On line 2028: + I don’t know that we + had the capability + to understand the + +On line 2028: + to understand the + financial complexities; + didn’t want any part + +On line 2030: + rating agencies were + not liable for misstatements + in securities + +On line 2030: + in securities + registra-tions because courts + ruled that their ratings + +On line 2030: + ruled that their ratings + were opinions, protected by + the First Amendment. Moody’s + +On line 2030: + by the First Amendment. + Moody’s standard disclaimer reads "The + ratings are, and must + +On line 2030: + Amendment. Moody’s standard + disclaimer reads "The ratings are, + and must be construed + +On line 2030: + Moody’s standard disclaimer + reads "The ratings are, and must + be construed solely + +On line 2030: + standard disclaimer reads + "The ratings are, and must be + construed solely as, + +On line 2030: + "The ratings are, and + must be construed solely as, + statements of opinion + +On line 2030: + be construed solely + as, statements of opinion and + not statements of fact + +On line 2030: + construed solely as, + statements of opinion and not + statements of fact or + +On line 2030: + statements of opinion + and not statements of fact or + recommendations + +On line 2030: + and not statements of + fact or recommendations + to purchase, sell, or + +On line 2030: + not statements of fact + or recommendations to + purchase, sell, or hold + +On line 2030: + recommendations + to purchase, sell, or hold any + securities." Gary + +On line 2030: + to purchase, sell, or + hold any securities." Gary + Witt, a former team + +On line 2030: + Gary Witt, a former + team managing director + at Moody’s, told the FCIC, + +On line 2030: + director at Moody’s, + told the FCIC, "People expect + too much from ratings + +On line 2030: + at Moody’s, told the FCIC, + "People expect too much from + ratings investment + +On line 2030: + too much from ratings + investment decisions should + always be based on + +On line 2030: + ratings investment + decisions should always be + based on much more than + +On line 2032: + always be based on + much more than just a rating."107 + "Everything but the + +On line 2032: + on much more than just + a rating."107 "Everything but + the elephant sitting + +On line 2032: + much more than just a + rating."107 "Everything but the + elephant sitting on + +On line 2032: + the elephant sitting + on the table" The ratings + were intended to + +On line 2032: + on the table" The + ratings were intended to + provide a means of + +On line 2032: + provide a means of + comparing risks across asset + classes and time. In + +On line 2032: + means of comparing + risks across asset classes and + time. In other words, + +On line 2032: + of comparing risks + across asset classes and time. + In other words, the + +On line 2032: + comparing risks across + asset classes and time. In + other words, the risk + +On line 2032: + asset classes and + time. In other words, the risk + of a triple-A rated + +On line 2032: + classes and time. In + other words, the risk of a + triple-A rated mortgage + +On line 2032: + other words, the risk + of a triple-A rated mortgage + security was + +On line 2032: + triple-A rated mortgage + security was supposed + to be similar + +On line 2032: + security was + supposed to be similar + to the risk of a + +On line 2034: + be similar to + the risk of a triple-A rated + corporate bond. Since + +On line 2034: + to the risk of a + triple-A rated corporate bond. + Since the mid-1990s, Moody’s has + +On line 2034: + has rated tranches + of mortgage-backed securities + using three models. + +On line 2034: + In Moody’s created + a new model, M3 Prime, to + rate prime, jumbo, and + +On line 2034: + Moody’s created a + new model, M3 Prime, to rate + prime, jumbo, and Alt-A + +On line 2034: + created a new + model, M3 Prime, to rate prime, + jumbo, and Alt-A deals. + +On line 2034: + a new model, M3 + Prime, to rate prime, jumbo, and + Alt-A deals. Only in + +On line 2034: + new model, M3 Prime, + to rate prime, jumbo, and Alt-A + deals. Only in the + +On line 2034: + model, M3 Prime, to + rate prime, jumbo, and Alt-A deals. + Only in the fall + +On line 2034: + M3 Prime, to rate prime, + jumbo, and Alt-A deals. Only + in the fall of when + +On line 2034: + rate prime, jumbo, and + Alt-A deals. Only in the fall + of when the housing + +On line 2034: + jumbo, and Alt-A deals. + Only in the fall of when + the housing market + +On line 2034: + Alt-A deals. Only in + the fall of when the housing + market had already + +On line 2034: + Only in the fall + of when the housing market + had already peaked, did + +On line 2034: + of when the housing + market had already peaked, did + it develop its + +On line 2034: + market had already + peaked, did it develop its + model for rating + +On line 2034: + had already peaked, did + it develop its model + for rating subprime + +On line 2034: + already peaked, did it + develop its model for + rating subprime deals, + +On line 2034: + it develop its + model for rating subprime + deals, called M3 Subprime.108 + +On line 2036: + rating subprime deals, + called M3 Subprime.108 The models + incorporated + +On line 2036: + and legal factors, + and macroeconomic trends. The + M3 Prime model let + +On line 2036: + legal factors, and + macroeconomic trends. The M3 + Prime model let Moody’s + +On line 2036: + and macroeconomic + trends. The M3 Prime model let + Moody’s automate more + +On line 2036: + macroeconomic trends. + The M3 Prime model let Moody’s + automate more of + +On line 2036: + The M3 Prime model + let Moody’s automate more of + the process. Although Moody’s + +On line 2036: + M3 Prime model let + Moody’s automate more of the + process. Although Moody’s did + +On line 2036: + Prime model let Moody’s + automate more of the process. + Although Moody’s did not + +On line 2036: + let Moody’s automate + more of the process. Although Moody’s + did not sample or + +On line 2036: + automate more of + the process. Although Moody’s did not + sample or review + +On line 2036: + the process. Although Moody’s + did not sample or review + individual + +On line 2036: + did not sample or + review individual + loans, the company + +On line 2036: + issuer. Relying + on loan-to-value ratios, + borrower credit + +On line 2036: + on loan-to-value + ratios, borrower credit + scores, originator + +On line 2036: + ratios, borrower + credit scores, originator + quality, and loan + +On line 2036: + loan terms and other + information, the model + simulated the + +On line 2036: + information, the + model simulated the + performance of each + +On line 2038: + loan in scenarios, + including variations in + interest rates and + +On line 2038: + in interest rates + and state-level unemployment + as well as home price + +On line 2038: + interest rates and + state-level unemployment as + well as home price changes. + +On line 2038: + as well as home price + changes. On average, across the + scenarios, home prices + +On line 2038: + changes. On average, + across the scenarios, home prices + trended upward at + +On line 2038: + across the scenarios, + home prices trended upward at + approximately + +On line 2038: + prices trended upward + at approximately per + year.109 The model put + +On line 2038: + little weight on the + possibility prices would + fall sharply nationwide. + +On line 2038: + possibility + prices would fall sharply nationwide. + Jay Siegel, a former + +On line 2038: + in developing + the model, told the FCIC, "There + may have been [state-level] + +On line 2038: + the model, told the + FCIC, "There may have been [state-level] + components of this + +On line 2038: + the FCIC, "There may have + been [state-level] components of + this real estate + +On line 2038: + FCIC, "There may have been + [state-level] components of this + real estate drop + +On line 2038: + may have been [state-level] + components of this real + estate drop that the + +On line 2038: + [state-level] components + of this real estate drop + that the statistics + +On line 2038: + components of this + real estate drop that the + statistics would have + +On line 2038: + this real estate + drop that the statistics would + have covered, but the + +On line 2038: + estate drop that the + statistics would have covered, + but the national + +On line 2038: + statistics would have + covered, but the national + drop, staying down over + +On line 2038: + would have covered, but + the national drop, staying + down over this short but + +On line 2038: + down over this short but + multiple-year period, is + more stressful than the + +On line 2038: + short but multiple-year + period, is more stressful + than the statistics + +On line 2038: + is more stressful than + the statistics call for." Even + as housing prices rose + +On line 2038: + more stressful than the + statistics call for." Even as + housing prices rose to + +On line 2038: + the statistics call + for." Even as housing prices rose + to unprecedented + +On line 2038: + for." Even as housing + prices rose to unprecedented + levels, Moody’s never + +On line 2038: + housing prices rose to + unprecedented levels, Moody’s + never adjusted + +On line 2038: + levels, Moody’s never + adjusted the scenarios + to put greater weight on + +On line 2038: + put greater weight on the + possibility of a + decline. According + +On line 2038: + decline. According + to Siegel, in "Moody’s position + was that there was not + +On line 2042: + position was that + there was not a national + housing bubble."110 When + +On line 2042: + on the deal convened + a rating committee of + other analysts + +On line 2042: + rating committee + of other analysts and + managers to assess + +On line 2042: + other analysts + and managers to assess it + and determine the + +On line 2042: + it and determine + the overall ratings for the + securities.111 Siegel + +On line 2042: + also integral: + "One common misperception + is that Moody’s credit + +On line 2042: + misperception is + that Moody’s credit ratings are + derived solely from + +On line 2042: + Moody’s credit ratings + are derived solely from the + application of + +On line 2042: + derived solely from + the application of a + mathematical + +On line 2042: + the application + of a mathematical + process or model. This + +On line 2042: + application of + a mathematical process + or model. This is + +On line 2042: + mathematical + process or model. This is not + the case. The credit + +On line 2042: + process or model. This + is not the case. The credit + rating process involves + +On line 2042: + rating process involves + much more—most importantly, + the exercise of + +On line 2042: + of independent + judgment by members of the + rating committee. + +On line 2042: + rating committee. + Ultimately, ratings are + subjective opinions + +On line 2042: + majority view + of the committee’s members."112 + As Roger Stein, a Moody’s + +On line 2042: + a Moody’s managing + director, noted, "Overall, + the model has to + +On line 2042: + director, noted, + "Overall, the model has to + contemplate events for + +On line 2042: + noted, "Overall, the + model has to contemplate + events for which there is + +On line 2044: + events for which there is + no data."113 After rating + subprime deals with the + +On line 2044: + there is no data."113 + After rating subprime deals + with the model for + +On line 2044: + no data."113 After + rating subprime deals with the + model for years, in + +On line 2044: + rating subprime deals + with the model for years, in + Moody’s introduced a + +On line 2044: + with the model for + years, in Moody’s introduced a + parallel model + +On line 2046: + subprime mortgage–backed + securities. Like M3 Prime, + the subprime model + +On line 2046: + securities. Like + M3 Prime, the subprime model + ran the mortgages through + +On line 2046: + subprime model ran + the mortgages through scenarios.114 + Moody’s officials told + +On line 2046: + through scenarios.114 Moody’s + officials told the FCIC they + recognized that stress + +On line 2046: + Moody’s officials told + the FCIC they recognized that + stress scenarios were + +On line 2046: + officials told the + FCIC they recognized that stress + scenarios were not + +On line 2046: + most stressful scenario, + which reduced the portion of + each deal rated triple-A. + +On line 2046: + stressful scenario, which + reduced the portion of each + deal rated triple-A. Stein, + +On line 2046: + reduced the portion + of each deal rated triple-A. Stein, + who helped develop + +On line 2046: + of each deal rated + triple-A. Stein, who helped develop + the subprime model, + +On line 2046: + each deal rated triple-A. + Stein, who helped develop the + subprime model, said + +On line 2046: + was manually + "calibrated" to be more + conservative to + +On line 2046: + "calibrated" to + be more conservative to + ensure predicted + +On line 2046: + conservative to + ensure predicted losses + were consistent with + +On line 2046: + ensure predicted + losses were consistent with + analysts’ "expert + +On line 2046: + were consistent with + analysts’ "expert views." Stein + also noted Moody’s + +On line 2046: + for example, as + one step, analysts took the + "single worst case" from + +On line 2046: + step, analysts took + the "single worst case" from the + M3 Subprime model + +On line 2046: + the "single worst case" + from the M3 Subprime model + simulations and + +On line 2046: + from the M3 Subprime + model simulations and + multiplied it by + +On line 2048: + in order to add + deterioration.115 Moody’s + did not, however, + +On line 2048: + of the loans being + securitized. Fons described + this problem to the + +On line 2048: + securitized. Fons + described this problem to the + FCIC: "I sat on this + +On line 2048: + described this problem + to the FCIC: "I sat on this + high-level Structured + +On line 2048: + to the FCIC: "I sat + on this high-level Structured + Credit committee, + +On line 2048: + FCIC: "I sat on this + high-level Structured Credit + committee, which you’d + +On line 2048: + on this high-level + Structured Credit committee, + which you’d think would be + +On line 2048: + high-level Structured + Credit committee, which you’d + think would be dealing + +On line 2048: + Credit committee, + which you’d think would be dealing + with such issues [of + +On line 2048: + would be dealing with + such issues [of declining + mortgage-underwriting + +On line 2048: + mortgage-underwriting + standards], and never once was + it raised to this group + +On line 2048: + and never once was + it raised to this group or put + on our agenda that + +On line 2048: + never once was it + raised to this group or put on + our agenda that the + +On line 2048: + was it raised to this + group or put on our agenda + that the decline in + +On line 2048: + this group or put on + our agenda that the decline + in quality that + +On line 2048: + group or put on our + agenda that the decline in + quality that was + +On line 2048: + our agenda that the + decline in quality that + was going into + +On line 2048: + in quality that + was going into pools, the + impact possibly + +On line 2048: + was going into + pools, the impact possibly + on ratings, other + +On line 2048: + going into pools, + the impact possibly on + ratings, other things. + +On line 2048: + impact possibly + on ratings, other things. We + talked about everything + +On line 2048: + ratings, other things. + We talked about everything but, + you know, the elephant + +On line 2048: + other things. We talked + about everything but, you know, + the elephant sitting + +On line 2050: + about everything but, + you know, the elephant sitting + on the table."116 To + +On line 2050: + everything but, you + know, the elephant sitting on + the table."116 To rate + +On line 2050: + the elephant sitting + on the table."116 To rate CMLTI + 2006-NC2, our sample deal, + +On line 2050: + elephant sitting on + the table."116 To rate CMLTI 2006-NC2, + our sample deal, Moody’s + +On line 2050: + the table."116 To rate + CMLTI 2006-NC2, our sample deal, Moody’s + first used its model + +On line 2050: + table."116 To rate CMLTI + 2006-NC2, our sample deal, Moody’s first + used its model to + +On line 2050: + 2006-NC2, our sample deal, + Moody’s first used its model to + simulate losses + +On line 2050: + first used its model + to simulate losses in + the mortgage pool. Those + +On line 2050: + pool. Those estimates, + in turn, determined how big + the junior tranches + +On line 2050: + Those estimates, in + turn, determined how big the + junior tranches of + +On line 2050: + in turn, determined + how big the junior tranches + of the deal would have + +On line 2050: + turn, determined how + big the junior tranches of + the deal would have to + +On line 2050: + determined how big + the junior tranches of the + deal would have to be + +On line 2050: + how big the junior + tranches of the deal would have + to be in order + +On line 2050: + junior tranches of + the deal would have to be in + order to protect + +On line 2050: + the deal would have to + be in order to protect + the senior tranches + +On line 2050: + deal would have to be + in order to protect the + senior tranches from + +On line 2050: + tranches from losses. + In analyzing the deal, + the lead analyst + +On line 2050: + was similar to + another Citigroup deal + of New Century + +On line 2050: + Century loans that + Moody’s had rated earlier + and recommended + +On line 2050: + rated earlier + and recommended the same + amount.117 Then the deal was + +On line 2050: + and recommended + the same amount.117 Then the deal was + tweaked to account for + +On line 2050: + the same amount.117 Then the + deal was tweaked to account for + certain riskier types + +On line 2050: + amount.117 Then the deal was + tweaked to account for certain + riskier types of loans, + +On line 2050: + of loans, including + interest-only mortgages.118 For + its efforts, Moody’s was + +On line 2052: + For its efforts, Moody’s + was paid an estimated + (S&P also rated + +On line 2052: + its efforts, Moody’s was + paid an estimated (S&P + also rated this + +On line 2054: + an estimated + (S&P also rated this deal + and received As we + +On line 2054: + estimated (S&P + also rated this deal and + received As we will + +On line 2054: + (S&P also rated + this deal and received As we + will describe later, + +On line 2054: + also rated this + deal and received As we will + describe later, three + +On line 2054: + rated this deal and + received As we will describe + later, three tranches + +On line 2054: + this deal and received + As we will describe later, + three tranches of this + +On line 2054: + deal and received As + we will describe later, three + tranches of this deal + +On line 2054: + received As we will + describe later, three tranches + of this deal would be + +On line 2054: + will describe later, + three tranches of this deal would + be downgraded less + +On line 2054: + describe later, three + tranches of this deal would be + downgraded less than + +On line 2054: + three tranches of this + deal would be downgraded less + than a year after + +On line 2054: + of this deal would be + downgraded less than a year + after issuance—part + +On line 2054: + downgraded less than + a year after issuance—part + of Moody’s mass downgrade + +On line 2054: + Moody’s mass downgrade on + July when housing prices had + declined by only + +On line 2054: + July when housing + prices had declined by only + In October the + +On line 2054: + October the M4–M11 + tranches ere downgraded and + by all the tranches + +On line 2054: + ere downgraded and + by all the tranches had been + downgraded. Of all + +On line 2054: + the tranches had been + downgraded. Of all mortgage-backed + securities it + +On line 2054: + been downgraded. Of + all mortgage-backed securities + it had rated triple-A + +On line 2054: + downgraded. Of all + mortgage-backed securities it + had rated triple-A in + +On line 2054: + it had rated triple-A + in Moody’s downgraded to junk.121 + The consequences would + +On line 2054: + The consequences would + reverberate throughout the + financial system. + +On line 2058: + financial system. + FANNIE MAE AND FREDDIE MAC: + "LESS COMPETITIVE + +On line 2060: + had violated + accounting rules and now faced + corrections and fines.122 + +On line 2060: + faced corrections and + fines.122 They were losing market + share to Wall Street, which + +On line 2060: + corrections and fines.122 + They were losing market share + to Wall Street, which was + +On line 2060: + fines.122 They were losing + market share to Wall Street, which + was beginning to + +On line 2060: + standards, purchasing + and guaranteeing riskier + loans, and increasing + +On line 2060: + and guaranteeing + riskier loans, and increasing + their securities + +On line 2060: + their regulator, + the Office of Federal + Housing Enterprise + +On line 2060: + Freddie’s increasing + investments in risky mortgages + and securities. + +On line 2062: + in risky mortgages and + securities. In Freddie + changed accounting firms. + +On line 2062: + and securities. + In Freddie changed accounting + firms. The company + +On line 2062: + securities. In + Freddie changed accounting firms. + The company had + +On line 2062: + accounting firms. The + company had been using + Arthur Andersen for + +On line 2062: + The company had + been using Arthur Andersen + for many years, but when + +On line 2062: + had been using Arthur + Andersen for many years, but + when Andersen got + +On line 2062: + Arthur Andersen for + many years, but when Andersen + got into trouble + +On line 2062: + Andersen for many + years, but when Andersen got + into trouble in + +On line 2062: + but when Andersen + got into trouble in the + Enron debacle + +On line 2062: + got into trouble + in the Enron debacle + (which put both Enron + +On line 2062: + into trouble in + the Enron debacle (which + put both Enron and + +On line 2062: + Enron debacle + (which put both Enron and its + accountant out of + +On line 2062: + (which put both Enron + and its accountant out of + business), Freddie switched + +On line 2062: + both Enron and its + accountant out of business), + Freddie switched to PricewaterhouseCoopers. + +On line 2062: + accountant out of + business), Freddie switched to PricewaterhouseCoopers. + The new accountant + +On line 2062: + business), Freddie switched + to PricewaterhouseCoopers. The new accountant + found the company + +On line 2062: + the company had + understated its earnings + by billion from through + +On line 2062: + had understated + its earnings by billion from + through the third quarter + +On line 2062: + understated its + earnings by billion from through + the third quarter of + +On line 2062: + earnings by billion + from through the third quarter of + in an effort to + +On line 2062: + through the third quarter + of in an effort to smooth + reported earnings + +On line 2062: + quarter of in an + effort to smooth reported + earnings and promote + +On line 2062: + of in an effort + to smooth reported earnings + and promote itself + +On line 2062: + in an effort to + smooth reported earnings and + promote itself as + +On line 2062: + to smooth reported + earnings and promote itself + as "Steady Freddie," a + +On line 2062: + earnings and promote + itself as "Steady Freddie," a + company of strong + +On line 2062: + promote itself as + "Steady Freddie," a company + of strong and steady growth. + +On line 2062: + as "Steady Freddie," a + company of strong and steady + growth. Bonuses were tied + +On line 2062: + company of strong + and steady growth. Bonuses were tied + to the reported + +On line 2064: + and steady growth. Bonuses + were tied to the reported + earnings, and OFHEO found + +On line 2064: + growth. Bonuses were tied + to the reported earnings, + and OFHEO found that this + +On line 2064: + to the accounting + manipulations. Freddie’s + board ousted most top + +On line 2064: + manipulations. + Freddie’s board ousted most top + managers, including + +On line 2064: + CEO Leland Brendsel, + President and COO David Glenn, + and CFO Vaughn Clarke.124 In + +On line 2064: + Brendsel, President + and COO David Glenn, and CFO Vaughn + Clarke.124 In December + +On line 2064: + President and COO + David Glenn, and CFO Vaughn Clarke.124 In + December Freddie + +On line 2064: + and COO David Glenn, and + CFO Vaughn Clarke.124 In December + Freddie agreed with OFHEO + +On line 2064: + David Glenn, and CFO Vaughn + Clarke.124 In December Freddie + agreed with OFHEO to pay + +On line 2064: + Glenn, and CFO Vaughn Clarke.124 + In December Freddie agreed + with OFHEO to pay a + +On line 2064: + Clarke.124 In December + Freddie agreed with OFHEO to pay + a million penalty + +On line 2064: + risk management. In + January OFHEO directed + Freddie to maintain + +On line 2064: + to maintain more than + its minimum capital + requirement until + +On line 2064: + requirement until + it reduced operational + risk and could produce + +On line 2066: + settle shareholder + lawsuits for million and pay + million in penalties + +On line 2066: + shareholder lawsuits + for million and pay million + in penalties to the + +On line 2068: + lawsuits for million + and pay million in penalties + to the SEC. Fannie + +On line 2068: + for million and pay + million in penalties to the + SEC. Fannie was next. + +On line 2068: + million in penalties + to the SEC. Fannie was next. + In September OFHEO + +On line 2068: + Fannie was next. In + September OFHEO discovered + violations of + +On line 2068: + In September OFHEO + discovered violations + of accounting rules + +On line 2068: + rules that called into + question previous filings. + In OFHEO reported + +On line 2068: + In OFHEO reported + that Fannie had overstated + earnings from through by + +On line 2068: + earnings from through by + billion and that it, too, had + manipulated + +On line 2068: + billion and that it, + too, had manipulated + accounting in ways + +On line 2068: + in ways influenced + by compensation plans.125 OFHEO + made Fannie improve + +On line 2068: + by compensation + plans.125 OFHEO made Fannie improve + accounting controls, + +On line 2068: + made Fannie improve + accounting controls, maintain + the same capital + +On line 2068: + accounting controls, + maintain the same capital + surplus imposed on + +On line 2068: + imposed on Freddie, + and improve governance and + internal controls. + +On line 2068: + Freddie, and improve + governance and internal + controls. Fannie’s board + +On line 2068: + internal controls. + Fannie’s board ousted CEO Franklin + Raines and others, and + +On line 2068: + board ousted CEO Franklin + Raines and others, and the SEC + required Fannie to + +On line 2068: + Raines and others, and + the SEC required Fannie to + restate its results + +On line 2068: + others, and the SEC + required Fannie to restate + its results for through + +On line 2068: + required Fannie to + restate its results for through + mid-2004. Fannie settled + +On line 2068: + results for through mid-2004. + Fannie settled SEC and OFHEO + enforcement actions + +On line 2070: + actions for million + in penalties. Donald Bisenius, + an executive + +On line 2070: + in penalties. Donald + Bisenius, an executive + vice president at + +On line 2070: + an executive + vice president at Freddie + Mac, told the FCIC that + +On line 2070: + executive vice + president at Freddie Mac, + told the FCIC that the + +On line 2070: + at Freddie Mac, told + the FCIC that the accounting + issues distracted + +On line 2070: + accounting issues + distracted management from + the mortgage business, + +On line 2070: + issues distracted + management from the mortgage + business, taking "a + +On line 2070: + the mortgage business, + taking "a tremendous amount of + management’s time and + +On line 2070: + business, taking "a + tremendous amount of management’s + time and attention + +On line 2070: + management’s time and + attention and probably + led to us being + +On line 2070: + less aggressive or + less competitive in the + marketplace [than] we + +On line 2070: + less competitive + in the marketplace [than] we + otherwise might have + +On line 2074: + in the marketplace + [than] we otherwise might have + been."126 As the scandals + +On line 2074: + [than] we otherwise + might have been."126 As the scandals + unfolded, subprime + +On line 2074: + been."126 As the scandals + unfolded, subprime private + label mortgage–backed + +On line 2074: + unfolded, subprime + private label mortgage–backed + securities (PLS) + +On line 2074: + label mortgage–backed + securities (PLS) issued + by Wall Street increased + +On line 2074: + securities (PLS) + issued by Wall Street increased + from billion in to + +On line 2076: + (PLS) issued by Wall + Street increased from billion in + to billion in (shown + +On line 2076: + issued by Wall Street + increased from billion in to + billion in (shown in + +On line 2076: + by Wall Street increased + from billion in to billion + in (shown in figure + +On line 2076: + Wall Street increased from + billion in to billion in + (shown in figure the + +On line 2076: + increased from billion + in to billion in (shown in + figure the value + +On line 2076: + from billion in to + billion in (shown in figure + the value of Alt-A + +On line 2076: + in to billion in + (shown in figure the value + of Alt-A mortgage–backed + +On line 2078: + the value of Alt-A + mortgage–backed securities + increased from billion + +On line 2078: + of Alt-A mortgage–backed + securities increased from + billion to billion. + +On line 2078: + billion to billion. + Starting in for Freddie and + for Fannie, the GSEs—particularly + +On line 2078: + billion. Starting in + for Freddie and for Fannie, + the GSEs—particularly Freddie—became + +On line 2078: + for Fannie, the GSEs—particularly + Freddie—became buyers in this + market. While private + +On line 2078: + Freddie—became buyers + in this market. While private + investors always bought + +On line 2078: + market. While private + investors always bought the most, + the GSEs purchased of + +On line 2078: + bought the most, the GSEs + purchased of the private-issued + subprime mortgage–backed + +On line 2078: + private-issued subprime + mortgage–backed securities + in The share peaked at + +On line 2078: + subprime mortgage–backed + securities in The share + peaked at in and then + +On line 2078: + securities in + The share peaked at in and then + fell back to in The + +On line 2078: + share peaked at in and + then fell back to in The share + for Alt-A mortgage–backed + +On line 2078: + then fell back to in + The share for Alt-A mortgage–backed + securities was + +On line 2078: + in The share for Alt-A + mortgage–backed securities + was always lower.127 + +On line 2078: + was always lower.127 + The GSEs almost always bought + the safest, triple-A-rated tranches. + +On line 2078: + always lower.127 The + GSEs almost always bought the + safest, triple-A-rated tranches. From + +On line 2080: + almost always bought + the safest, triple-A-rated tranches. From through + the GSEs’ purchases + +On line 2080: + always bought the safest, + triple-A-rated tranches. From through the GSEs’ + purchases declined, + +On line 2080: + triple-A-rated tranches. From through + the GSEs’ purchases declined, + both in dollar amount + +On line 2080: + tranches. From through the + GSEs’ purchases declined, both + in dollar amount and + +On line 2082: + purchases declined, + both in dollar amount and as + a percentage. These + +On line 2082: + profitable at first, but + as delinquencies increased in + and both GSEs began + +On line 2082: + delinquencies increased + in and both GSEs began to + take significant + +On line 2082: + both GSEs began to + take significant losses + on their private-label + +On line 2084: + from their purchases + of Alt-A securities. By + the third quarter of + +On line 2084: + purchases of Alt-A + securities. By the third + quarter of total + +On line 2084: + total impairments + on securities totaled + billion at the two + +On line 2084: + on securities + totaled billion at the two + companies—enough to + +On line 2084: + totaled billion at + the two companies—enough to + wipe out nearly of + +On line 2084: + two companies—enough + to wipe out nearly of their + pre-crisis capital.128 + +On line 2086: + to wipe out nearly + of their pre-crisis capital.128 + OFHEO knew about the GSEs’ + +On line 2088: + the GSEs’ purchases + of subprime and Alt-A mortgage– + backed securities. + +On line 2088: + GSEs’ purchases of + subprime and Alt-A mortgage– backed + securities. In + +On line 2088: + backed securities. + In its examination, + the regulator + +On line 2088: + examination, + the regulator noted + Freddie’s purchases + +On line 2088: + Freddie’s purchases + of these securities. It + also noted that + +On line 2088: + purchases of these + securities. It also + noted that Freddie + +On line 2088: + securities. It + also noted that Freddie + was purchasing whole + +On line 2090: + also noted that + Freddie was purchasing whole + mortgages with "higher + +On line 2090: + mortgages with "higher + risk attributes which exceeded + the Enterprise’s + +On line 2090: + capabilities," + including "No Income/No Asset + loans" that introduced + +On line 2090: + including "No Income/No + Asset loans" that introduced + "considerable risk." + +On line 2090: + Income/No Asset loans" that + introduced "considerable + risk." OFHEO reported + +On line 2090: + mortgage insurers + were already seeing abuses + with these loans.129 But the + +On line 2090: + with these loans.129 But the + regulator concluded + that the purchases + +On line 2090: + that the purchases + of mortgage-backed securities + and riskier mortgages + +On line 2090: + the purchases of + mortgage-backed securities and + riskier mortgages were + +On line 2090: + and riskier mortgages + were not a "significant + supervisory + +On line 2090: + efforts to address + accounting and internal + deficiencies.130 OFHEO + +On line 2090: + nothing in Fannie’s + report about its purchases + of subprime and Alt-A + +On line 2090: + Fannie’s report about + its purchases of subprime + and Alt-A mortgage–backed + +On line 2090: + its purchases of + subprime and Alt-A mortgage–backed + securities, and + +On line 2090: + of subprime and Alt-A + mortgage–backed securities, + and its credit risk + +On line 2092: + risk management was + deemed satisfactory.131 The + reasons for the GSEs’ + +On line 2092: + The reasons for the + GSEs’ purchases of subprime + and Alt-A mortgage–backed + +On line 2092: + GSEs’ purchases of + subprime and Alt-A mortgage–backed + securities have + +On line 2092: + of subprime and Alt-A + mortgage–backed securities + have been debated. + +On line 2092: + securities have + been debated. Some observers, + including Alan Greenspan, + +On line 2092: + have been debated. + Some observers, including Alan + Greenspan, have linked the GSEs’ + +On line 2092: + push to fulfill their + higher goals for affordable + housing. The former + +On line 2092: + former Fed chairman + wrote in a working paper + submitted as part + +On line 2092: + a working paper + submitted as part of his + testimony to + +On line 2092: + submitted as part + of his testimony to + the FCIC that when the + +On line 2094: + his testimony + to the FCIC that when the GSEs + were pressed to "expand + +On line 2094: + to the FCIC that when + the GSEs were pressed to "expand + ‘affordable housing + +On line 2094: + that when the GSEs were + pressed to "expand ‘affordable + housing commitments,’ + +On line 2094: + the GSEs were pressed to + "expand ‘affordable housing + commitments,’ they chose + +On line 2094: + ‘affordable housing + commitments,’ they chose to meet + them by investing + +On line 2094: + multifamily + purchases alone met each of + the goals; in other + +On line 2094: + purchases alone met + each of the goals; in other + words, the enterprise + +On line 2094: + the goals; in other + words, the enterprise would have + met its obligations + +On line 2094: + in other words, the + enterprise would have met its + obligations without + +On line 2094: + enterprise would have + met its obligations without + buying subprime or + +On line 2096: + none of Fannie Mae’s + purchases of subprime or + Alt-A securities + +On line 2096: + of subprime or Alt-A + securities were ever + submitted to HUD + +On line 2096: + Alt-A securities + were ever submitted to + HUD to be counted + +On line 2098: + submitted to HUD + to be counted toward the + goals. Before or less + +On line 2098: + HUD to be counted + toward the goals. Before or + less of the GSEs’ loan + +On line 2098: + counted toward the + goals. Before or less of the + GSEs’ loan purchases + +On line 2098: + goals. Before or less + of the GSEs’ loan purchases + had to satisfy + +On line 2098: + Before or less of + the GSEs’ loan purchases had + to satisfy the + +On line 2098: + purchases had to + satisfy the affordable + housing goals. In the + +On line 2098: + to satisfy the + affordable housing goals. In + the goals were increased + +On line 2098: + met the overall goals.133 + Securities purchases + did, in several + +On line 2098: + requiring the GSEs + to purchase or guarantee + loans to purchase homes. + +On line 2098: + GSEs to purchase or + guarantee loans to purchase + homes. In Fannie missed + +On line 2098: + guarantee loans to + purchase homes. In Fannie missed + one of these subgoals + +On line 2098: + loans to purchase homes. + In Fannie missed one of these + subgoals and would have + +On line 2098: + homes. In Fannie missed + one of these subgoals and would + have missed a second + +On line 2098: + Fannie missed one of + these subgoals and would have missed + a second without + +On line 2098: + these subgoals and would + have missed a second without + the securities + +On line 2098: + have missed a second + without the securities + purchases; in the + +On line 2098: + purchases; in the + securities purchases + helped Fannie meet those + +On line 2100: + the securities + purchases helped Fannie meet + those two subgoals. The + +On line 2100: + helped Fannie meet those + two subgoals. The pattern is + the same at Freddie + +On line 2100: + Fannie meet those two + subgoals. The pattern is the + same at Freddie Mac, + +On line 2100: + the FCIC show that from + through Freddie would have met the + affordable housing + +On line 2100: + that from through Freddie + would have met the affordable + housing goals without + +On line 2100: + affordable housing + goals without any purchases + of Alt-A or subprime + +On line 2100: + of Alt-A or subprime + securities, but used the + securities to + +On line 2102: + securities, but + used the securities to + help meet subgoals.135 Robert + +On line 2102: + securities to + help meet subgoals.135 Robert Levin, the + former chief business + +On line 2102: + Robert Levin, the former + chief business officer of + Fannie Mae, told the + +On line 2102: + was no trade-off [between + making money and hitting + goals], it was a very + +On line 2102: + trade-off [between making + money and hitting goals], it + was a very broad-brushed + +On line 2102: + making money and + hitting goals], it was a very + broad-brushed effort" that + +On line 2102: + money and hitting + goals], it was a very broad-brushed + effort" that could be + +On line 2102: + goals], it was a very + broad-brushed effort" that could be + characterized as + +On line 2104: + very broad-brushed effort" + that could be characterized + as "win-win-win: money, goals, + +On line 2104: + broad-brushed effort" that + could be characterized as + "win-win-win: money, goals, and + +On line 2104: + be characterized + as "win-win-win: money, goals, and share."136 + Mark Winer, the head + +On line 2104: + characterized as + "win-win-win: money, goals, and share."136 Mark + Winer, the head of + +On line 2104: + as "win-win-win: money, goals, + and share."136 Mark Winer, the head + of Fannie’s Business, + +On line 2104: + Winer, the head of + Fannie’s Business, Analysis, + and Decisions Group, + +On line 2104: + of Fannie’s Business, + Analysis, and Decisions + Group, stated that the + +On line 2104: + Business, Analysis, + and Decisions Group, stated + that the purchase of + +On line 2104: + of triple-A tranches of + mortgage-backed securities backed + by subprime loans was + +On line 2104: + backed by subprime loans + was viewed as an attractive + opportunity + +On line 2104: + as an attractive + opportunity with good + returns. He said that + +On line 2104: + returns. He said that + the mortgage-backed securities + satisfied housing + +On line 2104: + said that the mortgage-backed + securities satisfied + housing goals, and that + +On line 2104: + satisfied housing + goals, and that the goals became + a factor in the + +On line 2104: + housing goals, and that + the goals became a factor + in the decision + +On line 2106: + of private label + securities. Overall, while + the mortgages behind + +On line 2106: + behind the subprime + mortgage–backed securities + were often issued + +On line 2106: + were often issued + to borrowers that could help + Fannie and Freddie + +On line 2106: + to borrowers that + could help Fannie and Freddie + fulfill their goals, the + +On line 2106: + that could help Fannie + and Freddie fulfill their goals, + the mortgages behind + +On line 2106: + could help Fannie and + Freddie fulfill their goals, the + mortgages behind the + +On line 2106: + Freddie fulfill their + goals, the mortgages behind the + Alt-A securities + +On line 2106: + the mortgages behind + the Alt-A securities were + not. Alt-A mortgages were + +On line 2106: + mortgages behind the + Alt-A securities were not. + Alt-A mortgages were not + +On line 2106: + not generally + extended to lower-income + borrowers, and the + +On line 2106: + Alt-A loans—from counting + toward affordability + goals.138 Levin told the FCIC + +On line 2106: + told the FCIC that they + believed that the purchase of + Alt-A securities + +On line 2106: + the purchase of Alt-A + securities "did not have + a net positive + +On line 2106: + securities "did + not have a net positive + effect on Fannie + +On line 2106: + positive effect + on Fannie Mae’s housing goals."139 + Instead, they had to + +On line 2106: + effect on Fannie + Mae’s housing goals."139 Instead, they + had to be offset + +On line 2106: + housing goals."139 Instead, + they had to be offset with + more mortgages for low- + +On line 2108: + and moderate-income + borrowers to meet the goals. + Fannie and Freddie + +On line 2108: + meet the goals. Fannie + and Freddie continued to + purchase subprime and + +On line 2108: + from to and also + bought and securitized greater + numbers of riskier + +On line 2108: + and also bought and + securitized greater numbers + of riskier mortgages. + +On line 2108: + securitized greater + numbers of riskier mortgages. + The results would be + +On line 2108: + numbers of riskier + mortgages. The results would be + disastrous for the + +On line 2108: + riskier mortgages. The + results would be disastrous + for the companies, + +On line 2110: + their shareholders, and + American taxpayers. The + Commission concludes + +On line 2110: + policy of the + Federal Reserve, along with + capital flows from + +On line 2110: + capital flows from + abroad, created conditions + in which a housing + +On line 2110: + a housing bubble + could develop. However, + these conditions need + +On line 2110: + housing bubble could + develop. However, these + conditions need not + +On line 2110: + conditions need not + have led to a crisis. The + Federal Reserve + +On line 2110: + need not have led to + a crisis. The Federal + Reserve and other + +On line 2110: + Federal Reserve + and other regulators + did not take actions + +On line 2110: + Reserve and other + regulators did not take + actions necessary + +On line 2110: + did not take actions + necessary to constrain the + credit bubble. In + +On line 2110: + constrain the credit + bubble. In addition, the + Federal Reserve’s + +On line 2110: + credit bubble. In + addition, the Federal + Reserve’s policies and + +On line 2110: + Reserve’s policies and + pronouncements encouraged rather + than inhibited + +On line 2110: + encouraged rather than + inhibited the growth of + mortgage debt and the + +On line 2110: + than inhibited + the growth of mortgage debt and + the housing bubble. + +On line 2112: + of mortgage debt and + the housing bubble. Lending + standards collapsed, and + +On line 2112: + accountability + and responsibility + throughout each level + +On line 2112: + securitizers, + credit rating agencies, and + investors, and ranged from + +On line 2112: + and investors, and ranged + from corporate boardrooms to + individuals. + +On line 2112: + corporate boardrooms + to individuals. Loans + were often premised on + +On line 2112: + Loans were often premised + on ever-rising home prices and + were made regardless + +On line 2112: + were often premised on + ever-rising home prices and were + made regardless of + +On line 2112: + on ever-rising home + prices and were made regardless + of ability to + +On line 2112: + ever-rising home prices + and were made regardless of + ability to pay. + +On line 2114: + home prices and were made + regardless of ability + to pay. The nonprime + +On line 2114: + process created a + pipeline through which risky mortgages + were conveyed and sold + +On line 2114: + which risky mortgages were + conveyed and sold throughout the + financial system. + +On line 2116: + was essential to + the origination of the + burgeoning numbers + +On line 2116: + the origination + of the burgeoning numbers + of high-risk mortgages. + +On line 2116: + origination of + the burgeoning numbers of + high-risk mortgages. The + +On line 2116: + model undermined + responsibility and + accountability + +On line 2120: + Federal and state + rules required or encouraged + financial firms and + +On line 2120: + institutional + investors to make investments + based on the ratings + +On line 2120: + based on the ratings + of credit rating agencies, + leading to undue + +On line 2120: + ratings of credit + rating agencies, leading to + undue reliance on + +On line 2120: + to undue reliance + on those ratings. However, + the rating agencies + +On line 2120: + undue reliance on + those ratings. However, the + rating agencies were + +On line 2120: + regulator to + ensure the quality and + accuracy of + +On line 2120: + of their ratings. Moody’s, + the Commission’s case study in + this area, relied on + +On line 2120: + their ratings. Moody’s, the + Commission’s case study in this + area, relied on flawed + +On line 2120: + the Commission’s case + study in this area, relied on + flawed and outdated + +On line 2120: + area, relied on flawed + and outdated models to + issue erroneous + +On line 2120: + issue erroneous + ratings on mortgage-related + securities, failed + +On line 2120: + perform meaningful + due diligence on the assets + underlying the + +On line 2120: + due diligence on the + assets underlying the + securities, and + +On line 2120: + the securities, + and continued to rely + on those models even + +On line 2120: + and continued to + rely on those models even + after it became + +On line 2120: + models even after + it became obvious that + the models were wrong. + +On line 2122: + after it became + obvious that the models + were wrong. Not only + +On line 2122: + obvious that the + models were wrong. Not only + did the federal + +On line 2122: + were wrong. Not only + did the federal banking + supervisors fail + +On line 2122: + federal banking + supervisors fail to rein + in risky mortgage-lending + +On line 2122: + in risky mortgage-lending + practices, but the Office of + the Comptroller of + +On line 2132: + on this segment of + the mortgage market. THE CDO + MACHINE CONTENTS CDOs: + +On line 2132: + the mortgage market. + THE CDO MACHINE CONTENTS CDOs: + "We created the + +On line 2134: + MACHINE CONTENTS CDOs: + "We created the investor" + Bear Stearns’s hedge funds: "It + +On line 2134: + CDOs: "We created + the investor" Bear Stearns’s hedge funds: + "It functioned fine up + +On line 2134: + the investor" Bear Stearns’s + hedge funds: "It functioned fine up + until one day it + +On line 2134: + Bear Stearns’s hedge funds: "It + functioned fine up until one + day it just didn’t + +On line 2134: + hedge funds: "It functioned + fine up until one day it + just didn’t function".....................................................................................134 + +On line 2136: + just didn’t function".....................................................................................134 + Citigroup’s liquidity + puts: "A potential + +On line 2138: + puts: "A potential + conflict of interest" AIG: + "Golden goose for the + +On line 2138: + potential conflict + of interest" AIG: "Golden + goose for the entire + +On line 2140: + goose for the entire + Street" Goldman Sachs: "Multiplied + the effects of the + +On line 2140: + entire Street" Goldman + Sachs: "Multiplied the effects + of the collapse in + +On line 2142: + Sachs: "Multiplied the + effects of the collapse in + subprime"..................142 Moody’s: "Achieved through + +On line 2144: + the effects of the + collapse in subprime"..................142 Moody’s: "Achieved + through some alchemy" SEC: + +On line 2144: + collapse in subprime"..................142 + Moody’s: "Achieved through some alchemy" SEC: + "It’s going to be + +On line 2144: + "Achieved through some alchemy" + SEC: "It’s going to be an + awfully big mess"..........................................................150 + +On line 2146: + SEC: "It’s going to + be an awfully big mess"..........................................................150 + In the first decade of + +On line 2146: + "It’s going to be + an awfully big mess"..........................................................150 In + the first decade of the + +On line 2146: + going to be an + awfully big mess"..........................................................150 In the + first decade of the 21st + +On line 2146: + be an awfully + big mess"..........................................................150 In the first decade of + the 21st century, + +On line 2146: + an awfully big + mess"..........................................................150 In the first decade of the + 21st century, a + +On line 2146: + big mess"..........................................................150 In the first + decade of the 21st century, + a previously + +On line 2146: + the 21st century, + a previously obscure + financial product + +On line 2146: + financial product + called the collateralized + debt obligation, or + +On line 2146: + obligation, or CDO, + transformed the mortgage market + by creating a + +On line 2146: + transformed the mortgage + market by creating a + new source of demand + +On line 2146: + the mortgage market + by creating a new source + of demand for the + +On line 2146: + by creating a + new source of demand for the + lower-rated tranches + +On line 2148: + tranches of mortgage-backed + securities.* Despite their + relatively high + +On line 2148: + their relatively + high returns, tranches rated + other than triple-A could + +On line 2148: + high returns, tranches + rated other than triple-A could + be hard to sell. If + +On line 2148: + be hard to sell. If + borrowers were delinquent or + defaulted, investors + +On line 2148: + defaulted, investors + in these tranches were out of + luck because of where + +On line 2148: + these tranches were out + of luck because of where they + sat in the payments + +On line 2150: + of luck because of + where they sat in the payments + waterfall. Wall Street + +On line 2150: + of where they sat in + the payments waterfall. Wall + Street came up with a + +On line 2150: + sat in the payments + waterfall. Wall Street came up + with a solution: + +On line 2150: + waterfall. Wall Street + came up with a solution: + in the words of one + +On line 2150: + the words of one banker, + they "created the investor."1 + That is, they built new + +On line 2150: + banker, they "created + the investor."1 That is, they built + new securities + +On line 2150: + they "created the + investor."1 That is, they built new + securities that + +On line 2150: + investor."1 That is, they + built new securities that + would buy the tranches + +On line 2150: + That is, they built new + securities that would buy + the tranches that had + +On line 2150: + new securities + that would buy the tranches that + had become harder + +On line 2150: + securities that + would buy the tranches that had + become harder to + +On line 2150: + would buy the tranches + that had become harder to + sell. Bankers would take those + +On line 2150: + buy the tranches that + had become harder to sell. + Bankers would take those low + +On line 2150: + had become harder + to sell. Bankers would take those low + investment-grade + +On line 2150: + Bankers would take those low + investment-grade tranches, + largely rated BBB + +On line 2150: + BBB or A, from many + mortgage-backed securities and + repackage them into + +On line 2150: + A, from many mortgage-backed + securities and repackage + them into the new + +On line 2150: + them into the new + securities—CDOs. Approximately of + these CDO tranches would + +On line 2150: + into the new securities—CDOs. + Approximately of these + CDO tranches would be + +On line 2150: + Approximately + of these CDO tranches would be + rated triple-A despite + +On line 2150: + lower-rated tranches + of mortgage-backed securities. + CDO securities + +On line 2150: + be sold with their own + waterfalls, with the risk-averse + investors, again, paid first + +On line 2150: + own waterfalls, with + the risk-averse investors, again, paid + first and the risk-seeking + +On line 2150: + the risk-averse investors, + again, paid first and the risk-seeking + investors paid last. As + +On line 2150: + investors, again, paid first + and the risk-seeking investors paid + last. As they did in + +On line 2150: + again, paid first and the + risk-seeking investors paid last. As + they did in the case + +On line 2150: + they did in the case + of mortgage-backed securities, + the rating agencies + +On line 2150: + did in the case of + mortgage-backed securities, the + rating agencies gave + +On line 2150: + rating agencies gave + their highest, triple-A ratings to + the securities + +On line 2150: + highest, triple-A ratings + to the securities at + the top (see figure + +On line 2152: + triple-A ratings to the + securities at the top + (see figure Still, it + +On line 2152: + securities at + the top (see figure Still, it + was not obvious + +On line 2152: + top (see figure Still, + it was not obvious that + a pool of mortgage-backed + +On line 2152: + be transformed into + a new security that + is mostly rated + +On line 2152: + transformed into a + new security that is + mostly rated triple-A. + +On line 2152: + new security + that is mostly rated triple-A. + But math made it so. + +On line 2154: + rated triple-A. But math + made it so. *Throughout this book, + unless otherwise + +On line 2154: + triple-A. But math made it + so. *Throughout this book, unless + otherwise noted, + +On line 2154: + made it so. *Throughout + this book, unless otherwise + noted, we use the + +On line 2154: + so. *Throughout this book, + unless otherwise noted, + we use the term "CDOs" + +On line 2154: + unless otherwise + noted, we use the term "CDOs" + to refer to cash + +On line 2154: + noted, we use the + term "CDOs" to refer to cash + CDOs backed by asset-backed + +On line 2154: + term "CDOs" to refer + to cash CDOs backed by asset-backed + securities (such + +On line 2154: + securities (such + as mortgage-backed securities), + also known as ABS + +On line 2156: + also known as ABS + CDOs. The securities firms + argued—and the rating + +On line 2156: + known as ABS CDOs. The + securities firms argued—and + the rating agencies + +On line 2156: + securities firms + argued—and the rating agencies + agreed—that if they pooled many + +On line 2156: + rating agencies agreed—that + if they pooled many BBB-rated mortgage-backed + securities, they + +On line 2156: + significant—that + if one security went + bad, the second had + +On line 2156: + security went + bad, the second had only + a very small chance of + +On line 2156: + went bad, the second + had only a very small chance + of going bad at + +On line 2156: + bad, the second had + only a very small chance of + going bad at the + +On line 2156: + second had only + a very small chance of going + bad at the same time. + +On line 2156: + had only a very + small chance of going bad at + the same time. And as + +On line 2156: + only a very small + chance of going bad at the + same time. And as long + +On line 2156: + small chance of going + bad at the same time. And as + long as losses were + +On line 2156: + bad at the same time. + And as long as losses were + limited, only + +On line 2156: + same time. And as long + as losses were limited, + only those investors + +On line 2156: + limited, only + those investors at the bottom + would lose money. They + +On line 2156: + those investors at the + bottom would lose money. They + would absorb the blow, + +On line 2156: + the bottom would lose + money. They would absorb the + blow, and the other + +On line 2156: + would lose money. They + would absorb the blow, and the + other investors would + +On line 2156: + They would absorb the + blow, and the other investors + would continue to + +On line 2156: + would absorb the blow, + and the other investors would + continue to get + +On line 2158: + blow, and the other + investors would continue to + get paid. Relying + +On line 2158: + the other investors + would continue to get paid. + Relying on that + +On line 2158: + paid. Relying on + that logic, the CDO machine + gobbled up the BBB + +On line 2158: + lower-rated tranches + of mortgage-backed securities, + growing from a bit + +On line 2158: + tranches of mortgage-backed + securities, growing from + a bit player to + +On line 2158: + Between and as house + prices rose nationally and + trillion in mortgage-backed + +On line 2160: + securities were + created, Wall Street issued + nearly billion in + +On line 2160: + created, Wall Street + issued nearly billion in + CDOs that included + +On line 2160: + nearly billion in + CDOs that included mortgage-backed + securities as + +On line 2160: + CDOs that included + mortgage-backed securities as + collateral.2 With + +On line 2160: + demand loans for their + pools, and hundreds of billions + of dollars flooded + +On line 2160: + pools, and hundreds of + billions of dollars flooded + the mortgage world. In + +On line 2160: + of dollars flooded + the mortgage world. In effect, + the CDO became the + +On line 2160: + the mortgage world. In + effect, the CDO became the + engine that powered + +On line 2160: + world. In effect, the + CDO became the engine that + powered the mortgage + +On line 2160: + mortgage supply chain. + "There is a machine going," + Scott Eichel, a senior + +On line 2160: + machine going," Scott + Eichel, a senior managing + director at Bear + +On line 2160: + at Bear Stearns, told a + financial journalist in + May "There is a lot + +On line 2162: + May "There is a lot + of brain power to keep this + going."3 Everyone + +On line 2162: + is a lot of brain + power to keep this going."3 + Everyone involved + +On line 2162: + of brain power to + keep this going."3 Everyone + involved in keeping + +On line 2162: + machine humming—the CDO + managers and underwriters + who packaged and sold + +On line 2162: + packaged and sold the + securities, the rating + agencies that gave most + +On line 2162: + the securities, + the rating agencies that gave + most of them sterling + +On line 2162: + agencies that gave most + of them sterling ratings, and + the guarantors who + +On line 2162: + most of them sterling + ratings, and the guarantors + who wrote protection + +On line 2162: + them sterling ratings, + and the guarantors who wrote + protection against their + +On line 2162: + protection against their + defaulting—collected fees + based on the dollar + +On line 2162: + based on the dollar + volume of securities + sold. For the bankers who + +On line 2162: + the dollar volume + of securities sold. For + the bankers who had put + +On line 2162: + dollar volume of + securities sold. For the + bankers who had put these + +On line 2162: + of securities + sold. For the bankers who had put + these deals together, + +On line 2162: + securities sold. + For the bankers who had put these + deals together, as + +On line 2162: + the bankers who had put + these deals together, as for + the executives + +On line 2162: + bankers who had put these + deals together, as for the + executives of + +On line 2162: + these deals together, + as for the executives + of their companies, + +On line 2162: + together, as for + the executives of their + companies, volume + +On line 2162: + the executives + of their companies, volume + equaled fees equaled bonuses. + +On line 2162: + executives of + their companies, volume equaled + fees equaled bonuses. And + +On line 2162: + of their companies, + volume equaled fees equaled bonuses. + And those fees were in + +On line 2162: + fees equaled bonuses. And + those fees were in the billions + of dollars across the + +On line 2164: + And those fees were in + the billions of dollars across + the market. But when + +On line 2164: + those fees were in the + billions of dollars across the + market. But when the + +On line 2164: + were in the billions + of dollars across the market. + But when the housing + +On line 2164: + billions of dollars + across the market. But when the + housing market went + +On line 2164: + of dollars across the + market. But when the housing + market went south, the + +On line 2164: + across the market. But + when the housing market went + south, the models on + +On line 2164: + the market. But when + the housing market went south, + the models on which + +On line 2164: + market. But when the + housing market went south, the + models on which CDOs + +On line 2164: + But when the housing + market went south, the models + on which CDOs were based + +On line 2164: + market went south, the + models on which CDOs were based + proved tragically + +On line 2164: + would default in large + numbers. This was not how it + was supposed to work. + +On line 2164: + in large numbers. This + was not how it was supposed + to work. Losses in + +On line 2164: + large numbers. This was + not how it was supposed to + work. Losses in one + +On line 2164: + This was not how it + was supposed to work. Losses + in one region were + +On line 2164: + it was supposed to + work. Losses in one region + were supposed to be + +On line 2164: + in one region were + supposed to be offset by + successful loans in + +On line 2164: + by successful loans + in another region. In + the end, CDOs turned out + +On line 2164: + successful loans in + another region. In the + end, CDOs turned out to + +On line 2164: + loans in another + region. In the end, CDOs turned + out to be some of + +On line 2164: + another region. + In the end, CDOs turned out to + be some of the most + +On line 2164: + to be some of the + most ill-fated assets + in the financial + +On line 2164: + most ill-fated + assets in the financial + crisis. The greatest + +On line 2164: + financial crisis. + The greatest losses would be + experienced by + +On line 2164: + The greatest losses + would be experienced by + big CDO arrangers such + +On line 2164: + greatest losses would + be experienced by big + CDO arrangers such as + +On line 2164: + be experienced + by big CDO arrangers such as + Citigroup, Merrill + +On line 2164: + by big CDO arrangers + such as Citigroup, Merrill + Lynch, and UBS, and by + +On line 2164: + Lynch, and UBS, and by + financial guarantors such + as AIG, Ambac, and + +On line 2164: + as AIG, Ambac, and + MBIA. These players had believed + their own models and + +On line 2164: + Ambac, and MBIA. These + players had believed their own + models and retained + +On line 2164: + MBIA. These players had + believed their own models and + retained exposure + +On line 2164: + players had believed + their own models and retained + exposure to what + +On line 2164: + their own models and + retained exposure to what + were understood to + +On line 2164: + exposure to what + were understood to be the + least risky tranches of + +On line 2164: + were understood to + be the least risky tranches of + the CDOs: those rated + +On line 2164: + understood to be + the least risky tranches of the + CDOs: those rated triple-A + +On line 2164: + the least risky tranches + of the CDOs: those rated triple-A + or even "super-senior," + +On line 2164: + least risky tranches of + the CDOs: those rated triple-A or + even "super-senior," which + +On line 2164: + risky tranches of the + CDOs: those rated triple-A or even + "super-senior," which were + +On line 2164: + the CDOs: those rated + triple-A or even "super-senior," which + were assumed to be + +On line 2164: + CDOs: those rated triple-A + or even "super-senior," which were + assumed to be safer + +On line 2164: + rated triple-A or even + "super-senior," which were assumed + to be safer than triple-A-rated + +On line 2166: + or even "super-senior," + which were assumed to be safer + than triple-A-rated tranches. "The + +On line 2166: + even "super-senior," which + were assumed to be safer than + triple-A-rated tranches. "The whole + +On line 2166: + which were assumed to + be safer than triple-A-rated tranches. "The + whole concept of ABS + +On line 2166: + were assumed to be + safer than triple-A-rated tranches. "The whole + concept of ABS CDOs + +On line 2166: + to be safer than triple-A-rated + tranches. "The whole concept of + ABS CDOs had been an + +On line 2166: + triple-A-rated tranches. "The whole + concept of ABS CDOs had been + an abomination," + +On line 2166: + ABS CDOs had been an + abomination," Patrick Parkinson, + currently the head + +On line 2166: + currently the head + of banking supervision + and regulation + +On line 2168: + and regulation + at the Federal Reserve + Board, told the FCIC.4 CDOS: + +On line 2168: + regulation at + the Federal Reserve Board, + told the FCIC.4 CDOS: "WE + +On line 2168: + at the Federal + Reserve Board, told the FCIC.4 CDOS: + "WE CREATED THE + +On line 2170: + told the FCIC.4 CDOS: "WE + CREATED THE INVESTOR" Michael + Milken’s Drexel Burnham + +On line 2170: + assembled the first + rated collateralized + debt obligation in + +On line 2170: + The strategy made + sense—pooling many bonds reduced + investors’ exposure + +On line 2170: + sense—pooling many bonds + reduced investors’ exposure + to the failure of + +On line 2170: + bonds reduced investors’ + exposure to the failure + of any one bond, and + +On line 2172: + enabled investors to + pick their preferred level of + risk and return. For + +On line 2172: + to pick their preferred + level of risk and return. + For the managers who + +On line 2172: + level of risk and + return. For the managers who + created CDOs, the + +On line 2172: + For the managers who + created CDOs, the key to + profitability of + +On line 2172: + who created CDOs, + the key to profitability + of the CDO was the + +On line 2172: + created CDOs, the + key to profitability of + the CDO was the fee + +On line 2172: + to profitability + of the CDO was the fee and + the spread—the difference + +On line 2172: + CDO was the fee and + the spread—the difference between + the interest that + +On line 2172: + was the fee and the + spread—the difference between the + interest that the + +On line 2172: + the spread—the difference + between the interest that + the CDO received on + +On line 2172: + difference between + the interest that the CDO + received on the bonds + +On line 2172: + the interest that + the CDO received on the bonds + or loans that it held + +On line 2172: + interest that the + CDO received on the bonds or + loans that it held and + +On line 2172: + the CDO received on + the bonds or loans that it held + and the interest + +On line 2172: + CDO received on the + bonds or loans that it held and + the interest that + +On line 2172: + received on the bonds + or loans that it held and the + interest that the + +On line 2172: + the bonds or loans that + it held and the interest + that the CDO paid to + +On line 2172: + or loans that it held + and the interest that the + CDO paid to investors. + +On line 2172: + that it held and the + interest that the CDO paid + to investors. Throughout + +On line 2172: + and the interest + that the CDO paid to investors. + Throughout the 1990s, CDO + +On line 2172: + interest that the + CDO paid to investors. Throughout + the 1990s, CDO managers + +On line 2172: + market bonds and bank + loans. When the liquidity + crisis of drove up + +On line 2172: + bonds and bank loans. When + the liquidity crisis + of drove up returns + +On line 2172: + and bank loans. When the + liquidity crisis of + drove up returns on + +On line 2172: + Securities saw + an opportunity and + launched a series of + +On line 2172: + "multisector" or + "ABS" securities were backed + by mortgages, mobile + +On line 2172: + securities were + backed by mortgages, mobile home + loans, aircraft leases, + +On line 2172: + leases, mutual + fund fees, and other asset + classes with predictable + +On line 2172: + mutual fund fees, + and other asset classes + with predictable income + +On line 2172: + with predictable income + streams. The diversity was + supposed to provide + +On line 2172: + The diversity + was supposed to provide yet + another layer + +On line 2172: + supposed to provide + yet another layer of + safety for investors. + +On line 2174: + layer of safety + for investors. Multisector + CDOs went through a tough + +On line 2174: + safety for investors. + Multisector CDOs went through + a tough patch when some + +On line 2174: + CDOs went through a tough + patch when some of the asset-backed + securities in + +On line 2174: + patch when some of the + asset-backed securities in + which they invested + +On line 2174: + some of the asset-backed + securities in which they + invested started + +On line 2174: + securities in + which they invested started + to perform poorly + +On line 2174: + to perform poorly + in 2002—particularly those + backed by mobile home + +On line 2174: + perform poorly in + 2002—particularly those backed + by mobile home loans + +On line 2174: + 2002—particularly + those backed by mobile home loans + (after borrowers + +On line 2174: + those backed by mobile + home loans (after borrowers + defaulted in large + +On line 2174: + leases (after and + mutual fund fees (after + the dot-com bust).5 The + +On line 2174: + mutual fund fees + (after the dot-com bust).5 The + accepted wisdom + +On line 2174: + (after the dot-com + bust).5 The accepted wisdom + among many investment + +On line 2174: + many investment banks, + investors, and rating agencies + was that the wide range + +On line 2174: + rating agencies was + that the wide range of assets + had actually + +On line 2174: + that the wide range of + assets had actually + contributed to the + +On line 2174: + had actually + contributed to the problem; + according to this + +On line 2174: + this view, the asset + managers who selected the + portfolios could not + +On line 2174: + asset managers who + selected the portfolios + could not be experts + +On line 2174: + portfolios could not + be experts in sectors as + diverse as aircraft + +On line 2174: + could not be experts + in sectors as diverse as + aircraft leases and + +On line 2176: + as aircraft leases + and mutual funds. So the + CDO industry turned + +On line 2176: + aircraft leases and + mutual funds. So the CDO + industry turned to + +On line 2176: + mutual funds. So + the CDO industry turned to + nonprime mortgage–backed + +On line 2176: + the CDO industry + turned to nonprime mortgage–backed + securities, which + +On line 2176: + CDO managers believed + they understood, which seemed to + have a record of good + +On line 2176: + they understood, which + seemed to have a record of good + performance, and which + +On line 2176: + seemed to have a record + of good performance, and which + paid relatively + +On line 2176: + to have a record of + good performance, and which paid + relatively high + +On line 2176: + of good performance, + and which paid relatively + high returns for what + +On line 2176: + good performance, and + which paid relatively high + returns for what was + +On line 2176: + was considered a + safe investment. "Everyone + looked at the sector + +On line 2176: + considered a safe + investment. "Everyone looked + at the sector and + +On line 2176: + "Everyone looked at + the sector and said, the CDO + construct works, but we + +On line 2176: + looked at the sector + and said, the CDO construct works, + but we just need to + +On line 2176: + at the sector and + said, the CDO construct works, but + we just need to find + +On line 2176: + the sector and said, + the CDO construct works, but we + just need to find more + +On line 2176: + construct works, but we + just need to find more stable + collateral," said + +On line 2176: + we just need to find + more stable collateral," + said Wing Chau, who ran + +On line 2176: + just need to find more + stable collateral," said + Wing Chau, who ran two + +On line 2176: + Wing Chau, who ran two + firms, Maxim Group and Harding + Advisory, that + +On line 2176: + firms, Maxim Group and + Harding Advisory, that + managed CDOs mostly + +On line 2176: + industry looked at + residential mortgage–backed + securities, Alt-A, + +On line 2178: + mortgages, and saw the + relative stability."6 + CDOs quickly became + +On line 2178: + saw the relative + stability."6 CDOs quickly + became ubiquitous + +On line 2178: + CDOs quickly became + ubiquitous in the mortgage + business.7 Investors liked + +On line 2178: + ubiquitous in the + mortgage business.7 Investors liked + the combination + +On line 2178: + bankers liked having a + new source of demand for the + lower tranches of + +On line 2178: + having a new source + of demand for the lower + tranches of mortgage-backed + +On line 2178: + of demand for the + lower tranches of mortgage-backed + securities and + +On line 2178: + the lower tranches + of mortgage-backed securities + and other asset-backed + +On line 2178: + created. "We told + you these [BBB-rated securities] + were a great deal, and + +On line 2178: + "We told you these [BBB-rated + securities] were a great + deal, and priced at great + +On line 2178: + [BBB-rated securities] + were a great deal, and priced at + great spreads, but nobody + +On line 2178: + securities] were + a great deal, and priced at great + spreads, but nobody stepped + +On line 2178: + were a great deal, and + priced at great spreads, but nobody + stepped up," the Credit + +On line 2178: + great deal, and priced at + great spreads, but nobody stepped up," + the Credit Suisse + +On line 2178: + deal, and priced at great + spreads, but nobody stepped up," the + Credit Suisse banker + +On line 2178: + great spreads, but nobody + stepped up," the Credit Suisse + banker Joe Donovan told + +On line 2178: + spreads, but nobody stepped + up," the Credit Suisse banker + Joe Donovan told a + +On line 2178: + but nobody stepped up," + the Credit Suisse banker Joe + Donovan told a Phoenix + +On line 2178: + stepped up," the Credit + Suisse banker Joe Donovan told + a Phoenix conference + +On line 2178: + a Phoenix conference + of securitization + bankers in February + +On line 2178: + Phoenix conference of + securitization bankers + in February "So + +On line 2180: + in February "So + we created the investor."8 + By creators of CDOs + +On line 2180: + February "So we + created the investor."8 By + creators of CDOs were + +On line 2180: + we created the + investor."8 By creators of CDOs + were the dominant + +On line 2180: + investor."8 By creators + of CDOs were the dominant + buyers of the BBB-rated + +On line 2180: + By creators of CDOs + were the dominant buyers + of the BBB-rated tranches + +On line 2180: + creators of CDOs were + the dominant buyers of + the BBB-rated tranches of + +On line 2180: + tranches of mortgage-backed + securities, and their bids + significantly + +On line 2180: + securities, and + their bids significantly + influenced prices in + +On line 2182: + By they were buying + "virtually all" of the + BBB tranches.9 Just as + +On line 2182: + the BBB tranches.9 Just + as mortgage-backed securities + provided the cash + +On line 2182: + provided the cash + to originate mortgages, now + CDOs would provide the + +On line 2182: + provide the cash to + fund mortgage-backed securities. + Also by mortgage-backed + +On line 2182: + Also by mortgage-backed + securities accounted + for more than half of + +On line 2182: + for more than half of + the collateral in CDOs, + up from in Sales of + +On line 2182: + more than half of the + collateral in CDOs, up + from in Sales of these + +On line 2182: + collateral in + CDOs, up from in Sales of these + CDOs more than doubled + +On line 2182: + CDOs, up from in Sales + of these CDOs more than doubled + every year, jumping + +On line 2182: + in Sales of these CDOs + more than doubled every year, + jumping from billion + +On line 2182: + of these CDOs more than + doubled every year, jumping + from billion in to + +On line 2182: + doubled every year, + jumping from billion in to + billion in Filling + +On line 2184: + hundreds of billions + of dollars of subprime and + Alt-A mortgages. "It was + +On line 2184: + billions of dollars + of subprime and Alt-A mortgages. + "It was a lot of + +On line 2186: + dollars of subprime + and Alt-A mortgages. "It was a + lot of effort" Five + +On line 2186: + of subprime and Alt-A + mortgages. "It was a lot of + effort" Five key types + +On line 2186: + and Alt-A mortgages. "It + was a lot of effort" Five + key types of players + +On line 2186: + Alt-A mortgages. "It was + a lot of effort" Five key + types of players were + +On line 2186: + of effort" Five key + types of players were involved + in the construction + +On line 2186: + effort" Five key types + of players were involved in + the construction of + +On line 2186: + players were involved + in the construction of CDOs: + securities firms, + +On line 2186: + in the construction + of CDOs: securities firms, + CDO managers, rating + +On line 2186: + agencies, investors, and + financial guarantors. Each + took varying degrees + +On line 2188: + of risk and, for a + time, profited handsomely. + Securities firms + +On line 2188: + a time, profited + handsomely. Securities + firms underwrote the + +On line 2188: + the selection of + collateral, structured the + notes into tranches, + +On line 2188: + were responsible + for selling them to investors. + Three firms—Merrill Lynch, Goldman + +On line 2188: + responsible for + selling them to investors. Three + firms—Merrill Lynch, Goldman Sachs, + +On line 2188: + them to investors. Three + firms—Merrill Lynch, Goldman Sachs, and the + securities arm + +On line 2188: + Lynch, Goldman Sachs, and + the securities arm of + Citigroup—accounted + +On line 2188: + the securities + arm of Citigroup—accounted + for more than of CDOs + +On line 2190: + Citigroup—accounted + for more than of CDOs structured + from to Deutsche Bank and + +On line 2190: + were also major + participants.12 "We had sales + representatives + +On line 2190: + participants.12 "We + had sales representatives + in all those [global] + +On line 2190: + were to sell structured + products," Nestor Dominguez, the co-head + of Citigroup’s CDO + +On line 2190: + products," Nestor Dominguez, the + co-head of Citigroup’s CDO + desk, told the FCIC. "We + +On line 2190: + Nestor Dominguez, the co-head + of Citigroup’s CDO desk, told + the FCIC. "We spent a + +On line 2190: + Dominguez, the co-head of + Citigroup’s CDO desk, told the + FCIC. "We spent a lot + +On line 2190: + of Citigroup’s CDO + desk, told the FCIC. "We spent a + lot of effort to + +On line 2190: + Citigroup’s CDO desk, + told the FCIC. "We spent a lot + of effort to have + +On line 2190: + CDO desk, told the FCIC. + "We spent a lot of effort + to have people in + +On line 2190: + desk, told the FCIC. "We + spent a lot of effort to + have people in place + +On line 2190: + told the FCIC. "We spent + a lot of effort to have + people in place to + +On line 2190: + "We spent a lot of + effort to have people in + place to educate, + +On line 2190: + a lot of effort + to have people in place to + educate, to pitch + +On line 2190: + to have people in + place to educate, to pitch + structured products. So, + +On line 2190: + people in place to + educate, to pitch structured + products. So, it was + +On line 2190: + place to educate, + to pitch structured products. So, + it was a lot of + +On line 2190: + educate, to pitch + structured products. So, it was + a lot of effort, + +On line 2190: + structured products. So, + it was a lot of effort, + about people. And I + +On line 2190: + a lot of effort, + about people. And I presume + our competitors did + +On line 2190: + lot of effort, about + people. And I presume our + competitors did the + +On line 2192: + deals that they could sell. + Underwriting did entail + risks, however. The + +On line 2192: + sell. Underwriting + did entail risks, however. + The securities + +On line 2192: + Underwriting did + entail risks, however. The + securities firm + +On line 2192: + risks, however. The + securities firm had to + hold the assets, such + +On line 2192: + securities firm + had to hold the assets, such + as the BBB-rated tranches + +On line 2192: + as the BBB-rated tranches + of mortgage-backed securities, + during the ramp-up + +On line 2192: + CDOs. Typically, + during that period, the + securities firm + +On line 2192: + that period, the + securities firm took the + risk that the assets + +On line 2192: + securities firm + took the risk that the assets + might lose value. "Our + +On line 2192: + firm took the risk that + the assets might lose value. + "Our business was to + +On line 2192: + took the risk that the + assets might lose value. "Our + business was to make + +On line 2192: + that the assets might + lose value. "Our business was + to make new issue + +On line 2192: + the assets might lose + value. "Our business was to + make new issue fees, + +On line 2194: + value. "Our business + was to make new issue fees, + [and to] make sure that + +On line 2194: + "Our business was to + make new issue fees, [and to] + make sure that if the + +On line 2194: + to make new issue + fees, [and to] make sure that if + the market did have + +On line 2194: + make new issue fees, + [and to] make sure that if the + market did have a + +On line 2194: + issue fees, [and to] + make sure that if the market + did have a downturn, + +On line 2194: + fees, [and to] make sure + that if the market did have + a downturn, we were + +On line 2194: + make sure that if the + market did have a downturn, + we were somehow hedged," + +On line 2194: + the market did have + a downturn, we were somehow + hedged," Michael Lamont, + +On line 2194: + market did have a + downturn, we were somehow hedged," + Michael Lamont, the + +On line 2194: + a downturn, we were + somehow hedged," Michael Lamont, + the former co-head + +On line 2194: + we were somehow hedged," + Michael Lamont, the former + co-head for CDOs at + +On line 2194: + hedged," Michael Lamont, + the former co-head for CDOs + at Deutsche Bank, told the + +On line 2194: + Michael Lamont, the + former co-head for CDOs at + Deutsche Bank, told the FCIC.14 + +On line 2194: + former co-head for + CDOs at Deutsche Bank, told the FCIC.14 + Chris Ricciardi, + +On line 2194: + CDOs at Deutsche Bank, told + the FCIC.14 Chris Ricciardi, + formerly head of + +On line 2194: + Bank, told the FCIC.14 Chris + Ricciardi, formerly + head of the CDO desk + +On line 2194: + Chris Ricciardi, + formerly head of the CDO + desk at Merrill Lynch, + +On line 2194: + formerly head of + the CDO desk at Merrill Lynch, + likewise told the FCIC + +On line 2194: + head of the CDO desk + at Merrill Lynch, likewise told + the FCIC that he did + +On line 2194: + of the CDO desk at + Merrill Lynch, likewise told the + FCIC that he did not + +On line 2194: + CDO desk at Merrill + Lynch, likewise told the FCIC that + he did not track the + +On line 2194: + Merrill Lynch, likewise + told the FCIC that he did not + track the performance + +On line 2194: + Lynch, likewise told the + FCIC that he did not track the + performance of CDOs + +On line 2194: + he did not track the + performance of CDOs after + underwriting them.15 + +On line 2194: + performance of CDOs + after underwriting them.15 + Moreover, Lamont + +On line 2194: + underwriting them.15 + Moreover, Lamont said it + was not his job to + +On line 2194: + it was not his job + to decide whether the rating + agencies’ models had + +On line 2194: + agencies’ models had + the correct underlying + assumptions. That "was + +On line 2194: + That "was not what we + brought to the table," he said.16 + In many cases, though, + +On line 2194: + brought to the table," + he said.16 In many cases, though, + underwriters helped + +On line 2194: + CDO managers select + collateral, leading to + potential conflicts + +On line 2196: + conflicts (more on that + later). The role of the CDO + manager was to + +On line 2196: + on that later). The + role of the CDO manager + was to select the + +On line 2196: + The role of the CDO + manager was to select + the collateral, + +On line 2196: + collateral, such + as mortgage-backed securities, + and in some cases + +On line 2196: + securities, and + in some cases manage the + portfolio on an + +On line 2196: + such as Chau’s to units + of large asset management + companies such as + +On line 2198: + such as PIMCO and + Blackrock. CDO managers received + periodic fees + +On line 2198: + Blackrock. CDO managers + received periodic fees + based on the dollar + +On line 2198: + CDO managers received + periodic fees based on + the dollar amount of + +On line 2198: + periodic fees + based on the dollar amount of + assets in the CDO + +On line 2198: + based on the dollar + amount of assets in the CDO + and in some cases + +On line 2198: + on the dollar amount + of assets in the CDO and + in some cases on + +On line 2198: + amount of assets in + the CDO and in some cases + on performance. On + +On line 2198: + of assets in the + CDO and in some cases on + performance. On a + +On line 2198: + in the CDO and in + some cases on performance. + On a percentage + +On line 2198: + performance. On a + percentage basis, these may + have looked small—sometimes + +On line 2198: + percentage basis, + these may have looked small—sometimes + measured in tenths of + +On line 2198: + small—sometimes measured + in tenths of a percentage + point—but the amounts were + +On line 2198: + of a percentage + point—but the amounts were far from + trivial. For CDOs that + +On line 2198: + percentage point—but + the amounts were far from trivial. + For CDOs that focused + +On line 2198: + CDOs that focused on + the relatively senior + tranches of mortgage-backed + +On line 2198: + tended to be in + the range of to a million + dollars per year for + +On line 2198: + be in the range of + to a million dollars per + year for a billion + +On line 2198: + the range of to a + million dollars per year for + a billion dollar + +On line 2198: + dollars per year for + a billion dollar deal. For + CDOs that focused on + +On line 2198: + billion dollar deal. + For CDOs that focused on the + more junior tranches, + +On line 2198: + CDOs that focused on + the more junior tranches, which + were often smaller, + +On line 2198: + that focused on the + more junior tranches, which were + often smaller, fees + +On line 2200: + more junior tranches, + which were often smaller, fees + would be to million + +On line 2200: + junior tranches, which + were often smaller, fees would + be to million per + +On line 2200: + were often smaller, + fees would be to million per + year for a million + +On line 2200: + often smaller, fees + would be to million per year + for a million deal.17 + +On line 2200: + would be to million + per year for a million deal.17 + As managers did more + +On line 2200: + be to million per + year for a million deal.17 As + managers did more deals, + +On line 2200: + year for a million + deal.17 As managers did more deals, + they generated + +On line 2200: + for a million deal.17 + As managers did more deals, they + generated more + +On line 2200: + deal.17 As managers did + more deals, they generated + more fees without much + +On line 2200: + "You’d hear statements like, + ‘Everybody and his uncle + now wants to be a + +On line 2200: + like, ‘Everybody and + his uncle now wants to be + a CDO manager,’" + +On line 2200: + ‘Everybody and his + uncle now wants to be a + CDO manager,’" Mark + +On line 2200: + his uncle now wants + to be a CDO manager,’" + Mark Adelson, then a + +On line 2200: + wants to be a CDO + manager,’" Mark Adelson, then + a structured finance + +On line 2200: + a CDO manager,’" + Mark Adelson, then a structured + finance analyst + +On line 2200: + a structured finance + analyst at Nomura + Securities and + +On line 2200: + and currently chief + credit officer at S&P, + told the FCIC. "That was + +On line 2200: + credit officer + at S&P, told the FCIC. "That was + an observation + +On line 2200: + at S&P, told the FCIC. + "That was an observation + voiced repeatedly + +On line 2200: + S&P, told the FCIC. "That + was an observation voiced + repeatedly at + +On line 2200: + several of the + industry conferences around + those times—the enormous + +On line 2202: + those times—the enormous + proliferation of CDO + managers— because it + +On line 2202: + proliferation + of CDO managers— because it + was very lucrative."18 + +On line 2202: + CDO managers— because + it was very lucrative."18 CDO + managers industry-wide + +On line 2202: + was very lucrative."18 + CDO managers industry-wide earned + at least billion in + +On line 2204: + industry-wide earned at + least billion in management + fees between and The + +On line 2204: + earned at least billion + in management fees between + and The role of the + +On line 2204: + in management fees + between and The role of the + rating agencies was + +On line 2204: + between and The role + of the rating agencies was + to provide basic + +On line 2204: + basic guidelines on + the collateral and the + structure of the CDOs—that + +On line 2204: + collateral and + the structure of the CDOs—that is, + the sizes and returns + +On line 2204: + the structure of the + CDOs—that is, the sizes and returns + of the various + +On line 2204: + the sizes and returns + of the various tranches—in + close consultation + +On line 2204: + sizes and returns of + the various tranches—in close + consultation with + +On line 2204: + various tranches—in + close consultation with the + underwriters. For + +On line 2204: + close consultation + with the underwriters. For + many investors, the riple-A + +On line 2204: + the riple-A rating made + those products appropriate + investments. Rating + +On line 2204: + Rating agency fees + were typically between + and for CDOs.20 For most + +On line 2204: + for CDOs.20 For most deals, + at least two rating agencies + would provide ratings + +On line 2204: + CDOs.20 For most deals, at + least two rating agencies would + provide ratings and + +On line 2204: + most deals, at least two + rating agencies would provide + ratings and receive + +On line 2204: + at least two rating + agencies would provide ratings + and receive those fees—although + +On line 2204: + agencies would provide + ratings and receive those fees—although + the views tended to + +On line 2204: + would provide ratings + and receive those fees—although the views + tended to be in + +On line 2206: + ratings and receive + those fees—although the views tended to + be in sync. The CDO + +On line 2206: + and receive those fees—although + the views tended to be in + sync. The CDO investors, + +On line 2206: + receive those fees—although the + views tended to be in sync. + The CDO investors, like + +On line 2206: + views tended to be + in sync. The CDO investors, like + investors in mortgage-backed + +On line 2206: + investors in mortgage-backed + securities, focused on + different tranches + +On line 2206: + different tranches + based on their preference for + risk and return. CDO + +On line 2206: + for risk and return. + CDO underwriters such as + Citigroup, Merrill + +On line 2206: + CDO underwriters + such as Citigroup, Merrill + Lynch, and UBS often + +On line 2206: + Citigroup, Merrill + Lynch, and UBS often retained + the super-senior triple-A + +On line 2206: + Lynch, and UBS often + retained the super-senior triple-A + tranches for reasons + +On line 2206: + UBS often retained + the super-senior triple-A tranches + for reasons we will + +On line 2206: + often retained the + super-senior triple-A tranches for + reasons we will see + +On line 2206: + for reasons we will + see later. They also sold + them to commercial + +On line 2206: + also sold them to + commercial paper programs + that invested in + +On line 2206: + in CDOs and other + highly rated assets. Hedge + funds often bought the + +On line 2208: + CDOs became the most + important class of investor + for the mezzanine + +On line 2208: + important class of + investor for the mezzanine + tranches of CDOs. By + +On line 2208: + of the mezzanine + tranches—including those rated + A—and, especially, + +On line 2208: + tranches—including those + rated A—and, especially, + those rated BBB, the + +On line 2208: + BBB, the lowest and + riskiest investment-grade + rating—to other + +On line 2208: + rating—to other + CDO managers, to be packaged + into other CDOs.22 + +On line 2208: + CDO managers, to be + packaged into other CDOs.22 + It was common for + +On line 2208: + into other CDOs.22 + It was common for CDOs to + be structured with or + +On line 2208: + was common for CDOs + to be structured with or of + their cash invested + +On line 2208: + common for CDOs to + be structured with or of their + cash invested in + +On line 2208: + to be structured with + or of their cash invested + in other CDOs; CDOs + +On line 2208: + be structured with or + of their cash invested in + other CDOs; CDOs with + +On line 2208: + with or of their cash + invested in other CDOs; + CDOs with as much as + +On line 2208: + their cash invested + in other CDOs; CDOs with as + much as to of their + +On line 2208: + cash invested in + other CDOs; CDOs with as much + as to of their cash + +On line 2208: + in other CDOs; CDOs + with as much as to of their + cash invested in + +On line 2208: + CDOs with as much as + to of their cash invested + in other CDOs were + +On line 2208: + as to of their cash + invested in other CDOs + were typically + +On line 2208: + in other CDOs were + typically known as "CDOs + squared." Finally, the + +On line 2208: + typically known + as "CDOs squared." Finally, the + issuers of over-the-counter + +On line 2208: + notably AIG, played a + central role by issuing + swaps to investors in + +On line 2210: + reimburse them for + any losses on the tranches + in exchange for a + +On line 2210: + exchange for a stream + of premium-like payments. + This credit default + +On line 2210: + of premium-like + payments. This credit default + swap protection made + +On line 2210: + This credit default + swap protection made the CDOs + much more attractive + +On line 2210: + credit default swap + protection made the CDOs much + more attractive to + +On line 2210: + protection made the + CDOs much more attractive to + potential investors + +On line 2210: + made the CDOs much more + attractive to potential + investors because they + +On line 2210: + more attractive to + potential investors because + they appeared to be + +On line 2210: + potential investors + because they appeared to be + virtually risk + +On line 2210: + they appeared to be + virtually risk free, but + it created huge + +On line 2210: + be virtually + risk free, but it created + huge exposures for + +On line 2210: + virtually risk + free, but it created huge + exposures for the + +On line 2210: + it created huge + exposures for the credit + default swap issuers + +On line 2210: + exposures for the + credit default swap issuers + if significant + +On line 2210: + credit default swap + issuers if significant + losses did occur. + +On line 2212: + default swap issuers + if significant losses + did occur. Profit + +On line 2212: + if significant + losses did occur. Profit + from the creation of + +On line 2212: + did occur. Profit + from the creation of CDOs, as + is customary on + +On line 2212: + occur. Profit from + the creation of CDOs, as is + customary on Wall + +On line 2212: + the creation of CDOs, + as is customary on Wall + Street, was reflected + +On line 2212: + creation of CDOs, as + is customary on Wall Street, + was reflected in + +On line 2212: + is customary on + Wall Street, was reflected in + employee bonuses. + +On line 2212: + Street, was reflected + in employee bonuses. And, + as demand for all + +On line 2212: + was reflected in + employee bonuses. And, as + demand for all types + +On line 2212: + products soared during + the liquidity boom at + the beginning of + +On line 2212: + the liquidity + boom at the beginning of + the 21st century, + +On line 2212: + the beginning of + the 21st century, pretax + profit for the five + +On line 2212: + the 21st century, + pretax profit for the five + largest investment banks + +On line 2212: + pretax profit for + the five largest investment banks + doubled between and + +On line 2212: + five largest investment + banks doubled between and from + billion to billion; + +On line 2212: + billion to billion; + total compensation at + these investment banks + +On line 2212: + compensation at + these investment banks for their + employees across the + +On line 2212: + these investment banks + for their employees across the + world rose from billion + +On line 2212: + investment banks for + their employees across the world + rose from billion to + +On line 2212: + for their employees + across the world rose from billion + to billion.23 A part + +On line 2212: + their employees across + the world rose from billion to + billion.23 A part of + +On line 2212: + across the world rose from + billion to billion.23 A part + of the growth could be + +On line 2212: + rose from billion to + billion.23 A part of the growth + could be credited + +On line 2212: + part of the growth could + be credited to mortgage-backed + securities, CDOs, + +On line 2212: + could be credited + to mortgage-backed securities, + CDOs, and various + +On line 2212: + mortgage and asset-backed + securities salespeople + should especially + +On line 2214: + for investment banks + reported in To see in + more detail how the + +On line 2214: + banks reported in + To see in more detail how + the CDO pipeline worked, + +On line 2214: + reported in To + see in more detail how the + CDO pipeline worked, we + +On line 2214: + in To see in more + detail how the CDO pipeline + worked, we revisit + +On line 2214: + detail how the CDO + pipeline worked, we revisit + our illustrative + +On line 2214: + security, CMLTI + 2006-NC2. Earlier, we described + how most of the below-triple-A + +On line 2214: + CMLTI 2006-NC2. Earlier, + we described how most of the + below-triple-A bonds issued in + +On line 2214: + 2006-NC2. Earlier, we + described how most of the below-triple-A + bonds issued in this + +On line 2214: + we described how most + of the below-triple-A bonds issued in + this deal went into + +On line 2214: + described how most of + the below-triple-A bonds issued in this + deal went into CDOs. + +On line 2214: + how most of the below-triple-A + bonds issued in this deal went + into CDOs. One such + +On line 2216: + the below-triple-A bonds issued + in this deal went into CDOs. + One such CDO was Kleros + +On line 2216: + bonds issued in this + deal went into CDOs. One such + CDO was Kleros Real + +On line 2216: + deal went into CDOs. + One such CDO was Kleros Real + Estate Funding III, + +On line 2216: + into CDOs. One such + CDO was Kleros Real Estate + Funding III, which was + +On line 2216: + CDO was Kleros Real + Estate Funding III, which was + underwritten by + +On line 2218: + Estate Funding III, + which was underwritten by + UBS, a Swiss bank.25 The + +On line 2218: + Cohen Company; + that investment company + was headed by Chris + +On line 2218: + Ricciardi, who + had earlier built Merrill’s + CDO business.26 Kleros III, + +On line 2218: + who had earlier + built Merrill’s CDO business.26 Kleros + III, launched in purchased + +On line 2218: + had earlier built + Merrill’s CDO business.26 Kleros III, + launched in purchased and + +On line 2218: + business.26 Kleros III, launched + in purchased and held million + in securities + +On line 2218: + in purchased and held + million in securities + from the A-rated M5 + +On line 2220: + of other mortgage-backed + securities. In total, + it owned million of + +On line 2220: + In total, it owned + million of mortgage-related + securities, of + +On line 2220: + of which were rated + BBB or lower, A, and the + rest higher than A. + +On line 2220: + which were rated BBB + or lower, A, and the rest + higher than A. To + +On line 2220: + or lower, A, and + the rest higher than A. To + fund those purchases, + +On line 2220: + lower, A, and the + rest higher than A. To fund + those purchases, Kleros + +On line 2220: + rest higher than A. + To fund those purchases, Kleros + III issued billion + +On line 2220: + higher than A. To + fund those purchases, Kleros III + issued billion of + +On line 2220: + than A. To fund those + purchases, Kleros III issued + billion of bonds to + +On line 2220: + fund those purchases, + Kleros III issued billion of + bonds to investors. As + +On line 2220: + those purchases, Kleros + III issued billion of bonds + to investors. As was + +On line 2220: + III issued billion + of bonds to investors. As was + typical for this + +On line 2220: + billion of bonds to + investors. As was typical + for this type of CDO + +On line 2220: + of bonds to investors. + As was typical for this + type of CDO at the + +On line 2220: + bonds to investors. As + was typical for this type + of CDO at the time, + +On line 2220: + As was typical + for this type of CDO at the + time, roughly of the + +On line 2220: + was typical for + this type of CDO at the time, + roughly of the Kleros + +On line 2220: + for this type of CDO + at the time, roughly of the + Kleros III bonds were triple-A-rated. + +On line 2220: + this type of CDO at + the time, roughly of the Kleros + III bonds were triple-A-rated. At + +On line 2220: + type of CDO at the + time, roughly of the Kleros III + bonds were triple-A-rated. At least + +On line 2220: + of CDO at the time, + roughly of the Kleros III bonds + were triple-A-rated. At least half + +On line 2220: + at the time, roughly + of the Kleros III bonds were triple-A-rated. + At least half of the + +On line 2220: + the time, roughly of + the Kleros III bonds were triple-A-rated. At + least half of the below-triple-A + +On line 2220: + roughly of the Kleros + III bonds were triple-A-rated. At least half + of the below-triple-A tranches + +On line 2220: + of the Kleros III bonds + were triple-A-rated. At least half of the + below-triple-A tranches issued + +On line 2220: + the Kleros III bonds were + triple-A-rated. At least half of the below-triple-A + tranches issued by + +On line 2220: + III bonds were triple-A-rated. At + least half of the below-triple-A tranches + issued by Kleros III + +On line 2220: + triple-A-rated. At least half of + the below-triple-A tranches issued by + Kleros III went into + +On line 2220: + least half of the below-triple-A + tranches issued by Kleros III + went into other + +On line 2222: + tranches issued by + Kleros III went into other + CDOs.27 "Mother’s milk to + +On line 2224: + Kleros III went into + other CDOs.27 "Mother’s milk to + the market" The growth + +On line 2224: + into other CDOs.27 + "Mother’s milk to the market" + The growth of CDOs had + +On line 2224: + "Mother’s milk to the + market" The growth of CDOs had + important impacts + +On line 2224: + the mortgage market + itself. CDO managers who were + eager to expand + +On line 2224: + market itself. CDO + managers who were eager to + expand the assets + +On line 2224: + itself. CDO managers + who were eager to expand + the assets that they + +On line 2224: + who were eager to + expand the assets that they + were managing—on which + +On line 2224: + assets that they were + managing—on which their income + was based—were willing + +On line 2224: + they were managing—on + which their income was based—were + willing to pay high + +On line 2224: + managing—on which their + income was based—were willing + to pay high prices to + +On line 2224: + income was based—were + willing to pay high prices to + accumulate BBB-rated + +On line 2224: + willing to pay high + prices to accumulate BBB-rated + tranches of mortgage-backed + +On line 2224: + tranches of mortgage-backed + securities. This "CDO bid" + pushed up market prices + +On line 2224: + This "CDO bid" pushed up + market prices on those tranches, + pricing out of the + +On line 2224: + bid" pushed up market + prices on those tranches, pricing + out of the market + +On line 2226: + securities were + typically protected + from losses by bond + +On line 2226: + were typically + protected from losses by + bond insurers, who + +On line 2228: + by bond insurers, + who had analyzed the deals + as well. Beginning + +On line 2228: + bond insurers, who + had analyzed the deals as + well. Beginning in + +On line 2228: + insurers, who had + analyzed the deals as well. + Beginning in the + +On line 2228: + had analyzed the + deals as well. Beginning in + the late 1990s, mortgage-backed + +On line 2228: + securities that + were structured with six or more + tranches and other + +On line 2228: + were structured with six + or more tranches and other + features to protect + +On line 2228: + tranches and other + features to protect the triple-A + investors became more + +On line 2228: + and other features + to protect the triple-A investors + became more common, + +On line 2228: + features to protect + the triple-A investors became more + common, replacing + +On line 2228: + triple-A investors became + more common, replacing the + earlier structures + +On line 2228: + common, replacing + the earlier structures that + had relied on bond + +On line 2228: + on bond insurance + to protect investors. By the + earlier forms of + +On line 2228: + the earlier forms + of mortgage-backed securities + had essentially + +On line 2228: + had essentially + vanished, leaving the market + increasingly to + +On line 2230: + increasingly to + the multitranche structures and + their CDO investors. This + +On line 2230: + was a critical + development, given that + the focus of CDO + +On line 2230: + that the focus of + CDO managers differed from that + of traditional + +On line 2230: + differed from that of + traditional investors. "The + CDO manager and + +On line 2230: + of traditional + investors. "The CDO manager + and the CDO investor + +On line 2230: + "The CDO manager + and the CDO investor are not + the same kind of folks + +On line 2230: + CDO manager and + the CDO investor are not the + same kind of folks [as + +On line 2230: + manager and the + CDO investor are not the same + kind of folks [as the + +On line 2230: + and the CDO investor + are not the same kind of folks + [as the monoline bond + +On line 2230: + are not the same kind + of folks [as the monoline bond + insurers], who just + +On line 2230: + kind of folks [as the + monoline bond insurers], who + just backed away," Adelson + +On line 2230: + folks [as the monoline + bond insurers], who just backed + away," Adelson said. "They’re + +On line 2230: + bond insurers], who + just backed away," Adelson said. "They’re + mostly not mortgage + +On line 2230: + just backed away," Adelson + said. "They’re mostly not mortgage + professionals, not + +On line 2234: + folks."28 Indeed, Chau, the + CDO manager, portrayed his + job as creating + +On line 2234: + that rating agencies + would approve and investors would + buy, and making sure + +On line 2234: + rating agencies would + approve and investors would buy, + and making sure the + +On line 2234: + and investors would buy, + and making sure the mortgage-backed + securities that + +On line 2234: + industry standards." + He said that he relied on + the rating agencies. + +On line 2234: + the rating agencies. + "Unfortunately, what lulled + a lot of investors, + +On line 2234: + "Unfortunately, + what lulled a lot of investors, + and I’m in that camp + +On line 2234: + what lulled a lot of + investors, and I’m in that camp + as well, what lulled us + +On line 2234: + a lot of investors, + and I’m in that camp as well, + what lulled us into + +On line 2234: + lot of investors, and + I’m in that camp as well, what + lulled us into that + +On line 2234: + of investors, and I’m + in that camp as well, what lulled + us into that sense + +On line 2234: + investors, and I’m in + that camp as well, what lulled us + into that sense of + +On line 2234: + and I’m in that camp + as well, what lulled us into + that sense of comfort + +On line 2234: + I’m in that camp as + well, what lulled us into that + sense of comfort was + +On line 2234: + in that camp as well, + what lulled us into that sense + of comfort was that + +On line 2234: + that camp as well, what + lulled us into that sense of + comfort was that the + +On line 2234: + as well, what lulled us + into that sense of comfort + was that the rating + +On line 2234: + into that sense of + comfort was that the rating + stability was + +On line 2234: + of comfort was that + the rating stability + was so solid and + +On line 2234: + comfort was that the + rating stability was + so solid and that + +On line 2234: + stability was + so solid and that it was + so consistent. I + +On line 2234: + was so solid and + that it was so consistent. + I mean, the rating + +On line 2234: + solid and that it + was so consistent. I mean, + the rating agencies + +On line 2234: + was so consistent. + I mean, the rating agencies + did a very good job + +On line 2234: + so consistent. I + mean, the rating agencies did + a very good job of + +On line 2234: + making everything + consistent."29 CDO production + was effectively + +On line 2236: + was effectively + on autopilot. "Mortgage traders + speak lovingly of + +On line 2236: + effectively on + autopilot. "Mortgage traders speak + lovingly of ‘the + +On line 2238: + speak lovingly of + ‘the CDO bid.’ It is mother’s + milk to the market," + +On line 2238: + lovingly of ‘the + CDO bid.’ It is mother’s milk + to the market," James + +On line 2238: + ‘the CDO bid.’ It is + mother’s milk to the market," + James Grant, a market + +On line 2238: + mother’s milk to the + market," James Grant, a market + commentator, wrote + +On line 2238: + the market," James Grant, + a market commentator, + wrote in "Without it, + +On line 2238: + wrote in "Without it, + fewer asset-backed structures could + be built, and those that + +On line 2238: + "Without it, fewer + asset-backed structures could be built, + and those that were would + +On line 2238: + it, fewer asset-backed + structures could be built, and those + that were would have to + +On line 2238: + asset-backed structures could + be built, and those that were would + have to meet a much + +On line 2238: + be built, and those that + were would have to meet a much + more conservative + +On line 2238: + were would have to meet + a much more conservative + standard of design. + +On line 2238: + The resulting pangs + of credit withdrawal would + certainly be felt + +On line 2238: + credit withdrawal + would certainly be felt in + the residential + +On line 2238: + would certainly be + felt in the residential + real-estate market."30 + +On line 2240: + UBS’s Global CDO Group + agreed, noting that CDOs "have now + become bullies in + +On line 2240: + Group agreed, noting that + CDOs "have now become bullies + in their respective + +On line 2240: + volume and the price + of mortgage-backed securities, + bids from CDOs had "an + +On line 2240: + the price of mortgage-backed + securities, bids from CDOs + had "an impact on + +On line 2240: + bids from CDOs had "an + impact on the overall U.S. + economy that goes + +On line 2240: + had "an impact on + the overall U.S. economy + that goes well beyond + +On line 2240: + "an impact on the + overall U.S. economy that + goes well beyond the + +On line 2240: + economy that goes + well beyond the CDO market."31 + Without the demand + +On line 2240: + that goes well beyond + the CDO market."31 Without the + demand for mortgage-backed + +On line 2240: + Without the demand + for mortgage-backed securities + from CDOs, lenders would have + +On line 2240: + demand for mortgage-backed + securities from CDOs, lenders + would have been able to + +On line 2240: + securities from + CDOs, lenders would have been able to + sell ewer mortgages, + +On line 2240: + CDOs, lenders would have been + able to sell ewer mortgages, + and thus they would have + +On line 2240: + lenders would have been able + to sell ewer mortgages, and + thus they would have had + +On line 2240: + would have been able to + sell ewer mortgages, and thus + they would have had less + +On line 2240: + able to sell ewer + mortgages, and thus they would have + had less reason to + +On line 2240: + sell ewer mortgages, + and thus they would have had less + reason to push so + +On line 2240: + mortgages, and thus they + would have had less reason to + push so hard to make + +On line 2240: + and thus they would have + had less reason to push so + hard to make the loans + +On line 2240: + thus they would have had + less reason to push so hard + to make the loans in + +On line 2240: + they would have had less + reason to push so hard to + make the loans in the + +On line 2240: + have had less reason + to push so hard to make the + loans in the first place. + +On line 2242: + less reason to push + so hard to make the loans in + the first place. "Leverage + +On line 2242: + reason to push so + hard to make the loans in the + first place. "Leverage is + +On line 2242: + so hard to make the + loans in the first place. "Leverage + is inherent in + +On line 2242: + hard to make the loans + in the first place. "Leverage is + inherent in CDOs" + +On line 2244: + the loans in the first + place. "Leverage is inherent + in CDOs" The mortgage + +On line 2244: + inherent in CDOs" + The mortgage pipeline also + introduced leverage + +On line 2244: + in CDOs" The mortgage + pipeline also introduced + leverage at every + +On line 2244: + The mortgage pipeline + also introduced leverage + at every step. Most + +On line 2244: + at every step. Most + financial institutions + thrive on leverage—that + +On line 2244: + leverage—that is, on + investing borrowed money. + Leverage increases + +On line 2244: + investing borrowed + money. Leverage increases + profits in good times, + +On line 2244: + is of the low down + payment, high loan-to-value + ratio variety. + +On line 2244: + the low down payment, + high loan-to-value ratio + variety. Mortgage-backed + +On line 2244: + high loan-to-value + ratio variety. Mortgage-backed + securities and + +On line 2244: + and CDOs created + further leverage because they + were financed with debt. + +On line 2244: + financed with debt. And + the CDOs were often purchased + as collateral + +On line 2244: + the CDOs were often + purchased as collateral + by those creating + +On line 2244: + were often purchased + as collateral by those + creating other + +On line 2244: + collateral by + those creating other CDOs + with yet another + +On line 2244: + creating other + CDOs with yet another round + of debt. Synthetic + +On line 2244: + of debt. Synthetic + CDOs consisting of credit + default swaps, described + +On line 2244: + CDOs consisting of + credit default swaps, described + below, amplified + +On line 2244: + credit default swaps, + described below, amplified + the leverage. The CDO, + +On line 2244: + below, amplified + the leverage. The CDO, backed by + securities that + +On line 2244: + the leverage. The CDO, + backed by securities that + were themselves backed by + +On line 2244: + securities that + were themselves backed by mortgages, + created leverage + +On line 2244: + were themselves backed by + mortgages, created leverage + on leverage, as Dan + +On line 2244: + leverage, as Dan Sparks, + mortgage department head at + Goldman Sachs, explained + +On line 2244: + as Dan Sparks, mortgage + department head at Goldman + Sachs, explained to the + +On line 2244: + mortgage department + head at Goldman Sachs, explained + to the FCIC.32 "People + +On line 2244: + to the FCIC.32 "People + were looking for other forms + of leverage. You could + +On line 2244: + "People were looking + for other forms of leverage. + You could either take + +On line 2244: + either take leverage + individually, as + an institution, + +On line 2246: + take leverage within + the structure," Citigroup’s Dominguez + told the FCIC.33 Even the + +On line 2246: + within the structure," + Citigroup’s Dominguez told the FCIC.33 + Even the investor that + +On line 2246: + Citigroup’s Dominguez told + the FCIC.33 Even the investor that + bought the CDOs could use + +On line 2246: + told the FCIC.33 Even the + investor that bought the CDOs could + use leverage. Structured + +On line 2246: + Even the investor that + bought the CDOs could use leverage. + Structured investment + +On line 2246: + bought the CDOs could use + leverage. Structured investment + vehicles—a type + +On line 2246: + use leverage. Structured + investment vehicles—a + type of commercial + +On line 2246: + triple-Arated securities—were + leveraged an average of + just under 14-to-1: in + +On line 2246: + an average of + just under 14-to-1: in other + words, these SIVs would hold + +On line 2246: + average of just + under 14-to-1: in other words, + these SIVs would hold in + +On line 2246: + of just under 14-to-1: + in other words, these SIVs would + hold in assets for + +On line 2246: + 14-to-1: in other words, + these SIVs would hold in assets + for every dollar + +On line 2246: + in other words, these + SIVs would hold in assets for + every dollar of + +On line 2246: + these SIVs would hold in + assets for every dollar + of capital.34 The + +On line 2246: + for every dollar + of capital.34 The assets + would be financed with + +On line 2246: + every dollar of + capital.34 The assets would + be financed with debt. + +On line 2246: + of capital.34 The + assets would be financed with + debt. Hedge funds, which were + +On line 2246: + The assets would be + financed with debt. Hedge funds, which + were common purchasers, + +On line 2246: + would be financed with + debt. Hedge funds, which were common + purchasers, were also + +On line 2246: + financed with debt. Hedge + funds, which were common purchasers, + were also often + +On line 2246: + funds, which were common + purchasers, were also often + highly leveraged in + +On line 2246: + purchasers, were also + often highly leveraged in + the repo market, + +On line 2246: + highly leveraged in + the repo market, as we + will see. But it would + +On line 2246: + the repo market, + as we will see. But it would + become clear during + +On line 2246: + market, as we will + see. But it would become clear + during the crisis + +On line 2246: + as we will see. But + it would become clear during + the crisis that some + +On line 2246: + we will see. But it + would become clear during the + crisis that some of + +On line 2246: + But it would become + clear during the crisis that + some of the highest + +On line 2246: + become clear during + the crisis that some of the + highest leverage was + +On line 2246: + some of the highest + leverage was created by + companies such as + +On line 2246: + was created by + companies such as Merrill, + Citigroup, and AIG + +On line 2246: + by companies such + as Merrill, Citigroup, and + AIG when they retained + +On line 2246: + companies such as + Merrill, Citigroup, and AIG + when they retained or + +On line 2246: + Merrill, Citigroup, + and AIG when they retained or + purchased the triple-A and + +On line 2246: + or purchased the triple-A + and super-senior tranches of + CDOs with little or + +On line 2246: + purchased the triple-A and + super-senior tranches of CDOs + with little or no + +On line 2246: + triple-A and super-senior + tranches of CDOs with little + or no capital + +On line 2246: + super-senior tranches + of CDOs with little or no + capital backing. + +On line 2248: + tranches of CDOs with + little or no capital + backing. Thus, in when + +On line 2248: + backing. Thus, in when + the homeownership rate was + peaking, and when new + +On line 2248: + peaking, and when new + mortgages were increasingly + being driven by + +On line 2248: + refinancings, by + investors and speculators, + and by second home + +On line 2248: + and by second home + purchases, the value of + trillions of dollars + +On line 2248: + trillions of dollars + of securities rested + on just two things: the + +On line 2248: + on just two things: the + ability of millions of + homeowners to make + +On line 2248: + things: the ability + of millions of homeowners + to make the payments + +On line 2248: + the ability of + millions of homeowners to + make the payments on + +On line 2248: + homeowners to make + the payments on their subprime + and Alt-A mortgages and + +On line 2248: + the payments on their + subprime and Alt-A mortgages and + the stability + +On line 2248: + and Alt-A mortgages and + the stability of the + market value of + +On line 2248: + the stability + of the market value of + homes whose mortgages were + +On line 2248: + stability of + the market value of homes + whose mortgages were the + +On line 2248: + value of homes whose + mortgages were the basis of + the securities. + +On line 2248: + the basis of the + securities. Those dangers + were understood all + +On line 2248: + securities. Those + dangers were understood all + along by some market + +On line 2248: + is inherent in + [asset-backed securities] CDOs," + Mark Klipsch, a banker + +On line 2248: + securities] CDOs," + Mark Klipsch, a banker with Orix + Capital Markets, + +On line 2248: + Klipsch, a banker with + Orix Capital Markets, an + asset management + +On line 2248: + Raton conference + of securitization + bankers in October + +On line 2250: + bankers in October + While it was good for short-term + profits, losses could + +On line 2250: + October While it + was good for short-term profits, + losses could be large + +On line 2250: + While it was good for + short-term profits, losses could + be large later on. + +On line 2250: + was good for short-term + profits, losses could be large + later on. Klipsch + +On line 2250: + for short-term profits, + losses could be large later + on. Klipsch said, "We’ll + +On line 2250: + losses could be large + later on. Klipsch said, "We’ll + see some problems down + +On line 2250: + could be large later + on. Klipsch said, "We’ll see some + problems down the road."35 + +On line 2252: + later on. Klipsch + said, "We’ll see some problems down + the road."35 BEAR STEARNS’S HEDGE + +On line 2252: + on. Klipsch said, "We’ll + see some problems down the road."35 + BEAR STEARNS’S HEDGE FUNDS: "IT + +On line 2254: + "We’ll see some problems + down the road."35 BEAR STEARNS’S HEDGE FUNDS: + "IT FUNCTIONED FINE UP + +On line 2254: + problems down the road."35 + BEAR STEARNS’S HEDGE FUNDS: "IT FUNCTIONED + FINE UP UNTIL ONE + +On line 2254: + down the road."35 BEAR STEARNS’S + HEDGE FUNDS: "IT FUNCTIONED FINE UP + UNTIL ONE DAY IT + +On line 2254: + road."35 BEAR STEARNS’S HEDGE FUNDS: + "IT FUNCTIONED FINE UP UNTIL + ONE DAY IT JUST DIDN’ + +On line 2254: + BEAR STEARNS’S HEDGE FUNDS: "IT + FUNCTIONED FINE UP UNTIL ONE + DAY IT JUST DIDN’ T + +On line 2254: + HEDGE FUNDS: "IT FUNCTIONED + FINE UP UNTIL ONE DAY IT + JUST DIDN’ T FUNCTION" + +On line 2256: + FUNDS: "IT FUNCTIONED FINE + UP UNTIL ONE DAY IT JUST + DIDN’ T FUNCTION" Bear + +On line 2256: + "IT FUNCTIONED FINE UP + UNTIL ONE DAY IT JUST DIDN’ + T FUNCTION" Bear Stearns, + +On line 2256: + FINE UP UNTIL ONE + DAY IT JUST DIDN’ T FUNCTION" + Bear Stearns, the smallest + +On line 2256: + UP UNTIL ONE DAY + IT JUST DIDN’ T FUNCTION" Bear + Stearns, the smallest of + +On line 2256: + UNTIL ONE DAY IT + JUST DIDN’ T FUNCTION" Bear Stearns, + the smallest of the + +On line 2256: + JUST DIDN’ T FUNCTION" + Bear Stearns, the smallest of the + five large investment + +On line 2256: + DIDN’ T FUNCTION" Bear + Stearns, the smallest of the five + large investment banks, + +On line 2256: + Stearns, the smallest of + the five large investment banks, + started its asset + +On line 2256: + started its asset + management business in when + it established Bear + +On line 2260: + it established Bear + Stearns Asset Management (BSAM). + Asset management + +On line 2260: + Asset Management + (BSAM). Asset management brought + in steady fee income, + +On line 2260: + in steady fee income, + allowed banks to offer new + products to customers + +On line 2260: + income, allowed banks + to offer new products to + customers and required + +On line 2262: + customers and required + little capital. BSAM played + a prominent role + +On line 2262: + little capital. + BSAM played a prominent role + in the CDO business + +On line 2262: + capital. BSAM played + a prominent role in the + CDO business as both + +On line 2262: + a prominent role + in the CDO business as both + a CDO manager + +On line 2262: + prominent role in + the CDO business as both a + CDO manager and + +On line 2262: + in the CDO business + as both a CDO manager + and a hedge fund that + +On line 2262: + business as both a + CDO manager and a hedge + fund that invested + +On line 2262: + fund that invested + in mortgage-backed securities + and CDOs. At BSAM, by + +On line 2262: + that invested in + mortgage-backed securities and + CDOs. At BSAM, by the + +On line 2262: + and CDOs. At BSAM, by + the end of Ralph Cioffi was + managing CDOs with + +On line 2262: + BSAM, by the end of + Ralph Cioffi was managing + CDOs with billion in + +On line 2264: + of Ralph Cioffi was + managing CDOs with billion + in assets and hedge + +On line 2264: + was managing CDOs + with billion in assets and + hedge funds with billion + +On line 2264: + managing CDOs with + billion in assets and hedge + funds with billion in + +On line 2264: + billion in assets + and hedge funds with billion in + assets.36 Although Bear + +On line 2264: + in assets and hedge + funds with billion in assets.36 + Although Bear Stearns owned + +On line 2264: + funds with billion in + assets.36 Although Bear Stearns owned + BSAM, Bear’s management + +On line 2264: + assets.36 Although Bear + Stearns owned BSAM, Bear’s management + exercised little + +On line 2264: + supervision over + its business.37 The eventual + failure of Cioffi’s + +On line 2264: + of Cioffi’s two large + mortgage-focused hedge funds would + be an important + +On line 2264: + mortgage-focused hedge + funds would be an important + event in early in + +On line 2264: + hedge funds would be an + important event in early + in the financial + +On line 2266: + important event in + early in the financial + crisis. In Cioffi + +On line 2266: + event in early in + the financial crisis. In + Cioffi launched his first + +On line 2266: + in the financial + crisis. In Cioffi launched his + first fund at BSAM, the + +On line 2266: + crisis. In Cioffi + launched his first fund at BSAM, the + High-Grade Structured Credit + +On line 2266: + Cioffi launched his first + fund at BSAM, the High-Grade Structured + Credit Strategies Fund, + +On line 2266: + launched his first fund at + BSAM, the High-Grade Structured Credit + Strategies Fund, and in + +On line 2266: + first fund at BSAM, the + High-Grade Structured Credit Strategies + Fund, and in he added + +On line 2266: + fund at BSAM, the High-Grade + Structured Credit Strategies Fund, + and in he added the + +On line 2266: + and in he added the + High-Grade Structured Credit Strategies + Enhanced Leverage Fund. + +On line 2266: + funds purchased mostly + mortgage-backed securities or + CDOs, and used leverage + +On line 2268: + CDOs, and used leverage + to enhance their returns. The + target was for of + +On line 2268: + leverage to enhance + their returns. The target was + for of assets to + +On line 2268: + returns. The target + was for of assets to be + rated either AAA + +On line 2268: + The target was for + of assets to be rated + either AAA or AA. + +On line 2268: + was for of assets + to be rated either AAA + or AA. As Cioffi + +On line 2268: + for of assets to + be rated either AAA or + AA. As Cioffi told + +On line 2268: + of assets to be + rated either AAA or AA. + As Cioffi told the + +On line 2268: + be rated either + AAA or AA. As Cioffi told + the FCIC, "The thesis + +On line 2268: + either AAA or AA. + As Cioffi told the FCIC, "The + thesis behind the + +On line 2268: + AA. As Cioffi told + the FCIC, "The thesis behind + the fund was that the + +On line 2268: + Cioffi told the FCIC, + "The thesis behind the fund + was that the structured + +On line 2268: + was that the structured + credit markets offered yield + over and above what their + +On line 2268: + the structured credit + markets offered yield over and + above what their ratings + +On line 2268: + markets offered yield + over and above what their ratings + suggested they should + +On line 2268: + yield over and above what + their ratings suggested they + should offer."38 Cioffi + +On line 2268: + above what their ratings + suggested they should offer."38 + Cioffi targeted + +On line 2268: + suggested they should + offer."38 Cioffi targeted + a leverage ratio + +On line 2268: + Cioffi targeted + a leverage ratio of to + for the first High-Grade fund. + +On line 2268: + a leverage ratio + of to for the first High-Grade fund. + For Enhanced Leverage, + +On line 2268: + ratio of to for + the first High-Grade fund. For Enhanced + Leverage, Cioffi upped + +On line 2268: + of to for the first + High-Grade fund. For Enhanced Leverage, + Cioffi upped the ante, + +On line 2268: + for the first High-Grade fund. + For Enhanced Leverage, Cioffi + upped the ante, touting + +On line 2268: + the first High-Grade fund. For + Enhanced Leverage, Cioffi upped + the ante, touting the + +On line 2268: + High-Grade fund. For Enhanced + Leverage, Cioffi upped the ante, + touting the Enhanced + +On line 2268: + For Enhanced Leverage, + Cioffi upped the ante, touting + the Enhanced Leverage + +On line 2268: + Leverage, Cioffi upped + the ante, touting the Enhanced + Leverage fund as "a + +On line 2268: + Cioffi upped the ante, + touting the Enhanced Leverage + fund as "a levered + +On line 2268: + upped the ante, touting + the Enhanced Leverage fund as + "a levered version + +On line 2268: + the ante, touting the + Enhanced Leverage fund as "a + levered version of + +On line 2268: + touting the Enhanced + Leverage fund as "a levered + version of the [High + +On line 2268: + the Enhanced Leverage + fund as "a levered version + of the [High Grade] fund" + +On line 2268: + Enhanced Leverage fund + as "a levered version of + the [High Grade] fund" that + +On line 2268: + of the [High Grade] fund" + that targeted leverage of + to At the end of + +On line 2268: + the [High Grade] fund" that + targeted leverage of to + At the end of the + +On line 2270: + to At the end of + the High-Grade fund contained billion + in assets (using + +On line 2270: + end of the High-Grade fund + contained billion in assets + (using billion of + +On line 2270: + the High-Grade fund contained + billion in assets (using + billion of his hedge + +On line 2270: + contained billion in + assets (using billion of + his hedge fund investors’ + +On line 2270: + billion in assets + (using billion of his hedge + fund investors’ money + +On line 2270: + investors’ money and + billion in borrowed money). + The Enhanced Leverage + +On line 2274: + money).40 BSAM financed + these asset purchases by + borrowing in the + +On line 2274: + by borrowing in + the repo markets, which was + typical for hedge + +On line 2274: + the FCIC identified + at least billion of repo + borrowing as of + +On line 2274: + as of June by the + approximately hedge funds + that responded. The + +On line 2274: + funds that responded. + The respondents invested + at least billion in + +On line 2274: + at least billion in + mortgage-backed securities or + CDOs as of June The + +On line 2274: + or CDOs as of June + The ability to borrow + using the AAA and + +On line 2274: + June The ability + to borrow using the AAA + and AA tranches of + +On line 2274: + The ability to + borrow using the AAA and + AA tranches of CDOs + +On line 2274: + AA tranches of CDOs + as repo collateral + facilitated + +On line 2276: + securities. But + repo borrowing carried + risks: it created + +On line 2276: + leverage and it had + to be renewed frequently. + For example, an + +On line 2276: + had to be renewed + frequently. For example, + an investor buying + +On line 2276: + renewed frequently. + For example, an investor + buying a stock on + +On line 2276: + an investor buying + a stock on margin—meaning with + borrowed money—might have + +On line 2276: + stock on margin—meaning + with borrowed money—might have to + put up cents on the + +On line 2278: + money—might have to put + up cents on the dollar, with + the other cents loaned + +On line 2278: + to put up cents on + the dollar, with the other + cents loaned by his or + +On line 2278: + put up cents on the + dollar, with the other cents + loaned by his or her + +On line 2278: + on the dollar, with + the other cents loaned by his + or her stockbroker, + +On line 2278: + the dollar, with the + other cents loaned by his or + her stockbroker, for + +On line 2278: + other cents loaned by + his or her stockbroker, for + a leverage ratio + +On line 2278: + loaned by his or her + stockbroker, for a leverage + ratio of to A + +On line 2278: + or her stockbroker, + for a leverage ratio of + to A homeowner + +On line 2278: + stockbroker, for a + leverage ratio of to A + homeowner buying + +On line 2278: + leverage ratio of + to A homeowner buying + a house might make a + +On line 2278: + to A homeowner + buying a house might make a + down payment and take + +On line 2278: + buying a house might + make a down payment and take + out a mortgage for + +On line 2278: + a house might make a + down payment and take out a + mortgage for the rest, + +On line 2278: + make a down payment + and take out a mortgage for + the rest, a leverage + +On line 2278: + down payment and take + out a mortgage for the rest, + a leverage ratio + +On line 2278: + payment and take out + a mortgage for the rest, a + leverage ratio of + +On line 2278: + out a mortgage for + the rest, a leverage ratio + of to By contrast, + +On line 2278: + mortgage for the rest, + a leverage ratio of to + By contrast, repo + +On line 2278: + a leverage ratio + of to By contrast, repo + lending allowed an + +On line 2278: + of to By contrast, + repo lending allowed an + investor to buy a + +On line 2278: + allowed an investor + to buy a security + for much less out of + +On line 2278: + an investor to buy + a security for much + less out of pocket—in + +On line 2278: + investor to buy a + security for much less + out of pocket—in the + +On line 2278: + security for + much less out of pocket—in the + case of a Treasury + +On line 2278: + pocket—in the case of + a Treasury security, + an investor may have + +On line 2278: + case of a Treasury + security, an investor + may have to put in + +On line 2278: + security, an + investor may have to put in + only borrowing + +On line 2278: + may have to put in + only borrowing from a + securities firm + +On line 2278: + only borrowing + from a securities firm + to In the case of + +On line 2278: + to In the case of + a mortgage-backed security, + an investor might pay + +On line 2280: + In the case of a + mortgage-backed security, an + investor might pay to + +On line 2282: + case of a mortgage-backed + security, an investor + might pay to With this + +On line 2282: + security, an + investor might pay to With this + amount of leverage, a + +On line 2282: + investor might pay to + With this amount of leverage, a + change in the value + +On line 2282: + might pay to With this + amount of leverage, a change in + the value of that + +On line 2282: + leverage, a change in + the value of that mortgage-backed + security can + +On line 2282: + the value of that + mortgage-backed security can + double the investor’s + +On line 2282: + double the investor’s + money—or lose all of the + initial investment. + +On line 2284: + the underlying + collateral could be sold + easily. But when + +On line 2284: + collateral could + be sold easily. But when + it came to selling + +On line 2284: + sold easily. But + when it came to selling them + in times of distress, + +On line 2284: + private-label mortgage-backed + securities would prove to + be very different + +On line 2288: + securities would + prove to be very different + from U.S. Treasuries. he + +On line 2288: + would prove to be very + different from U.S. Treasuries. + he short-term nature + +On line 2288: + be very different + from U.S. Treasuries. he short-term + nature of repo + +On line 2288: + different from U.S. + Treasuries. he short-term nature + of repo money + +On line 2288: + from U.S. Treasuries. he + short-term nature of repo + money also makes + +On line 2288: + short-term nature of + repo money also makes + it inherently + +On line 2288: + inherently risky + and unreliable: funding + that is offered at + +On line 2288: + and unreliable: + funding that is offered at + certain terms today + +On line 2288: + terms today could be + gone tomorrow. Cioffi’s funds, + for example, took + +On line 2288: + today could be gone + tomorrow. Cioffi’s funds, for + example, took the + +On line 2288: + be gone tomorrow. + Cioffi’s funds, for example, + took the risk that its + +On line 2288: + tomorrow. Cioffi’s + funds, for example, took the + risk that its repo + +On line 2288: + funds, for example, + took the risk that its repo + lenders would decide not + +On line 2288: + for example, took + the risk that its repo lenders + would decide not to + +On line 2290: + took the risk that its + repo lenders would decide not + to extend, or "roll," + +On line 2290: + that its repo lenders + would decide not to extend, + or "roll," the repo + +On line 2290: + its repo lenders would + decide not to extend, or + "roll," the repo lines + +On line 2290: + would decide not to + extend, or "roll," the repo + lines on any given + +On line 2290: + not to extend, or + "roll," the repo lines on any + given day. Yet more + +On line 2290: + extend, or "roll," the + repo lines on any given + day. Yet more and more, + +On line 2290: + or "roll," the repo + lines on any given day. Yet + more and more, repo + +On line 2290: + "roll," the repo lines + on any given day. Yet more + and more, repo lenders + +On line 2290: + the repo lines on + any given day. Yet more and + more, repo lenders were + +On line 2290: + on any given day. + Yet more and more, repo lenders + were loaning money + +On line 2290: + any given day. Yet + more and more, repo lenders were + loaning money to + +On line 2290: + more and more, repo + lenders were loaning money to + funds like Cioffi’s, rolling + +On line 2290: + and more, repo lenders + were loaning money to funds + like Cioffi’s, rolling the + +On line 2290: + more, repo lenders were + loaning money to funds like + Cioffi’s, rolling the debt + +On line 2290: + were loaning money + to funds like Cioffi’s, rolling the + debt nightly, and not + +On line 2290: + money to funds like + Cioffi’s, rolling the debt nightly, + and not worrying + +On line 2290: + to funds like Cioffi’s, + rolling the debt nightly, and not + worrying very much + +On line 2290: + debt nightly, and not + worrying very much about the + real quality + +On line 2292: + real quality + of the collateral. The + firms loaning money + +On line 2292: + the collateral. + The firms loaning money to + Cioffi’s hedge funds were + +On line 2292: + loaning money to + Cioffi’s hedge funds were often + also selling them + +On line 2292: + to Cioffi’s hedge funds + were often also selling + them mortgage-related + +On line 2292: + were often also + selling them mortgage-related + securities, and + +On line 2292: + and the hedge funds pledged + those same securities to + secure the loans.43 If + +On line 2292: + same securities + to secure the loans.43 If the + market value of + +On line 2292: + to secure the loans.43 + If the market value of + the collateral + +On line 2292: + secure the loans.43 If + the market value of the + collateral fell, + +On line 2292: + the market value + of the collateral fell, + the repo lenders could + +On line 2292: + market value of + the collateral fell, the + repo lenders could and + +On line 2292: + could and would demand + more collateral from the + hedge fund to back the + +On line 2292: + hedge fund to back the + repo loan. This dynamic + would play a pivotal + +On line 2292: + to back the repo + loan. This dynamic would play + a pivotal role in + +On line 2292: + back the repo loan. + This dynamic would play a + pivotal role in the + +On line 2292: + loan. This dynamic + would play a pivotal role in + the fate of many hedge + +On line 2292: + This dynamic would + play a pivotal role in the + fate of many hedge funds + +On line 2292: + dynamic would play + a pivotal role in the fate + of many hedge funds in + +On line 2292: + pivotal role in the + fate of many hedge funds in 2007—most + spectacularly + +On line 2292: + of many hedge funds in + 2007—most spectacularly in + the case of Cioffi’s + +On line 2292: + many hedge funds in 2007—most + spectacularly in the + case of Cioffi’s funds. + +On line 2292: + spectacularly + in the case of Cioffi’s funds. + "The repo market, + +On line 2292: + the case of Cioffi’s + funds. "The repo market, I + mean it functioned fine + +On line 2292: + case of Cioffi’s funds. + "The repo market, I mean + it functioned fine up + +On line 2292: + "The repo market, + I mean it functioned fine up + until one day it + +On line 2292: + market, I mean it + functioned fine up until one + day it just didn’t + +On line 2292: + I mean it functioned + fine up until one day it + just didn’t function," + +On line 2292: + fine up until one + day it just didn’t function," + Cioffi told the FCIC. + +On line 2292: + until one day it + just didn’t function," Cioffi + told the FCIC. Up to + +On line 2292: + day it just didn’t + function," Cioffi told the FCIC. + Up to that point, his + +On line 2292: + just didn’t function," + Cioffi told the FCIC. Up to + that point, his hedge funds + +On line 2292: + Cioffi told the FCIC. + Up to that point, his hedge funds + could buy billions of + +On line 2292: + told the FCIC. Up to + that point, his hedge funds could buy + billions of dollars + +On line 2292: + FCIC. Up to that point, + his hedge funds could buy billions + of dollars of CDOs + +On line 2292: + Up to that point, his + hedge funds could buy billions of + dollars of CDOs on + +On line 2292: + that point, his hedge funds + could buy billions of dollars + of CDOs on borrowed + +On line 2292: + his hedge funds could buy + billions of dollars of CDOs + on borrowed money + +On line 2292: + could buy billions of + dollars of CDOs on borrowed + money because of + +On line 2292: + dollars of CDOs on + borrowed money because of + the market’s bullishness + +On line 2292: + the market’s bullishness + about mortgage assets, he said. + "It became a more + +On line 2292: + market’s bullishness about + mortgage assets, he said. "It + became a more and + +On line 2292: + about mortgage assets, + he said. "It became a more + and more acceptable + +On line 2292: + he said. "It became + a more and more acceptable + asset class, [with] more + +On line 2292: + "It became a more + and more acceptable asset + class, [with] more traders, more + +On line 2292: + more repo lenders, more + investors obviously. [It + had a] much broader + +On line 2292: + obviously. [It + had a] much broader footprint + domestically + +On line 2296: + CDOs were a market + opportunity because + they were complex and + +On line 2296: + in the general + marketplace. In this was a + promising market with + +On line 2298: + a promising market + with seemingly manageable + risks. Cioffi and his + +On line 2298: + promising market with + seemingly manageable risks. + Cioffi and his team + +On line 2298: + risks. Cioffi and his + team not only bought CDOs, they + also created + +On line 2298: + team not only bought + CDOs, they also created + and managed other + +On line 2298: + not only bought CDOs, + they also created and + managed other CDOs. + +On line 2298: + managed other CDOs. + Cioffi would purchase mortgage-backed + securities, CDOs, + +On line 2298: + securities, CDOs, + and other securities + for his hedge funds. When + +On line 2298: + securities for + his hedge funds. When he had reached + his firm’s internal + +On line 2298: + his hedge funds. When he + had reached his firm’s internal + investment limits, + +On line 2298: + he would repackage those + securities and sell CDO + securities to + +On line 2298: + those securities + and sell CDO securities + to other customers. + +On line 2300: + securities and + sell CDO securities to + other customers. With + +On line 2300: + CDO securities + to other customers. With the + proceeds, Cioffi would + +On line 2300: + to other customers. + With the proceeds, Cioffi would + pay off his repo + +On line 2300: + other customers. With + the proceeds, Cioffi would pay + off his repo lenders, + +On line 2300: + the proceeds, Cioffi + would pay off his repo lenders, + and at the same time + +On line 2300: + proceeds, Cioffi would + pay off his repo lenders, and + at the same time he + +On line 2300: + repo lenders, and at + the same time he would acquire + the equity tranche + +On line 2300: + at the same time he + would acquire the equity + tranche of a new CDO.45 + +On line 2302: + he would acquire the + equity tranche of a new + CDO.45 Because Cioffi + +On line 2302: + equity tranche of + a new CDO.45 Because Cioffi + managed these newly + +On line 2302: + tranche of a new CDO.45 + Because Cioffi managed these + newly created + +On line 2302: + a new CDO.45 Because + Cioffi managed these newly + created CDOs that + +On line 2302: + created CDOs that + selected collateral + from his own hedge funds,46 + +On line 2302: + his own hedge funds,46 he + was positioned on both sides + of the transaction. + +On line 2302: + own hedge funds,46 he was + positioned on both sides of + the transaction. The + +On line 2302: + positioned on both + sides of the transaction. The + structure created + +On line 2302: + interest between + Cioffi’s obligation to his + hedge fund investors and + +On line 2302: + Cioffi’s obligation + to his hedge fund investors and + his obligation to + +On line 2302: + his hedge fund investors + and his obligation to his + CDO investors; this was + +On line 2302: + hedge fund investors and + his obligation to his CDO + investors; this was not + +On line 2302: + and his obligation + to his CDO investors; this was + not unique on Wall Street, + +On line 2302: + his obligation to + his CDO investors; this was not + unique on Wall Street, and + +On line 2302: + obligation to his + CDO investors; this was not unique + on Wall Street, and BSAM + +On line 2302: + to his CDO investors; + this was not unique on Wall Street, + and BSAM disclosed the + +On line 2302: + CDO investors; this was + not unique on Wall Street, and BSAM + disclosed the structure, + +On line 2302: + not unique on Wall Street, + and BSAM disclosed the structure, + and the conflict of + +On line 2302: + Street, and BSAM disclosed + the structure, and the conflict + of interest, to + +On line 2302: + the structure, and the + conflict of interest, to + potential investors.47 + +On line 2302: + For example, a + critical question was at + what price the CDO should + +On line 2302: + critical question + was at what price the CDO should + purchase assets from + +On line 2302: + was at what price the + CDO should purchase assets from + the hedge fund: if the + +On line 2302: + at what price the CDO + should purchase assets from the + hedge fund: if the CDO + +On line 2302: + what price the CDO should + purchase assets from the hedge + fund: if the CDO paid + +On line 2302: + should purchase assets + from the hedge fund: if the CDO + paid above-market prices + +On line 2302: + purchase assets from + the hedge fund: if the CDO paid + above-market prices for + +On line 2302: + the hedge fund: if the + CDO paid above-market prices for + a security, + +On line 2302: + hedge fund: if the CDO + paid above-market prices for a + security, that + +On line 2302: + CDO paid above-market + prices for a security, + that would advantage + +On line 2302: + paid above-market prices + for a security, that + would advantage the + +On line 2302: + above-market prices for + a security, that would + advantage the hedge + +On line 2304: + the hedge fund investors + and disadvantage the CDO + investors. BSAM’s flagship + +On line 2304: + and disadvantage + the CDO investors. BSAM’s flagship + CDOs—dubbed Klio I, II, and + +On line 2304: + disadvantage the + CDO investors. BSAM’s flagship CDOs—dubbed + Klio I, II, and III—were + +On line 2304: + the CDO investors. BSAM’s + flagship CDOs—dubbed Klio I, II, and + III—were created in + +On line 2304: + BSAM’s flagship CDOs—dubbed Klio + I, II, and III—were created + in rapid succession + +On line 2304: + flagship CDOs—dubbed Klio I, + II, and III—were created in + rapid succession over + +On line 2304: + and III—were created + in rapid succession over and + with Citigroup as + +On line 2304: + III—were created in + rapid succession over and with + Citigroup as their + +On line 2304: + in rapid succession + over and with Citigroup as + their underwriter. + +On line 2304: + rapid succession over + and with Citigroup as their + underwriter. All + +On line 2304: + and with Citigroup + as their underwriter. All + three deals were mainly + +On line 2304: + Citigroup as their + underwriter. All three deals + were mainly composed + +On line 2304: + composed of mortgage- + and asset-backed securities + that BSAM already owned, + +On line 2304: + BSAM already owned, and + BSAM retained the equity + position in all + +On line 2304: + owned, and BSAM retained + the equity position + in all three; all three + +On line 2304: + and BSAM retained the + equity position in + all three; all three were + +On line 2304: + all three; all three were + primarily funded with + asset-backed commercial + +On line 2304: + asset-backed commercial + paper.48 Typical for the + industry at the + +On line 2304: + paper.48 Typical + for the industry at the + time, the expected + +On line 2304: + Typical for the + industry at the time, the + expected return + +On line 2304: + for the industry + at the time, the expected + return for the CDO + +On line 2304: + managing assets + and holding the equity + tranche, was between and + +On line 2304: + tranche, was between and + annually, assuming + no defaults on the + +On line 2304: + and annually, + assuming no defaults on + the underlying + +On line 2304: + the underlying + collateral.49 Thanks to the + combination of + +On line 2304: + combination of + mortgage-backed securities, CDOs, + and leverage, Cioffi’s + +On line 2304: + securities, CDOs, + and leverage, Cioffi’s funds earned + healthy returns for a + +On line 2304: + and leverage, Cioffi’s + funds earned healthy returns for a + time: the High-Grade fund had + +On line 2304: + Cioffi’s funds earned healthy + returns for a time: the High-Grade + fund had returns of + +On line 2304: + funds earned healthy returns + for a time: the High-Grade fund had + returns of in in + +On line 2304: + healthy returns for a + time: the High-Grade fund had returns + of in in and in + +On line 2304: + for a time: the High-Grade + fund had returns of in in + and in after fees.50 + +On line 2304: + time: the High-Grade fund had + returns of in in and in + after fees.50 Cioffi + +On line 2304: + fund had returns of + in in and in after fees.50 + Cioffi and Tannin + +On line 2304: + in and in after + fees.50 Cioffi and Tannin made + millions before the + +On line 2304: + millions before the + hedge funds collapsed in Cioffi + was rewarded with + +On line 2304: + collapsed in Cioffi + was rewarded with total + compensation worth + +On line 2304: + was rewarded with + total compensation worth + more than million from + +On line 2304: + compensation worth + more than million from to In + the year the two hedge + +On line 2304: + than million from to + In the year the two hedge funds + filed for bankruptcy, + +On line 2304: + In the year the two + hedge funds filed for bankruptcy, + Cioffi made more than + +On line 2304: + year the two hedge funds + filed for bankruptcy, Cioffi + made more than million + +On line 2304: + the two hedge funds filed + for bankruptcy, Cioffi made + more than million in + +On line 2304: + made more than million + in total compensation. + Matt Tannin, his lead + +On line 2304: + million in total + compensation. Matt Tannin, + his lead manager, + +On line 2304: + his lead manager, + was awarded compensation + of more than million + +On line 2304: + lead manager, was + awarded compensation of + more than million from + +On line 2304: + compensation of + more than million from to Both + managers invested + +On line 2304: + than million from to + Both managers invested some + of their own money + +On line 2304: + million from to Both + managers invested some of + their own money in + +On line 2304: + from to Both managers + invested some of their own + money in the funds, + +On line 2304: + managers invested + some of their own money in + the funds, and used this + +On line 2304: + invested some of + their own money in the funds, + and used this as a + +On line 2304: + of their own money + in the funds, and used this as + a selling point when + +On line 2304: + money in the funds, + and used this as a selling + point when pitching the + +On line 2304: + in the funds, and used + this as a selling point when + pitching the funds to + +On line 2304: + funds, and used this as + a selling point when pitching + the funds to others.52 + +On line 2306: + and used this as a + selling point when pitching the + funds to others.52 But + +On line 2306: + this as a selling + point when pitching the funds to + others.52 But when house + +On line 2306: + a selling point when + pitching the funds to others.52 + But when house prices fell + +On line 2306: + point when pitching the + funds to others.52 But when house + prices fell and investors + +On line 2306: + pitching the funds to + others.52 But when house prices fell + and investors started + +On line 2306: + funds to others.52 But + when house prices fell and investors + started to question + +On line 2306: + question the value + of mortgage-backed securities + in the same short-term + +On line 2306: + value of mortgage-backed + securities in the same + short-term leverage that + +On line 2306: + in the same short-term + leverage that had inflated + Cioffi’s returns would + +On line 2306: + amplify losses + and quickly put his two hedge + funds out of business. + +On line 2308: + losses and quickly + put his two hedge funds out of + business. CITIGROUP’S + +On line 2308: + put his two hedge funds + out of business. CITIGROUP’S + LIQUIDITY PUTS: + +On line 2310: + funds out of business. + CITIGROUP’S LIQUIDITY + PUTS: "A POTENTIAL + +On line 2312: + LIQUIDITY PUTS: + "A POTENTIAL CONFLICT OF + INTEREST" By the + +On line 2312: + PUTS: "A POTENTIAL + CONFLICT OF INTEREST" By + the middle of the + +On line 2312: + By the middle of + the decade, Citigroup was a + market leader in + +On line 2312: + middle of the decade, + Citigroup was a market + leader in selling + +On line 2312: + the decade, Citigroup + was a market leader in + selling CDOs, often + +On line 2312: + Citigroup was a + market leader in selling + CDOs, often using + +On line 2312: + market leader in + selling CDOs, often using + its depositor-based + +On line 2312: + selling CDOs, often + using its depositor-based + commercial bank to + +On line 2312: + types of trouble with + its regulators, and then-CEO + Charles Prince told the FCIC + +On line 2312: + of trouble with its + regulators, and then-CEO Charles + Prince told the FCIC that + +On line 2312: + its regulators, + and then-CEO Charles Prince told the FCIC + that dealing with those + +On line 2312: + and then-CEO Charles Prince told + the FCIC that dealing with those + troubles took up more + +On line 2312: + Charles Prince told the FCIC + that dealing with those troubles + took up more than half + +On line 2312: + Prince told the FCIC that + dealing with those troubles took + up more than half his + +On line 2312: + FCIC that dealing with + those troubles took up more than + half his time.53 After + +On line 2312: + those troubles took up + more than half his time.53 After + paying the million + +On line 2312: + more than half his time.53 + After paying the million + fine related to + +On line 2312: + time.53 After paying + the million fine related + to subprime mortgage + +On line 2312: + to subprime mortgage + lending, Citigroup again got + into trouble, charged + +On line 2312: + into trouble, charged + with helping Enron—before + that company filed + +On line 2312: + company filed for + bankruptcy in 2001—use structured + finance transactions + +On line 2312: + bankruptcy in 2001—use + structured finance transactions + to manipulate + +On line 2312: + to manipulate + its financial statements. In + July Citigroup + +On line 2314: + allegations and + also agreed, under formal + enforcement actions + +On line 2314: + also agreed, under + formal enforcement actions + by the Federal + +On line 2314: + agreed, under formal + enforcement actions by the + Federal Reserve + +On line 2314: + formal enforcement + actions by the Federal + Reserve and Office + +On line 2314: + enforcement actions + by the Federal Reserve + and Office of the + +On line 2314: + by the Federal + Reserve and Office of the + Comptroller of the + +On line 2314: + the Comptroller of + the Currency, to overhaul + its risk management + +On line 2316: + the Currency, to + overhaul its risk management + practices.54 By March the + +On line 2316: + to overhaul its risk + management practices.54 By March + the Fed had seen enough: + +On line 2316: + management practices.54 + By March the Fed had seen enough: + it banned Citigroup + +On line 2316: + By March the Fed had + seen enough: it banned Citigroup + from making any more + +On line 2316: + legal compliance. + According to Prince, he had + already decided + +On line 2318: + growth."55 Robert Rubin, a + former treasury secretary + and former Goldman + +On line 2318: + treasury secretary + and former Goldman Sachs co-CEO + who was at that time + +On line 2318: + Goldman Sachs co-CEO who + was at that time chairman of + the Executive + +On line 2318: + time chairman of the + Executive Committee + of Citigroup’s board + +On line 2318: + the Executive + Committee of Citigroup’s + board of directors, + +On line 2318: + recommended that + Citigroup increase its risk + taking—assuming, he told + +On line 2318: + Citigroup increase + its risk taking—assuming, he told + the FCIC, that the firm + +On line 2318: + taking—assuming, he told + the FCIC, that the firm managed + those risks properly.56 + +On line 2320: + was a natural + area for growth after the Fed + and then Congress had + +On line 2320: + a natural area + for growth after the Fed and + then Congress had done + +On line 2320: + natural area for + growth after the Fed and then + Congress had done away + +On line 2320: + for growth after the + Fed and then Congress had done + away with restrictions + +On line 2320: + growth after the Fed + and then Congress had done away + with restrictions on + +On line 2320: + Fed and then Congress + had done away with restrictions + on activities + +On line 2320: + and then Congress had + done away with restrictions on + activities that + +On line 2320: + commercial banks. One + opportunity among many + was the CDO business, + +On line 2320: + the CDO business, which + was just then taking off amid + the booming mortgage + +On line 2322: + was just then taking + off amid the booming mortgage + market. In Citi’s CDO + +On line 2322: + then taking off amid + the booming mortgage market. + In Citi’s CDO desk was + +On line 2322: + taking off amid the + booming mortgage market. In + Citi’s CDO desk was a + +On line 2322: + off amid the booming + mortgage market. In Citi’s CDO + desk was a tiny unit + +On line 2322: + the booming mortgage + market. In Citi’s CDO desk was + a tiny unit in the + +On line 2322: + mortgage market. In + Citi’s CDO desk was a tiny unit + in the company’s + +On line 2322: + Citi’s CDO desk was a + tiny unit in the company’s + investment banking + +On line 2322: + was a tiny unit in + the company’s investment + banking arm, "eight guys + +On line 2322: + banking arm, "eight guys + and a Bloomberg" terminal, in + the words of Nestor Dominguez, + +On line 2322: + "eight guys and a Bloomberg" + terminal, in the words of + Nestor Dominguez, then co-head + +On line 2322: + a Bloomberg" terminal, + in the words of Nestor Dominguez, then + co-head of the desk.57 + +On line 2322: + in the words of Nestor + Dominguez, then co-head of the desk.57 + Nevertheless, this + +On line 2322: + Dominguez, then co-head of + the desk.57 Nevertheless, this + tiny operation + +On line 2324: + Nevertheless, this + tiny operation under + the command of homas + +On line 2324: + tiny operation + under the command of homas + Maheras, co-CEO of the + +On line 2324: + under the command + of homas Maheras, co-CEO of the + investment bank, had + +On line 2324: + of homas Maheras, co-CEO + of the investment bank, had + become a leader + +On line 2324: + Maheras, co-CEO of the + investment bank, had become + a leader in the + +On line 2324: + of the investment + bank, had become a leader + in the nascent market + +On line 2324: + the investment bank, + had become a leader in + the nascent market for + +On line 2324: + investment bank, had + become a leader in the + nascent market for CDOs, + +On line 2324: + bank, had become a + leader in the nascent market + for CDOs, creating + +On line 2324: + become a leader + in the nascent market for CDOs, + creating more than + +On line 2324: + leader in the nascent + market for CDOs, creating + more than billion in + +On line 2324: + in the nascent market + for CDOs, creating more than + billion in and 2004—close + +On line 2324: + for CDOs, creating + more than billion in and 2004—close + to one-fifth of the + +On line 2324: + more than billion in + and 2004—close to one-fifth of the + market in those years. + +On line 2326: + billion in and 2004—close + to one-fifth of the market + in those years. The eight + +On line 2326: + and 2004—close to one-fifth + of the market in those years. + The eight guys had picked + +On line 2326: + 2004—close to one-fifth of + the market in those years. The + eight guys had picked up + +On line 2326: + to one-fifth of the + market in those years. The eight + guys had picked up on + +On line 2326: + of the market in + those years. The eight guys had picked + up on a novel + +On line 2326: + market in those years. + The eight guys had picked up on + a novel structure + +On line 2326: + those years. The eight guys + had picked up on a novel + structure pioneered + +On line 2326: + had picked up on a + novel structure pioneered + by Goldman Sachs and + +On line 2326: + a novel structure + pioneered by Goldman Sachs + and WestLB, a German + +On line 2326: + structure pioneered + by Goldman Sachs and WestLB, a + German bank. Instead + +On line 2326: + by Goldman Sachs and + WestLB, a German bank. Instead + of issuing the + +On line 2326: + Goldman Sachs and WestLB, + a German bank. Instead of + issuing the triple-A + +On line 2326: + and WestLB, a German + bank. Instead of issuing + the triple-A tranches of + +On line 2326: + WestLB, a German bank. + Instead of issuing the + triple-A tranches of the + +On line 2326: + of issuing the + triple-A tranches of the CDOs as + long-term debt, Citigroup + +On line 2326: + of the CDOs as long-term + debt, Citigroup structured them + as short-term asset-backed + +On line 2326: + as short-term asset-backed + commercial paper.58 Of course, + using commercial + +On line 2326: + commercial paper.58 + Of course, using commercial + paper introduced + +On line 2326: + commercial paper + introduced liquidity + risk (not present when the + +On line 2326: + paper introduced + liquidity risk (not present + when the tranches were + +On line 2326: + risk (not present when the + tranches were sold as long-term debt), + because the CDO would + +On line 2326: + present when the tranches + were sold as long-term debt), because + the CDO would have to + +On line 2326: + the tranches were sold + as long-term debt), because the CDO + would have to reissue + +On line 2326: + tranches were sold as + long-term debt), because the CDO would + have to reissue the + +On line 2326: + were sold as long-term debt), + because the CDO would have to + reissue the paper + +On line 2326: + long-term debt), because the + CDO would have to reissue the + paper to investors + +On line 2326: + days or weeks—for the + life of the CDO. But asset-backed + commercial paper + +On line 2326: + life of the CDO. But + asset-backed commercial paper + was a cheap form of + +On line 2326: + the CDO. But asset-backed + commercial paper was a + cheap form of funding + +On line 2326: + asset-backed commercial + paper was a cheap form of + funding at the time, + +On line 2326: + commercial paper + was a cheap form of funding + at the time, and it + +On line 2326: + paper was a cheap + form of funding at the time, + and it had a large + +On line 2326: + was a cheap form of + funding at the time, and it + had a large base of + +On line 2326: + form of funding at + the time, and it had a large + base of potential + +On line 2326: + funding at the time, + and it had a large base of + potential investors, + +On line 2326: + and it had a large + base of potential investors, + particularly + +On line 2326: + base of potential + investors, particularly + among money market + +On line 2326: + funds. To mitigate + the liquidity risk and + to ensure that the + +On line 2326: + the liquidity + risk and to ensure that the + rating agencies would + +On line 2326: + and to ensure that + the rating agencies would give + it their top ratings, + +On line 2326: + to ensure that the + rating agencies would give it + their top ratings, Citibank + +On line 2326: + their top ratings, Citibank + (Citigroup’s national bank + subsidiary) provided + +On line 2326: + puts. In selling the + liquidity put, for an + ongoing fee the + +On line 2326: + the liquidity + put, for an ongoing fee + the bank would be on + +On line 2326: + liquidity put, + for an ongoing fee the + bank would be on the + +On line 2326: + for an ongoing + fee the bank would be on the + hook to step in and + +On line 2326: + an ongoing fee + the bank would be on the hook + to step in and buy + +On line 2326: + ongoing fee the + bank would be on the hook to + step in and buy the + +On line 2326: + fee the bank would be + on the hook to step in and + buy the commercial + +On line 2326: + bank would be on the + hook to step in and buy the + commercial paper + +On line 2326: + on the hook to step + in and buy the commercial + paper if there were + +On line 2326: + to step in and buy + the commercial paper if + there were no buyers + +On line 2326: + step in and buy the + commercial paper if there + were no buyers when + +On line 2326: + commercial paper + if there were no buyers when + it matured or if + +On line 2326: + paper if there were + no buyers when it matured + or if the cost of + +On line 2326: + there were no buyers + when it matured or if the + cost of funding rose + +On line 2326: + were no buyers when + it matured or if the cost + of funding rose by + +On line 2326: + no buyers when it + matured or if the cost of + funding rose by a + +On line 2326: + it matured or if + the cost of funding rose by + a predetermined + +On line 2326: + matured or if the + cost of funding rose by a + predetermined amount.59 + +On line 2328: + the cost of funding + rose by a predetermined + amount.59 The CDO team at + +On line 2328: + funding rose by a + predetermined amount.59 The CDO + team at Citigroup + +On line 2328: + predetermined amount.59 + The CDO team at Citigroup + had jumped into the + +On line 2328: + team at Citigroup + had jumped into the market + in July with a + +On line 2328: + had jumped into the + market in July with a + billion CDO named Grenadier + +On line 2328: + into the market + in July with a billion + CDO named Grenadier Funding + +On line 2328: + in July with a + billion CDO named Grenadier Funding + that included a + +On line 2328: + a billion CDO named + Grenadier Funding that included + a billion tranche backed + +On line 2328: + billion CDO named Grenadier + Funding that included a + billion tranche backed by + +On line 2328: + a billion tranche backed + by a liquidity put + from Citibank.60 Over the next + +On line 2328: + billion tranche backed by + a liquidity put from + Citibank.60 Over the next three + +On line 2328: + Over the next three years, + Citi would write liquidity + puts on billion of + +On line 2328: + liquidity puts + on billion of commercial + paper issued by + +On line 2328: + puts on billion of + commercial paper issued + by CDOs,61 more than any + +On line 2328: + commercial paper + issued by CDOs,61 more than any + other company. + +On line 2328: + issued by CDOs,61 more + than any other company. + BSAM’s three Klio CDOs, which + +On line 2328: + more than any other + company. BSAM’s three Klio CDOs, + which Citigroup had + +On line 2328: + which Citigroup had + underwritten, accounted + for just over billion + +On line 2328: + accounted for just + over billion of this total,62 + a large number that + +On line 2328: + just over billion of + this total,62 a large number + that would not bode well + +On line 2328: + over billion of this + total,62 a large number that + would not bode well for + +On line 2330: + of this total,62 a + large number that would not bode + well for the bank. But + +On line 2330: + a large number that + would not bode well for the bank. + But initially, this + +On line 2330: + would not bode well for + the bank. But initially, this + "strategic initiative," + +On line 2330: + bode well for the bank. + But initially, this "strategic + initiative," as Dominguez + +On line 2330: + bank. But initially, + this "strategic initiative," as + Dominguez called it, was very + +On line 2330: + initiative," as Dominguez + called it, was very profitable for + Citigroup. The CDO + +On line 2330: + Dominguez called it, was very + profitable for Citigroup. The + CDO desk earned roughly + +On line 2330: + it, was very profitable + for Citigroup. The CDO desk + earned roughly of the + +On line 2330: + for Citigroup. The + CDO desk earned roughly of the + total deal value + +On line 2330: + CDO desk earned roughly + of the total deal value + in structuring fees + +On line 2330: + desk earned roughly of + the total deal value in + structuring fees for + +On line 2330: + in structuring fees + for Citigroup’s investment + banking arm, or about + +On line 2330: + fees for Citigroup’s + investment banking arm, or + about million for a + +On line 2330: + for a billion deal. + In addition, Citigroup + would generally + +On line 2330: + a billion deal. In + addition, Citigroup would + generally charge + +On line 2330: + generally charge + buyers to in premiums + annually for + +On line 2330: + annually for + the liquidity puts.63 In + other words, for a + +On line 2330: + the liquidity + puts.63 In other words, for a + typical billion + +On line 2330: + puts.63 In other words, + for a typical billion + deal, Citibank would receive + +On line 2330: + In other words, for + a typical billion deal, + Citibank would receive to + +On line 2330: + Citibank would receive to + million annually on + the liquidity + +On line 2330: + liquidity puts + alone—practically free money, + it seemed, because the + +On line 2330: + alone—practically free + money, it seemed, because the + trading desk believed + +On line 2330: + it seemed, because the + trading desk believed that these + puts would never be + +On line 2330: + because the trading + desk believed that these puts would + never be triggered.64 + +On line 2332: + trading desk believed + that these puts would never be + triggered.64 In effect, + +On line 2332: + these puts would never + be triggered.64 In effect, the + liquidity put + +On line 2332: + another highly + leveraged bet: a contingent + liability + +On line 2332: + bet: a contingent + liability that would + be triggered in some + +On line 2332: + liability + that would be triggered in some + circumstances. Prior + +On line 2332: + that would be triggered + in some circumstances. Prior + to the change in the + +On line 2332: + to the change in the + capital rules regarding + liquidity puts + +On line 2332: + (discussed earlier), + Citigroup did not have to + hold any capital + +On line 2332: + hold any capital + against such contingencies. Rather, + it was permitted + +On line 2332: + any capital against + such contingencies. Rather, it + was permitted to + +On line 2332: + capital against such + contingencies. Rather, it was + permitted to use + +On line 2332: + contingencies. Rather, + it was permitted to use + its own risk models + +On line 2332: + it was permitted + to use its own risk models + to determine the + +On line 2332: + to determine the + appropriate capital + charge. But Citigroup’s + +On line 2332: + only a remote + possibility that the + puts would be triggered. + +On line 2332: + possibility + that the puts would be triggered. + Following the rule + +On line 2332: + that the puts would be + triggered. Following the rule + change, Citibank was required + +On line 2332: + puts would be triggered. + Following the rule change, Citibank + was required to hold + +On line 2332: + Following the rule + change, Citibank was required to hold + in capital against + +On line 2332: + Citibank was required to + hold in capital against the + amount of commercial + +On line 2332: + required to hold in + capital against the amount of + commercial paper + +On line 2332: + hold in capital + against the amount of commercial + paper supported + +On line 2332: + capital against the + amount of commercial paper + supported by the + +On line 2332: + amount of commercial + paper supported by the + liquidity put, + +On line 2332: + paper supported + by the liquidity put, + or million for a + +On line 2332: + liquidity put, + or million for a billion + liquidity put. + +On line 2332: + put, or million for + a billion liquidity + put. Given a to + +On line 2332: + fee for the put, the + annual return on that + capital could still + +On line 2332: + put, the annual + return on that capital + could still exceed No + +On line 2332: + annual return + on that capital could still + exceed No doubt about + +On line 2332: + on that capital + could still exceed No doubt about + it, Dominguez told the FCIC, + +On line 2332: + that capital could + still exceed No doubt about it, + Dominguez told the FCIC, the + +On line 2332: + capital could still + exceed No doubt about it, Dominguez + told the FCIC, the triple-A + +On line 2332: + still exceed No doubt + about it, Dominguez told the FCIC, the + triple-A or similar + +On line 2332: + Dominguez told the FCIC, the + triple-A or similar ratings, + the multiple fees, + +On line 2332: + told the FCIC, the triple-A + or similar ratings, the + multiple fees, and + +On line 2332: + requirements made the + liquidity puts "a much + better trade" for Citi’s + +On line 2332: + the liquidity + puts "a much better trade" for + Citi’s balance sheet.65 The + +On line 2332: + liquidity puts + "a much better trade" for Citi’s + balance sheet.65 The events + +On line 2334: + puts "a much better + trade" for Citi’s balance sheet.65 The + events of would reveal + +On line 2334: + "a much better trade" + for Citi’s balance sheet.65 The events + of would reveal the + +On line 2334: + trade" for Citi’s balance + sheet.65 The events of would reveal + the fallacy of + +On line 2334: + for Citi’s balance sheet.65 + The events of would reveal the + fallacy of those + +On line 2334: + sheet.65 The events of would + reveal the fallacy of + those assumptions and + +On line 2334: + fallacy of those + assumptions and catapult + the entire billion + +On line 2334: + commercial paper + straight onto the bank’s balance + sheet, requiring it + +On line 2334: + the bank’s balance sheet, + requiring it to come up + with billion in cash + +On line 2334: + sheet, requiring it + to come up with billion in + cash as well as more + +On line 2334: + it to come up with + billion in cash as well as + more capital to + +On line 2334: + with billion in cash + as well as more capital + to satisfy bank + +On line 2334: + cash as well as more + capital to satisfy + bank regulators. + +On line 2336: + liquidity puts + were approved by Citigroup’s + Capital Markets + +On line 2336: + Capital Markets + Approval Committee, which was + charged with reviewing + +On line 2336: + Approval Committee, + which was charged with reviewing + all new financial + +On line 2336: + Committee, which was + charged with reviewing all new + financial products.66 + +On line 2336: + charged with reviewing + all new financial products.66 + Deeming them to be + +On line 2336: + reviewing all new + financial products.66 Deeming + them to be low risk, + +On line 2336: + financial products.66 + Deeming them to be low risk, + the company based + +On line 2336: + Deeming them to be + low risk, the company based + its opinions on the + +On line 2336: + to be low risk, the + company based its opinions + on the credit risk + +On line 2336: + failed to consider + the liquidity risk posed + by a general + +On line 2336: + the liquidity + risk posed by a general + market disruption.67 + +On line 2336: + by a general + market disruption.67 The OCC, + the supervisor + +On line 2336: + market disruption.67 + The OCC, the supervisor + of Citigroup’s largest + +On line 2338: + supervisor of + Citigroup’s largest commercial + bank sub - sidiary, was + +On line 2338: + of Citigroup’s largest + commercial bank sub - sidiary, + was aware that the bank + +On line 2338: + largest commercial bank + sub - sidiary, was aware that the + bank had issued the + +On line 2338: + bank sub - sidiary, was + aware that the bank had issued + the liquidity + +On line 2338: + sub - sidiary, was aware + that the bank had issued the + liquidity puts.68 + +On line 2338: + aware that the bank had + issued the liquidity + puts.68 However, the + +On line 2338: + liquidity puts.68 + However, the terms of the + OCC’s post-Enron enforcement + +On line 2338: + terms of the OCC’s post-Enron + enforcement action focused + only on whether Citibank + +On line 2338: + OCC’s post-Enron enforcement + action focused only on + whether Citibank had a process + +On line 2338: + enforcement action + focused only on whether Citibank + had a process in place + +On line 2338: + on whether Citibank had a + process in place to review the + product, and not on + +On line 2338: + Citibank had a process in + place to review the product, + and not on the risks + +On line 2338: + had a process in place + to review the product, and + not on the risks of + +On line 2338: + a process in place to + review the product, and not + on the risks of the + +On line 2338: + in place to review + the product, and not on the + risks of the puts to + +On line 2338: + place to review the + product, and not on the risks + of the puts to Citibank’s + +On line 2338: + review the product, + and not on the risks of the + puts to Citibank’s balance + +On line 2340: + product, and not on + the risks of the puts to Citibank’s + balance sheet.69 Besides + +On line 2340: + not on the risks of + the puts to Citibank’s balance sheet.69 + Besides Citigroup, + +On line 2340: + the risks of the puts + to Citibank’s balance sheet.69 Besides + Citigroup, only + +On line 2340: + few large financial + institutions, such as AIG + Financial Products, + +On line 2340: + institutions, such + as AIG Financial Products, + BNP, WestLB of Germany, + +On line 2340: + as AIG Financial + Products, BNP, WestLB of Germany, + and Société Générale + +On line 2340: + BNP, WestLB of Germany, + and Société Générale of France, + wrote significant + +On line 2340: + WestLB of Germany, and + Société Générale of France, wrote + significant amounts + +On line 2340: + Société Générale of + France, wrote significant amounts + of liquidity + +On line 2340: + significant amounts + of liquidity puts on + commercial paper + +On line 2340: + of liquidity + puts on commercial paper + issued by CDOs.70 Bank + +On line 2340: + puts on commercial + paper issued by CDOs.70 Bank + of America, the + +On line 2340: + paper issued by + CDOs.70 Bank of America, the + biggest commercial + +On line 2340: + issued by CDOs.70 Bank + of America, the biggest + commercial bank in + +On line 2340: + Bank of America, + the biggest commercial bank + in the United States, + +On line 2340: + of America, the + biggest commercial bank in + the United States, wrote + +On line 2340: + biggest commercial + bank in the United States, wrote + small deals through but did + +On line 2340: + commercial bank in + the United States, wrote small deals + through but did billion + +On line 2340: + bank in the United + States, wrote small deals through but did + billion worth in just + +On line 2340: + the United States, wrote + small deals through but did billion + worth in just before + +On line 2340: + United States, wrote small + deals through but did billion worth + in just before the + +On line 2340: + States, wrote small deals through + but did billion worth in just + before the market + +On line 2342: + small deals through but did + billion worth in just before + the market crashed.71 When + +On line 2342: + did billion worth in + just before the market crashed.71 + When asked why other + +On line 2342: + participants were + not writing liquidity + puts, Dominguez stated that + +On line 2342: + puts, Dominguez stated that + Société Générale and BNP were + big players in that + +On line 2344: + Société Générale and + BNP were big players in that + market. "You needed + +On line 2344: + Générale and BNP were + big players in that market. + "You needed to be + +On line 2344: + BNP were big players + in that market. "You needed + to be a bank with + +On line 2344: + were big players in + that market. "You needed to + be a bank with a + +On line 2344: + big players in that + market. "You needed to be + a bank with a strong + +On line 2344: + in that market. "You + needed to be a bank with + a strong balance sheet, + +On line 2344: + market. "You needed + to be a bank with a strong + balance sheet, access + +On line 2344: + to be a bank with + a strong balance sheet, access + to collateral, + +On line 2344: + be a bank with a + strong balance sheet, access to + collateral, and + +On line 2344: + collateral, and + existing relationships + with collateral + +On line 2346: + relationships with + collateral managers," he + said.72 The CDO desk stopped + +On line 2346: + he said.72 The CDO desk + stopped writing liquidity + puts in early when + +On line 2346: + said.72 The CDO desk stopped + writing liquidity puts + in early when it + +On line 2346: + liquidity puts + in early when it reached its + internal limits. + +On line 2346: + in early when it + reached its internal limits. + Citibank’s treasury function + +On line 2346: + early when it reached + its internal limits. Citibank’s + treasury function had + +On line 2346: + reached its internal + limits. Citibank’s treasury function + had set a billion + +On line 2346: + internal limits. + Citibank’s treasury function had set + a billion cap on + +On line 2346: + Citibank’s treasury function + had set a billion cap on + liquidity puts;74 + +On line 2346: + set a billion cap + on liquidity puts;74 it + granted one final + +On line 2346: + on liquidity + puts;74 it granted one final + exception, bringing + +On line 2346: + bringing the total + to billion.75 Risk management + had also set a + +On line 2346: + total to billion.75 + Risk management had also + set a billion risk + +On line 2346: + Risk management had + also set a billion risk + limit on top-rated + +On line 2346: + set a billion risk + limit on top-rated asset-backed + securities, which + +On line 2346: + which included the + liquidity puts. Later, + in an October + +On line 2346: + puts. Later, in an + October memo, Citigroup’s + Financial Control + +On line 2346: + Group criticized the + firm’s pricing of the puts, which + failed to consider + +On line 2346: + criticized the firm’s + pricing of the puts, which failed + to consider the + +On line 2346: + firm’s pricing of the + puts, which failed to consider + the risk that investors + +On line 2346: + pricing of the puts, + which failed to consider the + risk that investors would + +On line 2346: + of the puts, which failed + to consider the risk that + investors would not buy + +On line 2346: + failed to consider + the risk that investors would not + buy the commercial + +On line 2346: + consider the risk + that investors would not buy the + commercial paper + +On line 2346: + the risk that investors + would not buy the commercial + paper protected + +On line 2346: + that investors would not + buy the commercial paper + protected by the + +On line 2346: + buy the commercial + paper protected by the + liquidity puts + +On line 2346: + it came due, thereby + creating a billion cash + demand on Citibank.76 An + +On line 2346: + thereby creating + a billion cash demand on + Citibank.76 An undated + +On line 2346: + billion cash demand + on Citibank.76 An undated and + unattributed internal + +On line 2346: + (believed to have been + drafted in also questioned + one of the practices + +On line 2346: + one of the practices + of Citigroup’s investment + bank, which paid traders on + +On line 2346: + of the practices of + Citigroup’s investment bank, + which paid traders on its + +On line 2346: + investment bank, which + paid traders on its CDO desk for + generating the + +On line 2346: + paid traders on its CDO + desk for generating the + deals without regard + +On line 2346: + traders on its CDO desk + for generating the deals + without regard to + +On line 2348: + for generating + the deals without regard to + later losses: "There + +On line 2348: + without regard to + later losses: "There is a + potential conflict + +On line 2348: + later losses: "There + is a potential conflict + of interest in + +On line 2348: + potential conflict + of interest in pricing + the liquidity + +On line 2348: + of interest in + pricing the liquidity + put cheep [sic] so that + +On line 2348: + the liquidity + put cheep [sic] so that more CDO + equities can be + +On line 2348: + cheep [sic] so that more + CDO equities can be sold + and more structuring + +On line 2348: + [sic] so that more CDO + equities can be sold and + more structuring fee + +On line 2348: + and more structuring + fee to be generated."77 + The result would be + +On line 2348: + be generated."77 + The result would be losses + so severe that they + +On line 2348: + generated."77 The + result would be losses so + severe that they would + +On line 2348: + The result would be + losses so severe that they + would help bring the huge + +On line 2348: + would be losses so + severe that they would help bring + the huge financial + +On line 2348: + severe that they would + help bring the huge financial + conglomerate to + +On line 2348: + the huge financial + conglomerate to the brink + of failure, as we + +On line 2350: + conglomerate to + the brink of failure, as we + will see. AIG: "GOLDEN + +On line 2350: + the brink of failure, + as we will see. AIG: "GOLDEN + GOOSE FOR THE ENTIRE + +On line 2350: + brink of failure, as + we will see. AIG: "GOLDEN GOOSE + FOR THE ENTIRE STREET" + +On line 2352: + of failure, as we + will see. AIG: "GOLDEN GOOSE FOR + THE ENTIRE STREET" In + +On line 2352: + as we will see. AIG: + "GOLDEN GOOSE FOR THE ENTIRE + STREET" In American + +On line 2352: + "GOLDEN GOOSE FOR THE + ENTIRE STREET" In American + International + +On line 2352: + STREET" In American + International Group was + the largest insurance + +On line 2352: + International + Group was the largest insurance + company in the + +On line 2352: + as measured by stock + market value: a massive + conglomerate with + +On line 2352: + market value: a + massive conglomerate with + billion in assets, + +On line 2354: + billion in assets, + employees in countries, and3 + subsidiaries. But to Wall + +On line 2354: + assets, employees + in countries, and3 subsidiaries. But + to Wall Street, AIG’s most + +On line 2354: + But to Wall Street, AIG’s + most valuable asset was its + credit rating: that + +On line 2354: + most valuable asset + was its credit rating: that + it was awarded the + +On line 2354: + credit rating: that + it was awarded the highest + possible rating—Aaa by + +On line 2354: + that it was awarded + the highest possible rating—Aaa + by Moody’s since AAA by + +On line 2354: + it was awarded the + highest possible rating—Aaa by + Moody’s since AAA by S&P + +On line 2354: + awarded the highest + possible rating—Aaa by Moody’s since + AAA by S&P since 983—was + +On line 2354: + possible rating—Aaa by + Moody’s since AAA by S&P since 983—was + crucial, because these + +On line 2354: + by Moody’s since AAA by + S&P since 983—was crucial, because + these sterling ratings + +On line 2354: + Moody’s since AAA by S&P + since 983—was crucial, because these + sterling ratings let + +On line 2354: + 983—was crucial, because + these sterling ratings let it + borrow cheaply and + +On line 2354: + these sterling ratings + let it borrow cheaply and + deploy the money + +On line 2354: + cheaply and deploy + the money in lucrative + investments. Only + +On line 2356: + in early carried + those ratings.78 Starting in AIG + Financial Products, + +On line 2356: + those ratings.78 Starting + in AIG Financial Products, + a Connecticut-based unit + +On line 2356: + ratings.78 Starting in + AIG Financial Products, a + Connecticut-based unit with + +On line 2356: + a Connecticut-based unit + with major operations + in London, figured + +On line 2356: + Connecticut-based unit with + major operations in + London, figured out + +On line 2356: + operations in + London, figured out a new + way to make money + +On line 2356: + figured out a new + way to make money from those + ratings. Relying + +On line 2356: + out a new way to + make money from those ratings. + Relying on the + +On line 2356: + way to make money + from those ratings. Relying + on the guarantee + +On line 2356: + to make money from + those ratings. Relying on + the guarantee of + +On line 2356: + make money from those + ratings. Relying on the + guarantee of its + +On line 2356: + Relying on the + guarantee of its parent, + AIG, AIG Financial + +On line 2356: + guarantee of its + parent, AIG, AIG Financial + Products became a + +On line 2356: + its parent, AIG, AIG + Financial Products became + a major over-the-counter + +On line 2356: + in notional amount. + Among other derivatives + activities, the + +On line 2356: + activities, the + unit issued credit default + swaps guaranteeing + +On line 2356: + unit issued credit + default swaps guaranteeing + debt obligations held + +On line 2356: + obligations held by + financial institutions + and other investors. + +On line 2356: + held by financial + institutions and other + investors. In exchange + +On line 2356: + agreed to reimburse + the investor in such a debt + obligation in the + +On line 2356: + the investor in such + a debt obligation in the + event of any default. + +On line 2356: + investor in such a + debt obligation in the event + of any default. The + +On line 2356: + a debt obligation + in the event of any default. + The credit default + +On line 2356: + debt obligation in + the event of any default. The + credit default swap + +On line 2356: + in the event of any + default. The credit default + swap (CDS) is often + +On line 2356: + event of any default. + The credit default swap (CDS) + is often compared + +On line 2356: + of any default. The + credit default swap (CDS) is + often compared to + +On line 2356: + The credit default + swap (CDS) is often compared + to insurance, but + +On line 2356: + credit default swap + (CDS) is often compared to + insurance, but when + +On line 2356: + swap (CDS) is often + compared to insurance, but + when an insurance + +On line 2356: + insurance, but when + an insurance company + sells a policy, + +On line 2356: + company sells a + policy, regulations + require that it set + +On line 2356: + set aside a reserve + in case of a loss. Because + credit default swaps + +On line 2356: + a reserve in case + of a loss. Because credit + default swaps were not + +On line 2356: + such requirement was + applicable. In this case, + the unit predicted + +On line 2356: + applicable. In + this case, the unit predicted + with confidence that + +On line 2356: + In this case, the unit + predicted with confidence + that there would be no + +On line 2356: + the unit predicted + with confidence that there would + be no realized + +On line 2356: + with confidence that + there would be no realized + economic loss on + +On line 2356: + CDOs on which they wrote + CDS protection, and failed to + make any provisions + +On line 2356: + CDS protection, and + failed to make any provisions + whatsoever for + +On line 2358: + losses—a decision + that would prove fatal to AIG + in AIG Financial + +On line 2358: + decision that would + prove fatal to AIG in AIG + Financial Products + +On line 2358: + that would prove fatal + to AIG in AIG Financial + Products had a huge + +On line 2358: + prove fatal to AIG + in AIG Financial Products + had a huge business + +On line 2358: + Financial Products + had a huge business selling + CDS to European + +On line 2358: + huge business selling + CDS to European banks on + a variety of + +On line 2358: + CDS to European + banks on a variety of + financial assets, + +On line 2358: + assets, including + bonds, mortgage-backed securities, + CDOs, and other debt + +On line 2358: + debt securities. + For AIG, the fee for selling + protection via the + +On line 2358: + For AIG, the fee for + selling protection via the + swap appeared well worth + +On line 2358: + selling protection + via the swap appeared well worth + the risk. For the banks + +On line 2358: + appeared well worth the + risk. For the banks purchasing + protection, the swap + +On line 2358: + worth the risk. For the + banks purchasing protection, + the swap enabled them + +On line 2358: + the risk. For the banks + purchasing protection, the + swap enabled them to + +On line 2358: + the banks purchasing + protection, the swap enabled + them to neutralize + +On line 2358: + protection, the swap + enabled them to neutralize + the credit risk and + +On line 2358: + the swap enabled them + to neutralize the credit + risk and thereby hold + +On line 2358: + swap enabled them to + neutralize the credit risk + and thereby hold less + +On line 2358: + them to neutralize + the credit risk and thereby + hold less capital + +On line 2358: + to neutralize the + credit risk and thereby hold + less capital against + +On line 2358: + and thereby hold less + capital against its assets. + Purchasing credit + +On line 2358: + hold less capital + against its assets. Purchasing + credit default swaps + +On line 2358: + capital against its + assets. Purchasing credit + default swaps from AIG + +On line 2358: + assets. Purchasing + credit default swaps from AIG + could reduce the amount + +On line 2358: + AIG could reduce the + amount of regulatory + capital that the + +On line 2358: + capital that the + bank needed to hold against an + asset from to By + +On line 2358: + the bank needed to + hold against an asset from to + By AIG had written + +On line 2360: + needed to hold against + an asset from to By AIG + had written billion + +On line 2360: + hold against an asset + from to By AIG had written + billion in CDS for + +On line 2360: + regulatory + capital benefits; most + were with European + +On line 2360: + European banks for + a variety of asset + types. That total would + +On line 2360: + for a variety + of asset types. That total + would rise to billion + +On line 2360: + a variety of + asset types. That total would + rise to billion by + +On line 2362: + types. That total would + rise to billion by The same + advantages could be + +On line 2362: + would rise to billion + by The same advantages could + be enjoyed by banks + +On line 2362: + rise to billion by + The same advantages could be + enjoyed by banks in + +On line 2362: + The same advantages + could be enjoyed by banks in + the United States, where + +On line 2362: + could be enjoyed by + banks in the United States, where + regulators had + +On line 2362: + where regulators + had introduced similar + capital standards + +On line 2362: + capital standards + for banks’ holdings of mortgage-backed + securities and + +On line 2362: + for banks’ holdings of + mortgage-backed securities and + other investments + +On line 2362: + holdings of mortgage-backed + securities and other + investments under + +On line 2362: + securities and + other investments under + the Recourse Rule in + +On line 2362: + investments under + the Recourse Rule in So a + credit default swap + +On line 2362: + the Recourse Rule in + So a credit default swap + with AIG could also + +On line 2364: + could also lower + American banks’ capital + requirements. In and + +On line 2366: + AIG sold protection + on super-senior CDO tranches + valued at billion, + +On line 2366: + on super-senior CDO + tranches valued at billion, + up from just billion + +On line 2366: + valued at billion, + up from just billion in In + an interview with + +On line 2368: + billion in In an + interview with the FCIC, one + AIG executive + +On line 2368: + with the FCIC, one AIG + executive described AIG + Financial Products’ + +On line 2370: + Financial Products’ + principal swap salesman, Alan + Frost, as "the golden + +On line 2370: + Products’ principal + swap salesman, Alan Frost, as "the + golden goose for the + +On line 2372: + Frost, as "the golden + goose for the entire Street."83 AIG’s + biggest customer in + +On line 2372: + for the entire Street."83 + AIG’s biggest customer in this + business was always + +On line 2372: + always Goldman Sachs, + consistently a leading + CDO underwriter. + +On line 2372: + billions of dollars + of protection for Merrill + Lynch, Société Générale, + +On line 2372: + of protection for + Merrill Lynch, Société Générale, + and other firms. AIG + +On line 2372: + Merrill Lynch, Société + Générale, and other firms. AIG + "looked like the perfect + +On line 2372: + Lynch, Société Générale, + and other firms. AIG "looked like + the perfect customer + +On line 2372: + Société Générale, and + other firms. AIG "looked like the + perfect customer for + +On line 2372: + Générale, and other + firms. AIG "looked like the perfect + customer for this," Craig + +On line 2372: + other firms. AIG "looked + like the perfect customer for + this," Craig Broderick, + +On line 2372: + firms. AIG "looked like the + perfect customer for this," Craig + Broderick, Goldman’s + +On line 2372: + perfect customer for + this," Craig Broderick, Goldman’s + chief risk officer, + +On line 2372: + customer for this," Craig + Broderick, Goldman’s chief risk + officer, told the + +On line 2372: + Broderick, Goldman’s + chief risk officer, told the + FCIC. "They really + +On line 2372: + chief risk officer, + told the FCIC. "They really + ticked all the boxes. + +On line 2372: + risk officer, told + the FCIC. "They really ticked + all the boxes. They + +On line 2372: + officer, told the + FCIC. "They really ticked all + the boxes. They were + +On line 2372: + FCIC. "They really + ticked all the boxes. They were + among the highest-rated + +On line 2372: + ticked all the boxes. + They were among the highest-rated + [corporations] around. + +On line 2372: + among the highest-rated + [corporations] around. They had + what appeared to be + +On line 2372: + to be unquestioned + expertise. They had tremendous + financial strength. They + +On line 2376: + this space, backed by a + long history of trading + in it."84 AIG also + +On line 2376: + in it."84 AIG also + bestowed the imprimatur of + its pristine credit + +On line 2376: + also bestowed the + imprimatur of its pristine + credit rating on + +On line 2376: + imprimatur of its + pristine credit rating on + commercial paper + +On line 2376: + paper programs by + providing liquidity + puts, similar to + +On line 2376: + liquidity puts, + similar to the ones that + Citigroup’s bank wrote + +On line 2376: + puts, similar to + the ones that Citigroup’s bank + wrote for many of its + +On line 2376: + similar to the + ones that Citigroup’s bank wrote + for many of its own + +On line 2376: + ones that Citigroup’s + bank wrote for many of its own + deals, guaranteeing + +On line 2376: + that Citigroup’s bank + wrote for many of its own deals, + guaranteeing it + +On line 2376: + wrote for many of its + own deals, guaranteeing it + would buy commercial + +On line 2376: + many of its own deals, + guaranteeing it would buy + commercial paper + +On line 2376: + paper if no one + else wanted it. It entered + this business in by + +On line 2376: + one else wanted it. + It entered this business in + by it had written + +On line 2376: + else wanted it. It + entered this business in by + it had written more + +On line 2378: + business in by it + had written more than billion + of liquidity + +On line 2378: + had written more than + billion of liquidity + puts on commercial + +On line 2378: + of liquidity + puts on commercial paper + issued by CDOs. AIG + +On line 2378: + puts on commercial + paper issued by CDOs. AIG + also wrote more than + +On line 2378: + commercial paper + issued by CDOs. AIG also + wrote more than billion + +On line 2378: + paper issued by + CDOs. AIG also wrote more than + billion in CDS to + +On line 2378: + issued by CDOs. AIG + also wrote more than billion + in CDS to protect + +On line 2378: + by CDOs. AIG also + wrote more than billion in CDS + to protect Société + +On line 2378: + also wrote more than + billion in CDS to protect + Société Générale against + +On line 2378: + wrote more than billion + in CDS to protect Société + Générale against the risks + +On line 2378: + in CDS to protect + Société Générale against the risks + on liquidity + +On line 2378: + Société Générale against + the risks on liquidity + puts that the French bank + +On line 2378: + Générale against the risks + on liquidity puts that + the French bank itself + +On line 2378: + on liquidity + puts that the French bank itself + wrote on commercial + +On line 2378: + puts that the French bank + itself wrote on commercial + paper issued by + +On line 2378: + the French bank itself + wrote on commercial paper + issued by CDOs.85 "What + +On line 2378: + bank itself wrote on + commercial paper issued + by CDOs.85 "What we would + +On line 2378: + wrote on commercial + paper issued by CDOs.85 "What + we would always try + +On line 2378: + commercial paper + issued by CDOs.85 "What we would + always try to do + +On line 2378: + issued by CDOs.85 "What + we would always try to do + is to structure a + +On line 2378: + "What we would always + try to do is to structure + a transaction where + +On line 2378: + we would always try + to do is to structure a + transaction where the + +On line 2378: + try to do is to + structure a transaction where + the transaction was + +On line 2378: + where the transaction + was virtually riskless, + and get paid a small + +On line 2378: + was virtually + riskless, and get paid a small + premium," Gene Park, + +On line 2378: + small premium," Gene + Park, who was a managing + director at AIG + +On line 2378: + director at AIG + Financial Products, told the + FCIC. "And we’re one of + +On line 2378: + at AIG Financial + Products, told the FCIC. "And we’re + one of the few guys + +On line 2378: + Financial Products, + told the FCIC. "And we’re one of + the few guys who can + +On line 2378: + told the FCIC. "And we’re + one of the few guys who can + do that. Because if + +On line 2378: + the FCIC. "And we’re one + of the few guys who can do + that. Because if you + +On line 2378: + FCIC. "And we’re one of + the few guys who can do that. + Because if you think + +On line 2378: + we’re one of the few + guys who can do that. Because + if you think about it, + +On line 2378: + one of the few guys + who can do that. Because if + you think about it, no + +On line 2378: + of the few guys who + can do that. Because if you + think about it, no one + +On line 2378: + the few guys who can + do that. Because if you think + about it, no one wants + +On line 2378: + few guys who can do + that. Because if you think about + it, no one wants to + +On line 2378: + guys who can do that. + Because if you think about it, + no one wants to buy + +On line 2378: + do that. Because if + you think about it, no one wants + to buy disaster + +On line 2378: + it, no one wants to + buy disaster protection + from someone who is + +On line 2378: + no one wants to buy + disaster protection from + someone who is not + +On line 2378: + to buy disaster + protection from someone who + is not going to + +On line 2378: + from someone who is + not going to be around. That + was AIGFP’s sales pitch to + +On line 2378: + someone who is not + going to be around. That was + AIGFP’s sales pitch to the + +On line 2378: + who is not going + to be around. That was AIGFP’s sales + pitch to the Street or + +On line 2378: + is not going to + be around. That was AIGFP’s sales pitch + to the Street or to + +On line 2378: + not going to be + around. That was AIGFP’s sales pitch to + the Street or to banks."86 + +On line 2380: + going to be around. + That was AIGFP’s sales pitch to the + Street or to banks."86 AIG’s + +On line 2380: + to be around. That was + AIGFP’s sales pitch to the Street or + to banks."86 AIG’s business + +On line 2380: + be around. That was AIGFP’s + sales pitch to the Street or to + banks."86 AIG’s business of + +On line 2380: + sales pitch to the Street + or to banks."86 AIG’s business of + offering credit + +On line 2380: + the Street or to banks."86 + AIG’s business of offering + credit protection + +On line 2380: + offering credit + protection on assets of + many sorts, including + +On line 2380: + many sorts, including + mortgage-backed securities and + CDOs, grew from billion + +On line 2380: + including mortgage-backed + securities and CDOs, grew + from billion in to + +On line 2380: + grew from billion in + to billion in and billion + in This business was + +On line 2380: + from billion in to + billion in and billion in + This business was a + +On line 2380: + in to billion in + and billion in This business + was a small part of + +On line 2380: + to billion in and + billion in This business was + a small part of the + +On line 2380: + and billion in This + business was a small part of + the AIG Financial + +On line 2380: + business was a small + part of the AIG Financial + Services business unit, + +On line 2380: + small part of the AIG + Financial Services business + unit, which included + +On line 2380: + unit, which included + AIG Financial Products; AIG + Financial Services + +On line 2382: + billion in or of + AIG’s total. AIG did not post + any collateral + +On line 2382: + total. AIG did not + post any collateral when + it wrote these contracts; + +On line 2382: + but unlike monoline + insurers, AIG Financial + Products agreed to post + +On line 2382: + Financial Products + agreed to post collateral + if the value of + +On line 2382: + the underlying + securities dropped, or if + the rating agencies + +On line 2382: + securities dropped, + or if the rating agencies + downgraded AIG’s long-term + +On line 2382: + guarantors—insurance + companies such as MBIA and + Ambac that focused + +On line 2382: + companies such as + MBIA and Ambac that focused + on guaranteeing + +On line 2382: + MBIA and Ambac that + focused on guaranteeing + financial contracts— + +On line 2384: + paying out until + actual losses occurred. + The collateral + +On line 2384: + actual losses + occurred. The collateral + posting terms in AIG’s + +On line 2384: + The collateral + posting terms in AIG’s credit + default swap contracts + +On line 2384: + posting terms in AIG’s + credit default swap contracts + would have an enormous + +On line 2384: + terms in AIG’s credit + default swap contracts would have + an enormous impact + +On line 2384: + default swap contracts + would have an enormous impact + on the crisis about + +On line 2386: + enormous impact on + the crisis about to unfold. + But during the boom, + +On line 2386: + on the crisis about + to unfold. But during the + boom, these terms didn’t + +On line 2386: + But during the boom, + these terms didn’t matter. The + investors got their triple-Arated + +On line 2386: + boom, these terms didn’t + matter. The investors got their + triple-Arated protection, AIG + +On line 2386: + The investors got their + triple-Arated protection, AIG got its + fees for providing + +On line 2386: + investors got their triple-Arated + protection, AIG got its fees + for providing that + +On line 2386: + triple-Arated protection, AIG + got its fees for providing + that insurance—about + +On line 2386: + protection, AIG got + its fees for providing that + insurance—about of + +On line 2386: + fees for providing + that insurance—about of the + notional amount of + +On line 2386: + that insurance—about + of the notional amount of + the swap per year88—and the + +On line 2386: + notional amount of + the swap per year88—and the managers + got their bonuses. In + +On line 2386: + of the swap per year88—and + the managers got their bonuses. + In the case of the + +On line 2386: + year88—and the managers got + their bonuses. In the case of + the London subsidiary + +On line 2386: + the managers got their + bonuses. In the case of the + London subsidiary that + +On line 2386: + In the case of the + London subsidiary that ran the + operation, the + +On line 2386: + the London subsidiary + that ran the operation, + the bonus pool was of + +On line 2386: + London subsidiary that + ran the operation, the + bonus pool was of new + +On line 2386: + subsidiary that ran the + operation, the bonus pool + was of new earnings.89 + +On line 2386: + operation, the + bonus pool was of new earnings.89 + Financial Products + +On line 2386: + bonus pool was of new + earnings.89 Financial Products + CEO Joseph J. Cassano + +On line 2386: + was of new earnings.89 + Financial Products CEO Joseph + J. Cassano made the + +On line 2386: + Financial Products + CEO Joseph J. Cassano made the + allocations at + +On line 2386: + CEO Joseph J. Cassano + made the allocations at + the end of the year.90 + +On line 2386: + J. Cassano made the + allocations at the end + of the year.90 Between + +On line 2386: + at the end of the + year.90 Between and the least amount + Cassano paid himself + +On line 2386: + of the year.90 Between + and the least amount Cassano paid + himself in a year + +On line 2386: + Between and the least + amount Cassano paid himself in + a year was million. + +On line 2386: + Cassano paid himself + in a year was million. In + the later years, his + +On line 2386: + the later years, his + compensation was sometimes + double that of the + +On line 2386: + compensation was + sometimes double that of the + parent company’s + +On line 2388: + sometimes double that + of the parent company’s + CEO.91 In the spring of + +On line 2388: + that of the parent + company’s CEO.91 In the spring + of disaster struck: + +On line 2388: + By November the + company had reduced its + reported earnings + +On line 2388: + reported earnings + over the five-year period by + billion.92 The board forced + +On line 2388: + earnings over the five-year + period by billion.92 The + board forced out Maurice + +On line 2388: + the five-year period + by billion.92 The board forced out + Maurice "Hank" Greenberg, + +On line 2388: + by billion.92 The board + forced out Maurice "Hank" Greenberg, + who had been CEO for + +On line 2388: + billion.92 The board forced + out Maurice "Hank" Greenberg, who + had been CEO for years. + +On line 2388: + been CEO for years. New + York Attorney General + Eliot Spitzer prepared to + +On line 2388: + CEO for years. New York + Attorney General Eliot + Spitzer prepared to bring + +On line 2388: + New York Attorney + General Eliot Spitzer prepared + to bring fraud charges against + +On line 2390: + General Eliot Spitzer + prepared to bring fraud charges against + him. Greenberg told the + +On line 2390: + Eliot Spitzer prepared to + bring fraud charges against him. Greenberg + told the FCIC, "When the + +On line 2390: + Spitzer prepared to bring + fraud charges against him. Greenberg told + the FCIC, "When the AAA + +On line 2390: + bring fraud charges against him. + Greenberg told the FCIC, "When the + AAA credit rating + +On line 2390: + against him. Greenberg told + the FCIC, "When the AAA credit + rating disappeared + +On line 2390: + Greenberg told the FCIC, + "When the AAA credit rating + disappeared in spring + +On line 2392: + the FCIC, "When the AAA + credit rating disappeared + in spring it would have + +On line 2392: + AAA credit rating + disappeared in spring it would + have been logical + +On line 2392: + in spring it would have + been logical for AIG to + have exited or + +On line 2392: + been logical for + AIG to have exited or + reduced its business + +On line 2392: + reduced its business + of writing credit default + swaps."93 But that didn’t + +On line 2392: + of writing credit + default swaps."93 But that didn’t + happen. Instead, AIG + +On line 2392: + default swaps."93 But that + didn’t happen. Instead, AIG + Financial Products + +On line 2392: + Financial Products + wrote another billion in + credit default swaps + +On line 2392: + another billion + in credit default swaps on + super-senior tranches + +On line 2394: + billion in credit + default swaps on super-senior + tranches of DOs in + +On line 2394: + tranches of DOs in + The company wouldn’t make + the decision to + +On line 2394: + in The company + wouldn’t make the decision + to stop writing these + +On line 2394: + company wouldn’t + make the decision to stop + writing these contracts + +On line 2396: + make the decision + to stop writing these contracts + until GOLDMAN SACHS: + +On line 2400: + THE EFFECTS OF THE + COLLAPSE IN SUBPRIME" Henry + Paulson, the CEO of + +On line 2400: + OF THE COLLAPSE IN + SUBPRIME" Henry Paulson, the + CEO of Goldman Sachs + +On line 2400: + IN SUBPRIME" Henry + Paulson, the CEO of Goldman + Sachs from until he + +On line 2400: + Paulson, the CEO of + Goldman Sachs from until he + became secretary + +On line 2400: + the CEO of Goldman + Sachs from until he became + secretary of the + +On line 2400: + until he became + secretary of the Treasury + in testified to + +On line 2400: + secretary of the + Treasury in testified to + the FCIC that by the + +On line 2400: + in testified to + the FCIC that by the time he + became secretary + +On line 2400: + the FCIC that by the + time he became secretary + many bad loans already + +On line 2400: + FCIC that by the time + he became secretary many + bad loans already had + +On line 2400: + that by the time he + became secretary many bad + loans already had been + +On line 2400: + became secretary + many bad loans already had been + issued—"most of the + +On line 2400: + many bad loans already + had been issued—"most of the + toothpaste was out of + +On line 2400: + loans already had been + issued—"most of the toothpaste + was out of the tube"— + +On line 2402: + had been issued—"most + of the toothpaste was out of + the tube"— and that "there + +On line 2402: + of the toothpaste was + out of the tube"— and that "there + really wasn’t + +On line 2402: + Paulson provided + examples: "Subprime mortgages + went from accounting + +On line 2402: + "Subprime mortgages went + from accounting for percent + of total mortgages + +On line 2402: + from accounting for + percent of total mortgages + in to percent by + +On line 2402: + originators from + the risk of the products they + originated." The + +On line 2402: + from the risk of the + products they originated." + The result, Paulson + +On line 2402: + of the products they + originated." The result, + Paulson observed, "was + +On line 2402: + originated." The + result, Paulson observed, "was + a housing bubble + +On line 2402: + housing bubble that + eventually burst in far + more spectacular + +On line 2404: + more spectacular + fashion than most previous + bubbles."97 Under Paulson’s + +On line 2404: + bubbles."97 Under Paulson’s + leadership, Goldman Sachs had + played a central role + +On line 2404: + leadership, Goldman + Sachs had played a central role + in the creation and + +On line 2404: + central role in the + creation and sale of mortgage + securities. From + +On line 2404: + creation and sale of + mortgage securities. From + through the company + +On line 2404: + billions of dollars + in loans to mortgage lenders; most + went to the subprime + +On line 2404: + of dollars in loans + to mortgage lenders; most went to + the subprime lenders Ameriquest, + +On line 2404: + dollars in loans to + mortgage lenders; most went to the + subprime lenders Ameriquest, Long + +On line 2404: + loans to mortgage lenders; + most went to the subprime lenders + Ameriquest, Long Beach, Fremont, + +On line 2404: + to mortgage lenders; most + went to the subprime lenders Ameriquest, + Long Beach, Fremont, New + +On line 2404: + subprime lenders Ameriquest, Long + Beach, Fremont, New Century, + and Countrywide through + +On line 2404: + Long Beach, Fremont, New + Century, and Countrywide + through warehouse lines of + +On line 2404: + New Century, and + Countrywide through warehouse lines + of credit, often + +On line 2404: + through warehouse lines of + credit, often in the form + of repos.98 During + +On line 2404: + credit, often in + the form of repos.98 During + the same period, + +On line 2404: + often in the form + of repos.98 During the same + period, Goldman + +On line 2404: + of repos.98 During + the same period, Goldman + acquired billion of + +On line 2404: + billion of loans from + these and other subprime loan + originators, which + +On line 2404: + and other subprime + loan originators, which it + securitized and + +On line 2404: + loan originators, + which it securitized and + sold to investors.99 From + +On line 2404: + originators, which + it securitized and sold + to investors.99 From to + +On line 2406: + totaling billion + (about a quarter were subprime), + and CDOs totaling + +On line 2406: + issued synthetic + or hybrid CDOs with a face + value of billion + +On line 2408: + with a face value + of billion between and June + Synthetic CDOs were + +On line 2408: + Synthetic CDOs were + complex paper transactions + involving credit + +On line 2410: + credit default swaps. + Unlike the traditional + cash CDO, synthetic + +On line 2410: + cash CDO, synthetic + CDOs contained no actual + tranches of mortgage-backed + +On line 2410: + actual tranches + of mortgage-backed securities, + or even tranches of + +On line 2410: + securities, or + even tranches of other CDOs. + Instead, they simply + +On line 2410: + simply referenced + these mortgage securities + and thus were bets on + +On line 2410: + and thus were bets on + whether borrowers would pay their + mortgages. In the place + +On line 2410: + whether borrowers would + pay their mortgages. In the place + of real mortgage + +On line 2410: + default swaps and did + not finance a single home + purchase. Investors in + +On line 2410: + purchase. Investors in + these CDOs included "funded" + long investors, who paid + +On line 2410: + included "funded" + long investors, who paid cash to + purchase actual + +On line 2410: + paid cash to purchase + actual securities + issued by the CDO; + +On line 2410: + purchase actual + securities issued by + the CDO; "unfunded" + +On line 2410: + issued by the CDO; + "unfunded" long investors, who + entered into swaps + +On line 2410: + entered into swaps + with the CDO, making money + if the reference + +On line 2410: + if the reference + securities performed; and + "short" investors, who bought + +On line 2410: + default swaps on the + reference securities, + making money if + +On line 2410: + securities failed. + While funded investors received + interest if the + +On line 2410: + interest if the + reference securities + performed, they could lose + +On line 2410: + if the reference + securities performed, they + could lose all of their + +On line 2412: + if the reference + securities defaulted. + Unfunded investors, + +On line 2412: + waterfall, received + premium-like payments from + the CDO as long as + +On line 2412: + CDO as long as the + reference securities + performed but would have + +On line 2412: + as the reference + securities performed but + would have to pay if + +On line 2412: + beyond a certain + point and if the CDO did not + have sufficient funds + +On line 2412: + and if the CDO did + not have sufficient funds to + pay the short investors. + +On line 2412: + if the CDO did not + have sufficient funds to pay + the short investors. Short + +On line 2412: + not have sufficient + funds to pay the short investors. + Short investors, often + +On line 2412: + have sufficient funds + to pay the short investors. Short + investors, often hedge + +On line 2412: + the short investors. Short + investors, often hedge funds, bought + the credit default + +On line 2412: + investors, often hedge + funds, bought the credit default + swaps from the CDOs and + +On line 2412: + often hedge funds, bought + the credit default swaps from + the CDOs and paid those + +On line 2412: + funds, bought the credit + default swaps from the CDOs and + paid those premiums. + +On line 2412: + the credit default + swaps from the CDOs and paid those + premiums. Hybrid + +On line 2412: + default swaps from the + CDOs and paid those premiums. + Hybrid CDOs were a + +On line 2412: + the CDOs and paid those + premiums. Hybrid CDOs were + a combination + +On line 2412: + premiums. Hybrid + CDOs were a combination + of traditional + +On line 2414: + CDOs. Firms like Goldman + found synthetic CDOs cheaper + and easier to + +On line 2414: + and easier to + create than traditional + CDOs at the same time + +On line 2414: + than traditional + CDOs at the same time as the + supply of mortgages + +On line 2414: + CDOs at the same time + as the supply of mortgages + was beginning to + +On line 2414: + at the same time as + the supply of mortgages was + beginning to dry + +On line 2416: + time as the supply + of mortgages was beginning + to dry up. Because + +On line 2416: + as the supply of + mortgages was beginning to + dry up. Because there + +On line 2416: + supply of mortgages + was beginning to dry up. + Because there were no + +On line 2416: + was beginning to + dry up. Because there were no + mortgage assets to + +On line 2416: + dry up. Because there + were no mortgage assets to + collect and finance, + +On line 2416: + collect and finance, + creating synthetic CDOs + took a fraction of + +On line 2418: + time. They also were + easier to customize, + because CDO managers + +On line 2418: + and underwriters + could reference any mortgage-backed + security—they were + +On line 2418: + could reference any + mortgage-backed security—they were + not limited to + +On line 2418: + limited to the + universe of securities + available for them to + +On line 2418: + to the universe of + securities available for + them to buy. Figure + +On line 2418: + them to buy. Figure + provides an example of + how such a deal worked. + +On line 2420: + Figure provides an + example of how such a + deal worked. In Goldman + +On line 2420: + example of how + such a deal worked. In Goldman + launched its first major + +On line 2420: + of how such a deal + worked. In Goldman launched its first + major synthetic + +On line 2420: + worked. In Goldman launched + its first major synthetic + CDO, Abacus 2004-1—a deal + +On line 2420: + In Goldman launched its + first major synthetic CDO, + Abacus 2004-1—a deal worth + +On line 2420: + launched its first major + synthetic CDO, Abacus 2004-1—a + deal worth billion. About + +On line 2420: + the rest, commercial + mortgage–backed securities + (made up of bundled + +On line 2420: + securities (made + up of bundled commercial + real estate loans) + +On line 2422: + real estate loans) + and other securities. + Goldman was the short + +On line 2422: + was the short investor + for the entire billion deal: + it purchased credit + +On line 2422: + entire billion deal: + it purchased credit default + swap protection on + +On line 2422: + on these reference + securities from the CDO. + The funded investors—IKB (a + +On line 2422: + securities from + the CDO. The funded investors—IKB (a + German bank), the TCW + +On line 2422: + CDO. The funded investors—IKB + (a German bank), the TCW Group, + and Wachovia—put + +On line 2422: + The funded investors—IKB (a + German bank), the TCW Group, and + Wachovia—put up + +On line 2422: + (a German bank), the + TCW Group, and Wachovia—put + up a total of + +On line 2424: + Wachovia—put up + a total of million to + purchase mezzanine + +On line 2424: + million to purchase + mezzanine tranches of the + deal.101 These investors would + +On line 2426: + assets performed. If + the referenced assets did + not perform, Goldman, + +On line 2426: + referenced assets + did not perform, Goldman, as + the short investor, would + +On line 2426: + perform, Goldman, as + the short investor, would receive + the million.102 In this + +On line 2426: + as the short investor, + would receive the million.102 In + this sense, IKB, TCW, and + +On line 2426: + investor, would receive + the million.102 In this sense, IKB, + TCW, and Wachovia were + +On line 2426: + the million.102 In this + sense, IKB, TCW, and Wachovia were + "long" investors, betting + +On line 2426: + million.102 In this sense, + IKB, TCW, and Wachovia were "long" + investors, betting that + +On line 2426: + TCW, and Wachovia were + "long" investors, betting that the + referenced assets + +On line 2426: + "long" investors, betting + that the referenced assets + would perform well, and + +On line 2428: + that the referenced + assets would perform well, and + Goldman was a "short" + +On line 2428: + referenced assets + would perform well, and Goldman + was a "short" investor, + +On line 2428: + assets would perform + well, and Goldman was a "short" + investor, betting that + +On line 2428: + would perform well, and + Goldman was a "short" investor, + betting that they would + +On line 2430: + Goldman was a "short" + investor, betting that they would + fail. The unfunded + +On line 2430: + was a "short" investor, + betting that they would fail. The + unfunded investors—TCW and + +On line 2430: + investor, betting that + they would fail. The unfunded + investors—TCW and GSC Partners + +On line 2430: + betting that they would + fail. The unfunded investors—TCW and + GSC Partners (asset + +On line 2430: + fail. The unfunded + investors—TCW and GSC Partners (asset + management firms that + +On line 2430: + investors—TCW and GSC Partners + (asset management firms that + managed both hedge funds + +On line 2430: + GSC Partners (asset + management firms that managed + both hedge funds and CDOs)—did + +On line 2430: + (asset management + firms that managed both hedge funds + and CDOs)—did not put up + +On line 2430: + firms that managed both + hedge funds and CDOs)—did not put up + any money up front; + +On line 2430: + that managed both hedge + funds and CDOs)—did not put up any + money up front; they + +On line 2430: + funds and CDOs)—did not put + up any money up front; they + received annual + +On line 2430: + up any money up + front; they received annual + premiums from the + +On line 2430: + up front; they received + annual premiums from + the CDO in return + +On line 2430: + the CDO in return + for the promise that they would + pay the CDO if the + +On line 2430: + pay the CDO if the + reference securities + failed and the CDO did + +On line 2430: + if the reference + securities failed and the + CDO did not have enough + +On line 2430: + securities failed + and the CDO did not have enough + funds to pay the short + +On line 2432: + failed and the CDO did + not have enough funds to pay the + short investors.103 Goldman + +On line 2432: + and the CDO did not + have enough funds to pay the short + investors.103 Goldman was + +On line 2432: + CDO did not have enough + funds to pay the short investors.103 + Goldman was the largest + +On line 2432: + have enough funds to pay + the short investors.103 Goldman was + the largest unfunded + +On line 2432: + funds to pay the short + investors.103 Goldman was the largest + unfunded investor + +On line 2432: + investors.103 Goldman was + the largest unfunded investor + at the time that the + +On line 2432: + Goldman was the largest + unfunded investor at the + time that the deal was + +On line 2432: + Goldman’s billion short + position more than offset + that exposure; about + +On line 2432: + short position more + than offset that exposure; + about one year later, + +On line 2432: + position more than + offset that exposure; about + one year later, it + +On line 2432: + that exposure; about + one year later, it transferred + the unfunded long + +On line 2432: + about one year later, + it transferred the unfunded + long position by + +On line 2432: + long position by + buying credit protection + from AIG, in return + +On line 2432: + credit protection + from AIG, in return for an + annual payment + +On line 2432: + from AIG, in return + for an annual payment + of million.104 As a + +On line 2432: + for an annual + payment of million.104 As a + result, by AIG was + +On line 2432: + payment of million.104 + As a result, by AIG was + effectively the + +On line 2432: + a result, by AIG + was effectively the largest + unfunded investor + +On line 2432: + was effectively + the largest unfunded investor + in the super-senior + +On line 2432: + unfunded investor + in the super-senior tranches + of the Abacus deal. + +On line 2434: + in the super-senior + tranches of the Abacus deal. + All told, long investors + +On line 2434: + the Abacus deal. All + told, long investors in Abacus + 2004-1 stood to receive + +On line 2434: + told, long investors in + Abacus 2004-1 stood to receive + millions of dollars + +On line 2434: + investors in Abacus + 2004-1 stood to receive millions + of dollars if the + +On line 2434: + Abacus 2004-1 stood to + receive millions of dollars + if the reference + +On line 2434: + of dollars if the + reference securities + performed (just as a + +On line 2434: + if the reference + securities performed (just + as a bond investor + +On line 2434: + performed (just as a + bond investor makes money when + a bond performs). On + +On line 2434: + a bond investor makes + money when a bond performs). + On the other hand, + +On line 2434: + investor makes money + when a bond performs). On the + other hand, Goldman + +On line 2434: + makes money when a + bond performs). On the other + hand, Goldman stood to + +On line 2434: + money when a bond + performs). On the other hand, + Goldman stood to gain + +On line 2434: + when a bond performs). + On the other hand, Goldman + stood to gain nearly + +On line 2434: + bond performs). On the + other hand, Goldman stood to + gain nearly billion + +On line 2434: + other hand, Goldman + stood to gain nearly billion + if the assets failed. + +On line 2436: + hand, Goldman stood to + gain nearly billion if the + assets failed. In the + +On line 2436: + stood to gain nearly + billion if the assets failed. + In the end, Goldman, + +On line 2436: + gain nearly billion + if the assets failed. In the + end, Goldman, the short + +On line 2436: + assets failed. In the + end, Goldman, the short investor + in the Abacus 2004-1 + +On line 2436: + the end, Goldman, the + short investor in the Abacus + 2004-1 CDO, has received + +On line 2436: + end, Goldman, the short + investor in the Abacus 2004-1 + CDO, has received about + +On line 2436: + short investor in the + Abacus 2004-1 CDO, has received + about million while the + +On line 2436: + in the Abacus 2004-1 + CDO, has received about million + while the long investors + +On line 2436: + the Abacus 2004-1 CDO, + has received about million while + the long investors have + +On line 2436: + Abacus 2004-1 CDO, has + received about million while the + long investors have lost + +On line 2436: + CDO, has received about + million while the long investors + have lost just about all + +On line 2436: + received about million + while the long investors have lost + just about all of their + +On line 2436: + million while the long + investors have lost just about all + of their investments. + +On line 2438: + while the long investors + have lost just about all of their + investments. In April + +On line 2438: + lost just about all of + their investments. In April GSC + paid Goldman million + +On line 2438: + just about all of their + investments. In April GSC paid + Goldman million as + +On line 2438: + their investments. In + April GSC paid Goldman million + as a result of + +On line 2438: + investments. In April + GSC paid Goldman million as + a result of CDS + +On line 2438: + April GSC paid Goldman + million as a result of + CDS protection sold + +On line 2438: + as a result of + CDS protection sold by GSC + to Goldman on the + +On line 2438: + a result of CDS + protection sold by GSC to + Goldman on the first + +On line 2438: + of CDS protection + sold by GSC to Goldman on + the first and second + +On line 2438: + CDS protection sold + by GSC to Goldman on the + first and second loss + +On line 2438: + Goldman on the first + and second loss tranches. In + June Goldman received + +On line 2440: + the first and second + loss tranches. In June Goldman + received million from + +On line 2440: + received million from + AIG Financial Products as + a result of the + +On line 2440: + from AIG Financial + Products as a result of + the CDS protection + +On line 2440: + Financial Products + as a result of the CDS + protection it had + +On line 2440: + result of the CDS + protection it had purchased + against the super-senior + +On line 2440: + protection it had + purchased against the super-senior + tranche. The same month it + +On line 2440: + had purchased against the + super-senior tranche. The same month + it received million + +On line 2440: + against the super-senior + tranche. The same month it received + million from TCW as + +On line 2440: + tranche. The same month it + received million from TCW as + a result of the + +On line 2440: + it received million + from TCW as a result of + the CDS purchased against + +On line 2440: + received million from + TCW as a result of the + CDS purchased against the + +On line 2440: + TCW as a result + of the CDS purchased against the + junior mezzanine + +On line 2440: + a result of the + CDS purchased against the junior + mezzanine tranches, + +On line 2440: + of the CDS purchased + against the junior mezzanine + tranches, and million + +On line 2440: + CDS purchased against the + junior mezzanine tranches, + and million from IKB + +On line 2440: + junior mezzanine + tranches, and million from IKB + because of the CDS + +On line 2440: + tranches, and million + from IKB because of the CDS + it purchased against the + +On line 2440: + from IKB because of + the CDS it purchased against the + C tranche. In April IKB + +On line 2440: + IKB because of the + CDS it purchased against the C + tranche. In April IKB paid + +On line 2440: + CDS it purchased against + the C tranche. In April IKB paid + Goldman another + +On line 2440: + purchased against the C + tranche. In April IKB paid Goldman + another million + +On line 2440: + tranche. In April IKB paid + Goldman another million + as a result of + +On line 2440: + April IKB paid Goldman + another million as a + result of the CDS + +On line 2440: + Goldman another + million as a result of + the CDS against the B + +On line 2442: + another million + as a result of the CDS + against the B tranche. Through + +On line 2442: + as a result of + the CDS against the B tranche. Through + May Goldman received + +On line 2442: + against the B tranche. Through + May Goldman received million + from IKB, Wachovia, and + +On line 2442: + the B tranche. Through May + Goldman received million from + IKB, Wachovia, and TCW + +On line 2442: + May Goldman received + million from IKB, Wachovia, and + TCW as a result + +On line 2442: + from IKB, Wachovia, and + TCW as a result of the + credit default swaps + +On line 2442: + Wachovia, and TCW as + a result of the credit + default swaps against the + +On line 2442: + TCW as a result + of the credit default swaps + against the A tranche. As + +On line 2442: + as a result of + the credit default swaps against + the A tranche. As was + +On line 2442: + the credit default + swaps against the A tranche. As was + common, some of the + +On line 2442: + default swaps against the + A tranche. As was common, some + of the tranches of + +On line 2442: + swaps against the A tranche. + As was common, some of the + tranches of Abacus + +On line 2442: + the A tranche. As was + common, some of the tranches + of Abacus 2004-1 found + +On line 2442: + was common, some of + the tranches of Abacus 2004-1 + found their way into + +On line 2442: + some of the tranches + of Abacus 2004-1 found their way + into other funds + +On line 2442: + Abacus 2004-1 found their + way into other funds and + CDOs; for example, + +On line 2442: + way into other + funds and CDOs; for example, + TCW put tranches of + +On line 2442: + CDOs; for example, + TCW put tranches of Abacus + 2004-1 into three of + +On line 2442: + for example, TCW + put tranches of Abacus 2004-1 + into three of its + +On line 2444: + of its own CDOs. In + total, between July and + May Goldman packaged + +On line 2444: + between July and + May Goldman packaged and sold + synthetic CDOs, with + +On line 2444: + May Goldman packaged + and sold synthetic CDOs, with + an aggregate face + +On line 2444: + and sold synthetic + CDOs, with an aggregate face + value of billion.105 + +On line 2444: + with an aggregate + face value of billion.105 Its + underwriting fee + +On line 2444: + underwriting fee + was to of the deal totals, + Dan Sparks, the former + +On line 2444: + of the deal totals, + Dan Sparks, the former head of + Goldman’s mortgage desk, + +On line 2444: + deal totals, Dan Sparks, + the former head of Goldman’s + mortgage desk, told the + +On line 2444: + Dan Sparks, the former + head of Goldman’s mortgage desk, + told the FCIC.106 Goldman + +On line 2444: + Sparks, the former head + of Goldman’s mortgage desk, told + the FCIC.106 Goldman would + +On line 2444: + the former head of + Goldman’s mortgage desk, told the + FCIC.106 Goldman would earn + +On line 2444: + Goldman’s mortgage desk, + told the FCIC.106 Goldman would earn + profits from shorting + +On line 2444: + mortgage desk, told the + FCIC.106 Goldman would earn profits + from shorting many of + +On line 2444: + told the FCIC.106 Goldman + would earn profits from shorting + many of these deals; on + +On line 2444: + FCIC.106 Goldman would earn + profits from shorting many of + these deals; on others, + +On line 2444: + profits from shorting + many of these deals; on others, + it would profit by + +On line 2444: + many of these deals; on + others, it would profit by + facilitating + +On line 2444: + transaction between + the buyer and the seller + of credit default + +On line 2446: + the buyer and the + seller of credit default + swap protection. As + +On line 2446: + seller of credit + default swap protection. As + we will see, these new + +On line 2446: + credit default swap + protection. As we will see, + these new instruments + +On line 2446: + protection. As we + will see, these new instruments + would yield substantial + +On line 2446: + these new instruments + would yield substantial profits + for investors that held + +On line 2446: + new instruments would + yield substantial profits for + investors that held a + +On line 2446: + would yield substantial + profits for investors that held + a short position + +On line 2446: + substantial profits + for investors that held a short + position in the + +On line 2446: + profits for investors + that held a short position + in the synthetic + +On line 2446: + for investors that held + a short position in the + synthetic CDOs—that is, + +On line 2446: + a short position + in the synthetic CDOs—that is, + investors betting that + +On line 2446: + in the synthetic + CDOs—that is, investors betting that + the housing boom was + +On line 2446: + the synthetic CDOs—that + is, investors betting that the + housing boom was a + +On line 2446: + is, investors betting + that the housing boom was a + bubble about to burst. + +On line 2446: + boom was a bubble + about to burst. They also would + multiply losses + +On line 2446: + bubble about to burst. + They also would multiply + losses when housing + +On line 2446: + to burst. They also + would multiply losses when + housing prices collapsed. + +On line 2446: + losses when housing + prices collapsed. When borrowers + defaulted on their + +On line 2446: + housing prices collapsed. + When borrowers defaulted + on their mortgages, the + +On line 2446: + on their mortgages, the + investors expecting cash from + the mortgage payments + +On line 2446: + expecting cash from + the mortgage payments lost. And + investors betting on + +On line 2446: + investors betting on + these mortgage-backed securities + via synthetic CDOs + +On line 2446: + securities via + synthetic CDOs also lost + (while those betting against + +On line 2446: + via synthetic CDOs + also lost (while those betting + against the mortgages would + +On line 2446: + also lost (while those + betting against the mortgages would + gain).107 As a result, + +On line 2446: + (while those betting against + the mortgages would gain).107 As a + result, the losses + +On line 2446: + mortgages would gain).107 As + a result, the losses from + the housing collapse + +On line 2448: + Citigroup mortgage-backed + securities deal, CMLTI 2006-NC2. + Credit default swaps + +On line 2448: + securities deal, + CMLTI 2006-NC2. Credit default swaps + made it possible + +On line 2448: + default swaps made it + possible for new market + participants to + +On line 2448: + it possible for + new market participants + to bet for or against + +On line 2448: + possible for new + market participants to + bet for or against the + +On line 2448: + significantly + increased the demand for such + bets. For example, + +On line 2448: + increased the demand + for such bets. For example, + there were about million + +On line 2448: + the demand for such + bets. For example, there were + about million worth of + +On line 2448: + demand for such bets. + For example, there were about + million worth of bonds + +On line 2448: + bets. For example, + there were about million worth of + bonds in the M9 (BBB-rated) + +On line 2448: + example, there were + about million worth of bonds in + the M9 (BBB-rated) tranche—one + +On line 2448: + about million worth of + bonds in the M9 (BBB-rated) tranche—one + of the mezzanine + +On line 2448: + M9 (BBB-rated) tranche—one of + the mezzanine tranches of + the security. + +On line 2448: + Auriga, Volans, and + Neptune CDO IV all contained + credit default swaps + +On line 2448: + and Neptune CDO IV + all contained credit default + swaps in which the M9 + +On line 2448: + Neptune CDO IV all + contained credit default swaps + in which the M9 tranche + +On line 2448: + all contained credit + default swaps in which the M9 + tranche was referenced. + +On line 2448: + default swaps in which + the M9 tranche was referenced. + As long as the M9 + +On line 2448: + in which the M9 tranche + was referenced. As long as + the M9 bonds performed, + +On line 2448: + was referenced. As + long as the M9 bonds performed, + investors betting that + +On line 2448: + As long as the M9 + bonds performed, investors betting + that the tranche would fail + +On line 2448: + long as the M9 bonds + performed, investors betting that + the tranche would fail (short + +On line 2448: + the M9 bonds performed, + investors betting that the tranche + would fail (short investors) + +On line 2448: + bonds performed, investors + betting that the tranche would fail + (short investors) would make + +On line 2448: + investors betting that + the tranche would fail (short investors) + would make regular + +On line 2448: + betting that the tranche + would fail (short investors) would make + regular payments + +On line 2448: + the tranche would fail (short + investors) would make regular + payments into the + +On line 2448: + would fail (short investors) + would make regular payments + into the CDO, which + +On line 2448: + (short investors) would make + regular payments into + the CDO, which would be + +On line 2448: + would make regular + payments into the CDO, which + would be paid out to + +On line 2448: + regular payments + into the CDO, which would be + paid out to other + +On line 2448: + into the CDO, which + would be paid out to other + investors banking on + +On line 2448: + the CDO, which would be + paid out to other investors + banking on it to + +On line 2448: + which would be paid out + to other investors banking + on it to succeed + +On line 2448: + would be paid out to + other investors banking on + it to succeed (long + +On line 2448: + paid out to other + investors banking on it to + succeed (long investors). + +On line 2448: + to other investors + banking on it to succeed + (long investors). If the + +On line 2448: + banking on it to + succeed (long investors). If the + M9 bonds defaulted, + +On line 2448: + on it to succeed + (long investors). If the M9 bonds + defaulted, then the + +On line 2448: + succeed (long investors). + If the M9 bonds defaulted, + then the long investors + +On line 2448: + (long investors). If the + M9 bonds defaulted, then the + long investors would make + +On line 2448: + investors). If the M9 + bonds defaulted, then the long + investors would make large + +On line 2448: + M9 bonds defaulted, + then the long investors would make + large payments to the + +On line 2448: + bonds defaulted, then + the long investors would make large + payments to the short + +On line 2448: + then the long investors + would make large payments to the + short investors. That is + +On line 2448: + the long investors would + make large payments to the short + investors. That is the + +On line 2448: + investors would make large + payments to the short investors. + That is the bet—and + +On line 2448: + would make large payments + to the short investors. That is + the bet—and there were + +On line 2448: + make large payments to + the short investors. That is the + bet—and there were more + +On line 2448: + to the short investors. + That is the bet—and there were + more than million in + +On line 2448: + the short investors. That + is the bet—and there were more + than million in such + +On line 2448: + short investors. That is + the bet—and there were more than + million in such bets + +On line 2448: + That is the bet—and + there were more than million in + such bets in early + +On line 2450: + is the bet—and there + were more than million in such + bets in early on + +On line 2450: + the bet—and there were + more than million in such bets + in early on the + +On line 2450: + bet—and there were more + than million in such bets in + early on the M9 + +On line 2450: + were more than million + in such bets in early on + the M9 tranche of this + +On line 2450: + more than million in + such bets in early on the + M9 tranche of this deal. + +On line 2450: + than million in such + bets in early on the M9 + tranche of this deal. Thus, + +On line 2450: + million in such bets + in early on the M9 tranche + of this deal. Thus, on + +On line 2450: + such bets in early + on the M9 tranche of this deal. + Thus, on the basis + +On line 2450: + bets in early on + the M9 tranche of this deal. Thus, + on the basis of + +On line 2450: + in early on the + M9 tranche of this deal. Thus, on + the basis of the + +On line 2450: + on the M9 tranche of + this deal. Thus, on the basis + of the performance + +On line 2450: + the M9 tranche of this + deal. Thus, on the basis of + the performance of + +On line 2450: + this deal. Thus, on the + basis of the performance + of million in bonds, + +On line 2450: + the basis of the + performance of million in + bonds, more than million + +On line 2450: + bonds, more than million + could potentially change hands. + Goldman’s Sparks put it + +On line 2450: + could potentially + change hands. Goldman’s Sparks put it + succinctly to the + +On line 2450: + hands. Goldman’s Sparks put + it succinctly to the FCIC: + if there’s a problem + +On line 2450: + Goldman’s Sparks put it + succinctly to the FCIC: if + there’s a problem with + +On line 2450: + it succinctly to + the FCIC: if there’s a problem + with a product, syn + +On line 2450: + to the FCIC: if there’s + a problem with a product, + syn thetics increase + +On line 2450: + the FCIC: if there’s a + problem with a product, syn + thetics increase the + +On line 2450: + if there’s a problem + with a product, syn thetics + increase the impact.108 + +On line 2452: + increase the impact.108 + The amplification of + the M9 tranche was not + +On line 2452: + amplification + of the M9 tranche was not unique. + A million tranche of + +On line 2452: + of the M9 tranche was + not unique. A million tranche of + the Glacier Funding CDO + +On line 2452: + the M9 tranche was not + unique. A million tranche of the + Glacier Funding CDO 2006-4A, + +On line 2452: + not unique. A million + tranche of the Glacier Funding CDO + 2006-4A, rated A, was + +On line 2452: + million tranche of the + Glacier Funding CDO 2006-4A, rated + A, was referenced + +On line 2452: + Glacier Funding CDO 2006-4A, + rated A, was referenced + in million worth of + +On line 2452: + CDO 2006-4A, rated A, + was referenced in million + worth of synthetic + +On line 2452: + 2006-4A, rated A, was + referenced in million worth + of synthetic CDOs. + +On line 2452: + was referenced in + million worth of synthetic + CDOs. A million tranche + +On line 2452: + in million worth of + synthetic CDOs. A million + tranche of the Soundview + +On line 2452: + synthetic CDOs. A + million tranche of the Soundview + Home Equity Loan + +On line 2454: + A million tranche of + the Soundview Home Equity + Loan Trust 2006-EQ1, also + +On line 2454: + tranche of the Soundview + Home Equity Loan Trust 2006-EQ1, + also rated A, + +On line 2454: + Home Equity Loan + Trust 2006-EQ1, also rated A, + was referenced in + +On line 2454: + Loan Trust 2006-EQ1, also + rated A, was referenced + in million worth of + +On line 2454: + also rated A, + was referenced in million + worth of synthetic + +On line 2456: + was referenced in + million worth of synthetic + CDOs. A million tranche + +On line 2456: + in million worth of + synthetic CDOs. A million + tranche of the Soundview + +On line 2456: + synthetic CDOs. A + million tranche of the Soundview + Home Equity Loan + +On line 2456: + A million tranche of + the Soundview Home Equity + Loan Trust 2006-EQ1, rated + +On line 2456: + million tranche of the + Soundview Home Equity Loan + Trust 2006-EQ1, rated BBB, + +On line 2456: + Trust 2006-EQ1, rated BBB, + was referenced in million + worth of synthetic + +On line 2456: + 2006-EQ1, rated BBB, was + referenced in million worth + of synthetic CDOs.109 + +On line 2458: + worth of synthetic + CDOs.109 In total, synthetic + CDOs created by + +On line 2458: + total, synthetic + CDOs created by Goldman + referenced mortgage + +On line 2458: + CDOs created by + Goldman referenced mortgage + securities, some + +On line 2458: + Goldman referenced + mortgage securities, some + of them multiple + +On line 2458: + referenced mortgage + securities, some of them + multiple times. For + +On line 2458: + multiple times. For + example, securities + were referenced twice. + +On line 2458: + were referenced twice. + Indeed, one single mortgage-backed + security was + +On line 2458: + Indeed, one single + mortgage-backed security was + referenced in nine + +On line 2460: + was referenced in + nine different synthetic + DOs created by + +On line 2460: + DOs created by + Goldman Sachs.110 Because of such + deals, when the housing + +On line 2460: + Goldman Sachs.110 Because + of such deals, when the housing + bubble burst, billions + +On line 2460: + Because of such deals, + when the housing bubble burst, + billions of dollars + +On line 2460: + of such deals, when the + housing bubble burst, billions + of dollars changed hands. + +On line 2462: + the housing bubble + burst, billions of dollars changed + hands. Although Goldman + +On line 2462: + they also maintained + that their creation had "social + utility" because + +On line 2462: + creation had "social + utility" because it added + liquidity to + +On line 2462: + enabled investors to + customize the exposures + they wanted in their + +On line 2462: + to customize the + exposures they wanted in + their portfolios.111 In + +On line 2462: + the exposures they + wanted in their portfolios.111 + In testimony + +On line 2462: + their portfolios.111 In + testimony before the + Commission, Goldman’s + +On line 2462: + President and Chief + Operating Officer + Gary Cohn argued: "This + +On line 2462: + Gary Cohn argued: "This + is no different than the + tens of thousands of + +On line 2462: + Cohn argued: "This is + no different than the tens + of thousands of swaps + +On line 2462: + is no different + than the tens of thousands of + swaps written every + +On line 2462: + no different than + the tens of thousands of swaps + written every day + +On line 2462: + the tens of thousands + of swaps written every day + on the U.S. dollar + +On line 2462: + of thousands of swaps + written every day on the + U.S. dollar versus + +On line 2462: + U.S. dollar versus + another currency. Or, + more importantly, + +On line 2462: + importantly, on + U.S. Treasuries This is the way + that the financial + +On line 2464: + U.S. Treasuries This is + the way that the financial + markets work."112 Others, + +On line 2464: + This is the way that + the financial markets work."112 + Others, however, + +On line 2464: + markets work."112 Others, + however, criticized these + deals. Patrick Parkinson, the + +On line 2464: + these deals. Patrick Parkinson, + the current director of + the Division of + +On line 2464: + of the Division + of Banking Supervision + and Regulation + +On line 2464: + the Division of + Banking Supervision and + Regulation at + +On line 2464: + Federal Reserve + Board, noted that synthetic + CDOs "multiplied the + +On line 2466: + of the collapse in + subprime."113 Other observers were + even harsher in their + +On line 2466: + in subprime."113 Other + observers were even harsher in + their assessment. "I + +On line 2466: + even harsher in their + assessment. "I don’t think they + have social value," + +On line 2466: + assessment. "I don’t + think they have social value," + Michael Greenberger, a + +On line 2466: + think they have social + value," Michael Greenberger, a + professor at the + +On line 2466: + the University + of Maryland School of Law and + former director + +On line 2466: + of Maryland School of + Law and former director + of the Division + +On line 2466: + Maryland School of Law + and former director of + the Division of + +On line 2466: + of the Division + of Trading and Markets at + the Commodity + +On line 2466: + Commission, told the + FCIC. He characterized the + credit default swap + +On line 2466: + characterized the + credit default swap market + as a "casino." And + +On line 2466: + the credit default + swap market as a "casino." + And he testified + +On line 2466: + credit default swap + market as a "casino." And + he testified that + +On line 2466: + swap market as a + "casino." And he testified + that "the concept of + +On line 2466: + a "casino." And he + testified that "the concept + of lawful betting + +On line 2466: + And he testified + that "the concept of lawful + betting of billions + +On line 2466: + that "the concept of + lawful betting of billions + of dollars on the + +On line 2466: + of lawful betting + of billions of dollars on + the question of whether + +On line 2466: + lawful betting of + billions of dollars on the + question of whether a + +On line 2466: + the question of whether + a homeowner would default + on a mortgage that + +On line 2466: + question of whether a + homeowner would default on + a mortgage that was + +On line 2466: + whether a homeowner + would default on a mortgage + that was not owned by + +On line 2466: + would default on a + mortgage that was not owned by + either party, has + +On line 2466: + a mortgage that was + not owned by either party, + has had a profound + +On line 2466: + that was not owned by + either party, has had a + profound effect on + +On line 2466: + by either party, + has had a profound effect + on the American + +On line 2468: + a profound effect + on the American public + and taxpayers."114 MOODY’S: + +On line 2468: + profound effect on + the American public and + taxpayers."114 MOODY’S: "ACHIEVED + +On line 2468: + on the American + public and taxpayers."114 MOODY’S: + "ACHIEVED THROUGH SOME ALCHEMY" + +On line 2470: + taxpayers."114 MOODY’S: "ACHIEVED + THROUGH SOME ALCHEMY" The machine + churning out CDOs would + +On line 2470: + THROUGH SOME ALCHEMY" The + machine churning out CDOs would + not have worked without + +On line 2470: + ALCHEMY" The machine + churning out CDOs would not have + worked without the stamp + +On line 2470: + machine churning out + CDOs would not have worked without + the stamp of approval + +On line 2470: + churning out CDOs would + not have worked without the stamp + of approval given + +On line 2470: + CDOs would not have worked + without the stamp of approval + given to these deals + +On line 2470: + not have worked without + the stamp of approval given + to these deals by the + +On line 2470: + have worked without the + stamp of approval given to + these deals by the three + +On line 2470: + without the stamp of + approval given to these deals + by the three leading + +On line 2470: + the stamp of approval + given to these deals by the + three leading rating + +On line 2470: + approval given to + these deals by the three leading + rating agencies: Moody’s, + +On line 2470: + given to these deals + by the three leading rating + agencies: Moody’s, S&P, and + +On line 2470: + these deals by the three + leading rating agencies: Moody’s, + S&P, and Fitch. Investors + +On line 2470: + by the three leading + rating agencies: Moody’s, S&P, and + Fitch. Investors often + +On line 2470: + often relied on + the rating agencies’ views rather + than conduct their own + +On line 2470: + the rating agencies’ + views rather than conduct their own + credit analysis. + +On line 2470: + rather than conduct their + own credit analysis. Moody’s + was paid according + +On line 2470: + than conduct their own + credit analysis. Moody’s was + paid according to + +On line 2470: + credit analysis. + Moody’s was paid according to + the size of each deal, + +On line 2470: + analysis. Moody’s was + paid according to the size + of each deal, with caps + +On line 2470: + paid according to + the size of each deal, with caps + set at a half-million + +On line 2470: + of each deal, with caps + set at a half-million dollars + for a "standard" CDO + +On line 2470: + each deal, with caps set + at a half-million dollars for + a "standard" CDO in + +On line 2470: + deal, with caps set at + a half-million dollars for a + "standard" CDO in and + +On line 2470: + set at a half-million + dollars for a "standard" CDO + in and and as much + +On line 2472: + a half-million dollars + for a "standard" CDO in and + and as much as for + +On line 2472: + half-million dollars for + a "standard" CDO in and and + as much as for a + +On line 2474: + for a "standard" CDO + in and and as much as for + a "complex" CDO.115 In + +On line 2474: + and as much as for + a "complex" CDO.115 In rating + both synthetic and + +On line 2474: + as much as for a + "complex" CDO.115 In rating both + synthetic and cash + +On line 2474: + for a "complex" CDO.115 + In rating both synthetic + and cash CDOs, Moody’s faced + +On line 2474: + a "complex" CDO.115 In + rating both synthetic and + cash CDOs, Moody’s faced two + +On line 2474: + CDO.115 In rating both + synthetic and cash CDOs, Moody’s + faced two key challenges: + +On line 2474: + synthetic and cash + CDOs, Moody’s faced two key challenges: + first, estimating + +On line 2474: + by the CDO (or its + synthetic equivalent) and, + second, gauging the + +On line 2474: + and, second, gauging + the correlation between + those defaults—that is, + +On line 2474: + second, gauging the + correlation between those + defaults—that is, the + +On line 2474: + the correlation + between those defaults—that is, + the likelihood that + +On line 2474: + is, the likelihood + that the securities would + default at the same + +On line 2474: + the securities + would default at the same time.116 + Imagine flipping a + +On line 2474: + would default at the + same time.116 Imagine flipping a + coin to see how many + +On line 2474: + default at the same + time.116 Imagine flipping a coin + to see how many times + +On line 2474: + the same time.116 Imagine + flipping a coin to see how + many times it comes up + +On line 2474: + time.116 Imagine flipping + a coin to see how many times + it comes up heads. Each + +On line 2474: + Imagine flipping a + coin to see how many times it + comes up heads. Each flip + +On line 2474: + coin to see how many + times it comes up heads. Each flip + is unrelated + +On line 2474: + to see how many times + it comes up heads. Each flip is + unrelated to + +On line 2474: + times it comes up heads. + Each flip is unrelated + to the others; that + +On line 2474: + it comes up heads. Each + flip is unrelated to + the others; that is, + +On line 2474: + comes up heads. Each flip + is unrelated to the + others; that is, the + +On line 2474: + others; that is, the + flips are uncorrelated. + Now, imagine a loaf + +On line 2474: + uncorrelated. + Now, imagine a loaf of sliced + bread. When there is one + +On line 2474: + imagine a loaf of + sliced bread. When there is one moldy + slice, there are likely + +On line 2474: + a loaf of sliced bread. + When there is one moldy slice, there + are likely other + +On line 2474: + loaf of sliced bread. When + there is one moldy slice, there are + likely other moldy + +On line 2474: + sliced bread. When there is + one moldy slice, there are likely + other moldy slices. The + +On line 2474: + When there is one moldy + slice, there are likely other + moldy slices. The freshness + +On line 2474: + there is one moldy slice, + there are likely other moldy + slices. The freshness of + +On line 2474: + is one moldy slice, there + are likely other moldy slices. + The freshness of each + +On line 2474: + one moldy slice, there are + likely other moldy slices. The + freshness of each slice + +On line 2474: + each slice is highly + correlated with that of + the other slices. As + +On line 2474: + now understand, the + mortgage-backed securities in + CDOs were less like coins + +On line 2476: + like coins than like slices + of bread. To estimate the + probability + +On line 2476: + bread. To estimate + the probability of + default, Moody’s relied + +On line 2476: + default, Moody’s relied + almost exclusively on + its own ratings of + +On line 2476: + its own ratings of + the mortgage-backed securities + purchased by the CDOs.117 + +On line 2476: + by the CDOs.117 At no + time did the agencies "look through" + the securities + +On line 2476: + the CDOs.117 At no time + did the agencies "look through" the + securities to + +On line 2476: + did the agencies "look + through" the securities to + the underlying + +On line 2478: + securities to + the underlying subprime + mortgages. "We took the + +On line 2478: + been assigned by the + [mortgage-backed securities] group," + Gary Witt, formerly + +On line 2478: + securities] group," + Gary Witt, formerly one of + Moody’s team managing + +On line 2478: + Gary Witt, formerly + one of Moody’s team managing + directors for the + +On line 2478: + for the CDO unit, told + the FCIC. This approach would lead + to problems for Moody’s—and + +On line 2478: + the CDO unit, told the + FCIC. This approach would lead to + problems for Moody’s—and for + +On line 2478: + unit, told the FCIC. This + approach would lead to problems + for Moody’s—and for investors. + +On line 2478: + approach would lead to + problems for Moody’s—and for investors. + Witt testified that + +On line 2478: + problems for Moody’s—and for + investors. Witt testified that + the underlying + +On line 2478: + disintegrated + below us and we didn’t + react and we should + +On line 2478: + below us and we + didn’t react and we should + have. We had to be + +On line 2478: + us and we didn’t + react and we should have. We + had to be looking + +On line 2478: + we didn’t react + and we should have. We had to + be looking for a + +On line 2478: + react and we should + have. We had to be looking + for a problem. And + +On line 2478: + have. We had to be + looking for a problem. And + we weren’t looking."118 + +On line 2480: + To determine the + likelihood that any given + security in + +On line 2480: + likelihood that any + given security in + the CDO would default, + +On line 2480: + security in + the CDO would default, Moody’s plugged + in assumptions based + +On line 2480: + the CDO would default, + Moody’s plugged in assumptions based + on those original + +On line 2480: + would default, Moody’s plugged + in assumptions based on those + original ratings. + +On line 2480: + in assumptions based + on those original ratings. + This was no simple + +On line 2480: + assumptions based on + those original ratings. This + was no simple task. + +On line 2480: + on those original + ratings. This was no simple + task. Meanwhile, if the + +On line 2480: + ratings. This was no + simple task. Meanwhile, if the + initial ratings turned + +On line 2480: + simple task. Meanwhile, + if the initial ratings turned + out—owing to poor + +On line 2480: + turned out—owing to + poor underwriting, fraud, or + any other cause—to + +On line 2480: + poor underwriting, + fraud, or any other cause—to + poorly reflect the + +On line 2480: + fraud, or any other + cause—to poorly reflect the + quality of the + +On line 2480: + the quality of + the mortgages in the bonds, the + error was blindly + +On line 2480: + blindly compounded + when mortgage-backed securities + were packaged into + +On line 2482: + securities were + packaged into CDOs. Even more + difficult was the + +On line 2482: + were packaged into + CDOs. Even more difficult was + the estimation + +On line 2482: + packaged into CDOs. + Even more difficult was the + estimation of + +On line 2482: + securities in + the portfolio—always tricky, but + particularly + +On line 2482: + the portfolio—always + tricky, but particularly + so in the case of + +On line 2482: + portfolio—always tricky, + but particularly so + in the case of CDOs + +On line 2482: + of CDOs consisting + of subprime and Alt-A mortgage-backed + securities that + +On line 2482: + of subprime and Alt-A + mortgage-backed securities that + had only a short + +On line 2482: + history. So the + firm explicitly relied + on the judgment of + +On line 2482: + firm explicitly + relied on the judgment of + its analysts. "In + +On line 2482: + its analysts. "In + the absence of meaningful + default data, it + +On line 2482: + based on actual + observations of defaults," + Moody’s acknowledged in + +On line 2484: + acknowledged in one + early explanation of + its process.119 In plainer + +On line 2484: + explanation of + its process.119 In plainer English, + Witt said, Moody’s didn’t + +On line 2484: + its process.119 In plainer + English, Witt said, Moody’s didn’t + have a good model + +On line 2484: + In plainer English, + Witt said, Moody’s didn’t have a + good model on which + +On line 2484: + plainer English, Witt + said, Moody’s didn’t have a good + model on which to + +On line 2484: + them up." He recalled, + "They went to the analyst + in each of the groups + +On line 2484: + up." He recalled, "They + went to the analyst in + each of the groups and + +On line 2484: + He recalled, "They went + to the analyst in each + of the groups and they + +On line 2484: + recalled, "They went to + the analyst in each of + the groups and they said, + +On line 2484: + to the analyst + in each of the groups and they + said, ‘Well, you know, how + +On line 2484: + in each of the groups + and they said, ‘Well, you know, how + related do you + +On line 2484: + the groups and they said, + ‘Well, you know, how related + do you think these types + +On line 2484: + groups and they said, ‘Well, + you know, how related do + you think these types of + +On line 2484: + they said, ‘Well, you know, + how related do you think + these types of [mortgage-backed + +On line 2484: + how related do + you think these types of [mortgage-backed + securities] are1’"120 + +On line 2486: + do you think these types + of [mortgage-backed securities] + are1’"120 This problem would + +On line 2486: + securities] are1’"120 + This problem would become more + serious with the + +On line 2486: + are1’"120 This problem would + become more serious with + the rise of CDOs in + +On line 2486: + serious with the + rise of CDOs in the middle + of the decade. Witt felt + +On line 2486: + with the rise of CDOs + in the middle of the decade. + Witt felt strongly that + +On line 2486: + the rise of CDOs in + the middle of the decade. Witt + felt strongly that Moody’s + +On line 2486: + CDOs in the middle + of the decade. Witt felt strongly + that Moody’s needed to + +On line 2486: + the middle of the + decade. Witt felt strongly that Moody’s + needed to update + +On line 2486: + Witt felt strongly that + Moody’s needed to update its + CDO rating model + +On line 2486: + felt strongly that Moody’s + needed to update its CDO + rating model to + +On line 2488: + CDOs.121 He undertook + two initiatives to address + this issue. First, in + +On line 2488: + He undertook two + initiatives to address this + issue. First, in mid-2004, + +On line 2488: + two initiatives to + address this issue. First, in + mid-2004, he developed + +On line 2488: + incorporated + correlation into the + model. However, + +On line 2488: + model. However, + the technique he devised was + not applied to CDO + +On line 2488: + not applied to CDO + ratings for another year.122 + Second, he proposed + +On line 2488: + to CDO ratings for + another year.122 Second, he + proposed a research + +On line 2490: + Second, he proposed + a research initiative in + early to "look through" + +On line 2490: + proposed a research + initiative in early to + "look through" a few CDO + +On line 2490: + research initiative + in early to "look through" a + few CDO deals at the + +On line 2490: + to "look through" a few + CDO deals at the level of + the underlying + +On line 2490: + at the level of + the underlying mortgage-backed + securities and + +On line 2490: + securities and + to see if "the assumptions + that we’re making for + +On line 2490: + if "the assumptions + that we’re making for AAA CDOs + are consistent with + +On line 2490: + "the assumptions that + we’re making for AAA CDOs are + consistent with the + +On line 2490: + that we’re making for + AAA CDOs are consistent with + the correlation + +On line 2490: + consistent with the + correlation assumptions + that we’re making for + +On line 2490: + that we’re making for + AAA [mortgage-backed securities]." + Although Witt received + +On line 2490: + received approval from + his superiors for this + investigation, + +On line 2490: + investigation, + contractual disagreements + prevented him from + +On line 2492: + buying the software + he needed to conduct the + look-through analysis.123 In + +On line 2492: + needed to conduct + the look-through analysis.123 In June + Moody’s updated its + +On line 2492: + analysis.123 In June + Moody’s updated its approach + for estimating + +On line 2492: + based the new model + on trends from the previous + years, a period + +On line 2492: + the new model on + trends from the previous years, + a period when + +On line 2492: + the previous years, + a period when housing + prices were rising and + +On line 2492: + a period when + housing prices were rising and + mortgage delinquencies + +On line 2492: + prices were rising and + mortgage delinquencies were very + low—and a period + +On line 2492: + rising and mortgage + delinquencies were very low—and a + period in which + +On line 2492: + delinquencies were very + low—and a period in which + nontraditional + +On line 2492: + low—and a period + in which nontraditional + mortgage products had + +On line 2492: + period in which + nontraditional mortgage + products had been a + +On line 2492: + nontraditional + mortgage products had been a + very small niche. Then, Moody’s + +On line 2492: + had been a very small + niche. Then, Moody’s modified this + optimistic set of + +On line 2492: + adjustments based on + factors such as region, year + of origination, + +On line 2492: + as region, year of + origination, and servicer. + For example, if + +On line 2492: + For example, if + two mortgage-backed securities + were issued in the + +On line 2492: + example, if two + mortgage-backed securities were + issued in the same + +On line 2494: + region—say, Southern + California— Moody’s boosted + the correlation; + +On line 2494: + correlation; if + they shared a common mortgage + servicer, Moody’s boosted + +On line 2494: + they shared a common + mortgage servicer, Moody’s boosted + it further. But at + +On line 2494: + mortgage servicer, Moody’s + boosted it further. But at + the same time, it would + +On line 2494: + further. But at the + same time, it would make other + technical hoices + +On line 2494: + at the same time, it + would make other technical + hoices that lowered + +On line 2494: + the estimated + correlation of default, + which would improve the + +On line 2494: + estimated that + two mortgage-backed securities + would be less closely + +On line 2496: + card or auto loans.124 + The other major rating + agencies followed a + +On line 2496: + The other major + rating agencies followed a + similar approach.125 + +On line 2496: + agencies followed a + similar approach.125 Academics, + including some who + +On line 2496: + be dangerous. "The + complexity of structured + finance transactions + +On line 2496: + finance transactions + may lead to situations + where investors tend to + +On line 2496: + to situations + where investors tend to rely + more heavily on + +On line 2496: + tend to rely more + heavily on ratings than + for other types of + +On line 2496: + than for other types + of rated securities. + On this basis, the + +On line 2496: + the transformation + of risk involved in structured + finance gives rise to + +On line 2496: + number of questions + with important potential + implications. One + +On line 2496: + question is whether tranched + instruments might result in + unanticipated + +On line 2498: + sponsored by the world’s + regulators and central + banks, warned in June CDO + +On line 2498: + in June CDO managers + and underwriters relied + on the ratings to + +On line 2498: + and underwriters + relied on the ratings to + promote the bonds. For + +On line 2498: + on the ratings to + promote the bonds. For each new + CDO, they created + +On line 2498: + CDO, they created + marketing material, + including a pitch + +On line 2498: + book that investors used + to decide whether to subscribe + to a new CDO. Each + +On line 2498: + that investors used to + decide whether to subscribe to + a new CDO. Each book + +On line 2498: + used to decide whether + to subscribe to a new CDO. + Each book described the + +On line 2498: + to decide whether to + subscribe to a new CDO. Each + book described the types + +On line 2498: + whether to subscribe to + a new CDO. Each book described + the types of assets + +On line 2498: + to subscribe to a + new CDO. Each book described the + types of assets that + +On line 2498: + subscribe to a new + CDO. Each book described the types + of assets that would + +On line 2498: + a new CDO. Each book + described the types of assets + that would make up the + +On line 2498: + Each book described the + types of assets that would make + up the portfolio + +On line 2498: + described the types of + assets that would make up the + portfolio without + +On line 2498: + types of assets that + would make up the portfolio + without providing + +On line 2498: + assets that would make + up the portfolio without + providing details.127 + +On line 2498: + up the portfolio + without providing details.127 + Without exception, + +On line 2498: + portfolio without + providing details.127 Without + exception, every + +On line 2498: + providing details.127 + Without exception, every + pitch book examined + +On line 2498: + exception, every + pitch book examined by the + FCIC staff cited an + +On line 2500: + the historical + "stability" of these new + products’ ratings with + +On line 2500: + "stability" of + these new products’ ratings with + the stability + +On line 2500: + of corporate bonds. + Statistics that made this case + included the fact + +On line 2500: + bonds. Statistics that + made this case included the + fact that between and + +On line 2500: + Statistics that made + this case included the fact + that between and of + +On line 2500: + this case included + the fact that between and of + these new products did + +On line 2500: + case included the + fact that between and of these + new products did not + +On line 2500: + the fact that between + and of these new products did + not experience + +On line 2500: + fact that between and + of these new products did not + experience any + +On line 2500: + of these new products + did not experience any + rating changes over a + +On line 2500: + new products did not + experience any rating + changes over a twelve-month + +On line 2500: + of corporate bonds + maintained their ratings. Over a + longer time period, + +On line 2500: + maintained their ratings. + Over a longer time period, + however, structured + +On line 2500: + longer time period, + however, structured finance + ratings were not so + +On line 2500: + however, structured + finance ratings were not so + stable. Between and + +On line 2500: + triple-A-rated structured finance + securities retained their + original rating + +On line 2502: + sell CDOs using these + statistics in their pitch books + during and after + +On line 2502: + statistics in their + pitch books during and after + mortgage defaults had + +On line 2502: + their pitch books during + and after mortgage defaults + had started to rise + +On line 2502: + pitch books during and + after mortgage defaults had + started to rise but + +On line 2502: + during and after + mortgage defaults had started + to rise but before + +On line 2502: + mortgage defaults had + started to rise but before + the rating agencies + +On line 2502: + started to rise but + before the rating agencies + had downgraded large + +On line 2502: + before the rating + agencies had downgraded large + numbers of mortgage-backed + +On line 2502: + numbers of mortgage-backed + securities. Of course, each + pitch book did include + +On line 2502: + securities. Of + course, each pitch book did include + the disclaimer that "past + +On line 2502: + Of course, each pitch book + did include the disclaimer that + "past performance is + +On line 2502: + course, each pitch book did + include the disclaimer that "past + performance is not + +On line 2502: + include the disclaimer + that "past performance is not + a guarantee of + +On line 2502: + that "past performance + is not a guarantee of + future performance" + +On line 2502: + not a guarantee + of future performance" and + encouraged investors + +On line 2502: + future performance" + and encouraged investors to + perform their own due + +On line 2504: + testified before + the House Financial Services + Committee, CDOs that + +On line 2504: + the House Financial + Services Committee, CDOs that + purchased lower-rated + +On line 2504: + Financial Services + Committee, CDOs that purchased + lower-rated tranches + +On line 2504: + Services Committee, + CDOs that purchased lower-rated + tranches of mortgage-backed + +On line 2504: + lower-rated tranches + of mortgage-backed securities + "are arcane structured + +On line 2504: + finance products that + were designed specifically + to make dangerous, + +On line 2504: + dangerous, lowly + rated tranches of subprime + debt deceptively + +On line 2504: + through some alchemy and + some negligence in adapting + unrealistic + +On line 2504: + unrealistic + correlation assumptions + on behalf of the + +On line 2506: + on behalf of the + ratings agencies. They convinced + investors that of a + +On line 2506: + the ratings agencies. + They convinced investors that of + a collection of + +On line 2506: + subprime tranches were + the ratings equivalent of + U.S. Government bonds."129 + +On line 2508: + ratings equivalent + of U.S. Government bonds."129 When + housing prices started + +On line 2508: + equivalent of U.S. + Government bonds."129 When housing + prices started to fall + +On line 2508: + of U.S. Government + bonds."129 When housing prices started + to fall nationwide + +On line 2508: + U.S. Government bonds."129 + When housing prices started to + fall nationwide and + +On line 2508: + bonds."129 When housing prices + started to fall nationwide + and defaults increased, + +On line 2508: + to fall nationwide + and defaults increased, it turned + out that the mortgage-backed + +On line 2508: + and defaults increased, + it turned out that the mortgage-backed + securities were + +On line 2508: + were in fact much more + highly correlated than + the rating agencies + +On line 2508: + the rating agencies + had estimated—that is, they + stopped performing at + +On line 2508: + had estimated—that + is, they stopped performing at + roughly the same time. + +On line 2508: + same time. These losses + led to massive downgrades in + the ratings of the + +On line 2508: + time. These losses led + to massive downgrades in the + ratings of the CDOs. + +On line 2510: + of the CDOs. In of + U.S. CDO securities would + be downgraded. In + +On line 2510: + the CDOs. In of U.S. + CDO securities would be + downgraded. In would.130 + +On line 2514: + CDO securities + would be downgraded. In would.130 + In late Moody’s would throw + +On line 2514: + securities would + be downgraded. In would.130 In + late Moody’s would throw out + +On line 2514: + downgraded. In would.130 + In late Moody’s would throw out its + key CDO assumptions + +On line 2514: + In late Moody’s would throw + out its key CDO assumptions + and replace them with + +On line 2514: + late Moody’s would throw out + its key CDO assumptions and + replace them with an + +On line 2514: + would throw out its key + CDO assumptions and replace + them with an asset + +On line 2514: + and replace them with + an asset correlation + assumption two to + +On line 2516: + to three times higher + than used before the crisis.131 + In retrospect, it + +On line 2516: + three times higher than + used before the crisis.131 In + retrospect, it is + +On line 2516: + before the crisis.131 + In retrospect, it is clear + that the agencies’ CDO + +On line 2516: + In retrospect, it + is clear that the agencies’ CDO + models made two key + +On line 2518: + it is clear that the + agencies’ CDO models made two + key mistakes. First, they + +On line 2518: + that the agencies’ CDO + models made two key mistakes. + First, they assumed that + +On line 2518: + models made two key + mistakes. First, they assumed that + securitizers + +On line 2518: + these securities + weren’t that different to + begin with. "There were + +On line 2518: + that different to + begin with. "There were a lot + of things [the credit + +On line 2520: + begin with. "There were + a lot of things [the credit + rating agencies] did + +On line 2520: + were a lot of things + [the credit rating agencies] + did wrong," Federal + +On line 2520: + [the credit rating + agencies] did wrong," Federal + Reserve Chairman Ben + +On line 2520: + did wrong," Federal + Reserve Chairman Ben Bernanke told + the FCIC. "They did not + +On line 2520: + Reserve Chairman Ben + Bernanke told the FCIC. "They did not + take into account + +On line 2520: + Bernanke told the FCIC. "They + did not take into account + the appropriate + +On line 2520: + the appropriate + correlation between [and] + across the categories + +On line 2522: + the categories of + mortgages."132 Second, the agencies + based their CDO ratings + +On line 2522: + the agencies based their + CDO ratings on ratings they + themselves had assigned + +On line 2522: + ratings on ratings + they themselves had assigned on + the underlying + +On line 2522: + the underlying + collateral. "The danger + with CDOs is when they + +On line 2522: + collateral. "The + danger with CDOs is when they + are based on structured + +On line 2522: + danger with CDOs is + when they are based on structured + finance ratings," Ann + +On line 2522: + with CDOs is when they + are based on structured finance + ratings," Ann Rutledge, + +On line 2522: + when they are based on + structured finance ratings," Ann + Rutledge, a structured + +On line 2522: + are based on structured + finance ratings," Ann Rutledge, + a structured finance + +On line 2522: + finance ratings," Ann + Rutledge, a structured finance + expert, told the FCIC. + +On line 2522: + ratings," Ann Rutledge, + a structured finance expert, + told the FCIC. "Ratings + +On line 2522: + a structured finance + expert, told the FCIC. "Ratings + are not predictive + +On line 2522: + expert, told the FCIC. + "Ratings are not predictive + of future defaults; + +On line 2522: + the FCIC. "Ratings are + not predictive of future + defaults; they only + +On line 2522: + not predictive of + future defaults; they only + describe a ratings + +On line 2522: + future defaults; they + only describe a ratings + management process, and + +On line 2522: + only describe a + ratings management process, and + a mean and static + +On line 2522: + ratings management + process, and a mean and static + expectation of + +On line 2522: + process, and a mean and + static expectation of + security loss."133 + +On line 2524: + expectation of + security loss."133 Of course, + rating CDOs was a + +On line 2524: + of security + loss."133 Of course, rating CDOs was + a profitable business + +On line 2524: + security loss."133 + Of course, rating CDOs was a + profitable business for + +On line 2524: + Of course, rating CDOs + was a profitable business for + the rating agencies. + +On line 2524: + the rating agencies. + Including all types of CDOs—not + just those that were mortgage-related—Moody’s + +On line 2526: + agencies. Including + all types of CDOs—not just those that + were mortgage-related—Moody’s rated deals + +On line 2526: + Including all types + of CDOs—not just those that were mortgage-related—Moody’s + rated deals in in + +On line 2526: + all types of CDOs—not just + those that were mortgage-related—Moody’s rated deals + in in in and in + +On line 2526: + types of CDOs—not just those + that were mortgage-related—Moody’s rated deals in + in in and in the + +On line 2526: + CDOs—not just those that were + mortgage-related—Moody’s rated deals in in in + and in the value + +On line 2526: + just those that were mortgage-related—Moody’s + rated deals in in in and + in the value of + +On line 2526: + that were mortgage-related—Moody’s rated + deals in in in and in the + value of those deals + +On line 2526: + mortgage-related—Moody’s rated deals in + in in and in the value + of those deals rose from + +On line 2526: + deals in in in and + in the value of those deals + rose from billion in + +On line 2526: + in in in and in + the value of those deals rose + from billion in to + +On line 2526: + and in the value + of those deals rose from billion + in to billion in + +On line 2526: + the value of those + deals rose from billion in to + billion in billion + +On line 2526: + deals rose from billion + in to billion in billion + in and billion in + +On line 2526: + rose from billion in + to billion in billion in + and billion in The + +On line 2526: + in and billion in + The reported revenues of + Moody’s Investors Service + +On line 2526: + and billion in The + reported revenues of Moody’s + Investors Service from + +On line 2526: + Service from structured + products—which included mortgage-backed + securities and + +On line 2528: + products—which included + mortgage-backed securities and + CDOs—grew from million in + +On line 2528: + included mortgage-backed + securities and CDOs—grew from + million in or of + +On line 2528: + securities and + CDOs—grew from million in or of + Moody’s Corporation’s + +On line 2528: + CDOs—grew from million in + or of Moody’s Corporation’s + revenues, to million + +On line 2530: + million in or of + Moody’s Corporation’s revenues, + to million in or + +On line 2530: + corporate revenue. + The rating of asset-backed CDOs + alone contributed more + +On line 2530: + rating of asset-backed + CDOs alone contributed more than + of the revenue from + +On line 2530: + of asset-backed CDOs alone + contributed more than of the + revenue from structured + +On line 2530: + CDOs alone contributed + more than of the revenue from + structured finance.135 The + +On line 2530: + contributed more than + of the revenue from structured + finance.135 The boom years + +On line 2530: + of the revenue from + structured finance.135 The boom years + of structured finance + +On line 2530: + structured finance.135 The + boom years of structured finance + coincided with + +On line 2530: + boom years of structured + finance coincided with + a company-wide surge + +On line 2530: + company-wide surge in + revenue and profits. From to + the corporation’s + +On line 2530: + and profits. From to + the corporation’s revenues + surged from million to + +On line 2534: + to billion and its + profit margin climbed from to + Yet the increase in + +On line 2534: + profit margin climbed + from to Yet the increase in + the CDO group’s workload + +On line 2534: + the increase in the + CDO group’s workload and revenue + was not paralleled + +On line 2534: + increase in the CDO + group’s workload and revenue was + not paralleled by + +On line 2534: + CDO group’s workload and + revenue was not paralleled + by a staffing increase. + +On line 2534: + workload and revenue + was not paralleled by a + staffing increase. "We were + +On line 2534: + was not paralleled + by a staffing increase. "We were + under-resourced, you + +On line 2534: + by a staffing increase. + "We were under-resourced, you + know, we were always + +On line 2534: + staffing increase. "We were + under-resourced, you know, we + were always playing + +On line 2534: + were always playing + catch-up," Witt said.136 Moody’s "penny-pinching" + and "stingy" management + +On line 2534: + always playing catch-up," + Witt said.136 Moody’s "penny-pinching" and + "stingy" management was + +On line 2534: + and "stingy" management + was reluctant to pay up + for experienced + +On line 2534: + was insoluble. + Investment banks often hired + away our best people. + +On line 2534: + banks often hired away + our best people. As far as + I can remember, + +On line 2534: + often hired away our + best people. As far as I + can remember, we + +On line 2534: + As far as I can + remember, we were never + allocated funds + +On line 2534: + remember, we were + never allocated funds + to make counter offers," + +On line 2534: + allocated funds + to make counter offers," Witt said. + "We had almost no + +On line 2534: + to make counter offers," + Witt said. "We had almost no + ability to do + +On line 2534: + offers," Witt said. "We + had almost no ability + to do meaningful + +On line 2534: + ability to do + meaningful research."137 Eric + Kolchinsky, a former + +On line 2534: + Kolchinsky, a former + team managing director + at Moody’s, told the FCIC + +On line 2534: + at Moody’s, told the FCIC + that from to the increase in + the number of deals + +On line 2534: + the FCIC that from to + the increase in the number + of deals rated was + +On line 2534: + FCIC that from to the + increase in the number of + deals rated was "huge + +On line 2534: + in the number of + deals rated was "huge but our + personnel did not + +On line 2534: + rated was "huge but + our personnel did not go + up accordingly." + +On line 2534: + our personnel did + not go up accordingly." + By Kolchinsky recalled, + +On line 2534: + personnel did not + go up accordingly." By + Kolchinsky recalled, "My + +On line 2534: + up accordingly." + By Kolchinsky recalled, "My role + as a team leader + +On line 2534: + accordingly." By + Kolchinsky recalled, "My role as + a team leader was + +On line 2534: + Kolchinsky recalled, "My + role as a team leader was + crisis management. + +On line 2534: + recalled, "My role as + a team leader was crisis + management. Each deal + +On line 2534: + as a team leader + was crisis management. Each + deal was a crisis."138 + +On line 2534: + a team leader was + crisis management. Each deal + was a crisis."138 When + +On line 2534: + crisis management. + Each deal was a crisis."138 When + personnel worked to + +On line 2534: + worked to create a + new methodology, Witt said, + "We had to kind of + +On line 2534: + to create a new + methodology, Witt said, "We + had to kind of do + +On line 2534: + new methodology, + Witt said, "We had to kind of + do it in our spare + +On line 2534: + methodology, Witt + said, "We had to kind of do + it in our spare time."139 + +On line 2536: + Witt said, "We had to + kind of do it in our spare + time."139 The agencies worked + +On line 2536: + "We had to kind of + do it in our spare time."139 The + agencies worked closely + +On line 2536: + to kind of do it + in our spare time."139 The agencies + worked closely with CDO + +On line 2536: + it in our spare time."139 + The agencies worked closely with + CDO underwriters + +On line 2536: + in our spare time."139 The + agencies worked closely with CDO + underwriters and + +On line 2536: + agencies worked closely + with CDO underwriters and + managers as each new + +On line 2536: + worked closely with CDO + underwriters and managers + as each new CDO was + +On line 2536: + CDO underwriters + and managers as each new CDO + was devised. And the + +On line 2536: + and managers as each + new CDO was devised. And the + rating agencies now + +On line 2536: + was devised. And the + rating agencies now relied + for a substantial + +On line 2536: + rating agencies now + relied for a substantial + amount of their revenues + +On line 2536: + agencies now relied + for a substantial amount of + their revenues on a + +On line 2536: + a substantial amount + of their revenues on a small + number of players. + +On line 2536: + number of players. + Citigroup and Merrill alone + accounted for more + +On line 2536: + players. Citigroup + and Merrill alone accounted + for more than billion + +On line 2538: + The ratings agencies’ + correlation assumptions + had a direct and + +On line 2538: + ow CDOs were structured: + assumptions of a lower + correlation made + +On line 2538: + assumptions of a + lower correlation made + possible larger + +On line 2538: + easy-to-sell triple-A tranches + and smaller harder-to-sell BBB + tranches. Thus, as is + +On line 2538: + is discussed later, + underwriters crafted the + structure to earn more + +On line 2538: + because issuers could + choose which rating agencies to + do business with, and + +On line 2538: + on the issuers for + their revenues, rating agencies + felt pressured to give + +On line 2538: + their revenues, rating + agencies felt pressured to give + favorable ratings + +On line 2538: + rating agencies felt + pressured to give favorable + ratings so that they + +On line 2540: + that they might remain + competitive. The pressure + on rating agency + +On line 2540: + agency employees + was also intense as a + result of the high + +On line 2540: + was also intense + as a result of the high + turnover—a revolving door + +On line 2540: + also intense as + a result of the high turnover—a + revolving door that + +On line 2540: + as a result of + the high turnover—a revolving door + that often left raters + +On line 2540: + turnover—a revolving door + that often left raters dealing + with their old colleagues, + +On line 2540: + revolving door that + often left raters dealing with + their old colleagues, this + +On line 2540: + that often left raters + dealing with their old colleagues, + this time as clients. In + +On line 2540: + raters dealing with their + old colleagues, this time as clients. + In her interview + +On line 2540: + dealing with their old + colleagues, this time as clients. In + her interview with + +On line 2540: + colleagues, this time as + clients. In her interview with + FCIC staff, Yuri Yoshizawa, + +On line 2540: + this time as clients. In + her interview with FCIC staff, + Yuri Yoshizawa, a Moody’s + +On line 2540: + time as clients. In her + interview with FCIC staff, Yuri + Yoshizawa, a Moody’s team + +On line 2540: + In her interview + with FCIC staff, Yuri Yoshizawa, a + Moody’s team managing + +On line 2540: + Yoshizawa, a Moody’s team + managing director for + U.S. derivatives + +On line 2540: + U.S. derivatives + in was presented with an + organization + +On line 2540: + in was presented + with an organization + chart from July She + +On line 2542: + She identified out + of analysts—about of the staff— + who had left Moody’s to + +On line 2542: + identified out of + analysts—about of the staff— who + had left Moody’s to work + +On line 2542: + of analysts—about of + the staff— who had left Moody’s to + work for investment + +On line 2542: + analysts—about of the + staff— who had left Moody’s to work + for investment or + +On line 2542: + the staff— who had left + Moody’s to work for investment + or commercial banks.141 + +On line 2544: + left Moody’s to work for + investment or commercial + banks.141 Brian Clarkson, + +On line 2544: + work for investment + or commercial banks.141 Brian + Clarkson, who oversaw + +On line 2544: + or commercial banks.141 + Brian Clarkson, who oversaw + the structured finance + +On line 2544: + the structured finance + group before becoming the + president of Moody’s + +On line 2544: + always a challenge, + for the simple reason that + the banks paid more. As + +On line 2544: + reason that the banks + paid more. As a precaution, + Moody’s employees were + +On line 2544: + banks paid more. As a + precaution, Moody’s employees + were prohibited + +On line 2544: + Moody’s employees were + prohibited from rating + deals by a bank or + +On line 2544: + were prohibited + from rating deals by a bank + or issuer while they + +On line 2544: + prohibited from + rating deals by a bank or + issuer while they were + +On line 2544: + from rating deals by + a bank or issuer while they + were interviewing + +On line 2544: + rating deals by a + bank or issuer while they were + interviewing for + +On line 2544: + a bank or issuer + while they were interviewing + for a job with that + +On line 2544: + institution, but + the responsibility + for notifying + +On line 2544: + management of the + interview rested on the + employee. After + +On line 2544: + of the interview + rested on the employee. + After leaving Moody’s, + +On line 2544: + interview rested + on the employee. After + leaving Moody’s, former + +On line 2544: + on the employee. + After leaving Moody’s, former + employees were barred + +On line 2544: + After leaving Moody’s, + former employees were barred + from interacting + +On line 2544: + former employees + were barred from interacting + with Moody’s on the same + +On line 2544: + employees were barred + from interacting with Moody’s + on the same series + +On line 2544: + interacting with + Moody’s on the same series of + deals they had rated + +On line 2544: + on the same series + of deals they had rated while + in its employ, but + +On line 2544: + the same series of + deals they had rated while in + its employ, but there + +On line 2544: + same series of deals + they had rated while in its + employ, but there were + +On line 2544: + they had rated while + in its employ, but there were + no bans against working + +On line 2544: + had rated while in + its employ, but there were no + bans against working on + +On line 2544: + in its employ, but + there were no bans against working + on other deals with + +On line 2544: + its employ, but there + were no bans against working on + other deals with Moody’s.142 + +On line 2546: + there were no bans against + working on other deals with + Moody’s.142 SEC: "IT’S GOING + +On line 2546: + no bans against working + on other deals with Moody’s.142 SEC: + "IT’S GOING TO BE + +On line 2546: + bans against working on + other deals with Moody’s.142 SEC: "IT’S + GOING TO BE AN + +On line 2546: + on other deals with + Moody’s.142 SEC: "IT’S GOING TO BE + AN AWFULLY BIG + +On line 2546: + other deals with Moody’s.142 + SEC: "IT’S GOING TO BE AN + AWFULLY BIG MESS" + +On line 2548: + Moody’s.142 SEC: "IT’S GOING + TO BE AN AWFULLY BIG + MESS" The five major + +On line 2548: + SEC: "IT’S GOING TO + BE AN AWFULLY BIG MESS" + The five major U.S. + +On line 2548: + The five major U.S. + investment banks expanded + their involvement in + +On line 2548: + U.S. investment banks + expanded their involvement + in the mortgage and + +On line 2548: + mortgage and mortgage + securities industries + in the early 21st + +On line 2548: + formal government + regulation beyond their + broker-dealer subsidiaries. + +On line 2548: + broker-dealer subsidiaries. + In the European Union told + U.S. financial firms + +On line 2548: + In the European + Union told U.S. financial firms + that to continue + +On line 2548: + the European Union + told U.S. financial firms that + to continue to + +On line 2548: + European Union told + U.S. financial firms that to + continue to do + +On line 2548: + U.S. financial firms + that to continue to do + business in Europe, + +On line 2548: + in Europe, they would + need a "consolidated" + supervisor by + +On line 2548: + "consolidated" + supervisor by 2004—that is, + one regulator + +On line 2548: + company. The U.S. + commercial banks already met + that criterion— + +On line 2550: + supervisor was + the Federal Reserve—and + the Office of Thrift + +On line 2550: + was the Federal + Reserve—and the Office of + Thrift Supervision’s + +On line 2550: + Thrift Supervision’s + oversight of AIG would later + also satisfy + +On line 2550: + oversight of AIG would + later also satisfy + the Europeans. The + +On line 2550: + would later also + satisfy the Europeans. + The five investment + +On line 2550: + The five investment + banks, however, did not meet + the standard: the SEC + +On line 2550: + five investment banks, + however, did not meet the + standard: the SEC was + +On line 2550: + banks, however, did + not meet the standard: the SEC + was supervising + +On line 2550: + however, did not + meet the standard: the SEC was + supervising their + +On line 2550: + not meet the standard: + the SEC was supervising + their securities + +On line 2550: + meet the standard: the + SEC was supervising their + securities arms, + +On line 2550: + supervising their + securities arms, but no + one supervisor + +On line 2550: + of these companies + on a consolidated + basis. Thus all five + +On line 2550: + companies on a + consolidated basis. + Thus all five faced an + +On line 2550: + faced an important + decision: what agency would + they prefer as their + +On line 2552: + would they prefer as + their regulator1 By the + combined assets at + +On line 2552: + their regulator1 + By the combined assets at + the five firms totaled + +On line 2552: + combined assets at + the five firms totaled trillion, + more than half of the + +On line 2552: + assets at the five + firms totaled trillion, more than + half of the trillion + +On line 2552: + the five firms totaled + trillion, more than half of the + trillion of assets + +On line 2552: + firms totaled trillion, + more than half of the trillion + of assets held by + +On line 2552: + totaled trillion, more + than half of the trillion of + assets held by the + +On line 2552: + trillion, more than half + of the trillion of assets + held by the five largest + +On line 2552: + more than half of the + trillion of assets held by + the five largest U.S. bank + +On line 2552: + half of the trillion + of assets held by the five + largest U.S. bank holding + +On line 2552: + trillion of assets + held by the five largest U.S. bank + holding companies. + +On line 2552: + of assets held by + the five largest U.S. bank holding + companies. In the + +On line 2552: + held by the five largest + U.S. bank holding companies. + In the next three years + +On line 2552: + by the five largest U.S. + bank holding companies. In + the next three years the + +On line 2552: + largest U.S. bank holding + companies. In the next three + years the investment + +On line 2552: + companies. In the + next three years the investment + banks’ assets would grow + +On line 2552: + In the next three years + the investment banks’ assets + would grow to trillion. + +On line 2552: + the investment banks’ + assets would grow to trillion. + Goldman Sachs was the + +On line 2552: + banks’ assets would grow + to trillion. Goldman Sachs was + the largest, followed by + +On line 2552: + to trillion. Goldman + Sachs was the largest, followed by + Morgan Stanley and + +On line 2554: + the largest, followed by + Morgan Stanley and Merrill, + then Lehman and Bear. These + +On line 2554: + Lehman and Bear. These large, + diverse international + firms had transformed their + +On line 2554: + Bear. These large, diverse + international firms had + transformed their business + +On line 2554: + international + firms had transformed their business + models over the years. + +On line 2554: + firms had transformed their + business models over the years. + For their revenues they + +On line 2554: + transformed their business + models over the years. For their + revenues they relied + +On line 2554: + models over the years. + For their revenues they relied + increasingly on + +On line 2554: + years. For their revenues + they relied increasingly + on trading and OTC + +On line 2554: + activities on + top of their traditional + investment banking + +On line 2554: + their traditional + investment banking functions. + Recall that at Bear + +On line 2554: + Recall that at Bear + Stearns, trading and investments + accounted for more + +On line 2554: + Bear Stearns, trading and + investments accounted for + more than of pretax + +On line 2556: + accounted for more + than of pretax earnings in + some years after The + +On line 2556: + more than of pretax + earnings in some years after + The investment banks + +On line 2556: + some years after The + investment banks also owned + depository + +On line 2556: + they could provide FDIC-insured + accounts to their brokerage + customers; the deposits + +On line 2556: + limited funding. + These depositories took + the form of a thrift + +On line 2556: + the form of a thrift + (supervised by the OTS) or + an industrial + +On line 2556: + an industrial + loan company (supervised + by the Federal + +On line 2556: + and Lehman, which had among + the largest of these subsidiaries, used + them to finance their + +On line 2556: + which had among the largest + of these subsidiaries, used them to + finance their mortgage + +On line 2558: + used them to finance + their mortgage origination + activities. The + +On line 2558: + subsidiaries suggested + two obvious choices when + they found themselves in + +On line 2558: + found themselves in need + of a consolidated + supervisor. If + +On line 2558: + If a firm chartered + its depository as + a commercial bank, + +On line 2558: + a firm chartered its + depository as a + commercial bank, the + +On line 2558: + would be its holding + company supervisor; + if as a thrift, the + +On line 2558: + holding company + supervisor; if as a + thrift, the OTS would do + +On line 2558: + if as a thrift, the + OTS would do the job. But the + investment banks came + +On line 2558: + thrift, the OTS would do + the job. But the investment + banks came up with a + +On line 2558: + the OTS would do the + job. But the investment banks + came up with a third + +On line 2558: + would do the job. But + the investment banks came up + with a third option. + +On line 2558: + do the job. But the + investment banks came up with + a third option. They + +On line 2558: + the investment banks + came up with a third option. + They lobbied the SEC + +On line 2558: + investment banks came + up with a third option. They + lobbied the SEC to + +On line 2558: + banks came up with a + third option. They lobbied the + SEC to devise a + +On line 2558: + They lobbied the SEC + to devise a system of + regulation that + +On line 2558: + SEC to devise a + system of regulation + that would satisfy + +On line 2558: + devise a system + of regulation that would + satisfy the terms + +On line 2558: + of regulation + that would satisfy the terms + of the European + +On line 2558: + that would satisfy + the terms of the European + directive and keep + +On line 2560: + Consolidated + Supervised Entity (CSE) + program to oversee + +On line 2560: + program to oversee + the holding companies of + investment banks and + +On line 2560: + holding companies + of investment banks and all + their subsidiaries. The CSE + +On line 2560: + all their subsidiaries. The + CSE program was open only + to investment banks + +On line 2560: + their subsidiaries. The CSE + program was open only to + investment banks that + +On line 2560: + The CSE program was + open only to investment + banks that had large U.S. + +On line 2560: + large U.S. broker-dealer + subsidiaries already subject to + SEC regulation. + +On line 2560: + SEC regulation. + However, this was the SEC’s + first foray into + +On line 2560: + However, this was + the SEC’s first foray into + supervising firms + +On line 2560: + firms for safety and + soundness. The SEC did not have + express legislative + +On line 2560: + soundness. The SEC did + not have express legislative + authority to + +On line 2560: + express legislative + authority to require + the investment banks + +On line 2560: + it proposed that the + CSE program be voluntary; + the SEC crafted the + +On line 2560: + proposed that the CSE + program be voluntary; the + SEC crafted the new + +On line 2560: + the CSE program be + voluntary; the SEC crafted + the new program out + +On line 2560: + program out of its + authority to make rules + for the broker-dealer + +On line 2560: + banks. The program would + apply to broker-dealers that + volunteered to be + +On line 2560: + consolidated + supervision under the + CSE program, or those + +On line 2560: + the CSE program, or + those that already were subject + to supervision + +On line 2560: + CSE program, or those + that already were subject to + supervision by + +On line 2560: + those that already were + subject to supervision + by the Fed at the + +On line 2560: + already were subject + to supervision by the + Fed at the holding + +On line 2560: + to supervision + by the Fed at the holding + company level, + +On line 2560: + by the Fed at the + holding company level, + such as JP Morgan + +On line 2560: + holding company + level, such as JP Morgan + and Citigroup. The + +On line 2560: + as JP Morgan and + Citigroup. The CSE program + would introduce a + +On line 2560: + and Citigroup. The + CSE program would introduce + a limited form + +On line 2560: + Citigroup. The CSE + program would introduce a + limited form of + +On line 2560: + a limited form + of supervision by SEC + examiners. CSE + +On line 2560: + of supervision + by SEC examiners. CSE + firms were allowed to + +On line 2560: + supervision by + SEC examiners. CSE firms + were allowed to use + +On line 2560: + examiners. CSE + firms were allowed to use a + new methodology + +On line 2560: + firms were allowed to + use a new methodology + to calculate the + +On line 2560: + were holding against their + securities portfolios—a + methodology based + +On line 2560: + the "alternative + net capital rule," would be + similar to the + +On line 2560: + net capital rule," + would be similar to the + standards—based on + +On line 2562: + be similar to + the standards—based on the + Market Risk Amendment + +On line 2562: + the standards—based + on the Market Risk Amendment + to the Basel rules—that large + +On line 2562: + on the Market Risk + Amendment to the Basel rules—that large + commercial banks and + +On line 2564: + The traditional + net capital rule that had + governed broker-dealers + +On line 2564: + governed broker-dealers + since had required straightforward + calculations based + +On line 2564: + asset classes and + credit ratings, a bright-line + approach that gave firms + +On line 2564: + classes and credit + ratings, a bright-line approach + that gave firms little + +On line 2564: + credit ratings, a + bright-line approach that gave firms + little discretion + +On line 2564: + bright-line approach that + gave firms little discretion + in calculating + +On line 2564: + rules would allow the + investment banks to create + their own proprietary + +On line 2564: + investment banks to + create their own proprietary + Value at Risk (VaR) + +On line 2564: + banks to create their + own proprietary Value at + Risk (VaR) models to + +On line 2564: + their own proprietary + Value at Risk (VaR) models + to calculate their + +On line 2564: + Value at Risk (VaR) + models to calculate their + regulatory + +On line 2564: + capital—that is, the + capital each firm would have + to hold to protect + +On line 2564: + is, the capital + each firm would have to hold to + protect its customers’ + +On line 2564: + capital each firm + would have to hold to protect + its customers’ assets + +On line 2564: + customers’ assets should + it experience losses + on its ecurities + +On line 2564: + it experience + losses on its ecurities + and derivatives. + +On line 2564: + SEC estimated + that the proposed new reliance + on proprietary VaR + +On line 2564: + that the proposed new + reliance on proprietary VaR + models would allow + +On line 2564: + reduce average + capital charges by The firms + would be required to + +On line 2564: + by The firms would be + required to give the SEC an + early-warning notice + +On line 2564: + required to give the + SEC an early-warning notice + if their tentative + +On line 2564: + SEC an early-warning + notice if their tentative + net capital (net + +On line 2564: + net capital (net + capital minus hard-to-sell + assets) fell below + +On line 2566: + capital minus + hard-to-sell assets) fell below + billion at any time. + +On line 2568: + hard-to-sell assets) fell + below billion at any time. + Meanwhile, the OTS was + +On line 2568: + assets) fell below + billion at any time. Meanwhile, + the OTS was already + +On line 2568: + billion at any time. + Meanwhile, the OTS was already + supervising the + +On line 2568: + securities firms + and argued that it therefore + was the natural + +On line 2568: + and argued that it + therefore was the natural + supervisor of + +On line 2568: + supervisor of + their holding companies. In + a letter to the + +On line 2568: + holding companies. + In a letter to the SEC, + the OTS was harshly + +On line 2568: + In a letter to + the SEC, the OTS was harshly + critical of the + +On line 2568: + the SEC, the OTS was + harshly critical of the + agency’s proposal, + +On line 2568: + the OTS was harshly + critical of the agency’s + proposal, which it + +On line 2568: + harshly critical + of the agency’s proposal, + which it said had "the + +On line 2568: + which it said had "the + potential to duplicate + or conflict with OTS’s + +On line 2570: + over savings and loan + holding companies that would + also be CSEs. The + +On line 2570: + holding companies + that would also be CSEs. The + OTS argued that the + +On line 2570: + would also be CSEs. + The OTS argued that the SEC + was interfering + +On line 2570: + also be CSEs. The + OTS argued that the SEC was + interfering with + +On line 2570: + The OTS argued that + the SEC was interfering + with the intentions + +On line 2570: + OTS argued that the + SEC was interfering with + the intentions of + +On line 2570: + interfering with + the intentions of Congress, + which, in the Gramm-Leach-Bliley Act, + +On line 2570: + with the intentions + of Congress, which, in the Gramm-Leach-Bliley + Act, "carefully kept + +On line 2570: + the intentions of + Congress, which, in the Gramm-Leach-Bliley Act, + "carefully kept the + +On line 2570: + Act, "carefully kept + the responsibility + for supervision + +On line 2570: + "carefully kept the + responsibility for + supervision of + +On line 2570: + for supervision + of the holding company + itself with the OTS + +On line 2570: + holding company + itself with the OTS or the + Federal Reserve + +On line 2570: + depending upon + whether the holding company + was a [thrift holding + +On line 2570: + company] or a + bank holding company. This + was in recognition + +On line 2570: + in recognition of + the expertise developed + over the years by these + +On line 2570: + of the expertise + developed over the years by + these regulators + +On line 2570: + developed over the + years by these regulators + in evaluating + +On line 2570: + and the federal + deposit insurance funds by + depository + +On line 2570: + their affiliates." + The OTS declared: "We believe + that the SEC’s proposed + +On line 2570: + "We believe that the + SEC’s proposed assertion of + authority over + +On line 2570: + holding companies] + is unfounded and could pose + significant risks + +On line 2570: + is unfounded and + could pose significant risks + to these entities, + +On line 2570: + unfounded and could + pose significant risks to + these entities, their + +On line 2572: + and the federal + deposit insurance funds."144 In + contrast, the response + +On line 2572: + federal deposit + insurance funds."144 In contrast, + the response from the + +On line 2572: + deposit insurance + funds."144 In contrast, the response + from the financial + +On line 2572: + insurance funds."144 In + contrast, the response from the + financial services + +On line 2572: + funds."144 In contrast, the + response from the financial + services industry + +On line 2572: + contrast, the response + from the financial services + industry to the + +On line 2572: + from the financial + services industry to the + SEC proposal was + +On line 2572: + SEC proposal was + overwhelmingly positive, + particularly + +On line 2572: + computation. Lehman + Brothers, for example, wrote + that it "applauds and + +On line 2572: + for example, wrote + that it "applauds and supports + the Commission." JP + +On line 2572: + "applauds and supports + the Commission." JP Morgan + was supportive of + +On line 2572: + the Commission." JP + Morgan was supportive of + what it saw as an + +On line 2572: + of what it saw as + an improvement over the old + net capital rule + +On line 2572: + what it saw as an + improvement over the old net + capital rule that + +On line 2572: + as an improvement + over the old net capital + rule that still governed + +On line 2572: + rule that still governed + securities subsidiaries of + the commercial banks: + +On line 2572: + the commercial banks: + "The existing capital + rule overstates the amount + +On line 2572: + commercial banks: "The + existing capital rule + overstates the amount of + +On line 2572: + banks: "The existing + capital rule overstates the + amount of capital + +On line 2572: + overstates the amount of + capital a broker-dealer + needs," the company + +On line 2572: + a broker-dealer needs," + the company wrote. Deutsche Bank + found it to be "a + +On line 2572: + broker-dealer needs," the + company wrote. Deutsche Bank found + it to be "a great + +On line 2572: + needs," the company + wrote. Deutsche Bank found it to be + "a great stride towards + +On line 2572: + wrote. Deutsche Bank found it + to be "a great stride towards + consistency with + +On line 2572: + "a great stride towards + consistency with modern + comprehensive risk + +On line 2572: + consistency with + modern comprehensive risk + management practices."145 + +On line 2572: + executives at + the investment banks stated + that the firms preferred + +On line 2572: + the investment banks + stated that the firms preferred + the SEC because it + +On line 2572: + stated that the firms + preferred the SEC because it + was more familiar + +On line 2572: + that the firms preferred + the SEC because it was more + familiar with their + +On line 2574: + familiar with their + core securities-related + businesses. In an + +On line 2574: + an April meeting, SEC + commissioners voted to + adopt the CSE program + +On line 2574: + adopt the CSE program + and the new net capital + calculations that + +On line 2574: + that went along with it. + Over the following year and + a half, the five largest + +On line 2574: + banks volunteered for + this supervision, although + Merrill’s and Lehman’s thrifts + +On line 2574: + this supervision, + although Merrill’s and Lehman’s thrifts + continued to be + +On line 2574: + although Merrill’s and + Lehman’s thrifts continued to be + supervised by the + +On line 2574: + Lehman’s thrifts continued + to be supervised by the + OTS. Several firms + +On line 2574: + to be supervised + by the OTS. Several firms + delayed entry to + +On line 2574: + the OTS. Several + firms delayed entry to the + program in order + +On line 2574: + delayed entry to + the program in order to + develop systems + +On line 2576: + price movements. Harvey + Goldschmid, SEC commissioner + from to told FCIC staff + +On line 2576: + Harvey Goldschmid, SEC + commissioner from to told + FCIC staff that before + +On line 2576: + commissioner from + to told FCIC staff that before + the CSE program was + +On line 2576: + from to told FCIC staff + that before the CSE program + was created, SEC + +On line 2576: + to told FCIC staff that + before the CSE program was + created, SEC staff + +On line 2576: + staff that before the + CSE program was created, + SEC staff members were + +On line 2576: + the CSE program was + created, SEC staff members + were concerned about how + +On line 2576: + were concerned about how + little authority they + had over the Wall Street + +On line 2576: + had over the Wall Street + firms, including their hedge funds + and overseas subsidiaries. + +On line 2576: + over the Wall Street firms, + including their hedge funds and + overseas subsidiaries. Once + +On line 2576: + firms, including their + hedge funds and overseas subsidiaries. + Once the CSE program + +On line 2576: + including their hedge + funds and overseas subsidiaries. Once + the CSE program was + +On line 2576: + hedge funds and overseas + subsidiaries. Once the CSE program + was in place, the SEC + +On line 2576: + and overseas subsidiaries. + Once the CSE program was in + place, the SEC had "the + +On line 2576: + Once the CSE program + was in place, the SEC had "the + authority to + +On line 2576: + was in place, the SEC + had "the authority to + look at everything."146 + +On line 2576: + in place, the SEC had + "the authority to look + at everything."146 SEC + +On line 2576: + look at everything."146 + SEC commissioners discussed + at the time the risks + +On line 2576: + at everything."146 SEC + commissioners discussed at + the time the risks they + +On line 2576: + SEC commissioners + discussed at the time the risks + they were taking by + +On line 2576: + discussed at the time + the risks they were taking by + allowing firms to + +On line 2576: + the time the risks they + were taking by allowing + firms to reduce their + +On line 2576: + they were taking by + allowing firms to reduce + their capital. "If + +On line 2576: + by allowing firms + to reduce their capital. + "If anything goes wrong + +On line 2576: + allowing firms to + reduce their capital. "If + anything goes wrong it’s + +On line 2576: + firms to reduce their + capital. "If anything goes + wrong it’s going to + +On line 2576: + goes wrong it’s going + to be an awfully big + mess," Goldschmid said at + +On line 2576: + wrong it’s going to + be an awfully big mess," + Goldschmid said at a + +On line 2576: + going to be an + awfully big mess," Goldschmid + said at a meeting. + +On line 2576: + be an awfully + big mess," Goldschmid said at a + meeting. "Do we feel + +On line 2576: + awfully big mess," + Goldschmid said at a meeting. + "Do we feel secure + +On line 2576: + big mess," Goldschmid said + at a meeting. "Do we feel + secure if these drops + +On line 2576: + said at a meeting. + "Do we feel secure if these + drops in capital + +On line 2576: + at a meeting. "Do + we feel secure if these drops + in capital and + +On line 2576: + we feel secure if + these drops in capital and + other things [occur] + +On line 2576: + drops in capital + and other things [occur] we + really will have + +On line 2576: + we really will + have investor protection1" In + response, Annette Nazareth, + +On line 2576: + investor protection1" + In response, Annette Nazareth, the + SEC official who + +On line 2576: + In response, Annette + Nazareth, the SEC official who + would be in charge of + +On line 2576: + response, Annette Nazareth, + the SEC official who would + be in charge of the + +On line 2576: + Annette Nazareth, the SEC + official who would be in + charge of the program, + +On line 2576: + the SEC official + who would be in charge of the + program, assured the + +On line 2576: + who would be in charge + of the program, assured the + commissioners that + +On line 2576: + charge of the program, + assured the commissioners + that her division + +On line 2576: + the program, assured + the commissioners that her + division was up + +On line 2578: + the commissioners + that her division was up + to the challenge.147 The + +On line 2578: + commissioners that + her division was up to + the challenge.147 The new + +On line 2578: + that her division + was up to the challenge.147 The + new program was housed + +On line 2578: + the SEC’s Office of + Prudential Supervision + and Risk Analysis, + +On line 2578: + Supervision and + Risk Analysis, an office + with a staff of to + +On line 2578: + staff of to within + the Division of Market + Regulation.148 In + +On line 2578: + the Division of + Market Regulation.148 In + the beginning, it + +On line 2578: + CSE program had grown + to Still, only "monitors" + were responsible + +On line 2578: + program had grown to + Still, only "monitors" were + responsible for + +On line 2578: + only "monitors" + were responsible for the + five investment banks; + +On line 2578: + the five investment + banks; monitors were assigned + to each firm, with some + +On line 2580: + were assigned to each + firm, with some overlap.150 The CSE + program was based on + +On line 2580: + with some overlap.150 The + CSE program was based on the + bank supervision + +On line 2580: + CSE program was based + on the bank supervision + model, but the SEC + +On line 2580: + was based on the bank + supervision model, but + the SEC did not try + +On line 2580: + but the SEC did not + try to do exactly what + bank examiners + +On line 2580: + the SEC did not try + to do exactly what bank + examiners did.151 + +On line 2580: + to do exactly + what bank examiners did.151 + For one thing, unlike + +On line 2580: + SEC never assigned + on-site examiners under + the CSE program; by + +On line 2580: + on-site examiners + under the CSE program; by + comparison, the + +On line 2582: + alone assigned more than + examiners full-time + at Citibank. According + +On line 2582: + to Erik Sirri, the + SEC’s former director of + trading and markets, + +On line 2584: + and markets, the CSE + program was intended to + focus mainly on + +On line 2584: + a securities + firm traditionally had + no access to a + +On line 2584: + securities firm + traditionally had no + access to a lender + +On line 2584: + traditionally + had no access to a lender + of last resort.152 (Of + +On line 2584: + no access to a + lender of last resort.152 (Of course, + that would change during + +On line 2584: + access to a lender + of last resort.152 (Of course, that + would change during the + +On line 2584: + to a lender of last + resort.152 (Of course, that would change + during the crisis.) + +On line 2584: + resort.152 (Of course, that + would change during the crisis.) + The investment banks + +On line 2584: + that would change during + the crisis.) The investment + banks were subject to + +On line 2584: + The investment banks + were subject to annual + examinations, + +On line 2584: + examinations, + during which staff reviewed the + firms’ systems and records + +On line 2584: + firms’ systems and records + and verified that the firms + had instituted + +On line 2584: + and verified that + the firms had instituted + control processes. + +On line 2586: + had instituted + control processes. The CSE + program was troubled + +On line 2586: + control processes. + The CSE program was troubled + from the start. The SEC + +On line 2586: + from the start. The SEC + conducted an exam for + each investment bank + +On line 2586: + SEC conducted an + exam for each investment + bank when it entered + +On line 2586: + each investment bank + when it entered the program. + The result of Bear + +On line 2586: + investment bank when + it entered the program. The + result of Bear Stearns’s + +On line 2586: + when it entered the + program. The result of Bear + Stearns’s entrance exam, + +On line 2586: + program. The result + of Bear Stearns’s entrance exam, + in showed several + +On line 2586: + of Bear Stearns’s entrance + exam, in showed several + deficiencies. For + +On line 2586: + deficiencies. For + example, examiners + were concerned that there + +On line 2586: + examiners were + concerned that there were no firmwide + VaR limits and that + +On line 2586: + were concerned that there + were no firmwide VaR limits and + that contingency + +On line 2586: + VaR limits and that + contingency funding plans + relied on overly + +On line 2586: + relied on overly + optimistic stress scenarios.153 + In addition, the + +On line 2586: + was aware of the firm’s + concentration of mortgage + securities and + +On line 2586: + firm’s concentration + of mortgage securities + and its high leverage. + +On line 2586: + securities and + its high leverage. Nonetheless, + the SEC did not ask + +On line 2586: + and its high leverage. + Nonetheless, the SEC did not + ask Bear to change its + +On line 2586: + SEC did not ask Bear + to change its asset balance, + decrease its leverage, + +On line 2586: + ask Bear to change its + asset balance, decrease its + leverage, or increase + +On line 2586: + to change its asset + balance, decrease its leverage, + or increase its cash + +On line 2586: + balance, decrease its + leverage, or increase its cash + liquidity pool—all + +On line 2586: + leverage, or increase + its cash liquidity pool—all + actions well within + +On line 2588: + to SEC officials.154 + Then, because the CSE program + was preoccupied + +On line 2588: + SEC officials.154 Then, + because the CSE program was + preoccupied with + +On line 2588: + its next annual + exam, during which the SEC + was supposed to be + +On line 2588: + exam, during which + the SEC was supposed to be + on-site. The SEC did meet + +On line 2588: + during which the SEC + was supposed to be on-site. The + SEC did meet monthly + +On line 2588: + the SEC was supposed + to be on-site. The SEC did meet + monthly with all CSE + +On line 2588: + to be on-site. The SEC + did meet monthly with all CSE + firms, including Bear,155 + +On line 2590: + be on-site. The SEC did + meet monthly with all CSE firms, + including Bear,155 and + +On line 2590: + did meet monthly with + all CSE firms, including Bear,155 + and it did conduct + +On line 2590: + and it did conduct + occasional targeted + examinations + +On line 2592: + worried that Bear was + too reliant on unsecured + commercial paper + +On line 2592: + Bear was too reliant + on unsecured commercial + paper funding, and + +On line 2592: + and Bear reduced its + exposure to unsecured + commercial paper + +On line 2592: + increased its reliance + on secured repo lending.156 + Unfortunately, + +On line 2592: + on secured repo + lending.156 Unfortunately, + tens of billions of + +On line 2592: + billions of dollars + of that repo lending was + overnight funding that could + +On line 2592: + overnight funding that could + disappear with no warning. + Ironically, in + +On line 2592: + could disappear with + no warning. Ironically, + in the second week + +On line 2592: + disappear with no + warning. Ironically, in + the second week of + +On line 2592: + Ironically, in + the second week of March when + the firm went into + +On line 2592: + second week of March + when the firm went into its + four-day death spiral, + +On line 2592: + week of March when the + firm went into its four-day + death spiral, the SEC + +On line 2594: + of March when the firm + went into its four-day death + spiral, the SEC was + +On line 2594: + firm went into its + four-day death spiral, the SEC + was on-site conducting + +On line 2594: + into its four-day + death spiral, the SEC was on-site + conducting its first + +On line 2594: + four-day death spiral, + the SEC was on-site conducting + its first CSE exam + +On line 2594: + death spiral, the SEC + was on-site conducting its first + CSE exam since Bear’s + +On line 2594: + was on-site conducting + its first CSE exam since Bear’s + entrance exam more + +On line 2594: + conducting its first + CSE exam since Bear’s entrance + exam more than two + +On line 2594: + first CSE exam since + Bear’s entrance exam more than + two years earlier.157 + +On line 2596: + exam more than two + years earlier.157 Leverage at + the investment banks + +On line 2596: + two years earlier.157 + Leverage at the investment + banks increased from to + +On line 2596: + at the investment + banks increased from to growth that + some critics have blamed + +On line 2596: + the investment banks + increased from to growth that some + critics have blamed on + +On line 2596: + banks increased from to + growth that some critics have blamed + on the SEC’s change in + +On line 2596: + increased from to growth + that some critics have blamed on + the SEC’s change in the + +On line 2596: + growth that some critics + have blamed on the SEC’s change in + the net capital + +On line 2596: + that some critics have + blamed on the SEC’s change in the + net capital rules. + +On line 2596: + have blamed on the SEC’s + change in the net capital + rules. Goldschmid told the + +On line 2596: + blamed on the SEC’s change + in the net capital rules. + Goldschmid told the FCIC + +On line 2596: + the SEC’s change in the + net capital rules. Goldschmid + told the FCIC that the + +On line 2596: + the net capital + rules. Goldschmid told the FCIC that + the increase was owed + +On line 2596: + net capital rules. + Goldschmid told the FCIC that the + increase was owed to + +On line 2596: + Goldschmid told the FCIC + that the increase was owed to + "a wild capital + +On line 2596: + told the FCIC that the + increase was owed to "a wild + capital time and + +On line 2596: + the increase was owed + to "a wild capital time + and the firms being + +On line 2598: + had been higher at + the five investment banks in + the late 1990s, then dropped + +On line 2598: + higher at the five + investment banks in the late + 1990s, then dropped before + +On line 2598: + the five investment + banks in the late 1990s, then dropped + before increasing + +On line 2598: + investment banks in + the late 1990s, then dropped before + increasing over the + +On line 2598: + banks in the late 1990s, + then dropped before increasing + over the life of the + +On line 2598: + in the late 1990s, then + dropped before increasing over + the life of the CSE + +On line 2598: + 1990s, then dropped before + increasing over the life of + the CSE program—a + +On line 2598: + over the life of the + CSE program—a history + hat suggests that the + +On line 2598: + the CSE program—a + history hat suggests that + the program was not + +On line 2598: + the program was not + solely responsible for + the changes.159 In Sirri + +On line 2598: + responsible for + the changes.159 In Sirri noted + that under the CSE + +On line 2598: + In Sirri noted + that under the CSE program + the investment banks’ + +On line 2598: + Sirri noted that + under the CSE program the + investment banks’ net + +On line 2598: + and, in some cases, + increased significantly" + over the program.160 Still, + +On line 2598: + some cases, increased + significantly" over the + program.160 Still, Goldschmid, + +On line 2598: + significantly" + over the program.160 Still, Goldschmid, + who left the SEC in + +On line 2598: + over the program.160 Still, + Goldschmid, who left the SEC in + argued that the SEC + +On line 2598: + program.160 Still, Goldschmid, + who left the SEC in argued + that the SEC had the + +On line 2598: + Still, Goldschmid, who left + the SEC in argued that the + SEC had the power + +On line 2598: + Goldschmid, who left the + SEC in argued that the SEC + had the power to + +On line 2598: + who left the SEC in + argued that the SEC had the + power to do more + +On line 2598: + the SEC in argued + that the SEC had the power + to do more to rein + +On line 2598: + SEC in argued that + the SEC had the power to + do more to rein in + +On line 2598: + in argued that the + SEC had the power to do + more to rein in the + +On line 2598: + that the SEC had the + power to do more to rein + in the investment + +On line 2598: + SEC had the power + to do more to rein in the + investment banks. He + +On line 2598: + power to do more + to rein in the investment + banks. He insisted, + +On line 2598: + to do more to rein + in the investment banks. He + insisted, "There was + +On line 2598: + in the investment + banks. He insisted, "There was + much more than enough moral + +On line 2598: + investment banks. He + insisted, "There was much more + than enough moral suasion + +On line 2598: + banks. He insisted, + "There was much more than enough moral + suasion and kind of + +On line 2598: + "There was much more than + enough moral suasion and kind of + practical power + +On line 2600: + enough moral suasion and + kind of practical power + that was involved. The + +On line 2600: + moral suasion and kind + of practical power that + was involved. The SEC + +On line 2600: + suasion and kind of + practical power that was + involved. The SEC has + +On line 2600: + involved. The SEC has + the practical ability + to do a lot if + +On line 2600: + has the practical + ability to do a lot + if it uses its + +On line 2602: + ability to do + a lot if it uses its + power."161 Overall, the + +On line 2602: + do a lot if it + uses its power."161 Overall, + the CSE program was + +On line 2602: + lot if it uses + its power."161 Overall, the CSE + program was widely + +On line 2602: + uses its power."161 + Overall, the CSE program was + widely viewed as a + +On line 2602: + its power."161 Overall, + the CSE program was widely + viewed as a failure. + +On line 2602: + power."161 Overall, the + CSE program was widely viewed + as a failure. From + +On line 2602: + was widely viewed as + a failure. From until the + financial crisis, + +On line 2602: + failure. From until + the financial crisis, all + five investment banks + +On line 2602: + their spectacular + growth, relying heavily + on short-term funding. + +On line 2602: + "fundamentally + flawed from the beginning."162 Mary + Schapiro, the current SEC + +On line 2602: + the beginning."162 Mary + Schapiro, the current SEC chairman, + concluded that the + +On line 2602: + Mary Schapiro, the current + SEC chairman, concluded that + the program "was not + +On line 2602: + current SEC chairman, + concluded that the program + "was not successful + +On line 2602: + "was not successful + in providing prudential + supervision."163 And, + +On line 2602: + chapters ahead, the SEC’s + inspector general would + be quite critical, + +On line 2602: + quite critical, too. + In September in the midst + of the financial + +On line 2602: + all five of the largest + independent investment + banks had either closed + +On line 2602: + largest independent + investment banks had either + closed down (Lehman Brothers), + +On line 2602: + investment banks had + either closed down (Lehman Brothers), + merged into other + +On line 2602: + banks had either closed + down (Lehman Brothers), merged into + other entities + +On line 2602: + either closed down (Lehman + Brothers), merged into other + entities (Bear Stearns + +On line 2602: + down (Lehman Brothers), merged + into other entities + (Bear Stearns and Merrill + +On line 2602: + Brothers), merged into + other entities (Bear Stearns + and Merrill Lynch), or + +On line 2602: + other entities + (Bear Stearns and Merrill Lynch), or + converted to bank + +On line 2602: + (Bear Stearns and Merrill + Lynch), or converted to bank + holding companies + +On line 2602: + and Merrill Lynch), or + converted to bank holding + companies to be + +On line 2602: + Lynch), or converted + to bank holding companies + to be supervised + +On line 2602: + or converted to + bank holding companies to + be supervised by + +On line 2602: + converted to bank + holding companies to be + supervised by the + +On line 2602: + holding companies + to be supervised by the + Federal Reserve + +On line 2604: + Reserve (Goldman Sachs + and Morgan Stanley). For the + Fed, there would be a + +On line 2604: + and Morgan Stanley). + For the Fed, there would be a + certain irony in that + +On line 2604: + For the Fed, there would + be a certain irony in that + last development + +On line 2604: + be a certain irony + in that last development + concerning Goldman + +On line 2604: + shrinking over the course + of the decade, as JP Morgan + switched the charter of + +On line 2604: + of the decade, as JP + Morgan switched the charter of + its banking subsidiary + +On line 2604: + as JP Morgan switched + the charter of its banking + subsidiary to the OCC164 + +On line 2604: + switched the charter of + its banking subsidiary to the + OCC164 and as the OTS + +On line 2604: + the charter of its + banking subsidiary to the OCC164 + and as the OTS and + +On line 2604: + its banking subsidiary + to the OCC164 and as the OTS + and SEC promoted + +On line 2604: + banking subsidiary to + the OCC164 and as the OTS and + SEC promoted their + +On line 2604: + to the OCC164 and as + the OTS and SEC promoted + their alternatives + +On line 2604: + the OCC164 and as the + OTS and SEC promoted their + alternatives for + +On line 2604: + "The OTS and SEC were + very aggressive in trying + to promote themselves + +On line 2604: + OTS and SEC were very + aggressive in trying to + promote themselves as + +On line 2604: + to promote themselves + as a regulator in + that environment + +On line 2604: + promote themselves as + a regulator in that + environment and + +On line 2604: + a regulator + in that environment and + wanted to be the + +On line 2604: + a Fed governor + from to "There was a lot of + competitiveness + +On line 2604: + to "There was a lot + of competitiveness among + the regulators."165 + +On line 2604: + "There was a lot of + competitiveness among the + regulators."165 In + +On line 2604: + competitiveness + among the regulators."165 In + January Fed staff + +On line 2604: + January Fed staff + had prepared an internal + study to find out why + +On line 2604: + Fed staff had prepared + an internal study to find + out why none of the + +On line 2604: + an internal study + to find out why none of the + investment banks had + +On line 2604: + study to find out why + none of the investment banks + had chosen the Fed + +On line 2604: + to find out why none + of the investment banks had + chosen the Fed as + +On line 2604: + the investment banks + had chosen the Fed as its + consolidated + +On line 2604: + had chosen the Fed + as its consolidated + supervisor. The + +On line 2604: + interviewed five firms + that already were supervised + by the Fed and four + +On line 2604: + firms that already were + supervised by the Fed and + four that had chosen + +On line 2604: + supervised by the + Fed and four that had chosen + the SEC. According + +On line 2604: + Fed and four that had + chosen the SEC. According + to the report, the + +On line 2604: + four that had chosen + the SEC. According to the + report, the biggest + +On line 2604: + had chosen the SEC. + According to the report, + the biggest reason + +On line 2604: + the SEC. According + to the report, the biggest + reason firms opted + +On line 2604: + According to the + report, the biggest reason + firms opted not to + +On line 2604: + report, the biggest + reason firms opted not to + be supervised by + +On line 2608: + riskier portions (or + tranches) of mortgage-related + securities led + +On line 2608: + led to the creation + of an enormous volume of + collateralized + +On line 2608: + an enormous volume + of collateralized debt + obligations (CDOs). These + +On line 2608: + for nonprime mortgage + securitization and + contributed to the + +On line 2608: + and contributed to + the housing bubble. Certain + products also played + +On line 2608: + the housing bubble. + Certain products also played + an important role + +On line 2608: + important role in + doing so, including CDOs + squared, credit default + +On line 2608: + credit default swaps, + synthetic CDOs, and asset-backed + commercial paper + +On line 2608: + that invested in + mortgage-backed securities and + CDOs. Many of these risky + +On line 2608: + securities and + CDOs. Many of these risky assets + ended up on the + +On line 2608: + and CDOs. Many of these + risky assets ended up on + the balance sheets of + +On line 2608: + risky assets ended + up on the balance sheets of + systemically + +On line 2608: + systemically + important institutions + and contributed to + +On line 2608: + institutions and + contributed to their failure + or near failure in + +On line 2608: + and contributed to + their failure or near failure + in the financial + +On line 2610: + near failure in the + financial crisis. Credit + default swaps, sold to + +On line 2610: + financial crisis. + Credit default swaps, sold to + provide protection + +On line 2610: + provide protection + against default to purchasers of + the top-rated tranches + +On line 2610: + top-rated tranches of + CDOs, facilitated the + sale of those tranches + +On line 2610: + facilitated + the sale of those tranches by + convincing investors + +On line 2610: + of those tranches by + convincing investors of their + low risk, but greatly + +On line 2610: + investors of their low + risk, but greatly increased the + exposure of the + +On line 2610: + low risk, but greatly + increased the exposure of + the sellers of the + +On line 2612: + swap protection to + the housing bubble’s collapse. + Synthetic CDOs, which + +On line 2612: + the housing bubble’s + collapse. Synthetic CDOs, which + consisted in whole + +On line 2612: + which consisted in + whole or in part of credit + default swaps, enabled + +On line 2612: + to continue and + expand even as the mortgage + market dried up and + +On line 2612: + up and provided + speculators with a means + of betting on the + +On line 2612: + speculators with + a means of betting on the + housing market. By + +On line 2612: + spread and amplified + exposure to losses when + the housing market + +On line 2614: + the continuing + securitization of + nonprime mortgages. There + +On line 2614: + mortgages. There was a + clear failure of corporate + governance at Moody’s, + +On line 2614: + was a clear failure + of corporate governance + at Moody’s, which did not + +On line 2614: + at Moody’s, which did not + ensure the quality of + its ratings on tens + +On line 2614: + did not ensure the + quality of its ratings + on tens of thousands + +On line 2614: + of its ratings on + tens of thousands of mortgage-backed + securities and + +On line 2616: + thousands of mortgage-backed + securities and CDOs. The + Securities and + +On line 2616: + securities and + CDOs. The Securities and + Exchange Commission’s + +On line 2616: + The Securities + and Exchange Commission’s poor + oversight of the five + +On line 2616: + Exchange Commission’s + poor oversight of the five largest + investment banks failed + +On line 2616: + poor oversight of the + five largest investment banks failed + to restrict their risky + +On line 2616: + five largest investment + banks failed to restrict their risky + activities and + +On line 2616: + banks failed to restrict + their risky activities and + did not require them + +On line 2616: + failed to restrict their + risky activities and did + not require them to + +On line 2616: + to restrict their risky + activities and did not + require them to hold + +On line 2616: + not require them to + hold adequate capital + and liquidity + +On line 2616: + require them to hold + adequate capital and + liquidity for + +On line 2616: + failure or need for + government bailouts of all five + of the supervised + +On line 2616: + of the supervised + investment banks during the + financial crisis. + +On line 2626: + financial crisis. + ALL IN CONTENTS The bubble: + "A credit-induced boom".................................................................157 + +On line 2630: + and due diligence: "A + quality control issue + in the factory" + +On line 2636: + loans and commercial + real estate: "You’ve got + to get up and dance" + +On line 2638: + commercial real + estate: "You’ve got to get + up and dance" Lehman: From + +On line 2638: + estate: "You’ve got + to get up and dance" Lehman: From + "moving" to "storage" + +On line 2640: + "You’ve got to get + up and dance" Lehman: From "moving" + to "storage" Fannie + +On line 2640: + up and dance" Lehman: From + "moving" to "storage" Fannie + Mae and Freddie Mac: + +On line 2640: + dance" Lehman: From "moving" + to "storage" Fannie Mae and + Freddie Mac: "Two stark + +On line 2642: + "moving" to "storage" + Fannie Mae and Freddie Mac: + "Two stark choices"............................................178 In + +On line 2642: + Warren Peterson + was paying as little as + for a 10,000-square-foot lot, + +On line 2642: + as little as for + a 10,000-square-foot lot, about the size + of three tennis courts. + +On line 2642: + little as for a + 10,000-square-foot lot, about the size of + three tennis courts. The + +On line 2642: + for a 10,000-square-foot lot, + about the size of three tennis + courts. The next year the + +On line 2642: + a 10,000-square-foot lot, about + the size of three tennis courts. + The next year the cost + +On line 2642: + 10,000-square-foot lot, about the + size of three tennis courts. The + next year the cost more + +On line 2642: + lot, about the size of + three tennis courts. The next year + the cost more than tripled + +On line 2642: + about the size of three + tennis courts. The next year the + cost more than tripled to + +On line 2642: + of three tennis courts. + The next year the cost more than + tripled to as real + +On line 2642: + tennis courts. The next + year the cost more than tripled to + as real estate + +On line 2642: + The next year the cost + more than tripled to as real + estate boomed. Over the + +On line 2642: + the cost more than tripled + to as real estate boomed. + Over the previous + +On line 2642: + more than tripled to as + real estate boomed. Over the + previous quarter + +On line 2642: + had built between and + custom and semi-custom homes + a year. For a while, + +On line 2642: + between and custom + and semi-custom homes a year. + For a while, he was + +On line 2642: + and semi-custom homes + a year. For a while, he was + building as many as + +On line 2642: + homes a year. For a + while, he was building as many + as And then came the + +On line 2642: + a year. For a while, + he was building as many as + And then came the crash. + +On line 2644: + year. For a while, he + was building as many as And + then came the crash. "I + +On line 2644: + For a while, he was + building as many as And then + came the crash. "I have + +On line 2644: + was building as many + as And then came the crash. "I + have built exactly + +On line 2644: + building as many as + And then came the crash. "I have + built exactly one + +On line 2644: + as And then came the + crash. "I have built exactly + one new home since late + +On line 2644: + And then came the crash. + "I have built exactly one + new home since late he + +On line 2644: + then came the crash. "I + have built exactly one new + home since late he told + +On line 2644: + came the crash. "I have + built exactly one new home + since late he told the + +On line 2644: + the crash. "I have built + exactly one new home since + late he told the FCIC + +On line 2644: + built exactly one + new home since late he told the + FCIC five years later.1 + +On line 2646: + exactly one new + home since late he told the FCIC + five years later.1 In + +On line 2646: + new home since late he + told the FCIC five years later.1 + In the average + +On line 2646: + home since late he told + the FCIC five years later.1 In + the average price + +On line 2646: + since late he told the + FCIC five years later.1 In the + average price was + +On line 2646: + told the FCIC five years + later.1 In the average + price was for a new + +On line 2646: + FCIC five years later.1 + In the average price was + for a new house in + +On line 2646: + In the average + price was for a new house in + Bakersfield, at the + +On line 2646: + of California’s + agricultural center, the + San Joaquin Valley. That + +On line 2646: + center, the San Joaquin + Valley. That jumped to almost + by June "By money + +On line 2646: + the San Joaquin Valley. + That jumped to almost by June + "By money seemed to + +On line 2646: + San Joaquin Valley. That + jumped to almost by June "By + money seemed to be + +On line 2646: + Valley. That jumped to + almost by June "By money + seemed to be coming + +On line 2646: + That jumped to almost + by June "By money seemed to + be coming in very + +On line 2646: + jumped to almost by + June "By money seemed to be + coming in very fast + +On line 2646: + almost by June "By + money seemed to be coming + in very fast and from + +On line 2646: + June "By money seemed + to be coming in very fast + and from everywhere," + +On line 2646: + "By money seemed to + be coming in very fast and + from everywhere," said + +On line 2646: + money seemed to be + coming in very fast and from + everywhere," said Lloyd + +On line 2646: + coming in very fast + and from everywhere," said Lloyd + Plank, a Bakersfield + +On line 2646: + in very fast and from + everywhere," said Lloyd Plank, a + Bakersfield real + +On line 2646: + everywhere," said Lloyd + Plank, a Bakersfield real + estate broker. "They + +On line 2646: + Plank, a Bakersfield + real estate broker. "They + would purchase a house + +On line 2646: + would purchase a house + in Bakersfield, keep it for + a short period + +On line 2646: + purchase a house in + Bakersfield, keep it for a + short period and + +On line 2646: + Bakersfield, keep it + for a short period and + resell it. Sometimes + +On line 2646: + keep it for a short + period and resell it. + Sometimes they would flip + +On line 2646: + a short period + and resell it. Sometimes they + would flip the house while + +On line 2646: + short period and + resell it. Sometimes they would + flip the house while it + +On line 2646: + resell it. Sometimes + they would flip the house while it + was still in escrow, + +On line 2646: + it. Sometimes they would + flip the house while it was still + in escrow, and would + +On line 2646: + Sometimes they would flip + the house while it was still in + escrow, and would still + +On line 2646: + they would flip the house + while it was still in escrow, + and would still make to + +On line 2648: + house while it was still + in escrow, and would still make + to Nationally, + +On line 2648: + and would still make to + Nationally, housing prices + jumped between and their + +On line 2650: + to Nationally, + housing prices jumped between and + their peak in more than + +On line 2650: + prices jumped between and + their peak in more than in any + decade since at least It + +On line 2650: + jumped between and their + peak in more than in any decade + since at least It would + +On line 2650: + between and their peak + in more than in any decade since + at least It would be + +On line 2650: + in more than in any + decade since at least It would be + catastrophically + +On line 2650: + decade since at least It + would be catastrophically + downhill from there—yet the + +On line 2650: + at least It would be + catastrophically downhill + from there—yet the mortgage + +On line 2650: + catastrophically + downhill from there—yet the mortgage + machine kept churning + +On line 2650: + machine kept churning + well into apparently + indifferent to + +On line 2650: + indifferent to + the fact that housing prices were + starting to fall and + +On line 2650: + the fact that housing + prices were starting to fall and + lending standards to + +On line 2650: + prices were starting to + fall and lending standards to + deteriorate. + +On line 2650: + Newspaper stories + highlighted the weakness in + the housing market— + +On line 2652: + the housing market— + even suggesting this was a + bubble that could burst + +On line 2652: + even suggesting this + was a bubble that could burst + anytime. Checks were in + +On line 2658: + this was a bubble + that could burst anytime. Checks were + in place, but they were + +On line 2658: + a bubble that could + burst anytime. Checks were in place, + but they were failing. + +On line 2658: + bubble that could burst + anytime. Checks were in place, but + they were failing. Loan + +On line 2658: + that could burst anytime. + Checks were in place, but they were + failing. Loan purchasers + +On line 2658: + were in place, but they + were failing. Loan purchasers and + securitizers + +On line 2658: + their own due diligence + on what they were buying. The + Federal Reserve + +On line 2658: + easier access + to credit were common in + other markets, too. + +On line 2658: + credit were common + in other markets, too. For + example, credit + +On line 2658: + common in other + markets, too. For example, + credit was flowing + +On line 2658: + in other markets, + too. For example, credit + was flowing into + +On line 2658: + too. For example, + credit was flowing into + commercial real + +On line 2658: + was flowing into + commercial real estate + and corporate loans. + +On line 2658: + commercial real + estate and corporate loans. + How to react to + +On line 2658: + How to react to + what increasingly appeared + to be a credit + +On line 2658: + to be a credit + bubble1 Many enterprises, + such as Lehman Brothers + +On line 2658: + credit bubble1 Many + enterprises, such as Lehman + Brothers and Fannie + +On line 2660: + enterprises, such + as Lehman Brothers and Fannie + Mae, pushed deeper. All + +On line 2660: + as Lehman Brothers and + Fannie Mae, pushed deeper. All + along the assembly + +On line 2660: + Brothers and Fannie + Mae, pushed deeper. All along the + assembly line, from + +On line 2660: + Mae, pushed deeper. All + along the assembly line, from + the origination + +On line 2660: + pushed deeper. All along + the assembly line, from the + origination of + +On line 2660: + along the assembly + line, from the origination + of the mortgages to + +On line 2660: + the assembly line, + from the origination of + the mortgages to the + +On line 2660: + origination of + the mortgages to the creation + and marketing of + +On line 2660: + to the creation and + marketing of the mortgage-backed + securities and + +On line 2660: + marketing of the + mortgage-backed securities and + collateralized + +On line 2660: + (CDOs), many understood + and the regulators at + least suspected that + +On line 2660: + regulators at + least suspected that every + cog was reliant on + +On line 2660: + least suspected that + every cog was reliant on + the mortgages themselves, + +On line 2662: + which would not perform + as advertised. THE BUBBLE: + "A CREDITINDUCED BOOM" + +On line 2664: + would not perform as + advertised. THE BUBBLE: "A + CREDITINDUCED BOOM" Irvine, + +On line 2664: + "A CREDITINDUCED BOOM" + Irvine, California–based New + Century—once the + +On line 2664: + own loan quality + was deteriorating + and stripped power from + +On line 2664: + loan quality was + deteriorating and + stripped power from two + +On line 2664: + and stripped power from + two risk-control departments + that had noted the + +On line 2664: + from two risk-control + departments that had noted + the evidence. In + +On line 2664: + June presentation, + the Quality Assurance + staff reported they + +On line 2664: + presentation, the + Quality Assurance staff + reported they had + +On line 2664: + reported they had + found severe underwriting + errors, including + +On line 2664: + errors, including + evidence of predatory + lending, legal and + +On line 2664: + violations, and + credit issues, in of the + loans they audited + +On line 2664: + credit issues, in + of the loans they audited + in November and + +On line 2666: + in of the loans they + audited in November + and December In + +On line 2666: + December In Chief + Operating Officer + and later CEO Brad + +On line 2666: + and later CEO Brad + Morrice recommended these + results be removed + +On line 2666: + recommended these + results be removed from the + statistical tools + +On line 2666: + be removed from the + statistical tools used to + track loan performance, + +On line 2666: + performance, and in + the department was dissolved + and its personnel + +On line 2666: + the department was + dissolved and its personnel + terminated. The + +On line 2666: + deficiencies in + loan files; out of nine reviews + it conducted in + +On line 2666: + out of nine reviews + it conducted in it gave + the company’s loan + +On line 2666: + cut the department’s + budget, saying in a memo + that the "group was out + +On line 2666: + budget, saying in + a memo that the "group was out + of control and tries + +On line 2666: + a memo that the "group + was out of control and tries + to dictate business + +On line 2666: + was out of control + and tries to dictate business + practices instead of + +On line 2666: + of control and tries + to dictate business practices + instead of audit."6 + +On line 2668: + and tries to dictate + business practices instead of + audit."6 This happened + +On line 2668: + to dictate business + practices instead of audit."6 + This happened as the + +On line 2668: + practices instead of + audit."6 This happened as the + company struggled + +On line 2668: + company struggled + with increasing requests that + it buy back soured loans + +On line 2668: + requests that it buy + back soured loans from investors. By + December almost + +On line 2668: + it buy back soured loans + from investors. By December + almost of its loans + +On line 2668: + soured loans from investors. + By December almost of + its loans were going + +On line 2668: + almost of its loans + were going into default + within the first three + +On line 2668: + its loans were going + into default within the + first three months after + +On line 2668: + within the first three + months after origination. + "New Century had + +On line 2668: + with increasing loan + originations, without due + regard to the risks + +On line 2668: + regard to the risks + associated with that + business strategy," + +On line 2670: + securitizers, + and investors met at the ABS + East conference in + +On line 2670: + East conference in + Boca Raton, Florida, + to play golf, do deals, + +On line 2670: + in Boca Raton, + Florida, to play golf, do + deals, and talk about the + +On line 2670: + Raton, Florida, + to play golf, do deals, and talk + about the market. The + +On line 2670: + Florida, to play + golf, do deals, and talk about the + market. The asset-backed + +On line 2670: + talk about the market. + The asset-backed security + business was still good, + +On line 2670: + market. The asset-backed + security business was + still good, but even the + +On line 2670: + was still good, but even + the most optimistic could read + the signs. Panelists had + +On line 2670: + still good, but even the + most optimistic could read the + signs. Panelists had three + +On line 2670: + most optimistic could + read the signs. Panelists had three + concerns: Were housing + +On line 2670: + read the signs. Panelists + had three concerns: Were housing + prices overheated, or + +On line 2670: + the signs. Panelists had + three concerns: Were housing prices + overheated, or just + +On line 2672: + by "fundamentals" + such as increased demand1 Would + rising interest + +On line 2672: + as increased demand1 + Would rising interest rates + halt the arket1 And + +On line 2672: + increased demand1 Would + rising interest rates halt + the arket1 And was + +On line 2672: + rising interest + rates halt the arket1 And was + the CDO, because of + +On line 2672: + rates halt the arket1 + And was the CDO, because of + its ratings-driven + +On line 2674: + mortgage market18 The + numbers were stark. Nationwide, + house prices had never + +On line 2674: + market18 The numbers + were stark. Nationwide, house prices + had never risen so + +On line 2676: + Nationwide, house prices + had never risen so far, so + fast. And national + +On line 2676: + national indices + masked important variations. + House prices in the four + +On line 2676: + California, had + dramatically larger + spikes—and subsequent + +On line 2676: + spikes—and subsequent + declines—than did the nation. If + there was a bubble, + +On line 2676: + subsequent declines—than + did the nation. If there was + a bubble, perhaps, + +On line 2676: + did the nation. If + there was a bubble, perhaps, + as Fed Chairman Alan + +On line 2676: + the nation. If there + was a bubble, perhaps, as + Fed Chairman Alan Greenspan + +On line 2676: + nation. If there was + a bubble, perhaps, as Fed + Chairman Alan Greenspan said, + +On line 2676: + a bubble, perhaps, + as Fed Chairman Alan Greenspan said, + it was only in + +On line 2676: + as Fed Chairman Alan + Greenspan said, it was only in + certain regions. He + +On line 2676: + Chairman Alan Greenspan said, + it was only in certain + regions. He told a + +On line 2676: + said, it was only + in certain regions. He told + a congressional + +On line 2676: + in certain regions. + He told a congressional + committee in June + +On line 2676: + regions. He told a + congressional committee + in June that growth in + +On line 2676: + a congressional + committee in June that growth + in nonprime mortgages + +On line 2676: + committee in June + that growth in nonprime mortgages + was helping to push + +On line 2676: + in June that growth in + nonprime mortgages was helping + to push home prices in + +On line 2676: + in nonprime mortgages + was helping to push home prices + in some markets to + +On line 2676: + push home prices in some + markets to unsustainable + levels, "although a + +On line 2676: + prices in some markets + to unsustainable levels, + "although a ‘bubble’ + +On line 2676: + to unsustainable + levels, "although a ‘bubble’ + in home prices for the + +On line 2676: + levels, "although a + ‘bubble’ in home prices for the + nation as a whole + +On line 2676: + "although a ‘bubble’ + in home prices for the nation + as a whole does not + +On line 2676: + a ‘bubble’ in home + prices for the nation as a + whole does not appear + +On line 2678: + prices for the nation + as a whole does not appear + likely."9 Globally, + +On line 2678: + the nation as a + whole does not appear likely."9 + Globally, prices jumped + +On line 2678: + whole does not appear + likely."9 Globally, prices jumped + in many countries around + +On line 2678: + not appear likely."9 + Globally, prices jumped in many + countries around the world + +On line 2678: + likely."9 Globally, + prices jumped in many countries around + the world during the + +On line 2678: + Globally, prices jumped + in many countries around the world + during the 2000s. As + +On line 2678: + jumped in many countries + around the world during the 2000s. + As Christopher Mayer, + +On line 2678: + in many countries around + the world during the 2000s. As + Christopher Mayer, an + +On line 2678: + around the world during + the 2000s. As Christopher Mayer, + an economist from + +On line 2678: + the 2000s. As Christopher + Mayer, an economist from + Columbia Business + +On line 2678: + Christopher Mayer, an + economist from Columbia + Business School, noted + +On line 2678: + to the Commission, + "What really sticks out is + how unremarkable + +On line 2678: + the Commission, "What + really sticks out is how + unremarkable the + +On line 2678: + "What really sticks + out is how unremarkable + the United States house + +On line 2678: + really sticks out + is how unremarkable the + United States house price + +On line 2678: + is relative to + our European peers."10 From to + price increases in + +On line 2678: + relative to our + European peers."10 From to price + increases in the + +On line 2678: + our European peers."10 + From to price increases in + the United Kingdom + +On line 2678: + European peers."10 From + to price increases in the + United Kingdom and + +On line 2678: + to price increases + in the United Kingdom and + Spain were above those in + +On line 2678: + price increases in + the United Kingdom and Spain + were above those in the + +On line 2678: + the United Kingdom + and Spain were above those in the + United States, while price + +On line 2678: + Kingdom and Spain were + above those in the United States, + while price increases + +On line 2678: + those in the United + States, while price increases in + Ireland and France were + +On line 2678: + United States, while price + increases in Ireland and + France were just below. + +On line 2678: + France were just below. + In an International + Monetary Fund study + +On line 2678: + International + Monetary Fund study from more + than one half of the + +On line 2678: + Monetary Fund study + from more than one half of the + developed countries + +On line 2678: + Fund study from more than + one half of the developed + countries analyzed + +On line 2678: + from more than one half + of the developed countries + analyzed had greater + +On line 2678: + developed countries + analyzed had greater home price + appreciation + +On line 2678: + analyzed had greater + home price appreciation + than the United States + +On line 2678: + appreciation + than the United States from late + through the third quarter + +On line 2678: + than the United States + from late through the third quarter + of and yet some of + +On line 2678: + the United States from + late through the third quarter of + and yet some of these + +On line 2678: + States from late through the + third quarter of and yet some + of these countries did + +On line 2678: + from late through the third + quarter of and yet some of + these countries did not + +On line 2678: + the third quarter of + and yet some of these countries + did not suffer sharp + +On line 2678: + third quarter of and + yet some of these countries did + not suffer sharp price + +On line 2678: + and yet some of these + countries did not suffer sharp + price declines.11 Notably, + +On line 2678: + of these countries did + not suffer sharp price declines.11 + Notably, Canada had + +On line 2678: + home price increases + followed by a modest and + temporary decline + +On line 2678: + in Researchers at the + Federal Reserve Bank of + Cleveland attributed + +On line 2678: + Federal Reserve + Bank of Cleveland attributed + Canada’s experience + +On line 2678: + Cleveland attributed + Canada’s experience to tighter + lending standards than + +On line 2678: + Canada’s experience + to tighter lending standards than + in the United States + +On line 2678: + experience to + tighter lending standards than in + the United States as + +On line 2678: + United States as well + as regulatory and + structural differences + +On line 2680: + structural differences + in the financial system.12 + Other countries, such + +On line 2680: + differences in the + financial system.12 Other + countries, such as the + +On line 2680: + countries, such as the + United Kingdom, Ireland, and + Spain, saw steep house price + +On line 2680: + such as the United + Kingdom, Ireland, and Spain, saw + steep house price declines. + +On line 2682: + steep house price declines. + American economists and + policy makers + +On line 2682: + declines. American + economists and policy + makers struggled to + +On line 2682: + policy makers + struggled to explain the house + price increases. The + +On line 2682: + to explain the house + price increases. The good news + was the economy + +On line 2682: + explain the house price + increases. The good news was + the economy was + +On line 2682: + The good news was the + economy was growing and + unemployment was + +On line 2684: + and unemployment + was low. But, a Federal + Reserve study in May + +On line 2684: + Reserve study in May + presented evidence that + the cost of owning + +On line 2684: + cost of owning rather + than renting was much higher + than had been the case + +On line 2684: + than renting was much + higher than had been the case + historically: + +On line 2684: + higher than had been + the case historically: + home prices had risen from + +On line 2684: + than had been the case + historically: home prices + had risen from times the + +On line 2684: + historically: + home prices had risen from times the + annual cost of + +On line 2684: + home prices had risen from + times the annual cost of + renting to times.13 In + +On line 2684: + had risen from times the + annual cost of renting + to times.13 In some cities, + +On line 2684: + times the annual + cost of renting to times.13 In + some cities, the change was + +On line 2684: + cost of renting to + times.13 In some cities, the change was + particularly + +On line 2684: + times.13 In some cities, the + change was particularly + dramatic. From to + +On line 2684: + prices to rents rose in + Los Angeles, Miami, + and New York City by + +On line 2684: + to rents rose in Los + Angeles, Miami, and + New York City by and + +On line 2684: + index—which measures whether + a typical family + could qualify for + +On line 2684: + whether a typical + family could qualify + for a mortgage on + +On line 2686: + qualify for a + mortgage on a typical + home— had reached a record + +On line 2686: + for a mortgage on + a typical home— had reached + a record low.15 But that + +On line 2686: + a mortgage on a + typical home— had reached a + record low.15 But that was + +On line 2686: + on a typical + home— had reached a record low.15 But + that was based on the + +On line 2686: + a typical home— + had reached a record low.15 But that + was based on the cost + +On line 2686: + typical home— had + reached a record low.15 But that was + based on the cost of + +On line 2686: + reached a record low.15 But + that was based on the cost of + a traditional + +On line 2686: + that was based on the + cost of a traditional + mortgage with a down + +On line 2686: + based on the cost of + a traditional mortgage + with a down payment,16 + +On line 2686: + on the cost of a + traditional mortgage with + a down payment,16 which + +On line 2686: + a down payment,16 which + was no longer required. Perhaps + such measures were no + +On line 2686: + down payment,16 which was + no longer required. Perhaps such + measures were no longer + +On line 2686: + was no longer required. + Perhaps such measures were no + longer relevant, when + +On line 2686: + Perhaps such measures + were no longer relevant, when + Americans could make + +On line 2686: + measures were no longer + relevant, when Americans + could make lower down + +On line 2686: + when Americans could + make lower down payments and + obtain loans such as + +On line 2686: + could make lower down + payments and obtain loans such + as payment-option + +On line 2686: + payments and obtain + loans such as payment-option + adjustable-rate mortgages and + +On line 2686: + and interest-only + mortgages, with reduced initial + mortgage payments. Or + +On line 2686: + mortgages, with reduced + initial mortgage payments. Or + perhaps buying a + +On line 2686: + payments. Or perhaps + buying a home continued + to make financial + +On line 2688: + given homeowners’ + expectations of further + price gains. During a + +On line 2688: + gains. During a June + meeting, the Federal Open + Market Committee + +On line 2688: + Market Committee + (FOMC), composed of Federal + Reserve governors, + +On line 2688: + Federal Reserve + governors, four regional + Federal Reserve + +On line 2688: + presidents, and the + Federal Reserve Bank of + New York president, + +On line 2688: + New York president, + heard five presentations on + mortgage risks and the + +On line 2688: + president, heard five + presentations on mortgage + risks and the housing + +On line 2688: + presentations on + mortgage risks and the housing + market. Members and + +On line 2688: + developing a + consensus on whether housing + prices were overvalued + +On line 2688: + consensus on whether + housing prices were overvalued + and "it was hard for + +On line 2688: + prices were overvalued + and "it was hard for many FOMC + participants to + +On line 2688: + and "it was hard for + many FOMC participants to + ascribe substantial + +On line 2688: + to the proposition + that overvaluation in + the housing market + +On line 2688: + the proposition that + overvaluation in the + housing market posed + +On line 2688: + overvaluation + in the housing market posed + the major systemic + +On line 2688: + the housing market + posed the major systemic risks + that we now know it + +On line 2688: + housing market posed + the major systemic risks that + we now know it did," + +On line 2688: + the major systemic + risks that we now know it did," + according to a + +On line 2688: + systemic risks that we + now know it did," according + to a letter from + +On line 2688: + we now know it did," + according to a letter + from Fed Chairman Ben + +On line 2688: + did," according to + a letter from Fed Chairman + Ben Bernanke to the FCIC. + +On line 2688: + according to a + letter from Fed Chairman Ben + Bernanke to the FCIC. "The + +On line 2688: + to a letter from + Fed Chairman Ben Bernanke to the + FCIC. "The national + +On line 2688: + Fed Chairman Ben Bernanke + to the FCIC. "The national + mortgage system might + +On line 2688: + FCIC. "The national + mortgage system might bend but + will likely not break," + +On line 2690: + not break," and "neither + borrowers nor lenders appeared + particularly + +On line 2690: + according to the + letter. In discussions about + nontraditional + +On line 2690: + mortgages are not an + especially sinister + development," and + +On line 2690: + an especially + sinister development," + and their risks "could be + +On line 2690: + development," and + their risks "could be cushioned by + large down payments." The + +On line 2690: + and their risks "could be + cushioned by large down payments." + The presentation + +On line 2690: + cushioned by large down + payments." The presentation + also noted that + +On line 2690: + also noted that + while loan-to-value ratios + were rising on a + +On line 2690: + were rising on a + portion of interest-only + loans, the ratios for + +On line 2690: + that housing market + activity could be the + result of "solid + +On line 2690: + activity could + be the result of "solid + fundamentals." Yet + +On line 2690: + fundamentals." Yet + another presentation + concluded that the + +On line 2690: + concluded that the + impact of changes in household + wealth on spending would + +On line 2690: + impact of changes in + household wealth on spending would + be "perhaps only + +On line 2690: + changes in household wealth + on spending would be "perhaps + only half as large + +On line 2690: + wealth on spending would + be "perhaps only half as + large as that of the + +On line 2690: + on spending would be + "perhaps only half as large + as that of the 1990s + +On line 2690: + be "perhaps only + half as large as that of the + 1990s stock bubble." Most + +On line 2690: + "perhaps only half + as large as that of the 1990s + stock bubble." Most FOMC + +On line 2690: + half as large as that + of the 1990s stock bubble." Most + FOMC participants + +On line 2690: + as large as that of + the 1990s stock bubble." Most FOMC + participants agreed + +On line 2690: + 1990s stock bubble." Most + FOMC participants agreed "the + probability + +On line 2690: + participants agreed + "the probability of + spillovers to financial + +On line 2692: + were "agnostics" on + housing, unwilling to risk + their reputations + +On line 2692: + housing, unwilling + to risk their reputations + or spook markets by + +On line 2692: + reputations or + spook markets by alleging + a bubble without + +On line 2692: + finding support in + economic theory.18 Fed + Vice Chairman Donald + +On line 2694: + theory.18 Fed Vice + Chairman Donald Kohn was one. + "Identification + +On line 2694: + Chairman Donald Kohn + was one. "Identification + [of a bubble] is + +On line 2694: + Donald Kohn was one. + "Identification [of a + bubble] is a tricky + +On line 2694: + "Identification + [of a bubble] is a tricky + proposition because + +On line 2694: + bubble] is a tricky + proposition because not all + the fundamental + +On line 2694: + driving asset prices + are directly observable," + Kohn said in a speech, + +On line 2694: + prices are directly + observable," Kohn said in a + speech, citing research + +On line 2694: + observable," Kohn said + in a speech, citing research + by the European + +On line 2694: + in a speech, citing + research by the European + Central Bank. "For this + +On line 2694: + speech, citing research + by the European Central + Bank. "For this reason, + +On line 2694: + citing research by + the European Central Bank. + "For this reason, any + +On line 2694: + by the European + Central Bank. "For this reason, + any judgment by a + +On line 2694: + Central Bank. "For this + reason, any judgment by a + central bank that stocks + +On line 2694: + Bank. "For this reason, + any judgment by a central + bank that stocks or homes + +On line 2694: + "For this reason, any + judgment by a central bank + that stocks or homes are + +On line 2694: + reason, any judgment + by a central bank that stocks + or homes are overpriced + +On line 2694: + by a central bank + that stocks or homes are overpriced + is inherently + +On line 2694: + that stocks or homes are + overpriced is inherently + highly uncertain."19 + +On line 2696: + or homes are overpriced + is inherently highly + uncertain."19 But not + +On line 2696: + to sound a louder + alarm. "The situation is + beginning to look + +On line 2696: + "The situation + is beginning to look like + a credit-induced boom + +On line 2696: + situation is + beginning to look like a + credit-induced boom in + +On line 2696: + is beginning to + look like a credit-induced boom + in housing that could + +On line 2696: + beginning to look + like a credit-induced boom in + housing that could very + +On line 2696: + like a credit-induced + boom in housing that could very + well result in a + +On line 2696: + Federal Deposit + Insurance Corporation + Chief Economist Richard + +On line 2698: + Chief Economist Richard + Brown wrote in a March report. + "During the past five + +On line 2698: + Brown wrote in a March + report. "During the past five + years, the average + +On line 2698: + in a March report. + "During the past five years, the + average U.S. home + +On line 2698: + report. "During the + past five years, the average + U.S. home has risen in + +On line 2698: + "During the past five + years, the average U.S. home + has risen in value + +On line 2700: + the past five years, the + average U.S. home has risen + in value by while + +On line 2700: + years, the average + U.S. home has risen in value + by while homes in the + +On line 2700: + U.S. home has risen in + value by while homes in the + fastest-growing markets + +On line 2700: + approximately + doubled in value." While this + increase might have been + +On line 2700: + this increase might have + been explained by strong market + fundamentals, "the + +On line 2700: + fundamentals, "the + dramatic broadening of + the housing boom in + +On line 2700: + in strongly suggests + the influence of systemic + factors, including + +On line 2700: + the influence of + systemic factors, including + the low cost and wide + +On line 2700: + of systemic factors, + including the low cost and + wide availability + +On line 2700: + including the low + cost and wide availability + of mortgage credit."20 + +On line 2702: + the low cost and wide + availability of mortgage + credit."20 A couple + +On line 2702: + availability of + mortgage credit."20 A couple + of months later, Fed + +On line 2702: + of mortgage credit."20 + A couple of months later, + Fed economists in + +On line 2702: + mortgage credit."20 A + couple of months later, Fed + economists in an + +On line 2702: + A couple of months + later, Fed economists in + an internal memo + +On line 2702: + that housing prices were + overvalued, but downplayed the + potential impacts + +On line 2702: + potential impacts + of a downturn. Even in the + face of a large price + +On line 2702: + of a downturn. Even + in the face of a large price + decline, they argued, + +On line 2702: + downturn. Even in the + face of a large price decline, + they argued, defaults + +On line 2702: + in the face of a + large price decline, they argued, + defaults would not be + +On line 2702: + face of a large price + decline, they argued, defaults + would not be widespread, + +On line 2702: + a large price decline, + they argued, defaults would not + be widespread, given + +On line 2702: + large price decline, they + argued, defaults would not be + widespread, given the + +On line 2702: + they argued, defaults + would not be widespread, given + the large equity + +On line 2702: + argued, defaults would + not be widespread, given the + large equity that + +On line 2702: + would not be widespread, + given the large equity + that many borrowers + +On line 2702: + be widespread, given + the large equity that many + borrowers still had + +On line 2702: + the large equity + that many borrowers still had + in their homes. Structural + +On line 2702: + large equity that + many borrowers still had in + their homes. Structural changes + +On line 2702: + equity that many + borrowers still had in their + homes. Structural changes in + +On line 2702: + that many borrowers + still had in their homes. Structural + changes in the mortgage + +On line 2702: + borrowers still had + in their homes. Structural changes in + the mortgage market + +On line 2702: + in their homes. Structural + changes in the mortgage market + made a crisis less + +On line 2702: + homes. Structural changes in + the mortgage market made a + crisis less likely, + +On line 2702: + the mortgage market + made a crisis less likely, + and the financial + +On line 2702: + less likely, and the + financial system seemed well + capitalized. "Even + +On line 2702: + financial system + seemed well capitalized. "Even + historically + +On line 2702: + well capitalized. + "Even historically large + declines in house prices + +On line 2702: + historically + large declines in house prices would + be small relative + +On line 2702: + declines in house prices + would be small relative to + the recent decline + +On line 2702: + house prices would be small + relative to the recent + decline in household + +On line 2702: + be small relative + to the recent decline in + household wealth owing + +On line 2702: + relative to the + recent decline in household + wealth owing to the + +On line 2702: + the recent decline + in household wealth owing to + the stock market," the + +On line 2702: + wealth owing to the + stock market," the economists + concluded. "From a + +On line 2702: + to the stock market," + the economists concluded. + "From a wealth-effects + +On line 2702: + concluded. "From a + wealth-effects perspective, this + seems unlikely to + +On line 2710: + only company + that ignored concerns about poor + loan quality. Across + +On line 2710: + ignored concerns about + poor loan quality. Across the + mortgage industry, + +On line 2710: + concerns about poor loan + quality. Across the mortgage + industry, with the + +On line 2710: + poor loan quality. + Across the mortgage industry, + with the bubble at + +On line 2710: + loan quality. Across + the mortgage industry, with + the bubble at its + +On line 2710: + quality. Across the + mortgage industry, with the + bubble at its peak, + +On line 2710: + mortgage industry, + with the bubble at its peak, + standards had declined, + +On line 2710: + with the bubble at + its peak, standards had declined, + documentation + +On line 2710: + standards had declined, + documentation was no + longer verified, and + +On line 2710: + no longer verified, + and warnings from internal + audit departments + +On line 2710: + patterns during the + savings and loan crisis, told + the Commission that + +On line 2710: + and loan crisis, told + the Commission that by one + estimate, in the + +On line 2710: + the Commission that + by one estimate, in the + mid-2000s, at least million + +On line 2710: + Commission that by + one estimate, in the mid-2000s, + at least million loans + +On line 2710: + by one estimate, + in the mid-2000s, at least million + loans annually + +On line 2710: + in the mid-2000s, at least + million loans annually + contained "some sort of + +On line 2710: + mid-2000s, at least million + loans annually contained + "some sort of fraud," in + +On line 2710: + at least million loans + annually contained "some + sort of fraud," in part + +On line 2710: + loans annually + contained "some sort of fraud," in + part because of the + +On line 2710: + contained "some sort of + fraud," in part because of the + large percentage of + +On line 2710: + part because of the + large percentage of no-doc + loans originated + +On line 2710: + because of the large + percentage of no-doc loans + originated then.23 + +On line 2712: + large percentage of + no-doc loans originated + then.23 Fraud for housing + +On line 2712: + housing can entail + a borrower’s lying or + intentionally + +On line 2712: + deception to gain + financially from the sale + of a house. Illinois + +On line 2712: + of a house. Illinois + Attorney General Lisa + Madigan defines fraud + +On line 2714: + mortgage products to + borrowers."24 In of cases, + according to the + +On line 2714: + to borrowers."24 In + of cases, according to + the FBI, fraud involves + +On line 2714: + involves industry + insiders.25 For example, + property flipping + +On line 2714: + real estate agents, + appraisers, and complicit + closing agents. In a + +On line 2714: + agents, appraisers, and + complicit closing agents. In + a "silent second," the + +On line 2714: + closing agents. In a + "silent second," the buyer, with + the collusion of + +On line 2714: + second," the buyer, + with the collusion of a + loan officer and + +On line 2714: + with the collusion + of a loan officer and + without the knowledge + +On line 2714: + collusion of a + loan officer and without + the knowledge of the + +On line 2714: + a loan officer + and without the knowledge of + the first mortgage lender, + +On line 2714: + the knowledge of the + first mortgage lender, disguises + the existence of + +On line 2714: + knowledge of the first + mortgage lender, disguises the + existence of a + +On line 2714: + lender, disguises the + existence of a second + mortgage to hide the + +On line 2714: + the existence of + a second mortgage to hide + the fact that no down + +On line 2714: + a second mortgage + to hide the fact that no down + payment has been made. + +On line 2714: + mortgage to hide the + fact that no down payment has + been made. "Straw buyers" + +On line 2714: + to hide the fact that + no down payment has been made. + "Straw buyers" allow + +On line 2714: + hide the fact that no + down payment has been made. "Straw + buyers" allow their + +On line 2714: + no down payment has + been made. "Straw buyers" allow + their names and credit + +On line 2714: + down payment has been + made. "Straw buyers" allow their + names and credit scores + +On line 2714: + payment has been made. + "Straw buyers" allow their names + and credit scores to + +On line 2714: + been made. "Straw buyers" + allow their names and credit + scores to be used, for + +On line 2714: + "Straw buyers" allow + their names and credit scores to + be used, for a fee, + +On line 2714: + buyers" allow their + names and credit scores to be + used, for a fee, by + +On line 2714: + allow their names and + credit scores to be used, for + a fee, by buyers + +On line 2714: + their names and credit + scores to be used, for a fee, + by buyers who want + +On line 2714: + names and credit scores + to be used, for a fee, by + buyers who want to + +On line 2714: + credit scores to be + used, for a fee, by buyers + who want to conceal + +On line 2716: + used, for a fee, by + buyers who want to conceal + their ownership.26 In + +On line 2716: + by buyers who want + to conceal their ownership.26 + In one instance, two + +On line 2716: + want to conceal their + ownership.26 In one instance, + two women in South + +On line 2716: + their ownership.26 In + one instance, two women in + South Florida were + +On line 2716: + In one instance, two + women in South Florida + were indicted in + +On line 2716: + two women in South + Florida were indicted + in for placing ads + +On line 2716: + South Florida were + indicted in for placing + ads between and in + +On line 2716: + indicted in for + placing ads between and in + Haitian community + +On line 2716: + were accused of then + stealing the identities of + hundreds of people + +On line 2716: + of then stealing the + identities of hundreds of + people who came for + +On line 2716: + the identities of + hundreds of people who came + for help and using + +On line 2716: + hundreds of people + who came for help and using + the information + +On line 2716: + who came for help and + using the information + to buy properties, + +On line 2716: + A. Ferrer told the + Commission it was "one of + the cruelest schemes" he + +On line 2718: + Commission it was + "one of the cruelest schemes" he + had seen.27 Estimates + +On line 2718: + "one of the cruelest + schemes" he had seen.27 Estimates + vary on the extent + +On line 2718: + of the cruelest schemes" + he had seen.27 Estimates vary + on the extent of + +On line 2718: + the cruelest schemes" he + had seen.27 Estimates vary on + the extent of fraud, + +On line 2718: + cruelest schemes" he had + seen.27 Estimates vary on the + extent of fraud, as + +On line 2718: + had seen.27 Estimates + vary on the extent of fraud, + as it is seldom + +On line 2718: + vary on the extent + of fraud, as it is seldom + investigated + +On line 2718: + of fraud, as it is + seldom investigated + unless properties + +On line 2720: + business relations + at Inter - thinx, a fraud + detection service, + +On line 2720: + at Inter - thinx, + a fraud detection service, + told the FCIC that her + +On line 2720: + Inter - thinx, a + fraud detection service, told + the FCIC that her firm + +On line 2720: + a fraud detection + service, told the FCIC that her + firm analyzed a + +On line 2720: + service, told the FCIC + that her firm analyzed a + large sample of all + +On line 2720: + the FCIC that her firm + analyzed a large sample + of all loans from to + +On line 2720: + firm analyzed a + large sample of all loans from + to and found contained + +On line 2720: + analyzed a large + sample of all loans from to + and found contained lies + +On line 2720: + all loans from to and + found contained lies or omissions + significant enough + +On line 2720: + and found contained lies + or omissions significant + enough to rescind the + +On line 2720: + found contained lies or + omissions significant enough + to rescind the loan + +On line 2720: + the loan or demand + a buyback if it had been + securitized. The + +On line 2720: + worth of fraudulent + loans from to resulted in + foreclosures, leading + +On line 2720: + from to resulted + in foreclosures, leading to + losses of billion + +On line 2720: + losses of billion + for the holders. According + to Fulmer, experts + +On line 2720: + the percentage of + transactions involving less + significant forms + +On line 2724: + the radar, because many + borrowers made payments on + time. Ed Parker, the + +On line 2724: + many borrowers made + payments on time. Ed Parker, + the head of mortgage + +On line 2724: + the head of mortgage + fraud investigation at + Ameriquest, the largest subprime + +On line 2724: + head of mortgage fraud + investigation at Ameriquest, + the largest subprime lender + +On line 2724: + investigation + at Ameriquest, the largest subprime lender + in and told the FCIC + +On line 2724: + Ameriquest, the largest subprime + lender in and told the FCIC that + fraudulent loans were + +On line 2724: + subprime lender in and + told the FCIC that fraudulent + loans were very common + +On line 2724: + lender in and told the + FCIC that fraudulent loans were + very common at the + +On line 2724: + FCIC that fraudulent + loans were very common at the + company. "No one + +On line 2724: + were very common at + the company. "No one was + watching. The volume + +On line 2724: + the company. "No + one was watching. The volume + was up and now you + +On line 2724: + company. "No one + was watching. The volume was + up and now you see + +On line 2724: + "No one was watching. + The volume was up and now + you see the fallout + +On line 2724: + watching. The volume + was up and now you see the + fallout behind the + +On line 2724: + was up and now you + see the fallout behind the + loan origination + +On line 2724: + up and now you see + the fallout behind the loan + origination process," + +On line 2724: + the fallout behind + the loan origination process," + he told the FCIC.29 David + +On line 2724: + Markets at Fannie + Mae, told the Commission that + in one package of + +On line 2724: + that in one package + of securitized loans his + analysts found one + +On line 2724: + of securitized + loans his analysts found one + purchaser who had + +On line 2724: + his analysts found + one purchaser who had bought + properties, falsely + +On line 2724: + properties, falsely + identifying himself each + time as the owner + +On line 2724: + time as the owner + of only one property, + while another had + +On line 2724: + as the owner of + only one property, while + another had bought + +On line 2724: + while another had + bought five properties.30 Fannie + Mae’s detection of + +On line 2724: + another had bought + five properties.30 Fannie Mae’s + detection of fraud + +On line 2724: + bought five properties.30 + Fannie Mae’s detection of + fraud increased steadily + +On line 2724: + Mae’s detection of + fraud increased steadily during + the housing bubble + +On line 2724: + detection of fraud + increased steadily during the + housing bubble and + +On line 2724: + the housing bubble + and accelerated in + late according to + +On line 2724: + housing bubble and + accelerated in late + according to William + +On line 2724: + accelerated + in late according to William + Brewster, the current + +On line 2724: + in late according + to William Brewster, the current + director of the + +On line 2724: + to William Brewster, the + current director of the + company’s mortgage + +On line 2724: + current director + of the company’s mortgage + fraud program. He said + +On line 2724: + program. He said that, + seeing evidence of fraud, + Fannie demanded + +On line 2724: + He said that, seeing + evidence of fraud, Fannie + demanded that lenders + +On line 2724: + seeing evidence + of fraud, Fannie demanded + that lenders such as Bank + +On line 2724: + that lenders such as Bank + of America, Countrywide, + Citigroup, and JP + +On line 2724: + Citigroup, and JP + Morgan Chase repurchase about + million in mortgages + +On line 2724: + Chase repurchase about + million in mortgages in and + million in "Lax or + +On line 2724: + million in "Lax or + practically non-existent + government oversight + +On line 2724: + thrive," said Henry N. + Pontell, a professor of + criminology + +On line 2724: + a professor of + criminology at the + University of + +On line 2724: + criminology + at the University of + California, Irvine, + +On line 2724: + the University + of California, Irvine, in + testimony to + +On line 2726: + of California, + Irvine, in testimony to + the Commission.32 The + +On line 2726: + to the Commission.32 + The responsibility + to investigate + +On line 2726: + the Commission.32 The + responsibility to + investigate and + +On line 2726: + to investigate + and prosecute mortgage fraud + violations falls + +On line 2726: + to local, state and + federal law enforcement + officials. On the + +On line 2726: + state and federal + law enforcement officials. + On the federal + +On line 2726: + federal level, + the Federal Bureau of + Investigation + +On line 2726: + prosecution to + U.S. Attorneys, who are part + of the Department + +On line 2726: + U.S. Attorneys, who + are part of the Department + of Justice. Cases + +On line 2726: + Attorneys, who are + part of the Department of + Justice. Cases may + +On line 2726: + of Justice. Cases + may also involve other + agencies, including + +On line 2726: + U.S. Postal Inspection + Service, the Department of + Housing and Urban + +On line 2726: + The FBI, which has the + broadest jurisdiction of + any federal law + +On line 2726: + of any federal + law enforcement agency, was + aware of the extent + +On line 2726: + any federal law + enforcement agency, was aware + of the extent of + +On line 2726: + Chris Swecker began + noticing a rise in mortgage + fraud while he was the + +On line 2726: + began noticing a + rise in mortgage fraud while he + was the special agent + +On line 2726: + noticing a rise in + mortgage fraud while he was the + special agent in charge + +On line 2726: + a rise in mortgage + fraud while he was the special + agent in charge of the + +On line 2726: + in mortgage fraud while + he was the special agent in + charge of the Charlotte, + +On line 2726: + mortgage fraud while he + was the special agent in charge + of the Charlotte, North + +On line 2726: + was the special agent + in charge of the Charlotte, North + Carolina, office + +On line 2726: + charge of the Charlotte, + North Carolina, office from + to In that office + +On line 2726: + Mortgage for selling + fraudulent loans to Fannie + Mae, leading to the + +On line 2726: + selling fraudulent + loans to Fannie Mae, leading + to the successful + +On line 2726: + to the successful + criminal prosecution + of the company’s + +On line 2726: + prosecution of + the company’s owner, James + Edward McLean Jr., and + +On line 2728: + Jr., and others. First + Beneficial repurchased + the mortgages after + +On line 2728: + but then—without any + interference from Fannie—resold + them to Ginnie Mae.34 + +On line 2728: + any interference + from Fannie—resold them to Ginnie + Mae.34 For not alerting + +On line 2728: + from Fannie—resold them to + Ginnie Mae.34 For not alerting + Ginnie, Fannie paid + +On line 2728: + Mae.34 For not alerting + Ginnie, Fannie paid million + of restitution to + +On line 2730: + Ginnie, Fannie paid + million of restitution to + the government. McLean + +On line 2730: + of restitution to + the government. McLean came to + the attention of + +On line 2730: + restitution to the + government. McLean came to the + attention of the + +On line 2730: + to the government. + McLean came to the attention + of the FBI after + +On line 2730: + government. McLean came + to the attention of the + FBI after buying + +On line 2730: + to the attention + of the FBI after buying + a luxury yacht + +On line 2730: + the attention of + the FBI after buying a + luxury yacht for + +On line 2730: + after buying a + luxury yacht for in cash.35 + Soon after Swecker + +On line 2730: + luxury yacht for + in cash.35 Soon after Swecker + was promoted to + +On line 2730: + after Swecker was + promoted to assistant + FBI director for + +On line 2730: + FBI director for + investigations in he + turned a spotlight on + +On line 2730: + turned a spotlight on + mortgage fraud. "The potential + impact of mortgage + +On line 2730: + spotlight on mortgage + fraud. "The potential impact + of mortgage fraud is + +On line 2730: + fraud. "The potential + impact of mortgage fraud is + clear," Swecker told a + +On line 2730: + clear," Swecker told a + congressional committee + in "If fraudulent + +On line 2730: + committee in "If + fraudulent practices become + systemic within the + +On line 2730: + fraudulent practices + become systemic within the + mortgage industry + +On line 2730: + fraud is allowed to + become unrestrained, it will + ultimately place + +On line 2730: + institutions at + risk and have adverse effects + on the stock market."36 + +On line 2732: + Swecker pointed out + the inadequacies of + data regarding + +On line 2732: + inadequacies + of data regarding fraud + and recommended + +On line 2732: + data regarding + fraud and recommended that + Congress mandate a + +On line 2732: + that Congress mandate + a reporting system and + other remedies and + +On line 2732: + system and other + remedies and require all lenders + to participate, + +On line 2732: + remedies and require + all lenders to participate, + whether federally + +On line 2732: + not. For example, + suspicious activity + reports, also known + +On line 2732: + reports filed by FDIC-insured + banks and their affiliates + to the Financial + +On line 2732: + to the Financial + Crimes Enforcement Network FinCEN), + a bureau within + +On line 2732: + the Financial Crimes + Enforcement Network FinCEN), a + bureau within the + +On line 2732: + Enforcement Network + FinCEN), a bureau within the + Treasury Department + +On line 2734: + and works closely with + law enforcement to combat + financial crimes. SARs + +On line 2734: + in a financial + transaction. But many mortgage + originators, such + +On line 2734: + New Century, and + Option One, were outside FinCEN’s + jurisdiction—and + +On line 2734: + investment banks, were + not subject to FinCEN review. + William Black testified + +On line 2734: + not subject to FinCEN + review. William Black testified + to the Commission + +On line 2734: + William Black testified + to the Commission that an + estimated of + +On line 2734: + to the Commission + that an estimated of + nonprime mortgage loans + +On line 2734: + Commission that an + estimated of nonprime + mortgage loans were made + +On line 2734: + an estimated + of nonprime mortgage loans were + made by noninsured + +On line 2734: + estimated of + nonprime mortgage loans were made + by noninsured lenders + +On line 2734: + of nonprime mortgage + loans were made by noninsured + lenders not required to + +On line 2734: + nonprime mortgage loans + were made by noninsured lenders + not required to file + +On line 2734: + SARs. And as for those + institutions required to + do so, he believed + +On line 2734: + he saw evidence + of underreporting in + that, he said, only + +On line 2734: + saw evidence of + underreporting in that, + he said, only about + +On line 2734: + underreporting + in that, he said, only about + of federally + +On line 2734: + he said, only about + of federally insured + mortgage lenders filed even + +On line 2734: + filed even a single + criminal referral for + alleged mortgage fraud + +On line 2736: + mortgage fraud in the + first half of Countrywide, the + nation’s largest mortgage + +On line 2736: + fraud in the first half + of Countrywide, the nation’s + largest mortgage lender at + +On line 2736: + in the first half of + Countrywide, the nation’s largest + mortgage lender at the + +On line 2736: + half of Countrywide, + the nation’s largest mortgage lender + at the time, had about + +On line 2736: + lender at the time, had + about internal referrals + of potentially + +On line 2738: + activity in + its mortgage business in in + and in according + +On line 2738: + its mortgage business + in in and in according + to Francisco San + +On line 2738: + and in according + to Francisco San Pedro, + the former senior + +On line 2738: + in according to + Francisco San Pedro, the + former senior vice + +On line 2738: + to Francisco San + Pedro, the former senior + vice president of + +On line 2738: + the former senior + vice president of special + investigations + +On line 2738: + vice president of + special investigations + at the company.38 + +On line 2740: + investigations + at the company.38 But it + filed only SARs in + +On line 2742: + company.38 But it + filed only SARs in in and + in Similarly, + +On line 2742: + filed only SARs in + in and in Similarly, + in examining + +On line 2742: + only SARs in in + and in Similarly, in + examining Bank + +On line 2742: + in Similarly, + in examining Bank of + America in its + +On line 2742: + examining Bank + of America in its lead + bank regulator, + +On line 2742: + of America in + its lead bank regulator, + the Office of the + +On line 2742: + regulator, the + Office of the Comptroller + of the Currency + +On line 2742: + the Comptroller of + the Currency (OCC), sampled + mortgages and found with + +On line 2742: + activity for + which no report had been filed + with FinCEN. All met the + +On line 2742: + which no report had + been filed with FinCEN. All met the + legal requirement + +On line 2742: + report had been filed + with FinCEN. All met the legal + requirement for a + +On line 2742: + been filed with FinCEN. All + met the legal requirement + for a filing. The + +On line 2742: + filed with FinCEN. All met + the legal requirement for + a filing. The OCC + +On line 2742: + required management + to refine its processes + to ensure that SARs + +On line 2744: + and fraud analyst + at Wells Fargo, the second + largest mortgage lender from + +On line 2744: + fraud analyst at + Wells Fargo, the second largest + mortgage lender from through + +On line 2744: + at Wells Fargo, the + second largest mortgage lender from + through and the largest in + +On line 2744: + Fargo, the second + largest mortgage lender from through and + the largest in told the + +On line 2744: + second largest mortgage + lender from through and the largest in + told the Commission + +On line 2744: + from through and the largest + in told the Commission that + "hundreds and hundreds + +On line 2744: + the largest in told the + Commission that "hundreds and + hundreds and hundreds + +On line 2744: + identified within + Wells Fargo’s home equity + loan division were + +On line 2744: + loan division were + not reported to FinCEN. And, + she added, at least half + +On line 2744: + division were not + reported to FinCEN. And, she + added, at least half the + +On line 2744: + were not reported + to FinCEN. And, she added, at least + half the loans she flagged + +On line 2744: + not reported to + FinCEN. And, she added, at least half + the loans she flagged for + +On line 2744: + reported to FinCEN. + And, she added, at least half the + loans she flagged for fraud + +On line 2744: + And, she added, at least + half the loans she flagged for fraud + were nevertheless + +On line 2744: + loans she flagged for fraud + were nevertheless funded, + over her objections.41 + +On line 2746: + objections.41 Despite + the underreporting, the + jump in mortgage fraud + +On line 2748: + underreporting, + the jump in mortgage fraud drew + attention. FinCEN in + +On line 2748: + drew attention. FinCEN + in November reported + a 20-fold increase in + +On line 2748: + attention. FinCEN in + November reported a + 20-fold increase in SARs + +On line 2748: + FinCEN in November + reported a 20-fold increase + in SARs related + +On line 2748: + a 20-fold increase in + SARs related to mortgage + fraud between and It + +On line 2748: + in SARs related + to mortgage fraud between and + It noted that two-thirds + +On line 2748: + SARs related to + mortgage fraud between and It + noted that two-thirds of + +On line 2748: + fraud between and It + noted that two-thirds of the loans + being created + +On line 2748: + noted that two-thirds of + the loans being created + were originated + +On line 2748: + were originated + by mortgage brokers who were + not subject to any + +On line 2748: + by mortgage brokers + who were not subject to any + federal standard + +On line 2748: + brokers who were not + subject to any federal + standard or oversight.42 + +On line 2748: + who were not subject + to any federal standard + or oversight.42 Swecker + +On line 2748: + to any federal + standard or oversight.42 Swecker + unsuccessfully + +On line 2748: + standard or oversight.42 + Swecker unsuccessfully + asked legislators + +On line 2748: + legislators to + compel all lenders to forward + information about + +On line 2748: + to compel all lenders + to forward information + about criminal fraud + +On line 2748: + compel all lenders to + forward information about + criminal fraud to + +On line 2748: + about criminal fraud + to regulators and law + enforcement agencies.43 + +On line 2750: + to regulators + and law enforcement agencies.43 + Swecker attempted + +On line 2750: + and law enforcement + agencies.43 Swecker attempted + to gain more funding + +On line 2750: + gain more funding to + combat mortgage fraud but was + resisted. Swecker + +On line 2750: + cut at either the + director level at the + FBI, at the Justice + +On line 2750: + director level + at the FBI, at the Justice + Department, or at + +On line 2750: + level at the FBI, + at the Justice Department, + or at the Office + +On line 2750: + Department, or at + the Office of Management + and Budget. He called + +On line 2750: + or at the Office + of Management and Budget. + He called his struggle + +On line 2750: + at the Office of + Management and Budget. He + called his struggle for + +On line 2750: + of Management and + Budget. He called his struggle + for more resources an + +On line 2752: + and Budget. He called + his struggle for more resources + an "uphill slog."44 In + +On line 2752: + Budget. He called his + struggle for more resources an + "uphill slog."44 In SARs + +On line 2752: + called his struggle for + more resources an "uphill slog."44 + In SARs related + +On line 2752: + his struggle for more + resources an "uphill slog."44 In + SARs related to + +On line 2752: + resources an "uphill + slog."44 In SARs related to + mortgage fraud were filed; + +On line 2752: + an "uphill slog."44 In + SARs related to mortgage + fraud were filed; in there + +On line 2752: + "uphill slog."44 In SARs + related to mortgage fraud + were filed; in there were + +On line 2754: + In SARs related + to mortgage fraud were filed; in + there were The number + +On line 2754: + SARs related to + mortgage fraud were filed; in there + were The number kept + +On line 2754: + to mortgage fraud were + filed; in there were The number + kept climbing, to in + +On line 2754: + mortgage fraud were filed; + in there were The number kept + climbing, to in in + +On line 2754: + fraud were filed; in there + were The number kept climbing, + to in in and in + +On line 2756: + were filed; in there were + The number kept climbing, to + in in and in At + +On line 2756: + filed; in there were The + number kept climbing, to in + in and in At the + +On line 2756: + there were The number + kept climbing, to in in and + in At the same time, + +On line 2756: + were The number kept + climbing, to in in and in + At the same time, top + +On line 2756: + kept climbing, to in + in and in At the same time, + top FBI officials, + +On line 2756: + At the same time, top + FBI officials, focusing + on terrorist threats, + +On line 2756: + top FBI officials, + focusing on terrorist + threats, reduced the agents + +On line 2756: + on terrorist threats, + reduced the agents assigned to + white-collar crime from + +On line 2756: + threats, reduced the agents + assigned to white-collar crime + from in the fiscal + +On line 2758: + to white-collar crime + from in the fiscal year to + fewer than by That + +On line 2758: + from in the fiscal + year to fewer than by That + year, its mortgage fraud + +On line 2758: + the fiscal year to + fewer than by That year, its + mortgage fraud program + +On line 2758: + year to fewer than + by That year, its mortgage fraud + program had only + +On line 2758: + fewer than by That + year, its mortgage fraud program + had only agents at + +On line 2758: + That year, its mortgage + fraud program had only agents + at any one time to + +On line 2758: + mortgage fraud program + had only agents at any one + time to review more + +On line 2758: + had only agents at + any one time to review more + than SARs filed with FinCEN. + +On line 2758: + only agents at any + one time to review more than + SARs filed with FinCEN. In + +On line 2758: + agents at any one time + to review more than SARs filed + with FinCEN. In response + +On line 2758: + at any one time to + review more than SARs filed with + FinCEN. In response to + +On line 2758: + one time to review + more than SARs filed with FinCEN. In + response to inquiries + +On line 2758: + to review more than + SARs filed with FinCEN. In response + to inquiries from the + +On line 2758: + review more than SARs + filed with FinCEN. In response to + inquiries from the FCIC, + +On line 2758: + more than SARs filed with + FinCEN. In response to inquiries + from the FCIC, the FBI + +On line 2758: + than SARs filed with FinCEN. + In response to inquiries from + the FCIC, the FBI said + +On line 2758: + SARs filed with FinCEN. In + response to inquiries from the + FCIC, the FBI said that + +On line 2758: + response to inquiries + from the FCIC, the FBI said that + to compensate for + +On line 2758: + the FCIC, the FBI said + that to compensate for a + lack of manpower, + +On line 2758: + FCIC, the FBI said that + to compensate for a lack + of manpower, it + +On line 2758: + the FBI said that to + compensate for a lack of + manpower, it had + +On line 2758: + that to compensate + for a lack of manpower, + it had developed + +On line 2758: + to compensate for + a lack of manpower, it + had developed "new + +On line 2758: + compensate for a + lack of manpower, it had + developed "new and + +On line 2758: + developed "new and + innovative methods to + detect and combat + +On line 2758: + methods to detect + and combat mortgage fraud," such + as a computer + +On line 2760: + property flipping.46 + Robert Mueller, the FBI’s director + since said mortgage fraud + +On line 2760: + the FBI’s director + since said mortgage fraud needed + to be considered + +On line 2760: + FBI’s director since + said mortgage fraud needed to + be considered "in + +On line 2760: + priorities," such + as terrorism. He told the + Commission that he + +On line 2760: + as terrorism. He + told the Commission that he + hired additional + +On line 2760: + told the Commission + that he hired additional + resources to fight fraud, + +On line 2760: + Commission that he + hired additional resources + to fight fraud, but that + +On line 2760: + hired additional + resources to fight fraud, but that + "we didn’t get what + +On line 2760: + resources to fight fraud, + but that "we didn’t get what + we had requested" + +On line 2760: + to fight fraud, but that + "we didn’t get what we had + requested" during + +On line 2760: + but that "we didn’t + get what we had requested" + during the budget + +On line 2760: + "we didn’t get what + we had requested" during + the budget process. He + +On line 2760: + we had requested" + during the budget process. He + also said that the + +On line 2760: + during the budget + process. He also said that the + FBI allocated + +On line 2760: + FBI allocated + additional resources to + reflect the growth in + +On line 2760: + resources to reflect + the growth in mortgage fraud, but + acknowledged that those + +On line 2760: + reflect the growth in + mortgage fraud, but acknowledged + that those resources may + +On line 2760: + the growth in mortgage + fraud, but acknowledged that those + resources may have been + +On line 2760: + fraud, but acknowledged + that those resources may have been + insufficient. "I + +On line 2760: + that those resources may + have been insufficient. "I + am not going to + +On line 2760: + those resources may have + been insufficient. "I am + not going to tell + +On line 2760: + resources may have been + insufficient. "I am not + going to tell you + +On line 2760: + not going to tell + you that that is adequate + for what is out there," + +On line 2760: + going to tell you + that that is adequate for + what is out there," he + +On line 2760: + to tell you that that + is adequate for what is + out there," he said. In + +On line 2760: + tell you that that is + adequate for what is out + there," he said. In the + +On line 2760: + that is adequate + for what is out there," he said. + In the wake of the + +On line 2760: + adequate for what + is out there," he said. In the + wake of the crisis, + +On line 2760: + for what is out there," + he said. In the wake of the + crisis, the FBI is + +On line 2760: + there," he said. In the + wake of the crisis, the FBI + is continuing + +On line 2760: + he said. In the wake + of the crisis, the FBI is + continuing to + +On line 2760: + wake of the crisis, + the FBI is continuing + to investigate + +On line 2760: + of the crisis, the + FBI is continuing to + investigate fraud, + +On line 2760: + is continuing + to investigate fraud, and + Mueller suggested that + +On line 2760: + continuing to + investigate fraud, and Mueller + suggested that some + +On line 2760: + to investigate + fraud, and Mueller suggested that + some prosecutions + +On line 2760: + investigate fraud, + and Mueller suggested that some + prosecutions may + +On line 2762: + suggested that some + prosecutions may be still + to come.47 Alberto + +On line 2762: + may be still to come.47 + Alberto Gonzales, the + nation’s attorney + +On line 2762: + nation’s attorney + general from February + to September told + +On line 2762: + to September told + the Commission that while he + might have done more on + +On line 2762: + told the Commission + that while he might have done more + on mortgage fraud, in + +On line 2762: + that while he might have + done more on mortgage fraud, in + hindsight he believed + +On line 2762: + might have done more on + mortgage fraud, in hindsight he + believed that other + +On line 2762: + done more on mortgage + fraud, in hindsight he believed + that other issues + +On line 2762: + more on mortgage fraud, + in hindsight he believed that + other issues were + +On line 2762: + fraud, in hindsight he + believed that other issues + were more pressing: "I + +On line 2762: + hindsight he believed + that other issues were more + pressing: "I don’t think + +On line 2762: + believed that other + issues were more pressing: "I + don’t think anyone can + +On line 2762: + more pressing: "I don’t + think anyone can credibly + argue that [mortgage + +On line 2762: + "I don’t think anyone + can credibly argue that + [mortgage fraud] is more + +On line 2762: + argue that [mortgage + fraud] is more important than + the war on terror. + +On line 2762: + that [mortgage fraud] is + more important than the war + on terror. Mortgage + +On line 2762: + [mortgage fraud] is more + important than the war on + terror. Mortgage fraud + +On line 2762: + more important than + the war on terror. Mortgage + fraud doesn’t involve + +On line 2762: + the war on terror. + Mortgage fraud doesn’t involve + taking loss of life + +On line 2762: + on terror. Mortgage + fraud doesn’t involve taking + loss of life so it + +On line 2762: + Mortgage fraud doesn’t + involve taking loss of life + so it doesn’t rank + +On line 2762: + fraud doesn’t involve + taking loss of life so it + doesn’t rank above the + +On line 2762: + taking loss of life + so it doesn’t rank above the + priority of + +On line 2762: + the priority + of protecting neighborhoods + from dangerous gangs + +On line 2762: + priority of + protecting neighborhoods from + dangerous gangs or + +On line 2764: + Housing Enterprise + Oversight, the regulator + of the GSEs, released + +On line 2764: + a report showing + a "significant rise in + the incidence of + +On line 2764: + report showing a + "significant rise in the + incidence of fraud + +On line 2764: + "significant rise + in the incidence of fraud + in mortgage lending + +On line 2764: + in the incidence + of fraud in mortgage lending + in and the first half + +On line 2764: + the incidence of + fraud in mortgage lending in + and the first half of + +On line 2764: + incidence of fraud + in mortgage lending in and + the first half of OFHEO + +On line 2764: + of fraud in mortgage + lending in and the first half + of OFHEO stated it + +On line 2764: + in mortgage lending + in and the first half of OFHEO + stated it had been + +On line 2764: + in and the first half + of OFHEO stated it had been + working closely with + +On line 2764: + half of OFHEO stated + it had been working closely + with law enforcement + +On line 2764: + of OFHEO stated it + had been working closely with + law enforcement and + +On line 2764: + OFHEO stated it had + been working closely with law + enforcement and was + +On line 2764: + it had been working + closely with law enforcement + and was an active + +On line 2764: + been working closely + with law enforcement and was + an active member + +On line 2764: + working closely with + law enforcement and was an + active member of + +On line 2764: + with law enforcement + and was an active member + of the Department + +On line 2764: + law enforcement and + was an active member of + the Department of + +On line 2764: + and was an active + member of the Department + of Justice Mortgage + +On line 2764: + active member of + the Department of Justice + Mortgage Fraud Working + +On line 2764: + the Department of + Justice Mortgage Fraud Working + Group.49 "The concern about + +On line 2764: + of Justice Mortgage + Fraud Working Group.49 "The concern + about mortgage fraud and + +On line 2764: + Justice Mortgage Fraud + Working Group.49 "The concern about + mortgage fraud and fraud + +On line 2764: + Fraud Working Group.49 "The + concern about mortgage fraud and + fraud in general + +On line 2764: + concern about mortgage + fraud and fraud in general + was an issue," Richard + +On line 2764: + about mortgage fraud and + fraud in general was an + issue," Richard Spillenkothen, head + +On line 2764: + issue," Richard Spillenkothen, head + of banking supervision + and regulation + +On line 2764: + supervision and + regulation at the Fed + from to told the FCIC. + +On line 2764: + regulation at + the Fed from to told the FCIC. + "And we understood + +On line 2764: + Fed from to told the + FCIC. "And we understood there + was an increasing + +On line 2766: + understood there was + an increasing incidence + of [mortgage fraud]."50 Michael + +On line 2766: + was an increasing + incidence of [mortgage fraud]."50 + Michael B. Mukasey, who served + +On line 2766: + B. Mukasey, who served as + U.S. attorney general + from November to + +On line 2766: + Mukasey, who served as U.S. + attorney general from + November to the + +On line 2766: + as U.S. attorney + general from November + to the end of told + +On line 2766: + the end of told the + Commission that he recalled + "receiving reports + +On line 2766: + told the Commission + that he recalled "receiving + reports of mortgage + +On line 2766: + Commission that he + recalled "receiving reports + of mortgage failures + +On line 2766: + recalled "receiving + reports of mortgage failures + and of there being + +On line 2766: + mortgage failures and + of there being fraudulent + activity in + +On line 2766: + and of there being + fraudulent activity + in connection with + +On line 2766: + with flipping houses, + overvaluation, and the + like. I have a dim + +On line 2766: + overvaluation, + and the like. I have a dim + recollection of + +On line 2766: + like. I have a dim + recollection of outside + people commenting + +On line 2766: + recollection of + outside people commenting + that additional + +On line 2766: + people commenting + that additional resources + should be devoted, + +On line 2766: + be devoted, and + there being speculation + about whether resources that + +On line 2766: + devoted, and there + being speculation about + whether resources that were + +On line 2766: + investigations + were somehow impeding fraud + investigations, + +On line 2766: + investigations, + which I thought was a bogus + issue." He said that + +On line 2766: + which I thought was a + bogus issue." He said that + the department had + +On line 2766: + a bogus issue." + He said that the department + had other pressing + +On line 2768: + as terrorism, gang + violence, and southwestern + border issues.51 In + +On line 2768: + gang violence, and + southwestern border issues.51 + In letters to the + +On line 2768: + southwestern border + issues.51 In letters to the + FCIC, the Department + +On line 2768: + issues.51 In letters + to the FCIC, the Department + of Justice outlined + +On line 2768: + letters to the FCIC, + the Department of Justice + outlined actions it + +On line 2768: + FCIC, the Department + of Justice outlined actions + it undertook along + +On line 2768: + the Department of + Justice outlined actions it + undertook along with + +On line 2768: + outlined actions it + undertook along with the FBI + to combat mortgage + +On line 2768: + undertook along with + the FBI to combat mortgage + fraud. For example, + +On line 2768: + combat mortgage fraud. + For example, in the FBI + launched Operation + +On line 2768: + For example, in + the FBI launched Operation + Continued Action, + +On line 2768: + Continued Action, + targeting a variety + of financial crimes, + +On line 2768: + a variety of + financial crimes, including + mortgage fraud. In that + +On line 2768: + the agency started + to publish an annual + mortgage fraud report. + +On line 2768: + following year, the + FBI and other federal + agencies announced a + +On line 2768: + produced indictments, + arrests, and convictions for + mortgage fraud. In the + +On line 2768: + mortgage fraud. In the + FBI started specifically + tracking mortgage fraud + +On line 2768: + cases and increased + personnel dedicated + to those efforts. And + +On line 2768: + those efforts. And in + Operation Malicious + Mortgage resulted + +On line 2768: + Mortgage resulted + in mortgage fraud cases in + which defendants were + +On line 2768: + mortgage fraud cases + in which defendants were charged + by U.S. Attorneys + +On line 2768: + fraud cases in which + defendants were charged by U.S. + Attorneys offices + +On line 2768: + in which defendants + were charged by U.S. Attorneys + offices throughout the + +On line 2768: + defendants were charged + by U.S. Attorneys offices + throughout the country.52 + +On line 2770: + Attorneys offices + throughout the country.52 William Black + told the Commission + +On line 2770: + the Commission that + Washington essentially + ignored the issue + +On line 2770: + issue and allowed + it to worsen. "The FBI did + have severe limits," + +On line 2770: + it to worsen. "The + FBI did have severe limits," + because of the need + +On line 2770: + FBI did have severe + limits," because of the need + to respond to the + +On line 2770: + limits," because of + the need to respond to the + attacks, Black said, and + +On line 2770: + and the problem was + compounded by the lack of + cooperation: + +On line 2770: + compounded by the + lack of cooperation: + "The terrible thing + +On line 2770: + "The terrible thing + that happened was that the FBI + got virtually + +On line 2770: + terrible thing that + happened was that the FBI got + virtually no + +On line 2770: + that happened was that + the FBI got virtually + no assistance from + +On line 2770: + happened was that the + FBI got virtually no + assistance from the + +On line 2770: + assistance from the + regulators, the banking + regulators and + +On line 2772: + FBI official, told + the Commission he had no + contact with banking + +On line 2772: + he had no contact + with banking regulators + during his tenure.54 + +On line 2774: + contact with banking + regulators during his + tenure.54 As mortgage + +On line 2774: + As mortgage fraud grew, + state agencies took action. In + Florida, Ellen Wilcox, + +On line 2774: + fraud grew, state agencies + took action. In Florida, + Ellen Wilcox, a special + +On line 2774: + grew, state agencies took + action. In Florida, Ellen + Wilcox, a special agent + +On line 2774: + agencies took action. + In Florida, Ellen Wilcox, a + special agent with the + +On line 2774: + In Florida, Ellen + Wilcox, a special agent with the + state Department of + +On line 2774: + Florida, Ellen Wilcox, + a special agent with the state + Department of Law + +On line 2774: + Ellen Wilcox, a special + agent with the state Department + of Law Enforcement, + +On line 2774: + Wilcox, a special agent + with the state Department of + Law Enforcement, teamed + +On line 2774: + a special agent with + the state Department of Law + Enforcement, teamed with + +On line 2774: + the state Department + of Law Enforcement, teamed with + the Tampa police + +On line 2774: + Agency to bring down + a criminal ring scamming + homeowners in the + +On line 2774: + down a criminal + ring scamming homeowners in + the Tampa area. Its + +On line 2774: + a criminal ring + scamming homeowners in the + Tampa area. Its key + +On line 2774: + scamming homeowners + in the Tampa area. Its key + member was Orson + +On line 2774: + homeowners in the + Tampa area. Its key member + was Orson Benn, a + +On line 2774: + in the Tampa area. + Its key member was Orson + Benn, a New York–based + +On line 2774: + the Tampa area. Its + key member was Orson Benn, + a New York–based vice + +On line 2774: + Its key member was + Orson Benn, a New York–based + vice president of + +On line 2774: + was Orson Benn, a + New York–based vice president + of Argent Mortgage + +On line 2774: + Benn, a New York–based + vice president of Argent + Mortgage Company, + +On line 2774: + of Ameriquest. Beginning + in investigators and + two prosecutors + +On line 2774: + Ameriquest. Beginning in + investigators and two + prosecutors worked + +On line 2774: + prosecutors worked + for years to unravel a + network of alliances + +On line 2774: + repair contractors, + title companies, notaries, + and a convicted + +On line 2774: + contractors, title + companies, notaries, and a + convicted felon in + +On line 2774: + title companies, + notaries, and a convicted + felon in a case that + +On line 2774: + companies, notaries, + and a convicted felon in + a case that involved + +On line 2776: + and a convicted + felon in a case that involved + some loans.55 According + +On line 2776: + a convicted felon + in a case that involved some + loans.55 According to + +On line 2776: + case that involved some + loans.55 According to charging + documents in the + +On line 2776: + documents in the + case, the perpetrators would + walk through neighborhoods, + +On line 2776: + neighborhoods, looking + for elderly homeowners + they thought were likely + +On line 2776: + thought were likely to + have substantial equity + in their homes. They would + +On line 2776: + to have substantial + equity in their homes. They + would suggest repairs + +On line 2776: + equity in their + homes. They would suggest repairs + or improvements to + +On line 2776: + would suggest repairs + or improvements to the homes. + The homeowners would + +On line 2776: + suggest repairs or + improvements to the homes. The + homeowners would fill + +On line 2776: + or improvements to + the homes. The homeowners would + fill out paperwork, + +On line 2776: + improvements to the + homes. The homeowners would fill + out paperwork, and + +On line 2776: + homes. The homeowners + would fill out paperwork, and + insiders would use + +On line 2776: + fill out paperwork, + and insiders would use the + information to + +On line 2776: + and insiders would + use the information to + apply for loans in + +On line 2776: + the information + to apply for loans in their + names. Members of the + +On line 2776: + information to + apply for loans in their names. + Members of the ring + +On line 2776: + the ring would prepare + fraudulent loan documents, + including false W-2 + +On line 2776: + prepare fraudulent + loan documents, including + false W-2 forms, filled with + +On line 2776: + with information + about invented employment + and falsified salaries, + +On line 2776: + information about + invented employment and + falsified salaries, and + +On line 2776: + falsified salaries, and + take out home equity loans + in the homeowners’ + +On line 2776: + out home equity + loans in the homeowners’ names. + Each person involved + +On line 2776: + home equity loans + in the homeowners’ names. Each + person involved in + +On line 2776: + in the homeowners’ + names. Each person involved in + the transaction would + +On line 2776: + person involved in + the transaction would receive + a fee for his or + +On line 2776: + in the transaction + would receive a fee for his + or her role; Benn, at + +On line 2776: + would receive a fee + for his or her role; Benn, at + Argent, received a + +On line 2776: + fee for his or her + role; Benn, at Argent, received + a kickback for each + +On line 2776: + for his or her role; + Benn, at Argent, received a + kickback for each loan + +On line 2776: + or her role; Benn, at + Argent, received a kickback + for each loan he helped + +On line 2776: + role; Benn, at Argent, + received a kickback for each + loan he helped secure. + +On line 2776: + at Argent, received + a kickback for each loan he + helped secure. When the + +On line 2776: + Argent, received a + kickback for each loan he helped + secure. When the loan + +On line 2776: + a kickback for each + loan he helped secure. When the + loan was funded, the + +On line 2776: + kickback for each loan + he helped secure. When the loan + was funded, the checks + +On line 2776: + loan he helped secure. + When the loan was funded, the + checks were frequently + +On line 2776: + he helped secure. When + the loan was funded, the checks + were frequently made + +On line 2776: + helped secure. When the + loan was funded, the checks were + frequently made out + +On line 2776: + the loan was funded, + the checks were frequently made + out to the bogus + +On line 2776: + loan was funded, the + checks were frequently made out + to the bogus home + +On line 2776: + out to the bogus + home construction company + that had proposed the + +On line 2776: + to the bogus home + construction company that + had proposed the work, + +On line 2776: + company that had + proposed the work, which would then + disappear with the + +On line 2776: + that had proposed the + work, which would then disappear + with the proceeds. Some + +On line 2776: + had proposed the work, + which would then disappear with + the proceeds. Some of + +On line 2776: + proposed the work, which + would then disappear with the + proceeds. Some of the + +On line 2776: + would then disappear + with the proceeds. Some of the + homeowners never + +On line 2776: + with the proceeds. Some + of the homeowners never + received a penny + +On line 2776: + proceeds. Some of the + homeowners never received + a penny from the + +On line 2776: + homeowners never + received a penny from the + refinancing on + +On line 2776: + received a penny + from the refinancing on + their homes. Hillsborough + +On line 2776: + a penny from the + refinancing on their homes. + Hillsborough County + +On line 2776: + refinancing on + their homes. Hillsborough County + officials learned of + +On line 2776: + to say that scheduled + repairs had never been made + to their homes, and then + +On line 2776: + that scheduled repairs + had never been made to their + homes, and then sometimes + +On line 2776: + scheduled repairs had + never been made to their homes, + and then sometimes learned + +On line 2776: + repairs had never + been made to their homes, and then + sometimes learned that they + +On line 2776: + had never been made + to their homes, and then sometimes + learned that they had lost + +On line 2776: + never been made to + their homes, and then sometimes learned + that they had lost years’ + +On line 2776: + been made to their homes, + and then sometimes learned that they + had lost years’ worth of + +On line 2776: + homes, and then sometimes + learned that they had lost years’ worth + of equity as + +On line 2776: + and then sometimes learned + that they had lost years’ worth of + equity as well. + +On line 2776: + of equity as + well. Sixteen of defendants, + including Benn, have + +On line 2776: + as well. Sixteen of + defendants, including Benn, + have been convicted + +On line 2778: + have been convicted + or have pled guilty.56 Wilcox told the + Commission that the + +On line 2778: + or have pled guilty.56 Wilcox + told the Commission that the + "cost and length of these + +On line 2778: + told the Commission + that the "cost and length of these + investigations + +On line 2778: + the "cost and length of + these investigations make + them less attractive + +On line 2778: + "cost and length of these + investigations make them + less attractive to + +On line 2778: + investigations + make them less attractive to + most investigative + +On line 2778: + less attractive to + most investigative agencies + and prosecutors + +On line 2778: + their budgets based on + investigative statistics."57 + She said it has been + +On line 2778: + on investigative + statistics."57 She said it has + been hard to follow + +On line 2778: + said it has been hard + to follow up on other + cases because so + +On line 2778: + to follow up on + other cases because so + many of the subprime + +On line 2778: + cases because so + many of the subprime lenders have + gone out of business, + +On line 2778: + because so many of + the subprime lenders have gone out + of business, making + +On line 2778: + the subprime lenders have + gone out of business, making + it difficult to + +On line 2778: + subprime lenders have gone + out of business, making it + difficult to track + +On line 2778: + of business, making + it difficult to track down + perpetrators and + +On line 2778: + it difficult to + track down perpetrators and + witnesses. Ameriquest, for + +On line 2778: + and witnesses. Ameriquest, + for example, collapsed in + although Argent, and + +On line 2778: + Ameriquest, for example, + collapsed in although Argent, + and the company’s + +On line 2778: + collapsed in although + Argent, and the company’s + loan-servicing arm, were + +On line 2778: + and the company’s + loan-servicing arm, were bought by + Citigroup that same + +On line 2782: + loan-servicing arm, were + bought by Citigroup that same + year. DISCLOSURE AND + +On line 2784: + year. DISCLOSURE AND + DUE DILIGENCE: "A QUALITY + CONTROL ISSUE IN + +On line 2784: + AND DUE DILIGENCE: "A + QUALITY CONTROL ISSUE + IN THE FACTORY" + +On line 2786: + QUALITY CONTROL + ISSUE IN THE FACTORY" + In addition to + +On line 2786: + the final years of + the bubble. After growing + for years, Alt-A lending + +On line 2786: + the bubble. After + growing for years, Alt-A lending + increased another + +On line 2786: + for years, Alt-A lending + increased another from to + In particular, + +On line 2786: + another from to + In particular, option + ARMs grew during that + +On line 2788: + for borrowers with + fixed-rate mortgages) grew Overall, by + no-doc or low-doc + +On line 2790: + no-doc or low-doc + loans made up of all mortgages + originated. Many + +On line 2790: + loans made up of all + mortgages originated. Many + of these products would + +On line 2790: + up of all mortgages + originated. Many of these + products would perform + +On line 2790: + Many of these products + would perform only if prices + continued to rise + +On line 2790: + would perform only + if prices continued to rise + and the borrower + +On line 2790: + perform only if + prices continued to rise and + the borrower could + +On line 2790: + if prices continued + to rise and the borrower + could refinance at + +On line 2790: + prices continued to + rise and the borrower could + refinance at a + +On line 2792: + and the borrower + could refinance at a low + rate.58 In theory, + +On line 2792: + participant along + the securitization + pipeline should have had + +On line 2792: + in the quality + of every underlying + mortgage. In practice, + +On line 2792: + mortgage. In practice, + their interests were often + not aligned. Two New York + +On line 2792: + their interests were + often not aligned. Two New York + Fed economists have + +On line 2792: + were often not aligned. + Two New York Fed economists + have pointed out the + +On line 2792: + aligned. Two New York Fed + economists have pointed out + the "seven deadly + +On line 2792: + York Fed economists + have pointed out the "seven + deadly frictions" in + +On line 2792: + frictions" in mortgage + securitization—places + along the pipeline where + +On line 2792: + along the pipeline where + one party knew more than the + other, creating + +On line 2792: + one party knew more + than the other, creating + opportunities + +On line 2792: + to take advantage.59 + For example, the lender who + originated the + +On line 2792: + who originated + the mortgage for sale, earning + a commission, knew + +On line 2792: + originated the + mortgage for sale, earning a + commission, knew a + +On line 2792: + the mortgage for sale, + earning a commission, knew + a great deal about the + +On line 2792: + for sale, earning a + commission, knew a great deal + about the loan and the + +On line 2792: + a commission, knew + a great deal about the loan and + the borrower but + +On line 2792: + commission, knew a + great deal about the loan and the + borrower but had + +On line 2792: + knew a great deal about + the loan and the borrower + but had no long-term stake + +On line 2792: + a great deal about the + loan and the borrower but + had no long-term stake in + +On line 2792: + great deal about the loan + and the borrower but had + no long-term stake in whether + +On line 2792: + deal about the loan and + the borrower but had no + long-term stake in whether the + +On line 2792: + and the borrower + but had no long-term stake in whether + the mortgage was paid, + +On line 2792: + but had no long-term stake + in whether the mortgage was paid, + beyond the lender’s own + +On line 2792: + no long-term stake in whether + the mortgage was paid, beyond + the lender’s own business + +On line 2792: + the mortgage was paid, + beyond the lender’s own business + reputation. The + +On line 2792: + beyond the lender’s own + business reputation. The + securitizer + +On line 2794: + process. They described their + role as being "an umpire + in the market."60 But + +On line 2794: + They described their role + as being "an umpire in + the market."60 But they + +On line 2794: + described their role as + being "an umpire in the + market."60 But they did + +On line 2794: + role as being "an + umpire in the market."60 But + they did not review + +On line 2794: + security, nor + did they check to see that the + mortgages were what the + +On line 2794: + did they check to see + that the mortgages were what the + securitizers + +On line 2796: + that the mortgages were + what the securitizers + said they were. So the + +On line 2796: + said they were. So the + integrity of the market + depended on two + +On line 2796: + So the integrity + of the market depended + on two critical + +On line 2796: + the integrity of + the market depended on + two critical checks. + +On line 2796: + integrity of the + market depended on two + critical checks. First, + +On line 2796: + market depended + on two critical checks. First, + firms purchasing and + +On line 2796: + on two critical + checks. First, firms purchasing and + securitizing + +On line 2796: + First, firms purchasing + and securitizing the + mortgages would conduct + +On line 2796: + securitizing + the mortgages would conduct due + diligence reviews of + +On line 2796: + mortgages would conduct + due diligence reviews of the + mortgage pools, either + +On line 2796: + due diligence reviews + of the mortgage pools, either + using third-party + +On line 2796: + of the mortgage pools, + either using third-party + firms or doing the + +On line 2796: + mortgage pools, either + using third-party firms or + doing the reviews + +On line 2796: + using third-party + firms or doing the reviews + in-house. Second, + +On line 2796: + rules, parties in the + securitization process + were expected to + +On line 2796: + were expected to + disclose what they were selling + to investors. Neither + +On line 2796: + disclose what they were + selling to investors. Neither + of these checks performed + +On line 2796: + what they were selling + to investors. Neither of these + checks performed as they + +On line 2796: + they were selling to + investors. Neither of these checks + performed as they should + +On line 2798: + selling to investors. + Neither of these checks performed + as they should have. Due + +On line 2798: + to investors. Neither + of these checks performed as they + should have. Due diligence + +On line 2798: + investors. Neither of + these checks performed as they should + have. Due diligence firms: + +On line 2798: + Neither of these checks + performed as they should have. Due + diligence firms: "Waived in" + +On line 2800: + these checks performed as + they should have. Due diligence firms: + "Waived in" As subprime + +On line 2800: + performed as they should + have. Due diligence firms: "Waived in" + As subprime mortgage + +On line 2800: + securitizers + undertook due diligence on + their own or through third + +On line 2800: + due diligence on their + own or through third parties on + the mortgage pools that + +On line 2800: + their own or through third + parties on the mortgage pools + that originators + +On line 2800: + The originator + and the securitizer + negotiated + +On line 2800: + extent of the due + diligence investigation. + While the percentage + +On line 2800: + of the due diligence + investigation. While the + percentage of the + +On line 2800: + investigation. + While the percentage of the + pool examined could + +On line 2802: + While the percentage + of the pool examined could + be as high as it + +On line 2802: + the percentage of + the pool examined could be + as high as it was + +On line 2802: + the pool examined + could be as high as it was + often much lower; + +On line 2802: + could be as high as + it was often much lower; + according to some + +On line 2802: + as it was often + much lower; according to + some observers, as the + +On line 2802: + often much lower; + according to some observers, + as the market grew + +On line 2802: + according to some + observers, as the market grew + and originators + +On line 2802: + as the market grew + and originators became + more concentrated, + +On line 2802: + the market grew and + originators became more + concentrated, they + +On line 2802: + bargaining power + over the mortgage purchasers, and + samples were sometimes + +On line 2802: + sometimes as low as + to Some securitizers + requested that the + +On line 2802: + requested that the + due diligence firm analyze + a random sample + +On line 2802: + that the due diligence + firm analyze a random + sample of mortgages + +On line 2802: + firm analyze a + random sample of mortgages + from the pool; others + +On line 2802: + random sample of + mortgages from the pool; others + asked for a sampling + +On line 2802: + sample of mortgages + from the pool; others asked for + a sampling of those + +On line 2802: + mortgages from the pool; + others asked for a sampling + of those most likely + +On line 2802: + from the pool; others + asked for a sampling of those + most likely to be + +On line 2802: + others asked for a + sampling of those most likely + to be deficient + +On line 2802: + asked for a sampling + of those most likely to be + deficient in some + +On line 2802: + sampling of those most + likely to be deficient + in some way, in an + +On line 2802: + of those most likely + to be deficient in some + way, in an effort + +On line 2802: + those most likely to + be deficient in some way, + in an effort to + +On line 2802: + to be deficient + in some way, in an effort + to efficiently + +On line 2802: + in some way, in an + effort to efficiently + detect more of the + +On line 2802: + way, in an effort + to efficiently detect + more of the problem + +On line 2802: + in an effort to + efficiently detect more + of the problem loans. + +On line 2804: + to efficiently + detect more of the problem + loans. layton Holdings, + +On line 2804: + detect more of the + problem loans. layton Holdings, + a Connecticut-based firm, + +On line 2804: + problem loans. layton + Holdings, a Connecticut-based firm, + was a major provider + +On line 2804: + was a major provider + of third-party due diligence + services. As Clayton + +On line 2804: + due diligence services. + As Clayton Vice President + Vicki Beal explained + +On line 2804: + services. As Clayton + Vice President Vicki Beal + explained to the FCIC, + +On line 2804: + Vicki Beal explained + to the FCIC, firms like hers were + "not retained by [their] + +On line 2804: + to the FCIC, firms like + hers were "not retained by [their] + clients to provide an + +On line 2804: + FCIC, firms like hers were + "not retained by [their] clients to + provide an opinion + +On line 2804: + hers were "not retained + by [their] clients to provide an + opinion as to whether + +On line 2804: + "not retained by [their] + clients to provide an opinion + as to whether a loan + +On line 2804: + retained by [their] clients + to provide an opinion as + to whether a loan is + +On line 2804: + [their] clients to provide + an opinion as to whether a + loan is a good loan + +On line 2804: + clients to provide an + opinion as to whether a loan + is a good loan or + +On line 2804: + provide an opinion + as to whether a loan is a + good loan or a bad + +On line 2804: + an opinion as to + whether a loan is a good loan + or a bad loan." Rather, + +On line 2804: + opinion as to whether + a loan is a good loan or + a bad loan." Rather, they + +On line 2804: + as to whether a loan + is a good loan or a bad + loan." Rather, they were hired + +On line 2804: + to whether a loan is + a good loan or a bad loan." + Rather, they were hired to + +On line 2804: + loan is a good loan + or a bad loan." Rather, they were + hired to identify, + +On line 2804: + is a good loan or + a bad loan." Rather, they were hired + to identify, among + +On line 2804: + or a bad loan." Rather, + they were hired to identify, + among other things, whether + +On line 2804: + a bad loan." Rather, they + were hired to identify, among + other things, whether the + +On line 2804: + loan." Rather, they were hired + to identify, among other + things, whether the loans met + +On line 2804: + Rather, they were hired to + identify, among other things, + whether the loans met the + +On line 2804: + to identify, among + other things, whether the loans met + the originator’s + +On line 2806: + to enable clients to + negotiate better prices + on pools of loans.63 The + +On line 2806: + prices on pools of loans.63 + The review fell into three + general areas: + +On line 2806: + the originator’s + standards, sometimes with overlays + or additional + +On line 2806: + standards, sometimes with + overlays or additional + guidelines provided + +On line 2806: + sometimes with overlays + or additional guidelines + provided by the + +On line 2806: + provided by the + financial institutions + purchasing the loans)1 + +On line 2806: + by the financial + institutions purchasing + the loans)1 Did the loans + +On line 2806: + values accurate164 + And, critically: to the + degree that a loan + +On line 2806: + And, critically: + to the degree that a loan + was deficient, did + +On line 2806: + critically: to + the degree that a loan was + deficient, did it + +On line 2806: + degree that a loan + was deficient, did it have + any "compensating + +On line 2806: + was deficient, did + it have any "compensating + factors" that offset + +On line 2806: + loan had a higher + loan-to-value ratio than + guidelines called for, did + +On line 2806: + as the borrower’s + higher income mitigate + that weakness1 The due + +On line 2806: + income mitigate + that weakness1 The due diligence + firm would then grade the + +On line 2806: + due diligence firm would + then grade the loan sample and + forward the data + +On line 2806: + firm would then grade the + loan sample and forward the + data to its client. + +On line 2806: + grade the loan sample + and forward the data to + its client. Report in + +On line 2806: + the loan sample and + forward the data to its + client. Report in hand, + +On line 2806: + its client. Report in + hand, the securitizer + would negotiate + +On line 2806: + client. Report in hand, + the securitizer would + negotiate a + +On line 2806: + securitizer + would negotiate a price + for the pool and could + +On line 2806: + would negotiate + a price for the pool and could + "kick out" loans that did + +On line 2806: + negotiate a + price for the pool and could "kick + out" loans that did not + +On line 2806: + a price for the pool + and could "kick out" loans that did + not meet the stated + +On line 2806: + for the pool and could + "kick out" loans that did not meet + the stated guidelines. + +On line 2808: + and could "kick out" loans + that did not meet the stated + guidelines. Because of + +On line 2808: + loans that did not meet + the stated guidelines. Because + of the volume of + +On line 2808: + that did not meet the + stated guidelines. Because of + the volume of loans + +On line 2808: + the stated guidelines. + Because of the volume of + loans examined by + +On line 2808: + of the volume of + loans examined by Clayton + during the housing + +On line 2808: + loans examined by + Clayton during the housing + boom, the firm had a + +On line 2808: + by Clayton during + the housing boom, the firm had + a unique inside view + +On line 2808: + Clayton during the + housing boom, the firm had a + unique inside view of + +On line 2808: + housing boom, the firm + had a unique inside view of + the underwriting + +On line 2808: + unique inside view of + the underwriting standards + that originators + +On line 2808: + inside view of the + underwriting standards that + originators were + +On line 2808: + the underwriting + standards that originators + were actually + +On line 2808: + willing to accept. + Loans were classified into + three groups: loans that met + +On line 2808: + to accept. Loans were + classified into three groups: + loans that met guidelines + +On line 2808: + Loans were classified + into three groups: loans that met + guidelines (a Grade Event), + +On line 2808: + classified into + three groups: loans that met guidelines + (a Grade Event), those that + +On line 2808: + into three groups: loans + that met guidelines (a Grade Event), + those that failed to meet + +On line 2808: + three groups: loans that met + guidelines (a Grade Event), those that + failed to meet guidelines + +On line 2808: + loans that met guidelines + (a Grade Event), those that failed to + meet guidelines but were + +On line 2808: + (a Grade Event), those that + failed to meet guidelines but were + approved because of + +On line 2810: + were approved because + of compensating factors + (a Grade Event), and those + +On line 2810: + approved because of + compensating factors (a + Grade Event), and those that + +On line 2810: + (a Grade Event), and those + that failed to meet guidelines and + were not approved (a + +On line 2810: + Grade Event), and those that + failed to meet guidelines and were + not approved (a Grade + +On line 2812: + Event), and those that failed + to meet guidelines and were not + approved (a Grade Event). + +On line 2812: + those that failed to meet + guidelines and were not approved + (a Grade Event). Overall, + +On line 2812: + failed to meet guidelines + and were not approved (a Grade + Event). Overall, for the + +On line 2812: + to meet guidelines and + were not approved (a Grade Event). + Overall, for the months + +On line 2812: + and were not approved + (a Grade Event). Overall, for the + months that ended June + +On line 2812: + not approved (a Grade + Event). Overall, for the months that + ended June Clayton + +On line 2812: + (a Grade Event). Overall, + for the months that ended June + Clayton rated of + +On line 2814: + Event). Overall, for the + months that ended June Clayton + rated of the loans + +On line 2814: + the months that ended + June Clayton rated of the + loans it analyzed + +On line 2814: + months that ended June + Clayton rated of the loans + it analyzed as + +On line 2814: + Clayton rated of + the loans it analyzed as + Grade and another + +On line 2814: + rated of the loans + it analyzed as Grade and + another as Grade + +On line 2814: + loans it analyzed + as Grade and another as + Grade 2—for a total + +On line 2814: + it analyzed as + Grade and another as Grade + 2—for a total of + +On line 2814: + analyzed as Grade + and another as Grade 2—for + a total of that + +On line 2814: + Grade and another + as Grade 2—for a total of + that met the guidelines + +On line 2814: + another as Grade + 2—for a total of that met + the guidelines outright + +On line 2814: + a total of that + met the guidelines outright or + with compensating + +On line 2814: + guidelines outright or + with compensating factors. + The remaining of + +On line 2814: + with compensating + factors. The remaining of + the loans were Grade In + +On line 2814: + of the loans were Grade + In theory, the banks could + have refused to buy + +On line 2814: + the loans were Grade In + theory, the banks could have + refused to buy a + +On line 2814: + Grade In theory, + the banks could have refused to + buy a loan pool, or, + +On line 2814: + theory, the banks + could have refused to buy a + loan pool, or, indeed, + +On line 2814: + could have refused to + buy a loan pool, or, indeed, + they could have used the + +On line 2814: + refused to buy a + loan pool, or, indeed, they could + have used the findings + +On line 2814: + to buy a loan pool, + or, indeed, they could have used + the findings of the + +On line 2814: + buy a loan pool, or, + indeed, they could have used the + findings of the due + +On line 2814: + loan pool, or, indeed, + they could have used the findings + of the due diligence + +On line 2814: + pool, or, indeed, they + could have used the findings of + the due diligence firm + +On line 2814: + or, indeed, they could + have used the findings of the + due diligence firm to + +On line 2814: + indeed, they could have + used the findings of the due + diligence firm to probe + +On line 2814: + they could have used the + findings of the due diligence + firm to probe the loans’ + +On line 2814: + used the findings of + the due diligence firm to probe + the loans’ quality + +On line 2814: + the findings of the + due diligence firm to probe the + loans’ quality more + +On line 2814: + findings of the due + diligence firm to probe the loans’ + quality more deeply. + +On line 2814: + the due diligence firm + to probe the loans’ quality + more deeply. Over the 18-month + +On line 2814: + firm to probe the loans’ + quality more deeply. Over the + 18-month period, of + +On line 2814: + quality more deeply. + Over the 18-month period, of + the loans that Clayton + +On line 2814: + more deeply. Over the 18-month + period, of the loans that + Clayton found to be + +On line 2814: + the 18-month period, + of the loans that Clayton found + to be deficient—Grade 3—were "waived + +On line 2814: + 18-month period, of + the loans that Clayton found to + be deficient—Grade 3—were "waived in" + +On line 2814: + period, of the + loans that Clayton found to be + deficient—Grade 3—were "waived in" by + +On line 2814: + the loans that Clayton + found to be deficient—Grade 3—were "waived in" + by the banks. Thus of + +On line 2814: + loans that Clayton found + to be deficient—Grade 3—were "waived in" by + the banks. Thus of the + +On line 2814: + that Clayton found to + be deficient—Grade 3—were "waived in" by the + banks. Thus of the loans + +On line 2814: + found to be deficient—Grade 3—were + "waived in" by the banks. Thus of + the loans sampled by + +On line 2814: + be deficient—Grade 3—were "waived in" + by the banks. Thus of the loans + sampled by Clayton + +On line 2814: + by the banks. Thus of + the loans sampled by Clayton + were accepted even + +On line 2814: + the banks. Thus of the + loans sampled by Clayton were + accepted even though + +On line 2814: + the loans sampled by + Clayton were accepted even + though the company + +On line 2814: + sampled by Clayton + were accepted even though the + company had found + +On line 2816: + found a basis for + rejecting them (see figure + Referring to the + +On line 2816: + for rejecting them + (see figure Referring to + the data, Keith + +On line 2816: + the data, Keith + Johnson, the president of + Clayton from May to + +On line 2816: + Keith Johnson, the + president of Clayton from + May to May told the + +On line 2816: + the president of + Clayton from May to May told + the Commission, "That + +On line 2816: + of Clayton from May + to May told the Commission, + "That to me says there + +On line 2816: + Clayton from May to + May told the Commission, "That + to me says there [was] + +On line 2816: + told the Commission, + "That to me says there [was] a + quality control + +On line 2816: + me says there [was] a + quality control issue + in the factory" + +On line 2816: + in the factory" + for mortgage-backed securities.66 + Johnson concluded + +On line 2816: + Johnson concluded + that his clients often waived in + loans to preserve their + +On line 2816: + concluded that his + clients often waived in loans to + preserve their business + +On line 2816: + clients often waived in + loans to preserve their business + relationship with + +On line 2816: + preserve their business + relationship with the loan + originator—a + +On line 2816: + of rejections might + lead the originator to + sell the loans to a + +On line 2816: + to sell the loans to + a competitor. Simply put, + it was a sellers’ + +On line 2816: + a sellers’ market. + "Probably the seller had + more power than the + +On line 2818: + had more power than + the Wall Street issuer," Johnson + told the FCIC.67 The high + +On line 2818: + more power than the + Wall Street issuer," Johnson told + the FCIC.67 The high rate + +On line 2818: + power than the Wall + Street issuer," Johnson told the + FCIC.67 The high rate of + +On line 2818: + FCIC.67 The high rate of + waivers following rejections + may not itself be + +On line 2818: + of waivers following + rejections may not itself + be evidence of + +On line 2818: + rejections may not + itself be evidence of + something wrong in the + +On line 2818: + be evidence of + something wrong in the process, Beal + testified. She said + +On line 2818: + Beal testified. She + said that as originators’ + lending guidelines were + +On line 2818: + credit Rejected + Loans Waived in by Selected + Banks guidelines. "As you + +On line 2818: + in by Selected + Banks guidelines. "As you know, there + was stated income, + +On line 2818: + by Selected Banks + guidelines. "As you know, there was + stated income, they + +On line 2818: + Banks guidelines. "As you + know, there was stated income, + they were telling us look + +On line 2818: + guidelines. "As you know, + there was stated income, they + were telling us look for + +On line 2818: + know, there was stated + income, they were telling us look + for reasonableness + +On line 2818: + income, they were telling + us look for reasonableness + of that income, things + +On line 2818: + they were telling us look + for reasonableness of that + income, things like that."68 + +On line 2818: + for reasonableness + of that income, things like that."68 + With stricter guidelines, one + +On line 2818: + reasonableness of + that income, things like that."68 With + stricter guidelines, one would + +On line 2818: + one would expect more + rejections, and, after the + securitizer + +On line 2818: + at the rejected + loans, possibly more waivers. As + Moody’s Investors Service + +On line 2818: + Moody’s Investors Service + explained in a letter to + the FCIC, "A high rate + +On line 2818: + Service explained in + a letter to the FCIC, "A + high rate of waivers from + +On line 2818: + a letter to the + FCIC, "A high rate of waivers from + an institution + +On line 2818: + letter to the FCIC, + "A high rate of waivers from an + institution with + +On line 2818: + FCIC, "A high rate of + waivers from an institution + with extremely tight + +On line 2818: + with extremely tight + underwriting standards could + result in a pool + +On line 2818: + tight underwriting + standards could result in a + pool that is less risky + +On line 2818: + standards could result + in a pool that is less risky + than a pool with no + +On line 2818: + could result in a + pool that is less risky than a + pool with no waivers from + +On line 2818: + result in a pool + that is less risky than a pool + with no waivers from an + +On line 2818: + pool that is less risky + than a pool with no waivers from + an institution + +On line 2818: + that is less risky than + a pool with no waivers from an + institution with + +On line 2818: + than a pool with no + waivers from an institution + with extremely loose + +On line 2818: + indicated that + the loans in the pools either + met guidelines outright + +On line 2818: + guidelines outright or + had compensating factors, + even though Clayton’s records + +On line 2818: + had compensating + factors, even though Clayton’s records + show that only a + +On line 2818: + though Clayton’s records show + that only a portion of + the loans were sampled, + +On line 2818: + Clayton’s records show that + only a portion of the + loans were sampled, and + +On line 2818: + records show that only + a portion of the loans were + sampled, and that of + +On line 2818: + only a portion + of the loans were sampled, and + that of those that were + +On line 2818: + a portion of the + loans were sampled, and that of + those that were sampled, + +On line 2818: + portion of the loans + were sampled, and that of those + that were sampled, a + +On line 2818: + and that of those that + were sampled, a substantial + percentage of Grade + +On line 2818: + those that were sampled, + a substantial percentage + of Grade Event loans were + +On line 2818: + that were sampled, a + substantial percentage of + Grade Event loans were waived + +On line 2820: + percentage of Grade + Event loans were waived in. Johnson + said he approached the + +On line 2820: + Grade Event loans were waived + in. Johnson said he approached + the rating agencies + +On line 2820: + Event loans were waived in. + Johnson said he approached the + rating agencies in + +On line 2820: + were waived in. Johnson + said he approached the rating + agencies in and to + +On line 2820: + in. Johnson said he + approached the rating agencies + in and to gauge their + +On line 2820: + said he approached the + rating agencies in and to + gauge their interest + +On line 2820: + approached the rating + agencies in and to gauge their + interest in the + +On line 2820: + agencies in and to + gauge their interest in the + exception-tracking + +On line 2820: + gauge their interest + in the exception-tracking + product that Clayton + +On line 2820: + product that Clayton + was developing. He said + he shared some of their + +On line 2820: + was developing. + He said he shared some of their + company’s results, + +On line 2820: + the agencies that the + data would benefit the + ratings process. "We went + +On line 2820: + would benefit the + ratings process. "We went to the + rating agencies and + +On line 2822: + the ratings process. "We + went to the rating agencies + and said, ‘Wouldn’t this + +On line 2822: + went to the rating + agencies and said, ‘Wouldn’t this + information be + +On line 2822: + and said, ‘Wouldn’t this + information be great for + you to have as you + +On line 2822: + information be + great for you to have as you + assign tranche levels + +On line 2822: + for you to have as + you assign tranche levels of + isk1’" Johnson recalled. + +On line 2822: + you to have as you + assign tranche levels of isk1’" + Johnson recalled. The + +On line 2822: + have as you assign + tranche levels of isk1’" Johnson + recalled. The agencies + +On line 2822: + assign tranche levels + of isk1’" Johnson recalled. The + agencies thought the due + +On line 2822: + tranche levels of isk1’" + Johnson recalled. The agencies + thought the due diligence + +On line 2824: + Johnson recalled. The + agencies thought the due diligence + firm’s data were "great," + +On line 2824: + The agencies thought the + due diligence firm’s data were + "great," but they did not + +On line 2824: + agencies thought the due + diligence firm’s data were "great," + but they did not want + +On line 2824: + diligence firm’s data + were "great," but they did not want + the information, + +On line 2824: + were "great," but they did + not want the information, + Johnson said, because + +On line 2824: + but they did not want + the information, Johnson + said, because it would + +On line 2824: + the information, + Johnson said, because it would + presumably produce + +On line 2824: + Johnson said, because + it would presumably produce + lower ratings for + +On line 2824: + lower ratings for + the securitizations + and cost the agency + +On line 2828: + market was winding + down.70 When securitizers + did kick loans out of + +On line 2828: + was winding down.70 When + securitizers did kick + loans out of the pools, + +On line 2828: + securitizers + did kick loans out of the pools, + some originators + +On line 2828: + loans out of the pools, + some originators simply + put them into new + +On line 2828: + out of the pools, some + originators simply put + them into new pools, + +On line 2828: + some originators + simply put them into new + pools, presumably in + +On line 2828: + put them into new + pools, presumably in hopes that + those loans would not be + +On line 2828: + new pools, presumably + in hopes that those loans would not + be captured in the + +On line 2828: + pools, presumably in + hopes that those loans would not be + captured in the next + +On line 2828: + in hopes that those loans + would not be captured in the + next pool’s sampling. The + +On line 2828: + the next pool’s sampling. + The examiner’s report + for New Century + +On line 2828: + Investment Loan had + a policy of putting loans + into subsequent + +On line 2828: + a policy of + putting loans into subsequent + pools until they were + +On line 2828: + policy of putting + loans into subsequent pools + until they were kicked + +On line 2828: + of putting loans into + subsequent pools until they + were kicked out three times, + +On line 2828: + they were kicked out three + times, the company’s former + regulatory + +On line 2828: + times, the company’s + former regulatory + compliance and risk + +On line 2828: + compliance and risk + manager, Roger Ehrnman, told + the FCIC. As Johnson + +On line 2828: + and risk manager, + Roger Ehrnman, told the FCIC. As + Johnson described the + +On line 2828: + Roger Ehrnman, told the + FCIC. As Johnson described the + practice to the FCIC, + +On line 2828: + the FCIC. As Johnson + described the practice to the + FCIC, this was the "three + +On line 2828: + As Johnson described + the practice to the FCIC, this + was the "three strikes, you’re + +On line 2828: + Johnson described the + practice to the FCIC, this was + the "three strikes, you’re out + +On line 2830: + described the practice + to the FCIC, this was the "three + strikes, you’re out rule."72 Some + +On line 2830: + the practice to the + FCIC, this was the "three strikes, you’re + out rule."72 Some mortgage + +On line 2830: + FCIC, this was the "three + strikes, you’re out rule."72 Some mortgage + securitizers + +On line 2830: + out rule."72 Some mortgage + securitizers did their + own due diligence, but + +On line 2830: + their own due diligence, + but seemed to devote only + limited resources + +On line 2830: + diligence, but seemed to + devote only limited + resources to it. At + +On line 2830: + but seemed to devote + only limited resources + to it. At Morgan + +On line 2830: + to devote only + limited resources to it. + At Morgan Stanley, + +On line 2830: + only limited + resources to it. At Morgan + Stanley, the head of + +On line 2830: + resources to it. At + Morgan Stanley, the head of + due diligence was based + +On line 2830: + At Morgan Stanley, + the head of due diligence was + based not in New York + +On line 2830: + Morgan Stanley, the + head of due diligence was based + not in New York but + +On line 2830: + Stanley, the head of + due diligence was based not in + New York but rather in + +On line 2830: + of due diligence was + based not in New York but rather + in Boca Raton, + +On line 2830: + based not in New York + but rather in Boca Raton, + Florida. He had, + +On line 2830: + New York but rather in + Boca Raton, Florida. + He had, at any one + +On line 2830: + but rather in Boca + Raton, Florida. He had, + at any one time, two + +On line 2830: + in Boca Raton, + Florida. He had, at any + one time, two to five + +On line 2830: + Florida. He had, + at any one time, two to five + individuals + +On line 2830: + at any one time, two + to five individuals + reporting to him + +On line 2830: + him directly—and they were + actually employees + of a personnel + +On line 2830: + of a personnel + consultant, Equinox.73 Deutsche Bank and + JP Morgan likewise + +On line 2830: + consultant, Equinox.73 Deutsche + Bank and JP Morgan likewise + also had only + +On line 2830: + Bank and JP Morgan + likewise also had only + small due diligence teams.74 + +On line 2832: + JP Morgan likewise + also had only small due + diligence teams.74 Banks did + +On line 2832: + diligence teams.74 Banks did + not necessarily have + better processes + +On line 2832: + necessarily + have better processes for + monitoring the + +On line 2832: + for monitoring + the mortgages that they purchased. + At an FCIC hearing + +On line 2832: + monitoring the + mortgages that they purchased. At + an FCIC hearing on + +On line 2832: + they purchased. At an + FCIC hearing on the mortgage + business, Richard Bowen, a + +On line 2832: + At an FCIC hearing + on the mortgage business, Richard + Bowen, a whistleblower + +On line 2832: + an FCIC hearing on + the mortgage business, Richard Bowen, + a whistleblower who + +On line 2832: + FCIC hearing on the + mortgage business, Richard Bowen, a + whistleblower who had + +On line 2832: + the mortgage business, + Richard Bowen, a whistleblower who + had been a senior + +On line 2832: + mortgage business, Richard + Bowen, a whistleblower who had + been a senior vice + +On line 2832: + Bowen, a whistleblower + who had been a senior vice + president at CitiFinancial + +On line 2832: + been a senior vice + president at CitiFinancial Mortgage + in charge of a staff + +On line 2832: + testified that his + team conducted quality + assurance checks on + +On line 2832: + his team conducted + quality assurance checks + on the loans bought by + +On line 2832: + assurance checks on + the loans bought by Citigroup + from a network of + +On line 2832: + on the loans bought by + Citigroup from a network + of lenders, including + +On line 2832: + Citigroup from a + network of lenders, including + both subprime mortgages + +On line 2832: + subprime mortgages that + Citigroup intended to + hold and prime mortgages + +On line 2832: + hold and prime mortgages + that it intended to sell + to Fannie Mae and + +On line 2834: + sell to Fannie Mae + and Freddie Mac. For subprime + purchases, Bowen’s team + +On line 2834: + Mae and Freddie Mac. + For subprime purchases, Bowen’s + team would review the + +On line 2834: + purchases, Bowen’s team + would review the physical + credit file of the + +On line 2834: + Bowen’s team would review + the physical credit file + of the loans they were + +On line 2834: + file of the loans they + were purchasing. "During and + I witnessed many changes + +On line 2834: + of the loans they were + purchasing. "During and I + witnessed many changes to + +On line 2834: + they were purchasing. + "During and I witnessed many + changes to the way the + +On line 2834: + purchasing. "During + and I witnessed many changes to + the way the credit + +On line 2834: + many changes to the way + the credit risk was being + evaluated for + +On line 2834: + way the credit risk + was being evaluated + for these pools during + +On line 2834: + the credit risk was + being evaluated for + these pools during the + +On line 2834: + evaluated for + these pools during the purchase + processes," Bowen said. + +On line 2834: + for these pools during + the purchase processes," Bowen + said. For example, + +On line 2834: + these pools during the + purchase processes," Bowen said. + For example, he + +On line 2834: + processes," Bowen said. + For example, he said, the + chief risk officer + +On line 2834: + example, he said, + the chief risk officer in + Citigroup’s Consumer + +On line 2834: + risk officer in + Citigroup’s Consumer Lending + business reversed large + +On line 2836: + business reversed large + numbers of underwriting + decisions from "turn + +On line 2838: + of underwriting + decisions from "turn down" to + "approved."75 Another + +On line 2838: + decisions from "turn + down" to "approved."75 Another + part of Bowen’s charge was + +On line 2838: + "turn down" to "approved."75 + Another part of Bowen’s charge + was to supervise + +On line 2838: + part of Bowen’s charge was + to supervise the purchase + of roughly billion + +On line 2838: + to supervise the + purchase of roughly billion + annually in + +On line 2838: + purchase of roughly + billion annually in + prime loan pools, a high + +On line 2838: + in prime loan pools, a + high percentage of which were + sold to Fannie Mae + +On line 2838: + prime loan pools, a high + percentage of which were sold + to Fannie Mae and + +On line 2838: + a high percentage + of which were sold to Fannie + Mae and Freddie Mac + +On line 2838: + high percentage of + which were sold to Fannie Mae + and Freddie Mac for + +On line 2838: + and Freddie Mac for + securitization. The + sampling provided + +On line 2838: + sampling provided + to Bowen’s staff for quality + control was supposed + +On line 2838: + quality control + was supposed to include at + least of the loan pool + +On line 2838: + usually ignored." + Samples of were more likely, + and the loan samples + +On line 2838: + ignored." Samples of + were more likely, and the loan + samples that Bowen’s group + +On line 2838: + of were more likely, + and the loan samples that Bowen’s + group did examine + +On line 2838: + were more likely, and + the loan samples that Bowen’s group + did examine showed + +On line 2838: + and the loan samples + that Bowen’s group did examine + showed extremely high + +On line 2838: + the loan samples that + Bowen’s group did examine showed + extremely high rates + +On line 2838: + group did examine + showed extremely high rates of + noncompliance. "At + +On line 2838: + extremely high rates + of noncompliance. "At the + time that I became + +On line 2838: + time that I became + involved, which was early to + mid-2006, we identified + +On line 2838: + I became involved, + which was early to mid-2006, we + identified that to + +On line 2838: + which was early to + mid-2006, we identified that to + percent of the files + +On line 2838: + early to mid-2006, we + identified that to percent + of the files either + +On line 2838: + to percent of the + files either had a ‘disagree’ + decision, or they + +On line 2838: + of the files either + had a ‘disagree’ decision, + or they were missing + +On line 2840: + supervisor and + company executives + about the quality + +On line 2840: + the quality and + underwriting of mortgages + that CitiMortgage purchased and + +On line 2840: + and underwriting + of mortgages that CitiMortgage purchased + and then sold to the + +On line 2840: + underwriting of + mortgages that CitiMortgage purchased and + then sold to the GSEs. + +On line 2840: + of mortgages that CitiMortgage + purchased and then sold to the + GSEs. As discussed in + +On line 2840: + purchased and then sold + to the GSEs. As discussed in + a later chapter, + +On line 2840: + then sold to the GSEs. + As discussed in a later + chapter, the GSEs would + +On line 2840: + GSEs. As discussed in + a later chapter, the GSEs + would later require + +On line 2840: + a later chapter, + the GSEs would later require + Citigroup to buy + +On line 2840: + chapter, the GSEs would + later require Citigroup + to buy back billion + +On line 2840: + the GSEs would later + require Citigroup to buy + back billion in loans + +On line 2840: + require Citigroup + to buy back billion in loans + as of November + +On line 2840: + Citigroup to buy + back billion in loans as of + November finding + +On line 2840: + to buy back billion + in loans as of November + finding that the loans + +On line 2840: + billion in loans as + of November finding that + the loans Citigroup + +On line 2840: + finding that the loans + Citigroup had sold them did + not conform to GSE + +On line 2842: + the loans Citigroup + had sold them did not conform + to GSE standards. SEC: + +On line 2842: + loans Citigroup had + sold them did not conform to + GSE standards. SEC: "The + +On line 2842: + had sold them did not + conform to GSE standards. SEC: + "The elephant in the + +On line 2842: + did not conform to + GSE standards. SEC: "The elephant + in the room is that + +On line 2844: + not conform to GSE + standards. SEC: "The elephant in + the room is that we + +On line 2844: + GSE standards. SEC: "The + elephant in the room is that + we didn’t review + +On line 2844: + SEC: "The elephant in + the room is that we didn’t + review the prospectus + +On line 2846: + the room is that we + didn’t review the prospectus + supplements" By the + +On line 2846: + didn’t review the + prospectus supplements" By the + time the financial + +On line 2846: + review the prospectus + supplements" By the time the + financial crisis + +On line 2846: + prospectus supplements" + By the time the financial + crisis hit, investors + +On line 2846: + supplements" By the + time the financial crisis + hit, investors held more + +On line 2846: + time the financial + crisis hit, investors held more + than trillion of non-GSE + +On line 2848: + hit, investors held more + than trillion of non-GSE mortgage-backed + securities and + +On line 2848: + more than trillion of + non-GSE mortgage-backed securities + and close to billion + +On line 2848: + than trillion of non-GSE + mortgage-backed securities and + close to billion of + +On line 2848: + billion of CDOs that + held mortgage-backed securities.77 + These securities + +On line 2848: + securities.77 These + securities were issued + with practically + +On line 2850: + securities were + issued with practically + no SEC oversight. And + +On line 2850: + with practically + no SEC oversight. And only + a minority + +On line 2850: + practically no + SEC oversight. And only a + minority were + +On line 2850: + no SEC oversight. And + only a minority + were subject to the + +On line 2850: + ongoing public + reporting requirements. The + SEC’s mandate is to + +On line 2850: + disclosures so that + investors can make up their own + minds. In the case of + +On line 2850: + that investors can make + up their own minds. In the case + of initial public + +On line 2850: + can make up their own + minds. In the case of initial + public offerings + +On line 2850: + up their own minds. In + the case of initial public + offerings of a + +On line 2850: + minds. In the case of + initial public offerings + of a company’s + +On line 2850: + the case of initial + public offerings of a + company’s shares, the + +On line 2850: + offerings of a + company’s shares, the work has + historically + +On line 2850: + historically + involved a lengthy review of + the issuer’s prospectus + +On line 2852: + other "offering + materials" prior to + sale.78 However, with + +On line 2852: + with the advent of + "shelf registration," a method + of registering + +On line 2852: + "shelf registration," + a method of registering + securities on + +On line 2852: + on an ongoing + basis, the process became much + quicker for mortgage-backed + +On line 2852: + became much quicker + for mortgage-backed securities + ranked in the highest + +On line 2852: + quicker for mortgage-backed + securities ranked in the + highest grades by the + +On line 2852: + securities ranked + in the highest grades by the + rating agencies. The + +On line 2852: + in the highest grades + by the rating agencies. The + process allowed issuers + +On line 2852: + the highest grades by + the rating agencies. The process + allowed issuers to + +On line 2852: + the rating agencies. + The process allowed issuers to + file a base prospectus + +On line 2852: + rating agencies. The + process allowed issuers to file + a base prospectus with + +On line 2852: + allowed issuers to + file a base prospectus with the + SEC, giving investors + +On line 2852: + issuer intended + to offer securities + in the future. The + +On line 2852: + future. The issuer + then filed a supplemental + prospectus describing + +On line 2852: + offering’s terms. "The + elephant in the room is that + we didn’t review + +On line 2852: + terms. "The elephant in + the room is that we didn’t + review the prospectus + +On line 2852: + the room is that we + didn’t review the prospectus + supplements," the SEC’s + +On line 2852: + we didn’t review + the prospectus supplements," the + SEC’s deputy director + +On line 2852: + didn’t review the + prospectus supplements," the SEC’s + deputy director for + +On line 2852: + in corporation + finance, Shelley Parratt, told + the FCIC.79 To improve + +On line 2852: + Regulation AB + in late The regulation + required that every + +On line 2852: + credit-granting or + underwriting criteria + used to originate + +On line 2852: + used to originate + or purchase the pool assets, + including, to the + +On line 2852: + or purchase the pool + assets, including, to the + extent known, any changes + +On line 2852: + assets, including, + to the extent known, any changes + in such criteria + +On line 2852: + including, to the + extent known, any changes in such + criteria and the + +On line 2852: + to the extent known, + any changes in such criteria + and the extent to + +On line 2852: + the extent known, any + changes in such criteria and + the extent to which + +On line 2852: + extent known, any changes + in such criteria and the + extent to which such + +On line 2852: + known, any changes in such + criteria and the extent + to which such policies + +On line 2852: + criteria and the + extent to which such policies + and criteria are + +On line 2854: + to which such policies + and criteria are or could + be overridden."80 With + +On line 2854: + and criteria are + or could be overridden."80 With + essentially no + +On line 2854: + be overridden."80 With + essentially no review + or oversight, how good + +On line 2854: + With essentially + no review or oversight, how + good were disclosures + +On line 2854: + essentially no + review or oversight, how good + were disclosures about + +On line 2854: + included disclaimers + to the effect that not all + mortgages would comply + +On line 2854: + the effect that not + all mortgages would comply with + the lending policies + +On line 2854: + effect that not all + mortgages would comply with the + lending policies of + +On line 2854: + mortgages would comply + with the lending policies of + the originator: + +On line 2854: + the lending policies + of the originator: "On + a case-by-case basis + +On line 2854: + lending policies of + the originator: "On a + case-by-case basis [the + +On line 2854: + the originator: + "On a case-by-case basis [the + originator] may + +On line 2854: + may determine that, + based upon compensating + factors, a prospective + +On line 2854: + mortgage not strictly + qualifying under the + underwriting risk + +On line 2854: + risk category + or other guidelines described + below warrants an + +On line 2856: + an underwriting + exception."81 The disclosure + typically had + +On line 2856: + typically had + a sentence stating that "a + substantial number" + +On line 2858: + number" or perhaps + "a substantial portion of + the Mortgage Loans will + +On line 2858: + Loans will represent + these exceptions."82 Citigroup’s + Bowen criticized the + +On line 2858: + Bowen criticized the + extent of information + provided on loan + +On line 2858: + of information + provided on loan pools: "There + was no disclosure + +On line 2858: + provided on loan + pools: "There was no disclosure + made to the investors + +On line 2858: + on loan pools: "There was + no disclosure made to the + investors with regard + +On line 2858: + no disclosure made + to the investors with regard + to the quality + +On line 2858: + disclosure made to + the investors with regard to + the quality of + +On line 2858: + to the investors with + regard to the quality + of the files they were + +On line 2860: + with regard to the + quality of the files they + were purchasing."83 Such + +On line 2860: + the quality of + the files they were purchasing."83 + Such disclosures were + +On line 2860: + of the files they were + purchasing."83 Such disclosures + were insufficient + +On line 2860: + know what criteria + the mortgages they were buying + actually did + +On line 2860: + the mortgages they were + buying actually did + meet. Only a small + +On line 2862: + actually did + meet. Only a small portion—as + little as to 3%—of + +On line 2862: + did meet. Only a + small portion—as little as to + 3%—of the loans in any + +On line 2862: + meet. Only a small + portion—as little as to 3%—of + the loans in any deal + +On line 2862: + small portion—as little + as to 3%—of the loans in any + deal were sampled, and + +On line 2862: + the loans in any deal + were sampled, and evidence + from Clayton shows that + +On line 2862: + loans in any deal were + sampled, and evidence from + Clayton shows that a + +On line 2862: + from Clayton shows that + a significant number + did not meet stated + +On line 2862: + stated guidelines or + have compensating factors.84 + On he loans in the + +On line 2862: + have compensating + factors.84 On he loans in the + remainder of the + +On line 2862: + factors.84 On he loans + in the remainder of the + mortgage pool that were + +On line 2862: + in the remainder + of the mortgage pool that were + not sampled (as much + +On line 2862: + the remainder of + the mortgage pool that were not + sampled (as much as + +On line 2864: + of the mortgage pool + that were not sampled (as much + as Clayton and the + +On line 2864: + that were not sampled + (as much as Clayton and the + securitizers + +On line 2864: + much as Clayton and + the securitizers had + no information, + +On line 2864: + as Clayton and the + securitizers had no + information, but + +On line 2864: + securitizers + had no information, but + one could reasonably + +On line 2864: + information, but + one could reasonably expect + them to have many of + +On line 2864: + reasonably expect + them to have many of the same + deficiencies, and + +On line 2864: + them to have many of + the same deficiencies, and + at the same rate, as + +On line 2864: + to have many of the + same deficiencies, and at + the same rate, as the + +On line 2864: + at the same rate, as + the sampled loans. Prospectuses + for the ultimate + +On line 2864: + this information, + or information on how + few loans were reviewed, + +On line 2864: + or information + on how few loans were reviewed, + raising the question + +On line 2864: + few loans were reviewed, + raising the question of whether + the disclosures were + +On line 2864: + raising the question + of whether the disclosures were + materially + +On line 2866: + violation of + the securities laws. CDOs + were issued under + +On line 2866: + framework from the one + that applied to many mortgage-backed + securities, and + +On line 2866: + one that applied to + many mortgage-backed securities, + and were not subject + +On line 2866: + that applied to many + mortgage-backed securities, and + were not subject even + +On line 2866: + and were not subject + even to the minimal shelf + registration rules. + +On line 2866: + rules. Underwriters + typically issued CDOs + under the SEC’s Rule + +On line 2868: + issued CDOs under + the SEC’s Rule 144A, which allows + the unregistered + +On line 2868: + the SEC’s Rule 144A, which + allows the unregistered + resale of certain + +On line 2868: + so-called qualified + institutional buyers + (QIBs); these included + +On line 2868: + institutional + buyers (QIBs); these included + investors as diverse + +On line 2868: + included investors + as diverse as insurance + companies like MetLife, + +On line 2868: + investors as diverse + as insurance companies + like MetLife, pension funds + +On line 2868: + like MetLife, pension funds + like the California State + Teachers’ Retirement + +On line 2868: + pension funds like the + California State Teachers’ + Retirement System, + +On line 2868: + California State + Teachers’ Retirement System, + and investment banks + +On line 2870: + Teachers’ Retirement + System, and investment banks + like Goldman Sachs.85 The + +On line 2870: + U.S. investment banks + more competitive with their + foreign counterparts; + +On line 2870: + more competitive + with their foreign counterparts; + at the time, market + +On line 2870: + counterparts; at the + time, market participants + viewed U.S. disclosure + +On line 2870: + participants viewed + U.S. disclosure requirements + as more onerous than + +On line 2870: + viewed U.S. disclosure + requirements as more onerous + than those in other + +On line 2870: + requirements as more + onerous than those in other + countries. The new rule + +On line 2870: + onerous than those in + other countries. The new rule + significantly + +On line 2870: + significantly + expanded the market for + these securities + +On line 2870: + the market for these + securities by declaring + that distributions + +On line 2870: + securities by + declaring that distributions + which complied with the + +On line 2870: + distributions which + complied with the rule would no + longer be considered + +On line 2870: + complied with the rule + would no longer be considered + "public offerings" + +On line 2870: + considered "public + offerings" and therefore would + not be subject to + +On line 2870: + exemption with the + National Securities + Markets Improvements + +On line 2870: + that Denise Voigt Crawford, + a commissioner on the + Texas Securities + +On line 2870: + Denise Voigt Crawford, a + commissioner on the Texas + Securities Board, + +On line 2870: + a commissioner + on the Texas Securities + Board, characterized + +On line 2870: + commissioner on + the Texas Securities Board, + characterized to + +On line 2870: + prohibit[ing] the states + from taking preventative + actions in areas + +On line 2870: + the states from taking + preventative actions in + areas that we now + +On line 2870: + in areas that we + now know have been substantial + contributing factors + +On line 2870: + the current crisis."86 + Under this legislation, + state securities + +On line 2870: + regulators were + preempted from overseeing + private placements such + +On line 2870: + were preempted from + overseeing private placements + such as CDOs. In the + +On line 2870: + such as CDOs. In the + absence of registration + requirements, a new + +On line 2870: + In the absence of + registration requirements, + a new debt market + +On line 2870: + a new debt market + developed quickly under + Rule 144A. This market + +On line 2870: + market developed + quickly under Rule 144A. This + market was liquid, + +On line 2870: + Rule 144A. This market + was liquid, since qualified + investors could freely trade + +On line 2870: + market was liquid, + since qualified investors could + freely trade Rule 144A debt + +On line 2870: + could freely trade Rule 144A + debt securities. But debt + securities when + +On line 2872: + securities. But + debt securities when Rule + 144A was enacted + +On line 2872: + securities when + Rule 144A was enacted were + mostly corporate + +On line 2872: + 144A was enacted + were mostly corporate bonds, + very different from + +On line 2872: + was enacted were + mostly corporate bonds, very + different from the + +On line 2872: + corporate bonds, very + different from the CDOs that + dominated the + +On line 2872: + very different from + the CDOs that dominated + the private placement + +On line 2872: + dominated the + private placement market more + than a decade later.87 + +On line 2874: + been adequate, filed + numerous lawsuits under + federal and state + +On line 2874: + numerous lawsuits + under federal and state + securities laws. + +On line 2874: + under federal + and state securities laws. + As we will see, some + +On line 2874: + state securities + laws. As we will see, some have + already resulted + +On line 2878: + new mortgage products + had been on regulators’ + radar screens in the years + +On line 2878: + products had been on + regulators’ radar screens in + the years before the + +On line 2878: + in the years before + the crisis, but disagreements + among the agencies and + +On line 2878: + the years before the + crisis, but disagreements among + the agencies and their + +On line 2880: + banks’ own internal + risk management systems.88 "As + internal systems + +On line 2880: + the basic thrust of + the examination process + should shift from largely + +On line 2880: + feedback that the bank + can use to enhance further + the quality of + +On line 2880: + can use to enhance + further the quality of + its risk-management + +On line 2880: + the quality of + its risk-management systems," + Chairman Greenspan had said + +On line 2880: + its risk-management + systems," Chairman Greenspan had said + in Across agencies, there + +On line 2880: + said in Across agencies, + there was a "historic vision, + historic approach, that + +On line 2880: + Across agencies, there was + a "historic vision, historic + approach, that a lighter + +On line 2880: + approach, that a lighter + hand at regulation was + the appropriate + +On line 2880: + regulation was + the appropriate way to + regulate," Eugene + +On line 2880: + the appropriate + way to regulate," Eugene + Ludwig, comptroller + +On line 2880: + way to regulate," + Eugene Ludwig, comptroller + of the currency + +On line 2880: + regulate," Eugene + Ludwig, comptroller of the + currency from to + +On line 2880: + comptroller of the + currency from to told the + FCIC, referring to + +On line 2880: + the currency from + to told the FCIC, referring + to the Gramm-Leach-Bliley Act in + +On line 2880: + currency from to + told the FCIC, referring to + the Gramm-Leach-Bliley Act in The + +On line 2880: + from to told the FCIC, + referring to the Gramm-Leach-Bliley Act + in The New York Fed, + +On line 2882: + FCIC, referring to + the Gramm-Leach-Bliley Act in The New York + Fed, in a "lessons-learned" + +On line 2882: + the Gramm-Leach-Bliley Act in The + New York Fed, in a "lessons-learned" + analysis after + +On line 2882: + in The New York Fed, + in a "lessons-learned" analysis + after the crisis, + +On line 2882: + New York Fed, in a + "lessons-learned" analysis after + the crisis, pointed + +On line 2882: + "lessons-learned" analysis + after the crisis, pointed + to the mistaken + +On line 2882: + analysis after + the crisis, pointed to the + mistaken belief + +On line 2882: + after the crisis, + pointed to the mistaken + belief that "markets + +On line 2882: + crisis, pointed to + the mistaken belief that + "markets will always + +On line 2882: + belief that "markets + will always self-correct." + "A deference to + +On line 2882: + supervisors from + imposing prescriptive views + on banks," the report + +On line 2884: + prescriptive views on + banks," the report concluded.91 + The reliance on banks’ + +On line 2886: + capital standards. + Banks had complained for years that + the original Basel + +On line 2886: + complained for years that + the original Basel standards + did not allow them + +On line 2886: + did not allow them + sufficient latitude to + base their capital + +On line 2886: + with strong support from + the Fed, introduced the Basel + II capital regime + +On line 2886: + strong support from the + Fed, introduced the Basel II + capital regime in + +On line 2886: + Fed, introduced the + Basel II capital regime in + June which would allow + +On line 2886: + introduced the Basel + II capital regime in June + which would allow banks + +On line 2886: + Basel II capital + regime in June which would allow + banks to lower their + +On line 2886: + regime in June which would + allow banks to lower their + capital charges if + +On line 2886: + which would allow banks + to lower their capital + charges if they could show + +On line 2886: + would allow banks to + lower their capital charges + if they could show they + +On line 2886: + charges if they could show + they had sophisticated + internal models + +On line 2886: + sophisticated + approaches that it allowed, + Basel II reflected + +On line 2886: + approaches that it + allowed, Basel II reflected + and reinforced the + +On line 2886: + it allowed, Basel II + reflected and reinforced + the supervisors’ + +On line 2886: + and reinforced the + supervisors’ risk-focused + approach. Spillenkothen said that + +On line 2886: + approach. Spillenkothen said that + one of the regulators’ + biggest mistakes was + +On line 2886: + "acceptance of Basel + II premises," which he described + as displaying "an + +On line 2886: + Basel II premises," which + he described as displaying + "an excessive faith + +On line 2886: + II premises," which he + described as displaying "an + excessive faith in + +On line 2886: + which he described as + displaying "an excessive + faith in internal + +On line 2886: + accuracy of + complex quantitative risk + measurement techniques, + +On line 2886: + quantitative risk + measurement techniques, and a + willingness (at least + +On line 2886: + measurement techniques, + and a willingness (at least + in the early days + +On line 2886: + willingness (at least + in the early days of Basel + II) to tolerate + +On line 2886: + in the early days + of Basel II) to tolerate + a reduction in + +On line 2886: + regulatory + capital in return for + the prospect of better + +On line 2888: + Regulators had + been taking notice of the + mortgage market for + +On line 2888: + mortgage market for + several years before the + crisis. As early + +On line 2888: + mortgage products and + borrowers had changed during + and following the + +On line 2888: + and borrowers had + changed during and following + the refinancing + +On line 2888: + borrowers had changed + during and following the + refinancing boom + +On line 2888: + and following the + refinancing boom of the + previous year, and + +On line 2888: + the refinancing + boom of the previous year, + and they began work + +On line 2888: + refinancing boom + of the previous year, and + they began work on + +On line 2888: + of the previous + year, and they began work on + providing guidance + +On line 2888: + year, and they began + work on providing guidance + to banks and thrifts. But + +On line 2888: + and they began work + on providing guidance to + banks and thrifts. But too + +On line 2888: + work on providing + guidance to banks and thrifts. But + too little was done, + +On line 2888: + guidance to banks and + thrifts. But too little was done, + and too late, because + +On line 2888: + But too little was + done, and too late, because of + interagency + +On line 2888: + too late, because of + interagency discord, + industry pushback, + +On line 2888: + interagency + discord, industry pushback, + and a widely held + +On line 2888: + widely held view that + market participants had + the situation + +On line 2890: + participants had + the situation well in + hand. "Within the board, + +On line 2890: + the situation + well in hand. "Within the board, + people understood + +On line 2890: + well in hand. "Within + the board, people understood + that many of these loan + +On line 2890: + in hand. "Within the + board, people understood that + many of these loan types + +On line 2890: + hand. "Within the board, + people understood that many + of these loan types had + +On line 2890: + many of these loan types + had gotten to an extreme," + Susan Bies, then a + +On line 2890: + types had gotten to + an extreme," Susan Bies, then + a Fed governor + +On line 2890: + had gotten to an + extreme," Susan Bies, then a + Fed governor and + +On line 2890: + governor and chair + of the Federal Reserve + Board’s subcommittees + +On line 2890: + of the Federal + Reserve Board’s subcommittees + on both safety and + +On line 2890: + Federal Reserve + Board’s subcommittees on both + safety and soundness + +On line 2890: + Board’s subcommittees + on both safety and soundness + supervision and + +On line 2890: + on both safety and + soundness supervision and + consumer protection + +On line 2890: + consumer protection + supervision, told the FCIC. + "So the main debate + +On line 2890: + supervision, told + the FCIC. "So the main debate + within the board was + +On line 2892: + told the FCIC. "So the + main debate within the board + was how tightly [should + +On line 2892: + the FCIC. "So the main + debate within the board was + how tightly [should we] + +On line 2892: + debate within the + board was how tightly [should we] + rein in the abuses + +On line 2892: + within the board was + how tightly [should we] rein in + the abuses that we + +On line 2892: + board was how tightly + [should we] rein in the abuses + that we were seeing. + +On line 2892: + was how tightly [should + we] rein in the abuses that + we were seeing. So + +On line 2892: + how tightly [should we] + rein in the abuses that we + were seeing. So it + +On line 2892: + tightly [should we] rein + in the abuses that we were + seeing. So it was + +On line 2892: + [should we] rein in the + abuses that we were seeing. + So it was more of + +On line 2892: + rein in the abuses + that we were seeing. So it + was more of ‘to a + +On line 2892: + the abuses that we + were seeing. So it was more + of ‘to a degree.’"93 + +On line 2894: + that we were seeing. + So it was more of ‘to a + degree.’"93 Indeed, in + +On line 2894: + were seeing. So it + was more of ‘to a degree.’"93 + Indeed, in the same + +On line 2894: + it was more of ‘to + a degree.’"93 Indeed, in the + same June Federal + +On line 2894: + was more of ‘to a + degree.’"93 Indeed, in the same + June Federal Open + +On line 2894: + degree.’"93 Indeed, in + the same June Federal Open + Market Committee + +On line 2894: + Indeed, in the same + June Federal Open Market + Committee meeting + +On line 2894: + June Federal Open + Market Committee meeting + described earlier, + +On line 2894: + Committee meeting + described earlier, one FOMC + member noted that + +On line 2894: + described earlier, + one FOMC member noted that + "some of the newer, + +On line 2894: + noted that "some of + the newer, more intricate + and untested credit + +On line 2894: + and untested credit + default instruments had caused + some market turmoil." + +On line 2894: + turmoil." Another + participant was concerned + "that subprime lending + +On line 2894: + participant was + concerned "that subprime lending + was an accident + +On line 2894: + concerned "that subprime + lending was an accident + waiting to happen." + +On line 2894: + "that subprime lending + was an accident waiting + to happen." A third + +On line 2894: + third participant + noted the risks in mortgage + securities, the + +On line 2894: + noted the risks in + mortgage securities, the + rapid growth of subprime + +On line 2894: + the risks in mortgage + securities, the rapid growth + of subprime lending, + +On line 2894: + securities, the + rapid growth of subprime lending, + and the fact that many + +On line 2894: + information on + borrowers," adding, however, + that record profits and + +On line 2894: + on borrowers," adding, + however, that record profits + and high capital + +On line 2894: + however, that record + profits and high capital + levels allayed those + +On line 2894: + record profits and high + capital levels allayed + those concerns. A fourth + +On line 2894: + capital levels + allayed those concerns. A fourth + participant said + +On line 2894: + those concerns. A fourth + participant said that "we + could be seeing the + +On line 2894: + fourth participant + said that "we could be seeing + the final gasps of + +On line 2894: + participant said + that "we could be seeing the + final gasps of house + +On line 2894: + "we could be seeing + the final gasps of house price + appreciation." + +On line 2894: + the final gasps of + house price appreciation." + The participant + +On line 2894: + appreciation." + The participant expressed + concern about "creative + +On line 2894: + The participant + expressed concern about "creative + financing" and was + +On line 2894: + concern about "creative + financing" and was "worried + that piggybacks and + +On line 2894: + of default ould be + higher than suggested by + the securities + +On line 2894: + than suggested by + the securities they backed, + "could be making the + +On line 2894: + suggested by the + securities they backed, "could + be making the books + +On line 2894: + securities they + backed, "could be making the books + of GSEs look better + +On line 2894: + backed, "could be making + the books of GSEs look better + than they really + +On line 2894: + "could be making the + books of GSEs look better than + they really were." + +On line 2894: + be making the books + of GSEs look better than they + really were." Fed + +On line 2894: + the books of GSEs look + better than they really + were." Fed staff replied that + +On line 2894: + of GSEs look better + than they really were." Fed + staff replied that the GSEs + +On line 2894: + GSEs look better than + they really were." Fed staff + replied that the GSEs were + +On line 2894: + look better than they + really were." Fed staff replied + that the GSEs were not + +On line 2894: + than they really + were." Fed staff replied that the GSEs + were not large purchasers + +On line 2894: + they really were." + Fed staff replied that the GSEs were + not large purchasers of + +On line 2894: + were." Fed staff replied that + the GSEs were not large purchasers + of private label + +On line 2896: + the GSEs were not large + purchasers of private label + securities.94 In + +On line 2896: + purchasers of private + label securities.94 In + the spring of the FOMC + +On line 2896: + of private label + securities.94 In the spring + of the FOMC would again + +On line 2896: + securities.94 In + the spring of the FOMC would again + discuss risks in the + +On line 2896: + the spring of the FOMC + would again discuss risks in the + housing and mortgage + +On line 2896: + of the FOMC would again + discuss risks in the housing + and mortgage markets + +On line 2896: + would again discuss risks + in the housing and mortgage + markets and express + +On line 2896: + in the housing and + mortgage markets and express + nervousness about the + +On line 2896: + markets and express + nervousness about the growing + "ingenuity" of + +On line 2896: + nervousness about the + growing "ingenuity" of + the mortgage sector. + +On line 2896: + amortization loans + had the per-nicious effect of + stripping equity + +On line 2896: + the per-nicious effect + of stripping equity and + wealth from homeowners + +On line 2896: + per-nicious effect of + stripping equity and wealth + from homeowners and + +On line 2896: + and raised concerns about + nontraditional lending + practices that seemed based + +On line 2896: + nontraditional + lending practices that seemed based + on the presumption + +On line 2896: + that seemed based on the + presumption of continued + increases in home + +On line 2898: + on the presumption + of continued increases + in home prices. John Snow, + +On line 2898: + the presumption of + continued increases in + home prices. John Snow, then + +On line 2898: + in home prices. John Snow, + then treasury secretary, told + the FCIC that he called + +On line 2898: + home prices. John Snow, then + treasury secretary, told the + FCIC that he called a + +On line 2898: + John Snow, then treasury + secretary, told the FCIC that + he called a meeting + +On line 2900: + treasury secretary, + told the FCIC that he called a + meeting in late or + +On line 2900: + secretary, told the + FCIC that he called a meeting + in late or early + +On line 2900: + he called a meeting + in late or early to urge + regulators to + +On line 2900: + proliferation + of poor lending practices. He + said he was struck that + +On line 2900: + practices. He said he + was struck that regulators + tended not to see + +On line 2900: + said he was struck that + regulators tended not + to see a problem + +On line 2900: + to see a problem + at their own institutions. + "Nobody had a full + +On line 2900: + a problem at their + own institutions. "Nobody + had a full 360-degree + +On line 2900: + problem at their own + institutions. "Nobody had + a full 360-degree view. + +On line 2900: + regulators was, + ‘Well, there may be a problem. + But it’s not in my + +On line 2900: + was, ‘Well, there may be + a problem. But it’s not in + my field of view,’" Snow + +On line 2900: + ‘Well, there may be a + problem. But it’s not in my + field of view,’" Snow told + +On line 2900: + may be a problem. + But it’s not in my field of + view,’" Snow told the FCIC. + +On line 2900: + my field of view,’" Snow + told the FCIC. Regulators + responded to Snow’s + +On line 2900: + view,’" Snow told the FCIC. + Regulators responded + to Snow’s questions by + +On line 2900: + questions by saying, + "Our default rates are very low. + Our institutions + +On line 2900: + rates are very low. Our + institutions are very well + capitalized. Our + +On line 2900: + Our institutions + are very well capitalized. + Our institutions + +On line 2902: + institutions are + very well capitalized. Our + institutions [have] + +On line 2902: + well capitalized. + Our institutions [have] very + low delinquencies. So + +On line 2902: + capitalized. Our + institutions [have] very low + delinquencies. So we + +On line 2902: + institutions [have] + very low delinquencies. So we + don’t see any real + +On line 2904: + very low delinquencies. + So we don’t see any real + big problem."95 In May + +On line 2904: + low delinquencies. So + we don’t see any real big + problem."95 In May the + +On line 2904: + So we don’t see any + real big problem."95 In May + the banking agencies + +On line 2904: + see any real big + problem."95 In May the banking + agencies did issue + +On line 2904: + real big problem."95 + In May the banking agencies + did issue guidance + +On line 2904: + problem."95 In May the + banking agencies did issue + guidance on the risks + +On line 2904: + In May the banking + agencies did issue guidance + on the risks of home + +On line 2904: + banking agencies did + issue guidance on the risks + of home equity + +On line 2904: + agencies did issue + guidance on the risks of home + equity lines of + +On line 2904: + issue guidance on + the risks of home equity + lines of credit and + +On line 2904: + on the risks of home + equity lines of credit + and home equity + +On line 2904: + and home equity + loans. It cautioned financial + institutions about + +On line 2904: + loan-to-value and + debt-to-income ratios, lower + credit scores, greater use + +On line 2904: + debt-to-income ratios, + lower credit scores, greater use + of automated + +On line 2904: + and the increase in + transactions generated + through a loan broker + +On line 2904: + generated through + a loan broker or other + third party. While this + +On line 2904: + a loan broker or + other third party. While this + guidance identified + +On line 2904: + broker or other + third party. While this guidance + identified many of + +On line 2904: + third party. While this + guidance identified many of + the problematic + +On line 2904: + identified many of + the problematic lending + practices engaged in + +On line 2904: + the problematic + lending practices engaged in + by bank lenders, it was + +On line 2904: + engaged in by bank + lenders, it was limited to + home equity loans. + +On line 2904: + it was limited + to home equity loans. It + did not apply to + +On line 2904: + was limited to + home equity loans. It did + not apply to first + +On line 2906: + to first mortgages.96 In + examiners from the Fed + and other agencies + +On line 2908: + confidential "peer + group" study of mortgage practices + at six companies + +On line 2908: + group" study of mortgage + practices at six companies + that together had + +On line 2908: + that together had + originated trillion in + mortgages in almost + +On line 2908: + mortgages in almost + half the national total. + In the group were five + +On line 2908: + in almost half the + national total. In the + group were five banks whose + +On line 2908: + national total. + In the group were five banks whose + holding companies + +On line 2908: + In the group were five + banks whose holding companies + were under the Fed’s + +On line 2908: + and Wells Fargo—as well + as the largest thrift, Washington + Mutual.97 The study + +On line 2908: + well as the largest thrift, + Washington Mutual.97 The + study "showed a very rapid + +On line 2908: + largest thrift, Washington + Mutual.97 The study "showed a + very rapid increase in + +On line 2908: + Mutual.97 The study + "showed a very rapid increase in + the volume of these + +On line 2908: + in the volume of + these irresponsible loans, + very risky loans," Sabeth + +On line 2908: + Sabeth Siddique, then + head of credit risk at the + Federal Reserve + +On line 2908: + head of credit risk + at the Federal Reserve + Board’s Division of + +On line 2908: + Federal Reserve + Board’s Division of Banking + Supervision and + +On line 2908: + Board’s Division of + Banking Supervision and + Regulation, told + +On line 2908: + Supervision and + Regulation, told the FCIC.98 + A large percentage + +On line 2908: + Regulation, told + the FCIC.98 A large percentage + of their loans issued + +On line 2908: + large percentage of + their loans issued were subprime + and Alt-A mortgages, and + +On line 2908: + percentage of their + loans issued were subprime and + Alt-A mortgages, and the + +On line 2908: + their loans issued were + subprime and Alt-A mortgages, and + the underwriting + +On line 2908: + and Alt-A mortgages, and + the underwriting standards + for these products had + +On line 2910: + for these products had + deteriorated.99 Once + the Fed and other + +On line 2910: + had identified the + mortgage problems, they agreed to + express those concerns + +On line 2910: + mortgage problems, they + agreed to express those concerns + to the industry + +On line 2910: + problems, they agreed to + express those concerns to the + industry in the + +On line 2910: + express those concerns + to the industry in the + form of nonbinding + +On line 2910: + those concerns to the + industry in the form of + nonbinding guidance. + +On line 2912: + to the industry + in the form of nonbinding + guidance. "There was among + +On line 2912: + industry in the + form of nonbinding guidance. + "There was among the Board + +On line 2912: + form of nonbinding + guidance. "There was among the Board + of Governors folks, + +On line 2912: + guidance. "There was among + the Board of Governors folks, + you know, some who felt + +On line 2912: + "There was among the Board + of Governors folks, you know, + some who felt that if + +On line 2912: + was among the Board of + Governors folks, you know, some + who felt that if we + +On line 2912: + Board of Governors + folks, you know, some who felt that + if we just put out + +On line 2912: + Governors folks, you + know, some who felt that if we + just put out guidance, + +On line 2912: + folks, you know, some who + felt that if we just put out + guidance, the banks would + +On line 2912: + know, some who felt that + if we just put out guidance, + the banks would get the + +On line 2912: + who felt that if we + just put out guidance, the banks + would get the message," + +On line 2912: + felt that if we just + put out guidance, the banks would + get the message," Bies + +On line 2912: + that if we just put + out guidance, the banks would get + the message," Bies said.100 + +On line 2914: + if we just put out + guidance, the banks would get the + message," Bies said.100 The + +On line 2914: + put out guidance, the + banks would get the message," Bies + said.100 The federal + +On line 2914: + guidance, the banks would + get the message," Bies said.100 The + federal agencies + +On line 2914: + message," Bies said.100 The + federal agencies therefore + drafted guidance on + +On line 2914: + federal agencies + therefore drafted guidance on + nontraditional + +On line 2914: + drafted guidance on + nontraditional mortgages + such as option ARMs, + +On line 2914: + nontraditional + mortgages such as option ARMs, + issuing it for + +On line 2914: + such as option ARMs, + issuing it for public + comment in late The + +On line 2914: + comment in late The + draft guidance directed lenders + to consider a + +On line 2914: + directed lenders to + consider a borrower’s + ability to make + +On line 2914: + to consider a + borrower’s ability to + make the loan payment + +On line 2914: + the loan payment when + rates adjusted, rather than just + the lower starting + +On line 2914: + loan payment when rates + adjusted, rather than just the + lower starting rate. + +On line 2914: + rates adjusted, rather + than just the lower starting + rate. It warned lenders that + +On line 2916: + loans should be "used with + caution."101 Immediately, + the industry was + +On line 2916: + Immediately, + the industry was up in + arms. The American + +On line 2916: + industry was up + in arms. The American Bankers + Association + +On line 2916: + The American Bankers + Association said the + guidance "overstate[d] + +On line 2916: + the guidance required + them to assume "a worst case + scenario," that is, the + +On line 2916: + assume "a worst case + scenario," that is, the scenario + in which borrowers + +On line 2916: + "a worst case scenario," + that is, the scenario in which + borrowers would have + +On line 2916: + scenario," that is, the + scenario in which borrowers + would have to make the + +On line 2916: + is, the scenario in + which borrowers would have to + make the full payment + +On line 2916: + the scenario in which + borrowers would have to make + the full payment when + +On line 2916: + which borrowers would + have to make the full payment + when rates adjusted.103 + +On line 2916: + borrowers would have + to make the full payment when + rates adjusted.103 They + +On line 2916: + have to make the full + payment when rates adjusted.103 + They disputed the + +On line 2916: + that "almost any form + of documentation can + be appropriate."104 + +On line 2918: + "almost any form of + documentation can be + appropriate."104 They + +On line 2918: + documentation + can be appropriate."104 They + denied that better + +On line 2918: + denied that better + disclosures were required to + protect borrowers + +On line 2918: + required to protect + borrowers from the risks of + nontraditional + +On line 2918: + borrowers from the + risks of nontraditional + mortgages, arguing + +On line 2918: + nontraditional + mortgages, arguing that they + were "not aware of any + +On line 2918: + were "not aware of any + empirical evidence + that supports the need + +On line 2920: + supports the need for + further consumer protection + standards."105 The need for + +On line 2920: + the need for further + consumer protection standards."105 + The need for guidance + +On line 2920: + consumer protection + standards."105 The need for guidance + was controversial + +On line 2920: + standards."105 The need for + guidance was controversial + within the agencies, + +On line 2920: + The need for guidance + was controversial within + the agencies, too. "We + +On line 2920: + need for guidance was + controversial within the + agencies, too. "We got + +On line 2920: + was controversial + within the agencies, too. "We + got tremendous pushback + +On line 2920: + within the agencies, + too. "We got tremendous pushback + from the industry + +On line 2920: + the agencies, too. "We + got tremendous pushback from the + industry as well + +On line 2920: + too. "We got tremendous + pushback from the industry + as well as Congress + +On line 2920: + got tremendous pushback + from the industry as well + as Congress as well + +On line 2920: + tremendous pushback from + the industry as well as + Congress as well as, + +On line 2920: + industry as well + as Congress as well as, you + know, internally," + +On line 2920: + as Congress as well + as, you know, internally," + the Fed’s Siddique told + +On line 2920: + Congress as well as, + you know, internally," the + Fed’s Siddique told the + +On line 2920: + the FCIC. "Because it + was stifling innovation, + potentially, and + +On line 2922: + and it was denying + the American dream to many + people."106 The pressures + +On line 2922: + American dream to + many people."106 The pressures to + weaken and delay + +On line 2922: + dream to many people."106 + The pressures to weaken and + delay the guidance + +On line 2922: + people."106 The pressures + to weaken and delay the + guidance were strong and + +On line 2922: + pressures to weaken + and delay the guidance were + strong and came from many + +On line 2922: + delay the guidance + were strong and came from many sources. + Opposition by + +On line 2922: + were strong and came from + many sources. Opposition by + the Office of Thrift + +On line 2922: + the Office of Thrift + Supervision helped delay + the mortgage guidance + +On line 2922: + Supervision helped + delay the mortgage guidance + for almost a year.107 + +On line 2922: + delay the mortgage + guidance for almost a year.107 + Bies said, "There was some + +On line 2922: + the mortgage guidance + for almost a year.107 Bies said, + "There was some real + +On line 2922: + guidance for almost + a year.107 Bies said, "There was some + real concern about + +On line 2922: + for almost a year.107 + Bies said, "There was some real + concern about if the + +On line 2922: + a year.107 Bies said, "There + was some real concern about + if the Fed tightened + +On line 2922: + year.107 Bies said, "There was + some real concern about if + the Fed tightened down + +On line 2922: + Bies said, "There was some + real concern about if the + Fed tightened down on + +On line 2922: + concern about if the + Fed tightened down on [the banks + it regulated], + +On line 2922: + Fed tightened down on + [the banks it regulated], + whether that would create + +On line 2922: + tightened down on [the + banks it regulated], whether + that would create an + +On line 2922: + down on [the banks it + regulated], whether that would + create an un-level + +On line 2922: + regulated], whether + that would create an un-level + playing field [for] stand-alone + +On line 2922: + whether that would create + an un-level playing field [for] + stand-alone mortgage lenders whom + +On line 2922: + that would create an + un-level playing field [for] stand-alone + mortgage lenders whom the + +On line 2922: + create an un-level + playing field [for] stand-alone mortgage + lenders whom the [Fed] did + +On line 2922: + stand-alone mortgage lenders whom + the [Fed] did not regulate." + Another challenge + +On line 2922: + the mortgage market + was Congress. She recalled an + occasion when she + +On line 2922: + market was Congress. + She recalled an occasion + when she testified + +On line 2922: + occasion when she + testified about a proposed + rule and "members of + +On line 2922: + she testified about + a proposed rule and "members + of Congress [said] that + +On line 2922: + testified about a + proposed rule and "members of + Congress [said] that we + +On line 2922: + about a proposed rule + and "members of Congress [said] + that we were going + +On line 2922: + a proposed rule and + "members of Congress [said] that + we were going to + +On line 2922: + "members of Congress + [said] that we were going to + deny the dream of + +On line 2922: + going to deny + the dream of homeownership + to Americans if + +On line 2922: + of homeownership + to Americans if we put + this new stronger standard + +On line 2922: + homeownership to + Americans if we put this + new stronger standard in + +On line 2924: + to Americans if + we put this new stronger standard + in place."108 When guidance + +On line 2924: + Americans if we + put this new stronger standard in + place."108 When guidance was + +On line 2924: + we put this new stronger + standard in place."108 When guidance + was put in place in + +On line 2924: + stronger standard in place."108 + When guidance was put in place + in regulators + +On line 2924: + When guidance was put + in place in regulators + policed their guidance + +On line 2924: + in regulators + policed their guidance through bank + examinations + +On line 2926: + institutions switched + regulators in search of + more lenient treatment. + +On line 2926: + Countrywide applied + to switch regulators from + the Fed and OCC to + +On line 2926: + switch regulators + from the Fed and OCC to the + OTS. Countrywide’s move + +On line 2926: + regulators from + the Fed and OCC to the OTS. + Countrywide’s move came + +On line 2926: + the Fed and OCC to + the OTS. Countrywide’s move came + after several + +On line 2926: + and OCC to the OTS. + Countrywide’s move came after + several months of + +On line 2926: + OTS. Countrywide’s move + came after several months + of evaluation + +On line 2926: + several months of + evaluation within the + company about the + +On line 2926: + of evaluation + within the company about + the benefits of + +On line 2926: + the benefits of + OTS regulation, many of + which were promoted + +On line 2926: + benefits of OTS + regulation, many of which + were promoted by + +On line 2926: + OTS regulation, + many of which were promoted + by the OTS itself + +On line 2926: + regulation, many + of which were promoted by + the OTS itself over + +On line 2926: + which were promoted + by the OTS itself over the + course of an "outreach + +On line 2926: + promoted by the + OTS itself over the course of + an "outreach effort" + +On line 2926: + OTS itself over the + course of an "outreach effort" + initiated in + +On line 2928: + John Reich became + director of the agency. + Publicly, Countrywide + +On line 2928: + the agency. Publicly, + Countrywide stated that the + decision to switch + +On line 2928: + Publicly, Countrywide + stated that the decision + to switch to the OTS + +On line 2928: + the decision to + switch to the OTS was driven + by the desire to + +On line 2928: + decision to switch + to the OTS was driven by + the desire to have + +On line 2930: + holding company.109 + However, other factors + came into play as + +On line 2930: + came into play as + well. The OCC’s top Countrywide + examiner told + +On line 2930: + OCC’s top Countrywide + examiner told the FCIC + that Countrywide CEO + +On line 2930: + examiner told + the FCIC that Countrywide CEO + Angelo Mozilo + +On line 2930: + FCIC that Countrywide + CEO Angelo Mozilo and + President and COO + +On line 2932: + Angelo Mozilo + and President and COO David + Sambol thought the OCC’s + +On line 2932: + and COO David Sambol + thought the OCC’s position on + property appraisals + +On line 2932: + Sambol thought the OCC’s + position on property + appraisals would be "killing + +On line 2932: + the OCC’s position + on property appraisals would + be "killing the business."110 + +On line 2932: + OCC’s position on + property appraisals would be + "killing the business."110 An + +On line 2932: + property appraisals + would be "killing the business."110 An + internal July + +On line 2932: + appraisals would be "killing + the business."110 An internal + July Countrywide + +On line 2934: + July Countrywide + briefing paper noted, "The + OTS regulation + +On line 2934: + OTS regulation + of holding companies is + not as intrusive + +On line 2934: + regulation of + holding companies is not + as intrusive as + +On line 2934: + intrusive as that + of the Federal Reserve. + In particular, + +On line 2934: + of the Federal + Reserve. In particular, + the OTS rarely conducts + +On line 2934: + extensive onsite + examinations and when + they do conduct an + +On line 2934: + conduct an onsite + examination they are + generally not + +On line 2934: + regulator than + the Federal Reserve."111 In + August Mozilo wrote + +On line 2934: + than the Federal + Reserve."111 In August Mozilo + wrote to members of + +On line 2934: + Reserve."111 In August + Mozilo wrote to members of + his executive + +On line 2934: + wrote to members of + his executive team, "It + appears that the Fed + +On line 2934: + his executive + team, "It appears that the Fed + is now troubled by + +On line 2934: + executive team, + "It appears that the Fed is + now troubled by pay + +On line 2934: + team, "It appears that + the Fed is now troubled by + pay options while the + +On line 2934: + "It appears that the + Fed is now troubled by pay + options while the OTS + +On line 2934: + that the Fed is now + troubled by pay options while + the OTS is not. Since + +On line 2934: + is now troubled by + pay options while the OTS is + not. Since pay options + +On line 2934: + now troubled by pay + options while the OTS is not. + Since pay options are + +On line 2934: + the OTS is not. Since + pay options are a major + component of both + +On line 2934: + not. Since pay options + are a major component + of both our volumes + +On line 2934: + Since pay options are + a major component of + both our volumes and + +On line 2934: + of both our volumes + and profitability the Fed + may force us into + +On line 2934: + both our volumes and + profitability the Fed may + force us into a + +On line 2934: + and profitability + the Fed may force us into + a decision faster + +On line 2934: + profitability the + Fed may force us into a + decision faster than + +On line 2934: + may force us into + a decision faster than we + would like." Countrywide + +On line 2934: + force us into a + decision faster than we would + like." Countrywide Chief + +On line 2934: + a decision faster + than we would like." Countrywide + Chief Risk Officer + +On line 2934: + decision faster than + we would like." Countrywide Chief + Risk Officer John + +On line 2934: + would like." Countrywide + Chief Risk Officer John McMurray + responded that "based + +On line 2934: + Chief Risk Officer + John McMurray responded that "based + on my meetings with + +On line 2934: + Risk Officer John + McMurray responded that "based on + my meetings with the + +On line 2934: + Officer John McMurray + responded that "based on my + meetings with the FRB + +On line 2934: + John McMurray responded + that "based on my meetings with + the FRB and OTS, the + +On line 2934: + McMurray responded that + "based on my meetings with the + FRB and OTS, the OTS + +On line 2934: + "based on my meetings + with the FRB and OTS, the OTS + appears to be both + +On line 2934: + with the FRB and OTS, + the OTS appears to be both + more familiar and + +On line 2934: + the FRB and OTS, the + OTS appears to be both more + familiar and more + +On line 2934: + OTS, the OTS appears + to be both more familiar + and more comfortable + +On line 2934: + the OTS appears to + be both more familiar and + more comfortable with + +On line 2936: + more familiar and + more comfortable with Option + ARMs."112 The OTS approved + +On line 2936: + ARMs."112 The OTS approved + Countrywide’s application + for a thrift charter + +On line 2942: + March LEVERAGED LOANS AND + COMMERCIAL REAL ESTATE: + "YOU’VE GOT TO GET + +On line 2942: + LOANS AND COMMERCIAL + REAL ESTATE: "YOU’VE GOT + TO GET UP AND DANCE" + +On line 2944: + GOT TO GET UP AND + DANCE" The credit bubble was + not confined to the + +On line 2944: + AND DANCE" The credit + bubble was not confined to + the residential + +On line 2944: + was not confined to + the residential mortgage + market. The markets + +On line 2944: + (typically loans + to below-investment-grade + companies to aid + +On line 2944: + dynamics, although + the effects were not as large + and damaging as + +On line 2944: + the effects were not + as large and damaging as + in residential + +On line 2944: + and damaging as + in residential real + estate. From to these + +On line 2944: + in residential + real estate. From to these + other two markets + +On line 2944: + real estate. From + to these other two markets + grew tremendously, spurred + +On line 2944: + to these other two + markets grew tremendously, spurred + by structured finance + +On line 2944: + by structured finance + products—commercial mortgage–backed + securities and + +On line 2944: + loan obligations (CLOs), + respectively—which were in + many ways similar + +On line 2944: + respectively—which + were in many ways similar + to residential + +On line 2944: + many ways similar + to residential mortgage-backed + securities and + +On line 2944: + to residential + mortgage-backed securities and + CDOs. And just as in + +On line 2944: + standards loosened, even + as the cost of borrowing + decreased,113 and trading + +On line 2944: + loosened, even as the + cost of borrowing decreased,113 + and trading in these + +On line 2944: + cost of borrowing + decreased,113 and trading in these + securities was + +On line 2946: + Historically, + leveraged loans had been made by + commercial banks; but + +On line 2946: + but a market for + institutional investors + developed and grew + +On line 2946: + institutional + investors developed and grew + in the mid- to late + +On line 2946: + investors developed + and grew in the mid- to late + 1990s.115 An "agent" bank would + +On line 2946: + the mid- to late 1990s.115 + An "agent" bank would originate + a package of loans + +On line 2946: + mid- to late 1990s.115 An + "agent" bank would originate a + package of loans to + +On line 2946: + late 1990s.115 An "agent" bank + would originate a package + of loans to only + +On line 2946: + 1990s.115 An "agent" bank would + originate a package of + loans to only one + +On line 2946: + would originate a + package of loans to only + one company and + +On line 2946: + of loans to only + one company and then sell + or syndicate the + +On line 2946: + loans to only one + company and then sell or + syndicate the loans + +On line 2946: + one company and + then sell or syndicate the + loans in the package + +On line 2946: + company and then + sell or syndicate the loans + in the package to + +On line 2946: + sell or syndicate + the loans in the package to + other banks and large + +On line 2946: + syndicate the loans + in the package to other + banks and large nonbank + +On line 2946: + in the package to + other banks and large nonbank + investors. The package + +On line 2946: + large nonbank investors. + The package generally + included loans with + +On line 2946: + investors. The package + generally included + loans with different + +On line 2946: + included loans with + different maturities. + Some were short-term lines + +On line 2946: + lines of credit, which + would be syndicated to + banks; the rest were longer-term + +On line 2946: + of credit, which would + be syndicated to banks; + the rest were longer-term loans + +On line 2946: + be syndicated + to banks; the rest were longer-term loans + syndicated to + +On line 2946: + the rest were longer-term loans + syndicated to nonbank, + institutional + +On line 2946: + syndicated to + nonbank, institutional + investors. Leveraged loan + +On line 2946: + institutional + investors. Leveraged loan issuance + more than doubled from + +On line 2946: + investors. Leveraged loan + issuance more than doubled from + to but the rapid growth + +On line 2946: + Leveraged loan issuance + more than doubled from to but + the rapid growth was in + +On line 2946: + loan issuance more than + doubled from to but the rapid + growth was in the longer-term + +On line 2946: + doubled from to but + the rapid growth was in the longer-term + institutional + +On line 2946: + rapid growth was in the + longer-term institutional loans + rather than in short-term + +On line 2946: + rather than in short-term + lending. By the longer-term leveraged + loans rose to billion, + +On line 2946: + in short-term lending. + By the longer-term leveraged loans rose + to billion, up from + +On line 2946: + lending. By the longer-term + leveraged loans rose to billion, + up from billion in + +On line 2948: + By the longer-term leveraged + loans rose to billion, up from + billion in Starting + +On line 2948: + longer-term leveraged loans rose + to billion, up from billion + in Starting in the + +On line 2948: + leveraged loans rose to + billion, up from billion in + Starting in the longer-term + +On line 2948: + loans rose to billion, + up from billion in Starting + in the longer-term leveraged + +On line 2948: + rose to billion, up + from billion in Starting in + the longer-term leveraged loans + +On line 2948: + to billion, up from + billion in Starting in the + longer-term leveraged loans were + +On line 2948: + up from billion in + Starting in the longer-term leveraged + loans were packaged in + +On line 2948: + billion in Starting + in the longer-term leveraged loans were + packaged in CLOs, which + +On line 2948: + Starting in the longer-term + leveraged loans were packaged in + CLOs, which were rated + +On line 2948: + the longer-term leveraged loans + were packaged in CLOs, which were + rated according + +On line 2948: + CLOs, which were rated + according to methodologies + similar to those + +On line 2948: + rated according + to methodologies similar + to those the rating + +On line 2948: + similar to those + the rating agencies used for + CDOs. Like CDOs, CLOs had + +On line 2948: + for CDOs. Like CDOs, CLOs + had tranches, underwriters, + and collateral + +On line 2948: + underwriters, and + collateral managers. The + market was less than + +On line 2948: + The market was less + than billion annually + from to but then it + +On line 2948: + but then it started + growing dramatically. + Annual issuance + +On line 2950: + Annual issuance + exceeded billion in and + peaked above billion in + +On line 2950: + billion in and peaked + above billion in From through the + third quarter of more + +On line 2950: + peaked above billion in + From through the third quarter of + more than of leveraged + +On line 2950: + above billion in From + through the third quarter of more + than of leveraged loans + +On line 2950: + billion in From through + the third quarter of more than + of leveraged loans were + +On line 2950: + through the third quarter + of more than of leveraged loans + were packaged into + +On line 2950: + the third quarter of + more than of leveraged loans were + packaged into CLOs.117 + +On line 2952: + quarter of more than + of leveraged loans were packaged + into CLOs.117 As the + +On line 2952: + more than of leveraged + loans were packaged into CLOs.117 + As the market for + +On line 2952: + of leveraged loans were + packaged into CLOs.117 As the + market for leveraged + +On line 2952: + CLOs.117 As the market + for leveraged loans grew, credit + became looser and + +On line 2952: + for leveraged loans grew, + credit became looser and + leverage increased as + +On line 2952: + became looser and + leverage increased as well. The + deals became larger + +On line 2952: + became larger and + costs of borrowing declined. + Loans that in had paid + +On line 2952: + had paid interest + of percentage points over an + interbank lending + +On line 2952: + of percentage points + over an interbank lending + rate were refinanced + +On line 2952: + percentage points over + an interbank lending rate + were refinanced in + +On line 2952: + over an interbank + lending rate were refinanced + in early into + +On line 2952: + were refinanced in + early into loans paying + just percentage points + +On line 2952: + in early into + loans paying just percentage + points over that same rate. + +On line 2952: + into loans paying + just percentage points over that + same rate. During the + +On line 2952: + just percentage points + over that same rate. During the + peak of the recent + +On line 2952: + same rate. During the + peak of the recent leveraged + buyout boom, leveraged + +On line 2952: + During the peak of + the recent leveraged buyout + boom, leveraged loans were + +On line 2952: + peak of the recent + leveraged buyout boom, leveraged + loans were frequently + +On line 2952: + the recent leveraged + buyout boom, leveraged loans were + frequently issued + +On line 2952: + buyout boom, leveraged + loans were frequently issued + with interest-only, + +On line 2954: + to defer paying + interest by issuing + new debt to cover + +On line 2954: + interest. Covenant-lite + loans exempted borrowers + from standard loan covenants + +On line 2954: + covenants that usually + require corporate firms to + limit their other + +On line 2954: + usually require + corporate firms to limit + their other debts and + +On line 2954: + require corporate + firms to limit their other + debts and to maintain + +On line 2954: + firms to limit their + other debts and to maintain + minimum levels + +On line 2954: + debts and to maintain + minimum levels of cash. + Private equity + +On line 2954: + those that specialized + in investing directly + in companies, found + +On line 2954: + that specialized in + investing directly in + companies, found it + +On line 2954: + companies, found it + easier and cheaper to + finance their leveraged + +On line 2954: + found it easier + and cheaper to finance their + leveraged buyouts. Just + +On line 2954: + cheaper to finance + their leveraged buyouts. Just as + home prices rose, so too + +On line 2954: + finance their leveraged + buyouts. Just as home prices rose, + so too did the prices + +On line 2954: + their leveraged buyouts. + Just as home prices rose, so too + did the prices of the + +On line 2954: + Just as home prices rose, + so too did the prices of the + target companies. + +On line 2956: + home prices rose, so too + did the prices of the target + companies. One of + +On line 2956: + so too did the prices + of the target companies. + One of the largest deals + +On line 2956: + did the prices of the + target companies. One of + the largest deals ever + +On line 2956: + the largest deals ever + made involving leveraged loans + was announced on April + +On line 2956: + largest deals ever made + involving leveraged loans was + announced on April by + +On line 2956: + on April by KKR, a + private equity firm. KKR + said it intended + +On line 2956: + Corporation, a + processor of electronic + data including + +On line 2956: + including credit + and debit card payments, for + about billion. As part + +On line 2956: + debit card payments, + for about billion. As part of + this transaction, KKR + +On line 2956: + for about billion. As + part of this transaction, KKR + would issue billion + +On line 2956: + about billion. As part + of this transaction, KKR would + issue billion in + +On line 2956: + of this transaction, + KKR would issue billion in + junk bonds and take out + +On line 2956: + in junk bonds and take + out another billion in + leveraged loans from a + +On line 2956: + take out another + billion in leveraged loans from + a consortium of + +On line 2956: + a consortium of + banks including Citigroup, + Deutsche Bank, Goldman Sachs, + +On line 2956: + Deutsche Bank, Goldman Sachs, + HSBC Securities, Lehman + Brothers, and Merrill + +On line 2958: + Goldman Sachs, HSBC + Securities, Lehman Brothers, + and Merrill Lynch.119 As + +On line 2958: + and Merrill Lynch.119 As + late as July Citigroup + and others were still + +On line 2958: + As late as July + Citigroup and others were + still increasing their + +On line 2958: + and others were still + increasing their leveraged loan + business.120 Citigroup + +On line 2958: + leveraged loan business.120 + Citigroup CEO Charles Prince then + said of the business, + +On line 2958: + Citigroup CEO Charles + Prince then said of the business, + "When the music stops, + +On line 2958: + said of the business, + "When the music stops, in terms + of liquidity, + +On line 2958: + of the business, "When + the music stops, in terms of + liquidity, things + +On line 2958: + music stops, in terms + of liquidity, things will + be complicated. + +On line 2958: + of liquidity, + things will be complicated. + But as long as the + +On line 2958: + be complicated. + But as long as the music + is playing, you’ve + +On line 2958: + complicated. But + as long as the music is + playing, you’ve got + +On line 2958: + But as long as the + music is playing, you’ve + got to get up and + +On line 2958: + long as the music + is playing, you’ve got to + get up and dance. We’re + +On line 2958: + as the music is + playing, you’ve got to get + up and dance. We’re still + +On line 2958: + music is playing, + you’ve got to get up and + dance. We’re still dancing." + +On line 2958: + playing, you’ve got + to get up and dance. We’re still + dancing." Prince later + +On line 2958: + you’ve got to get + up and dance. We’re still dancing." + Prince later explained + +On line 2958: + to get up and dance. + We’re still dancing." Prince later + explained to the FCIC, + +On line 2958: + up and dance. We’re still + dancing." Prince later explained + to the FCIC, "At that + +On line 2958: + dance. We’re still dancing." + Prince later explained to the + FCIC, "At that point in + +On line 2958: + We’re still dancing." Prince + later explained to the FCIC, + "At that point in time, + +On line 2958: + dancing." Prince later + explained to the FCIC, "At that + point in time, because + +On line 2958: + later explained to + the FCIC, "At that point in time, + because interest + +On line 2958: + explained to the FCIC, + "At that point in time, because + interest rates had + +On line 2958: + the FCIC, "At that point + in time, because interest + rates had been so low + +On line 2958: + FCIC, "At that point in + time, because interest rates + had been so low for + +On line 2958: + "At that point in time, + because interest rates had + been so low for so + +On line 2958: + point in time, because + interest rates had been so + low for so long, the + +On line 2958: + interest rates had + been so low for so long, the + private equity + +On line 2958: + been so low for so + long, the private equity + firms were driving very + +On line 2958: + so low for so long, + the private equity firms + were driving very hard + +On line 2958: + so long, the private + equity firms were driving + very hard bargains with + +On line 2958: + equity firms were + driving very hard bargains with + the banks. And at that + +On line 2958: + firms were driving very + hard bargains with the banks. And + at that point in time + +On line 2958: + were driving very hard + bargains with the banks. And at + that point in time the + +On line 2958: + participating + in this lending business. It + was not credible + +On line 2958: + this lending business. + It was not credible for + one institution + +On line 2958: + lending business. It + was not credible for one + institution to + +On line 2958: + was not credible + for one institution to + unilaterally + +On line 2958: + one institution + to unilaterally back + away from this leveraged + +On line 2958: + away from this leveraged + lending business. It was in + that context that I + +On line 2958: + lending business. It + was in that context that I + suggested that all + +On line 2958: + was in that context + that I suggested that all + of us, we were all + +On line 2960: + up lending standards + in the leveraged lending area."121 + The CLO market would + +On line 2960: + lending standards in + the leveraged lending area."121 The + CLO market would seize + +On line 2960: + the leveraged lending + area."121 The CLO market would seize + up in the summer + +On line 2960: + leveraged lending area."121 + The CLO market would seize up + in the summer of + +On line 2960: + lending area."121 The CLO + market would seize up in the + summer of during + +On line 2960: + up in the summer + of during the financial + crisis, just as the + +On line 2960: + crisis, just as the + much-larger mortgage-related CDO + market seized. At the + +On line 2960: + just as the much-larger + mortgage-related CDO market + seized. At the time this + +On line 2960: + roughly billion in + outstanding commitments for + new loans; as demand + +On line 2960: + new loans; as demand + in the secondary market dried + up, these loans ended + +On line 2960: + loans; as demand in + the secondary market dried up, + these loans ended up + +On line 2960: + as demand in the + secondary market dried up, these + loans ended up on + +On line 2960: + the secondary market + dried up, these loans ended up + on the banks’ balance + +On line 2960: + secondary market dried + up, these loans ended up on + the banks’ balance sheets.122 + +On line 2962: + up, these loans ended + up on the banks’ balance sheets.122 + Commercial real + +On line 2962: + and industrial + properties—went through a bubble + similar to that + +On line 2962: + the housing market. + Investment banks created + commercial mortgage– + +On line 2964: + securities and + even CDOs out of commercial + real estate loans, + +On line 2964: + and even CDOs out of + commercial real estate + loans, just as they did + +On line 2964: + commercial real + estate loans, just as they did + with residential + +On line 2964: + estate loans, just as + they did with residential + mortgages. And, just as + +On line 2964: + loans, just as they did + with residential mortgages. + And, just as houses + +On line 2964: + with residential + mortgages. And, just as houses + appreciated + +On line 2964: + mortgages. And, just as + houses appreciated + from on, so too did + +On line 2964: + from on, so too did + commercial real estate + values. Office prices + +On line 2966: + prices rose by nearly + between and in the central + business districts of + +On line 2966: + between and in the + central business districts of + the markets for which + +On line 2968: + of the markets for + which data are available. The + increase was in Phoenix, + +On line 2968: + for which data are + available. The increase was in + Phoenix, in Tampa, in + +On line 2968: + available. The increase + was in Phoenix, in Tampa, in + Manhattan, and in + +On line 2970: + in Phoenix, in Tampa, + in Manhattan, and in Los + Angeles.123 Issuance + +On line 2970: + Angeles.123 Issuance + of commercial mortgage–backed + securities rose + +On line 2970: + securities rose + from billion in to billion + in reaching billion + +On line 2970: + reaching billion in + When securitization + markets contracted, + +On line 2970: + markets contracted, + issuance fell to billion in + and billion in When + +On line 2970: + issued billion of + commercial mortgage CDOs, a + number that again dropped + +On line 2970: + commercial mortgage + CDOs, a number that again dropped + precipitously + +On line 2972: + CDOs, a number that + again dropped precipitously + in Leveraged loans and + +On line 2972: + a number that again + dropped precipitously in + Leveraged loans and the + +On line 2974: + came together on + July when the Blackstone Group + announced its plan to + +On line 2974: + on July when the + Blackstone Group announced its plan + to buy Hilton—a hotel + +On line 2974: + buy Hilton—a hotel chain + with properties—for billion, + a premium over + +On line 2974: + Hilton—a hotel chain with + properties—for billion, a + premium over the + +On line 2974: + with properties—for + billion, a premium over + the share price. A year + +On line 2974: + a premium over + the share price. A year later, + one author described + +On line 2974: + premium over the + share price. A year later, one + author described this + +On line 2974: + the share price. A year + later, one author described + this deal as "the apogee + +On line 2974: + price. A year later, + one author described this deal + as "the apogee of the + +On line 2974: + one author described + this deal as "the apogee of the + early-millennial + +On line 2974: + this deal as "the apogee + of the early-millennial + megabuy-out frenzy, where cheap + +On line 2974: + deal as "the apogee of + the early-millennial megabuy-out + frenzy, where cheap and + +On line 2974: + private equity + firms to buy out companies + at often absurd + +On line 2974: + at often absurd + overvaluations, saddle + them with massive debt, + +On line 2974: + overvaluations, + saddle them with massive debt, + and then pay themselves + +On line 2974: + with massive debt, and + then pay themselves hefty fees for + the trouble."125 Twenty + +On line 2974: + then pay themselves hefty + fees for the trouble."125 Twenty + billion dollars in + +On line 2974: + fees for the trouble."125 + Twenty billion dollars in + financing came from + +On line 2974: + billion dollars in + financing came from the top + five investment banks + +On line 2974: + financing came from + the top five investment banks + and large commercial + +On line 2974: + investment banks and + large commercial banks such as + Bank of America + +On line 2976: + large commercial banks + such as Bank of America + and Deutsche Bank.126 Bear Stearns + +On line 2976: + commercial banks such + as Bank of America and + Deutsche Bank.126 Bear Stearns was + +On line 2976: + and Deutsche Bank.126 Bear Stearns + was increasingly active + in these markets. While + +On line 2976: + Deutsche Bank.126 Bear Stearns was + increasingly active in + these markets. While Bear + +On line 2976: + was increasingly + active in these markets. While + Bear topped the market + +On line 2976: + in residential + securitizations, it + ranked in the bottom + +On line 2976: + half in commercial + securitizations.127 But + it was racing to + +On line 2978: + established Bear Stearns + as a global presence in + commercial real + +On line 2980: + originations more + than doubled between and And + then the market came + +On line 2980: + than doubled between + and And then the market came + crashing to a halt. + +On line 2980: + between and And then + the market came crashing to + a halt. Although the + +On line 2980: + a halt. Although the + commercial real estate + mortgage market was + +On line 2980: + commercial real + estate mortgage market was + much smaller than the + +On line 2980: + market—in commercial + real estate debt was less + than trillion, compared + +On line 2980: + for residential + mortgages129—it declined even + more steeply. From its peak, + +On line 2980: + its peak, commercial + real estate fell roughly + in value, and prices + +On line 2980: + real estate fell + roughly in value, and prices + have remained close to + +On line 2980: + roughly in value, + and prices have remained close to + their lows. Losses on + +On line 2980: + and prices have remained + close to their lows. Losses on + commercial real + +On line 2980: + remained close to their + lows. Losses on commercial + real estate would + +On line 2980: + their lows. Losses on + commercial real estate + would be an issue + +On line 2980: + real estate would + be an issue across Wall Street, + particularly + +On line 2980: + be an issue across + Wall Street, particularly + for Lehman and Bear. And + +On line 2980: + And potentially + for the taxpayer. When the + Federal Reserve + +On line 2980: + for the taxpayer. + When the Federal Reserve + would assume billion + +On line 2980: + the taxpayer. When + the Federal Reserve would + assume billion of + +On line 2980: + Federal Reserve + would assume billion of Bear’s + illiquid assets in + +On line 2980: + assume billion of + Bear’s illiquid assets in that + would include roughly + +On line 2980: + Bear’s illiquid assets + in that would include roughly + billion in loans from + +On line 2980: + assets in that would + include roughly billion in + loans from the unsold + +On line 2980: + in that would include + roughly billion in loans from + the unsold portion + +On line 2980: + unsold portion of + the Hilton financing package.130 + And the commercial + +On line 2980: + portion of the Hilton + financing package.130 And the + commercial real + +On line 2980: + financing package.130 + And the commercial real + estate market would + +On line 2980: + estate market would + continue to decline long + after the housing + +On line 2982: + the housing market + had begun to stabilize. + LEHMAN: FROM "MOVING" TO + +On line 2984: + to stabilize. LEHMAN: + FROM "MOVING" TO "STORAGE" Even + as the market was + +On line 2984: + LEHMAN: FROM "MOVING" TO + "STORAGE" Even as the market + was nearing its peak, + +On line 2984: + TO "STORAGE" Even as + the market was nearing its + peak, Lehman took on more + +On line 2984: + "STORAGE" Even as the + market was nearing its peak, + Lehman took on more risk. + +On line 2986: + market was nearing + its peak, Lehman took on more risk. + On October when + +On line 2986: + its peak, Lehman took on + more risk. On October when + commercial real + +On line 2986: + On October when + commercial real estate + already made up of + +On line 2986: + of its assets, Lehman + Brothers acquired a major + stake in Archstone Smith, + +On line 2986: + Brothers acquired a + major stake in Archstone Smith, + a publicly traded + +On line 2986: + stake in Archstone Smith, + a publicly traded real + estate investment + +On line 2988: + investment trust, for + billion. Archstone owned more than + apartments, including + +On line 2988: + Archstone owned more than + apartments, including units still + under construction, + +On line 2988: + owned more than apartments, + including units still under + construction, in over + +On line 2988: + including units still + under construction, in over + communities in + +On line 2988: + under construction, + in over communities in + the United States. It + +On line 2988: + communities in + the United States. It was the + bank’s largest commercial + +On line 2990: + would generate more + than billion in profits over + years—projections based + +On line 2990: + more than billion in + profits over years—projections + based on optimistic + +On line 2990: + years—projections based + on optimistic assumptions, + given the state of + +On line 2990: + based on optimistic + assumptions, given the state + of the market at + +On line 2990: + assumptions, given + the state of the market at + that point. Both Lehman and + +On line 2990: + given the state of + the market at that point. Both + Lehman and Archstone were + +On line 2990: + of the market at + that point. Both Lehman and Archstone + were highly leveraged: + +On line 2990: + that point. Both Lehman and + Archstone were highly leveraged: + Archstone had little + +On line 2990: + Both Lehman and Archstone + were highly leveraged: Archstone + had little cushion + +On line 2990: + Lehman and Archstone were + highly leveraged: Archstone had + little cushion if + +On line 2990: + Archstone were highly + leveraged: Archstone had little + cushion if its rent + +On line 2990: + were highly leveraged: + Archstone had little cushion + if its rent receipts + +On line 2990: + leveraged: Archstone had + little cushion if its rent + receipts should go down, + +On line 2990: + Archstone had little + cushion if its rent receipts + should go down, and Lehman + +On line 2990: + little cushion if + its rent receipts should go down, + and Lehman had little + +On line 2990: + cushion if its rent + receipts should go down, and Lehman + had little cushion + +On line 2990: + receipts should go down, + and Lehman had little cushion + if investments such + +On line 2990: + and Lehman had little + cushion if investments such + as Archstone should lose + +On line 2990: + if investments such + as Archstone should lose value.132 + Although the firm had + +On line 2990: + such as Archstone should + lose value.132 Although the firm + had proclaimed that "Risk + +On line 2990: + lose value.132 Although + the firm had proclaimed that "Risk + Management is at + +On line 2990: + Although the firm had + proclaimed that "Risk Management + is at the very core + +On line 2990: + the firm had proclaimed + that "Risk Management is at + the very core of Lehman’s + +On line 2990: + had proclaimed that "Risk + Management is at the very + core of Lehman’s business + +On line 2990: + that "Risk Management + is at the very core of Lehman’s + business model," the + +On line 2990: + core of Lehman’s business + model," the Executive + Committee simply + +On line 2990: + business model," the + Executive Committee + simply left its risk + +On line 2990: + its risk officer, + Madelyn Antoncic, out of + the loop when it made + +On line 2992: + Madelyn Antoncic, + out of the loop when it made + this investment.133 Since + +On line 2992: + out of the loop when + it made this investment.133 Since + the late 1990s, Lehman had + +On line 2992: + the loop when it made + this investment.133 Since the late + 1990s, Lehman had also + +On line 2992: + loop when it made this + investment.133 Since the late 1990s, + Lehman had also built + +On line 2992: + this investment.133 Since + the late 1990s, Lehman had also + built a large mortgage + +On line 2992: + the late 1990s, Lehman had + also built a large mortgage + origination arm, + +On line 2992: + also built a large + mortgage origination arm, + a formidable + +On line 2992: + and a powerful + underwriting division + as well. Then, in its + +On line 2992: + Richard Fuld and other + executives explained to + their colleagues a new + +On line 2992: + new move toward an + aggressive growth strategy, + including greater risk + +On line 2992: + an aggressive growth + strategy, including greater + risk and more leverage. + +On line 2992: + including greater risk + and more leverage. They described + the change as a shift + +On line 2992: + risk and more leverage. + They described the change as a + shift from a "moving" + +On line 2992: + and more leverage. They + described the change as a shift + from a "moving" or + +On line 2994: + a "storage" business, + in which Lehman would make and hold + longer-term investments.134 By + +On line 2994: + in which Lehman would make + and hold longer-term investments.134 By + summer the housing + +On line 2994: + Lehman would make and hold + longer-term investments.134 By summer + the housing market + +On line 2994: + would make and hold longer-term + investments.134 By summer the + housing market faced + +On line 2994: + firm’s risk policies and + limits—and warnings from risk + managers—and pursued + +On line 2994: + limits—and warnings + from risk managers—and pursued + its "countercyclical + +On line 2994: + from risk managers—and + pursued its "countercyclical + growth strategy." It + +On line 2994: + its "countercyclical + growth strategy." It had worked + well during prior + +On line 2994: + dislocations, and + Lehman’s management assumed that + it would work again.135 Lehman’s + +On line 2994: + and Lehman’s management + assumed that it would work again.135 + Lehman’s Aurora unit + +On line 2994: + it would work again.135 Lehman’s + Aurora unit continued + to originate Alt-A + +On line 2994: + Lehman’s Aurora unit + continued to originate + Alt-A loans after the + +On line 2994: + unit continued to + originate Alt-A loans after + the housing market + +On line 2994: + originate Alt-A loans + after the housing market + had begun to show + +On line 2994: + after the housing + market had begun to show + signs of weakening.136 + +On line 2994: + also continued + to securitize mortgage + assets for sale but + +On line 2994: + to securitize + mortgage assets for sale but + was now holding more + +On line 2994: + assets for sale but + was now holding more of them + as investments. Across + +On line 2994: + was now holding more + of them as investments. Across + both the commercial + +On line 2994: + now holding more of + them as investments. Across both + the commercial and + +On line 2994: + both the commercial + and residential real + estate sectors, the + +On line 2994: + estate sectors, the + mortgage-related assets on + Lehman’s books increased from + +On line 2994: + the mortgage-related + assets on Lehman’s books increased + from billion in to + +On line 2994: + on Lehman’s books increased + from billion in to billion + in This increase would + +On line 2994: + Lehman’s books increased from + billion in to billion in + This increase would be + +On line 2994: + in to billion in + This increase would be part of + Lehman’s undoing a + +On line 2994: + to billion in This + increase would be part of Lehman’s + undoing a year + +On line 2996: + in This increase would + be part of Lehman’s undoing + a year later. Lehman’s + +On line 2996: + would be part of Lehman’s + undoing a year later. + Lehman’s regulators + +On line 2996: + undoing a year + later. Lehman’s regulators + did not restrain its + +On line 2996: + rapid growth. The SEC, Lehman’s + main regulator, knew of + the firm’s disregard + +On line 2996: + growth. The SEC, Lehman’s main + regulator, knew of the + firm’s disregard of + +On line 2996: + main regulator, + knew of the firm’s disregard + of risk management. + +On line 2996: + regulator, knew + of the firm’s disregard of + risk management. The + +On line 2996: + firm’s disregard of + risk management. The SEC knew + that Lehman continued + +On line 2996: + disregard of risk + management. The SEC knew that + Lehman continued to + +On line 2996: + management. The SEC + knew that Lehman continued to + increase its holding + +On line 2996: + The SEC knew that Lehman + continued to increase its + holding of mortgage + +On line 2996: + SEC reports obtained + by the FCIC.137 Nonetheless, Erik + Sirri, who led the + +On line 2996: + Sirri, who led the + SEC’s supervision program, + told the FCIC that it + +On line 2996: + SEC’s supervision + program, told the FCIC that it + would not have mattered + +On line 2996: + program, told the FCIC + that it would not have mattered + if the agency had + +On line 2996: + told the FCIC that it + would not have mattered if the + agency had fully + +On line 2996: + that it would not have + mattered if the agency had + fully recognized + +On line 2996: + would not have mattered + if the agency had fully + recognized the risks + +On line 2996: + if the agency had + fully recognized the risks + associated + +On line 2996: + To avoid serious + losses, Sirri maintained, Lehman + would have had to start + +On line 2996: + serious losses, + Sirri maintained, Lehman would have + had to start selling + +On line 2996: + maintained, Lehman would have + had to start selling real + estate assets in + +On line 2996: + Lehman would have had to + start selling real estate + assets in Instead, + +On line 2996: + start selling real + estate assets in Instead, + it kept buying, well + +On line 2996: + assets in Instead, + it kept buying, well into + the first quarter of + +On line 2998: + well into the first + quarter of In addition, + according to the + +On line 2998: + the first quarter of + In addition, according + to the bankruptcy + +On line 2998: + according to the + bankruptcy examiner, + Lehman understated + +On line 2998: + balance sheet before + each reporting period. + Martin Kelly, Lehman’s + +On line 2998: + Kelly, Lehman’s global + financial controller, stated + that the transactions + +On line 2998: + balance sheet." Other + Lehman executives described + Repo transactions + +On line 2998: + Lehman executives + described Repo transactions + as an "accounting + +On line 2998: + Repo transactions + as an "accounting gimmick" + and a "lazy way of + +On line 2998: + of managing the + balance sheet as opposed to + legitimately + +On line 2998: + sheet as opposed to + legitimately meeting + balance sheet targets + +On line 2998: + legitimately + meeting balance sheet targets + at quarter-end." Bart McDade, + +On line 2998: + quarter-end." Bart McDade, who + became Lehman’s president and + chief operating + +On line 2998: + president and chief + operating officer + in June in an email + +On line 3000: + an email called Repo + transactions "another drug + we R on."139 Ernst Young + +On line 3000: + drug we R on."139 Ernst + Young (E&Y), Lehman’s auditor, was + aware of the Repo + +On line 3000: + R on."139 Ernst Young (E&Y), + Lehman’s auditor, was aware of + the Repo practice + +On line 3000: + on."139 Ernst Young (E&Y), Lehman’s + auditor, was aware of the + Repo practice but + +On line 3000: + Lehman’s auditor, was + aware of the Repo practice + but did not question + +On line 3000: + auditor, was aware + of the Repo practice but + did not question Lehman’s + +On line 3000: + Repo practice but + did not question Lehman’s failure + to publicly disclose + +On line 3000: + did not question Lehman’s + failure to publicly disclose + it, despite being + +On line 3000: + failure to publicly + disclose it, despite being + informed in May by + +On line 3000: + publicly disclose it, + despite being informed in + May by Lehman Senior + +On line 3000: + improper. The Lehman + bankruptcy examiner + concluded that E&Y + +On line 3000: + concluded that E&Y + took "virtually no ction + to investigate + +On line 3000: + investigate the + Repo allegations, took + no steps to question + +On line 3000: + steps to question or + challenge the non-disclosure by + Lehman," and that "colorable + +On line 3000: + non-disclosure by Lehman," + and that "colorable claims exist + that E&Y did not meet + +On line 3000: + Lehman," and that "colorable + claims exist that E&Y did not + meet professional + +On line 3000: + investigating + Lee’s allegations and in + connection with its + +On line 3000: + Lee’s allegations + and in connection with its + audit and review + +On line 3000: + and in connection + with its audit and review + of Lehman’s financial + +On line 3000: + connection with its + audit and review of Lehman’s + financial statements."140 + +On line 3000: + audit and review + of Lehman’s financial statements."140 + New York Attorney + +On line 3000: + of Lehman’s financial + statements."140 New York Attorney + General Andrew + +On line 3000: + accusing the firm + of facilitating a + "massive accounting + +On line 3000: + facilitating + a "massive accounting fraud" + by helping Lehman to + +On line 3002: + about its financial + condition.141 The Office of + Thrift Supervision + +On line 3002: + The Office of Thrift + Supervision had also + regulated Lehman + +On line 3002: + regulated Lehman + since through its jurisdiction + over Lehman’s thrift subsidiary. + +On line 3002: + jurisdiction over + Lehman’s thrift subsidiary. Although "the + SEC was regarded + +On line 3002: + regulator," the + OTS examiner told the + FCIC, "we in no way + +On line 3002: + OTS examiner + told the FCIC, "we in no way + just assumed that [the + +On line 3002: + examiner told + the FCIC, "we in no way just + assumed that [the SEC] + +On line 3002: + told the FCIC, "we in + no way just assumed that [the + SEC] would do the right + +On line 3002: + the FCIC, "we in no + way just assumed that [the SEC] + would do the right thing, + +On line 3002: + FCIC, "we in no way + just assumed that [the SEC] would + do the right thing, so + +On line 3002: + "we in no way just + assumed that [the SEC] would do + the right thing, so we + +On line 3002: + just assumed that [the + SEC] would do the right thing, so + we regulated + +On line 3002: + assumed that [the SEC] + would do the right thing, so we + regulated and + +On line 3002: + SEC] would do the right + thing, so we regulated + and supervised the + +On line 3002: + we regulated + and supervised the holding + company."142 Still, not + +On line 3002: + and supervised the + holding company."142 Still, not + until July 2008—just + +On line 3002: + holding company."142 + Still, not until July 2008—just + a few months before + +On line 3002: + company."142 Still, not + until July 2008—just a few + months before Lehman failed— + +On line 3004: + until July 2008—just + a few months before Lehman failed— + would the OTS issue + +On line 3004: + a few months before + Lehman failed— would the OTS issue + a report warning + +On line 3004: + few months before Lehman + failed— would the OTS issue a + report warning that + +On line 3004: + before Lehman failed— would + the OTS issue a report + warning that Lehman had + +On line 3004: + Lehman failed— would the OTS + issue a report warning + that Lehman had made an + +On line 3004: + would the OTS issue + a report warning that Lehman + had made an "outsized + +On line 3004: + the OTS issue a + report warning that Lehman had + made an "outsized bet" + +On line 3004: + a report warning + that Lehman had made an "outsized + bet" on commercial + +On line 3004: + had made an "outsized + bet" on commercial real + estate—larger than + +On line 3004: + bet" on commercial + real estate—larger than + that by its peer firms, + +On line 3004: + commercial real + estate—larger than that by + its peer firms, despite + +On line 3004: + estate—larger than + that by its peer firms, despite + Lehman’s smaller size; that + +On line 3004: + its peer firms, despite + Lehman’s smaller size; that Lehman was + "materially + +On line 3004: + Lehman’s smaller size; that + Lehman was "materially + overexposed" to the + +On line 3004: + overexposed" to the + commercial real estate + sector; and that Lehman + +On line 3004: + to the commercial + real estate sector; and + that Lehman had "major + +On line 3004: + commercial real + estate sector; and that Lehman + had "major failings + +On line 3004: + sector; and that Lehman + had "major failings in its + risk management process."143 + +On line 3006: + failings in its risk + management process."143 FANNIE MAE + AND FREDDIE MAC: "TWO + +On line 3006: + its risk management + process."143 FANNIE MAE AND FREDDIE + MAC: "TWO STARK CHOICES" + +On line 3008: + risk management process."143 + FANNIE MAE AND FREDDIE MAC: + "TWO STARK CHOICES" In + +On line 3008: + process."143 FANNIE MAE AND + FREDDIE MAC: "TWO STARK CHOICES" + In while Countrywide, + +On line 3008: + FREDDIE MAC: "TWO STARK + CHOICES" In while Countrywide, + Citigroup, Lehman, and + +On line 3008: + "TWO STARK CHOICES" In + while Countrywide, Citigroup, + Lehman, and many others + +On line 3008: + STARK CHOICES" In while + Countrywide, Citigroup, Lehman, + and many others in + +On line 3008: + Citigroup, Lehman, and + many others in the mortgage + and CDO businesses + +On line 3008: + many others in the + mortgage and CDO businesses + were going into + +On line 3008: + and CDO businesses + were going into overdrive, + executives at + +On line 3008: + were going into + overdrive, executives at + the two behemoth + +On line 3008: + two behemoth GSEs, + Fannie and Freddie, worried + they were being left + +On line 3008: + Fannie and Freddie, + worried they were being left + behind. One sign of + +On line 3008: + and Freddie, worried + they were being left behind. + One sign of the times: + +On line 3008: + they were being left + behind. One sign of the times: + Fannie’s biggest source + +On line 3008: + Fannie would not buy + the new mortgages, Countrywide + President and COO + +On line 3008: + buy the new mortgages, + Countrywide President and + COO Sambol told the + +On line 3008: + and COO Sambol told + the FCIC.144 Typical of the + market as a whole, + +On line 3008: + the FCIC.144 Typical + of the market as a whole, + Countrywide sold of + +On line 3008: + of the market as + a whole, Countrywide sold of + its loans to Fannie + +On line 3008: + the market as a + whole, Countrywide sold of its + loans to Fannie in + +On line 3008: + market as a whole, + Countrywide sold of its loans + to Fannie in but + +On line 3008: + a whole, Countrywide + sold of its loans to Fannie + in but only in + +On line 3008: + whole, Countrywide sold + of its loans to Fannie in + but only in and + +On line 3010: + Countrywide sold of + its loans to Fannie in but + only in and in + +On line 3012: + sold of its loans to + Fannie in but only in + and in "The risk in + +On line 3012: + in and in "The risk + in the environment has + accelerated + +On line 3012: + Lund, Fannie’s head of + single-family lending, + told fellow senior + +On line 3012: + single-family + lending, told fellow senior + officers at a + +On line 3012: + told fellow senior + officers at a strategic + planning meeting on + +On line 3012: + planning meeting on + June In a bulleted list, + he ticked off changes in + +On line 3014: + concern about housing + bubbles, growing concerns about + borrowers taking + +On line 3014: + borrowers taking + on increased risks and higher + debt, [and] aggressive + +On line 3016: + on increased risks and + higher debt, [and] aggressive + risk layering."146 "We + +On line 3016: + debt, [and] aggressive + risk layering."146 "We face two + stark choices: stay the + +On line 3016: + [and] aggressive risk + layering."146 "We face two stark + choices: stay the course + +On line 3016: + layering."146 "We face + two stark choices: stay the course + [or] meet the market + +On line 3016: + two stark choices: stay + the course [or] meet the market + where the market is," + +On line 3016: + stark choices: stay the + course [or] meet the market where + the market is," Lund + +On line 3016: + choices: stay the course + [or] meet the market where the + market is," Lund said. + +On line 3016: + the course [or] meet the + market where the market is," + Lund said. If Fannie + +On line 3016: + [or] meet the market + where the market is," Lund said. + If Fannie Mae stayed + +On line 3016: + meet the market where + the market is," Lund said. If + Fannie Mae stayed the + +On line 3016: + the market is," Lund + said. If Fannie Mae stayed the + course, it would maintain + +On line 3016: + market is," Lund said. + If Fannie Mae stayed the course, + it would maintain its + +On line 3016: + If Fannie Mae stayed + the course, it would maintain its + credit discipline, + +On line 3016: + it would maintain its + credit discipline, protect + the quality of + +On line 3016: + discipline, protect + the quality of its book, + preserve capital, + +On line 3016: + the quality of + its book, preserve capital, + and intensify + +On line 3016: + quality of its + book, preserve capital, and + intensify the + +On line 3016: + intensify the + company’s public voice on + concerns. However, + +On line 3016: + company’s public + voice on concerns. However, + it would also face + +On line 3016: + concerns. However, + it would also face lower + volumes and revenues, + +On line 3016: + it would also face + lower volumes and revenues, + continued declines + +On line 3016: + declines in market + share, lower earnings, and a + weakening of key + +On line 3016: + a weakening of + key customer relationships.147 + It was simply a + +On line 3016: + relationships.147 It + was simply a matter of + relevance, former + +On line 3016: + simply a matter + of relevance, former CEO + Dan Mudd told the FCIC: + +On line 3016: + relevance, former + CEO Dan Mudd told the FCIC: "If + you’re not relevant, + +On line 3016: + CEO Dan Mudd told the + FCIC: "If you’re not relevant, + you’re unprofitable, and + +On line 3016: + Dan Mudd told the FCIC: + "If you’re not relevant, you’re + unprofitable, and you’re + +On line 3016: + the FCIC: "If you’re not + relevant, you’re unprofitable, + and you’re not serving + +On line 3016: + you’re not relevant, + you’re unprofitable, and you’re not + serving the mission. + +On line 3018: + you’re unprofitable, and + you’re not serving the mission. + And there was danger + +On line 3018: + unprofitable, and you’re + not serving the mission. And + there was danger to + +On line 3018: + you’re not serving the + mission. And there was danger + to profitability. + +On line 3018: + mission. And there was + danger to profitability. + I’m speaking more long + +On line 3018: + there was danger to + profitability. I’m speaking + more long term than in + +On line 3018: + profitability. I’m + speaking more long term than in + any given quarter + +On line 3018: + speaking more long term + than in any given quarter + or any given year. + +On line 3018: + more long term than in + any given quarter or any + given year. So this + +On line 3018: + given quarter or + any given year. So this was + a real strategic + +On line 3020: + any given year. So + this was a real strategic + rethinking."148 Lund saw + +On line 3020: + saw significant + obstacles to meeting the + market. He noted + +On line 3020: + meeting the market. + He noted Fannie’s lack of + capability + +On line 3020: + He noted Fannie’s + lack of capability + and infrastructure + +On line 3020: + noted Fannie’s lack + of capability and + infrastructure to + +On line 3020: + offered by Wall Street, + its unfamiliarity + with the new credit + +On line 3020: + with the new credit + risks, worries that the price of + the mortgages wouldn’t + +On line 3020: + the new credit risks, + worries that the price of the + mortgages wouldn’t be + +On line 3020: + credit risks, worries + that the price of the mortgages + wouldn’t be worth the + +On line 3020: + risks, worries that the + price of the mortgages wouldn’t + be worth the risk, and + +On line 3020: + price of the mortgages + wouldn’t be worth the risk, and + regulatory + +On line 3020: + wouldn’t be worth the + risk, and regulatory + concerns surrounding + +On line 3020: + be worth the risk, and + regulatory concerns + surrounding certain + +On line 3020: + regulatory + concerns surrounding certain + products.149 At this and + +On line 3020: + concerns surrounding + certain products.149 At this and + other meetings, Lund + +On line 3020: + other meetings, Lund + recommended studying whether + the current market + +On line 3020: + were cyclical or more + permanent, but he also + recommended that + +On line 3020: + permanent, but he + also recommended that + Fannie "dedicate + +On line 3020: + capabilities + to compete in any mortgage + environment."150 Citibank + +On line 3020: + environment."150 Citibank + executives also made + a presentation + +On line 3020: + a presentation + to Fannie’s board in July + warning that Fannie + +On line 3020: + to Fannie’s board in + July warning that Fannie + was increasingly + +On line 3020: + July warning that + Fannie was increasingly + at risk of being + +On line 3020: + warning that Fannie + was increasingly at risk + of being marginalized, + +On line 3020: + was increasingly + at risk of being marginalized, + and that "stay the course" + +On line 3020: + increasingly at + risk of being marginalized, and + that "stay the course" was + +On line 3020: + at risk of being + marginalized, and that "stay the course" + was not an option. + +On line 3020: + being marginalized, and + that "stay the course" was not an + option. Citibank proposed + +On line 3020: + that "stay the course" was + not an option. Citibank proposed + that Fannie expand + +On line 3020: + "stay the course" was not + an option. Citibank proposed that + Fannie expand its + +On line 3020: + the second-largest seller + of mortgages to Fannie, Citibank + would benefit from + +On line 3020: + second-largest seller of + mortgages to Fannie, Citibank would + benefit from such + +On line 3020: + mortgages to Fannie, + Citibank would benefit from such + a move. Over the next + +On line 3020: + to Fannie, Citibank would + benefit from such a move. + Over the next two years, + +On line 3020: + would benefit from + such a move. Over the next two + years, Citibank would increase + +On line 3020: + benefit from such + a move. Over the next two years, + Citibank would increase its + +On line 3020: + such a move. Over the + next two years, Citibank would increase + its sales to Fannie + +On line 3020: + a move. Over the next + two years, Citibank would increase its + sales to Fannie by + +On line 3020: + move. Over the next two + years, Citibank would increase its sales + to Fannie by more + +On line 3020: + Over the next two years, + Citibank would increase its sales to + Fannie by more than + +On line 3020: + years, Citibank would increase + its sales to Fannie by more + than a quarter, to + +On line 3020: + would increase its sales + to Fannie by more than a + quarter, to billion + +On line 3020: + to Fannie by more + than a quarter, to billion + in the fiscal year, + +On line 3020: + Fannie by more than + a quarter, to billion in + the fiscal year, while + +On line 3020: + more than a quarter, + to billion in the fiscal + year, while more than tripling + +On line 3020: + than a quarter, to + billion in the fiscal year, + while more than tripling its + +On line 3020: + quarter, to billion + in the fiscal year, while more + than tripling its sales of + +On line 3022: + year, while more than tripling + its sales of interest-only + mortgages, to billion.152 + +On line 3024: + more than tripling its sales + of interest-only mortgages, + to billion.152 Lund told + +On line 3024: + than tripling its sales of + interest-only mortgages, to + billion.152 Lund told the + +On line 3024: + of interest-only + mortgages, to billion.152 Lund told + the FCIC that in the + +On line 3024: + that in the board would + adopt his recommendation: + for the time being, + +On line 3024: + the board would adopt his + recommendation: for the + time being, Fannie + +On line 3024: + recommendation: + for the time being, Fannie + would "stay the course," while + +On line 3024: + capabilities + to compete with Wall Street in + nonprime mortgages.153 In + +On line 3024: + Wall Street in nonprime + mortgages.153 In fact, however, + internal reports + +On line 3024: + nonprime mortgages.153 In + fact, however, internal + reports show that by + +On line 3024: + In fact, however, + internal reports show that + by September the + +On line 3024: + reports show that by + September the company + had already begun + +On line 3024: + that by September + the company had already + begun to increase + +On line 3024: + the company had + already begun to increase + its acquisitions + +On line 3024: + already begun to + increase its acquisitions + of riskier loans. By + +On line 3024: + its acquisitions + of riskier loans. By the end + of its Alt-A loans were + +On line 3026: + loans. By the end of + its Alt-A loans were billion, up + from billion in and + +On line 3026: + end of its Alt-A loans + were billion, up from billion + in and billion in + +On line 3026: + of its Alt-A loans were + billion, up from billion in + and billion in its + +On line 3026: + loans were billion, up + from billion in and billion + in its loans without + +On line 3026: + were billion, up from + billion in and billion in + its loans without full + +On line 3028: + from billion in and + its interest-only mortgages + were billion in up + +On line 3028: + billion in and its + interest-only mortgages were + billion in up from + +On line 3028: + its interest-only + mortgages were billion in up + from billion in (Note + +On line 3028: + mortgages were billion + in up from billion in (Note + that these categories + +On line 3028: + billion in (Note that + these categories can overlap. + For example, Alt-A + +On line 3028: + that these categories + can overlap. For example, + Alt-A loans may also + +On line 3028: + these categories can + overlap. For example, Alt-A + loans may also lack + +On line 3028: + loans may also lack + full documentation.) To + cover potential + +On line 3028: + had a total of + billion in capital at + the end of "Plans to + +On line 3028: + "Plans to meet market + share targets resulted in + strategies to increase + +On line 3028: + market share targets + resulted in strategies to + increase purchases + +On line 3028: + strategies to increase + purchases of higher risk + products, creating + +On line 3028: + prudent credit risk + management and corporate + business objectives," + +On line 3028: + (the successor to + the Office of Federal + Housing Enterprise + +On line 3028: + Federal Housing + Enterprise Oversight) would write + in September on + +On line 3028: + Oversight) would write in + September on the eve of + the government takeover + +On line 3028: + in September on + the eve of the government + takeover of Fannie Mae. + +On line 3030: + September on the + eve of the government takeover + of Fannie Mae. "Since + +On line 3030: + on the eve of the + government takeover of Fannie + Mae. "Since Fannie Mae + +On line 3030: + the government takeover + of Fannie Mae. "Since Fannie + Mae has grown its Alt-A + +On line 3030: + takeover of Fannie Mae. + "Since Fannie Mae has grown its + Alt-A portfolio and + +On line 3030: + Mae. "Since Fannie Mae + has grown its Alt-A portfolio + and other higher + +On line 3030: + "Since Fannie Mae has + grown its Alt-A portfolio and + other higher risk + +On line 3030: + and other higher + risk products rapidly without + adequate controls + +On line 3032: + higher risk products + rapidly without adequate + controls in place."154 In + +On line 3032: + adequate controls + in place."154 In its financial + statements, Fannie Mae’s + +On line 3032: + Mae’s disclosures about + key loan characteristics + changed over time, making + +On line 3032: + disclosures about key + loan characteristics changed + over time, making it + +On line 3032: + of a "subprime" loan + was one originated by + a company or + +On line 3032: + a "subprime" loan was + one originated by a + company or a + +On line 3032: + originated by + a company or a part + of a company + +On line 3032: + a company or + a part of a company + that specialized in + +On line 3032: + Fannie Mae stated + that subprime loans accounted + for less than of its + +On line 3032: + accounted for less + than of its business volume + during those years even + +On line 3032: + than of its business + volume during those years even + while it reported + +On line 3032: + its business volume + during those years even while it + reported that of + +On line 3032: + during those years even + while it reported that of + its conventional, + +On line 3032: + while it reported + that of its conventional, + single-family + +On line 3036: + portfolios quickly + with limited capital.156 + In CEO Richard Syron + +On line 3036: + Richard Syron fired David + Andrukonis, Freddie’s longtime + chief risk officer. + +On line 3036: + Andrukonis, Freddie’s + longtime chief risk officer. + Syron said one of + +On line 3036: + Freddie’s longtime chief + risk officer. Syron said + one of the reasons + +On line 3036: + officer. Syron + said one of the reasons that + Andrukonis was fired + +On line 3036: + one of the reasons + that Andrukonis was fired was + that Andrukonis was + +On line 3036: + the FCIC, "I had a + legitimate difference + of opinion on how + +On line 3036: + a legitimate + difference of opinion on + how dangerous it + +On line 3036: + of opinion on how + dangerous it was. Now, as + t turns out he was + +On line 3036: + how dangerous it + was. Now, as t turns out he + was able to foresee + +On line 3036: + dangerous it was. + Now, as t turns out he was + able to foresee the + +On line 3036: + was. Now, as t turns + out he was able to foresee + the market better + +On line 3036: + Now, as t turns out + he was able to foresee the + market better than + +On line 3036: + t turns out he was + able to foresee the market + better than a lot + +On line 3036: + out he was able to + foresee the market better + than a lot of the + +On line 3036: + was able to foresee + the market better than a + lot of the rest of + +On line 3036: + able to foresee the + market better than a lot + of the rest of us + +On line 3036: + foresee the market + better than a lot of the + rest of us could."157 The + +On line 3036: + the market better + than a lot of the rest of + us could."157 The new risk + +On line 3036: + better than a lot + of the rest of us could."157 The + new risk officer, + +On line 3036: + us could."157 The new risk + officer, Anurag Saksena, + recounted to the + +On line 3036: + new risk officer, + Anurag Saksena, recounted + to the FCIC staff that + +On line 3036: + risk officer, Anurag + Saksena, recounted to + the FCIC staff that he + +On line 3036: + to the FCIC staff that + he repeatedly made the + case for increasing + +On line 3036: + case for increasing + capital to compensate + for the increasing + +On line 3036: + vice president for + single-family housing, + told FCIC staff that he + +On line 3036: + single-family + housing, told FCIC staff that he + did not recall such + +On line 3036: + housing, told FCIC staff + that he did not recall such + discussions.159 Syron + +On line 3036: + FCIC staff that he did + not recall such discussions.159 + Syron never made + +On line 3036: + did not recall such + discussions.159 Syron never + made Saksena part + +On line 3038: + of riskier loans and + securities in every + examination + +On line 3040: + examination + report. But OFHEO never told + the GSEs to stop. Rather, + +On line 3040: + never told the GSEs + to stop. Rather, year after year, + the regulator + +On line 3040: + stop. Rather, year after + year, the regulator said + that both companies + +On line 3040: + Rather, year after year, + the regulator said that + both companies had + +On line 3040: + both companies had + adequate capital, strong + asset quality, + +On line 3042: + active officers + and directors. In May at + the same time as it + +On line 3042: + directors. In May + at the same time as it paid + a million penalty + +On line 3042: + In May at the same + time as it paid a million + penalty related + +On line 3042: + time as it paid a + million penalty related + to deficiencies + +On line 3042: + penalty related + to deficiencies in its + accounting practices, + +On line 3042: + mortgage portfolio + to billion, the level on + December Two months + +On line 3042: + on December Two + months later, Freddie agreed to + limit the growth of + +On line 3042: + months later, Freddie + agreed to limit the growth of + its portfolio to + +On line 3042: + later, Freddie agreed + to limit the growth of its + portfolio to per + +On line 3042: + portfolio to per + year.162 In examination + reports for the year + +On line 3042: + examination + reports for the year issued + to both companies + +On line 3042: + reports for the year + issued to both companies + in May OFHEO noted + +On line 3042: + for the year issued + to both companies in May + OFHEO noted the growth + +On line 3042: + the year issued to + both companies in May OFHEO + noted the growth in + +On line 3042: + to both companies + in May OFHEO noted the growth + in purchases of + +On line 3042: + both companies in + May OFHEO noted the growth in + purchases of risky + +On line 3042: + noted the growth in + purchases of risky loans and + non-GSE securities + +On line 3042: + purchases of risky + loans and non-GSE securities + but concluded that + +On line 3044: + examination + of Fannie was limited + in scope—focusing + +On line 3044: + primarily on + the company’s efforts to + fix accounting and + +On line 3044: + of the extensive + resources needed to complete + a three-year special + +On line 3044: + resources needed to + complete a three-year special + examination + +On line 3044: + complete a three-year + special examination + initiated in + +On line 3048: + report on Fannie + Mae detailed the "arrogant + and unethical + +On line 3048: + the "arrogant and + unethical corporate + culture where Fannie + +On line 3048: + corporate culture + where Fannie Mae employees + manipulated + +On line 3048: + manipulated + accounting and earnings to + trigger bonuses for + +On line 3050: + trigger bonuses for + senior executives from + to OFHEO Director + +On line 3050: + to OFHEO Director + James Lockhart (who had assumed + that position the + +On line 3050: + OFHEO Director James + Lockhart (who had assumed that + position the month + +On line 3050: + James Lockhart (who had + assumed that position the + month the report was + +On line 3050: + during the special + examination an email + from Mudd, then Fannie’s + +On line 3050: + examination + an email from Mudd, then Fannie’s + chief operating + +On line 3050: + an email from Mudd, then + Fannie’s chief operating + officer, to CEO + +On line 3050: + Mudd, then Fannie’s chief + operating officer, + to CEO Franklin Raines. Mudd + +On line 3052: + to CEO Franklin Raines. Mudd + wrote, "The old political + reality [at + +On line 3052: + old political + reality [at Fannie] + was that we always + +On line 3054: + [at Fannie] was that + we always won, we took no + prisoners we used + +On line 3054: + was that we always + won, we took no prisoners + we used to be able + +On line 3054: + that we always won, + we took no prisoners we + used to be able to + +On line 3054: + we always won, we + took no prisoners we used + to be able to write, + +On line 3054: + always won, we took + no prisoners we used to + be able to write, or + +On line 3054: + took no prisoners + we used to be able to write, + or have written rules + +On line 3054: + no prisoners we + used to be able to write, or + have written rules that + +On line 3054: + prisoners we used + to be able to write, or have + written rules that worked + +On line 3056: + we used to be able + to write, or have written rules + that worked for us."165 Soon + +On line 3056: + to be able to write, + or have written rules that worked + for us."165 Soon after + +On line 3056: + be able to write, or + have written rules that worked for + us."165 Soon after his + +On line 3056: + or have written rules + that worked for us."165 Soon after + his arrival, Lockhart + +On line 3056: + for us."165 Soon after + his arrival, Lockhart began + advocating for + +On line 3056: + his arrival, Lockhart + began advocating for + reform. "The need for + +On line 3056: + for legislation + was obvious as OFHEO was + regulating two + +On line 3056: + was obvious as + OFHEO was regulating two + of the largest and most + +On line 3056: + institutions," he + told the FCIC.166 But no reform + legislation would + +On line 3056: + he told the FCIC.166 But + no reform legislation + would be passed until + +On line 3056: + FCIC.166 But no reform + legislation would be passed + until July and + +On line 3056: + legislation would + be passed until July and + by then it would be + +On line 3058: + would be passed until + July and by then it would + be too late. "Increase + +On line 3058: + July and by then + it would be too late. "Increase + our penetration + +On line 3060: + After several + years during which Fannie Mae + purchased riskier loans + +On line 3060: + during which Fannie + Mae purchased riskier loans and + securities, then-Chief + +On line 3060: + and securities, + then-Chief Financial Officer + Robert Levin proposed a + +On line 3060: + subprime" at Fannie’s + January board meeting.167 In + the next month the board + +On line 3060: + meeting.167 In the next + month the board gave its approval.168 + Fannie would become + +On line 3060: + In the next month the + board gave its approval.168 Fannie + would become more and + +On line 3060: + the next month the board + gave its approval.168 Fannie would + become more and more + +On line 3060: + board gave its approval.168 + Fannie would become more and + more aggressive in + +On line 3060: + and more aggressive + in its purchases. During + a summer retreat + +On line 3060: + more aggressive in + its purchases. During a + summer retreat for + +On line 3060: + in its purchases. + During a summer retreat + for Fannie’s senior + +On line 3060: + During a summer + retreat for Fannie’s senior + officers, as Stephen + +On line 3060: + summer retreat for + Fannie’s senior officers, + as Stephen Ashley, the + +On line 3060: + retreat for Fannie’s + senior officers, as Stephen + Ashley, the chairman + +On line 3060: + for Fannie’s senior + officers, as Stephen Ashley, + the chairman of the + +On line 3060: + the chairman of the + board, introduced Fannie’s new + chief risk officer, + +On line 3060: + Enrico Dallavecchia, + he declared that the new CRO + would not stand in the + +On line 3060: + Dallavecchia, he declared + that the new CRO would not stand + in the way of risk + +On line 3060: + he declared that the + new CRO would not stand in the + way of risk taking: + +On line 3060: + declared that the new + CRO would not stand in the way + of risk taking: "We + +On line 3060: + that the new CRO would + not stand in the way of risk + taking: "We have to + +On line 3060: + not stand in the way + of risk taking: "We have to + think differently + +On line 3060: + stand in the way of + risk taking: "We have to think + differently and + +On line 3060: + of risk taking: "We + have to think differently + and creatively about + +On line 3060: + risk taking: "We have + to think differently and + creatively about risk, + +On line 3060: + think differently + and creatively about risk, about + compliance, and about + +On line 3060: + compliance, and about + controls. Historically + these have not been strong + +On line 3062: + Historically + these have not been strong suits of + Fannie Mae. Today’s + +On line 3062: + these have not been strong + suits of Fannie Mae. Today’s + thinking requires that + +On line 3062: + suits of Fannie Mae. + Today’s thinking requires that + these areas become + +On line 3062: + active partners with + the business units and be viewed + as tools that enable + +On line 3062: + the business units and + be viewed as tools that enable + us to develop + +On line 3062: + be viewed as tools that + enable us to develop + product and address + +On line 3062: + as tools that enable + us to develop product + and address market + +On line 3062: + tools that enable us + to develop product and + address market needs. + +On line 3062: + and address market + needs. Enrico Dallavecchia was + not brought on-board to be + +On line 3062: + address market needs. + Enrico Dallavecchia was not + brought on-board to be a + +On line 3062: + Enrico Dallavecchia + was not brought on-board to be a + business dampener."169 + +On line 3064: + was not brought on-board to + be a business dampener."169 + In Fannie acquired + +On line 3066: + acquired billion of + loans; of those (including some + overlap), billion, or + +On line 3066: + billion of loans; of + those (including some overlap), + billion, or about had + +On line 3066: + or about had combined + loan-to-value ratios above + were interest-only; + +On line 3068: + and billion of Alt-A + non-GSE mortgage-backed securities.171 + The total amount of + +On line 3068: + of Alt-A non-GSE mortgage-backed + securities.171 The total + amount of riskier loans + +On line 3068: + The total amount of + riskier loans represented + larger multiples + +On line 3070: + larger multiples + of capital than before. + At least initially, + +On line 3070: + of capital than + before. At least initially, + while house prices were still + +On line 3070: + than before. At least + initially, while house prices were + still increasing, the + +On line 3070: + least initially, while + house prices were still increasing, + the strategic plan to + +On line 3070: + while house prices were still + increasing, the strategic plan + to increase risk and + +On line 3070: + were still increasing, + the strategic plan to increase + risk and market share + +On line 3070: + to increase risk and + market share appeared to be + successful. Fannie + +On line 3070: + risk and market share + appeared to be successful. + Fannie reported + +On line 3070: + successful. Fannie + reported net income of + billion in and then + +On line 3070: + Fannie reported + net income of billion in + and then billion in + +On line 3070: + in In those two years, + CEO Mudd’s compensation + totaled million and + +On line 3070: + totaled million and + Levin, who was interim CFO + and then chief business + +On line 3072: + interim CFO and + then chief business officer, + received million.172 In + +On line 3072: + risk, "expand[ing] the + purchase and guarantee of + higher-risk mortgages to + +On line 3072: + mortgages to increase + market share, meet mission goals, + stay competitive, + +On line 3072: + competitive, and + be responsive to sellers’ + needs."173 It lowered its + +On line 3072: + and be responsive + to sellers’ needs."173 It lowered + its underwriting + +On line 3072: + to sellers’ needs."173 It + lowered its underwriting + standards, increasing + +On line 3072: + products, offered to + a broader range of customers + than ever before, + +On line 3072: + a broader range of + customers than ever before, + accounted for about + +On line 3072: + range of customers than + ever before, accounted + for about of that year’s + +On line 3072: + for about of that year’s + purchases. Freddie Mac’s plan + also seemed to be + +On line 3072: + that year’s purchases. + Freddie Mac’s plan also seemed + to be successful. + +On line 3072: + to be successful. + The company increased risk + and market share while + +On line 3072: + for and billion.174 CEO + Richard Syron’s compensation + totaled million for + +On line 3072: + and combined,175 while Chief + Operating Officer + Eugene McQuade received + +On line 3074: + Eugene McQuade received + million.176 Again, OFHEO was aware of + these developments. + +On line 3074: + Again, OFHEO was aware of + these developments. Its March + report noted that + +On line 3074: + March report noted + that Fannie’s new initiative + to purchase higher-risk + +On line 3074: + to purchase higher-risk + products included a plan + to capture of the + +On line 3074: + products included + a plan to capture of the + subprime market by + +On line 3074: + included a plan + to capture of the subprime + market by And OFHEO + +On line 3074: + a plan to capture + of the subprime market by + And OFHEO reported + +On line 3074: + plan to capture of + the subprime market by And + OFHEO reported that + +On line 3074: + the subprime market + by And OFHEO reported that + credit risk increased + +On line 3074: + OFHEO reported that + credit risk increased "slightly" + because of growth in + +On line 3074: + credit risk increased + "slightly" because of growth in + subprime and other + +On line 3074: + "slightly" because of + growth in subprime and other + nontraditional + +On line 3076: + growth in subprime and + other nontraditional + products. But overall + +On line 3076: + subprime and other + nontraditional products. + But overall asset + +On line 3076: + nontraditional + products. But overall asset + quality in its + +On line 3076: + products. But overall + asset quality in its + single-family + +On line 3076: + asset quality + in its single-family + business was found to + +On line 3076: + quality in its + single-family business + was found to be "strong," + +On line 3076: + single-family + business was found to be "strong," + and the board members + +On line 3076: + business was found to + be "strong," and the board members + were "qualified and + +On line 3076: + to be "strong," and the + board members were "qualified + and active." And, of + +On line 3076: + be "strong," and the board + members were "qualified and + active." And, of course, + +On line 3076: + and the board members + were "qualified and active." + And, of course, Fannie + +On line 3076: + the board members were + "qualified and active." And, + of course, Fannie was + +On line 3076: + were "qualified and + active." And, of course, Fannie + was "adequately + +On line 3078: + Similarly, OFHEO + told Freddie in that it had + weaknesses that raised + +On line 3078: + Freddie in that it + had weaknesses that raised some + possibility + +On line 3078: + had weaknesses that + raised some possibility + of failure, but that + +On line 3078: + strength and financial + capacity made failure + unlikely.178 Freddie + +On line 3078: + a "significant + supervisory concern,"179 + and OFHEO noted the + +On line 3078: + supervisory + concern,"179 and OFHEO noted the + significant shift + +On line 3078: + and OFHEO noted the + significant shift toward + higher-risk mortgages.180 But + +On line 3078: + higher-risk mortgages.180 But + again, as in previous years, + the regulator + +On line 3080: + asset quality + and credit risk management + were "strong."181 The GSEs charged + +On line 3080: + The GSEs charged a fee + for guaranteeing payments + on GSE mortgage–backed + +On line 3080: + for guaranteeing + payments on GSE mortgage–backed + securities, and + +On line 3080: + and OFHEO was silent about + Fannie’s practice of charging + less to guarantee + +On line 3080: + Fannie’s practice of + charging less to guarantee + securities than + +On line 3080: + securities than + their models indicated + was appropriate. + +On line 3080: + indicated was + appropriate. Mark Winer, + the head of Fannie’s + +On line 3080: + appropriate. Mark + Winer, the head of Fannie’s + Business, Analysis + +On line 3080: + Winer, the head of + Fannie’s Business, Analysis + and Decisions Group + +On line 3080: + of Fannie’s Business, + Analysis and Decisions + Group since May and the + +On line 3080: + Group since May and the + person responsible for + odeling pricing fees, + +On line 3080: + for odeling pricing + fees, raised concerns that Fannie + Mae was not charging + +On line 3080: + odeling pricing fees, + raised concerns that Fannie Mae + was not charging fees + +On line 3080: + fees, raised concerns that + Fannie Mae was not charging + fees for Alt-A mortgages + +On line 3080: + Fannie Mae was not + charging fees for Alt-A mortgages + that adequately + +On line 3080: + charging fees for Alt-A + mortgages that adequately + compensated for + +On line 3080: + that adequately + compensated for the risk. + Winer recalled that + +On line 3080: + compensated for + the risk. Winer recalled that + Levin was critical + +On line 3080: + risk. Winer recalled + that Levin was critical of + his models, asking, + +On line 3080: + Winer recalled that + Levin was critical of his + models, asking, "Can + +On line 3080: + recalled that Levin was + critical of his models, + asking, "Can you show + +On line 3080: + Levin was critical + of his models, asking, "Can + you show me why you + +On line 3080: + was critical of + his models, asking, "Can you + show me why you think + +On line 3080: + critical of his + models, asking, "Can you show + me why you think you’re + +On line 3080: + models, asking, "Can + you show me why you think you’re + right and everyone + +On line 3080: + asking, "Can you show + me why you think you’re right and + everyone else is + +On line 3080: + me why you think you’re + right and everyone else is + wrong1"182 Undercharging + +On line 3080: + why you think you’re right + and everyone else is wrong1"182 + Undercharging for + +On line 3080: + right and everyone + else is wrong1"182 Undercharging + for the guarantee + +On line 3080: + and everyone else + is wrong1"182 Undercharging for + the guarantee fees + +On line 3080: + everyone else is + wrong1"182 Undercharging for the + guarantee fees was + +On line 3080: + to Todd Hempstead, the + senior vice president at + Fannie in charge of + +On line 3080: + charge of the western + region.183 Mudd acknowledged the + difference between + +On line 3080: + western region.183 Mudd + acknowledged the difference + between the model + +On line 3080: + difference between + the model fee and the fee + actually charged + +On line 3080: + the model fee and + the fee actually charged + and also told the + +On line 3080: + model fee and the + fee actually charged and + also told the FCIC + +On line 3080: + fee actually + charged and also told the FCIC + that the scarcity of + +On line 3080: + told the FCIC that the + scarcity of historical + data for many loans + +On line 3080: + FCIC that the scarcity + of historical data + for many loans caused the + +On line 3080: + of historical + data for many loans caused the + model fee to be + +On line 3082: + data for many loans + caused the model fee to be + unreliable.184 In + +On line 3082: + loans caused the model + fee to be unreliable.184 + In the September + +On line 3082: + caused the model fee + to be unreliable.184 In + the September memo + +On line 3082: + the model fee to + be unreliable.184 In the + September memo that + +On line 3082: + be unreliable.184 + In the September memo that + would recommend that + +On line 3082: + that would recommend + that Fannie be placed into + conservatorship, + +On line 3082: + that Fannie be placed + into conservatorship, + OFHEO would expressly + +On line 3082: + conservatorship, + OFHEO would expressly cite this + practice as unsafe + +On line 3082: + OFHEO would expressly + cite this practice as unsafe + and unsound: "During + +On line 3082: + would expressly cite + this practice as unsafe and + unsound: "During and + +On line 3082: + cite this practice as + unsafe and unsound: "During + and modeled loan fees + +On line 3082: + unsound: "During and + modeled loan fees were higher + than actual fees + +On line 3082: + and modeled loan fees + were higher than actual + fees charged, due to an + +On line 3082: + loan fees were higher + than actual fees charged, due + to an emphasis + +On line 3082: + fees were higher than + actual fees charged, due to + an emphasis on + +On line 3082: + than actual fees + charged, due to an emphasis + on growing market + +On line 3082: + actual fees charged, + due to an emphasis on + growing market share + +On line 3082: + to an emphasis + on growing market share and + competing with Wall + +On line 3082: + on growing market + share and competing with Wall + Street and the other + +On line 3082: + growing market share + and competing with Wall Street + and the other GSE."185 + +On line 3084: + share and competing + with Wall Street and the other + GSE."185 "Moving deeper + +On line 3084: + with Wall Street and the + other GSE."185 "Moving deeper + into the credit + +On line 3086: + Street and the other + GSE."185 "Moving deeper into + the credit pool" By + +On line 3086: + and the other GSE."185 + "Moving deeper into the + credit pool" By the + +On line 3086: + GSE."185 "Moving deeper + into the credit pool" By + the time housing prices + +On line 3086: + credit pool" By the + time housing prices had peaked in + the second quarter + +On line 3086: + time housing prices had + peaked in the second quarter + of delinquencies had + +On line 3086: + the second quarter + of delinquencies had started + to rise. During the + +On line 3086: + second quarter of + delinquencies had started to + rise. During the board + +On line 3086: + of delinquencies had + started to rise. During the + board meeting held in + +On line 3086: + had started to rise. + During the board meeting held + in April Lund said that + +On line 3086: + rise. During the board + meeting held in April Lund said + that dislocation + +On line 3086: + held in April Lund said + that dislocation in the + housing market was + +On line 3086: + dislocation in + the housing market was an + opportunity + +On line 3086: + housing market was + an opportunity for + Fannie to reclaim + +On line 3086: + Fannie to reclaim + market share. At the same time, + Fannie would support + +On line 3086: + reclaim market share. + At the same time, Fannie would + support the housing + +On line 3086: + market share. At the + same time, Fannie would support + the housing market + +On line 3086: + Fannie’s market share + could increase to from about in + Indeed, in Fannie + +On line 3086: + increase to from about + in Indeed, in Fannie Mae + forged ahead, purchasing + +On line 3086: + Indeed, in Fannie + Mae forged ahead, purchasing more + high-risk loans.188 Fannie + +On line 3086: + in Fannie Mae forged + ahead, purchasing more high-risk + loans.188 Fannie also + +On line 3086: + ahead, purchasing more + high-risk loans.188 Fannie also + purchased billion of + +On line 3086: + loans.188 Fannie also + purchased billion of subprime + non-GSE securities, + +On line 3086: + purchased billion of + subprime non-GSE securities, + and billion of Alt-A.189 + +On line 3088: + non-GSE securities, + and billion of Alt-A.189 In June, + Fannie prepared its + +On line 3088: + billion of Alt-A.189 In + June, Fannie prepared its five-year + strategic plan, titled + +On line 3088: + Alt-A.189 In June, Fannie + prepared its five-year strategic plan, + titled "Deepen Segments—Develop + +On line 3088: + June, Fannie prepared + its five-year strategic plan, titled + "Deepen Segments—Develop Breadth." The + +On line 3088: + strategic plan, titled + "Deepen Segments—Develop Breadth." The plan, which + mentioned Fannie’s "tough + +On line 3088: + The plan, which mentioned + Fannie’s "tough new challenges—a + weakening housing + +On line 3088: + mentioned Fannie’s "tough + new challenges—a weakening + housing market" and + +On line 3088: + "tough new challenges—a + weakening housing market" + and "slower-growing + +On line 3088: + debt market"—included + taking and managing "more + mortgage credit risk, + +On line 3088: + and managing "more + mortgage credit risk, moving + deeper into the + +On line 3088: + "more mortgage credit + risk, moving deeper into + the credit pool to + +On line 3088: + mortgage credit risk, + moving deeper into the + credit pool to serve + +On line 3088: + credit risk, moving + deeper into the credit + pool to serve a large + +On line 3088: + deeper into the + credit pool to serve a large + and growing part of + +On line 3088: + credit pool to serve + a large and growing part of + the mortgage market." + +On line 3088: + a large and growing + part of the mortgage market." + Overall, revenues and + +On line 3088: + and growing part of + the mortgage market." Overall, + revenues and earnings + +On line 3088: + the mortgage market." + Overall, revenues and earnings + were projected to + +On line 3088: + Overall, revenues and + earnings were projected to + increase in each of + +On line 3090: + to increase in each + of the following five years.190 + Management told the + +On line 3090: + of the following + five years.190 Management told the + board that Fannie’s risk + +On line 3090: + five years.190 Management + told the board that Fannie’s risk + management function + +On line 3090: + the board that Fannie’s + risk management function had + all the necessary + +On line 3090: + board that Fannie’s risk + management function had all + the necessary means + +On line 3090: + management function + had all the necessary means + and budget to act + +On line 3090: + function had all the + necessary means and budget + to act on the plan. + +On line 3090: + necessary means and + budget to act on the plan. + Chief Risk Officer + +On line 3090: + budget to act on + the plan. Chief Risk Officer + Dallavecchia did not agree, + +On line 3090: + on the plan. Chief Risk + Officer Dallavecchia did not + agree, especially + +On line 3090: + Officer Dallavecchia + did not agree, especially + in light of a planned + +On line 3090: + Dallavecchia did not agree, + especially in light of + a planned cut in his + +On line 3090: + agree, especially + in light of a planned cut in + his budget. In a + +On line 3090: + in light of a planned + cut in his budget. In a + July email to CEO + +On line 3090: + a planned cut in his + budget. In a July email + to CEO Mudd, Dallavecchia + +On line 3090: + cut in his budget. + In a July email to CEO + Mudd, Dallavecchia wrote that + +On line 3090: + in his budget. In + a July email to CEO Mudd, + Dallavecchia wrote that he + +On line 3090: + In a July email + to CEO Mudd, Dallavecchia wrote that + he was very upset + +On line 3090: + a July email to + CEO Mudd, Dallavecchia wrote that he + was very upset that + +On line 3090: + July email to CEO + Mudd, Dallavecchia wrote that he was + very upset that he + +On line 3090: + to CEO Mudd, Dallavecchia + wrote that he was very upset + that he had to hear + +On line 3090: + CEO Mudd, Dallavecchia wrote + that he was very upset that + he had to hear at + +On line 3090: + Mudd, Dallavecchia wrote that + he was very upset that he + had to hear at the + +On line 3090: + Dallavecchia wrote that he + was very upset that he had + to hear at the board + +On line 3090: + wrote that he was very + upset that he had to hear + at the board meeting + +On line 3090: + was very upset that + he had to hear at the board + meeting that Fannie + +On line 3090: + upset that he had + to hear at the board meeting + that Fannie had the + +On line 3090: + he had to hear at + the board meeting that Fannie + had the "will and the + +On line 3090: + to hear at the board + meeting that Fannie had the + "will and the money + +On line 3090: + at the board meeting + that Fannie had the "will and + the money to change + +On line 3090: + the board meeting that + Fannie had the "will and the + money to change our + +On line 3090: + meeting that Fannie + had the "will and the money + to change our culture + +On line 3090: + Fannie had the "will + and the money to change our + culture and support + +On line 3090: + had the "will and the + money to change our culture + and support taking + +On line 3090: + and the money to + change our culture and support + taking more credit + +On line 3090: + and support taking + more credit risk," given the + proposed budget cut + +On line 3090: + credit risk," given + the proposed budget cut for + his department in + +On line 3092: + for his department + in after a reduction + in headcount in In + +On line 3092: + his department in + after a reduction in + headcount in In an + +On line 3092: + in headcount in In + an earlier email, Dallavecchia + had written to Chief + +On line 3092: + In an earlier + email, Dallavecchia had written to + Chief Operating + +On line 3092: + had written to Chief + Operating Officer + Michael Williams that Fannie + +On line 3092: + Williams that Fannie had + "one of the weakest control + processes" that he + +On line 3092: + "one of the weakest + control processes" that he + "ever witnessed in + +On line 3092: + control processes" + that he "ever witnessed in + [his] career, was not + +On line 3092: + "ever witnessed in + [his] career, was not even close + to having proper + +On line 3092: + [his] career, was not + even close to having proper + control processes + +On line 3092: + even close to having + proper control processes + for credit, market + +On line 3092: + for credit, market + and operational risk," and + was "already back to + +On line 3092: + credit, market and + operational risk," and was + "already back to the + +On line 3092: + operational risk," + and was "already back to the + old days of scraping + +On line 3092: + was "already back to + the old days of scraping on + controls to reduce + +On line 3092: + back to the old days + of scraping on controls to + reduce expenses." + +On line 3092: + These deficiencies + indicated that "people + don’t care about the [risk] + +On line 3092: + indicated that + "people don’t care about the [risk] + function or they don’t + +On line 3096: + don’t care about the [risk] + function or they don’t get it."192 + Mudd responded, "My + +On line 3096: + [risk] function or they + don’t get it."192 Mudd responded, + "My experience + +On line 3096: + function or they don’t + get it."192 Mudd responded, "My + experience is + +On line 3096: + it."192 Mudd responded, + "My experience is that + email is not a very + +On line 3096: + Mudd responded, "My + experience is that email + is not a very good + +On line 3096: + a very good venue for + conversation, venting or + negotiating." + +On line 3096: + negotiating." + If Dallavecchia felt that he had + been dealt with in bad + +On line 3096: + If Dallavecchia felt that + he had been dealt with in bad + faith, he should "address + +On line 3096: + Dallavecchia felt that he + had been dealt with in bad faith, + he should "address it + +On line 3096: + felt that he had been + dealt with in bad faith, he should + "address it man to + +On line 3096: + had been dealt with in + bad faith, he should "address it + man to man," unless + +On line 3096: + been dealt with in bad + faith, he should "address it man + to man," unless he + +On line 3096: + with in bad faith, he + should "address it man to man," + unless he wanted + +On line 3096: + faith, he should "address + it man to man," unless he + wanted Mudd "to be + +On line 3096: + should "address it man + to man," unless he wanted + Mudd "to be the one + +On line 3096: + "address it man to + man," unless he wanted Mudd + "to be the one to + +On line 3096: + to man," unless he + wanted Mudd "to be the one + to carry messages + +On line 3096: + wanted Mudd "to be + the one to carry messages + for you to your peers." + +On line 3096: + the one to carry + messages for you to your peers." + Mudd concluded, "Please + +On line 3096: + for you to your peers." + Mudd concluded, "Please come and + see me today face + +On line 3096: + you to your peers." Mudd + concluded, "Please come and see + me today face to + +On line 3096: + peers." Mudd concluded, + "Please come and see me today + face to face."193 Dallavecchia + +On line 3096: + Mudd concluded, "Please + come and see me today face + to face."193 Dallavecchia told + +On line 3096: + concluded, "Please come + and see me today face to + face."193 Dallavecchia told the + +On line 3096: + "Please come and see me + today face to face."193 Dallavecchia + told the FCIC that when + +On line 3096: + and see me today + face to face."193 Dallavecchia told the + FCIC that when he wrote + +On line 3096: + see me today face + to face."193 Dallavecchia told the FCIC + that when he wrote this + +On line 3096: + me today face to + face."193 Dallavecchia told the FCIC that + when he wrote this email + +On line 3096: + today face to face."193 + Dallavecchia told the FCIC that when + he wrote this email he + +On line 3096: + face to face."193 Dallavecchia + told the FCIC that when he wrote + this email he was tired + +On line 3096: + to face."193 Dallavecchia told + the FCIC that when he wrote this + email he was tired and + +On line 3096: + Dallavecchia told the FCIC + that when he wrote this email he + was tired and upset, + +On line 3096: + told the FCIC that when + he wrote this email he was tired + and upset, and that + +On line 3096: + the FCIC that when he + wrote this email he was tired and + upset, and that the + +On line 3096: + that when he wrote this + email he was tired and upset, + and that the view it + +On line 3096: + he wrote this email he + was tired and upset, and that + the view it expressed + +On line 3096: + wrote this email he was + tired and upset, and that the + view it expressed was + +On line 3096: + this email he was tired + and upset, and that the view + it expressed was more + +On line 3096: + was tired and upset, + and that the view it expressed + was more extreme than + +On line 3096: + tired and upset, and + that the view it expressed was + more extreme than what + +On line 3096: + and upset, and that + the view it expressed was more + extreme than what he + +On line 3096: + and that the view it + expressed was more extreme than + what he thought at the + +On line 3096: + view it expressed was + more extreme than what he thought + at the time.194 Fannie, + +On line 3096: + guarantee higher-risk + mortgages in would report a + billion net loss for + +On line 3096: + higher-risk mortgages in + would report a billion net + loss for the year, caused + +On line 3096: + report a billion + net loss for the year, caused by + credit losses. In + +On line 3096: + a billion net loss + for the year, caused by credit + losses. In Mudd’s + +On line 3096: + by credit losses. + In Mudd’s compensation + totaled million and + +On line 3100: + also persisted + in increasing purchases + of riskier loans. A + +On line 3100: + loans. A strategic plan + from March highlighted "pressure + on the franchise" and + +On line 3100: + A strategic plan from + March highlighted "pressure on + the franchise" and the + +On line 3100: + strategic plan from March + highlighted "pressure on the + franchise" and the "risk + +On line 3100: + from March highlighted + "pressure on the franchise" and + the "risk of falling + +On line 3100: + highlighted "pressure + on the franchise" and the "risk + of falling below + +On line 3100: + of falling below + our return aspirations."195 + The company would + +On line 3100: + falling below our + return aspirations."195 The + company would try + +On line 3100: + to improve earnings + by entering adjacent + markets: "Freddie Mac + +On line 3100: + non-GSE participants + in nonprime," the strategy + document explained. + +On line 3100: + opportunity + to expand into markets + we have missed—Subprime and Alt-A."196 + +On line 3100: + into markets we + have missed—Subprime and Alt-A."196 It took that + opportunity. + +On line 3100: + have missed—Subprime and Alt-A."196 It + took that opportunity. + As OFHEO would note in + +On line 3100: + missed—Subprime and Alt-A."196 It took + that opportunity. As + OFHEO would note in its + +On line 3100: + OFHEO would note in its + examination report, + Freddie purchased and + +On line 3100: + characteristics, + including interest-only + loans, loans with FICO + +On line 3100: + than loans with higher + loan-to-value ratios, loans + with high debt-to-income + +On line 3100: + with high debt-to-income + ratios, and loans without full + documentation. + +On line 3100: + documentation. + Financial results in were + poor: a billion net + +On line 3100: + results in were poor: + a billion net loss driven + by credit losses. + +On line 3100: + were poor: a billion + net loss driven by credit + losses. The value + +On line 3100: + a billion net loss + driven by credit losses. + The value of the + +On line 3100: + driven by credit + losses. The value of the + billion subprime and + +On line 3100: + and Alt-A private-label + securities book suffered + a billion decline + +On line 3100: + securities book + suffered a billion decline + in market value.197 + +On line 3100: + in market value.197 + In Syron’s compensation + totaled million and + +On line 3102: + housing goals: "GSEs cried + bloody murder forever" As + discussed earlier, + +On line 3102: + set goals for the GSEs + related to increasing + homeownership among + +On line 3102: + and borrowers in + underserved areas. Until + these goals were based on + +On line 3102: + underserved areas. + Until these goals were based on + the fraction of the + +On line 3102: + these goals were based on + the fraction of the total + mortgage market made + +On line 3102: + on the fraction of + the total mortgage market + made up of low- and + +On line 3102: + were intended to + be only a modest reach + beyond the mortgages + +On line 3102: + modest reach beyond + the mortgages that the GSEs would + normally purchase.198 + +On line 3104: + beyond the mortgages + that the GSEs would normally + purchase.198 From to of + +On line 3104: + normally purchase.198 + From to of GSE purchases + were required to meet + +On line 3104: + purchase.198 From to of + GSE purchases were required + to meet goals for low-and + +On line 3104: + of GSE purchases + were required to meet goals for + low-and moderate-income + +On line 3104: + were required to meet + goals for low-and moderate-income + borrowers. In the + +On line 3104: + to meet goals for low-and + moderate-income borrowers. + In the goal was raised + +On line 3104: + low-and moderate-income + borrowers. In the goal was + raised to Mudd said that + +On line 3104: + borrowers. In the + goal was raised to Mudd said that + as long as the goals + +On line 3104: + the goal was raised to + Mudd said that as long as the + goals remained below + +On line 3104: + goal was raised to Mudd + said that as long as the goals + remained below half + +On line 3104: + raised to Mudd said that + as long as the goals remained + below half of the + +On line 3104: + said that as long as + the goals remained below half + of the GSEs’ lending, + +On line 3104: + that as long as the + goals remained below half of + the GSEs’ lending, loans + +On line 3104: + as long as the goals + remained below half of the + GSEs’ lending, loans made + +On line 3104: + goals remained below + half of the GSEs’ lending, loans + made in the normal + +On line 3104: + remained below half + of the GSEs’ lending, loans made + in the normal course + +On line 3104: + lending, loans made in + the normal course of business + would satisfy the + +On line 3104: + in the normal course + of business would satisfy + the goals: "What comes in + +On line 3104: + the normal course of + business would satisfy the + goals: "What comes in the + +On line 3104: + course of business would + satisfy the goals: "What comes + in the door through the + +On line 3104: + would satisfy the + goals: "What comes in the door through + the natural course + +On line 3104: + satisfy the goals: + "What comes in the door through the + natural course of + +On line 3104: + the goals: "What comes in + the door through the natural + course of business will + +On line 3104: + goals: "What comes in the + door through the natural course + of business will tend + +On line 3104: + "What comes in the door + through the natural course of + business will tend to + +On line 3104: + in the door through the + natural course of business + will tend to match the + +On line 3104: + through the natural + course of business will tend to + match the market, and + +On line 3104: + natural course of + business will tend to match the + market, and therefore + +On line 3104: + course of business will + tend to match the market, and + therefore will tend to + +On line 3104: + business will tend to + match the market, and therefore + will tend to meet the + +On line 3104: + will tend to match the + market, and therefore will tend + to meet the goals."200 Levin + +On line 3104: + to match the market, + and therefore will tend to meet + the goals."200 Levin told the + +On line 3104: + match the market, and + therefore will tend to meet the + goals."200 Levin told the FCIC + +On line 3104: + market, and therefore + will tend to meet the goals."200 Levin + told the FCIC that "there + +On line 3104: + and therefore will tend + to meet the goals."200 Levin told the + FCIC that "there was a + +On line 3104: + therefore will tend to + meet the goals."200 Levin told the FCIC + that "there was a great + +On line 3104: + will tend to meet the + goals."200 Levin told the FCIC that "there + was a great deal of + +On line 3104: + to meet the goals."200 Levin + told the FCIC that "there was a + great deal of business + +On line 3104: + meet the goals."200 Levin told + the FCIC that "there was a great + deal of business that + +On line 3104: + the goals."200 Levin told the + FCIC that "there was a great deal + of business that came + +On line 3104: + goals."200 Levin told the FCIC + that "there was a great deal of + business that came through + +On line 3104: + told the FCIC that "there + was a great deal of business + that came through normal + +On line 3104: + FCIC that "there was a + great deal of business that came + through normal channels + +On line 3104: + that "there was a great + deal of business that came through + normal channels that + +On line 3104: + was a great deal of + business that came through normal + channels that met goals" + +On line 3104: + great deal of business + that came through normal channels + that met goals" and that + +On line 3104: + deal of business that + came through normal channels that + met goals" and that most + +On line 3104: + of business that came + through normal channels that met + goals" and that most of + +On line 3104: + business that came through + normal channels that met goals" + and that most of the + +On line 3104: + that came through normal + channels that met goals" and that + most of the loans that + +On line 3104: + normal channels that + met goals" and that most of the + loans that satisfied + +On line 3104: + channels that met goals" + and that most of the loans that + satisfied the goals + +On line 3104: + met goals" and that most + of the loans that satisfied + the goals "would have been + +On line 3104: + goals" and that most of + the loans that satisfied the + goals "would have been made + +On line 3104: + that most of the loans + that satisfied the goals "would + have been made anyway."201 + +On line 3106: + most of the loans that + satisfied the goals "would have + been made anyway."201 In + +On line 3106: + that satisfied the + goals "would have been made anyway."201 + In HUD announced that + +On line 3106: + the goals "would have been + made anyway."201 In HUD announced + that starting in of + +On line 3106: + goals "would have been made + anyway."201 In HUD announced that + starting in of the + +On line 3106: + made anyway."201 In HUD + announced that starting in of + the GSEs’ purchases + +On line 3106: + that starting in of + the GSEs’ purchases would need + to satisfy the + +On line 3106: + starting in of the + GSEs’ purchases would need to + satisfy the low- + +On line 3106: + GSEs’ purchases would + need to satisfy the low- + and moderate-income + +On line 3106: + purchases would need + to satisfy the low- and + moderate-income goals. + +On line 3106: + need to satisfy + the low- and moderate-income + goals. The targets would + +On line 3106: + to satisfy the + low- and moderate-income goals. + The targets would reach + +On line 3106: + satisfy the low- + and moderate-income goals. The + targets would reach in + +On line 3108: + and moderate-income + goals. The targets would reach in + and in Given the + +On line 3108: + goals. The targets would + reach in and in Given the + dramatic growth in + +On line 3108: + would reach in and in + Given the dramatic growth + in the number of + +On line 3108: + in and in Given + the dramatic growth in the + number of riskier + +On line 3108: + the dramatic growth + in the number of riskier + loans riginated + +On line 3108: + dramatic growth in + the number of riskier loans + riginated in + +On line 3108: + in the number of + riskier loans riginated + in the market, the + +On line 3108: + number of riskier + loans riginated in the + market, the new goals + +On line 3108: + loans riginated + in the market, the new goals + were closer to where + +On line 3108: + riginated in + the market, the new goals were + closer to where the + +On line 3108: + the market, the new + goals were closer to where the + market really + +On line 3110: + were closer to where + the market really was. + But, as Mudd noted, + +On line 3110: + closer to where the + market really was. But, + as Mudd noted, "When + +On line 3110: + to where the market + really was. But, as Mudd + noted, "When became + +On line 3110: + really was. But, + as Mudd noted, "When became + ultimately, then + +On line 3110: + But, as Mudd noted, + "When became ultimately, + then you have to work + +On line 3110: + noted, "When became + ultimately, then you have + to work harder, pay + +On line 3110: + ultimately, then + you have to work harder, pay + more attention, and + +On line 3110: + to work harder, pay + more attention, and create + a preference for + +On line 3110: + work harder, pay more + attention, and create a + preference for those + +On line 3110: + more attention, and + create a preference for + those loans."203 Targeted + +On line 3110: + preference for those + loans."203 Targeted goals loans (loans + made specifically + +On line 3110: + loans."203 Targeted goals + loans (loans made specifically + to meet the targets), + +On line 3110: + Targeted goals loans + (loans made specifically to + meet the targets), while + +On line 3110: + specifically to + meet the targets), while always + a small share of the + +On line 3110: + to meet the targets), + while always a small share of + the GSEs’ purchases, + +On line 3110: + meet the targets), while + always a small share of the + GSEs’ purchases, rose + +On line 3110: + while always a small + share of the GSEs’ purchases, + rose in importance. + +On line 3112: + always a small share + of the GSEs’ purchases, rose + in importance. Mudd + +On line 3112: + rose in importance. + Mudd testified that by when + the housing market + +On line 3112: + in importance. Mudd + testified that by when the + housing market was + +On line 3112: + testified that by + when the housing market was + in turmoil, Fannie + +On line 3112: + the housing market + was in turmoil, Fannie Mae + could no longer balance + +On line 3112: + housing market was + in turmoil, Fannie Mae could + no longer balance its + +On line 3112: + Fannie Mae could no + longer balance its obligations + to shareholders with + +On line 3112: + no longer balance its + obligations to shareholders + with its affordable + +On line 3112: + demands: "There may have + been no way to satisfy + of the myriad + +On line 3112: + "There may have been no + way to satisfy of the + myriad demands + +On line 3112: + way to satisfy + of the myriad demands + for Fannie Mae to + +On line 3112: + of the myriad + demands for Fannie Mae to + support all manner + +On line 3112: + myriad demands + for Fannie Mae to support + all manner of projects + +On line 3114: + demands for Fannie + Mae to support all manner + of projects [or] housing + +On line 3114: + for Fannie Mae to + support all manner of projects + [or] housing goals which + +On line 3114: + Mae to support all + manner of projects [or] housing + goals which were set above + +On line 3114: + manner of projects [or] + housing goals which were set above + the origination + +On line 3114: + goals which were set above + the origination levels + in the marketplace."204 + +On line 3116: + which were set above the + origination levels in + the marketplace."204 As + +On line 3116: + the origination + levels in the marketplace."204 + As the combined size + +On line 3116: + in the marketplace."204 + As the combined size of the + GSEs rose steadily from + +On line 3116: + marketplace."204 As the + combined size of the GSEs rose + steadily from trillion + +On line 3116: + combined size of the + GSEs rose steadily from trillion + in to trillion in + +On line 3116: + the GSEs rose steadily + from trillion in to trillion + in the number of + +On line 3116: + from trillion in to + trillion in the number of + mortgage borrowers + +On line 3116: + in the number of + mortgage borrowers that the + GSEs needed to serve + +On line 3116: + GSEs needed to serve + in order to fulfill the + affordable housing + +On line 3116: + to serve in order + to fulfill the affordable + housing goals also + +On line 3116: + housing goals also + rose. By Fannie and Freddie + were stretching to meet + +On line 3116: + were stretching to meet + the higher goals, according + to a number of + +On line 3116: + stretching to meet the + higher goals, according to + a number of GSE + +On line 3118: + GSE executives, + OFHEO officials, and market + observers. Yet all but + +On line 3118: + OFHEO officials, and + market observers. Yet all but + two of the dozens of + +On line 3118: + market observers. Yet + all but two of the dozens of + current and former + +On line 3118: + observers. Yet all but + two of the dozens of current + and former Fannie + +On line 3118: + two of the dozens of + current and former Fannie + Mae employees and + +On line 3118: + Mae employees and + regulators interviewed + on the subject told + +On line 3118: + the subject told the + FCIC that reaching the goals was + not the primary + +On line 3118: + FCIC that reaching the + goals was not the primary + driver of the GSEs’ + +On line 3118: + the goals was not the + primary driver of the + GSEs’ purchases of + +On line 3118: + primary driver + of the GSEs’ purchases of + riskier mortgages and + +On line 3118: + the GSEs’ purchases + of riskier mortgages and of + subprime and Alt-A non-GSE + +On line 3118: + subprime and Alt-A non-GSE + mortgage–backed securities. + Executives from + +On line 3118: + to originators’ + demands, and responding to + shareholder demands + +On line 3118: + increase market share + and profits, in addition + to fulfilling the + +On line 3118: + in addition to + fulfilling the mission of + meeting affordable + +On line 3118: + meeting affordable + housing goals and providing + liquidity to + +On line 3120: + liquidity to + the market. For example, + Levin told the FCIC that + +On line 3120: + to the market. For + example, Levin told the FCIC + that while Fannie, to + +On line 3120: + For example, Levin + told the FCIC that while Fannie, + to meet its housing + +On line 3120: + example, Levin told + the FCIC that while Fannie, to + meet its housing goals, + +On line 3120: + told the FCIC that while + Fannie, to meet its housing + goals, did purchase some + +On line 3120: + FCIC that while Fannie, + to meet its housing goals, did + purchase some subprime + +On line 3120: + while Fannie, to meet + its housing goals, did purchase + some subprime mortgages + +On line 3120: + Fannie, to meet its + housing goals, did purchase some + subprime mortgages and + +On line 3120: + to meet its housing + goals, did purchase some subprime + mortgages and mortgage-backed + +On line 3120: + goals, did purchase some + subprime mortgages and mortgage-backed + securities it + +On line 3120: + some subprime mortgages + and mortgage-backed securities + it would otherwise + +On line 3120: + subprime mortgages and + mortgage-backed securities it + would otherwise have + +On line 3120: + securities it + would otherwise have passed up, + Fannie was driven + +On line 3120: + would otherwise have + passed up, Fannie was driven + to "meet the market" + +On line 3120: + otherwise have passed + up, Fannie was driven to + "meet the market" and + +On line 3120: + Fannie was driven + to "meet the market" and to + reverse declining + +On line 3120: + was driven to "meet + the market" and to reverse + declining market + +On line 3120: + to "meet the market" + and to reverse declining + market share. On the + +On line 3120: + the market" and to + reverse declining market + share. On the other + +On line 3120: + reverse declining + market share. On the other + hand, he said that most + +On line 3120: + declining market + share. On the other hand, he + said that most Alt-A loans + +On line 3120: + On the other hand, + he said that most Alt-A loans were + high-income-oriented + +On line 3120: + said that most Alt-A loans + were high-income-oriented and + would not have counted + +On line 3120: + would not have counted + toward the goals, so those were + purchased solely to + +On line 3120: + have counted toward + the goals, so those were purchased + solely to increase + +On line 3120: + so those were purchased + solely to increase profits.206 + Similarly, Lund + +On line 3120: + solely to increase + profits.206 Similarly, Lund + told the FCIC that the + +On line 3120: + to increase profits.206 + Similarly, Lund told the + FCIC that the desire + +On line 3120: + Similarly, Lund + told the FCIC that the desire + for market share was + +On line 3120: + Lund told the FCIC that + the desire for market share + was the main driver + +On line 3120: + was the main driver + behind Fannie’s strategy + in Housing goals had + +On line 3120: + Fannie’s strategy + in Housing goals had been a + factor, but not the + +On line 3120: + in Housing goals had + been a factor, but not the + primary one.207 And + +On line 3120: + had been a factor, + but not the primary one.207 + And Dallavecchia likewise + +On line 3120: + been a factor, but + not the primary one.207 And + Dallavecchia likewise told + +On line 3120: + factor, but not the + primary one.207 And Dallavecchia + likewise told the FCIC + +On line 3120: + not the primary + one.207 And Dallavecchia likewise told + the FCIC that Fannie + +On line 3120: + primary one.207 And + Dallavecchia likewise told the FCIC + that Fannie increased + +On line 3120: + Dallavecchia likewise told + the FCIC that Fannie increased + its purchases of + +On line 3120: + the FCIC that Fannie + increased its purchases of + Alt-A loans to regain + +On line 3120: + Fannie increased its + purchases of Alt-A loans to + regain relevance + +On line 3120: + purchases of Alt-A + loans to regain relevance + in the market and + +On line 3120: + Alt-A loans to regain + relevance in the market + and meet customer needs.208 + +On line 3122: + the market and meet + customer needs.208 Hempstead, Fannie’s + principal contact + +On line 3122: + customer needs.208 Hempstead, + Fannie’s principal contact + with Countrywide, told + +On line 3122: + principal contact + with Countrywide, told the FCIC + that while housing goals + +On line 3122: + with Countrywide, told + the FCIC that while housing goals + were one reason for + +On line 3122: + that while housing goals + were one reason for Fannie’s + strategy, the main + +On line 3122: + goals were one reason + for Fannie’s strategy, the + main reason Fannie + +On line 3122: + reason for Fannie’s + strategy, the main reason + Fannie entered the + +On line 3122: + main reason Fannie + entered the riskier mortgage + market was that those + +On line 3122: + Fannie entered the + riskier mortgage market was + that those were the types + +On line 3122: + entered the riskier + mortgage market was that those + were the types of loans + +On line 3122: + the riskier mortgage + market was that those were the + types of loans being + +On line 3122: + market was that those + were the types of loans being + originated in + +On line 3122: + those were the types of + loans being originated + in the primary + +On line 3122: + originated in + the primary market.209 If + Fannie wanted to + +On line 3122: + If Fannie wanted + to continue purchasing + large quantities of + +On line 3122: + Fannie wanted to + continue purchasing large + quantities of loans, + +On line 3122: + large quantities of + loans, the company would need + to buy riskier loans. + +On line 3122: + need to buy riskier + loans. Kenneth Bacon, Fannie’s + executive vice + +On line 3122: + vice president of + multifamily lending, + said much the same thing, + +On line 3122: + same thing, and added that + shareholders also wanted + to see market share + +On line 3122: + also wanted to + see market share and returns + rise.210 Former Fannie + +On line 3122: + see market share and + returns rise.210 Former Fannie + chairman Stephen Ashley + +On line 3122: + share and returns rise.210 + Former Fannie chairman Stephen + Ashley told the FCIC + +On line 3122: + returns rise.210 Former + Fannie chairman Stephen Ashley + told the FCIC that the + +On line 3122: + rise.210 Former Fannie + chairman Stephen Ashley told the + FCIC that the change in + +On line 3122: + Fannie chairman Stephen + Ashley told the FCIC that the + change in strategy + +On line 3124: + chairman Stephen Ashley + told the FCIC that the change in + strategy in and + +On line 3124: + Ashley told the FCIC + that the change in strategy + in and was owed to + +On line 3124: + told the FCIC that the + change in strategy in and + was owed to a "mix + +On line 3124: + the FCIC that the change + in strategy in and was + owed to a "mix of + +On line 3124: + in strategy in + and was owed to a "mix of + reasons," including + +On line 3124: + was owed to a "mix + of reasons," including the + desire to regain + +On line 3124: + a "mix of reasons," + including the desire to + regain market share + +On line 3124: + desire to regain + market share and the need to + respond to pressures + +On line 3124: + market share and the + need to respond to pressures + from originators + +On line 3124: + respond to pressures + from originators as well + as to pressures from + +On line 3124: + as to pressures from + real estate industry + advocates to be + +On line 3124: + from real estate + industry advocates to + be more engaged in + +On line 3128: + more engaged in the + marketplace.211 To ensure an + adequate supply + +On line 3128: + in the marketplace.211 + To ensure an adequate + supply of mortgages + +On line 3128: + adequate supply + of mortgages in case the goals + were not met in the + +On line 3128: + supply of mortgages + in case the goals were not met + in the normal course + +On line 3128: + in case the goals were + not met in the normal course + of business, Fannie + +On line 3128: + case the goals were not + met in the normal course of + business, Fannie and + +On line 3128: + goals were not met in + the normal course of business, + Fannie and Freddie + +On line 3128: + of business, Fannie + and Freddie instituted + outreach programs in + +On line 3128: + for originators + and brokers.212 In addition, + as explained by Mike + +On line 3128: + originators and + brokers.212 In addition, as + explained by Mike Quinn, + +On line 3128: + explained by Mike Quinn, + the Fannie executive + responsible for + +On line 3128: + responsible for + the goals, Fannie set lower + fees on loans that met + +On line 3128: + for the goals, Fannie + set lower fees on loans that + met the goals, although + +On line 3128: + the goals, Fannie set + lower fees on loans that met + the goals, although it + +On line 3128: + Fannie set lower + fees on loans that met the goals, + although it would not + +On line 3128: + set lower fees on + loans that met the goals, although + it would not purchase + +On line 3128: + fees on loans that met + the goals, although it would not + purchase mortgages that + +On line 3128: + met the goals, although + it would not purchase mortgages + that fell outside its + +On line 3128: + it would not purchase + mortgages that fell outside its + predetermined risk + +On line 3128: + its predetermined + risk targets.213 Ashley also + maintained that Fannie + +On line 3128: + that Fannie did not + shift eligibility + or underwriting + +On line 3128: + instead directed + its resources to marketing + and promotional + +On line 3128: + partnership offices. + "The effort was really + in the outreach as + +On line 3128: + outreach as opposed + to reduced or diminished + or loosened standards," + +On line 3128: + opposed to reduced + or diminished or loosened + standards," Ashley told + +On line 3130: + or diminished or + loosened standards," Ashley told + the FCIC.214 Former OFHEO + +On line 3130: + testified that the + GSEs invested in subprime + and Alt-A mortgages in + +On line 3130: + GSEs invested in + subprime and Alt-A mortgages in + order to increase + +On line 3130: + and Alt-A mortgages in + order to increase profits + and regain market + +On line 3130: + to increase profits + and regain market share and + that any impact on + +On line 3130: + and regain market + share and that any impact on + meeting affordable + +On line 3130: + that any impact on + meeting affordable housing + goals was simply a + +On line 3130: + impact on meeting + affordable housing goals was + simply a by-product + +On line 3130: + attributed the GSEs’ + change in strategy to their + drive for profit and + +On line 3130: + change in strategy + to their drive for profit and + market share, as well + +On line 3130: + strategy to their + drive for profit and market + share, as well as the + +On line 3130: + drive for profit and + market share, as well as the + need to meet housing + +On line 3130: + market share, as well + as the need to meet housing + goals. Noting that the + +On line 3130: + as well as the need + to meet housing goals. Noting + that the affordable + +On line 3130: + as the need to meet + housing goals. Noting that the + affordable housing + +On line 3130: + to meet housing goals. + Noting that the affordable + housing goals increased + +On line 3130: + housing goals. Noting + that the affordable housing + goals increased markedly + +On line 3130: + that the affordable + housing goals increased markedly + in he said in an + +On line 3130: + housing goals increased + markedly in he said in an + FCIC interview that + +On line 3130: + markedly in he said + in an FCIC interview that + the "goals were just one + +On line 3130: + in he said in an + FCIC interview that the "goals + were just one reason, + +On line 3130: + FCIC interview that + the "goals were just one reason, + certainly not the + +On line 3130: + the "goals were just one + reason, certainly not the + exclusive reason" + +On line 3130: + reason, certainly + not the exclusive reason" + for the change.217 These views + +On line 3130: + for the change.217 These views + were corroborated by + numerous other + +On line 3132: + other officials + from the agency.218 The former + HUD official Mike + +On line 3132: + from the agency.218 The + former HUD official Mike + Price told the FCIC that + +On line 3132: + agency.218 The former + HUD official Mike Price told + the FCIC that while the + +On line 3132: + HUD official Mike + Price told the FCIC that while the + "GSEs cried bloody murder + +On line 3132: + Price told the FCIC that + while the "GSEs cried bloody murder + forever" when it + +On line 3132: + FCIC that while the "GSEs + cried bloody murder forever" + when it came to the + +On line 3132: + that while the "GSEs cried + bloody murder forever" when + it came to the goals, + +On line 3132: + while the "GSEs cried bloody + murder forever" when it + came to the goals, they + +On line 3132: + "GSEs cried bloody murder + forever" when it came to + the goals, they touted + +On line 3132: + forever" when it + came to the goals, they touted + their contribution + +On line 3132: + contribution to + increasing homeownership. + In addition, Price + +On line 3132: + homeownership. In + addition, Price and other + HUD officials told + +On line 3134: + In addition, Price + and other HUD officials + told the FCIC that the + +On line 3134: + addition, Price and + other HUD officials told + the FCIC that the GSEs + +On line 3134: + Price and other HUD + officials told the FCIC that + the GSEs never claimed + +On line 3134: + HUD officials told + the FCIC that the GSEs never + claimed that meeting the + +On line 3134: + officials told the + FCIC that the GSEs never claimed + that meeting the goals + +On line 3134: + told the FCIC that the + GSEs never claimed that meeting + the goals would leave them + +On line 3134: + the FCIC that the GSEs + never claimed that meeting the + goals would leave them in + +On line 3134: + the GSEs never claimed + that meeting the goals would leave + them in an unsafe + +On line 3134: + GSEs never claimed that + meeting the goals would leave them + in an unsafe or + +On line 3134: + meeting the goals would + leave them in an unsafe or + unsound condition.219 + +On line 3136: + the goals would leave them + in an unsafe or unsound + condition.219 Indeed, + +On line 3136: + in an unsafe or + unsound condition.219 Indeed, + the law allowed both + +On line 3136: + unsafe or unsound + condition.219 Indeed, the law + allowed both Fannie + +On line 3136: + condition.219 Indeed, + the law allowed both Fannie + Mae and Freddie Mac + +On line 3136: + both Fannie Mae and + Freddie Mac to fall short of + meeting housing goals + +On line 3136: + Mac to fall short of + meeting housing goals that were + "infeasible" or + +On line 3136: + of meeting housing + goals that were "infeasible" + or that would affect + +On line 3136: + meeting housing goals + that were "infeasible" or + that would affect the + +On line 3136: + or that would affect + the companies’ safety and + soundness.220 And while the + +On line 3136: + companies’ safety + and soundness.220 And while the GSEs + often exceeded + +On line 3136: + soundness.220 And while the + GSEs often exceeded the + goals, in some cases + +On line 3136: + while the GSEs often + exceeded the goals, in some + cases those targets + +On line 3136: + goals, in some cases + those targets were adjusted + downward by HUD or, + +On line 3136: + adjusted downward + by HUD or, in rare cases, + were simply missed by + +On line 3136: + downward by HUD or, + in rare cases, were simply + missed by the GSEs.221 For + +On line 3136: + or, in rare cases, + were simply missed by the GSEs.221 + For example, on + +On line 3136: + were simply missed by + the GSEs.221 For example, on + December Mudd wrote + +On line 3136: + For example, on + December Mudd wrote to HUD: + "Fannie Mae believes + +On line 3136: + wrote to HUD: "Fannie + Mae believes that the low- and + moderate-income and + +On line 3136: + Mae believes that the + low- and moderate-income and + special affordable + +On line 3136: + moderate-income and + special affordable subgoals + are infeasible + +On line 3136: + anticipated + such a communication, + stating, "In the event + +On line 3136: + we reach a viewpoint + that achieving the goals this year + is ‘infeasible,’ + +On line 3136: + reach a viewpoint that + achieving the goals this year is + ‘infeasible,’ we + +On line 3136: + that achieving the goals + this year is ‘infeasible,’ + we will determine + +On line 3136: + achieving the goals this + year is ‘infeasible,’ we + will determine how + +On line 3136: + ‘infeasible,’ we + will determine how best to + address the matter + +On line 3138: + how best to address + the matter with HUD and will + continue to keep + +On line 3138: + keep the Board apprised + accordingly."223 In fact, both + Fannie and Freddie + +On line 3138: + accordingly."223 In + fact, both Fannie and Freddie + appealed to HUD to + +On line 3138: + Fannie and Freddie + appealed to HUD to lower + two components of + +On line 3138: + HUD to lower two + components of the goals for + affordable housing. + +On line 3140: + complied and allowed + the GSEs to fall short without + any consequences.224 The + +On line 3140: + the GSEs to fall short + without any consequences.224 The + impact of the goals + +On line 3142: + to fall short without + any consequences.224 The impact + of the goals At least + +On line 3142: + any consequences.224 The + impact of the goals At least + until HUD set new + +On line 3142: + impact of the goals + At least until HUD set new + affordable housing + +On line 3142: + least until HUD set + new affordable housing goals + for the GSEs only + +On line 3142: + for the GSEs only + supplemented their routine + purchases with a + +On line 3142: + supplemented their + routine purchases with a + small volume of loans + +On line 3142: + routine purchases + with a small volume of loans + and non-GSE mortgage–backed + +On line 3142: + and non-GSE mortgage–backed + securities needed to + meet their requirements. + +On line 3142: + needed to meet their + requirements. The GSEs knew that + they might not earn as + +On line 3142: + meet their requirements. + The GSEs knew that they might not + earn as much on these + +On line 3142: + The GSEs knew that they + might not earn as much on these + targeted goal loans + +On line 3142: + that they might not earn + as much on these targeted + goal loans as they would + +On line 3142: + they might not earn as + much on these targeted goal + loans as they would earn + +On line 3142: + might not earn as much + on these targeted goal loans + as they would earn on + +On line 3142: + not earn as much on + these targeted goal loans as + they would earn on both + +On line 3142: + on these targeted + goal loans as they would earn on + both oal-qualifying + +On line 3142: + these targeted goal + loans as they would earn on both + oal-qualifying and + +On line 3142: + loans as they would earn + on both oal-qualifying and + non-goal-qualifying + +On line 3142: + non-goal-qualifying + loans purchased in the usual + course of business; on + +On line 3142: + loans purchased in the + usual course of business; on + some of these loans, they + +On line 3142: + in the usual course + of business; on some of these + loans, they might even lose + +On line 3142: + on some of these loans, + they might even lose money. The + organizations + +On line 3142: + administrative + and other costs related + to the housing goals. + +On line 3144: + to the housing goals. + In June Freddie Mac staff made + a presentation + +On line 3144: + the housing goals. In + June Freddie Mac staff made a + presentation to + +On line 3144: + In June Freddie Mac + staff made a presentation + to the Business and + +On line 3144: + June Freddie Mac staff + made a presentation to + the Business and Risk + +On line 3144: + to the Business and + Risk Committee of the Board + of Directors on + +On line 3144: + the Business and Risk + Committee of the Board of + Directors on the + +On line 3144: + Risk Committee of + the Board of Directors on + the costs of meeting + +On line 3144: + Committee of the + Board of Directors on the + costs of meeting its + +On line 3146: + Board of Directors + on the costs of meeting its + goals. From to the cost + +On line 3146: + of Directors on + the costs of meeting its goals. + From to the cost of + +On line 3146: + Directors on the + costs of meeting its goals. From + to the cost of the + +On line 3146: + the costs of meeting + its goals. From to the cost of + the targeted goal + +On line 3146: + costs of meeting its + goals. From to the cost of the + targeted goal loans + +On line 3146: + goals. From to the cost + of the targeted goal loans + was effectively + +On line 3146: + of the targeted + goal loans was effectively + zero, as the goals + +On line 3146: + targeted goal loans + was effectively zero, + as the goals were reached + +On line 3146: + more challenging and + cost Freddie money in the + multifamily + +On line 3146: + cost Freddie money + in the multifamily + business; thus, only + +On line 3146: + after did meeting + the multifamily and + single-family + +On line 3146: + multifamily + and single-family goals + cost the GSE money. + +On line 3146: + single-family + goals cost the GSE money. Still, + only about of all + +On line 3146: + cost the GSE money. + Still, only about of all loans + purchased by Freddie + +On line 3146: + money. Still, only + about of all loans purchased by + Freddie between and + +On line 3146: + Still, only about of + all loans purchased by Freddie + between and were bought + +On line 3146: + of all loans purchased + by Freddie between and were + bought "specifically + +On line 3146: + between and were bought + "specifically because they + contribute to the + +On line 3146: + loans did have higher + than average expected + default rates, although + +On line 3146: + expected default + rates, although Freddie also + charged a higher fee + +On line 3146: + rates, although Freddie + also charged a higher fee + to guarantee them. + +On line 3146: + fee to guarantee + them. From through Freddie’s costs of + complying with the + +On line 3146: + averaged million + annually. The costs of + complying with these + +On line 3146: + took into account + three components: expected + revenues, expected + +On line 3146: + expected defaults, + and foregone revenues (based on + an assumption of + +On line 3146: + and foregone revenues + (based on an assumption of + what they might have earned + +On line 3146: + revenues (based on an + assumption of what they might + have earned elsewhere). These + +On line 3146: + an assumption of + what they might have earned elsewhere). + These costs were only + +On line 3146: + what they might have earned + elsewhere). These costs were only + computed on the + +On line 3146: + have earned elsewhere). These + costs were only computed + on the narrow set + +On line 3146: + earned elsewhere). These costs + were only computed on + the narrow set of + +On line 3146: + elsewhere). These costs were + only computed on the + narrow set of loans + +On line 3146: + the narrow set of + loans specifically purchased + to achieve the goals, as + +On line 3146: + to achieve the goals, as + opposed to goal-qualifying + loans purchased in the + +On line 3146: + goals, as opposed to + goal-qualifying loans purchased + in the normal course + +On line 3146: + to goal-qualifying + loans purchased in the normal + course of business.225 For + +On line 3146: + loans purchased in the + normal course of business.225 For + comparison, the + +On line 3146: + the normal course of + business.225 For comparison, + the company’s net + +On line 3148: + earnings averaged + just under billion per year + from to In Fannie + +On line 3148: + just under billion + per year from to In Fannie + Mae retained McKinsey and + +On line 3148: + billion per year from + to In Fannie Mae retained + McKinsey and Citigroup + +On line 3148: + to In Fannie Mae + retained McKinsey and Citigroup + to determine whether + +On line 3148: + McKinsey and Citigroup + to determine whether it would + be worthwhile to give + +On line 3148: + and Citigroup to + determine whether it would be + worthwhile to give up + +On line 3148: + to determine whether + it would be worthwhile to give + up the company’s + +On line 3148: + it would be worthwhile + to give up the company’s + charter as a GSE, + +On line 3148: + be worthwhile to give + up the company’s charter + as a GSE, which—while + +On line 3148: + and put constraints on + business practices, including + its mission goals. The + +On line 3148: + on business practices, + including its mission goals. + The final report + +On line 3148: + practices, including + its mission goals. The final + report to Fannie + +On line 3148: + its mission goals. The + final report to Fannie + Mae’s top management, + +On line 3148: + final report to + Fannie Mae’s top management, + called Project Phineas, found that + +On line 3148: + to Fannie Mae’s top + management, called Project Phineas, found + that the explicit + +On line 3148: + management, called Project + Phineas, found that the explicit + cost of compliance + +On line 3148: + that the explicit + cost of compliance with the + goals from to was close + +On line 3148: + the explicit cost + of compliance with the goals + from to was close to + +On line 3148: + cost of compliance + with the goals from to was close + to zero: "it is + +On line 3148: + of compliance with + the goals from to was close to + zero: "it is hard + +On line 3148: + with the goals from to + was close to zero: "it is + hard to discern a + +On line 3148: + hard to discern a + fundamental marginal + cost to meeting the + +On line 3148: + a fundamental + marginal cost to meeting + the housing goals on + +On line 3148: + cost to meeting the + housing goals on the single + family business + +On line 3150: + housing goals on the + single family business + side."227 The report came + +On line 3150: + goals on the single + family business side."227 The + report came to this + +On line 3150: + single family + business side."227 The report came + to this conclusion + +On line 3150: + family business + side."227 The report came to this + conclusion despite + +On line 3150: + greater difficulty + of meeting the goals in the + refinancing boom: + +On line 3150: + of meeting the goals + in the refinancing boom: + the large numbers of + +On line 3150: + the large numbers of + homeowners refinancing, + in particular + +On line 3150: + refinancing, in + particular those who were + middle and upper + +On line 3150: + and upper income, + necessarily reduced + the percentage of + +On line 3152: + of the pool that would + qualify for the goals. In + calculating these + +On line 3152: + qualify for the + goals. In calculating these + costs, the consultants + +On line 3152: + costs, the consultants + computed the difference + between fees charged on + +On line 3152: + difference between + fees charged on goal-qualifying + loans and the higher + +On line 3152: + loans and the higher + fees suggested by Fannie’s + own models. But this + +On line 3152: + and the higher fees + suggested by Fannie’s own + models. But this cost + +On line 3152: + fees suggested by + Fannie’s own models. But this + cost was not unique to + +On line 3152: + Fannie’s own models. + But this cost was not unique to + goal qualifying + +On line 3152: + this cost was not unique + to goal qualifying loans. + Across its portfolio, + +On line 3152: + was not unique to goal + qualifying loans. Across its + portfolio, Fannie + +On line 3152: + qualifying loans. + Across its portfolio, Fannie + charged lower fees than + +On line 3152: + charged lower fees than + its models computed for + goals loans as well as + +On line 3152: + lower fees than its + models computed for goals + loans as well as for + +On line 3152: + fees than its models + computed for goals loans as + well as for non-goals + +On line 3152: + models computed + for goals loans as well as for + non-goals loans. As a + +On line 3152: + computed for goals + loans as well as for non-goals + loans. As a result, + +On line 3152: + for goals loans as well + as for non-goals loans. As a + result, goals loans, even + +On line 3152: + well as for non-goals + loans. As a result, goals loans, + even targeted goals + +On line 3152: + as for non-goals loans. + As a result, goals loans, even + targeted goals loans, + +On line 3152: + loans. As a result, + goals loans, even targeted goals + loans, were not solely + +On line 3152: + Fannie’s discount was + actually smaller for + many goal-qualifying + +On line 3154: + for the others from + to Facing more aggressive + goals in and Fannie + +On line 3154: + the others from to + Facing more aggressive goals + in and Fannie Mae + +On line 3154: + in and Fannie Mae + expanded initiatives to + purchase targeted + +On line 3154: + loans. These included + mortgages acquired under the + My Community + +On line 3154: + looser standards, and + manufactured housing loans. + For these loans, Fannie + +On line 3154: + housing loans. For these + loans, Fannie explicitly + calculated the + +On line 3154: + opportunity + cost (foregone revenues based on + an assumption of + +On line 3154: + cost (foregone revenues + based on an assumption of + what they might have earned + +On line 3154: + revenues based on an + assumption of what they might + have earned elsewhere) along + +On line 3154: + an assumption of + what they might have earned elsewhere) + along with the so-called + +On line 3154: + assumption of what + they might have earned elsewhere) along + with the so-called cash + +On line 3154: + what they might have earned + elsewhere) along with the so-called + cash flow cost, or the + +On line 3154: + have earned elsewhere) along + with the so-called cash flow cost, + or the difference + +On line 3154: + elsewhere) along with the + so-called cash flow cost, or the + difference between + +On line 3154: + difference between + their expected losses and + expected revenue + +On line 3154: + expected losses + and expected revenue on + these loans. For as the + +On line 3154: + these loans. For as the + market was peaking, Fannie + Mae estimated + +On line 3154: + market was peaking, + Fannie Mae estimated + the cash flow cost of + +On line 3154: + was peaking, Fannie + Mae estimated the cash + flow cost of the loans + +On line 3154: + peaking, Fannie Mae + estimated the cash flow + cost of the loans to + +On line 3154: + Mae estimated + the cash flow cost of the loans + to be million and + +On line 3154: + estimated the + cash flow cost of the loans to + be million and the + +On line 3154: + cash flow cost of the + loans to be million and the + opportunity + +On line 3154: + to be million and + the opportunity cost + of the targeted + +On line 3154: + be million and the + opportunity cost of + the targeted goals + +On line 3154: + opportunity + cost of the targeted goals + loans million, compared + +On line 3154: + of the targeted + goals loans million, compared to + net income that year + +On line 3154: + the targeted goals + loans million, compared to net + income that year to + +On line 3154: + loans million, compared + to net income that year to + Fannie of billion—a + +On line 3154: + to net income that + year to Fannie of billion—a + figure that includes + +On line 3154: + income that year to + Fannie of billion—a figure + that includes returns + +On line 3154: + of billion—a figure + that includes returns on the + goal-qualifying loans + +On line 3154: + includes returns on + the goal-qualifying loans made + during the normal + +On line 3154: + the goal-qualifying + loans made during the normal + course of business.228 The + +On line 3154: + loans made during the + normal course of business.228 The + targeted goals loans + +On line 3154: + course of business.228 The + targeted goals loans amounted + to billion, or of + +On line 3154: + targeted goals loans + amounted to billion, or of + Fannie Mae’s billion + +On line 3154: + single-family + mortgage purchases in As + the markets tightened + +On line 3154: + mortgage purchases + in As the markets tightened + in the middle of + +On line 3154: + the middle of the + opportunity cost for + that year was forecast + +On line 3156: + Looking back at how + the targeted affordable + portfolio performed + +On line 3156: + at Freddie Mac took + the analysis of the goals’ + costs one step further. + +On line 3156: + Freddie Mac took the + analysis of the goals’ costs + one step further. While + +On line 3156: + the analysis of + the goals’ costs one step further. + While the outstanding + +On line 3156: + costs one step further. + While the outstanding billion + of these targeted + +On line 3156: + While the outstanding + billion of these targeted + affordable loans was + +On line 3156: + loans was only of + the total portfolio, these + were relatively + +On line 3156: + portfolio, these were + relatively high-risk loans + and were expected + +On line 3156: + and were expected + to account for of total + projected losses. + +On line 3156: + to account for of + total projected losses. + In fact, as of late + +On line 3156: + total projected + losses. In fact, as of late + they had accounted + +On line 3156: + fact, as of late they + had accounted for only + of losses—meaning + +On line 3156: + as of late they had + accounted for only of + losses—meaning that + +On line 3156: + had accounted for + only of losses—meaning + that they had performed + +On line 3156: + of losses—meaning + that they had performed better + than expected in + +On line 3156: + that they had performed + better than expected in + relation to the + +On line 3156: + whole portfolio. The + company’s major losses + came from loans acquired + +On line 3156: + company’s major + losses came from loans acquired + in the normal course + +On line 3156: + from loans acquired in + the normal course of business. + The presentation + +On line 3156: + the normal course of + business. The presentation + noted that many of + +On line 3158: + perform adequate + due diligence on the mortgages + they purchased and at + +On line 3158: + due diligence on the + mortgages they purchased and at + times knowingly waived + +On line 3158: + purchased and at times + knowingly waived compliance + with underwriting + +On line 3158: + Potential investors + were not fully informed or + were misled about the + +On line 3158: + not fully informed + or were misled about the poor + quality of the + +On line 3158: + or were misled about + the poor quality of the + mortgages contained in + +On line 3158: + the poor quality + of the mortgages contained in + some mortgage-related + +On line 3158: + some mortgage-related + securities. These problems + appear to have been + +On line 3158: + securities. These + problems appear to have been + significant. The + +On line 3158: + These problems appear + to have been significant. + The Securities + +On line 3158: + problems appear to + have been significant. The + Securities and + +On line 3158: + significant. The + Securities and Exchange + Commission failed to + +On line 3158: + The Securities + and Exchange Commission failed + to adequately + +On line 3158: + securities from + its review, and preempted + states from applying + +On line 3158: + and preempted states + from applying state law to + them, thereby failing + +On line 3158: + preempted states from + applying state law to them, + thereby failing in + +On line 3158: + from applying state + law to them, thereby failing + in its core mission + +On line 3158: + applying state law + to them, thereby failing in + its core mission to + +On line 3158: + law to them, thereby + failing in its core mission + to protect investors. + +On line 3160: + to protect investors. + The Federal Reserve failed + to recognize the + +On line 3160: + to recognize the + cataclysmic danger posed by + the housing bubble + +On line 3160: + cataclysmic danger + posed by the housing bubble + to the financial + +On line 3160: + posed by the housing + bubble to the financial + system and refused + +On line 3160: + the housing bubble + to the financial system + and refused to take + +On line 3160: + to the financial + system and refused to take + timely action to + +On line 3160: + financial system + and refused to take timely + action to constrain + +On line 3160: + and refused to take + timely action to constrain + its growth, believing + +On line 3160: + timely action to + constrain its growth, believing + that it could contain + +On line 3160: + believing that it + could contain the damage from + the bubble’s collapse. + +On line 3162: + that it could contain + the damage from the bubble’s + collapse. Lax mortgage + +On line 3162: + the damage from the + bubble’s collapse. Lax mortgage + regulation and + +On line 3162: + standards and practices + created conditions that + were ripe for mortgage + +On line 3172: + were ripe for mortgage + fraud. THE MADNESS CONTENTS CDO + managers: "We are not + +On line 3172: + THE MADNESS CONTENTS + CDO managers: "We are not a + rent-a-manager" + +On line 3174: + CDO managers: "We are + not a rent-a-manager" + Credit default swaps: + +On line 3176: + Credit default swaps: + "Dumb question"..............................................................190 Citigroup: "I + do not believe we + +On line 3178: + question"..............................................................190 Citigroup: + "I do not believe we were + powerless"..................................................195 AIG: "I’m + +On line 3178: + "I do not believe + we were powerless"..................................................195 AIG: "I’m + not getting paid enough + +On line 3178: + do not believe we + were powerless"..................................................195 AIG: "I’m not + getting paid enough to + +On line 3178: + we were powerless"..................................................195 + AIG: "I’m not getting paid enough + to stand on these tracks" + +On line 3180: + powerless"..................................................195 AIG: "I’m + not getting paid enough to stand + on these tracks" Merrill: + +On line 3180: + AIG: "I’m not getting + paid enough to stand on these tracks" + Merrill: "Whatever + +On line 3180: + not getting paid enough + to stand on these tracks" Merrill: + "Whatever it takes" + +On line 3182: + enough to stand on these + tracks" Merrill: "Whatever it + takes" Regulators: + +On line 3182: + to stand on these tracks" + Merrill: "Whatever it takes" + Regulators: "Are + +On line 3182: + "Whatever it takes" + Regulators: "Are undue + concentrations of + +On line 3182: + Regulators: "Are + undue concentrations of + risk developing1" + +On line 3184: + concentrations of + risk developing1" Moody’s: "It + was all about revenue"....................................................................206 + +On line 3186: + developing1" Moody’s: + "It was all about revenue"....................................................................206 The + collateralized + +On line 3186: + was all about revenue"....................................................................206 + The collateralized debt + obligation machine + +On line 3186: + collateralized + debt obligation machine could + have sputtered to a + +On line 3186: + could have sputtered to + a natural end by the + spring of Housing prices + +On line 3186: + have sputtered to a + natural end by the spring + of Housing prices peaked, + +On line 3186: + a natural end + by the spring of Housing prices + peaked, and AIG started + +On line 3186: + natural end by + the spring of Housing prices peaked, + and AIG started to + +On line 3186: + the spring of Housing + prices peaked, and AIG started to + slow down its business + +On line 3186: + spring of Housing prices + peaked, and AIG started to slow + down its business of + +On line 3186: + started to slow down + its business of insuring + subprime-mortgage CDOs. + +On line 3186: + down its business of + insuring subprime-mortgage + CDOs. But it turned out + +On line 3186: + CDOs. But it turned out + that Wall Street didn’t need its + golden goose any more. + +On line 3186: + that Wall Street didn’t + need its golden goose any more. + Securities firms + +On line 3186: + need its golden goose + any more. Securities firms + were starting to take + +On line 3186: + its golden goose any + more. Securities firms were + starting to take on + +On line 3186: + more. Securities + firms were starting to take on + a significant + +On line 3186: + Securities firms + were starting to take on a + significant share + +On line 3186: + firms were starting to + take on a significant + share of the risks from + +On line 3186: + were starting to take + on a significant share + of the risks from their + +On line 3186: + starting to take on + a significant share of + the risks from their own + +On line 3186: + a significant + share of the risks from their own + deals, without AIG as + +On line 3186: + significant share + of the risks from their own deals, + without AIG as the + +On line 3186: + of the risks from their + own deals, without AIG as the + ultimate bearer + +On line 3186: + deals, without AIG as + the ultimate bearer of + the risk of losses + +On line 3186: + without AIG as the + ultimate bearer of the + risk of losses on + +On line 3186: + risk of losses on + super-senior CDO tranches. The + machine kept humming + +On line 3186: + "That just seemed kind of + odd, given everything we + had seen and what we + +On line 3186: + just seemed kind of odd, + given everything we had + seen and what we had + +On line 3186: + we had concluded," + Gary Gorton, a Yale finance + professor who had + +On line 3186: + Gary Gorton, a Yale + finance professor who had + designed AIG’s model + +On line 3186: + finance professor + who had designed AIG’s model + for analyzing + +On line 3186: + who had designed AIG’s + model for analyzing + its CDO positions, + +On line 3186: + designed AIG’s model + for analyzing its CDO + positions, told the + +On line 3188: + for analyzing + its CDO positions, told the + FCIC.1 The CDO machine + +On line 3188: + analyzing its + CDO positions, told the FCIC.1 + The CDO machine had + +On line 3190: + promoters of CDOs, + Citigroup, Merrill Lynch, and + UBS— apparently + +On line 3190: + Citigroup, Merrill + Lynch, and UBS— apparently + did not accept or + +On line 3190: + UBS— apparently + did not accept or perhaps + even understand the + +On line 3190: + apparently did + not accept or perhaps even + understand the risks + +On line 3190: + did not accept or + perhaps even understand the + risks inherent in + +On line 3190: + understand the risks + inherent in the products + they were creating. + +On line 3190: + in the products they + were creating. More and more, + the senior tranches + +On line 3190: + the products they were + creating. More and more, the + senior tranches were + +On line 3190: + were creating. More + and more, the senior tranches + were retained by the + +On line 3190: + senior tranches were + retained by the arranging + securities firms, + +On line 3190: + were retained by the + arranging securities + firms, the mezzanine + +On line 3190: + securities firms, + the mezzanine tranches were + bought by other CDOs, + +On line 3190: + bought by other CDOs, + and the equity tranches + were bought by hedge funds + +On line 3190: + by other CDOs, and + the equity tranches were + bought by hedge funds that + +On line 3190: + other CDOs, and the + equity tranches were bought + by hedge funds that were + +On line 3190: + equity tranches + were bought by hedge funds that were + often engaged in + +On line 3190: + by hedge funds that were + often engaged in complex + trading strategies: they + +On line 3190: + were often engaged + in complex trading strategies: + they made money when + +On line 3190: + often engaged in + complex trading strategies: they + made money when the + +On line 3190: + in complex trading + strategies: they made money when + the CDOs performed, but + +On line 3190: + made money when the + CDOs performed, but could also + make money if the + +On line 3190: + when the CDOs performed, + but could also make money + if the market crashed. + +On line 3190: + the CDOs performed, but + could also make money if + the market crashed. These + +On line 3190: + but could also make + money if the market crashed. + These factors helped keep + +On line 3190: + the market crashed. These + factors helped keep the mortgage + market going long + +On line 3190: + These factors helped keep + the mortgage market going + long after house prices + +On line 3190: + factors helped keep the + mortgage market going long + after house prices had + +On line 3190: + helped keep the mortgage + market going long after + house prices had begun + +On line 3190: + the mortgage market + going long after house prices + had begun to fall + +On line 3190: + prices had begun to + fall and created massive + exposures on the + +On line 3192: + ultimately bring + many of them to the brink of + failure. The subprime + +On line 3192: + pioneer Lewis Ranieri + called the willing suspension + of prudent standards + +On line 3198: + of prudent standards + "the madness." He told the FCIC, + "You had the breakdown + +On line 3198: + prudent standards "the + madness." He told the FCIC, "You + had the breakdown of + +On line 3198: + madness." He told the + FCIC, "You had the breakdown of + the standards, because + +On line 3198: + told the FCIC, "You had + the breakdown of the standards, + because you break down + +On line 3198: + "You had the breakdown + of the standards, because you + break down the checks and + +On line 3198: + the breakdown of the + standards, because you break down + the checks and balances + +On line 3198: + standards, because you + break down the checks and balances + that normally would + +On line 3200: + the checks and balances + that normally would have stopped + them."2 Synthetic CDOs + +On line 3200: + checks and balances that + normally would have stopped them."2 + Synthetic CDOs boomed. + +On line 3200: + that normally would + have stopped them."2 Synthetic CDOs + boomed. They provided + +On line 3200: + Synthetic CDOs boomed. + They provided easier + opportunities + +On line 3200: + opportunities + for bullish and bearish investors + to bet for and against + +On line 3200: + for bullish and bearish + investors to bet for and against + the housing boom and + +On line 3200: + investors to bet for + and against the housing boom and + the securities + +On line 3200: + and against the housing + boom and the securities + that depended on + +On line 3200: + against the housing boom + and the securities that + depended on it. + +On line 3200: + that depended on + it. Synthetic CDOs also + made it easier + +On line 3200: + depended on it. + Synthetic CDOs also made + it easier for + +On line 3200: + it. Synthetic CDOs + also made it easier + for investment banks + +On line 3202: + CDOs also made it + easier for investment + banks and CDO managers + +On line 3202: + made it easier + for investment banks and CDO + managers to create + +On line 3202: + for investment banks + and CDO managers to create + CDOs more quickly. But + +On line 3202: + banks and CDO managers + to create CDOs more quickly. + But synthetic CDO + +On line 3202: + to create CDOs more + quickly. But synthetic CDO + issuers and managers + +On line 3202: + CDOs more quickly. But + synthetic CDO issuers and + managers had two sets + +On line 3202: + But synthetic CDO + issuers and managers had two + sets of customers, each + +On line 3202: + sets of customers, each + with different interests. + And managers sometimes + +On line 3202: + of customers, each with + different interests. And + managers sometimes had + +On line 3202: + in selecting the + collateral—including + those who were betting + +On line 3202: + those who were betting + against the collateral, as + a high-profile case + +On line 3202: + who were betting against + the collateral, as a + high-profile case launched + +On line 3202: + collateral, as + a high-profile case launched by + the Securities + +On line 3202: + high-profile case launched + by the Securities and + Exchange Commission + +On line 3204: + would eventually + illustrate.3 Regulators + reacted weakly. + +On line 3204: + recognized that CDOs + and credit default swaps (CDS) + could actually + +On line 3204: + and credit default + swaps (CDS) could actually + concentrate rather than + +On line 3204: + concentrate rather than + diversify risk, but they + concluded that Wall + +On line 3204: + than diversify + risk, but they concluded that + Wall Street knew what it + +On line 3204: + diversify risk, + but they concluded that Wall + Street knew what it was + +On line 3204: + Wall Street knew what it + was doing. Supervisors + issued guidance in + +On line 3204: + issued guidance in + late warning banks of the risks + of complex structured + +On line 3204: + securities and + CDOs, because they saw the risks + of those products as + +On line 3204: + and CDOs, because they + saw the risks of those products + as relatively + +On line 3204: + saw the risks of those + products as relatively + straightforward and well + +On line 3204: + of those products as + relatively straightforward + and well understood.4 + +On line 3208: + straightforward and well + understood.4 Disaster was + fast approaching. CDO + +On line 3210: + During the "madness," + when everyone wanted a + piece of the action, + +On line 3210: + everyone wanted + a piece of the action, CDO + managers faced growing + +On line 3210: + declined, as demand + for mortgage-backed securities + drove up prices, squeezing + +On line 3210: + demand for mortgage-backed + securities drove up prices, + squeezing the profit + +On line 3210: + securities drove + up prices, squeezing the profit + they made on CDOs. At + +On line 3210: + drove up prices, squeezing + the profit they made on CDOs. + At the same time, new + +On line 3210: + up prices, squeezing the + profit they made on CDOs. At + the same time, new CDO + +On line 3210: + squeezing the profit + they made on CDOs. At the same + time, new CDO managers + +On line 3210: + they made on CDOs. At + the same time, new CDO managers + were entering the + +On line 3210: + At the same time, new + CDO managers were entering + the arena. Wing Chau, + +On line 3210: + the same time, new CDO + managers were entering the + arena. Wing Chau, a + +On line 3210: + CDO manager who + frequently worked with Merrill + Lynch, said the fees fell + +On line 3210: + worked with Merrill Lynch, + said the fees fell by half for + mezzanine CDOs over + +On line 3210: + Lynch, said the fees fell + by half for mezzanine CDOs + over time.5 And overall + +On line 3210: + compensation could + be maintained by creating + and managing more + +On line 3212: + could be maintained by + creating and managing + more new product. More + +On line 3212: + by creating and + managing more new product. + More than had been the + +On line 3212: + and managing more + new product. More than had been + the case three or four + +On line 3212: + managing more new + product. More than had been the + case three or four years + +On line 3212: + more new product. More + than had been the case three or + four years earlier, + +On line 3212: + new product. More than + had been the case three or four + years earlier, in + +On line 3212: + the case three or four + years earlier, in picking + the collateral + +On line 3212: + case three or four years + earlier, in picking the + collateral the + +On line 3212: + were influenced by + the underwriters—the + securities firms + +On line 3212: + firms that created + and marketed the deals. An + FCIC survey of CDO + +On line 3212: + and marketed the + deals. An FCIC survey of CDO + managers confirmed this + +On line 3214: + deals. An FCIC survey + of CDO managers confirmed this + point.6 Sometimes managers + +On line 3214: + An FCIC survey of + CDO managers confirmed this point.6 + Sometimes managers were + +On line 3214: + point.6 Sometimes managers + were given a portfolio + constructed by the + +On line 3214: + the securities + firm; the managers would then choose + the mortgage assets + +On line 3214: + securities firm; + the managers would then choose the + mortgage assets from + +On line 3214: + firm; the managers would + then choose the mortgage assets + from that portfolio. + +On line 3214: + the managers would then + choose the mortgage assets from + that portfolio. The + +On line 3214: + in the first place—also + influenced the selection + of assets in many + +On line 3214: + place—also influenced + the selection of assets + in many instances. Still, + +On line 3214: + the selection of + assets in many instances. Still, + some managers said that + +On line 3214: + many instances. Still, some + managers said that they acted + independently. + +On line 3216: + rent-a-manager, + we actually select + our collateral," + +On line 3216: + securities firms + often had particular + CDO managers with whom + +On line 3216: + particular CDO + managers with whom they preferred + to work. Merrill, the + +On line 3216: + CDO managers with whom + they preferred to work. Merrill, + the market leader, + +On line 3216: + managers with whom they + preferred to work. Merrill, the + market leader, had + +On line 3216: + CDOs underwritten + by Merrill frequently bought + tranches of other + +On line 3218: + of other Merrill + CDOs. According to market + participants, CDOs + +On line 3218: + CDOs. According to + market participants, CDOs + stimulated greater + +On line 3218: + the greater demand in + turn affected the standards + for originating + +On line 3220: + for originating + mortgages underlying those + securities.8 As + +On line 3220: + underlying those + securities.8 As standards + fell, at least one firm + +On line 3220: + securities.8 As + standards fell, at least one firm + opted out: PIMCO, + +On line 3220: + fell, at least one firm + opted out: PIMCO, one of + the largest investment + +On line 3220: + least one firm opted + out: PIMCO, one of the largest + investment unds in + +On line 3220: + opted out: PIMCO, + one of the largest investment + unds in the country, + +On line 3220: + out: PIMCO, one of + the largest investment unds in + the country, whose CDO + +On line 3220: + the largest investment + unds in the country, whose CDO + management unit was + +On line 3220: + unds in the country, + whose CDO management unit was + one of the nation’s + +On line 3220: + in the country, whose + CDO management unit was one + of the nation’s largest + +On line 3220: + the country, whose CDO + management unit was one of + the nation’s largest in + +On line 3222: + whose CDO management + unit was one of the nation’s + largest in Early in + +On line 3222: + CDO management unit + was one of the nation’s largest + in Early in it + +On line 3222: + unit was one of the + nation’s largest in Early in + it announced that it + +On line 3222: + the nation’s largest in + Early in it announced that + it would not manage + +On line 3222: + largest in Early in + it announced that it would not + manage any new deals, + +On line 3222: + in it announced that + it would not manage any new + deals, in part because + +On line 3222: + it announced that it + would not manage any new deals, + in part because of + +On line 3222: + announced that it would + not manage any new deals, in + part because of the + +On line 3222: + credit quality + of mortgage-backed securities. + "There is an awful + +On line 3222: + "There is an awful + lot of moral hazard in the + sector," Scott Simon, + +On line 3222: + sector," Scott Simon, + a managing director + at PIMCO, told the + +On line 3222: + the audience at + an industry conference + in "You either take + +On line 3222: + audience at an + industry conference in + "You either take the + +On line 3222: + at an industry + conference in "You either + take the high road or + +On line 3222: + in "You either take + the high road or you don’t—we’re + not going to hurt + +On line 3222: + the high road or you + don’t—we’re not going to hurt + accounts or damage + +On line 3222: + don’t—we’re not going + to hurt accounts or damage + our reputation + +On line 3222: + to hurt accounts or + damage our reputation + for fees." Simon said + +On line 3222: + reputation for + fees." Simon said the rating + agencies’ methodologies + +On line 3222: + were being applied + to new types of subprime and + AltA loans with little + +On line 3222: + being applied to + new types of subprime and AltA + loans with little or + +On line 3222: + new types of subprime + and AltA loans with little or + no historical + +On line 3222: + performance data.9 + Not everyone agreed with this + viewpoint. "Managers who + +On line 3222: + Not everyone agreed + with this viewpoint. "Managers who + are sticking in this + +On line 3222: + viewpoint. "Managers who + are sticking in this business + are doing it right," + +On line 3222: + who are sticking in + this business are doing it + right," Armand Pastine, + +On line 3222: + are sticking in this + business are doing it right," + Armand Pastine, the + +On line 3222: + business are doing + it right," Armand Pastine, the + chief operating + +On line 3222: + chief operating + officer at Maxim Group, + responded at that + +On line 3222: + responded at that + same conference. "To suggest + that CDO managers would + +On line 3222: + that same conference. + "To suggest that CDO managers + would pull out of an + +On line 3222: + "To suggest that CDO + managers would pull out of an + economically + +On line 3222: + managers would pull out + of an economically + viable deal for moral + +On line 3222: + viable deal for moral + reasons—that’s a cop-out."10 As was + typical for the + +On line 3222: + for moral reasons—that’s + a cop-out."10 As was typical + for the industry + +On line 3222: + reasons—that’s a cop-out."10 + As was typical for the + industry during + +On line 3222: + As was typical + for the industry during + the crisis, two of + +On line 3222: + for the industry + during the crisis, two of + Maxim’s eight mortgage-backed + +On line 3222: + during the crisis, + two of Maxim’s eight mortgage-backed + CDOs, Maxim High Grade + +On line 3222: + two of Maxim’s eight + mortgage-backed CDOs, Maxim High Grade + CDO I and Maxim + +On line 3222: + Maxim’s eight mortgage-backed + CDOs, Maxim High Grade CDO I + and Maxim High Grade + +On line 3222: + mortgage-backed CDOs, Maxim + High Grade CDO I and Maxim + High Grade CDO II, would + +On line 3222: + CDOs, Maxim High Grade + CDO I and Maxim High Grade + CDO II, would default + +On line 3222: + Maxim High Grade CDO + I and Maxim High Grade CDO + II, would default on + +On line 3222: + I and Maxim High + Grade CDO II, would default on + interest payments + +On line 3222: + interest payments + to investors—including investors + holding bonds that had + +On line 3222: + to investors—including + investors holding bonds that had + originally been + +On line 3222: + holding bonds that had + originally been rated + triple-A—and the other six + +On line 3222: + originally been + rated triple-A—and the other six + would be downgraded + +On line 3222: + triple-A—and the other six + would be downgraded to junk + status, including + +On line 3222: + other six would be + downgraded to junk status, + including all of + +On line 3222: + downgraded to junk + status, including all of + those originally + +On line 3224: + also changed the CDOs: + in and CDO managers were less + likely to put their + +On line 3224: + the CDOs: in and CDO + managers were less likely to + put their own money + +On line 3224: + in and CDO managers + were less likely to put their + own money into + +On line 3224: + and CDO managers were + less likely to put their own + money into their + +On line 3224: + were less likely to + put their own money into + their deals. Early in + +On line 3224: + less likely to put + their own money into their + deals. Early in the + +On line 3224: + likely to put their + own money into their deals. + Early in the decade, + +On line 3224: + put their own money + into their deals. Early in + the decade, investors had + +On line 3224: + own money into + their deals. Early in the decade, + investors had taken + +On line 3224: + deals. Early in the + decade, investors had taken the + managers’ investment + +On line 3224: + investors had taken + the managers’ investment in + the equity tranche + +On line 3224: + managers’ investment + in the equity tranche of + their own CDOs to be + +On line 3224: + in the equity + tranche of their own CDOs to be + an assurance of + +On line 3224: + own CDOs to be an + assurance of quality, + believing that if + +On line 3224: + be an assurance + of quality, believing + that if the managers + +On line 3224: + an assurance of + quality, believing that + if the managers were + +On line 3224: + believing that if + the managers were sharing the + risk of loss, they would + +On line 3224: + managers were sharing + the risk of loss, they would have + an incentive to + +On line 3224: + the risk of loss, they + would have an incentive to + pick collateral + +On line 3224: + an incentive to + pick collateral wisely. + But this fail-safe lost force + +On line 3224: + incentive to pick + collateral wisely. But + this fail-safe lost force as + +On line 3224: + lost force as the amount + of managers’ investment per + transaction declined + +On line 3224: + the amount of managers’ + investment per transaction + declined over time. ACA + +On line 3224: + managers’ investment + per transaction declined over + time. ACA Management, + +On line 3224: + Capital, provides + a good illustration of + this trend. ACA held of + +On line 3224: + good illustration + of this trend. ACA held of the + equity in the + +On line 3224: + this trend. ACA held of + the equity in the CDOs + it originated + +On line 3224: + trend. ACA held of the + equity in the CDOs it + originated in + +On line 3226: + the equity in + the CDOs it originated + in and and of two + +On line 3226: + equity in the + CDOs it originated in + and and of two deals + +On line 3226: + it originated + in and and of two deals it + originated in + +On line 3226: + in and and of two + deals it originated in + between and of deals + +On line 3226: + and of two deals it + originated in between + and of deals in and + +On line 3226: + it originated + in between and of deals in + and between and of + +On line 3226: + originated in + between and of deals in and + between and of deals + +On line 3228: + between and of deals + in and between and of deals + in And synthetic + +On line 3228: + and of deals in and + between and of deals in And + synthetic CDOs, as + +On line 3228: + in and between and + of deals in And synthetic + CDOs, as we will see, + +On line 3228: + and between and of + deals in And synthetic CDOs, + as we will see, had + +On line 3228: + between and of deals + in And synthetic CDOs, as + we will see, had no + +On line 3228: + and of deals in And + synthetic CDOs, as we will + see, had no fail-safe at + +On line 3228: + And synthetic CDOs, + as we will see, had no fail-safe + at all with regard + +On line 3228: + synthetic CDOs, as + we will see, had no fail-safe at + all with regard to + +On line 3228: + will see, had no fail-safe + at all with regard to the + managers’ incentives. + +On line 3228: + had no fail-safe at all + with regard to the managers’ + incentives. By the + +On line 3228: + at all with regard + to the managers’ incentives. + By the very nature + +On line 3228: + all with regard to + the managers’ incentives. By + the very nature of + +On line 3228: + with regard to the + managers’ incentives. By the + very nature of the + +On line 3228: + managers’ incentives. + By the very nature of the + credit default swaps + +On line 3228: + incentives. By the + very nature of the credit + default swaps bundled + +On line 3228: + By the very nature + of the credit default swaps + bundled into these + +On line 3228: + swaps bundled into + these synthetics, customers on + the short side of the + +On line 3228: + bundled into these + synthetics, customers on the + short side of the deal + +On line 3228: + synthetics, customers + on the short side of the deal + were betting that the + +On line 3228: + customers on the short + side of the deal were betting + that the assets would + +On line 3230: + side of the deal were + betting that the assets would + fail. CREDIT DEFAULT + +On line 3232: + credit default swap, + a complex instrument that + mimicked the timing + +On line 3232: + which these new swaps were + bundled were much easier + to issue and sell. + +On line 3234: + were bundled were much + easier to issue and + sell. The pay-as-you-go + +On line 3234: + to issue and sell. + The pay-as-you-go swap also + enabled a second + +On line 3234: + a second major + development, introduced + in January the + +On line 3234: + in January the + first index based on the prices + of credit default + +On line 3234: + January the first + index based on the prices of + credit default swaps + +On line 3234: + credit default swaps + on mortgage-backed securities. + Known as the ABX.HE, + +On line 3234: + as the ABX.HE, it + was really a series + of indices, meant to + +On line 3234: + the ABX.HE, it was + really a series of + indices, meant to act + +On line 3234: + it was really + a series of indices, meant + to act as a sort + +On line 3234: + was really a + series of indices, meant to + act as a sort of + +On line 3234: + to act as a sort + of Dow Jones Industrial + Average for the + +On line 3234: + Jones Industrial + Average for the nonprime + mortgage market, and + +On line 3234: + the nonprime mortgage + market, and it became a + popular way to + +On line 3234: + mortgage market, and + it became a popular + way to bet on the + +On line 3234: + and it became a + popular way to bet on + the performance of + +On line 3234: + popular way to + bet on the performance of + the market. Every + +On line 3234: + way to bet on the + performance of the market. + Every six months, a + +On line 3234: + on the performance + of the market. Every six + months, a consortium + +On line 3234: + the performance of + the market. Every six months, + a consortium of + +On line 3234: + the market. Every + six months, a consortium of + securities firms + +On line 3234: + securities in + each of five ratings-based tranches: + AAA, AA, A, BBB, and + +On line 3236: + each of five ratings-based + tranches: AAA, AA, A, BBB, and + BBB-. Investors who + +On line 3236: + five ratings-based tranches: + AAA, AA, A, BBB, and BBB-. + Investors who believed + +On line 3236: + tranches: AAA, AA, A, + BBB, and BBB-. Investors who + believed that the bonds + +On line 3236: + AAA, AA, A, BBB, and + BBB-. Investors who believed + that the bonds in any + +On line 3236: + A, BBB, and BBB-. + Investors who believed that the + bonds in any given + +On line 3236: + Investors who believed + that the bonds in any given + category would + +On line 3236: + that the bonds in any + given category would + fall behind in their + +On line 3236: + category would + fall behind in their payments + could buy protection + +On line 3236: + fall behind in their + payments could buy protection + through credit default + +On line 3236: + credit default swaps. + As demand for protection + rose, the index would + +On line 3236: + swaps. As demand for + protection rose, the index + would fall. The index + +On line 3236: + the index would fall. + The index was therefore a + barometer recording + +On line 3236: + index was therefore + a barometer recording the + confidence of the + +On line 3238: + the confidence of + the market. Synthetic CDOs + proliferated, + +On line 3238: + market. Synthetic + CDOs proliferated, in + part because it was + +On line 3238: + it was much quicker + and easier for managers + to assemble a + +On line 3238: + CDO out of mortgage-backed + securities. "The beauty + in a way of the + +On line 3238: + securities. "The + beauty in a way of the + synthetic deals is + +On line 3238: + "The beauty in a + way of the synthetic deals + is you can look at + +On line 3238: + beauty in a way + of the synthetic deals is + you can look at the + +On line 3238: + in a way of the + synthetic deals is you can + look at the entire + +On line 3238: + of the synthetic + deals is you can look at the + entire universe, you + +On line 3238: + synthetic deals is + you can look at the entire + universe, you don’t have + +On line 3238: + deals is you can look + at the entire universe, you + don’t have to go and + +On line 3238: + is you can look at + the entire universe, you don’t + have to go and buy + +On line 3238: + you can look at the + entire universe, you don’t have + to go and buy the + +On line 3238: + look at the entire + universe, you don’t have to go + and buy the cash bonds," + +On line 3238: + entire universe, you + don’t have to go and buy the + cash bonds," said Laura + +On line 3238: + universe, you don’t have + to go and buy the cash bonds," + said Laura Schwartz of + +On line 3238: + have to go and buy + the cash bonds," said Laura Schwartz + of ACA Capital.14 + +On line 3238: + to go and buy the + cash bonds," said Laura Schwartz of + ACA Capital.14 There + +On line 3238: + go and buy the cash + bonds," said Laura Schwartz of ACA + Capital.14 There were + +On line 3238: + Laura Schwartz of ACA + Capital.14 There were also + no warehousing costs + +On line 3238: + no warehousing costs + or associated risks. + And they tended to + +On line 3238: + risks. And they tended + to offer the potential + for higher returns + +On line 3238: + And they tended to + offer the potential for + higher returns on + +On line 3238: + estimated that + the equity tranche on a + synthetic CDO could + +On line 3238: + that the equity + tranche on a synthetic CDO + could typically + +On line 3238: + the equity tranche + on a synthetic CDO could + typically yield + +On line 3238: + a synthetic CDO + could typically yield about + while the equity + +On line 3238: + synthetic CDO could + typically yield about while + the equity tranche + +On line 3238: + typically yield + about while the equity tranche + of a typical + +On line 3240: + equity tranche of + a typical cash CDO could + pay An important + +On line 3240: + a typical cash + CDO could pay An important + driver in the growth + +On line 3240: + cash CDO could pay An + important driver in the + growth of synthetic + +On line 3240: + important driver + in the growth of synthetic + CDOs was the demand + +On line 3240: + driver in the growth + of synthetic CDOs was the + demand for credit + +On line 3240: + credit default swaps + on mortgage-backed securities. + Greg Lippmann, a Deutsche + +On line 3240: + securities. Greg + Lippmann, a Deutsche Bank mortgage + trader, told the FCIC + +On line 3240: + Greg Lippmann, a Deutsche + Bank mortgage trader, told the + FCIC that he often + +On line 3240: + a Deutsche Bank mortgage + trader, told the FCIC that he + often brokered these + +On line 3242: + trader, told the FCIC + that he often brokered these + deals, matching the "shorts" + +On line 3242: + FCIC that he often + brokered these deals, matching the + "shorts" with the "longs" and + +On line 3242: + matching the "shorts" with + the "longs" and minimizing + any risk for his own + +On line 3242: + "shorts" with the "longs" and + minimizing any risk for + his own bank. Lippmann + +On line 3242: + minimizing any + risk for his own bank. Lippmann + said that between and + +On line 3242: + any risk for his own + bank. Lippmann said that between + and he brokered deals + +On line 3242: + risk for his own bank. + Lippmann said that between and + he brokered deals for + +On line 3242: + own bank. Lippmann said + that between and he brokered + deals for at least and + +On line 3242: + bank. Lippmann said that + between and he brokered deals + for at least and maybe + +On line 3242: + said that between and + he brokered deals for at least + and maybe as many as + +On line 3244: + that between and he + brokered deals for at least and + maybe as many as hedge + +On line 3244: + he brokered deals for + at least and maybe as many as + hedge funds that wanted + +On line 3244: + brokered deals for at + least and maybe as many as hedge + funds that wanted to + +On line 3244: + deals for at least and + maybe as many as hedge funds that + wanted to short the + +On line 3244: + least and maybe as many + as hedge funds that wanted to + short the mezzanine + +On line 3244: + maybe as many as hedge + funds that wanted to short the + mezzanine tranches + +On line 3244: + mezzanine tranches + of mortgage-backed securities. + Meanwhile, on the long + +On line 3244: + tranches of mortgage-backed + securities. Meanwhile, on + the long side, "Most of + +On line 3244: + on the long side, "Most + of our CDS purchases were + from UBS, Merrill, and + +On line 3244: + the long side, "Most of + our CDS purchases were from + UBS, Merrill, and Citibank, + +On line 3244: + our CDS purchases + were from UBS, Merrill, and Citibank, + because they were the + +On line 3244: + [synthetic] CDOs."16 In + many cases, they were buying + those positions from + +On line 3244: + In many cases, they + were buying those positions + from Lippmann to put + +On line 3244: + many cases, they were + buying those positions from + Lippmann to put them + +On line 3244: + those positions from + Lippmann to put them into + synthetic CDOs; as + +On line 3244: + from Lippmann to put + them into synthetic CDOs; + as it would turn out, + +On line 3244: + Lippmann to put them + into synthetic CDOs; as + it would turn out, the + +On line 3244: + to put them into + synthetic CDOs; as it would + turn out, the banks would + +On line 3244: + into synthetic + CDOs; as it would turn out, the + banks would retain much + +On line 3244: + synthetic CDOs; as + it would turn out, the banks would + retain much of the + +On line 3244: + CDOs; as it would turn + out, the banks would retain much + of the risk of those + +On line 3244: + would turn out, the banks + would retain much of the risk + of those synthetic + +On line 3244: + turn out, the banks would + retain much of the risk of + those synthetic CDOs + +On line 3244: + would retain much of + the risk of those synthetic + CDOs by keeping the + +On line 3244: + of the risk of those + synthetic CDOs by keeping + the super-senior and + +On line 3244: + synthetic CDOs by + keeping the super-senior and + triple-A tranches, selling + +On line 3244: + CDOs by keeping the + super-senior and triple-A tranches, + selling below-triple-A tranches + +On line 3244: + super-senior and triple-A + tranches, selling below-triple-A tranches + largely to other + +On line 3244: + selling below-triple-A tranches + largely to other CDOs, and + selling equity + +On line 3244: + below-triple-A tranches largely + to other CDOs, and selling + equity tranches + +On line 3244: + largely to other + CDOs, and selling equity + tranches to hedge funds. + +On line 3246: + to other CDOs, and + selling equity tranches + to hedge funds. Issuance + +On line 3246: + selling equity + tranches to hedge funds. Issuance + of synthetic CDOs + +On line 3246: + tranches to hedge funds. + Issuance of synthetic CDOs + jumped from billion in + +On line 3246: + synthetic CDOs jumped + from billion in to billion + just one year later. + +On line 3246: + CDOs jumped from billion + in to billion just one year + later. (We include + +On line 3246: + from billion in to + billion just one year later. + (We include all CDOs + +On line 3246: + in to billion just + one year later. (We include + all CDOs with or more + +On line 3246: + or more synthetic + collateral; again, unless + otherwise noted, + +On line 3246: + collateral; again, + unless otherwise noted, + our data refers to + +On line 3246: + to CDOs that include + mortgage-backed securities.) Even + CDOs that were labeled + +On line 3246: + that include mortgage-backed + securities.) Even CDOs that + were labeled as "cash + +On line 3246: + securities.) Even + CDOs that were labeled as "cash + CDOs" increasingly + +On line 3246: + of billion in CDOs + were issued in including + those labeled as cash, + +On line 3246: + in CDOs were issued + in including those labeled + as cash, "hybrid," or + +On line 3246: + in including those + labeled as cash, "hybrid," or + synthetic; the FCIC + +On line 3246: + those labeled as cash, + "hybrid," or synthetic; the + FCIC estimates that + +On line 3246: + or synthetic; the + FCIC estimates that of the + collateral was + +On line 3246: + the FCIC estimates + that of the collateral + was derivatives, + +On line 3248: + the collateral + was derivatives, compared + with in and in The + +On line 3248: + with in and in The + advent of synthetic CDOs + changed the incentives + +On line 3248: + and in The advent + of synthetic CDOs changed the + incentives of CDO + +On line 3248: + of synthetic CDOs + changed the incentives of CDO + managers and hedge fund + +On line 3248: + incentives of CDO + managers and hedge fund investors. + Once short investors were + +On line 3248: + CDO managers and hedge + fund investors. Once short investors + were involved, the CDO + +On line 3248: + managers and hedge fund + investors. Once short investors were + involved, the CDO had + +On line 3248: + and hedge fund investors. + Once short investors were involved, + the CDO had two types + +On line 3248: + hedge fund investors. Once + short investors were involved, the + CDO had two types of + +On line 3248: + the CDO had two types + of investors with opposing + interests: those who + +On line 3248: + types of investors with + opposing interests: those + who would benefit + +On line 3248: + would benefit if + the assets performed, and those + who would benefit + +On line 3248: + benefit if the + assets performed, and those who + would benefit if + +On line 3248: + who would benefit + if the mortgage borrowers + stopped making payments + +On line 3248: + would benefit if + the mortgage borrowers stopped + making payments and + +On line 3250: + making payments and + the assets failed to perform. + Even the incentives + +On line 3250: + to perform. Even the + incentives of long investors + became conflicted. + +On line 3250: + sophisticated + investors to place bets against the + housing market or + +On line 3250: + investors to place bets + against the housing market or + pursue more complex + +On line 3250: + to place bets against the + housing market or pursue + more complex trading + +On line 3250: + market or pursue + more complex trading strategies. + Investors, usually + +On line 3250: + more complex trading + strategies. Investors, usually + hedge funds, often used + +On line 3250: + Investors, usually + hedge funds, often used credit + default swaps to take + +On line 3250: + default swaps to take + offsetting positions in + different tranches + +On line 3250: + to take offsetting + positions in different + tranches of the same + +On line 3250: + security; that + way, hey could make some money + as long as the CDOs + +On line 3250: + that way, hey could make + some money as long as the + CDOs performed, but they + +On line 3250: + way, hey could make some + money as long as the CDOs + performed, but they stood + +On line 3250: + could make some money + as long as the CDOs performed, + but they stood to make + +On line 3250: + make some money as + long as the CDOs performed, but + they stood to make more + +On line 3250: + money as long as + the CDOs performed, but they stood + to make more money + +On line 3250: + as long as the CDOs + performed, but they stood to make + more money if the + +On line 3250: + CDOs performed, but they + stood to make more money if + the entire market + +On line 3250: + performed, but they stood + to make more money if the + entire market crashed. + +On line 3250: + but they stood to make + more money if the entire + market crashed. An FCIC + +On line 3250: + to make more money + if the entire market crashed. + An FCIC survey of + +On line 3250: + make more money if + the entire market crashed. An + FCIC survey of more + +On line 3250: + more money if the + entire market crashed. An FCIC + survey of more than + +On line 3250: + market crashed. An FCIC + survey of more than hedge funds + encompassing over + +On line 3250: + survey of more than + hedge funds encompassing over + trillion in assets + +On line 3250: + of more than hedge funds + encompassing over trillion + in assets as of + +On line 3250: + funds encompassing + over trillion in assets as + of early found this + +On line 3250: + encompassing over + trillion in assets as of + early found this to + +On line 3250: + in assets as of + early found this to be a + common strategy + +On line 3250: + early found this to + be a common strategy + among medium-size hedge + +On line 3250: + to be a common + strategy among medium-size + hedge funds: of all the + +On line 3250: + common strategy + among medium-size hedge funds: of + all the CDOs issued + +On line 3250: + among medium-size hedge + funds: of all the CDOs issued + in the second half + +On line 3250: + medium-size hedge funds: + of all the CDOs issued in + the second half of + +On line 3250: + hedge funds: of all the + CDOs issued in the second + half of more than half + +On line 3250: + funds: of all the CDOs + issued in the second half + of more than half of + +On line 3250: + CDOs issued in the + second half of more than half + of the equity + +On line 3250: + second half of more + than half of the equity + tranches were purchased + +On line 3250: + half of more than half + of the equity tranches + were purchased by hedge + +On line 3250: + of more than half of + the equity tranches were + purchased by hedge funds + +On line 3250: + was being used in + the mortgage-backed securities + market as well. The + +On line 3250: + used in the mortgage-backed + securities market as + well. The FCIC’s survey + +On line 3252: + market as well. The + FCIC’s survey found that by June + the largest hedge funds held + +On line 3252: + well. The FCIC’s survey + found that by June the largest hedge + funds held billion in + +On line 3252: + the largest hedge funds held + billion in equity and + other lower-rated + +On line 3252: + hedge funds held billion + in equity and other + lower-rated tranches + +On line 3254: + more than offset by + billion in short positions.19 + These types of trades changed + +On line 3254: + trades changed the structured + finance market. Investors in + the equity and + +On line 3254: + traditionally + had the greatest incentive + to monitor the + +On line 3254: + credit risk of an + underlying portfolio. + With the advent of + +On line 3254: + an underlying + portfolio. With the advent + of credit default + +On line 3254: + portfolio. With the + advent of credit default + swaps, it was no longer + +On line 3254: + advent of credit + default swaps, it was no longer + clear who—if anyone—had + +On line 3256: + default swaps, it was + no longer clear who—if anyone—had + that incentive. For + +On line 3256: + was no longer clear who—if + anyone—had that incentive. + For one example, + +On line 3256: + that incentive. For + one example, consider + Merrill Lynch’s billion + +On line 3258: + Merrill Lynch’s billion + Norma CDO, issued in The + equity investor, + +On line 3258: + billion Norma CDO, + issued in The equity + investor, Magnetar + +On line 3258: + investor, Magnetar + Capital, a hedge fund, was + executing a + +On line 3258: + Capital, a hedge + fund, was executing a + common strategy + +On line 3258: + executing a + common strategy known as + the correlation + +On line 3258: + strategy known as + the correlation trade—it bought + the equity tranche + +On line 3258: + the correlation + trade—it bought the equity tranche + while shorting other + +On line 3258: + equity tranche while + shorting other tranches in + Norma and other + +On line 3258: + tranches in Norma + and other CDOs. According + to court documents, + +On line 3258: + CDOs. According to + court documents, Magnetar + was also involved + +On line 3258: + According to court + documents, Magnetar was + also involved in + +On line 3258: + was also involved + in selecting assets for + Norma.20 Magnetar + +On line 3258: + assets for Norma.20 + Magnetar received million + related to this + +On line 3258: + Norma.20 Magnetar + received million related + to this transaction + +On line 3258: + Magnetar received + million related to this + transaction and NIR + +On line 3258: + this transaction and + NIR Capital Management, + the CDO manager, + +On line 3258: + transaction and NIR + Capital Management, the + CDO manager, was + +On line 3258: + additional fees.21 + Magnetar’s counsel told the + FCIC that the million + +On line 3258: + Magnetar’s counsel + told the FCIC that the million + was a discount in + +On line 3258: + FCIC that the million + was a discount in the form + of a rebate on + +On line 3258: + that the million was + a discount in the form of + a rebate on the + +On line 3258: + the million was a + discount in the form of a + rebate on the price + +On line 3258: + discount in the form + of a rebate on the price + of the equity + +On line 3258: + in the form of a + rebate on the price of the + equity tranche and + +On line 3258: + of a rebate on + the price of the equity + tranche and other long + +On line 3258: + positions purchased + by Magnetar and not a + payment received in + +On line 3258: + by Magnetar and + not a payment received in + return for good or + +On line 3258: + for good or services.22 + Court documents indicate + that Magnetar was + +On line 3258: + collateral, and + that NIR abdicated its + asset selection + +On line 3258: + abdicated its + asset selection duties + to Magnetar with + +On line 3258: + asset selection + duties to Magnetar with + Merrill’s knowledge. In + +On line 3258: + had executed + approximately million + in trades for Norma + +On line 3258: + for Norma without + NIR’s apparent involvement + or knowledge, she emailed + +On line 3260: + colleagues, "Dumb question. + Is Magnetar allowed to + trade for NIR1"23 Merrill + +On line 3260: + allowed to trade for + NIR1"23 Merrill failed to disclose + that Magnetar was + +On line 3260: + for NIR1"23 Merrill failed + to disclose that Magnetar + was paid million or + +On line 3260: + NIR1"23 Merrill failed to + disclose that Magnetar was + paid million or that + +On line 3260: + failed to disclose that + Magnetar was paid million + or that Magnetar + +On line 3260: + paid million or that + Magnetar was selecting + collateral when + +On line 3260: + that Magnetar was + selecting collateral + when it also had + +On line 3262: + position that would + benefit from losses.24 The + counsel for Merrill’s + +On line 3262: + that would benefit + from losses.24 The counsel for + Merrill’s new owner, + +On line 3262: + Merrill’s new owner, + Bank of America, explained + to the FCIC that it + +On line 3262: + new owner, Bank of + America, explained to the + FCIC that it was a + +On line 3262: + America, explained + to the FCIC that it was a + common industry + +On line 3262: + FCIC that it was a + common industry practice + for "the equity + +On line 3262: + it was a common + industry practice for "the + equity investor + +On line 3262: + common industry + practice for "the equity + investor in a CDO, + +On line 3262: + industry practice + for "the equity investor + in a CDO, which had + +On line 3262: + in a CDO, which had + the riskiest investment, to + have input during + +On line 3262: + a CDO, which had the + riskiest investment, to have + input during the + +On line 3264: + input during the + collateral selection + process[;] however, the + +On line 3264: + the collateral + selection process[;] however, + the collateral + +On line 3264: + process[;] however, the + collateral manager + made the ultimate + +On line 3264: + The letter did not + specifically mention the + Norma CDO. Bank of + +On line 3264: + not specifically + mention the Norma CDO. Bank + of America failed + +On line 3264: + Bank of America + failed to produce documents + related to this + +On line 3264: + produce documents + related to this issue + requested by the + +On line 3266: + instruments inside + synthetic CDOs. In April the + SEC charged Goldman Sachs + +On line 3266: + CDOs. In April the SEC + charged Goldman Sachs with fraud for + telling investors that an + +On line 3266: + SEC charged Goldman Sachs + with fraud for telling investors that + an independent + +On line 3266: + charged Goldman Sachs with + fraud for telling investors that an + independent CDO + +On line 3266: + Management, had picked + the underlying assets + in a CDO when in + +On line 3266: + the underlying + assets in a CDO when in + fact a short investor, + +On line 3266: + assets in a CDO + when in fact a short investor, + the Paulson Co. hedge + +On line 3266: + a CDO when in fact + a short investor, the Paulson + Co. hedge fund, had played + +On line 3266: + CDO when in fact a + short investor, the Paulson Co. + hedge fund, had played a + +On line 3266: + a short investor, the + Paulson Co. hedge fund, had played + a "significant + +On line 3266: + Co. hedge fund, had played + a "significant role" in + the selection. The + +On line 3266: + hedge fund, had played a + "significant role" in the + selection. The SEC + +On line 3266: + a "significant + role" in the selection. The + SEC alleged that those + +On line 3266: + Goldman’s marketing + materials for Abacus + 2007-AC1, one of Goldman’s + +On line 3270: + for Abacus 2007-AC1, one + of Goldman’s Abacus deals.26 Ira + Wagner, the head + +On line 3270: + 2007-AC1, one of Goldman’s + Abacus deals.26 Ira Wagner, + the head of Bear Stearns’s + +On line 3270: + of Goldman’s Abacus + deals.26 Ira Wagner, the head + of Bear Stearns’s CDO Group + +On line 3270: + Goldman’s Abacus deals.26 + Ira Wagner, the head of + Bear Stearns’s CDO Group in + +On line 3270: + deals.26 Ira Wagner, + the head of Bear Stearns’s CDO Group + in told the FCIC that + +On line 3270: + Ira Wagner, the + head of Bear Stearns’s CDO Group in + told the FCIC that he + +On line 3270: + the head of Bear Stearns’s + CDO Group in told the FCIC that + he rejected the + +On line 3270: + head of Bear Stearns’s CDO + Group in told the FCIC that he + rejected the deal + +On line 3270: + Stearns’s CDO Group in told + the FCIC that he rejected + the deal when approached + +On line 3270: + CDO Group in told the + FCIC that he rejected the + deal when approached by + +On line 3270: + in told the FCIC that + he rejected the deal when + approached by Paulson + +On line 3270: + he rejected the + deal when approached by Paulson + representatives. + +On line 3270: + deal when approached by + Paulson representatives. + When asked about Goldman’s + +On line 3270: + approached by Paulson + representatives. When asked + about Goldman’s contention + +On line 3270: + representatives. + When asked about Goldman’s contention + that Paulson’s picking the + +On line 3270: + When asked about Goldman’s + contention that Paulson’s picking the + collateral was + +On line 3270: + collateral was + immaterial because + the collateral + +On line 3270: + collateral was + disclosed and because Paulson + was not well-known at + +On line 3270: + disclosed and because + Paulson was not well-known at + that time, Wagner + +On line 3270: + and because Paulson + was not well-known at that time, + Wagner called the + +On line 3270: + was not well-known at + that time, Wagner called the + argument "ridiculous." + +On line 3270: + time, Wagner called + the argument "ridiculous." He + said that the structure + +On line 3270: + said that the structure + encouraged Paulson to pick + the worst assets. While + +On line 3270: + encouraged Paulson + to pick the worst assets. While + acknowledging the + +On line 3270: + the worst assets. While + acknowledging the point that + every synthetic + +On line 3270: + every synthetic + deal necessarily had + long and short investors, + +On line 3270: + long and short investors, + Wagner saw having the + short investors select + +On line 3270: + investors select the + referenced collateral + as a serious + +On line 3270: + serious conflict + and for that reason declined + to participate.27 + +On line 3272: + and for that reason + declined to participate.27 + ACA executives + +On line 3272: + the FCIC they were not + initially aware that the short + investor was involved + +On line 3272: + were not initially + aware that the short investor was + involved in choosing + +On line 3272: + that the short investor + was involved in choosing the + collateral. CEO + +On line 3272: + involved in choosing + the collateral. CEO Alan + Roseman said that he + +On line 3272: + the collateral. + CEO Alan Roseman said that he + first heard of Paulson’s role + +On line 3272: + collateral. CEO + Alan Roseman said that he first + heard of Paulson’s role when + +On line 3272: + CEO Alan Roseman said + that he first heard of Paulson’s role + when he reviewed the + +On line 3272: + Alan Roseman said that + he first heard of Paulson’s role when + he reviewed the SEC’s + +On line 3272: + that he first heard of + Paulson’s role when he reviewed the + SEC’s complaint.28 Laura + +On line 3272: + he first heard of Paulson’s + role when he reviewed the SEC’s + complaint.28 Laura Schwartz, + +On line 3272: + heard of Paulson’s role when + he reviewed the SEC’s complaint.28 + Laura Schwartz, who was + +On line 3272: + when he reviewed the + SEC’s complaint.28 Laura Schwartz, who + was responsible + +On line 3272: + he reviewed the SEC’s + complaint.28 Laura Schwartz, who was + responsible for + +On line 3272: + SEC’s complaint.28 Laura + Schwartz, who was responsible + for the deal at ACA, + +On line 3272: + complaint.28 Laura Schwartz, + who was responsible for + the deal at ACA, said + +On line 3272: + was responsible + for the deal at ACA, said she + believed that Paulson’s firm + +On line 3272: + the deal at ACA, said + she believed that Paulson’s firm was + the investor taking + +On line 3272: + deal at ACA, said she + believed that Paulson’s firm was the + investor taking the + +On line 3272: + she believed that Paulson’s + firm was the investor taking + the equity tranche + +On line 3272: + believed that Paulson’s firm + was the investor taking the + equity tranche and + +On line 3272: + firm was the investor + taking the equity tranche + and would therefore have + +On line 3272: + tranche and would therefore + have an interest in the + deal performing well. + +On line 3272: + and would therefore have + an interest in the deal + performing well. She + +On line 3272: + have an interest + in the deal performing well. + She said she would not + +On line 3272: + an interest in + the deal performing well. She + said she would not have + +On line 3272: + interest in the + deal performing well. She said + she would not have been + +On line 3272: + deal performing well. + She said she would not have been + surprised that Paulson + +On line 3272: + She said she would not + have been surprised that Paulson + would also have had + +On line 3272: + said she would not have + been surprised that Paulson would + also have had a + +On line 3272: + have been surprised that + Paulson would also have had + a short position, + +On line 3272: + surprised that Paulson + would also have had a short + position, because + +On line 3272: + would also have had + a short position, because + the correlation + +On line 3272: + also have had a + short position, because the + correlation trade + +On line 3272: + a short position, + because the correlation + trade was common in + +On line 3274: + trade was common in + the market, but added, "To be + honest, [at that time,] + +On line 3274: + in the market, but + added, "To be honest, [at that + time,] until the SEC + +On line 3274: + added, "To be honest, + [at that time,] until the SEC + testimony I + +On line 3274: + [at that time,] until + the SEC testimony I + did not even know that + +On line 3274: + time,] until the SEC + testimony I did not + even know that Paulson + +On line 3274: + I did not even know + that Paulson was only short."29 + Paulson told the FCIC + +On line 3274: + Paulson was only + short."29 Paulson told the FCIC that + any synthetic CDO + +On line 3274: + short."29 Paulson told the + FCIC that any synthetic CDO + would have to invest + +On line 3274: + Paulson told the FCIC + that any synthetic CDO would + have to invest in + +On line 3274: + told the FCIC that any + synthetic CDO would have to + invest in "a pool + +On line 3274: + that any synthetic + CDO would have to invest in + "a pool that both a + +On line 3274: + synthetic CDO would + have to invest in "a pool + that both a buyer + +On line 3274: + in "a pool that both + a buyer and seller of + protection could agree + +On line 3274: + both a buyer and + seller of protection could + agree on." He didn’t + +On line 3274: + agree on." He didn’t + understand the objections: + "Every [synthetic] + +On line 3274: + [synthetic] CDO has + a buyer and seller of + protection. So for + +On line 3274: + CDO has a buyer + and seller of protection. + So for anyone to + +On line 3274: + has a buyer and + seller of protection. So + for anyone to say + +On line 3274: + that they didn’t want + to structure a CDO because + someone was buying + +On line 3274: + to structure a CDO + because someone was buying + protection in that + +On line 3274: + because someone was + buying protection in that + CDO, then you wouldn’t + +On line 3274: + someone was buying + protection in that CDO, then + you wouldn’t do any + +On line 3276: + then you wouldn’t do + any CDOs."30 In July Goldman + Sachs settled the case, + +On line 3276: + In July Goldman + Sachs settled the case, paying + a record million fine. + +On line 3278: + Sachs settled the case, + paying a record million fine. + Goldman "acknowledge[d] + +On line 3278: + "acknowledge[d] that the + marketing materials + for the ABACUS 2007-AC1 + +On line 3280: + materials for + the ABACUS 2007-AC1 transaction + contained incomplete + +On line 3280: + transaction contained + incomplete information. + In particular, + +On line 3280: + In particular, + it was a mistake for the + Goldman marketing + +On line 3280: + it was a mistake + for the Goldman marketing + materials to + +On line 3282: + that the reference + portfolio was ‘selected + by’ ACA Management + +On line 3282: + was ‘selected by’ + ACA Management LLC without + disclosing the role + +On line 3282: + by’ ACA Management + LLC without disclosing the + role of Paulson Co. + +On line 3282: + ACA Management LLC + without disclosing the role + of Paulson Co. Inc. + +On line 3282: + without disclosing + the role of Paulson Co. Inc. + in the portfolio + +On line 3282: + the role of Paulson + Co. Inc. in the portfolio + selection process and + +On line 3286: + that Paulson’s economic + interests were adverse to + CDO investors."31 The new + +On line 3286: + opportunity + for bearish investors to bet + against the housing boom. + +On line 3286: + for bearish investors + to bet against the housing boom. + Home prices in the hottest + +On line 3286: + investors to bet against + the housing boom. Home prices in + the hottest markets in + +On line 3286: + against the housing boom. + Home prices in the hottest markets + in California + +On line 3286: + the housing boom. Home + prices in the hottest markets in + California and + +On line 3286: + Home prices in the hottest + markets in California + and Florida had + +On line 3286: + in California + and Florida had blasted + into the stratosphere; + +On line 3286: + had blasted into + the stratosphere; it was hard for + skeptics to believe + +On line 3286: + was hard for skeptics + to believe that their upward + trajectory could + +On line 3286: + to believe that their + upward trajectory could + continue. And if + +On line 3286: + trajectory could + continue. And if it did + not, the landing would + +On line 3286: + could continue. And + if it did not, the landing + would not be a soft + +On line 3286: + continue. And if + it did not, the landing would + not be a soft one. + +On line 3286: + And if it did not, + the landing would not be a + soft one. Some spoke out + +On line 3286: + not, the landing would + not be a soft one. Some spoke + out publicly. Others + +On line 3286: + the landing would not + be a soft one. Some spoke out + publicly. Others bet + +On line 3286: + not be a soft one. + Some spoke out publicly. Others + bet the bubble would + +On line 3286: + be a soft one. Some + spoke out publicly. Others bet + the bubble would burst. + +On line 3286: + Some spoke out publicly. + Others bet the bubble would + burst. Betting against CDOs + +On line 3286: + publicly. Others bet + the bubble would burst. Betting + against CDOs was also, + +On line 3286: + the bubble would burst. + Betting against CDOs was also, + in some cases, a + +On line 3286: + Betting against CDOs was + also, in some cases, a + bet against the rating + +On line 3286: + against CDOs was also, + in some cases, a bet against + the rating agencies + +On line 3286: + CDOs was also, in + some cases, a bet against the + rating agencies and + +On line 3288: + in some cases, a + bet against the rating agencies + and their models. Jamie + +On line 3288: + some cases, a bet + against the rating agencies and + their models. Jamie Mai + +On line 3288: + cases, a bet against + the rating agencies and their + models. Jamie Mai and + +On line 3288: + bet against the rating + agencies and their models. Jamie + Mai and Ben Hockett, + +On line 3288: + rating agencies and + their models. Jamie Mai and Ben + Hockett, principals + +On line 3288: + models. Jamie Mai and + Ben Hockett, principals at + the small investment + +On line 3288: + Hockett, principals + at the small investment firm + Cornwall Capital, + +On line 3288: + principals at the + small investment firm Cornwall + Capital, told the + +On line 3288: + the small investment + firm Cornwall Capital, told + the FCIC that they had + +On line 3288: + small investment firm + Cornwall Capital, told the + FCIC that they had warned + +On line 3288: + Cornwall Capital, + told the FCIC that they had warned + the SEC in that the + +On line 3288: + Capital, told the + FCIC that they had warned the SEC + in that the agencies + +On line 3288: + FCIC that they had warned + the SEC in that the agencies + were dangerously + +On line 3288: + the SEC in that the + agencies were dangerously + overoptimistic in their + +On line 3288: + that the agencies were + dangerously overoptimistic + in their assessment + +On line 3288: + overoptimistic in their + assessment of mortgage-backed CDOs. + Mai and Hockett saw + +On line 3288: + of mortgage-backed CDOs. Mai + and Hockett saw the rating + agencies as "the root + +On line 3288: + CDOs. Mai and Hockett + saw the rating agencies as + "the root of the mess," + +On line 3288: + and Hockett saw the + rating agencies as "the root + of the mess," because + +On line 3288: + rating agencies as + "the root of the mess," because + their ratings removed + +On line 3288: + "the root of the mess," + because their ratings removed + the need for buyers + +On line 3288: + of the mess," because + their ratings removed the need + for buyers to study + +On line 3288: + the mess," because their + ratings removed the need for + buyers to study prices + +On line 3288: + their ratings removed + the need for buyers to study + prices and perform due + +On line 3288: + the need for buyers + to study prices and perform due + diligence, even as "there + +On line 3288: + for buyers to study + prices and perform due diligence, + even as "there was a + +On line 3288: + study prices and perform + due diligence, even as "there was + a massive amount of + +On line 3288: + due diligence, even as + "there was a massive amount of + gaming going on."32 + +On line 3290: + of gaming going + on."32 Shorting CDOs was "pretty + attractive" because + +On line 3290: + going on."32 Shorting + CDOs was "pretty attractive" + because the rating + +On line 3290: + on."32 Shorting CDOs was + "pretty attractive" because + the rating agencies + +On line 3290: + "pretty attractive" + because the rating agencies + had given too much + +On line 3290: + of Paulson Co. told + the FCIC. Paulson established + a fund in June that + +On line 3290: + June that initially + focused only on shorting + BBB-rated tranches. By the + +On line 3290: + focused only on + shorting BBB-rated tranches. By the + end of Paulson Co.’s + +On line 3290: + only on shorting + BBB-rated tranches. By the end of + Paulson Co.’s Credit + +On line 3290: + BBB-rated tranches. By the + end of Paulson Co.’s Credit + Opportunities + +On line 3290: + end of Paulson Co.’s + Credit Opportunities + fund, set up less han + +On line 3290: + Paulson Co.’s Credit + Opportunities fund, set + up less han a year + +On line 3290: + Opportunities + fund, set up less han a year + earlier to bet + +On line 3290: + fund, set up less han + a year earlier to bet + exclusively against + +On line 3290: + a year earlier + to bet exclusively against + the subprime housing + +On line 3292: + exclusively against + the subprime housing market, + was up "Each MBS tranche + +On line 3292: + the subprime housing + market, was up "Each MBS tranche + typically would + +On line 3292: + California, in + Florida, in New York, and + when you aggregate + +On line 3292: + Florida, in New + York, and when you aggregate + MBS positions you + +On line 3292: + New York, and when you + aggregate MBS positions + you still have the same + +On line 3292: + you aggregate MBS + positions you still have the + same geographic + +On line 3292: + same geographic + diversification. To + us, there was not much + +On line 3292: + To us, there was not + much diversification + in CDOs." Shu’s research + +On line 3292: + research convinced him + that if home prices were to stop + appreciating, + +On line 3292: + appreciating, + BBB-rated mortgage-backed securities + would be at risk for + +On line 3292: + securities would + be at risk for downgrades. Should + prices drop CDO losses + +On line 3294: + at risk for downgrades. + Should prices drop CDO losses would + increase 20-fold.33 And if + +On line 3294: + prices drop CDO losses + would increase 20-fold.33 And if a + relatively small + +On line 3294: + small number of the + underlying loans were to + go into fore - + +On line 3296: + underlying loans + were to go into fore - + closure, the losses + +On line 3296: + closure, the losses + would render virtually + all of the riskier + +On line 3296: + losses would render + virtually all of the + riskier BBB-rated tranches + +On line 3296: + all of the riskier + BBB-rated tranches worthless. "The whole + system worked fine as + +On line 3296: + BBB-rated tranches worthless. + "The whole system worked fine as + long as everyone + +On line 3296: + tranches worthless. "The + whole system worked fine as long + as everyone could + +On line 3296: + "The whole system worked + fine as long as everyone + could refinance," Steve + +On line 3296: + worked fine as long as + everyone could refinance," + Steve Eisman, the founder + +On line 3296: + long as everyone + could refinance," Steve Eisman, + the founder of a fund + +On line 3296: + could refinance," Steve + Eisman, the founder of a fund + within FrontPoint Partners, + +On line 3296: + Eisman, the founder of + a fund within FrontPoint Partners, + told the FCIC. The minute + +On line 3296: + of a fund within + FrontPoint Partners, told the FCIC. The + minute refinancing + +On line 3296: + a fund within FrontPoint + Partners, told the FCIC. The minute + refinancing stopped, + +On line 3296: + Partners, told the FCIC. + The minute refinancing stopped, + "losses would explode. + +On line 3296: + told the FCIC. The minute + refinancing stopped, "losses + would explode. By about + +On line 3296: + minute refinancing + stopped, "losses would explode. By + about half [the mortgages + +On line 3296: + refinancing stopped, + "losses would explode. By about + half [the mortgages sold] + +On line 3296: + explode. By about half + [the mortgages sold] were no-doc + or low-doc. You were + +On line 3296: + low-doc. You were at + max underwriting weakness + at max housing prices. + +On line 3296: + max underwriting + weakness at max housing prices. + And so the system + +On line 3296: + max housing prices. And + so the system imploded. + Everyone was so + +On line 3296: + And so the system + imploded. Everyone was + so levered there was + +On line 3296: + so levered there was + no ability to take any + pain."34 On October + +On line 3296: + levered there was no + ability to take any pain."34 + On October James + +On line 3296: + no ability to + take any pain."34 On October + James Grant wrote in his + +On line 3296: + to take any pain."34 On + October James Grant wrote in + his newsletter about + +On line 3298: + October James Grant + wrote in his newsletter about + the "mysterious + +On line 3298: + processes" in which + "Wall Street transforms BBB-minus-rated mortgages + into AAA-rated tranches + +On line 3298: + into AAA-rated tranches + of mortgage securities" + by creating CDOs. + +On line 3298: + by creating CDOs. + He estimated that even + the triple-A tranches of + +On line 3298: + creating CDOs. He + estimated that even the + triple-A tranches of CDOs + +On line 3298: + estimated that + even the triple-A tranches of CDOs + would experience + +On line 3298: + tranches of CDOs would + experience some losses + if national home + +On line 3298: + would experience + some losses if national + home prices were to fall + +On line 3298: + experience some + losses if national home + prices were to fall just + +On line 3298: + if national home + prices were to fall just or less + within two years; and + +On line 3298: + home prices were to fall + just or less within two years; + and if prices were to + +On line 3298: + prices were to fall just + or less within two years; and + if prices were to fall + +On line 3298: + to fall just or less + within two years; and if prices + were to fall investors + +On line 3298: + or less within two + years; and if prices were to fall + investors of tranches + +On line 3298: + within two years; and + if prices were to fall investors + of tranches rated + +On line 3298: + if prices were to fall + investors of tranches rated + AA- or below would + +On line 3298: + investors of tranches + rated AA- or below would + be completely wiped + +On line 3300: + AA- or below would + be completely wiped out.35 In + Eisman and others + +On line 3300: + be completely wiped + out.35 In Eisman and others + were already looking + +On line 3300: + completely wiped out.35 + In Eisman and others were + already looking for + +On line 3300: + out.35 In Eisman and + others were already looking + for the best way to + +On line 3300: + Eisman and others + were already looking for the + best way to bet on + +On line 3300: + were already looking + for the best way to bet on + this disaster by + +On line 3300: + for the best way to + bet on this disaster by + shorting all these shaky + +On line 3300: + efficient. Eisman + realized that he could pick + what he considered + +On line 3300: + he considered the + most vulnerable tranches + of the mortgage-backed bonds + +On line 3300: + considered the most + vulnerable tranches of + the mortgage-backed bonds and + +On line 3300: + most vulnerable + tranches of the mortgage-backed bonds + and bet millions of + +On line 3300: + the mortgage-backed bonds and + bet millions of dollars against + them, relatively + +On line 3300: + of dollars against them, + relatively cheaply and + with considerable + +On line 3302: + that’s what he did. By + the end of Eisman had put + millions of dollars + +On line 3302: + he did. By the end + of Eisman had put millions + of dollars into + +On line 3302: + did. By the end of + Eisman had put millions of + dollars into short + +On line 3302: + of Eisman had put + millions of dollars into + short positions on + +On line 3302: + millions of dollars + into short positions on + credit default swaps. + +On line 3302: + of dollars into + short positions on credit + default swaps. It was, + +On line 3302: + short positions on + credit default swaps. It was, + he was sure, just a + +On line 3302: + on credit default + swaps. It was, he was sure, just + a matter of time. + +On line 3302: + default swaps. It was, + he was sure, just a matter + of time. "Everyone + +On line 3302: + just a matter of + time. "Everyone really + did believe that things + +On line 3302: + a matter of time. + "Everyone really did + believe that things were + +On line 3302: + of time. "Everyone + really did believe that + things were going to + +On line 3302: + believe that things were + going to be okay," Eisman + said. "[I] thought they were + +On line 3302: + things were going to + be okay," Eisman said. "[I] thought + they were certifi-able + +On line 3302: + going to be okay," + Eisman said. "[I] thought they were + certifi-able lunatics."36 + +On line 3304: + be okay," Eisman said. + "[I] thought they were certifi-able + lunatics."36 Michael Burry, + +On line 3304: + certifi-able lunatics."36 + Michael Burry, another short + who became well-known + +On line 3304: + lunatics."36 Michael Burry, + another short who became + well-known after the + +On line 3304: + another short who + became well-known after the + crisis hit, was a + +On line 3304: + who became well-known + after the crisis hit, was + a doctor-turned-investor + +On line 3304: + the crisis hit, was + a doctor-turned-investor whose hedge + fund, Scion Capital, + +On line 3304: + crisis hit, was a + doctor-turned-investor whose hedge fund, + Scion Capital, in + +On line 3304: + fund, Scion Capital, + in Northern California’s + Silicon Valley, + +On line 3304: + heart, because he had + invested in homebuilder stocks + in But the closer + +On line 3304: + he had invested + in homebuilder stocks in But the + closer he looked, the + +On line 3304: + in homebuilder stocks in + But the closer he looked, the + more he wondered about + +On line 3304: + homebuilder stocks in But + the closer he looked, the more + he wondered about the + +On line 3304: + in But the closer + he looked, the more he wondered + about the financing + +On line 3304: + But the closer he + looked, the more he wondered about + the financing that + +On line 3304: + he looked, the more he + wondered about the financing + that supported this + +On line 3304: + he wondered about the + financing that supported + this booming market. + +On line 3304: + this booming market. + Burry decided that some + of the newfangled + +On line 3304: + Burry decided + that some of the newfangled + adjustable rate mortgages + +On line 3304: + decided that some + of the newfangled adjustable + rate mortgages were "the + +On line 3304: + of the newfangled + adjustable rate mortgages were "the + most toxic mortgages" + +On line 3304: + adjustable rate mortgages + were "the most toxic mortgages" + created. He told + +On line 3304: + mortgages were "the most + toxic mortgages" created. + He told the FCIC, "I + +On line 3304: + were "the most toxic + mortgages" created. He told + the FCIC, "I watched those + +On line 3304: + mortgages" created. + He told the FCIC, "I watched those + with interest as + +On line 3304: + He told the FCIC, "I + watched those with interest as + they migrated down + +On line 3304: + told the FCIC, "I watched + those with interest as they + migrated down the + +On line 3304: + those with interest + as they migrated down the + credit spectrum to + +On line 3304: + as they migrated + down the credit spectrum to + the subprime market. + +On line 3304: + they migrated down + the credit spectrum to the + subprime market. As + +On line 3304: + the credit spectrum + to the subprime market. As + [home] prices had increased + +On line 3304: + credit spectrum to + the subprime market. As [home] + prices had increased on + +On line 3304: + market. As [home] prices + had increased on the back of + virtually no + +On line 3304: + had increased on the + back of virtually no + accompanying + +On line 3304: + of virtually + no accompanying rise + in wages and incomes, + +On line 3304: + virtually no + accompanying rise in + wages and incomes, I + +On line 3304: + accompanying + rise in wages and incomes, I + came to the judgment + +On line 3304: + in wages and incomes, + I came to the judgment that + in two years there will + +On line 3304: + wages and incomes, I + came to the judgment that in + two years there will be + +On line 3304: + and incomes, I came + to the judgment that in two + years there will be a + +On line 3304: + came to the judgment + that in two years there will be + a final judgment + +On line 3304: + to the judgment that + in two years there will be a + final judgment on + +On line 3304: + judgment that in two + years there will be a final + judgment on housing + +On line 3304: + that in two years there + will be a final judgment + on housing when those + +On line 3304: + in two years there will + be a final judgment on + housing when those two-year + +On line 3304: + years there will be a + final judgment on housing + when those two-year [adjustable + +On line 3304: + on housing when those + two-year [adjustable rate mortgages] seek + refinancing."37 By + +On line 3304: + those two-year [adjustable rate + mortgages] seek refinancing."37 + By the middle of + +On line 3304: + [adjustable rate mortgages] + seek refinancing."37 By the + middle of Burry + +On line 3304: + refinancing."37 By + the middle of Burry had + bought credit default + +On line 3304: + bonds of financial + companies in the housing + market, including + +On line 3304: + companies in the + housing market, including + Fannie Mae, Freddie + +On line 3306: + market, including + Fannie Mae, Freddie Mac, and + AIG. Eisman, Cornwall, + +On line 3306: + Fannie Mae, Freddie + Mac, and AIG. Eisman, Cornwall, + Paulson, and Burry + +On line 3306: + Mae, Freddie Mac, and + AIG. Eisman, Cornwall, Paulson, + and Burry were not + +On line 3306: + Freddie Mac, and AIG. + Eisman, Cornwall, Paulson, and + Burry were not alone + +On line 3306: + AIG. Eisman, Cornwall, + Paulson, and Burry were not + alone in shorting the + +On line 3306: + Paulson, and Burry + were not alone in shorting the + housing market. In + +On line 3306: + and Burry were not + alone in shorting the housing + market. In fact, on + +On line 3306: + not alone in shorting + the housing market. In fact, + on one side of tens + +On line 3306: + alone in shorting the + housing market. In fact, on + one side of tens of + +On line 3306: + shorting the housing + market. In fact, on one side + of tens of billions + +On line 3306: + housing market. In + fact, on one side of tens of + billions of dollars + +On line 3306: + market. In fact, on + one side of tens of billions + of dollars worth of + +On line 3306: + fact, on one side of + tens of billions of dollars + worth of synthetic + +On line 3306: + on one side of tens + of billions of dollars worth + of synthetic CDOs + +On line 3306: + one side of tens of + billions of dollars worth of + synthetic CDOs were + +On line 3306: + billions of dollars + worth of synthetic CDOs were + investors taking short + +On line 3306: + were investors taking + short positions. The purchasers + of credit default + +On line 3306: + investors taking short + positions. The purchasers of + credit default swaps + +On line 3306: + short positions. The + purchasers of credit default + swaps illustrate the + +On line 3306: + of credit default + swaps illustrate the impact + of derivatives + +On line 3306: + credit default swaps + illustrate the impact of + derivatives in + +On line 3306: + swaps illustrate the + impact of derivatives + in introducing + +On line 3306: + of derivatives + in introducing new risks + and leverage into + +On line 3306: + derivatives in + introducing new risks and + leverage into the + +On line 3306: + in introducing + new risks and leverage into + the system. Although + +On line 3306: + introducing new + risks and leverage into the + system. Although these + +On line 3306: + investors profited + spectacularly from the + housing crisis, they + +On line 3306: + the housing crisis, + they never made a single + subprime loan or bought + +On line 3306: + a single subprime + loan or bought an actual + mortgage. In other + +On line 3306: + subprime loan or bought + an actual mortgage. In + other words, they were + +On line 3306: + bought an actual + mortgage. In other words, they + were not purchasing + +On line 3306: + other words, they were + not purchasing insurance + against anything they owned. + +On line 3306: + they owned. Instead, they + merely made side bets on the + risks undertaken + +On line 3306: + merely made side bets + on the risks undertaken + by others. Paulson + +On line 3306: + side bets on the risks + undertaken by others. + Paulson told the FCIC + +On line 3306: + risks undertaken + by others. Paulson told the + FCIC that his research + +On line 3306: + by others. Paulson + told the FCIC that his research + indicated that + +On line 3306: + told the FCIC that his + research indicated that + if home prices remained + +On line 3306: + if home prices remained + flat, losses would wipe out the + BBB-rated tranches; meanwhile, + +On line 3306: + home prices remained flat, + losses would wipe out the BBB-rated + tranches; meanwhile, at + +On line 3306: + remained flat, losses + would wipe out the BBB-rated tranches; + meanwhile, at the time + +On line 3306: + flat, losses would wipe + out the BBB-rated tranches; meanwhile, + at the time he could + +On line 3306: + out the BBB-rated tranches; + meanwhile, at the time he could + purchase default swap + +On line 3306: + meanwhile, at the time + he could purchase default swap + protection on them + +On line 3308: + time he could purchase + default swap protection on + them very cheaply.38 On + +On line 3308: + on them very cheaply.38 + On the other side of the + zero-sum game were + +On line 3308: + On the other side + of the zero-sum game were + often the major + +On line 3308: + eventually be + battered. Burry acknowledged + to the FCIC, "There is + +On line 3308: + be battered. Burry + acknowledged to the FCIC, "There + is an argument + +On line 3308: + acknowledged to the + FCIC, "There is an argument + to be made that you + +On line 3308: + the FCIC, "There is an + argument to be made that + you shouldn’t allow + +On line 3308: + is an argument + to be made that you shouldn’t + allow what I did." + +On line 3308: + argument to be + made that you shouldn’t allow + what I did." But the + +On line 3308: + to be made that you + shouldn’t allow what I did." + But the problem, he + +On line 3308: + made that you shouldn’t + allow what I did." But the + problem, he said, was + +On line 3308: + you shouldn’t allow + what I did." But the problem, + he said, was not the + +On line 3308: + shouldn’t allow what + I did." But the problem, he + said, was not the short + +On line 3308: + what I did." But the + problem, he said, was not the + short positions he + +On line 3308: + the problem, he said, + was not the short positions + he was taking; it + +On line 3308: + problem, he said, was + not the short positions he + was taking; it was + +On line 3308: + said, was not the short + positions he was taking; + it was the risks that + +On line 3308: + the short positions + he was taking; it was the + risks that others were + +On line 3308: + he was taking; it + was the risks that others were + accepting. "When I + +On line 3308: + it was the risks that + others were accepting. "When + I did the shorts, the + +On line 3308: + the risks that others + were accepting. "When I did + the shorts, the whole time + +On line 3308: + risks that others were + accepting. "When I did the + shorts, the whole time I + +On line 3308: + were accepting. "When + I did the shorts, the whole time + I was putting on the + +On line 3310: + "When I did the shorts, + the whole time I was putting on + the positions there + +On line 3310: + I did the shorts, the + whole time I was putting on the + positions there were + +On line 3310: + shorts, the whole time I + was putting on the positions + there were people on + +On line 3310: + the whole time I was + putting on the positions there + were people on the + +On line 3310: + I was putting on the + positions there were people + on the other side + +On line 3310: + positions there were + people on the other side + that were just eating + +On line 3310: + there were people on + the other side that were just + eating them up. I + +On line 3310: + other side that were + just eating them up. I think + it’s a catastrophe + +On line 3310: + just eating them up. + I think it’s a catastrophe + and I think it was + +On line 3312: + up. I think it’s a + catastrophe and I think it + was preventable."39 Credit + +On line 3312: + it’s a catastrophe + and I think it was preventable."39 + Credit default swaps + +On line 3312: + catastrophe and I + think it was preventable."39 Credit + default swaps greased the + +On line 3312: + and I think it was + preventable."39 Credit default swaps + greased the CDO machine + +On line 3312: + default swaps greased the + CDO machine in several + ways. First, they allowed + +On line 3312: + greased the CDO machine + in several ways. First, they + allowed CDO managers + +On line 3312: + several ways. First, + they allowed CDO managers to + create synthetic + +On line 3312: + managers to create + synthetic and hybrid CDOs + more quickly than they + +On line 3312: + create synthetic + and hybrid CDOs more quickly + than they could create + +On line 3312: + and hybrid CDOs more + quickly than they could create + cash CDOs. Second, they + +On line 3312: + more quickly than they + could create cash CDOs. Second, + they enabled investors + +On line 3312: + quickly than they could + create cash CDOs. Second, they + enabled investors in + +On line 3312: + than they could create + cash CDOs. Second, they enabled + investors in the CDOs + +On line 3312: + they enabled investors + in the CDOs (including the + originating banks, + +On line 3312: + the CDOs (including + the originating banks, such + as Citigroup and + +On line 3312: + the originating + banks, such as Citigroup and + Merrill) to transfer + +On line 3312: + such as Citigroup + and Merrill) to transfer the + risk of default to + +On line 3312: + as Citigroup and + Merrill) to transfer the risk + of default to the + +On line 3312: + transfer the risk of + default to the issuer of + the credit default + +On line 3312: + risk of default to + the issuer of the credit + default swap (such as + +On line 3312: + to the issuer of + the credit default swap (such + as AIG and other + +On line 3312: + default swap (such as + AIG and other insurance + companies). Third, they + +On line 3312: + companies). Third, they + made correlation trading + possible. As the + +On line 3312: + made correlation + trading possible. As the + FCIC survey revealed, + +On line 3312: + possible. As the + FCIC survey revealed, most hedge + fund purchases of + +On line 3312: + revealed, most hedge fund + purchases of equity + and other junior + +On line 3312: + hedge fund purchases + of equity and other + junior tranches of + +On line 3312: + junior tranches of + mortgage-backed securities and + CDOs were done as part + +On line 3312: + were done as part of + complex trading strategies.40 As + a result, credit + +On line 3312: + trading strategies.40 As + a result, credit default + swaps were critical + +On line 3312: + a result, credit + default swaps were critical + to facilitate + +On line 3312: + swaps were critical + to facilitate demand + from hedge funds for the + +On line 3312: + junior tranches of + mortgage-backed securities and + CDOs. Finally, they + +On line 3312: + securities and + CDOs. Finally, they allowed + speculators to + +On line 3312: + and CDOs. Finally, + they allowed speculators + to make bets for or + +On line 3312: + CDOs. Finally, they + allowed speculators to + make bets for or against + +On line 3314: + make bets for or against + the housing market without + putting up much cash. On + +On line 3314: + bets for or against the + housing market without putting + up much cash. On the + +On line 3314: + or against the housing + market without putting up much + cash. On the other + +On line 3314: + the housing market + without putting up much cash. On + the other hand, it + +On line 3314: + without putting up much + cash. On the other hand, it + can be argued that + +On line 3314: + putting up much cash. On + the other hand, it can be + argued that credit + +On line 3314: + cash. On the other + hand, it can be argued that + credit default swaps + +On line 3314: + the other hand, it + can be argued that credit + default swaps helped end + +On line 3314: + it can be argued + that credit default swaps helped + end the housing and + +On line 3314: + helped end the housing + and mortgage-backed securities + bubble. Because CDO + +On line 3314: + could more easily + buy mortgage exposure for + their CDOs through credit + +On line 3314: + exposure for their + CDOs through credit default swaps + than through actual + +On line 3314: + actual mortgage-backed + securities, demand for + credit default swaps + +On line 3314: + demand for credit + default swaps may in fact have + reduced the need to + +On line 3314: + credit default swaps + may in fact have reduced the + need to originate + +On line 3314: + default swaps may in + fact have reduced the need to + originate high-yield + +On line 3314: + reduced the need to + originate high-yield mortgages. + In addition, some + +On line 3314: + participants have + contended that without the + ability to short + +On line 3314: + the ability to + short the housing market via + credit default swaps, + +On line 3314: + to short the housing + market via credit default + swaps, the bubble would + +On line 3314: + market via credit + default swaps, the bubble would + have lasted longer. As + +On line 3314: + credit default swaps, + the bubble would have lasted + longer. As we will see, + +On line 3314: + swaps, the bubble would + have lasted longer. As we will + see, the declines in + +On line 3314: + the bubble would have + lasted longer. As we will see, + the declines in the + +On line 3314: + would have lasted longer. + As we will see, the declines + in the ABX index + +On line 3314: + have lasted longer. As + we will see, the declines in + the ABX index in + +On line 3314: + lasted longer. As we + will see, the declines in the + ABX index in late + +On line 3314: + As we will see, the + declines in the ABX index + in late would be one + +On line 3314: + will see, the declines + in the ABX index in late + would be one of the + +On line 3314: + see, the declines in + the ABX index in late would + be one of the first + +On line 3314: + in the ABX index + in late would be one of the + first harbingers of + +On line 3314: + in late would be one + of the first harbingers of + market turmoil. "Once + +On line 3316: + would be one of the + first harbingers of market + turmoil. "Once [pessimists] + +On line 3316: + first harbingers of + market turmoil. "Once [pessimists] + can, in effect, sell + +On line 3316: + of market turmoil. + "Once [pessimists] can, in effect, + sell short via the CDS, + +On line 3316: + market turmoil. "Once + [pessimists] can, in effect, sell + short via the CDS, prices + +On line 3316: + "Once [pessimists] can, in + effect, sell short via the CDS, + prices must reflect their + +On line 3316: + in effect, sell short + via the CDS, prices must reflect + their views and not just + +On line 3316: + effect, sell short via + the CDS, prices must reflect their + views and not just the + +On line 3316: + sell short via the CDS, + prices must reflect their views and + not just the views of + +On line 3316: + short via the CDS, prices + must reflect their views and not + just the views of the + +On line 3316: + must reflect their views + and not just the views of the + leveraged optimists," + +On line 3316: + and not just the views + of the leveraged optimists," + John Geanakoplos, a + +On line 3316: + not just the views of + the leveraged optimists," John + Geanakoplos, a Yale + +On line 3316: + views of the leveraged + optimists," John Geanakoplos, + a Yale economics + +On line 3316: + John Geanakoplos, a + Yale economics professor + and a partner in + +On line 3316: + Geanakoplos, a Yale + economics professor and + a partner in the + +On line 3316: + a partner in the + hedge fund Ellington Capital + Management, which both + +On line 3316: + the hedge fund Ellington + Capital Management, which + both invested in + +On line 3318: + which both invested + in and managed CDOs, told the + FCIC.41 CITIGROUP: "I + +On line 3318: + both invested in + and managed CDOs, told the FCIC.41 + CITIGROUP: "I DO + +On line 3318: + in and managed CDOs, + told the FCIC.41 CITIGROUP: "I + DO NOT BELIEVE WE + +On line 3318: + and managed CDOs, told + the FCIC.41 CITIGROUP: "I DO + NOT BELIEVE WE WERE + +On line 3320: + the FCIC.41 CITIGROUP: + "I DO NOT BELIEVE WE WERE + POWERLESS" While the + +On line 3320: + "I DO NOT BELIEVE + WE WERE POWERLESS" While the + hedge funds were betting + +On line 3320: + DO NOT BELIEVE WE + WERE POWERLESS" While the hedge + funds were betting against + +On line 3320: + NOT BELIEVE WE WERE + POWERLESS" While the hedge funds + were betting against the + +On line 3320: + WERE POWERLESS" While + the hedge funds were betting against + the housing market + +On line 3320: + POWERLESS" While the + hedge funds were betting against the + housing market in + +On line 3320: + hedge funds were betting + against the housing market in + and Citigroup’s CDO + +On line 3320: + funds were betting against + the housing market in and + Citigroup’s CDO desk + +On line 3320: + housing market in + and Citigroup’s CDO desk was + pushing more money + +On line 3320: + and Citigroup’s CDO + desk was pushing more money + to the center of + +On line 3320: + Citigroup’s CDO desk + was pushing more money to + the center of the + +On line 3322: + CDO desk was pushing + more money to the center + of the table. ut + +On line 3322: + paper issued by + Citigroup’s CDOs—the bank’s treasury + department had put + +On line 3322: + by Citigroup’s CDOs—the + bank’s treasury department had + put a stop to the + +On line 3322: + department had put + a stop to the practice. To + keep doing deals, the + +On line 3322: + had put a stop to + the practice. To keep doing + deals, the CDO desk had + +On line 3322: + put a stop to the + practice. To keep doing deals, + the CDO desk had to + +On line 3322: + the practice. To keep + doing deals, the CDO desk had + to find another + +On line 3322: + deals, the CDO desk had + to find another market + for the super-senior + +On line 3322: + CDO desk had to find + another market for the + super-senior tranches + +On line 3322: + to find another + market for the super-senior + tranches of the CDOs + +On line 3322: + another market + for the super-senior tranches + of the CDOs it was + +On line 3322: + for the super-senior + tranches of the CDOs it was + underwriting—or it + +On line 3322: + tranches of the CDOs + it was underwriting—or it + had to find a way + +On line 3322: + of the CDOs it was + underwriting—or it had to + find a way to get + +On line 3322: + was underwriting—or + it had to find a way to + get the company + +On line 3322: + underwriting—or it + had to find a way to get + the company to + +On line 3322: + it had to find a + way to get the company + to support the CDO + +On line 3322: + find a way to get + the company to support + the CDO production + +On line 3322: + a way to get the + company to support the + CDO production line. + +On line 3322: + to support the CDO + production line. The CDO desk + accumulated + +On line 3322: + production line. The + CDO desk accumulated + another billion + +On line 3322: + another billion + in super-senior exposures, + most between early + +On line 3322: + between early and + August which it otherwise + would have been able to + +On line 3322: + and August which it + otherwise would have been able + to sell into the + +On line 3322: + it otherwise would + have been able to sell into + the market only + +On line 3322: + otherwise would have + been able to sell into the + market only for + +On line 3322: + have been able to sell + into the market only + for a loss.42 It was + +On line 3322: + able to sell into + the market only for a + loss.42 It was also + +On line 3322: + loss.42 It was also + increasingly financing + securities that + +On line 3322: + that it was holding + in its CDO warehouse—that is, + securities that + +On line 3322: + its CDO warehouse—that + is, securities that were + waiting to be put + +On line 3324: + put into new CDOs. + Historically, owning + securities was + +On line 3324: + securities was + not what securities firms + did. The adage "We are + +On line 3324: + what securities + firms did. The adage "We are in + the moving business, + +On line 3324: + securities firms + did. The adage "We are in the + moving business, not + +On line 3324: + did. The adage "We are + in the moving business, not + the storage business" + +On line 3326: + securities, not + buying or retaining them. + However, as the + +On line 3326: + or retaining them. + However, as the biggest + commercial banks and + +On line 3326: + them. However, as + the biggest commercial banks + and investment banks + +On line 3326: + banks competed in + the securities business + in the late 1990s and + +On line 3326: + competed in the + securities business in + the late 1990s and on + +On line 3326: + the securities + business in the late 1990s and + on into the new + +On line 3326: + the late 1990s and on + into the new century, + they often touted + +On line 3326: + and on into the + new century, they often + touted the "balance + +On line 3326: + new century, they + often touted the "balance + sheet" that they could make + +On line 3326: + often touted the + "balance sheet" that they could make + available to support + +On line 3326: + touted the "balance + sheet" that they could make available + to support the sale + +On line 3326: + they could make available + to support the sale of new + securities. In + +On line 3326: + support the sale of + new securities. In this + regard, Citigroup + +On line 3326: + new securities. + In this regard, Citigroup + broke new ground in the + +On line 3326: + securities. In + this regard, Citigroup broke + new ground in the CDO + +On line 3326: + trillion commercial + bank whose deposits were insured + by the FDIC. While its + +On line 3326: + bank whose deposits were + insured by the FDIC. While its + competitors did the + +On line 3326: + were insured by the + FDIC. While its competitors did + the same, few did so + +On line 3326: + insured by the FDIC. + While its competitors did the + same, few did so as + +On line 3326: + While its competitors + did the same, few did so as + aggressively or, + +On line 3326: + did the same, few did + so as aggressively or, + ultimately, with + +On line 3328: + the super-senior and + triple-A tranches of most of the + CDOs it created. + +On line 3328: + super-senior and triple-A + tranches of most of the CDOs + it created. In + +On line 3328: + most of the CDOs it + created. In many cases + Citigroup would hedge + +On line 3328: + credit protection + from a monoline insurance + company such as + +On line 3328: + monoline insurance + company such as Ambac. + Because these hedges were + +On line 3328: + company such as + Ambac. Because these hedges were + in place, Citigroup + +On line 3328: + Ambac. Because these + hedges were in place, Citigroup + presumed that the risk + +On line 3328: + presumed that the risk + associated with the + retained tranches had + +On line 3330: + had been neutralized. + Citigroup reported these + tranches at values + +On line 3330: + tranches at values + for which they could not be sold, + raising questions about + +On line 3330: + for which they could not + be sold, raising questions about + their accuracy + +On line 3330: + which they could not be + sold, raising questions about their + accuracy and, + +On line 3332: + the accuracy + of reported earnings. "As + everybody in any + +On line 3332: + growing, that means you’re + not pricing it correctly," + Richard Bookstaber, who had + +On line 3332: + means you’re not pricing + it correctly," Richard Bookstaber, + who had been head of + +On line 3332: + you’re not pricing it + correctly," Richard Bookstaber, who + had been head of risk + +On line 3332: + it correctly," Richard + Bookstaber, who had been head of + risk management at + +On line 3332: + Richard Bookstaber, who had + been head of risk management + at Citigroup in + +On line 3332: + Bookstaber, who had been + head of risk management at + Citigroup in the + +On line 3332: + had been head of risk + management at Citigroup + in the late 1990s, told + +On line 3332: + of risk management + at Citigroup in the late + 1990s, told the FCIC. But + +On line 3332: + at Citigroup in + the late 1990s, told the FCIC. But + keeping the tranches + +On line 3332: + the late 1990s, told the + FCIC. But keeping the tranches + on the books at these + +On line 3332: + late 1990s, told the FCIC. + But keeping the tranches on + the books at these prices + +On line 3332: + the FCIC. But keeping + the tranches on the books at + these prices improved the + +On line 3332: + on the books at these + prices improved the finances for + creating the deal. + +On line 3332: + at these prices improved + the finances for creating + the deal. "It was a + +On line 3332: + creating the deal. + "It was a hidden subsidy + of the CDO business + +On line 3332: + of the CDO business + by mispricing," Bookstaber said.43 + The company would + +On line 3332: + the CDO business by + mispricing," Bookstaber said.43 The + company would not + +On line 3332: + mispricing," Bookstaber + said.43 The company would not + begin writing the + +On line 3332: + said.43 The company + would not begin writing the + securities down + +On line 3332: + begin writing the + securities down toward + the market’s real + +On line 3334: + the market’s real + valuations until the + fall of Part of the + +On line 3334: + treatment. As we saw + in an earlier chapter, + under the Recourse + +On line 3334: + As we saw in an + earlier chapter, under + the Recourse Rule, one + +On line 3334: + earlier chapter, + under the Recourse Rule, one + of the attractions + +On line 3334: + the Recourse Rule, one + of the attractions of triple-A-rated + securities was + +On line 3334: + of the attractions + of triple-A-rated securities was + that banks were required + +On line 3334: + the attractions of + triple-A-rated securities was that + banks were required to + +On line 3334: + attractions of triple-A-rated + securities was that banks + were required to hold + +On line 3334: + triple-A-rated securities + was that banks were required to + hold relatively + +On line 3334: + securities was + that banks were required to hold + relatively less + +On line 3334: + that banks were required + to hold relatively less + capital against them + +On line 3336: + than against lower-rated + securities. And if the + bank held those assets + +On line 3336: + And if the bank held + those assets in their trading + account (as opposed + +On line 3336: + bank held those assets + in their trading account (as + opposed to holding + +On line 3336: + those assets in their + trading account (as opposed + to holding them as + +On line 3336: + trading account (as + opposed to holding them as + a long-term investment), + +On line 3336: + account (as opposed + to holding them as a long-term + investment), it could + +On line 3336: + investment), it could + get even better capital + treatment under the + +On line 3338: + better capital + treatment under the Market + Risk Amendment. That rule + +On line 3338: + treatment under the + Market Risk Amendment. That rule + allowed banks to use + +On line 3338: + under the Market + Risk Amendment. That rule allowed + banks to use their own + +On line 3338: + Market Risk Amendment. + That rule allowed banks to use + their own models to + +On line 3338: + That rule allowed banks + to use their own models to + determine how much + +On line 3338: + banks to use their own + models to determine how + much capital to + +On line 3338: + how much capital + to hold, an amount that varied + according to how + +On line 3338: + to hold, an amount that + varied according to how + much market prices moved. + +On line 3338: + varied according + to how much market prices moved. + Citigroup judged that + +On line 3338: + Citigroup judged that + the capital requirement + for the super-senior + +On line 3338: + for the super-senior + tranches of synthetic CDOs + it held for trading + +On line 3338: + synthetic CDOs it + held for trading purposes + was effectively + +On line 3338: + zero, because the + prices didn’t move much. As a + result, Citigroup + +On line 3340: + some synthetic CDOs; + that is, it sold protection + to the CDO. If the + +On line 3340: + underperformed, the + short investors would begin to + get paid. Money to + +On line 3340: + the short investors would + begin to get paid. Money + to pay them would come + +On line 3340: + investors would begin + to get paid. Money to pay + them would come first from + +On line 3340: + would begin to get + paid. Money to pay them would + come first from wiping + +On line 3340: + begin to get paid. + Money to pay them would come + first from wiping out + +On line 3340: + paid. Money to pay + them would come first from wiping + out long investors who + +On line 3340: + Money to pay them + would come first from wiping out + long investors who had + +On line 3340: + pay them would come first + from wiping out long investors + who had bought tranches + +On line 3340: + them would come first from + wiping out long investors who + had bought tranches that + +On line 3340: + from wiping out long + investors who had bought tranches + that were below triple-A. + +On line 3340: + long investors who had + bought tranches that were below + triple-A. Then, if the short + +On line 3340: + who had bought tranches + that were below triple-A. Then, if + the short investors were + +On line 3340: + had bought tranches that + were below triple-A. Then, if the + short investors were still + +On line 3340: + bought tranches that were + below triple-A. Then, if the short + investors were still owed + +On line 3340: + that were below triple-A. + Then, if the short investors were + still owed money, Citibank + +On line 3340: + were below triple-A. Then, + if the short investors were still + owed money, Citibank would + +On line 3340: + below triple-A. Then, if + the short investors were still owed + money, Citibank would have + +On line 3340: + triple-A. Then, if the short + investors were still owed money, + Citibank would have to pay. + +On line 3340: + the short investors were + still owed money, Citibank would have + to pay. For taking + +On line 3340: + short investors were still + owed money, Citibank would have to + pay. For taking on + +On line 3340: + investors were still owed + money, Citibank would have to pay. + For taking on this + +On line 3342: + pay. For taking on + this risk, Citi typically + received about to in + +On line 3342: + a billion-dollar + transaction, it would earn an + annual fee of + +On line 3342: + transaction, it would + earn an annual fee of + million to million. + +On line 3344: + earn an annual + fee of million to million. + Citigroup also + +On line 3344: + fee of million to + million. Citigroup also + had exposure to + +On line 3344: + securities that + went into CDOs during the + ramp-up period, + +On line 3344: + into CDOs during + the ramp-up period, which + could be as long as + +On line 3344: + during the ramp-up + period, which could be as + long as six or nine + +On line 3344: + ramp-up period, + which could be as long as six + or nine months, before + +On line 3344: + which could be as long + as six or nine months, before + it packaged and sold + +On line 3344: + could be as long as + six or nine months, before it + packaged and sold the + +On line 3344: + CDO. Typically, + Citigroup’s securities + unit would set up a + +On line 3344: + a warehouse funding + line for the CDO manager. + During the ramp-up + +On line 3344: + funding line for the + CDO manager. During the + ramp-up period, + +On line 3344: + securities would + pay interest; depending + on the terms of the + +On line 3344: + terms of the agreement, + that interest would either + go exclusively + +On line 3344: + of the agreement, that + interest would either go + exclusively to + +On line 3344: + that interest would + either go exclusively + to Citigroup or + +On line 3344: + go exclusively + to Citigroup or be split + with the manager. + +On line 3344: + exclusively to + Citigroup or be split with + the manager. For + +On line 3344: + to Citigroup or + be split with the manager. + For the CDO desk, this + +On line 3344: + the manager. For + the CDO desk, this frequently + represented a + +On line 3348: + facility had + relatively attractive + yields—often to more + +On line 3348: + than the typical + bank borrowing rate—and it + was not uncommon + +On line 3348: + the typical bank + borrowing rate—and it was + not uncommon for + +On line 3348: + borrowing rate—and + it was not uncommon for + the CDO desk to earn + +On line 3348: + rate—and it was not + uncommon for the CDO desk + to earn to million + +On line 3348: + uncommon for the + CDO desk to earn to million + in interest on + +On line 3350: + earn to million in + interest on a single + transaction.44 Traders on + +On line 3350: + in interest on + a single transaction.44 Traders + on the desk would get + +On line 3350: + transaction.44 Traders on + the desk would get credit for + those revenues at bonus + +On line 3350: + desk would get credit + for those revenues at bonus time. + But Citigroup would + +On line 3350: + for those revenues at + bonus time. But Citigroup would + also be on the + +On line 3350: + revenues at bonus time. + But Citigroup would also + be on the hook for + +On line 3350: + But Citigroup would + also be on the hook for + any losses incurred + +On line 3350: + also be on the + hook for any losses incurred + on assets stuck in + +On line 3350: + on the hook for any + losses incurred on assets + stuck in the warehouse. + +On line 3352: + hook for any losses + incurred on assets stuck in + the warehouse. When the + +On line 3352: + losses incurred on + assets stuck in the warehouse. + When the financial + +On line 3352: + incurred on assets + stuck in the warehouse. When the + financial crisis + +On line 3352: + assets stuck in the + warehouse. When the financial + crisis deepened, many + +On line 3352: + the warehouse. When the + financial crisis deepened, + many CDO transactions + +On line 3352: + investment banks were + forced to write down the value + of securities + +On line 3352: + write down the value + of securities held in + their warehouses. The + +On line 3352: + their warehouses. The + result would be substantial + losses across Wall Street. + +On line 3352: + The result would be + substantial losses across Wall + Street. In many cases, + +On line 3352: + would be substantial + losses across Wall Street. In many + cases, to offload + +On line 3352: + substantial losses + across Wall Street. In many cases, + to offload assets + +On line 3352: + across Wall Street. In many + cases, to offload assets + underwriters placed + +On line 3352: + cases, to offload + assets underwriters placed + collateral from + +On line 3356: + warehouses into + other CDOs. A factor that + made firm-wide hedging + +On line 3356: + Citigroup could have + various and offsetting + exposures to the + +On line 3356: + could have various + and offsetting exposures + to the same CDO. It + +On line 3356: + have various and + offsetting exposures to + the same CDO. It was + +On line 3356: + exposures to the + same CDO. It was possible, + even likely, that the + +On line 3356: + to the same CDO. It + was possible, even likely, + that the CDO desk would + +On line 3356: + was possible, even + likely, that the CDO desk would + structure a given + +On line 3356: + likely, that the CDO + desk would structure a given + CDO, a different + +On line 3356: + desk would structure a + given CDO, a different + division would buy + +On line 3356: + a given CDO, a + different division would + buy protection for + +On line 3356: + ran into trouble, + the CDO immediately + would have to pay the + +On line 3356: + would have to pay the + division that bought credit + protection on the + +On line 3356: + the division that + bought credit protection on + the underlying + +On line 3356: + the underlying + collateral; if the CDO + ran out of money + +On line 3356: + collateral; if + the CDO ran out of money + to pay, it would have + +On line 3356: + if the CDO ran out + of money to pay, it would + have to draw on the + +On line 3356: + ran out of money + to pay, it would have to draw + on the division + +On line 3356: + out of money to + pay, it would have to draw on + the division that + +On line 3356: + of money to pay, + it would have to draw on the + division that bought + +On line 3356: + pay, it would have to + draw on the division that + bought the unfunded + +On line 3356: + it would have to draw + on the division that bought + the unfunded tranche. + +On line 3356: + would have to draw on + the division that bought the + unfunded tranche. In + +On line 3356: + the division that + bought the unfunded tranche. In + November after + +On line 3356: + November after + Citigroup had reported + substantial losses + +On line 3356: + after Citigroup + had reported substantial + losses on its CDO + +On line 3356: + its CDO portfolio, + regulators would note that + the company did + +On line 3356: + did not have a good + understanding of its firmwide + CDO exposures: "The + +On line 3356: + good understanding + of its firmwide CDO exposures: + "The nature, origin, + +On line 3356: + understanding of + its firmwide CDO exposures: "The + nature, origin, and + +On line 3356: + firmwide CDO exposures: + "The nature, origin, and size + of CDO exposure + +On line 3356: + CDO exposures: "The + nature, origin, and size of + CDO exposure were + +On line 3356: + "The nature, origin, + and size of CDO exposure + were surprising to + +On line 3356: + nature, origin, and + size of CDO exposure were + surprising to many + +On line 3356: + of CDO exposure + were surprising to many in + senior management + +On line 3356: + to many in senior + management and the board. The + liquidity put + +On line 3356: + management and the + board. The liquidity put + exposure was not + +On line 3356: + liquidity put + exposure was not well known. + In particular, + +On line 3356: + exposure was not + well known. In particular, + management did not + +On line 3356: + was not well known. In + particular, management + did not consider + +On line 3358: + risk inherent in + CDO positions."45 Citigroup’s + willingness to use + +On line 3358: + in CDO positions."45 + Citigroup’s willingness to + use its balance sheet + +On line 3358: + willingness to use + its balance sheet to support + the CDO business had + +On line 3358: + its balance sheet to + support the CDO business had + the desired effect. + +On line 3358: + sheet to support the + CDO business had the desired + effect. Its CDO desk + +On line 3358: + CDO business had the + desired effect. Its CDO desk + created billion + +On line 3358: + included mortgage- + acked securities in their + collateral in + +On line 3358: + acked securities + in their collateral in + and billion in Among + +On line 3358: + securities in + their collateral in and + billion in Among CDO + +On line 3358: + CDO underwriters, + including all types of CDOs, + Citigroup rose from + +On line 3360: + including all types + of CDOs, Citigroup rose from + fourteenth place in to + +On line 3360: + Citigroup rose from + fourteenth place in to second + place in according + +On line 3360: + fourteenth place in to + second place in according + to FCIC analysis + +On line 3360: + place in to second + place in according to FCIC + analysis of Moody’s + +On line 3362: + place in according + to FCIC analysis of Moody’s + data.46 What was good + +On line 3362: + good for Citigroup’s + investment bank was also + lucrative for its + +On line 3362: + investment bank was + also lucrative for its + investment bankers. Thomas + +On line 3362: + also lucrative + for its investment bankers. Thomas + Maheras, the co-CEO of + +On line 3362: + for its investment + bankers. Thomas Maheras, the co-CEO of + the investment bank + +On line 3362: + its investment bankers. + Thomas Maheras, the co-CEO of the + investment bank who + +On line 3362: + bankers. Thomas Maheras, the + co-CEO of the investment bank + who said he spent less + +On line 3362: + Thomas Maheras, the co-CEO + of the investment bank who + said he spent less than + +On line 3362: + Maheras, the co-CEO of + the investment bank who said + he spent less than of + +On line 3362: + of the investment + bank who said he spent less than + of his time thinking + +On line 3362: + the investment bank + who said he spent less than of + his time thinking about + +On line 3362: + investment bank who + said he spent less than of his + time thinking about CDOs, + +On line 3362: + who said he spent less + than of his time thinking about + CDOs, was a highly + +On line 3362: + said he spent less than + of his time thinking about CDOs, + was a highly paid + +On line 3364: + than million in salary + and bonus compensation in + Co-head of Global + +On line 3364: + Co-head of Global + Fixed Income Randolph Barker + made about million in + +On line 3364: + Randolph Barker made + about million in that same year. + Citigroup’s chief risk + +On line 3364: + made about million in + that same year. Citigroup’s chief + risk officer made + +On line 3364: + year. Citigroup’s chief + risk officer made million.47 + Others were also + +On line 3364: + risk officer made + million.47 Others were also + well rewarded. The + +On line 3364: + made million.47 Others + were also well rewarded. + The co-heads of the + +On line 3364: + Others were also + well rewarded. The co-heads + of the global CDO + +On line 3364: + well rewarded. The + co-heads of the global CDO + business, Nestor Dominguez and + +On line 3364: + The co-heads of the + global CDO business, Nestor Dominguez + and Janice Warne, each + +On line 3364: + global CDO business, + Nestor Dominguez and Janice Warne, each + made about million in + +On line 3364: + CDO business, Nestor Dominguez + and Janice Warne, each made about + million in total + +On line 3364: + and Janice Warne, each + made about million in total + compensation in + +On line 3366: + made about million in + total compensation in + Citi did have "clawback" + +On line 3366: + despite Citigroup’s + eventual large losses, no + compensation was + +On line 3366: + no compensation + was ever clawed back under + this policy. The + +On line 3366: + was ever clawed back + under this policy. The + Corporate Library, + +On line 3366: + clawed back under this + policy. The Corporate + Library, which rates firms’ + +On line 3366: + Library, which rates firms’ + corporate governance, gave + Citigroup a C. + +On line 3366: + rates firms’ corporate + governance, gave Citigroup + a C. In early + +On line 3366: + Citigroup a C. + In early the Corporate + Library would downgrade + +On line 3366: + a C. In early + the Corporate Library would + downgrade Citigroup + +On line 3366: + Corporate Library + would downgrade Citigroup to + a D, "reflecting + +On line 3366: + D, "reflecting a + high degree of governance + risk." Among the issues + +On line 3368: + that were poorly aligned + with shareholder interests.49 + Where were Citigroup’s + +On line 3368: + interests.49 Where were + Citigroup’s regulators + while the company + +On line 3368: + while the company + piled up tens of billions of + dollars of risk in + +On line 3368: + company piled up + tens of billions of dollars + of risk in the CDO + +On line 3368: + tens of billions of + dollars of risk in the CDO + business1 Citigroup + +On line 3368: + billions of dollars + of risk in the CDO business1 + Citigroup had a + +On line 3368: + of risk in the CDO + business1 Citigroup had a + complex corporate + +On line 3368: + in the CDO business1 + Citigroup had a complex + corporate structure + +On line 3368: + business1 Citigroup + had a complex corporate + structure and, as a + +On line 3368: + Citigroup had a + complex corporate structure + and, as a result, + +On line 3368: + complex corporate + structure and, as a result, + faced an array of + +On line 3368: + structure and, as a + result, faced an array of + supervisors. The + +On line 3368: + directed, relied + on others to monitor + the most important + +On line 3368: + the most important + subsidiaries: the Office of the + Comptroller of the + +On line 3368: + Comptroller of the + Currency (OCC) supervised + the largest bank subsidiary, + +On line 3368: + of the Currency + (OCC) supervised the largest bank + subsidiary, Citibank, and the + +On line 3368: + (OCC) supervised the + largest bank subsidiary, Citibank, and the + SEC supervised the + +On line 3368: + the largest bank subsidiary, + Citibank, and the SEC supervised + the securities + +On line 3368: + largest bank subsidiary, Citibank, + and the SEC supervised the + securities firm, + +On line 3368: + securities firm, + Citigroup Global Markets. + Moreover, Citigroup + +On line 3368: + Citigroup Global + Markets. Moreover, Citigroup + did not really + +On line 3368: + on the CDO desk on + an intricate transaction + could interact with + +On line 3370: + specific concerns. + Unlike the Fed and OCC, which + had risk management + +On line 3370: + Fed and OCC, which had + risk management and safety + and soundness rules, the + +On line 3370: + and OCC, which had risk + management and safety and + soundness rules, the SEC + +On line 3370: + risk management and + safety and soundness rules, the + SEC used these exams + +On line 3370: + these exams to look + for general weaknesses + in risk management. + +On line 3370: + in risk management. + Unlike safety and soundness + regulators, who + +On line 3370: + Unlike safety and + soundness regulators, who + concentrated on + +On line 3370: + concentrated on + preventing firms from failing, + the SEC always kept + +On line 3370: + on preventing firms + from failing, the SEC always + kept its focus on + +On line 3370: + from failing, the SEC + always kept its focus on + protecting investors. + +On line 3370: + kept its focus on + protecting investors. Its most + recent review of + +On line 3370: + recent review of + Citigroup’s securities + arm preceding the + +On line 3370: + the examiners + completed their report in + June In that exam, + +On line 3370: + their report in June + In that exam, they told the + FCIC, they saw nothing + +On line 3370: + report in June In + that exam, they told the FCIC, + they saw nothing "earth + +On line 3370: + In that exam, they + told the FCIC, they saw nothing + "earth shattering," but + +On line 3370: + that exam, they told + the FCIC, they saw nothing "earth + shattering," but they + +On line 3370: + they told the FCIC, they + saw nothing "earth shattering," + but they did note key + +On line 3370: + FCIC, they saw nothing + "earth shattering," but they did + note key weaknesses + +On line 3370: + they saw nothing "earth + shattering," but they did note + key weaknesses in + +On line 3370: + "earth shattering," but + they did note key weaknesses + in risk management + +On line 3370: + internal pricing + and valuation controls, + for example, and + +On line 3370: + and valuation + controls, for example, and + a willingness to + +On line 3370: + for example, and + a willingness to allow + traders to exceed their + +On line 3370: + example, and a + willingness to allow traders + to exceed their risk + +On line 3372: + a willingness to + allow traders to exceed their + risk limits.50 Unlike + +On line 3372: + traders to exceed their + risk limits.50 Unlike the SEC, + the Fed and OCC did + +On line 3372: + Unlike the SEC, the + Fed and OCC did maintain a + continuous on-site + +On line 3374: + the Fed and OCC did + maintain a continuous + on-site presence. During + +On line 3374: + OCC did maintain a + continuous on-site presence. + During the years that + +On line 3374: + a continuous + on-site presence. During the years + that CDOs boomed, the OCC + +On line 3374: + continuous on-site + presence. During the years that + CDOs boomed, the OCC team + +On line 3374: + on-site presence. During + the years that CDOs boomed, the OCC + team regularly + +On line 3374: + CDOs boomed, the OCC team + regularly criticized + the company for + +On line 3374: + team regularly + criticized the company + for its weaknesses + +On line 3374: + its weaknesses in + risk management, including + specific problems + +On line 3378: + specific problems + in the CDO business. "Earnings + and profitability + +On line 3378: + CDO business. "Earnings + and profitability growth have + taken precedence over + +On line 3378: + and profitability + growth have taken precedence over + risk management and + +On line 3378: + risk management and + internal control," the OCC + told the company + +On line 3378: + told the company + in January Another + document from that + +On line 3378: + stated, "The findings + of this examination + are disappointing, + +On line 3378: + examination + are disappointing, in that + the business grew far + +On line 3378: + far in excess of + management’s underlying + infrastructure and + +On line 3378: + peers at the other + Federal Reserve banks was + critical of the + +On line 3378: + other Federal + Reserve banks was critical + of the New York Fed—then + +On line 3378: + Federal Reserve + banks was critical of the + New York Fed—then headed + +On line 3378: + was critical of + the New York Fed—then headed by + the current treasury + +On line 3378: + of Citigroup. The + review concluded that the + Fed’s on-site Citigroup + +On line 3378: + review concluded + that the Fed’s on-site Citigroup + team appeared to have + +On line 3378: + supervisory + issues that detract from the + team’s continuous + +On line 3378: + team’s continuous + supervision objectives + the level of the + +On line 3378: + the level of the + staffing within the Citi team has + not kept pace with the + +On line 3378: + of the staffing within + the Citi team has not kept pace + with the magnitude + +On line 3378: + the staffing within the + Citi team has not kept pace with + the magnitude of + +On line 3378: + Citi team has not kept + pace with the magnitude of + supervisory + +On line 3378: + the institution + has realized."53 That the Fed’s + examination + +On line 3378: + has realized."53 That + the Fed’s examination + of Citigroup did + +On line 3378: + realized."53 That the + Fed’s examination of + Citigroup did not + +On line 3378: + examination + of Citigroup did not raise + the concerns expressed + +On line 3378: + of Citigroup did + not raise the concerns expressed + that same year by the + +On line 3378: + Citigroup did not + raise the concerns expressed that + same year by the OCC + +On line 3378: + not raise the concerns + expressed that same year by the + OCC may illustrate + +On line 3378: + expressed that same year + by the OCC may illustrate + these problems. Four years + +On line 3378: + same year by the OCC + may illustrate these problems. + Four years later, the + +On line 3378: + year by the OCC may + illustrate these problems. Four + years later, the next + +On line 3378: + OCC may illustrate + these problems. Four years later, + the next peer review + +On line 3378: + may illustrate these + problems. Four years later, the + next peer review would + +On line 3378: + peer review would again + find substantial weaknesses + in the New York Fed’s + +On line 3380: + in the New York Fed’s + oversight of Citigroup.54 In + April the Fed raised the + +On line 3380: + New York Fed’s oversight + of Citigroup.54 In April the + Fed raised the holding + +On line 3380: + holding company’s + supervisory rating + from the previous + +On line 3380: + the previous year’s + "fair" to "satisfactory."55 + It lifted the ban + +On line 3380: + previous year’s "fair" + to "satisfactory."55 It + lifted the ban on + +On line 3380: + "satisfactory."55 + It lifted the ban on new + mergers imposed the + +On line 3380: + It lifted the ban + on new mergers imposed the + previous year in + +On line 3380: + mergers imposed the + previous year in response + to Citigroup’s many + +On line 3380: + previous year in + response to Citigroup’s many + regulatory + +On line 3380: + problems.56 The Fed and + OCC examiners concurred + that the company + +On line 3380: + OCC examiners + concurred that the company + had made "substantial + +On line 3380: + that the company + had made "substantial progress" in + implementing CEO + +On line 3380: + made "substantial progress" + in implementing CEO Charles + Prince’s plan to overhaul + +On line 3380: + "substantial progress" in + implementing CEO Charles Prince’s + plan to overhaul risk + +On line 3380: + in implementing + CEO Charles Prince’s plan to overhaul + risk management. The + +On line 3380: + implementing CEO + Charles Prince’s plan to overhaul risk + management. The Fed + +On line 3380: + plan to overhaul risk + management. The Fed declared: + "The company has + +On line 3380: + Reserve enforcement + actions related to the + execution of + +On line 3380: + related to the + execution of highly + structured transactions + +On line 3380: + structured transactions + and controls."57 The following + year, Citigroup’s board + +On line 3380: + The following year, + Citigroup’s board would allude + to Prince’s successful + +On line 3380: + Citigroup’s board would + allude to Prince’s successful + resolution of + +On line 3382: + in justifying + his compensation increase.58 + The OCC noted in + +On line 3382: + his compensation + increase.58 The OCC noted in + retrospect that the + +On line 3382: + that the lifting of + supervisory constraints + in had been a key + +On line 3382: + supervisory + constraints in had been a key + turning point. "After + +On line 3382: + constraints in had been + a key turning point. "After + regulatory + +On line 3382: + turning point. "After + regulatory restraints + against significant + +On line 3382: + regulatory + restraints against significant + acquisitions were + +On line 3382: + against significant + acquisitions were lifted, + Citigroup embarked + +On line 3382: + acquisitions were + lifted, Citigroup embarked + on an aggressive + +On line 3384: + wrote to Vikram Pandit, + Prince’s replacement, in early + "Additionally, + +On line 3384: + Prince’s replacement, in + early "Additionally, + with the removal of + +On line 3384: + removal of formal + and informal agreements, the + previous focus + +On line 3384: + informal agreements, + the previous focus on + risk and compliance + +On line 3384: + and compliance gave + way to business expansion + and profits." Meanwhile, + +On line 3384: + compliance gave way + to business expansion and + profits." Meanwhile, risk + +On line 3384: + risk managers granted + exceptions to limits, and + increased exposure + +On line 3384: + limits, and increased + exposure limits, instead + of keeping business + +On line 3384: + increased exposure + limits, instead of keeping + business units in check + +On line 3384: + exposure limits, + instead of keeping business + units in check as they + +On line 3384: + limits, instead of + keeping business units in check + as they had told the + +On line 3384: + of keeping business + units in check as they had told + the regulators.59 + +On line 3384: + keeping business units + in check as they had told the + regulators.59 Well + +On line 3384: + in check as they had + told the regulators.59 Well + after Citigroup + +On line 3384: + as they had told the + regulators.59 Well after + Citigroup sustained + +On line 3384: + regulators.59 Well + after Citigroup sustained + large losses on its + +On line 3384: + Citigroup sustained + large losses on its CDOs, the + Fed would criticize + +On line 3384: + large losses on its + CDOs, the Fed would criticize + the firm for using + +On line 3384: + losses on its CDOs, + the Fed would criticize the + firm for using its + +On line 3384: + criticize the firm + for using its commercial + bank to support its + +On line 3384: + "Senior management + allowed business lines largely + un-challenged access to + +On line 3384: + allowed business lines + largely un-challenged access to + the balance sheet to + +On line 3384: + lines largely un-challenged + access to the balance sheet + to pursue revenue + +On line 3384: + un-challenged access to + the balance sheet to pursue + revenue growth," the Fed + +On line 3384: + to the balance sheet + to pursue revenue growth," the + Fed wrote in an April + +On line 3384: + to pursue revenue + growth," the Fed wrote in an April + letter to Pandit. + +On line 3384: + revenue growth," the Fed + wrote in an April letter to + Pandit. "Citigroup + +On line 3384: + growth," the Fed wrote in + an April letter to Pandit. + "Citigroup attained + +On line 3384: + share across numerous + products, including leveraged + finance and structured + +On line 3384: + numerous products, + including leveraged finance + and structured credit + +On line 3384: + including leveraged + finance and structured credit + trading, utilizing + +On line 3384: + finance and structured + credit trading, utilizing + balance sheet for its + +On line 3384: + balance sheet for its + ‘originate to distribute’ + strategy. Senior + +On line 3384: + for its ‘originate + to distribute’ strategy. + Senior management + +On line 3384: + potential balance + sheet implications of this + strategy in the + +On line 3384: + strategy in the + case of market disruptions. + Further, they did not + +On line 3384: + the case of market + disruptions. Further, they did + not adequately + +On line 3384: + negative impact + of earnings volatility of + these businesses on + +On line 3386: + businesses on the + firm’s capital position."60 + eithner told + +On line 3386: + the firm’s capital + position."60 eithner + told the Commission + +On line 3386: + Commission that he + and others in leadership + positions could have + +On line 3386: + that he and others + in leadership positions + could have done more to + +On line 3386: + done more to prevent + the crisis, testifying, + "I do not believe + +On line 3386: + more to prevent the + crisis, testifying, "I + do not believe we + +On line 3388: + "I do not believe + we were powerless."61 AIG: "I’M + NOT GETTING PAID ENOUGH + +On line 3390: + do not believe we + were powerless."61 AIG: "I’M NOT + GETTING PAID ENOUGH TO + +On line 3390: + we were powerless."61 + AIG: "I’M NOT GETTING PAID ENOUGH + TO STAND ON THESE TRACKS" + +On line 3392: + powerless."61 AIG: "I’M + NOT GETTING PAID ENOUGH TO STAND + ON THESE TRACKS" Unlike + +On line 3392: + AIG: "I’M NOT GETTING + PAID ENOUGH TO STAND ON THESE TRACKS" + Unlike their peers at + +On line 3392: + GETTING PAID ENOUGH TO + STAND ON THESE TRACKS" Unlike their + peers at Citigroup, + +On line 3392: + TRACKS" Unlike their peers + at Citigroup, some senior + executives at + +On line 3392: + peers at Citigroup, + some senior executives + at AIG’s Financial + +On line 3392: + Financial Products + subsidiary had figured out that + the company was + +On line 3392: + subsidiary had figured + out that the company was + taking on too much + +On line 3392: + that the company + was taking on too much risk. + Nonetheless, they did + +On line 3392: + was taking on too + much risk. Nonetheless, they did + not do enough about it. + +On line 3392: + taking on too much + risk. Nonetheless, they did not + do enough about it. Doubts + +On line 3392: + risk. Nonetheless, they + did not do enough about it. Doubts + about all the credit + +On line 3392: + did not do enough about + it. Doubts about all the credit + default swaps that they + +On line 3392: + it. Doubts about all the + credit default swaps that they + were originating + +On line 3392: + default swaps that they + were originating emerged in + among AIG Financial + +On line 3392: + Financial Products + executives, including + Andrew Forster and Gene + +On line 3392: + including Andrew + Forster and Gene Park. Park told the + FCIC that he witnessed + +On line 3392: + Andrew Forster and Gene + Park. Park told the FCIC that he + witnessed Financial + +On line 3392: + Forster and Gene Park. Park + told the FCIC that he witnessed + Financial Products + +On line 3392: + FCIC that he witnessed + Financial Products CEO Joseph + Cassano berating + +On line 3392: + Financial Products + CEO Joseph Cassano berating + a salesman over the + +On line 3392: + salesman over the large + volume of credit default + swaps being written + +On line 3392: + volume of credit + default swaps being written + by AIG Financial + +On line 3392: + of credit default + swaps being written by AIG + Financial Products, + +On line 3392: + default swaps being + written by AIG Financial + Products, suggesting + +On line 3392: + swaps being written + by AIG Financial Products, + suggesting there was + +On line 3392: + there was already some + high-level uneasiness with + these deals. Told by a + +On line 3392: + uneasiness with these + deals. Told by a consultant, + Gary Gorton, that the + +On line 3392: + these deals. Told by a + consultant, Gary Gorton, that + the "multisector" + +On line 3392: + the "multisector" + CDOs on which AIG was selling + credit default swaps + +On line 3392: + CDOs on which AIG was + selling credit default swaps + consisted mainly + +On line 3392: + consisted mainly + of mortgage-backed securities + with less than subprime + +On line 3392: + with less than subprime + and Alt-A mortgages, Park asked Adam + Budnick, another + +On line 3392: + and Alt-A mortgages, Park + asked Adam Budnick, another + AIG employee, for + +On line 3392: + checked and returned to + say, according to Park, "‘I + can’t believe it. You + +On line 3392: + and returned to say, + according to Park, "‘I can’t + believe it. You know, + +On line 3392: + to say, according + to Park, "‘I can’t believe it. + You know, it’s like or + +On line 3392: + believe it. You know, + it’s like or Reviewing the + portfolio—and thinking + +On line 3392: + You know, it’s like or + Reviewing the portfolio—and + thinking about a friend + +On line 3392: + or Reviewing the + portfolio—and thinking about a + friend who had received + +On line 3392: + portfolio—and thinking + about a friend who had received + financing for his + +On line 3392: + friend who had received + financing for his new home + after losing his + +On line 3392: + his new home after + losing his job—Park said, "This is + horrendous business. + +On line 3392: + after losing his + job—Park said, "This is horrendous + business. We should get + +On line 3392: + losing his job—Park said, + "This is horrendous business. + We should get out of + +On line 3394: + his job—Park said, "This is + horrendous business. We should + get out of it."62 In + +On line 3394: + "This is horrendous + business. We should get out of + it."62 In July Park’s + +On line 3394: + horrendous business. + We should get out of it."62 In + July Park’s colleague + +On line 3394: + business. We should get + out of it."62 In July Park’s + colleague Andrew Forster + +On line 3394: + We should get out of + it."62 In July Park’s colleague + Andrew Forster sent an + +On line 3394: + get out of it."62 In + July Park’s colleague Andrew + Forster sent an email both + +On line 3394: + of it."62 In July + Park’s colleague Andrew Forster sent + an email both to Alan + +On line 3394: + it."62 In July Park’s + colleague Andrew Forster sent an + email both to Alan Frost, + +On line 3394: + July Park’s colleague + Andrew Forster sent an email both + to Alan Frost, the AIG + +On line 3394: + Park’s colleague Andrew + Forster sent an email both to Alan + Frost, the AIG salesman + +On line 3394: + both to Alan Frost, the + AIG salesman primarily + responsible for + +On line 3394: + company’s booming + credit default swap business, + and to Gorton, who + +On line 3394: + credit default swap + business, and to Gorton, who + had engineered the + +On line 3394: + swap business, and to + Gorton, who had engineered + the formula to + +On line 3394: + to Gorton, who had + engineered the formula + to determine how + +On line 3394: + had engineered the + formula to determine + how much risk AIG was + +On line 3394: + the formula to + determine how much risk AIG + was taking on each + +On line 3394: + to determine how + much risk AIG was taking on + each CDS it wrote. "We + +On line 3394: + determine how much + risk AIG was taking on each + CDS it wrote. "We are + +On line 3394: + how much risk AIG was + taking on each CDS it wrote. + "We are taking on + +On line 3394: + risk AIG was taking + on each CDS it wrote. "We are + taking on a huge + +On line 3394: + was taking on each + CDS it wrote. "We are taking + on a huge amount of + +On line 3394: + taking on each CDS + it wrote. "We are taking on + a huge amount of sub + +On line 3394: + each CDS it wrote. "We + are taking on a huge amount + of sub prime mortgage + +On line 3394: + wrote. "We are taking + on a huge amount of sub prime + mortgage exposure + +On line 3394: + are taking on a + huge amount of sub prime mortgage + exposure here," Forster + +On line 3394: + a huge amount of sub + prime mortgage exposure here," + Forster wrote. "Everyone + +On line 3394: + huge amount of sub prime + mortgage exposure here," Forster + wrote. "Everyone we + +On line 3394: + mortgage exposure + here," Forster wrote. "Everyone we + have talked to says they + +On line 3394: + Forster wrote. "Everyone + we have talked to says they are + worried about deals with + +On line 3394: + "Everyone we have + talked to says they are worried + about deals with huge amounts + +On line 3394: + we have talked to says + they are worried about deals with + huge amounts [of high-risk + +On line 3394: + talked to says they are + worried about deals with huge amounts + [of high-risk mortgage] + +On line 3394: + they are worried about + deals with huge amounts [of high-risk + mortgage] exposure + +On line 3394: + worried about deals with + huge amounts [of high-risk mortgage] + exposure yet I + +On line 3394: + huge amounts [of high-risk + mortgage] exposure yet I + regularly see + +On line 3394: + with [high-risk mortgage] + concentrations currently. + Are these really + +On line 3396: + currently. Are these + really the same risk as + other deals1"63 Park and + +On line 3396: + these really the + same risk as other deals1"63 Park + and others studied + +On line 3396: + really the same + risk as other deals1"63 Park and + others studied the + +On line 3396: + same risk as other + deals1"63 Park and others studied + the issue for weeks, + +On line 3396: + risk as other deals1"63 + Park and others studied the + issue for weeks, talked + +On line 3396: + other deals1"63 Park and + others studied the issue + for weeks, talked to bank + +On line 3396: + and others studied + the issue for weeks, talked to + bank analysts and + +On line 3396: + the issue for weeks, + talked to bank analysts and + other experts, and + +On line 3396: + whether it made sense for + AIG to continue to write + protection on the + +On line 3396: + mortgage markets. The + general view of others + was that some of the + +On line 3396: + The general view + of others was that some of + the underlying + +On line 3396: + of others was that + some of the underlying + mortgages "were structured + +On line 3396: + was that some of the + underlying mortgages "were + structured to fail, [but] + +On line 3396: + "were structured to fail, + [but] that all the borrowers + would basically + +On line 3396: + structured to fail, [but] + that all the borrowers would + basically be + +On line 3396: + the borrowers would + basically be bailed out + as long as real + +On line 3396: + basically be + bailed out as long as real + estate prices went up."64 + +On line 3398: + bailed out as long as + real estate prices went up."64 + The AIG consultant + +On line 3398: + as long as real + estate prices went up."64 The AIG + consultant Gorton + +On line 3398: + real estate prices + went up."64 The AIG consultant + Gorton recalled a + +On line 3398: + estate prices went up."64 + The AIG consultant Gorton + recalled a meeting + +On line 3398: + prices went up."64 The AIG + consultant Gorton recalled + a meeting that he + +On line 3398: + The AIG consultant + Gorton recalled a meeting + that he and others + +On line 3398: + consultant Gorton + recalled a meeting that he + and others from AIG + +On line 3398: + Gorton recalled a + meeting that he and others + from AIG had with one + +On line 3398: + recalled a meeting + that he and others from AIG + had with one Bear Stearns + +On line 3398: + meeting that he and + others from AIG had with one + Bear Stearns analyst. + +On line 3398: + others from AIG had + with one Bear Stearns analyst. + The analyst was + +On line 3398: + had with one Bear Stearns + analyst. The analyst + was so optimistic + +On line 3398: + analyst was so + optimistic about the housing + market that they thought + +On line 3398: + was so optimistic + about the housing market that + they thought he was "out + +On line 3398: + so optimistic about + the housing market that they + thought he was "out of + +On line 3398: + optimistic about the + housing market that they thought + he was "out of his + +On line 3398: + the housing market + that they thought he was "out of + his mind" and "must be + +On line 3398: + housing market that + they thought he was "out of his + mind" and "must be on + +On line 3398: + market that they thought + he was "out of his mind" and + "must be on drugs or + +On line 3398: + that they thought he was + "out of his mind" and "must be + on drugs or something."65 + +On line 3398: + thought he was "out of + his mind" and "must be on drugs + or something."65 Speaking + +On line 3398: + he was "out of his + mind" and "must be on drugs or + something."65 Speaking of + +On line 3398: + his mind" and "must be + on drugs or something."65 Speaking + of a potential + +On line 3398: + and "must be on drugs + or something."65 Speaking of a + potential decline + +On line 3398: + something."65 Speaking of + a potential decline in + the housing market, + +On line 3398: + potential decline + in the housing market, Park + related to the + +On line 3398: + the housing market, + Park related to the FCIC + the risks as he and + +On line 3398: + housing market, Park + related to the FCIC the + risks as he and some + +On line 3398: + Park related to + the FCIC the risks as he and + some of his colleagues + +On line 3398: + related to the + FCIC the risks as he and some + of his colleagues saw + +On line 3398: + the FCIC the risks as + he and some of his colleagues + saw them, saying, "We + +On line 3398: + the risks as he and + some of his colleagues saw them, + saying, "We weren’t + +On line 3398: + as he and some of + his colleagues saw them, saying, + "We weren’t getting + +On line 3398: + he and some of his + colleagues saw them, saying, "We + weren’t getting paid + +On line 3398: + his colleagues saw them, + saying, "We weren’t getting + paid enough money to + +On line 3398: + saying, "We weren’t + getting paid enough money to + take that risk. I’m not + +On line 3398: + "We weren’t getting + paid enough money to take that + risk. I’m not going + +On line 3398: + weren’t getting paid + enough money to take that risk. + I’m not going to + +On line 3398: + paid enough money to + take that risk. I’m not going + to opine on whether there’s + +On line 3398: + enough money to take + that risk. I’m not going to + opine on whether there’s a + +On line 3398: + money to take that + risk. I’m not going to opine + on whether there’s a train + +On line 3398: + to take that risk. I’m + not going to opine on whether + there’s a train on its + +On line 3398: + take that risk. I’m not + going to opine on whether there’s + a train on its way. + +On line 3398: + risk. I’m not going + to opine on whether there’s a train + on its way. I just + +On line 3398: + I’m not going to + opine on whether there’s a train on + its way. I just know + +On line 3398: + not going to opine + on whether there’s a train on its + way. I just know that + +On line 3398: + going to opine on + whether there’s a train on its way. + I just know that I’m + +On line 3398: + opine on whether there’s a + train on its way. I just know + that I’m not getting + +On line 3398: + on whether there’s a train + on its way. I just know that + I’m not getting paid + +On line 3398: + whether there’s a train on + its way. I just know that I’m + not getting paid enough + +On line 3398: + there’s a train on its + way. I just know that I’m not + getting paid enough to + +On line 3398: + train on its way. I + just know that I’m not getting + paid enough to stand on + +On line 3398: + on its way. I just + know that I’m not getting paid + enough to stand on these + +On line 3398: + its way. I just know + that I’m not getting paid enough + to stand on these tracks."66 + +On line 3400: + way. I just know that + I’m not getting paid enough to + stand on these tracks."66 By + +On line 3400: + that I’m not getting + paid enough to stand on these tracks."66 + By February Park + +On line 3400: + I’m not getting paid + enough to stand on these tracks."66 By + February Park and + +On line 3400: + enough to stand on these + tracks."66 By February Park and + others persuaded + +On line 3400: + stand on these tracks."66 By + February Park and others + persuaded Cassano + +On line 3400: + tracks."66 By February + Park and others persuaded + Cassano and Frost to + +On line 3404: + an email to Cassano + on February Park wrote: Joe, + Below summarizes + +On line 3404: + on February Park + wrote: Joe, Below summarizes + the message we plan + +On line 3404: + February Park wrote: + Joe, Below summarizes the + message we plan on + +On line 3404: + message we plan on + delivering to dealers + later this week with + +On line 3404: + on delivering + to dealers later this week + with regard to our + +On line 3404: + to dealers later + this week with regard to our + approach to the CDO + +On line 3404: + week with regard to + our approach to the CDO of + ABS super senior + +On line 3404: + ABS super senior + business going forward. We + feel that the CDO of + +On line 3404: + that the CDO of ABS + market has increasingly + become less diverse + +On line 3404: + CDO of ABS market + has increasingly become + less diverse over the + +On line 3404: + of ABS market has + increasingly become less + diverse over the last + +On line 3404: + has increasingly + become less diverse over the + last year or so and + +On line 3404: + become less diverse + over the last year or so and + is currently at + +On line 3404: + over the last year or + so and is currently at + a state where deals are + +On line 3404: + last year or so and + is currently at a state + where deals are almost + +On line 3404: + is currently at + a state where deals are almost + totally reliant + +On line 3404: + a state where deals are + almost totally reliant + on subprime/non prime + +On line 3404: + and the potential + for higher rates we are no + longer as comfortable + +On line 3404: + on we would like to + see significant change in + the composition + +On line 3404: + we would like to see + significant change in the + composition of + +On line 3404: + see significant + change in the composition + of these deals going + +On line 3408: + of our ongoing + due diligence we are not as + comfortable with the + +On line 3408: + due diligence we are + not as comfortable with the + mezzanine layers + +On line 3408: + comfortable with the + mezzanine layers (namely + BBB and single A + +On line 3408: + layers (namely BBB + and single A tranches) of + this asset class. We + +On line 3408: + BBB and single A + tranches) of this asset class. + We realize that + +On line 3408: + A tranches) of this + asset class. We realize + that this is likely + +On line 3408: + of this asset class. + We realize that this is + likely to take us + +On line 3408: + class. We realize + that this is likely to take + us out of the CDO + +On line 3408: + We realize that + this is likely to take us + out of the CDO of + +On line 3408: + realize that this + is likely to take us out + of the CDO of ABS + +On line 3408: + that this is likely + to take us out of the CDO + of ABS market for + +On line 3408: + this is likely to + take us out of the CDO of + ABS market for the + +On line 3408: + is likely to take + us out of the CDO of ABS + market for the time + +On line 3408: + take us out of the + CDO of ABS market for the + time being given + +On line 3408: + us out of the CDO + of ABS market for the time + being given the + +On line 3408: + CDO of ABS market + for the time being given + the arbitrage in + +On line 3408: + in developing + the CDO of ABS market to + hopefully become + +On line 3408: + CDO of ABS market + to hopefully become more + diversified from + +On line 3408: + a collateral + perspective. With that in mind, + we will be open to + +On line 3408: + With that in mind, we + will be open to including + new asset classes + +On line 3408: + that in mind, we will + be open to including new + asset classes to + +On line 3408: + asset classes to + these structures or increasing + allocations to + +On line 3408: + to these structures or + increasing allocations + to others such as + +On line 3412: + with indifference. + "The day that you [AIG] drop out, + we’re going to have + +On line 3412: + "The day that you [AIG] + drop out, we’re going to have + other people who + +On line 3412: + out, we’re going to + have other people who are + going to replace + +On line 3412: + have other people + who are going to replace + you," Park says he was + +On line 3412: + other people who + are going to replace you," + Park says he was told + +On line 3412: + going to replace + you," Park says he was told by + an investment banker + +On line 3412: + you," Park says he was + told by an investment banker + at another firm.68 + +On line 3412: + Park says he was told + by an investment banker at + another firm.68 In + +On line 3412: + an investment banker + at another firm.68 In any + event, counterparties + +On line 3412: + investment banker at + another firm.68 In any event, + counterparties had + +On line 3412: + at another firm.68 + In any event, counterparties + had some time to find + +On line 3412: + another firm.68 In + any event, counterparties had + some time to find new + +On line 3412: + Products continued + to write the credit default + swaps. While the bearish + +On line 3412: + to write the credit + default swaps. While the bearish + executives were + +On line 3412: + the issue from the + summer of onward, the team + continued to work + +On line 3412: + from the summer of + onward, the team continued + to work on deals that + +On line 3412: + summer of onward, + the team continued to work + on deals that were in + +On line 3412: + team continued to + work on deals that were in the + pipeline, even after + +On line 3412: + work on deals that were + in the pipeline, even after + February Overall, + +On line 3412: + in the pipeline, even + after February Overall, + they completed deals + +On line 3412: + after February + Overall, they completed deals + between September + +On line 3414: + July 2006—one of them + on a CDO backed by subprime + assets.69 By June AIG + +On line 3414: + of them on a CDO + backed by subprime assets.69 By + June AIG had written + +On line 3414: + them on a CDO backed + by subprime assets.69 By June + AIG had written swaps + +On line 3414: + on a CDO backed by + subprime assets.69 By June AIG + had written swaps on + +On line 3414: + assets.69 By June AIG + had written swaps on billion + in multisector + +On line 3414: + swaps on billion in + multisector CDOs, five times + the billion held at + +On line 3414: + in multisector + CDOs, five times the billion held + at the end of Park + +On line 3414: + the billion held at + the end of Park asserted + that neither he nor + +On line 3414: + billion held at the + end of Park asserted that + neither he nor most + +On line 3414: + held at the end of + Park asserted that neither + he nor most others + +On line 3414: + at the end of Park + asserted that neither he + nor most others at + +On line 3414: + Park asserted that + neither he nor most others + at AIG knew at the + +On line 3414: + that neither he nor + most others at AIG knew at + the time that the swaps + +On line 3414: + at the time that the + swaps entailed collateral + calls on AIG if the + +On line 3414: + of the referenced + securities declined.71 Park + said their concern was + +On line 3414: + declined.71 Park said their + concern was simply that AIG + would be on the hook + +On line 3414: + said their concern was + simply that AIG would be on + the hook if subprime + +On line 3414: + concern was simply + that AIG would be on the hook + if subprime and Alt-A + +On line 3414: + simply that AIG would + be on the hook if subprime + and Alt-A borrowers + +On line 3414: + be on the hook if + subprime and Alt-A borrowers + defaulted in large + +On line 3414: + if subprime and Alt-A + borrowers defaulted in + large numbers. Cassano, + +On line 3414: + and Alt-A borrowers + defaulted in large numbers. + Cassano, however, + +On line 3414: + defaulted in large + numbers. Cassano, however, + told the FCIC that he + +On line 3414: + large numbers. Cassano, + however, told the FCIC that + he did know about the + +On line 3414: + Cassano, however, + told the FCIC that he did know + about the possible + +On line 3414: + however, told the + FCIC that he did know about the + possible alls,72 but + +On line 3414: + the FCIC that he did + know about the possible alls,72 + but AIG’s SEC filings + +On line 3414: + FCIC that he did know + about the possible alls,72 but + AIG’s SEC filings to + +On line 3414: + he did know about the + possible alls,72 but AIG’s SEC + filings to investors + +On line 3414: + about the possible + alls,72 but AIG’s SEC filings to + investors for mentioned + +On line 3414: + possible alls,72 but + AIG’s SEC filings to investors + for mentioned the risk + +On line 3414: + AIG’s SEC filings to + investors for mentioned the risk + of collateral + +On line 3414: + investors for mentioned + the risk of collateral + calls only if AIG + +On line 3416: + only if AIG were + downgraded. Still, AIG never + hedged more than million + +On line 3416: + AIG never hedged more + than million of its total + subprime exposure.73 + +On line 3418: + subprime exposure.73 + Some of AIG’s counterparties + not only used AIG’s + +On line 3418: + counterparties not + only used AIG’s swaps to hedge + other positions + +On line 3418: + only used AIG’s swaps + to hedge other positions + but also hedged AIG’s + +On line 3418: + swaps to hedge other + positions but also hedged + AIG’s ability to + +On line 3418: + but also hedged AIG’s + ability to make good on + its contracts. As we + +On line 3418: + AIG’s ability to + make good on its contracts. As + we will see later, + +On line 3418: + its contracts. As we + will see later, Goldman Sachs + hedged aggressively + +On line 3418: + contracts. As we will + see later, Goldman Sachs hedged + aggressively by + +On line 3418: + aggressively by + buying CDS protection on + AIG and by shorting + +On line 3418: + CDS protection on + AIG and by shorting other + securities and + +On line 3418: + and indexes to + counterbalance the risk that + AIG would fail to pay + +On line 3418: + to counterbalance + the risk that AIG would fail to + pay up on its swaps + +On line 3418: + counterbalance the + risk that AIG would fail to pay + up on its swaps or + +On line 3418: + risk that AIG would fail + to pay up on its swaps or + that a collapsing + +On line 3418: + AIG would fail to pay + up on its swaps or that a + collapsing subprime + +On line 3418: + to pay up on its + swaps or that a collapsing + subprime market would + +On line 3418: + up on its swaps or + that a collapsing subprime + market would pull down + +On line 3420: + pull down the value + of mortgage-backed securities. + MERRILL: "WHATEVER + +On line 3422: + When Dow Kim became + co-president of Merrill Lynch’s + Global Markets and + +On line 3422: + Lynch’s Global Markets + and Investment Banking Group + in July he was + +On line 3422: + in July he was + instructed to boost revenue, + especially in + +On line 3422: + was instructed to + boost revenue, especially + in businesses in + +On line 3422: + instructed to boost + revenue, especially in + businesses in which + +On line 3422: + in which Merrill lagged + behind its competitors.74 Kim + focused on the CDO + +On line 3422: + Merrill lagged behind + its competitors.74 Kim focused + on the CDO business; + +On line 3422: + its competitors.74 Kim + focused on the CDO business; + clients saw CDOs as an + +On line 3422: + Kim focused on the + CDO business; clients saw CDOs as + an integral part + +On line 3422: + focused on the CDO + business; clients saw CDOs as an + integral part of + +On line 3422: + the CDO business; clients + saw CDOs as an integral + part of their trading + +On line 3424: + an integral part + of their trading strategy, + CEO Stanley O’Neal told + +On line 3424: + integral part of + their trading strategy, CEO + Stanley O’Neal told the + +On line 3424: + part of their trading + strategy, CEO Stanley O’Neal + told the FCIC.75 Kim hired + +On line 3424: + O’Neal told the FCIC.75 Kim + hired Chris Ricciardi from + Credit Suisse, where + +On line 3424: + from Credit Suisse, + where Ricciardi’s group had sold + more CDOs than anyone + +On line 3424: + Credit Suisse, where + Ricciardi’s group had sold more + CDOs than anyone else.76 + +On line 3426: + where Ricciardi’s group + had sold more CDOs than anyone + else.76 Ricciardi + +On line 3426: + Ricciardi’s group had + sold more CDOs than anyone else.76 + Ricciardi came + +On line 3426: + more CDOs than anyone + else.76 Ricciardi came through, + lifting Merrill’s CDO + +On line 3426: + else.76 Ricciardi + came through, lifting Merrill’s CDO + business from fifteenth + +On line 3428: + through, lifting Merrill’s + CDO business from fifteenth place + in to second place + +On line 3428: + fifteenth place in to + second place behind only + Citigroup in and + +On line 3428: + in to second place + behind only Citigroup + in and Goldman in + +On line 3428: + second place behind + only Citigroup in and + Goldman in Then, in + +On line 3428: + only Citigroup + in and Goldman in Then, in + February he left + +On line 3428: + in and Goldman in + Then, in February he left + the bank to become + +On line 3428: + and Goldman in Then, + in February he left the + bank to become CEO + +On line 3428: + Goldman in Then, in + February he left the bank + to become CEO of + +On line 3428: + February he left + the bank to become CEO of + Cohen Company, + +On line 3428: + bank to become CEO + of Cohen Company, an + asset management + +On line 3428: + asset management + business; at Cohen he would + manage several + +On line 3430: + left, Kim instructed + the rest of the team to do + "whatever it takes" + +On line 3430: + the rest of the team + to do "whatever it takes" + not just to maintain + +On line 3430: + of the team to do + "whatever it takes" not just + to maintain market + +On line 3430: + "whatever it takes" + not just to maintain market + share but also to + +On line 3430: + not just to maintain + market share but also to + take over the number + +On line 3430: + maintain market share + but also to take over the + number one ranking, + +On line 3430: + but also to take + over the number one ranking, + former employees + +On line 3430: + over the number one + ranking, former employees + said in a complaint + +On line 3430: + number one ranking, + former employees said in + a complaint filed against + +On line 3430: + former employees + said in a complaint filed against + Merrill Lynch.78 Kim told + +On line 3430: + employees said in + a complaint filed against Merrill + Lynch.78 Kim told FCIC staff + +On line 3430: + in a complaint filed + against Merrill Lynch.78 Kim told FCIC + staff that he couldn’t + +On line 3430: + against Merrill Lynch.78 Kim + told FCIC staff that he couldn’t + recall specific + +On line 3430: + told FCIC staff that he + couldn’t recall specific + conversations but + +On line 3430: + conversations but + that after Ricciardi + left, Merrill was still + +On line 3430: + left, Merrill was still + trying to expand the CDO + business globally + +On line 3430: + globally and that + he, Kim, wanted people to + know that Merrill was + +On line 3430: + to know that Merrill + was willing to commit its + people, resources, and + +On line 3432: + commit its people, + resources, and balance sheet to + achieve that goal.79 It was + +On line 3432: + its people, resources, + and balance sheet to achieve that + goal.79 It was indeed + +On line 3432: + and balance sheet to + achieve that goal.79 It was indeed + willing. Despite the + +On line 3432: + Despite the loss of + its rainmaker, Merrill swamped + the competition, + +On line 3432: + a total billion + in mortgage-related CDOs in + while the second-ranked firm, + +On line 3432: + in mortgage-related + CDOs in while the second-ranked firm, + Morgan Stanley, did + +On line 3432: + while the second-ranked firm, + Morgan Stanley, did only + billion, and earning + +On line 3432: + Morgan Stanley, did + only billion, and earning + another first-place + +On line 3432: + only billion, and + earning another first-place + ranking in on the + +On line 3432: + billion, and earning + another first-place ranking + in on the strength of + +On line 3432: + on the strength of the + CDO machine Ricciardi + had built—a machine + +On line 3432: + the strength of the CDO + machine Ricciardi had + built—a machine that + +On line 3432: + of the CDO machine + Ricciardi had built—a + machine that brought in + +On line 3432: + Ricciardi had + built—a machine that brought in + more than billion in + +On line 3432: + had built—a machine + that brought in more than billion + in fees between and + +On line 3436: + built—a machine that + brought in more than billion in + fees between and To + +On line 3436: + more than billion in + fees between and To keep its + CDO business going, + +On line 3436: + fees between and To + keep its CDO business going, + Merrill pursued three + +On line 3436: + keep its CDO business + going, Merrill pursued three + strategies, all of which + +On line 3436: + CDO business going, + Merrill pursued three strategies, + all of which involved + +On line 3436: + Merrill pursued three + strategies, all of which involved + repackaging riskier + +On line 3436: + all of which involved + repackaging riskier mortgages + more attractively + +On line 3436: + repackaging riskier + mortgages more attractively + or buying its own + +On line 3436: + riskier mortgages more + attractively or buying + its own products when + +On line 3436: + more attractively + or buying its own products + when no one else would. + +On line 3436: + attractively or + buying its own products when + no one else would. Like + +On line 3436: + Citigroup, Merrill + increasingly retained for + its own portfolio + +On line 3436: + creating, mainly + the super-senior tranches, and + it increasingly + +On line 3436: + the hard-to-sell BBB-rated and + other low-rated tranches of + its CDOs into its + +On line 3436: + and other low-rated + tranches of its CDOs into + its other CDOs; it + +On line 3436: + low-rated tranches of + its CDOs into its other + CDOs; it used the cash + +On line 3436: + tranches of its CDOs + into its other CDOs; it + used the cash sitting + +On line 3436: + of its CDOs into + its other CDOs; it used the + cash sitting in its + +On line 3436: + into its other + CDOs; it used the cash sitting + in its synthetic + +On line 3436: + its other CDOs; it + used the cash sitting in its + synthetic CDOs to + +On line 3436: + used the cash sitting + in its synthetic CDOs to + purchase other CDO + +On line 3436: + cash sitting in its + synthetic CDOs to purchase + other CDO tranches. + +On line 3440: + in its synthetic + CDOs to purchase other CDO + tranches. It had long + +On line 3440: + to purchase other + CDO tranches. It had long been + standard practice for + +On line 3440: + CDO tranches. It had + long been standard practice for + CDO underwriters + +On line 3440: + tranches. It had long + been standard practice for CDO + underwriters to + +On line 3440: + been standard practice + for CDO underwriters to + sell some mezzanine + +On line 3440: + mezzanine tranches + to other CDO managers. Even + in the early days + +On line 3440: + other CDO managers. + Even in the early days of + ABS CDOs, these assets + +On line 3440: + CDO managers. Even in + the early days of ABS CDOs, + these assets often + +On line 3440: + Even in the early + days of ABS CDOs, these assets + often contained a + +On line 3440: + days of ABS CDOs, these + assets often contained a + small percentage of + +On line 3440: + mezzanine tranches + of other CDOs; the rating + agencies signed off on + +On line 3440: + tranches of other + CDOs; the rating agencies signed + off on this practice + +On line 3440: + the rating agencies + signed off on this practice when + rating each deal. But + +On line 3440: + agencies signed off on + this practice when rating each + deal. But reliance on + +On line 3440: + practice when rating + each deal. But reliance on them + became heavier as + +On line 3440: + as the demand from + traditional investors waned, + as it had for the + +On line 3440: + from traditional + investors waned, as it had for + the riskier tranches + +On line 3440: + as it had for the + riskier tranches of mortgage-backed + securities. The + +On line 3440: + the riskier tranches + of mortgage-backed securities. + The market came to + +On line 3440: + riskier tranches of + mortgage-backed securities. The + market came to call + +On line 3440: + The market came to + call traditional investors + the "real money," + +On line 3440: + market came to call + traditional investors the + "real money," to + +On line 3440: + call traditional + investors the "real money," + to distinguish them + +On line 3440: + investors the "real + money," to distinguish them + from CDO managers who + +On line 3440: + distinguish them from + CDO managers who were buying + tranches just to put + +On line 3440: + them from CDO managers + who were buying tranches just + to put them into + +On line 3440: + from CDO managers who + were buying tranches just to + put them into their + +On line 3440: + CDO managers who were + buying tranches just to put + them into their CDOs. + +On line 3440: + were buying tranches + just to put them into their + CDOs. Between and the + +On line 3440: + tranches just to put + them into their CDOs. Between + and the typical + +On line 3442: + their CDOs. Between and + the typical amount a CDO + could include of the + +On line 3442: + the typical amount + a CDO could include of the + tranches of other + +On line 3442: + a CDO could include + of the tranches of other + CDOs and still maintain + +On line 3442: + CDO could include of + the tranches of other CDOs + and still maintain its + +On line 3442: + of the tranches of + other CDOs and still maintain + its ratings grew from + +On line 3444: + of other CDOs and + still maintain its ratings grew + from to according + +On line 3444: + other CDOs and still + maintain its ratings grew from + to according to + +On line 3444: + maintain its ratings + grew from to according to + the CDO manager + +On line 3444: + its ratings grew from + to according to the CDO + manager Wing Chau.82 + +On line 3444: + from to according + to the CDO manager Wing + Chau.82 According to + +On line 3444: + CDO manager Wing + Chau.82 According to data + compiled by the FCIC, + +On line 3444: + Wing Chau.82 According + to data compiled by the + FCIC, tranches from CDOs + +On line 3444: + Chau.82 According to + data compiled by the FCIC, + tranches from CDOs rose + +On line 3444: + data compiled by + the FCIC, tranches from CDOs rose + from an average + +On line 3444: + compiled by the FCIC, + tranches from CDOs rose from an + average of of + +On line 3444: + tranches from CDOs rose + from an average of of + the collateral + +On line 3444: + from an average + of of the collateral + in mortgage-backed CDOs in + +On line 3444: + an average of + of the collateral in + mortgage-backed CDOs in to + +On line 3444: + collateral in + mortgage-backed CDOs in to by CDO-squared + deals—those engineered + +On line 3444: + mortgage-backed CDOs in to + by CDO-squared deals—those engineered + primarily from + +On line 3444: + to by CDO-squared deals—those + engineered primarily + from the tranches of + +On line 3446: + primarily from + the tranches of other CDOs—grew + from marketwide in to + +On line 3446: + of other CDOs—grew from + marketwide in to in and in + Merrill created + +On line 3448: + marketwide in to in + and in Merrill created + and sold of them.83 Still, + +On line 3448: + in to in and in + Merrill created and sold + of them.83 Still, there are + +On line 3448: + in and in Merrill + created and sold of them.83 + Still, there are clear signs + +On line 3448: + them.83 Still, there are clear + signs that few "real money" + investors remained in + +On line 3448: + there are clear signs that + few "real money" investors + remained in the CDO + +On line 3450: + signs that few "real + money" investors remained in + the CDO market by + +On line 3450: + remained in the CDO + market by late Consider + Merrill: for the ABS + +On line 3450: + in the CDO market + by late Consider Merrill: + for the ABS CDOs that + +On line 3450: + CDO market by late + Consider Merrill: for the + ABS CDOs that Merrill + +On line 3450: + by late Consider + Merrill: for the ABS CDOs that + Merrill created + +On line 3450: + Consider Merrill: + for the ABS CDOs that Merrill + created and sold + +On line 3450: + Merrill: for the ABS + CDOs that Merrill created + and sold from the fourth + +On line 3450: + for the ABS CDOs that + Merrill created and sold + from the fourth quarter + +On line 3450: + ABS CDOs that Merrill + created and sold from the + fourth quarter of through + +On line 3450: + created and sold + from the fourth quarter of through + August nearly of + +On line 3450: + the fourth quarter of + through August nearly of the + mezzanine tranches + +On line 3450: + through August nearly + of the mezzanine tranches + were purchased by CDO + +On line 3450: + of the mezzanine + tranches were purchased by CDO + managers.84 The pattern + +On line 3450: + tranches were purchased + by CDO managers.84 The pattern + was similar for + +On line 3452: + determined that of + the mezzanine tranches sold + by the CDOs managed + +On line 3452: + the CDOs managed by + Chau were sold for inclusion + into other CDOs.85 + +On line 3452: + purchased tranches in + Merrill’s Norma CDO. In the + most extreme case found + +On line 3452: + in Merrill’s Norma + CDO. In the most extreme case + found by the FCIC, CDO + +On line 3452: + Norma CDO. In the + most extreme case found by the + FCIC, CDO managers were + +On line 3452: + most extreme case found + by the FCIC, CDO managers were + the only purchasers + +On line 3452: + extreme case found by + the FCIC, CDO managers were the + only purchasers of + +On line 3452: + case found by the FCIC, + CDO managers were the only + purchasers of Merrill’s + +On line 3454: + CDO managers were the + only purchasers of Merrill’s + Neo CDO.86 Marketwide, in + +On line 3454: + the only purchasers + of Merrill’s Neo CDO.86 Marketwide, + in CDOs took in about + +On line 3454: + only purchasers of + Merrill’s Neo CDO.86 Marketwide, in + CDOs took in about of + +On line 3454: + purchasers of Merrill’s + Neo CDO.86 Marketwide, in CDOs took + in about of the A + +On line 3454: + of Merrill’s Neo CDO.86 + Marketwide, in CDOs took in about + of the A tranches, + +On line 3454: + Neo CDO.86 Marketwide, in + CDOs took in about of the A + tranches, of the Aa + +On line 3454: + Marketwide, in CDOs took + in about of the A tranches, + of the Aa tranches, + +On line 3454: + in CDOs took in about + of the A tranches, of the + Aa tranches, and of + +On line 3454: + CDOs took in about of + the A tranches, of the Aa + tranches, and of the + +On line 3454: + the A tranches, of + the Aa tranches, and of the + Baa tranches issued + +On line 3454: + A tranches, of the + Aa tranches, and of the Baa + tranches issued by + +On line 3454: + the Aa tranches, and + of the Baa tranches issued + by other CDOs, as + +On line 3456: + of the Baa tranches + issued by other CDOs, as + rated by Moody’s. (Moody’s + +On line 3456: + Baa tranches issued + by other CDOs, as rated + by Moody’s. (Moody’s rating + +On line 3456: + tranches issued by + other CDOs, as rated by + Moody’s. (Moody’s rating of + +On line 3456: + issued by other + CDOs, as rated by Moody’s. (Moody’s + rating of Aaa is + +On line 3456: + CDOs, as rated by + Moody’s. (Moody’s rating of Aaa is + equivalent to S&P’s + +On line 3456: + by Moody’s. (Moody’s rating + of Aaa is equivalent to + S&P’s AAA, Aa to AA, + +On line 3456: + Moody’s. (Moody’s rating of + Aaa is equivalent to S&P’s + AAA, Aa to AA, Baa + +On line 3456: + (Moody’s rating of Aaa + is equivalent to S&P’s AAA, + Aa to AA, Baa to + +On line 3456: + rating of Aaa is + equivalent to S&P’s AAA, Aa + to AA, Baa to BBB, + +On line 3456: + Aaa is equivalent + to S&P’s AAA, Aa to AA, Baa + to BBB, and Ba to + +On line 3456: + is equivalent to + S&P’s AAA, Aa to AA, Baa to + BBB, and Ba to BB). + +On line 3456: + equivalent to S&P’s + AAA, Aa to AA, Baa to BBB, + and Ba to BB). In + +On line 3456: + to S&P’s AAA, Aa to + AA, Baa to BBB, and Ba to + BB). In those numbers + +On line 3456: + S&P’s AAA, Aa to AA, + Baa to BBB, and Ba to BB). + In those numbers were + +On line 3456: + AAA, Aa to AA, Baa + to BBB, and Ba to BB). In + those numbers were and + +On line 3456: + Baa to BBB, and Ba + to BB). In those numbers were + and respectively.87 + +On line 3456: + those numbers were and + respectively.87 Merrill and + other investment + +On line 3458: + buy the harder-to-sell + portions of the old ones. As + SEC attorneys told + +On line 3458: + of the old ones. As + SEC attorneys told the FCIC, + heading into there + +On line 3458: + attorneys told the + FCIC, heading into there was + a Streetwide gentle-man’s + +On line 3458: + FCIC, heading into + there was a Streetwide gentle-man’s + agreement: you buy my + +On line 3458: + into there was a + Streetwide gentle-man’s agreement: you + buy my BBB tranche and + +On line 3460: + gentle-man’s agreement: + you buy my BBB tranche and I’ll + buy yours.88 Merrill and + +On line 3460: + you buy my BBB tranche + and I’ll buy yours.88 Merrill and + its CDO managers were + +On line 3460: + buy my BBB tranche and + I’ll buy yours.88 Merrill and its + CDO managers were the + +On line 3460: + I’ll buy yours.88 Merrill + and its CDO managers were the + biggest buyers of + +On line 3460: + yours.88 Merrill and its + CDO managers were the biggest + buyers of their own + +On line 3462: + its CDO managers were + the biggest buyers of their + own products. Merrill + +On line 3462: + the biggest buyers + of their own products. Merrill + created and sold + +On line 3462: + buyers of their own + products. Merrill created + and sold CDOs from to + +On line 3462: + of their own products. + Merrill created and sold + CDOs from to All but + +On line 3462: + own products. Merrill + created and sold CDOs from + to All but of these—134 + +On line 3464: + Merrill created + and sold CDOs from to All but + of these—134 CDOs—sold at least + +On line 3464: + created and sold + CDOs from to All but of these—134 + CDOs—sold at least one tranche + +On line 3464: + CDOs from to All but + of these—134 CDOs—sold at least one tranche + into another + +On line 3464: + to All but of these—134 + CDOs—sold at least one tranche into + another Merrill + +On line 3464: + CDOs—sold at least one tranche + into another Merrill + CDO. In Merrill’s deals, + +On line 3464: + into another + Merrill CDO. In Merrill’s deals, + on average, of + +On line 3464: + average, of the + collateral packed into + the CDOs consisted + +On line 3464: + the CDOs consisted + of tranches of other CDOs + that Merrill itself + +On line 3464: + CDOs consisted of + tranches of other CDOs that + Merrill itself had + +On line 3464: + tranches of other + CDOs that Merrill itself had + created and sold. + +On line 3464: + Merrill itself had + created and sold. This was + a relatively + +On line 3464: + created and sold. + This was a relatively + high percentage, but + +On line 3464: + but not the highest: + for Citigroup, another + big player in this + +On line 3468: + Managers defended + the practice. Chau, who managed + CDOs created and + +On line 3468: + the practice. Chau, who + managed CDOs created and + sold by Merrill at + +On line 3468: + created and sold + by Merrill at Maxim Group + and later Harding + +On line 3468: + and later Harding + Advisory and had worked + with Ricciardi + +On line 3468: + Ricciardi at + Prudential Securities + in the early days + +On line 3468: + the early days of + multisector CDOs, told the + FCIC that plain mortgage-backed + +On line 3468: + multisector CDOs, + told the FCIC that plain mortgage-backed + securities had + +On line 3468: + told the FCIC that plain + mortgage-backed securities had + become expensive + +On line 3468: + relation to their + returns, even as the real + estate market sagged. + +On line 3468: + their returns, even as + the real estate market + sagged. Because CDOs paid + +On line 3468: + the real estate + market sagged. Because CDOs paid + better returns than + +On line 3468: + market sagged. Because + CDOs paid better returns than + did imilarly + +On line 3468: + securities, they + were in demand, and that is + why CDO managers packed + +On line 3468: + were in demand, and + that is why CDO managers packed + their securities + +On line 3468: + in demand, and that + is why CDO managers packed their + securities with + +On line 3470: + their securities + with other CDOs.90 And Merrill + continued to push + +On line 3470: + CDO business despite + signals that the market was + weakening. As late + +On line 3470: + despite signals that + the market was weakening. + As late as the spring + +On line 3470: + that the market was + weakening. As late as the + spring of when AIG stopped + +On line 3470: + was weakening. As + late as the spring of when AIG + stopped insuring even + +On line 3470: + weakening. As late + as the spring of when AIG stopped + insuring even the + +On line 3470: + as the spring of when + AIG stopped insuring even the + very safest, super-senior + +On line 3470: + the spring of when AIG + stopped insuring even the very + safest, super-senior CDO + +On line 3470: + stopped insuring even + the very safest, super-senior CDO + tranches for Merrill + +On line 3470: + very safest, super-senior + CDO tranches for Merrill and + others, it did not + +On line 3470: + Merrill and others, + it did not reconsider + its strategy. Cut + +On line 3470: + not reconsider + its strategy. Cut off from + AIG, which had already + +On line 3470: + its strategy. Cut + off from AIG, which had already + insured billion of + +On line 3472: + Cut off from AIG, which + had already insured billion + of its CDO bonds91—Merrill was + +On line 3472: + off from AIG, which had + already insured billion of + its CDO bonds91—Merrill was AIG’s + +On line 3472: + its CDO bonds91—Merrill was AIG’s + third-largest counterparty, after + Goldman and Société + +On line 3472: + switched to the monoline + insurance companies for + protection. In the + +On line 3472: + monoline insurance + companies for protection. + In the summer of + +On line 3472: + In the summer of + Merrill management noticed + that Citigroup, its + +On line 3472: + Merrill management + noticed that Citigroup, its + biggest competitor + +On line 3472: + of CDOs onto its + own balance sheet at razor-thin + margins, and thus in + +On line 3472: + and thus in effect + subsidizing returns for + investors in the BBB-rated + +On line 3472: + returns for investors + in the BBB-rated and equity + tranches. In response, + +On line 3472: + for investors in the + BBB-rated and equity tranches. + In response, Merrill + +On line 3472: + BBB-rated and equity + tranches. In response, Merrill + continued to ramp + +On line 3472: + In response, Merrill + continued to ramp up its + CDO warehouses and + +On line 3472: + continued to ramp + up its CDO warehouses and + inventory; and + +On line 3472: + CDO warehouses and + inventory; and in an + effort to compete + +On line 3472: + inventory; and + in an effort to compete + and get deals done, it + +On line 3472: + and in an effort + to compete and get deals done, + it increasingly + +On line 3472: + in an effort to + compete and get deals done, it + increasingly took + +On line 3472: + to compete and get + deals done, it increasingly + took on super-senior + +On line 3472: + increasingly took + on super-senior positions + without insurance + +On line 3474: + positions without + insurance from AIG or the + monolines.92 This would not + +On line 3474: + without insurance + from AIG or the monolines.92 This + would not be the end + +On line 3474: + the monolines.92 This would + not be the end of Merrill’s + all-in wager on + +On line 3474: + would not be the end + of Merrill’s all-in wager + on the mortgage and + +On line 3474: + not be the end of + Merrill’s all-in wager on + the mortgage and CDO + +On line 3476: + of Merrill’s all-in + wager on the mortgage and + CDO businesses. Even + +On line 3476: + on the mortgage and + CDO businesses. Even though it + did grab the first-place + +On line 3476: + Even though it did grab + the first-place trophy in the + mortgage-related CDO + +On line 3476: + the first-place trophy + in the mortgage-related CDO + business in it had + +On line 3476: + mortgage-related CDO + business in it had come late + to the "vertical + +On line 3476: + had come late to the + "vertical integration" + mortgage model that + +On line 3476: + that Lehman Brothers and + Bear Stearns had pioneered, which + required having a + +On line 3476: + Brothers and Bear Stearns + had pioneered, which required + having a stake in + +On line 3476: + Stearns had pioneered, + which required having a stake + in every step of + +On line 3476: + had pioneered, which + required having a stake in + every step of the + +On line 3476: + step of the mortgage + business—originating + mortgages, bundling these loans + +On line 3476: + mortgages, bundling these loans + into securities, bundling + these securities + +On line 3476: + securities, and + selling all of them on Wall + Street. In September + +On line 3476: + of them on Wall Street. + In September months after + the housing bubble + +On line 3476: + them on Wall Street. In + September months after the + housing bubble had + +On line 3476: + bubble had started + to deflate and delinquencies + had begun to rise, + +On line 3476: + Merrill announced it + would acquire a subprime lender, + First Franklin Financial + +On line 3476: + acquire a subprime + lender, First Franklin Financial Corp., + from National City + +On line 3476: + First Franklin Financial + Corp., from National City Corp. + for billion. As a + +On line 3476: + analysts because + the market for subprime loans + was souring in a + +On line 3476: + because the market + for subprime loans was souring + in a hurry."93 And + +On line 3476: + for subprime loans was + souring in a hurry."93 And + Merrill already had + +On line 3476: + Mortgage Solutions + Inc., for which it provided + a warehouse line of + +On line 3476: + it provided a + warehouse line of credit; it + also provided + +On line 3476: + provided a line + of credit to Mortgage Lenders + Network.94 Both of those + +On line 3476: + a line of credit + to Mortgage Lenders Network.94 Both + of those companies + +On line 3476: + line of credit to + Mortgage Lenders Network.94 Both of + those companies would + +On line 3476: + Mortgage Lenders Network.94 + Both of those companies would + cease operations + +On line 3476: + of those companies + would cease operations soon + after the First Franklin + +On line 3476: + companies would cease + operations soon after + the First Franklin purchase.95 + +On line 3478: + operations soon + after the First Franklin purchase.95 + Nor did Merrill cut + +On line 3478: + after the First Franklin + purchase.95 Nor did Merrill cut + back in September + +On line 3478: + the First Franklin purchase.95 + Nor did Merrill cut back in + September when one + +On line 3478: + did Merrill cut back + in September when one of + its own analysts + +On line 3478: + in September when + one of its own analysts + issued a report + +On line 3478: + analysts issued + a report warning that this + subprime exposure + +On line 3478: + report warning that + this subprime exposure could + lead to a sudden + +On line 3478: + subprime exposure + could lead to a sudden cut + in earnings, because + +On line 3478: + a sudden cut in + earnings, because demand for + these mortgages assets + +On line 3478: + assets could dry up + quickly.96 That assessment was + not in line with the + +On line 3478: + dry up quickly.96 That + assessment was not in line + with the corporate + +On line 3478: + not in line with the + corporate strategy, and + Merrill did nothing. + +On line 3478: + with the corporate + strategy, and Merrill did + nothing. Finally, + +On line 3478: + Merrill did nothing. + Finally, at the end of + Kim instructed his + +On line 3478: + Finally, at the + end of Kim instructed his + people to reduce + +On line 3478: + at the end of Kim + instructed his people to + reduce credit risk + +On line 3478: + Kim instructed his + people to reduce credit + risk across the board.97 As + +On line 3478: + people to reduce + credit risk across the board.97 As + it would turn out, they + +On line 3478: + to reduce credit + risk across the board.97 As it would + turn out, they were too + +On line 3478: + reduce credit risk + across the board.97 As it would turn + out, they were too late. + +On line 3478: + risk across the board.97 As + it would turn out, they were too + late. The pipeline was + +On line 3478: + across the board.97 As it + would turn out, they were too late. + The pipeline was too + +On line 3478: + the board.97 As it would + turn out, they were too late. The + pipeline was too large. + +On line 3480: + would turn out, they were + too late. The pipeline was too + large. REGULATORS: + +On line 3480: + turn out, they were too + late. The pipeline was too large. + REGULATORS: "ARE + +On line 3482: + pipeline was too large. + REGULATORS: "ARE UNDUE + CONCENTRATIONS OF + +On line 3482: + REGULATORS: "ARE + UNDUE CONCENTRATIONS OF + RISK DEVELOPING1 + +On line 3484: + CONCENTRATIONS OF + RISK DEVELOPING1 As had + happened when they faced + +On line 3484: + DEVELOPING1 As + had happened when they faced the + question of guidance + +On line 3484: + happened when they faced + the question of guidance on + nontraditional + +On line 3484: + the rapidly changing + structured finance market the + regulators failed + +On line 3484: + finance market the + regulators failed to take + timely action. They + +On line 3484: + the regulators + failed to take timely action. + They missed a crucial + +On line 3484: + failed to take timely + action. They missed a crucial + opportunity. + +On line 3484: + action. They missed a + crucial opportunity. + On January one + +On line 3484: + one year after the + collapse of Enron, the U.S. + Senate Permanent + +On line 3484: + collapse of Enron, + the U.S. Senate Permanent + Subcommittee on + +On line 3484: + Subcommittee on + Investigations called on + the Fed, OCC, and SEC + +On line 3484: + immediately + initiate a one-time, joint + review of banks and + +On line 3484: + U.S. company’s use + of deceptive accounting + in its financial + +On line 3484: + The subcommittee + recommended the agencies + issue joint guidance + +On line 3484: + recommended the + agencies issue joint guidance + on "acceptable and + +On line 3484: + the agencies issue + joint guidance on "acceptable + and unacceptable + +On line 3484: + products, transactions + and practices" by June Four years + later, the banking + +On line 3484: + and practices" by June + Four years later, the banking + agencies and the SEC + +On line 3484: + Risk Complex Structured + Finance Activities," a + document that was + +On line 3486: + Activities," a + document that was all of + nine pages long.99 In the + +On line 3486: + a document that + was all of nine pages long.99 In + the intervening + +On line 3486: + document that was + all of nine pages long.99 In the + intervening years, + +On line 3486: + all of nine pages long.99 + In the intervening years, + from to the banking + +On line 3486: + nine pages long.99 In the + intervening years, from to + the banking agencies + +On line 3486: + intervening years, + from to the banking agencies + and SEC issued two + +On line 3486: + banking agencies and + SEC issued two draft statements + for public comment. + +On line 3486: + SEC issued two draft + statements for public comment. + The draft, issued the + +On line 3486: + statements for public + comment. The draft, issued the + year after the OCC, + +On line 3486: + public comment. The + draft, issued the year after + the OCC, Fed, and SEC + +On line 3486: + draft, issued the year + after the OCC, Fed, and SEC + had brought enforcement + +On line 3486: + the OCC, Fed, and SEC + had brought enforcement actions + against Citigroup and + +On line 3486: + OCC, Fed, and SEC had + brought enforcement actions against + Citigroup and JP + +On line 3486: + Citigroup and JP + Morgan for helping Enron + to manipulate + +On line 3486: + manipulate its + financial statements, focused + on the policies and + +On line 3486: + on the policies and + procedures that financial + institutions should + +On line 3486: + have for managing + the structured finance business.100 + The aim was to avoid + +On line 3486: + finance business.100 The + aim was to avoid another + Enron—and for that + +On line 3486: + institutions to + look out for customers that, like + Enron, were trying + +On line 3486: + for customers that, like + Enron, were trying to use + structured transactions + +On line 3486: + regulatory + or financial reporting + requirements, evade tax + +On line 3488: + guidance as too broad, + prescriptive, and burdensome. + Several said it + +On line 3488: + too broad, prescriptive, + and burdensome. Several + said it would cover + +On line 3488: + broad, prescriptive, and + burdensome. Several said + it would cover many + +On line 3488: + cover many structured + finance products that did not + pose significant + +On line 3488: + Another said that + it "would disrupt the market + for legitimate + +On line 3488: + disrupt the market + for legitimate structured + finance products and + +On line 3488: + for legitimate + structured finance products and + place U.S. financial + +On line 3488: + market for [complex + structured finance transactions] + in the United States + +On line 3488: + for [complex structured + finance transactions] in the + United States and abroad."101 + +On line 3490: + finance transactions] + in the United States and abroad."101 + Two years later, in + +On line 3490: + transactions] in the + United States and abroad."101 Two years + later, in May the + +On line 3490: + the United States and + abroad."101 Two years later, in May + the agencies issued + +On line 3490: + United States and abroad."101 + Two years later, in May the + agencies issued an + +On line 3490: + Two years later, in + May the agencies issued an + abbreviated + +On line 3490: + the agencies issued + an abbreviated draft + that reflected a + +On line 3490: + agencies issued an + abbreviated draft that + reflected a more + +On line 3490: + abbreviated + draft that reflected a more + "principles-based" approach, + +On line 3490: + draft that reflected + a more "principles-based" approach, + and again requested + +On line 3490: + reflected a more + "principles-based" approach, and again + requested comments. + +On line 3490: + a more "principles-based" + approach, and again requested + comments. Most of the + +On line 3490: + requested comments. + Most of the requirements were + very similar to + +On line 3490: + of the requirements + were very similar to those + that the OCC and Fed + +On line 3490: + the requirements were + very similar to those that + the OCC and Fed had + +On line 3490: + that the OCC and Fed + had imposed on Citigroup + and JP Morgan in + +On line 3490: + the OCC and Fed had + imposed on Citigroup and + JP Morgan in the + +On line 3490: + Fed had imposed on + Citigroup and JP Morgan + in the enforcement + +On line 3492: + and JP Morgan in + the enforcement actions.102 When + the regulators + +On line 3492: + the regulators + issued the final guidance + in January the + +On line 3492: + issued the final + guidance in January the + industry was more + +On line 3492: + final guidance in + January the industry + was more supportive. + +On line 3492: + was more supportive. + One reason was that mortgage-backed + securities and + +On line 3494: + to participants + in the financial markets, + have well-established track records, + +On line 3494: + participants in + the financial markets, have + well-established track records, and + +On line 3494: + in the financial + markets, have well-established track records, + and typically + +On line 3494: + well-established track records, and + typically would not be + considered [complex + +On line 3494: + considered [complex + structured finance transactions] + for purposes of + +On line 3494: + had been added after + the regulators received + comments on the draft. + +On line 3496: + the regulators + received comments on the draft. + Regulators did + +On line 3496: + comments on the draft. + Regulators did take note + of the potential + +On line 3496: + did take note of the + potential risks of CDOs and + credit default swaps. + +On line 3498: + default swaps. In the + Basel Committee on Banking + Supervision’s Joint + +On line 3498: + Basel Committee on + Banking Supervision’s Joint + Forum, which includes + +On line 3498: + Supervision’s Joint + Forum, which includes banking, + securities, and + +On line 3498: + around the world, issued + a comprehensive report + on these products. The + +On line 3498: + a comprehensive + report on these products. The + report focused on + +On line 3498: + The report focused + on whether banks and other firms + involved in the CDO + +On line 3498: + focused on whether banks + and other firms involved in + the CDO and credit + +On line 3498: + whether banks and other + firms involved in the CDO and + credit default swap + +On line 3498: + firms involved in the + CDO and credit default swap + business understood + +On line 3498: + and credit default + swap business understood the + credit isk they were + +On line 3498: + default swap business + understood the credit isk + they were taking. It + +On line 3498: + the credit isk they + were taking. It advised them + to make sure that they + +On line 3498: + isk they were taking. + It advised them to make sure + that they understood + +On line 3498: + they were taking. It + advised them to make sure that + they understood the + +On line 3498: + It advised them to + make sure that they understood + the nature of the + +On line 3498: + to make sure that they + understood the nature of + the rating agencies’ + +On line 3498: + the rating agencies’ + models, especially for + CDOs. And it further + +On line 3498: + especially for + CDOs. And it further advised + them to make sure that + +On line 3498: + CDOs. And it further + advised them to make sure that + counterparties from + +On line 3498: + advised them to make + sure that counterparties from + whom they bought credit + +On line 3498: + and the financial + guarantors—would be good for + that protection if + +On line 3500: + guarantors—would be + good for that protection if + it was needed.104 The + +On line 3500: + if it was needed.104 + The regulators also + said they had researched + +On line 3500: + it was needed.104 The + regulators also said + they had researched in + +On line 3500: + The regulators + also said they had researched + in some depth, for the + +On line 3500: + depth, for the CDO and + derivatives market, the + question "Are undue + +On line 3500: + risk developing1" + Their answer: probably not. + The credit risk was + +On line 3500: + developing1" Their + answer: probably not. The + credit risk was "quite + +On line 3500: + probably not. The + credit risk was "quite modest," + the regulators + +On line 3500: + credit risk was "quite + modest," the regulators + concluded, and the + +On line 3500: + monoline financial + guarantors appeared to know + what they were doing.105 + +On line 3502: + what they were doing.105 + The [Joint Forum’s Working Group + on Risk Assessment + +On line 3502: + they were doing.105 The + [Joint Forum’s Working Group on + Risk Assessment and + +On line 3504: + [Joint Forum’s Working + Group on Risk Assessment and + Capital] has not + +On line 3504: + Capital] has not + found evidence of ‘hidden + concentrations’ of + +On line 3504: + not found evidence + of ‘hidden concentrations’ + of credit risk. There + +On line 3504: + found evidence of + ‘hidden concentrations’ of + credit risk. There are + +On line 3504: + concentrations’ of + credit risk. There are some non-bank + firms whose primary + +On line 3504: + risk. There are some non-bank + firms whose primary business + model focuses + +On line 3504: + model focuses + on taking on credit risk. + Most important among + +On line 3504: + taking on credit + risk. Most important among these + firms are the monoline + +On line 3504: + monoline financial + guarantors. Other market + participants seem + +On line 3504: + guarantors. Other + market participants seem + to be fully aware + +On line 3504: + participants seem + to be fully aware of the + nature of these firms. + +On line 3504: + seem to be fully + aware of the nature of these + firms. In the case of + +On line 3504: + to be fully aware + of the nature of these firms. + In the case of the + +On line 3504: + fully aware of the + nature of these firms. In the + case of the monolines, + +On line 3504: + aware of the nature + of these firms. In the case of + the monolines, credit + +On line 3504: + of the nature of + these firms. In the case of the + monolines, credit risk + +On line 3504: + of these firms. In the + case of the monolines, credit + risk has always been + +On line 3504: + these firms. In the case + of the monolines, credit risk + has always been a + +On line 3504: + been a primary + business activity and + they have invested + +On line 3504: + in obtaining the + relevant expertise. While + obviously this + +On line 3504: + to experience + unanticipated problems + or to misjudge the + +On line 3504: + misjudge the risks, their + risks are primarily at + the catastrophic + +On line 3504: + the catastrophic + or macroeconomic level. + It is also clear + +On line 3504: + catastrophic or + macroeconomic level. It + is also clear that + +On line 3504: + is also clear that + such firms are subjected to + regulatory, + +On line 3504: + are subjected to + regulatory, rating + agency, and market + +On line 3506: + learned from earlier + flare-ups in the CDO sector: "The + Working Group believes + +On line 3506: + earlier flare-ups in + the CDO sector: "The Working + Group believes that it + +On line 3506: + in the CDO sector: + "The Working Group believes that + it is important + +On line 3506: + the CDO sector: "The + Working Group believes that it + is important for + +On line 3506: + Working Group believes + that it is important for + investors in CDOs to + +On line 3506: + Group believes that it + is important for investors + in CDOs to seek to + +On line 3506: + it is important + for investors in CDOs to seek + to develop a + +On line 3506: + is important for + investors in CDOs to seek to + develop a sound + +On line 3506: + for investors in CDOs + to seek to develop a + sound understanding + +On line 3506: + investors in CDOs to + seek to develop a sound + understanding of + +On line 3506: + to develop a + sound understanding of the + credit risks involved + +On line 3506: + sound understanding + of the credit risks involved + and not to rely + +On line 3506: + of the credit risks + involved and not to rely + solely on rating + +On line 3506: + credit risks involved + and not to rely solely + on rating agency + +On line 3506: + involved and not to + rely solely on rating + agency assessments. + +On line 3506: + and not to rely + solely on rating agency + assessments. In many + +On line 3506: + rely solely on + rating agency assessments. + In many respects, the + +On line 3506: + solely on rating + agency assessments. In many + respects, the losses + +On line 3506: + CDOs have probably + been salutary in highlighting + the potential risks + +On line 3510: + the potential risks + involved."107 MOODY’S: "IT WAS ALL ABOUT + REVENUE" Like other + +On line 3510: + MOODY’S: "IT WAS ALL ABOUT + REVENUE" Like other market + participants, Moody’s + +On line 3510: + REVENUE" Like other + market participants, Moody’s + Investors Service, one + +On line 3510: + Like other market + participants, Moody’s Investors + Service, one of the + +On line 3510: + Moody’s Investors Service, + one of the three dominant + rating agencies, was + +On line 3510: + the three dominant + rating agencies, was swept up + in the frenzy of + +On line 3510: + rating agencies, was + swept up in the frenzy of + the structured products + +On line 3510: + in the frenzy of + the structured products market. + The tranching structure + +On line 3510: + the frenzy of the + structured products market. The + tranching structure of + +On line 3510: + products market. The + tranching structure of mortgage-backed + securities and + +On line 3510: + tranching structure of + mortgage-backed securities and + CDOs was standardized + +On line 3510: + guidelines set by the + agencies; without their models + and their generous + +On line 3510: + agencies; without their + models and their generous + allotment of triple-A + +On line 3510: + their models and their + generous allotment of + triple-A ratings, there would + +On line 3510: + of triple-A ratings, there + would have been little investor + interest and few + +On line 3510: + would have been little + investor interest and few + deals. Between and the + +On line 3510: + the dollar value + of that business increased from + million to million; + +On line 3510: + increased from million + to million; the number of + staff rating these deals + +On line 3510: + million to million; + the number of staff rating + these deals doubled. But + +On line 3510: + of staff rating these + deals doubled. But over the same + period, while the + +On line 3510: + these deals doubled. But + over the same period, while + the volume of CDOs + +On line 3510: + deals doubled. But over + the same period, while the + volume of CDOs to + +On line 3510: + the same period, + while the volume of CDOs to + be rated increased + +On line 3510: + increased sevenfold, + staffing increased only From to + annual revenue + +On line 3510: + staffing increased only + From to annual revenue + tied to CDOs grew from + +On line 3510: + From to annual + revenue tied to CDOs grew from + million to million.108 + +On line 3512: + annual revenue + tied to CDOs grew from million + to million.108 When Moody’s + +On line 3512: + tied to CDOs grew from + million to million.108 When Moody’s + Corporation went + +On line 3512: + the investor Warren + Buffett’s Berkshire Hathaway held + of the company. + +On line 3512: + Berkshire Hathaway held + of the company. After + share repurchases + +On line 3512: + repurchases by + Moody’s Corporation, Berkshire + Hathaway’s holdings of + +On line 3514: + of outstanding shares + increased to over by As of + Berkshire Hathaway and + +On line 3514: + increased to over by + As of Berkshire Hathaway and + three other investors + +On line 3514: + of Berkshire Hathaway + and three other investors owned + a combined of Moody’s. + +On line 3514: + Berkshire Hathaway and + three other investors owned a + combined of Moody’s. When + +On line 3514: + combined of Moody’s. When + asked whether he was satisfied + with the internal + +On line 3514: + of Moody’s. When asked whether + he was satisfied with the + internal controls + +On line 3514: + satisfied with the + internal controls at Moody’s, + Buffett responded + +On line 3514: + internal controls + at Moody’s, Buffett responded + to the FCIC that he + +On line 3514: + responded to the + FCIC that he knew nothing about + the management of + +On line 3514: + the FCIC that he knew + nothing about the management + of Moody’s. "I had no + +On line 3514: + that he knew nothing + about the management of Moody’s. + "I had no idea. I’d + +On line 3514: + knew nothing about the + management of Moody’s. "I had + no idea. I’d never + +On line 3514: + about the management + of Moody’s. "I had no idea. I’d + never been at Moody’s, + +On line 3514: + management of Moody’s. + "I had no idea. I’d never + been at Moody’s, I don’t + +On line 3514: + of Moody’s. "I had no + idea. I’d never been at Moody’s, + I don’t know where they + +On line 3514: + Moody’s. "I had no idea. + I’d never been at Moody’s, I + don’t know where they are + +On line 3514: + no idea. I’d never + been at Moody’s, I don’t know where + they are located."109 + +On line 3514: + I’d never been at + Moody’s, I don’t know where they are + located."109 Buffett + +On line 3514: + been at Moody’s, I don’t + know where they are located."109 + Buffett said that he + +On line 3514: + I don’t know where they + are located."109 Buffett said + that he invested + +On line 3514: + don’t know where they are + located."109 Buffett said that + he invested in + +On line 3514: + that he invested + in the company because + the rating agency + +On line 3514: + company because + the rating agency business + was "a natural + +On line 3514: + the rating agency + business was "a natural + duopoly," which gave + +On line 3516: + and "the single-most + important decision in + evaluating a + +On line 3518: + pricing power."110 Many + former employees said that + after the public + +On line 3518: + power."110 Many former + employees said that after + the public listing, + +On line 3518: + public listing, the + company culture changed—it + went "from [a culture] + +On line 3518: + culture changed—it went + "from [a culture] resembling + a university + +On line 3518: + department to one + which values revenues at all + costs," according to + +On line 3518: + which values revenues + at all costs," according to + Eric Kolchinsky, a + +On line 3518: + also identified + a new focus on market + share directed by + +On line 3518: + a new focus on + market share directed by + former president + +On line 3518: + focus on market + share directed by former + president of Moody’s + +On line 3518: + Moody’s Investors Service + Brian Clarkson. Clarkson had + joined Moody’s in as a + +On line 3518: + Clarkson. Clarkson had + joined Moody’s in as a senior + analyst in the + +On line 3518: + had joined Moody’s in as + a senior analyst in + the residential + +On line 3518: + co-chief operating + officer of the rating + agency in and then + +On line 3518: + the rating agency + in and then president in + August Gary Witt, a + +On line 3518: + agency in and then + president in August Gary + Witt, a former team + +On line 3518: + Clarkson: "My kind of + working hypothesis was + that [former chairman + +On line 3518: + [former chairman and + CEO] John Rutherford was thinking, + ‘I want to remake + +On line 3518: + CEO] John Rutherford was + thinking, ‘I want to remake + the culture of this + +On line 3518: + was thinking, ‘I want + to remake the culture of + this company to + +On line 3518: + of this company + to increase profitability + dramatically + +On line 3518: + to make that happen, + and he was successful in + that regard. And that + +On line 3518: + make that happen, and + he was successful in that + regard. And that was + +On line 3518: + he was successful + in that regard. And that was + why Brian Clarkson’s + +On line 3518: + was successful in + that regard. And that was why + Brian Clarkson’s rise + +On line 3518: + that regard. And that + was why Brian Clarkson’s rise + was so meteoric: + +On line 3518: + regard. And that was + why Brian Clarkson’s rise was + so meteoric: he + +On line 3518: + why Brian Clarkson’s + rise was so meteoric: he + was the enforcer who + +On line 3518: + Brian Clarkson’s rise + was so meteoric: he was + the enforcer who could + +On line 3518: + was so meteoric: + he was the enforcer who could + change the culture to + +On line 3518: + so meteoric: he + was the enforcer who could change + the culture to have + +On line 3518: + meteoric: he was + the enforcer who could change the + culture to have more + +On line 3518: + he was the enforcer + who could change the culture to + have more focus on + +On line 3518: + the enforcer who could + change the culture to have more + focus on market + +On line 3518: + culture to have more + focus on market share."113 The + former managing + +On line 3518: + focus on market + share."113 The former managing + director Jerome Fons, + +On line 3518: + former managing + director Jerome Fons, who was + responsible for + +On line 3518: + responsible for + assembling an internal + history of Moody’s, + +On line 3518: + history of Moody’s, + agreed: "The main problem was that + the firm became so + +On line 3518: + main problem was that + the firm became so focused, + particularly + +On line 3518: + the firm became so + focused, particularly + the structured area, on + +On line 3518: + particularly + the structured area, on revenues, + on market share, and + +On line 3518: + the structured area, on + revenues, on market share, and + the ambitions of + +On line 3518: + revenues, on market + share, and the ambitions of + Brian Clarkson, that + +On line 3518: + and the ambitions + of Brian Clarkson, that they + willingly looked the + +On line 3518: + of Brian Clarkson, + that they willingly looked the + other way, traded + +On line 3518: + they willingly looked + the other way, traded the + firm’s reputation + +On line 3518: + willingly looked the + other way, traded the firm’s + reputation for + +On line 3520: + other way, traded + the firm’s reputation for + short-term profits."114 Moody’s + +On line 3520: + for short-term profits."114 + Moody’s Corporation Chairman + and CEO Raymond McDaniel + +On line 3520: + short-term profits."114 Moody’s + Corporation Chairman and + CEO Raymond McDaniel did + +On line 3520: + Moody’s Corporation + Chairman and CEO Raymond McDaniel + did not agree with this + +On line 3520: + CEO Raymond McDaniel did + not agree with this assessment, + telling the FCIC that he + +On line 3520: + McDaniel did not agree with + this assessment, telling the FCIC + that he didn’t see + +On line 3520: + did not agree with this + assessment, telling the FCIC that + he didn’t see "any + +On line 3520: + this assessment, telling + the FCIC that he didn’t see + "any particular + +On line 3520: + he didn’t see "any + particular difference + in culture" after + +On line 3520: + spin-off.115 Clarkson also + disputed this version of + events, explaining that + +On line 3520: + this version of events, + explaining that market share + was important to + +On line 3520: + events, explaining that + market share was important + to Moody’s well before + +On line 3520: + share was important + to Moody’s well before it was + an independent + +On line 3520: + to Moody’s well before + it was an independent + company. "[The idea + +On line 3520: + before it was an + independent company. + "[The idea that before + +On line 3520: + company. "[The idea + that before Moody’s] was spun off + from Dun Bradstreet, it + +On line 3520: + idea that before Moody’s] + was spun off from Dun Bradstreet, + it was a sort of + +On line 3520: + that before Moody’s] was + spun off from Dun Bradstreet, it + was a sort of sleepy, + +On line 3520: + Moody’s] was spun off from + Dun Bradstreet, it was a sort + of sleepy, academic + +On line 3520: + was spun off from Dun + Bradstreet, it was a sort of + sleepy, academic kind + +On line 3520: + Dun Bradstreet, it was + a sort of sleepy, academic + kind of company + +On line 3520: + Bradstreet, it was a + sort of sleepy, academic kind + of company that + +On line 3520: + of sleepy, academic + kind of company that was + in an ivory tower + +On line 3520: + academic kind of + company that was in an + ivory tower isn’t + +On line 3520: + kind of company + that was in an ivory tower + isn’t the case, you + +On line 3520: + company that was + in an ivory tower isn’t + the case, you know," he + +On line 3520: + that was in an ivory + tower isn’t the case, you + know," he explained. "I + +On line 3520: + in an ivory tower + isnâ€™t the case, you know," he + explained. "I think [the + +On line 3520: + tower isn’t the + case, you know," he explained. "I + think [the ivory tower] + +On line 3520: + explained. "I think [the + ivory tower] was really + a misnomer. I think + +On line 3520: + think [the ivory tower] + was really a misnomer. + I think that Moody’s has + +On line 3520: + was really a + misnomer. I think that Moody’s has + always been focused + +On line 3522: + misnomer. I think that + Moody’s has always been focused + on business."116 Clarkson + +On line 3522: + business."116 Clarkson and + McDaniel also adamantly disagreed + with the perception + +On line 3522: + adamantly disagreed with + the perception that concerns + about market share trumped + +On line 3522: + the perception that + concerns about market share trumped + ratings quality. + +On line 3522: + concerns about market + share trumped ratings quality. + Clarkson told the FCIC + +On line 3522: + about market share trumped + ratings quality. Clarkson + told the FCIC that it + +On line 3522: + ratings quality. + Clarkson told the FCIC that it + was fine for Moody’s to + +On line 3522: + Clarkson told the FCIC + that it was fine for Moody’s to + lose transactions if + +On line 3522: + FCIC that it was fine + for Moody’s to lose transactions + if it was for the + +On line 3522: + that it was fine for + Moody’s to lose transactions if + it was for the "right + +On line 3522: + was fine for Moody’s to + lose transactions if it was + for the "right reasons": + +On line 3522: + fine for Moody’s to lose + transactions if it was for + the "right reasons": "If + +On line 3522: + if it was for the + "right reasons": "If it was an + analytical + +On line 3522: + "right reasons": "If it + was an analytical + reason or it was + +On line 3522: + reason or it was + a credit reason, there’s not + a lot you can do + +On line 3522: + it was a credit + reason, there’s not a lot you + can do about that. But + +On line 3522: + a credit reason, + there’s not a lot you can do + about that. But if you’re + +On line 3522: + reason, there’s not a + lot you can do about that. But + if you’re losing a + +On line 3522: + a lot you can do + about that. But if you’re losing + a deal because you’re + +On line 3522: + lot you can do about + that. But if you’re losing a + deal because you’re not + +On line 3522: + deal because you’re not + communicating, you’re not + being transparent, + +On line 3522: + communicating, + you’re not being transparent, + you’re not picking up + +On line 3522: + transparent, you’re not + picking up the phone, that could + be problematic."117 + +On line 3522: + the phone, that could be + problematic."117 McDaniel cited + unforeseen market + +On line 3522: + problematic."117 McDaniel + cited unforeseen market + conditions as the + +On line 3522: + unforeseen market + conditions as the reason + that the models did + +On line 3522: + conditions as the + reason that the models did + not accurately + +On line 3522: + the models did not + accurately predict the + credit uality.118 + +On line 3522: + credit uality.118 + He testified to the FCIC, + "We believed that our + +On line 3522: + He testified to + the FCIC, "We believed that our + ratings were our best + +On line 3522: + the FCIC, "We believed + that our ratings were our best + opinion at the time + +On line 3522: + "We believed that our + ratings were our best opinion + at the time that we + +On line 3522: + that our ratings were + our best opinion at the time + that we assigned them. + +On line 3522: + our ratings were our + best opinion at the time that + we assigned them. As + +On line 3522: + ratings were our best + opinion at the time that we + assigned them. As we + +On line 3522: + were our best opinion + at the time that we assigned + them. As we obtained + +On line 3522: + our best opinion at + the time that we assigned them. + As we obtained new + +On line 3522: + at the time that we + assigned them. As we obtained + new information + +On line 3522: + them. As we obtained + new information and were + able to update our + +On line 3522: + new information + and were able to update our + judgments based on the + +On line 3522: + were able to update + our judgments based on the new + information and + +On line 3522: + judgments based on the + new information and the + trends we were seeing + +On line 3522: + information and + the trends we were seeing in + the housing market, + +On line 3522: + trends we were seeing + in the housing market, we + made what I think are + +On line 3522: + market, we made what + I think are appropriate + changes to our ratings."119 + +On line 3524: + made what I think are + appropriate changes to our + ratings."119 Nonetheless, + +On line 3524: + appropriate changes + to our ratings."119 Nonetheless, + Moody’s president did + +On line 3524: + changes to our ratings."119 + Nonetheless, Moody’s president + did not seem to have + +On line 3524: + did not seem to have + the same enthusiasm for + compliance as he + +On line 3524: + same enthusiasm + for compliance as he did + for market share and + +On line 3524: + for compliance as + he did for market share and + profit, according + +On line 3524: + he did for market + share and profit, according + to those who worked with + +On line 3524: + did for market share + and profit, according to + those who worked with him. + +On line 3524: + for market share and + profit, according to those + who worked with him. Scott + +On line 3524: + profit, according + to those who worked with him. Scott + McCleskey, a former chief + +On line 3524: + worked with him. Scott McCleskey, + a former chief compliance + officer at Moody’s, + +On line 3524: + Scott McCleskey, a former + chief compliance officer + at Moody’s, recounted + +On line 3524: + McCleskey, a former chief + compliance officer at + Moody’s, recounted a + +On line 3524: + officer at Moody’s, + recounted a story to + the FCIC about an evening + +On line 3524: + at Moody’s, recounted + a story to the FCIC about + an evening when he and + +On line 3524: + a story to the + FCIC about an evening when he and + Clarkson were dining + +On line 3524: + to the FCIC about an + evening when he and Clarkson were + dining with the board + +On line 3524: + an evening when he and + Clarkson were dining with the + board of directors + +On line 3524: + when he and Clarkson + were dining with the board of + directors after + +On line 3524: + were dining with the + board of directors after + the company had + +On line 3524: + board of directors + after the company had + announced strong earnings, + +On line 3524: + announced strong earnings, + particularly in the + business of rating + +On line 3524: + of rating mortgage-backed + securities and CDOs. "So + Brian Clarkson comes + +On line 3524: + securities and + CDOs. "So Brian Clarkson comes + up to me, in front + +On line 3524: + and CDOs. "So Brian + Clarkson comes up to me, in + front of everybody + +On line 3524: + "So Brian Clarkson + comes up to me, in front of + everybody at the + +On line 3524: + comes up to me, in + front of everybody at the + table, including + +On line 3524: + front of everybody + at the table, including + board members, and says + +On line 3524: + literally, ‘How + much revenue did Compliance + bring in this quarter1 + +On line 3526: + Compliance bring in + this quarter1 Nothing. Nothing.’ + For him to say that + +On line 3526: + bring in this quarter1 + Nothing. Nothing.’ For him to + say that in front of + +On line 3526: + this quarter1 Nothing. + Nothing.’ For him to say that + in front of the board, + +On line 3526: + Nothing. Nothing.’ For + him to say that in front of + the board, that’s just so + +On line 3526: + Nothing.’ For him to + say that in front of the board, + that’s just so telling of + +On line 3526: + For him to say that + in front of the board, that’s just + so telling of how he + +On line 3526: + him to say that in + front of the board, that’s just so + telling of how he felt + +On line 3526: + to say that in front + of the board, that’s just so telling + of how he felt that + +On line 3526: + say that in front of + the board, that’s just so telling of + how he felt that he + +On line 3526: + that in front of the + board, that’s just so telling of how + he felt that he was + +On line 3526: + of the board, that’s just + so telling of how he felt that + he was bulletproof. + +On line 3526: + the board, that’s just so + telling of how he felt that he + was bulletproof. For + +On line 3526: + board, that’s just so telling + of how he felt that he was + bulletproof. For him, + +On line 3526: + so telling of how he + felt that he was bulletproof. + For him, it was all + +On line 3526: + telling of how he felt + that he was bulletproof. For + him, it was all about + +On line 3526: + how he felt that he + was bulletproof. For him, it + was all about revenue."120 + +On line 3526: + was bulletproof. For + him, it was all about revenue."120 + Clarkson told the FCIC + +On line 3526: + For him, it was all + about revenue."120 Clarkson told the + FCIC that he didn’t + +On line 3526: + was all about revenue."120 + Clarkson told the FCIC that he + didn’t remember + +On line 3526: + Clarkson told the FCIC + that he didn’t remember + this conversation + +On line 3528: + employees, Clarkson’s + management style left little + room for discussion + +On line 3528: + left little room for + discussion or dissent. Witt + referred to Clarkson + +On line 3528: + referred to Clarkson + as the "dictator" of Moody’s + and said that if he + +On line 3528: + to Clarkson as the + "dictator" of Moody’s and said + that if he asked an + +On line 3528: + as the "dictator" + of Moody’s and said that if he + asked an employee + +On line 3528: + the "dictator" of + Moody’s and said that if he asked + an employee to + +On line 3528: + "dictator" of Moody’s + and said that if he asked an + employee to do + +On line 3528: + Moody’s and said that if + he asked an employee to + do something, "either + +On line 3528: + and said that if he + asked an employee to do + something, "either you + +On line 3528: + that if he asked an + employee to do something, + "either you comply + +On line 3528: + employee to do + something, "either you comply + with his request or + +On line 3528: + do something, "either + you comply with his request + or you start looking + +On line 3528: + something, "either you + comply with his request or + you start looking for + +On line 3528: + you comply with his + request or you start looking + for another job."122 + +On line 3528: + his request or you + start looking for another + job."122 "When I joined Moody’s + +On line 3528: + request or you start + looking for another job."122 + "When I joined Moody’s in + +On line 3528: + or you start looking + for another job."122 "When I + joined Moody’s in late an + +On line 3528: + for another job."122 + "When I joined Moody’s in late an + analyst’s worst fear + +On line 3528: + job."122 "When I joined Moody’s + in late an analyst’s worst + fear was that we would + +On line 3528: + joined Moody’s in late an + analyst’s worst fear was that + we would contribute + +On line 3528: + analyst’s worst fear + was that we would contribute + to the assignment + +On line 3528: + we would contribute + to the assignment of a + rating that was wrong," + +On line 3528: + to the assignment + of a rating that was wrong," + Mark Froeba, former + +On line 3528: + former senior vice + president, testified to + the FCIC. "When I left + +On line 3528: + to the FCIC. "When I + left Moody’s, an analyst’s worst + fear was that he would + +On line 3528: + the FCIC. "When I left + Moody’s, an analyst’s worst fear + was that he would do + +On line 3528: + "When I left Moody’s, an + analyst’s worst fear was that + he would do something, + +On line 3528: + Moody’s, an analyst’s + worst fear was that he would do + something, or she, that + +On line 3528: + worst fear was that he + would do something, or she, that + would allow him or + +On line 3528: + fear was that he would + do something, or she, that would + allow him or her + +On line 3528: + would do something, or + she, that would allow him or + her to be singled + +On line 3528: + do something, or she, + that would allow him or her + to be singled out + +On line 3528: + something, or she, that + would allow him or her to + be singled out for + +On line 3528: + that would allow him + or her to be singled out + for jeopardizing + +On line 3528: + would allow him or + her to be singled out for + jeopardizing Moody’s + +On line 3528: + her to be singled + out for jeopardizing Moody’s + market share."123 Clarkson + +On line 3528: + be singled out for + jeopardizing Moody’s market + share."123 Clarkson denied + +On line 3528: + jeopardizing Moody’s + market share."123 Clarkson denied + having a "forceful" + +On line 3528: + market share."123 Clarkson + denied having a "forceful" + management style, and + +On line 3528: + denied having a + "forceful" management style, and + his supervisor, + +On line 3528: + "forceful" management + style, and his supervisor, + Raymond McDaniel, told the + +On line 3528: + management style, and + his supervisor, Raymond + McDaniel, told the FCIC that + +On line 3528: + his supervisor, + Raymond McDaniel, told the FCIC that + Clarkson was a "good + +On line 3530: + Raymond McDaniel, told the + FCIC that Clarkson was a "good + manager."124 Former + +On line 3530: + manager."124 Former + team managing director + Gary Witt recalled that + +On line 3530: + Witt recalled that he + received a monthly email from + Clarkson "that outlined + +On line 3530: + received a monthly + email from Clarkson "that outlined + basically my + +On line 3530: + email from Clarkson "that + outlined basically my + market share in the + +On line 3530: + Clarkson "that outlined + basically my market + share in the areas + +On line 3530: + basically my + market share in the areas + that I was in charge + +On line 3530: + my market share in + the areas that I was in + charge of. I believe + +On line 3530: + market share in the + areas that I was in charge + of. I believe it + +On line 3530: + share in the areas + that I was in charge of. I + believe it listed + +On line 3530: + the areas that I + was in charge of. I believe + it listed the deals + +On line 3530: + areas that I was + in charge of. I believe it + listed the deals that + +On line 3530: + that I was in charge + of. I believe it listed + the deals that we did, + +On line 3530: + I was in charge of. + I believe it listed the + deals that we did, and + +On line 3530: + was in charge of. I + believe it listed the deals + that we did, and then + +On line 3530: + charge of. I believe + it listed the deals that we + did, and then it would + +On line 3530: + of. I believe it + listed the deals that we did, + and then it would list + +On line 3530: + believe it listed + the deals that we did, and then + it would list the deals + +On line 3530: + it listed the deals + that we did, and then it would + list the deals like S&P + +On line 3530: + the deals that we did, + and then it would list the deals + like S&P and/or Fitch + +On line 3530: + deals that we did, and + then it would list the deals like + S&P and/or Fitch did + +On line 3530: + that we did, and then + it would list the deals like S&P + and/or Fitch did that + +On line 3530: + and then it would list + the deals like S&P and/or Fitch + did that we didn’t + +On line 3530: + then it would list the + deals like S&P and/or Fitch did + that we didn’t do + +On line 3530: + it would list the deals + like S&P and/or Fitch did that + we didn’t do that + +On line 3530: + would list the deals like + S&P and/or Fitch did that we + didn’t do that was + +On line 3530: + deals like S&P and/or + Fitch did that we didn’t do + that was in my area. + +On line 3530: + like S&P and/or Fitch + did that we didn’t do that + was in my area. And + +On line 3530: + S&P and/or Fitch did + that we didn’t do that was + in my area. And at + +On line 3530: + and/or Fitch did that + we didn’t do that was in + my area. And at times, + +On line 3530: + did that we didn’t + do that was in my area. And + at times, I would have + +On line 3530: + that we didn’t do + that was in my area. And at + times, I would have to + +On line 3530: + didn’t do that was + in my area. And at times, I + would have to comment + +On line 3530: + do that was in my + area. And at times, I would have + to comment on that + +On line 3530: + in my area. And at + times, I would have to comment + on that verbally + +On line 3530: + my area. And at times, + I would have to comment on + that verbally or + +On line 3530: + area. And at times, I + would have to comment on that + verbally or even + +On line 3530: + have to comment on + that verbally or even write + a written report + +On line 3530: + a written report + about—you know, look into what + was it about that deal, + +On line 3530: + report about—you know, + look into what was it about + that deal, why did we + +On line 3530: + know, look into what + was it about that deal, why did + we not rate it. So, + +On line 3530: + look into what was + it about that deal, why did we + not rate it. So, you + +On line 3530: + into what was it + about that deal, why did we not + rate it. So, you know, + +On line 3530: + what was it about that + deal, why did we not rate it. + So, you know, it was + +On line 3530: + was it about that deal, + why did we not rate it. So, + you know, it was clear + +On line 3530: + it about that deal, why + did we not rate it. So, you + know, it was clear that + +On line 3530: + that deal, why did we + not rate it. So, you know, it + was clear that market + +On line 3530: + deal, why did we not + rate it. So, you know, it was + clear that market share + +On line 3530: + why did we not rate + it. So, you know, it was clear + that market share was + +On line 3530: + not rate it. So, you + know, it was clear that market + share was important + +On line 3530: + rate it. So, you know, + it was clear that market share + was important to + +On line 3530: + it. So, you know, it + was clear that market share was + important to him." + +On line 3530: + was clear that market + share was important to him." + Witt acknowledged the + +On line 3530: + share was important + to him." Witt acknowledged the + pressures that he felt + +On line 3530: + important to him." + Witt acknowledged the pressures + that he felt as a + +On line 3530: + him." Witt acknowledged + the pressures that he felt as + a manager: "When + +On line 3530: + Witt acknowledged the + pressures that he felt as a + manager: "When I + +On line 3530: + pressures that he felt + as a manager: "When I + was an analyst, + +On line 3530: + that he felt as a + manager: "When I was an + analyst, I just + +On line 3530: + a manager: "When + I was an analyst, I + just thought about getting + +On line 3530: + manager: "When I + was an analyst, I just + thought about getting the + +On line 3530: + was an analyst, + I just thought about getting the + deals right. Once I [was + +On line 3530: + deals right. Once I [was + promoted to managing + director and] had + +On line 3530: + I [was promoted + to managing director + and] had a budget + +On line 3530: + [was promoted to + managing director and] + had a budget to + +On line 3530: + and] had a budget + to meet, I had salaries to pay, + I started thinking + +On line 3530: + to meet, I had salaries + to pay, I started thinking + bigger picture. I + +On line 3530: + I had salaries to pay, + I started thinking bigger + picture. I started + +On line 3530: + I started thinking + bigger picture. I started + realizing, yes, + +On line 3530: + picture. I started + realizing, yes, we do + have shareholders and, + +On line 3530: + realizing, yes, + we do have shareholders and, + yes, they deserved to + +On line 3530: + do have shareholders + and, yes, they deserved to make + some money. We need + +On line 3530: + have shareholders and, + yes, they deserved to make some + money. We need to + +On line 3530: + and, yes, they deserved + to make some money. We need + to get the ratings + +On line 3530: + yes, they deserved to + make some money. We need to + get the ratings right + +On line 3530: + they deserved to make + some money. We need to get + the ratings right first, + +On line 3530: + deserved to make some + money. We need to get the + ratings right first, that’s + +On line 3530: + to make some money. + We need to get the ratings + right first, that’s the most + +On line 3530: + money. We need to + get the ratings right first, that’s + the most important + +On line 3530: + We need to get the + ratings right first, that’s the most + important thing; but + +On line 3530: + get the ratings right + first, that’s the most important + thing; but you do have + +On line 3530: + the ratings right first, + that’s the most important thing; + but you do have to + +On line 3530: + ratings right first, that’s + the most important thing; but + you do have to think + +On line 3532: + the most important + thing; but you do have to think + about market share."125 Even + +On line 3532: + most important thing; + but you do have to think about + market share."125 Even as + +On line 3532: + thing; but you do have + to think about market share."125 Even + as far back as a + +On line 3532: + but you do have to + think about market share."125 Even as + far back as a strong + +On line 3532: + to think about market + share."125 Even as far back as a + strong emphasis on + +On line 3532: + as far back as a + strong emphasis on market + share was evident + +On line 3532: + far back as a strong + emphasis on market share + was evident in + +On line 3532: + share was evident + in employee performance + evaluations. In + +On line 3532: + In July Clarkson + circulated a spreadsheet + to subordinates + +On line 3532: + subordinates that + listed analysts and the + number and dollar + +On line 3532: + listed analysts + and the number and dollar + volume of deals each + +On line 3532: + and the number and + dollar volume of deals each + had "rated" or "NOT + +On line 3532: + and dollar volume + of deals each had "rated" or + "NOT rated." Clarkson’s + +On line 3532: + volume of deals each + had "rated" or "NOT rated." + Clarkson’s instructions: + +On line 3532: + had "rated" or "NOT + rated." Clarkson’s instructions: + "You should be using + +On line 3532: + using this in PE’s + [performance evaluations] + and to give people + +On line 3532: + in PE’s [performance + evaluations] and to give + people a heads up + +On line 3532: + and to give people + a heads up on where they stand + relative to their + +On line 3532: + a heads up on where + they stand relative to their + peers."126 Team managing + +On line 3532: + peers."126 Team managing + directors, who oversaw the + analysts rating + +On line 3532: + deals, received a base + salary, cash bonus, and stock options. + Their performance goals + +On line 3532: + base salary, cash bonus, and + stock options. Their performance + goals generally + +On line 3532: + salary, cash bonus, and stock + options. Their performance goals + generally fell + +On line 3532: + Their performance goals + generally fell into + the categories of + +On line 3532: + generally fell + into the categories of + market coverage, + +On line 3532: + the categories of + market coverage, revenue, + market outreach (such + +On line 3532: + and development + of analytical tools, + only one of which + +On line 3532: + analytical + tools, only one of which was + impossible to + +On line 3532: + tools, only one of + which was impossible to + measure in real + +On line 3532: + was impossible + to measure in real time + as compensation + +On line 3532: + impossible to + measure in real time as + compensation was + +On line 3532: + as compensation + was being awarded: ratings + quality. It might + +On line 3532: + was being awarded: + ratings quality. It might + take years for the poor + +On line 3532: + ratings quality. + It might take years for the poor + quality of a + +On line 3532: + It might take years for + the poor quality of a + rating to become + +On line 3532: + take years for the poor + quality of a rating + to become clear as + +On line 3532: + the poor quality + of a rating to become + clear as the rated + +On line 3532: + quality of a + rating to become clear as + the rated asset + +On line 3532: + rating to become + clear as the rated asset + failed to perform as + +On line 3534: + rated asset failed + to perform as expected. + In January a + +On line 3534: + failed to perform as + expected. In January + a derivatives + +On line 3534: + a derivatives + manager listed his most + important achievements + +On line 3534: + manager listed + his most important achievements + in a performance + +On line 3534: + his most important + achievements in a performance + evaluation. At + +On line 3534: + the list: "Protected + our market share in the CDO + corporate cash flow + +On line 3534: + CDO corporate cash + flow sector. To my knowledge + we missed only one + +On line 3534: + corporate cash flow + sector. To my knowledge we + missed only one CLO + +On line 3536: + we missed only one + CLO [collateralized loan + obligation] from BofA + +On line 3536: + obligation] from BofA + and that CLO was unratable + by us because of + +On line 3538: + because of it’s [sic] + bizarre structure."127 More evidence + of Moody’s emphasis + +On line 3538: + More evidence of + Moody’s emphasis on market + share was provided + +On line 3538: + evidence of Moody’s + emphasis on market share + was provided by + +On line 3538: + on market share was + provided by an email that + circulated in + +On line 3538: + was provided by + an email that circulated + in the fall of in + +On line 3538: + provided by an + email that circulated in + the fall of in the + +On line 3538: + that circulated + in the fall of in the midst + of significant + +On line 3538: + of in the midst of + significant downgrades in + the structured finance + +On line 3538: + finance market. Group + Managing Director of + U.S. Derivatives + +On line 3538: + Yoshizawa asked her team’s + managing directors to + explain a market + +On line 3538: + her team’s managing + directors to explain a + market share decrease + +On line 3540: + from to Despite this + apparent emphasis on + market share, Clarkson + +On line 3540: + Clarkson told the FCIC + that "the most important goal + for any managing + +On line 3540: + McDaniel, the chairman and + CEO of Moody’s Corporation, + elaborated: "I + +On line 3540: + Moody’s Corporation, + elaborated: "I disagree + that there was a drive + +On line 3540: + elaborated: "I + disagree that there was a drive + for market share. We + +On line 3540: + "I disagree that there + was a drive for market share. + We pay attention + +On line 3540: + disagree that there was + a drive for market share. We + pay attention to + +On line 3540: + a drive for market + share. We pay attention to + our position in + +On line 3540: + drive for market share. + We pay attention to our + position in the + +On line 3540: + We pay attention + to our position in the + market. But ratings + +On line 3540: + to our position + in the market. But ratings + quality, getting + +On line 3540: + in the market. But + ratings quality, getting + the ratings to the + +On line 3540: + the ratings to the + best possible predictive + content, predictive + +On line 3542: + status, is paramount."130 + Whatever McDaniel’s or Clarkson’s + intended message, + +On line 3542: + market share. Former + team managing director + Witt recalled that the + +On line 3542: + Witt recalled that the + "smoking gun" moment of his + employment at Moody’s + +On line 3542: + "smoking gun" moment + of his employment at Moody’s + occurred during a + +On line 3542: + gun" moment of his + employment at Moody’s occurred + during a "town hall" + +On line 3542: + of his employment + at Moody’s occurred during a + "town hall" meeting in + +On line 3542: + his employment at + Moody’s occurred during a "town + hall" meeting in the + +On line 3542: + employment at Moody’s + occurred during a "town hall" + meeting in the third + +On line 3542: + Moody’s occurred during + a "town hall" meeting in the + third quarter of with + +On line 3542: + occurred during a + "town hall" meeting in the third + quarter of with Moody’s + +On line 3542: + a "town hall" meeting + in the third quarter of with + Moody’s management and + +On line 3542: + "town hall" meeting in + the third quarter of with Moody’s + management and its + +On line 3542: + and its managing + directors, after Moody’s had + already announced mass + +On line 3542: + a presentation + about Moody’s financial outlook + for the year ahead, one + +On line 3542: + ahead, one managing + director responded: "I + was interested, + +On line 3542: + responded: "I was + interested, Ray, to hear + your belief that the + +On line 3542: + was interested, + Ray, to hear your belief that + the first thing in the + +On line 3542: + interested, Ray, + to hear your belief that the + first thing in the minds + +On line 3542: + to hear your belief + that the first thing in the minds + of people in this + +On line 3542: + hear your belief that + the first thing in the minds of + people in this room + +On line 3542: + belief that the first + thing in the minds of people + in this room is the + +On line 3542: + the first thing in the + minds of people in this room + is the financial + +On line 3542: + thing in the minds of + people in this room is the + financial outlook + +On line 3542: + people in this room + is the financial outlook + for the remainder + +On line 3542: + in this room is the + financial outlook for the + remainder of the + +On line 3542: + financial outlook + for the remainder of the + year. [M]y thinking is + +On line 3542: + the remainder of + the year. [M]y thinking is there’s + a much greater concern + +On line 3542: + remainder of the + year. [M]y thinking is there’s a + much greater concern about + +On line 3542: + the year. [M]y thinking + is there’s a much greater concern + about the franchise." He + +On line 3542: + year. [M]y thinking is + there’s a much greater concern about + the franchise." He added, + +On line 3542: + [M]y thinking is there’s + a much greater concern about the + franchise." He added, "I + +On line 3542: + is there’s a much greater + concern about the franchise." He + added, "I think that the + +On line 3542: + greater concern about the + franchise." He added, "I think that + the greater anxiety + +On line 3542: + franchise." He added, "I + think that the greater anxiety + being felt by the + +On line 3542: + He added, "I think that + the greater anxiety being + felt by the people + +On line 3542: + added, "I think that the + greater anxiety being felt + by the people in + +On line 3542: + "I think that the greater + anxiety being felt by + the people in this + +On line 3542: + the greater anxiety + being felt by the people + in this room and by + +On line 3542: + being felt by the + people in this room and by + the analysts is + +On line 3542: + the people in this + room and by the analysts + is what’s going on + +On line 3542: + people in this room + and by the analysts is + what’s going on with + +On line 3542: + this room and by the + analysts is what’s going + on with the ratings + +On line 3542: + by the analysts + is what’s going on with the + ratings and what the + +On line 3542: + analysts is what’s + going on with the ratings + and what the outlook + +On line 3542: + going on with the + ratings and what the outlook + is[,] specifically + +On line 3542: + ratings and what the + outlook is[,] specifically + the severe ratings + +On line 3542: + what the outlook is[,] + specifically the severe + ratings transitions + +On line 3542: + specifically the + severe ratings transitions + we’re dealing with and + +On line 3542: + the severe ratings + transitions we’re dealing with + and uncertainty + +On line 3542: + we’re dealing with and + uncertainty about what’s ahead + on that, the ratings + +On line 3542: + uncertainty about + what’s ahead on that, the ratings + accuracy."132 Witt + +On line 3542: + on that, the ratings + accuracy."132 Witt recalled, + "Moody’s reputation + +On line 3542: + reputation was + just being absolutely + lacer-ated; and that + +On line 3542: + and that these people + are standing here, and they’re not + even addressing—they’re + +On line 3542: + are standing here, and + they’re not even addressing—they’re + acting like it’s not + +On line 3542: + acting like it’s not + even happening, even now that + it’s already happened. + +On line 3542: + even happening, even + now that it’s already happened. + [T]hat just made it so + +On line 3542: + happening, even now + that it’s already happened. [T]hat + just made it so clear + +On line 3542: + now that it’s already + happened. [T]hat just made it so + clear to me that the + +On line 3542: + it’s already happened. + [T]hat just made it so clear to + me that the balance + +On line 3542: + already happened. [T]hat + just made it so clear to me + that the balance was + +On line 3542: + happened. [T]hat just made + it so clear to me that the + balance was far too + +On line 3542: + [T]hat just made it so + clear to me that the balance + was far too much on + +On line 3542: + just made it so clear + to me that the balance was + far too much on the + +On line 3542: + made it so clear to + me that the balance was far + too much on the side + +On line 3542: + it so clear to me + that the balance was far too + much on the side of + +On line 3542: + clear to me that the + balance was far too much on + the side of short-term + +On line 3544: + balance was far too + much on the side of short-term + profitability."133 In + +On line 3544: + too much on the side + of short-term profitability."133 + In an internal + +On line 3544: + memorandum from + October sent to McDaniel, in + a section titled + +On line 3544: + sent to McDaniel, in a + section titled "Conflict of + Interest: Market + +On line 3544: + titled "Conflict of + Interest: Market Share," Chief + Credit Officer + +On line 3544: + Interest: Market + Share," Chief Credit Officer + Andrew Kimball xplained + +On line 3544: + Credit Officer + Andrew Kimball xplained that "Moody’s + has erected safeguards + +On line 3544: + Andrew Kimball xplained + that "Moody’s has erected safeguards + to keep teams from too + +On line 3544: + that "Moody’s has erected + safeguards to keep teams from too + easily solving + +On line 3544: + erected safeguards to + keep teams from too easily + solving the market + +On line 3544: + easily solving + the market share problem by + lowering standards." + +On line 3544: + market share problem + by lowering standards." But + he observed that these + +On line 3544: + But he observed that + these protections were far from + fail-safe, as he detailed + +On line 3544: + he observed that these + protections were far from fail-safe, + as he detailed in + +On line 3544: + protections were far + from fail-safe, as he detailed in + two area. First, "Ratings + +On line 3544: + were far from fail-safe, as + he detailed in two area. First, + "Ratings are assigned + +On line 3544: + he detailed in two + area. First, "Ratings are assigned + by committee, not + +On line 3544: + area. First, "Ratings are + assigned by committee, not + individuals. + +On line 3544: + are susceptible + to market share objectives)." + Second, "Methodologies + +On line 3544: + objectives)." Second, + "Methodologies criteria are + published and thus put + +On line 3544: + Second, "Methodologies + criteria are published and + thus put boundaries on + +On line 3546: + latitude within + those boundaries to register + market influence.)"134 + +On line 3548: + Moreover, the pressure + for market share, combined with + complacency, may + +On line 3548: + may have deterred Moody’s + from creating new models + or updating its + +On line 3548: + Moody’s from creating + new models or updating + its assumptions, as + +On line 3548: + or updating its + assumptions, as Kimball wrote: + "Organizations + +On line 3548: + their competence and + the adequacy of their + procedures rather than + +On line 3548: + the adequacy + of their procedures rather than + a run of good luck. + +On line 3548: + adequacy of + their procedures rather than a + run of good luck. [O]ur + +On line 3548: + of their procedures + rather than a run of good luck. + [O]ur years of success + +On line 3548: + procedures rather than + a run of good luck. [O]ur years + of success rating + +On line 3548: + a run of good luck. + [O]ur years of success rating + RMBS [residential + +On line 3548: + success rating RMBS + [residential mortgage–backed + securities] may + +On line 3548: + merely fine-tune the + existing system—to make + it more efficient, + +On line 3550: + in fact, it often + makes success less certain."135 If + an issuer didn’t + +On line 3550: + fact, it often makes + success less certain."135 If an + issuer didn’t like + +On line 3550: + often makes success + less certain."135 If an issuer + didn’t like a Moody’s + +On line 3550: + success less certain."135 + If an issuer didn’t like + a Moody’s rating on + +On line 3550: + an issuer didn’t + like a Moody’s rating on a + particular deal, + +On line 3550: + a Moody’s rating on + a particular deal, it + might get a better + +On line 3550: + ratings agency. The + agencies were compensated + only for rated + +On line 3550: + effect, only for + the deals for which their ratings + were accepted by + +On line 3552: + for the deals for which + their ratings were accepted + by the issuer. So + +On line 3552: + the deals for which their + ratings were accepted by + the issuer. So the + +On line 3552: + which their ratings were + accepted by the issuer. + So the pressure came + +On line 3552: + accepted by the + issuer. So the pressure came + from two directions: + +On line 3552: + from two directions: + in-house insistence on + increasing market + +On line 3552: + from the issuers and + investment bankers, who pushed for + better ratings with + +On line 3552: + investment bankers, who + pushed for better ratings with + fewer conditions.136 + +On line 3554: + for better ratings + with fewer conditions.136 Richard + Michalek, a former Moody’s + +On line 3554: + better ratings with + fewer conditions.136 Richard Michalek, + a former Moody’s vice + +On line 3554: + Michalek, a former Moody’s + vice president and senior + credit officer, + +On line 3554: + vice president and + senior credit officer, + testified to the + +On line 3554: + and senior credit + officer, testified to + the FCIC, "The threat of + +On line 3554: + to the FCIC, "The threat + of losing business to a + competitor, even if + +On line 3554: + if not realized, + absolutely tilted the + balance away from an + +On line 3554: + the balance away from + an independent arbiter + of risk towards a + +On line 3554: + of risk towards a + captive facilitator + of risk transfer."137 Witt + +On line 3554: + towards a captive + facilitator of risk + transfer."137 Witt agreed. When + +On line 3554: + transfer."137 Witt agreed. When + asked if the investment banks + frequently threatened + +On line 3554: + agreed. When asked if the + investment banks frequently + threatened to withdraw + +On line 3554: + if the investment + banks frequently threatened to + withdraw their business + +On line 3554: + frequently threatened + to withdraw their business if + they didn’t get their + +On line 3554: + they didn’t get their + desired rating, Witt replied, "Oh + God, are you kidding1 + +On line 3554: + desired rating, Witt + replied, "Oh God, are you kidding1 + All the time. I mean, + +On line 3554: + Witt replied, "Oh God, are + you kidding1 All the time. I + mean, that’s routine. I + +On line 3554: + replied, "Oh God, are you + kidding1 All the time. I mean, + that’s routine. I mean, + +On line 3554: + you kidding1 All the + time. I mean, that’s routine. I + mean, they would threaten + +On line 3554: + kidding1 All the time. + I mean, that’s routine. I mean, + they would threaten you + +On line 3554: + All the time. I mean, + that’s routine. I mean, they would + threaten you all of + +On line 3554: + I mean, that’s routine. + I mean, they would threaten you + all of the time. It’s + +On line 3554: + mean, that’s routine. I + mean, they would threaten you all + of the time. It’s like, + +On line 3554: + that’s routine. I mean, + they would threaten you all of + the time. It’s like, ‘Well, + +On line 3554: + routine. I mean, they + would threaten you all of the + time. It’s like, ‘Well, next + +On line 3554: + mean, they would threaten + you all of the time. It’s like, + ‘Well, next time, we’re just + +On line 3554: + would threaten you all + of the time. It’s like, ‘Well, next + time, we’re just going + +On line 3554: + threaten you all of + the time. It’s like, ‘Well, next time, + we’re just going to + +On line 3554: + you all of the time. + It’s like, ‘Well, next time, we’re just + going to go with + +On line 3554: + of the time. It’s like, + ‘Well, next time, we’re just going + to go with Fitch and + +On line 3554: + the time. It’s like, ‘Well, + next time, we’re just going to + go with Fitch and S&P.’"138 + +On line 3554: + It’s like, ‘Well, next time, + we’re just going to go with + Fitch and S&P.’"138 Clarkson + +On line 3554: + ‘Well, next time, we’re just + going to go with Fitch and + S&P.’"138 Clarkson affirmed + +On line 3554: + to go with Fitch and + S&P.’"138 Clarkson affirmed that "it + wouldn’t surprise me + +On line 3554: + S&P.’"138 Clarkson affirmed + that "it wouldn’t surprise me + to hear people say + +On line 3554: + Clarkson affirmed that + "it wouldn’t surprise me to + hear people say that" + +On line 3554: + "it wouldn’t surprise + me to hear people say that" + about issuer pressure + +On line 3554: + wouldn’t surprise me + to hear people say that" about + issuer pressure on + +On line 3554: + me to hear people + say that" about issuer pressure + on Moody’s employees.139 + +On line 3556: + hear people say that" + about issuer pressure on Moody’s + employees.139 Former + +On line 3556: + say that" about issuer + pressure on Moody’s employees.139 + Former managing + +On line 3556: + employees.139 Former + managing director Fons + suggested that Moody’s + +On line 3556: + Former managing + director Fons suggested + that Moody’s was complaisant + +On line 3556: + Fons suggested that + Moody’s was complaisant when it should + have been principled: + +On line 3556: + suggested that Moody’s + was complaisant when it should have + been principled: "[Moody’s] + +On line 3556: + Moody’s was complaisant when + it should have been principled: + "[Moody’s] knew that they were + +On line 3556: + complaisant when it should + have been principled: "[Moody’s] knew + that they were being + +On line 3556: + when it should have been + principled: "[Moody’s] knew that they + were being bullied + +On line 3556: + have been principled: + "[Moody’s] knew that they were being + bullied into cav-ing + +On line 3556: + principled: "[Moody’s] knew + that they were being bullied + into cav-ing in to + +On line 3556: + "[Moody’s] knew that they were + being bullied into cav-ing + in to bank pressure + +On line 3556: + that they were being + bullied into cav-ing in to + bank pressure from the + +On line 3556: + bullied into cav-ing + in to bank pressure from the + investment banks and + +On line 3556: + in to bank pressure + from the investment banks and + originators of + +On line 3558: + from the investment + banks and originators of + these things. Moody’s allow[ed] + +On line 3558: + investment banks and + originators of these things. + Moody’s allow[ed] itself + +On line 3558: + originators of + these things. Moody’s allow[ed] itself + to be bullied. And, + +On line 3558: + Moody’s allow[ed] itself + to be bullied. And, you know, + they willingly played + +On line 3558: + allow[ed] itself to + be bullied. And, you know, they + willingly played the + +On line 3558: + to be bullied. And, + you know, they willingly played + the game. They could have + +On line 3558: + be bullied. And, you + know, they willingly played the + game. They could have stood + +On line 3558: + bullied. And, you know, + they willingly played the game. + They could have stood up + +On line 3558: + they willingly played + the game. They could have stood up + and said, ‘I’m sorry, + +On line 3558: + willingly played the + game. They could have stood up and + said, ‘I’m sorry, this + +On line 3558: + game. They could have stood + up and said, ‘I’m sorry, this + is not—we’re not going + +On line 3558: + They could have stood up + and said, ‘I’m sorry, this is + not—we’re not going to + +On line 3558: + could have stood up and + said, ‘I’m sorry, this is not—we’re + not going to sign + +On line 3558: + have stood up and said, + ‘I’m sorry, this is not—we’re not + going to sign off + +On line 3558: + and said, ‘I’m sorry, + this is not—we’re not going to + sign off on this. We’re + +On line 3558: + ‘I’m sorry, this is + not—we’re not going to sign off + on this. We’re going + +On line 3558: + sorry, this is not—we’re + not going to sign off on + this. We’re going to + +On line 3558: + not—we’re not going to + sign off on this. We’re going + to protect investors. + +On line 3558: + not going to sign + off on this. We’re going to + protect investors. We’re + +On line 3558: + this. We’re going to + protect investors. We’re going + to stop—you know, we’re + +On line 3558: + to protect investors. + We’re going to stop—you know, + we’re going to try + +On line 3558: + protect investors. We’re + going to stop—you know, we’re + going to try to + +On line 3558: + investors. We’re going + to stop—you know, we’re going + to try to protect + +On line 3558: + to stop—you know, we’re + going to try to protect + our reputation. + +On line 3558: + going to try to + protect our reputation. + We’re not going to + +On line 3558: + to try to protect + our reputation. We’re not + going to rate these + +On line 3558: + our reputation. + We’re not going to rate these + CDOs, we’re not going + +On line 3558: + reputation. We’re + not going to rate these CDOs, + we’re not going to + +On line 3558: + We’re not going to + rate these CDOs, we’re not going + to rate these subprime + +On line 3558: + not going to rate + these CDOs, we’re not going to + rate these subprime RMBS.’"140 + +On line 3560: + in his October + memorandum: Ideally, + competition would + +On line 3560: + competition would + be primarily on the + basis of ratings + +On line 3560: + be primarily + on the basis of ratings + quality, with a + +On line 3560: + on the basis of + ratings quality, with a + second component + +On line 3560: + basis of ratings + quality, with a second + component of price + +On line 3560: + ratings quality, + with a second component + of price and a third + +On line 3564: + three competitive + factors, rating quality + is proving the least + +On line 3564: + is proving the least + powerful given the long + tail in measuring + +On line 3564: + given the long tail + in measuring performance. + The real problem + +On line 3564: + not that the market + does underweights [sic] ratings + quality but rather + +On line 3564: + does underweights [sic] + ratings quality but rather + that, in some sectors, + +On line 3564: + ratings quality + but rather that, in some sectors, + it actually + +On line 3564: + by awarding rating + mandates based on the lowest + credit enhancement + +On line 3564: + the lowest credit + enhancement needed for the + highest rating. Unchecked, + +On line 3564: + enhancement needed + for the highest rating. Unchecked, + competition on + +On line 3564: + the highest rating. + Unchecked, competition on this + basis can place the + +On line 3564: + Unchecked, competition + on this basis can place the + entire financial + +On line 3564: + on this basis can + place the entire financial + system at risk. It + +On line 3564: + basis can place the + entire financial system + at risk. It turns out + +On line 3564: + at risk. It turns out + that ratings quality has + surprisingly few + +On line 3564: + few friends: issuers want + high ratings; investors don’t want + rating downgrades; and + +On line 3564: + high ratings; investors + don’t want rating downgrades; and + bankers game the rating + +On line 3564: + rating downgrades; and + bankers game the rating agencies + for a few extra + +On line 3564: + downgrades; and bankers game + the rating agencies for a + few extra basis + +On line 3564: + rating agencies for + a few extra basis points + on execution.141 + +On line 3566: + few extra basis + points on execution.141 Moody’s + employees told the + +On line 3566: + on execution.141 + Moody’s employees told the FCIC + that one tactic used + +On line 3566: + execution.141 Moody’s + employees told the FCIC that + one tactic used by + +On line 3566: + Moody’s employees told + the FCIC that one tactic used + by the investment + +On line 3566: + employees told the + FCIC that one tactic used by + the investment bankers + +On line 3566: + FCIC that one tactic + used by the investment bankers + to apply subtle + +On line 3566: + tactic used by the + investment bankers to apply + subtle pressure was + +On line 3566: + the investment bankers + to apply subtle pressure + was to submit a + +On line 3566: + investment bankers to + apply subtle pressure was + to submit a deal + +On line 3566: + to apply subtle + pressure was to submit a + deal for a rating + +On line 3566: + subtle pressure was + to submit a deal for a + rating within a + +On line 3566: + was to submit a + deal for a rating within + a very tight time frame. + +On line 3566: + submit a deal for + a rating within a very + tight time frame. Kolchinsky, + +On line 3566: + deal for a rating + within a very tight time frame. + Kolchinsky, who oversaw + +On line 3566: + a rating within + a very tight time frame. Kolchinsky, + who oversaw ratings + +On line 3566: + rating within a + very tight time frame. Kolchinsky, who + oversaw ratings on + +On line 3566: + a very tight time frame. + Kolchinsky, who oversaw ratings + on CDOs, recalled the + +On line 3566: + tight time frame. Kolchinsky, + who oversaw ratings on CDOs, + recalled the case of + +On line 3566: + who oversaw ratings + on CDOs, recalled the case of + a particular + +On line 3566: + oversaw ratings on + CDOs, recalled the case of a + particular CDO: + +On line 3566: + on CDOs, recalled the + case of a particular + CDO: "What the trouble + +On line 3566: + CDOs, recalled the case + of a particular CDO: + "What the trouble on + +On line 3566: + recalled the case of + a particular CDO: "What + the trouble on this + +On line 3566: + a particular + CDO: "What the trouble on this + deal was, and this is + +On line 3566: + the trouble on this + deal was, and this is crucial + about the market share, + +On line 3566: + trouble on this deal + was, and this is crucial about + the market share, was + +On line 3566: + this deal was, and this + is crucial about the market + share, was that the banker + +On line 3566: + deal was, and this is + crucial about the market share, + was that the banker gave + +On line 3566: + this is crucial about + the market share, was that the + banker gave us hardly + +On line 3566: + is crucial about the + market share, was that the banker + gave us hardly any + +On line 3566: + the market share, was + that the banker gave us hardly + any notice and any + +On line 3566: + share, was that the banker + gave us hardly any notice + and any documents + +On line 3566: + was that the banker gave + us hardly any notice and + any documents and + +On line 3566: + that the banker gave us + hardly any notice and any + documents and any + +On line 3566: + hardly any notice + and any documents and any + time to analyze + +On line 3566: + any notice and any + documents and any time to + analyze this deal. + +On line 3566: + and any documents + and any time to analyze + this deal. Because bankers + +On line 3566: + any documents and + any time to analyze this + deal. Because bankers knew + +On line 3566: + documents and any + time to analyze this deal. + Because bankers knew that + +On line 3566: + time to analyze + this deal. Because bankers knew that + we could not say no + +On line 3566: + to analyze this + deal. Because bankers knew that we + could not say no to + +On line 3566: + analyze this deal. + Because bankers knew that we could + not say no to a + +On line 3566: + this deal. Because bankers + knew that we could not say no + to a deal, could not + +On line 3566: + deal. Because bankers knew + that we could not say no to + a deal, could not walk + +On line 3566: + Because bankers knew that + we could not say no to a + deal, could not walk away + +On line 3566: + bankers knew that we could + not say no to a deal, could + not walk away from the + +On line 3566: + knew that we could not + say no to a deal, could not + walk away from the deal + +On line 3566: + we could not say no + to a deal, could not walk away + from the deal because + +On line 3566: + could not say no to + a deal, could not walk away from + the deal because of + +On line 3566: + not say no to a + deal, could not walk away from the + deal because of a + +On line 3566: + to a deal, could not + walk away from the deal because + of a market share, + +On line 3566: + a deal, could not walk + away from the deal because of + a market share, they + +On line 3566: + deal, could not walk away + from the deal because of a + market share, they took + +On line 3566: + walk away from the deal + because of a market share, + they took advantage + +On line 3566: + from the deal because + of a market share, they took + advantage of that."142 + +On line 3568: + of a market share, + they took advantage of that."142 + For this CDO deal, the + +On line 3568: + a market share, they + took advantage of that."142 For + this CDO deal, the bankers + +On line 3568: + they took advantage + of that."142 For this CDO deal, the + bankers allowed only + +On line 3568: + took advantage of + that."142 For this CDO deal, the bankers + allowed only three + +On line 3568: + of that."142 For this CDO + deal, the bankers allowed only + three or four days for + +On line 3568: + For this CDO deal, the + bankers allowed only three or + four days for review + +On line 3568: + this CDO deal, the bankers + allowed only three or four + days for review and + +On line 3568: + deal, the bankers allowed + only three or four days for + review and final + +On line 3568: + bankers allowed only + three or four days for review + and final judgment. + +On line 3568: + only three or four + days for review and final + judgment. Kolchinsky emailed + +On line 3568: + three or four days for + review and final judgment. + Kolchinsky emailed Yoshizawa + +On line 3568: + four days for review + and final judgment. Kolchinsky + emailed Yoshizawa that the + +On line 3568: + review and final + judgment. Kolchinsky emailed Yoshizawa + that the transactions + +On line 3568: + judgment. Kolchinsky emailed + Yoshizawa that the transactions + had "egregiously pushed + +On line 3568: + emailed Yoshizawa that the + transactions had "egregiously + pushed our time limits + +On line 3568: + "egregiously pushed our + time limits (and analysts)."143 + Before the frothy days + +On line 3568: + pushed our time limits + (and analysts)."143 Before the + frothy days of the peak + +On line 3568: + our time limits (and + analysts)."143 Before the frothy + days of the peak of + +On line 3568: + analysts)."143 Before + the frothy days of the peak of + the housing boom, an + +On line 3568: + Before the frothy days + of the peak of the housing + boom, an agency took + +On line 3568: + the frothy days of the + peak of the housing boom, an + agency took six weeks + +On line 3568: + days of the peak of + the housing boom, an agency + took six weeks or even + +On line 3568: + of the peak of the + housing boom, an agency took + six weeks or even two + +On line 3568: + peak of the housing + boom, an agency took six weeks + or even two months to + +On line 3568: + of the housing boom, + an agency took six weeks or + even two months to rate + +On line 3568: + the housing boom, an + agency took six weeks or even + two months to rate a + +On line 3570: + an agency took six + weeks or even two months to rate + a CDO.144 By Kolchinsky + +On line 3570: + took six weeks or even + two months to rate a CDO.144 By + Kolchinsky described a + +On line 3570: + even two months to rate + a CDO.144 By Kolchinsky described + a very different + +On line 3570: + a CDO.144 By Kolchinsky + described a very different + environment in + +On line 3572: + a very different + environment in the CDO + group: "Bankers were pushing + +On line 3572: + environment in + the CDO group: "Bankers were pushing + more aggressively, + +On line 3572: + the CDO group: "Bankers were + pushing more aggressively, + so that it became + +On line 3572: + group: "Bankers were pushing + more aggressively, so that + it became from a + +On line 3572: + more aggressively, + so that it became from a + quiet little group + +On line 3572: + that it became from + a quiet little group to + more of a machine."145 + +On line 3572: + it became from a + quiet little group to more + of a machine."145 In + +On line 3572: + quiet little group + to more of a machine."145 In + Moody’s gave triple-A ratings + +On line 3572: + little group to more + of a machine."145 In Moody’s gave + triple-A ratings to an + +On line 3572: + more of a machine."145 + In Moody’s gave triple-A ratings to + an average of + +On line 3572: + of a machine."145 In + Moody’s gave triple-A ratings to an + average of more + +On line 3574: + securities each + and every working day.146 Such + pressure can be seen + +On line 3574: + and every working + day.146 Such pressure can be seen + in an April email to + +On line 3574: + pressure can be seen + in an April email to Yoshizawa + from a managing + +On line 3574: + email to Yoshizawa from + a managing director + in synthetic CDO + +On line 3574: + "I’m going to have + a major political + problem if we can’t + +On line 3574: + to have a major + political problem if + we can’t make this [deal + +On line 3574: + problem if we can’t + make this [deal rating] short and + sweet because, even though + +On line 3574: + we can’t make this [deal + rating] short and sweet because, + even though I always + +On line 3574: + make this [deal rating] + short and sweet because, even though + I always explain + +On line 3574: + this [deal rating] short + and sweet because, even though I + always explain to + +On line 3574: + rating] short and sweet + because, even though I always + explain to investors + +On line 3574: + and sweet because, even + though I always explain to + investors that closing + +On line 3574: + investors that closing + is subject to Moody’s timelines, + they often choose not + +On line 3574: + closing is subject + to Moody’s timelines, they often + choose not to hear it."147 + +On line 3576: + they often choose not + to hear it."147 The external + pressure was summed up + +On line 3576: + choose not to hear it."147 + The external pressure was + summed up in Kimball’s + +On line 3578: + ‘pitched’ by bankers, issuers, + investors—all with reasonable + arguments—whose views can + +On line 3578: + sometimes improving + it, other times degrading + it (we ‘drink the kool-aid’). + +On line 3578: + kool-aid’). Coupled with strong + internal emphasis on + market share margin + +On line 3578: + with strong internal + emphasis on market share + margin focus, this + +On line 3580: + market share margin + focus, this does constitute + a ‘risk’ to ratings + +On line 3580: + margin focus, this + does constitute a ‘risk’ to + ratings quality."148 + +On line 3582: + ratings quality."148 + The SEC investigated + the rating agencies’ + +On line 3582: + agencies’ ratings of + mortgage-backed securities and + CDOs in reporting + +On line 3582: + in reporting its + findings to Moody’s in July + The SEC criticized + +On line 3582: + findings to Moody’s in + July The SEC criticized + Moody’s for, among other + +On line 3582: + Moody’s in July The + SEC criticized Moody’s for, among + other things, failing + +On line 3582: + SEC criticized Moody’s + for, among other things, failing + to verify the + +On line 3582: + Moody’s for, among other + things, failing to verify + the accuracy + +On line 3582: + for, among other things, + failing to verify the + accuracy of + +On line 3582: + the accuracy + of mortgage information, + leaving that work to + +On line 3582: + leaving that work to + due diligence firms and other + parties; failing to + +On line 3582: + parties; failing to + retain documentation + about how most deals were + +On line 3582: + failing to retain + documentation about how + most deals were rated; + +On line 3582: + documentation + about how most deals were rated; + allowing ratings + +On line 3582: + about how most deals were + rated; allowing ratings + quality to be + +On line 3582: + rated; allowing + ratings quality to be + compromised by the + +On line 3582: + ratings quality + to be compromised by the + complexity of + +On line 3582: + to be compromised + by the complexity of + CDO deals; not hiring + +On line 3584: + CDO deals; not hiring + sufficient staff to rate DOs; + pushing ratings out + +On line 3584: + pushing ratings out + the door with insufficient + review; failing to + +On line 3584: + its rating process for + mortgage-backed securities and + CDOs; and allowing + +On line 3584: + securities and + CDOs; and allowing conflicts + of interest to + +On line 3584: + allowing conflicts + of interest to affect + rating decisions.149 + +On line 3586: + of interest to + affect rating decisions.149 + So matters stood in + +On line 3586: + to affect rating + decisions.149 So matters stood + in when the machine + +On line 3586: + rating decisions.149 + So matters stood in when the + machine that had been + +On line 3586: + So matters stood in + when the machine that had been + humming so smoothly + +On line 3586: + the machine that had + been humming so smoothly and + so lucratively + +On line 3586: + machine that had been + humming so smoothly and so + lucratively slipped + +On line 3586: + so smoothly and so + lucratively slipped a gear, + and then another, + +On line 3586: + lucratively slipped + a gear, and then another, + and another—and then + +On line 3588: + seized up entirely. + The Commission concludes that + the credit rating + +On line 3588: + the credit rating + agencies abysmally failed in their + central mission to + +On line 3588: + agencies abysmally failed + in their central mission to + provide quality + +On line 3588: + abysmally failed in their + central mission to provide + quality ratings + +On line 3588: + central mission to + provide quality ratings + on securities + +On line 3588: + provide quality + ratings on securities + for the benefit + +On line 3588: + securities for + the benefit of investors. + They did not heed many + +On line 3588: + housing and mortgage + sector. Moody’s, the Commission’s + case study in this area, + +On line 3588: + mortgage sector. Moody’s, + the Commission’s case study in + this area, continued + +On line 3588: + the Commission’s case + study in this area, continued + issuing ratings + +On line 3588: + The business model + under which firms issuing + securities paid + +On line 3588: + paid for their ratings + seriously undermined + the quality and + +On line 3588: + the quality and + integrity of those ratings; + the rating agencies + +On line 3588: + integrity of those + ratings; the rating agencies + placed market share and + +On line 3588: + the rating agencies + placed market share and profit + considerations + +On line 3588: + placed market share and + profit considerations + above the quality + +On line 3590: + the leveling off + and subsequent decline of + the housing market + +On line 3590: + collateralized + debt obligations (CDOs), CDOs squared, + and synthetic CDOs + +On line 3590: + squared, and synthetic + CDOs continued unabated, + greatly expanding + +On line 3590: + unabated, greatly + expanding the exposure + to losses when the + +On line 3590: + to losses when the + housing market collapsed and + exacerbating + +On line 3590: + exacerbating + the impact of the collapse + on the financial + +On line 3592: + the collapse on the + financial system and the + economy. During + +On line 3592: + fueled the market + for synthetic CDOs to bet + on the future of + +On line 3592: + for synthetic CDOs + to bet on the future of + the housing market. + +On line 3592: + synthetic CDOs to + bet on the future of the + housing market. CDO + +On line 3592: + the future of the + housing market. CDO managers + of these synthetic + +On line 3592: + synthetic products + had potential conflicts in + trying to serve the + +On line 3592: + trying to serve the + interests of customers who + were betting mortgage + +On line 3592: + serve the interests + of customers who were betting + mortgage borrowers + +On line 3592: + of customers who were + betting mortgage borrowers + would continue to + +On line 3592: + were betting mortgage + borrowers would continue + to make their payments + +On line 3592: + continue to make + their payments and of customers + who were betting the + +On line 3592: + make their payments and + of customers who were betting + the housing market + +On line 3592: + their payments and of + customers who were betting the + housing market would + +On line 3594: + of customers who were + betting the housing market + would collapse. There were + +On line 3594: + betting the housing + market would collapse. There were + also potential + +On line 3594: + the housing market + would collapse. There were also + potential conflicts + +On line 3594: + would collapse. There were + also potential conflicts + for underwriters + +On line 3594: + also potential + conflicts for underwriters + of mortgage-related + +On line 3594: + securities to + the extent they shorted the + products for their own + +On line 3594: + to the extent they + shorted the products for their + own accounts outside + +On line 3594: + products for their own + accounts outside of their roles + as market makers. + +On line 3604: + outside of their roles + as market makers. THE BUST + CONTENTS Delinquencies: + +On line 3604: + market makers. THE + BUST CONTENTS Delinquencies: "The + turn of the housing + +On line 3610: + before"....................................................................221 CDOs: "Climbing + the wall of subprime worry"..................................................223 + Legal remedies: "On + +On line 3610: + the wall of subprime + worry"..................................................223 Legal remedies: "On + the basis of the + +On line 3612: + the basis of the + information"..............................................224 Losses: "Who + owns residential + +On line 3614: + owns residential + credit risk1" What happens when + a bubble bursts1 In + +On line 3614: + What happens when a + bubble bursts1 In early it + became obvious + +On line 3614: + bursts1 In early it + became obvious that home + prices were falling in + +On line 3614: + early it became + obvious that home prices were + falling in regions + +On line 3614: + became obvious + that home prices were falling in + regions that had once + +On line 3614: + obvious that home + prices were falling in regions + that had once boomed, that + +On line 3614: + falling in regions + that had once boomed, that mortgage + originators were + +On line 3614: + that had once boomed, that + mortgage originators were + floundering, and that + +On line 3614: + were floundering, and + that more and more families, + especially those + +On line 3614: + and that more and more + families, especially + those with subprime and + +On line 3614: + especially those + with subprime and Alt-A loans, would + be unable to make + +On line 3614: + with subprime and Alt-A + loans, would be unable to make + their mortgage payments. + +On line 3616: + subprime and Alt-A loans, + would be unable to make their + mortgage payments. What + +On line 3616: + and Alt-A loans, would be + unable to make their mortgage + payments. What was not + +On line 3616: + unable to make their + mortgage payments. What was not + immediately + +On line 3616: + the housing crisis + would affect the financial + system that had helped + +On line 3616: + crisis would affect + the financial system that + had helped inflate the + +On line 3616: + had helped inflate the + bubble. Were all those mortgage-backed + securities and + +On line 3616: + bubble. Were all those + mortgage-backed securities and + collateralized + +On line 3616: + collateralized + debt obligations ticking time + bombs on the balance + +On line 3616: + on the balance sheets + of the world’s largest financial + institutions1 "The + +On line 3616: + sheets of the world’s largest + financial institutions1 + "The concerns were just + +On line 3616: + concerns were just that + if people couldn’t value + the assets, then that + +On line 3616: + just that if people + couldn’t value the assets, + then that created + +On line 3616: + if people couldn’t + value the assets, then that + created questions + +On line 3616: + value the assets, + then that created questions + about the solvency + +On line 3616: + the assets, then that + created questions about the + solvency of the + +On line 3616: + then that created + questions about the solvency + of the firms," William C. + +On line 3616: + created questions + about the solvency of the + firms," William C. Dudley, + +On line 3616: + about the solvency + of the firms," William C. Dudley, + now president of + +On line 3616: + the solvency of + the firms," William C. Dudley, now + president of the + +On line 3616: + now president of + the Federal Reserve Bank + of New York, told the + +On line 3616: + president of the + Federal Reserve Bank of + New York, told the FCIC.1 + +On line 3618: + banking system were + supposed to distribute risk + efficiently among + +On line 3620: + to distribute risk + efficiently among investors. + The theory would + +On line 3620: + risk efficiently + among investors. The theory + would prove to be wrong. + +On line 3620: + efficiently among + investors. The theory would + prove to be wrong. Much + +On line 3620: + would prove to be wrong. + Much of the risk from mortgage-backed + securities had + +On line 3620: + wrong. Much of the risk + from mortgage-backed securities + had actually + +On line 3620: + Much of the risk from + mortgage-backed securities had + actually been + +On line 3620: + securities had + actually been taken + by a small group of + +On line 3620: + actually been + taken by a small group of + systemically + +On line 3620: + systemically + important companies with + outsized holdings of, + +On line 3620: + with outsized holdings + of, or exposure to, the + super-senior and triple-A + +On line 3620: + of, or exposure + to, the super-senior and triple-A + tranches of CDOs. These + +On line 3620: + CDOs. These companies + would ultimately bear great + losses, even though those + +On line 3622: + great losses, even though + those investments were supposed + to be super-safe. As + +On line 3622: + losses, even though those + investments were supposed to + be super-safe. As went + +On line 3622: + those investments were + supposed to be super-safe. As + went on, increasing + +On line 3624: + agencies to downgrade + first mortgage-backed securities, + then CDOs. Alarmed investors + +On line 3624: + then CDOs. Alarmed investors + sent prices plummeting. Hedge funds + faced with margin calls + +On line 3624: + CDOs. Alarmed investors sent + prices plummeting. Hedge funds faced + with margin calls from + +On line 3624: + Alarmed investors sent prices + plummeting. Hedge funds faced with + margin calls from their + +On line 3624: + sent prices plummeting. + Hedge funds faced with margin calls + from their repo lenders + +On line 3624: + prices plummeting. Hedge + funds faced with margin calls from + their repo lenders were + +On line 3624: + plummeting. Hedge funds + faced with margin calls from their + repo lenders were forced + +On line 3624: + faced with margin calls + from their repo lenders were forced + to sell at distressed + +On line 3624: + with margin calls from + their repo lenders were forced to + sell at distressed prices; + +On line 3624: + margin calls from their + repo lenders were forced to sell + at distressed prices; many + +On line 3624: + from their repo lenders + were forced to sell at distressed + prices; many would shut down. + +On line 3624: + their repo lenders were + forced to sell at distressed prices; + many would shut down. Banks + +On line 3624: + repo lenders were forced + to sell at distressed prices; many + would shut down. Banks wrote + +On line 3624: + lenders were forced to sell + at distressed prices; many would shut + down. Banks wrote down the + +On line 3624: + to sell at distressed + prices; many would shut down. Banks wrote + down the value of + +On line 3624: + sell at distressed prices; + many would shut down. Banks wrote down + the value of their + +On line 3624: + prices; many would shut down. + Banks wrote down the value of + their holdings by tens + +On line 3624: + many would shut down. Banks + wrote down the value of their + holdings by tens of + +On line 3624: + shut down. Banks wrote down + the value of their holdings + by tens of billions + +On line 3624: + down. Banks wrote down the + value of their holdings by + tens of billions of + +On line 3624: + wrote down the value + of their holdings by tens of + billions of dollars. + +On line 3626: + their holdings by tens + of billions of dollars. The + summer of also + +On line 3626: + by tens of billions + of dollars. The summer of + also saw a near + +On line 3626: + billions of dollars. + The summer of also saw + a near halt in many + +On line 3626: + saw a near halt in + many securitization + markets, including + +On line 3626: + the second quarter + of (already down from prior + quarters). That figure + +On line 3626: + quarters). That figure + dropped precipitously to + billion in the third + +On line 3626: + to billion in the + third quarter and to only + billion in the fourth + +On line 3626: + in the third quarter + and to only billion in + the fourth quarter of + +On line 3626: + the third quarter and + to only billion in the + fourth quarter of Alt-A + +On line 3626: + to only billion + in the fourth quarter of Alt-A + issuance topped billion + +On line 3626: + the fourth quarter of + Alt-A issuance topped billion in + the second quarter, + +On line 3626: + fourth quarter of Alt-A + issuance topped billion in the + second quarter, but + +On line 3626: + issuance topped billion + in the second quarter, but + fell to billion in + +On line 3626: + topped billion in the + second quarter, but fell to + billion in the fourth + +On line 3626: + quarter, but fell to + billion in the fourth quarter + of Once-booming + +On line 3626: + in the fourth quarter + of Once-booming markets + were now gone—only + +On line 3626: + of Once-booming + markets were now gone—only + billion in subprime + +On line 3626: + gone—only billion + in subprime or AltA mortgage-backed + securities were + +On line 3626: + in subprime or AltA + mortgage-backed securities were + issued in the first + +On line 3628: + in the first half of + and almost none after that.2 + CDOs followed suit. From + +On line 3628: + the first half of and + almost none after that.2 CDOs + followed suit. From a + +On line 3628: + half of and almost + none after that.2 CDOs followed + suit. From a high of + +On line 3628: + of and almost none + after that.2 CDOs followed suit. + From a high of more + +On line 3628: + none after that.2 CDOs + followed suit. From a high of + more than billion in + +On line 3628: + CDOs followed suit. From + a high of more than billion + in the first quarter + +On line 3628: + followed suit. From a + high of more than billion in + the first quarter of + +On line 3630: + suit. From a high of + more than billion in the first + quarter of worldwide + +On line 3630: + a high of more than + billion in the first quarter + of worldwide issuance + +On line 3630: + more than billion in + the first quarter of worldwide + issuance of CDOs with + +On line 3630: + billion in the first + quarter of worldwide issuance + of CDOs with mortgage-backed + +On line 3630: + quarter of worldwide + issuance of CDOs with mortgage-backed + securities as + +On line 3630: + securities as + collateral plummeted + to billion in the + +On line 3630: + as collateral + plummeted to billion in + the third quarter of + +On line 3630: + to billion in the + third quarter of and only + billion in the fourth + +On line 3630: + in the third quarter + of and only billion in + the fourth quarter. And + +On line 3630: + the third quarter of + and only billion in the + fourth quarter. And as + +On line 3630: + third quarter of and + only billion in the fourth + quarter. And as the + +On line 3630: + and only billion + in the fourth quarter. And as + the CDO market ground + +On line 3630: + only billion in + the fourth quarter. And as the + CDO market ground to + +On line 3630: + in the fourth quarter. + And as the CDO market ground + to a halt, investors + +On line 3630: + the fourth quarter. And + as the CDO market ground to + a halt, investors no + +On line 3630: + fourth quarter. And as + the CDO market ground to a + halt, investors no longer + +On line 3630: + as the CDO market + ground to a halt, investors no + longer trusted other + +On line 3630: + a halt, investors no + longer trusted other structured + products.3 Over billion + +On line 3630: + products.3 Over billion + of collateralized loan + obligations (CLOs), or + +On line 3630: + loan obligations (CLOs), + or securitized leveraged + loans, were issued in + +On line 3630: + or securitized + leveraged loans, were issued in + only billion were + +On line 3630: + loans, were issued in + only billion were issued + in The issuance of + +On line 3630: + only billion were + issued in The issuance of + commercial real + +On line 3630: + estate mortgage–backed + securities plummeted + from billion in to + +On line 3632: + in to billion in + Those securitization + markets that held up + +On line 3632: + held up during the + turmoil in eventually + suffered in as the + +On line 3632: + during the turmoil + in eventually suffered + in as the crisis + +On line 3632: + the crisis deepened. + Securitization of + auto loans, credit + +On line 3632: + small business loans, and + equipment leases all nearly + ceased in the third and + +On line 3632: + and equipment leases + all nearly ceased in the third + and fourth quarters of + +On line 3634: + all nearly ceased in + the third and fourth quarters of + DELINQUENCIES: "THE TURN + +On line 3634: + in the third and fourth + quarters of DELINQUENCIES: "THE + TURN OF THE HOUSING + +On line 3634: + third and fourth quarters + of DELINQUENCIES: "THE TURN OF + THE HOUSING MARKET" + +On line 3636: + and fourth quarters of + DELINQUENCIES: "THE TURN OF THE + HOUSING MARKET" Home + +On line 3636: + THE HOUSING MARKET" + Home prices rose nationally + in their third year of + +On line 3636: + MARKET" Home prices rose + nationally in their third + year of double-digit + +On line 3636: + nationally in + their third year of double-digit + growth. But by the spring + +On line 3636: + in their third year of + double-digit growth. But by the + spring of as the sales + +On line 3636: + year of double-digit + growth. But by the spring of as + the sales pace slowed, the + +On line 3636: + double-digit growth. But + by the spring of as the sales + pace slowed, the number + +On line 3636: + growth. But by the spring + of as the sales pace slowed, the + number of months it + +On line 3636: + by the spring of as + the sales pace slowed, the number + of months it would take + +On line 3636: + the spring of as the + sales pace slowed, the number of + months it would take to + +On line 3636: + spring of as the sales + pace slowed, the number of months + it would take to sell + +On line 3636: + of as the sales pace + slowed, the number of months it + would take to sell off + +On line 3636: + as the sales pace slowed, + the number of months it would + take to sell off all + +On line 3636: + the sales pace slowed, the + number of months it would take + to sell off all the + +On line 3636: + pace slowed, the number + of months it would take to sell + off all the homes on + +On line 3636: + slowed, the number of + months it would take to sell off + all the homes on the + +On line 3636: + number of months it + would take to sell off all the + homes on the market + +On line 3636: + of months it would take + to sell off all the homes on + the market rose to + +On line 3636: + months it would take to + sell off all the homes on the + market rose to its + +On line 3636: + would take to sell off + all the homes on the market + rose to its highest + +On line 3636: + to sell off all the + homes on the market rose to + its highest level + +On line 3636: + sell off all the homes + on the market rose to its + highest level in + +On line 3636: + homes on the market + rose to its highest level + in years. Nationwide, + +On line 3636: + on the market rose + to its highest level in + years. Nationwide, home + +On line 3636: + the market rose to + its highest level in years. + Nationwide, home prices + +On line 3636: + rose to its highest + level in years. Nationwide, + home prices peaked in April + +On line 3638: + its highest level + in years. Nationwide, home prices + peaked in April Members + +On line 3638: + highest level in + years. Nationwide, home prices peaked + in April Members of + +On line 3638: + in years. Nationwide, + home prices peaked in April Members + of the Federal + +On line 3638: + Nationwide, home prices + peaked in April Members of the + Federal Reserve’s + +On line 3638: + home prices peaked in April + Members of the Federal + Reserve’s Federal + +On line 3638: + Reserve’s Federal + Open Market Committee (FOMC) + discussed housing prices + +On line 3638: + Market Committee + (FOMC) discussed housing prices in + the spring of Chairman + +On line 3638: + (FOMC) discussed housing + prices in the spring of Chairman + Ben Bernanke and other + +On line 3638: + prices in the spring of + Chairman Ben Bernanke and other + members predicted + +On line 3638: + Chairman Ben Bernanke and + other members predicted + a decline in home + +On line 3638: + members predicted + a decline in home prices but + were uncertain whether + +On line 3638: + a decline in home + prices but were uncertain whether + the decline would be + +On line 3638: + decline in home prices + but were uncertain whether the + decline would be slow + +On line 3638: + in home prices but were + uncertain whether the decline + would be slow or fast. + +On line 3638: + but were uncertain + whether the decline would be slow + or fast. Bernanke believed + +On line 3638: + were uncertain whether + the decline would be slow or + fast. Bernanke believed some + +On line 3638: + whether the decline would + be slow or fast. Bernanke believed + some correction in + +On line 3638: + the decline would be + slow or fast. Bernanke believed some + correction in the + +On line 3638: + be slow or fast. Bernanke + believed some correction in + the housing market + +On line 3638: + fast. Bernanke believed some + correction in the housing + market would be healthy + +On line 3638: + some correction in + the housing market would be + healthy and that the goal + +On line 3638: + correction in the + housing market would be healthy + and that the goal of + +On line 3638: + the housing market + would be healthy and that the goal + of the FOMC should be + +On line 3638: + housing market would + be healthy and that the goal of + the FOMC should be to + +On line 3638: + market would be healthy + and that the goal of the FOMC + should be to ensure + +On line 3638: + and that the goal of + the FOMC should be to ensure + the correction did + +On line 3638: + that the goal of the + FOMC should be to ensure the + correction did not + +On line 3638: + the FOMC should be to + ensure the correction did + not overly affect + +On line 3638: + be to ensure the + correction did not overly + affect the growth of + +On line 3638: + the correction did + not overly affect the growth + of the rest of the + +On line 3640: + affect the growth of + the rest of the economy.5 + In October with + +On line 3640: + Economy.com, a + business unit separate from + Moody’s Investors Service, + +On line 3640: + unit separate from + Moody’s Investors Service, issued + a report authored + +On line 3640: + separate from Moody’s + Investors Service, issued a + report authored by + +On line 3640: + Moody’s Investors Service, + issued a report authored + by Chief Economist + +On line 3640: + issued a report + authored by Chief Economist + Mark Zandi titled + +On line 3640: + report authored by + Chief Economist Mark Zandi + titled "Housing at + +On line 3640: + by Chief Economist + Mark Zandi titled "Housing + at the Tipping Point: + +On line 3640: + Chief Economist Mark + Zandi titled "Housing at + the Tipping Point: The + +On line 3640: + Mark Zandi titled + "Housing at the Tipping Point: + The Outlook for the + +On line 3640: + The Outlook for the + U.S. Residential Real + Estate Market." He + +On line 3642: + to the following + conclusion: Nearly of the + nation’s metro areas + +On line 3642: + conclusion: Nearly + of the nation’s metro areas + will experience + +On line 3642: + of the nation’s metro + areas will experience + a crash in house prices; + +On line 3642: + crash in house prices; a + double-digit peak-to-trough decline + in house prices. These sharp + +On line 3642: + prices; a double-digit + peak-to-trough decline in house prices. + These sharp declines in + +On line 3642: + double-digit peak-to-trough + decline in house prices. These sharp + declines in house prices + +On line 3642: + decline in house prices. + These sharp declines in house prices + are expected along + +On line 3642: + prices. These sharp declines + in house prices are expected + along the Southwest coast + +On line 3642: + These sharp declines in + house prices are expected along + the Southwest coast of + +On line 3642: + expected along the + Southwest coast of Florida, + in the metro areas + +On line 3642: + along the Southwest coast + of Florida, in the metro + areas of Arizona + +On line 3642: + of Florida, in + the metro areas of Arizona + and Nevada, in a + +On line 3642: + areas of Arizona + and Nevada, in a number + of California + +On line 3642: + and Nevada, in a + number of California + areas, throughout the + +On line 3642: + areas, throughout the + broad Washington, D.C. area, and + in and around Detroit. + +On line 3642: + broad Washington, D.C. + area, and in and around Detroit. + Many more metro areas + +On line 3642: + Washington, D.C. area, + and in and around Detroit. Many + more metro areas are + +On line 3642: + area, and in and around + Detroit. Many more metro areas + are expected to + +On line 3642: + around Detroit. Many more + metro areas are expected + to experience + +On line 3642: + to experience + only house-price corrections + in which peak-to-trough price + +On line 3642: + price declines remain + in the single digits. It + is important to + +On line 3642: + declines remain in + the single digits. It is + important to note + +On line 3642: + the single digits. + It is important to note + that price declines in + +On line 3642: + It is important + to note that price declines in + various markets + +On line 3644: + various markets + are expected to extend + into and even With + +On line 3644: + nation’s housing stock + experiencing or about + to experience + +On line 3644: + to experience + price declines, national house + prices are also set + +On line 3644: + experience price + declines, national house prices + are also set to + +On line 3644: + declines, national + house prices are also set to + decline. Indeed, odds + +On line 3644: + national house prices + are also set to decline. + Indeed, odds are high + +On line 3644: + prices are also set + to decline. Indeed, odds are + high that national + +On line 3644: + are also set to + decline. Indeed, odds are high + that national house + +On line 3644: + to decline. Indeed, + odds are high that national + house prices will decline + +On line 3644: + decline. Indeed, odds + are high that national house + prices will decline in + +On line 3646: + Indeed, odds are high + that national house prices will + decline in For the + +On line 3646: + Association + of Realtors announced that + the number of sales + +On line 3646: + Realtors announced + that the number of sales of + existing homes had + +On line 3646: + that the number of + sales of existing homes had + experienced the + +On line 3646: + sales of existing + homes had experienced the + sharpest fall in years. That + +On line 3646: + of existing homes + had experienced the sharpest + fall in years. That year, + +On line 3646: + existing homes had + experienced the sharpest fall + in years. That year, home + +On line 3646: + had experienced + the sharpest fall in years. That year, + home prices declined In + +On line 3646: + experienced the + sharpest fall in years. That year, home + prices declined In they + +On line 3646: + sharpest fall in years. That + year, home prices declined In they + would drop a stunning + +On line 3646: + in years. That year, home + prices declined In they would drop + a stunning Overall, + +On line 3646: + years. That year, home prices + declined In they would drop a + stunning Overall, by + +On line 3646: + year, home prices declined + In they would drop a stunning + Overall, by the end + +On line 3648: + prices declined In they + would drop a stunning Overall, + by the end of prices + +On line 3648: + declined In they would + drop a stunning Overall, by + the end of prices would + +On line 3648: + In they would drop a + stunning Overall, by the end + of prices would drop from + +On line 3648: + would drop a stunning + Overall, by the end of prices + would drop from their peak + +On line 3648: + a stunning Overall, + by the end of prices would drop + from their peak in Some + +On line 3648: + stunning Overall, by + the end of prices would drop from + their peak in Some cities + +On line 3648: + Overall, by the end + of prices would drop from their peak + in Some cities saw a + +On line 3648: + of prices would drop from + their peak in Some cities saw a + particularly + +On line 3648: + peak in Some cities saw + a particularly large + drop: in Las Vegas, + +On line 3648: + in Some cities saw a + particularly large drop: + in Las Vegas, as + +On line 3648: + particularly + large drop: in Las Vegas, as + of August home prices + +On line 3648: + drop: in Las Vegas, + as of August home prices were + down from their peak. And + +On line 3648: + Las Vegas, as of + August home prices were down from + their peak. And areas + +On line 3648: + as of August home + prices were down from their peak. And + areas that never + +On line 3648: + August home prices were + down from their peak. And areas + that never saw huge + +On line 3648: + prices were down from their + peak. And areas that never + saw huge price gains have + +On line 3648: + their peak. And areas + that never saw huge price gains + have experienced + +On line 3648: + that never saw huge + price gains have experienced + losses as well: home + +On line 3648: + have experienced + losses as well: home prices in + Denver have fallen + +On line 3650: + losses as well: home + prices in Denver have fallen + since their peak. In some + +On line 3650: + as well: home prices in + Denver have fallen since their + peak. In some areas, + +On line 3650: + home prices in Denver + have fallen since their peak. In + some areas, home prices + +On line 3650: + Denver have fallen + since their peak. In some areas, + home prices started to + +On line 3650: + have fallen since their + peak. In some areas, home prices + started to fall as + +On line 3650: + since their peak. In some + areas, home prices started to + fall as early as + +On line 3650: + peak. In some areas, + home prices started to fall as + early as late For + +On line 3650: + home prices started to + fall as early as late For + example, in Ocean + +On line 3650: + to fall as early + as late For example, in + Ocean City, New Jersey, + +On line 3650: + fall as early as + late For example, in Ocean + City, New Jersey, where + +On line 3650: + as early as late + For example, in Ocean City, + New Jersey, where many + +On line 3650: + late For example, + in Ocean City, New Jersey, where + many properties are + +On line 3650: + New Jersey, where many + properties are vacation + homes, home prices had risen + +On line 3650: + where many properties + are vacation homes, home prices + had risen since they topped + +On line 3650: + many properties are + vacation homes, home prices had + risen since they topped out + +On line 3650: + are vacation homes, + home prices had risen since they topped + out in December + +On line 3650: + vacation homes, home + prices had risen since they topped out + in December and + +On line 3650: + home prices had risen since + they topped out in December + and fell in the first + +On line 3650: + prices had risen since they + topped out in December and + fell in the first half + +On line 3650: + had risen since they topped + out in December and fell + in the first half of + +On line 3650: + risen since they topped out + in December and fell in + the first half of By + +On line 3650: + since they topped out in + December and fell in the + first half of By mid-2010, + +On line 3650: + out in December + and fell in the first half of + By mid-2010, they would be% + +On line 3650: + December and fell + in the first half of By mid-2010, + they would be% below + +On line 3650: + and fell in the first + half of By mid-2010, they would be% + below their peak. Prices + +On line 3650: + in the first half of + By mid-2010, they would be% below + their peak. Prices topped out + +On line 3650: + the first half of By + mid-2010, they would be% below their + peak. Prices topped out in + +On line 3650: + of By mid-2010, they would + be% below their peak. Prices topped + out in Sacramento + +On line 3650: + By mid-2010, they would be% + below their peak. Prices topped out + in Sacramento in + +On line 3650: + be% below their peak. + Prices topped out in Sacramento + in October and + +On line 3650: + below their peak. Prices + topped out in Sacramento in + October and are + +On line 3650: + peak. Prices topped out in + Sacramento in October + and are today down + +On line 3650: + in Sacramento in + October and are today + down nearly In most + +On line 3650: + in October and + are today down nearly In + most places, prices rose for + +On line 3650: + October and are + today down nearly In most + places, prices rose for a + +On line 3650: + and are today down + nearly In most places, prices rose + for a bit longer. For + +On line 3650: + today down nearly + In most places, prices rose for a + bit longer. For instance, + +On line 3650: + nearly In most places, + prices rose for a bit longer. For + instance, in Tucson, + +On line 3650: + In most places, prices rose + for a bit longer. For instance, + in Tucson, Arizona, + +On line 3650: + most places, prices rose for + a bit longer. For instance, in + Tucson, Arizona, prices + +On line 3650: + for a bit longer. For + instance, in Tucson, Arizona, + prices kept increasing + +On line 3650: + bit longer. For instance, + in Tucson, Arizona, prices kept + increasing for much + +On line 3650: + instance, in Tucson, + Arizona, prices kept increasing + for much of climbing + +On line 3650: + in Tucson, Arizona, + prices kept increasing for much + of climbing from to + +On line 3650: + Tucson, Arizona, prices + kept increasing for much of + climbing from to their + +On line 3650: + kept increasing for + much of climbing from to their + high point in August + +On line 3650: + increasing for much + of climbing from to their high + point in August and + +On line 3650: + much of climbing from + to their high point in August + and then fell only + +On line 3650: + of climbing from to + their high point in August and + then fell only by + +On line 3650: + climbing from to their + high point in August and then + fell only by the + +On line 3650: + to their high point in + August and then fell only + by the end of the + +On line 3652: + high point in August + and then fell only by the + end of the year.8 One + +On line 3652: + point in August and + then fell only by the end + of the year.8 One of + +On line 3652: + in August and then + fell only by the end of + the year.8 One of the + +On line 3652: + August and then fell + only by the end of the + year.8 One of the first + +On line 3652: + and then fell only + by the end of the year.8 One + of the first signs of + +On line 3652: + then fell only by + the end of the year.8 One of + the first signs of the + +On line 3652: + only by the end + of the year.8 One of the first + signs of the housing + +On line 3652: + by the end of the + year.8 One of the first signs of + the housing crash was + +On line 3652: + the end of the year.8 + One of the first signs of the + housing crash was an + +On line 3652: + of the year.8 One of + the first signs of the housing + crash was an upswing + +On line 3652: + the year.8 One of the + first signs of the housing crash + was an upswing in + +On line 3652: + One of the first signs + of the housing crash was an + upswing in early + +On line 3652: + the first signs of the + housing crash was an upswing + in early payment + +On line 3652: + housing crash was an + upswing in early payment + defaults—usually + +On line 3652: + borrowers’ being + or more days delinquent within + the first year. Figures + +On line 3652: + being or more days + delinquent within the first year. + Figures provided + +On line 3652: + or more days delinquent + within the first year. Figures + provided to the + +On line 3652: + delinquent within the + first year. Figures provided + to the FCIC show that + +On line 3652: + within the first year. + Figures provided to the + FCIC show that by the + +On line 3652: + the first year. Figures + provided to the FCIC show + that by the summer + +On line 3652: + Figures provided + to the FCIC show that by the + summer of of loans + +On line 3652: + provided to the + FCIC show that by the summer + of of loans less than + +On line 3652: + to the FCIC show that + by the summer of of loans + less than a year old + +On line 3652: + the FCIC show that by + the summer of of loans less + than a year old were + +On line 3652: + FCIC show that by the + summer of of loans less than + a year old were in + +On line 3652: + that by the summer + of of loans less than a year + old were in default. + +On line 3652: + by the summer of + of loans less than a year old + were in default. The + +On line 3652: + summer of of loans + less than a year old were in + default. The figure + +On line 3652: + of of loans less than + a year old were in default. + The figure would peak + +On line 3652: + of loans less than a + year old were in default. The + figure would peak in + +On line 3652: + less than a year old + were in default. The figure + would peak in late at + +On line 3652: + than a year old were + in default. The figure would + peak in late at well + +On line 3652: + a year old were in + default. The figure would peak + in late at well above + +On line 3652: + old were in default. + The figure would peak in late + at well above the peak + +On line 3652: + were in default. The + figure would peak in late at + well above the peak in + +On line 3652: + The figure would peak + in late at well above the peak + in the recession. + +On line 3652: + figure would peak in + late at well above the peak in + the recession. Even + +On line 3652: + in late at well above + the peak in the recession. + Even more stunning, first + +On line 3652: + at well above the peak + in the recession. Even more + stunning, first payment + +On line 3654: + out by borrowers + who never made a single + payment— went above of + +On line 3654: + payment— went above of + loans in early Responding + to questions about that + +On line 3654: + of loans in early + Responding to questions about + that data, CoreLogic Chief + +On line 3654: + early Responding + to questions about that data, + CoreLogic Chief Economist + +On line 3654: + to questions about that + data, CoreLogic Chief Economist + Mark Fleming told the + +On line 3654: + about that data, CoreLogic + Chief Economist Mark Fleming + told the FCIC that the + +On line 3654: + CoreLogic Chief Economist + Mark Fleming told the FCIC that + the early payment + +On line 3654: + payment default rate + "certainly correlates with + the increase in the + +On line 3654: + the increase in the + Alt-A and subprime shares and the + turn of the housing + +On line 3654: + shares and the turn of + the housing market and the + sensitivity + +On line 3654: + the housing market + and the sensitivity + of those loan products."10 + +On line 3656: + loan products."10 Mortgages + in serious delinquency, + defined as those or + +On line 3656: + delinquency, defined + as those or more days past due + or in foreclosure, + +On line 3656: + those or more days past + due or in foreclosure, had + hovered around during + +On line 3656: + days past due or in + foreclosure, had hovered around + during the early + +On line 3656: + or in foreclosure, + had hovered around during the + early part of the + +On line 3658: + during the early + part of the decade, jumped in and + kept climbing. By the + +On line 3658: + early part of the + decade, jumped in and kept climbing. + By the end of of + +On line 3658: + part of the decade, jumped + in and kept climbing. By the + end of of mortgage + +On line 3658: + of the decade, jumped in + and kept climbing. By the end + of of mortgage loans + +On line 3658: + the decade, jumped in and + kept climbing. By the end of + of mortgage loans were + +On line 3658: + and kept climbing. By + the end of of mortgage loans + were seriously + +On line 3658: + of of mortgage loans + were seriously delinquent. + By comparison, + +On line 3658: + By comparison, + serious delinquencies peaked + at in following + +On line 3660: + the country that had + experienced the biggest + housing booms. In the + +On line 3660: + had experienced + the biggest housing booms. In + the "sand states"—California, Arizona, + +On line 3660: + the "sand states"—California, Arizona, + Nevada, and Florida—serious + delinquency rose to + +On line 3660: + Arizona, Nevada, and + Florida—serious delinquency + rose to in mid-2007 and + +On line 3660: + and Florida—serious + delinquency rose to in mid-2007 + and by late double + +On line 3660: + delinquency rose to + in mid-2007 and by late double + the rate in other + +On line 3660: + rose to in mid-2007 and + by late double the rate in + other areas of + +On line 3660: + and by late double + the rate in other areas + of the country (see + +On line 3660: + late double the rate + in other areas of the + country (see figure + +On line 3662: + the rate in other + areas of the country (see + figure Serious + +On line 3662: + figure Serious + delinquency also varied + by type of loan (see + +On line 3662: + (see figure Subprime + adjustable-rate mortgages began to + show increases in + +On line 3662: + to show increases + in serious delinquency + in early even as + +On line 3662: + show increases in + serious delinquency in + early even as house + +On line 3662: + in early even as + house prices were peaking; the rate + rose rapidly to in + +On line 3662: + early even as house + prices were peaking; the rate rose + rapidly to in By + +On line 3662: + even as house prices were + peaking; the rate rose rapidly + to in By late the + +On line 3662: + prices were peaking; the + rate rose rapidly to in By + late the delinquency + +On line 3662: + were peaking; the rate + rose rapidly to in By late + the delinquency rate + +On line 3662: + peaking; the rate rose + rapidly to in By late the + delinquency rate for + +On line 3662: + rate rose rapidly to + in By late the delinquency + rate for subprime ARMs + +On line 3662: + rose rapidly to in + By late the delinquency rate + for subprime ARMs was + +On line 3662: + rapidly to in By + late the delinquency rate for + subprime ARMs was Prime + +On line 3662: + to in By late the + delinquency rate for subprime + ARMs was Prime ARMs did + +On line 3662: + late the delinquency + rate for subprime ARMs was Prime + ARMs did not weaken + +On line 3662: + delinquency rate for + subprime ARMs was Prime ARMs did + not weaken until + +On line 3662: + rate for subprime ARMs + was Prime ARMs did not weaken + until at about the + +On line 3662: + subprime ARMs was Prime + ARMs did not weaken until + at about the same time + +On line 3662: + was Prime ARMs did not + weaken until at about the + same time as subprime + +On line 3662: + weaken until at + about the same time as subprime + fixed-rate mortgages. Prime fixed-rate + +On line 3662: + at about the same time + as subprime fixed-rate mortgages. Prime + fixed-rate mortgages, which have + +On line 3662: + Prime fixed-rate mortgages, which + have historically been + the least risky, showed a + +On line 3662: + fixed-rate mortgages, which have + historically been the + least risky, showed a slow + +On line 3662: + showed a slow increase + in serious delinquency + that coincided + +On line 3662: + a slow increase in + serious delinquency that + coincided with + +On line 3662: + coincided with + the increasing severity + of the recession + +On line 3664: + of the recession + and of unemployment in + The FCIC undertook + +On line 3664: + the recession and + of unemployment in The + FCIC undertook an + +On line 3664: + of mortgages purchased + or guaranteed by the GSEs, + those securitized + +On line 3664: + mortgages purchased or + guaranteed by the GSEs, those + securitized in + +On line 3664: + guaranteed by the + GSEs, those securitized in + the private market, + +On line 3664: + those securitized + in the private market, and + those insured by the + +On line 3664: + of each year from through + The data contained mortgages + in four groups—loans that + +On line 3664: + each year from through The + data contained mortgages in + four groups—loans that were + +On line 3664: + subprime by issuers + (labeled SUB), loans sold into + private label Alt-A + +On line 3664: + private label Alt-A + securitizations (ALT), + loans either purchased + +On line 3664: + either purchased or + guaranteed by the GSEs (GSE), + and loans guaranteed + +On line 3664: + guaranteed by the + GSEs (GSE), and loans guaranteed + by the Federal + +On line 3664: + and loans guaranteed + by the Federal Housing + Administration + +On line 3664: + group, in addition + to the more traditional + conforming GSE loans, + +On line 3664: + more traditional + conforming GSE loans, also + includes mortgages that + +On line 3664: + conforming GSE loans, + also includes mortgages that + the GSEs identified + +On line 3664: + mortgages that the GSEs + identified as subprime and + Alt-A loans owing to + +On line 3664: + as subprime and Alt-A + loans owing to their higher-risk + characteristics, + +On line 3666: + characteristics, + as discussed in earlier + chapters. Within each + +On line 3666: + earlier chapters. + Within each of the four groups, + the FCIC created + +On line 3666: + the four groups, the FCIC + created subgroups based on + characteristics + +On line 3666: + created subgroups + based on characteristics + that could affect loan + +On line 3666: + that could affect loan + performance: FICO credit + scores, loan-to-value + +On line 3666: + FICO credit scores, + loan-to-value ratios (LTVs), + and mortgage size. For + +On line 3666: + scores, loan-to-value + ratios (LTVs), and mortgage size. + For example, one + +On line 3666: + (LTVs), and mortgage size. + For example, one subgroup + would be GSE loans with + +On line 3666: + and mortgage size. For + example, one subgroup would + be GSE loans with a + +On line 3666: + For example, one + subgroup would be GSE loans with + a balance below + +On line 3666: + subgroup would be GSE + loans with a balance below + (conforming to GSE + +On line 3666: + loans with a balance + below (conforming to GSE + loan size limits), a + +On line 3666: + a balance below + (conforming to GSE loan size + limits), a FICO + +On line 3666: + below (conforming + to GSE loan size limits), a + FICO score between + +On line 3666: + (conforming to GSE + loan size limits), a FICO + score between and (a + +On line 3666: + GSE loan size limits), + a FICO score between and + (a borrower with + +On line 3666: + and (a borrower + with below-average credit + history), and LTV + +On line 3666: + history), and LTV + between and Another group + would be Alt-A loans with + +On line 3666: + and Another group + would be Alt-A loans with the same + characteristics. + +On line 3666: + would be Alt-A loans with + the same characteristics. + In each year, the loans + +On line 3666: + be Alt-A loans with the + same characteristics. In + each year, the loans were + +On line 3666: + each year, the loans were + broken into different + subgroups—144 each for GSE, + +On line 3666: + the loans were broken + into different subgroups—144 + each for GSE, SUB, ALT, + +On line 3666: + were broken into + different subgroups—144 each for + GSE, SUB, ALT, and FHA.15 + +On line 3668: + for GSE, SUB, ALT, and + FHA.15 Figure graphically + demonstrates the results + +On line 3668: + demonstrates the results + of the examination. + The various bars + +On line 3668: + examination. + The various bars show the + range of average + +On line 3668: + The various bars + show the range of average + delinquencies for each + +On line 3668: + bars show the range of + average delinquencies for + each of the four groups + +On line 3668: + range of average + delinquencies for each of the + four groups examined, + +On line 3668: + for each of the four + groups examined, based on the + distribution of + +On line 3668: + four groups examined, + based on the distribution + of delinquency rates + +On line 3668: + the distribution + of delinquency rates within + the subgroups for each + +On line 3668: + distribution of + delinquency rates within the + subgroups for each loan + +On line 3668: + of delinquency rates + within the subgroups for each + loan category. + +On line 3668: + within the subgroups + for each loan category. + The black portion of + +On line 3668: + the subgroups for each + loan category. The black + portion of each bar + +On line 3668: + black portion of each + bar represents the middle + on either side of + +On line 3668: + portion of each bar + represents the middle on + either side of the + +On line 3668: + each bar represents + the middle on either side + of the median) + +On line 3668: + bar represents the + middle on either side of + the median) of + +On line 3668: + middle on either + side of the median) of + the distribution + +On line 3668: + including both dark + and light shading, represents + the middle of the + +On line 3668: + dark and light shading, + represents the middle of + the distribution + +On line 3668: + the distribution + of average delinquency + rates. The bars exclude + +On line 3668: + distribution of + average delinquency rates. + The bars exclude the + +On line 3668: + bars exclude the at + the extremes of each end of + the distribution. + +On line 3668: + exclude the at the + extremes of each end of the + distribution. For + +On line 3668: + the extremes of each + end of the distribution. + For example, at + +On line 3668: + extremes of each end + of the distribution. For + example, at the + +On line 3668: + the distribution. + For example, at the end + of the black portion + +On line 3668: + distribution. For + example, at the end of + the black portion of + +On line 3668: + For example, at + the end of the black portion + of the GSE bar spans + +On line 3668: + example, at the + end of the black portion of + the GSE bar spans a + +On line 3668: + at the end of the + black portion of the GSE bar + spans a average + +On line 3668: + black portion of the + GSE bar spans a average + delinquency rate on + +On line 3668: + of the GSE bar spans + a average delinquency + rate on the low end + +On line 3668: + the GSE bar spans a + average delinquency rate + on the low end and + +On line 3668: + on the low end and + a average delinquency + rate on the high end. + +On line 3668: + the low end and a + average delinquency rate + on the high end. The + +On line 3668: + and a average + delinquency rate on the high + end. The full bar for + +On line 3668: + high end. The full bar + for the GSEs spans average + delinquency rates from + +On line 3668: + full bar for the GSEs + spans average delinquency + rates from to That means + +On line 3668: + bar for the GSEs spans + average delinquency rates + from to That means that + +On line 3668: + GSEs spans average + delinquency rates from to That + means that only of + +On line 3668: + were in subgroups with + average delinquency rates + above In sharp contrast, + +On line 3670: + (SUB) spans average + delinquency rates between on + the low end and on + +On line 3670: + rates between on the + low end and on the high end, + and the full bar spans + +On line 3670: + on the low end and + on the high end, and the full + bar spans average + +On line 3670: + end, and the full bar + spans average delinquency + rates between and That + +On line 3670: + and the full bar spans + average delinquency rates + between and That means + +On line 3670: + bar spans average + delinquency rates between and + That means that only + +On line 3670: + rates between and That + means that only of SUB loans + were in subgroups with + +On line 3672: + The worst-performing of + GSE loans are in subgroups with + rates of serious + +On line 3672: + in subgroups with rates + of serious delinquency + similar to the + +On line 3672: + rates of serious + delinquency similar to + the best-performing of + +On line 3674: + to the best-performing + of SUB loans.16 By the end of + performance within + +On line 3674: + of SUB loans.16 By the + end of performance within + all segments of the + +On line 3674: + end of performance + within all segments of the + market had weakened. + +On line 3676: + market had weakened. + The median delinquency + rate—the midpoints of the + +On line 3678: + rate—the midpoints of the + black bars—rose from in to for GSE + loans, from to for SUB + +On line 3678: + midpoints of the black + bars—rose from in to for GSE loans, + from to for SUB loans, + +On line 3678: + of the black bars—rose from + in to for GSE loans, from to + for SUB loans, from to + +On line 3678: + the black bars—rose from in + to for GSE loans, from to for + SUB loans, from to for + +On line 3678: + black bars—rose from in to + for GSE loans, from to for SUB + loans, from to for Alt-A + +On line 3678: + bars—rose from in to for + GSE loans, from to for SUB loans, + from to for Alt-A loans, + +On line 3678: + from in to for GSE + loans, from to for SUB loans, from + to for Alt-A loans, and + +On line 3678: + to for GSE loans, from + to for SUB loans, from to for + Alt-A loans, and remained + +On line 3678: + for GSE loans, from to + for SUB loans, from to for Alt-A + loans, and remained at + +On line 3678: + loans, from to for SUB + loans, from to for Alt-A loans, and + remained at roughly + +On line 3678: + to for SUB loans, from + to for Alt-A loans, and remained + at roughly for FHA + +On line 3678: + for SUB loans, from to + for Alt-A loans, and remained at + roughly for FHA loans. + +On line 3680: + from to for Alt-A loans, + and remained at roughly for + FHA loans. The data + +On line 3680: + Alt-A loans, and remained + at roughly for FHA loans. The + data illustrate + +On line 3680: + at roughly for FHA + loans. The data illustrate + that in and GSE loans + +On line 3680: + data illustrate + that in and GSE loans performed + significantly + +On line 3680: + or non-GSE, subprime and + Alt-A loans. That holds true even when + comparing loans in + +On line 3680: + and Alt-A loans. That holds + true even when comparing loans + in GSE pools that share + +On line 3680: + Alt-A loans. That holds true + even when comparing loans in + GSE pools that share the + +On line 3680: + loans. That holds true even + when comparing loans in GSE + pools that share the same + +On line 3680: + That holds true even when + comparing loans in GSE pools + that share the same key + +On line 3680: + comparing loans in + GSE pools that share the same key + characteristics + +On line 3680: + that share the same key + characteristics with the + loans in privately + +On line 3680: + loans in privately + securitized mortgages, such + as low FICO scores. + +On line 3680: + such as low FICO + scores. For example, among loans + to borrowers with + +On line 3680: + scores. For example, + among loans to borrowers with + FICO scores below + +On line 3684: + times as likely to + be seriously delinquent + as a GSE. In the + +On line 3684: + In the respective + average delinquency rates + for the non-GSE and GSE + +On line 3684: + delinquency rates for + the non-GSE and GSE loans were and + These patterns are most + +On line 3684: + for the non-GSE and GSE + loans were and These patterns are + most likely driven + +On line 3684: + the non-GSE and GSE loans + were and These patterns are most + likely driven by + +On line 3686: + by some differences + not captured in these mortgages.17 + For instance, in the + +On line 3686: + some differences not + captured in these mortgages.17 For + instance, in the GSE + +On line 3686: + not captured in these + mortgages.17 For instance, in the + GSE pool, borrowers + +On line 3686: + For instance, in the + GSE pool, borrowers tended + to make bigger down + +On line 3686: + borrowers tended + to make bigger down payments. + The FCIC’s data show + +On line 3686: + to make bigger down + payments. The FCIC’s data show + that of GSE loans with + +On line 3686: + bigger down payments. + The FCIC’s data show that of + GSE loans with FICO + +On line 3686: + The FCIC’s data show + that of GSE loans with FICO + scores below had an + +On line 3686: + indicating that + the borrower made a down + payment of at least + +On line 3686: + that the borrower + made a down payment of at + least of the sales price. + +On line 3686: + the borrower made + a down payment of at least + of the sales price. This + +On line 3686: + made a down payment + of at least of the sales price. + This relatively + +On line 3686: + a down payment of + at least of the sales price. This + relatively large + +On line 3686: + of at least of the + sales price. This relatively + large down payment would + +On line 3686: + at least of the sales + price. This relatively large + down payment would help + +On line 3686: + relatively large + down payment would help offset + the effect of the + +On line 3686: + large down payment would + help offset the effect of + the lower FICO + +On line 3686: + down payment would help + offset the effect of the + lower FICO score. + +On line 3686: + offset the effect + of the lower FICO score. + In contrast, only + +On line 3686: + the lower FICO + score. In contrast, only of + loans with FICO scores + +On line 3686: + under The data + illustrate that non-agency + securitized loans + +On line 3686: + more likely to have + more than one risk factor and + thereby exhibit + +On line 3686: + one risk factor and + thereby exhibit so-called + risk layering, such + +On line 3686: + thereby exhibit + so-called risk layering, such + as low FICO scores + +On line 3686: + exhibit so-called + risk layering, such as low + FICO scores on top + +On line 3686: + risk layering, such + as low FICO scores on top + of small down payments. + +On line 3688: + layering, such as + low FICO scores on top of + small down payments. GSE + +On line 3688: + as low FICO scores + on top of small down payments. + GSE mortgages with Alt-A + +On line 3688: + on top of small down + payments. GSE mortgages with Alt-A + characteristics + +On line 3688: + Alt-A securities. + For example, in among loans + with an LTV above the + +On line 3688: + securities. For + example, in among loans with + an LTV above the GSE + +On line 3688: + in among loans with an + LTV above the GSE pools have an + average rate of + +On line 3688: + with an LTV above the + GSE pools have an average + rate of serious + +On line 3688: + an average rate + of serious delinquency + of versus a rate + +On line 3688: + average rate of + serious delinquency of + versus a rate of + +On line 3688: + rate of serious + delinquency of versus a + rate of for loans in + +On line 3688: + of versus a rate + of for loans in private Alt-A + securities.18 These + +On line 3688: + loans in private Alt-A + securities.18 These results + are also, in large + +On line 3688: + Alt-A securities.18 + These results are also, in + large part, driven by + +On line 3688: + are also, in large + part, driven by differences + in risk layering. + +On line 3690: + by differences in + risk layering. Others frame + the situation + +On line 3690: + the situation + differently. According + to Ed Pinto, a + +On line 3690: + to Ed Pinto, a + mortgage finance industry + consultant who was + +On line 3690: + a mortgage finance + industry consultant who + was the chief credit + +On line 3690: + finance industry + consultant who was the chief + credit officer + +On line 3690: + consultant who was + the chief credit officer + at Fannie Mae in + +On line 3690: + credit officer + at Fannie Mae in the 1980s, + GSEs dominated + +On line 3690: + at Fannie Mae in + the 1980s, GSEs dominated + the market for risky + +On line 3690: + Fannie Mae in the + 1980s, GSEs dominated the + market for risky loans. + +On line 3690: + market for risky loans. + In written analyses reviewed + by the FCIC staff and + +On line 3690: + the FCIC staff and sent + to Commissioners as well + as in a number + +On line 3690: + FCIC staff and sent to + Commissioners as well as + in a number of + +On line 3690: + Commissioners as + well as in a number of + interviews, Pinto + +On line 3690: + as in a number + of interviews, Pinto has + argued that the GSE + +On line 3690: + interviews, Pinto + has argued that the GSE loans + that had FICO scores + +On line 3690: + has argued that the + GSE loans that had FICO scores + below a combined + +On line 3690: + FICO scores below + a combined loan-to-value + ratio greater than or + +On line 3690: + as interest-only + payments were essentially + equivalent to those + +On line 3692: + labeled subprime and + Alt-A by issuers. Using strict + cutoffs on FICO + +On line 3692: + subprime and Alt-A by + issuers. Using strict cutoffs + on FICO score and + +On line 3692: + by issuers. Using + strict cutoffs on FICO score + and loan-to-value + +On line 3692: + partly related + to mortgage performance (as + well as relying + +On line 3692: + well as relying + on a number of other + assumptions), Pinto + +On line 3692: + on a number of + other assumptions), Pinto + estimates that as + +On line 3692: + assumptions), Pinto + estimates that as of June + of all mortgages in + +On line 3692: + estimates that as + of June of all mortgages in + the country—26.7 million + +On line 3692: + that as of June of + all mortgages in the country—26.7 + million of them—were risky + +On line 3692: + June of all mortgages + in the country—26.7 million of + them—were risky mortgages that + +On line 3692: + of all mortgages in + the country—26.7 million of them—were + risky mortgages that he + +On line 3692: + the country—26.7 million + of them—were risky mortgages that he + defines as subprime + +On line 3692: + million of them—were risky + mortgages that he defines as + subprime or Alt-A. Of + +On line 3692: + them—were risky mortgages that + he defines as subprime or + Alt-A. Of these, Pinto + +On line 3692: + risky mortgages that he + defines as subprime or Alt-A. + Of these, Pinto counts + +On line 3692: + defines as subprime + or Alt-A. Of these, Pinto counts + million, or that were + +On line 3692: + as subprime or Alt-A. + Of these, Pinto counts million, + or that were purchased + +On line 3692: + subprime or Alt-A. Of + these, Pinto counts million, or + that were purchased or + +On line 3692: + Of these, Pinto counts + million, or that were purchased + or guaranteed by + +On line 3692: + million, or that were + purchased or guaranteed by + the GSEs.19 In contrast, + +On line 3692: + or that were purchased + or guaranteed by the GSEs.19 + In contrast, the GSEs + +On line 3694: + GSEs.19 In contrast, the + GSEs categorize fewer + than million of their + +On line 3694: + In contrast, the GSEs + categorize fewer than + million of their loans + +On line 3694: + GSEs categorize + fewer than million of their + loans as subprime or + +On line 3696: + fewer than million + of their loans as subprime or + Alt-A.20 Importantly, + +On line 3696: + their loans as subprime + or Alt-A.20 Importantly, as + the FCIC review shows, + +On line 3696: + loans as subprime or + Alt-A.20 Importantly, as the + FCIC review shows, the + +On line 3696: + as subprime or Alt-A.20 + Importantly, as the FCIC + review shows, the GSE + +On line 3696: + Alt-A.20 Importantly, + as the FCIC review shows, the + GSE loans classified + +On line 3696: + Importantly, as + the FCIC review shows, the GSE + loans classified as + +On line 3696: + as the FCIC review + shows, the GSE loans classified + as subprime or Alt-A + +On line 3696: + the FCIC review shows, + the GSE loans classified as + subprime or Alt-A in + +On line 3696: + review shows, the GSE + loans classified as subprime + or Alt-A in Pinto’s + +On line 3696: + loans classified as + subprime or Alt-A in Pinto’s + analysis did not + +On line 3696: + as subprime or Alt-A + in Pinto’s analysis did + not perform nearly + +On line 3696: + subprime or Alt-A in + Pinto’s analysis did not + perform nearly as + +On line 3696: + or Alt-A in Pinto’s + analysis did not perform + nearly as poorly + +On line 3696: + Pinto’s analysis + did not perform nearly as + poorly as loans in + +On line 3696: + as poorly as loans + in non-agency subprime or + Alt-A securities. + +On line 3696: + poorly as loans in + non-agency subprime or Alt-A + securities. These + +On line 3696: + non-agency subprime + or Alt-A securities. These + differences suggest + +On line 3696: + Alt-A securities. + These differences suggest that + grouping all of these + +On line 3696: + suggest that grouping + all of these loans together + is misleading. In + +On line 3696: + these loans together + is misleading. In direct + contrast to Pinto’s + +On line 3696: + is misleading. In + direct contrast to Pinto’s + claim, GSE mortgages with + +On line 3696: + characteristics + such as high loan-to-value + ratios are not at + +On line 3696: + performance data + assembled and analyzed + by the FCIC show that + +On line 3696: + securitized loans + experienced much higher + rates of delinquency + +On line 3696: + experienced much + higher rates of delinquency + than did the GSE loans + +On line 3696: + much higher rates of + delinquency than did the GSE + loans with similar + +On line 3696: + delinquency than did + the GSE loans with similar + characteristics. + +On line 3698: + In addition to + examining loans owned and + guaranteed by the + +On line 3698: + examining loans + owned and guaranteed by the + GSEs, Pinto also + +On line 3698: + owned and guaranteed + by the GSEs, Pinto also + commented on the + +On line 3698: + GSEs, Pinto also + commented on the role of + the Community + +On line 3698: + commented on the + role of the Community + Reinvestment Act (CRA) + +On line 3698: + on the role of the + Community Reinvestment + Act (CRA) in causing + +On line 3698: + Act (CRA) in causing + the crisis, declaring, "The pain + and hardship that CRA + +On line 3698: + (CRA) in causing the + crisis, declaring, "The pain and + hardship that CRA has + +On line 3698: + causing the crisis, + declaring, "The pain and hardship + that CRA has likely + +On line 3698: + the crisis, declaring, + "The pain and hardship that CRA + has likely spawned are + +On line 3700: + CRA has likely spawned + are immeasurable."21 ontrary + to this view, two Fed + +On line 3700: + to this view, two Fed + economists determined that + lenders actually + +On line 3700: + lenders actually + made few subprime loans to meet + their CRA requirements. + +On line 3700: + made few subprime loans + to meet their CRA requirements. + Analyzing a + +On line 3702: + their CRA requirements. + Analyzing a database + of nearly million + +On line 3702: + Analyzing a + database of nearly million + loans originated + +On line 3702: + of nearly million + loans originated in they + found that only a + +On line 3702: + nearly million loans + originated in they found + that only a small + +On line 3702: + loans originated + in they found that only a + small percentage of + +On line 3702: + originated in + they found that only a small + percentage of all + +On line 3702: + they found that only + a small percentage of all + higher-cost loans as + +On line 3702: + a small percentage + of all higher-cost loans as + defined by the Home + +On line 3702: + percentage of all + higher-cost loans as defined + by the Home Mortgage + +On line 3702: + of all higher-cost + loans as defined by the Home + Mortgage Disclosure + +On line 3702: + higher-cost loans as + defined by the Home Mortgage + Disclosure Act had + +On line 3702: + as defined by the + Home Mortgage Disclosure Act + had any connection + +On line 3702: + defined by the Home + Mortgage Disclosure Act had + any connection to + +On line 3702: + Disclosure Act had + any connection to the CRA. + These higher-cost loans + +On line 3702: + had any connection + to the CRA. These higher-cost + loans serve as a rough + +On line 3702: + any connection to + the CRA. These higher-cost loans + serve as a rough proxy + +On line 3702: + connection to the + CRA. These higher-cost loans serve + as a rough proxy for + +On line 3702: + rough proxy for subprime + mortgages. Specifically, the + study found that only + +On line 3702: + for subprime mortgages. + Specifically, the study found + that only of such + +On line 3702: + Specifically, the + study found that only of such + higher-cost loans were + +On line 3702: + or moderate-income + neighborhoods by banks and thrifts + (and their subsidiaries and + +On line 3702: + banks and thrifts (and their + subsidiaries and affiliates) + covered by the CRA. + +On line 3704: + (and their subsidiaries and + affiliates) covered by + the CRA. The other + +On line 3704: + covered by the CRA. + The other of higher-cost + loans either were made + +On line 3704: + loans either were made + by CRA-covered institutions that + did not receive CRA + +On line 3704: + institutions that + did not receive CRA credit + for these loans or were + +On line 3704: + that did not receive + CRA credit for these loans or + were made by lenders not + +On line 3704: + receive CRA credit + for these loans or were made by + lenders not covered by + +On line 3704: + CRA credit for these + loans or were made by lenders not + covered by the CRA. + +On line 3704: + these loans or were made + by lenders not covered by the + CRA. Using other + +On line 3704: + were made by lenders not + covered by the CRA. Using + other data sources, + +On line 3704: + not covered by the + CRA. Using other data + sources, these economists + +On line 3704: + CRA. Using other + data sources, these economists + also found that CRA-related + +On line 3704: + other data sources, + these economists also found + that CRA-related subprime loans + +On line 3704: + that CRA-related subprime loans + appeared to perform better + than other subprime + +On line 3704: + than other subprime + loans. "Taken together, the + available evidence + +On line 3704: + "Taken together, + the available evidence seems + to run counter to the + +On line 3704: + evidence seems to + run counter to the contention that + the CRA contributed + +On line 3704: + counter to the contention + that the CRA contributed in + any substantive way + +On line 3704: + to the contention that + the CRA contributed in any + substantive way to + +On line 3704: + the CRA contributed + in any substantive way to + the current crisis," + +On line 3704: + CRA contributed in + any substantive way to the + current crisis," they + +On line 3706: + in any substantive + way to the current crisis," + they wrote.22 Subsequent + +On line 3706: + substantive way to + the current crisis," they wrote.22 + Subsequent research + +On line 3706: + way to the current + crisis," they wrote.22 Subsequent + research has come to + +On line 3706: + current crisis," they + wrote.22 Subsequent research has + come to similar + +On line 3706: + come to similar + conclusions. For example, + two economists at + +On line 3706: + the San Francisco + Fed, using a different + methodology and + +On line 3706: + methodology and + analyzing data on + the California + +On line 3706: + of loans made by CRA-covered + lenders were located in low- + and moderate-income + +On line 3706: + lenders were located + in low- and moderate-income + census tracts versus + +On line 3706: + located in low- + and moderate-income census + tracts versus over for + +On line 3706: + not covered by the + CRA. Further, fewer than of + the loans made by CRA + +On line 3706: + covered by the CRA. + Further, fewer than of the + loans made by CRA lenders + +On line 3706: + loans made by CRA lenders + in low-income communities + were higher priced, even + +On line 3706: + made by CRA lenders in + low-income communities were + higher priced, even at + +On line 3706: + CRA lenders in low-income + communities were higher + priced, even at the peak + +On line 3706: + communities were + higher priced, even at the peak + of the market. In + +On line 3706: + were higher priced, even + at the peak of the market. + In contrast, about one-half + +On line 3706: + higher priced, even at + the peak of the market. In + contrast, about one-half of + +On line 3706: + priced, even at the peak + of the market. In contrast, + about one-half of the loans + +On line 3706: + peak of the market. + In contrast, about one-half of the + loans originated + +On line 3706: + of the market. In + contrast, about one-half of the loans + originated by + +On line 3706: + In contrast, about one-half + of the loans originated + by independent + +On line 3706: + loans originated + by independent mortgage + companies in these + +On line 3706: + by independent + mortgage companies in these + communities were + +On line 3706: + of the loans and the + borrowers, such as income + and credit score, the + +On line 3706: + and the borrowers, + such as income and credit + score, the authors found + +On line 3706: + the borrowers, such + as income and credit score, + the authors found that + +On line 3706: + borrowers, such as + income and credit score, the + authors found that loans + +On line 3706: + such as income and + credit score, the authors found + that loans made by CRA-covered + +On line 3706: + income and credit + score, the authors found that loans + made by CRA-covered lenders in + +On line 3706: + and credit score, the + authors found that loans made by + CRA-covered lenders in the low-and + +On line 3706: + the authors found that + loans made by CRA-covered lenders in the + low-and moderate-income + +On line 3706: + loans made by CRA-covered lenders + in the low-and moderate-income + areas they serve were + +On line 3706: + by CRA-covered lenders in the + low-and moderate-income areas + they serve were half as + +On line 3706: + low-and moderate-income + areas they serve were half as + likely to default + +On line 3706: + areas they serve were + half as likely to default + as similar loans + +On line 3706: + similar loans made + by independent mortgage + companies, which are + +On line 3706: + by independent + mortgage companies, which are + not subject to CRA + +On line 3706: + mortgage companies, + which are not subject to CRA + and are subject to + +On line 3706: + are not subject to + CRA and are subject to less + regulatory + +On line 3706: + are subject to less + regulatory oversight + in general. "While + +On line 3706: + in general. "While + certainly not conclusive, + this suggests that the + +On line 3706: + this suggests that the + CRA, and particularly + its emphasis on + +On line 3706: + suggests that the CRA, + and particularly its + emphasis on loans + +On line 3706: + assessment area, helped + to ensure responsible + lending, even during + +On line 3708: + overall declines in + underwriting standards," they + concluded.23 Overall, + +On line 3708: + and CRA-covered banks and thrifts + accounted for at least of + all mortgage lending + +On line 3708: + and thrifts accounted + for at least of all mortgage + lending but only + +On line 3708: + accounted for at + least of all mortgage lending + but only between + +On line 3708: + mortgage companies + originated less than one-third + of all mortgages but + +On line 3708: + one-third of all mortgages + but about one-half of all higher-priced + mortgages.24 Finally, + +On line 3708: + all mortgages but about + one-half of all higher-priced mortgages.24 + Finally, lending + +On line 3708: + but about one-half of all + higher-priced mortgages.24 Finally, + lending by nonbank + +On line 3708: + These affiliates + accounted for another + roughly of mortgage + +On line 3708: + another roughly + of mortgage lending but about + of high-price lending. + +On line 3710: + of mortgage lending + but about of high-price lending. + Bank of America + +On line 3710: + but about of high-price + lending. Bank of America + provided the FCIC + +On line 3710: + provided the FCIC + with performance data on + its CRA-qualifying portfolio, + +On line 3710: + its CRA-qualifying portfolio, + which represented only + of the bank’s mortgage + +On line 3710: + which represented + only of the bank’s mortgage + portfolio.25 In the + +On line 3710: + of the bank’s mortgage + portfolio.25 In the end of + the first quarter of + +On line 3710: + portfolio.25 In the + end of the first quarter of + of the bank’s billion + +On line 3710: + In the end of the + first quarter of of the bank’s + billion portfolio + +On line 3710: + first quarter of of + the bank’s billion portfolio + of residential + +On line 3710: + billion portfolio + of residential mortgages + was nonperforming: + +On line 3710: + of residential + mortgages was nonperforming: + of the billion CRA-qualifying + +On line 3710: + nonperforming: of + the billion CRA-qualifying portfolio + was nonperforming + +On line 3712: + CRA-qualifying portfolio was + nonperforming at that date. + John Reed, a former + +On line 3712: + nonperforming at + that date. John Reed, a former + CEO of Citigroup, + +On line 3712: + that date. John Reed, a + former CEO of Citigroup, + when asked whether he thought + +On line 3712: + Reed, a former CEO + of Citigroup, when asked whether + he thought government + +On line 3712: + of Citigroup, when + asked whether he thought government + policies such as the + +On line 3712: + when asked whether he thought + government policies such as + the CRA played a role + +On line 3712: + government policies + such as the CRA played a role + in the crisis, said + +On line 3712: + as the CRA played a + role in the crisis, said that + he didn’t believe + +On line 3712: + the CRA played a role + in the crisis, said that he + didn’t believe THE + +On line 3714: + played a role in the + crisis, said that he didn’t + believe THE BUST1 banks + +On line 3714: + the crisis, said that + he didn’t believe THE BUST1 + banks would originate + +On line 3714: + crisis, said that he + didn’t believe THE BUST1 banks + would originate "a + +On line 3714: + didn’t believe THE + BUST1 banks would originate "a + bad mortgage because + +On line 3714: + banks would originate + "a bad mortgage because they + thought the government + +On line 3714: + policy allowed + it" unless the bank could sell + off the mortgage to + +On line 3714: + it" unless the bank + could sell off the mortgage to + Fannie or Freddie, + +On line 3714: + the bank could sell off + the mortgage to Fannie or + Freddie, which had their + +On line 3714: + off the mortgage to + Fannie or Freddie, which had + their own obligations + +On line 3714: + mortgage to Fannie + or Freddie, which had their own + obligations in this + +On line 3714: + Fannie or Freddie, + which had their own obligations + in this arena. He + +On line 3714: + or Freddie, which had + their own obligations in this + arena. He said, "It’s + +On line 3714: + own obligations in + this arena. He said, "It’s hard + for me to answer. + +On line 3714: + obligations in this + arena. He said, "It’s hard for + me to answer. If + +On line 3714: + this arena. He said, + "It’s hard for me to answer. + If the reason the + +On line 3714: + said, "It’s hard for me + to answer. If the reason + the regulators + +On line 3714: + to answer. If the + reason the regulators + didn’t jump up and + +On line 3714: + If the reason the + regulators didn’t jump + up and down and yell + +On line 3714: + the regulators + didn’t jump up and down and + yell at the low-doc, + +On line 3714: + jump up and down and + yell at the low-doc, no-doc + subprime mortgage was + +On line 3714: + and down and yell at + the low-doc, no-doc subprime + mortgage was because + +On line 3714: + yell at the low-doc, + no-doc subprime mortgage was + because they felt that + +On line 3714: + mortgage was because + they felt that they, Congress had + sort of pushed in that + +On line 3714: + because they felt that + they, Congress had sort of pushed + in that direction, + +On line 3714: + they, Congress had sort + of pushed in that direction, + then I would say yes."26 + +On line 3716: + Congress had sort of + pushed in that direction, then + I would say yes."26 "You + +On line 3716: + had sort of pushed in + that direction, then I would + say yes."26 "You know, CRA + +On line 3716: + sort of pushed in that + direction, then I would say + yes."26 "You know, CRA could + +On line 3716: + in that direction, + then I would say yes."26 "You know, + CRA could be a pain + +On line 3716: + that direction, then + I would say yes."26 "You know, CRA + could be a pain in + +On line 3716: + direction, then I + would say yes."26 "You know, CRA could + be a pain in the + +On line 3716: + then I would say yes."26 + "You know, CRA could be a pain + in the neck," the banker + +On line 3716: + I would say yes."26 "You + know, CRA could be a pain in + the neck," the banker Lewis + +On line 3716: + would say yes."26 "You know, + CRA could be a pain in the + neck," the banker Lewis Ranieri + +On line 3716: + say yes."26 "You know, CRA + could be a pain in the neck," + the banker Lewis Ranieri told + +On line 3716: + yes."26 "You know, CRA could + be a pain in the neck," the + banker Lewis Ranieri told the + +On line 3716: + "You know, CRA could be + a pain in the neck," the banker + Lewis Ranieri told the FCIC. + +On line 3716: + know, CRA could be a + pain in the neck," the banker Lewis + Ranieri told the FCIC. "But + +On line 3716: + CRA could be a pain + in the neck," the banker Lewis Ranieri + told the FCIC. "But you + +On line 3716: + could be a pain in + the neck," the banker Lewis Ranieri told + the FCIC. "But you know + +On line 3716: + be a pain in the + neck," the banker Lewis Ranieri told the + FCIC. "But you know what1 + +On line 3716: + a pain in the neck," + the banker Lewis Ranieri told the FCIC. + "But you know what1 It + +On line 3716: + in the neck," the banker + Lewis Ranieri told the FCIC. "But you + know what1 It always, + +On line 3716: + the neck," the banker Lewis + Ranieri told the FCIC. "But you know + what1 It always, in + +On line 3716: + neck," the banker Lewis Ranieri + told the FCIC. "But you know what1 + It always, in my + +On line 3716: + the banker Lewis Ranieri told + the FCIC. "But you know what1 It + always, in my view, + +On line 3716: + Ranieri told the FCIC. "But + you know what1 It always, in + my view, it always + +On line 3716: + told the FCIC. "But you + know what1 It always, in my + view, it always did + +On line 3716: + the FCIC. "But you know + what1 It always, in my view, + it always did much + +On line 3716: + FCIC. "But you know what1 + It always, in my view, it + always did much more + +On line 3716: + know what1 It always, + in my view, it always did + much more good than it + +On line 3716: + what1 It always, in + my view, it always did much + more good than it did + +On line 3716: + always, in my view, + it always did much more good + than it did anything. + +On line 3716: + my view, it always + did much more good than it did + anything. You know, we + +On line 3716: + it always did much + more good than it did anything. + You know, we did a + +On line 3716: + always did much more + good than it did anything. You + know, we did a lot. + +On line 3716: + did much more good than + it did anything. You know, we + did a lot. CRA made + +On line 3716: + much more good than it + did anything. You know, we did + a lot. CRA made a + +On line 3716: + more good than it did + anything. You know, we did a + lot. CRA made a big + +On line 3716: + it did anything. You + know, we did a lot. CRA made + a big difference + +On line 3716: + did anything. You know, + we did a lot. CRA made a + big difference in + +On line 3716: + know, we did a lot. + CRA made a big difference + in communities. + +On line 3716: + we did a lot. CRA + made a big difference in + communities. You + +On line 3716: + a difference." But + lenders including Countrywide + used pro-homeownership + +On line 3716: + "smokescreen" to do away + with underwriting standards + such as requiring + +On line 3716: + with underwriting + standards such as requiring + down payments, he said. + +On line 3716: + as requiring down + payments, he said. "The danger + is that it gives air + +On line 3716: + down payments, he said. + "The danger is that it gives + air cover to all + +On line 3716: + payments, he said. "The + danger is that it gives air + cover to all of + +On line 3716: + he said. "The danger + is that it gives air cover + to all of this kind + +On line 3716: + said. "The danger is + that it gives air cover to + all of this kind of + +On line 3716: + danger is that it + gives air cover to all of + this kind of madness + +On line 3716: + is that it gives air + cover to all of this kind + of madness that had + +On line 3716: + gives air cover to + all of this kind of madness + that had nothing to + +On line 3716: + air cover to all + of this kind of madness that + had nothing to do + +On line 3716: + cover to all of + this kind of madness that had + nothing to do with + +On line 3716: + all of this kind of + madness that had nothing to + do with the housing + +On line 3718: + kind of madness that + had nothing to do with the + housing goal."27 RATING + +On line 3720: + do with the housing + goal."27 RATING DOWNGRADES: "NEVER + BEFORE" Prior to + +On line 3720: + to the ratings of + mortgage-backed securities at + Moody’s were monitored + +On line 3720: + ratings of mortgage-backed + securities at Moody’s were + monitored by the + +On line 3720: + securities at + Moody’s were monitored by the + same analysts who + +On line 3720: + Moody’s were monitored + by the same analysts who + had rated them in + +On line 3720: + were monitored by + the same analysts who had + rated them in the + +On line 3720: + the same analysts + who had rated them in the + first place. In Nicolas + +On line 3720: + same analysts who + had rated them in the first + place. In Nicolas Weill, + +On line 3720: + analysts who had + rated them in the first place. + In Nicolas Weill, Moody’s + +On line 3720: + who had rated them + in the first place. In Nicolas + Weill, Moody’s chief credit + +On line 3720: + in the first place. In + Nicolas Weill, Moody’s chief credit + officer and team + +On line 3720: + place. In Nicolas Weill, + Moody’s chief credit officer + and team managing + +On line 3720: + officer and team + managing director, was + charged with creating + +On line 3720: + with creating an + independent surveillance + team to monitor + +On line 3722: + team to monitor + previously rated deals.28 + In November the + +On line 3722: + deals.28 In November + the surveillance team began + to see a rise in + +On line 3722: + team began to see + a rise in early payment + defaults in mortgages + +On line 3722: + a rise in early + payment defaults in mortgages + originated by + +On line 3722: + payment defaults in + mortgages originated by + Fremont Investment + +On line 3722: + defaults in mortgages + originated by Fremont + Investment Loan,29 and + +On line 3722: + Loan,29 and downgraded + several securities + with underlying + +On line 3722: + securities with + underlying Fremont loans + or put them on watch + +On line 3722: + or put them on watch + for future downgrades. "This was + a very unusual + +On line 3722: + for future downgrades. + "This was a very unusual + situation as + +On line 3722: + a very unusual + situation as never + before had we put + +On line 3722: + situation as + never before had we put + on watch deals rated + +On line 3722: + before had we put + on watch deals rated in the + same calendar year," + +On line 3722: + on watch deals rated + in the same calendar year," + Weill later wrote to + +On line 3722: + rated in the same + calendar year," Weill later + wrote to Raymond McDaniel, + +On line 3722: + same calendar year," + Weill later wrote to Raymond + McDaniel, the chairman and + +On line 3722: + calendar year," Weill + later wrote to Raymond McDaniel, + the chairman and CEO + +On line 3722: + wrote to Raymond McDaniel, + the chairman and CEO of Moody’s + Corporation, and + +On line 3722: + McDaniel, the chairman and + CEO of Moody’s Corporation, + and Brian Clarkson, + +On line 3722: + the chairman and CEO + of Moody’s Corporation, and + Brian Clarkson, the + +On line 3724: + Brian Clarkson, the + president of Moody’s Investors + Service.30 In early + +On line 3724: + Moody’s Investors Service.30 + In early a Moody’s special + report, overseen by + +On line 3724: + report, overseen by + Weill, about the sharp increases + in early payment + +On line 3724: + were concentrated + in subprime mortgage pools. In + addition, more than + +On line 3724: + subprime mortgage pools. + In addition, more than of + the subprime mortgages + +On line 3724: + In addition, more + than of the subprime mortgages + securitized in + +On line 3724: + than of the subprime + mortgages securitized in + the second quarter + +On line 3724: + securitized in + the second quarter of were + days delinquent within + +On line 3724: + second quarter of + were days delinquent within six + months, more than double + +On line 3724: + quarter of were days + delinquent within six months, more + than double the rate + +On line 3724: + delinquent within six + months, more than double the rate + a year earlier + +On line 3724: + months, more than double + the rate a year earlier + The exact cause of + +On line 3724: + more than double the + rate a year earlier The + exact cause of the + +On line 3724: + double the rate a + year earlier The exact + cause of the trouble + +On line 3724: + year earlier The + exact cause of the trouble + was still unclear to + +On line 3724: + exact cause of the + trouble was still unclear to + the ratings agency, + +On line 3724: + of the trouble was + still unclear to the ratings + agency, though. "Moody’s is + +On line 3724: + agency, though. "Moody’s is + currently assessing whether + this represents an + +On line 3726: + overall expected + loss."31 For the next few months, the + company published + +On line 3726: + loss."31 For the next few + months, the company published + regular updates + +On line 3726: + the subprime mortgage + market. Over the next three months, + Moody’s took negative + +On line 3726: + market. Over the next + three months, Moody’s took negative + rating actions on + +On line 3726: + Over the next three months, + Moody’s took negative rating + actions on of the + +On line 3726: + Moody’s took negative + rating actions on of the + outstanding subprime + +On line 3726: + Then, on July in + an unprecedented move, Moody’s + downgraded subprime + +On line 3726: + downgraded subprime + mortgage-backed securities that + had been issued in + +On line 3726: + securities that + had been issued in and put + an additional + +On line 3726: + had been issued in + and put an additional + securities on + +On line 3726: + securities that + were affected, all rated + Baa and lower, made + +On line 3726: + were affected, all + rated Baa and lower, made + up of the subprime + +On line 3726: + lower, made up of + the subprime securities + that Moody’s rated Baa + +On line 3726: + securities that + Moody’s rated Baa in For the + time eing, there were no + +On line 3726: + Baa in For the time + eing, there were no downgrades on + higher-rated tranches. + +On line 3726: + with prolonged, slowing + home price appreciation" + and noted that about + +On line 3726: + prolonged, slowing home + price appreciation" and + noted that about of + +On line 3726: + contained mortgages from + one of four originators: + Fremont Investment + +On line 3726: + mortgages from one of + four originators: Fremont + Investment Loan, Long + +On line 3726: + Investment Loan, Long + Beach Mortgage Company, New + Century Mortgage + +On line 3728: + Corporation, and + WMC Mortgage Corp.32 Weill later + told the FCIC staff that + +On line 3728: + and WMC Mortgage Corp.32 + Weill later told the FCIC staff + that Moody’s issued a + +On line 3728: + WMC Mortgage Corp.32 Weill + later told the FCIC staff that + Moody’s issued a mass + +On line 3728: + Corp.32 Weill later told + the FCIC staff that Moody’s issued + a mass announcement, + +On line 3728: + Weill later told the + FCIC staff that Moody’s issued a + mass announcement, rather + +On line 3728: + later told the FCIC + staff that Moody’s issued a mass + announcement, rather than + +On line 3728: + the FCIC staff that Moody’s + issued a mass announcement, + rather than downgrading + +On line 3728: + staff that Moody’s issued + a mass announcement, rather than + downgrading a few + +On line 3728: + a mass announcement, + rather than downgrading a few + securities at + +On line 3728: + downgrading a few + securities at a time, + to avoid creating + +On line 3728: + securities at + a time, to avoid creating + confusion in the + +On line 3728: + at a time, to avoid + creating confusion in + the market.33 A few + +On line 3728: + to avoid creating + confusion in the market.33 + A few days later, + +On line 3728: + days later, Standard + Poor’s downgraded similar + tranches. These initial + +On line 3728: + tranches. These initial + downgrades were remarkable not + only because of + +On line 3728: + of the number of + securities involved but + also because of + +On line 3728: + of securities + involved but also because + of the sharp rating + +On line 3728: + involved but also + because of the sharp rating + cuts—an average + +On line 3728: + but also because + of the sharp rating cuts—an + average of four + +On line 3728: + because of the sharp + rating cuts—an average + of four notches per + +On line 3728: + sharp rating cuts—an + average of four notches + per security, + +On line 3728: + of four notches per + security, when one or + two notches was more + +On line 3728: + or two notches was + more routine (for example, + a single notch would + +On line 3728: + two notches was more + routine (for example, a + single notch would be + +On line 3728: + was more routine (for + example, a single notch + would be a downgrade + +On line 3728: + a single notch would + be a downgrade from AA to + AA-). Among the tranches + +On line 3730: + M10, and M11) of the + Citigroup deal that we have + been examining, + +On line 3730: + Citigroup deal that + we have been examining, + CMLTI 2006-NC2. By that point, + +On line 3732: + deal that we have been + examining, CMLTI 2006-NC2. By + that point, nearly of + +On line 3732: + been examining, + CMLTI 2006-NC2. By that point, nearly + of the original + +On line 3732: + examining, CMLTI + 2006-NC2. By that point, nearly of + the original loan + +On line 3732: + CMLTI 2006-NC2. By that point, + nearly of the original + loan pool had prepaid + +On line 3732: + original loan pool + had prepaid but another + were or more days past + +On line 3732: + loan pool had prepaid + but another were or more + days past due or in + +On line 3734: + but another were + or more days past due or in + foreclosure.34 Investors + +On line 3734: + days past due or in + foreclosure.34 Investors across the + world were assessing + +On line 3734: + foreclosure.34 Investors + across the world were assessing + their own exposure, + +On line 3734: + were assessing their + own exposure, and guessing + at that of others, + +On line 3734: + others, however + indirect, to these assets. + A report from Bear + +On line 3734: + to these assets. A + report from Bear Stearns Asset + Management detailed + +On line 3734: + report from Bear Stearns + Asset Management detailed + its exposure. One + +On line 3734: + Asset Management + detailed its exposure. One + of its CDOs, Tall Ships, + +On line 3734: + exposure. One of + its CDOs, Tall Ships, had direct + exposure to our + +On line 3734: + One of its CDOs, Tall + Ships, had direct exposure + to our sample deal, + +On line 3734: + its CDOs, Tall Ships, had + direct exposure to our + sample deal, owning + +On line 3734: + Tall Ships, had direct + exposure to our sample + deal, owning million + +On line 3734: + direct exposure + to our sample deal, owning + million of the M7 + +On line 3734: + exposure to our + sample deal, owning million + of the M7 and M8 + +On line 3734: + to our sample deal, + owning million of the M7 + and M8 tranches. BSAM’s + +On line 3734: + sample deal, owning + million of the M7 and M8 + tranches. BSAM’s High-Grade hedge + +On line 3734: + owning million of + the M7 and M8 tranches. BSAM’s + High-Grade hedge fund also + +On line 3734: + M7 and M8 tranches. + BSAM’s High-Grade hedge fund also had + exposure through a + +On line 3734: + hedge fund also had + exposure through a million + credit default swap + +On line 3734: + had exposure through + a million credit default + swap position with + +On line 3734: + exposure through a + million credit default swap + position with Lehman + +On line 3734: + a million credit + default swap position with + Lehman referencing + +On line 3734: + swap position with + Lehman referencing the M8 + tranche. And BSAM’s Enhanced + +On line 3734: + Lehman referencing + the M8 tranche. And BSAM’s Enhanced + Leverage hedge fund owned + +On line 3734: + tranche. And BSAM’s Enhanced + Leverage hedge fund owned parts of + the equity in + +On line 3734: + Leverage hedge fund owned + parts of the equity in + Independence CDO, + +On line 3734: + of the equity + in Independence CDO, which + in turn owned the M9 + +On line 3736: + the equity in + Independence CDO, which in + turn owned the M9 tranche + +On line 3736: + in Independence + CDO, which in turn owned the M9 + tranche of our sample + +On line 3736: + Independence CDO, + which in turn owned the M9 tranche + of our sample deal. + +On line 3736: + CDO, which in turn owned + the M9 tranche of our sample + deal. In addition, + +On line 3736: + which in turn owned the + M9 tranche of our sample deal. + In addition, these + +On line 3736: + in turn owned the M9 + tranche of our sample deal. In + addition, these funds + +On line 3736: + tranche of our sample + deal. In addition, these funds + had exposure through + +On line 3736: + of our sample deal. + In addition, these funds had + exposure through their + +On line 3736: + In addition, these + funds had exposure through their + holdings of other + +On line 3736: + funds had exposure + through their holdings of other + CDOs that in turn owned + +On line 3736: + exposure through their + holdings of other CDOs that + in turn owned tranches + +On line 3736: + holdings of other + CDOs that in turn owned tranches + of the Citigroup + +On line 3738: + of other CDOs that + in turn owned tranches of the + Citigroup deal.35 Then, + +On line 3738: + in turn owned tranches + of the Citigroup deal.35 Then, + on October Moody’s + +On line 3738: + Then, on October + Moody’s downgraded another + tranches billion) of + +On line 3738: + tranches billion) on + watch for potential downgrade. + Now the total of + +On line 3738: + of securities + downgraded and put on watch + represented of + +On line 3738: + Moody’s had rated. Of + the securities placed on + watch in October, + +On line 3738: + the securities + placed on watch in October, + tranches billion) were + +On line 3740: + October, tranches + billion) were originally + Aaa-rated and billion) + +On line 3740: + tranches billion) were + originally Aaa-rated and + billion) were Aa-rated. + +On line 3740: + Aaa-rated and billion) + were Aa-rated. All told, in the + first months of of the + +On line 3740: + the first months of of + the mortgage-backed security + deals issued in had + +On line 3740: + first months of of the + mortgage-backed security deals + issued in had at + +On line 3740: + of of the mortgage-backed + security deals issued + in had at least one + +On line 3740: + security deals + issued in had at least one + tranche downgraded or + +On line 3742: + deals issued in had + at least one tranche downgraded + or put on watch.36 By + +On line 3742: + issued in had at + least one tranche downgraded or + put on watch.36 By this + +On line 3742: + in had at least one + tranche downgraded or put on + watch.36 By this point in + +On line 3742: + one tranche downgraded + or put on watch.36 By this point + in October, of + +On line 3742: + tranche downgraded or + put on watch.36 By this point in + October, of the + +On line 3742: + or put on watch.36 By + this point in October, of + the loans in our case + +On line 3742: + put on watch.36 By this + point in October, of the + loans in our case study + +On line 3742: + on watch.36 By this point + in October, of the loans + in our case study deal + +On line 3742: + watch.36 By this point in + October, of the loans in + our case study deal CMLTI + +On line 3744: + point in October, + of the loans in our case study + deal CMLTI 2006- NC2 were + +On line 3744: + our case study deal CMLTI + 2006- NC2 were seriously + delinquent and some homes + +On line 3744: + deal CMLTI 2006- NC2 were + seriously delinquent and + some homes had already + +On line 3744: + M4 through M8 tranches + were downgraded as part of + the second wave of + +On line 3744: + through M8 tranches were + downgraded as part of the + second wave of mass + +On line 3744: + wave of mass downgrades. + Five additional tranches + would eventually + +On line 3744: + of mass downgrades. Five + additional tranches would + eventually be + +On line 3744: + Five additional + tranches would eventually + be downgraded in + +On line 3748: + eventually be + downgraded in April Before + it was over, Moody’s would + +On line 3748: + be downgraded in + April Before it was over, Moody’s + would downgrade of all + +On line 3748: + downgraded in April + Before it was over, Moody’s would + downgrade of all the + +On line 3748: + in April Before it + was over, Moody’s would downgrade of + all the Aaa mortgage-backed + +On line 3748: + downgrade of all the + Aaa mortgage-backed securities + tranches and all of + +On line 3748: + the Baa tranches. For + those securities issued + in the second half + +On line 3748: + Baa tranches. For those + securities issued in + the second half of + +On line 3748: + those securities + issued in the second half + of nearly all Aaa + +On line 3750: + and Baa tranches were + downgraded. Of all THE BUST3 + tranches initially + +On line 3750: + downgraded. Of all + THE BUST3 tranches initially + rated investment + +On line 3750: + tranches initially + rated investment grade—that + is, rated Baa3 or + +On line 3750: + investment grade—that + is, rated Baa3 or higher—76% + of those issued in + +On line 3750: + is, rated Baa3 or + higher—76% of those issued in + were downgraded to + +On line 3750: + or higher—76% of those + issued in were downgraded + to junk, as were of + +On line 3752: + of those issued in + were downgraded to junk, as + were of those from CDOS: + +On line 3752: + in were downgraded + to junk, as were of those from + CDOS: "CLIMBING THE WALL + +On line 3752: + were downgraded to + junk, as were of those from CDOS: + "CLIMBING THE WALL OF + +On line 3752: + to junk, as were of + those from CDOS: "CLIMBING THE WALL + OF SUBPRIME WORRY" + +On line 3754: + junk, as were of those + from CDOS: "CLIMBING THE WALL OF + SUBPRIME WORRY" In + +On line 3754: + were of those from CDOS: + "CLIMBING THE WALL OF SUBPRIME + WORRY" In March Moody’s + +On line 3754: + from CDOS: "CLIMBING THE + WALL OF SUBPRIME WORRY" In + March Moody’s reported + +On line 3754: + CDOS: "CLIMBING THE WALL + OF SUBPRIME WORRY" In March + Moody’s reported that + +On line 3754: + "CLIMBING THE WALL OF + SUBPRIME WORRY" In March Moody’s + reported that CDOs + +On line 3754: + WORRY" In March Moody’s + reported that CDOs with high + concentrations of + +On line 3754: + reported that CDOs + with high concentrations of + subprime mortgage–backed + +On line 3754: + subprime mortgage–backed + securities could incur + "severe" downgrades.39 In + +On line 3754: + securities could + incur "severe" downgrades.39 In + an internal email + +On line 3754: + sent five days after + the report, Group Managing + Director of U.S. + +On line 3754: + U.S. Derivatives + Yuri Yoshizawa explained to Moody’s + Chairman McDaniel and to + +On line 3754: + Yuri Yoshizawa explained + to Moody’s Chairman McDaniel and to + Executive Vice + +On line 3754: + to Moody’s Chairman McDaniel + and to Executive Vice + President Noel Kirnon + +On line 3754: + banks like Merrill, Citi, + and UBS still furiously + doing transactions + +On line 3754: + Merrill, Citi, and UBS + still furiously doing + transactions to clear + +On line 3754: + still furiously + doing transactions to clear + out their warehouses. + +On line 3754: + doing transactions + to clear out their warehouses. + He believes that they + +On line 3754: + He believes that they + are creating and pricing + the CDOs in order + +On line 3754: + believes that they are + creating and pricing the + CDOs in order to + +On line 3754: + the CDOs in order + to remove the assets from + the warehouses, but + +On line 3754: + CDOs in order to + remove the assets from the + warehouses, but that + +On line 3754: + remove the assets + from the warehouses, but that + they are holding on + +On line 3754: + the assets from the + warehouses, but that they are + holding on to the + +On line 3756: + from the warehouses, + but that they are holding on + to the CDOs in hopes + +On line 3756: + the warehouses, but + that they are holding on to + the CDOs in hopes that + +On line 3756: + warehouses, but that + they are holding on to the + CDOs in hopes that they + +On line 3756: + that they are holding + on to the CDOs in hopes that + they will be able to + +On line 3756: + they are holding on + to the CDOs in hopes that they + will be able to sell + +On line 3756: + are holding on to + the CDOs in hopes that they will + be able to sell them + +On line 3756: + the CDOs in hopes that + they will be able to sell them + later."40 Several + +On line 3756: + they will be able to + sell them later."40 Several + months later, in a + +On line 3756: + to sell them later."40 + Several months later, in + a review of the + +On line 3756: + later."40 Several + months later, in a review + of the CDO market + +On line 3756: + months later, in a + review of the CDO market + titled "Climbing the + +On line 3756: + a review of the + CDO market titled "Climbing + the Wall of Subprime + +On line 3756: + of the CDO market + titled "Climbing the Wall of + Subprime Worry," Moody’s + +On line 3756: + CDO market titled + "Climbing the Wall of Subprime + Worry," Moody’s noted, + +On line 3758: + titled "Climbing the + Wall of Subprime Worry," Moody’s + noted, "Some of the + +On line 3758: + noted, "Some of the + first quarter’s activity + [in was the result + +On line 3758: + feverishly working + to clear inventory and + reduce their balance + +On line 3758: + clear inventory + and reduce their balance sheet + exposure to the + +On line 3758: + to the subprime class."41 + Even though Moody’s was aware that the + investment banks were + +On line 3758: + Moody’s was aware that the + investment banks were dumping + collateral out + +On line 3758: + investment banks were + dumping collateral out + of the warehouses + +On line 3758: + of the warehouses + and into CDOs—possibly regardless + of quality—the firm + +On line 3758: + of quality—the firm + continued to rate new CDOs + using existing + +On line 3760: + continued to rate + new CDOs using existing + assumptions. Former + +On line 3760: + assumptions. Former + Moody’s executive Richard Michalek + testified to the + +On line 3760: + Moody’s executive + Richard Michalek testified to the + FCIC, "It was a case + +On line 3760: + executive Richard + Michalek testified to the FCIC, + "It was a case of, + +On line 3760: + Richard Michalek testified + to the FCIC, "It was a case + of, with respect to + +On line 3760: + Michalek testified to + the FCIC, "It was a case of, + with respect to why + +On line 3760: + to the FCIC, "It was + a case of, with respect to + why didn’t we stop + +On line 3760: + the FCIC, "It was a + case of, with respect to why + didn’t we stop and + +On line 3760: + "It was a case of, + with respect to why didn’t + we stop and change our + +On line 3760: + of, with respect to + why didn’t we stop and change + our methodology, + +On line 3760: + with respect to why + didn’t we stop and change our + methodology, there + +On line 3760: + we stop and change our + methodology, there is a + very conservative + +On line 3760: + methodology, there + is a very conservative + culture at Moody’s, at + +On line 3760: + at Moody’s, at least while + I was there, that suggested + that the only thing + +On line 3760: + Moody’s, at least while I + was there, that suggested that + the only thing worse + +On line 3760: + at least while I was + there, that suggested that the + only thing worse than + +On line 3760: + while I was there, that + suggested that the only + thing worse than quickly + +On line 3760: + there, that suggested + that the only thing worse than + quickly getting a + +On line 3760: + that the only thing + worse than quickly getting a + new methodology + +On line 3760: + the only thing worse + than quickly getting a new + methodology in + +On line 3760: + quickly getting a + new methodology in place + is quickly getting + +On line 3760: + methodology in + place is quickly getting the + wrong methodology + +On line 3760: + is quickly getting + the wrong methodology in + place and having to + +On line 3760: + methodology in + place and having to unwind + that and to fail to + +On line 3760: + in place and having + to unwind that and to fail + to consider the + +On line 3762: + to consider the + unintended consequences."42 + In July, McDaniel gave + +On line 3762: + July, McDaniel gave a + presentation to the board + on the company’s + +On line 3762: + presentation to + the board on the company’s + strategic plan. His slides + +On line 3762: + plan. His slides had such + bleak titles as "Spotlight on + Mortgages: Quality + +On line 3762: + Mortgages: Quality + Continues to Erode," "House Prices + Are Falling "Mortgage + +On line 3762: + Continues to Erode," + "House Prices Are Falling "Mortgage + Payment Resets Are + +On line 3762: + the quality of + the underlying mortgages + was declining, Moody’s + +On line 3762: + quality of the + underlying mortgages was + declining, Moody’s did + +On line 3762: + declining, Moody’s did + not make any significant + adjustments to its + +On line 3762: + Moody’s did not make any + significant adjustments + to its CDO ratings + +On line 3762: + ratings assumptions + until late September.44 Out + of billion in CDOs + +On line 3762: + late September.44 Out + of billion in CDOs that Moody’s + rated after its + +On line 3762: + Out of billion in + CDOs that Moody’s rated after + its mass downgrade of + +On line 3762: + billion in CDOs that + Moody’s rated after its mass + downgrade of subprime + +On line 3762: + CDOs that Moody’s rated + after its mass downgrade of + subprime mortgage–backed + +On line 3764: + subprime mortgage–backed + securities on July + were rated Aaa.45 Moody’s + +On line 3764: + securities on + July were rated Aaa.45 Moody’s + had hoped that rating + +On line 3764: + July were rated + Aaa.45 Moody’s had hoped that rating + downgrades could be staved + +On line 3764: + were rated Aaa.45 Moody’s + had hoped that rating downgrades + could be staved off by + +On line 3764: + borrowers might stay + current. However, in mid-September, + Eric Kolchinsky, a + +On line 3764: + Eric Kolchinsky, a + team managing director + for CDOs, learned that a + +On line 3764: + learned that a survey + of servicers indicated + that very few troubled + +On line 3764: + survey of servicers + indicated that very few + troubled mortgages were + +On line 3764: + indicated that + very few troubled mortgages were + being modified.46 + +On line 3764: + troubled mortgages were + being modified.46 Worried + that continuing + +On line 3764: + being modified.46 + Worried that continuing + to rate CDOs without + +On line 3764: + adjusting for known + deterioration in + the underlying + +On line 3764: + could expose Moody’s to + liability, Kolchinsky + advised Yoshizawa that + +On line 3764: + liability, + Kolchinsky advised Yoshizawa that + the company should + +On line 3764: + that the company + should stop rating CDOs until + the securities + +On line 3768: + the FCIC that Yoshizawa + "admonished" him for making + the suggestion.47 y + +On line 3768: + "admonished" him for + making the suggestion.47 y + the end of more than + +On line 3768: + the suggestion.47 y + the end of more than of all + tranches of CDOs had + +On line 3768: + y the end of more + than of all tranches of CDOs + had been downgraded. + +On line 3768: + the end of more than + of all tranches of CDOs had + been downgraded. Moody’s + +On line 3768: + of all tranches of + CDOs had been downgraded. Moody’s + downgraded nearly + +On line 3768: + had been downgraded. + Moody’s downgraded nearly all + of the Aaa and all + +On line 3768: + been downgraded. Moody’s + downgraded nearly all of + the Aaa and all of + +On line 3770: + downgraded nearly + all of the Aaa and all of + the Baa CDO tranches. + +On line 3770: + nearly all of the + Aaa and all of the Baa CDO + tranches. And, again, the + +On line 3770: + all of the Aaa and + all of the Baa CDO tranches. + And, again, the downgrades + +On line 3770: + of the Aaa and all + of the Baa CDO tranches. And, + again, the downgrades were + +On line 3770: + Aaa and all of the + Baa CDO tranches. And, again, the + downgrades were large—more + +On line 3770: + all of the Baa CDO + tranches. And, again, the downgrades + were large—more than of + +On line 3772: + Baa CDO tranches. And, + again, the downgrades were large—more + than of Aaa CDO bonds + +On line 3772: + CDO tranches. And, again, + the downgrades were large—more than + of Aaa CDO bonds and + +On line 3772: + tranches. And, again, the + downgrades were large—more than of + Aaa CDO bonds and more + +On line 3772: + And, again, the downgrades + were large—more than of Aaa CDO + bonds and more than of + +On line 3772: + again, the downgrades were + large—more than of Aaa CDO bonds + and more than of Baa + +On line 3772: + downgrades were large—more + than of Aaa CDO bonds and more + than of Baa CDO bonds + +On line 3772: + than of Aaa CDO bonds + and more than of Baa CDO bonds + were eventually + +On line 3772: + and more than of Baa + CDO bonds were eventually + downgraded to junk.48 + +On line 3776: + THE BASIS OF THE + INFORMATION" The housing + bust exposed the flaws + +On line 3776: + THE INFORMATION" + The housing bust exposed the + flaws in the mortgages + +On line 3776: + INFORMATION" The + housing bust exposed the flaws + in the mortgages that + +On line 3776: + exposed the flaws in + the mortgages that had been made + and securitized. + +On line 3776: + the mortgages that had + been made and securitized. + After the crisis + +On line 3776: + that had been made and + securitized. After the + crisis unfolded, + +On line 3776: + mortgage insurance + firms—closely examined the + representations + +On line 3776: + representations + and warranties made by mortgage + originators and + +On line 3776: + assure investors and + insurers that the mortgages + met stated guidelines. + +On line 3776: + that the mortgages met + stated guidelines. As mortgage + securities lost + +On line 3776: + met stated guidelines. + As mortgage securities + lost value, investors + +On line 3776: + stated guidelines. As + mortgage securities lost + value, investors found + +On line 3776: + securitizers’ + due diligence on the mortgage + pools underlying + +On line 3776: + on the mortgage pools + underlying the mortgage-backed + securities as + +On line 3776: + pools underlying + the mortgage-backed securities + as well as in their + +On line 3776: + their disclosure about + the characteristics of + those deals. As private + +On line 3776: + mortgage insurance + companies found similar + deficiencies in + +On line 3776: + deficiencies in + the loans they insured, they have + denied claims to an + +On line 3778: + have denied claims to + an unprecedented extent. + Fannie and Freddie + +On line 3778: + warranties—that the loans + meet specified criteria. + They then checked samples + +On line 3778: + then checked samples of + the loans to ensure that these + representations + +On line 3778: + the loans to ensure + that these representations + and warranties were not + +On line 3778: + loans to ensure that + these representations and + warranties were not breached. + +On line 3778: + representations + and warranties were not breached. If + there was a breach and + +On line 3778: + were not breached. If there + was a breach and the loans were + "ineligible" + +On line 3778: + was a breach and the + loans were "ineligible" + for purchase, the GSE + +On line 3780: + a breach and the loans + were "ineligible" for + purchase, the GSE had + +On line 3780: + "ineligible" + for purchase, the GSE had the + right to require the + +On line 3780: + for purchase, the GSE + had the right to require the + seller to buy back + +On line 3780: + GSE had the right to + require the seller to buy + back the loan—assuming, + +On line 3780: + the right to require + the seller to buy back the + loan—assuming, of course, + +On line 3780: + the seller to buy + back the loan—assuming, of course, + that the seller had + +On line 3780: + seller to buy back + the loan—assuming, of course, that + the seller had not + +On line 3782: + back the loan—assuming, + of course, that the seller had + not gone bankrupt. As + +On line 3782: + the loan—assuming, of + course, that the seller had not + gone bankrupt. As a + +On line 3782: + seller had not gone + bankrupt. As a result of + such sampling, during + +On line 3782: + not gone bankrupt. As + a result of such sampling, + during the three years + +On line 3782: + a result of such + sampling, during the three years + and eight months ending + +On line 3782: + sampling, during the + three years and eight months ending + August Freddie and + +On line 3782: + during the three years + and eight months ending August + Freddie and Fannie + +On line 3782: + the three years and eight + months ending August Freddie + and Fannie required + +On line 3782: + and eight months ending + August Freddie and Fannie + required sellers to + +On line 3782: + and Fannie required + sellers to repurchase loans + totaling billion. + +On line 3782: + to repurchase loans + totaling billion. So far, + Freddie has received + +On line 3782: + totaling billion. + So far, Freddie has received + billion from sellers, + +On line 3782: + sellers, and Fannie + has received billion—a total + of billion.49 The amount + +On line 3782: + Fannie has received + billion—a total of billion.49 + The amount put back is + +On line 3782: + has received billion—a + total of billion.49 The amount + put back is notable + +On line 3782: + billion—a total of + billion.49 The amount put back is + notable in that it + +On line 3782: + of billion.49 The amount + put back is notable in that + it represents of + +On line 3782: + is notable in that + it represents of billion + in credit-related + +On line 3782: + it represents of + billion in credit-related + expenses recorded + +On line 3784: + beginning of through + September In testing to + ensure compliance + +On line 3784: + testing to ensure + compliance with its standards, + Freddie reviews a + +On line 3784: + compliance with its + standards, Freddie reviews a + small percentage of + +On line 3784: + its standards, Freddie + reviews a small percentage + of performing loans + +On line 3784: + a small percentage + of performing loans and a + high percentage of + +On line 3784: + a high percentage + of foreclosed loans (including + well over of all loans + +On line 3784: + high percentage of + foreclosed loans (including well + over of all loans that + +On line 3784: + loans (including well + over of all loans that default + in the first two years). + +On line 3784: + (including well over + of all loans that default in + the first two years). In + +On line 3784: + over of all loans that + default in the first two years). + In total, Freddie + +On line 3784: + default in the first + two years). In total, Freddie + reviewed billion of + +On line 3784: + in the first two years). + In total, Freddie reviewed + billion of loans (out + +On line 3784: + two years). In total, + Freddie reviewed billion of + loans (out of trillion + +On line 3784: + In total, Freddie + reviewed billion of loans (out + of trillion in loans + +On line 3784: + billion of loans (out + of trillion in loans acquired + or guaranteed) and + +On line 3784: + (out of trillion in + loans acquired or guaranteed) + and found billion to + +On line 3784: + of trillion in loans + acquired or guaranteed) and + found billion to be + +On line 3786: + time an increasing + percentage were found to be + ineligible, + +On line 3788: + put back very few of + these performing loans to the + originators. Among + +On line 3788: + the originators. + Among mortgages originated + from to it found that + +On line 3788: + originators. Among + mortgages originated from + to it found that of + +On line 3788: + that of the delinquent + loans were ineligible, + as were of the loans + +On line 3788: + of the delinquent loans + were ineligible, as + were of the loans in + +On line 3788: + loans in foreclosure.52 + Most of these were put back to + originators—again, + +On line 3788: + Most of these were put + back to originators—again, + in cases in which + +On line 3788: + of these were put back + to originators—again, in + cases in which the + +On line 3790: + cases in which the + originators were still in + op-THE BUST5 eration. + +On line 3790: + if the reasons for + ineligibility + were sufficiently + +On line 3792: + were sufficiently + minor, the loans were not put + back. Overall, of the + +On line 3792: + minor, the loans were + not put back. Overall, of the + delinquent loans and loans + +On line 3792: + put back. Overall, of + the delinquent loans and loans in + foreclosure sampled + +On line 3792: + the delinquent loans and + loans in foreclosure sampled + by Freddie, were put + +On line 3792: + delinquent loans and loans + in foreclosure sampled by + Freddie, were put back. + +On line 3792: + loans in foreclosure + sampled by Freddie, were put + back. In and Freddie + +On line 3792: + foreclosure sampled + by Freddie, were put back. In + and Freddie put back + +On line 3792: + by Freddie, were put + back. In and Freddie put back + significant loan + +On line 3792: + and Freddie put back + significant loan volumes + to the following + +On line 3792: + loan volumes to the + following lenders: Countrywide, + billion; Wells Fargo, + +On line 3792: + to the following + lenders: Countrywide, billion; Wells + Fargo, billion; Chase + +On line 3792: + Countrywide, billion; + Wells Fargo, billion; Chase Home + Financial, billion; + +On line 3792: + Wells Fargo, billion; + Chase Home Financial, billion; + Bank of America, + +On line 3792: + Chase Home Financial, + billion; Bank of America, + million; and Ally + +On line 3794: + million; and Ally + Financial, million.53 Using + a method similar + +On line 3794: + Financial, million.53 + Using a method similar + to Freddie’s to test + +On line 3794: + and of the mortgages + originated since 2005—sampling + at the higher rates + +On line 3794: + originated since + 2005—sampling at the higher rates + for delinquent loans. From + +On line 3794: + since 2005—sampling at the + higher rates for delinquent loans. + From through Fannie put + +On line 3794: + the higher rates for + delinquent loans. From through Fannie + put back loans to the + +On line 3794: + rates for delinquent loans. + From through Fannie put back loans + to the following + +On line 3794: + for delinquent loans. From + through Fannie put back loans to + the following large + +On line 3794: + delinquent loans. From through + Fannie put back loans to the + following large lenders: + +On line 3794: + Fannie put back loans + to the following large lenders: + Bank of America, + +On line 3794: + put back loans to the + following large lenders: Bank of + America, billion; + +On line 3794: + to the following + large lenders: Bank of America, + billion; Wells Fargo, + +On line 3794: + following large lenders: + Bank of America, billion; + Wells Fargo, billion; + +On line 3794: + Morgan Chase, billion; + Citigroup, billion; SunTrust Bank, + million; and Ally + +On line 3794: + billion; Citigroup, + billion; SunTrust Bank, million; and + Ally Financial, + +On line 3794: + Citigroup, billion; + SunTrust Bank, million; and Ally + Financial, million.54 + +On line 3794: + Financial, million.54 + In early January Bank + of America reached + +On line 3794: + early January + Bank of America reached a + deal with Fannie and + +On line 3794: + January Bank of + America reached a deal with + Fannie and Freddie, + +On line 3794: + Bank of America + reached a deal with Fannie and + Freddie, settling the + +On line 3794: + America reached a + deal with Fannie and Freddie, + settling the GSEs’ claims + +On line 3794: + a deal with Fannie + and Freddie, settling the GSEs’ + claims with a payment + +On line 3794: + deal with Fannie and + Freddie, settling the GSEs’ claims + with a payment of + +On line 3794: + Fannie and Freddie, + settling the GSEs’ claims with a + payment of more than + +On line 3794: + and Freddie, settling + the GSEs’ claims with a payment + of more than billion. + +On line 3796: + Freddie, settling the + GSEs’ claims with a payment of + more than billion. Like + +On line 3796: + settling the GSEs’ claims + with a payment of more than + billion. Like Fannie + +On line 3796: + with a payment of + more than billion. Like Fannie + and Freddie, private + +On line 3796: + more than billion. Like + Fannie and Freddie, private + mortgage insurance + +On line 3796: + Fannie and Freddie, + private mortgage insurance + (PMI) companies have + +On line 3796: + (PMI) companies have + been finding significant + deficiencies in + +On line 3796: + deficiencies in + mortgages. They are refusing + to pay claims on some + +On line 3796: + in mortgages. They are + refusing to pay claims on + some insured mortgages + +On line 3796: + They are refusing + to pay claims on some insured + mortgages that have gone + +On line 3796: + refusing to pay + claims on some insured mortgages + that have gone into + +On line 3796: + to pay claims on some + insured mortgages that have gone + into default. This + +On line 3796: + insured mortgages that + have gone into default. This + insurance protects + +On line 3796: + insurance protects + the holder of the mortgage + if a homeowner + +On line 3796: + the holder of the + mortgage if a homeowner + defaults on a loan, + +On line 3796: + of the mortgage if + a homeowner defaults on + a loan, even though the + +On line 3796: + on a loan, even though + the responsibility + for the premiums + +On line 3796: + for the premiums + generally lies with the + homeowner. By the + +On line 3796: + homeowner. By the + end of PMI companies had + insured a total + +On line 3796: + By the end of PMI + companies had insured a + total of billion + +On line 3798: + insured a total + of billion in potential + mortgage losses.56 As + +On line 3798: + mortgage losses.56 As + defaults and losses on the + insured mortgages have + +On line 3798: + defaults and losses + on the insured mortgages have + been increasing, the + +On line 3798: + the insured mortgages + have been increasing, the PMI + companies have seen + +On line 3798: + have been increasing, + the PMI companies have seen + a spike in claims. As + +On line 3798: + been increasing, the + PMI companies have seen a + spike in claims. As of + +On line 3798: + the PMI companies + have seen a spike in claims. As + of October the + +On line 3798: + a spike in claims. As + of October the seven + largest PMI companies, + +On line 3798: + spike in claims. As of + October the seven largest + PMI companies, which + +On line 3798: + largest PMI companies, + which share of the market, had + rejected about of + +On line 3800: + share of the market, + had rejected about of the + claims (or billion of + +On line 3800: + had rejected about + of the claims (or billion of + billion) brought to them, + +On line 3800: + claims (or billion of + billion) brought to them, because + of violations + +On line 3800: + billion) brought to them, + because of violations + of origination + +On line 3802: + Separate from their + purchase and guarantee of + mortgages, over the course + +On line 3802: + and guarantee of + mortgages, over the course of the + housing boom the GSEs + +On line 3802: + of mortgages, over the + course of the housing boom the + GSEs purchased billion + +On line 3802: + mortgages, over the course + of the housing boom the GSEs + purchased billion of + +On line 3802: + over the course of the + housing boom the GSEs purchased + billion of subprime + +On line 3802: + course of the housing + boom the GSEs purchased billion + of subprime and Alt-A + +On line 3802: + housing boom the GSEs + purchased billion of subprime + and Alt-A private-label + +On line 3802: + purchased billion of + subprime and Alt-A private-label + securities.58 The + +On line 3802: + of subprime and Alt-A + private-label securities.58 + The GSEs have recorded + +On line 3802: + and Alt-A private-label + securities.58 The GSEs have + recorded billion in + +On line 3802: + have recorded billion + in charges on securities + from January to + +On line 3802: + securities from + January to September + Frustrated with the + +On line 3802: + Frustrated with the + lack of information from + the securities’ + +On line 3802: + in many cases large + banks, on July the GSEs through + their regulator, + +On line 3802: + many cases large banks, + on July the GSEs through their + regulator, the + +On line 3802: + on July the GSEs + through their regulator, the + Federal Housing + +On line 3802: + to various trustees + and servicers in transactions + in which the GSEs lost + +On line 3802: + trustees and servicers in + transactions in which the GSEs + lost money.60 Where they + +On line 3802: + in which the GSEs lost + money.60 Where they find that the + nonperforming loans + +On line 3802: + lost money.60 Where they + find that the nonperforming + loans in the pools have + +On line 3802: + violations, the + GSEs intend to demand that + the trustees recognize + +On line 3802: + intend to demand + that the trustees recognize their + rights (including any + +On line 3802: + the trustees recognize + their rights (including any rights + to put loans back to + +On line 3802: + trustees recognize their + rights (including any rights to + put loans back to the + +On line 3802: + their rights (including + any rights to put loans back to + the originator + +On line 3802: + rights (including any + rights to put loans back to the + originator or + +On line 3804: + any rights to put loans + back to the originator + or wholesaler).61 While this + +On line 3804: + put loans back to the + originator or wholesaler).61 + While this strategy + +On line 3804: + originator or + wholesaler).61 While this strategy + being followed by + +On line 3804: + or wholesaler).61 While this + strategy being followed + by the GSEs is based + +On line 3804: + While this strategy + being followed by the GSEs + is based in contract + +On line 3804: + being followed by + the GSEs is based in contract + law, other investors + +On line 3804: + the GSEs is based in + contract law, other investors + are relying on + +On line 3804: + contract law, other + investors are relying on + securities law + +On line 3804: + are relying on + securities law to file + lawsuits, claiming that + +On line 3804: + on securities + law to file lawsuits, claiming + that they were misled + +On line 3804: + securities law + to file lawsuits, claiming that + they were misled by + +On line 3804: + law to file lawsuits, + claiming that they were misled + by inaccurate + +On line 3804: + by inaccurate + or incomplete prospectuses; + and, in a number + +On line 3804: + inaccurate or + incomplete prospectuses; and, + in a number of + +On line 3806: + prospectuses; and, in + a number of cases, they + are winning. As of + +On line 3806: + in a number of + cases, they are winning. As + of mid-2010, court actions + +On line 3806: + number of cases, + they are winning. As of mid-2010, + court actions embroiled + +On line 3806: + they are winning. As + of mid-2010, court actions embroiled + almost all major + +On line 3806: + of mid-2010, court actions + embroiled almost all major + loan originators + +On line 3806: + loan originators + and underwriters—there + were more than lawsuits + +On line 3806: + were more than lawsuits + related to breaches of + representations + +On line 3806: + and warranties, by one + estimate.62 These lawsuits filed + in the wake of the + +On line 3806: + by one estimate.62 + These lawsuits filed in the wake + of the financial + +On line 3806: + These lawsuits filed in + the wake of the financial + crisis include those + +On line 3806: + crisis include those + alleging "untrue statements + of material + +On line 3806: + or "material + isrepresentations" in + the registration + +On line 3806: + They generally + allege violations of + the Securities + +On line 3808: + Act of Both private + and government entities + have gone to court. For + +On line 3808: + have gone to court. For + example, the investment + brokerage Charles Schwab + +On line 3808: + court. For example, + the investment brokerage + Charles Schwab has sued units + +On line 3808: + For example, the + investment brokerage Charles + Schwab has sued units of + +On line 3808: + sued units of Bank of + America, Wells Fargo, and + UBS Securities.63 + +On line 3808: + Securities.63 The + Massachusetts attorney + general’s office + +On line 3808: + of inadequate + disclosure relating to + their sales of mortgage-backed + +On line 3810: + Stanley agreed to pay + million and Goldman Sachs agreed + to pay million.64 To + +On line 3810: + to pay million.64 To + take another example, + the Federal Home + +On line 3810: + pay million.64 To take + another example, the + Federal Home Loan + +On line 3810: + Bank of Chicago has + sued several defendants, + including Bank of + +On line 3810: + sued units of Morgan + Stanley, Citigroup, HSBC, + Goldman Sachs, Barclays, + +On line 3810: + of Morgan Stanley, + Citigroup, HSBC, Goldman + Sachs, Barclays, and Bank + +On line 3810: + Citigroup, HSBC, + Goldman Sachs, Barclays, and Bank + of America, among + +On line 3810: + Sachs, Barclays, and Bank + of America, among others, + "on the basis of + +On line 3810: + Barclays, and Bank of + America, among others, "on + the basis of the + +On line 3810: + of America, among + others, "on the basis of + the information + +On line 3810: + the basis of the + information contained in + the applicable + +On line 3814: + downgraded mortgage-backed + securities and CDOs, and + investors began to + +On line 3814: + securities and + CDOs, and investors began to + panic, market prices + +On line 3814: + and investors began + to panic, market prices for + these securities + +On line 3814: + investors began to + panic, market prices for these + securities plunged. + +On line 3814: + to panic, market + prices for these securities + plunged. Both the direct + +On line 3814: + market prices for these + securities plunged. Both the + direct losses as + +On line 3814: + securities plunged. + Both the direct losses as + well as the marketwide + +On line 3814: + losses as well as + the marketwide contagion and + panic that ensued + +On line 3814: + well as the marketwide + contagion and panic that + ensued would lead to + +On line 3814: + marketwide contagion + and panic that ensued would + lead to the failure + +On line 3814: + panic that ensued + would lead to the failure or + near failure of many + +On line 3814: + lead to the failure + or near failure of many large + financial firms across + +On line 3814: + or near failure of + many large financial firms across + the system. The drop + +On line 3814: + near failure of many + large financial firms across the + system. The drop in + +On line 3814: + many large financial + firms across the system. The drop + in market prices for + +On line 3814: + the underlying + mortgages would actually + default (meaning that + +On line 3814: + less cash would flow to + the investors) as well as the + more generalized + +On line 3814: + cash would flow to the + investors) as well as the more + generalized fear + +On line 3814: + the investors) as well + as the more generalized + fear among investors that + +On line 3814: + investors) as well as + the more generalized fear + among investors that this + +On line 3814: + generalized fear + among investors that this market + had become illiquid. + +On line 3814: + because they wanted + the assurance that they could + sell securities + +On line 3814: + the assurance that + they could sell securities + quickly to raise cash + +On line 3814: + quickly to raise cash + if necessary. Potential + investors worried they + +On line 3814: + get stuck holding these + securities as market + participants looked + +On line 3814: + these securities + as market participants + looked to limit their + +On line 3814: + participants looked + to limit their exposure + to the collapsing + +On line 3816: + exposure to the + collapsing mortgage market. + As market prices dropped, + +On line 3816: + As market prices dropped, + "mark-to-market" accounting + rules required firms to + +On line 3816: + required firms to write + down their holdings to reflect + the lower market + +On line 3816: + holdings to reflect + the lower market prices. In + the first quarter of + +On line 3818: + market prices. In the + first quarter of the largest banks + and investment banks + +On line 3818: + first quarter of the + largest banks and investment banks + began complying + +On line 3818: + banks and investment + banks began complying with + a new accounting + +On line 3818: + and investment banks + began complying with a + new accounting rule + +On line 3818: + began complying + with a new accounting rule + and for the first time + +On line 3818: + accounting rule and + for the first time reported + their assets in one + +On line 3818: + three valuation + categories: "Level assets," + which had observable + +On line 3818: + categories: "Level + assets," which had observable + market prices, like stocks + +On line 3818: + "Level assets," which + had observable market prices, + like stocks on the stock + +On line 3818: + which had observable + market prices, like stocks on the + stock exchange; "Level + +On line 3818: + market prices, like stocks + on the stock exchange; "Level + assets," which were not + +On line 3818: + on the stock exchange; + "Level assets," which were not + as easily priced + +On line 3818: + "Level assets," which + were not as easily priced + because they were not + +On line 3818: + priced because they were + not actively traded; and + "Level assets," which + +On line 3818: + were not actively + traded; and "Level assets," + which were illiquid and + +On line 3818: + actively traded; + and "Level assets," which were + illiquid and had no + +On line 3818: + and "Level assets," + which were illiquid and had no + discernible market prices + +On line 3818: + which were illiquid and + had no discernible market prices + or other inputs. + +On line 3818: + were illiquid and had + no discernible market prices or + other inputs. To + +On line 3818: + or other inputs. + To determine the value + of Level and in + +On line 3818: + other inputs. To + determine the value of + Level and in some + +On line 3818: + To determine the + value of Level and in + some cases Level + +On line 3818: + value of Level + and in some cases Level + assets where market + +On line 3818: + of Level and in + some cases Level assets + where market prices were + +On line 3818: + and in some cases + Level assets where market + prices were unavailable, + +On line 3818: + some cases Level + assets where market prices were + unavailable, firms used + +On line 3818: + Level assets where + market prices were unavailable, + firms used models that + +On line 3818: + assets where market + prices were unavailable, firms used + models that relied + +On line 3818: + prices were unavailable, + firms used models that relied + on assumptions. Many + +On line 3818: + on assumptions. Many + financial institutions + reported Level + +On line 3818: + Level assets that + substantially exceeded + their capital. For + +On line 3818: + that substantially + exceeded their capital. + For example, for + +On line 3820: + for the first quarter + of Bear Stearns reported about + billion in Level + +On line 3820: + first quarter of Bear + Stearns reported about billion + in Level assets, + +On line 3820: + Stearns reported about + billion in Level assets, + compared to billion + +On line 3822: + capital; Morgan + Stanley re-THE BUST7 ported about + billion in Level + +On line 3822: + Morgan Stanley re-THE + BUST7 ported about billion in + Level assets, against + +On line 3822: + re-THE BUST7 ported about + billion in Level assets, + against capital of + +On line 3822: + billion in Level + assets, against capital of + billion; and Goldman + +On line 3822: + Level assets, against + capital of billion; and + Goldman reported + +On line 3824: + were required on many + securities even if there + were no actual + +On line 3824: + securities even + if there were no actual + realized losses + +On line 3824: + were no actual + realized losses and in + some cases even if + +On line 3824: + losses and in some + cases even if the firms did + not intend to sell + +On line 3824: + cases even if the + firms did not intend to sell + the securities. + +On line 3824: + firms did not intend + to sell the securities. + The charges reflecting + +On line 3824: + in part, on credit + rating agencies’ and investors’ + expectations that + +On line 3824: + that the mortgages would + default. But only when those + defaults came to pass + +On line 3824: + default. But only + when those defaults came to pass + would holders of the + +On line 3824: + market value of + securities that did not + trade was difficult, + +On line 3824: + securities that + did not trade was difficult, + was subjective, and + +On line 3824: + trade was difficult, + was subjective, and became + a contentious issue + +On line 3824: + was subjective, and + became a contentious issue + during the crisis. + +On line 3824: + crisis. Why1 Because + the write-downs reduced earnings + and capital, and + +On line 3826: + and capital, and + triggered collateral calls. + These mark-to-market + +On line 3826: + received a good deal + of criticism in recent + years, as firms argued + +On line 3826: + in recent years, as + firms argued that the lower + market prices did not + +On line 3826: + as firms argued that + the lower market prices did + not reflect market + +On line 3826: + the lower market + prices did not reflect market + values but rather fire-sale + +On line 3826: + market prices did not + reflect market values but + rather fire-sale prices driven + +On line 3826: + prices did not reflect + market values but rather fire-sale + prices driven by forced + +On line 3826: + market values but + rather fire-sale prices driven by forced + sales. Joseph Grundfest, when + +On line 3826: + values but rather fire-sale + prices driven by forced sales. Joseph + Grundfest, when he was + +On line 3826: + rather fire-sale prices driven + by forced sales. Joseph Grundfest, when + he was a member + +On line 3826: + fire-sale prices driven by + forced sales. Joseph Grundfest, when he + was a member of + +On line 3826: + prices driven by forced + sales. Joseph Grundfest, when he was + a member of the + +On line 3826: + driven by forced sales. + Joseph Grundfest, when he was a + member of the SEC’s + +On line 3826: + forced sales. Joseph Grundfest, + when he was a member of + the SEC’s Committee + +On line 3826: + sales. Joseph Grundfest, when + he was a member of the + SEC’s Committee on + +On line 3826: + SEC’s Committee on + Improvements to Financial + Reporting, noted + +On line 3826: + noted that at times, + marking securities at + market prices "creates + +On line 3826: + market prices "creates + situations where you have + to go out and raise + +On line 3826: + to go out and raise + physical capital in + order to cover + +On line 3826: + and raise physical + capital in order to + cover losses that + +On line 3826: + never really + there."66 But not valuing assets + based on market prices + +On line 3826: + really there."66 But + not valuing assets based on + market prices could mean + +On line 3826: + there."66 But not valuing + assets based on market prices + could mean that firms were + +On line 3826: + valuing assets based + on market prices could mean that + firms were not recording + +On line 3826: + on market prices could + mean that firms were not recording + losses required by + +On line 3826: + could mean that firms were + not recording losses required + by the accounting + +On line 3826: + mean that firms were not + recording losses required by + the accounting rules + +On line 3826: + not recording losses + required by the accounting + rules and therefore were + +On line 3828: + capital. As the + mortgage market was crashing, + some economists and + +On line 3828: + estimated that + actual losses, also + known as realized + +On line 3828: + actual losses, + also known as realized + losses, on subprime + +On line 3828: + known as realized + losses, on subprime and Alt-A + mortgages would total + +On line 3828: + losses, on subprime + and Alt-A mortgages would total + to billion;67 so far, + +On line 3828: + and Alt-A mortgages would + total to billion;67 so far, + by the figure has + +On line 3828: + mortgages would total + to billion;67 so far, by the + figure has turned out + +On line 3828: + total to billion;67 + so far, by the figure has + turned out not to be + +On line 3828: + to billion;67 so far, + by the figure has turned out + not to be much more + +On line 3828: + billion;67 so far, by + the figure has turned out not + to be much more than + +On line 3828: + far, by the figure + has turned out not to be much + more than that. As of + +On line 3828: + by the figure has + turned out not to be much more + than that. As of year-end + +On line 3828: + the figure has turned + out not to be much more than + that. As of year-end the + +On line 3828: + turned out not to be + much more than that. As of year-end + the dollar value + +On line 3828: + out not to be much + more than that. As of year-end the + dollar value of + +On line 3828: + much more than that. As + of year-end the dollar value + of all impaired Alt-A + +On line 3828: + more than that. As of + year-end the dollar value of + all impaired Alt-A and + +On line 3828: + total about billion.68 + Securities are impaired + when they have suffered + +On line 3828: + Securities are + impaired when they have suffered + realized losses + +On line 3828: + impaired when they have + suffered realized losses + or are expected + +On line 3828: + are expected to + suffer realized losses + imminently. While + +On line 3828: + suffer realized + losses imminently. While + those numbers are small + +On line 3830: + numbers are small in + relation to the trillion + U.S. economy, the + +On line 3830: + in relation to + the trillion U.S. economy, + the losses had a + +On line 3830: + mortgages themselves are + a pretty small asset class," + Fed Chairman Ben Bernanke + +On line 3830: + pretty small asset + class," Fed Chairman Ben Bernanke told + the FCIC, explaining + +On line 3830: + small asset class," Fed + Chairman Ben Bernanke told the FCIC, + explaining how in + +On line 3830: + Fed Chairman Ben Bernanke + told the FCIC, explaining how + in he and Treasury + +On line 3830: + Ben Bernanke told the FCIC, + explaining how in he and + Treasury Secretary + +On line 3830: + explaining how in + he and Treasury Secretary + Henry Paulson had + +On line 3830: + Henry Paulson had + underestimated the + repercussions of the + +On line 3830: + repercussions of the + emerging housing crisis. "You + know, the stock market + +On line 3830: + housing crisis. "You + know, the stock market goes up + and down every day + +On line 3830: + crisis. "You know, the + stock market goes up and down + every day more than + +On line 3830: + know, the stock market + goes up and down every day + more than the entire + +On line 3830: + stock market goes up + and down every day more than + the entire value + +On line 3830: + market goes up and + down every day more than the + entire value of + +On line 3830: + down every day more + than the entire value of + the subprime mortgages + +On line 3830: + every day more than + the entire value of the + subprime mortgages in + +On line 3830: + the entire value + of the subprime mortgages in + the country. But what + +On line 3830: + the country. But what + created the contagion, + or one of the things + +On line 3830: + what created the + contagion, or one of the + things that created + +On line 3830: + contagion, or one + of the things that created + the contagion, was + +On line 3830: + one of the things that + created the contagion, + was that the subprime + +On line 3830: + things that created + the contagion, was that the + subprime mortgages were + +On line 3830: + the contagion, was + that the subprime mortgages were + entangled in these + +On line 3830: + the subprime mortgages + were entangled in these huge + securitized pools."69 + +On line 3832: + entangled in these + huge securitized pools."69 The + large drop in market + +On line 3832: + huge securitized + pools."69 The large drop in market + prices of the mortgage + +On line 3832: + pools."69 The large drop in + market prices of the mortgage + securities had + +On line 3832: + in market prices of + the mortgage securities + had large spillover effects + +On line 3832: + market prices of the + mortgage securities had + large spillover effects to + +On line 3832: + had large spillover effects + to the financial sector, + for a number of + +On line 3832: + spillover effects to the + financial sector, for a + number of reasons. + +On line 3832: + financial sector, + for a number of reasons. + For example, as + +On line 3832: + for a number of + reasons. For example, as + just discussed, when the + +On line 3832: + discussed, when the prices + of mortgage-backed securities + and CDOs fell, many of + +On line 3832: + the prices of mortgage-backed + securities and CDOs fell, + many of the holders + +On line 3832: + many of the holders + of those securities marked + down the value of + +On line 3832: + of the holders of + those securities marked down + the value of their + +On line 3832: + those securities + marked down the value of their + holdings—before they + +On line 3832: + marked down the value + of their holdings—before they + had experienced + +On line 3832: + down the value of + their holdings—before they had + experienced any + +On line 3832: + their holdings—before + they had experienced any + actual losses. + +On line 3834: + had experienced + any actual losses. In + addition, rather than + +On line 3834: + addition, rather than + spreading the risks of losses + among many investors, the + +On line 3834: + had concentrated + them. "Who owns residential + credit risk1" two Lehman + +On line 3834: + analysts asked in + a September report. The + answer: three-quarters + +On line 3834: + report. The answer: + three-quarters of subprime and + Alt-A mortgages had been + +On line 3834: + investment-grade + securities and has been + almost entirely + +On line 3834: + and has been almost + entirely transferred to AAA + collateralized + +On line 3834: + entirely transferred + to AAA collateralized + debt obligation (CDO) + +On line 3834: + (CDO) holders."70 A set + of large, systemically + important firms with + +On line 3834: + important firms with + significant holdings or + exposure to these + +On line 3834: + with significant + holdings or exposure to + these securities + +On line 3834: + or exposure to + these securities would be + found to be holding + +On line 3834: + exposure to these + securities would be found + to be holding very + +On line 3834: + securities would + be found to be holding very + little capital + +On line 3834: + holding very little + capital to protect against + potential losses. + +On line 3834: + little capital + to protect against potential + losses. And most of + +On line 3834: + potential losses. + And most of those companies + would turn out to be + +On line 3834: + losses. And most of + those companies would turn out + to be considered + +On line 3834: + companies would turn + out to be considered by + the authorities + +On line 3834: + to be considered + by the authorities too + big to fail in the + +On line 3834: + be considered by + the authorities too big + to fail in the midst + +On line 3834: + considered by the + authorities too big to + fail in the midst of + +On line 3834: + the authorities + too big to fail in the midst + of a financial + +On line 3836: + fail in the midst of + a financial crisis. The + International + +On line 3836: + examined where the + declining assets were held + and estimated + +On line 3836: + assets were held and + estimated how severe + the write-downs would be. + +On line 3836: + and estimated + how severe the write-downs would + be. All told, the IMF + +On line 3836: + write-downs would be. All + told, the IMF calculated + that roughly trillion + +On line 3836: + be. All told, the IMF + calculated that roughly + trillion in mortgage + +On line 3836: + trillion in mortgage + assets were held throughout the + financial system. + +On line 3836: + these, trillion were GSE + mortgage–backed securities; + the IMF expected + +On line 3836: + securities; the + IMF expected losses of + billion, but investors + +On line 3836: + billion, but investors + holding these securities + would lose no money, + +On line 3836: + but investors holding + these securities would lose + no money, because + +On line 3836: + investors holding these + securities would lose no + money, because of + +On line 3836: + securities would + lose no money, because of + the GSEs’ guarantee. + +On line 3836: + mortgage assets were + estimated to be prime + and nonprime mortgages + +On line 3836: + estimated to + be prime and nonprime mortgages + held largely by the + +On line 3836: + be prime and nonprime + mortgages held largely by the + banks and the GSEs. These + +On line 3836: + mortgages held largely + by the banks and the GSEs. These + were expected to + +On line 3836: + by the banks and the + GSEs. These were expected to + suffer as much as + +On line 3836: + banks and the GSEs. These + were expected to suffer + as much as billion + +On line 3836: + and the GSEs. These were + expected to suffer as + much as billion in + +On line 3836: + were expected to + suffer as much as billion + in write-downs due to + +On line 3836: + suffer as much as + billion in write-downs due to + declines in market + +On line 3836: + as much as billion + in write-downs due to declines + in market value. + +On line 3836: + much as billion in + write-downs due to declines in + market value. The + +On line 3836: + estimated to + be mortgage-backed securities + and CDOs. Write-downs on + +On line 3836: + securities and + CDOs. Write-downs on those assets + were expected to + +On line 3836: + and CDOs. Write-downs on + those assets were expected + to be billion. And, + +On line 3836: + CDOs. Write-downs on those + assets were expected to + be billion. And, even + +On line 3836: + on those assets were + expected to be billion. + And, even more troubling, + +On line 3836: + expected to be + billion. And, even more troubling, + more than one-half of these + +On line 3836: + to be billion. And, + even more troubling, more than one-half + of these losses were + +On line 3836: + And, even more troubling, + more than one-half of these losses + were expected to + +On line 3836: + even more troubling, more + than one-half of these losses were + expected to be + +On line 3836: + one-half of these losses + were expected to be borne + by the investment + +On line 3836: + of these losses were + expected to be borne by + the investment banks, + +On line 3836: + were expected to + be borne by the investment + banks, commercial banks, + +On line 3836: + expected to be + borne by the investment banks, + commercial banks, and + +On line 3836: + to be borne by the + investment banks, commercial + banks, and thrifts. The rest + +On line 3836: + the investment banks, + commercial banks, and thrifts. The + rest of the write-downs + +On line 3836: + rest of the write-downs + from non-agency mortgage–backed + securities were + +On line 3836: + institutions such + as insurance companies, + pension funds, the GSEs, + +On line 3836: + such as insurance + companies, pension funds, the + GSEs, and hedge funds. The + +On line 3836: + companies, pension + funds, the GSEs, and hedge funds. The + October report + +On line 3836: + funds, the GSEs, and hedge + funds. The October report + also expected + +On line 3836: + funds. The October + report also expected + another billion + +On line 3836: + billion in write-downs + on commercial mortgage–backed + securities, CLOs, + +On line 3836: + securities, CLOs, + leveraged loans, and other loans + and securities—with + +On line 3836: + more than half coming + from commercial mortgage–backed + securities. Again, + +On line 3836: + securities. Again, + the commercial banks and thrifts + and investment banks + +On line 3836: + Again, the commercial + banks and thrifts and investment + banks were expected + +On line 3836: + the commercial banks + and thrifts and investment banks + were expected to + +On line 3836: + commercial banks and + thrifts and investment banks were + expected to bear + +On line 3838: + investment banks were + expected to bear much of + the brunt.71 Furthermore, + +On line 3838: + (suggested by the + sizable revi-sions in the + IMF estimates) and + +On line 3838: + sizable revi-sions + in the IMF estimates) and + leverage would promote + +On line 3838: + promote contagion. + Investors would realize they + did not know as much + +On line 3838: + contagion. Investors + would realize they did not + know as much as they + +On line 3838: + would realize they + did not know as much as they + wanted to know about + +On line 3838: + did not know as much + as they wanted to know about + the mortgage assets + +On line 3838: + not know as much as + they wanted to know about the + mortgage assets that + +On line 3838: + as they wanted to + know about the mortgage assets + that banks, investment + +On line 3838: + they wanted to know + about the mortgage assets that + banks, investment banks, + +On line 3838: + wanted to know about + the mortgage assets that banks, + investment banks, and + +On line 3838: + know about the mortgage + assets that banks, investment + banks, and other firms + +On line 3838: + the mortgage assets + that banks, investment banks, and + other firms held or + +On line 3838: + banks, investment banks, + and other firms held or to + which they were exposed. + +On line 3838: + investment banks, and + other firms held or to which + they were exposed. To + +On line 3838: + and other firms held + or to which they were exposed. + To an extent not + +On line 3838: + held or to which they + were exposed. To an extent + not understood by + +On line 3838: + or to which they were + exposed. To an extent not + understood by many + +On line 3838: + they were exposed. To + an extent not understood + by many before the + +On line 3838: + before the crisis, + financial institutions + had leveraged themselves + +On line 3838: + had leveraged themselves + with commercial paper, with + derivatives, and + +On line 3838: + commercial paper, + with derivatives, and in + the short-term repo + +On line 3838: + with derivatives, + and in the short-term repo + markets, in part by + +On line 3840: + by using mortgage-backed + securities and CDOs as + collateral. Lenders + +On line 3840: + as collateral. + Lenders would question the value + of the assets that + +On line 3840: + collateral. Lenders + would question the value of + the assets that those + +On line 3840: + Lenders would question the + value of the assets that + those companies had + +On line 3840: + of the assets that + those companies had posted + as collateral + +On line 3840: + the assets that those + companies had posted as + collateral at + +On line 3840: + those companies had + posted as collateral + at the same time that + +On line 3840: + the same time that they + were questioning the value + of those companies’ + +On line 3844: + were questioning the + value of those companies’ + balance sheets. Even the + +On line 3844: + highest-rated tranches + of mortgage-backed securities + were downgraded, and + +On line 3844: + balance sheets based on + declines in market value. + However, although + +On line 3844: + based on declines in + market value. However, + although this could not + +On line 3844: + declines in market + value. However, although + this could not be known + +On line 3844: + in market value. + However, although this could + not be known in at + +On line 3844: + value. However, + although this could not be known + in at the end of + +On line 3844: + However, although + this could not be known in at + the end of most of + +On line 3844: + this could not be known + in at the end of most of + the triple-A tranches of + +On line 3844: + not be known in at + the end of most of the triple-A + tranches of mortgage-backed + +On line 3844: + the end of most of + the triple-A tranches of mortgage-backed + securities have + +On line 3844: + the triple-A tranches of + mortgage-backed securities have + avoided actual + +On line 3844: + tranches of mortgage-backed + securities have avoided + actual losses + +On line 3844: + securities have + avoided actual losses + in cash flow through and + +On line 3846: + avoid significant + realized losses going + forward. Overall, for + +On line 3846: + realized losses + going forward. Overall, for + to vintage tranches + +On line 3846: + mass downgrades, only + about of Alt-A and of subprime + securities had + +On line 3846: + "materially + impaired"—meaning that losses + were imminent or + +On line 3846: + imminent or had + already been suffered—by the + end of (see figure + +On line 3846: + (see figure For the + lower-rated Baa tranches, of + Alt-A and of subprime + +On line 3846: + tranches, of Alt-A and + of subprime securities + were impaired. In all, + +On line 3846: + Alt-A and of subprime + securities were impaired. + In all, by the end + +On line 3846: + securities were + impaired. In all, by the end + of billion worth of + +On line 3846: + were impaired. In all, + by the end of billion worth + of subprime and Alt-A + +On line 3846: + In all, by the end + of billion worth of subprime + and Alt-A tranches had + +On line 3846: + all, by the end of + billion worth of subprime and + Alt-A tranches had been + +On line 3846: + outcome would be far + worse for CDO investors, whose fate + largely depended + +On line 3846: + would be far worse for + CDO investors, whose fate largely + depended on the + +On line 3846: + worse for CDO investors, + whose fate largely depended + on the performance + +On line 3846: + for CDO investors, whose + fate largely depended on + the performance of + +On line 3848: + lower-rated mortgage-backed + securities. More than of + Baa CDO bonds and of + +On line 3850: + CDO bonds and of Aaa + CDO bonds were ultimately + impaired.72 The housing + +On line 3850: + and of Aaa CDO bonds + were ultimately impaired.72 + The housing bust would + +On line 3850: + of Aaa CDO bonds were + ultimately impaired.72 The + housing bust would not + +On line 3850: + were ultimately + impaired.72 The housing bust would + not be the end of + +On line 3850: + would not be the end + of the story. As Chairman + Bernanke testified to + +On line 3850: + not be the end of + the story. As Chairman Bernanke + testified to the + +On line 3850: + end of the story. + As Chairman Bernanke testified + to the FCIC: "What I + +On line 3850: + of the story. As + Chairman Bernanke testified to + the FCIC: "What I did + +On line 3850: + to the FCIC: "What I + did not recognize was the + extent to which the + +On line 3850: + FCIC: "What I did not + recognize was the extent + to which the system + +On line 3850: + did not recognize + was the extent to which the + system had flaws and + +On line 3850: + was the extent to + which the system had flaws and + weaknesses in it + +On line 3850: + to which the system + had flaws and weaknesses in + it that were going + +On line 3850: + which the system had + flaws and weaknesses in it + that were going to + +On line 3850: + it that were going + to amplify the initial + shock from subprime and + +On line 3850: + that were going to + amplify the initial shock + from subprime and make + +On line 3850: + to amplify the + initial shock from subprime and + make it into a + +On line 3852: + and make it into + a much bigger crisis."73 The + Commission concludes + +On line 3852: + much bigger crisis."73 + The Commission concludes that + the collapse of the + +On line 3852: + that the collapse of + the housing bubble began + the chain of events that + +On line 3852: + the collapse of the + housing bubble began the + chain of events that led + +On line 3852: + bubble began the + chain of events that led to the + financial crisis. + +On line 3854: + crisis. High leverage, + inadequate capital, + and short-term funding + +On line 3856: + vulnerable to + the downturn in the market + in The investment + +On line 3856: + in The investment + banks had leverage ratios, by + one measure, of up + +On line 3856: + The investment banks + had leverage ratios, by one + measure, of up to + +On line 3856: + had leverage ratios, + by one measure, of up to + to This means that for + +On line 3856: + by one measure, of + up to to This means that for + every of assets, + +On line 3856: + measure, of up to + to This means that for every + of assets, they held + +On line 3856: + up to to This means + that for every of assets, + they held only of + +On line 3856: + that for every of + assets, they held only of + capital. Fannie + +On line 3856: + they held only of + capital. Fannie Mae and + Freddie Mac (the GSEs) + +On line 3856: + Freddie Mac (the GSEs) + had even greater leverage—with a + combined to ratio. + +On line 3858: + Mac (the GSEs) had even + greater leverage—with a combined + to ratio. Leverage + +On line 3858: + (the GSEs) had even greater + leverage—with a combined to + ratio. Leverage or + +On line 3858: + many institutions + was even greater than reported + when one takes into + +On line 3858: + reported when one + takes into account "window + dressing," off-balance-sheet + +On line 3858: + takes into account + "window dressing," off-balance-sheet + exposures such as + +On line 3858: + of Citigroup, and + derivatives positions + such as those of AIG. + +On line 3860: + as those of AIG. The + GSEs contributed to, but were + not a primary + +On line 3860: + those of AIG. The GSEs + contributed to, but were not + a primary cause + +On line 3860: + contributed to, but + were not a primary cause + of, the financial + +On line 3862: + a primary cause + of, the financial crisis. + Their trillion mortgage + +On line 3862: + mortgage exposure + and market position were + significant, and + +On line 3862: + market position + were significant, and they + were without question + +On line 3862: + were significant, + and they were without question + dramatic failures. + +On line 3862: + dramatic failures. + They participated in + the expansion of + +On line 3862: + participated + in the expansion of risky + mortgage lending and + +On line 3862: + in the expansion + of risky mortgage lending and + declining mortgage + +On line 3862: + mortgage lending and + declining mortgage standards, + adding significant + +On line 3862: + declining mortgage + standards, adding significant + demand for less-than-prime loans. + +On line 3862: + mortgage standards, adding + significant demand for + less-than-prime loans. However, + +On line 3862: + demand for less-than-prime loans. + However, they followed, rather + than led, the Wall Street + +On line 3862: + rather than led, the Wall + Street firms. The delinquency rates + on the loans that they + +On line 3862: + led, the Wall Street firms. + The delinquency rates on the + loans that they purchased + +On line 3862: + the Wall Street firms. The + delinquency rates on the loans + that they purchased or + +On line 3862: + The delinquency rates + on the loans that they purchased + or guaranteed were + +On line 3862: + on the loans that they + purchased or guaranteed were + significantly + +On line 3862: + or guaranteed were + significantly lower + than those purchased and + +On line 3862: + significantly + lower than those purchased and + securitized by + +On line 3864: + The Community + Reinvestment Act (CRA)—which requires + regulated banks + +On line 3864: + services consistent + with safety and soundness to + the areas where they + +On line 3864: + they take deposits—was not + a significant factor + in subprime lending. + +On line 3864: + in subprime lending. + However, community + lending commitments + +On line 3864: + required by the CRA + were clearly used by lending + institutions for + +On line 3864: + were clearly used by + lending institutions for + public relations + +On line 3889: + CONTENTS Goldman: "Let’s + be aggressive distributing + things"..............................................235 Bear Stearns’s hedge funds: + +On line 3889: + "Let’s be aggressive + distributing things"..............................................235 Bear Stearns’s hedge + funds: "Looks pretty damn + +On line 3891: + Bear Stearns’s hedge funds: "Looks + pretty damn ugly"........................................238 Rating + agencies: "It can’t be + +On line 3891: + hedge funds: "Looks pretty + damn ugly"........................................238 Rating agencies: + "It can’t be all of + +On line 3891: + funds: "Looks pretty damn + ugly"........................................238 Rating agencies: "It + can’t be all of a + +On line 3891: + pretty damn ugly"........................................238 + Rating agencies: "It can’t be + all of a sudden"..................................................242 + +On line 3893: + damn ugly"........................................238 Rating + agencies: "It can’t be all of + a sudden"..................................................242 AIG: "Well + +On line 3893: + Rating agencies: "It + can’t be all of a sudden"..................................................242 + AIG: "Well bigger than + +On line 3893: + "It can’t be all of + a sudden"..................................................242 AIG: "Well bigger + than we ever planned + +On line 3893: + can’t be all of a + sudden"..................................................242 AIG: "Well bigger than + we ever planned for" + +On line 3895: + of a sudden"..................................................242 AIG: + "Well bigger than we ever + planned for" Over the course + +On line 3895: + a sudden"..................................................242 AIG: "Well + bigger than we ever planned + for" Over the course of + +On line 3895: + AIG: "Well bigger than + we ever planned for" Over the + course of the collapse + +On line 3895: + "Well bigger than we + ever planned for" Over the course + of the collapse of + +On line 3895: + ever planned for" Over + the course of the collapse of + the housing bubble + +On line 3895: + for" Over the course of + the collapse of the housing + bubble and the abrupt + +On line 3895: + course of the collapse + of the housing bubble and + the abrupt shutdown of + +On line 3895: + the collapse of the + housing bubble and the abrupt + shutdown of subprime + +On line 3895: + bubble and the abrupt + shutdown of subprime lending + led to losses for + +On line 3895: + institutions, runs + on money market funds, tighter + credit, and higher + +On line 3895: + higher interest + rates. Unemployment remained + relatively steady, + +On line 3895: + steady, hovering just + below until the end of + the year, and oil prices + +On line 3895: + of the year, and oil + prices rose dramatically. + By the middle of + +On line 3895: + the year, and oil prices + rose dramatically. By + the middle of home + +On line 3895: + year, and oil prices rose + dramatically. By the + middle of home prices + +On line 3895: + dramatically. + By the middle of home prices + had declined almost + +On line 3895: + the middle of home + prices had declined almost from + their peak in Early + +On line 3895: + almost from their peak + in Early evidence of + the coming storm was + +On line 3895: + their peak in Early + evidence of the coming + storm was the drop in + +On line 3895: + Early evidence + of the coming storm was the + drop in November + +On line 3897: + evidence of the + coming storm was the drop in + November of the + +On line 3897: + of the coming storm + was the drop in November + of the ABX Index—a + +On line 3897: + the coming storm was + the drop in November of + the ABX Index—a Dow + +On line 3897: + in November of + the ABX Index—a Dow Jones–like + index for credit + +On line 3897: + the ABX Index—a Dow + Jones–like index for credit + default swaps on BBB-tranches + +On line 3897: + default swaps on BBB-tranches + of mortgage-backed securities + issued in the first + +On line 3899: + on BBB-tranches of mortgage-backed + securities issued in + the first half of That + +On line 3899: + issued in the first + half of That drop came after + Moody’s and S&P put on + +On line 3899: + the first half of That + drop came after Moody’s and S&P + put on negative + +On line 3899: + first half of That drop + came after Moody’s and S&P put + on negative watch + +On line 3899: + came after Moody’s and + S&P put on negative watch + selected tranches + +On line 3899: + Moody’s and S&P put on + negative watch selected + tranches in one deal + +On line 3899: + on negative watch + selected tranches in one + deal backed by mortgages + +On line 3899: + backed by mortgages from + one originator: Fremont + Investment Loan.2 In + +On line 3899: + one originator: + Fremont Investment Loan.2 In + December, the same + +On line 3899: + In December, the + same index fell another + after the mortgage + +On line 3899: + Sebring Capital + ceased operations. Senior + risk officers of + +On line 3899: + officers of the + five largest investment banks told + the Securities + +On line 3899: + largest investment banks + told the Securities and + Exchange Commission + +On line 3899: + the Securities + and Exchange Commission that + they expected to + +On line 3899: + Securities and + Exchange Commission that they + expected to see + +On line 3899: + Exchange Commission + that they expected to see + further subprime lender + +On line 3899: + Commission that they + expected to see further + subprime lender failures + +On line 3899: + that they expected + to see further subprime lender + failures in "There is + +On line 3899: + expected to see + further subprime lender failures + in "There is a broad + +On line 3899: + see further subprime + lender failures in "There is a + broad recognition that, + +On line 3899: + further subprime lender + failures in "There is a broad + recognition that, with + +On line 3899: + failures in "There is + a broad recognition that, with + the refinancing + +On line 3899: + a broad recognition + that, with the refinancing + and real estate + +On line 3899: + broad recognition that, + with the refinancing and + real estate booms + +On line 3899: + the refinancing + and real estate booms over, + the business model + +On line 3899: + refinancing and + real estate booms over, the + business model of + +On line 3899: + real estate booms + over, the business model of + many of the smaller + +On line 3899: + estate booms over, the + business model of many of + the smaller subprime + +On line 3899: + business model of + many of the smaller subprime + originators is + +On line 3899: + many of the smaller + subprime originators is + no longer viable," SEC + +On line 3899: + no longer viable," SEC + analysts told Director + Erik Sirri in a + +On line 3901: + told Director Erik + Sirri in a January + memorandum.3 That + +On line 3901: + Erik Sirri in a + January memorandum.3 + That became more and + +On line 3901: + became more and more + evident. In January, + Mortgage Lenders Network + +On line 3901: + and more evident. + In January, Mortgage Lenders + Network announced it + +On line 3901: + January, Mortgage + Lenders Network announced it had + stopped funding mortgages + +On line 3901: + funding mortgages and + accepting applications. + In February, New + +On line 3901: + credit losses and + HSBC, the largest subprime lender + in the United States, + +On line 3901: + losses and HSBC, + the largest subprime lender in the + United States, announced + +On line 3901: + the largest subprime lender + in the United States, announced + a billion increase + +On line 3901: + largest subprime lender in + the United States, announced a + billion increase in + +On line 3901: + in the United States, + announced a billion increase + in its quarterly + +On line 3901: + billion increase in + its quarterly provision + for losses. In March, + +On line 3901: + for losses. In March, + Fremont stopped originating + subprime loans after + +On line 3901: + In March, Fremont stopped + originating subprime loans + after receiving + +On line 3901: + after receiving + a cease and desist order + from the Federal + +On line 3901: + receiving a cease + and desist order from the + Federal Deposit + +On line 3901: + a cease and desist + order from the Federal + Deposit Insurance + +On line 3901: + Deposit Insurance + Corporation. In April, New + Century filed for + +On line 3903: + their operating + cash on short-term funding through + commercial paper + +On line 3903: + on short-term funding + through commercial paper and + the repo market. + +On line 3903: + short-term funding through + commercial paper and the + repo market. But + +On line 3903: + commercial paper + and the repo market. But + commercial paper + +On line 3903: + paper buyers and + banks became unwilling to + continue funding + +On line 3903: + continue funding + them, and repo lenders became + less and less willing + +On line 3903: + them, and repo lenders + became less and less willing + to accept subprime + +On line 3903: + became less and less + willing to accept subprime + and Alt-A mortgages or + +On line 3903: + less and less willing + to accept subprime and Alt-A + mortgages or mortgage-backed + +On line 3903: + to accept subprime + and Alt-A mortgages or mortgage-backed + securities as + +On line 3903: + and Alt-A mortgages or + mortgage-backed securities as + collateral. They + +On line 3903: + gave them the option + of withholding funding on + short notice if they + +On line 3903: + them the option of + withholding funding on short + notice if they lost + +On line 3903: + withholding funding + on short notice if they lost + confidence in the + +On line 3905: + lost confidence in + the borrower. Another + sign of problems in + +On line 3905: + confidence in the + borrower. Another sign + of problems in the + +On line 3905: + in the borrower. + Another sign of problems + in the market came + +On line 3905: + of problems in the + market came when financial + companies began + +On line 3905: + in the market came + when financial companies + began to report + +On line 3905: + companies began + to report more detail about + their assets under + +On line 3905: + report more detail + about their assets under the + new mark-to-market + +On line 3905: + securities that + were becoming illiquid and + hard to value. The + +On line 3905: + hard to value. The + sum of more illiquid Level + and assets at these + +On line 3905: + to value. The sum + of more illiquid Level and + assets at these firms + +On line 3905: + sum of more illiquid + Level and assets at these + firms was "eye-popping + +On line 3905: + more illiquid Level + and assets at these firms was + "eye-popping in terms + +On line 3905: + Level and assets + at these firms was "eye-popping + in terms of the amount + +On line 3905: + assets at these firms + was "eye-popping in terms of + the amount of leverage + +On line 3905: + "eye-popping in terms + of the amount of leverage the + banks and investment + +On line 3905: + the amount of leverage + the banks and investment banks + had," according to + +On line 3905: + amount of leverage the + banks and investment banks had," + according to Jim + +On line 3905: + banks and investment + banks had," according to Jim + Chanos, a New York hedge + +On line 3905: + and investment banks + had," according to Jim Chanos, + a New York hedge fund + +On line 3905: + banks had," according + to Jim Chanos, a New York hedge + fund manager. Chanos + +On line 3905: + had," according to + Jim Chanos, a New York hedge fund + manager. Chanos said + +On line 3905: + Chanos, a New York hedge + fund manager. Chanos said that + the new disclosures + +On line 3905: + fund manager. Chanos + said that the new disclosures + also revealed for + +On line 3905: + Chanos said that the new + disclosures also revealed + for the first time that + +On line 3905: + disclosures also + revealed for the first time that + many firms retained large + +On line 3905: + large exposures from + securitizations. "You + clearly didn’t get + +On line 3905: + "You clearly didn’t + get the magnitude, and the + market didn’t grasp + +On line 3905: + the magnitude, and + the market didn’t grasp the + magnitude until + +On line 3905: + market didn’t grasp + the magnitude until spring + of when the figures + +On line 3905: + until spring of when + the figures began to be + published, and then it + +On line 3905: + of when the figures + began to be published, and + then it was as if + +On line 3905: + the figures began + to be published, and then it + was as if someone + +On line 3905: + figures began to + be published, and then it was + as if someone rang + +On line 3905: + to be published, and + then it was as if someone + rang a bell, because + +On line 3905: + published, and then it + was as if someone rang a + bell, because almost + +On line 3905: + was as if someone + rang a bell, because almost + immediately + +On line 3905: + bell, because almost + immediately upon + the publication + +On line 3905: + the publication + of these numbers, journalists + began writing about + +On line 3905: + journalists began + writing about it, and hedge funds + began talking about + +On line 3905: + and hedge funds began + talking about it, and people + began speaking about + +On line 3905: + funds began talking + about it, and people began + speaking about it in + +On line 3907: + about it, and people + began speaking about it in + the marketplace."4 In + +On line 3907: + began speaking about + it in the marketplace."4 In + late and early some + +On line 3907: + speaking about it in + the marketplace."4 In late and + early some banks moved + +On line 3907: + in the marketplace."4 + In late and early some banks + moved to reduce their + +On line 3907: + marketplace."4 In late + and early some banks moved to + reduce their subprime + +On line 3907: + In late and early + some banks moved to reduce their + subprime exposures + +On line 3907: + banks moved to reduce + their subprime exposures by + selling assets and + +On line 3907: + by selling assets + and buying protection through + credit default swaps. + +On line 3907: + buying protection + through credit default swaps. Some, + such as Citigroup + +On line 3907: + credit default swaps. + Some, such as Citigroup and + Merrill Lynch, reduced + +On line 3907: + default swaps. Some, such + as Citigroup and Merrill + Lynch, reduced mortgage + +On line 3907: + as Citigroup and + Merrill Lynch, reduced mortgage + exposure in some + +On line 3907: + Merrill Lynch, reduced + mortgage exposure in some + areas of the firm + +On line 3907: + mortgage exposure + in some areas of the firm + but increased it in + +On line 3907: + in some areas of + the firm but increased it in + others. Banks that had + +On line 3907: + areas of the firm + but increased it in others. + Banks that had been busy + +On line 3907: + the firm but increased + it in others. Banks that had + been busy for nearly + +On line 3907: + firm but increased it + in others. Banks that had been + busy for nearly four + +On line 3907: + but increased it in + others. Banks that had been busy + for nearly four years + +On line 3907: + it in others. Banks + that had been busy for nearly + four years creating + +On line 3907: + in others. Banks that + had been busy for nearly four + years creating and + +On line 3907: + that had been busy for + nearly four years creating + and selling subprime-backed + +On line 3907: + collateralized + debt obligations (CDOs) scrambled + in about that many months + +On line 3907: + (CDOs) scrambled in about + that many months to sell or hedge + whatever they could. + +On line 3907: + in about that many months + to sell or hedge whatever + they could. They now dumped + +On line 3907: + about that many months to + sell or hedge whatever they + could. They now dumped these + +On line 3907: + many months to sell or + hedge whatever they could. They + now dumped these products + +On line 3907: + hedge whatever they + could. They now dumped these products + into some of the + +On line 3907: + could. They now dumped these + products into some of the + most ill-fated + +On line 3907: + Merrill Lynch, and UBS, + particularly, were forced + to retain larger + +On line 3907: + retain larger and + larger quantities of the + "super-senior" tranches + +On line 3907: + larger quantities + of the "super-senior" tranches + of these CDOs. The bankers + +On line 3909: + of the "super-senior" + tranches of these CDOs. The bankers + could always hope— and + +On line 3909: + tranches of these CDOs. + The bankers could always hope— and + many apparently + +On line 3909: + The bankers could always + hope— and many apparently + even believed—that all would + +On line 3909: + bankers could always hope— + and many apparently even + believed—that all would turn + +On line 3909: + always hope— and many + apparently even believed—that + all would turn out well + +On line 3909: + many apparently + even believed—that all would turn out + well with these super + +On line 3909: + even believed—that all would + turn out well with these super + seniors, which were, in + +On line 3909: + all would turn out well + with these super seniors, which + were, in theory, + +On line 3909: + would turn out well with + these super seniors, which were, + in theory, the + +On line 3909: + turn out well with these + super seniors, which were, in + theory, the safest + +On line 3911: + these super seniors, + which were, in theory, the + safest of all. With such + +On line 3911: + the safest of all. With + such uncertainty about the + market value of + +On line 3911: + such uncertainty + about the market value of + mortgage assets, trades + +On line 3911: + market value of + mortgage assets, trades became + scarce and setting prices + +On line 3911: + value of mortgage + assets, trades became scarce and + setting prices for these + +On line 3911: + mortgage assets, trades + became scarce and setting prices + for these instruments + +On line 3911: + assets, trades became + scarce and setting prices for these + instruments became + +On line 3913: + scarce and setting prices + for these instruments became + difficult. Although + +On line 3913: + subprime markets, they + misjudged the risks posed to the + financial system. + +On line 3913: + misjudged the risks posed + to the financial system. + In January SEC + +On line 3913: + to the financial + system. In January SEC + officials noted + +On line 3913: + that investment banks + had credit exposure to + struggling subprime lenders + +On line 3913: + credit exposure + to struggling subprime lenders but + argued that "none of + +On line 3913: + to struggling subprime + lenders but argued that "none of + these exposures are + +On line 3913: + lenders but argued that + "none of these exposures are + material."5 The + +On line 3913: + these exposures are + material."5 The Treasury + and Fed insisted + +On line 3913: + material."5 The + Treasury and Fed insisted + throughout the spring and + +On line 3913: + The Treasury and Fed + insisted throughout the spring + and early summer + +On line 3913: + insisted throughout + the spring and early summer + that the damage would + +On line 3913: + the spring and early + summer that the damage would + be limited. "The + +On line 3913: + broader economy + and financial markets of + the problems in the + +On line 3913: + the problems in the + subprime market seems likely + to be contained,"6 Fed + +On line 3913: + the subprime market + seems likely to be contained,"6 + Fed Chairman Ben Bernanke + +On line 3913: + market seems likely + to be contained,"6 Fed Chairman + Ben Bernanke testified + +On line 3913: + seems likely to be + contained,"6 Fed Chairman Ben Bernanke + testified before + +On line 3913: + contained,"6 Fed Chairman + Ben Bernanke testified before + the Joint Economic + +On line 3913: + Congress on March That + same day, Treasury Secretary + Henry Paulson told + +On line 3913: + on March That same day, + Treasury Secretary Henry + Paulson told a House + +On line 3913: + Treasury Secretary + Henry Paulson told a House + Appropriations + +On line 3915: + Henry Paulson told + a House Appropriations + subcommittee: "From + +On line 3915: + "From the standpoint of + the overall economy, my + bottom line is we’re + +On line 3915: + my bottom line is + we’re watching it closely but + it appears to be + +On line 3919: + is we’re watching it + closely but it appears to + be contained."7 EARLY + +On line 3919: + but it appears to + be contained."7 EARLY GOLDMAN: + "LET’S BE AGGRESSIVE + +On line 3919: + be contained."7 EARLY + GOLDMAN: "LET’S BE AGGRESSIVE + DISTRIBUTING THINGS" In + +On line 3919: + EARLY GOLDMAN: "LET’S + BE AGGRESSIVE DISTRIBUTING + THINGS" In December + +On line 3919: + DISTRIBUTING THINGS" In + December following the + initial decline in + +On line 3919: + initial decline in + ABX BBB indices and after + consecutive days + +On line 3919: + ABX BBB indices and + after consecutive days + of trading losses + +On line 3919: + on its mortgage desk, + executives at Goldman + Sachs decided to + +On line 3919: + desk, executives + at Goldman Sachs decided + to reduce the firm’s + +On line 3919: + to reduce the firm’s + subprime exposure. Goldman + marked down the value + +On line 3919: + the value of its + mortgage-related products to + reflect the lower + +On line 3919: + reflect the lower + ABX prices, and began posting + daily losses for + +On line 3919: + ABX prices, and began + posting daily losses for + this inventory.8 + +On line 3921: + internal report + on December regarding + "the major risk in + +On line 3921: + risk in the Mortgage + business" to Chief Financial + Officer David Viniar + +On line 3921: + Mortgage business" to + Chief Financial Officer + David Viniar and Chief Risk + +On line 3921: + to Chief Financial + Officer David Viniar and Chief + Risk Officer Craig + +On line 3921: + Officer David Viniar + and Chief Risk Officer Craig + Broderick.9 The next + +On line 3921: + get "closer to home," + meaning that they wanted to + reduce their mortgage + +On line 3921: + to home," meaning that + they wanted to reduce their + mortgage exposure: + +On line 3921: + wanted to reduce + their mortgage exposure: sell + what could be sold as + +On line 3921: + reduce their mortgage + exposure: sell what could be + sold as is, repackage + +On line 3921: + exposure: sell what + could be sold as is, repackage + and sell everything + +On line 3921: + could be sold as is, + repackage and sell everything + else.10 Kevin Gasvoda, the + +On line 3921: + else.10 Kevin Gasvoda, the + managing director for + Goldman’s Fixed Income, + +On line 3921: + Income, Currency, + and Commodities business line, + instructed the sales + +On line 3921: + the sales team to sell + asset-backed security and + CDO positions, even + +On line 3921: + security and + CDO positions, even at a + loss: "Pls refo-cus + +On line 3921: + positions, even at + a loss: "Pls refo-cus on + retained new issue + +On line 3921: + loss: "Pls refo-cus + on retained new issue bond + positions and move + +On line 3921: + retained new issue + bond positions and move them + out. There will be big + +On line 3921: + bond positions and + move them out. There will be big + opportunities + +On line 3921: + move them out. There will + be big opportunities + the next several + +On line 3921: + them out. There will be + big opportunities the + next several months + +On line 3921: + out. There will be big + opportunities the next + several months and + +On line 3921: + opportunities + the next several months and + we don’t want to be + +On line 3921: + the next several + months and we don’t want to be + hamstrung based on old + +On line 3921: + want to be hamstrung + based on old inventory. + Refocus efforts + +On line 3921: + hamstrung based on old + inventory. Refocus + efforts and move stuff + +On line 3921: + old inventory. + Refocus efforts and move + stuff out even if you + +On line 3921: + Refocus efforts + and move stuff out even if you + have to take a small + +On line 3923: + efforts and move stuff + out even if you have to take + a small loss."11 In a + +On line 3923: + move stuff out even if + you have to take a small loss."11 + In a December + +On line 3923: + stuff out even if you + have to take a small loss."11 In + a December email, + +On line 3923: + out even if you have + to take a small loss."11 In a + December email, Viniar + +On line 3923: + you have to take a + small loss."11 In a December + email, Viniar described the + +On line 3923: + a small loss."11 In a + December email, Viniar described + the strategy to + +On line 3923: + a December email, + Viniar described the strategy + to Tom Montag, the + +On line 3923: + ABX, the position + is reasonably sensible + but is just too big. + +On line 3925: + the position is + reasonably sensible but + is just too big. Might + +On line 3925: + sensible but is + just too big. Might have to spend + a little to size + +On line 3925: + too big. Might have to + spend a little to size it + appropriately. + +On line 3925: + spend a little to + size it appropriately. + On everything else + +On line 3925: + a little to size + it appropriately. On + everything else my + +On line 3925: + message was let’s be + aggressive distributing things + because there will be + +On line 3925: + because there will be + very good opportunities + as the market goes + +On line 3925: + there will be very good + opportunities as the + market goes into + +On line 3925: + opportunities + as the market goes into + what is likely to + +On line 3925: + as the market goes + into what is likely to + be even greater distress + +On line 3925: + market goes into + what is likely to be even + greater distress and we + +On line 3925: + likely to be even + greater distress and we want to + be in position + +On line 3925: + greater distress and we + want to be in position + to take advantage + +On line 3925: + distress and we want + to be in position to + take advantage of + +On line 3927: + take advantage of + them."12 Subsequent emails suggest + that the "everything + +On line 3927: + advantage of them."12 + Subsequent emails suggest that + the "everything else" + +On line 3927: + the "everything else" + meant mortgage-related assets. + On December in + +On line 3927: + "everything else" meant + mortgage-related assets. On + December in an + +On line 3927: + meant mortgage-related + assets. On December in + an internal email + +On line 3927: + in an internal + email with broad distribution, + Goldman’s Stacy Bash-Polley, + +On line 3927: + Goldman’s Stacy Bash-Polley, + a partner and the co-head + of fixed income sales, + +On line 3927: + Bash-Polley, a partner and + the co-head of fixed income + sales, noted that the + +On line 3927: + a partner and the + co-head of fixed income sales, + noted that the firm, + +On line 3927: + the co-head of fixed + income sales, noted that the + firm, unlike others, + +On line 3927: + of fixed income sales, + noted that the firm, unlike + others, had been able + +On line 3927: + income sales, noted + that the firm, unlike others, + had been able to find + +On line 3927: + sales, noted that the + firm, unlike others, had been + able to find buyers + +On line 3927: + noted that the firm, + unlike others, had been able + to find buyers for + +On line 3927: + firm, unlike others, + had been able to find buyers + for the super-senior + +On line 3927: + unlike others, had + been able to find buyers for + the super-senior and + +On line 3927: + find buyers for the + super-senior and equity + tranches of CDOs, but + +On line 3927: + the super-senior and + equity tranches of CDOs, + but the mezzanine + +On line 3927: + equity tranches + of CDOs, but the mezzanine + tranches remained a + +On line 3927: + but the mezzanine + tranches remained a challenge. + The "best target," she + +On line 3927: + mezzanine tranches + remained a challenge. The "best + target," she said, would + +On line 3927: + tranches remained a + challenge. The "best target," she + said, would be to put + +On line 3927: + remained a challenge. + The "best target," she said, would + be to put them in + +On line 3927: + a challenge. The "best + target," she said, would be to + put them in other + +On line 3927: + The "best target," she + said, would be to put them in + other CDOs: "We have + +On line 3927: + other CDOs: "We have + been thinking collectively + as a group about how + +On line 3927: + "We have been thinking + collectively as a group + about how to help move + +On line 3927: + collectively as + a group about how to help move + some of the risk. While + +On line 3927: + as a group about how + to help move some of the risk. + While we have made great + +On line 3927: + a group about how to + help move some of the risk. While + we have made great progress + +On line 3927: + about how to help move + some of the risk. While we have + made great progress moving + +On line 3927: + how to help move some + of the risk. While we have made + great progress moving the + +On line 3927: + to help move some of + the risk. While we have made great + progress moving the tail + +On line 3927: + some of the risk. While + we have made great progress moving + the tail risks—[super-senior] + +On line 3927: + of the risk. While we + have made great progress moving the + tail risks—[super-senior] and + +On line 3927: + we have made great progress + moving the tail risks—[super-senior] + and equity—we + +On line 3927: + the tail risks—[super-senior] + and equity—we think it + is critical to + +On line 3927: + and equity—we + think it is critical to + focus on the mezz + +On line 3927: + it is critical + to focus on the mezz risk + that has been built up + +On line 3927: + is critical to + focus on the mezz risk that + has been built up over + +On line 3927: + to focus on the + mezz risk that has been built up + over the past few months. + +On line 3927: + on the mezz risk that + has been built up over the past + few months. Given some + +On line 3927: + the mezz risk that has + been built up over the past few + months. Given some of + +On line 3927: + mezz risk that has been + built up over the past few months. + Given some of the + +On line 3927: + that has been built up + over the past few months. Given + some of the feedback + +On line 3927: + has been built up over + the past few months. Given some + of the feedback we + +On line 3927: + been built up over the + past few months. Given some of + the feedback we have + +On line 3927: + over the past few months. + Given some of the feedback + we have received so + +On line 3927: + past few months. Given + some of the feedback we have + received so far [from + +On line 3927: + months. Given some of + the feedback we have received + so far [from investors,] + +On line 3927: + Given some of the + feedback we have received so + far [from investors,] it + +On line 3927: + some of the feedback + we have received so far [from + investors,] it seems that + +On line 3927: + the feedback we have + received so far [from investors,] + it seems that cdo’s maybe + +On line 3927: + have received so far + [from investors,] it seems that cdo’s + maybe the best target + +On line 3927: + received so far [from + investors,] it seems that cdo’s maybe + the best target for + +On line 3927: + so far [from investors,] + it seems that cdo’s maybe the best + target for moving + +On line 3927: + [from investors,] it seems + that cdo’s maybe the best target + for moving some of + +On line 3927: + investors,] it seems that + cdo’s maybe the best target for + moving some of this + +On line 3927: + it seems that cdo’s maybe + the best target for moving + some of this risk but + +On line 3927: + that cdo’s maybe the best + target for moving some of + this risk but clearly + +On line 3927: + target for moving + some of this risk but clearly + in limited size + +On line 3927: + some of this risk but + clearly in limited size + (and timing right now + +On line 3927: + risk but clearly in + limited size (and timing + right now not ideal)."13 + +On line 3929: + limited size (and + timing right now not ideal)."13 + It was becoming + +On line 3929: + right now not ideal)."13 + It was becoming harder + to find buyers for + +On line 3929: + now not ideal)."13 It + was becoming harder to + find buyers for these + +On line 3929: + It was becoming + harder to find buyers for + these securities. + +On line 3929: + to find buyers for + these securities. Back in + October, Goldman + +On line 3929: + these securities. + Back in October, Goldman + Sachs traders had complained + +On line 3929: + securities. Back + in October, Goldman Sachs + traders had complained that + +On line 3929: + Back in October, + Goldman Sachs traders had complained + that they were being + +On line 3929: + October, Goldman + Sachs traders had complained that they + were being asked to + +On line 3929: + Goldman Sachs traders had + complained that they were being + asked to "distribute + +On line 3929: + Sachs traders had complained + that they were being asked to + "distribute junk that + +On line 3929: + complained that they were + being asked to "distribute + junk that nobody was + +On line 3929: + that they were being + asked to "distribute junk that + nobody was dumb enough + +On line 3929: + were being asked to + "distribute junk that nobody + was dumb enough to take + +On line 3929: + asked to "distribute + junk that nobody was dumb enough + to take first time around."14 + +On line 3929: + "distribute junk that + nobody was dumb enough to take + first time around."14 Despite + +On line 3929: + junk that nobody was + dumb enough to take first time around."14 + Despite the first of + +On line 3929: + nobody was dumb enough + to take first time around."14 Despite + the first of Goldman’s + +On line 3929: + was dumb enough to take + first time around."14 Despite the first + of Goldman’s business + +On line 3929: + to take first time around."14 + Despite the first of Goldman’s + business principles—that + +On line 3929: + first time around."14 Despite + the first of Goldman’s business + principles—that "our clients’ + +On line 3929: + Despite the first of + Goldman’s business principles—that + "our clients’ interests + +On line 3929: + the first of Goldman’s + business principles—that "our clients’ + interests always + +On line 3929: + business principles—that + "our clients’ interests always + come first"—documents + +On line 3929: + "our clients’ interests + always come first"—documents + indicate that the + +On line 3929: + in its efforts to + reduce subprime exposure. + In a December + +On line 3929: + exposure. In a + December email discussing a + list of customers to + +On line 3929: + a December email + discussing a list of customers + to target for the + +On line 3929: + discussing a list of + customers to target for the + year, Goldman’s Fabrice + +On line 3929: + list of customers to + target for the year, Goldman’s + Fabrice Tourre, then a + +On line 3929: + to target for the + year, Goldman’s Fabrice Tourre, then + a vice president + +On line 3929: + target for the year, + Goldman’s Fabrice Tourre, then a + vice president on + +On line 3929: + Goldman’s Fabrice Tourre, + then a vice president on + the structured product + +On line 3929: + trading desk, said to + "focus efforts" on "buy and + hold rating-based buyers" + +On line 3929: + efforts" on "buy and + hold rating-based buyers" ather than + "sophisticated + +On line 3929: + hold rating-based buyers" + ather than "sophisticated + hedge funds" that "will be + +On line 3929: + rating-based buyers" ather + than "sophisticated hedge + funds" that "will be on + +On line 3929: + "sophisticated + hedge funds" that "will be on the + same side of the trade + +On line 3929: + hedge funds" that "will be + on the same side of the trade + as we will."15 The "same + +On line 3929: + funds" that "will be on + the same side of the trade as + we will."15 The "same of + +On line 3929: + that "will be on the + same side of the trade as we + will."15 The "same of side + +On line 3929: + "will be on the same + side of the trade as we will."15 + The "same of side of + +On line 3929: + be on the same side + of the trade as we will."15 The + "same of side of the + +On line 3929: + on the same side of + the trade as we will."15 The "same + of side of the trade" + +On line 3929: + the same side of the + trade as we will."15 The "same of + side of the trade" as + +On line 3929: + side of the trade as + we will."15 The "same of side of + the trade" as Goldman + +On line 3929: + of the trade as we + will."15 The "same of side of the + trade" as Goldman was + +On line 3929: + the trade as we will."15 + The "same of side of the trade" + as Goldman was the + +On line 3929: + we will."15 The "same of + side of the trade" as Goldman + was the selling or + +On line 3929: + The "same of side of + the trade" as Goldman was the + selling or shorting + +On line 3929: + of side of the trade" + as Goldman was the selling + or shorting side—those + +On line 3929: + side of the trade" as + Goldman was the selling or + shorting side—those who + +On line 3929: + as Goldman was the + selling or shorting side—those + who expected the + +On line 3929: + selling or shorting + side—those who expected the + mortgage market to + +On line 3929: + the mortgage market + to continue to decline. + In January, Daniel + +On line 3929: + mortgage market to + continue to decline. In + January, Daniel Sparks, + +On line 3929: + January, Daniel Sparks, + the head of Goldman’s mortgage + department, extolled + +On line 3929: + the head of Goldman’s + mortgage department, extolled + Goldman’s success in + +On line 3929: + the team had "structured + like mad and traveled the world, + and worked their tails off + +On line 3929: + team had "structured like + mad and traveled the world, and + worked their tails off to + +On line 3929: + had "structured like mad + and traveled the world, and worked + their tails off to make + +On line 3929: + "structured like mad and + traveled the world, and worked their + tails off to make some + +On line 3929: + like mad and traveled + the world, and worked their tails off + to make some lemonade + +On line 3929: + mad and traveled the + world, and worked their tails off to + make some lemonade from + +On line 3929: + and traveled the world, + and worked their tails off to make + some lemonade from some + +On line 3929: + traveled the world, and + worked their tails off to make some + lemonade from some big + +On line 3929: + the world, and worked their + tails off to make some lemonade + from some big old lemons."16 + +On line 3929: + world, and worked their tails + off to make some lemonade from + some big old lemons."16 Tourre + +On line 3929: + their tails off to make + some lemonade from some big old + lemons."16 Tourre acknowledged + +On line 3929: + tails off to make some + lemonade from some big old lemons."16 + Tourre acknowledged that + +On line 3929: + some lemonade from some + big old lemons."16 Tourre acknowledged + that there was "more and + +On line 3929: + lemonade from some big + old lemons."16 Tourre acknowledged that + there was "more and more + +On line 3929: + from some big old lemons."16 + Tourre acknowledged that there was + "more and more leverage + +On line 3929: + some big old lemons."16 Tourre + acknowledged that there was "more + and more leverage in + +On line 3929: + "more and more leverage + in the system," and—writing + of himself in the + +On line 3929: + and more leverage in + the system," and—writing of + himself in the third + +On line 3929: + himself in the third + person—said he was "standing + in middle of all + +On line 3929: + the third person—said + he was "standing in middle + of all these complex, + +On line 3929: + person—said he was + "standing in middle of all + these complex, highly + +On line 3929: + "standing in middle + of all these complex, highly + levered, exotic + +On line 3929: + in middle of all + these complex, highly levered, + exotic trades he + +On line 3929: + of all these complex, + highly levered, exotic + trades he created + +On line 3929: + these complex, highly + levered, exotic trades he + created without + +On line 3929: + levered, exotic + trades he created without + necessarily + +On line 3929: + trades he created + without necessarily + understanding all + +On line 3931: + of those monstrosities."17 + On February Goldman CEO + Lloyd Blankfein questioned + +On line 3933: + million in losses + on residual positions + from old deals, asking, + +On line 3933: + from old deals, asking, + "Could/should we have cleaned up these + books before and are + +On line 3933: + asking, "Could/should we + have cleaned up these books before + and are we doing + +On line 3933: + "Could/should we have cleaned + up these books before and are + we doing enough right + +On line 3933: + have cleaned up these books + before and are we doing + enough right now to sell + +On line 3933: + up these books before + and are we doing enough right + now to sell off cats + +On line 3933: + these books before and + are we doing enough right now + to sell off cats and + +On line 3933: + books before and are + we doing enough right now to + sell off cats and dogs + +On line 3933: + before and are we + doing enough right now to sell + off cats and dogs in + +On line 3933: + and are we doing + enough right now to sell off cats + and dogs in other + +On line 3933: + are we doing enough + right now to sell off cats and + dogs in other books + +On line 3933: + doing enough right now + to sell off cats and dogs in + other books throughout + +On line 3935: + to sell off cats and + dogs in other books throughout + the division1"18 The + +On line 3935: + and dogs in other + books throughout the division1"18 + The numbers suggest + +On line 3935: + dogs in other books + throughout the division1"18 The + numbers suggest that + +On line 3935: + The numbers suggest + that the answer was yes, they + had cleaned up pretty + +On line 3935: + numbers suggest that + the answer was yes, they had + cleaned up pretty well, + +On line 3935: + that the answer was + yes, they had cleaned up pretty + well, even given a + +On line 3935: + answer was yes, they + had cleaned up pretty well, even + given a million + +On line 3935: + was yes, they had cleaned + up pretty well, even given + a million write-off and + +On line 3935: + had cleaned up pretty + well, even given a million + write-off and billions of + +On line 3935: + up pretty well, even + given a million write-off and + billions of dollars + +On line 3935: + well, even given a + million write-off and billions of + dollars of subprime + +On line 3935: + billions of dollars + of subprime exposure still + retained. In the first + +On line 3935: + dollars of subprime + exposure still retained. In + the first quarter of + +On line 3935: + still retained. In the + first quarter of its mortgage + business earned a record + +On line 3935: + the first quarter of + its mortgage business earned a + record million, driven + +On line 3935: + its mortgage business + earned a record million, driven + primarily by + +On line 3935: + by short positions, + including a billion short + position on the + +On line 3935: + position on the + bellwether ABX BBB index, whose + drop the previous + +On line 3935: + BBB index, whose drop + the previous November + had been the red flag + +On line 3935: + index, whose drop the + previous November had + been the red flag that + +On line 3935: + drop the previous + November had been the red + flag that got Goldman’s + +On line 3937: + November had been + the red flag that got Goldman’s + attention. In the + +On line 3937: + had been the red flag + that got Goldman’s attention. + In the following + +On line 3937: + been the red flag that + got Goldman’s attention. In + the following months, + +On line 3937: + products to its clients. + From December through August + it created and + +On line 3939: + created and sold + approximately billion + of CDOs— including + +On line 3939: + of CDOs— including + billion of synthetic CDOs. + The firm used the cash + +On line 3939: + including billion + of synthetic CDOs. The firm + used the cash CDOs to + +On line 3939: + of synthetic CDOs. + The firm used the cash CDOs to + unload much of its + +On line 3939: + CDOs. The firm used the + cash CDOs to unload much of + its own remaining + +On line 3939: + cash CDOs to unload + much of its own remaining + inventory of + +On line 3939: + its own remaining + inventory of other + CDO securities + +On line 3941: + criticized—and sued—for + selling its subprime mortgage + securities to + +On line 3941: + finance expert at + R&R Consulting in New York, + reportedly called + +On line 3941: + at R&R Consulting + in New York, reportedly + called Goldman’s practice + +On line 3941: + R&R Consulting in + New York, reportedly called + Goldman’s practice "the + +On line 3941: + York, reportedly + called Goldman’s practice "the most + cynical use of + +On line 3941: + most cynical use + of credit information + that I have ever + +On line 3941: + cynical use of + credit information that + I have ever seen," + +On line 3941: + I have ever seen," + and compared it to "buying + fire insurance on + +On line 3941: + seen," and compared it + to "buying fire insurance + on someone else’s house + +On line 3941: + and compared it to + "buying fire insurance on + someone else’s house and + +On line 3943: + arson."20 During a + FCIC hearing, Goldman CEO Lloyd + Blankfein was asked if + +On line 3943: + FCIC hearing, Goldman + CEO Lloyd Blankfein was asked if + he believed it was + +On line 3943: + hearing, Goldman CEO + Lloyd Blankfein was asked if he + believed it was a + +On line 3943: + CEO Lloyd Blankfein was + asked if he believed it was + a proper, legal, + +On line 3943: + Lloyd Blankfein was asked + if he believed it was a + proper, legal, or + +On line 3943: + if he believed it + was a proper, legal, or + ethical practice + +On line 3943: + a proper, legal, + or ethical practice for + Goldman to sell clients + +On line 3943: + for Goldman to sell + clients mortgage securities + that Goldman believed + +On line 3943: + Goldman to sell clients + mortgage securities that + Goldman believed would + +On line 3943: + to sell clients mortgage + securities that Goldman + believed would default, + +On line 3945: + believed would default, + while simultaneously + shorting them. Blankfein + +On line 3945: + shorting them. Blankfein + responded, "I do think that + the behavior is + +On line 3945: + responded, "I do + think that the behavior is + improper and we + +On line 3945: + "I do think that the + behavior is improper + and we regret the + +On line 3945: + is improper and + we regret the result—the + consequence [is] that + +On line 3945: + and we regret the + result—the consequence [is] + that people have lost + +On line 3945: + have lost money"21 The + next day, Goldman issued a + press release declaring + +On line 3945: + declaring Blankfein did + not state that Goldman’s "practices + with respect to the + +On line 3945: + improper. Blankfein + was responding to a lengthy + series of statements + +On line 3945: + series of statements + followed by a question that + was predicated + +On line 3945: + by a question that + was predicated on the + assumption that a + +On line 3945: + was predicated + on the assumption that a + firm was selling a + +On line 3945: + on the assumption + that a firm was selling a + product that it thought + +On line 3945: + a firm was selling + a product that it thought was + going to default. + +On line 3945: + selling a product + that it thought was going to + default. Mr. Blankfein + +On line 3945: + a product that it + thought was going to default. + Mr. Blankfein agreed that, + +On line 3945: + product that it thought + was going to default. Mr. + Blankfein agreed that, if + +On line 3945: + going to default. + Mr. Blankfein agreed that, if such + an assumption was + +On line 3945: + Mr. Blankfein agreed that, + if such an assumption was + true, the practice would + +On line 3945: + Blankfein agreed that, if + such an assumption was true, + the practice would be + +On line 3945: + true, the practice would + be improper. Mr. Blankfein + does not believe, nor + +On line 3945: + the practice would be + improper. Mr. Blankfein does + not believe, nor did + +On line 3945: + would be improper. + Mr. Blankfein does not believe, + nor did he say, that + +On line 3949: + say, that Goldman Sachs + had behaved improperly + in any way."22 EARLY + +On line 3949: + that Goldman Sachs had + behaved improperly in + any way."22 EARLY In + +On line 3949: + President and Chief + Operating Officer + Gary Cohn testified: + +On line 3951: + Gary Cohn testified: + "During the two years of the + financial crisis, + +On line 3951: + the two years of the + financial crisis, Goldman + Sachs lost billion in + +On line 3951: + financial crisis, + Goldman Sachs lost billion in + its residential + +On line 3951: + its residential + mortgage–related business. We + did not bet against our + +On line 3953: + bet against our clients, and + these numbers underscore that + fact."23 Indeed, Goldman’s + +On line 3953: + against our clients, and these + numbers underscore that fact."23 + Indeed, Goldman’s short + +On line 3953: + numbers underscore + that fact."23 Indeed, Goldman’s short + position was not + +On line 3953: + Indeed, Goldman’s short + position was not the whole + story. The daily + +On line 3955: + position was not + the whole story. The daily + mortgage "Value at + +On line 3955: + not the whole story. + The daily mortgage "Value + at Risk" measure, or + +On line 3955: + the whole story. The + daily mortgage "Value at + Risk" measure, or VaR, + +On line 3955: + mortgage "Value at + Risk" measure, or VaR, which tracked + potential losses + +On line 3955: + Risk" measure, or VaR, + which tracked potential losses + if the market moved + +On line 3955: + which tracked potential + losses if the market moved + unexpectedly, + +On line 3955: + if the market moved + unexpectedly, increased + in the three months through + +On line 3955: + in the three months through + February. By February, + Goldman’s company-wide + +On line 3955: + Goldman’s company-wide + VaR reached an all-time high, + according to SEC + +On line 3955: + bet on the mortgage + market’s continuing to + decline. Preferring + +On line 3955: + the mortgage market’s + continuing to decline. + Preferring to be + +On line 3955: + between March and May, + the mortgage securities + desk reduced its short + +On line 3955: + and May, the mortgage + securities desk reduced + its short position + +On line 3955: + securities desk + reduced its short position + on the ABX Index;24 + +On line 3955: + its short position + on the ABX Index;24 between + June and August, it + +On line 3955: + short position on + the ABX Index;24 between June + and August, it again + +On line 3955: + Index;24 between June + and August, it again reversed + course, increasing its + +On line 3955: + June and August, it + again reversed course, increasing + its short position + +On line 3955: + and August, it again + reversed course, increasing its + short position by + +On line 3955: + its short position + by purchasing protection + on mortgage-related + +On line 3957: + assets. The Basis + Yield Alpha Fund, a hedge fund + and Goldman client that + +On line 3957: + Basis Yield Alpha + Fund, a hedge fund and Goldman + client that claims to have + +On line 3957: + Alpha Fund, a hedge + fund and Goldman client that claims + to have invested + +On line 3957: + Fund, a hedge fund and + Goldman client that claims to have + invested million + +On line 3957: + fund and Goldman client + that claims to have invested + million in Goldman’s + +On line 3957: + invested million + in Goldman’s Timberwolf CDO, + sued Goldman for fraud + +On line 3959: + Goldman’s Timberwolf + CDO, sued Goldman for fraud in + The Timberwolf deal + +On line 3959: + The Timberwolf deal + was heavily criticized + by Senator Carl + +On line 3959: + Timberwolf deal was + heavily criticized by + Senator Carl Levin + +On line 3959: + deal was heavily + criticized by Senator + Carl Levin and other + +On line 3959: + Carl Levin and other + members of the Permanent + Subcommittee on + +On line 3959: + Subcommittee on + Investigations during + an April hearing. The + +On line 3959: + Investigations + during an April hearing. The + Basis Yield Alpha + +On line 3959: + that Goldman designed + Timberwolf to quickly fail + so that Goldman could + +On line 3959: + low-quality assets + and profit from betting against + the CDO. Within two + +On line 3959: + betting against the CDO. + Within two weeks of the fund’s + investment, Goldman + +On line 3959: + two weeks of the fund’s + investment, Goldman began + making margin calls + +On line 3959: + investment, Goldman + began making margin calls + on the deal. By the + +On line 3959: + margin calls on the + deal. By the end of July + it had demanded + +On line 3959: + calls on the deal. By + the end of July it had + demanded more than + +On line 3959: + the end of July + it had demanded more than + million.25 According + +On line 3959: + of July it had + demanded more than million.25 + According to the + +On line 3959: + had demanded more + than million.25 According to + the hedge fund, Goldman’s + +On line 3959: + fund, Goldman’s demands + forced it into bankruptcy + in August 2007—Goldman + +On line 3959: + into bankruptcy + in August 2007—Goldman received + about million from the + +On line 3961: + the liquidation. + Goldman denies Basis Yield + Alpha Fund’s claims, and + +On line 3961: + Yield Alpha Fund’s claims, + and CEO Blankfein dismissed the + notion that Goldman + +On line 3961: + Blankfein dismissed the + notion that Goldman misled + investors. "I will tell + +On line 3961: + dismissed the notion + that Goldman misled investors. + "I will tell you, we + +On line 3961: + notion that Goldman + misled investors. "I will tell + you, we only dealt + +On line 3961: + misled investors. "I + will tell you, we only dealt + with people who knew + +On line 3961: + tell you, we only + dealt with people who knew what + they were buying. And + +On line 3961: + you, we only dealt + with people who knew what they + were buying. And of + +On line 3961: + we only dealt with + people who knew what they were + buying. And of course + +On line 3961: + dealt with people who + knew what they were buying. And + of course when you look + +On line 3961: + people who knew what + they were buying. And of course + when you look after + +On line 3961: + who knew what they were + buying. And of course when you + look after the fact, + +On line 3961: + were buying. And of + course when you look after the + fact, someone’s going + +On line 3961: + buying. And of course + when you look after the fact, + someone’s going to + +On line 3961: + And of course when you + look after the fact, someone’s + going to come along + +On line 3961: + when you look after + the fact, someone’s going to + come along and say they + +On line 3963: + to come along and say + they really didn’t know," + he told the FCIC.26 In + +On line 3963: + say they really + didn’t know," he told the FCIC.26 + In addition to + +On line 3963: + didn’t know," he told + the FCIC.26 In addition to + selling its subprime + +On line 3963: + to customers, the firm + took short positions using + credit default swaps; + +On line 3963: + took short positions + using credit default swaps; + it also took short + +On line 3963: + swaps; it also took + short positions on the ABX + indices and on some + +On line 3963: + short positions on + the ABX indices and on some + of the financial + +On line 3963: + positions on the + ABX indices and on some of + the financial firms + +On line 3963: + the ABX indices and + on some of the financial + firms with which it did + +On line 3963: + indices and on some + of the financial firms with + which it did business. + +On line 3963: + of the financial + firms with which it did business. + Like every market + +On line 3963: + its securities + after considering both + actual market + +On line 3963: + trades and surveys of + how other institutions + valued the assets. + +On line 3963: + the assets. As the + crisis unfolded, Goldman + marked mortgage-related + +On line 3963: + crisis unfolded, + Goldman marked mortgage-related + securities at + +On line 3963: + significantly + lower than those of other + companies. Goldman + +On line 3963: + lower than those of + other companies. Goldman + knew that those lower + +On line 3963: + than those of other + companies. Goldman knew that + those lower marks might + +On line 3963: + similar assets. + In addition, Goldman’s marks + would get picked up by + +On line 3963: + Goldman’s marks would get + picked up by competitors in + dealer surveys. As + +On line 3963: + up by competitors + in dealer surveys. As a + result, Goldman’s marks + +On line 3963: + in dealer surveys. + As a result, Goldman’s marks + could contribute to + +On line 3963: + result, Goldman’s marks + could contribute to other + companies recording + +On line 3963: + companies recording + "mark-to-market" losses: that + is, the reported + +On line 3963: + losses: that is, the + reported value of their + assets could fall and + +On line 3963: + is, the reported + value of their assets could + fall and their earnings + +On line 3965: + their assets could fall + and their earnings would decline. + The markdowns of these + +On line 3965: + and their earnings would + decline. The markdowns of these + assets could also + +On line 3965: + earnings would decline. + The markdowns of these assets + could also require + +On line 3965: + could also require + that companies reduce their + repo borrowings + +On line 3965: + companies reduce + their repo borrowings or + post additional + +On line 3965: + sold credit default + swap protection. In a May + email, Craig Broderick, + +On line 3965: + credit default swap + protection. In a May email, + Craig Broderick, who + +On line 3965: + swap protection. In + a May email, Craig Broderick, + who as Goldman’s chief + +On line 3965: + protection. In a + May email, Craig Broderick, who + as Goldman’s chief risk + +On line 3965: + In a May email, Craig + Broderick, who as Goldman’s + chief risk officer + +On line 3965: + Broderick, who as + Goldman’s chief risk officer + was responsible + +On line 3965: + was responsible + for tracking how much of the + company’s money + +On line 3965: + for tracking how much + of the company’s money + was at risk,27 noted + +On line 3965: + tracking how much of + the company’s money was + at risk,27 noted to + +On line 3965: + of the company’s + money was at risk,27 noted + to colleagues that the + +On line 3965: + money was at risk,27 + noted to colleagues that the + mortgage group was "in + +On line 3965: + was at risk,27 noted + to colleagues that the mortgage + group was "in the process + +On line 3965: + at risk,27 noted to + colleagues that the mortgage group + was "in the process f + +On line 3965: + to colleagues that the + mortgage group was "in the process + f considering + +On line 3965: + marks on their mortgage + portfolio [especially] + CDOs and CDO squared. This + +On line 3965: + CDOs and CDO squared. This + will potentially have a + big [profit and loss] + +On line 3965: + will potentially + have a big [profit and loss] + impact on us, but + +On line 3965: + have a big [profit + and loss] impact on us, but + also to our clients + +On line 3965: + big [profit and loss] + impact on us, but also + to our clients due to + +On line 3965: + and loss] impact on + us, but also to our clients + due to the marks and + +On line 3965: + us, but also to + our clients due to the marks and + associated + +On line 3965: + derivatives, and + other products. We need to + survey our clients and + +On line 3965: + and other products. + We need to survey our clients + and take a shot at + +On line 3965: + We need to survey + our clients and take a shot at + determining the + +On line 3965: + our clients and take a + shot at determining the + most vulnerable + +On line 3965: + clients and take a shot + at determining the most + vulnerable clients, + +On line 3965: + determining the + most vulnerable clients, knock + on implications, + +On line 3965: + most vulnerable + clients, knock on implications, + etc. This is getting + +On line 3965: + vulnerable clients, + knock on implications, etc. + This is getting lots + +On line 3965: + on implications, + etc. This is getting lots of + 30th floor attention + +On line 3965: + implications, etc. + This is getting lots of 30th + floor attention right + +On line 3967: + etc. This is getting + lots of 30th floor attention + right now."28 Broderick + +On line 3967: + This is getting lots + of 30th floor attention right + now."28 Broderick was + +On line 3967: + is getting lots of + 30th floor attention right now."28 + Broderick was right + +On line 3967: + 30th floor attention + right now."28 Broderick was right + about the impact of + +On line 3967: + attention right now."28 + Broderick was right about the + impact of Goldman’s + +On line 3967: + right now."28 Broderick + was right about the impact of + Goldman’s marks on clients + +On line 3967: + right about the impact + of Goldman’s marks on clients and + counterparties. The + +On line 3967: + of Goldman’s marks on + clients and counterparties. The + first significant + +On line 3967: + counterparties. The + first significant dispute + about these marks began + +On line 3967: + first significant + dispute about these marks began + in May it concerned + +On line 3967: + dispute about these marks + began in May it concerned + the two high-flying, + +On line 3967: + began in May it + concerned the two high-flying, + mortgage-focused hedge + +On line 3967: + it concerned the two + high-flying, mortgage-focused + hedge funds run by Bear + +On line 3967: + the two high-flying, + mortgage-focused hedge funds run + by Bear Stearns Asset + +On line 3969: + mortgage-focused hedge + funds run by Bear Stearns Asset + Management (BSAM). BEAR + +On line 3971: + hedge funds run by Bear + Stearns Asset Management (BSAM). + BEAR STEARNS’S HEDGE FUNDS: "LOOKS + +On line 3971: + by Bear Stearns Asset + Management (BSAM). BEAR STEARNS’S HEDGE + FUNDS: "LOOKS PRETTY DAMN + +On line 3973: + (BSAM). BEAR STEARNS’S HEDGE FUNDS: + "LOOKS PRETTY DAMN UGLY" In + Ralph Cioffi and Matthew + +On line 3973: + HEDGE FUNDS: "LOOKS PRETTY + DAMN UGLY" In Ralph Cioffi + and Matthew Tannin, who + +On line 3973: + FUNDS: "LOOKS PRETTY DAMN + UGLY" In Ralph Cioffi and + Matthew Tannin, who had + +On line 3973: + DAMN UGLY" In Ralph + Cioffi and Matthew Tannin, who + had structured CDOs at + +On line 3973: + In Ralph Cioffi and + Matthew Tannin, who had structured + CDOs at Bear Stearns, were + +On line 3973: + Ralph Cioffi and Matthew + Tannin, who had structured CDOs + at Bear Stearns, were busy + +On line 3973: + and Matthew Tannin, who + had structured CDOs at Bear Stearns, + were busy managing + +On line 3973: + Matthew Tannin, who had + structured CDOs at Bear Stearns, were + busy managing BSAM’s + +On line 3973: + structured CDOs at Bear + Stearns, were busy managing BSAM’s + High-Grade Structured Credit + +On line 3973: + at Bear Stearns, were busy + managing BSAM’s High-Grade Structured + Credit Strategies Fund. + +On line 3975: + busy managing BSAM’s + High-Grade Structured Credit Strategies + Fund. When they added the + +On line 3975: + High-Grade Structured Credit + Strategies Fund. When they added the + higher-leveraged, higher-risk + +On line 3975: + Credit Strategies Fund. + When they added the higher-leveraged, + higher-risk Enhanced Fund + +On line 3975: + Strategies Fund. When they + added the higher-leveraged, higher-risk + Enhanced Fund in they + +On line 3975: + Fund. When they added the + higher-leveraged, higher-risk Enhanced + Fund in they became + +On line 3977: + added the higher-leveraged, + higher-risk Enhanced Fund in they + became even busier. By + +On line 3977: + higher-risk Enhanced Fund + in they became even busier. By + April internal BSAM + +On line 3977: + Fund in they became + even busier. By April internal + BSAM risk exposure + +On line 3977: + they became even busier. + By April internal BSAM risk + exposure reports + +On line 3977: + By April internal + BSAM risk exposure reports + showed about of the High-Grade + +On line 3977: + April internal BSAM + risk exposure reports showed + about of the High-Grade fund’s + +On line 3977: + BSAM risk exposure + reports showed about of the High-Grade + fund’s collateral + +On line 3977: + showed about of the High-Grade + fund’s collateral to be + subprime mortgage–backed + +On line 3977: + fund’s collateral + to be subprime mortgage–backed + CDOs, assets that were + +On line 3977: + that were beginning + to lose market value.29 In + a diary kept in + +On line 3977: + were beginning to + lose market value.29 In a + diary kept in his + +On line 3977: + a diary kept in + his personal email account + because he "didn’t + +On line 3977: + his personal email + account because he "didn’t + want to use [his] work + +On line 3977: + account because he + "didn’t want to use [his] work + email anymore," Tannin + +On line 3977: + "didn’t want to use + [his] work email anymore," Tannin + recounted that in + +On line 3979: + to use [his] work email + anymore," Tannin recounted + that in "a wave of + +On line 3979: + [his] work email anymore," + Tannin recounted that in + "a wave of fear set + +On line 3979: + email anymore," Tannin + recounted that in "a wave + of fear set over [him]" + +On line 3979: + recounted that in + "a wave of fear set over [him]" + when he realized + +On line 3979: + "a wave of fear set + over [him]" when he realized + that the Enhanced Fund + +On line 3979: + wave of fear set over + [him]" when he realized that + the Enhanced Fund "was + +On line 3979: + set over [him]" when he + realized that the Enhanced + Fund "was going to + +On line 3979: + he realized that + the Enhanced Fund "was going + to subject investors + +On line 3979: + realized that the + Enhanced Fund "was going to + subject investors to + +On line 3979: + the Enhanced Fund "was + going to subject investors + to ‘blow up risk’" and + +On line 3979: + Fund "was going to + subject investors to ‘blow up + risk’" and "we could not + +On line 3979: + going to subject + investors to ‘blow up risk’" and + "we could not run the + +On line 3979: + to subject investors + to ‘blow up risk’" and "we could + not run the leverage + +On line 3979: + subject investors to + ‘blow up risk’" and "we could not + run the leverage as + +On line 3979: + investors to ‘blow up + risk’" and "we could not run the + leverage as high as + +On line 3979: + to ‘blow up risk’" and + "we could not run the leverage + as high as I had + +On line 3979: + ‘blow up risk’" and "we + could not run the leverage as + high as I had thought + +On line 3979: + up risk’" and "we could + not run the leverage as high + as I had thought we + +On line 3979: + risk’" and "we could not + run the leverage as high as + I had thought we could."30 + +On line 3981: + and "we could not run + the leverage as high as I + had thought we could."30 This + +On line 3981: + "we could not run the + leverage as high as I had + thought we could."30 This "blow + +On line 3981: + not run the leverage + as high as I had thought we + could."30 This "blow up risk," + +On line 3981: + the leverage as high + as I had thought we could."30 This + "blow up risk," coupled + +On line 3981: + leverage as high as + I had thought we could."30 This "blow + up risk," coupled with + +On line 3981: + as I had thought we + could."30 This "blow up risk," coupled + with bad timing, proved + +On line 3981: + had thought we could."30 This + "blow up risk," coupled with bad + timing, proved fatal + +On line 3981: + we could."30 This "blow up + risk," coupled with bad timing, + proved fatal for the + +On line 3981: + "blow up risk," coupled + with bad timing, proved fatal + for the Enhanced Fund. + +On line 3983: + risk," coupled with bad + timing, proved fatal for the + Enhanced Fund. Shortly + +On line 3983: + with bad timing, proved + fatal for the Enhanced Fund. + Shortly after the + +On line 3983: + timing, proved fatal + for the Enhanced Fund. Shortly + after the fund opened, + +On line 3983: + proved fatal for the + Enhanced Fund. Shortly after + the fund opened, the ABX + +On line 3983: + Fund. Shortly after + the fund opened, the ABX BBB- + index started to + +On line 3983: + the fund opened, the ABX + BBB- index started to + falter, falling in + +On line 3983: + opened, the ABX BBB- + index started to falter, + falling in the last + +On line 3983: + ABX BBB- index + started to falter, falling + in the last three months + +On line 3983: + started to falter, + falling in the last three months + of then another + +On line 3983: + falling in the last + three months of then another + in January and + +On line 3983: + last three months of then + another in January + and in February. + +On line 3983: + in January and + in February. The market’s + confidence fell with + +On line 3983: + and in February. + The market’s confidence fell + with the ABX. Investors + +On line 3983: + ABX. Investors began + to bail out of both Enhanced + and High-Grade. Cioffi and + +On line 3983: + to bail out of both + Enhanced and High-Grade. Cioffi and + Tannin stepped up their + +On line 3983: + of both Enhanced and + High-Grade. Cioffi and Tannin stepped + up their marketing. + +On line 3983: + both Enhanced and High-Grade. + Cioffi and Tannin stepped up + their marketing. On + +On line 3983: + Cioffi and Tannin + stepped up their marketing. On + March Tannin said in + +On line 3983: + Tannin stepped up their + marketing. On March Tannin + said in an email to + +On line 3983: + up their marketing. + On March Tannin said in an + email to investors, "we + +On line 3983: + their marketing. On + March Tannin said in an email + to investors, "we see + +On line 3983: + marketing. On March + Tannin said in an email to + investors, "we see an + +On line 3983: + Tannin said in an + email to investors, "we see an + opportunity + +On line 3983: + prudent opportunity—I am putting + in additional capital—I think + you should as well."31 On + +On line 3983: + in additional + capital—I think you should as well."31 On + a March conference + +On line 3983: + additional capital—I + think you should as well."31 On a + March conference call, + +On line 3983: + think you should as well."31 + On a March conference call, + Tannin and Cioffi + +On line 3983: + should as well."31 On a + March conference call, Tannin + and Cioffi assured + +On line 3983: + March conference call, + Tannin and Cioffi assured + investors that both funds + +On line 3983: + both funds "have plenty + of liquidity," and they + continued to use + +On line 3983: + of liquidity," + and they continued to use + the investment of + +On line 3983: + liquidity," and + they continued to use the + investment of their + +On line 3983: + and they continued + to use the investment of + their own money as + +On line 3983: + investment of their + own money as evidence + of their confidence.32 + +On line 3983: + evidence of their + confidence.32 Tannin even said + he was increasing + +On line 3983: + he was increasing + his personal investment, + although, according + +On line 3985: + investment, although, + according to the SEC, he + never did.33 Despite + +On line 3985: + although, according + to the SEC, he never did.33 + Despite their avowals of + +On line 3985: + did.33 Despite their avowals + of confidence, Cioffi and + Tannin were in full + +On line 3985: + avowals of confidence, + Cioffi and Tannin were in + full red-alert mode. In April, + +On line 3985: + confidence, Cioffi + and Tannin were in full red-alert + mode. In April, Cioffi + +On line 3985: + and Tannin were in + full red-alert mode. In April, Cioffi + redeemed million of + +On line 3985: + in full red-alert mode. In + April, Cioffi redeemed million + of his own million + +On line 3985: + mode. In April, Cioffi + redeemed million of his own + million investment + +On line 3985: + redeemed million of + his own million investment + in Enhanced Leverage + +On line 3985: + Enhanced Leverage and + transferred the funds to a third + hedge fund he managed.34 + +On line 3985: + Leverage and transferred + the funds to a third hedge fund + he managed.34 They tried + +On line 3985: + transferred the funds to + a third hedge fund he managed.34 + They tried to sell the + +On line 3985: + the funds to a third + hedge fund he managed.34 They tried + to sell the toxic + +On line 3985: + funds to a third hedge + fund he managed.34 They tried to + sell the toxic CDO + +On line 3985: + hedge fund he managed.34 + They tried to sell the toxic + CDO securities + +On line 3985: + fund he managed.34 They + tried to sell the toxic CDO + securities held + +On line 3985: + They tried to sell the + toxic CDO securities + held by the hedge funds. + +On line 3985: + to sell the toxic + CDO securities held by + the hedge funds. They had + +On line 3985: + by the hedge funds. They + had little success selling + them directly on + +On line 3985: + the hedge funds. They had + little success selling them + directly on the + +On line 3985: + had little success + selling them directly on + the market,35 but there + +On line 3987: + market,35 but there was + another way. In late May, + BSAM put together + +On line 3987: + another way. In + late May, BSAM put together + a CDO-squared deal that would + +On line 3987: + way. In late May, BSAM + put together a CDO-squared deal + that would take billion + +On line 3987: + In late May, BSAM put + together a CDO-squared deal that + would take billion of + +On line 3987: + put together a + CDO-squared deal that would take billion + of CDO assets off + +On line 3987: + together a CDO-squared + deal that would take billion of + CDO assets off the + +On line 3987: + a CDO-squared deal that would + take billion of CDO assets + off the hedge funds’ books. + +On line 3987: + CDO-squared deal that would take + billion of CDO assets off + the hedge funds’ books. The + +On line 3987: + would take billion of + CDO assets off the hedge funds’ + books. The senior-most + +On line 3987: + CDO assets off the + hedge funds’ books. The senior-most + tranches, worth billion, + +On line 3987: + off the hedge funds’ books. + The senior-most tranches, worth + billion, EARLY were + +On line 3987: + billion, EARLY were + sold as commercial paper + to short-term investors + +On line 3991: + commercial paper + investors would refuse to roll over + this particular + +On line 3991: + would refuse to roll over + this particular paper; + Bank of America + +On line 3991: + this particular + paper; Bank of America + ultimately lost + +On line 3995: + more than billion on + this arrangement.37 is doomsday" + Nearly all hedge funds + +On line 3995: + this arrangement.37 is + doomsday" Nearly all hedge funds + provide their investors + +On line 3995: + doomsday" Nearly all + hedge funds provide their investors + with market value + +On line 3995: + provide their investors + with market value reports, + at least monthly, based + +On line 3995: + readily traded + assets, such as stocks, at the + current trading price, + +On line 3995: + assets, such as stocks, + at the current trading price, + while assets in very + +On line 3995: + stocks, at the current + trading price, while assets in + very slow markets were + +On line 3995: + the current trading + price, while assets in very slow + markets were marked by + +On line 3995: + price, while assets in + very slow markets were marked by + surveying price quotes + +On line 3995: + very slow markets were + marked by surveying price quotes + from other dealers, + +On line 3995: + and then arriving + at a final net asset + value. For mortgage-backed + +On line 3995: + at a final net + asset value. For mortgage-backed + investments, marking + +On line 3995: + value. For mortgage-backed + investments, marking assets + was an extremely + +On line 3995: + marking assets was + an extremely important + exercise, because + +On line 3995: + exercise, because + the market values were used + to inform investors + +On line 3995: + the market values + were used to inform investors + and to calculate + +On line 3995: + market values were + used to inform investors and + to calculate the + +On line 3995: + were used to inform + investors and to calculate + the hedge fund’s total + +On line 3995: + inform investors and + to calculate the hedge fund’s + total fund value + +On line 3995: + to calculate the + hedge fund’s total fund value + for internal risk + +On line 3995: + for internal risk + management purposes, and + because these assets + +On line 3995: + as collateral + for repo and other lenders. + Crucially, if the + +On line 3995: + lenders. Crucially, if + the value of a hedge fund’s + portfolio declined, + +On line 3995: + the value of a + hedge fund’s portfolio declined, + repo and other + +On line 3995: + hedge fund’s portfolio + declined, repo and other + lenders might require more + +On line 3995: + declined, repo and + other lenders might require more + collateral. In + +On line 3995: + and other lenders might + require more collateral. + In April, JP Morgan + +On line 3995: + lenders might require more + collateral. In April, JP + Morgan told Alan Schwartz, + +On line 3995: + collateral. In + April, JP Morgan told Alan Schwartz, + Bear Stearns’s co-president, + +On line 3995: + April, JP Morgan told + Alan Schwartz, Bear Stearns’s co-president, + that the bank would be + +On line 3995: + Morgan told Alan Schwartz, + Bear Stearns’s co-president, that the + bank would be asking + +On line 3995: + told Alan Schwartz, Bear Stearns’s + co-president, that the bank would + be asking the BSAM + +On line 3995: + Bear Stearns’s co-president, + that the bank would be asking + the BSAM hedge funds to + +On line 3995: + Stearns’s co-president, that + the bank would be asking the + BSAM hedge funds to post + +On line 3995: + that the bank would be + asking the BSAM hedge funds to + post additional + +On line 3995: + asking the BSAM hedge + funds to post additional + collateral to + +On line 3997: + support its repo + borrowing.38 Dealer marks were + slow to keep up with + +On line 3997: + repo borrowing.38 + Dealer marks were slow to keep + up with movements in + +On line 3997: + borrowing.38 Dealer + marks were slow to keep up with + movements in the ABX + +On line 3997: + Dealer marks were slow + to keep up with movements in + the ABX indices. Even + +On line 3997: + marks were slow to keep + up with movements in the ABX + indices. Even as the + +On line 3997: + up with movements in + the ABX indices. Even as the + ABX BBB- index + +On line 3997: + the ABX indices. Even + as the ABX BBB- index + recovered some in + +On line 3997: + as the ABX BBB- + index recovered some in + March, rebounding marks + +On line 3997: + March, rebounding marks + by broker-dealers finally + started to reflect + +On line 3997: + started to reflect + the lower values. On April + Goldman sent BSAM marks + +On line 3997: + reflect the lower + values. On April Goldman sent + BSAM marks ranging from + +On line 3997: + the lower values. + On April Goldman sent BSAM marks + ranging from cents to + +On line 3997: + April Goldman sent BSAM + marks ranging from cents to cents + on the dollar—meaning + +On line 3997: + Goldman sent BSAM marks + ranging from cents to cents on + the dollar—meaning that + +On line 3997: + ranging from cents to + cents on the dollar—meaning that + some securities + +On line 3997: + on the dollar—meaning + that some securities were + worth as little as + +On line 3997: + the dollar—meaning that + some securities were worth + as little as of + +On line 3997: + dollar—meaning that some + securities were worth as + little as of their + +On line 3997: + some securities + were worth as little as of + their initial value.39 + +On line 3997: + securities were + worth as little as of their + initial value.39 On + +On line 3997: + were worth as little + as of their initial value.39 + On Thursday, April in + +On line 3997: + little as of their + initial value.39 On Thursday, + April in preparation + +On line 3997: + as of their initial + value.39 On Thursday, April in + preparation for an + +On line 3997: + initial value.39 On + Thursday, April in preparation + for an investor call + +On line 3997: + On Thursday, April in + preparation for an investor + call the following + +On line 3997: + preparation for an + investor call the following + week, BSAM analysts + +On line 3997: + call the following + week, BSAM analysts informed + Cioffi and Tannin + +On line 3997: + following week, BSAM + analysts informed Cioffi + and Tannin that in + +On line 3997: + week, BSAM analysts + informed Cioffi and Tannin + that in their view, the + +On line 3997: + analysts informed + Cioffi and Tannin that in + their view, the value + +On line 3997: + informed Cioffi and + Tannin that in their view, the + value of the funds’ + +On line 3997: + and Tannin that in + their view, the value of the + funds’ portfolios had + +On line 3997: + value of the funds’ + portfolios had declined sharply.40 + On Sunday, Tannin + +On line 3997: + the funds’ portfolios + had declined sharply.40 On Sunday, + Tannin sent an email + +On line 3997: + had declined sharply.40 On + Sunday, Tannin sent an email + from his personal + +On line 3997: + Sunday, Tannin sent + an email from his personal + account to Cioffi’s + +On line 3997: + Cioffi’s personal + account arguing that both + hedge funds should be closed + +On line 3997: + account arguing + that both hedge funds should be closed + and liquidated: + +On line 3999: + both hedge funds should be + closed and liquidated: "Looks + pretty damn ugly. + +On line 3999: + funds should be closed and + liquidated: "Looks pretty + damn ugly. If we + +On line 3999: + and liquidated: + "Looks pretty damn ugly. If + we believe the runs + +On line 3999: + liquidated: "Looks + pretty damn ugly. If we + believe the runs [the + +On line 3999: + pretty damn ugly. + If we believe the runs [the + analyst] has been + +On line 3999: + If we believe the + runs [the analyst] has been + doing are ANYWHERE + +On line 3999: + believe the runs [the + analyst] has been doing + are ANYWHERE CLOSE to + +On line 3999: + runs [the analyst] + has been doing are ANYWHERE + CLOSE to accurate, + +On line 3999: + [the analyst] has + been doing are ANYWHERE CLOSE + to accurate, I + +On line 3999: + analyst] has been + doing are ANYWHERE CLOSE to + accurate, I think + +On line 3999: + has been doing are + ANYWHERE CLOSE to accurate, + I think we should close + +On line 3999: + doing are ANYWHERE + CLOSE to accurate, I think + we should close the Funds + +On line 3999: + are ANYWHERE CLOSE to + accurate, I think we should + close the Funds now. If + +On line 3999: + CLOSE to accurate, + I think we should close the Funds + now. If [the runs] are + +On line 3999: + accurate, I think + we should close the Funds now. If + [the runs] are correct + +On line 3999: + should close the Funds now. + If [the runs] are correct then + the entire sub-prime + +On line 3999: + Funds now. If [the runs] + are correct then the entire + sub-prime market is + +On line 3999: + runs] are correct then + the entire sub-prime market + is toast."41 But by the + +On line 3999: + the entire sub-prime + market is toast."41 But by the + following Wednesday, + +On line 3999: + sub-prime market is + toast."41 But by the following + Wednesday, Cioffi and + +On line 3999: + market is toast."41 But + by the following Wednesday, + Cioffi and Tannin + +On line 3999: + is toast."41 But by the + following Wednesday, Cioffi + and Tannin were back + +On line 3999: + by the following + Wednesday, Cioffi and Tannin + were back on the same + +On line 3999: + following Wednesday, + Cioffi and Tannin were back + on the same upbeat + +On line 3999: + Wednesday, Cioffi and + Tannin were back on the same + upbeat page. At the + +On line 3999: + and Tannin were back + on the same upbeat page. At + the beginning of + +On line 3999: + Tannin were back on + the same upbeat page. At the + beginning of the + +On line 3999: + on the same upbeat + page. At the beginning of + the conference call, + +On line 3999: + the beginning of + the conference call, Tannin + told investors, "The key + +On line 3999: + beginning of the + conference call, Tannin told + investors, "The key sort + +On line 3999: + the conference call, + Tannin told investors, "The key + sort of big picture + +On line 3999: + Tannin told investors, + "The key sort of big picture + point for us at this + +On line 3999: + told investors, "The key + sort of big picture point for + us at this point is + +On line 3999: + investors, "The key sort + of big picture point for us + at this point is our + +On line 3999: + sort of big picture + point for us at this point is + our confidence that + +On line 3999: + of big picture point + for us at this point is our + confidence that the + +On line 3999: + point for us at this + point is our confidence that + the structured credit + +On line 3999: + at this point is our + confidence that the structured + credit market and + +On line 3999: + confidence that the + structured credit market and + the sub-prime market + +On line 3999: + the sub-prime market + in particular, has not + systemically + +On line 3999: + in particular, + has not systemically + broken down; we’re very + +On line 3999: + broken down; we’re very + comfortable with exactly + where we are." Cioffi + +On line 3999: + exactly where we + are." Cioffi also assured + investors that the funds + +On line 3999: + where we are." Cioffi + also assured investors that + the funds would likely + +On line 3999: + are." Cioffi also + assured investors that the funds + would likely finish + +On line 3999: + likely finish the + year with positive returns.42 + On May the two hedge + +On line 3999: + finish the year with + positive returns.42 On May + the two hedge funds had + +On line 3999: + year with positive + returns.42 On May the two hedge + funds had attracted + +On line 3999: + positive returns.42 + On May the two hedge funds had + attracted more than + +On line 3999: + returns.42 On May the + two hedge funds had attracted + more than million in + +On line 3999: + On May the two hedge + funds had attracted more than + million in new funds, + +On line 3999: + the two hedge funds had + attracted more than million + in new funds, but more + +On line 3999: + funds had attracted + more than million in new funds, + but more than million + +On line 3999: + had attracted more + than million in new funds, but + more than million was + +On line 3999: + than million in new + funds, but more than million was + redeemed by investors.43 + +On line 4001: + in new funds, but more + than million was redeemed by + investors.43 That same day, + +On line 4001: + but more than million + was redeemed by investors.43 That + same day, Goldman sent + +On line 4001: + more than million was + redeemed by investors.43 That same + day, Goldman sent BSAM + +On line 4001: + redeemed by investors.43 + That same day, Goldman sent BSAM + marks ranging from cents + +On line 4001: + investors.43 That same day, + Goldman sent BSAM marks ranging + from cents to cents on + +On line 4001: + same day, Goldman sent + BSAM marks ranging from cents to + cents on the dollar.44 + +On line 4001: + Goldman sent BSAM marks + ranging from cents to cents on + the dollar.44 Cioffi + +On line 4001: + BSAM marks ranging from + cents to cents on the dollar.44 + Cioffi disputed + +On line 4001: + ranging from cents to + cents on the dollar.44 Cioffi + disputed Goldman’s + +On line 4001: + cents to cents on the + dollar.44 Cioffi disputed + Goldman’s marks as well + +On line 4001: + cents on the dollar.44 + Cioffi disputed Goldman’s + marks as well as marks + +On line 4001: + the dollar.44 Cioffi + disputed Goldman’s marks as + well as marks from Lehman, + +On line 4001: + Cioffi disputed + Goldman’s marks as well as marks + from Lehman, Citigroup, + +On line 4001: + disputed Goldman’s + marks as well as marks from Lehman, + Citigroup, nd JP + +On line 4001: + Goldman’s marks as well + as marks from Lehman, Citigroup, + nd JP Morgan.45 On + +On line 4001: + marks as well as marks + from Lehman, Citigroup, nd JP + Morgan.45 On May in + +On line 4001: + from Lehman, Citigroup, + nd JP Morgan.45 On May in + a preliminary + +On line 4001: + nd JP Morgan.45 On + May in a preliminary + estimate, Cioffi + +On line 4001: + told investors that the + net asset value of the + Enhanced Leverage Fund + +On line 4001: + net asset value + of the Enhanced Leverage Fund + was down in April.46 In + +On line 4001: + Fund was down in April.46 + In computing the final + numbers later that + +On line 4001: + In computing the + final numbers later that + month, he requested + +On line 4001: + numbers later that + month, he requested that BSAM’s + Pricing Committee + +On line 4001: + later that month, he + requested that BSAM’s Pricing + Committee instead + +On line 4001: + requested that BSAM’s + Pricing Committee instead + use fair value marks + +On line 4001: + Committee instead + use fair value marks based on + his team’s modeling, + +On line 4001: + use fair value marks + based on his team’s modeling, + which implied losses + +On line 4001: + fair value marks based + on his team’s modeling, which + implied losses that + +On line 4003: + his team’s modeling, + which implied losses that were + to million less than + +On line 4003: + were to million less + than losses using Goldman’s + marks.47 On June although + +On line 4003: + using Goldman’s marks.47 + On June although Goldman’s marks + were considered low, + +On line 4003: + June although Goldman’s + marks were considered low, the + Pricing Committee + +On line 4003: + marks rather than to use + fair value. The committee + also noted that + +On line 4003: + use fair value. The + committee also noted + that the decline in + +On line 4003: + committee also + noted that the decline in + net asset value + +On line 4003: + also noted that + the decline in net asset + value would be greater + +On line 4003: + the decline in net + asset value would be greater + than the estimate, + +On line 4003: + asset value would + be greater than the estimate, + because "many of the + +On line 4003: + would be greater than the + estimate, because "many of + the positions that + +On line 4003: + estimate, because + "many of the positions that + were marked down received + +On line 4003: + because "many of the + positions that were marked down + received dealer marks + +On line 4003: + the positions that + were marked down received dealer + marks after release + +On line 4003: + positions that were + marked down received dealer marks + after release of + +On line 4003: + were marked down received + dealer marks after release + of the estimate."48 + +On line 4005: + after release of + the estimate."48 The decline + was revised from to + +On line 4005: + of the estimate."48 + The decline was revised from + to According to + +On line 4005: + was revised from to + According to Cioffi, a + number of factors + +On line 4005: + from to According + to Cioffi, a number of + factors contributed + +On line 4005: + Cioffi, a number + of factors contributed to + the April revision, + +On line 4005: + factors contributed + to the April revision, and + Goldman’s marks were one + +On line 4005: + contributed to the + April revision, and Goldman’s + marks were one factor.49 + +On line 4005: + April revision, and + Goldman’s marks were one factor.49 + After these meetings, + +On line 4005: + marks were one factor.49 + After these meetings, Cioffi + emailed one committee + +On line 4005: + one factor.49 After + these meetings, Cioffi emailed one + committee member: + +On line 4005: + After these meetings, + Cioffi emailed one committee + member: "There is no + +On line 4005: + these meetings, Cioffi + emailed one committee member: + "There is no market + +On line 4005: + meetings, Cioffi emailed + one committee member: "There + is no market its + +On line 4005: + is no market its + [sic] all academic anyway—19% + [value] is doomsday."50 + +On line 4005: + market its [sic] all + academic anyway—19% [value] + is doomsday."50 On June + +On line 4005: + [sic] all academic + anyway—19% [value] is doomsday."50 + On June BSAM announced + +On line 4005: + academic anyway—19% + [value] is doomsday."50 On June + BSAM announced the drop + +On line 4005: + [value] is doomsday."50 + On June BSAM announced the drop + and froze redemptions. + +On line 4007: + is doomsday."50 On June + BSAM announced the drop and froze + redemptions. "Canary + +On line 4007: + On June BSAM announced + the drop and froze redemptions. + "Canary in the mine + +On line 4009: + BSAM announced the drop + and froze redemptions. "Canary + in the mine shaft" When + +On line 4009: + announced the drop and + froze redemptions. "Canary in + the mine shaft" When JP + +On line 4009: + in the mine shaft" When + JP Morgan contacted Bear’s + co-president Alan Schwartz + +On line 4009: + shaft" When JP Morgan + contacted Bear’s co-president + Alan Schwartz in April about + +On line 4009: + Alan Schwartz in April about + its up-coming margin + call, Schwartz convened an + +On line 4009: + call, Schwartz convened an + executive committee + meeting to discuss + +On line 4009: + meeting to discuss + how repo lenders were marking + down positions and + +On line 4009: + how repo lenders were + marking down positions and + making margin calls + +On line 4009: + down positions and + making margin calls on the + basis of those new + +On line 4009: + and making margin + calls on the basis of those + new marks.51 In early + +On line 4009: + making margin calls + on the basis of those new + marks.51 In early June, + +On line 4009: + margin calls on the + basis of those new marks.51 In + early June, Bear met + +On line 4009: + calls on the basis + of those new marks.51 In early + June, Bear met with BSAM’s + +On line 4009: + the basis of those + new marks.51 In early June, Bear + met with BSAM’s repo + +On line 4009: + basis of those new + marks.51 In early June, Bear met + with BSAM’s repo lenders + +On line 4009: + new marks.51 In early + June, Bear met with BSAM’s repo + lenders to explain that + +On line 4009: + marks.51 In early June, + Bear met with BSAM’s repo lenders + to explain that BSAM + +On line 4009: + In early June, Bear + met with BSAM’s repo lenders to + explain that BSAM lacked + +On line 4009: + June, Bear met with BSAM’s + repo lenders to explain that + BSAM lacked cash to meet + +On line 4009: + met with BSAM’s repo + lenders to explain that BSAM lacked + cash to meet margin + +On line 4009: + with BSAM’s repo lenders + to explain that BSAM lacked cash + to meet margin calls + +On line 4009: + BSAM’s repo lenders to + explain that BSAM lacked cash to + meet margin calls and + +On line 4009: + explain that BSAM lacked + cash to meet margin calls and + to negotiate + +On line 4009: + cash to meet margin + calls and to negotiate + a 60-day reprieve. Some + +On line 4009: + to meet margin calls + and to negotiate a + 60-day reprieve. Some of + +On line 4009: + meet margin calls and + to negotiate a 60-day + reprieve. Some of these + +On line 4009: + to negotiate + a 60-day reprieve. Some of these + very same firms had sold + +On line 4009: + a 60-day reprieve. Some + of these very same firms had sold + Enhanced and High-Grade some + +On line 4009: + reprieve. Some of these + very same firms had sold Enhanced + and High-Grade some of the + +On line 4009: + Some of these very same + firms had sold Enhanced and High-Grade + some of the same CDOs + +On line 4009: + of these very same firms + had sold Enhanced and High-Grade some + of the same CDOs and + +On line 4009: + very same firms had sold + Enhanced and High-Grade some of the + same CDOs and other + +On line 4009: + Enhanced and High-Grade some + of the same CDOs and other + securities that + +On line 4009: + some of the same CDOs + and other securities + that were turning out + +On line 4009: + of the same CDOs and + other securities that + were turning out to + +On line 4009: + securities that + were turning out to be such + bad assets.52 Now all + +On line 4009: + were turning out to + be such bad assets.52 Now all + refused Schwartz’s appeal; + +On line 4009: + out to be such bad + assets.52 Now all refused Schwartz’s + appeal; instead, they + +On line 4009: + bad assets.52 Now all + refused Schwartz’s appeal; instead, + they made margin calls.53 + +On line 4009: + Schwartz’s appeal; instead, + they made margin calls.53 As a + direct result, the + +On line 4009: + they made margin calls.53 + As a direct result, the + two funds had to sell + +On line 4009: + calls.53 As a direct + result, the two funds had to + sell collateral + +On line 4009: + result, the two funds + had to sell collateral + at distressed prices to + +On line 4009: + sell collateral + at distressed prices to raise cash.54 + Selling the bonds led + +On line 4009: + at distressed prices to + raise cash.54 Selling the bonds led + to a complete loss + +On line 4009: + distressed prices to raise + cash.54 Selling the bonds led to + a complete loss of + +On line 4009: + to raise cash.54 Selling + the bonds led to a complete + loss of confidence + +On line 4009: + raise cash.54 Selling the + bonds led to a complete loss + of confidence by + +On line 4009: + cash.54 Selling the bonds + led to a complete loss of + confidence by the + +On line 4009: + the bonds led to a + complete loss of confidence + by the investors, whose + +On line 4009: + led to a complete + loss of confidence by the + investors, whose requests + +On line 4011: + Shortly after BSAM + froze redemptions, Merrill Lynch + seized more than million + +On line 4011: + redemptions, Merrill + Lynch seized more than million of + its collateral + +On line 4011: + posted by Bear for + its outstanding repo loans. + Merrill was able to + +On line 4011: + for its outstanding + repo loans. Merrill was able + to sell just million + +On line 4011: + outstanding repo + loans. Merrill was able to sell + just million of the + +On line 4011: + loans. Merrill was able + to sell just million of the + seized collateral + +On line 4011: + Merrill was able to + sell just million of the seized + collateral at + +On line 4011: + sell just million of + the seized collateral at + auction by July + +On line 4011: + million of the seized + collateral at auction + by July 5—and at + +On line 4011: + seized collateral + at auction by July 5—and + at discounts to its + +On line 4011: + collateral at + auction by July 5—and at + discounts to its face + +On line 4011: + by July 5—and at + discounts to its face value.55 + Other repo lenders + +On line 4011: + at discounts to its + face value.55 Other repo + lenders were increasing + +On line 4011: + discounts to its face + value.55 Other repo lenders + were increasing their + +On line 4011: + face value.55 Other + repo lenders were increasing + their collateral + +On line 4011: + were increasing their + collateral requirements + or refusing to + +On line 4011: + their collateral + requirements or refusing + to roll over their loans.56 + +On line 4011: + or refusing to + roll over their loans.56 This run on + both hedge funds left both + +On line 4011: + refusing to roll + over their loans.56 This run on both + hedge funds left both BSAM + +On line 4011: + to roll over their loans.56 + This run on both hedge funds left + both BSAM and Bear Stearns + +On line 4011: + roll over their loans.56 This + run on both hedge funds left both + BSAM and Bear Stearns with + +On line 4011: + loans.56 This run on both + hedge funds left both BSAM and Bear + Stearns with limited + +On line 4011: + run on both hedge funds + left both BSAM and Bear Stearns with + limited options. + +On line 4011: + hedge funds left both BSAM + and Bear Stearns with limited + options. Although it + +On line 4011: + left both BSAM and Bear + Stearns with limited options. + Although it owned the + +On line 4011: + BSAM and Bear Stearns with + limited options. Although + it owned the asset + +On line 4011: + Stearns with limited + options. Although it owned the + asset management + +On line 4011: + limited options. + Although it owned the asset + management business, + +On line 4011: + management business, + Bear’s equity positions + in the two BSAM hedge + +On line 4011: + the two BSAM hedge funds + were relatively small. On + April Bear’s co-president + +On line 4011: + April Bear’s co-president + Warren Spector approved a + million investment + +On line 4011: + co-president Warren + Spector approved a million + investment into + +On line 4011: + Spector approved a + million investment into + the Enhanced Leverage + +On line 4011: + million investment + into the Enhanced Leverage + Fund.57 Bear Stearns had no + +On line 4011: + investment into + the Enhanced Leverage Fund.57 Bear + Stearns had no legal + +On line 4011: + into the Enhanced + Leverage Fund.57 Bear Stearns had no + legal obligation + +On line 4011: + Leverage Fund.57 Bear Stearns + had no legal obligation + to rescue either + +On line 4011: + legal obligation + to rescue either the funds + or their repo lenders. + +On line 4011: + to rescue either + the funds or their repo lenders. + However, those lenders + +On line 4011: + either the funds or + their repo lenders. However, + those lenders were the same + +On line 4011: + or their repo lenders. + However, those lenders were the + same large investment + +On line 4011: + However, those lenders + were the same large investment + banks that Bear Stearns dealt + +On line 4011: + those lenders were the same + large investment banks that Bear + Stearns dealt with every + +On line 4011: + lenders were the same large + investment banks that Bear Stearns + dealt with every day.58 + +On line 4011: + investment banks that + Bear Stearns dealt with every day.58 + Moreover, any failure + +On line 4011: + every day.58 Moreover, + any failure of entities + related to Bear + +On line 4011: + Moreover, any failure + of entities related + to Bear Stearns could raise + +On line 4011: + related to Bear + Stearns could raise investors’ concerns + about the firm itself. + +On line 4013: + to Bear Stearns could raise + investors’ concerns about the firm + itself. Thomas Marano, + +On line 4013: + Stearns could raise investors’ + concerns about the firm itself. + Thomas Marano, the head + +On line 4013: + about the firm itself. + Thomas Marano, the head of the + mortgage trading desk, + +On line 4013: + Thomas Marano, the head + of the mortgage trading desk, + told FCIC staff that the + +On line 4013: + head of the mortgage + trading desk, told FCIC staff that + the constant barrage + +On line 4013: + mortgage trading desk, + told FCIC staff that the constant + barrage of margin + +On line 4013: + trading desk, told FCIC + staff that the constant barrage + of margin calls had + +On line 4013: + told FCIC staff that the + constant barrage of margin + calls had created + +On line 4013: + staff that the constant + barrage of margin calls had + created chaos at + +On line 4013: + constant barrage of + margin calls had created + chaos at Bear. In late + +On line 4013: + barrage of margin + calls had created chaos at + Bear. In late June, Bear + +On line 4013: + calls had created + chaos at Bear. In late June, Bear + Stearns dispatched him to + +On line 4013: + In late June, Bear Stearns + dispatched him to engineer + a solution with + +On line 4013: + Stearns dispatched him to + engineer a solution + with Richard Marin, BSAM’s CEO. + +On line 4013: + him to engineer + a solution with Richard Marin, + BSAM’s CEO. Marano now + +On line 4013: + to engineer a + solution with Richard Marin, BSAM’s + CEO. Marano now worked + +On line 4013: + a solution with + Richard Marin, BSAM’s CEO. Marano now + worked to understand + +On line 4013: + solution with Richard + Marin, BSAM’s CEO. Marano now worked + to understand the + +On line 4013: + Marano now worked to + understand the portfolio, + including what it + +On line 4013: + worked to understand + the portfolio, including + what it might be worth + +On line 4013: + to understand the + portfolio, including what + it might be worth in + +On line 4013: + what it might be worth + in a worst-EARLY case scenario in + which significant + +On line 4013: + it might be worth in + a worst-EARLY case scenario in which + significant amounts + +On line 4013: + a worst-EARLY case scenario + in which significant amounts + of assets had to + +On line 4013: + worst-EARLY case scenario in + which significant amounts of + assets had to be + +On line 4013: + significant amounts + of assets had to be sold.59 + Bear Stearns’s conclusion: + +On line 4013: + assets had to be + sold.59 Bear Stearns’s conclusion: High-Grade + still had positive + +On line 4013: + had to be sold.59 Bear + Stearns’s conclusion: High-Grade still had + positive value, + +On line 4013: + Stearns’s conclusion: High-Grade + still had positive value, + but Enhanced Leverage + +On line 4013: + conclusion: High-Grade still + had positive value, but + Enhanced Leverage did + +On line 4015: + positive value, + but Enhanced Leverage did not. + On the basis of + +On line 4015: + but Enhanced Leverage + did not. On the basis of + that analysis, Bear + +On line 4015: + Enhanced Leverage did + not. On the basis of that + analysis, Bear Stearns + +On line 4015: + not. On the basis + of that analysis, Bear Stearns + committed up to + +On line 4015: + committed up to + billion—and ultimately + loaned billion—to take + +On line 4015: + ultimately loaned + billion—to take out the High-Grade + Fund repo lenders and + +On line 4015: + loaned billion—to take + out the High-Grade Fund repo lenders + and become the sole + +On line 4015: + take out the High-Grade Fund + repo lenders and become the + sole repo lender to + +On line 4015: + Fund repo lenders and + become the sole repo lender + to the fund; Enhanced + +On line 4015: + lenders and become the + sole repo lender to the fund; + Enhanced Leverage was + +On line 4017: + sole repo lender to + the fund; Enhanced Leverage was + on its own. During + +On line 4017: + repo lender to the + fund; Enhanced Leverage was on + its own. During a + +On line 4017: + fund; Enhanced Leverage + was on its own. During a + June Federal Open + +On line 4017: + a June Federal + Open Market Committee (FOMC) + meeting, members were + +On line 4017: + (FOMC) meeting, members + were informed about the subprime + market and the BSAM + +On line 4017: + members were informed + about the subprime market and + the BSAM hedge funds. The + +On line 4017: + the subprime market + and the BSAM hedge funds. The staff + reported that the + +On line 4017: + and the BSAM hedge funds. + The staff reported that the + subprime market was + +On line 4017: + The staff reported + that the subprime market was + "very unsettled and + +On line 4017: + housing market." The + liquidation of subprime + securities at + +On line 4019: + The liquidation + of subprime securities + at the two BSAM hedge + +On line 4019: + liquidation of + subprime securities at + the two BSAM hedge funds + +On line 4019: + two BSAM hedge funds was + compared to the troubles faced + by Long-Term Capital + +On line 4019: + troubles faced by Long-Term + Capital Management in + Chairman Bernanke noted + +On line 4019: + Chairman Bernanke noted + that the problems the hedge funds + experienced were + +On line 4019: + that the problems the + hedge funds experienced were + a good example + +On line 4019: + the problems the hedge + funds experienced were a + good example of + +On line 4019: + problems the hedge funds + experienced were a good + example of how + +On line 4019: + experienced were + a good example of how + leverage can increase + +On line 4019: + a good example + of how leverage can increase + liquidity risk, + +On line 4019: + of how leverage can + increase liquidity risk, + especially in + +On line 4019: + risk, especially + in situations in which + counterparties were + +On line 4019: + in situations + in which counterparties were + not willing to give + +On line 4019: + situations in + which counterparties were not + willing to give them + +On line 4019: + which counterparties + were not willing to give them + time to liquidate + +On line 4019: + counterparties were + not willing to give them time + to liquidate and + +On line 4019: + time to liquidate + and possibly realize + whatever value + +On line 4019: + whatever value + might be in the positions. + But it was also + +On line 4019: + value might be in + the positions. But it was + also noted that + +On line 4019: + in the positions. + But it was also noted + that the BSAM hedge funds + +On line 4019: + positions. But it + was also noted that the + BSAM hedge funds appeared + +On line 4019: + also noted that + the BSAM hedge funds appeared to + be "relatively + +On line 4019: + BSAM hedge funds appeared + to be "relatively unique" + among sponsored funds in + +On line 4019: + hedge funds appeared to + be "relatively unique" among + sponsored funds in their + +On line 4019: + be "relatively + unique" among sponsored funds in their + concentration in + +On line 4021: + unique" among sponsored funds + in their concentration in + subprime mortgages.60 Some + +On line 4021: + sponsored funds in their + concentration in subprime + mortgages.60 Some members + +On line 4021: + concentration in + subprime mortgages.60 Some members + were concerned about the + +On line 4021: + subprime mortgages.60 Some + members were concerned about the + lack of transparency + +On line 4021: + mortgages.60 Some members + were concerned about the lack of + transparency around hedge + +On line 4021: + were concerned about the + lack of transparency around hedge + funds, the consequent + +On line 4021: + concerned about the lack + of transparency around hedge funds, + the consequent lack + +On line 4021: + transparency around hedge + funds, the consequent lack of + market discipline + +On line 4021: + funds, the consequent + lack of market discipline + on valuations + +On line 4021: + the consequent lack + of market discipline on + valuations of + +On line 4021: + market discipline + on valuations of hedge + fund holdings, and the + +On line 4021: + valuations of + hedge fund holdings, and the fact + that the Federal + +On line 4021: + funds because they were + outside its jurisdiction. + These facts caused members + +On line 4021: + its jurisdiction. + These facts caused members to be + concerned about whether they + +On line 4021: + These facts caused members + to be concerned about whether they + understood the scope + +On line 4023: + be concerned about whether + they understood the scope of + the problem. During + +On line 4023: + concerned about whether they + understood the scope of the + problem. During the + +On line 4023: + they understood the + scope of the problem. During + the same meeting, FOMC + +On line 4023: + scope of the problem. + During the same meeting, FOMC + members noted that + +On line 4023: + the problem. During + the same meeting, FOMC members + noted that the size + +On line 4023: + size of the credit + derivatives market, its + lack of transparency + +On line 4023: + of transparency and + activities related + to subprime debt could + +On line 4025: + cloud in the background + of policy. Meanwhile, Bear + Stearns executives + +On line 4025: + in the background of + policy. Meanwhile, Bear Stearns + executives who + +On line 4025: + policy. Meanwhile, + Bear Stearns executives who + supported the High-Grade + +On line 4025: + Stearns executives + who supported the High-Grade bailout + did not expect to + +On line 4025: + executives who + supported the High-Grade bailout did + not expect to lose + +On line 4025: + supported the High-Grade + bailout did not expect to lose + money. However, + +On line 4025: + bailout did not expect + to lose money. However, + that support was not + +On line 4025: + did not expect to + lose money. However, that + support was not universal—CEO + +On line 4025: + money. However, + that support was not universal—CEO James + Cayne and Earl Hedin, the + +On line 4025: + Cayne and Earl Hedin, the + former senior managing + director of Bear + +On line 4025: + the former senior + managing director of + Bear Stearns and BSAM, were + +On line 4025: + of Bear Stearns and BSAM, + were opposed, because they did + not want to increase + +On line 4025: + and BSAM, were opposed, + because they did not want to + increase shareholders’ + +On line 4025: + because they did not + want to increase shareholders’ + potential losses.61 + +On line 4025: + increase shareholders’ + potential losses.61 Their fears + proved accurate. By + +On line 4025: + potential losses.61 + Their fears proved accurate. By + July, the two hedge + +On line 4025: + losses.61 Their fears proved + accurate. By July, the + two hedge funds had shrunk + +On line 4025: + fears proved accurate. + By July, the two hedge funds + had shrunk to almost + +On line 4025: + By July, the two + hedge funds had shrunk to almost + nothing: High-Grade Fund was + +On line 4025: + the two hedge funds had + shrunk to almost nothing: High-Grade + Fund was down Enhanced + +On line 4025: + hedge funds had shrunk to + almost nothing: High-Grade Fund was + down Enhanced Leverage + +On line 4027: + almost nothing: High-Grade + Fund was down Enhanced Leverage + Fund, On July both + +On line 4027: + nothing: High-Grade Fund was + down Enhanced Leverage Fund, On + July both filed for + +On line 4027: + Fund was down Enhanced + Leverage Fund, On July both + filed for bankruptcy. + +On line 4027: + down Enhanced Leverage + Fund, On July both filed for + bankruptcy. Cioffi + +On line 4027: + Fund, On July both + filed for bankruptcy. Cioffi + and Tannin would be + +On line 4027: + filed for bankruptcy. + Cioffi and Tannin would be + criminally charged + +On line 4027: + investors, but they were + acquitted of all charges in + November Civil + +On line 4027: + they were acquitted + of all charges in November + Civil charges brought by + +On line 4027: + acquitted of all + charges in November Civil + charges brought by the SEC + +On line 4027: + charges in November + Civil charges brought by the SEC + were still pending as + +On line 4027: + November Civil + charges brought by the SEC were still + pending as of the + +On line 4027: + Civil charges brought by + the SEC were still pending as + of the date of this + +On line 4027: + charges brought by the SEC + were still pending as of the + date of this report. + +On line 4029: + by the SEC were still + pending as of the date of + this report. Looking + +On line 4029: + were still pending as + of the date of this report. + Looking back, Marano + +On line 4029: + pending as of the + date of this report. Looking + back, Marano told the + +On line 4029: + of the date of this + report. Looking back, Marano + told the FCIC, "We caught + +On line 4029: + date of this report. + Looking back, Marano told the + FCIC, "We caught a lot + +On line 4029: + this report. Looking + back, Marano told the FCIC, "We + caught a lot of flak + +On line 4029: + report. Looking back, + Marano told the FCIC, "We caught + a lot of flak for + +On line 4029: + back, Marano told the + FCIC, "We caught a lot of flak + for allowing the + +On line 4029: + Marano told the FCIC, + "We caught a lot of flak for + allowing the funds + +On line 4029: + the FCIC, "We caught a + lot of flak for allowing + the funds to fail, but + +On line 4029: + FCIC, "We caught a lot + of flak for allowing the + funds to fail, but we + +On line 4029: + "We caught a lot of + flak for allowing the funds + to fail, but we had + +On line 4029: + caught a lot of flak + for allowing the funds to + fail, but we had no + +On line 4029: + flak for allowing + the funds to fail, but we had + no option."63 In an + +On line 4029: + the funds to fail, but + we had no option."63 In an + internal email in + +On line 4029: + we had no option."63 + In an internal email in + June, Bill Jamison of + +On line 4029: + in June, Bill Jamison + of Federated Investors, + one of the largest of + +On line 4029: + June, Bill Jamison of + Federated Investors, one + of the largest of all + +On line 4029: + of Federated + Investors, one of the largest of + all mutual fund + +On line 4029: + Investors, one of the + largest of all mutual fund + companies, referred + +On line 4029: + of the largest of all + mutual fund companies, + referred to the Bear + +On line 4029: + of all mutual + fund companies, referred to + the Bear Stearns hedge funds + +On line 4029: + all mutual fund + companies, referred to the + Bear Stearns hedge funds as + +On line 4029: + companies, referred + to the Bear Stearns hedge funds as + the "canary in the + +On line 4029: + referred to the Bear + Stearns hedge funds as the "canary + in the mine shaft" and + +On line 4029: + the Bear Stearns hedge funds + as the "canary in the mine + shaft" and predicted + +On line 4029: + Bear Stearns hedge funds as + the "canary in the mine shaft" + and predicted more + +On line 4029: + as the "canary in + the mine shaft" and predicted + more market turmoil.64 + +On line 4029: + the "canary in the + mine shaft" and predicted more + market turmoil.64 As + +On line 4029: + and predicted more + market turmoil.64 As the two + funds were collapsing, + +On line 4029: + turmoil.64 As the two + funds were collapsing, repo + lending tightened across + +On line 4029: + As the two funds were + collapsing, repo lending + tightened across the board. + +On line 4031: + funds were collapsing, + repo lending tightened across + the board. Many repo + +On line 4031: + the board. Many repo + lenders sharpened their focus on + the valuation + +On line 4031: + board. Many repo lenders + sharpened their focus on the + valuation of + +On line 4031: + sharpened their focus + on the valuation of + any collateral + +On line 4031: + the valuation + of any collateral with + potential subprime + +On line 4031: + margins on loans to + institutions that appeared + to be exposed to + +On line 4031: + institutions that + appeared to be exposed to + the mortgage market; + +On line 4031: + the mortgage market; + they often required Treasury + securities as + +On line 4031: + they often required + Treasury securities as + collateral; in + +On line 4031: + collateral; in + many cases, they demanded + shorter lending terms.65 + +On line 4031: + in many cases, they + demanded shorter lending + terms.65 Clearly, the triple-A-rated + +On line 4031: + securities and + CDOs were not considered the + "super-safe" investments + +On line 4031: + were not considered + the "super-safe" investments in + which investors—and some + +On line 4031: + investments in which + investors—and some dealers—had + only recently + +On line 4033: + dealers—had only + recently believed. Cayne called + Spector into the + +On line 4033: + recently believed. + Cayne called Spector into the + office and asked him + +On line 4033: + called Spector into + the office and asked him to + resign. On Sunday, + +On line 4035: + resign. On Sunday, + August Spector submitted + his resignation + +On line 4037: + Spector submitted + his resignation to the + board. RATING AGENCIES: + +On line 4037: + his resignation + to the board. RATING AGENCIES: + "IT CAN’ T BE ALL + +On line 4037: + resignation to + the board. RATING AGENCIES: "IT + CAN’ T BE ALL OF + +On line 4037: + to the board. RATING + AGENCIES: "IT CAN’ T BE ALL + OF A SUDDEN" While + +On line 4037: + board. RATING AGENCIES: + "IT CAN’ T BE ALL OF A + SUDDEN" While BSAM was + +On line 4037: + AGENCIES: "IT CAN’ T + BE ALL OF A SUDDEN" While + BSAM was wrestling with its + +On line 4037: + CAN’ T BE ALL OF + A SUDDEN" While BSAM was wrestling + with its two ailing + +On line 4037: + ALL OF A SUDDEN" + While BSAM was wrestling with its two + ailing flagship hedge + +On line 4037: + A SUDDEN" While BSAM + was wrestling with its two ailing + flagship hedge funds, the + +On line 4037: + BSAM was wrestling with its + two ailing flagship hedge funds, + the major credit + +On line 4037: + downgrades and credit + watch warnings on an array + of residential + +On line 4037: + on an array of + residential mortgage–backed + securities. These + +On line 4037: + securities. These + announcements foreshadowed the + actual losses + +On line 4039: + actual losses + to come. S&P announced that it + had placed tranches backed + +On line 4039: + placed tranches backed by + U.S. subprime collateral, + or some billion in + +On line 4039: + in securities, + on negative watch. S&P promised + to review every + +On line 4039: + securities, on + negative watch. S&P promised to + review every deal + +On line 4039: + on negative watch. + S&P promised to review every + deal in its ratings + +On line 4039: + S&P promised to review + every deal in its ratings + database for adverse + +On line 4039: + to review every + deal in its ratings database + for adverse effects. + +On line 4039: + review every deal + in its ratings database for + adverse effects. In + +On line 4039: + deal in its ratings + database for adverse effects. + In the afternoon, + +On line 4039: + downgraded mortgage-backed + securities issued in + backed by U.S. subprime + +On line 4039: + watch. These Moody’s downgrades + affected about billion in + securities. The + +On line 4039: + in securities. + The following day, Moody’s placed + tranches of CDOs, with + +On line 4039: + placed tranches of CDOs, + with original face value + of about billion, on + +On line 4039: + tranches of CDOs, with + original face value of + about billion, on watch + +On line 4039: + with original face + value of about billion, on + watch for possible + +On line 4039: + of about billion, on + watch for possible downgrade. + Two days after its + +On line 4039: + Two days after its + original announcement, S&P + downgraded of the + +On line 4041: + S&P downgraded of + the tranches it had placed on + negative watch. Fitch + +On line 4041: + the tranches it had + placed on negative watch. Fitch + Ratings, the smallest + +On line 4041: + placed on negative + watch. Fitch Ratings, the smallest + of the three major + +On line 4041: + negative watch. Fitch + Ratings, the smallest of the + three major credit + +On line 4043: + While the specific + securities downgraded + were only a small + +On line 4043: + the universe (less than + of mortgage-backed securities + issued in investors + +On line 4043: + (less than of mortgage-backed + securities issued in + investors knew that more + +On line 4043: + investors knew that more + downgrades might come. Many investors + were critical of + +On line 4043: + downgrades might come. Many + investors were critical of + the rating agencies, + +On line 4043: + come. Many investors were + critical of the rating + agencies, lam-basting them + +On line 4043: + critical of the + rating agencies, lam-basting them + for their belated + +On line 4043: + for their belated + reactions. By July by + one measure, housing + +On line 4043: + one measure, housing + prices had already fallen about + nationally from + +On line 4043: + had already fallen + about nationally from their + peak at the spring of + +On line 4045: + already fallen about + nationally from their peak + at the spring of On + +On line 4045: + peak at the spring of + On a July conference + call with S&P, the hedge + +On line 4045: + at the spring of On + a July conference call + with S&P, the hedge fund + +On line 4045: + of On a July + conference call with S&P, the + hedge fund manager + +On line 4045: + conference call with + S&P, the hedge fund manager + Steve Eisman questioned + +On line 4045: + call with S&P, the hedge + fund manager Steve Eisman + questioned Tom Warrack, + +On line 4045: + Steve Eisman questioned + Tom Warrack, the managing + director of S&P’s + +On line 4045: + director of S&P’s + residential mortgage–backed + securities group. + +On line 4045: + S&P’s residential + mortgage–backed securities + group. Eisman asked, "I’d + +On line 4045: + securities group. + Eisman asked, "I’d like to know + why now. I mean, the + +On line 4045: + group. Eisman asked, "I’d + like to know why now. I mean, + the news has been out + +On line 4045: + Eisman asked, "I’d like + to know why now. I mean, the + news has been out on + +On line 4045: + asked, "I’d like to know + why now. I mean, the news has + been out on subprime + +On line 4045: + "I’d like to know why + now. I mean, the news has been + out on subprime now + +On line 4045: + like to know why now. + I mean, the news has been out + on subprime now for + +On line 4045: + to know why now. I + mean, the news has been out on + subprime now for many, + +On line 4045: + why now. I mean, the + news has been out on subprime + now for many, many months. + +On line 4045: + now. I mean, the news + has been out on subprime now + for many, many months. The + +On line 4045: + the news has been out + on subprime now for many, many + months. The delinquencies + +On line 4045: + news has been out on + subprime now for many, many months. + The delinquencies have + +On line 4045: + subprime now for many, + many months. The delinquencies have + been a disaster + +On line 4045: + now for many, many months. + The delinquencies have been a + disaster now for + +On line 4045: + months. The delinquencies + have been a disaster now + for many, many months. (Your) + +On line 4045: + delinquencies have been + a disaster now for many, + many months. (Your) ratings + +On line 4045: + a disaster now + for many, many months. (Your) ratings + have been called into + +On line 4045: + for many, many months. (Your) + ratings have been called into + question now for many, + +On line 4045: + many months. (Your) ratings + have been called into question + now for many, many months. + +On line 4045: + months. (Your) ratings have + been called into question now + for many, many months. I’d + +On line 4045: + (Your) ratings have been + called into question now for + many, many months. I’d like + +On line 4045: + ratings have been called + into question now for many, + many months. I’d like to + +On line 4045: + called into question + now for many, many months. I’d like + to understand why + +On line 4045: + into question now + for many, many months. I’d like to + understand why you’re + +On line 4045: + now for many, many months. + I’d like to understand why + you’re making this move + +On line 4045: + many months. I’d like to + understand why you’re making + this move today when + +On line 4045: + to understand why + you’re making this move today + when you—and why didn’t + +On line 4045: + understand why you’re + making this move today when + you—and why didn’t you + +On line 4045: + you’re making this move + today when you—and why didn’t + you do this many, many + +On line 4045: + this move today when + you—and why didn’t you do this + many, many months ago. I + +On line 4045: + move today when you—and + why didn’t you do this many, + many months ago. I mean, + +On line 4045: + today when you—and why + didn’t you do this many, many + months ago. I mean, it + +On line 4045: + when you—and why didn’t + you do this many, many months ago. + I mean, it can’t be + +On line 4045: + you—and why didn’t you + do this many, many months ago. I + mean, it can’t be that + +On line 4045: + why didn’t you do + this many, many months ago. I mean, + it can’t be that all + +On line 4045: + didn’t you do this + many, many months ago. I mean, it + can’t be that all of + +On line 4045: + do this many, many months + ago. I mean, it can’t be that + all of a sudden, + +On line 4045: + this many, many months ago. + I mean, it can’t be that all + of a sudden, the + +On line 4045: + ago. I mean, it can’t + be that all of a sudden, + the performance has + +On line 4045: + I mean, it can’t be + that all of a sudden, the + performance has reached + +On line 4045: + can’t be that all of + a sudden, the performance + has reached a level + +On line 4045: + be that all of a + sudden, the performance has + reached a level where + +On line 4045: + all of a sudden, + the performance has reached a + level where you’ve + +On line 4045: + the performance has + reached a level where you’ve + woken up." Warrack + +On line 4045: + reached a level where + you’ve woken up." Warrack + responded that S&P + +On line 4045: + where you’ve woken + up." Warrack responded that + S&P "took action as + +On line 4045: + you’ve woken up." + Warrack responded that S&P + "took action as soon + +On line 4045: + S&P "took action as + soon as possible given + the information + +On line 4045: + "took action as soon + as possible given the + information at + +On line 4047: + soon as possible + given the information + at hand."68 The ratings + +On line 4047: + possible given + the information at hand."68 + The ratings agencies’ + +On line 4047: + the information + at hand."68 The ratings agencies’ + downgrades, in tandem + +On line 4047: + at hand."68 The ratings + agencies’ downgrades, in tandem + with the problems at + +On line 4047: + The ratings agencies’ + downgrades, in tandem with the + problems at Bear Stearns’s + +On line 4047: + agencies’ downgrades, in + tandem with the problems at + Bear Stearns’s hedge funds, had + +On line 4047: + the problems at Bear + Stearns’s hedge funds, had a further + chilling effect on + +On line 4047: + Bear Stearns’s hedge funds, had + a further chilling effect + on the markets. The + +On line 4047: + Stearns’s hedge funds, had a + further chilling effect on + the markets. The ABX + +On line 4047: + a further chilling + effect on the markets. The + ABX BBB- index + +On line 4047: + July, confirming + and guaranteeing even more + problems for holders + +On line 4047: + problems for holders + of mortgage securities. + Enacting the same + +On line 4047: + holders of mortgage + securities. Enacting + the same inexorable + +On line 4047: + Enacting the same + inexorable dynamic that + had taken down the + +On line 4047: + the same inexorable + dynamic that had taken + down the Bear Stearns funds, + +On line 4047: + Bear Stearns funds, repo + lenders increasingly required + other borrowers + +On line 4047: + as collateral + to put up more, because their + value was unclear + +On line 4047: + put up more, because + their value was unclear or + depressed. Many of these + +On line 4047: + because their value + was unclear or depressed. Many + of these borrowers + +On line 4047: + unclear or depressed. + Many of these borrowers sold + assets to meet these + +On line 4047: + or depressed. Many of + these borrowers sold assets + to meet these margin + +On line 4047: + depressed. Many of these + borrowers sold assets to + meet these margin calls, + +On line 4047: + these borrowers sold + assets to meet these margin + calls, EARLY and each + +On line 4047: + to meet these margin + calls, EARLY and each sale had + the potential to + +On line 4047: + calls, EARLY and each + sale had the potential to + further depress prices. + +On line 4047: + had the potential + to further depress prices. If + at all possible, + +On line 4047: + the potential to + further depress prices. If at + all possible, the + +On line 4047: + to further depress + prices. If at all possible, + the borrowers sold + +On line 4047: + other assets in + more liquid markets, for which + prices were readily + +On line 4047: + more liquid markets, + for which prices were readily + available, pushing prices + +On line 4047: + prices were readily + available, pushing prices downward + in those markets, too. + +On line 4049: + readily available, + pushing prices downward in those + markets, too. AIG: "WELL + +On line 4049: + available, pushing prices + downward in those markets, too. + AIG: "WELL BIGGER THAN + +On line 4049: + prices downward in those + markets, too. AIG: "WELL BIGGER + THAN WE EVER PLANNED + +On line 4051: + those markets, too. AIG: + "WELL BIGGER THAN WE EVER + PLANNED FOR" Of all the + +On line 4051: + too. AIG: "WELL BIGGER + THAN WE EVER PLANNED FOR" Of + all the possible + +On line 4051: + AIG: "WELL BIGGER THAN + WE EVER PLANNED FOR" Of all + the possible losers + +On line 4051: + "WELL BIGGER THAN WE + EVER PLANNED FOR" Of all the + possible losers in + +On line 4051: + THAN WE EVER PLANNED + FOR" Of all the possible + losers in the looming + +On line 4051: + WE EVER PLANNED FOR" + Of all the possible losers + in the looming rout, + +On line 4051: + EVER PLANNED FOR" Of + all the possible losers in + the looming rout, AIG + +On line 4051: + all the possible + losers in the looming rout, AIG + should have been among the + +On line 4051: + the possible losers + in the looming rout, AIG should + have been among the most + +On line 4051: + losers in the looming + rout, AIG should have been among the + most concerned. After + +On line 4051: + looming rout, AIG should + have been among the most concerned. + After several + +On line 4051: + rout, AIG should have been + among the most concerned. After + several years of + +On line 4051: + have been among the most + concerned. After several + years of aggressive + +On line 4051: + among the most concerned. + After several years of + aggressive growth, AIG’s + +On line 4051: + After several + years of aggressive growth, AIG’s + Financial Products + +On line 4051: + years of aggressive + growth, AIG’s Financial Products + subsidiary had written + +On line 4051: + aggressive growth, AIG’s + Financial Products subsidiary + had written billion + +On line 4051: + growth, AIG’s Financial + Products subsidiary had written + billion in over-the-counter + +On line 4051: + Financial Products + subsidiary had written billion + in over-the-counter credit + +On line 4051: + Products subsidiary had + written billion in over-the-counter + credit default swap + +On line 4051: + had written billion + in over-the-counter credit default + swap (CDS) protection + +On line 4051: + written billion in + over-the-counter credit default swap + (CDS) protection on + +On line 4051: + swap (CDS) protection + on super-senior tranches of + multisector CDOs + +On line 4051: + super-senior tranches + of multisector CDOs backed + mostly by subprime + +On line 4053: + of multisector + CDOs backed mostly by subprime + mortgages. In a phone + +On line 4053: + CDOs backed mostly by + subprime mortgages. In a phone + call made July the + +On line 4053: + by subprime mortgages. + In a phone call made July + the day after the + +On line 4053: + In a phone call made + July the day after the + downgrades, Andrew Forster, + +On line 4053: + phone call made July + the day after the downgrades, + Andrew Forster, the head + +On line 4053: + the day after the + downgrades, Andrew Forster, the head + of credit trading + +On line 4053: + downgrades, Andrew Forster, + the head of credit trading + at AIG Financial + +On line 4053: + Andrew Forster, the head + of credit trading at AIG + Financial Products, + +On line 4053: + the head of credit + trading at AIG Financial + Products, told Alan Frost, + +On line 4053: + executive vice + president of Financial + Product’s Marketing + +On line 4053: + had to analyze + exposures because "every + f***ing rating agency + +On line 4053: + exposures because + "every f***ing rating agency + we’ve spoken to [came] + +On line 4053: + because "every f***ing + rating agency we’ve spoken + to [came] out with more + +On line 4053: + "every f***ing rating + agency we’ve spoken to [came] + out with more downgrades" + +On line 4053: + f***ing rating agency + we’ve spoken to [came] out with + more downgrades" and that + +On line 4053: + rating agency we’ve + spoken to [came] out with more + downgrades" and that he + +On line 4053: + spoken to [came] out + with more downgrades" and that he + was increasingly + +On line 4053: + with more downgrades" and + that he was increasingly + concerned: "About a month + +On line 4053: + downgrades" and that he + was increasingly concerned: + "About a month ago I + +On line 4053: + "About a month ago I + was like, you know, suicidal. + The problem that we’re + +On line 4053: + ago I was like, you + know, suicidal. The problem + that we’re going to + +On line 4053: + I was like, you know, + suicidal. The problem that + we’re going to face + +On line 4053: + you know, suicidal. + The problem that we’re going + to face is that we’re + +On line 4053: + The problem that we’re + going to face is that we’re + going to have just + +On line 4053: + we’re going to face + is that we’re going to have + just enormous downgrades + +On line 4053: + going to face is + that we’re going to have just + enormous downgrades on + +On line 4053: + to face is that we’re + going to have just enormous + downgrades on the stuff + +On line 4053: + is that we’re going + to have just enormous downgrades + on the stuff that we’ve + +On line 4053: + that we’re going to + have just enormous downgrades on + the stuff that we’ve got. + +On line 4053: + to have just enormous + downgrades on the stuff that we’ve + got. Everyone tells + +On line 4053: + downgrades on the stuff + that we’ve got. Everyone tells + me that it’s trading + +On line 4053: + on the stuff that we’ve + got. Everyone tells me that + it’s trading and it’s + +On line 4053: + the stuff that we’ve got. + Everyone tells me that it’s + trading and it’s two + +On line 4053: + we’ve got. Everyone + tells me that it’s trading and + it’s two points lower + +On line 4053: + got. Everyone tells + me that it’s trading and it’s + two points lower and + +On line 4053: + Everyone tells me + that it’s trading and it’s two + points lower and all + +On line 4053: + me that it’s trading + and it’s two points lower and + all the rest of it + +On line 4053: + that it’s trading and + it’s two points lower and all + the rest of it and + +On line 4053: + it’s trading and it’s + two points lower and all the + rest of it and how + +On line 4053: + trading and it’s two + points lower and all the rest + of it and how come + +On line 4053: + it’s two points lower + and all the rest of it and + how come you can’t mark + +On line 4053: + two points lower and + all the rest of it and how + come you can’t mark your + +On line 4053: + points lower and all + the rest of it and how come + you can’t mark your book. + +On line 4053: + lower and all the + rest of it and how come you + can’t mark your book. So + +On line 4053: + rest of it and how + come you can’t mark your book. So + it’s definitely + +On line 4053: + come you can’t mark your + book. So it’s definitely + going to give it + +On line 4053: + can’t mark your book. So + it’s definitely going + to give it renewed + +On line 4053: + it’s definitely + going to give it renewed + focus. I mean we + +On line 4053: + going to give it + renewed focus. I mean we + can’t we have to mark + +On line 4053: + to give it renewed + focus. I mean we can’t we + have to mark it. It’s, + +On line 4053: + it renewed focus. + I mean we can’t we have to + mark it. It’s, it’s, uh, + +On line 4053: + renewed focus. I + mean we can’t we have to mark + it. It’s, it’s, uh, we’re + +On line 4053: + mark it. It’s, it’s, uh, + we’re [unintelligible] + f***ed basically."69 + +On line 4055: + it. It’s, it’s, uh, we’re + [unintelligible] f***ed + basically."69 Forster + +On line 4055: + f***ed basically."69 + Forster was likely worried that + most of AIG’s credit + +On line 4055: + likely worried that + most of AIG’s credit default + swap contracts required + +On line 4055: + most of AIG’s credit + default swap contracts required + that collateral + +On line 4055: + default swap contracts + required that collateral + be posted to the + +On line 4055: + contracts required that + collateral be posted + to the purchasers, should + +On line 4055: + collateral be + posted to the purchasers, should + the market value + +On line 4055: + of the referenced + securities decline by + a certain amount, or + +On line 4055: + a certain amount, or + should rating agencies downgrade + AIG’s long-term debt. That is, + +On line 4055: + should rating agencies + downgrade AIG’s long-term debt. That is, + collateral calls + +On line 4055: + downgrade AIG’s long-term debt. + That is, collateral calls + could be triggered even + +On line 4055: + AIG’s long-term debt. That is, + collateral calls could be + triggered even if there + +On line 4055: + collateral calls + could be triggered even if there + were no actual + +On line 4055: + could be triggered even + if there were no actual + cash losses in, for + +On line 4055: + even if there were no + actual cash losses in, + for example, the + +On line 4055: + in, for example, + the super-senior tranches of + CDOs upon which the + +On line 4055: + CDOs upon which the + protection had been written. + Remarkably, top AIG + +On line 4055: + Remarkably, top AIG + executives—including CEO + Martin Sullivan, + +On line 4055: + Officer Robert Lewis, + Chief Credit Officer Kevin + McGinn, and Financial + +On line 4055: + Financial Services + Division CFO Elias Habayeb—told FCIC + investigators + +On line 4055: + Division CFO Elias + Habayeb—told FCIC investigators + that they did not even + +On line 4055: + investigators + that they did not even know about + these terms of the swaps + +On line 4055: + did not even know about + these terms of the swaps until + the collateral + +On line 4055: + not even know about these + terms of the swaps until the + collateral calls + +On line 4055: + these terms of the swaps + until the collateral + calls started rolling in + +On line 4055: + the collateral + calls started rolling in during + July.70 Office of + +On line 4055: + calls started rolling in + during July.70 Office of + Thrift Supervision + +On line 4055: + who supervised AIG + on a consolidated + basis didn’t know + +On line 4055: + consolidated + basis didn’t know either.71 + Frost, who was the chief + +On line 4055: + basis didn’t know + either.71 Frost, who was the chief + credit default swap + +On line 4055: + didn’t know either.71 + Frost, who was the chief credit + default swap salesman + +On line 4055: + know either.71 Frost, who + was the chief credit default + swap salesman at AIG + +On line 4055: + Frost, who was the chief + credit default swap salesman + at AIG Financial + +On line 4055: + was the chief credit + default swap salesman at AIG + Financial Products, + +On line 4055: + credit default swap + salesman at AIG Financial + Products, did know about + +On line 4055: + default swap salesman + at AIG Financial Products, + did know about the terms, + +On line 4055: + swap salesman at AIG + Financial Products, did know + about the terms, and he + +On line 4055: + Financial Products, + did know about the terms, and he + said he believed they + +On line 4055: + did know about the terms, + and he said he believed they + were standard for the + +On line 4055: + the terms, and he said + he believed they were standard + for the industry.72 + +On line 4055: + terms, and he said he + believed they were standard for + the industry.72 Joseph + +On line 4055: + they were standard for + the industry.72 Joseph Cassano, + the division’s CEO, + +On line 4055: + for the industry.72 + Joseph Cassano, the division’s + CEO, also knew about + +On line 4055: + the industry.72 Joseph + Cassano, the division’s CEO, + also knew about the + +On line 4057: + the division’s CEO, + also knew about the terms.73 And + the counterparties + +On line 4057: + also knew about the + terms.73 And the counterparties + knew, of course. On the + +On line 4057: + knew about the terms.73 And + the counterparties knew, of + course. On the evening of + +On line 4057: + the counterparties + knew, of course. On the evening of + July Goldman Sachs, + +On line 4057: + knew, of course. On the + evening of July Goldman Sachs, + which held billion of + +On line 4057: + of course. On the evening + of July Goldman Sachs, which + held billion of AIG’s + +On line 4057: + the evening of July + Goldman Sachs, which held billion + of AIG’s super-senior + +On line 4057: + of July Goldman + Sachs, which held billion of AIG’s + super-senior credit + +On line 4057: + Goldman Sachs, which held + billion of AIG’s super-senior + credit default swaps,74 + +On line 4057: + Sachs, which held billion + of AIG’s super-senior credit + default swaps,74 sent news + +On line 4057: + held billion of AIG’s + super-senior credit default + swaps,74 sent news of the + +On line 4057: + super-senior credit + default swaps,74 sent news of the + first collateral + +On line 4057: + default swaps,74 sent news + of the first collateral + call in the form of + +On line 4057: + swaps,74 sent news of the + first collateral call in + the form of an email + +On line 4057: + sent news of the first + collateral call in the + form of an email from + +On line 4057: + first collateral + call in the form of an email + from Goldman’s salesman + +On line 4057: + call in the form of + an email from Goldman’s salesman + Andrew Davilman to + +On line 4059: + an email from Goldman’s + salesman Andrew Davilman to + Frost: DAVILMAN: Sorry + +On line 4059: + DAVILMAN: Sorry to + bother you on vacation. + Margin call coming + +On line 4059: + Sorry to bother + you on vacation. Margin + call coming your way. + +On line 4059: + you on vacation. + Margin call coming your way. + Want to give you a + +On line 4059: + vacation. Margin + call coming your way. Want to + give you a heads up. + +On line 4061: + Margin call coming + your way. Want to give you a + heads up. FROST, minutes + +On line 4061: + call coming your way. + Want to give you a heads up. + FROST, minutes later: + +On line 4061: + coming your way. Want + to give you a heads up. FROST, + minutes later: On + +On line 4063: + Want to give you a + heads up. FROST, minutes later: + On what1 DAVILMAN, one + +On line 4063: + to give you a heads + up. FROST, minutes later: On + what1 DAVILMAN, one minute + +On line 4065: + On what1 DAVILMAN, one + minute later: 20bb billion] of + supersenior.75 he + +On line 4065: + one minute later: 20bb + billion] of supersenior.75 + he next day, Goldman + +On line 4065: + later: 20bb billion] + of supersenior.75 he next + day, Goldman made the + +On line 4065: + of supersenior.75 + he next day, Goldman made the + collateral call + +On line 4065: + purchased million of + five-year protection—in the form + of credit default + +On line 4067: + default swaps—against the + possibility that AIG + might default on its + +On line 4069: + on its obligations.77 + Frost never responded to + Davilman’s email. And when + +On line 4069: + Davilman’s email. And when + he returned from vacation, + he was instructed + +On line 4069: + from vacation, he + was instructed to not have + any involvement in + +On line 4069: + vacation, he was + instructed to not have any + involvement in the + +On line 4069: + was instructed to + not have any involvement in + the issue, because + +On line 4069: + any involvement in + the issue, because Cassano + wanted Forster to take + +On line 4069: + wanted Forster to take + the lead on resolving the + dispute.78 AIG’s models + +On line 4069: + Forster to take the lead + on resolving the dispute.78 + AIG’s models showed there + +On line 4069: + to take the lead on + resolving the dispute.78 AIG’s + models showed there would + +On line 4069: + on resolving the + dispute.78 AIG’s models showed there + would be no defaults + +On line 4069: + dispute.78 AIG’s models + showed there would be no defaults + on any of the bond + +On line 4069: + AIG’s models showed there + would be no defaults on any + of the bond payments + +On line 4069: + models showed there would + be no defaults on any of + the bond payments that + +On line 4069: + showed there would be no + defaults on any of the bond + payments that AIG’s swaps + +On line 4069: + would be no defaults + on any of the bond payments + that AIG’s swaps insured. + +On line 4071: + be no defaults on + any of the bond payments that + AIG’s swaps insured. The + +On line 4071: + defaults on any of + the bond payments that AIG’s swaps + insured. The Goldman + +On line 4071: + if market value + declined, irrespective of + any long-term cash losses.79 + +On line 4071: + irrespective of + any long-term cash losses.79 Goldman + estimated that + +On line 4071: + estimated that + the average decline in + the market value + +On line 4073: + average decline + in the market value of + the bonds was So, first + +On line 4073: + the market value + of the bonds was So, first Bear + Stearns’s hedge funds and now + +On line 4073: + market value of + the bonds was So, first Bear Stearns’s + hedge funds and now AIG + +On line 4073: + of the bonds was So, + first Bear Stearns’s hedge funds and now + AIG was getting hit + +On line 4073: + the bonds was So, first + Bear Stearns’s hedge funds and now AIG + was getting hit by + +On line 4073: + So, first Bear Stearns’s hedge + funds and now AIG was getting + hit by Goldman’s marks + +On line 4073: + first Bear Stearns’s hedge funds + and now AIG was getting hit + by Goldman’s marks on + +On line 4073: + AIG was getting hit + by Goldman’s marks on mortgage-backed + securities. Like + +On line 4073: + hit by Goldman’s marks + on mortgage-backed securities. + Like Cioffi and his + +On line 4073: + securities. Like + Cioffi and his colleagues at + Bear Stearns, Frost and his + +On line 4073: + Like Cioffi and his + colleagues at Bear Stearns, Frost and + his colleagues at AIG + +On line 4073: + and his colleagues at + Bear Stearns, Frost and his colleagues + at AIG disputed + +On line 4073: + colleagues at Bear Stearns, + Frost and his colleagues at AIG + disputed Goldman’s + +On line 4073: + Frost and his colleagues + at AIG disputed Goldman’s + marks. On July Forster + +On line 4073: + and his colleagues at + AIG disputed Goldman’s marks. + On July Forster was + +On line 4073: + his colleagues at AIG + disputed Goldman’s marks. On + July Forster was told + +On line 4073: + disputed Goldman’s + marks. On July Forster was told + by another AIG + +On line 4073: + marks. On July Forster + was told by another AIG + trader that "[AIG] would + +On line 4073: + July Forster was told + by another AIG trader + that "[AIG] would be in + +On line 4073: + by another AIG + trader that "[AIG] would be in + fine shape if Goldman + +On line 4073: + trader that "[AIG] would + be in fine shape if Goldman + wasn’t hanging its + +On line 4073: + that "[AIG] would be in + fine shape if Goldman wasn’t + hanging its head out + +On line 4073: + would be in fine shape + if Goldman wasn’t hanging + its head out there." The + +On line 4073: + fine shape if Goldman + wasn’t hanging its head out + there." The margin call + +On line 4073: + wasn’t hanging its + head out there." The margin call + was "something that hit + +On line 4073: + its head out there." The + margin call was "something that + hit out of the blue + +On line 4073: + out there." The margin + call was "something that hit out + of the blue and it’s + +On line 4073: + there." The margin call + was "something that hit out of + the blue and it’s a + +On line 4073: + The margin call was + "something that hit out of the + blue and it’s a f***ing + +On line 4073: + call was "something that + hit out of the blue and it’s + a f***ing number that’s + +On line 4073: + was "something that hit + out of the blue and it’s a + f***ing number that’s well + +On line 4073: + that hit out of the + blue and it’s a f***ing number + that’s well bigger than + +On line 4073: + hit out of the blue + and it’s a f***ing number that’s + well bigger than we + +On line 4073: + the blue and it’s a + f***ing number that’s well bigger + than we ever planned + +On line 4073: + blue and it’s a f***ing + number that’s well bigger than + we ever planned for." + +On line 4073: + f***ing number that’s well + bigger than we ever planned + for." He acknowledged + +On line 4073: + we ever planned for." + He acknowledged that dealers + might say the marks "could + +On line 4073: + ever planned for." He + acknowledged that dealers might + say the marks "could be + +On line 4073: + for." He acknowledged + that dealers might say the marks + "could be anything from + +On line 4073: + He acknowledged that + dealers might say the marks "could + be anything from to + +On line 4073: + that dealers might say + the marks "could be anything from + to sort of, you know, + +On line 4073: + might say the marks "could + be anything from to sort of, + you know, because of + +On line 4073: + say the marks "could be + anything from to sort of, you + know, because of the + +On line 4073: + be anything from to + sort of, you know, because of + the lack of trading + +On line 4073: + anything from to sort + of, you know, because of the + lack of trading but + +On line 4073: + of, you know, because + of the lack of trading but + said Goldman’s marks were + +On line 4075: + because of the lack + of trading but said Goldman’s + marks were "ridiculous."81 In + +On line 4075: + lack of trading but + said Goldman’s marks were "ridiculous."81 + In testimony + +On line 4075: + of trading but said + Goldman’s marks were "ridiculous."81 In + testimony to + +On line 4075: + said Goldman’s marks were + "ridiculous."81 In testimony + to the FCIC, Viniar said + +On line 4075: + marks were "ridiculous."81 In + testimony to the FCIC, + Viniar said Goldman had + +On line 4075: + In testimony + to the FCIC, Viniar said Goldman + had stood ready to sell + +On line 4075: + FCIC, Viniar said Goldman + had stood ready to sell mortgage-backed + securities to + +On line 4075: + had stood ready to sell + mortgage-backed securities to + AIG at Goldman’s own + +On line 4075: + ready to sell mortgage-backed + securities to AIG at + Goldman’s own marks.82 AIG’s + +On line 4075: + securities to + AIG at Goldman’s own marks.82 AIG’s + Forster stated that he + +On line 4075: + to AIG at Goldman’s + own marks.82 AIG’s Forster stated that + he would not buy the + +On line 4075: + AIG at Goldman’s own + marks.82 AIG’s Forster stated that he + would not buy the bonds + +On line 4075: + at Goldman’s own marks.82 + AIG’s Forster stated that he would + not buy the bonds at + +On line 4075: + Goldman’s own marks.82 AIG’s + Forster stated that he would not + buy the bonds at even + +On line 4075: + marks.82 AIG’s Forster stated + that he would not buy the bonds + at even cents on the + +On line 4075: + Forster stated that he + would not buy the bonds at even + cents on the dollar, + +On line 4075: + would not buy the bonds + at even cents on the dollar, + because values might + +On line 4075: + to value its own + portfolio of similar + assets at the same + +On line 4075: + its own portfolio + of similar assets at + the same price. Forster said, + +On line 4075: + own portfolio of + similar assets at the + same price. Forster said, "In + +On line 4075: + assets at the same + price. Forster said, "In the current + environment I + +On line 4075: + same price. Forster said, "In + the current environment + I still wouldn’t buy + +On line 4075: + price. Forster said, "In the + current environment I + still wouldn’t buy them + +On line 4075: + environment I + still wouldn’t buy them because + they could probably + +On line 4075: + still wouldn’t buy them + because they could probably + go low we can’t mark + +On line 4075: + buy them because they + could probably go low we + can’t mark any of our + +On line 4075: + they could probably + go low we can’t mark any of + our positions, and + +On line 4075: + go low we can’t mark + any of our positions, and + obviously that’s + +On line 4075: + of our positions, + and obviously that’s what + saves us having this + +On line 4075: + what saves us having + this enormous mark to market. + If we start buying + +On line 4075: + saves us having this + enormous mark to market. If + we start buying the + +On line 4075: + this enormous mark to + market. If we start buying + the physical bonds + +On line 4075: + If we start buying + the physical bonds back then + any accountant is + +On line 4075: + the physical bonds + back then any accountant is + going to turn around + +On line 4075: + then any accountant + is going to turn around and + say, well, John, you know + +On line 4075: + any accountant is + going to turn around and say, + well, John, you know you + +On line 4075: + is going to turn + around and say, well, John, you know + you traded at you + +On line 4075: + going to turn around + and say, well, John, you know you + traded at you must + +On line 4075: + to turn around and say, + well, John, you know you traded + at you must be able + +On line 4075: + turn around and say, well, + John, you know you traded at + you must be able to + +On line 4075: + around and say, well, John, + you know you traded at you + must be able to mark + +On line 4075: + and say, well, John, you + know you traded at you must + be able to mark your + +On line 4075: + say, well, John, you know + you traded at you must be + able to mark your bonds + +On line 4075: + well, John, you know you + traded at you must be able + to mark your bonds then."83 + +On line 4077: + you know you traded + at you must be able to mark + your bonds then."83 Tough, lengthy + +On line 4077: + at you must be able + to mark your bonds then."83 Tough, lengthy + negotiations + +On line 4077: + to mark your bonds then."83 + Tough, lengthy negotiations + followed. Goldman "was + +On line 4077: + "was not budging" on + its collateral demands, + according to Tom + +On line 4077: + its collateral + demands, according to Tom + Athan, a managing + +On line 4077: + demands, according + to Tom Athan, a managing + director at AIG + +On line 4077: + a conference call + with Goldman executives + on August "I played + +On line 4077: + had, legal wording, + market practice, intent of + the language, meaning + +On line 4077: + practice, intent of + the language, meaning of the + [contract], and also + +On line 4077: + the language, meaning + of the [contract], and also + stressed the potential + +On line 4077: + and also stressed the + potential damage to the + relationship and + +On line 4077: + potential damage + to the relationship and + GS said that this has + +On line 4077: + relationship and + GS said that this has gone to + the ‘highest levels’ + +On line 4077: + GS said that this has + gone to the ‘highest levels’ + at GS and they feel + +On line 4077: + said that this has gone + to the ‘highest levels’ at + GS and they feel that + +On line 4077: + that this has gone to + the ‘highest levels’ at GS + and they feel that this + +On line 4077: + this has gone to the + ‘highest levels’ at GS and + they feel that this is + +On line 4079: + gone to the ‘highest + levels’ at GS and they feel + that this is a ‘test + +On line 4081: + ‘highest levels’ at + GS and they feel that this is + a ‘test case.’"84 Goldman + +On line 4081: + levels’ at GS and + they feel that this is a ‘test + case.’"84 Goldman Sachs and + +On line 4081: + they feel that this is + a ‘test case.’"84 Goldman Sachs and + AIG would continue + +On line 4081: + feel that this is a + ‘test case.’"84 Goldman Sachs and AIG + would continue to + +On line 4081: + ‘test case.’"84 Goldman Sachs + and AIG would continue to + argue about Goldman’s + +On line 4081: + Goldman Sachs and AIG + would continue to argue + about Goldman’s marks, even + +On line 4081: + about Goldman’s marks, even + as AIG would continue to + post collateral + +On line 4081: + Goldman’s marks, even as + AIG would continue to post + collateral that + +On line 4081: + would continue to + post collateral that would + fall short of Goldman’s + +On line 4081: + post collateral + that would fall short of Goldman’s + demands and Goldman + +On line 4081: + that would fall short of + Goldman’s demands and Goldman + would continue to + +On line 4081: + Goldman’s demands and + Goldman would continue to + purchase CDS contracts + +On line 4081: + demands and Goldman + would continue to purchase + CDS contracts against the + +On line 4081: + would continue to + purchase CDS contracts against the + possibility + +On line 4081: + purchase CDS contracts + against the possibility + of AIG’s default. Over + +On line 4081: + CDS contracts against the + possibility of AIG’s + default. Over the next + +On line 4081: + possibility + of AIG’s default. Over the next + months, more such disputes + +On line 4081: + of AIG’s default. Over + the next months, more such disputes + would cost AIG tens of + +On line 4081: + default. Over the next + months, more such disputes would cost + AIG tens of billions + +On line 4081: + the next months, more such + disputes would cost AIG tens of + billions of dollars + +On line 4081: + months, more such disputes + would cost AIG tens of billions + of dollars and help + +On line 4081: + more such disputes would + cost AIG tens of billions of + dollars and help lead + +On line 4081: + disputes would cost AIG + tens of billions of dollars + and help lead to one + +On line 4081: + would cost AIG tens of + billions of dollars and help + lead to one of the + +On line 4081: + AIG tens of billions + of dollars and help lead to + one of the biggest + +On line 4081: + billions of dollars + and help lead to one of the + biggest government + +On line 4081: + of dollars and help + lead to one of the biggest + government bailouts in + +On line 4081: + and help lead to one + of the biggest government + bailouts in American + +On line 4085: + history. EARLY + The Commission concludes that + entities such as + +On line 4085: + Commission concludes + that entities such as Bear + Stearns’s hedge funds and AIG + +On line 4085: + that entities such + as Bear Stearns’s hedge funds and AIG + Financial Products + +On line 4085: + Bear Stearns’s hedge funds and + AIG Financial Products that + had significant + +On line 4085: + parent companies. + The commercial paper and + repo markets—two + +On line 4085: + commercial paper + and repo markets—two key + components of the + +On line 4085: + in collateral + asset values and concern + about financial firms’ + +On line 4085: + asset values and + concern about financial firms’ + subprime exposure. + +On line 4091: + values and concern + about financial firms’ subprime + exposure. SUMMER + +On line 4099: + FUNDING CONTENTS IKB + of Germany: "Real money + investors" Countrywide: + +On line 4101: + of Germany: "Real + money investors" Countrywide: + "That’s our BNP Paribas: "The + +On line 4103: + investors" Countrywide: + "That’s our BNP Paribas: "The ringing + of the bell"...............................................................250 SIVs: "An + +On line 4103: + Countrywide: "That’s our + BNP Paribas: "The ringing of the + bell"...............................................................250 SIVs: "An oasis + +On line 4105: + BNP Paribas: "The ringing + of the bell"...............................................................250 SIVs: "An oasis + of calm"......................................................................................252 Money funds + +On line 4105: + Paribas: "The ringing of + the bell"...............................................................250 SIVs: "An oasis of + calm"......................................................................................252 Money funds and + +On line 4105: + of the bell"...............................................................250 SIVs: "An + oasis of calm"......................................................................................252 Money funds + and other investors: + +On line 4105: + SIVs: "An oasis of + calm"......................................................................................252 Money funds and other + investors: "Drink[ing] from + +On line 4107: + of calm"......................................................................................252 Money funds + and other investors: "Drink[ing] + from a fire hose.........................253 In + +On line 4107: + calm"......................................................................................252 Money funds and + other investors: "Drink[ing] from + a fire hose.........................253 In the + +On line 4107: + and other investors: + "Drink[ing] from a fire hose.........................253 In + the summer of as + +On line 4107: + investors: "Drink[ing] from + a fire hose.........................253 In the summer + of as the prices of + +On line 4107: + a fire hose.........................253 In the + summer of as the prices of + some highly rated + +On line 4107: + of as the prices of + some highly rated mortgage + securities crashed + +On line 4107: + securities crashed + and Bear’s hedge funds imploded, + broader repercussions + +On line 4107: + hedge funds imploded, + broader repercussions from the + declining housing + +On line 4107: + broader repercussions + from the declining housing + market were still not + +On line 4107: + repercussions from the + declining housing market + were still not clear. "I + +On line 4107: + from the declining + housing market were still not + clear. "I don’t think [the + +On line 4107: + declining housing + market were still not clear. "I + don’t think [the subprime + +On line 4107: + housing market were + still not clear. "I don’t think [the + subprime mess] poses + +On line 4107: + market were still not + clear. "I don’t think [the subprime + mess] poses any threat + +On line 4107: + not clear. "I don’t think + [the subprime mess] poses any + threat to the overall + +On line 4107: + don’t think [the subprime + mess] poses any threat to the + overall economy," + +On line 4107: + mess] poses any threat + to the overall economy," + Treasury Secretary + +On line 4107: + overall economy," + Treasury Secretary Henry + Paulson told Bloomberg on + +On line 4107: + economy," Treasury + Secretary Henry Paulson + told Bloomberg on July + +On line 4107: + were looking under + every rock for any sign of + hidden or latent + +On line 4107: + every rock for any + sign of hidden or latent + subprime exposure. + +On line 4107: + rock for any sign of + hidden or latent subprime + exposure. In late + +On line 4107: + sign of hidden or + latent subprime exposure. + In late July, they + +On line 4107: + hidden or latent + subprime exposure. In late + July, they found it + +On line 4107: + or latent subprime + exposure. In late July, + they found it in the + +On line 4107: + subprime exposure. + In late July, they found it + in the market for + +On line 4107: + exposure. In late + July, they found it in the + market for asset-backed + +On line 4107: + In late July, they + found it in the market for + asset-backed commercial + +On line 4107: + July, they found it + in the market for asset-backed + commercial paper + +On line 4107: + market for asset-backed + commercial paper (ABCP), a + crucial, usually + +On line 4107: + commercial paper + (ABCP), a crucial, usually + boring backwater + +On line 4107: + crucial, usually + boring backwater of the + financial sector. + +On line 4109: + financing allowed + companies to raise money + by borrowing against + +On line 4109: + short-term assets. By + mid-2007, hundreds of billions out + of the trillion U.S. + +On line 4109: + By mid-2007, hundreds of + billions out of the trillion + U.S. ABCP market were + +On line 4109: + hundreds of billions + out of the trillion U.S. ABCP + market were backed by + +On line 4109: + ABCP market were backed + by mortgage-related assets, + including some with + +On line 4109: + by mortgage-related + assets, including some with + subprime exposure.2 + +On line 4111: + noted, the rating + agencies had given all of + these ABCP programs their + +On line 4111: + ABCP programs their top + investment-grade ratings, + often because of + +On line 4111: + investment-grade + ratings, often because of + liquidity puts + +On line 4113: + commercial banks. When + the mortgage securities + market dried up and + +On line 4113: + market dried up and + money market mutual + funds became skittish + +On line 4113: + market mutual + funds became skittish about broad + categories of ABCP, + +On line 4113: + became skittish about + broad categories of ABCP, the + banks would be required + +On line 4113: + banks would be required + under these liquidity + puts to stand behind + +On line 4113: + required under these + liquidity puts to stand + behind the paper + +On line 4113: + liquidity puts + to stand behind the paper + and bring the assets + +On line 4113: + to stand behind the + paper and bring the assets + onto their balance + +On line 4113: + the assets onto + their balance sheets, transferring + losses back into + +On line 4113: + transferring losses + back into the commercial + banking system. In + +On line 4113: + would support programs + they had sponsored even when they + had made no prior + +On line 4113: + they had sponsored even + when they had made no prior + commitment to do + +On line 4115: + when they had made no + prior commitment to do + so. IKB OF GERMANY: + +On line 4115: + had made no prior + commitment to do so. IKB + OF GERMANY: "REAL + +On line 4117: + commitment to do + so. IKB OF GERMANY: "REAL + MONEY INVESTORS" The + +On line 4117: + OF GERMANY: "REAL + MONEY INVESTORS" The first big + casualty of + +On line 4117: + MONEY INVESTORS" The + first big casualty of + the run on asset-backed + +On line 4123: + the run on asset-backed + commercial paper was a + German SUMMER bank, + +On line 4123: + commercial paper + was a German SUMMER bank, + IKB Deutsche Industriebank + +On line 4123: + a German SUMMER + bank, IKB Deutsche Industriebank AG. + Since its foundation + +On line 4123: + German SUMMER bank, + IKB Deutsche Industriebank AG. Since + its foundation in + +On line 4123: + IKB Deutsche Industriebank + AG. Since its foundation in + IKB had focused on + +On line 4123: + Industriebank AG. Since + its foundation in IKB had + focused on lending + +On line 4123: + its foundation in + IKB had focused on lending + to midsize German + +On line 4123: + IKB had focused on + lending to midsize German + businesses, but in + +On line 4123: + but in the past decade, + management diversified. + In IKB created + +On line 4123: + In IKB created + an off-balance-sheet commercial + paper program, called + +On line 4123: + commercial paper + program, called Rhineland, to purchase + a portfolio of + +On line 4123: + securities backed + by credit card receivables, + business loans, auto + +On line 4123: + receivables, business + loans, auto loans, and mortgages. + It made money by + +On line 4123: + loans, and mortgages. It + made money by using less + expensive short-term + +On line 4123: + commercial paper + to purchase higher-yielding long-term + securities, a + +On line 4123: + strategy known as + "securities arbitrage." + By the end of June, + +On line 4123: + as "securities + arbitrage." By the end of + June, Rhineland owned billion + +On line 4123: + arbitrage." By the + end of June, Rhineland owned billion + billion) of assets, + +On line 4123: + By the end of June, + Rhineland owned billion billion) of + assets, of which were + +On line 4123: + end of June, Rhineland owned + billion billion) of assets, + of which were CDOs and + +On line 4123: + of which were CDOs and + CLOs (collateralized loan + obligations—that is, + +On line 4123: + obligations—that is, + securitized leveraged loans). + And at least billion + +On line 4123: + leveraged loans). And at + least billion billion) of that + was protected by + +On line 4123: + billion billion) of + that was protected by IKB + through liquidity + +On line 4125: + that was protected + by IKB through liquidity + puts.3 Importantly, + +On line 4125: + through liquidity + puts.3 Importantly, German + regulators at + +On line 4125: + did not require IKB + to hold any capital to + offset potential + +On line 4127: + hold any capital + to offset potential Rhineland + losses.4 As late as + +On line 4127: + losses.4 As late as + June when so many were bailing + out of the structured + +On line 4127: + As late as June when + so many were bailing out of + the structured products + +On line 4127: + June when so many were + bailing out of the structured + products market, IKB + +On line 4127: + so many were bailing + out of the structured products + market, IKB was still + +On line 4127: + were bailing out of + the structured products market, + IKB was still planning + +On line 4127: + bailing out of the + structured products market, IKB + was still planning to + +On line 4127: + out of the structured + products market, IKB was still + planning to expand + +On line 4127: + planning to expand + its off-balance-sheet holdings and + was willing to take + +On line 4129: + such as synthetic + CDOs.5 This attitude made IKB + a favorite of the + +On line 4129: + CDOs.5 This attitude + made IKB a favorite of the + investment banks and + +On line 4129: + a favorite of the + investment banks and hedge funds + that were desperate + +On line 4129: + investment banks and + hedge funds that were desperate + to take the short side + +On line 4129: + banks and hedge funds that + were desperate to take the + short side of the deal. + +On line 4131: + and hedge funds that were + desperate to take the short + side of the deal. In + +On line 4131: + that were desperate + to take the short side of the + deal. In early when + +On line 4131: + desperate to take + the short side of the deal. In + early when Goldman + +On line 4131: + to take the short side + of the deal. In early when + Goldman was looking + +On line 4131: + short side of the deal. + In early when Goldman was + looking for buyers + +On line 4131: + the deal. In early + when Goldman was looking for + buyers for Abacus + +On line 4131: + Goldman was looking + for buyers for Abacus 2007-AC1, + the synthetic CDO + +On line 4131: + for Abacus 2007-AC1, the + synthetic CDO mentioned in + part III, it looked to + +On line 4131: + in part III, it looked + to IKB. An employee of + Paulson Co., the hedge + +On line 4131: + III, it looked to IKB. + An employee of Paulson + Co., the hedge fund that + +On line 4131: + it looked to IKB. An + employee of Paulson Co., + the hedge fund that was + +On line 4131: + IKB. An employee + of Paulson Co., the hedge fund + that was taking the + +On line 4131: + An employee of + Paulson Co., the hedge fund that + was taking the short + +On line 4131: + of Paulson Co., the + hedge fund that was taking the + short side of the deal, + +On line 4131: + Co., the hedge fund that + was taking the short side of + the deal, bluntly said + +On line 4131: + the hedge fund that was + taking the short side of the + deal, bluntly said that + +On line 4131: + was taking the short + side of the deal, bluntly said + that "real money" + +On line 4131: + the short side of the + deal, bluntly said that "real + money" investors such + +On line 4131: + deal, bluntly said that + "real money" investors such + as IKB were outgunned. + +On line 4131: + scenario," the Paulson + employee wrote in an email. + "In my opinion this + +On line 4131: + employee wrote in + an email. "In my opinion this + situation is + +On line 4131: + in an email. "In my + opinion this situation + is due to the fact + +On line 4131: + "In my opinion this + situation is due to + the fact that rating + +On line 4131: + situation is + due to the fact that rating + agencies, CDO managers + +On line 4131: + due to the fact that + rating agencies, CDO managers + and underwriters + +On line 4131: + agencies, CDO managers + and underwriters have all + the incentives to + +On line 4131: + and underwriters + have all the incentives to + keep the game going, + +On line 4131: + underwriters have + all the incentives to keep + the game going, while + +On line 4131: + incentives to keep + the game going, while ‘real + money’ investors have + +On line 4135: + IKB subsequently + purchased million of the A1 + and A2 tranches of + +On line 4135: + purchased million of + the A1 and A2 tranches of + the Abacus CDO and + +On line 4135: + of the A1 and A2 + tranches of the Abacus CDO + and placed them in Rhineland.7 + +On line 4135: + A1 and A2 tranches + of the Abacus CDO and placed + them in Rhineland.7 It would + +On line 4135: + and A2 tranches of + the Abacus CDO and placed them + in Rhineland.7 It would lose + +On line 4135: + A2 tranches of the + Abacus CDO and placed them in + Rhineland.7 It would lose of + +On line 4135: + the Abacus CDO and + placed them in Rhineland.7 It would lose + of that investment. + +On line 4137: + Abacus CDO and placed + them in Rhineland.7 It would lose of + that investment. In + +On line 4137: + placed them in Rhineland.7 It + would lose of that investment. + In mid-2007, Rhineland’s asset-backed + +On line 4137: + Rhineland.7 It would lose of + that investment. In mid-2007, Rhineland’s + asset-backed commercial + +On line 4137: + that investment. In + mid-2007, Rhineland’s asset-backed commercial + paper was held by + +On line 4137: + In mid-2007, Rhineland’s asset-backed + commercial paper was held + by a number of + +On line 4137: + commercial paper + was held by a number of + American investors, + +On line 4137: + paper was held by + a number of American + investors, including + +On line 4137: + American investors, + including the Montana Board + of Investments, the + +On line 4137: + Investments, the city + of Oakland, California, + and the Robbinsdale + +On line 4137: + the Robbinsdale Area + School District in suburban + Minneapolis. + +On line 4139: + that ratings downgrades + of mortgage-backed securities + would have only a + +On line 4139: + would have only a + limited impact on its + business.8 However, + +On line 4139: + limited impact + on its business.8 However, + within days, Goldman + +On line 4139: + business.8 However, + within days, Goldman Sachs, which + regularly helped + +On line 4139: + within days, Goldman + Sachs, which regularly helped + Rhineland raise money in + +On line 4139: + which regularly + helped Rhineland raise money in the + commercial paper + +On line 4139: + helped Rhineland raise money + in the commercial paper + market, told IKB that + +On line 4139: + raise money in the + commercial paper market, + told IKB that it would + +On line 4139: + in the commercial + paper market, told IKB that + it would not sell any + +On line 4139: + commercial paper + market, told IKB that it would + not sell any more Rhineland + +On line 4139: + paper market, told + IKB that it would not sell any + more Rhineland paper to + +On line 4139: + market, told IKB that + it would not sell any more Rhineland + paper to its clients. + +On line 4141: + IKB that it would not + sell any more Rhineland paper to + its clients. On Friday, + +On line 4141: + it would not sell any + more Rhineland paper to its clients. + On Friday, July + +On line 4141: + would not sell any more + Rhineland paper to its clients. On + Friday, July Deutsche + +On line 4141: + Rhineland paper to its + clients. On Friday, July Deutsche + Bank, recognizing + +On line 4141: + paper to its clients. + On Friday, July Deutsche Bank, + recognizing that + +On line 4141: + On Friday, July + Deutsche Bank, recognizing that + the ABCP markets would + +On line 4141: + Friday, July Deutsche + Bank, recognizing that the + ABCP markets would soon + +On line 4141: + Bank, recognizing + that the ABCP markets would soon + abandon Rhineland and that + +On line 4141: + the ABCP markets would + soon abandon Rhineland and that IKB + would have to provide + +On line 4141: + soon abandon Rhineland and + that IKB would have to provide + substantial support + +On line 4141: + would have to provide + substantial support to the + program, decided + +On line 4141: + substantial support + to the program, decided + that doing business + +On line 4141: + program, decided + that doing business with IKB + was too risky and cut + +On line 4141: + that doing business + with IKB was too risky and cut + off its credit lines. + +On line 4141: + doing business with + IKB was too risky and cut off + its credit lines. These + +On line 4141: + with IKB was too risky + and cut off its credit lines. + These were necessary + +On line 4141: + IKB was too risky and + cut off its credit lines. These + were necessary for + +On line 4141: + was too risky and cut + off its credit lines. These were + necessary for IKB + +On line 4141: + cut off its credit + lines. These were necessary for + IKB to continue + +On line 4141: + its credit lines. These + were necessary for IKB to + continue running + +On line 4141: + were necessary for + IKB to continue running + its business. Deutsche Bank + +On line 4141: + IKB to continue + running its business. Deutsche Bank + also alerted the + +On line 4141: + continue running + its business. Deutsche Bank also + alerted the German + +On line 4141: + its business. Deutsche Bank + also alerted the German + bank regulator + +On line 4141: + also alerted the + German bank regulator + to IKB’s critical + +On line 4141: + alerted the German + bank regulator to IKB’s + critical state. With + +On line 4141: + bank regulator + to IKB’s critical state. With + the regulator’s + +On line 4141: + to IKB’s critical + state. With the regulator’s + encouragement, IKB’s + +On line 4141: + encouragement, IKB’s + largest shareholder, KfW Bankengruppe, + announced on July + +On line 4141: + largest shareholder, KfW + Bankengruppe, announced on July + that it would bail out + +On line 4141: + KfW Bankengruppe, announced + on July that it would bail + out IKB. On August + +On line 4141: + Bankengruppe, announced on + July that it would bail out + IKB. On August Rhineland + +On line 4141: + on July that it + would bail out IKB. On August + Rhineland exercised its + +On line 4141: + it would bail out IKB. + On August Rhineland exercised + its liquidity + +On line 4141: + would bail out IKB. On + August Rhineland exercised its + liquidity puts + +On line 4143: + its liquidity + puts with KB. Rhineland’s commercial + paper investors were + +On line 4143: + commercial paper + investors were able to get rid + of the paper, and + +On line 4143: + were able to get rid + of the paper, and KfW took + the hit instead—with + +On line 4143: + able to get rid of + the paper, and KfW took the + hit instead—with its + +On line 4143: + the paper, and KfW + took the hit instead—with its + losses expected + +On line 4143: + the hit instead—with + its losses expected to + eventually reach + +On line 4145: + losses expected + to eventually reach The + IKB episode served notice + +On line 4145: + to eventually + reach The IKB episode served notice + that exposures to + +On line 4145: + IKB episode served notice + that exposures to toxic + mortgage assets were + +On line 4145: + mortgage assets were + lurk-ing in the portfolios of + even risk-averse investors. + +On line 4145: + the short-term funding + markets—even those that were + not exposed to risky + +On line 4145: + markets—even those + that were not exposed to risky + mortgages. "There was a + +On line 4145: + that were not exposed + to risky mortgages. "There was a + recognition, I’d say + +On line 4145: + to risky mortgages. "There + was a recognition, I’d say + an acute recognition, + +On line 4145: + risky mortgages. "There was + a recognition, I’d say an + acute recognition, that + +On line 4145: + was a recognition, + I’d say an acute recognition, + that potentially + +On line 4145: + a recognition, I’d + say an acute recognition, that + potentially some + +On line 4145: + acute recognition, that + potentially some of the + asset-backed commercial + +On line 4145: + potentially some + of the asset-backed commercial + paper conduits could + +On line 4145: + some of the asset-backed + commercial paper conduits + could have exposure + +On line 4145: + commercial paper + conduits could have exposure + to those areas. As + +On line 4145: + a result, investors + in general—without even + looking into the + +On line 4145: + the underlying + assets—decided ‘I don’t + want to be in any + +On line 4145: + assets—decided + ‘I don’t want to be in any + asset-backed commercial + +On line 4145: + ‘I don’t want to be + in any asset-backed commercial + paper, I don’t want + +On line 4145: + be in any asset-backed + commercial paper, I don’t + want to invest in + +On line 4145: + commercial paper, + I don’t want to invest in + a fund that may have + +On line 4145: + don’t want to invest + in a fund that may have those + positions,’" Steven Meier, + +On line 4145: + invest in a fund + that may have those positions,’" + Steven Meier, global cash + +On line 4145: + those positions,’" Steven + Meier, global cash investment + officer at State + +On line 4147: + at State Street Global + Advisors, testified to + the FCIC.10 From its peak + +On line 4147: + Global Advisors, + testified to the FCIC.10 From + its peak of billion + +On line 4147: + the FCIC.10 From its peak + of billion on August the + asset-backed commercial + +On line 4147: + asset-backed commercial + paper market would decline + by almost billion + +On line 4149: + market would decline + by almost billion by the + end of COUNTRYWIDE: + +On line 4151: + by almost billion + by the end of COUNTRYWIDE: + "THAT’S OUR On August + +On line 4151: + almost billion by + the end of COUNTRYWIDE: "THAT’S + OUR On August three + +On line 4151: + three days after the + IKB rescue, Countrywide CEO + Angelo Mozilo + +On line 4151: + realized that his + company was unable to + roll its commercial + +On line 4151: + roll its commercial + paper or borrow on the + repo market. "When + +On line 4151: + commercial paper + or borrow on the repo + market. "When we talk + +On line 4151: + paper or borrow + on the repo market. "When + we talk about [August + +On line 4151: + the repo market. + "When we talk about [August at + Countrywide, that’s our + +On line 4151: + market. "When we talk + about [August at Countrywide, + that’s our he said. "We + +On line 4151: + we talk about [August + at Countrywide, that’s our he + said. "We worked seven + +On line 4151: + talk about [August at + Countrywide, that’s our he said. + "We worked seven days + +On line 4151: + at Countrywide, that’s + our he said. "We worked seven + days a week trying + +On line 4151: + Countrywide, that’s our + he said. "We worked seven days + a week trying to + +On line 4151: + our he said. "We worked + seven days a week trying + to figure this thing + +On line 4151: + worked seven days a + week trying to figure this + thing out and trying + +On line 4151: + seven days a week + trying to figure this thing + out and trying to + +On line 4151: + days a week trying + to figure this thing out and + trying to work with + +On line 4151: + trying to figure + this thing out and trying to + work with the banks. Our + +On line 4151: + figure this thing out + and trying to work with the + banks. Our repurchase + +On line 4151: + and trying to work + with the banks. Our repurchase + lines were coming due + +On line 4151: + Our repurchase lines + were coming due billions and + billions of dollars."11 + +On line 4153: + billions and billions + of dollars."11 Mozilo emailed Lyle + Gramley, a former + +On line 4153: + of dollars."11 Mozilo + emailed Lyle Gramley, a former + Fed governor and + +On line 4153: + dollars."11 Mozilo emailed + Lyle Gramley, a former Fed + governor and a + +On line 4153: + credit markets is + now tending towards panic. + There is little to + +On line 4153: + now tending towards + panic. There is little to + no liquidity + +On line 4153: + There is little to + no liquidity in the + mortgage market with + +On line 4153: + no liquidity + in the mortgage market with + the exception of + +On line 4155: + with the exception + of Fannie and Freddie. Any + mortgage product that + +On line 4155: + is not deemed to be + conforming either cannot + be sold into the + +On line 4155: + conforming either + cannot be sold into the + secondary markets or + +On line 4157: + into the secondary + markets or are subject to + egregious discounts."12 On + +On line 4157: + the secondary markets + or are subject to egregious + discounts."12 On August + +On line 4157: + Eric Sieracki + told investors that Countrywide + had "significant + +On line 4157: + sources of our bank. It + is important to note that + the company has + +On line 4157: + It is important + to note that the company + has experienced + +On line 4157: + is important to + note that the company has + experienced no + +On line 4157: + commercial paper."13 + Moody’s reaffirmed its A3 ratings + and stable outlook + +On line 4157: + Moody’s reaffirmed its A3 + ratings and stable outlook + on the company. + +On line 4159: + ratings and stable + outlook on the company. + The ratings agencies + +On line 4159: + on the company. + The ratings agencies and the + company itself + +On line 4159: + The ratings agencies + and the company itself + would quickly reverse + +On line 4159: + ratings agencies and + the company itself would + quickly reverse their + +On line 4161: + and the company + itself would quickly reverse + their positions. On + +On line 4161: + would quickly reverse + their positions. On August + Mozilo reported + +On line 4161: + their positions. On + August Mozilo reported + to the board during + +On line 4161: + reported to the + board during a specially + convened meeting that, + +On line 4161: + the board during a + specially convened meeting + that, as the meeting + +On line 4161: + specially convened + meeting that, as the meeting + minutes recorded, "the + +On line 4161: + meeting that, as the + meeting minutes recorded, "the + secondary market for + +On line 4161: + the meeting minutes + recorded, "the secondary market + for virtually + +On line 4161: + (both prime and non-prime) had + unexpectedly and with + almost no warning + +On line 4161: + almost no warning + seized up and the Company + was unable to sell + +On line 4161: + and COO David Sambol + told the board, "Management can + only plan on a + +On line 4161: + David Sambol told the + board, "Management can only + plan on a week by + +On line 4161: + Sambol told the board, + "Management can only plan + on a week by week + +On line 4161: + the board, "Management + can only plan on a week + by week basis due + +On line 4161: + board, "Management can + only plan on a week by + week basis due to + +On line 4161: + can only plan on + a week by week basis due + to the tenuous + +On line 4161: + week basis due to + the tenuous nature of + the situation." + +On line 4161: + Mozilo reported + that although he continued + to negotiate + +On line 4161: + he continued to + negotiate with banks for + alternative sources + +On line 4161: + negotiate with + banks for alternative sources + of liquidity, + +On line 4161: + for alternative + sources of liquidity, the + "unprecedented and + +On line 4161: + secondary market could + force the company to draw + down on its backup + +On line 4161: + market could force the + company to draw down on + its backup credit + +On line 4163: + force the company + to draw down on its backup + credit lines.14 Shortly + +On line 4163: + company to draw + down on its backup credit + lines.14 Shortly after + +On line 4163: + down on its backup + credit lines.14 Shortly after + the Countrywide board + +On line 4163: + lines.14 Shortly after + the Countrywide board meeting, + the Fed’s Federal + +On line 4163: + Shortly after the + Countrywide board meeting, the + Fed’s Federal Open + +On line 4163: + the Countrywide board + meeting, the Fed’s Federal + Open Market SUMMER + +On line 4163: + Fed’s Federal Open + Market SUMMER Committee + members discussed the + +On line 4163: + Open Market SUMMER + Committee members discussed + the "considerable + +On line 4163: + members discussed the + "considerable financial + turbulence" in the + +On line 4163: + the "considerable + financial turbulence" in + the subprime mortgage + +On line 4163: + market and that some + firms, including Countrywide, + were showing some strain. + +On line 4163: + some firms, including + Countrywide, were showing some + strain. They noted that + +On line 4163: + were showing some strain. + They noted that the data + did not indicate + +On line 4163: + showing some strain. They + noted that the data did + not indicate a + +On line 4163: + They noted that the + data did not indicate + a collapse of the + +On line 4163: + the data did not + indicate a collapse of + the housing market + +On line 4163: + the housing market + was imminent and that, if + the more optimistic + +On line 4163: + was imminent and + that, if the more optimistic + scenarios proved to + +On line 4163: + and that, if the more + optimistic scenarios proved + to be accurate, + +On line 4163: + scenarios proved to + be accurate, they might look + back and be surprised + +On line 4163: + be accurate, they + might look back and be surprised + that the financial + +On line 4163: + accurate, they might + look back and be surprised that + the financial events + +On line 4163: + might look back and be + surprised that the financial + events did not have a + +On line 4163: + and be surprised that + the financial events did not + have a stronger impact + +On line 4163: + be surprised that the + financial events did not have + a stronger impact on + +On line 4163: + events did not have a + stronger impact on the real + economy. But the + +On line 4163: + have a stronger impact + on the real economy. + But the FOMC members + +On line 4163: + stronger impact on the + real economy. But the + FOMC members also + +On line 4163: + real economy. + But the FOMC members also + expressed concern that + +On line 4163: + effects of subprime + developments could spread to + other sectors and + +On line 4163: + developments could + spread to other sectors and + noted that they had + +On line 4163: + and duration of + the deterioration + of these markets. One + +On line 4163: + One participant, + in a paraphrase of a quote + he attributed to + +On line 4163: + in a paraphrase of + a quote he attributed to + Winston Churchill, said that + +On line 4163: + paraphrase of a quote + he attributed to Winston + Churchill, said that no amount + +On line 4163: + quote he attributed + to Winston Churchill, said that no + amount of rewriting of + +On line 4163: + Churchill, said that no amount + of rewriting of history + would exonerate + +On line 4163: + said that no amount of + rewriting of history would + exonerate those + +On line 4163: + of history would + exonerate those present if + they did not prepare + +On line 4163: + those present if they did + not prepare for the more dire + scenarios discussed + +On line 4163: + they did not prepare + for the more dire scenarios + discussed in the staff + +On line 4165: + staff presentations.15 + Several days later, on + August Countrywide + +On line 4165: + Countrywide released + its July operational + results, reporting + +On line 4165: + that foreclosures and + delinquencies were up and that + loan production had + +On line 4165: + delinquencies were up + and that loan production had + fallen by during + +On line 4165: + that loan production + had fallen by during the + preceding month. A + +On line 4165: + preceding month. A + company spokesman said layoffs + would be considered. + +On line 4165: + company spokesman said + layoffs would be considered. + On the same day, Fed + +On line 4165: + spokesman said layoffs would + be considered. On the same + day, Fed staff, who had + +On line 4165: + same day, Fed staff, who + had supervised Countrywide’s + holding company + +On line 4165: + holding company + until the bank switched to a + thrift charter in March + +On line 4167: + the bank switched to a + thrift charter in March sent a + confidential memo + +On line 4167: + a thrift charter in + March sent a confidential + memo to the Fed’s Board + +On line 4167: + thrift charter in March + sent a confidential memo + to the Fed’s Board of + +On line 4169: + The company is + heavily reliant on an + originate-to-distribute + +On line 4169: + heavily reliant + on an originate-to-distribute + model, and, given + +On line 4169: + originate-to-distribute + model, and, given current + market conditions, + +On line 4169: + model, and, given + current market conditions, + the firm is unable + +On line 4169: + its non-conforming + mortgages. Countrywide’s short-term + funding strategy + +On line 4169: + mortgages. Countrywide’s + short-term funding strategy + relied heavily + +On line 4169: + relied heavily + on commercial paper (CP) + and, especially, + +On line 4169: + market conditions, + the viability of + that strategy is + +On line 4169: + that strategy is + questionable. The ability + of the company + +On line 4171: + ability of the + company to use [mortgage] + securities as + +On line 4171: + the company to + use [mortgage] securities + as collateral + +On line 4171: + company to use + [mortgage] securities as + collateral in + +On line 4171: + Those liquidity + pressures conceivably could lead + eventually to + +On line 4173: + eventually to + possible insolvency.16 + Countrywide asked its + +On line 4173: + provide assistance, + perhaps by waiving a Fed + rule and allowing + +On line 4173: + rule and allowing + Countrywide’s thrift subsidiary to + support its holding + +On line 4173: + subsidiary to support + its holding company by + raising money from + +On line 4173: + money from insured + depositors, or perhaps + through discount-window + +On line 4173: + through discount-window + lending, which would require the + Fed to accept risky + +On line 4173: + which would require the + Fed to accept risky mortgage-backed + securities as + +On line 4173: + the Fed to accept + risky mortgage-backed securities + as collateral, + +On line 4173: + securities as + collateral, something it + never had done and + +On line 4173: + as collateral, + something it never had done + and would not do—until + +On line 4173: + something it never + had done and would not do—until + the following spring. + +On line 4173: + and would not do—until + the following spring. The Fed + did not intervene: + +On line 4173: + before the Board could + authorize lending to the + holding company + +On line 4173: + authorize lending + to the holding company + or mortgage subsidiary," + +On line 4173: + mortgage subsidiary," staff + wrote. "The Federal Reserve + had not lent to a + +On line 4173: + subsidiary," staff wrote. "The + Federal Reserve had not + lent to a nonbank + +On line 4173: + wrote. "The Federal + Reserve had not lent to a + nonbank in many decades; + +On line 4173: + Federal Reserve + had not lent to a nonbank + in many decades; and such + +On line 4173: + Reserve had not lent + to a nonbank in many decades; + and such lending in + +On line 4173: + a nonbank in many + decades; and such lending in the + current circumstances + +On line 4175: + current circumstances + seemed highly improbable."17 + The following day, + +On line 4175: + recommended to + his board that the company + notify lenders of + +On line 4175: + to his board that the + company notify lenders + of its intention + +On line 4175: + notify lenders of + its intention to draw down + billion on backup + +On line 4175: + intention to draw + down billion on backup lines + of credit.18 Mozilo + +On line 4175: + to draw down billion + on backup lines of credit.18 + Mozilo and his team + +On line 4175: + billion on backup + lines of credit.18 Mozilo and + his team knew that the + +On line 4175: + and his team knew that + the decision could lead to + ratings owngrades. "The + +On line 4175: + that the decision + could lead to ratings owngrades. + "The only option + +On line 4175: + the decision could + lead to ratings owngrades. "The + only option we + +On line 4175: + could lead to ratings + owngrades. "The only option + we had was to pull + +On line 4175: + to ratings owngrades. + "The only option we had + was to pull down those + +On line 4175: + ratings owngrades. "The + only option we had was + to pull down those lines," + +On line 4175: + owngrades. "The only + option we had was to pull + down those lines," he told + +On line 4175: + "The only option + we had was to pull down those + lines," he told the FCIC. + +On line 4175: + only option we + had was to pull down those lines," + he told the FCIC. "We + +On line 4175: + option we had was + to pull down those lines," he told + the FCIC. "We had a + +On line 4175: + we had was to pull + down those lines," he told the FCIC. + "We had a pipeline + +On line 4175: + had was to pull down + those lines," he told the FCIC. "We + had a pipeline of + +On line 4175: + was to pull down those + lines," he told the FCIC. "We had + a pipeline of loans + +On line 4175: + to pull down those lines," + he told the FCIC. "We had a + pipeline of loans and + +On line 4175: + those lines," he told the + FCIC. "We had a pipeline of + loans and we either + +On line 4175: + lines," he told the FCIC. + "We had a pipeline of loans + and we either had + +On line 4175: + he told the FCIC. "We + had a pipeline of loans and + we either had to + +On line 4175: + told the FCIC. "We had + a pipeline of loans and we + either had to say + +On line 4175: + a pipeline of loans + and we either had to say + to the borrowers, + +On line 4175: + pipeline of loans and + we either had to say to + the borrowers, the + +On line 4175: + and we either had + to say to the borrowers, + the customers, ‘we’re out + +On line 4175: + we either had to + say to the borrowers, the + customers, ‘we’re out of + +On line 4175: + had to say to the + borrowers, the customers, ‘we’re + out of business, we’re + +On line 4175: + the borrowers, the + customers, ‘we’re out of business, + we’re not going to + +On line 4175: + the customers, ‘we’re out + of business, we’re not going + to fund’—and there’s great + +On line 4175: + customers, ‘we’re out of + business, we’re not going to + fund’—and there’s great risk + +On line 4175: + ‘we’re out of business, + we’re not going to fund’—and + there’s great risk to that, + +On line 4175: + we’re not going to + fund’—and there’s great risk to that, + litigation risk, + +On line 4175: + fund’—and there’s great risk + to that, litigation risk, + we had committed + +On line 4175: + there’s great risk to that, + litigation risk, we had + committed to fund. + +On line 4175: + that, litigation + risk, we had committed to + fund. When it’s between + +On line 4175: + litigation risk, + we had committed to fund. + When it’s between your + +On line 4175: + we had committed + to fund. When it’s between your + ass and your image, + +On line 4175: + had committed to + fund. When it’s between your ass + and your image, you + +On line 4175: + committed to fund. + When it’s between your ass and + your image, you hold + +On line 4175: + fund. When it’s between + your ass and your image, you + hold on to your ass."19 + +On line 4177: + When it’s between your + ass and your image, you hold + on to your ass."19 On + +On line 4177: + it’s between your ass + and your image, you hold on + to your ass."19 On the + +On line 4177: + between your ass and + your image, you hold on to + your ass."19 On the same + +On line 4177: + your image, you hold + on to your ass."19 On the same + day that Countrywide’s + +On line 4177: + image, you hold on + to your ass."19 On the same day + that Countrywide’s board + +On line 4177: + to your ass."19 On the + same day that Countrywide’s board + approved the billion + +On line 4177: + On the same day that + Countrywide’s board approved the + billion drawdown—but + +On line 4177: + drawdown—but before + the company announced it + publicly, the Merrill + +On line 4177: + company announced + it publicly, the Merrill Lynch + analyst Kenneth + +On line 4177: + announced it publicly, + the Merrill Lynch analyst + Kenneth Bruce, who had + +On line 4177: + publicly, the Merrill + Lynch analyst Kenneth Bruce, + who had reissued his + +On line 4177: + Kenneth Bruce, who had + reissued his "buy" rating on + the company’s stock + +On line 4177: + his "buy" rating on + the company’s stock two days + earlier, switched to + +On line 4177: + company’s stock two + days earlier, switched to "sell" + with a "negative" + +On line 4177: + days earlier, switched + to "sell" with a "negative" + outlook because of + +On line 4177: + outlook because of + Countrywide’s funding pressures, + adding, "if the market + +On line 4177: + Countrywide’s funding + pressures, adding, "if the market + loses confidence + +On line 4177: + pressures, adding, "if the + market loses confidence + in its ability + +On line 4177: + in its ability + to function properly, then + the model can break. + +On line 4177: + its ability to + function properly, then the + model can break. If + +On line 4177: + the model can break. + If liquidations occur + in a weak market, + +On line 4177: + model can break. If + liquidations occur in + a weak market, then + +On line 4177: + in a weak market, + then it is possible for + [Countrywide] to go + +On line 4179: + market, then it is + possible for [Countrywide] + to go bankrupt."20 The + +On line 4179: + is possible for + [Countrywide] to go bankrupt."20 + The next day, as news + +On line 4179: + for [Countrywide] to + go bankrupt."20 The next day, as + news of Bruce’s call spread, + +On line 4179: + go bankrupt."20 The next + day, as news of Bruce’s call spread, + Countrywide informed + +On line 4179: + The next day, as news + of Bruce’s call spread, Countrywide + informed markets about + +On line 4179: + news of Bruce’s call spread, + Countrywide informed markets + about the drawdown. Moody’s + +On line 4179: + senior unsecured + debt rating to the lowest + tier of investment + +On line 4179: + debt rating to the + lowest tier of investment + grade. Countrywide shares + +On line 4179: + the lowest tier of + investment grade. Countrywide + shares fell closing at + +On line 4179: + of investment grade. + Countrywide shares fell closing + at for the year, the + +On line 4179: + grade. Countrywide shares + fell closing at for the year, + the company’s stock + +On line 4179: + Countrywide shares fell + closing at for the year, the + company’s stock was + +On line 4179: + shares fell closing at + for the year, the company’s + stock was down The bad + +On line 4179: + fell closing at for + the year, the company’s stock + was down The bad news + +On line 4179: + closing at for the + year, the company’s stock was + down The bad news led + +On line 4179: + at for the year, the + company’s stock was down The + bad news led to an + +On line 4179: + year, the company’s + stock was down The bad news led + to an old-fashioned + +On line 4179: + the company’s stock + was down The bad news led to + an old-fashioned bank + +On line 4179: + company’s stock was + down The bad news led to an + old-fashioned bank run. + +On line 4179: + was down The bad news + led to an old-fashioned bank + run. Mozilo singled + +On line 4179: + down The bad news led + to an old-fashioned bank run. + Mozilo singled out + +On line 4179: + Los Angeles Times + article covering Bruce’s + report, which, he said, + +On line 4179: + report, which, he said, + "caused a run on our bank of + billion on Monday." + +On line 4179: + "caused a run on our + bank of billion on Monday." + The article spurred + +On line 4179: + bank of billion on + Monday." The article spurred + customers to withdraw + +On line 4179: + billion on Monday." + The article spurred customers + to withdraw their funds + +On line 4179: + their funds by noting + specific addresses of + Countrywide branches + +On line 4179: + noting specific + addresses of Countrywide + branches in southern + +On line 4179: + Countrywide branches + in southern California, + Mozilo told the FCIC. + +On line 4179: + branches in southern + California, Mozilo told + the FCIC. A reporter + +On line 4179: + Mozilo told the FCIC. + A reporter "came out with a + photographer and, + +On line 4179: + A reporter "came out + with a photographer and, + you know, interviewed + +On line 4179: + reporter "came out with + a photographer and, you + know, interviewed the + +On line 4179: + a photographer + and, you know, interviewed the + people in line, and + +On line 4181: + you know, interviewed + the people in line, and he + created— it was + +On line 4181: + was just horrible. + Horrible for the people, + horrible for us. + +On line 4183: + horrible for us. + Totally unnecessary," + Mozilo said.21 Six days + +On line 4183: + for us. Totally + unnecessary," Mozilo said.21 + Six days later, on + +On line 4183: + Mozilo said.21 Six days + later, on August, Bank of + America announced + +On line 4183: + on August, Bank of + America announced it would + invest billion for + +On line 4183: + invest billion for + a stake in Countrywide. Both + companies denied + +On line 4183: + nation’s biggest bank + would soon acquire the mortgage + lender. Mozilo told the + +On line 4183: + would soon acquire the + mortgage lender. Mozilo told the + press, "There was never + +On line 4183: + mortgage lender. Mozilo + told the press, "There was never + a question about our + +On line 4183: + Mozilo told the press, + "There was never a question + about our survival"; he + +On line 4183: + told the press, "There was + never a question about our + survival"; he said the + +On line 4183: + "There was never a + question about our survival"; he + said the investment + +On line 4185: + net loss of billion, + its first quarterly loss in + years. As charge-offs on its + +On line 4185: + of billion, its first + quarterly loss in years. As + charge-offs on its mortgage + +On line 4185: + its first quarterly + loss in years. As charge-offs on its + mortgage portfolio + +On line 4185: + loss in years. As charge-offs + on its mortgage portfolio + grew, Countrywide raised + +On line 4185: + charge-offs on its mortgage + portfolio grew, Countrywide + raised provisions for + +On line 4185: + raised provisions for + loan losses to million from + only million one + +On line 4185: + for loan losses to + million from only million + one year earlier. + +On line 4185: + million from only + million one year earlier. + On January Bank + +On line 4185: + January Bank of + America issued a press + release announcing + +On line 4185: + America issued + a press release announcing + a "definitive + +On line 4185: + approximately + billion. It said the combined + entity would stop + +On line 4187: + would expand programs + to help distressed borrowers. + BNP PARIBAS: "THE RINGING + +On line 4187: + expand programs to + help distressed borrowers. BNP + PARIBAS: "THE RINGING OF + +On line 4189: + distressed borrowers. + BNP PARIBAS: "THE RINGING OF THE + BELL" Meanwhile, problems + +On line 4189: + BNP PARIBAS: "THE RINGING + OF THE BELL" Meanwhile, problems + in U.S. financial + +On line 4189: + "THE RINGING OF THE + BELL" Meanwhile, problems in U.S. + financial markets + +On line 4189: + OF THE BELL" Meanwhile, + problems in U.S. financial + markets hit the largest + +On line 4189: + BELL" Meanwhile, problems + in U.S. financial markets + hit the largest French bank. + +On line 4189: + Meanwhile, problems in + U.S. financial markets hit + the largest French bank. On + +On line 4189: + in U.S. financial + markets hit the largest French bank. + On August BNP Paribas + +On line 4189: + On August BNP Paribas + SA suspended redemptions + from three investment + +On line 4189: + August BNP Paribas SA + suspended redemptions from + three investment funds + +On line 4189: + redemptions from three + investment funds that had plunged + in less than two weeks. + +On line 4189: + three investment funds + that had plunged in less than two + weeks. Total assets + +On line 4189: + investment funds that + had plunged in less than two weeks. + Total assets in + +On line 4189: + had plunged in less than + two weeks. Total assets in + those funds were billion, + +On line 4189: + plunged in less than two + weeks. Total assets in those + funds were billion, with + +On line 4189: + in less than two weeks. + Total assets in those funds + were billion, with a + +On line 4189: + weeks. Total assets + in those funds were billion, with + a third of that amount + +On line 4189: + Total assets in + those funds were billion, with a + third of that amount in + +On line 4189: + assets in those funds + were billion, with a third of + that amount in subprime + +On line 4189: + that amount in subprime + securities rated AA + or higher.23 The bank + +On line 4189: + AA or higher.23 The + bank said it would also stop + calculating a + +On line 4189: + said it would also + stop calculating a fair + market value for + +On line 4189: + stop calculating + a fair market value for + the funds because "the + +On line 4189: + market value for + the funds because "the complete + evaporation of + +On line 4189: + for the funds because + "the complete evaporation + of liquidity + +On line 4189: + the funds because "the + complete evaporation of + liquidity in + +On line 4189: + evaporation of + liquidity in certain + market segments of + +On line 4189: + it impossible + to value certain assets + fairly regardless + +On line 4189: + to value certain + assets fairly regardless + of their quality + +On line 4191: + "was the ringing of + the bell" for short-term funding + markets, Paul McCulley, a + +On line 4191: + markets, Paul McCulley, a + managing director at + PIMCO, told the FCIC. + +On line 4193: + McCulley, a managing + director at PIMCO, told + the FCIC. "The buyers + +On line 4193: + the FCIC. "The buyers + went on a buyer strike and + simply weren’t rolling."25 + +On line 4193: + "The buyers went on + a buyer strike and simply + weren’t rolling."25 That is, + +On line 4193: + went on a buyer + strike and simply weren’t rolling."25 + That is, they stopped rolling + +On line 4193: + on a buyer strike + and simply weren’t rolling."25 That + is, they stopped rolling over + +On line 4193: + a buyer strike and + simply weren’t rolling."25 That is, + they stopped rolling over their + +On line 4193: + simply weren’t rolling."25 + That is, they stopped rolling over their + commercial paper + +On line 4193: + is, they stopped rolling over + their commercial paper and + instead demanded + +On line 4193: + paper and instead + demanded payment on their + loans. On August the + +On line 4193: + demanded payment + on their loans. On August the + interest rates for + +On line 4193: + payment on their loans. + On August the interest + rates for overnight lending + +On line 4193: + interest rates for + overnight lending of A-1 rated + asset-backed commercial + +On line 4193: + overnight lending of A-1 + rated asset-backed commercial + paper rose from to + +On line 4195: + It would continue + rising unevenly, hitting + in August Figure + +On line 4197: + rising unevenly, + hitting in August Figure + shows how, in response, + +On line 4197: + unevenly, hitting + in August Figure shows how, + in response, lending + +On line 4199: + hitting in August + Figure shows how, in response, + lending declined. In + +On line 4199: + in August Figure + shows how, in response, lending + declined. In August + +On line 4199: + in response, lending + declined. In August alone, the + asset-backed commercial + +On line 4199: + declined. In August + alone, the asset-backed commercial + paper market shrank + +On line 4199: + commercial paper + market shrank by billion, or + On August subprime + +On line 4199: + On August subprime + lender American Home Mortgage’s + asset-backed commercial + +On line 4199: + program invoked its + privilege of postponing + repayment, trapping + +On line 4199: + Lenders quickly withdrew + from programs with similar + provisions, which shrank + +On line 4199: + withdrew from programs + with similar provisions, + which shrank that market + +On line 4199: + provisions, which shrank + that market from billion to + billion between May + +On line 4201: + shrank that market from + billion to billion between + May and August.26 The + +On line 4201: + market from billion + to billion between May and + August.26 The paper + +On line 4201: + billion to billion + between May and August.26 The + paper that did sell + +On line 4203: + as frequently as + possible. The average + maturity of + +On line 4203: + asset-backed commercial + paper in the United States + fell from bout days in + +On line 4203: + the United States fell + from bout days in late July + to about days by mid-September, + +On line 4203: + United States fell from + bout days in late July to + about days by mid-September, though + +On line 4203: + from bout days in late + July to about days by mid-September, + though the overwhelming + +On line 4203: + July to about days + by mid-September, though the overwhelming + majority was + +On line 4203: + days by mid-September, though the + overwhelming majority + was issued for just + +On line 4205: + was issued for just + to days.27 Disruptions quickly + spread to other parts + +On line 4205: + issued for just to + days.27 Disruptions quickly spread + to other parts of + +On line 4205: + Disruptions quickly + spread to other parts of the + money market. In + +On line 4205: + to other parts of + the money market. In a + flight to quality, + +On line 4205: + flight to quality, + investors dumped their repo and + commercial paper + +On line 4205: + holdings and increased + their holdings in seemingly + safer money market + +On line 4205: + other’s potential + subprime exposures, scrambled + to amass funds for their + +On line 4205: + subprime exposures, + scrambled to amass funds for their + own liquidity. + +On line 4205: + amass funds for their own + liquidity. Banks became + less willing to lend + +On line 4205: + own liquidity. + Banks became less willing to + lend to each other. + +On line 4205: + liquidity. Banks + became less willing to lend + to each other. A + +On line 4205: + less willing to lend + to each other. A closely + watched indicator + +On line 4205: + willing to lend to + each other. A closely watched + indicator of + +On line 4205: + indicator of + interbank lending rates, called + the one-month LIBOR-OIS + +On line 4207: + lending rates, called the + one-month LIBOR-OIS spread, increased, + signifying that + +On line 4207: + the one-month LIBOR-OIS + spread, increased, signifying + that banks were concerned + +On line 4207: + one-month LIBOR-OIS spread, + increased, signifying that + banks were concerned about + +On line 4207: + that banks were concerned + about the credit risk involved + in lending to each + +On line 4207: + about the credit risk + involved in lending to each + other. On August + +On line 4207: + credit risk involved + in lending to each other. + On August it rose + +On line 4207: + three-to fourfold + over historical values, + and by September + +On line 4207: + by September it + climbed by another In it + would peak much higher. + +On line 4209: + September it climbed + by another In it would + peak much higher. The + +On line 4209: + climbed by another + In it would peak much higher. + The panic in the + +On line 4209: + In it would peak much + higher. The panic in the + repo, commercial + +On line 4209: + would peak much higher. + The panic in the repo, + commercial paper, + +On line 4209: + interbank markets + was met by immediate + government action. + +On line 4209: + markets was met by + immediate government + action. On August + +On line 4209: + government action. + On August the day after + BNP Paribas suspended + +On line 4209: + On August the day + after BNP Paribas suspended + redemptions, the Fed + +On line 4209: + the day after BNP + Paribas suspended redemptions, + the Fed announced that + +On line 4209: + day after BNP Paribas + suspended redemptions, the + Fed announced that it + +On line 4209: + BNP Paribas suspended + redemptions, the Fed announced + that it would "provid[e] + +On line 4209: + redemptions, the Fed + announced that it would "provid[e] + liquidity as + +On line 4209: + Fed announced that it + would "provid[e] liquidity + as necessary to + +On line 4209: + facilitate the + orderly functioning of + financial markets,"28 + +On line 4209: + financial markets,"28 + and the European Central + Bank infused billions + +On line 4209: + and the European + Central Bank infused billions + of Euros into + +On line 4209: + Central Bank infused + billions of Euros into + overnight lending markets. + +On line 4209: + infused billions of + Euros into overnight lending + markets. On August + +On line 4209: + billions of Euros + into overnight lending markets. + On August the Fed + +On line 4209: + into overnight lending + markets. On August the Fed + cut the discount rate + +On line 4209: + markets. On August + the Fed cut the discount rate + by basis points—from + +On line 4209: + August the Fed cut + the discount rate by basis + points—from to This would + +On line 4209: + Fed cut the discount + rate by basis points—from to + This would be the first + +On line 4209: + cut the discount rate + by basis points—from to This + would be the first of + +On line 4209: + the discount rate by + basis points—from to This would + be the first of many + +On line 4209: + by basis points—from + to This would be the first of + many such cuts aimed at + +On line 4209: + points—from to This would + be the first of many such cuts + aimed at increasing + +On line 4209: + be the first of many + such cuts aimed at increasing + liquidity. The + +On line 4209: + also extended + the term of discount-window + lending to days (from + +On line 4209: + (from the usual overnight + or very short-term period) + to offer banks a + +On line 4209: + the usual overnight or + very short-term period) to + offer banks a more + +On line 4209: + overnight or very short-term + period) to offer banks + a more stable source + +On line 4209: + to offer banks a + more stable source of funds. On + the same day, the Fed’s + +On line 4209: + offer banks a more + stable source of funds. On the + same day, the Fed’s FOMC + +On line 4209: + banks a more stable + source of funds. On the same day, + the Fed’s FOMC released + +On line 4209: + a more stable source + of funds. On the same day, the + Fed’s FOMC released a + +On line 4209: + stable source of funds. + On the same day, the Fed’s FOMC + released a statement + +On line 4209: + On the same day, the + Fed’s FOMC released a statement + acknowledging the + +On line 4209: + Fed’s FOMC released a + statement acknowledging the + continued market + +On line 4209: + continued market + deterioration and + promising that it was + +On line 4209: + promising that it was + "prepared to act as needed + to mitigate the + +On line 4209: + was "prepared to act + as needed to mitigate + the adverse effects + +On line 4209: + "prepared to act as + needed to mitigate the + adverse effects on + +On line 4213: + the adverse effects + on the economy."29 SIVS: "AN + OASIS OF CALM" In + +On line 4213: + on the economy."29 + SIVS: "AN OASIS OF CALM" In + August, the turmoil + +On line 4213: + "AN OASIS OF CALM" + In August, the turmoil in + asset-backed commercial + +On line 4213: + turmoil in asset-backed + commercial paper markets + hit the market for + +On line 4213: + commercial paper + markets hit the market for + structured investment + +On line 4213: + market for structured + investment vehicles, or + SIVs, even though most of + +On line 4213: + structured investment + vehicles, or SIVs, even though + most of these programs + +On line 4213: + vehicles, or SIVs, + even though most of these programs + had little subprime + +On line 4213: + even though most of these + programs had little subprime + mortgage exposure. + +On line 4213: + most of these programs + had little subprime mortgage + exposure. SIVs had + +On line 4213: + programs had little + subprime mortgage exposure. + SIVs had a stable + +On line 4213: + exposure. SIVs had + a stable history since + their introduction + +On line 4215: + stable history + since their introduction in + These investments had + +On line 4215: + in These investments + had weathered a number of + credit crises—even + +On line 4215: + weathered a number + of credit crises—even through + early summer of + +On line 4215: + credit crises—even + through early summer of as + noted in a Moody’s + +On line 4215: + through early summer + of as noted in a Moody’s + report issued on + +On line 4217: + of as noted in + a Moody’s report issued on + July titled "SIVs: + +On line 4217: + in a Moody’s report + issued on July titled + "SIVs: An Oasis of + +On line 4217: + Moody’s report issued + on July titled "SIVs: An + Oasis of Calm in + +On line 4217: + issued on July + titled "SIVs: An Oasis of + Calm in the Sub-prime + +On line 4217: + on July titled + "SIVs: An Oasis of Calm in + the Sub-prime Maelstrom."30 + +On line 4219: + "SIVs: An Oasis of + Calm in the Sub-prime Maelstrom."30 + Unlike typical + +On line 4219: + Oasis of Calm in + the Sub-prime Maelstrom."30 Unlike + typical asset-backed + +On line 4219: + Calm in the Sub-prime + Maelstrom."30 Unlike typical + asset-backed commercial + +On line 4219: + the Sub-prime Maelstrom."30 + Unlike typical asset-backed + commercial paper + +On line 4219: + paper programs, SIVs + were funded primarily + through medium-term notes—bonds + +On line 4219: + primarily through + medium-term notes—bonds maturing + in one to five years. + +On line 4219: + notes—bonds maturing + in one to five years. SIVs held + significant amounts + +On line 4219: + in one to five years. + SIVs held significant amounts + of highly liquid + +On line 4219: + significant amounts + of highly liquid assets + and marked those assets + +On line 4219: + and marked those assets + to market prices daily or + weekly, which allowed + +On line 4221: + without explicit + liquidity support from + their sponsors. The SIV + +On line 4221: + from their sponsors. The + SIV sector tripled in assets + between and On the + +On line 4221: + SIV sector tripled in + assets between and On the + eve of the crisis, + +On line 4221: + and On the eve of + the crisis, there were SIVs with + almost billion in + +On line 4221: + the crisis, there were + SIVs with almost billion in + assets.31 About one-quarter + +On line 4221: + billion in assets.31 + About one-quarter of that money + was invested in + +On line 4221: + was invested in + mortgage-backed securities or + in CDOs, but only + +On line 4227: + first SIVs to fail were + concentrated in subprime + mortgage– SUMMER backed + +On line 4227: + were concentrated + in subprime mortgage– SUMMER + backed securities, + +On line 4227: + in subprime mortgage– + SUMMER backed securities, + mortgage-related CDOs, + +On line 4227: + backed securities, + mortgage-related CDOs, or both. + These included Cheyne + +On line 4227: + mortgage-related CDOs, + or both. These included Cheyne + Finance (managed by + +On line 4227: + Cheyne Finance (managed + by London-based Cheyne Capital + Management), Rhinebridge + +On line 4227: + (managed by London-based + Cheyne Capital Management), + Rhinebridge (another + +On line 4227: + structured by Barclays + Capital). Between August + and October, each + +On line 4227: + Capital). Between + August and October, each + of these four was forced + +On line 4229: + these four was forced to + restructure or liquidate. + Investors soon ran from + +On line 4229: + forced to restructure + or liquidate. Investors soon + ran from even the safer + +On line 4229: + to restructure or + liquidate. Investors soon ran + from even the safer SIVs. + +On line 4229: + liquidate. Investors + soon ran from even the safer SIVs. + "The media was quite + +On line 4229: + Investors soon ran from + even the safer SIVs. "The media + was quite happy to + +On line 4229: + even the safer SIVs. "The + media was quite happy to + sen-sationalize + +On line 4229: + the collapse of the + next ‘leaking SIV’ or the next + ‘SIV-positive’ institution," + +On line 4229: + collapse of the next + ‘leaking SIV’ or the next ‘SIV-positive’ + institution," then-Moody’s + +On line 4229: + ‘SIV-positive’ institution," + then-Moody’s managing director + Henry Tabe told the + +On line 4229: + Henry Tabe told the + FCIC.32 The situation was + complicated by + +On line 4229: + situation was + complicated by the SIVs’ + lack of transparency. + +On line 4229: + complicated by + the SIVs’ lack of transparency. + "In a context of + +On line 4229: + by the SIVs’ lack of + transparency. "In a context + of opacity about + +On line 4229: + of transparency. "In + a context of opacity + about where risk resides, + +On line 4229: + transparency. "In a + context of opacity about + where risk resides, a + +On line 4229: + about where risk resides, + a general distrust has + contaminated + +On line 4229: + general distrust + has contaminated many + asset classes. What + +On line 4229: + contaminated + many asset classes. What had + once been liquid is + +On line 4229: + classes. What had once + been liquid is now illiquid. + Good collateral + +On line 4229: + been liquid is now + illiquid. Good collateral + cannot be sold or + +On line 4229: + is now illiquid. Good + collateral cannot be + sold or financed at + +On line 4229: + be sold or financed + at anything approaching its + true value," Moody’s wrote + +On line 4229: + sold or financed at + anything approaching its true + value," Moody’s wrote on + +On line 4231: + wrote on September + Even high-quality assets + that had nothing to + +On line 4231: + on September Even + high-quality assets that + had nothing to do + +On line 4231: + Even high-quality + assets that had nothing to + do with the mortgage + +On line 4231: + that had nothing to + do with the mortgage market + were declining in + +On line 4231: + do with the mortgage + market were declining in + value. One SIV marked + +On line 4231: + the mortgage market + were declining in value. + One SIV marked down a + +On line 4231: + mortgage market were + declining in value. One + SIV marked down a CDO + +On line 4231: + were declining in + value. One SIV marked down a + CDO to seven cents + +On line 4231: + in value. One SIV + marked down a CDO to seven + cents on the dollar + +On line 4231: + value. One SIV marked + down a CDO to seven cents + on the dollar while + +On line 4231: + One SIV marked down a + CDO to seven cents on the + dollar while it was + +On line 4231: + a CDO to seven + cents on the dollar while it + was still rated triple-A.34 + +On line 4231: + CDO to seven cents + on the dollar while it was + still rated triple-A.34 To + +On line 4231: + to seven cents on + the dollar while it was still + rated triple-A.34 To raise + +On line 4231: + cents on the dollar + while it was still rated triple-A.34 + To raise cash, managers + +On line 4231: + on the dollar while + it was still rated triple-A.34 To + raise cash, managers sold + +On line 4231: + dollar while it was + still rated triple-A.34 To raise cash, + managers sold assets. + +On line 4231: + it was still rated + triple-A.34 To raise cash, managers sold + assets. But selling + +On line 4231: + managers sold assets. + But selling high-quality + assets into a + +On line 4231: + prices of these unimpaired + securities and pushed down + the market values + +On line 4233: + values of other + SIV portfolios. By the end + of November, SIVs + +On line 4233: + portfolios. By the + end of November, SIVs still + in operation + +On line 4233: + end of November, + SIVs still in operation + had liquidated + +On line 4233: + of November, SIVs + still in operation had + liquidated of + +On line 4233: + their portfolios, on + average.35 Sponsors rescued + some SIVs. Other SIVs + +On line 4233: + Sponsors rescued some + SIVs. Other SIVs restructured + or liquidated; + +On line 4233: + SIVs restructured or + liquidated; some investors + had to wait a year + +On line 4233: + liquidated; some + investors had to wait a year + or more to receive + +On line 4233: + investors had to wait + a year or more to receive + payments and, even then, + +On line 4233: + had to wait a year + or more to receive payments + and, even then, recouped + +On line 4233: + wait a year or more + to receive payments and, even + then, recouped only + +On line 4233: + a year or more to + receive payments and, even then, + recouped only some + +On line 4233: + or more to receive + payments and, even then, recouped + only some of their + +On line 4233: + to receive payments + and, even then, recouped only + some of their money. + +On line 4233: + receive payments and, + even then, recouped only some + of their money. In + +On line 4233: + payments and, even then, + recouped only some of their + money. In the case + +On line 4233: + recouped only some + of their money. In the case + of Rhinebridge, investors + +On line 4233: + Rhinebridge, investors lost + and only gradually + received their payments + +On line 4233: + received their payments + over the next year.36 Investors in + one SIV, Sigma, lost + +On line 4233: + their payments over the + next year.36 Investors in one SIV, + Sigma, lost more than + +On line 4233: + the next year.36 Investors + in one SIV, Sigma, lost more + than As of fall not + +On line 4233: + next year.36 Investors in + one SIV, Sigma, lost more than + As of fall not a + +On line 4233: + Investors in one SIV, + Sigma, lost more than As of + fall not a single + +On line 4233: + one SIV, Sigma, lost + more than As of fall not a + single SIV remained + +On line 4233: + Sigma, lost more than + As of fall not a single + SIV remained in its + +On line 4233: + more than As of fall + not a single SIV remained + in its original + +On line 4233: + than As of fall not + a single SIV remained in + its original form. + +On line 4235: + As of fall not a + single SIV remained in its + original form. The + +On line 4235: + single SIV remained + in its original form. The + subprime crisis had + +On line 4235: + SIV remained in its + original form. The subprime + crisis had brought to + +On line 4235: + in its original + form. The subprime crisis had + brought to its knees a + +On line 4235: + resilient market in + which losses due to subprime + mortgage defaults had + +On line 4235: + in which losses due + to subprime mortgage defaults + had been, if anything, + +On line 4237: + mortgage defaults had + been, if anything, modest and + localized. MONEY + +On line 4237: + if anything, modest + and localized. MONEY FUNDS + AND OTHER INVESTORS: + +On line 4241: + AND OTHER INVESTORS: + "DRINKING FROM A FIRE HOSE" The + next dominoes were the + +On line 4241: + "DRINKING FROM A FIRE + HOSE" The next dominoes were the + money market funds + +On line 4241: + HOSE" The next dominoes + were the money market funds + and other funds. Most + +On line 4241: + The next dominoes were + the money market funds and + other funds. Most were + +On line 4241: + Fidelity, Vanguard, + and Federated. Under + SEC regulations, + +On line 4241: + and Federated. + Under SEC regulations, + money market funds + +On line 4241: + SEC regulations, + money market funds that serve + retail investors must + +On line 4241: + market funds that serve + retail investors must keep two + sets of accounting + +On line 4241: + funds that serve retail + investors must keep two sets of + accounting books, one + +On line 4241: + retail investors must + keep two sets of accounting + books, one reflecting + +On line 4241: + investors must keep two + sets of accounting books, one + reflecting the price + +On line 4241: + accounting books, one + reflecting the price they paid + for securities + +On line 4241: + reflecting the price + they paid for securities + and the other the + +On line 4241: + and the other the + fund’s mark-to-market value + (the "shadow price," in + +On line 4241: + (the "shadow price," in + market parlance). However, + funds do not have to + +On line 4241: + have to disclose the + shadow price unless the fund’s + net asset value + +On line 4241: + shadow price unless + the fund’s net asset value + (NAV) has fallen by + +On line 4241: + price unless the fund’s + net asset value (NAV) has + fallen by below + +On line 4243: + the fund’s net asset + value (NAV) has fallen by + below (to per share. + +On line 4243: + net asset value + (NAV) has fallen by below + (to per share. Such a + +On line 4243: + (NAV) has fallen by + below (to per share. Such a + decline in market + +On line 4243: + fallen by below + (to per share. Such a decline + in market value + +On line 4243: + below (to per share. + Such a decline in market + value is known as + +On line 4243: + (to per share. Such a + decline in market value + is known as "breaking + +On line 4243: + share. Such a decline + in market value is known + as "breaking the buck" + +On line 4243: + Such a decline in + market value is known as + "breaking the buck" and + +On line 4243: + in market value + is known as "breaking the buck" + and generally + +On line 4243: + market value is + known as "breaking the buck" and + generally leads + +On line 4243: + known as "breaking the + buck" and generally leads + to a fund’s collapse. + +On line 4243: + as "breaking the buck" + and generally leads to + a fund’s collapse. It + +On line 4243: + "breaking the buck" and + generally leads to a + fund’s collapse. It can + +On line 4243: + a fund’s collapse. It + can happen, for example, + if just of a fund’s + +On line 4243: + It can happen, for + example, if just of a + fund’s portfolio is + +On line 4243: + example, if just + of a fund’s portfolio is + in an investment + +On line 4243: + a fund’s portfolio + is in an investment that + loses just of its + +On line 4243: + portfolio is in + an investment that loses + just of its value. + +On line 4245: + of its value. So + a fund manager cannot + afford big risks. But + +On line 4245: + value. So a fund + manager cannot afford + big risks. But SIVs were + +On line 4245: + a fund manager + cannot afford big risks. But + SIVs were considered + +On line 4245: + manager cannot + afford big risks. But SIVs were + considered very safe + +On line 4245: + were considered very + safe investments—they always + had been—and were widely + +On line 4245: + considered very safe + investments—they always had + been—and were widely held + +On line 4245: + been—and were widely held + by money market funds. In + fall dozens of money + +On line 4245: + market funds. In fall + dozens of money market funds + faced losses on SIVs + +On line 4245: + losses on SIVs and + other asset-backed commercial + paper. To prevent + +On line 4245: + on SIVs and other + asset-backed commercial paper. + To prevent their funds + +On line 4245: + asset-backed commercial + paper. To prevent their funds + from breaking the buck, + +On line 4245: + To prevent their funds + from breaking the buck, at least + sponsors, including + +On line 4245: + from breaking the buck, + at least sponsors, including + large banks such s Bank + +On line 4245: + breaking the buck, at + least sponsors, including large + banks such s Bank of + +On line 4245: + buck, at least sponsors, + including large banks such s + Bank of America, + +On line 4245: + including large banks + such s Bank of America, + US Bancorp, and SunTrust, + +On line 4245: + large banks such s Bank + of America, US Bancorp, + and SunTrust, purchased SIV + +On line 4245: + Bank of America, + US Bancorp, and SunTrust, purchased + SIV assets from their + +On line 4245: + US Bancorp, and SunTrust, + purchased SIV assets from their + money market funds.38 + +On line 4247: + purchased SIV assets + from their money market funds.38 + Similar dramas + +On line 4247: + dramas played out in + the less-regulated realm of + the money market + +On line 4247: + the money market + sector known as enhanced cash + funds. These funds serve not + +On line 4249: + enhanced cash funds. These + funds serve not retail investors + but rather "qualified + +On line 4249: + cash funds. These funds serve + not retail investors but rather + "qualified purchasers," + +On line 4249: + not retail investors + but rather "qualified purchasers," + which may include wealthy + +On line 4249: + but rather "qualified + purchasers," which may include wealthy + investors who invest + +On line 4249: + "qualified purchasers," + which may include wealthy investors + who invest million + +On line 4249: + which may include wealthy + investors who invest million + or more. Enhanced cash + +On line 4249: + include wealthy investors + who invest million or more. + Enhanced cash funds fall + +On line 4249: + investors who invest + million or more. Enhanced cash + funds fall outside most + +On line 4249: + SEC regulations + and disclosure requirements. + Because they have much + +On line 4249: + Because they have much + higher investment thresholds + than retail funds, and + +On line 4249: + higher investment + thresholds than retail funds, and + because they face less + +On line 4249: + and higher returns. + Nonetheless, these funds also + aim to maintain a + +On line 4249: + Nonetheless, these funds + also aim to maintain a + net asset value. + +On line 4251: + aim to maintain a + net asset value. As the + market turned, some of + +On line 4251: + net asset value. + As the market turned, some of + these funds did break the + +On line 4251: + asset value. As + the market turned, some of these + funds did break the buck, + +On line 4251: + As the market turned, + some of these funds did break the + buck, while the sponsors + +On line 4251: + the market turned, some + of these funds did break the buck, + while the sponsors of + +On line 4251: + some of these funds did + break the buck, while the sponsors + of others stepped in + +On line 4251: + of these funds did break + the buck, while the sponsors of + others stepped in to + +On line 4251: + funds did break the buck, + while the sponsors of others + stepped in to support + +On line 4251: + did break the buck, while + the sponsors of others stepped + in to support their + +On line 4251: + of others stepped in + to support their value. The + billion GE Asset + +On line 4251: + stepped in to support + their value. The billion GE + Asset Management + +On line 4251: + value. The billion + GE Asset Management Trust + Enhanced Cash Trust, a + +On line 4251: + billion GE Asset + Management Trust Enhanced Cash + Trust, a GE-sponsored fund that + +On line 4251: + Asset Management + Trust Enhanced Cash Trust, a GE-sponsored + fund that managed GE’s + +On line 4251: + fund that managed GE’s + own pension and employee + benefit assets, + +On line 4251: + benefit assets, + ran aground in the summer; it + had of its assets + +On line 4251: + assets, ran aground in + the summer; it had of its + assets in mortgage-backed + +On line 4251: + the summer; it had + of its assets in mortgage-backed + securities. When + +On line 4251: + assets in mortgage-backed + securities. When the fund + reportedly lost + +On line 4251: + securities. When + the fund reportedly lost + million and closed in + +On line 4251: + million and closed in + November investors redeemed + their interests at + +On line 4251: + November investors + redeemed their interests at + Bank of America + +On line 4253: + largest enhanced cash fund, + with billion in assets at + its peak—after one of that + +On line 4253: + enhanced cash fund, with + billion in assets at its + peak—after one of that fund’s + +On line 4253: + fund, with billion in + assets at its peak—after one of + that fund’s largest investors + +On line 4253: + billion in assets + at its peak—after one of that fund’s + largest investors withdrew + +On line 4255: + assets at its peak—after + one of that fund’s largest investors + withdrew billion in + +On line 4257: + peak—after one of that fund’s + largest investors withdrew billion + in November An + +On line 4257: + largest investors withdrew + billion in November An + interesting case + +On line 4257: + in November An + interesting case study is + provided by the + +On line 4257: + An interesting + case study is provided by + the meteoric rise + +On line 4257: + interesting case + study is provided by the + meteoric rise and + +On line 4257: + the Credit Suisse + Institutional Money + Market Prime Fund. The + +On line 4257: + Institutional + Money Market Prime Fund. The + fund sought to attract + +On line 4257: + "portals," which supplied + an estimated billion + to money market + +On line 4257: + an estimated + billion to money market + funds and other funds. + +On line 4257: + to money market + funds and other funds. Investors + used these portals to + +On line 4257: + funds and other funds. + Investors used these portals to + quickly move their cash + +On line 4257: + other funds. Investors + used these portals to quickly + move their cash to the + +On line 4257: + to quickly move their + cash to the highest-yielding fund. + Posting a higher + +On line 4257: + move their cash to the + highest-yielding fund. Posting a + higher return could + +On line 4257: + higher return could + attract significant funds: + one money market + +On line 4257: + money market fund + manager later compared + the use of portal + +On line 4257: + manager later + compared the use of portal + money to "drink[ing] + +On line 4257: + later compared the + use of portal money to + "drink[ing] from a fire + +On line 4257: + compared the use of + portal money to "drink[ing] + from a fire hose."41 But + +On line 4257: + of portal money + to "drink[ing] from a fire hose."41 + But the money could + +On line 4257: + a fire hose."41 But the + money could vanish just as + quickly. The Credit + +On line 4257: + hose."41 But the money + could vanish just as quickly. + The Credit Suisse + +On line 4257: + But the money could + vanish just as quickly. The + Credit Suisse fund + +On line 4257: + money could vanish + just as quickly. The Credit + Suisse fund posted + +On line 4257: + just as quickly. The + Credit Suisse fund posted + the highest returns + +On line 4257: + Credit Suisse fund + posted the highest returns + in the industry + +On line 4257: + Suisse fund posted + the highest returns in the + industry during + +On line 4257: + the highest returns + in the industry during + the months before the + +On line 4257: + the months before the + liquidity crisis, and + increased its assets + +On line 4259: + crisis, and increased + its assets from about billion + in the summer of + +On line 4259: + its assets from about + billion in the summer of + to more than billion + +On line 4259: + summer of to more + than billion in the summer + of To deliver + +On line 4259: + than billion in the + summer of To deliver + those high returns and + +On line 4259: + the summer of To + deliver those high returns + and attract investors, + +On line 4259: + deliver those high + returns and attract investors, + though, it focused on + +On line 4259: + focused on structured + finance products, including + CDOs and SIVs such as + +On line 4259: + on structured finance + products, including CDOs and + SIVs such as Cheyne. When + +On line 4259: + including CDOs and + SIVs such as Cheyne. When investors + became concerned about + +On line 4259: + and SIVs such as Cheyne. + When investors became concerned + about such assets, they + +On line 4259: + SIVs such as Cheyne. When + investors became concerned about + such assets, they yanked + +On line 4259: + When investors became + concerned about such assets, they + yanked about billion out + +On line 4261: + about such assets, they + yanked about billion out of the + fund in August alone. + +On line 4261: + assets, they yanked about + billion out of the fund in + August alone. Credit + +On line 4261: + they yanked about billion + out of the fund in August + alone. Credit Suisse, + +On line 4261: + yanked about billion out + of the fund in August alone. + Credit Suisse, the + +On line 4261: + billion out of the + fund in August alone. Credit + Suisse, the Swiss bank + +On line 4261: + the fund in August + alone. Credit Suisse, the Swiss + bank that sponsored the + +On line 4261: + fund in August alone. + Credit Suisse, the Swiss bank + that sponsored the fund, + +On line 4261: + alone. Credit Suisse, + the Swiss bank that sponsored the + fund, was forced to bail + +On line 4261: + Credit Suisse, the + Swiss bank that sponsored the fund, + was forced to bail it + +On line 4261: + bank that sponsored the + fund, was forced to bail it out, + purchasing billion + +On line 4261: + was forced to bail it + out, purchasing billion of + assets in August.42 + +On line 4261: + purchasing billion + of assets in August.42 The + episode highlights the risks + +On line 4261: + billion of assets + in August.42 The episode highlights + the risks of money + +On line 4261: + assets in August.42 + The episode highlights the risks of + money market funds’ + +On line 4261: + The episode highlights the + risks of money market funds’ + relying on "hot + +On line 4261: + on "hot money"—that is, + institutional investors + who move quickly in + +On line 4261: + institutional + investors who move quickly in + and out of funds in + +On line 4261: + who move quickly in + and out of funds in search of + the highest returns. + +On line 4263: + move quickly in and + out of funds in search of the + highest returns. The + +On line 4263: + and out of funds in + search of the highest returns. + The losses on SIVs + +On line 4263: + out of funds in search + of the highest returns. The + losses on SIVs and + +On line 4263: + funds in search of the + highest returns. The losses + on SIVs and other + +On line 4263: + The losses on SIVs + and other mortgage-tainted + investments also + +On line 4263: + investments also + battered local government + investment pools across + +On line 4263: + investment pools across + the country, some of which held + billions of dollars + +On line 4263: + country, some of which + held billions of dollars in + these securities. + +On line 4263: + districts, and other + government agencies with economies + of scale, investment + +On line 4263: + of scale, investment + diversification, and + liquidity. In + +On line 4265: + participation + is mandatory. With billion + in assets, Florida’s + +On line 4265: + is mandatory. With + billion in assets, Florida’s + local government + +On line 4265: + billion in assets, + Florida’s local government + investment pool was + +On line 4265: + local government + investment pool was the largest + in the country, and + +On line 4265: + pool was the largest in + the country, and "intended + to operate like + +On line 4265: + was the largest in the + country, and "intended to + operate like a + +On line 4265: + and "intended to + operate like a highly + liquid, low-risk money + +On line 4265: + a highly liquid, + low-risk money market fund, with + securities like + +On line 4265: + low-risk money market + fund, with securities like + cash, certificates of + +On line 4265: + state legislature + noted.43 But by November + because of ratings + +On line 4265: + But by November + because of ratings downgrades, + the fund held at least + +On line 4265: + November because + of ratings downgrades, the fund + held at least billion + +On line 4265: + of ratings downgrades, + the fund held at least billion + in securities + +On line 4265: + ratings downgrades, the + fund held at least billion in + securities that + +On line 4265: + the fund held at least + billion in securities + that no longer met the + +On line 4265: + that no longer met the + state’s requirements. It had more + than billion in SIVs + +On line 4265: + no longer met the state’s + requirements. It had more than + billion in SIVs and + +On line 4265: + state’s requirements. It + had more than billion in SIVs + and other distressed + +On line 4265: + had more than billion + in SIVs and other distressed + securities, of + +On line 4265: + in SIVs and other + distressed securities, of + which about million had + +On line 4265: + and other distressed + securities, of which about + million had already + +On line 4265: + securities, of + which about million had already + defaulted. And it + +On line 4265: + of which about million + had already defaulted. And + it held million in + +On line 4265: + maturities that + stretched out as far as June In + early November, + +On line 4265: + early November, + following a series of + news reports, the fund + +On line 4265: + of news reports, the + fund suffered a run. Local + governments withdrew + +On line 4265: + fund suffered a run. + Local governments withdrew + billion in just two + +On line 4265: + two weeks. Orange and + Pinellas counties pulled out their + entire investments. + +On line 4265: + Pinellas counties pulled + out their entire investments. + On November the + +On line 4265: + pulled out their entire + investments. On November + the fund’s managers stopped + +On line 4267: + withdrawals. Florida’s was + the hardest hit, but other + state investment pools + +On line 4267: + state investment pools + also took significant + losses on SIVs and + +On line 4269: + on SIVs and other + mortgage-related holdings. The + Commission concludes + +On line 4269: + the shadow banking + system was permitted to + grow to rival the + +On line 4269: + permitted to grow + to rival the commercial + banking system with + +On line 4269: + grow to rival the + commercial banking system + with inadequate + +On line 4269: + commercial banking + system with inadequate + supervision and + +On line 4269: + supervision and + regulation. That system + was very fragile due + +On line 4269: + and regulation. + That system was very fragile + due to high leverage, + +On line 4269: + That system was very + fragile due to high leverage, + short-term funding, risky + +On line 4269: + the mortgage market + collapsed and financial firms + began to abandon + +On line 4269: + commercial paper + and repo lending markets, + some institutions + +On line 4269: + and repo lending + markets, some institutions + depending on them + +On line 4269: + lending markets, some + institutions depending + on them for funding + +On line 4269: + operations failed + or, later in the crisis, + had to be rescued. + +On line 4269: + interconnections + created contagion, as + the crisis spread even + +On line 4269: + as the crisis spread + even to markets and firms that + had little or no + +On line 4269: + even to markets and + firms that had little or no + direct exposure + +On line 4269: + markets and firms that + had little or no direct + exposure to the + +On line 4269: + that had little or + no direct exposure to + the mortgage market. + +On line 4271: + had little or no + direct exposure to the + mortgage market. In + +On line 4271: + mortgage market. In + addition, regulation + and supervision + +On line 4271: + thrifts to operate + with fewer constraints and to + engage in a wider + +On line 4271: + with fewer constraints + and to engage in a wider + range of financial + +On line 4271: + range of financial + activities, including + activities in + +On line 4273: + banking system. The + financial sector, which grew + enormously in the + +On line 4273: + financial sector, + which grew enormously in the + years leading up to + +On line 4273: + grew enormously in + the years leading up to the + financial crisis, + +On line 4273: + leading up to the + financial crisis, wielded + great political + +On line 4273: + financial crisis, + wielded great political + power to weaken + +On line 4273: + institutional + supervision and market + regulation of + +On line 4273: + vulnerable to + the financial crisis and + exacerbated + +On line 4281: + exacerbated + its effects. LATE TO EARLY + BILLIONS IN SUBPRIME + +On line 4285: + TO EARLY BILLIONS + IN SUBPRIME LOSSES CONTENTS + Merrill Lynch: "Dawning + +On line 4285: + BILLIONS IN SUBPRIME + LOSSES CONTENTS Merrill Lynch: + "Dawning awareness over + +On line 4285: + IN SUBPRIME LOSSES + CONTENTS Merrill Lynch: "Dawning + awareness over the course + +On line 4287: + Merrill Lynch: "Dawning + awareness over the course of the + summer".................257 Citigroup: + +On line 4287: + Lynch: "Dawning awareness + over the course of the summer".................257 + Citigroup: "That would + +On line 4287: + awareness over the course + of the summer".................257 Citigroup: + "That would not in any + +On line 4287: + over the course of the + summer".................257 Citigroup: "That would + not in any way have + +On line 4289: + way have excited + my attention"...................260 AIG’s dispute + with Goldman: "There could + +On line 4289: + my attention"...................260 AIG’s + dispute with Goldman: "There could + never be losses"...............................265 + +On line 4291: + dispute with Goldman: + "There could never be losses"...............................265 + Federal Reserve: + +On line 4291: + "There could never be + losses"...............................265 Federal Reserve: + "The discount window + +On line 4295: + never expected + losses"...................................................276 While a handful of + banks were bailing out + +On line 4295: + banks were bailing out + their money market funds and + commercial paper + +On line 4295: + their money market + funds and commercial paper + programs in the fall + +On line 4295: + funds and commercial + paper programs in the fall + of the financial + +On line 4295: + commercial paper + programs in the fall of the + financial sector + +On line 4295: + loans, securities, + and derivatives, with no + end in sight. Among U.S. + +On line 4295: + securities, and + derivatives, with no end + in sight. Among U.S. firms, + +On line 4295: + and derivatives, + with no end in sight. Among U.S. + firms, Citigroup and + +On line 4295: + end in sight. Among U.S. + firms, Citigroup and Merrill + Lynch reported the + +On line 4295: + in sight. Among U.S. firms, + Citigroup and Merrill Lynch + reported the most + +On line 4295: + firms, Citigroup and + Merrill Lynch reported the + most spectacular + +On line 4295: + Lynch reported the + most spectacular losses, + largely because of + +On line 4295: + debt obligation (CDO) + businesses, writing down a + total of billion + +On line 4295: + total of billion + and billion, respectively, + by the end of the + +On line 4295: + billion and billion, + respectively, by the end + of the year. Billions + +On line 4295: + respectively, by + the end of the year. Billions + more in losses were + +On line 4295: + by the end of the + year. Billions more in losses + were reported by + +On line 4295: + the end of the year. + Billions more in losses were + reported by large + +On line 4295: + the year. Billions more + in losses were reported + by large financial + +On line 4297: + America billion), + Morgan Stanley billion), JP + Morgan billion), and + +On line 4297: + Stanley billion), JP + Morgan billion), and Bear Stearns + billion).1 Insurance + +On line 4297: + Morgan billion), and + Bear Stearns billion).1 Insurance + companies, hedge funds, + +On line 4297: + hedge funds, and other + financial institutions + collectively had + +On line 4299: + discriminating + between firms perceived to be + relatively healthy + +On line 4299: + between firms perceived + to be relatively healthy + and others about which + +On line 4299: + be relatively + healthy and others about which they + were not so sure. Bear + +On line 4299: + relatively healthy + and others about which they were + not so sure. Bear Stearns + +On line 4299: + healthy and others about + which they were not so sure. Bear + Stearns and Lehman Brothers + +On line 4299: + and others about which + they were not so sure. Bear Stearns + and Lehman Brothers were + +On line 4299: + others about which they + were not so sure. Bear Stearns and + Lehman Brothers were at + +On line 4299: + which they were not so + sure. Bear Stearns and Lehman Brothers + were at the top of + +On line 4299: + they were not so sure. + Bear Stearns and Lehman Brothers were + at the top of the + +On line 4299: + not so sure. Bear Stearns + and Lehman Brothers were at the + top of the "suspect" + +On line 4299: + so sure. Bear Stearns and + Lehman Brothers were at the top + of the "suspect" list; + +On line 4299: + sure. Bear Stearns and Lehman + Brothers were at the top of + the "suspect" list; by + +On line 4299: + and Lehman Brothers were + at the top of the "suspect" + list; by year-end the cost + +On line 4299: + Lehman Brothers were at + the top of the "suspect" list; + by year-end the cost of + +On line 4299: + Brothers were at the + top of the "suspect" list; by + year-end the cost of five-year + +On line 4299: + at the top of the + "suspect" list; by year-end the cost + of five-year protection + +On line 4299: + "suspect" list; by year-end + the cost of five-year protection + against default on their + +On line 4299: + by year-end the cost of + five-year protection against default + on their obligations + +On line 4299: + year-end the cost of five-year + protection against default on + their obligations in + +On line 4299: + against default on their + obligations in the credit + default swap market + +On line 4299: + default swap market + stood at, respectively, and + annually for + +On line 4299: + respectively, and + annually for every + million, while the cost + +On line 4299: + million, while the cost + for the relatively stronger + Goldman Sachs stood at + +On line 4301: + while the cost for the + relatively stronger Goldman + Sachs stood at Meanwhile, + +On line 4301: + relatively stronger + Goldman Sachs stood at Meanwhile, + the economy was + +On line 4301: + stronger Goldman Sachs stood + at Meanwhile, the economy + was beginning to + +On line 4301: + Goldman Sachs stood at + Meanwhile, the economy was + beginning to show + +On line 4301: + stood at Meanwhile, the + economy was beginning + to show signs of stress. + +On line 4301: + the economy was + beginning to show signs of + stress. Facing turmoil + +On line 4301: + financial markets, + declining home prices, and oil + prices above a barrel, + +On line 4301: + declining home prices, + and oil prices above a barrel, + consumer spending was + +On line 4301: + Reserve lowered the + overnight bank borrowing rate from + earlier in the + +On line 4301: + bank borrowing rate + from earlier in the year + to in September, + +On line 4301: + borrowing rate from + earlier in the year to + in September, in + +On line 4301: + from earlier in + the year to in September, + in October, and + +On line 4301: + earlier in the + year to in September, in + October, and then + +On line 4309: + to in September, + in October, and then in + December. LATE TO + +On line 4309: + in October, and + then in December. LATE TO + EARLY MERRILL LYNCH: + +On line 4311: + then in December. + LATE TO EARLY MERRILL LYNCH: + "DAWNING AWARENESS OVER + +On line 4311: + December. LATE TO + EARLY MERRILL LYNCH: "DAWNING + AWARENESS OVER THE COURSE + +On line 4311: + TO EARLY MERRILL + LYNCH: "DAWNING AWARENESS OVER THE + COURSE OF THE SUMMER" + +On line 4313: + EARLY MERRILL LYNCH: + "DAWNING AWARENESS OVER THE COURSE + OF THE SUMMER" On + +On line 4313: + "DAWNING AWARENESS OVER + THE COURSE OF THE SUMMER" On + October Merrill + +On line 4313: + COURSE OF THE SUMMER" + On October Merrill Lynch + stunned investors when it + +On line 4313: + when it announced that + third-quarter earnings would include + a billion loss on + +On line 4313: + that third-quarter earnings + would include a billion loss + on CDOs and billion + +On line 4313: + third-quarter earnings would + include a billion loss on + CDOs and billion on + +On line 4313: + earnings would include + a billion loss on CDOs and + billion on subprime + +On line 4313: + a billion loss on + CDOs and billion on subprime + mortgages—$7.9 billion in + +On line 4313: + on CDOs and billion + on subprime mortgages—$7.9 billion + in total, the largest + +On line 4313: + CDOs and billion on + subprime mortgages—$7.9 billion in + total, the largest Wall + +On line 4313: + on subprime mortgages—$7.9 + billion in total, the largest + Wall Street write-down to + +On line 4313: + billion in total, + the largest Wall Street write-down to + that point, and nearly + +On line 4313: + in total, the largest + Wall Street write-down to that point, + and nearly twice the + +On line 4313: + largest Wall Street write-down + to that point, and nearly twice + the billion loss that + +On line 4313: + Wall Street write-down to + that point, and nearly twice the + billion loss that the + +On line 4313: + that point, and nearly + twice the billion loss that the + company had warned + +On line 4313: + twice the billion loss + that the company had warned + investors to expect + +On line 4313: + billion loss that the + company had warned investors + to expect just three + +On line 4313: + the company had + warned investors to expect just + three weeks earlier. + +On line 4313: + company had warned + investors to expect just three + weeks earlier. Six + +On line 4313: + expect just three weeks + earlier. Six days later, + the embattled CEO + +On line 4313: + weeks earlier. Six + days later, the embattled + CEO Stanley O’Neal, a + +On line 4315: + earlier. Six days + later, the embattled CEO + Stanley O’Neal, a 21-year + +On line 4315: + the embattled CEO + Stanley O’Neal, a 21-year Merrill + veteran, resigned. + +On line 4317: + Stanley O’Neal, a 21-year + Merrill veteran, resigned. + Much of this write-down + +On line 4317: + O’Neal, a 21-year Merrill + veteran, resigned. Much of + this write-down came from + +On line 4317: + veteran, resigned. + Much of this write-down came from + the firm’s holdings of + +On line 4317: + of this write-down came + from the firm’s holdings of the + super-senior tranches + +On line 4317: + from the firm’s holdings + of the super-senior tranches + of mortgage-related + +On line 4317: + the firm’s holdings of + the super-senior tranches of + mortgage-related CDOs + +On line 4317: + of the super-senior + tranches of mortgage-related + CDOs that Merrill had + +On line 4317: + CDOs that Merrill had + previously thought to be + extremely safe. As + +On line 4317: + had previously + thought to be extremely safe. + As late as fall its + +On line 4317: + extremely safe. As + late as fall its management + had been "bullish on growth" + +On line 4319: + safe. As late as fall + its management had been "bullish + on growth" and "bullish on + +On line 4319: + As late as fall its + management had been "bullish on + growth" and "bullish on [the + +On line 4319: + its management had + been "bullish on growth" and "bullish on + [the subprime] asset + +On line 4319: + management had been + "bullish on growth" and "bullish on [the + subprime] asset class."4 + +On line 4319: + been "bullish on growth" and + "bullish on [the subprime] asset + class."4 But later that + +On line 4319: + "bullish on growth" and "bullish + on [the subprime] asset class."4 + But later that year, + +On line 4319: + on growth" and "bullish on + [the subprime] asset class."4 But + later that year, the + +On line 4319: + [the subprime] asset + class."4 But later that year, the + signs of trouble were + +On line 4319: + the signs of trouble + were becoming difficult + even for Merrill to + +On line 4319: + Merrill to ignore. + Two mortgage originators + to which the firm had + +On line 4319: + ignore. Two mortgage + originators to which the + firm had extended + +On line 4319: + firm had extended + credit lines failed: Ownit, in + which Merrill also + +On line 4319: + lines failed: Ownit, in + which Merrill also had a + small equity stake, + +On line 4319: + failed: Ownit, in which + Merrill also had a small + equity stake, and + +On line 4319: + Merrill also had + a small equity stake, and + Mortgage Lenders Network. + +On line 4319: + also had a small + equity stake, and Mortgage + Lenders Network. Merrill + +On line 4319: + Network. Merrill seized + the collateral backing + those loans: billion from + +On line 4319: + the collateral + backing those loans: billion from + Mortgage Lenders, billion + +On line 4321: + Mortgage Lenders, billion + from Ownit. Merrill, like many + of its competitors, + +On line 4321: + from Ownit. Merrill, + like many of its competitors, + started to ramp up + +On line 4321: + of its competitors, + started to ramp up its sales + efforts, packaging + +On line 4321: + started to ramp up + its sales efforts, packaging + its inventory + +On line 4321: + of mortgage loans and + securities into CDOs + with new vigor. Its + +On line 4321: + CDOs with new vigor. + Its goal was to reduce the + firm’s risk by getting + +On line 4321: + with new vigor. Its + goal was to reduce the firm’s + risk by getting those + +On line 4321: + new vigor. Its goal + was to reduce the firm’s risk + by getting those loans + +On line 4321: + vigor. Its goal was + to reduce the firm’s risk by + getting those loans and + +On line 4321: + was to reduce the + firm’s risk by getting those loans + and securities + +On line 4321: + to reduce the firm’s + risk by getting those loans and + securities off + +On line 4321: + firm’s risk by getting + those loans and securities + off its balance sheet. + +On line 4323: + risk by getting those + loans and securities off + its balance sheet. Yet + +On line 4323: + by getting those loans + and securities off its + balance sheet. Yet it + +On line 4323: + and securities + off its balance sheet. Yet it + found that it could not + +On line 4323: + securities off + its balance sheet. Yet it found + that it could not sell + +On line 4323: + off its balance sheet. + Yet it found that it could not + sell the super-senior + +On line 4323: + balance sheet. Yet it + found that it could not sell the + super-senior tranches + +On line 4323: + Yet it found that it + could not sell the super-senior + tranches of those CDOs + +On line 4323: + it could not sell the + super-senior tranches of those + CDOs at acceptable + +On line 4323: + super-senior tranches + of those CDOs at acceptable + prices; it therefore had + +On line 4323: + CDOs at acceptable + prices; it therefore had to "take + down senior tranches + +On line 4323: + therefore had to "take + down senior tranches into + inventory in + +On line 4323: + of tens of billions + of dollars of those tranches + on Merrill’s books. Dow + +On line 4323: + tens of billions of + dollars of those tranches on + Merrill’s books. Dow Kim, + +On line 4323: + billions of dollars + of those tranches on Merrill’s + books. Dow Kim, then the + +On line 4323: + on Merrill’s books. Dow + Kim, then the co-president of + Merrill’s investment + +On line 4323: + the co-president of + Merrill’s investment banking + segment, told FCIC staff + +On line 4323: + Merrill’s investment + banking segment, told FCIC staff + that the buildup of the + +On line 4323: + investment banking + segment, told FCIC staff that the + buildup of the retained + +On line 4323: + banking segment, told + FCIC staff that the buildup of the + retained super-senior + +On line 4323: + segment, told FCIC staff + that the buildup of the retained + super-senior tranches + +On line 4323: + FCIC staff that the buildup + of the retained super-senior + tranches in the CDO + +On line 4323: + buildup of the retained + super-senior tranches in the + CDO positions was + +On line 4323: + super-senior tranches + in the CDO positions was + actually part + +On line 4323: + CDO positions was + actually part of a + strategy begun + +On line 4323: + actually part + of a strategy begun + in late to reduce + +On line 4323: + strategy begun + in late to reduce the firm’s + inventory of + +On line 4323: + to reduce the firm’s + inventory of subprime + and Alt-A mortgages. Sell + +On line 4323: + firm’s inventory + of subprime and Alt-A mortgages. + Sell the lower-rated + +On line 4323: + inventory of + subprime and Alt-A mortgages. Sell + the lower-rated CDO + +On line 4323: + of subprime and Alt-A + mortgages. Sell the lower-rated + CDO tranches, retain + +On line 4323: + tranches, retain the + super-senior tranches: those had + been his instructions + +On line 4323: + super-senior tranches: + those had been his instructions + to his managers at + +On line 4323: + been his instructions + to his managers at the end + of Kim recalled. He + +On line 4323: + instructions to his + managers at the end of Kim + recalled. He believed + +On line 4323: + managers at the end + of Kim recalled. He believed + that this strategy + +On line 4323: + of Kim recalled. He + believed that this strategy + would reduce overall + +On line 4323: + that this strategy + would reduce overall credit + risk. After all, the + +On line 4323: + would reduce overall + credit risk. After all, the + super-senior tranches + +On line 4323: + super-senior tranches + were theoretically + the safest pieces of those + +On line 4323: + of those investments.6 + To some degree, however, + the strategy was + +On line 4323: + the strategy was + involuntary: his people + were having trouble + +On line 4323: + were having trouble + selling these investments, and + some were even sold at + +On line 4325: + and some were even sold + at a loss.7 Initially, the + strategy seemed to + +On line 4325: + even sold at a loss.7 + Initially, the strategy + seemed to work. By May, + +On line 4325: + a loss.7 Initially, + the strategy seemed to work. + By May, the amount of + +On line 4325: + seemed to work. By May, + the amount of mortgage loans and + securities to + +On line 4325: + the amount of mortgage + loans and securities to + be packaged into + +On line 4325: + amount of mortgage loans + and securities to be + packaged into CDOs + +On line 4325: + securities to + be packaged into CDOs had + declined to billion + +On line 4325: + be packaged into + CDOs had declined to billion + from billion in March.8 + +On line 4325: + CDOs had declined to + billion from billion in March.8 + According to a + +On line 4325: + net amount in retained + super-senior CDO tranches had + increased from billion + +On line 4325: + tranches had increased + from billion in September + to billion by March + +On line 4325: + increased from billion + in September to billion + by March and billion + +On line 4325: + in September to + billion by March and billion + by May.9 But as the + +On line 4325: + to billion by March + and billion by May.9 But as + the mortgage market + +On line 4325: + billion by March and + billion by May.9 But as the + mortgage market came + +On line 4325: + by March and billion + by May.9 But as the mortgage + market came under + +On line 4325: + billion by May.9 But + as the mortgage market came + under increasing + +On line 4325: + by May.9 But as the + mortgage market came under + increasing pressure + +On line 4325: + mortgage market came + under increasing pressure + and as the market + +On line 4325: + market came under + increasing pressure and as + the market value + +On line 4325: + increasing pressure + and as the market value + of even super-senior + +On line 4325: + and as the market + value of even super-senior + tranches crumbled, the + +On line 4325: + super-senior tranches + crumbled, the strategy would + come back to haunt the + +On line 4327: + tranches crumbled, the + strategy would come back to + haunt the firm. Merrill’s + +On line 4327: + strategy would come + back to haunt the firm. Merrill’s + first-quarter earnings for + +On line 4327: + come back to haunt the + firm. Merrill’s first-quarter earnings + for 2007—net revenues of + +On line 4327: + for 2007—net revenues of + billion—were its second-highest + quarterly results + +On line 4327: + quarterly results + ever, including a record + for the Fixed Income, + +On line 4327: + for the Fixed Income, + Currencies and Commodities + business, which housed the + +On line 4327: + Income, Currencies + and Commodities business, which + housed the retained CDO + +On line 4327: + which housed the retained + CDO positions. These esults were + announced during a + +On line 4327: + CDO positions. These + esults were announced during a + conference call with + +On line 4327: + These esults were announced + during a conference call + with analysts—an + +On line 4327: + event that investors and + analysts rely on to + obtain important + +On line 4327: + analysts rely + on to obtain important + information about + +On line 4327: + about the company + and that, like other public + statements, is subject + +On line 4329: + securities laws. + Merrill’s then-CFO Jeffrey Edwards + indicated that + +On line 4329: + indicated that + the company’s results would + not be hurt by the + +On line 4329: + that the company’s + results would not be hurt by + the dislocation + +On line 4329: + dislocation in + the subprime market, because + "revenues from subprime + +On line 4329: + of our net revenues" + over the past five quarters, and + because Merrill’s "risk + +On line 4329: + better than ever, + and crucial to our success + in navigating + +On line 4329: + and crucial to our + success in navigating + turbulent markets." + +On line 4329: + to our success in + navigating turbulent + markets." Providing + +On line 4329: + Providing further + assurances, he stated, "We + believe the issues + +On line 4329: + stated, "We believe + the issues in this narrow + slice of the market + +On line 4329: + the issues in this + narrow slice of the market + remain contained and + +On line 4331: + not negatively + impacted other sectors."10 + However, Edwards + +On line 4331: + impacted other + sectors."10 However, Edwards + did not disclose the + +On line 4331: + increase in retained + super-senior CDO tranches or + the difficulty + +On line 4331: + CDO tranches or the + difficulty of selling + those tranches, even at + +On line 4331: + difficulty of + selling those tranches, even at + a loss—though specific + +On line 4331: + those tranches, even at + a loss—though specific questions + on the subject were + +On line 4331: + tranches, even at a + loss—though specific questions on + the subject were raised. + +On line 4333: + subject were raised. In + July, Merrill followed its + strong first-quarter report + +On line 4333: + first-quarter report with + another for the second + quarter that "enabled + +On line 4333: + another for the + second quarter that "enabled + the company to + +On line 4333: + second quarter that + "enabled the company to + achieve record net revenues, + +On line 4333: + company to achieve + record net revenues, net earnings + and net earnings per + +On line 4333: + achieve record net revenues, + net earnings and net earnings + per diluted share + +On line 4333: + record net revenues, net + earnings and net earnings per + diluted share for + +On line 4333: + net earnings and net + earnings per diluted share + for the first half of + +On line 4333: + and net earnings per + diluted share for the first + half of During the + +On line 4333: + per diluted share + for the first half of During + the conference call + +On line 4333: + share for the first half + of During the conference + call announcing the + +On line 4333: + the conference call + announcing the results, the + analyst Glenn Schorr + +On line 4333: + call announcing the + results, the analyst Glenn + Schorr of UBS, a large + +On line 4333: + analyst Glenn Schorr + of UBS, a large Swiss bank, asked + the CFO to provide + +On line 4333: + Glenn Schorr of UBS, a + large Swiss bank, asked the CFO to + provide some "color + +On line 4333: + of UBS, a large Swiss + bank, asked the CFO to provide + some "color around myth + +On line 4333: + the CFO to provide + some "color around myth versus + reality" on + +On line 4333: + some "color around myth + versus reality" on + Merrill’s exposure + +On line 4333: + Merrill’s exposure + to retained CDO positions. + As he had three months + +On line 4333: + CDO positions. As + he had three months earlier, + Edwards stressed Merrill’s + +On line 4333: + earlier, Edwards + stressed Merrill’s risk management + and the fact that the + +On line 4333: + Edwards stressed Merrill’s + risk management and the fact + that the CDO business + +On line 4333: + risk management and + the fact that the CDO business + was a small part of + +On line 4333: + and the fact that the + CDO business was a small part + of Merrill’s overall + +On line 4333: + that the CDO business + was a small part of Merrill’s + overall business. He + +On line 4333: + CDO business was a + small part of Merrill’s overall + business. He said that + +On line 4333: + was a small part of + Merrill’s overall business. He + said that there had been + +On line 4333: + of Merrill’s overall + business. He said that there had + been significant + +On line 4333: + said that there had been + significant reductions + in Merrill’s retained + +On line 4333: + retained exposures + to lower-rated segments of + the market, although + +On line 4333: + lower-rated segments + of the market, although he + did not disclose that + +On line 4333: + although he did not + disclose that the total amount + of Merrill’s retained + +On line 4333: + did not disclose that + the total amount of Merrill’s + retained CDOs had reached + +On line 4333: + that the total amount + of Merrill’s retained CDOs had + reached billion by June. + +On line 4335: + of Merrill’s retained + CDOs had reached billion by June. + Edwards declined to + +On line 4335: + CDOs had reached billion + by June. Edwards declined to + provide details about + +On line 4335: + provide details about + the company’s exposure + to subprime mortgage + +On line 4335: + mortgage CDOs and any + inventory of mortgage-backed + securities to + +On line 4335: + inventory of + mortgage-backed securities to + be packaged into + +On line 4335: + "We don’t disclose our + capital allocations + against any specific + +On line 4337: + any specific or + even broader group," Edwards said.12 + On July, after + +On line 4337: + specific or even + broader group," Edwards said.12 On + July, after the + +On line 4337: + broader group," Edwards + said.12 On July, after the + super-senior tranches + +On line 4337: + July, after the + super-senior tranches had been + accumulating + +On line 4337: + super-senior tranches + had been accumulating + for many months, Merrill + +On line 4337: + executives first + officially informed its + board about the buildup. At + +On line 4337: + about the buildup. At a + presentation to the board’s + Finance Committee, + +On line 4337: + presentation to + the board’s Finance Committee, + Dale Lattanzio, co-head + +On line 4337: + Finance Committee, + Dale Lattanzio, co-head of the + American branch of + +On line 4337: + of the Fixed Income, + Currencies and Commodities + business, reported + +On line 4339: + a "net" exposure + of billion in CDO-related assets, + essentially all + +On line 4339: + of billion in CDO-related + assets, essentially all + of them rated triple-A, + +On line 4339: + all of them rated + triple-A, with exposure to the + lower-rated asset + +On line 4339: + with exposure to + the lower-rated asset class + significantly + +On line 4339: + significantly + reduced.13 This net exposure + was the amount of CDO + +On line 4339: + was the amount of CDO + positions left after the + subtraction of the + +On line 4341: + CDO positions left + after the subtraction of + the hedges— guarantees + +On line 4341: + the subtraction of + the hedges— guarantees in one + form or another—that + +On line 4341: + the hedges— guarantees + in one form or another—that + Merrill had purchased + +On line 4341: + guarantees in one + form or another—that Merrill + had purchased to pass + +On line 4341: + form or another—that + Merrill had purchased to pass + along its ultimate + +On line 4341: + another—that Merrill + had purchased to pass along its + ultimate risk to + +On line 4341: + Merrill had purchased + to pass along its ultimate + risk to third parties + +On line 4341: + had purchased to pass + along its ultimate risk to + third parties willing + +On line 4341: + purchased to pass along + its ultimate risk to third + parties willing to + +On line 4341: + third parties willing + to provide that protection + and take that risk for + +On line 4341: + parties willing to + provide that protection and + take that risk for a + +On line 4343: + willing to provide + that protection and take that + risk for a fee. AIG + +On line 4343: + that protection and + take that risk for a fee. AIG + and the small club of + +On line 4343: + take that risk for a + fee. AIG and the small club of + monoline insurers + +On line 4343: + fee. AIG and the small + club of monoline insurers + were significant + +On line 4343: + suppliers of these + guarantees, commonly done + as credit default + +On line 4343: + as credit default + swaps. In July Merrill had + begun to increase + +On line 4343: + July Merrill had + begun to increase the amount + of CDS protection + +On line 4345: + of CDS protection + to offset the retained CDO + positions. Lattanzio + +On line 4345: + told the committee, + "[Management] decided in + the beginning of + +On line 4345: + decided in the + beginning of this year to + significantly + +On line 4345: + beginning of this + year to significantly + reduce exposure + +On line 4345: + reduce exposure + to lower-rated assets in + the sub-prime asset + +On line 4345: + lower-rated assets + in the sub-prime asset class + and instead migrate + +On line 4345: + senior and super + senior tranches."14 Edwards did + not see any problems. + +On line 4345: + and super senior + tranches."14 Edwards did not see + any problems. As Kim + +On line 4345: + see any problems. As + Kim insisted, "Everyone + at the firm and most + +On line 4345: + As Kim insisted, + "Everyone at the firm and + most people in the + +On line 4345: + "Everyone at the + firm and most people in the + industry felt that + +On line 4345: + at the firm and most + people in the industry + felt that super-senior + +On line 4349: + the industry felt + that super-senior was super + safe."15 LATE TO EARLY + +On line 4349: + that super-senior was + super safe."15 LATE TO EARLY + Former CEO O’Neal told + +On line 4349: + Former CEO O’Neal told + FCIC investigators he + had not known that the + +On line 4349: + the company was + retaining the super-senior + tranches of the CDOs + +On line 4349: + was retaining the + super-senior tranches of the + CDOs until Lattanzio’s + +On line 4349: + super-senior tranches + of the CDOs until Lattanzio’s + presentation to + +On line 4349: + Finance Committee. + He was startled, if only + because he had been + +On line 4349: + Committee. He was + startled, if only because + he had been under + +On line 4349: + startled, if only + because he had been under + the impression that + +On line 4349: + because he had been + under the impression that + Merrill’s mortgage-backed-assets + +On line 4349: + he had been under + the impression that Merrill’s + mortgage-backed-assets business + +On line 4349: + the impression that + Merrill’s mortgage-backed-assets business + had been driven by + +On line 4349: + mortgage-backed-assets business + had been driven by demand: + he had assumed that + +On line 4349: + had been driven by + demand: he had assumed that + if there were no new + +On line 4349: + driven by demand: + he had assumed that if there + were no new customers, + +On line 4349: + by demand: he had + assumed that if there were no + new customers, there would + +On line 4349: + he had assumed that + if there were no new customers, + there would be no new + +On line 4349: + that if there were no + new customers, there would be no + new offerings. If + +On line 4349: + new customers, there would + be no new offerings. If + customers demanded + +On line 4349: + no new offerings. + If customers demanded the + CDOs, why would Merrill + +On line 4349: + new offerings. If + customers demanded the CDOs, + why would Merrill have + +On line 4349: + CDOs, why would Merrill + have to retain CDO tranches + on the balance sheet1 + +On line 4349: + why would Merrill have + to retain CDO tranches on + the balance sheet1 O’Neal + +On line 4349: + would Merrill have to + retain CDO tranches on the + balance sheet1 O’Neal said + +On line 4349: + retain CDO tranches + on the balance sheet1 O’Neal said + he was surprised about + +On line 4349: + the balance sheet1 O’Neal + said he was surprised about the + retained positions + +On line 4349: + said he was surprised + about the retained positions + but stated that the + +On line 4349: + but stated that the + presentation, analysis, + and estimation + +On line 4349: + and estimation + of potential losses were + not sufficient to + +On line 4349: + estimation of + potential losses were not + sufficient to sound + +On line 4349: + retained positions + had experienced only + million in losses.17 + +On line 4351: + had experienced + only million in losses.17 + Over the next three months, + +On line 4351: + only million in + losses.17 Over the next three months, + the market value + +On line 4351: + losses.17 Over the next + three months, the market value + of the super-senior + +On line 4351: + Over the next three months, + the market value of the + super-senior tranches + +On line 4351: + three months, the market + value of the super-senior + tranches plummeted + +On line 4351: + tranches plummeted + and losses ballooned; O’Neal told + the FCIC: "It was a + +On line 4351: + and losses ballooned; + O’Neal told the FCIC: "It was a + dawning awareness over + +On line 4351: + told the FCIC: "It was + a dawning awareness over the + course of the summer + +On line 4351: + the FCIC: "It was a + dawning awareness over the course + of the summer and + +On line 4351: + a dawning awareness + over the course of the summer + and through September + +On line 4351: + dawning awareness over + the course of the summer and + through September as + +On line 4351: + over the course of the + summer and through September + as the size of the + +On line 4351: + course of the summer + and through September as the + size of the losses + +On line 4351: + of the summer and + through September as the size + of the losses were + +On line 4353: + of the losses were + being estimated."18 On + October Merrill + +On line 4353: + October Merrill + executives gave its board + a detailed account + +On line 4353: + executives gave + its board a detailed account + of how the firm found + +On line 4353: + its board a detailed + account of how the firm found + itself with what was + +On line 4353: + a detailed account + of how the firm found itself + with what was by that + +On line 4353: + detailed account of + how the firm found itself with + what was by that time + +On line 4353: + account of how the + firm found itself with what was + by that time billion + +On line 4353: + of how the firm found + itself with what was by that + time billion in net + +On line 4353: + firm found itself with + what was by that time billion + in net exposure + +On line 4353: + found itself with what + was by that time billion in + net exposure to + +On line 4353: + itself with what was + by that time billion in net + exposure to the + +On line 4353: + what was by that time + billion in net exposure + to the super-senior + +On line 4353: + exposure to the + super-senior tranches—down from + a peak in July + +On line 4353: + to the super-senior + tranches—down from a peak in + July of billion + +On line 4353: + tranches—down from a + peak in July of billion + because the firm had + +On line 4353: + a peak in July + of billion because the firm + had increasingly + +On line 4353: + peak in July of + billion because the firm had + increasingly hedged, + +On line 4353: + of billion because + the firm had increasingly + hedged, written off, and + +On line 4353: + billion because the + firm had increasingly hedged, + written off, and sold + +On line 4353: + its exposure. On + October Merrill announced + its third-quarter earnings: + +On line 4353: + October Merrill + announced its third-quarter earnings: + a stunning billion + +On line 4353: + of billion. Merrill + also reported—for the + first time—its billion net + +On line 4353: + the first time—its billion + net exposure to retained + CDO positions. Still, + +On line 4353: + first time—its billion net + exposure to retained CDO + positions. Still, in + +On line 4353: + net exposure to + retained CDO positions. Still, + in their conference + +On line 4353: + CDO positions. Still, + in their conference call with + analysts, O’Neal and + +On line 4353: + in their conference + call with analysts, O’Neal and + Edwards refused to + +On line 4353: + conference call with + analysts, O’Neal and Edwards + refused to disclose + +On line 4353: + analysts, O’Neal and + Edwards refused to disclose + the gross exposures, + +On line 4353: + Edwards refused to + disclose the gross exposures, + excluding the hedges + +On line 4353: + to disclose the gross + exposures, excluding the + hedges from the monolines + +On line 4353: + the gross exposures, + excluding the hedges from the + monolines and AIG. "I + +On line 4353: + excluding the hedges + from the monolines and AIG. "I + just don’t want to get + +On line 4353: + from the monolines and + AIG. "I just don’t want to get + into the details + +On line 4353: + monolines and AIG. "I + just don’t want to get into + the details behind + +On line 4353: + AIG. "I just don’t want + to get into the details + behind that," Edwards + +On line 4353: + just don’t want to get + into the details behind + that," Edwards said. "Let + +On line 4353: + to get into the + details behind that," Edwards + said. "Let me just say + +On line 4353: + into the details + behind that," Edwards said. "Let + me just say that what + +On line 4353: + the details behind + that," Edwards said. "Let me just + say that what we have + +On line 4353: + behind that," Edwards + said. "Let me just say that what + we have provided + +On line 4353: + that," Edwards said. "Let + me just say that what we have + provided again we + +On line 4353: + said. "Let me just say + that what we have provided + again we think is an + +On line 4353: + the Securities + and Exchange Commission, by + September Merrill + +On line 4353: + Exchange Commission, + by September Merrill had + accumulated + +On line 4353: + accumulated + billion of "gross" retained CDO + positions, almost + +On line 4353: + of "gross" retained CDO + positions, almost four times + the billion of "net" + +On line 4355: + reported during + the October conference + call.20 On October + +On line 4355: + On October when + O’Neal resigned, he left with a + severance package + +On line 4357: + O’Neal resigned, he left + with a severance package + worth million21—on top of + +On line 4357: + resigned, he left with + a severance package worth + million21—on top of the + +On line 4359: + top of the million + in total compensation + he earned in when his + +On line 4359: + million in total + compensation he earned in + when his company + +On line 4359: + compensation he + earned in when his company + was still expanding + +On line 4359: + operations. Kim, + who oversaw the strategy + that left Merrill with + +On line 4359: + the strategy that + left Merrill with billions in + losses, had left in + +On line 4359: + Merrill with billions + in losses, had left in May + after being paid + +On line 4359: + in losses, had left + in May after being paid + million for his work + +On line 4359: + left in May after + being paid million for his + work in which was a + +On line 4359: + May after being + paid million for his work in + which was a profitable + +On line 4359: + after being paid + million for his work in which + was a profitable year + +On line 4359: + paid million for his + work in which was a profitable + year for Merrill as + +On line 4359: + million for his work + in which was a profitable year + for Merrill as a + +On line 4361: + his work in which was + a profitable year for Merrill + as a firm.22 By late + +On line 4361: + work in which was a + profitable year for Merrill as + a firm.22 By late the + +On line 4361: + a firm.22 By late the + viability of the + monoline insurers + +On line 4361: + viability + of the monoline insurers + from which Merrill had + +On line 4361: + monoline insurers + from which Merrill had purchased + almost billion in + +On line 4361: + insurers from which + Merrill had purchased almost + billion in hedges had + +On line 4361: + from which Merrill had + purchased almost billion in + hedges had come into + +On line 4361: + Merrill had purchased + almost billion in hedges had + come into question, + +On line 4361: + billion in hedges had + come into question, and the + rating agencies were + +On line 4361: + come into question, + and the rating agencies were + downgrading them, as + +On line 4361: + rating agencies were + downgrading them, as we will + see in more detail + +On line 4361: + downgrading them, as + we will see in more detail + shortly. The SEC had + +On line 4361: + them, as we will see + in more detail shortly. The + SEC had told Merrill + +On line 4361: + as we will see in + more detail shortly. The SEC + had told Merrill that + +On line 4361: + we will see in more + detail shortly. The SEC had + told Merrill that it + +On line 4361: + more detail shortly. + The SEC had told Merrill that + it would impose a + +On line 4361: + had told Merrill that + it would impose a punitive + capital charge on + +On line 4361: + that it would impose + a punitive capital charge + on the firm if it + +On line 4361: + might not be good for + all the protection purchased, + Merrill began to + +On line 4361: + be good for all the + protection purchased, Merrill + began to put aside + +On line 4361: + all the protection + purchased, Merrill began to + put aside loss allowances, + +On line 4361: + protection purchased, + Merrill began to put aside + loss allowances, starting + +On line 4363: + allowances, starting with + billion on January By + the end of Merrill + +On line 4363: + starting with billion + on January By the end + of Merrill would put + +On line 4363: + on January By + the end of Merrill would put + aside a total of + +On line 4363: + the end of Merrill + would put aside a total of + billion related + +On line 4363: + total of billion + related to monolines and + had recorded total + +On line 4363: + billion related + to monolines and had recorded + total write-downs on + +On line 4363: + to monolines and had + recorded total write-downs on + nearly billion of + +On line 4365: + billion of other + mortgage-related exposures. + ITIGROUP: "THAT WOULD + +On line 4369: + NOT IN ANY WAY HAVE + EXCITED MY ATTENTION" + Five days after O’Neal’s + +On line 4369: + its total subprime + exposure was billion, which + was billion more than + +On line 4369: + subprime exposure + was billion, which was billion + more than it had told + +On line 4369: + was billion, which was + billion more than it had told + investors just three weeks + +On line 4369: + which was billion more + than it had told investors just + three weeks earlier. + +On line 4369: + told investors just three + weeks earlier. Citigroup + also announced it + +On line 4369: + three weeks earlier. + Citigroup also announced + it would be taking + +On line 4369: + Citigroup also + announced it would be taking + an to billion loss + +On line 4369: + to billion loss on + its subprime mortgage–related + holdings and that Chuck + +On line 4369: + holdings and that Chuck + Prince was resigning as its + CEO. Like O’Neal, Prince had + +On line 4369: + and that Chuck Prince was + resigning as its CEO. Like + O’Neal, Prince had learned late + +On line 4369: + resigning as its + CEO. Like O’Neal, Prince had learned late + of his company’s + +On line 4369: + CEO. Like O’Neal, Prince had + learned late of his company’s + subprime-related CDO + +On line 4369: + had learned late of his + company’s subprime-related + CDO exposures. Prince + +On line 4369: + CDO exposures. Prince + and Robert Rubin, chairman of + the Executive + +On line 4369: + the Executive + Committee of the board, told + the FCIC that before + +On line 4369: + Committee of the + board, told the FCIC that before + September they had + +On line 4369: + of the board, told the + FCIC that before September + they had not known that + +On line 4369: + investment banking + division had sold some CDOs + with liquidity + +On line 4369: + division had sold + some CDOs with liquidity + puts and retained the + +On line 4369: + liquidity puts + and retained the super-senior + tranches of others.23 + +On line 4371: + super-senior tranches + of others.23 Prince told the FCIC + that even in hindsight + +On line 4371: + of others.23 Prince told + the FCIC that even in hindsight + it was difficult + +On line 4371: + others.23 Prince told the + FCIC that even in hindsight it + was difficult for + +On line 4371: + that even in hindsight + it was difficult for him + to criticize any + +On line 4371: + even in hindsight it + was difficult for him to + criticize any of + +On line 4371: + was difficult for + him to criticize any of + his team’s decisions. + +On line 4371: + difficult for him + to criticize any of his + team’s decisions. "If + +On line 4371: + team’s decisions. "If + someone had elevated + to my level that + +On line 4373: + had elevated + to my level that we were + putting on a trillion + +On line 4373: + to my level that + we were putting on a trillion + balance sheet, billion + +On line 4373: + level that we were + putting on a trillion balance + sheet, billion of triple-A-rated, + +On line 4373: + putting on a trillion + balance sheet, billion of triple-A-rated, + zero-risk paper, that + +On line 4373: + a trillion balance + sheet, billion of triple-A-rated, zero-risk + paper, that would not + +On line 4373: + balance sheet, billion + of triple-A-rated, zero-risk paper, that + would not in any way + +On line 4373: + paper, that would not + in any way have excited + my attention," Prince + +On line 4373: + not in any way have + excited my attention," + Prince said. "It wouldn’t + +On line 4373: + attention," Prince said. + "It wouldn’t have been useful + for someone to come + +On line 4373: + Prince said. "It wouldn’t + have been useful for someone + to come to me and + +On line 4373: + said. "It wouldn’t have + been useful for someone to + come to me and say, + +On line 4373: + "It wouldn’t have been + useful for someone to come + to me and say, ‘Now, + +On line 4373: + have been useful for + someone to come to me and + say, ‘Now, we have got + +On line 4373: + useful for someone + to come to me and say, ‘Now, + we have got trillion + +On line 4373: + for someone to come + to me and say, ‘Now, we have + got trillion on the + +On line 4373: + to come to me and + say, ‘Now, we have got trillion + on the balance sheet + +On line 4373: + come to me and say, + ‘Now, we have got trillion on + the balance sheet of + +On line 4373: + and say, ‘Now, we have + got trillion on the balance + sheet of assets. I + +On line 4373: + say, ‘Now, we have got + trillion on the balance sheet + of assets. I want + +On line 4373: + have got trillion on + the balance sheet of assets. + I want to point out + +On line 4373: + got trillion on the + balance sheet of assets. I + want to point out to + +On line 4373: + on the balance sheet + of assets. I want to point + out to you there is + +On line 4373: + the balance sheet of + assets. I want to point out + to you there is a + +On line 4373: + sheet of assets. I + want to point out to you there + is a one in a + +On line 4373: + assets. I want to + point out to you there is a + one in a billion + +On line 4373: + I want to point out + to you there is a one in + a billion chance that + +On line 4373: + want to point out to + you there is a one in a + billion chance that this + +On line 4373: + point out to you there + is a one in a billion + chance that this billion + +On line 4373: + out to you there is + a one in a billion chance + that this billion could + +On line 4373: + to you there is a + one in a billion chance that + this billion could go + +On line 4373: + you there is a one + in a billion chance that this + billion could go south.’ + +On line 4373: + is a one in a + billion chance that this billion + could go south.’ That would + +On line 4373: + one in a billion + chance that this billion could go + south.’ That would not have + +On line 4373: + in a billion chance + that this billion could go south.’ + That would not have been + +On line 4373: + billion chance that this + billion could go south.’ That would + not have been useful + +On line 4373: + billion could go south.’ + That would not have been useful + information. There + +On line 4373: + south.’ That would not have + been useful information. + There is nothing I + +On line 4373: + That would not have been + useful information. There + is nothing I can + +On line 4373: + information. There + is nothing I can do with + that, because there is + +On line 4373: + There is nothing I + can do with that, because there + is that level of + +On line 4373: + is nothing I can + do with that, because there is + that level of chance + +On line 4373: + nothing I can do + with that, because there is that + level of chance on + +On line 4373: + do with that, because + there is that level of chance + on everything."24 In + +On line 4373: + with that, because there + is that level of chance on + everything."24 In fact, + +On line 4373: + there is that level + of chance on everything."24 In + fact, the odds were much + +On line 4373: + that level of chance + on everything."24 In fact, the + odds were much higher + +On line 4373: + level of chance on + everything."24 In fact, the odds + were much higher than + +On line 4373: + on everything."24 In + fact, the odds were much higher + than that. Even before + +On line 4373: + everything."24 In fact, + the odds were much higher than + that. Even before the + +On line 4373: + fact, the odds were much + higher than that. Even before + the mass downgrades of + +On line 4373: + odds were much higher + than that. Even before the mass + downgrades of CDOs in + +On line 4373: + much higher than that. + Even before the mass downgrades + of CDOs in late a + +On line 4373: + higher than that. Even + before the mass downgrades of + CDOs in late a triple-A + +On line 4373: + than that. Even before + the mass downgrades of CDOs in + late a triple-A tranche of + +On line 4373: + that. Even before the + mass downgrades of CDOs in late + a triple-A tranche of a + +On line 4373: + Even before the mass + downgrades of CDOs in late a + triple-A tranche of a CDO + +On line 4373: + the mass downgrades of + CDOs in late a triple-A tranche of + a CDO had a in + +On line 4373: + mass downgrades of CDOs + in late a triple-A tranche of a + CDO had a in chance + +On line 4373: + downgrades of CDOs in + late a triple-A tranche of a CDO + had a in chance of + +On line 4373: + of CDOs in late a + triple-A tranche of a CDO had a + in chance of being + +On line 4373: + late a triple-A tranche of + a CDO had a in chance of + being downgraded + +On line 4373: + triple-A tranche of a CDO + had a in chance of being + downgraded within + +On line 4373: + a CDO had a in + chance of being downgraded + within years of its + +On line 4375: + original rating.25 + Certainly, Citigroup was + a large and complex + +On line 4375: + organization. + That trillion balance sheet—and + trillion off-balance + +On line 4375: + That trillion balance + sheet—and trillion off-balance + sheet—was spread among more + +On line 4377: + sheet—was spread among more + than operating subsidiaries + in Prince insisted + +On line 4377: + than operating + subsidiaries in Prince insisted + that Citigroup was + +On line 4377: + in Prince insisted + that Citigroup was not "too + big to manage."26 But + +On line 4377: + Prince insisted that + Citigroup was not "too big + to manage."26 But it + +On line 4377: + to manage."26 But it + was an organization + in which one unit would + +On line 4377: + organization + in which one unit would decide + to reduce mortgage + +On line 4377: + in which one unit would + decide to reduce mortgage + risk while another + +On line 4377: + decide to reduce + mortgage risk while another + unit increased it. And + +On line 4377: + reduce mortgage risk + while another unit increased + it. And it was an + +On line 4377: + while another unit + increased it. And it was an + organization + +On line 4377: + it. And it was an + organization in which + senior management + +On line 4377: + management would not + be notified of billion + in concentrated + +On line 4379: + be notified of + billion in concentrated + exposure— of the + +On line 4379: + exposure— of the + company’s balance sheet and + more than a third of + +On line 4379: + and more than a third + of its capital—because + it was perceived to + +On line 4379: + more than a third of + its capital—because it + was perceived to be + +On line 4381: + Financial Control + Group had argued in that the + liquidity puts + +On line 4381: + Group had argued in + that the liquidity puts + that Citigroup had + +On line 4381: + liquidity puts + that Citigroup had written + on its CDOs had been + +On line 4381: + puts that Citigroup + had written on its CDOs had + been priced for investors + +On line 4381: + that Citigroup had + written on its CDOs had been + priced for investors too + +On line 4381: + had written on its + CDOs had been priced for investors + too cheaply in light + +On line 4381: + written on its CDOs + had been priced for investors too + cheaply in light of + +On line 4381: + on its CDOs had been + priced for investors too cheaply + in light of the risks.28 + +On line 4381: + CDOs had been priced for + investors too cheaply in light + of the risks.28 Also, + +On line 4381: + priced for investors too + cheaply in light of the risks.28 + Also, in early + +On line 4381: + investors too cheaply + in light of the risks.28 Also, + in early Susan + +On line 4381: + in light of the risks.28 + Also, in early Susan + Mills, a managing + +On line 4381: + Also, in early + Susan Mills, a managing + director in the + +On line 4381: + mortgages from other + companies and bundled them + for sale to investors—took + +On line 4381: + bundled them for sale + to investors—took note of rising + delinquencies in the + +On line 4381: + sale to investors—took note + of rising delinquencies in + the subprime market + +On line 4381: + to investors—took note of + rising delinquencies in the + subprime market and + +On line 4381: + subprime market and + created a surveillance + group to track loans that + +On line 4381: + and created a + surveillance group to track loans + that her unit purchased.29 + +On line 4381: + surveillance group to + track loans that her unit purchased.29 + By mid-2006, her group saw + +On line 4381: + By mid-2006, her group saw + a deterioration + in loan quality + +On line 4381: + mid-2006, her group saw a + deterioration in + loan quality and + +On line 4381: + in loan quality + and an increase in early + payment defaults—that + +On line 4381: + quality and an + increase in early payment + defaults—that is, more + +On line 4381: + and an increase in + early payment defaults—that + is, more borrowers + +On line 4381: + defaults—that is, more + borrowers were defaulting + within a few months + +On line 4381: + is, more borrowers + were defaulting within a + few months of getting + +On line 4381: + more borrowers were + defaulting within a few + months of getting a + +On line 4381: + within a few months + of getting a loan. From to + Mills recalled before + +On line 4381: + few months of getting + a loan. From to Mills recalled + before the FCIC, the + +On line 4381: + of getting a loan. + From to Mills recalled before + the FCIC, the early + +On line 4381: + From to Mills recalled + before the FCIC, the early + payment default rates + +On line 4381: + Mills recalled before + the FCIC, the early payment + default rates nearly + +On line 4381: + before the FCIC, the + early payment default rates + nearly tripled from to + +On line 4381: + the FCIC, the early + payment default rates nearly + tripled from to or In + +On line 4381: + the early payment + default rates nearly tripled from + to or In response, + +On line 4381: + or In response, the + securitization unit + slowed down its purchase + +On line 4381: + diligence on what it + bought. However, neither Mills + nor other members + +On line 4381: + However, neither + Mills nor other members of + the unit shared any of + +On line 4381: + nor other members + of the unit shared any of this + information with + +On line 4381: + of the unit shared any + of this information with + other divisions + +On line 4381: + unit shared any of this + information with other + divisions in Citi-LATE + +On line 4381: + this information + with other divisions in + Citi-LATE TO EARLY group, + +On line 4381: + divisions in Citi-LATE + TO EARLY group, including + the CDO desk.31 Around March + +On line 4381: + in Citi-LATE TO EARLY + group, including the CDO desk.31 + Around March or April in + +On line 4381: + April in contrast with + the securitization + desk, Citigroup’s CDO + +On line 4381: + in contrast with the + securitization desk, + Citigroup’s CDO desk + +On line 4383: + observed. "Management + acknowledged that, in looking + back, it should have made + +On line 4383: + have made the mortgage + deterioration known + earlier throughout + +On line 4383: + throughout the firm. The + Global Consumer Group saw signs + of sub-prime issues + +On line 4383: + Global Consumer Group + saw signs of sub-prime issues + and avoided losses, + +On line 4383: + saw signs of sub-prime + issues and avoided losses, + as did mortgage backed + +On line 4383: + issues and avoided + losses, as did mortgage backed + securities traders, + +On line 4383: + as did mortgage backed + securities traders, but CDO + structures business did + +On line 4383: + securities traders, + but CDO structures business did + so belatedly—[there + +On line 4385: + CDO structures business + did so belatedly—[there was] + no dialogue across + +On line 4387: + was] no dialogue + across businesses."33 Co-head of + the CDO desk Janice + +On line 4387: + no dialogue across + businesses."33 Co-head of the + CDO desk Janice Warne + +On line 4387: + businesses."33 Co-head + of the CDO desk Janice Warne + told the FCIC that she + +On line 4387: + the CDO desk Janice + Warne told the FCIC that she first + saw weaknesses in + +On line 4387: + CDO desk Janice Warne + told the FCIC that she first saw + weaknesses in the + +On line 4387: + Warne told the FCIC that + she first saw weaknesses in + the underlying + +On line 4387: + In February, when + the ABX.HE.BBB- 06-2 fell to + below par, the CDO + +On line 4387: + when the ABX.HE.BBB- + 06-2 fell to below par, the + CDO desk decided + +On line 4387: + the ABX.HE.BBB- 06-2 + fell to below par, the CDO + desk decided to + +On line 4387: + ABX.HE.BBB- 06-2 fell + to below par, the CDO desk + decided to slow + +On line 4387: + 06-2 fell to below + par, the CDO desk decided + to slow down on the + +On line 4387: + below par, the CDO + desk decided to slow down + on the financing + +On line 4387: + on the financing + of mortgage securities + for inventory + +On line 4387: + the financing of + mortgage securities for + inventory to + +On line 4387: + securities for + inventory to produce + CDOs.34 Shortly thereafter, + +On line 4387: + inventory to + produce CDOs.34 Shortly thereafter, + however, the same + +On line 4389: + produce CDOs.34 Shortly + thereafter, however, the same + ABX index started + +On line 4389: + thereafter, however, + the same ABX index started + to rally, rising + +On line 4389: + the same ABX index + started to rally, rising + to below par in + +On line 4389: + started to rally, + rising to below par in + March and holding around + +On line 4389: + rising to below + par in March and holding around + that level through May. + +On line 4389: + below par in March + and holding around that level + through May. So, the CDO + +On line 4389: + in March and holding + around that level through May. So, + the CDO desk reversed + +On line 4389: + March and holding around + that level through May. So, the + CDO desk reversed course + +On line 4389: + and holding around that + level through May. So, the CDO + desk reversed course and + +On line 4389: + level through May. So, + the CDO desk reversed course and + accelerated + +On line 4389: + the CDO desk reversed + course and accelerated + its purchases of + +On line 4389: + of inventory + in April, according to Nestor + Dominguez, Warne’s co-head on + +On line 4389: + inventory in + April, according to Nestor Dominguez, + Warne’s co-head on the + +On line 4391: + in April, according + to Nestor Dominguez, Warne’s co-head on + the CDO desk.35 Dominguez said + +On line 4391: + April, according to + Nestor Dominguez, Warne’s co-head on the + CDO desk.35 Dominguez said he + +On line 4391: + the CDO desk.35 Dominguez said + he didn’t see the market + weakening until + +On line 4391: + Dominguez said he didn’t + see the market weakening + until the summer, + +On line 4391: + he didn’t see the + market weakening until + the summer, when the + +On line 4391: + market weakening + until the summer, when the + index fell to less + +On line 4393: + the index fell to + less than below par.36 Murray + Barnes, the Citigroup + +On line 4393: + index fell to less + than below par.36 Murray Barnes, + the Citigroup risk + +On line 4393: + par.36 Murray Barnes, the + Citigroup risk officer + assigned to the CDO + +On line 4393: + the Citigroup risk + officer assigned to the + CDO business, approved + +On line 4393: + officer assigned + to the CDO business, approved + the CDO desk’s request + +On line 4393: + to the CDO business, + approved the CDO desk’s request + to temporarily + +On line 4393: + approved the CDO desk’s + request to temporarily + increase its limits + +On line 4395: + collateral. Barnes + observed, in hindsight, that rather + than looking at the + +On line 4395: + observed, in hindsight, + that rather than looking at the + widening spreads as an + +On line 4395: + that rather than looking + at the widening spreads as an + opportunity, + +On line 4395: + at the widening spreads + as an opportunity, + Citigroup should have + +On line 4395: + opportunity, + Citigroup should have reassessed + its assumptions and + +On line 4395: + Citigroup should have + reassessed its assumptions and + examined whether the + +On line 4395: + should have reassessed its + assumptions and examined + whether the decline in + +On line 4395: + its assumptions and + examined whether the decline + in the ABX was a + +On line 4395: + and examined whether + the decline in the ABX was + a sign of strain in + +On line 4395: + examined whether the + decline in the ABX was a + sign of strain in the + +On line 4395: + the decline in the + ABX was a sign of strain in + the mortgage market. + +On line 4395: + decline in the ABX + was a sign of strain in the + mortgage market. He + +On line 4397: + manage its risk.37 The + risk management division + also increased the + +On line 4397: + The risk management + division also increased + the CDO desk’s limits + +On line 4397: + division also + increased the CDO desk’s limits + for retaining the + +On line 4397: + increased the CDO desk’s + limits for retaining the + most senior tranches + +On line 4397: + CDO desk’s limits for + retaining the most senior + tranches from billion + +On line 4397: + retaining the most + senior tranches from billion + to billion in the + +On line 4397: + most senior tranches + from billion to billion in + the first half of As + +On line 4397: + senior tranches from + billion to billion in the + first half of As at + +On line 4397: + tranches from billion + to billion in the first half + of As at Merrill, + +On line 4397: + billion to billion + in the first half of As at + Merrill, traders and risk + +On line 4397: + to billion in the + first half of As at Merrill, + traders and risk managers + +On line 4397: + billion in the first + half of As at Merrill, traders + and risk managers at + +On line 4397: + and risk managers at + Citigroup believed that the + super-senior tranches + +On line 4397: + Citigroup believed + that the super-senior tranches + carried little risk.38 + +On line 4397: + Super Senior AAA + CDO exposure was perhaps + Citigroup’s ‘biggest + +On line 4397: + CDO exposure was + perhaps Citigroup’s ‘biggest + miss.’ As management + +On line 4397: + perhaps Citigroup’s + ‘biggest miss.’ As management + felt comfortable with + +On line 4397: + As management felt + comfortable with the credit + risk of these tranches, + +On line 4397: + risk of these tranches, + it began to retain large + positions on the + +On line 4397: + tranches, it began + to retain large positions + on the balance sheet. + +On line 4397: + positions on the + balance sheet. As the sub-prime + market began to + +On line 4397: + balance sheet. As the + sub-prime market began to + deteriorate, + +On line 4397: + total about billion, + nearly half of Citigroup’s + capital at the + +On line 4397: + billion, nearly half + of Citigroup’s capital + at the end of About + +On line 4397: + half of Citigroup’s + capital at the end of + About billion of that + +On line 4397: + capital at the + end of About billion of that + loss related to + +On line 4397: + end of About billion + of that loss related to + protection purchased + +On line 4397: + loss related to + protection purchased from the + monoline insurers.40 + +On line 4399: + protection purchased + from the monoline insurers.40 + Barnes’s decision + +On line 4399: + insurers.40 Barnes’s + decision to increase the + CDO risk limits was + +On line 4399: + to increase the CDO + risk limits was approved by + his superior, + +On line 4399: + increase the CDO risk + limits was approved by his + superior, Ellen + +On line 4399: + was approved by his + superior, Ellen Duke. Barnes + and Duke reported + +On line 4399: + superior, Ellen + Duke. Barnes and Duke reported + to David Bushnell, the + +On line 4399: + David Bushnell, the chief + risk officer. Bushnell—whom + Prince called "the best risk + +On line 4399: + chief risk officer. + Bushnell—whom Prince called "the best + risk manager on + +On line 4399: + Bushnell—whom Prince called + "the best risk manager on + Wall Street"—told the FCIC + +On line 4399: + Prince called "the best risk + manager on Wall Street"—told + the FCIC that he did + +On line 4399: + risk manager on + Wall Street"—told the FCIC that he + did not remember + +On line 4399: + did not remember + specifically approving + the increase but that, + +On line 4399: + that, in general, + the risk management function + did approve higher + +On line 4399: + in general, the + risk management function did + approve higher risk + +On line 4399: + the risk management + function did approve higher + risk limits when a + +On line 4399: + did approve higher + risk limits when a business + line was growing.41 He + +On line 4399: + risk limits when a + business line was growing.41 He + described a "firm-wide + +On line 4399: + when a business line + was growing.41 He described a + "firm-wide initiative" + +On line 4399: + growing.41 He described + a "firm-wide initiative" to + increase Citigroup’s + +On line 4401: + Citigroup’s structured + products business.42 Perhaps what + is most remarkable + +On line 4401: + business.42 Perhaps what + is most remarkable about the + conflicting strategies + +On line 4401: + strategies employed by + the ecuritization and + CDO desks is that their + +On line 4401: + CDO desks is that their + respective risk officers + attended the same + +On line 4401: + independent risk + meetings. Duke reflected that + she was not overly + +On line 4401: + Duke reflected that + she was not overly concerned + when the issue came + +On line 4401: + reflected that she + was not overly concerned when + the issue came up, + +On line 4401: + she was not overly + concerned when the issue came + up, saying she and + +On line 4401: + overly concerned when + the issue came up, saying + she and her risk team + +On line 4401: + when the issue came + up, saying she and her risk + team were "seduced by + +On line 4401: + came up, saying she + and her risk team were "seduced + by structuring and + +On line 4401: + up, saying she and + her risk team were "seduced by + structuring and failed + +On line 4401: + she and her risk team + were "seduced by structuring + and failed to look at + +On line 4401: + and her risk team were + "seduced by structuring and + failed to look at the + +On line 4401: + the underlying + collateral."43 According + to Barnes, the CDO desk + +On line 4401: + CDOs’ underlying + collateral because it + lacked the "ability" + +On line 4401: + the "ability" to + see loan performance data, + such as delinquencies + +On line 4401: + "ability" to see + loan performance data, such + as delinquencies and + +On line 4401: + see loan performance + data, such as delinquencies + and early payment + +On line 4401: + such as delinquencies + and early payment defaults.44 + Yet the surveillance + +On line 4401: + as delinquencies and + early payment defaults.44 Yet + the surveillance unit + +On line 4401: + and early payment + defaults.44 Yet the surveillance + unit in Citigroup’s + +On line 4401: + unit in Citigroup’s + securitization desk + might have been able to + +On line 4401: + desk might have been able + to provide some insights based + on its own data.45 + +On line 4401: + might have been able to + provide some insights based on + its own data.45 Barnes + +On line 4401: + been able to provide + some insights based on its own + data.45 Barnes told the + +On line 4401: + some insights based on + its own data.45 Barnes told the + FCIC that Citigroup’s + +On line 4401: + insights based on its + own data.45 Barnes told the FCIC + that Citigroup’s risk + +On line 4401: + own data.45 Barnes told + the FCIC that Citigroup’s risk + management tended + +On line 4401: + that Citigroup’s risk + management tended to be + managed along business + +On line 4401: + management tended + to be managed along business + lines, noting that he + +On line 4401: + lines, noting that he + was only two offices away + from his colleague who + +On line 4401: + what was happening + to the underlying loans. + He regretted not + +On line 4401: + underlying loans. + He regretted not reaching + out to the consumer + +On line 4401: + He regretted not + reaching out to the consumer + bank to "get the pulse" + +On line 4403: + to the consumer bank + to "get the pulse" of mortgage + origination.46 "That + +On line 4403: + to "get the pulse" of + mortgage origination.46 "That + has never happened + +On line 4405: + origination.46 "That + has never happened since the + Depression" Prince and + +On line 4405: + has never happened + since the Depression" Prince and + Rubin appeared to + +On line 4405: + since the Depression" + Prince and Rubin appeared to + believe up until + +On line 4405: + Depression" Prince and + Rubin appeared to believe + up until the fall + +On line 4405: + Rubin appeared to + believe up until the fall + of that any downside + +On line 4405: + appeared to believe + up until the fall of that + any downside risk in + +On line 4405: + up until the fall + of that any downside risk in + the CDO business was + +On line 4405: + of that any downside + risk in the CDO business was + minuscule. "I don’t + +On line 4405: + downside risk in the + CDO business was minuscule. + "I don’t think anybody + +On line 4405: + in the CDO business + was minuscule. "I don’t think + anybody focused on + +On line 4407: + was minuscule. "I + don’t think anybody focused on + the CDOs. This was one + +On line 4407: + "I don’t think anybody + focused on the CDOs. This was + one business in a + +On line 4407: + focused on the CDOs. + This was one business in a + vast enterprise, and + +On line 4407: + This was one business + in a vast enterprise, and + until the trouble + +On line 4407: + business in a vast + enterprise, and until the + trouble developed, + +On line 4407: + wasn’t one that had + any particular profile," + Rubin—in Prince’s words, a + +On line 4407: + Rubin—in Prince’s words, a + "very important member of + [the] board"47—told the FCIC. + +On line 4407: + important member + of [the] board"47—told the FCIC. "You + know, Tom Maheras was + +On line 4407: + of [the] board"47—told the + FCIC. "You know, Tom Maheras was + in charge of trading. + +On line 4407: + [the] board"47—told the FCIC. + "You know, Tom Maheras was in + charge of trading. Tom + +On line 4407: + board"47—told the FCIC. "You + know, Tom Maheras was in charge + of trading. Tom was + +On line 4407: + "You know, Tom Maheras + was in charge of trading. Tom + was an extremely + +On line 4407: + know, Tom Maheras was + in charge of trading. Tom was + an extremely well + +On line 4407: + in charge of trading. + Tom was an extremely well + regarded trading + +On line 4407: + trading. Tom was an + extremely well regarded + trading figure on + +On line 4407: + an extremely well + regarded trading figure + on the street. And this + +On line 4407: + regarded trading + figure on the street. And this + is what traders do, they + +On line 4407: + trading figure on + the street. And this is what traders + do, they handle these + +On line 4407: + figure on the street. + And this is what traders do, they + handle these kinds of + +On line 4407: + on the street. And this + is what traders do, they handle + these kinds of problems."48 + +On line 4407: + street. And this is what + traders do, they handle these kinds + of problems."48 Maheras, + +On line 4407: + And this is what traders + do, they handle these kinds of + problems."48 Maheras, the + +On line 4407: + is what traders do, they + handle these kinds of problems."48 + Maheras, the co-head + +On line 4407: + of problems."48 Maheras, + the co-head of Citigroup’s + investment bank, told + +On line 4407: + Maheras, the co-head + of Citigroup’s investment + bank, told the FCIC that + +On line 4407: + investment bank, told + the FCIC that he spent "a small + fraction of of his + +On line 4407: + bank, told the FCIC that + he spent "a small fraction of + of his time thinking + +On line 4407: + told the FCIC that he + spent "a small fraction of of + his time thinking about + +On line 4407: + the FCIC that he spent + "a small fraction of of his + time thinking about or + +On line 4407: + spent "a small fraction + of of his time thinking about + or dealing with the + +On line 4407: + "a small fraction of + of his time thinking about or + dealing with the CDO + +On line 4407: + fraction of of his + time thinking about or dealing + with the CDO business.49 + +On line 4409: + of his time thinking + about or dealing with the CDO + business.49 Citigroup’s + +On line 4409: + or dealing with the + CDO business.49 Citigroup’s risk + management function + +On line 4409: + with the CDO business.49 + Citigroup’s risk management + function was simply + +On line 4409: + management function + was simply not very concerned + about housing market + +On line 4409: + was simply not very + concerned about housing market + risks. According to + +On line 4409: + housing market risks. + According to Prince, Bushnell + and others told him, + +On line 4409: + risks. According to + Prince, Bushnell and others told + him, in effect, "‘Gosh, + +On line 4409: + to Prince, Bushnell and + others told him, in effect, + "‘Gosh, housing prices would + +On line 4409: + and others told him, + in effect, "‘Gosh, housing prices + would have to go down + +On line 4409: + told him, in effect, + "‘Gosh, housing prices would have to + go down nationwide + +On line 4409: + him, in effect, "‘Gosh, + housing prices would have to go + down nationwide for + +On line 4409: + "‘Gosh, housing prices would + have to go down nationwide + for us to have, not + +On line 4409: + housing prices would have + to go down nationwide for + us to have, not a + +On line 4409: + prices would have to go + down nationwide for us to + have, not a problem + +On line 4409: + would have to go down + nationwide for us to have, + not a problem with + +On line 4409: + have, not a problem + with [mortgage-backed securities] + CDOs, but for us to + +On line 4409: + not a problem with + [mortgage-backed securities] CDOs, + but for us to have + +On line 4409: + problem with [mortgage-backed + securities] CDOs, but for + us to have problems,’ + +On line 4409: + securities] CDOs, + but for us to have problems,’ + and that has never + +On line 4409: + us to have problems,’ + and that has never happened + since the Depression."50 + +On line 4409: + have problems,’ and that + has never happened since the + Depression."50 Housing + +On line 4409: + and that has never + happened since the Depression."50 + Housing prices would be + +On line 4409: + has never happened + since the Depression."50 Housing + prices would be down much + +On line 4409: + never happened since + the Depression."50 Housing prices + would be down much less + +On line 4409: + down much less than when + Citigroup began having + problems because of + +On line 4411: + because of write-downs + and the liquidity puts + it had written. By + +On line 4411: + the liquidity + puts it had written. By June + national house prices + +On line 4411: + puts it had written. + By June national house prices + had fallen and about + +On line 4411: + it had written. By + June national house prices had + fallen and about of + +On line 4411: + By June national + house prices had fallen and about + of subprime adjustable-rate + +On line 4411: + house prices had fallen + and about of subprime adjustable-rate + mortgages were delinquent. + +On line 4411: + and about of subprime + adjustable-rate mortgages were delinquent. + Yet Citigroup still + +On line 4411: + adjustable-rate mortgages were + delinquent. Yet Citigroup still + did not expect that + +On line 4411: + still did not expect + that the liquidity puts + could be triggered, and + +On line 4411: + did not expect that + the liquidity puts could + be triggered, and it + +On line 4411: + the liquidity + puts could be triggered, and it + remained unconcerned + +On line 4411: + puts could be triggered, + and it remained unconcerned + about the value of + +On line 4411: + could be triggered, and + it remained unconcerned about + the value of its + +On line 4411: + On June Citigroup + made a presentation to + the SEC about subprime + +On line 4411: + in its CDO business. + The presentation noted + that Citigroup did + +On line 4411: + its CDO business. The + presentation noted that + Citigroup did not + +On line 4411: + the liquidity + puts were not a concern: "The + risk of default is + +On line 4413: + "The risk of default + is extremely unlikely + [and] certain market + +On line 4413: + risk of default is + extremely unlikely [and] + certain market events + +On line 4413: + [and] certain market + events must also occur for + us to be required + +On line 4413: + certain market events + must also occur for us + to be required to + +On line 4413: + must also occur + for us to be required to + fund. Therefore, we view + +On line 4413: + also occur for + us to be required to fund. + Therefore, we view these + +On line 4413: + us to be required + to fund. Therefore, we view these + positions to be + +On line 4413: + to fund. Therefore, we + view these positions to be + even less risky than the + +On line 4413: + Therefore, we view these + positions to be even less + risky than the Super + +On line 4413: + view these positions + to be even less risky than the + Super Senior Book."51 + +On line 4415: + positions to be + even less risky than the Super + Senior Book."51 Just a + +On line 4415: + be even less risky than + the Super Senior Book."51 Just + a few weeks later, + +On line 4415: + even less risky than the + Super Senior Book."51 Just a + few weeks later, the + +On line 4415: + risky than the Super + Senior Book."51 Just a few weeks + later, the July + +On line 4415: + the Super Senior + Book."51 Just a few weeks later, + the July failure + +On line 4415: + Super Senior Book."51 + Just a few weeks later, the + July failure of + +On line 4415: + Senior Book."51 Just a + few weeks later, the July + failure of the two + +On line 4415: + Book."51 Just a few weeks + later, the July failure + of the two Bear Stearns + +On line 4415: + a few weeks later, + the July failure of the + two Bear Stearns hedge funds + +On line 4415: + few weeks later, the + July failure of the two + Bear Stearns hedge funds spelled + +On line 4415: + later, the July + failure of the two Bear Stearns + hedge funds spelled trouble. + +On line 4415: + July failure of + the two Bear Stearns hedge funds spelled + trouble. Commercial + +On line 4415: + failure of the two + Bear Stearns hedge funds spelled trouble. + Commercial paper + +On line 4415: + the two Bear Stearns hedge + funds spelled trouble. Commercial + paper written against + +On line 4415: + paper written against + three Citigroup-underwritten + CDOs for which Bear Stearns + +On line 4415: + CDOs for which Bear Stearns + Asset Management was the + asset manager + +On line 4415: + which Bear Stearns Asset + Management was the asset + manager and on + +On line 4415: + Management was the + asset manager and on + LATE TO EARLY which + +On line 4415: + on LATE TO EARLY + which Citigroup had issued + liquidity puts + +On line 4415: + liquidity puts + began losing value, and + their interest rates + +On line 4415: + puts began losing + value, and their interest + rates began rising. + +On line 4415: + puts would be triggered + if interest rates on the + asset-backed commercial + +On line 4415: + if interest rates + on the asset-backed commercial + paper rose above a + +On line 4415: + rates on the asset-backed + commercial paper rose above + a certain level. + +On line 4417: + asset-backed commercial + paper rose above a certain + level. The Office + +On line 4417: + commercial paper + rose above a certain level. + The Office of the + +On line 4417: + paper rose above a + certain level. The Office + of the Comptroller + +On line 4417: + rose above a certain + level. The Office of the + Comptroller of the + +On line 4417: + certain level. The + Office of the Comptroller + of the Currency, + +On line 4417: + regulator of + Citigroup’s national bank + subsidiary, had expressed + +On line 4417: + subsidiary, had expressed + no apprehensions about the + liquidity puts + +On line 4419: + apprehensions about + the liquidity puts in + But by the summer + +On line 4419: + the liquidity + puts in But by the summer + of OCC Examiner-in-Charge John Lyons + +On line 4419: + liquidity puts + in But by the summer of + OCC Examiner-in-Charge John Lyons told + +On line 4419: + puts in But by the + summer of OCC Examiner-in-Charge John Lyons + told the FCIC, the OCC + +On line 4419: + But by the summer + of OCC Examiner-in-Charge John Lyons told the + FCIC, the OCC became + +On line 4419: + the summer of OCC + Examiner-in-Charge John Lyons told the FCIC, the + OCC became concerned. + +On line 4419: + of OCC Examiner-in-Charge John Lyons + told the FCIC, the OCC became + concerned. Buying the + +On line 4419: + told the FCIC, the OCC + became concerned. Buying the + commercial paper + +On line 4419: + drain billion of the + company’s cash and expose + it to possible + +On line 4419: + company’s cash and + expose it to possible + balance-sheet losses at + +On line 4419: + distress. But given + the rising rates, Lyons also + said Citigroup did + +On line 4419: + the rising rates, Lyons + also said Citigroup did + not have the option + +On line 4419: + rates, Lyons also said + Citigroup did not have the + option to wait. Over + +On line 4419: + said Citigroup did + not have the option to wait. + Over the next six months, + +On line 4419: + not have the option + to wait. Over the next six months, + Citigroup purchased + +On line 4419: + option to wait. Over + the next six months, Citigroup + purchased all billion + +On line 4419: + to wait. Over the next + six months, Citigroup purchased + all billion of the + +On line 4419: + six months, Citigroup + purchased all billion of the + paper that had been + +On line 4419: + Citigroup purchased + all billion of the paper + that had been subject + +On line 4421: + been subject to its + liquidity puts.52 On a + July conference + +On line 4421: + CFO Gary Crittenden + told analysts and investors + that the company’s + +On line 4421: + told analysts and + investors that the company’s + subprime exposures + +On line 4421: + company’s subprime + exposures had fallen from + billion at the end + +On line 4421: + fallen from billion + at the end of to billion + on June But he made + +On line 4421: + billion at the end + of to billion on June But + he made no mention + +On line 4421: + at the end of to + billion on June But he made + no mention of the + +On line 4421: + of to billion on + June But he made no mention + of the super-senior + +On line 4421: + made no mention of + the super-senior exposures + and liquidity + +On line 4421: + no mention of the + super-senior exposures and + liquidity puts. + +On line 4421: + risk team did a nice + job of anticipating + that this was going + +On line 4421: + team did a nice job + of anticipating that + this was going to + +On line 4421: + did a nice job of + anticipating that this + was going to be + +On line 4421: + going to be a + difficult environment, + and so set about in + +On line 4421: + be a difficult + environment, and so set + about in a pretty + +On line 4421: + and so set about in + a pretty concentrated + effort to reduce + +On line 4421: + effort to reduce + our exposure over the last + six months,"53 he said. A + +On line 4421: + our exposure over + the last six months,"53 he said. A + week later, on a + +On line 4421: + A week later, on + a July call, Crittenden + reiterated + +On line 4421: + reiterated + that subprime exposure had + been cut: "So I think + +On line 4421: + exposure had been + cut: "So I think we’ve had good + risk management that + +On line 4421: + I think we’ve had good + risk management that has been + anticipating + +On line 4423: + anticipating + some market dislocation + here."54 By August, as + +On line 4423: + here."54 By August, as + market conditions worsened, + Citigroup’s CDO desk + +On line 4423: + Citigroup’s CDO desk + was revaluing its super-senior + tranches, though it had + +On line 4423: + desk was revaluing its + super-senior tranches, though it + had no effective + +On line 4423: + tranches, though it had + no effective model for + assigning value. + +On line 4423: + assigning value. + However, as the market + congealed, then froze, the + +On line 4423: + value. However, + as the market congealed, then + froze, the paucity of + +On line 4423: + prices for these tranches + demanded a model. The + New York Fed later + +On line 4423: + tranches demanded + a model. The New York Fed + later noted that + +On line 4423: + model. The New York + Fed later noted that "the + model for Super + +On line 4423: + New York Fed later + noted that "the model for + Super Senior CDOs, + +On line 4423: + Fed later noted + that "the model for Super + Senior CDOs, based on + +On line 4423: + for Super Senior + CDOs, based on fundamental + economic factors, + +On line 4423: + Senior CDOs, based on + fundamental economic + factors, could not be + +On line 4423: + factors, could not be + fully validated by + Citigroup’s current + +On line 4423: + Citigroup’s current + validation methodologies + yet it was relied + +On line 4425: + exposures."55 Barnes, the + CDO risk officer, told the + FCIC that sometime that + +On line 4425: + CDO risk officer, + told the FCIC that sometime that + summer he met with + +On line 4425: + the FCIC that sometime + that summer he met with the + co-heads of the CDO + +On line 4425: + that summer he met + with the co-heads of the CDO + desk to express his + +On line 4425: + CDO desk to express + his concerns about possible + losses on both the + +On line 4425: + express his concerns + about possible losses on + both the unsold CDO + +On line 4425: + on both the unsold + CDO inventory and the + retained super-senior + +On line 4425: + CDO inventory + and the retained super-senior + tranches. The message + +On line 4425: + retained super-senior + tranches. The message got through. + Nestor Dominguez told the FCIC, + +On line 4425: + through. Nestor Dominguez told the + FCIC, "We began extensive + discussions about the + +On line 4425: + the FCIC, "We began + extensive discussions about + the implications + +On line 4425: + implications of + the dramatic decline of + the underlying + +On line 4425: + the underlying + subprime markets, and how that + would feed into the + +On line 4425: + that would feed into + the super-senior positions."56 + Also at this time— + +On line 4427: + this time— for the first + time—such concerns reached Maheras. + He justified his + +On line 4427: + first time—such concerns + reached Maheras. He justified + his lack of prior + +On line 4427: + concerns reached Maheras. + He justified his lack of + prior knowledge of + +On line 4427: + justified his lack + of prior knowledge of the + billions of dollars + +On line 4427: + of prior knowledge + of the billions of dollars + in inventory + +On line 4427: + prior knowledge of + the billions of dollars in + inventory and + +On line 4427: + in inventory + and super-senior tranches by + pointing out "that the + +On line 4427: + competent managers + and by an independent + risk group and that I + +On line 4427: + group and that I was + properly apprised of the + general nature + +On line 4427: + I was properly + apprised of the general + nature of our work + +On line 4427: + properly apprised + of the general nature + of our work in this + +On line 4427: + general nature + of our work in this area and + its attendant risks."57 + +On line 4429: + of our work in this + area and its attendant risks."57 + The exact dates are + +On line 4429: + our work in this area + and its attendant risks."57 The + exact dates are not + +On line 4429: + in this area and its + attendant risks."57 The exact + dates are not certain, + +On line 4429: + attendant risks."57 The + exact dates are not certain, + but according to + +On line 4429: + dates are not certain, + but according to Bushnell, + he remembers a + +On line 4429: + but according to + Bushnell, he remembers a + discussion at a + +On line 4429: + he remembers a + discussion at a "Business + Heads" meeting about the + +On line 4429: + volatility on those + super-senior tranches in late + August or early + +On line 4429: + on those super-senior + tranches in late August or + early September, + +On line 4429: + paper backing the + super-senior tranches of the + CDOs that BSAM managed.58 + +On line 4429: + super-senior tranches + of the CDOs that BSAM managed.58 + This was also when + +On line 4429: + of the CDOs that BSAM + managed.58 This was also when + Chairman and CEO Prince + +On line 4429: + CDOs that BSAM managed.58 + This was also when Chairman + and CEO Prince first heard + +On line 4429: + that BSAM managed.58 This + was also when Chairman and + CEO Prince first heard about + +On line 4429: + BSAM managed.58 This was + also when Chairman and CEO + Prince first heard about the + +On line 4429: + This was also when + Chairman and CEO Prince first heard + about the possible + +On line 4429: + also when Chairman + and CEO Prince first heard about the + possible amount of + +On line 4429: + and CEO Prince first heard + about the possible amount of + "open positions" on + +On line 4429: + CEO Prince first heard about + the possible amount of "open + positions" on the + +On line 4429: + about the possible + amount of "open positions" on + the super-senior CDO + +On line 4429: + "open positions" on + the super-senior CDO tranches + that Citigroup held: + +On line 4429: + positions" on the + super-senior CDO tranches that + Citigroup held: "It + +On line 4429: + Citigroup held: "It + wasn’t presented at the + time in a startling + +On line 4429: + wasn’t presented + at the time in a startling + fashion [but] hen it + +On line 4429: + a startling fashion + [but] hen it got bigger and + bigger and bigger, + +On line 4429: + bigger and bigger + and bigger, obviously, + over the next days."59 In + +On line 4429: + bigger and bigger, + obviously, over the next + days."59 In late August, + +On line 4429: + days."59 In late August, + Citigroup’s valuation + models suggested + +On line 4429: + might range from million + to billion. This number was + recalculated + +On line 4431: + billion. This number + was recalculated as + to million in mid-September, + +On line 4431: + recalculated + as to million in mid-September, as + the valuation + +On line 4431: + as to million in + mid-September, as the valuation + methodology was + +On line 4433: + the valuation + methodology was refined.60 + In the weeks ahead, those + +On line 4437: + ahead, those numbers would + skyrocket. "DEFCON calls" + To get a handle + +On line 4437: + liquidity puts, + starting on September Prince + convened a series + +On line 4439: + convened a series + of meetings—and later, nightly + "DEFCON calls"—with + +On line 4439: + series of meetings—and + later, nightly "DEFCON + calls"—with members of + +On line 4439: + senior management + team; they included Rubin, + Maheras, Crittenden, + +On line 4439: + team; they included + Rubin, Maheras, Crittenden, + and Bushnell, as well + +On line 4439: + as well as Lou Kaden, + the chief administrative + officer.61 Rubin + +On line 4439: + administrative + officer.61 Rubin was in + Korea during the + +On line 4439: + officer.61 Rubin + was in Korea during the + first meeting but Kaden + +On line 4441: + in Korea during + the first meeting but Kaden kept + him informed.62 Rubin + +On line 4441: + meeting but Kaden kept + him informed.62 Rubin later + emailed Prince: "According + +On line 4441: + him informed.62 Rubin + later emailed Prince: "According + to Lou, Tom [Maheras] + +On line 4441: + Rubin later emailed + Prince: "According to Lou, Tom + [Maheras] never did + +On line 4441: + emailed Prince: "According + to Lou, Tom [Maheras] never + did provide a clear + +On line 4441: + Prince: "According to + Lou, Tom [Maheras] never did + provide a clear and + +On line 4441: + to Lou, Tom [Maheras] + never did provide a clear + and direct answer + +On line 4441: + did provide a clear + and direct answer on the + super seniors. If + +On line 4441: + and direct answer + on the super seniors. If + that is so, and the + +On line 4441: + super seniors. If + that is so, and the meeting + did not bring that to + +On line 4441: + seniors. If that is + so, and the meeting did not + bring that to a head, + +On line 4441: + If that is so, and + the meeting did not bring that + to a head, isn’t + +On line 4441: + that is so, and the + meeting did not bring that to + a head, isn’t that + +On line 4441: + the meeting did not + bring that to a head, isn’t + that deeply troubling not + +On line 4441: + meeting did not bring + that to a head, isn’t that + deeply troubling not as + +On line 4441: + bring that to a head, + isn’t that deeply troubling not + as to what happened—that + +On line 4441: + to a head, isn’t + that deeply troubling not as to + what happened—that is a + +On line 4441: + that deeply troubling not + as to what happened—that is a + different question + +On line 4441: + what happened—that is a + different question that is + also troubling—but + +On line 4441: + different question + that is also troubling—but + as to providing + +On line 4441: + also troubling—but + as to providing full and + clear information + +On line 4441: + as to providing + full and clear information + and analysis now." + +On line 4441: + to providing full + and clear information and + analysis now." Prince + +On line 4441: + information and + analysis now." Prince disagreed, + writing, "I thought, for + +On line 4441: + and analysis now." + Prince disagreed, writing, "I thought, + for first mtg, it was + +On line 4441: + analysis now." Prince + disagreed, writing, "I thought, for + first mtg, it was good. + +On line 4441: + disagreed, writing, "I + thought, for first mtg, it was good. + We weren’t trying + +On line 4441: + thought, for first mtg, it + was good. We weren’t trying + to get to final + +On line 4441: + first mtg, it was good. + We weren’t trying to get + to final answers."63 + +On line 4443: + mtg, it was good. We + weren’t trying to get to + final answers."63 A + +On line 4443: + was good. We weren’t + trying to get to final + answers."63 A second + +On line 4443: + We weren’t trying + to get to final answers."63 + A second meeting + +On line 4443: + weren’t trying to + get to final answers."63 A + second meeting was + +On line 4443: + to get to final + answers."63 A second meeting + was held September + +On line 4443: + to final answers."63 + A second meeting was held + September after + +On line 4443: + answers."63 A second + meeting was held September + after Rubin was + +On line 4443: + A second meeting + was held September after + Rubin was back in + +On line 4445: + Rubin was back in + the country. This meeting marked + the first time Rubin + +On line 4445: + meeting marked the first + time Rubin recalled hearing + of the super-senior + +On line 4445: + time Rubin recalled + hearing of the super-senior + and liquidity + +On line 4445: + and liquidity + put exposure. He later + commented, "As far + +On line 4445: + put exposure. He + later commented, "As far + as I was concerned + +On line 4445: + later commented, + "As far as I was concerned + they were all one thing, + +On line 4445: + commented, "As far + as I was concerned they were + all one thing, because + +On line 4445: + "As far as I was + concerned they were all one thing, + because if there was + +On line 4445: + as I was concerned + they were all one thing, because + if there was a put + +On line 4445: + I was concerned they + were all one thing, because if + there was a put back + +On line 4445: + was concerned they were + all one thing, because if there + was a put back to + +On line 4445: + concerned they were all + one thing, because if there was + a put back to Citi + +On line 4445: + they were all one thing, + because if there was a put + back to Citi under + +On line 4445: + was a put back to + Citi under any circumstance, + however remote + +On line 4445: + circumstance might be, + you hadn’t fully disposed + of the risk."64 And, of + +On line 4445: + you hadn’t fully + disposed of the risk."64 And, of + course, the circumstance + +On line 4445: + disposed of the risk."64 + And, of course, the circumstance + was not remote, since + +On line 4445: + of the risk."64 And, of + course, the circumstance was not + remote, since billions + +On line 4445: + the circumstance was + not remote, since billions of + dollars in subprime + +On line 4445: + billions of dollars + in subprime mortgage assets + had already come back + +On line 4445: + in subprime mortgage + assets had already come back + onto Citigroup’s + +On line 4447: + assets had already + come back onto Citigroup’s + books. Prince told the FCIC + +On line 4447: + Citigroup’s books. Prince + told the FCIC that Maheras had + assured him throughout + +On line 4447: + books. Prince told the FCIC + that Maheras had assured him + throughout the meetings + +On line 4447: + Maheras had assured + him throughout the meetings and + the DEFCON calls + +On line 4447: + throughout the meetings + and the DEFCON calls that + the super seniors + +On line 4447: + DEFCON calls that + the super seniors posed no + risk to Citigroup, + +On line 4447: + the super seniors + posed no risk to Citigroup, + even as the market + +On line 4447: + even as the market + deteriorated; he + added that he became + +On line 4447: + added that he became + increasingly uneasy with + Maheras’s assessment. + +On line 4447: + uneasy with Maheras’s + assessment. "Tom had said and + said till his last day + +On line 4447: + assessment. "Tom had + said and said till his last day + at work [October + +On line 4447: + and said till his last + day at work [October ‘We + are never going + +On line 4447: + said till his last day + at work [October ‘We are + never going to + +On line 4447: + his last day at work + [October ‘We are never + going to lose a + +On line 4447: + at work [October + ‘We are never going to + lose a penny on + +On line 4447: + work [October ‘We + are never going to lose + a penny on these + +On line 4447: + are never going + to lose a penny on these + super seniors. We + +On line 4447: + to lose a penny + on these super seniors. We + are never going + +On line 4447: + lose a penny on + these super seniors. We are + never going to + +On line 4447: + these super seniors. + We are never going to + lose a penny on + +On line 4447: + super seniors. We + are never going to lose + a penny on these + +On line 4447: + are never going + to lose a penny on these + super seniors. And + +On line 4447: + to lose a penny + on these super seniors. And + as we went along and + +On line 4447: + lose a penny on + these super seniors. And as + we went along and I + +On line 4447: + a penny on these + super seniors. And as we + went along and I was + +On line 4447: + seniors. And as we + went along and I was more and + more uncomfortable + +On line 4447: + went along and I was + more and more uncomfortable + with this and more and + +On line 4447: + along and I was more + and more uncomfortable with + this and more and more + +On line 4447: + really began + to have some very serious + concerns about what was + +On line 4447: + began to have some + very serious concerns about + what was going to + +On line 4449: + some very serious + concerns about what was going + to happen."65 Despite + +On line 4449: + what was going to + happen."65 Despite Prince’s concerns, + Citigroup remained + +On line 4449: + happen."65 Despite Prince’s + concerns, Citigroup remained + publicly silent about the + +On line 4449: + exposure from the + super-senior positions and + liquidity puts, + +On line 4449: + and liquidity + puts, even as it preannounced + some details of its + +On line 4451: + third-quarter earnings on + October On October + the rating agencies + +On line 4451: + On October the + rating agencies announced the + first in a series + +On line 4451: + first in a series + of downgrades on thousands of + securities. In + +On line 4451: + downgrades on thousands + of securities. In Prince’s + view, these downgrades were + +On line 4451: + securities. In + Prince’s view, these downgrades were "the + precipitating + +On line 4451: + view, these downgrades were + "the precipitating event + in the financial + +On line 4451: + On the same day, Prince + restructured the investment + bank, a move that led + +On line 4453: + move that led to the + resignation of Maheras. + Four days later, the + +On line 4453: + the resignation + of Maheras. Four days later, + the question of the + +On line 4453: + of Maheras. Four days + later, the question of the + super-senior CDOs and + +On line 4453: + later, the question + of the super-senior CDOs and + liquidity puts + +On line 4453: + of the super-senior + CDOs and liquidity puts + was specifically + +On line 4453: + the super-senior CDOs + and liquidity puts was + specifically raised + +On line 4453: + specifically raised + at the board of directors’ + Corporate Audit + +On line 4453: + board of directors’ + Corporate Audit and Risk + Management LATE TO + +On line 4453: + Corporate Audit + and Risk Management LATE TO + EARLY Committee + +On line 4453: + and Risk Management + LATE TO EARLY Committee + meeting and brought up + +On line 4453: + Management LATE TO + EARLY Committee meeting + and brought up to the + +On line 4453: + Committee meeting + and brought up to the full board. + A presentation + +On line 4455: + to the full board. A + presentation concluded + that "total sub-prime + +On line 4455: + exposure in [the + investment bank] was $13bn with + an additional + +On line 4457: + Super Senior and + $27bn in Liquidity and + Par Puts."67 Citigroup’s + +On line 4457: + Senior and $27bn in + Liquidity and Par Puts."67 + Citigroup’s total + +On line 4457: + Liquidity and + Par Puts."67 Citigroup’s total + subprime exposure + +On line 4457: + Par Puts."67 Citigroup’s + total subprime exposure + was billion, nearly + +On line 4457: + subprime exposure + was billion, nearly half of + its capital. The + +On line 4457: + was billion, nearly + half of its capital. The + calculation was + +On line 4457: + of the super-senior- + and liquidity-put-related + exposure as he + +On line 4457: + told participants + that Citigroup had under + billion in subprime + +On line 4459: + that Citigroup had + under billion in subprime + exposure.68 A week + +On line 4459: + A week later, on + Saturday, October Prince + learned from Crittenden + +On line 4459: + the board. He later + reflected, "When I drove home + and Gary called me and + +On line 4459: + later reflected, + "When I drove home and Gary called + me and told me it + +On line 4459: + reflected, "When I + drove home and Gary called me and + told me it wasn’t + +On line 4459: + "When I drove home and + Gary called me and told me it + wasn’t going to + +On line 4459: + drove home and Gary called + me and told me it wasn’t + going to be two + +On line 4459: + Gary called me and told + me it wasn’t going to + be two or million + +On line 4459: + called me and told me + it wasn’t going to be + two or million but + +On line 4459: + me and told me it + wasn’t going to be two + or million but it + +On line 4459: + it wasn’t going + to be two or million but + it was going to + +On line 4459: + wasn’t going to + be two or million but it + was going to be + +On line 4459: + be two or million + but it was going to be + eight billion—I will never + +On line 4459: + or million but it + was going to be eight billion—I + will never forget + +On line 4459: + million but it was + going to be eight billion—I will + never forget that + +On line 4459: + but it was going + to be eight billion—I will never + forget that call. I + +On line 4459: + going to be eight + billion—I will never forget that + call. I continued + +On line 4459: + to be eight billion—I will + never forget that call. I + continued driving, + +On line 4459: + never forget that + call. I continued driving, + and I got home, I + +On line 4459: + forget that call. I + continued driving, and I + got home, I walked in + +On line 4459: + call. I continued + driving, and I got home, I + walked in the door, I + +On line 4459: + continued driving, + and I got home, I walked in + the door, I told my + +On line 4459: + driving, and I got + home, I walked in the door, I + told my wife, I said + +On line 4459: + and I got home, I + walked in the door, I told my + wife, I said here’s what + +On line 4459: + I got home, I walked + in the door, I told my wife, + I said here’s what I + +On line 4459: + got home, I walked in + the door, I told my wife, I + said here’s what I just + +On line 4459: + home, I walked in the + door, I told my wife, I said + here’s what I just heard + +On line 4459: + I walked in the door, + I told my wife, I said here’s + what I just heard and + +On line 4459: + walked in the door, I + told my wife, I said here’s what + I just heard and if + +On line 4459: + in the door, I told + my wife, I said here’s what I + just heard and if this + +On line 4459: + the door, I told my + wife, I said here’s what I just + heard and if this turns + +On line 4459: + door, I told my wife, + I said here’s what I just heard + and if this turns out + +On line 4459: + I told my wife, I + said here’s what I just heard and + if this turns out to + +On line 4459: + told my wife, I said + here’s what I just heard and if + this turns out to be + +On line 4459: + my wife, I said here’s + what I just heard and if this + turns out to be true, + +On line 4459: + wife, I said here’s what + I just heard and if this turns + out to be true, I + +On line 4459: + I said here’s what I + just heard and if this turns out + to be true, I am + +On line 4459: + what I just heard and + if this turns out to be true, + I am resigning."69 + +On line 4461: + I just heard and if + this turns out to be true, I + am resigning."69 On + +On line 4461: + to be true, I am + resigning."69 On November + Citigroup revealed + +On line 4461: + accurate subprime + exposure—now estimated + at billion—and it + +On line 4461: + at billion—and it + disclosed the subprime-related + losses. Though Prince had + +On line 4461: + Though Prince had resigned, + he remained on Citigroup’s + payroll until the + +On line 4461: + payroll until the + end of the year, and the board + of directors gave + +On line 4461: + end of the year, and + the board of directors gave + him a generous + +On line 4461: + the year, and the board + of directors gave him a + generous parting + +On line 4461: + in cash and million + in stock, bringing his total + compensation to + +On line 4463: + in stock, bringing his + total compensation to + million from to The + +On line 4463: + sued Citigroup for + its delayed disclosures. To + resolve the charges, the + +On line 4463: + delayed disclosures. + To resolve the charges, the bank + paid million. The New + +On line 4463: + To resolve the charges, + the bank paid million. The New + York Fed would later + +On line 4465: + the charges, the bank paid + million. The New York Fed would + later conclude, "There + +On line 4465: + extensive level + of subprime exposure posed + by Super Senior + +On line 4465: + level of subprime + exposure posed by Super + Senior CDO. Senior + +On line 4465: + subprime exposure + posed by Super Senior CDO. + Senior management, + +On line 4465: + exposure posed by + Super Senior CDO. Senior + management, as well + +On line 4465: + Senior CDO. Senior + management, as well as the + independent Risk + +On line 4465: + management, as well + as the independent Risk + Management function + +On line 4465: + the independent + Risk Management function charged + with monitoring + +On line 4467: + and analyze these + risks in a timely fashion."71 + Prince’s replacements as + +On line 4467: + a timely fashion."71 + Prince’s replacements as chairman + and CEO—Richard Parsons and + +On line 4467: + timely fashion."71 Prince’s + replacements as chairman and + CEO—Richard Parsons and Vikram + +On line 4467: + Prince’s replacements as + chairman and CEO—Richard Parsons and + Vikram Pandit—were announced + +On line 4467: + Pandit—were announced in + December. Rubin would stay + until January + +On line 4467: + December. Rubin + would stay until January + having been paid more + +On line 4467: + having been paid more + than million from to during + his tenure at the + +On line 4467: + paid more than million + from to during his tenure + at the company, + +On line 4467: + from to during his + tenure at the company, + including his role + +On line 4467: + his tenure at the + company, including his + role as chairman of + +On line 4467: + as chairman of the + Executive Committee, + a position that + +On line 4467: + the FCIC. "My agreement + with Citi provided that I’d + have no management + +On line 4467: + FCIC. "My agreement with + Citi provided that I’d have + no management of + +On line 4467: + with Citi provided + that I’d have no management + of personnel or + +On line 4469: + John Reed, former co-CEO + of Citigroup, attributed + the firm’s failures in + +On line 4469: + Reed, former co-CEO of + Citigroup, attributed the + firm’s failures in part + +On line 4469: + the firm’s failures in + part to a culture change that + occurred when the bank + +On line 4469: + failures in part to + a culture change that occurred + when the bank took on + +On line 4469: + to a culture change + that occurred when the bank took + on Salomon Brothers + +On line 4469: + a culture change that + occurred when the bank took on + Salomon Brothers as + +On line 4471: + on Salomon Brothers + as part of the Travelers + merger. He said that + +On line 4471: + of the Travelers + merger. He said that Salomon + executives "were + +On line 4471: + merger. He said that + Salomon executives "were + used to taking big + +On line 4471: + He said that Salomon + executives "were used to + taking big risks" and + +On line 4471: + executives "were + used to taking big risks" and + "had a history + +On line 4471: + used to taking big + risks" and "had a history + [of] making a lot + +On line 4471: + to taking big risks" + and "had a history [of] + making a lot of + +On line 4471: + big risks" and "had a + history [of] making a + lot of money but + +On line 4473: + [of] making a lot + of money but then getting + into trouble."74 AIG’S + +On line 4473: + of money but then + getting into trouble."74 AIG’S + DISPUTE WITH GOLDMAN: + +On line 4475: + into trouble."74 AIG’S + DISPUTE WITH GOLDMAN: "THERE COULD + NEVER BE LOSSES" + +On line 4477: + NEVER BE LOSSES" + Beginning on July when + Goldman’s Davilman sent + +On line 4477: + when Goldman’s Davilman + sent the email that disrupted + the vacation of + +On line 4477: + Goldman’s Davilman sent + the email that disrupted the + vacation of AIG’s + +On line 4477: + that disrupted the + vacation of AIG’s Alan Frost, + the dispute between + +On line 4477: + vacation of AIG’s + Alan Frost, the dispute between + Goldman and AIG over + +On line 4477: + of AIG’s Alan Frost, the + dispute between Goldman and + AIG over the need for + +On line 4477: + the dispute between + Goldman and AIG over the need + for collateral + +On line 4477: + and AIG over the need + for collateral to back + credit default swaps + +On line 4477: + the attention of + the senior management of + both companies. For + +On line 4477: + attention of the + senior management of both + companies. For months, + +On line 4477: + senior management + of both companies. For months, + Goldman pressed its case + +On line 4477: + management of both + companies. For months, Goldman + pressed its case and sent + +On line 4477: + both companies. For + months, Goldman pressed its case and + sent AIG a formal + +On line 4477: + day. It would pursue + AIG relentlessly with emands + for collateral + +On line 4477: + It would pursue AIG + relentlessly with emands for + collateral based + +On line 4477: + AIG relentlessly + with emands for collateral + based on marks that were + +On line 4477: + collateral based + on marks that were initially + well below those of + +On line 4477: + based on marks that were + initially well below those + of other firms—while + +On line 4477: + that were initially + well below those of other + firms—while AIG and its + +On line 4477: + well below those of + other firms—while AIG and its + management struggled + +On line 4477: + other firms—while AIG + and its management struggled + to come to grips with + +On line 4479: + burgeoning crisis. + The initial collateral + call was a shock to + +On line 4479: + crisis. The initial + collateral call was a + shock to AIG’s senior + +On line 4479: + collateral call + was a shock to AIG’s senior + executives, most + +On line 4479: + call was a shock to + AIG’s senior executives, + most of whom had not + +On line 4479: + was a shock to AIG’s + senior executives, most + of whom had not even + +On line 4479: + shock to AIG’s senior + executives, most of whom + had not even known that + +On line 4479: + executives, most + of whom had not even known that + the credit default + +On line 4479: + whom had not even known + that the credit default swaps + with Goldman contained + +On line 4481: + They had known there were + enormous exposures—$79 billion, + backed in large part by + +On line 4481: + known there were enormous + exposures—$79 billion, backed in + large part by subprime + +On line 4481: + enormous exposures—$79 + billion, backed in large part by + subprime and Alt-A loans, + +On line 4481: + billion, backed in large + part by subprime and Alt-A loans, + in compared with the + +On line 4481: + part by subprime and + Alt-A loans, in compared with the + parent company’s + +On line 4481: + subprime and Alt-A loans, + in compared with the parent + company’s total + +On line 4481: + Alt-A loans, in compared + with the parent company’s + total reported + +On line 4481: + total reported + capital of billion—but + executives said + +On line 4481: + said they had never + been concerned. "The mantra at [AIG + Financial Products] + +On line 4481: + never been concerned. + "The mantra at [AIG Financial + Products] had always + +On line 4481: + been concerned. "The mantra + at [AIG Financial Products] + had always been (in + +On line 4481: + concerned. "The mantra at + [AIG Financial Products] had + always been (in my + +On line 4481: + at [AIG Financial + Products] had always been (in + my experience) + +On line 4481: + Products] had always + been (in my experience) + that there could never + +On line 4481: + always been (in my + experience) that there could + never be losses," + +On line 4481: + experience) that + there could never be losses," + Vice President of + +On line 4483: + Vice President of + Accounting Policy Joseph + St. Denis said.76 Then + +On line 4483: + Policy Joseph St. + Denis said.76 Then came that first + collateral call. + +On line 4483: + St. Denis said.76 Then + came that first collateral + call. St. Denis told + +On line 4483: + Denis said.76 Then came + that first collateral call. + St. Denis told FCIC + +On line 4485: + first collateral + call. St. Denis told FCIC staff + that he was so "stunned" + +On line 4485: + collateral call. + St. Denis told FCIC staff that + he was so "stunned" when + +On line 4485: + call. St. Denis told + FCIC staff that he was so "stunned" + when he got the news + +On line 4485: + St. Denis told FCIC + staff that he was so "stunned" when + he got the news that + +On line 4485: + Denis told FCIC staff + that he was so "stunned" when he + got the news that he + +On line 4485: + told FCIC staff that he + was so "stunned" when he got the + news that he "had to + +On line 4485: + FCIC staff that he was + so "stunned" when he got the news + that he "had to sit + +On line 4485: + staff that he was so + "stunned" when he got the news that + he "had to sit down."77 + +On line 4485: + that he was so "stunned" + when he got the news that he + "had to sit down."77 The + +On line 4485: + "stunned" when he got the + news that he "had to sit down."77 + The collateral + +On line 4485: + news that he "had to + sit down."77 The collateral + provisions surprised + +On line 4485: + "had to sit down."77 The + collateral provisions + surprised even Gene Park, + +On line 4487: + who had insisted + months earlier that AIG stop + writing the swaps. He + +On line 4487: + months earlier that + AIG stop writing the swaps. He + told the FCIC that "rule + +On line 4487: + that AIG stop writing + the swaps. He told the FCIC that + "rule Number at AIG + +On line 4487: + AIG stop writing the + swaps. He told the FCIC that "rule + Number at AIG FP" + +On line 4487: + writing the swaps. He + told the FCIC that "rule Number + at AIG FP" was to + +On line 4487: + the swaps. He told the + FCIC that "rule Number at AIG + FP" was to never + +On line 4487: + swaps. He told the FCIC + that "rule Number at AIG FP" + was to never post + +On line 4487: + FCIC that "rule Number + at AIG FP" was to never + post collateral. + +On line 4487: + that "rule Number at + AIG FP" was to never post + collateral. This + +On line 4487: + FP" was to never + post collateral. This was + particularly + +On line 4487: + post collateral. + This was particularly + important in the + +On line 4487: + particularly + important in the credit + default swap business, + +On line 4487: + important in the + credit default swap business, + he said, because it + +On line 4487: + the credit default + swap business, he said, because + it was the only + +On line 4487: + swap business, he said, + because it was the only + unhedged business that + +On line 4489: + said, because it was + the only unhedged business + that AIG ran.78 But Jake + +On line 4489: + because it was the + only unhedged business that + AIG ran.78 But Jake Sun, + +On line 4489: + the only unhedged + business that AIG ran.78 But Jake + Sun, the general + +On line 4489: + that AIG ran.78 But Jake + Sun, the general counsel + of the Financial + +On line 4489: + ran.78 But Jake Sun, the + general counsel of the + Financial Products + +On line 4489: + Sun, the general + counsel of the Financial + Products subsidiary, who + +On line 4489: + general counsel + of the Financial Products + subsidiary, who reviewed + +On line 4489: + Financial Products + subsidiary, who reviewed the swap + contracts before they + +On line 4489: + subsidiary, who reviewed + the swap contracts before they + were executed, + +On line 4489: + executed, told + the FCIC that the provisions + were standard both at + +On line 4489: + told the FCIC that the + provisions were standard both + at AIG and in the + +On line 4489: + that the provisions + were standard both at AIG and + in the industry.79 + +On line 4489: + the provisions were + standard both at AIG and in + the industry.79 Frost, + +On line 4489: + were standard both at + AIG and in the industry.79 + Frost, who was the first + +On line 4489: + standard both at AIG + and in the industry.79 Frost, + who was the first to + +On line 4489: + both at AIG and in + the industry.79 Frost, who was + the first to learn of + +On line 4489: + at AIG and in the + industry.79 Frost, who was the + first to learn of the + +On line 4489: + the industry.79 Frost, + who was the first to learn of + the collateral + +On line 4489: + industry.79 Frost, who + was the first to learn of the + collateral call, + +On line 4489: + who was the first to + learn of the collateral + call, agreed and said that + +On line 4489: + the first to learn of + the collateral call, agreed + and said that other + +On line 4489: + and said that other + financial institutions + also commonly + +On line 4489: + also commonly + did deals with collateral + posting provisions.80 + +On line 4489: + Micottis, the Paris-based + head of the AIG Financial + Products’ Enterprise + +On line 4489: + Financial Products’ + Enterprise Risk Management + department, told the + +On line 4491: + were indeed common + in derivatives contracts— + but surprising in + +On line 4491: + indeed common in + derivatives contracts— but + surprising in the + +On line 4491: + in derivatives + contracts— but surprising in + the super-senior CDS + +On line 4491: + but surprising in + the super-senior CDS contracts, + which were considered + +On line 4491: + surprising in the + super-senior CDS contracts, which + were considered safe.81 + +On line 4491: + CDS contracts, which were + considered safe.81 Insurance + supervisors did + +On line 4491: + like MBIA and Ambac + to pay out except when the + insured entity + +On line 4491: + and Ambac to pay + out except when the insured + entity suffered + +On line 4491: + out except when the + insured entity suffered + an actual loss, + +On line 4491: + an actual loss, + and therefore those companies + were forbidden to + +On line 4491: + actual loss, and + therefore those companies were + forbidden to post + +On line 4491: + were forbidden to + post collateral for a + decline in market + +On line 4491: + decline in market + value or unrealized + losses. Because AIG + +On line 4491: + losses. Because AIG + Financial Products was not + regulated as + +On line 4491: + regulated as + an insurance company, + it was not subject + +On line 4493: + it was not subject + to this prohibition. As + disturbing as the + +On line 4493: + prohibition. As + disturbing as the senior + AIG executives’ + +On line 4493: + as the senior AIG + executives’ surprise at + the collateral + +On line 4493: + inability to + assess the validity + of Goldman’s numbers. + +On line 4493: + Goldman’s numbers. AIG + Financial Products did not + have its own model + +On line 4493: + Financial Products + did not have its own model + or otherwise try + +On line 4493: + did not have its own + model or otherwise try + to value the CDO + +On line 4493: + its own model or + otherwise try to value + the CDO portfolio + +On line 4493: + otherwise try to + value the CDO portfolio + that it guaranteed + +On line 4493: + CDO portfolio that + it guaranteed through credit + default swaps, nor did + +On line 4493: + nor did it hedge its + exposure. Gene Park explained + that hedging was seen + +On line 4493: + exposure. Gene Park + explained that hedging was seen + as unnecessary + +On line 4493: + explained that hedging + was seen as unnecessary + in part because of + +On line 4493: + in part because of + the mistaken belief that + AIG would have to pay + +On line 4493: + of the mistaken + belief that AIG would have to + pay counterparties + +On line 4493: + belief that AIG would + have to pay counterparties + only if holders + +On line 4493: + that AIG would have to + pay counterparties only + if holders of the + +On line 4493: + pay counterparties + only if holders of the + super-senior tranches + +On line 4493: + only if holders + of the super-senior tranches + incurred actual + +On line 4493: + if holders of the + super-senior tranches incurred + actual losses. + +On line 4493: + of the super-senior + tranches incurred actual + losses. He also + +On line 4493: + super-senior tranches + incurred actual losses. + He also said that + +On line 4493: + incurred actual + losses. He also said that + purchasing a hedge + +On line 4493: + losses. He also + said that purchasing a hedge + from UBS, the Swiss bank, + +On line 4493: + said that purchasing + a hedge from UBS, the Swiss bank, + was considered, but + +On line 4493: + that purchasing a + hedge from UBS, the Swiss bank, was + considered, but that + +On line 4493: + a hedge from UBS, the + Swiss bank, was considered, but + that Andrew Forster, the + +On line 4493: + hedge from UBS, the Swiss + bank, was considered, but that + Andrew Forster, the head + +On line 4493: + bank, was considered, + but that Andrew Forster, the head + of credit trading + +On line 4493: + was considered, but + that Andrew Forster, the head of + credit trading at + +On line 4493: + but that Andrew Forster, + the head of credit trading + at AIG Financial + +On line 4493: + Andrew Forster, the head + of credit trading at AIG + Financial Products, + +On line 4493: + the head of credit + trading at AIG Financial + Products, rejected + +On line 4493: + of credit trading + at AIG Financial Products, + rejected the idea + +On line 4493: + at AIG Financial + Products, rejected the idea + because it would cost + +On line 4493: + Financial Products, + rejected the idea because + it would cost more than + +On line 4493: + Products, rejected + the idea because it would cost + more than the fees that + +On line 4493: + idea because it would + cost more than the fees that AIG + Financial Products + +On line 4493: + cost more than the fees + that AIG Financial Products + was receiving to + +On line 4493: + more than the fees that + AIG Financial Products was + receiving to write + +On line 4493: + Financial Products + was receiving to write the + CDS protection. "We’re + +On line 4493: + was receiving to + write the CDS protection. "We’re + not going to pay + +On line 4493: + receiving to write + the CDS protection. "We’re not + going to pay a + +On line 4493: + the CDS protection. + "We’re not going to pay a + dime for this," Forster told + +On line 4493: + CDS protection. "We’re + not going to pay a dime + for this," Forster told Park.82 + +On line 4495: + to pay a dime for + this," Forster told Park.82 Therefore, AIG + Financial Products + +On line 4495: + dime for this," Forster told + Park.82 Therefore, AIG Financial + Products relied on + +On line 4495: + did not provide a + tool for monitoring the + CDOs’ market value. + +On line 4495: + not provide a tool + for monitoring the CDOs’ + market value. The + +On line 4495: + CDOs’ market value. + The model was developed + by LATE TO EARLY + +On line 4495: + market value. The + model was developed by + LATE TO EARLY Gary + +On line 4495: + value. The model + was developed by LATE TO + EARLY Gary Gorton, + +On line 4495: + by LATE TO EARLY + Gary Gorton, then a finance + professor at the + +On line 4495: + Gary Gorton, then a + finance professor at the + University of + +On line 4495: + University of + Pennsylvania’s Wharton School, + who began working + +On line 4495: + who began working + as a consultant to AIG + Financial Products + +On line 4495: + as a consultant + to AIG Financial Products + in and was close to + +On line 4495: + a consultant to + AIG Financial Products in + and was close to its + +On line 4495: + consultant to AIG + Financial Products in and + was close to its CEO, + +On line 4495: + to AIG Financial + Products in and was close to + its CEO, Joe Cassano. + +On line 4495: + Products in and was + close to its CEO, Joe Cassano. + The Gorton model + +On line 4495: + close to its CEO, Joe + Cassano. The Gorton model + had determined with + +On line 4495: + Cassano. The Gorton + model had determined with + confidence that the + +On line 4495: + Gorton model had + determined with confidence + that the owners of + +On line 4495: + had determined with + confidence that the owners + of the super-senior + +On line 4495: + confidence that the + owners of the super-senior + tranches of the CDOs + +On line 4495: + that the owners of + the super-senior tranches of + the CDOs insured by + +On line 4495: + the owners of the + super-senior tranches of the + CDOs insured by AIG + +On line 4497: + of the super-senior + tranches of the CDOs insured + by AIG Financial + +On line 4497: + super-senior tranches + of the CDOs insured by AIG + Financial Products + +On line 4497: + tranches of the CDOs + insured by AIG Financial + Products would never + +On line 4497: + of the CDOs insured + by AIG Financial Products + would never suffer + +On line 4497: + by AIG Financial + Products would never suffer + real economic + +On line 4497: + Financial Products + would never suffer real + economic losses, + +On line 4497: + Products would never + suffer real economic + losses, even in an + +On line 4497: + economic losses, + even in an economy as + troubled as the worst + +On line 4497: + losses, even in an + economy as troubled as + the worst post–World War II + +On line 4497: + in an economy + as troubled as the worst post–World + War II recession. + +On line 4497: + an economy as + troubled as the worst post–World War + II recession. The + +On line 4497: + the worst post–World War II + recession. The company’s + auditors, PricewaterhouseCoopers (PwC), + +On line 4497: + the collateral + requirements, concluded that + "the risk of default + +On line 4497: + [AIG’s] portfolio has + been effectively removed + and as a result + +On line 4497: + portfolio has been + effectively removed and + as a result from + +On line 4497: + result from a risk + management perspective, there + are no substantive + +On line 4497: + the fair value of + the liability stream + on these positions + +On line 4497: + fair value of the + liability stream on + these positions from + +On line 4497: + liability + stream on these positions from + a risk management + +On line 4497: + positions from a + risk management perspective + could reasonably be + +On line 4497: + a risk management + perspective could reasonably + be considered to + +On line 4499: + could reasonably be + considered to be zero."83 + In speaking with the + +On line 4499: + be considered to + be zero."83 In speaking with + the FCIC, Cassano was + +On line 4499: + considered to be + zero."83 In speaking with the + FCIC, Cassano was adamant + +On line 4499: + to be zero."83 In + speaking with the FCIC, Cassano + was adamant that the "CDS + +On line 4499: + zero."83 In speaking + with the FCIC, Cassano was adamant + that the "CDS book" was + +On line 4499: + with the FCIC, Cassano + was adamant that the "CDS book" was + effectively hedged. + +On line 4499: + was adamant that the "CDS + book" was effectively hedged. + He said that AIG could + +On line 4499: + that the "CDS book" was + effectively hedged. He said + that AIG could never + +On line 4499: + effectively hedged. + He said that AIG could never + suffer losses on + +On line 4499: + hedged. He said that AIG + could never suffer losses + on the swaps, because + +On line 4499: + He said that AIG could + never suffer losses on + the swaps, because the + +On line 4499: + could never suffer + losses on the swaps, because + the CDS contracts were + +On line 4499: + losses on the swaps, + because the CDS contracts were + written only on + +On line 4499: + swaps, because the CDS + contracts were written only + on the super-senior + +On line 4499: + contracts were written + only on the super-senior + tranches of top-rated + +On line 4499: + super-senior tranches + of top-rated securities + with high "attachment + +On line 4499: + securities with + high "attachment points"—that is, many + securities in + +On line 4499: + with high "attachment + points"—that is, many securities + in the CDOs would have + +On line 4499: + high "attachment points"—that + is, many securities in + the CDOs would have to + +On line 4499: + in the CDOs would have + to default in order for + losses to reach the + +On line 4499: + would have to default + in order for losses to + reach the super-senior + +On line 4499: + reach the super-senior + tranches—and because the bulk of + the exposure came + +On line 4499: + tranches—and because the + bulk of the exposure came + from loans made before + +On line 4499: + because the bulk of + the exposure came from loans + made before when he + +On line 4499: + the exposure came + from loans made before when he + thought underwriting + +On line 4499: + from loans made before + when he thought underwriting + standards had begun + +On line 4499: + deteriorate.84 + Indeed, according to Gene + Park, Cassano put a + +On line 4499: + Indeed, according + to Gene Park, Cassano put a + halt to a million + +On line 4499: + according to Gene + Park, Cassano put a halt to + a million hedge, in + +On line 4499: + to Gene Park, Cassano + put a halt to a million + hedge, in which AIG had + +On line 4499: + Park, Cassano put a + halt to a million hedge, in + which AIG had taken + +On line 4499: + Cassano put a halt + to a million hedge, in which + AIG had taken a + +On line 4499: + halt to a million + hedge, in which AIG had taken + a short position + +On line 4499: + to a million hedge, + in which AIG had taken a + short position in + +On line 4499: + a million hedge, in + which AIG had taken a short + position in the + +On line 4499: + hedge, in which AIG had + taken a short position + in the ABX index. + +On line 4499: + which AIG had taken + a short position in the + ABX index. As Park + +On line 4499: + a short position + in the ABX index. As Park + explained, "Joe stopped that + +On line 4499: + position in the + ABX index. As Park explained, + "Joe stopped that because + +On line 4499: + in the ABX index. + As Park explained, "Joe stopped that + because after we + +On line 4499: + ABX index. As Park + explained, "Joe stopped that because + after we put on + +On line 4499: + As Park explained, "Joe + stopped that because after we + put on the first the + +On line 4499: + explained, "Joe stopped that + because after we put on + the first the market + +On line 4499: + "Joe stopped that because + after we put on the first + the market moved against + +On line 4499: + because after we + put on the first the market + moved against us we were + +On line 4499: + after we put on + the first the market moved against + us we were losing + +On line 4499: + we put on the first + the market moved against us we + were losing money + +On line 4499: + put on the first the + market moved against us we were + losing money on + +On line 4499: + the market moved against + us we were losing money + on the million. Joe + +On line 4499: + market moved against us + we were losing money on + the million. Joe said, + +On line 4501: + us we were losing + money on the million. Joe + said, ‘You know, I don’t + +On line 4501: + were losing money + on the million. Joe said, ‘You + know, I don’t think the + +On line 4501: + losing money on + the million. Joe said, ‘You know, + I don’t think the world + +On line 4501: + on the million. Joe + said, ‘You know, I don’t think the + world is going to + +On line 4501: + the million. Joe said, + ‘You know, I don’t think the world + is going to blow + +On line 4501: + million. Joe said, ‘You + know, I don’t think the world is + going to blow up + +On line 4501: + Joe said, ‘You know, I + don’t think the world is going + to blow up I don’t + +On line 4501: + said, ‘You know, I don’t + think the world is going to + blow up I don’t want + +On line 4501: + ‘You know, I don’t think + the world is going to blow + up I don’t want to + +On line 4501: + know, I don’t think the + world is going to blow up + I don’t want to spend + +On line 4501: + I don’t think the world + is going to blow up I + don’t want to spend that + +On line 4501: + the world is going + to blow up I don’t want to + spend that money. Stop + +On line 4501: + world is going to + blow up I don’t want to spend + that money. Stop it.’"85 + +On line 4503: + don’t want to spend that + money. Stop it.’"85 Despite the + limited market + +On line 4503: + spend that money. Stop + it.’"85 Despite the limited + market transparency + +On line 4503: + limited market + transparency in the summer + of Goldman used what + +On line 4503: + transparency in the + summer of Goldman used what + information there + +On line 4503: + there was, including + information from ABX and + other indices, to + +On line 4503: + information from + ABX and other indices, to + estimate what it + +On line 4503: + from ABX and other + indices, to estimate what + it considered to + +On line 4503: + what it considered + to be realistic prices. + Goldman also spoke + +On line 4503: + be realistic + prices. Goldman also spoke with + other companies + +On line 4503: + prices. Goldman also + spoke with other companies + to see what values + +On line 4503: + Goldman also spoke + with other companies to + see what values they + +On line 4503: + companies to see + what values they assigned to + the securities. + +On line 4503: + they assigned to the + securities. Finally, + Goldman looked to its + +On line 4503: + Goldman looked to its + own experience: in most + cases, when the bank + +On line 4503: + experience: in + most cases, when the bank bought + credit protection + +On line 4503: + most cases, when the + bank bought credit protection + on an investment, + +On line 4503: + cases, when the bank + bought credit protection on + an investment, it + +On line 4503: + credit protection + on an investment, it turned + around and sold credit + +On line 4503: + on an investment, + it turned around and sold credit + protection on the + +On line 4503: + it turned around and sold + credit protection on the + same investment to + +On line 4503: + protection on the + same investment to other + counterparties. These + +On line 4503: + the same investment + to other counterparties. + These deals yielded more + +On line 4503: + same investment to + other counterparties. These + deals yielded more price + +On line 4505: + deals yielded more price + information.86 Until the + dispute with Goldman, + +On line 4505: + Until the dispute + with Goldman, AIG relied on + the Gorton model, + +On line 4505: + dispute with Goldman, + AIG relied on the Gorton + model, which did not + +On line 4505: + Goldman, AIG relied + on the Gorton model, which + did not estimate + +On line 4505: + the Gorton model, + which did not estimate the + market value of + +On line 4507: + So Goldman’s marks caught + AIG by surprise. When AIG pushed + back, Goldman almost + +On line 4507: + AIG by surprise. When + AIG pushed back, Goldman almost + immediately + +On line 4507: + AIG pushed back, Goldman + almost immediately + reduced its July + +On line 4509: + reduced its July + collateral demand from + billion to billion, + +On line 4509: + billion to billion, + a move that underscored the + difficulty of + +On line 4509: + that underscored the + difficulty of finding + reliable market + +On line 4509: + difficulty of + finding reliable market + prices. The new demand + +On line 4509: + finding reliable + market prices. The new demand + was still too high, in + +On line 4509: + reliable market + prices. The new demand was still + too high, in AIG’s view, + +On line 4509: + new demand was still + too high, in AIG’s view, which was + corroborated + +On line 4509: + too high, in AIG’s view, + which was corroborated + by third-party marks. + +On line 4509: + Goldman valued the + CDOs between and cents on the + dollar, while Merrill + +On line 4509: + CDOs between and cents + on the dollar, while Merrill + Lynch, for example, + +On line 4511: + same securities + between and cents.87 On August + Cassano told PwC that + +On line 4511: + between and cents.87 On + August Cassano told PwC that + there was "little or + +On line 4511: + and cents.87 On August + Cassano told PwC that there was + "little or no price + +On line 4511: + August Cassano told + PwC that there was "little or + no price transparency" + +On line 4511: + Cassano told PwC that + there was "little or no price + transparency" and that + +On line 4511: + there was "little or + no price transparency" and that + it was "difficult + +On line 4511: + was "little or no + price transparency" and that it + was "difficult to + +On line 4511: + no price transparency" + and that it was "difficult + to determine whether + +On line 4511: + were indicative of + true market levels moving."88 + AIG managers did call + +On line 4511: + bonds to check their marks + in order to help its case + with Goldman, but those + +On line 4511: + to check their marks in + order to help its case with + Goldman, but those marks + +On line 4511: + their marks in order + to help its case with Goldman, + but those marks were not + +On line 4511: + order to help its + case with Goldman, but those marks + were not "actionable"—that + +On line 4511: + to help its case with + Goldman, but those marks were not + "actionable"—that is, the + +On line 4511: + case with Goldman, but + those marks were not "actionable"—that + is, the dealers would + +On line 4511: + with Goldman, but those + marks were not "actionable"—that is, + the dealers would not + +On line 4511: + the dealers would not + actually execute + transactions at the + +On line 4511: + not actually + execute transactions at + the uoted prices. "The + +On line 4511: + the uoted prices. "The + above estimated values + do not represent + +On line 4511: + above estimated + values do not represent + actual bids or + +On line 4511: + do not represent + actual bids or offers + by Merrill Lynch" was + +On line 4511: + actual bids or + offers by Merrill Lynch" was + the disclaimer in a + +On line 4511: + bids or offers by + Merrill Lynch" was the disclaimer + in a listing of + +On line 4511: + by Merrill Lynch" was + the disclaimer in a listing + of estimated + +On line 4511: + of estimated + market values provided + by Merrill to AIG.89 + +On line 4511: + values provided + by Merrill to AIG.89 Goldman + Sachs disputed the + +On line 4515: + of such estimates. + "Without being flippant" On + August for the first + +On line 4515: + estimates. "Without + being flippant" On August + for the first time, AIG + +On line 4515: + On August for the + first time, AIG executives + publicly disclosed the + +On line 4515: + AIG executives + publicly disclosed the billion + in credit default + +On line 4515: + credit default swaps + on the super-senior tranches + of CDOs during the + +On line 4515: + second-quarter earnings + call. They acknowledged that the + great majority + +On line 4515: + They acknowledged that + the great majority of + the underlying + +On line 4515: + acknowledged that the + great majority of the + underlying bonds + +On line 4515: + majority of + the underlying bonds thus + insured—$64 billion—were + +On line 4515: + underlying bonds + thus insured—$64 billion—were backed + by subprime mortgages. + +On line 4515: + insured—$64 billion—were + backed by subprime mortgages. Of + this amount, billion was + +On line 4515: + billion—were backed by + subprime mortgages. Of this amount, + billion was written + +On line 4515: + mortgages. Of this amount, + billion was written on CDOs + predominantly + +On line 4515: + BBB-rated collateral. + On the call, Cassano maintained + that the exposures + +On line 4515: + collateral. On + the call, Cassano maintained that + the exposures were + +On line 4515: + On the call, Cassano + maintained that the exposures + were no problem: "It + +On line 4515: + call, Cassano maintained + that the exposures were no + problem: "It is hard + +On line 4515: + the exposures were + no problem: "It is hard for + us, without being + +On line 4515: + no problem: "It is + hard for us, without being + flippant, to even see + +On line 4515: + "It is hard for us, + without being flippant, to + even see a scenario + +On line 4515: + hard for us, without + being flippant, to even see + a scenario within + +On line 4515: + being flippant, to + even see a scenario within + any kind of realm or + +On line 4515: + flippant, to even see + a scenario within any kind + of realm or reason + +On line 4515: + even see a scenario + within any kind of realm or + reason that would see + +On line 4515: + scenario within any + kind of realm or reason that + would see us losing + +On line 4515: + within any kind of + realm or reason that would see + us losing in any + +On line 4515: + realm or reason that + would see us losing in any + of those transactions." + +On line 4515: + or reason that would + see us losing in any of + those transactions." He + +On line 4515: + would see us losing + in any of those transactions." + He concluded: "We + +On line 4515: + see us losing in + any of those transactions." He + concluded: "We see + +On line 4515: + concluded: "We see + no issues at all emerging. + We see no dollar + +On line 4515: + We see no dollar + of loss associated + with any of [the CDO] + +On line 4515: + no dollar of loss + associated with any + of [the CDO] business. + +On line 4515: + of [the CDO] business. + Any reasonable scenario that + anyone can draw, and + +On line 4515: + reasonable scenario + that anyone can draw, and when + I say reasonable, + +On line 4515: + that anyone can draw, + and when I say reasonable, + I mean a severe + +On line 4515: + can draw, and when I + say reasonable, I mean a + severe recession + +On line 4515: + say reasonable, I + mean a severe recession + scenario that you can + +On line 4515: + I mean a severe + recession scenario that you + can draw out for the + +On line 4515: + severe recession + scenario that you can draw out + for the life of the + +On line 4515: + out for the life of + the securities." Senior + Vice President and + +On line 4515: + for the life of the + securities." Senior Vice + President and Chief + +On line 4515: + the securities." + Senior Vice President and + Chief Risk Officer + +On line 4515: + that reassurance: + "We believe that it would take + declines in housing + +On line 4515: + declines in housing + values to reach depression + proportions, along with + +On line 4515: + to reach depression + proportions, along with default + frequencies never + +On line 4517: + AA investments would + be impaired."90 These assurances + focused on the risk + +On line 4517: + would be impaired."90 These + assurances focused on the + risk that actual + +On line 4517: + assurances focused + on the risk that actual + mortgage defaults would + +On line 4517: + risk that actual + mortgage defaults would create + real economic + +On line 4517: + actual mortgage + defaults would create real + economic losses + +On line 4517: + defaults would create + real economic losses + on the company’s + +On line 4517: + would create real + economic losses on the + company’s credit + +On line 4517: + real economic + losses on the company’s + credit default swap + +On line 4517: + company’s credit + default swap positions.91 But + more important at + +On line 4517: + positions.91 But more + important at the time were + the other tremendous + +On line 4517: + But more important + at the time were the other + tremendous risks that AIG + +On line 4517: + at the time were the + other tremendous risks that AIG + executives had + +On line 4517: + the other tremendous + risks that AIG executives + had already discussed + +On line 4517: + had already discussed + internally. No one on + the conference call + +On line 4517: + demand for billion + in collateral; the clear + possibility + +On line 4517: + in collateral; + the clear possibility + that future, much-larger + +On line 4517: + calls could jeopardize + AIG’s liquidity; or the + risk that AIG would be + +On line 4517: + could jeopardize AIG’s + liquidity; or the risk + that AIG would be forced + +On line 4519: + liquidity; or + the risk that AIG would be forced + to take an "enormous + +On line 4519: + risk that AIG would be + forced to take an "enormous mark" + on its existing + +On line 4519: + that AIG would be forced + to take an "enormous mark" on + its existing book, + +On line 4519: + AIG would be forced to + take an "enormous mark" on its + existing book, the + +On line 4519: + to take an "enormous + mark" on its existing book, + the concern Forster had + +On line 4521: + "enormous mark" on its + existing book, the concern + Forster had noted. The + +On line 4521: + its existing book, + the concern Forster had noted. + The day after the + +On line 4521: + book, the concern Forster + had noted. The day after + the conference call, + +On line 4521: + the concern Forster had + noted. The day after the + conference call, AIG + +On line 4521: + had noted. The day + after the conference call, + AIG posted million + +On line 4521: + The day after the + conference call, AIG posted + million in cash to + +On line 4521: + the conference call, + AIG posted million in cash + to Goldman, its first + +On line 4521: + posting since Goldman + had requested the billion. + As Frost wrote to Forster + +On line 4521: + had requested the + billion. As Frost wrote to Forster + in an August email, + +On line 4521: + the billion. As Frost + wrote to Forster in an August + email, the idea was "to + +On line 4521: + billion. As Frost wrote + to Forster in an August email, + the idea was "to get + +On line 4521: + Frost wrote to Forster in + an August email, the idea was + "to get everyone + +On line 4521: + wrote to Forster in an + August email, the idea was "to + get everyone to + +On line 4521: + an August email, the + idea was "to get everyone + to chill out."92 For one + +On line 4521: + August email, the idea + was "to get everyone to + chill out."92 For one thing, + +On line 4521: + email, the idea was "to + get everyone to chill out."92 + For one thing, some AIG + +On line 4521: + "to get everyone + to chill out."92 For one thing, some + AIG executives, + +On line 4521: + to chill out."92 For one + thing, some AIG executives, + including Cassano, + +On line 4521: + including Cassano, + had late-summer vacations + planned. Cassano signed off + +On line 4521: + Cassano signed off on + the million "good faith deposit" + before leaving for + +On line 4521: + on the million "good + faith deposit" before leaving + for a cycling trip + +On line 4521: + the million "good faith + deposit" before leaving for + a cycling trip through + +On line 4521: + executed a + side letter making clear that + both disputed the + +On line 4521: + letter making clear + that both disputed the amount. + For the time being, + +On line 4521: + that both disputed + the amount. For the time being, + two companies that + +On line 4521: + both disputed the + amount. For the time being, two + companies that had + +On line 4523: + that had been doing + business together for decades + agreed to disagree. On + +On line 4523: + been doing business + together for decades agreed to + disagree. On August + +On line 4523: + business together + for decades agreed to disagree. On + August Frost went to + +On line 4523: + together for decades + agreed to disagree. On August + Frost went to Goldman’s + +On line 4523: + agreed to disagree. On + August Frost went to Goldman’s + offices to "start the + +On line 4523: + On August Frost went + to Goldman’s offices to "start + the dialog," which + +On line 4523: + August Frost went to + Goldman’s offices to "start the + dialog," which had + +On line 4523: + to Goldman’s offices + to "start the dialog," which + had stalled while Cassano + +On line 4523: + Goldman’s offices to + "start the dialog," which had + stalled while Cassano and + +On line 4523: + offices to "start the + dialog," which had stalled while + Cassano and other + +On line 4523: + dialog," which had + stalled while Cassano and other + key executives + +On line 4523: + stalled while Cassano and + other key executives + were on vacation. + +On line 4523: + Cassano and other + key executives were on + vacation. Two days + +On line 4523: + key executives + were on vacation. Two days + later, Frost wrote to + +On line 4523: + were on vacation. + Two days later, Frost wrote to + Forster: "Trust me. This is + +On line 4523: + on vacation. Two + days later, Frost wrote to Forster: + "Trust me. This is not + +On line 4523: + vacation. Two days + later, Frost wrote to Forster: "Trust + me. This is not the + +On line 4523: + Two days later, Frost + wrote to Forster: "Trust me. This is + not the last margin + +On line 4523: + days later, Frost wrote + to Forster: "Trust me. This is not + the last margin call + +On line 4523: + later, Frost wrote to + Forster: "Trust me. This is not the + last margin call we + +On line 4523: + wrote to Forster: "Trust me. + This is not the last margin + call we are going + +On line 4523: + to Forster: "Trust me. This + is not the last margin call + we are going to + +On line 4523: + "Trust me. This is not + the last margin call we are + going to debate."94 + +On line 4525: + This is not the last + margin call we are going + to debate."94 He was + +On line 4525: + margin call we are + going to debate."94 He was + right. By September + +On line 4525: + call we are going + to debate."94 He was right. By + September Société + +On line 4525: + going to debate."94 + He was right. By September + Société Générale—known + +On line 4525: + September Société + Générale—known more commonly + as SocGen—had demanded + +On line 4525: + more commonly as + SocGen—had demanded million in + collateral on + +On line 4525: + demanded million + in collateral on CDS + it had purchased from + +On line 4525: + collateral on + CDS it had purchased from AIG + Financial Products, + +On line 4525: + CDS it had purchased + from AIG Financial Products, + UBS had demanded + +On line 4525: + had purchased from AIG + Financial Products, UBS had + demanded million, + +On line 4525: + from AIG Financial + Products, UBS had demanded + million, and Goldman + +On line 4525: + Financial Products, + UBS had demanded million, + and Goldman had upped + +On line 4525: + and Goldman had upped + its demand by million. The + SocGen demand was based + +On line 4525: + Goldman had upped its + demand by million. The SocGen + demand was based on + +On line 4525: + had upped its demand + by million. The SocGen demand + was based on an bid + +On line 4525: + upped its demand by + million. The SocGen demand was + based on an bid price + +On line 4525: + by million. The SocGen + demand was based on an bid + price provided by + +On line 4525: + SocGen demand was based + on an bid price provided + by Goldman, which AIG + +On line 4525: + was based on an bid + price provided by Goldman, + which AIG disputed. + +On line 4525: + based on an bid price + provided by Goldman, which + AIG disputed. Tom + +On line 4525: + price provided by + Goldman, which AIG disputed. + Tom Athan, managing + +On line 4525: + disputed. Tom Athan, + managing director at + AIG Fi-LATE TO EARLY + +On line 4525: + AIG Fi-LATE TO EARLY + nancial Products, told Forster that + SocGen "received marks from + +On line 4525: + nancial Products, told + Forster that SocGen "received marks from + GS on positions + +On line 4525: + Products, told Forster that + SocGen "received marks from GS on + positions that would + +On line 4525: + Forster that SocGen "received + marks from GS on positions + that would result in + +On line 4525: + that SocGen "received marks + from GS on positions that + would result in big + +On line 4525: + that would result in + big collateral calls but + SG disputed them + +On line 4525: + would result in big + collateral calls but SG + disputed them with + +On line 4525: + big collateral + calls but SG disputed them + with GS."95 Several + +On line 4525: + collateral calls + but SG disputed them with + GS."95 Several weeks + +On line 4525: + but SG disputed + them with GS."95 Several weeks + later, Cassano told + +On line 4525: + with GS."95 Several + weeks later, Cassano told AIG + Financial Services + +On line 4525: + weeks later, Cassano + told AIG Financial Services + CFO Elias Habayeb that he + +On line 4525: + Financial Services + CFO Elias Habayeb that he believed + the SocGen margin call + +On line 4525: + Habayeb that he believed + the SocGen margin call had been + "spurred by Goldman," and + +On line 4525: + that he believed the + SocGen margin call had been "spurred + by Goldman," and that + +On line 4525: + he believed the SocGen + margin call had been "spurred by + Goldman," and that AIG + +On line 4525: + the SocGen margin call + had been "spurred by Goldman," and + that AIG "disputed + +On line 4525: + SocGen margin call had + been "spurred by Goldman," and that + AIG "disputed the + +On line 4525: + margin call had been + "spurred by Goldman," and that AIG + "disputed the call + +On line 4525: + been "spurred by Goldman," + and that AIG "disputed the + call and [had] not heard + +On line 4525: + "spurred by Goldman," and + that AIG "disputed the call + and [had] not heard from + +On line 4525: + by Goldman," and that + AIG "disputed the call and + [had] not heard from SocGen + +On line 4525: + Goldman," and that AIG + "disputed the call and [had] + not heard from SocGen again + +On line 4525: + "disputed the call + and [had] not heard from SocGen again + on that specific + +On line 4525: + and [had] not heard from + SocGen again on that specific + call."96 In the second + +On line 4525: + [had] not heard from SocGen + again on that specific call."96 + In the second week + +On line 4525: + not heard from SocGen again + on that specific call."96 In + the second week of + +On line 4525: + of additional + downgrades affecting tens of + billions of dollars + +On line 4525: + subprime mortgage–backed + securities and CDOs. By + November Goldman’s + +On line 4525: + securities and + CDOs. By November Goldman’s + demand had almost + +On line 4525: + CDOs. By November + Goldman’s demand had almost + doubled, to billion. + +On line 4525: + Goldman’s demand had + almost doubled, to billion. + On November Bensinger, + +On line 4525: + had almost doubled, + to billion. On November + Bensinger, the CFO, informed + +On line 4525: + almost doubled, to + billion. On November Bensinger, + the CFO, informed AIG’s + +On line 4525: + doubled, to billion. + On November Bensinger, the CFO, + informed AIG’s Audit + +On line 4525: + Bensinger, the CFO, informed + AIG’s Audit Committee that + Financial Products + +On line 4525: + informed AIG’s Audit + Committee that Financial + Products had received + +On line 4525: + Audit Committee + that Financial Products had + received margin calls + +On line 4525: + Financial Products + had received margin calls from + five counterparties + +On line 4525: + had received margin + calls from five counterparties + and was disputing + +On line 4527: + five counterparties + and was disputing every + single one.97 This stance + +On line 4527: + and was disputing + every single one.97 This stance + was rooted in the + +On line 4527: + was rooted in the + company’s continuing + belief that Goldman + +On line 4527: + low. AIG’s position + was corroborated, at + least in part, by the + +On line 4527: + AIG’s position was + corroborated, at least + in part, by the wide + +On line 4527: + corroborated, + at least in part, by the wide + disparity in + +On line 4527: + point, Merrill Lynch and + Goldman made collateral + demands on the very + +On line 4527: + on the very same CDS + positions, but Goldman’s marks + were almost lower + +On line 4527: + same CDS positions, + but Goldman’s marks were almost + lower than Merrill’s.98 + +On line 4527: + but Goldman’s marks were + almost lower than Merrill’s.98 + Goldman insisted + +On line 4527: + lower than Merrill’s.98 + Goldman insisted that its + marks represented + +On line 4529: + had executed, + market activity we + observed, price changes in + +On line 4529: + the current prices of + relevant liquid indices."99 + Trading in the ABX + +On line 4529: + prices of relevant + liquid indices."99 Trading in + the ABX would fall from + +On line 4529: + relevant liquid + indices."99 Trading in the ABX + would fall from over trades + +On line 4529: + indices."99 Trading in + the ABX would fall from over trades + per week through the end + +On line 4529: + in the ABX would fall + from over trades per week through the + end of September + +On line 4529: + the ABX would fall from + over trades per week through the end + of September to + +On line 4529: + ABX would fall from over + trades per week through the end of + September to less + +On line 4529: + from over trades per week + through the end of September + to less than per week + +On line 4529: + over trades per week through + the end of September to + less than per week in + +On line 4529: + trades per week through the + end of September to less + than per week in the + +On line 4529: + per week through the end + of September to less than + per week in the fourth + +On line 4529: + of September to + less than per week in the fourth + quarter of trading + +On line 4529: + per week in the fourth + quarter of trading in the + TABX, which focuses + +On line 4529: + TABX, which focuses + on lower-rated tranches, dropped + from roughly trades per + +On line 4529: + which focuses on + lower-rated tranches, dropped from + roughly trades per week + +On line 4529: + lower-rated tranches, + dropped from roughly trades per week + through mid-July to almost + +On line 4531: + dropped from roughly trades + per week through mid-July to almost + zero by mid-August.100 But + +On line 4531: + roughly trades per week + through mid-July to almost zero + by mid-August.100 But Cassano + +On line 4531: + trades per week through mid-July + to almost zero by mid-August.100 + But Cassano believed + +On line 4531: + per week through mid-July to + almost zero by mid-August.100 But + Cassano believed that + +On line 4531: + through mid-July to almost + zero by mid-August.100 But Cassano + believed that the quick + +On line 4531: + almost zero by + mid-August.100 But Cassano believed that + the quick reduction + +On line 4531: + quick reduction in + Goldman’s first collateral + demand (from billion + +On line 4531: + the million deposit + confirmed that Goldman was not + as certain of its + +On line 4531: + deposit confirmed that + Goldman was not as certain + of its marks as it + +On line 4531: + confirmed that Goldman + was not as certain of its + marks as it later + +On line 4531: + Goldman was not as + certain of its marks as it + later insisted. + +On line 4531: + marks as it later + insisted. According to + Cassano, Michael Sherwood, + +On line 4531: + co-CEO of Goldman Sachs + International, told him + that Goldman "didn’t + +On line 4531: + International, + told him that Goldman "didn’t + cover ourselves in + +On line 4531: + told him that Goldman + "didn’t cover ourselves in + glory during this + +On line 4531: + in glory during + this period" but that "the + market’s starting to + +On line 4531: + this period" but + that "the market’s starting to + come our [Goldman’s] way"; + +On line 4531: + but that "the market’s + starting to come our [Goldman’s] + way"; Cassano took those + +On line 4531: + market’s starting to + come our [Goldman’s] way"; Cassano + took those comments as + +On line 4531: + to come our [Goldman’s] + way"; Cassano took those comments + as an implicit + +On line 4531: + took those comments as + an implicit admission + that Goldman’s initial + +On line 4531: + those comments as an + implicit admission that + Goldman’s initial marks + +On line 4535: + that Goldman’s initial + marks had been aggressive.101 "More + love notes" In mid-August, Forster + +On line 4535: + Goldman’s initial marks + had been aggressive.101 "More love + notes" In mid-August, Forster told + +On line 4535: + initial marks had been + aggressive.101 "More love notes" In + mid-August, Forster told Frost in + +On line 4535: + had been aggressive.101 + "More love notes" In mid-August, Forster told + Frost in an email that + +On line 4535: + aggressive.101 "More love + notes" In mid-August, Forster told Frost in + an email that Goldman + +On line 4535: + notes" In mid-August, Forster told + Frost in an email that Goldman + was pursuing a + +On line 4535: + told Frost in an email + that Goldman was pursuing + a strategy of + +On line 4535: + email that Goldman was + pursuing a strategy + of aggressively + +On line 4535: + of aggressively + marking down assets to "cause + maximum pain to + +On line 4535: + marking down assets + to "cause maximum pain to + their competitors."102 PricewaterhouseCoopers, + +On line 4535: + "cause maximum pain + to their competitors."102 PricewaterhouseCoopers, which + served as auditor + +On line 4535: + maximum pain to + their competitors."102 PricewaterhouseCoopers, which served + as auditor for + +On line 4535: + their competitors."102 PricewaterhouseCoopers, + which served as auditor for + both AIG and Goldman + +On line 4535: + as auditor for + both AIG and Goldman during + this period, knew + +On line 4535: + auditor for both + AIG and Goldman during this + period, knew full + +On line 4535: + both AIG and Goldman + during this period, knew + full well that AIG had + +On line 4535: + and Goldman during + this period, knew full well + that AIG had never + +On line 4535: + that AIG had never + before marked these positions + to market. In the + +On line 4535: + never before marked + these positions to market. + In the third quarter + +On line 4535: + In the third quarter + of with the collateral + demands piling up, + +On line 4535: + demands piling up, + PwC prompted AIG to begin + developing a + +On line 4535: + up, PwC prompted AIG + to begin developing + a model of its + +On line 4535: + PwC prompted AIG to + begin developing a + model of its own. + +On line 4535: + a model of its + own. Prior to the Goldman + margin call, PwC had + +On line 4535: + of its own. Prior + to the Goldman margin call, + PwC had concluded + +On line 4535: + its own. Prior to + the Goldman margin call, PwC + had concluded that + +On line 4535: + PwC had concluded + that "compensating controls" + made up for AIG’s not + +On line 4535: + that "compensating + controls" made up for AIG’s not + having a model. + +On line 4535: + controls" made up for + AIG’s not having a model. + Among those was notice + +On line 4535: + AIG’s not having a + model. Among those was notice + from counterparties + +On line 4535: + model. Among those was + notice from counterparties + that collateral + +On line 4535: + from counterparties + that collateral was due.103 + In other words, one + +On line 4535: + counterparties that + collateral was due.103 In + other words, one of + +On line 4535: + collateral was + due.103 In other words, one of + AIG’s risk management + +On line 4535: + due.103 In other words, + one of AIG’s risk management + tools was to learn of + +On line 4535: + In other words, one + of AIG’s risk management tools + was to learn of its + +On line 4535: + other words, one of + AIG’s risk management tools was + to learn of its own + +On line 4535: + words, one of AIG’s risk + management tools was to learn + of its own problems + +On line 4535: + management tools was + to learn of its own problems + from counterparties + +On line 4535: + of its own problems + from counterparties who did + have the ability + +On line 4535: + its own problems from + counterparties who did have + the ability to + +On line 4535: + have the ability + to mark their own positions + to market prices and + +On line 4535: + the ability to + mark their own positions to + market prices and then + +On line 4535: + own positions to + market prices and then demand + collateral from + +On line 4537: + market prices and then + demand collateral from + AIG. he decision + +On line 4537: + to develop a + valuation model was + not unanimous. In + +On line 4537: + a valuation + model was not unanimous. + In mid-September, Cassano and + +On line 4537: + was not unanimous. + In mid-September, Cassano and Forster met + with Habayeb and others + +On line 4537: + not unanimous. In + mid-September, Cassano and Forster met with + Habayeb and others to + +On line 4537: + In mid-September, Cassano and + Forster met with Habayeb and others + to discuss marking + +On line 4537: + mid-September, Cassano and Forster + met with Habayeb and others to + discuss marking the + +On line 4537: + Forster met with Habayeb and + others to discuss marking + the positions down + +On line 4537: + others to discuss + marking the positions down + and actually + +On line 4539: + in AIG’s financial + statements. Cassano still thought the + valuation process + +On line 4539: + valuation process + unnecessary because the + possibility + +On line 4539: + possibility + of defaults was "remote."104 He + sent Forster and others + +On line 4539: + defaults was "remote."104 + He sent Forster and others emails + describing requests + +On line 4539: + "remote."104 He sent Forster + and others emails describing + requests from Habayeb as + +On line 4539: + sent Forster and others + emails describing requests from + Habayeb as "more love notes + +On line 4539: + requests from Habayeb as + "more love notes [asking us to + go through] the same drill + +On line 4539: + Habayeb as "more love notes + [asking us to go through] the + same drill of drafting + +On line 4539: + "more love notes [asking + us to go through] the same drill + of drafting answers."105 + +On line 4539: + us to go through] the + same drill of drafting answers."105 + Nevertheless, by + +On line 4539: + same drill of drafting + answers."105 Nevertheless, by + October, and in + +On line 4539: + with PwC, AIG started + to evaluate the pricing + model for subprime + +On line 4539: + model for subprime + instruments developed and + used by Moody’s. Cassano + +On line 4539: + subprime instruments + developed and used by Moody’s. + Cassano considered + +On line 4539: + used by Moody’s. Cassano + considered the Moody’s model + only a "gut check" + +On line 4539: + Cassano considered + the Moody’s model only a + "gut check" until it + +On line 4539: + "gut check" until it + was fully validated + internally.106 AIG + +On line 4539: + coupled this model + with generic CDO tranche data + sold by JP Morgan + +On line 4539: + with generic CDO tranche + data sold by JP Morgan + that were considered + +On line 4539: + be relatively + representative of the + market. Of course, by + +On line 4539: + course, by this time—and + for several preceding + months—there was no + +On line 4539: + that this was not a + perfect solution, but AIG + and its auditors + +On line 4539: + was not a perfect + solution, but AIG and its + auditors thought it + +On line 4539: + perfect solution, + but AIG and its auditors + thought it could serve as + +On line 4539: + auditors thought it + could serve as an interim + step. The makeshift model + +On line 4539: + thought it could serve as + an interim step. The makeshift + model was up and + +On line 4539: + as an interim + step. The makeshift model was up + and running in the + +On line 4539: + an interim step. + The makeshift model was up and + running in the third + +On line 4541: + The makeshift model was + up and running in the third + quarter. "Confident + +On line 4541: + model was up and + running in the third quarter. + "Confident in our + +On line 4543: + running in the third + quarter. "Confident in our + marks" On November + +On line 4543: + in the third quarter. + "Confident in our marks" On + November when AIG + +On line 4543: + quarter. "Confident + in our marks" On November + when AIG reported + +On line 4543: + On November when + AIG reported its third-quarter + earnings, it disclosed + +On line 4543: + AIG reported its + third-quarter earnings, it disclosed + that it was taking + +On line 4543: + it disclosed that it + was taking a million charge + "related to its + +On line 4543: + it was taking a + million charge "related to + its super senior + +On line 4543: + through October of + approximately million + before tax [on that] + +On line 4543: + approximately + million before tax [on that] + portfolio." On a + +On line 4543: + million before tax + [on that] portfolio." On a + conference call, CEO + +On line 4545: + [on that] portfolio." + On a conference call, CEO + Sullivan assured + +On line 4545: + conference call, CEO + Sullivan assured investors + that the insurance + +On line 4545: + assured investors that + the insurance company + had "active and strong + +On line 4545: + that the insurance + company had "active and + strong risk management." + +On line 4545: + strong risk management." + He said, "AIG continues to + believe that it is + +On line 4545: + management." He said, + "AIG continues to believe + that it is highly + +On line 4545: + "AIG continues to + believe that it is highly + unlikely that AIGFP + +On line 4547: + to believe that it + is highly unlikely that + AIGFP will be required + +On line 4547: + believe that it is + highly unlikely that AIGFP + will be required to + +On line 4547: + will be required to + make payments with respect to + these derivatives." + +On line 4547: + with respect to these + derivatives." Cassano added + that AIG had "more than + +On line 4547: + these derivatives." + Cassano added that AIG had "more + than enough resources to + +On line 4547: + that AIG had "more than + enough resources to meet any of + the collateral + +On line 4547: + AIG had "more than enough + resources to meet any of the + collateral calls + +On line 4547: + enough resources to meet + any of the collateral + calls that might come in."107 + +On line 4547: + resources to meet any + of the collateral calls + that might come in."107 While + +On line 4547: + the collateral + calls that might come in."107 While the + company remained + +On line 4547: + calls that might come in."107 + While the company remained + adamant that there would be + +On line 4547: + that might come in."107 While + the company remained adamant + that there would be no + +On line 4547: + be no realized + economic losses from the + credit default swaps, + +On line 4547: + economic losses + from the credit default swaps, + it used the newly + +On line 4547: + default swaps, it used + the newly adopted—and adapted—Moody’s model + to estimate the + +On line 4547: + used the newly adopted—and + adapted—Moody’s model to estimate + the million charge. In + +On line 4547: + the newly adopted—and adapted—Moody’s + model to estimate the + million charge. In fact, + +On line 4547: + the relevance of + the model: it hadn’t been + validated in + +On line 4547: + of the model: it + hadn’t been validated + in advance of the + +On line 4547: + been validated + in advance of the earnings + release, it didn’t + +On line 4547: + in advance of the + earnings release, it didn’t + take into account + +On line 4547: + earnings release, it + didn’t take into account + important structural + +On line 4547: + didn’t take into + account important structural + information about + +On line 4547: + account important + structural information about + the swap contracts, and + +On line 4547: + important structural + information about the swap + contracts, and there were + +On line 4547: + about the swap contracts, + and there were questions about the + quality of the + +On line 4547: + contracts, and there were + questions about the quality + of the data.108 AIG + +On line 4547: + and there were questions + about the quality of the + data.108 AIG didn’t + +On line 4547: + were questions about the + quality of the data.108 + AIG didn’t mention + +On line 4547: + about the quality + of the data.108 AIG didn’t + mention those caveats on + +On line 4547: + quality of the + data.108 AIG didn’t mention + those caveats on the call. + +On line 4549: + data.108 AIG didn’t + mention those caveats on the call. + Two weeks later, on + +On line 4549: + mention those caveats on + the call. Two weeks later, on + November Goldman + +On line 4549: + caveats on the call. Two + weeks later, on November + Goldman demanded + +On line 4549: + Goldman demanded + an additional billion + in cash. AIG protested, + +On line 4549: + in cash. AIG protested, + but paid billion, bringing the + total posted to + +On line 4549: + AIG protested, but paid + billion, bringing the total + posted to billion.109 + +On line 4551: + memo from Forster listing + the pertinent marks for the + securities from + +On line 4551: + the pertinent marks + for the securities from + Goldman Sachs, Merrill + +On line 4551: + the securities + from Goldman Sachs, Merrill Lynch, + Calyon, Bank of + +On line 4551: + Lynch, Calyon, Bank + of Montreal, and SocGen.110 The + marks varied widely, + +On line 4551: + Calyon, Bank of + Montreal, and SocGen.110 The marks + varied widely, from + +On line 4551: + of Montreal, and + SocGen.110 The marks varied widely, + from as little as + +On line 4551: + Montreal, and SocGen.110 + The marks varied widely, from + as little as of + +On line 4551: + varied widely, from + as little as of the bonds’ + original value + +On line 4551: + as little as of + the bonds’ original value + to virtually + +On line 4551: + little as of the + bonds’ original value to + virtually full + +On line 4551: + the bonds’ original + value to virtually + full value. Goldman’s + +On line 4551: + full value. Goldman’s + estimated values were + much lower than those + +On line 4551: + were much lower than + those of other dealers. For + example, Goldman + +On line 4551: + other dealers. For + example, Goldman valued + one CDO, the Dunhill + +On line 4551: + Goldman valued one + CDO, the Dunhill CDO, at of + par, whereas Merrill + +On line 4551: + CDO, the Dunhill CDO, + at of par, whereas Merrill + valued it at of + +On line 4551: + Dunhill CDO, at of + par, whereas Merrill valued + it at of par; the + +On line 4551: + at of par, whereas + Merrill valued it at of + par; the Orient Point + +On line 4551: + par, whereas Merrill + valued it at of par; the + Orient Point CDO was + +On line 4551: + Merrill valued it + at of par; the Orient Point + CDO was valued at + +On line 4553: + valued it at of + par; the Orient Point CDO was + valued at of par + +On line 4553: + of par; the Orient + Point CDO was valued at of + par by Goldman but + +On line 4553: + par; the Orient Point + CDO was valued at of par + by Goldman but at + +On line 4553: + the Orient Point CDO + was valued at of par by + Goldman but at of + +On line 4553: + CDO was valued at + of par by Goldman but at + of par by Merrill. + +On line 4553: + was valued at of + par by Goldman but at of + par by Merrill. Forster + +On line 4553: + of par by Goldman + but at of par by Merrill. + Forster suggested that + +On line 4553: + par by Goldman but + at of par by Merrill. Forster + suggested that the + +On line 4553: + of par by Merrill. + Forster suggested that the marks + validated AIG’s + +On line 4553: + marks validated + AIG’s long-standing contention + that "there is no one + +On line 4553: + that "there is no one + dealer with more knowledge than + the others or with + +On line 4553: + no one dealer with + more knowledge than the others + or with a better + +On line 4553: + one dealer with more + knowledge than the others or + with a better deal + +On line 4553: + more knowledge than the + others or with a better + deal flow of trades and + +On line 4553: + than the others or + with a better deal flow of + trades and all admit + +On line 4553: + the others or with + a better deal flow of trades + and all admit to + +On line 4553: + others or with a + better deal flow of trades and + all admit to LATE + +On line 4553: + with a better deal + flow of trades and all admit + to LATE TO EARLY + +On line 4553: + flow of trades and all + admit to LATE TO EARLY + ‘guesstimating’ pricing."111 + +On line 4553: + and all admit to + LATE TO EARLY ‘guesstimating’ + pricing."111 Cassano agreed. + +On line 4553: + admit to LATE TO + EARLY ‘guesstimating’ pricing."111 + Cassano agreed. "No one + +On line 4553: + to LATE TO EARLY + ‘guesstimating’ pricing."111 Cassano + agreed. "No one seems to + +On line 4553: + EARLY ‘guesstimating’ + pricing."111 Cassano agreed. "No one + seems to know how to + +On line 4553: + ‘guesstimating’ pricing."111 + Cassano agreed. "No one seems to + know how to discern + +On line 4553: + pricing."111 Cassano agreed. + "No one seems to know how to + discern a market + +On line 4553: + "No one seems to know + how to discern a market + valuation price + +On line 4553: + know how to discern + a market valuation + price from the current + +On line 4553: + how to discern a + market valuation price + from the current opaque + +On line 4553: + discern a market + valuation price from the + current opaque market + +On line 4553: + price from the current + opaque market environment," + Cassano wrote to a + +On line 4553: + current opaque market + environment," Cassano wrote + to a colleague. "This + +On line 4553: + Cassano wrote to a + colleague. "This information + is limited due + +On line 4553: + information is + limited due to the lack + of participants + +On line 4553: + limited due to + the lack of participants + [willing] to even give + +On line 4555: + give indications + on these obligations."112 One week + later, Cassano called + +On line 4555: + on these obligations."112 + One week later, Cassano called + Sherwood in Goldman’s + +On line 4555: + obligations."112 One week + later, Cassano called Sherwood + in Goldman’s London + +On line 4555: + London office and + demanded reimbursement + of billion. He told + +On line 4555: + executives that + independent third-party + pricing for of the + +On line 4555: + that independent + third-party pricing for of + the securities + +On line 4555: + third-party pricing + for of the securities + underlying the + +On line 4555: + the CDOs on which AIG + FP had written CDS and AIG’s + own valuation + +On line 4555: + CDOs on which AIG FP + had written CDS and AIG’s own + valuation for + +On line 4555: + valuation for + the other indicated + that Goldman’s demand + +On line 4557: + return the money.113 + Goldman refused, and instead + demanded more.114 By + +On line 4557: + Goldman refused, and + instead demanded more.114 By + late November, there + +On line 4557: + By late November, + there was relative agreement + within AIG and with + +On line 4557: + there was relative + agreement within AIG and with + its auditor that + +On line 4557: + that the Moody’s model + incorporated into + AIG’s valuation + +On line 4557: + was inadequate + for valuing the super-senior + book.115 But there was no + +On line 4557: + the super-senior book.115 + But there was no consensus + on how that book should + +On line 4557: + super-senior book.115 But + there was no consensus on + how that book should be + +On line 4557: + no consensus on + how that book should be valued. + Inputting generic CDO + +On line 4557: + on how that book should + be valued. Inputting generic + CDO collateral + +On line 4557: + be valued. Inputting + generic CDO collateral + data into the + +On line 4557: + would result in a + billion valuation loss; + using Goldman’s marks + +On line 4559: + using Goldman’s marks + would result in a billion + valuation loss, + +On line 4559: + marks would result in + a billion valuation + loss, which would wipe out + +On line 4559: + would result in a + billion valuation loss, + which would wipe out the + +On line 4561: + wipe out the quarter’s + profits.116 On November PwC + auditors met with + +On line 4561: + On November PwC + auditors met with senior + executives from + +On line 4561: + to discuss the whole + situation. According + to PwC meeting notes, + +On line 4561: + whole situation. + According to PwC meeting + notes, AIG reported + +On line 4561: + According to PwC + meeting notes, AIG reported + that disagreements with + +On line 4561: + notes, AIG reported + that disagreements with Goldman + continued, and AIG + +On line 4561: + that disagreements with + Goldman continued, and AIG + did not have data + +On line 4561: + Goldman continued, + and AIG did not have data + to dispute Goldman’s + +On line 4561: + and AIG did not have + data to dispute Goldman’s + marks. Forster recalled that + +On line 4561: + data to dispute + Goldman’s marks. Forster recalled that + Sullivan said that + +On line 4561: + marks. Forster recalled that + Sullivan said that he was + going to have a + +On line 4561: + that Sullivan said + that he was going to have + a heart attack when + +On line 4561: + Sullivan said that + he was going to have a + heart attack when he + +On line 4561: + that he was going + to have a heart attack when + he learned that using + +On line 4561: + was going to have + a heart attack when he learned + that using Goldman’s + +On line 4561: + going to have a + heart attack when he learned that + using Goldman’s marks + +On line 4561: + a heart attack when + he learned that using Goldman’s + marks would eliminate + +On line 4561: + heart attack when he + learned that using Goldman’s marks + would eliminate the + +On line 4561: + he learned that using + Goldman’s marks would eliminate + the quarter’s profits.117 + +On line 4561: + using Goldman’s marks + would eliminate the quarter’s + profits.117 Sullivan + +On line 4561: + would eliminate the + quarter’s profits.117 Sullivan + told FCIC staff that he + +On line 4561: + profits.117 Sullivan + told FCIC staff that he did not + remember this part + +On line 4563: + told FCIC staff that he + did not remember this part + of the meeting.118 AIG + +On line 4563: + part of the meeting.118 + AIG adjusted the number, + and in doing so + +On line 4563: + of the meeting.118 AIG + adjusted the number, and + in doing so it + +On line 4563: + the number, and in + doing so it chose not to + rely on dealer + +On line 4565: + doing so it chose + not to rely on dealer + quotes. James Bridgewater, + +On line 4565: + president in charge + of models, came up with a + solution. Convinced + +On line 4565: + in charge of models, + came up with a solution. + Convinced that there was + +On line 4565: + between the value + of the underlying bonds + and the value of + +On line 4565: + the value of the + underlying bonds and the + value of the swap + +On line 4565: + the underlying + bonds and the value of the + swap protection AIG + +On line 4567: + underlying bonds + and the value of the swap + protection AIG had + +On line 4567: + bonds and the value + of the swap protection AIG + had written on those + +On line 4567: + and the value of + the swap protection AIG had + written on those bonds, + +On line 4567: + "negative basis + adjustment," which would reduce + the unrealized + +On line 4567: + adjustment," which would + reduce the unrealized + loss estimate from + +On line 4567: + the unrealized + loss estimate from billion + (Goldman’s figure) to + +On line 4567: + loss estimate from + billion (Goldman’s figure) to + about billion. With their + +On line 4567: + about billion. With their + auditor’s knowledge, Cassano + and others agreed that + +On line 4569: + to go. Several + documents given to the + FCIC by PwC, AIG, and + +On line 4569: + FCIC by PwC, AIG, and + Cassano reflect discussions + during and after + +On line 4569: + discussions during + and after the November + meeting. During a + +On line 4569: + November meeting. + During a second meeting + at which only the + +On line 4569: + (Financial Products + executives, including + Cassano and Forster, did + +On line 4569: + the valuation + of the credit default swap + portfolio, as well + +On line 4569: + the credit default + swap portfolio, as well as + to the company’s + +On line 4571: + collateral. AIG + Financial Products had paid + out billion without + +On line 4571: + Financial Products + had paid out billion without + active involvement + +On line 4571: + out billion without + active involvement from the + parent company’s + +On line 4571: + Risk Management group. + Another issue was "the + way in which AIGFP [had] + +On line 4571: + Another issue + was "the way in which AIGFP [had] + been ‘managing’ the + +On line 4571: + was "the way in which + AIGFP [had] been ‘managing’ the + SS [super senior] + +On line 4571: + PwC will not get any + more information until + after the investor + +On line 4571: + more information + until after the investor + day presentation."119 + +On line 4573: + until after the + investor day presentation."119 + The auditors laid + +On line 4573: + auditors laid out + their concerns about conflicting + strategies pursued by + +On line 4575: + subsidiaries. Notably, the + securities-lending subsidiary + had been purchasing + +On line 4575: + using cash raised by + lending securities that + AIG held on ehalf of + +On line 4575: + that AIG held on ehalf + of its insurance subsidiaries. + From the end of through + +On line 4575: + of through September + its holdings rose from billion + to billion. Meanwhile, + +On line 4575: + its holdings rose from + billion to billion. Meanwhile, + Financial Products, + +On line 4575: + rose from billion to + billion. Meanwhile, Financial + Products, acting on + +On line 4575: + billion to billion. + Meanwhile, Financial Products, + acting on its own + +On line 4575: + acting on its own + analysis, had decided + in to begin pulling + +On line 4575: + own analysis, had + decided in to begin + pulling back on writing + +On line 4575: + decided in to + begin pulling back on writing + credit default swaps + +On line 4575: + to begin pulling back + on writing credit default + swaps on CDOs. In PwC’s + +On line 4575: + begin pulling back on + writing credit default swaps + on CDOs. In PwC’s view, + +On line 4575: + on writing credit + default swaps on CDOs. In PwC’s + view, in allowing + +On line 4575: + CDOs. In PwC’s view, in + allowing one subsidiary to + increase exposure + +On line 4575: + subsidiary to increase + exposure to subprime while + another subsidiary + +On line 4575: + market entirely, + the parent company’s risk + management failed. PwC + +On line 4575: + second quarter of + financial disclosures would + have been changed if the + +On line 4575: + if the exposure + of the securities-lending + business had been known. + +On line 4575: + "these items together + raised control concerns around risk + management which could + +On line 4575: + control concerns around + risk management which could be + a material + +On line 4575: + risk management which + could be a material + weakness."120 Kevin McGinn, AIG’s + +On line 4575: + weakness."120 Kevin McGinn, AIG’s + chief credit officer, shared + these concerns about the + +On line 4575: + McGinn, AIG’s chief credit + officer, shared these concerns + about the conflicting + +On line 4575: + shared these concerns about + the conflicting strategies. In + a November email, + +On line 4575: + these concerns about the + conflicting strategies. In a + November email, McGinn + +On line 4577: + about the conflicting + strategies. In a November + email, McGinn wrote: "All units + +On line 4577: + a November email, + McGinn wrote: "All units were apprised + regularly of + +On line 4577: + email, McGinn wrote: "All units + were apprised regularly + of our concerns about + +On line 4577: + McGinn wrote: "All units were + apprised regularly of + our concerns about the + +On line 4577: + regularly of + our concerns about the housing + market. Some listened + +On line 4577: + the housing market. + Some listened and responded; + others simply chose + +On line 4577: + chose not to listen + and then, to add insult to + injury, not to spot + +On line 4577: + then, to add insult + to injury, not to spot the + manifest signs." He + +On line 4577: + insult to injury, + not to spot the manifest + signs." He concluded + +On line 4577: + to injury, not to + spot the manifest signs." He + concluded that this + +On line 4577: + the manifest signs." + He concluded that this was + akin to "Nero playing + +On line 4577: + manifest signs." He + concluded that this was akin + to "Nero playing the + +On line 4577: + He concluded that + this was akin to "Nero playing + the fiddle while Rome + +On line 4577: + concluded that this + was akin to "Nero playing the + fiddle while Rome burns."121 + +On line 4577: + akin to "Nero playing + the fiddle while Rome burns."121 On + the opposite side, + +On line 4577: + while Rome burns."121 On the + opposite side, Sullivan + insisted to the + +On line 4577: + On the opposite + side, Sullivan insisted + to the FCIC that the + +On line 4577: + to the FCIC that the + conflicting strategies in the + securities-lending + +On line 4577: + conflicting strategies + in the securities-lending + business and at AIG + +On line 4577: + business and at AIG + Financial Products simply + revealed that the two + +On line 4577: + revealed that the two + subsidiaries adopted different + business models, and + +On line 4577: + that the two subsidiaries + adopted different business + models, and did not + +On line 4577: + adopted different + business models, and did not + constitute a risk + +On line 4577: + business models, and + did not constitute a risk + management failure.122 + +On line 4579: + did not constitute + a risk management failure.122 + On December six + +On line 4579: + not constitute a + risk management failure.122 On + December six days + +On line 4579: + On December six + days after receiving PwC’s + warnings, Sullivan + +On line 4579: + conference call about + AIG’s risk management systems + and the company’s + +On line 4579: + risk we have taken + in the U.S. residential + housing sector is + +On line 4579: + is supported by + sound analysis and a risk + management structure. + +On line 4581: + structure. we believe + the probability that + it will sustain an + +On line 4581: + that it will sustain + an economic loss is close + to zero. We are + +On line 4581: + an economic loss + is close to zero. We are + confident in our + +On line 4581: + to zero. We are + confident in our marks and + the reasonableness + +On line 4581: + methods." Charlie Gates, + an analyst at Credit + Suisse, a Swiss bank, + +On line 4581: + Gates, an analyst + at Credit Suisse, a Swiss + bank, asked directly + +On line 4581: + an analyst at + Credit Suisse, a Swiss bank, + asked directly about + +On line 4581: + at Credit Suisse, + a Swiss bank, asked directly + about valuation + +On line 4581: + Credit Suisse, a + Swiss bank, asked directly about + valuation and + +On line 4581: + about valuation + and collateral disputes + with counterparties + +On line 4581: + valuation and + collateral disputes with + counterparties to + +On line 4581: + AIG had alluded + in its third-quarter financial + results. Cassano replied, + +On line 4581: + alluded in its + third-quarter financial results. + Cassano replied, "We have + +On line 4581: + "We have from time to + time gotten collateral + calls from people and + +On line 4581: + have from time to time + gotten collateral calls + from people and then + +On line 4581: + collateral calls + from people and then we say + to them, well we don’t + +On line 4581: + from people and then + we say to them, well we don’t + agree with your numbers. + +On line 4581: + people and then we + say to them, well we don’t agree + with your numbers. And + +On line 4581: + and then we say to + them, well we don’t agree with your + numbers. And they go, + +On line 4581: + we say to them, well + we don’t agree with your numbers. + And they go, oh, and + +On line 4581: + say to them, well we + don’t agree with your numbers. And + they go, oh, and they + +On line 4581: + to them, well we don’t + agree with your numbers. And they + go, oh, and they go + +On line 4581: + them, well we don’t agree + with your numbers. And they go, + oh, and they go away. + +On line 4581: + well we don’t agree with + your numbers. And they go, oh, + and they go away. And + +On line 4581: + we don’t agree with your + numbers. And they go, oh, and + they go away. And you + +On line 4581: + agree with your numbers. + And they go, oh, and they go + away. And you say well + +On line 4581: + with your numbers. And + they go, oh, and they go away. + And you say well what + +On line 4581: + your numbers. And they + go, oh, and they go away. And + you say well what was + +On line 4581: + numbers. And they go, + oh, and they go away. And you + say well what was that1 + +On line 4581: + And they go, oh, and + they go away. And you say well + what was that1 It’s like + +On line 4581: + they go, oh, and they + go away. And you say well what + was that1 It’s like a + +On line 4581: + oh, and they go away. + And you say well what was that1 + It’s like a drive-by + +On line 4581: + and they go away. And + you say well what was that1 It’s + like a drive-by in + +On line 4581: + they go away. And you + say well what was that1 It’s like + a drive-by in a + +On line 4581: + go away. And you say + well what was that1 It’s like a + drive-by in a way. + +On line 4581: + And you say well what + was that1 It’s like a drive-by + in a way. And the + +On line 4581: + say well what was that1 + It’s like a drive-by in a + way. And the other + +On line 4581: + well what was that1 It’s + like a drive-by in a way. + And the other times + +On line 4581: + what was that1 It’s like + a drive-by in a way. And + the other times they + +On line 4581: + was that1 It’s like a + drive-by in a way. And the + other times they sat + +On line 4581: + It’s like a drive-by + in a way. And the other + times they sat down with + +On line 4581: + like a drive-by in + a way. And the other times + they sat down with us, + +On line 4581: + a drive-by in a + way. And the other times they + sat down with us, and + +On line 4581: + drive-by in a way. + And the other times they sat + down with us, and none + +On line 4581: + in a way. And the + other times they sat down with + us, and none of this + +On line 4581: + And the other times + they sat down with us, and none + of this is hostile + +On line 4581: + the other times they + sat down with us, and none of + this is hostile or + +On line 4581: + they sat down with us, + and none of this is hostile + or anything, it’s all + +On line 4581: + sat down with us, and + none of this is hostile or + anything, it’s all very + +On line 4581: + with us, and none of + this is hostile or anything, + it’s all very cordial, + +On line 4581: + us, and none of this + is hostile or anything, it’s + all very cordial, and + +On line 4581: + and none of this is + hostile or anything, it’s all + very cordial, and we + +On line 4581: + this is hostile or + anything, it’s all very cordial, + and we sit down and + +On line 4581: + hostile or anything, + it’s all very cordial, and we + sit down and we try + +On line 4581: + or anything, it’s all + very cordial, and we sit down + and we try and find + +On line 4581: + anything, it’s all very + cordial, and we sit down and + we try and find the + +On line 4581: + it’s all very cordial, + and we sit down and we try + and find the middle + +On line 4581: + all very cordial, and + we sit down and we try and + find the middle ground + +On line 4581: + very cordial, and we + sit down and we try and find + the middle ground and + +On line 4581: + and we sit down and + we try and find the middle + ground and compare where + +On line 4581: + we sit down and we + try and find the middle ground + and compare where we + +On line 4581: + sit down and we try + and find the middle ground and + compare where we are."123 + +On line 4583: + and we try and find + the middle ground and compare + where we are."123 Cassano + +On line 4583: + we try and find the + middle ground and compare where + we are."123 Cassano did + +On line 4583: + the middle ground and + compare where we are."123 Cassano + did not reveal the + +On line 4583: + dollars posted to + other counterparties, and + the daily demands + +On line 4583: + the daily demands + from Goldman and the others + for additional + +On line 4583: + daily demands from + Goldman and the others for + additional cash. + +On line 4583: + from Goldman and the + others for additional + cash. The analysts + +On line 4583: + additional cash. + The analysts and investors + on the call were not + +On line 4583: + cash. The analysts + and investors on the call were + not informed about the + +On line 4583: + and investors on the + call were not informed about the + "negative basis + +On line 4583: + on the call were not + informed about the "negative + basis adjustment" + +On line 4583: + call were not informed + about the "negative basis + adjustment" used to + +On line 4583: + about the "negative + basis adjustment" used to + derive the announced + +On line 4583: + "negative basis + adjustment" used to derive + the announced billion + +On line 4583: + basis adjustment" + used to derive the announced + billion maximum + +On line 4583: + did not know that AIG’s + earnings were overstated by + billion—and they would + +On line 4583: + that AIG’s earnings were + overstated by billion—and + they would not learn that + +On line 4583: + were overstated by + billion—and they would not learn + that information + +On line 4583: + billion—and they would + not learn that information + until February + +On line 4587: + until February + "Material weakness" By + January AIG still + +On line 4587: + January AIG still + did not have a reliable + way to determine + +On line 4587: + market price of the + securities on which it + had written credit + +On line 4587: + had written credit + protection. Nevertheless, + on January LATE + +On line 4587: + Nevertheless, on + January LATE TO EARLY + Cassano sent an email + +On line 4587: + on January LATE + TO EARLY Cassano sent an + email to Michael Sherwood + +On line 4587: + January LATE TO + EARLY Cassano sent an email + to Michael Sherwood and + +On line 4587: + TO EARLY Cassano + sent an email to Michael Sherwood + and CFO David Viniar at + +On line 4587: + sent an email to Michael + Sherwood and CFO David Viniar at + Goldman demanding + +On line 4587: + email to Michael Sherwood + and CFO David Viniar at Goldman + demanding that they + +On line 4587: + and CFO David Viniar at + Goldman demanding that they + return billion of + +On line 4587: + Goldman demanding + that they return billion of + the billion posted.124 + +On line 4587: + they return billion + of the billion posted.124 He + attached a spreadsheet + +On line 4587: + billion posted.124 He + attached a spreadsheet showing + that AIG valued many + +On line 4587: + attached a spreadsheet + showing that AIG valued many + securities at + +On line 4587: + that AIG valued many + securities at par, as + if there had been no + +On line 4587: + many securities + at par, as if there had been + no decline in their + +On line 4587: + as if there had been + no decline in their value. + That was simply not + +On line 4587: + no decline in their + value. That was simply not + credible, Goldman + +On line 4587: + credible, Goldman + executives told the FCIC.125 + Meanwhile, Goldman had + +On line 4587: + FCIC.125 Meanwhile, Goldman + had by then built up billion + in protection by + +On line 4587: + had by then built up + billion in protection by + purchasing credit + +On line 4587: + built up billion in + protection by purchasing + credit default swaps + +On line 4587: + default swaps on AIG + to cover the difference + between the amount of + +On line 4587: + AIG to cover the + difference between the amount + of collateral + +On line 4587: + difference between + the amount of collateral + they had demanded + +On line 4587: + of collateral + they had demanded and the + amount that AIG had paid.126 + +On line 4589: + collateral they + had demanded and the amount + that AIG had paid.126 On + +On line 4589: + they had demanded + and the amount that AIG had paid.126 + On February PwC + +On line 4589: + and the amount that AIG + had paid.126 On February PwC + auditors met with + +On line 4589: + that AIG had paid.126 On + February PwC auditors + met with Robert Willumstad, + +On line 4589: + paid.126 On February + PwC auditors met with Robert + Willumstad, the chairman + +On line 4589: + Willumstad, the chairman + of AIG’s board of directors. + They informed him that + +On line 4589: + "negative basis + adjustment" used to reach the + billion estimate + +On line 4589: + to reach the billion + estimate disclosed on the + December investor + +On line 4589: + billion estimate + disclosed on the December + investor call had been + +On line 4589: + December investor + call had been improper and + unsupported, and + +On line 4589: + had been improper + and unsupported, and was + a sign that "controls + +On line 4589: + been improper and + unsupported, and was a + sign that "controls over + +On line 4589: + unsupported, and + was a sign that "controls over + the AIG Financial + +On line 4589: + deficiency was + a material weakness + as of December + +On line 4589: + a material + weakness as of December + In other words, PwC + +On line 4589: + as of December + In other words, PwC would have + to announce that the + +On line 4589: + words, PwC would have to + announce that the numbers AIG + had already publicly + +On line 4589: + have to announce that + the numbers AIG had already + publicly reported + +On line 4589: + had already publicly + reported were wrong. Why the + auditors waited + +On line 4589: + publicly reported + were wrong. Why the auditors + waited so long to + +On line 4589: + reported were wrong. + Why the auditors waited + so long to make this + +On line 4591: + this pronouncement is + unclear, particularly + given that PwC had + +On line 4591: + particularly + given that PwC had known about + the adjustment in + +On line 4593: + given that PwC had + known about the adjustment in + November. In the + +On line 4593: + PwC had known about the + adjustment in November. + In the meeting with + +On line 4593: + In the meeting with + Willumstad, the auditors were + broadly critical + +On line 4593: + they deemed unable to + compensate for Sullivan’s + weaknesses; and Lewis, + +On line 4593: + to compensate for + Sullivan’s weaknesses; and + Lewis, who might not have + +On line 4593: + complex matters" had + contributed to the problems.128 + Despite PwC’s findings, + +On line 4593: + contributed to the + problems.128 Despite PwC’s findings, + Sullivan received + +On line 4593: + problems.128 Despite PwC’s + findings, Sullivan received + million over four years + +On line 4593: + findings, Sullivan + received million over four years + in compensation + +On line 4593: + received million over + four years in compensation + from AIG, including + +On line 4593: + from AIG, including + a severance package of + million. When asked about + +On line 4593: + severance package + of million. When asked about these + figures at a FCIC + +On line 4593: + package of million. + When asked about these figures at + a FCIC hearing, he + +On line 4593: + of million. When asked + about these figures at a FCIC + hearing, he said, "I + +On line 4593: + asked about these figures + at a FCIC hearing, he said, + "I have no knowledge + +On line 4593: + about these figures at + a FCIC hearing, he said, "I + have no knowledge or + +On line 4593: + at a FCIC hearing, + he said, "I have no knowledge + or recollection + +On line 4593: + a FCIC hearing, he + said, "I have no knowledge or + recollection of + +On line 4593: + recollection of + those numbers whatsoever, + sir. I certainly + +On line 4593: + whatsoever, sir. + I certainly don’t recall + earning that amount of + +On line 4595: + sir. I certainly + don’t recall earning that amount + of money, sir."129 The + +On line 4595: + don’t recall earning + that amount of money, sir."129 The + following day, PwC + +On line 4595: + earning that amount of + money, sir."129 The following + day, PwC met with the + +On line 4595: + that amount of money, + sir."129 The following day, PwC + met with the entire + +On line 4595: + amount of money, sir."129 + The following day, PwC met + with the entire AIG + +On line 4595: + The following day, + PwC met with the entire AIG + Audit Committee + +On line 4595: + auditors said they + could complete AIG’s audit, but + only if Cassano + +On line 4595: + complete AIG’s audit, + but only if Cassano "did + not interfere in + +On line 4597: + not interfere in + the process." Retaining Cassano + was a "management + +On line 4597: + culture needed to + change at FP."130 On February + AIG disclosed in an + +On line 4597: + to change at FP."130 On + February AIG disclosed in + an SEC filing that + +On line 4597: + On February AIG + disclosed in an SEC filing + that its auditor + +On line 4597: + disclosed in an SEC + filing that its auditor + had identified the + +On line 4597: + SEC filing that its + auditor had identified + the material + +On line 4597: + the material + weakness, acknowledging that + it had reduced its + +On line 4597: + it had reduced its + December valuation + loss estimates by + +On line 4597: + valuation loss + estimates by billion—that + is, the difference + +On line 4597: + is, the difference + between the estimates of + billion and billion— + +On line 4599: + difference between + the estimates of billion + and billion— because + +On line 4601: + agencies responded + immediately. Moody’s and + S&P announced downgrades, + +On line 4601: + immediately. + Moody’s and S&P announced downgrades, + and Fitch placed AIG on + +On line 4601: + AIG on "Ratings Watch + Negative," suggesting that + a future downgrade + +On line 4601: + future downgrade was + possible. AIG’s stock declined + for the day, closing + +On line 4603: + possible. AIG’s stock + declined for the day, closing + at At the end of + +On line 4603: + AIG’s stock declined for + the day, closing at At the + end of February, + +On line 4603: + declined for the day, + closing at At the end of + February, Goldman + +On line 4603: + the day, closing at + At the end of February, + Goldman held billion + +On line 4603: + closing at At the + end of February, Goldman + held billion in cash + +On line 4603: + end of February, + Goldman held billion in cash + collateral, was + +On line 4603: + was demanding an + additional billion, and + had upped to billion + +On line 4603: + protection against an + AIG failure. On February + AIG disappointed + +On line 4603: + AIG disappointed + Wall Street again—this time with dismal + fourth-quarter and fiscal + +On line 4603: + fourth-quarter and fiscal + year earnings. The company + reported a net + +On line 4603: + CDO credit default + swap exposure and more than + illion in losses + +On line 4603: + swap exposure and + more than illion in losses + relating to the + +On line 4603: + more than illion in + losses relating to the + securities-lending + +On line 4603: + relating to the + securities-lending business’s + mortgage-backed purchases. + +On line 4603: + securities-lending + business’s mortgage-backed purchases. + Along with the losses, + +On line 4603: + Along with the losses, + Sullivan announced Cassano’s + retirement, but the + +On line 4603: + losses, Sullivan + announced Cassano’s retirement, + but the news wasn’t + +On line 4603: + Sullivan announced + Cassano’s retirement, but the + news wasn’t all bad + +On line 4603: + retirement, but the + news wasn’t all bad for the + former Financial + +On line 4603: + news wasn’t all bad + for the former Financial + Products chief: He made + +On line 4603: + bad for the former + Financial Products chief: He + made more than million + +On line 4603: + former Financial + Products chief: He made more than + million from the time + +On line 4603: + Financial Products + chief: He made more than million + from the time he joined + +On line 4603: + Financial Products + in January of until + his retirement in + +On line 4603: + his retirement in + including a million-a-month + consulting agreement + +On line 4605: + consulting agreement + after his retirement.131 In + March, the Office of + +On line 4605: + AIG and its subsidiaries, + downgraded the company’s + composite rating + +On line 4607: + still judged the threat to + overall viability + as remote.132 It did + +On line 4607: + remote.132 It did not + schedule a follow-up review + of the company’s + +On line 4607: + of the company’s + financial condition for + another six months. + +On line 4611: + another six months. + By then, it would be too late. + FEDERAL RESERVE: + +On line 4613: + six months. By then, it + would be too late. FEDERAL + RESERVE: "THE DISCOUNT + +On line 4613: + By then, it would be + too late. FEDERAL RESERVE: + "THE DISCOUNT WINDOW + +On line 4613: + then, it would be too + late. FEDERAL RESERVE: "THE + DISCOUNT WINDOW WASN’ + +On line 4615: + too late. FEDERAL + RESERVE: "THE DISCOUNT WINDOW + WASN’ T WORKING" Over + +On line 4615: + FEDERAL RESERVE: + "THE DISCOUNT WINDOW WASN’ T + WORKING" Over the course + +On line 4615: + RESERVE: "THE DISCOUNT + WINDOW WASN’ T WORKING" Over + the course of the fall, + +On line 4615: + course of the fall, the + announcements by Citigroup, + Merrill, and others + +On line 4615: + fall, the announcements + by Citigroup, Merrill, and + others made it clear + +On line 4615: + Merrill, and others + made it clear that financial + institutions were + +On line 4615: + clear that financial + institutions were going + to take serious + +On line 4615: + were going to take + serious losses from their + exposures to the + +On line 4615: + serious losses + from their exposures to the + mortgage market. Stocks + +On line 4615: + from their exposures + to the mortgage market. Stocks + of financial firms + +On line 4615: + their exposures to + the mortgage market. Stocks of + financial firms fell + +On line 4615: + the mortgage market. + Stocks of financial firms fell + sharply; by the end of + +On line 4615: + Stocks of financial + firms fell sharply; by the end of + November, the S&P + +On line 4615: + firms fell sharply; by the + end of November, the S&P + Financials Index + +On line 4615: + end of November, + the S&P Financials Index + had lost more than for + +On line 4615: + of November, the + S&P Financials Index had + lost more than for the + +On line 4615: + November, the S&P + Financials Index had lost + more than for the year. + +On line 4615: + Financials Index + had lost more than for the year. + Between July and + +On line 4615: + had lost more than for + the year. Between July and + November, asset-backed + +On line 4615: + November, asset-backed + commercial paper declined + about which meant that those + +On line 4615: + asset-backed commercial + paper declined about which meant + that those assets had + +On line 4615: + commercial paper + declined about which meant that those + assets had to be + +On line 4615: + declined about which meant + that those assets had to be + sold or funded by + +On line 4615: + about which meant that those + assets had to be sold or + funded by other + +On line 4615: + assets had to be + sold or funded by other + means. Investment banks + +On line 4615: + tighter funding markets + and increasing cash pressures. + As a result, the + +On line 4615: + and increasing cash + pressures. As a result, the + Federal Reserve + +On line 4615: + Reserve decided + that its interest rate cuts + and other measures + +On line 4615: + that its interest + rate cuts and other measures + since August had not + +On line 4615: + its interest rate + cuts and other measures since + August had not been + +On line 4615: + rate cuts and other + measures since August had not + been sufficient to + +On line 4615: + since August had not + been sufficient to provide + liquidity and + +On line 4615: + not been sufficient + to provide liquidity + and stability + +On line 4615: + been sufficient to + provide liquidity and + stability to + +On line 4615: + and stability + to financial markets. The + Fed’s discount window + +On line 4615: + Fed’s discount window + hadn’t attracted much bank + borrowing because + +On line 4615: + attracted much bank + borrowing because of the + stigma attached to + +On line 4615: + borrowing because + of the stigma attached to + it. "The problem with + +On line 4615: + the stigma attached + to it. "The problem with the + discount window is + +On line 4615: + to it. "The problem + with the discount window is + that people don’t like + +On line 4615: + it. "The problem with + the discount window is that + people don’t like to + +On line 4615: + the discount window + is that people don’t like to + use it because they + +On line 4615: + discount window is + that people don’t like to use + it because they view + +On line 4615: + is that people don’t + like to use it because they + view it as a risk + +On line 4615: + that people don’t like + to use it because they view + it as a risk that + +On line 4615: + people don’t like to + use it because they view it + as a risk that they + +On line 4615: + don’t like to use it + because they view it as a + risk that they will be + +On line 4615: + to use it because + they view it as a risk that + they will be viewed as + +On line 4615: + use it because they + view it as a risk that they + will be viewed as weak," + +On line 4615: + it because they view + it as a risk that they will + be viewed as weak," William + +On line 4615: + they view it as a + risk that they will be viewed as + weak," William Dudley, then + +On line 4615: + view it as a risk + that they will be viewed as weak," + William Dudley, then head + +On line 4615: + it as a risk that + they will be viewed as weak," William + Dudley, then head of + +On line 4615: + that they will be viewed + as weak," William Dudley, then head + of the capital + +On line 4615: + will be viewed as weak," + William Dudley, then head of the + capital markets + +On line 4615: + as weak," William Dudley, + then head of the capital + markets group at the + +On line 4615: + William Dudley, then head + of the capital markets + group at the New York + +On line 4615: + Dudley, then head of + the capital markets group + at the New York Fed + +On line 4615: + of the capital + markets group at the New York + Fed and currently + +On line 4615: + markets group at the + New York Fed and currently + its president, told + +On line 4617: + the New York Fed and + currently its president, + told the FCIC.133 Banks and + +On line 4617: + Fed and currently + its president, told the FCIC.133 + Banks and thrifts preferred + +On line 4617: + and currently its + president, told the FCIC.133 Banks + and thrifts preferred to + +On line 4617: + its president, told + the FCIC.133 Banks and thrifts preferred + to draw on other + +On line 4617: + president, told the + FCIC.133 Banks and thrifts preferred to + draw on other sources + +On line 4617: + Banks and thrifts preferred + to draw on other sources of + liquidity; in + +On line 4617: + of liquidity; + in particular, during + the second half of + +On line 4617: + liquidity; in + particular, during the + second half of the + +On line 4617: + in particular, + during the second half of + the Federal Home + +On line 4617: + second half of the + Federal Home Loan Banks—which are + government-sponsored + +On line 4617: + Federal Home Loan + Banks—which are government-sponsored + entities that lend + +On line 4617: + government-sponsored + entities that lend to banks + and thrifts, accepting + +On line 4619: + of March and the end + of December Washington + Mutual, the largest + +On line 4619: + end of December + Washington Mutual, the + largest thrift, increased its + +On line 4619: + Mutual, the largest + thrift, increased its borrowing + from the Federal + +On line 4619: + borrowing from the + Federal Home Loan Banks from + billion to billion; + +On line 4619: + from the Federal + Home Loan Banks from billion to + billion; Countrywide + +On line 4619: + Federal Home Loan + Banks from billion to billion; + Countrywide increased + +On line 4619: + Banks from billion to + billion; Countrywide increased + its borrowing from + +On line 4619: + billion; Countrywide + increased its borrowing from + billion to billion; + +On line 4619: + Countrywide increased + its borrowing from billion + to billion; Bank of + +On line 4619: + its borrowing from + billion to billion; Bank of + America increased + +On line 4619: + billion to billion; + Bank of America increased + its borrowing from + +On line 4619: + Bank of America + increased its borrowing from + billion to billion. + +On line 4619: + billion to billion. + The Federal Home Loan Banks + could thus be seen as + +On line 4619: + The Federal Home + Loan Banks could thus be seen as + the lender of next to + +On line 4619: + Federal Home Loan + Banks could thus be seen as the + lender of next to last + +On line 4619: + Home Loan Banks could thus + be seen as the lender of next + to last resort for + +On line 4619: + thus be seen as the + lender of next to last resort + for commercial banks + +On line 4619: + be seen as the lender + of next to last resort for + commercial banks and + +On line 4619: + the lender of next to + last resort for commercial + banks and thrifts—the + +On line 4619: + lender of next to last + resort for commercial banks + and thrifts—the Fed + +On line 4621: + for commercial banks + and thrifts—the Fed being + the last resort.134 In + +On line 4621: + banks and thrifts—the + Fed being the last resort.134 + In addition, the + +On line 4621: + and thrifts—the Fed + being the last resort.134 In + addition, the loss + +On line 4621: + addition, the loss + of liquidity in the + financial sector + +On line 4621: + of liquidity + in the financial sector + was making it more + +On line 4621: + liquidity in + the financial sector was + making it more diffi-LATE + +On line 4621: + in the financial + sector was making it more + diffi-LATE TO EARLY cult + +On line 4621: + sector was making + it more diffi-LATE TO EARLY cult + for businesses and + +On line 4621: + TO EARLY cult for + businesses and consumers to + get credit, raising + +On line 4621: + get credit, raising + the Fed’s concerns. From July + to October, the + +On line 4621: + the Fed’s concerns. From + July to October, the + percentage of loan + +On line 4621: + the percentage of + loan officers reporting + tightening standards + +On line 4621: + tightening standards + on prime mortgages increased from + to about Over that time, + +On line 4621: + prime mortgages increased + from to about Over that time, the + percentage of loan + +On line 4621: + increased from to about + Over that time, the percentage + of loan officers + +On line 4621: + the percentage of + loan officers reporting + tightening standards + +On line 4621: + tightening standards + on loans to large and midsize + companies increased + +On line 4621: + standards on loans to + large and midsize companies + increased from to its + +On line 4621: + on loans to large and + midsize companies increased + from to its highest + +On line 4621: + to large and midsize + companies increased from to + its highest level + +On line 4621: + companies increased + from to its highest level + since "The Federal + +On line 4621: + from to its highest + level since "The Federal + Reserve pursued a + +On line 4621: + its highest level + since "The Federal Reserve + pursued a whole slew + +On line 4623: + wasn’t working as + hoped," Frederic Mishkin, a Fed + governor from to + +On line 4623: + as hoped," Frederic + Mishkin, a Fed governor from + to told the FCIC. "These + +On line 4623: + Frederic Mishkin, a + Fed governor from to told + the FCIC. "These actions + +On line 4623: + Fed governor from + to told the FCIC. "These actions + were very aggressive, + +On line 4623: + governor from to + told the FCIC. "These actions were + very aggressive, [and] + +On line 4623: + they were extremely + controversial."136 The first of + these measures, announced + +On line 4623: + controversial."136 The + first of these measures, announced + on December was + +On line 4623: + first of these measures, + announced on December was + the creation of the + +On line 4623: + measures, announced on + December was the creation + of the Term Auction + +On line 4623: + December was the + creation of the Term Auction + Facility (TAF). + +On line 4623: + the creation of the + Term Auction Facility + (TAF). The idea was to + +On line 4623: + of the Term Auction + Facility (TAF). The idea + was to reduce the + +On line 4623: + (TAF). The idea was to + reduce the discount window + stigma by making + +On line 4623: + was to reduce the + discount window stigma by + making the money + +On line 4623: + reduce the discount + window stigma by making + the money available + +On line 4623: + window stigma by + making the money available + to all banks at once + +On line 4623: + stigma by making + the money available to all + banks at once through a + +On line 4623: + making the money + available to all banks at once + through a regular + +On line 4623: + the money available + to all banks at once through a + regular auction. + +On line 4623: + available to all banks + at once through a regular + auction. The program + +On line 4623: + to all banks at once + through a regular auction. + The program had some + +On line 4623: + regular auction. + The program had some success, + with banks borrowing + +On line 4623: + The program had some + success, with banks borrowing + billion by the end + +On line 4623: + had some success, with + banks borrowing billion by + the end of the year. + +On line 4623: + some success, with banks + borrowing billion by the + end of the year. Over + +On line 4623: + with banks borrowing + billion by the end of the + year. Over time, the Fed + +On line 4623: + billion by the end + of the year. Over time, the Fed + would continue to + +On line 4623: + of the year. Over time, + the Fed would continue to + tweak the TAF auctions, + +On line 4623: + Over time, the Fed would + continue to tweak the TAF + auctions, offering + +On line 4623: + continue to tweak + the TAF auctions, offering + more credit and longer + +On line 4623: + tweak the TAF auctions, + offering more credit and + longer maturities. + +On line 4625: + more credit and longer + maturities. Another + Fed concern was that + +On line 4625: + longer maturities. + Another Fed concern was + that banks and others + +On line 4625: + concern was that banks + and others who did have cash + would hoard it. Hoarding + +On line 4625: + that banks and others + who did have cash would hoard it. + Hoarding meant foreign + +On line 4625: + and others who did + have cash would hoard it. Hoarding + meant foreign banks had + +On line 4625: + did have cash would hoard + it. Hoarding meant foreign banks + had difficulty + +On line 4625: + meant foreign banks had + difficulty borrowing + in dollars and were + +On line 4625: + had difficulty + borrowing in dollars and + were therefore under + +On line 4625: + Those sales and fears of + more sales to come weighed on the + market prices of U.S. + +On line 4625: + of more sales to come + weighed on the market prices of + U.S. securities. + +On line 4625: + more sales to come weighed + on the market prices of U.S. + securities. In + +On line 4625: + weighed on the market + prices of U.S. securities. + In response, the Fed + +On line 4625: + on the market prices + of U.S. securities. In + response, the Fed and + +On line 4625: + market prices of U.S. + securities. In response, + the Fed and other + +On line 4625: + securities. In + response, the Fed and other + central banks around the + +On line 4625: + response, the Fed and + other central banks around the + world announced (also + +On line 4625: + other central banks + around the world announced (also + on December new + +On line 4625: + around the world announced + (also on December new + "currency swap lines" + +On line 4625: + on December new + "currency swap lines" to help + foreign banks borrow + +On line 4625: + "currency swap lines" + to help foreign banks borrow + dollars. Under this + +On line 4625: + to help foreign banks + borrow dollars. Under this + mechanism, foreign + +On line 4625: + dollars. Under this + mechanism, foreign central + banks swapped currencies + +On line 4625: + mechanism, foreign + central banks swapped currencies + with the Federal + +On line 4625: + currencies with the + Federal Reserve—local + currency for U.S. + +On line 4625: + with the Federal + Reserve—local currency + for U.S. dollars—and lent + +On line 4625: + currency for U.S. + dollars—and lent these dollars to + foreign banks. "During + +On line 4625: + for U.S. dollars—and lent + these dollars to foreign banks. + "During the crisis, + +On line 4625: + foreign banks. "During + the crisis, the U.S. banks were + very reluctant to + +On line 4625: + were very reluctant + to extend liquidity + to European banks," + +On line 4625: + liquidity to + European banks," Dudley said.137 + Central banks had used + +On line 4625: + said.137 Central banks had + used similar arrangements + in the aftermath + +On line 4625: + Central banks had used + similar arrangements in + the aftermath of + +On line 4625: + the aftermath of + the attacks to bolster the + global financial + +On line 4627: + bolster the global + financial markets. In late + the swap lines totaled + +On line 4627: + financial markets. + In late the swap lines totaled + billion. During the + +On line 4627: + In late the swap lines + totaled billion. During the + financial crisis + +On line 4627: + billion. During the + financial crisis seven + years later, they would + +On line 4629: + financial crisis + seven years later, they would + reach billion. The Fed + +On line 4629: + crisis seven years + later, they would reach billion. + The Fed hoped the TAF + +On line 4629: + seven years later, + they would reach billion. The Fed + hoped the TAF and the + +On line 4629: + years later, they would + reach billion. The Fed hoped the + TAF and the swap lines + +On line 4629: + later, they would reach + billion. The Fed hoped the TAF + and the swap lines would + +On line 4629: + they would reach billion. + The Fed hoped the TAF and the + swap lines would reduce + +On line 4629: + would reach billion. The + Fed hoped the TAF and the swap + lines would reduce strains + +On line 4629: + reach billion. The Fed + hoped the TAF and the swap lines + would reduce strains in + +On line 4629: + Fed hoped the TAF and + the swap lines would reduce strains + in short-term money + +On line 4629: + lines would reduce strains + in short-term money markets, + easing some of the + +On line 4629: + in short-term money + markets, easing some of the + funding pressure on + +On line 4629: + some of the funding + pressure on other struggling + participants such + +On line 4629: + pressure on other + struggling participants such + as investment banks. + +On line 4629: + as investment banks. + Importantly, it wasn’t + just the commercial + +On line 4629: + Importantly, it + wasn’t just the commercial + banks and thrifts but the + +On line 4629: + just the commercial + banks and thrifts but the "broader + financial system" + +On line 4629: + banks and thrifts but the + "broader financial system" + that concerned the Fed, + +On line 4629: + "Historically, + the Federal Reserve has + always tended to + +On line 4629: + has always tended + to supply liquidity + to the banks with the + +On line 4629: + always tended to + supply liquidity to + the banks with the idea + +On line 4629: + that liquidity + provided to the banking + system can be [lent + +On line 4629: + the banking system + can be [lent on] to solvent + institutions in + +On line 4629: + can be [lent on] to + solvent institutions in + the nonbank sector. + +On line 4629: + institutions in + the nonbank sector. What we + saw in this crisis + +On line 4629: + nonbank sector. What + we saw in this crisis was + that didn’t always + +On line 4629: + saw in this crisis + was that didn’t always take + place to the extent + +On line 4629: + in this crisis was + that didn’t always take place + to the extent that + +On line 4629: + this crisis was that + didn’t always take place to + the extent that it + +On line 4629: + that didn’t always + take place to the extent that + it had in the past. + +On line 4629: + didn’t always take + place to the extent that it + had in the past. I + +On line 4629: + always take place to + the extent that it had in + the past. I don’t think + +On line 4629: + to the extent that + it had in the past. I don’t + think people going + +On line 4629: + the extent that it + had in the past. I don’t think + people going in + +On line 4629: + it had in the past. + I don’t think people going + in really had + +On line 4629: + had in the past. I + don’t think people going in + really had a + +On line 4629: + think people going + in really had a full + understanding of + +On line 4629: + in really had + a full understanding of + the complexity + +On line 4629: + really had a + full understanding of the + complexity of + +On line 4629: + full understanding + of the complexity of + the shadow banking + +On line 4631: + complexity of + the shadow banking system, + the role of [structured + +On line 4631: + the role of [structured + investment vehicles] and + conduits, the backstops + +On line 4631: + [structured investment + vehicles] and conduits, the + backstops that banks were + +On line 4633: + explicitly or + implicitly."138 Burdened with + capital losses + +On line 4633: + to cover their own + funding commitments, the banks + were not stable enough + +On line 4633: + funding commitments, + the banks were not stable enough + to fill the void, even + +On line 4633: + commitments, the banks + were not stable enough to fill + the void, even after + +On line 4633: + stable enough to fill + the void, even after the Fed + lowered interest + +On line 4633: + enough to fill the void, + even after the Fed lowered + interest rates and + +On line 4633: + the void, even after + the Fed lowered interest + rates and began the + +On line 4633: + void, even after the + Fed lowered interest rates + and began the TAF + +On line 4633: + interest rates and + began the TAF auctions. In + January the Fed + +On line 4633: + rates and began the + TAF auctions. In January + the Fed cut rates again— + +On line 4635: + and began the TAF + auctions. In January the + Fed cut rates again— and + +On line 4635: + the TAF auctions. In + January the Fed cut rates + again— and then again, twice + +On line 4635: + In January the + Fed cut rates again— and then again, + twice within two weeks, + +On line 4635: + January the Fed + cut rates again— and then again, twice + within two weeks, a + +On line 4635: + cut rates again— and then + again, twice within two weeks, a + highly unusual + +On line 4635: + again— and then again, twice + within two weeks, a highly + unusual move that + +On line 4635: + within two weeks, a + highly unusual move that + brought the federal + +On line 4635: + two weeks, a highly + unusual move that brought the + federal funds rate + +On line 4637: + highly unusual + move that brought the federal + funds rate from to he + +On line 4637: + the federal funds + rate from to he Fed also + started plans for a + +On line 4637: + funds rate from to he + Fed also started plans for + a new program that + +On line 4637: + rate from to he Fed + also started plans for a + new program that would + +On line 4637: + also started plans + for a new program that would + use its emergency + +On line 4637: + for a new program + that would use its emergency + authority, the + +On line 4637: + authority, the + Term Securities Lending + Facility, though + +On line 4639: + Facility, though + it wasn’t launched until March. + "The TLSF was more a + +On line 4639: + launched until March. "The + TLSF was more a view that the + liquidity that + +On line 4639: + TLSF was more a view + that the liquidity that + we were providing + +On line 4639: + was more a view that + the liquidity that we + were providing to + +On line 4639: + more a view that the + liquidity that we were + providing to the + +On line 4639: + the liquidity + that we were providing to + the banks through the TAF + +On line 4639: + liquidity that + we were providing to the + banks through the TAF was + +On line 4639: + we were providing + to the banks through the TAF was + not leading to a + +On line 4639: + diminishment of + financing pressures elsewhere," + Dudley told the FCIC. + +On line 4639: + financing pressures + elsewhere," Dudley told the FCIC. + "So maybe we should think + +On line 4639: + elsewhere," Dudley told + the FCIC. "So maybe we should think + about bypassing the + +On line 4639: + told the FCIC. "So maybe + we should think about bypassing + the banking system + +On line 4639: + the FCIC. "So maybe we + should think about bypassing the + banking system and + +On line 4639: + "So maybe we should think + about bypassing the banking + system and [try] to + +On line 4639: + think about bypassing + the banking system and [try] + to come up with a + +On line 4641: + to the primary + dealer community more + directly."139 On March + +On line 4641: + community more + directly."139 On March the Fed + increased the total + +On line 4641: + directly."139 On March + the Fed increased the total + available in each of + +On line 4641: + March the Fed increased + the total available in each + of the biweekly + +On line 4641: + the Fed increased the + total available in each of + the biweekly TAF + +On line 4641: + total available in + each of the biweekly TAF + auctions from billion + +On line 4641: + auctions from billion + to billion, and guaranteed + at least that amount for + +On line 4641: + billion to billion, + and guaranteed at least that + amount for six months. The + +On line 4641: + months. The Fed also + liberalized its standard + for collateral. + +On line 4641: + for collateral. + Primary dealers—mainly + the investment banks + +On line 4645: + backed securities, + as collateral. The Fed + expected to have + +On line 4645: + as collateral. + The Fed expected to have + billion in such loans + +On line 4645: + The Fed expected + to have billion in such loans + outstanding at any + +On line 4647: + to have billion in + such loans outstanding at any + given time. Also + +On line 4647: + billion in such loans + outstanding at any given + time. Also at this + +On line 4647: + such loans outstanding + at any given time. Also + at this time, the U.S. + +On line 4647: + outstanding at any + given time. Also at this + time, the U.S. central + +On line 4647: + at any given time. + Also at this time, the U.S. + central bank began + +On line 4647: + Also at this time, + the U.S. central bank began + contemplating a + +On line 4647: + central bank began + contemplating a step that + was revo-lutionary: + +On line 4647: + contemplating a + step that was revo-lutionary: + a program that would + +On line 4647: + over which the Fed had + no supervisory or + regulatory + +On line 4649: + similar to those + available to commercial banks. + MONOLINE INSURERS: + +On line 4651: + NEVER EXPECTED + LOSSES" Meanwhile, the rating + agencies continued + +On line 4651: + LOSSES" Meanwhile, the + rating agencies continued + to downgrade mortgage-backed + +On line 4651: + to downgrade mortgage-backed + securities and CDOs through + By January as + +On line 4651: + securities and + CDOs through By January as + a result of the + +On line 4651: + By January as + a result of the stress in + the mortgage market, + +On line 4651: + January as a + result of the stress in the + mortgage market, S&P + +On line 4651: + a result of the + stress in the mortgage market, + S&P had downgraded + +On line 4651: + the mortgage market, + S&P had downgraded tranches + of residential + +On line 4651: + of residential + mortgage–backed securities + and tranches from CDOs. + +On line 4651: + and tranches from CDOs. + MBIA and Ambac, the two largest + monoline insurers, + +On line 4651: + MBIA and Ambac, the + two largest monoline insurers, + had taken on a + +On line 4651: + the two largest monoline + insurers, had taken on + a combined billion + +On line 4651: + a combined billion + of guarantees on mortgage + securities and + +On line 4651: + products. Downgrades on + the products that they insured + brought the financial + +On line 4651: + that they insured brought + the financial strength of these + companies into + +On line 4651: + companies into + question. After conducting + stress analysis, S&P + +On line 4651: + estimated in + February that Ambac would + need up to million + +On line 4651: + need up to million + in capital to cover + potential losses + +On line 4651: + in capital to + cover potential losses + on structured products.140 + +On line 4651: + cover potential + losses on structured products.140 + Such charges would affect + +On line 4651: + structured products.140 Such + charges would affect the monolines’ + own credit ratings, + +On line 4651: + charges would affect the + monolines’ own credit ratings, + which in turn could lead + +On line 4651: + affect the monolines’ + own credit ratings, which in + turn could lead to more + +On line 4651: + monolines’ own credit + ratings, which in turn could lead + to more downgrades of + +On line 4651: + ratings, which in turn + could lead to more downgrades of + the products they had + +On line 4651: + in turn could lead to + more downgrades of the products + they had guaranteed. + +On line 4653: + turn could lead to more + downgrades of the products they + had guaranteed. Like + +On line 4653: + of the products they + had guaranteed. Like many of + the monolines, ACA, the + +On line 4653: + they had guaranteed. + Like many of the monolines, ACA, + the smallest of them, + +On line 4653: + had guaranteed. Like + many of the monolines, ACA, the + smallest of them, kept + +On line 4653: + many of the monolines, + ACA, the smallest of them, kept + razor-thin capital— + +On line 4655: + the monolines, ACA, the + smallest of them, kept razor-thin + capital— less than + +On line 4655: + the smallest of them, + kept razor-thin capital— less + than million—against + +On line 4655: + smallest of them, kept + razor-thin capital— less than + million—against its + +On line 4655: + million—against its + obligations that included + billion in credit + +On line 4655: + billion in credit + default swaps on CDOs. In late + ACA reported a + +On line 4655: + default swaps on CDOs. + In late ACA reported a + net loss of billion, + +On line 4655: + swaps on CDOs. In late + ACA reported a net loss + of billion, almost + +On line 4655: + ACA reported a + net loss of billion, almost + entirely due to + +On line 4655: + net loss of billion, + almost entirely due to + credit default swaps. + +On line 4657: + of billion, almost + entirely due to credit + default swaps. This was + +On line 4657: + entirely due to + credit default swaps. This was + news. The notion of + +On line 4657: + credit default swaps. + This was news. The notion of + "zero-loss tolerance" + +On line 4657: + they and various + stakeholders—the rating + agencies, investors, and + +On line 4657: + the monolines never + would have to take a loss. As + Alan Roseman, CEO of + +On line 4657: + monolines never would + have to take a loss. As Alan + Roseman, CEO of ACA, + +On line 4657: + never would have to + take a loss. As Alan Roseman, + CEO of ACA, told FCIC + +On line 4659: + would have to take a + loss. As Alan Roseman, CEO of + ACA, told FCIC staff: "We + +On line 4659: + to take a loss. As + Alan Roseman, CEO of ACA, told + FCIC staff: "We never + +On line 4659: + loss. As Alan Roseman, + CEO of ACA, told FCIC staff: "We + never expected + +On line 4659: + Alan Roseman, CEO of + ACA, told FCIC staff: "We never + expected losses. + +On line 4659: + ACA, told FCIC staff: "We + never expected losses. + We were providing + +On line 4659: + FCIC staff: "We never + expected losses. We were + providing hedges on + +On line 4659: + expected losses. + We were providing hedges on + market volatility + +On line 4659: + were providing hedges + on market volatility to + institutional + +On line 4659: + we believed, to take + the volatility because we + didn’t have to post + +On line 4659: + take the volatility + because we didn’t have to + post collateral + +On line 4659: + didn’t have to post + collateral against the changes + in market value + +On line 4659: + market value to + our counterparty, number + one. Number two, we + +On line 4659: + Number two, we were + told by the rating agencies + that LATE TO EARLY + +On line 4659: + two, we were told by + the rating agencies that LATE + TO EARLY rated + +On line 4659: + we were told by the + rating agencies that LATE TO + EARLY rated us + +On line 4659: + told by the rating + agencies that LATE TO EARLY + rated us that that + +On line 4659: + TO EARLY rated + us that that mark-to-market + variation was not + +On line 4659: + rated us that that + mark-to-market variation + was not important + +On line 4659: + variation was not + important to our rating, + from a financial + +On line 4659: + important to our + rating, from a financial + strength point of view at + +On line 4659: + our rating, from a + financial strength point of view + at the insurance + +On line 4661: + point of view at the + insurance company."141 In + early November, + +On line 4661: + November, the SEC + called the growing concern about + Merrill’s use of the + +On line 4661: + use of the monolines + for hedging "a concern that + we also share."142 The + +On line 4661: + of the monolines for + hedging "a concern that we + also share."142 The large + +On line 4661: + monolines for hedging + "a concern that we also + share."142 The large Wall Street + +On line 4661: + "a concern that we + also share."142 The large Wall Street + firms attempted to + +On line 4661: + we also share."142 The + large Wall Street firms attempted + to minimize their + +On line 4661: + The large Wall Street firms + attempted to minimize + their exposure to + +On line 4661: + to minimize their + exposure to the monolines, + particularly + +On line 4661: + exposure to the + monolines, particularly + ACA. On December + +On line 4661: + ACA. On December + S&P downgraded ACA to junk + status, rating the + +On line 4661: + S&P downgraded ACA + to junk status, rating the + company CCC, which + +On line 4661: + ACA to junk status, + rating the company CCC, + which was fatal for + +On line 4661: + CCC, which was fatal + for a company whose CEO + said that its "rating + +On line 4661: + which was fatal for + a company whose CEO said + that its "rating is + +On line 4661: + was fatal for a + company whose CEO said that + its "rating is the + +On line 4661: + for a company + whose CEO said that its "rating + is the franchise."143 Firms + +On line 4661: + a company whose + CEO said that its "rating is + the franchise."143 Firms like + +On line 4661: + whose CEO said that its + "rating is the franchise."143 Firms + like Merrill Lynch would + +On line 4661: + like Merrill Lynch would + get virtually nothing + for the guarantees + +On line 4661: + Merrill Lynch would get + virtually nothing for + the guarantees they + +On line 4661: + get virtually + nothing for the guarantees + they had purchased from + +On line 4663: + the guarantees they + had purchased from ACA. Despite + the stresses in the + +On line 4663: + they had purchased from + ACA. Despite the stresses in + the market, the SEC + +On line 4663: + had purchased from ACA. + Despite the stresses in the + market, the SEC saw + +On line 4663: + from ACA. Despite the + stresses in the market, the + SEC saw the monoline + +On line 4663: + Despite the stresses + in the market, the SEC saw + the monoline problems + +On line 4663: + in the market, the + SEC saw the monoline problems + as largely confined + +On line 4663: + the market, the SEC + saw the monoline problems as + largely confined to + +On line 4663: + confined to ACA. A + January internal SEC + document said, "While + +On line 4663: + ACA. A January + internal SEC document + said, "While there is a + +On line 4663: + "While there is a clear + sentiment that capital + raising will need to + +On line 4663: + a clear sentiment + that capital raising will + need to continue, + +On line 4663: + clear sentiment that + capital raising will need + to continue, the + +On line 4663: + raising will need to + continue, the fact that the + guarantors (with the + +On line 4663: + need to continue, + the fact that the guarantors + (with the exception + +On line 4663: + to continue, the + fact that the guarantors (with + the exception of + +On line 4663: + continue, the fact + that the guarantors (with the + exception of ACA) + +On line 4663: + that the guarantors + (with the exception of ACA) + are relatively + +On line 4663: + (with the exception + of ACA) are relatively + insulated from + +On line 4663: + provides hope that event[s] + in this sector will unfold + in a manageable + +On line 4663: + hope that event[s] in this + sector will unfold in a + manageable manner."144 + +On line 4665: + will unfold in a + manageable manner."144 Still, the + rating agencies told + +On line 4665: + manageable manner."144 + Still, the rating agencies told + the monolines that if + +On line 4665: + the rating agencies + told the monolines that if they + wanted to retain + +On line 4665: + told the monolines that + if they wanted to retain + their stel-lar ratings, they + +On line 4665: + the monolines that if + they wanted to retain their + stel-lar ratings, they would + +On line 4665: + monolines that if they + wanted to retain their stel-lar + ratings, they would have + +On line 4665: + that if they wanted + to retain their stel-lar ratings, + they would have to raise + +On line 4665: + wanted to retain + their stel-lar ratings, they would have + to raise capital. + +On line 4665: + to retain their stel-lar + ratings, they would have to raise + capital. MBIA and + +On line 4665: + they would have to raise + capital. MBIA and Ambac + ultimately did + +On line 4667: + raise capital. MBIA + and Ambac ultimately + did raise billion and + +On line 4667: + billion and billion, + respectively. Nonetheless, + S&P downgraded both + +On line 4667: + downgraded both to + AA in June As the crisis + unfolded, most of + +On line 4667: + both to AA in June + As the crisis unfolded, + most of the monolines + +On line 4667: + to AA in June As + the crisis unfolded, most + of the monolines stopped + +On line 4669: + of the monolines stopped + writing new coverage. The + subprime contagion + +On line 4669: + monolines stopped writing + new coverage. The subprime + contagion spread through + +On line 4669: + is easy to follow: + in anticipation of + the monoline downgrades, + +On line 4669: + that had nothing to + do with the mortgage-backed markets, + including a set + +On line 4669: + do with the mortgage-backed + markets, including a set + of investments known + +On line 4669: + investments known as + auction rate securities, + or ARS. An ARS is + +On line 4669: + known as auction rate + securities, or ARS. An + ARS is a long-term bond + +On line 4669: + rate securities, + or ARS. An ARS is a long-term + bond whose interest + +On line 4669: + securities, or + ARS. An ARS is a long-term bond + whose interest rate + +On line 4669: + or ARS. An ARS is + a long-term bond whose interest + rate is reset at + +On line 4669: + is a long-term bond whose + interest rate is reset + at regularly + +On line 4669: + interest rate is + reset at regularly + scheduled auctions held + +On line 4669: + at regularly + scheduled auctions held every + one to seven weeks.145 + +On line 4669: + scheduled auctions held + every one to seven weeks.145 + Existing investors + +On line 4669: + one to seven weeks.145 + Existing investors can choose + to rebid for the + +On line 4669: + Existing investors + can choose to rebid for the + bonds and new investors + +On line 4669: + investors can choose to + rebid for the bonds and new + investors can come in. + +On line 4669: + can choose to rebid + for the bonds and new investors + can come in. The debt + +On line 4669: + choose to rebid for + the bonds and new investors can + come in. The debt is + +On line 4669: + new investors can come + in. The debt is frequently + municipal bonds. + +On line 4669: + debt is frequently + municipal bonds. As of + December state and + +On line 4669: + municipal bonds. + As of December state and + local governments + +On line 4671: + As of December + state and local governments + had issued billion + +On line 4671: + of December state + and local governments had + issued billion in + +On line 4671: + local governments + had issued billion in ARS, + accounting for half + +On line 4671: + issued billion in + ARS, accounting for half of + the billion market. + +On line 4671: + ARS, accounting for + half of the billion market. + The other half were + +On line 4671: + The other half were + primarily bundles of + student loans and debt + +On line 4671: + were primarily + bundles of student loans and + debt of nonprofits + +On line 4671: + bundles of student + loans and debt of nonprofits + such as museums + +On line 4673: + as museums and + hospitals. The key point: these + entities wanted + +On line 4673: + hospitals. The key + point: these entities wanted + to borrow long-term but + +On line 4673: + point: these entities + wanted to borrow long-term but + get the benefit + +On line 4673: + wanted to borrow + long-term but get the benefit + of lower short-term + +On line 4673: + get the benefit + of lower short-term rates, and + investors wanted to + +On line 4673: + of lower short-term + rates, and investors wanted to + get the safety of + +On line 4673: + wanted to get the + safety of investing in + these securities + +On line 4673: + without tying up + their money for a long time. + Unlike commercial + +On line 4673: + their money for a + long time. Unlike commercial + paper, this market + +On line 4673: + this market had no + explicit liquidity + backstop from a bank, + +On line 4673: + had no explicit + liquidity backstop from + a bank, but there was + +On line 4673: + backstop from a bank, + but there was an implicit + backstop: often, if + +On line 4673: + from a bank, but there + was an implicit backstop: + often, if there were + +On line 4673: + bank, but there was an + implicit backstop: often, + if there were not enough + +On line 4673: + was an implicit + backstop: often, if there were + not enough new buyers + +On line 4673: + if there were not enough + new buyers to replace the + previous investors, + +On line 4673: + not enough new buyers + to replace the previous + investors, the dealers + +On line 4673: + buyers to replace + the previous investors, the + dealers running these + +On line 4673: + the dealers running + these auctions, including firms + like UBS, Citigroup, + +On line 4673: + dealers running these + auctions, including firms like + UBS, Citigroup, and + +On line 4673: + auctions, including + firms like UBS, Citigroup, and + Merrill Lynch, would step + +On line 4673: + including firms like + UBS, Citigroup, and Merrill + Lynch, would step in and + +On line 4673: + UBS, Citigroup, and + Merrill Lynch, would step in and + pick up the shortfall. + +On line 4673: + would step in and pick + up the shortfall. Because of + these interventions, + +On line 4673: + step in and pick up + the shortfall. Because of these + interventions, there + +On line 4673: + the shortfall. Because + of these interventions, there + were only failures + +On line 4673: + interventions, there + were only failures between + and early in more + +On line 4675: + were only failures + between and early in more + than auctions. Dealers + +On line 4675: + failures between and + early in more than auctions. + Dealers highlighted + +On line 4675: + Dealers highlighted + those minuscule failure rates + to convince clients that + +On line 4675: + to convince clients that + ARS were very liquid, short-term + instruments, even in + +On line 4675: + clients that ARS were very + liquid, short-term instruments, + even in times of stress.146 + +On line 4677: + very liquid, short-term + instruments, even in times of + stress.146 However, if + +On line 4677: + instruments, even in + times of stress.146 However, if + an auction did fail, + +On line 4677: + auction did fail, the + previous ARS investors would + be obligated + +On line 4677: + ARS investors would be + obligated to retain + their investments. In + +On line 4677: + be obligated + to retain their investments. + In compensation, + +On line 4677: + obligated to + retain their investments. In + compensation, the + +On line 4677: + compensation, the + interest rates on the debt + would reset, often + +On line 4677: + rates on the debt would + reset, often much higher, + but investors’ funds would + +On line 4677: + would reset, often + much higher, but investors’ funds + would be trapped until + +On line 4677: + reset, often much + higher, but investors’ funds would + be trapped until new + +On line 4677: + often much higher, + but investors’ funds would be trapped + until new investors + +On line 4677: + but investors’ funds would + be trapped until new investors + or the ealer stepped + +On line 4677: + investors’ funds would be + trapped until new investors or + the ealer stepped up + +On line 4677: + until new investors + or the ealer stepped up or + the borrower paid + +On line 4677: + the ealer stepped up + or the borrower paid off + the loan. ARS investors + +On line 4677: + ealer stepped up or + the borrower paid off the + loan. ARS investors were + +On line 4677: + or the borrower + paid off the loan. ARS investors + were typically + +On line 4677: + the borrower paid + off the loan. ARS investors were + typically very + +On line 4677: + risk averse and valued + liquidity, and so they + were willing to pay + +On line 4677: + liquidity, and + so they were willing to pay + a premium for + +On line 4677: + so they were willing + to pay a premium for + guarantees on the + +On line 4677: + the monolines’ growing + problems in the latter half + of affected the + +On line 4679: + half of affected + the ARS market. Fearing that + the monolines would not + +On line 4679: + of affected the + ARS market. Fearing that the + monolines would not be + +On line 4679: + ARS market. Fearing + that the monolines would not be + able to perform on + +On line 4679: + market. Fearing that + the monolines would not be able + to perform on their + +On line 4679: + the monolines would not + be able to perform on their + guarantees, investors + +On line 4679: + were all that kept the + market going, but the stress + became too great. With + +On line 4679: + that kept the market + going, but the stress became + too great. With their own + +On line 4679: + the market going, + but the stress became too great. + With their own problems + +On line 4679: + market going, but + the stress became too great. With + their own problems to + +On line 4679: + going, but the stress + became too great. With their own + problems to contend + +On line 4679: + but the stress became + too great. With their own problems + to contend with, the + +On line 4679: + became too great. With + their own problems to contend + with, the dealers were + +On line 4679: + too great. With their own + problems to contend with, the + dealers were unable + +On line 4679: + With their own problems + to contend with, the dealers + were unable to step + +On line 4679: + their own problems to + contend with, the dealers were + unable to step in + +On line 4679: + ensure successful + auctions. In February, en + masse, they pulled up stakes. + +On line 4679: + masse, they pulled up stakes. + The market collapsed almost + instantaneously. + +On line 4679: + The market collapsed + almost instantaneously. + On February in + +On line 4679: + instantaneously. + On February in one of + the starkest market + +On line 4679: + On February in + one of the starkest market + dislocations of + +On line 4679: + dislocations of + the financial crisis, of + the ARS auctions failed; + +On line 4679: + of the financial + crisis, of the ARS auctions + failed; the following + +On line 4679: + financial crisis, + of the ARS auctions failed; the + following week, failed. + +On line 4681: + crisis, of the ARS + auctions failed; the following + week, failed. Hundreds of + +On line 4681: + of the ARS auctions + failed; the following week, failed. + Hundreds of billions + +On line 4681: + failed; the following + week, failed. Hundreds of billions + of dollars were trapped + +On line 4681: + the following week, + failed. Hundreds of billions of + dollars were trapped by + +On line 4681: + week, failed. Hundreds of + billions of dollars were trapped + by ARS instruments + +On line 4681: + dollars were trapped by + ARS instruments as investors + were obligated + +On line 4683: + small businesses, and + charities—constituted + more than billion of + +On line 4683: + more than billion of + this billion market.147 Moreover, + investors who chose to + +On line 4683: + who chose to remain + in the market demanded + a premium to + +On line 4683: + chose to remain in + the market demanded a + premium to take + +On line 4683: + and interest rate + resets, countless governments, + infrastructure projects, + +On line 4683: + rate resets, countless + governments, infrastructure + projects, and nonprofits + +On line 4683: + projects, and nonprofits + on tight budgets were slammed with + interest rates of + +On line 4685: + on tight budgets were + slammed with interest rates of + or higher. Problems + +On line 4685: + tight budgets were slammed + with interest rates of or + higher. Problems in + +On line 4685: + slammed with interest + rates of or higher. Problems + in the ARS market + +On line 4685: + with interest rates + of or higher. Problems in + the ARS market cost + +On line 4685: + higher. Problems in + the ARS market cost Georgetown + University, a + +On line 4685: + the ARS market cost + Georgetown University, a + borrower, million.148 + +On line 4687: + million.148 New York State + was stuck with interest rates + that soared from about to + +On line 4687: + New York State was stuck + with interest rates that soared + from about to more than + +On line 4687: + York State was stuck with + interest rates that soared from + about to more than on + +On line 4687: + stuck with interest + rates that soared from about to more + than on billion of + +On line 4687: + with interest rates + that soared from about to more than + on billion of its + +On line 4687: + interest rates that + soared from about to more than on + billion of its debt. + +On line 4687: + from about to more than + on billion of its debt. The + Port Authority + +On line 4687: + about to more than on + billion of its debt. The Port + Authority of + +On line 4687: + on billion of its + debt. The Port Authority + of New York and New + +On line 4687: + of its debt. The Port + Authority of New York + and New Jersey saw + +On line 4687: + Port Authority + of New York and New Jersey + saw the interest + +On line 4687: + Authority of + New York and New Jersey saw + the interest rate + +On line 4687: + of New York and New + Jersey saw the interest + rate on its debt jump + +On line 4687: + York and New Jersey + saw the interest rate on + its debt jump from to + +On line 4687: + and New Jersey saw + the interest rate on its + debt jump from to in + +On line 4687: + New Jersey saw the + interest rate on its debt + jump from to in a + +On line 4687: + saw the interest + rate on its debt jump from to + in a single week + +On line 4687: + the interest rate + on its debt jump from to in + a single week in + +On line 4689: + rate on its debt jump + from to in a single week + in February.149 In + +On line 4689: + on its debt jump from + to in a single week in + February.149 In alone, + +On line 4689: + to in a single + week in February.149 In alone, + the SEC received more + +On line 4689: + in a single week + in February.149 In alone, the + SEC received more than + +On line 4689: + week in February.149 + In alone, the SEC received more + than investor complaints + +On line 4689: + SEC received more than + investor complaints regarding + the failed ARS auctions. + +On line 4689: + complaints regarding + the failed ARS auctions. Investors + argued that brokers + +On line 4689: + regarding the failed + ARS auctions. Investors argued + that brokers had led + +On line 4689: + ARS auctions. Investors + argued that brokers had led + them to believe that + +On line 4689: + led them to believe + that ARS were safe and liquid, + essentially the + +On line 4689: + the equivalent of + money market accounts but + with the potential + +On line 4689: + accounts but with the + potential for a slightly + higher interest + +On line 4689: + potential for a + slightly higher interest + rate. Investors also + +On line 4689: + also reported + that the frozen market blocked their + access to money + +On line 4689: + that the frozen market + blocked their access to money + for short-term needs such + +On line 4689: + the frozen market blocked + their access to money for + short-term needs such as + +On line 4689: + for short-term needs such + as medical expenses, + college tuition, and, + +On line 4689: + college tuition, and, + for some small businesses and + charities, payroll. + +On line 4691: + some small businesses + and charities, payroll. By + the SEC had settled + +On line 4691: + small businesses and + charities, payroll. By the + SEC had settled with + +On line 4691: + SEC had settled with + financial institutions + including Bank of + +On line 4693: + including Bank of + America, RBC Capital + Markets, and Deutsche Bank + +On line 4693: + Bank of America, + RBC Capital Markets, and + Deutsche Bank to resolve + +On line 4693: + of America, RBC + Capital Markets, and Deutsche + Bank to resolve charges + +On line 4693: + Capital Markets, + and Deutsche Bank to resolve charges + that the firms misled + +On line 4693: + Markets, and Deutsche Bank + to resolve charges that the firms + misled investors. As + +On line 4693: + Bank to resolve charges + that the firms misled investors. + As a result, these + +On line 4693: + to resolve charges that + the firms misled investors. As + a result, these and + +On line 4693: + that the firms misled + investors. As a result, these + and other banks made + +On line 4693: + As a result, these + and other banks made more than + billion available to + +On line 4693: + these and other banks + made more than billion available + to pay off tens of + +On line 4693: + other banks made more + than billion available to pay + off tens of thousands + +On line 4697: + than billion available + to pay off tens of thousands + of ARS investors.150 LATE + +On line 4697: + billion available to + pay off tens of thousands of + ARS investors.150 LATE TO + +On line 4697: + of thousands of ARS + investors.150 LATE TO EARLY The + Commission concludes + +On line 4697: + of ARS investors.150 LATE + TO EARLY The Commission + concludes that some large + +On line 4697: + LATE TO EARLY The + Commission concludes that some + large investment banks, + +On line 4697: + holding companies, + and insurance companies, + including Merrill + +On line 4697: + Lynch, Citigroup, and + AIG, experienced massive + losses related + +On line 4701: + regulators—the + Securities and Exchange + Commission for the + +On line 4701: + Securities and + Exchange Commission for the + large investment banks + +On line 4701: + investment banks and + the banking supervisors + for the bank holding + +On line 4701: + banks and the banking + supervisors for the bank + holding companies + +On line 4701: + to adequately + supervise their safety and + soundness, allowing + +On line 4701: + allowing them to + take inordinate risk in + activities such + +On line 4701: + take inordinate + risk in activities such + as nonprime mortgage + +On line 4701: + dealing and to hold + inadequate capital + and liquidity. + +On line 4713: + liquidity. MARCH + THE FALL OF BEAR STEARNS CONTENTS + "I requested some + +On line 4715: + MARCH THE FALL OF BEAR + STEARNS CONTENTS "I requested + some forbearance" "We + +On line 4715: + THE FALL OF BEAR STEARNS + CONTENTS "I requested some + forbearance" "We were + +On line 4719: + suitably skeptical"...............................................................................282 + "Turn into a death spiral" + "Duty to protect + +On line 4721: + death spiral" "Duty + to protect their investors" "The + government would not + +On line 4721: + "Duty to protect + their investors" "The government + would not permit a + +On line 4723: + government would not + permit a higher number" + "It was heading to + +On line 4725: + permit a higher + number" "It was heading to + a black hole"..........................................................................290 After + +On line 4725: + a higher number" + "It was heading to a black + hole"..........................................................................290 After its hedge + +On line 4725: + higher number" "It + was heading to a black hole"..........................................................................290 + After its hedge funds + +On line 4725: + "It was heading to + a black hole"..........................................................................290 After its hedge + funds failed in July + +On line 4725: + was heading to a + black hole"..........................................................................290 After its hedge funds + failed in July Bear + +On line 4725: + heading to a black + hole"..........................................................................290 After its hedge funds failed + in July Bear Stearns + +On line 4725: + black hole"..........................................................................290 After its + hedge funds failed in July Bear + Stearns faced more challenges + +On line 4725: + hole"..........................................................................290 After its hedge + funds failed in July Bear Stearns + faced more challenges in + +On line 4725: + After its hedge funds + failed in July Bear Stearns faced + more challenges in the + +On line 4725: + funds failed in July + Bear Stearns faced more challenges in + the second half of + +On line 4725: + failed in July Bear + Stearns faced more challenges in the + second half of the + +On line 4725: + Stearns faced more challenges + in the second half of the + year. Taking out the + +On line 4725: + in the second half + of the year. Taking out the + repo lenders to the + +On line 4725: + second half of the + year. Taking out the repo + lenders to the High-Grade Fund + +On line 4725: + of the year. Taking + out the repo lenders to the + High-Grade Fund brought nearly + +On line 4725: + year. Taking out the + repo lenders to the High-Grade Fund + brought nearly billion + +On line 4725: + out the repo lenders + to the High-Grade Fund brought nearly + billion in subprime + +On line 4725: + repo lenders to the + High-Grade Fund brought nearly billion + in subprime assets + +On line 4725: + to the High-Grade Fund brought + nearly billion in subprime + assets onto Bear’s + +On line 4725: + brought nearly billion + in subprime assets onto + Bear’s books, contributing + +On line 4725: + nearly billion in + subprime assets onto Bear’s + books, contributing to + +On line 4725: + a billion write-down + on mortgage-related assets + in November. That + +On line 4725: + on mortgage-related + assets in November. That + prompted investors to + +On line 4725: + to scrutinize Bear + Stearns’s finances. Over the fall, Bear’s + repo lenders—mostly + +On line 4725: + required Bear to post + more collateral and pay + higher interest + +On line 4725: + more collateral + and pay higher interest + rates. Then, in just one + +On line 4725: + collateral and + pay higher interest rates. + Then, in just one week + +On line 4725: + higher interest + rates. Then, in just one week in + March a run by these + +On line 4725: + interest rates. Then, + in just one week in March a + run by these lenders, hedge + +On line 4725: + rates. Then, in just one + week in March a run by these + lenders, hedge fund customers, + +On line 4725: + Then, in just one week + in March a run by these lenders, + hedge fund customers, and + +On line 4725: + week in March a run + by these lenders, hedge fund customers, + and derivatives + +On line 4725: + by these lenders, hedge fund + customers, and derivatives + counterparties led + +On line 4727: + the biggest piece of + Bear Stearns’s most-profitable division, + its fixed-income business, + +On line 4727: + biggest piece of Bear + Stearns’s most-profitable division, its + fixed-income business, which + +On line 4727: + its fixed-income business, + which generated of the + firm’s total revenues. + +On line 4729: + which generated + of the firm’s total revenues. + Growing fast was the + +On line 4729: + of the firm’s total + revenues. Growing fast was the + Global Client Services + +On line 4729: + fast was the Global + Client Services division, which + included Bear’s prime + +On line 4729: + Global Client Services + division, which included + Bear’s prime brokerage + +On line 4729: + Stearns was the second-biggest + prime broker in the country, + with a market share + +On line 4729: + was the second-biggest prime + broker in the country, with + a market share in + +On line 4729: + prime broker in the + country, with a market share + in trailing Morgan + +On line 4729: + in the country, with + a market share in trailing + Morgan Stanley’s This + +On line 4729: + a market share in + trailing Morgan Stanley’s This + business would figure + +On line 4731: + origination through + securitization and + sale. It both acquired + +On line 4731: + It both acquired and + created its own captive + originators to + +On line 4731: + created its own + captive originators to + generate mortgages + +On line 4731: + originators to + generate mortgages that Bear + bundled, turned into + +On line 4731: + generate mortgages + that Bear bundled, turned into + securities, and + +On line 4731: + that Bear bundled, turned + into securities, and + sold to investors.2 The + +On line 4731: + bundled, turned into + securities, and sold to + investors.2 The smallest + +On line 4731: + and sold to investors.2 + The smallest of the five large + investment banks, it + +On line 4731: + investors.2 The smallest + of the five large investment + banks, it was still a + +On line 4733: + top-three underwriter + of private-label mortgage– backed + securities from + +On line 4733: + private-label mortgage– + backed securities from to + In it underwrote + +On line 4733: + underwrote billion + in collateralized debt + obligations of all + +On line 4733: + collateralized + debt obligations of all kinds, + more than double its + +On line 4733: + debt obligations of + all kinds, more than double its + figure of billion. + +On line 4739: + more than double its + figure of billion. MARCH The + total included + +On line 4739: + double its figure + of billion. MARCH The total + included billion + +On line 4739: + figure of billion. + MARCH The total included + billion in CDOs that + +On line 4739: + CDOs that included + mortgage-backed securities, putting + it in the top in + +On line 4739: + top in that business.4 + As was typical on Wall + Street, the company’s + +On line 4739: + in that business.4 As + was typical on Wall Street, + the company’s view + +On line 4739: + that business.4 As was + typical on Wall Street, the + company’s view was + +On line 4739: + As was typical + on Wall Street, the company’s + view was that Bear was + +On line 4739: + was typical on + Wall Street, the company’s view + was that Bear was in + +On line 4739: + typical on Wall + Street, the company’s view was + that Bear was in the + +On line 4739: + Street, the company’s + view was that Bear was in the + moving business, not + +On line 4739: + view was that Bear was + in the moving business, not + the storage business—that + +On line 4739: + was that Bear was in + the moving business, not the + storage business—that is, + +On line 4739: + the moving business, + not the storage business—that is, + it sought to provide + +On line 4739: + storage business—that is, + it sought to provide services + to clients rather than take + +On line 4739: + business—that is, it sought + to provide services to clients + rather than take on long-term + +On line 4739: + it sought to provide + services to clients rather than take + on long-term exposures + +On line 4739: + to provide services + to clients rather than take on long-term + exposures of its + +On line 4741: + to clients rather than take + on long-term exposures of its + own.5 Bear expanded + +On line 4741: + clients rather than take on + long-term exposures of its own.5 + Bear expanded its + +On line 4741: + on long-term exposures + of its own.5 Bear expanded + its mortgage business + +On line 4741: + own.5 Bear expanded + its mortgage business despite + evidence that the + +On line 4741: + that the market was + beginning to falter, as + did other firms such + +On line 4741: + was beginning to + falter, as did other firms + such as Citigroup + +On line 4741: + did other firms such + as Citigroup and Merrill. + As early as May + +On line 4741: + other firms such as + Citigroup and Merrill. As + early as May Bear + +On line 4741: + as Citigroup and + Merrill. As early as May + Bear had lost million + +On line 4741: + Bear had lost million + relating to defaults6 on + mortgages which occurred + +On line 4741: + million relating + to defaults6 on mortgages which + occurred within days + +On line 4741: + defaults6 on mortgages + which occurred within days of + origination, which + +On line 4741: + which occurred within + days of origination, which + had been rare in the + +On line 4741: + occurred within days + of origination, which had + been rare in the decade. + +On line 4741: + of origination, + which had been rare in the decade. + But Bear persisted, + +On line 4741: + rare in the decade. But + Bear persisted, assuming + the setback would be + +On line 4741: + But Bear persisted, + assuming the setback would + be temporary. In + +On line 4741: + be temporary. In + February Bear even acquired + Encore Credit, its + +On line 4741: + February Bear even + acquired Encore Credit, its + third captive mortgage + +On line 4741: + originator in + the United States, doubling its + capacity. The + +On line 4741: + capacity. The + purchase was consistent with + Bear’s contrarian + +On line 4743: + markets and waiting + for them to turn around.7 Only + a month after the + +On line 4743: + and waiting for them + to turn around.7 Only a month + after the purchase + +On line 4743: + for them to turn around.7 + Only a month after the + purchase of Encore, + +On line 4743: + the Securities + and Exchange Commission wrote + in an internal + +On line 4743: + market risk losses" + on its Alt-A mortgage assets.8 + The losses were small, + +On line 4743: + losses" on its Alt-A + mortgage assets.8 The losses + were small, but the SEC + +On line 4743: + Alt-A mortgage assets.8 + The losses were small, but the + SEC reported that + +On line 4743: + mortgage assets.8 The + losses were small, but the SEC + reported that "risk + +On line 4743: + The losses were small, + but the SEC reported that + "risk managers note[d] + +On line 4743: + losses were small, but + the SEC reported that "risk + managers note[d] that + +On line 4743: + were small, but the SEC + reported that "risk managers + note[d] that these events + +On line 4743: + the SEC reported + that "risk managers note[d] that + these events reflect a + +On line 4743: + SEC reported that + "risk managers note[d] that these + events reflect a more + +On line 4743: + reported that "risk + managers note[d] that these events + reflect a more rapid + +On line 4745: + anticipated + in ex ante models of stress + events."9 "I REQUESTED + +On line 4747: + Vacationing on + Nantucket Island when the + two Bear-sponsored hedge funds + +On line 4747: + Nantucket Island + when the two Bear-sponsored hedge funds + declared bankruptcy + +On line 4747: + when the two Bear-sponsored + hedge funds declared bankruptcy + on July former + +On line 4747: + the two Bear-sponsored hedge + funds declared bankruptcy on + July former Bear + +On line 4747: + on July former + Bear treasurer Robert Upton + anticipated + +On line 4747: + the rating agencies + would downgrade the company, + raising borrowing + +On line 4747: + its operations + borrowing short-term in the + repo market; it + +On line 4747: + borrowing short-term + in the repo market; it + borrowed between and + +On line 4747: + repo market; it + borrowed between and billion + overnight.10 Even a threat of + +On line 4747: + it borrowed between + and billion overnight.10 Even a threat + of a downgrade by + +On line 4747: + borrowed between and + billion overnight.10 Even a threat of + a downgrade by a + +On line 4747: + and billion overnight.10 Even + a threat of a downgrade by + a rating agency + +On line 4747: + billion overnight.10 Even a + threat of a downgrade by a + rating agency would + +On line 4747: + threat of a downgrade + by a rating agency would + make financing more + +On line 4749: + would make financing + more expensive, starting the + next morning. Investors, + +On line 4749: + scrutinized leverage + ratios, available at the end + of each quarter. By + +On line 4749: + at the end of each + quarter. By November Bear’s + leverage ratio had + +On line 4749: + Bear’s leverage ratio + had reached nearly to By the + end of Bear’s Level + +On line 4749: + to By the end of + Bear’s Level assets—illiquid + assets difficult + +On line 4749: + assets difficult + to value and to sell—were + of its tangible + +On line 4749: + to value and to + sell—were of its tangible + common equity; + +On line 4749: + tangible common + equity; thus, writing down + these illiquid assets + +On line 4749: + common equity; + thus, writing down these illiquid + assets by would wipe + +On line 4749: + these illiquid assets + by would wipe out tangible + common equity. + +On line 4751: + wipe out tangible + common equity. At the + end of each quarter, + +On line 4751: + tangible common + equity. At the end of + each quarter, Bear would + +On line 4751: + common equity. + At the end of each quarter, + Bear would lower its + +On line 4751: + equity. At the + end of each quarter, Bear would + lower its leverage + +On line 4751: + At the end of each + quarter, Bear would lower its + leverage ratio by + +On line 4751: + end of each quarter, + Bear would lower its leverage + ratio by selling + +On line 4751: + each quarter, Bear would + lower its leverage ratio + by selling assets, + +On line 4751: + Bear would lower its + leverage ratio by selling + assets, only to + +On line 4751: + lower its leverage + ratio by selling assets, + only to buy them + +On line 4751: + its leverage ratio + by selling assets, only + to buy them back at + +On line 4751: + leverage ratio by + selling assets, only to + buy them back at the + +On line 4751: + by selling assets, + only to buy them back at + the beginning of + +On line 4751: + only to buy them + back at the beginning of + the next quarter. Bear + +On line 4751: + at the beginning + of the next quarter. Bear and + other firms booked these + +On line 4751: + these transactions as + sales—even though the assets + didn’t stay off the + +On line 4751: + as sales—even though + the assets didn’t stay off + the balance sheet for + +On line 4751: + the assets didn’t + stay off the balance sheet for + long—in order to + +On line 4751: + stay off the balance + sheet for long—in order to + reduce the amount of + +On line 4751: + for long—in order + to reduce the amount of the + company’s assets + +On line 4751: + order to reduce + the amount of the company’s + assets and lower + +On line 4751: + reduce the amount of + the company’s assets and + lower its leverage + +On line 4751: + leverage ratio. Bear’s + former treasurer Upton + called the move "window + +On line 4751: + ratio. Bear’s former + treasurer Upton called the + move "window dressing" + +On line 4751: + former treasurer + Upton called the move "window + dressing" and said it + +On line 4751: + treasurer Upton + called the move "window dressing" + and said it ensured + +On line 4751: + called the move "window + dressing" and said it ensured + that creditors and + +On line 4751: + dressing" and said it + ensured that creditors and + rating agencies were + +On line 4751: + and said it ensured + that creditors and rating + agencies were happy.11 + +On line 4751: + that creditors and + rating agencies were happy.11 + Bear’s public filings + +On line 4751: + rating agencies were + happy.11 Bear’s public filings + reflected this, to + +On line 4751: + the balance sheet was + approximately lower + than the average + +On line 4751: + approximately + lower than the average + month-end balance over + +On line 4753: + average month-end + balance over the previous + twelve months.12 To forestall + +On line 4753: + month-end balance over + the previous twelve months.12 To + forestall a downgrade, + +On line 4753: + the previous twelve + months.12 To forestall a downgrade, + Upton spoke with the + +On line 4753: + twelve months.12 To forestall + a downgrade, Upton spoke with + the three main rating + +On line 4753: + forestall a downgrade, + Upton spoke with the three main + rating agencies, Moody’s, + +On line 4753: + a downgrade, Upton + spoke with the three main rating + agencies, Moody’s, Standard + +On line 4753: + Upton spoke with the + three main rating agencies, Moody’s, + Standard Poor’s, and Fitch, + +On line 4753: + and Fitch, in early + August.13 Several times in + ncluding April and June—S&P + +On line 4753: + August.13 Several + times in ncluding April and June—S&P + had confirmed Bear’s strong + +On line 4753: + times in ncluding April + and June—S&P had confirmed Bear’s strong + ratings, noting in + +On line 4753: + ncluding April and June—S&P + had confirmed Bear’s strong ratings, + noting in April that + +On line 4753: + June—S&P had confirmed Bear’s + strong ratings, noting in April + that "Bear’s risk profile + +On line 4753: + had confirmed Bear’s strong + ratings, noting in April that + "Bear’s risk profile is + +On line 4753: + strong ratings, noting + in April that "Bear’s risk profile + is relatively + +On line 4753: + in April that "Bear’s risk + profile is relatively + conservative" and + +On line 4753: + senior management + oversight and a strong culture + throughout the firm are + +On line 4753: + oversight and a strong + culture throughout the firm are + the foundation of + +On line 4753: + culture throughout the + firm are the foundation of + Bear’s risk management + +On line 4753: + throughout the firm are + the foundation of Bear’s risk + management process." On + +On line 4753: + the foundation of + Bear’s risk management process." On + June, Moody’s had also + +On line 4753: + management process." On + June, Moody’s had also confirmed + its A1 rating, and + +On line 4753: + June, Moody’s had also + confirmed its A1 rating, and + Fitch had confirmed its + +On line 4753: + had also confirmed + its A1 rating, and Fitch had + confirmed its "stable" + +On line 4755: + management had learned + its lesson about governance + and risk management + +On line 4755: + governance and risk + management from the failure + of the two hedge funds + +On line 4755: + risk management from + the failure of the two hedge + funds and was going + +On line 4755: + management from the + failure of the two hedge funds + and was going to + +On line 4755: + the failure of the + two hedge funds and was going + to rely less on + +On line 4755: + two hedge funds and was + going to rely less on + short-term unsecured + +On line 4755: + funds and was going + to rely less on short-term + unsecured funding + +On line 4755: + going to rely + less on short-term unsecured + funding and more on + +On line 4755: + not foresee that Bear’s + own repo lenders might refuse to + lend against risky mortgage + +On line 4755: + that Bear’s own repo + lenders might refuse to lend against risky + mortgage assets and + +On line 4755: + lenders might refuse to lend + against risky mortgage assets and + eventually not + +On line 4755: + lend against risky mortgage + assets and eventually + not even against Treasuries. + +On line 4757: + even against Treasuries. "I + requested some forbearance" + from S&P, Upton told + +On line 4757: + "I requested some + forbearance" from S&P, Upton + told the FCIC.14 He did + +On line 4757: + some forbearance" from + S&P, Upton told the FCIC.14 He + did not get it. On + +On line 4757: + from S&P, Upton told + the FCIC.14 He did not get it. + On August just three + +On line 4757: + S&P, Upton told the + FCIC.14 He did not get it. On + August just three days + +On line 4757: + told the FCIC.14 He did + not get it. On August just + three days after the + +On line 4757: + the FCIC.14 He did not + get it. On August just three + days after the two + +On line 4757: + FCIC.14 He did not get + it. On August just three days + after the two Bear + +On line 4757: + did not get it. On + August just three days after + the two Bear Stearns hedge + +On line 4757: + it. On August just + three days after the two Bear + Stearns hedge funds declared + +On line 4757: + the two Bear Stearns hedge + funds declared bankruptcy, S&P + highlighted the funds, + +On line 4759: + base as it placed Bear + on a "negative outlook."15 + Asked how he felt about + +On line 4759: + as it placed Bear on + a "negative outlook."15 Asked + how he felt about the + +On line 4759: + on a "negative + outlook."15 Asked how he felt about + the rating agency’s + +On line 4759: + outlook."15 Asked how he + felt about the rating agency’s + actions, Jimmy Cayne, + +On line 4759: + Asked how he felt about + the rating agency’s actions, + Jimmy Cayne, Bear’s CEO + +On line 4759: + felt about the rating + agency’s actions, Jimmy Cayne, + Bear’s CEO until said, + +On line 4759: + Jimmy Cayne, Bear’s CEO + until said, "A negative + outlook can touch a + +On line 4759: + Cayne, Bear’s CEO until + said, "A negative outlook + can touch a number + +On line 4759: + Bear’s CEO until said, + "A negative outlook can + touch a number of + +On line 4759: + CEO until said, "A + negative outlook can touch + a number of parts + +On line 4759: + negative outlook + can touch a number of parts + of your businesses. + +On line 4761: + can touch a number + of parts of your businesses. + It was like having + +On line 4761: + touch a number of + parts of your businesses. It + was like having a + +On line 4761: + businesses. It was + like having a beautiful + child and they have a + +On line 4761: + It was like having + a beautiful child and they + have a disease of + +On line 4761: + was like having a + beautiful child and they have + a disease of some + +On line 4761: + beautiful child and + they have a disease of some + sort that you never + +On line 4761: + child and they have a + disease of some sort that you + never expect to + +On line 4761: + they have a disease + of some sort that you never + expect to happen + +On line 4761: + a disease of some + sort that you never expect + to happen and it + +On line 4761: + disease of some sort + that you never expect to + happen and it did. + +On line 4761: + of some sort that you + never expect to happen + and it did. How did + +On line 4761: + sort that you never + expect to happen and it + did. How did I feel1 + +On line 4763: + you never expect + to happen and it did. How + did I feel1 Lousy."16 To + +On line 4763: + expect to happen + and it did. How did I feel1 + Lousy."16 To reassure + +On line 4763: + to happen and it + did. How did I feel1 Lousy."16 To + reassure investors + +On line 4763: + and it did. How did + I feel1 Lousy."16 To reassure + investors that no more + +On line 4763: + did. How did I feel1 + Lousy."16 To reassure investors + that no more shoes would + +On line 4763: + How did I feel1 Lousy."16 + To reassure investors that + no more shoes would drop, + +On line 4763: + did I feel1 Lousy."16 To + reassure investors that no + more shoes would drop, Bear + +On line 4763: + Lousy."16 To reassure + investors that no more shoes would + drop, Bear invited + +On line 4763: + reassure investors + that no more shoes would drop, Bear + invited them on + +On line 4763: + that no more shoes would + drop, Bear invited them on + a conference call + +On line 4763: + no more shoes would drop, + Bear invited them on a + conference call that + +On line 4763: + drop, Bear invited + them on a conference call + that same day. The call + +On line 4763: + Bear invited them + on a conference call that + same day. The call did + +On line 4763: + invited them on + a conference call that same + day. The call did not + +On line 4763: + on a conference + call that same day. The call did + not go well. By the + +On line 4763: + a conference call + that same day. The call did not + go well. By the end + +On line 4763: + conference call that + same day. The call did not go + well. By the end of + +On line 4763: + call that same day. The + call did not go well. By the + end of the day, Bear’s + +On line 4763: + that same day. The call + did not go well. By the end + of the day, Bear’s stock + +On line 4763: + same day. The call did + not go well. By the end of + the day, Bear’s stock slid + +On line 4763: + day. The call did not + go well. By the end of the + day, Bear’s stock slid to + +On line 4763: + call did not go well. + By the end of the day, Bear’s + stock slid to below + +On line 4763: + did not go well. By + the end of the day, Bear’s stock + slid to below its + +On line 4763: + By the end of the + day, Bear’s stock slid to below + its all-time high + +On line 4763: + the end of the day, + Bear’s stock slid to below its + all-time high of + +On line 4763: + day, Bear’s stock slid to + below its all-time high + of reached earlier + +On line 4765: + stock slid to below + its all-time high of reached + earlier in "WE + +On line 4765: + all-time high of + reached earlier in "WE WERE + SUITABLY SKEPTICAL" + +On line 4767: + reached earlier in + "WE WERE SUITABLY SKEPTICAL" + On Sunday, August + +On line 4767: + earlier in "WE + WERE SUITABLY SKEPTICAL" On + Sunday, August two + +On line 4767: + Bear had another + opportunity to make + its case: this time, with + +On line 4767: + opportunity + to make its case: this time, with + the SEC. The two SEC + +On line 4767: + to make its case: this + time, with the SEC. The two SEC + supervisors who + +On line 4767: + this time, with the SEC. + The two SEC supervisors + who visited the + +On line 4767: + supervisors who + visited the company + that Sunday were Michael + +On line 4767: + who visited the + company that Sunday were + Michael Macchiaroli and Matthew + +On line 4769: + of the division + of market regulation. + The regulators + +On line 4769: + regulation. The + regulators reviewed Bear’s + exposures to the + +On line 4769: + The regulators + reviewed Bear’s exposures to + the mortgage market, + +On line 4769: + the mortgage market, + including the billion in + adjustable-rate mortgages on + +On line 4769: + billion in adjustable-rate + mortgages on the firm’s books that + were waiting to be + +On line 4769: + mortgages on the firm’s + books that were waiting to be + securitized. Bear + +On line 4769: + books that were waiting + to be securitized. Bear + executives gave + +On line 4769: + gave assurances that + inventory would shrink once + investors returned in + +On line 4769: + that inventory + would shrink once investors returned + in September from + +On line 4769: + inventory would + shrink once investors returned in + September from their + +On line 4769: + would shrink once investors + returned in September from + their retreats in the + +On line 4769: + from their retreats in + the Hamptons. "Obviously, + regulators are + +On line 4769: + regulators are + not supposed to listen to + happy talk and go + +On line 4769: + supposed to listen + to happy talk and go away + smiling," Eichner + +On line 4771: + to happy talk and + go away smiling," Eichner + told the FCIC. "Thirteen + +On line 4771: + smiling," Eichner + told the FCIC. "Thirteen billion + in ARMs is no joke." + +On line 4771: + told the FCIC. "Thirteen + billion in ARMs is no joke." + Still, Eichner did + +On line 4771: + billion in ARMs is + no joke." Still, Eichner did + not believe the Bear + +On line 4771: + not believe the Bear + executives were being + disingenuous. He + +On line 4771: + Bear executives + were being disingenuous. + He thought they were just + +On line 4773: + the upside.17 Alan Schwartz, + the co-president who later + succeeded Jimmy + +On line 4773: + the co-president who + later succeeded Jimmy + Cayne as CEO, and Thomas + +On line 4773: + Thomas Marano, head of + Global Mortgages and Asset + Backed Securities, + +On line 4773: + Global Mortgages and + Asset Backed Securities, + seemed unconcerned. But + +On line 4773: + Backed Securities, + seemed unconcerned. But other + executives were + +On line 4773: + seemed unconcerned. But + other executives were + leery. Wendy de Monchaux, + +On line 4773: + Wendy de Monchaux, the + head of proprietary trading, + urged Marano to trim + +On line 4773: + de Monchaux, the head + of proprietary trading, urged + Marano to trim the + +On line 4773: + urged Marano to trim + the mortgage portfolio, as + did Steven Meyer, the + +On line 4773: + portfolio, as did + Steven Meyer, the co-head of + stock sales and trading.18 + +On line 4773: + as did Steven Meyer, + the co-head of stock sales and + trading.18 According + +On line 4773: + co-head of stock sales + and trading.18 According to + Chief Risk Officer + +On line 4773: + According to Chief + Risk Officer Michael Alix, + former chairman Alan + +On line 4773: + Chief Risk Officer + Michael Alix, former chairman + Alan Greenberg would say, + +On line 4773: + Risk Officer Michael + Alix, former chairman Alan + Greenberg would say, "the + +On line 4773: + Michael Alix, former + chairman Alan Greenberg would say, + "the best hedge is a + +On line 4773: + chairman Alan Greenberg + would say, "the best hedge is a + sale."19 Bear finally + +On line 4773: + Alan Greenberg would say, + "the best hedge is a sale."19 Bear + finally reduced + +On line 4773: + "the best hedge is a + sale."19 Bear finally reduced + the portfolio from + +On line 4773: + sale."19 Bear finally + reduced the portfolio from + billion in the third + +On line 4773: + finally reduced + the portfolio from billion + in the third quarter + +On line 4773: + the portfolio from + billion in the third quarter + of to billion in + +On line 4773: + from billion in the + third quarter of to billion + in the fourth quarter, + +On line 4773: + billion in the third + quarter of to billion in + the fourth quarter, but + +On line 4773: + in the third quarter + of to billion in the fourth + quarter, but it was + +On line 4773: + of to billion in + the fourth quarter, but it was + too little too late. + +On line 4777: + to billion in the + fourth quarter, but it was too + little too late. MARCH + +On line 4777: + in the fourth quarter, + but it was too little too + late. MARCH That summer, + +On line 4777: + the fourth quarter, but + it was too little too late. + MARCH That summer, the + +On line 4777: + fourth quarter, but it + was too little too late. MARCH + That summer, the SEC + +On line 4777: + quarter, but it was + too little too late. MARCH That + summer, the SEC felt + +On line 4777: + too little too late. + MARCH That summer, the SEC felt + Bear’s liquidity + +On line 4777: + little too late. MARCH + That summer, the SEC felt Bear’s + liquidity was + +On line 4777: + MARCH That summer, the + SEC felt Bear’s liquidity + was adequate for + +On line 4777: + That summer, the SEC + felt Bear’s liquidity was + adequate for the + +On line 4777: + was adequate for + the immediate future, + but supervisors + +On line 4777: + adequate for the + immediate future, but + supervisors "were + +On line 4777: + insisted. After + the August meeting, the SEC + required that Bear Stearns + +On line 4777: + the August meeting, + the SEC required that Bear Stearns + report daily on + +On line 4777: + the SEC required that + Bear Stearns report daily on + Bear’s liquidity. + +On line 4777: + agency had grossly + underestimated the + possibility + +On line 4779: + updated the SEC + on Bear’s billion balance sheet, + with specifics on repo + +On line 4779: + Bear’s billion balance + sheet, with specifics on repo and + commercial paper. + +On line 4779: + with specifics on repo + and commercial paper. On + September Bear Stearns + +On line 4779: + commercial paper. + On September Bear Stearns raised + approximately + +On line 4779: + approximately + billion in unsecured 10-year + bonds. The reports slowed + +On line 4779: + reports slowed to once + a week.21 The SEC’s inspector + general later + +On line 4779: + to once a week.21 The + SEC’s inspector general + later criticized + +On line 4779: + later criticized + the regulators, writing + that they did not push + +On line 4779: + that they did not push + Bear to reduce leverage or + "make any efforts to + +On line 4779: + did not push Bear to + reduce leverage or "make any + efforts to limit + +On line 4779: + push Bear to reduce + leverage or "make any efforts + to limit Bear Stearns’ + +On line 4779: + mortgages at Bear Stearns + had numerous shortcomings, + including lack of + +On line 4779: + Stearns had numerous + shortcomings, including lack + of expertise by + +On line 4779: + lack of expertise + by risk managers in mortgage + backed securities" + +On line 4779: + of expertise by + risk managers in mortgage backed + securities" and + +On line 4779: + backed securities" + and "persistent understaffing; + a proximity + +On line 4779: + securities" and + "persistent understaffing; a + proximity of + +On line 4779: + of risk managers to + traders suggesting a lack of + independence; turnover + +On line 4779: + traders suggesting a + lack of independence; turnover + of key personnel + +On line 4779: + independence; turnover + of key personnel during + times of crisis; and + +On line 4779: + of key personnel + during times of crisis; and + the inability + +On line 4779: + inability or + unwillingness to update + models to reflect + +On line 4779: + unwillingness to + update models to reflect + changing circumstances."22 + +On line 4781: + update models to + reflect changing circumstances."22 + Michael Halloran, a + +On line 4781: + changing circumstances."22 + Michael Halloran, a senior + adviser to SEC + +On line 4781: + Michael Halloran, a + senior adviser to SEC + Chairman Christopher Cox, + +On line 4781: + senior adviser + to SEC Chairman Christopher Cox, + told the FCIC the SEC + +On line 4781: + told the FCIC the SEC + had ample information + and authority + +On line 4781: + the FCIC the SEC had + ample information and + authority to + +On line 4781: + information and + authority to require + Bear Stearns to decrease + +On line 4781: + other financial + institutions were doing. + Halloran said that + +On line 4781: + institutions were + doing. Halloran said that + as early as the + +On line 4781: + doing. Halloran + said that as early as the + first quarter of he + +On line 4781: + said that as early + as the first quarter of he + had asked Erik Sirri, + +On line 4781: + that as early as + the first quarter of he had + asked Erik Sirri, in + +On line 4781: + as early as the + first quarter of he had asked + Erik Sirri, in charge + +On line 4781: + early as the first + quarter of he had asked Erik + Sirri, in charge of + +On line 4781: + as the first quarter + of he had asked Erik Sirri, + in charge of the SEC’s + +On line 4781: + of he had asked Erik + Sirri, in charge of the SEC’s + Consolidated + +On line 4781: + Entities program, + about Bear Stearns (and Lehman Brothers), + "Why can’t we make them + +On line 4781: + program, about Bear Stearns + (and Lehman Brothers), "Why can’t we + make them reduce risk1" + +On line 4781: + Stearns (and Lehman Brothers), + "Why can’t we make them reduce + risk1" According to + +On line 4781: + "Why can’t we make them + reduce risk1" According to + Halloran, Sirri + +On line 4781: + make them reduce risk1" + According to Halloran, + Sirri said the SEC’s + +On line 4781: + risk1" According to + Halloran, Sirri said the + SEC’s job was not to + +On line 4781: + Halloran, Sirri + said the SEC’s job was not to + tell the banks how to + +On line 4781: + said the SEC’s job was + not to tell the banks how to + run their companies + +On line 4781: + the SEC’s job was not + to tell the banks how to run + their companies but + +On line 4781: + SEC’s job was not to + tell the banks how to run their + companies but to + +On line 4781: + not to tell the banks + how to run their companies + but to protect their + +On line 4781: + tell the banks how to + run their companies but to + protect their customers’ + +On line 4781: + banks how to run their + companies but to protect + their customers’ assets.23 + +On line 4783: + run their companies + but to protect their customers’ + assets.23 "TURN INTO + +On line 4783: + companies but to + protect their customers’ assets.23 + "TURN INTO A DEATH + +On line 4785: + but to protect their + customers’ assets.23 "TURN INTO + A DEATH SPIRAL" In + +On line 4785: + protect their customers’ + assets.23 "TURN INTO A DEATH + SPIRAL" In August, + +On line 4785: + their customers’ assets.23 + "TURN INTO A DEATH SPIRAL" + In August, after + +On line 4785: + customers’ assets.23 "TURN + INTO A DEATH SPIRAL" In + August, after the + +On line 4785: + assets.23 "TURN INTO + A DEATH SPIRAL" In August, + after the rating + +On line 4785: + "TURN INTO A DEATH + SPIRAL" In August, after + the rating agencies + +On line 4785: + A DEATH SPIRAL" In + August, after the rating + agencies revised their + +On line 4785: + SPIRAL" In August, + after the rating agencies + revised their outlook + +On line 4785: + In August, after + the rating agencies revised + their outlook on Bear, + +On line 4785: + August, after the + rating agencies revised their + outlook on Bear, Cayne + +On line 4785: + after the rating + agencies revised their outlook + on Bear, Cayne tried to + +On line 4785: + the rating agencies + revised their outlook on Bear, + Cayne tried to obtain + +On line 4785: + revised their outlook + on Bear, Cayne tried to obtain + lines of credit from + +On line 4785: + on Bear, Cayne tried to + obtain lines of credit from + Citigroup and JP + +On line 4785: + tried to obtain lines + of credit from Citigroup + and JP Morgan. Both + +On line 4785: + to obtain lines of + credit from Citigroup and + JP Morgan. Both banks + +On line 4785: + lines of credit from + Citigroup and JP Morgan. + Both banks acknowledged + +On line 4785: + Citigroup and JP + Morgan. Both banks acknowledged + Bear had always been + +On line 4785: + banks acknowledged Bear + had always been a very good + customer and maintained + +On line 4785: + always been a very + good customer and maintained they + were interested + +On line 4785: + customer and maintained + they were interested in + helping.24 "We wanted + +On line 4785: + and maintained they were + interested in helping.24 + "We wanted to try + +On line 4785: + "We wanted to try + to be belts-and-suspenders," said + CFO Samuel Molinaro, as + +On line 4785: + wanted to try to + be belts-and-suspenders," said CFO + Samuel Molinaro, as Bear + +On line 4785: + be belts-and-suspenders," + said CFO Samuel Molinaro, as Bear + attempted both to + +On line 4785: + Samuel Molinaro, as Bear + attempted both to obtain + lines of credit with + +On line 4785: + money market funds. + But, Cayne told the FCIC, nothing + happened. "Why the [large] + +On line 4785: + market funds. But, Cayne + told the FCIC, nothing happened. + "Why the [large] banks were + +On line 4785: + funds. But, Cayne told the + FCIC, nothing happened. "Why the + [large] banks were not more + +On line 4785: + told the FCIC, nothing + happened. "Why the [large] banks were + not more willing to + +On line 4785: + happened. "Why the [large] + banks were not more willing to + participate and + +On line 4785: + to participate + and provide lines during that + period of time, + +On line 4785: + provide lines during + that period of time, I + can’t tell you," Molinaro + +On line 4787: + period of time, + I can’t tell you," Molinaro said.25 + A major money + +On line 4787: + of time, I can’t tell + you," Molinaro said.25 A major + money market fund + +On line 4787: + traditionally + seen as a riskier lifeline + than repo. Throughout + +On line 4787: + seen as a riskier + lifeline than repo. Throughout + Bear Stearns reduced its + +On line 4787: + repo. Throughout Bear + Stearns reduced its unsecured + commercial paper + +On line 4787: + commercial paper + (from billion at the end of + to only billion + +On line 4787: + paper (from billion + at the end of to only + billion at the end + +On line 4787: + (from billion at the + end of to only billion + at the end of and + +On line 4787: + at the end of to + only billion at the end + of and replaced it + +On line 4787: + only billion at + the end of and replaced it + with secured repo + +On line 4787: + and replaced it with + secured repo borrowing + (which rose from billion + +On line 4787: + rose from billion to + billion). But Bear Stearns’s growing + dependence on overnight + +On line 4787: + billion). But Bear Stearns’s + growing dependence on overnight + repo would create + +On line 4787: + growing dependence + on overnight repo would create + a different set + +On line 4789: + a different set + of problems. The tri-party + repo market used + +On line 4789: + set of problems. The + tri-party repo market + used two clearing banks, + +On line 4789: + tri-party repo + market used two clearing banks, + JP Morgan and BNY + +On line 4791: + escrow; and then lend + their own cash to borrowers + during the day. This + +On line 4791: + then lend their own cash + to borrowers during the + day. This is referred + +On line 4791: + lend their own cash to + borrowers during the day. + This is referred to + +On line 4791: + borrowers during + the day. This is referred to + as "unwinding" the + +On line 4791: + to as "unwinding" + the repo transaction; it + allows borrowers + +On line 4791: + allows borrowers + to change the assets posted + as collateral + +On line 4791: + the assets posted + as collateral every + day. The transaction + +On line 4791: + assets posted as + collateral every day. + The transaction is + +On line 4791: + as collateral + every day. The transaction + is then "rewound" at + +On line 4791: + day. The transaction + is then "rewound" at the end + of the day, when the + +On line 4791: + The transaction is + then "rewound" at the end of + the day, when the lenders + +On line 4791: + transaction is then + "rewound" at the end of the + day, when the lenders post + +On line 4791: + is then "rewound" at + the end of the day, when the + lenders post cash to the + +On line 4791: + "rewound" at the end + of the day, when the lenders post + cash to the clearing + +On line 4791: + at the end of the + day, when the lenders post cash to + the clearing banks in + +On line 4791: + of the day, when the + lenders post cash to the clearing + banks in return for + +On line 4791: + the day, when the lenders + post cash to the clearing banks + in return for the + +On line 4791: + day, when the lenders post + cash to the clearing banks in + return for the new + +On line 4793: + cash to the clearing + banks in return for the new + collateral. The + +On line 4793: + banks in return for + the new collateral. The + little-regulated + +On line 4793: + little-regulated + tri-party repo market + had grown from billion + +On line 4793: + grown from billion in + average daily volume + in to trillion in + +On line 4793: + trillion in trillion + in and trillion by early + It had become a + +On line 4793: + in trillion in and + trillion by early It had + become a very deep + +On line 4793: + in and trillion by + early It had become a + very deep and liquid + +On line 4793: + trillion by early + It had become a very deep + and liquid market. + +On line 4793: + had become a very + deep and liquid market. Even + though most borrowers + +On line 4793: + become a very deep + and liquid market. Even though + most borrowers rolled + +On line 4793: + and liquid market. + Even though most borrowers rolled + repo overnight, it was + +On line 4793: + most borrowers rolled + repo overnight, it was also + considered a very + +On line 4793: + repo overnight, it was + also considered a very + safe market, because + +On line 4793: + because transactions + were overcollateralized + (loans were made for less + +On line 4793: + made for less than the + collateral was worth). That + was the general + +On line 4793: + the general view + before the onset of the + financial crisis. + +On line 4795: + before the onset + of the financial crisis. + As Bear increased its + +On line 4795: + of the financial + crisis. As Bear increased its + tri-party repo + +On line 4795: + tri-party repo + borrowing, it became more + dependent on JP + +On line 4797: + repo borrowing, + it became more dependent + on JP Morgan, the + +On line 4797: + dependent on JP + Morgan, the clearing bank. A + risk that was little + +On line 4797: + Morgan, the clearing + bank. A risk that was little + appreciated + +On line 4797: + bank. A risk that was + little appreciated + before was that JP + +On line 4797: + risk that was little + appreciated before + was that JP Morgan + +On line 4797: + appreciated + before was that JP Morgan + and BNY Mellon could + +On line 4797: + before was that JP + Morgan and BNY Mellon could + face large losses if + +On line 4797: + could face large losses + if a counterparty such + as Bear defaulted + +On line 4797: + large losses if a + counterparty such as Bear + defaulted during + +On line 4797: + defaulted during + the day. Essentially, JP + Morgan served as Bear’s + +On line 4799: + Essentially, JP + Morgan served as Bear’s daytime + repo lender. Even long-term + +On line 4799: + JP Morgan served as + Bear’s daytime repo lender. Even + long-term repo loans have + +On line 4799: + Morgan served as Bear’s + daytime repo lender. Even long-term + repo loans have to + +On line 4799: + daytime repo lender. + Even long-term repo loans have to + be unwound every + +On line 4799: + Even long-term repo loans + have to be unwound every + day by the clearing + +On line 4799: + long-term repo loans have + to be unwound every day + by the clearing bank, + +On line 4799: + repo loans have to + be unwound every day by + the clearing bank, if + +On line 4799: + have to be unwound + every day by the clearing + bank, if not by the + +On line 4799: + be unwound every + day by the clearing bank, if + not by the lender. Seth + +On line 4799: + every day by the + clearing bank, if not by the + lender. Seth Carpenter, + +On line 4799: + clearing bank, if not + by the lender. Seth Carpenter, + an officer at + +On line 4799: + not by the lender. Seth + Carpenter, an officer + at the Federal + +On line 4799: + an officer at + the Federal Reserve Board, + compared it to a + +On line 4799: + at the Federal + Reserve Board, compared it to + a mortgage that has + +On line 4799: + Reserve Board, compared + it to a mortgage that has + to be refinanced + +On line 4799: + Board, compared it to + a mortgage that has to be + refinanced every + +On line 4799: + it to a mortgage + that has to be refinanced + every week: "Imagine + +On line 4799: + a mortgage that has + to be refinanced every + week: "Imagine that your + +On line 4799: + to be refinanced + every week: "Imagine that your + mortgage is only + +On line 4799: + refinanced every + week: "Imagine that your mortgage + is only a week. + +On line 4799: + every week: "Imagine + that your mortgage is only + a week. Instead of + +On line 4799: + week: "Imagine that your + mortgage is only a week. + Instead of a 30-year + +On line 4799: + mortgage is only + a week. Instead of a 30-year + mortgage, you’ve got + +On line 4799: + is only a week. + Instead of a 30-year mortgage, + you’ve got a one-week + +On line 4799: + a week. Instead of + a 30-year mortgage, you’ve got + a one-week mortgage. If + +On line 4799: + got a one-week mortgage. + If everything’s going fine, + you get to the end + +On line 4799: + a one-week mortgage. If + everything’s going fine, you + get to the end of + +On line 4799: + everything’s going + fine, you get to the end of + the week, you go out + +On line 4799: + fine, you get to the + end of the week, you go out + and you refinance + +On line 4799: + you get to the end + of the week, you go out and + you refinance that + +On line 4799: + end of the week, you + go out and you refinance + that mortgage because + +On line 4799: + of the week, you go + out and you refinance that + mortgage because you + +On line 4799: + week, you go out and + you refinance that mortgage + because you don’t have + +On line 4799: + and you refinance + that mortgage because you don’t + have enough cash on hand + +On line 4799: + you refinance that + mortgage because you don’t have + enough cash on hand to + +On line 4799: + that mortgage because + you don’t have enough cash on hand + to pay off the whole + +On line 4799: + because you don’t have + enough cash on hand to pay off + the whole mortgage. And + +On line 4799: + you don’t have enough cash + on hand to pay off the whole + mortgage. And then you + +On line 4799: + have enough cash on hand + to pay off the whole mortgage. + And then you get to + +On line 4799: + enough cash on hand to + pay off the whole mortgage. And + then you get to the + +On line 4799: + cash on hand to pay + off the whole mortgage. And then + you get to the end + +On line 4799: + on hand to pay off + the whole mortgage. And then you + get to the end of + +On line 4799: + off the whole mortgage. + And then you get to the end + of another week + +On line 4799: + the whole mortgage. And + then you get to the end of + another week and + +On line 4799: + And then you get to + the end of another week + and you refinance + +On line 4799: + then you get to the + end of another week and + you refinance that + +On line 4801: + end of another + week and you refinance that + mortgage. And that’s, for + +On line 4801: + mortgage. And that’s, for + all intents and purposes, + what repos are like + +On line 4803: + fall, Federated + Investors, which had taken Bear + Stearns off its list of + +On line 4803: + which had taken Bear + Stearns off its list of approved + commercial paper + +On line 4803: + commercial paper + counterparties, continued + to provide secured + +On line 4803: + another major + lender, limited its overall + exposure to Bear, + +On line 4803: + maturities.30 In + October, State Street Global + Advisors refused + +On line 4803: + October, State Street + Global Advisors refused + any repo lending + +On line 4803: + Global Advisors + refused any repo lending + to Bear other than + +On line 4805: + refused any repo + lending to Bear other than + overnight.31 Often, backing + +On line 4807: + were mortgage-related + securities and of these, + billion—more than Bear’s + +On line 4809: + these, billion—more than + Bear’s equity—were Level + assets. In the fourth + +On line 4809: + Bear’s equity—were + Level assets. In the fourth + quarter of Bear Stearns + +On line 4809: + Level assets. In + the fourth quarter of Bear Stearns + reported its first + +On line 4809: + In the fourth quarter + of Bear Stearns reported its + first quarterly loss, + +On line 4809: + Stearns reported its + first quarterly loss, million. + Still, the SEC saw "no + +On line 4809: + its first quarterly + loss, million. Still, the SEC saw + "no evidence of + +On line 4809: + first quarterly loss, + million. Still, the SEC saw "no + evidence of any + +On line 4813: + The SEC concluded, + "Bear Stearns’ liquidity pool + remains stable."32 In + +On line 4813: + concluded, "Bear Stearns’ + liquidity pool remains + stable."32 In the fall + +On line 4813: + Stearns’ liquidity + pool remains stable."32 In the + fall of Bear’s board had + +On line 4813: + board had commissioned + the consultant Oliver Wyman + to review the firm’s + +On line 4813: + had commissioned the + consultant Oliver Wyman to + review the firm’s risk + +On line 4813: + Case for Economic + Capital Development," + was presented on + +On line 4813: + Development," was + presented on February + to the management + +On line 4813: + on February to + the management committee. + Among its conclusions: + +On line 4813: + February to the + management committee. Among + its conclusions: risk + +On line 4813: + committee. Among its + conclusions: risk assessment + was "infrequent and + +On line 4813: + not effectively + positioned to challenge front + office decisions," + +On line 4813: + decisions," and risk + management was "understaffed" + and considered a + +On line 4813: + and considered a + "low priority." Schwartz told + the FCIC the findings + +On line 4813: + considered a "low + priority." Schwartz told the + FCIC the findings did + +On line 4813: + "low priority." + Schwartz told the FCIC the findings + did not indicate + +On line 4815: + FCIC the findings did + not indicate substantial + deficiencies. He + +On line 4815: + did not indicate + substantial deficiencies. + He wasn’t looking + +On line 4815: + wasn’t looking for + positive feedback from the + consultants, because + +On line 4815: + positive feedback + from the consultants, because + the Wyman re-MARCH port was + +On line 4815: + from the consultants, + because the Wyman re-MARCH port was + meant to provide a + +On line 4815: + consultants, because + the Wyman re-MARCH port was meant to + provide a road map + +On line 4815: + because the Wyman re-MARCH + port was meant to provide a + road map of what "the + +On line 4815: + Wyman re-MARCH port was meant + to provide a road map of + what "the gold standard" + +On line 4815: + re-MARCH port was meant to + provide a road map of what + "the gold standard" in + +On line 4815: + to provide a road + map of what "the gold standard" + in risk management + +On line 4815: + provide a road map + of what "the gold standard" in + risk management would + +On line 4817: + "the gold standard" in + risk management would be.33 In + January before + +On line 4817: + January before + the report was completed, + Cayne resigned as CEO, + +On line 4817: + Cayne resigned as CEO, + after receiving million + in compensation + +On line 4817: + after receiving + million in compensation + from through He remained + +On line 4817: + through He remained as + non-executive chairman of + the board. Some senior + +On line 4817: + chairman of the board. + Some senior executives + sharply criticized him + +On line 4817: + executives sharply + criticized him and the board. + Thomas Marano told the + +On line 4817: + sharply criticized him + and the board. Thomas Marano told + the FCIC that Cayne played + +On line 4817: + criticized him and + the board. Thomas Marano told the + FCIC that Cayne played a + +On line 4817: + him and the board. Thomas + Marano told the FCIC that Cayne + played a lot of golf + +On line 4817: + the board. Thomas Marano + told the FCIC that Cayne played a + lot of golf and bridge.35 + +On line 4817: + Thomas Marano told the + FCIC that Cayne played a lot of + golf and bridge.35 Speaking + +On line 4817: + Marano told the FCIC + that Cayne played a lot of golf + and bridge.35 Speaking of + +On line 4817: + told the FCIC that Cayne + played a lot of golf and bridge.35 + Speaking of the board, + +On line 4817: + that Cayne played a lot + of golf and bridge.35 Speaking of + the board, Paul Friedman, + +On line 4817: + Cayne played a lot of + golf and bridge.35 Speaking of the + board, Paul Friedman, a + +On line 4817: + a lot of golf and + bridge.35 Speaking of the board, Paul + Friedman, a former + +On line 4817: + bridge.35 Speaking of the + board, Paul Friedman, a former + senior managing + +On line 4817: + board, Paul Friedman, a + former senior managing + director at Bear + +On line 4817: + a former senior + managing director at + Bear Stearns, said, "I guess + +On line 4817: + senior managing + director at Bear Stearns, said, + "I guess because I’d + +On line 4817: + director at Bear + Stearns, said, "I guess because I’d + never worked at a + +On line 4817: + at Bear Stearns, said, "I + guess because I’d never worked + at a firm with a + +On line 4817: + said, "I guess because + I’d never worked at a firm + with a real board, + +On line 4817: + "I guess because I’d + never worked at a firm with + a real board, it + +On line 4817: + I’d never worked at + a firm with a real board, + it never dawned on + +On line 4817: + never worked at a + firm with a real board, it + never dawned on me + +On line 4817: + worked at a firm with + a real board, it never + dawned on me that at + +On line 4817: + at a firm with a + real board, it never dawned + on me that at some + +On line 4817: + with a real board, + it never dawned on me that + at some point somebody + +On line 4817: + a real board, it + never dawned on me that at + some point somebody would + +On line 4817: + it never dawned on + me that at some point somebody + would have or should have + +On line 4817: + dawned on me that at + some point somebody would have or + should have gotten the + +On line 4817: + on me that at some + point somebody would have or should + have gotten the board + +On line 4817: + at some point somebody + would have or should have gotten + the board involved in + +On line 4817: + some point somebody would + have or should have gotten the + board involved in all + +On line 4817: + point somebody would have + or should have gotten the board + involved in all of + +On line 4817: + would have or should have + gotten the board involved in + all of this," although + +On line 4817: + or should have gotten + the board involved in all of + this," although he told + +On line 4817: + should have gotten the + board involved in all of this," + although he told the + +On line 4817: + the board involved in + all of this," although he told + the FCIC that he made + +On line 4817: + board involved in all + of this," although he told the + FCIC that he made these + +On line 4817: + all of this," although + he told the FCIC that he made + these comments in anger + +On line 4817: + of this," although he + told the FCIC that he made these + comments in anger and + +On line 4817: + he told the FCIC that + he made these comments in anger + and frustration in + +On line 4817: + told the FCIC that he + made these comments in anger and + frustration in the + +On line 4817: + made these comments in + anger and frustration in the + wake of Bear’s failure.36 + +On line 4817: + these comments in anger + and frustration in the wake + of Bear’s failure.36 In + +On line 4817: + comments in anger and + frustration in the wake of + Bear’s failure.36 In its + +On line 4817: + and frustration in + the wake of Bear’s failure.36 In + its final report + +On line 4817: + frustration in the + wake of Bear’s failure.36 In its + final report on + +On line 4817: + wake of Bear’s failure.36 + In its final report on + Bear, the Corporate + +On line 4817: + Bear’s failure.36 In its + final report on Bear, the + Corporate Library, + +On line 4817: + final report on + Bear, the Corporate Library, + which researches and + +On line 4817: + company a "D," + reflecting "a high degree + of governance risk" + +On line 4817: + "D," reflecting "a + high degree of governance + risk" resulting from + +On line 4817: + reflecting "a high + degree of governance risk" + resulting from "high + +On line 4817: + "a high degree of + governance risk" resulting + from "high levels of + +On line 4817: + levels of concern + related to the board and + compensation."37 When + +On line 4817: + related to the + board and compensation."37 When + asked if he had made + +On line 4817: + compensation."37 When + asked if he had made mistakes + while at Bear Stearns, Cayne + +On line 4817: + When asked if he had + made mistakes while at Bear Stearns, + Cayne told the FCIC, "I + +On line 4817: + asked if he had made + mistakes while at Bear Stearns, Cayne + told the FCIC, "I take + +On line 4817: + Cayne told the FCIC, "I + take responsibility + for what happened. I’m + +On line 4817: + told the FCIC, "I take + responsibility for + what happened. I’m not + +On line 4819: + to walk away from the + responsibility."38 At + Bear, compensation + +On line 4819: + compensation was + based largely on the return + on equity in + +On line 4819: + was based largely on + the return on equity + in a given year. + +On line 4821: + based largely on the + return on equity in + a given year. For + +On line 4821: + on equity in + a given year. For senior + executives, about + +On line 4821: + in a given year. + For senior executives, + about half of each bonus + +On line 4821: + a given year. For + senior executives, about + half of each bonus was + +On line 4821: + executives, about + half of each bonus was paid in + cash, and about half in + +On line 4821: + about half of each bonus + was paid in cash, and about half + in restricted stock + +On line 4821: + half of each bonus was + paid in cash, and about half in + restricted stock that + +On line 4821: + bonus was paid in cash, + and about half in restricted + stock that vested over + +On line 4821: + was paid in cash, and + about half in restricted stock + that vested over three + +On line 4821: + paid in cash, and about + half in restricted stock that + vested over three years + +On line 4821: + cash, and about half in + restricted stock that vested + over three years and had + +On line 4821: + half in restricted + stock that vested over three years + and had to be held + +On line 4821: + in restricted stock + that vested over three years and + had to be held for + +On line 4821: + restricted stock that + vested over three years and had + to be held for five.39 + +On line 4821: + that vested over three + years and had to be held for + five.39 The formula + +On line 4821: + vested over three years + and had to be held for five.39 + The formula for + +On line 4821: + years and had to be + held for five.39 The formula + for the size of each + +On line 4821: + and had to be held + for five.39 The formula for + the size of each year’s + +On line 4821: + for the size of each + year’s compensation pool was + determined by a + +On line 4821: + year’s compensation + pool was determined by a + subcommittee of + +On line 4821: + pool was determined + by a subcommittee of + the board. Stockholders + +On line 4821: + determined by a + subcommittee of the board. + Stockholders approved + +On line 4821: + plan and capital + accumulation plan for + senior managing + +On line 4821: + accumulation + plan for senior managing + directors. Cayne told + +On line 4821: + told the FCIC he set + his own compensation and + the compensation + +On line 4821: + the FCIC he set his + own compensation and the + compensation for + +On line 4821: + own compensation + and the compensation for + all five members of + +On line 4821: + compensation and + the compensation for all + five members of the + +On line 4821: + five members of the + Executive Committee. + According to Cayne, + +On line 4823: + including the board, + questioned his decisions.40 For + even with its losses, + +On line 4823: + the board, questioned his + decisions.40 For even with its + losses, Bear Stearns paid + +On line 4823: + his decisions.40 For + even with its losses, Bear Stearns + paid out of revenues + +On line 4823: + decisions.40 For even + with its losses, Bear Stearns paid + out of revenues in + +On line 4823: + even with its losses, + Bear Stearns paid out of revenues + in compensation. + +On line 4823: + Bear Stearns paid out of + revenues in compensation. + Alix, who sat on + +On line 4823: + the Compensation + Committee, told FCIC staff the + firm typically + +On line 4823: + firm typically + paid but that the percentage + increased in because + +On line 4823: + that the percentage + increased in because revenues + fell—if management + +On line 4823: + fell—if management + had lowered compensation + proportionately, + +On line 4823: + proportionately, + he said, many employees might + have quit.41 Base salaries for + +On line 4823: + many employees might + have quit.41 Base salaries for senior + managers were capped at + +On line 4823: + have quit.41 Base salaries for + senior managers were capped at + with the remainder + +On line 4823: + senior managers were + capped at with the remainder + of compensation + +On line 4823: + of compensation + a discretionary mix of cash, + restricted stock, and + +On line 4825: + a discretionary mix + of cash, restricted stock, and + options.42 From through the + +On line 4825: + cash, restricted stock, + and options.42 From through the top + five executives + +On line 4825: + restricted stock, and + options.42 From through the top five + executives at + +On line 4825: + and options.42 From through + the top five executives + at Bear Stearns took home + +On line 4825: + options.42 From through the + top five executives at + Bear Stearns took home over + +On line 4827: + From through the top five + executives at Bear Stearns + took home over million + +On line 4827: + at Bear Stearns took home + over million in cash and over + billion from stock sales, + +On line 4827: + took home over million + in cash and over billion from + stock sales, for more than + +On line 4827: + home over million in + cash and over billion from stock + sales, for more than a + +On line 4827: + million in cash and + over billion from stock sales, for + more than a total + +On line 4829: + cash and over billion + from stock sales, for more than a + total of billion. + +On line 4829: + from stock sales, for more + than a total of billion. + This exceeded the + +On line 4829: + than a total of + billion. This exceeded the + annual budget + +On line 4829: + This exceeded the + annual budget for the + SEC.43 Alan Schwartz, who took + +On line 4829: + annual budget + for the SEC.43 Alan Schwartz, who took + over as CEO after + +On line 4829: + budget for the SEC.43 + Alan Schwartz, who took over as CEO + after Cayne and had + +On line 4829: + for the SEC.43 Alan Schwartz, + who took over as CEO after + Cayne and had been a + +On line 4829: + SEC.43 Alan Schwartz, who took + over as CEO after Cayne and + had been a leading + +On line 4829: + who took over as CEO + after Cayne and had been a + leading proponent + +On line 4829: + after Cayne and had + been a leading proponent + of investing in + +On line 4829: + of investing in + the mortgage sector, earned more + than million from to + +On line 4829: + the mortgage sector, + earned more than million from to + Warren Spector, the + +On line 4829: + Warren Spector, the + co-president responsible + for overseeing the + +On line 4829: + responsible for + overseeing the two hedge funds + that had failed, received + +On line 4829: + had failed, received more + than million during the same + period. Although + +On line 4829: + than million during + the same period. Although + Spector was asked to + +On line 4829: + the same period. + Although Spector was asked to + resign, Bear never + +On line 4829: + period. Although + Spector was asked to resign, + Bear never asked him + +On line 4829: + Although Spector was + asked to resign, Bear never + asked him to return + +On line 4829: + asked to resign, Bear + never asked him to return + any money. In Cayne, + +On line 4829: + Bear never asked him + to return any money. In + Cayne, Schwartz, and Spector + +On line 4829: + never asked him to + return any money. In Cayne, + Schwartz, and Spector each + +On line 4829: + asked him to return + any money. In Cayne, Schwartz, and + Spector each earned more + +On line 4829: + return any money. + In Cayne, Schwartz, and Spector each + earned more than times as + +On line 4829: + any money. In Cayne, + Schwartz, and Spector each earned more + than times as much as + +On line 4829: + Cayne, Schwartz, and Spector + each earned more than times as much + as Alix, the chief + +On line 4829: + Schwartz, and Spector each + earned more than times as much as + Alix, the chief risk + +On line 4831: + each earned more than times + as much as Alix, the chief + risk officer.44 Cayne + +On line 4831: + earned more than times as + much as Alix, the chief risk + officer.44 Cayne was + +On line 4831: + as much as Alix, + the chief risk officer.44 Cayne + was out, Schwartz was in, + +On line 4831: + much as Alix, the + chief risk officer.44 Cayne was + out, Schwartz was in, and + +On line 4831: + as Alix, the chief + risk officer.44 Cayne was out, + Schwartz was in, and Bear + +On line 4831: + Alix, the chief risk + officer.44 Cayne was out, Schwartz + was in, and Bear Stearns + +On line 4831: + chief risk officer.44 + Cayne was out, Schwartz was in, and + Bear Stearns continued + +On line 4831: + officer.44 Cayne was + out, Schwartz was in, and Bear Stearns + continued hanging + +On line 4833: + out, Schwartz was in, and + Bear Stearns continued hanging + on in early Bear + +On line 4833: + Schwartz was in, and Bear + Stearns continued hanging on + in early Bear was + +On line 4833: + was in, and Bear Stearns + continued hanging on in + early Bear was still + +On line 4833: + Bear Stearns continued + hanging on in early Bear + was still able to fund + +On line 4833: + in early Bear was + still able to fund its balance + sheet through repo loans, + +On line 4833: + early Bear was still + able to fund its balance sheet + through repo loans, though + +On line 4833: + still able to fund its + balance sheet through repo loans, + though the interest + +On line 4833: + to fund its balance + sheet through repo loans, though the + interest rates the + +On line 4833: + sheet through repo loans, + though the interest rates the + firm had to pay had + +On line 4833: + repo loans, though the + interest rates the firm had + to pay had increased.45 + +On line 4833: + though the interest + rates the firm had to pay had + increased.45 Marano said + +On line 4833: + the firm had to pay + had increased.45 Marano said he + worried this increased + +On line 4833: + had increased.45 Marano + said he worried this increased + cost would signal to + +On line 4833: + increased.45 Marano said + he worried this increased cost + would signal to the + +On line 4833: + said he worried this + increased cost would signal to + the market that Bear + +On line 4833: + this increased cost would + signal to the market that + Bear was distressed, which + +On line 4833: + the market that Bear + was distressed, which could "make our + problems turn into + +On line 4833: + distressed, which could "make + our problems turn into a + death spiral."46 DUTY + +On line 4833: + could "make our problems + turn into a death spiral."46 + DUTY TO PROTECT + +On line 4833: + problems turn into + a death spiral."46 DUTY TO + PROTECT THEIR INVESTORS" + +On line 4835: + death spiral."46 DUTY + TO PROTECT THEIR INVESTORS" On + Wednesday, January + +On line 4835: + Treasurer Upton + reported an internal + accounting error + +On line 4835: + Upton reported + an internal accounting + error that showed Bear + +On line 4835: + have less than billion + in liquidity—triggering + a report to the + +On line 4835: + less than billion in + liquidity—triggering a + report to the SEC. + +On line 4835: + the error, the SEC + reinstituted daily + reporting by the + +On line 4835: + reinstituted + daily reporting by the + company of its + +On line 4837: + daily reporting + by the company of its + liquidity.47 Lenders + +On line 4837: + by the company + of its liquidity.47 Lenders + and customers were more + +On line 4837: + the company of + its liquidity.47 Lenders and + customers were more and + +On line 4837: + its liquidity.47 + Lenders and customers were more and + more reluctant to + +On line 4837: + liquidity.47 Lenders + and customers were more and more + reluctant to do + +On line 4837: + Lenders and customers were + more and more reluctant to + do business with the + +On line 4837: + reluctant to do + business with the company. + On February Bear + +On line 4837: + do business with the + company. On February + Bear Stearns had billion + +On line 4837: + with the company. + On February Bear Stearns had + billion in mortgages, + +On line 4837: + in mortgages, mortgage-backed + securities, and asset-backed + securities on + +On line 4837: + securities, and + asset-backed securities on + its balance sheet, down + +On line 4837: + almost billion from + November. Nearly billion + were subprime or Alt-A + +On line 4837: + Nearly billion were + subprime or Alt-A mortgage–backed + securities and + +On line 4839: + were subprime or Alt-A + mortgage–backed securities + and CDOs. The hedge funds + +On line 4839: + or Alt-A mortgage–backed + securities and CDOs. The + hedge funds that were clients + +On line 4839: + that were clients of Bear’s + prime brokerage services were + particularly + +On line 4839: + unable to return + their cash and securities. + Lou Lebedin, the head + +On line 4839: + return their cash and + securities. Lou Lebedin, + the head of Bear’s prime + +On line 4839: + and securities. + Lou Lebedin, the head of Bear’s + prime brokerage, told + +On line 4839: + securities. Lou + Lebedin, the head of Bear’s prime + brokerage, told the + +On line 4839: + Lou Lebedin, the head + of Bear’s prime brokerage, told + the FCIC that hedge fund + +On line 4839: + Lebedin, the head of + Bear’s prime brokerage, told the + FCIC that hedge fund clients + +On line 4839: + Bear’s prime brokerage, + told the FCIC that hedge fund clients + occasionally + +On line 4839: + told the FCIC that hedge + fund clients occasionally + inquired about the bank’s + +On line 4839: + inquired about the bank’s + financial condition in + the latter half of + +On line 4839: + the bank’s financial + condition in the latter + half of but that such + +On line 4839: + condition in the + latter half of but that such + inquiries picked up at + +On line 4839: + the latter half of + but that such inquiries picked up + at the beginning + +On line 4839: + latter half of but + that such inquiries picked up at + the beginning of + +On line 4839: + that such inquiries picked + up at the beginning of + particularly + +On line 4839: + at the beginning + of particularly as + the cost increased of + +On line 4839: + the cost increased of + purchasing credit default + swap protection on + +On line 4839: + started taking their + business elsewhere. "They felt there + were too many concerns + +On line 4839: + taking their business + elsewhere. "They felt there were too + many concerns about us + +On line 4839: + business elsewhere. "They + felt there were too many concerns + about us and felt that + +On line 4839: + elsewhere. "They felt there + were too many concerns about us + and felt that this was + +On line 4839: + felt there were too many + concerns about us and felt that + this was a short-term + +On line 4839: + too many concerns about + us and felt that this was a + short-term move," Lebedin + +On line 4839: + us and felt that this + was a short-term move," Lebedin + said. "Often they would + +On line 4839: + and felt that this was + a short-term move," Lebedin said. + "Often they would tell + +On line 4839: + this was a short-term + move," Lebedin said. "Often they + would tell us they’d be + +On line 4839: + short-term move," Lebedin + said. "Often they would tell us + they’d be happy to + +On line 4839: + said. "Often they would + tell us they’d be happy to + bring the business back, + +On line 4839: + "Often they would tell + us they’d be happy to bring + the business back, but + +On line 4839: + would tell us they’d be + happy to bring the business + back, but that they had + +On line 4839: + they’d be happy to + bring the business back, but that + they had the duty + +On line 4839: + be happy to bring + the business back, but that they + had the duty to + +On line 4839: + the business back, but + that they had the duty to + protect their investors." + +On line 4839: + back, but that they had + the duty to protect their + investors." Renaissance + +On line 4839: + protect their investors." + Renaissance Technologies, one + of Bear’s biggest prime + +On line 4839: + Technologies, one of + Bear’s biggest prime brokerage + clients, pulled out all of + +On line 4839: + one of Bear’s biggest + prime brokerage clients, pulled out + all of its business. + +On line 4839: + of Bear’s biggest prime + brokerage clients, pulled out all + of its business. By + +On line 4839: + prime brokerage clients, + pulled out all of its business. + By April, Lebedin’s prime + +On line 4839: + of its business. By + April, Lebedin’s prime brokerage + operation would + +On line 4839: + billion in assets + under management, down more + than from billion in + +On line 4841: + more than from billion + in January.48 Nonetheless, + during the week of + +On line 4841: + during the week of + March when SEC staff inspected + Bear’s liquidity + +On line 4843: + liquidity pool + ranged from billion to billion.49 + Bear opened for business + +On line 4843: + ranged from billion to + billion.49 Bear opened for business + on Monday, March with + +On line 4843: + billion.49 Bear opened for + business on Monday, March with + approximately + +On line 4843: + on Monday, March with + approximately billion + in cash reserves. The + +On line 4843: + downgraded mortgage-backed + securities issued by + Bear Stearns Alt-A Trust, a + +On line 4843: + Bear Stearns Alt-A Trust, a + special purpose entity. + News reports on the + +On line 4843: + a special purpose + entity. News reports on + the downgrades carried + +On line 4843: + the downgrades carried + abbreviated headlines + stating, "Moody’s Downgrades + +On line 4843: + abbreviated + headlines stating, "Moody’s Downgrades + Bear Stearns," Upton said.50 + +On line 4843: + said.50 Rumors flew and + counterparties panicked.51 Bear’s + liquidity pool + +On line 4843: + and counterparties + panicked.51 Bear’s liquidity + pool began to dry + +On line 4843: + liquidity pool + began to dry up, and the + SEC was now concerned + +On line 4843: + began to dry up, + and the SEC was now concerned + that Bear was being + +On line 4843: + to dry up, and the + SEC was now concerned that Bear + was being squeezed from + +On line 4843: + dry up, and the SEC + was now concerned that Bear was + being squeezed from all + +On line 4843: + SEC was now concerned + that Bear was being squeezed from + all directions.52 While + +On line 4843: + being squeezed from all + directions.52 While "everything + rolled" during the day—that + +On line 4843: + all directions.52 While + "everything rolled" during the + day—that is, Bear’s repo + +On line 4843: + rolled" during the day—that + is, Bear’s repo lenders renewed + their commitments—SEC officials + +On line 4843: + is, Bear’s repo lenders + renewed their commitments—SEC officials + worried that this would + +On line 4843: + lenders renewed their commitments—SEC + officials worried that this + would "probably not + +On line 4845: + worried that this would + "probably not continue."53 + On Tuesday, the Fed + +On line 4845: + this would "probably + not continue."53 On Tuesday, + the Fed announced it + +On line 4845: + would "probably not + continue."53 On Tuesday, the + Fed announced it would + +On line 4847: + Fed announced it would + lend to investment banks and + other "primary + +On line 4847: + Term Securities + Lending Facility (TSLF) + would make available up + +On line 4847: + billion in Treasury + securities, accepting + as collateral + +On line 4849: + collateral GSE + mortgage– backed securities + and non-GSE mortgage–backed + +On line 4849: + and non-GSE mortgage–backed + securities rated triple-A. + The hope was that lenders + +On line 4849: + hope was that lenders would + lend to investment banks if + the collateral + +On line 4849: + was that lenders would lend + to investment banks if the + collateral was + +On line 4849: + lend to investment + banks if the collateral + was Treasuries rather than + +On line 4849: + the collateral + was Treasuries rather than other + highly rated but + +On line 4849: + was Treasuries rather than + other highly rated but + now suspect assets + +On line 4849: + securities. The + Fed also announced it would + extend loans from overnight + +On line 4849: + extend loans from overnight + to days, giv-MARCH ing investment + banks an added breather from + +On line 4849: + overnight to days, giv-MARCH ing + investment banks an added breather + from the relentless + +On line 4851: + the relentless need + to unwind repos every + morning. With the TSLF, + +On line 4851: + would be setting a + new precedent by extending + emergency credit + +On line 4851: + emergency credit + to institutions other + than commercial banks. + +On line 4851: + under section of + the Federal Reserve Act + to determine that + +On line 4851: + Federal Reserve + Act to determine that there + were "unusual and + +On line 4851: + were "unusual and + exigent circumstances." The + Fed had not invoked + +On line 4853: + circumstances." The Fed + had not invoked its section + authority since + +On line 4853: + had not invoked its + section authority since + the Great Depression; + +On line 4853: + invoked its section + authority since the Great + Depression; it was + +On line 4853: + authority since + the Great Depression; it was + the Fed’s first use of + +On line 4853: + the Great Depression; + it was the Fed’s first use of + the authority + +On line 4853: + Great Depression; it + was the Fed’s first use of the + authority since + +On line 4853: + Fed’s first use of the + authority since Congress + had expanded the + +On line 4853: + the authority + since Congress had expanded + the language of the + +On line 4853: + authority since + Congress had expanded the + language of the act + +On line 4853: + had expanded the + language of the act in to + allow the Fed to + +On line 4853: + language of the act + in to allow the Fed to + lend to investment + +On line 4853: + of the act in to + allow the Fed to lend to + investment banks.54 The + +On line 4853: + to allow the Fed + to lend to investment banks.54 + The Fed was taking + +On line 4853: + allow the Fed to + lend to investment banks.54 The + Fed was taking the + +On line 4853: + lend to investment + banks.54 The Fed was taking the + unusual step of + +On line 4853: + Fed was taking the + unusual step of declaring + its willingness to + +On line 4853: + unusual step of + declaring its willingness to + soon open its checkbook + +On line 4853: + soon open its checkbook + to institutions it did + not regulate and + +On line 4853: + open its checkbook to + institutions it did not + regulate and whose + +On line 4855: + and whose financial + condition it had never + examined. But the + +On line 4855: + condition it had + never examined. But the + Fed would not launch the + +On line 4855: + never examined. + But the Fed would not launch the + TSLF until March more + +On line 4855: + But the Fed would not + launch the TSLF until March more + than two weeks later—and + +On line 4855: + the Fed would not launch + the TSLF until March more than + two weeks later—and it + +On line 4855: + Fed would not launch the + TSLF until March more than two + weeks later—and it was + +On line 4855: + would not launch the TSLF + until March more than two weeks + later—and it was not + +On line 4855: + launch the TSLF until + March more than two weeks later—and + it was not clear that + +On line 4855: + the TSLF until March + more than two weeks later—and it + was not clear that Bear + +On line 4855: + TSLF until March more + than two weeks later—and it was + not clear that Bear could + +On line 4855: + until March more than + two weeks later—and it was not + clear that Bear could last + +On line 4855: + March more than two weeks + later—and it was not clear that + Bear could last that long. + +On line 4855: + weeks later—and it was + not clear that Bear could last that + long. The following + +On line 4855: + later—and it was not + clear that Bear could last that long. + The following day, + +On line 4855: + not clear that Bear could + last that long. The following + day, Jim Embersit + +On line 4855: + clear that Bear could last + that long. The following day, + Jim Embersit of + +On line 4855: + that Bear could last that + long. The following day, Jim + Embersit of the + +On line 4855: + long. The following + day, Jim Embersit of the + Federal Reserve + +On line 4855: + Reserve Board checked on + Bear’s liquidity with the + SEC. The SEC said Bear + +On line 4855: + liquidity with + the SEC. The SEC said Bear had + billion in cash—down + +On line 4855: + the SEC. The SEC said + Bear had billion in cash—down + from about billion at + +On line 4855: + SEC. The SEC said Bear + had billion in cash—down from + about billion at the + +On line 4855: + The SEC said Bear had + billion in cash—down from about + billion at the start + +On line 4855: + said Bear had billion + in cash—down from about billion + at the start of the + +On line 4855: + Bear had billion in + cash—down from about billion at + the start of the week—and + +On line 4855: + billion in cash—down + from about billion at the start + of the week—and was able + +On line 4855: + from about billion at + the start of the week—and was able + to finance all its + +On line 4855: + about billion at the + start of the week—and was able to + finance all its bank + +On line 4855: + at the start of the + week—and was able to finance all + its bank loans and most + +On line 4855: + the start of the week—and + was able to finance all its + bank loans and most of + +On line 4855: + start of the week—and was + able to finance all its bank + loans and most of its + +On line 4855: + "The SEC indicates + that no notable losses have + been sustained and that + +On line 4855: + SEC indicates that + no notable losses have been + sustained and that the + +On line 4855: + been sustained and that + the capital position + of the firm is ‘fine.’"55 + +On line 4857: + that the capital + position of the firm is + ‘fine.’"55 Derivatives + +On line 4857: + position of the + firm is ‘fine.’"55 Derivatives + counterparties were + +On line 4857: + counterparties were + increasingly reluctant + to be exposed to + +On line 4857: + be exposed to Bear. + In some cases they unwound + trades in which they faced + +On line 4857: + exposed to Bear. In + some cases they unwound trades + in which they faced Bear, + +On line 4857: + In some cases they + unwound trades in which they faced + Bear, and in others + +On line 4857: + cases they unwound + trades in which they faced Bear, and + in others they made + +On line 4857: + unwound trades in which + they faced Bear, and in others + they made margin or + +On line 4857: + which they faced Bear, and + in others they made margin + or collateral + +On line 4857: + they faced Bear, and in + others they made margin or + collateral calls.56 + +On line 4857: + in others they made + margin or collateral + calls.56 In Bear’s last few + +On line 4857: + they made margin or + collateral calls.56 In Bear’s + last few years as an + +On line 4857: + or collateral + calls.56 In Bear’s last few years as + an independent + +On line 4857: + calls.56 In Bear’s last few + years as an independent + company, it had + +On line 4857: + had substantially + increased its exposure to + derivatives. At + +On line 4857: + its exposure to + derivatives. At the end + of fiscal year Bear + +On line 4857: + to derivatives. + At the end of fiscal year + Bear had trillion in + +On line 4857: + year Bear had trillion + in notional exposure + on derivatives + +On line 4857: + on derivatives + contracts, compared with trillion + at fiscal year-end and + +On line 4857: + contracts, compared with + trillion at fiscal year-end and + trillion at the end + +On line 4859: + trillion at fiscal + year-end and trillion at the end + of Derivatives + +On line 4859: + year-end and trillion at + the end of Derivatives + counterparties who + +On line 4859: + of Derivatives + counterparties who worried + about Bear’s ability + +On line 4859: + counterparties who + worried about Bear’s ability + to make good on their + +On line 4859: + who worried about Bear’s + ability to make good on + their payments could get + +On line 4859: + about Bear’s ability + to make good on their payments + could get out of their + +On line 4859: + their payments could get + out of their derivative + positions with Bear + +On line 4859: + Assignments allow + counterparties to assign + their positions to + +On line 4859: + counterparties to + assign their positions to + someone else: if firm + +On line 4859: + their positions to + someone else: if firm X has + a derivatives + +On line 4859: + someone else: if firm + X has a derivatives + contract with firm Y, + +On line 4859: + else: if firm X has + a derivatives contract + with firm Y, then firm + +On line 4859: + if firm X has a + derivatives contract with + firm Y, then firm X + +On line 4859: + a derivatives + contract with firm Y, then firm + X can assign its + +On line 4859: + contract with firm Y, + then firm X can assign its + position to firm + +On line 4859: + firm Y, then firm X + can assign its position + to firm Z, so that + +On line 4859: + Y, then firm X can + assign its position to + firm Z, so that Z + +On line 4859: + firm X can assign + its position to firm Z, + so that Z now is + +On line 4859: + X can assign its + position to firm Z, so + that Z now is the + +On line 4859: + its position to + firm Z, so that Z now is + the one that has a + +On line 4859: + to firm Z, so that + Z now is the one that has + a derivatives + +On line 4861: + is the one that has + a derivatives contract + with Y. Novations + +On line 4861: + counterparties to + get out of their exposure + to each other, but + +On line 4861: + to get out of their + exposure to each other, + but by bringing in + +On line 4861: + their exposure to + each other, but by bringing + in a third party: + +On line 4861: + but by bringing in + a third party: instead of + X facing Y, X + +On line 4861: + by bringing in a + third party: instead of X + facing Y, X faces + +On line 4861: + in a third party: + instead of X facing Y, + X faces Z and Z + +On line 4861: + third party: instead + of X facing Y, X faces + Z and Z faces Y. + +On line 4861: + party: instead of + X facing Y, X faces Z + and Z faces Y. Both + +On line 4861: + of X facing Y, + X faces Z and Z faces Y. + Both assignments and + +On line 4861: + Y, X faces Z and + Z faces Y. Both assignments + and novations are + +On line 4861: + Y. Both assignments + and novations are routine + transactions on Wall + +On line 4861: + and novations are + routine transactions on Wall + Street. But on Tuesday, + +On line 4861: + routine transactions + on Wall Street. But on Tuesday, + Brian Peters of + +On line 4861: + transactions on Wall + Street. But on Tuesday, Brian + Peters of the New + +On line 4861: + on Tuesday, Brian + Peters of the New York Fed + advised Eichner + +On line 4861: + Peters of the New + York Fed advised Eichner + at the SEC that the + +On line 4861: + of the New York Fed + advised Eichner at the + SEC that the New York + +On line 4861: + New York Fed advised + Eichner at the SEC that + the New York Fed was + +On line 4863: + advised Eichner + at the SEC that the New York + Fed was "seeing some + +On line 4863: + Eichner at the + SEC that the New York Fed was + "seeing some HFs [hedge + +On line 4863: + at the SEC that the + New York Fed was "seeing some + HFs [hedge funds] wishing + +On line 4863: + the SEC that the New + York Fed was "seeing some HFs + [hedge funds] wishing to + +On line 4863: + that the New York Fed + was "seeing some HFs [hedge funds] + wishing to assign + +On line 4863: + York Fed was "seeing + some HFs [hedge funds] wishing to + assign trades the clients + +On line 4863: + was "seeing some HFs + [hedge funds] wishing to assign + trades the clients had done + +On line 4863: + "seeing some HFs [hedge + funds] wishing to assign trades + the clients had done with + +On line 4863: + [hedge funds] wishing to + assign trades the clients had done + with Bear to other + +On line 4863: + assign trades the clients + had done with Bear to other + CPs [counterparties] + +On line 4863: + had done with Bear to + other CPs [counterparties] + so that Bear ‘steps out.’"57 + +On line 4863: + so that Bear ‘steps out.’"57 + Counterparties did not want + to have Bear Stearns as + +On line 4863: + Counterparties did + not want to have Bear Stearns as + a derivatives + +On line 4863: + not want to have Bear + Stearns as a derivatives + counterparty any + +On line 4865: + more. Bear Stearns also + encountered difficulties + stepping into trades. + +On line 4865: + stepping into trades. + Hayman Capital Partners, + a hedge fund in Texas + +On line 4865: + into trades. Hayman + Capital Partners, a hedge + fund in Texas wanting + +On line 4865: + Hayman Capital + Partners, a hedge fund in Texas + wanting to decrease + +On line 4865: + Partners, a hedge fund + in Texas wanting to decrease + its exposure to + +On line 4865: + fund in Texas wanting + to decrease its exposure + to subprime mortgages, + +On line 4865: + in Texas wanting to + decrease its exposure to + subprime mortgages, had + +On line 4865: + to subprime mortgages, + had decided to close out + a relatively + +On line 4865: + subprime mortgages, had + decided to close out a + relatively small + +On line 4865: + had decided to + close out a relatively + small million subprime + +On line 4865: + small million subprime + derivative position + with Goldman Sachs. Bear + +On line 4865: + with Goldman Sachs. Bear + Stearns offered the best bid, so + Hayman expected + +On line 4865: + best bid, so Hayman + expected to assign its + position to Bear, + +On line 4865: + Hayman expected + to assign its position + to Bear, which would then + +On line 4865: + position to Bear, + which would then become Goldman’s + counterparty in + +On line 4865: + which would then become + Goldman’s counterparty in + the derivative. + +On line 4865: + counterparty in + the derivative. Hayman + notified Goldman + +On line 4865: + the derivative. + Hayman notified Goldman + by a routine email + +On line 4865: + Hayman notified + Goldman by a routine email + on Tuesday, March at + +On line 4867: + Tuesday, March at P.M. + The reply minutes later + was unexpected: + +On line 4867: + The reply minutes + later was unexpected: + "GS does not consent + +On line 4867: + minutes later was + unexpected: "GS does not + consent to this trade."58 + +On line 4869: + was unexpected: + "GS does not consent to this + trade."58 hat startled Kyle + +On line 4869: + unexpected: "GS + does not consent to this trade."58 + hat startled Kyle Bass, + +On line 4869: + does not consent to + this trade."58 hat startled Kyle Bass, + Hayman’s managing + +On line 4869: + consent to this trade."58 + hat startled Kyle Bass, Hayman’s + managing partner. + +On line 4869: + this trade."58 hat startled + Kyle Bass, Hayman’s managing + partner. He told the + +On line 4869: + hat startled Kyle Bass, + Hayman’s managing partner. + He told the FCIC he + +On line 4869: + Hayman’s managing + partner. He told the FCIC he + could not recall any + +On line 4869: + next morning offered + no details: "Our trading desk + would prefer to stay + +On line 4869: + desk would prefer to + stay facing Hayman. We do + not want to face Bear."60 + +On line 4869: + would prefer to stay + facing Hayman. We do not + want to face Bear."60 Adding + +On line 4869: + stay facing Hayman. + We do not want to face Bear."60 + Adding to the mystery, + +On line 4869: + not want to face Bear."60 + Adding to the mystery, minutes + later Goldman agreed + +On line 4869: + Adding to the mystery, + minutes later Goldman agreed + to accept Bear Sterns + +On line 4869: + agreed to accept Bear + Sterns as the counterparty + after all.61 But the + +On line 4869: + accept Bear Sterns as + the counterparty after + all.61 But the damage + +On line 4869: + the counterparty + after all.61 But the damage + was done. The news hit + +On line 4869: + after all.61 But the + damage was done. The news hit + the street that Goldman + +On line 4869: + But the damage was + done. The news hit the street that + Goldman had refused + +On line 4869: + The news hit the street + that Goldman had refused a + routine transaction + +On line 4869: + Goldman had refused + a routine transaction with + one of the other + +On line 4869: + routine transaction + with one of the other big + five investment banks. + +On line 4869: + one of the other + big five investment banks. The + message: don’t rely + +On line 4869: + the other big five + investment banks. The message: + don’t rely on Bear + +On line 4871: + big five investment + banks. The message: don’t rely + on Bear Stearns. CEO Alan + +On line 4871: + five investment banks. + The message: don’t rely on + Bear Stearns. CEO Alan Schwartz + +On line 4871: + investment banks. The + message: don’t rely on Bear + Stearns. CEO Alan Schwartz hoped + +On line 4871: + message: don’t rely + on Bear Stearns. CEO Alan Schwartz hoped + an appearance on + +On line 4871: + CEO Alan Schwartz hoped an + appearance on CNBC would + reassure markets. + +On line 4873: + hoped an appearance + on CNBC would reassure + markets. Questioned about + +On line 4873: + reassure markets. + Questioned about this incident, + Schwartz said he had no + +On line 4873: + markets. Questioned about + this incident, Schwartz said he + had no knowledge of + +On line 4873: + about this incident, + Schwartz said he had no knowledge + of such a refusal + +On line 4873: + this incident, Schwartz + said he had no knowledge of + such a refusal and + +On line 4873: + Schwartz said he had no + knowledge of such a refusal + and rhetorically + +On line 4873: + knowledge of such a + refusal and rhetorically + asked, "Why do rumors + +On line 4873: + of such a refusal + and rhetorically asked, "Why + do rumors start1"62 SEC + +On line 4873: + Cox told reporters his + agency was monitoring + capital levels + +On line 4875: + levels at Bear Stearns + and other securities + firms "on a constant + +On line 4875: + Bear Stearns and other + securities firms "on a + constant basis" and + +On line 4875: + securities firms + "on a constant basis" and + has "a good deal of + +On line 4875: + firms "on a constant + basis" and has "a good deal + of comfort about the + +On line 4875: + constant basis" and + has "a good deal of comfort + about the capital + +On line 4875: + basis" and has "a + good deal of comfort about the + capital cushions + +On line 4875: + has "a good deal of + comfort about the capital + cushions at these firms + +On line 4875: + good deal of comfort + about the capital cushions + at these firms at the + +On line 4875: + of comfort about the + capital cushions at these + firms at the moment."63 + +On line 4877: + about the capital + cushions at these firms at the + moment."63 Still, the run + +On line 4877: + capital cushions + at these firms at the moment."63 + Still, the run on Bear + +On line 4877: + at these firms at the + moment."63 Still, the run on Bear + accelerated. + +On line 4877: + moment."63 Still, the run + on Bear accelerated. + Many investors believed + +On line 4877: + accelerated. + Many investors believed the Fed’s + announcement about its + +On line 4877: + Many investors believed + the Fed’s announcement about its + new loan program was + +On line 4877: + the Fed’s announcement + about its new loan program was + directed at Bear + +On line 4877: + its new loan program + was directed at Bear Stearns, + and they worried about + +On line 4877: + new loan program was + directed at Bear Stearns, and + they worried about the + +On line 4877: + was directed at + Bear Stearns, and they worried about + the facility’s + +On line 4877: + directed at Bear + Stearns, and they worried about the + facility’s not + +On line 4877: + Stearns, and they worried + about the facility’s not + being available for + +On line 4877: + being available for + several weeks. On Wednesday, + March the SEC noted + +On line 4877: + weeks. On Wednesday, March + the SEC noted that Bear paid + another billion + +On line 4877: + the SEC noted that + Bear paid another billion + for margin calls from + +On line 4879: + Repo lenders who had + already tightened the terms for + their contracts over the + +On line 4879: + had already tightened + the terms for their contracts over + the preceding four + +On line 4879: + already tightened the + terms for their contracts over the + preceding four or + +On line 4879: + terms for their contracts + over the preceding four or + five months shortened the + +On line 4879: + for their contracts over + the preceding four or five + months shortened the leash + +On line 4879: + their contracts over the + preceding four or five months + shortened the leash again, + +On line 4879: + over the preceding + four or five months shortened the + leash again, demanding + +On line 4879: + the preceding four + or five months shortened the leash + again, demanding more + +On line 4879: + or five months shortened + the leash again, demanding more + collateral from + +On line 4879: + leash again, demanding + more collateral from Bear + Stearns.65 Worries about a + +On line 4881: + evening, Bear’s ability + to borrow in the repo + market was drying + +On line 4881: + to borrow in the + repo market was drying + up. The SEC noted + +On line 4881: + market was drying + up. The SEC noted that some + large and important + +On line 4881: + was drying up. The + SEC noted that some large and + important money + +On line 4881: + important money + funds, including Fidelity + and Mellon, had told + +On line 4881: + Mellon, had told Bear + after the close of business + Wednesday they "might be + +On line 4881: + told Bear after the + close of business Wednesday they + "might be hesitant + +On line 4881: + Bear after the close + of business Wednesday they "might + be hesitant to + +On line 4881: + after the close of + business Wednesday they "might be + hesitant to roll + +On line 4881: + be hesitant to + roll some funding tomorrow." + The SEC said that though + +On line 4881: + hesitant to roll + some funding tomorrow." The + SEC said that though they + +On line 4881: + to roll some funding + tomorrow." The SEC said that + though they believed the + +On line 4881: + The SEC said that though + they believed the amounts were "very + manageable (between + +On line 4881: + that though they believed + the amounts were "very manageable + (between and billion)," + +On line 4881: + believed the amounts were + "very manageable (between and + billion)," the withdrawals + +On line 4881: + manageable (between + and billion)," the withdrawals would + not send a helpful + +On line 4881: + (between and billion)," + the withdrawals would not send a + helpful signal to + +On line 4881: + the withdrawals would not + send a helpful signal to + the market.67 But the + +On line 4881: + helpful signal to + the market.67 But the issue + was almost moot. Schwartz + +On line 4881: + to the market.67 But + the issue was almost moot. + Schwartz called New York Fed + +On line 4881: + moot. Schwartz called New York + Fed President Timothy + Geithner that + +On line 4881: + York Fed President + Timothy Geithner + that night to discuss + +On line 4883: + event that some repo + lenders did pull away.68 Upton, the + treasurer, said that + +On line 4883: + repo lenders did pull + away.68 Upton, the treasurer, + said that before that + +On line 4883: + the treasurer, said + that before that week, he had + never worried about + +On line 4883: + that before that week, + he had never worried about + the disappearance + +On line 4883: + before that week, he + had never worried about the + disappearance of + +On line 4883: + had never worried + about the disappearance of + repo lending. By + +On line 4883: + disappearance of + repo lending. By Thursday, + he believed the end + +On line 4883: + lending. By Thursday, + he believed the end was near.69 + Bear executives + +On line 4883: + he believed the end + was near.69 Bear executives + informed the board that + +On line 4883: + the end was near.69 Bear + executives informed the + board that the rumors + +On line 4883: + informed the board that + the rumors were dissuading + counterparties from + +On line 4883: + that the rumors were + dissuading counterparties + from doing business + +On line 4883: + counterparties from + doing business with Bear, that + Bear was receiving + +On line 4883: + calls, that billion in + repo was not going to + roll over, and that "there + +On line 4883: + billion in repo + was not going to roll over, + and that "there was a + +On line 4883: + was not going to + roll over, and that "there was a + reasonable chance that + +On line 4883: + to roll over, and that + "there was a reasonable chance + that there would not be + +On line 4883: + roll over, and that "there + was a reasonable chance that + there would not be enough + +On line 4883: + over, and that "there was + a reasonable chance that there + would not be enough cash + +On line 4883: + and that "there was a + reasonable chance that there would + not be enough cash to + +On line 4883: + was a reasonable + chance that there would not be enough + cash to meet [Bear’s] needs."70 + +On line 4883: + a reasonable chance + that there would not be enough cash + to meet [Bear’s] needs."70 Some + +On line 4883: + chance that there would not + be enough cash to meet [Bear’s] needs."70 + Some repo lenders were + +On line 4883: + would not be enough cash + to meet [Bear’s] needs."70 Some repo + lenders were already so + +On line 4883: + not be enough cash to + meet [Bear’s] needs."70 Some repo lenders + were already so averse + +On line 4883: + be enough cash to meet + [Bear’s] needs."70 Some repo lenders were + already so averse to + +On line 4883: + cash to meet [Bear’s] needs."70 + Some repo lenders were already + so averse to Bear that + +On line 4883: + to meet [Bear’s] needs."70 Some + repo lenders were already so + averse to Bear that they + +On line 4883: + needs."70 Some repo lenders + were already so averse to Bear + that they stopped lending + +On line 4883: + Some repo lenders were + already so averse to Bear that + they stopped lending to + +On line 4883: + were already so averse + to Bear that they stopped lending + to the company + +On line 4883: + already so averse to + Bear that they stopped lending to + the company at + +On line 4883: + to Bear that they stopped + lending to the company + at all, not even against + +On line 4883: + that they stopped lending + to the company at all, + not even against Treasury + +On line 4883: + FCIC.71 Derivatives + counterparties continued + to run from Bear. By + +On line 4883: + to run from Bear. By + that night, liquidity had + dwindled to a mere + +On line 4883: + from Bear. By that night, + liquidity had dwindled + to a mere billion + +On line 4885: + liquidity had + dwindled to a mere billion + (see figure Bear had + +On line 4885: + had dwindled to a + mere billion (see figure Bear + had run out of cash + +On line 4885: + dwindled to a mere + billion (see figure Bear had + run out of cash in + +On line 4885: + to a mere billion + (see figure Bear had run out + of cash in one week. + +On line 4885: + (see figure Bear had + run out of cash in one week. + Executives and + +On line 4885: + had run out of cash + in one week. Executives + and regulators + +On line 4885: + Executives and + regulators continued + to believe the firm + +On line 4885: + however. Former + SEC Chairman Cox testified + before the FCIC, "At + +On line 4885: + testified before + the FCIC, "At all times during + the week of March to + +On line 4885: + before the FCIC, "At + all times during the week of + March to up to and + +On line 4885: + "At all times during + the week of March to up to + and including the + +On line 4885: + all times during the + week of March to up to and + including the time + +On line 4885: + the week of March to + up to and including the + time of its agreement + +On line 4885: + week of March to up + to and including the time + of its agreement to + +On line 4885: + of March to up to + and including the time of + its agreement to be + +On line 4885: + to and including + the time of its agreement to + be acquired by JP + +On line 4885: + to be acquired by + JP Morgan, Bear Stearns had a + capital cushion + +On line 4885: + Morgan, Bear Stearns had + a capital cushion well + above what is required."72 + +On line 4887: + capital cushion + well above what is required."72 "THE + GOVERNMENT WOULD NOT + +On line 4887: + cushion well above what + is required."72 "THE GOVERNMENT + WOULD NOT PERMIT A + +On line 4887: + what is required."72 "THE + GOVERNMENT WOULD NOT PERMIT + A HIGHER NUMBER" + +On line 4889: + GOVERNMENT WOULD NOT + PERMIT A HIGHER NUMBER" + On Thursday evening, March + +On line 4889: + PERMIT A HIGHER + NUMBER" On Thursday evening, March + Bear Stearns informed the + +On line 4889: + A HIGHER NUMBER" + On Thursday evening, March Bear Stearns + informed the SEC that + +On line 4889: + NUMBER" On Thursday + evening, March Bear Stearns informed the + SEC that it would be + +On line 4889: + On Thursday evening, March + Bear Stearns informed the SEC that + it would be "unable + +On line 4889: + Thursday evening, March Bear + Stearns informed the SEC that it + would be "unable to + +On line 4889: + it would be "unable + to operate normally + on Friday."73 CEO Alan + +On line 4889: + would be "unable to + operate normally on + Friday."73 CEO Alan Schwartz + +On line 4889: + on Friday."73 CEO Alan + Schwartz called JP Morgan CEO Jamie + Dimon to request + +On line 4889: + CEO Alan Schwartz called JP + Morgan CEO Jamie Dimon to + request a billion + +On line 4889: + Schwartz called JP Morgan + CEO Jamie Dimon to request + a billion credit + +On line 4889: + called JP Morgan CEO + Jamie Dimon to request a + billion credit line. + +On line 4889: + CEO Jamie Dimon to + request a billion credit + line. Dimon turned him + +On line 4889: + billion credit line. + Dimon turned him down,74 citing, + according to Schwartz, + +On line 4889: + line. Dimon turned him + down,74 citing, according to + Schwartz, JP Morgan’s own + +On line 4889: + own significant + exposure to the mortgage + market. Because Bear + +On line 4889: + exposure to the + mortgage market. Because Bear + also had a large, + +On line 4889: + Bear also had a + large, illiquid portfolio of + mortgage assets, JP + +On line 4889: + of mortgage assets, + JP Morgan would not render + assistance without + +On line 4889: + assets, JP Morgan + would not render assistance + without government + +On line 4889: + JP Morgan would not + render assistance without + government support. + +On line 4889: + assistance without + government support. Schwartz spoke + with Geithner + +On line 4889: + government support. + Schwartz spoke with Geithner + again. Schwartz insisted + +On line 4889: + Geithner again. + Schwartz insisted Bear’s problem + was liquidity, + +On line 4889: + Schwartz insisted Bear’s + problem was liquidity, + not insufficient + +On line 4889: + liquidity, not + insufficient capital. + A series of calls + +On line 4889: + of calls between Schwartz, + Dimon, Geithner, and + Treasury Secretary + +On line 4889: + between Schwartz, Dimon, + Geithner, and Treasury + Secretary Henry + +On line 4889: + Geithner, and + Treasury Secretary Henry + Paulson followed.75 To + +On line 4889: + Secretary Henry + Paulson followed.75 To address + Bear’s liquidity + +On line 4889: + Paulson followed.75 To + address Bear’s liquidity + needs, the New York Fed + +On line 4889: + followed.75 To address + Bear’s liquidity needs, the + New York Fed made a + +On line 4889: + Bear’s liquidity + needs, the New York Fed made a + billion loan to Bear + +On line 4889: + needs, the New York Fed + made a billion loan to Bear + Stearns through JP Morgan + +On line 4889: + the New York Fed made + a billion loan to Bear Stearns + through JP Morgan on + +On line 4889: + New York Fed made a + billion loan to Bear Stearns through + JP Morgan on the + +On line 4889: + made a billion loan + to Bear Stearns through JP Morgan + on the morning of + +On line 4889: + billion loan to Bear + Stearns through JP Morgan on the + morning of Friday, + +On line 4891: + to Bear Stearns through JP + Morgan on the morning of + Friday, March Standard + +On line 4891: + through JP Morgan on + the morning of Friday, March + Standard Poor’s lowered + +On line 4891: + morning of Friday, + March Standard Poor’s lowered Bear’s + rating three levels + +On line 4891: + Friday, March Standard + Poor’s lowered Bear’s rating three + levels to BBB. Moody’s + +On line 4891: + levels to BBB. Moody’s + and Fitch also downgraded + the company. By + +On line 4891: + Moody’s and Fitch also + downgraded the company. + By the end of the + +On line 4891: + also downgraded + the company. By the end + of the day, Bear was + +On line 4891: + the company. By + the end of the day, Bear was + out of cash. Its stock + +On line 4891: + the end of the day, + Bear was out of cash. Its stock + plummeted closing + +On line 4893: + the day, Bear was out + of cash. Its stock plummeted + closing below The + +On line 4893: + Bear was out of cash. + Its stock plummeted closing + below The markets + +On line 4893: + Its stock plummeted + closing below The markets + evidently viewed + +On line 4893: + closing below The + markets evidently viewed + the loan as a sign + +On line 4893: + viewed the loan as a + sign of terminal weakness. + After markets closed + +On line 4893: + sign of terminal + weakness. After markets closed + on Friday, Paulson + +On line 4893: + on Friday, Paulson + and Geithner informed + Bear CEO Schwartz that the + +On line 4893: + Friday, Paulson and + Geithner informed Bear + CEO Schwartz that the Fed + +On line 4893: + CEO Schwartz that the Fed + loan to JP Morgan would not + be available after + +On line 4893: + Schwartz that the Fed loan + to JP Morgan would not be + available after the + +On line 4893: + the Fed loan to JP + Morgan would not be available + after the weekend. + +On line 4893: + loan to JP Morgan + would not be available after + the weekend. Without + +On line 4893: + to JP Morgan would + not be available after the + weekend. Without that + +On line 4893: + Morgan would not be + available after the weekend. + Without that loan, Bear + +On line 4893: + would not be available + after the weekend. Without + that loan, Bear could not + +On line 4893: + be available after + the weekend. Without that loan, + Bear could not conduct + +On line 4893: + after the weekend. + Without that loan, Bear could not + conduct business. In + +On line 4893: + the weekend. Without + that loan, Bear could not conduct + business. In fact, Bear + +On line 4893: + Without that loan, Bear + could not conduct business. In + fact, Bear Stearns had to + +On line 4893: + that loan, Bear could not + conduct business. In fact, Bear + Stearns had to find a + +On line 4893: + Bear could not conduct + business. In fact, Bear Stearns had + to find a buyer + +On line 4893: + not conduct business. + In fact, Bear Stearns had to find + a buyer before + +On line 4893: + conduct business. In + fact, Bear Stearns had to find a + buyer before the + +On line 4893: + In fact, Bear Stearns had + to find a buyer before + the Asian markets opened + +On line 4893: + Bear Stearns had to find + a buyer before the Asian + markets opened Sunday + +On line 4893: + to find a buyer + before the Asian markets opened + Sunday night or the + +On line 4893: + a buyer before + the Asian markets opened Sunday + night or the game would + +On line 4893: + buyer before the + Asian markets opened Sunday night + or the game would be + +On line 4895: + the Asian markets opened + Sunday night or the game would + be over.76 Schwartz, olinaro, + +On line 4895: + markets opened Sunday + night or the game would be over.76 + Schwartz, olinaro, Alix, + +On line 4895: + Sunday night or the + game would be over.76 Schwartz, olinaro, + Alix, and others + +On line 4895: + night or the game would + be over.76 Schwartz, olinaro, Alix, + and others spent the + +On line 4895: + game would be over.76 Schwartz, + olinaro, Alix, and others + spent the weekend in + +On line 4895: + olinaro, Alix, and + others spent the weekend in + due diligence meetings + +On line 4897: + spent the weekend in + due diligence meetings with JP + Morgan and other + +On line 4897: + due diligence meetings + with JP Morgan and other + potential buyers, + +On line 4897: + buyers, including + the private equity firm + J.C. Flowers and Co. + +On line 4897: + JP Morgan was the + only candidate with the + size and stature to make + +On line 4899: + the size and stature to + make a credible offer + within hours.77 As Bear + +On line 4899: + make a credible + offer within hours.77 As Bear + Stearns’s clearing bank for + +On line 4899: + within hours.77 As Bear + Stearns’s clearing bank for repo + trades, JP Morgan held + +On line 4899: + Bear Stearns’s clearing bank + for repo trades, JP Morgan + held much of Bear Stearns’s + +On line 4899: + trades, JP Morgan held + much of Bear Stearns’s assets as + collateral and + +On line 4899: + of Bear Stearns’s assets + as collateral and had + been assessing their + +On line 4899: + as collateral + and had been assessing their + value daily.78 This + +On line 4899: + been assessing their + value daily.78 This knowledge + let JP Morgan move + +On line 4901: + their value daily.78 + This knowledge let JP Morgan + move more quickly. On + +On line 4901: + let JP Morgan move + more quickly. On Sunday, March + JP Morgan informed + +On line 4901: + JP Morgan move more + quickly. On Sunday, March JP + Morgan informed the + +On line 4901: + quickly. On Sunday, + March JP Morgan informed the + New York Fed and the + +On line 4901: + On Sunday, March JP + Morgan informed the New York + Fed and the Treasury + +On line 4901: + informed the New York + Fed and the Treasury that it + was interested + +On line 4901: + Fed and the Treasury + that it was interested + in a deal if it + +On line 4901: + Treasury that it was + interested in a deal + if it included + +On line 4901: + interested in + a deal if it included + financial support + +On line 4901: + if it included + financial support from the + Fed.79 The Federal + +On line 4901: + finding "unusual + and exigent circumstances" + as required under + +On line 4901: + as required under + section of the Federal + Reserve Act, agreed to + +On line 4901: + Federal Reserve + Act, agreed to purchase billion + of Bear’s assets to + +On line 4901: + Act, agreed to purchase + billion of Bear’s assets to + get them off the firm’s + +On line 4901: + to purchase billion + of Bear’s assets to get them + off the firm’s books through + +On line 4901: + purchase billion of + Bear’s assets to get them off + the firm’s books through a + +On line 4901: + of Bear’s assets to + get them off the firm’s books through + a new entity + +On line 4901: + Bear’s assets to get + them off the firm’s books through a + new entity called + +On line 4901: + get them off the firm’s + books through a new entity + called Maiden Lane LLC + +On line 4901: + them off the firm’s books + through a new entity called + Maiden Lane LLC (named + +On line 4901: + the firm’s books through a + new entity called Maiden + Lane LLC (named for a + +On line 4901: + firm’s books through a new + entity called Maiden Lane + LLC (named for a street + +On line 4901: + a new entity + called Maiden Lane LLC (named for + a street alongside the + +On line 4901: + new entity called + Maiden Lane LLC (named for a + street alongside the New + +On line 4901: + Maiden Lane LLC (named + for a street alongside the New + York Fed). Those assets— + +On line 4903: + Lane LLC (named for a + street alongside the New York Fed). + Those assets— mostly + +On line 4903: + other assets, and + hedges from Bear’s mortgage trading + desk—would be under New + +On line 4903: + assets, and hedges from + Bear’s mortgage trading desk—would be + under New York Fed + +On line 4903: + hedges from Bear’s mortgage + trading desk—would be under New + York Fed management. + +On line 4903: + be under New York + Fed management. To finance + the purchases, JP + +On line 4903: + York Fed management. + To finance the purchases, + JP Morgan made a + +On line 4903: + JP Morgan made a + billion subordinated + loan and the New York + +On line 4903: + subordinated + loan and the New York Fed lent + billion. Because of + +On line 4903: + loan and the New York + Fed lent billion. Because of + its loan, JP Morgan + +On line 4903: + and the New York Fed + lent billion. Because of its + loan, JP Morgan bore + +On line 4903: + the New York Fed lent + billion. Because of its loan, + JP Morgan bore the + +On line 4903: + lent billion. Because + of its loan, JP Morgan bore + the risk of the first + +On line 4903: + Because of its loan, + JP Morgan bore the risk of + the first billion of + +On line 4903: + loan, JP Morgan bore + the risk of the first billion + of losses; the Fed + +On line 4903: + JP Morgan bore the + risk of the first billion of + losses; the Fed would + +On line 4903: + the risk of the first + billion of losses; the Fed + would bear any further + +On line 4903: + of the first billion + of losses; the Fed would bear + any further losses + +On line 4903: + the first billion of + losses; the Fed would bear any + further losses up + +On line 4903: + of losses; the Fed + would bear any further losses + up to billion.80 The + +On line 4903: + losses; the Fed would + bear any further losses up + to billion.80 The Fed’s + +On line 4903: + any further losses + up to billion.80 The Fed’s loan + would be repaid as + +On line 4903: + up to billion.80 The + Fed’s loan would be repaid as + Maiden Lane sold the + +On line 4903: + The Fed’s loan would be + repaid as Maiden Lane sold + the collateral. + +On line 4905: + repaid as Maiden + Lane sold the collateral. + On Sunday night, with + +On line 4905: + Maiden Lane sold the + collateral. On Sunday + night, with Maiden Lane + +On line 4905: + collateral. On + Sunday night, with Maiden Lane + in place, JP Morgan + +On line 4905: + night, with Maiden Lane + in place, JP Morgan publicly + announced a deal to + +On line 4905: + Maiden Lane in place, + JP Morgan publicly announced + a deal to buy Bear + +On line 4905: + in place, JP Morgan + publicly announced a deal to + buy Bear Stearns for a + +On line 4905: + publicly announced a + deal to buy Bear Stearns for a + share. Minutes of Bear’s + +On line 4905: + to buy Bear Stearns for + a share. Minutes of Bear’s board + meeting indicate + +On line 4905: + Bear Stearns for a share. + Minutes of Bear’s board meeting + indicate that JP + +On line 4905: + a share. Minutes of + Bear’s board meeting indicate + that JP Morgan had + +On line 4905: + of Bear’s board meeting + indicate that JP Morgan + had considered but + +On line 4905: + indicate that JP + Morgan had considered but + cut it to "because + +On line 4905: + it to "because the + government would not permit + a higher number. + +On line 4905: + Fed and the Treasury + Department would not support + a transaction where + +On line 4905: + Department would not + support a transaction where + [Bear Stearns] equity + +On line 4905: + equity holders + received any significant + consideration + +On line 4905: + any significant + consideration because + of the ‘moral hazard’ + +On line 4905: + consideration + because of the ‘moral hazard’ + of the federal + +On line 4905: + because of the ‘moral + hazard’ of the federal + government using + +On line 4905: + the ‘moral hazard’ of + the federal government + using taxpayer + +On line 4905: + government using + taxpayer money to ‘bail + out’ the investment + +On line 4907: + taxpayer money + to ‘bail out’ the investment + bank’s stockholders."81 Eight + +On line 4907: + the investment bank’s + stockholders."81 Eight days later, + on March Bear Stearns and + +On line 4907: + bank’s stockholders."81 Eight + days later, on March Bear Stearns + and JP Morgan agreed + +On line 4907: + stockholders."81 Eight days + later, on March Bear Stearns and + JP Morgan agreed to + +On line 4907: + Eight days later, on + March Bear Stearns and JP Morgan + agreed to increase the + +On line 4907: + days later, on March + Bear Stearns and JP Morgan agreed + to increase the price + +On line 4907: + later, on March Bear + Stearns and JP Morgan agreed to + increase the price to + +On line 4907: + on March Bear Stearns and + JP Morgan agreed to increase + the price to John Chrin, + +On line 4907: + Stearns and JP Morgan + agreed to increase the price to + John Chrin, co-head of + +On line 4907: + and JP Morgan agreed + to increase the price to John + Chrin, co-head of the + +On line 4907: + of the financial + institutions mergers and + acquisitions group + +On line 4907: + and acquisitions + group at JP Morgan, told the + FCIC they increased the + +On line 4907: + acquisitions group + at JP Morgan, told the FCIC + they increased the price + +On line 4907: + JP Morgan, told the + FCIC they increased the price to + make Bear shareholders’ + +On line 4907: + FCIC they increased the + price to make Bear shareholders’ + approval more likely.82 + +On line 4907: + increased the price to + make Bear shareholders’ approval + more likely.82 Bear CEO + +On line 4907: + make Bear shareholders’ + approval more likely.82 Bear CEO + Schwartz told the FCIC the + +On line 4907: + shareholders’ approval + more likely.82 Bear CEO Schwartz told + the FCIC the increase + +On line 4907: + more likely.82 Bear CEO + Schwartz told the FCIC the increase + let Bear preserve the + +On line 4907: + Schwartz told the FCIC the + increase let Bear preserve the + company’s value + +On line 4907: + extent possible + under the circumstances for + our shareholders, our + +On line 4907: + circumstances for our + shareholders, our employees, + and our creditors."83 + +On line 4911: + employees, and our + creditors."83 "IT WAS HEADING + TO A BLACK HOLE" The + +On line 4911: + creditors."83 "IT WAS + HEADING TO A BLACK HOLE" The + SEC regulators + +On line 4911: + TO A BLACK HOLE" The + SEC regulators Macchiaroli + and Eichner were + +On line 4911: + A BLACK HOLE" The SEC + regulators Macchiaroli and + Eichner were as + +On line 4911: + and Eichner were + as stunned as everyone else + by the speed of Bear’s + +On line 4911: + as everyone else + by the speed of Bear’s collapse. + Macchiaroli had had doubts + +On line 4911: + else by the speed of + Bear’s collapse. Macchiaroli had had + doubts as far back as + +On line 4911: + speed of Bear’s collapse. + Macchiaroli had had doubts as far + back as August, he + +On line 4911: + Bear’s collapse. Macchiaroli + had had doubts as far back as + August, he told the + +On line 4911: + Macchiaroli had had doubts + as far back as August, he + told the FCIC, but he + +On line 4911: + had had doubts as far + back as August, he told the + FCIC, but he and his + +On line 4911: + doubts as far back as + August, he told the FCIC, but + he and his colleagues + +On line 4911: + back as August, he + told the FCIC, but he and his + colleagues expected + +On line 4911: + August, he told the + FCIC, but he and his colleagues + expected Bear would + +On line 4911: + told the FCIC, but he + and his colleagues expected + Bear would be able to + +On line 4911: + the FCIC, but he and + his colleagues expected Bear + would be able to fund + +On line 4911: + he and his colleagues + expected Bear would be able + to fund itself through + +On line 4911: + expected Bear would + be able to fund itself through + the repo market, + +On line 4911: + Bear would be able to + fund itself through the repo + market, albeit at + +On line 4911: + to fund itself through + the repo market, albeit + at higher margins.84 + +On line 4913: + fund itself through the + repo market, albeit at + higher margins.84 Fed + +On line 4913: + the repo market, + albeit at higher margins.84 + Fed Chairman Ben Bernanke + +On line 4913: + market, albeit at + higher margins.84 Fed Chairman + Ben Bernanke later called + +On line 4913: + albeit at higher + margins.84 Fed Chairman Ben Bernanke + later called the Bear + +On line 4913: + margins.84 Fed Chairman + Ben Bernanke later called the Bear + Stearns decision the + +On line 4913: + later called the Bear + Stearns decision the toughest + of the financial + +On line 4913: + Stearns decision the + toughest of the financial + crisis. The trillion + +On line 4913: + repo market had + "really [begun] to break + down," Bernanke said. "As the + +On line 4913: + "really [begun] + to break down," Bernanke said. "As the + fear increased," short-term + +On line 4913: + [begun] to break down," + Bernanke said. "As the fear increased," + short-term lenders began + +On line 4913: + break down," Bernanke said. "As + the fear increased," short-term lenders + began demanding + +On line 4913: + fear increased," short-term + lenders began demanding more + collateral, "which + +On line 4913: + began demanding + more collateral, "which was + making it more and + +On line 4913: + more collateral, + "which was making it more and + more difficult for + +On line 4913: + collateral, "which + was making it more and more + difficult for the + +On line 4913: + "which was making it + more and more difficult for + the financial firms + +On line 4913: + was making it more + and more difficult for the + financial firms to + +On line 4913: + and more difficult + for the financial firms to + finance themselves and + +On line 4913: + for the financial + firms to finance themselves and + creating more and + +On line 4913: + creating more and + more liquidity pressure + on MARCH them. And, it + +On line 4913: + more liquidity + pressure on MARCH them. And, it + was heading sort of + +On line 4913: + pressure on MARCH them. + And, it was heading sort of + to a black hole." He + +On line 4913: + on MARCH them. And, it + was heading sort of to a + black hole." He saw the + +On line 4913: + And, it was heading + sort of to a black hole." He + saw the collapse of + +On line 4913: + it was heading sort + of to a black hole." He saw + the collapse of Bear + +On line 4913: + was heading sort of + to a black hole." He saw the + collapse of Bear Stearns + +On line 4913: + of to a black hole." + He saw the collapse of Bear + Stearns as threatening + +On line 4913: + to a black hole." He + saw the collapse of Bear Stearns + as threatening to + +On line 4913: + a black hole." He saw + the collapse of Bear Stearns as + threatening to freeze + +On line 4913: + saw the collapse of + Bear Stearns as threatening to + freeze the tri-party + +On line 4913: + collapse of Bear Stearns + as threatening to freeze the + tri-party repo + +On line 4913: + as threatening to + freeze the tri-party repo + market, leaving the + +On line 4913: + leaving the short-term + lenders with collateral they + would try to "dump on + +On line 4913: + with collateral + they would try to "dump on the + market. You would have + +On line 4913: + would try to "dump on + the market. You would have a + big crunch in asset + +On line 4913: + try to "dump on the + market. You would have a big + crunch in asset prices."85 + +On line 4915: + "dump on the market. + You would have a big crunch in + asset prices."85 "Bear Stearns, + +On line 4915: + the market. You would + have a big crunch in asset + prices."85 "Bear Stearns, which is + +On line 4915: + market. You would have + a big crunch in asset prices."85 + "Bear Stearns, which is not + +On line 4915: + You would have a big + crunch in asset prices."85 "Bear Stearns, + which is not that big + +On line 4915: + would have a big crunch + in asset prices."85 "Bear Stearns, which + is not that big a + +On line 4915: + have a big crunch in + asset prices."85 "Bear Stearns, which is + not that big a firm, + +On line 4915: + big crunch in asset + prices."85 "Bear Stearns, which is not that + big a firm, our view + +On line 4915: + crunch in asset prices."85 + "Bear Stearns, which is not that big + a firm, our view on + +On line 4915: + in asset prices."85 "Bear + Stearns, which is not that big a + firm, our view on why + +On line 4915: + asset prices."85 "Bear Stearns, + which is not that big a firm, + our view on why it + +On line 4915: + Stearns, which is not that + big a firm, our view on why + it was important + +On line 4915: + which is not that big + a firm, our view on why it + was important to + +On line 4915: + is not that big a + firm, our view on why it was + important to save + +On line 4915: + big a firm, our view + on why it was important + to save it—you may + +On line 4915: + view on why it was + important to save it—you + may disagree—but our + +On line 4915: + important to save + it—you may disagree—but our + view was that because + +On line 4915: + to save it—you may + disagree—but our view was that + because it was so + +On line 4915: + may disagree—but our + view was that because it was + so essentially + +On line 4915: + that because it was + so essentially involved + in this critical + +On line 4915: + so essentially + involved in this critical + repo financing + +On line 4915: + in this critical + repo financing market, + that its failure would + +On line 4915: + critical repo + financing market, that its + failure would have brought + +On line 4915: + financing market, + that its failure would have brought + down that market, which + +On line 4915: + failure would have brought + down that market, which would have + had implications + +On line 4915: + down that market, which + would have had implications + for other firms," Bernanke + +On line 4915: + that market, which would + have had implications for + other firms," Bernanke told + +On line 4917: + had implications + for other firms," Bernanke told the + FCIC.86 Geithner + +On line 4917: + for other firms," Bernanke + told the FCIC.86 Geithner + explained the need for + +On line 4917: + firms," Bernanke told the FCIC.86 + Geithner explained the + need for government + +On line 4917: + explained the need for + government support for Bear’s + acquisition by + +On line 4919: + acquisition by + JP Morgan as follows: "The + sudden discovery + +On line 4919: + Morgan as follows: + "The sudden discovery by + Bear’s derivative + +On line 4919: + to protect themselves + from financial risk were no + longer operative + +On line 4919: + protect themselves from + financial risk were no longer + operative would + +On line 4919: + triggered substantial + further dislocation in + markets. This would have + +On line 4919: + to liquidate the + collateral they held against + those positions and + +On line 4919: + the collateral + they held against those positions + and to attempt to + +On line 4919: + against those positions + and to attempt to replicate + those positions in + +On line 4919: + and to attempt to + replicate those positions in + already very fragile + +On line 4919: + attempt to replicate + those positions in already + very fragile markets."87 + +On line 4921: + those positions in + already very fragile markets."87 + Paulson told the FCIC + +On line 4921: + already very fragile + markets."87 Paulson told the FCIC + that Bear had both a + +On line 4921: + FCIC that Bear had both + a liquidity problem + and a capital + +On line 4921: + a liquidity + problem and a capital + problem. "Could you just + +On line 4921: + and a capital + problem. "Could you just imagine + the mess we would have + +On line 4921: + capital problem. + "Could you just imagine the mess + we would have had1 If + +On line 4921: + problem. "Could you just + imagine the mess we would have + had1 If Bear had gone + +On line 4921: + "Could you just imagine + the mess we would have had1 If + Bear had gone there were + +On line 4921: + just imagine the mess + we would have had1 If Bear had + gone there were hundreds, + +On line 4921: + imagine the mess we + would have had1 If Bear had gone + there were hundreds, maybe + +On line 4921: + the mess we would have + had1 If Bear had gone there were + hundreds, maybe thousands + +On line 4921: + had1 If Bear had gone + there were hundreds, maybe thousands + of counterparties + +On line 4921: + If Bear had gone there + were hundreds, maybe thousands of + counterparties that + +On line 4921: + there were hundreds, maybe + thousands of counterparties + that all would have grabbed + +On line 4921: + that all would have grabbed + their collateral, would have + started trying to + +On line 4921: + collateral, would + have started trying to sell + their collateral, + +On line 4921: + have started trying + to sell their collateral, + drove down prices, create + +On line 4921: + started trying to + sell their collateral, drove + down prices, create even + +On line 4921: + trying to sell their + collateral, drove down prices, + create even bigger + +On line 4921: + collateral, drove + down prices, create even bigger + losses. There was huge + +On line 4921: + was huge fear about the + investment banking model + at that time." Paulson + +On line 4921: + about the investment + banking model at that time." + Paulson believed that + +On line 4921: + investment banking + model at that time." Paulson + believed that if Bear + +On line 4921: + banking model at + that time." Paulson believed that + if Bear had filed for + +On line 4921: + at that time." Paulson + believed that if Bear had filed + for bankruptcy, "you + +On line 4921: + if Bear had filed for + bankruptcy, "you would have had + Lehman going almost + +On line 4921: + bankruptcy, "you would + have had Lehman going almost + immediately + +On line 4921: + have had Lehman going + almost immediately + if Bear had gone, and + +On line 4921: + Lehman going almost + immediately if Bear + had gone, and just the + +On line 4921: + immediately + if Bear had gone, and just the + whole process would have just + +On line 4921: + if Bear had gone, and + just the whole process would have just + started earlier."88 + +On line 4923: + the whole process would have + just started earlier."88 The + Commission concludes + +On line 4923: + would have just started + earlier."88 The Commission + concludes the failure + +On line 4923: + started earlier."88 + The Commission concludes the + failure of Bear Stearns + +On line 4923: + by its exposure + to risky mortgage assets, its + reliance on short-term + +On line 4923: + exposure to risky + mortgage assets, its reliance + on short-term funding, + +On line 4923: + mortgage assets, its + reliance on short-term funding, + and its high leverage. + +On line 4923: + assets, its reliance + on short-term funding, and its + high leverage. These were + +On line 4923: + reliance on short-term + funding, and its high leverage. + These were a result + +On line 4923: + on short-term funding, + and its high leverage. These were + a result of weak + +On line 4923: + funding, and its high + leverage. These were a result + of weak corporate + +On line 4923: + leverage. These were a + result of weak corporate + governance and risk + +On line 4923: + were a result of + weak corporate governance + and risk management. + +On line 4923: + a result of weak + corporate governance and + risk management. Its + +On line 4923: + largely on return + on equity, creating + incentives to use + +On line 4923: + incentives to use + excessive leverage and to + focus on short-term + +On line 4923: + to use excessive + leverage and to focus on + short-term gains such as + +On line 4925: + on short-term gains such + as annual growth goals. Bear + experienced runs + +On line 4925: + such as annual + growth goals. Bear experienced + runs by repo lenders, + +On line 4925: + as annual growth + goals. Bear experienced runs + by repo lenders, hedge + +On line 4925: + annual growth goals. + Bear experienced runs by + repo lenders, hedge fund + +On line 4925: + repo lenders, hedge fund + customers, and derivatives + counterparties and + +On line 4925: + considered it too + interconnected to fail. + Bear’s failure was in + +On line 4925: + interconnected + to fail. Bear’s failure was in + part a result of + +On line 4925: + the Securities + and Exchange Commission, which + did not restrict its + +On line 4925: + Securities and + Exchange Commission, which did + not restrict its risky + +On line 4925: + Exchange Commission, + which did not restrict its risky + activities and + +On line 4925: + which did not restrict + its risky activities and + which allowed undue + +On line 4925: + activities and + which allowed undue leverage + and insufficient + +On line 4931: + which allowed undue + leverage and insufficient + liquidity. MARCH + +On line 4939: + RISK CONCERNS CONTENTS + The Federal Reserve: "When + people got scared".................................................293 JP + +On line 4939: + got scared".................................................293 JP Morgan: + "Refusing to unwind would + be unforgivable" + +On line 4945: + stages of assessing + the potential systemic risk" + Banks: "The markets were + +On line 4947: + catastrophe—for the + time being. The Federal + Reserve had found new + +On line 4947: + the time being. The + Federal Reserve had found + new ways to lend cash + +On line 4947: + Federal Reserve + had found new ways to lend cash + to the financial + +On line 4947: + new ways to lend cash + to the financial system, + and some investors and + +On line 4947: + ways to lend cash to + the financial system, and + some investors and lenders + +On line 4947: + to the financial + system, and some investors and + lenders believed the Bear + +On line 4947: + and some investors and + lenders believed the Bear episode had + set a precedent for + +On line 4947: + lenders believed the Bear + episode had set a precedent for + extraordinary + +On line 4947: + extraordinary + government intervention. + Investors began to + +On line 4947: + began to worry + less about a recession and + more about inflation, + +On line 4947: + to worry less about + a recession and more about + inflation, as the + +On line 4947: + recession and more + about inflation, as the price + of oil continued + +On line 4947: + inflation, as the + price of oil continued to + rise (hitting almost + +On line 4949: + as the price of oil + continued to rise (hitting + almost per barrel + +On line 4949: + of oil continued + to rise (hitting almost per + barrel in July). + +On line 4949: + continued to rise + (hitting almost per barrel + in July). At the + +On line 4949: + rise (hitting almost + per barrel in July). At + the beginning of + +On line 4949: + (hitting almost per + barrel in July). At the + beginning of the + +On line 4951: + the beginning of + the stock market had fallen + almost from its peak + +On line 4951: + of the stock market + had fallen almost from its + peak in the fall of + +On line 4951: + the stock market had + fallen almost from its peak + in the fall of Then, + +On line 4951: + market had fallen + almost from its peak in the + fall of Then, in May + +On line 4951: + had fallen almost + from its peak in the fall of + Then, in May the Dow + +On line 4951: + fallen almost from + its peak in the fall of Then, + in May the Dow Jones + +On line 4951: + almost from its peak + in the fall of Then, in May + the Dow Jones climbed to + +On line 4953: + from its peak in the + fall of Then, in May the Dow + Jones climbed to within + +On line 4953: + its peak in the fall + of Then, in May the Dow Jones + climbed to within of + +On line 4953: + peak in the fall of + Then, in May the Dow Jones climbed + to within of the + +On line 4953: + in the fall of Then, + in May the Dow Jones climbed to + within of the record + +On line 4953: + fall of Then, in May + the Dow Jones climbed to within + of the record set in + +On line 4953: + in May the Dow Jones + climbed to within of the record + set in October + +On line 4953: + May the Dow Jones climbed + to within of the record set + in October The + +On line 4953: + the Dow Jones climbed to + within of the record set in + October The cost + +On line 4953: + to within of the + record set in October The + cost of protecting + +On line 4953: + within of the record + set in October The cost + of protecting against + +On line 4953: + set in October + The cost of protecting against + the risk of default + +On line 4953: + in October The + cost of protecting against the + risk of default by + +On line 4953: + the prices of credit + default swaps—declined from the + highs of March and April. + +On line 4953: + the highs of March and + April. "In hindsight, the markets + were surprisingly + +On line 4953: + April. "In hindsight, the + markets were surprisingly + stable and almost + +On line 4953: + hindsight, the markets + were surprisingly stable + and almost seemed to + +On line 4953: + were surprisingly + stable and almost seemed to + be neutral a month + +On line 4953: + and almost seemed to + be neutral a month after + Bear Stearns, leading all + +On line 4953: + almost seemed to be + neutral a month after Bear + Stearns, leading all the + +On line 4953: + to be neutral a + month after Bear Stearns, leading + all the way up to + +On line 4953: + a month after Bear + Stearns, leading all the way up + to September," said + +On line 4953: + month after Bear Stearns, + leading all the way up to + September," said David + +On line 4953: + Bear Stearns, leading all + the way up to September," + said David Wong, Morgan + +On line 4953: + leading all the way + up to September," said David + Wong, Morgan Stanley’s + +On line 4953: + up to September," + said David Wong, Morgan Stanley’s + treasurer.1 Taking + +On line 4953: + said David Wong, Morgan + Stanley’s treasurer.1 Taking + advantage of the + +On line 4953: + Stanley’s treasurer.1 + Taking advantage of the + brief respite in investor + +On line 4953: + treasurer.1 Taking + advantage of the brief respite + in investor concern, + +On line 4953: + Taking advantage + of the brief respite in investor + concern, the top ten + +On line 4953: + of the brief respite in + investor concern, the top ten + American banks and + +On line 4953: + investor concern, the + top ten American banks and + the four remaining + +On line 4953: + top ten American + banks and the four remaining + big investment banks, + +On line 4953: + just under billion + and billion, respectively, + in new equity + +On line 4953: + under billion and + billion, respectively, in + new equity by + +On line 4955: + respectively, in + new equity by the end + of June. Despite this + +On line 4955: + in new equity + by the end of June. Despite + this good news, bankers and + +On line 4955: + new equity by + the end of June. Despite this + good news, bankers and their + +On line 4955: + by the end of June. + Despite this good news, bankers and + their regulators + +On line 4955: + Despite this good news, + bankers and their regulators + were haunted by the + +On line 4955: + good news, bankers and their + regulators were haunted + by the speed of Bear + +On line 4955: + their regulators + were haunted by the speed of + Bear Stearns’s demise. And they + +On line 4955: + regulators were + haunted by the speed of Bear + Stearns’s demise. And they knew + +On line 4955: + were haunted by the + speed of Bear Stearns’s demise. And they + knew that the other + +On line 4955: + by the speed of Bear + Stearns’s demise. And they knew that the + other investment + +On line 4955: + speed of Bear Stearns’s demise. + And they knew that the other + investment banks shared + +On line 4955: + demise. And they knew that + the other investment banks + shared Bear’s weaknesses: + +On line 4957: + in illiquid mortgage + securities and other + troubled assets. In + +On line 4957: + securities and + other troubled assets. In + particular, the + +On line 4957: + and other troubled + assets. In particular, + the run on Bear had + +On line 4957: + troubled assets. In + particular, the run on + Bear had exposed the + +On line 4957: + on Bear had exposed + the dangers of tri-party + repo agreements and + +On line 4957: + repo agreements and + the counterparty risk caused + by derivatives + +On line 4959: + the counterparty + risk caused by derivatives + contracts. And the word + +On line 4959: + And the word on the + street—despite the assurances + of Lehman CEO Dick Fuld + +On line 4965: + on the street—despite + the assurances of Lehman CEO + Dick Fuld at MARCH TO + +On line 4965: + of Lehman CEO Dick Fuld + at MARCH TO AUGUST an April + shareholder meeting + +On line 4965: + Dick Fuld at MARCH TO + AUGUST an April shareholder + meeting that "the worst + +On line 4965: + MARCH TO AUGUST an + April shareholder meeting that + "the worst is behind + +On line 4965: + TO AUGUST an April + shareholder meeting that "the + worst is behind us"2—was + +On line 4965: + shareholder meeting + that "the worst is behind us"2—was + that Bear would not be + +On line 4965: + meeting that "the worst + is behind us"2—was that Bear would + not be the only + +On line 4967: + "the worst is behind + us"2—was that Bear would not be the + only failure. THE + +On line 4967: + us"2—was that Bear would not + be the only failure. THE + FEDERAL RESERVE: + +On line 4969: + the only failure. + THE FEDERAL RESERVE: "WHEN + PEOPLE GOT SCARED" The + +On line 4969: + FEDERAL RESERVE: + "WHEN PEOPLE GOT SCARED" The most + pressing danger was + +On line 4969: + PEOPLE GOT SCARED" The + most pressing danger was the + potential failure + +On line 4971: + potential failure + of the repo market—a + market that "grew very, + +On line 4971: + very, very quickly with + no single regulator + having a purview of + +On line 4971: + purview of it," former + Treasury Secretary Henry + Paulson would tell the + +On line 4971: + safe and durable source of + collateralized short-term + financing. It was + +On line 4971: + collateralized + short-term financing. It was + on precisely this + +On line 4971: + short-term financing. + It was on precisely this + understanding that + +On line 4971: + that Bear had shifted + approximately billion + of its unsecured + +On line 4971: + of its unsecured + funding into repos in + But now it was clear + +On line 4971: + now it was clear that + repo funding could be just + as vulnerable + +On line 4971: + funding could be just + as vulnerable to runs + as were other forms + +On line 4971: + vulnerable to + runs as were other forms of + short-term financing. + +On line 4973: + runs as were other + forms of short-term financing. + The repo runs of + +On line 4973: + as were other forms + of short-term financing. The + repo runs of which + +On line 4973: + short-term financing. + The repo runs of which had + devastated hedge + +On line 4973: + The repo runs of + which had devastated hedge + funds such as the two + +On line 4973: + repo runs of which + had devastated hedge funds + such as the two Bear + +On line 4973: + devastated hedge + funds such as the two Bear Stearns + Asset Management + +On line 4973: + two Bear Stearns Asset + Management funds and mortgage + originators such + +On line 4973: + Management funds and + mortgage originators such + as Countrywide, had + +On line 4973: + originators such + as Countrywide, had seized the + attention of the + +On line 4973: + attention of the + financial community, + and the run on Bear + +On line 4973: + participants and + regulators now better + appreciated + +On line 4973: + regulators now + better appreciated + how the quality + +On line 4973: + how the quality + of repo collateral + had shifted over time + +On line 4973: + the quality of + repo collateral had + shifted over time from + +On line 4973: + time from Treasury notes + and securities issued + by Fannie Mae and + +On line 4975: + and Freddie Mac to + highly rated non-GSE mortgage– + backed securities + +On line 4975: + backed securities + and collateralized debt + obligations (CDOs).4 At + +On line 4975: + before the crisis, + this riskier collateral + accounted for as + +On line 4975: + crisis, this riskier + collateral accounted + for as much as of + +On line 4975: + for as much as of + the total posted.5 In April + the Bankruptcy Abuse + +On line 4975: + April the Bankruptcy + Abuse Prevention and Consumer + Protection Act of + +On line 4975: + dramatically + expanded protections for + repo lenders holding + +On line 4975: + securities, that + was riskier than government + or highly rated + +On line 4975: + than government or + highly rated corporate + debt. These protections + +On line 4975: + rated corporate + debt. These protections gave lenders + confidence that they + +On line 4975: + These protections gave + lenders confidence that they had + clear, immediate + +On line 4975: + protections gave lenders + confidence that they had clear, + immediate rights + +On line 4975: + confidence that they + had clear, immediate rights + to collateral + +On line 4975: + clear, immediate + rights to collateral if + a borrower should + +On line 4975: + declare bankruptcy. + Nonetheless, Jamie Dimon, the + CEO of JP Morgan, + +On line 4975: + Jamie Dimon, the CEO + of JP Morgan, told the FCIC, + "When people got scared, + +On line 4975: + Dimon, the CEO of + JP Morgan, told the FCIC, "When + people got scared, they + +On line 4975: + of JP Morgan, told + the FCIC, "When people got scared, + they wouldn’t finance + +On line 4975: + JP Morgan, told the + FCIC, "When people got scared, they + wouldn’t finance the + +On line 4975: + the FCIC, "When people + got scared, they wouldn’t finance + the nonstandard stuff + +On line 4975: + FCIC, "When people got + scared, they wouldn’t finance the + nonstandard stuff at + +On line 4977: + they wouldn’t finance + the nonstandard stuff at all."6 + To the surprise of + +On line 4977: + wouldn’t finance the + nonstandard stuff at all."6 To + the surprise of both + +On line 4977: + the nonstandard stuff + at all."6 To the surprise of + both borrowers and + +On line 4977: + stuff at all."6 To the + surprise of both borrowers + and regulators, + +On line 4977: + ensure access to + the repo market. Repo + lenders cared just as much + +On line 4977: + the repo market. + Repo lenders cared just as much + about the financial + +On line 4977: + lenders cared just as much + about the financial health of + the borrower as + +On line 4977: + cared just as much about + the financial health of the + borrower as about + +On line 4977: + about the financial + health of the borrower as + about the quality + +On line 4977: + the financial health + of the borrower as about + the quality of + +On line 4977: + financial health of + the borrower as about the + quality of the + +On line 4977: + of the borrower + as about the quality of + the collateral. + +On line 4977: + the borrower as + about the quality of the + collateral. In + +On line 4977: + about the quality + of the collateral. In + fact, even for the same + +On line 4977: + borrowers.7 Despite + the bankruptcy provisions + in the act, lenders were + +On line 4977: + provisions in the + act, lenders were reluctant to + risk the hassle of + +On line 4977: + were reluctant to + risk the hassle of seizing + collateral, even + +On line 4977: + risk the hassle of + seizing collateral, even + good collateral, + +On line 4977: + collateral, even + good collateral, from a + bankrupt borrower. + +On line 4979: + good collateral, + from a bankrupt borrower. + Steven Meier of State Street + +On line 4979: + borrower. Steven Meier + of State Street testified to + the FCIC: "I would say + +On line 4979: + State Street testified + to the FCIC: "I would say the + counterparties are + +On line 4979: + the FCIC: "I would say + the counterparties are a + first line of defense, + +On line 4979: + FCIC: "I would say the + counterparties are a first + line of defense, and + +On line 4979: + the counterparties + are a first line of defense, + and we don’t want to + +On line 4979: + counterparties are + a first line of defense, and + we don’t want to go + +On line 4979: + first line of defense, + and we don’t want to go through + that uncomfortable + +On line 4979: + line of defense, and + we don’t want to go through that + uncomfortable process + +On line 4979: + and we don’t want to + go through that uncomfortable + process of having to + +On line 4979: + uncomfortable process + of having to liquidate + collateral."8 William + +On line 4979: + process of having to + liquidate collateral."8 + William Dudley of the + +On line 4981: + collateral."8 William + Dudley of the New York Fed + told the FCIC, "At the + +On line 4981: + Dudley of the New + York Fed told the FCIC, "At the + first sign of trouble, + +On line 4981: + the New York Fed told + the FCIC, "At the first sign of + trouble, these investors + +On line 4981: + FCIC, "At the first sign + of trouble, these investors in + tri-party repo + +On line 4981: + first sign of trouble, + these investors in tri-party + repo tend to run + +On line 4981: + trouble, these investors + in tri-party repo tend + to run rather than take + +On line 4981: + tri-party repo + tend to run rather than take the + collateral that + +On line 4981: + So high-quality + collateral itself is + not sufficient when + +On line 4983: + sufficient when and + if an institution gets + in trouble."9 Moreover, + +On line 4983: + an institution + gets in trouble."9 Moreover, if + a borrower in + +On line 4983: + institution gets + in trouble."9 Moreover, if a + borrower in the + +On line 4983: + funds—frequent lenders in + this market—may have to seize + collateral that + +On line 4983: + this market—may have + to seize collateral that + they cannot legally + +On line 4983: + market—may have to + seize collateral that they + cannot legally own. + +On line 4983: + seize collateral + that they cannot legally own. + For example, a + +On line 4983: + cannot legally own. + For example, a money + market fund cannot + +On line 4983: + Typically, if + a fund takes possession of + such collateral, + +On line 4983: + the securities + immediately, even—as + was the case during + +On line 4983: + immediately, + even—as was the case during + the crisis—into + +On line 4983: + crisis—into a + declining market. As a + result, funds simply + +On line 4983: + declining market. + As a result, funds simply + avoided lending against + +On line 4983: + funds simply avoided + lending against mortgage-related + securities. In + +On line 4983: + securities. In + the crisis, investors didn’t + consider secured + +On line 4983: + the crisis, investors + didn’t consider secured + funding to be much + +On line 4983: + to be much better + than unsecured, according + to Darryll Hendricks, + +On line 4983: + be much better than + unsecured, according to + Darryll Hendricks, a + +On line 4983: + to Darryll Hendricks, + a managing director + and global head of + +On line 4983: + Darryll Hendricks, a + managing director and + global head of risk + +On line 4983: + and global head of + risk methodology at UBS, + as well as the head + +On line 4983: + global head of risk + methodology at UBS, as + well as the head of + +On line 4983: + methodology at + UBS, as well as the head of + a private-sector + +On line 4983: + as well as the head + of a private-sector task + force on the repo + +On line 4983: + as the head of a + private-sector task force on + the repo market + +On line 4983: + private-sector task + force on the repo market + organized by the + +On line 4985: + the repo market + organized by the New York + Fed.10 As noted, the + +On line 4985: + organized by the + New York Fed.10 As noted, the + Fed had announced a + +On line 4985: + the New York Fed.10 As + noted, the Fed had announced + a new program, the + +On line 4985: + noted, the Fed had + announced a new program, the + Term Securities + +On line 4985: + a new program, the + Term Securities Lending + Facility (TSLF), + +On line 4985: + Facility (TSLF), + on the Tuesday before Bear’s + collapse, but it would + +On line 4985: + (TSLF), on the Tuesday + before Bear’s collapse, but it + would not be available + +On line 4985: + the Tuesday before + Bear’s collapse, but it would not + be available until + +On line 4985: + Tuesday before Bear’s + collapse, but it would not be + available until March + +On line 4985: + before Bear’s collapse, + but it would not be available + until March The TSLF + +On line 4985: + Bear’s collapse, but it + would not be available until + March The TSLF would lend + +On line 4985: + collapse, but it would + not be available until March + The TSLF would lend a + +On line 4985: + but it would not be + available until March The TSLF + would lend a total + +On line 4985: + would not be available + until March The TSLF would lend + a total of up + +On line 4985: + available until March + The TSLF would lend a total + of up to billion + +On line 4985: + lend a total of + up to billion of Treasury + securities at + +On line 4985: + of up to billion + of Treasury securities + at any one time to + +On line 4985: + up to billion of + Treasury securities at + any one time to the + +On line 4985: + affiliates of + the large commercial banks and + investment banks that + +On line 4985: + the large commercial + banks and investment banks that + trade with the New York + +On line 4985: + large commercial banks + and investment banks that trade + with the New York Fed, + +On line 4985: + commercial banks and + investment banks that trade with + the New York Fed, such + +On line 4985: + and investment banks + that trade with the New York Fed, + such as Citigroup, + +On line 4985: + that trade with the New + York Fed, such as Citigroup, + Morgan Stanley, or + +On line 4985: + with the New York Fed, + such as Citigroup, Morgan + Stanley, or Merrill + +On line 4985: + New York Fed, such as + Citigroup, Morgan Stanley, + or Merrill Lynch—for + +On line 4985: + such as Citigroup, + Morgan Stanley, or Merrill + Lynch—for up to days. + +On line 4985: + Morgan Stanley, or + Merrill Lynch—for up to days. + The borrowers would + +On line 4985: + Merrill Lynch—for up + to days. The borrowers would + trade highly rated + +On line 4985: + return for Treasuries. + The primary dealers could + then use those Treasuries + +On line 4985: + primary dealers + could then use those Treasuries as + collateral to + +On line 4985: + use those Treasuries as + collateral to borrow + cash in the repo + +On line 4985: + collateral to + borrow cash in the repo + market. Like the Term + +On line 4985: + cash in the repo + market. Like the Term Auction + Facility for + +On line 4985: + earlier, the TSLF + would run as a regular + auction to reduce + +On line 4985: + the TSLF would run as + a regular auction to + reduce the stigma + +On line 4985: + regular auction + to reduce the stigma of + borrowing from the + +On line 4985: + reduce the stigma + of borrowing from the Fed. + However, after + +On line 4985: + However, after + Bear’s collapse, Fed officials + recognized that the + +On line 4985: + recognized that the + situation called for a + program that could be + +On line 4985: + the situation + called for a program that could + be up and running + +On line 4985: + situation called + for a program that could be + up and running right + +On line 4985: + a program that could + be up and running right away. + And they concluded + +On line 4985: + program that could be + up and running right away. And + they concluded that + +On line 4985: + be up and running + right away. And they concluded + that the TSLF alone would + +On line 4985: + up and running right + away. And they concluded that + the TSLF alone would not + +On line 4985: + and running right away. + And they concluded that the + TSLF alone would not be + +On line 4985: + running right away. And + they concluded that the TSLF + alone would not be enough. + +On line 4987: + And they concluded + that the TSLF alone would not be + enough. So, the Fed would + +On line 4987: + concluded that the + TSLF alone would not be enough. So, + the Fed would create + +On line 4987: + that the TSLF alone would + not be enough. So, the Fed would + create another + +On line 4987: + TSLF alone would not be + enough. So, the Fed would create + another program + +On line 4987: + not be enough. So, the + Fed would create another + program first. On the + +On line 4987: + enough. So, the Fed would + create another program + first. On the Sunday + +On line 4987: + the Fed would create + another program first. On + the Sunday of Bear’s + +On line 4987: + create another + program first. On the Sunday + of Bear’s collapse, the + +On line 4987: + program first. On the + Sunday of Bear’s collapse, the + Fed announced the new + +On line 4987: + On the Sunday of + Bear’s collapse, the Fed announced + the new Primary + +On line 4987: + cash, not Treasuries, to + investment banks and other + primary dealers + +On line 4987: + investment banks and + other primary dealers + on terms close to those + +On line 4987: + institutions—banks + and thrifts—received through the Fed’s + discount window. The + +On line 4987: + thrifts—received through the + Fed’s discount window. The move + came "just about minutes" + +On line 4987: + through the Fed’s discount + window. The move came "just about + minutes" too late for + +On line 4987: + discount window. The + move came "just about minutes" too + late for Bear, Jimmy + +On line 4987: + window. The move came + "just about minutes" too late for + Bear, Jimmy Cayne, its + +On line 4987: + came "just about minutes" + too late for Bear, Jimmy Cayne, + its former CEO, told + +On line 4987: + "just about minutes" too + late for Bear, Jimmy Cayne, its + former CEO, told the + +On line 4989: + late for Bear, Jimmy + Cayne, its former CEO, told the + FCIC.11 Unlike the TSLF, + +On line 4989: + for Bear, Jimmy Cayne, + its former CEO, told the FCIC.11 + Unlike the TSLF, which + +On line 4989: + its former CEO, told + the FCIC.11 Unlike the TSLF, which + would offer Treasuries + +On line 4989: + former CEO, told the + FCIC.11 Unlike the TSLF, which would + offer Treasuries for + +On line 4989: + the FCIC.11 Unlike the + TSLF, which would offer Treasuries + for days, the PDCF + +On line 4989: + Unlike the TSLF, which + would offer Treasuries for days, + the PDCF offered + +On line 4989: + TSLF, which would offer + Treasuries for days, the PDCF + offered overnight cash loans + +On line 4989: + offer Treasuries for + days, the PDCF offered overnight + cash loans in exchange + +On line 4989: + the PDCF offered + overnight cash loans in exchange for + collateral. In + +On line 4989: + loans in exchange for + collateral. In effect, + this program could serve + +On line 4989: + this program could serve + as an alternative to + the overnight tri-party + +On line 4989: + alternative to + the overnight tri-party repo + lenders, potentially + +On line 4989: + the overnight tri-party + repo lenders, potentially + providing hundreds + +On line 4989: + providing hundreds + of billions of dollars of + credit. "So the idea + +On line 4989: + billions of dollars + of credit. "So the idea of + the PDCF then was + +On line 4989: + dollars of credit. + "So the idea of the PDCF + then was anything that + +On line 4989: + "So the idea of the + PDCF then was anything that + the dealer couldn’t + +On line 4989: + then was anything that + the dealer couldn’t finance—the + securities that + +On line 4989: + securities that + were acceptable under the + discount window—if they + +On line 4989: + the discount window—if + they couldn’t get financing + in the market, they + +On line 4989: + discount window—if they + couldn’t get financing in + the market, they could + +On line 4989: + in the market, they + could get financing from the + Federal Reserve," + +On line 4989: + could get financing + from the Federal Reserve," + said Seth Carpenter, + +On line 4989: + get financing from + the Federal Reserve," said + Seth Carpenter, deputy + +On line 4989: + said Seth Carpenter, + deputy associate director + in the Division + +On line 4989: + Seth Carpenter, deputy + associate director in + the Division of + +On line 4989: + the Division of + Monetary Affairs at the + Federal Reserve + +On line 4989: + Monetary Affairs + at the Federal Reserve + Board. "And that way, you + +On line 4989: + at the Federal + Reserve Board. "And that way, you + don’t have to worry. + +On line 4989: + Federal Reserve + Board. "And that way, you don’t have + to worry. And by + +On line 4989: + Reserve Board. "And that + way, you don’t have to worry. + And by providing + +On line 4989: + way, you don’t have to + worry. And by providing + that support, other + +On line 4989: + have to worry. And + by providing that support, + other lenders know that + +On line 4989: + And by providing + that support, other lenders know + that they’re going to + +On line 4989: + by providing that + support, other lenders know that + they’re going to be + +On line 4989: + that support, other + lenders know that they’re going to + be able to get their + +On line 4989: + other lenders know that + they’re going to be able to + get their money back + +On line 4991: + that they’re going to + be able to get their money + back the next day."12 By + +On line 4991: + going to be able + to get their money back the + next day."12 By charging + +On line 4991: + get their money back + the next day."12 By charging the + Federal Reserve’s + +On line 4991: + Reserve’s discount rate + and adding additional fees + for regular use, + +On line 4991: + adding additional + fees for regular use, the + Federal Reserve + +On line 4991: + fees for regular + use, the Federal Reserve + encouraged dealers + +On line 4991: + use, the Federal + Reserve encouraged dealers + to use the PDCF + +On line 4991: + Federal Reserve + encouraged dealers to use + the PDCF only + +On line 4991: + Reserve encouraged + dealers to use the PDCF + only as a last + +On line 4991: + encouraged dealers + to use the PDCF only + as a last resort. + +On line 4991: + dealers to use the + PDCF only as a last + resort. In its first + +On line 4991: + to use the PDCF + only as a last resort. + In its first week of + +On line 4991: + only as a last + resort. In its first week of + operation, this + +On line 4991: + In its first week of + operation, this program + immediately + +On line 4991: + immediately + provided over billion in + cash to Bear Stearns (as + +On line 4991: + in cash to Bear Stearns + (as bridge financing until + the JP Morgan deal + +On line 4991: + (as bridge financing + until the JP Morgan deal + officially closed), + +On line 4993: + of Citigroup, among + others. However, as the + immediate post-Bear + +On line 4993: + others. However, + as the immediate post-Bear + concerns subsided, + +On line 4993: + However, as the + immediate post-Bear concerns + subsided, use of + +On line 4993: + immediate post-Bear + concerns subsided, use of + the facility + +On line 4993: + TO AUGUST after + April and ceased completely by + late July.13 Because + +On line 4993: + AUGUST after April + and ceased completely by late + July.13 Because the + +On line 4993: + after April and ceased + completely by late July.13 + Because the dealers + +On line 4993: + completely by late + July.13 Because the dealers + feared that markets would + +On line 4993: + late July.13 Because + the dealers feared that markets + would see reliance on + +On line 4993: + July.13 Because the + dealers feared that markets would + see reliance on the + +On line 4993: + the dealers feared that + markets would see reliance on + the PDCF as an + +On line 4993: + that markets would see + reliance on the PDCF as + an indication + +On line 4993: + severe distress, the + facility carried a + stigma similar + +On line 4993: + stigma similar + to the Fed’s discount window. + "Paradoxically, + +On line 4993: + to the Fed’s discount + window. "Paradoxically, + while the PDCF was + +On line 4993: + while the PDCF was + created to mitigate + the liquidity + +On line 4993: + loss of confidence + in an investment bank, use + of the PDCF was + +On line 4993: + of confidence in + an investment bank, use of + the PDCF was seen + +On line 4993: + confidence in an + investment bank, use of the + PDCF was seen both + +On line 4993: + in an investment + bank, use of the PDCF was + seen both within Lehman, + +On line 4993: + an investment bank, + use of the PDCF was seen + both within Lehman, and + +On line 4993: + use of the PDCF + was seen both within Lehman, and + possibly by the + +On line 4993: + was seen both within + Lehman, and possibly by the + broader market, as + +On line 4993: + both within Lehman, and + possibly by the broader + market, as an event + +On line 4993: + and possibly by + the broader market, as an + event that could trigger + +On line 4993: + possibly by the + broader market, as an event + that could trigger a + +On line 4993: + broader market, as + an event that could trigger a + loss of confidence," + +On line 4993: + market, as an event + that could trigger a loss of + confidence," noted + +On line 4993: + that could trigger a + loss of confidence," noted + the Lehman bankruptcy + +On line 4995: + loss of confidence," + noted the Lehman bankruptcy + examiner.14 On + +On line 4995: + the Lehman bankruptcy + examiner.14 On May the + Fed broadened the kinds + +On line 4995: + examiner.14 On + May the Fed broadened the kinds + of collateral + +On line 4995: + May the Fed broadened + the kinds of collateral + allowed in the TSLF + +On line 4995: + broadened the kinds of + collateral allowed in + the TSLF to include + +On line 4995: + to include other + triple-A-rated asset-backed securities, + such as auto and + +On line 4997: + securities, such + as auto and credit card + loans. In June, the Fed’s + +On line 4997: + such as auto and + credit card loans. In June, the + Fed’s Dudley urged in + +On line 4997: + and credit card loans. + In June, the Fed’s Dudley urged + in an internal + +On line 4997: + credit card loans. In + June, the Fed’s Dudley urged in + an internal email + +On line 4997: + June, the Fed’s Dudley + urged in an internal email + that both programs be + +On line 4997: + internal email that + both programs be extended + at least through the end + +On line 4997: + email that both programs + be extended at least through + the end of the year. + +On line 4997: + at least through the end + of the year. "PDCF remains + critical to the + +On line 4997: + of the year. "PDCF + remains critical to the + stability of + +On line 4997: + critical to the + stability of some of + the [investment banks]," + +On line 4997: + the stability + of some of the [investment + banks]," he wrote. "Amounts don’t + +On line 4997: + of the [investment + banks]," he wrote. "Amounts don’t matter + here, it is the fact + +On line 4997: + the [investment banks]," + he wrote. "Amounts don’t matter here, + it is the fact that + +On line 4997: + [investment banks]," he + wrote. "Amounts don’t matter here, it + is the fact that the + +On line 4997: + wrote. "Amounts don’t matter + here, it is the fact that the + PDCF underpins + +On line 4997: + it is the fact that + the PDCF underpins the + tri-party repo + +On line 4997: + fact that the PDCF + underpins the tri-party + repo system."15 On + +On line 4999: + Fed extended both + programs through January JP + MORGAN: "REFUSING + +On line 5003: + TO UNWIND WOULD BE + UNFORGIVABLE" The repo + run on Bear also + +On line 5003: + The repo run on + Bear also alerted the two + repo clearing banks—JP + +On line 5003: + repo clearing banks—JP + Morgan, the main clearing bank + for Lehman and Merrill + +On line 5003: + clearing banks—JP Morgan, + the main clearing bank for Lehman + and Merrill Lynch, as + +On line 5003: + the main clearing bank + for Lehman and Merrill Lynch, as + it had been for Bear + +On line 5003: + main clearing bank for + Lehman and Merrill Lynch, as it + had been for Bear Stearns, + +On line 5003: + clearing bank for Lehman + and Merrill Lynch, as it had + been for Bear Stearns, and + +On line 5003: + for Lehman and Merrill + Lynch, as it had been for Bear + Stearns, and BNY Mellon, + +On line 5003: + Lehman and Merrill Lynch, + as it had been for Bear Stearns, + and BNY Mellon, the + +On line 5003: + and Merrill Lynch, as + it had been for Bear Stearns, and + BNY Mellon, the main + +On line 5003: + Lynch, as it had been + for Bear Stearns, and BNY Mellon, + the main clearing bank + +On line 5003: + as it had been for + Bear Stearns, and BNY Mellon, the + main clearing bank for + +On line 5003: + been for Bear Stearns, and + BNY Mellon, the main clearing + bank for Goldman Sachs + +On line 5003: + for Bear Stearns, and BNY + Mellon, the main clearing bank + for Goldman Sachs and + +On line 5003: + the main clearing bank + for Goldman Sachs and Morgan + Stanley—to the risks + +On line 5003: + bank for Goldman Sachs + and Morgan Stanley—to the + risks they were taking. + +On line 5005: + Stanley—to the risks + they were taking. Before Bear’s + collapse, the market + +On line 5005: + the market had not + really understood the + colossal exposures + +On line 5005: + colossal exposures + that the tri-party repo + market created + +On line 5005: + exposures that the + tri-party repo market + created for these + +On line 5005: + that the tri-party + repo market created + for these clearing banks. + +On line 5005: + explained earlier, + the "unwind/rewind" mechanism + could leave JP Morgan + +On line 5005: + enormous "intraday" + exposure—an interim + exposure, but no + +On line 5005: + exposure, but no + less real for its brevity. + In an interview + +On line 5005: + less real for its + brevity. In an interview + with the FCIC, Dimon + +On line 5005: + for its brevity. In + an interview with the FCIC, + Dimon said that he + +On line 5005: + In an interview + with the FCIC, Dimon said that + he had not become + +On line 5005: + interview with the + FCIC, Dimon said that he had + not become fully + +On line 5005: + with the FCIC, Dimon + said that he had not become + fully aware of the + +On line 5005: + Dimon said that he + had not become fully aware + of the risks stemming + +On line 5005: + said that he had not + become fully aware of the + risks stemming from his + +On line 5005: + not become fully + aware of the risks stemming from + his bank’s tri-party + +On line 5005: + stemming from his bank’s + tri-party repo clearing + business until the + +On line 5005: + tri-party repo + clearing business until the + Bear crisis in A + +On line 5005: + business until the + Bear crisis in A clearing + bank had two concerns: + +On line 5005: + Bear crisis in A + clearing bank had two concerns: + First, if repo lenders + +On line 5005: + bank had two concerns: + First, if repo lenders abandoned + an investment bank, + +On line 5005: + had two concerns: First, + if repo lenders abandoned an + investment bank, it + +On line 5005: + First, if repo lenders + abandoned an investment bank, + it could be pressured + +On line 5005: + repo lenders abandoned + an investment bank, it could + be pressured into + +On line 5005: + an investment bank, + it could be pressured into + taking over the role + +On line 5005: + it could be pressured + into taking over the role + of the lenders. Second, + +On line 5005: + of the lenders. Second, + and worse—if the investment + bank defaulted, it + +On line 5005: + the lenders. Second, and + worse—if the investment bank + defaulted, it could + +On line 5005: + bank defaulted, it + could be stuck with unwanted + securities. "If + +On line 5005: + it could be stuck with + unwanted securities. + "If they defaulted + +On line 5005: + intraday, we own + the securities and we + have to liquidate + +On line 5005: + the securities + and we have to liquidate + them. That’s a huge risk + +On line 5005: + securities and + we have to liquidate them. + That’s a huge risk to + +On line 5007: + have to liquidate + them. That’s a huge risk to us," + Dimon explained.17 To + +On line 5007: + liquidate them. That’s + a huge risk to us," Dimon + explained.17 To address + +On line 5007: + them. That’s a huge risk + to us," Dimon explained.17 To + address those risks in + +On line 5007: + a huge risk to us," + Dimon explained.17 To address + those risks in for the + +On line 5007: + risk to us," Dimon + explained.17 To address those risks + in for the first time + +On line 5007: + us," Dimon explained.17 + To address those risks in for + the first time both JP + +On line 5007: + explained.17 To address + those risks in for the first time + both JP Morgan and + +On line 5007: + those risks in for the + first time both JP Morgan and + BNY Mellon started + +On line 5007: + risks in for the first + time both JP Morgan and BNY + Mellon started to + +On line 5007: + for the first time both + JP Morgan and BNY Mellon + started to demand + +On line 5007: + JP Morgan and BNY + Mellon started to demand + that intraday loans + +On line 5007: + BNY Mellon started + to demand that intraday + loans to tri-party + +On line 5009: + investment banks—be + overcollateralized. The + Fed increasingly + +On line 5009: + systemic risk posed by + the two repo clearing banks. + In the chain-reaction + +On line 5009: + risk posed by the two + repo clearing banks. In the + chain-reaction scenario + +On line 5009: + repo clearing banks. + In the chain-reaction scenario + that it envisioned, + +On line 5011: + that it envisioned, + if either JP Morgan or + BNY Mellon chose not + +On line 5011: + it envisioned, if + either JP Morgan or BNY + Mellon chose not to + +On line 5011: + either JP Morgan + or BNY Mellon chose not to + unwind its trades one + +On line 5011: + JP Morgan or BNY + Mellon chose not to unwind + its trades one morning, + +On line 5011: + or BNY Mellon chose + not to unwind its trades one + morning, the money + +On line 5011: + Mellon chose not to + unwind its trades one morning, + the money funds and + +On line 5011: + to unwind its trades + one morning, the money funds + and other repo + +On line 5011: + unwind its trades one + morning, the money funds and + other repo lenders + +On line 5011: + its trades one morning, + the money funds and other + repo lenders could be + +On line 5011: + the money funds and + other repo lenders could be + stuck with billions of + +On line 5011: + other repo lenders + could be stuck with billions of + dollars in repo + +On line 5011: + billions of dollars + in repo collateral. + Those lenders would then be + +On line 5011: + lenders would then be in + the difficult position + of having to sell + +On line 5011: + would then be in the + difficult position of + having to sell off + +On line 5011: + in the difficult + position of having to + sell off large amounts of + +On line 5011: + having to sell off + large amounts of collateral + in order to meet + +On line 5011: + sell off large amounts of + collateral in order + to meet their own cash + +On line 5011: + of collateral + in order to meet their own + cash needs, an action + +On line 5011: + collateral in + order to meet their own cash + needs, an action that + +On line 5011: + in order to meet + their own cash needs, an action + that in turn might lead + +On line 5011: + order to meet their + own cash needs, an action that + in turn might lead to + +On line 5011: + to meet their own cash + needs, an action that in turn + might lead to widespread + +On line 5011: + meet their own cash needs, + an action that in turn might + lead to widespread fire + +On line 5011: + their own cash needs, an + action that in turn might lead + to widespread fire sales + +On line 5011: + needs, an action that + in turn might lead to widespread + fire sales of repo + +On line 5011: + in turn might lead to + widespread fire sales of repo + collateral and + +On line 5013: + to widespread fire sales + of repo collateral + and runs by lenders.18 The + +On line 5013: + by lenders.18 The PDCF + provided overnight funding, in + case money market + +On line 5013: + money market funds + and other epo lenders refused + to lend as they had + +On line 5013: + funds and other epo + lenders refused to lend as they + had in the case of + +On line 5013: + and other epo lenders + refused to lend as they had + in the case of Bear + +On line 5013: + epo lenders refused to + lend as they had in the case + of Bear Stearns, but it + +On line 5013: + lenders refused to lend + as they had in the case of + Bear Stearns, but it did + +On line 5013: + refused to lend as + they had in the case of Bear + Stearns, but it did not + +On line 5013: + to lend as they had + in the case of Bear Stearns, but + it did not protect + +On line 5013: + lend as they had in + the case of Bear Stearns, but it + did not protect against + +On line 5013: + they had in the case + of Bear Stearns, but it did not + protect against clearing + +On line 5013: + it did not protect + against clearing banks’ refusing + exposure to an + +On line 5013: + protect against clearing + banks’ refusing exposure + to an investment + +On line 5015: + exposure to an + investment bank during the + day. On July Fed + +On line 5015: + bank during the day. + On July Fed officials + circulated a + +On line 5015: + circulated a + plan, ultimately never + implemented, that + +On line 5015: + the two clearing banks + would become unwilling or + unable to unwind + +On line 5015: + unable to unwind + its trades.19 The plan would allow + the Fed to provide + +On line 5015: + to unwind its trades.19 + The plan would allow the Fed + to provide troubled + +On line 5015: + its trades.19 The plan would + allow the Fed to provide + troubled investment + +On line 5015: + The plan would allow + the Fed to provide troubled + investment banks, such + +On line 5015: + the Fed to provide + troubled investment banks, such + as Lehman Brothers, with + +On line 5015: + to provide troubled + investment banks, such as Lehman + Brothers, with billion + +On line 5015: + such as Lehman Brothers, + with billion in tri-party + repo financing + +On line 5015: + financing during + the day—essentially covering + for JP Morgan or + +On line 5015: + covering for JP + Morgan or BNY Mellon if + the two clearing banks + +On line 5015: + JP Morgan or BNY + Mellon if the two clearing + banks would not or could + +On line 5015: + or BNY Mellon if + the two clearing banks would not + or could not provide + +On line 5015: + BNY Mellon if the + two clearing banks would not or + could not provide that + +On line 5015: + or could not provide + that level of financing.20 + Fed officials made + +On line 5015: + could not provide that + level of financing.20 Fed + officials made a + +On line 5015: + of financing.20 Fed + officials made a case for + the proposal in + +On line 5015: + Fed officials made + a case for the proposal + in an internal + +On line 5015: + officials made a + case for the proposal in + an internal memo: + +On line 5015: + for the proposal + in an internal memo: "Should + a dealer lose the + +On line 5015: + in an internal + memo: "Should a dealer lose the + confidence of its + +On line 5015: + memo: "Should a dealer + lose the confidence of its + investors or clearing + +On line 5015: + a dealer lose the + confidence of its investors + or clearing bank, their + +On line 5015: + lose the confidence + of its investors or clearing + bank, their efforts to + +On line 5015: + the confidence of + its investors or clearing bank, + their efforts to pull + +On line 5015: + confidence of its + investors or clearing bank, their + efforts to pull away + +On line 5015: + their efforts to pull + away from providing credit + could be disastrous + +On line 5015: + efforts to pull away + from providing credit could + be disastrous for + +On line 5015: + providing credit + could be disastrous for the + firm and also cast + +On line 5015: + could be disastrous + for the firm and also cast + widespread doubt about the + +On line 5015: + also cast widespread + doubt about the instrument as + a nearly risk free, + +On line 5015: + widespread doubt about the + instrument as a nearly + risk free, liquid overnight + +On line 5017: + the instrument as + a nearly risk free, liquid + overnight investment."21 But + +On line 5017: + instrument as a + nearly risk free, liquid overnight + investment."21 But the + +On line 5017: + as a nearly risk + free, liquid overnight investment."21 + But the New York Fed’s + +On line 5017: + a nearly risk free, + liquid overnight investment."21 But + the New York Fed’s new + +On line 5017: + risk free, liquid overnight + investment."21 But the New York + Fed’s new plan shouldn’t + +On line 5017: + investment."21 But the + New York Fed’s new plan shouldn’t + be necessary as + +On line 5017: + New York Fed’s new plan + shouldn’t be necessary as + long as the PDCF + +On line 5017: + Fed’s new plan shouldn’t + be necessary as long as + the PDCF was there + +On line 5017: + new plan shouldn’t be + necessary as long as the + PDCF was there to + +On line 5017: + be necessary as + long as the PDCF was there + to back up the overnight + +On line 5017: + necessary as long + as the PDCF was there to + back up the overnight lenders, + +On line 5017: + as the PDCF was + there to back up the overnight lenders, + argued Patrick Parkinson, + +On line 5017: + PDCF was there to + back up the overnight lenders, argued + Patrick Parkinson, then deputy + +On line 5017: + there to back up the + overnight lenders, argued Patrick Parkinson, + then deputy director + +On line 5017: + to back up the overnight + lenders, argued Patrick Parkinson, then + deputy director of + +On line 5017: + back up the overnight lenders, + argued Patrick Parkinson, then deputy + director of the + +On line 5017: + overnight lenders, argued Patrick + Parkinson, then deputy director + of the Federal + +On line 5017: + argued Patrick Parkinson, + then deputy director of the + Federal Reserve + +On line 5017: + then deputy director + of the Federal Reserve + Board’s Division of + +On line 5017: + Federal Reserve + Board’s Division of Research + and Statistics. "We + +On line 5019: + Board’s Division of + Research and Statistics. "We + should tell [JP Morgan] + +On line 5019: + and Statistics. "We + should tell [JP Morgan] that with + the PDCF in place + +On line 5019: + with the PDCF in + place refusing to unwind + is unnecessary + +On line 5019: + the PDCF in place + refusing to unwind is + unnecessary and + +On line 5019: + is unnecessary + and would be unforgiveable," + he emailed Dudley and + +On line 5021: + be unforgiveable," + he emailed Dudley and others.22 + A week later, on + +On line 5021: + he emailed Dudley and + others.22 A week later, on + July Parkinson wrote + +On line 5021: + Dudley and others.22 + A week later, on July + Parkinson wrote to Fed + +On line 5021: + A week later, on + July Parkinson wrote to Fed + Governor Kevin Warsh + +On line 5021: + July Parkinson wrote + to Fed Governor Kevin Warsh + and Fed General + +On line 5021: + Parkinson wrote to Fed + Governor Kevin Warsh and Fed + General Counsel + +On line 5021: + to Fed Governor + Kevin Warsh and Fed General + Counsel Scott Alvarez + +On line 5021: + Governor Kevin Warsh + and Fed General Counsel + Scott Alvarez that JP + +On line 5021: + and Fed General + Counsel Scott Alvarez that JP + Morgan, because of + +On line 5021: + Counsel Scott Alvarez + that JP Morgan, because of + its clearing role, was + +On line 5023: + Morgan, because of + its clearing role, was "likely + to be the first to + +On line 5023: + of its clearing role, + was "likely to be the first + to realize that + +On line 5023: + its clearing role, was + "likely to be the first to + realize that the + +On line 5023: + role, was "likely to + be the first to realize + that the money funds + +On line 5023: + was "likely to be + the first to realize that + the money funds and + +On line 5023: + to realize that + the money funds and other + investors that provide + +On line 5023: + investors that provide + tri-party financing to + [Lehman Brothers] are pulling + +On line 5023: + to [Lehman Brothers] are + pulling back significantly." + Parkinson described the + +On line 5023: + in which a clearing + bank’s refusal to unwind would + lead to a widespread + +On line 5023: + which a clearing bank’s + refusal to unwind would lead + to a widespread fire + +On line 5023: + clearing bank’s refusal + to unwind would lead to a + widespread fire sale and + +On line 5023: + to unwind would lead + to a widespread fire sale and + market panic. "Fear + +On line 5023: + to a widespread fire + sale and market panic. "Fear + of these consequences + +On line 5023: + a widespread fire sale + and market panic. "Fear of + these consequences is, + +On line 5023: + widespread fire sale and + market panic. "Fear of these + consequences is, of + +On line 5025: + facilitated + Bear’s acquisition by JPMC," + he said.23 Still, it was + +On line 5025: + Bear’s acquisition + by JPMC," he said.23 Still, it was + possible that the + +On line 5025: + dissuade JP Morgan + from refusing to unwind + Lehman’s repos, Parkinson + +On line 5025: + from refusing to + unwind Lehman’s repos, Parkinson + said. Because a large + +On line 5025: + repos, Parkinson said. + Because a large portion of + Lehman’s collateral + +On line 5025: + Lehman’s collateral + was ineligible to + be funded by the + +On line 5025: + to be funded by + the PDCF, and because Lehman + could fail during the + +On line 5025: + be funded by the + PDCF, and because Lehman could + fail during the day + +On line 5025: + by the PDCF, and + because Lehman could fail during + the day (before the + +On line 5025: + PDCF, and because + Lehman could fail during the day + (before the repos + +On line 5025: + because Lehman could fail + during the day (before the + repos were settled), + +On line 5025: + could fail during the + day (before the repos were + settled), JP Morgan + +On line 5025: + (before the repos + were settled), JP Morgan still + faced significant + +On line 5025: + settled), JP Morgan + still faced significant risks. + Parkinson noted that + +On line 5025: + JP Morgan still faced + significant risks. Parkinson + noted that even if + +On line 5025: + faced significant + risks. Parkinson noted that even + if the Fed lent as + +On line 5025: + significant risks. + Parkinson noted that even if + the Fed lent as much + +On line 5025: + risks. Parkinson noted + that even if the Fed lent as + much as billion to + +On line 5025: + Parkinson noted that + even if the Fed lent as much + as billion to Lehman, + +On line 5025: + that even if the Fed + lent as much as billion to + Lehman, the sum might not + +On line 5025: + even if the Fed lent + as much as billion to Lehman, + the sum might not be + +On line 5025: + if the Fed lent as + much as billion to Lehman, the + sum might not be enough + +On line 5025: + the Fed lent as much + as billion to Lehman, the sum + might not be enough to + +On line 5025: + as much as billion + to Lehman, the sum might not be + enough to ensure the + +On line 5025: + much as billion to + Lehman, the sum might not be enough + to ensure the firm’s + +On line 5025: + to Lehman, the sum might + not be enough to ensure the + firm’s survival in the + +On line 5025: + sum might not be enough + to ensure the firm’s survival + in the absence of + +On line 5025: + might not be enough to + ensure the firm’s survival in + the absence of an + +On line 5025: + enough to ensure the + firm’s survival in the absence + of an acquirer: + +On line 5025: + to ensure the firm’s + survival in the absence of + an acquirer: if + +On line 5025: + the absence of an + acquirer: if the stigma + associated + +On line 5025: + counterparties to + stop providing funding to + Lehman, the company + +On line 5027: + providing funding + to Lehman, the company would + fail.24 THE FED AND THE + +On line 5027: + Lehman, the company + would fail.24 THE FED AND THE SEC: + "WEAK LIQUIDITY + +On line 5029: + would fail.24 THE FED AND + THE SEC: "WEAK LIQUIDITY + POSITION" Among the + +On line 5029: + POSITION" Among the + four remaining investment + banks, one key measure + +On line 5029: + one key measure of + liquidity risk was the + portion of total + +On line 5029: + liquidity risk + was the portion of total + liabilities + +On line 5029: + was the portion of + total liabilities + that the firms funded + +On line 5029: + portion of total + liabilities that the + firms funded through the + +On line 5029: + liabilities + that the firms funded through the + repo market: to + +On line 5031: + that the firms funded + through the repo market: to + for Lehman and Merrill + +On line 5031: + the firms funded through + the repo market: to for + Lehman and Merrill Lynch, + +On line 5031: + firms funded through the + repo market: to for Lehman + and Merrill Lynch, to + +On line 5031: + repo market: to + for Lehman and Merrill Lynch, to + for Morgan Stanley, + +On line 5031: + for Lehman and Merrill + Lynch, to for Morgan Stanley, + and about for Goldman + +On line 5031: + Lehman and Merrill Lynch, + to for Morgan Stanley, and + about for Goldman Sachs.25 + +On line 5031: + and about for Goldman + Sachs.25 Another metric was + the reliance on overnight + +On line 5031: + the reliance on overnight + repo (which mature in one + day) or open repo + +On line 5031: + on overnight repo (which + mature in one day) or open + repo (which can be + +On line 5031: + (which mature in one + day) or open repo (which can + be terminated + +On line 5031: + mature in one day) + or open repo (which can be + terminated at + +On line 5031: + day) or open repo + (which can be terminated + at any time). Despite + +On line 5031: + open repo (which can + be terminated at any + time). Despite efforts + +On line 5031: + repo (which can be + terminated at any time). + Despite efforts among + +On line 5031: + be terminated + at any time). Despite efforts + among the investment + +On line 5031: + terminated at + any time). Despite efforts among + the investment banks + +On line 5031: + at any time). Despite + efforts among the investment + banks to reduce the + +On line 5031: + time). Despite efforts + among the investment banks to + reduce the portion + +On line 5031: + investment banks to + reduce the portion of their + repo financing + +On line 5031: + reduce the portion + of their repo financing + that was overnight or open, + +On line 5031: + financing that was + overnight or open, the ratio of + overnight and open repo + +On line 5031: + that was overnight or open, + the ratio of overnight and open + repo funding to + +On line 5031: + open, the ratio of + overnight and open repo funding + to total repo + +On line 5031: + open repo funding + to total repo funding + still exceeded for + +On line 5031: + repo funding to + total repo funding still + exceeded for all + +On line 5031: + to total repo + funding still exceeded for + all but Goldman Sachs. + +On line 5031: + all but Goldman Sachs. + Comparing the period + between March and May + +On line 5031: + between March and May + to the period between + July and August, + +On line 5031: + to the period + between July and August, + Lehman’s percentage fell + +On line 5031: + between July and + August, Lehman’s percentage fell + MARCH TO AUGUST from + +On line 5031: + fell MARCH TO AUGUST + from to Merrill Lynch’s fell from + to Morgan Stanley’s + +On line 5031: + MARCH TO AUGUST from + to Merrill Lynch’s fell from to + Morgan Stanley’s fell + +On line 5033: + to Merrill Lynch’s fell + from to Morgan Stanley’s fell + from to and Goldman’s + +On line 5033: + Merrill Lynch’s fell from + to Morgan Stanley’s fell from + to and Goldman’s fell + +On line 5033: + to Morgan Stanley’s + fell from to and Goldman’s fell + from to Another + +On line 5033: + and Goldman’s fell from + to Another measure of + risk was the haircuts + +On line 5033: + Goldman’s fell from to + Another measure of risk + was the haircuts on + +On line 5033: + Another measure + of risk was the haircuts on + repo loans—that is, the + +On line 5033: + haircuts on repo + loans—that is, the amount of excess + collateral that + +On line 5033: + loans—that is, the amount of + excess collateral that + lenders demanded for + +On line 5033: + a given loan. Fed + officials kept tabs on the + haircuts demanded + +On line 5033: + officials kept tabs + on the haircuts demanded + of investment banks, + +On line 5033: + haircuts demanded + of investment banks, hedge funds, + and other repo + +On line 5033: + of investment banks, + hedge funds, and other repo + borrowers. As Fed + +On line 5033: + hedge funds, and other + repo borrowers. As Fed + analysts later + +On line 5035: + borrowers. As Fed + analysts later noted, + "With lenders worrying + +On line 5035: + later noted, "With + lenders worrying that they could + lose money on the + +On line 5035: + "With lenders worrying + that they could lose money on + the securities + +On line 5035: + lenders worrying that + they could lose money on the + securities they + +On line 5035: + could lose money on + the securities they held + as collateral, + +On line 5035: + as collateral, + haircuts increased—doubling for + some agency mortgage + +On line 5035: + significantly + even for borrowers with high + credit ratings and + +On line 5035: + even for borrowers + with high credit ratings and + on relatively + +On line 5035: + for borrowers with + high credit ratings and on + relatively safe + +On line 5035: + high credit ratings + and on relatively safe + collateral such + +On line 5037: + collateral such + as Treasury securities."27 + On the day of Bear’s + +On line 5037: + securities."27 On + the day of Bear’s demise, in an + effort to get a + +On line 5037: + of Bear’s demise, in an + effort to get a better + understanding of + +On line 5037: + an effort to get + a better understanding + of the investment + +On line 5037: + effort to get a + better understanding of + the investment banks, + +On line 5037: + understanding of + the investment banks, the New + York Fed and the SEC + +On line 5037: + of the investment + banks, the New York Fed and the + SEC sent teams to work + +On line 5037: + the investment banks, + the New York Fed and the SEC + sent teams to work on-site + +On line 5037: + investment banks, the + New York Fed and the SEC sent + teams to work on-site at + +On line 5037: + banks, the New York Fed + and the SEC sent teams to work + on-site at Lehman Brothers, + +On line 5037: + New York Fed and the + SEC sent teams to work on-site at + Lehman Brothers, Merrill + +On line 5037: + York Fed and the SEC + sent teams to work on-site at Lehman + Brothers, Merrill Lynch, + +On line 5037: + and the SEC sent teams + to work on-site at Lehman Brothers, + Merrill Lynch, Goldman + +On line 5037: + SEC sent teams to work + on-site at Lehman Brothers, Merrill + Lynch, Goldman Sachs, and + +On line 5037: + Lehman Brothers, Merrill + Lynch, Goldman Sachs, and Morgan + Stanley. According + +On line 5037: + and Morgan Stanley. + According to Erik Sirri, + director of the + +On line 5037: + According to Erik + Sirri, director of the + SEC’s Division of + +On line 5037: + Sirri, director + of the SEC’s Division of + Trading and Markets, + +On line 5039: + assets, funding, and + capital.28 Fed Chairman Ben + Bernanke would testify + +On line 5039: + Fed Chairman Ben Bernanke + would testify before a + House committee that + +On line 5039: + Chairman Ben Bernanke would + testify before a House + committee that the + +On line 5039: + testify before + a House committee that the + Fed’s primary role + +On line 5039: + a House committee + that the Fed’s primary role + at the investment + +On line 5039: + House committee that + the Fed’s primary role at + the investment banks + +On line 5039: + committee that the + Fed’s primary role at the + investment banks in + +On line 5039: + the Fed’s primary + role at the investment banks + in was not as a + +On line 5039: + banks in was not as + a regulator but as + a lender through the new + +On line 5039: + a regulator + but as a lender through the new + emergency lending + +On line 5039: + but as a lender through + the new emergency lending + facilities.29 Two + +On line 5039: + the new emergency + lending facilities.29 Two + questions guided the + +On line 5039: + analyses: First, was each + investment bank liquid—did + it have access to + +On line 5039: + each investment bank + liquid—did it have access + to the cash needed + +On line 5039: + it have access to + the cash needed to meet its + commitments1 Second, + +On line 5039: + the cash needed to + meet its commitments1 Second, + was it solvent—was + +On line 5039: + cash needed to meet + its commitments1 Second, was + it solvent—was its + +On line 5039: + needed to meet its + commitments1 Second, was it + solvent—was its net + +On line 5039: + meet its commitments1 + Second, was it solvent—was + its net equity + +On line 5039: + it solvent—was its + net equity (the value + of assets minus + +On line 5039: + solvent—was its net + equity (the value of + assets minus the + +On line 5041: + U.S. Treasury also + dispatched so-called SWAT teams to + the investment banks + +On line 5041: + dispatched so-called SWAT + teams to the investment banks + in the spring of The + +On line 5041: + so-called SWAT teams to + the investment banks in the + spring of The arrival + +On line 5041: + the investment banks + in the spring of The arrival + of officials from + +On line 5041: + investment banks in + the spring of The arrival of + officials from the + +On line 5041: + banks in the spring of + The arrival of officials + from the Treasury and + +On line 5041: + in the spring of The + arrival of officials from + the Treasury and the + +On line 5041: + Treasury and the Fed + created a full-time + on-site presence—something + +On line 5041: + SEC had never had. + Historically, the SEC’s + primary concern + +On line 5041: + Historically, + the SEC’s primary concern + with the investment + +On line 5041: + primary concern + with the investment banks had + been liquidity + +On line 5041: + with the investment + banks had been liquidity + risk, because these firms + +On line 5041: + the investment banks + had been liquidity risk, + because these firms were + +On line 5041: + because these firms were + entirely dependent on + the credit markets + +On line 5041: + firms were entirely + dependent on the credit + markets for funding.31 + +On line 5041: + the credit markets + for funding.31 The SEC already + required these firms to + +On line 5041: + markets for funding.31 + The SEC already required these + firms to implement + +On line 5041: + for funding.31 The SEC + already required these firms to + implement so-called + +On line 5041: + designed to ensure + that they had sufficient cash + available to sustain + +On line 5041: + to ensure that they + had sufficient cash available + to sustain themselves + +On line 5041: + ensure that they had + sufficient cash available to + sustain themselves on + +On line 5041: + had sufficient cash + available to sustain themselves + on a stand-alone basis + +On line 5041: + available to sustain + themselves on a stand-alone basis + for a minimum + +On line 5041: + to sustain themselves + on a stand-alone basis for a + minimum of one + +On line 5041: + themselves on a stand-alone + basis for a minimum + of one year without + +On line 5041: + on a stand-alone basis + for a minimum of one + year without access + +On line 5041: + a stand-alone basis for + a minimum of one year + without access to + +On line 5041: + a minimum of + one year without access to + unsecured funding + +On line 5041: + year without access + to unsecured funding and + without having to + +On line 5041: + unsecured funding + and without having to sell + a substantial amount + +On line 5041: + and without having + to sell a substantial amount + of assets. Before + +On line 5041: + without having to + sell a substantial amount of + assets. Before the + +On line 5041: + having to sell a + substantial amount of assets. + Before the run on + +On line 5041: + sell a substantial + amount of assets. Before the + run on Bear in the + +On line 5041: + substantial amount of + assets. Before the run on + Bear in the repo + +On line 5041: + the run on Bear in + the repo market, the SEC’s + liquidity stress + +On line 5041: + the repo market, + the SEC’s liquidity stress + scenarios—also + +On line 5041: + SEC’s liquidity + stress scenarios—also known + as stress tests—had not + +On line 5041: + known as stress tests—had + not taken account of the + possibility + +On line 5041: + not taken account + of the possibility + that a firm would lose + +On line 5041: + possibility + that a firm would lose access + to secured funding. + +On line 5041: + that a firm would lose + access to secured funding. + According to the + +On line 5041: + would lose access to + secured funding. According + to the SEC’s Sirri, + +On line 5041: + access to secured + funding. According to the + SEC’s Sirri, the SEC + +On line 5041: + funding. According + to the SEC’s Sirri, the SEC + never thought that a + +On line 5041: + to the SEC’s Sirri, + the SEC never thought that a + situation would + +On line 5041: + SEC never thought that + a situation would arise + where an investment + +On line 5041: + never thought that a + situation would arise where + an investment bank + +On line 5041: + a situation + would arise where an investment + bank couldn’t enter + +On line 5041: + an investment bank + couldn’t enter into a + repo transaction + +On line 5041: + by high-quality + collateral including + Treasuries. He told the + +On line 5041: + including Treasuries. + He told the FCIC that as the + financial crisis + +On line 5041: + Treasuries. He told the + FCIC that as the financial + crisis worsened, the + +On line 5041: + the FCIC that as the + financial crisis worsened, + the SEC began to + +On line 5041: + financial crisis + worsened, the SEC began to + see liquidity + +On line 5041: + see liquidity + and funding risks as the most + critical for the + +On line 5041: + and funding risks as + the most critical for the + investment banks, and + +On line 5041: + the most critical + for the investment banks, and + the SEC encouraged + +On line 5041: + most critical for + the investment banks, and the + SEC encouraged a + +On line 5041: + for the investment + banks, and the SEC encouraged + a reduction in + +On line 5041: + commercial paper + and an extension of the + maturities of + +On line 5043: + and an extension + of the maturities of + repo loans.32 The Fed + +On line 5043: + extension of the + maturities of repo + loans.32 The Fed and the + +On line 5043: + loans.32 The Fed and the + SEC collaborated in + developing two + +On line 5043: + developing two + new stress tests to determine + the investment banks’ + +On line 5043: + two new stress tests to + determine the investment + banks’ ability to + +On line 5043: + the investment banks’ + ability to withstand a + potential run or + +On line 5043: + potential run or + a systemwide disruption in + the repo market. + +On line 5043: + systemwide disruption + in the repo market. The + stress scenarios, called + +On line 5043: + the repo market. + The stress scenarios, called "Bear + Stearns" and "Bear Stearns Light," + +On line 5043: + repo market. The + stress scenarios, called "Bear Stearns" + and "Bear Stearns Light," were + +On line 5043: + stress scenarios, called + "Bear Stearns" and "Bear Stearns Light," were + developed jointly + +On line 5043: + "Bear Stearns" and "Bear Stearns + Light," were developed jointly + with the remaining + +On line 5043: + Light," were developed + jointly with the remaining + investment banks. In + +On line 5043: + with the remaining + investment banks. In May, Lehman, + for example, would + +On line 5043: + investment banks. In + May, Lehman, for example, would + be billion short of + +On line 5043: + banks. In May, Lehman, for + example, would be billion + short of cash in the + +On line 5043: + Lehman, for example, + would be billion short of cash + in the more stringent + +On line 5043: + for example, would + be billion short of cash in + the more stringent Bear + +On line 5043: + example, would be + billion short of cash in the + more stringent Bear Stearns + +On line 5043: + would be billion short + of cash in the more stringent + Bear Stearns scenario and + +On line 5043: + billion short of cash + in the more stringent Bear Stearns + scenario and billion + +On line 5043: + of cash in the more + stringent Bear Stearns scenario and + billion short under + +On line 5043: + in the more stringent + Bear Stearns scenario and billion + short under Bear Stearns + +On line 5043: + the more stringent Bear + Stearns scenario and billion short + under Bear Stearns Light.33 + +On line 5045: + The Fed conducted + another liquidity + stress analysis in + +On line 5045: + liquidity stress + analysis in June. While each + firm ran ifferent + +On line 5045: + analysis in June. + While each firm ran ifferent + scenarios that matched + +On line 5045: + June. While each firm ran + ifferent scenarios that + matched its risk profile, + +On line 5045: + between the tests. The + tests assumed that each firm would + lose of unsecured + +On line 5045: + each firm would lose of + unsecured funding and a + fraction of repo + +On line 5045: + lose of unsecured + funding and a fraction of + repo funding that + +On line 5045: + unsecured funding + and a fraction of repo + funding that would vary + +On line 5045: + and a fraction of + repo funding that would vary + with the quality + +On line 5045: + fraction of repo + funding that would vary with the + quality of its + +On line 5045: + funding that would vary + with the quality of its + collateral. The + +On line 5045: + with the quality + of its collateral. The + stress tests, under just + +On line 5045: + the quality of + its collateral. The stress + tests, under just one + +On line 5045: + Morgan Stanley were + relatively sound. Merrill + Lynch and Lehman Brothers + +On line 5045: + relatively sound. + Merrill Lynch and Lehman Brothers + failed: the two banks came + +On line 5045: + sound. Merrill Lynch and + Lehman Brothers failed: the two banks + came out billion and + +On line 5045: + and Lehman Brothers failed: + the two banks came out billion + and billion short of + +On line 5045: + Lehman Brothers failed: the + two banks came out billion and + billion short of cash, + +On line 5045: + the two banks came out + billion and billion short of + cash, respectively; + +On line 5045: + billion and billion + short of cash, respectively; + each had only of + +On line 5045: + each had only of + the liquidity it would + need under the stress + +On line 5047: + need under the stress + scenario.34 The Fed’s internal + report on the stress + +On line 5047: + stress scenario.34 The Fed’s + internal report on the + stress tests criticized + +On line 5047: + assets" and noted + that "Merrill’s liquidity + pool is low, a fact + +On line 5049: + fact [the company] + does not acknowledge." As for + Lehman Brothers, the Fed + +On line 5049: + does not acknowledge." + As for Lehman Brothers, the Fed + concluded that "Lehman’s + +On line 5049: + As for Lehman Brothers, + the Fed concluded that "Lehman’s + weak liquidity + +On line 5049: + weak liquidity + position is driven by + its relatively + +On line 5049: + exposure to overnight + [commercial paper], combined + with significant + +On line 5049: + [commercial paper], + combined with significant + overnight secured [repo] + +On line 5051: + paper], combined with + significant overnight secured + [repo] funding of + +On line 5051: + significant overnight + secured [repo] funding of + less liquid assets."35 + +On line 5051: + "less liquid assets" + included mortgage-related + securities—now + +On line 5051: + securities—now + devalued. Meanwhile, Lehman ran + stress tests of its own + +On line 5051: + devalued. Meanwhile, + Lehman ran stress tests of its own + and passed with billions + +On line 5051: + Meanwhile, Lehman ran stress + tests of its own and passed with + billions in "excess + +On line 5053: + ran stress tests of its + own and passed with billions in + "excess cash."36 Although + +On line 5053: + tests of its own and + passed with billions in "excess + cash."36 Although the SEC + +On line 5053: + of its own and passed + with billions in "excess cash."36 + Although the SEC and + +On line 5053: + and passed with billions + in "excess cash."36 Although the + SEC and the Fed worked + +On line 5053: + billions in "excess + cash."36 Although the SEC and the + Fed worked together + +On line 5053: + Although the SEC and + the Fed worked together on + the liquidity + +On line 5053: + Fed worked together + on the liquidity stress + tests, with equal access + +On line 5053: + worked together on + the liquidity stress tests, + with equal access to + +On line 5053: + together on the + liquidity stress tests, with + equal access to the + +On line 5053: + liquidity stress + tests, with equal access to the + data, each agency + +On line 5053: + tests, with equal access + to the data, each agency + has said that for months + +On line 5053: + equal access to the + data, each agency has said + that for months during + +On line 5053: + to the data, each + agency has said that for months + during the crisis, + +On line 5053: + agency has said that + for months during the crisis, + the other did not + +On line 5053: + that for months during + the crisis, the other did + not share its analyses + +On line 5053: + for months during the + crisis, the other did not + share its analyses and + +On line 5053: + told the bankruptcy + examiner that the SEC + had declined to share + +On line 5053: + examiner that + the SEC had declined to share + two horizontal + +On line 5053: + the SEC had declined + to share two horizontal + (cross-firm) reviews of + +On line 5053: + had declined to share + two horizontal (cross-firm) + reviews of the banks’ + +On line 5053: + reviews of the banks’ + liquidity positions + and exposures to + +On line 5053: + and exposures to + commercial real estate. + The SEC’s response was + +On line 5053: + commercial real + estate. The SEC’s response was + that the documents + +On line 5053: + The SEC’s response was + that the documents were in + "draft" form and had not + +On line 5053: + SEC’s response was that + the documents were in "draft" + form and had not been + +On line 5053: + "draft" form and had not + been reviewed or finalized. + Adding to the tension, + +On line 5053: + form and had not been + reviewed or finalized. Adding + to the tension, the + +On line 5053: + had not been reviewed + or finalized. Adding to the + tension, the Fed’s on-site + +On line 5053: + or finalized. Adding + to the tension, the Fed’s on-site + personnel believed + +On line 5053: + tension, the Fed’s on-site + personnel believed that the + SEC on-site personnel + +On line 5053: + or expertise to + adequately evaluate + the data.37 This lack + +On line 5053: + the data.37 This lack + of communication was + remedied only by + +On line 5053: + remedied only by + a formal memorandum + of understanding + +On line 5053: + understanding (MOU) + to govern information + sharing. According + +On line 5055: + former SEC Chairman + Christopher Cox, "One reason the + MOU was needed was + +On line 5055: + SEC Chairman Christopher + Cox, "One reason the MOU was + needed was that the + +On line 5055: + Cox, "One reason the + MOU was needed was that the + Fed was reluctant + +On line 5055: + "One reason the MOU + was needed was that the Fed + was reluctant to + +On line 5055: + reason the MOU was + needed was that the Fed was + reluctant to share + +On line 5055: + needed was that the + Fed was reluctant to share + supervisory + +On line 5055: + Fed was reluctant + to share supervisory + information with + +On line 5055: + supervisory + information with the SEC, + out of concern that + +On line 5055: + information with + the SEC, out of concern that + the investment banks + +On line 5055: + SEC, out of concern + that the investment banks would + not be forthcoming + +On line 5055: + out of concern that + the investment banks would not + be forthcoming with + +On line 5055: + that the investment + banks would not be forthcoming + with information + +On line 5055: + the investment banks + would not be forthcoming with + information if + +On line 5055: + be forthcoming with + information if they thought + they would be referred + +On line 5057: + if they thought they would + be referred to the SEC for + enforcement."38 The MOU + +On line 5057: + referred to the SEC + for enforcement."38 The MOU was + not executed + +On line 5057: + for enforcement."38 The + MOU was not executed + until July more + +On line 5059: + the collapse of Bear + Stearns. DERIVATIVES: "EARLY + STAGES OF ASSESSING + +On line 5061: + collapse of Bear Stearns. + DERIVATIVES: "EARLY STAGES + OF ASSESSING THE + +On line 5063: + OF ASSESSING THE + POTENTIAL SYSTEMIC RISK" The + Fed’s Parkinson advised + +On line 5063: + Fed’s Parkinson advised + colleagues in an internal + August email that the + +On line 5063: + advised colleagues in + an internal August email + that the systemic risks + +On line 5063: + in an internal + August email that the systemic + risks of the repo + +On line 5063: + August email that the + systemic risks of the repo + and derivatives + +On line 5063: + systemic risks of the + repo and derivatives + markets demanded + +On line 5063: + markets demanded + attention: "We have given + considerable thought + +On line 5063: + attention: "We have + given considerable thought + to what might be done + +On line 5063: + thought to what might be + done to avoid a fire sale of + tri-party repo + +On line 5063: + done to avoid a fire + sale of tri-party repo + collateral. (That + +On line 5063: + under existing + authority are not very + attractive—lots of risk + +On line 5063: + authority are + not very attractive—lots of risk + to Fed/taxpayer, + +On line 5063: + not very attractive—lots + of risk to Fed/taxpayer, + lots of moral hazard.) + +On line 5063: + very attractive—lots of + risk to Fed/taxpayer, lots + of moral hazard.) We + +On line 5063: + attractive—lots of risk + to Fed/taxpayer, lots of + moral hazard.) We still + +On line 5063: + to Fed/taxpayer, + lots of moral hazard.) We still + are at the early + +On line 5063: + Fed/taxpayer, lots + of moral hazard.) We still are + at the early stages + +On line 5063: + lots of moral hazard.) + We still are at the early + stages of assessing + +On line 5063: + of moral hazard.) We + still are at the early stages + of assessing the + +On line 5063: + the early stages of + assessing the potential + systemic risk from close-out + +On line 5063: + risk from close-out of OTC + derivatives transactions + by an investment + +On line 5065: + and identifying + potential mitigants."39 The + repo market was + +On line 5065: + The repo market + was huge, but as discussed in + earlier chapters, + +On line 5065: + market was huge, but + as discussed in earlier + chapters, it was dwarfed + +On line 5065: + but as discussed in + earlier chapters, it was + dwarfed by the global + +On line 5065: + dwarfed by the global + derivatives market. At + the end of June the + +On line 5065: + notional amount of + the over-the-counter derivatives + market was trillion + +On line 5065: + amount of the over-the-counter + derivatives market was + trillion and the gross + +On line 5067: + trillion (see figure + Adequate information + about the risks in this + +On line 5067: + figure Adequate + information about the risks + in this market was + +On line 5067: + risks in this market + was not available to market + participants or + +On line 5067: + participants or + government regulators + like the Federal + +On line 5067: + Federal Reserve. + Because the market had been + deregulated by + +On line 5067: + were not subject to + reporting or disclosure + requirements and no + +On line 5067: + agency had oversight + responsibility. While + the Office of the + +On line 5067: + the Comptroller of + the Currency did report + information on + +On line 5067: + of the Currency + did report information + on derivatives + +On line 5067: + information on + derivatives positions + from commercial banks + +On line 5067: + on derivatives + positions from commercial + banks and bank holding + +On line 5067: + from commercial banks + and bank holding companies, + it did not collect + +On line 5067: + commercial banks and + bank holding companies, it + did not collect such + +On line 5067: + it did not collect + such information from the + large investment banks + +On line 5067: + did not collect such + information from the large + investment banks and + +On line 5067: + investment banks and + insurance companies like + AIG, which were also + +On line 5067: + banks and insurance + companies like AIG, which were + also major OTC + +On line 5067: + AIG, which were also + major OTC derivatives + dealers. During the + +On line 5067: + were also major + OTC derivatives dealers. + During the crisis + +On line 5067: + crisis the lack of + such basic information + created heightened + +On line 5069: + relationships that + derivatives created + among the small number + +On line 5069: + among the small number + of large financial firms that + act as dealers in + +On line 5069: + the small number of + large financial firms that act + as dealers in the + +On line 5069: + small number of large + financial firms that act as + dealers in the OTC + +On line 5069: + large financial firms + that act as dealers in the + OTC derivatives + +On line 5069: + as dealers in the + OTC derivatives business. + A derivatives + +On line 5069: + OTC derivatives + business. A derivatives + contract creates a + +On line 5069: + parties, such that one + party may have to make large + and unexpected + +On line 5069: + may have to make large + and unexpected payments + to the other based + +On line 5069: + have to make large and + unexpected payments to + the other based on + +On line 5069: + and unexpected + payments to the other based + on sudden price or + +On line 5071: + to the other based + on sudden price or rate changes + or loan defaults. If + +On line 5071: + the other based on + sudden price or rate changes or + loan defaults. If a + +On line 5071: + based on sudden price + or rate changes or loan defaults. + If a party is + +On line 5071: + sudden price or rate + changes or loan defaults. If a + party is unable + +On line 5071: + price or rate changes or + loan defaults. If a party + is unable to make + +On line 5071: + or rate changes or loan + defaults. If a party is + unable to make those + +On line 5071: + changes or loan defaults. + If a party is unable + to make those payments + +On line 5071: + or loan defaults. If + a party is unable to + make those payments when + +On line 5071: + loan defaults. If a + party is unable to make + those payments when they + +On line 5071: + If a party is + unable to make those payments + when they become due, + +On line 5071: + is unable to make + those payments when they become + due, that failure may + +On line 5071: + unable to make those + payments when they become due, + that failure may ause + +On line 5071: + those payments when they + become due, that failure may + ause significant + +On line 5071: + may have offsetting + obligations to third parties + and depend on prompt + +On line 5071: + obligations to third + parties and depend on prompt + payment. Indeed, most + +On line 5071: + parties and depend + on prompt payment. Indeed, most + OTC derivatives + +On line 5071: + payment. Indeed, most + OTC derivatives dealers + hedge their contracts with + +On line 5071: + OTC derivatives + dealers hedge their contracts with + offsetting contracts; + +On line 5071: + hedge their contracts with + offsetting contracts; thus, if + they are owed payments + +On line 5071: + offsetting contracts; + thus, if they are owed payments + on one contract, they + +On line 5071: + are owed payments on + one contract, they most likely + owe similar amounts + +On line 5071: + owed payments on one + contract, they most likely owe + similar amounts on + +On line 5071: + one contract, they most + likely owe similar amounts + on an offsetting + +On line 5071: + offsetting contract, + creating the potential + for a series of + +On line 5071: + for a series of + losses or defaults. Since these + contracts numbered in + +On line 5071: + these contracts numbered + in the millions and allowed + a party to have + +On line 5071: + have virtually + unlimited leverage, the + possibility + +On line 5071: + of sudden large and + devastating losses in + this market could pose + +On line 5073: + The Counterparty + Risk Management Policy + Group, led by former + +On line 5073: + Counterparty Risk + Management Policy Group, + led by former New + +On line 5073: + by former New York + Fed President E. Gerald + Corrigan and + +On line 5073: + York Fed President + E. Gerald Corrigan + and consisting of + +On line 5073: + Fed President E. + Gerald Corrigan and + consisting of the + +On line 5073: + Corrigan and + consisting of the major + securities firms, + +On line 5073: + and consisting of + the major securities + firms, had warned that a + +On line 5073: + warned that a backlog + in paperwork confirming + derivatives trades + +On line 5073: + corporate defaults + occur.40 With urging from New + York Fed President + +On line 5073: + urging from New York + Fed President Timothy + Geithner, by + +On line 5073: + Geithner, by + September major market + participants had + +On line 5073: + September major + market participants had + significantly + +On line 5073: + participants had + significantly reduced + the backlog and had + +On line 5073: + significantly + reduced the backlog and had + ended the practice + +On line 5073: + reduced the backlog + and had ended the practice + of assigning trades + +On line 5073: + ended the practice + of assigning trades to third + parties without the + +On line 5073: + of assigning trades + to third parties without the + prior consent of + +On line 5075: + third parties without + the prior consent of their + counterparties.41 Large + +On line 5075: + counterparties.41 Large + derivatives positions, + and the resulting + +On line 5075: + and the resulting + counterparty credit and + operational risks, + +On line 5075: + and operational + risks, were concentrated in + a very few firms. Among + +On line 5075: + operational risks, + were concentrated in a + very few firms. Among U.S. + +On line 5075: + concentrated in + a very few firms. Among U.S. bank + holding companies, + +On line 5075: + Among U.S. bank holding + companies, the following + institutions held + +On line 5075: + institutions held + enormous OTC derivatives + positions as of + +On line 5077: + positions as of + June trillion in notional + amount for JP Morgan, + +On line 5077: + as of June trillion + in notional amount for JP + Morgan, trillion for + +On line 5077: + in notional amount + for JP Morgan, trillion for + Bank of America, + +On line 5077: + America, trillion + for Citigroup, trillion for + Wachovia, and trillion + +On line 5077: + Citigroup, trillion + for Wachovia, and trillion for + HSBC. Goldman Sachs + +On line 5077: + Wachovia, and trillion + for HSBC. Goldman Sachs and + Morgan Stanley, which + +On line 5077: + for HSBC. Goldman + Sachs and Morgan Stanley, which + began to report + +On line 5077: + companies in held + and trillion, respectively, + in notional amount + +On line 5077: + in notional amount + of OTC derivatives in + the first quarter of + +On line 5079: + notional amount of + OTC derivatives in the + first quarter of In + +On line 5079: + of In the current + and potential exposure + to derivatives + +On line 5079: + In the current and + potential exposure to + derivatives at + +On line 5081: + derivatives at + the top five U.S. bank holding + companies was on + +On line 5081: + at the top five U.S. + bank holding companies was + on average three + +On line 5081: + the top five U.S. bank + holding companies was on + average three times + +On line 5081: + companies was on + average three times greater than + the capital they + +On line 5081: + on average three + times greater than the capital + they had on hand to + +On line 5081: + average three times + greater than the capital they + had on hand to meet + +On line 5081: + was even higher at + the investment banks. Goldman + Sachs, just after it + +On line 5081: + even higher at the + investment banks. Goldman Sachs, + just after it changed + +On line 5081: + at the investment + banks. Goldman Sachs, just after + it changed its charter, + +On line 5081: + the investment banks. + Goldman Sachs, just after it + changed its charter, had + +On line 5081: + banks. Goldman Sachs, just + after it changed its charter, + had derivatives + +On line 5081: + after it changed its + charter, had derivatives + exposure more than + +On line 5081: + concentrations of + positions in the hands of + the largest bank holding + +On line 5081: + in the hands of the + largest bank holding companies + and investment banks + +On line 5081: + the hands of the largest + bank holding companies and + investment banks posed + +On line 5081: + the largest bank holding + companies and investment + banks posed risks for the + +On line 5081: + holding companies + and investment banks posed risks + for the financial + +On line 5081: + and investment banks + posed risks for the financial + system because of + +On line 5081: + system because of + their interconnections with + other financial + +On line 5083: + By the summer of + outstanding amounts of some types + of derivatives + +On line 5083: + amounts of some types of + derivatives had begun + to decline sharply. As + +On line 5083: + of derivatives + had begun to decline sharply. + As we will see, over + +On line 5083: + derivatives had + begun to decline sharply. As + we will see, over the + +On line 5083: + begun to decline + sharply. As we will see, over the + course of the second + +On line 5083: + to decline sharply. As + we will see, over the course of + the second half of + +On line 5083: + decline sharply. As we + will see, over the course of the + second half of the + +On line 5083: + will see, over the course + of the second half of the + OTC derivatives + +On line 5083: + second half of the + OTC derivatives market + would undergo an + +On line 5085: + problems for hedging + and price discovery. The Fed + was uneasy in part + +On line 5085: + Fed was uneasy in + part because derivatives + counterparties had + +On line 5085: + counterparties had + played an important role in + the run on Bear Stearns. + +On line 5085: + played an important + role in the run on Bear Stearns. + The novations by + +On line 5085: + by derivatives + counterparties to assign + their positions away + +On line 5085: + counterparties to + assign their positions away + from Bear—and the rumored + +On line 5085: + positions away from + Bear—and the rumored refusal by + Goldman to accept + +On line 5085: + rumored refusal by + Goldman to accept Bear as + a derivatives + +On line 5085: + Goldman to accept + Bear as a derivatives + counterparty—were + +On line 5085: + a derivatives + counterparty—were still a + fresh memory across + +On line 5085: + counterparty—were + still a fresh memory across + Wall Street. Chris Mewbourne, + +On line 5085: + Wall Street. Chris Mewbourne, + a portfolio manager + at PIMCO, told the + +On line 5085: + Street. Chris Mewbourne, a + portfolio manager at + PIMCO, told the FCIC + +On line 5085: + told the FCIC that the + ability to novate ceased + to exist and this + +On line 5085: + that the ability + to novate ceased to exist + and this was a key + +On line 5085: + the ability to + novate ceased to exist and + this was a key event + +On line 5085: + to novate ceased to + exist and this was a key + event in the demise of + +On line 5087: + to exist and this + was a key event in the demise + of Bear Stearns.43 Credit + +On line 5087: + was a key event in + the demise of Bear Stearns.43 Credit + derivatives in + +On line 5087: + in the demise of Bear + Stearns.43 Credit derivatives + in particular + +On line 5087: + the demise of Bear Stearns.43 + Credit derivatives in + particular were + +On line 5087: + in particular + were a serious source of + worry. Of greatest + +On line 5087: + were a serious + source of worry. Of greatest + interest were the + +On line 5087: + source of worry. Of + greatest interest were the + sellers of credit + +On line 5087: + worry. Of greatest + interest were the sellers + of credit default + +On line 5087: + of credit default + swaps: the monoline insurers + and AIG, which back-MARCH TO + +On line 5087: + monoline insurers + and AIG, which back-MARCH TO AUGUST + stopped the market in + +On line 5087: + insurers and AIG, + which back-MARCH TO AUGUST stopped the + market in CDOs. In + +On line 5087: + and AIG, which back-MARCH TO + AUGUST stopped the market in + CDOs. In addition, + +On line 5087: + everyone, because + they guaranteed hundreds of + billions of dollars + +On line 5087: + guaranteed hundreds + of billions of dollars in + structured products. As + +On line 5087: + dollars in structured + products. As we have seen, when + their credit ratings + +On line 5087: + products. As we have + seen, when their credit ratings + were downgraded, the + +On line 5087: + seen, when their credit + ratings were downgraded, the + value of all the + +On line 5087: + their credit ratings + were downgraded, the value + of all the assets + +On line 5087: + credit ratings were + downgraded, the value of + all the assets they + +On line 5087: + of all the assets + they guaranteed, including + municipal bonds + +On line 5087: + municipal bonds + and other securities, + necessarily + +On line 5087: + the conservative + institutional investors + in those markets. In + +On line 5087: + institutional + investors in those markets. In + the vernacular + +On line 5087: + in those markets. In + the vernacular of Wall + Street, this outcome is + +On line 5087: + those markets. In the + vernacular of Wall Street, + this outcome is the + +On line 5087: + the vernacular + of Wall Street, this outcome is + the knock-on effect; + +On line 5087: + vernacular of + Wall Street, this outcome is the + knock-on effect; in + +On line 5087: + Wall Street, this outcome + is the knock-on effect; in + the vernacular + +On line 5087: + Street, this outcome is + the knock-on effect; in the + vernacular of + +On line 5087: + the knock-on effect; + in the vernacular of + Main Street, the domino + +On line 5087: + the domino effect; + in the vernacular of + the Fed, systemic risk. + +On line 5089: + domino effect; in + the vernacular of the + Fed, systemic risk. BANKS: + +On line 5091: + Fed, systemic risk. BANKS: + "THE MARKETS WERE REALLY, + REALLY DICEY" By + +On line 5091: + risk. BANKS: "THE MARKETS + WERE REALLY, REALLY + DICEY" By the fall of + +On line 5091: + BANKS: "THE MARKETS WERE + REALLY, REALLY DICEY" + By the fall of signs + +On line 5091: + REALLY DICEY" By + the fall of signs of strain were + beginning to emerge + +On line 5091: + the fall of signs of + strain were beginning to emerge + among the commercial + +On line 5091: + fall of signs of strain + were beginning to emerge among + the commercial banks. + +On line 5091: + of signs of strain were + beginning to emerge among the + commercial banks. In + +On line 5091: + were beginning to + emerge among the commercial banks. + In the fourth quarter + +On line 5091: + beginning to emerge + among the commercial banks. In + the fourth quarter of + +On line 5091: + In the fourth quarter + of commercial banks’ earnings + declined to a 16- + +On line 5093: + of commercial banks’ + earnings declined to a 16- + year low, driven by + +On line 5093: + earnings declined to + a 16- year low, driven by + write-downs on mortgage-backed + +On line 5093: + driven by write-downs + on mortgage-backed securities + and CDOs and by record + +On line 5093: + write-downs on mortgage-backed + securities and CDOs and + by record provisions + +On line 5093: + as borrowers had + increasing difficulty + meeting their mortgage + +On line 5093: + their mortgage payments—and + even greater difficulty was + anticipated. + +On line 5093: + greater difficulty + was anticipated. The + net charge-off rate—the ratio + +On line 5093: + difficulty was + anticipated. The net + charge-off rate—the ratio of + +On line 5093: + anticipated. + The net charge-off rate—the ratio of + failed loans to total + +On line 5093: + rate—the ratio of failed + loans to total loans—rose to + its highest level + +On line 5093: + ratio of failed loans + to total loans—rose to its + highest level since + +On line 5095: + to total loans—rose + to its highest level since + when the economy + +On line 5095: + total loans—rose to + its highest level since when + the economy was + +On line 5095: + its highest level + since when the economy was + coming out of the + +On line 5095: + when the economy + was coming out of the post-9/11 + recession. Earnings + +On line 5095: + recession. Earnings + continued to decline in + 2008—at first, more for big + +On line 5095: + Earnings continued + to decline in 2008—at first, more + for big banks than small + +On line 5095: + to decline in 2008—at + first, more for big banks than small + banks, in part because + +On line 5095: + decline in 2008—at first, + more for big banks than small banks, + in part because of + +On line 5095: + in 2008—at first, more for + big banks than small banks, in part + because of write-downs + +On line 5095: + more for big banks than + small banks, in part because of + write-downs related + +On line 5095: + big banks than small banks, + in part because of write-downs + related to their + +On line 5095: + securities, CDOs, + and collateralized loan + obligations. Declines + +On line 5095: + obligations. Declines + in market values required + banks to write down the + +On line 5095: + Declines in market + values required banks to write + down the value of + +On line 5095: + values required banks + to write down the value of + their holdings of these + +On line 5095: + banks to write down the + value of their holdings of + these securities. + +On line 5095: + these securities. + As previously noted, + several of the + +On line 5095: + As previously + noted, several of the + largest banks had also + +On line 5095: + noted, several + of the largest banks had also + provided support + +On line 5095: + activities, such + as money market funds and + commercial paper + +On line 5097: + assets onto their + balance sheets— assets that were + losing value fast. + +On line 5097: + balance sheets— assets + that were losing value fast. + Supervisors had + +On line 5097: + begun to downgrade + the ratings of many smaller + banks in response to + +On line 5097: + the ratings of many + smaller banks in response to + their high exposures + +On line 5097: + their high exposures + in residential real + estate construction, + +On line 5097: + in residential + real estate construction, + an industry that + +On line 5097: + went out of business + as financing dried up in + mid-2007. By the end of + +On line 5097: + out of business as + financing dried up in mid-2007. + By the end of the + +On line 5097: + financing dried up + in mid-2007. By the end of the + FDIC had banks, mainly + +On line 5097: + dried up in mid-2007. By + the end of the FDIC had banks, + mainly smaller ones, + +On line 5097: + in mid-2007. By the end + of the FDIC had banks, mainly + smaller ones, on its + +On line 5099: + By the end of the + FDIC had banks, mainly smaller + ones, on its "problem + +On line 5099: + the end of the FDIC + had banks, mainly smaller ones, + on its "problem list"; + +On line 5099: + end of the FDIC had + banks, mainly smaller ones, on + its "problem list"; their + +On line 5099: + on its "problem list"; + their combined assets totaled + billion.44 (When large banks + +On line 5099: + billion.44 (When large banks + started to be downgraded, + in early they stayed + +On line 5099: + large banks started to + be downgraded, in early + they stayed off the FDIC’s + +On line 5099: + to be downgraded, + in early they stayed off the + FDIC’s problem list, as + +On line 5099: + in early they stayed + off the FDIC’s problem list, as + supervisors rarely + +On line 5099: + FDIC’s problem list, as + supervisors rarely give the + largest institutions + +On line 5099: + supervisors rarely + give the largest institutions + the lowest ratings.)45 + +On line 5101: + institutions the + lowest ratings.)45 The market + for nonconforming + +On line 5101: + mortgages that did not + meet Fannie Mae’s or Freddie + Mac’s underwriting + +On line 5101: + Mac’s underwriting + or mortgage size guidelines) had + also vanished in + +On line 5101: + mortgage size guidelines) + had also vanished in the + fourth quarter of Not + +On line 5101: + guidelines) had also + vanished in the fourth quarter + of Not only did + +On line 5101: + vanished in the fourth + quarter of Not only did + these nonconforming + +On line 5101: + of Not only did + these nonconforming loans prove + harder to sell, but + +On line 5101: + these nonconforming + loans prove harder to sell, but + they also proved less + +On line 5101: + loans prove harder to + sell, but they also proved less + attractive to keep + +On line 5101: + sell, but they also + proved less attractive to keep + on balance sheet, as + +On line 5101: + but they also proved + less attractive to keep on + balance sheet, as house + +On line 5101: + proved less attractive + to keep on balance sheet, as + house price forecasts looked + +On line 5101: + to keep on balance + sheet, as house price forecasts looked + increasingly grim. + +On line 5101: + house price forecasts looked + increasingly grim. Already, + house prices had fallen + +On line 5101: + grim. Already, house prices + had fallen about for the year, + depending on the + +On line 5101: + house prices had fallen + about for the year, depending + on the measure. In + +On line 5101: + prices had fallen about + for the year, depending on + the measure. In the + +On line 5101: + had fallen about for + the year, depending on the + measure. In the first + +On line 5101: + the year, depending + on the measure. In the first + quarter of real + +On line 5101: + depending on the + measure. In the first quarter + of real estate + +On line 5101: + on the measure. In + the first quarter of real + estate loans in the + +On line 5101: + measure. In the first + quarter of real estate + loans in the banking + +On line 5101: + In the first quarter + of real estate loans in + the banking sector + +On line 5101: + the first quarter of + real estate loans in the + banking sector showed + +On line 5101: + smallest quarterly + increase since IndyMac reported + a decline in loan + +On line 5101: + IndyMac reported a + decline in loan production + for that quarter from + +On line 5101: + in loan production + for that quarter from a year + earlier, because + +On line 5101: + for that quarter from + a year earlier, because + it had stopped making + +On line 5101: + a year earlier, + because it had stopped making + nonconforming loans. + +On line 5101: + thrift, discontinued + all remaining lending through + its subprime mortgage + +On line 5103: + mortgage channel in + April But those actions could not + reduce the subprime + +On line 5103: + channel in April But + those actions could not reduce + the subprime and Alt-A + +On line 5103: + April But those actions + could not reduce the subprime + and Alt-A exposure + +On line 5103: + But those actions could + not reduce the subprime and + Alt-A exposure that + +On line 5103: + those actions could not + reduce the subprime and Alt-A + exposure that these + +On line 5103: + could not reduce the + subprime and Alt-A exposure + that these arge banks and + +On line 5103: + the subprime and Alt-A + exposure that these arge banks + and thrifts already had. + +On line 5103: + exposure that these + arge banks and thrifts already had. + And on these assets, + +On line 5103: + that these arge banks and + thrifts already had. And on these + assets, the markdowns + +On line 5103: + banks and thrifts already + had. And on these assets, the + markdowns continued + +On line 5105: + the banks to raise new + capital. In January + Citigroup secured + +On line 5105: + raise new capital. + In January Citigroup + secured a total + +On line 5105: + Citigroup secured + a total of billion in + capital from Kuwait, + +On line 5105: + secured a total + of billion in capital + from Kuwait, Sin-gapore, + +On line 5105: + in capital from + Kuwait, Sin-gapore, Saudi Prince + Alwaleed bin Talal, + +On line 5105: + In April, Washington + Mutual raised billion from + an investor group led + +On line 5105: + from an investor group + led by the buyout firm TPG + Capital. Wachovia + +On line 5105: + Capital. Wachovia + raised billion in capital + at the turn of the + +On line 5105: + Wachovia raised billion + in capital at the turn + of the year and then + +On line 5105: + in capital at + the turn of the year and then + an additional + +On line 5105: + of the year and then + an additional billion + in April Despite the + +On line 5105: + an additional + billion in April Despite the + capital raises, + +On line 5105: + in April Despite the + capital raises, though, the + downgrades by banking + +On line 5107: + significant part + of this period, starting + with August Roger Cole, + +On line 5107: + of this period, + starting with August Roger Cole, + then-director of the + +On line 5107: + Cole, then-director of + the Division of Banking + Supervision and + +On line 5107: + of the Division + of Banking Supervision + and Regulation + +On line 5107: + the Division of + Banking Supervision and + Regulation at + +On line 5107: + and Regulation + at the Federal Reserve + Board, told the FCIC.47 The + +On line 5107: + Regulation at + the Federal Reserve Board, + told the FCIC.47 The same + +On line 5107: + at the Federal + Reserve Board, told the FCIC.47 The + same was true for the + +On line 5107: + Federal Reserve + Board, told the FCIC.47 The same was + true for the thrifts. Michael + +On line 5107: + Board, told the FCIC.47 The + same was true for the thrifts. Michael + Solomon, a managing + +On line 5107: + same was true for the + thrifts. Michael Solomon, a managing + director in risk + +On line 5107: + for the thrifts. Michael Solomon, + a managing director + in risk management + +On line 5107: + director in risk + management manager in + the Office of Thrift + +On line 5107: + in the Office of + Thrift Supervision (OTS), told + the FCIC, "It was hard + +On line 5107: + the Office of Thrift + Supervision (OTS), told the + FCIC, "It was hard for + +On line 5107: + particularly + small, midsized thrifts—to keep up + with [how quickly the + +On line 5107: + up with [how quickly + the ratings downgrades occurred + during the crisis] + +On line 5107: + quickly the ratings + downgrades occurred during the + crisis] and change their + +On line 5107: + the ratings downgrades + occurred during the crisis] + and change their business + +On line 5107: + occurred during the + crisis] and change their business + models and not get + +On line 5107: + the crisis] and change + their business models and not + get stuck without the + +On line 5107: + crisis] and change their + business models and not get + stuck without the chair + +On line 5107: + their business models + and not get stuck without the + chair when the music + +On line 5107: + business models and + not get stuck without the chair + when the music stopped + +On line 5107: + models and not get + stuck without the chair when the + music stopped They got + +On line 5107: + get stuck without the + chair when the music stopped They + got caught. The rating + +On line 5107: + without the chair when + the music stopped They got caught. + The rating downgrades + +On line 5107: + chair when the music + stopped They got caught. The rating + downgrades started and + +On line 5107: + the music stopped They + got caught. The rating downgrades + started and by the + +On line 5107: + stopped They got caught. The + rating downgrades started and + by the time the thrift + +On line 5107: + got caught. The rating + downgrades started and by the + time the thrift was able + +On line 5107: + The rating downgrades + started and by the time the + thrift was able to do + +On line 5107: + downgrades started and + by the time the thrift was able + to do something about + +On line 5107: + started and by the + time the thrift was able to do + something about it, it + +On line 5107: + and by the time the + thrift was able to do something + about it, it was too + +On line 5107: + by the time the thrift + was able to do something about + it, it was too late + +On line 5107: + time the thrift was able + to do something about it, it + was too late Business + +On line 5107: + thrift was able to do + something about it, it was too + late Business models + +On line 5107: + to do something about + it, it was too late Business + models can’t keep up + +On line 5107: + something about it, it + was too late Business models + can’t keep up with what + +On line 5107: + about it, it was too + late Business models can’t keep + up with what we saw + +On line 5107: + it, it was too late + Business models can’t keep up + with what we saw in + +On line 5109: + was too late Business + models can’t keep up with what + we saw in As the + +On line 5109: + Business models can’t + keep up with what we saw in + As the commercial + +On line 5109: + models can’t keep up + with what we saw in As the + commercial banks’ health + +On line 5109: + keep up with what we + saw in As the commercial + banks’ health worsened in + +On line 5109: + we saw in As the + commercial banks’ health worsened + in examiners + +On line 5109: + commercial banks’ health + worsened in examiners + downgraded even large + +On line 5109: + large institutions + that had maintained favorable + ratings and required + +On line 5109: + These ratings downgrades + and enforcement actions came + late in the day—often + +On line 5109: + ratings downgrades and + enforcement actions came late + in the day—often just + +On line 5109: + enforcement actions + came late in the day—often just + as firms were on the + +On line 5109: + in the day—often just + as firms were on the verge of + failure. In cases + +On line 5109: + day—often just as firms + were on the verge of failure. + In cases that the + +On line 5109: + investigated, + regulators either did + not identify the + +On line 5109: + not identify the + problems early enough or did + not act forcefully + +On line 5109: + problems early enough + or did not act forcefully + enough to compel the + +On line 5109: + enough or did not act + forcefully enough to compel + the necessary changes. + +On line 5111: + act forcefully enough + to compel the necessary + changes. Citigroup: "Time + +On line 5111: + forcefully enough to + compel the necessary changes. + Citigroup: "Time to + +On line 5111: + enough to compel the + necessary changes. Citigroup: + "Time to come up with + +On line 5111: + the necessary changes. + Citigroup: "Time to come up + with a new playbook" + +On line 5113: + to come up with a + new playbook" For Citigroup, + supervisors at + +On line 5113: + a new playbook" For + Citigroup, supervisors + at the New York Fed, + +On line 5113: + the New York Fed, who + examined the bank holding + company, and at + +On line 5113: + Fed, who examined + the bank holding company, + and at the Office + +On line 5113: + who examined the + bank holding company, and + at the Office of + +On line 5113: + examined the bank + holding company, and at + the Office of the + +On line 5113: + holding company, + and at the Office of the + Comptroller of the + +On line 5113: + the Comptroller of + the Currency, who oversaw + the national bank + +On line 5113: + the Currency, who + oversaw the national bank + subsidiary, finally + +On line 5113: + subsidiary, finally + downgraded the company + and its main bank to + +On line 5113: + its main bank to "less + than satisfactory" in + April 2008—five months after + +On line 5113: + main bank to "less than + satisfactory" in April + 2008—five months after the + +On line 5113: + satisfactory" + in April 2008—five months after the + firm’s announcement in + +On line 5113: + firm’s announcement in + November of billions of + dollars in write-downs + +On line 5113: + billions of dollars + in write-downs related to + its mortgage-related + +On line 5113: + related to its + mortgage-related holdings. The + supervisors put + +On line 5113: + its mortgage-related + holdings. The supervisors + put the company + +On line 5113: + supervisors put + the company under new + enforcement actions + +On line 5113: + company under + new enforcement actions in + May and June. Only + +On line 5113: + enforcement actions + in May and June. Only a + year earlier, both + +On line 5113: + May and June. Only + a year earlier, both the + Fed and the OCC had + +On line 5113: + Fed and the OCC had + upgraded the company, + after lifting all + +On line 5113: + after lifting all + remaining restrictions and + enforcement actions + +On line 5113: + actions related + to complex transactions that + it had structured for + +On line 5113: + transactions that it + had structured for Enron and + to the actions of + +On line 5113: + structured for Enron + and to the actions of its + subprime subsidiary CitiFinancial, + +On line 5113: + for Enron and to + the actions of its subprime + subsidiary CitiFinancial, discussed + +On line 5113: + the actions of its + subprime subsidiary CitiFinancial, discussed + in an earlier + +On line 5113: + subsidiary CitiFinancial, discussed + in an earlier chapter. + "The risk management + +On line 5113: + in an earlier + chapter. "The risk management + assessment for is + +On line 5113: + assessment for is + reflective of a control + environment where + +On line 5113: + is reflective of + a control environment + where the risks facing + +On line 5113: + environment where + the risks facing Citigroup + continue to be + +On line 5113: + where the risks facing + Citigroup continue to + be managed in a + +On line 5113: + in its annual + inspection report on April + had noted. "During + +On line 5113: + had noted. "During + all formal restrictions and + enforcement actions + +On line 5113: + "During all formal + restrictions and enforcement + actions between the + +On line 5113: + were lifted. Board and + senior management remain + actively engaged + +On line 5115: + actively engaged + in improving relevant + processes."49 But the + +On line 5115: + supervisors. In + November MARCH TO AUGUST + the New York Fed led + +On line 5115: + MARCH TO AUGUST the + New York Fed led a team of + international + +On line 5115: + New York Fed led a + team of international + supervisors, the + +On line 5115: + international + supervisors, the Senior + Supervisors Group, + +On line 5115: + supervisors, the + Senior Supervisors Group, + in evaluating + +On line 5115: + Supervisors Group, + in evaluating of the + largest firms to assess + +On line 5115: + largest firms to assess + lessons learned from the financial + crisis up to that + +On line 5115: + to assess lessons learned + from the financial crisis + up to that point. Much + +On line 5115: + assess lessons learned from + the financial crisis up + to that point. Much of + +On line 5115: + financial crisis + up to that point. Much of the + toughest language was + +On line 5117: + that point. Much of the + toughest language was reserved + for Citigroup. "The + +On line 5117: + the toughest language + was reserved for Citigroup. + "The firm did not have + +On line 5117: + toughest language was + reserved for Citigroup. "The + firm did not have an + +On line 5117: + have an adequate, + firm-wide consolidated + understanding of + +On line 5117: + management. "Stress tests + were not designed for this type + of extreme market + +On line 5117: + were not designed for + this type of extreme market + event. Management had + +On line 5117: + this type of extreme + market event. Management had + believed that CDOs and + +On line 5117: + of extreme market + event. Management had believed + that CDOs and leveraged + +On line 5117: + extreme market event. + Management had believed that + CDOs and leveraged loans + +On line 5117: + that CDOs and leveraged + loans would be syndicated, + and that the credit + +On line 5117: + CDOs and leveraged loans + would be syndicated, and + that the credit risk + +On line 5117: + and leveraged loans would + be syndicated, and that + the credit risk in + +On line 5117: + be syndicated, + and that the credit risk in + super senior AAA + +On line 5117: + that the credit risk + in super senior AAA CDOs + was negligible."50 + +On line 5119: + the credit risk in + super senior AAA CDOs was + negligible."50 In + +On line 5119: + was negligible."50 + In retrospect, Citigroup + had two key problems: + +On line 5119: + negligible."50 In + retrospect, Citigroup had + two key problems: a + +On line 5119: + risks and a lack of + proper infrastructure and + internal controls + +On line 5119: + controls with respect + to the creation of CDOs. The + OCC appears to have + +On line 5119: + to the creation of + CDOs. The OCC appears to have + identified some of + +On line 5119: + The OCC appears to + have identified some of these + issues as early + +On line 5119: + some of these issues + as early as but did not + effectively act + +On line 5119: + as early as but + did not effectively act + to rectify them. + +On line 5121: + early as but did + not effectively act to + rectify them. In + +On line 5121: + not effectively + act to rectify them. In + particular, the + +On line 5121: + act to rectify + them. In particular, the + OCC assessed both the + +On line 5121: + OCC assessed both the + liquidity puts and the + super-senior tranches + +On line 5121: + super-senior tranches + as part of its reviews of + the bank’s compliance + +On line 5121: + part of its reviews + of the bank’s compliance with + the post-Enron enforcement + +On line 5121: + its reviews of the + bank’s compliance with the post-Enron + enforcement action, + +On line 5121: + action, but it did + not examine the risks of + these exposures. As + +On line 5121: + did not examine + the risks of these exposures. + As for the issues + +On line 5121: + not examine the + risks of these exposures. As + for the issues it + +On line 5121: + examine the risks + of these exposures. As for + the issues it did + +On line 5121: + of these exposures. + As for the issues it did + spot, the OCC failed to + +On line 5121: + these exposures. As + for the issues it did spot, + the OCC failed to take + +On line 5121: + As for the issues + it did spot, the OCC failed to + take forceful steps to + +On line 5121: + it did spot, the OCC + failed to take forceful steps to + require mandatory + +On line 5121: + failed to take forceful + steps to require mandatory + corrective action, + +On line 5121: + assurances in that + the executives would strive + to meet the OCC’s goals + +On line 5121: + the executives + would strive to meet the OCC’s goals + for improving risk + +On line 5123: + goals for improving + risk management. In contrast, + documents obtained + +On line 5123: + risk management. In + contrast, documents obtained + by the FCIC from the + +On line 5123: + contrast, documents + obtained by the FCIC from the + New York Fed give no + +On line 5123: + obtained by the FCIC + from the New York Fed give no + indication that + +On line 5123: + the New York Fed give + no indication that its + examination + +On line 5123: + examination + staff had any independent + knowledge of those two + +On line 5123: + Fed’s supervision + of Citigroup, conducted + by examiners + +On line 5123: + supervision of + Citigroup, conducted by + examiners from + +On line 5123: + Banks (the December + Operations Review of + the New York Fed, which + +On line 5123: + of the New York Fed, + which covered the previous + four years), concluded: + +On line 5123: + the New York Fed, which + covered the previous four + years), concluded: The + +On line 5123: + four years), concluded: + The supervision program + for Citigroup has + +On line 5123: + years), concluded: The + supervision program for + Citigroup has been + +On line 5123: + Citigroup has been + less than effective. Although + the dedicated + +On line 5123: + less than effective. + Although the dedicated + supervisory + +On line 5123: + the dedicated + supervisory team is + well qualified and + +On line 5123: + supervisory + team is well qualified and + generally has + +On line 5123: + sound knowledge of the + organization, there have + been significant + +On line 5123: + organization, + there have been significant + weaknesses in the + +On line 5123: + the execution + of the supervisory + program. The team has + +On line 5123: + supervisory + program. The team has not been + proactive in making + +On line 5123: + firm, as evidenced + by the double downgrades in + the firm’s financial + +On line 5123: + the firm’s financial + component and related + subcomponents at + +On line 5123: + subcomponents at + year-end Additionally, the + supervisory + +On line 5123: + program has lacked the + appropriate level of + focus on the firm’s + +On line 5123: + the appropriate + level of focus on the + firm’s risk oversight and + +On line 5123: + level of focus + on the firm’s risk oversight and + internal audit + +On line 5123: + focus on the firm’s + risk oversight and internal + audit functions. As + +On line 5123: + firm’s risk oversight and + internal audit functions. + As a result, there + +On line 5123: + a result, there is + currently significant + work to be done in + +On line 5123: + there is currently + significant work to be + done in both of these + +On line 5123: + significant work + to be done in both of these + areas. Moreover, the + +On line 5123: + work to be done in + both of these areas. Moreover, + the team has lacked a + +On line 5123: + done in both of these + areas. Moreover, the team has + lacked a disciplined + +On line 5123: + areas. Moreover, the + team has lacked a disciplined + and proactive approach + +On line 5125: + issues.51 Timothy + Geithner, secretary + of the Treasury and + +On line 5125: + of the Treasury and + former president of the + Federal Reserve + +On line 5125: + president of the + Federal Reserve Bank of + New York, reflected + +On line 5125: + Federal Reserve + Bank of New York, reflected + on the Fed’s oversight + +On line 5125: + reflected on the + Fed’s oversight of Citigroup, + telling the Commission, + +On line 5125: + of Citigroup, telling + the Commission, "I do not + think we did enough as + +On line 5125: + Citigroup, telling the + Commission, "I do not think + we did enough as an + +On line 5125: + the Commission, "I + do not think we did enough as + an institution + +On line 5125: + Commission, "I do + not think we did enough as an + institution with + +On line 5125: + not think we did enough + as an institution with + the authority + +On line 5125: + think we did enough as + an institution with the + authority we + +On line 5125: + an institution + with the authority we + had to help contain + +On line 5125: + institution with + the authority we had + to help contain the + +On line 5125: + authority we + had to help contain the risks + that ultimately + +On line 5125: + help contain the risks + that ultimately emerged in + that institution."52 + +On line 5127: + contain the risks that + ultimately emerged in that + institution."52 In + +On line 5127: + that ultimately + emerged in that institution."52 + In January an + +On line 5127: + ultimately emerged + in that institution."52 In + January an OCC + +On line 5127: + institution."52 In + January an OCC review + of the breakdown in + +On line 5127: + In January an + OCC review of the breakdown + in the CDO business + +On line 5127: + OCC review of the + breakdown in the CDO business + noted that the risk + +On line 5127: + of the breakdown in + the CDO business noted that + the risk in the unit + +On line 5127: + the breakdown in the + CDO business noted that the + risk in the unit had + +On line 5127: + breakdown in the CDO + business noted that the risk + in the unit had grown + +On line 5127: + in the CDO business + noted that the risk in the + unit had grown rapidly + +On line 5127: + business noted that + the risk in the unit had grown + rapidly since after + +On line 5127: + noted that the risk + in the unit had grown rapidly + since after the OCC’s + +On line 5127: + risk in the unit had + grown rapidly since after the + OCC’s and Fed’s ifting + +On line 5127: + in the unit had grown + rapidly since after the OCC’s + and Fed’s ifting of + +On line 5127: + rapidly since after + the OCC’s and Fed’s ifting of + supervisory + +On line 5127: + and Fed’s ifting of + supervisory agreements + associated + +On line 5127: + various control + problems at Citigroup. In + April the Fed and OCC + +On line 5127: + control problems at + Citigroup. In April the Fed + and OCC downgraded + +On line 5127: + Citigroup. In April + the Fed and OCC downgraded + their overall ratings + +On line 5127: + and OCC downgraded + their overall ratings of the + company and its + +On line 5127: + their overall ratings + of the company and its + largest bank subsidiary from + +On line 5127: + of the company + and its largest bank subsidiary from + (satisfactory) + +On line 5127: + satisfactory), + reflecting weaknesses in + risk management that + +On line 5127: + in risk management + that were now apparent to + the supervisors. + +On line 5129: + risk management that + were now apparent to the + supervisors. Both + +On line 5129: + now apparent to + the supervisors. Both Fed + and OCC officials + +On line 5129: + the supervisors. + Both Fed and OCC officials + cited the Gramm-Leach-Bliley Act + +On line 5129: + and OCC officials + cited the Gramm-Leach-Bliley Act of as + an obstacle that + +On line 5129: + cited the Gramm-Leach-Bliley Act + of as an obstacle that + prevented each from + +On line 5129: + Gramm-Leach-Bliley Act of as an + obstacle that prevented + each from obtaining + +On line 5129: + that prevented each + from obtaining a complete + understanding of + +On line 5129: + each from obtaining + a complete understanding + of the risks assumed + +On line 5129: + from obtaining a + complete understanding of + the risks assumed by + +On line 5129: + of the risks assumed + by large financial firms such + as Citigroup. The + +On line 5129: + the risks assumed by + large financial firms such as + Citigroup. The act + +On line 5129: + financial firms such + as Citigroup. The act made + it more difficult— + +On line 5131: + it more difficult— + though not impossible—for + regulators to + +On line 5131: + direct purview into + other areas of a large + firm. Citigroup, for + +On line 5131: + other areas of + a large firm. Citigroup, for + example, had many + +On line 5133: + from the Fed, OCC, SEC, + OTS, and state agencies. In May + and June Citigroup + +On line 5133: + Fed, OCC, SEC, OTS, and + state agencies. In May and June + Citigroup entered + +On line 5133: + Citigroup entered + into memoranda of + understanding with + +On line 5133: + memoranda of + understanding with both the + New York Fed and OCC + +On line 5133: + of understanding + with both the New York Fed and + OCC to resolve the + +On line 5133: + understanding with + both the New York Fed and OCC + to resolve the risk + +On line 5133: + York Fed and OCC to + resolve the risk management + weaknesses that the + +On line 5133: + OCC to resolve the + risk management weaknesses + that the events of had + +On line 5133: + to resolve the risk + management weaknesses that + the events of had laid + +On line 5133: + the risk management + weaknesses that the events of + had laid bare. In the + +On line 5133: + weaknesses that the + events of had laid bare. In the + ensuing months, Fed + +On line 5133: + events of had laid bare. + In the ensuing months, Fed + and OCC officials + +On line 5133: + of had laid bare. In + the ensuing months, Fed and + OCC officials said, + +On line 5133: + had laid bare. In the + ensuing months, Fed and OCC + officials said, they + +On line 5133: + the ensuing months, + Fed and OCC officials said, + they were satisfied + +On line 5133: + ensuing months, Fed + and OCC officials said, they + were satisfied with + +On line 5133: + compliance with their + recommendations. Indeed, + in speaking to the + +On line 5133: + recommendations. + Indeed, in speaking to the + FCIC, Steve Manzari, the + +On line 5133: + Manzari, the senior + relationship manager + for Citigroup at + +On line 5133: + York Fed from April to + September complimented + Citigroup on its + +On line 5133: + April to September + complimented Citigroup + on its assertiveness + +On line 5133: + management, raising + capital from investors in + late and putting in place + +On line 5133: + raising capital + from investors in late and putting + in place a number + +On line 5133: + late and putting in place + a number of much needed + "internal fixes." + +On line 5133: + in place a number + of much needed "internal + fixes." However, + +On line 5133: + a number of much + needed "internal fixes." + However, Manzari + +On line 5133: + needed "internal + fixes." However, Manzari + went on, "Citi was trapped + +On line 5133: + "internal fixes." + However, Manzari went on, + "Citi was trapped in what + +On line 5133: + on, "Citi was trapped in + what was a pretty vicious + systemic event," and for + +On line 5133: + what was a pretty + vicious systemic event," and for + regulators "it + +On line 5133: + vicious systemic event," + and for regulators "it + was time to come up + +On line 5133: + systemic event," and for + regulators "it was time + to come up with a + +On line 5135: + regulators "it + was time to come up with a + new playbook."53 Wachovia: + +On line 5135: + come up with a new + playbook."53 Wachovia: "The Golden + West acquisition + +On line 5135: + playbook."53 Wachovia: "The + Golden West acquisition + was a mistake" At + +On line 5135: + Wachovia: "The Golden + West acquisition was a + mistake" At Wachovia, + +On line 5135: + West acquisition + was a mistake" At Wachovia, + which was supervised + +On line 5135: + acquisition was + a mistake" At Wachovia, which + was supervised by + +On line 5135: + was a mistake" At + Wachovia, which was supervised + by the OCC as well + +On line 5135: + mistake" At Wachovia, + which was supervised by the + OCC as well as the + +On line 5135: + At Wachovia, which was + supervised by the OCC as + well as the OTS and + +On line 5135: + was supervised by + the OCC as well as the OTS + and the Federal + +On line 5135: + as well as the OTS + and the Federal Reserve, + a end-of-year report showed + +On line 5135: + well as the OTS and + the Federal Reserve, a + end-of-year report showed that + +On line 5135: + and the Federal + Reserve, a end-of-year report showed + that credit losses + +On line 5135: + a end-of-year report showed + that credit losses in its + subsidiary Golden West’s + +On line 5135: + that credit losses + in its subsidiary Golden West’s + portfolio of "Pick-a-Pay" + +On line 5135: + subsidiary Golden West’s + portfolio of "Pick-a-Pay" adjustable-rate + mortgages, or option + +On line 5135: + portfolio of "Pick-a-Pay" + adjustable-rate mortgages, or option + ARMs, were expected + +On line 5135: + adjustable-rate mortgages, or + option ARMs, were expected + to rise to about of + +On line 5135: + or option ARMs, were + expected to rise to about + of the portfolio + +On line 5135: + expected to rise + to about of the portfolio + for in losses in + +On line 5135: + rise to about of the + portfolio for in losses + in this portfolio + +On line 5135: + portfolio for in + losses in this portfolio + had been less than It + +On line 5135: + in losses in this + portfolio had been less than + It would soon become + +On line 5135: + in this portfolio + had been less than It would soon + become clear that the + +On line 5135: + portfolio had been + less than It would soon become + clear that the higher + +On line 5135: + had been less than It + would soon become clear that the + higher estimate + +On line 5137: + less than It would soon + become clear that the higher + estimate for was + +On line 5137: + would soon become clear + that the higher estimate + for was not high enough. + +On line 5137: + soon become clear that + the higher estimate for + was not high enough. The + +On line 5137: + clear that the higher + estimate for was not high + enough. The company + +On line 5137: + for was not high enough. + The company would hike its + estimate of the + +On line 5137: + The company would + hike its estimate of the + eventual losses + +On line 5137: + hike its estimate + of the eventual losses + on the portfolio + +On line 5137: + its estimate of + the eventual losses on + the portfolio to + +On line 5137: + estimate of the + eventual losses on the + portfolio to by + +On line 5137: + of the eventual + losses on the portfolio + to by June and to% + +On line 5139: + to by June and to% + by September. Facing these + and other growing + +On line 5141: + concerns, Wachovia raised + additional capital. + Then, in April, Wachovia + +On line 5141: + capital. Then, in + April, Wachovia announced a loss + of million for the + +On line 5141: + Then, in April, Wachovia + announced a loss of million + for the first three months + +On line 5141: + April, Wachovia announced + a loss of million for the + first three months of the + +On line 5141: + Wachovia announced a + loss of million for the first + three months of the year. + +On line 5141: + a loss of million + for the first three months of the + year. Depositors + +On line 5141: + for the first three months + of the year. Depositors + withdrew about billion + +On line 5141: + first three months of the + year. Depositors withdrew + about billion in the + +On line 5141: + year. Depositors + withdrew about billion in the + following weeks, and + +On line 5141: + terms, increasing rates, + and reducing loan amounts.54 By + June, according to + +On line 5141: + rates, and reducing + loan amounts.54 By June, according + to Angus McBryde, then + +On line 5141: + management had launched + a liquidity crisis + management plan in + +On line 5141: + a liquidity + crisis management plan in + anticipation + +On line 5141: + more adverse market + reaction to second-quarter + losses that would be + +On line 5141: + market reaction + to second-quarter losses that + would be announced in + +On line 5143: + losses that would be + announced in July.55 On June + Wachovia’s board ousted + +On line 5143: + that would be announced + in July.55 On June Wachovia’s + board ousted CEO Ken + +On line 5143: + in July.55 On June + Wachovia’s board ousted CEO Ken + Thompson after he + +On line 5143: + Wachovia’s board ousted + CEO Ken Thompson after he + had spent years at the + +On line 5143: + board ousted CEO Ken + Thompson after he had spent + years at the bank, of + +On line 5143: + Ken Thompson after + he had spent years at the bank, + of them at its helm.56 + +On line 5143: + Thompson after he + had spent years at the bank, of + them at its helm.56 At + +On line 5143: + after he had spent + years at the bank, of them at + its helm.56 At the end + +On line 5143: + he had spent years at + the bank, of them at its helm.56 + At the end of the + +On line 5143: + had spent years at the + bank, of them at its helm.56 At + the end of the month, + +On line 5143: + spent years at the bank, + of them at its helm.56 At the + end of the month, the + +On line 5143: + years at the bank, of + them at its helm.56 At the end + of the month, the bank + +On line 5143: + the bank, of them at + its helm.56 At the end of the + month, the bank announced + +On line 5143: + bank, of them at its + helm.56 At the end of the month, + the bank announced that + +On line 5143: + of them at its helm.56 + At the end of the month, the + bank announced that it + +On line 5143: + them at its helm.56 At + the end of the month, the bank + announced that it would + +On line 5143: + the end of the month, + the bank announced that it would + stop originating + +On line 5143: + announced that it would + stop originating Golden + West’s Pick-a-Pay products and + +On line 5143: + stop originating + Golden West’s Pick-a-Pay products and + would MARCH TO AUGUST + +On line 5143: + West’s Pick-a-Pay products and + would MARCH TO AUGUST waive all + fees and prepayment + +On line 5143: + products and would MARCH + TO AUGUST waive all fees and + prepayment penalties + +On line 5143: + TO AUGUST waive all + fees and prepayment penalties + associated + +On line 5143: + fees and prepayment + penalties associated + with them. On July, + +On line 5143: + prepayment penalties + associated with them. + On July, Wachovia + +On line 5143: + Wachovia reported + an billion second-quarter loss. + The new CEO, Robert Steel, + +On line 5143: + Steel, most recently + an undersecretary of + the treasury, announced + +On line 5143: + most recently an + undersecretary of the + treasury, announced a + +On line 5143: + undersecretary + of the treasury, announced a + plan to improve the + +On line 5143: + plan to improve the + bank’s financial condition: + raise capital, cut + +On line 5143: + to improve the bank’s + financial condition: raise + capital, cut the + +On line 5143: + raise capital, cut + the stock dividend, and lay + off to of the staff. + +On line 5145: + capital, cut the + stock dividend, and lay off + to of the staff. The + +On line 5145: + the stock dividend, + and lay off to of the staff. + The rating agencies + +On line 5145: + stock dividend, and + lay off to of the staff. The + rating agencies and + +On line 5145: + and lay off to of + the staff. The rating agencies + and supervisors + +On line 5145: + The rating agencies + and supervisors ignored + those reassurances. + +On line 5145: + rating agencies and + supervisors ignored those + reassurances. On + +On line 5145: + and supervisors + ignored those reassurances. + On the same day as + +On line 5145: + the same day as the + announcement, S&P downgraded + the bank, and the Fed, + +On line 5145: + as the announcement, + S&P downgraded the bank, and + the Fed, after years + +On line 5145: + the announcement, S&P + downgraded the bank, and the + Fed, after years of + +On line 5145: + downgraded the bank, + and the Fed, after years of + "satisfactory" + +On line 5145: + and the Fed, after + years of "satisfactory" + ratings, downgraded + +On line 5145: + Fed, after years of + "satisfactory" ratings, + downgraded Wachovia + +On line 5145: + showed losses that could + wipe out the recently raised + capital: losses + +On line 5145: + out the recently + raised capital: losses alone + could exceed billion, + +On line 5145: + the recently raised + capital: losses alone could + exceed billion, an + +On line 5145: + capital: losses + alone could exceed billion, an + amount that could cause a + +On line 5145: + exceed billion, an + amount that could cause a further + ratings downgrade.57 The + +On line 5145: + an amount that could cause + a further ratings downgrade.57 + The Fed directed + +On line 5145: + directed Wachovia + to reevaluate and update + its capital plans + +On line 5145: + up to the summer + meltdown, the Fed now declared + that many of Wachovia’s + +On line 5145: + the summer meltdown, + the Fed now declared that many + of Wachovia’s problems + +On line 5145: + summer meltdown, the + Fed now declared that many of + Wachovia’s problems were + +On line 5145: + meltdown, the Fed now + declared that many of Wachovia’s + problems were "long-term in + +On line 5145: + the Fed now declared + that many of Wachovia’s problems + were "long-term in nature + +On line 5145: + Fed now declared that + many of Wachovia’s problems were + "long-term in nature and + +On line 5145: + that many of Wachovia’s + problems were "long-term in nature + and result[ed] from + +On line 5145: + problems were "long-term in + nature and result[ed] from + delayed investment + +On line 5145: + delayed investment + decisions and a desire + to have business lines + +On line 5147: + and a desire to + have business lines operate + autonomously."58 The Fed + +On line 5147: + criticized the board + and senior management for + "an environment + +On line 5147: + senior management + for "an environment with + inconsistent and + +On line 5147: + of all risk-taking + activities, including + deficiencies in + +On line 5147: + in stress testing" and + "little accountability + for errors." Wachovia + +On line 5147: + management had not + completely understood the + level of risk across + +On line 5147: + in certain nonbank + investments, and management + had delayed fixing + +On line 5147: + questioned investment + decisions.59 Nonetheless, the + Fed concluded that + +On line 5147: + market disruption, + management had minimized + exposure to overnight + +On line 5149: + exposure to overnight + funding markets. On August + the OCC downgraded + +On line 5149: + markets. On August + the OCC downgraded Wachovia + Bank and assessed its + +On line 5149: + On August the OCC + downgraded Wachovia Bank and + assessed its overall + +On line 5149: + the OCC downgraded + Wachovia Bank and assessed its + overall risk profile + +On line 5149: + downgraded Wachovia + Bank and assessed its overall + risk profile as "high." + +On line 5149: + Bank and assessed its + overall risk profile as "high." + The OCC noted many + +On line 5149: + assessed its overall + risk profile as "high." The OCC + noted many of the + +On line 5149: + overall risk profile + as "high." The OCC noted many + of the same issues + +On line 5149: + risk profile as "high." + The OCC noted many of the + same issues as the + +On line 5149: + profile as "high." The + OCC noted many of the same + issues as the Fed, + +On line 5149: + issues as the Fed, + and added particularly + strong remarks about the + +On line 5149: + strong remarks about the + acquisition of Golden + West, identifying + +On line 5149: + West, identifying + that mortgage portfolio and + associated + +On line 5149: + foreclosures as the + heart of Wachovia’s problem. The + OCC noted that the + +On line 5149: + of Wachovia’s problem. + The OCC noted that the board + had "acknowledged that + +On line 5149: + Wachovia’s problem. The + OCC noted that the board had + "acknowledged that the + +On line 5151: + "acknowledged that the + Golden West acquisition + was a mistake."60 The + +On line 5151: + West acquisition + was a mistake."60 The OCC wrote + that the market was + +On line 5151: + mistake."60 The OCC wrote + that the market was focused + on the company’s + +On line 5151: + The OCC wrote that the + market was focused on the + company’s weakened + +On line 5151: + that the market was + focused on the company’s + weakened condition + +On line 5151: + market was focused + on the company’s weakened + condition and that + +On line 5151: + on the company’s + weakened condition and that + some large fund providers had + +On line 5151: + company’s weakened + condition and that some large + fund providers had already + +On line 5151: + weakened condition + and that some large fund providers had + already limited + +On line 5151: + and that some large fund + providers had already limited + their exposure to + +On line 5151: + fund providers had already + limited their exposure + to Wachovia. Like the + +On line 5151: + the Fed, however, + the OCC concluded that the + bank’s liquidity + +On line 5151: + Fed, however, the + OCC concluded that the bank’s + liquidity was + +On line 5151: + OCC concluded that + the bank’s liquidity was + adequate, unless + +On line 5151: + bank’s liquidity + was adequate, unless events + undermined market + +On line 5151: + undermined market + confidence.61 And, like the Fed, + the OCC approved of + +On line 5151: + confidence.61 And, like + the Fed, the OCC approved of + the new management + +On line 5151: + Fed, the OCC approved + of the new management and + a new, more hands-on + +On line 5151: + OCC approved of the + new management and a new, + more hands-on oversight + +On line 5151: + approved of the new + management and a new, more + hands-on oversight role + +On line 5151: + new management and + a new, more hands-on oversight + role for the board of + +On line 5153: + hands-on oversight role + for the board of directors. + Yet Wachovia’s problems + +On line 5153: + Yet Wachovia’s problems + would continue, and in the + fall regulators + +On line 5153: + Wachovia’s problems would + continue, and in the fall + regulators would + +On line 5153: + would continue, and + in the fall regulators + would scramble to find + +On line 5153: + continue, and in + the fall regulators would + scramble to find a + +On line 5153: + regulators would + scramble to find a buyer + for the troubled bank. + +On line 5155: + persistent lack of + progress" Washington Mutual, + often called WaMu, was + +On line 5155: + of progress" Washington + Mutual, often called WaMu, + was the largest thrift in + +On line 5155: + Mutual, often + called WaMu, was the largest thrift in + the country, with over + +On line 5155: + often called WaMu, was + the largest thrift in the country, + with over billion in + +On line 5155: + called WaMu, was the largest + thrift in the country, with over + billion in assets + +On line 5155: + was the largest thrift in + the country, with over billion + in assets at the + +On line 5155: + the largest thrift in the + country, with over billion in + assets at the end + +On line 5155: + thrift in the country, + with over billion in assets + at the end of At + +On line 5155: + in the country, with + over billion in assets at + the end of At the + +On line 5155: + the country, with over + billion in assets at the + end of At the time, + +On line 5155: + with over billion in + assets at the end of At + the time, billion of + +On line 5155: + billion in assets + at the end of At the time, + billion of the home + +On line 5155: + in assets at the + end of At the time, billion + of the home loans on + +On line 5155: + assets at the end + of At the time, billion of + the home loans on its + +On line 5155: + at the end of At + the time, billion of the home + loans on its balance + +On line 5155: + the end of At the + time, billion of the home loans + on its balance sheet + +On line 5155: + end of At the time, + billion of the home loans on + its balance sheet were + +On line 5155: + the time, billion of + the home loans on its balance + sheet were option ARMs, + +On line 5155: + time, billion of the + home loans on its balance sheet + were option ARMs, two + +On line 5155: + billion of the home + loans on its balance sheet were + option ARMs, two times + +On line 5155: + loans on its balance + sheet were option ARMs, two times + its capital and + +On line 5155: + option ARMs, two times + its capital and reserves, + with oncentrated + +On line 5155: + in California. + The reason WaMu liked option + ARMs was simple: in + +On line 5155: + California. The + reason WaMu liked option ARMs + was simple: in in + +On line 5155: + The reason WaMu liked + option ARMs was simple: in + in combination + +On line 5155: + was simple: in in + combination with other + nontraditional + +On line 5155: + as subprime loans, they + had generated returns + up to times those on + +On line 5155: + subprime loans, they had + generated returns up + to times those on GSE + +On line 5155: + to times those on GSE + mortgage–backed securities.62 + But that was then. WaMu + +On line 5155: + on GSE mortgage–backed + securities.62 But that was + then. WaMu was forced to + +On line 5155: + securities.62 But + that was then. WaMu was forced to + write off billion for + +On line 5155: + But that was then. WaMu + was forced to write off billion + for the fourth quarter + +On line 5155: + that was then. WaMu was + forced to write off billion for + the fourth quarter of + +On line 5155: + was then. WaMu was forced + to write off billion for the + fourth quarter of and + +On line 5155: + was forced to write off + billion for the fourth quarter + of and another + +On line 5155: + to write off billion + for the fourth quarter of and + another billion + +On line 5155: + billion for the fourth + quarter of and another + billion in the first + +On line 5155: + for the fourth quarter + of and another billion + in the first quarter + +On line 5155: + the fourth quarter of + and another billion in + the first quarter of + +On line 5155: + in the first quarter + of mostly related to + its portfolio of + +On line 5157: + related to its + portfolio of option ARMs. + In response to these + +On line 5157: + to its portfolio + of option ARMs. In response + to these losses, the + +On line 5157: + ARMs. In response to + these losses, the Office of + Thrift Supervision, + +On line 5157: + In response to these + losses, the Office of Thrift + Supervision, WaMu’s + +On line 5157: + Supervision, WaMu’s + regulator, requested + that the thrift address + +On line 5157: + address concerns about + asset quality, earnings, + and liquidity— + +On line 5159: + asset quality, + earnings, and liquidity— + issues that the OTS + +On line 5159: + quality, earnings, + and liquidity— issues + that the OTS had raised + +On line 5159: + and liquidity— + issues that the OTS had raised + in the past but that + +On line 5159: + that the OTS had raised + in the past but that had not + been reflected in + +On line 5159: + in the past but that + had not been reflected in + supervisory + +On line 5159: + been reflected in + supervisory ratings. + "It has been hard for + +On line 5159: + supervisory + ratings. "It has been hard for + us to justify + +On line 5159: + ratings. "It has been + hard for us to justify + doing much more than + +On line 5159: + has been hard for us + to justify doing much + more than constantly + +On line 5159: + have not really + been adversely impacted + in terms of losses,"63 + +On line 5159: + not really been + adversely impacted in + terms of losses,"63 the + +On line 5159: + in terms of losses,"63 + the OTS’s lead examiner + at the company + +On line 5159: + terms of losses,"63 the + OTS’s lead examiner at + the company had + +On line 5159: + a email. Indeed, the + nontraditional mortgage + portfolio had been + +On line 5159: + nontraditional + mortgage portfolio had been + performing very well + +On line 5161: + mortgage portfolio + had been performing very well + through and But with WaMu + +On line 5161: + had been performing + very well through and But with WaMu + now taking losses, + +On line 5161: + been performing very + well through and But with WaMu now + taking losses, the + +On line 5161: + very well through and But + with WaMu now taking losses, + the OTS determined + +On line 5161: + well through and But with + WaMu now taking losses, the + OTS determined on + +On line 5161: + with WaMu now taking + losses, the OTS determined + on February that + +On line 5161: + that its condition + required a downgrade in its + rating from a to + +On line 5161: + condition required + a downgrade in its rating + from a to a or + +On line 5161: + a to a or "less + than satisfactory."64 In + March, the OTS advised + +On line 5161: + to a or "less than + satisfactory."64 In March, + the OTS advised that + +On line 5163: + March, the OTS advised + that WaMu undertake "strategic + initiatives"— that is, + +On line 5163: + undertake "strategic + initiatives"— that is, either + find a buyer or + +On line 5163: + initiatives"— that is, + either find a buyer or + raise new capital. + +On line 5163: + a buyer or raise + new capital. In April, WaMu + secured a billion + +On line 5163: + new capital. In + April, WaMu secured a billion + investment from a + +On line 5163: + In April, WaMu secured + a billion investment from + a consortium led + +On line 5163: + April, WaMu secured a + billion investment from a + consortium led by + +On line 5163: + billion investment + from a consortium led by + the Texas Pacific + +On line 5163: + investment from a + consortium led by the Texas + Pacific Group, a + +On line 5163: + consortium led by + the Texas Pacific Group, a + private equity + +On line 5165: + Pacific Group, a + private equity firm.65 But + bad news continued + +On line 5165: + private equity + firm.65 But bad news continued + for thrifts. On July + +On line 5165: + equity firm.65 But + bad news continued for thrifts. + On July the OTS + +On line 5165: + news continued for + thrifts. On July the OTS closed + IndyMac Bank in Pasadena, + +On line 5167: + largest-ever thrift to fail. + On July, WaMu reported + a billion loss in + +On line 5167: + to fail. On July, + WaMu reported a billion + loss in the second + +On line 5167: + loss in the second + quarter. WaMu’s depositors + withdrew billion over + +On line 5167: + the second quarter. + WaMu’s depositors withdrew + billion over the next + +On line 5167: + billion over the next + two weeks.66 And the Federal + Home Loan Bank of San + +On line 5167: + the next two weeks.66 And + the Federal Home Loan Bank + of San Francisco—which, + +On line 5167: + next two weeks.66 And the + Federal Home Loan Bank of + San Francisco—which, as + +On line 5167: + Home Loan Bank of San + Francisco—which, as noted, had + historically + +On line 5167: + served with the other + Federal Home Loan Banks as + an important source + +On line 5167: + Federal Home Loan + Banks as an important source + of funds for WaMu and + +On line 5167: + and others—began + to limit WaMu’s borrowing + capacity. The + +On line 5169: + while maintaining the + overall rating at As the + insurer of many + +On line 5169: + the overall rating + at As the insurer of + many of WaMu’s deposits, + +On line 5169: + overall rating at + As the insurer of many + of WaMu’s deposits, the + +On line 5169: + rating at As the + insurer of many of WaMu’s + deposits, the FDIC had + +On line 5169: + As the insurer + of many of WaMu’s deposits, the + FDIC had a stake in + +On line 5169: + the insurer of + many of WaMu’s deposits, the FDIC + had a stake in WaMu’s + +On line 5169: + many of WaMu’s deposits, + the FDIC had a stake in WaMu’s + condition, and it + +On line 5169: + deposits, the FDIC had + a stake in WaMu’s condition, + and it was not as + +On line 5169: + FDIC had a stake in + WaMu’s condition, and it was + not as generous + +On line 5169: + had a stake in WaMu’s + condition, and it was not + as generous as + +On line 5169: + WaMu’s condition, and + it was not as generous + as the OTS in its + +On line 5169: + and it was not as + generous as the OTS in + its assessment. It + +On line 5169: + as generous as + the OTS in its assessment. + It had already dropped + +On line 5169: + generous as the + OTS in its assessment. It + had already dropped WaMu’s + +On line 5169: + its assessment. It + had already dropped WaMu’s rating + significantly + +On line 5171: + March indicating + a "high level of concern."67 + The FDIC expressly + +On line 5171: + a "high level of + concern."67 The FDIC expressly + disagreed with the OTS’s + +On line 5171: + of concern."67 The FDIC + expressly disagreed with the + OTS’s decision to + +On line 5171: + expressly disagreed + with the OTS’s decision to + maintain the overall + +On line 5171: + OTS’s decision to + maintain the overall rating, + recommending a + +On line 5171: + the overall rating, + recommending a instead.68 + Ordinarily, + +On line 5171: + recommending a + instead.68 Ordinarily, + would have triggered a + +On line 5171: + Ordinarily, + would have triggered a formal + enforcement action, + +On line 5171: + triggered a formal + enforcement action, but none + was forthcoming. In + +On line 5171: + action, but none was + forthcoming. In an August + interview, William Isaac, + +On line 5171: + was forthcoming. In + an August interview, William + Isaac, who was chairman + +On line 5171: + forthcoming. In an + August interview, William Isaac, + who was chairman of + +On line 5171: + August interview, + William Isaac, who was chairman of + the FDIC from until + +On line 5171: + interview, William Isaac, + who was chairman of the FDIC + from until noted + +On line 5171: + who was chairman of + the FDIC from until noted + that the OTS and FDIC + +On line 5171: + was chairman of the + FDIC from until noted that + the OTS and FDIC had + +On line 5171: + that the OTS and FDIC + had competing interests. + OTS, as primary + +On line 5171: + interests. OTS, as + primary regulator, + "tends to want to see + +On line 5171: + OTS, as primary + regulator, "tends to want + to see if they can + +On line 5171: + regulator, "tends + to want to see if they can + rehabilitate + +On line 5171: + to want to see if + they can rehabilitate + the bank and doesn’t + +On line 5171: + want to see if they + can rehabilitate the + bank and doesn’t want + +On line 5171: + to see if they can + rehabilitate the bank + and doesn’t want to + +On line 5171: + bank and doesn’t want + to act precipitously + as a rule." On the + +On line 5171: + doesn’t want to act + precipitously as a + rule." On the other + +On line 5171: + precipitously + as a rule." On the other + hand, "The FDIC’s job is + +On line 5171: + hand, "The FDIC’s job is + to handle the failures, and + it—generally + +On line 5173: + it—generally + speaking— would rather be tougher on + the theory that + +On line 5173: + on the theory + that the sooner the problems + are resolved, the less + +On line 5173: + that the sooner the + problems are resolved, the less + expensive the cleanup + +On line 5175: + problems are resolved, + the less expensive the cleanup + will be."69 FDIC Chairman + +On line 5175: + are resolved, the less + expensive the cleanup will be."69 + FDIC Chairman Sheila Bair + +On line 5175: + the less expensive + the cleanup will be."69 FDIC Chairman + Sheila Bair underscored + +On line 5175: + less expensive the + cleanup will be."69 FDIC Chairman Sheila + Bair underscored this + +On line 5175: + the cleanup will be."69 FDIC + Chairman Sheila Bair underscored + this tension, telling the + +On line 5175: + be."69 FDIC Chairman Sheila + Bair underscored this tension, + telling the FCIC that "our + +On line 5175: + Sheila Bair underscored + this tension, telling the FCIC that + "our examiners, + +On line 5175: + Bair underscored this + tension, telling the FCIC that "our + examiners, much + +On line 5175: + this tension, telling the + FCIC that "our examiners, + much earlier, were + +On line 5175: + tension, telling the FCIC + that "our examiners, much + earlier, were very + +On line 5175: + the underwriting + quality of WaMu’s mortgage + portfolio, and we + +On line 5175: + portfolio, and we + were actively opposed by + the OTS in terms of + +On line 5175: + we were actively + opposed by the OTS in terms + of going in and + +On line 5175: + the OTS in terms of + going in and letting our + [FDIC] examiners + +On line 5179: + and letting our [FDIC] + examiners do loan-level + analysis."70 MARCH TO + +On line 5179: + examiners do + loan-level analysis."70 MARCH TO + AUGUST The Treasury’s + +On line 5179: + AUGUST The Treasury’s + inspector general would + later criticize + +On line 5179: + OTS’s supervision + of Washington Mutual: + "We concluded that + +On line 5179: + supervision of + Washington Mutual: "We + concluded that OTS + +On line 5179: + sooner to force WaMu’s + management to correct the + problems identified + +On line 5179: + progress in correcting + OTS-identified weaknesses, we believe + OTS should have followed + +On line 5179: + in correcting OTS-identified + weaknesses, we believe OTS + should have followed its + +On line 5179: + OTS-identified weaknesses, we + believe OTS should have followed + its own policies and + +On line 5179: + we believe OTS should + have followed its own policies + and taken formal + +On line 5179: + OTS should have followed + its own policies and taken + formal enforcement + +On line 5179: + have followed its own + policies and taken formal + enforcement action + +On line 5179: + policies and taken + formal enforcement action + rather than informal + +On line 5179: + formal enforcement + action rather than informal + enforcement action."71 + +On line 5183: + enforcement action."71 + Regulators: "A lot of + that pushback" In these + +On line 5183: + of that pushback" In + these examples and others + that the Commission + +On line 5183: + late to identify + the mistakes and problems of + commercial banks and + +On line 5183: + mistakes and problems + of commercial banks and thrifts + or did not react + +On line 5183: + of commercial banks + and thrifts or did not react + strongly enough when they + +On line 5183: + banks and thrifts or did + not react strongly enough when + they were identified. + +On line 5183: + and thrifts or did not + react strongly enough when they + were identified. In + +On line 5183: + not react strongly + enough when they were identified. + In part, this failure + +On line 5183: + strongly enough when they + were identified. In part, this + failure reflects the + +On line 5183: + they were identified. + In part, this failure reflects + the nature of bank + +On line 5183: + In part, this failure + reflects the nature of bank + examinations + +On line 5183: + reflects the nature + of bank examinations + conducted during + +On line 5183: + conducted during + periods of apparent + financial calm when + +On line 5183: + when institutions + were reporting profits. In + addition to their + +On line 5183: + working with banks to + assess the adequacy + of their systems. This + +On line 5183: + with banks to assess + the adequacy of their + systems. This function + +On line 5183: + the adequacy + of their systems. This function + was, to a degree, + +On line 5183: + adequacy of + their systems. This function was, + to a degree, a + +On line 5183: + of their systems. This + function was, to a degree, + a reflection of + +On line 5183: + function was, to a + degree, a reflection of + the supervisors’ + +On line 5183: + reflection of the + supervisors’ "risk-focused" + approach. The OCC Large + +On line 5183: + do not attempt to + restrict risk-taking but rather + determine whether banks + +On line 5183: + rather determine whether + banks identify, understand, + and control the risks + +On line 5183: + determine whether banks + identify, understand, and + control the risks they + +On line 5183: + whether banks identify, + understand, and control the + risks they assume."72 As + +On line 5183: + the risks they assume."72 + As the crisis developed, + bank regulators + +On line 5183: + risks they assume."72 As + the crisis developed, bank + regulators were + +On line 5185: + crisis developed, + bank regulators were slow + to shift gears. Senior + +On line 5185: + bank regulators + were slow to shift gears. Senior + supervisors told + +On line 5185: + to shift gears. Senior + supervisors told the FCIC + it was difficult + +On line 5185: + told the FCIC it was + difficult to express their + concerns forcefully + +On line 5185: + express their concerns + forcefully when financial + institutions were + +On line 5185: + were generating + record-level profits. The Fed’s Roger + Cole told the FCIC that + +On line 5185: + record-level profits. The + Fed’s Roger Cole told the FCIC that + supervisors did + +On line 5185: + The Fed’s Roger Cole told + the FCIC that supervisors + did discuss issues + +On line 5185: + Fed’s Roger Cole told the + FCIC that supervisors did + discuss issues such + +On line 5185: + Cole told the FCIC that + supervisors did discuss + issues such as whether + +On line 5185: + that supervisors + did discuss issues such as + whether banks were growing + +On line 5185: + supervisors did + discuss issues such as whether + banks were growing too + +On line 5185: + did discuss issues + such as whether banks were growing + too fast and taking + +On line 5185: + discuss issues such + as whether banks were growing too + fast and taking too + +On line 5185: + issues such as whether + banks were growing too fast and + taking too much risk, + +On line 5185: + such as whether banks were + growing too fast and taking + too much risk, but ran + +On line 5185: + whether banks were growing + too fast and taking too much + risk, but ran into + +On line 5185: + were growing too fast + and taking too much risk, but + ran into pushback. + +On line 5185: + growing too fast and + taking too much risk, but ran + into pushback. "Frankly + +On line 5185: + too fast and taking + too much risk, but ran into + pushback. "Frankly a lot + +On line 5185: + and taking too much + risk, but ran into pushback. + "Frankly a lot of that + +On line 5185: + too much risk, but ran + into pushback. "Frankly a lot + of that pushback was + +On line 5185: + risk, but ran into + pushback. "Frankly a lot of that + pushback was given + +On line 5185: + ran into pushback. + "Frankly a lot of that pushback + was given credence + +On line 5185: + into pushback. "Frankly + a lot of that pushback was + given credence on + +On line 5185: + pushback. "Frankly a lot + of that pushback was given + credence on the part + +On line 5185: + "Frankly a lot of that + pushback was given credence + on the part of the + +On line 5185: + lot of that pushback + was given credence on the + part of the firms by + +On line 5185: + of that pushback was + given credence on the part + of the firms by the + +On line 5185: + was given credence + on the part of the firms by + the fact that—like a + +On line 5185: + the firms by the fact + that—like a Citigroup was + earning to billion + +On line 5185: + the fact that—like a + Citigroup was earning to + billion a quarter. + +On line 5185: + a quarter. And that + is really hard for a + supervisor to + +On line 5185: + that is really + hard for a supervisor + to successfully + +On line 5185: + supervisor to + successfully challenge. When + that kind of money + +On line 5185: + money is flowing + out quarter after quarter + after quarter, and + +On line 5187: + very hard to challenge."73 + Supervisors also told + the FCIC that they feared + +On line 5187: + aggravating a + bank’s already-existing problems. + For the large banks, the + +On line 5187: + a formal, public + supervisory action + taken under the + +On line 5187: + supervisory + action taken under the + federal banking + +On line 5187: + banking statutes marked a + severe regulatory + assessment of the + +On line 5187: + regulatory + assessment of the bank’s risk + practices, and it was + +On line 5187: + assessment of the + bank’s risk practices, and it was + rarely employed for banks + +On line 5187: + bank’s risk practices, and + it was rarely employed for banks + that were determined + +On line 5187: + risk practices, and it + was rarely employed for banks that + were determined to + +On line 5187: + practices, and it was + rarely employed for banks that were + determined to be + +On line 5187: + was rarely employed for + banks that were determined to + be going concerns. + +On line 5187: + rarely employed for banks + that were determined to be + going concerns. Richard + +On line 5187: + that were determined + to be going concerns. Richard + Spillenkothen, the Fed’s head of + +On line 5189: + Richard Spillenkothen, the Fed’s head + of supervision until + early attributed + +On line 5189: + of supervision + until early attributed + supervisory + +On line 5189: + "a belief that the + traditional, nonpublic + (behind-the-scenes) approach to + +On line 5189: + the traditional, + nonpublic (behind-the-scenes) approach + to supervision + +On line 5189: + supervision was + less confrontational and more + likely to induce + +On line 5189: + less confrontational + and more likely to induce + bank management to + +On line 5189: + and more likely to + induce bank management to + cooperate; a + +On line 5189: + bank management to + cooperate; a desire + not to inject an + +On line 5189: + to cooperate; + a desire not to inject + an element of + +On line 5189: + a desire not to + inject an element of + contentiousness into + +On line 5189: + not to inject an + element of contentiousness + into what was felt + +On line 5189: + into what was felt + to be a constructive or + equable relationship + +On line 5189: + be a constructive + or equable relationship with + management; and a + +On line 5189: + relationship with + management; and a fear that + financial markets + +On line 5189: + management; and a + fear that financial markets + would overreact to + +On line 5189: + financial markets + would overreact to public + actions, possibly + +On line 5189: + would overreact to + public actions, possibly + causing a run." Spillenkothen + +On line 5189: + to public actions, + possibly causing a run." + Spillenkothen argued that these + +On line 5189: + actions, possibly + causing a run." Spillenkothen argued + that these concerns were + +On line 5189: + causing a run." Spillenkothen + argued that these concerns were + relevant but that + +On line 5189: + run." Spillenkothen argued that + these concerns were relevant + but that "at times they + +On line 5189: + Spillenkothen argued that these + concerns were relevant but + that "at times they can + +On line 5189: + needed corrective + action. One of the lessons of + this crisis is that + +On line 5189: + of the lessons of this + crisis is that the working + presumption should be + +On line 5189: + of this crisis is + that the working presumption + should be earlier + +On line 5189: + this crisis is that + the working presumption should + be earlier and + +On line 5189: + crisis is that the + working presumption should be + earlier and stronger + +On line 5189: + working presumption + should be earlier and stronger + supervisory + +On line 5191: + should be earlier + and stronger supervisory + follow up."74 ouglas + +On line 5191: + earlier and stronger + supervisory follow + up."74 ouglas Roeder, + +On line 5191: + supervisory + follow up."74 ouglas Roeder, + the OCC’s senior deputy + +On line 5191: + follow up."74 ouglas + Roeder, the OCC’s senior deputy + comptroller for Large + +On line 5191: + from to said that the + regulators were hampered + by inadequate + +On line 5191: + regulators were + hampered by inadequate + information from + +On line 5191: + by inadequate + information from the banks + but acknowledged that + +On line 5191: + information from + the banks but acknowledged that + regulators did + +On line 5191: + banks but acknowledged + that regulators did not + do a good job of + +On line 5191: + that regulators + did not do a good job of + intervening at + +On line 5191: + did not do a good + job of intervening at + key points in the run-up + +On line 5191: + not do a good job + of intervening at key + points in the run-up to + +On line 5191: + do a good job of + intervening at key points + in the run-up to the + +On line 5191: + of intervening + at key points in the run-up to + the crisis. He said + +On line 5191: + intervening at + key points in the run-up to the + crisis. He said that + +On line 5191: + at key points in the + run-up to the crisis. He said + that regulators, + +On line 5191: + the crisis. He said + that regulators, market + participants, and + +On line 5191: + participants, and + others should have balanced their + concerns about safety + +On line 5191: + markets work, noting, + "We underestimated + what systemic risk would + +On line 5193: + in the marketplace."75 + Regulators also blame + the complexity + +On line 5193: + supervisory + system in the United States. + The patchwork quilt of + +On line 5193: + The patchwork quilt of + regulators created + opportunities + +On line 5193: + banks to shop for the + most lenient regulator, + and the presence of + +On line 5193: + to shop for the most + lenient regulator, and + the presence of more + +On line 5193: + regulator, and + the presence of more than one + supervisor at + +On line 5193: + presence of more than + one supervisor at an + organization. + +On line 5193: + one supervisor + at an organization. + For example, a + +On line 5193: + supervisor at + an organization. For + example, a large + +On line 5193: + organization. + For example, a large firm + like Citigroup could + +On line 5193: + supervising the + bank holding company, the + OCC supervising + +On line 5195: + supervising the + national bank subsidiary, the + SEC supervising + +On line 5195: + supervising the + securities firm, and the + OTS supervising + +On line 5195: + OTS supervising + the thrift subsidiary—creating the + potential for both + +On line 5195: + thrift subsidiary—creating + the potential for both gaps + in coverage and + +On line 5195: + gaps in coverage + and problematic overlap. + Successive Treasury + +On line 5195: + leaders have proposed + consolidation of the + supervisors to + +On line 5195: + the supervisors + to simplify this system + over the years. Notably, + +On line 5195: + to simplify this + system over the years. Notably, + Secretary Henry + +On line 5195: + system over the years. + Notably, Secretary Henry + Paulson released the + +On line 5195: + over the years. Notably, + Secretary Henry Paulson + released the "Blueprint + +On line 5195: + Secretary Henry + Paulson released the "Blueprint + for a Modernized + +On line 5197: + Structure" on March two + weeks after the Bear rescue, + in which he proposed + +On line 5197: + March two weeks after + the Bear rescue, in which he + proposed getting rid + +On line 5197: + weeks after the Bear + rescue, in which he proposed + getting rid of the + +On line 5197: + the Bear rescue, in + which he proposed getting rid + of the thrift charter, + +On line 5197: + getting rid of the + thrift charter, creating a + federal charter + +On line 5197: + federal charter + for insurance companies + (now regulated + +On line 5197: + only by the states), + and merging the SEC and CFTC. + The proposals did + +On line 5197: + states), and merging the + SEC and CFTC. The proposals + did not move forward + +On line 5197: + and merging the SEC + and CFTC. The proposals did + not move forward in + +On line 5199: + merging the SEC and + CFTC. The proposals did not + move forward in The + +On line 5199: + CFTC. The proposals + did not move forward in The + Commission concludes + +On line 5199: + banks and thrifts or their + poor corporate governance + and risk management, + +On line 5199: + often maintaining + satisfactory ratings + on institutions + +On line 5199: + satisfactory + ratings on institutions + until just before + +On line 5199: + until just before + their collapse. This failure was + caused by many factors, + +On line 5199: + before their collapse. + This failure was caused by many + factors, including + +On line 5199: + were capable of + self-regulation, and that + regulators should + +On line 5199: + self-regulation, + and that regulators should + not interfere with + +On line 5201: + with activities + reported as profitable. Large + commercial banks and + +On line 5201: + such as Wachovia and + IndyMac, that had significant + exposure to risky + +On line 5201: + had significant + exposure to risky mortgage + assets were subject + +On line 5203: + assets were subject + to runs by creditors and + depositors. The + +On line 5203: + too late the systemic + danger inherent in the + interconnections + +On line 5203: + inherent in the + interconnections of the + unregulated + +On line 5203: + unregulated + over-the-counter (OTC) derivatives + market and did not + +On line 5209: + and did not have the + information needed to + act. SEPTEMBER THE + +On line 5211: + the information + needed to act. SEPTEMBER + THE TAKEOVER OF FANNIE + +On line 5213: + to act. SEPTEMBER + THE TAKEOVER OF FANNIE MAE AND + FREDDIE MAC CONTENTS + +On line 5215: + SEPTEMBER THE TAKEOVER + OF FANNIE MAE AND FREDDIE + MAC CONTENTS "A good + +On line 5215: + THE TAKEOVER OF FANNIE + MAE AND FREDDIE MAC CONTENTS + "A good time to buy"...........................................................................................310 + +On line 5217: + TAKEOVER OF FANNIE MAE + AND FREDDIE MAC CONTENTS "A + good time to buy"...........................................................................................310 "The + +On line 5217: + MAE AND FREDDIE MAC + CONTENTS "A good time to buy"...........................................................................................310 + "The only game in + +On line 5219: + MAC CONTENTS "A good + time to buy"...........................................................................................310 "The only game + in town"....................................................................................311 "It’s a time + +On line 5219: + CONTENTS "A good time + to buy"...........................................................................................310 "The only game in + town"....................................................................................311 "It’s a time game + +On line 5219: + "A good time to buy"...........................................................................................310 + "The only game in town"....................................................................................311 "It’s + a time game be cool"...............................................................................312 + +On line 5221: + good time to buy"...........................................................................................310 "The + only game in town"....................................................................................311 "It’s a + time game be cool"...............................................................................312 "The + +On line 5221: + to buy"...........................................................................................310 "The only + game in town"....................................................................................311 "It’s a time game + be cool"...............................................................................312 "The idea strikes + +On line 5221: + buy"...........................................................................................310 "The only game + in town"....................................................................................311 "It’s a time game be + cool"...............................................................................312 "The idea strikes me + +On line 5221: + "The only game in + town"....................................................................................311 "It’s a time game be cool"...............................................................................312 + "The idea strikes me as + +On line 5223: + game in town"....................................................................................311 "It’s a + time game be cool"...............................................................................312 "The idea strikes + me as perverse" "It + +On line 5223: + in town"....................................................................................311 "It’s a time + game be cool"...............................................................................312 "The idea strikes me + as perverse" "It will + +On line 5223: + game be cool"...............................................................................312 "The idea + strikes me as perverse" "It will + increase confidence"................................................................................315 + +On line 5225: + strikes me as perverse" + "It will increase confidence"................................................................................315 + "Critical unsafe + +On line 5227: + "Critical unsafe + and unsound practices" "They went + from zero to three + +On line 5227: + and unsound practices" + "They went from zero to three + with no warning in + +On line 5229: + from zero to three + with no warning in between" + "The worst-run financial + +On line 5231: + in between" "The worst-run + financial institution".................................................................321 + "Wasn’t done at my + +On line 5233: + "The worst-run financial + institution".................................................................321 "Wasn’t done + at my pay grade"...........................................................................322 From + +On line 5233: + at my pay grade"...........................................................................322 From + the fall of until Fannie + Mae and Freddie Mac + +On line 5233: + my pay grade"...........................................................................322 From the + fall of until Fannie Mae + and Freddie Mac were + +On line 5233: + pay grade"...........................................................................322 From the fall + of until Fannie Mae and + Freddie Mac were placed + +On line 5233: + conservatorship + on September government + officials struggled + +On line 5233: + enterprises and + their mission to support the + mortgage market. The + +On line 5233: + mortgage market. The + task was critical because + the mortgage market + +On line 5233: + the mortgage market + was quickly weakening—home prices + were declining, loan + +On line 5233: + weakening—home prices were + declining, loan delinquencies + were rising, and, as + +On line 5233: + prices were declining, + loan delinquencies were rising, + and, as a result, + +On line 5233: + were declining, loan + delinquencies were rising, and, + as a result, the + +On line 5233: + result, the values + of mortgage securities + were plummeting. Lenders + +On line 5233: + plummeting. Lenders were + more willing to refinance + borrowers into + +On line 5233: + Lenders were more willing + to refinance borrowers + into affordable + +On line 5233: + borrowers into + affordable mortgages if these + government-sponsored + +On line 5233: + affordable mortgages + if these government-sponsored + enterprises (GSEs) + +On line 5233: + enterprises (GSEs) + would purchase the new loans. If + the GSEs bought more loans, + +On line 5233: + would purchase the new + loans. If the GSEs bought more loans, + that would stabilize + +On line 5233: + purchase the new loans. + If the GSEs bought more loans, that + would stabilize the + +On line 5233: + loans. If the GSEs bought + more loans, that would stabilize + the market, but it + +On line 5233: + If the GSEs bought more + loans, that would stabilize the + market, but it would + +On line 5233: + GSEs bought more loans, that + would stabilize the market, + but it would also + +On line 5233: + bought more loans, that would + stabilize the market, but + it would also leave + +On line 5233: + would stabilize the + market, but it would also + leave the GSEs with more + +On line 5233: + it would also leave + the GSEs with more risk on their + already-strained balance + +On line 5235: + GSEs with more risk on + their already-strained balance sheets. + The GSEs were highly + +On line 5235: + balance sheets. The GSEs + were highly leveraged—owning + and guaranteeing + +On line 5235: + trillion of mortgages + with capital of less than + When interviewed by + +On line 5235: + capital of less + than When interviewed by the + FCIC, former Treasury + +On line 5235: + than When interviewed + by the FCIC, former Treasury + Secretary Henry + +On line 5235: + by the FCIC, former + Treasury Secretary Henry + Paulson acknowledged + +On line 5235: + Treasury Secretary + Henry Paulson acknowledged + that after he was + +On line 5235: + after he was briefed + on the GSEs upon taking + office in June he + +On line 5235: + he was briefed on the + GSEs upon taking office + in June he believed + +On line 5235: + was briefed on the GSEs + upon taking office in + June he believed that + +On line 5235: + on the GSEs upon + taking office in June he + believed that they were + +On line 5235: + in June he believed + that they were "a disaster + waiting to happen" + +On line 5235: + he believed that they + were "a disaster waiting + to happen" and that + +On line 5235: + believed that they were + "a disaster waiting to + happen" and that one + +On line 5235: + were "a disaster + waiting to happen" and that + one key problem was + +On line 5235: + happen" and that one + key problem was the legal + definition of + +On line 5235: + one key problem was + the legal definition + of capital, which + +On line 5235: + key problem was the + legal definition of + capital, which their + +On line 5235: + their regulator + lacked discretion to adjust; + indeed, he said that + +On line 5235: + lacked discretion to + adjust; indeed, he said that + some people referred + +On line 5235: + adjust; indeed, he + said that some people referred + to it as "bullsh*t + +On line 5235: + said that some people + referred to it as "bullsh*t + capital."1 Still, the + +On line 5235: + referred to it as + "bullsh*t capital."1 Still, the + GSEs kept buying more + +On line 5235: + to it as "bullsh*t + capital."1 Still, the GSEs kept + buying more of the + +On line 5235: + capital."1 Still, the + GSEs kept buying more of the + riskier mortgage loans + +On line 5235: + GSEs kept buying more + of the riskier mortgage loans + and securities, + +On line 5235: + kept buying more of + the riskier mortgage loans and + securities, which + +On line 5235: + riskier mortgage loans + and securities, which by + fall constituted + +On line 5235: + and securities, + which by fall constituted + multiples of their + +On line 5235: + The GSEs reported + billions of dollars of net + losses on these loans + +On line 5235: + billions of dollars + of net losses on these loans + and securities, + +On line 5235: + of net losses on + these loans and securities, + beginning in the + +On line 5237: + beginning in the + third quarter of But many in + Treasury believed the + +On line 5237: + the third quarter of + But many in Treasury believed + the country needed + +On line 5237: + third quarter of But + many in Treasury believed the + country needed the + +On line 5237: + But many in Treasury + believed the country needed + the GSEs to provide + +On line 5237: + believed the country + needed the GSEs to provide + liquidity to + +On line 5237: + needed the GSEs to + provide liquidity to + the mortgage market + +On line 5237: + and guaranteeing + loans and securities at + a time when no one + +On line 5237: + guaranteeing loans + and securities at a + time when no one else + +On line 5237: + and securities + at a time when no one else + would. Paulson told the + +On line 5237: + securities at + a time when no one else would. + Paulson told the FCIC + +On line 5237: + at a time when no + one else would. Paulson told the + FCIC that after the + +On line 5237: + time when no one else + would. Paulson told the FCIC that + after the housing + +On line 5237: + one else would. Paulson + told the FCIC that after the + housing market dried + +On line 5237: + would. Paulson told the + FCIC that after the housing + market dried up in + +On line 5237: + the FCIC that after + the housing market dried up + in the summer of + +On line 5237: + FCIC that after the + housing market dried up in + the summer of the + +On line 5237: + the housing market + dried up in the summer of + the key to getting + +On line 5237: + housing market dried + up in the summer of the + key to getting through + +On line 5237: + up in the summer + of the key to getting through + the crisis was to + +On line 5237: + summer of the key + to getting through the crisis + was to limit the + +On line 5237: + to getting through the + crisis was to limit the + decline in housing, + +On line 5237: + ensure continued + mortgage funding, all of which + required that the GSEs + +On line 5237: + continued mortgage + funding, all of which required + that the GSEs remain + +On line 5237: + funding, all of which + required that the GSEs remain + viable.2 However, + +On line 5237: + all of which required + that the GSEs remain viable.2 + However, there were + +On line 5237: + required that the GSEs + remain viable.2 However, + there were constraints on + +On line 5237: + that the GSEs remain + viable.2 However, there were + constraints on how many + +On line 5237: + GSEs remain viable.2 + However, there were constraints + on how many loans the + +On line 5237: + viable.2 However, + there were constraints on how many + loans the GSEs could fund; + +On line 5237: + However, there were + constraints on how many loans the + GSEs could fund; they and + +On line 5237: + constraints on how many + loans the GSEs could fund; they and + their regulators + +On line 5237: + the GSEs could fund; they + and their regulators had + agreed to portfolio + +On line 5237: + agreed to portfolio + caps—limits on the loans and + securities they + +On line 5239: + securities they + could hold on their books—and a + capital surplus + +On line 5241: + surplus requirement. + So, even as each company + reported billions + +On line 5241: + their regulator, + the Office of Federal + Housing Enterprise + +On line 5241: + Enterprise Oversight + (OFHEO), loosened those constraints. "From + the fall of to the + +On line 5241: + "From the fall of to + the conservatorships, it + was a tightrope with no + +On line 5241: + with no safety net," + former OFHEO Director James + Lockhart testified + +On line 5241: + safety net," former + OFHEO Director James Lockhart + testified to the + +On line 5241: + the balancing act + ultimately failed and both + companies were placed + +On line 5243: + conservatorship, + costing the U.S. taxpayers + billion—so far. "A + +On line 5245: + far. "A GOOD TIME TO + BUY" In an August letter + to Lockhart, Fannie + +On line 5245: + "A GOOD TIME TO BUY" + In an August letter to + Lockhart, Fannie Mae + +On line 5245: + TIME TO BUY" In an + August letter to Lockhart, + Fannie Mae CEO Daniel + +On line 5245: + BUY" In an August + letter to Lockhart, Fannie + Mae CEO Daniel Mudd sought + +On line 5245: + Mae CEO Daniel Mudd sought + immediate relief from + the portfolio caps + +On line 5245: + sought immediate + relief from the portfolio + caps required by the + +On line 5245: + have witnessed growing + evidence of turmoil in + virtually all + +On line 5245: + in virtually + all sectors of the housing + finance market," Mudd + +On line 5245: + finance market," Mudd + wrote, and "the immediate + crisis in subprime + +On line 5245: + indicative of a + serious liquidity + event impacting the + +On line 5245: + credit market, not + just subprime."4 As demand for + purchasing loans dried + +On line 5245: + not just subprime."4 As + demand for purchasing loans + dried up, large lenders like + +On line 5245: + lenders like Countrywide + kept loans that they normally + securitized, and + +On line 5245: + that they normally + securitized, and smaller + lenders went under. A + +On line 5245: + securitized, and + smaller lenders went under. A + number of firms told + +On line 5245: + and smaller lenders went + under. A number of firms + told Fannie that they + +On line 5245: + under. A number + of firms told Fannie that they + would stop making loans + +On line 5245: + of firms told Fannie + that they would stop making loans + if Fannie would not + +On line 5245: + firms told Fannie that + they would stop making loans if + Fannie would not buy + +On line 5247: + Fannie that they would + stop making loans if Fannie + would not buy them. Mudd + +On line 5247: + they would stop making + loans if Fannie would not buy + them. Mudd argued that + +On line 5247: + would stop making loans + if Fannie would not buy them. + Mudd argued that a + +On line 5247: + loans if Fannie would + not buy them. Mudd argued that + a relaxed cap would + +On line 5247: + if Fannie would not + buy them. Mudd argued that a + relaxed cap would let + +On line 5247: + them. Mudd argued that + a relaxed cap would let his + company provide + +On line 5247: + a relaxed cap would + let his company provide + that liquidity. + +On line 5247: + relaxed cap would let + his company provide that + liquidity. "A + +On line 5247: + liquidity. "A + moderate, percent increase + in the Fannie Mae + +On line 5247: + moderate, percent + increase in the Fannie Mae + portfolio cap would + +On line 5247: + percent increase in + the Fannie Mae portfolio + cap would provide us + +On line 5247: + cap would provide us + with flexibility and + send a strong signal + +On line 5247: + would provide us with + flexibility and send + a strong signal to + +On line 5247: + flexibility + and send a strong signal to + the market that the + +On line 5247: + send a strong signal + to the market that the GSEs + are able to address + +On line 5247: + to the market that + the GSEs are able to address + liquidity events + +On line 5247: + the GSEs are able to + address liquidity events + before they become + +On line 5247: + are able to address + liquidity events before + they become crises." He + +On line 5247: + crises." He maintained that + the consent agreement allowed + OFHEO to lift the cap + +On line 5247: + He maintained that the + consent agreement allowed OFHEO + to lift the cap to + +On line 5247: + the consent agreement + allowed OFHEO to lift the cap + to address "market + +On line 5249: + deficiencies— the + primary condition for + removing the cap. + +On line 5249: + removing the cap. + Finally, he stressed that the + GSEs’ charter required + +On line 5249: + the cap. Finally, + he stressed that the GSEs’ charter + required Fannie to + +On line 5249: + Finally, he stressed + that the GSEs’ charter required + Fannie to provide + +On line 5249: + that the GSEs’ charter + required Fannie to provide + liquidity and + +On line 5249: + required Fannie to + provide liquidity and + stability to + +On line 5249: + stability to + the market. "Ultimately," + Mudd concluded, "this + +On line 5249: + "Ultimately," Mudd + concluded, "this request is + about restoring market + +On line 5249: + market confidence + that the GSEs can fulfill their + stabilizing role + +On line 5251: + the GSEs can fulfill + their stabilizing role in + housing."5 Fannie Mae + +On line 5251: + money. Because there + was less competition, the + GSEs could charge higher + +On line 5251: + Because there was less + competition, the GSEs could + charge higher fees for + +On line 5251: + less competition, + the GSEs could charge higher fees + for guaranteeing + +On line 5251: + pay less for loans and + securities they wanted + to own, enabling them + +On line 5251: + and securities + they wanted to own, enabling + them (in theory) + +On line 5251: + securities they + wanted to own, enabling them + (in theory) to + +On line 5251: + they wanted to own, + enabling them (in theory) + to increase returns.6 + +On line 5251: + to own, enabling them + (in theory) to increase + returns.6 Tom Lund, a + +On line 5251: + them (in theory) + to increase returns.6 Tom Lund, + a longtime Fannie + +On line 5251: + (in theory) to + increase returns.6 Tom Lund, a + longtime Fannie Mae + +On line 5251: + to increase returns.6 + Tom Lund, a longtime Fannie + Mae executive + +On line 5251: + increase returns.6 Tom + Lund, a longtime Fannie Mae + executive who + +On line 5251: + FCIC that the market + moved in Fannie Mae’s favor + af-SEPTEMBER ter August as + +On line 5251: + moved in Fannie Mae’s + favor af-SEPTEMBER ter August as + competitors dropped out + +On line 5251: + Mae’s favor af-SEPTEMBER ter + August as competitors dropped + out and prices of loans + +On line 5253: + dropped out and prices of + loans and securities fell. + Lund told FCIC staff that + +On line 5253: + and prices of loans and + securities fell. Lund told + FCIC staff that after + +On line 5253: + securities fell. + Lund told FCIC staff that after + the liquidity + +On line 5253: + Lund told FCIC staff that + after the liquidity + shock, Fannie had "more + +On line 5253: + staff that after the + liquidity shock, Fannie + had "more comfort that + +On line 5253: + liquidity shock, + Fannie had "more comfort that + the relationship + +On line 5253: + "more comfort that the + relationship between risk + and price was correct."7 + +On line 5253: + and price was correct."7 + Robert Levin, the company’s chief + business officer, + +On line 5253: + was correct."7 Robert Levin, + the company’s chief business + officer, recalled, + +On line 5253: + the company’s chief + business officer, recalled, + "It was a good time + +On line 5255: + business officer, + recalled, "It was a good time + to buy."8 On August + +On line 5255: + was a good time to + buy."8 On August OFHEO’s Lockhart + notified Fannie + +On line 5255: + buy."8 On August OFHEO’s + Lockhart notified Fannie + that increasing the + +On line 5255: + Lockhart notified + Fannie that increasing the + portfolio cap would + +On line 5255: + the portfolio cap + would be "premature" but the + regulator would + +On line 5255: + be "premature" but + the regulator would keep + the request under + +On line 5255: + the request under + "active consideration." + Lockhart wrote that he + +On line 5255: + would not authorize + changes, because Fannie could still + guarantee mortgages + +On line 5255: + changes, because Fannie + could still guarantee mortgages + even if it couldn’t + +On line 5255: + because Fannie could + still guarantee mortgages even + if it couldn’t buy + +On line 5255: + could still guarantee + mortgages even if it couldn’t + buy them and because + +On line 5255: + guarantee mortgages + even if it couldn’t buy them + and because Fannie + +On line 5255: + mortgages even if it + couldn’t buy them and because + Fannie remained a + +On line 5255: + it couldn’t buy them + and because Fannie remained + a "significant + +On line 5255: + and because Fannie + remained a "significant + supervisory + +On line 5255: + addition, Lockhart + noted that Fannie could not + prudently address + +On line 5255: + Lockhart noted that + Fannie could not prudently + address the problems + +On line 5255: + noted that Fannie + could not prudently address + the problems in the + +On line 5255: + in the subprime and + Alt-A mortgage market, and the + company’s charter + +On line 5255: + Alt-A mortgage market, + and the company’s charter + did not permit it + +On line 5255: + mortgage market, and + the company’s charter did + not permit it to + +On line 5255: + and the company’s + charter did not permit it + to address problems + +On line 5255: + did not permit it + to address problems in the + market for jumbo + +On line 5255: + to address problems + in the market for jumbo + loans (mortgages larger + +On line 5255: + address problems in + the market for jumbo loans + (mortgages larger than + +On line 5255: + (mortgages larger than + the GSEs’ loan limit).9 Although + there had been progress in + +On line 5255: + larger than the GSEs’ + loan limit).9 Although there had + been progress in dealing + +On line 5255: + loan limit).9 Although + there had been progress in dealing + with the accounting + +On line 5255: + limit).9 Although there + had been progress in dealing with + the accounting and + +On line 5255: + work remained. Fannie + still had not filed financial + statements for or "a + +On line 5257: + unsettled markets."10 + As Lockhart testified to + the FCIC, "It became + +On line 5257: + Lockhart testified + to the FCIC, "It became clear + by August that the + +On line 5257: + FCIC, "It became clear + by August that the turmoil + was too big for the + +On line 5257: + clear by August that + the turmoil was too big for + the Enterprises + +On line 5257: + by August that the + turmoil was too big for the + Enterprises [the + +On line 5257: + the turmoil was too + big for the Enterprises + [the GSEs] to solve in + +On line 5257: + turmoil was too big + for the Enterprises [the + GSEs] to solve in a + +On line 5257: + was too big for the + Enterprises [the GSEs] to + solve in a safe and + +On line 5257: + the Enterprises + [the GSEs] to solve in a safe + and sound manner." He + +On line 5257: + Enterprises [the + GSEs] to solve in a safe and + sound manner." He was + +On line 5257: + GSEs] to solve in a + safe and sound manner." He was + worried that fewer + +On line 5257: + solve in a safe and + sound manner." He was worried + that fewer controls + +On line 5257: + in a safe and sound + manner." He was worried that + fewer controls would + +On line 5257: + safe and sound manner." + He was worried that fewer + controls would mean more + +On line 5257: + sound manner." He was + worried that fewer controls + would mean more losses. + +On line 5257: + worried that fewer + controls would mean more losses. + "They were fulfilling + +On line 5257: + controls would mean more + losses. "They were fulfilling + their mission," Lockhart + +On line 5257: + mean more losses. "They + were fulfilling their mission," + Lockhart told the FCIC, + +On line 5257: + "They were fulfilling + their mission," Lockhart told the + FCIC, "but they had no + +On line 5257: + their mission," Lockhart + told the FCIC, "but they had no + power to do more + +On line 5257: + Lockhart told the FCIC, + "but they had no power to + do more in a safe + +On line 5257: + told the FCIC, "but they + had no power to do more + in a safe and sound + +On line 5257: + FCIC, "but they had no + power to do more in a + safe and sound manner. + +On line 5257: + they had no power + to do more in a safe and + sound manner. If their + +On line 5257: + power to do more + in a safe and sound manner. + If their mission is + +On line 5257: + and sound manner. If + their mission is to provide + stability and + +On line 5257: + their mission is to + provide stability and + lessen market turmoil, + +On line 5257: + there was nothing in + their capital structure" that + would allow them to + +On line 5257: + was nothing in their + capital structure" that would + allow them to do + +On line 5259: + in their capital + structure" that would allow them + to do so.11 Lockhart + +On line 5259: + would allow them to + do so.11 Lockhart had worried + about the financial + +On line 5259: + do so.11 Lockhart had + worried about the financial + stability of + +On line 5259: + had worried about the + financial stability + of the two GSEs and + +On line 5259: + two GSEs and about OFHEO’s + ability to regulate + the behemoths from + +On line 5259: + to regulate the + behemoths from the day he + became director + +On line 5261: + the day he became + director in May and he + advocated for + +On line 5263: + his largely toothless + agency. Lockhart pushed for the + power to increase + +On line 5263: + power to increase + capital requirements and + to limit growth, and + +On line 5263: + and to limit growth, + and he sought authority + over mission goals set + +On line 5263: + to limit growth, and + he sought authority over + mission goals set by + +On line 5263: + of the Department + of Justice. His shopping list + also included + +On line 5263: + Justice. His shopping + list also included the + authority to + +On line 5263: + also included + the authority to put + Fannie and Freddie + +On line 5263: + the authority + to put Fannie and Freddie + into receivership, + +On line 5263: + to put Fannie and + Freddie into receivership, + a power held by + +On line 5263: + a power held by + bank regulators over banks, + and to liquidate + +On line 5263: + power held by bank + regulators over banks, and + to liquidate the + +On line 5263: + regulators over + banks, and to liquidate the + GSEs if necessary. + +On line 5263: + and to liquidate + the GSEs if necessary. As + it stood, OFHEO had the + +On line 5263: + effect, to force a + government takeover—but because + it lacked funding to + +On line 5263: + government takeover—but + because it lacked funding to + operate the GSEs + +On line 5263: + to operate the + GSEs as conservator, that + authority was + +On line 5263: + deteriorate + even further before Lockhart + secured the powers + +On line 5265: + even further before + Lockhart secured the powers + he sought.12 "THE ONLY + +On line 5267: + secured the powers + he sought.12 "THE ONLY GAME IN + TOWN" But Fannie and + +On line 5267: + the powers he sought.12 + "THE ONLY GAME IN TOWN" But + Fannie and Freddie + +On line 5267: + "THE ONLY GAME IN + TOWN" But Fannie and Freddie + were "the only game + +On line 5267: + ONLY GAME IN TOWN" + But Fannie and Freddie were + "the only game in + +On line 5267: + IN TOWN" But Fannie + and Freddie were "the only + game in town" once the + +On line 5267: + and Freddie were "the + only game in town" once the + housing market dried + +On line 5267: + only game in town" + once the housing market dried + up in the summer + +On line 5267: + the housing market + dried up in the summer of + Paulson told the FCIC. + +On line 5267: + market dried up in + the summer of Paulson told + the FCIC. And by the + +On line 5267: + up in the summer + of Paulson told the FCIC. And + by the spring of "[the + +On line 5267: + in the summer of + Paulson told the FCIC. And by + the spring of "[the GSEs,] + +On line 5267: + summer of Paulson + told the FCIC. And by the spring + of "[the GSEs,] more than + +On line 5267: + of Paulson told the + FCIC. And by the spring of "[the + GSEs,] more than anyone, + +On line 5267: + Paulson told the FCIC. + And by the spring of "[the GSEs,] + more than anyone, were + +On line 5267: + FCIC. And by the spring + of "[the GSEs,] more than anyone, + were the engine we + +On line 5267: + by the spring of "[the + GSEs,] more than anyone, were the + engine we needed + +On line 5267: + spring of "[the GSEs,] more + than anyone, were the engine + we needed to get + +On line 5267: + of "[the GSEs,] more than + anyone, were the engine we + needed to get through + +On line 5267: + more than anyone, were + the engine we needed to + get through the problem."13 + +On line 5269: + than anyone, were the + engine we needed to get + through the problem."13 Few + +On line 5269: + engine we needed + to get through the problem."13 Few + doubted Fannie and + +On line 5269: + we needed to get + through the problem."13 Few doubted + Fannie and Freddie + +On line 5269: + Few doubted Fannie + and Freddie were needed to + support the struggling + +On line 5269: + needed to support + the struggling housing market. + The question was how + +On line 5269: + support the struggling + housing market. The question + was how to do so + +On line 5269: + the struggling housing + market. The question was how + to do so safely.14 + +On line 5269: + housing market. The + question was how to do so + safely.14 Purchasing + +On line 5269: + question was how to + do so safely.14 Purchasing + and guaranteeing + +On line 5269: + guaranteeing risky + mortgage-backed securities helped + make money available + +On line 5269: + make money available + for borrowers, but it could + also result in + +On line 5269: + for borrowers, but + it could also result in + further losses for + +On line 5269: + could also result + in further losses for the + two huge companies + +On line 5269: + in further losses + for the two huge companies + later on. "There’s a + +On line 5269: + losses for the two + huge companies later on. + "There’s a real trade-off," + +On line 5269: + two huge companies + later on. "There’s a real + trade-off," Lockhart said in + +On line 5269: + later on. "There’s a + real trade-off," Lockhart said in + late 2007—a trade-off made all + +On line 5269: + on. "There’s a real + trade-off," Lockhart said in late 2007—a + trade-off made all the more + +On line 5269: + real trade-off," Lockhart + said in late 2007—a trade-off made all + the more difficult + +On line 5269: + trade-off," Lockhart said in + late 2007—a trade-off made all the more + difficult by the + +On line 5269: + said in late 2007—a trade-off + made all the more difficult + by the state of he + +On line 5269: + in late 2007—a trade-off made + all the more difficult by + the state of he GSEs’ + +On line 5269: + 2007—a trade-off made all the + more difficult by the state + of he GSEs’ balance + +On line 5269: + trade-off made all the more + difficult by the state of + he GSEs’ balance sheets.15 + +On line 5269: + more difficult by + the state of he GSEs’ balance + sheets.15 The value of + +On line 5269: + difficult by the + state of he GSEs’ balance sheets.15 + The value of risky + +On line 5269: + of he GSEs’ balance + sheets.15 The value of risky loans + and securities + +On line 5269: + he GSEs’ balance sheets.15 + The value of risky loans and + securities was + +On line 5269: + and securities + was swamping their reported + capital. By the + +On line 5269: + end of guaranteed + and portfolio mortgages with + FICO scores less than + +On line 5269: + less than exceeded + reported capital at + Fannie Mae by more + +On line 5269: + Fannie Mae by more + than seven to one; Alt-A loans + and securities, + +On line 5269: + than seven to one; + Alt-A loans and securities, + by more than six to + +On line 5269: + seven to one; Alt-A + loans and securities, by + more than six to one. + +On line 5269: + to one; Alt-A loans and + securities, by more than + six to one. Loans for + +On line 5269: + and securities, + by more than six to one. Loans + for which borrowers + +On line 5269: + securities, by + more than six to one. Loans for + which borrowers did + +On line 5269: + by more than six to + one. Loans for which borrowers + did not provide full + +On line 5269: + did not provide full + documentation amounted + to more than ten times + +On line 5271: + to more than ten times + reported capital.16 In + mid-September, OFHEO relented + +On line 5271: + mid-September, OFHEO relented + and marginally loosened the GSEs’ + portfolio cap, from + +On line 5271: + marginally loosened the + GSEs’ portfolio cap, from about + billion to billion. + +On line 5271: + GSEs’ portfolio cap, + from about billion to billion. + It allowed Fannie + +On line 5271: + portfolio cap, from + about billion to billion. It + allowed Fannie to + +On line 5271: + from about billion to + billion. It allowed Fannie + to increase the amount + +On line 5271: + billion. It allowed + Fannie to increase the amount + of mortgage loans and + +On line 5271: + Fannie to increase + the amount of mortgage loans and + securities it + +On line 5271: + amount of mortgage loans + and securities it owned + by per year—a power + +On line 5271: + of mortgage loans and + securities it owned by + per year—a power that + +On line 5271: + and securities + it owned by per year—a power + that Freddie already + +On line 5271: + securities it + owned by per year—a power that + Freddie already had + +On line 5271: + per year—a power that + Freddie already had under + its agreement with OFHEO. + +On line 5271: + that Freddie already + had under its agreement with + OFHEO. OFHEO ruled out more + +On line 5271: + already had under + its agreement with OFHEO. OFHEO ruled + out more dramatic + +On line 5271: + its agreement with OFHEO. + OFHEO ruled out more dramatic + increases "because + +On line 5271: + increases "because + the remediation process + is not yet finished, + +On line 5271: + remediation + process is not yet finished, many + safety and soundness + +On line 5271: + not yet finished, many + safety and soundness issues + are not yet resolved, + +On line 5271: + finished, many safety + and soundness issues are not + yet resolved, and the + +On line 5271: + safety and soundness + issues are not yet resolved, + and the criteria + +On line 5271: + and soundness issues + are not yet resolved, and the + criteria in the + +On line 5271: + issues are not yet + resolved, and the criteria + in the Fannie Mae + +On line 5271: + are not yet resolved, + and the criteria in the + Fannie Mae consent + +On line 5271: + yet resolved, and the + criteria in the Fannie + Mae consent agreement + +On line 5271: + and the criteria + in the Fannie Mae consent + agreement and Freddie + +On line 5271: + Mae consent agreement + and Freddie Mac’s voluntary + agreement have not been + +On line 5273: + agreement and Freddie + Mac’s voluntary agreement have + not been met."17 As the + +On line 5273: + voluntary agreement + have not been met."17 As the year + progressed, Fannie and + +On line 5273: + important to the + mortgage market. By the fourth + quarter of they were + +On line 5273: + the mortgage market. + By the fourth quarter of they + were purchasing of + +On line 5273: + mortgage market. By + the fourth quarter of they were + purchasing of new + +On line 5273: + By the fourth quarter + of they were purchasing of + new mortgages, nearly + +On line 5273: + the fourth quarter of + they were purchasing of new + mortgages, nearly twice + +On line 5273: + were purchasing of + new mortgages, nearly twice the + level. With trillion + +On line 5273: + new mortgages, nearly + twice the level. With trillion + in mortgages resting + +On line 5273: + mortgages, nearly twice + the level. With trillion in + mortgages resting on + +On line 5273: + in mortgages resting + on razor-thin capital, the + GSEs were doomed if the + +On line 5273: + resting on razor-thin + capital, the GSEs were doomed + if the market did + +On line 5273: + "a withdrawal by + Freddie Mac and Fannie Mae + or even a drop in + +On line 5273: + by Freddie Mac and + Fannie Mae or even a drop + in confidence in + +On line 5273: + Fannie Mae or even + a drop in confidence in + the Enterprises + +On line 5273: + drop in confidence + in the Enterprises would + have created a + +On line 5275: + have created a + self-fulfilling credit + crisis."18 In early + +On line 5275: + to temporarily + lift portfolio limits on + the GSEs by percent, + +On line 5275: + temporarily lift + portfolio limits on the + GSEs by percent, or + +On line 5275: + portfolio limits + on the GSEs by percent, or + approximately + +On line 5275: + GSEs by percent, or + approximately billion, + most of which would be + +On line 5275: + approximately + billion, most of which would be + designated for + +On line 5275: + be designated + for refinancing subprime + loans. The measures, which + +On line 5275: + for refinancing + subprime loans. The measures, which + Federal Reserve + +On line 5277: + "ill advised," were not + enacted.19 In November, + Fannie and Freddie + +On line 5277: + were not enacted.19 + In November, Fannie and + Freddie reported + +On line 5279: + that it had billion + of capital to absorb + potential losses + +On line 5279: + assets and trillion + of guarantees on mortgage-backed + securities; if + +On line 5279: + of guarantees on + mortgage-backed securities; if + losses exceeded + +On line 5279: + exceeded it would + be insolvent. Freddie would + be insolvent if + +On line 5279: + be insolvent if + losses exceeded Moreover, + there were serious + +On line 5281: + validity of + their "reported" capital. + "IT’S A TIME GAME BE + +On line 5283: + of their "reported" + capital. "IT’S A TIME GAME + BE COOL" In the first + +On line 5283: + capital. "IT’S A + TIME GAME BE COOL" In the first + quarter, real gross + +On line 5283: + TIME GAME BE COOL" In + the first quarter, real gross + domestic product + +On line 5283: + first quarter, real + gross domestic product fell + at an annual + +On line 5283: + quarter, real gross + domestic product fell at + an annual rate, + +On line 5283: + domestic product + fell at an annual rate, + reflecting in part + +On line 5283: + an annual rate, + reflecting in part the first + decline in consumer + +On line 5283: + decline in consumer + spending since the early 1990s. + The unemployment + +On line 5283: + The unemployment + rate averaged in the first + three months of up from + +On line 5283: + unemployment rate + averaged in the first three + months of up from a + +On line 5283: + rate averaged in + the first three months of up from + a low of in spring + +On line 5283: + averaged in the + first three months of up from a + low of in spring of + +On line 5283: + in the first three months + of up from a low of in + spring of As the Fed + +On line 5283: + three months of up from + a low of in spring of As + the Fed continued + +On line 5283: + months of up from a + low of in spring of As the + Fed continued to + +On line 5283: + of up from a low + of in spring of As the Fed + continued to cut + +On line 5283: + a low of in spring + of As the Fed continued + to cut interest + +On line 5283: + low of in spring of + As the Fed continued to + cut interest rates, + +On line 5283: + of in spring of As + the Fed continued to cut + interest rates, the + +On line 5283: + passed the Economic + Stimulus Act, which raised the + limits on the size + +On line 5283: + which raised the limits + on the size of mortgages that + Fannie and Freddie + +On line 5283: + limits on the size + of mortgages that Fannie and + Freddie could purchase, + +On line 5283: + the size of mortgages + that Fannie and Freddie could + purchase, among other + +On line 5285: + mortgages that Fannie + and Freddie could purchase, among + other measures. The + +On line 5285: + Freddie could purchase, + among other measures. The push + to get OFHEO to loosen + +On line 5285: + purchase, among other + measures. The push to get OFHEO + to loosen requirements + +On line 5285: + among other measures. + The push to get OFHEO to loosen + requirements on the + +On line 5285: + measures. The push to + get OFHEO to loosen requirements + on the GSEs also + +On line 5285: + push to get OFHEO to + loosen requirements on the GSEs + also continued. + +On line 5287: + capital surcharge; + such a stringent requirement, + he wrote Lockhart on + +On line 5291: + days later, Fannie + CEO Mudd reported losses + in the fourth quarter + +On line 5291: + later, Fannie CEO + Mudd reported losses in + the fourth quarter of + +On line 5291: + CEO Mudd reported + losses in the fourth quarter + of acknowledging + +On line 5291: + the fourth quarter of + acknowledging that Fannie + was "working through the + +On line 5291: + of acknowledging + that Fannie was "working through + the toughest housing + +On line 5291: + acknowledging that + Fannie was "working through the + toughest housing and + +On line 5291: + Fannie was "working + through the toughest housing and + mortgage markets in + +On line 5291: + the toughest housing + and mortgage markets in a + generation."21 The + +On line 5291: + a generation."21 + The company had issued + billion of preferred + +On line 5291: + The company had + issued billion of preferred + stock, had completed + +On line 5291: + issued billion of + preferred stock, had completed + all requirements of + +On line 5291: + had completed all + requirements of the consent + agreement with OFHEO, and + +On line 5291: + all requirements of + the consent agreement with OFHEO, + and was discussing with + +On line 5291: + requirements of the + consent agreement with OFHEO, and + was discussing with OFHEO + +On line 5291: + and was discussing with + OFHEO the possibility + of reducing the + +On line 5291: + surplus requirement. + The next day, Freddie also + reported losses + +On line 5291: + day, Freddie also + reported losses and said + the company had + +On line 5293: + losses and said the + company had raised billion + of preferred stock. As + +On line 5293: + the company had + raised billion of preferred stock. + As both companies + +On line 5293: + company had raised + billion of preferred stock. As + both companies had + +On line 5293: + preferred stock. As both + companies had filed current + financial statements + +On line 5293: + As both companies + had filed current financial + statements by this time, + +On line 5293: + time, fulfilling a + condition of lifting the + restrictions imposed + +On line 5293: + announced that OFHEO would + remove the portfolio caps + on March He also + +On line 5293: + that OFHEO would remove + the portfolio caps on March + He also said OFHEO + +On line 5293: + OFHEO would remove the + portfolio caps on March He + also said OFHEO would + +On line 5293: + requirement, because + both companies had made progress + in satisfying + +On line 5293: + both companies had + made progress in satisfying + their consent agreements + +On line 5293: + companies had made + progress in satisfying their + consent agreements and + +On line 5293: + and had recently + raised capital through preferred + stock offerings. Mudd + +On line 5293: + had recently raised + capital through preferred stock + offerings. Mudd told + +On line 5293: + raised capital through + preferred stock offerings. Mudd + told the FCIC that he + +On line 5293: + offerings. Mudd told + the FCIC that he sought relief + from the capital + +On line 5293: + the FCIC that he sought + relief from the capital + surplus requirement + +On line 5293: + that he sought relief + from the capital surplus + requirement because + +On line 5293: + from the capital + surplus requirement because + he did not want to + +On line 5295: + Fannie fell short of + required capital levels.22 + On February the + +On line 5295: + On February the + day after OFHEO lifted the + growth limits, a New + +On line 5295: + February the day + after OFHEO lifted the growth + limits, a New York + +On line 5295: + growth limits, a New + York Fed analyst noted + to Treasury that the + +On line 5295: + York Fed analyst + noted to Treasury that the + capital surcharge + +On line 5295: + noted to Treasury + that the capital surcharge + was a constraint that + +On line 5295: + that the capital + surcharge was a constraint that + prevented the GSEs + +On line 5297: + market.23 Calls to ease + the surcharge also came from + the marketplace. Mike + +On line 5297: + the surcharge also + came from the marketplace. Mike + Farrell, the CEO of + +On line 5297: + Steel that a crisis + loomed in the credit markets + that only the GSEs + +On line 5297: + that a crisis loomed + in the credit markets that + only the GSEs could + +On line 5297: + crisis loomed in the + credit markets that only + the GSEs could solve. "We + +On line 5297: + loomed in the credit + markets that only the GSEs + could solve. "We believe + +On line 5297: + the credit markets + that only the GSEs could solve. + "We believe that we + +On line 5297: + credit markets that + only the GSEs could solve. "We + believe that we are + +On line 5297: + markets that only + the GSEs could solve. "We believe + that we are nearing + +On line 5297: + only the GSEs could + solve. "We believe that we are + nearing a tipping + +On line 5297: + the GSEs could solve. "We + believe that we are nearing + a tipping point; lack + +On line 5297: + "We believe that we + are nearing a tipping point; + lack of transparency + +On line 5297: + believe that we are + nearing a tipping point; lack + of transparency on + +On line 5297: + a tipping point; lack + of transparency on pricing + for virtually + +On line 5297: + of transparency on + pricing for virtually + every asset class" + +On line 5297: + asset class" and "a + dearth of buyers" foreshadowed + worse news, Farrell wrote. + +On line 5297: + "a dearth of buyers" + foreshadowed worse news, Farrell + wrote. Removing the + +On line 5297: + foreshadowed worse news, + Farrell wrote. Removing the + capital surcharge + +On line 5297: + worse news, Farrell wrote. + Removing the capital + surcharge and passing + +On line 5297: + capital surcharge + and passing legislation + to overhaul the GSEs + +On line 5297: + surcharge and passing + legislation to overhaul + the GSEs would make it + +On line 5297: + legislation to + overhaul the GSEs would make it + possible for them + +On line 5297: + to overhaul the GSEs + would make it possible for + them to provide more + +On line 5297: + for them to provide + more stability, he said. + Farrell recognized + +On line 5297: + stability, he + said. Farrell recognized that + the GSEs might believe + +On line 5297: + recognized that the + GSEs might believe their return + on capital would + +On line 5297: + GSEs might believe their + return on capital would + be insufficient, + +On line 5297: + be insufficient, + but contended that "they will + have to get past that + +On line 5297: + insufficient, but + contended that "they will have + to get past that and + +On line 5297: + have to get past that + and focus on fulfilling + their charters," because + +On line 5297: + to get past that and + focus on fulfilling their + charters," because "the + +On line 5297: + their charters," because + "the big picture is that right + now whatever is + +On line 5297: + charters," because "the + big picture is that right now + whatever is best + +On line 5297: + big picture is that + right now whatever is best + for the economy + +On line 5297: + picture is that right + now whatever is best for + the economy and + +On line 5297: + right now whatever + is best for the economy + and the financial + +On line 5297: + economy and the + financial security + of America trumps + +On line 5297: + the ROI [return on + investment] for Fannie and + Freddie shareholders."24 + +On line 5299: + Freddie shareholders."24 + Days before Bear Stearns collapsed, + Steel reported to + +On line 5299: + Bear Stearns collapsed, Steel + reported to Mudd that he + had "encouraging" + +On line 5299: + reported to Mudd + that he had "encouraging" + conversations with + +On line 5299: + conversations with + Senator Richard Shelby, the + ranking member of + +On line 5299: + the ranking member + of the Senate Committee + on Banking, Housing, + +On line 5299: + ranking member of + the Senate Committee on + Banking, Housing, and + +On line 5299: + and Urban Affairs, + and Representative Frank, + chairman of the House + +On line 5299: + the House Financial + Services Committee, about the + possibility + +On line 5301: + legislation and + capital relief for the + GSEs. He intended + +On line 5301: + capital relief + for the GSEs. He intended + to speak with Senate + +On line 5301: + GSEs. He intended + to speak with Senate Banking + Committee Chairman + +On line 5301: + with Senate Banking + Committee Chairman Christopher + Dodd. Confident that + +On line 5301: + Confident that the + government desperately + needed the GSEs to + +On line 5301: + that the government + desperately needed the + GSEs to back up the + +On line 5303: + GSEs to back up the + mortgage market, Mudd proposed + an "easier trade." + +On line 5303: + mortgage market, Mudd + proposed an "easier trade." + If regulators + +On line 5303: + If regulators + would eliminate the surcharge, + Fannie Mae would agree + +On line 5303: + Mae would agree to raise + new capital.25 In a March + email to Fannie chief + +On line 5303: + new capital.25 In + a March email to Fannie chief + business officer + +On line 5303: + March email to Fannie + chief business officer Levin, + Mudd suggested that + +On line 5303: + email to Fannie chief + business officer Levin, Mudd + suggested that the + +On line 5303: + business officer + Levin, Mudd suggested that the + capital surplus + +On line 5303: + Levin, Mudd suggested + that the capital surplus + requirement might be + +On line 5303: + that the capital + surplus requirement might be + reduced without any + +On line 5303: + capital surplus + requirement might be reduced + without any trade: "It’s + +On line 5303: + surplus requirement + might be reduced without any + trade: "It’s a time game + +On line 5303: + requirement might be + reduced without any trade: "It’s + a time game whether they + +On line 5303: + be reduced without + any trade: "It’s a time game whether + they need us more or + +On line 5303: + reduced without any + trade: "It’s a time game whether they + need us more or if + +On line 5303: + without any trade: "It’s + a time game whether they need us + more or if we hit + +On line 5303: + "It’s a time game whether + they need us more or if we + hit the capital + +On line 5303: + a time game whether they + need us more or if we hit + the capital wall + +On line 5303: + time game whether they need + us more or if we hit the + capital wall first. + +On line 5305: + they need us more or + if we hit the capital + wall first. Be cool."26 n + +On line 5305: + need us more or if + we hit the capital wall + first. Be cool."26 n the + +On line 5305: + us more or if we + hit the capital wall first. + Be cool."26 n the next + +On line 5305: + more or if we hit + the capital wall first. Be + cool."26 n the next day, + +On line 5305: + or if we hit the + capital wall first. Be cool."26 + n the next day, March + +On line 5305: + hit the capital + wall first. Be cool."26 n the next + day, March Treasury and + +On line 5305: + the capital wall + first. Be cool."26 n the next day, + March Treasury and White + +On line 5305: + capital wall first. + Be cool."26 n the next day, March + Treasury and White House + +On line 5305: + wall first. Be cool."26 n + the next day, March Treasury and + White House officials + +On line 5305: + Be cool."26 n the next + day, March Treasury and White House + officials received + +On line 5305: + email enclosing an + alarming analysis: it claimed + that in reporting + +On line 5307: + which resembled one + offered in a March Barron’s + article, stated: + +On line 5309: + offered in a March + Barron’s article, stated: + Any realistic + +On line 5309: + show the company + is currently insolvent. + Accounting fraud has + +On line 5309: + Accounting fraud has + resulted in several + asset categories + +On line 5309: + asset categories + (non-agency securities, + deferred tax assets, + +On line 5309: + understated. These + accounting shenanigans add up + to tens of billions + +On line 5311: + to tens of billions + of exaggerated net + worth. Yet, the impact + +On line 5311: + tens of billions of + exaggerated net worth. + Yet, the impact of + +On line 5311: + worth. Yet, the impact + of a tsunami of mortgage + defaults has yet to + +On line 5311: + the impact of a + tsunami of mortgage defaults + has yet to run through + +On line 5311: + of mortgage defaults + has yet to run through Fannie’s + income statement and + +On line 5311: + to run through Fannie’s + income statement and further + annihilate its + +On line 5313: + income statement and + further annihilate its + capital. Such grim + +On line 5313: + annihilate its + capital. Such grim results + are a logical + +On line 5313: + Such grim results are + a logical consequence + of Fannie’s dual + +On line 5313: + to serve the housing + market while maximizing + shareholder returns. + +On line 5313: + housing market while + maximizing shareholder + returns. In trying + +On line 5313: + In trying to do + both, Fannie has done neither + well. With shareholder + +On line 5313: + well. With shareholder + capital depleted, a + government seizure of + +On line 5315: + government seizure of + the company is inevitable.27 + Given the turmoil + +On line 5315: + is inevitable.27 Given + the turmoil of the Bear Stearns + crisis, Paulson said + +On line 5315: + turmoil of the Bear + Stearns crisis, Paulson said he + wanted to increase + +On line 5315: + the Bear Stearns crisis, + Paulson said he wanted to + increase confidence + +On line 5315: + Stearns crisis, Paulson + said he wanted to increase + confidence in the + +On line 5315: + said he wanted to + increase confidence in the + mortgage market by + +On line 5315: + wanted to increase + confidence in the mortgage + market by having + +On line 5315: + increase confidence + in the mortgage market by + having Fannie and + +On line 5315: + confidence in the + mortgage market by having + Fannie and Freddie + +On line 5315: + mortgage market by + having Fannie and Freddie + raise capital. Steel + +On line 5315: + having Fannie and + Freddie raise capital. Steel + told him that Treasury, + +On line 5315: + Fannie and Freddie + raise capital. Steel told him + that Treasury, OFHEO, and + +On line 5315: + capital. Steel told + him that Treasury, OFHEO, and the + Fed were preparing + +On line 5315: + him that Treasury, OFHEO, + and the Fed were preparing + plans to relax the + +On line 5315: + that Treasury, OFHEO, and + the Fed were preparing plans + to relax the GSEs’ + +On line 5317: + OFHEO, and the Fed were + preparing plans to relax + the GSEs’ capital + +On line 5317: + preparing plans to + relax the GSEs’ capital + surcharges in exchange + +On line 5317: + capital surcharges + in exchange for assurances + that the companies + +On line 5319: + the companies would + raise capital. On March Steel + also reported + +On line 5319: + capital. On March + Steel also reported to + his Treasury colleagues + +On line 5319: + then executive + vice president of the New + York Fed, wanted to + +On line 5321: + Freddie and Fannie. + Steel wrote that Dudley "leaned on + me hard" to make the + +On line 5321: + Fannie. Steel wrote that + Dudley "leaned on me hard" to + make the guarantee + +On line 5321: + on me hard" to make + the guarantee explicit + in conjunction with + +On line 5321: + make the guarantee + explicit in conjunction + with dialing back + +On line 5321: + in conjunction with + dialing back the surcharge + and attempting to + +On line 5321: + dialing back the + surcharge and attempting to + raise new capital, + +On line 5321: + and attempting to + raise new capital, and Steel + worried about how this + +On line 5321: + worried about how this + might affect the federal + government’s balance + +On line 5321: + how this might affect + the federal government’s + balance sheet: "I do + +On line 5321: + government’s balance + sheet: "I do not like that and + it has not been part + +On line 5321: + "I do not like that + and it has not been part of + my conversation + +On line 5321: + do not like that and + it has not been part of my + conversation with + +On line 5321: + and it has not been + part of my conversation + with anyone else. I + +On line 5321: + it has not been part + of my conversation with + anyone else. I view + +On line 5321: + not been part of my + conversation with anyone + else. I view that as + +On line 5321: + else. I view that as + a very significant move, + way above my pay grade + +On line 5321: + I view that as a + very significant move, way + above my pay grade to + +On line 5321: + very significant + move, way above my pay grade to + double the size of + +On line 5321: + move, way above my pay + grade to double the size of + the U.S. debt in one + +On line 5321: + way above my pay grade + to double the size of the + U.S. debt in one fell + +On line 5321: + above my pay grade to + double the size of the U.S. + debt in one fell swoop."28 + +On line 5323: + pay grade to double + the size of the U.S. debt in + one fell swoop."28 "THE IDEA + +On line 5323: + grade to double the + size of the U.S. debt in one + fell swoop."28 "THE IDEA STRIKES + +On line 5323: + to double the size + of the U.S. debt in one fell + swoop."28 "THE IDEA STRIKES ME + +On line 5323: + double the size of + the U.S. debt in one fell swoop."28 + "THE IDEA STRIKES ME AS + +On line 5323: + the size of the U.S. + debt in one fell swoop."28 "THE IDEA + STRIKES ME AS PERVERSE" + +On line 5325: + debt in one fell swoop."28 + "THE IDEA STRIKES ME AS PERVERSE" + Regulators at + +On line 5325: + "THE IDEA STRIKES ME AS + PERVERSE" Regulators at + OFHEO and the Treasury + +On line 5325: + STRIKES ME AS PERVERSE" + Regulators at OFHEO and + the Treasury huddled + +On line 5325: + the Treasury huddled + with GSE executives to + discuss lowering + +On line 5325: + discuss lowering + capital requirements if + the GSEs would raise more + +On line 5325: + requirements if the + GSEs would raise more capital. + "The entire mortgage + +On line 5325: + if the GSEs would raise + more capital. "The entire + mortgage market was + +On line 5325: + raise more capital. + "The entire mortgage market + was at risk," Lockhart + +On line 5325: + more capital. "The + entire mortgage market was + at risk," Lockhart told + +On line 5325: + was at risk," Lockhart + told the FCIC.29 The pushing and + tugging continued. + +On line 5325: + risk," Lockhart told the + FCIC.29 The pushing and tugging + continued. Paulson + +On line 5325: + pushing and tugging + continued. Paulson told the + FCIC that personal + +On line 5325: + continued. Paulson + told the FCIC that personal + commitments from Mudd + +On line 5325: + Paulson told the FCIC + that personal commitments + from Mudd and Freddie + +On line 5325: + from Mudd and Freddie + Mac CEO Richard Syron to raise + capital cinched the + +On line 5325: + Freddie Mac CEO Richard + Syron to raise capital + cinched the deal.30 Just days + +On line 5325: + CEO Richard Syron to + raise capital cinched the deal.30 + Just days earlier, + +On line 5325: + Richard Syron to raise + capital cinched the deal.30 Just + days earlier, on + +On line 5325: + raise capital cinched + the deal.30 Just days earlier, + on March Syron had + +On line 5325: + cinched the deal.30 Just days + earlier, on March Syron + had announced in a + +On line 5325: + Just days earlier, + on March Syron had announced + in a quarterly + +On line 5325: + days earlier, on + March Syron had announced in + a quarterly call + +On line 5325: + earlier, on March + Syron had announced in a + quarterly call to + +On line 5325: + on March Syron had + announced in a quarterly + call to investors that + +On line 5325: + had announced in a + quarterly call to investors + that his company + +On line 5325: + to investors that his + company would not raise new + capital. Fannie + +On line 5325: + that his company + would not raise new capital. + Fannie and Freddie + +On line 5325: + capital. Fannie + and Freddie executives + prepared a draft press + +On line 5325: + a draft press release + before a discussion with + Lockhart and Steel. It + +On line 5325: + press release before + a discussion with Lockhart + and Steel. It announced + +On line 5325: + release before a + discussion with Lockhart and + Steel. It announced a + +On line 5325: + a discussion with + Lockhart and Steel. It announced + a reduction in + +On line 5325: + with Lockhart and Steel. + It announced a reduction + in the capital + +On line 5325: + a reduction in + the capital surcharge from + to Lockhart was not + +On line 5325: + reduction in the + capital surcharge from to + Lockhart was not pleased; + +On line 5325: + in the capital + surcharge from to Lockhart was + not pleased; the draft lacked + +On line 5325: + capital surcharge + from to Lockhart was not pleased; + the draft lacked a com-SEPTEMBER + +On line 5325: + com-SEPTEMBER mitment to raise + additional capital, + stating instead that + +On line 5325: + raise additional + capital, stating instead + that the GSEs planned to + +On line 5327: + capital, stating + instead that the GSEs planned to + raise it "over time as + +On line 5327: + stating instead that + the GSEs planned to raise it "over + time as needed."31 It + +On line 5327: + instead that the GSEs + planned to raise it "over time as + needed."31 It looked as + +On line 5327: + that the GSEs planned to + raise it "over time as needed."31 + It looked as if the + +On line 5327: + the GSEs planned to raise + it "over time as needed."31 It + looked as if the GSEs + +On line 5327: + GSEs planned to raise it + "over time as needed."31 It looked + as if the GSEs were + +On line 5327: + to raise it "over time + as needed."31 It looked as if + the GSEs were making + +On line 5327: + raise it "over time as + needed."31 It looked as if the + GSEs were making the + +On line 5327: + "over time as needed."31 + It looked as if the GSEs were + making the deal with + +On line 5327: + needed."31 It looked as + if the GSEs were making the + deal with their fingers + +On line 5327: + It looked as if the + GSEs were making the deal with + their fingers crossed. In + +On line 5327: + looked as if the GSEs + were making the deal with their + fingers crossed. In an + +On line 5327: + the GSEs were making + the deal with their fingers crossed. + In an email to Steel + +On line 5327: + GSEs were making the + deal with their fingers crossed. In + an email to Steel and + +On line 5327: + were making the deal + with their fingers crossed. In an + email to Steel and the + +On line 5327: + making the deal with + their fingers crossed. In an email + to Steel and the CEOs + +On line 5327: + their fingers crossed. In + an email to Steel and the CEOs + of both entities, + +On line 5327: + an email to Steel and + the CEOs of both entities, + Lockhart wrote: "The idea + +On line 5327: + to Steel and the CEOs + of both entities, Lockhart + wrote: "The idea strikes me + +On line 5327: + Steel and the CEOs of + both entities, Lockhart wrote: + "The idea strikes me as + +On line 5327: + of both entities, + Lockhart wrote: "The idea strikes me + as perverse, and I + +On line 5327: + Lockhart wrote: "The idea + strikes me as perverse, and I + assume it would seem + +On line 5327: + wrote: "The idea strikes me + as perverse, and I assume + it would seem perverse + +On line 5327: + "The idea strikes me as + perverse, and I assume it + would seem perverse to + +On line 5327: + as perverse, and I + assume it would seem perverse + to the markets that + +On line 5327: + assume it would seem + perverse to the markets that + a regulator + +On line 5327: + agree to allow a + regulatee to increase + its very high mortgage + +On line 5327: + regulatee to + increase its very high mortgage + credit risk leverage + +On line 5327: + its very high mortgage + credit risk leverage (not to + mention increasing + +On line 5327: + credit risk leverage + (not to mention increasing + interest rate risk) + +On line 5327: + mention increasing + interest rate risk) without + any new capital." + +On line 5327: + rate risk) without any + new capital." The initial + negotiations + +On line 5327: + new capital." The + initial negotiations + had the GSEs raising + +On line 5327: + had the GSEs raising + of capital for each of + reduction in the + +On line 5327: + of capital for + each of reduction in the + surplus. Lockhart wrote + +On line 5327: + each of reduction + in the surplus. Lockhart wrote + in frustration, "We + +On line 5327: + of reduction in + the surplus. Lockhart wrote in + frustration, "We seem + +On line 5327: + the surplus. Lockhart + wrote in frustration, "We seem + to have gone from to + +On line 5327: + surplus. Lockhart wrote + in frustration, "We seem to + have gone from to right + +On line 5327: + wrote in frustration, + "We seem to have gone from to + right through to to now + +On line 5327: + in frustration, "We + seem to have gone from to right + through to to now to + +On line 5329: + "We seem to have gone + from to right through to to now + to Despite Lockhart’s + +On line 5329: + have gone from to right + through to to now to Despite + Lockhart’s reservations, + +On line 5329: + through to to now to + Despite Lockhart’s reservations, + OFHEO announced the deal, + +On line 5329: + to Despite Lockhart’s + reservations, OFHEO announced the + deal, unaltered in + +On line 5329: + the deal, unaltered + in any material way, + on March OFHEO agreed to + +On line 5329: + deal, unaltered in + any material way, on + March OFHEO agreed to ease + +On line 5329: + unaltered in any + material way, on March + OFHEO agreed to ease the + +On line 5329: + material way, + on March OFHEO agreed to ease the + capital restraint + +On line 5331: + on March OFHEO agreed to + ease the capital restraint + from to Fannie and + +On line 5331: + OFHEO agreed to ease the + capital restraint from to + Fannie and Freddie + +On line 5331: + capital restraint + from to Fannie and Freddie + pledged to "begin the + +On line 5331: + Fannie and Freddie + pledged to "begin the process to + raise significant + +On line 5331: + pledged to "begin the + process to raise significant + capital," giving + +On line 5331: + giving no concrete + commitment.33 Paulson told the + FCIC that the agreement, + +On line 5331: + commitment.33 Paulson + told the FCIC that the agreement, + which included a + +On line 5331: + FCIC that the agreement, + which included a promise + to raise capital, + +On line 5331: + that the agreement, which + included a promise to + raise capital, was + +On line 5331: + which included a + promise to raise capital, + was "a no-brainer," and + +On line 5331: + a promise to raise + capital, was "a no-brainer," + and that he had no + +On line 5331: + to raise capital, + was "a no-brainer," and that he + had no memory + +On line 5331: + raise capital, was + "a no-brainer," and that he had + no memory of + +On line 5331: + was "a no-brainer," and + that he had no memory + of Lockhart ever + +On line 5333: + had no memory + of Lockhart ever having + called it "perverse."34 The + +On line 5333: + of Lockhart ever + having called it "perverse."34 The + market analyst + +On line 5333: + "perverse."34 The market + analyst Joshua Rosner panned + the deal. "We view any + +On line 5333: + market analyst + Joshua Rosner panned the deal. "We + view any reduction + +On line 5333: + Joshua Rosner panned the + deal. "We view any reduction + [in capital] as + +On line 5333: + Rosner panned the deal. + "We view any reduction [in + capital] as a + +On line 5333: + the deal. "We view any + reduction [in capital] + as a comment not + +On line 5333: + any reduction [in + capital] as a comment + not only on the + +On line 5333: + [in capital] as + a comment not only on + the GSEs but on the + +On line 5333: + on the GSEs but on + the burgeoning panic in + Washington," he wrote. + +On line 5333: + on the burgeoning + panic in Washington," he + wrote. "If this action + +On line 5333: + burgeoning panic + in Washington," he wrote. "If + this action results + +On line 5333: + Washington," he wrote. + "If this action results in + the destabilizing + +On line 5335: + this action results + in the destabilizing of + the GSEs, OFHEO will go + +On line 5335: + action results in + the destabilizing of the + GSEs, OFHEO will go from + +On line 5335: + the destabilizing + of the GSEs, OFHEO will go from + being the only + +On line 5335: + of the GSEs, OFHEO will + go from being the only + regulator that + +On line 5335: + will go from being + the only regulator + that prevented its + +On line 5335: + go from being the + only regulator that + prevented its charges + +On line 5335: + into trouble, to + a textbook example of + why regulators + +On line 5337: + pressure."35 Fannie would + keep its promise by raising + billion in preferred + +On line 5337: + keep its promise by + raising billion in preferred + stock. Freddie reneged. + +On line 5337: + raising billion in + preferred stock. Freddie reneged. + Executive Vice + +On line 5337: + preferred stock. Freddie + reneged. Executive Vice + President Donald + +On line 5337: + Executive Vice + President Donald Bisenius + offered two reasons + +On line 5337: + two reasons why, in + hindsight, Fannie Mae did not + raise additional + +On line 5337: + hindsight, Fannie Mae + did not raise additional + capital. First was + +On line 5337: + First was protecting + the assets of existing + shareholders. "I’m sure + +On line 5337: + shareholders. "I’m sure + [Fannie’s] investors are not very + happy," Bisenius told + +On line 5337: + sure [Fannie’s] investors + are not very happy," Bisenius + told the FCIC. "Part two + +On line 5337: + [Fannie’s] investors are + not very happy," Bisenius told + the FCIC. "Part two is + +On line 5337: + investors are not very + happy," Bisenius told the FCIC. + "Part two is if you + +On line 5337: + very happy," Bisenius + told the FCIC. "Part two is if + you actually + +On line 5337: + told the FCIC. "Part two + is if you actually + fundamentally + +On line 5339: + downturn in house prices, + you wouldn’t raise capital."36 + Similarly, CEO + +On line 5339: + prices, you wouldn’t raise + capital."36 Similarly, + CEO Syron spoke of + +On line 5341: + spoke of the downside + of raising capital on + August "Raising a + +On line 5341: + raising capital + on August "Raising a lot + more capital at + +On line 5341: + on August "Raising + a lot more capital at + these kinds of prices could + +On line 5341: + August "Raising a + lot more capital at these + kinds of prices could be + +On line 5341: + lot more capital + at these kinds of prices could be + quite dilutive to + +On line 5341: + more capital at + these kinds of prices could be quite + dilutive to our + +On line 5341: + at these kinds of prices + could be quite dilutive to + our shareholders, so + +On line 5341: + these kinds of prices could + be quite dilutive to our + shareholders, so we + +On line 5341: + be quite dilutive + to our shareholders, so we + have to balance the + +On line 5341: + to our shareholders, + so we have to balance the + interest of our + +On line 5341: + interest of our + shareholders."37 But Lockhart saw + it differently; + +On line 5341: + it differently; + in his view, Syron’s public + comments put "a good + +On line 5341: + put "a good face on + Freddie’s inability to + raise capital." He + +On line 5341: + He speculated + that Syron was masking a + different concern: + +On line 5341: + "[Syron] was getting + advice from his attorneys + about the high risk of + +On line 5341: + was getting advice + from his attorneys about the + high risk of raising + +On line 5341: + from his attorneys + about the high risk of raising + capital before + +On line 5341: + before releasing + [quarterly earnings] and our + lawyers could not disagree + +On line 5341: + [quarterly earnings] + and our lawyers could not disagree + because we know about + +On line 5341: + not disagree because + we know about their accounting + issues," Lockhart told + +On line 5343: + accounting issues," + Lockhart told the FCIC.38 "IT WILL + INCREASE CONFIDENCE" + +On line 5345: + told the FCIC.38 "IT WILL + INCREASE CONFIDENCE" In May, + the two companies + +On line 5345: + FCIC.38 "IT WILL INCREASE + CONFIDENCE" In May, the two + companies announced + +On line 5345: + CONFIDENCE" In May, + the two companies announced + further losses in + +On line 5345: + the two companies + announced further losses in + the first quarter. Even + +On line 5345: + companies announced + further losses in the first + quarter. Even as the + +On line 5345: + the situation + deteriorated, on + June OFHEO rewarded + +On line 5345: + rewarded Fannie + Mae for raising billion in + new capital by + +On line 5345: + in new capital + by further lowering the + capital surcharge, + +On line 5345: + further lowering + the capital surcharge, from + to In June, Fannie’s + +On line 5345: + capital surcharge, + from to In June, Fannie’s stock + fell Freddie’s, The price + +On line 5345: + fell Freddie’s, The price + of protection on million + in Fannie’s debt through + +On line 5345: + price of protection + on million in Fannie’s debt + through credit default + +On line 5345: + of protection on + million in Fannie’s debt through + credit default swaps + +On line 5345: + million in Fannie’s + debt through credit default swaps + jumped to in June, up + +On line 5345: + in Fannie’s debt through + credit default swaps jumped to + in June, up from in + +On line 5345: + through credit default + swaps jumped to in June, up from + in May; between and + +On line 5345: + credit default swaps + jumped to in June, up from in + May; between and it + +On line 5345: + jumped to in June, up + from in May; between and it + had typically + +On line 5345: + to in June, up from + in May; between and it had + typically been + +On line 5345: + from in May; between + and it had typically + been about In August, + +On line 5345: + in May; between and + it had typically been + about In August, they + +On line 5345: + May; between and it + had typically been about + In August, they both + +On line 5345: + In August, they both + reported more losses for + the second quarter. + +On line 5347: + they both reported + more losses for the second + quarter. Even after + +On line 5347: + after both Fannie + and Freddie became public + companies owned by + +On line 5347: + Fannie and Freddie + became public companies + owned by shareholders, + +On line 5347: + and Freddie became + public companies owned by + shareholders, they had + +On line 5347: + by shareholders, they + had continued to possess + an asset that is + +On line 5347: + shareholders, they had + continued to possess an + asset that is hard + +On line 5347: + had continued to + possess an asset that is + hard to quantify: + +On line 5347: + possess an asset + that is hard to quantify: + the implicit full + +On line 5347: + hard to quantify: + the implicit full faith and + credit of the U.S. + +On line 5347: + full faith and credit + of the U.S. government. The + government worried + +On line 5347: + credit of the U.S. + government. The government + worried that it could + +On line 5347: + the U.S. government. + The government worried that + it could not let the + +On line 5347: + worried that it could + not let the trillion GSEs fail, + because they were the + +On line 5347: + that it could not let + the trillion GSEs fail, because + they were the only + +On line 5347: + it could not let the + trillion GSEs fail, because they + were the only source + +On line 5347: + they were the only + source of liquidity in + the mortgage market + +On line 5347: + were the only source + of liquidity in the + mortgage market and + +On line 5347: + of liquidity + in the mortgage market and + because their failure + +On line 5347: + mortgage market and + because their failure would cause + losses to owners + +On line 5347: + market and because + their failure would cause losses + to owners of their + +On line 5347: + because their failure + would cause losses to owners + of their debt and their + +On line 5347: + would cause losses to + owners of their debt and their + guaranteed mortgage + +On line 5347: + GSEs before. It bailed + out Fannie when double-digit + inflation wrecked its + +On line 5347: + It bailed out Fannie + when double-digit inflation + wrecked its balance sheet + +On line 5347: + bailed out Fannie when + double-digit inflation wrecked + its balance sheet in + +On line 5349: + inflation wrecked its + balance sheet in the early + 1980s, and it came through + +On line 5349: + wrecked its balance sheet + in the early 1980s, and it + came through in the mid-1980s + +On line 5349: + its balance sheet in + the early 1980s, and it came + through in the mid-1980s for + +On line 5349: + sheet in the early + 1980s, and it came through in the + mid-1980s for another + +On line 5349: + in the early 1980s, + and it came through in the mid-1980s + for another GSE + +On line 5349: + the early 1980s, and + it came through in the mid-1980s for + another GSE in + +On line 5349: + 1980s, and it came through + in the mid-1980s for another + GSE in duress, the Farm + +On line 5349: + it came through in the + mid-1980s for another GSE in + duress, the Farm Credit + +On line 5349: + through in the mid-1980s for + another GSE in duress, the + Farm Credit System. + +On line 5349: + mid-1980s for another + GSE in duress, the Farm Credit + System. In the mid-1990s, + +On line 5349: + another GSE in + duress, the Farm Credit System. + In the mid-1990s, even a + +On line 5351: + Corporation, was + given a helping hand. As + the market grappled + +On line 5351: + market grappled with + the fundamental question + of whether Fannie and + +On line 5351: + the fundamental + question of whether Fannie and + Freddie would be backed + +On line 5351: + of whether Fannie and + Freddie would be backed by the + government, the yield + +On line 5351: + and Freddie would be + backed by the government, the + yield on the GSEs’ long-term + +On line 5351: + Freddie would be backed + by the government, the yield + on the GSEs’ long-term bonds + +On line 5351: + would be backed by the + government, the yield on the + GSEs’ long-term bonds rose. The + +On line 5351: + by the government, + the yield on the GSEs’ long-term bonds + rose. The difference + +On line 5351: + government, the yield + on the GSEs’ long-term bonds rose. The + difference between + +On line 5351: + the yield on the GSEs’ + long-term bonds rose. The difference + between the rate that + +On line 5351: + on the GSEs’ long-term bonds + rose. The difference between + the rate that the GSEs + +On line 5351: + the GSEs’ long-term bonds rose. + The difference between the + rate that the GSEs paid + +On line 5351: + GSEs’ long-term bonds rose. The + difference between the rate + that the GSEs paid on + +On line 5351: + rose. The difference + between the rate that the GSEs + paid on their debt and + +On line 5351: + difference between + the rate that the GSEs paid on + their debt and rates on + +On line 5351: + the rate that the GSEs + paid on their debt and rates on + Treasuries—a premium + +On line 5351: + paid on their debt and + rates on Treasuries—a premium + that reflects investors’ + +On line 5351: + that reflects investors’ + assessment of risk—widened in to + one-half a percentage + +On line 5351: + of risk—widened in to one-half + a percentage point. That was + low compared with the + +On line 5351: + risk—widened in to one-half a + percentage point. That was low + compared with the same + +On line 5351: + one-half a percentage + point. That was low compared with + the same figure for + +On line 5351: + percentage point. That + was low compared with the same + figure for other + +On line 5351: + compared with the same + figure for other publicly + traded companies, + +On line 5351: + with the same figure + for other publicly traded + companies, but high + +On line 5351: + for other publicly + traded companies, but high + for the ultra-safe + +On line 5351: + traded companies, + but high for the ultra-safe + GSEs. By June the spread + +On line 5351: + companies, but high + for the ultra-safe GSEs. By + June the spread had risen + +On line 5351: + for the ultra-safe + GSEs. By June the spread had risen + over the level; by + +On line 5351: + the spread had nearly + doubled from its level to + just under making + +On line 5351: + under making it + more difficult and costly + for the GSEs to fund + +On line 5351: + more difficult and + costly for the GSEs to fund + their operations. + +On line 5351: + costly for the GSEs + to fund their operations. + On the other hand, + +On line 5351: + for the GSEs to fund + their operations. On the + other hand, the prices + +On line 5351: + increased slightly over + this time period, while the + prices of private-label + +On line 5351: + prices of private-label + mortgage–backed securities + dramatically + +On line 5351: + dramatically + declined. For example, the + price of the FNCI7 + +On line 5351: + example, the price + of the FNCI7 index—an + index of Fannie + +On line 5351: + index of Fannie + mortgage–backed securities + with an average + +On line 5351: + average coupon of + 7%—increased from in January + to on September + +On line 5351: + price of the FNCI5 + index—Fannie securities with an + average coupon of + +On line 5351: + average coupon of + 5%—increased from to during the + same time period. + +On line 5353: + to during the same + time period. In July + and August Fannie + +On line 5353: + and August Fannie + suffered a liquidity + squeeze, because it was + +On line 5353: + Fannie suffered a + liquidity squeeze, because + it was unable to + +On line 5353: + a liquidity + squeeze, because it was unable + to borrow against its + +On line 5353: + liquidity squeeze, + because it was unable to + borrow against its own + +On line 5353: + squeeze, because it was + unable to borrow against its + own securities + +On line 5353: + unable to borrow + against its own securities + to raise sufficient + +On line 5353: + to borrow against its + own securities to raise + sufficient cash in + +On line 5353: + own securities + to raise sufficient cash in + the repo market. + +On line 5355: + securities to + raise sufficient cash in the + repo market. Its + +On line 5355: + to raise sufficient + cash in the repo market. + Its stock price dove to + +On line 5355: + raise sufficient cash + in the repo market. Its + stock price dove to less + +On line 5355: + sufficient cash in + the repo market. Its stock + price dove to less than + +On line 5355: + the repo market. + Its stock price dove to less than + a share. Fannie asked + +On line 5355: + repo market. Its + stock price dove to less than a + share. Fannie asked the + +On line 5355: + Its stock price dove to + less than a share. Fannie asked + the Fed for help.39 A + +On line 5355: + price dove to less than + a share. Fannie asked the Fed + for help.39 A senior + +On line 5355: + a share. Fannie asked + the Fed for help.39 A senior + adviser in the + +On line 5355: + the Fed for help.39 A + senior adviser in the + Federal Reserve + +On line 5355: + senior adviser + in the Federal Reserve + Board’s Division of + +On line 5355: + Federal Reserve + Board’s Division of Banking + Supervision and + +On line 5355: + Board’s Division of + Banking Supervision and + Regulation gave + +On line 5355: + Supervision and + Regulation gave the FCIC + a bleak account of + +On line 5355: + Regulation gave + the FCIC a bleak account of + the situation + +On line 5355: + a bleak account of + the situation at the + two GSEs and noted + +On line 5355: + bleak account of the + situation at the two + GSEs and noted that + +On line 5357: + the situation + at the two GSEs and noted + that "liquidity + +On line 5357: + situation at + the two GSEs and noted that + "liquidity was + +On line 5357: + at the two GSEs and + noted that "liquidity + was just becoming + +On line 5357: + so essential, so + the Federal Reserve agreed + to help provide it."40 + +On line 5359: + essential, so the + Federal Reserve agreed to + help provide it."40 On + +On line 5359: + so the Federal + Reserve agreed to help provide + it."40 On July the + +On line 5359: + Reserve agreed to help + provide it."40 On July the + Federal Reserve + +On line 5359: + York Fed to extend + emergency loans to the GSEs + "should such lending prove + +On line 5361: + GSEs "should such lending + prove necessary to promote + the availability + +On line 5361: + "should such lending prove + necessary to promote the + availability of + +On line 5361: + availability of + home mortgage credit during + a period of + +On line 5361: + home mortgage credit + during a period of + stress in financial + +On line 5361: + a period of + stress in financial markets."41 + Fannie and Freddie + +On line 5361: + stress in financial + markets."41 Fannie and Freddie + would never tap the + +On line 5361: + markets."41 Fannie and + Freddie would never tap the + Fed for that funding.42 + +On line 5363: + Fannie and Freddie + would never tap the Fed for + that funding.42 Also + +On line 5363: + Freddie would never + tap the Fed for that funding.42 + Also on July + +On line 5363: + would never tap the + Fed for that funding.42 Also + on July Treasury + +On line 5363: + never tap the Fed + for that funding.42 Also on + July Treasury laid + +On line 5363: + tap the Fed for that + funding.42 Also on July + Treasury laid out a + +On line 5363: + Treasury laid out a + three-part legislative plan + to strengthen the GSEs + +On line 5363: + strengthen the GSEs by + temporarily increasing + their lines of credit + +On line 5363: + lines of credit with + the Treasury, authorizing + Treasury to inject + +On line 5363: + Treasury to inject + capital into the GSEs, + and replacing OFHEO + +On line 5363: + into the GSEs, and + replacing OFHEO with the new + Federal Housing + +On line 5363: + Federal Housing + Finance Agency (FHFA), with + the power to place + +On line 5363: + Agency (FHFA), with + the power to place the GSEs + into receivership. + +On line 5367: + needed "a bazooka" at + their disposal. SEPTEMBER + "You are not likely + +On line 5367: + "You are not likely + to take it out," Paulson told + legislators. "I + +On line 5367: + take it out," Paulson + told legislators. "I just + say that by having + +On line 5367: + having something that + is unspecified, it will + increase confidence. + +On line 5367: + is unspecified, + it will increase confidence. + And by increasing + +On line 5367: + confidence. And by + increasing confidence it + will greatly reduce + +On line 5367: + greatly reduce the + likelihood it will ever + be used."43 Fannie’s Mudd + +On line 5367: + likelihood it will + ever be used."43 Fannie’s Mudd + and Freddie’s Syron + +On line 5367: + it will ever be + used."43 Fannie’s Mudd and Freddie’s + Syron praised the plan.44 + +On line 5369: + be used."43 Fannie’s Mudd + and Freddie’s Syron praised the + plan.44 At the end of + +On line 5369: + and Freddie’s Syron + praised the plan.44 At the end of + July, Congress passed + +On line 5369: + July, Congress passed + the Housing and Economic + Recovery Act (HERA) + +On line 5369: + Act (HERA) of giving + Paulson his bazooka—the ability + to extend secured + +On line 5369: + his bazooka—the ability + to extend secured lines of + credit to the GSEs, + +On line 5369: + extend secured lines + of credit to the GSEs, to + purchase their mortgage + +On line 5369: + of credit to the + GSEs, to purchase their mortgage + securities, and + +On line 5371: + inject capital. + The 261-page bill also strengthened + regulation of + +On line 5371: + GSEs by creating + FHFA, an independent + federal agency, + +On line 5371: + and compensation. + In addition, the bill raised + the federal debt + +On line 5371: + In addition, the + bill raised the federal debt + ceiling by billion + +On line 5371: + raised the federal + debt ceiling by billion to + trillion, providing + +On line 5371: + ceiling by billion + to trillion, providing funds + to operate the + +On line 5371: + to operate the + GSEs if they were placed into + conservatorship. + +On line 5373: + Federal Reserve + Board consented in mid-July to + furnish emergency + +On line 5373: + in mid-July to furnish + emergency loans, Fed staff and + representatives + +On line 5373: + emergency loans, Fed + staff and representatives + of the Office of + +On line 5373: + of the Comptroller + of the Currency (OCC), along + with Morgan Stanley, + +On line 5373: + the Comptroller of + the Currency (OCC), along with + Morgan Stanley, which + +On line 5373: + of the Currency + (OCC), along with Morgan Stanley, + which acted as an + +On line 5373: + as an adviser + to Treasury, initiated + a review of the + +On line 5373: + an adviser to + Treasury, initiated a + review of the GSEs. + +On line 5373: + review of the GSEs. + Timothy Clark, who oversaw + the weeklong review + +On line 5373: + the GSEs. Timothy + Clark, who oversaw the weeklong + review for the Fed, + +On line 5373: + Timothy Clark, who + oversaw the weeklong review + for the Fed, told the + +On line 5373: + Clark, who oversaw the + weeklong review for the Fed, + told the FCIC that it + +On line 5373: + oversaw the weeklong + review for the Fed, told the + FCIC that it was the + +On line 5373: + the weeklong review + for the Fed, told the FCIC that + it was the first time + +On line 5373: + weeklong review for + the Fed, told the FCIC that it + was the first time they + +On line 5373: + review for the Fed, + told the FCIC that it was the + first time they ever + +On line 5373: + the Fed, told the FCIC + that it was the first time they + ever had access + +On line 5373: + that it was the first + time they ever had access + to information + +On line 5373: + it was the first time + they ever had access to + information from + +On line 5373: + time they ever had + access to information + from the GSEs. He said + +On line 5373: + the GSEs. He said that + previously, "The GSEs [saw] + the Fed as public + +On line 5373: + previously, "The + GSEs [saw] the Fed as public + enemy number + +On line 5373: + number one. There was + a battle between us and + them." Clark added, "We would + +On line 5373: + There was a battle + between us and them." Clark added, + "We would deal with OFHEO, + +On line 5373: + a battle between + us and them." Clark added, "We would + deal with OFHEO, which was + +On line 5373: + between us and them." + Clark added, "We would deal with OFHEO, + which was also very + +On line 5373: + us and them." Clark added, + "We would deal with OFHEO, which was + also very guarded. + +On line 5373: + them." Clark added, "We would + deal with OFHEO, which was also + very guarded. So we + +On line 5373: + Clark added, "We would deal + with OFHEO, which was also very + guarded. So we did + +On line 5373: + "We would deal with OFHEO, + which was also very guarded. + So we did not have + +On line 5373: + deal with OFHEO, which was + also very guarded. So we + did not have access + +On line 5373: + which was also very + guarded. So we did not have + access to info + +On line 5373: + also very guarded. + So we did not have access + to info until + +On line 5373: + guarded. So we did + not have access to info + until they wanted + +On line 5373: + So we did not have + access to info until + they wanted funding + +On line 5373: + access to info + until they wanted funding + from us."45 Although Fed + +On line 5373: + to info until + they wanted funding from us."45 + Although Fed and OCC + +On line 5373: + until they wanted + funding from us."45 Although Fed + and OCC personnel + +On line 5373: + they wanted funding + from us."45 Although Fed and OCC + personnel were at + +On line 5373: + us."45 Although Fed and + OCC personnel were at the + GSEs and conferring + +On line 5373: + Although Fed and OCC + personnel were at the GSEs + and conferring with + +On line 5373: + OCC personnel were + at the GSEs and conferring + with executives, + +On line 5373: + personnel were at + the GSEs and conferring with + executives, Mudd + +On line 5373: + GSEs and conferring + with executives, Mudd told + the FCIC that he did + +On line 5373: + and conferring with + executives, Mudd told the + FCIC that he did not + +On line 5373: + executives, Mudd + told the FCIC that he did not + know of the agencies’ + +On line 5375: + told the FCIC that he + did not know of the agencies’ + involvement until + +On line 5375: + did not know of the + agencies’ involvement until + their enterprises + +On line 5377: + enterprises were + both in conservatorship.46 + The Fed and the OCC + +On line 5377: + the OCC discovered + that the problems were worse than + their suspicions and + +On line 5377: + that the problems were + worse than their suspicions and + reports from FHFA + +On line 5377: + problems were worse than + their suspicions and reports + from FHFA had led + +On line 5377: + than their suspicions + and reports from FHFA had + led them to believe. + +On line 5377: + from FHFA had led + them to believe. According + to Clark, the Fed found + +On line 5377: + FHFA had led them + to believe. According to + Clark, the Fed found that + +On line 5377: + led them to believe. + According to Clark, the Fed + found that the GSEs were + +On line 5377: + According to Clark, + the Fed found that the GSEs were + significantly + +On line 5377: + the Fed found that the + GSEs were significantly + "underreserved," with + +On line 5377: + "underreserved," with + huge potential losses, and + their operations + +On line 5377: + potential losses, + and their operations were + "unsafe and unsound."47 + +On line 5377: + their operations + were "unsafe and unsound."47 The + OCC rejected the + +On line 5377: + and unsound."47 The OCC + rejected the forecasting + methodologies on which + +On line 5377: + The OCC rejected + the forecasting methodologies + on which Fannie and + +On line 5377: + on which Fannie and + Freddie relied. Using its + own metrics, it found + +On line 5377: + and Freddie relied. + Using its own metrics, it + found insufficient + +On line 5377: + its own metrics, it + found insufficient reserves + for future losses + +On line 5377: + own metrics, it found + insufficient reserves for + future losses and + +On line 5377: + future losses and + identified significant + problems in credit + +On line 5377: + in credit and risk + management. Kevin Bailey, the + OCC deputy comptroller + +On line 5377: + loss forecasting was + problematic, and that its + loan losses therefore + +On line 5377: + problematic, and + that its loan losses therefore + were understated. + +On line 5377: + that its loan losses + therefore were understated. + He added that Fannie + +On line 5377: + He added that Fannie + had overvalued its deferred + tax assets—because + +On line 5379: + had no value.48 Loss + projections calculated + by Morgan Stanley + +On line 5379: + Stanley concluded + that Fannie’s loss projection + methodology was + +On line 5381: + Fannie’s projections + did not. All told, the litany of + understatements and + +On line 5381: + did not. All told, the + litany of understatements and + shortfalls led the OCC’s + +On line 5381: + All told, the litany of + understatements and shortfalls + led the OCC’s Bailey + +On line 5381: + OCC’s Bailey to a + firm conclusion. If the GSEs + were not insolvent + +On line 5381: + Bailey to a firm + conclusion. If the GSEs were + not insolvent at + +On line 5381: + firm conclusion. If + the GSEs were not insolvent + at the time, they were + +On line 5381: + If the GSEs were not + insolvent at the time, they + were "almost there," he + +On line 5381: + were not insolvent + at the time, they were "almost + there," he told the FCIC.49 + +On line 5381: + there," he told the FCIC.49 + Regulators also learned + that Fannie was not + +On line 5381: + FCIC.49 Regulators + also learned that Fannie was + not charging off loans + +On line 5381: + learned that Fannie was + not charging off loans until + they were delinquent for + +On line 5381: + that Fannie was not + charging off loans until they + were delinquent for two + +On line 5381: + not charging off loans + until they were delinquent for + two years, a head-in-the-sand + +On line 5381: + off loans until they + were delinquent for two years, a + head-in-the-sand approach. Banks + +On line 5381: + they were delinquent for + two years, a head-in-the-sand approach. + Banks are required to + +On line 5381: + were delinquent for two + years, a head-in-the-sand approach. Banks + are required to charge + +On line 5381: + delinquent for two years, + a head-in-the-sand approach. Banks are + required to charge off + +On line 5381: + two years, a head-in-the-sand + approach. Banks are required to + charge off loans once they + +On line 5381: + a head-in-the-sand approach. + Banks are required to charge off + loans once they are days + +On line 5381: + Banks are required to + charge off loans once they are days + delinquent. For these and + +On line 5381: + charge off loans once they + are days delinquent. For these and + numerous other + +On line 5381: + delinquent. For these and + numerous other errors + and flawed methodologies, + +On line 5381: + numerous other + errors and flawed methodologies, + Fannie and Freddie + +On line 5381: + other errors and + flawed methodologies, Fannie and + Freddie earned rebukes. + +On line 5381: + Fannie and Freddie + earned rebukes. "Given he role + of the GSEs and their + +On line 5381: + earned rebukes. "Given + he role of the GSEs and their + market dominance," + +On line 5381: + he role of the GSEs + and their market dominance," + the OCC report said, + +On line 5381: + role of the GSEs and + their market dominance," the + OCC report said, "they + +On line 5381: + of the GSEs and their + market dominance," the OCC + report said, "they should + +On line 5381: + Instead they appear + to significantly lag + the industry in + +On line 5383: + significantly + lag the industry in all + respects."50 "CRITICAL + +On line 5383: + lag the industry + in all respects."50 "CRITICAL + UNSAFE AND UNSOUND + +On line 5383: + industry in all + respects."50 "CRITICAL UNSAFE + AND UNSOUND PRACTICES" + +On line 5385: + respects."50 "CRITICAL + UNSAFE AND UNSOUND PRACTICES" + Paulson told the FCIC + +On line 5385: + UNSAFE AND UNSOUND + PRACTICES" Paulson told the FCIC + that although he learned + +On line 5385: + PRACTICES" Paulson told + the FCIC that although he learned + of the Fed and OCC + +On line 5385: + Paulson told the FCIC + that although he learned of the + Fed and OCC findings + +On line 5385: + the FCIC that although + he learned of the Fed and OCC + findings by August + +On line 5385: + that although he learned + of the Fed and OCC findings + by August it took + +On line 5385: + although he learned of + the Fed and OCC findings by + August it took him + +On line 5385: + he learned of the Fed + and OCC findings by August + it took him three weeks + +On line 5385: + learned of the Fed and + OCC findings by August it + took him three weeks to + +On line 5385: + and OCC findings by + August it took him three weeks + to convince Lockhart + +On line 5385: + August it took him + three weeks to convince Lockhart + and FHFA that there + +On line 5385: + three weeks to convince + Lockhart and FHFA that there + was a capital + +On line 5385: + to convince Lockhart + and FHFA that there was a + capital shortfall, + +On line 5385: + Lockhart and FHFA + that there was a capital + shortfall, that the GSEs + +On line 5385: + and FHFA that there + was a capital shortfall, + that the GSEs were not + +On line 5385: + was a capital + shortfall, that the GSEs were not + viable, and that they + +On line 5385: + capital shortfall, + that the GSEs were not viable, + and that they should be + +On line 5385: + shortfall, that the GSEs + were not viable, and that they + should be placed under + +On line 5385: + were not viable, and + that they should be placed under + government control.51 + +On line 5385: + that they should be placed + under government control.51 + On August, FHFA + +On line 5385: + under government + control.51 On August, FHFA + informed both Mudd and + +On line 5385: + government control.51 + On August, FHFA informed + both Mudd and Syron + +On line 5385: + control.51 On August, + FHFA informed both Mudd and + Syron that their firms + +On line 5385: + FHFA informed both + Mudd and Syron that their firms + were "adequately + +On line 5385: + were "adequately + capitalized" under the + regulations, a + +On line 5385: + regulations, a + judgment based on financial + information that + +On line 5385: + a judgment based on + financial information + that was "certified + +On line 5385: + that was "certified + and represented as true + and correct by [GSE] + +On line 5385: + true and correct by + [GSE] management." But FHFA + also emphasized + +On line 5385: + current level of + Fannie Mae’s capital" if + the housing market + +On line 5387: + Mae’s capital" if + the housing market decline + continued.52 Fannie’s + +On line 5387: + the housing market + decline continued.52 Fannie’s + prospects for increasing + +On line 5387: + grew gloomier. Fannie + informed Treasury on August + 25—and repeatedly + +On line 5387: + Treasury on August + 25—and repeatedly told FHFA—that + raising capital + +On line 5387: + 25—and repeatedly + told FHFA—that raising capital + was infeasible + +On line 5387: + repeatedly told + FHFA—that raising capital was + infeasible and + +On line 5387: + raising capital + was infeasible and that + the company was + +On line 5387: + the company was + expecting additional + losses. Even Fannie’s + +On line 5387: + Even Fannie’s "base-case + earnings forecast" pointed to + substantial pressure + +On line 5389: + September Lockhart + and FHFA agreed with Treasury + that the GSEs needed + +On line 5389: + Lockhart and FHFA + agreed with Treasury that the GSEs + needed to be placed + +On line 5389: + and FHFA agreed with + Treasury that the GSEs needed + to be placed into + +On line 5389: + Treasury that the GSEs + needed to be placed into + conservatorship. + +On line 5389: + needed to be placed + into conservatorship. + That day, Syron and + +On line 5389: + That day, Syron and + Mudd received blistering midyear + reviews from FHFA. + +On line 5389: + received blistering + midyear reviews from FHFA. The + opening paragraph of + +On line 5389: + reviews from FHFA. + The opening paragraph of each + letter informed the + +On line 5389: + opening paragraph of + each letter informed the CEOs + that their companies + +On line 5389: + each letter informed + the CEOs that their companies + had been downgraded + +On line 5389: + letter informed the + CEOs that their companies had + been downgraded to + +On line 5389: + companies had been + downgraded to "critical + concerns," and that "the + +On line 5389: + had been downgraded + to "critical concerns," and + that "the critical + +On line 5389: + that "the critical + unsafe and unsound practices + and conditions that + +On line 5389: + unsound practices and + conditions that gave rise to + the Enterprise’s + +On line 5391: + bad situation + was expected to worsen. + The 21-page report sent + +On line 5391: + situation was + expected to worsen. The + 21-page report sent to + +On line 5391: + 21-page report sent to + Fannie identified sweeping + concerns, including + +On line 5391: + Fannie identified + sweeping concerns, including + failures by the board + +On line 5391: + failures by the board + and senior management, a + significant drop + +On line 5391: + senior management, + a significant drop in + the quality of + +On line 5391: + the quality of + mortgages and securities + owned or guaranteed + +On line 5391: + and securities + owned or guaranteed by the + GSE, insufficient + +On line 5391: + owned or guaranteed + by the GSE, insufficient + reserves, the almost + +On line 5391: + exclusive reliance + on short-term funding, and the + inability to + +On line 5391: + on short-term funding, + and the inability to + raise additional + +On line 5391: + for their "imprudent + decisions" to "purchase or + guarantee higher + +On line 5391: + mortgage products." The + letter faulted Fannie for + purchasing high-risk + +On line 5391: + faulted Fannie for + purchasing high-risk loans to + "increase market share, + +On line 5391: + purchasing high-risk + loans to "increase market share, + raise revenue and meet + +On line 5391: + and for attempting + to increase market share by + competing with Wall + +On line 5391: + to increase market + share by competing with Wall + Street firms that purchased + +On line 5391: + prudent credit risk + management and corporate + business objectives," + +On line 5391: + Using models that + underestimated this + risk, the GSE then charged + +On line 5391: + this risk, the GSE then + charged fees even lower than what + its own deficient + +On line 5391: + the GSE then charged fees + even lower than what its own + deficient models + +On line 5391: + charged fees even lower + than what its own deficient + models suggested + +On line 5391: + models suggested + were appropriate. FHFA + determined that these + +On line 5391: + were appropriate. + FHFA determined that these + lower fees were charged + +On line 5391: + FHFA determined + that these lower fees were charged + because "focus was + +On line 5391: + that these lower fees + were charged because "focus was + improperly placed + +On line 5391: + fees were charged because + "focus was improperly + placed on market share + +On line 5397: + Wall Street and [Freddie + Mac]."55 SEPTEMBER Even after + internal reports + +On line 5397: + Mac]."55 SEPTEMBER Even + after internal reports + pointed to market + +On line 5397: + after internal + reports pointed to market + problems, Fannie kept + +On line 5397: + internal reports + pointed to market problems, + Fannie kept buying + +On line 5397: + pointed to market + problems, Fannie kept buying + and guaranteeing + +On line 5397: + problems, Fannie kept + buying and guaranteeing + riskier loan products, + +On line 5397: + Fannie kept buying + and guaranteeing riskier + loan products, FHFA + +On line 5397: + and guaranteeing + riskier loan products, FHFA + said. "Despite signs in + +On line 5397: + riskier loan products, + FHFA said. "Despite signs in + the latter half of + +On line 5399: + problems, management + continued activity + in risky programs, and + +On line 5399: + for Alt-A loans without + establishing limits."56 The + company also + +On line 5399: + by Alt-A and subprime + loans.57 Losses were likely to + be higher than the + +On line 5399: + Alt-A and subprime loans.57 + Losses were likely to be + higher than the GSEs + +On line 5399: + Losses were likely + to be higher than the GSEs + had estimated, + +On line 5401: + to be higher than + the GSEs had estimated, + FHFA found. FHFA + +On line 5401: + higher than the GSEs + had estimated, FHFA + found. FHFA also + +On line 5401: + had estimated, + FHFA found. FHFA also + noted "increasing + +On line 5401: + FHFA found. FHFA + also noted "increasing + questions and concerns" + +On line 5401: + models it used to + forecast losses had not been + independently + +On line 5401: + forecast losses had + not been independently + validated or + +On line 5401: + validated or + updated for several + years. FHFA judged that + +On line 5401: + would likely show a + "material increase." In + addition, Fannie + +On line 5401: + performance, FHFA + found this benefit to be + significantly + +On line 5403: + found this benefit + to be significantly + overstated.58 The-page + +On line 5403: + of that GSE’s safety + and soundness, but more severe + criticisms of its + +On line 5403: + safety and soundness, + but more severe criticisms + of its management + +On line 5403: + and soundness, but more + severe criticisms of its + management and board. + +On line 5403: + severe criticisms + of its management and board. + In particular, + +On line 5403: + of its management + and board. In particular, + the report noted + +On line 5403: + its management and + board. In particular, the + report noted a + +On line 5403: + the report noted + a significant lack of + market confidence, + +On line 5403: + significant lack + of market confidence, which + had "eliminated + +On line 5403: + market confidence, + which had "eliminated the + ability to raise + +On line 5403: + ability to raise + capital." FHFA, for its + part, "lost confidence + +On line 5403: + FHFA, for its part, + "lost confidence in the Board + of Directors and + +On line 5403: + "lost confidence in + the Board of Directors and + the executive + +On line 5403: + other serious + misjudgments." According to + the regulator, + +On line 5403: + According to the + regulator, they therefore + could not be relied + +On line 5403: + could not be relied + on, particularly in + light of their widespread + +On line 5403: + widespread failures to + resolve regulatory + issues and address + +On line 5403: + address criticisms. + In addition, FHFA said + that Freddie’s failure + +On line 5403: + capital despite + its assurances "invite[d]" + the conclusion that + +On line 5403: + that the board and CEO + had not negotiated + "in good faith" about the + +On line 5405: + about the capital + surcharge reduction.59 As in + its assessment of + +On line 5405: + surcharge reduction.59 + As in its assessment of + Fannie, FHFA found + +On line 5405: + in its assessment + of Fannie, FHFA found that + Freddie’s unsafe and + +On line 5405: + and guarantee of + higher-risk loan products in and + in a declining + +On line 5405: + higher-risk loan products + in and in a declining + market. Even after + +On line 5405: + loan products in and + in a declining market. + Even after being + +On line 5405: + products in and in + a declining market. Even + after being told + +On line 5405: + declining market. + Even after being told by + the regulator + +On line 5405: + after being told + by the regulator in + that its purchases + +On line 5405: + the regulator + in that its purchases of + subprime private-label + +On line 5405: + subprime private-label + securities had outpaced + its risk management + +On line 5405: + securities had + outpaced its risk management + abilities, Freddie + +On line 5405: + Freddie bought billion + of subprime securities + in each subsequent + +On line 5407: + FHFA also found + that "aggressive" accounting + cast doubt on Freddie’s + +On line 5407: + reported earnings + and capital. Despite "clear + signals" that losses + +On line 5407: + capital. Despite + "clear signals" that losses on + mortgage assets were + +On line 5407: + mortgage assets were + likely, Freddie waited to + record write-downs until + +On line 5407: + record write-downs until + the regulator threatened + to issue a cease + +On line 5407: + write-downs until the + regulator threatened to + issue a cease and + +On line 5407: + the regulator + threatened to issue a cease + and desist order. + +On line 5407: + threatened to issue + a cease and desist order. + Even then, one write-down + +On line 5407: + issue a cease and + desist order. Even then, one + write-down was reversed + +On line 5407: + desist order. Even + then, one write-down was reversed + "just prior to the + +On line 5407: + Even then, one write-down + was reversed "just prior to + the issuance of the + +On line 5407: + credit losses would + "result in a substantial + dissipation of + +On line 5409: + in a substantial + dissipation of earnings + and capital."60 "THEY + +On line 5411: + dissipation of + earnings and capital."60 "THEY + WENT FROM ZERO TO + +On line 5411: + capital."60 "THEY WENT + FROM ZERO TO THREE WITH NO + WARNING IN BETWEEN" + +On line 5413: + "THEY WENT FROM ZERO + TO THREE WITH NO WARNING IN + BETWEEN" Mudd told the + +On line 5413: + FROM ZERO TO THREE + WITH NO WARNING IN BETWEEN" + Mudd told the FCIC that + +On line 5413: + ZERO TO THREE WITH + NO WARNING IN BETWEEN" Mudd + told the FCIC that its + +On line 5413: + WITH NO WARNING IN + BETWEEN" Mudd told the FCIC that + its regulator + +On line 5413: + BETWEEN" Mudd told the + FCIC that its regulator + had never before + +On line 5413: + kind of criticisms + leveled in the September + letter. He said the + +On line 5413: + September letter. + He said the regulator’s + "chronicling of the + +On line 5413: + situation" then + was "inconsistent with what + you would consider + +On line 5413: + you would consider + better regulatory + practice to be—like, + +On line 5413: + practice to be—like, + first warning: fix it; second + warning: fix it; third + +On line 5413: + be—like, first warning: + fix it; second warning: fix + it; third warning: you’re + +On line 5413: + first warning: fix it; + second warning: fix it; third + warning: you’re ut of + +On line 5413: + it; second warning: + fix it; third warning: you’re ut + of here. Instead, they + +On line 5413: + second warning: fix + it; third warning: you’re ut of + here. Instead, they went + +On line 5413: + fix it; third warning: + you’re ut of here. Instead, they + went from zero to + +On line 5413: + it; third warning: you’re + ut of here. Instead, they went + from zero to three + +On line 5413: + third warning: you’re ut + of here. Instead, they went from + zero to three with + +On line 5413: + ut of here. Instead, + they went from zero to three + with no warning in + +On line 5413: + here. Instead, they went + from zero to three with no + warning in between."61 + +On line 5413: + they went from zero + to three with no warning in + between."61 A review + +On line 5413: + from zero to three + with no warning in between."61 + A review of the + +On line 5413: + with no warning in + between."61 A review of the + examination + +On line 5413: + between."61 A review + of the examination + reports and other + +On line 5413: + reports and other + documents provided by + FHFA to the FCIC + +On line 5413: + FHFA to the FCIC + largely supports Mudd’s view + on this specific + +On line 5413: + to the FCIC largely + supports Mudd’s view on this + specific point. While + +On line 5413: + examination + reports noted concerns about + increasing credit + +On line 5413: + remediation + of deficiencies required + by the May consent + +On line 5413: + of deficiencies + required by the May consent + agreement, they do not + +On line 5413: + required by the May + consent agreement, they do not + include the sweeping + +On line 5413: + consent agreement, they + do not include the sweeping + criticisms contained + +On line 5413: + do not include the + sweeping criticisms contained + in the September + +On line 5413: + include the sweeping + criticisms contained in the + September letter. + +On line 5415: + criticisms contained + in the September letter. + Two days after their + +On line 5415: + in the September + letter. Two days after their + two companies were + +On line 5415: + were designated + "critical concerns," Mudd at + Fannie and Syron + +On line 5415: + "critical concerns," + Mudd at Fannie and Syron + at Freddie faced a + +On line 5415: + Mudd at Fannie and + Syron at Freddie faced a + government takeover. On + +On line 5415: + Syron at Freddie + faced a government takeover. On + September FHFA + +On line 5415: + government takeover. On + September FHFA Acting + Deputy Director Chris + +On line 5415: + Deputy Director Chris + Dickerson sent separate + memos to Lockhart + +On line 5417: + was not a foregone + conclusion. Paulson, Lockhart, + and Bernanke met with Mudd, + +On line 5417: + foregone conclusion. + Paulson, Lockhart, and Bernanke met + with Mudd, Syron, and + +On line 5417: + conclusion. Paulson, + Lockhart, and Bernanke met with Mudd, + Syron, and their boards + +On line 5417: + Paulson, Lockhart, and + Bernanke met with Mudd, Syron, and + their boards to persuade + +On line 5417: + Lockhart, and Bernanke met + with Mudd, Syron, and their boards + to persuade them to + +On line 5417: + persuade them to cede + control.63 Essentially the + GSEs faced a Hobson’s + +On line 5417: + them to cede control.63 + Essentially the GSEs faced + a Hobson’s choice: take + +On line 5417: + Essentially the + GSEs faced a Hobson’s choice: take + the horse offered or + +On line 5417: + GSEs faced a Hobson’s + choice: take the horse offered or + none at all. "They had + +On line 5417: + faced a Hobson’s choice: + take the horse offered or none + at all. "They had to + +On line 5417: + take the horse offered + or none at all. "They had to + voluntarily + +On line 5417: + or none at all. "They + had to voluntarily + agree to a consent + +On line 5417: + at all. "They had to + voluntarily agree to + a consent agreement," + +On line 5417: + voluntarily + agree to a consent agreement," + Lockhart told the FCIC. + +On line 5419: + agree to a consent + agreement," Lockhart told the FCIC. + The alternative, + +On line 5419: + agreement," Lockhart told + the FCIC. The alternative, + a hostile action, + +On line 5419: + a hostile action, + invited trouble and "nasty + lawsuits," he noted. + +On line 5419: + action, invited + trouble and "nasty lawsuits," he + noted. "So we made + +On line 5419: + invited trouble + and "nasty lawsuits," he noted. + "So we made a very + +On line 5419: + and "nasty lawsuits," he + noted. "So we made a very + strong case so the board + +On line 5419: + he noted. "So we + made a very strong case so the + board of directors + +On line 5419: + noted. "So we made + a very strong case so the board + of directors did + +On line 5419: + made a very strong case + so the board of directors + did not have a choice."64 + +On line 5419: + very strong case so the + board of directors did not + have a choice."64 Paulson + +On line 5419: + board of directors + did not have a choice."64 Paulson + reminded the GSEs + +On line 5419: + have a choice."64 Paulson + reminded the GSEs that he + had authority + +On line 5419: + the GSEs that he had + authority to inject + capital, but he + +On line 5419: + had authority + to inject capital, but + he would not do so + +On line 5421: + so unless they were + in conservatorship.65 Mudd + was "stunned and angry," + +On line 5421: + was "stunned and angry," + according to Paulson.66 Tom + Lund, who ran Fannie + +On line 5421: + business, told the FCIC + that conservatorship came + as a surprise to + +On line 5421: + came as a surprise + to everyone.67 Levin told the + FCIC that he never + +On line 5421: + as a surprise to + everyone.67 Levin told the FCIC + that he never saw + +On line 5421: + to everyone.67 Levin + told the FCIC that he never + saw a government + +On line 5421: + everyone.67 Levin told + the FCIC that he never saw + a government seizure + +On line 5421: + that he never saw + a government seizure coming. + He never imagined, + +On line 5421: + he never saw a + government seizure coming. He + never imagined, he + +On line 5421: + a government seizure + coming. He never imagined, + he said, that Fannie + +On line 5421: + that Fannie Mae was + or might become insolvent.68 + Interviewed in Mudd + +On line 5421: + was or might become + insolvent.68 Interviewed in + Mudd told the FCIC: "I + +On line 5421: + become insolvent.68 + Interviewed in Mudd told the + FCIC: "I did not think + +On line 5421: + Interviewed in Mudd + told the FCIC: "I did not think + in any way it was + +On line 5421: + in Mudd told the FCIC: + "I did not think in any way + it was fair for the + +On line 5421: + the FCIC: "I did not + think in any way it was fair + for the government + +On line 5421: + FCIC: "I did not think + in any way it was fair for + the government to + +On line 5421: + "I did not think in + any way it was fair for the + government to have + +On line 5421: + think in any way it + was fair for the government + to have been in a + +On line 5421: + way it was fair for + the government to have been + in a position + +On line 5421: + it was fair for the + government to have been in + a position of + +On line 5421: + the government to + have been in a position + of being in the + +On line 5421: + to have been in a + position of being in + the chorus for the + +On line 5421: + in a position + of being in the chorus + for the company + +On line 5421: + a position of + being in the chorus for + the company to + +On line 5421: + of being in the + chorus for the company + to add capital, + +On line 5421: + for the company + to add capital, and then + to inject itself + +On line 5421: + the company to + add capital, and then to + inject itself in + +On line 5421: + to add capital, + and then to inject itself + in the capital + +On line 5421: + capital, and then + to inject itself in the + capital structure."69 + +On line 5421: + inject itself in + the capital structure."69 The + conservatorship + +On line 5421: + reiterated + all the damning evidence + presented in the + +On line 5421: + damning evidence + presented in the letters + two days earlier. + +On line 5421: + presented in the + letters two days earlier. + Losses at Fannie + +On line 5421: + in the letters two + days earlier. Losses at + Fannie Mae for the + +On line 5421: + earlier. Losses + at Fannie Mae for the year + were estimated + +On line 5421: + Fannie Mae for the + year were estimated to + be between billion + +On line 5421: + were estimated + to be between billion and + billion.70 Freddie Mac’s + +On line 5421: + billion and billion.70 + Freddie Mac’s memorandum + differed only in + +On line 5421: + in the details. Its + losses, recorded at billion + in the first six months + +On line 5421: + details. Its losses, + recorded at billion in the + first six months of were + +On line 5421: + losses, recorded at + billion in the first six months + of were projected + +On line 5421: + recorded at billion + in the first six months of were + projected to end + +On line 5421: + billion in the first + six months of were projected + to end up between + +On line 5421: + the first six months of + were projected to end up + between and billion + +On line 5421: + were projected to + end up between and billion + by the end of the + +On line 5421: + projected to end + up between and billion by + the end of the year.71 + +On line 5423: + to end up between + and billion by the end of + the year.71 Although the + +On line 5423: + end up between and + billion by the end of the + year.71 Although the boards + +On line 5423: + and billion by the + end of the year.71 Although the + boards had a choice, the + +On line 5423: + the boards had a choice, + the only realistic + option was assent. + +On line 5423: + agree to go in a + conservatorship anyway," + Syron told the FCIC. + +On line 5423: + conservatorship + anyway," Syron told the FCIC. + "There was a very clear + +On line 5423: + Syron told the FCIC. + "There was a very clear message + that the [September + +On line 5423: + told the FCIC. "There was + a very clear message that the + [September letter + +On line 5423: + "There was a very clear + message that the [September + letter was there as + +On line 5423: + clear message that the + [September letter was there + as a mechanism + +On line 5423: + letter was there as + a mechanism to bring about + a result."72 Mudd agreed, + +On line 5423: + as a mechanism + to bring about a result."72 Mudd + agreed, observing that + +On line 5423: + a mechanism to + bring about a result."72 Mudd agreed, + observing that "the + +On line 5423: + a result."72 Mudd agreed, + observing that "the purpose + of the letter was + +On line 5423: + agreed, observing that + "the purpose of the letter + was really to + +On line 5423: + observing that "the + purpose of the letter was + really to force + +On line 5423: + really to force + conservatorship."73 The boards + of both companies + +On line 5423: + conservatorship."73 + The boards of both companies + voted to accept + +On line 5425: + voted to accept + conservatorship. Both CEOs + were ousted, but the + +On line 5425: + CEOs were ousted, but + the fundamental problems + persisted. As promised, + +On line 5425: + persisted. As promised, + the Treasury was prepared to + take two direct steps + +On line 5425: + Treasury was prepared + to take two direct steps to + support solvency. + +On line 5425: + was prepared to take + two direct steps to support + solvency. First, it + +On line 5425: + to take two direct + steps to support solvency. + First, it would buy up + +On line 5425: + take two direct steps + to support solvency. First, + it would buy up to + +On line 5425: + solvency. First, it + would buy up to billion of + senior preferred stock + +On line 5425: + it would buy up to + billion of senior preferred + stock from the GSEs and + +On line 5425: + buy up to billion + of senior preferred stock from + the GSEs and extend + +On line 5425: + up to billion of + senior preferred stock from the + GSEs and extend them + +On line 5425: + billion of senior + preferred stock from the GSEs and + extend them short-term + +On line 5425: + of senior preferred + stock from the GSEs and extend + them short-term secured + +On line 5425: + senior preferred stock + from the GSEs and extend them + short-term secured loans. + +On line 5425: + stock from the GSEs and + extend them short-term secured + loans. In addition, + +On line 5425: + the GSEs and extend + them short-term secured loans. In + addition, it pledged + +On line 5425: + extend them short-term + secured loans. In addition, + it pledged to buy GSE + +On line 5425: + short-term secured loans. + In addition, it pledged to + buy GSE mortgage–backed + +On line 5425: + In addition, it + pledged to buy GSE mortgage–backed + securities from + +On line 5425: + it pledged to buy GSE + mortgage–backed securities + from Wall Street firms and + +On line 5425: + from Wall Street firms and + others until the end of + Up front, Treasury bought + +On line 5425: + Street firms and others + until the end of Up front, + Treasury bought from each + +On line 5425: + others until the + end of Up front, Treasury bought + from each GSE billion + +On line 5425: + of Up front, Treasury + bought from each GSE billion in + preferred stock with a + +On line 5425: + Treasury bought from each + GSE billion in preferred stock + with a dividend. + +On line 5427: + preferred stock with a + dividend. Each GSE also + gave Treasury warrants + +On line 5427: + with a dividend. + Each GSE also gave Treasury + warrants to purchase + +On line 5427: + dividend. Each GSE + also gave Treasury warrants + to purchase common + +On line 5427: + also gave Treasury + warrants to purchase common + stock representing + +On line 5427: + warrants to purchase + common stock representing + of shares outstanding. + +On line 5427: + representing of + shares outstanding. Existing + common and preferred + +On line 5427: + Existing common + and preferred shareholders were + effectively wiped + +On line 5427: + effectively wiped + out. The decline in value + of the preferred stock + +On line 5427: + wiped out. The decline + in value of the preferred + stock caused losses at + +On line 5427: + out. The decline in + value of the preferred stock + caused losses at many + +On line 5427: + of the preferred stock + caused losses at many banks that + held SEPTEMBER these + +On line 5427: + stock caused losses at + many banks that held SEPTEMBER + these securities, + +On line 5427: + held SEPTEMBER these + securities, contributing + to the failure of + +On line 5427: + these securities, + contributing to the failure + of institutions + +On line 5427: + to the failure of + institutions and to the + downgrading of to + +On line 5429: + capitalized" by + their regulators.74 Paulson + told the FCIC that he + +On line 5429: + told the FCIC that he + was "naive" enough to believe that + the action would halt + +On line 5429: + the FCIC that he was + "naive" enough to believe that the + action would halt the + +On line 5429: + that he was "naive" enough + to believe that the action + would halt the crisis + +On line 5429: + "naive" enough to believe + that the action would halt the + crisis because it + +On line 5429: + to believe that the + action would halt the crisis + because it "would put + +On line 5429: + the action would halt + the crisis because it "would + put a floor under + +On line 5429: + action would halt the + crisis because it "would put + a floor under the + +On line 5429: + would halt the crisis + because it "would put a floor + under the housing + +On line 5429: + the crisis because + it "would put a floor under + the housing market + +On line 5429: + because it "would put + a floor under the housing + market decline, and + +On line 5429: + it "would put a floor + under the housing market + decline, and provide + +On line 5429: + a floor under the + housing market decline, and + provide confidence + +On line 5429: + under the housing + market decline, and provide + confidence to the + +On line 5429: + decline, and provide + confidence to the market." + He realized he + +On line 5429: + confidence to the + market." He realized he + was wrong on the next + +On line 5429: + to the market." He + realized he was wrong on + the next day, when, as + +On line 5429: + He realized he + was wrong on the next day, when, + as he told the FCIC, + +On line 5429: + realized he was + wrong on the next day, when, as + he told the FCIC, "Lehman + +On line 5429: + he was wrong on the + next day, when, as he told the + FCIC, "Lehman started to + +On line 5429: + was wrong on the next + day, when, as he told the FCIC, + "Lehman started to go."75 + +On line 5429: + next day, when, as he + told the FCIC, "Lehman started to + go."75 Former Treasury + +On line 5429: + as he told the FCIC, + "Lehman started to go."75 Former + Treasury Assistant + +On line 5429: + "Lehman started to go."75 + Former Treasury Assistant + Secretary Neel Kashkari + +On line 5429: + go."75 Former Treasury + Assistant Secretary Neel + Kashkari agreed. "We thought that + +On line 5429: + Treasury Assistant + Secretary Neel Kashkari agreed. "We + thought that after we + +On line 5429: + Secretary Neel Kashkari + agreed. "We thought that after we + stabilized Fannie + +On line 5429: + Neel Kashkari agreed. "We thought + that after we stabilized + Fannie and Freddie + +On line 5429: + "We thought that after + we stabilized Fannie and + Freddie that we bought + +On line 5429: + Fannie and Freddie + that we bought ourselves some time. + Maybe a month, maybe three + +On line 5429: + and Freddie that we + bought ourselves some time. Maybe a + month, maybe three months. But + +On line 5429: + Freddie that we bought + ourselves some time. Maybe a month, + maybe three months. But they + +On line 5429: + that we bought ourselves + some time. Maybe a month, maybe three + months. But they were such + +On line 5429: + bought ourselves some time. + Maybe a month, maybe three months. But + they were such profound + +On line 5429: + three months. But they were + such profound interventions, + stabilizing such + +On line 5429: + such a huge part of + the financial markets, that + would buy us some time. + +On line 5429: + a huge part of the + financial markets, that would + buy us some time. We + +On line 5429: + of the financial + markets, that would buy us some + time. We were surprised + +On line 5429: + financial markets, + that would buy us some time. We + were surprised that Lehman + +On line 5429: + markets, that would buy + us some time. We were surprised + that Lehman then happened + +On line 5429: + that would buy us some + time. We were surprised that Lehman + then happened a week + +On line 5429: + us some time. We were + surprised that Lehman then happened + a week later, that + +On line 5429: + time. We were surprised + that Lehman then happened a week + later, that Lehman had + +On line 5429: + were surprised that Lehman + then happened a week later, + that Lehman had to be + +On line 5429: + that Lehman then happened + a week later, that Lehman had + to be taken over + +On line 5429: + Lehman then happened a + week later, that Lehman had to + be taken over or + +On line 5429: + then happened a week + later, that Lehman had to be + taken over or it + +On line 5429: + week later, that Lehman + had to be taken over or + it would go into + +On line 5429: + that Lehman had to be + taken over or it would go + into bankruptcy."76 + +On line 5431: + had to be taken + over or it would go into + bankruptcy."76 The firms’ + +On line 5431: + taken over or it + would go into bankruptcy."76 + The firms’ failure was + +On line 5431: + over or it would go + into bankruptcy."76 The firms’ + failure was a huge + +On line 5431: + it would go into + bankruptcy."76 The firms’ failure + was a huge event and + +On line 5431: + into bankruptcy."76 + The firms’ failure was a huge + event and increased the + +On line 5431: + The firms’ failure was + a huge event and increased the + magnitude of the + +On line 5431: + event and increased the + magnitude of the crisis, + according to Fed + +On line 5431: + the magnitude of + the crisis, according to + Fed Governor Kevin + +On line 5431: + magnitude of the + crisis, according to Fed + Governor Kevin Warsh + +On line 5431: + according to Fed + Governor Kevin Warsh and New + York Fed General + +On line 5431: + Governor Kevin Warsh + and New York Fed General + Counsel Tom Baxter.77 + +On line 5431: + Kevin Warsh and New York + Fed General Counsel Tom + Baxter.77 Warsh also + +On line 5431: + General Counsel + Tom Baxter.77 Warsh also told + the FCIC that the events + +On line 5431: + Counsel Tom Baxter.77 + Warsh also told the FCIC that + the events surrounding + +On line 5431: + Warsh also told the + FCIC that the events surrounding + the GSE takeover led to + +On line 5431: + also told the FCIC + that the events surrounding the + GSE takeover led to "a + +On line 5431: + told the FCIC that the + events surrounding the GSE takeover + led to "a massive, + +On line 5431: + events surrounding the + GSE takeover led to "a massive, + underreported, + +On line 5431: + underreported, + underappreciated + jolt to the system." + +On line 5431: + jolt to the system." + Then, according to Warsh, when + the market grasped that + +On line 5431: + to the system." Then, + according to Warsh, when the + market grasped that it + +On line 5431: + according to Warsh, + when the market grasped that it + had misunderstood + +On line 5431: + market grasped that it + had misunderstood the risks + associated + +On line 5431: + had misunderstood + the risks associated + with the GSEs, and that + +On line 5431: + misunderstood the + risks associated with + the GSEs, and that the + +On line 5431: + that the government + could have conceivably let them + fail, it "caused investors + +On line 5431: + the government could + have conceivably let them fail, + it "caused investors to + +On line 5431: + could have conceivably + let them fail, it "caused investors + to panic about the + +On line 5431: + let them fail, it "caused + investors to panic about the + value of every + +On line 5431: + fail, it "caused investors + to panic about the value + of every asset, + +On line 5431: + it "caused investors to + panic about the value of + every asset, to + +On line 5431: + investors to panic + about the value of every + asset, to reassess + +On line 5431: + to panic about the + value of every asset, + to reassess every + +On line 5431: + about the value of + every asset, to reassess + every portfolio."78 + +On line 5433: + value of every + asset, to reassess every + portfolio."78 FHFA + +On line 5433: + every asset, to + reassess every portfolio."78 + FHFA Director + +On line 5433: + asset, to reassess + every portfolio."78 FHFA + Director Lockhart + +On line 5433: + portfolio."78 FHFA + Director Lockhart described + the decision to + +On line 5433: + Director Lockhart + described the decision to + put the GSEs into + +On line 5433: + failure. Given that + the investment bank’s balance + sheet was about one-fifth + +On line 5433: + the investment bank’s + balance sheet was about one-fifth + the size of Fannie + +On line 5433: + balance sheet was about + one-fifth the size of Fannie + Mae’s, he felt that the + +On line 5433: + sheet was about one-fifth + the size of Fannie Mae’s, he + felt that the fallout + +On line 5433: + was about one-fifth the + size of Fannie Mae’s, he felt + that the fallout from + +On line 5433: + about one-fifth the size + of Fannie Mae’s, he felt that + the fallout from Lehman’s + +On line 5433: + the size of Fannie + Mae’s, he felt that the fallout + from Lehman’s bankruptcy + +On line 5433: + size of Fannie Mae’s, + he felt that the fallout from + Lehman’s bankruptcy would + +On line 5433: + of Fannie Mae’s, he + felt that the fallout from Lehman’s + bankruptcy would have + +On line 5433: + that the fallout from + Lehman’s bankruptcy would have paled + in comparison + +On line 5433: + the fallout from Lehman’s + bankruptcy would have paled in + comparison to + +On line 5433: + Lehman’s bankruptcy would + have paled in comparison + to a GSE failure. + +On line 5433: + bankruptcy would have + paled in comparison to + a GSE failure. He + +On line 5435: + in comparison + to a GSE failure. He said, + "What happened after + +On line 5435: + comparison to + a GSE failure. He said, "What + happened after Lehman + +On line 5435: + to a GSE failure. + He said, "What happened after + Lehman would have been very + +On line 5435: + a GSE failure. He + said, "What happened after Lehman + would have been very small + +On line 5435: + failure. He said, "What + happened after Lehman would have + been very small compared + +On line 5435: + He said, "What happened + after Lehman would have been very + small compared to these + +On line 5435: + GSE securities + included the Chinese and + Russian central banks, + +On line 5435: + Chinese and Russian + central banks, which, between them, + owned more than half a + +On line 5435: + and Russian central + banks, which, between them, owned more + than half a trillion + +On line 5435: + them, owned more than half + a trillion dollars of these + securities, and + +On line 5435: + a trillion dollars + of these securities, and + U.S. financial firms + +On line 5435: + trillion dollars of + these securities, and U.S. + financial firms and + +On line 5435: + these securities, + and U.S. financial firms and + investment funds had + +On line 5435: + and U.S. financial + firms and investment funds had + even more extensive + +On line 5435: + financial firms and + investment funds had even more + extensive holdings. + +On line 5435: + firms and investment + funds had even more extensive + holdings. A Fed study + +On line 5435: + extensive holdings. + A Fed study concluded that + U.S. banks owned more than + +On line 5435: + holdings. A Fed study + concluded that U.S. banks owned + more than trillion in + +On line 5435: + that U.S. banks owned more + than trillion in GSE debt and + securities—more + +On line 5435: + than trillion in GSE + debt and securities—more + than of the banks’ Tier + +On line 5437: + capital and of + their total assets at the + time.80 Testifying + +On line 5437: + their total assets + at the time.80 Testifying + before the FCIC, Mudd + +On line 5437: + time.80 Testifying + before the FCIC, Mudd claimed that + failure was all but + +On line 5439: + the FCIC, Mudd claimed that + failure was all but inevitable. + "In the companies + +On line 5439: + Mudd claimed that failure + was all but inevitable. "In the + companies had no + +On line 5439: + failure was all but + inevitable. "In the companies + had no refuge from the + +On line 5439: + was all but inevitable. + "In the companies had no + refuge from the twin shocks + +On line 5439: + all but inevitable. "In + the companies had no refuge + from the twin shocks of + +On line 5439: + but inevitable. "In the + companies had no refuge from + the twin shocks of a + +On line 5439: + the companies had + no refuge from the twin shocks of + a housing crisis + +On line 5439: + from the twin shocks of + a housing crisis followed + by a financial + +On line 5439: + a housing crisis + followed by a financial + crisis," he said. "A + +On line 5439: + crisis followed by + a financial crisis," he + said. "A monoline GSE + +On line 5439: + by a financial + crisis," he said. "A monoline + GSE structure asked to + +On line 5439: + crisis," he said. "A + monoline GSE structure asked to + perform multiple + +On line 5439: + monoline GSE structure + asked to perform multiple + tasks cannot withstand + +On line 5439: + cannot withstand a + multiyear home price decline + on a national + +On line 5439: + multiyear home price + decline on a national + scale, even without the + +On line 5439: + scale, even without the + accompanying global + financial turmoil. + +On line 5439: + accompanying + global financial turmoil. + The model allowed + +On line 5439: + The model allowed + a balance of business and + mission when home prices + +On line 5439: + allowed a balance + of business and mission when + home prices were rising. + +On line 5439: + balance of business + and mission when home prices were + rising. When prices crashed + +On line 5439: + business and mission + when home prices were rising. When + prices crashed far beyond + +On line 5439: + and mission when home + prices were rising. When prices crashed + far beyond the realm + +On line 5439: + mission when home prices + were rising. When prices crashed far + beyond the realm of + +On line 5439: + prices were rising. When + prices crashed far beyond the realm + of historical + +On line 5439: + prices crashed far beyond + the realm of historical + experience, it + +On line 5439: + it became ‘The Pit + and the Pendulum,’ a choice + between horrible + +On line 5441: + and the Pendulum,’ + a choice between horrible + alternatives."81 "THE + +On line 5443: + When interviewed by + the FCIC, FHFA officials + were very critical + +On line 5443: + interviewed by the + FCIC, FHFA officials were + very critical of + +On line 5443: + John Kerr, the FHFA + examiner (and an OCC + veteran) in charge + +On line 5443: + no words. He labeled + Fannie "the worst-run financial + institution" he + +On line 5443: + "the worst-run financial + institution" he had seen + in his years as a + +On line 5443: + institution" he + had seen in his years as a + bank regulator. + +On line 5443: + had seen in his years + as a bank regulator. + Scott Smith, who became + +On line 5443: + his years as a bank + regulator. Scott Smith, who + became ssociate + +On line 5443: + Scott Smith, who became + ssociate director at + FHFA after that + +On line 5443: + FHFA after that + agency replaced OFHEO, concurred; + in his view, Fannie’s + +On line 5443: + Fannie’s forecasting + capabilities were not + particularly + +On line 5443: + capabilities + were not particularly + well thought out, and lacked + +On line 5443: + variety of stress + scenarios. Both officials + noted Fannie’s weak + +On line 5443: + included hundreds + of market simulations + but scarcely any that + +On line 5443: + prices. To Austin Kelly, + an OFHEO examination + specialist, there was + +On line 5443: + specialist, there was + no relying on Fannie’s + numbers, because their + +On line 5443: + was no relying + on Fannie’s numbers, because + their "processes were + +On line 5443: + no relying on + Fannie’s numbers, because their + "processes were a + +On line 5443: + on Fannie’s numbers, + because their "processes were + a bowl of spaghetti." + +On line 5443: + numbers, because their + "processes were a bowl of + spaghetti." Kerr and a + +On line 5443: + their "processes were + a bowl of spaghetti." Kerr and + a colleague said that + +On line 5443: + "processes were a + bowl of spaghetti." Kerr and a + colleague said that that + +On line 5443: + a bowl of spaghetti." + Kerr and a colleague said that + that they were struck that + +On line 5443: + of spaghetti." Kerr and + a colleague said that that they + were struck that Fannie + +On line 5443: + spaghetti." Kerr and a + colleague said that that they were + struck that Fannie Mae, + +On line 5443: + struck that Fannie Mae, + a multitrillion-dollar + company, employed + +On line 5445: + was less tech-savvy than the + average community + bank.82 Nonetheless, OFHEO’s + +On line 5445: + criticisms. FHFA + officials conceded that + they had made mistakes + +On line 5445: + they had made mistakes + in their oversight of Fannie + and Freddie. They paid + +On line 5445: + had made mistakes in + their oversight of Fannie and + Freddie. They paid too + +On line 5445: + in their oversight of + Fannie and Freddie. They paid + too much attention + +On line 5445: + too much attention + to fixing operational + problems and did not + +On line 5447: + did not react to + Fannie’s increasing credit + risk. Lockhart told the + +On line 5447: + Fannie’s increasing + credit risk. Lockhart told the + FCIC that more resources + +On line 5447: + increasing credit + risk. Lockhart told the FCIC that + more resources should have + +On line 5447: + risk. Lockhart told the + FCIC that more resources should have + been dedicated + +On line 5447: + Lockhart told the FCIC + that more resources should have been + dedicated to + +On line 5447: + that more resources should + have been dedicated to + assessing credit + +On line 5447: + dedicated to + assessing credit risk of + their mortgage assets + +On line 5447: + mortgage assets and + guarantees.83 Current FHFA + Acting Director + +On line 5447: + guarantees.83 Current + FHFA Acting Director + Edward DeMarco told the + +On line 5447: + Acting Director + Edward DeMarco told the FCIC that + it would not pass the + +On line 5447: + Edward DeMarco told the + FCIC that it would not pass the + "reasonable person + +On line 5447: + FCIC that it would not + pass the "reasonable person + test" to deny that + +On line 5447: + that it would not pass + the "reasonable person test" + to deny that OFHEO + +On line 5447: + it would not pass the + "reasonable person test" to + deny that OFHEO took + +On line 5447: + pass the "reasonable + person test" to deny that + OFHEO took its eye off + +On line 5447: + "reasonable person + test" to deny that OFHEO took + its eye off the ball + +On line 5447: + deny that OFHEO took + its eye off the ball by not + paying sufficient + +On line 5447: + paying sufficient + attention to credit risk + and instead focused + +On line 5447: + on operational + risk, accounting and lack of + audited results.84 + +On line 5449: + risk, accounting and + lack of audited results.84 + To Mudd and others, + +On line 5449: + accounting and lack + of audited results.84 To + Mudd and others, OFHEO’s + +On line 5449: + lack of audited + results.84 To Mudd and others, + OFHEO’s mistakes were not + +On line 5449: + results.84 To Mudd and + others, OFHEO’s mistakes were not + surprising. Mudd told + +On line 5449: + Mudd and others, OFHEO’s + mistakes were not surprising. + Mudd told the FCIC that + +On line 5449: + told the FCIC that the + regulators’ skill levels + were "developing + +On line 5449: + "developing but + below average."85 Henry + Cisneros, a former + +On line 5449: + below average."85 + Henry Cisneros, a former + housing and urban + +On line 5449: + a former housing + and urban development + secretary, expressed + +On line 5449: + a similar view. + "OFHEO," Cisneros told the FCIC, "was + puny compared to what + +On line 5449: + view. "OFHEO," Cisneros told + the FCIC, "was puny compared to + what Fannie Mae and + +On line 5449: + told the FCIC, "was puny + compared to what Fannie Mae + and Freddie Mac could + +On line 5449: + "was puny compared to + what Fannie Mae and Freddie + Mac could muster in their + +On line 5449: + to what Fannie Mae + and Freddie Mac could muster in + their intelligence, + +On line 5449: + what Fannie Mae and + Freddie Mac could muster in their + intelligence, their + +On line 5449: + Mac could muster in their + intelligence, their Ivy League + educations, their + +On line 5449: + intelligence, their + Ivy League educations, their + rocket scientists + +On line 5449: + educations, their + rocket scientists in their + place, their lobbyists, + +On line 5449: + rocket scientists + in their place, their lobbyists, + their ability to + +On line 5451: + place, their lobbyists, + their ability to work the + Hill."86 The costs of the + +On line 5451: + their lobbyists, their + ability to work the Hill."86 + The costs of the bailouts + +On line 5451: + their ability to + work the Hill."86 The costs of the + bailouts have been enormous + +On line 5451: + ability to work + the Hill."86 The costs of the bailouts + have been enormous and + +On line 5451: + work the Hill."86 The costs + of the bailouts have been enormous + and are expected + +On line 5451: + the Hill."86 The costs of + the bailouts have been enormous and + are expected to + +On line 5451: + have been enormous and + are expected to increase. + From January through + +On line 5451: + been enormous and are + expected to increase. From + January through the + +On line 5451: + and are expected + to increase. From January + through the third quarter + +On line 5451: + are expected to + increase. From January through + the third quarter of + +On line 5451: + through the third quarter + of the two companies lost + billion, wiping out + +On line 5451: + third quarter of the + two companies lost billion, + wiping out billion + +On line 5451: + wiping out billion + of combined capital that + they had reported + +On line 5453: + combined capital + that they had reported at + the end of and the + +On line 5453: + capital that they + had reported at the end + of and the billion + +On line 5453: + had reported at + the end of and the billion + of capital raised + +On line 5453: + reported at the + end of and the billion of + capital raised by + +On line 5453: + at the end of and + the billion of capital + raised by Fannie in + +On line 5453: + and the billion of + capital raised by Fannie + in Treasury narrowed + +On line 5453: + capital raised by + Fannie in Treasury narrowed + the gap with billion + +On line 5453: + raised by Fannie in + Treasury narrowed the gap with + billion in support. + +On line 5453: + Fannie in Treasury + narrowed the gap with billion + in support. FHFA + +On line 5453: + narrowed the gap with + billion in support. FHFA + has estimated + +On line 5453: + billion in support. + FHFA has estimated + that costs through will range + +On line 5453: + support. FHFA has + estimated that costs through + will range from billion + +On line 5453: + range from billion to + billion. The Congressional + Budget Office has + +On line 5453: + projected that the + economic cost of the GSEs’ + downfall, including + +On line 5453: + support as well as + actual dollar outlays, + could reach billion by + +On line 5455: + actual dollar + outlays, could reach billion by + "WASN’ T DONE AT MY + +On line 5457: + T DONE AT MY PAY + GRADE" Fannie’s two most senior + executives were + +On line 5457: + PAY GRADE" Fannie’s two + most senior executives + were asked at an FCIC + +On line 5457: + executives were + asked at an FCIC hearing how + their charter could have + +On line 5457: + were asked at an FCIC + hearing how their charter could + have been changed to make + +On line 5457: + FCIC hearing how their + charter could have been changed to + make the company + +On line 5457: + charter could have been + changed to make the company + more sound, and to avoid + +On line 5459: + approximately + million from to testified + that "the thing that would + +On line 5459: + from to testified + that "the thing that would have made + the institution + +On line 5459: + to testified that + "the thing that would have made the + institution more + +On line 5459: + "the thing that would have + made the institution more + sound or have produced + +On line 5459: + thing that would have made + the institution more sound + or have produced a + +On line 5459: + the institution + more sound or have produced a + different outcome + +On line 5459: + sound or have produced + a different outcome would + have been for it to + +On line 5459: + or have produced a + different outcome would have + been for it to have + +On line 5459: + different outcome + would have been for it to have + become over time a + +On line 5459: + outcome would have been + for it to have become over + time a more normal + +On line 5459: + have been for it to + have become over time a more + normal financial + +On line 5459: + have become over time + a more normal financial + institution able + +On line 5459: + capital, able to + be SEPTEMBER long or short + in the market, able + +On line 5459: + to be SEPTEMBER + long or short in the market, + able to operate + +On line 5459: + able to operate + internationally. And + if the trade for that + +On line 5459: + And if the trade for + that would have been, you know, a + cut in the so-called + +On line 5459: + trade for that would have + been, you know, a cut in the + so-called implicit + +On line 5459: + that would have been, you + know, a cut in the so-called + implicit ties with + +On line 5459: + you know, a cut in + the so-called implicit ties + with the government, + +On line 5459: + know, a cut in the + so-called implicit ties with + the government, I + +On line 5459: + so-called implicit + ties with the government, I + think that would have—that would + +On line 5459: + implicit ties with + the government, I think that + would have—that would have been + +On line 5459: + government, I think + that would have—that would have been a + better solution."87 + +On line 5459: + would have—that would have been + a better solution."87 Chief + Business Officer + +On line 5459: + to answered only + that making such decisions + "wasn’t done at my + +On line 5461: + only that making + such decisions "wasn’t done + at my pay grade."88 The + +On line 5461: + done at my pay grade."88 + The Commission concludes that + the business model + +On line 5461: + at my pay grade."88 The + Commission concludes that the + business model of + +On line 5461: + model of Fannie + Mae and Freddie Mac (the GSEs), + as private-sector, + +On line 5461: + government backing + and a public mission, was + fundamentally + +On line 5461: + a public mission, + was fundamentally flawed. + We find that the risky + +On line 5461: + flawed. We find that the + risky practices of Fannie Mae—the + Commission’s case study + +On line 5461: + Commission’s case study + in this area—particularly + from on, led to its + +On line 5461: + to its fall: practices + undertaken to meet Wall + Street’s expectations + +On line 5461: + undertaken to + meet Wall Street’s expectations + for growth, to regain + +On line 5461: + Street’s expectations + for growth, to regain market + share, and to ensure + +On line 5461: + regain market share, + and to ensure generous + compensation for + +On line 5461: + share, and to ensure + generous compensation + for its employees. + +On line 5461: + compensation for + its employees. Affordable + housing goals imposed + +On line 5461: + Development (HUD) + did contribute marginally to + these practices. The GSEs + +On line 5461: + (HUD) did contribute + marginally to these practices. The + GSEs justified their + +On line 5461: + GSEs justified their + activities, in part, on + the broad and sustained + +On line 5461: + activities, in + part, on the broad and sustained + public policy + +On line 5461: + the broad and sustained + public policy support + for homeownership. + +On line 5461: + at Fannie Mae, which, + combined with its excessive + leverage permitted + +On line 5463: + failure. Corporate + governance, including risk + management, failed at + +On line 5463: + management, failed at + the GSEs in part because of + skewed compensation + +On line 5463: + skewed compensation + methodologies. The Office of + Federal Housing + +On line 5463: + Federal Housing + Enterprise Oversight (OFHEO) lacked + the authority + +On line 5463: + Enterprise Oversight + (OFHEO) lacked the authority + and capacity + +On line 5463: + legislation and + regulatory actions + that would have strengthened + +On line 5463: + regulatory + actions that would have strengthened + oversight of them and + +On line 5465: + oversight of them and + restricted their risk-taking + activities. In + +On line 5465: + decision by the + federal government and + the GSEs to increase + +On line 5465: + GSEs to increase the + GSEs’ mortgage activities + and risk to support + +On line 5465: + to increase the GSEs’ + mortgage activities and + risk to support the + +On line 5465: + risk to support the + collapsing mortgage market + was made despite the + +On line 5465: + collapsing mortgage + market was made despite the + unsound financial + +On line 5465: + despite the unsound + financial condition of + the institutions. + +On line 5465: + the mortgage market, + they led to increased losses + at the GSEs, which were + +On line 5465: + they led to increased + losses at the GSEs, which were + ultimately borne + +On line 5465: + losses at the GSEs, + which were ultimately borne + by taxpayers, and + +On line 5465: + by taxpayers, and + reflected the conflicted + nature of the GSEs’ + +On line 5465: + and reflected the + conflicted nature of the + GSEs’ dual mandate. + +On line 5467: + maintained their value + throughout the crisis and did + not contribute to + +On line 5467: + throughout the crisis + and did not contribute to + the significant + +On line 5467: + contribute to the + significant financial + firm losses that were + +On line 5467: + the significant + financial firm losses that + were central to the + +On line 5473: + firm losses that were + central to the financial + crisis. SEPTEMBER + +On line 5479: + financial crisis. + SEPTEMBER THE BANKRUPTCY + OF LEHMAN CONTENTS "Get + +On line 5481: + LEHMAN CONTENTS "Get more + conservatively funded" + "This is not sounding + +On line 5483: + conservatively + funded" "This is not sounding + good at all".......................................................................327 "Spook the + +On line 5485: + "This is not sounding + good at all".......................................................................327 "Spook the market" + "Imagination hat" + +On line 5487: + good at all".......................................................................327 "Spook the + market" "Imagination hat" + "Heads of family" + +On line 5489: + all".......................................................................327 "Spook the market" + "Imagination hat" "Heads of + family" "Tell those + +On line 5489: + "Imagination hat" + "Heads of family" "Tell those + sons of bitches to + +On line 5491: + "Heads of family" + "Tell those sons of bitches to + unwind".................................................................334 "This doesn’t + +On line 5491: + family" "Tell those + sons of bitches to unwind".................................................................334 + "This doesn’t seem like + +On line 5491: + those sons of bitches + to unwind".................................................................334 "This doesn’t seem + like it is going + +On line 5491: + sons of bitches to + unwind".................................................................334 "This doesn’t seem like + it is going to + +On line 5493: + like it is going + to end pretty"..................................................335 "The only + alternative was + +On line 5493: + to end pretty"..................................................335 "The + only alternative was + that Lehman had to fail"...........................................338 + +On line 5497: + was that Lehman had to + fail"...........................................338 "A calamity" Solvency + should be a simple + +On line 5497: + should be a simple + financial concept: if your + assets are worth more + +On line 5497: + assets are worth more + than your liabilities, + you are solvent; if + +On line 5497: + are worth more than your + liabilities, you are + solvent; if not, you + +On line 5497: + liabilities, + you are solvent; if not, you + are in danger of + +On line 5497: + you are solvent; if + not, you are in danger of + bankruptcy. But on + +On line 5497: + if not, you are in + danger of bankruptcy. But + on the afternoon + +On line 5497: + bankruptcy. But on + the afternoon of Friday, + September experts + +On line 5497: + the country’s biggest + commercial and investment + banks met at the Wall + +On line 5497: + biggest commercial + and investment banks met at + the Wall Street offices + +On line 5497: + and investment banks + met at the Wall Street offices + of the Federal + +On line 5497: + met at the Wall Street + offices of the Federal + Reserve to ponder + +On line 5497: + the Wall Street offices + of the Federal Reserve + to ponder the fate + +On line 5497: + Wall Street offices of + the Federal Reserve to + ponder the fate of + +On line 5497: + of the Federal + Reserve to ponder the fate + of Lehman Brothers, and + +On line 5497: + Federal Reserve + to ponder the fate of Lehman + Brothers, and could not + +On line 5497: + Reserve to ponder + the fate of Lehman Brothers, and + could not agree whether or + +On line 5497: + to ponder the fate + of Lehman Brothers, and could not + agree whether or not the + +On line 5497: + ponder the fate of + Lehman Brothers, and could not agree + whether or not the 157- + +On line 5499: + fate of Lehman Brothers, + and could not agree whether or not + the 157- year-old firm was + +On line 5499: + Lehman Brothers, and could + not agree whether or not the 157- + year-old firm was solvent. + +On line 5501: + and could not agree whether + or not the 157- year-old firm was + solvent. Only two + +On line 5501: + whether or not the 157- + year-old firm was solvent. Only + two days earlier, + +On line 5501: + or not the 157- year-old + firm was solvent. Only two + days earlier, Lehman + +On line 5501: + not the 157- year-old firm + was solvent. Only two days + earlier, Lehman had + +On line 5501: + year-old firm was solvent. + Only two days earlier, + Lehman had reported + +On line 5501: + days earlier, Lehman + had reported shareholder + equity—the measure + +On line 5501: + end of August. Over + the previous nine months, the + bank had lost billion + +On line 5501: + of August. Over the + previous nine months, the bank + had lost billion but + +On line 5501: + previous nine months, + the bank had lost billion but + raised more than billion + +On line 5501: + had lost billion but + raised more than billion in new + capital, leaving + +On line 5501: + more than billion in + new capital, leaving it + with more reported + +On line 5503: + with more reported + equity than it had a + year earlier. But + +On line 5503: + than it had a year + earlier. But this arithmetic + reassured hardly + +On line 5503: + earlier. But this + arithmetic reassured hardly + anyone outside the + +On line 5503: + arithmetic reassured + hardly anyone outside the + investment bank. Fed + +On line 5503: + investment bank. Fed + officials had been discussing + Lehman’s solvency for + +On line 5503: + Fed officials had + been discussing Lehman’s solvency + for months, and the stakes + +On line 5503: + officials had been + discussing Lehman’s solvency for + months, and the stakes were + +On line 5503: + had been discussing Lehman’s + solvency for months, and the + stakes were very high. To + +On line 5503: + solvency for months, + and the stakes were very high. To + resolve the question, + +On line 5503: + for months, and the stakes + were very high. To resolve the + question, the Fed would + +On line 5503: + the stakes were very high. + To resolve the question, the + Fed would not rely + +On line 5503: + stakes were very high. To + resolve the question, the Fed + would not rely on + +On line 5503: + resolve the question, + the Fed would not rely on + Lehman’s billion figure, + +On line 5503: + would not rely on + Lehman’s billion figure, given + questions about whether Lehman + +On line 5503: + questions about whether Lehman + was reporting assets at + market value. As + +On line 5503: + Lehman was reporting + assets at market value. + As one New York Fed + +On line 5503: + assets at market + value. As one New York Fed + official wrote to + +On line 5503: + market value. As + one New York Fed official + wrote to colleagues in + +On line 5503: + value. As one New + York Fed official wrote to + colleagues in July, + +On line 5503: + As one New York Fed + official wrote to colleagues + in July, "Balance-sheet + +On line 5503: + York Fed official + wrote to colleagues in July, + "Balance-sheet capital + +On line 5503: + official wrote to + colleagues in July, "Balance-sheet + capital isn’t + +On line 5503: + colleagues in July, + "Balance-sheet capital isn’t + too relevant if + +On line 5503: + "Balance-sheet capital + isn’t too relevant if + you’re suffering a + +On line 5503: + too relevant if + you’re suffering a massive + run."1 If there is a + +On line 5503: + relevant if you’re + suffering a massive run."1 + If there is a run, + +On line 5503: + if you’re suffering + a massive run."1 If there is + a run, and a firm + +On line 5503: + you’re suffering a + massive run."1 If there is a + run, and a firm can + +On line 5503: + a massive run."1 If + there is a run, and a firm + can only get fire-sale + +On line 5503: + massive run."1 If there + is a run, and a firm can + only get fire-sale prices + +On line 5503: + If there is a run, + and a firm can only get + fire-sale prices for assets, + +On line 5503: + there is a run, and + a firm can only get fire-sale + prices for assets, even + +On line 5503: + is a run, and a + firm can only get fire-sale prices + for assets, even large + +On line 5503: + a run, and a firm + can only get fire-sale prices for + assets, even large amounts + +On line 5503: + firm can only get + fire-sale prices for assets, even large + amounts of capital + +On line 5503: + can only get fire-sale + prices for assets, even large amounts + of capital can + +On line 5503: + prices for assets, even + large amounts of capital can + disappear almost + +On line 5505: + of capital can + disappear almost overnight. The + bankers thought Lehman’s real + +On line 5505: + disappear almost + overnight. The bankers thought Lehman’s real + estate assets were + +On line 5505: + overnight. The bankers thought Lehman’s + real estate assets were + overvalued. In light + +On line 5511: + Lehman’s real estate + assets were overvalued. In + light of SEPTEMBER + +On line 5511: + Lehman’s unreliable + valuation methods, the + bankers had good reason + +On line 5511: + methods, the bankers had + good reason for their doubts. None + of the bankers at the + +On line 5511: + bankers had good reason + for their doubts. None of the bankers + at the New York Fed + +On line 5511: + had good reason for + their doubts. None of the bankers at + the New York Fed that + +On line 5511: + reason for their doubts. + None of the bankers at the New + York Fed that weekend + +On line 5511: + for their doubts. None of + the bankers at the New York Fed + that weekend believed + +On line 5511: + their doubts. None of the + bankers at the New York Fed that + weekend believed the + +On line 5511: + None of the bankers at + the New York Fed that weekend + believed the billion + +On line 5511: + bankers at the New York + Fed that weekend believed the + billion in real + +On line 5511: + the New York Fed that + weekend believed the billion + in real estate + +On line 5511: + weekend believed the + billion in real estate + assets (excluding + +On line 5511: + believed the billion + in real estate assets + (excluding real + +On line 5511: + billion in real + estate assets (excluding + real estate held + +On line 5511: + in real estate + assets (excluding real + estate held for sale) + +On line 5511: + assets (excluding + real estate held for sale) + on Lehman’s books was an + +On line 5511: + real estate held + for sale) on Lehman’s books was an + accurate figure. + +On line 5511: + for sale) on Lehman’s books + was an accurate figure. + If the assets were + +On line 5511: + sale) on Lehman’s books was + an accurate figure. If + the assets were worth + +On line 5511: + was an accurate + figure. If the assets were + worth only half that + +On line 5511: + only half that amount + (a likely scenario, given + market conditions), + +On line 5511: + (a likely scenario, + given market conditions), + then Lehman’s billion in + +On line 5511: + conditions), then Lehman’s + billion in equity would + be gone. In a fire + +On line 5511: + then Lehman’s billion in + equity would be gone. In + a fire sale, some might + +On line 5511: + in equity would + be gone. In a fire sale, some + might sell for even less + +On line 5511: + equity would be + gone. In a fire sale, some might + sell for even less than + +On line 5511: + be gone. In a fire + sale, some might sell for even less + than half their stated + +On line 5511: + In a fire sale, some + might sell for even less than half + their stated value. + +On line 5513: + a fire sale, some might + sell for even less than half their + stated value. "What + +On line 5513: + might sell for even less + than half their stated value. + "What does solvent mean1" + +On line 5513: + sell for even less than + half their stated value. "What + does solvent mean1" JP + +On line 5513: + than half their stated + value. "What does solvent mean1" + JP Morgan CEO Jamie + +On line 5513: + "What does solvent mean1" + JP Morgan CEO Jamie Dimon + responded when the + +On line 5513: + mean1" JP Morgan CEO + Jamie Dimon responded when + the FCIC asked if Lehman + +On line 5513: + JP Morgan CEO Jamie + Dimon responded when the + FCIC asked if Lehman had + +On line 5513: + the FCIC asked if Lehman + had been solvent. "The answer + is, I don’t know. I + +On line 5513: + FCIC asked if Lehman had + been solvent. "The answer is, + I don’t know. I still + +On line 5513: + asked if Lehman had been + solvent. "The answer is, I + don’t know. I still could + +On line 5513: + had been solvent. "The + answer is, I don’t know. I + still could not answer + +On line 5513: + I don’t know. I still + could not answer that question."2 + JP Morgan’s Chief Risk + +On line 5513: + could not answer that + question."2 JP Morgan’s Chief Risk + Officer Barry + +On line 5513: + Officer Barry + Zubrow testified before the + FCIC that "from a pure + +On line 5513: + the FCIC that "from a + pure accounting standpoint, it + was solvent," although + +On line 5513: + FCIC that "from a pure + accounting standpoint, it was + solvent," although "it + +On line 5513: + accounting standpoint, + it was solvent," although "it + obviously was + +On line 5513: + "it obviously + was financing its assets + on a very leveraged + +On line 5513: + was financing its + assets on a very leveraged + basis with a lot + +On line 5515: + former Lehman Brothers + CEO Richard Fuld insisted his + firm had been solvent: + +On line 5515: + Lehman Brothers CEO Richard + Fuld insisted his firm had + been solvent: "There was + +On line 5515: + Brothers CEO Richard Fuld + insisted his firm had been + solvent: "There was no + +On line 5515: + Richard Fuld insisted + his firm had been solvent: "There + was no capital + +On line 5515: + Fuld insisted his + firm had been solvent: "There was + no capital hole + +On line 5515: + insisted his firm + had been solvent: "There was no + capital hole at + +On line 5515: + firm had been solvent: + "There was no capital hole + at Lehman Brothers. At + +On line 5515: + had been solvent: "There + was no capital hole at + Lehman Brothers. At the + +On line 5515: + been solvent: "There was + no capital hole at Lehman + Brothers. At the end + +On line 5515: + no capital hole + at Lehman Brothers. At the end + of Lehman’s third quarter, + +On line 5515: + capital hole at + Lehman Brothers. At the end of + Lehman’s third quarter, we + +On line 5515: + at Lehman Brothers. At + the end of Lehman’s third quarter, + we had billion of + +On line 5515: + Fed Chairman Ben Bernanke + disagreed: "I believe it had + a capital hole." + +On line 5515: + disagreed: "I believe + it had a capital hole." + He emphasized that + +On line 5515: + a capital hole." + He emphasized that New York + Federal Reserve + +On line 5515: + Henry Paulson, and + SEC Chairman Christopher Cox agreed + it was "just way too + +On line 5515: + SEC Chairman Christopher + Cox agreed it was "just way too + big a hole. And my + +On line 5515: + Chairman Christopher Cox + agreed it was "just way too big + a hole. And my own + +On line 5515: + Christopher Cox agreed it + was "just way too big a hole. + And my own view is + +On line 5515: + Cox agreed it was "just + way too big a hole. And my + own view is it’s very + +On line 5515: + it was "just way too + big a hole. And my own view + is it’s very likely + +On line 5515: + was "just way too big + a hole. And my own view is + it’s very likely that + +On line 5515: + "just way too big a + hole. And my own view is it’s + very likely that the + +On line 5515: + big a hole. And my + own view is it’s very likely + that the company + +On line 5515: + a hole. And my own + view is it’s very likely that + the company was + +On line 5515: + own view is it’s very + likely that the company + was insolvent, even, + +On line 5515: + very likely that the + company was insolvent, + even, not just illiquid."5 + +On line 5515: + that the company + was insolvent, even, not just + illiquid."5 Others, such + +On line 5515: + insolvent, even, not + just illiquid."5 Others, such as + Bank of America + +On line 5515: + just illiquid."5 Others, + such as Bank of America + CEO Ken Lewis, who that + +On line 5515: + illiquid."5 Others, such + as Bank of America CEO + Ken Lewis, who that week + +On line 5515: + America CEO Ken + Lewis, who that week considered + acquiring Lehman with + +On line 5515: + CEO Ken Lewis, who that + week considered acquiring + Lehman with government + +On line 5515: + acquiring Lehman with + government support, had no + doubts either. He told + +On line 5517: + Lehman with government + support, had no doubts either. + He told the FCIC that + +On line 5517: + support, had no doubts + either. He told the FCIC that + Lehman’s real estate + +On line 5517: + no doubts either. He + told the FCIC that Lehman’s real + estate and other + +On line 5517: + either. He told the + FCIC that Lehman’s real estate + and other assets + +On line 5517: + FCIC that Lehman’s real + estate and other assets + had been overvalued + +On line 5517: + Lehman’s real estate + and other assets had been + overvalued by to + +On line 5517: + and other assets + had been overvalued by to + billion—a message he + +On line 5517: + had been overvalued + by to billion—a message he + had delivered to + +On line 5517: + billion—a message he + had delivered to Paulson + a few days before + +On line 5519: + a few days before + Lehman declared bankruptcy.6 It + had been quite a week; + +On line 5519: + few days before Lehman + declared bankruptcy.6 It had + been quite a week; it + +On line 5519: + before Lehman declared + bankruptcy.6 It had been quite + a week; it would be + +On line 5519: + bankruptcy.6 It had + been quite a week; it would be + quite a weekend. The + +On line 5519: + a week; it would be + quite a weekend. The debate + will continue over + +On line 5519: + week; it would be quite + a weekend. The debate will + continue over the + +On line 5519: + quite a weekend. The + debate will continue over + the largest bankruptcy + +On line 5519: + the largest bankruptcy + in American history, + but nothing will change + +On line 5519: + largest bankruptcy in + American history, but + nothing will change the + +On line 5519: + nothing will change the + basic facts: a consortium + of banks would fail to + +On line 5519: + will change the basic + facts: a consortium of banks + would fail to agree on + +On line 5519: + change the basic facts: + a consortium of banks would + fail to agree on a + +On line 5519: + facts: a consortium + of banks would fail to agree on + a rescue, two last-minute + +On line 5519: + a consortium of + banks would fail to agree on a + rescue, two last-minute deals + +On line 5519: + of banks would fail to + agree on a rescue, two last-minute + deals would fall through, and + +On line 5519: + banks would fail to agree + on a rescue, two last-minute deals + would fall through, and the + +On line 5519: + agree on a rescue, + two last-minute deals would fall through, and + the government would + +On line 5519: + deals would fall through, and + the government would decide + not to rescue this + +On line 5519: + the government would + decide not to rescue this + investment bank—for + +On line 5519: + practical reasons, + for philosophical reasons, + and because, as Bernanke + +On line 5519: + for philosophical + reasons, and because, as Bernanke + told the FCIC, if the + +On line 5519: + reasons, and because, + as Bernanke told the FCIC, if the + government had lent + +On line 5519: + because, as Bernanke told + the FCIC, if the government + had lent money, "the + +On line 5519: + as Bernanke told the FCIC, + if the government had lent + money, "the firm would + +On line 5519: + told the FCIC, if the + government had lent money, + "the firm would fail, and + +On line 5519: + if the government + had lent money, "the firm would + fail, and not only + +On line 5519: + the government had + lent money, "the firm would fail, + and not only would + +On line 5519: + government had lent + money, "the firm would fail, and + not only would we + +On line 5519: + money, "the firm would + fail, and not only would we + be unsuccessful + +On line 5519: + and not only would + we be unsuccessful but + we would have saddled + +On line 5519: + not only would we + be unsuccessful but we + would have saddled the + +On line 5519: + be unsuccessful + but we would have saddled the + taxpayer with tens + +On line 5519: + we would have saddled + the taxpayer with tens of + billions of dollars + +On line 5521: + the taxpayer with + tens of billions of dollars + of losses."7 "GET MORE + +On line 5521: + tens of billions of + dollars of losses."7 "GET MORE + CONSERVATIVELY + +On line 5523: + dollars of losses."7 + "GET MORE CONSERVATIVELY + FUNDED" After the + +On line 5523: + of losses."7 "GET MORE + CONSERVATIVELY FUNDED" + After the demise of + +On line 5523: + CONSERVATIVELY + FUNDED" After the demise of + Bear Stearns in March most + +On line 5523: + FUNDED" After the + demise of Bear Stearns in March most + observers—including Bernanke, + +On line 5523: + Bear Stearns in March most + observers—including Bernanke, Paulson, + Geithner, and + +On line 5523: + most observers—including + Bernanke, Paulson, Geithner, + and Cox8—viewed Lehman Brothers + +On line 5523: + observers—including Bernanke, + Paulson, Geithner, and + Cox8—viewed Lehman Brothers as + +On line 5523: + Geithner, and + Cox8—viewed Lehman Brothers as the next + big worry among the + +On line 5523: + and Cox8—viewed Lehman Brothers + as the next big worry among + the four remaining + +On line 5523: + Cox8—viewed Lehman Brothers as + the next big worry among the + four remaining large + +On line 5523: + worry among the four + remaining large investment + banks. Geithner + +On line 5523: + large investment banks. + Geithner said he was + "consumed" with finding + +On line 5523: + Geithner said + he was "consumed" with finding + a way that Lehman might + +On line 5523: + "consumed" with finding + a way that Lehman might "get more + conservatively + +On line 5525: + Vice Chairman Donald + Kohn told Bernanke that in the wake + of Bear’s collapse, some + +On line 5525: + Kohn told Bernanke that in + the wake of Bear’s collapse, some + institutional + +On line 5525: + of Bear’s collapse, some + institutional investors + believed it was a + +On line 5525: + institutional + investors believed it was a + matter not of whether + +On line 5525: + investors believed it + was a matter not of whether + Lehman would fail, but when.10 + +On line 5525: + believed it was a + matter not of whether Lehman would + fail, but when.10 One set + +On line 5525: + was a matter not + of whether Lehman would fail, but when.10 + One set of numbers + +On line 5525: + a matter not of + whether Lehman would fail, but when.10 One + set of numbers in + +On line 5525: + of whether Lehman would fail, + but when.10 One set of numbers + in particular + +On line 5525: + but when.10 One set of + numbers in particular + reinforced their doubts: + +On line 5527: + set of numbers in + particular reinforced + their doubts: on March the + +On line 5527: + in particular + reinforced their doubts: on March + the day after JP + +On line 5527: + reinforced their doubts: + on March the day after JP + Morgan announced its + +On line 5527: + doubts: on March the day + after JP Morgan announced + its acquisition + +On line 5527: + JP Morgan announced + its acquisition of Bear + Stearns, the market through + +On line 5527: + its acquisition + of Bear Stearns, the market through + credit default swaps + +On line 5527: + Bear Stearns, the market + through credit default swaps on + Lehman’s debt) put the cost + +On line 5527: + Stearns, the market through + credit default swaps on Lehman’s + debt) put the cost of + +On line 5527: + credit default swaps + on Lehman’s debt) put the cost of + insuring million + +On line 5527: + on Lehman’s debt) put the + cost of insuring million + of Lehman’s five-year senior + +On line 5527: + Lehman’s debt) put the cost + of insuring million of + Lehman’s five-year senior debt + +On line 5527: + debt) put the cost of + insuring million of Lehman’s + five-year senior debt at + +On line 5527: + insuring million + of Lehman’s five-year senior debt at + annually; for + +On line 5527: + of Lehman’s five-year senior + debt at annually; for + Merrill Lynch, the cost + +On line 5527: + five-year senior debt at + annually; for Merrill + Lynch, the cost was and + +On line 5527: + at annually; + for Merrill Lynch, the cost was + and for Goldman Sachs, + +On line 5529: + annually; for + Merrill Lynch, the cost was and + for Goldman Sachs, The + +On line 5529: + for Merrill Lynch, the + cost was and for Goldman Sachs, + The chief concerns were + +On line 5529: + Merrill Lynch, the cost + was and for Goldman Sachs, The + chief concerns were Lehman’s + +On line 5529: + The chief concerns were + Lehman’s real estate–related + investments and its + +On line 5529: + on short-term funding + sources, including billion of + commercial paper + +On line 5529: + including billion + of commercial paper and + billion of repos + +On line 5529: + commercial paper + and billion of repos at + the end of the first + +On line 5529: + paper and billion + of repos at the end of + the first quarter of + +On line 5529: + repos at the end + of the first quarter of There + were also concerns + +On line 5529: + the end of the first + quarter of There were also + concerns about the firm’s + +On line 5529: + of the first quarter + of There were also concerns + about the firm’s more than + +On line 5529: + about the firm’s more than + derivative contracts with + a myriad of + +On line 5529: + than derivative + contracts with a myriad + of counterparties.11 + +On line 5531: + a myriad of + counterparties.11 As they did + for all investments + +On line 5531: + counterparties.11 As + they did for all investments + banks, the Fed and SEC + +On line 5531: + As they did for all + investments banks, the Fed and + SEC asked: Did Lehman have + +On line 5531: + and SEC asked: Did Lehman + have enough capital—real + capital, after + +On line 5531: + withstand the kind of + run that had taken down Bear + Stearns1 Solvency and + +On line 5531: + run that had taken + down Bear Stearns1 Solvency and + liquidity were + +On line 5531: + liquidity were + essential and related. + If money market + +On line 5531: + and related. If + money market funds, hedge funds, + and investment banks + +On line 5531: + money market funds, + hedge funds, and investment banks + believed Lehman’s assets + +On line 5531: + market funds, hedge funds, + and investment banks believed + Lehman’s assets were worth + +On line 5531: + Lehman’s assets were worth + less than Lehman’s valuations, + they would withdraw funds, + +On line 5531: + Lehman’s valuations, + they would withdraw funds, demand + more collateral, + +On line 5531: + valuations, they + would withdraw funds, demand more + collateral, and + +On line 5531: + they would withdraw funds, + demand more collateral, + and curtail lending. + +On line 5531: + more collateral, + and curtail lending. That could + force Lehman to sell its + +On line 5531: + and curtail lending. + That could force Lehman to sell its + assets at fire-sale prices, + +On line 5531: + lending. That could force + Lehman to sell its assets at + fire-sale prices, wiping out + +On line 5531: + force Lehman to sell its + assets at fire-sale prices, wiping + out capital and + +On line 5531: + its assets at fire-sale + prices, wiping out capital + and liquidity + +On line 5533: + and liquidity + virtually overnight. Bear proved + it could happen. "The + +On line 5533: + but the Fed, as a + consequence of its banking + mandate, had more of + +On line 5533: + a consequence of + its banking mandate, had more + of an emphasis + +On line 5533: + consequence of its + banking mandate, had more of + an emphasis on + +On line 5533: + banking mandate, had + more of an emphasis on + capital raising," + +On line 5533: + of an emphasis + on capital raising," Erik + Sirri, head of the + +On line 5533: + Sirri, head of the + SEC’s Division of Trading + and Markets, told the + +On line 5533: + the SEC’s Division + of Trading and Markets, told + the FCIC. "Because the + +On line 5533: + SEC’s Division of + Trading and Markets, told the + FCIC. "Because the Fed + +On line 5533: + Trading and Markets, + told the FCIC. "Because the Fed + had become the de + +On line 5533: + told the FCIC. "Because + the Fed had become the de + facto primary + +On line 5533: + facto primary + regulator because of + its balance sheet, its + +On line 5533: + The SEC wanted to + be collaborative, and + so came to accept + +On line 5533: + SEC wanted to be + collaborative, and so + came to accept the + +On line 5533: + came to accept the + Fed’s focus on capital. + However, as time + +On line 5533: + the Fed’s focus on + capital. However, as + time progressed, both saw + +On line 5533: + the importance of + liquidity with respect + to the problems at + +On line 5533: + liquidity with + respect to the problems at + the large investment + +On line 5535: + to the problems at + the large investment banks."12 In + fact, both problems had + +On line 5535: + the problems at the + large investment banks."12 In fact, + both problems had to + +On line 5535: + problems at the large + investment banks."12 In fact, both + problems had to be + +On line 5535: + the large investment + banks."12 In fact, both problems had + to be resolved. Bear’s + +On line 5535: + large investment banks."12 + In fact, both problems had to + be resolved. Bear’s demise + +On line 5535: + investment banks."12 In + fact, both problems had to be + resolved. Bear’s demise had + +On line 5535: + fact, both problems had + to be resolved. Bear’s demise had + precipitated + +On line 5535: + resolved. Bear’s demise had + precipitated Lehman’s "first + real financing + +On line 5535: + precipitated + Lehman’s "first real financing + difficulties" since + +On line 5535: + Treasurer Paolo + Tonucci told the FCIC.13 Over the + two weeks following + +On line 5535: + the FCIC.13 Over the two + weeks following Bear’s collapse, + Lehman borrowed from the + +On line 5535: + FCIC.13 Over the two weeks + following Bear’s collapse, Lehman + borrowed from the Fed’s + +On line 5535: + two weeks following + Bear’s collapse, Lehman borrowed from + the Fed’s new lending + +On line 5535: + (PDCF),14 but had to + be careful to avoid seeming + overreliant on the + +On line 5535: + had to be careful + to avoid seeming overreliant + on the PDCF for + +On line 5535: + to be careful to + avoid seeming overreliant on + the PDCF for cash, + +On line 5535: + be careful to avoid + seeming overreliant on the + PDCF for cash, which + +On line 5535: + seeming overreliant + on the PDCF for cash, which + would signal funding + +On line 5537: + on the PDCF for + cash, which would signal funding + problems. Lehman built up + +On line 5537: + cash, which would signal + funding problems. Lehman built up + its liquidity + +On line 5537: + funding problems. Lehman + built up its liquidity + to billion at the + +On line 5537: + liquidity to + billion at the end of May, + but it and Merrill + +On line 5537: + billion at the end + of May, but it and Merrill + performed the worst among + +On line 5537: + at the end of May, + but it and Merrill performed + the worst among the four + +On line 5537: + of May, but it and + Merrill performed the worst among + the four investment + +On line 5537: + but it and Merrill + performed the worst among the four + investment banks in + +On line 5537: + performed the worst among + the four investment banks in + the regulators’ + +On line 5537: + the four investment + banks in the regulators’ + liquidity stress + +On line 5537: + the regulators’ + liquidity stress tests in + the spring and summer + +On line 5539: + the spring and summer + of Meanwhile, the company + was also working + +On line 5539: + spring and summer of + Meanwhile, the company was + also working to + +On line 5539: + summer of Meanwhile, + the company was also + working to improve + +On line 5539: + was also working + to improve its capital + position. First, it + +On line 5539: + estate held for sale) + from billion to billion at + the end of May and + +On line 5539: + for sale) from billion + to billion at the end of + May and to billion + +On line 5539: + sale) from billion to + billion at the end of May + and to billion at + +On line 5539: + billion to billion + at the end of May and to + billion at the end + +On line 5539: + to billion at the + end of May and to billion + at the end of the + +On line 5539: + the end of May and + to billion at the end of + the summer. Second, + +On line 5539: + end of May and to + billion at the end of the + summer. Second, it + +On line 5539: + May and to billion + at the end of the summer. + Second, it raised new + +On line 5539: + billion at the end + of the summer. Second, it + raised new capital + +On line 5539: + at the end of the + summer. Second, it raised new + capital and longer-term + +On line 5539: + the summer. Second, + it raised new capital and + longer-term debt—a total + +On line 5539: + summer. Second, it + raised new capital and longer-term + debt—a total of + +On line 5539: + Second, it raised new + capital and longer-term debt—a + total of billion + +On line 5539: + raised new capital + and longer-term debt—a total of + billion of preferred + +On line 5539: + capital and longer-term + debt—a total of billion + of preferred stock and + +On line 5541: + stock and senior and + subordinated debt from + April through June Treasury + +On line 5541: + subordinated + debt from April through June Treasury + Undersecretary + +On line 5541: + issues."15 But other + difficulties loomed. Fuld would + later describe Lehman’s + +On line 5541: + difficulties loomed. + Fuld would later describe Lehman’s + main problem as one + +On line 5541: + would later describe + Lehman’s main problem as one of + market confidence, + +On line 5541: + Lehman’s main problem as + one of market confidence, + and he suggested + +On line 5541: + main problem as one + of market confidence, and + he suggested that + +On line 5541: + problem as one of + market confidence, and he + suggested that the + +On line 5541: + market confidence, + and he suggested that the + company’s image + +On line 5541: + he suggested that + the company’s image was + damaged by investors + +On line 5541: + investors taking "naked + short" positions (short selling + Lehman’s securities + +On line 5541: + Lehman’s securities + without first borrowing them), + hoping Lehman would fail, + +On line 5541: + them), hoping Lehman would + fail, and potentially even + helping it fail by + +On line 5541: + potentially even + helping it fail by eroding + confidence. "Bear went + +On line 5541: + even helping it fail + by eroding confidence. "Bear + went down on rumors + +On line 5541: + helping it fail by + eroding confidence. "Bear went + down on rumors and + +On line 5541: + eroding confidence. + "Bear went down on rumors and + a liquidity + +On line 5541: + down on rumors and + a liquidity crisis + of confidence," Fuld + +On line 5541: + on rumors and a + liquidity crisis of + confidence," Fuld told + +On line 5541: + "Immediately + there-SEPTEMBER after, the rumors and + the naked short sellers + +On line 5541: + the rumors and the + naked short sellers came after + us."16 The company + +On line 5541: + rumors and the naked + short sellers came after us."16 + The company pressed + +On line 5541: + naked short sellers came + after us."16 The company + pressed the SEC to clamp + +On line 5541: + sellers came after + us."16 The company pressed the + SEC to clamp down on + +On line 5541: + came after us."16 The + company pressed the SEC to + clamp down on the naked + +On line 5541: + us."16 The company + pressed the SEC to clamp down on + the naked short selling.17 + +On line 5541: + The company pressed + the SEC to clamp down on the + naked short selling.17 The + +On line 5541: + company pressed the + SEC to clamp down on the naked + short selling.17 The SEC’s + +On line 5541: + pressed the SEC to clamp + down on the naked short selling.17 + The SEC’s Division + +On line 5541: + the SEC to clamp down + on the naked short selling.17 The + SEC’s Division of + +On line 5541: + SEC to clamp down on + the naked short selling.17 The SEC’s + Division of Risk, + +On line 5541: + down on the naked short + selling.17 The SEC’s Division + of Risk, Strategy + +On line 5541: + Division of Risk, + Strategy and Financial + Innovation shared + +On line 5541: + Risk, Strategy and + Financial Innovation + shared with the FCIC a + +On line 5541: + shared with the FCIC a + study it did concerning short + selling. As Chairman + +On line 5541: + the FCIC a study it + did concerning short selling. + As Chairman Mary Schapiro + +On line 5541: + it did concerning + short selling. As Chairman Mary + Schapiro explained to the + +On line 5541: + Mary Schapiro explained to + the Commission, "We do not + have information + +On line 5541: + Schapiro explained to the + Commission, "We do not have + information at + +On line 5541: + manipulative + short selling was the cause of + the collapse of Bear + +On line 5541: + short selling was the + cause of the collapse of Bear + and Lehman or of the + +On line 5541: + cause of the collapse + of Bear and Lehman or of the + difficulties faced + +On line 5541: + Bear and Lehman or of + the difficulties faced by + other investment + +On line 5541: + the difficulties + faced by other investment + banks during the fall + +On line 5541: + difficulties faced + by other investment banks + during the fall of + +On line 5541: + other investment + banks during the fall of The + SEC to date has not + +On line 5541: + banks during the fall + of The SEC to date has not + brought short selling charges + +On line 5541: + fall of The SEC to + date has not brought short selling + charges related to + +On line 5541: + of The SEC to date + has not brought short selling charges + related to the + +On line 5541: + to date has not brought + short selling charges related + to the failure of + +On line 5541: + date has not brought short + selling charges related to + the failure of these + +On line 5541: + brought short selling charges + related to the failure + of these investment + +On line 5543: + of these investment + banks.18 On March Lehman reported + better-than-expected + +On line 5543: + March Lehman reported + better-than-expected earnings + of million for the + +On line 5543: + better-than-expected + earnings of million for the + first quarter of Its + +On line 5543: + earnings of million + for the first quarter of Its + stock jumped nearly to + +On line 5543: + stock jumped nearly to + But investors and analysts + quickly raised questions, + +On line 5543: + Portfolio.com called + Lehman’s write-downs "suspiciously + minuscule."19 In a + +On line 5543: + minuscule."19 In a + speech in May, David Einhorn of + Greenlight Capital, + +On line 5543: + in May, David Einhorn + of Greenlight Capital, which + was then shorting Lehman’s + +On line 5543: + May, David Einhorn of + Greenlight Capital, which was + then shorting Lehman’s stock, + +On line 5543: + Greenlight Capital, + which was then shorting Lehman’s stock, + noted the bank’s large + +On line 5543: + noted the bank’s large + portfolio of commercial + real estate loans + +On line 5543: + large portfolio of + commercial real estate + loans and said, "There is + +On line 5543: + real estate loans + and said, "There is good reason + to question Lehman’s fair + +On line 5543: + "There is good reason + to question Lehman’s fair value + calculations. I + +On line 5543: + that greater transparency + on these valuations would + not inspire market + +On line 5545: + reasons that observers + might have been skeptical of + management at Lehman. + +On line 5547: + have been skeptical + of management at Lehman. "On + Lehman Brothers’ [board], they + +On line 5547: + been skeptical of + management at Lehman. "On Lehman + Brothers’ [board], they had + +On line 5547: + of management at + Lehman. "On Lehman Brothers’ [board], they + had an actress, a + +On line 5547: + Brothers’ [board], they had + an actress, a theatrical + producer, and an + +On line 5547: + they had an actress, + a theatrical producer, + and an admiral, + +On line 5547: + had an actress, a + theatrical producer, and + an admiral, and + +On line 5547: + and not one person + who understood financial + derivatives."21 The + +On line 5547: + derivatives."21 The + Corporate Library gave Lehman + a D rating in + +On line 5547: + Library gave Lehman a + D rating in June a grade + it downgraded to + +On line 5547: + D rating in June + a grade it downgraded to + F in September + +On line 5547: + rating in June a + grade it downgraded to F + in September On + +On line 5547: + grade it downgraded + to F in September On + June Lehman announced a + +On line 5547: + On June Lehman announced + a preliminary billion + loss for its second + +On line 5547: + a preliminary + billion loss for its second + quarter—the first loss since + +On line 5547: + its second quarter—the + first loss since it became a + public company + +On line 5547: + loss since it became + a public company in + The share price fell to + +On line 5547: + since it became a + public company in The + share price fell to Three + +On line 5547: + The share price fell to + Three days later Lehman announced + it was replacing + +On line 5547: + share price fell to Three + days later Lehman announced it + was replacing Chief + +On line 5547: + Three days later Lehman + announced it was replacing + Chief Operating + +On line 5547: + was replacing Chief + Operating Officer + Joseph Gregory and + +On line 5547: + Chief Operating + Officer Joseph Gregory + and Chief Financial + +On line 5547: + Joseph Gregory and + Chief Financial Officer + Erin Callan. The stock slumped + +On line 5547: + Gregory and Chief + Financial Officer Erin + Callan. The stock slumped again, + +On line 5549: + and Chief Financial + Officer Erin Callan. The stock + slumped again, to "THIS IS + +On line 5549: + Officer Erin Callan. + The stock slumped again, to "THIS IS + NOT SOUNDING GOOD AT + +On line 5551: + Erin Callan. The stock slumped + again, to "THIS IS NOT SOUNDING + GOOD AT ALL" After + +On line 5551: + Callan. The stock slumped again, + to "THIS IS NOT SOUNDING GOOD + AT ALL" After Lehman + +On line 5551: + again, to "THIS IS NOT + SOUNDING GOOD AT ALL" After + Lehman reported its + +On line 5551: + SOUNDING GOOD AT ALL" + After Lehman reported its + final second-quarter + +On line 5551: + GOOD AT ALL" After + Lehman reported its final + second-quarter results + +On line 5551: + Lehman reported its + final second-quarter results + on June the New York + +On line 5551: + final second-quarter + results on June the New York + Fed’s on-site monitor + +On line 5551: + second-quarter results + on June the New York Fed’s on-site + monitor at Lehman, + +On line 5551: + results on June the + New York Fed’s on-site monitor + at Lehman, Kirsten Harlow, + +On line 5551: + June the New York Fed’s + on-site monitor at Lehman, Kirsten + Harlow, reported + +On line 5551: + on-site monitor at + Lehman, Kirsten Harlow, reported + that there had been "no + +On line 5551: + Harlow, reported + that there had been "no adverse + information on + +On line 5551: + information on + liquidity, novations, + terminations or + +On line 5551: + on liquidity, + novations, terminations + or ability to + +On line 5551: + or unsecured [funds]."23 + The announced liquidity + numbers were better + +On line 5553: + capital numbers. + Nevertheless, Lehman’s lenders and + supervisors were + +On line 5553: + and supervisors + were worried. The next morning, + William Dudley, then head + +On line 5553: + supervisors were + worried. The next morning, William + Dudley, then head of + +On line 5553: + were worried. The next + morning, William Dudley, then head + of the New York Fed’s + +On line 5553: + The next morning, William + Dudley, then head of the New + York Fed’s Markets Group + +On line 5553: + morning, William Dudley, + then head of the New York Fed’s + Markets Group (and its + +On line 5553: + William Dudley, then head + of the New York Fed’s Markets + Group (and its current + +On line 5553: + then head of the New + York Fed’s Markets Group (and its + current president), + +On line 5553: + of the New York Fed’s + Markets Group (and its current + president), emailed Bernanke, + +On line 5553: + Fed’s Markets Group (and + its current president), emailed + Bernanke, Geithner, + +On line 5553: + Markets Group (and its + current president), emailed Bernanke, + Geithner, Kohn, + +On line 5553: + current president), + emailed Bernanke, Geithner, Kohn, + and others that the + +On line 5553: + Geithner, Kohn, + and others that the PDCF + should be extended + +On line 5553: + and others that the + PDCF should be extended + because it "remains + +On line 5553: + that the PDCF should + be extended because it + "remains critical + +On line 5553: + extended because + it "remains critical to + the stability" + +On line 5553: + the stability" + of some of the investment + banks—particularly + +On line 5553: + the PDCF, Lehman might + have experienced a full + blown liquidity + +On line 5555: + have experienced + a full blown liquidity + crisis," he wrote.24 Just + +On line 5555: + blown liquidity + crisis," he wrote.24 Just one week + after the earnings + +On line 5555: + he wrote.24 Just one week + after the earnings release, + Harlow reported + +On line 5555: + Just one week after + the earnings release, Harlow + reported that Lehman + +On line 5555: + after the earnings + release, Harlow reported + that Lehman was indeed + +On line 5555: + the earnings release, + Harlow reported that Lehman + was indeed having + +On line 5555: + reported that Lehman + was indeed having funding + difficulties. Four + +On line 5555: + difficulties. Four + financial institutions + had "trading issues" + +On line 5555: + had "trading issues" + with Lehman and had reduced their + exposure to the + +On line 5555: + Lehman and had reduced + their exposure to the firm, + including Natixis, + +On line 5557: + their exposure to + the firm, including Natixis, + a rench investment + +On line 5557: + exposure to the + firm, including Natixis, a + rench investment bank + +On line 5557: + the firm, including + Natixis, a rench investment + bank that had already + +On line 5557: + investment bank that + had already eliminated + all activity + +On line 5559: + eliminated all + activity with Lehman. JP + Morgan reported + +On line 5559: + activity with + Lehman. JP Morgan reported + that large pension funds + +On line 5559: + with Lehman. JP Morgan + reported that large pension + funds and some smaller + +On line 5559: + Morgan reported + that large pension funds and some + smaller Asian central + +On line 5559: + reported that large + pension funds and some smaller + Asian central banks were + +On line 5559: + that large pension funds + and some smaller Asian central + banks were reducing + +On line 5559: + large pension funds and + some smaller Asian central banks + were reducing their + +On line 5559: + and some smaller Asian + central banks were reducing + their exposures to + +On line 5559: + Asian central banks were + reducing their exposures + to Lehman, as well as + +On line 5559: + banks were reducing + their exposures to Lehman, as + well as to Merrill + +On line 5559: + were reducing their + exposures to Lehman, as well + as to Merrill Lynch. + +On line 5559: + their exposures to + Lehman, as well as to Merrill + Lynch. And Citigroup + +On line 5559: + Lehman, as well as to + Merrill Lynch. And Citigroup + requested a to + +On line 5559: + to Merrill Lynch. And + Citigroup requested a + to billion "comfort + +On line 5559: + Lynch. And Citigroup + requested a to billion + "comfort deposit" to + +On line 5559: + "comfort deposit" to + cover its exposure to + Lehman, settling later + +On line 5559: + exposure to Lehman, + settling later for billion.25 + In an internal + +On line 5559: + settling later for + billion.25 In an internal + memo, Thomas Fontana, the head + +On line 5559: + later for billion.25 + In an internal memo, Thomas + Fontana, the head of risk + +On line 5559: + Fontana, the head of risk + management in Citigroup’s + global financial + +On line 5559: + Citigroup’s global + financial institutions + group, wrote that "loss of + +On line 5559: + global financial + institutions group, wrote that + "loss of confidence + +On line 5559: + institutions group, + wrote that "loss of confidence + [in Lehman] is huge at + +On line 5559: + [in Lehman] is huge at + the moment."26 Timothy Clark, + senior adviser + +On line 5559: + adviser in the + Federal Reserve’s banking + supervision and + +On line 5559: + supervision and + regulation division, + was short and direct: + +On line 5561: + was short and direct: + "This is not sounding good at + all."27 On June results + +On line 5561: + short and direct: "This + is not sounding good at all."27 + On June results from + +On line 5561: + and direct: "This is + not sounding good at all."27 On + June results from the + +On line 5561: + is not sounding good + at all."27 On June results from + the regulators’ + +On line 5561: + not sounding good at + all."27 On June results from the + regulators’ most + +On line 5561: + all."27 On June results + from the regulators’ most + recent stress test showed + +On line 5561: + June results from the + regulators’ most recent + stress test showed that Lehman + +On line 5561: + the regulators’ + most recent stress test showed that + Lehman would need billion + +On line 5561: + regulators’ most + recent stress test showed that Lehman + would need billion more + +On line 5561: + most recent stress test + showed that Lehman would need billion + more than the billion + +On line 5561: + recent stress test showed + that Lehman would need billion more + than the billion in + +On line 5561: + Lehman would need billion + more than the billion in its + liquidity pool + +On line 5561: + more than the billion + in its liquidity pool + to survive a loss + +On line 5561: + than the billion in + its liquidity pool to + survive a loss of + +On line 5561: + survive a loss of + all unsecured borrowings + and varying amounts of + +On line 5563: + secured borrowings.28 + Lehman’s borrowings in the overnight + commercial paper + +On line 5563: + paper market were + increasing, however, from + billion at the end + +On line 5563: + billion at the end + of November to billion + at the end of May + +On line 5565: + of November to + billion at the end of May + And it was reliant + +On line 5565: + billion at the end + of May And it was reliant + on repo funding, + +On line 5565: + of May And it was + reliant on repo funding, + particularly + +On line 5565: + that matured overnight and + were collateralized by + illiquid assets.29 As + +On line 5565: + securities, such + as illiquid mortgage-related + securities—which could + +On line 5565: + the PDCF and of + which investors were becoming + increasingly wary.30 + +On line 5567: + Lehman’s largest tri-party + repo lenders—notified JP + Morgan, Lehman’s clearing + +On line 5567: + tri-party repo + lenders—notified JP Morgan, + Lehman’s clearing bank, that + +On line 5567: + lenders—notified JP + Morgan, Lehman’s clearing bank, that + Federated would + +On line 5567: + with Lehman," because JP + Morgan was "unwilling to + negotiate in + +On line 5567: + Dreyfus, another + large money market fund and + a Lehman tri-party + +On line 5567: + large money market + fund and a Lehman tri-party + repo lender, also + +On line 5567: + a Lehman tri-party + repo lender, also pulled its + repo line from the + +On line 5569: + tri-party repo + lender, also pulled its repo + line from the firm.32 "SPOOK + +On line 5569: + repo lender, also + pulled its repo line from the + firm.32 "SPOOK THE MARKET" + +On line 5571: + lender, also pulled its + repo line from the firm.32 "SPOOK + THE MARKET" As the + +On line 5571: + its repo line from + the firm.32 "SPOOK THE MARKET" As + the Fed considered + +On line 5571: + repo line from the + firm.32 "SPOOK THE MARKET" As the + Fed considered the + +On line 5571: + "SPOOK THE MARKET" As + the Fed considered the risks + of the tri-party + +On line 5571: + MARKET" As the Fed + considered the risks of the + tri-party repo + +On line 5571: + the Fed considered + the risks of the tri-party + repo market, it + +On line 5571: + considered the risks + of the tri-party repo + market, it also + +On line 5571: + it also mulled over + more specific measures to + help Lehman. The New York + +On line 5571: + also mulled over more + specific measures to help + Lehman. The New York Fed + +On line 5571: + over more specific + measures to help Lehman. The New + York Fed and FDIC both + +On line 5571: + FDIC both rejected + the company’s proposal + to convert to a + +On line 5571: + both rejected the + company’s proposal to + convert to a bank + +On line 5571: + to a bank holding + company, a proposal + which Geithner + +On line 5571: + a proposal which + Geithner told Fuld was + "gimmicky" and "[could not] + +On line 5571: + proposal by the + Fed’s Dudley followed the Bear + Stearns model: billion + +On line 5571: + Fed’s Dudley followed + the Bear Stearns model: billion + of Lehman’s assets would + +On line 5571: + Dudley followed the + Bear Stearns model: billion of + Lehman’s assets would be + +On line 5571: + the Bear Stearns model: + billion of Lehman’s assets would + be held by a new + +On line 5571: + model: billion of + Lehman’s assets would be held by + a new special-purpose + +On line 5571: + Lehman’s assets would be + held by a new special-purpose + vehicle, financed + +On line 5571: + would be held by a + new special-purpose vehicle, + financed by billion + +On line 5571: + financed by billion + of Lehman’s equity and a + billion loan from the + +On line 5571: + by billion of Lehman’s + equity and a billion + loan from the Fed. This + +On line 5571: + of Lehman’s equity + and a billion loan from the + Fed. This proposal + +On line 5571: + Lehman’s equity and + a billion loan from the Fed. + This proposal would + +On line 5571: + a billion loan from + the Fed. This proposal would + remove the illiquid + +On line 5571: + loan from the Fed. This + proposal would remove the + illiquid assets from + +On line 5571: + This proposal would + remove the illiquid assets + from the market and + +On line 5571: + remove the illiquid + assets from the market and + potentially avert + +On line 5571: + from the market and + potentially avert a fire + sale that could render + +On line 5571: + potentially avert + a fire sale that could render + Lehman insolvent.34 It + +On line 5571: + a fire sale that could + render Lehman insolvent.34 It + didn’t go anywhere. + +On line 5573: + sale that could render + Lehman insolvent.34 It didn’t + go anywhere. But when + +On line 5573: + that could render Lehman + insolvent.34 It didn’t go + anywhere. But when that + +On line 5573: + Lehman insolvent.34 It + didn’t go anywhere. But when + that idea was floated + +On line 5573: + didn’t go anywhere. + But when that idea was floated + in July, the need + +On line 5573: + But when that idea was + floated in July, the need + for such action was + +On line 5573: + July, the need for + such action was still somewhat + speculative. Not + +On line 5573: + for such action was + still somewhat speculative. + Not so by August. + +On line 5573: + such action was still + somewhat speculative. Not + so by August. In + +On line 5573: + so by August. In + an August email to colleagues + at the Federal + +On line 5573: + an August email to + colleagues at the Federal + Reserve and Treasury, + +On line 5573: + email to colleagues at + the Federal Reserve and + Treasury, Patrick Parkinson, + +On line 5573: + Federal Reserve + and Treasury, Patrick Parkinson, then + the deputy director + +On line 5573: + the deputy director + of the Federal Reserve + Board’s Division of + +On line 5573: + significantly + harm financial markets and + the economy if + +On line 5573: + economy if it + filed for chapter bankruptcy + protection, gather + +On line 5573: + SEPTEMBER to more + accurately assess the + potential effects + +On line 5575: + not know nearly enough + about over-the-counter derivatives + activities at + +On line 5575: + activities at + Lehman and other investment + banks, which were major + +On line 5577: + total number of + OTC derivative contracts + they had, the total + +On line 5577: + OTC derivative + contracts they had, the total + exposures of the + +On line 5577: + of the contracts, and + their estimated market + value, but they did + +On line 5577: + their estimated + market value, but they did + not publicly report + +On line 5577: + value, but they did + not publicly report the terms + of the contracts or + +On line 5577: + not publicly report + the terms of the contracts or + the counterparties. + +On line 5577: + publicly report the + terms of the contracts or the + counterparties. Thus, + +On line 5577: + terms of the contracts + or the counterparties. Thus, + there was no way to + +On line 5577: + of the contracts or + the counterparties. Thus, there + was no way to know + +On line 5577: + the contracts or the + counterparties. Thus, there was + no way to know who + +On line 5577: + the counterparties. + Thus, there was no way to know + who would be owed how + +On line 5577: + counterparties. Thus, + there was no way to know who + would be owed how much + +On line 5577: + Thus, there was no way + to know who would be owed how + much and when payments + +On line 5577: + there was no way to + know who would be owed how much + and when payments would + +On line 5577: + was no way to know + who would be owed how much and + when payments would have + +On line 5577: + no way to know who + would be owed how much and when + payments would have to + +On line 5577: + be owed how much and + when payments would have to be + made—information + +On line 5577: + to analyze the + possible impact of a + Lehman bankruptcy on + +On line 5579: + financial markets. + Parkinson reviewed a standing + recommendation + +On line 5579: + Parkinson reviewed a + standing recommendation + to form a "default + +On line 5579: + to form a "default + management group" of senior + executives of + +On line 5579: + of major market + participants to work with + regulators to + +On line 5579: + recommendation + was from the private-sector + Counterparty Risk + +On line 5579: + Counterparty Risk + Management Policy Group, + the same group that had + +On line 5579: + Policy Group, the + same group that had alerted the + Fed to the backlog + +On line 5579: + Group, the same group that + had alerted the Fed to the + backlog problem in + +On line 5579: + alerted the Fed to + the backlog problem in the + OTC derivatives + +On line 5579: + the backlog problem + in the OTC derivatives + market earlier + +On line 5579: + accelerating + the formation of this group + while being careful + +On line 5579: + formation of this + group while being careful not + to signal concerns + +On line 5579: + concerns about any one + market participant.36 On + August Parkinson emailed + +On line 5579: + about any one market + participant.36 On August + Parkinson emailed New York + +On line 5579: + participant.36 On + August Parkinson emailed New York + Fed officials that + +On line 5579: + On August Parkinson + emailed New York Fed officials + that he was worried + +On line 5579: + August Parkinson emailed + New York Fed officials that + he was worried that + +On line 5579: + York Fed officials + that he was worried that no + sensible game plan + +On line 5579: + he was worried that + no sensible game plan could + be formulated + +On line 5579: + be formulated + without more information.37 + He was informed that + +On line 5579: + more information.37 + He was informed that New York + Fed officials had + +On line 5579: + information.37 He + was informed that New York Fed + officials had just + +On line 5579: + He was informed that + New York Fed officials had + just met with Lehman two + +On line 5579: + was informed that New + York Fed officials had just + met with Lehman two days + +On line 5579: + two days earlier + to obtain derivative-related + information, that + +On line 5579: + that they still needed + more information, and that + the meeting had "caused + +On line 5579: + they still needed more + information, and that the + meeting had "caused a + +On line 5579: + more information, + and that the meeting had "caused + a stir," which in turn + +On line 5579: + and that the meeting + had "caused a stir," which in turn + required assurances + +On line 5579: + which in turn required + assurances that requests for + information would + +On line 5581: + York Fed officials + were also "very reluctant" + to request copies of + +On line 5581: + Fed officials were + also "very reluctant" to + request copies of the + +On line 5581: + "very reluctant" to + request copies of the master + agreements that would shed + +On line 5581: + to request copies of + the master agreements that would + shed light on the Lehman’s + +On line 5581: + Lehman’s derivatives + counterparties, because such + a request would send + +On line 5581: + a request would send + a "huge negative signal."39 + The formation of + +On line 5581: + request would send a + "huge negative signal."39 The + formation of the + +On line 5581: + a "huge negative + signal."39 The formation of + the industry group + +On line 5581: + The formation of + the industry group seemed "less + provocative," wrote a New + +On line 5581: + the industry group + seemed "less provocative," wrote a New + York Fed official, + +On line 5581: + industry group seemed + "less provocative," wrote a New York + Fed official, but + +On line 5583: + seemed "less provocative," wrote + a New York Fed official, + but could still "spook the + +On line 5583: + provocative," wrote a New + York Fed official, but could + still "spook the market."40 + +On line 5583: + wrote a New York Fed + official, but could still "spook + the market."40 Parkinson + +On line 5583: + York Fed official, + but could still "spook the market."40 + Parkinson believed that + +On line 5583: + but could still "spook the + market."40 Parkinson believed that + the information + +On line 5583: + information was + important, but attempting + to collect it was + +On line 5583: + was important, but + attempting to collect it + was "not without risks."41 + +On line 5583: + it was "not without + risks."41 He also recognized + the difficulties + +On line 5583: + was "not without risks."41 + He also recognized the + difficulties in + +On line 5583: + difficulties in + unraveling the complex + dependencies among + +On line 5583: + unraveling the + complex dependencies among + the many Lehman subsidiaries + +On line 5583: + dependencies among + the many Lehman subsidiaries and their + counterparties, which + +On line 5583: + Lehman subsidiaries and their + counterparties, which would keep + lawyers and accountants + +On line 5583: + counterparties, which + would keep lawyers and accountants + busy for a long time.42 + +On line 5585: + busy for a long time.42 + On August Treasury’s Steve Shafran + informed Parkinson that + +On line 5585: + On August Treasury’s + Steve Shafran informed Parkinson that + Secretary Paulson + +On line 5585: + informed Parkinson that + Secretary Paulson agreed on + the need to collect + +On line 5585: + Secretary Paulson + agreed on the need to collect + information on + +On line 5585: + agreed on the need to + collect information on + OTC derivatives.43 + +On line 5585: + information on + OTC derivatives.43 It just + had to be done in + +On line 5585: + derivatives.43 It + just had to be done in a + way that minimized + +On line 5585: + done in a way that + minimized disruptions. On + September Parkinson + +On line 5585: + circulated a + draft letter requesting the + information from + +On line 5585: + information from + Lehman CEO Fuld.44 Geithner + would ask E. Gerald + +On line 5585: + would ask E. Gerald + Corrigan, the Goldman + Sachs executive + +On line 5585: + Corrigan, the + Goldman Sachs executive + and former New York + +On line 5585: + and former New York + Fed president who had co-chaired + the Counterparty + +On line 5585: + former New York Fed + president who had co-chaired the + Counterparty Risk + +On line 5585: + the Counterparty + Risk Management Policy + Group report, to form + +On line 5585: + Counterparty Risk + Management Policy Group + report, to form an + +On line 5585: + report, to form an + industry group to advise + on information + +On line 5585: + troubled investment + bank. Parkinson, Shafran, and others + would also create + +On line 5585: + bank. Parkinson, Shafran, and + others would also create + a "playbook" for an + +On line 5585: + Shafran, and others would + also create a "playbook" + for an investment + +On line 5585: + for an investment + bank failure at Secretary + Paulson’s request. Events over + +On line 5585: + an investment bank + failure at Secretary Paulson’s + request. Events over the + +On line 5587: + request. Events over the + following week would render + these efforts moot. n + +On line 5587: + over the following + week would render these efforts + moot. n September + +On line 5587: + week would render these + efforts moot. n September + executives from + +On line 5589: + executives at + JP Morgan, Lehman’s tri-party + repo clearing bank, + +On line 5589: + at JP Morgan, Lehman’s + tri-party repo clearing + bank, of the third-quarter + +On line 5589: + tri-party repo + clearing bank, of the third-quarter + results that it would + +On line 5589: + repo clearing bank, + of the third-quarter results that + it would announce two + +On line 5589: + bank, of the third-quarter + results that it would announce + two weeks later. A + +On line 5589: + the third-quarter results + that it would announce two weeks + later. A billion + +On line 5589: + an investment by + Korea Development Bank + or others, the sale + +On line 5589: + of real estate + assets, and the division + of the company + +On line 5589: + and the division + of the company into + a "good bank" and "bad + +On line 5589: + the division of + the company into a + "good bank" and "bad bank" + +On line 5589: + division of the + company into a "good + bank" and "bad bank" with + +On line 5589: + company into + a "good bank" and "bad bank" with + private equity + +On line 5589: + bank" and "bad bank" with + private equity sponsors.45 + The executives + +On line 5589: + private equity + sponsors.45 The executives + also discussed JP + +On line 5589: + equity sponsors.45 + The executives also + discussed JP Morgan’s + +On line 5591: + September more than + New York Fed officials were + notified of a + +On line 5591: + more than New York Fed + officials were notified + of a meeting the + +On line 5591: + Fed officials were + notified of a meeting + the next morning "to + +On line 5591: + were notified of + a meeting the next morning + "to continue the + +On line 5591: + of a meeting the + next morning "to continue + the discussion of + +On line 5591: + a meeting the next + morning "to continue the + discussion of near-term + +On line 5591: + the next morning "to + continue the discussion + of near-term options for + +On line 5591: + "to continue the + discussion of near-term options + for dealing with a + +On line 5591: + the discussion of + near-term options for dealing with + a failing nonbank." + +On line 5591: + discussion of near-term + options for dealing with a + failing nonbank." They + +On line 5591: + nonbank." They received + a list documenting Lehman’s + tri-party repo + +On line 5591: + repo exposure + at roughly billion. Before + its collapse, Bear Stearns’s + +On line 5591: + at roughly billion. + Before its collapse, Bear Stearns’s + exposure had been + +On line 5591: + billion. Before its + collapse, Bear Stearns’s exposure + had been only to + +On line 5591: + Before its collapse, + Bear Stearns’s exposure had been + only to billion. + +On line 5591: + Stearns’s exposure had + been only to billion. The + documentation + +On line 5591: + that counterparties + provided of Lehman’s repo + financing, and that + +On line 5591: + financing, and that + intraday liquidity + provided by Lehman’s + +On line 5591: + and that intraday + liquidity provided + by Lehman’s clearing banks + +On line 5591: + provided by Lehman’s + clearing banks could become a + problem. Indeed, JP + +On line 5591: + banks could become a + problem. Indeed, JP Morgan, + Citigroup, and Bank + +On line 5591: + a problem. Indeed, + JP Morgan, Citigroup, and + Bank of America + +On line 5591: + problem. Indeed, JP + Morgan, Citigroup, and Bank + of America had + +On line 5591: + Morgan, Citigroup, + and Bank of America had + all demanded more + +On line 5591: + had all demanded + more collateral from Lehman, + with the threat they might + +On line 5591: + all demanded more + collateral from Lehman, with + the threat they might "cut + +On line 5591: + more collateral + from Lehman, with the threat they might + "cut off Lehman if they + +On line 5591: + collateral from + Lehman, with the threat they might "cut + off Lehman if they don’t + +On line 5593: + from Lehman, with the threat + they might "cut off Lehman if they + don’t receive it."46 On + +On line 5593: + threat they might "cut off + Lehman if they don’t receive it."46 + On Tuesday morning, + +On line 5593: + "cut off Lehman if they + don’t receive it."46 On Tuesday + morning, September + +On line 5593: + don’t receive it."46 On + Tuesday morning, September + news there would be no + +On line 5593: + On Tuesday morning, + September news there would be + no investment from + +On line 5593: + be no investment + from Korea Development + Bank shook the market. + +On line 5593: + no investment from + Korea Development Bank + shook the market. Lehman’s + +On line 5593: + Development Bank + shook the market. Lehman’s stock plunged + from the day before, + +On line 5593: + market. Lehman’s stock plunged + from the day before, closing + at To prepare for + +On line 5593: + from the day before, + closing at To prepare for + an afternoon call + +On line 5593: + for an afternoon + call with Bernanke, Geithner + directed his staff + +On line 5593: + Bernanke, Geithner + directed his staff to "put + together a quick + +On line 5593: + directed his staff + to "put together a quick + ‘what’s different1 what’s + +On line 5595: + to "put together + a quick ‘what’s different1 what’s + the same1’ list about [Lehman] + +On line 5595: + "put together a + quick ‘what’s different1 what’s the + same1’ list about [Lehman] vs + +On line 5595: + together a quick + ‘what’s different1 what’s the same1’ + list about [Lehman] vs [Bear + +On line 5595: + quick ‘what’s different1 + what’s the same1’ list about [Lehman] vs + [Bear Stearns], as well as + +On line 5595: + ‘what’s different1 what’s + the same1’ list about [Lehman] vs [Bear + Stearns], as well as about + +On line 5595: + different1 what’s the + same1’ list about [Lehman] vs [Bear Stearns], + as well as about mid-March + +On line 5595: + the same1’ list about [Lehman] + vs [Bear Stearns], as well as about + mid-March (then) vs. early + +On line 5595: + same1’ list about [Lehman] vs + [Bear Stearns], as well as about mid-March + (then) vs. early Sept + +On line 5595: + list about [Lehman] vs [Bear + Stearns], as well as about mid-March (then) + vs. early Sept (now)."47 + +On line 5595: + about [Lehman] vs [Bear Stearns], + as well as about mid-March (then) vs. + early Sept (now)."47 The + +On line 5595: + [Bear Stearns], as well as + about mid-March (then) vs. early Sept + (now)."47 The Fed’s Parkinson + +On line 5595: + Stearns], as well as about + mid-March (then) vs. early Sept (now)."47 + The Fed’s Parkinson emailed + +On line 5595: + well as about mid-March (then) + vs. early Sept (now)."47 The Fed’s + Parkinson emailed Treasury’s + +On line 5595: + mid-March (then) vs. early + Sept (now)."47 The Fed’s Parkinson emailed + Treasury’s Shafran about his + +On line 5595: + vs. early Sept (now)."47 + The Fed’s Parkinson emailed Treasury’s + Shafran about his concerns + +On line 5595: + early Sept (now)."47 The + Fed’s Parkinson emailed Treasury’s Shafran + about his concerns that + +On line 5595: + The Fed’s Parkinson emailed + Treasury’s Shafran about his concerns + that Lehman would announce + +On line 5595: + Parkinson emailed Treasury’s + Shafran about his concerns that Lehman + would announce further + +On line 5595: + Treasury’s Shafran about his + concerns that Lehman would announce + further losses the + +On line 5595: + Shafran about his concerns + that Lehman would announce further + losses the next week, + +On line 5595: + his concerns that Lehman + would announce further losses + the next week, that it + +On line 5595: + concerns that Lehman would + announce further losses the + next week, that it might + +On line 5595: + that Lehman would announce + further losses the next week, + that it might not be + +On line 5595: + would announce further + losses the next week, that it + might not be able to + +On line 5595: + losses the next week, + that it might not be able to + raise equity, and + +On line 5595: + week, that it might not + be able to raise equity, + and that even though its + +On line 5595: + not be able to raise + equity, and that even though + its liquidity + +On line 5595: + and that even though its + liquidity position + was better than Bear + +On line 5595: + its liquidity + position was better than + Bear Stearns’s had been, Lehman + +On line 5597: + had been, Lehman remained + vulnerable to a loss + of confidence.48 At + +On line 5597: + vulnerable to + a loss of confidence.48 At + P.M., Paulson convened + +On line 5597: + confidence.48 At P.M., + Paulson convened a call with + Cox, Geithner, + +On line 5597: + Paulson convened a + call with Cox, Geithner, + Bernanke, and Treasury staff + +On line 5597: + convened a call with + Cox, Geithner, Bernanke, and + Treasury staff "to deal + +On line 5597: + Cox, Geithner, + Bernanke, and Treasury staff "to deal + with a possible + +On line 5597: + Geithner, Bernanke, + and Treasury staff "to deal with + a possible Lehman + +On line 5597: + Bernanke, and Treasury staff + "to deal with a possible + Lehman bankruptcy."49 At + +On line 5597: + and Treasury staff "to + deal with a possible Lehman + bankruptcy."49 At P.M., + +On line 5597: + staff "to deal with a + possible Lehman bankruptcy."49 + At P.M., Treasury Chief + +On line 5597: + Lehman bankruptcy."49 At + P.M., Treasury Chief of Staff Jim + Wilkinson emailed Michelle Davis, + +On line 5597: + At P.M., Treasury Chief + of Staff Jim Wilkinson emailed Michelle + Davis, the assistant + +On line 5597: + Wilkinson emailed Michelle Davis, + the assistant secretary + for public affairs + +On line 5597: + Treasury, to express + his distaste for government + assistance: "We need + +On line 5597: + express his distaste + for government assistance: + "We need to talk. I + +On line 5597: + assistance: "We need + to talk. I just can’t stomach + us bailing out lehman. + +On line 5597: + to talk. I just can’t + stomach us bailing out lehman. + Will be horrible + +On line 5597: + I just can’t stomach + us bailing out lehman. Will be + horrible in the + +On line 5597: + stomach us bailing + out lehman. Will be horrible + in the press don’t u + +On line 5599: + us bailing out lehman. + Will be horrible in the + press don’t u think."50 That + +On line 5599: + bailing out lehman. Will + be horrible in the press + don’t u think."50 That same + +On line 5599: + Will be horrible + in the press don’t u think."50 That + same day, Fuld agreed to + +On line 5599: + be horrible in + the press don’t u think."50 That same + day, Fuld agreed to post + +On line 5599: + horrible in the + press don’t u think."50 That same day, + Fuld agreed to post an + +On line 5599: + the press don’t u think."50 + That same day, Fuld agreed to post + an additional + +On line 5599: + day, Fuld agreed to post + an additional billion + of collateral + +On line 5599: + Fuld agreed to post an + additional billion of + collateral to + +On line 5601: + an additional + billion of collateral + to JP Morgan. Lehman’s + +On line 5601: + collateral to + JP Morgan. Lehman’s bankruptcy + estate would later + +On line 5601: + bankruptcy estate + would later claim that Lehman did + so because of JP + +On line 5601: + would later claim that + Lehman did so because of JP + Morgan’s improper + +On line 5601: + did so because of + JP Morgan’s improper threat + to withhold repo + +On line 5601: + repo funding. Zubrow + said JP Morgan requested + the collateral + +On line 5601: + to Lehman.51 Steven Black, JP + Morgan’s president, said he + requested billion + +On line 5601: + Morgan’s president, + said he requested billion + from Lehman, which agreed to + +On line 5601: + said he requested + billion from Lehman, which agreed to + post billion.52 He did + +On line 5601: + to post billion.52 He + did not believe the request + put undue pressure + +On line 5601: + post billion.52 He did + not believe the request put + undue pressure on + +On line 5601: + did not believe the + request put undue pressure + on Lehman. On Tuesday + +On line 5601: + request put undue + pressure on Lehman. On Tuesday + night, executives + +On line 5601: + on Lehman. On Tuesday + night, executives of Lehman + and JP Morgan met + +On line 5601: + Lehman. On Tuesday night, + executives of Lehman and + JP Morgan met again + +On line 5601: + night, executives + of Lehman and JP Morgan met + again at Lehman’s request + +On line 5601: + executives of + Lehman and JP Morgan met again + at Lehman’s request to + +On line 5601: + Lehman and JP Morgan + met again at Lehman’s request to + discuss options for + +On line 5601: + JP Morgan met again + at Lehman’s request to discuss + options for raising + +On line 5601: + at Lehman’s request to + discuss options for raising + capital. The JP + +On line 5601: + to discuss options + for raising capital. The + JP Morgan group was + +On line 5601: + discuss options for + raising capital. The JP + Morgan group was not + +On line 5601: + options for raising + capital. The JP Morgan + group was not impressed. + +On line 5601: + raising capital. + The JP Morgan group was not + impressed. "[Lehman] sent the + +On line 5601: + capital. The JP + Morgan group was not impressed. + "[Lehman] sent the Junior + +On line 5601: + The JP Morgan group + was not impressed. "[Lehman] sent the + Junior Varsity," + +On line 5601: + Junior Varsity," + JP Morgan executives + reported to Black. + +On line 5601: + reported to Black. + "They have no proposal and + are looking to us + +On line 5601: + have no proposal + and are looking to us for + ideas/credit line to + +On line 5601: + and are looking to + us for ideas/credit line to + bridge them to the first + +On line 5601: + looking to us for + ideas/credit line to bridge them + to the first quarter + +On line 5601: + ideas/credit line to + bridge them to the first quarter + when they intend to + +On line 5601: + to bridge them to the + first quarter when they intend + to split into good + +On line 5601: + bridge them to the first + quarter when they intend to + split into good bank/bad + +On line 5601: + when they intend to + split into good bank/bad bank." Black + responded, "Let’s give + +On line 5601: + to split into good + bank/bad bank." Black responded, "Let’s + give them an order + +On line 5601: + split into good bank/bad + bank." Black responded, "Let’s give + them an order for + +On line 5601: + into good bank/bad bank." + Black responded, "Let’s give them + an order for the + +On line 5601: + Black responded, "Let’s + give them an order for the + same drugs SEPTEMBER + +On line 5601: + responded, "Let’s give + them an order for the same + drugs SEPTEMBER they + +On line 5601: + them an order for + the same drugs SEPTEMBER they + have apparently + +On line 5601: + an order for the + same drugs SEPTEMBER they have + apparently been + +On line 5601: + same drugs SEPTEMBER + they have apparently been + taking to think we + +On line 5601: + SEPTEMBER they have + apparently been taking + to think we would do + +On line 5601: + have apparently + been taking to think we would + do something like that."53 + +On line 5601: + apparently been + taking to think we would do + something like that."53 The + +On line 5601: + been taking to think + we would do something like that."53 + The Lehman bankruptcy + +On line 5601: + do something like that."53 + The Lehman bankruptcy estate + has a different + +On line 5601: + something like that."53 The + Lehman bankruptcy estate has + a different view. + +On line 5601: + The Lehman bankruptcy + estate has a different + view. It alleges Black + +On line 5601: + bankruptcy estate + has a different view. It + alleges Black agreed to + +On line 5601: + has a different + view. It alleges Black agreed to + send a due diligence + +On line 5601: + a different view. + It alleges Black agreed to send + a due diligence team, + +On line 5601: + It alleges Black agreed + to send a due diligence team, + following Dimon’s + +On line 5601: + Black agreed to send a + due diligence team, following + Dimon’s suggestion + +On line 5601: + firm might be willing + to purchase Lehman preferred stock, + but instead sent over + +On line 5601: + willing to purchase + Lehman preferred stock, but instead + sent over senior risk + +On line 5601: + Lehman preferred stock, but + instead sent over senior risk + managers to probe Lehman’s + +On line 5601: + but instead sent over + senior risk managers to probe + Lehman’s confidential + +On line 5603: + risk managers to probe + Lehman’s confidential records and + plans.54 The bankruptcy + +On line 5603: + Lehman’s confidential + records and plans.54 The bankruptcy + estate alleges that + +On line 5603: + plans.54 The bankruptcy + estate alleges that later + that night, JP Morgan + +On line 5603: + estate alleges that + later that night, JP Morgan + demanded that Lehman + +On line 5603: + later that night, JP + Morgan demanded that Lehman + execute amended + +On line 5603: + demanded that Lehman + execute amended agreements + to its tri-party + +On line 5603: + preannouncing its + third-quarter earnings at the next + morning. The amendments + +On line 5603: + amendments required Lehman + to provide additional + guarantees, increased + +On line 5603: + and gave JP Morgan + additional control over + Lehman bank accounts.55 Again, + +On line 5603: + executed the + agreements because JP Morgan + executives led + +On line 5603: + the agreements because + JP Morgan executives + led Lehman to believe + +On line 5603: + agreements because JP + Morgan executives led + Lehman to believe its + +On line 5603: + because JP Morgan + executives led Lehman to + believe its bank would + +On line 5603: + led Lehman to believe + its bank would refuse to extend + intraday credit + +On line 5603: + believe its bank would + refuse to extend intraday + credit if Lehman did + +On line 5603: + its bank would refuse to + extend intraday credit + if Lehman did not do + +On line 5603: + would refuse to extend + intraday credit if Lehman + did not do so. JP + +On line 5603: + intraday credit + if Lehman did not do so. JP + Morgan denies this. + +On line 5603: + if Lehman did not do + so. JP Morgan denies this. + Black told the FCIC, "JPMC + +On line 5605: + did not do so. JP + Morgan denies this. Black told + the FCIC, "JPMC never + +On line 5605: + do so. JP Morgan + denies this. Black told the FCIC, + "JPMC never told Lehman + +On line 5605: + Morgan denies this. + Black told the FCIC, "JPMC never + told Lehman that it would + +On line 5605: + this. Black told the FCIC, + "JPMC never told Lehman that it + would stop extending + +On line 5605: + "JPMC never told Lehman + that it would stop extending + credit and clearing + +On line 5605: + would stop extending + credit and clearing if the + September Agreements + +On line 5605: + not executed + before the markets opened on + [Wednesday,] September + +On line 5607: + before the markets + opened on [Wednesday,] September + Before the market + +On line 5607: + the markets opened on + [Wednesday,] September Before + the market opened on + +On line 5607: + [Wednesday,] September + Before the market opened on + Wednesday, Lehman announced + +On line 5607: + Before the market + opened on Wednesday, Lehman announced + its billion third-quarter + +On line 5607: + opened on Wednesday, Lehman + announced its billion third-quarter + loss, including a + +On line 5607: + announced its billion + third-quarter loss, including a + billion write-down. Four + +On line 5607: + a billion write-down. + Four hours later, Matthew Rutherford, + an adviser to + +On line 5607: + Four hours later, Matthew + Rutherford, an adviser to + Treasury, emailed colleagues + +On line 5607: + Treasury, emailed colleagues + that several large money + funds had reduced their + +On line 5607: + that several large + money funds had reduced their + exposure to Lehman, + +On line 5607: + large money funds had + reduced their exposure to + Lehman, although there was + +On line 5607: + funds had reduced their + exposure to Lehman, although + there was not yet "a + +On line 5607: + their exposure to + Lehman, although there was not yet + "a wholesale pull back + +On line 5607: + exposure to Lehman, + although there was not yet "a + wholesale pull back of + +On line 5607: + to Lehman, although there + was not yet "a wholesale pull + back of [repo] lines."57 + +On line 5609: + there was not yet "a + wholesale pull back of [repo] + lines."57 "Importantly, + +On line 5609: + wholesale pull back of + [repo] lines."57 "Importantly, + Fidelity, the largest + +On line 5609: + back of [repo] lines."57 + "Importantly, Fidelity, + the largest fund complex, + +On line 5609: + the largest fund complex, + stressed that while they hadn’t made + any significant + +On line 5609: + largest fund complex, stressed + that while they hadn’t made any + significant shifts + +On line 5609: + that while they hadn’t + made any significant shifts + yet today, they were + +On line 5609: + while they hadn’t made + any significant shifts yet + today, they were still + +On line 5609: + significant shifts + yet today, they were still in + the process of making + +On line 5609: + were still in the process + of making decisions and + wanted to update + +On line 5609: + the process of making + decisions and wanted to + update me later + +On line 5609: + making decisions + and wanted to update me + later in the day," + +On line 5609: + update me later + in the day," Rutherford wrote. By + Friday, Fidelity + +On line 5609: + me later in the + day," Rutherford wrote. By Friday, + Fidelity would have + +On line 5609: + in the day," Rutherford + wrote. By Friday, Fidelity + would have reduced its + +On line 5609: + would have reduced its + tri-party repo lending + to Lehman to less than + +On line 5609: + to Lehman to less than + billion from over billion the + previous Friday; + +On line 5609: + less than billion from + over billion the previous + Friday; according + +On line 5609: + previous Friday; + according to Fidelity’s + response to an FCIC + +On line 5609: + Friday; according + to Fidelity’s response to + an FCIC survey of + +On line 5609: + to an FCIC survey + of market participants, + in the week prior + +On line 5609: + an FCIC survey of + market participants, in + the week prior to + +On line 5609: + survey of market + participants, in the week + prior to Bear’s demise + +On line 5609: + participants, in + the week prior to Bear’s demise + in March, Fidelity + +On line 5609: + the week prior to + Bear’s demise in March, Fidelity + had pulled its entire + +On line 5609: + prior to Bear’s demise + in March, Fidelity had pulled + its entire billion + +On line 5609: + in March, Fidelity + had pulled its entire billion + repo line to that + +On line 5613: + to that company. + "IMAGINATION HAT" At the + Federal Reserve, + +On line 5613: + Federal Reserve, + working groups were directed + to "spend the next few + +On line 5613: + Reserve, working groups + were directed to "spend the + next few hours fleshing + +On line 5613: + directed to "spend + the next few hours fleshing out + how a Fed-assisted + +On line 5613: + BofA acquisition + transaction might look, how a + private consortium + +On line 5613: + equity investors + transaction might look, and how + a Fed takeout of + +On line 5613: + transaction might look, + and how a Fed takeout of + tri-party repo + +On line 5613: + might look, and how a + Fed takeout of tri-party + repo lenders would look."58 + +On line 5613: + how a Fed takeout + of tri-party repo lenders + would look."58 That day, New + +On line 5613: + a Fed takeout of + tri-party repo lenders would + look."58 That day, New York + +On line 5613: + look."58 That day, New York + Fed Senior Vice President + Patricia Mosser + +On line 5613: + Patricia Mosser + circulated her opinion + on Dudley’s request + +On line 5613: + circulated her + opinion on Dudley’s request + for "thoughts on how to + +On line 5613: + opinion on Dudley’s + request for "thoughts on how to + resolve Lehman." She laid + +On line 5613: + on Dudley’s request + for "thoughts on how to resolve + Lehman." She laid out three + +On line 5613: + request for "thoughts on + how to resolve Lehman." She laid + out three options: find + +On line 5613: + on how to resolve + Lehman." She laid out three options: + find a buyer at + +On line 5613: + how to resolve Lehman." + She laid out three options: find + a buyer at any + +On line 5613: + to resolve Lehman." She + laid out three options: find a + buyer at any price, + +On line 5613: + Lehman." She laid out three + options: find a buyer at + any price, wind down Lehman’s + +On line 5613: + laid out three options: + find a buyer at any price, + wind down Lehman’s affairs, + +On line 5613: + out three options: find + a buyer at any price, wind + down Lehman’s affairs, or + +On line 5613: + three options: find a + buyer at any price, wind down + Lehman’s affairs, or force + +On line 5613: + find a buyer at + any price, wind down Lehman’s affairs, + or force it into + +On line 5613: + down Lehman’s affairs, or + force it into bankruptcy. + Regarding option + +On line 5613: + into bankruptcy. + Regarding option Mosser + said it "should be done + +On line 5613: + "should be done in a + way that requires minimal + temporary support. + +On line 5615: + requires minimal + temporary support. No more + Maiden Lane LLCs and + +On line 5615: + [the] Fed. Moral hazard + and reputation cost is + too high. If the Fed + +On line 5615: + Fed. Moral hazard and + reputation cost is too + high. If the Fed agrees + +On line 5615: + and reputation + cost is too high. If the Fed + agrees to another + +On line 5615: + in March in terms of + temporary liquidity + backstops is useless. + +On line 5615: + terms of temporary + liquidity backstops is + useless. Horrible + +On line 5615: + backstops is useless. + Horrible precedent; in the + long run MUCH worse than + +On line 5615: + long run MUCH worse than + option Option bankruptcy, + would be "[a] mess on + +On line 5615: + MUCH worse than option + Option bankruptcy, would be + "[a] mess on every + +On line 5615: + than option Option + bankruptcy, would be "[a] mess + on every level, + +On line 5615: + Option bankruptcy, + would be "[a] mess on every + level, but fixes + +On line 5615: + bankruptcy, would be + "[a] mess on every level, + but fixes the moral + +On line 5617: + "[a] mess on every + level, but fixes the moral + hazard problem."59 n + +On line 5617: + on every level, + but fixes the moral hazard + problem."59 n Wednesday + +On line 5617: + level, but fixes + the moral hazard problem."59 n + Wednesday night, a New + +On line 5617: + but fixes the moral + hazard problem."59 n Wednesday + night, a New York Fed + +On line 5617: + night, a New York Fed + official circulated + a "Liquidation + +On line 5617: + circulated a + "Liquidation Consortium" + game plan to colleagues.60 + +On line 5617: + Consortium" game plan + to colleagues.60 The plan was to + convene in one room + +On line 5617: + game plan to colleagues.60 + The plan was to convene in + one room senior-level + +On line 5617: + one room senior-level + representatives of Lehman’s + counterparties in + +On line 5617: + Lehman’s counterparties + in the tri-party repo, + credit default swap, + +On line 5617: + credit default swap, + and over-the-counter derivatives + markets—everyone + +On line 5617: + markets—everyone + who would suffer most if Lehman + failed—and have them explore + +On line 5617: + would suffer most if + Lehman failed—and have them explore joint + funding mechanisms + +On line 5619: + mechanisms to avert + a failure. According to + the proposed game plan, + +On line 5619: + to avert a failure. + According to the proposed + game plan, Secretary + +On line 5619: + According to the + proposed game plan, Secretary + Paulson would tell the + +On line 5619: + the proposed game plan, + Secretary Paulson would tell + the participants + +On line 5619: + Secretary Paulson + would tell the participants + they had until the + +On line 5619: + the participants + they had until the opening + of business in Asia + +On line 5619: + participants they + had until the opening of + business in Asia the + +On line 5619: + business in Asia the + following Monday morning + (Sunday night, New York + +On line 5619: + following Monday + morning (Sunday night, New York + time) to devise a + +On line 5619: + morning (Sunday night, + New York time) to devise a + credible plan. The + +On line 5619: + night, New York time) to + devise a credible plan. + The game plan stated + +On line 5619: + York time) to devise + a credible plan. The game + plan stated that "we + +On line 5619: + time) to devise a + credible plan. The game plan + stated that "we should + +On line 5619: + a credible plan. + The game plan stated that "we + should have in mind a + +On line 5619: + The game plan stated + that "we should have in mind a + maximum number + +On line 5619: + stated that "we should + have in mind a maximum + number of how much + +On line 5619: + that "we should have in + mind a maximum number + of how much we are + +On line 5619: + should have in mind a + maximum number of how + much we are willing + +On line 5619: + mind a maximum + number of how much we are + willing to finance + +On line 5619: + maximum number + of how much we are willing + to finance before + +On line 5619: + number of how much + we are willing to finance + before the meeting + +On line 5619: + of how much we are + willing to finance before + the meeting starts, but + +On line 5619: + we are willing to + finance before the meeting + starts, but not divulge + +On line 5619: + finance before the + meeting starts, but not divulge + our willingness to + +On line 5619: + the meeting starts, but + not divulge our willingness + to do so to the + +On line 5619: + starts, but not divulge + our willingness to do so + to the consortium."61 + +On line 5621: + our willingness to + do so to the consortium."61 + Indeed, Paulson would + +On line 5621: + to the consortium."61 + Indeed, Paulson would tell the + consortium when it + +On line 5621: + Indeed, Paulson would + tell the consortium when it + met two days later + +On line 5621: + Paulson would tell the + consortium when it met two + days later that the + +On line 5621: + tell the consortium + when it met two days later + that the government + +On line 5621: + the consortium when + it met two days later that + the government was + +On line 5621: + when it met two days + later that the government + was willing to let + +On line 5623: + days later that the + government was willing to + let Lehman fail.62 Former + +On line 5623: + let Lehman fail.62 Former + Bank of America CEO Ken + Lewis told the FCIC that + +On line 5623: + fail.62 Former Bank of + America CEO Ken Lewis told + the FCIC that Treasury + +On line 5623: + Bank of America + CEO Ken Lewis told the FCIC that + Treasury Secretary + +On line 5623: + America CEO Ken + Lewis told the FCIC that Treasury + Secretary Paulson + +On line 5623: + CEO Ken Lewis told the + FCIC that Treasury Secretary + Paulson had called him + +On line 5623: + called him on Wednesday, + September and asked him to + take another look + +On line 5623: + September and asked + him to take another look + at acquiring Lehman, + +On line 5623: + another look at + acquiring Lehman, assuring + him that Fuld was ready + +On line 5623: + at acquiring Lehman, + assuring him that Fuld was + ready to deal. Paulson + +On line 5623: + assuring him that + Fuld was ready to deal. Paulson + and Geithner + +On line 5623: + Fuld was ready to deal. + Paulson and Geithner + had arranged for Fuld + +On line 5623: + to deal. Paulson and + Geithner had arranged + for Fuld and Lewis to + +On line 5623: + for Fuld and Lewis to + discuss an acquisition + in July, but Fuld + +On line 5623: + Lewis to discuss an + acquisition in July, + but Fuld had not been + +On line 5623: + an acquisition + in July, but Fuld had not + been interested + +On line 5623: + acquisition in + July, but Fuld had not been + interested in + +On line 5623: + July, but Fuld had + not been interested in + selling the entire + +On line 5623: + but Fuld had not been + interested in selling + the entire firm at + +On line 5623: + been interested + in selling the entire firm + at that time. Because + +On line 5623: + interested in + selling the entire firm at + that time. Because of + +On line 5623: + selling the entire + firm at that time. Because of + this history, Lewis + +On line 5623: + time. Because of this + history, Lewis expressed his + concerns to Paulson + +On line 5623: + of this history, + Lewis expressed his concerns to + Paulson that Fuld would + +On line 5623: + Paulson that Fuld would + not want to sell the entire + company or would + +On line 5623: + would not want to sell + the entire company or + would not be willing + +On line 5623: + not want to sell the + entire company or would + not be willing to + +On line 5623: + to sell the entire + company or would not be + willing to sell at + +On line 5623: + company or would + not be willing to sell at + a realistic + +On line 5623: + not be willing to + sell at a realistic + price. Still, a team of + +On line 5623: + be willing to sell + at a realistic price. + Still, a team of Bank + +On line 5623: + willing to sell at + a realistic price. Still, + a team of Bank of + +On line 5623: + a team of Bank of + America executives + began reviewing + +On line 5623: + books, and on the next + day, Fuld sounded optimistic + about a deal. But Bank + +On line 5623: + and on the next day, + Fuld sounded optimistic about + a deal. But Bank of + +On line 5623: + next day, Fuld sounded + optimistic about a deal. But + Bank of America + +On line 5623: + optimistic about a + deal. But Bank of America + determined that Lehman’s + +On line 5623: + about a deal. But Bank + of America determined + that Lehman’s assets were + +On line 5623: + Bank of America + determined that Lehman’s assets + were overvalued, and + +On line 5623: + determined that Lehman’s + assets were overvalued, and + Lewis told Paulson there + +On line 5623: + Paulson told Lewis—as Lewis + informed the FCIC—to put on his + "imagination hat" + +On line 5623: + Lewis informed the FCIC—to + put on his "imagination + hat" and figure out + +On line 5623: + informed the FCIC—to put + on his "imagination hat" + and figure out a + +On line 5623: + his "imagination + hat" and figure out a deal. + His insistence kept + +On line 5623: + "imagination hat" + and figure out a deal. His + insistence kept the + +On line 5623: + and figure out a + deal. His insistence kept the + Bank of America + +On line 5623: + Friday, September + Lewis called Paulson to repeat + his assessment—no + +On line 5623: + Lewis called Paulson to + repeat his assessment—no + government support, + +On line 5623: + his assessment—no + government support, no deal. + Apparently Fuld + +On line 5623: + government support, + no deal. Apparently Fuld + had been kept out of + +On line 5623: + deal. Apparently + Fuld had been kept out of the + loop, and began to + +On line 5623: + Apparently Fuld + had been kept out of the loop, + and began to call + +On line 5623: + Fuld had been kept out + of the loop, and began to + call Lewis at home. Lewis’s + +On line 5623: + had been kept out of + the loop, and began to call + Lewis at home. Lewis’s wife + +On line 5623: + been kept out of the + loop, and began to call Lewis + at home. Lewis’s wife told + +On line 5623: + kept out of the loop, + and began to call Lewis at + home. Lewis’s wife told Fuld + +On line 5623: + out of the loop, and + began to call Lewis at home. + Lewis’s wife told Fuld that + +On line 5623: + the loop, and began + to call Lewis at home. Lewis’s wife + told Fuld that Lewis would + +On line 5623: + loop, and began to + call Lewis at home. Lewis’s wife told + Fuld that Lewis would not + +On line 5623: + and began to call + Lewis at home. Lewis’s wife told Fuld + that Lewis would not come + +On line 5623: + began to call Lewis + at home. Lewis’s wife told Fuld that + Lewis would not come to + +On line 5623: + to call Lewis at home. + Lewis’s wife told Fuld that Lewis would + not come to the phone + +On line 5623: + call Lewis at home. Lewis’s + wife told Fuld that Lewis would not + come to the phone and + +On line 5623: + Lewis at home. Lewis’s wife + told Fuld that Lewis would not come + to the phone and to + +On line 5623: + at home. Lewis’s wife told + Fuld that Lewis would not come to + the phone and to stop + +On line 5623: + Lewis’s wife told Fuld that + Lewis would not come to the phone + and to stop calling.63 + +On line 5625: + wife told Fuld that Lewis + would not come to the phone and + to stop calling.63 On + +On line 5625: + Fuld that Lewis would not + come to the phone and to stop + calling.63 On Thursday + +On line 5625: + would not come to the + phone and to stop calling.63 On + Thursday September + +On line 5625: + come to the phone and + to stop calling.63 On Thursday + September an email + +On line 5625: + and to stop calling.63 + On Thursday September an + email time-stamped A.M. from + +On line 5625: + calling.63 On Thursday + September an email time-stamped + A.M. from Susan McCabe, + +On line 5625: + an email time-stamped A.M. + from Susan McCabe, a Goldman + Sachs executive, + +On line 5625: + email time-stamped A.M. from + Susan McCabe, a Goldman Sachs + executive, to + +On line 5625: + McCabe, a Goldman Sachs + executive, to Dudley + and others set the + +On line 5625: + Sachs executive, + to Dudley and others set + the tone for the day: + +On line 5625: + executive, to + Dudley and others set the + tone for the day: "It + +On line 5625: + Dudley and others + set the tone for the day: "It + is not pretty, This + +On line 5625: + set the tone for the + day: "It is not pretty, This + is getting pretty + +On line 5625: + the tone for the day: + "It is not pretty, This is + getting pretty scary + +On line 5625: + "It is not pretty, + This is getting pretty scary + and ugly again. They + +On line 5625: + is not pretty, This + is getting pretty scary and + ugly again. They [Lehman] + +On line 5625: + [Lehman] have much bigger + counter-party risk than Bear + did, especially + +On line 5625: + counter-party risk + than Bear did, especially + in Derivatives + +On line 5625: + did, especially + in Derivatives market, + so [t]he market is + +On line 5625: + market is getting + very spooked, nervous. Also have + Aig, Wamu concerns. + +On line 5625: + spooked, nervous. Also + have Aig, Wamu concerns. This + is just spinning out + +On line 5625: + nervous. Also have + Aig, Wamu concerns. This is + just spinning out of + +On line 5625: + Aig, Wamu concerns. + This is just spinning out of + control again. Just fyi, + +On line 5625: + This is just spinning + out of control again. Just fyi, + this is shaping up + +On line 5625: + is just spinning out + of control again. Just fyi, this + is shaping up as + +On line 5625: + out of control again. + Just fyi, this is shaping up + as going to be + +On line 5625: + of control again. Just + fyi, this is shaping up as + going to be a + +On line 5627: + again. Just fyi, this is + shaping up as going to + be a rough day."64 Bernanke + +On line 5627: + this is shaping up + as going to be a rough + day."64 Bernanke was informed + +On line 5627: + is shaping up as + going to be a rough day."64 + Bernanke was informed that + +On line 5627: + as going to be + a rough day."64 Bernanke was informed + that if Lehman failed, "it + +On line 5627: + going to be a + rough day."64 Bernanke was informed that + if Lehman failed, "it would + +On line 5627: + to be a rough day."64 + Bernanke was informed that if Lehman + failed, "it would be a + +On line 5627: + be a rough day."64 Bernanke + was informed that if Lehman failed, + "it would be a much + +On line 5627: + a rough day."64 Bernanke was + informed that if Lehman failed, "it + would be a much more + +On line 5627: + day."64 Bernanke was informed + that if Lehman failed, "it would be + a much more complex + +On line 5627: + informed that if Lehman + failed, "it would be a much more + complex proposition + +On line 5627: + a much more complex + proposition to unwind their + positions than it + +On line 5627: + complex proposition + to unwind their positions + than it would have been + +On line 5627: + their positions than + it would have been to unwind + the positions held + +On line 5627: + positions than it + would have been to unwind the + positions held by + +On line 5627: + it would have been to + unwind the positions held + by Bear Stearns," because + +On line 5627: + have been to unwind + the positions held by Bear + Stearns," because Lehman was + +On line 5627: + the positions held + by Bear Stearns," because Lehman was + "nearly twice the size + +On line 5629: + Bear Stearns," because Lehman + was "nearly twice the size of + Bear Stearns."65 Some believed + +On line 5629: + was "nearly twice the + size of Bear Stearns."65 Some believed + government action + +On line 5629: + twice the size of Bear + Stearns."65 Some believed government + action was required. + +On line 5629: + size of Bear Stearns."65 Some + believed government action + was required. At A.M., + +On line 5629: + government action + was required. At A.M., Hayley + Boesky, a senior New + +On line 5629: + was required. At A.M., + Hayley Boesky, a senior New + York Fed official, + +On line 5629: + a senior New York + Fed official, forwarded + to her colleagues an + +On line 5629: + senior New York Fed + official, forwarded to + her colleagues an email + +On line 5629: + York Fed official, + forwarded to her colleagues + an email from the hedge + +On line 5629: + forwarded to her + colleagues an email from the hedge + fund manager Louis + +On line 5629: + colleagues an email from + the hedge fund manager Louis + Bacon suggesting + +On line 5629: + an email from the hedge + fund manager Louis Bacon + suggesting the New + +On line 5629: + fund manager Louis + Bacon suggesting the New + York Fed could "attempt + +On line 5629: + Bacon suggesting + the New York Fed could "attempt + to stabilize or + +On line 5629: + Fed could "attempt to + stabilize or support the + LEH situation" + +On line 5629: + or support the LEH + situation" but noting + that "none of the above + +On line 5629: + that "none of the above + will fix the fundamental + problem, which is too + +On line 5629: + of the above will fix + the fundamental problem, + which is too many bad + +On line 5629: + the fundamental + problem, which is too many bad + assets that need to + +On line 5629: + which is too many bad + assets that need to get off + too many balance sheets."66 + +On line 5633: + bad assets that need + to get off too many balance + sheets."66 SEPTEMBER At + +On line 5633: + assets that need to + get off too many balance sheets."66 + SEPTEMBER At P.M., + +On line 5633: + to get off too many + balance sheets."66 SEPTEMBER At + P.M., Fed officials + +On line 5633: + outline of a plan + to create a "Lehman Default + Management Group," a + +On line 5633: + a plan to create + a "Lehman Default Management + Group," a group of Lehman + +On line 5633: + Management Group," a + group of Lehman counterparties + and creditors who + +On line 5633: + Lehman counterparties + and creditors who would make + plans to cope with a + +On line 5633: + counterparties and + creditors who would make plans + to cope with a Lehman + +On line 5633: + and creditors who + would make plans to cope with a + Lehman bankruptcy. They + +On line 5633: + creditors who would + make plans to cope with a Lehman + bankruptcy. They would + +On line 5633: + who would make plans to + cope with a Lehman bankruptcy. + They would agree to hold + +On line 5633: + would make plans to cope + with a Lehman bankruptcy. They + would agree to hold off + +On line 5633: + make plans to cope with + a Lehman bankruptcy. They would + agree to hold off on + +On line 5633: + to cope with a Lehman + bankruptcy. They would agree to + hold off on fully + +On line 5633: + bankruptcy. They would + agree to hold off on fully + exercising their + +On line 5633: + would agree to hold off + on fully exercising + their rights to close out + +On line 5633: + agree to hold off on + fully exercising their + rights to close out their + +On line 5633: + hold off on fully + exercising their rights to + close out their trades with + +On line 5633: + exercising their + rights to close out their trades with + Lehman; instead, they would + +On line 5633: + their rights to close out + their trades with Lehman; instead, they + would establish a + +On line 5633: + rights to close out their + trades with Lehman; instead, they would + establish a process + +On line 5633: + trades with Lehman; instead, + they would establish a process + to "net down"—that is, + +On line 5633: + Lehman; instead, they would + establish a process to "net + down"—that is, reduce—all + +On line 5633: + they would establish + a process to "net down"—that is, + reduce—all exposures + +On line 5633: + establish a process + to "net down"—that is, reduce—all + exposures using + +On line 5633: + midnight on Thursday, + Boesky notified colleagues that + panicked hedge funds had + +On line 5633: + colleagues that panicked + hedge funds had called to say they + were "expecting [a] + +On line 5633: + hedge funds had called to + say they were "expecting [a] + full blown recession" + +On line 5633: + funds had called to say + they were "expecting [a] full + blown recession" and + +On line 5633: + had called to say they + were "expecting [a] full blown + recession" and that + +On line 5633: + they were "expecting + [a] full blown recession" and + that there was a "full + +On line 5633: + and that there was a + "full expectation that Leh + goes, wamu and then + +On line 5633: + that there was a "full + expectation that Leh goes, + wamu and then ML + +On line 5633: + "full expectation + that Leh goes, wamu and then + ML [Merrill Lynch]." They + +On line 5633: + expectation that + Leh goes, wamu and then ML + [Merrill Lynch]." They were + +On line 5633: + Leh goes, wamu and + then ML [Merrill Lynch]." They were + "ALL begging, pleading + +On line 5633: + goes, wamu and then + ML [Merrill Lynch]." They were "ALL + begging, pleading for + +On line 5633: + [Merrill Lynch]." They were + "ALL begging, pleading for a + large scale solution + +On line 5633: + "ALL begging, pleading + for a large scale solution + which spans beyond just + +On line 5633: + begging, pleading for + a large scale solution which + spans beyond just LEH." + +On line 5633: + large scale solution + which spans beyond just LEH." Boesky + compared the level + +On line 5633: + which spans beyond just + LEH." Boesky compared the level + of panic to the + +On line 5633: + just LEH." Boesky compared + the level of panic to + the failure of Bear + +On line 5633: + LEH." Boesky compared the + level of panic to the + failure of Bear Stearns—"On + +On line 5633: + compared the level + of panic to the failure + of Bear Stearns—"On a scale + +On line 5633: + level of panic + to the failure of Bear Stearns—"On + a scale of to where + +On line 5633: + of panic to the + failure of Bear Stearns—"On a scale + of to where is Bear-Stearns-week-panic, + +On line 5633: + to the failure of + Bear Stearns—"On a scale of to where + is Bear-Stearns-week-panic, I would put + +On line 5633: + Bear Stearns—"On a scale of + to where is Bear-Stearns-week-panic, I would put + sentiment today + +On line 5635: + scale of to where is + Bear-Stearns-week-panic, I would put sentiment + today at a At + +On line 5635: + to where is Bear-Stearns-week-panic, I + would put sentiment today + at a At almost + +On line 5635: + where is Bear-Stearns-week-panic, I would + put sentiment today at + a At almost the + +On line 5635: + is Bear-Stearns-week-panic, I would put + sentiment today at a + At almost the same + +On line 5635: + almost the same time, + JP Morgan demanded that + Lehman post another + +On line 5635: + demanded that Lehman + post another billion in + cash "by the opening + +On line 5635: + another billion + in cash "by the opening of + business tomorrow + +On line 5635: + "by the opening of + business tomorrow in New + York"; if it didn’t, + +On line 5635: + York"; if it didn’t, + JP Morgan would "exercise + our right to decline + +On line 5635: + if it didn’t, JP + Morgan would "exercise our + right to decline to + +On line 5635: + didn’t, JP Morgan + would "exercise our right to + decline to extend + +On line 5635: + would "exercise our + right to decline to extend + credit to you."69 JP + +On line 5637: + right to decline to + extend credit to you."69 JP + Morgan CEO Dimon, + +On line 5637: + extend credit to + you."69 JP Morgan CEO Dimon, + President Black, and + +On line 5637: + to you."69 JP Morgan + CEO Dimon, President Black, + and CRO Zubrow had first + +On line 5637: + you."69 JP Morgan CEO + Dimon, President Black, and + CRO Zubrow had first made + +On line 5637: + Dimon, President + Black, and CRO Zubrow had first made + the demand in a + +On line 5637: + Black, and CRO Zubrow had + first made the demand in a + phone call earlier + +On line 5637: + and CRO Zubrow had first + made the demand in a phone + call earlier that + +On line 5637: + CRO Zubrow had first made + the demand in a phone call + earlier that evening + +On line 5637: + first made the demand + in a phone call earlier + that evening to Lehman CEO + +On line 5637: + made the demand in + a phone call earlier that + evening to Lehman CEO Fuld, + +On line 5637: + the demand in a + phone call earlier that evening + to Lehman CEO Fuld, CFO + +On line 5637: + demand in a phone + call earlier that evening to + Lehman CEO Fuld, CFO Ian + +On line 5637: + call earlier that + evening to Lehman CEO Fuld, CFO Ian + Lowitt, and Treasurer + +On line 5637: + Lehman CEO Fuld, CFO Ian + Lowitt, and Treasurer Paolo + Tonucci.70 Tonucci told + +On line 5637: + Fuld, CFO Ian Lowitt, and + Treasurer Paolo Tonucci.70 + Tonucci told the JP + +On line 5637: + Tonucci told the JP + Morgan executives on + the call that Lehman could + +On line 5637: + told the JP Morgan + executives on the call + that Lehman could not meet + +On line 5637: + executives on + the call that Lehman could not meet + the demand. Dimon + +On line 5637: + call that Lehman could not + meet the demand. Dimon said + Lehman’s difficulties + +On line 5637: + that Lehman could not meet + the demand. Dimon said Lehman’s + difficulties in + +On line 5637: + the demand. Dimon + said Lehman’s difficulties in + coming up with the + +On line 5637: + difficulties in + coming up with the money + were not JP Morgan’s + +On line 5637: + coming up with the + money were not JP Morgan’s + problem, Tonucci told + +On line 5637: + up with the money + were not JP Morgan’s problem, + Tonucci told the FCIC. + +On line 5637: + the money were not + JP Morgan’s problem, Tonucci + told the FCIC. "They just + +On line 5637: + were not JP Morgan’s + problem, Tonucci told the FCIC. + "They just wanted the + +On line 5639: + JP Morgan’s problem, + Tonucci told the FCIC. "They just + wanted the cash. We + +On line 5639: + problem, Tonucci told + the FCIC. "They just wanted the + cash. We made the point + +On line 5639: + Tonucci told the FCIC. + "They just wanted the cash. We + made the point that it’s + +On line 5639: + told the FCIC. "They just + wanted the cash. We made the + point that it’s too much + +On line 5639: + FCIC. "They just wanted + the cash. We made the point that + it’s too much cash to + +On line 5639: + wanted the cash. We + made the point that it’s too much + cash to mobilize. + +On line 5639: + the cash. We made the + point that it’s too much cash to + mobilize. There was + +On line 5639: + made the point that it’s + too much cash to mobilize. + There was no give on + +On line 5639: + the point that it’s too + much cash to mobilize. There + was no give on that. + +On line 5641: + point that it’s too much + cash to mobilize. There was + no give on that. Again, + +On line 5641: + that it’s too much cash + to mobilize. There was no + give on that. Again, they + +On line 5641: + it’s too much cash to + mobilize. There was no give + on that. Again, they said + +On line 5641: + cash to mobilize. + There was no give on that. Again, + they said ‘that’s not our + +On line 5641: + mobilize. There was + no give on that. Again, they said + ‘that’s not our problem, + +On line 5641: + There was no give on + that. Again, they said ‘that’s not our + problem, we just want + +On line 5641: + no give on that. Again, + they said ‘that’s not our problem, + we just want the cash.’"71 + +On line 5641: + give on that. Again, they + said ‘that’s not our problem, we + just want the cash.’"71 When + +On line 5641: + that. Again, they said ‘that’s + not our problem, we just want + the cash.’"71 When Tonucci + +On line 5641: + Again, they said ‘that’s not + our problem, we just want the + cash.’"71 When Tonucci asked + +On line 5641: + they said ‘that’s not our + problem, we just want the cash.’"71 + When Tonucci asked what + +On line 5641: + not our problem, we + just want the cash.’"71 When Tonucci + asked what would keep JP + +On line 5641: + problem, we just want + the cash.’"71 When Tonucci asked what + would keep JP Morgan + +On line 5641: + just want the cash.’"71 When + Tonucci asked what would keep JP + Morgan from asking + +On line 5641: + cash.’"71 When Tonucci asked + what would keep JP Morgan from + asking for billion + +On line 5643: + billion tomorrow, + Dimon replied, "Nothing, maybe we + will."72 Under normal + +On line 5643: + Dimon replied, "Nothing, + maybe we will."72 Under normal + circumstances, Tonucci + +On line 5643: + "Nothing, maybe we will."72 + Under normal circumstances, + Tonucci would not have + +On line 5643: + will."72 Under normal + circumstances, Tonucci would not + have tolerated + +On line 5643: + Tonucci would not have + tolerated this treatment, + but circumstances were + +On line 5643: + have tolerated + this treatment, but circumstances + were far from normal. + +On line 5643: + tolerated this + treatment, but circumstances were + far from normal. "JPM + +On line 5643: + circumstances were far + from normal. "JPM as ‘clearing + bank’ continues to + +On line 5643: + far from normal. "JPM + as ‘clearing bank’ continues + to ask for more cash + +On line 5643: + "JPM as ‘clearing bank’ + continues to ask for more + cash collateral. + +On line 5643: + continues to ask + for more cash collateral. + If we don’t provide + +On line 5643: + to ask for more cash + collateral. If we don’t + provide the cash, they + +On line 5643: + cash collateral. + If we don’t provide the cash, + they refuse to clear, we + +On line 5643: + collateral. If + we don’t provide the cash, they + refuse to clear, we fail," + +On line 5643: + If we don’t provide + the cash, they refuse to clear, we + fail," was the message + +On line 5643: + the cash, they refuse to + clear, we fail," was the message + circulated in + +On line 5643: + to clear, we fail," was + the message circulated + in an email to Lehman + +On line 5643: + in an email to Lehman + executives on Friday, + September So Lehman + +On line 5643: + Lehman executives + on Friday, September So + Lehman "delivered the + +On line 5643: + September So Lehman + "delivered the billion in + cash only by pulling + +On line 5643: + Lehman "delivered the + billion in cash only by + pulling virtually + +On line 5643: + in cash only by + pulling virtually every + unencum-bered asset + +On line 5643: + pulling virtually + every unencum-bered asset + it could deliver."73 + +On line 5645: + every unencum-bered + asset it could deliver."73 + JP Morgan’s Zubrow saw + +On line 5645: + posted billion of + collateral by Lehman was + "inappropriate" + +On line 5645: + was "illiquid" and "could + not be reasonably valued." + Moreover, Zubrow said the + +On line 5645: + Moreover, Zubrow said the + potential collateral + shortfall was greater than + +On line 5645: + said the potential + collateral shortfall was + greater than billion.74 Lehman’s + +On line 5645: + shortfall was greater than + billion.74 Lehman’s former CEO, Fuld, + told the FCIC that he + +On line 5645: + was greater than billion.74 + Lehman’s former CEO, Fuld, told the + FCIC that he agreed to + +On line 5645: + greater than billion.74 Lehman’s + former CEO, Fuld, told the FCIC + that he agreed to post + +On line 5645: + former CEO, Fuld, told + the FCIC that he agreed to post + the billion because + +On line 5645: + Fuld, told the FCIC that + he agreed to post the billion + because JP Morgan + +On line 5645: + the FCIC that he agreed + to post the billion because + JP Morgan said it + +On line 5645: + FCIC that he agreed to + post the billion because JP + Morgan said it would + +On line 5645: + to post the billion + because JP Morgan said it + would be returned to + +On line 5645: + the billion because + JP Morgan said it would be + returned to Lehman at + +On line 5645: + because JP Morgan + said it would be returned to + Lehman at the close of + +On line 5645: + JP Morgan said it + would be returned to Lehman at + the close of business + +On line 5645: + Morgan said it would + be returned to Lehman at the + close of business the + +On line 5645: + would be returned to + Lehman at the close of business + the following day.75 + +On line 5645: + be returned to Lehman + at the close of business the + following day.75 The + +On line 5645: + Lehman at the close of + business the following day.75 + The Lehman bankruptcy + +On line 5645: + the close of business + the following day.75 The Lehman + bankruptcy estate + +On line 5645: + bankruptcy estate + made the same allegation. + This dispute is now + +On line 5645: + estate made the same + allegation. This dispute + is now the subject + +On line 5645: + allegation. This + dispute is now the subject + of litigation; + +On line 5645: + dispute is now the + subject of litigation; + the Lehman bankruptcy + +On line 5645: + is now the subject + of litigation; the Lehman + bankruptcy estate + +On line 5645: + litigation; the + Lehman bankruptcy estate is + suing JP Morgan + +On line 5649: + the billion—and the + original billion.76 "HEADS OF + FAMILY" Should Lehman + +On line 5649: + original billion.76 + "HEADS OF FAMILY" Should Lehman + be allowed to go + +On line 5649: + "HEADS OF FAMILY" + Should Lehman be allowed to go + bankrupt1 Within the + +On line 5649: + go bankrupt1 Within + the government, sentiments + varied. On Friday + +On line 5649: + Friday morning, as + Secretary Paulson headed + to New York to "sort + +On line 5649: + Paulson headed to + New York to "sort through his Lehman + mess," Wilkinson wrote that + +On line 5649: + to New York to "sort + through his Lehman mess," Wilkinson wrote + that he still "[couldn’t] + +On line 5649: + York to "sort through his + Lehman mess," Wilkinson wrote that he + still "[couldn’t] imagine + +On line 5649: + to "sort through his Lehman + mess," Wilkinson wrote that he still + "[couldn’t] imagine a + +On line 5649: + Lehman mess," Wilkinson wrote + that he still "[couldn’t] imagine + a scenario where we + +On line 5649: + mess," Wilkinson wrote that + he still "[couldn’t] imagine a + scenario where we put + +On line 5649: + that he still "[couldn’t] + imagine a scenario where we + put in [government] + +On line 5649: + still "[couldn’t] imagine + a scenario where we put in + [government] money + +On line 5649: + imagine a scenario + where we put in [government] + money we shall see."77 + +On line 5649: + [government] money + we shall see."77 That afternoon, + Fed Governor Warsh + +On line 5649: + Governor Warsh wrote, + in response to a colleague’s + hope the Fed would not + +On line 5649: + wrote, in response to + a colleague’s hope the Fed would + not have to protect + +On line 5649: + in response to a + colleague’s hope the Fed would not + have to protect some + +On line 5649: + colleague’s hope the Fed + would not have to protect some + of Lehman’s debt holders, + +On line 5649: + hope the Fed would not + have to protect some of Lehman’s + debt holders, "I hope + +On line 5649: + the Fed would not have + to protect some of Lehman’s debt + holders, "I hope we + +On line 5649: + not have to protect + some of Lehman’s debt holders, "I + hope we don[’]t protect + +On line 5649: + to protect some of + Lehman’s debt holders, "I hope we + don[’]t protect anything!"78 + +On line 5649: + protect some of Lehman’s + debt holders, "I hope we don[’]t + protect anything!"78 But + +On line 5649: + Lehman’s debt holders, "I + hope we don[’]t protect anything!"78 + But on Friday, Fed + +On line 5649: + holders, "I hope we + don[’]t protect anything!"78 But on + Friday, Fed Chairman + +On line 5649: + don[’]t protect anything!"78 + But on Friday, Fed Chairman + Bernanke was taking no + +On line 5649: + protect anything!"78 But + on Friday, Fed Chairman Bernanke + was taking no chances. + +On line 5649: + But on Friday, Fed + Chairman Bernanke was taking no + chances. He stayed behind + +On line 5649: + taking no chances. He + stayed behind in Washington, + in case he had to + +On line 5649: + chances. He stayed behind + in Washington, in case he + had to convene the + +On line 5649: + He stayed behind in + Washington, in case he had + to convene the Fed’s + +On line 5649: + Washington, in case + he had to convene the Fed’s + board to exercise + +On line 5649: + had to convene the + Fed’s board to exercise its + emergency lending + +On line 5651: + to exercise its + emergency lending powers.79 + Early Friday evening, + +On line 5651: + emergency lending + powers.79 Early Friday evening, + Treasury Secretary + +On line 5651: + Early Friday evening, + Treasury Secretary Paulson + summoned the "heads of + +On line 5651: + Treasury Secretary + Paulson summoned the "heads of + family"—the phrase used + +On line 5651: + Paulson summoned the + "heads of family"—the phrase used + by Harvey Miller, Lehman’s + +On line 5651: + "heads of family"—the + phrase used by Harvey Miller, Lehman’s + bankruptcy counsel, + +On line 5651: + phrase used by Harvey + Miller, Lehman’s bankruptcy counsel, + to describe the CEOs + +On line 5651: + used by Harvey Miller, + Lehman’s bankruptcy counsel, to + describe the CEOs of + +On line 5651: + Miller, Lehman’s bankruptcy + counsel, to describe the CEOs + of the big Wall Street + +On line 5651: + bankruptcy counsel, + to describe the CEOs of the + big Wall Street firms80—to + +On line 5651: + counsel, to describe + the CEOs of the big Wall Street + firms80—to the New York + +On line 5651: + CEOs of the big Wall + Street firms80—to the New York Fed’s + headquarters. Paulson + +On line 5651: + big Wall Street firms80—to + the New York Fed’s headquarters. + Paulson told them that + +On line 5651: + a private-sector + solution was the only + option to prevent + +On line 5651: + solution was the + only option to prevent + a Lehman bankruptcy. + +On line 5651: + only option to + prevent a Lehman bankruptcy. + The people in the + +On line 5651: + to prevent a Lehman + bankruptcy. The people in + the room needed to + +On line 5651: + Lehman bankruptcy. The + people in the room needed + to come up with a + +On line 5651: + The people in the + room needed to come up with + a realistic + +On line 5651: + people in the room + needed to come up with a + realistic set + +On line 5651: + room needed to come + up with a realistic + set of options to + +On line 5651: + needed to come up + with a realistic set + of options to help + +On line 5651: + set of options to + help limit damage to the + system. A sudden + +On line 5651: + help limit damage + to the system. A sudden + and disorderly + +On line 5651: + to the system. A + sudden and disorderly + wind-down could harm the + +On line 5651: + wind-down could harm the + capital markets and pose + the significant + +On line 5651: + markets and pose the + significant risk of a + precipitous drop + +On line 5651: + the significant + risk of a precipitous + drop in asset prices, + +On line 5651: + precipitous drop + in asset prices, resulting + in collateral + +On line 5651: + collateral calls + and reduced liquidity: + that is, systemic risk. + +On line 5651: + liquidity: that + is, systemic risk. He could not + offer the prospect of + +On line 5651: + that is, systemic risk. + He could not offer the prospect + of containing the + +On line 5651: + offer the prospect of + containing the damage if + the executives + +On line 5651: + resolution of + the situation, as had + been done in for Long-Term + +On line 5651: + had been done in for + Long-Term Capital Management. + Paulson did offer + +On line 5651: + Management. Paulson + did offer the Fed’s help through + regulatory + +On line 5651: + did offer the Fed’s + help through regulatory + approvals and access + +On line 5651: + approvals and access + to lending facilities, + but emphasized that + +On line 5651: + facilities, but + emphasized that the Fed would + not provide "any form + +On line 5651: + would not provide "any + form of extraordinary + credit support."81 As + +On line 5651: + provide "any form of + extraordinary credit + support."81 As New York + +On line 5651: + support."81 As New York + Fed General Counsel Tom + Baxter told the FCIC, + +On line 5651: + York Fed General + Counsel Tom Baxter told the + FCIC, Paulson made it + +On line 5651: + Counsel Tom Baxter + told the FCIC, Paulson made it + clear there would be no + +On line 5651: + Baxter told the FCIC, + Paulson made it clear there would + be no government + +On line 5651: + Paulson made it clear + there would be no government + assistance, "not a + +On line 5653: + it clear there would be + no government assistance, + "not a penny."82 H. + +On line 5653: + be no government + assistance, "not a penny."82 + H. Rodgin Cohen, + +On line 5653: + assistance, "not a + penny."82 H. Rodgin Cohen, + a veteran Wall + +On line 5653: + Rodgin Cohen, a + veteran Wall Street lawyer who + has represented + +On line 5653: + veteran Wall Street + lawyer who has represented + most of the major + +On line 5653: + of the major banks, + including Lehman, told the FCIC + that the government’s + +On line 5653: + that the government’s + "not a penny" posture was + a calculated + +On line 5653: + know exactly what + the government was thinking, + but my impression + +On line 5653: + exactly what the + government was thinking, but + my impression was + +On line 5653: + the government was + thinking, but my impression + was they were playing + +On line 5653: + my impression was + they were playing a game of + chicken or poker + +On line 5653: + they were playing a + game of chicken or poker + or whatever. It + +On line 5653: + were playing a game + of chicken or poker or + whatever. It was + +On line 5653: + a game of chicken + or poker or whatever. + It was said on more + +On line 5653: + game of chicken or + poker or whatever. It + was said on more than + +On line 5653: + politically + difficult to rescue Lehman. + There had been a lot + +On line 5653: + to rescue Lehman. There + had been a lot of blowback + after Bear Stearns. I + +On line 5653: + Lehman. There had been a + lot of blowback after Bear + Stearns. I believe the + +On line 5653: + a lot of blowback + after Bear Stearns. I believe + the government thought + +On line 5653: + Bear Stearns. I believe + the government thought that it + could, with respect to + +On line 5653: + Stearns. I believe the + government thought that it could, + with respect to a + +On line 5653: + the government thought + that it could, with respect to + a game of chicken, + +On line 5653: + could, with respect to + a game of chicken, persuade + the private sector + +On line 5653: + with respect to a + game of chicken, persuade the + private sector to + +On line 5653: + a game of chicken, + persuade the private sector + to take a big chunk" + +On line 5653: + of chicken, persuade + the private sector to take + a big chunk" of Lehman’s + +On line 5653: + the private sector + to take a big chunk" of Lehman’s + liabilities.83 + +On line 5655: + to take a big chunk" + of Lehman’s liabilities.83 + The Fed’s internal + +On line 5655: + The Fed’s internal + liquidation consortium + game plan would seem to + +On line 5655: + consortium game plan + would seem to confirm Cohen’s + view, given that it + +On line 5655: + would seem to confirm + Cohen’s view, given that it + contemplated a + +On line 5655: + it contemplated + a financial commitment, + even though that was not + +On line 5655: + contemplated a + financial commitment, even + though that was not to + +On line 5655: + be divulged.84 Moreover, + notwithstanding Paulson’s "not a + penny" statement, the + +On line 5655: + Paulson’s "not a penny" + statement, the United Kingdom’s + chancellor of the + +On line 5655: + penny" statement, the + United Kingdom’s chancellor + of the exchequer, + +On line 5655: + of the exchequer, + Alistair Darling, said that + Paulson told him that + +On line 5655: + Alistair Darling, + said that Paulson told him that + "the FRBNY might be + +On line 5655: + said that Paulson told + him that "the FRBNY might be + prepared to provide + +On line 5655: + Paulson told him that + "the FRBNY might be prepared + to provide Barclays + +On line 5655: + regulatory + assistance to support a + transaction if it + +On line 5657: + consortium meeting + on Friday night, Citigroup + CEO Vikram Pandit asked + +On line 5657: + night, Citigroup CEO + Vikram Pandit asked if the group + was also going + +On line 5657: + Citigroup CEO Vikram + Pandit asked if the group was + also going to + +On line 5657: + was also going + to talk about AIG. Timothy + Geithner said + +On line 5657: + about AIG. Timothy + Geithner said simply: + "Let’s focus on Lehman."86 + +On line 5661: + on Lehman."86 "TELL THOSE SONS + OF BITCHES TO UNWIND" What + would happen if JP + +On line 5661: + SONS OF BITCHES TO + UNWIND" What would happen if + JP Morgan refused + +On line 5661: + would happen if JP + Morgan refused to provide + intraday credit + +On line 5661: + refused to provide + intraday credit for Lehman + in the tri-party + +On line 5661: + intraday credit + for Lehman in the tri-party + repo market on + +On line 5661: + in the tri-party + repo market on Monday, + September The Fed + +On line 5661: + market on Monday, + September The Fed had been + considering this + +On line 5661: + September The Fed + had been considering this + possibility + +On line 5661: + considering this + possibility since the + summer. As Parkinson + +On line 5661: + summer. As Parkinson + noted, the fundamental + problem was that even + +On line 5661: + As Parkinson noted, + the fundamental problem + was that even if Lehman + +On line 5661: + Parkinson noted, the + fundamental problem was + that even if Lehman filed + +On line 5661: + the fundamental + problem was that even if Lehman + filed for bankruptcy, + +On line 5661: + problem was that even + if Lehman filed for bankruptcy, + the SEC would want Lehman’s + +On line 5661: + that even if Lehman filed + for bankruptcy, the SEC would + want Lehman’s broker-SEPTEMBER dealer + +On line 5661: + even if Lehman filed for + bankruptcy, the SEC would want + Lehman’s broker-SEPTEMBER dealer to + +On line 5661: + for bankruptcy, the + SEC would want Lehman’s broker-SEPTEMBER dealer + to live on and would + +On line 5661: + bankruptcy, the SEC + would want Lehman’s broker-SEPTEMBER dealer to + live on and would not + +On line 5661: + the SEC would want Lehman’s + broker-SEPTEMBER dealer to live on and + would not want the Fed + +On line 5661: + SEC would want Lehman’s broker-SEPTEMBER + dealer to live on and would + not want the Fed in + +On line 5661: + broker-SEPTEMBER dealer to live + on and would not want the Fed + in its position + +On line 5661: + dealer to live on + and would not want the Fed in + its position as + +On line 5661: + would not want the Fed + in its position as lender + to grab tri-party + +On line 5661: + to grab tri-party + collateral.87 Parkinson told + the FCIC staff that Zubrow + +On line 5661: + Parkinson told the FCIC + staff that Zubrow informed him over + the weekend that JP + +On line 5661: + the FCIC staff that Zubrow + informed him over the weekend + that JP Morgan would + +On line 5661: + Zubrow informed him over + the weekend that JP Morgan + would not unwind Lehman’s + +On line 5661: + the weekend that JP + Morgan would not unwind Lehman’s + repos on Monday + +On line 5661: + that JP Morgan would + not unwind Lehman’s repos on + Monday if the Fed + +On line 5661: + would not unwind Lehman’s + repos on Monday if the + Fed did not expand + +On line 5661: + unwind Lehman’s repos + on Monday if the Fed did + not expand the types + +On line 5661: + on Monday if the + Fed did not expand the types + of collateral + +On line 5661: + Monday if the Fed + did not expand the types of + collateral that + +On line 5661: + Fed did not expand + the types of collateral + that could be financed + +On line 5661: + did not expand the + types of collateral that + could be financed through + +On line 5661: + not expand the types + of collateral that could + be financed through the + +On line 5661: + the PDCF lending + facility. Earlier + in the year, Parkinson + +On line 5661: + Earlier in the + year, Parkinson had said that JP + Morgan’s refusal to + +On line 5661: + the year, Parkinson had + said that JP Morgan’s refusal + to unwind would be + +On line 5661: + said that JP Morgan’s + refusal to unwind would be + unforgiveable. Now + +On line 5661: + to unwind would be + unforgiveable. Now he told + Geithner to + +On line 5661: + be unforgiveable. + Now he told Geithner + to "tell those sons of + +On line 5663: + told Geithner + to "tell those sons of bitches + to unwind."88 Merrill + +On line 5663: + Geithner to + "tell those sons of bitches to + unwind."88 Merrill CEO + +On line 5663: + to "tell those sons of + bitches to unwind."88 Merrill + CEO John Thain told the + +On line 5663: + those sons of bitches + to unwind."88 Merrill CEO John + Thain told the FCIC that + +On line 5663: + sons of bitches to + unwind."88 Merrill CEO John Thain + told the FCIC that by + +On line 5663: + unwind."88 Merrill CEO + John Thain told the FCIC that by + Saturday morning, + +On line 5663: + told the FCIC that by + Saturday morning, the group + of executives + +On line 5663: + of executives + reviewing Lehman’s assets had + estimated that + +On line 5663: + they were overvalued + by anywhere from to billion. + Thain thought that was more + +On line 5663: + were overvalued by + anywhere from to billion. Thain + thought that was more than + +On line 5663: + by anywhere from to + billion. Thain thought that was more + than the assembled + +On line 5663: + billion. Thain thought that + was more than the assembled + executives would + +On line 5663: + that was more than the + assembled executives + would be willing to + +On line 5663: + executives would + be willing to finance and, + therefore, Thain believed + +On line 5663: + willing to finance + and, therefore, Thain believed Lehman + would fail.89 If Lehman failed, + +On line 5663: + finance and, therefore, + Thain believed Lehman would fail.89 If + Lehman failed, Thain believed, + +On line 5663: + therefore, Thain believed + Lehman would fail.89 If Lehman failed, Thain + believed, Merrill would + +On line 5663: + Thain believed Lehman would + fail.89 If Lehman failed, Thain believed, + Merrill would be next. + +On line 5663: + Lehman would fail.89 If Lehman + failed, Thain believed, Merrill would + be next. So he had + +On line 5663: + would fail.89 If Lehman failed, + Thain believed, Merrill would be + next. So he had called + +On line 5663: + fail.89 If Lehman failed, Thain + believed, Merrill would be next. + So he had called Ken + +On line 5663: + Lehman failed, Thain believed, + Merrill would be next. So he + had called Ken Lewis, the + +On line 5663: + Thain believed, Merrill + would be next. So he had called + Ken Lewis, the CEO of + +On line 5663: + believed, Merrill would + be next. So he had called Ken + Lewis, the CEO of Bank + +On line 5663: + would be next. So he + had called Ken Lewis, the CEO of + Bank of America, + +On line 5663: + be next. So he had + called Ken Lewis, the CEO of Bank + of America, and + +On line 5663: + next. So he had called + Ken Lewis, the CEO of Bank of + America, and they + +On line 5663: + had called Ken Lewis, the + CEO of Bank of America, + and they met later + +On line 5663: + called Ken Lewis, the CEO + of Bank of America, and + they met later that + +On line 5663: + Ken Lewis, the CEO of + Bank of America, and they + met later that day + +On line 5663: + Lewis, the CEO of Bank + of America, and they met + later that day at + +On line 5663: + America, and they + met later that day at Bank + of America’s + +On line 5663: + met later that day + at Bank of America’s + New York corporate + +On line 5663: + of America’s + New York corporate apartment. + By Sunday, the two + +On line 5663: + America’s New + York corporate apartment. By + Sunday, the two agreed + +On line 5663: + corporate apartment. + By Sunday, the two agreed that + Bank of America + +On line 5663: + By Sunday, the two + agreed that Bank of America + would acquire Merrill + +On line 5663: + Sunday, the two agreed + that Bank of America would + acquire Merrill for + +On line 5663: + the two agreed that Bank + of America would acquire + Merrill for per share, + +On line 5663: + Bank of America + would acquire Merrill for per + share, payable in Bank of + +On line 5665: + would acquire Merrill + for per share, payable in Bank of + America stock. On + +On line 5665: + Merrill for per share, + payable in Bank of America + stock. On Saturday + +On line 5665: + America stock. On + Saturday afternoon, Lehman’s + counsel provided + +On line 5665: + counsel provided + the Fed with a document + describing how Lehman’s + +On line 5665: + with a document + describing how Lehman’s default + on its obligations + +On line 5665: + Lehman’s default on its + obligations would "trigger a + cascade of defaults + +On line 5665: + on its obligations + would "trigger a cascade of + defaults through to the + +On line 5665: + of defaults through to + the [subsidiaries] which have large OTC + [derivatives] books."90 + +On line 5665: + the [subsidiaries] which have + large OTC [derivatives] books."90 + Bernanke, Fed Governor + +On line 5665: + [subsidiaries] which have large + OTC [derivatives] books."90 Bernanke, + Fed Governor Kohn, + +On line 5665: + OTC [derivatives] + books."90 Bernanke, Fed Governor Kohn, + Geithner, and + +On line 5665: + other senior Fed + officials subsequently + participated + +On line 5665: + General Counsel + Scott Alvarez cautioned others + not to mention the + +On line 5665: + Scott Alvarez cautioned + others not to mention the + plan to JP Morgan, + +On line 5665: + cautioned others not + to mention the plan to JP + Morgan, because he + +On line 5665: + not to mention the + plan to JP Morgan, because + he did not want to + +On line 5665: + mention the plan to + JP Morgan, because he did + not want to "suggest + +On line 5665: + JP Morgan, because + he did not want to "suggest + Fed willingness to + +On line 5665: + Morgan, because he + did not want to "suggest Fed + willingness to give + +On line 5665: + he did not want to + "suggest Fed willingness to + give JPMC cover to + +On line 5667: + not want to "suggest + Fed willingness to give JPMC + cover to screw [Lehman] + +On line 5669: + Fed willingness to + give JPMC cover to screw [Lehman] + or anyone else."92 By + +On line 5669: + to give JPMC cover + to screw [Lehman] or anyone else."92 + By Saturday night, + +On line 5669: + or anyone else."92 By + Saturday night, however, + it appeared that the + +On line 5669: + else."92 By Saturday + night, however, it appeared + that the parade of + +On line 5669: + it appeared that the + parade of horrors that would + result from a Lehman + +On line 5669: + that the parade of + horrors that would result from + a Lehman bankruptcy + +On line 5669: + parade of horrors + that would result from a Lehman + bankruptcy had been + +On line 5669: + that would result from + a Lehman bankruptcy had been + avoided. An agreement + +On line 5669: + a Lehman bankruptcy + had been avoided. An agreement + apparently had + +On line 5669: + had been avoided. An + agreement apparently had + been reached. Barclays would + +On line 5669: + avoided. An agreement + apparently had been reached. + Barclays would purchase + +On line 5669: + apparently had + been reached. Barclays would purchase + Lehman, excluding to + +On line 5669: + been reached. Barclays would + purchase Lehman, excluding to + billion of assets + +On line 5669: + Barclays would purchase + Lehman, excluding to billion + of assets financed + +On line 5669: + of assets financed + by the private consortium + (even though the bankers in + +On line 5669: + assets financed by + the private consortium (even + though the bankers in the + +On line 5669: + consortium (even though + the bankers in the consortium + had estimated + +On line 5669: + to Barclays, had told + Lehman President Bart McDade that + Barclays was willing + +On line 5669: + President Bart McDade + that Barclays was willing to + purchase Lehman, given + +On line 5669: + Bart McDade that Barclays + was willing to purchase Lehman, + given the private + +On line 5669: + Barclays was willing + to purchase Lehman, given the + private consortium + +On line 5669: + private consortium + agreement to assist the deal.93 + It seemed a deal would + +On line 5671: + agreement to assist + the deal.93 It seemed a deal would + be completed.94 "THIS + +On line 5671: + the deal.93 It seemed a + deal would be completed.94 "THIS + DOESN’ T SEEM LIKE IT + +On line 5671: + deal.93 It seemed a deal + would be completed.94 "THIS DOESN’ + T SEEM LIKE IT IS + +On line 5671: + seemed a deal would be + completed.94 "THIS DOESN’ T SEEM + LIKE IT IS GOING + +On line 5671: + completed.94 "THIS DOESN’ + T SEEM LIKE IT IS GOING + TO END PRETTY" But + +On line 5671: + DOESN’ T SEEM LIKE IT + IS GOING TO END PRETTY" + But on Sunday, things + +On line 5671: + T SEEM LIKE IT IS + GOING TO END PRETTY" But + on Sunday, things went + +On line 5671: + IT IS GOING TO + END PRETTY" But on Sunday, + things went terribly + +On line 5671: + IS GOING TO END + PRETTY" But on Sunday, things + went terribly wrong. + +On line 5671: + END PRETTY" But on + Sunday, things went terribly + wrong. At A.M., Barclays + +On line 5671: + terribly wrong. At + A.M., Barclays CEO John Varley + and President Robert + +On line 5671: + At A.M., Barclays CEO + John Varley and President + Robert Diamond told + +On line 5671: + Authority (FSA) + had declined to approve the + deal.95 The issue boiled + +On line 5671: + declined to approve + the deal.95 The issue boiled down + to a guarantee—the + +On line 5671: + to approve the deal.95 + The issue boiled down to a + guarantee—the New York + +On line 5671: + the deal.95 The issue + boiled down to a guarantee—the + New York Fed required + +On line 5671: + The issue boiled down + to a guarantee—the New York + Fed required Barclays + +On line 5671: + issue boiled down to + a guarantee—the New York Fed + required Barclays to + +On line 5671: + to a guarantee—the + New York Fed required Barclays + to guarantee Lehman’s + +On line 5671: + New York Fed required + Barclays to guarantee Lehman’s + obligations from the + +On line 5671: + required Barclays to + guarantee Lehman’s obligations + from the sale until + +On line 5671: + from the sale until + the transaction closed, much as + JP Morgan had done + +On line 5671: + the sale until the + transaction closed, much as JP + Morgan had done for + +On line 5671: + the transaction closed, + much as JP Morgan had done + for Bear Stearns in March.96 + +On line 5671: + much as JP Morgan + had done for Bear Stearns in March.96 + Under U.K. law, the + +On line 5671: + Morgan had done for + Bear Stearns in March.96 Under U.K. + law, the guarantee + +On line 5671: + had done for Bear Stearns + in March.96 Under U.K. law, the + guarantee required + +On line 5671: + March.96 Under U.K. law, + the guarantee required a + Barclays shareholder + +On line 5671: + guarantee required + a Barclays shareholder vote, + which could take to days. + +On line 5671: + required a Barclays + shareholder vote, which could take + to days. Though it could + +On line 5671: + shareholder vote, which + could take to days. Though it could + waive that requirement, + +On line 5671: + could take to days. Though + it could waive that requirement, + the FSA asserted + +On line 5671: + take to days. Though it + could waive that requirement, the + FSA asserted that + +On line 5671: + to days. Though it could + waive that requirement, the FSA + asserted that such + +On line 5671: + waive that requirement, + the FSA asserted that such + a waiver would be + +On line 5671: + the FSA asserted + that such a waiver would be + unprecedented, that + +On line 5671: + that such a waiver + would be unprecedented, that + it had not heard about + +On line 5671: + such a waiver would + be unprecedented, that it + had not heard about this + +On line 5671: + be unprecedented, + that it had not heard about this + guarantee until + +On line 5671: + that it had not heard + about this guarantee until + Saturday night, and + +On line 5671: + about this guarantee + until Saturday night, and + that Barclays did not + +On line 5671: + until Saturday + night, and that Barclays did not + really want to + +On line 5671: + and that Barclays did + not really want to take + on that obligation + +On line 5673: + obligation anyway. + eithner pleaded with + FSA Chairman Callum + +On line 5673: + FSA Chairman Callum + McCarthy to waive the shareholder + vote, but McCarthy wanted + +On line 5673: + Chairman Callum McCarthy + to waive the shareholder vote, + but McCarthy wanted the + +On line 5673: + Callum McCarthy to waive + the shareholder vote, but McCarthy + wanted the New York + +On line 5673: + waive the shareholder + vote, but McCarthy wanted the New + York Fed to provide + +On line 5673: + the shareholder vote, + but McCarthy wanted the New York + Fed to provide the + +On line 5673: + but McCarthy wanted the + New York Fed to provide the + guarantee instead + +On line 5673: + York Fed to provide + the guarantee instead of + Barclays.97 Otherwise, + +On line 5673: + instead of Barclays.97 + Otherwise, according to + the FSA, "Barclays would + +On line 5673: + had to provide a + (possibly unlimited) + guarantee, for an + +On line 5673: + covering prior + and future exposures and + liabilities + +On line 5673: + of all transactions + entered into prior to + the purchase, even in + +On line 5673: + to the purchase, even + in the event the transaction + ultimately failed."98 + +On line 5675: + even in the event the + transaction ultimately + failed."98 For Paulson, such + +On line 5675: + For Paulson, such a + guarantee by the Fed was + unequivocally + +On line 5675: + guarantee by the + Fed was unequivocally + out of the question.99 + +On line 5677: + out of the question.99 + The guarantee could have put + the Fed on the hook + +On line 5677: + of the question.99 The + guarantee could have put the + Fed on the hook for + +On line 5677: + The guarantee could + have put the Fed on the hook + for tens of billions + +On line 5677: + guarantee could have + put the Fed on the hook for + tens of billions of + +On line 5677: + have put the Fed on + the hook for tens of billions + of dollars. If the + +On line 5677: + put the Fed on the + hook for tens of billions of + dollars. If the run + +On line 5677: + Fed on the hook for + tens of billions of dollars. + If the run on Lehman + +On line 5677: + on the hook for tens + of billions of dollars. If + the run on Lehman had + +On line 5677: + for tens of billions + of dollars. If the run on + Lehman had continued + +On line 5677: + If the run on Lehman + had continued despite the + guarantee, Barclays’ + +On line 5677: + guarantee, Barclays’ + shareholders could reject the + acquisition, and + +On line 5679: + possession of an + insolvent bank. Baxter told + the FCIC that Barclays + +On line 5679: + of an insolvent + bank. Baxter told the FCIC that + Barclays had known all + +On line 5679: + Baxter told the FCIC + that Barclays had known all along + that the guarantee + +On line 5679: + that Barclays had known + all along that the guarantee + was required, because + +On line 5679: + Barclays had known all + along that the guarantee was + required, because JP + +On line 5679: + had known all along that + the guarantee was required, + because JP Morgan + +On line 5679: + the guarantee was + required, because JP Morgan + had to provide the + +On line 5679: + because JP Morgan + had to provide the same type + of guarantee when + +On line 5679: + had to provide the + same type of guarantee when + it acquired Bear Stearns. + +On line 5679: + of guarantee when + it acquired Bear Stearns. Indeed, + Baxter said he was + +On line 5679: + Baxter said he was + "stunned" at this development. + He believed that the + +On line 5679: + this development. + He believed that the real + reason Barclays said + +On line 5679: + reason Barclays said + it could not guarantee Lehman’s + obligations was the + +On line 5679: + obligations was the + U.K. government’s discomfort + with the transaction.100 + +On line 5681: + Treasury’s Wilkinson emailed + JP Morgan Investment Bank + CEO Jes Staley that + +On line 5681: + Morgan Investment + Bank CEO Jes Staley that he + was in a meeting + +On line 5681: + Staley that he was + in a meeting with Paulson + and Geithner + +On line 5681: + in a meeting with + Paulson and Geithner + and that things did not + +On line 5681: + meeting with Paulson + and Geithner and that + things did not look good. + +On line 5681: + and Geithner + and that things did not look good. + He concluded, "This + +On line 5681: + and that things did not + look good. He concluded, "This + doesn’t seem like it + +On line 5681: + did not look good. He + concluded, "This doesn’t seem + like it is going + +On line 5683: + doesn’t seem like it + is going to end pretty."101 + In another note + +On line 5683: + it is going to + end pretty."101 In another + note a little more + +On line 5683: + is going to end + pretty."101 In another note + a little more than + +On line 5683: + In another note + a little more than an hour + later, he added that + +On line 5683: + note a little more + than an hour later, he added + that there would be no + +On line 5683: + later, he added that + there would be no government + assistance: "No way + +On line 5683: + added that there would be + no government assistance: + "No way [government] + +On line 5683: + "No way [government] + money is coming in. I’m + here writing the usg + +On line 5683: + here writing the usg + coms [United States government + communications] + +On line 5683: + communications] + plan for orderly unwind + also just did a + +On line 5683: + plan for orderly + unwind also just did a + call with the WH [White + +On line 5683: + orderly unwind + also just did a call with + the WH [White House] and + +On line 5683: + just did a call with + the WH [White House] and usg is + united behind no + +On line 5683: + a call with the WH + [White House] and usg is united + behind no money. + +On line 5683: + with the WH [White House] + and usg is united behind + no money. No way + +On line 5683: + the WH [White House] and + usg is united behind no + money. No way in + +On line 5683: + and usg is united + behind no money. No way + in hell Paulson could + +On line 5683: + is united behind + no money. No way in hell + Paulson could blink now + +On line 5683: + behind no money. + No way in hell Paulson could + blink now we will know + +On line 5683: + money. No way in + hell Paulson could blink now we + will know more after + +On line 5685: + hell Paulson could blink + now we will know more after + this [CEO meeting] this + +On line 5685: + blink now we will know + more after this [CEO meeting] + this morning but I + +On line 5685: + now we will know more + after this [CEO meeting] this + morning but I think + +On line 5685: + will know more after + this [CEO meeting] this morning + but I think we are + +On line 5685: + more after this [CEO + meeting] this morning but I + think we are headed + +On line 5685: + this [CEO meeting] this + morning but I think we are + headed for winddown + +On line 5685: + meeting] this morning + but I think we are headed + for winddown unless + +On line 5685: + morning but I think + we are headed for winddown + unless bar-clays deal + +On line 5685: + think we are headed + for winddown unless bar-clays + deal gets untangled."102 + +On line 5687: + we are headed for + winddown unless bar-clays deal + gets untangled."102 It + +On line 5687: + for winddown unless + bar-clays deal gets untangled."102 + It did not. Paulson + +On line 5687: + unless bar-clays deal + gets untangled."102 It did not. + Paulson made a last-ditch + +On line 5687: + deal gets untangled."102 + It did not. Paulson made a + last-ditch pitch to his U.K. + +On line 5687: + It did not. Paulson + made a last-ditch pitch to his U.K. + counterpart, Darling, + +On line 5687: + made a last-ditch pitch to + his U.K. counterpart, Darling, + without success.103 Two + +On line 5687: + his U.K. counterpart, + Darling, without success.103 Two + years later, Darling + +On line 5687: + admitted that he + had vetoed the transaction: + "Yeah I did. Imagine + +On line 5687: + that he had vetoed + the transaction: "Yeah I did. + Imagine if I had + +On line 5687: + the transaction: "Yeah + I did. Imagine if I had + said yes to a British + +On line 5687: + transaction: "Yeah I + did. Imagine if I had said + yes to a British bank + +On line 5687: + "Yeah I did. Imagine + if I had said yes to a + British bank buying a + +On line 5687: + I did. Imagine if + I had said yes to a British + bank buying a very + +On line 5687: + did. Imagine if I + had said yes to a British bank + buying a very large + +On line 5687: + if I had said yes + to a British bank buying a + very large American + +On line 5687: + I had said yes to + a British bank buying a very + large American bank + +On line 5687: + had said yes to a + British bank buying a very large + American bank which + +On line 5687: + buying a very large + American bank which collapsed + the following week." + +On line 5687: + large American bank + which collapsed the following + week." He would have found + +On line 5687: + bank which collapsed the + following week." He would have + found himself telling a + +On line 5687: + the following week." + He would have found himself telling + a British audience, + +On line 5687: + found himself telling a + British audience, "Everybody + sitting in this room + +On line 5687: + a British audience, + "Everybody sitting in this + room and your children + +On line 5687: + "Everybody sitting + in this room and your children + and your grandchildren + +On line 5687: + in this room and your + children and your grandchildren + and their grandchildren + +On line 5687: + room and your children + and your grandchildren and their + grandchildren would be + +On line 5687: + and your grandchildren + and their grandchildren would be + paying for years to + +On line 5687: + grandchildren and their + grandchildren would be paying + for years to come." That + +On line 5687: + grandchildren would be + paying for years to come." That + Bank of America + +On line 5687: + paying for years to + come." That Bank of America + had taken itself + +On line 5687: + years to come." That Bank + of America had taken + itself out of the + +On line 5687: + Bank of America + had taken itself out of + the picture may have + +On line 5687: + of America had + taken itself out of the + picture may have played + +On line 5687: + taken itself out + of the picture may have played + a role in Darling’s + +On line 5687: + of the picture may + have played a role in Darling’s + decision: "My first + +On line 5687: + may have played a role + in Darling’s decision: "My + first reaction was + +On line 5687: + have played a role in + Darling’s decision: "My first + reaction was ‘If + +On line 5687: + Darling’s decision: + "My first reaction was ‘If + this is such a good + +On line 5687: + decision: "My first + reaction was ‘If this is + such a good deal how + +On line 5687: + reaction was ‘If + this is such a good deal how + come no American + +On line 5687: + this is such a good + deal how come no American + bank is going to + +On line 5687: + is such a good deal + how come no American bank + is going to go + +On line 5687: + such a good deal how + come no American bank is + going to go near + +On line 5687: + good deal how come no + American bank is going + to go near it1’" So + +On line 5687: + American bank is + going to go near it1’" So + Darling concluded + +On line 5687: + going to go near + it1’" So Darling concluded + that for Barclays to + +On line 5687: + to go near it1’" So + Darling concluded that for + Barclays to accept + +On line 5687: + Darling concluded + that for Barclays to accept + the guarantee, which + +On line 5687: + Barclays to accept + the guarantee, which could have + a grave impact on + +On line 5687: + the guarantee, which + could have a grave impact on + the British economy, + +On line 5687: + guarantee, which could + have a grave impact on the + British economy, was + +On line 5687: + have a grave impact + on the British economy, was + simply out of the + +On line 5687: + grave impact on the + British economy, was simply + out of the question: + +On line 5687: + impact on the British + economy, was simply out + of the question: "I + +On line 5687: + was simply out of + the question: "I spoke to Hank + Paulson and said ‘Look, + +On line 5687: + out of the question: + "I spoke to Hank Paulson and + said ‘Look, there’s no way + +On line 5687: + of the question: "I + spoke to Hank Paulson and said + ‘Look, there’s no way we + +On line 5687: + the question: "I spoke + to Hank Paulson and said ‘Look, + there’s no way we could + +On line 5687: + spoke to Hank Paulson + and said ‘Look, there’s no way we + could allow a British + +On line 5687: + to Hank Paulson and + said ‘Look, there’s no way we could + allow a British bank + +On line 5687: + Paulson and said ‘Look, + there’s no way we could allow + a British bank to take + +On line 5687: + and said ‘Look, there’s no + way we could allow a British + bank to take over the + +On line 5687: + way we could allow + a British bank to take over the + liability + +On line 5687: + a British bank to take + over the liability + of an American + +On line 5687: + British bank to take over + the liability of + an American bank,’ + +On line 5687: + bank to take over the + liability of an + American bank,’ which + +On line 5687: + liability + of an American bank,’ which + in effect meant the + +On line 5687: + of an American + bank,’ which in effect meant the + British taxpayer was + +On line 5687: + bank,’ which in effect + meant the British taxpayer was + underwriting an + +On line 5689: + underwriting an + American bank."104 Following + that decision in + +On line 5689: + bank."104 Following that + decision in London, Lehman + Brothers was, for all + +On line 5689: + Brothers was, for all + practical purposes, dead. + Cohen, Lehman’s counsel + +On line 5689: + for all practical + purposes, dead. Cohen, Lehman’s + counsel at the time, + +On line 5689: + Cohen, Lehman’s counsel + at the time, told the FCIC, "When + Secretary Paulson + +On line 5689: + counsel at the time, + told the FCIC, "When Secretary + Paulson came out of + +On line 5689: + the time, told the FCIC, + "When Secretary Paulson came + out of the meeting + +On line 5689: + time, told the FCIC, "When + Secretary Paulson came out + of the meeting with + +On line 5689: + Secretary Paulson + came out of the meeting with + Geithner and + +On line 5689: + out of the meeting + with Geithner and Cox, + they called Lehman’s presi-SEPTEMBER dent + +On line 5689: + of the meeting with + Geithner and Cox, they + called Lehman’s presi-SEPTEMBER dent and + +On line 5689: + with Geithner + and Cox, they called Lehman’s presi-SEPTEMBER dent + and me over and said, + +On line 5689: + Geithner and + Cox, they called Lehman’s presi-SEPTEMBER dent and + me over and said, ‘We + +On line 5689: + Cox, they called Lehman’s presi-SEPTEMBER + dent and me over and said, ‘We + have the consortium, + +On line 5689: + they called Lehman’s presi-SEPTEMBER dent + and me over and said, ‘We have + the consortium, but + +On line 5689: + called Lehman’s presi-SEPTEMBER dent and + me over and said, ‘We have the + consortium, but the + +On line 5689: + and me over and said, + ‘We have the consortium, but + the British government + +On line 5689: + me over and said, ‘We + have the consortium, but the + British government won’t + +On line 5689: + over and said, ‘We have + the consortium, but the British + government won’t do + +On line 5689: + have the consortium, + but the British government won’t + do it. Darling said + +On line 5689: + the consortium, but + the British government won’t do + it. Darling said he + +On line 5689: + consortium, but the + British government won’t do it. + Darling said he did + +On line 5689: + the British government + won’t do it. Darling said he + did not want the U.S. + +On line 5689: + government won’t do + it. Darling said he did not + want the U.S. cancer + +On line 5689: + won’t do it. Darling + said he did not want the U.S. + cancer to spread to + +On line 5689: + it. Darling said he + did not want the U.S. cancer + to spread to the U.K.’"105 + +On line 5691: + Darling said he did + not want the U.S. cancer to + spread to the U.K.’"105 At + +On line 5691: + said he did not want + the U.S. cancer to spread to + the U.K.’"105 At around P.M., + +On line 5691: + he did not want the + U.S. cancer to spread to the + U.K.’"105 At around P.M., Lehman’s + +On line 5691: + did not want the U.S. + cancer to spread to the U.K.’"105 + At around P.M., Lehman’s team—President + +On line 5691: + want the U.S. cancer + to spread to the U.K.’"105 At around + P.M., Lehman’s team—President Bart McDade, + +On line 5691: + the U.S. cancer to + spread to the U.K.’"105 At around P.M., + Lehman’s team—President Bart McDade, CFO + +On line 5691: + U.S. cancer to spread + to the U.K.’"105 At around P.M., Lehman’s + team—President Bart McDade, CFO Ian + +On line 5691: + cancer to spread to + the U.K.’"105 At around P.M., Lehman’s team—President + Bart McDade, CFO Ian Lowitt, + +On line 5691: + to spread to the U.K.’"105 + At around P.M., Lehman’s team—President Bart McDade, + CFO Ian Lowitt, Head of + +On line 5691: + the U.K.’"105 At around P.M., + Lehman’s team—President Bart McDade, CFO Ian Lowitt, + Head of Principal + +On line 5691: + Lehman’s team—President Bart McDade, CFO + Ian Lowitt, Head of Principal + Investing Alex Kirk, + +On line 5693: + others—reconvened + at Lehman’s offices to "digest + what obviously + +On line 5693: + at Lehman’s offices to + "digest what obviously + was stark news." Upon + +On line 5693: + obviously was + stark news." Upon arriving, + they heard that the New + +On line 5693: + that the New York Fed + would provide more flexible + terms for the PDCF + +On line 5693: + include expanding + the types of collateral + borrowers could use.106 + +On line 5693: + of collateral + borrowers could use.106 McDade, Kirk, + Lowitt, and Miller returned + +On line 5693: + borrowers could use.106 + McDade, Kirk, Lowitt, and Miller returned + to the New York Fed + +On line 5693: + could use.106 McDade, Kirk, Lowitt, + and Miller returned to the New + York Fed building and + +On line 5693: + use.106 McDade, Kirk, Lowitt, and + Miller returned to the New York + Fed building and met + +On line 5693: + McDade, Kirk, Lowitt, and Miller + returned to the New York Fed + building and met with + +On line 5693: + Lowitt, and Miller returned + to the New York Fed building + and met with the Fed’s + +On line 5693: + Miller returned to the + New York Fed building and met + with the Fed’s Baxter + +On line 5693: + returned to the New + York Fed building and met with + the Fed’s Baxter and + +On line 5693: + to the New York Fed + building and met with the Fed’s + Baxter and Dudley, + +On line 5693: + New York Fed building + and met with the Fed’s Baxter + and Dudley, the SEC’s + +On line 5693: + building and met with + the Fed’s Baxter and Dudley, + the SEC’s Sirri, and + +On line 5693: + and met with the Fed’s + Baxter and Dudley, the SEC’s + Sirri, and others + +On line 5693: + the Fed’s Baxter and + Dudley, the SEC’s Sirri, and + others to discuss + +On line 5695: + to McDade and Kirk, the + government officials—led + by Baxter— made it + +On line 5695: + Kirk, the government + officials—led by Baxter— + made it plain they would + +On line 5695: + officials—led by + Baxter— made it plain they would + not permit Lehman to + +On line 5695: + by Baxter— made it + plain they would not permit Lehman + to borrow against the + +On line 5695: + made it plain they would + not permit Lehman to borrow + against the expanded + +On line 5695: + it plain they would not + permit Lehman to borrow against + the expanded types + +On line 5695: + against the expanded + types of collateral, as + other firms could. The + +On line 5695: + as other firms could. + The sentiment was clear but + the reasons were vague, + +On line 5695: + other firms could. The + sentiment was clear but the + reasons were vague, McDade + +On line 5695: + could. The sentiment + was clear but the reasons were + vague, McDade told the FCIC. + +On line 5695: + The sentiment was + clear but the reasons were vague, + McDade told the FCIC. He + +On line 5695: + sentiment was clear + but the reasons were vague, McDade + told the FCIC. He said + +On line 5695: + clear but the reasons + were vague, McDade told the FCIC. He + said the refusal to + +On line 5695: + the reasons were vague, + McDade told the FCIC. He said the + refusal to allow + +On line 5695: + McDade told the FCIC. He + said the refusal to allow + Lehman to provide the + +On line 5695: + He said the refusal + to allow Lehman to provide + the expanded types + +On line 5695: + said the refusal to + allow Lehman to provide the + expanded types of + +On line 5695: + to allow Lehman to + provide the expanded types + of collateral + +On line 5695: + the expanded types + of collateral made the + difference in Lehman’s + +On line 5695: + the difference in + Lehman’s being able to obtain + the funding needed + +On line 5695: + difference in Lehman’s + being able to obtain the + funding needed to + +On line 5695: + Lehman’s being able to + obtain the funding needed + to open for business + +On line 5695: + able to obtain the + funding needed to open for + business on Monday.107 + +On line 5697: + obtain the funding + needed to open for business + on Monday.107 Baxter + +On line 5697: + funding needed to + open for business on Monday.107 + Baxter explained to + +On line 5697: + needed to open for + business on Monday.107 Baxter + explained to the FCIC, + +On line 5697: + open for business on + Monday.107 Baxter explained to + the FCIC, however, + +On line 5697: + business on Monday.107 + Baxter explained to the FCIC, + however, that Lehman’s + +On line 5697: + the expanded types + of collateral.108 A New + York Fed email written + +On line 5697: + expanded types of + collateral.108 A New York + Fed email written at + +On line 5697: + collateral.108 A + New York Fed email written at + P.M. on that Sunday, + +On line 5697: + P.M. on that Sunday, + September stated that Lehman’s + counsel was informed + +On line 5697: + September stated + that Lehman’s counsel was informed + of the expansion + +On line 5697: + counsel was informed + of the expansion of PDCF-eligible + collateral but + +On line 5697: + the expansion of + PDCF-eligible collateral but that + such collateral + +On line 5697: + expansion of PDCF-eligible + collateral but that such + collateral would + +On line 5697: + PDCF-eligible collateral + but that such collateral + would not be available + +On line 5697: + collateral but + that such collateral would + not be available to + +On line 5697: + such collateral + would not be available to the + broker-dealer if it + +On line 5697: + would not be available + to the broker-dealer if it + filed for bankruptcy.109 + +On line 5699: + not be available to + the broker-dealer if it filed + for bankruptcy.109 The + +On line 5699: + to the broker-dealer + if it filed for bankruptcy.109 + The minutes of Lehman’s + +On line 5699: + for bankruptcy.109 The + minutes of Lehman’s September + board meeting show that + +On line 5699: + meeting show that the + Fed rejected Lehman’s request + for an even broader + +On line 5699: + for an even broader + range of collateral to + be eligible + +On line 5699: + an even broader range + of collateral to be + eligible for + +On line 5699: + of collateral + to be eligible for + PDCF financing + +On line 5699: + PDCF financing + and preferred that Lehman’s holding + company—but not + +On line 5701: + and preferred that Lehman’s + holding company—but not + the broker-dealer— file + +On line 5701: + not the broker-dealer— + file for bankruptcy and that + the broker-dealer "be + +On line 5701: + the broker-dealer— file + for bankruptcy and that the + broker-dealer "be wound + +On line 5701: + bankruptcy and that + the broker-dealer "be wound down + in an orderly + +On line 5701: + a letter dated + September the New York Fed + informed Lehman Senior + +On line 5701: + September the New + York Fed informed Lehman Senior + Vice President Robert + +On line 5701: + New York Fed informed + Lehman Senior Vice President + Robert Guglielmo that the + +On line 5701: + informed Lehman Senior + Vice President Robert Guglielmo + that the broker-dealer + +On line 5701: + that the broker-dealer + could finance expanded types + of collateral + +On line 5701: + the broker-dealer could + finance expanded types of + collateral with + +On line 5701: + finance expanded + types of collateral with + the PDCF, but that + +On line 5701: + collateral with + the PDCF, but that letter + was not sent until + +On line 5701: + the PDCF, but that + letter was not sent until + A.M. on September + +On line 5701: + letter was not sent + until A.M. on September + 15—after Lehman had filed + +On line 5701: + sent until A.M. on + September 15—after Lehman had + filed for bankruptcy.111 + +On line 5701: + September 15—after + Lehman had filed for bankruptcy.111 + The Lehman broker-dealer + +On line 5701: + filed for bankruptcy.111 + The Lehman broker-dealer borrowed + to billion from the + +On line 5701: + The Lehman broker-dealer + borrowed to billion from the + PDCF each day over + +On line 5701: + broker-dealer borrowed + to billion from the PDCF + each day over the next + +On line 5703: + borrowed to billion + from the PDCF each day over + the next three days.112 As + +On line 5703: + from the PDCF each + day over the next three days.112 As + Kirk recounted to + +On line 5703: + the PDCF each day + over the next three days.112 As Kirk + recounted to the + +On line 5703: + each day over the next + three days.112 As Kirk recounted + to the FCIC, during + +On line 5703: + day over the next three + days.112 As Kirk recounted to + the FCIC, during that + +On line 5703: + the next three days.112 As + Kirk recounted to the FCIC, + during that Sunday + +On line 5703: + Kirk recounted to + the FCIC, during that Sunday + meeting at the New + +On line 5703: + the FCIC, during that + Sunday meeting at the New + York Fed, government + +On line 5703: + Sunday meeting at + the New York Fed, government + officials stepped out + +On line 5703: + at the New York Fed, + government officials stepped + out for an hour and + +On line 5703: + York Fed, government + officials stepped out for an + hour and came back to + +On line 5703: + officials stepped out + for an hour and came back to + ask: "Are you planning + +On line 5703: + stepped out for an hour + and came back to ask: "Are you + planning on filing + +On line 5703: + an hour and came back + to ask: "Are you planning on + filing bankruptcy + +On line 5703: + and came back to ask: + "Are you planning on filing + bankruptcy tonight1"113 A + +On line 5703: + ask: "Are you planning + on filing bankruptcy tonight1"113 + A surprised Miller replied + +On line 5703: + "Are you planning on + filing bankruptcy tonight1"113 A + surprised Miller replied that + +On line 5703: + planning on filing + bankruptcy tonight1"113 A surprised + Miller replied that "no one + +On line 5703: + filing bankruptcy + tonight1"113 A surprised Miller replied that + "no one in the room + +On line 5703: + tonight1"113 A surprised Miller + replied that "no one in the room + was authorized to + +On line 5703: + A surprised Miller replied + that "no one in the room was + authorized to file + +On line 5703: + replied that "no one in + the room was authorized to + file the company, + +On line 5703: + "no one in the room + was authorized to file the + company, only + +On line 5703: + was authorized to + file the company, only + the Board could and the + +On line 5703: + authorized to file + the company, only the + Board could and the Board + +On line 5703: + file the company, + only the Board could and the + Board had to be called + +On line 5703: + company, only + the Board could and the Board had + to be called to a + +On line 5703: + only the Board could + and the Board had to be called + to a meeting and + +On line 5703: + the Board could and the + Board had to be called to a + meeting and have a + +On line 5703: + could and the Board had + to be called to a meeting + and have a vote. There + +On line 5703: + and the Board had to + be called to a meeting and + have a vote. There would + +On line 5703: + the Board had to be + called to a meeting and have + a vote. There would be + +On line 5703: + Board had to be called + to a meeting and have a + vote. There would be some + +On line 5703: + had to be called to + a meeting and have a vote. + There would be some lag + +On line 5703: + to be called to a + meeting and have a vote. There + would be some lag in + +On line 5703: + called to a meeting + and have a vote. There would be + some lag in terms of + +On line 5703: + a meeting and have + a vote. There would be some lag + in terms of having + +On line 5703: + meeting and have a + vote. There would be some lag in + terms of having to + +On line 5703: + and have a vote. There + would be some lag in terms of + having to put all + +On line 5703: + vote. There would be some + lag in terms of having to + put all the papers + +On line 5703: + be some lag in terms + of having to put all the + papers together + +On line 5703: + of having to put + all the papers together + to actually + +On line 5703: + having to put all + the papers together to + actually file + +On line 5703: + file it. There was a + practical issue that you + couldn’t get it done + +On line 5703: + couldn’t get it done + quickly."114 Unmoved, government + officials explained + +On line 5703: + directors of Lehman’s + U.K. subsidiary—LBIE—would be personally + liable if they did + +On line 5703: + of Lehman’s U.K. subsidiary—LBIE—would be + personally liable if + they did not file for + +On line 5703: + be personally + liable if they did not file + for bankruptcy by + +On line 5703: + they did not file for + bankruptcy by the opening + of business Monday. + +On line 5703: + bankruptcy by the + opening of business Monday. + As Kirk recalled, "They + +On line 5703: + opening of business + Monday. As Kirk recalled, "They + then told us ‘we would + +On line 5703: + of business Monday. + As Kirk recalled, "They then told + us ‘we would like you + +On line 5703: + business Monday. As + Kirk recalled, "They then told us + ‘we would like you to + +On line 5703: + As Kirk recalled, "They + then told us ‘we would like you + to file tonight. It’s the + +On line 5703: + Kirk recalled, "They then + told us ‘we would like you to + file tonight. It’s the right + +On line 5703: + recalled, "They then told + us ‘we would like you to file + tonight. It’s the right thing + +On line 5703: + "They then told us ‘we + would like you to file tonight. It’s + the right thing to do, + +On line 5703: + told us ‘we would like + you to file tonight. It’s the right + thing to do, because + +On line 5703: + us ‘we would like you + to file tonight. It’s the right thing + to do, because there’s + +On line 5703: + would like you to file + tonight. It’s the right thing to do, + because there’s something + +On line 5703: + you to file tonight. It’s + the right thing to do, because + there’s something else which + +On line 5703: + to file tonight. It’s the + right thing to do, because there’s + something else which we + +On line 5703: + tonight. It’s the right thing + to do, because there’s something + else which we can’t tell + +On line 5703: + It’s the right thing to + do, because there’s something else + which we can’t tell you + +On line 5703: + the right thing to do, + because there’s something else which + we can’t tell you that + +On line 5703: + to do, because there’s + something else which we can’t tell + you that will happen + +On line 5703: + because there’s something + else which we can’t tell you that + will happen this evening. + +On line 5703: + something else which we + can’t tell you that will happen + this evening. We would like + +On line 5703: + else which we can’t tell + you that will happen this evening. + We would like both events + +On line 5703: + which we can’t tell you + that will happen this evening. We + would like both events to + +On line 5703: + can’t tell you that will + happen this evening. We would like + both events to happen + +On line 5703: + that will happen this + evening. We would like both events to + happen tonight before + +On line 5703: + We would like both events + to happen tonight before the + opening of trading + +On line 5703: + before the opening + of trading Monday morning.’"115 + The second event would + +On line 5703: + opening of trading + Monday morning.’"115 The second + event would turn out to + +On line 5703: + of trading Monday + morning.’"115 The second event would + turn out to be the + +On line 5703: + Monday morning.’"115 The + second event would turn out to + be the announcement + +On line 5703: + morning.’"115 The second + event would turn out to be the + announcement of Bank + +On line 5703: + event would turn out to + be the announcement of Bank + of America’s + +On line 5703: + be the announcement + of Bank of America’s + acquisition of + +On line 5703: + of Merrill Lynch. THE + ONLY ALTERNATIVE WAS + THAT LEHMAN HAD TO FAIL" + +On line 5703: + bankruptcy would be + "Armageddon."116 Lehman had prepared + a presentation + +On line 5703: + "Armageddon."116 Lehman had + prepared a presentation + arguing that a + +On line 5703: + a Lehman bankruptcy + would be catastrophic. It + would take at least five + +On line 5703: + Lehman bankruptcy would + be catastrophic. It would + take at least five years + +On line 5703: + bankruptcy would be + catastrophic. It would take + at least five years to + +On line 5703: + be catastrophic. + It would take at least five years + to resolve, cost to + +On line 5703: + years to resolve, cost + to billion, and cause major + disruptions in the + +On line 5703: + cost to billion, and + cause major disruptions in + the United States and + +On line 5703: + to billion, and cause + major disruptions in the + United States and abroad.117 + +On line 5705: + major disruptions + in the United States and abroad.117 + Baxter told the FCIC, + +On line 5705: + disruptions in the + United States and abroad.117 Baxter + told the FCIC, "I knew + +On line 5705: + United States and abroad.117 + Baxter told the FCIC, "I knew + that the consequences + +On line 5705: + Baxter told the FCIC, + "I knew that the consequences + were going to be + +On line 5705: + FCIC, "I knew that the + consequences were going to + be bad; that wasn’t + +On line 5705: + that the consequences + were going to be bad; that + wasn’t an issue. + +On line 5705: + were going to be + bad; that wasn’t an issue. + Lehman was in denial + +On line 5705: + going to be bad; + that wasn’t an issue. Lehman + was in denial at + +On line 5705: + bad; that wasn’t an + issue. Lehman was in denial + at that point in time. + +On line 5705: + wasn’t an issue. + Lehman was in denial at that + point in time. There was + +On line 5705: + an issue. Lehman was + in denial at that point in + time. There was no way + +On line 5705: + issue. Lehman was in + denial at that point in time. + There was no way they + +On line 5705: + Lehman was in denial + at that point in time. There was + no way they believed + +On line 5705: + was in denial at + that point in time. There was no + way they believed that + +On line 5705: + in denial at that + point in time. There was no way + they believed that this + +On line 5705: + at that point in time. + There was no way they believed + that this story ends + +On line 5705: + that point in time. There + was no way they believed that + this story ends with + +On line 5705: + point in time. There was + no way they believed that this + story ends with a + +On line 5705: + no way they believed + that this story ends with a + Lehman bankruptcy they + +On line 5705: + way they believed that + this story ends with a Lehman + bankruptcy they kept + +On line 5705: + that this story ends + with a Lehman bankruptcy they + kept thinking that they + +On line 5705: + this story ends with + a Lehman bankruptcy they kept + thinking that they were + +On line 5705: + a Lehman bankruptcy + they kept thinking that they were + going to be bailed + +On line 5705: + bankruptcy they kept + thinking that they were going + to be bailed out by + +On line 5705: + kept thinking that they + were going to be bailed out + by the taxpayer + +On line 5705: + thinking that they were + going to be bailed out by + the taxpayer of + +On line 5705: + were going to be + bailed out by the taxpayer + of the United States. + +On line 5705: + going to be bailed + out by the taxpayer of + the United States. And + +On line 5705: + the taxpayer of + the United States. And I’m not + trying to convince + +On line 5705: + the United States. And + I’m not trying to convince + you that that belief + +On line 5705: + United States. And I’m + not trying to convince you + that that belief was + +On line 5705: + I’m not trying to + convince you that that belief + was a crazy belief + +On line 5705: + trying to convince + you that that belief was a + crazy belief because + +On line 5705: + convince you that that + belief was a crazy belief + because they had seen + +On line 5705: + that that belief was + a crazy belief because they + had seen that happen + +On line 5705: + that belief was a + crazy belief because they had + seen that happen in + +On line 5705: + belief was a crazy + belief because they had seen + that happen in the + +On line 5705: + crazy belief because + they had seen that happen in + the Bear case." Baxter’s + +On line 5705: + seen that happen in + the Bear case." Baxter’s mission, + however, was to + +On line 5705: + the Bear case." Baxter’s + mission, however, was to + "try to get them to + +On line 5705: + mission, however, + was to "try to get them to + understand that they + +On line 5705: + was to "try to get + them to understand that they + weren’t going to + +On line 5705: + them to understand + that they weren’t going to + be rescued, and then + +On line 5705: + weren’t going to + be rescued, and then focus + on what their real + +On line 5705: + be rescued, and then + focus on what their real + options were, which were + +On line 5705: + and then focus on + what their real options were, + which were drift into + +On line 5705: + focus on what their + real options were, which were + drift into Monday + +On line 5705: + real options were, + which were drift into Monday + morning with nothing + +On line 5705: + options were, which were + drift into Monday morning + with nothing done and + +On line 5705: + which were drift into + Monday morning with nothing + done and then have chaos + +On line 5705: + drift into Monday + morning with nothing done and + then have chaos break out, + +On line 5705: + and then have chaos break + out, or alternatively + file." He concluded, + +On line 5705: + then have chaos break out, + or alternatively file." + He concluded, "From + +On line 5705: + have chaos break out, or + alternatively file." He + concluded, "From my + +On line 5705: + alternatively + file." He concluded, "From my + point of view, first thing + +On line 5705: + He concluded, "From + my point of view, first thing was + to convince Harvey + +On line 5705: + concluded, "From my + point of view, first thing was to + convince Harvey that + +On line 5705: + point of view, first thing + was to convince Harvey that + it was far better + +On line 5705: + of view, first thing was + to convince Harvey that it + was far better to + +On line 5705: + view, first thing was to + convince Harvey that it was + far better to file + +On line 5705: + convince Harvey that + it was far better to file + than to go into + +On line 5705: + Harvey that it was + far better to file than to + go into Monday + +On line 5705: + pandemonium + break out. And then he had to + have discussions with + +On line 5705: + break out. And then he + had to have discussions with + the Lehman Board because + +On line 5705: + out. And then he had + to have discussions with the + Lehman Board because they + +On line 5705: + And then he had to + have discussions with the Lehman + Board because they had + +On line 5705: + then he had to have + discussions with the Lehman Board + because they had a + +On line 5705: + to have discussions + with the Lehman Board because they + had a fiduciary + +On line 5705: + discussions with the + Lehman Board because they had a + fiduciary duty + +On line 5705: + Lehman Board because they + had a fiduciary duty + to resolve what was + +On line 5705: + Board because they had + a fiduciary duty to + resolve what was in + +On line 5705: + fiduciary duty + to resolve what was in the + best interests of + +On line 5705: + to resolve what was + in the best interests of + the company and + +On line 5705: + resolve what was in + the best interests of the + company and its + +On line 5707: + other stakeholders."118 + "The only alternative + was that Lehman had to + +On line 5709: + was that Lehman had to + fail," Miller testified to the + FCIC.119 He stated that + +On line 5709: + Lehman had to fail," Miller + testified to the FCIC.119 He + stated that Baxter + +On line 5709: + fail," Miller testified + to the FCIC.119 He stated that + Baxter provided + +On line 5709: + the FCIC.119 He stated + that Baxter provided no + further details on + +On line 5709: + Baxter provided + no further details on the + government’s plan for + +On line 5709: + government’s plan for + the fallout from bankruptcy, + but assured him that + +On line 5709: + assured him that the + situation was under + control. Then, Miller told + +On line 5709: + the situation + was under control. Then, Miller + told the FCIC, Baxter + +On line 5709: + situation was + under control. Then, Miller told + the FCIC, Baxter told + +On line 5709: + control. Then, Miller told + the FCIC, Baxter told the Lehman + delegation to + +On line 5709: + the FCIC, Baxter told + the Lehman delegation to + leave the Fed offices. + +On line 5711: + FCIC, Baxter told the + Lehman delegation to leave + the Fed offices. "They + +On line 5711: + Lehman delegation + to leave the Fed offices. "They + basically threw + +On line 5711: + said. Miller remembered + telling his colleagues as they left + the building, "‘I don’t + +On line 5711: + Miller remembered telling + his colleagues as they left the + building, "‘I don’t think + +On line 5711: + telling his colleagues as + they left the building, "‘I don’t + think they like us.’" Miller + +On line 5713: + they left the building, + "‘I don’t think they like us.’" Miller + continued: We went + +On line 5713: + building, "‘I don’t think + they like us.’" Miller continued: + We went back to the + +On line 5713: + don’t think they like us.’" + Miller continued: We went back + to the headquarters, + +On line 5713: + think they like us.’" Miller + continued: We went back to + the headquarters, and + +On line 5715: + the headquarters, and + it was pandemonium + up there— it was like + +On line 5715: + headquarters, and it + was pandemonium up + there— it was like a + +On line 5715: + pandemonium + up there— it was like a scene + from [the film] It’s a + +On line 5715: + up there— it was like + a scene from [the film] It’s a + Wonderful Life with + +On line 5715: + was like a scene from + [the film] It’s a Wonderful + Life with the run on + +On line 5715: + like a scene from [the + film] It’s a Wonderful Life + with the run on the + +On line 5715: + scene from [the film] It’s + a Wonderful Life with the + run on the savings + +On line 5715: + from [the film] It’s a + Wonderful Life with the run + on the savings and + +On line 5715: + a Wonderful Life + with the run on the savings + and loan crisis. [A]ll + +On line 5715: + Wonderful Life with + the run on the savings and + loan crisis. [A]ll of + +On line 5715: + with the run on the + savings and loan crisis. [A]ll + of paparazzi running + +On line 5717: + on the savings and + loan crisis. [A]ll of paparazzi + running around. There was + +On line 5717: + and loan crisis. [A]ll + of paparazzi running around. There + was a guy there in + +On line 5717: + loan crisis. [A]ll of + paparazzi running around. There was + a guy there in a + +On line 5717: + of paparazzi running + around. There was a guy there in + a sort of a Norse + +On line 5717: + paparazzi running around. + There was a guy there in a + sort of a Norse god + +On line 5717: + running around. There was + a guy there in a sort of + a Norse god uniform + +On line 5717: + around. There was a guy + there in a sort of a Norse + god uniform with a + +On line 5717: + a guy there in a + sort of a Norse god uniform + with a helmet and + +On line 5717: + guy there in a sort + of a Norse god uniform with + a helmet and a + +On line 5717: + a sort of a Norse + god uniform with a helmet + and a picket sign + +On line 5717: + Norse god uniform with + a helmet and a picket + sign saying "Down with + +On line 5717: + god uniform with a + helmet and a picket sign + saying "Down with Wall + +On line 5717: + with a helmet and + a picket sign saying "Down + with Wall Street." There were + +On line 5717: + sign saying "Down with + Wall Street." There were hundreds of + employees going + +On line 5717: + "Down with Wall Street." There + were hundreds of employees + going in and out. + +On line 5717: + Street." There were hundreds + of employees going in + and out. Bart McDade was + +On line 5717: + in and out. Bart McDade + was reporting to the board + what had happened. Most + +On line 5717: + and out. Bart McDade was + reporting to the board what + had happened. Most of + +On line 5717: + was reporting to + the board what had happened. Most + of the board members + +On line 5717: + reporting to the + board what had happened. Most of + the board members were + +On line 5717: + board what had happened. + Most of the board members were + stunned. Henry Kaufman, + +On line 5717: + what had happened. Most + of the board members were stunned. + Henry Kaufman, in + +On line 5717: + of the board members + were stunned. Henry Kaufman, in + particular, was + +On line 5717: + Henry Kaufman, in + particular, was asking + "How could this happen + +On line 5719: + particular, was + asking "How could this happen + in America1"120 The + +On line 5719: + was asking "How could + this happen in America1"120 + The group informed the + +On line 5719: + asking "How could this + happen in America1"120 The + group informed the board + +On line 5719: + informed the board that + the Barclays deal had fallen + apart. The government + +On line 5719: + the Barclays deal had + fallen apart. The government + had instructed the + +On line 5719: + had fallen apart. The + government had instructed + the board to file for + +On line 5719: + apart. The government + had instructed the board to + file for bankruptcy. + +On line 5719: + The government had + instructed the board to file + for bankruptcy. SEC’s + +On line 5719: + had instructed the + board to file for bankruptcy. + SEC’s Cox called. With Tom + +On line 5719: + the board to file for + bankruptcy. SEC’s Cox called. With + Tom Baxter also + +On line 5719: + file for bankruptcy. + SEC’s Cox called. With Tom Baxter + also on the line, + +On line 5719: + bankruptcy. SEC’s Cox + called. With Tom Baxter also + on the line, Cox told + +On line 5719: + SEC’s Cox called. With Tom + Baxter also on the line, + Cox told the board that + +On line 5719: + Baxter also on + the line, Cox told the board that + the situation + +On line 5719: + the line, Cox told the + board that the situation + was serious and + +On line 5719: + the situation + was serious and required + action. The board asked + +On line 5719: + and required action. + The board asked Cox if he was + directing them to + +On line 5719: + The board asked Cox if + he was directing them to + file for bankruptcy. + +On line 5719: + board asked Cox if he + was directing them to file + for bankruptcy. Cox + +On line 5719: + asked Cox if he was + directing them to file for + bankruptcy. Cox and + +On line 5719: + was directing them + to file for bankruptcy. Cox + and Baxter conferred + +On line 5719: + directing them to + file for bankruptcy. Cox and + Baxter conferred for + +On line 5719: + file for bankruptcy. + Cox and Baxter conferred for + a few minutes, and + +On line 5719: + for bankruptcy. Cox + and Baxter conferred for a + few minutes, and then + +On line 5719: + conferred for a few + minutes, and then answered that + the decision was + +On line 5719: + few minutes, and then + answered that the decision + was the board’s to make. + +On line 5719: + and then answered that + the decision was the board’s + to make. The board again + +On line 5719: + then answered that the + decision was the board’s to + make. The board again asked + +On line 5719: + that the decision + was the board’s to make. The board + again asked if Cox and + +On line 5719: + decision was the + board’s to make. The board again asked + if Cox and Baxter + +On line 5719: + was the board’s to make. + The board again asked if Cox and + Baxter were telling them + +On line 5719: + board’s to make. The board + again asked if Cox and Baxter + were telling them to file + +On line 5719: + to make. The board again + asked if Cox and Baxter were + telling them to file for + +On line 5719: + board again asked if Cox + and Baxter were telling them to + file for bankruptcy. + +On line 5719: + again asked if Cox and + Baxter were telling them to file + for bankruptcy. Cox + +On line 5719: + Baxter were telling them + to file for bankruptcy. Cox + and Baxter conferred + +On line 5719: + telling them to file for + bankruptcy. Cox and Baxter + conferred again, then replied + +On line 5719: + for bankruptcy. Cox + and Baxter conferred again, then + replied that they believed + +On line 5719: + bankruptcy. Cox and + Baxter conferred again, then replied + that they believed the + +On line 5719: + that they believed the + gov-SEPTEMBER ernment’s position had + been made perfectly + +On line 5719: + they believed the gov-SEPTEMBER + ernment’s position had been + made perfectly clear + +On line 5719: + ernment’s position + had been made perfectly clear + at the meeting at + +On line 5719: + position had been + made perfectly clear at the + meeting at the Fed + +On line 5719: + been made perfectly + clear at the meeting at the + Fed earlier in + +On line 5719: + made perfectly clear + at the meeting at the Fed + earlier in the + +On line 5721: + clear at the meeting + at the Fed earlier in + the day.121 Following + +On line 5721: + at the meeting at + the Fed earlier in the + day.121 Following that + +On line 5721: + the meeting at the + Fed earlier in the day.121 + Following that call, + +On line 5721: + the Fed earlier + in the day.121 Following that + call, McDade advised the + +On line 5721: + Fed earlier in + the day.121 Following that call, + McDade advised the board + +On line 5721: + earlier in the + day.121 Following that call, McDade + advised the board that + +On line 5721: + day.121 Following that + call, McDade advised the board that + Lehman would be unable + +On line 5721: + Following that call, + McDade advised the board that Lehman + would be unable to + +On line 5721: + call, McDade advised the + board that Lehman would be unable + to obtain funding + +On line 5721: + board that Lehman would be + unable to obtain funding + without government + +On line 5721: + unable to obtain + funding without government + assistance. The board + +On line 5721: + file for bankruptcy. + The company filed at A.M. + on Monday morning.122 + +On line 5723: + for bankruptcy. The + company filed at A.M. on + Monday morning.122 "A + +On line 5725: + company filed at + A.M. on Monday morning.122 "A + CALAMITY" Fed Chairman + +On line 5725: + FCIC that government + officials understood a + Lehman bankruptcy would + +On line 5727: + a Lehman bankruptcy + would be catastrophic: We + never had any doubt + +On line 5727: + bankruptcy would be + catastrophic: We never + had any doubt about that. + +On line 5727: + be catastrophic: + We never had any doubt about + that. It was going + +On line 5727: + catastrophic: We + never had any doubt about that. + It was going to + +On line 5727: + We never had any + doubt about that. It was going + to have huge impacts + +On line 5727: + never had any doubt + about that. It was going to + have huge impacts on + +On line 5727: + had any doubt about that. + It was going to have huge + impacts on funding + +On line 5727: + doubt about that. It was + going to have huge impacts + on funding markets. + +On line 5727: + going to have huge + impacts on funding markets. + It would create a + +On line 5727: + to have huge impacts + on funding markets. It would + create a huge loss + +On line 5727: + on funding markets. + It would create a huge loss + of confidence in + +On line 5727: + It would create a + huge loss of confidence in + other financial + +On line 5727: + create a huge loss + of confidence in other + financial firms. It + +On line 5727: + of confidence in + other financial firms. It + would create pressure + +On line 5727: + create pressure on + Merrill and Morgan Stanley, + if not Goldman, which + +On line 5727: + Merrill and Morgan + Stanley, if not Goldman, which + it eventually + +On line 5727: + if not Goldman, which + it eventually did. It + would probably bring + +On line 5727: + not Goldman, which it + eventually did. It would + probably bring the + +On line 5727: + it eventually + did. It would probably bring + the short-term money + +On line 5727: + would probably bring + the short-term money markets + into crisis, which + +On line 5727: + the short-term money + markets into crisis, which + we didn’t fully + +On line 5727: + we didn’t fully + anticipate; but, of course, + in the end it did + +On line 5727: + anticipate; but, + of course, in the end it did + bring the commercial + +On line 5727: + of course, in the end + it did bring the commercial + paper market and + +On line 5727: + market mutual + funds under pressure. So there + was never any doubt + +On line 5727: + funds under pressure. + So there was never any doubt + in our minds that it + +On line 5727: + under pressure. So + there was never any doubt in + our minds that it would + +On line 5727: + pressure. So there was + never any doubt in our minds + that it would be a + +On line 5727: + So there was never + any doubt in our minds that it + would be a calamity, + +On line 5727: + never any doubt in + our minds that it would be a + calamity, catastrophe, + +On line 5727: + any doubt in our minds + that it would be a calamity, + catastrophe, and that, + +On line 5727: + our minds that it would + be a calamity, catastrophe, + and that, you know, we + +On line 5727: + minds that it would be + a calamity, catastrophe, and + that, you know, we should + +On line 5727: + that it would be a + calamity, catastrophe, and that, + you know, we should do + +On line 5727: + calamity, catastrophe, + and that, you know, we should do + everything we could + +On line 5729: + and that, you know, we + should do everything we could + to save it.123 "What’s the + +On line 5729: + should do everything + we could to save it.123 "What’s the + connection between + +On line 5729: + between Lehman Brothers + and General Motors1" he + asked rhetorically. + +On line 5729: + General Motors1" + he asked rhetorically. "Lehman + Brothers’ failure meant + +On line 5729: + asked rhetorically. + "Lehman Brothers’ failure meant that + commercial paper + +On line 5729: + Brothers’ failure meant + that commercial paper that + they used to finance + +On line 5729: + commercial paper + that they used to finance went + bad." Bernanke noted that + +On line 5729: + went bad." Bernanke noted + that money market funds, in + particular one + +On line 5729: + particular one + named the Reserve Primary + Fund, held Lehman’s paper + +On line 5729: + held Lehman’s paper and + suffered losses. He explained + that this "meant there was + +On line 5729: + paper and suffered + losses. He explained that this + "meant there was a run + +On line 5729: + and suffered losses. + He explained that this "meant there + was a run in the + +On line 5729: + this "meant there was a + run in the money market + mutual funds, which + +On line 5729: + run in the money + market mutual funds, which + meant the commercial + +On line 5729: + the money market + mutual funds, which meant the + commercial paper + +On line 5729: + market mutual + funds, which meant the commercial + paper market spiked, + +On line 5729: + paper market spiked, + which [created] problems for + General Motors."124 + +On line 5731: + "As the financial + industry came under stress," + Paulson told the FCIC, + +On line 5731: + under stress," Paulson + told the FCIC, "investors pulled back + from the market, and + +On line 5731: + stress," Paulson told the + FCIC, "investors pulled back from the + market, and when Lehman + +On line 5731: + told the FCIC, "investors + pulled back from the market, and + when Lehman collapsed, even + +On line 5731: + FCIC, "investors pulled back + from the market, and when Lehman + collapsed, even major + +On line 5731: + and when Lehman collapsed, + even major industrial + corporations found + +On line 5731: + difficult to sell + their paper. The resulting + liquidity crunch + +On line 5731: + sell their paper. The + resulting liquidity + crunch showed that firms had + +On line 5731: + crunch showed that firms had + overly relied on this short + term funding and had + +On line 5731: + relied on this short + term funding and had failed to + anticipate how + +On line 5731: + short term funding and + had failed to anticipate + how restricted the + +On line 5731: + anticipate how + restricted the commercial + paper market could + +On line 5731: + how restricted the + commercial paper market + could become in times + +On line 5733: + commercial paper + market could become in times + of stress."125 Harvey Miller + +On line 5733: + market could become + in times of stress."125 Harvey Miller + testified to the + +On line 5733: + become in times of + stress."125 Harvey Miller testified + to the FCIC that "the + +On line 5733: + times of stress."125 Harvey + Miller testified to the FCIC + that "the bankruptcy + +On line 5733: + of stress."125 Harvey Miller + testified to the FCIC that + "the bankruptcy of + +On line 5733: + "the bankruptcy of + Lehman was a catalyst for + systemic consequences + +On line 5733: + a catalyst for + systemic consequences throughout + the world. It fostered + +On line 5733: + the world. It fostered + a negative reaction + that endangered the + +On line 5733: + that endangered the + viability of the + financial system. + +On line 5733: + viability + of the financial system. + As a result of + +On line 5733: + of the financial + system. As a result of + failed expectations + +On line 5733: + As a result of + failed expectations of the + financial markets + +On line 5733: + expectations of + the financial markets and + others, a major + +On line 5733: + financial markets + and others, a major loss + of confidence in + +On line 5733: + others, a major + loss of confidence in the + financial system + +On line 5735: + loss of confidence + in the financial system + occurred."126 On the day + +On line 5735: + confidence in the + financial system occurred."126 + On the day that Lehman + +On line 5735: + financial system + occurred."126 On the day that Lehman + filed for bankruptcy, + +On line 5735: + occurred."126 On the day + that Lehman filed for bankruptcy, + the Dow plummeted + +On line 5735: + On the day that Lehman + filed for bankruptcy, the Dow + plummeted more than + +On line 5735: + for bankruptcy, the + Dow plummeted more than points; + billion in value + +On line 5735: + Dow plummeted more + than points; billion in value + from retirement plans, + +On line 5735: + than points; billion in + value from retirement plans, + government pension + +On line 5735: + from retirement plans, + government pension funds, and + other investment + +On line 5737: + other investment + portfolios disappeared.127 As + for Lehman itself, the + +On line 5737: + and affiliates + with billion in assets and + liabilities, + +On line 5737: + liabilities, + the firm’s more than creditors, + and about employees. + +On line 5737: + contracts, llowing its + counterparties to have the + option of seizing + +On line 5737: + counterparties to + have the option of seizing + its collateral + +On line 5737: + have the option of + seizing its collateral + and terminating + +On line 5737: + collateral and + terminating the contracts. + After the parent + +On line 5737: + terminating the + contracts. After the parent + company filed, about + +On line 5737: + the contracts. After + the parent company filed, + about insolvency + +On line 5737: + company filed, about + insolvency proceedings + of its subsidiaries in + +On line 5737: + about insolvency + proceedings of its subsidiaries + in foreign countries + +On line 5737: + proceedings of its + subsidiaries in foreign countries + followed. In the main + +On line 5737: + of its subsidiaries in + foreign countries followed. In + the main bankruptcy + +On line 5737: + about claims—exceeding + billion—have been filed against Lehman + as of September + +On line 5737: + billion—have been filed + against Lehman as of September + Miller told the FCIC that + +On line 5737: + filed against Lehman as of + September Miller told the FCIC + that Lehman’s bankruptcy + +On line 5737: + September Miller told + the FCIC that Lehman’s bankruptcy + "represents the largest, + +On line 5737: + Miller told the FCIC that + Lehman’s bankruptcy "represents + the largest, most complex, + +On line 5737: + in the United States." + The costs of the bankruptcy + administration + +On line 5737: + administration + are approaching billion; as + of this writing, the + +On line 5737: + billion; as of this + writing, the proceeding is + expected to last + +On line 5737: + the proceeding is + expected to last at least + another two years.128 + +On line 5739: + least another two + years.128 In his testimony + before the FCIC, Bernanke + +On line 5741: + Lehman to fail were both + legal and practical. From + a legal standpoint, + +On line 5741: + were both legal and + practical. From a legal + standpoint, Bernanke explained, + +On line 5741: + practical. From a + legal standpoint, Bernanke explained, + "We are not allowed + +On line 5741: + legal standpoint, Bernanke + explained, "We are not allowed + to lend without a + +On line 5741: + are not allowed to + lend without a reasonable + expectation of + +On line 5741: + to lend without a + reasonable expectation + of repayment. The + +On line 5741: + expectation of + repayment. The loan has to + be secured to the + +On line 5741: + of repayment. The + loan has to be secured to + the satisfaction + +On line 5741: + repayment. The loan + has to be secured to the + satisfaction of + +On line 5741: + satisfaction of + the Reserve Bank. Remember, + this was before TARP. + +On line 5741: + this was before TARP. + We had no ability to + inject capital + +On line 5741: + before TARP. We had + no ability to inject + capital or to + +On line 5741: + had no ability + to inject capital or + to make guarantees."129 + +On line 5741: + no ability to + inject capital or to + make guarantees."129 A + +On line 5741: + inject capital + or to make guarantees."129 A + Sunday afternoon + +On line 5741: + capital or to + make guarantees."129 A Sunday + afternoon email from + +On line 5741: + afternoon email from + Bernanke to Fed Governor Warsh + indicated that + +On line 5741: + that more than billion + in capital assistance + would have been needed + +On line 5741: + more than billion in + capital assistance would + have been needed to + +On line 5741: + assistance would have + been needed to prevent Lehman’s + failure. "In case I + +On line 5741: + would have been needed + to prevent Lehman’s failure. "In + case I am asked: How + +On line 5741: + have been needed to + prevent Lehman’s failure. "In case + I am asked: How much + +On line 5741: + failure. "In case I + am asked: How much capital + injection would have + +On line 5741: + case I am asked: How + much capital injection + would have been needed + +On line 5741: + I am asked: How much + capital injection would + have been needed to + +On line 5741: + have been needed to + keep LEH alive as a going + concern1 I gather + +On line 5743: + needed to keep LEH + alive as a going concern1 + I gather $12B or + +On line 5743: + keep LEH alive as a + going concern1 I gather + $12B or so from the + +On line 5743: + alive as a going + concern1 I gather $12B or + so from the private + +On line 5743: + concern1 I gather + $12B or so from the private + guys together with + +On line 5743: + $12B or so from the + private guys together with + Fed liquidity + +On line 5745: + guys together with + Fed liquidity support + was not enough."130 In March, + +On line 5745: + together with Fed + liquidity support was + not enough."130 In March, the + +On line 5745: + not enough."130 In March, the + Fed had provided a loan + to facilitate + +On line 5745: + enough."130 In March, the Fed + had provided a loan to + facilitate JP + +On line 5745: + Fed had provided + a loan to facilitate + JP Morgan’s purchase + +On line 5745: + had provided a + loan to facilitate JP + Morgan’s purchase of + +On line 5745: + to facilitate + JP Morgan’s purchase of Bear + Stearns, invoking its + +On line 5745: + Act. But, even with this + authority, practical + considerations + +On line 5745: + in play. Bernanke explained + that Lehman had insufficient + collateral and + +On line 5745: + had insufficient + collateral and the Fed, + had it acted, would + +On line 5745: + collateral and + the Fed, had it acted, would + have lent into a + +On line 5745: + and the Fed, had it + acted, would have lent into + a run: "On Sunday + +On line 5745: + Fed, had it acted, + would have lent into a run: + "On Sunday night of + +On line 5745: + had it acted, would + have lent into a run: "On + Sunday night of that + +On line 5745: + acted, would have lent + into a run: "On Sunday + night of that weekend, + +On line 5745: + would have lent into + a run: "On Sunday night of + that weekend, what was + +On line 5745: + have lent into a + run: "On Sunday night of that + weekend, what was told + +On line 5745: + into a run: "On + Sunday night of that weekend, + what was told to me + +On line 5745: + a run: "On Sunday + night of that weekend, what was + told to me was that—and + +On line 5745: + run: "On Sunday night + of that weekend, what was told + to me was that—and I + +On line 5745: + "On Sunday night of + that weekend, what was told to + me was that—and I have + +On line 5745: + of that weekend, what + was told to me was that—and I + have every reason + +On line 5745: + that weekend, what was + told to me was that—and I have + every reason to + +On line 5745: + was told to me was + that—and I have every reason + to believe—was that + +On line 5745: + told to me was that—and + I have every reason to + believe—was that there + +On line 5745: + have every reason + to believe—was that there was + a run proceeding + +On line 5745: + every reason to + believe—was that there was a + run proceeding on + +On line 5745: + believe—was that there + was a run proceeding on + Lehman, that is people + +On line 5745: + that is people were + essentially demanding + liquidity from + +On line 5745: + were essentially + demanding liquidity + from Lehman; that Lehman did + +On line 5745: + liquidity from + Lehman; that Lehman did not have enough + collateral to + +On line 5745: + from Lehman; that Lehman did + not have enough collateral + to allow the Fed + +On line 5745: + Lehman; that Lehman did not + have enough collateral to + allow the Fed to + +On line 5745: + Lehman did not have enough + collateral to allow + the Fed to lend it + +On line 5745: + enough collateral + to allow the Fed to lend + it enough to meet that + +On line 5745: + collateral to + allow the Fed to lend it + enough to meet that run." + +On line 5745: + to allow the Fed + to lend it enough to meet that + run." Thus, "If we lent + +On line 5745: + allow the Fed to + lend it enough to meet that run." + Thus, "If we lent the + +On line 5745: + the Fed to lend it + enough to meet that run." Thus, "If + we lent the money + +On line 5745: + Fed to lend it enough + to meet that run." Thus, "If we + lent the money to + +On line 5745: + to lend it enough to + meet that run." Thus, "If we lent + the money to Lehman, + +On line 5745: + lend it enough to meet + that run." Thus, "If we lent the + money to Lehman, all + +On line 5745: + enough to meet that run." + Thus, "If we lent the money + to Lehman, all that would + +On line 5745: + meet that run." Thus, "If + we lent the money to Lehman, + all that would happen + +On line 5745: + that run." Thus, "If we + lent the money to Lehman, all + that would happen would + +On line 5745: + run." Thus, "If we lent + the money to Lehman, all that + would happen would be + +On line 5745: + Thus, "If we lent the + money to Lehman, all that would + happen would be that + +On line 5745: + we lent the money + to Lehman, all that would happen + would be that the run + +On line 5745: + lent the money to + Lehman, all that would happen would + be that the run [on + +On line 5745: + the money to Lehman, + all that would happen would be + that the run [on Lehman] + +On line 5747: + money to Lehman, all + that would happen would be that + the run [on Lehman] would + +On line 5747: + to Lehman, all that would + happen would be that the run + [on Lehman] would succeed, + +On line 5747: + all that would happen + would be that the run [on Lehman] + would succeed, because + +On line 5747: + that would happen would + be that the run [on Lehman] would + succeed, because it + +On line 5747: + happen would be that + the run [on Lehman] would succeed, + because it wouldn’t + +On line 5747: + would be that the run + [on Lehman] would succeed, because + it wouldn’t be able + +On line 5747: + be that the run [on + Lehman] would succeed, because it + wouldn’t be able to + +On line 5747: + the run [on Lehman] would + succeed, because it wouldn’t + be able to meet the + +On line 5747: + [on Lehman] would succeed, + because it wouldn’t be able + to meet the demands, + +On line 5747: + would succeed, because + it wouldn’t be able to meet + the demands, the firm + +On line 5747: + succeed, because it + wouldn’t be able to meet the + demands, the firm would + +On line 5747: + because it wouldn’t + be able to meet the demands, + the firm would fail, and + +On line 5747: + wouldn’t be able to + meet the demands, the firm would + fail, and not only + +On line 5747: + be able to meet the + demands, the firm would fail, and + not only would we + +On line 5747: + demands, the firm would + fail, and not only would we + be unsuccessful + +On line 5747: + and not only would + we be unsuccessful but + we would [have] saddled + +On line 5747: + not only would we + be unsuccessful but we + would [have] saddled the + +On line 5747: + be unsuccessful + but we would [have] saddled the + [t]axpayer with tens + +On line 5747: + we would [have] saddled + the [t]axpayer with tens of + billions of dollars + +On line 5747: + the [t]axpayer with + tens of billions of dollars + of losses."131 The Fed + +On line 5747: + [t]axpayer with tens + of billions of dollars of + losses."131 The Fed had + +On line 5747: + with tens of billions + of dollars of losses."131 The + Fed had no choice but + +On line 5747: + tens of billions of + dollars of losses."131 The Fed + had no choice but to + +On line 5747: + billions of dollars + of losses."131 The Fed had no + choice but to stand by + +On line 5747: + dollars of losses."131 + The Fed had no choice but to + stand by as Lehman went + +On line 5747: + of losses."131 The Fed + had no choice but to stand by + as Lehman went under, + +On line 5747: + losses."131 The Fed had + no choice but to stand by as + Lehman went under, Bernanke + +On line 5749: + had no choice but to + stand by as Lehman went under, + Bernanke insisted. As + +On line 5749: + no choice but to stand + by as Lehman went under, Bernanke + insisted. As Bernanke + +On line 5749: + to stand by as Lehman + went under, Bernanke insisted. + As Bernanke acknowledged + +On line 5749: + stand by as Lehman went + under, Bernanke insisted. As + Bernanke acknowledged to + +On line 5749: + As Bernanke acknowledged + to the FCIC, however, his + explanation for + +On line 5749: + explanation for + not providing assistance + to Lehman was not the + +On line 5749: + for not providing + assistance to Lehman was not + the explanation + +On line 5749: + the explanation + he offered days after the + bankruptcy—at that time, + +On line 5749: + offered days after + the bankruptcy—at that time, he + said that he believed + +On line 5749: + bankruptcy—at that time, + he said that he believed the + market was prepared + +On line 5749: + that time, he said that + he believed the market was + prepared for the event.132 + +On line 5749: + that he believed the + market was prepared for the + event.132 On September + +On line 5749: + market was prepared + for the event.132 On September + he testified: "The + +On line 5749: + event.132 On September + he testified: "The failure + of Lehman posed risks. But + +On line 5749: + On September he + testified: "The failure of + Lehman posed risks. But the + +On line 5749: + he testified: "The + failure of Lehman posed risks. But + the troubles at Lehman + +On line 5749: + "The failure of Lehman + posed risks. But the troubles at + Lehman had been well known + +On line 5749: + failure of Lehman posed + risks. But the troubles at Lehman + had been well known for + +On line 5749: + of Lehman posed risks. But + the troubles at Lehman had been + well known for some time, + +On line 5749: + Lehman posed risks. But the + troubles at Lehman had been well + known for some time, and + +On line 5749: + risks. But the troubles + at Lehman had been well known for + some time, and investors + +On line 5749: + the troubles at Lehman + had been well known for some time, + and investors clearly + +On line 5749: + at Lehman had been well + known for some time, and investors + clearly recognized—as + +On line 5749: + and investors clearly + recognized—as evidenced, for + example, by the + +On line 5749: + clearly recognized—as + evidenced, for example, + by the high cost of + +On line 5749: + example, by the + high cost of insuring Lehman’s + debt in the market + +On line 5749: + by the high cost of + insuring Lehman’s debt in the + market for credit + +On line 5749: + insuring Lehman’s debt + in the market for credit + default swaps—that the + +On line 5749: + debt in the market + for credit default swaps—that + the failure of the + +On line 5749: + in the market for + credit default swaps—that the + failure of the firm + +On line 5749: + market for credit + default swaps—that the failure + of the firm was a + +On line 5749: + the failure of the + firm was a significant + possibility. + +On line 5749: + a significant + possibility. Thus, we + judged that investors and + +On line 5749: + possibility. + Thus, we judged that investors and + counterparties had + +On line 5749: + had had time to take + pre-cautionary measures."133 In + addition, though the + +On line 5749: + Federal Reserve + subsequently asserted + that it did not have + +On line 5749: + that it did not have + the legal ability to + save Lehman because the + +On line 5749: + it did not have the + legal ability to save + Lehman because the firm + +On line 5749: + save Lehman because the + firm did not have sufficient + collateral to + +On line 5749: + the firm did not have + sufficient collateral + to secure a loan + +On line 5749: + not have sufficient + collateral to secure + a loan from the Fed + +On line 5749: + collateral to + secure a loan from the Fed + under section the + +On line 5749: + to secure a loan + from the Fed under section + the authority + +On line 5749: + secure a loan from + the Fed under section the + authority to + +On line 5749: + from the Fed under + section the authority + to lend under that + +On line 5749: + to lend under that + provision is very broad. It + requires not that loans + +On line 5749: + provision is very + broad. It requires not that loans + be fully secured + +On line 5749: + broad. It requires not + that loans be fully secured + but rather that they be + +On line 5749: + requires not that loans + be fully secured but rather + that they be "secured + +On line 5749: + fully secured but + rather that they be "secured to + the satisfaction + +On line 5749: + they be "secured to + the satisfaction of the + Federal Reserve + +On line 5749: + Counsel Scott Alvarez + concluded that requiring + loans under to be + +On line 5749: + fully secured would + "undermine the very purpose + of section which was + +On line 5749: + would "undermine the + very purpose of section which + was to make credit + +On line 5749: + credit available in + unusual and exigent + circumstances to help + +On line 5751: + restore economic + activity."135 To CEO Fuld + and others, the Fed’s + +On line 5751: + activity."135 To + CEO Fuld and others, the Fed’s + emergency lending + +On line 5751: + officials discussed + and dismissed many ideas in the + chaotic days leading + +On line 5751: + discussed and dismissed + many ideas in the chaotic days + leading up to the + +On line 5751: + dismissed many ideas in + the chaotic days leading up + to the bankruptcy, + +On line 5751: + chaotic days leading + up to the bankruptcy, the + Fed did not furnish + +On line 5751: + days leading up to + the bankruptcy, the Fed did + not furnish to the + +On line 5751: + leading up to the + bankruptcy, the Fed did not + furnish to the FCIC + +On line 5751: + to the bankruptcy, + the Fed did not furnish to + the FCIC any written + +On line 5751: + not furnish to the + FCIC any written analysis + to illustrate that + +On line 5751: + furnish to the FCIC + any written analysis to + illustrate that Lehman + +On line 5751: + Lehman lacked sufficient + collateral to secure + a loan under Fuld + +On line 5751: + collateral to + secure a loan under Fuld + asserted to the + +On line 5753: + to secure a loan + under Fuld asserted to + the FCIC that in fact, + +On line 5753: + FCIC that in fact, "Lehman + had adequate financeable + collateral. [O]n + +On line 5753: + "Lehman had adequate + financeable collateral. + [O]n September the + +On line 5753: + [O]n September the + Friday night preceding Lehman’s + bankruptcy filing, + +On line 5753: + bankruptcy filing, + Lehman financed itself and did + not need access to + +On line 5753: + financed itself and + did not need access to the + Fed’s discount window. + +On line 5753: + did not need access + to the Fed’s discount window. + What Lehman needed on + +On line 5753: + not need access to + the Fed’s discount window. What + Lehman needed on that + +On line 5753: + to the Fed’s discount + window. What Lehman needed on + that Sunday night was + +On line 5753: + that Sunday night was + a liquidity bridge. We + had the capital. + +On line 5753: + Sunday night was a + liquidity bridge. We had + the capital. Along + +On line 5753: + a liquidity + bridge. We had the capital. + Along with its excess + +On line 5753: + had the capital. + Along with its excess available + collateral, Lehman + +On line 5753: + Along with its excess + available collateral, Lehman + also could have used + +On line 5753: + used whole businesses + as collateral—such as + its Neuberger Berman + +On line 5753: + its Neuberger Berman + subsidiary—as did AIG some two days + later." Fuld also + +On line 5753: + later." Fuld also + rejected assertions about + Lehman’s capital hole. + +On line 5753: + assertions about Lehman’s + capital hole. He told the + FCIC, "As of August + +On line 5753: + capital hole. He + told the FCIC, "As of August + two weeks prior to + +On line 5753: + He told the FCIC, "As + of August two weeks prior + to the bankruptcy + +On line 5757: + different from the + negative or billion ‘holes’ + claimed by some." Moreover, + +On line 5757: + from the negative + or billion ‘holes’ claimed by some." + Moreover, Fuld maintained + +On line 5757: + or billion ‘holes’ claimed + by some." Moreover, Fuld maintained + that Lehman would have been + +On line 5757: + billion ‘holes’ claimed by + some." Moreover, Fuld maintained that + Lehman would have been saved + +On line 5757: + claimed by some." Moreover, + Fuld maintained that Lehman would have + been saved if it had + +On line 5757: + by some." Moreover, Fuld + maintained that Lehman would have been + saved if it had been + +On line 5757: + Moreover, Fuld maintained + that Lehman would have been saved if + it had been granted + +On line 5757: + maintained that Lehman would + have been saved if it had been + granted bank holding + +On line 5757: + Lehman would have been saved + if it had been granted bank + holding company + +On line 5757: + have been saved if it + had been granted bank holding + company status—as + +On line 5757: + had been granted bank + holding company status—as + were Goldman Sachs and + +On line 5757: + holding company + status—as were Goldman Sachs and + Morgan Stanley the + +On line 5759: + the week after Lehman’s + bankruptcy.136 The Fed chairman + denied any bias against + +On line 5759: + Lehman’s bankruptcy.136 The + Fed chairman denied any bias + against Lehman Brothers. In + +On line 5759: + bankruptcy.136 The Fed + chairman denied any bias against + Lehman Brothers. In his + +On line 5759: + Fed chairman denied + any bias against Lehman Brothers. In + his view, the only + +On line 5759: + against Lehman Brothers. In + his view, the only real + resolution short + +On line 5759: + his view, the only + real resolution short + of bankruptcy had + +On line 5759: + resolution short + of bankruptcy had been to + find a buyer. Bernanke + +On line 5759: + bankruptcy had been + to find a buyer. Bernanke said: + "When the potential + +On line 5759: + to find a buyer. + Bernanke said: "When the potential + buyers were unable + +On line 5759: + buyer. Bernanke said: "When + the potential buyers were + unable to carry + +On line 5759: + unable to carry + through—in the case of Bank of + America, because + +On line 5759: + carry through—in the + case of Bank of America, + because they changed their + +On line 5759: + through—in the case of + Bank of America, because + they changed their minds and + +On line 5759: + they changed their minds and + decided they wanted to + buy Merrill instead; + +On line 5759: + minds and decided + they wanted to buy Merrill + instead; in the case + +On line 5759: + they wanted to buy + Merrill instead; in the case + of Barclays, [because + +On line 5759: + Barclays, [because they + withdrew] we essentially + had no choice and had + +On line 5759: + [because they withdrew] + we essentially had no + choice and had to let + +On line 5761: + we essentially + had no choice and had to let + it fail."137 During the + +On line 5761: + had no choice and had + to let it fail."137 During the + September meeting + +On line 5761: + and had to let it + fail."137 During the September + meeting of the Fed’s + +On line 5761: + let it fail."137 During + the September meeting of + the Fed’s Federal + +On line 5761: + it fail."137 During the + September meeting of the + Fed’s Federal Open + +On line 5761: + September meeting + of the Fed’s Federal Open + Market Committee, + +On line 5761: + the Fed’s Federal + Open Market Committee, some + members stated that + +On line 5761: + Market Committee, + some members stated that the + government should not + +On line 5761: + some members stated + that the government should not + have prevented Lehman’s + +On line 5761: + government should not + have prevented Lehman’s failure + because doing so + +On line 5761: + have prevented Lehman’s + failure because doing so + would only strengthen + +On line 5761: + would only strengthen + the perception that some firms + were "too big to fail" + +On line 5761: + only strengthen the + perception that some firms were + "too big to fail" and + +On line 5761: + "too big to fail" and + erode market discipline. They + noted that letting + +On line 5761: + fail" and erode market + discipline. They noted that + letting Lehman fail was + +On line 5761: + market discipline. + They noted that letting Lehman + fail was the only + +On line 5761: + letting Lehman fail was + the only way to provide + credibility + +On line 5761: + the only way to + provide credibility + to the assertion + +On line 5763: + credibility + to the assertion that no + firm was "too big to + +On line 5763: + to the assertion + that no firm was "too big to + fail" and one member + +On line 5763: + assertion that no + firm was "too big to fail" and + one member stated + +On line 5763: + firm was "too big to + fail" and one member stated + that the market was + +On line 5763: + fail" and one member + stated that the market was + beginning to "play" + +On line 5763: + member stated that + the market was beginning + to "play" the Treasury + +On line 5763: + firm could have a broad + and disruptive effect on + financial markets + +On line 5763: + disruptive effect + on financial markets and + the economy, but + +On line 5763: + financial markets + and the economy, but that + the appropriate + +On line 5763: + Federal Reserve + did not have. Bernanke’s view was that + only a fiscal + +On line 5763: + Reserve did not have. + Bernanke’s view was that only a + fiscal and perhaps + +On line 5765: + wide-scale failure of + financial institutions.138 + Merrill’s Thain made it + +On line 5765: + Bank of America, + formerly Lehman’s potential + suitor. Thain blamed the + +On line 5765: + potential suitor. + Thain blamed the failure to bail + out Lehman on politicians + +On line 5765: + Thain blamed the failure + to bail out Lehman on politicians + and regulators + +On line 5765: + blamed the failure to + bail out Lehman on politicians and + regulators who + +On line 5765: + out Lehman on politicians + and regulators who feared + the political + +On line 5765: + the political + consequences of rescuing + the firm. "There was a + +On line 5765: + of rescuing the + firm. "There was a tremendous amount + of criticism of + +On line 5765: + rescuing the firm. + "There was a tremendous amount of + criticism of what + +On line 5765: + the firm. "There was a + tremendous amount of criticism + of what was done with + +On line 5765: + "There was a tremendous + amount of criticism of what + was done with Bear Stearns + +On line 5765: + was a tremendous amount + of criticism of what was + done with Bear Stearns so + +On line 5765: + a tremendous amount of + criticism of what was done + with Bear Stearns so that + +On line 5765: + amount of criticism + of what was done with Bear Stearns + so that JP Morgan + +On line 5765: + of criticism of + what was done with Bear Stearns so + that JP Morgan would + +On line 5765: + criticism of what + was done with Bear Stearns so that + JP Morgan would buy + +On line 5765: + of what was done with + Bear Stearns so that JP Morgan + would buy them," Thain told + +On line 5765: + what was done with Bear + Stearns so that JP Morgan would + buy them," Thain told he + +On line 5765: + was done with Bear Stearns + so that JP Morgan would buy + them," Thain told he FCIC. + +On line 5765: + done with Bear Stearns so + that JP Morgan would buy them," + Thain told he FCIC. "There + +On line 5765: + with Bear Stearns so that + JP Morgan would buy them," Thain + told he FCIC. "There was + +On line 5765: + Bear Stearns so that JP + Morgan would buy them," Thain told + he FCIC. "There was a + +On line 5765: + that JP Morgan would + buy them," Thain told he FCIC. "There + was a criticism + +On line 5765: + JP Morgan would buy + them," Thain told he FCIC. "There was + a criticism of + +On line 5765: + buy them," Thain told he + FCIC. "There was a criticism + of bailing out Wall + +On line 5765: + them," Thain told he FCIC. + "There was a criticism of + bailing out Wall Street. + +On line 5765: + told he FCIC. "There was + a criticism of bailing + out Wall Street. It was + +On line 5765: + he FCIC. "There was a + criticism of bailing out + Wall Street. It was a + +On line 5765: + a criticism of + bailing out Wall Street. It was + a combination + +On line 5765: + bailing out Wall Street. + It was a combination + of political + +On line 5765: + Street and a belief + that there needed to be a + reinforcement of + +On line 5765: + that there needed to + be a reinforcement of + moral hazard. There was + +On line 5765: + reinforcement of + moral hazard. There was never + a discussion about + +On line 5765: + There was never a + discussion about the legal + ability of the + +On line 5765: + a discussion about + the legal ability of + the Fed to do this." + +On line 5765: + discussion about the + legal ability of the + Fed to do this." He + +On line 5765: + the Fed to do this." + He noted, "There was never + discussion to the + +On line 5765: + do this." He noted, + "There was never discussion + to the best of my + +On line 5765: + discussion to the + best of my recollection + that they couldn’t [bail + +On line 5765: + my recollection + that they couldn’t [bail out Lehman]. + It was only that + +On line 5765: + recollection that + they couldn’t [bail out Lehman]. It + was only that they + +On line 5767: + they couldn’t [bail out + Lehman]. It was only that they + wouldn’t."139 Thain also + +On line 5767: + [bail out Lehman]. It was + only that they wouldn’t."139 Thain + also told the FCIC + +On line 5767: + Lehman]. It was only + that they wouldn’t."139 Thain also + told the FCIC that in + +On line 5767: + It was only that + they wouldn’t."139 Thain also told + the FCIC that in his + +On line 5767: + told the FCIC that in + his opinion, "allowing Lehman + to go bankrupt was + +On line 5767: + the FCIC that in his + opinion, "allowing Lehman to + go bankrupt was the + +On line 5767: + "allowing Lehman to + go bankrupt was the single + biggest mistake of + +On line 5767: + go bankrupt was the + single biggest mistake of + the whole financial + +On line 5767: + biggest mistake of + the whole financial crisis." + He wished that he and + +On line 5767: + the whole financial + crisis." He wished that he and + the other Wall Street + +On line 5767: + crisis." He wished that + he and the other Wall Street + executives had + +On line 5767: + and the other Wall + Street executives had tried + harder to convince + +On line 5767: + convince Paulson and + Geithner to prevent + Lehman’s failure: "As I + +On line 5767: + and Geithner + to prevent Lehman’s failure: "As + I think about what I + +On line 5767: + Geithner to + prevent Lehman’s failure: "As I + think about what I would + +On line 5767: + prevent Lehman’s failure: + "As I think about what I would + do differently + +On line 5767: + "As I think about what + I would do differently + after that weekend + +On line 5767: + think about what I would + do differently after + that weekend is try + +On line 5767: + about what I would do + differently after that + weekend is try to + +On line 5767: + do differently + after that weekend is try + to grab them and shake + +On line 5767: + after that weekend + is try to grab them and shake + them that they can’t let + +On line 5767: + weekend is try to + grab them and shake them that they + can’t let this happen. + +On line 5769: + is try to grab them + and shake them that they can’t let + this happen. They were + +On line 5769: + try to grab them and + shake them that they can’t let this + happen. They were not + +On line 5769: + grab them and shake them + that they can’t let this happen. + They were not very much + +On line 5769: + them and shake them that + they can’t let this happen. They + were not very much in + +On line 5769: + and shake them that they + can’t let this happen. They were + not very much in the + +On line 5769: + shake them that they can’t + let this happen. They were not + very much in the mood + +On line 5769: + them that they can’t let + this happen. They were not very + much in the mood to + +On line 5769: + can’t let this happen. + They were not very much in the + mood to listen. They + +On line 5769: + let this happen. They + were not very much in the mood + to listen. They were + +On line 5769: + this happen. They were + not very much in the mood to + listen. They were not + +On line 5769: + They were not very much + in the mood to listen. They + were not willing to + +On line 5769: + not very much in the + mood to listen. They were not + willing to listen + +On line 5769: + much in the mood to + listen. They were not willing + to listen to the + +On line 5769: + mood to listen. They + were not willing to listen + to the idea that there + +On line 5769: + to listen. They were + not willing to listen to + the idea that there had + +On line 5769: + listen. They were not + willing to listen to the + idea that there had to + +On line 5769: + the idea that there had + to be government support. + The group of us should + +On line 5769: + idea that there had to + be government support. The + group of us should have + +On line 5769: + that there had to be + government support. The group + of us should have just + +On line 5769: + to be government + support. The group of us should + have just grabbed them and + +On line 5769: + government support. + The group of us should have just + grabbed them and shaken + +On line 5769: + support. The group of + us should have just grabbed them and + shaken them and said, + +On line 5769: + The group of us should + have just grabbed them and shaken + them and said, ‘Look, you + +On line 5769: + group of us should have + just grabbed them and shaken them + and said, ‘Look, you guys + +On line 5769: + of us should have just + grabbed them and shaken them and + said, ‘Look, you guys could + +On line 5769: + us should have just grabbed + them and shaken them and said, + ‘Look, you guys could not + +On line 5769: + should have just grabbed them + and shaken them and said, ‘Look, + you guys could not do + +On line 5769: + have just grabbed them and + shaken them and said, ‘Look, you + guys could not do this.’ + +On line 5769: + grabbed them and shaken + them and said, ‘Look, you guys could + not do this.’ But we + +On line 5769: + and shaken them and + said, ‘Look, you guys could not do + this.’ But we didn’t, + +On line 5769: + shaken them and said, + ‘Look, you guys could not do this.’ + But we didn’t, and + +On line 5769: + them and said, ‘Look, you + guys could not do this.’ But we + didn’t, and they were + +On line 5769: + ‘Look, you guys could not + do this.’ But we didn’t, and + they were not willing + +On line 5769: + you guys could not do + this.’ But we didn’t, and they + were not willing to + +On line 5771: + didn’t, and they were + not willing to entertain + that discussion."140 FCIC + +On line 5771: + were not willing to + entertain that discussion."140 + FCIC staff asked Thain if + +On line 5771: + asked Thain if he and + the other executives + explicitly said + +On line 5771: + explicitly said + to Paulson, Geithner, + or anyone else, "You + +On line 5771: + Geithner, or + anyone else, "You can’t let this + happen." Thain replied, "We + +On line 5771: + or anyone else, "You + can’t let this happen." Thain replied, + "We didn’t do it + +On line 5771: + else, "You can’t let this + happen." Thain replied, "We didn’t + do it strongly enough. + +On line 5771: + can’t let this happen." + Thain replied, "We didn’t do it + strongly enough. We said + +On line 5771: + this happen." Thain replied, + "We didn’t do it strongly + enough. We said to them, + +On line 5771: + happen." Thain replied, "We + didn’t do it strongly enough. + We said to them, ‘Look, + +On line 5771: + Thain replied, "We didn’t + do it strongly enough. We said + to them, ‘Look, this is + +On line 5771: + "We didn’t do it + strongly enough. We said to them, + ‘Look, this is going + +On line 5771: + do it strongly enough. + We said to them, ‘Look, this is + going to be bad.’ + +On line 5771: + strongly enough. We said + to them, ‘Look, this is going + to be bad.’ But it + +On line 5771: + enough. We said to them, + ‘Look, this is going to be + bad.’ But it wasn’t + +On line 5771: + We said to them, ‘Look, + this is going to be bad.’ + But it wasn’t like, + +On line 5773: + said to them, ‘Look, this + is going to be bad.’ But + it wasn’t like, ‘No + +On line 5773: + to them, ‘Look, this is + going to be bad.’ But it + wasn’t like, ‘No you + +On line 5773: + ‘Look, this is going + to be bad.’ But it wasn’t + like, ‘No you have to + +On line 5773: + this is going to + be bad.’ But it wasn’t like, + ‘No you have to help.’"141 + +On line 5775: + it wasn’t like, ‘No + you have to help.’"141 Another + prominent member + +On line 5775: + of that select group, + JP Morgan’s Dimon, had a + different view. He + +On line 5775: + Morgan’s Dimon, had + a different view. He told + the FCIC, "I didn’t + +On line 5775: + a different view. + He told the FCIC, "I didn’t + think it was so bad. + +On line 5775: + different view. He + told the FCIC, "I didn’t think + it was so bad. I + +On line 5775: + view. He told the FCIC, + "I didn’t think it was so + bad. I hate to say + +On line 5775: + He told the FCIC, "I + didn’t think it was so bad. + I hate to say that. + +On line 5775: + the FCIC, "I didn’t + think it was so bad. I hate + to say that. But I + +On line 5777: + FCIC, "I didn’t think + it was so bad. I hate to + say that. But I [thought] + +On line 5777: + "I didn’t think it + was so bad. I hate to say + that. But I [thought] it + +On line 5777: + didn’t think it was + so bad. I hate to say that. + But I [thought] it was + +On line 5777: + think it was so bad. + I hate to say that. But I + [thought] it was almost + +On line 5777: + it was so bad. I + hate to say that. But I [thought] + it was almost the + +On line 5777: + was so bad. I hate + to say that. But I [thought] it + was almost the same + +On line 5777: + so bad. I hate to + say that. But I [thought] it was + almost the same if + +On line 5777: + hate to say that. But + I [thought] it was almost the + same if on Monday + +On line 5777: + say that. But I [thought] + it was almost the same if + on Monday morning + +On line 5777: + that. But I [thought] it + was almost the same if on + Monday morning the + +On line 5777: + it was almost the + same if on Monday morning + the government had + +On line 5777: + was almost the same + if on Monday morning the + government had saved + +On line 5777: + same if on Monday + morning the government had + saved Lehman. You still would + +On line 5777: + saved Lehman. You still would + have terrible things happen. + AIG was going to + +On line 5777: + Lehman. You still would have + terrible things happen. AIG + was going to have + +On line 5777: + would have terrible + things happen. AIG was going + to have their problems + +On line 5777: + have terrible things + happen. AIG was going to + have their problems that + +On line 5777: + things happen. AIG was + going to have their problems + that had nothing to + +On line 5777: + was going to have + their problems that had nothing + to do with Lehman. You + +On line 5777: + going to have their + problems that had nothing to + do with Lehman. You were + +On line 5777: + have their problems that + had nothing to do with Lehman. + You were still going + +On line 5777: + their problems that had + nothing to do with Lehman. You + were still going to + +On line 5777: + had nothing to do + with Lehman. You were still going + to have the runs on + +On line 5777: + nothing to do with + Lehman. You were still going to + have the runs on the + +On line 5777: + to do with Lehman. You + were still going to have the + runs on the other + +On line 5777: + do with Lehman. You were + still going to have the runs + on the other banks + +On line 5777: + with Lehman. You were still + going to have the runs on + the other banks and + +On line 5777: + still going to have + the runs on the other banks + and you were going + +On line 5777: + going to have the + runs on the other banks and + you were going to + +On line 5777: + runs on the other + banks and you were going to + have absolute fear + +On line 5777: + on the other banks + and you were going to have + absolute fear and + +On line 5777: + fear and panic in + the global markets. Whether Lehman + itself got saved or + +On line 5777: + the global markets. + Whether Lehman itself got saved or + not the crisis would + +On line 5777: + global markets. Whether + Lehman itself got saved or not + the crisis would have + +On line 5777: + Whether Lehman itself got + saved or not the crisis would + have unfolded along + +On line 5777: + Lehman itself got saved + or not the crisis would have + unfolded along a + +On line 5777: + got saved or not the + crisis would have unfolded + along a different + +On line 5777: + or not the crisis + would have unfolded along a + different path, but + +On line 5777: + would have unfolded + along a different path, but + it probably would + +On line 5777: + have unfolded along + a different path, but it + probably would have + +On line 5779: + along a different + path, but it probably would + have unfolded."142 Fed + +On line 5779: + probably would have + unfolded."142 Fed General + Counsel Alvarez and + +On line 5779: + York Fed General + Counsel Baxter told the FCIC + that there would have been + +On line 5779: + General Counsel + Baxter told the FCIC that there + would have been questions + +On line 5779: + Counsel Baxter told + the FCIC that there would have been + questions either way. + +On line 5779: + told the FCIC that there + would have been questions either + way. As Baxter put + +On line 5779: + the FCIC that there would + have been questions either way. + As Baxter put it, + +On line 5779: + FCIC that there would have + been questions either way. As + Baxter put it, "I + +On line 5779: + would have been questions + either way. As Baxter put + it, "I think that if + +On line 5779: + Baxter put it, "I + think that if the Federal + Reserve had lent to + +On line 5779: + put it, "I think that + if the Federal Reserve + had lent to Lehman that + +On line 5779: + "I think that if the + Federal Reserve had lent + to Lehman that Monday + +On line 5779: + if the Federal + Reserve had lent to Lehman that + Monday in a way + +On line 5779: + Federal Reserve + had lent to Lehman that Monday + in a way that some + +On line 5779: + to Lehman that Monday + in a way that some people + think—without adequate + +On line 5779: + in a way that some + people think—without adequate + collateral and + +On line 5779: + some people think—without + adequate collateral + and without other + +On line 5779: + hearing and other + hearings would have only been + about how we wasted + +On line 5783: + only been about how + we wasted the taxpayers’ + money."143 SEPTEMBER + +On line 5783: + money."143 SEPTEMBER + The Commission concludes the + financial crisis + +On line 5783: + financial crisis + reached cataclysmic proportions + with the collapse of + +On line 5785: + proportions with the + collapse of Lehman Brothers. Lehman’s + collapse demonstrated + +On line 5785: + Brothers. Lehman’s collapse + demonstrated weaknesses that + also contributed + +On line 5785: + contributed to the + failures or near failures of + the other four large + +On line 5785: + to the failures or + near failures of the other + four large investment + +On line 5785: + the failures or near + failures of the other four + large investment banks: + +On line 5785: + near failures of the + other four large investment + banks: inadequate + +On line 5785: + (OTC) derivatives + dealing), enormous leverage, and + reliance on short-term + +On line 5785: + enormous leverage, and + reliance on short-term funding. + While investment banks + +On line 5785: + on short-term funding. + While investment banks tended + to be initially + +On line 5785: + short-term funding. While + investment banks tended to + be initially more + +On line 5785: + While investment banks + tended to be initially + more vulnerable, + +On line 5785: + be initially more + vulnerable, commercial + banks suffered from many + +On line 5785: + from many of the same + weaknesses, including their + involvement in the + +On line 5785: + their involvement in + the shadow banking system, + and ultimately + +On line 5785: + involvement in the + shadow banking system, and + ultimately many + +On line 5785: + the shadow banking + system, and ultimately + many suffered major + +On line 5787: + Lehman, like other large + OTC derivatives dealers, + experienced runs + +On line 5787: + its derivatives + operations that played a + role in its failure. + +On line 5787: + role in its failure. + Its massive derivatives + positions greatly + +On line 5787: + complicated its + bankruptcy, and the impact + of its bankruptcy + +On line 5787: + other financial + institutions contributed + significantly + +On line 5787: + significantly + to the severity and depth + of the financial + +On line 5789: + to the severity + and depth of the financial + crisis. Lehman’s failure + +On line 5789: + resulted in part + from significant problems + in its corporate + +On line 5789: + exacerbated + by compensation to its + executives and + +On line 5791: + to rescue Lehman for + a variety of reasons, + including the lack + +On line 5791: + for a variety + of reasons, including the + lack of a private + +On line 5791: + a variety of + reasons, including the lack + of a private firm + +On line 5791: + reasons, including + the lack of a private firm + willing and able to + +On line 5791: + including the lack + of a private firm willing + and able to acquire + +On line 5791: + of a private firm + willing and able to acquire + it, uncertainty + +On line 5791: + willing and able to + acquire it, uncertainty + about Lehman’s potential + +On line 5791: + and able to acquire + it, uncertainty about Lehman’s + potential losses, + +On line 5791: + and political + reaction, and erroneous + assumptions that Lehman’s + +On line 5791: + that Lehman’s failure would + have a manageable impact + on the financial + +On line 5791: + failure would have a + manageable impact on the + financial system + +On line 5791: + After the fact, they + justified their decision + by stating that the + +On line 5791: + fact, they justified + their decision by stating + that the Federal + +On line 5791: + their decision by + stating that the Federal + Reserve did not have + +On line 5791: + that the Federal + Reserve did not have legal + authority to + +On line 5793: + inconsistency + of federal government + decisions in not + +On line 5793: + in not rescuing + Lehman after having rescued + Bear Stearns and the GSEs, + +On line 5793: + not rescuing Lehman + after having rescued Bear + Stearns and the GSEs, and + +On line 5793: + Stearns and the GSEs, and + immediately before + rescuing AIG, added + +On line 5793: + immediately + before rescuing AIG, added + to uncertainty + +On line 5793: + before rescuing + AIG, added to uncertainty + and panic in the + +On line 5799: + uncertainty and + panic in the financial + markets. SEPTEMBER + +On line 5805: + AIG CONTENTS "Current + liquidity position + is precarious" + +On line 5811: + precarious" "Spillover + effect" "Like a gnat on an + elephant" Nine billion + +On line 5811: + effect" "Like a gnat + on an elephant" Nine billion + dollars is a lot + +On line 5811: + gnat on an elephant" + Nine billion dollars is a + lot of money, but + +On line 5811: + on an elephant" Nine + billion dollars is a lot + of money, but as + +On line 5811: + billion dollars is + a lot of money, but as + AIG executives + +On line 5811: + lot of money, but + as AIG executives and + the board examined + +On line 5811: + of money, but as + AIG executives and the + board examined their + +On line 5811: + the board examined + their balance sheet and pondered + the markets in the + +On line 5811: + sheet and pondered the + markets in the second week + of September they + +On line 5811: + the second week of + September they were almost + certain billion in + +On line 5811: + of September they + were almost certain billion + in cash could not keep + +On line 5811: + September they were + almost certain billion in + cash could not keep the + +On line 5811: + were almost certain + billion in cash could not keep + the company alive + +On line 5811: + billion in cash could + not keep the company alive + through the next week.1 The + +On line 5811: + keep the company + alive through the next week.1 The AIG + corporate empire + +On line 5811: + alive through the next week.1 + The AIG corporate empire + held more than trillion + +On line 5811: + through the next week.1 The + AIG corporate empire held + more than trillion in + +On line 5811: + The AIG corporate + empire held more than trillion + in assets, but most + +On line 5811: + insurance subsidiaries + whose regulators did not + allow the cash to + +On line 5811: + whose regulators + did not allow the cash to + flow freely up to the + +On line 5811: + did not allow the + cash to flow freely up to the + holding company, + +On line 5811: + allow the cash to + flow freely up to the holding + company, much less + +On line 5811: + to flow freely up to + the holding company, much + less out to troubled + +On line 5811: + up to the holding + company, much less out to + troubled subsidiaries such + +On line 5811: + company, much less + out to troubled subsidiaries such + as AIG Financial + +On line 5813: + liabilities, + especially those due in + the near future, were + +On line 5813: + especially those + due in the near future, were + much larger than the + +On line 5813: + those due in the near + future, were much larger than + the billion on hand. + +On line 5815: + the near future, were + much larger than the billion + on hand. On Friday, + +On line 5815: + much larger than the + billion on hand. On Friday, + September AIG was + +On line 5815: + the billion on hand. + On Friday, September AIG + was facing challenges + +On line 5815: + billion on hand. On + Friday, September AIG was + facing challenges on + +On line 5815: + Friday, September + AIG was facing challenges on + a number of fronts. + +On line 5817: + was facing challenges + on a number of fronts. It + had to fund billion + +On line 5817: + facing challenges on + a number of fronts. It had + to fund billion of + +On line 5817: + a number of fronts. + It had to fund billion of + its own commercial + +On line 5817: + to fund billion of + its own commercial paper + on that day3 because + +On line 5817: + on that day3 because + traditional investors—for + example, money + +On line 5817: + the company had + another billion coming + due the following + +On line 5817: + another billion + coming due the following + week.4 On another + +On line 5817: + due the following + week.4 On another front, the + repo lenders—who had + +On line 5817: + On another front, + the repo lenders—who had the + comfort of holding + +On line 5817: + the repo lenders—who + had the comfort of holding + collateral for + +On line 5817: + comfort of holding + collateral for their loans + to AIG billion in + +On line 5817: + billion in mostly + overnight funding)5—were nonetheless + becoming skittish + +On line 5817: + becoming skittish + about the perceived weakness of + the company and + +On line 5817: + the perceived weakness + of the company and the + low quality of + +On line 5817: + perceived weakness of + the company and the low + quality of most + +On line 5817: + company and the + low quality of most of + its collateral: + +On line 5819: + securities.6 On + a third front, AIG had already + put up billions of + +On line 5819: + front, AIG had already + put up billions of dollars + in collateral + +On line 5819: + AIG had already put + up billions of dollars in + collateral to + +On line 5819: + billions of dollars + in collateral to its + credit default swap + +On line 5819: + in collateral + to its credit default swap + counterparties. By + +On line 5819: + its credit default + swap counterparties. By June + of counterparties + +On line 5819: + credit default swap + counterparties. By June of + counterparties were + +On line 5821: + counterparties. By + June of counterparties were + demanding billion, + +On line 5821: + counterparties were + demanding billion, and AIG + had posted billion. + +On line 5821: + demanding billion, + and AIG had posted billion. + By September the + +On line 5821: + had posted billion. + By September the calls had + soared to billion, and + +On line 5821: + posted billion. By + September the calls had soared + to billion, and AIG + +On line 5821: + By September the + calls had soared to billion, and + AIG had paid billion—$7.6 + +On line 5821: + soared to billion, and + AIG had paid billion—$7.6 billion + to Goldman alone—and + +On line 5821: + to billion, and AIG + had paid billion—$7.6 billion to + Goldman alone—and it + +On line 5821: + AIG had paid billion—$7.6 + billion to Goldman alone—and + it looked very likely + +On line 5821: + paid billion—$7.6 billion + to Goldman alone—and it looked + very likely that AIG + +On line 5821: + billion—$7.6 billion to + Goldman alone—and it looked very + likely that AIG would + +On line 5821: + billion to Goldman + alone—and it looked very likely + that AIG would need to + +On line 5821: + Goldman alone—and it + looked very likely that AIG would + need to post billions + +On line 5821: + alone—and it looked very + likely that AIG would need to + post billions more in + +On line 5821: + very likely that AIG + would need to post billions more + in the near future.7 + +On line 5821: + likely that AIG would + need to post billions more in + the near future.7 That + +On line 5821: + that AIG would need to + post billions more in the near + future.7 That day, S&P + +On line 5821: + need to post billions + more in the near future.7 That + day, S&P and Moody’s both + +On line 5821: + to post billions more + in the near future.7 That day, + S&P and Moody’s both warned + +On line 5821: + post billions more in + the near future.7 That day, S&P + and Moody’s both warned of + +On line 5821: + the near future.7 That + day, S&P and Moody’s both warned of + potential coming + +On line 5821: + coming downgrades to + AIG’s credit rating, which, if + they happened, would lead + +On line 5821: + credit rating, which, + if they happened, would lead to + an estimated + +On line 5829: + downgrade would also + trigger liquidity puts + that SEPTEMBER AIG + +On line 5829: + that SEPTEMBER AIG + had written on commercial + paper, requiring + +On line 5829: + commercial paper, + requiring AIG to come up + with another to + +On line 5833: + requiring AIG to + come up with another to + billion.9 Finally, + +On line 5833: + up with another + to billion.9 Finally, AIG + was increasingly + +On line 5833: + with another to + billion.9 Finally, AIG was + increasingly strained + +On line 5833: + was increasingly + strained by its securities + lending business. As + +On line 5833: + its securities + lending business. As a lender + of securities, + +On line 5833: + lending business. As + a lender of securities, + AIG received cash from + +On line 5833: + securities, AIG + received cash from borrowers, + typically equal + +On line 5835: + AIG received cash from + borrowers, typically + equal to between and + +On line 5835: + equal to between and + of the market value of + the securities + +On line 5835: + to between and of + the market value of the + securities they + +On line 5835: + the market value + of the securities they + lent. As borrowers + +On line 5835: + the value of the + securities.10 Furthermore, + AIG had invested + +On line 5835: + AIG had invested + this cash in mortgage-related + assets, whose value + +On line 5835: + assets, whose value + had fallen. Since September + state regulators + +On line 5835: + state regulators + had worked with AIG to reduce + exposures of the + +On line 5835: + of the New York State + Insurance Department (NYSID).11 + Still, by the end of + +On line 5835: + York State Insurance + Department (NYSID).11 Still, by the + end of June AIG had + +On line 5835: + Department (NYSID).11 Still, + by the end of June AIG had + invested billion + +On line 5835: + (NYSID).11 Still, by the end + of June AIG had invested + billion in cash in + +On line 5835: + end of June AIG had + invested billion in cash + in mortgage-related + +On line 5835: + invested billion + in cash in mortgage-related + securities, which + +On line 5835: + which had declined in + value to billion. By late + August the parent + +On line 5835: + value to billion. + By late August the parent + company had to + +On line 5835: + By late August the + parent company had to + provide billion to + +On line 5835: + provide billion to + its struggling securities + lending subsidiary, and + +On line 5835: + and counterparties + were demanding billion to + offset the shortfall + +On line 5835: + the securities.12 + According to Dinallo, + the collateral + +On line 5835: + to Dinallo, the + collateral call disputes + between AIG and its + +On line 5835: + the collateral + call disputes between AIG and + its credit default + +On line 5835: + collateral call + disputes between AIG and its + credit default swap + +On line 5835: + call disputes between + AIG and its credit default + swap counterparties + +On line 5835: + its credit default + swap counterparties hindered + an orderly wind + +On line 5835: + credit default swap + counterparties hindered an + orderly wind down + +On line 5835: + an orderly wind + down of the securities + lending business, and + +On line 5835: + the securities + lending business, and in fact + accelerated + +On line 5835: + business, and in fact + accelerated demands + from securities + +On line 5837: + That Friday, AIG’s board + dispatched a team led by Vice + Chairman Jacob Frenkel + +On line 5837: + board dispatched a team + led by Vice Chairman Jacob + Frenkel to meet with top + +On line 5837: + a team led by Vice + Chairman Jacob Frenkel to meet + with top officials + +On line 5837: + led by Vice Chairman + Jacob Frenkel to meet with top + officials at the + +On line 5837: + Chairman Jacob Frenkel + to meet with top officials + at the Federal + +On line 5837: + Jacob Frenkel to meet + with top officials at the + Federal Reserve + +On line 5837: + top officials at + the Federal Reserve Bank + of New York.14 Elsewhere + +On line 5837: + officials at the + Federal Reserve Bank of + New York.14 Elsewhere in + +On line 5837: + Federal Reserve + Bank of New York.14 Elsewhere in + the building, Treasury + +On line 5837: + Reserve Bank of New + York.14 Elsewhere in the building, + Treasury Secretary + +On line 5837: + York.14 Elsewhere in the + building, Treasury Secretary + Henry Paulson and + +On line 5837: + Paulson and New York + Fed President Timothy + Geithner were + +On line 5837: + York Fed President + Timothy Geithner + were telling Wall Street bankers + +On line 5837: + Wall Street bankers that they + had the weekend to devise + a solution to + +On line 5837: + bankruptcy without + government assistance. Now + came this emergency + +On line 5837: + "Bottom line," the New + York Fed later reported + of that meeting, "[AIG’s] + +On line 5837: + [Financial Products] + have days before they are out + of liquidity."15 + +On line 5839: + have days before they + are out of liquidity."15 + AIG posed a simple + +On line 5839: + before they are out + of liquidity."15 AIG posed + a simple question: + +On line 5839: + of liquidity."15 + AIG posed a simple question: + how could it obtain + +On line 5839: + liquidity."15 AIG + posed a simple question: how + could it obtain an + +On line 5839: + AIG posed a simple + question: how could it obtain + an emergency loan + +On line 5839: + could it obtain an + emergency loan under the + Federal Reserve’s + +On line 5839: + Federal Reserve’s + authority1 Without a + solution, there was + +On line 5839: + this conglomerate, + despite more than trillion in + assets, would survive + +On line 5843: + IS PRECARIOUS" + AIG’s visit to the New York + Fed may have been an + +On line 5843: + AIG’s visit to the + New York Fed may have been an + emergency, but it + +On line 5843: + to the New York Fed + may have been an emergency, + but it should not have + +On line 5843: + the New York Fed may + have been an emergency, but + it should not have been + +On line 5843: + New York Fed may have + been an emergency, but it + should not have been a + +On line 5843: + Fed may have been an + emergency, but it should not + have been a surprise. + +On line 5843: + emergency, but it + should not have been a surprise. + With the Primary + +On line 5843: + investment banks that + qualified as primary + dealers; AIG did not + +On line 5843: + banks that qualified + as primary dealers; AIG + did not qualify. + +On line 5845: + that qualified as + primary dealers; AIG did + not qualify. But + +On line 5845: + primary dealers; + AIG did not qualify. But + over the summer, New + +On line 5845: + did not qualify. + But over the summer, New York + Fed officials had + +On line 5845: + funding to even more + large institutions that were + systemically + +On line 5845: + large institutions + that were systemically + important. That led + +On line 5845: + to look closely at + two trillion-dollar holding + companies, AIG and + +On line 5845: + two trillion-dollar + holding companies, AIG and + GE Capital. Both + +On line 5845: + companies, AIG and + GE Capital. Both were large + participants in + +On line 5845: + and GE Capital. + Both were large participants + in the commercial + +On line 5845: + Capital. Both were + large participants in the + commercial paper + +On line 5845: + commercial paper + market: AIG with billion in + outstanding paper, + +On line 5847: + outstanding paper, + GE Capital with billion.16 + In ugust, the New York + +On line 5847: + GE Capital with + billion.16 In ugust, the New York + Fed set up a team + +On line 5847: + with billion.16 In ugust, + the New York Fed set up a + team to study the two + +On line 5847: + In ugust, the New York + Fed set up a team to study + the two companies’ + +On line 5847: + the New York Fed set + up a team to study the two + companies’ funding + +On line 5847: + up a team to study + the two companies’ funding + and liquidity + +On line 5847: + a team to study the + two companies’ funding and + liquidity risk. + +On line 5849: + the two companies’ + funding and liquidity + risk. On August New + +On line 5849: + companies’ funding + and liquidity risk. On + August New York Fed + +On line 5849: + and liquidity + risk. On August New York Fed + officials met with + +On line 5849: + Supervision (OTS) + regulators to discuss + AIG.17 The OTS said that + +On line 5851: + OTS said that it was + "generally comfortable + with [the] firm’s current + +On line 5851: + comfortable with [the] + firm’s current liquidity + [and] confident that + +On line 5851: + the firm could access + the capital markets with + no problem if it + +On line 5851: + firm could access the + capital markets with no + problem if it had + +On line 5851: + capital markets + with no problem if it had + to."18 The New York Fed + +On line 5851: + no problem if it + had to."18 The New York Fed did + not agree. On August + +On line 5853: + problem if it had + to."18 The New York Fed did not + agree. On August Kevin + +On line 5853: + if it had to."18 The + New York Fed did not agree. On + August Kevin Coffey, + +On line 5853: + New York Fed did not + agree. On August Kevin Coffey, + an analyst from + +On line 5853: + York Fed did not agree. + On August Kevin Coffey, an + analyst from the + +On line 5853: + not agree. On August + Kevin Coffey, an analyst + from the Financial + +On line 5853: + Financial Sector + Policy and Analysis + unit, wrote that despite + +On line 5853: + Analysis unit, wrote + that despite raising billion + earlier in the + +On line 5853: + unit, wrote that despite + raising billion earlier + in the year, "AIG is + +On line 5853: + that despite raising + billion earlier in the + year, "AIG is under + +On line 5853: + and liquidity + pressure" and "appears to need + to raise substantial + +On line 5853: + and "appears to need + to raise substantial longer term + funds to address the + +On line 5853: + address the impact + of deteriorating + asset values on + +On line 5853: + asset values on + its capital and available + liquidity as + +On line 5853: + its capital and + available liquidity as + well as to address + +On line 5855: + funding mismatches."19 + Coffey listed six concerns: + AIG’s significant + +On line 5855: + on AIG Financial + Products’ credit default swap + book and related + +On line 5855: + Financial Products’ + credit default swap book and + related margin + +On line 5855: + credit default swap + book and related margin + calls, for which AIG had + +On line 5855: + default swap book and + related margin calls, for + which AIG had posted + +On line 5855: + book and related + margin calls, for which AIG had + posted billion in + +On line 5855: + margin calls, for which + AIG had posted billion in + collateral by + +On line 5855: + had posted billion + in collateral by mid-August; + significant near-term + +On line 5855: + in collateral + by mid-August; significant near-term + liabilities; + +On line 5855: + obligations due to + outstanding liquidity + puts; ratings-based triggers + +On line 5855: + collateral calls + if AIG were downgraded; and + limited standby + +On line 5855: + were downgraded; and + limited standby credit + facilities to + +On line 5855: + limited standby + credit facilities to + manage sudden cash + +On line 5855: + facilities to + manage sudden cash needs. He + noted Moody’s and S&P + +On line 5857: + to manage sudden + cash needs. He noted Moody’s and + S&P had highlighted + +On line 5857: + cash needs. He noted + Moody’s and S&P had highlighted + worries about earnings, + +On line 5857: + noted Moody’s and S&P + had highlighted worries about + earnings, capital, + +On line 5857: + and liquidity + following AIG’s second-quarter + earnings. The agencies + +On line 5857: + earnings. The agencies + warned they would downgrade AIG if + it did not address + +On line 5857: + agencies warned they would + downgrade AIG if it did not + address these issues.20 + +On line 5859: + warned they would downgrade + AIG if it did not address + these issues.20 Four days + +On line 5859: + AIG if it did not + address these issues.20 Four days + later, Goldman Sachs + +On line 5859: + it did not address + these issues.20 Four days later, + Goldman Sachs issued + +On line 5859: + address these issues.20 + Four days later, Goldman Sachs + issued a report + +On line 5859: + these issues.20 Four days + later, Goldman Sachs issued + a report to clients + +On line 5859: + days later, Goldman + Sachs issued a report to + clients that echoed much of + +On line 5859: + echoed much of Coffey’s + internal analysis. The + report, "Don’t Buy AIG: + +On line 5859: + Coffey’s internal + analysis. The report, "Don’t + Buy AIG: Potential + +On line 5859: + Buy AIG: Potential + Downgrades, Capital Raise on + the Horizon," warned that + +On line 5859: + Downgrades, Capital + Raise on the Horizon," warned that + "we foresee billion + +On line 5859: + on the Horizon," warned + that "we foresee billion in + economic losses + +On line 5859: + "we foresee billion + in economic losses from + [AIG’s credit default + +On line 5859: + foresee billion in + economic losses from [AIG’s + credit default swap] + +On line 5859: + economic losses + from [AIG’s credit default swap] + book, which could result + +On line 5859: + [AIG’s credit default + swap] book, which could result in + larger cash outlays + +On line 5861: + default swap] book, which + could result in larger cash + outlays resulting + +On line 5861: + result in larger + cash outlays resulting in + a significant + +On line 5861: + resulting in a + significant shift in the + risk quality of + +On line 5861: + a significant + shift in the risk quality + of AIG’s assets. Put + +On line 5861: + risk quality of + AIG’s assets. Put simply, we + have seen this credit + +On line 5861: + have seen this credit + overhang story before with + another stock in + +On line 5861: + with another stock + in our coverage universe, + and foresee outcomes + +On line 5861: + and foresee outcomes + similar in nature but + on a much larger + +On line 5861: + outcomes similar + in nature but on a much + larger scale."21 Goldman + +On line 5861: + on a much larger + scale."21 Goldman appeared to be + referring to Bear + +On line 5861: + larger scale."21 Goldman + appeared to be referring + to Bear Stearns. Ira Selig, + +On line 5861: + referring to Bear + Stearns. Ira Selig, a manager + at the New York Fed, + +On line 5861: + Bear Stearns. Ira Selig, a + manager at the New York + Fed, emailed the Goldman + +On line 5861: + Selig, a manager + at the New York Fed, emailed the + Goldman report to + +On line 5861: + manager at the + New York Fed, emailed the Goldman + report to Coffey + +On line 5861: + at the New York Fed, + emailed the Goldman report to + Coffey and others. + +On line 5861: + the Goldman report + to Coffey and others. "The + bottom line: large scale + +On line 5861: + report to Coffey + and others. "The bottom line: + large scale cash outflows + +On line 5861: + Coffey and others. + "The bottom line: large scale cash + outflows and posting + +On line 5861: + "The bottom line: large + scale cash outflows and posting + of collateral + +On line 5861: + bottom line: large scale + cash outflows and posting of + collateral could + +On line 5861: + scale cash outflows and + posting of collateral + could substantially + +On line 5861: + of collateral + could substantially weaken + AIG’s balance sheet," the + +On line 5863: + could substantially + weaken AIG’s balance sheet," the + manager wrote.22 On + +On line 5863: + weaken AIG’s balance + sheet," the manager wrote.22 On + September the New + +On line 5863: + sheet," the manager + wrote.22 On September the New + York Fed’s Danielle Vicente + +On line 5863: + manager wrote.22 On + September the New York Fed’s + Danielle Vicente noted + +On line 5863: + September the New + York Fed’s Danielle Vicente noted + the situation + +On line 5863: + worsened: "AIG’s current + liquidity position + is precarious + +On line 5863: + precarious and + asset liability + management appears + +On line 5863: + the substantial off + balance sheet liquidity + needs." Liquidating + +On line 5863: + liabilities + would mean substantial losses + and "potentially" + +On line 5863: + would mean substantial + losses and "potentially" + affect prices, she wrote. + +On line 5863: + she wrote. Borrowing + against AIG’s securities through + the Fed’s PDCF might + +On line 5863: + Borrowing against AIG’s + securities through the Fed’s + PDCF might allow + +On line 5863: + securities through + the Fed’s PDCF might allow + AIG to unwind its + +On line 5863: + the Fed’s PDCF might + allow AIG to unwind its + positions calmly + +On line 5863: + while satisfying + immediate cash needs, but + Vicente questioned whether + +On line 5865: + cash needs, but Vicente + questioned whether the PDCF was + "necessary for the + +On line 5865: + Vicente questioned whether + the PDCF was "necessary + for the survival of + +On line 5865: + whether the PDCF was + "necessary for the survival + of the firm."23 Arguably, + +On line 5865: + "necessary for the + survival of the firm."23 Arguably, + however, AIG’s volatile + +On line 5865: + for the survival of + the firm."23 Arguably, however, + AIG’s volatile funding sources + +On line 5865: + the survival of the + firm."23 Arguably, however, AIG’s + volatile funding sources made + +On line 5865: + survival of the firm."23 + Arguably, however, AIG’s volatile + funding sources made the + +On line 5865: + Arguably, however, + AIG’s volatile funding sources made the + firm vulnerable + +On line 5865: + AIG’s volatile funding sources + made the firm vulnerable + to runs. Off-balance-sheet + +On line 5865: + commitments—including + collateral calls, contract + terminations, and + +On line 5865: + collateral calls, + contract terminations, and + liquidity puts—could + +On line 5865: + terminations, and + liquidity puts—could be as + high as SEPTEMBER + +On line 5865: + liquidity puts—could + be as high as SEPTEMBER + billion if AIG was + +On line 5865: + puts—could be as high as + SEPTEMBER billion if AIG + was downgraded. Yet + +On line 5865: + was downgraded. Yet + AIG had only billion of + revolving credit + +On line 5865: + in addition to + the to billion of cash it + had on hand at the + +On line 5865: + addition to the + to billion of cash it had + on hand at the time.24 + +On line 5867: + to the to billion + of cash it had on hand at + the time.24 The rating + +On line 5867: + to billion of cash + it had on hand at the time.24 + The rating agencies + +On line 5867: + of cash it had on + hand at the time.24 The rating + agencies waited to + +On line 5867: + it had on hand at + the time.24 The rating agencies + waited to see how + +On line 5867: + on hand at the time.24 + The rating agencies waited + to see how AIG would + +On line 5867: + the time.24 The rating + agencies waited to see how + AIG would address its + +On line 5867: + agencies waited to + see how AIG would address its + liquidity and + +On line 5867: + to see how AIG would + address its liquidity + and capital needs. + +On line 5867: + credit default swaps + and investment portfolios, + about rating agency + +On line 5867: + agency actions, and + about subsequent impacts on + capital. Indeed, + +On line 5867: + capital. Indeed, + Goldman’s August report on + AIG concluded that + +On line 5867: + on AIG concluded + that the firm itself and the + rating agencies were + +On line 5869: + rating agencies were + in denial about impending + losses.25 By early + +On line 5869: + losses.25 By early + September, management was + no longer in denial. + +On line 5869: + no longer in denial. + At the Friday, September + meeting at the New + +On line 5869: + in denial. At the + Friday, September meeting + at the New York Fed, + +On line 5869: + Friday, September + meeting at the New York Fed, + AIG executives + +On line 5869: + meeting at the New + York Fed, AIG executives + reported that the + +On line 5869: + the New York Fed, AIG + executives reported + that the company + +On line 5871: + "facing serious + liquidity issues that + threaten[ed] its survival + +On line 5871: + downgrade, possibly + after a rating agency + meeting September + +On line 5871: + after a rating + agency meeting September + would trigger billions + +On line 5871: + trigger billions of + dollars in collateral + calls, liquidity + +On line 5871: + AIG’s stock had fallen + significantly (shares hit + an intraday low + +On line 5871: + significantly + (shares hit an intraday low + of Friday, down from + +On line 5871: + hit an intraday + low of Friday, down from a + close the day before) + +On line 5871: + an intraday low + of Friday, down from a close + the day before) and + +On line 5871: + low of Friday, down + from a close the day before) + and credit default + +On line 5871: + of Friday, down from + a close the day before) and + credit default swap + +On line 5871: + close the day before) + and credit default swap spreads + had reached during the + +On line 5871: + the day before) and + credit default swap spreads had + reached during the day,27 + +On line 5871: + and credit default + swap spreads had reached during the + day,27 indicating + +On line 5871: + credit default swap + spreads had reached during the day,27 + indicating that + +On line 5871: + day,27 indicating + that protection on million + of AIG debt would cost + +On line 5871: + that protection on + million of AIG debt would cost + approximately + +On line 5871: + million of AIG debt + would cost approximately + million per year. AIG + +On line 5871: + AIG reported it + was having problems with its + commercial paper, + +On line 5871: + was having problems + with its commercial paper, + able to roll only + +On line 5871: + commercial paper, + able to roll only billion + of the billion that + +On line 5871: + roll only billion + of the billion that matured + on September In + +On line 5871: + of the billion that + matured on September In + addition, some banks + +On line 5871: + and even refusing + to provide repo funding.29 + Assets were illiquid, + +On line 5871: + declined, borrowing + was restricted, and raising + capital was not + +On line 5873: + was restricted, and + raising capital was not + viable. "SPILLOVER EFFECT" + +On line 5875: + raising capital + was not viable. "SPILLOVER EFFECT" + The New York Fed knew + +On line 5875: + capital was not + viable. "SPILLOVER EFFECT" The New + York Fed knew that a + +On line 5875: + was not viable. "SPILLOVER + EFFECT" The New York Fed knew + that a failure of + +On line 5875: + viable. "SPILLOVER EFFECT" + The New York Fed knew that a + failure of AIG would + +On line 5875: + New York Fed knew that + a failure of AIG would have + dramatic, far-reaching + +On line 5875: + knew that a failure + of AIG would have dramatic, + far-reaching consequences. + +On line 5875: + a failure of AIG + would have dramatic, far-reaching + consequences. By the + +On line 5875: + would have dramatic, + far-reaching consequences. By the + evening of September + +On line 5875: + dramatic, far-reaching + consequences. By the evening of + September after + +On line 5875: + far-reaching consequences. + By the evening of September + after the meeting + +On line 5875: + consequences. By the + evening of September after + the meeting with AIG + +On line 5875: + evening of September + after the meeting with AIG + executives, that + +On line 5875: + after the meeting + with AIG executives, that + possibility + +On line 5875: + looked increasingly + realistic. Hayley Boesky + of the New York Fed + +On line 5875: + of the New York Fed + emailed William Dudley and others. + "More panic from [hedge + +On line 5875: + the New York Fed emailed + William Dudley and others. "More + panic from [hedge funds]. + +On line 5875: + Fed emailed William Dudley + and others. "More panic from + [hedge funds]. Now focus + +On line 5875: + emailed William Dudley and + others. "More panic from [hedge + funds]. Now focus is + +On line 5875: + Dudley and others. + "More panic from [hedge funds]. Now + focus is on AIG," + +On line 5875: + others. "More panic + from [hedge funds]. Now focus is + on AIG," she wrote. "I + +On line 5875: + panic from [hedge funds]. + Now focus is on AIG," she + wrote. "I am hearing + +On line 5875: + [hedge funds]. Now focus + is on AIG," she wrote. "I am + hearing worse than LEH. + +On line 5875: + Now focus is on + AIG," she wrote. "I am hearing + worse than LEH. Every + +On line 5875: + focus is on AIG," + she wrote. "I am hearing worse + than LEH. Every bank + +On line 5875: + AIG," she wrote. "I am + hearing worse than LEH. Every + bank and dealer has + +On line 5875: + am hearing worse than + LEH. Every bank and dealer + has exposure to + +On line 5875: + hearing worse than LEH. + Every bank and dealer has + exposure to them."30 + +On line 5877: + LEH. Every bank and + dealer has exposure to + them."30 Shortly before + +On line 5877: + bank and dealer has + exposure to them."30 Shortly + before midnight, New + +On line 5877: + exposure to them."30 + Shortly before midnight, New + York Fed Assistant + +On line 5877: + midnight, New York Fed + Assistant Vice President + Alejandro LaTorre emailed + +On line 5877: + Fed Assistant Vice + President Alejandro LaTorre + emailed Geithner, + +On line 5877: + emailed Geithner, + Dudley, and other senior + officials about AIG: + +On line 5877: + Dudley, and other + senior officials about AIG: + "The key take-away is + +On line 5877: + and other senior + officials about AIG: "The key + take-away is that they + +On line 5877: + officials about AIG: + "The key take-away is that they + are potentially + +On line 5877: + "The key take-away is + that they are potentially + facing a severe + +On line 5877: + take-away is that they + are potentially facing + a severe run on + +On line 5877: + are potentially + facing a severe run on + their liquidity + +On line 5877: + facing a severe + run on their liquidity + over the course of the + +On line 5877: + the course of the next + several (approx. days if + they are downgraded. + +On line 5877: + several (approx. + days if they are downgraded. + Their risk exposures + +On line 5877: + risk exposures are + concentrated among the largest + international + +On line 5877: + international + banks (both U.S. and European) + across a wide array + +On line 5877: + lines, derivatives, + securities lending, etc.) + meaning [there] could be + +On line 5877: + be significant + counterparty losses to + those firms in the event + +On line 5879: + to those firms in the + event of AIG’s failure."31 New York + Fed officials met + +On line 5879: + those firms in the event + of AIG’s failure."31 New York Fed + officials met on + +On line 5879: + of AIG’s failure."31 New + York Fed officials met on + Saturday morning, + +On line 5879: + Saturday morning, + and gathered additional + information about + +On line 5879: + information about + AIG’s financial condition, + but according to + +On line 5879: + according to New + York Fed General Counsel + Tom Baxter, it "seemed + +On line 5879: + York Fed General + Counsel Tom Baxter, it "seemed + clear that the private + +On line 5879: + General Counsel + Tom Baxter, it "seemed clear that + the private sector + +On line 5879: + Counsel Tom Baxter, + it "seemed clear that the private + sector solution + +On line 5879: + sector solution + would materialize for + AIG."32 Indeed, Christopher + +On line 5879: + Christopher Flowers, head + of J. C. Flowers Co., a + private equity + +On line 5879: + Flowers, head of J. + C. Flowers Co., a private + equity firm, had + +On line 5879: + of J. C. Flowers + Co., a private equity + firm, had spoken to + +On line 5879: + J. C. Flowers Co., + a private equity firm, + had spoken to AIG + +On line 5879: + C. Flowers Co., a + private equity firm, had + spoken to AIG CEO + +On line 5879: + had spoken to AIG + CEO Robert Willumstad the prior + Thursday, and the two + +On line 5879: + AIG CEO Robert Willumstad + the prior Thursday, and the + two had called Warren + +On line 5879: + Willumstad the prior + Thursday, and the two had called + Warren Buffett to + +On line 5879: + the prior Thursday, + and the two had called Warren + Buffett to discuss + +On line 5879: + and the two had called + Warren Buffett to discuss + a possible deal. + +On line 5879: + called Warren Buffett + to discuss a possible + deal. Willumstad told the + +On line 5879: + Warren Buffett to + discuss a possible deal. + Willumstad told the FCIC + +On line 5879: + Buffett to discuss + a possible deal. Willumstad + told the FCIC hat he + +On line 5879: + a possible deal. + Willumstad told the FCIC hat he + was in contact with + +On line 5879: + Willumstad told the FCIC + hat he was in contact with + about a dozen private + +On line 5879: + the FCIC hat he was + in contact with about a dozen + private equity + +On line 5879: + in contact with about + a dozen private equity + firms over the weekend.33 + +On line 5881: + contact with about a + dozen private equity firms + over the weekend.33 AIG + +On line 5881: + firms over the weekend.33 + AIG executives also + worked with then-Superintendent Eric + +On line 5881: + AIG executives + also worked with then-Superintendent Eric + Dinallo to help + +On line 5881: + also worked with then-Superintendent + Eric Dinallo to help + craft a deal that would + +On line 5881: + that would have allowed + AIG’s regulated subsidiaries + to essentially + +On line 5881: + would have allowed AIG’s + regulated subsidiaries to + essentially lend + +On line 5881: + AIG’s regulated + subsidiaries to essentially + lend money to the + +On line 5881: + reported to AIG + executives during a + conference call on + +On line 5881: + AIG executives + during a conference call + on Saturday that + +On line 5881: + particularly + optimistic [about financial + assistance], given + +On line 5883: + [the Fed’s] 13-3 lending + [authority]."34 And by the + end of the day on + +On line 5883: + And by the end of + the day on Saturday, AIG + appeared to the Fed + +On line 5883: + the end of the day + on Saturday, AIG appeared + to the Fed to be + +On line 5883: + to the Fed to be + pursuing private-sector + leads. "It was clear from + +On line 5883: + the conversation + that Flowers [is] actively + involved in working + +On line 5883: + actively involved + in working with everything + (AIG, regulators, + +On line 5883: + with everything (AIG, + regulators, bankers, etc) in + putting together both + +On line 5883: + (AIG, regulators, + bankers, etc) in putting together + both the ‘term sheet’ with + +On line 5883: + regulators, bankers, + etc) in putting together both + the ‘term sheet’ with AIG, + +On line 5883: + Patricia Mosser, + a senior vice president + at the New York Fed, + +On line 5883: + Mosser, a senior + vice president at the New + York Fed, wrote to LaTorre + +On line 5885: + president at the + New York Fed, wrote to LaTorre and + others.35 On Sunday + +On line 5885: + New York Fed, wrote to + LaTorre and others.35 On Sunday + morning, September + +On line 5885: + Fed, wrote to LaTorre and + others.35 On Sunday morning, + September Adam Ashcraft + +On line 5885: + LaTorre and others.35 On + Sunday morning, September + Adam Ashcraft of the New + +On line 5885: + others.35 On Sunday + morning, September Adam Ashcraft + of the New York Fed + +On line 5885: + morning, September + Adam Ashcraft of the New York Fed + circulated a + +On line 5885: + circulated a + memo, "Comment on Possible + 13-3 Lending to AIG," + +On line 5885: + on Possible 13-3 + Lending to AIG," discussing the + effect of a fire + +On line 5885: + 13-3 Lending to AIG," + discussing the effect of a + fire sale by AIG on + +On line 5885: + discussing the effect + of a fire sale by AIG on + asset markets.36 In + +On line 5885: + a fire sale by AIG + on asset markets.36 In an + accompanying + +On line 5885: + on asset markets.36 + In an accompanying + email, Ashcraft wrote that the + +On line 5885: + asset markets.36 In + an accompanying email, + Ashcraft wrote that the "threat" + +On line 5885: + accompanying + email, Ashcraft wrote that the "threat" by + AIG to sell assets + +On line 5885: + email, Ashcraft wrote that the + "threat" by AIG to sell assets + was "a clear attempt + +On line 5885: + Ashcraft wrote that the "threat" + by AIG to sell assets was + "a clear attempt to + +On line 5885: + wrote that the "threat" by + AIG to sell assets was "a + clear attempt to scare + +On line 5885: + AIG to sell assets + was "a clear attempt to scare + policymakers + +On line 5885: + was "a clear attempt + to scare policymakers + into giving [AIG] + +On line 5885: + clear attempt to scare + policymakers into + giving [AIG] access + +On line 5885: + discount window, and + avoid making otherwise hard + but viable options: + +On line 5885: + making otherwise + hard but viable options: sell + or hedge the CDO risk + +On line 5885: + otherwise hard but + viable options: sell or hedge + the CDO risk (little + +On line 5885: + viable options: sell + or hedge the CDO risk (little + to no impact on + +On line 5885: + sell or hedge the CDO + risk (little to no impact + on capital), sell + +On line 5885: + CDO risk (little to + no impact on capital), + sell subsidiaries, or raise + +On line 5887: + sell subsidiaries, or raise + capital."37 Before a P.M. + meeting, LaTorre sent an + +On line 5887: + or raise capital."37 + Before a P.M. meeting, LaTorre + sent an analysis, + +On line 5887: + capital."37 Before + a P.M. meeting, LaTorre sent an + analysis, "Pros and + +On line 5887: + a P.M. meeting, LaTorre + sent an analysis, "Pros and + cons of lending to + +On line 5887: + P.M. meeting, LaTorre sent + an analysis, "Pros and cons + of lending to AIG," + +On line 5887: + meeting, LaTorre sent an + analysis, "Pros and cons of + lending to AIG," to + +On line 5887: + sent an analysis, + "Pros and cons of lending to + AIG," to colleagues. The + +On line 5887: + an analysis, "Pros + and cons of lending to AIG," + to colleagues. The pros + +On line 5887: + and cons of lending + to AIG," to colleagues. The pros + included avoiding + +On line 5887: + to AIG," to colleagues. + The pros included avoiding + a messy collapse and + +On line 5887: + The pros included + avoiding a messy collapse and + dislocations in + +On line 5887: + a messy collapse and + dislocations in markets + such as commercial + +On line 5887: + in markets such as + commercial paper. If AIG + collapsed, it could have + +On line 5887: + commercial paper. + If AIG collapsed, it could have + a "spillover effect on + +On line 5887: + If AIG collapsed, it + could have a "spillover effect on + other firms involved + +On line 5887: + effect on other + firms involved in similar + activities (e.g. + +On line 5889: + European banks that + had lowered credit risk—and, as + a result, lowered + +On line 5889: + banks that had lowered + credit risk—and, as a result, + lowered capital + +On line 5891: + by buying credit + default swaps from AIG would lose + that protection if + +On line 5893: + swaps from AIG would lose + that protection if AIG failed. + AIG’s bankruptcy would + +On line 5893: + lose that protection + if AIG failed. AIG’s bankruptcy + would also affect + +On line 5893: + failed. AIG’s bankruptcy + would also affect other + companies because + +On line 5893: + companies because + of its "non-trivial exotic + derivatives book," + +On line 5893: + a trillion over-the-counter + derivatives portfolio + of which trillion was + +On line 5893: + was concentrated + in large counterparties. The + memo also noted + +On line 5893: + concentrated in + large counterparties. The memo + also noted that + +On line 5893: + large counterparties. + The memo also noted that + an AIG failure "could + +On line 5893: + counterparties. The + memo also noted that an + AIG failure "could cause + +On line 5893: + memo also noted + that an AIG failure "could cause + dislocations in + +On line 5893: + that an AIG failure + "could cause dislocations in + CDS market [that] could + +On line 5893: + an AIG failure "could + cause dislocations in CDS + market [that] could leave + +On line 5895: + significantly + unbalanced."38 The cons of a + bailout included a + +On line 5895: + unbalanced."38 The cons + of a bailout included a + "chilling effect" on + +On line 5895: + "chilling effect" on + private-sector solutions + thought to be under + +On line 5895: + thought to be under + way; the possibility + that a Fed loan would + +On line 5895: + to be under way; + the possibility that + a Fed loan would be + +On line 5895: + a Fed loan would be + insufficient to keep AIG + afloat, "undermining + +On line 5895: + insufficient to + keep AIG afloat, "undermining + efficacy of + +On line 5895: + 13-3 lending as a + policy tool"; an increase + in moral hazard; the + +On line 5895: + a policy tool"; + an increase in moral hazard; + the perception that + +On line 5895: + policy tool"; an + increase in moral hazard; the + perception that it + +On line 5895: + in moral hazard; the + perception that it would be + "incoherent" to + +On line 5895: + the perception that + it would be "incoherent" + to lend to AIG and + +On line 5895: + perception that it + would be "incoherent" to + lend to AIG and not + +On line 5895: + "incoherent" to + lend to AIG and not Lehman; the + possibility + +On line 5895: + lend to AIG and not + Lehman; the possibility + of assets being + +On line 5895: + hole. LaTorre concluded, + "Without punitive terms, lending + [to AIG] could reward + +On line 5895: + concluded, "Without + punitive terms, lending [to AIG] + could reward poor risk + +On line 5895: + "Without punitive terms, + lending [to AIG] could reward + poor risk management," + +On line 5895: + lending [to AIG] could + reward poor risk management," + which included AIG’s + +On line 5895: + could reward poor risk + management," which included + AIG’s unwillingness + +On line 5895: + which included AIG’s + unwillingness to sell or + hedge some of its CDO + +On line 5897: + of its CDO risk.39 The + private-sector solutions + LaTorre referred to had + +On line 5897: + LaTorre referred to had + hit a wall, however. By + Sunday afternoon, + +On line 5897: + by AIG’s board. Flowers + told the FCIC that under his + proposal, his firm + +On line 5897: + Flowers told the FCIC + that under his proposal, + his firm and Allianz, + +On line 5897: + the FCIC that under + his proposal, his firm and + Allianz, the giant + +On line 5897: + Allianz, the giant + insurance company, would + have each invested + +On line 5897: + company, would have + each invested billion in + exchange for the stock + +On line 5897: + have each invested + billion in exchange for the + stock of AIG subsidiaries. + +On line 5897: + stock of AIG subsidiaries. + With SEPTEMBER approval from + the NYSID, the subsidiaries + +On line 5897: + of AIG subsidiaries. With + SEPTEMBER approval from the + NYSID, the subsidiaries would + +On line 5897: + SEPTEMBER approval + from the NYSID, the subsidiaries would + "upstream" billion to + +On line 5897: + the NYSID, the subsidiaries + would "upstream" billion to the + parent company, + +On line 5897: + parent company, + and the parent company + would get access to + +On line 5899: + would get access to + bridge financing from the Fed. + Then, Allianz would take + +On line 5899: + to bridge financing + from the Fed. Then, Allianz would + take control of AIG + +On line 5899: + Fed. Then, Allianz would + take control of AIG almost + immediately. + +On line 5899: + take control of AIG + almost immediately. + Flowers said that he + +On line 5899: + that he was surprised + by AIG’s unwillingness to + negotiate. "I’m + +On line 5899: + AIG’s unwillingness + to negotiate. "I’m not + saying it would have + +On line 5899: + to negotiate. + "I’m not saying it would have + worked or that it was + +On line 5899: + "I’m not saying it + would have worked or that it was + perfect as written, + +On line 5899: + saying it would have + worked or that it was perfect + as written, but it + +On line 5899: + have worked or that it + was perfect as written, but + it was astounding + +On line 5899: + worked or that it was + perfect as written, but it + was astounding to + +On line 5899: + perfect as written, + but it was astounding to + me that given what + +On line 5899: + as written, but it + was astounding to me that + given what happened, + +On line 5899: + was astounding to + me that given what happened, + nobody bothered to + +On line 5899: + to me that given + what happened, nobody bothered + to check this [deal] out," + +On line 5899: + me that given what + happened, nobody bothered to + check this [deal] out," he + +On line 5899: + to check this [deal] out," + he said.40 Willumstad referred to + the Flowers deal as + +On line 5899: + check this [deal] out," he + said.40 Willumstad referred to the + Flowers deal as a + +On line 5899: + said.40 Willumstad referred + to the Flowers deal as a + "so-called offer"—he + +On line 5899: + to the Flowers deal + as a "so-called offer"—he + did not consider + +On line 5899: + the Flowers deal as + a "so-called offer"—he did + not consider it + +On line 5899: + Flowers deal as a + "so-called offer"—he did not + consider it to + +On line 5899: + "so-called offer"—he + did not consider it to + be a "serious + +On line 5899: + offer"—he did not + consider it to be a + "serious effort," + +On line 5899: + did not consider + it to be a "serious + effort," and so it + +On line 5901: + immediately." + With respect to the other + potential investors + +On line 5901: + With respect to the + other potential investors + AIG spoke with over the + +On line 5901: + other potential + investors AIG spoke with over the + weekend, Willumstad said + +On line 5901: + the weekend, Willumstad + said that negotiations + were unsuccessful + +On line 5901: + negotiations + were unsuccessful because + every potential + +On line 5901: + were unsuccessful + because every potential + deal would have required + +On line 5901: + required government + assistance—something Willumstad + had been assured by + +On line 5901: + assistance—something + Willumstad had been assured by + the "highest levels" + +On line 5903: + had been assured by + the "highest levels" would not + be forthcoming.41 On + +On line 5903: + the "highest levels" + would not be forthcoming.41 On + Monday morning—after Lehman had + +On line 5903: + be forthcoming.41 On + Monday morning—after Lehman had declared + bankruptcy, and with + +On line 5903: + Monday morning—after Lehman had + declared bankruptcy, and with + no private-sector + +On line 5903: + declared bankruptcy, + and with no private-sector + solution on the + +On line 5903: + horizon—the Fed + initiated an effort + to have JP Morgan + +On line 5903: + to have JP Morgan + and Goldman Sachs assemble + a syndicate of + +On line 5903: + have JP Morgan and + Goldman Sachs assemble a + syndicate of banks + +On line 5903: + Sachs assemble a + syndicate of banks to lend + about billion to keep + +On line 5905: + a syndicate of + banks to lend about billion to + keep AIG afloat.42 In the + +On line 5905: + of banks to lend about + billion to keep AIG afloat.42 In + the afternoon, the + +On line 5905: + about billion to keep + AIG afloat.42 In the afternoon, + the rating agencies + +On line 5905: + to keep AIG afloat.42 In + the afternoon, the rating + agencies announced their + +On line 5905: + In the afternoon, + the rating agencies announced + their assessments, which + +On line 5905: + the afternoon, the + rating agencies announced their + assessments, which were + +On line 5905: + agencies announced their + assessments, which were even worse + than expected. All + +On line 5905: + assessments, which were + even worse than expected. All + three rating agencies + +On line 5905: + than expected. All + three rating agencies announced + downgrades of AIG: S&P + +On line 5905: + three rating agencies + announced downgrades of AIG: S&P + by three notches to + +On line 5905: + announced downgrades of + AIG: S&P by three notches to + A-, and Moody’s and Fitch + +On line 5905: + downgrades of AIG: S&P + by three notches to A-, and + Moody’s and Fitch by two + +On line 5905: + of AIG: S&P by three + notches to A-, and Moody’s and + Fitch by two notches + +On line 5905: + S&P by three notches + to A-, and Moody’s and Fitch by + two notches to A2 + +On line 5905: + by three notches to + A-, and Moody’s and Fitch by two + notches to A2 and + +On line 5905: + A-, and Moody’s and Fitch + by two notches to A2 and + A, respectively. + +On line 5905: + and Moody’s and Fitch by + two notches to A2 and A, + respectively. The + +On line 5905: + by two notches to + A2 and A, respectively. + The downgrades triggered + +On line 5905: + two notches to A2 + and A, respectively. The + downgrades triggered an + +On line 5905: + downgrades triggered an + additional billion in + cash collateral + +On line 5905: + collateral calls + on AIG Financial Products’ + credit default swaps. + +On line 5905: + Financial Products’ + credit default swaps. Goldman + Sachs alone requested + +On line 5907: + credit default swaps. + Goldman Sachs alone requested + billion.43 Demands hit + +On line 5907: + default swaps. Goldman + Sachs alone requested billion.43 + Demands hit billion, + +On line 5907: + swaps. Goldman Sachs alone + requested billion.43 Demands + hit billion, and AIG’s + +On line 5907: + requested billion.43 + Demands hit billion, and AIG’s + payouts increased to + +On line 5909: + hit billion, and AIG’s + payouts increased to billion.44 + The company’s stock + +On line 5909: + AIG’s payouts increased + to billion.44 The company’s + stock plummeted to + +On line 5909: + payouts increased to + billion.44 The company’s stock + plummeted to from + +On line 5909: + stock plummeted to + from the closing price of the + previous Friday—a + +On line 5909: + closing price of the + previous Friday—a fraction + of its all-time + +On line 5911: + Friday—a fraction of + its all-time high of The + syndicate of banks + +On line 5911: + of its all-time + high of The syndicate of + banks did not agree on + +On line 5911: + its all-time high + of The syndicate of banks + did not agree on a + +On line 5911: + all-time high of + The syndicate of banks did + not agree on a deal, + +On line 5911: + not agree on a deal, + despite the expectations + of Fed officials. + +On line 5911: + on a deal, despite + the expectations of Fed + officials. "Once Lehman + +On line 5911: + the expectations + of Fed officials. "Once Lehman + filed [for bankruptcy] + +On line 5911: + expectations of + Fed officials. "Once Lehman filed + [for bankruptcy] on + +On line 5911: + of Fed officials. + "Once Lehman filed [for bankruptcy] + on the morning of + +On line 5911: + Fed officials. "Once + Lehman filed [for bankruptcy] on + the morning of the + +On line 5911: + officials. "Once Lehman + filed [for bankruptcy] on the + morning of the 15th, + +On line 5911: + morning of the 15th, + everyone decided that, + ‘we’ve got to protect + +On line 5911: + ‘we’ve got to protect + our own balance sheet,’ and the + banks that were going + +On line 5911: + got to protect our + own balance sheet,’ and the banks + that were going to + +On line 5911: + own balance sheet,’ and + the banks that were going to + provide the billion + +On line 5911: + sheet,’ and the banks that + were going to provide the + billion decided + +On line 5911: + going to provide + the billion decided that + they were not going + +On line 5911: + provide the billion + decided that they were not + going to," Baxter + +On line 5911: + billion decided + that they were not going to," + Baxter told the FCIC.45 + +On line 5911: + decided that they + were not going to," Baxter + told the FCIC.45 Sarah Dahlgren, + +On line 5911: + they were not going + to," Baxter told the FCIC.45 Sarah + Dahlgren, a senior New + +On line 5911: + were not going to," + Baxter told the FCIC.45 Sarah Dahlgren, + a senior New York + +On line 5911: + to," Baxter told the + FCIC.45 Sarah Dahlgren, a senior New + York Fed official, + +On line 5911: + Baxter told the FCIC.45 + Sarah Dahlgren, a senior New York + Fed official, agreed + +On line 5911: + senior New York Fed + official, agreed with Baxter. + Lehman’s bankruptcy "was + +On line 5911: + Fed official, agreed + with Baxter. Lehman’s bankruptcy + "was the end of the + +On line 5911: + agreed with Baxter. Lehman’s + bankruptcy "was the end of + the private-sector + +On line 5911: + bankruptcy "was the + end of the private-sector + solution," she told + +On line 5913: + told the Commission.46 + After the markets closed, AIG + informed the New York + +On line 5913: + Commission.46 After + the markets closed, AIG informed + the New York Fed it + +On line 5913: + After the markets + closed, AIG informed the New York + Fed it was unable + +On line 5913: + AIG informed the New + York Fed it was unable to + access the short-term + +On line 5913: + the New York Fed it + was unable to access the + short-term commercial + +On line 5913: + access the short-term + commercial paper market.47 + Regulators spent + +On line 5913: + commercial paper + market.47 Regulators spent + the next several + +On line 5913: + the next several + hours preparing for a late-night + teleconference with + +On line 5913: + hours preparing for + a late-night teleconference with + Geithner. The + +On line 5913: + late-night teleconference + with Geithner. The "Lead + point," according to + +On line 5913: + teleconference with + Geithner. The "Lead point," + according to an + +On line 5913: + Geithner. The + "Lead point," according to an + email circulated + +On line 5913: + circulated to + the Fed’s AIG monitoring + group, was that "the size, + +On line 5913: + monitoring group, + was that "the size, name, franchise + and market presence + +On line 5913: + was that "the size, name, + franchise and market presence + (wholesale and retail) + +On line 5913: + "the size, name, franchise + and market presence (wholesale + and retail) [of AIG] + +On line 5913: + size, name, franchise and + market presence (wholesale and + retail) [of AIG] raise + +On line 5913: + franchise and market + presence (wholesale and retail) + [of AIG] raise questions + +On line 5913: + and retail) [of AIG] + raise questions about potential + worldwide contagion, + +On line 5913: + potential worldwide + contagion, should this franchise + become impaired."48 Late + +On line 5913: + this franchise become + impaired."48 Late that night, for the + second time since the + +On line 5913: + become impaired."48 Late + that night, for the second time + since the beginning + +On line 5913: + impaired."48 Late that night, + for the second time since the + beginning of the + +On line 5913: + the beginning of + the crisis, the Federal + Reserve Board invoked + +On line 5913: + Federal Reserve + Board invoked section of the + Federal Reserve + +On line 5913: + Reserve Board invoked + section of the Federal + Reserve Act to bail + +On line 5913: + Board invoked section + of the Federal Reserve + Act to bail out a + +On line 5913: + of the Federal + Reserve Act to bail out a + company. As it + +On line 5913: + Reserve Act to bail + out a company. As it + had done for Bear Stearns, + +On line 5913: + Act to bail out a + company. As it had done + for Bear Stearns, the New + +On line 5913: + out a company. + As it had done for Bear Stearns, + the New York Fed, with + +On line 5913: + a company. As + it had done for Bear Stearns, the + New York Fed, with the + +On line 5913: + As it had done for + Bear Stearns, the New York Fed, with + the support of the + +On line 5913: + done for Bear Stearns, the + New York Fed, with the support + of the Treasury, would + +On line 5913: + Bear Stearns, the New York + Fed, with the support of the + Treasury, would rescue + +On line 5913: + New York Fed, with the + support of the Treasury, would + rescue a brand-name + +On line 5913: + with the support of + the Treasury, would rescue a + brand-name financial + +On line 5915: + rescue a brand-name + financial institution. + The Federal Open + +On line 5915: + The Federal Open + Market Committee was briefed + about AIG. Members were + +On line 5915: + Market Committee + was briefed about AIG. Members were + told that AIG faced a + +On line 5915: + Members were told that + AIG faced a liquidity + crisis but that it + +On line 5915: + told that AIG faced a + liquidity crisis but + that it was unclear + +On line 5915: + unclear if there were + also solvency issues. + In addition, the + +On line 5915: + addition, the staff + noted that money market + funds had even broader + +On line 5915: + the staff noted that + money market funds had even + broader exposure + +On line 5915: + noted that money + market funds had even broader + exposure to AIG + +On line 5915: + money market funds + had even broader exposure + to AIG than to Lehman + +On line 5915: + market funds had even + broader exposure to AIG + than to Lehman and that + +On line 5915: + than to Lehman and that + the parent company could + run out of money + +On line 5915: + to Lehman and that the + parent company could run + out of money quite + +On line 5915: + and that the parent + company could run out of + money quite soon, even + +On line 5915: + parent company + could run out of money quite + soon, even within days.49 + +On line 5917: + run out of money + quite soon, even within days.49 n + Tuesday morning, the + +On line 5917: + of money quite soon, + even within days.49 n Tuesday + morning, the Fed put + +On line 5917: + quite soon, even within + days.49 n Tuesday morning, the + Fed put a number + +On line 5917: + soon, even within days.49 + n Tuesday morning, the Fed + put a number on + +On line 5917: + even within days.49 n + Tuesday morning, the Fed put + a number on the + +On line 5917: + n Tuesday morning, + the Fed put a number on + the table: it would + +On line 5917: + Tuesday morning, the + Fed put a number on the + table: it would loan + +On line 5917: + morning, the Fed put + a number on the table: + it would loan billion + +On line 5917: + Fed put a number + on the table: it would loan + billion so that AIG + +On line 5917: + a number on the + table: it would loan billion + so that AIG could meet + +On line 5917: + table: it would loan + billion so that AIG could meet + its immediate + +On line 5917: + that AIG could meet its + immediate obligations. + The collateral + +On line 5917: + The collateral + would be the assets of the + parent company + +On line 5917: + would be the assets + of the parent company + and its primary + +On line 5917: + The Fed stated that + "a disorderly failure + of AIG could add to + +On line 5917: + could add to already + significant levels of + financial market + +On line 5917: + higher borrowing + costs, reduced household wealth, and + materially + +On line 5917: + costs, reduced household + wealth, and materially + weaker economic + +On line 5917: + weaker economic + performance."50 By Wednesday, a + share of AIG sold for + +On line 5919: + By Wednesday, a share + of AIG sold for as little + as The previous + +On line 5919: + Wednesday, a share of + AIG sold for as little as + The previous eight + +On line 5919: + of AIG sold for as + little as The previous + eight years’ profits of + +On line 5919: + sold for as little + as The previous eight years’ + profits of billion + +On line 5919: + as little as The + previous eight years’ profits + of billion would be + +On line 5919: + as The previous + eight years’ profits of billion + would be dwarfed by the + +On line 5919: + previous eight years’ + profits of billion would be + dwarfed by the billion + +On line 5919: + eight years’ profits of + billion would be dwarfed by the + billion loss for this + +On line 5919: + profits of billion + would be dwarfed by the billion + loss for this one year, + +On line 5921: + billion would be dwarfed + by the billion loss for this + one year, But billion + +On line 5921: + would be dwarfed by the + billion loss for this one year, + But billion would soon + +On line 5921: + billion loss for this + one year, But billion would soon + prove insufficient. + +On line 5921: + one year, But billion + would soon prove insufficient. + Treasury added billion + +On line 5921: + But billion would soon + prove insufficient. Treasury + added billion under + +On line 5921: + billion would soon prove + insufficient. Treasury added + billion under its + +On line 5921: + prove insufficient. + Treasury added billion under + its Troubled Asset + +On line 5921: + Treasury added billion + under its Troubled Asset + Relief Program (TARP).51 + +On line 5921: + the Congressional + Oversight Panel, taxpayer + funds committed to + +On line 5921: + Panel, taxpayer + funds committed to AIG reached + billion. The panel + +On line 5921: + billion. The panel + faulted the government for + deciding to bail + +On line 5921: + panel faulted the + government for deciding + to bail out AIG too + +On line 5921: + the government for + deciding to bail out AIG + too hastily: "With AIG, + +On line 5921: + for deciding to + bail out AIG too hastily: "With + AIG, the Federal + +On line 5921: + AIG too hastily: "With + AIG, the Federal Reserve + and Treasury broke new + +On line 5921: + too hastily: "With AIG, + the Federal Reserve and + Treasury broke new ground. + +On line 5921: + AIG, the Federal + Reserve and Treasury broke new + ground. They put the U.S. + +On line 5921: + Reserve and Treasury + broke new ground. They put the U.S. + taxpayer on the + +On line 5921: + Treasury broke new ground. + They put the U.S. taxpayer + on the line for the + +On line 5921: + broke new ground. They put + the U.S. taxpayer on the + line for the full cost + +On line 5921: + new ground. They put the + U.S. taxpayer on the line + for the full cost and + +On line 5921: + ground. They put the U.S. + taxpayer on the line for + the full cost and full + +On line 5921: + taxpayer on the + line for the full cost and full + risk of rescuing + +On line 5921: + for the full cost and + full risk of rescuing a + failing company."52 + +On line 5921: + risk of rescuing + a failing company."52 The + Treasury Department + +On line 5921: + report "overlooks the + basic fact that the global + economy was on + +On line 5921: + basic fact that the + global economy was on + the brink of collapse + +On line 5921: + fact that the global + economy was on the brink + of collapse and there + +On line 5921: + global economy + was on the brink of collapse + and there were only + +On line 5921: + economy was on + the brink of collapse and there + were only hours in + +On line 5921: + was on the brink of + collapse and there were only + hours in which to make + +On line 5921: + brink of collapse and + there were only hours in which + to make critical + +On line 5923: + there were only hours + in which to make critical + decisions."53 "LIKE A + +On line 5925: + "LIKE A GNAT ON AN + ELEPHANT" The Office of Thrift + Supervision has + +On line 5925: + ELEPHANT" The Office + of Thrift Supervision has + acknowledged failures + +On line 5925: + Thrift Supervision + has acknowledged failures in + its oversight of AIG. + +On line 5925: + Supervision has + acknowledged failures in its + oversight of AIG. In + +On line 5925: + Acting Director + Scott Polakoff testified that + supervisors failed + +On line 5925: + supervisors failed + to recognize the extent + of liquidity + +On line 5927: + told the FCIC that as + late as September he had + "no clue—no idea—what [AIG’s] CDS + +On line 5927: + late as September + he had "no clue—no idea—what [AIG’s] CDS + liability + +On line 5929: + he had "no clue—no idea—what + [AIG’s] CDS liability + was."55 According to + +On line 5929: + had "no clue—no idea—what [AIG’s] + CDS liability was."55 + According to Mike + +On line 5929: + liability + was."55 According to Mike Finn, + the director for + +On line 5929: + According to Mike + Finn, the director for the + OTS’s northeast region, + +On line 5929: + the director for + the OTS’s northeast region, the + OTS’s authority + +On line 5929: + director for the + OTS’s northeast region, the OTS’s + authority to + +On line 5929: + OTS’s northeast region, + the OTS’s authority to + regulate holding + +On line 5929: + safety and soundness + of the FDIC-insured subsidiary of AIG + and not to focus + +On line 5929: + and soundness of the + FDIC-insured subsidiary of AIG and not + to focus on the + +On line 5929: + of the FDIC-insured subsidiary + of AIG and not to focus + on the potential + +On line 5929: + FDIC-insured subsidiary of AIG + and not to focus on the + potential impact + +On line 5929: + of AIG and not to + focus on the potential + impact on AIG of + +On line 5929: + not to focus on + the potential impact on + AIG of an uninsured + +On line 5929: + impact on AIG of + an uninsured subsidiary like AIG + Financial Products.56 + +On line 5929: + AIG of an uninsured + subsidiary like AIG Financial + Products.56 Finn ignored + +On line 5929: + an uninsured subsidiary + like AIG Financial Products.56 + Finn ignored the OTS’s + +On line 5929: + the European Union’s + Financial Conglomerates + Directive (FCD)—responsibilities the + +On line 5929: + Directive (FCD)—responsibilities the + OTS had actively sought. The + directive required + +On line 5929: + OTS had actively + sought. The directive required + foreign companies + +On line 5929: + actively sought. The + directive required foreign + companies doing + +On line 5929: + sought. The directive + required foreign companies + doing business in + +On line 5929: + directive required + foreign companies doing + business in Europe + +On line 5929: + companies doing + business in Europe to have + the equivalent of + +On line 5931: + have the equivalent + of a "consolidated + supervisor" in + +On line 5931: + "consolidated + supervisor" in their home + country. Starting in + +On line 5931: + home country. Starting + in the OTS worked to persuade + the European Union + +On line 5931: + country. Starting in + the OTS worked to persuade the + European Union that + +On line 5931: + OTS worked to persuade + the European Union that it + was capable of + +On line 5931: + the European Union + that it was capable of + serving as AIG’s "home + +On line 5931: + was capable of + serving as AIG’s "home country + consolidated + +On line 5931: + serving as AIG’s "home + country consolidated + supervisor."57 In + +On line 5931: + supervisor."57 In + the agency wrote: "AIG and its + subsidiaries are subject + +On line 5931: + agency wrote: "AIG and + its subsidiaries are subject to + consolidated + +On line 5931: + supervision, OTS + will conduct continuous + on-site reviews of AIG + +On line 5931: + reviews of AIG and + its subsidiaries."58 Yet even Reich + told FCIC staff that he + +On line 5931: + its subsidiaries."58 Yet even + Reich told FCIC staff that he + did not understand + +On line 5933: + under the FCD. The + former director said he + was never sure what + +On line 5933: + former director + said he was never sure what + authority the + +On line 5933: + was never sure what + authority the OTS had + over AIG Financial + +On line 5933: + authority the + OTS had over AIG Financial + Products, which he said + +On line 5933: + the OTS had over AIG + Financial Products, which he + said had slipped through a + +On line 5933: + Financial Products, + which he said had slipped through a + regulatory + +On line 5937: + he said had slipped through + a regulatory gap.59 + SEPTEMBER Further + +On line 5937: + the OTS’s claim that it + lacked authority over AIG + Financial Products + +On line 5937: + lacked authority + over AIG Financial Products + are its own actions: + +On line 5937: + authority over + AIG Financial Products are + its own actions: the + +On line 5937: + over AIG Financial + Products are its own actions: + the OTS did in fact + +On line 5937: + its own actions: the + OTS did in fact examine + the subsidiary, albeit + +On line 5937: + own actions: the OTS + did in fact examine the + subsidiary, albeit much + +On line 5937: + in fact examine + the subsidiary, albeit much too + late to matter. OTS + +On line 5937: + Cassano, the head of + the subsidiary. Joseph Gonzales, + the examiner + +On line 5937: + Joseph Gonzales, the + examiner in charge from + April to November + +On line 5937: + April to November + told FCIC staff, "I overheard one + employee saying + +On line 5937: + FCIC staff, "I overheard + one employee saying that + Joe Cassano felt that + +On line 5937: + staff, "I overheard one + employee saying that Joe + Cassano felt that [the + +On line 5937: + employee saying + that Joe Cassano felt that [the + OTS was] overreaching + +On line 5937: + that Joe Cassano felt + that [the OTS was] overreaching + our scope by going + +On line 5937: + Cassano felt that [the + OTS was] overreaching our scope + by going into + +On line 5939: + OTS was] overreaching + our scope by going into + FP."60 The OTS did not + +On line 5939: + was] overreaching our + scope by going into FP."60 + The OTS did not look + +On line 5939: + our scope by going + into FP."60 The OTS did not + look carefully at + +On line 5939: + into FP."60 The OTS + did not look carefully at + the credit default + +On line 5939: + AIG did describe the + nature of its super-senior + portfolio in its + +On line 5939: + portfolio in its + annual reports at that + time, including the + +On line 5939: + reports at that time, + including the dollar amount + of total credit + +On line 5939: + that time, including + the dollar amount of total + credit default swaps + +On line 5939: + the dollar amount of + total credit default swaps + that it had written. + +On line 5939: + default swaps that it + had written. Gonzales said + that the OTS did not + +On line 5939: + that it had written. + Gonzales said that the OTS + did not know about the + +On line 5939: + written. Gonzales + said that the OTS did not know + about the CDS during + +On line 5939: + that the OTS did not + know about the CDS during the + period.61 After + +On line 5939: + about the CDS during + the period.61 After a + limited review + +On line 5939: + period.61 After + a limited review in + July 2007—conducted + +On line 5939: + limited review + in July 2007—conducted a + week before Goldman + +On line 5939: + week before Goldman + sent AIG Financial Products + its first demand for + +On line 5941: + sent AIG Financial + Products its first demand for + collateral— the + +On line 5941: + for collateral— + the OTS concluded that the + risk in the CDS book + +On line 5941: + collateral— the + OTS concluded that the risk + in the CDS book was + +On line 5941: + the OTS concluded + that the risk in the CDS book + was too small to be + +On line 5941: + concluded that the + risk in the CDS book was too + small to be measured + +On line 5941: + risk in the CDS book + was too small to be measured + and decided to + +On line 5941: + in the CDS book was + too small to be measured and + decided to put + +On line 5941: + book was too small to + be measured and decided + to put off a more + +On line 5941: + to be measured and + decided to put off a + more detailed review + +On line 5941: + decided to put + off a more detailed review + until The agency’s + +On line 5941: + off a more detailed + review until The agency’s + stated reason was + +On line 5941: + review until The + agency’s stated reason was + its limited time + +On line 5941: + The agency’s stated + reason was its limited + time and staff resources.63 + +On line 5943: + and staff resources.63 In + February AIG reported + billions of dollars + +On line 5943: + credit default swap + positions. Yet the OTS did + not initiate an + +On line 5943: + swap positions. Yet + the OTS did not initiate + an in-depth review + +On line 5943: + positions. Yet the + OTS did not initiate an + in-depth review of + +On line 5943: + did not initiate + an in-depth review of the + credit default swaps + +On line 5943: + an in-depth review + of the credit default swaps + until September + +On line 5943: + the credit default + swaps until September 2008—ten + days before AIG went + +On line 5943: + credit default swaps + until September 2008—ten days + before AIG went to + +On line 5943: + default swaps until + September 2008—ten days before + AIG went to the Fed + +On line 5943: + until September + 2008—ten days before AIG went to + the Fed seeking a + +On line 5943: + 2008—ten days before AIG + went to the Fed seeking a + rescue—completing + +On line 5943: + on October more + than a month after AIG failed. + It was, former OTS + +On line 5943: + after AIG failed. It + was, former OTS director + of Conglomerate + +On line 5945: + "in hindsight, a bad + choice."64 Reich told the FCIC that + before AIG had not + +On line 5945: + a bad choice."64 Reich + told the FCIC that before AIG + had not been a great + +On line 5945: + choice."64 Reich told the + FCIC that before AIG had not + been a great concern. + +On line 5945: + Reich told the FCIC + that before AIG had not been + a great concern. He + +On line 5945: + that before AIG had + not been a great concern. He + also acknowledged + +On line 5945: + been a great concern. + He also acknowledged that + the OTS had never + +On line 5945: + had never fully + understood the Financial + Products unit, and thus + +On line 5945: + Products unit, and thus + couldn’t regulate it. "At + the simplest level, + +On line 5945: + simplest level, an + organization like OTS + cannot supervise + +On line 5945: + organization + like OTS cannot supervise + AIG, GE, Merrill Lynch, + +On line 5945: + GE, Merrill Lynch, and + entities that have worldwide + offices. I would be + +On line 5945: + Lynch, and entities + that have worldwide offices. I + would be the first to + +On line 5945: + and entities that + have worldwide offices. I would + be the first to say + +On line 5945: + entities that have + worldwide offices. I would be + the first to say that + +On line 5945: + offices. I would be + the first to say that for an + organization + +On line 5945: + the first to say that + for an organization + like OTS to pretend + +On line 5945: + first to say that for + an organization like + OTS to pretend that + +On line 5945: + to say that for an + organization like OTS + to pretend that it + +On line 5945: + that it has total + responsibility over + AIG and all of its + +On line 5947: + over AIG and all of + its subsidiaries it’s like a gnat + on an elephant— there’s + +On line 5947: + AIG and all of its + subsidiaries it’s like a gnat on + an elephant— there’s no + +On line 5947: + of its subsidiaries it’s + like a gnat on an elephant— + there’s no way." Reich + +On line 5947: + its subsidiaries it’s like + a gnat on an elephant— there’s + no way." Reich said + +On line 5947: + subsidiaries it’s like a + gnat on an elephant— there’s no + way." Reich said that + +On line 5947: + like a gnat on an + elephant— there’s no way." Reich + said that for the OTS + +On line 5947: + gnat on an elephant— + there’s no way." Reich said that + for the OTS to think + +On line 5947: + on an elephant— there’s + no way." Reich said that for + the OTS to think it + +On line 5947: + an elephant— there’s no + way." Reich said that for the + OTS to think it could + +On line 5947: + there’s no way." Reich + said that for the OTS to think + it could regulate + +On line 5947: + no way." Reich said + that for the OTS to think it + could regulate AIG + +On line 5947: + way." Reich said that + for the OTS to think it could + regulate AIG was + +On line 5947: + said that for the OTS + to think it could regulate + AIG was "totally + +On line 5947: + impractical and + unrealistic. I think + we thought we could grow + +On line 5947: + we could grow into + that responsibility. + But I think that was + +On line 5947: + could grow into that + responsibility. But + I think that was sort + +On line 5949: + I think that was sort + of pie in the sky dreaming."65 + Geithner agreed, + +On line 5949: + sort of pie in the + sky dreaming."65 Geithner + agreed, and told Reich + +On line 5949: + of pie in the sky + dreaming."65 Geithner agreed, + and told Reich so + +On line 5949: + in the sky dreaming."65 + Geithner agreed, and told + Reich so bluntly. + +On line 5949: + Geithner agreed, + and told Reich so bluntly. + Reich told the FCIC + +On line 5949: + agreed, and told Reich + so bluntly. Reich told the + FCIC about a phone call + +On line 5949: + and told Reich so + bluntly. Reich told the FCIC + about a phone call from + +On line 5949: + so bluntly. Reich + told the FCIC about a phone call + from Geithner + +On line 5949: + told the FCIC about a + phone call from Geithner + after the rescue. + +On line 5949: + FCIC about a phone call + from Geithner after + the rescue. "About all + +On line 5949: + about a phone call from + Geithner after the + rescue. "About all I + +On line 5949: + from Geithner + after the rescue. "About all + I can remember + +On line 5949: + after the rescue. + "About all I can remember + is the foul language + +On line 5949: + the rescue. "About all + I can remember is the + foul language that I + +On line 5949: + rescue. "About all I + can remember is the foul + language that I heard + +On line 5949: + I can remember + is the foul language that I + heard on the other + +On line 5949: + can remember is + the foul language that I heard + on the other end + +On line 5949: + remember is the + foul language that I heard on + the other end of + +On line 5949: + the foul language that + I heard on the other end + of the line," Reich + +On line 5949: + foul language that I + heard on the other end of + the line," Reich said. + +On line 5949: + language that I heard + on the other end of the + line," Reich said. He + +On line 5949: + other end of the + line," Reich said. He recalled + Geithner telling + +On line 5951: + the line," Reich said. + He recalled Geithner + telling him. "‘You guys have + +On line 5951: + Geithner telling + him. "‘You guys have handed me + a bag of sh*t.’ I + +On line 5953: + telling him. "‘You guys have + handed me a bag of sh*t.’ + I just listened."66 The + +On line 5953: + handed me a bag + of sh*t.’ I just listened."66 The + Commission concludes + +On line 5953: + a bag of sh*t.’ I + just listened."66 The Commission + concludes AIG failed and + +On line 5953: + sh*t.’ I just listened."66 + The Commission concludes AIG + failed and was rescued + +On line 5953: + I just listened."66 The + Commission concludes AIG failed + and was rescued by + +On line 5953: + was rescued by the + government primarily + because its enormous + +On line 5953: + because its enormous + sales of credit default swaps + were made without putting + +On line 5953: + capital reserves, + or hedging its exposure—a + profound failure in + +On line 5955: + deregulation of + over-the-counter (OTC) derivatives, + including credit + +On line 5955: + requirements that would + have lessened the likelihood + of AIG’s failure. The + +On line 5957: + of AIG’s failure. The + OTC derivatives market’s + lack of transparency + +On line 5957: + AIG’s failure. The OTC + derivatives market’s lack + of transparency and + +On line 5957: + OTC derivatives + market’s lack of transparency + and of effective + +On line 5957: + transparency and of + effective price discovery + exacerbated + +On line 5957: + exacerbated + the collateral disputes + of AIG and Goldman + +On line 5957: + the collateral + disputes of AIG and Goldman + Sachs and similar + +On line 5957: + regulatory + arbitrage by setting up + a major business + +On line 5957: + a major business + in this unregulated + product, locating + +On line 5957: + locating much of + the business in London, and + selecting a weak + +On line 5957: + much of the business + in London, and selecting + a weak federal + +On line 5957: + selecting a weak + federal regulator, + the Office of Thrift + +On line 5959: + (OTS). The OTS failed to + effectively exercise + its authority + +On line 5959: + affiliates: it + lacked the capability + to supervise an + +On line 5959: + to supervise an + institution of the size + and complexity + +On line 5959: + and complexity + of AIG, did not recognize + the risks inherent + +On line 5959: + complexity of + AIG, did not recognize the + risks inherent in + +On line 5959: + not recognize the + risks inherent in AIG’s sales + of credit default + +On line 5959: + recognize the risks + inherent in AIG’s sales of + credit default swaps, + +On line 5959: + not understand its + responsibility to + oversee the entire + +On line 5961: + oversee the entire + company, including AIG + Financial Products. + +On line 5961: + entire company, + including AIG Financial + Products. Furthermore, + +On line 5961: + Financial Products. + Furthermore, because of the + deregulation of + +On line 5961: + Furthermore, because + of the deregulation of + OTC derivatives, + +On line 5961: + from regulating + AIG’s sale of credit default + swaps even though they were + +On line 5961: + swaps even though they were + similar in effect to + insurance contracts. + +On line 5961: + they were similar + in effect to insurance + contracts. If they had + +On line 5961: + been regulated + as insurance contracts, AIG + would have been required + +On line 5961: + regulated as + insurance contracts, AIG would + have been required to + +On line 5961: + insurance contracts, + AIG would have been required to + maintain adequate + +On line 5961: + reserves, would not have + been able to enter into + contracts requiring + +On line 5961: + not have been able to + provide default protection + to speculators; + +On line 5961: + speculators; thus + AIG would have been prevented + from acting in such + +On line 5961: + thus AIG would have been + prevented from acting in + such a risky manner. + +On line 5963: + have been prevented + from acting in such a risky + manner. AIG was so + +On line 5963: + from acting in such + a risky manner. AIG was so + interconnected + +On line 5963: + risky manner. AIG was + so interconnected with + many large commercial + +On line 5963: + manner. AIG was so + interconnected with many + large commercial banks, + +On line 5963: + interconnected + with many large commercial banks, + investment banks, and + +On line 5963: + through counterparty + credit relationships on + credit default swaps + +On line 5963: + activities such + as securities lending + that its potential + +On line 5963: + as securities + lending that its potential + failure created + +On line 5963: + that its potential + failure created systemic + risk. The government + +On line 5963: + failure created + systemic risk. The government + concluded AIG was + +On line 5963: + and committed more + than billion to its rescue. + Without the bailout, AIG’s + +On line 5963: + than billion to its + rescue. Without the bailout, AIG’s + default and collapse + +On line 5963: + rescue. Without the + bailout, AIG’s default and collapse + could have brought down its + +On line 5963: + the bailout, AIG’s default + and collapse could have brought down + its counterparties, + +On line 5963: + and collapse could have + brought down its counterparties, + causing cascading + +On line 5963: + cascading losses + and collapses throughout the + financial system. + +On line 5973: + financial system. + CRISIS AND PANIC CONTENTS + Money market funds: + +On line 5973: + CRISIS AND PANIC + CONTENTS Money market funds: + "Dealers weren’t even + +On line 5973: + AND PANIC CONTENTS + Money market funds: "Dealers + weren’t even picking + +On line 5975: + Money market funds: + "Dealers weren’t even picking + up their phones" Morgan + +On line 5975: + market funds: "Dealers + weren’t even picking up their + phones" Morgan Stanley: + +On line 5975: + "Dealers weren’t even + picking up their phones" Morgan + Stanley: "Now we’re the + +On line 5975: + weren’t even picking + up their phones" Morgan Stanley: + "Now we’re the next in + +On line 5977: + picking up their phones" + Morgan Stanley: "Now we’re the + next in line".....................................................360 Over-the-counter + +On line 5977: + Morgan Stanley: "Now + we’re the next in line".....................................................360 Over-the-counter + derivatives: "A + +On line 5981: + "It’s yours".........................................................................365 Wachovia: "At + the front end of the dominoes + as other dominoes + +On line 5981: + yours".........................................................................365 Wachovia: "At the + front end of the dominoes as + other dominoes fell".................366 + +On line 5985: + other dominoes fell".................366 + TARP: "Comprehensive approach" + AIG: "We needed to + +On line 5985: + TARP: "Comprehensive + approach" AIG: "We needed to + stop the sucking chest + +On line 5987: + "We needed to stop + the sucking chest wound in this + patient".....................376 Citigroup: + +On line 5987: + the sucking chest wound + in this patient".....................376 Citigroup: + "Let the world know we + +On line 5987: + sucking chest wound in + this patient".....................376 Citigroup: "Let + the world know we will + +On line 5987: + wound in this patient".....................376 + Citigroup: "Let the world know + we will not pull a + +On line 5989: + patient".....................376 Citigroup: + "Let the world know we will not + pull a Lehman"...............................379 Bank of + +On line 5989: + know we will not pull + a Lehman"...............................379 Bank of America: + "A shotgun wedding" + +On line 5991: + not pull a Lehman"...............................379 Bank + of America: "A shotgun + wedding" September + +On line 5991: + "A shotgun wedding" + September 2008—the date of the + bankruptcy of Lehman + +On line 5991: + wedding" September + 2008—the date of the bankruptcy + of Lehman Brothers and + +On line 5991: + September 2008—the date + of the bankruptcy of Lehman + Brothers and the takeover + +On line 5991: + the bankruptcy of + Lehman Brothers and the takeover of + Merrill Lynch, followed + +On line 5991: + Lehman Brothers and the + takeover of Merrill Lynch, followed + within hours by the + +On line 5991: + the takeover of Merrill + Lynch, followed within hours by + the rescue of AIG—marked + +On line 5991: + takeover of Merrill Lynch, + followed within hours by the + rescue of AIG—marked the + +On line 5991: + Lynch, followed within + hours by the rescue of AIG—marked + the beginning of + +On line 5991: + followed within hours + by the rescue of AIG—marked the + beginning of the + +On line 5991: + the rescue of AIG—marked + the beginning of the worst + market disruption + +On line 5991: + beginning of the + worst market disruption in + postwar American + +On line 5991: + history and an + extraordinary rush to + the safest possible + +On line 5991: + the safest possible + investments. Creditors and + investors suspected + +On line 5991: + that many other large + financial institutions + were on the edge of + +On line 5991: + institutions were + on the edge of failure, and + the Lehman bankruptcy + +On line 5991: + the edge of failure, + and the Lehman bankruptcy seemed + to prove that at least + +On line 5991: + edge of failure, and + the Lehman bankruptcy seemed to + prove that at least some + +On line 5991: + of failure, and the + Lehman bankruptcy seemed to prove + that at least some of + +On line 5991: + failure, and the Lehman + bankruptcy seemed to prove that + at least some of them + +On line 5991: + the Lehman bankruptcy + seemed to prove that at least some + of them would not have + +On line 5991: + bankruptcy seemed to + prove that at least some of them + would not have access + +On line 5991: + prove that at least some + of them would not have access + to the federal + +On line 5991: + of them would not have + access to the federal + government’s safety + +On line 5993: + not have access to + the federal government’s + safety net. John Mack, + +On line 5993: + to the federal + government’s safety net. John + Mack, CEO of Morgan + +On line 5993: + government’s safety + net. John Mack, CEO of Morgan + Stanley during the + +On line 5993: + net. John Mack, CEO of + Morgan Stanley during the + crisis, told the FCIC, + +On line 5993: + Mack, CEO of Morgan + Stanley during the crisis, + told the FCIC, "In the + +On line 5993: + Stanley during the + crisis, told the FCIC, "In the + immediate wake + +On line 5993: + the crisis, told the + FCIC, "In the immediate + wake of Lehman’s failure + +On line 5993: + crisis, told the FCIC, + "In the immediate wake + of Lehman’s failure on + +On line 5993: + Morgan Stanley and + similar institutions + experienced a + +On line 5993: + bank,’ as investors lost + confidence in financial + institutions and + +On line 5995: + investment banking + business model came under + siege."1 "The markets were + +On line 5995: + model came under + siege."1 "The markets were very bad, + the volatility, the + +On line 5995: + siege."1 "The markets were + very bad, the volatility, the + illiquidity, some + +On line 5995: + bad, the volatility, + the illiquidity, some things + couldn’t trade at all, + +On line 5995: + the illiquidity, + some things couldn’t trade at all, + I mean completely + +On line 5995: + illiquidity, some + things couldn’t trade at all, I + mean completely locked, + +On line 5995: + some things couldn’t trade + at all, I mean completely + locked, the markets were + +On line 5995: + things couldn’t trade at + all, I mean completely locked, + the markets were in + +On line 5995: + trade at all, I mean + completely locked, the markets + were in terrible + +On line 5995: + completely locked, the + markets were in terrible + shape," JP Morgan CEO + +On line 5995: + in terrible shape," + JP Morgan CEO Jamie Dimon + recalled to the FCIC. + +On line 5995: + JP Morgan CEO Jamie + Dimon recalled to the FCIC. + He thought the country + +On line 5995: + recalled to the FCIC. + He thought the country could face + unemployment. "We + +On line 5995: + He thought the country + could face unemployment. "We + could have survived it + +On line 5995: + thought the country could + face unemployment. "We could + have survived it in + +On line 5995: + the country could face + unemployment. "We could have + survived it in my + +On line 5995: + face unemployment. + "We could have survived it in + my opinion, but it + +On line 5995: + unemployment. "We + could have survived it in my + opinion, but it would + +On line 5995: + could have survived it + in my opinion, but it would + have been terrible. + +On line 5995: + have survived it in + my opinion, but it would have + been terrible. I + +On line 5995: + survived it in my + opinion, but it would have been + terrible. I would + +On line 5995: + my opinion, but it + would have been terrible. I + would have stopped lending, + +On line 5995: + but it would have been + terrible. I would have stopped + lending, marketing, + +On line 5995: + would have stopped lending, + marketing, investing and + probably laid off + +On line 5997: + lending, marketing, + investing and probably + laid off people. And + +On line 5997: + and probably laid + off people. And I would have + done it in three weeks. + +On line 5997: + probably laid off + people. And I would have done + it in three weeks. You + +On line 5997: + off people. And I + would have done it in three weeks. + You get companies + +On line 5997: + done it in three weeks. + You get companies starting + to take actions like + +On line 5997: + it in three weeks. You + get companies starting to + take actions like that, + +On line 5997: + in three weeks. You get + companies starting to take + actions like that, that’s + +On line 5997: + You get companies + starting to take actions like + that, that’s what a Great + +On line 5999: + actions like that, that’s + what a Great Depression is."2 + Treasury Secretary + +On line 5999: + Treasury Secretary + Timothy Geithner + told the FCIC, "You had + +On line 5999: + told the FCIC, "You had + people starting to take their + deposits out of very, + +On line 5999: + FCIC, "You had people + starting to take their deposits + out of very, very strong + +On line 5999: + had people starting + to take their deposits out of + very, very strong banks, long + +On line 5999: + people starting to + take their deposits out of very, + very strong banks, long way + +On line 5999: + starting to take their + deposits out of very, very strong + banks, long way removed + +On line 5999: + take their deposits out + of very, very strong banks, long way + removed in distance + +On line 5999: + deposits out of very, + very strong banks, long way removed + in distance and risk + +On line 5999: + of very, very strong banks, + long way removed in distance + and risk and business + +On line 5999: + very, very strong banks, long + way removed in distance and + risk and business from + +On line 5999: + very strong banks, long way + removed in distance and risk + and business from the + +On line 5999: + long way removed in + distance and risk and business + from the guys on Wall + +On line 5999: + removed in distance + and risk and business from the + guys on Wall Street that + +On line 5999: + in distance and risk + and business from the guys on + Wall Street that were at + +On line 5999: + distance and risk and + business from the guys on Wall + Street that were at the + +On line 5999: + risk and business from + the guys on Wall Street that were + at the epicenter + +On line 5999: + and business from the + guys on Wall Street that were at + the epicenter of + +On line 5999: + business from the guys + on Wall Street that were at the + epicenter of the + +On line 5999: + the guys on Wall Street + that were at the epicenter + of the problem. And + +On line 5999: + guys on Wall Street that + were at the epicenter of + the problem. And that + +On line 5999: + on Wall Street that were + at the epicenter of the + problem. And that is + +On line 5999: + Street that were at the + epicenter of the problem. + And that is a good + +On line 5999: + the epicenter of + the problem. And that is a + good measure, classic + +On line 5999: + classic measure of + incipient panic."3 In + an interview in + +On line 5999: + an interview in + December Geithner + said that "none of [the + +On line 5999: + Geithner said + that "none of [the biggest banks] + would have survived a + +On line 5999: + said that "none of [the + biggest banks] would have survived + a situation + +On line 5999: + biggest banks] would have + survived a situation + in which we had let + +On line 5999: + banks] would have survived + a situation in which + we had let that fire + +On line 5999: + would have survived a + situation in which we + had let that fire try + +On line 5999: + a situation + in which we had let that fire + try to burn itself + +On line 5999: + situation in + which we had let that fire try + to burn itself out."4 + +On line 6001: + in which we had let + that fire try to burn itself + out."4 Fed Chairman Ben + +On line 6001: + which we had let that + fire try to burn itself out."4 + Fed Chairman Ben Bernanke + +On line 6001: + we had let that fire + try to burn itself out."4 Fed + Chairman Ben Bernanke told + +On line 6001: + let that fire try to + burn itself out."4 Fed Chairman + Ben Bernanke told the FCIC, + +On line 6001: + that fire try to burn + itself out."4 Fed Chairman Ben + Bernanke told the FCIC, "As + +On line 6001: + to burn itself out."4 + Fed Chairman Ben Bernanke told the + FCIC, "As a scholar + +On line 6001: + burn itself out."4 Fed + Chairman Ben Bernanke told the FCIC, + "As a scholar of + +On line 6001: + Chairman Ben Bernanke told + the FCIC, "As a scholar of + the Great Depression, + +On line 6001: + FCIC, "As a scholar + of the Great Depression, I + honestly believe + +On line 6001: + that September and + October of was the worst + financial crisis + +On line 6001: + crisis in global + history, including the + Great Depression. If + +On line 6001: + the Great Depression. + If you look at the firms that + came under pressure + +On line 6001: + Great Depression. If + you look at the firms that came + under pressure in + +On line 6001: + If you look at the + firms that came under pressure + in that period + +On line 6001: + look at the firms that + came under pressure in that + period only + +On line 6001: + firms that came under + pressure in that period + only one was not + +On line 6001: + period only + one was not at serious + risk of failure. So + +On line 6001: + not at serious + risk of failure. So out of + maybe the of the most + +On line 6001: + of maybe the of the + most important financial + institutions in + +On line 6001: + the most important + financial institutions + in the United States, + +On line 6001: + institutions in + the United States, were at risk + of failure within + +On line 6001: + the United States, were + at risk of failure within + a period of + +On line 6001: + United States, were at + risk of failure within a + period of a + +On line 6003: + at risk of failure + within a period of + a week or two."5 As + +On line 6003: + of failure within + a period of a week + or two."5 As it had + +On line 6003: + failure within a + period of a week or + two."5 As it had on + +On line 6003: + a period of + a week or two."5 As it had + on the weekend of + +On line 6003: + period of a + week or two."5 As it had on + the weekend of Bear’s + +On line 6003: + week or two."5 As it + had on the weekend of Bear’s + demise, the Federal + +On line 6003: + two."5 As it had on + the weekend of Bear’s demise, the + Federal Reserve + +On line 6003: + had on the weekend + of Bear’s demise, the Federal + Reserve announced new + +On line 6003: + the weekend of Bear’s + demise, the Federal Reserve + announced new measures + +On line 6003: + announced new measures + on Sunday, September to + make more cash available + +On line 6003: + Sunday, September + to make more cash available to + investment banks and + +On line 6003: + to investment banks + and other firms. Yet again, it + lowered its standards + +On line 6003: + Yet again, it lowered + its standards regarding the + quality of the + +On line 6003: + collateral that + investment banks and other + primary dealers + +On line 6003: + dealers could use while + borrowing under the two + programs to support + +On line 6003: + borrowing under + the two programs to support + repo lending, the + +On line 6003: + the two programs to + support repo lending, the + Primary Dealer + +On line 6003: + Term Securities + Lending Facility (TSLF).6 + And, providing a + +On line 6003: + And, providing a + temporary exception to + its rules, it allowed + +On line 6003: + borrow cash from their + insured depository + affiliates. The + +On line 6003: + The investment banks + drew liberally on the + Fed’s lending programs. + +On line 6003: + investment banks drew + liberally on the Fed’s + lending programs. By + +On line 6003: + Fed’s lending programs. + By the end of September, + Morgan Stanley was + +On line 6005: + end of September, + Morgan Stanley was getting + by on billion of + +On line 6005: + was getting by on + billion of Fed-provided life + support; Goldman was + +On line 6007: + life support; Goldman + was receiving billion.7 But + the new measures did + +On line 6007: + support; Goldman was + receiving billion.7 But the + new measures did not + +On line 6007: + the new measures did + not quell the market panic. + Among the first to be + +On line 6007: + market panic. Among + the first to be directly + affected were the + +On line 6007: + Among the first to be + directly affected were + the money market + +On line 6007: + money market funds + and other institutions + that held Lehman’s billion + +On line 6007: + that held Lehman’s billion + in unsecured commercial + paper and made loans + +On line 6007: + paper and made loans + to the company through the + tri-party repo + +On line 6007: + to the company + through the tri-party repo + market. Investors pulled + +On line 6007: + company through the + tri-party repo market. + Investors pulled out of + +On line 6007: + through the tri-party + repo market. Investors pulled + out of funds with known + +On line 6007: + known exposure to + that jeopardy, including the + Reserve Management + +On line 6009: + Reserve Primary + Fund and Wachovia’s Evergreen + Investments. Other + +On line 6009: + Other parties with + direct connections to Lehman + included the hedge + +On line 6009: + direct connections + to Lehman included the hedge + funds, investment banks, + +On line 6009: + to Lehman included + the hedge funds, investment banks, + and investors who were + +On line 6009: + Lehman included the + hedge funds, investment banks, and + investors who were on + +On line 6009: + hedge funds, investment + banks, and investors who were on + the other side of + +On line 6009: + funds, investment banks, + and investors who were on the + other side of Lehman’s + +On line 6011: + banks, and investors who + were on the other side of + Lehman’s more than over-the-counter + +On line 6011: + Lehman’s more than over-the-counter + derivatives contracts. For + example, Deutsche Bank, + +On line 6013: + Deutsche Bank, JP Morgan, + and UBS together had more + than outstanding trades + +On line 6013: + Bank, JP Morgan, and + UBS together had more than + outstanding trades with + +On line 6013: + and UBS together + had more than outstanding trades + with Lehman as of May + +On line 6013: + UBS together had + more than outstanding trades with + Lehman as of May The + +On line 6013: + together had more + than outstanding trades with Lehman + as of May The Lehman + +On line 6013: + more than outstanding + trades with Lehman as of May The + Lehman bankruptcy caused + +On line 6015: + law to terminate + their derivatives contracts + with Lehman upon its + +On line 6015: + their derivatives + contracts with Lehman upon its + bankruptcy, and to + +On line 6015: + its bankruptcy, and + to the extent that Lehman owed + them money on the + +On line 6015: + and to the extent + that Lehman owed them money on + the contracts they could + +On line 6015: + to the extent that + Lehman owed them money on the + contracts they could seize + +On line 6015: + extent that Lehman owed + them money on the contracts + they could seize any Lehman + +On line 6015: + owed them money on + the contracts they could seize any + Lehman collateral + +On line 6015: + them money on the + contracts they could seize any Lehman + collateral that + +On line 6015: + contracts they could seize + any Lehman collateral that + they held. However, + +On line 6015: + Lehman collateral + that they held. However, any + additional amount + +On line 6015: + they held. However, + any additional amount owed + to them had to be + +On line 6015: + held. However, any + additional amount owed to + them had to be claimed + +On line 6015: + additional amount + owed to them had to be claimed + in the bankruptcy + +On line 6015: + owed to them had to + be claimed in the bankruptcy + proceeding. If they + +On line 6015: + had to be claimed in + the bankruptcy proceeding. + If they had posted + +On line 6015: + proceeding. If they + had posted collateral + with Lehman, they would have + +On line 6015: + If they had posted + collateral with Lehman, they + would have to make a + +On line 6015: + collateral with + Lehman, they would have to make a + claim for the return + +On line 6015: + they would have to make + a claim for the return of + that collateral, + +On line 6015: + would have to make a + claim for the return of that + collateral, and + +On line 6015: + the return of that + collateral, and disputes + over valuation + +On line 6015: + collateral, and + disputes over valuation + of the contracts would + +On line 6015: + over valuation + of the contracts would still have + to be resolved. These + +On line 6015: + would still have to be + resolved. These proceedings would + delay payment and + +On line 6015: + would delay payment + and most likely result in + losses. Moreover, any + +On line 6015: + most likely result + in losses. Moreover, any hedges + that rested on these + +On line 6015: + result in losses. + Moreover, any hedges that rested + on these contracts were + +On line 6015: + in losses. Moreover, + any hedges that rested on these + contracts were now gone, + +On line 6015: + Moreover, any hedges that + rested on these contracts were + now gone, increasing + +On line 6017: + these contracts were now + gone, increasing risk.8 Investors + also pulled out of + +On line 6017: + now gone, increasing + risk.8 Investors also pulled out + of funds that did not + +On line 6017: + gone, increasing risk.8 + Investors also pulled out of + funds that did not have + +On line 6017: + also pulled out of + funds that did not have direct + Lehman exposure. The + +On line 6017: + of funds that did not + have direct Lehman exposure. + The managers of these + +On line 6017: + funds that did not have + direct Lehman exposure. The + managers of these funds, + +On line 6017: + did not have direct + Lehman exposure. The managers + of these funds, in turn, + +On line 6017: + not have direct Lehman + exposure. The managers of + these funds, in turn, pulled + +On line 6017: + Lehman exposure. The + managers of these funds, in turn, + pulled billion out of + +On line 6017: + The managers of these + funds, in turn, pulled billion out + of the commercial + +On line 6017: + billion out of the + commercial paper market + in September and + +On line 6017: + commercial paper + market in September and + shifted billions of + +On line 6017: + in September and + shifted billions of dollars + of repo loans to + +On line 6017: + shifted billions of + dollars of repo loans to + safer collateral, + +On line 6017: + dollars of repo + loans to safer collateral, + putting further pressure + +On line 6017: + further pressure on + investment banks and other + finance companies + +On line 6019: + companies that deCost + of Interbank Lending As + concerns about the health + +On line 6019: + Interbank Lending + As concerns about the health of + bank counterparties + +On line 6019: + bank counterparties + spread, lending banks demanded + higher interest + +On line 6019: + interest rates to + compensate for the risk. The + one-month LIBOR-OIS spread + +On line 6019: + to compensate for + the risk. The one-month LIBOR-OIS + spread measures the part + +On line 6019: + compensate for the + risk. The one-month LIBOR-OIS spread + measures the part of + +On line 6019: + the risk. The one-month + LIBOR-OIS spread measures the part + of the interest + +On line 6019: + The one-month LIBOR-OIS + spread measures the part of the + interest rates banks + +On line 6019: + LIBOR-OIS spread measures + the part of the interest + rates banks paid other + +On line 6019: + spread measures the part + of the interest rates banks + paid other banks that + +On line 6019: + measures the part of + the interest rates banks paid + other banks that is + +On line 6019: + the interest rates + banks paid other banks that is + due to this credit + +On line 6019: + interest rates banks + paid other banks that is due + to this credit risk. + +On line 6019: + other banks that is + due to this credit risk. Strains + in the interbank + +On line 6019: + banks that is due to + this credit risk. Strains in the + interbank lending + +On line 6019: + this credit risk. Strains + in the interbank lending + markets appeared just + +On line 6019: + in the interbank + lending markets appeared just + after the crisis + +On line 6019: + interbank lending + markets appeared just after + the crisis began + +On line 6019: + appeared just after + the crisis began in and + then peaked during the + +On line 6021: + the crisis began + in and then peaked during the + fall of pended on + +On line 6021: + crisis began in + and then peaked during the fall + of pended on those + +On line 6021: + peaked during the fall + of pended on those markets.9 + "When the commercial + +On line 6021: + of pended on those + markets.9 "When the commercial + paper market died, + +On line 6021: + paper market died, + the biggest corporations + in America thought + +On line 6021: + thought they were finished," + Harvey Miller, the bankruptcy + attorney for the + +On line 6021: + finished," Harvey Miller, + the bankruptcy attorney + for the Lehman estate, + +On line 6023: + the Lehman estate, told + the FCIC.10 Investors and uninsured + depositors yanked + +On line 6023: + told the FCIC.10 Investors + and uninsured depositors + yanked tens of billions + +On line 6023: + the FCIC.10 Investors and + uninsured depositors yanked + tens of billions of + +On line 6023: + Investors and uninsured + depositors yanked tens of + billions of dollars + +On line 6023: + of banks whose real + estate exposures might be + debilitating + +On line 6023: + Wachovia) in favor + of those whose real estate + exposures appeared + +On line 6023: + favor of those whose + real estate exposures + appeared manageable + +On line 6023: + appeared manageable + (Wells Fargo, JP Morgan). Hedge + funds withdrew tens of + +On line 6023: + JP Morgan). Hedge funds + withdrew tens of billions of + dollars of assets + +On line 6023: + billions of dollars + of assets held in custody + at the remaining + +On line 6023: + in custody at the + remaining investment banks + (Goldman Sachs, Morgan + +On line 6023: + at the remaining + investment banks (Goldman Sachs, + Morgan Stanley, and + +On line 6023: + (Goldman Sachs, Morgan + Stanley, and even Merrill Lynch, + as the just-announced Bank + +On line 6023: + Bank of America + acquisition wouldn’t close + for another three + +On line 6023: + for another three + and a half months) in favor + of large commercial + +On line 6023: + another three and + a half months) in favor of + large commercial banks + +On line 6025: + commercial banks with + prime brokerage businesses + (JP Morgan, Credit + +On line 6025: + (JP Morgan, Credit + Suisse, Deutsche Bank), because the + commercial banks had + +On line 6025: + Credit Suisse, Deutsche + Bank), because the commercial + banks had more diverse + +On line 6025: + banks had more diverse + sources of liquidity than + the investment banks + +On line 6025: + had more diverse sources + of liquidity than the + investment banks as + +On line 6025: + of liquidity + than the investment banks as + well as large bases of + +On line 6025: + than the investment + banks as well as large bases of + insured deposits. JP + +On line 6025: + investment banks as + well as large bases of insured + deposits. JP Morgan + +On line 6025: + well as large bases of + insured deposits. JP Morgan + and BNY Mellon, the + +On line 6025: + insured deposits. JP + Morgan and BNY Mellon, the + tri-party repo + +On line 6025: + and BNY Mellon, the + tri-party repo clearing + banks, clamped down on their + +On line 6025: + on their intraday + exposures, demanding more + collateral than + +On line 6025: + collateral than + ever from the remaining + investment banks and + +On line 6025: + from the remaining + investment banks and other + primary dealers. + +On line 6025: + investment banks and + other primary dealers. + Many banks refused to + +On line 6025: + primary dealers. + Many banks refused to lend to + one another; the + +On line 6025: + Many banks refused to + lend to one another; the + cost of interbank + +On line 6025: + refused to lend to + one another; the cost of + interbank lending + +On line 6025: + another; the cost + of interbank lending rose + to unprecedented + +On line 6027: + Monday, September + the Dow Jones Industrial + Average fell more + +On line 6027: + fell more than points, or + the largest single-day point drop + since the terrorist + +On line 6027: + than points, or the largest + single-day point drop since the + terrorist attacks. + +On line 6029: + the largest single-day + point drop since the terrorist + attacks. These drops would + +On line 6029: + terrorist attacks. + These drops would be exceeded + on September 29—the + +On line 6029: + financial markets + and firms--when the Dow Jones fell + and financial stocks + +On line 6029: + and firms--when the Dow + Jones fell and financial stocks + fell For the month, the + +On line 6029: + firms--when the Dow Jones + fell and financial stocks fell + For the month, the S&P + +On line 6029: + the Dow Jones fell and + financial stocks fell For the + month, the S&P would lose + +On line 6029: + fell and financial + stocks fell For the month, the S&P + would lose billion of + +On line 6029: + and financial stocks + fell For the month, the S&P would + lose billion of its + +On line 6029: + fell For the month, the + S&P would lose billion of its + value, a decline + +On line 6029: + the month, the S&P would + lose billion of its value, + a decline of 9%—the + +On line 6029: + month, the S&P would lose + billion of its value, a + decline of 9%—the worst + +On line 6029: + S&P would lose billion + of its value, a decline + of 9%—the worst month since + +On line 6031: + of 9%—the worst month since + September And specific + institutions would + +On line 6031: + since September And + specific institutions + would take direct hits. + +On line 6035: + would take direct hits. + MONEY MARKET FUNDS: "DEALERS + WEREN’ T EVEN PICKING + +On line 6035: + direct hits. MONEY + MARKET FUNDS: "DEALERS WEREN’ T + EVEN PICKING UP THEIR + +On line 6037: + MONEY MARKET FUNDS: + "DEALERS WEREN’ T EVEN PICKING + UP THEIR PHONES" When Lehman + +On line 6037: + MARKET FUNDS: "DEALERS + WEREN’ T EVEN PICKING UP THEIR + PHONES" When Lehman declared + +On line 6037: + "DEALERS WEREN’ T EVEN + PICKING UP THEIR PHONES" When Lehman + declared bankruptcy, + +On line 6037: + Reserve Primary + Fund had million invested + in Lehman’s commercial + +On line 6037: + Primary Fund had + million invested in Lehman’s + commercial paper. + +On line 6037: + million invested + in Lehman’s commercial paper. + The Primary Fund + +On line 6037: + Fund was the world’s first + money market mutual + fund, established in + +On line 6037: + in conservative + assets such as government + securities and + +On line 6037: + and bank certificates + of deposit and had for years + enjoyed Moody’s and S&P’s + +On line 6037: + of deposit and had + for years enjoyed Moody’s and S&P’s + highest ratings for + +On line 6037: + enjoyed Moody’s and S&P’s + highest ratings for safety + and liquidity. + +On line 6039: + highest ratings for + safety and liquidity. + In March the fund had + +On line 6039: + ratings for safety + and liquidity. In March + the fund had advised + +On line 6039: + and liquidity. + In March the fund had advised + investors that it had + +On line 6039: + the fund had advised + investors that it had "slightly + underperformed" its + +On line 6039: + investors that it had + "slightly underperformed" its + rivals, owing to + +On line 6039: + that it had "slightly + underperformed" its rivals, + owing to a "more + +On line 6039: + underperformed" its + rivals, owing to a "more + conservative and + +On line 6039: + its rivals, owing + to a "more conservative + and risk averse manner" + +On line 6039: + rivals, owing to + a "more conservative and + risk averse manner" of + +On line 6039: + risk averse manner" of + investing—"for example, + the Reserve Funds do + +On line 6039: + of investing—"for + example, the Reserve Funds + do not invest in + +On line 6039: + Funds do not invest + in commercial paper."11 But + immediately + +On line 6039: + it quietly but + dramatically changed that + strategy. Within + +On line 6039: + strategy. Within + months, commercial paper grew + from zero to one-half + +On line 6039: + commercial paper + grew from zero to one-half of + Reserve Primary’s + +On line 6039: + grew from zero to + one-half of Reserve Primary’s + assets. The higher + +On line 6039: + Primary’s assets. + The higher yields attracted + new investors and the + +On line 6039: + was the fastest-growing + money market fund complex + in the United States + +On line 6041: + fastest-growing money + market fund complex in the + United States in and + +On line 6041: + money market fund + complex in the United States + in and 2008—doubling in + +On line 6041: + market fund complex + in the United States in and + 2008—doubling in the first + +On line 6041: + fund complex in the + United States in and 2008—doubling + in the first eight months + +On line 6043: + United States in and + 2008—doubling in the first eight months + of alone.12 Earlier + +On line 6043: + 2008—doubling in the first + eight months of alone.12 Earlier + in Primary Fund’s + +On line 6043: + first eight months of alone.12 + Earlier in Primary + Fund’s managers had loaned + +On line 6043: + alone.12 Earlier in + Primary Fund’s managers had + loaned Bear Stearns money + +On line 6043: + managers had loaned Bear + Stearns money in the repo + market up to two + +On line 6043: + loaned Bear Stearns money + in the repo market up + to two days before + +On line 6043: + Bear Stearns money in + the repo market up to + two days before Bear’s + +On line 6043: + the repo market + up to two days before Bear’s + near-collapse, pulling its + +On line 6043: + two days before Bear’s + near-collapse, pulling its money + only after Bear + +On line 6043: + near-collapse, pulling its + money only after Bear + CEO Alan Schwartz appeared + +On line 6043: + appeared on CNBC + in the company’s final + days, Primary Fund + +On line 6043: + days, Primary Fund + Portfolio Manager Michael + Luciano told the FCIC. + +On line 6043: + said he assumed that + the federal government + would similarly + +On line 6043: + he assumed that the + federal government would + similarly save + +On line 6043: + if Lehman or one of + the other investment banks, + which were much larger + +On line 6043: + Lehman or one of the + other investment banks, which + were much larger and + +On line 6043: + one of the other + investment banks, which were much + larger and posed greater + +On line 6043: + other investment + banks, which were much larger and + posed greater apparent + +On line 6043: + investment banks, which + were much larger and posed greater + apparent systemic + +On line 6043: + much larger and posed + greater apparent systemic risks, + ran into trouble. + +On line 6043: + larger and posed greater + apparent systemic risks, ran + into trouble. These + +On line 6043: + apparent systemic + risks, ran into trouble. These + firms, Luciano said, were + +On line 6045: + said, were too big to + fail.13 On September when Lehman + declared bankruptcy, + +On line 6045: + fail.13 On September + when Lehman declared bankruptcy, + the Primary Fund’s + +On line 6045: + On September when + Lehman declared bankruptcy, the + Primary Fund’s Lehman + +On line 6045: + Primary Fund’s Lehman + holdings amounted to of the + fund’s total assets + +On line 6045: + fund’s total assets + of billion. That morning, the + fund was flooded with + +On line 6045: + That morning, the fund + was flooded with redemption + requests totaling + +On line 6045: + custodian bank, + initially helped the fund meet + those requests, largely + +On line 6045: + initially helped the + fund meet those requests, largely + through an existing + +On line 6045: + those requests, largely + through an existing overdraft + facility, but + +On line 6045: + through an existing + overdraft facility, but + stopped doing so at + +On line 6045: + facility, but + stopped doing so at A.M. With + no means to borrow, + +On line 6045: + at A.M. With no means + to borrow, Primary Fund + representatives + +On line 6045: + representatives + reportedly described State + Street’s action as "the + +On line 6045: + action as "the kiss + of death" for the Primary + Fund.14 Despite public + +On line 6045: + "the kiss of death" for + the Primary Fund.14 Despite + public assurances + +On line 6045: + assurances from the + fund’s investment advisors, + Bruce Bent Sr. and Bruce + +On line 6045: + the fund’s investment + advisors, Bruce Bent Sr. and + Bruce Bent II, that the + +On line 6045: + advisors, Bruce Bent + Sr. and Bruce Bent II, that the + fund was committed + +On line 6045: + Sr. and Bruce Bent II, + that the fund was committed + to maintaining a + +On line 6045: + and Bruce Bent II, that + the fund was committed to + maintaining a net + +On line 6047: + investors requested + an additional billion + later on Monday + +On line 6049: + Tuesday, September + Meanwhile, on Monday, the fund’s + board had determined + +On line 6049: + September Meanwhile, + on Monday, the fund’s board had + determined that the + +On line 6049: + Meanwhile, on Monday, + the fund’s board had determined + that the Lehman paper + +On line 6049: + on Monday, the fund’s + board had determined that the + Lehman paper was worth + +On line 6049: + Monday, the fund’s board + had determined that the Lehman + paper was worth cents + +On line 6049: + board had determined + that the Lehman paper was worth + cents on the dollar. + +On line 6049: + had determined that + the Lehman paper was worth cents + on the dollar. That + +On line 6049: + the Lehman paper was + worth cents on the dollar. That + appraisal had quickly + +On line 6049: + cents on the dollar. + That appraisal had quickly proved + optimistic. After + +On line 6049: + dollar. That appraisal + had quickly proved optimistic. + After the market + +On line 6049: + appraisal had quickly + proved optimistic. After the + market closed Tuesday, + +On line 6049: + closed Tuesday, Reserve + Management publicly announced + that the value of + +On line 6049: + Management publicly + announced that the value of + its Lehman paper was + +On line 6049: + that the value of + its Lehman paper was zero, + "effective 4:00PM New + +On line 6049: + of its Lehman paper + was zero, "effective 4:00PM + New York time today." + +On line 6049: + its Lehman paper was + zero, "effective 4:00PM New + York time today." As + +On line 6049: + zero, "effective + 4:00PM New York time today." As + a result, the fund + +On line 6049: + York time today." As + a result, the fund broke the + buck.16 Four days later, + +On line 6049: + time today." As a + result, the fund broke the buck.16 + Four days later, the + +On line 6049: + the fund broke the buck.16 + Four days later, the fund sought + SEC permission to + +On line 6049: + buck.16 Four days later, + the fund sought SEC permission + to officially + +On line 6051: + sought SEC permission + to officially suspend + redemptions. Other + +On line 6051: + redemptions. Other + funds suffering similar + losses were propped up + +On line 6051: + similar losses + were propped up by their sponsors. + On Monday, Wachovia’s + +On line 6051: + were propped up by their + sponsors. On Monday, Wachovia’s + asset management + +On line 6051: + asset management + unit, Evergreen Investments, + announced that it would + +On line 6051: + it would support three + Evergreen mutual funds + that held about million + +On line 6051: + that held about million + in Lehman paper. On Wednesday, + BNY Mellon announced + +On line 6051: + paper. On Wednesday, + BNY Mellon announced support + for various funds + +On line 6051: + BNY Mellon announced + support for various funds + that held Lehman paper, + +On line 6051: + announced support for + various funds that held Lehman + paper, including + +On line 6051: + Institutional + Cash Reserves fund and four of + its trademark Dreyfus + +On line 6051: + Cash Reserves fund and + four of its trademark Dreyfus + funds. BNY Mellon would + +On line 6051: + Reserves fund and four + of its trademark Dreyfus funds. + BNY Mellon would take + +On line 6051: + four of its trademark + Dreyfus funds. BNY Mellon would + take an after-tax + +On line 6051: + its trademark Dreyfus + funds. BNY Mellon would take an + after-tax charge of + +On line 6051: + funds. BNY Mellon would + take an after-tax charge of + million because of + +On line 6051: + take an after-tax + charge of million because of + this decision. Over + +On line 6051: + an after-tax charge + of million because of this + decision. Over the + +On line 6051: + of million because + of this decision. Over the + next two years, money + +On line 6051: + of this decision. + Over the next two years, money + market funds—36 based in + +On line 6051: + Over the next two years, + money market funds—36 based in + the United States, in + +On line 6051: + money market funds—36 + based in the United States, in + Europe17—would receive + +On line 6051: + based in the United + States, in Europe17—would receive + such assistance to + +On line 6051: + in the United States, + in Europe17—would receive such + assistance to keep + +On line 6051: + Europe17—would receive + such assistance to keep their + funds from breaking the + +On line 6053: + to keep their funds from + breaking the buck. After the + Primary Fund broke + +On line 6053: + funds from breaking the + buck. After the Primary + Fund broke the buck, the + +On line 6053: + from breaking the buck. + After the Primary Fund + broke the buck, the run + +On line 6053: + the Primary Fund + broke the buck, the run took an + ominous turn: it even + +On line 6053: + broke the buck, the run + took an ominous turn: it even + slammed money market + +On line 6053: + the buck, the run took + an ominous turn: it even slammed + money market funds + +On line 6053: + took an ominous turn: + it even slammed money market + funds with no direct + +On line 6053: + an ominous turn: it + even slammed money market funds + with no direct Lehman + +On line 6053: + it even slammed money + market funds with no direct + Lehman exposure. This + +On line 6053: + market funds with no + direct Lehman exposure. This + lack of exposure + +On line 6053: + lack of exposure + was generally known, since + the SEC requires these + +On line 6053: + of exposure was + generally known, since the + SEC requires these funds + +On line 6053: + generally known, + since the SEC requires these funds + to report details + +On line 6053: + since the SEC requires + these funds to report details + on their investments + +On line 6053: + the SEC requires these + funds to report details on + their investments at + +On line 6053: + SEC requires these funds + to report details on their + investments at least + +On line 6053: + these funds to report + details on their investments + at least quarterly. + +On line 6053: + to report details + on their investments at least + quarterly. Investors + +On line 6053: + their investments at + least quarterly. Investors pulled + out simply because + +On line 6053: + investments at least + quarterly. Investors pulled out + simply because they + +On line 6053: + quarterly. Investors + pulled out simply because they + feared that their fellow + +On line 6053: + simply because they + feared that their fellow investors + would run first. "It was + +On line 6053: + feared that their fellow + investors would run first. "It was + overwhelmingly clear + +On line 6053: + investors would run first. + "It was overwhelmingly clear + that we were staring + +On line 6053: + would run first. "It was + overwhelmingly clear that we + were staring into + +On line 6053: + overwhelmingly clear + that we were staring into + the abyss—that there wasn’t + +On line 6053: + that we were staring + into the abyss—that there wasn’t + a bottom to this—as + +On line 6053: + staring into the + abyss—that there wasn’t a bottom + to this—as the outflows + +On line 6053: + into the abyss—that there + wasn’t a bottom to this—as + the outflows picked up + +On line 6053: + wasn’t a bottom + to this—as the outflows picked up + steam on Wednesday and + +On line 6053: + a bottom to this—as + the outflows picked up steam on + Wednesday and Thursday," + +On line 6053: + the outflows picked up + steam on Wednesday and Thursday," + Fed economist Patrick + +On line 6053: + outflows picked up steam + on Wednesday and Thursday," Fed + economist Patrick McCabe + +On line 6053: + up steam on Wednesday + and Thursday," Fed economist + Patrick McCabe told the FCIC. + +On line 6055: + steam on Wednesday and + Thursday," Fed economist Patrick + McCabe told the FCIC. "The + +On line 6055: + economist Patrick McCabe + told the FCIC. "The overwhelming + sense was that this was + +On line 6055: + McCabe told the FCIC. "The + overwhelming sense was that this + was a catastrophe + +On line 6055: + overwhelming sense was + that this was a catastrophe + that we were watching + +On line 6057: + sense was that this was + a catastrophe that we were + watching unfold."18 "We + +On line 6057: + was a catastrophe + that we were watching unfold."18 + "We were really + +On line 6057: + catastrophe that we + were watching unfold."18 "We were + really cognizant + +On line 6057: + that we were watching + unfold."18 "We were really + cognizant of the fact + +On line 6057: + were watching unfold."18 + "We were really cognizant + of the fact that there + +On line 6057: + "We were really + cognizant of the fact that there + weren’t backstops in + +On line 6057: + cognizant of the fact + that there weren’t backstops in + the system that were + +On line 6057: + fact that there weren’t + backstops in the system that + were resilient at that + +On line 6057: + weren’t backstops in + the system that were resilient + at that time," the Fed’s + +On line 6057: + in the system that + were resilient at that time," the + Fed’s Michael Palumbo said. + +On line 6057: + that were resilient at + that time," the Fed’s Michael Palumbo + said. "Liquidity + +On line 6057: + were resilient at that + time," the Fed’s Michael Palumbo said. + "Liquidity crises, + +On line 6057: + that time," the Fed’s Michael + Palumbo said. "Liquidity + crises, by their nature, + +On line 6057: + the Fed’s Michael Palumbo + said. "Liquidity crises, by + their nature, invoke + +On line 6057: + Fed’s Michael Palumbo said. + "Liquidity crises, by their + nature, invoke rapid, + +On line 6057: + said. "Liquidity + crises, by their nature, invoke + rapid, emergent episodes—that’s what + +On line 6057: + "Liquidity crises, + by their nature, invoke rapid, + emergent episodes—that’s what they + +On line 6057: + their nature, invoke + rapid, emergent episodes—that’s what they are. + By their nature, they + +On line 6057: + nature, invoke rapid, + emergent episodes—that’s what they are. By + their nature, they spread + +On line 6059: + rapid, emergent episodes—that’s what + they are. By their nature, they + spread very quickly."19 An + +On line 6059: + By their nature, they + spread very quickly."19 An early + and significant + +On line 6059: + spread very quickly."19 An + early and significant + casualty was + +On line 6059: + and significant + casualty was Putnam + Investments’ billion + +On line 6059: + casualty was + Putnam Investments’ billion + Prime Money Market + +On line 6059: + Putnam Investments’ + billion Prime Money Market + Fund, which was hit on + +On line 6059: + Investments’ billion + Prime Money Market Fund, which + was hit on Wednesday + +On line 6059: + billion Prime Money + Market Fund, which was hit on + Wednesday with a wave + +On line 6059: + on Wednesday with a + wave of redemption requests. + The fund, unable to + +On line 6059: + wave of redemption + requests. The fund, unable to + liquidate assets + +On line 6059: + assets quickly enough, + halted redemptions. One week + later, it was sold + +On line 6059: + halted redemptions. + One week later, it was sold + to Federated + +On line 6061: + One week later, it + was sold to Federated + Investors. Within a + +On line 6061: + Investors. Within a + week, investors in prime money + market funds—funds that + +On line 6061: + a week, investors in + prime money market funds—funds + that invested in + +On line 6061: + in highly rated + securities—withdrew billion; + within three weeks, they + +On line 6061: + securities—withdrew + billion; within three weeks, they + withdrew another + +On line 6061: + billion; within three + weeks, they withdrew another + billion. That money + +On line 6061: + money was mostly + headed for other funds that + bought only Treasuries + +On line 6061: + mostly headed for + other funds that bought only + Treasuries and agency + +On line 6061: + bought only Treasuries + and agency securities; + indeed, it was more + +On line 6061: + Treasuries and agency + securities; indeed, it + was more money than + +On line 6061: + was more money than + those funds could invest, and they + had to turn people + +On line 6061: + more money than those + funds could invest, and they had + to turn people away20 + +On line 6061: + money than those funds + could invest, and they had to + turn people away20 (see + +On line 6061: + those funds could invest, + and they had to turn people + away20 (see figure As + +On line 6061: + funds could invest, and + they had to turn people away20 + (see figure As a + +On line 6061: + and they had to turn + people away20 (see figure As + a result of the + +On line 6061: + turn people away20 (see + figure As a result of + the unprecedented + +On line 6061: + As a result of + the unprecedented demand + for Treasuries, the yield + +On line 6061: + a result of the + unprecedented demand for + Treasuries, the yield on + +On line 6061: + the unprecedented + demand for Treasuries, the yield + on four-week Treasuries fell + +On line 6063: + demand for Treasuries, + the yield on four-week Treasuries fell + close to levels not + +On line 6063: + for Treasuries, the yield + on four-week Treasuries fell close to + levels not seen since + +On line 6065: + on four-week Treasuries fell + close to levels not seen since + World War II. Money + +On line 6065: + Treasuries fell close to + levels not seen since World War + II. Money market + +On line 6065: + close to levels not + seen since World War II. Money + market mutual + +On line 6065: + seen since World War II. + Money market mutual + funds needing cash to + +On line 6065: + market mutual + funds needing cash to honor + redemptions sold their + +On line 6065: + illiquid investments. + Unfortunately, there was + little market to + +On line 6065: + little market to + speak of. "We heard investments + in Money Market + +On line 6065: + in Money Market + Funds anecdotally that the + dealers weren’t even + +On line 6065: + Funds anecdotally + that the dealers weren’t even + picking up their phones. + +On line 6065: + the dealers weren’t + even picking up their phones. The + funds had to get rid + +On line 6065: + dealers weren’t even + picking up their phones. The funds + had to get rid of + +On line 6065: + even picking up their + phones. The funds had to get rid + of their paper; they + +On line 6065: + phones. The funds had to + get rid of their paper; they + didn’t have anyone + +On line 6065: + funds had to get rid + of their paper; they didn’t + have anyone to give + +On line 6065: + had to get rid of + their paper; they didn’t have + anyone to give it + +On line 6065: + rid of their paper; + they didn’t have anyone to + give it to," McCabe said.21 + +On line 6067: + of their paper; they + didn’t have anyone to give + it to," McCabe said.21 And + +On line 6067: + paper; they didn’t + have anyone to give it to," + McCabe said.21 And holding + +On line 6067: + didn’t have anyone + to give it to," McCabe said.21 And + holding unsecured + +On line 6067: + to give it to," McCabe + said.21 And holding unsecured + commercial paper + +On line 6067: + paper from any large + financial institution + was now simply out + +On line 6067: + was now simply out + of the question: fund managers + wanted no part of + +On line 6067: + simply out of the + question: fund managers wanted + no part of the next + +On line 6067: + out of the question: + fund managers wanted no part + of the next Lehman. An + +On line 6067: + of the question: fund + managers wanted no part of + the next Lehman. An FCIC + +On line 6067: + question: fund managers + wanted no part of the next + Lehman. An FCIC survey + +On line 6067: + fund managers wanted + no part of the next Lehman. An + FCIC survey of the + +On line 6067: + managers wanted no + part of the next Lehman. An FCIC + survey of the largest + +On line 6067: + wanted no part of + the next Lehman. An FCIC survey + of the largest money + +On line 6067: + no part of the next + Lehman. An FCIC survey of the + largest money market + +On line 6067: + part of the next Lehman. + An FCIC survey of the largest + money market funds + +On line 6067: + the next Lehman. An FCIC + survey of the largest money + market funds found that + +On line 6067: + Lehman. An FCIC survey + of the largest money market + funds found that many were + +On line 6067: + survey of the largest + money market funds found that + many were unwilling + +On line 6067: + were unwilling to + purchase commercial paper + from financial firms + +On line 6067: + commercial paper + from financial firms during + the week after Lehman. + +On line 6067: + from financial firms + during the week after Lehman. + Of the respondents, + +On line 6067: + the week after Lehman. + Of the respondents, the five + with the most drastic + +On line 6067: + with the most drastic + reduction in financial + commercial paper + +On line 6067: + commercial paper + cut their holdings by half, from + billion to billion.22 + +On line 6067: + holdings by half, from + billion to billion.22 This led + to unprecedented + +On line 6067: + billion to billion.22 + This led to unprecedented + increases in the + +On line 6067: + to unprecedented + increases in the rates on + commercial paper, + +On line 6067: + increases in the + rates on commercial paper, + creating problems + +On line 6067: + commercial paper + to pay their immediate + expenses such as + +On line 6067: + paper to pay their + immediate expenses + such as payroll and + +On line 6067: + their immediate + expenses such as payroll + and inventories. + +On line 6067: + such as payroll and + inventories. The cost of + commercial paper + +On line 6067: + inventories. The + cost of commercial paper + borrowing spiked in + +On line 6067: + dramatically + surpassing the previous + highs in (see figure + +On line 6069: + highs in (see figure + "You had a broad-based run on + commercial paper + +On line 6069: + a broad-based run on + commercial paper markets," + Geithner told + +On line 6069: + commercial paper + markets," Geithner told + the FCIC. "And so you + +On line 6069: + Geithner told + the FCIC. "And so you faced the + prospect of some of the + +On line 6069: + told the FCIC. "And so + you faced the prospect of some of + the largest companies + +On line 6069: + the FCIC. "And so you + faced the prospect of some of the + largest companies in + +On line 6069: + FCIC. "And so you faced + the prospect of some of the largest + companies in the + +On line 6069: + you faced the prospect of + some of the largest companies + in the world and the + +On line 6069: + the prospect of some of + the largest companies in the + world and the United + +On line 6069: + prospect of some of the + largest companies in the world + and the United States + +On line 6069: + and the United States + losing the capacity + to fund and access + +On line 6069: + markets."23 Three decades of + easy borrowing for those with + top-rated credit in + +On line 6069: + of easy borrowing + for those with top-rated credit + in a very liquid + +On line 6069: + borrowing for those + with top-rated credit in a + very liquid market + +On line 6069: + top-rated credit in + a very liquid market had + disappeared almost + +On line 6069: + very liquid market + had disappeared almost overnight. + The panic threatened + +On line 6069: + liquid market had + disappeared almost overnight. The + panic threatened to + +On line 6069: + disappeared almost + overnight. The panic threatened to + disrupt the payments + +On line 6069: + panic threatened to + disrupt the payments system + through which financial + +On line 6069: + of dollars in Cost + of Short-Term Borrowing cash and + assets every day + +On line 6069: + Short-Term Borrowing cash + and assets every day and + upon which consumers + +On line 6069: + upon which consumers + rely—for example, to + use their credit cards + +On line 6069: + example, to use + their credit cards and debit + cards. "At that point, you + +On line 6069: + to use their credit + cards and debit cards. "At that + point, you don’t need to + +On line 6069: + use their credit cards + and debit cards. "At that point, + you don’t need to map + +On line 6069: + their credit cards and + debit cards. "At that point, you + don’t need to map out + +On line 6069: + debit cards. "At that + point, you don’t need to map out + which particular + +On line 6069: + point, you don’t need to + map out which particular + mechanism—it’s not + +On line 6069: + mechanism—it’s not + relevant anymore—it’s + become systemic and + +On line 6069: + become systemic and + endemic and it needs to + be stopped," Palumbo said.24 + +On line 6071: + and endemic and + it needs to be stopped," Palumbo + said.24 The government + +On line 6071: + it needs to be stopped," + Palumbo said.24 The government + responded with two + +On line 6071: + be stopped," Palumbo said.24 + The government responded + with two new lending + +On line 6071: + lending programs on + Friday, September Treasury + would guarantee the + +On line 6071: + Friday, September + Treasury would guarantee the + net asset value + +On line 6071: + net asset value + of eligible money + market funds, for a + +On line 6071: + of eligible + money market funds, for a + fee paid by the funds.25 + +On line 6071: + market funds, for a + fee paid by the funds.25 And the + Fed would provide loans + +On line 6071: + funds, for a fee paid + by the funds.25 And the Fed would + provide loans to banks + +On line 6071: + fee paid by the funds.25 + And the Fed would provide loans + to banks to purchase + +On line 6071: + commercial paper + from money market funds.26 In + its first two weeks, this + +On line 6071: + paper from money + market funds.26 In its first two + weeks, this program loaned + +On line 6071: + market funds.26 In its + first two weeks, this program loaned + banks billion, although + +On line 6073: + money market funds. + With the financial sector + in disarray, the + +On line 6073: + in disarray, the + SEC imposed a temporary + ban on short-selling on + +On line 6073: + disarray, the SEC + imposed a temporary ban + on short-selling on the + +On line 6073: + the SEC imposed a + temporary ban on short-selling + on the stocks of about + +On line 6073: + a temporary ban + on short-selling on the stocks of + about banks, insurance + +On line 6073: + on the stocks of about + banks, insurance companies, + and securities + +On line 6073: + the stocks of about banks, + insurance companies, and + securities firms. + +On line 6075: + and securities + firms. This action, taken on + September followed + +On line 6075: + September followed + an earlier temporary + ban put in place over + +On line 6075: + temporary ban put + in place over the summer on + naked short-selling—that is, + +On line 6075: + put in place over the + summer on naked short-selling—that + is, shorting a stock + +On line 6075: + without arranging + to deliver it to the + buyer—of financial stocks + +On line 6075: + deliver it to + the buyer—of financial stocks in + order to protect + +On line 6077: + manipulation." + Meanwhile, Treasury Secretary + Henry Paulson and + +On line 6077: + Treasury Secretary + Henry Paulson and other + senior officials + +On line 6077: + Henry Paulson and + other senior officials + had decided they + +On line 6077: + and other senior + officials had decided + they needed a more + +On line 6077: + they needed a more + systematic approach to + dealing with troubled + +On line 6077: + authority from + Congress for TARP. "One hing that + was constant about the + +On line 6077: + from Congress for TARP. + "One hing that was constant about + the crisis is that + +On line 6077: + Congress for TARP. "One + hing that was constant about the + crisis is that we + +On line 6077: + TARP. "One hing that was + constant about the crisis is + that we were always + +On line 6077: + hing that was constant + about the crisis is that we + were always behind. + +On line 6077: + that was constant about + the crisis is that we were + always behind. It + +On line 6077: + crisis is that we + were always behind. It was + always morphing + +On line 6077: + were always behind. + It was always morphing + and manifesting + +On line 6077: + always morphing + and manifesting itself + in ways we didn’t + +On line 6077: + and manifesting + itself in ways we didn’t + expect," Neel Kashkari, then + +On line 6077: + expect," Neel Kashkari, then + assistant secretary of + the treasury, told the + +On line 6077: + Kashkari, then assistant + secretary of the treasury, + told the FCIC. "So we + +On line 6077: + secretary of the + treasury, told the FCIC. "So we + knew we’d get one shot + +On line 6077: + told the FCIC. "So we + knew we’d get one shot at this + authority and + +On line 6077: + knew we’d get one shot + at this authority and + it was important + +On line 6077: + we’d get one shot at + this authority and it + was important that + +On line 6077: + get one shot at this + authority and it was + important that we + +On line 6077: + authority and + it was important that we + provided ourselves + +On line 6077: + ourselves maximum + firepower and maximum + flexibility. + +On line 6077: + flexibility. + We specifically designed + the authority + +On line 6077: + authority to + allow us basically + to do whatever + +On line 6077: + basically to + do whatever we needed + to do." Kashkari "spent the + +On line 6077: + to do." Kashkari "spent the + next two weeks basically + living on Capitol + +On line 6077: + Kashkari "spent the next two + weeks basically living + on Capitol Hill."27 As + +On line 6077: + weeks basically + living on Capitol Hill."27 As + discussed below, the + +On line 6077: + living on Capitol + Hill."27 As discussed below, the + program was a tough + +On line 6079: + As discussed below, + the program was a tough sell. + MORGAN STANLEY: "NOW + +On line 6079: + the program was a + tough sell. MORGAN STANLEY: "NOW + WE’RE THE NEXT IN LINE" + +On line 6081: + MORGAN STANLEY: "NOW + WE’RE THE NEXT IN LINE" Investors + scrutinized the two + +On line 6081: + "NOW WE’RE THE NEXT IN + LINE" Investors scrutinized the + two remaining large, + +On line 6081: + large, independent + investment banks after the + failure of Lehman and + +On line 6081: + Stanley. On Monday, + September the annual + cost of protecting + +On line 6081: + the annual cost + of protecting million in + Morgan Stanley debt + +On line 6081: + protecting million + in Morgan Stanley debt through + credit default swaps + +On line 6083: + Morgan Stanley debt + through credit default swaps jumped + to $682,000—from on Friday—about + +On line 6083: + through credit default + swaps jumped to $682,000—from on Friday—about + double the cost for + +On line 6083: + default swaps jumped to + $682,000—from on Friday—about double the + cost for Goldman. "As + +On line 6083: + swaps jumped to $682,000—from on + Friday—about double the cost for + Goldman. "As soon as + +On line 6083: + to $682,000—from on Friday—about + double the cost for Goldman. + "As soon as we come + +On line 6083: + on Friday—about double + the cost for Goldman. "As soon + as we come in on + +On line 6083: + double the cost for + Goldman. "As soon as we come + in on Monday, we’re + +On line 6083: + the cost for Goldman. + "As soon as we come in on + Monday, we’re in the + +On line 6083: + for Goldman. "As soon + as we come in on Monday, + we’re in the eye of + +On line 6083: + Goldman. "As soon as + we come in on Monday, we’re + in the eye of the + +On line 6083: + "As soon as we come + in on Monday, we’re in the + eye of the storm with + +On line 6083: + as we come in on + Monday, we’re in the eye of + the storm with Merrill + +On line 6083: + come in on Monday, + we’re in the eye of the storm + with Merrill gone and + +On line 6083: + in on Monday, we’re + in the eye of the storm with + Merrill gone and Lehman + +On line 6083: + Monday, we’re in the + eye of the storm with Merrill + gone and Lehman gone," John + +On line 6083: + we’re in the eye of + the storm with Merrill gone and + Lehman gone," John Mack, then + +On line 6083: + the eye of the storm + with Merrill gone and Lehman gone," + John Mack, then Morgan + +On line 6083: + the storm with Merrill + gone and Lehman gone," John Mack, then + Morgan Stanley’s CEO, + +On line 6083: + with Merrill gone and + Lehman gone," John Mack, then Morgan + Stanley’s CEO, said to + +On line 6083: + gone and Lehman gone," John + Mack, then Morgan Stanley’s CEO, + said to the FCIC. He + +On line 6083: + Lehman gone," John Mack, then + Morgan Stanley’s CEO, said to + the FCIC. He later + +On line 6083: + John Mack, then Morgan + Stanley’s CEO, said to the FCIC. + He later added, "Now + +On line 6083: + Morgan Stanley’s CEO, + said to the FCIC. He later + added, "Now we’re the next + +On line 6083: + Stanley’s CEO, said to + the FCIC. He later added, "Now + we’re the next in line."28 + +On line 6085: + CEO, said to the FCIC. + He later added, "Now we’re the + next in line."28 Morgan + +On line 6085: + He later added, "Now + we’re the next in line."28 Morgan + Stanley officials + +On line 6085: + we’re the next in line."28 + Morgan Stanley officials + had some reason for + +On line 6085: + line."28 Morgan Stanley + officials had some reason + for confidence. On + +On line 6085: + the regulators’ + liquidity stress tests months + earlier. But the + +On line 6085: + the early market + indicators were mixed. David + Wong, Morgan Stanley’s + +On line 6085: + Wong, Morgan Stanley’s + treasurer, heard early from + his London office + +On line 6085: + London office that + several European banks + were not accepting + +On line 6085: + a counterparty + on derivatives trades.30 He + called those banks and they + +On line 6085: + counterparty on + derivatives trades.30 He called + those banks and they agreed + +On line 6085: + on derivatives + trades.30 He called those banks and they + agreed to keep their trades + +On line 6085: + derivatives trades.30 + He called those banks and they agreed + to keep their trades with + +On line 6085: + trades.30 He called those banks + and they agreed to keep their trades + with Morgan Stanley, + +On line 6085: + He called those banks and + they agreed to keep their trades with + Morgan Stanley, at + +On line 6085: + those banks and they agreed + to keep their trades with Morgan + Stanley, at least for + +On line 6085: + and they agreed to keep + their trades with Morgan Stanley, + at least for the time + +On line 6085: + agreed to keep their trades + with Morgan Stanley, at least + for the time being. + +On line 6085: + to keep their trades with + Morgan Stanley, at least for + the time being. But + +On line 6085: + their trades with Morgan + Stanley, at least for the time + being. But Wong well + +On line 6085: + with Morgan Stanley, + at least for the time being. + But Wong well knew that + +On line 6085: + Stanley, at least for + the time being. But Wong well + knew that rumors about + +On line 6085: + for the time being. + But Wong well knew that rumors + about derivatives + +On line 6087: + through novations had + contributed to the demise of + Bear and Lehman. Repo + +On line 6087: + contributed to the + demise of Bear and Lehman. Repo + lenders, primarily + +On line 6087: + demise of Bear and Lehman. + Repo lenders, primarily + money market funds, + +On line 6087: + Bear and Lehman. Repo + lenders, primarily money + market funds, likewise + +On line 6089: + funds, likewise did not + panic immediately. + On Monday, only + +On line 6089: + immediately. + On Monday, only a few + of them requested + +On line 6091: + only a few of + them requested slightly more + collateral.31 But + +On line 6091: + of them requested + slightly more collateral.31 + But the relative + +On line 6091: + was fleeting. Morgan + Stanley immediately + became the target + +On line 6091: + immediately + became the target of a + hedge fund run. Before + +On line 6091: + hedge fund run. Before + the financial crisis, it + had typically + +On line 6091: + fund run. Before the + financial crisis, it had + typically been + +On line 6091: + brokers like Morgan + Stanley who were worried about + their exposures to + +On line 6091: + who were worried about + their exposures to hedge fund + clients. Now the roles were + +On line 6091: + about their exposures + to hedge fund clients. Now the roles + were reversed. The Lehman + +On line 6091: + their exposures to + hedge fund clients. Now the roles were + reversed. The Lehman episode + +On line 6091: + to hedge fund clients. Now + the roles were reversed. The Lehman + episode had revealed that + +On line 6091: + fund clients. Now the roles + were reversed. The Lehman episode had + revealed that because + +On line 6091: + the roles were reversed. + The Lehman episode had revealed that + because prime brokers + +On line 6091: + were reversed. The Lehman + episode had revealed that because + prime brokers were able + +On line 6091: + reversed. The Lehman episode + had revealed that because prime + brokers were able to + +On line 6091: + Lehman episode had revealed + that because prime brokers were + able to reuse clients’ + +On line 6091: + prime brokers were able + to reuse clients’ assets to + raise cash for their own + +On line 6091: + able to reuse clients’ + assets to raise cash for their + own activities, + +On line 6091: + assets to raise cash + for their own activities, + clients’ assets could be + +On line 6091: + raise cash for their own + activities, clients’ assets + could be frozen or lost + +On line 6091: + own activities, + clients’ assets could be frozen or + lost in bankruptcy + +On line 6093: + could be frozen or lost + in bankruptcy proceedings.32 + To protect themselves, + +On line 6093: + be frozen or lost in + bankruptcy proceedings.32 To + protect themselves, hedge + +On line 6093: + protect themselves, hedge + funds pulled billions of dollars + in cash and other + +On line 6093: + themselves, hedge funds pulled + billions of dollars in cash + and other assets + +On line 6093: + of prime brokers in + bank holding companies, such + as JP Morgan; big + +On line 6093: + companies, such as + JP Morgan; big foreign banks, + such as Deutsche Bank and + +On line 6093: + as JP Morgan; big + foreign banks, such as Deutsche Bank + and Credit Suisse; + +On line 6093: + foreign banks, such as + Deutsche Bank and Credit Suisse; + and custodian + +On line 6093: + and Credit Suisse; + and custodian banks, such + as BNY Mellon and + +On line 6093: + and custodian + banks, such as BNY Mellon and + Northern Trust, which they + +On line 6093: + Mellon and Northern + Trust, which they believed were safer + and more transparent. + +On line 6093: + Trust, which they believed + were safer and more transparent. + Fund managers told the + +On line 6093: + which they believed were + safer and more transparent. Fund + managers told the FCIC + +On line 6095: + believed were safer and + more transparent. Fund managers + told the FCIC that some + +On line 6095: + and more transparent. + Fund managers told the FCIC that + some prime brokers took + +On line 6095: + Fund managers told the + FCIC that some prime brokers took + aggressive measures + +On line 6095: + told the FCIC that some + prime brokers took aggressive + measures to prevent + +On line 6095: + aggressive measures + to prevent hedge fund customers + from demanding their + +On line 6095: + hedge fund customers from + demanding their assets. For + example, "Most [hedge + +On line 6095: + from demanding their + assets. For example, "Most + [hedge funds] request cash + +On line 6095: + "Most [hedge funds] request + cash movement from [prime brokers] + primarily through + +On line 6095: + cash movement from [prime + brokers] primarily through + a fax," the hedge fund + +On line 6095: + through a fax," the hedge + fund manager Jonathan Wood told + the FCIC. "What tends to + +On line 6095: + hedge fund manager + Jonathan Wood told the FCIC. "What tends + to happen in very + +On line 6095: + Jonathan Wood told the FCIC. + "What tends to happen in very + stressful times is those + +On line 6095: + told the FCIC. "What tends + to happen in very stressful + times is those faxes + +On line 6095: + the FCIC. "What tends to + happen in very stressful times + is those faxes tend + +On line 6095: + "What tends to happen + in very stressful times is those + faxes tend to get + +On line 6095: + to happen in very + stressful times is those faxes + tend to get lost. I’m + +On line 6095: + in very stressful times + is those faxes tend to get + lost. I’m not sure that’s + +On line 6095: + very stressful times is + those faxes tend to get lost. + I’m not sure that’s just + +On line 6095: + those faxes tend to + get lost. I’m not sure that’s just + coincidental + +On line 6095: + lost. I’m not sure that’s + just coincidental that + was collateral + +On line 6095: + I’m not sure that’s just + coincidental that was + collateral for + +On line 6095: + coincidental + that was collateral for + whatever lending + +On line 6095: + was collateral + for whatever lending [prime + brokers] had against you + +On line 6095: + whatever lending + [prime brokers] had against you and + they didn’t want to + +On line 6097: + lending [prime brokers] + had against you and they didn’t + want to give it [away]."33 + +On line 6099: + [prime brokers] had against + you and they didn’t want to + give it [away]."33 Soon, hedge + +On line 6099: + brokers] had against you + and they didn’t want to give + it [away]."33 Soon, hedge funds + +On line 6099: + [away]."33 Soon, hedge funds would + suffer unprecedented runs + by their own investors. + +On line 6099: + an FCIC survey of + hedge funds that survived, investor + redemption requests + +On line 6099: + hedge funds that survived, + investor redemption requests + averaged of client + +On line 6099: + redemption requests + averaged of client funds in + the fourth quarter of + +On line 6099: + of client funds in the + fourth quarter of This pummeled + the markets. Money + +On line 6099: + in the fourth quarter + of This pummeled the markets. + Money invested + +On line 6099: + fourth quarter of This + pummeled the markets. Money + invested in hedge + +On line 6099: + of This pummeled the + markets. Money invested + in hedge funds totaled + +On line 6099: + pummeled the markets. + Money invested in hedge + funds totaled trillion, + +On line 6099: + Money invested + in hedge funds totaled trillion, + globally, at the + +On line 6101: + in hedge funds totaled + trillion, globally, at the + end of but because + +On line 6101: + of but because of + leverage, their market impact + was several times + +On line 6101: + their market impact + was several times larger. + Widespread redemptions + +On line 6101: + was several times + larger. Widespread redemptions + forced hedge funds to sell + +On line 6101: + further depressing + market prices. Many hedge funds would + halt redemptions or + +On line 6103: + market prices. Many hedge + funds would halt redemptions or + collapse. On Monday, + +On line 6103: + prices. Many hedge funds would + halt redemptions or collapse. + On Monday, hedge funds + +On line 6103: + would halt redemptions + or collapse. On Monday, hedge + funds requested about + +On line 6105: + On Monday, hedge funds + requested about billion from + Morgan Stanley.36 Then, + +On line 6105: + Morgan Stanley.36 Then, + on Tuesday morning, Morgan + Stanley announced a + +On line 6105: + on Tuesday morning, + Morgan Stanley announced a + profit of billion + +On line 6105: + announced a profit + of billion for the three months + ended August about + +On line 6105: + the three months ended + August about the same as that + period a year + +On line 6105: + ended August about + the same as that period + a year earlier. + +On line 6107: + August about the same + as that period a year + earlier. Mack had + +On line 6107: + year earlier. Mack + had decided to release + the good news a day + +On line 6107: + Mack had decided + to release the good news a + day early, but this + +On line 6107: + had decided to + release the good news a day + early, but this move + +On line 6109: + to release the good + news a day early, but this + move had backfired. "One + +On line 6109: + release the good news + a day early, but this move + had backfired. "One hedge + +On line 6109: + news a day early, + but this move had backfired. "One + hedge fund manager + +On line 6109: + a day early, but + this move had backfired. "One hedge + fund manager said + +On line 6109: + day early, but this + move had backfired. "One hedge fund + manager said to + +On line 6109: + this move had backfired. + "One hedge fund manager said + to me after the + +On line 6109: + move had backfired. "One + hedge fund manager said to + me after the fact + +On line 6109: + had backfired. "One hedge + fund manager said to me + after the fact that + +On line 6109: + fund manager said + to me after the fact that + he thought preannounc-ing + +On line 6109: + after the fact that + he thought preannounc-ing earnings + a day early was + +On line 6109: + the fact that he thought + preannounc-ing earnings a day + early was a sign + +On line 6109: + he thought preannounc-ing + earnings a day early was + a sign of weakness. + +On line 6109: + preannounc-ing earnings + a day early was a sign + of weakness. So I + +On line 6109: + a day early was + a sign of weakness. So I + guess it was, because + +On line 6109: + early was a sign + of weakness. So I guess it + was, because people + +On line 6109: + a sign of weakness. + So I guess it was, because + people certainly + +On line 6109: + So I guess it was, + because people certainly + continued to short + +On line 6109: + was, because people + certainly continued to + short our stock or sell + +On line 6109: + people certainly + continued to short our stock + or sell our stock—I don’t + +On line 6109: + to short our stock or + sell our stock—I don’t know if they + were shorting it but + +On line 6109: + short our stock or sell + our stock—I don’t know if they were + shorting it but they + +On line 6109: + sell our stock—I don’t know + if they were shorting it but + they were certainly + +On line 6109: + stock—I don’t know if they + were shorting it but they were + certainly selling + +On line 6109: + if they were shorting + it but they were certainly + selling it," Mack told + +On line 6109: + were shorting it but + they were certainly selling + it," Mack told the FCIC.37 + +On line 6109: + shorting it but they + were certainly selling it," + Mack told the FCIC.37 Wong + +On line 6109: + certainly selling + it," Mack told the FCIC.37 Wong said, + "We were managing + +On line 6109: + the FCIC.37 Wong said, "We + were managing our funding + but really there + +On line 6109: + FCIC.37 Wong said, "We were + managing our funding but + really there were + +On line 6109: + "We were managing + our funding but really + there were other things + +On line 6109: + were managing our + funding but really there + were other things that + +On line 6109: + there were other things + that were happening as a + result of the Lehman + +On line 6109: + that were happening + as a result of the Lehman + bankruptcy that were + +On line 6109: + Lehman bankruptcy that + were beginning to affect, + really ripple + +On line 6109: + were beginning to + affect, really ripple + through and affect some + +On line 6109: + affect, really + ripple through and affect some + of our clients, our more + +On line 6111: + of our clients, our more + sophisticated clients."38 The + hedge fund run became + +On line 6111: + sophisticated + clients."38 The hedge fund run became + a billion torrent + +On line 6111: + clients."38 The hedge fund run + became a billion torrent + on Wednesday,39 the day + +On line 6111: + fund run became a + billion torrent on Wednesday,39 + the day after AIG + +On line 6111: + became a billion + torrent on Wednesday,39 the day + after AIG was bailed + +On line 6111: + a billion torrent + on Wednesday,39 the day after + AIG was bailed out and + +On line 6111: + billion torrent on + Wednesday,39 the day after AIG + was bailed out and the + +On line 6111: + torrent on Wednesday,39 + the day after AIG was bailed + out and the day that + +On line 6111: + on Wednesday,39 the day + after AIG was bailed out and + the day that "many of + +On line 6111: + the day that "many of + our sophisticated clients + started to liq-uefy," + +On line 6111: + sophisticated + clients started to liq-uefy," as + Wong put it.40 Many of + +On line 6111: + started to liq-uefy," + as Wong put it.40 Many of the + hedge funds now sought to + +On line 6111: + liq-uefy," as Wong put + it.40 Many of the hedge funds now + sought to exercise + +On line 6111: + it.40 Many of the hedge + funds now sought to exercise + their contractual + +On line 6111: + borrowed billion from + the Fed’s PDCF on Tuesday, + billion on Wednesday, + +On line 6113: + triggered the event that + Fed policymakers had + worried about over the + +On line 6113: + had worried about over + the summer: an increase in + collateral calls + +On line 6113: + summer: an increase + in collateral calls by + the two tri-party + +On line 6113: + in collateral + calls by the two tri-party + repo clearing banks, + +On line 6113: + tri-party repo + clearing banks, JP Morgan and + BNY Mellon. As had + +On line 6113: + banks, JP Morgan and + BNY Mellon. As had happened + during the Bear episode, + +On line 6113: + and BNY Mellon. As + had happened during the Bear + episode, the two clearing + +On line 6113: + BNY Mellon. As had + happened during the Bear episode, + the two clearing banks + +On line 6113: + had happened during + the Bear episode, the two clearing + banks became concerned + +On line 6113: + happened during the + Bear episode, the two clearing banks + became concerned about + +On line 6113: + the Bear episode, the two + clearing banks became concerned + about their intraday + +On line 6113: + became concerned about + their intraday exposures + to Morgan Stanley, + +On line 6113: + Stanley, Merrill, and + Goldman. On Sunday of the + Lehman weekend, the Fed + +On line 6113: + Goldman. On Sunday + of the Lehman weekend, the Fed + had lowered the bar + +On line 6113: + the Lehman weekend, the + Fed had lowered the bar on + the collateral + +On line 6113: + Lehman weekend, the Fed + had lowered the bar on the + collateral that + +On line 6113: + Fed had lowered the + bar on the collateral + that it would take for + +On line 6113: + had lowered the bar + on the collateral that + it would take for overnight + +On line 6113: + collateral that + it would take for overnight lending + through the PDCF. But + +On line 6113: + that it would take for + overnight lending through the PDCF. + But the PDCF was + +On line 6113: + it would take for overnight + lending through the PDCF. But + the PDCF was not + +On line 6113: + for overnight lending through + the PDCF. But the PDCF + was not designed to + +On line 6113: + overnight lending through the + PDCF. But the PDCF was + not designed to take + +On line 6113: + through the PDCF. But + the PDCF was not designed + to take the place of + +On line 6113: + the PDCF. But the + PDCF was not designed to + take the place of the + +On line 6113: + But the PDCF was + not designed to take the place + of the intraday + +On line 6113: + not designed to take + the place of the intraday + funding provided + +On line 6113: + intraday funding + provided by JP Morgan + and BNY Mellon, and + +On line 6113: + JP Morgan and BNY + Mellon, and neither of them + wanted to accept + +On line 6113: + Mellon, and neither + of them wanted to accept + for their intraday + +On line 6113: + and neither of them + wanted to accept for their + intraday loans the + +On line 6113: + the lower-quality + collateral that the Fed + was accepting for + +On line 6113: + collateral that + the Fed was accepting for + its overnight loans. They would + +On line 6113: + Fed was accepting + for its overnight loans. They would not + make those loans to the + +On line 6113: + was accepting for + its overnight loans. They would not make + those loans to the three + +On line 6113: + for its overnight loans. They + would not make those loans to the + three investment banks + +On line 6113: + would not make those loans + to the three investment banks + without requiring + +On line 6113: + make those loans to the + three investment banks without + requiring bigger + +On line 6115: + more collateral. + "Big intraday issues at + the clearing banks," the + +On line 6115: + collateral. "Big + intraday issues at the + clearing banks," the SEC’s + +On line 6115: + the clearing banks," the + SEC’s Matt Eichner informed + New York Fed colleagues + +On line 6115: + clearing banks," the SEC’s + Matt Eichner informed New + York Fed colleagues in + +On line 6115: + Eichner informed + New York Fed colleagues in an + early Wednesday email. + +On line 6115: + York Fed colleagues in + an early Wednesday email. "They + don’t want exposure + +On line 6115: + Fed colleagues in an + early Wednesday email. "They don’t + want exposure and + +On line 6115: + an early Wednesday + email. "They don’t want exposure + and are asking for + +On line 6115: + and are asking for + cash/securities. Lots of + desk level noise around + +On line 6115: + cash/securities. + Lots of desk level noise around + [Morgan Stanley] and + +On line 6117: + desk level noise around + [Morgan Stanley] and [Merrill + Lynch] and taking the + +On line 6117: + around [Morgan Stanley] + and [Merrill Lynch] and taking + the name. Not pretty."41 + +On line 6119: + Stanley] and [Merrill + Lynch] and taking the name. Not + pretty."41 "Taking the + +On line 6119: + and [Merrill Lynch] and + taking the name. Not pretty."41 + "Taking the name" is + +On line 6119: + and taking the name. + Not pretty."41 "Taking the name" + is Wall Street parlance + +On line 6119: + taking the name. Not + pretty."41 "Taking the name" is + Wall Street parlance for + +On line 6119: + Not pretty."41 "Taking + the name" is Wall Street parlance + for accepting a + +On line 6119: + the name" is Wall Street + parlance for accepting a + counterparty on + +On line 6121: + a counterparty + on a trade. On Thursday, BNY + Mellon requested + +On line 6121: + trade. On Thursday, BNY + Mellon requested billion + in collateral + +On line 6121: + Mellon requested + billion in collateral + from Morgan Stanley. + +On line 6123: + in collateral + from Morgan Stanley. nd New + York Fed officials + +On line 6123: + from Morgan Stanley. + nd New York Fed officials + reported that JP + +On line 6123: + Stanley. nd New York + Fed officials reported + that JP Morgan was + +On line 6125: + Morgan was "thinking" + about requesting billion on + top of a billion + +On line 6125: + requesting billion + on top of a billion on + deposit.42 According + +On line 6125: + of a billion on + deposit.42 According to a + Fed examiner + +On line 6125: + deposit.42 According + to a Fed examiner + at Citigroup, a + +On line 6125: + Fed examiner + at Citigroup, a banker from + that firm had said that + +On line 6125: + at Citigroup, a + banker from that firm had said that + "Morgan [Stanley] is + +On line 6125: + a banker from that firm + had said that "Morgan [Stanley] + is the ‘deer in the + +On line 6125: + from that firm had said + that "Morgan [Stanley] is the + ‘deer in the headlights’ + +On line 6125: + that firm had said that + "Morgan [Stanley] is the ‘deer + in the headlights’ and + +On line 6125: + had said that "Morgan + [Stanley] is the ‘deer in the + headlights’ and having + +On line 6125: + [Stanley] is the ‘deer + in the headlights’ and having + significant stress + +On line 6125: + ‘deer in the headlights’ + and having significant + stress in Europe. It’s + +On line 6125: + significant stress + in Europe. It’s looking like + Lehman did a few weeks + +On line 6127: + stress in Europe. It’s + looking like Lehman did a few + weeks ago."43 Commercial + +On line 6127: + Europe. It’s looking + like Lehman did a few weeks ago."43 + Commercial paper + +On line 6127: + like Lehman did a few + weeks ago."43 Commercial paper + markets also seized + +On line 6127: + did a few weeks ago."43 + Commercial paper markets + also seized up for + +On line 6127: + Commercial paper + markets also seized up for + Morgan Stanley. From + +On line 6127: + markets also seized + up for Morgan Stanley. From + Friday, September + +On line 6127: + also seized up for + Morgan Stanley. From Friday, + September to the + +On line 6127: + Morgan Stanley. From + Friday, September to the + end of September, + +On line 6127: + Stanley. From Friday, + September to the end of + September, the amount + +On line 6127: + Friday, September + to the end of September, + the amount of the firm’s + +On line 6127: + of September, the + amount of the firm’s outstanding + commercial paper + +On line 6127: + commercial paper + had fallen nearly and it + had rolled over only + +On line 6127: + paper had fallen + nearly and it had rolled over + only million. By + +On line 6127: + nearly and it had + rolled over only million. By + comparison, on + +On line 6127: + comparison, on + average Morgan Stanley + rolled over about million + +On line 6127: + average Morgan + Stanley rolled over about million + every day in the + +On line 6127: + Morgan Stanley rolled + over about million every day + in the last two weeks + +On line 6129: + rolled over about million + every day in the last two + weeks of August.44 On + +On line 6129: + every day in the + last two weeks of August.44 On + Saturday, Morgan + +On line 6129: + weeks of August.44 On + Saturday, Morgan Stanley + executives briefed + +On line 6129: + Saturday, Morgan + Stanley executives briefed + the New York Fed on + +On line 6129: + briefed the New York Fed + on the situation. By + this time, the firm had + +On line 6129: + the New York Fed on + the situation. By this + time, the firm had a + +On line 6129: + the situation. + By this time, the firm had a + total of billion + +On line 6129: + By this time, the firm + had a total of billion + in PDCF funding + +On line 6129: + this time, the firm had + a total of billion in + PDCF funding and + +On line 6129: + had a total of + billion in PDCF funding + and billion in TSLF + +On line 6129: + billion in PDCF + funding and billion in TSLF + funding from the Fed.45 + +On line 6129: + in PDCF funding + and billion in TSLF funding + from the Fed.45 Morgan + +On line 6129: + from the Fed.45 Morgan + Stanley’s liquidity pool + had dropped from billion + +On line 6129: + billion to billion + in one week. Repo lenders had + pulled out billion and + +On line 6129: + to billion in one + week. Repo lenders had pulled out + billion and hedge funds + +On line 6129: + in one week. Repo + lenders had pulled out billion and + hedge funds had taken + +On line 6129: + week. Repo lenders had + pulled out billion and hedge funds + had taken billion + +On line 6129: + Repo lenders had pulled + out billion and hedge funds had + taken billion out + +On line 6129: + out billion and hedge + funds had taken billion out + of Morgan Stanley’s + +On line 6129: + billion and hedge funds + had taken billion out of + Morgan Stanley’s prime + +On line 6129: + had taken billion + out of Morgan Stanley’s prime + brokerage. That run + +On line 6129: + of Morgan Stanley’s + prime brokerage. That run had + vastly exceeded + +On line 6129: + prime brokerage. That + run had vastly exceeded + the company’s most + +On line 6129: + That run had vastly + exceeded the company’s + most severe scenario + +On line 6129: + vastly exceeded + the company’s most severe + scenario in stress tests + +On line 6131: + one month earlier.46 + During the week, Goldman Sachs + had encountered a + +On line 6131: + liquidity pool + had fallen from about billion + on the previous + +On line 6131: + had fallen from about + billion on the previous + Friday to billion + +On line 6131: + from about billion on + the previous Friday to + billion on Thursday. + +On line 6131: + previous Friday + to billion on Thursday. At + the end of the week, + +On line 6131: + of the week, its Fed + borrowing totaled billion + from the PDCF and + +On line 6131: + borrowing totaled + billion from the PDCF and + billion from the TSLF. + +On line 6131: + totaled billion from + the PDCF and billion from + the TSLF. Lloyd Blankfein, + +On line 6133: + and billion from the + TSLF. Lloyd Blankfein, Goldman’s CEO, + told the FCIC, We had + +On line 6133: + Blankfein, Goldman’s CEO, + told the FCIC, We had tremendous + liquidity through + +On line 6133: + CEO, told the FCIC, We + had tremendous liquidity + through the period. + +On line 6133: + told the FCIC, We had + tremendous liquidity through + the period. But + +On line 6133: + liquidity through + the period. But there were + systemic events going + +On line 6133: + the period. But + there were systemic events going + on, and we were very + +On line 6133: + But there were systemic + events going on, and we were + very nervous. If you + +On line 6133: + there were systemic events + going on, and we were very + nervous. If you are + +On line 6133: + systemic events going + on, and we were very nervous. + If you are asking + +On line 6133: + events going on, and + we were very nervous. If you + are asking me what + +On line 6133: + going on, and we + were very nervous. If you are + asking me what would + +On line 6133: + we were very nervous. + If you are asking me what + would have happened but + +On line 6133: + were very nervous. If + you are asking me what would + have happened but for + +On line 6133: + very nervous. If you + are asking me what would have + happened but for the + +On line 6133: + you are asking me + what would have happened but for + the considerable + +On line 6133: + happened but for the + considerable government + intervention, I + +On line 6133: + the considerable + government intervention, + I would say we were + +On line 6133: + we were in—it was a + more nervous position than + we would have wanted + +On line 6133: + were in—it was a more + nervous position than we + would have wanted [to + +On line 6133: + was a more nervous + position than we would have + wanted [to be] in. + +On line 6133: + nervous position + than we would have wanted [to + be] in. We never + +On line 6133: + the government help. + We weren’t relying on + those mechanisms. I + +On line 6133: + government help. We + weren’t relying on those + mechanisms. I felt + +On line 6133: + weren’t relying + on those mechanisms. I felt + good about it, but we + +On line 6133: + on those mechanisms. + I felt good about it, but we + were going to bed + +On line 6133: + I felt good about it, + but we were going to bed + every night with more + +On line 6133: + good about it, but we + were going to bed every + night with more risk than + +On line 6133: + about it, but we were + going to bed every night + with more risk than any + +On line 6133: + were going to bed + every night with more risk than + any responsible + +On line 6133: + every night with more + risk than any responsible + manager should want + +On line 6133: + have, either for our + business or for the system + as a whole—risk, not + +On line 6135: + our business or for + the system as a whole—risk, + not certainty.47 Bernanke + +On line 6135: + business or for the + system as a whole—risk, not + certainty.47 Bernanke told + +On line 6135: + for the system as + a whole—risk, not certainty.47 + Bernanke told the FCIC that + +On line 6135: + the system as a + whole—risk, not certainty.47 Bernanke + told the FCIC that the + +On line 6135: + as a whole—risk, not + certainty.47 Bernanke told the FCIC + that the Fed believed + +On line 6135: + certainty.47 Bernanke told + the FCIC that the Fed believed + the run on Goldman + +On line 6135: + Bernanke told the FCIC that + the Fed believed the run on + Goldman that week could + +On line 6135: + the FCIC that the Fed + believed the run on Goldman + that week could lead to + +On line 6135: + the Fed believed the + run on Goldman that week could + lead to its failure: + +On line 6135: + Fed believed the run + on Goldman that week could lead + to its failure: "[Like + +On line 6135: + believed the run on + Goldman that week could lead to + its failure: "[Like JP + +On line 6135: + on Goldman that week + could lead to its failure: "[Like + JP Morgan,] Goldman + +On line 6135: + Goldman that week could + lead to its failure: "[Like JP + Morgan,] Goldman Sachs + +On line 6135: + that week could lead to + its failure: "[Like JP Morgan,] + Goldman Sachs I would + +On line 6135: + lead to its failure: + "[Like JP Morgan,] Goldman Sachs + I would say also + +On line 6135: + I would say also + protected themselves quite well + on the whole. They had + +On line 6135: + also protected + themselves quite well on the whole. + They had a lot of + +On line 6135: + themselves quite well on + the whole. They had a lot of + capital, a lot + +On line 6135: + the whole. They had a + lot of capital, a lot + of liquidity. + +On line 6135: + whole. They had a lot + of capital, a lot of + liquidity. But + +On line 6135: + lot of capital, + a lot of liquidity. + But being in the + +On line 6135: + in the investment + banking category rather + than the commercial + +On line 6135: + investment banking + category rather than the + commercial banking + +On line 6135: + category rather + than the commercial banking + category, when + +On line 6135: + commercial banking + category, when that huge + funding crisis hit + +On line 6135: + category, when + that huge funding crisis hit + all the investment + +On line 6135: + huge funding crisis + hit all the investment banks, + even Goldman Sachs, we + +On line 6135: + funding crisis hit + all the investment banks, even + Goldman Sachs, we thought + +On line 6135: + crisis hit all the + investment banks, even Goldman + Sachs, we thought there was + +On line 6135: + all the investment + banks, even Goldman Sachs, we thought + there was a real + +On line 6135: + the investment banks, + even Goldman Sachs, we thought there + was a real chance + +On line 6135: + investment banks, even + Goldman Sachs, we thought there was + a real chance that + +On line 6135: + banks, even Goldman Sachs, + we thought there was a real + chance that they would go + +On line 6135: + Goldman Sachs, we thought + there was a real chance that + they would go under."48 + +On line 6135: + Sachs, we thought there was + a real chance that they would + go under."48 Although + +On line 6135: + we thought there was a + real chance that they would go + under."48 Although it + +On line 6135: + there was a real + chance that they would go under."48 + Although it did not + +On line 6135: + a real chance that + they would go under."48 Although + it did not keep pace + +On line 6135: + real chance that they + would go under."48 Although it + did not keep pace with + +On line 6135: + chance that they would go + under."48 Although it did not + keep pace with Morgan + +On line 6135: + they would go under."48 + Although it did not keep pace + with Morgan Stanley’s + +On line 6135: + under."48 Although it + did not keep pace with Morgan + Stanley’s use of the + +On line 6135: + did not keep pace with + Morgan Stanley’s use of the + Fed’s facilities, + +On line 6135: + Stanley’s use of the + Fed’s facilities, Goldman + Sachs would continue + +On line 6135: + Fed’s facilities, + Goldman Sachs would continue + to access the Fed’s + +On line 6135: + PDCF borrowing + to a high of billion in + October and its + +On line 6135: + a high of billion + in October and its TSLF + borrowing to a + +On line 6135: + in October and + its TSLF borrowing to a + high of billion in + +On line 6137: + both Morgan Stanley + and Goldman Sachs applied to + the Fed to become + +On line 6137: + Morgan Stanley and + Goldman Sachs applied to the + Fed to become bank + +On line 6137: + Stanley and Goldman + Sachs applied to the Fed to + become bank holding + +On line 6137: + Goldman Sachs applied + to the Fed to become bank + holding companies. + +On line 6137: + Sachs applied to the + Fed to become bank holding + companies. "In my + +On line 6137: + the Fed to become + bank holding companies. "In + my 30-year history, + +On line 6137: + companies. "In my + 30-year history, [Goldman and + Morgan Stanley] had + +On line 6137: + my 30-year history, + [Goldman and Morgan Stanley] + had consistently + +On line 6137: + [Goldman and Morgan + Stanley] had consistently + opposed Federal + +On line 6137: + and Morgan Stanley] + had consistently opposed + Federal Reserve + +On line 6137: + had consistently + opposed Federal Reserve + supervision—[but + +On line 6137: + Federal Reserve + supervision—[but after + Lehman,] those franchises + +On line 6137: + supervision—[but + after Lehman,] those franchises + saw that they were next + +On line 6137: + those franchises saw + that they were next unless they + did something drastic. + +On line 6139: + franchises saw that + they were next unless they did + something drastic. That + +On line 6139: + they were next unless + they did something drastic. That + drastic thing was to + +On line 6139: + next unless they did + something drastic. That drastic + thing was to become + +On line 6139: + thing was to become + bank holding companies," Tom + Baxter, the New York + +On line 6139: + holding companies," + Tom Baxter, the New York Fed’s + general counsel, + +On line 6139: + Tom Baxter, the New + York Fed’s general counsel, + told the FCIC.49 The Fed, + +On line 6139: + Baxter, the New York + Fed’s general counsel, told + the FCIC.49 The Fed, in + +On line 6139: + York Fed’s general + counsel, told the FCIC.49 The Fed, + in tandem with the + +On line 6139: + the FCIC.49 The Fed, in + tandem with the Department + of Justice, approved + +On line 6139: + with the Department + of Justice, approved the two + applications with + +On line 6139: + of Justice, approved + the two applications with + extraordinary + +On line 6139: + two applications + with extraordinary speed, + waiving the standard + +On line 6139: + company into + a national bank, subject + to supervision + +On line 6139: + a national bank, + subject to supervision + by the Office of + +On line 6139: + of the Comptroller + of the Currency (OCC), and + Goldman converted + +On line 6139: + that was a member + of the Federal Reserve + System, subject to + +On line 6139: + of the Federal + Reserve System, subject to + supervision by + +On line 6139: + System, subject to + supervision by the Fed + and New York State. The + +On line 6139: + to supervision + by the Fed and New York State. + The Fed would begin + +On line 6139: + supervision by + the Fed and New York State. The + Fed would begin to + +On line 6139: + by the Fed and New + York State. The Fed would begin + to supervise the + +On line 6139: + the Fed and New York + State. The Fed would begin to + supervise the two + +On line 6139: + York State. The Fed would + begin to supervise the + two new bank holding + +On line 6139: + Fed would begin to + supervise the two new bank + holding companies. + +On line 6141: + supervise the two + new bank holding companies. + The two companies + +On line 6141: + emergency access + to the discount window for + terms of up to days.51 + +On line 6141: + the discount window + for terms of up to days.51 But, + more important, "I + +On line 6141: + discount window for + terms of up to days.51 But, more + important, "I think + +On line 6141: + of up to days.51 But, + more important, "I think the + biggest benefit + +On line 6141: + more important, "I + think the biggest benefit + is it would show you + +On line 6141: + important, "I think + the biggest benefit is + it would show you that + +On line 6141: + biggest benefit + is it would show you that you’re + important to the + +On line 6141: + is it would show you + that you’re important to the + system and the Fed + +On line 6141: + would show you that you’re + important to the system + and the Fed would not + +On line 6141: + that you’re important + to the system and the Fed + would not make you a + +On line 6141: + important to the + system and the Fed would not + make you a holding + +On line 6141: + to the system and + the Fed would not make you a + holding company + +On line 6141: + system and the Fed + would not make you a holding + company if they + +On line 6141: + the Fed would not make + you a holding company + if they thought in a + +On line 6141: + Fed would not make you + a holding company if + they thought in a very + +On line 6141: + would not make you a + holding company if they + thought in a very short + +On line 6141: + holding company + if they thought in a very short + period of time + +On line 6141: + they thought in a very + short period of time you’d + be out of business," + +On line 6141: + thought in a very short + period of time you’d be + out of business," Mack + +On line 6141: + short period of + time you’d be out of business," + Mack told the FCIC. "It + +On line 6141: + period of time + you’d be out of business," Mack + told the FCIC. "It sends + +On line 6141: + of time you’d be out + of business," Mack told the FCIC. + "It sends a signal + +On line 6141: + time you’d be out of + business," Mack told the FCIC. "It + sends a signal that + +On line 6141: + be out of business," + Mack told the FCIC. "It sends a + signal that these two + +On line 6141: + of business," Mack told + the FCIC. "It sends a signal + that these two firms are + +On line 6141: + Mack told the FCIC. "It + sends a signal that these two + firms are going to + +On line 6141: + the FCIC. "It sends a + signal that these two firms are + going to survive."52 + +On line 6143: + "It sends a signal + that these two firms are going + to survive."52 In a + +On line 6143: + sends a signal that + these two firms are going to + survive."52 In a show + +On line 6143: + that these two firms are + going to survive."52 In a + show of confidence, + +On line 6143: + two firms are going + to survive."52 In a show of + confidence, Warren + +On line 6143: + to survive."52 In a + show of confidence, Warren + Buffett invested + +On line 6143: + show of confidence, + Warren Buffett invested + billion in Goldman + +On line 6143: + confidence, Warren + Buffett invested billion + in Goldman Sachs, and + +On line 6143: + invested billion + in Morgan Stanley. Mack said + he had been waiting + +On line 6143: + billion in Morgan + Stanley. Mack said he had been + waiting all weekend + +On line 6143: + Stanley. Mack said he + had been waiting all weekend + for confirmation + +On line 6143: + confirmation of + Mitsubishi’s investment when, late + Sunday afternoon, + +On line 6143: + Mitsubishi’s investment + when, late Sunday afternoon, + he received a call + +On line 6143: + Sunday afternoon, + he received a call from Bernanke, + Geithner, and + +On line 6143: + Bernanke, Geithner, + and Paulson. "Basically + they said they wanted + +On line 6143: + Geithner, and + Paulson. "Basically they + said they wanted me + +On line 6143: + "Basically they + said they wanted me to sell + the firm," Mack told the + +On line 6143: + they said they wanted + me to sell the firm," Mack told + the FCIC. Less than an + +On line 6143: + said they wanted me + to sell the firm," Mack told the + FCIC. Less than an hour + +On line 6143: + wanted me to sell + the firm," Mack told the FCIC. Less + than an hour later, + +On line 6143: + me to sell the firm," + Mack told the FCIC. Less than an + hour later, Mitsubishi + +On line 6143: + to sell the firm," Mack + told the FCIC. Less than an hour + later, Mitsubishi called + +On line 6143: + Mack told the FCIC. Less + than an hour later, Mitsubishi + called to confirm its + +On line 6143: + than an hour later, + Mitsubishi called to confirm its + investment and the + +On line 6145: + its investment and + the regulators backed off.53 + Despite the weekend + +On line 6145: + the run on Morgan + Stanley continued. "Over the + course of a week, a + +On line 6145: + Stanley continued. + "Over the course of a week, a + decreasing number + +On line 6145: + the course of a week, + a decreasing number of + people [were] willing + +On line 6145: + decreasing number + of people [were] willing to + do new repos," Wong + +On line 6145: + people [were] willing + to do new repos," Wong said. + "They just couldn’t lend + +On line 6145: + [were] willing to do + new repos," Wong said. "They just + couldn’t lend anymore."54 + +On line 6147: + to do new repos," + Wong said. "They just couldn’t lend + anymore."54 By the end + +On line 6147: + said. "They just couldn’t + lend anymore."54 By the end of + September, Morgan + +On line 6149: + September, Morgan + Stanley’s liquidity pool + would be billion.55 But + +On line 6149: + But Morgan Stanley’s + liquidity depended + critically on + +On line 6149: + borrowing from two + Fed programs, billion from the + PDCF and billion + +On line 6149: + from two Fed programs, + billion from the PDCF and + billion from the TSLF. + +On line 6149: + Fed programs, billion + from the PDCF and billion + from the TSLF. Goldman + +On line 6149: + programs, billion from + the PDCF and billion from + the TSLF. Goldman Sachs’s + +On line 6149: + from the PDCF and + billion from the TSLF. Goldman + Sachs’s liquidity + +On line 6149: + billion from the TSLF. + Goldman Sachs’s liquidity + pool had recovered + +On line 6149: + from the TSLF. Goldman + Sachs’s liquidity pool had + recovered to about + +On line 6149: + had recovered to + about billion, backed by billion + from the PDCF and + +On line 6149: + to about billion, backed + by billion from the PDCF + and billion from the + +On line 6149: + about billion, backed by + billion from the PDCF and + billion from the TSLF. + +On line 6151: + backed by billion from + the PDCF and billion from + the TSLF. OVERTHECOUNTER + +On line 6153: + the TSLF. OVERTHECOUNTER + DERIVATIVES: "A GRINDING + HALT" Trading in the + +On line 6153: + had been declining + as investors grew more concerned + about counterparty + +On line 6153: + been declining as + investors grew more concerned about + counterparty risk + +On line 6153: + as investors grew more + concerned about counterparty + risk and as hedge funds + +On line 6153: + grew more concerned about + counterparty risk and as + hedge funds and other + +On line 6153: + of these markets slowed + to a crawl; in some cases, + there was no market + +On line 6153: + these markets slowed to + a crawl; in some cases, there + was no market at + +On line 6153: + in some cases, there + was no market at all—no + trades whatsoever. + +On line 6153: + some cases, there was + no market at all—no trades + whatsoever. A + +On line 6153: + market at all—no + trades whatsoever. A sharp + and unprecedented + +On line 6153: + trades whatsoever. + A sharp and unprecedented + contraction of the + +On line 6155: + market occurred.56 "The + OTC derivatives markets + came to a grinding + +On line 6155: + OTC derivatives + markets came to a grinding + halt, jeopardizing + +On line 6155: + viability + of every participant + regardless of their + +On line 6155: + by liquidating + their positions in other + assets those swaps were + +On line 6155: + their positions in + other assets those swaps were + designed to hedge." This + +On line 6155: + assets those swaps were + designed to hedge." This market + was nregulated + +On line 6155: + designed to hedge." This + market was nregulated + and largely opaque, with + +On line 6155: + hedge." This market was + nregulated and largely + opaque, with no public + +On line 6155: + opaque, with no public + reporting requirements and + little or no price + +On line 6155: + public reporting + requirements and little or + no price discovery. + +On line 6155: + participants in + the market became concerned + about the exposures + +On line 6155: + about the exposures + and creditworthiness of + their counterparties + +On line 6155: + the exposures and + creditworthiness of their + counterparties and + +On line 6155: + creditworthiness + of their counterparties and + the value of their + +On line 6155: + counterparties and + the value of their contracts. + That uncertainly + +On line 6155: + the value of their + contracts. That uncertainly + caused an abrupt retreat + +On line 6157: + That uncertainly + caused an abrupt retreat from the + market. Badly hit + +On line 6157: + caused an abrupt retreat + from the market. Badly hit + was the market for + +On line 6157: + hit was the market + for derivatives based on + nonprime mortgages. Firms + +On line 6157: + for derivatives + based on nonprime mortgages. Firms + had come to rely + +On line 6157: + derivatives based + on nonprime mortgages. Firms had + come to rely on + +On line 6157: + come to rely on + the prices of derivatives + contracts reflected + +On line 6157: + rely on the prices + of derivatives contracts + reflected in the + +On line 6157: + indices to value + their nonprime mortgage assets. + The ABX.HE.BBB- 06-2, + +On line 6159: + their nonprime mortgage + assets. The ABX.HE.BBB- 06-2, + whose decline in had + +On line 6159: + The ABX.HE.BBB- 06-2, + whose decline in had been an + early bellwether for + +On line 6159: + whose decline in had + been an early bellwether for + the market crisis, + +On line 6159: + decline in had been + an early bellwether for the + market crisis, had + +On line 6159: + an early bellwether + for the market crisis, had + been trading around cents + +On line 6159: + early bellwether for + the market crisis, had been + trading around cents on + +On line 6159: + the market crisis, + had been trading around cents on + the dollar since May. + +On line 6159: + market crisis, had + been trading around cents on the + dollar since May. But + +On line 6159: + had been trading around + cents on the dollar since May. + But trading on this + +On line 6159: + cents on the dollar + since May. But trading on this + index had become + +On line 6159: + the dollar since May. + But trading on this index + had become so thin, + +On line 6159: + since May. But trading + on this index had become + so thin, falling from + +On line 6159: + May. But trading on + this index had become so + thin, falling from an + +On line 6159: + on this index had + become so thin, falling from + an average of + +On line 6159: + had become so thin, + falling from an average + of about transactions + +On line 6159: + from an average + of about transactions per week + from January to + +On line 6161: + week from January + to September to fewer + than transactions per + +On line 6161: + from January to + September to fewer than + transactions per week + +On line 6161: + to September to + fewer than transactions per + week in October + +On line 6161: + week in October + that index values weren’t + informative.58 So, + +On line 6161: + that index values + weren’t informative.58 So, + what was a valid price + +On line 6161: + was a valid price for + these assets1 Price discovery + was a guessing game, + +On line 6161: + a valid price for these + assets1 Price discovery was + a guessing game, even + +On line 6161: + for these assets1 Price + discovery was a guessing + game, even more than it + +On line 6161: + Price discovery was + a guessing game, even more than + it had been under + +On line 6163: + it had been under + normal market conditions. + The contraction of + +On line 6163: + contraction of the + OTC derivatives market + had implications + +On line 6163: + the valuation + of mortgage securities. + Derivatives had + +On line 6163: + used to manage all + manner of risk—the risk that + currency exchange + +On line 6163: + manner of risk—the + risk that currency exchange + rates would fluctuate, + +On line 6163: + of risk—the risk that + currency exchange rates would + fluctuate, the risk + +On line 6163: + currency exchange + rates would fluctuate, the risk + that interest rates + +On line 6163: + rates would fluctuate, + the risk that interest rates + would change, the risk that + +On line 6163: + fluctuate, the risk + that interest rates would change, + the risk that asset + +On line 6163: + the risk that asset + prices would move. Efficiently + managing these risks + +On line 6163: + so that positions + could be adjusted daily + and at little cost. + +On line 6163: + that positions could + be adjusted daily and + at little cost. But + +On line 6163: + positions could be + adjusted daily and at + little cost. But in + +On line 6163: + could be adjusted + daily and at little cost. + But in the fall of + +On line 6163: + at little cost. But + in the fall of everyone + wanted to reduce + +On line 6163: + cost. But in the fall + of everyone wanted to + reduce exposure + +On line 6163: + everyone wanted + to reduce exposure to + everyone else. There + +On line 6163: + wanted to reduce + exposure to everyone + else. There was a rush + +On line 6163: + everyone else. There + was a rush for the exits + as participants + +On line 6163: + was a rush for the + exits as participants + worked to get out of + +On line 6163: + for the exits as + participants worked to get + out of existing + +On line 6165: + out of existing + trades. And because everyone + was worried about the + +On line 6165: + of existing trades. + And because everyone was + worried about the risk + +On line 6165: + was worried about the + risk inherent in the next + trade, there often was + +On line 6165: + worried about the risk + inherent in the next trade, + there often was no + +On line 6165: + the risk inherent + in the next trade, there often + was no next trade—and + +On line 6165: + inherent in the + next trade, there often was no + next trade—and volume + +On line 6165: + in the next trade, there + often was no next trade—and + volume fell further. + +On line 6165: + trade, there often was + no next trade—and volume fell + further. The result + +On line 6165: + often was no next + trade—and volume fell further. + The result was a + +On line 6165: + next trade—and volume + fell further. The result was + a vicious circle + +On line 6165: + trade—and volume fell + further. The result was a + vicious circle of + +On line 6167: + vicious circle of + justifiable caution and + inaction. Meanwhile, + +On line 6167: + and efficient price + discovery, every firm’s risk + management became + +On line 6167: + discovery, every + firm’s risk management became + more expensive and + +On line 6167: + The usual hedging + mechanisms were impaired. An + investor that wanted + +On line 6167: + hedging mechanisms + were impaired. An investor that + wanted to trade at + +On line 6167: + impaired. An investor + that wanted to trade at a + loss to get out of + +On line 6167: + investor that wanted + to trade at a loss to get + out of a losing + +On line 6167: + wanted to trade at + a loss to get out of a + losing position + +On line 6167: + to trade at a loss + to get out of a losing + position might not + +On line 6167: + loss to get out of + a losing position might + not find a buyer, + +On line 6167: + to get out of a + losing position might not + find a buyer, and + +On line 6167: + out of a losing + position might not find a + buyer, and those that + +On line 6167: + losing position + might not find a buyer, and + those that needed hedges + +On line 6167: + position might not + find a buyer, and those that + needed hedges would find + +On line 6167: + find a buyer, and + those that needed hedges would find + them more expensive + +On line 6167: + a buyer, and those + that needed hedges would find them + more expensive or + +On line 6169: + hedges would find them more + expensive or unavailable. + Several measures + +On line 6169: + them more expensive + or unavailable. Several + measures revealed the + +On line 6169: + of liquidity + in derivatives markets. + First, the number of + +On line 6169: + in derivatives + markets. First, the number of + outstanding contracts + +On line 6169: + contracts in a broad + range of OTC derivatives + sharply declined. Since its + +On line 6169: + by federal statute + in December this market + had increased more than + +On line 6169: + statute in December + this market had increased more + than sevenfold. From + +On line 6169: + in December this + market had increased more than + sevenfold. From June + +On line 6169: + market had increased + more than sevenfold. From June + to the end of the + +On line 6169: + to the end of the + year, however, outstanding + notional amounts of + +On line 6169: + notional amounts of + OTC derivatives fell by + more than This decline + +On line 6169: + period since the + Bank for International + Settlements began + +On line 6169: + Moreover, it occurred + during a period of + great volatility in + +On line 6169: + of great volatility + in the financial markets. + At such a time, firms + +On line 6169: + in the financial + markets. At such a time, firms + usually turn to + +On line 6169: + markets. At such a + time, firms usually turn to + the derivatives + +On line 6169: + time, firms usually + turn to the derivatives + market to hedge their + +On line 6169: + usually turn to + the derivatives market + to hedge their increased + +On line 6169: + the derivatives + market to hedge their increased + risks—but now they fled + +On line 6171: + market to hedge their + increased risks—but now they fled + the market. The lack + +On line 6171: + increased risks—but now + they fled the market. The lack + of liquidity + +On line 6171: + they fled the market. + The lack of liquidity + in derivatives + +On line 6171: + of liquidity + in derivatives markets + was also signaled + +On line 6171: + liquidity in + derivatives markets was + also signaled by + +On line 6171: + in derivatives + markets was also signaled + by the higher prices + +On line 6171: + was also signaled + by the higher prices charged by + OTC derivatives + +On line 6171: + by the higher prices + charged by OTC derivatives + dealers to enter + +On line 6171: + higher prices charged by + OTC derivatives dealers + to enter into + +On line 6171: + OTC derivatives + dealers to enter into + contracts. Dealers bear + +On line 6171: + dealers to enter + into contracts. Dealers bear + additional risks + +On line 6171: + bear additional + risks when markets are illiquid, + and they pass the cost + +On line 6171: + additional risks + when markets are illiquid, and + they pass the cost of + +On line 6171: + risks when markets are + illiquid, and they pass the cost + of those risks on to + +On line 6171: + markets are illiquid, + and they pass the cost of those + risks on to market + +On line 6171: + and they pass the cost + of those risks on to market + participants. The + +On line 6171: + of those risks on to + market participants. The + cost is evident + +On line 6171: + risks on to market + participants. The cost is + evident in the + +On line 6171: + evident in the + increased "bid-ask spread"—the difference + between the price at + +On line 6171: + in the increased "bid-ask + spread"—the difference between the + price at which dealers + +On line 6171: + the increased "bid-ask spread"—the + difference between the price + at which dealers were + +On line 6171: + between the price at + which dealers were willing to + buy contracts (the bid + +On line 6171: + price at which dealers + were willing to buy contracts + (the bid price) and the + +On line 6171: + at which dealers were + willing to buy contracts (the + bid price) and the price + +On line 6171: + dealers were willing + to buy contracts (the bid price) + and the price at which + +On line 6171: + were willing to buy + contracts (the bid price) and the + price at which they were + +On line 6171: + to buy contracts (the + bid price) and the price at which + they were willing to + +On line 6171: + buy contracts (the bid + price) and the price at which they + were willing to sell + +On line 6171: + contracts (the bid price) + and the price at which they were + willing to sell them + +On line 6171: + (the bid price) and the + price at which they were willing + to sell them (the ask + +On line 6171: + bid price) and the price + at which they were willing to + sell them (the ask price). + +On line 6171: + price) and the price at + which they were willing to sell + them (the ask price). As + +On line 6171: + the price at which they + were willing to sell them (the + ask price). As markets + +On line 6171: + which they were willing + to sell them (the ask price). As + markets became less + +On line 6171: + were willing to sell + them (the ask price). As markets + became less liquid + +On line 6171: + to sell them (the ask + price). As markets became less + liquid during the + +On line 6171: + them (the ask price). As + markets became less liquid + during the crisis, + +On line 6171: + ask price). As markets + became less liquid during + the crisis, dealers + +On line 6171: + markets became less + liquid during the crisis, + dealers worried that + +On line 6171: + became less liquid + during the crisis, dealers + worried that they might + +On line 6171: + liquid during the + crisis, dealers worried that + they might be saddled + +On line 6171: + worried that they might + be saddled with unwanted + exposure. As a + +On line 6171: + they might be saddled + with unwanted exposure. + As a result, they + +On line 6171: + exposure. As a + result, they began charging + more to sell contracts + +On line 6171: + As a result, they + began charging more to sell + contracts (raising their + +On line 6171: + result, they began + charging more to sell contracts + (raising their ask price), + +On line 6171: + they began charging + more to sell contracts (raising + their ask price), and the + +On line 6171: + began charging more + to sell contracts (raising their + ask price), and the spread + +On line 6171: + charging more to sell + contracts (raising their ask price), + and the spread rose. In + +On line 6171: + sell contracts (raising + their ask price), and the spread rose. + In addition, they + +On line 6171: + their ask price), and the + spread rose. In addition, they + offered less to buy + +On line 6171: + price), and the spread rose. + In addition, they offered + less to buy contracts + +On line 6171: + In addition, they + offered less to buy contracts + (lowered their bid price), + +On line 6171: + they offered less to + buy contracts (lowered their bid + price), because they feared + +On line 6171: + less to buy contracts + (lowered their bid price), because + they feared involvement + +On line 6171: + uncreditworthy + counterparties. The increase + in the spread in these + +On line 6171: + counterparties. The + increase in the spread in these + contracts meant that the + +On line 6171: + The increase in the + spread in these contracts meant that + the cost to a firm + +On line 6171: + increase in the spread + in these contracts meant that the + cost to a firm of + +On line 6171: + in the spread in these + contracts meant that the cost to + a firm of hedging + +On line 6171: + contracts meant that the + cost to a firm of hedging + its exposure to + +On line 6171: + the cost to a firm + of hedging its exposure + to the potential + +On line 6171: + or of another + firm also increased. The cost + of risk management + +On line 6171: + of another firm + also increased. The cost of + risk management rose + +On line 6171: + firm also increased. + The cost of risk management + rose just when the risks + +On line 6171: + increased. The cost of + risk management rose just when + the risks themselves had + +On line 6173: + management rose just + when the risks themselves had risen. + Meanwhile, outstanding + +On line 6175: + December when they + reached their height of trillion in + notional amount, and + +On line 6175: + when they reached their height + of trillion in notional + amount, and the latest + +On line 6175: + their height of trillion + in notional amount, and the + latest figures as + +On line 6175: + in notional amount, + and the latest figures as + of June when they had + +On line 6177: + latest figures as + of June when they had fallen + to trillion.60 In sum, + +On line 6177: + of June when they had + fallen to trillion.60 In sum, + the sharp contraction + +On line 6177: + when they had fallen + to trillion.60 In sum, the sharp + contraction in the + +On line 6177: + to trillion.60 In sum, + the sharp contraction in the + OTC derivatives + +On line 6177: + the sharp contraction + in the OTC derivatives + market in the fall + +On line 6177: + the fall of greatly + diminished the ability + of institutions + +On line 6177: + unwind their contracts + or to effectively hedge + their business risks at + +On line 6177: + effectively hedge + their business risks at a time + when uncertainty + +On line 6177: + their business risks at + a time when uncertainty + in the financial + +On line 6177: + when uncertainty + in the financial system + made risk management + +On line 6177: + uncertainty in + the financial system made + risk management a + +On line 6179: + management a top + priority. WASHINGTON + MUTUAL: "IT’S YOURS" + +On line 6181: + top priority. + WASHINGTON MUTUAL: "IT’S + YOURS" In the eight days + +On line 6181: + "IT’S YOURS" In the eight + days after Lehman’s bankruptcy, + depositors pulled + +On line 6181: + eight days after Lehman’s + bankruptcy, depositors + pulled billion out of + +On line 6181: + depositors pulled + billion out of Washington + Mutual, which now + +On line 6181: + pulled billion out of + Washington Mutual, which + now faced imminent + +On line 6181: + Mutual, which now + faced imminent collapse. WaMu + had been the subject + +On line 6181: + imminent collapse. + WaMu had been the subject of + concern for some time + +On line 6181: + collapse. WaMu had been + the subject of concern for + some time because of + +On line 6181: + because of its poor + mortgage-underwriting standards + and its exposures + +On line 6181: + mortgage-underwriting + standards and its exposures + to payment-option + +On line 6181: + and its exposures + to payment-option adjustable-rate + mortgages (ARMs). Moody’s had + +On line 6181: + the lowest-tier + investment-grade rating, + in July, and then + +On line 6181: + investment-grade + rating, in July, and then + to junk status on + +On line 6181: + rating, in July, + and then to junk status on + September citing + +On line 6181: + July, and then to + junk status on September + citing "WAMU’s reduced + +On line 6181: + then to junk status + on September citing "WAMU’s + reduced financial + +On line 6183: + expected franchise + erosion."61 The Office of Thrift + Supervision (OTS) + +On line 6183: + erosion."61 The Office + of Thrift Supervision (OTS) + determined that the + +On line 6185: + Thrift Supervision + (OTS) determined that the thrift + likely could not "pay + +On line 6185: + (OTS) determined that + the thrift likely could not "pay + its obligations and + +On line 6185: + determined that the + thrift likely could not "pay its + obligations and meet + +On line 6185: + thrift likely could not + "pay its obligations and meet + its operating + +On line 6185: + "pay its obligations + and meet its operating + liquidity needs."62 + +On line 6185: + the bank on Thursday, + September appointing the + Federal Deposit + +On line 6185: + Thursday, September + appointing the Federal + Deposit Insurance + +On line 6185: + Federal Deposit + Insurance Corporation + as receiver; many + +On line 6185: + Corporation as + receiver; many unsecured + creditors suffered + +On line 6185: + suffered losses. With + assets of billion as of + June WaMu thus became + +On line 6185: + losses. With assets + of billion as of June WaMu + thus became the largest + +On line 6185: + thus became the largest + insured depository + institution in + +On line 6185: + U.S. history to + fail—bigger than IndyMac, bigger + than any bank or thrift + +On line 6185: + to fail—bigger than + IndyMac, bigger than any bank or + thrift failure in the + +On line 6185: + fail—bigger than IndyMac, + bigger than any bank or thrift + failure in the 1980s + +On line 6185: + than IndyMac, bigger than + any bank or thrift failure in + the 1980s and 1990s. JP + +On line 6185: + bigger than any bank + or thrift failure in the 1980s + and 1990s. JP Morgan + +On line 6185: + thrift failure in the + 1980s and 1990s. JP Morgan paid + billion to acquire + +On line 6185: + in the 1980s and 1990s. + JP Morgan paid billion to + acquire WaMu’s banking + +On line 6185: + billion to acquire + WaMu’s banking operations + from the FDIC on the + +On line 6185: + acquire WaMu’s banking + operations from the FDIC + on the same day; on + +On line 6185: + from the FDIC on the + same day; on the next day, WaMu’s + parent company + +On line 6185: + same day; on the next + day, WaMu’s parent company + (now minus the thrift) + +On line 6185: + day; on the next day, + WaMu’s parent company (now + minus the thrift) filed + +On line 6185: + next day, WaMu’s parent + company (now minus the + thrift) filed for Chapter + +On line 6185: + parent company + (now minus the thrift) filed for + Chapter bankruptcy + +On line 6187: + thrift) filed for Chapter + bankruptcy protection. FDIC + officials told the + +On line 6187: + Chapter bankruptcy + protection. FDIC officials + told the FCIC that they + +On line 6187: + told the FCIC that they + had known in advance of WaMu’s + troubles and thus had + +On line 6187: + FCIC that they had known + in advance of WaMu’s troubles + and thus had time to + +On line 6187: + had known in advance + of WaMu’s troubles and thus had + time to arrange the + +On line 6187: + of WaMu’s troubles and + thus had time to arrange the + transaction with JP + +On line 6187: + time to arrange the + transaction with JP Morgan. + JP Morgan CEO Jamie + +On line 6187: + the transaction with + JP Morgan. JP Morgan CEO + Jamie Dimon said that + +On line 6187: + transaction with JP + Morgan. JP Morgan CEO Jamie + Dimon said that his + +On line 6187: + said that his bank was + already examining WaMu’s + assets for purchase + +On line 6187: + his bank was already + examining WaMu’s assets + for purchase when FDIC + +On line 6187: + examining WaMu’s + assets for purchase when FDIC + Chairman Sheila Bair called + +On line 6187: + assets for purchase + when FDIC Chairman Sheila Bair called + him and asked, "Would you + +On line 6187: + when FDIC Chairman Sheila + Bair called him and asked, "Would you + be prepared to bid + +On line 6187: + FDIC Chairman Sheila Bair + called him and asked, "Would you be + prepared to bid on + +On line 6187: + Sheila Bair called him and + asked, "Would you be prepared to + bid on WaMu1" "I said + +On line 6187: + Bair called him and asked, + "Would you be prepared to bid + on WaMu1" "I said yes + +On line 6187: + called him and asked, "Would + you be prepared to bid on + WaMu1" "I said yes we + +On line 6187: + him and asked, "Would you + be prepared to bid on WaMu1" + "I said yes we would," + +On line 6187: + "Would you be prepared + to bid on WaMu1" "I said yes + we would," Dimon told + +On line 6187: + you be prepared to + bid on WaMu1" "I said yes we + would," Dimon told the + +On line 6187: + be prepared to bid + on WaMu1" "I said yes we would," + Dimon told the FCIC. + +On line 6187: + to bid on WaMu1" "I + said yes we would," Dimon told + the FCIC. "She called me + +On line 6187: + bid on WaMu1" "I said + yes we would," Dimon told the + FCIC. "She called me up + +On line 6187: + yes we would," Dimon + told the FCIC. "She called me up + literally the + +On line 6187: + told the FCIC. "She called + me up literally the + next day and said—‘It’s yours.’ + +On line 6187: + the FCIC. "She called me + up literally the next + day and said—‘It’s yours.’ I + +On line 6187: + FCIC. "She called me up + literally the next day + and said—‘It’s yours.’ I thought + +On line 6187: + literally the + next day and said—‘It’s yours.’ I thought + there was another + +On line 6187: + next day and said—‘It’s yours.’ + I thought there was another + bidder, by the way, + +On line 6187: + and said—‘It’s yours.’ I thought + there was another bidder, + by the way, the whole + +On line 6187: + said—‘It’s yours.’ I thought there + was another bidder, by + the way, the whole time, + +On line 6187: + there was another + bidder, by the way, the whole + time, otherwise I + +On line 6187: + the way, the whole time, + otherwise I would have bid + a dollar—not billion], + +On line 6187: + otherwise I would + have bid a dollar—not billion], + but we wanted to + +On line 6189: + a dollar—not billion], + but we wanted to win."63 The + FDIC insurance fund + +On line 6189: + dollar—not billion], but + we wanted to win."63 The FDIC + insurance fund came + +On line 6189: + but we wanted to + win."63 The FDIC insurance fund + came out of the WaMu + +On line 6189: + FDIC funds to protect + unsecured creditors, which + it could have done by + +On line 6189: + protect unsecured + creditors, which it could have + done by invoking + +On line 6189: + it could have done by + invoking the "systemic risk + exception" under + +On line 6189: + exception" under + the FDIC Improvement Act of + (Recall that FDICIA + +On line 6189: + the FDIC Improvement + Act of (Recall that FDICIA + required that failing + +On line 6189: + Improvement Act of + (Recall that FDICIA required + that failing banks be + +On line 6189: + Act of (Recall that + FDICIA required that failing + banks be dismantled + +On line 6189: + (Recall that FDICIA + required that failing banks be + dismantled at the + +On line 6189: + FDICIA required that + failing banks be dismantled + at the least cost to + +On line 6189: + required that failing + banks be dismantled at the + least cost to the FDIC + +On line 6189: + that failing banks be + dismantled at the least cost + to the FDIC unless + +On line 6189: + banks be dismantled + at the least cost to the FDIC + unless the FDIC, the + +On line 6189: + dismantled at the + least cost to the FDIC unless + the FDIC, the Fed, and + +On line 6189: + at the least cost to + the FDIC unless the FDIC, the + Fed, and Treasury agree + +On line 6189: + the least cost to the + FDIC unless the FDIC, the Fed, + and Treasury agree that + +On line 6189: + least cost to the FDIC + unless the FDIC, the Fed, and + Treasury agree that a + +On line 6189: + FDIC unless the FDIC, + the Fed, and Treasury agree that + a particular + +On line 6189: + the Fed, and Treasury + agree that a particular + company’s collapse + +On line 6189: + Treasury agree that a + particular company’s + collapse poses a + +On line 6189: + risk to the entire + financial system; it had + not been tested in + +On line 6189: + financial system; + it had not been tested in + years.) Losses among those + +On line 6189: + system; it had not + been tested in years.) Losses + among those creditors + +On line 6189: + been tested in years.) + Losses among those creditors + created panic + +On line 6189: + FDIC Chairman Bair stood + behind the decision. "I + absolutely do + +On line 6189: + do think that was the + right decision," she told the + FCIC. "WaMu was not a + +On line 6189: + think that was the right + decision," she told the FCIC. + "WaMu was not a well-run + +On line 6189: + right decision," she + told the FCIC. "WaMu was not a + well-run institution." + +On line 6189: + decision," she told + the FCIC. "WaMu was not a well-run + institution." She + +On line 6189: + told the FCIC. "WaMu was + not a well-run institution." + She characterized + +On line 6189: + the FCIC. "WaMu was not + a well-run institution." She + characterized the + +On line 6191: + She characterized + the resolution of WaMu + as "successful."64 The + +On line 6191: + characterized the + resolution of WaMu as + "successful."64 The FDIC’s + +On line 6191: + the resolution + of WaMu as "successful."64 The + FDIC’s decision would + +On line 6191: + resolution of + WaMu as "successful."64 The FDIC’s + decision would be + +On line 6191: + WaMu as "successful."64 + The FDIC’s decision would be + hotly debated. + +On line 6191: + FDIC’s decision would + be hotly debated. Fed + General Counsel + +On line 6191: + hotly debated. + Fed General Counsel Scott + Alvarez told the FCIC + +On line 6191: + General Counsel + Scott Alvarez told the FCIC that + he agreed with Bair that + +On line 6191: + Counsel Scott Alvarez + told the FCIC that he agreed with + Bair that "there should not + +On line 6191: + Scott Alvarez told the + FCIC that he agreed with Bair that + "there should not have been + +On line 6191: + the FCIC that he agreed + with Bair that "there should not have + been intervention + +On line 6191: + FCIC that he agreed with + Bair that "there should not have been + intervention in + +On line 6191: + with Bair that "there should + not have been intervention + in WaMu."65 But Treasury + +On line 6191: + "there should not have been + intervention in WaMu."65 But + Treasury officials + +On line 6191: + intervention in + WaMu."65 But Treasury officials + felt differently: + +On line 6191: + Treasury officials + felt differently: "We were + saying that’s great, we + +On line 6191: + felt differently: + "We were saying that’s great, we + can all be tough, and + +On line 6191: + differently: "We + were saying that’s great, we can + all be tough, and we + +On line 6191: + "We were saying that’s + great, we can all be tough, and + we can be so tough + +On line 6191: + were saying that’s great, + we can all be tough, and we + can be so tough that + +On line 6191: + saying that’s great, we + can all be tough, and we can + be so tough that we + +On line 6191: + that’s great, we can all + be tough, and we can be so + tough that we plunge the + +On line 6191: + can all be tough, and + we can be so tough that we + plunge the financial + +On line 6191: + be tough, and we can + be so tough that we plunge the + financial system + +On line 6191: + we can be so tough + that we plunge the financial + system into the + +On line 6191: + tough that we plunge the + financial system into + the Great Depression," + +On line 6191: + financial system + into the Great Depression," + Treasury’s Neel Kashkari told + +On line 6191: + system into the + Great Depression," Treasury’s Neel + Kashkari told the FCIC. "And + +On line 6191: + the Great Depression," + Treasury’s Neel Kashkari told the FCIC. + "And so, I think, in + +On line 6191: + Treasury’s Neel Kashkari told + the FCIC. "And so, I think, in + my judgment that was + +On line 6191: + Kashkari told the FCIC. "And + so, I think, in my judgment + that was a mistake. + +On line 6191: + told the FCIC. "And so, + I think, in my judgment that + was a mistake. [A]t + +On line 6191: + the FCIC. "And so, I + think, in my judgment that was + a mistake. [A]t that + +On line 6191: + FCIC. "And so, I think, + in my judgment that was a + mistake. [A]t that time, + +On line 6191: + think, in my judgment + that was a mistake. [A]t that + time, the economy + +On line 6191: + in my judgment that + was a mistake. [A]t that time, + the economy was + +On line 6191: + my judgment that was + a mistake. [A]t that time, the + economy was in + +On line 6191: + was a mistake. [A]t + that time, the economy was + in such a perilous + +On line 6191: + a mistake. [A]t that + time, the economy was in + such a perilous state, + +On line 6191: + mistake. [A]t that time, + the economy was in such + a perilous state, it + +On line 6191: + time, the economy + was in such a perilous state, + it was like playing + +On line 6191: + the economy was + in such a perilous state, it + was like playing with + +On line 6191: + economy was in + such a perilous state, it was + like playing with fire."66 + +On line 6193: + in such a perilous + state, it was like playing with + fire."66 WACHOVIA: "AT THE + +On line 6193: + such a perilous state, + it was like playing with fire."66 + WACHOVIA: "AT THE FRONT + +On line 6193: + perilous state, it was + like playing with fire."66 WACHOVIA: + "AT THE FRONT END OF + +On line 6195: + it was like playing + with fire."66 WACHOVIA: "AT THE FRONT + END OF THE DOMINOES + +On line 6195: + was like playing with + fire."66 WACHOVIA: "AT THE FRONT END + OF THE DOMINOES AS + +On line 6195: + with fire."66 WACHOVIA: "AT + THE FRONT END OF THE DOMINOES + AS OTHER DOMINOES + +On line 6195: + fire."66 WACHOVIA: "AT THE + FRONT END OF THE DOMINOES AS + OTHER DOMINOES FELL" + +On line 6197: + THE FRONT END OF THE + DOMINOES AS OTHER DOMINOES + FELL" Wachovia, having + +On line 6197: + OF THE DOMINOES AS + OTHER DOMINOES FELL" Wachovia, + having bought Golden + +On line 6197: + DOMINOES AS OTHER + DOMINOES FELL" Wachovia, having + bought Golden West, was + +On line 6197: + DOMINOES FELL" Wachovia, + having bought Golden West, was + the largest holder of + +On line 6197: + having bought Golden + West, was the largest holder of + payment-option ARMs, + +On line 6197: + was the largest holder + of payment-option ARMs, the + same product that had + +On line 6197: + the largest holder of + payment-option ARMs, the same + product that had helped + +On line 6197: + of payment-option + ARMs, the same product that had + helped bring down WaMu and + +On line 6197: + ARMs, the same product + that had helped bring down WaMu and + Countrywide. Concerns + +On line 6197: + that had helped bring down + WaMu and Countrywide. Concerns + about Wachovia—then the + +On line 6197: + had helped bring down WaMu + and Countrywide. Concerns about + Wachovia—then the fourth-largest + +On line 6197: + the fourth-largest bank holding + company—had also been + escalating for + +On line 6197: + escalating for + some time. On September the + Merrill analyst + +On line 6197: + the company’s stock + to "underperform," pointing + to weakness in its + +On line 6197: + to weakness in its + option ARM and commercial + loan portfolios. On + +On line 6197: + executives met + Fed officials to ask for + an exemption from + +On line 6197: + Fed officials to + ask for an exemption from + rules that limited + +On line 6199: + an exemption from + rules that limited holding + companies’ use of + +On line 6199: + rules that limited + holding companies’ use of + insured deposits to + +On line 6199: + limited holding + companies’ use of insured + deposits to meet their + +On line 6199: + companies’ use of + insured deposits to meet their + liquidity needs. + +On line 6199: + of insured deposits + to meet their liquidity + needs. The Fed did not + +On line 6199: + deposits to meet their + liquidity needs. The Fed + did not accede; staff + +On line 6199: + liquidity needs. + The Fed did not accede; staff + believed that Wachovia’s + +On line 6199: + Fed did not accede; + staff believed that Wachovia’s cash + position was strong + +On line 6199: + accede; staff believed + that Wachovia’s cash position + was strong and that the + +On line 6199: + believed that Wachovia’s + cash position was strong and + that the requested + +On line 6201: + cash position was + strong and that the requested + relief was a "want" + +On line 6201: + was strong and that the + requested relief was a + "want" rather than a "need."67 + +On line 6203: + that the requested + relief was a "want" rather than + a "need."67 But they changed + +On line 6203: + requested relief + was a "want" rather than a "need."67 + But they changed their minds + +On line 6203: + relief was a "want" + rather than a "need."67 But they changed + their minds after the + +On line 6203: + "want" rather than a "need."67 + But they changed their minds after + the Lehman bankruptcy, + +On line 6203: + But they changed their minds + after the Lehman bankruptcy, + immediately + +On line 6203: + the Lehman bankruptcy, + immediately launching + daily conference + +On line 6203: + conference calls to + discuss liquidity with + Wachovia management. + +On line 6203: + the Fed supported + the company’s request to + use insured deposits + +On line 6203: + Fed supported the + company’s request to use + insured deposits to + +On line 6203: + Wells Fargo Chairman + Richard M. Kovacevich told Robert + Steel, Wachovia’s CEO and + +On line 6203: + Robert Steel, Wachovia’s CEO + and recently a Treasury + undersecretary, + +On line 6203: + be interested + in acquiring the besieged + bank, and the two agreed + +On line 6203: + interested in + acquiring the besieged bank, + and the two agreed to + +On line 6203: + in acquiring the + besieged bank, and the two agreed + to speak later in + +On line 6203: + the besieged bank, and + the two agreed to speak later + in the week. The same + +On line 6203: + besieged bank, and the + two agreed to speak later in + the week. The same day, + +On line 6203: + the two agreed to speak + later in the week. The same + day, Fed Governor + +On line 6203: + agreed to speak later + in the week. The same day, Fed + Governor Kevin Warsh + +On line 6203: + later in the week. + The same day, Fed Governor + Kevin Warsh suggested + +On line 6203: + in the week. The same + day, Fed Governor Kevin Warsh + suggested that Steel + +On line 6203: + Governor Kevin Warsh + suggested that Steel also + talk to Goldman. As + +On line 6203: + Warsh suggested that + Steel also talk to Goldman. + As a former vice + +On line 6203: + Steel also talk to + Goldman. As a former vice + chairman of Goldman, + +On line 6203: + As a former vice + chairman of Goldman, Steel could + easily approach + +On line 6203: + of Goldman, Steel could + easily approach the firm, + but the ensuing + +On line 6203: + easily approach + the firm, but the ensuing + conversations were + +On line 6205: + were short; Goldman was + not interested.68 Throughout + the following week, + +On line 6205: + short; Goldman was not + interested.68 Throughout the + following week, it + +On line 6205: + following week, it + became increasingly clear + that Wachovia needed + +On line 6205: + Wachovia needed to + merge with a stronger financial + institution. Then, + +On line 6205: + to merge with a stronger + financial institution. + Then, WaMu’s failure on + +On line 6205: + Then, WaMu’s failure on + September "raised creditor + concern about the health + +On line 6205: + on September "raised + creditor concern about the + health of Wachovia," the + +On line 6205: + creditor concern + about the health of Wachovia," the + Fed’s Alvarez told the + +On line 6205: + concern about the health + of Wachovia," the Fed’s Alvarez + told the FCIC. "The day + +On line 6205: + the health of Wachovia," + the Fed’s Alvarez told the FCIC. + "The day after the + +On line 6205: + of Wachovia," the Fed’s + Alvarez told the FCIC. "The day + after the failure + +On line 6205: + Alvarez told the FCIC. + "The day after the failure + of WaMu, Wachovia Bank + +On line 6205: + FCIC. "The day after + the failure of WaMu, Wachovia + Bank depositors + +On line 6205: + the failure of WaMu, + Wachovia Bank depositors + accelerated + +On line 6205: + the withdrawal of + significant amounts from their + accounts," Alvarez said. + +On line 6205: + of significant + amounts from their accounts," Alvarez + said. "In addition, + +On line 6205: + Wachovia. It appeared + likely that Wachovia would soon + become unable to + +On line 6205: + It appeared likely + that Wachovia would soon become + unable to fund its + +On line 6205: + that Wachovia would soon + become unable to fund its + operations."69 Steel + +On line 6205: + soon become unable + to fund its operations."69 + Steel said, "As the day + +On line 6205: + unable to fund its + operations."69 Steel said, "As + the day progressed, some + +On line 6205: + its operations."69 + Steel said, "As the day progressed, + some liquidity + +On line 6205: + "As the day progressed, + some liquidity pressure + intensified as + +On line 6205: + intensified as + financial institutions + began declining + +On line 6207: + to conduct normal + financing transactions with + Wachovia."70 David Wilson, + +On line 6207: + normal financing + transactions with Wachovia."70 David + Wilson, the Office + +On line 6207: + the Currency’s lead + examiner at Wachovia, + agreed. "The whole world changed" + +On line 6207: + examiner at + Wachovia, agreed. "The whole world changed" + for Wachovia after + +On line 6207: + Wachovia, agreed. "The whole + world changed" for Wachovia after + WaMu’s failure, he said.71 + +On line 6207: + "The whole world changed" for + Wachovia after WaMu’s failure, + he said.71 The FDIC’s Bair + +On line 6207: + world changed" for Wachovia + after WaMu’s failure, he said.71 + The FDIC’s Bair had a + +On line 6207: + for Wachovia after + WaMu’s failure, he said.71 The FDIC’s + Bair had a slightly + +On line 6207: + after WaMu’s failure, + he said.71 The FDIC’s Bair had a + slightly different + +On line 6207: + WaMu’s failure, he said.71 + The FDIC’s Bair had a slightly + different view. WaMu’s + +On line 6207: + he said.71 The FDIC’s Bair + had a slightly different + view. WaMu’s failure "was + +On line 6207: + Bair had a slightly + different view. WaMu’s failure + "was practically + +On line 6207: + different view. WaMu’s + failure "was practically + a nonevent," she told + +On line 6207: + view. WaMu’s failure "was + practically a nonevent," + she told the FCIC. "It + +On line 6207: + "was practically + a nonevent," she told the FCIC. + "It was below the + +On line 6207: + practically a + nonevent," she told the FCIC. "It + was below the fold + +On line 6207: + a nonevent," she told + the FCIC. "It was below the + fold if it was even + +On line 6207: + nonevent," she told the + FCIC. "It was below the fold + if it was even on + +On line 6207: + she told the FCIC. "It + was below the fold if it + was even on the front + +On line 6207: + told the FCIC. "It was + below the fold if it was + even on the front page + +On line 6207: + FCIC. "It was below + the fold if it was even on + the front page barely + +On line 6207: + "It was below the + fold if it was even on the + front page barely a + +On line 6207: + was below the fold + if it was even on the front + page barely a blip + +On line 6207: + if it was even on + the front page barely a blip + given everything + +On line 6207: + was even on the front + page barely a blip given + everything else that + +On line 6207: + the front page barely + a blip given everything + else that was going + +On line 6207: + front page barely a + blip given everything else + that was going on."72 + +On line 6209: + page barely a blip + given everything else that + was going on."72 The + +On line 6209: + given everything + else that was going on."72 The + run on Wachovia Bank, + +On line 6209: + going on."72 The run + on Wachovia Bank, the country’s + fourth-largest commercial bank, + +On line 6211: + run on Wachovia Bank, + the country’s fourth-largest commercial + bank, was a "silent run" + +On line 6211: + on Wachovia Bank, the + country’s fourth-largest commercial bank, + was a "silent run" by + +On line 6211: + fourth-largest commercial bank, + was a "silent run" by uninsured + depositors and + +On line 6211: + computers, rather than + by depositors standing + in lines outside bank + +On line 6211: + By noon on Friday, + September creditors were + refusing to roll + +On line 6211: + Friday, September + creditors were refusing + to roll over the bank’s + +On line 6211: + to roll over the bank’s + short-term funding, including + commercial paper + +On line 6211: + commercial paper + and brokered certificates of + deposit.74 The FDIC’s John + +On line 6211: + John Corston testified + that Wachovia lost billion of + deposits and billion + +On line 6211: + Wachovia lost billion + of deposits and billion of + commercial paper + +On line 6211: + billion of deposits + and billion of commercial + paper and repos + +On line 6213: + deposits and billion + of commercial paper and + repos that day.75 By + +On line 6213: + commercial paper + and repos that day.75 By the + end of the day on + +On line 6213: + and repos that day.75 + By the end of the day on + Friday, Wachovia told + +On line 6213: + By the end of the + day on Friday, Wachovia told + the Fed that worried + +On line 6213: + Wachovia told the Fed + that worried creditors had + asked it to repay + +On line 6213: + the Fed that worried + creditors had asked it to + repay roughly half + +On line 6213: + asked it to repay + roughly half of its long-term debt—$50 + billion to billion.76 + +On line 6213: + to repay roughly + half of its long-term debt—$50 billion + to billion.76 Wachovia + +On line 6213: + repay roughly half + of its long-term debt—$50 billion to + billion.76 Wachovia "did + +On line 6213: + roughly half of its + long-term debt—$50 billion to billion.76 + Wachovia "did not have + +On line 6213: + half of its long-term debt—$50 + billion to billion.76 Wachovia + "did not have to pay + +On line 6213: + its long-term debt—$50 billion + to billion.76 Wachovia "did not + have to pay all these + +On line 6213: + long-term debt—$50 billion to + billion.76 Wachovia "did not have + to pay all these funds + +On line 6213: + billion to billion.76 + Wachovia "did not have to pay + all these funds from a + +On line 6213: + have to pay all these + funds from a contractual + basis (they had not + +On line 6213: + pay all these funds from + a contractual basis + (they had not matured), + +On line 6213: + all these funds from a + contractual basis (they + had not matured), but + +On line 6213: + (they had not matured), + but would have difficulty + [borrowing from these + +On line 6213: + matured), but would have + difficulty [borrowing + from these lenders] going + +On line 6213: + [borrowing from these + lenders] going forward given + the reluctance to + +On line 6213: + lenders] going forward + given the reluctance to + repay early," Richard + +On line 6213: + the reluctance to + repay early," Richard Westerkamp, + the Richmond Fed’s lead + +On line 6213: + to repay early," + Richard Westerkamp, the Richmond Fed’s + lead examiner + +On line 6213: + repay early," Richard + Westerkamp, the Richmond Fed’s lead + examiner at + +On line 6213: + Westerkamp, the Richmond + Fed’s lead examiner at + Wachovia, told the FCIC.77 + +On line 6215: + the Richmond Fed’s lead + examiner at Wachovia, + told the FCIC.77 In one + +On line 6215: + lead examiner + at Wachovia, told the FCIC.77 In + one day, the value + +On line 6215: + examiner at + Wachovia, told the FCIC.77 In one + day, the value of + +On line 6215: + at Wachovia, told the + FCIC.77 In one day, the value + of Wachovia’s 10-year bonds + +On line 6215: + Wachovia, told the FCIC.77 + In one day, the value of + Wachovia’s 10-year bonds fell + +On line 6215: + told the FCIC.77 In one + day, the value of Wachovia’s + 10-year bonds fell from cents + +On line 6215: + the FCIC.77 In one day, + the value of Wachovia’s 10-year + bonds fell from cents to + +On line 6215: + FCIC.77 In one day, the + value of Wachovia’s 10-year bonds + fell from cents to cents + +On line 6215: + one day, the value + of Wachovia’s 10-year bonds fell from + cents to cents on the + +On line 6215: + value of Wachovia’s + 10-year bonds fell from cents to cents + on the dollar, and + +On line 6215: + of Wachovia’s 10-year bonds + fell from cents to cents on the + dollar, and the cost + +On line 6215: + 10-year bonds fell from cents + to cents on the dollar, and + the cost of buying + +On line 6215: + from cents to cents on + the dollar, and the cost of + buying protection + +On line 6215: + dollar, and the cost + of buying protection on + million of Wachovia + +On line 6215: + the cost of buying + protection on million of + Wachovia debt jumped from + +On line 6215: + buying protection + on million of Wachovia debt + jumped from to almost + +On line 6217: + stock fell wiping out + billion in market value. + Comptroller of the + +On line 6217: + billion in market + value. Comptroller of the + Currency John Dugan, + +On line 6217: + Currency John Dugan, + whose agency regulated + Wachovia’s commercial + +On line 6217: + liquidity was + unstable.78 "Wachovia was at + the front end of the + +On line 6217: + unstable.78 "Wachovia + was at the front end of the + dominoes as other + +On line 6217: + "Wachovia was at the + front end of the dominoes as + other dominoes fell," + +On line 6217: + was at the front end + of the dominoes as other + dominoes fell," Steel told + +On line 6217: + the front end of the + dominoes as other dominoes + fell," Steel told the FCIC.79 + +On line 6219: + of the dominoes as + other dominoes fell," Steel told + the FCIC.79 Government + +On line 6219: + other dominoes fell," + Steel told the FCIC.79 Government + officials were not + +On line 6219: + fell," Steel told the FCIC.79 + Government officials were + not prepared to let + +On line 6219: + the FCIC.79 Government + officials were not prepared + to let Wachovia open + +On line 6219: + not prepared to let + Wachovia open for business on + Monday, September + +On line 6219: + business on Monday, + September without a deal + in place.80 "Markets were + +On line 6219: + were already under + considerable strain after + the events involving + +On line 6219: + considerable strain + after the events involving + Lehman Brothers, AIG, and + +On line 6219: + the events involving + Lehman Brothers, AIG, and WaMu," the + Fed’s Alvarez told the + +On line 6219: + events involving Lehman + Brothers, AIG, and WaMu," the Fed’s + Alvarez told the FCIC. + +On line 6219: + Lehman Brothers, AIG, and + WaMu," the Fed’s Alvarez told the + FCIC. "There were fears that + +On line 6219: + Brothers, AIG, and WaMu," + the Fed’s Alvarez told the FCIC. + "There were fears that the + +On line 6219: + AIG, and WaMu," the Fed’s + Alvarez told the FCIC. "There were + fears that the failure + +On line 6219: + the Fed’s Alvarez told + the FCIC. "There were fears that the + failure of Wachovia + +On line 6219: + Alvarez told the FCIC. + "There were fears that the failure + of Wachovia would lead + +On line 6219: + the FCIC. "There were fears + that the failure of Wachovia + would lead investors to + +On line 6219: + FCIC. "There were fears that + the failure of Wachovia would + lead investors to doubt + +On line 6219: + "There were fears that the + failure of Wachovia would lead + investors to doubt the + +On line 6219: + that the failure of + Wachovia would lead investors to + doubt the financial + +On line 6219: + failure of Wachovia + would lead investors to doubt the + financial strength of + +On line 6219: + investors to doubt the + financial strength of other + organizations + +On line 6221: + making it harder + for those institutions to + raise capital."81 Wells + +On line 6221: + institutions to + raise capital."81 Wells Fargo + had already expressed + +On line 6221: + buying Wachovia; by + Friday, Citigroup had as + well. Wachovia entered + +On line 6221: + both companies on + Friday and the two suitors + immediately + +On line 6223: + was whether the FDIC would + provide assistance in an + acquisition. Though + +On line 6223: + provide assistance + in an acquisition. Though + Citigroup never + +On line 6223: + application of + the systemic risk exception + under FDICIA. Over + +On line 6223: + the ystemic risks if + the FDIC did not intervene + and if creditors + +On line 6223: + ystemic risks if the + FDIC did not intervene and + if creditors and + +On line 6225: + and if creditors + and uninsured depositors + suffered losses. The + +On line 6225: + losses. The signs for + the bank were discouraging. + Given the recent + +On line 6225: + The signs for the bank + were discouraging. Given + the recent withdrawals, + +On line 6225: + signs for the bank were + discouraging. Given the + recent withdrawals, the + +On line 6225: + the recent withdrawals, + the FDIC and OCC predicted + in an internal + +On line 6225: + OCC predicted in + an internal analysis + that Wachovia could face + +On line 6225: + predicted in an + internal analysis that + Wachovia could face up + +On line 6225: + in an internal + analysis that Wachovia could + face up to billion + +On line 6225: + of additional + cash outflows the following + week—including, most + +On line 6227: + prominently, billion + of further deposit outflows, + as well as billion + +On line 6227: + customers. Yet Wachovia + had only billion in cash + and cash equivalents. + +On line 6227: + had only billion + in cash and cash equivalents. + While the FDIC and OCC + +On line 6227: + equivalents. While the + FDIC and OCC estimated + that the company + +On line 6227: + OCC estimated + that the company could use + its collateral + +On line 6227: + estimated that + the company could use its + collateral to + +On line 6227: + that the company + could use its collateral + to raise another + +On line 6227: + company could use + its collateral to raise + another billion + +On line 6227: + its collateral + to raise another billion + through the Fed’s discount + +On line 6227: + to raise another + billion through the Fed’s discount + window, the repo + +On line 6227: + another billion + through the Fed’s discount window, + the repo market, + +On line 6227: + through the Fed’s discount + window, the repo market, + and the Federal + +On line 6227: + Fed’s discount window, + the repo market, and the + Federal Home Loan + +On line 6227: + window, the repo + market, and the Federal + Home Loan Banks, even those + +On line 6227: + the repo market, + and the Federal Home Loan + Banks, even those efforts + +On line 6227: + repo market, and + the Federal Home Loan Banks, + even those efforts would + +On line 6227: + and the Federal + Home Loan Banks, even those efforts + would bring the amount on + +On line 6227: + the Federal Home + Loan Banks, even those efforts would + bring the amount on hand + +On line 6227: + Federal Home Loan + Banks, even those efforts would bring + the amount on hand to + +On line 6227: + Banks, even those efforts + would bring the amount on hand to + only billion to + +On line 6227: + those efforts would bring + the amount on hand to only + billion to cover + +On line 6231: + potential billion + outflow.84 During the weekend, + the Fed argued that + +On line 6231: + outflow.84 During the + weekend, the Fed argued that + Wachovia should be saved, + +On line 6231: + During the weekend, + the Fed argued that Wachovia + should be saved, with FDIC + +On line 6233: + FDIC assistance if + necessary. Its analysis + focused on the firm’s + +On line 6233: + if necessary. Its + analysis focused on the + firm’s counterparties + +On line 6235: + participants, and + stated that asset sales by + mutual funds could + +On line 6235: + stated that asset + sales by mutual funds could + cause short-term funding + +On line 6235: + mutual funds could + cause short-term funding markets + to "virtually + +On line 6237: + cause short-term funding + markets to "virtually + shut down."85 According + +On line 6237: + shut down."85 According + to supporting analysis + by the Richmond Fed, + +On line 6237: + by the Richmond Fed, + mutual funds held billion + of Wachovia debt, which + +On line 6237: + Fed, mutual funds + held billion of Wachovia debt, + which Richmond Fed staff + +On line 6237: + systemic consequences"; + and investment banks, "already + weak and exposed to + +On line 6237: + and exposed to low + levels of confidence," owned + billion of Wachovia’s + +On line 6237: + to low levels of + confidence," owned billion of + Wachovia’s billion debt + +On line 6237: + of confidence," owned + billion of Wachovia’s billion + debt and deposits. These + +On line 6237: + billion of Wachovia’s + billion debt and deposits. These + firms were in danger + +On line 6237: + deposits. These firms were + in danger of becoming + "even more reliant on + +On line 6237: + PDCF, to support + operations in the event + of a Wachovia[-led] + +On line 6239: + in the event of a + Wachovia[-led] disruption."86 In + addition, Fed staff + +On line 6239: + of a Wachovia[-led] + disruption."86 In addition, + Fed staff argued that + +On line 6239: + In addition, Fed + staff argued that a Wachovia + failure would cause banks + +On line 6239: + Fed staff argued that + a Wachovia failure would cause + banks to "become even + +On line 6239: + staff argued that a + Wachovia failure would cause banks + to "become even less + +On line 6239: + a Wachovia failure + would cause banks to "become even + less willing to lend + +On line 6239: + Wachovia failure would + cause banks to "become even less + willing to lend to + +On line 6239: + Secretary Paulson + had recused himself from the + decision because + +On line 6239: + Paulson had recused + himself from the decision + because of his ties + +On line 6239: + had recused himself + from the decision because + of his ties to Steel, + +On line 6239: + recused himself from + the decision because of + his ties to Steel, but + +On line 6239: + from the decision + because of his ties to Steel, + but other members + +On line 6239: + his ties to Steel, but + other members of Treasury + had "vigorously + +On line 6239: + saving Wachovia.88 White + House Chief of Staff Josh Bolten called + Bair on Sunday to + +On line 6239: + Wachovia.88 White House Chief + of Staff Josh Bolten called Bair on + Sunday to express + +On line 6239: + White House Chief of Staff + Josh Bolten called Bair on Sunday + to express support + +On line 6239: + House Chief of Staff Josh + Bolten called Bair on Sunday to + express support for + +On line 6239: + Josh Bolten called Bair on + Sunday to express support + for the systemic risk + +On line 6241: + Sunday to express + support for the systemic risk + exception.89 At about + +On line 6241: + for the systemic risk + exception.89 At about P.M. on + Sunday, September + +On line 6241: + exception.89 At about + P.M. on Sunday, September + Wells’s Kovacevich told + +On line 6241: + Sunday, September + Wells’s Kovacevich told Steel that + he wanted more time + +On line 6241: + Wells’s Kovacevich told + Steel that he wanted more time + to review Wachovia’s + +On line 6241: + he wanted more time + to review Wachovia’s assets, + particularly + +On line 6241: + commercial real + estate holdings, and could not + make a bid before + +On line 6241: + estate holdings, and + could not make a bid before + Monday if there were + +On line 6241: + holdings, and could not + make a bid before Monday + if there were to be + +On line 6241: + and could not make a + bid before Monday if there + were to be no FDIC + +On line 6241: + make a bid before + Monday if there were to be + no FDIC assistance. + +On line 6241: + bid before Monday + if there were to be no FDIC + assistance. So Wells + +On line 6241: + if there were to be + no FDIC assistance. So Wells + and Citigroup came + +On line 6241: + there were to be no + FDIC assistance. So Wells and + Citigroup came to + +On line 6241: + no FDIC assistance. + So Wells and Citigroup came + to the table with + +On line 6241: + Citigroup came to + the table with proposals + predicated on + +On line 6241: + to the table with + proposals predicated + on such assistance. + +On line 6241: + predicated on + such assistance. Wells offered + to cover the first + +On line 6241: + such assistance. Wells + offered to cover the first + billion of losses + +On line 6241: + to cover the first + billion of losses on a + pool of billion worth + +On line 6241: + billion of losses + on a pool of billion worth + of assets as well + +On line 6241: + pool of billion worth + of assets as well as of + subsequent losses, + +On line 6241: + of assets as well + as of subsequent losses, + if they grew large enough, + +On line 6241: + subsequent losses, + if they grew large enough, capping + the FDIC’s losses at + +On line 6241: + if they grew large enough, + capping the FDIC’s losses at + billion. Citigroup + +On line 6241: + grew large enough, capping + the FDIC’s losses at billion. + Citigroup wanted + +On line 6241: + the FDIC’s losses at + billion. Citigroup wanted + the FDIC to cover + +On line 6241: + losses at billion. + Citigroup wanted the FDIC + to cover losses + +On line 6241: + Citigroup wanted + the FDIC to cover losses + on a different, + +On line 6241: + the FDIC to cover + losses on a different, + and larger, pool of + +On line 6241: + cover losses on + a different, and larger, + pool of billion worth + +On line 6241: + on a different, + and larger, pool of billion + worth of assets, but + +On line 6241: + and larger, pool of + billion worth of assets, but + proposed to cover + +On line 6241: + worth of assets, but + proposed to cover the first + billion of losses + +On line 6241: + assets, but proposed + to cover the first billion + of losses and an + +On line 6241: + of losses and an + additional billion a + year for three years, while + +On line 6241: + an additional + billion a year for three years, + while giving the FDIC + +On line 6241: + billion a year for + three years, while giving the FDIC + billion in Wachovia + +On line 6241: + a year for three years, + while giving the FDIC billion + in Wachovia preferred + +On line 6241: + year for three years, while + giving the FDIC billion in + Wachovia preferred stock + +On line 6241: + three years, while giving + the FDIC billion in Wachovia + preferred stock and stock + +On line 6241: + while giving the FDIC + billion in Wachovia preferred + stock and stock warrants + +On line 6241: + the FDIC billion in + Wachovia preferred stock and stock + warrants (rights to buy + +On line 6241: + billion in Wachovia + preferred stock and stock warrants + (rights to buy stock at + +On line 6241: + preferred stock and stock + warrants (rights to buy stock at + a predetermined + +On line 6241: + (rights to buy stock at + a predetermined price) as + compensation; the + +On line 6241: + a predetermined + price) as compensation; the + FDIC would cover any + +On line 6243: + the FDIC would cover + any additional losses + above billion.90 FDIC staff + +On line 6243: + any additional + losses above billion.90 FDIC staff + expected Wachovia’s + +On line 6245: + be between billion + and billion. On the basis + of that analysis + +On line 6245: + between billion and + billion. On the basis of + that analysis and + +On line 6245: + of the offers, they + estimated that the Wells + proposal would cost + +On line 6245: + they estimated + that the Wells proposal would + cost the FDIC between + +On line 6245: + Wells proposal would + cost the FDIC between billion + and billion, whereas + +On line 6245: + proposal would cost + the FDIC between billion and + billion, whereas the + +On line 6245: + billion, whereas the + Citigroup proposal would + cost the FDIC nothing. + +On line 6245: + proposal would cost + the FDIC nothing. Late Sunday, + Wachovia submitted + +On line 6245: + the FDIC nothing. Late + Sunday, Wachovia submitted + its own proposal, + +On line 6245: + nothing. Late Sunday, + Wachovia submitted its own + proposal, under + +On line 6245: + the FDIC would provide + assistance directly to + the bank so that it + +On line 6245: + provide assistance + directly to the bank so + that it could survive + +On line 6247: + to the bank so that + it could survive as a stand-alone + entity.91 But the + +On line 6247: + that it could survive + as a stand-alone entity.91 But + the FDIC still hadn’t + +On line 6247: + survive as a stand-alone + entity.91 But the FDIC still + hadn’t decided + +On line 6247: + support the systemic + risk exception. Its board—which + included the heads + +On line 6247: + risk exception. Its + board—which included the heads + of the OCC and OTS—met + +On line 6247: + board—which included + the heads of the OCC and OTS—met + at A.M. on Monday, + +On line 6247: + the OCC and OTS—met at + A.M. on Monday, September + to decide Wachovia’s + +On line 6247: + OCC and OTS—met at A.M. + on Monday, September to + decide Wachovia’s fate + +On line 6247: + the markets opened.92 FDIC + Associate Director Miguel + Browne hewed closely to + +On line 6247: + Miguel Browne hewed closely + to the analysis prepared + by the Richmond Fed: + +On line 6247: + hewed closely to the + analysis prepared by the + Richmond Fed: Wachovia’s + +On line 6247: + analysis prepared + by the Richmond Fed: Wachovia’s + failure carried the + +On line 6247: + by the Richmond Fed: + Wachovia’s failure carried the + risk of knocking down + +On line 6247: + Richmond Fed: Wachovia’s + failure carried the risk of + knocking down too many + +On line 6247: + Fed: Wachovia’s failure + carried the risk of knocking + down too many dominoes + +On line 6247: + carried the risk of + knocking down too many dominoes + in lines stretching in + +On line 6247: + the risk of knocking + down too many dominoes in lines + stretching in too many + +On line 6247: + knocking down too many + dominoes in lines stretching in + too many directions + +On line 6247: + down too many dominoes + in lines stretching in too many + directions whose fall + +On line 6247: + lines stretching in too + many directions whose fall would + hurt too many people, + +On line 6247: + people, including + American taxpayers. He + also raised concerns + +On line 6247: + potential global + implications and reduced + confidence in the + +On line 6247: + implications and + reduced confidence in the + dollar. Bair remained + +On line 6247: + remained reluctant + to intervene in private + financial markets + +On line 6247: + to intervene in + private financial markets + but ultimately + +On line 6247: + private financial + markets but ultimately + agreed. "Well, I think this + +On line 6247: + financial markets + but ultimately agreed. "Well, + I think this is, you + +On line 6247: + but ultimately + agreed. "Well, I think this is, you + know one option of + +On line 6247: + ultimately agreed. + "Well, I think this is, you know + one option of a + +On line 6247: + agreed. "Well, I think this + is, you know one option of + a lot of not-very-good + +On line 6247: + I think this is, you + know one option of a lot + of not-very-good options," + +On line 6247: + think this is, you know + one option of a lot of + not-very-good options," she + +On line 6247: + one option of a + lot of not-very-good options," she + said at the meeting. + +On line 6247: + option of a lot + of not-very-good options," she said + at the meeting. "I + +On line 6247: + of not-very-good options," + she said at the meeting. "I + have acquiesced in + +On line 6247: + not-very-good options," she + said at the meeting. "I have + acquiesced in that + +On line 6247: + said at the meeting. + "I have acquiesced in that + decision based on + +On line 6247: + "I have acquiesced + in that decision based on + the input of my + +On line 6247: + in that decision + based on the input of my + colleagues, and the fact + +On line 6247: + decision based on + the input of my colleagues, + and the fact the statute + +On line 6247: + on the input of + my colleagues, and the fact the + statute gives multiple + +On line 6247: + my colleagues, and the + fact the statute gives multiple + decision makers + +On line 6247: + and the fact the statute + gives multiple decision + makers a say in + +On line 6247: + statute gives multiple + decision makers a say + in this process. I’m not + +On line 6247: + makers a say in + this process. I’m not completely + comfortable with it + +On line 6247: + say in this process. I’m + not completely comfortable + with it but we need + +On line 6247: + in this process. I’m not + completely comfortable with + it but we need to + +On line 6247: + I’m not completely + comfortable with it but we + need to move forward + +On line 6247: + comfortable with it + but we need to move forward + with something, clearly, + +On line 6247: + with it but we need + to move forward with something, + clearly, because this + +On line 6247: + need to move forward + with something, clearly, because + this institution + +On line 6247: + to move forward with + something, clearly, because this + institution is + +On line 6249: + in a tenuous + situation."93 To win the + approval of Bair and + +On line 6249: + situation."93 To + win the approval of Bair and + John Reich (the OTS + +On line 6249: + To win the approval + of Bair and John Reich (the + OTS director who + +On line 6249: + win the approval of + Bair and John Reich (the OTS + director who served + +On line 6249: + and John Reich (the + OTS director who served on + the FDIC board), Treasury + +On line 6249: + OTS director who + served on the FDIC board), Treasury + ultimately agreed + +On line 6249: + the FDIC board), Treasury + ultimately agreed to take + the unusual step + +On line 6249: + step of funding all + government losses from the + proposed transaction.94 + +On line 6249: + government losses + from the proposed transaction.94 + Without this express + +On line 6249: + transaction.94 Without + this express commitment from + Treasury, the FDIC would + +On line 6249: + Without this express + commitment from Treasury, the + FDIC would have been the + +On line 6249: + express commitment + from Treasury, the FDIC would have + been the first to bear + +On line 6249: + from Treasury, the FDIC + would have been the first to bear + losses out of its + +On line 6249: + would have been the first + to bear losses out of its + Deposit Insurance + +On line 6249: + been the first to bear + losses out of its Deposit + Insurance Fund, which + +On line 6249: + to bear losses out + of its Deposit Insurance + Fund, which then held about + +On line 6249: + losses out of its + Deposit Insurance Fund, which + then held about billion; + +On line 6249: + Deposit Insurance + Fund, which then held about billion; + normally, help would + +On line 6249: + Fund, which then held about + billion; normally, help would + have come from Treasury + +On line 6249: + then held about billion; + normally, help would have come + from Treasury only + +On line 6249: + billion; normally, + help would have come from Treasury + only after that + +On line 6249: + normally, help would + have come from Treasury only + after that fund was + +On line 6249: + help would have come from + Treasury only after that + fund was depleted.95 + +On line 6249: + after that fund was + depleted.95 According to + the minutes of the + +On line 6249: + fund was depleted.95 + According to the minutes + of the meeting, Bair + +On line 6249: + that Treasury agree to + fund losses, given that "it + has vigorously + +On line 6249: + fund losses, given + that "it has vigorously + advocated the + +On line 6253: + the winning bidder: + Citigroup. "It was the fog + of war," Bair told the + +On line 6253: + Citigroup. "It was + the fog of war," Bair told the + FCIC. "The system was + +On line 6253: + the fog of war," Bair + told the FCIC. "The system was + highly unstable. + +On line 6253: + of war," Bair told the + FCIC. "The system was highly + unstable. Who was + +On line 6253: + the FCIC. "The system + was highly unstable. Who + was going to take + +On line 6253: + FCIC. "The system was + highly unstable. Who was + going to take the + +On line 6253: + system was highly + unstable. Who was going + to take the chance that + +On line 6253: + highly unstable. + Who was going to take the + chance that Wachovia would + +On line 6253: + unstable. Who was + going to take the chance that + Wachovia would have a + +On line 6253: + going to take the + chance that Wachovia would have a + depository + +On line 6255: + that Wachovia would have + a depository run + on Monday1"97 Wachovia’s + +On line 6255: + Wachovia would have a + depository run on + Monday1"97 Wachovia’s board + +On line 6255: + depository + run on Monday1"97 Wachovia’s board + quickly voted to + +On line 6255: + board quickly voted + to accept Citigroup’s bid. + Wachovia, Citigroup, + +On line 6255: + Wachovia, Citigroup, + and the FDIC signed an agreement + in principle and + +On line 6255: + executed an + exclusivity agreement + that prohibited + +On line 6255: + that prohibited + Wachovia from, among other things, + negotiating + +On line 6257: + other potential + acquirers.98 In the midst of + the market turmoil, + +On line 6257: + acquirers.98 In the + midst of the market turmoil, + the Federal Open + +On line 6257: + midst of the market + turmoil, the Federal Open + Market Committee + +On line 6257: + the market turmoil, + the Federal Open Market + Committee met at + +On line 6257: + Committee met at + the end of September at + about the time of the + +On line 6257: + time of the announced + Citigroup acquisition + of Wachovia and the + +On line 6257: + invocation of + the systemic risk exception. + "The planned merger of + +On line 6257: + risk exception. "The + planned merger of two very large + institutions led + +On line 6257: + "The planned merger of + two very large institutions + led to some concern + +On line 6257: + planned merger of two + very large institutions led + to some concern among + +On line 6257: + merger of two very + large institutions led to + some concern among FOMC + +On line 6257: + large institutions + led to some concern among FOMC + participants that + +On line 6257: + led to some concern + among FOMC participants that + bigger and bigger + +On line 6257: + some concern among FOMC + participants that bigger + and bigger firms were + +On line 6257: + participants that + bigger and bigger firms were + being created + +On line 6257: + bigger and bigger + firms were being created + that would be ‘too big + +On line 6257: + and bigger firms were + being created that would + be ‘too big to fail,’" + +On line 6257: + would be ‘too big to + fail,’" according a letter + from Chairman Bernanke to + +On line 6257: + be ‘too big to fail,’" + according a letter from + Chairman Bernanke to the + +On line 6257: + to fail,’" according + a letter from Chairman Bernanke + to the FCIC. He added + +On line 6257: + fail,’" according a + letter from Chairman Bernanke to + the FCIC. He added that + +On line 6257: + letter from Chairman + Bernanke to the FCIC. He added that + he "shared this concern, + +On line 6257: + from Chairman Bernanke to + the FCIC. He added that he "shared + this concern, and voiced + +On line 6257: + Chairman Bernanke to the + FCIC. He added that he "shared this + concern, and voiced my + +On line 6257: + Bernanke to the FCIC. He + added that he "shared this concern, + and voiced my hope that + +On line 6257: + to the FCIC. He added + that he "shared this concern, and + voiced my hope that TARP + +On line 6257: + the FCIC. He added that + he "shared this concern, and voiced + my hope that TARP would + +On line 6257: + He added that he "shared + this concern, and voiced my hope + that TARP would create + +On line 6257: + this concern, and voiced + my hope that TARP would create + options other than + +On line 6257: + other than mergers + for managing problems at + large institutions + +On line 6257: + managing problems + at large institutions and + that subsequently, + +On line 6257: + regulatory + reform, we might develop + good resolution + +On line 6257: + might develop good + resolution mechanisms + and decisively + +On line 6259: + fail."99 itigroup and + Wachovia immediately + began working on + +On line 6259: + immediately + began working on the deal—even + as Wachovia’s stock fell + +On line 6259: + began working on + the deal—even as Wachovia’s stock fell + to on September + +On line 6259: + working on the deal—even + as Wachovia’s stock fell to on + September the day + +On line 6259: + the deal—even as Wachovia’s + stock fell to on September + the day that TARP was + +On line 6259: + Wachovia’s stock fell to + on September the day that + TARP was initially + +On line 6259: + the day that TARP was + initially rejected by + lawmakers. They faced + +On line 6259: + by lawmakers. They + faced tremendous pressure from the + regulators and + +On line 6259: + tremendous pressure from + the regulators and the + markets to conclude + +On line 6259: + regulators and + the markets to conclude the + transaction before + +On line 6259: + markets to conclude + the transaction before the + following Monday, + +On line 6259: + not acquiring the + holding company, just the + bank, and Citigroup + +On line 6259: + holding company, + just the bank, and Citigroup + wanted to change some + +On line 6259: + company, just the + bank, and Citigroup wanted + to change some of the + +On line 6259: + bank, and Citigroup + wanted to change some of the + original terms. Then + +On line 6259: + wanted to change some + of the original terms. Then + came a surprise: on + +On line 6259: + to change some of the + original terms. Then came a + surprise: on Thursday + +On line 6259: + original terms. Then + came a surprise: on Thursday + morning, October + +On line 6259: + came a surprise: on + Thursday morning, October + Wells Fargo returned + +On line 6259: + morning, October + Wells Fargo returned to the + table and made a + +On line 6259: + Wells Fargo returned + to the table and made a + competing bid to + +On line 6259: + to the table and + made a competing bid to + buy all of Wachovia + +On line 6259: + the table and made + a competing bid to buy + all of Wachovia for + +On line 6259: + table and made a + competing bid to buy all + of Wachovia for a + +On line 6259: + made a competing + bid to buy all of Wachovia + for a share—seven + +On line 6259: + a competing bid + to buy all of Wachovia for + a share—seven times + +On line 6259: + bid to buy all of + Wachovia for a share—seven + times Citigroup’s bid, + +On line 6261: + Citigroup’s bid, with + no government assistance. + There was a great deal + +On line 6261: + over the timing of + Wells Fargo’s new proposal, + particularly + +On line 6261: + particularly + given IRS Notice 2008-83. This + administrative + +On line 6261: + given IRS Notice + 2008-83. This administrative + ruling, issued just + +On line 6261: + IRS Notice 2008-83. This + administrative ruling, + issued just two days + +On line 6261: + administrative + ruling, issued just two days + earlier, allowed + +On line 6261: + write off the losses + of an acquired company + immediately, + +On line 6261: + acquired company + immediately, rather than + spreading them over time. + +On line 6261: + immediately, + rather than spreading them over time. + Wells told the SEC that + +On line 6261: + spreading them over time. + Wells told the SEC that the IRS + ruling permitted + +On line 6261: + them over time. Wells told + the SEC that the IRS ruling + permitted the bank + +On line 6261: + Wells told the SEC that + the IRS ruling permitted + the bank to reduce + +On line 6261: + the SEC that the IRS + ruling permitted the bank + to reduce taxable + +On line 6261: + ruling permitted + the bank to reduce taxable + income by billion + +On line 6261: + permitted the bank + to reduce taxable income + by billion in the + +On line 6261: + to reduce taxable + income by billion in the + first year following + +On line 6261: + income by billion + in the first year following + the acquisition + +On line 6261: + first year following + the acquisition rather than + by billion per year + +On line 6261: + year following the + acquisition rather than by + billion per year for + +On line 6261: + acquisition rather + than by billion per year for + three years. However, + +On line 6261: + by billion per year + for three years. However, Wells + said this "was itself + +On line 6261: + billion per year for + three years. However, Wells said + this "was itself not + +On line 6261: + three years. However, + Wells said this "was itself not + a major factor" + +On line 6261: + years. However, Wells + said this "was itself not a + major factor" in + +On line 6261: + said this "was itself + not a major factor" in + its decision to + +On line 6261: + this "was itself not + a major factor" in its + decision to bid + +On line 6261: + a major factor" + in its decision to bid + for Wachovia without + +On line 6261: + in its decision + to bid for Wachovia without + direct government + +On line 6261: + to bid for Wachovia + without direct government + assistance.100 Former + +On line 6261: + that Wells’s revised bid + reflected additional + due diligence, the point + +On line 6261: + additional due + diligence, the point he had made + to Wachovia CEO Steel + +On line 6261: + due diligence, the point + he had made to Wachovia CEO + Steel at the time.101 But + +On line 6261: + diligence, the point he + had made to Wachovia CEO Steel + at the time.101 But the + +On line 6261: + the point he had made + to Wachovia CEO Steel at the + time.101 But the FDIC’s Bair + +On line 6261: + point he had made to + Wachovia CEO Steel at the time.101 + But the FDIC’s Bair said + +On line 6261: + made to Wachovia CEO + Steel at the time.101 But the FDIC’s + Bair said Kovacevich + +On line 6261: + to Wachovia CEO Steel + at the time.101 But the FDIC’s Bair + said Kovacevich told + +On line 6261: + Wachovia CEO Steel at + the time.101 But the FDIC’s Bair said + Kovacevich told her + +On line 6261: + Steel at the time.101 But + the FDIC’s Bair said Kovacevich + told her at the time + +On line 6261: + at the time.101 But the + FDIC’s Bair said Kovacevich told + her at the time that + +On line 6261: + the time.101 But the FDIC’s + Bair said Kovacevich told her + at the time that the + +On line 6261: + time.101 But the FDIC’s Bair + said Kovacevich told her at + the time that the tax + +On line 6261: + But the FDIC’s Bair said + Kovacevich told her at the + time that the tax change + +On line 6261: + Bair said Kovacevich + told her at the time that the + tax change had been a + +On line 6261: + Kovacevich told her + at the time that the tax change + had been a factor + +On line 6261: + told her at the time + that the tax change had been a + factor leading to + +On line 6261: + time that the tax change + had been a factor leading + to Wells’s revised bid.102 + +On line 6263: + that the tax change had + been a factor leading to + Wells’s revised bid.102 On + +On line 6263: + factor leading to + Wells’s revised bid.102 On Thursday, + October three days + +On line 6263: + Wells’s revised bid.102 On + Thursday, October three days + after accepting + +On line 6263: + after accepting + Citigroup’s federally + assisted offer, + +On line 6263: + offer, Wachovia’s board + convened an emergency P.M. + session to discuss + +On line 6263: + discuss Wells’s revised + bid. The Wachovia board voted + unanimously in + +On line 6265: + bid. The Wachovia board + voted unanimously in + favor. At about A.M. + +On line 6265: + Wachovia board voted + unanimously in favor. + At about A.M. Friday, + +On line 6265: + in favor. At about + A.M. Friday, Wachovia’s Steel, its + General Counsel + +On line 6265: + At about A.M. Friday, + Wachovia’s Steel, its General + Counsel Jane Sherburne, + +On line 6265: + A.M. Friday, Wachovia’s + Steel, its General Counsel + Jane Sherburne, and FDIC + +On line 6265: + General Counsel + Jane Sherburne, and FDIC Chairman + Bair called Citigroup + +On line 6265: + Jane Sherburne, and FDIC + Chairman Bair called Citigroup + CEO Vikram Pandit to + +On line 6265: + FDIC Chairman Bair called + Citigroup CEO Vikram Pandit + to inform him that + +On line 6265: + Bair called Citigroup + CEO Vikram Pandit to inform + him that Wachovia had + +On line 6265: + called Citigroup CEO + Vikram Pandit to inform him + that Wachovia had signed + +On line 6265: + Citigroup CEO Vikram + Pandit to inform him that + Wachovia had signed a + +On line 6265: + that Wachovia had signed + a definitive merger + agreement with Wells. Steel + +On line 6265: + a definitive + merger agreement with Wells. Steel + read from prepared notes. + +On line 6265: + merger agreement with + Wells. Steel read from prepared notes. + Pandit was stunned. "He + +On line 6265: + Steel read from prepared + notes. Pandit was stunned. "He was + disappointed. That’s + +On line 6265: + notes. Pandit was stunned. + "He was disappointed. That’s + an understatement," + +On line 6265: + Pandit was stunned. "He + was disappointed. That’s an + understatement," Steel + +On line 6265: + was disappointed. + That’s an understatement," Steel + told the FCIC.103 Pandit + +On line 6265: + disappointed. That’s + an understatement," Steel told + the FCIC.103 Pandit thought + +On line 6265: + told the FCIC.103 Pandit + thought Citigroup and Wachovia + already had a deal. + +On line 6267: + and Wachovia already + had a deal. After Steel and + Sherburne dropped off the + +On line 6267: + had a deal. After + Steel and Sherburne dropped off the + phone call, Pandit asked + +On line 6267: + a deal. After Steel + and Sherburne dropped off the phone + call, Pandit asked Bair + +On line 6267: + deal. After Steel and + Sherburne dropped off the phone call, + Pandit asked Bair if + +On line 6267: + Steel and Sherburne dropped + off the phone call, Pandit asked + Bair if Citigroup + +On line 6267: + and Sherburne dropped off + the phone call, Pandit asked Bair + if Citigroup could + +On line 6267: + Sherburne dropped off the + phone call, Pandit asked Bair if + Citigroup could keep + +On line 6267: + the phone call, Pandit + asked Bair if Citigroup could + keep its original + +On line 6267: + call, Pandit asked Bair + if Citigroup could keep its + original loss-sharing + +On line 6267: + if Citigroup could + keep its original loss-sharing + agreement to purchase + +On line 6267: + keep its original + loss-sharing agreement to purchase + Wachovia if it matched + +On line 6267: + loss-sharing agreement to + purchase Wachovia if it matched + Wells’s offer of a + +On line 6267: + to purchase Wachovia + if it matched Wells’s offer of + a share. Bair said no, + +On line 6267: + Wachovia if it matched + Wells’s offer of a share. Bair + said no, reasoning + +On line 6267: + Wells’s offer of a + share. Bair said no, reasoning + that the FDIC was not + +On line 6267: + of a share. Bair said + no, reasoning that the FDIC + was not going to + +On line 6267: + a share. Bair said no, + reasoning that the FDIC was + not going to stand + +On line 6267: + said no, reasoning + that the FDIC was not going + to stand in the way + +On line 6267: + no, reasoning that + the FDIC was not going to + stand in the way of + +On line 6267: + reasoning that the + FDIC was not going to stand + in the way of a + +On line 6267: + that the FDIC was not + going to stand in the way + of a private deal. + +On line 6267: + FDIC was not going + to stand in the way of a + private deal. Nor was + +On line 6267: + not going to stand + in the way of a private + deal. Nor was it the + +On line 6267: + going to stand in + the way of a private deal. + Nor was it the role + +On line 6267: + to stand in the way + of a private deal. Nor was + it the role of the + +On line 6267: + in the way of a + private deal. Nor was it the + role of the agency + +On line 6267: + way of a private + deal. Nor was it the role of + the agency to help + +On line 6267: + private deal. Nor was + it the role of the agency + to help Citigroup + +On line 6267: + deal. Nor was it the + role of the agency to help + Citigroup in a + +On line 6267: + it the role of the + agency to help Citigroup + in a bidding war. + +On line 6267: + the agency to help + Citigroup in a bidding + war. She also told + +On line 6267: + help Citigroup in + a bidding war. She also + told the FCIC that she + +On line 6267: + Citigroup in a + bidding war. She also told + the FCIC that she had + +On line 6267: + in a bidding war. + She also told the FCIC that + she had concerns about + +On line 6267: + war. She also told + the FCIC that she had concerns + about Citigroup’s own + +On line 6267: + the FCIC that she had + concerns about Citigroup’s own + viability + +On line 6267: + about Citigroup’s own + viability if it + acquired Wachovia for + +On line 6267: + acquired Wachovia for + that price. "In reality, + we didn’t know how + +On line 6267: + reality, we + didn’t know how unstable + Citigroup was at + +On line 6267: + we didn’t know how + unstable Citigroup was + at that point," Chairman + +On line 6267: + know how unstable + Citigroup was at that point," + Chairman Bair said. "Here + +On line 6267: + Citigroup was at + that point," Chairman Bair said. "Here + we were selling a + +On line 6267: + Chairman Bair said. "Here + we were selling a troubled + institution with + +On line 6267: + we were selling a + troubled institution with + a troubled mortgage + +On line 6269: + another troubled + institution. I think if + that deal had gone through, + +On line 6269: + institution. I + think if that deal had gone through, + Citigroup would have + +On line 6269: + I think if that deal + had gone through, Citigroup would + have had to have been + +On line 6269: + think if that deal had + gone through, Citigroup would have + had to have been bailed + +On line 6269: + if that deal had gone + through, Citigroup would have had + to have been bailed out + +On line 6269: + that deal had gone through, + Citigroup would have had to + have been bailed out again."104 + +On line 6271: + through, Citigroup would + have had to have been bailed out + again."104 Later Friday + +On line 6271: + to have been bailed out + again."104 Later Friday morning, + Wachovia announced the + +On line 6271: + again."104 Later Friday + morning, Wachovia announced the + deal with Wells with the + +On line 6271: + announced the deal with + Wells with the blessing of the + FDIC. "This agreement won’t + +On line 6271: + the deal with Wells with + the blessing of the FDIC. "This + agreement won’t require + +On line 6271: + the blessing of the + FDIC. "This agreement won’t require + even a penny from + +On line 6271: + blessing of the FDIC. + "This agreement won’t require even + a penny from the + +On line 6271: + FDIC. "This agreement won’t + require even a penny from + the FDIC," Kovacevich + +On line 6271: + agreement won’t require + even a penny from the FDIC," + Kovacevich said in + +On line 6271: + even a penny from + the FDIC," Kovacevich said in + the press release. Steel + +On line 6271: + a penny from the + FDIC," Kovacevich said in the + press release. Steel added + +On line 6271: + penny from the FDIC," + Kovacevich said in the press + release. Steel added that + +On line 6271: + FDIC," Kovacevich said + in the press release. Steel added + that the "deal enables + +On line 6271: + Kovacevich said in + the press release. Steel added that + the "deal enables us + +On line 6271: + in the press release. + Steel added that the "deal enables + us to keep Wachovia + +On line 6271: + press release. Steel added + that the "deal enables us to + keep Wachovia intact + +On line 6271: + release. Steel added that + the "deal enables us to keep + Wachovia intact and + +On line 6271: + Steel added that the "deal + enables us to keep Wachovia + intact and preserve + +On line 6271: + the "deal enables us + to keep Wachovia intact and + preserve the value + +On line 6271: + enables us to keep + Wachovia intact and preserve + the value of an + +On line 6271: + keep Wachovia intact + and preserve the value of + an integrated + +On line 6271: + the value of an + integrated company, + without government + +On line 6273: + support."105 On Monday, + October Citigroup filed + suit to enjoin Wells + +On line 6273: + suit to enjoin Wells + Fargo’s acquisition of + Wachovia, but without + +On line 6273: + enjoin Wells Fargo’s + acquisition of Wachovia, + but without success. + +On line 6273: + acquisition of + Wachovia, but without success. + The Wells Fargo deal + +On line 6273: + Wachovia, but without + success. The Wells Fargo deal + would close at midnight + +On line 6275: + would close at midnight + on December for per share. + IRS Notice 2008-83 was + +On line 6275: + later conducted + an investigation of + the circumstances of + +On line 6275: + investigation + of the circumstances of its + issuance, reported + +On line 6275: + of the circumstances + of its issuance, reported + that the purpose of + +On line 6275: + the circumstances of + its issuance, reported that + the purpose of the + +On line 6275: + reported that the + purpose of the notice was + to encourage strong + +On line 6275: + the purpose of the + notice was to encourage + strong banks to acquire + +On line 6275: + of the notice was + to encourage strong banks to + acquire weak banks by + +On line 6275: + acquire weak banks by + removing limitations + on the use of tax + +On line 6275: + banks by removing + limitations on the use + of tax losses. The + +On line 6275: + use of tax losses. + The inspector general + concluded that there + +On line 6275: + that the notice may + have been an improper change + of the tax code by + +On line 6275: + notice may have been + an improper change of the + tax code by Treasury; + +On line 6275: + an improper change + of the tax code by Treasury; + the Constitution + +On line 6275: + of the tax code by + Treasury; the Constitution + allows Congress alone + +On line 6275: + tax code by Treasury; + the Constitution allows + Congress alone to change + +On line 6275: + to change the tax code. + A congressional report + estimated that + +On line 6275: + estimated that + repealing the notice saved + about billion of tax + +On line 6275: + that repealing the + notice saved about billion of + tax revenues over years.106 + +On line 6275: + the notice saved about + billion of tax revenues over + years.106 However, the + +On line 6275: + about billion of tax + revenues over years.106 However, + the Wells controller, Richard + +On line 6275: + tax revenues over years.106 + However, the Wells controller, + Richard Levy, told the FCIC + +On line 6275: + over years.106 However, + the Wells controller, Richard Levy, told + the FCIC that to date + +On line 6275: + years.106 However, the + Wells controller, Richard Levy, told the + FCIC that to date Wells + +On line 6275: + However, the Wells + controller, Richard Levy, told the FCIC + that to date Wells has + +On line 6275: + Wells controller, Richard Levy, + told the FCIC that to date Wells + has not recognized + +On line 6275: + controller, Richard Levy, told + the FCIC that to date Wells has + not recognized any + +On line 6275: + told the FCIC that to + date Wells has not recognized + any benefits from + +On line 6275: + the FCIC that to date + Wells has not recognized any + benefits from the + +On line 6275: + not recognized any + benefits from the notice, + because it has not + +On line 6275: + any benefits from + the notice, because it has + not yet had taxable + +On line 6275: + the notice, because + it has not yet had taxable + income to offset.107 + +On line 6277: + it has not yet had + taxable income to offset.107 + TARP: "COMPREHENSIVE + +On line 6279: + income to offset.107 + TARP: "COMPREHENSIVE APPROACH" + Ten days after the + +On line 6279: + TARP: "COMPREHENSIVE + APPROACH" Ten days after the + Lehman bankruptcy, the + +On line 6279: + Ten days after the + Lehman bankruptcy, the Fed had + provided nearly + +On line 6279: + provided nearly + billion to investment banks + and commercial banks + +On line 6279: + commercial banks through + the PDCF and TSLF lending + facilities, in + +On line 6279: + through the PDCF and + TSLF lending facilities, + in an attempt to + +On line 6279: + the PDCF and TSLF + lending facilities, in + an attempt to quell + +On line 6279: + in an attempt to + quell the storms in the repo + markets, and the Fed + +On line 6279: + to quell the storms in + the repo markets, and the + Fed and Treasury had + +On line 6279: + the Fed and Treasury + had announced unprecedented + programs to support + +On line 6279: + programs to support + money market funds. By the + end of September, + +On line 6279: + to support money + market funds. By the end of + September, the Fed’s + +On line 6279: + money market funds. + By the end of September, + the Fed’s balance sheet + +On line 6279: + market funds. By the + end of September, the Fed’s + balance sheet had grown + +On line 6281: + end of September, + the Fed’s balance sheet had grown + to trillion. But the + +On line 6281: + of September, the + Fed’s balance sheet had grown to + trillion. But the Fed + +On line 6281: + the Fed’s balance sheet + had grown to trillion. But the + Fed was running out + +On line 6281: + Fed’s balance sheet had + grown to trillion. But the Fed + was running out of + +On line 6281: + had grown to trillion. + But the Fed was running out + of options. In the + +On line 6281: + grown to trillion. But + the Fed was running out of + options. In the end, + +On line 6281: + trillion. But the Fed + was running out of options. + In the end, it could + +On line 6281: + the Fed was running + out of options. In the end, + it could only make + +On line 6281: + out of options. In + the end, it could only make + collateralized + +On line 6283: + could not replenish + financial institutions’ + capital, which was + +On line 6283: + on bad assets made + it difficult for investors + to determine which + +On line 6283: + made it difficult + for investors to determine + which institutions + +On line 6283: + it difficult for + investors to determine which + institutions could + +On line 6283: + to determine which + institutions could survive, + even with all the Fed’s + +On line 6283: + which institutions + could survive, even with all the + Fed’s new backstops. In + +On line 6283: + institutions could + survive, even with all the Fed’s + new backstops. In short, + +On line 6283: + could survive, even with + all the Fed’s new backstops. In + short, the financial + +On line 6283: + Fed’s new backstops. In + short, the financial system + was slipping away from + +On line 6283: + new backstops. In short, + the financial system was + slipping away from its + +On line 6285: + financial system + was slipping away from its lender + of last resort. On + +On line 6285: + was slipping away from + its lender of last resort. On + Thursday, September + +On line 6285: + of last resort. On + Thursday, September the Fed + and Treasury proposed + +On line 6285: + and Treasury proposed + what Secretary Paulson called + a "comprehensive + +On line 6285: + the mounting crisis + in the financial system + by purchasing the + +On line 6285: + weighing down many banks’ + balance sheets.108 In the early + hours of Saturday, + +On line 6285: + In the early hours + of Saturday, September + as Goldman Sachs and + +On line 6285: + hours of Saturday, + September as Goldman Sachs + and Morgan Stanley + +On line 6285: + Morgan Stanley were + preparing to become bank + holding companies, + +On line 6285: + holding companies, + Treasury sent Congress a draft + proposal of the + +On line 6285: + Treasury sent Congress + a draft proposal of the + legislation for + +On line 6285: + a draft proposal + of the legislation for + TARP. The modest length + +On line 6285: + draft proposal of + the legislation for TARP. + The modest length of + +On line 6285: + proposal of the + legislation for TARP. The + modest length of that + +On line 6285: + the legislation + for TARP. The modest length of + that document—just + +On line 6285: + legislation for + TARP. The modest length of that + document—just three + +On line 6285: + for TARP. The modest + length of that document—just + three pages—belied its + +On line 6285: + It would give Treasury + the authority to spend + as much as billion + +On line 6285: + would give Treasury the + authority to spend as + much as billion to + +On line 6285: + the authority + to spend as much as billion + to purchase toxic + +On line 6287: + was not promising. For + example, Senate Banking + Committee Chairman + +On line 6287: + example, Senate + Banking Committee Chairman + Christopher Dodd said on + +On line 6287: + Committee Chairman + Christopher Dodd said on Tuesday, + "This proposal is + +On line 6287: + Dodd said on Tuesday, + "This proposal is stunning + and unprecedented + +On line 6287: + said on Tuesday, "This + proposal is stunning and + unprecedented in + +On line 6287: + "This proposal is + stunning and unprecedented + in its scope—and + +On line 6287: + and unprecedented + in its scope—and lack of + detail, I might add." + +On line 6287: + its scope—and lack + of detail, I might add." "There + are very few details + +On line 6287: + scope—and lack of + detail, I might add." "There are + very few details in + +On line 6287: + detail, I might add." + "There are very few details in + this legislation," + +On line 6287: + very few details in + this legislation," Ranking + Member Richard Shelby + +On line 6287: + Member Richard Shelby + said. "Rather than establishing + a comprehensive, + +On line 6287: + than establishing + a comprehensive, workable + plan for resolving + +On line 6287: + establishing a + comprehensive, workable plan + for resolving this + +On line 6287: + crisis, I believe + this legislation merely + codifies Treasury’s + +On line 6289: + hoc approach."109 Paulson + told a Senate committee + on Tuesday, "Of course, + +On line 6289: + approach."109 Paulson told + a Senate committee on + Tuesday, "Of course, we + +On line 6289: + Senate committee + on Tuesday, "Of course, we all + believe that the very + +On line 6289: + on Tuesday, "Of course, + we all believe that the very + best thing we can do + +On line 6289: + Tuesday, "Of course, we + all believe that the very best + thing we can do is + +On line 6289: + course, we all believe + that the very best thing we can + do is make sure that + +On line 6289: + we all believe that + the very best thing we can do + is make sure that the + +On line 6289: + the very best thing we + can do is make sure that the + capital markets + +On line 6289: + thing we can do is + make sure that the capital + markets are open and + +On line 6289: + do is make sure that + the capital markets are + open and that enders + +On line 6289: + is make sure that the + capital markets are open + and that enders are + +On line 6289: + capital markets + are open and that enders are + continuing to + +On line 6289: + open and that enders + are continuing to lend. + And so that is what + +On line 6289: + and that enders are + continuing to lend. And + so that is what this + +On line 6289: + are continuing + to lend. And so that is what + this overall program + +On line 6289: + continuing to + lend. And so that is what this + overall program does, + +On line 6289: + to lend. And so that + is what this overall program + does, it deals with that."110 + +On line 6289: + lend. And so that is + what this overall program does, + it deals with that."110 Bernanke + +On line 6289: + And so that is what + this overall program does, it + deals with that."110 Bernanke told + +On line 6289: + so that is what this + overall program does, it deals + with that."110 Bernanke told the + +On line 6289: + this overall program + does, it deals with that."110 Bernanke told + the Joint Economic + +On line 6289: + does, it deals with that."110 + Bernanke told the Joint Economic + Committee Wednesday: + +On line 6289: + with that."110 Bernanke told the + Joint Economic Committee + Wednesday: "I think that + +On line 6289: + the Joint Economic + Committee Wednesday: "I think + that this is the most + +On line 6289: + that this is the most + significant financial + crisis in the post-War + +On line 6289: + most significant + financial crisis in the + post-War period for + +On line 6289: + financial crisis + in the post-War period for + the United States, and + +On line 6289: + crisis in the post-War + period for the United + States, and it has in + +On line 6289: + post-War period for + the United States, and it has + in fact a global + +On line 6289: + period for the + United States, and it has in + fact a global reach. + +On line 6289: + the United States, and + it has in fact a global + reach. I think it is + +On line 6289: + we have seen in many + previous examples of + different countries + +On line 6289: + different countries + and different times, choking + up of credit is + +On line 6289: + and different times, + choking up of credit is + like taking the lifeblood + +On line 6289: + up of credit is + like taking the lifeblood away from + the economy."111 He + +On line 6289: + of credit is like + taking the lifeblood away from the + economy."111 He told + +On line 6289: + taking the lifeblood away + from the economy."111 He told + the House Financial + +On line 6289: + the lifeblood away from the + economy."111 He told the House + Financial Services + +On line 6289: + from the economy."111 + He told the House Financial + Services Committee + +On line 6289: + economy."111 He told + the House Financial Services + Committee on the + +On line 6291: + the House Financial + Services Committee on the + same day, "People are + +On line 6291: + Financial Services + Committee on the same day, + "People are saying, + +On line 6291: + Services Committee + on the same day, "People are + saying, ‘Wall Street, what + +On line 6291: + Committee on the + same day, "People are saying, + ‘Wall Street, what does it + +On line 6291: + the same day, "People + are saying, ‘Wall Street, what does + it have to do with + +On line 6291: + same day, "People are + saying, ‘Wall Street, what does it + have to do with me1’ + +On line 6291: + "People are saying, + ‘Wall Street, what does it have to + do with me1’ That is + +On line 6291: + are saying, ‘Wall Street, + what does it have to do with + me1’ That is the way + +On line 6291: + saying, ‘Wall Street, what + does it have to do with me1’ + That is the way they + +On line 6291: + Street, what does it have + to do with me1’ That is the + way they are thinking + +On line 6291: + what does it have to + do with me1’ That is the way + they are thinking about + +On line 6291: + does it have to do + with me1’ That is the way they + are thinking about it. + +On line 6291: + with me1’ That is the + way they are thinking about it. + Unfortunately, + +On line 6291: + way they are thinking + about it. Unfortunately, + it has a lot to + +On line 6291: + they are thinking about + it. Unfortunately, it + has a lot to do + +On line 6291: + are thinking about it. + Unfortunately, it has + a lot to do with + +On line 6291: + Unfortunately, + it has a lot to do with + them. It will affect + +On line 6291: + it has a lot to + do with them. It will affect + their company, it + +On line 6291: + has a lot to do + with them. It will affect their + company, it will + +On line 6291: + to do with them. It + will affect their company, + it will affect their + +On line 6291: + do with them. It will + affect their company, it + will affect their job, + +On line 6291: + affect their job, it + will affect their economy. + That affects their own + +On line 6291: + job, it will affect + their economy. That affects + their own lives, affects + +On line 6291: + it will affect their + economy. That affects their + own lives, affects their + +On line 6291: + their economy. That + affects their own lives, affects + their ability to + +On line 6291: + That affects their own + lives, affects their ability + to borrow and to + +On line 6291: + affects their own lives, + affects their ability to + borrow and to save + +On line 6291: + their own lives, affects + their ability to borrow + and to save and to + +On line 6291: + own lives, affects their + ability to borrow and + to save and to save + +On line 6291: + their ability to + borrow and to save and to + save for retirement + +On line 6291: + borrow and to save + and to save for retirement + and so on."112 By the + +On line 6291: + and to save and to + save for retirement and so + on."112 By the evening of + +On line 6291: + save and to save for + retirement and so on."112 By + the evening of Sunday, + +On line 6291: + save for retirement + and so on."112 By the evening of + Sunday, September + +On line 6291: + retirement and so + on."112 By the evening of Sunday, + September as bankers + +On line 6291: + on."112 By the evening of + Sunday, September as bankers + and regulators + +On line 6291: + Sunday, September + as bankers and regulators + hammered out Wachovia’s + +On line 6291: + September as bankers + and regulators hammered + out Wachovia’s rescue, + +On line 6293: + negotiators had + agreed on the outlines of a + deal. Senator Mel + +On line 6293: + agreed on the outlines + of a deal. Senator Mel + Martinez, a former + +On line 6293: + a deal. Senator + Mel Martinez, a former HUD + secretary and then + +On line 6293: + secretary and then + a member of the Banking + Committee, told the + +On line 6293: + and then a member + of the Banking Committee, + told the FCIC about a + +On line 6293: + a member of the + Banking Committee, told the + FCIC about a meeting + +On line 6293: + Banking Committee, + told the FCIC about a meeting + with Paulson and Bernanke + +On line 6295: + told the FCIC about a + meeting with Paulson and Bernanke + that Sunday: I just + +On line 6295: + about a meeting with + Paulson and Bernanke that Sunday: + I just remember + +On line 6295: + meeting with Paulson + and Bernanke that Sunday: I just + remember thinking, + +On line 6295: + and Bernanke that Sunday: + I just remember thinking, + you know, Armageddon. + +On line 6295: + Bernanke that Sunday: I + just remember thinking, you + know, Armageddon. The + +On line 6295: + that Sunday: I just + remember thinking, you know, + Armageddon. The thing + +On line 6295: + I just remember + thinking, you know, Armageddon. + The thing that was the + +On line 6295: + Armageddon. The thing + that was the most frightening + about it is that even + +On line 6295: + thing that was the most + frightening about it is that + even with them asking + +On line 6295: + with them asking for + extraordinary powers, + that they were not at + +On line 6295: + extraordinary + powers, that they were not at + all assured that they + +On line 6295: + powers, that they were + not at all assured that they + could prevent the kind + +On line 6295: + prevent the kind of + financial disaster that + I think really + +On line 6295: + disaster that I + think really was greater than + the Great Depression. + +On line 6295: + think really was + greater than the Great Depression. + And obviously + +On line 6295: + really was greater + than the Great Depression. And + obviously to + +On line 6295: + the Great Depression. + And obviously to a + person like myself + +On line 6295: + And obviously + to a person like myself + I think you think, "Wow, + +On line 6295: + obviously to + a person like myself I + think you think, "Wow, if + +On line 6295: + to a person like + myself I think you think, "Wow, + if these guys that are + +On line 6295: + person like myself + I think you think, "Wow, if these + guys that are in the + +On line 6295: + like myself I think + you think, "Wow, if these guys that + are in the middle + +On line 6295: + myself I think you + think, "Wow, if these guys that are + in the middle of + +On line 6295: + I think you think, "Wow, + if these guys that are in the + middle of it and + +On line 6295: + you think, "Wow, if these + guys that are in the middle + of it and hold the + +On line 6295: + "Wow, if these guys that + are in the middle of it + and hold the titles + +On line 6295: + if these guys that are + in the middle of it and + hold the titles that + +On line 6295: + these guys that are in + the middle of it and hold + the titles that they + +On line 6295: + guys that are in the + middle of it and hold the + titles that they hold + +On line 6295: + are in the middle + of it and hold the titles + that they hold believe + +On line 6295: + in the middle of + it and hold the titles that + they hold believe this + +On line 6295: + the middle of it + and hold the titles that they + hold believe this to + +On line 6295: + middle of it and + hold the titles that they hold + believe this to be + +On line 6295: + of it and hold the + titles that they hold believe + this to be as dark + +On line 6295: + and hold the titles + that they hold believe this to + be as dark as they’re + +On line 6295: + the titles that they + hold believe this to be as + dark as they’re painting + +On line 6295: + titles that they hold + believe this to be as dark + as they’re painting it, + +On line 6295: + that they hold believe + this to be as dark as they’re + painting it, it must + +On line 6295: + believe this to be + as dark as they’re painting it, + it must be pretty + +On line 6295: + this to be as dark + as they’re painting it, it must + be pretty darned dark."113 + +On line 6297: + dark as they’re painting + it, it must be pretty darned + dark."113 Nevertheless, + +On line 6297: + as they’re painting it, + it must be pretty darned dark."113 + Nevertheless, on + +On line 6297: + it must be pretty + darned dark."113 Nevertheless, on + Monday, September + +On line 6297: + be pretty darned dark."113 + Nevertheless, on Monday, + September just hours + +On line 6297: + Nevertheless, on + Monday, September just hours + after Citigroup + +On line 6297: + acquisition of + Wachovia, the House rejected + TARP by a vote of8 + +On line 6297: + of Wachovia, the House + rejected TARP by a vote + of8 to The markets’ + +On line 6297: + the House rejected + TARP by a vote of8 to The + markets’ response was + +On line 6297: + TARP by a vote of8 + to The markets’ response was + immediate: the + +On line 6297: + The markets’ response + was immediate: the Dow + Jones Industrial + +On line 6297: + was immediate: + the Dow Jones Industrial + Average quickly + +On line 6299: + plunged points, or almost + To broaden the bill’s appeal, + TARP’s supporters made + +On line 6299: + points, or almost To + broaden the bill’s appeal, TARP’s + supporters made changes, + +On line 6299: + To broaden the bill’s + appeal, TARP’s supporters made + changes, including a + +On line 6299: + supporters made changes, + including a temporary + increase in the cap + +On line 6299: + changes, including a + temporary increase in the + cap on FDIC’s deposit + +On line 6299: + increase in the cap + on FDIC’s deposit insurance + coverage from to + +On line 6301: + from to per customer + account.114 On Wednesday evening, the + Senate voted in + +On line 6301: + per customer account.114 + On Wednesday evening, the Senate + voted in favor + +On line 6301: + On Wednesday evening, the + Senate voted in favor + by a margin of + +On line 6301: + the Senate voted + in favor by a margin + of to On Friday, + +On line 6301: + voted in favor + by a margin of to On + Friday, October + +On line 6301: + in favor by a + margin of to On Friday, + October the House + +On line 6301: + by a margin of + to On Friday, October + the House agreed, to and + +On line 6301: + of to On Friday, + October the House agreed, to + and President George + +On line 6301: + October the House + agreed, to and President George + W. Bush signed the law, + +On line 6301: + the House agreed, to and + President George W. Bush signed + the law, which had grown + +On line 6301: + to and President + George W. Bush signed the law, which + had grown to pages. TARP’s + +On line 6301: + President George W. + Bush signed the law, which had grown + to pages. TARP’s stated + +On line 6301: + George W. Bush signed the + law, which had grown to pages. TARP’s + stated goal was to + +On line 6301: + Bush signed the law, which + had grown to pages. TARP’s stated + goal was to restore + +On line 6301: + had grown to pages. TARP’s + stated goal was to restore + liquidity and + +On line 6301: + TARP’s stated goal was + to restore liquidity + and confidence in + +On line 6303: + for the Federal + Government to purchase and + insure certain types + +On line 6303: + and insure certain + types of troubled assets for + the purposes of + +On line 6303: + the purposes of + providing stability + to and preventing + +On line 6303: + stability to + and preventing disruption + in the economy + +On line 6303: + financial system + and protecting taxpayers."115 + To provide oversight + +On line 6303: + billion program, the + legislation established + the Congressional + +On line 6305: + Program (SIGTARP). But + the markets continued to + deteriorate. + +On line 6305: + markets continued + to deteriorate. On + Monday, October + +On line 6305: + deteriorate. + On Monday, October the + Dow closed below for + +On line 6305: + Monday, October + the Dow closed below for the + first time in four years; + +On line 6305: + October the Dow + closed below for the first time + in four years; by the + +On line 6305: + the Dow closed below + for the first time in four years; + by the end of the + +On line 6305: + Dow closed below for + the first time in four years; by + the end of the week + +On line 6305: + closed below for the + first time in four years; by the + end of the week it + +On line 6305: + below for the first + time in four years; by the end + of the week it was + +On line 6305: + the first time in four + years; by the end of the week + it was down almost + +On line 6305: + first time in four years; + by the end of the week it + was down almost points, + +On line 6305: + time in four years; by + the end of the week it was + down almost points, or + +On line 6305: + years; by the end of + the week it was down almost + points, or below its + +On line 6305: + by the end of the + week it was down almost points, + or below its peak + +On line 6305: + the end of the week + it was down almost points, or + below its peak in + +On line 6305: + the week it was down + almost points, or below its + peak in October + +On line 6305: + it was down almost + points, or below its peak in + October The spread + +On line 6305: + below its peak in + October The spread between + the interest rate + +On line 6305: + in October The + spread between the interest + rate at which banks lend + +On line 6305: + October The spread + between the interest rate + at which banks lend to + +On line 6305: + Treasuries—a closely watched + indicator of market + confidence—hit an + +On line 6305: + watched indicator + of market confidence—hit + an all-time high. + +On line 6305: + indicator of + market confidence—hit an + all-time high. And + +On line 6305: + the dollar value + of outstanding commercial + paper issued by + +On line 6305: + commercial paper + issued by both financial + and nonfinancial + +On line 6305: + and nonfinancial + companies had fallen by + billion in the month + +On line 6305: + by billion in the + month between Lehman’s failure and + TARP’s enactment. Even + +On line 6305: + billion in the month + between Lehman’s failure and TARP’s + enactment. Even firms + +On line 6305: + between Lehman’s failure + and TARP’s enactment. Even firms + that had survived the + +On line 6305: + firms that had survived + the previous disruptions + in the commercial + +On line 6305: + disruptions in the + commercial paper markets + were now feeling the + +On line 6305: + commercial paper + markets were now feeling the + strain. In response, on + +On line 6305: + now feeling the strain. + In response, on October + the Fed created + +On line 6305: + feeling the strain. In + response, on October the + Fed created yet + +On line 6305: + October the Fed + created yet another + emergency program, + +On line 6305: + Commercial Paper + Funding Facility, to + purchase secured and + +On line 6305: + to purchase secured + and unsecured commercial + paper directly + +On line 6305: + program, which allowed + firms to roll over their debt, would + be widely used by + +On line 6305: + allowed firms to roll + over their debt, would be widely + used by financial + +On line 6305: + over their debt, would be + widely used by financial + and nonfinancial + +On line 6305: + used by financial + and nonfinancial firms. The + three financial firms + +On line 6305: + by financial and + nonfinancial firms. The three + financial firms that + +On line 6305: + and nonfinancial + firms. The three financial firms + that made the greatest + +On line 6305: + nonfinancial firms. + The three financial firms that + made the greatest use + +On line 6305: + The three financial + firms that made the greatest use + of the program were + +On line 6305: + financial firms that + made the greatest use of the + program were foreign + +On line 6305: + made the greatest use + of the program were foreign + institutions: UBS + +On line 6305: + use of the program + were foreign institutions: + UBS (which borrowed a + +On line 6305: + UBS (which borrowed a + cumulative billion over + time), Dexia billion), + +On line 6305: + billion), and Barclays + billion). Other financial + firms included GE + +On line 6305: + Capital billion), + Prudential Funding billion), + and Toyota Motor + +On line 6305: + Verizon billion), + Harley-Davidson billion), McDonald’s, million) and + Georgia Transmission + +On line 6307: + Georgia Transmission + million).117 Treasury was already + rethinking TARP. The + +On line 6307: + million).117 Treasury was + already rethinking TARP. The + best way to structure + +On line 6307: + already rethinking + TARP. The best way to structure + the program was not + +On line 6307: + way to structure the + program was not obvious. + Which toxic assets + +On line 6307: + would the government + determine fair prices in an + illiquid market1 Would + +On line 6307: + prices in an illiquid + market1 Would firms holding these + assets agree to sell + +On line 6307: + an illiquid market1 + Would firms holding these assets + agree to sell them at + +On line 6307: + illiquid market1 Would + firms holding these assets agree + to sell them at a + +On line 6307: + holding these assets + agree to sell them at a fair + price if doing so + +On line 6307: + agree to sell them at + a fair price if doing so + would require them to + +On line 6307: + them at a fair price + if doing so would require + them to realize + +On line 6307: + if doing so would + require them to realize + losses1 How could the + +On line 6307: + so would require them + to realize losses1 How + could the government + +On line 6307: + would require them to + realize losses1 How could + the government avoid + +On line 6307: + losses1 How could the + government avoid overpaying1 + Such problems would take + +On line 6307: + could the government + avoid overpaying1 Such problems + would take time to solve, + +On line 6307: + the government avoid + overpaying1 Such problems would + take time to solve, and + +On line 6307: + avoid overpaying1 Such + problems would take time to solve, + and Treasury wanted + +On line 6307: + would take time to solve, + and Treasury wanted to bring + stability to + +On line 6307: + stability to + the deteriorating + markets as quickly + +On line 6309: + as possible. The + key concern for markets and + regulators was + +On line 6309: + The key concern for + markets and regulators + was that they weren’t + +On line 6309: + concern for markets + and regulators was that + they weren’t sure they + +On line 6309: + that they weren’t sure + they understood the extent + of toxic assets + +On line 6309: + they weren’t sure they + understood the extent of + toxic assets on + +On line 6309: + they understood the + extent of toxic assets + on the balance sheets + +On line 6309: + was allowed under + the TARP legislation, which + stated that Treasury, + +On line 6309: + TARP legislation, + which stated that Treasury, in + consultation with + +On line 6309: + stock, if they deemed such + purchases necessary to + promote financial + +On line 6309: + financial market + stability. However, + the new proposal + +On line 6309: + However, the new + proposal would pose a host + of new problems. By + +On line 6309: + would pose a host of + new problems. By injecting + capital in these + +On line 6309: + become a major + shareholder in the private + financial sector. + +On line 6311: + major shareholder + in the private financial + sector. On Sunday, + +On line 6311: + sector. On Sunday, + October after agreeing + to the terms of the + +On line 6311: + Sunday, October + after agreeing to the terms + of the capital + +On line 6311: + after agreeing to + the terms of the capital + injections, Paulson, + +On line 6311: + and Geithner + selected a small group of + major financial + +On line 6311: + selected a small + group of major financial + institutions to + +On line 6311: + immediately + offer capital: the four + largest commercial bank + +On line 6311: + offer capital: + the four largest commercial bank + holding companies + +On line 6311: + capital: the four + largest commercial bank holding + companies (Bank of + +On line 6311: + companies (Bank of + America, Citigroup, JP + Morgan, and Wells), the + +On line 6311: + the three remaining + large investment banks (Goldman + and Morgan Stanley, + +On line 6311: + three remaining large + investment banks (Goldman and + Morgan Stanley, which + +On line 6311: + Stanley, which were now + bank holding companies, and + Merrill, which Bank of + +On line 6311: + were now bank holding + companies, and Merrill, which + Bank of America + +On line 6311: + Bank of America + had agreed to acquire), and two + important clearing + +On line 6311: + had agreed to acquire), + and two important clearing + and settlement banks + +On line 6311: + agreed to acquire), and + two important clearing and + settlement banks (BNY + +On line 6311: + and two important + clearing and settlement banks + (BNY Mellon and State + +On line 6311: + banks (BNY Mellon and + State Street). Together, these nine + institutions held + +On line 6311: + State Street). Together, + these nine institutions held + more than trillion in + +On line 6311: + Together, these nine + institutions held more than + trillion in assets, + +On line 6311: + held more than trillion + in assets, or about of all + assets in U.S. banks. + +On line 6313: + in assets, or about + of all assets in U.S. banks. + Paulson summoned the + +On line 6313: + all assets in U.S. + banks. Paulson summoned the firms’ + chief executives + +On line 6313: + assets in U.S. banks. + Paulson summoned the firms’ chief + executives to + +On line 6313: + banks. Paulson summoned + the firms’ chief executives + to Washington on + +On line 6313: + chief executives + to Washington on Columbus + Day, October Along + +On line 6313: + executives to + Washington on Columbus Day, + October Along with + +On line 6313: + to Washington on + Columbus Day, October Along + with Bernanke, Bair, Dugan, and + +On line 6313: + Along with Bernanke, Bair, Dugan, + and Geithner, Paulson + explained that Treasury + +On line 6313: + and Geithner, + Paulson explained that Treasury + had set aside billion + +On line 6313: + Paulson explained that + Treasury had set aside billion + from TARP to purchase + +On line 6313: + from TARP to purchase + equity in financial + nstitutions under + +On line 6313: + purchase equity + in financial nstitutions + under the newly + +On line 6313: + nstitutions under + the newly formed Capital + Purchase Program (CPP). + +On line 6313: + Capital Purchase + Program (CPP). Specifically, + Treasury would purchase + +On line 6313: + (CPP). Specifically, + Treasury would purchase senior + preferred stock that would + +On line 6313: + Treasury would purchase + senior preferred stock that would + pay a dividend + +On line 6313: + would purchase senior + preferred stock that would pay a + dividend for the + +On line 6313: + senior preferred stock + that would pay a dividend + for the first five years; + +On line 6313: + preferred stock that would + pay a dividend for the + first five years; the rate + +On line 6313: + stock that would pay a + dividend for the first five + years; the rate would rise + +On line 6313: + pay a dividend + for the first five years; the rate + would rise to thereafter + +On line 6313: + a dividend for + the first five years; the rate would + rise to thereafter to + +On line 6313: + for the first five years; + the rate would rise to thereafter + to encourage the + +On line 6313: + years; the rate would rise + to thereafter to encourage + the companies to + +On line 6313: + the rate would rise to + thereafter to encourage the + companies to pay + +On line 6313: + the companies to + pay the government back. Firms + would also have to + +On line 6313: + pay the government + back. Firms would also have to + issue stock warrants + +On line 6313: + back. Firms would also + have to issue stock warrants + to Treasury and agree + +On line 6313: + Firms would also have + to issue stock warrants to + Treasury and agree to + +On line 6313: + have to issue stock + warrants to Treasury and agree + to abide by certain + +On line 6313: + issue stock warrants + to Treasury and agree to abide + by certain standards + +On line 6313: + to Treasury and agree + to abide by certain standards + for executive + +On line 6313: + to abide by certain + standards for executive + compensation and + +On line 6315: + compensation and + corporate governance. The + regulators had + +On line 6315: + The regulators + had already decided to + allocate half of + +On line 6315: + already decided + to allocate half of these + funds to the nine firms + +On line 6315: + to allocate half + of these funds to the nine firms + assembled that day: + +On line 6315: + half of these funds to + the nine firms assembled that + day: billion each to + +On line 6315: + funds to the nine firms + assembled that day: billion + each to Citigroup, + +On line 6315: + assembled that day: + billion each to Citigroup, + JP Morgan, and Wells; + +On line 6315: + that day: billion each + to Citigroup, JP Morgan, + and Wells; billion to + +On line 6315: + day: billion each to + Citigroup, JP Morgan, and + Wells; billion to Bank + +On line 6315: + to Citigroup, JP + Morgan, and Wells; billion to + Bank of America; + +On line 6315: + Wells; billion to Bank + of America; billion each + to Merrill, Morgan + +On line 6315: + to Merrill, Morgan + Stanley, and Goldman; billion + to BNY Mellon; and + +On line 6315: + Stanley, and Goldman; + billion to BNY Mellon; and + billion to State Street. + +On line 6317: + Goldman; billion to + BNY Mellon; and billion to + State Street. "We didn’t + +On line 6317: + Mellon; and billion + to State Street. "We didn’t want + it to look or be + +On line 6317: + and billion to State + Street. "We didn’t want it to + look or be like a + +On line 6317: + Street. "We didn’t want + it to look or be like a + nationalization" + +On line 6317: + to look or be like + a nationalization" of + the banking sector, + +On line 6317: + of nonvoting stock, + and the terms were intended + to be attractive.119 + +On line 6317: + Paulson emphasized + the importance of the banks’ + participation + +On line 6317: + importance of the + banks’ participation to + provide confidence + +On line 6317: + participation + to provide confidence to + the system. He told + +On line 6317: + provide confidence + to the system. He told the + CEOs: "If you don’t take + +On line 6317: + to the system. He + told the CEOs: "If you don’t take + [the capital] and + +On line 6317: + He told the CEOs: "If + you don’t take [the capital] + and sometime later + +On line 6317: + told the CEOs: "If you + don’t take [the capital] and + sometime later your + +On line 6317: + tells you that you are + undercapitalized you + may not like the terms + +On line 6317: + you may not like the + terms if you have to come back + to me."120 All nine firms + +On line 6317: + may not like the terms + if you have to come back to + me."120 All nine firms took + +On line 6317: + not like the terms if + you have to come back to me."120 + All nine firms took the + +On line 6317: + like the terms if you + have to come back to me."120 All + nine firms took the deal. + +On line 6317: + the terms if you have + to come back to me."120 All nine + firms took the deal. "They + +On line 6317: + terms if you have to + come back to me."120 All nine firms + took the deal. "They made + +On line 6317: + if you have to come + back to me."120 All nine firms took + the deal. "They made a + +On line 6317: + to come back to me."120 + All nine firms took the deal. "They + made a coherent, + +On line 6317: + come back to me."120 All + nine firms took the deal. "They made + a coherent, I + +On line 6317: + back to me."120 All nine + firms took the deal. "They made a + coherent, I thought, + +On line 6317: + All nine firms took the + deal. "They made a coherent, + I thought, a cogent + +On line 6317: + took the deal. "They made + a coherent, I thought, a + cogent argument + +On line 6317: + a coherent, I + thought, a cogent argument + about responding to + +On line 6317: + coherent, I thought, + a cogent argument about + responding to this + +On line 6317: + I thought, a cogent + argument about responding + to this crisis, which, + +On line 6317: + dramatically + worse. It wasn’t leading to + a run on some of + +On line 6317: + wasn’t leading to + a run on some of the banks + but it was getting + +On line 6317: + leading to a run + on some of the banks but it + was getting worse in + +On line 6317: + run on some of the + banks but it was getting worse + in the marketplace," + +On line 6317: + on some of the banks + but it was getting worse in + the marketplace," JP + +On line 6317: + but it was getting + worse in the marketplace," JP + Morgan’s Dimon told + +On line 6317: + was getting worse in + the marketplace," JP Morgan’s + Dimon told the FCIC.121 + +On line 6319: + the FCIC.121 To further + reassure markets that it + would not allow the + +On line 6319: + the largest financial + institutions to fail, the + government also + +On line 6319: + institutions to + fail, the government also + announced two new FDIC + +On line 6319: + fail, the government + also announced two new FDIC + programs the next day. + +On line 6321: + government also + announced two new FDIC programs + the next day. The first + +On line 6321: + FDIC programs the next + day. The first temporarily + guaranteed certain + +On line 6321: + the next day. The first + temporarily guaranteed + certain senior debt + +On line 6321: + senior debt for all + FDIC-insured institutions and some + holding companies. + +On line 6321: + FDIC-insured institutions + and some holding companies. + This program was used + +On line 6321: + was used broadly. For + example, Goldman Sachs had + billion in debt backed + +On line 6321: + had billion in debt + backed by the FDIC outstanding + in January and + +On line 6321: + debt backed by the FDIC + outstanding in January + and billion at the + +On line 6323: + end of according + to public filings; Morgan + Stanley had billion + +On line 6323: + to public filings; + Morgan Stanley had billion + at the end of and + +On line 6323: + Morgan Stanley had + billion at the end of and + billion at the end + +On line 6323: + Stanley had billion + at the end of and billion + at the end of GE + +On line 6323: + billion at the end + of and billion at the end + of GE Capital, + +On line 6323: + at the end of and + billion at the end of GE + Capital, one of + +On line 6323: + and billion at the + end of GE Capital, one + of the heaviest + +On line 6323: + billion at the end + of GE Capital, one of + the heaviest users + +On line 6323: + of GE Capital, + one of the heaviest users + of the program, had + +On line 6323: + Capital, one of + the heaviest users of the + program, had billion + +On line 6323: + heaviest users of + the program, had billion of + FDIC-backed debt outstanding + +On line 6323: + had billion of FDIC-backed + debt outstanding at the end + of and billion at + +On line 6323: + billion of FDIC-backed debt + outstanding at the end of + and billion at the + +On line 6323: + outstanding at the + end of and billion at the + end of Citigroup + +On line 6323: + end of and billion + at the end of Citigroup + had billion of FDIC + +On line 6323: + billion at the end + of Citigroup had billion + of FDIC guaranteed + +On line 6323: + of Citigroup had + billion of FDIC guaranteed + debt outstanding at + +On line 6323: + had billion of FDIC + guaranteed debt outstanding + at the end of and + +On line 6323: + of FDIC guaranteed + debt outstanding at the end + of and billion at + +On line 6323: + FDIC guaranteed debt + outstanding at the end of + and billion at the + +On line 6325: + debt outstanding at + the end of and billion at + the end of JPMorgan Chase + +On line 6325: + outstanding at the + end of and billion at the + end of JPMorgan Chase had + +On line 6325: + end of and billion + at the end of JPMorgan Chase had + billion outstanding + +On line 6325: + and billion at the + end of JPMorgan Chase had billion + outstanding at the + +On line 6325: + at the end of JPMorgan + Chase had billion outstanding + at the end of and + +On line 6325: + end of JPMorgan Chase had + billion outstanding at the + end of and billion + +On line 6325: + JPMorgan Chase had billion + outstanding at the end of + and billion at the + +On line 6327: + billion outstanding + at the end of and billion + at the end of The + +On line 6327: + outstanding at the + end of and billion at the + end of The second + +On line 6327: + at the end of and + billion at the end of The + second provided + +On line 6327: + end of and billion + at the end of The second + provided deposit + +On line 6327: + billion at the end + of The second provided + deposit insurance + +On line 6327: + deposit insurance + to certain non-interest-bearing + deposits, like checking + +On line 6327: + Because of the risk + to taxpayers, the measures + required the Fed, the + +On line 6327: + risk to taxpayers, + the measures required the Fed, + the FDIC, and Treasury + +On line 6327: + to taxpayers, the + measures required the Fed, the + FDIC, and Treasury to + +On line 6327: + measures required the + Fed, the FDIC, and Treasury to + declare a systemic + +On line 6327: + the FDIC, and Treasury + to declare a systemic risk + exception under + +On line 6327: + Treasury to declare + a systemic risk exception + under FDICIA, as + +On line 6327: + exception under + FDICIA, as they had done two + weeks earlier to + +On line 6329: + to facilitate + Citigroup’s bid for Wachovia. + Later in the week, + +On line 6329: + Citigroup’s bid for + Wachovia. Later in the week, + Treasury opened TARP to + +On line 6329: + for Wachovia. Later + in the week, Treasury opened TARP + to qualifying + +On line 6329: + Wachovia. Later in + the week, Treasury opened TARP to + qualifying "healthy" + +On line 6329: + in the week, Treasury + opened TARP to qualifying + "healthy" and "viable" banks, + +On line 6329: + the week, Treasury opened + TARP to qualifying "healthy" + and "viable" banks, thrifts, + +On line 6329: + week, Treasury opened TARP + to qualifying "healthy" and + "viable" banks, thrifts, and + +On line 6329: + to qualifying + "healthy" and "viable" banks, thrifts, and + holding companies, + +On line 6329: + "healthy" and "viable" banks, + thrifts, and holding companies, + under the same terms + +On line 6329: + "viable" banks, thrifts, and + holding companies, under + the same terms that the + +On line 6329: + banks, thrifts, and holding + companies, under the same + terms that the first nine + +On line 6329: + companies, under + the same terms that the first nine + firms had received.123 The + +On line 6329: + firms had received.123 The + appropriate federal + regulator—the Fed, + +On line 6329: + The appropriate + federal regulator—the + Fed, FDIC, OCC, or OTS— + +On line 6331: + regulator—the Fed, + FDIC, OCC, or OTS— would review + applications and + +On line 6331: + FDIC, OCC, or OTS— would + review applications and + pass them to Treasury + +On line 6331: + them to Treasury for + final approval. The program + was intended not + +On line 6331: + final approval. The + program was intended not + only to restore + +On line 6331: + only to restore + confidence in the banking + system but also + +On line 6331: + restore confidence + in the banking system but + also to provide + +On line 6331: + confidence in the + banking system but also + to provide banks with + +On line 6335: + mitigation."124 "The + whole reason for designing + the program was so + +On line 6335: + "The whole reason for + designing the program was + so many banks would take + +On line 6335: + for designing the + program was so many banks would + take it, would have the + +On line 6335: + the program was so + many banks would take it, would have + the capital, and + +On line 6335: + program was so many + banks would take it, would have the + capital, and that + +On line 6335: + so many banks would take + it, would have the capital, + and that would lead to + +On line 6335: + banks would take it, would + have the capital, and that + would lead to lending. + +On line 6335: + would take it, would have + the capital, and that would + lead to lending. That + +On line 6335: + take it, would have the + capital, and that would lead + to lending. That was + +On line 6335: + the capital, and + that would lead to lending. That + was the whole purpose," + +On line 6335: + to lending. That was + the whole purpose," Paulson told + the FCIC. However, + +On line 6335: + lending. That was the + whole purpose," Paulson told the + FCIC. However, there + +On line 6335: + whole purpose," Paulson + told the FCIC. However, there + were no specific + +On line 6335: + However, there were + no specific requirements + for those banks to make + +On line 6335: + banks to make loans to + businesses and households. "Right + after we announced + +On line 6335: + loans to businesses + and households. "Right after we + announced it we had + +On line 6335: + announced it we had + critics start saying, ‘You’ve + got to force them to + +On line 6335: + we had critics start + saying, ‘You’ve got to force + them to lend,’" Paulson + +On line 6335: + saying, ‘You’ve got + to force them to lend,’" Paulson + said. Although he said + +On line 6335: + got to force them to + lend,’" Paulson said. Although he + said he couldn’t see + +On line 6335: + to force them to lend,’" + Paulson said. Although he said + he couldn’t see how + +On line 6335: + to lend,’" Paulson said. + Although he said he couldn’t + see how to do this, + +On line 6335: + Paulson said. Although + he said he couldn’t see how + to do this, he did + +On line 6335: + said. Although he said + he couldn’t see how to do + this, he did concede + +On line 6335: + Although he said he + couldn’t see how to do this, + he did concede that + +On line 6335: + he couldn’t see how + to do this, he did concede + that the program could + +On line 6335: + couldn’t see how to + do this, he did concede that + the program could have + +On line 6335: + this, he did concede + that the program could have been + more effective in + +On line 6335: + he did concede that + the program could have been more + effective in this + +On line 6335: + the program could have + been more effective in this + regard.125 The enabling + +On line 6335: + been more effective + in this regard.125 The enabling + legislation did + +On line 6335: + legislation did + have provisions affecting + the compensation + +On line 6335: + compensation of + senior executives and + participating + +On line 6335: + shareholders. Over time, + these provisions would become + more stringent, and the + +On line 6335: + time, these provisions + would become more stringent, and + the following year, + +On line 6335: + these provisions would + become more stringent, and the + following year, in + +On line 6335: + following year, in + compliance with another + measure in the act + +On line 6335: + in compliance with + another measure in the + act that created + +On line 6335: + create the Office + of the Special Master for + TARP Executive + +On line 6337: + Program by the end + of ultimately, it would + invest billion in + +On line 6341: + invest billion in + financial institutions.126 + In the ensuing + +On line 6341: + institutions.126 In + the ensuing months, Treasury + would provide much of + +On line 6341: + In the ensuing + months, Treasury would provide much + of TARP’s remaining + +On line 6341: + loss guarantees), and + Bank of America billion). + On December it + +On line 6341: + it established the + Automotive Industry + Financing Program, + +On line 6341: + make investments in + and loans to automobile + manufacturers + +On line 6341: + and auto finance + companies, specifically + General Motors, + +On line 6341: + finance companies, + specifically General + Motors, GMAC, Chrysler, and + +On line 6343: + Chrysler Financial.127 On + January President Bush + notified Congress + +On line 6343: + notified Congress + that he intended not to + access the second + +On line 6343: + that he intended + not to access the second + half of the billion + +On line 6343: + he intended not + to access the second half + of the billion in + +On line 6343: + intended not to + access the second half of + the billion in TARP + +On line 6343: + not to access the + second half of the billion + in TARP funds, so that + +On line 6343: + access the second + half of the billion in TARP + funds, so that he might + +On line 6343: + the second half of + the billion in TARP funds, so + that he might "‘ensure + +On line 6343: + second half of the + billion in TARP funds, so that + he might "‘ensure that + +On line 6343: + half of the billion + in TARP funds, so that he might + "‘ensure that such funds + +On line 6343: + billion in TARP funds, + so that he might "‘ensure that + such funds are available + +On line 6343: + in TARP funds, so that + he might "‘ensure that such funds + are available early’ + +On line 6343: + TARP funds, so that he + might "‘ensure that such funds are + available early’ for + +On line 6345: + available early’ for + the new administration."128 + As of September + +On line 6345: + early’ for the new + administration."128 As of + September 2010—two years + +On line 6345: + administration."128 + As of September 2010—two years + after TARP’s creation—Treasury had + +On line 6347: + billion in losses + had been incurred.129 About billion + of the outstanding + +On line 6347: + in losses had been + incurred.129 About billion of the + outstanding funds were + +On line 6347: + incurred.129 About billion + of the outstanding funds were + in the Capital + +On line 6347: + About billion of the + outstanding funds were in the + Capital Purchase + +On line 6347: + outstanding funds were + in the Capital Purchase + Program. Treasury still + +On line 6347: + in the Capital + Purchase Program. Treasury still + held large stakes in GM + +On line 6347: + Treasury still held large + stakes in GM of common stock), + Ally Financial + +On line 6347: + Ally Financial + (formerly known as GMAC; and + Chrysler Moreover, billion + +On line 6347: + (formerly known as + GMAC; and Chrysler Moreover, billion + of TARP funds remained + +On line 6347: + known as GMAC; and Chrysler + Moreover, billion of TARP funds + remained invested + +On line 6347: + GMAC; and Chrysler Moreover, + billion of TARP funds remained + invested in AIG + +On line 6347: + billion of TARP funds + remained invested in AIG + in addition to + +On line 6347: + remained invested + in AIG in addition to + billion of loans from + +On line 6347: + invested in AIG + in addition to billion + of loans from the New + +On line 6347: + AIG in addition + to billion of loans from the + New York Fed and a + +On line 6347: + the New York Fed and + a billion non-TARP equity + investment by the + +On line 6347: + Fed and a billion + non-TARP equity investment + by the New York Fed + +On line 6347: + and a billion non-TARP + equity investment by + the New York Fed in + +On line 6347: + investment by the + New York Fed in two of AIG’s + foreign insurance + +On line 6347: + two of AIG’s foreign + insurance companies.130 By + December all nine + +On line 6347: + foreign insurance + companies.130 By December + all nine companies + +On line 6347: + December all nine + companies invited to + the initial Columbus + +On line 6347: + all nine companies + invited to the initial + Columbus Day meeting + +On line 6347: + invited to the + initial Columbus Day meeting + had fully repaid + +On line 6349: + initial Columbus Day + meeting had fully repaid + the government.131 Of + +On line 6349: + meeting had fully + repaid the government.131 Of + course, TARP was only + +On line 6349: + had fully repaid + the government.131 Of course, TARP + was only one of + +On line 6349: + fully repaid the + government.131 Of course, TARP was + only one of more + +On line 6349: + was only one of + more than two dozen emergency + programs totaling + +On line 6349: + two dozen emergency + programs totaling trillions + of dollars put in + +On line 6349: + in place during the + crisis to stabilize the + financial system + +On line 6349: + to stabilize the + financial system and to + rescue specific + +On line 6349: + financial system + and to rescue specific + firms. Indeed, TARP was + +On line 6349: + rescue specific + firms. Indeed, TARP was not even + the largest.132 Many of these + +On line 6349: + firms. Indeed, TARP was + not even the largest.132 Many of these + programs are discussed + +On line 6349: + TARP was not even the + largest.132 Many of these programs are + discussed in this and + +On line 6349: + even the largest.132 Many of + these programs are discussed in + this and previous + +On line 6349: + are discussed in this + and previous chapters. For + just some examples: + +On line 6349: + discussed in this and + previous chapters. For just + some examples: The + +On line 6349: + previous chapters. + For just some examples: The + Fed’s TSLF and PDCF + +On line 6349: + chapters. For just some + examples: The Fed’s TSLF and + PDCF programs peaked + +On line 6349: + some examples: The + Fed’s TSLF and PDCF programs + peaked at billion and + +On line 6351: + and PDCF programs + peaked at billion and billion, + respectively. Its + +On line 6351: + billion and billion, + respectively. Its money + market funding peaked + +On line 6351: + Its money market + funding peaked at billion in + January and its + +On line 6351: + market funding peaked + at billion in January + and its Commercial + +On line 6351: + January and its + Commercial Paper Funding + Facility peaked + +On line 6351: + Commercial Paper + Funding Facility peaked + at billion, also + +On line 6351: + at billion, also + in January When it was + introduced, the FDIC’s + +On line 6351: + was introduced, the + FDIC’s program to guarantee + senior debt for all + +On line 6351: + the FDIC’s program to + guarantee senior debt for + all FDIC-insured nstitutions + +On line 6351: + guarantee senior + debt for all FDIC-insured nstitutions + stood ready to backstop + +On line 6351: + senior debt for all + FDIC-insured nstitutions stood ready to + backstop as much as + +On line 6351: + all FDIC-insured nstitutions + stood ready to backstop as much + as billion in bank + +On line 6351: + FDIC-insured nstitutions stood + ready to backstop as much as + billion in bank debt. + +On line 6351: + ready to backstop as + much as billion in bank debt. + The Fed’s largest program, + +On line 6351: + backstop as much as + billion in bank debt. The Fed’s + largest program, announced + +On line 6353: + trillion in agency + mortgage–backed securities.134 + AIG: "WE NEEDED TO + +On line 6357: + AIG: "WE NEEDED TO + STOP THE SUCKING CHEST WOUND IN + THIS PATIENT" AIG would + +On line 6357: + "WE NEEDED TO STOP + THE SUCKING CHEST WOUND IN THIS + PATIENT" AIG would be + +On line 6357: + TO STOP THE SUCKING + CHEST WOUND IN THIS PATIENT" AIG + would be the first TARP + +On line 6357: + PATIENT" AIG would be + the first TARP recipient + that was not part of + +On line 6357: + was not part of the + Capital Purchase Program. + It still had two big + +On line 6357: + of the Capital + Purchase Program. It still had + two big holes to fill, + +On line 6357: + Capital Purchase + Program. It still had two big + holes to fill, despite + +On line 6357: + Purchase Program. It + still had two big holes to fill, + despite the billion + +On line 6357: + Program. It still had + two big holes to fill, despite + the billion loan from + +On line 6357: + still had two big holes + to fill, despite the billion + loan from the New York + +On line 6357: + had two big holes to + fill, despite the billion loan + from the New York Fed. + +On line 6357: + two big holes to fill, + despite the billion loan from + the New York Fed. Its + +On line 6357: + despite the billion + loan from the New York Fed. Its + securities-lending + +On line 6357: + the New York Fed. Its + securities-lending business + was underwater + +On line 6357: + securities-lending + business was underwater + despite payments in + +On line 6357: + despite payments in + September and October + of billion that the + +On line 6357: + and October of + billion that the Fed loan had + enabled; and it still + +On line 6357: + of billion that the + Fed loan had enabled; and it + still needed billion + +On line 6357: + billion that the Fed + loan had enabled; and it still + needed billion to + +On line 6357: + loan had enabled; and + it still needed billion to + pay credit default + +On line 6357: + had enabled; and it + still needed billion to pay + credit default swap + +On line 6357: + still needed billion + to pay credit default swap + (CDS) counterparties, + +On line 6357: + credit default swap + (CDS) counterparties, despite + earlier payments + +On line 6359: + On November the + government announced that it + was restructuring + +On line 6359: + government announced + that it was restructuring + the New York Fed loan + +On line 6359: + announced that it was + restructuring the New York + Fed loan and, in the + +On line 6359: + was restructuring + the New York Fed loan and, in + the process, Treasury would + +On line 6359: + the New York Fed loan + and, in the process, Treasury would + purchase billion in + +On line 6359: + loan and, in the process, + Treasury would purchase billion + in AIG preferred stock. + +On line 6359: + in the process, Treasury + would purchase billion in AIG + preferred stock. As was + +On line 6359: + Treasury would purchase + billion in AIG preferred stock. + As was done in the + +On line 6359: + purchase billion in + AIG preferred stock. As was done + in the Capital + +On line 6359: + AIG preferred stock. As + was done in the Capital + Purchase Program, in + +On line 6359: + As was done in the + Capital Purchase Program, + in return for the + +On line 6359: + in the Capital + Purchase Program, in return + for the equity + +On line 6359: + Purchase Program, in + return for the equity + provided, Treasury + +On line 6359: + for the equity + provided, Treasury received + stock warrants from AIG + +On line 6359: + from AIG and imposed + restrictions on dividends + and executive + +On line 6361: + day, the New York Fed + created two off-balance-sheet + entities to hold + +On line 6361: + Fed created two + off-balance-sheet entities to + hold AIG’s bad assets + +On line 6361: + associated + with securities lending + (Maiden Lane II) and + +On line 6361: + with securities + lending (Maiden Lane II) and + CDS (Maiden Lane III). + +On line 6361: + lending (Maiden Lane + II) and CDS (Maiden Lane III). + Over the next month, the + +On line 6361: + (Maiden Lane II) and + CDS (Maiden Lane III). Over the + next month, the New York + +On line 6361: + and CDS (Maiden Lane + III). Over the next month, the New + York Fed loaned Maiden + +On line 6361: + CDS (Maiden Lane III). + Over the next month, the New York + Fed loaned Maiden Lane + +On line 6361: + (Maiden Lane III). Over + the next month, the New York Fed + loaned Maiden Lane II + +On line 6361: + III). Over the next month, + the New York Fed loaned Maiden + Lane II billion so + +On line 6361: + Over the next month, the + New York Fed loaned Maiden Lane + II billion so that + +On line 6361: + the next month, the New + York Fed loaned Maiden Lane II + billion so that it + +On line 6361: + the New York Fed loaned + Maiden Lane II billion so + that it could purchase + +On line 6361: + York Fed loaned Maiden + Lane II billion so that it + could purchase mortgage-backed + +On line 6361: + Lane II billion so + that it could purchase mortgage-backed + securities from + +On line 6361: + that it could purchase + mortgage-backed securities from + AIG’s life insurance + +On line 6361: + subsidiaries. This enabled + those subsidiaries to pay back their + securities-lending + +On line 6361: + securities-lending + counterparties, bringing to + billion the total + +On line 6361: + bringing to billion + the total payments AIG would + make with government + +On line 6361: + the total payments + AIG would make with government + help. These payments are + +On line 6363: + make with government + help. These payments are listed + in figure Maiden + +On line 6363: + with government help. + These payments are listed in + figure Maiden Lane + +On line 6363: + payments are listed + in figure Maiden Lane III + was created with + +On line 6363: + in figure Maiden + Lane III was created with + a billion loan from + +On line 6363: + figure Maiden Lane + III was created with a + billion loan from the + +On line 6363: + Maiden Lane III was + created with a billion + loan from the New York + +On line 6363: + III was created + with a billion loan from the + New York Fed and an + +On line 6363: + was created with + a billion loan from the New + York Fed and an AIG + +On line 6363: + with a billion loan + from the New York Fed and an + AIG investment of + +On line 6363: + from the New York Fed + and an AIG investment of + billion, supported + +On line 6363: + New York Fed and an + AIG investment of billion, + supported by the + +On line 6363: + AIG investment of + billion, supported by the + Treasury investment. + +On line 6363: + billion, supported + by the Treasury investment. + That money went to + +On line 6363: + went to buy CDOs from + of AIG Financial Products’ + CDS counterparties. + +On line 6363: + to buy CDOs from of + AIG Financial Products’ CDS + counterparties. The + +On line 6363: + of AIG Financial + Products’ CDS counterparties. + The CDOs had a face + +On line 6363: + Financial Products’ + CDS counterparties. The CDOs + had a face value + +On line 6363: + CDS counterparties. + The CDOs had a face value + of billion, which AIG + +On line 6363: + The CDOs had a face + value of billion, which AIG + Financial Products + +On line 6363: + value of billion, + which AIG Financial Products + had guaranteed through + +On line 6363: + which AIG Financial + Products had guaranteed through + its CDS.136 Because AIG + +On line 6363: + guaranteed through its + CDS.136 Because AIG had already + posted billion in + +On line 6363: + its CDS.136 Because AIG + had already posted billion + in collateral + +On line 6363: + CDS.136 Because AIG had + already posted billion in + collateral to + +On line 6363: + collateral to + its counterparties, Maiden + Lane III paid billion + +On line 6363: + paid billion to those + counterparties, providing + them with the full face + +On line 6363: + those counterparties, + providing them with the full + face amount of the CDOs + +On line 6363: + providing them with + the full face amount of the CDOs + in return for the + +On line 6363: + with the full face amount + of the CDOs in return for + the cancellation + +On line 6363: + the full face amount of + the CDOs in return for the + cancellation of + +On line 6363: + the CDOs in return + for the cancellation of + their rights under the + +On line 6363: + CDOs in return for + the cancellation of their + rights under the CDS.137 + +On line 6363: + in return for the + cancellation of their rights + under the CDS.137 A + +On line 6363: + the cancellation + of their rights under the CDS.137 + A condition of + +On line 6363: + cancellation of + their rights under the CDS.137 A + condition of this + +On line 6363: + of their rights under + the CDS.137 A condition of + this transaction was + +On line 6363: + their rights under the + CDS.137 A condition of this + transaction was that + +On line 6363: + CDS.137 A condition + of this transaction was that + AIG waive its legal + +On line 6363: + A condition of + this transaction was that AIG + waive its legal claims + +On line 6363: + condition of this + transaction was that AIG waive + its legal claims against + +On line 6363: + transaction was that + AIG waive its legal claims against + those counterparties. + +On line 6363: + waive its legal claims + against those counterparties. These + payments are listed + +On line 6365: + those counterparties. + These payments are listed in + figure Goldman Sachs + +On line 6365: + figure Goldman Sachs + received billion in payments + from Maiden Lane III + +On line 6365: + Sachs received billion + in payments from Maiden Lane + III related to + +On line 6365: + received billion in + payments from Maiden Lane III + related to the + +On line 6365: + payments from Maiden + Lane III related to the + CDS it had purchased + +On line 6365: + from Maiden Lane III + related to the CDS it + had purchased from AIG. + +On line 6365: + Lane III related + to the CDS it had purchased + from AIG. During the + +On line 6365: + III related to + the CDS it had purchased from + AIG. During the FCIC’s + +On line 6365: + had purchased from AIG. + During the FCIC’s January + hearing, Goldman CEO + +On line 6365: + hearing, Goldman CEO + Lloyd Blankfein testified that + Goldman Sachs would not + +On line 6365: + Blankfein testified + that Goldman Sachs would not have + lost any money if + +On line 6365: + that Goldman Sachs would + not have lost any money if + AIG had failed, because + +On line 6365: + Goldman Sachs would not + have lost any money if AIG + had failed, because his + +On line 6365: + Sachs would not have lost + any money if AIG had failed, + because his firm had + +On line 6365: + lost any money if + AIG had failed, because his firm + had purchased credit + +On line 6365: + had purchased credit + protection to cover the + difference between + +On line 6365: + credit protection + to cover the difference + between the amount of + +On line 6365: + difference between + the amount of collateral + it demanded from + +On line 6365: + by AIG.138 Documents + submitted to the FCIC by + Goldman after the + +On line 6365: + submitted to the + FCIC by Goldman after the + hearing do show that + +On line 6365: + by Goldman after + the hearing do show that the + firm owned billion of + +On line 6365: + the hearing do show + that the firm owned billion of + credit protection + +On line 6365: + the firm owned billion + of credit protection in + the form of CDS on + +On line 6365: + firm owned billion of + credit protection in the + form of CDS on AIG, + +On line 6365: + billion of credit + protection in the form of + CDS on AIG, although + +On line 6365: + credit protection + in the form of CDS on AIG, + although much of that + +On line 6365: + in the form of CDS + on AIG, although much of that + protection came from + +On line 6365: + CDS on AIG, although + much of that protection came + from financially + +On line 6365: + million), which itself + had to be propped up by the + government, and Lehman + +On line 6365: + itself had to be + propped up by the government, + and Lehman million), which + +On line 6365: + be propped up by the + government, and Lehman million), + which was bankrupt by + +On line 6365: + the government, and + Lehman million), which was bankrupt + by the time AIG was + +On line 6365: + and Lehman million), which + was bankrupt by the time AIG + was rescued.139 In an + +On line 6365: + Lehman million), which was + bankrupt by the time AIG was + rescued.139 In an FCIC + +On line 6365: + was bankrupt by the + time AIG was rescued.139 In an + FCIC hearing, Goldman + +On line 6365: + bankrupt by the time + AIG was rescued.139 In an FCIC + hearing, Goldman CFO + +On line 6365: + by the time AIG was + rescued.139 In an FCIC hearing, + Goldman CFO David Viniar + +On line 6365: + time AIG was rescued.139 + In an FCIC hearing, Goldman + CFO David Viniar said that + +On line 6365: + AIG was rescued.139 In + an FCIC hearing, Goldman CFO + David Viniar said that those + +On line 6365: + In an FCIC hearing, + Goldman CFO David Viniar said that + those counterparties + +On line 6367: + the billion of CDS + protection that it purchased + from AIG was part of + +On line 6367: + of CDS protection + that it purchased from AIG was + part of Goldman’s "matched + +On line 6367: + CDS protection that + it purchased from AIG was part + of Goldman’s "matched book," + +On line 6367: + it purchased from AIG + was part of Goldman’s "matched book," + meaning that Goldman + +On line 6367: + from AIG was part of + Goldman’s "matched book," meaning that + Goldman sold billion + +On line 6367: + meaning that Goldman + sold billion in offsetting + protection to its + +On line 6367: + Goldman sold billion + in offsetting protection + to its own clients; it + +On line 6369: + clients; it provided + information to the FCIC + indicating that + +On line 6369: + information to + the FCIC indicating that + the billion received + +On line 6369: + FCIC indicating + that the billion received from + Maiden Lane III was + +On line 6369: + received from Maiden + Lane III was entirely paid + to its clients.141 Without + +On line 6369: + to its clients.141 Without + the federal assistance, + Goldman would have had + +On line 6371: + find the billion some + other way. oldman also + produced documents + +On line 6371: + billion some other + way. oldman also produced + documents to the + +On line 6371: + other way. oldman + also produced documents + to the FCIC that showed + +On line 6371: + that showed it received + billion from AIG related + to credit default + +On line 6371: + received billion from + AIG related to credit + default swaps on CDOs + +On line 6371: + from AIG related + to credit default swaps on + CDOs that were not part + +On line 6371: + AIG related to + credit default swaps on CDOs + that were not part of + +On line 6371: + to credit default + swaps on CDOs that were not part + of Maiden Lane III. + +On line 6371: + credit default swaps + on CDOs that were not part of + Maiden Lane III. Of + +On line 6371: + on CDOs that were not + part of Maiden Lane III. Of + that billion, billion + +On line 6371: + CDOs that were not part + of Maiden Lane III. Of that + billion, billion was + +On line 6371: + part of Maiden Lane + III. Of that billion, billion + was received after, + +On line 6371: + of Maiden Lane III. + Of that billion, billion was + received after, and + +On line 6371: + that billion, billion + was received after, and thus + made possible by, + +On line 6371: + billion, billion was + received after, and thus made + possible by, the + +On line 6371: + was received after, + and thus made possible by, + the federal bailout + +On line 6371: + received after, and + thus made possible by, the + federal bailout of + +On line 6371: + thus made possible + by, the federal bailout of + AIG. And most—$2.9 billion—of + +On line 6371: + made possible by, + the federal bailout of AIG. + And most—$2.9 billion—of the + +On line 6371: + by, the federal + bailout of AIG. And most—$2.9 billion—of + the total was for + +On line 6371: + bailout of AIG. And most—$2.9 + billion—of the total was for + proprietary trades (that + +On line 6371: + And most—$2.9 billion—of the + total was for proprietary + trades (that is, trades made + +On line 6371: + billion—of the total + was for proprietary trades (that + is, trades made solely + +On line 6371: + for proprietary trades + (that is, trades made solely for + Goldman’s benefit + +On line 6371: + is, trades made solely + for Goldman’s benefit rather + than on behalf of + +On line 6371: + trades made solely for + Goldman’s benefit rather than + on behalf of a + +On line 6371: + than on behalf of + a client) largely relating + to Goldman’s Abacus + +On line 6371: + on behalf of a + client) largely relating to + Goldman’s Abacus CDOs. + +On line 6371: + largely relating + to Goldman’s Abacus CDOs. Thus, + unlike the billion + +On line 6371: + to Goldman’s Abacus + CDOs. Thus, unlike the billion + received from AIG on + +On line 6371: + CDOs. Thus, unlike the + billion received from AIG on + trades in which Goldman + +On line 6371: + unlike the billion + received from AIG on trades in + which Goldman owed the + +On line 6371: + billion received from + AIG on trades in which Goldman + owed the money to + +On line 6371: + received from AIG on + trades in which Goldman owed the + money to its own + +On line 6371: + trades in which Goldman + owed the money to its own + counterparties, this + +On line 6371: + owed the money to + its own counterparties, this + billion was retained + +On line 6373: + incur any losses + on their investments—because + AIG, once it was backed + +On line 6373: + any losses on their + investments—because AIG, once + it was backed by the + +On line 6373: + investments—because + AIG, once it was backed by the + government, paid claims + +On line 6373: + once it was backed by + the government, paid claims to + CDS counterparties + +On line 6373: + it was backed by the + government, paid claims to CDS + counterparties at + +On line 6375: + government, paid claims + to CDS counterparties at + of face value—has + +On line 6375: + CDS counterparties + at of face value—has been + widely criticized. + +On line 6375: + of face value—has + been widely criticized. In + November SIGTARP + +On line 6375: + November SIGTARP + faulted the New York Fed for + failing to obtain + +On line 6375: + SIGTARP faulted the + New York Fed for failing to + obtain concessions. + +On line 6375: + failing to obtain + concessions. The inspector + general said that + +On line 6375: + obtain concessions. + The inspector general + said that seven of + +On line 6375: + said that seven of + the top eight counterparties + had insisted on + +On line 6375: + counterparties had + insisted on coverage + and that the New York + +On line 6375: + on coverage and + that the New York Fed had agreed + because efforts to + +On line 6375: + that the New York Fed + had agreed because efforts to + obtain concessions + +On line 6375: + New York Fed had agreed + because efforts to obtain + concessions from all + +On line 6375: + agreed because efforts + to obtain concessions from + all counterparties + +On line 6375: + because efforts to + obtain concessions from all + counterparties had + +On line 6377: + all counterparties + had little hope of success.143 + SIGTARP was highly + +On line 6377: + had little hope of + success.143 SIGTARP was highly + critical of the + +On line 6377: + of the New York Fed’s + negotiations. From the + outset, it found, the + +On line 6377: + the outset, it found, + the New York Fed was poorly + prepared to assist + +On line 6377: + the New York Fed was + poorly prepared to assist + AIG. To prevent AIG’s + +On line 6377: + York Fed was poorly + prepared to assist AIG. To + prevent AIG’s failure, + +On line 6377: + was poorly prepared + to assist AIG. To prevent + AIG’s failure, the New + +On line 6377: + poorly prepared to + assist AIG. To prevent AIG’s + failure, the New York + +On line 6377: + prepared to assist + AIG. To prevent AIG’s failure, + the New York Fed had + +On line 6377: + to assist AIG. To + prevent AIG’s failure, the New + York Fed had hastily + +On line 6377: + AIG. To prevent AIG’s + failure, the New York Fed had + hastily agreed to the + +On line 6377: + prevent AIG’s failure, + the New York Fed had hastily + agreed to the billion + +On line 6377: + AIG’s failure, the New + York Fed had hastily agreed to + the billion bailout on + +On line 6377: + York Fed had hastily + agreed to the billion bailout on + substantially the + +On line 6377: + negotiating + strategy for the outcome, + which it described as + +On line 6377: + the outcome, which it + described as the transfer of + "billions of dollars + +On line 6377: + which it described as + the transfer of "billions of + dollars of cash from + +On line 6377: + as the transfer of + "billions of dollars of cash + from the Government + +On line 6377: + transfer of "billions + of dollars of cash from the + Government to AIG’s + +On line 6377: + of dollars of cash + from the Government to AIG’s + counterparties, even + +On line 6377: + the Government to + AIG’s counterparties, even though + senior policy + +On line 6377: + AIG’s counterparties, + even though senior policy + makers contend that + +On line 6377: + policy makers + contend that assistance to + AIG’s counterparties + +On line 6379: + not a relevant + consideration."145 In June + TARP’s Congressional + +On line 6379: + Panel criticized + the AIG bailout for having a + "poisonous" effect on + +On line 6379: + government’s failure + to require "shared sacrifice" + among AIG’s creditors + +On line 6379: + the government and + the markets, signaling an + implicit "too big + +On line 6379: + markets, signaling + an implicit "too big to + fail" guarantee for + +On line 6379: + to fail" guarantee + for certain firms. The report + said the New York Fed + +On line 6379: + fail" guarantee for + certain firms. The report said + the New York Fed should + +On line 6379: + for certain firms. The + report said the New York Fed + should have insisted + +On line 6379: + report said the New + York Fed should have insisted + on concessions from + +On line 6379: + New York Fed should have + insisted on concessions + from counterparties.146 + +On line 6381: + would have led to an + instant ratings downgrade and + precipitated + +On line 6381: + ratings downgrade and + precipitated a run + on AIG.147 New York Fed + +On line 6381: + precipitated + a run on AIG.147 New York Fed + officials told the + +On line 6381: + a run on AIG.147 New + York Fed officials told the + FCIC that they had very + +On line 6381: + on AIG.147 New York Fed + officials told the FCIC that + they had very little + +On line 6381: + York Fed officials + told the FCIC that they had very + little bargaining + +On line 6381: + officials told the + FCIC that they had very little + bargaining power + +On line 6381: + FCIC that they had very + little bargaining power + with counterparties + +On line 6381: + little bargaining + power with counterparties + who were protected + +On line 6381: + bargaining power + with counterparties who were + protected by the + +On line 6381: + counterparties who + were protected by the terms + of their CDS contracts. + +On line 6381: + protected by the + terms of their CDS contracts. And, + after providing + +On line 6381: + contracts. And, after + providing a billion loan, + the government could + +On line 6381: + a billion loan, the + government could not let AIG + fail. "Counterparties + +On line 6381: + could not let AIG fail. + "Counterparties said ‘we got + the collateral, + +On line 6381: + "Counterparties said + ‘we got the collateral, + the contractual + +On line 6381: + collateral, the + contractual rights, you’ve + been rescued by the + +On line 6381: + the contractual + rights, you’ve been rescued by + the Fed, Uncle Sam’s + +On line 6381: + been rescued by the + Fed, Uncle Sam’s behind you, + why would we let you + +On line 6381: + rescued by the Fed, + Uncle Sam’s behind you, why + would we let you out + +On line 6381: + by the Fed, Uncle + Sam’s behind you, why would we + let you out of a + +On line 6381: + Uncle Sam’s behind + you, why would we let you out + of a contract you + +On line 6381: + Sam’s behind you, why + would we let you out of a + contract you agreed to1" + +On line 6381: + you, why would we let + you out of a contract you + agreed to1" New York Fed + +On line 6381: + we let you out of + a contract you agreed to1" New + York Fed General + +On line 6381: + a contract you agreed + to1" New York Fed General + Counsel Tom Baxter + +On line 6381: + you agreed to1" New York + Fed General Counsel Tom + Baxter told the FCIC. + +On line 6381: + General Counsel + Tom Baxter told the FCIC. "And + then the question was, + +On line 6381: + the FCIC. "And then the + question was, should we use our + regulatory + +On line 6381: + question was, should we + use our regulatory + power to leverage + +On line 6381: + have been completely + inappropriate, an abuse + of power, and not + +On line 6381: + abuse of power, and + not something we were willing + to even contemplate."148 + +On line 6383: + of power, and not + something we were willing to + even contemplate."148 Sarah + +On line 6383: + not something we were + willing to even contemplate."148 + Sarah Dahlgren, who was in + +On line 6383: + we were willing to + even contemplate."148 Sarah Dahlgren, who + was in charge of the + +On line 6383: + to even contemplate."148 + Sarah Dahlgren, who was in charge of + the Maiden Lane III + +On line 6383: + Sarah Dahlgren, who was in + charge of the Maiden Lane III + transaction at the + +On line 6383: + was in charge of the + Maiden Lane III transaction + at the New York Fed, + +On line 6383: + charge of the Maiden + Lane III transaction at the + New York Fed, said the + +On line 6383: + Lane III transaction + at the New York Fed, said the + government could not + +On line 6383: + the New York Fed, said + the government could not have + threatened bankruptcy. + +On line 6383: + government could not + have threatened bankruptcy. "There + was a financial + +On line 6383: + was a financial + meltdown," she told the FCIC. "The + credibility + +On line 6383: + meltdown," she told the + FCIC. "The credibility + of the United States + +On line 6383: + of the United States + government was on the line."149 + SIGTARP acknowledged + +On line 6383: + government was on + the line."149 SIGTARP acknowledged + that the New York Fed + +On line 6383: + that the New York Fed + "felt ethically restrained + from threatening an + +On line 6383: + the New York Fed "felt + ethically restrained from + threatening an AIG + +On line 6383: + from threatening an + AIG bankruptcy because it + had no actual + +On line 6383: + threatening an AIG + bankruptcy because it had + no actual plans + +On line 6383: + bankruptcy because + it had no actual plans + to carry out such + +On line 6383: + because it had no + actual plans to carry + out such a threat" and + +On line 6383: + had no actual + plans to carry out such a + threat" and that it was + +On line 6383: + out such a threat" and + that it was "uncomfortable + interfering with + +On line 6383: + the counterparties’ + contractual rights with AIG," + which were "certainly + +On line 6385: + Geithner has + said he was confident that + full reimbursement + +On line 6385: + he was confident + that full reimbursement was + "absolutely" the + +On line 6385: + full reimbursement + was "absolutely" the right + decision. "We did + +On line 6385: + was "absolutely" + the right decision. "We did + it in a way that + +On line 6385: + "absolutely" the + right decision. "We did it + in a way that I + +On line 6385: + the right decision. + "We did it in a way that + I believe was not + +On line 6385: + right decision. "We + did it in a way that I + believe was not just + +On line 6385: + "We did it in a + way that I believe was not + just least cost to the + +On line 6385: + in a way that I + believe was not just least cost + to the taxpayer, + +On line 6385: + way that I believe + was not just least cost to the + taxpayer, best deal + +On line 6385: + was not just least cost + to the taxpayer, best deal + for the taxpayer, + +On line 6385: + not just least cost to + the taxpayer, best deal for + the taxpayer, but + +On line 6385: + just least cost to the + taxpayer, best deal for the + taxpayer, but helped + +On line 6385: + to the taxpayer, + best deal for the taxpayer, + but helped avoid much, much + +On line 6385: + the taxpayer, best + deal for the taxpayer, but + helped avoid much, much more + +On line 6385: + the taxpayer, but + helped avoid much, much more damage + than would have happened + +On line 6387: + helped avoid much, much more + damage than would have happened + without that."151 New York + +On line 6387: + more damage than would + have happened without that."151 New + York Fed officials + +On line 6387: + damage than would have + happened without that."151 New York + Fed officials told + +On line 6387: + have happened without + that."151 New York Fed officials + told the FCIC that threats + +On line 6387: + happened without that."151 + New York Fed officials told + the FCIC that threats to + +On line 6387: + York Fed officials + told the FCIC that threats to AIG’s + survival continued + +On line 6387: + officials told the + FCIC that threats to AIG’s survival + continued after + +On line 6387: + told the FCIC that threats + to AIG’s survival continued + after the billion + +On line 6387: + FCIC that threats to AIG’s + survival continued after + the billion loan on + +On line 6387: + survival continued + after the billion loan on + September "If you + +On line 6387: + the billion loan on + September "If you don’t fix + the [securities] + +On line 6387: + September "If you + don’t fix the [securities] + lending or the CDOs, + +On line 6387: + "If you don’t fix the + [securities] lending or + the CDOs, [AIG would] blow + +On line 6387: + the [securities] + lending or the CDOs, [AIG would] + blow through the billion. + +On line 6387: + lending or the CDOs, + [AIG would] blow through the billion. + So we needed to + +On line 6387: + or the CDOs, [AIG would] + blow through the billion. So we + needed to stop the + +On line 6387: + CDOs, [AIG would] blow through + the billion. So we needed + to stop the sucking + +On line 6387: + [AIG would] blow through the + billion. So we needed to + stop the sucking chest + +On line 6387: + blow through the billion. + So we needed to stop the + sucking chest wound in + +On line 6387: + So we needed to + stop the sucking chest wound in + this patient," Dahlgren said. + +On line 6387: + we needed to stop + the sucking chest wound in this + patient," Dahlgren said. "It + +On line 6387: + to stop the sucking + chest wound in this patient," Dahlgren + said. "It wasn’t just + +On line 6387: + stop the sucking chest + wound in this patient," Dahlgren said. + "It wasn’t just AIG—it + +On line 6387: + the sucking chest wound + in this patient," Dahlgren said. "It + wasn’t just AIG—it was + +On line 6387: + wound in this patient," + Dahlgren said. "It wasn’t just AIG—it + was the financial + +On line 6387: + this patient," Dahlgren said. + "It wasn’t just AIG—it was the + financial markets. + +On line 6387: + "It wasn’t just AIG—it + was the financial markets. + It kept getting worse + +On line 6387: + wasn’t just AIG—it was + the financial markets. It + kept getting worse and + +On line 6389: + financial markets. + It kept getting worse and worse + and worse."153 Baxter told + +On line 6389: + It kept getting worse + and worse and worse."153 Baxter told + the FCIC that Maiden + +On line 6389: + kept getting worse and + worse and worse."153 Baxter told the + FCIC that Maiden Lane + +On line 6389: + getting worse and worse + and worse."153 Baxter told the FCIC + that Maiden Lane III + +On line 6389: + and worse."153 Baxter told + the FCIC that Maiden Lane III + stopped the "hemorrhage" + +On line 6389: + worse."153 Baxter told the + FCIC that Maiden Lane III stopped + the "hemorrhage" from + +On line 6389: + Baxter told the FCIC + that Maiden Lane III stopped the + "hemorrhage" from AIG + +On line 6391: + the FCIC that Maiden + Lane III stopped the "hemorrhage" + from AIG Financial + +On line 6391: + that Maiden Lane III + stopped the "hemorrhage" from AIG + Financial Products, + +On line 6393: + to counterparties + by drawing on the billion + government loan. In + +On line 6393: + by drawing on the + billion government loan. In + addition, because + +On line 6393: + government loan. In + addition, because Maiden + Lane III received the + +On line 6393: + addition, because + Maiden Lane III received the + CDOs underlying + +On line 6393: + Lane III received the + CDOs underlying the CDS, + "as value comes back + +On line 6393: + III received the CDOs + underlying the CDS, "as + value comes back in + +On line 6393: + underlying the + CDS, "as value comes back in + those CDOs, that’s value + +On line 6393: + CDS, "as value comes + back in those CDOs, that’s value + that is going to + +On line 6393: + "as value comes back + in those CDOs, that’s value that + is going to be + +On line 6393: + value comes back in + those CDOs, that’s value that is + going to be first + +On line 6393: + comes back in those CDOs, + that’s value that is going + to be first used to + +On line 6393: + back in those CDOs, that’s + value that is going to + be first used to pay + +On line 6393: + those CDOs, that’s value + that is going to be first + used to pay off the + +On line 6393: + CDOs, that’s value that + is going to be first used + to pay off the Fed + +On line 6393: + that’s value that is + going to be first used to + pay off the Fed loan; + +On line 6393: + that is going to + be first used to pay off the + Fed loan; the likely + +On line 6393: + going to be first + used to pay off the Fed loan; + the likely outcome + +On line 6393: + be first used to pay + off the Fed loan; the likely + outcome of Maiden + +On line 6393: + used to pay off the + Fed loan; the likely outcome + of Maiden Lane III + +On line 6393: + to pay off the Fed + loan; the likely outcome of + Maiden Lane III is + +On line 6393: + off the Fed loan; the + likely outcome of Maiden + Lane III is that we’re + +On line 6393: + Fed loan; the likely + outcome of Maiden Lane III + is that we’re going + +On line 6393: + the likely outcome + of Maiden Lane III is that + we’re going to be + +On line 6393: + likely outcome of + Maiden Lane III is that we’re + going to be paid + +On line 6393: + outcome of Maiden + Lane III is that we’re going + to be paid in full," + +On line 6393: + of Maiden Lane III + is that we’re going to be + paid in full," he said.154 + +On line 6395: + Maiden Lane III is + that we’re going to be paid + in full," he said.154 In + +On line 6395: + Lane III is that we’re + going to be paid in full," + he said.154 In total, + +On line 6395: + is that we’re going + to be paid in full," he said.154 + In total, the Fed + +On line 6395: + that we’re going to + be paid in full," he said.154 In + total, the Fed and + +On line 6395: + going to be paid + in full," he said.154 In total, + the Fed and Treasury + +On line 6395: + to be paid in full," + he said.154 In total, the Fed + and Treasury had made + +On line 6395: + in full," he said.154 In + total, the Fed and Treasury + had made available over + +On line 6395: + he said.154 In total, + the Fed and Treasury had made + available over billion + +On line 6395: + the Fed and Treasury + had made available over billion + in assistance to + +On line 6395: + Fed and Treasury had + made available over billion in + assistance to AIG + +On line 6395: + had made available over + billion in assistance to + AIG to prevent its + +On line 6395: + available over billion + in assistance to AIG to + prevent its failure.155 + +On line 6395: + in assistance to + AIG to prevent its failure.155 + As of September + +On line 6395: + assistance to AIG + to prevent its failure.155 As + of September the + +On line 6395: + reduced to billion, + primarily through the sale + of AIG business units.156 + +On line 6397: + primarily through + the sale of AIG business units.156 + CITIGROUP: "LET THE + +On line 6399: + through the sale of AIG + business units.156 CITIGROUP: "LET + THE WORLD KNOW THAT WE + +On line 6399: + sale of AIG business + units.156 CITIGROUP: "LET THE WORLD + KNOW THAT WE WILL NOT + +On line 6399: + of AIG business units.156 + CITIGROUP: "LET THE WORLD KNOW + THAT WE WILL NOT PULL + +On line 6401: + units.156 CITIGROUP: "LET + THE WORLD KNOW THAT WE WILL NOT + PULL A LEHMAN" The failed + +On line 6401: + CITIGROUP: "LET THE + WORLD KNOW THAT WE WILL NOT PULL + A LEHMAN" The failed bid + +On line 6401: + "LET THE WORLD KNOW THAT + WE WILL NOT PULL A LEHMAN" The + failed bid for Wachovia + +On line 6401: + KNOW THAT WE WILL NOT + PULL A LEHMAN" The failed bid for + Wachovia reflected + +On line 6401: + WE WILL NOT PULL A + LEHMAN" The failed bid for Wachovia + reflected badly + +On line 6401: + LEHMAN" The failed bid for + Wachovia reflected badly + on Citigroup. Its + +On line 6401: + reflected badly + on Citigroup. Its stock fell + on October the + +On line 6401: + on Citigroup. Its + stock fell on October the + day Wachovia announced + +On line 6401: + Citigroup. Its stock + fell on October the day + Wachovia announced that + +On line 6401: + on October the + day Wachovia announced that it + preferred Wells’s offer, + +On line 6403: + Wachovia announced that + it preferred Wells’s offer, and + another within + +On line 6403: + preferred Wells’s offer, + and another within a + week. "Having agreed to + +On line 6403: + "Having agreed to do + the deal was a recognition + on our part that we + +On line 6403: + agreed to do the deal + was a recognition on our + part that we needed + +On line 6403: + to do the deal was + a recognition on our part + that we needed it," + +On line 6403: + a recognition on + our part that we needed it," + Edward "Ned" Kelly + +On line 6403: + needed it," Edward + "Ned" Kelly III, vice chairman + of Citigroup, told + +On line 6405: + "Ned" Kelly III, vice + chairman of Citigroup, told + the FCIC. "And if we + +On line 6405: + III, vice chairman of + Citigroup, told the FCIC. "And + if we needed it + +On line 6405: + of Citigroup, told + the FCIC. "And if we needed + it and didn’t get + +On line 6405: + Citigroup, told the + FCIC. "And if we needed it + and didn’t get it, + +On line 6405: + told the FCIC. "And if + we needed it and didn’t + get it, what did that + +On line 6405: + "And if we needed + it and didn’t get it, what + did that imply for + +On line 6405: + if we needed it + and didn’t get it, what did + that imply for the + +On line 6405: + we needed it and + didn’t get it, what did that + imply for the strength + +On line 6405: + it and didn’t get + it, what did that imply for + the strength of the firm + +On line 6405: + didn’t get it, what + did that imply for the strength + of the firm going + +On line 6405: + get it, what did that + imply for the strength of the + firm going forward1"157 + +On line 6407: + did that imply for + the strength of the firm going + forward1"157 Roger Cole, then + +On line 6407: + imply for the strength + of the firm going forward1"157 + Roger Cole, then head of + +On line 6407: + for the strength of the + firm going forward1"157 Roger Cole, + then head of banking + +On line 6407: + firm going forward1"157 + Roger Cole, then head of banking + supervision at + +On line 6407: + acquisition as + a turning point, the moment + "when Citi really + +On line 6407: + point, the moment "when + Citi really came under + the microscope." "It + +On line 6407: + the moment "when Citi + really came under the + microscope." "It was + +On line 6407: + "when Citi really + came under the microscope." + "It was regarded + +On line 6407: + Citi really came + under the microscope." "It + was regarded [by + +On line 6407: + [by the market] as + an indication of bad + management at Citi + +On line 6407: + an indication + of bad management at Citi + that they lost the deal, + +On line 6407: + indication of + bad management at Citi that + they lost the deal, and + +On line 6407: + of bad management + at Citi that they lost the deal, + and had it taken + +On line 6407: + bad management at + Citi that they lost the deal, and + had it taken away + +On line 6407: + management at Citi + that they lost the deal, and had + it taken away from + +On line 6407: + at Citi that they lost + the deal, and had it taken + away from them by a + +On line 6407: + Citi that they lost the + deal, and had it taken away + from them by a smarter, + +On line 6407: + that they lost the deal, + and had it taken away from + them by a smarter, more + +On line 6407: + lost the deal, and had + it taken away from them by + a smarter, more astute + +On line 6407: + the deal, and had it + taken away from them by a + smarter, more astute Wells + +On line 6407: + and had it taken + away from them by a smarter, more + astute Wells Fargo + +On line 6407: + it taken away from + them by a smarter, more astute + Wells Fargo team," Cole + +On line 6407: + taken away from them + by a smarter, more astute Wells + Fargo team," Cole told + +On line 6407: + away from them by a + smarter, more astute Wells Fargo + team," Cole told the FCIC. + +On line 6407: + from them by a smarter, + more astute Wells Fargo team," + Cole told the FCIC. "And + +On line 6407: + them by a smarter, more + astute Wells Fargo team," Cole + told the FCIC. "And then + +On line 6407: + a smarter, more astute + Wells Fargo team," Cole told the + FCIC. "And then here’s an + +On line 6407: + Wells Fargo team," Cole + told the FCIC. "And then here’s an + organization + +On line 6407: + told the FCIC. "And then + here’s an organization + that doesn’t have the + +On line 6407: + the FCIC. "And then here’s + an organization that + doesn’t have the core + +On line 6407: + doesn’t have the core + funding [insured deposits] that + we were assuming + +On line 6407: + have the core funding + [insured deposits] that we were + assuming that they + +On line 6407: + [insured deposits] that + we were assuming that they + would get by that deal."158 + +On line 6409: + we were assuming + that they would get by that deal."158 + Citigroup’s stock rose + +On line 6409: + that they would get by + that deal."158 Citigroup’s stock rose + the day after the + +On line 6409: + would get by that deal."158 + Citigroup’s stock rose the day + after the Columbus + +On line 6409: + Citigroup’s stock rose + the day after the Columbus + Day announcement that + +On line 6409: + rose the day after + the Columbus Day announcement + that it would receive + +On line 6409: + after the Columbus + Day announcement that it would + receive government + +On line 6409: + Day announcement that + it would receive government + capital, but the + +On line 6409: + that it would receive + government capital, but + the optimism did + +On line 6409: + but the optimism + did not last. Two days later, + Citigroup announced + +On line 6409: + did not last. Two days + later, Citigroup announced + a billion net loss + +On line 6409: + later, Citigroup + announced a billion net loss + for the third quarter, + +On line 6409: + announced a billion + net loss for the third quarter, + concentrated in + +On line 6409: + in subprime and Alt-A + mortgages, commercial real + estate investments, + +On line 6409: + mortgages, commercial + real estate investments, + and structured nvestment + +On line 6409: + and structured nvestment + vehicle (SIV) write-downs. The + bank’s stock fell in the + +On line 6409: + nvestment vehicle + (SIV) write-downs. The bank’s stock fell + in the following + +On line 6409: + write-downs. The bank’s stock + fell in the following week + and, by November + +On line 6409: + in the following + week and, by November hit + single digits for + +On line 6409: + following week and, + by November hit single + digits for the first + +On line 6411: + by November hit + single digits for the first + time since The market’s + +On line 6411: + single digits for + the first time since The market’s + unease was heightened + +On line 6411: + digits for the first + time since The market’s unease + was heightened by press + +On line 6411: + time since The market’s + unease was heightened by press + speculation that + +On line 6411: + unease was heightened + by press speculation that + the company’s board + +On line 6411: + press speculation + that the company’s board had + lost confidence in + +On line 6411: + that the company’s + board had lost confidence in + senior management, + +On line 6411: + company’s board had + lost confidence in senior + management, Kelly + +On line 6411: + lost confidence in + senior management, Kelly + said.159 On November + +On line 6411: + said.159 On November + the company announced that + the value of the + +On line 6411: + On November the + company announced that the + value of the SIVs + +On line 6411: + the value of the + SIVs had fallen by billion + in the month since it + +On line 6411: + value of the SIVs + had fallen by billion in + the month since it had + +On line 6411: + SIVs had fallen by + billion in the month since it + had released third-quarter + +On line 6411: + billion in the month + since it had released third-quarter + earnings. Citigroup + +On line 6411: + since it had released + third-quarter earnings. Citigroup + was therefore going + +On line 6411: + therefore going to + bring the remaining billion + in off-balance-sheet SIV + +On line 6411: + bring the remaining + billion in off-balance-sheet SIV + assets onto its + +On line 6411: + SIV assets onto + its books. Investors clipped almost + another off the + +On line 6411: + its books. Investors clipped + almost another off the + value of the stock, + +On line 6411: + Investors clipped almost + another off the value + of the stock, its largest + +On line 6411: + almost another + off the value of the stock, + its largest single-day + +On line 6411: + another off the + value of the stock, its largest + single-day drop since + +On line 6411: + the value of the + stock, its largest single-day drop + since the October + +On line 6411: + value of the stock, + its largest single-day drop since + the October stock + +On line 6411: + its largest single-day + drop since the October stock + market crash. Two days + +On line 6411: + single-day drop since + the October stock market + crash. Two days later, + +On line 6413: + stock market crash. Two + days later, the stock closed at + Credit defaults swaps + +On line 6413: + Two days later, the + stock closed at Credit defaults + swaps on Citigroup + +On line 6413: + days later, the stock + closed at Credit defaults swaps + on Citigroup reached + +On line 6413: + later, the stock closed + at Credit defaults swaps on + Citigroup reached a + +On line 6413: + at Credit defaults + swaps on Citigroup reached a + steep annually + +On line 6413: + Credit defaults swaps + on Citigroup reached a steep + annually to + +On line 6413: + swaps on Citigroup + reached a steep annually + to protect million + +On line 6413: + on Citigroup reached + a steep annually to + protect million in + +On line 6413: + to make perceptions + become a reality + for the bank: "[Investors] + +On line 6415: + perceptions become + a reality for the + bank: "[Investors] look at + +On line 6415: + a reality + for the bank: "[Investors] look at + those spreads and say, ‘Is + +On line 6415: + reality for + the bank: "[Investors] look at those + spreads and say, ‘Is this + +On line 6415: + bank: "[Investors] look at + those spreads and say, ‘Is this some + place I really + +On line 6415: + "[Investors] look at those + spreads and say, ‘Is this some place + I really want + +On line 6415: + spreads and say, ‘Is this + some place I really want + to put my money1’ + +On line 6415: + and say, ‘Is this some + place I really want to + put my money1’ And + +On line 6415: + say, ‘Is this some place + I really want to put + my money1’ And that’s + +On line 6415: + ‘Is this some place I + really want to put my + money1’ And that’s not + +On line 6415: + place I really + want to put my money1’ And + that’s not just in terms + +On line 6415: + I really want + to put my money1’ And that’s + not just in terms of + +On line 6415: + to put my money1’ + And that’s not just in terms of + wholesale funding, that’s + +On line 6415: + my money1’ And that’s + not just in terms of wholesale + funding, that’s people + +On line 6415: + And that’s not just in + terms of wholesale funding, that’s + people who also + +On line 6415: + of wholesale funding, + that’s people who also have + deposits with us at + +On line 6415: + funding, that’s people + who also have deposits with + us at various + +On line 6417: + also have deposits + with us at various points."161 + The firm’s various + +On line 6417: + watched the stock price, the + daily liquidity, and + the CDS spreads with alarm. + +On line 6417: + and the CDS spreads with + alarm. On Friday, November + the United Kingdom’s + +On line 6417: + Kingdom’s Financial + Services Authority (FSA) + imposed a billion + +On line 6417: + London-based broker-dealer. + FDIC examiners knew that + this action would be + +On line 6417: + FDIC examiners + knew that this action would be + "very damaging" to + +On line 6417: + examiners knew + that this action would be "very + damaging" to the + +On line 6417: + that this action would + be "very damaging" to the + bank’s liquidity + +On line 6417: + this action would be + "very damaging" to the bank’s + liquidity and + +On line 6417: + be "very damaging" + to the bank’s liquidity + and worried that the + +On line 6417: + "very damaging" to + the bank’s liquidity and + worried that the FSA + +On line 6417: + or other foreign + regulators might impose + additional cash + +On line 6417: + regulators might + impose additional cash + requirements in the + +On line 6417: + requirements in the + following week.162 By the close + of business Friday, + +On line 6417: + business Friday, there + was widespread concern that if + the U.S. government + +On line 6417: + widespread concern that + if the U.S. government failed + to act, Citigroup + +On line 6417: + concern that if the + U.S. government failed to act, + Citigroup might not + +On line 6417: + "crisis proportions." + Among regulators at the + FDIC and the Fed, there + +On line 6417: + Among regulators + at the FDIC and the Fed, there + was no debate.163 Fed + +On line 6417: + at the FDIC and the + Fed, there was no debate.163 Fed + Chairman Bernanke told the + +On line 6417: + FDIC and the Fed, there + was no debate.163 Fed Chairman + Bernanke told the FCIC, "We + +On line 6417: + and the Fed, there was + no debate.163 Fed Chairman Bernanke + told the FCIC, "We were + +On line 6417: + there was no debate.163 + Fed Chairman Bernanke told the FCIC, + "We were looking at + +On line 6417: + was no debate.163 Fed + Chairman Bernanke told the FCIC, "We + were looking at this + +On line 6417: + Fed Chairman Bernanke told + the FCIC, "We were looking at + this firm [in the fall + +On line 6417: + Chairman Bernanke told the + FCIC, "We were looking at this + firm [in the fall of + +On line 6417: + told the FCIC, "We were + looking at this firm [in the + fall of and saying, + +On line 6417: + "We were looking at + this firm [in the fall of and + saying, ‘Citigroup + +On line 6417: + looking at this firm + [in the fall of and saying, + ‘Citigroup is not + +On line 6417: + this firm [in the fall + of and saying, ‘Citigroup + is not a very strong + +On line 6417: + firm [in the fall of + and saying, ‘Citigroup is + not a very strong firm, + +On line 6417: + [in the fall of and + saying, ‘Citigroup is not + a very strong firm, but + +On line 6417: + saying, ‘Citigroup + is not a very strong firm, but + it’s only one firm + +On line 6417: + is not a very strong + firm, but it’s only one firm + and the others are + +On line 6417: + not a very strong firm, + but it’s only one firm and + the others are okay,’ + +On line 6417: + a very strong firm, but + it’s only one firm and the + others are okay,’ but + +On line 6417: + it’s only one firm + and the others are okay,’ but + not recognizing + +On line 6417: + only one firm and + the others are okay,’ but not + recognizing that + +On line 6417: + and the others are + okay,’ but not recognizing + that that’s sort of like + +On line 6417: + others are okay,’ but + not recognizing that that’s + sort of like saying, + +On line 6417: + not recognizing + that that’s sort of like saying, + ‘Well, four out of your + +On line 6417: + recognizing that + that’s sort of like saying, ‘Well, + four out of your five + +On line 6417: + that that’s sort of like + saying, ‘Well, four out of your + five heart ventricles + +On line 6417: + sort of like saying, + ‘Well, four out of your five heart + ventricles are fine, + +On line 6417: + saying, ‘Well, four out + of your five heart ventricles + are fine, and the fifth + +On line 6417: + ‘Well, four out of your + five heart ventricles are fine, + and the fifth one is + +On line 6417: + four out of your five + heart ventricles are fine, and + the fifth one is lousy.’ + +On line 6417: + out of your five heart + ventricles are fine, and the + fifth one is lousy.’ They’re + +On line 6417: + the fifth one is lousy.’ + They’re all interconnected, + they all connect to + +On line 6417: + fifth one is lousy.’ They’re + all interconnected, they + all connect to each + +On line 6417: + they all connect to + each other; and, therefore, the + failure of one brings + +On line 6417: + to each other; and, + therefore, the failure of one + brings the others down."164 + +On line 6419: + other; and, therefore, + the failure of one brings the + others down."164 The FDIC’s + +On line 6419: + therefore, the failure + of one brings the others down."164 + The FDIC’s Arthur Murton + +On line 6419: + the failure of one + brings the others down."164 The FDIC’s + Arthur Murton emailed his + +On line 6419: + brings the others down."164 + The FDIC’s Arthur Murton emailed his + colleague Michael Krimminger + +On line 6419: + FDIC’s Arthur Murton emailed + his colleague Michael Krimminger on + November: "Given + +On line 6419: + colleague Michael Krimminger + on November: "Given that + the immediate + +On line 6419: + November: "Given + that the immediate risk + is liquidity, + +On line 6419: + the immediate + risk is liquidity, the + way to address that + +On line 6419: + immediate risk + is liquidity, the way + to address that is + +On line 6419: + to address that is + by letting counterparties + know that they will be + +On line 6419: + that is by letting + counterparties know that they + will be protected + +On line 6419: + counterparties know + that they will be protected + both at the bank and + +On line 6419: + will be protected + both at the bank and holding + company level. + +On line 6419: + both at the bank and + holding company level. + [T]he main point is to + +On line 6419: + the bank and holding + company level. [T]he main + point is to let the + +On line 6419: + holding company + level. [T]he main point is to + let the world know that + +On line 6419: + company level. + [T]he main point is to let the + world know that we will + +On line 6419: + level. [T]he main point + is to let the world know that + we will not pull a + +On line 6419: + main point is to let + the world know that we will not + pull a Lehman." Krimminger, + +On line 6419: + is to let the world + know that we will not pull a + Lehman." Krimminger, special + +On line 6419: + the world know that we + will not pull a Lehman." Krimminger, + special adviser + +On line 6419: + know that we will not + pull a Lehman." Krimminger, special + adviser to the + +On line 6419: + will not pull a Lehman." + Krimminger, special adviser + to the FDIC chairman, + +On line 6419: + pull a Lehman." Krimminger, + special adviser to the + FDIC chairman, agreed: "At + +On line 6419: + adviser to the + FDIC chairman, agreed: "At this stage, + it is probably + +On line 6419: + FDIC chairman, agreed: "At + this stage, it is probably + appropriate to + +On line 6419: + it is probably + appropriate to be clear + and direct that the + +On line 6419: + appropriate to + be clear and direct that the + US government will + +On line 6419: + be clear and direct + that the US government will + not allow Citi to + +On line 6419: + clear and direct that + the US government will not + allow Citi to fail + +On line 6419: + direct that the US + government will not allow + Citi to fail to meet + +On line 6419: + US government will + not allow Citi to fail to + meet its obligations."165 + +On line 6421: + Citi to fail to meet + its obligations."165 Citigroup’s + own calculations + +On line 6421: + own calculations + suggested that a drop in + deposits of just would + +On line 6421: + a drop in deposits + of just would wipe out its cash + surplus. If the trend + +On line 6421: + deposits of just would + wipe out its cash surplus. If + the trend of recent + +On line 6421: + of just would wipe out + its cash surplus. If the trend + of recent withdrawals + +On line 6421: + expect a outflow + of deposits per day. Unless + Citigroup received + +On line 6421: + outflow of deposits + per day. Unless Citigroup + received a large and + +On line 6421: + Citigroup received + a large and immediate + injection of funds, + +On line 6421: + received a large and + immediate injection + of funds, its coffers + +On line 6421: + injection of funds, + its coffers would be empty + before the weekend. + +On line 6421: + its coffers would be + empty before the weekend. + Meanwhile, Citigroup + +On line 6421: + the weekend. Meanwhile, + Citigroup executives + remained convinced that + +On line 6421: + remained convinced that + the company was sound and + that the market was + +On line 6421: + the company was + sound and that the market was + simply panicking. + +On line 6421: + and that the market + was simply panicking. CEO + Pandit argued, "This + +On line 6421: + Pandit argued, "This + was not a fundamental + situation, it + +On line 6421: + a fundamental + situation, it was not + about the capital + +On line 6421: + situation, it + was not about the capital + we had, not about the + +On line 6421: + it was not about the + capital we had, not about + the funding we had + +On line 6421: + about the capital + we had, not about the funding + we had at that time, + +On line 6421: + the capital we + had, not about the funding we + had at that time, but + +On line 6421: + capital we had, + not about the funding we had + at that time, but with + +On line 6421: + we had, not about the + funding we had at that time, + but with the stock price + +On line 6421: + not about the funding + we had at that time, but with + the stock price where it + +On line 6421: + about the funding we + had at that time, but with the + stock price where it was + +On line 6421: + had at that time, but + with the stock price where it was + perception becomes + +On line 6421: + with the stock price where + it was perception becomes + reality."166 All + +On line 6421: + perception becomes + reality."166 All that was + needed, Citigroup + +On line 6421: + reality."166 All + that was needed, Citigroup + contended, was for + +On line 6421: + All that was needed, + Citigroup contended, was + for the government + +On line 6421: + were questioning what + everything was worth at the + time. [T]here was a flight + +On line 6421: + time. [T]here was a flight + not just to quality and + safety, but almost + +On line 6421: + was a flight not just + to quality and safety, + but almost a flight + +On line 6421: + a flight not just to + quality and safety, but + almost a flight to + +On line 6421: + just to quality + and safety, but almost a + flight to certainty," + +On line 6421: + but almost a flight + to certainty," Kelly, then + Pandit’s adviser, + +On line 6423: + Pandit’s adviser, + told the FCIC.167 The FDIC dismissed + Citigroup’s request + +On line 6423: + told the FCIC.167 The FDIC + dismissed Citigroup’s request + that the government + +On line 6423: + FCIC.167 The FDIC dismissed + Citigroup’s request that the + government simply + +On line 6423: + dismissed Citigroup’s + request that the government + simply expand its + +On line 6423: + Citigroup’s request + that the government simply + expand its access + +On line 6423: + liquidity" could + be quickly eliminated + as depositors + +On line 6423: + as depositors + rushed out the door. Officials + also believed the + +On line 6423: + Officials also + believed the company did + not have sufficient + +On line 6423: + addition to the + billion from TARP, Citigroup + was already getting + +On line 6423: + by on substantial + government support. As of + November it had + +On line 6423: + government support. + As of November it had + billion outstanding + +On line 6423: + collateralized + liquidity programs and + million under the + +On line 6423: + Facility. And + it had borrowed billion from + the Federal Home + +On line 6423: + had borrowed billion + from the Federal Home Loan + Banks. In December, + +On line 6423: + from the Federal + Home Loan Banks. In December, + Citigroup would have + +On line 6423: + would have a total + of billion in senior debt + guaranteed by the + +On line 6423: + total of billion + in senior debt guaranteed + by the FDIC under + +On line 6425: + the FDIC under the + debt guarantee program. On + Sunday, November + +On line 6425: + guarantee program. + On Sunday, November FDIC + staff recommended + +On line 6425: + Sunday, November + FDIC staff recommended to + its board that a third + +On line 6425: + November FDIC staff + recommended to its board + that a third systemic + +On line 6425: + recommended to + its board that a third systemic + risk exception be + +On line 6425: + its board that a third + systemic risk exception be + made under FDICIA.168 + +On line 6425: + a third systemic risk + exception be made under + FDICIA.168 As they had + +On line 6425: + exception be made + under FDICIA.168 As they had + done previously, + +On line 6425: + decided that a + proposed resolution had + to be announced over + +On line 6425: + had to be announced + over the weekend to buttress + investor confidence + +On line 6425: + be announced over the + weekend to buttress investor + confidence before + +On line 6425: + over the weekend to + buttress investor confidence + before markets opened + +On line 6425: + weekend to buttress + investor confidence before + markets opened Monday. + +On line 6427: + staff.169 Regulators + were also concerned that the + economic effects + +On line 6427: + were also concerned + that the economic effects + of a Citigroup + +On line 6427: + economic effects + of a Citigroup failure + would undermine the + +On line 6427: + Citigroup failure + would undermine the impact + of the recently + +On line 6427: + the impact of the + recently implemented + Capital Purchase + +On line 6431: + Citigroup with an + additional billion in + TARP funds in exchange + +On line 6431: + billion in TARP funds + in exchange for preferred stock + with an dividend.171 + +On line 6431: + exchange for preferred + stock with an dividend.171 This + injection of cash + +On line 6431: + with an dividend.171 + This injection of cash brought + the company’s TARP + +On line 6431: + an dividend.171 This + injection of cash brought the + company’s TARP tab + +On line 6431: + This injection of + cash brought the company’s TARP + tab to billion. The + +On line 6431: + injection of cash + brought the company’s TARP tab + to billion. The bank + +On line 6431: + company’s TARP tab + to billion. The bank also + received billion in + +On line 6431: + of preferred stock and + the government’s guarantee + of certain assets.172 + +On line 6431: + assets.172 Under the + guarantee, Citigroup and + the government would + +On line 6431: + Citigroup and the + government would identify + a billion pool of + +On line 6431: + and the government + would identify a billion + pool of assets around + +On line 6431: + the government would + identify a billion pool + of assets around which + +On line 6431: + would identify a + billion pool of assets around + which a protective + +On line 6431: + of assets around which + a protective "ring fence" would + be placed. In effect, + +On line 6431: + assets around which a + protective "ring fence" would be + placed. In effect, this + +On line 6431: + a protective "ring + fence" would be placed. In effect, + this was a loss-sharing + +On line 6431: + be placed. In effect, + this was a loss-sharing agreement + between Citigroup + +On line 6431: + In effect, this was + a loss-sharing agreement between + Citigroup and the + +On line 6431: + this was a loss-sharing + agreement between Citigroup + and the federal + +On line 6431: + Citigroup and the + federal government. "There + was not a huge amount + +On line 6431: + and the federal + government. "There was not a + huge amount of science + +On line 6431: + government. "There was + not a huge amount of science + in coming to that + +On line 6433: + was not a huge amount + of science in coming to + that billion] number," + +On line 6433: + huge amount of science + in coming to that billion] + number," Citigroup’s + +On line 6433: + in coming to that + billion] number," Citigroup’s + Kelly told the FCIC. + +On line 6433: + that billion] number," + Citigroup’s Kelly told the + FCIC. He said the deal + +On line 6433: + number," Citigroup’s + Kelly told the FCIC. He said + the deal was structured + +On line 6433: + Citigroup’s Kelly + told the FCIC. He said the deal + was structured to "give + +On line 6433: + Kelly told the FCIC. + He said the deal was structured + to "give the market + +On line 6433: + told the FCIC. He said + the deal was structured to "give + the market comfort + +On line 6433: + the FCIC. He said the + deal was structured to "give the + market comfort that + +On line 6433: + deal was structured to + "give the market comfort that + the catastrophic + +On line 6433: + was structured to "give + the market comfort that the + catastrophic risk + +On line 6433: + the market comfort + that the catastrophic risk + has been taken off + +On line 6433: + market comfort that + the catastrophic risk has + been taken off the + +On line 6433: + the catastrophic + risk has been taken off the + table."173 When its terms + +On line 6433: + risk has been taken + off the table."173 When its terms + were finalized in + +On line 6433: + the guaranteed pool, + which contained mainly loans and + residential and + +On line 6433: + and residential + and commercial mortgage–backed + securities, was + +On line 6435: + Citigroup assumed + responsibility for + the first billion in + +On line 6435: + materialize, + Treasury would absorb the first + billion using TARP + +On line 6435: + would absorb the first + billion using TARP funds, the + FDIC would absorb the + +On line 6435: + first billion using + TARP funds, the FDIC would absorb + the next billion from + +On line 6435: + billion using TARP + funds, the FDIC would absorb the + next billion from the + +On line 6435: + FDIC would absorb the + next billion from the Deposit + Insurance Fund (for + +On line 6435: + next billion from the + Deposit Insurance Fund (for + which it had needed + +On line 6435: + which it had needed + to approve the systemic risk + exception), and the + +On line 6435: + balance. In return, + Citigroup agreed to grant the + government billion + +On line 6435: + return, Citigroup + agreed to grant the government + billion in preferred + +On line 6435: + Citigroup agreed to + grant the government billion + in preferred stock, as + +On line 6435: + grant the government + billion in preferred stock, as + well as warrants that + +On line 6435: + government billion + in preferred stock, as well as + warrants that gave the + +On line 6435: + billion in preferred + stock, as well as warrants that + gave the government + +On line 6435: + as well as warrants + that gave the government the + option to purchase + +On line 6435: + option to purchase + additional shares.174 After + analyzing the + +On line 6435: + additional shares.174 + After analyzing the + uality of the + +On line 6435: + the uality of + the protected assets, FDIC + staff projected that + +On line 6435: + uality of the + protected assets, FDIC staff + projected that the + +On line 6435: + protected assets, + FDIC staff projected that the + Deposit Insurance + +On line 6435: + FDIC staff projected + that the Deposit Insurance + Fund would not incur + +On line 6435: + staff projected that + the Deposit Insurance Fund + would not incur any + +On line 6437: + Insurance Fund would + not incur any losses.175 Once + again, the FDIC Board met + +On line 6437: + Fund would not incur + any losses.175 Once again, the FDIC + Board met late on a + +On line 6437: + incur any losses.175 + Once again, the FDIC Board met late + on a Sunday to + +On line 6437: + Once again, the FDIC Board + met late on a Sunday to + determine the fate + +On line 6437: + Board met late on a + Sunday to determine the + fate of a struggling + +On line 6437: + Brief dissent on the + P.M. conference call came from + OTS Director John + +On line 6437: + P.M. conference call + came from OTS Director John + Reich, who questioned + +On line 6437: + from OTS Director + John Reich, who questioned why + similar relief + +On line 6437: + Reich, who questioned + why similar relief had + not been extended + +On line 6437: + relief had not been + extended to OTS-supervised thrifts that + failed earlier. "There + +On line 6437: + been extended to + OTS-supervised thrifts that failed earlier. + "There isn’t any doubt + +On line 6437: + extended to OTS-supervised + thrifts that failed earlier. "There + isn’t any doubt in + +On line 6437: + to OTS-supervised thrifts that failed + earlier. "There isn’t any + doubt in my mind that + +On line 6437: + that failed earlier. + "There isn’t any doubt in my + mind that this is a + +On line 6437: + my mind that this is + a systemic situation," + he said. But he added, + +On line 6439: + mind that this is a + systemic situation," he + said. But he added, In + +On line 6439: + this is a systemic + situation," he said. But + he added, In hindsight, + +On line 6439: + situation," he + said. But he added, In hindsight, + I think there have been + +On line 6439: + I think there have been + some systemic situations + prior to this one + +On line 6439: + have been some systemic + situations prior to + this one that were not + +On line 6439: + prior to this one + that were not classified as + such. The failure of + +On line 6439: + were not classified + as such. The failure of IndyMac + pointed the focus + +On line 6439: + classified as such. + The failure of IndyMac pointed + the focus to the + +On line 6439: + as such. The failure + of IndyMac pointed the focus + to the next weakest + +On line 6439: + of IndyMac pointed the + focus to the next weakest + institution, which + +On line 6439: + the focus to the + next weakest institution, + which was WaMu, and its + +On line 6439: + which was WaMu, and its + failure pointed to Wachovia, + and now we’re looking + +On line 6439: + WaMu, and its failure + pointed to Wachovia, and now + we’re looking at Citi + +On line 6439: + pointed to Wachovia, + and now we’re looking at Citi + and I wonder who’s + +On line 6439: + to Wachovia, and now + we’re looking at Citi and I + wonder who’s next. I + +On line 6439: + and now we’re looking + at Citi and I wonder who’s + next. I hope that all + +On line 6439: + now we’re looking at + Citi and I wonder who’s next. + I hope that all of + +On line 6439: + we’re looking at Citi + and I wonder who’s next. I + hope that all of the + +On line 6439: + Citi and I wonder + who’s next. I hope that all of + the regulators, + +On line 6439: + and I wonder who’s + next. I hope that all of the + regulators, all + +On line 6439: + next. I hope that all + of the regulators, all + of us, including + +On line 6439: + hope that all of the + regulators, all of us, + including Treasury + +On line 6439: + including Treasury + and the Fed, are looking at + these situations + +On line 6439: + the Fed, are looking + at these situations in + a balanced manner, + +On line 6439: + Fed, are looking at + these situations in a + balanced manner, and + +On line 6439: + these situations + in a balanced manner, and + I fear there has been + +On line 6439: + situations in + a balanced manner, and I + fear there has been some + +On line 6439: + fear there has been some + selective creativity + exercised in the + +On line 6439: + exercised in the + determination of what + is systemic and what’s + +On line 6439: + what is systemic and + what’s not and what’s possible + for the government + +On line 6439: + is systemic and what’s + not and what’s possible for + the government to + +On line 6439: + systemic and what’s not + and what’s possible for the + government to do + +On line 6441: + and what’s possible + for the government to do + and what’s not.176 The FDIC + +On line 6441: + what’s possible for + the government to do and + what’s not.176 The FDIC Board + +On line 6441: + and what’s not.176 The FDIC + Board approved the proposal + unanimously. The + +On line 6441: + FDIC Board approved the + proposal unanimously. + The announcement beat + +On line 6441: + unanimously. The + announcement beat the opening + bell, and the markets + +On line 6441: + bell, and the markets + responded positively: + Citigroup’s stock price + +On line 6441: + markets responded + positively: Citigroup’s + stock price soared almost + +On line 6441: + Citigroup’s stock price + soared almost closing at The + ring fence would stay in + +On line 6441: + stock price soared almost + closing at The ring fence would + stay in place until + +On line 6441: + almost closing at + The ring fence would stay in place + until December + +On line 6443: + closing at The ring + fence would stay in place until + December at which + +On line 6443: + ring fence would stay in + place until December at + which time Citigroup + +On line 6443: + repaying billion + in TARP funds. In December + Treasury announced the + +On line 6443: + funds. In December + Treasury announced the sale of + its final shares of + +On line 6443: + Treasury announced the + sale of its final shares of + Citigroup’s common + +On line 6445: + of its final shares + of Citigroup’s common stock.177 + BANK OF AMERICA: + +On line 6445: + its final shares of + Citigroup’s common stock.177 BANK + OF AMERICA: "A + +On line 6447: + Citigroup’s common + stock.177 BANK OF AMERICA: "A + SHOTGUN WEDDING" With + +On line 6447: + SHOTGUN WEDDING" With + Citigroup stabilized, the + markets would quickly + +On line 6447: + quickly shift focus + to the next domino: Bank of + America, which had + +On line 6447: + to the next domino: + Bank of America, which had + swallowed Countrywide + +On line 6447: + Bank of America, + which had swallowed Countrywide + earlier in the + +On line 6447: + swallowed Countrywide + earlier in the year and, + on September had + +On line 6447: + in the year and, on + September had announced it + was going to take + +On line 6447: + and, on September + had announced it was going + to take on Merrill + +On line 6447: + on September had + announced it was going to + take on Merrill Lynch + +On line 6447: + was going to take + on Merrill Lynch as well. The + merger would create + +On line 6447: + to take on Merrill + Lynch as well. The merger would + create the world’s largest + +On line 6447: + Merrill Lynch as well. + The merger would create the + world’s largest brokerage + +On line 6447: + merger would create + the world’s largest brokerage and + reinforce Bank of + +On line 6447: + reinforce Bank of + America’s position + as the country’s largest + +On line 6447: + depository + institution. Given the + share prices of the two + +On line 6447: + the share prices of the + two companies at the time, + the transaction was + +On line 6447: + two companies at + the time, the transaction was + valued at billion. + +On line 6449: + time, the transaction + was valued at billion. But + the deal was not set + +On line 6449: + the transaction was + valued at billion. But the + deal was not set to + +On line 6449: + valued at billion. + But the deal was not set to + close until the first + +On line 6449: + billion. But the deal + was not set to close until + the first quarter of + +On line 6449: + deal was not set to + close until the first quarter + of the following + +On line 6449: + was not set to close + until the first quarter of + the following year. + +On line 6449: + In the interim, + the companies continued + to operate as + +On line 6449: + to operate as + independent entities, + pending shareholder + +On line 6449: + CEO John Thain and Bank + of America CEO Ken Lewis + had represented + +On line 6449: + John Thain and Bank of + America CEO Ken Lewis had + represented their + +On line 6449: + represented their + companies separately + at the Columbus Day + +On line 6449: + separately at + the Columbus Day meeting at + Treasury. Treasury would + +On line 6449: + at the Columbus Day + meeting at Treasury. Treasury + would invest the full + +On line 6449: + meeting at Treasury. + Treasury would invest the full + billion in Bank of + +On line 6449: + Treasury. Treasury would + invest the full billion in + Bank of America + +On line 6449: + Treasury would invest + the full billion in Bank of + America only + +On line 6449: + the full billion in + Bank of America only + after the Merrill + +On line 6449: + Bank of America + only after the Merrill + acquisition was + +On line 6451: + October, Merrill + Lynch reported a net loss + for the third quarter + +On line 6453: + Lynch reported a + net loss for the third quarter + of billion. In its + +On line 6453: + net loss for the third + quarter of billion. In its + October earnings + +On line 6453: + the third quarter of + billion. In its October + earnings press release, + +On line 6453: + quarter of billion. + In its October earnings + press release, Merrill + +On line 6453: + In its October + earnings press release, Merrill + Lynch described write-downs + +On line 6453: + earnings press release, + Merrill Lynch described write-downs + related to its + +On line 6453: + Merrill Lynch described + write-downs related to its + CDO positions and + +On line 6455: + told investors on the + conference call that Merrill’s + strategy was to + +On line 6455: + on the conference + call that Merrill’s strategy + was to clean house. It + +On line 6455: + the conference call + that Merrill’s strategy was + to clean house. It now + +On line 6455: + conference call that + Merrill’s strategy was to + clean house. It now held + +On line 6455: + Merrill’s strategy + was to clean house. It now held + less than billion in + +On line 6455: + was to clean house. It + now held less than billion in + asset-backed-security + +On line 6455: + less than billion in + asset-backed-security CDOs and + no Alt-A positions + +On line 6455: + asset-backed-security + CDOs and no Alt-A positions + at all. "We’re down to + +On line 6455: + no Alt-A positions + at all. "We’re down to million + in subprime on our + +On line 6455: + at all. "We’re down to + million in subprime on our + trading books," Thain said. + +On line 6455: + "We’re down to million + in subprime on our trading + books," Thain said. "We cut + +On line 6455: + down to million in + subprime on our trading books," + Thain said. "We cut our + +On line 6455: + our trading books," Thain + said. "We cut our non-U.S. mortgage + business positions + +On line 6457: + cut our non-U.S. mortgage + business positions in half."178 + The Fed approved the + +On line 6457: + non-U.S. mortgage business + positions in half."178 The Fed + approved the merger + +On line 6457: + half."178 The Fed approved + the merger on November + noting that both Bank + +On line 6457: + November noting + that both Bank of America + and Merrill were well + +On line 6457: + well capitalized + and would remain so after + the merger, and that + +On line 6457: + capitalized and + would remain so after the + merger, and that Bank + +On line 6457: + and would remain so + after the merger, and that + Bank of America + +On line 6457: + Bank of America + "has sufficient financial + resources to effect + +On line 6457: + financial resources + to effect the proposal."179 + Shareholders of both + +On line 6457: + resources to effect + the proposal."179 Shareholders + of both companies + +On line 6459: + of both companies + approved the acquisition + on December But + +On line 6459: + Bank of America + executives began to + have second thoughts, Lewis + +On line 6459: + second thoughts, Lewis told + the FCIC. In mid-November, Merrill Lynch’s + after-tax losses + +On line 6459: + Lewis told the FCIC. In + mid-November, Merrill Lynch’s after-tax + losses for the fourth + +On line 6459: + FCIC. In mid-November, Merrill + Lynch’s after-tax losses for + the fourth quarter had + +On line 6459: + In mid-November, Merrill Lynch’s + after-tax losses for the + fourth quarter had been + +On line 6459: + after-tax losses + for the fourth quarter had been + projected to reach + +On line 6459: + losses for the fourth + quarter had been projected + to reach about billion; + +On line 6459: + projected to reach + about billion; the projection + grew to about billion + +On line 6459: + December billion + by December and billion + by December Lewis + +On line 6459: + by December and + billion by December Lewis + said he learned only + +On line 6459: + Merrill’s losses had + "accelerated pretty + dramatically."181 + +On line 6459: + "accelerated + pretty dramatically."181 + Lewis attributed the + +On line 6461: + the fourth quarter."182 In + a January conference + call, Lewis and CFO Joe + +On line 6461: + fourth quarter."182 In a + January conference call, + Lewis and CFO Joe Price + +On line 6461: + In a January + conference call, Lewis and CFO + Joe Price told investors + +On line 6461: + conference call, Lewis + and CFO Joe Price told investors + that the bank had not + +On line 6461: + call, Lewis and CFO Joe + Price told investors that the bank + had not been aware of + +On line 6461: + Lewis and CFO Joe Price + told investors that the bank had + not been aware of the + +On line 6461: + Joe Price told investors + that the bank had not been aware + of the extent of + +On line 6461: + told investors that the + bank had not been aware of the + extent of Merrill’s + +On line 6461: + bank had not been aware + of the extent of Merrill’s + fourth-quarter losses at + +On line 6461: + not been aware of the + extent of Merrill’s fourth-quarter + losses at the time + +On line 6461: + aware of the extent + of Merrill’s fourth-quarter losses + at the time of the + +On line 6461: + extent of Merrill’s + fourth-quarter losses at the time + of the shareholder + +On line 6461: + of Merrill’s fourth-quarter + losses at the time of the + shareholder vote. "It + +On line 6461: + fourth-quarter losses at + the time of the shareholder + vote. "It wasn’t an + +On line 6461: + losses at the time + of the shareholder vote. "It + wasn’t an issue + +On line 6461: + at the time of the + shareholder vote. "It wasn’t + an issue of not + +On line 6461: + the shareholder vote. + "It wasn’t an issue of + not identifying + +On line 6461: + shareholder vote. "It + wasn’t an issue of not + identifying the + +On line 6461: + wasn’t an issue + of not identifying the + assets," Ken Lewis said. + +On line 6461: + an issue of not + identifying the assets," + Ken Lewis said. "It was + +On line 6461: + not identifying + the assets," Ken Lewis said. "It + was that we did not + +On line 6461: + the significant + deterioration, which + happened in mid- to + +On line 6461: + happened in mid- to + late December that we saw."183 + Merrill’s Thain contests + +On line 6461: + late December that + we saw."183 Merrill’s Thain contests + that version of events. + +On line 6461: + December that we + saw."183 Merrill’s Thain contests that + version of events. He + +On line 6461: + that we saw."183 Merrill’s + Thain contests that version of + events. He told the FCIC + +On line 6461: + we saw."183 Merrill’s Thain + contests that version of events. + He told the FCIC that + +On line 6461: + Merrill’s Thain contests + that version of events. He told + the FCIC that Merrill + +On line 6461: + contests that version + of events. He told the FCIC that + Merrill provided + +On line 6461: + that version of events. + He told the FCIC that Merrill + provided daily + +On line 6461: + of events. He told the + FCIC that Merrill provided + daily profit and + +On line 6461: + the FCIC that Merrill + provided daily profit + and loss reports to + +On line 6461: + provided daily + profit and loss reports to + Bank of America + +On line 6461: + and loss reports to + Bank of America and that + bank executives + +On line 6461: + loss reports to Bank + of America and that bank + executives should + +On line 6461: + of America and + that bank executives should + have known about losses + +On line 6461: + America and that + bank executives should have + known about losses as + +On line 6461: + bank executives + should have known about losses as + they occurred.184 The SEC + +On line 6463: + known about losses as + they occurred.184 The SEC later + brought an enforcement + +On line 6463: + they occurred.184 The SEC + later brought an enforcement + action against Bank of + +On line 6463: + The SEC later brought + an enforcement action against + Bank of America, + +On line 6463: + Bank of America, + charging the company with + failing to disclose + +On line 6463: + about billion of known + and expected Merrill Lynch + losses before the + +On line 6463: + Lynch losses before + the December shareholder + vote. According to + +On line 6463: + losses before the + December shareholder vote. + According to the + +On line 6463: + the SEC’s complaint, these + insufficient disclosures + deprived shareholders + +On line 6463: + fairly evaluate + the merger. In February + Bank of America + +On line 6463: + February Bank of + America would pay million + to settle the SEC’s + +On line 6465: + Bank of America + would pay million to settle + the SEC’s action.185 On + +On line 6465: + would pay million to + settle the SEC’s action.185 On + December Lewis called + +On line 6465: + the SEC’s action.185 On + December Lewis called Treasury + Secretary Paulson + +On line 6465: + December Lewis called + Treasury Secretary Paulson + to inform him that + +On line 6465: + Treasury Secretary + Paulson to inform him that + Bank of America + +On line 6465: + Paulson to inform + him that Bank of America + was considering + +On line 6465: + of America was + considering invoking + the material + +On line 6465: + the material + adverse change (MAC) clause of the + merger agreement, which + +On line 6465: + which would allow the + company to exit or + renegotiate the + +On line 6465: + renegotiate the + terms of the acquisition. + "The severity of + +On line 6465: + acquisition. "The + severity of the losses + were high enough that we + +On line 6465: + of the losses were + high enough that we should at least + consider a MAC," + +On line 6465: + were high enough that we + should at least consider a + MAC," Lewis told the FCIC. + +On line 6465: + high enough that we should + at least consider a MAC," + Lewis told the FCIC. "The + +On line 6465: + at least consider + a MAC," Lewis told the FCIC. "The + acceleration, + +On line 6465: + a MAC," Lewis told the + FCIC. "The acceleration, + we thought, was beyond + +On line 6465: + MAC," Lewis told the FCIC. + "The acceleration, we + thought, was beyond what + +On line 6465: + Lewis told the FCIC. "The + acceleration, we thought, + was beyond what should + +On line 6465: + acceleration, + we thought, was beyond what should + be happening. And + +On line 6465: + we thought, was beyond + what should be happening. And + then secondly, you + +On line 6465: + thought, was beyond what + should be happening. And then + secondly, you had + +On line 6465: + be happening. And + then secondly, you had a + major hole being + +On line 6465: + then secondly, you + had a major hole being + created in the + +On line 6465: + you had a major + hole being created in + the capital base + +On line 6465: + had a major hole + being created in the + capital base with + +On line 6467: + That afternoon, Lewis + flew from North Carolina to + Washington to meet + +On line 6467: + from North Carolina + to Washington to meet at + the Fed with Paulson + +On line 6467: + North Carolina to + Washington to meet at the + Fed with Paulson and + +On line 6467: + to Washington to + meet at the Fed with Paulson + and Fed Chairman Bernanke. + +On line 6467: + Washington to meet + at the Fed with Paulson and + Fed Chairman Bernanke. The + +On line 6467: + to meet at the Fed + with Paulson and Fed Chairman + Bernanke. The two asked Lewis + +On line 6467: + meet at the Fed with + Paulson and Fed Chairman Bernanke. + The two asked Lewis to + +On line 6467: + the Fed with Paulson + and Fed Chairman Bernanke. The two + asked Lewis to "stand down" + +On line 6467: + Fed with Paulson and + Fed Chairman Bernanke. The two asked + Lewis to "stand down" on + +On line 6467: + and Fed Chairman Bernanke. + The two asked Lewis to "stand down" + on invoking the + +On line 6467: + Fed Chairman Bernanke. The + two asked Lewis to "stand down" on + invoking the clause + +On line 6467: + two asked Lewis to "stand + down" on invoking the clause + while they considered + +On line 6467: + asked Lewis to "stand down" + on invoking the clause while + they considered the + +On line 6467: + down" on invoking + the clause while they considered + the situation.187 + +On line 6469: + while they considered + the situation.187 Paulson + and Bernanke concluded + +On line 6469: + they considered the + situation.187 Paulson and + Bernanke concluded that + +On line 6469: + the situation.187 + Paulson and Bernanke concluded + that an attempt by + +On line 6469: + an attempt by Bank + of America to invoke + the MAC clause "was not + +On line 6469: + attempt by Bank of + America to invoke the + MAC clause "was not a + +On line 6469: + MAC clause "was not a + legally reasonable option." + They believed that Bank + +On line 6469: + legally reasonable + option." They believed that Bank + of America would + +On line 6469: + option." They believed + that Bank of America would + be ultimately + +On line 6469: + action, and that the + attendant litigation + would likely result + +On line 6469: + that the attendant + litigation would likely + result in Bank of + +On line 6469: + of America still + being contractually + bound to acquire a + +On line 6469: + a considerably + weaker Merrill Lynch. Moreover, + Bernanke thought the market + +On line 6469: + weaker Merrill Lynch. + Moreover, Bernanke thought the market + would lose faith in Bank + +On line 6469: + Moreover, Bernanke thought the + market would lose faith in Bank + of America’s + +On line 6469: + market would lose faith + in Bank of America’s + management, given + +On line 6469: + lose faith in Bank of + America’s management, + given that review, + +On line 6469: + management, given + that review, preparation, nd + due diligence had been + +On line 6469: + given that review, + preparation, nd due diligence + had been ongoing + +On line 6469: + due diligence had been + ongoing for months." The two + officials also + +On line 6469: + had been ongoing + for months." The two officials + also believed that + +On line 6469: + officials also + believed that invoking the + clause would lead to a + +On line 6469: + that invoking the + clause would lead to a broader + systemic crisis that + +On line 6469: + the clause would lead to + a broader systemic crisis + that would result in + +On line 6469: + result in further + deterioration at + the two companies.188 + +On line 6471: + the two companies.188 + Neither Merrill nor its CEO, + John Thain, was informed + +On line 6471: + companies.188 Neither + Merrill nor its CEO, John Thain, + was informed of these + +On line 6471: + Merrill nor its CEO, + John Thain, was informed of these + deliberations + +On line 6471: + Thain, was informed of + these deliberations at + Bank of America. + +On line 6471: + was informed of these + deliberations at Bank + of America. Lewis + +On line 6471: + deliberations + at Bank of America. Lewis + told the FCIC that he + +On line 6471: + of America. Lewis + told the FCIC that he didn’t + contact Merrill Lynch + +On line 6471: + "adversarial + relationship" if it could + be avoided.189 When Thain + +On line 6471: + relationship" if + it could be avoided.189 When Thain + later found out that + +On line 6471: + it could be avoided.189 + When Thain later found out that + Bank of America + +On line 6471: + could be avoided.189 When + Thain later found out that Bank + of America had + +On line 6471: + When Thain later found + out that Bank of America + had contemplated + +On line 6471: + Thain later found out + that Bank of America had + contemplated putting + +On line 6471: + of America had + contemplated putting the MAC + clause into effect, + +On line 6471: + contemplated putting + the MAC clause into effect, + he was skeptical + +On line 6471: + clause into effect, + he was skeptical about its + chances of success: "One + +On line 6471: + into effect, he + was skeptical about its chances + of success: "One of + +On line 6471: + success: "One of the + things we negotiated + very heavily was + +On line 6473: + [It] specifically + excluded market moves [and] + pretty much nothing + +On line 6473: + excluded market + moves [and] pretty much nothing + happened to Merrill + +On line 6473: + moves [and] pretty much + nothing happened to Merrill + in the fourth quarter + +On line 6473: + pretty much nothing + happened to Merrill in the + fourth quarter other + +On line 6473: + happened to Merrill + in the fourth quarter other + than the market move."190 + +On line 6475: + quarter other than + the market move."190 On Sunday, + December Paulson + +On line 6475: + December Paulson + informed Lewis that invoking + the clause would demonstrate + +On line 6475: + Paulson informed Lewis + that invoking the clause would + demonstrate a "colossal + +On line 6475: + that invoking the + clause would demonstrate a "colossal + loss of judgment" by + +On line 6475: + invoking the clause + would demonstrate a "colossal loss + of judgment" by the + +On line 6475: + the clause would demonstrate + a "colossal loss of judgment" + by the company. + +On line 6475: + a "colossal loss of + judgment" by the company. + Paulson reminded + +On line 6475: + regulator, had + the legal authority + to replace Bank of + +On line 6475: + they embarked on a + "destructive" strategy that + had "no reasonable + +On line 6475: + had "no reasonable + legal basis."191 Bernanke later + told his general + +On line 6475: + reasonable legal + basis."191 Bernanke later told his + general counsel: + +On line 6475: + legal basis."191 Bernanke + later told his general + counsel: "Though we did + +On line 6475: + Bernanke later told his + general counsel: "Though we + did not order Lewis + +On line 6475: + general counsel: + "Though we did not order Lewis + to go forward, we + +On line 6475: + we did not order + Lewis to go forward, we did + indicate that we + +On line 6475: + order Lewis to go + forward, we did indicate + that we believed that + +On line 6475: + Lewis to go forward, + we did indicate that we + believed that going + +On line 6475: + go forward, we did + indicate that we believed + that going forward + +On line 6477: + we did indicate + that we believed that going + forward [with the clause] + +On line 6477: + indicate that we + believed that going forward + [with the clause] would be + +On line 6477: + that we believed that + going forward [with the clause] + would be detrimental + +On line 6477: + believed that going + forward [with the clause] would be + detrimental to the + +On line 6477: + going forward [with + the clause] would be detrimental + to the health (safety + +On line 6477: + be detrimental to + the health (safety and soundness) + of his company." + +On line 6477: + the health (safety and + soundness) of his company." + Congressman Edolphus + +On line 6477: + of his company." + Congressman Edolphus Towns of + New York would later + +On line 6477: + Congressman Edolphus + Towns of New York would later + refer to the Bank + +On line 6477: + Towns of New York would + later refer to the Bank + of America and + +On line 6477: + later refer to + the Bank of America and + Merrill Lynch merger + +On line 6477: + refer to the Bank + of America and Merrill + Lynch merger as "a + +On line 6477: + Bank of America + and Merrill Lynch merger as + "a shotgun wedding."192 + +On line 6479: + "a shotgun wedding."192 + Regulators began to + discuss a rescue + +On line 6479: + discuss a rescue + package similar to the + one for Citigroup, + +On line 6479: + package similar + to the one for Citigroup, + including preferred + +On line 6479: + preferred shares and an + asset pool similar to + Citigroup’s ring fence. + +On line 6479: + and an asset pool + similar to Citigroup’s + ring fence. The staff ’s + +On line 6479: + pool similar to + Citigroup’s ring fence. The staff + ’s analysis was + +On line 6479: + to Citigroup’s ring + fence. The staff ’s analysis + was essentially + +On line 6479: + Citigroup’s ring fence. + The staff ’s analysis was + essentially the + +On line 6479: + staff ’s analysis + was essentially the same + as it had been for + +On line 6479: + was essentially + the same as it had been for + Citigroup. Meanwhile, + +On line 6479: + the same as it had + been for Citigroup. Meanwhile, + Lewis decided to + +On line 6479: + Citigroup. Meanwhile, + Lewis decided to "deescalate" + the situation, + +On line 6479: + Lewis decided to + "deescalate" the situation, + explaining that when + +On line 6479: + the secretary of + the treasury and the chairman + of the Fed say that + +On line 6479: + of the treasury and + the chairman of the Fed say + that invoking the + +On line 6479: + the treasury and the + chairman of the Fed say that + invoking the MAC + +On line 6479: + the chairman of the + Fed say that invoking the + MAC would cause systemic + +On line 6479: + chairman of the Fed + say that invoking the MAC + would cause systemic risk, + +On line 6479: + of the Fed say that + invoking the MAC would cause + systemic risk, "then it + +On line 6479: + that invoking the + MAC would cause systemic risk, "then + it obviously + +On line 6479: + invoking the MAC + would cause systemic risk, "then it + obviously gives + +On line 6479: + MAC would cause systemic + risk, "then it obviously + gives you pause."193 At a + +On line 6479: + would cause systemic risk, + "then it obviously gives + you pause."193 At a board + +On line 6479: + systemic risk, "then it + obviously gives you pause."193 + At a board meeting + +On line 6481: + obviously gives + you pause."193 At a board meeting + on December Lewis + +On line 6481: + gives you pause."193 At a + board meeting on December + Lewis told his board that + +On line 6481: + you pause."193 At a board + meeting on December Lewis + told his board that the + +On line 6481: + At a board meeting + on December Lewis told his + board that the Fed and + +On line 6481: + on December Lewis + told his board that the Fed and + Treasury believed that + +On line 6481: + his board that the Fed + and Treasury believed that a + failed acquisition + +On line 6481: + board that the Fed and + Treasury believed that a failed + acquisition would + +On line 6481: + and Treasury believed + that a failed acquisition + would pose systemic risk + +On line 6481: + Treasury believed that + a failed acquisition would + pose systemic risk and + +On line 6481: + failed acquisition + would pose systemic risk and would + lead to removal of + +On line 6481: + would pose systemic risk + and would lead to removal of + management and the + +On line 6481: + would lead to removal + of management and the board + at the insistence + +On line 6481: + lead to removal of + management and the board at + the insistence of + +On line 6481: + of management and + the board at the insistence + of the government, + +On line 6481: + management and the + board at the insistence of + the government, and + +On line 6481: + at the insistence + of the government, and that + the government would + +On line 6481: + of the government, + and that the government would + provide assistance + +On line 6483: + "to protect [Bank of + America] against the adverse + impact of certain + +On line 6483: + [Bank of America] + against the adverse impact of + certain Merrill Lynch + +On line 6483: + America] against the + adverse impact of certain + Merrill Lynch assets," + +On line 6483: + impact of certain + Merrill Lynch assets," although + such assistance could + +On line 6483: + Merrill Lynch assets," + although such assistance could + not be provided + +On line 6483: + Lynch assets," although + such assistance could not be + provided in time + +On line 6483: + such assistance could + not be provided in time + for the merger’s close + +On line 6483: + assistance could not + be provided in time for + the merger’s close on + +On line 6485: + not be provided + in time for the merger’s close + on January The + +On line 6485: + be provided in + time for the merger’s close on + January The board + +On line 6485: + time for the merger’s + close on January The board + decided not to + +On line 6485: + close on January + The board decided not to + exercise the MAC + +On line 6485: + The board decided + not to exercise the MAC + and to proceed as + +On line 6485: + board decided not + to exercise the MAC and + to proceed as planned, + +On line 6485: + decided not to + exercise the MAC and to + proceed as planned, with + +On line 6485: + exercise the MAC + and to proceed as planned, with + the understanding + +On line 6485: + and to proceed as + planned, with the understanding + that the government’s + +On line 6485: + that the government’s + assistance would be "fully + documented" by + +On line 6485: + by the time fourth-quarter + earnings were announced in mid-January.195 + "Obviously if + +On line 6485: + were announced in mid-January.195 + "Obviously if [the MAC + clause] actually + +On line 6485: + "Obviously if + [the MAC clause] actually + would cause systemic risk + +On line 6485: + clause] actually + would cause systemic risk to the + financial system, + +On line 6485: + would cause systemic risk + to the financial system, + then that’s not good for + +On line 6485: + cause systemic risk to + the financial system, then + that’s not good for Bank + +On line 6485: + systemic risk to the + financial system, then that’s + not good for Bank of + +On line 6485: + to the financial + system, then that’s not good for + Bank of America," + +On line 6485: + financial system, + then that’s not good for Bank of + America," Lewis told + +On line 6485: + system, then that’s not + good for Bank of America," + Lewis told the FCIC. "Which + +On line 6485: + not good for Bank of + America," Lewis told the FCIC. + "Which is finally + +On line 6485: + America," Lewis told + the FCIC. "Which is finally + the conclusion that + +On line 6485: + told the FCIC. "Which is + finally the conclusion + that I came to and + +On line 6485: + "Which is finally + the conclusion that I came + to and the board came + +On line 6485: + is finally the + conclusion that I came to + and the board came to."196 + +On line 6487: + the conclusion that + I came to and the board came + to."196 The merger was + +On line 6487: + that I came to and + the board came to."196 The merger + was completed on + +On line 6487: + and the board came to."196 + The merger was completed + on January with + +On line 6487: + the board came to."196 The + merger was completed on + January with no + +On line 6487: + of billion announced + in September had fallen + to billion, thanks to + +On line 6487: + billion announced in + September had fallen to + billion, thanks to the + +On line 6487: + in September had + fallen to billion, thanks to + the decline in the + +On line 6487: + fallen to billion, + thanks to the decline in the + stock prices of the two + +On line 6487: + billion, thanks to the + decline in the stock prices of + the two companies + +On line 6487: + thanks to the decline + in the stock prices of the two + companies over the + +On line 6487: + decline in the stock + prices of the two companies + over the preceding + +On line 6487: + in the stock prices of + the two companies over the + preceding three months. + +On line 6487: + the two companies + over the preceding three months. + On January Bank + +On line 6487: + two companies over + the preceding three months. On + January Bank of + +On line 6487: + the preceding three + months. On January Bank of + America received + +On line 6487: + America received + the billion in capital + from TARP that had been + +On line 6487: + capital from TARP + that had been allocated + to Merrill Lynch, adding + +On line 6491: + Merrill Lynch, adding to + the billion it had received + in October.197 In + +On line 6491: + to the billion it + had received in October.197 + In addition to + +On line 6491: + the billion it had + received in October.197 In + addition to those + +On line 6491: + investments, at the + end of Bank of America + and Merrill Lynch had + +On line 6491: + the end of Bank of + America and Merrill Lynch + had borrowed billion + +On line 6491: + Bank of America + and Merrill Lynch had borrowed + billion under the + +On line 6493: + through the Term Auction + Facility and billion + through the PDCF and + +On line 6493: + the PDCF and TSLF) + and billion under the Fed’s + Commercial Paper + +On line 6493: + previous fall, Bank + of America’s legacy + securities arm + +On line 6493: + of America’s + legacy securities arm + had borrowed as much + +On line 6495: + had borrowed as much + as billion under TSLF and + as much as billion + +On line 6497: + as much as billion + under PDCF.) Also at + the end of the bank + +On line 6497: + end of the bank had + issued billion in senior + debt guaranteed by + +On line 6497: + had issued billion + in senior debt guaranteed + by the FDIC under + +On line 6497: + issued billion in + senior debt guaranteed by + the FDIC under the + +On line 6497: + by the FDIC under + the debt guarantee program.198 + And it had borrowed + +On line 6497: + FDIC under the debt + guarantee program.198 And it + had borrowed billion + +On line 6497: + guarantee program.198 + And it had borrowed billion + from the Federal + +On line 6497: + had borrowed billion + from the Federal Home Loan + Banks. Yet despite Bank + +On line 6497: + borrowed billion from + the Federal Home Loan Banks. + Yet despite Bank of + +On line 6497: + from the Federal + Home Loan Banks. Yet despite Bank + of America’s + +On line 6497: + Banks. Yet despite Bank + of America’s recourse + to these many supports, + +On line 6497: + Yet despite Bank of + America’s recourse to + these many supports, the + +On line 6497: + of America’s + recourse to these many supports, + the regulators + +On line 6497: + recourse to these many + supports, the regulators + worried that it would + +On line 6497: + would experience + liquidity problems if + the fourth-quarter earnings + +On line 6499: + the fourth-quarter earnings + were weak.199 The regulators + wanted to be ready + +On line 6499: + earnings were weak.199 The + regulators wanted to + be ready to announce + +On line 6499: + wanted to be ready + to announce the details of + government support + +On line 6499: + announce the details + of government support in + conjunction with Bank + +On line 6499: + of America’s + disclosure of its fourth-quarter + performance. They had + +On line 6499: + disclosure of its + fourth-quarter performance. They had + been working on the + +On line 6499: + performance. They had + been working on the details + of that assistance + +On line 6499: + been working on the + details of that assistance + since late December,200 + +On line 6499: + assistance since late + December,200 and had reason + to be cautious: for + +On line 6499: + late December,200 and + had reason to be cautious: + for example, of + +On line 6499: + December,200 and had + reason to be cautious: for + example, of Bank + +On line 6499: + of billion, was rolled + over every night, and Merrill + "legacy" businesses + +On line 6499: + and Merrill "legacy" + businesses also funded + billion overnight. A one-notch + +On line 6499: + "legacy" businesses + also funded billion overnight. + A one-notch downgrade in + +On line 6499: + businesses also + funded billion overnight. A one-notch + downgrade in the new + +On line 6499: + one-notch downgrade in the + new Bank of America’s + credit rating would + +On line 6499: + common equity + was low and, given the stressed + market conditions, + +On line 6499: + was low and, given + the stressed market conditions, + was likely to fall + +On line 6499: + most basic measure + of capital—worried the + market, which seemed to + +On line 6499: + capital—worried + the market, which seemed to think + that in the midst of + +On line 6499: + which seemed to think that + in the midst of the crisis, + regulatory + +On line 6499: + midst of the crisis, + regulatory measures + of capital were + +On line 6499: + regulatory + measures of capital were + not informative. + +On line 6501: + informative. On + January the Federal + Reserve and the FDIC, + +On line 6501: + On January the + Federal Reserve and the + FDIC, after "intense" + +On line 6501: + Federal Reserve + and the FDIC, after "intense" + discussions, agreed on + +On line 6501: + and the FDIC, after + "intense" discussions, agreed on + the terms:202 Treasury would + +On line 6501: + FDIC, after "intense" + discussions, agreed on the terms:202 + Treasury would use TARP + +On line 6501: + on the terms:202 Treasury + would use TARP funds to purchase + billion of Bank of + +On line 6501: + Treasury would use TARP + funds to purchase billion of + Bank of America + +On line 6501: + would use TARP funds to + purchase billion of Bank of + America preferred + +On line 6501: + billion of Bank of + America preferred stock with + an dividend. The + +On line 6501: + an dividend. The + bank and the three pertinent + government agencies—Treasury, the + +On line 6501: + The bank and the three + pertinent government agencies—Treasury, + the Fed, and the FDIC—designated + +On line 6501: + the three pertinent + government agencies—Treasury, the Fed, and + the FDIC—designated an asset + +On line 6501: + the Fed, and the FDIC—designated + an asset pool of billion, + primarily from + +On line 6501: + an asset pool of + billion, primarily from + the former Merrill + +On line 6501: + the former Merrill + Lynch portfolio, whose losses + the four entities + +On line 6501: + former Merrill Lynch + portfolio, whose losses the + four entities would + +On line 6501: + Lynch portfolio, whose + losses the four entities + would share. The pool was + +On line 6501: + whose losses the four + entities would share. The pool + was analogous to + +On line 6501: + four entities would + share. The pool was analogous + to Citigroup’s ring + +On line 6501: + entities would share. + The pool was analogous to + Citigroup’s ring fence. + +On line 6501: + would share. The pool was + analogous to Citigroup’s + ring fence. In this case, + +On line 6501: + ring fence. In this case, + Bank of America would be + responsible for + +On line 6501: + Bank of America + would be responsible for + the first billion in + +On line 6501: + America would be + responsible for the first + billion in losses + +On line 6501: + responsible for + the first billion in losses + on the pool, and the + +On line 6501: + for the first billion + in losses on the pool, and + the government would + +On line 6501: + on the pool, and the + government would cover of + any additional + +On line 6501: + Should the government + losses materialize, + Treasury would cover + +On line 6501: + government losses + materialize, Treasury + would cover up to + +On line 6501: + would cover up to + a limit of billion, and + the FDIC up to a + +On line 6501: + up to a limit + of billion, and the FDIC up + to a limit of + +On line 6501: + to a limit of + billion. Ninety percent of + any additional + +On line 6501: + Ninety percent of + any additional losses + would be covered by + +On line 6503: + any additional + losses would be covered by + the Fed.203 The FDIC Board + +On line 6503: + would be covered by + the Fed.203 The FDIC Board had a + conference call at + +On line 6503: + by the Fed.203 The FDIC + Board had a conference call + at P.M. on Thursday, + +On line 6503: + The FDIC Board had a + conference call at P.M. on + Thursday, January + +On line 6503: + conference call at + P.M. on Thursday, January + and voted for the + +On line 6503: + Thursday, January + and voted for the fourth time, + unanimously, to + +On line 6503: + and voted for the + fourth time, unanimously, to + approve a systemic + +On line 6503: + time, unanimously, + to approve a systemic risk + exception under + +On line 6505: + morning, January + Bank of America disclosed + that Merrill Lynch had + +On line 6505: + Bank of America + disclosed that Merrill Lynch had + recorded a billion + +On line 6505: + America disclosed + that Merrill Lynch had recorded + a billion net loss + +On line 6505: + disclosed that Merrill + Lynch had recorded a billion + net loss on real + +On line 6505: + a billion net loss + on real estate-related + write-downs and charges. It + +On line 6505: + announced the billion + TARP capital investment + and billion ring fence + +On line 6505: + that the government + had provided. Despite the + government’s support, + +On line 6505: + provided. Despite + the government’s support, Bank + of America’s + +On line 6505: + government’s support, + Bank of America’s stock + closed down almost from + +On line 6507: + of America’s + stock closed down almost from the + day before. ver the + +On line 6507: + America’s stock + closed down almost from the day + before. ver the next + +On line 6507: + stock closed down almost + from the day before. ver the + next several months + +On line 6507: + closed down almost from + the day before. ver the next + several months Bank + +On line 6507: + from the day before. + ver the next several months + Bank of America + +On line 6507: + the day before. ver + the next several months Bank + of America worked + +On line 6507: + day before. ver the + next several months Bank of + America worked with + +On line 6507: + next several months + Bank of America worked with + its regulators + +On line 6507: + several months Bank + of America worked with its + regulators to + +On line 6507: + Bank of America + worked with its regulators + to identify the + +On line 6507: + regulators to + identify the assets that + would be included + +On line 6507: + assets that would be + included in the asset + pool. Then, on May Bank + +On line 6507: + be included in + the asset pool. Then, on May + Bank of America + +On line 6507: + included in the + asset pool. Then, on May Bank + of America asked + +On line 6507: + the asset pool. Then, + on May Bank of America + asked to exit the + +On line 6507: + asset pool. Then, on + May Bank of America asked + to exit the ring + +On line 6507: + Bank of America + asked to exit the ring fence + deal, explaining that + +On line 6507: + of America asked + to exit the ring fence deal, + explaining that the + +On line 6507: + asked to exit the + ring fence deal, explaining that + the company had + +On line 6507: + explaining that the + company had determined + that losses would not + +On line 6507: + that the company + had determined that losses + would not exceed the + +On line 6507: + had determined that + losses would not exceed the + billion that Bank of + +On line 6507: + that losses would not + exceed the billion that Bank + of America was + +On line 6507: + exceed the billion + that Bank of America was + required to cover + +On line 6507: + the billion that Bank + of America was required + to cover in its + +On line 6507: + billion that Bank of + America was required to + cover in its first-loss + +On line 6507: + Bank of America + was required to cover in + its first-loss position. + +On line 6507: + the company was + eventually allowed to + terminate the deal, + +On line 6507: + was eventually + allowed to terminate the + deal, it was compelled + +On line 6507: + it was compelled to + compensate the government + for the benefits + +On line 6507: + the benefits it + had received from the market’s + perception that the + +On line 6507: + it had received from + the market’s perception that + the government would + +On line 6507: + that the government + would insure its assets. On + September Bank of + +On line 6509: + to pay a million + termination fee: million + to Treasury, million + +On line 6511: + Treasury, million to + the Fed, and million to the + FDIC. The Commission + +On line 6511: + million to the Fed, + and million to the FDIC. The + Commission concludes + +On line 6511: + million to the FDIC. + The Commission concludes that, + as massive losses + +On line 6511: + as massive losses + spread throughout the financial + system in the fall + +On line 6511: + system in the fall + of many institutions failed, + or would have failed but + +On line 6511: + many institutions + failed, or would have failed but for + government bailouts. As + +On line 6511: + for government bailouts. + As panic gripped the market, + credit markets seized + +On line 6511: + bailouts. As panic gripped + the market, credit markets + seized up, trading ground + +On line 6511: + As panic gripped the + market, credit markets seized + up, trading ground to + +On line 6511: + the market, credit + markets seized up, trading ground + to a halt, and the + +On line 6511: + credit markets seized + up, trading ground to a halt, + and the stock market + +On line 6511: + trading ground to a + halt, and the stock market plunged. + Lack of transparency + +On line 6511: + to the crisis: the + exposures of financial + institutions to + +On line 6511: + losses were unknown + to market participants, + and indeed many firms + +On line 6511: + unknown to market + participants, and indeed + many firms did not know + +On line 6511: + participants, and + indeed many firms did not know + their own exposures. + +On line 6513: + indeed many firms did + not know their own exposures. + The scale and nature + +On line 6513: + many firms did not know + their own exposures. The scale + and nature of the + +On line 6513: + exposures. The scale + and nature of the over-the-counter + (OTC) derivatives + +On line 6513: + and nature of the + over-the-counter (OTC) derivatives + market created + +On line 6513: + fuel the panic + in the fall of millions of + contracts in this opaque + +On line 6513: + among a vast web of + financial institutions + through counterparty + +On line 6513: + institutions through + counterparty credit risk, + thus exposing the + +On line 6513: + through counterparty + credit risk, thus exposing + the system to a + +On line 6513: + thus exposing the + system to a contagion + of spreading losses + +On line 6513: + a contagion of + spreading losses and defaults. + Enormous positions + +On line 6513: + spreading losses and + defaults. Enormous positions + concentrated in + +On line 6513: + that were major OTC + derivatives dealers added + to uncertainty + +On line 6513: + uncertainty in + the market. The "bank runs" on + these institutions + +On line 6513: + the market. The "bank + runs" on these institutions + included runs on + +On line 6513: + operations through + novations, collateral + demands, and refusals + +On line 6515: + series of actions, + inactions, and misjudgments + left the country with + +On line 6515: + the total collapse + of our financial system + or spend trillions of + +On line 6515: + of our financial + system or spend trillions of + taxpayer dollars + +On line 6515: + system and prevent + catastrophic damage to + the economy. In + +On line 6515: + to the economy. + In the process, the government + rescued a number + +On line 6515: + government rescued + a number of financial + institutions deemed + +On line 6515: + institutions deemed + "too big to fail"—so large and + interconnected + +On line 6515: + big to fail"—so large + and interconnected with + other financial + +On line 6515: + important in one + or more financial markets + that their failure would + +On line 6515: + or more financial + markets that their failure would + have caused losses and + +On line 6515: + financial markets + that their failure would have caused + losses and failures + +On line 6515: + that their failure would + have caused losses and failures + to spread to other + +On line 6517: + have caused losses and + failures to spread to other + institutions. The + +On line 6517: + failures to spread to + other institutions. The + government also + +On line 6517: + institutions through + failures and mergers during + the crisis, the U.S. + +On line 6517: + failures and mergers + during the crisis, the U.S. + financial sector + +On line 6517: + mergers during the + crisis, the U.S. financial + sector is now more + +On line 6517: + the crisis, the U.S. + financial sector is now + more concentrated + +On line 6517: + financial sector + is now more concentrated + than ever in the + +On line 6517: + sector is now more + concentrated than ever + in the hands of a + +On line 6517: + concentration places + greater responsibility + on regulators + +On line 6517: + on regulators + for effective oversight of + these institutions. + +On line 6523: + regulators for + effective oversight of these + institutions. PART + +On line 6526: + effective oversight + of these institutions. PART + V The Aftershocks + +On line 6534: + these institutions. + PART V The Aftershocks THE + ECONOMIC FALLOUT + +On line 6540: + CONTENTS Households "I’m + not eating. I’m not sleeping"...................................................390 + Businesses: "Squirrels + +On line 6546: + to close shortfalls" The + financial sector: "Almost + triple the level of + +On line 6546: + financial sector: + "Almost triple the level of + three years earlier".....................400 + +On line 6548: + triple the level of + three years earlier".....................400 Panic + and uncertainty + +On line 6548: + the level of three + years earlier".....................400 Panic and + uncertainty in + +On line 6548: + three years earlier".....................400 + Panic and uncertainty + in the financial + +On line 6548: + earlier".....................400 Panic + and uncertainty in the + financial system + +On line 6548: + uncertainty in + the financial system plunged + the nation into + +On line 6548: + financial system + plunged the nation into the + longest and deepest + +On line 6548: + into the longest + and deepest recession in + generations. The + +On line 6548: + generations. The + credit squeeze in financial + markets cascaded + +On line 6548: + squeeze in financial + markets cascaded throughout + the economy. In + +On line 6548: + markets cascaded + throughout the economy. In + testifying to + +On line 6550: + the Commission, Bank + of America CEO Brian + Moynihan described the + +On line 6550: + Bank of America + CEO Brian Moynihan described + the impact of the + +On line 6550: + CEO Brian Moynihan + described the impact of the + financial crisis + +On line 6550: + described the impact + of the financial crisis + on the economy: + +On line 6550: + the impact of the + financial crisis on the + economy: "Over the + +On line 6550: + of the financial + crisis on the economy: + "Over the course of the + +On line 6550: + financial crisis + on the economy: "Over the + course of the crisis, + +On line 6550: + the economy: "Over + the course of the crisis, we, + as an industry, + +On line 6550: + economy: "Over the + course of the crisis, we, as + an industry, caused + +On line 6550: + course of the crisis, + we, as an industry, caused + a lot of damage. + +On line 6550: + the crisis, we, as + an industry, caused a lot + of damage. Never + +On line 6550: + crisis, we, as an + industry, caused a lot of + damage. Never has + +On line 6550: + an industry, caused + a lot of damage. Never + has it been clearer + +On line 6550: + industry, caused a + lot of damage. Never has + it been clearer how + +On line 6550: + of damage. Never + has it been clearer how poor + business judgments we + +On line 6550: + it been clearer how + poor business judgments we have + made have affected + +On line 6550: + been clearer how poor + business judgments we have made + have affected Main + +On line 6550: + poor business judgments + we have made have affected + Main Street."1 Indeed, Main + +On line 6550: + business judgments we + have made have affected Main + Street."1 Indeed, Main Street + +On line 6550: + have affected Main + Street."1 Indeed, Main Street felt the + tremors as the upheaval + +On line 6550: + affected Main Street."1 + Indeed, Main Street felt the tremors + as the upheaval in + +On line 6550: + Street."1 Indeed, Main Street + felt the tremors as the upheaval + in the financial + +On line 6550: + felt the tremors as the + upheaval in the financial + system rumbled through + +On line 6550: + tremors as the upheaval + in the financial system + rumbled through the U.S. + +On line 6550: + dollars in household + wealth evaporated within + months, and reported + +On line 6550: + wealth evaporated + within months, and reported + unemployment hit + +On line 6550: + months, and reported + unemployment hit at its + peak in October + +On line 6552: + hit at its peak in + October As the housing + bubble deflated, + +On line 6552: + October As the + housing bubble deflated, + families that had + +On line 6552: + bubble deflated, + families that had counted + on rising housing + +On line 6552: + families that had + counted on rising housing + values for cash and + +On line 6552: + that had counted on + rising housing values for + cash and retirement + +On line 6552: + values for cash and + retirement security + became anchored to + +On line 6552: + became anchored to + mortgages that exceeded the + declining value + +On line 6552: + that exceeded the + declining value of their + homes. They ratcheted back + +On line 6552: + value of their homes. + They ratcheted back on spending, + cumulatively + +On line 6552: + cumulatively + putting the brakes on economic + growth—the classic "paradox + +On line 6552: + brakes on economic + growth—the classic "paradox of thrift," + described almost a + +On line 6552: + growth—the classic "paradox + of thrift," described almost a + century ago by + +On line 6554: + thrift," described almost + a century ago by John + Maynard Keynes. In the + +On line 6554: + a century ago + by John Maynard Keynes. In the + aftermath of the + +On line 6554: + by John Maynard Keynes. + In the aftermath of the + panic, when credit + +On line 6554: + the aftermath of + the panic, when credit was + severely tightened, + +On line 6554: + frozen, for financial + institutions, companies + found that cheap and easy + +On line 6554: + companies found that + cheap and easy credit was gone + for them, too. It was + +On line 6554: + cheap and easy credit + was gone for them, too. It was + tougher to borrow to + +On line 6554: + and easy credit was + gone for them, too. It was tougher + to borrow to meet + +On line 6554: + was gone for them, too. + It was tougher to borrow to + meet payrolls and to + +On line 6554: + to meet payrolls and + to expand inventories; + businesses that had + +On line 6554: + businesses that had + neither credit nor customers + trimmed costs and laid off + +On line 6554: + had neither credit + nor customers trimmed costs and laid + off employees. Still + +On line 6554: + Still today, credit + availability is tighter than + it was before the + +On line 6556: + availability is + tighter than it was before the + crisis. Without jobs, + +On line 6556: + is tighter than it was + before the crisis. Without + jobs, people could no + +On line 6556: + it was before the + crisis. Without jobs, people + could no longer afford + +On line 6556: + before the crisis. + Without jobs, people could no + longer afford their house + +On line 6556: + crisis. Without jobs, + people could no longer afford + their house payments. Yet + +On line 6556: + Without jobs, people + could no longer afford their house + payments. Yet even if + +On line 6556: + jobs, people could no + longer afford their house payments. + Yet even if moving + +On line 6556: + people could no longer + afford their house payments. Yet + even if moving could + +On line 6556: + could no longer afford + their house payments. Yet even if + moving could improve + +On line 6556: + longer afford their house + payments. Yet even if moving + could improve their job + +On line 6556: + their house payments. Yet + even if moving could improve + their job prospects, they were + +On line 6556: + house payments. Yet even + if moving could improve their + job prospects, they were stuck + +On line 6556: + payments. Yet even if + moving could improve their job + prospects, they were stuck with + +On line 6556: + Yet even if moving + could improve their job prospects, they + were stuck with houses + +On line 6556: + even if moving could + improve their job prospects, they were + stuck with houses they + +On line 6556: + moving could improve + their job prospects, they were stuck with + houses they could not + +On line 6556: + improve their job prospects, + they were stuck with houses they + could not sell. Millions + +On line 6556: + were stuck with houses + they could not sell. Millions of + families entered + +On line 6556: + houses they could not + sell. Millions of families + entered foreclosure + +On line 6556: + families entered + foreclosure and millions more + fell behind on their + +On line 6556: + more fell behind on + their mortgage payments. Others + simply walked away from + +On line 6556: + simply walked away from + their devalued properties, + returning the keys + +On line 6556: + returning the keys + to the banks—an action that would + destroy families’ + +On line 6556: + to the banks—an action + that would destroy families’ + credit for years. The + +On line 6556: + banks—an action that would + destroy families’ credit + for years. The surge in + +On line 6556: + destroy families’ + credit for years. The surge in + foreclosed and abandoned + +On line 6556: + credit for years. The + surge in foreclosed and abandoned + properties dragged home + +On line 6556: + The surge in foreclosed + and abandoned properties dragged + home prices down still more, + +On line 6556: + foreclosed and abandoned + properties dragged home prices down + still more, depressing + +On line 6556: + home prices down still more, + depressing the value of + surrounding real + +On line 6556: + still more, depressing + the value of surrounding + real estate in + +On line 6556: + surrounding real + estate in neighborhoods across + the country. Even those + +On line 6556: + across the country. Even + those who stayed current on their + mortgages found themselves + +On line 6556: + those who stayed current + on their mortgages found themselves + whirled into the storm. + +On line 6558: + who stayed current on + their mortgages found themselves whirled + into the storm. Towns + +On line 6558: + mortgages found themselves + whirled into the storm. Towns that + over several years + +On line 6558: + whirled into the storm. + Towns that over several years + had come to expect + +On line 6558: + into the storm. Towns + that over several years had + come to expect and + +On line 6558: + the storm. Towns that over + several years had come to + expect and rely + +On line 6558: + several years had + come to expect and rely + on the housing boom + +On line 6558: + had come to expect + and rely on the housing + boom now saw jobs and + +On line 6558: + come to expect and + rely on the housing boom + now saw jobs and tax + +On line 6558: + expect and rely + on the housing boom now saw + jobs and tax revenue + +On line 6558: + and rely on the + housing boom now saw jobs and + tax revenue vanish. + +On line 6558: + boom now saw jobs and + tax revenue vanish. As their + resources dwindled, these + +On line 6558: + tax revenue vanish. + As their resources dwindled, these + communities found + +On line 6558: + these communities + found themselves saddled with the + municipal costs + +On line 6558: + found themselves saddled + with the municipal costs + they had taken on + +On line 6558: + themselves saddled with + the municipal costs they + had taken on in + +On line 6558: + municipal costs + they had taken on in part + to expand services + +On line 6558: + expand services for + a growing population. + Sinking housing prices + +On line 6560: + fire protection. At + FCIC hearings around the country, + regional experts + +On line 6560: + FCIC hearings around the + country, regional experts + testified that the + +On line 6560: + country, regional + experts testified that the + local impact of + +On line 6560: + experts testified + that the local impact of + the crisis has been + +On line 6560: + has been severe. From + to for example, banks in + Sacramento had stopped + +On line 6562: + Bankers still complain to + him not only that demand + from borrowers has + +On line 6562: + to him not only + that demand from borrowers + has fallen off but + +On line 6562: + only that demand + from borrowers has fallen + off but also that + +On line 6562: + from borrowers has + fallen off but also that + they may be subject + +On line 6562: + but also that they + may be subject to increased + regulatory + +On line 6562: + may be subject to + increased regulatory + scrutiny if they + +On line 6562: + they do make new loans. + In September when the FCIC + held its Sacramento + +On line 6562: + In September when + the FCIC held its Sacramento + hearing, that region’s + +On line 6562: + was still languishing. + "Unless we begin to turn + around demand, unless + +On line 6562: + "Unless we begin + to turn around demand, unless + we begin to turn + +On line 6562: + begin to turn around + the business situation, + the employment is + +On line 6562: + situation, the + employment is not going + to increase here in + +On line 6562: + the employment is + not going to increase here + in the Sacramento + +On line 6562: + employment is not + going to increase here in + the Sacramento area, + +On line 6562: + increase here in the + Sacramento area, and housing + is critical to + +On line 6564: + the Sacramento area, + and housing is critical + to it. It is a + +On line 6564: + area, and housing is + critical to it. It is + a vicious circle," + +On line 6566: + critical to it. + It is a vicious circle," + Williams testified.2 The + +On line 6566: + a vicious circle," + Williams testified.2 The effects + of the financial + +On line 6566: + Williams testified.2 The + effects of the financial + crisis have been felt + +On line 6566: + individual + U.S. households and businesses, + big and small, and around + +On line 6566: + and small, and around the + world. Policy makers on + the state, national, + +On line 6566: + small, and around the world. + Policy makers on the + state, national, and + +On line 6566: + Policy makers + on the state, national, and + global levels are + +On line 6566: + are still grappling with + the aftermath, as are the + homeowners and lenders + +On line 6566: + with the aftermath, + as are the homeowners and + lenders now dealing with + +On line 6566: + the aftermath, as + are the homeowners and lenders + now dealing with the + +On line 6566: + are the homeowners + and lenders now dealing with the + complications that + +On line 6568: + complications that + entangle the foreclosure + process. HOUSEHOLDS: "I’M NOT + +On line 6568: + that entangle the + foreclosure process. HOUSEHOLDS: "I’M + NOT EATING. I’M NOT + +On line 6570: + in December By + many measures, its effects on + the job market were + +On line 6570: + December By many + measures, its effects on the + job market were the + +On line 6570: + By many measures, its + effects on the job market + were the worst on record, + +On line 6570: + its effects on the + job market were the worst on + record, as reflected + +On line 6570: + effects on the job + market were the worst on record, + as reflected in + +On line 6570: + job market were the + worst on record, as reflected + in the speed and breadth + +On line 6570: + market were the worst + on record, as reflected in + the speed and breadth of + +On line 6570: + were the worst on record, + as reflected in the speed + and breadth of the falloff + +On line 6570: + the worst on record, as + reflected in the speed and + breadth of the falloff in + +On line 6570: + record, as reflected + in the speed and breadth of the + falloff in jobs, the rise + +On line 6570: + as reflected in + the speed and breadth of the falloff + in jobs, the rise of + +On line 6570: + reflected in the + speed and breadth of the falloff in + jobs, the rise of the + +On line 6570: + and breadth of the falloff + in jobs, the rise of the ranks + of underemployed + +On line 6570: + in jobs, the rise of + the ranks of underemployed + workers, and the long + +On line 6570: + the rise of the ranks + of underemployed workers, + and the long stretches + +On line 6570: + rise of the ranks of + underemployed workers, and + the long stretches of + +On line 6570: + of underemployed + workers, and the long stretches + of time that millions + +On line 6570: + workers, and the long + stretches of time that millions + of Americans were + +On line 6570: + time that millions of + Americans were and still are + surviving without + +On line 6570: + Americans were and + still are surviving without + work. The economy + +On line 6570: + still are surviving + without work. The economy + shed million jobs in + +On line 6570: + work. The economy + shed million jobs in 2008—the largest + annual plunge since + +On line 6570: + shed million jobs in + 2008—the largest annual plunge since + record keeping began + +On line 6570: + million jobs in 2008—the + largest annual plunge since record + keeping began in + +On line 6570: + 2008—the largest annual + plunge since record keeping began + in By December + +On line 6570: + largest annual plunge + since record keeping began in + By December the + +On line 6570: + plunge since record keeping + began in By December + the United States had + +On line 6570: + the United States had + lost another million jobs. + Through November the + +On line 6570: + had lost another + million jobs. Through November + the economy had + +On line 6570: + jobs. Through November + the economy had regained + nearly million jobs, + +On line 6570: + the economy had + regained nearly million jobs, + putting only a small + +On line 6572: + jobs, putting only a + small dent in the declines. The + underemployment + +On line 6572: + those with part-time work + who would prefer full-time + jobs, and those who need + +On line 6572: + with part-time work who + would prefer full-time jobs, + and those who need jobs + +On line 6572: + part-time work who would + prefer full-time jobs, and + those who need jobs but + +On line 6572: + work who would prefer + full-time jobs, and those who + need jobs but say they + +On line 6572: + full-time jobs, and + those who need jobs but say they + are too discouraged + +On line 6572: + those who need jobs but + say they are too discouraged + to search—increased from + +On line 6574: + who need jobs but say + they are too discouraged to + search—increased from in + +On line 6574: + but say they are too + discouraged to search—increased + from in December + +On line 6576: + from in December + to in December reaching + in October This + +On line 6576: + in December to + in December reaching in + October This was + +On line 6576: + December reaching + in October This was the + highest level since + +On line 6576: + in October This + was the highest level since + calculations for + +On line 6576: + calculations for + that labor category + were first made in As + +On line 6576: + of November the + underemployment rate stood + at The average + +On line 6576: + The average length + of time individuals + spent unemployed spiked + +On line 6576: + average length of + time individuals spent + unemployed spiked from + +On line 6578: + individuals + spent unemployed spiked from weeks + in June to weeks in + +On line 6578: + spent unemployed spiked + from weeks in June to weeks in + June and weeks in June + +On line 6578: + spiked from weeks in June + to weeks in June and weeks in + June Fifty-nine percent + +On line 6578: + from weeks in June to + weeks in June and weeks in June + Fifty-nine percent of + +On line 6578: + in June to weeks in + June and weeks in June Fifty-nine + percent of all job + +On line 6578: + to weeks in June and + weeks in June Fifty-nine percent + of all job seekers, + +On line 6578: + June and weeks in June + Fifty-nine percent of all job + seekers, according + +On line 6578: + weeks in June Fifty-nine + percent of all job seekers, + according to the + +On line 6578: + Fifty-nine percent of + all job seekers, according + to the most recent + +On line 6578: + to the most recent + government statistics, searched + for work for at least + +On line 6580: + searched for work for at + least weeks. The labor market + is daunting across the + +On line 6580: + for work for at least + weeks. The labor market is + daunting across the board, + +On line 6580: + for at least weeks. The + labor market is daunting + across the board, but it + +On line 6580: + labor market is + daunting across the board, but it + is especially + +On line 6580: + the board, but it is + especially grim among African + American workers, + +On line 6580: + especially grim + among African American workers, + whose jobless rate is + +On line 6580: + among African American + workers, whose jobless rate is + about percentage points + +On line 6580: + workers, whose jobless + rate is about percentage points + above the national + +On line 6580: + percentage points above + the national average; + workers between the + +On line 6580: + above the national + average; workers between + the ages of and years + +On line 6582: + workers between the + ages of and years old, at and + Hispanics, at And + +On line 6582: + the ages of and years + old, at and Hispanics, at + And the impact has + +On line 6582: + ages of and years old, + at and Hispanics, at And + the impact has been + +On line 6582: + the impact has been + especially severe in + certain professions: + +On line 6582: + severe in certain + professions: unemployment + in construction, for + +On line 6582: + unemployment in + construction, for instance, climbed + to an average + +On line 6584: + for instance, climbed to + an average of in and + averaged during + +On line 6586: + average of in + and averaged during the + first months of Real + +On line 6586: + averaged during + the first months of Real gross + domestic product, + +On line 6586: + during the first months + of Real gross domestic + product, the nation’s + +On line 6586: + first months of Real + gross domestic product, the + nation’s measure of + +On line 6586: + output adjusted + for inflation, fell at an + annual rate of + +On line 6586: + for inflation, fell + at an annual rate of + in the third quarter + +On line 6586: + inflation, fell at + an annual rate of in + the third quarter of + +On line 6586: + at an annual + rate of in the third quarter + of and in the fourth + +On line 6586: + annual rate of + in the third quarter of and + in the fourth quarter. + +On line 6586: + in the third quarter + of and in the fourth quarter. + After falling again + +On line 6586: + third quarter of and + in the fourth quarter. After + falling again in the + +On line 6586: + of and in the fourth + quarter. After falling again + in the first half of + +On line 6586: + in the fourth quarter. + After falling again in the + first half of and then + +On line 6586: + After falling again + in the first half of and then + modestly growing + +On line 6586: + in the first half of + and then modestly growing + in the second half, + +On line 6586: + and then modestly + growing in the second half, + average GDP for + +On line 6586: + in the second half, + average GDP for the year + was lower than in + +On line 6586: + half, average GDP + for the year was lower than + in the biggest drop + +On line 6586: + average GDP for + the year was lower than in + the biggest drop since + +On line 6588: + GDP for the year was + lower than in the biggest + drop since Looking at + +On line 6588: + lower than in the + biggest drop since Looking at + the labor market, + +On line 6588: + in the biggest drop + since Looking at the labor + market, Edward Lazear, + +On line 6590: + market, Edward Lazear, + chairman of President George + W. Bush’s Council of + +On line 6590: + President George W. + Bush’s Council of Economic + Advisers during + +On line 6590: + George W. Bush’s Council + of Economic Advisers + during the crisis, + +On line 6590: + during the crisis, + told the Commission that the + financial crisis + +On line 6590: + told the Commission + that the financial crisis + was linked with today’s + +On line 6590: + that the financial + crisis was linked with today’s + economic problems: + +On line 6590: + crisis was linked with + today’s economic problems: + "I think most of it + +On line 6590: + was linked with today’s + economic problems: "I think + most of it had to + +On line 6590: + economic problems: + "I think most of it had to + do with investment. + +On line 6590: + of it had to do + with investment. Panic in + financial markets + +On line 6590: + through prevented firms + from investing in the way + that they otherwise + +On line 6590: + prevented firms from + investing in the way that + they otherwise would, + +On line 6590: + from investing in + the way that they otherwise + would, and I think that + +On line 6590: + investing in the + way that they otherwise would, + and I think that slows + +On line 6590: + and I think that slows + the rehiring of workers + and still continues + +On line 6590: + I think that slows the + rehiring of workers and + still continues to + +On line 6590: + the rehiring of + workers and still continues + to be a problem + +On line 6592: + still continues to + be a problem in labor + markets."3 In June the + +On line 6592: + problem in labor + markets."3 In June the nation + officially emerged + +On line 6592: + In June the nation + officially emerged out of + the recession that + +On line 6592: + the recession that + had begun months earlier. + The good news still had + +On line 6592: + recession that had + begun months earlier. The + good news still had not + +On line 6592: + that had begun months + earlier. The good news still + had not reached many of + +On line 6592: + The good news still had + not reached many of the million + Americans who were + +On line 6592: + still had not reached many + of the million Americans + who were out of work, + +On line 6592: + had not reached many of + the million Americans who + were out of work, who + +On line 6592: + not reached many of the + million Americans who were + out of work, who could + +On line 6592: + many of the million + Americans who were out of + work, who could not find + +On line 6592: + million Americans + who were out of work, who could + not find full-time + +On line 6592: + Americans who were + out of work, who could not find + full-time work, or + +On line 6592: + who were out of work, + who could not find full-time + work, or who had stopped + +On line 6592: + out of work, who could + not find full-time work, or + who had stopped looking + +On line 6592: + of work, who could not + find full-time work, or who + had stopped looking for + +On line 6592: + work, who could not find + full-time work, or who had + stopped looking for work + +On line 6592: + full-time work, or + who had stopped looking for work + as of November + +On line 6592: + stopped looking for work + as of November Jeannie + McDermott of Bakersfield + +On line 6592: + looking for work as + of November Jeannie McDermott + of Bakersfield told + +On line 6592: + November Jeannie + McDermott of Bakersfield told the + FCIC she started a + +On line 6592: + McDermott of Bakersfield + told the FCIC she started a + business refilling + +On line 6592: + Bakersfield told the + FCIC she started a business + refilling printer + +On line 6592: + FCIC she started a + business refilling printer + ink cartridges, but in + +On line 6592: + business refilling + printer ink cartridges, but in + a tight economy, + +On line 6592: + printer ink cartridges, + but in a tight economy, + she didn’t earn enough + +On line 6592: + cartridges, but in a + tight economy, she didn’t + earn enough to make a + +On line 6592: + a tight economy, + she didn’t earn enough to make + a living. She said + +On line 6592: + tight economy, she + didn’t earn enough to make a + living. She said she + +On line 6592: + she didn’t earn enough + to make a living. She said + she had been searching + +On line 6592: + didn’t earn enough to + make a living. She said she + had been searching for + +On line 6592: + to make a living. + She said she had been searching + for a full-time + +On line 6592: + make a living. She + said she had been searching for + a full-time job + +On line 6592: + a living. She said + she had been searching for a + full-time job since + +On line 6594: + she had been searching + for a full-time job since + Households suffered the + +On line 6594: + been searching for a + full-time job since Households + suffered the impact + +On line 6594: + full-time job since + Households suffered the impact + of the financial + +On line 6594: + Households suffered the + impact of the financial + crisis not only + +On line 6594: + suffered the impact + of the financial crisis + not only in the + +On line 6594: + not only in the + job market but also in + their net worth and their + +On line 6594: + in the job market + but also in their net worth + and their access to + +On line 6594: + in their net worth and + their access to credit. Of + the trillion lost from + +On line 6596: + their net worth and their + access to credit. Of the + trillion lost from to + +On line 6596: + worth and their access + to credit. Of the trillion + lost from to the first + +On line 6596: + access to credit. + Of the trillion lost from to + the first quarter of + +On line 6596: + Of the trillion lost + from to the first quarter of + in household net wealth—the + +On line 6596: + first quarter of in + household net wealth—the difference + between what households + +On line 6596: + of in household net + wealth—the difference between what + households own and what + +On line 6596: + difference between + what households own and what they + owe—about trillion was + +On line 6596: + what households own and + what they owe—about trillion was + due to declining + +On line 6596: + households own and what + they owe—about trillion was due + to declining house + +On line 6596: + they owe—about trillion + was due to declining house + prices, with much of the + +On line 6596: + trillion was due to + declining house prices, with much + of the remainder + +On line 6596: + house prices, with much of + the remainder due to the + declining value + +On line 6596: + remainder due to + the declining value of + financial assets. + +On line 6596: + financial assets. + As a point of reference, + GDP in was trillion. + +On line 6596: + assets. As a point + of reference, GDP in was + trillion. And, as a + +On line 6596: + point of reference, + GDP in was trillion. And, as + a separate point, + +On line 6596: + of reference, GDP + in was trillion. And, as a + separate point, the + +On line 6596: + GDP in was trillion. + And, as a separate point, + the amount of wealth lost + +On line 6596: + in was trillion. And, + as a separate point, the + amount of wealth lost in + +On line 6596: + was trillion. And, as + a separate point, the amount + of wealth lost in the + +On line 6596: + a separate point, + the amount of wealth lost in the + dot-com crash early + +On line 6596: + amount of wealth lost in + the dot-com crash early in + the decade was trillion, + +On line 6596: + of wealth lost in the + dot-com crash early in the + decade was trillion, with + +On line 6596: + early in the decade + was trillion, with far fewer + repercussions for the + +On line 6596: + the decade was trillion, + with far fewer repercussions + for the economy + +On line 6596: + decade was trillion, with + far fewer repercussions for + the economy as + +On line 6596: + was trillion, with far + fewer repercussions for the + economy as a + +On line 6596: + fewer repercussions + for the economy as a + whole. The painful drop in + +On line 6596: + repercussions for the + economy as a whole. The + painful drop in real + +On line 6596: + for the economy + as a whole. The painful drop in + real estate and + +On line 6596: + as a whole. The painful + drop in real estate and + financial asset + +On line 6596: + real estate and + financial asset values + followed a trillion + +On line 6596: + financial asset + values followed a trillion + run-up in household debt + +On line 6598: + values followed a + trillion run-up in household debt + from to Aided by + +On line 6598: + followed a trillion + run-up in household debt from to + Aided by the gains + +On line 6598: + a trillion run-up in + household debt from to Aided + by the gains in home + +On line 6598: + run-up in household debt + from to Aided by the gains + in home prices and, to + +On line 6598: + in household debt from + to Aided by the gains in + home prices and, to a + +On line 6598: + from to Aided by + the gains in home prices and, to + a lesser degree, + +On line 6598: + to Aided by the + gains in home prices and, to a + lesser degree, stock + +On line 6598: + the gains in home prices + and, to a lesser degree, + stock prices, households’ net + +On line 6598: + gains in home prices and, + to a lesser degree, stock + prices, households’ net wealth + +On line 6598: + in home prices and, to + a lesser degree, stock prices, + households’ net wealth had + +On line 6598: + and, to a lesser + degree, stock prices, households’ net + wealth had reached a peak + +On line 6598: + lesser degree, stock + prices, households’ net wealth had reached + a peak of trillion + +On line 6598: + households’ net wealth had + reached a peak of trillion in + the second quarter + +On line 6600: + a peak of trillion + in the second quarter of + The collapse of the + +On line 6600: + second quarter of + The collapse of the housing + and stock markets erased + +On line 6600: + of The collapse of + the housing and stock markets + erased much of the gains + +On line 6600: + The collapse of the + housing and stock markets erased + much of the gains from + +On line 6600: + of the housing and + stock markets erased much of the + gains from the run-up—while + +On line 6600: + stock markets erased much + of the gains from the run-up—while + household debt remained + +On line 6600: + erased much of the gains + from the run-up—while household debt + remained near historic + +On line 6600: + the run-up—while household + debt remained near historic highs, + exceeding even the + +On line 6600: + household debt remained + near historic highs, exceeding + even the levels of + +On line 6600: + exceeding even the + levels of As of the third + quarter of despite + +On line 6600: + even the levels of + As of the third quarter of + despite firmer stock and + +On line 6600: + levels of As of + the third quarter of despite + firmer stock and housing + +On line 6600: + of As of the third + quarter of despite firmer stock + and housing prices and + +On line 6600: + the third quarter of + despite firmer stock and housing + prices and a decline + +On line 6600: + stock and housing prices + and a decline in household + borrowing, household + +On line 6600: + decline in household + borrowing, household net worth + totaled trillion, a + +On line 6602: + totaled trillion, a + drop-off from its pinnacle just + three years earlier + +On line 6604: + from its pinnacle + just three years earlier (see + figure Nationwide, + +On line 6604: + pinnacle just three + years earlier (see figure + Nationwide, home prices + +On line 6604: + three years earlier + (see figure Nationwide, home + prices dropped from their peak + +On line 6604: + years earlier (see + figure Nationwide, home prices + dropped from their peak in + +On line 6604: + Nationwide, home prices + dropped from their peak in to their + low point early in + +On line 6604: + dropped from their peak in + to their low point early in + The homeownership + +On line 6604: + from their peak in to + their low point early in The + homeownership rate + +On line 6604: + their low point early + in The homeownership rate + declined from its peak + +On line 6604: + point early in The + homeownership rate declined + from its peak of in + +On line 6606: + The homeownership + rate declined from its peak of + in to as of the + +On line 6606: + homeownership rate + declined from its peak of in + to as of the fall + +On line 6606: + rate declined from its + peak of in to as of the + fall of Because so + +On line 6606: + declined from its peak + of in to as of the fall + of Because so many + +On line 6606: + its peak of in to + as of the fall of Because + so many American + +On line 6606: + of in to as of + the fall of Because so many + American households + +On line 6606: + as of the fall of + Because so many American + households own homes, and + +On line 6606: + the fall of Because + so many American households + own homes, and because + +On line 6606: + fall of Because so + many American households own + homes, and because for + +On line 6606: + of Because so many + American households own homes, + and because for most + +On line 6606: + so many American + households own homes, and because + for most homeowners + +On line 6606: + housing represents + their single most important + asset, these declines + +On line 6608: + via home equity + loans or cash-out refinancing + has fallen sharply. At + +On line 6608: + home equity loans + or cash-out refinancing has + fallen sharply. At an + +On line 6608: + fallen sharply. At an + FCIC hearing in Bakersfield, + California, Marie + +On line 6608: + an FCIC hearing in + Bakersfield, California, + Marie Vasile explained how + +On line 6608: + her family had + relocated miles into + the mountains to a + +On line 6608: + had relocated + miles into the mountains to + a rental house to help + +On line 6608: + relocated miles + into the mountains to a + rental house to help her + +On line 6608: + into the mountains + to a rental house to help her + husband’s fragile health.5 + +On line 6608: + the mountains to a + rental house to help her husband’s + fragile health.5 Their old + +On line 6608: + to a rental house to + help her husband’s fragile health.5 + Their old home was put + +On line 6608: + a rental house to help + her husband’s fragile health.5 Their + old home was put up + +On line 6608: + rental house to help her + husband’s fragile health.5 Their old + home was put up for + +On line 6608: + to help her husband’s + fragile health.5 Their old home was + put up for sale and + +On line 6608: + her husband’s fragile + health.5 Their old home was put up + for sale and languished + +On line 6608: + husband’s fragile health.5 + Their old home was put up for + sale and languished on + +On line 6608: + Their old home was put + up for sale and languished on + the market, losing + +On line 6608: + sale and languished on + the market, losing value. + Eventually, she + +On line 6608: + the market, losing + value. Eventually, she + and her husband found + +On line 6608: + Eventually, she + and her husband found buyers + willing to take their + +On line 6608: + she and her husband + found buyers willing to take + their house in a "short + +On line 6608: + and her husband found + buyers willing to take their + house in a "short sale"—that + +On line 6608: + husband found buyers + willing to take their house in + a "short sale"—that is, a + +On line 6608: + found buyers willing + to take their house in a "short + sale"—that is, a sale at + +On line 6608: + buyers willing to + take their house in a "short sale"—that + is, a sale at a + +On line 6608: + willing to take their + house in a "short sale"—that is, a + sale at a price less + +On line 6608: + to take their house in + a "short sale"—that is, a sale at + a price less than the + +On line 6608: + their house in a "short + sale"—that is, a sale at a price + less than the balance + +On line 6608: + house in a "short sale"—that + is, a sale at a price less + than the balance of + +On line 6608: + in a "short sale"—that is, + a sale at a price less than + the balance of the + +On line 6610: + sale"—that is, a sale at + a price less than the balance + of the mortgage. But + +On line 6610: + a sale at a price + less than the balance of the + mortgage. But because + +On line 6610: + at a price less than + the balance of the mortgage. + But because the lender + +On line 6610: + a price less than the + balance of the mortgage. But + because the lender was + +On line 6610: + less than the balance + of the mortgage. But because + the lender was acting + +On line 6610: + the balance of the + mortgage. But because the lender + was acting slowly + +On line 6610: + of the mortgage. But + because the lender was acting + slowly to approve + +On line 6610: + mortgage. But because + the lender was acting slowly + to approve that deal, + +On line 6610: + the lender was acting + slowly to approve that deal, + they risked losing the + +On line 6610: + was acting slowly + to approve that deal, they risked + losing the sale and + +On line 6610: + slowly to approve + that deal, they risked losing the + sale and then going + +On line 6610: + to approve that deal, + they risked losing the sale and + then going into + +On line 6610: + they risked losing the + sale and then going into + foreclosure. "To top + +On line 6610: + sale and then going + into foreclosure. "To top + this all off," Vasile told + +On line 6612: + into foreclosure. + "To top this all off," Vasile told + commissioners, "my + +On line 6612: + "To top this all off," + Vasile told commissioners, "my + husband is in the + +On line 6612: + husband is in the + position of possibly + losing his job. So + +On line 6612: + in the position + of possibly losing his + job. So not only + +On line 6612: + the position of + possibly losing his job. + So not only do + +On line 6612: + possibly losing + his job. So not only do + I have a house that + +On line 6612: + losing his job. So + not only do I have a + house that I don’t know + +On line 6612: + So not only do + I have a house that I don’t + know what’s happening + +On line 6612: + not only do I + have a house that I don’t know + what’s happening to, + +On line 6612: + only do I have + a house that I don’t know what’s + happening to, I + +On line 6612: + I have a house that + I don’t know what’s happening + to, I don’t know if + +On line 6612: + have a house that I + don’t know what’s happening to, + I don’t know if he’s + +On line 6612: + house that I don’t know + what’s happening to, I don’t + know if he’s going + +On line 6612: + that I don’t know what’s + happening to, I don’t know + if he’s going to + +On line 6612: + what’s happening to, + I don’t know if he’s going + to have a job come + +On line 6612: + to, I don’t know if + he’s going to have a job + come December. This + +On line 6612: + I don’t know if he’s + going to have a job come + December. This is + +On line 6612: + if he’s going to + have a job come December. + This is more than I + +On line 6612: + he’s going to have + a job come December. This + is more than I can + +On line 6612: + to have a job come + December. This is more than + I can handle. I’m + +On line 6612: + come December. This + is more than I can handle. + I’m not eating. I’m + +On line 6612: + December. This is + more than I can handle. I’m + not eating. I’m not + +On line 6612: + I can handle. I’m + not eating. I’m not sleeping." + Serious mortgage + +On line 6612: + not eating. I’m not + sleeping." Serious mortgage + delinquencies—payments + +On line 6612: + sleeping." Serious + mortgage delinquencies—payments + that are late days or + +On line 6612: + Serious mortgage + delinquencies—payments that are + late days or more or + +On line 6612: + are late days or more + or homes in the foreclosure + process—have spread since the + +On line 6612: + days or more or homes + in the foreclosure process—have + spread since the crisis. + +On line 6612: + or more or homes in + the foreclosure process—have spread + since the crisis. Among + +On line 6612: + spread since the crisis. + Among regions, the eastern states + in the Midwest (Ohio, + +On line 6612: + the eastern states in + the Midwest (Ohio, Indiana, + Illinois, Wisconsin, + +On line 6614: + in By fall this rate + had risen to Other regions + also endured high + +On line 6614: + had risen to Other + regions also endured high + rates—especially the + +On line 6614: + high rates—especially + the so-called sand states, where the + housing crisis was + +On line 6614: + so-called sand states, where + the housing crisis was the + worst. The third quarter + +On line 6614: + states, where the housing + crisis was the worst. The third + quarter serious + +On line 6614: + crisis was the worst. + The third quarter serious + delinquency rate for + +On line 6614: + worst. The third quarter + serious delinquency rate + for Florida was + +On line 6616: + data company + CoreLogic identified the housing + markets with the worst + +On line 6616: + CoreLogic identified the + housing markets with the worst + records of "distressed" sales, + +On line 6616: + the housing markets + with the worst records of "distressed" + sales, which include short + +On line 6616: + housing markets with + the worst records of "distressed" sales, + which include short sales + +On line 6616: + of "distressed" sales, which + include short sales and sales of + foreclosed properties. + +On line 6616: + include short sales and + sales of foreclosed properties. + Las Vegas led the + +On line 6616: + and sales of foreclosed + properties. Las Vegas led + the list in mid-2010, with + +On line 6616: + foreclosed properties. + Las Vegas led the list in + mid-2010, with distressed sales + +On line 6616: + Las Vegas led the + list in mid-2010, with distressed sales + accounting for more + +On line 6616: + led the list in mid-2010, + with distressed sales accounting + for more than of all + +On line 6616: + the list in mid-2010, with + distressed sales accounting for + more than of all home + +On line 6616: + in mid-2010, with distressed + sales accounting for more than + of all home sales.7 "The + +On line 6616: + mid-2010, with distressed sales + accounting for more than of + all home sales.7 "The state + +On line 6616: + sales accounting for + more than of all home sales.7 "The + state was overbuilt and + +On line 6616: + accounting for more + than of all home sales.7 "The state + was overbuilt and some + +On line 6616: + of all home sales.7 "The + state was overbuilt and some jobs + were predicated + +On line 6616: + all home sales.7 "The state + was overbuilt and some jobs were + predicated on + +On line 6616: + state was overbuilt and + some jobs were predicated + on a level of + +On line 6616: + was overbuilt and some + jobs were predicated on + a level of growth + +On line 6616: + overbuilt and some jobs + were predicated on a + level of growth and + +On line 6616: + were predicated + on a level of growth and + consumer spending that + +On line 6616: + on a level of + growth and consumer spending that + seemed to evaporate + +On line 6616: + level of growth and + consumer spending that seemed to + evaporate almost + +On line 6616: + consumer spending that + seemed to evaporate almost + overnight," Jeremy Aguero, an + +On line 6616: + an economic and + marketing analyst who + follows the Nevada + +On line 6618: + follows the Nevada + economy, testified to + the Commission.8 The + +On line 6618: + testified to the + Commission.8 The performance + of the stock market + +On line 6618: + to the Commission.8 + The performance of the stock + market in the wake + +On line 6618: + performance of the + stock market in the wake of + the crisis also + +On line 6618: + of the stock market + in the wake of the crisis + also reduced wealth. + +On line 6618: + in the wake of the + crisis also reduced wealth. + The Standard and Poor’s + +On line 6618: + the crisis also + reduced wealth. The Standard and + Poor’s Index fell by + +On line 6618: + also reduced wealth. + The Standard and Poor’s Index + fell by a third in + +On line 6618: + wealth. The Standard and + Poor’s Index fell by a third + in 2008—the largest single-year + +On line 6618: + Poor’s Index fell by + a third in 2008—the largest single-year + decline since 1974—as big + +On line 6618: + a third in 2008—the largest + single-year decline since 1974—as big + institutional + +On line 6618: + they perceived as safe. + Individuals felt these + effects not only + +On line 6618: + effects not only + in their current budgets but + also in their prospects + +On line 6618: + their current budgets + but also in their prospects for + retirement. By one + +On line 6618: + retirement. By one + calculation, assets in + retirement accounts + +On line 6618: + retirement accounts + such as 401(k)s lost trillion, or + about a third of their + +On line 6618: + 401(k)s lost trillion, or + about a third of their value, + between September + +On line 6618: + about a third of their + value, between September + and December While + +On line 6618: + their value, between + September and December + While the stock market + +On line 6618: + December While the + stock market has recovered + somewhat, the S&P as + +On line 6618: + the stock market has + recovered somewhat, the S&P + as of December + +On line 6620: + recovered somewhat, + the S&P as of December + was still about below + +On line 6620: + somewhat, the S&P as + of December was still about + below where it was + +On line 6620: + as of December + was still about below where it + was at the start of + +On line 6620: + was still about below + where it was at the start of + Similarly, stock + +On line 6620: + it was at the start + of Similarly, stock prices + worldwide plummeted + +On line 6620: + worldwide plummeted + more than in but rebounded + by in according + +On line 6620: + plummeted more than + in but rebounded by in + according to the + +On line 6620: + in but rebounded + by in according to the + MSCI World Index stock + +On line 6620: + but rebounded by + in according to the MSCI + World Index stock fund + +On line 6620: + rebounded by in + according to the MSCI World + Index stock fund (which + +On line 6620: + by in according + to the MSCI World Index stock + fund (which represents + +On line 6620: + in according to + the MSCI World Index stock fund + (which represents a + +On line 6622: + Index stock fund (which + represents a collection + of global stocks). The + +On line 6622: + fund (which represents + a collection of global + stocks). The financial + +On line 6622: + stocks). The financial + market fallout jeopardized + some public pension + +On line 6622: + fallout jeopardized + some public pension plans—many + of which were already + +On line 6622: + some public pension + plans—many of which were already + troubled before the + +On line 6622: + plans—many of which were + already troubled before the + crisis. In Colorado, + +On line 6622: + budget officials + warned that losses of billion, + unaddressed, could cause + +On line 6622: + and teachers—to go + bust in two decades. The state cut + retiree benefits + +On line 6622: + bust in two decades. The + state cut retiree benefits + to adjust for the + +On line 6622: + The state cut retiree + benefits to adjust for + the losses.10 Montana’s + +On line 6622: + public pension funds + lost billion, or a fourth of + their value, in the + +On line 6622: + lost billion, or a + fourth of their value, in the + six months following + +On line 6622: + billion, or a fourth + of their value, in the six + months following the + +On line 6622: + fourth of their value, + in the six months following + the downturn, in part + +On line 6622: + value, in the six + months following the downturn, + in part because of + +On line 6622: + six months following + the downturn, in part because + of investments in + +On line 6622: + in part because of + investments in complex Wall + Street securities.11 + +On line 6624: + in complex Wall Street + securities.11 Even before + the fall of consumer + +On line 6624: + securities.11 Even + before the fall of consumer + confidence had been + +On line 6624: + Even before the fall + of consumer confidence had + been on a downward + +On line 6624: + before the fall of + consumer confidence had been + on a downward slope + +On line 6624: + the fall of consumer + confidence had been on a + downward slope for months. + +On line 6624: + confidence had been + on a downward slope for months. + The Conference Board + +On line 6624: + been on a downward + slope for months. The Conference + Board reported in + +On line 6624: + on a downward slope + for months. The Conference Board + reported in May + +On line 6624: + The Conference Board + reported in May that its + measure of consumer + +On line 6624: + reported in May + that its measure of consumer + confidence fell to + +On line 6624: + May that its measure + of consumer confidence fell + to the lowest point + +On line 6624: + that its measure of + consumer confidence fell to + the lowest point since + +On line 6624: + confidence fell to + the lowest point since late By + early confidence + +On line 6624: + the lowest point since + late By early confidence + had plummeted to + +On line 6624: + lowest point since late + By early confidence had + plummeted to a + +On line 6624: + since late By early + confidence had plummeted + to a new low; it + +On line 6624: + plummeted to a + new low; it has recovered + somewhat since then but + +On line 6624: + to a new low; it + has recovered somewhat since + then but has remained + +On line 6626: + nobody willing to + make a decision. nobody + willing to take a + +On line 6626: + make a decision. + nobody willing to take a + chance, because of the + +On line 6626: + nobody willing to + take a chance, because of the + uncertainty in + +On line 6626: + in the economic + environment, and that goes + for both the state and + +On line 6626: + for both the state and + the federal level," the + commercial real + +On line 6626: + developer and + appraiser Gregory Bynum + testified at the + +On line 6628: + Bynum testified at + the FCIC’s Bakersfield hearing.14 + Influenced by the + +On line 6628: + the FCIC’s Bakersfield + hearing.14 Influenced by the + dramatic loss in + +On line 6628: + in wealth and by job + insecurity, households + have cut back on debt. + +On line 6628: + insecurity, + households have cut back on debt. + Total credit card + +On line 6628: + back on debt. Total + credit card debt expanded + every year for two + +On line 6628: + Total credit card + debt expanded every year + for two decades until + +On line 6628: + expanded every + year for two decades until it + peaked at billion at + +On line 6628: + for two decades until + it peaked at billion at the + end of Almost two + +On line 6628: + two decades until it + peaked at billion at the end + of Almost two years + +On line 6628: + peaked at billion at + the end of Almost two years + later, that total + +On line 6630: + end of Almost two + years later, that total had + fallen to billion. + +On line 6630: + later, that total + had fallen to billion. The + actions of banks have + +On line 6630: + total had fallen + to billion. The actions of + banks have also played + +On line 6630: + billion. The actions + of banks have also played an + important role: since + +On line 6630: + banks have also played + an important role: since they + have tightened lending + +On line 6630: + an important role: + since they have tightened lending + standards, reduced lines + +On line 6630: + standards, reduced lines + of credit on credit cards, + and increased fees and + +On line 6630: + lines of credit on + credit cards, and increased fees + and interest rates. + +On line 6630: + cards, and increased fees + and interest rates. In the + third quarter of of + +On line 6630: + and increased fees and + interest rates. In the third + quarter of of banks + +On line 6630: + and interest rates. + In the third quarter of of + banks imposed standards + +On line 6630: + interest rates. In + the third quarter of of banks + imposed standards on + +On line 6630: + In the third quarter + of of banks imposed standards + on credit cards that + +On line 6630: + the third quarter of + of banks imposed standards on + credit cards that were + +On line 6630: + quarter of of banks + imposed standards on credit + cards that were tighter than + +On line 6630: + of of banks imposed + standards on credit cards that + were tighter than those in + +On line 6630: + banks imposed standards + on credit cards that were tighter + than those in place in + +On line 6630: + imposed standards on + credit cards that were tighter than + those in place in the + +On line 6630: + credit cards that were + tighter than those in place in the + previous quarter. + +On line 6630: + that were tighter than those + in place in the previous + quarter. In the fourth + +On line 6630: + tighter than those in place + in the previous quarter. + In the fourth quarter, + +On line 6630: + than those in place in + the previous quarter. In + the fourth quarter, did + +On line 6630: + those in place in the + previous quarter. In the + fourth quarter, did so, + +On line 6630: + in the previous + quarter. In the fourth quarter, + did so, meaning that + +On line 6630: + previous quarter. + In the fourth quarter, did so, + meaning that many banks + +On line 6630: + quarter. In the fourth + quarter, did so, meaning that + many banks tightened again. + +On line 6632: + In the fourth quarter, + did so, meaning that many banks + tightened again. In fact, + +On line 6632: + did so, meaning that + many banks tightened again. In fact, + a significant + +On line 6632: + banks tightened credit + card standards quarter after + quarter until the + +On line 6632: + card standards quarter + after quarter until the + summer of Only + +On line 6632: + quarter until the + summer of Only in the + latest surveys have + +On line 6632: + until the summer + of Only in the latest + surveys have even a + +On line 6632: + summer of Only + in the latest surveys have + even a small numbers + +On line 6632: + of Only in the + latest surveys have even a + small numbers of banks + +On line 6632: + the latest surveys + have even a small numbers of + banks begun to loosen + +On line 6632: + latest surveys have + even a small numbers of banks + begun to loosen them.15 + +On line 6632: + surveys have even a + small numbers of banks begun + to loosen them.15 Faced with + +On line 6632: + even a small numbers + of banks begun to loosen them.15 + Faced with financial + +On line 6632: + of banks begun to + loosen them.15 Faced with financial + difficulties, over + +On line 6632: + to loosen them.15 Faced with + financial difficulties, + over million households + +On line 6634: + approximately + million in Together, the + decline in households’ + +On line 6634: + households’ financial + resources, banks’ tightening of + lending standards, and + +On line 6634: + financial resources, + banks’ tightening of lending + standards, and consumers’ + +On line 6634: + banks’ tightening of + lending standards, and consumers’ + lack of confidence + +On line 6634: + lending standards, and + consumers’ lack of confidence + have led to large cuts + +On line 6636: + of confidence have + led to large cuts in spending. + Consumer spending, which + +On line 6636: + have led to large cuts + in spending. Consumer spending, + which in the United + +On line 6636: + led to large cuts in + spending. Consumer spending, which + in the United States + +On line 6636: + large cuts in spending. + Consumer spending, which in the + United States makes up + +On line 6636: + in spending. Consumer + spending, which in the United + States makes up more than + +On line 6636: + Consumer spending, which + in the United States makes up + more than two-thirds of GDP, + +On line 6636: + spending, which in the + United States makes up more than + two-thirds of GDP, fell at + +On line 6636: + the United States makes + up more than two-thirds of GDP, fell + at an annual + +On line 6636: + United States makes up + more than two-thirds of GDP, fell at + an annual rate + +On line 6636: + up more than two-thirds of + GDP, fell at an annual + rate of roughly in + +On line 6636: + more than two-thirds of GDP, + fell at an annual rate + of roughly in the + +On line 6636: + of GDP, fell at an + annual rate of roughly + in the second half + +On line 6636: + an annual rate + of roughly in the second + half of and then fell + +On line 6636: + annual rate of + roughly in the second half + of and then fell again + +On line 6636: + rate of roughly in + the second half of and then + fell again in the first + +On line 6636: + of roughly in the + second half of and then fell + again in the first half + +On line 6636: + in the second half + of and then fell again in the + first half of Gains since + +On line 6636: + the second half of + and then fell again in the first + half of Gains since then + +On line 6636: + second half of and + then fell again in the first half + of Gains since then have + +On line 6636: + of and then fell again + in the first half of Gains since + then have been modest. + +On line 6636: + then fell again in the + first half of Gains since then have + been modest. Spending + +On line 6636: + fell again in the first + half of Gains since then have been + modest. Spending on + +On line 6636: + in the first half of + Gains since then have been modest. + Spending on cars and + +On line 6636: + first half of Gains since + then have been modest. Spending + on cars and trucks fell + +On line 6636: + half of Gains since then + have been modest. Spending on + cars and trucks fell by + +On line 6636: + of Gains since then have + been modest. Spending on cars + and trucks fell by an + +On line 6636: + been modest. Spending + on cars and trucks fell by an + extraordinary + +On line 6636: + on cars and trucks fell + by an extraordinary + between the end of + +On line 6636: + and trucks fell by an + extraordinary between + the end of and the + +On line 6638: + end of and the spring + of in part because consumer + financing was less + +On line 6638: + the spring of in part + because consumer financing + was less available as + +On line 6638: + of in part because + consumer financing was less + available as well as + +On line 6638: + part because consumer + financing was less available + as well as because + +On line 6638: + consumer financing + was less available as well as + because of job and + +On line 6640: + less available as well + as because of job and wage + losses. BUSINESSES: + +On line 6640: + as because of job + and wage losses. BUSINESSES: + "SQUIRRELS STORING NUTS" + +On line 6642: + losses. BUSINESSES: + "SQUIRRELS STORING NUTS" When the + financial panic + +On line 6642: + "SQUIRRELS STORING NUTS" + When the financial panic + hit in September + +On line 6642: + STORING NUTS" When the + financial panic hit in + September business + +On line 6642: + When the financial + panic hit in September + business financing + +On line 6642: + financial panic + hit in September business + financing dried up. + +On line 6642: + hit in September + business financing dried up. + Firms that could roll over + +On line 6642: + Firms that could roll over + their commercial paper faced + higher interest + +On line 6642: + commercial paper + faced higher interest rates + and shorter terms. Those + +On line 6642: + paper faced higher + interest rates and shorter + terms. Those that could not + +On line 6642: + higher interest + rates and shorter terms. Those that + could not roll over their + +On line 6642: + interest rates and + shorter terms. Those that could not + roll over their paper + +On line 6642: + rates and shorter terms. + Those that could not roll over their + paper relied on + +On line 6644: + their paper relied + on old-fashioned financing— + bank loans—or used their + +On line 6644: + paper relied on + old-fashioned financing— bank + loans—or used their own + +On line 6644: + bank loans—or used their + own cash reserves. Large firms, one + analyst said at + +On line 6644: + their own cash reserves. + Large firms, one analyst said + at the time, turned to + +On line 6644: + own cash reserves. Large + firms, one analyst said at + the time, turned to their + +On line 6644: + cash reserves. Large firms, + one analyst said at the + time, turned to their cash + +On line 6644: + one analyst said + at the time, turned to their cash + balances like "squirrels + +On line 6644: + time, turned to their cash + balances like "squirrels storing + nuts." Jeff Agosta, an + +On line 6644: + balances like "squirrels + storing nuts." Jeff Agosta, an + executive at + +On line 6644: + the government not + supported the commercial + paper market, "We + +On line 6644: + paper market, "We + would have been eating grasshoppers + and living in tents. + +On line 6644: + would have been eating + grasshoppers and living in tents. + Things could have been that + +On line 6644: + been eating grasshoppers + and living in tents. Things could + have been that bad."17 While + +On line 6644: + eating grasshoppers and + living in tents. Things could have + been that bad."17 While his + +On line 6644: + and living in tents. + Things could have been that bad."17 While + his expression was + +On line 6644: + tents. Things could have been + that bad."17 While his expression + was hyper-bolic, + +On line 6644: + Things could have been that + bad."17 While his expression was + hyper-bolic, the + +On line 6644: + While his expression + was hyper-bolic, the fear + was very real. The + +On line 6644: + his expression was + hyper-bolic, the fear was + very real. The lack + +On line 6644: + was hyper-bolic, + the fear was very real. The + lack of credit and + +On line 6644: + hyper-bolic, the + fear was very real. The lack + of credit and the + +On line 6644: + fear was very real. + The lack of credit and the + sharp drop in demand + +On line 6644: + was very real. The + lack of credit and the sharp + drop in demand took + +On line 6644: + very real. The lack + of credit and the sharp drop + in demand took its + +On line 6644: + real. The lack of + credit and the sharp drop in + demand took its toll + +On line 6644: + of credit and the + sharp drop in demand took its + toll on businesses. + +On line 6644: + credit and the sharp + drop in demand took its toll + on businesses. In + +On line 6644: + sharp drop in demand + took its toll on businesses. + In just under U.S. + +On line 6644: + on businesses. In + just under U.S. companies + filed for bankruptcy + +On line 6644: + U.S. companies filed + for bankruptcy protection. + That figure more than + +On line 6644: + companies filed for + bankruptcy protection. That + figure more than tripled + +On line 6644: + filed for bankruptcy + protection. That figure more + than tripled to nearly + +On line 6644: + That figure more than + tripled to nearly in Firms’ long-term + plans suddenly had + +On line 6644: + figure more than tripled + to nearly in Firms’ long-term plans + suddenly had to + +On line 6644: + to nearly in Firms’ + long-term plans suddenly had to + be reevaluated—the + +On line 6644: + suddenly had to + be reevaluated—the effects + of those decisions + +On line 6644: + decisions persist, + even though credit markets have + recovered somewhat. + +On line 6646: + though credit markets + have recovered somewhat. As + for the banks, by mid-2007 + +On line 6646: + credit markets have + recovered somewhat. As for + the banks, by mid-2007 they + +On line 6646: + somewhat. As for the + banks, by mid-2007 they had begun + to restrict access + +On line 6646: + for the banks, by mid-2007 + they had begun to restrict + access to credit + +On line 6646: + banks, by mid-2007 they had + begun to restrict access + to credit even for + +On line 6646: + begun to restrict + access to credit even for + large and medium-size + +On line 6646: + credit even for large + and medium-size businesses.19 + The Federal Open + +On line 6646: + The Federal Open + Market Committee noted + this tightening when + +On line 6646: + this tightening when + it announced on September + that it was cutting + +On line 6646: + tightening when it + announced on September that + it was cutting the + +On line 6646: + September that it + was cutting the federal + funds rate. After the + +On line 6646: + it was cutting the + federal funds rate. After + the Lehman bankruptcy, + +On line 6646: + federal funds rate. + After the Lehman bankruptcy, + companies such as + +On line 6646: + the Lehman bankruptcy, + companies such as Gannett + Corporation, FairPoint + +On line 6646: + companies such as + Gannett Corporation, FairPoint + Communications, + +On line 6646: + Corporation, FairPoint + Communications, and Duke + Energy drew down + +On line 6646: + Communications, + and Duke Energy drew down + their existing lines + +On line 6646: + and Duke Energy + drew down their existing lines + of credit because + +On line 6646: + Duke Energy drew + down their existing lines of + credit because they + +On line 6646: + their existing lines + of credit because they were + worried about getting + +On line 6646: + of credit because + they were worried about getting + shut out of credit + +On line 6648: + worried about getting + shut out of credit markets.20 + Without access to + +On line 6648: + about getting shut out + of credit markets.20 Without + access to credit, + +On line 6648: + access to credit, + with cash reserves dwindling, and + with uncertainty + +On line 6648: + cash reserves dwindling, + and with uncertainty about + the economy high, + +On line 6648: + about the economy + high, corporations laid off + workers or cut their + +On line 6648: + off workers or cut + their investments, inhibiting + growth and reducing + +On line 6648: + workers or cut their + investments, inhibiting growth + and reducing their + +On line 6648: + and reducing their + potential for improving + productivity. + +On line 6648: + U.S. companies were + somewhat or very affected + by credit constraints, + +On line 6648: + or very affected + by credit constraints, leading + to decisions to + +On line 6648: + very affected by + credit constraints, leading to + decisions to make + +On line 6648: + headlines chronicled + the problems: scarce capital + forced midsize firms to + +On line 6648: + such as Merck and + Wyeth; and tech companies alike + laid off employees + +On line 6648: + as Merck and Wyeth; + and tech companies alike laid + off employees as + +On line 6648: + Merck and Wyeth; and + tech companies alike laid off + employees as the + +On line 6648: + and tech companies + alike laid off employees as + the recession took + +On line 6648: + tech companies alike + laid off employees as the + recession took hold. + +On line 6648: + off employees as + the recession took hold. Some + businesses struggled + +On line 6648: + the recession took + hold. Some businesses struggled + to cover payrolls + +On line 6648: + recession took hold. + Some businesses struggled to + cover payrolls and + +On line 6648: + hold. Some businesses + struggled to cover payrolls + and the financing + +On line 6648: + struggled to cover + payrolls and the financing + of inventory. + +On line 6650: + paper market to + resume functioning at more + normal rates and terms. + +On line 6652: + market to resume + functioning at more normal + rates and terms. But even + +On line 6652: + functioning at more + normal rates and terms. But even + with the central bank’s + +On line 6652: + more normal rates and + terms. But even with the central + bank’s help, nearly of + +On line 6652: + normal rates and terms. + But even with the central bank’s + help, nearly of banks + +On line 6652: + terms. But even with the + central bank’s help, nearly of + banks tightened credit + +On line 6652: + with the central bank’s + help, nearly of banks tightened + credit standards and + +On line 6652: + bank’s help, nearly of + banks tightened credit standards + and lending in the + +On line 6652: + help, nearly of banks + tightened credit standards and + lending in the fourth + +On line 6652: + banks tightened credit + standards and lending in the + fourth quarter of And + +On line 6654: + employ nearly of + the country’s private-sector + workforce, "loans to small + +On line 6654: + to small businesses + are especially vital + to our economy," + +On line 6654: + are especially + vital to our economy," + Federal Reserve + +On line 6654: + Elizabeth Duke told + Congress early in Unlike + the larger firms, which + +On line 6654: + Congress early in + Unlike the larger firms, which + had come to rely + +On line 6654: + disrupted all these + sources, making credit more scarce + and more expensive. + +On line 6656: + sources, making credit + more scarce and more expensive. + In a survey of + +On line 6656: + making credit more + scarce and more expensive. In + a survey of small + +On line 6656: + expensive. In a + survey of small businesses + by the National + +On line 6656: + businesses by the + National Federation + of Independent + +On line 6656: + Federation of + Independent Business in + of respondents called + +On line 6656: + of Independent + Business in of respondents + called credit "harder + +On line 6656: + in of respondents + called credit "harder to get." + That figure compares + +On line 6656: + of respondents called + credit "harder to get." That + figure compares with + +On line 6658: + "harder to get." That + figure compares with in and + a previous peak, + +On line 6658: + That figure compares + with in and a previous + peak, at around during + +On line 6658: + figure compares with + in and a previous peak, + at around during the + +On line 6658: + compares with in and + a previous peak, at around + during the credit + +On line 6660: + a previous peak, + at around during the credit + crunch of Fed Chairman + +On line 6660: + previous peak, at + around during the credit crunch + of Fed Chairman Ben + +On line 6660: + at around during the + credit crunch of Fed Chairman + Ben Bernanke said in a + +On line 6660: + during the credit + crunch of Fed Chairman Ben Bernanke + said in a July + +On line 6660: + the credit crunch of + Fed Chairman Ben Bernanke said in + a July speech that + +On line 6660: + crunch of Fed Chairman + Ben Bernanke said in a July + speech that getting a + +On line 6660: + of Fed Chairman Ben + Bernanke said in a July speech + that getting a small + +On line 6660: + Ben Bernanke said in a + July speech that getting a + small business loan was + +On line 6660: + a small business loan + was still "very difficult." He + also noted that + +On line 6660: + business loan was still + "very difficult." He also + noted that banks’ loans + +On line 6660: + "very difficult." He + also noted that banks’ loans + to small businesses + +On line 6660: + also noted that + banks’ loans to small businesses + had dropped from more than + +On line 6660: + noted that banks’ loans + to small businesses had dropped + from more than billion + +On line 6660: + that banks’ loans to small + businesses had dropped from more + than billion in the + +On line 6660: + small businesses had + dropped from more than billion in + the second quarter + +On line 6660: + businesses had dropped + from more than billion in the + second quarter of + +On line 6662: + from more than billion + in the second quarter of + to less than billion + +On line 6662: + more than billion in + the second quarter of to + less than billion in + +On line 6662: + than billion in the + second quarter of to less + than billion in the + +On line 6662: + the second quarter + of to less than billion in + the first quarter of + +On line 6664: + than billion in the + first quarter of Another + factor—hesitancy + +On line 6664: + factor—hesitancy + to take on more debt in an + anemic economy—is + +On line 6664: + to take on more debt + in an anemic economy—is + certainly behind + +On line 6664: + behind some of the + statistics tracking lending + to small businesses. + +On line 6664: + statistics tracking + lending to small businesses. + Speaking on behalf + +On line 6664: + Bankers of America, + C. R. Cloutier, president + and CEO of Midsouth + +On line 6664: + of America, C. + R. Cloutier, president and + CEO of Midsouth Bank + +On line 6664: + America, C. R. + Cloutier, president and CEO + of Midsouth Bank in + +On line 6664: + Cloutier, president + and CEO of Midsouth Bank in + Lafayette, Louisiana, + +On line 6664: + of Midsouth Bank in + Lafayette, Louisiana, told the + FCIC, "Community + +On line 6664: + Midsouth Bank in Lafayette, + Louisiana, told the FCIC, + "Community banks + +On line 6664: + Lafayette, Louisiana, + told the FCIC, "Community + banks are willing to + +On line 6664: + Louisiana, told + the FCIC, "Community banks + are willing to lend. + +On line 6664: + FCIC, "Community + banks are willing to lend. That’s + how banks generate + +On line 6664: + "Community banks + are willing to lend. That’s how + banks generate a + +On line 6664: + are willing to lend. + That’s how banks generate a + return and survive. + +On line 6664: + to lend. That’s how banks + generate a return and + survive. However, + +On line 6664: + return and survive. + However, quality loan + demand is down. I + +On line 6664: + survive. However, + quality loan demand is + down. I can tell you + +On line 6664: + loan demand is down. + I can tell you from my own + bank’s experience, + +On line 6664: + I can tell you from + my own bank’s experience, + customers are scared about + +On line 6664: + customers are scared about + the economic climate and + are not borrowing. + +On line 6664: + borrowing. Credit + is available, but businesses + are not demanding + +On line 6666: + demanding it."26 Still, + creditworthy borrowers + seeking loans face tighter + +On line 6666: + Still, creditworthy + borrowers seeking loans face + tighter credit from banks + +On line 6666: + borrowers seeking + loans face tighter credit from banks + than they did before + +On line 6666: + seeking loans face tighter + credit from banks than they did + before the crisis, + +On line 6666: + loans face tighter credit + from banks than they did before + the crisis, surveys + +On line 6666: + face tighter credit from + banks than they did before the + crisis, surveys and + +On line 6666: + evidence suggest. + Historically, banks charged + a percentage point + +On line 6666: + Historically, + banks charged a percentage point + premium over their + +On line 6666: + a percentage point + premium over their funding + costs on business loans, + +On line 6666: + premium over their + funding costs on business loans, + but that premium + +On line 6666: + costs on business loans, + but that premium had hit + points by year-end and had + +On line 6666: + but that premium + had hit points by year-end and had + continued to rise + +On line 6668: + had hit points by year-end + and had continued to rise + in raising the costs + +On line 6668: + hit points by year-end and + had continued to rise in + raising the costs of + +On line 6670: + and had continued + to rise in raising the costs + of borrowing.27 Small + +On line 6670: + to rise in raising + the costs of borrowing.27 Small + businesses’ access + +On line 6670: + raising the costs of + borrowing.27 Small businesses’ + access to credit + +On line 6670: + also declined when + the housing market collapsed. + During the boom, many + +On line 6670: + the housing market + collapsed. During the boom, many + business owners had + +On line 6670: + During the boom, many + business owners had tapped the + rising equity + +On line 6670: + the boom, many business + owners had tapped the rising + equity in their + +On line 6670: + business owners had + tapped the rising equity + in their homes, taking + +On line 6670: + equity in their + homes, taking out low-interest + home equity loans. + +On line 6670: + home equity loans. + Seventeen percent of small + employers with a + +On line 6670: + Seventeen percent + of small employers with a + mortgage refinanced + +On line 6670: + of small employers + with a mortgage refinanced + it specifically + +On line 6670: + small employers with + a mortgage refinanced it + specifically to + +On line 6670: + housing prices declined, + their ability to use this + option was reduced + +On line 6670: + ability to use + this option was reduced or + blocked altogether + +On line 6670: + option was reduced + or blocked altogether by + the lenders. Jerry Jost + +On line 6670: + was reduced or blocked + altogether by the lenders. + Jerry Jost told the + +On line 6670: + blocked altogether + by the lenders. Jerry Jost told + the FCIC he borrowed + +On line 6670: + altogether by + the lenders. Jerry Jost told the + FCIC he borrowed against + +On line 6670: + by the lenders. Jerry + Jost told the FCIC he borrowed + against his home to help + +On line 6670: + the lenders. Jerry Jost + told the FCIC he borrowed against + his home to help is + +On line 6670: + Jerry Jost told the + FCIC he borrowed against his home + to help is daughter + +On line 6670: + Jost told the FCIC he + borrowed against his home to help + is daughter start a + +On line 6670: + he borrowed against his + home to help is daughter start + a bridal dress business + +On line 6670: + borrowed against his home + to help is daughter start a + bridal dress business in + +On line 6670: + daughter start a bridal + dress business in Bakersfield + several years ago. + +On line 6670: + his daughter’s business + languished. The Jost family + has exhausted its + +On line 6670: + Jost family has + exhausted its life savings + while struggling to find + +On line 6670: + its life savings while + struggling to find steady work and + reliable incomes.29 + +On line 6672: + reliable incomes.29 + The standards for credit card + loans, another source + +On line 6672: + standards for credit + card loans, another source of + financing for small + +On line 6672: + card loans, another + source of financing for small + businesses, also + +On line 6672: + source of financing + for small businesses, also + became more stringent. + +On line 6672: + financing for small + businesses, also became + more stringent. In the + +On line 6672: + businesses, also + became more stringent. In the + Fed’s April Senior Loan + +On line 6672: + became more stringent. + In the Fed’s April Senior Loan + Officer Survey, + +On line 6672: + the Fed’s April Senior + Loan Officer Survey, a + majority of + +On line 6672: + Officer Survey, + a majority of banks + indicated that + +On line 6672: + indicated that + their standards for approving + credit card accounts + +On line 6672: + small businesses were + tighter than "the longer-run average + level that prevailed + +On line 6672: + "the longer-run average + level that prevailed before + the crisis." Banks had + +On line 6672: + prevailed before the + crisis." Banks had continued + to tighten their terms + +On line 6672: + had continued to + tighten their terms on business + credit card loans to + +On line 6672: + to tighten their terms + on business credit card loans + to small businesses, + +On line 6672: + tighten their terms on + business credit card loans to + small businesses, for + +On line 6672: + to small businesses, + for both new and existing + accounts, since the end + +On line 6672: + businesses, for both + new and existing accounts, + since the end of But + +On line 6672: + new and existing + accounts, since the end of But + the July update + +On line 6672: + accounts, since the end + of But the July update + of the Fed survey + +On line 6672: + since the end of But + the July update of the + Fed survey showed the + +On line 6672: + the end of But the + July update of the Fed + survey showed the first + +On line 6672: + the July update + of the Fed survey showed the + first positive signs + +On line 6672: + July update of + the Fed survey showed the first + positive signs since + +On line 6672: + of the Fed survey + showed the first positive signs + since the end of that + +On line 6672: + the Fed survey showed + the first positive signs since + the end of that banks + +On line 6672: + Fed survey showed the + first positive signs since the + end of that banks were + +On line 6672: + the first positive + signs since the end of that banks + were easing up on + +On line 6672: + banks were easing up + on underwriting standards + for small businesses.31 + +On line 6674: + were easing up on + underwriting standards for + small businesses.31 In + +On line 6674: + on underwriting + standards for small businesses.31 + In an effort to + +On line 6674: + for small businesses.31 + In an effort to assist + small business lenders, the + +On line 6674: + In an effort to + assist small business lenders, the + Federal Reserve + +On line 6674: + assist small business + lenders, the Federal Reserve + in March created + +On line 6674: + small business lenders, the + Federal Reserve in March + created the Term + +On line 6674: + Federal Reserve + in March created the Term + Asset-Backed Securities + +On line 6674: + in March created + the Term Asset-Backed Securities + Loan Facility + +On line 6674: + March created the + Term Asset-Backed Securities Loan + Facility (TALF), + +On line 6674: + (TALF), a program to + aid securitization + of loans, including + +On line 6676: + loans, student loans, and + small business loans. Another + federal effort + +On line 6676: + aimed at improving + small businesses’ access to + credit was guidance + +On line 6676: + businesses’ access + to credit was guidance in + February from the + +On line 6676: + access to credit + was guidance in February + from the Federal + +On line 6676: + Federal Reserve + and other regulators, + advising banks to + +On line 6676: + Reserve and other + regulators, advising + banks to try to meet + +On line 6676: + advising banks to + try to meet the credit needs + of "creditworthy + +On line 6676: + to meet the credit + needs of "creditworthy small + business borrowers" + +On line 6676: + the credit needs of + "creditworthy small business + borrowers" with the + +On line 6676: + of "creditworthy + small business borrowers" with + the assurances that + +On line 6676: + borrowers" with the + assurances that government + supervisors would + +On line 6676: + the assurances that + government supervisors + would not hinder those + +On line 6678: + hinder those efforts. + Yet the prevailing headwinds + have been difficult + +On line 6678: + Yet the prevailing + headwinds have been difficult + to overcome. Without + +On line 6678: + have been difficult + to overcome. Without access + to credit, many small + +On line 6678: + to overcome. Without + access to credit, many small + businesses that had + +On line 6678: + Without access to + credit, many small businesses + that had depleted + +On line 6678: + access to credit, + many small businesses that had + depleted their cash + +On line 6678: + many small businesses + that had depleted their cash + reserves had trouble + +On line 6678: + businesses that had + depleted their cash reserves + had trouble paying + +On line 6678: + depleted their cash + reserves had trouble paying + bills, and bankruptcies + +On line 6678: + reserves had trouble + paying bills, and bankruptcies + and loan defaults rose. + +On line 6678: + had trouble paying + bills, and bankruptcies and loan + defaults rose. Defaults + +On line 6678: + bills, and bankruptcies + and loan defaults rose. Defaults + on small business loans + +On line 6678: + bankruptcies and loan + defaults rose. Defaults on small + business loans increased + +On line 6678: + and loan defaults rose. + Defaults on small business loans + increased to in from + +On line 6678: + rose. Defaults on small + business loans increased to in + from in Overall, the + +On line 6678: + business loans increased + to in from in Overall, the + current state of the + +On line 6678: + increased to in from + in Overall, the current state + of the small business + +On line 6678: + in from in Overall, + the current state of the small + business sector is + +On line 6678: + current state of the + small business sector is a + critical factor + +On line 6678: + business sector is + a critical factor in + the struggling labor + +On line 6678: + market: ailing small + businesses have laid people + off in large numbers, + +On line 6678: + have laid people off + in large numbers, and stronger small + businesses are not + +On line 6682: + paper, were constrained + as well. The business finance + company CIT Group + +On line 6682: + constrained as well. The + business finance company + CIT Group Inc. was one + +On line 6682: + as well. The business + finance company CIT Group + Inc. was one such firm. + +On line 6682: + was one such firm. Even + billion in additional + capital support + +On line 6682: + in additional + capital support from the + federal Troubled + +On line 6682: + federal Troubled + Asset Relief Program (TARP) + program did not save + +On line 6682: + save CIT from filing + for bankruptcy protection + in November Still, + +On line 6682: + CIT from filing for + bankruptcy protection in + November Still, some + +On line 6682: + in November Still, + some active lenders to smaller + businesses, such as + +On line 6682: + Still, some active lenders + to smaller businesses, such + as GE Capital, + +On line 6682: + some active lenders to + smaller businesses, such as + GE Capital, a + +On line 6682: + smaller businesses, + such as GE Capital, a + commercial lender with + +On line 6682: + with a focus on + middle-market customers, were + able to continue + +On line 6682: + offer financing. + GE Capital’s commercial + paper borrowing + +On line 6684: + commercial paper + borrowing fared better than + others’.33 Nonetheless, + +On line 6684: + of the company’s + borrowing did worsen. In + it registered to + +On line 6684: + it registered to + borrow up to billion in + commercial paper + +On line 6684: + up to billion in + commercial paper through one + government program + +On line 6684: + commercial paper + through one government program + and issued billion + +On line 6684: + government program + and issued billion in long-term + debt and billion in + +On line 6684: + and issued billion + in long-term debt and billion in + commercial paper + +On line 6684: + debt and billion in + commercial paper under + another program.34 + +On line 6684: + commercial paper + under another program.34 + That GE Capital + +On line 6684: + under another + program.34 That GE Capital + had trimmed commercial + +On line 6684: + another program.34 + That GE Capital had trimmed + commercial paper + +On line 6684: + That GE Capital + had trimmed commercial paper + before the crisis + +On line 6684: + Capital had trimmed + commercial paper before + the crisis to less + +On line 6684: + had trimmed commercial + paper before the crisis + to less than of its + +On line 6684: + commercial paper + before the crisis to less + than of its total + +On line 6684: + paper before the + crisis to less than of its + total debt, or about + +On line 6684: + before the crisis + to less than of its total + debt, or about billion, + +On line 6684: + the crisis to less + than of its total debt, or + about billion, also + +On line 6684: + to less than of its + total debt, or about billion, + also softened the + +On line 6684: + than of its total + debt, or about billion, also + softened the effects + +On line 6684: + its total debt, or + about billion, also softened + the effects of the + +On line 6684: + debt, or about billion, + also softened the effects + of the crisis on + +On line 6684: + also softened the + effects of the crisis on + the company. "A + +On line 6684: + the effects of the + crisis on the company. + "A decision was + +On line 6684: + the crisis on the + company. "A decision + was made that it would + +On line 6684: + on the company. + "A decision was made that + it would be prudent + +On line 6684: + the company. "A + decision was made that it + would be prudent for + +On line 6684: + "A decision was + made that it would be prudent + for us to reduce + +On line 6684: + decision was made + that it would be prudent for + us to reduce our + +On line 6684: + made that it would be + prudent for us to reduce + our reliance on the + +On line 6684: + would be prudent for + us to reduce our reliance + on the commercial + +On line 6684: + prudent for us to + reduce our reliance on the + commercial paper + +On line 6684: + us to reduce our + reliance on the commercial + paper market, and + +On line 6684: + reduce our reliance + on the commercial paper + market, and we did," + +On line 6684: + on the commercial + paper market, and we did," + Mark Barber, the deputy + +On line 6684: + paper market, and + we did," Mark Barber, the deputy + treasurer of GE + +On line 6684: + we did," Mark Barber, + the deputy treasurer of GE + Company and GE + +On line 6684: + the deputy treasurer + of GE Company and GE + Capital, told the + +On line 6688: + of GE Company + and GE Capital, told the + Commission. The firm + +On line 6688: + and GE Capital, + told the Commission. The firm + put more than billion + +On line 6688: + GE Capital, told + the Commission. The firm put + more than billion in + +On line 6688: + Capital, told the + Commission. The firm put more + than billion in cash + +On line 6688: + the Commission. The + firm put more than billion in + cash on its balance + +On line 6688: + Commission. The firm + put more than billion in cash + on its balance sheet, + +On line 6688: + more than billion in + cash on its balance sheet, with + billion in back-up + +On line 6688: + billion in cash on + its balance sheet, with billion + in back-up bank lines + +On line 6688: + cash on its balance + sheet, with billion in back-up + bank lines of credit, + +On line 6688: + on its balance sheet, + with billion in back-up bank + lines of credit, if + +On line 6690: + in back-up bank lines + of credit, if needed.35 The + decline in global + +On line 6690: + bank lines of credit, + if needed.35 The decline in + global trade also + +On line 6690: + credit, if needed.35 + The decline in global trade + also hurt the U.S. + +On line 6690: + needed.35 The decline + in global trade also hurt + the U.S. economy + +On line 6690: + global trade also + hurt the U.S. economy as + well as economies across the + +On line 6690: + trade also hurt the + U.S. economy as well as + economies across the world. As + +On line 6690: + also hurt the U.S. + economy as well as economies + across the world. As the + +On line 6690: + the U.S. economy + as well as economies across the world. + As the financial + +On line 6690: + economy as well + as economies across the world. As the + financial crisis + +On line 6690: + as economies across the world. + As the financial crisis + peaked in Europe and + +On line 6690: + economies across the world. As + the financial crisis peaked + in Europe and the + +On line 6690: + in Europe and the + United States, exports collapsed + in nearly every + +On line 6690: + States, exports collapsed + in nearly every major + trading country.36 The + +On line 6690: + in nearly every + major trading country.36 The + decline in exports + +On line 6690: + trading country.36 The + decline in exports shaved more + than percentage points + +On line 6690: + decline in exports + shaved more than percentage points + off GDP growth in the + +On line 6690: + in exports shaved more + than percentage points off GDP + growth in the third and + +On line 6690: + exports shaved more than + percentage points off GDP growth + in the third and fourth + +On line 6690: + more than percentage + points off GDP growth in the third + and fourth quarters of + +On line 6692: + points off GDP growth in + the third and fourth quarters of + Recently, exports + +On line 6692: + growth in the third and + fourth quarters of Recently, + exports have begun + +On line 6692: + Recently, exports + have begun to recover, + and as of the fall + +On line 6692: + exports have begun + to recover, and as of + the fall of they are + +On line 6692: + to recover, and + as of the fall of they are + back near precrisis + +On line 6694: + as of the fall of + they are back near precrisis + levels.37 COMMERCIAL + +On line 6694: + the fall of they are + back near precrisis levels.37 + COMMERCIAL REAL + +On line 6696: + MOVING" Commercial + real estate—offices, + stores, warehouses—also + +On line 6696: + took a pounding, an + indicator both of the + sector’s reliance on + +On line 6696: + indicator both + of the sector’s reliance on + the lending markets, + +On line 6696: + the sector’s reliance + on the lending markets, which + were impaired by the + +On line 6696: + lending markets, which + were impaired by the crisis, + and of its role as + +On line 6696: + which were impaired by + the crisis, and of its role + as a barometer + +On line 6696: + were impaired by the + crisis, and of its role as + a barometer of + +On line 6696: + as a barometer + of business activity. + Companies do not + +On line 6696: + Companies do not + need more space if they go out + of business, lay off + +On line 6696: + do not need more space + if they go out of business, + lay off workers, or + +On line 6696: + need more space if they + go out of business, lay off + workers, or decide + +On line 6696: + space if they go out + of business, lay off workers, + or decide not to + +On line 6696: + go out of business, + lay off workers, or decide + not to expand. Weak + +On line 6696: + of business, lay off + workers, or decide not to + expand. Weak demand, + +On line 6696: + workers, or decide + not to expand. Weak demand, + in turn, lowers rents + +On line 6696: + or decide not to + expand. Weak demand, in turn, + lowers rents and forces + +On line 6696: + not to expand. Weak + demand, in turn, lowers rents + and forces landlords to + +On line 6696: + expand. Weak demand, + in turn, lowers rents and forces + landlords to give their + +On line 6696: + turn, lowers rents and + forces landlords to give their big + tenants incentives + +On line 6696: + give their big tenants + incentives to stay put. One + example: two huge + +On line 6696: + example: two huge + real estate brokerages + with headquarters in + +On line 6696: + estate brokerages + with headquarters in New York + City received nine months’ + +On line 6696: + with headquarters in + New York City received nine months’ + free rent for signing + +On line 6698: + New York City received + nine months’ free rent for signing + leases in and In + +On line 6698: + for signing leases + in and In fall commercial + vacancy rates were + +On line 6698: + leases in and In + fall commercial vacancy + rates were still sky-high, with + +On line 6698: + In fall commercial + vacancy rates were still sky-high, + with of all office + +On line 6698: + vacancy rates were + still sky-high, with of all office + space unoccupied. + +On line 6698: + still sky-high, with of all + office space unoccupied. + And the actual + +On line 6698: + with of all office + space unoccupied. And the + actual rate is + +On line 6700: + "shadow vacancies"—a + couple of desks here, part of + a floor there—that tenants + +On line 6700: + vacancies"—a couple + of desks here, part of a floor + there—that tenants must fill + +On line 6700: + of desks here, part of + a floor there—that tenants must fill + before demand picks + +On line 6700: + here, part of a floor + there—that tenants must fill before + demand picks back up. + +On line 6700: + floor there—that tenants must + fill before demand picks back + up. In the absence + +On line 6700: + there—that tenants must fill + before demand picks back up. + In the absence of + +On line 6700: + before demand picks + back up. In the absence of + demand, banks remain + +On line 6700: + absence of demand, + banks remain unwilling to + lend to all but the + +On line 6700: + remain unwilling + to lend to all but the safest + projects involving the + +On line 6700: + to lend to all but + the safest projects involving the + most creditworthy + +On line 6700: + their bad properties, + creating a log jam," one + developer told + +On line 6702: + moving."39 In Nevada, + where tourism and construction once + fed the labor force, + +On line 6702: + construction once fed + the labor force, commercial + property took a + +On line 6702: + fed the labor force, + commercial property took + a huge hit. Office + +On line 6702: + property took a + huge hit. Office vacancies + in Las Vegas are + +On line 6702: + a huge hit. Office + vacancies in Las Vegas + are now hovering + +On line 6704: + vacancies in Las + Vegas are now hovering + around compared with their + +On line 6704: + Las Vegas are now + hovering around compared with + their low of midway + +On line 6704: + their low of midway + through Vacancies in retail + commercial space in + +On line 6704: + in Las Vegas top + compared with historical + vacancy rates of + +On line 6706: + with historical + vacancy rates of to The + economic downturn + +On line 6706: + economic downturn + tugged national-brand retailers + into bankruptcy, + +On line 6706: + retailers into + bankruptcy, emptying out + the anchor retail + +On line 6706: + into bankruptcy, + emptying out the anchor + retail space in Nevada’s + +On line 6706: + the anchor retail + space in Nevada’s malls and shopping + centers. As demand + +On line 6706: + retail space in Nevada’s + malls and shopping centers. As + demand for vacant + +On line 6706: + centers. As demand + for vacant property fell, + land values in and + +On line 6708: + land values in and + around Las Vegas plummeted.40 + Because lenders were still + +On line 6708: + and around Las Vegas + plummeted.40 Because lenders were + still reluctant, few + +On line 6708: + few developers + nationally could afford + to build or buy, right + +On line 6708: + nationally could + afford to build or buy, right + into the fall of + +On line 6708: + could afford to build + or buy, right into the fall + of Lehman’s bankruptcy + +On line 6708: + afford to build or + buy, right into the fall of + Lehman’s bankruptcy meant + +On line 6708: + right into the fall + of Lehman’s bankruptcy meant that + Monday Properties + +On line 6708: + of Lehman’s bankruptcy + meant that Monday Properties + came up short in its + +On line 6708: + bankruptcy meant that + Monday Properties came up + short in its efforts + +On line 6708: + Monday Properties + came up short in its efforts + to build a million, + +On line 6708: + in its efforts to + build a million, 35-story + glass office tower + +On line 6708: + its efforts to build + a million, 35-story glass + office tower in + +On line 6708: + across the river from + Washington, D.C. Potential + tenants wanted to + +On line 6708: + the developer + had financing; potential + lenders wanted to know + +On line 6708: + developer had + financing; potential lenders + wanted to know if + +On line 6708: + to know if it had + tenants. "It’s a bit of a + cart-and-horse situation," + +On line 6708: + tenants. "It’s a bit + of a cart-and-horse situation," + said CEO Anthony + +On line 6708: + "It’s a bit of a + cart-and-horse situation," said CEO + Anthony Westreich, + +On line 6708: + cart-and-horse situation," + said CEO Anthony Westreich, + who in October + +On line 6708: + situation," said + CEO Anthony Westreich, who + in October took + +On line 6708: + said CEO Anthony + Westreich, who in October + took the big risk of + +On line 6708: + Anthony Westreich, + who in October took the + big risk of starting + +On line 6708: + who in October + took the big risk of starting + construction on the + +On line 6708: + took the big risk of + starting construction on the + building without signed + +On line 6708: + big risk of starting + construction on the building + without signed tenants + +On line 6708: + institutions put + commercial real estate + developers and + +On line 6708: + commercial real + estate developers and + commercial landlords + +On line 6708: + developers and + commercial landlords in binds + when overex-tended banks + +On line 6708: + commercial landlords + in binds when overex-tended banks + suddenly pulled out + +On line 6708: + suddenly pulled out + of commercial construction + loans. And when banks ailed + +On line 6708: + out of commercial + construction loans. And when banks + ailed and were taken + +On line 6708: + loans. And when banks ailed + and were taken over by the + Federal Deposit + +On line 6708: + Federal Deposit + Insurance Commission, the + commercial landlords + +On line 6708: + commercial landlords + overnight lost major bank tenants + and the long-term leases + +On line 6708: + overnight lost major bank + tenants and the long-term leases + that went with them.42 In + +On line 6708: + bank tenants and the + long-term leases that went with them.42 + In California, + +On line 6708: + tenants and the long-term + leases that went with them.42 In + California, at + +On line 6708: + long-term leases that went + with them.42 In California, + at least banks have failed + +On line 6708: + leases that went with + them.42 In California, at + least banks have failed since + +On line 6710: + that went with them.42 In + California, at least banks + have failed since Almost + +On line 6710: + California, at + least banks have failed since Almost + half of commercial + +On line 6710: + least banks have failed since + Almost half of commercial + real estate loans + +On line 6710: + real estate loans + were underwater as of + February meaning + +On line 6710: + were underwater + as of February meaning + the loans were larger + +On line 6710: + underwater as + of February meaning the + loans were larger than + +On line 6710: + February meaning + the loans were larger than the + market value of + +On line 6710: + market value of + the property. Commercial + real estate loans + +On line 6712: + commercial mortgages + were also securitized, + and by August the + +On line 6712: + securitized, and + by August the delinquency + rate on these packaged + +On line 6712: + the delinquency rate + on these packaged mortgages neared + 9%—the highest in the + +On line 6712: + rate on these packaged + mortgages neared 9%—the highest in + the history of + +On line 6712: + the industry and + an ominous sign for real + estate a full two + +On line 6712: + and an ominous sign + for real estate a full + two years after the + +On line 6712: + an ominous sign for + real estate a full two + years after the height + +On line 6712: + real estate a + full two years after the height + of the financial + +On line 6712: + estate a full two + years after the height of the + financial storm.45 At + +On line 6712: + full two years after + the height of the financial + storm.45 At the end of + +On line 6712: + two years after the + height of the financial storm.45 + At the end of the + +On line 6712: + after the height of + the financial storm.45 At the + end of the default + +On line 6714: + the financial storm.45 + At the end of the default + rate had been Near the + +On line 6714: + financial storm.45 At + the end of the default rate + had been Near the end + +On line 6714: + storm.45 At the end of + the default rate had been Near + the end of it was + +On line 6714: + At the end of the + default rate had been Near the + end of it was not + +On line 6714: + end of the default + rate had been Near the end of + it was not at all + +On line 6714: + of the default rate + had been Near the end of it + was not at all clear + +On line 6714: + the default rate had + been Near the end of it was + not at all clear when + +On line 6714: + default rate had been + Near the end of it was not + at all clear when or + +On line 6714: + rate had been Near the + end of it was not at all + clear when or even if + +On line 6714: + had been Near the end + of it was not at all clear + when or even if the + +On line 6714: + the end of it was + not at all clear when or even + if the commercial + +On line 6714: + of it was not at + all clear when or even if the + commercial real + +On line 6714: + all clear when or even + if the commercial real + estate market had + +On line 6714: + if the commercial + real estate market had + hit bottom. Green Street + +On line 6714: + had hit bottom. Green + Street Advisors of Newport + Beach, California, + +On line 6714: + hit bottom. Green Street + Advisors of Newport Beach, + California, which + +On line 6714: + tracks real estate + investment trusts, believed that + it reached its nadir in + +On line 6716: + estate investment + trusts, believed that it reached its + nadir in mid- About half + +On line 6716: + believed that it reached + its nadir in mid- About half of + the decline between + +On line 6716: + it reached its nadir in + mid- About half of the decline + between and has been + +On line 6716: + nadir in mid- About half + of the decline between and + has been recovered, + +On line 6716: + between and has been + recovered, according to + Mike Kirby, Green Street’s + +On line 6716: + has been recovered, + according to Mike Kirby, + Green Street’s director + +On line 6718: + Green Street’s director + of research. "Nevertheless," + Kirby added, "values + +On line 6718: + added, "values remain + roughly shy of their peak."47 That’s + one perspective. On + +On line 6718: + roughly shy of their + peak."47 That’s one perspective. On + the other side, Moody’s + +On line 6718: + one perspective. On + the other side, Moody’s Investors + Service, whose REAL + +On line 6718: + Service, whose REAL + Commercial Property Price + Index tracks sales of + +On line 6718: + REAL Commercial + Property Price Index tracks + sales of commercial + +On line 6718: + Price Index tracks sales + of commercial buildings, says + it is too early + +On line 6718: + Index tracks sales of + commercial buildings, says it + is too early to + +On line 6718: + buildings, says it is + too early to make a call. + Moody’s detected some + +On line 6718: + too early to make + a call. Moody’s detected some + signs of a pickup + +On line 6718: + early to make a + call. Moody’s detected some signs + of a pickup in + +On line 6718: + to make a call. Moody’s + detected some signs of a + pickup in the spring + +On line 6718: + call. Moody’s detected + some signs of a pickup in + the spring and fall of + +On line 6718: + Moody’s detected some + signs of a pickup in the + spring and fall of and + +On line 6718: + the spring and fall of + and Managing Director + Nick Levidy said, "We + +On line 6718: + real estate prices + to remain choppy until + transaction volumes + +On line 6718: + transaction volumes + pick up."48 The largest commercial + real estate loan + +On line 6718: + The largest commercial + real estate loan losses + are projected for + +On line 6718: + are projected for + and beyond, according to + a report issued + +On line 6718: + projected for and + beyond, according to a + report issued by + +On line 6718: + beyond, according + to a report issued by + the Congressional + +On line 6718: + report issued by + the Congressional Oversight + Panel.49 And, looking + +On line 6718: + Panel.49 And, looking + forward, nearly billion in + commercial real + +On line 6718: + nearly billion in + commercial real estate + debt will come due from + +On line 6720: + commercial real + estate debt will come due from + through GOVERNMENT: "STATES + +On line 6720: + debt will come due from + through GOVERNMENT: "STATES STRUGGLED + TO CLOSE SHORTFALLS" State + +On line 6720: + will come due from through + GOVERNMENT: "STATES STRUGGLED TO + CLOSE SHORTFALLS" State and + +On line 6722: + companies and their + workers but also state and + local governments + +On line 6722: + but also state and + local governments that saw + their tax revenue fall—just + +On line 6722: + local governments + that saw their tax revenue fall—just + when people who had + +On line 6722: + saw their tax revenue + fall—just when people who had lost + their jobs, or were in + +On line 6722: + were in bankruptcy + or foreclosure proceedings, + were demanding more + +On line 6722: + services included + Medicaid, unemployment + compensation, and + +On line 6722: + compensation, and + wel-fare, in addition to + local assistance + +On line 6722: + mental health care, for + children, and for the homeless. + "At least states struggled + +On line 6722: + health care, for children, + and for the homeless. "At least + states struggled to close + +On line 6722: + children, and for the + homeless. "At least states struggled + to close shortfalls when + +On line 6722: + and for the homeless. + "At least states struggled to close + shortfalls when adopting + +On line 6722: + the homeless. "At least + states struggled to close shortfalls + when adopting budgets + +On line 6722: + homeless. "At least states + struggled to close shortfalls when + adopting budgets for + +On line 6722: + current fiscal year," + recently reported the + Center on Budget + +On line 6724: + Washington think tank.51 + "A critical aspect of + our situation + +On line 6724: + our situation + in Sacramento and throughout + the state is that these + +On line 6724: + in Sacramento and + throughout the state is that these + increased demands for + +On line 6724: + the state is that these + increased demands for services + are occurring at + +On line 6724: + increased demands for + services are occurring at + a time that resources + +On line 6726: + occurring at a + time that resources are being + dramatically + +On line 6726: + time that resources are + being dramatically + reduced," Bruce Wagstaff, the + +On line 6726: + resources are being + dramatically reduced," + Bruce Wagstaff, the agency + +On line 6726: + dramatically + reduced," Bruce Wagstaff, the agency + administrator + +On line 6728: + Commission.52 Unlike + the federal government, + almost every state + +On line 6728: + almost every state + is constitutionally + required to produce + +On line 6728: + produce a balanced + budget, so running a deficit + is not an option. + +On line 6728: + a balanced budget, + so running a deficit is not + an option. Sujit + +On line 6728: + balanced budget, so + running a deficit is not an + option. Sujit CanagaRetna, + +On line 6728: + running a deficit is + not an option. Sujit CanagaRetna, + a senior fiscal + +On line 6728: + a senior fiscal + analyst with the Council + of State Governments, + +On line 6728: + analyst with the + Council of State Governments, + told the FCIC that the + +On line 6728: + the Council of State + Governments, told the FCIC that + the budget shortfalls + +On line 6728: + of State Governments, + told the FCIC that the budget + shortfalls facing the + +On line 6728: + Governments, told the + FCIC that the budget shortfalls + facing the states "are + +On line 6728: + told the FCIC that the + budget shortfalls facing the + states "are staggering + +On line 6728: + FCIC that the budget + shortfalls facing the states "are + staggering numbers. + +On line 6728: + shortfalls facing the + states "are staggering numbers. + It’s not just the big + +On line 6728: + facing the states "are + staggering numbers. It’s not + just the big states; it’s + +On line 6728: + states "are staggering + numbers. It’s not just the big + states; it’s almost all + +On line 6728: + staggering numbers. + It’s not just the big states; it’s + almost all states." He + +On line 6728: + numbers. It’s not just + the big states; it’s almost all + states." He said the "great + +On line 6728: + just the big states; it’s + almost all states." He said the + "great transformation" + +On line 6728: + almost all states." He + said the "great transformation" + occurring in state + +On line 6728: + states." He said the "great + transformation" occurring + in state finances means + +On line 6728: + "great transformation" + occurring in state finances + means states are forced to + +On line 6728: + occurring in state + finances means states are forced to + "reorient their whole + +On line 6728: + in state finances means + states are forced to "reorient + their whole stance vis a + +On line 6728: + state finances means states + are forced to "reorient their + whole stance vis a vis + +On line 6728: + finances means states are + forced to "reorient their whole + stance vis a vis the + +On line 6728: + means states are forced to + "reorient their whole stance vis + a vis the kind of + +On line 6728: + forced to "reorient + their whole stance vis a vis the + kind of programs and + +On line 6728: + "reorient their whole + stance vis a vis the kind of + programs and services + +On line 6728: + their whole stance vis a + vis the kind of programs and + services they offer + +On line 6728: + the kind of programs + and services they offer their + citizens."53 In the + +On line 6728: + programs and services + they offer their citizens."53 + In the fiscal year + +On line 6728: + citizens."53 In the + fiscal year alone, which started + July states must come + +On line 6728: + the fiscal year alone, + which started July states must + come up with billion + +On line 6728: + fiscal year alone, which + started July states must come + up with billion in + +On line 6728: + year alone, which started + July states must come up with + billion in savings + +On line 6728: + which started July + states must come up with billion + in savings or new + +On line 6728: + July states must come + up with billion in savings + or new revenue to + +On line 6728: + states must come up with + billion in savings or new + revenue to balance + +On line 6728: + up with billion in + savings or new revenue to + balance their budgets, + +On line 6728: + billion in savings + or new revenue to balance + their budgets, one study + +On line 6728: + or new revenue to + balance their budgets, one study + estimated.54 By + +On line 6728: + balance their budgets, + one study estimated.54 By + the fall of there was + +On line 6728: + their budgets, one study + estimated.54 By the fall + of there was some good + +On line 6728: + study estimated.54 + By the fall of there was some + good news: revenue from + +On line 6728: + estimated.54 By + the fall of there was some good + news: revenue from some + +On line 6728: + By the fall of there + was some good news: revenue from + some taxes and fees + +On line 6728: + the fall of there was + some good news: revenue from some + taxes and fees in + +On line 6728: + of there was some good + news: revenue from some taxes + and fees in some states + +On line 6728: + there was some good news: + revenue from some taxes and + fees in some states had + +On line 6728: + some good news: revenue + from some taxes and fees in + some states had started + +On line 6728: + good news: revenue from + some taxes and fees in some + states had started to + +On line 6728: + news: revenue from some + taxes and fees in some states + had started to pick + +On line 6728: + from some taxes and + fees in some states had started + to pick up, or at + +On line 6728: + some taxes and fees + in some states had started to + pick up, or at least + +On line 6728: + taxes and fees in + some states had started to pick + up, or at least slowed + +On line 6728: + and fees in some states + had started to pick up, or + at least slowed their rate + +On line 6728: + fees in some states had + started to pick up, or at + least slowed their rate of + +On line 6728: + some states had started + to pick up, or at least slowed + their rate of decline.55 + +On line 6730: + states had started to + pick up, or at least slowed their + rate of decline.55 In + +On line 6730: + had started to pick + up, or at least slowed their rate + of decline.55 In a + +On line 6730: + to pick up, or at + least slowed their rate of decline.55 + In a September + +On line 6730: + up, or at least slowed + their rate of decline.55 In a + September report, + +On line 6730: + Conference of State + Legislatures declared that + the states "are waiting + +On line 6730: + the states "are waiting + to see if the economy + will sustain this nascent + +On line 6730: + waiting to see if + the economy will sustain + this nascent revenue growth. + +On line 6730: + the economy will + sustain this nascent revenue growth. + And despite recent + +On line 6730: + this nascent revenue growth. + And despite recent revenue + improvements, more gaps + +On line 6730: + And despite recent + revenue improvements, more gaps + loom as states confront + +On line 6730: + improvements, more gaps + loom as states confront the phase + out of federal + +On line 6730: + confront the phase out + of federal stimulus + funds, expiring tax + +On line 6730: + out of federal + stimulus funds, expiring + tax increases and + +On line 6732: + tax increases and + growing spending pressures."56 Some + states were hit harder + +On line 6732: + particularly + affected by the crisis + or because they came + +On line 6732: + affected by the + crisis or because they came + into the crisis + +On line 6732: + by the crisis or + because they came into the + crisis with structural + +On line 6732: + crisis or because + they came into the crisis + with structural budget + +On line 6732: + budget problems. In + New Jersey Governor Chris + Christie proposed chopping + +On line 6732: + chopping billion—or a + quarter—of the state budget to + eliminate a deficit. + +On line 6732: + a quarter—of the state + budget to eliminate a + deficit. California + +On line 6732: + deficit. California + officials struggled through the + summer and fall to + +On line 6732: + the summer and fall + to close a billion shortfall, + an amount larger than + +On line 6732: + summer and fall to + close a billion shortfall, an + amount larger than the + +On line 6732: + to close a billion + shortfall, an amount larger than + the entire budgets + +On line 6732: + billion shortfall, an + amount larger than the entire + budgets of some states. + +On line 6732: + an amount larger than + the entire budgets of some + states. Nonetheless, the + +On line 6732: + amount larger than the + entire budgets of some states. + Nonetheless, the state’s + +On line 6732: + the entire budgets + of some states. Nonetheless, the + state’s independent + +On line 6732: + states. Nonetheless, the + state’s independent budget + analysis office + +On line 6732: + state’s independent + budget analysis office + said in November + +On line 6732: + analysis office + said in November that the + deficit had instead grown + +On line 6732: + said in November + that the deficit had instead grown + to billion—$6 billion + +On line 6732: + in November that + the deficit had instead grown to + billion—$6 billion in + +On line 6732: + the deficit had instead + grown to billion—$6 billion in + the billion budget + +On line 6732: + deficit had instead grown + to billion—$6 billion in the + billion budget for + +On line 6732: + to billion—$6 billion + in the billion budget for + this year and billion + +On line 6732: + billion—$6 billion in + the billion budget for this + year and billion in + +On line 6732: + budget for this year + and billion in the fiscal + year commencing in + +On line 6732: + year and billion in + the fiscal year commencing + in June As people + +On line 6732: + and billion in the + fiscal year commencing in + June As people lost + +On line 6732: + year commencing in + June As people lost jobs, many + also lost their health + +On line 6732: + June As people lost + jobs, many also lost their health + insurance, helping + +On line 6732: + also lost their health + insurance, helping to drive + million Americans + +On line 6734: + Americans into + the Medicaid program in + alone, an increase—the largest + +On line 6734: + Medicaid program + in alone, an increase—the largest in + a single year since + +On line 6734: + program in alone, an + increase—the largest in a single + year since the early + +On line 6734: + in alone, an increase—the + largest in a single year since + the early days of + +On line 6734: + alone, an increase—the largest + in a single year since the + early days of this + +On line 6734: + largest in a single + year since the early days of + this government health + +On line 6734: + early days of this + government health insurance + plan, according to + +On line 6734: + the Kaiser Family + Foundation, a nonprofit + organization + +On line 6734: + research. Every state + showed an enrollment increase: + in nine states it was + +On line 6734: + Every state showed an + enrollment increase: in nine + states it was greater than + +On line 6734: + showed an enrollment + increase: in nine states it was + greater than in Nevada + +On line 6734: + increase: in nine states + it was greater than in Nevada + and Wisconsin, greater + +On line 6736: + states it was greater than + in Nevada and Wisconsin, + greater than States share the + +On line 6736: + it was greater than in + Nevada and Wisconsin, greater + than States share the cost + +On line 6736: + of Medicaid with + the federal government. + Congress included + +On line 6738: + government. Congress + included billion in the + stimulus package + +On line 6738: + Congress included + billion in the stimulus + package to help them + +On line 6738: + included billion + in the stimulus package + to help them with this + +On line 6738: + in the stimulus + package to help them with this + expense, and it has + +On line 6738: + them with this expense, + and it has extended the + assistance through June + +On line 6738: + it has extended + the assistance through June at + a reduced level. + +On line 6738: + has extended the + assistance through June at a + reduced level. If + +On line 6738: + the assistance through + June at a reduced level. + If the economy + +On line 6738: + assistance through June + at a reduced level. If + the economy has + +On line 6738: + June at a reduced + level. If the economy + has not improved by + +On line 6738: + a reduced level. + If the economy has not + improved by then, Kaiser + +On line 6738: + If the economy + has not improved by then, Kaiser + predicts, paying for + +On line 6738: + has not improved by + then, Kaiser predicts, paying for + this program will be + +On line 6738: + by then, Kaiser predicts, + paying for this program will + be another huge + +On line 6738: + this program will be + another huge potential + source of trouble for + +On line 6740: + huge potential source + of trouble for the states.59 The + National League of + +On line 6740: + source of trouble for + the states.59 The National League + of Cities recently + +On line 6740: + of trouble for the + states.59 The National League of + Cities recently said + +On line 6740: + trouble for the states.59 + The National League of Cities + recently said that + +On line 6740: + states.59 The National + League of Cities recently said + that U.S. cities are in + +On line 6740: + The National League + of Cities recently said that + U.S. cities are in their + +On line 6740: + National League of + Cities recently said that U.S. + cities are in their worst + +On line 6740: + of Cities recently + said that U.S. cities are in their + worst fiscal shape in + +On line 6740: + Cities recently said + that U.S. cities are in their worst + fiscal shape in at + +On line 6740: + said that U.S. cities are + in their worst fiscal shape in + at least a quarter + +On line 6740: + that U.S. cities are in + their worst fiscal shape in at + least a quarter of + +On line 6740: + U.S. cities are in their + worst fiscal shape in at least + a quarter of a + +On line 6740: + in their worst fiscal + shape in at least a quarter + of a century + +On line 6740: + their worst fiscal shape + in at least a quarter of + a century and + +On line 6740: + shape in at least a + quarter of a century + and probably have + +On line 6740: + of a century + and probably have not yet + hit bottom—even after + +On line 6740: + a century and + probably have not yet hit + bottom—even after four + +On line 6740: + probably have not + yet hit bottom—even after four + straight years of falling + +On line 6740: + bottom—even after four + straight years of falling revenue.60 + Because property + +On line 6740: + after four straight years + of falling revenue.60 Because + property taxes + +On line 6740: + straight years of falling + revenue.60 Because property + taxes are one of + +On line 6740: + of falling revenue.60 + Because property taxes + are one of the main + +On line 6740: + Because property + taxes are one of the main + source of revenue for + +On line 6740: + source of revenue for + most local governments, and + because some local + +On line 6740: + values, their revenue + is likely to continue + to decline for at + +On line 6742: + years.61 "The effects of + a depressed real estate + market, low levels + +On line 6742: + levels of consumer + confidence, and high levels + of unemployment + +On line 6742: + confidence, and high + levels of unemployment + will likely play out + +On line 6742: + and high levels of + unemployment will likely + play out in cities through + +On line 6742: + of unemployment + will likely play out in cities + through and beyond," the + +On line 6742: + play out in cities through + and beyond," the survey of + cities reported. The + +On line 6742: + through and beyond," the + survey of cities reported. + The authors of the + +On line 6742: + survey projected + that revenue would fall in and + cities’ budgets would shrink + +On line 6742: + that revenue would fall + in and cities’ budgets would shrink + another the largest + +On line 6742: + would fall in and cities’ + budgets would shrink another + the largest cutbacks in + +On line 6742: + in and cities’ budgets + would shrink another the largest + cutbacks in the years + +On line 6742: + cities’ budgets would shrink + another the largest cutbacks + in the years for which + +On line 6742: + would shrink another + the largest cutbacks in the years + for which the group has + +On line 6742: + another the largest + cutbacks in the years for which + the group has published + +On line 6742: + the largest cutbacks in + the years for which the group has + published the report.62 + +On line 6744: + cutbacks in the years + for which the group has published + the report.62 nvestors now + +On line 6744: + the years for which the + group has published the report.62 + nvestors now look askance at + +On line 6744: + the group has published + the report.62 nvestors now look askance + at once-solid + +On line 6744: + group has published the + report.62 nvestors now look askance at + once-solid state + +On line 6744: + the report.62 nvestors now + look askance at once-solid + state and local bonds, + +On line 6744: + at once-solid + state and local bonds, raising + borrowing costs for + +On line 6744: + state and local bonds, + raising borrowing costs for + many states and making + +On line 6744: + local bonds, raising + borrowing costs for many states + and making their task + +On line 6744: + borrowing costs for + many states and making their task + of balancing the + +On line 6744: + many states and making + their task of balancing the + budget even harder. + +On line 6744: + budget even harder. + Municipalities in + Florida, the state + +On line 6744: + in Florida, the + state with the third-highest rate of + home foreclosures, saw + +On line 6744: + state with the third-highest + rate of home foreclosures, saw + borrowing costs rise + +On line 6744: + third-highest rate of home + foreclosures, saw borrowing + costs rise when they sold + +On line 6744: + of home foreclosures, + saw borrowing costs rise when + they sold million in + +On line 6744: + home foreclosures, saw + borrowing costs rise when they + sold million in bonds + +On line 6744: + saw borrowing costs + rise when they sold million in + bonds in September + +On line 6746: + they sold million in + bonds in September Impact + at the federal + +On line 6746: + million in bonds in + September Impact at the + federal level + +On line 6748: + government’s response + to the financial crisis + and the ensuing + +On line 6750: + aggressive fiscal + and monetary policies in + history," said the + +On line 6750: + in history," said + the economists Mark Zandi + and Alan Blinder. "Yet + +On line 6750: + said the economists + Mark Zandi and Alan Blinder. + "Yet almost every + +On line 6750: + the economists Mark + Zandi and Alan Blinder. "Yet + almost every one + +On line 6750: + initiatives remain + controversial to this day, + with critics calling + +On line 6752: + ineffective or + both."63 The government’s fiscal + initiatives began + +On line 6752: + recession started: + the Economic Stimulus + Act of signed into + +On line 6752: + of signed into law + in February, provided + roughly billion in + +On line 6752: + law in February, + provided roughly billion + in tax rebates for + +On line 6752: + roughly billion in + tax rebates for households and + tax incentives for + +On line 6752: + in tax rebates for + households and tax incentives + for businesses. In + +On line 6752: + for households and tax + incentives for businesses. + In October at + +On line 6752: + tax incentives for + businesses. In October + at the height of the + +On line 6752: + at the height of the + crisis, the billion TARP was + enacted; and in + +On line 6752: + of the crisis, the + billion TARP was enacted; + and in early the + +On line 6752: + and in early the + American Recovery and + Reinvestment Act of + +On line 6752: + was enacted to + stimulate the weakening + economy, costing + +On line 6752: + economy, costing + another billion in tax + cuts and government + +On line 6754: + another billion + in tax cuts and government + spending. Beginning + +On line 6754: + cuts and government + spending. Beginning with the + rate cuts in mid-2007 through + +On line 6754: + rate cuts in mid-2007 through + the implementation of + the TALF in early + +On line 6754: + cuts in mid-2007 through the + implementation of the + TALF in early the + +On line 6754: + implementation + of the TALF in early the + Federal Reserve + +On line 6754: + Federal Reserve + provided support to the + economy throughout + +On line 6754: + Reserve provided + support to the economy + throughout the crisis. + +On line 6754: + provided support + to the economy throughout + the crisis. Aside from + +On line 6754: + crisis. Aside from its + emergency lending programs + put in place during + +On line 6754: + put in place during + the financial crisis, the + Fed put about trillion + +On line 6754: + the economy from + September to October + 2010—primarily by + +On line 6754: + as "quantitative + easing."64 And in November + officials announced + +On line 6756: + designed to keep long-term + and short-term interest rates + down. In October + +On line 6756: + short-term interest + rates down. In October the + Treasury Department + +On line 6756: + reported that the + TARP program would cost far less + than the billion that + +On line 6756: + would cost far less than + the billion that Congress had + appropriated + +On line 6758: + billion that Congress + had appropriated in + the fall of because + +On line 6758: + the fall of because + banks had begun to repay + the Treasury in In + +On line 6758: + fall of because banks + had begun to repay the + Treasury in In fact, + +On line 6758: + banks had begun to + repay the Treasury in In + fact, Treasury said, TARP + +On line 6758: + repay the Treasury + in In fact, Treasury said, TARP + would wind up costing + +On line 6758: + Treasury in In fact, + Treasury said, TARP would wind up + costing about billion, + +On line 6758: + in In fact, Treasury + said, TARP would wind up costing + about billion, mostly + +On line 6758: + Treasury said, TARP would + wind up costing about billion, + mostly owing to + +On line 6758: + said, TARP would wind up + costing about billion, mostly + owing to the bailout + +On line 6758: + would wind up costing + about billion, mostly owing + to the bailout of the + +On line 6758: + costing about billion, + mostly owing to the bailout + of the automakers + +On line 6758: + mostly owing to + the bailout of the automakers + General Motors + +On line 6760: + the Congressional + Budget Office (CBO) put its + cost at billion.66 As + +On line 6760: + its cost at billion.66 + As reported earlier, + the CBO projects that the + +On line 6762: + earlier, the CBO + projects that the economic cost + of the GSEs’ downfall, + +On line 6762: + the CBO projects that the + economic cost of the GSEs’ + downfall, including + +On line 6762: + economic cost of + the GSEs’ downfall, including + the financial cost + +On line 6762: + of the GSEs’ downfall, + including the financial + cost of government + +On line 6762: + the financial cost + of government support and + actual dollar + +On line 6764: + actual dollar + outlays, could reach billion by + Overall, as spending + +On line 6764: + dollar outlays, could + reach billion by Overall, as + spending increased and + +On line 6764: + could reach billion by + Overall, as spending increased + and revenues declined + +On line 6764: + as spending increased + and revenues declined during + the recession, the + +On line 6764: + and revenues declined + during the recession, the + federal deficit grew + +On line 6764: + declined during the + recession, the federal + deficit grew from billion + +On line 6764: + deficit grew from billion + in to trillion in And it + is estimated + +On line 6764: + grew from billion in + to trillion in And it is + estimated to + +On line 6764: + to trillion in And + it is estimated to + have risen to trillion + +On line 6764: + trillion in And it + is estimated to have + risen to trillion in + +On line 6766: + estimated to + have risen to trillion in THE + FINANCIAL SECTOR: + +On line 6768: + to trillion in THE + FINANCIAL SECTOR: "ALMOST + TRIPLE THE LEVEL OF + +On line 6768: + FINANCIAL SECTOR: + "ALMOST TRIPLE THE LEVEL OF + THREE YEARS EARLIER" + +On line 6770: + TRIPLE THE LEVEL OF + THREE YEARS EARLIER" While the + overall economy + +On line 6770: + YEARS EARLIER" While + the overall economy has + struggled, the story + +On line 6770: + financial sector + is somewhat different. Like + other sectors of + +On line 6770: + of the economy, + the financial industry + has cut jobs. After + +On line 6770: + industry has cut + jobs. After growing steadily + for years, employment + +On line 6770: + jobs. After growing + steadily for years, employment + in the financial + +On line 6772: + for years, employment + in the financial sector + fell by in in and + +On line 6772: + on the financial + industry, such as Charlotte, + North Carolina, have + +On line 6772: + such as Charlotte, North + Carolina, have been hit hard. + The unemployment + +On line 6772: + Carolina, have been + hit hard. The unemployment + rate in the Charlotte + +On line 6772: + have been hit hard. The + unemployment rate in the + Charlotte area rose from + +On line 6772: + unemployment rate + in the Charlotte area rose from + in to a recent + +On line 6774: + the Charlotte area rose + from in to a recent peak + of in February + +On line 6776: + February Between + January and December + banks have failed; most were + +On line 6776: + banks have failed; most were + small and medium-size banks.68 The + number of small banks + +On line 6776: + failed; most were small and + medium-size banks.68 The number + of small banks on the + +On line 6776: + small and medium-size + banks.68 The number of small banks + on the FDIC’s list of + +On line 6776: + medium-size banks.68 The + number of small banks on the + FDIC’s list of troubled + +On line 6776: + number of small banks + on the FDIC’s list of troubled + institutions rose + +On line 6776: + on the FDIC’s list of + troubled institutions rose + from in the second + +On line 6776: + FDIC’s list of troubled + institutions rose from in + the second quarter + +On line 6776: + institutions rose + from in the second quarter + of to in the third + +On line 6776: + the second quarter + of to in the third quarter, + the largest number since + +On line 6776: + second quarter of + to in the third quarter, the + largest number since March + +On line 6776: + of to in the third + quarter, the largest number since + March Though a number + +On line 6776: + in the third quarter, + the largest number since March Though + a number of large + +On line 6776: + a number of large + financial institutions + failed or nearly failed + +On line 6776: + institutions failed + or nearly failed during the + crisis, on the whole + +On line 6776: + nearly failed during + the crisis, on the whole they + have done better since + +On line 6776: + the crisis, on the + whole they have done better since + the fall of Total + +On line 6776: + on the whole they have + done better since the fall of + Total financial + +On line 6776: + done better since the + fall of Total financial + sector profits peaked + +On line 6776: + the fall of Total + financial sector profits + peaked at billion in + +On line 6776: + sector profits peaked + at billion in and then fell + to billion in the + +On line 6776: + peaked at billion in + and then fell to billion in + the lowest level + +On line 6776: + at billion in and + then fell to billion in the + lowest level since + +On line 6776: + then fell to billion + in the lowest level since + the early 1990s. They + +On line 6776: + fell to billion in + the lowest level since the + early 1990s. They have + +On line 6776: + the lowest level + since the early 1990s. They have + since rebounded in + +On line 6776: + lowest level since + the early 1990s. They have since + rebounded in and + +On line 6776: + since the early 1990s. + They have since rebounded in + and boosted by low + +On line 6776: + rebounded in and + boosted by low interest + rates and access to + +On line 6776: + Financial sector + profits were billion in and + reached an annual + +On line 6776: + profits were billion + in and reached an annual + rate of billion in + +On line 6776: + were billion in and + reached an annual rate of + billion in the fall + +On line 6778: + billion in the fall + of Within the financial + sector, commercial + +On line 6778: + financial sector, + commercial bank profits rose + from billion in the + +On line 6778: + sector, commercial + bank profits rose from billion + in the first quarter + +On line 6778: + bank profits rose from + billion in the first quarter + of to billion in + +On line 6778: + from billion in the + first quarter of to billion + in the first quarter + +On line 6778: + billion in the first + quarter of to billion in + the first quarter of + +On line 6778: + in the first quarter + of to billion in the first + quarter of The gains + +On line 6778: + of to billion in + the first quarter of The gains + were concentrated + +On line 6778: + to billion in the + first quarter of The gains were + concentrated among + +On line 6778: + the first quarter of + The gains were concentrated + among the larger banks.70 + +On line 6778: + first quarter of The + gains were concentrated among + the larger banks.70 For + +On line 6778: + quarter of The gains + were concentrated among the + larger banks.70 For banks + +On line 6778: + were concentrated + among the larger banks.70 For banks + with assets greater than + +On line 6778: + among the larger banks.70 + For banks with assets greater than + billion, profits more + +On line 6778: + banks with assets greater + than billion, profits more than + doubled, from billion + +On line 6778: + than billion, profits + more than doubled, from billion + to billion, from the + +On line 6778: + billion, profits more + than doubled, from billion to + billion, from the first + +On line 6780: + more than doubled, from + billion to billion, from the + first quarter of to + +On line 6780: + billion to billion, + from the first quarter of to + the first quarter of + +On line 6780: + from the first quarter + of to the first quarter of + For commercial banks + +On line 6780: + the first quarter of + to the first quarter of For + commercial banks with + +On line 6780: + to the first quarter + of For commercial banks with + less than billion in + +On line 6780: + first quarter of For + commercial banks with less than + billion in assets, + +On line 6780: + of For commercial + banks with less than billion in + assets, profits rose + +On line 6780: + commercial banks with + less than billion in assets, + profits rose only + +On line 6780: + less than billion in + assets, profits rose only + from less than billion + +On line 6782: + The securities + industry has reported + record profits and is + +On line 6782: + profits and is once + again distributing large bonuses. + Just for those who work + +On line 6782: + once again distributing + large bonuses. Just for those who + work in New York City, + +On line 6782: + large bonuses. Just for + those who work in New York City, + bonuses at Wall Street + +On line 6782: + for those who work in + New York City, bonuses at Wall + Street securities + +On line 6782: + those who work in New + York City, bonuses at Wall Street + securities firms + +On line 6782: + New York City, bonuses + at Wall Street securities + firms in were billion, + +On line 6782: + York City, bonuses at + Wall Street securities firms + in were billion, up + +On line 6782: + City, bonuses at Wall + Street securities firms in + were billion, up from + +On line 6782: + bonuses at Wall Street + securities firms in were + billion, up from the + +On line 6782: + Street securities + firms in were billion, up from + the year before, with + +On line 6782: + the year before, with + "average compensation + [rising] by percent + +On line 6782: + percent to more than + After reporting billion + of losses during + +On line 6782: + After reporting + billion of losses during + and the New York State + +On line 6782: + losses during and + the New York State Comptroller + reported that in + +On line 6782: + reported that in + "industry profits reached a + record billion—almost triple + +On line 6782: + "industry profits + reached a record billion—almost triple + the level of three + +On line 6792: + years earlier."74 THE + FORECLOSURE CRISIS CONTENTS + Foreclosures on the + +On line 6792: + FORECLOSURE CRISIS + CONTENTS Foreclosures on the + rise: "Hard to talk about + +On line 6794: + rise: "Hard to talk about + any recovery" Initiatives + to stem foreclosures: + +On line 6796: + Initiatives to stem + foreclosures: "Persistently + disregard" Flaws in + +On line 6796: + disregard" Flaws in + the process: "Speculation and + worst-case scenarios" + +On line 6800: + worst-case scenarios" + Neighborhood effects: "I’m not + leaving"..............................................................408 FORECLOSURES + +On line 6802: + Neighborhood effects: + "I’m not leaving"..............................................................408 FORECLOSURES + ON THE RISE: "HARD TO + +On line 6804: + leaving"..............................................................408 FORECLOSURES + ON THE RISE: "HARD TO TALK ABOUT + ANY RECOVERY" Since + +On line 6804: + ON THE RISE: "HARD TO + TALK ABOUT ANY RECOVERY" Since + the housing bubble + +On line 6804: + THE RISE: "HARD TO TALK + ABOUT ANY RECOVERY" Since the + housing bubble burst, + +On line 6804: + "HARD TO TALK ABOUT ANY + RECOVERY" Since the housing + bubble burst, about four + +On line 6804: + RECOVERY" Since the + housing bubble burst, about four + million families + +On line 6804: + housing bubble burst, + about four million families + have lost their homes to + +On line 6804: + burst, about four million + families have lost their homes + to foreclosure1 and + +On line 6804: + families have lost + their homes to foreclosure1 and + another four and + +On line 6804: + homes to foreclosure1 + and another four and a + half million2 have slipped + +On line 6804: + economic damage + finally abates, foreclosures + may total between + +On line 6804: + damage finally + abates, foreclosures may total + between million and + +On line 6804: + has hurt families + and undermined home values + in entire zip codes, + +On line 6804: + hurt families and + undermined home values in + entire zip codes, strained + +On line 6804: + and undermined home + values in entire zip codes, + strained school systems as + +On line 6804: + codes, strained school systems + as well as community + support services, and + +On line 6804: + support services, and + depleted state coffers. Even + if the economy + +On line 6804: + if the economy + began suddenly booming + the country would need + +On line 6804: + began suddenly + booming the country would need + years to recover. + +On line 6806: + suddenly booming + the country would need years to + recover. Prior + +On line 6806: + the country would need + years to recover. Prior + to the foreclosure + +On line 6806: + country would need years + to recover. Prior to + the foreclosure rate + +On line 6806: + recover. Prior + to the foreclosure rate was + historically + +On line 6806: + to the foreclosure + rate was historically + less than But the trend + +On line 6806: + the foreclosure rate + was historically less + than But the trend since + +On line 6806: + foreclosure rate was + historically less than + But the trend since the + +On line 6806: + than But the trend since + the housing market collapsed + has been dramatic: + +On line 6806: + But the trend since the + housing market collapsed has + been dramatic: In + +On line 6806: + the housing market + collapsed has been dramatic: + In of all houses, + +On line 6808: + market collapsed has + been dramatic: In of all + houses, or out of + +On line 6808: + has been dramatic: + In of all houses, or out + of received at least + +On line 6808: + been dramatic: In + of all houses, or out of + received at least one + +On line 6808: + of all houses, or + out of received at least one + foreclosure filing.4 + +On line 6808: + out of received at + least one foreclosure filing.4 + In the fall of in + +On line 6808: + received at least one + foreclosure filing.4 In the + fall of in every + +On line 6808: + least one foreclosure + filing.4 In the fall of in + every outstanding + +On line 6808: + fall of in every + outstanding residential + mortgage loans in the + +On line 6808: + every outstanding + residential mortgage loans + in the United States + +On line 6808: + mortgage loans in the + United States was at least one + payment past due but + +On line 6808: + loans in the United + States was at least one payment + past due but not yet + +On line 6808: + in the United States + was at least one payment past + due but not yet in + +On line 6808: + States was at least one + payment past due but not yet + in foreclosure—an + +On line 6808: + payment past due but + not yet in foreclosure—an + ominous warning that + +On line 6808: + past due but not yet + in foreclosure—an ominous + warning that this wave + +On line 6808: + in foreclosure—an + ominous warning that this wave + may not have crested.5 + +On line 6808: + ominous warning that + this wave may not have crested.5 + Distressed sales account + +On line 6808: + warning that this wave + may not have crested.5 Distressed + sales account for the + +On line 6808: + may not have crested.5 + Distressed sales account for the + majority of + +On line 6808: + Distressed sales account + for the majority of + home sales in cities around + +On line 6808: + the majority + of home sales in cities around the + country, including + +On line 6812: + Returning to the + borrowers whose loans were pooled + into CMLTI 2006- NC2: + +On line 6812: + the borrowers whose + loans were pooled into CMLTI 2006- + NC2: by September + +On line 6812: + borrowers whose loans + were pooled into CMLTI 2006- NC2: + by September many + +On line 6812: + pooled into CMLTI 2006- + NC2: by September many had + moved or refinanced + +On line 6812: + into CMLTI 2006- NC2: + by September many had moved + or refinanced their + +On line 6812: + NC2: by September + many had moved or refinanced + their mortgages; by that + +On line 6812: + by September many + had moved or refinanced their + mortgages; by that point, + +On line 6812: + moved or refinanced + their mortgages; by that point, had + entered foreclosure + +On line 6812: + entered foreclosure + (mostly in Florida and + California), and + +On line 6812: + and had started loan + modifications. Of the + still active loans then, + +On line 6812: + modifications. + Of the still active loans then, + were seriously + +On line 6812: + the still active loans + then, were seriously past + due in their payments + +On line 6812: + still active loans then, + were seriously past due + in their payments or + +On line 6814: + or currently in + foreclosure. The causes of + foreclosures have been + +On line 6814: + in foreclosure. The + causes of foreclosures have + been analyzed by + +On line 6814: + been analyzed by + many academics and government + agencies. Two events are + +On line 6814: + by many academics and + government agencies. Two events + are typically + +On line 6814: + government agencies. + Two events are typically + necessary for a + +On line 6814: + are typically + necessary for a mortgage + default. First, monthly + +On line 6820: + unemployment or + other financial hardship, + or because mortgage + +On line 6820: + other financial + hardship, or because mortgage + payments increase. And + +On line 6820: + financial hardship, + or because mortgage payments + increase. And second + +On line 6820: + or because mortgage + payments increase. And second + (in the opinion of + +On line 6820: + increase. And second + (in the opinion of many, now + the more important + +On line 6820: + And second (in the + opinion of many, now the more + important factor), + +On line 6820: + of many, now the more + important factor), the home’s + value becomes less + +On line 6820: + home’s value becomes + less than the debt owed—in other + words, the borrower + +On line 6820: + value becomes less + than the debt owed—in other words, + the borrower has + +On line 6822: + words, the borrower + has negative equity. + "The evidence is + +On line 6822: + "The evidence is + irrefutable," Laurie Goodman, a + senior managing + +On line 6822: + Goodman, a senior + managing director with + Amherst Securities, + +On line 6822: + Amherst Securities, + told Congress in "Negative + equity is the + +On line 6822: + equity is the + most important predictor + of default. When the + +On line 6822: + the most important + predictor of default. When + the borrower has + +On line 6822: + When the borrower + has negative equity, + unemployment acts + +On line 6822: + of many possible + catalysts, increasing the + probability + +On line 6824: + probability + of default."8 After falling + from their peak in to + +On line 6824: + of default."8 After + falling from their peak in to + the spring of home prices + +On line 6824: + to the spring of home + prices have rebounded somewhat, + but improvements are + +On line 6824: + prices have rebounded + somewhat, but improvements are + uneven across regions.9 + +On line 6826: + regions.9 Nationwide, + million households, or.5% of those + with mortgages, owe more + +On line 6826: + million households, or.5% + of those with mortgages, owe more + on their mortgages than + +On line 6826: + of those with mortgages, + owe more on their mortgages than + the market value + +On line 6826: + those with mortgages, owe + more on their mortgages than the + market value of + +On line 6826: + mortgages, owe more on + their mortgages than the market + value of their house + +On line 6826: + more on their mortgages + than the market value of + their house (see figure.1). + +On line 6826: + on their mortgages than + the market value of their + house (see figure.1). In + +On line 6826: + the market value + of their house (see figure.1). In + Nevada, of homes with + +On line 6826: + value of their house + (see figure.1). In Nevada, of + homes with mortgages are + +On line 6826: + house (see figure.1). In + Nevada, of homes with mortgages + are under water, + +On line 6826: + Nevada, of homes with + mortgages are under water, + the highest rate in + +On line 6826: + homes with mortgages are + under water, the highest + rate in the country; + +On line 6826: + under water, the + highest rate in the country; + in California, + +On line 6828: + highest rate in the + country; in California, + the rate is Given + +On line 6828: + prevalence and extent + of negative equity, + the phenomenon + +On line 6828: + defaults" has also + been on the rise: homeowners + purposefully walk + +On line 6828: + the rise: homeowners + purposefully walk away from + mortgage obligations + +On line 6828: + purposefully walk + away from mortgage obligations + when they perceive that + +On line 6828: + walk away from mortgage + obligations when they perceive + that their homes are worth + +On line 6828: + mortgage obligations + when they perceive that their homes + are worth less than what + +On line 6828: + obligations when they + perceive that their homes are worth + less than what they owe + +On line 6828: + they perceive that their + homes are worth less than what they + owe and they believe + +On line 6828: + perceive that their homes + are worth less than what they owe + and they believe that + +On line 6828: + homes are worth less than + what they owe and they believe + that the value will + +On line 6828: + are worth less than what + they owe and they believe that + the value will not + +On line 6828: + worth less than what they + owe and they believe that the + value will not be + +On line 6828: + than what they owe and + they believe that the value + will not be going + +On line 6828: + what they owe and they + believe that the value will + not be going up + +On line 6828: + owe and they believe + that the value will not be + going up anytime + +On line 6830: + they believe that the + value will not be going + up anytime soon. By + +On line 6830: + that the value will + not be going up anytime + soon. By the fall of + +On line 6830: + the value will not + be going up anytime soon. + By the fall of three + +On line 6830: + value will not be + going up anytime soon. By + the fall of three states + +On line 6830: + going up anytime + soon. By the fall of three states + particularly + +On line 6830: + the fall of three states + particularly hard hit + by foreclosures—California, Florida, + +On line 6830: + particularly + hard hit by foreclosures—California, Florida, + and Nevada—reported some + +On line 6830: + by foreclosures—California, Florida, + and Nevada—reported some recent + improvement in the + +On line 6830: + and Nevada—reported some + recent improvement in the + initiation of + +On line 6830: + recent improvement + in the initiation of + foreclosures, but in + +On line 6830: + of foreclosures, but + in November Nevada’s rate was + still five times higher + +On line 6830: + foreclosures, but in + November Nevada’s rate was still + five times higher than + +On line 6830: + in November Nevada’s + rate was still five times higher + than the national + +On line 6830: + five times higher than + the national average. + Foreclosure starts climbed + +On line 6830: + than the national + average. Foreclosure starts + climbed in states from their + +On line 6830: + Foreclosure starts climbed + in states from their levels a + year earlier, with + +On line 6830: + states from their levels + a year earlier, with the + largest increases in + +On line 6830: + a year earlier, + with the largest increases in + Washington State (which + +On line 6830: + has unemployment), + Indiana unemployment), + and South Carolina + +On line 6830: + and South Carolina + unemployment), according + to the Mortgage Bankers + +On line 6832: + to the Mortgage Bankers + Association. In Ohio, + the city of Cleveland + +On line 6832: + city of Cleveland and + surrounding Cuyahoga County + are bulldozing blocks + +On line 6832: + surrounding Cuyahoga + County are bulldozing blocks + of abandoned houses + +On line 6832: + Cuyahoga County are + bulldozing blocks of abandoned + houses down to the + +On line 6832: + are bulldozing blocks + of abandoned houses down to + the dirt with the aim + +On line 6832: + bulldozing blocks of + abandoned houses down to the + dirt with the aim of + +On line 6832: + of abandoned houses + down to the dirt with the aim + of creating a + +On line 6832: + down to the dirt with + the aim of creating a + northeastern Ohio "bank" + +On line 6832: + aim of creating + a northeastern Ohio "bank" of + land preserved for the + +On line 6832: + a northeastern Ohio + "bank" of land preserved for the + future. To do this, + +On line 6832: + "bank" of land preserved + for the future. To do this, + authorities seize + +On line 6832: + for the future. To + do this, authorities seize + blighted properties + +On line 6832: + this, authorities + seize blighted properties for + unpaid taxes, and + +On line 6832: + blighted properties + for unpaid taxes, and they + take donations of + +On line 6832: + unpaid taxes, and + they take donations of homes + from the Department + +On line 6832: + take donations of + homes from the Department of + Housing and Urban + +On line 6832: + Housing and Urban + Development, Fannie Mae, + and some private lenders.11 + +On line 6832: + Fannie Mae, and some + private lenders.11 Now, the county + finds itself under + +On line 6832: + and some private lenders.11 + Now, the county finds itself + under increasing + +On line 6832: + Now, the county finds + itself under increasing + duress, having endured + +On line 6834: + in After years of + high unemployment and a + fragile economy, + +On line 6834: + unemployment and + a fragile economy, the + financial crisis + +On line 6834: + took vulnerable + residents and "shoved them over + the edge of the cliff," + +On line 6834: + "shoved them over the edge + of the cliff," Jim Rokakis, Cuyahoga’s + treasurer, told the + +On line 6834: + the edge of the cliff," + Jim Rokakis, Cuyahoga’s treasurer, + told the Commission.13 + +On line 6836: + edge of the cliff," Jim + Rokakis, Cuyahoga’s treasurer, told + the Commission.13 In + +On line 6836: + of the cliff," Jim Rokakis, + Cuyahoga’s treasurer, told the + Commission.13 In a + +On line 6836: + Cuyahoga’s treasurer, + told the Commission.13 In a + spring survey, of the + +On line 6836: + told the Commission.13 + In a spring survey, of the + responding mayors + +On line 6836: + In a spring survey, + of the responding mayors + ranked the prevalence of + +On line 6836: + spring survey, of the + responding mayors ranked the + prevalence of nonprime + +On line 6836: + of the responding + mayors ranked the prevalence of + nonprime or subprime + +On line 6836: + responding mayors + ranked the prevalence of nonprime + or subprime mortgages + +On line 6836: + ranked the prevalence of + nonprime or subprime mortgages + as either first or + +On line 6836: + nonprime or subprime + mortgages as either first or + second on a list + +On line 6836: + subprime mortgages as + either first or second on + a list of factors + +On line 6836: + mortgages as either + first or second on a list + of factors causing + +On line 6836: + first or second on + a list of factors causing + foreclosures in their + +On line 6836: + a list of factors + causing foreclosures in their + cities. Almost all the + +On line 6836: + foreclosures in their + cities. Almost all the mayors, + said they expected + +On line 6836: + the mayors, said they + expected the foreclosure + problems to stay the + +On line 6836: + they expected the + foreclosure problems to stay + the same or worsen + +On line 6836: + foreclosure problems + to stay the same or worsen + in their cities over the + +On line 6838: + problems to stay the + same or worsen in their cities + over the next year.14 "There + +On line 6838: + to stay the same or + worsen in their cities over the + next year.14 "There has been + +On line 6838: + or worsen in their + cities over the next year.14 "There has + been no meaningful + +On line 6838: + next year.14 "There has been + no meaningful decline in + the inventory + +On line 6838: + year.14 "There has been no + meaningful decline in the + inventory of + +On line 6838: + meaningful decline + in the inventory of + distressed properties + +On line 6838: + inventory of + distressed properties found in + the housing market," + +On line 6838: + distressed properties + found in the housing market," + Guy Cecala, the chief + +On line 6838: + found in the housing + market," Guy Cecala, the chief + executive and + +On line 6838: + of Inside Mortgage + Finance Publications, told + a congressional + +On line 6838: + "It is hard to talk + about any recovery of the + housing market when + +On line 6838: + hard to talk about any + recovery of the housing + market when the share + +On line 6838: + about any recovery + of the housing market when + the share of distressed + +On line 6842: + Many mortgage holders + find themselves underwater; + that is, owing more + +On line 6842: + mortgage holders find + themselves underwater; that + is, owing more than + +On line 6842: + that is, owing more + than their homes are worth. This is + particularly + +On line 6854: + Michigan, and Nevada. + SHARE OF LOANS WITH NEGATIVE + EQUITY, WA ME + +On line 6860: + Nevada. SHARE OF LOANS + WITH NEGATIVE EQUITY, + WA ME MT ND NA + +On line 6868: + LOANS WITH NEGATIVE + EQUITY, WA ME MT ND + NA OR VT ID MN + +On line 6878: + EQUITY, WA ME + MT ND NA OR VT ID MN + NH NY SD MA WY + +On line 6884: + WA ME MT ND NA + OR VT ID MN NH NY SD + MA WY WI CT MI + +On line 6886: + ME MT ND NA OR + VT ID MN NH NY SD MA + WY WI CT MI RI + +On line 6888: + MT ND NA OR VT + ID MN NH NY SD MA WY + WI CT MI RI PA + +On line 6890: + ND NA OR VT ID + MN NH NY SD MA WY WI + CT MI RI PA NV + +On line 6892: + NA OR VT ID MN + NH NY SD MA WY WI CT + MI RI PA NV IA + +On line 6894: + OR VT ID MN NH + NY SD MA WY WI CT MI + RI PA NV IA NJ + +On line 6896: + VT ID MN NH NY + SD MA WY WI CT MI RI + PA NV IA NJ NE + +On line 6898: + ID MN NH NY SD + MA WY WI CT MI RI PA + NV IA NJ NE OH + +On line 6900: + MN NH NY SD MA + WY WI CT MI RI PA NV + IA NJ NE OH DE + +On line 6902: + NH NY SD MA WY + WI CT MI RI PA NV IA + NJ NE OH DE UT + +On line 6904: + NY SD MA WY WI + CT MI RI PA NV IA NJ + NE OH DE UT IL + +On line 6906: + SD MA WY WI CT + MI RI PA NV IA NJ NE + OH DE UT IL IN + +On line 6908: + MA WY WI CT MI + RI PA NV IA NJ NE OH + DE UT IL IN DC + +On line 6910: + WY WI CT MI RI + PA NV IA NJ NE OH DE + UT IL IN DC CA + +On line 6912: + WI CT MI RI PA + NV IA NJ NE OH DE UT + IL IN DC CA CO + +On line 6914: + CT MI RI PA NV + IA NJ NE OH DE UT IL + IN DC CA CO WV + +On line 6916: + MI RI PA NV IA + NJ NE OH DE UT IL IN + DC CA CO WV MD + +On line 6918: + RI PA NV IA NJ + NE OH DE UT IL IN DC + CA CO WV MD VA + +On line 6920: + PA NV IA NJ NE + OH DE UT IL IN DC CA + CO WV MD VA KS + +On line 6922: + NV IA NJ NE OH + DE UT IL IN DC CA CO + WV MD VA KS MO + +On line 6924: + IA NJ NE OH DE + UT IL IN DC CA CO WV + MD VA KS MO KY + +On line 6926: + NJ NE OH DE UT + IL IN DC CA CO WV MD + VA KS MO KY NC + +On line 6928: + NE OH DE UT IL + IN DC CA CO WV MD VA + KS MO KY NC TN + +On line 6930: + OH DE UT IL IN + DC CA CO WV MD VA KS + MO KY NC TN AZ + +On line 6932: + DE UT IL IN DC + CA CO WV MD VA KS MO + KY NC TN AZ NM + +On line 6934: + UT IL IN DC CA + CO WV MD VA KS MO KY + NC TN AZ NM OK + +On line 6936: + IL IN DC CA CO + WV MD VA KS MO KY NC + TN AZ NM OK AR + +On line 6938: + IN DC CA CO WV + MD VA KS MO KY NC TN + AZ NM OK AR SC + +On line 6940: + DC CA CO WV MD + VA KS MO KY NC TN AZ + NM OK AR SC MS + +On line 6942: + CA CO WV MD VA + KS MO KY NC TN AZ NM + OK AR SC MS AL + +On line 6944: + CO WV MD VA KS + MO KY NC TN AZ NM OK + AR SC MS AL GA + +On line 6946: + WV MD VA KS MO + KY NC TN AZ NM OK AR + SC MS AL GA U.S. + +On line 6946: + KS MO KY NC TN + AZ NM OK AR SC MS AL + GA U.S. average + +On line 6948: + MO KY NC TN AZ + NM OK AR SC MS AL GA + U.S. average TX + +On line 6950: + KY NC TN AZ NM + OK AR SC MS AL GA U.S. + average TX LA + +On line 6958: + AZ NM OK AR SC + MS AL GA U.S. average + TX LA FL AK HI + +On line 6960: + NM OK AR SC MS + AL GA U.S. average TX + LA FL AK HI SOURCE: + +On line 6960: + OK AR SC MS AL + GA U.S. average TX LA + FL AK HI SOURCE: CoreLogic + +On line 6962: + SC MS AL GA U.S. + average TX LA FL AK + HI SOURCE: CoreLogic Figure.1 + +On line 6964: + GA U.S. average + TX LA FL AK HI SOURCE: CoreLogic + Figure.1 "There was a + +On line 6964: + TX LA FL AK HI + SOURCE: CoreLogic Figure.1 "There was a + fundamental change + +On line 6964: + SOURCE: CoreLogic Figure.1 "There + was a fundamental change + in our financial + +On line 6964: + Figure.1 "There was a + fundamental change in our + financial services + +On line 6964: + financial services + sector that really is + the reason we’re in + +On line 6964: + services sector that + really is the reason + we’re in this crisis, + +On line 6964: + the reason we’re in + this crisis, this economic + crisis, and is the + +On line 6964: + we’re in this crisis, + this economic crisis, and + is the reason we’re + +On line 6964: + and is the reason + we’re seeing and will see in + total probably + +On line 6964: + will see in total + probably before we’re done, + between and million + +On line 6964: + total probably + before we’re done, between and + million foreclosure + +On line 6964: + probably before + we’re done, between and million + foreclosure filings + +On line 6964: + we’re done, between and + million foreclosure filings + in this country," John + +On line 6964: + between and million + foreclosure filings in this + country," John Taylor, + +On line 6964: + foreclosure filings + in this country," John Taylor, + the president and + +On line 6964: + of the National + Community Reinvestment + Coalition, explained to + +On line 6964: + Coalition, explained to + the FCIC. "And by the way, a + few hundred thousand + +On line 6964: + by the way, a few + hundred thousand people, even + a million people + +On line 6964: + thousand people, even + a million people going + into foreclosure, + +On line 6964: + a million people + going into foreclosure, + you can kind of blame + +On line 6964: + into foreclosure, + you can kind of blame and say, + ‘Well they should have known + +On line 6964: + foreclosure, you can + kind of blame and say, ‘Well they + should have known better.’ + +On line 6964: + blame and say, ‘Well they + should have known better.’ But [or] + million American + +On line 6964: + should have known better.’ + But [or] million American + families can’t all + +On line 6964: + million American + families can’t all be wrong. + They can’t all be greedy + +On line 6964: + families can’t all + be wrong. They can’t all be greedy + and they can’t all be + +On line 6968: + all be wrong. They can’t + all be greedy and they can’t all + be stupid."16 INITIATIVES + +On line 6968: + be wrong. They can’t all + be greedy and they can’t all be + stupid."16 INITIATIVES TO + +On line 6968: + wrong. They can’t all be + greedy and they can’t all be stupid."16 + INITIATIVES TO STEM + +On line 6968: + all be greedy and they + can’t all be stupid."16 INITIATIVES + TO STEM FORECLOSURES: + +On line 6972: + INITIATIVES TO STEM + FORECLOSURES: "PERSISTENTLY + DISREGARD" The same + +On line 6972: + TO STEM FORECLOSURES: + "PERSISTENTLY DISREGARD" + The same system that + +On line 6972: + system that was so + efficient at creating + millions of mortgage + +On line 6972: + was so efficient + at creating millions of + mortgage loans over the + +On line 6972: + millions of mortgage + loans over the past decade has been + ineffective at + +On line 6972: + loans over the past decade + has been ineffective at + resolving problems + +On line 6972: + been ineffective + at resolving problems in + the housing market, + +On line 6972: + market, including + the efforts of homeowners + to modify their + +On line 6972: + to encourage banks + to adjust interest rates, + spread loan payments over + +On line 6972: + encourage banks to + adjust interest rates, spread + loan payments over longer + +On line 6972: + adjust interest + rates, spread loan payments over longer + terms, or simply write + +On line 6972: + rates, spread loan payments + over longer terms, or simply write + down mortgage debts. But + +On line 6972: + spread loan payments over + longer terms, or simply write down + mortgage debts. But to + +On line 6972: + mortgage debts. But to + date, federal auditors + and independent + +On line 6972: + watchdogs have given + the federal government’s + and the banks’ mortgage + +On line 6974: + The Home Affordable + Modification Program + (HAMP) is falling short + +On line 6974: + Modification + Program (HAMP) is falling short + of the to million + +On line 6974: + is falling short of + the to million families + targeted for help + +On line 6974: + of the to million + families targeted for + help by the end of + +On line 6974: + million families + targeted for help by the + end of (The program’s + +On line 6974: + targeted for help + by the end of (The program’s + resources come from the + +On line 6974: + for help by the end + of (The program’s resources come + from the federal + +On line 6974: + help by the end of + (The program’s resources come from + the federal TARP + +On line 6974: + by the end of (The + program’s resources come from the + federal TARP funds.) + +On line 6974: + program’s resources come + from the federal TARP funds.) + As of December + +On line 6974: + resources come from the + federal TARP funds.) As of + December HAMP has + +On line 6974: + from the federal + TARP funds.) As of December + HAMP has resulted + +On line 6974: + the federal TARP + funds.) As of December HAMP + has resulted in + +On line 6974: + federal TARP funds.) + As of December HAMP has + resulted in the + +On line 6974: + modification + of only mortgages.17 Meanwhile, + the banks report that + +On line 6974: + the banks report that + they have independently + approved million loan + +On line 6974: + approved million loan + alterations of various + kinds, although many of + +On line 6974: + payments into a + new mortgage and thus result + in higher monthly + +On line 6976: + and thus result in + higher monthly payments.18 The + effectiveness of + +On line 6976: + modification + and foreclosure assistance + programs is unclear. + +On line 6978: + just getting started. + New Jersey, for instance, will + begin a million + +On line 6978: + started. New Jersey, + for instance, will begin a + million "HomeKeeper Program" + +On line 6978: + begin a million + "HomeKeeper Program" in to offer + some residents who + +On line 6978: + some residents who + face foreclosure because of + unemployment or + +On line 6980: + their mortgages.19 During + a series of hearings in + communities around + +On line 6980: + series of hearings + in communities around the + country affected + +On line 6980: + communities around + the country affected by + the housing crisis, + +On line 6980: + country affected + by the housing crisis, the + Commission heard from + +On line 6980: + the housing crisis, + the Commission heard from many + witnesses about the + +On line 6980: + the Commission heard + from many witnesses about the + extraordinary + +On line 6980: + from many witnesses + about the extraordinary + difficulties they + +On line 6980: + difficulties they + had encountered in seeking + to modify their + +On line 6980: + they had encountered + in seeking to modify + their mortgages and stay + +On line 6980: + had encountered in + seeking to modify their + mortgages and stay in + +On line 6980: + to modify their + mortgages and stay in their homes. + Borrowers who have + +On line 6980: + their mortgages and stay + in their homes. Borrowers who + have been paying down + +On line 6980: + homes. Borrowers who + have been paying down mortgages + for years and have built + +On line 6980: + Borrowers who have + been paying down mortgages for + years and have built up + +On line 6980: + who have been paying + down mortgages for years and have + built up substantial + +On line 6980: + for years and have built + up substantial equity + are especially + +On line 6980: + to being turned down + for loan modifications, + because the lender would + +On line 6980: + modifications, + because the lender would prefer + that they simply sell + +On line 6982: + because the lender would + prefer that they simply sell + their homes. Kirsten Keefe, a + +On line 6982: + the lender would prefer + that they simply sell their homes. + Kirsten Keefe, a senior + +On line 6982: + lender would prefer that + they simply sell their homes. Kirsten + Keefe, a senior staff + +On line 6982: + that they simply sell + their homes. Kirsten Keefe, a senior + staff attorney with + +On line 6982: + they simply sell their + homes. Kirsten Keefe, a senior staff + attorney with the + +On line 6982: + their homes. Kirsten Keefe, a + senior staff attorney with + the Empire Justice + +On line 6982: + Keefe, a senior staff + attorney with the Empire + Justice Center in + +On line 6982: + staff attorney with + the Empire Justice Center + in Albany, New York, + +On line 6982: + attorney with the + Empire Justice Center in + Albany, New York, brought + +On line 6982: + the Empire Justice + Center in Albany, New York, + brought this issue to + +On line 6982: + brought this issue to + regulators’ attention + in March Speaking to + +On line 6982: + to regulators’ + attention in March Speaking + to the Federal + +On line 6982: + attention in March + Speaking to the Federal + Reserve Board’s Consumer + +On line 6982: + identified trends among + borrowers in New York who + tried to qualify + +On line 6982: + borrowers in New + York who tried to qualify + for the government’s + +On line 6982: + for the government’s + HAMP program. "We are also + routinely hearing + +On line 6982: + HAMP program. "We are + also routinely hearing + that folks who have a + +On line 6982: + also routinely + hearing that folks who have a + lot of equity + +On line 6982: + hearing that folks who + have a lot of equity + are being denied + +On line 6982: + are being denied + HAMP modifications," she + said.20 Diane Thompson, + +On line 6982: + being denied HAMP + modifications," she said.20 + Diane Thompson, from + +On line 6982: + Diane Thompson, from + the National Consumer Law + Center, testified + +On line 6982: + Housing, and Urban + Affairs in November about + the challenges of the + +On line 6982: + Urban Affairs in + November about the challenges + of the program. She + +On line 6982: + in November about + the challenges of the program. + She stated, "Only + +On line 6982: + November about the + challenges of the program. She + stated, "Only a + +On line 6982: + the challenges of the + program. She stated, "Only + a very few of the + +On line 6982: + borrowers have been + able to obtain permanent + modifications. + +On line 6982: + and that some servicers + persistently disregard + HAMP applications."21 + +On line 6984: + HAMP applications."21 + Competing incentives may + encourage banks to + +On line 6984: + encourage banks to + view foreclosure as quicker, + cleaner, and often + +On line 6984: + often cheaper than + modifying the terms of + existing mortgages.22 + +On line 6986: + modifying the + terms of existing mortgages.22 + or them, foreclosure + +On line 6986: + existing mortgages.22 + or them, foreclosure is a + prudent response to + +On line 6986: + or them, foreclosure + is a prudent response to + default because, the + +On line 6986: + foreclosure is a + prudent response to default + because, the data + +On line 6986: + response to default + because, the data suggest, + many borrowers who + +On line 6986: + because, the data + suggest, many borrowers who + receive temporary + +On line 6986: + receive temporary + or permanent forgiveness + on their terms will slide + +On line 6986: + forgiveness on their + terms will slide into default + again.23 Also, servicers + +On line 6986: + on their terms will slide + into default again.23 Also, + servicers may receive + +On line 6986: + into default again.23 + Also, servicers may receive + substantial fees for + +On line 6986: + again.23 Also, servicers + may receive substantial fees + for guid-ing a mortgage + +On line 6986: + Also, servicers may + receive substantial fees for + guid-ing a mortgage through + +On line 6986: + receive substantial + fees for guid-ing a mortgage through + the foreclosure process, + +On line 6986: + a mortgage through the + foreclosure process, creating + an incentive to + +On line 6986: + process, creating an + incentive to deny a + modification.24 + +On line 6988: + modification.24 + Frequently, there’s another + complication to + +On line 6988: + modification: + the second mortgages that were + layered onto first + +On line 6988: + were layered onto + first mortgages. The first mortgages + were commonly sold + +On line 6988: + layered onto first + mortgages. The first mortgages were + commonly sold by + +On line 6988: + first mortgages. The first + mortgages were commonly sold + by banks into the + +On line 6988: + sold by banks into + the securitization + machine. The second + +On line 6988: + machine. The second + mortgages were often retained + by the same lenders who + +On line 6988: + by the same lenders who + typically service the + mortgage: that is, they + +On line 6988: + who typically + service the mortgage: that is, + they process the monthly + +On line 6988: + service the mortgage: + that is, they process the monthly + payments and provide + +On line 6988: + the mortgage: that is, + they process the monthly payments + and provide customer + +On line 6988: + that is, they process the + monthly payments and provide + customer service to + +On line 6988: + the monthly payments + and provide customer service + to borrowers. If + +On line 6988: + monthly payments and + provide customer service to + borrowers. If a + +On line 6988: + and provide customer + service to borrowers. If + a first mortgage is + +On line 6988: + borrowers. If a + first mortgage is modified + or foreclosed on, the + +On line 6988: + a first mortgage is + modified or foreclosed on, + the entire value + +On line 6988: + the entire value + of the second mortgage may + be wiped out. Under + +On line 6988: + entire value of + the second mortgage may be + wiped out. Under these + +On line 6988: + the second mortgage + may be wiped out. Under these + circumstances, the lender + +On line 6988: + mortgage may be wiped + out. Under these circumstances, + the lender holding that + +On line 6988: + wiped out. Under these + circumstances, the lender holding + that second lien has + +On line 6988: + these circumstances, the + lender holding that second lien + has an incentive + +On line 6988: + circumstances, the lender + holding that second lien has + an incentive to + +On line 6988: + second lien has an + incentive to delay a + modification + +On line 6988: + a new loan that would + make the mortgage payments more + affordable to the + +On line 6990: + would make the mortgage + payments more affordable to + the borrower.25 The + +On line 6990: + more affordable to + the borrower.25 The country’s + leading banks now hold + +On line 6990: + to the borrower.25 + The country’s leading banks now + hold on their books more + +On line 6990: + the borrower.25 The + country’s leading banks now hold + on their books more than + +On line 6990: + country’s leading banks + now hold on their books more than + billion in second + +On line 6990: + leading banks now hold + on their books more than billion + in second mortgages.26 + +On line 6990: + on their books more than + billion in second mortgages.26 + To the extent the + +On line 6990: + books more than billion + in second mortgages.26 To the + extent the banks have + +On line 6990: + billion in second + mortgages.26 To the extent the + banks have reported + +On line 6990: + in second mortgages.26 + To the extent the banks have + reported these loans + +On line 6990: + To the extent the + banks have reported these loans + as performing, the + +On line 6990: + the extent the banks + have reported these loans as + performing, the loans + +On line 6990: + banks have reported + these loans as performing, the + loans have not been marked + +On line 6990: + have reported these + loans as performing, the loans + have not been marked down + +On line 6990: + reported these loans + as performing, the loans have + not been marked down on + +On line 6990: + performing, the loans + have not been marked down on their + books. The actual + +On line 6990: + marked down on their books. + The actual value of + these second mortgages + +On line 6990: + down on their books. The + actual value of these + second mortgages could + +On line 6990: + actual value + of these second mortgages could + be much less than their + +On line 6990: + could be much less than + their billion-plus reported + value.27 The danger + +On line 6990: + danger of future + losses is self-evident. + Some frustrated first-lien + +On line 6990: + servicer is holding + the second lien, the servicers + are looking after + +On line 6990: + the second lien, the + servicers are looking after + their own balance sheets + +On line 6990: + servicers are looking + after their own balance sheets + by encouraging + +On line 6990: + keep up the payments + on their second mortgage when + they cannot afford + +On line 6990: + up the payments on + their second mortgage when they + cannot afford to + +On line 6990: + their second mortgage + when they cannot afford to + make payments on both + +On line 6990: + to make payments on + both obligations. According + to Laurie Goodman, + +On line 6990: + make payments on both + obligations. According to + Laurie Goodman, for + +On line 6990: + Laurie Goodman, for + mortgage modifications + to work, the holders + +On line 6990: + Goodman, for mortgage + modifications to work, + the holders of the + +On line 6990: + modifications + to work, the holders of the + second mortgages will + +On line 6990: + to work, the holders + of the second mortgages will + have to accept some + +On line 6990: + the holders of the + second mortgages will have to + accept some losses—a + +On line 6992: + modifications + difficult. For example, + there are competing + +On line 6992: + example, there are + competing interests among + various investors + +On line 6994: + from a foreclosure + may be enough to pay off the + investors holding the + +On line 6994: + may be enough to pay + off the investors holding the + highest-rated tranches + +On line 6994: + the investors holding + the highest-rated tranches of + securities, while + +On line 6994: + securities, while + the holders of the lower + tranches would likely + +On line 6994: + the holders of the + lower tranches would likely + be wiped out. As a + +On line 6994: + lower tranches would + likely be wiped out. As a + result, the holders + +On line 6994: + tranches would likely + be wiped out. As a result, + the holders of the + +On line 6994: + likely be wiped out. + As a result, the holders + of the lower-rated + +On line 6994: + be wiped out. As a + result, the holders of the + lower-rated tranches + +On line 6994: + As a result, the + holders of the lower-rated + tranches might prefer + +On line 6994: + tranches might prefer + a modification, if + it produced more cash + +On line 6994: + modification, + if it produced more cash flow + than a foreclosure. + +On line 6996: + if it produced more + cash flow than a foreclosure. + Other efforts in + +On line 6996: + more cash flow than a + foreclosure. Other efforts + in the private and + +On line 6996: + foreclosure. Other + efforts in the private and + public sectors to + +On line 6996: + and public sectors + to address the foreclosure + crisis have focused + +On line 6996: + crisis have focused + on encouraging short sales. + In theory, short + +On line 6996: + encouraging short + sales. In theory, short sales + should help borrowers, + +On line 6996: + sales. In theory, + short sales should help borrowers, + neighborhoods, and lenders. + +On line 6996: + dilapidated + homes that encourage crime; and + lenders avoid some of the + +On line 6996: + homes that encourage + crime; and lenders avoid some of the + costs of foreclosure. + +On line 6996: + crime; and lenders avoid some + of the costs of foreclosure. + Nonetheless, such deals + +On line 6996: + avoid some of the costs + of foreclosure. Nonetheless, + such deals frequently + +On line 6996: + some of the costs of + foreclosure. Nonetheless, such + deals frequently stall + +On line 6996: + Nonetheless, such deals + frequently stall because the + process is cumbersome, + +On line 6996: + process is cumbersome, + demands coordination, + and eats up resources. + +On line 6996: + and eats up resources. + For example, lenders can be + reluctant to sign + +On line 6996: + For example, lenders + can be reluctant to sign + off on the buyer’s + +On line 6996: + example, lenders can + be reluctant to sign off + on the buyer’s bid + +On line 6996: + can be reluctant + to sign off on the buyer’s + bid because they are + +On line 6996: + be reluctant to + sign off on the buyer’s bid + because they are not + +On line 6996: + to sign off on the + buyer’s bid because they are + not sure that the home + +On line 6996: + on the buyer’s bid + because they are not sure that + the home is being + +On line 6996: + buyer’s bid because + they are not sure that the home + is being sold at + +On line 6996: + because they are not + sure that the home is being + sold at the highest + +On line 6996: + are not sure that the + home is being sold at the + highest possible + +On line 6996: + sure that the home is + being sold at the highest + possible price. In + +On line 6996: + home is being sold + at the highest possible + price. In addition, + +On line 6996: + is being sold at + the highest possible price. + In addition, when + +On line 6996: + being sold at the + highest possible price. In + addition, when there + +On line 6996: + highest possible + price. In addition, when there + are two mortgages, the + +On line 6996: + possible price. In + addition, when there are two + mortgages, the holders + +On line 6996: + price. In addition, + when there are two mortgages, the + holders of the first + +On line 6996: + there are two mortgages, + the holders of the first and + second mortgages must + +On line 7000: + the first and second + mortgages must both agree to the + resolution. FLAWS + +On line 7002: + must both agree to the + resolution. FLAWS IN THE + PROCESS: "SPECULATION + +On line 7002: + resolution. FLAWS + IN THE PROCESS: "SPECULATION + AND WORSTCASE SCENARIOS" + +On line 7004: + AND WORSTCASE SCENARIOS" + In additional issues + have come to the fore, + +On line 7004: + WORSTCASE SCENARIOS" In + additional issues have + come to the fore, as + +On line 7004: + revealed systemic flaws + in how lenders documented + and processed mortgages + +On line 7004: + and processed mortgages + for securitization. + Legal experts and + +On line 7004: + procedural and + documentation problems + with foreclosure have + +On line 7004: + documentation + problems with foreclosure have + been laid out in court + +On line 7004: + foreclosure have been + laid out in court cases and + academic studies + +On line 7004: + have been laid out in + court cases and academic + studies for years, but + +On line 7004: + out in court cases + and academic studies for + years, but were ignored + +On line 7006: + of foreclosures rose + so dramatically. All + of the nation’s state + +On line 7006: + All of the nation’s + state attorneys general + banded together + +On line 7006: + general banded + together in the fall of + to investigate + +On line 7006: + harmed by improper + foreclosures. For example, + lenders have relied on + +On line 7006: + For example, lenders + have relied on "robo-signers" who + substituted speed + +On line 7006: + relied on "robo-signers" + who substituted speed for + accuracy by + +On line 7006: + who substituted + speed for accuracy by + signing, and sometimes + +On line 7006: + affidavits claiming + personal knowledge of facts + about mortgages that they + +On line 7006: + facts about mortgages that + they did not actually + know to be true. One + +On line 7006: + about mortgages that they + did not actually know + to be true. One such + +On line 7006: + actually know + to be true. One such "robo-signer," + Jeffrey Stephan of GMAC, + +On line 7006: + know to be true. One + such "robo-signer," Jeffrey Stephan of + GMAC, said that he signed + +On line 7006: + true. One such "robo-signer," + Jeffrey Stephan of GMAC, said that + he signed affidavits + +On line 7006: + such "robo-signer," Jeffrey + Stephan of GMAC, said that he signed + affidavits in a + +On line 7008: + Jeffrey Stephan of GMAC, + said that he signed affidavits + in a month— roughly + +On line 7008: + Stephan of GMAC, said that + he signed affidavits in a + month— roughly per minute, + +On line 7008: + of GMAC, said that he + signed affidavits in a month— + roughly per minute, in + +On line 7008: + affidavits in a + month— roughly per minute, in a + 40-hour workweek—making + +On line 7008: + roughly per minute, in + a 40-hour workweek—making it + highly unlikely + +On line 7008: + per minute, in a 40-hour + workweek—making it highly + unlikely that he + +On line 7008: + workweek—making it + highly unlikely that he + verified payment + +On line 7008: + highly unlikely + that he verified payment + histories in each + +On line 7008: + that he verified + payment histories in each + individual + +On line 7008: + payment histories + in each individual + case of foreclosure.29 + +On line 7008: + case of foreclosure.29 + In addition, a number + of court cases have + +On line 7008: + of foreclosure.29 In + addition, a number of + court cases have been + +On line 7008: + In addition, a + number of court cases have + been filed alleging + +On line 7008: + of court cases have + been filed alleging invalid + notarizations, forged + +On line 7008: + legal standing to + foreclose—that is, being the + entity with the + +On line 7010: + the entity with + the right to repossess a + home.30 The problem of + +On line 7010: + to repossess a + home.30 The problem of legal + standing arose because + +On line 7010: + speed up processing, + the financial industry + created Mortgage + +On line 7010: + created Mortgage + Electronic Registration + Systems, Inc. (MERS), an + +On line 7010: + Systems, Inc. (MERS), an + organization made up + of mortgage lenders. It + +On line 7010: + up of mortgage lenders. + It tracks changes in servicing + rights and ownership + +On line 7010: + in servicing rights + and ownership interests + in mortgage loans. MERS + +On line 7010: + servicing rights and + ownership interests in + mortgage loans. MERS is + +On line 7010: + in mortgage loans. MERS + is designated as the + "mortgagee of record" on + +On line 7010: + the "mortgagee of record" + on behalf of its members, + a status that is + +On line 7010: + "mortgagee of record" on + behalf of its members, a + status that is meant + +On line 7010: + of record" on behalf + of its members, a status + that is meant to give + +On line 7010: + record" on behalf of + its members, a status that + is meant to give it + +On line 7010: + on behalf of its + members, a status that is + meant to give it the + +On line 7010: + of its members, a + status that is meant to give + it the legal right + +On line 7010: + a status that is + meant to give it the legal + right to foreclose if + +On line 7010: + status that is meant + to give it the legal right + to foreclose if the + +On line 7010: + is meant to give it + the legal right to foreclose + if the borrower + +On line 7010: + meant to give it the + legal right to foreclose if + the borrower fails + +On line 7010: + the legal right to + foreclose if the borrower + fails to pay the loan. + +On line 7010: + if the borrower + fails to pay the loan. MERS has + registered million + +On line 7010: + fails to pay the loan. + MERS has registered million + mortgages since launching + +On line 7010: + pay the loan. MERS has + registered million mortgages + since launching in and + +On line 7010: + MERS has registered + million mortgages since launching + in and had million + +On line 7010: + million mortgages since + launching in and had million + loans outstanding as + +On line 7010: + since launching in and + had million loans outstanding + as of November + +On line 7012: + launching in and had + million loans outstanding as + of November The + +On line 7012: + outstanding as of + November The standing of + MERS or its designees + +On line 7012: + as of November + The standing of MERS or its + designees to foreclose + +On line 7012: + The standing of MERS + or its designees to foreclose + has been called into + +On line 7012: + or its designees to + foreclose has been called into + question by courts and + +On line 7012: + designees to foreclose + has been called into question + by courts and academics, + +On line 7012: + foreclose has been called + into question by courts and + academics, however.32 + +On line 7012: + has been called into + question by courts and academics, + however.32 In a + +On line 7012: + question by courts and + academics, however.32 In a + hearing before the + +On line 7012: + academics, however.32 + In a hearing before the + House Judiciary + +On line 7012: + Committee on the + foreclosure crisis, New York + State Supreme Court Justice + +On line 7012: + on the foreclosure + crisis, New York State Supreme Court + Justice F. Dana Winslow + +On line 7012: + State Supreme Court Justice + F. Dana Winslow testified that + "standing has become + +On line 7012: + Court Justice F. Dana + Winslow testified that "standing + has become such a + +On line 7012: + Winslow testified that + "standing has become such a + pervasive issue + +On line 7012: + "standing has become + such a pervasive issue + that I frequently + +On line 7012: + has become such a + pervasive issue that I + frequently use the + +On line 7012: + I frequently use + the term ‘presumptive mortgagee + in foreclosure’" to + +On line 7012: + the term ‘presumptive + mortgagee in foreclosure’" to + describe MERS. Because + +On line 7014: + unrecorded transfers + of the legal ownership + of the [m]ortgage," it + +On line 7014: + ownership of the + [m]ortgage," it is unclear whether + MERS continued to + +On line 7014: + the [m]ortgage," it is + unclear whether MERS continued + to be the mortgagee + +On line 7014: + whether MERS continued + to be the mortgagee after + subsequent sales of + +On line 7014: + to be the mortgagee + after subsequent sales of + the loan, according + +On line 7014: + the mortgagee after + subsequent sales of the loan, + according to Winslow.33 + +On line 7014: + after subsequent + sales of the loan, according + to Winslow.33 Moreover, courts + +On line 7014: + subsequent sales of + the loan, according to Winslow.33 + Moreover, courts have held + +On line 7014: + the loan, according + to Winslow.33 Moreover, courts have held + that MERS does not own + +On line 7014: + loan, according to + Winslow.33 Moreover, courts have held that + MERS does not own the + +On line 7014: + to Winslow.33 Moreover, courts + have held that MERS does not own + the underlying + +On line 7014: + Winslow.33 Moreover, courts have + held that MERS does not own the + underlying note + +On line 7014: + held that MERS does not + own the underlying note + and therefore cannot + +On line 7014: + underlying note + and therefore cannot transfer + the note or the deed + +On line 7014: + and therefore cannot + transfer the note or the deed + of trust, or foreclose + +On line 7014: + cannot transfer the + note or the deed of trust, or + foreclose upon the + +On line 7016: + the note or the deed + of trust, or foreclose upon + the property.34 Winslow + +On line 7016: + of trust, or foreclose + upon the property.34 Winslow + also highlighted + +On line 7016: + or foreclose upon + the property.34 Winslow also + highlighted other + +On line 7016: + the property.34 Winslow + also highlighted other + deficiencies in + +On line 7016: + deficiencies in + MERS’ standing, many involving + sloppy paperwork: + +On line 7016: + involving sloppy + paperwork: the failure to + produce the correct + +On line 7016: + sloppy paperwork: + the failure to produce the + correct promissory + +On line 7016: + gaps in the chain of + title, including printouts + of the title that + +On line 7016: + of the title that + have differed substantially + from information + +On line 7016: + from information + provided previously; + retroactive assignments + +On line 7016: + retroactive assignments + of notes and mortgages in an + effort to clean up + +On line 7016: + notes and mortgages in + an effort to clean up the + paperwork problems + +On line 7016: + an effort to clean + up the paperwork problems + from earlier years; + +On line 7016: + on assignments and + affidavits attesting to + the ownership of + +On line 7016: + to the ownership + of the note and mortgage; and + questionable notary + +On line 7018: + the note and mortgage; + and questionable notary stamps + on assignments.35 On + +On line 7018: + on assignments.35 On + November a bankruptcy + court ruled that the Bank + +On line 7018: + On November a + bankruptcy court ruled that the + Bank of New York could + +On line 7018: + a bankruptcy court + ruled that the Bank of New York + could not foreclose on + +On line 7018: + bankruptcy court ruled + that the Bank of New York could + not foreclose on a + +On line 7018: + court ruled that the Bank + of New York could not foreclose + on a loan it had + +On line 7018: + that the Bank of New + York could not foreclose on a + loan it had purchased + +On line 7018: + the Bank of New York + could not foreclose on a loan + it had purchased from + +On line 7018: + could not foreclose on + a loan it had purchased from + Countrywide, because + +On line 7020: + loan it had purchased + from Countrywide, because MERS + had failed to endorse + +On line 7020: + it had purchased from + Countrywide, because MERS had + failed to endorse or + +On line 7020: + Countrywide, because + MERS had failed to endorse or + deliver the note + +On line 7020: + because MERS had failed + to endorse or deliver + the note to the Bank + +On line 7020: + had failed to endorse + or deliver the note to + the Bank of New York + +On line 7020: + failed to endorse or + deliver the note to the + Bank of New York as + +On line 7020: + or deliver the + note to the Bank of New York + as required by the + +On line 7020: + Bank of New York as + required by the pooling and + servicing agreement. + +On line 7020: + York as required by + the pooling and servicing + agreement. This ruling + +On line 7020: + it was customary + for Countrywide to maintain + possession of the + +On line 7020: + for Countrywide to + maintain possession of the + note and related + +On line 7020: + maintain possession + of the note and related + loan documents when + +On line 7022: + note and related + loan documents when loans were + securitized.36 Across + +On line 7022: + documents when loans + were securitized.36 Across the + market, some mortgage + +On line 7022: + market, some mortgage + securities holders have + sued the issuers of + +On line 7022: + succeed, investors that + own mortgage-backed securities + could force the issuers + +On line 7022: + the issuers to buy + them back at the original + price—possibly + +On line 7022: + then be the owners + of the securities and + would bear the risk of + +On line 7022: + be the owners of + the securities and would + bear the risk of loss.38 + +On line 7024: + the owners of the + securities and would bear + the risk of loss.38 The + +On line 7024: + the securities + and would bear the risk of loss.38 + The Congressional + +On line 7024: + and would bear the risk + of loss.38 The Congressional + Oversight Panel, in + +On line 7024: + a report issued + in November said it is + on the lookout for + +On line 7024: + report issued in + November said it is on + the lookout for such + +On line 7024: + the lookout for such + risks: "If documentation + problems prove to be + +On line 7024: + pervasive and, more + importantly, throw into + doubt the ownership + +On line 7024: + throw into doubt the + ownership of not only + foreclosed properties + +On line 7024: + foreclosed properties + but also pooled mortgages, the + consequences could be + +On line 7024: + This sentiment was + echoed by University of + Iowa law professor + +On line 7024: + University of + Iowa law professor Katherine + Porter who has studied + +On line 7024: + Iowa law professor + Katherine Porter who has studied + foreclosures and the + +On line 7024: + Katherine Porter who has + studied foreclosures and the + law: "It is lack of + +On line 7024: + Porter who has studied + foreclosures and the law: "It + is lack of knowledge + +On line 7024: + foreclosures and the + law: "It is lack of knowledge + of how widespread the + +On line 7024: + the law: "It is lack + of knowledge of how widespread + the problems may be + +On line 7024: + law: "It is lack of + knowledge of how widespread the + problems may be that + +On line 7024: + lack of knowledge of + how widespread the problems may + be that is turning + +On line 7024: + of knowledge of how + widespread the problems may be + that is turning the + +On line 7024: + be that is turning + the allegations into + a crisis. Lack of + +On line 7024: + feeds speculation + and worst-case scenarios."40 Adam + Levitin, a Georgetown + +On line 7024: + Levitin, a Georgetown + University associate + professor of law, + +On line 7024: + professor of law, + has estimated that the + claims could be in the + +On line 7024: + has estimated + that the claims could be in the + trillions of dollars, + +On line 7024: + that the claims could be + in the trillions of dollars, + rendering major + +On line 7024: + in the trillions of + dollars, rendering major + U.S. banks insolvent.41 + +On line 7026: + dollars, rendering + major U.S. banks insolvent.41 + NEIGHBORHOOD EFFECTS: + +On line 7028: + NOT LEAVING" For the + millions of Americans who + paid their bills, never + +On line 7028: + For the millions of + Americans who paid their bills, + never flipped a house, + +On line 7028: + of Americans who + paid their bills, never flipped a + house, and had never + +On line 7028: + Americans who paid + their bills, never flipped a house, + and had never heard + +On line 7028: + paid their bills, never + flipped a house, and had never + heard of a CDO, the + +On line 7028: + never flipped a house, + and had never heard of a + CDO, the financial + +On line 7028: + flipped a house, and had + never heard of a CDO, the + financial crisis + +On line 7028: + and had never heard + of a CDO, the financial + crisis has been long, + +On line 7028: + heard of a CDO, the + financial crisis has been + long, bewildering, + +On line 7028: + financial crisis + has been long, bewildering, + and painful. A crisis + +On line 7028: + crisis has been long, + bewildering, and painful. A + crisis that started + +On line 7028: + bewildering, and + painful. A crisis that started + with a housing boom + +On line 7028: + and painful. A crisis + that started with a housing + boom that became a + +On line 7028: + that started with a + housing boom that became a + bubble has come back + +On line 7028: + with a housing boom + that became a bubble has + come back full circle + +On line 7028: + a housing boom that + became a bubble has come + back full circle to + +On line 7028: + a bubble has come + back full circle to forests of + "for sale" signs—but this + +On line 7028: + bubble has come back + full circle to forests of "for + sale" signs—but this time + +On line 7028: + come back full circle + to forests of "for sale" signs—but + this time attracting + +On line 7028: + back full circle to + forests of "for sale" signs—but this + time attracting few + +On line 7028: + to forests of "for sale" + signs—but this time attracting + few buyers. Stores have + +On line 7028: + this time attracting + few buyers. Stores have shuttered; + employers have cut + +On line 7028: + few buyers. Stores have + shuttered; employers have cut + jobs; hopes have fled. Too + +On line 7028: + Americans today + find themselves in suburban + ghost towns or urban + +On line 7028: + today find themselves + in suburban ghost towns or + urban wastelands, where + +On line 7028: + or urban wastelands, + where properties are vacant + and construction cranes + +On line 7028: + urban wastelands, where + properties are vacant and + construction cranes do + +On line 7028: + where properties are + vacant and construction cranes + do not lift a thing + +On line 7030: + and construction cranes + do not lift a thing for months. + Renters, who never bought + +On line 7030: + do not lift a thing + for months. Renters, who never bought + into the madness, + +On line 7030: + a thing for months. Renters, + who never bought into the + madness, are also + +On line 7030: + never bought into + the madness, are also among + the victims as lenders + +On line 7030: + madness, are also + among the victims as lenders seize + property after + +On line 7030: + among the victims as + lenders seize property after + landlords default on + +On line 7030: + victims as lenders seize + property after landlords + default on loans. Renters + +On line 7030: + lenders seize property + after landlords default on + loans. Renters can lose the + +On line 7030: + property after + landlords default on loans. Renters + can lose the roof over + +On line 7030: + landlords default on + loans. Renters can lose the roof over + their heads as well as + +On line 7030: + loans. Renters can lose the + roof over their heads as well as + their security + +On line 7030: + heads as well as their + security deposits. In + Minneapolis, + +On line 7030: + Minneapolis, + as many as of buildings with + foreclosures in and + +On line 7030: + testimony by + Deputy Assistant Secretary + Erika Poethig + +On line 7032: + Erika Poethig + from the U.S. Department of + Housing and Urban + +On line 7032: + Representatives + Subcommittee on Housing + and Community + +On line 7032: + Subcommittee on + Housing and Community + Opportunity.42 + +On line 7036: + Opportunity.42 + For children, a repossessed + house—whether rented or + +On line 7038: + bought—is destabilizing. + The impact of foreclosures + on children around the + +On line 7038: + of foreclosures on + children around the country has + been enormous. One-third of + +On line 7038: + on children around the + country has been enormous. One-third + of the children who + +On line 7038: + the country has been + enormous. One-third of the children + who experienced + +On line 7038: + enormous. One-third of the + children who experienced + homelessness after + +On line 7038: + did so because of + foreclosures of the housing + that their parents owned + +On line 7038: + of foreclosures of + the housing that their parents + owned or were renting, + +On line 7038: + the housing that their + parents owned or were renting, + according to a + +On line 7038: + that their parents owned + or were renting, according + to a recent study.43 + +On line 7038: + their parents owned or + were renting, according to + a recent study.43 One + +On line 7038: + parents owned or were + renting, according to a + recent study.43 One school + +On line 7038: + a recent study.43 One + school official in Nevada + told the Commission + +On line 7038: + recent study.43 One school + official in Nevada told + the Commission about + +On line 7038: + educational + system created by the + economic crisis.44 + +On line 7040: + system created + by the economic crisis.44 + All around, the demand + +On line 7040: + by the economic + crisis.44 All around, the demand + from people who need + +On line 7040: + crisis.44 All around, the + demand from people who need + help is outstripping + +On line 7040: + resources. Coast to coast, + communities are trying + to stretch housing aid + +On line 7040: + coast, communities + are trying to stretch housing + aid budgets to help + +On line 7040: + are trying to stretch + housing aid budgets to help + people displaced by + +On line 7040: + help people displaced + by foreclosures. In Nevada, + for example, Clark + +On line 7040: + by foreclosures. In + Nevada, for example, Clark + County, which contains + +On line 7040: + for example, Clark + County, which contains million + people living in + +On line 7040: + County, which contains + million people living in + and around Las Vegas, + +On line 7040: + which contains million + people living in and around + Las Vegas, was forced + +On line 7040: + around Las Vegas, was + forced to cut its Financial + Housing Assistance + +On line 7040: + Vegas, was forced to + cut its Financial Housing + Assistance program, + +On line 7040: + cut its Financial + Housing Assistance program, + despite the clear needs + +On line 7040: + Financial Housing + Assistance program, despite + the clear needs in the + +On line 7040: + Assistance program, + despite the clear needs in the + community. Gail + +On line 7040: + despite the clear needs + in the community. Gail + Burks, the president + +On line 7040: + the clear needs in the + community. Gail Burks, the + president and chief + +On line 7040: + the community. + Gail Burks, the president and + chief executive + +On line 7040: + community. Gail + Burks, the president and chief + executive of + +On line 7040: + the president and + chief executive of the + Nevada Fair Housing + +On line 7040: + Nevada Fair Housing + Center, told the Commission + that her group finds that + +On line 7040: + Fair Housing Center, + told the Commission that her + group finds that many they + +On line 7040: + Commission that her + group finds that many they counsel + through the foreclosure + +On line 7040: + group finds that many they + counsel through the foreclosure + process are in despair. + +On line 7040: + that many they counsel + through the foreclosure process are + in despair. "It’s very + +On line 7040: + through the foreclosure + process are in despair. "It’s very + stressful. There are times + +On line 7040: + foreclosure process are + in despair. "It’s very stressful. + There are times that the + +On line 7040: + process are in despair. + "It’s very stressful. There are times + that the couples we + +On line 7040: + are in despair. "It’s + very stressful. There are times that + the couples we are + +On line 7040: + "It’s very stressful. There + are times that the couples we + are helping end up + +On line 7040: + the couples we are + helping end up divorcing, + sometimes before the + +On line 7040: + are helping end up + divorcing, sometimes before + the process is over. We’ve + +On line 7040: + end up divorcing, + sometimes before the process is + over. We’ve also seen + +On line 7040: + divorcing, sometimes + before the process is over. We’ve + also seen threats of + +On line 7042: + sometimes before the + process is over. We’ve also seen + threats of suicide."45 And + +On line 7042: + is over. We’ve also + seen threats of suicide."45 And the + stories continue. + +On line 7042: + We’ve also seen threats + of suicide."45 And the stories + continue. Karen Mann, + +On line 7042: + threats of suicide."45 And + the stories continue. Karen + Mann, the appraiser + +On line 7042: + of suicide."45 And the + stories continue. Karen Mann, + the appraiser from + +On line 7042: + from Discovery Bay, + California, testified + to the Commission + +On line 7042: + to the Commission + about her family’s circumstances. + Her daughter and son-in-law + +On line 7042: + son-in-law refinanced their + mortgage into an adjustable-rate + mortgage. When the time + +On line 7042: + their mortgage into + an adjustable-rate mortgage. When the + time came for the rate + +On line 7042: + mortgage into an + adjustable-rate mortgage. When the time + came for the rate to + +On line 7042: + into an adjustable-rate + mortgage. When the time came for + the rate to adjust + +On line 7042: + an adjustable-rate mortgage. + When the time came for the rate + to adjust upward, + +On line 7042: + adjustable-rate mortgage. When + the time came for the rate to + adjust upward, new + +On line 7042: + the time came for the + rate to adjust upward, new + financial troubles + +On line 7042: + to adjust upward, + new financial troubles made + the payments more than + +On line 7042: + adjust upward, new + financial troubles made the + payments more than the + +On line 7042: + the payments more than + the family could afford. + Because the market + +On line 7042: + the family could + afford. Because the market + value of the home + +On line 7042: + could afford. Because + the market value of the + home was nearly equal + +On line 7042: + afford. Because the + market value of the home + was nearly equal to + +On line 7042: + the market value + of the home was nearly equal + to their mortgage debt, + +On line 7042: + market value of + the home was nearly equal to + their mortgage debt, the + +On line 7042: + the home was nearly + equal to their mortgage debt, the + family’s attempts to + +On line 7042: + was nearly equal to + their mortgage debt, the family’s + attempts to get the + +On line 7042: + their mortgage debt, the + family’s attempts to get the + mortgage modified + +On line 7042: + family’s attempts to + get the mortgage modified + were fruitless. They lined + +On line 7042: + to get the mortgage + modified were fruitless. They + lined up a buyer + +On line 7042: + mortgage modified + were fruitless. They lined up a + buyer for a short + +On line 7042: + were fruitless. They lined + up a buyer for a short + sale, but the deal was + +On line 7042: + fruitless. They lined up + a buyer for a short sale, + but the deal was nixed. + +On line 7044: + a buyer for a + short sale, but the deal was nixed. + Then, when medical + +On line 7044: + short sale, but the deal + was nixed. Then, when medical + problems created + +On line 7044: + medical problems + created yet another + challenge, the couple + +On line 7044: + problems created + yet another challenge, the + couple and their four + +On line 7044: + challenge, the couple + and their four children moved in + with Mann. "The children + +On line 7044: + and their four children + moved in with Mann. "The children + were relocated + +On line 7044: + their four children moved + in with Mann. "The children were + relocated to + +On line 7044: + moved in with Mann. "The + children were relocated + to new schools, and the + +On line 7044: + with Mann. "The children + were relocated to new + schools, and the adults dealt + +On line 7044: + Mann. "The children were + relocated to new schools, + and the adults dealt with + +On line 7044: + schools, and the adults dealt + with the pain and emotional + suffering while they + +On line 7044: + adults dealt with the pain + and emotional suffering + while they were trying + +On line 7044: + dealt with the pain and + emotional suffering while + they were trying to + +On line 7044: + while they were trying + to rebuild their lives," Mann said. + The couple filed for + +On line 7044: + trying to rebuild + their lives," Mann said. The couple + filed for bankruptcy. + +On line 7044: + to rebuild their lives," + Mann said. The couple filed for + bankruptcy. Two months + +On line 7044: + their lives," Mann said. The + couple filed for bankruptcy. + Two months after the + +On line 7044: + The couple filed for + bankruptcy. Two months after + the bankruptcy was + +On line 7044: + for bankruptcy. Two + months after the bankruptcy + was completed, the + +On line 7044: + bankruptcy. Two months + after the bankruptcy was + completed, the lender + +On line 7044: + Two months after the + bankruptcy was completed, + the lender asked them if + +On line 7044: + the bankruptcy was + completed, the lender asked them + if they wanted to + +On line 7044: + was completed, the + lender asked them if they wanted + to modify their + +On line 7046: + the lender asked them if + they wanted to modify + their mortgage.46 In Cape + +On line 7046: + lender asked them if they + wanted to modify their + mortgage.46 In Cape Coral, + +On line 7046: + if they wanted to + modify their mortgage.46 In + Cape Coral, Florida, + +On line 7046: + mortgage.46 In Cape Coral, + Florida, Dawn Hunt and her + husband, a mailman, + +On line 7046: + Cape Coral, Florida, + Dawn Hunt and her husband, a + mailman, and their two + +On line 7046: + Florida, Dawn Hunt + and her husband, a mailman, + and their two children + +On line 7046: + husband, a mailman, + and their two children live in + an attractive ranch-style + +On line 7046: + and their two children + live in an attractive ranch-style + home they bought for about + +On line 7046: + their two children live + in an attractive ranch-style home + they bought for about more + +On line 7046: + two children live in + an attractive ranch-style home they + bought for about more than + +On line 7046: + children live in an + attractive ranch-style home they bought + for about more than a + +On line 7046: + in an attractive + ranch-style home they bought for about more + than a decade ago. It + +On line 7046: + an attractive ranch-style + home they bought for about more than + a decade ago. It was + +On line 7046: + attractive ranch-style home + they bought for about more than a + decade ago. It was a + +On line 7046: + ranch-style home they bought for + about more than a decade ago. It + was a quiet, 20-year-old + +On line 7046: + for about more than a + decade ago. It was a quiet, + 20-year-old subdivision + +On line 7046: + about more than a decade + ago. It was a quiet, 20-year-old + subdivision where + +On line 7046: + It was a quiet, + 20-year-old subdivision where most + of the residents + +On line 7046: + was a quiet, 20-year-old + subdivision where most of + the residents were + +On line 7046: + 20-year-old subdivision + where most of the residents + were homeowners. In + +On line 7046: + subdivision where + most of the residents were + homeowners. In and + +On line 7046: + of the residents + were homeowners. In and builders + rushed to the area and + +On line 7046: + the residents were + homeowners. In and builders rushed + to the area and threw + +On line 7046: + were homeowners. In + and builders rushed to the area and + threw up dozens of new + +On line 7046: + homeowners. In and + builders rushed to the area and threw + up dozens of new homes + +On line 7046: + In and builders rushed to + the area and threw up dozens of + new homes on empty + +On line 7046: + and builders rushed to the + area and threw up dozens of new + homes on empty lots. + +On line 7046: + rushed to the area and + threw up dozens of new homes on + empty lots. Homebuilder + +On line 7046: + the area and threw up + dozens of new homes on empty + lots. Homebuilder Comfort + +On line 7046: + area and threw up dozens + of new homes on empty lots. + Homebuilder Comfort Homes + +On line 7046: + dozens of new homes on + empty lots. Homebuilder Comfort + Homes of Florida + +On line 7048: + new homes on empty + lots. Homebuilder Comfort Homes of + Florida LLC broke + +On line 7048: + empty lots. Homebuilder + Comfort Homes of Florida + LLC broke ground for a + +On line 7048: + lots. Homebuilder Comfort + Homes of Florida LLC broke + ground for a house across + +On line 7048: + Homebuilder Comfort Homes + of Florida LLC broke ground + for a house across the + +On line 7048: + Homes of Florida + LLC broke ground for a house across + the street from the Hunts, + +On line 7048: + of Florida LLC + broke ground for a house across the + street from the Hunts, but + +On line 7048: + Florida LLC broke + ground for a house across the street + from the Hunts, but did + +On line 7048: + LLC broke ground for a + house across the street from the Hunts, + but did not complete + +On line 7048: + broke ground for a house + across the street from the Hunts, but + did not complete it. + +On line 7050: + ground for a house across + the street from the Hunts, but did + not complete it. This + +On line 7050: + for a house across the + street from the Hunts, but did not + complete it. This fall, + +On line 7050: + house across the street from + the Hunts, but did not complete + it. This fall, the house + +On line 7050: + across the street from the + Hunts, but did not complete it. + This fall, the house sat + +On line 7050: + street from the Hunts, but + did not complete it. This fall, + the house sat vacant, + +On line 7050: + from the Hunts, but did + not complete it. This fall, the + house sat vacant, an + +On line 7050: + did not complete it. + This fall, the house sat vacant, + an empty shell. No + +On line 7050: + This fall, the house sat + vacant, an empty shell. No + stucco was ever + +On line 7050: + the house sat vacant, + an empty shell. No stucco + was ever applied + +On line 7050: + house sat vacant, an + empty shell. No stucco was + ever applied to + +On line 7050: + an empty shell. No + stucco was ever applied + to the concrete block + +On line 7050: + stucco was ever + applied to the concrete block + exterior, and + +On line 7050: + and the house had no + interior walls. A wasp + nest decorated + +On line 7050: + interior walls. + A wasp nest decorated + the electrical box + +On line 7050: + decorated the + electrical box near the front + door. The untended + +On line 7050: + electrical box near + the front door. The untended + grass had grown four feet + +On line 7052: + box near the front door. + The untended grass had grown + four feet high. Sharp sand + +On line 7052: + near the front door. The + untended grass had grown four + feet high. Sharp sand spurs + +On line 7052: + door. The untended + grass had grown four feet high. Sharp + sand spurs in the brush + +On line 7052: + The untended grass + had grown four feet high. Sharp sand + spurs in the brush made + +On line 7052: + untended grass had + grown four feet high. Sharp sand spurs + in the brush made it + +On line 7052: + grass had grown four feet + high. Sharp sand spurs in the brush + made it difficult + +On line 7052: + had grown four feet high. + Sharp sand spurs in the brush made + it difficult to + +On line 7052: + spurs in the brush made + it difficult to approach + the property. Two + +On line 7052: + in the brush made it + difficult to approach the + property. Two doors + +On line 7052: + made it difficult + to approach the property. + Two doors down from the + +On line 7052: + it difficult to + approach the property. Two + doors down from the Hunts, + +On line 7052: + doors down from the Hunts, + another house was also + vacant, left empty + +On line 7052: + another house was + also vacant, left empty + when a family + +On line 7052: + also vacant, left + empty when a family + split up and moved a + +On line 7052: + left empty when a + family split up and moved + a year earlier. + +On line 7052: + family split up + and moved a year earlier. + They abandoned a car + +On line 7052: + split up and moved a + year earlier. They abandoned + a car in the garage. + +On line 7052: + up and moved a year + earlier. They abandoned a + car in the garage. The + +On line 7052: + a year earlier. + They abandoned a car in the + garage. The roof leaked, and + +On line 7052: + year earlier. They + abandoned a car in the garage. + The roof leaked, and a + +On line 7052: + They abandoned a car + in the garage. The roof leaked, and + a blue plastic tarp + +On line 7052: + abandoned a car in + the garage. The roof leaked, and a + blue plastic tarp put + +On line 7052: + car in the garage. The + roof leaked, and a blue plastic + tarp put in place to + +On line 7052: + in the garage. The roof + leaked, and a blue plastic tarp + put in place to keep + +On line 7052: + the garage. The roof leaked, + and a blue plastic tarp put + in place to keep the + +On line 7052: + garage. The roof leaked, and + a blue plastic tarp put in + place to keep the rain + +On line 7052: + The roof leaked, and a + blue plastic tarp put in place + to keep the rain out + +On line 7052: + roof leaked, and a blue + plastic tarp put in place to + keep the rain out now + +On line 7052: + and a blue plastic + tarp put in place to keep the + rain out now flaps in + +On line 7052: + a blue plastic tarp + put in place to keep the rain + out now flaps in the + +On line 7052: + blue plastic tarp put + in place to keep the rain out + now flaps in the breeze. + +On line 7052: + plastic tarp put in + place to keep the rain out now + flaps in the breeze. The + +On line 7052: + tarp put in place to + keep the rain out now flaps in + the breeze. The Hunts called + +On line 7052: + put in place to keep + the rain out now flaps in the + breeze. The Hunts called the + +On line 7052: + place to keep the rain + out now flaps in the breeze. The + Hunts called the police + +On line 7052: + keep the rain out now + flaps in the breeze. The Hunts called + the police after + +On line 7052: + out now flaps in the + breeze. The Hunts called the police + after vandals broke + +On line 7052: + flaps in the breeze. The + Hunts called the police after + vandals broke into + +On line 7052: + the breeze. The Hunts called + the police after vandals + broke into the house + +On line 7052: + breeze. The Hunts called the + police after vandals broke + into the house one + +On line 7052: + the police after + vandals broke into the house + one night; intruders + +On line 7052: + vandals broke into + the house one night; intruders + have been back twice more + +On line 7052: + broke into the house + one night; intruders have been + back twice more in the + +On line 7054: + one night; intruders + have been back twice more in the + daylight.47 ow of the + +On line 7054: + intruders have been + back twice more in the daylight.47 + ow of the homes in + +On line 7054: + back twice more in the + daylight.47 ow of the homes in + the Hunts’ neighborhood + +On line 7054: + more in the daylight.47 + ow of the homes in the Hunts’ + neighborhood are in + +On line 7054: + daylight.47 ow of the + homes in the Hunts’ neighborhood + are in default, are + +On line 7054: + ow of the homes in + the Hunts’ neighborhood are in + default, are in the + +On line 7054: + the Hunts’ neighborhood + are in default, are in the + foreclosure process, or + +On line 7054: + are in default, are + in the foreclosure process, or + have been taken back + +On line 7054: + in default, are in + the foreclosure process, or have + been taken back by + +On line 7054: + default, are in the + foreclosure process, or have been + taken back by the + +On line 7054: + in the foreclosure + process, or have been taken back + by the bank.48 Most of + +On line 7054: + the foreclosure process, + or have been taken back by + the bank.48 Most of the + +On line 7054: + or have been taken + back by the bank.48 Most of the + other houses in + +On line 7054: + back by the bank.48 Most + of the other houses in + the community + +On line 7054: + by the bank.48 Most of + the other houses in the + community are + +On line 7054: + the other houses + in the community are + occupied by renters + +On line 7054: + the community + are occupied by renters whose + absentee landlords + +On line 7054: + are occupied by + renters whose absentee landlords + bought the houses when + +On line 7054: + occupied by renters + whose absentee landlords bought + the houses when the + +On line 7054: + renters whose absentee + landlords bought the houses when + the homeowners lost + +On line 7054: + bought the houses when + the homeowners lost their homes + to their banks. The Hunts’ + +On line 7054: + the houses when the + homeowners lost their homes to + their banks. The Hunts’ house + +On line 7054: + when the homeowners + lost their homes to their banks. The + Hunts’ house has lost two-thirds + +On line 7054: + the homeowners lost + their homes to their banks. The Hunts’ + house has lost two-thirds of + +On line 7054: + homeowners lost their + homes to their banks. The Hunts’ house + has lost two-thirds of its + +On line 7054: + lost their homes to their + banks. The Hunts’ house has lost two-thirds + of its value from + +On line 7054: + their homes to their banks. + The Hunts’ house has lost two-thirds of + its value from the + +On line 7054: + homes to their banks. The + Hunts’ house has lost two-thirds of its + value from the peak + +On line 7054: + their banks. The Hunts’ house + has lost two-thirds of its value + from the peak of the + +On line 7054: + The Hunts’ house has lost + two-thirds of its value from the + peak of the market. + +On line 7054: + has lost two-thirds of its + value from the peak of the + market. Nonetheless, + +On line 7054: + two-thirds of its value + from the peak of the market. + Nonetheless, even though + +On line 7054: + from the peak of the + market. Nonetheless, even though + the neighborhood is + +On line 7054: + market. Nonetheless, + even though the neighborhood is + not as lovely as + +On line 7054: + Nonetheless, even though + the neighborhood is not as + lovely as it used + +On line 7054: + though the neighborhood + is not as lovely as it + used to be, Dawn Hunt + +On line 7054: + the neighborhood is + not as lovely as it used + to be, Dawn Hunt told + +On line 7054: + neighborhood is not + as lovely as it used to + be, Dawn Hunt told the + +On line 7054: + is not as lovely + as it used to be, Dawn Hunt + told the FCIC, "I’m not + +On line 7054: + as lovely as it + used to be, Dawn Hunt told the + FCIC, "I’m not leaving."49 + +On line 7056: + lovely as it used + to be, Dawn Hunt told the FCIC, + "I’m not leaving."49 The + +On line 7056: + to be, Dawn Hunt told + the FCIC, "I’m not leaving."49 The + Commission concludes + +On line 7056: + FCIC, "I’m not leaving."49 + The Commission concludes the + unchecked increase in the + +On line 7056: + of the holders of + first and second mortgages and + of mortgage servicers; + +On line 7056: + the holders of first + and second mortgages and of + mortgage servicers; has + +On line 7056: + and second mortgages + and of mortgage servicers; has + reduced transparency + +On line 7056: + of mortgage servicers; + has reduced transparency for + policy makers, + +On line 7056: + policy makers, + regulators, financial + institutions, and + +On line 7056: + modifications. + The resulting disputes and + inaction have caused + +On line 7060: + housing market and + financial institutions. + Dissenting Statement + +On line 7086: + DOUGLAS HENNESSEY HOLTZ-EAKIN + Vice Chairman BILL THOMAS CAUSES + OF THE FINANCIAL + +On line 7092: + THE FINANCIAL AND + ECONOMIC CRISIS CONTENTS + Introduction.......................................................................................................413 How + +On line 7092: + ECONOMIC CRISIS + CONTENTS Introduction.......................................................................................................413 How + Our Approach Differs + +On line 7096: + Approach Differs from + Others’ Stages of the Crisis..............................................................................................417 + The Ten Essential + +On line 7096: + Differs from Others’ + Stages of the Crisis..............................................................................................417 The Ten + Essential Causes + +On line 7096: + Stages of the Crisis..............................................................................................417 + The Ten Essential Causes + of the Financial + +On line 7096: + of the Crisis..............................................................................................417 The + Ten Essential Causes of + the Financial and + +On line 7098: + Crisis........................417 The Credit + Bubble: Global Capital + Flows, Underpriced Risk, + +On line 7102: + Reserve Policy.................................................................................419 + The Housing Bubble Turning + Bad Mortgages into + +On line 7102: + The Housing Bubble + Turning Bad Mortgages into + Toxic Financial + +On line 7104: + Turning Bad Mortgages + into Toxic Financial + Assets Big Bank Bets + +On line 7104: + Bad Mortgages into + Toxic Financial Assets + Big Bank Bets and Why + +On line 7106: + Toxic Financial + Assets Big Bank Bets and Why + Banks Failed................................................................427 Two Types of + +On line 7106: + Financial Assets + Big Bank Bets and Why Banks Failed................................................................427 + Two Types of Systemic + +On line 7108: + Assets Big Bank Bets + and Why Banks Failed................................................................427 Two Types of + Systemic Failure............................................................................431 The + +On line 7108: + Big Bank Bets and Why + Banks Failed................................................................427 Two Types of Systemic + Failure............................................................................431 The Shock and + +On line 7108: + and Why Banks Failed................................................................427 Two + Types of Systemic Failure............................................................................431 The + Shock and the Panic....................................................................................435 + +On line 7110: + Why Banks Failed................................................................427 Two Types + of Systemic Failure............................................................................431 The Shock + and the Panic....................................................................................435 The + +On line 7119: + Panic....................................................................................435 The System + Freezing INTRODUCTION We + have identified ten + +On line 7119: + INTRODUCTION We + have identified ten causes + that are essential + +On line 7119: + have identified ten + causes that are essential + to explaining the + +On line 7119: + ten causes that are + essential to explaining + the crisis. In this + +On line 7119: + that are essential + to explaining the crisis. + In this dissenting + +On line 7119: + are essential to + explaining the crisis. In + this dissenting view: + +On line 7121: + to explaining the + crisis. In this dissenting + view: We explain how + +On line 7121: + this dissenting view: + We explain how our approach + differs from others’; + +On line 7123: + We explain how our + approach differs from others’; + We briefly describe the + +On line 7123: + approach differs from + others’; We briefly describe the + stages of the crisis; + +On line 7125: + differs from others’; + We briefly describe the stages of + the crisis; We list + +On line 7125: + We briefly describe the + stages of the crisis; We list + the ten essential + +On line 7125: + describe the stages of + the crisis; We list the ten + essential causes + +On line 7125: + the crisis; We list + the ten essential causes + of the crisis; and + +On line 7127: + crisis; We list the + ten essential causes of + the crisis; and We + +On line 7127: + the ten essential + causes of the crisis; and + We walk through each cause + +On line 7127: + essential causes + of the crisis; and We walk + through each cause in a + +On line 7129: + of the crisis; and + We walk through each cause in a + bit more detail. We + +On line 7129: + the crisis; and We + walk through each cause in a bit + more detail. We find + +On line 7129: + and We walk through each + cause in a bit more detail. + We find areas of + +On line 7129: + walk through each cause in + a bit more detail. We find + areas of agreement + +On line 7129: + each cause in a bit + more detail. We find areas + of agreement with the + +On line 7129: + bit more detail. We + find areas of agreement with + the majority’s + +On line 7129: + unfortunately + the areas of disagreement + are significant + +On line 7129: + of disagreement are + significant enough that we + dissent and present our + +On line 7129: + significant enough + that we dissent and present our + views in this report. + +On line 7131: + we dissent and present + our views in this report. We + wish to compliment + +On line 7131: + dissent and present our + views in this report. We wish + to compliment the + +On line 7131: + views in this report. + We wish to compliment the + Commission staff for + +On line 7131: + wish to compliment + the Commission staff for their + investigative work. + +On line 7131: + the Commission staff + for their investigative work. + In many ways it helped + +On line 7131: + Commission staff for + their investigative work. In + many ways it helped shape + +On line 7133: + helped shape our thinking + and conclusions. Due to a + length limitation + +On line 7133: + and conclusions. Due + to a length limitation + recently imposed + +On line 7133: + length limitation + recently imposed upon + us by six members + +On line 7133: + recently imposed + upon us by six members + of the Commission,1 + +On line 7133: + by six members of + the Commission,1 this report + focuses only + +On line 7133: + focuses only + on the causes essential + to explaining the + +On line 7133: + causes essential + to explaining the crisis. + We regret that the + +On line 7133: + to explaining the + crisis. We regret that the + limitation means + +On line 7133: + limitation means + that several important + topics that deserve + +On line 7133: + that deserve a much + fuller discussion get only + a brief mention here. + +On line 7141: + fuller discussion get + only a brief mention here. + DISSENTING STATEMENT + +On line 7143: + a brief mention here. + DISSENTING STATEMENT HOW OUR + APPROACH DIFFERS FROM + +On line 7145: + DISSENTING STATEMENT + HOW OUR APPROACH DIFFERS FROM + OTHERS’ During the + +On line 7145: + OUR APPROACH DIFFERS + FROM OTHERS’ During the course + of the Commission’s + +On line 7145: + During the course of + the Commission’s hearings and + investigations, + +On line 7145: + frequent arguments + that there was a single cause + of the crisis. For + +On line 7145: + arguments that there + was a single cause of the + crisis. For some it + +On line 7145: + a single cause of + the crisis. For some it was + international + +On line 7145: + the crisis. For some + it was international + capital flows or + +On line 7145: + banking sector, or + unregulated over-the-counter + derivatives, or + +On line 7145: + unregulated + over-the-counter derivatives, or + the greed of those in + +On line 7145: + the greed of those in + the financial sector and + the political + +On line 7147: + influence they had + in Washington. In each case, + these arguments, when + +On line 7147: + in Washington. In + each case, these arguments, when + used as single-cause + +On line 7147: + explanations, are + too simplistic because they + are incomplete. While + +On line 7147: + simplistic because + they are incomplete. While some + of these factors were + +On line 7147: + of these factors were + essential contributors + to the crisis, each + +On line 7149: + insufficient as + a standalone explanation. + The majority’s + +On line 7149: + The majority’s + approach to explaining the + crisis suffers from + +On line 7149: + opposite problem–it + is too broad. Not everything + that went wrong during + +On line 7149: + that went wrong during + the financial crisis caused + the crisis, and while + +On line 7149: + went wrong during the + financial crisis caused the + crisis, and while some + +On line 7149: + the crisis, and while + some causes were essential, + others had only + +On line 7149: + and while some causes + were essential, others had + only a minor + +On line 7149: + minor impact. Not + every regulatory + change related to + +On line 7149: + regulatory + change related to housing + or the financial + +On line 7149: + change related to + housing or the financial + system prior to + +On line 7149: + to housing or the + financial system prior + to the crisis was + +On line 7149: + to the crisis was + a cause. The majority’s + almost 550-page report + +On line 7149: + crisis was a cause. + The majority’s almost + 550-page report is more + +On line 7149: + The majority’s + almost 550-page report is more + an account of bad + +On line 7149: + almost 550-page report + is more an account of bad + events than a focused + +On line 7149: + is more an account + of bad events than a focused + explanation of + +On line 7149: + of bad events than a + focused explanation of + what happened and why. + +On line 7151: + happened and why. When + everything is important, + nothing is. As an + +On line 7151: + why. When everything + is important, nothing is. + As an example, + +On line 7151: + derivatives did + not in any meaningful way + cause or contribute + +On line 7151: + any meaningful way + cause or contribute to the + financial crisis. + +On line 7151: + contribute to the + financial crisis. Neither + the Community + +On line 7151: + financial crisis. + Neither the Community + Reinvestment Act nor + +On line 7151: + crisis. Neither the + Community Reinvestment + Act nor removal of + +On line 7151: + the Community + Reinvestment Act nor removal + of the Glass-Steagall firewall + +On line 7151: + of the Glass-Steagall firewall + was a significant cause. + The crisis can be + +On line 7151: + significant cause. + The crisis can be explained + without resorting + +On line 7153: + The crisis can be + explained without resorting + to these factors. We + +On line 7153: + be explained without + resorting to these factors. + We also reject + +On line 7153: + resorting to these + factors. We also reject + as too simplistic + +On line 7153: + factors. We also + reject as too simplistic + the hypothesis + +On line 7153: + hypothesis that + too little regulation + caused the crisis, as + +On line 7153: + regulation caused + the crisis, as well as its + opposite, that too + +On line 7153: + the crisis, as well + as its opposite, that too + much regulation + +On line 7153: + crisis, as well as + its opposite, that too much + regulation caused + +On line 7153: + as its opposite, + that too much regulation + caused the crisis. We + +On line 7153: + opposite, that too + much regulation caused the + crisis. We question + +On line 7153: + amount of financial + regulation should reflect + the need to address + +On line 7153: + example, high-risk, + nontraditional mortgage + lending by nonbank + +On line 7153: + nontraditional + mortgage lending by nonbank + lenders flourished in the + +On line 7153: + mortgage lending by + nonbank lenders flourished in the + 2000s and did tremendous + +On line 7153: + lending by nonbank + lenders flourished in the 2000s and + did tremendous damage + +On line 7153: + contributing to the + financial crisis. Poorly + designed government + +On line 7153: + designed government + housing policies distorted + market outcomes and + +On line 7153: + market outcomes and + contributed to the creation + of unsound mortgages + +On line 7153: + contributed to the + creation of unsound mortgages + as well. Countrywide’s + +On line 7153: + creation of unsound + mortgages as well. Countrywide’s + irresponsible + +On line 7153: + as well. Countrywide’s + irresponsible lending + and AIG’s failure were + +On line 7153: + regulation and + supervision, while Fannie + Mae and Freddie Mac’s + +On line 7153: + and supervision, + while Fannie Mae and Freddie + Mac’s failures were the + +On line 7153: + Mae and Freddie Mac’s + failures were the result of + policymakers + +On line 7153: + purpose with private + gains and then socializing + the losses. Both the + +On line 7153: + private gains and then + socializing the losses. + Both the "too little + +On line 7153: + socializing the + losses. Both the "too little + government" and "too + +On line 7153: + the losses. Both the + "too little government" and + "too much government" + +On line 7153: + government" and "too + much government" approaches + are too broad-brush to + +On line 7155: + explain the crisis. + The majority says the + crisis was avoidable + +On line 7155: + majority says + the crisis was avoidable if + only the United + +On line 7155: + crisis was avoidable + if only the United States + had adopted across-the-board more + +On line 7155: + avoidable if only + the United States had adopted + across-the-board more restrictive + +On line 7155: + the United States had + adopted across-the-board more restrictive + regulations, in + +On line 7155: + had adopted across-the-board more + restrictive regulations, + in conjunction with + +On line 7155: + conjunction with more + aggressive regulators + and supervisors. + +On line 7155: + This conclusion by + the majority largely + ignores the global + +On line 7157: + global nature of + the crisis. For example: + A credit bubble + +On line 7157: + For example: A + credit bubble appeared in + both the United States + +On line 7157: + A credit bubble + appeared in both the United + States and Europe. This + +On line 7157: + in both the United + States and Europe. This tells us + that our primary + +On line 7157: + States and Europe. This + tells us that our primary + explanation for + +On line 7161: + factors common to + both regions. KEITH HENNESSEY, + DOUGLAS HOLTZ-EAKIN, House Price + +On line 7161: + both regions. KEITH + HENNESSEY, DOUGLAS HOLTZ-EAKIN, House Price + Appreciation + +On line 7163: + Appreciation + in Selected Countries, 2002-2008 + The United States was + +On line 7163: + Selected Countries, + 2002-2008 The United States was one + of many countries to + +On line 7163: + 2002-2008 The United States + was one of many countries to + experience rapid + +On line 7165: + of many countries to + experience rapid house price + growth INDEX United + +On line 7167: + experience rapid + house price growth INDEX United + States United Kingdom + +On line 7233: + Ireland SOURCES: Standard + and Poors, Nationwide, Banco + de España, AusStats, FNAIM, + +On line 7235: + and Poors, Nationwide, + Banco de España, AusStats, FNAIM, + Permanent TSB The + +On line 7235: + de España, AusStats, FNAIM, + Permanent TSB The report + largely ignores the + +On line 7235: + FNAIM, Permanent TSB + The report largely ignores + the credit bubble + +On line 7235: + the credit bubble + beyond housing. Credit spreads + declined not just for + +On line 7235: + asset classes like + commercial real estate. + This tells us to look + +On line 7235: + This tells us to look + to the credit bubble as + an essential cause + +On line 7235: + tells us to look to + the credit bubble as an + essential cause of + +On line 7237: + credit bubble as + an essential cause of the + U.S. housing bubble. + +On line 7237: + an essential cause + of the U.S. housing bubble. + It also tells us + +On line 7237: + essential cause of + the U.S. housing bubble. It + also tells us that + +On line 7237: + of the U.S. housing + bubble. It also tells us + that problems with U.S. + +On line 7237: + bubble. It also + tells us that problems with U.S. + housing policy + +On line 7237: + tells us that problems + with U.S. housing policy + or markets do not + +On line 7237: + us that problems with + U.S. housing policy or + markets do not by + +On line 7239: + or markets do not + by themselves explain the U.S. + housing bubble. There + +On line 7239: + by themselves explain + the U.S. housing bubble. There + were housing bubbles + +On line 7239: + themselves explain the + U.S. housing bubble. There were + housing bubbles in + +On line 7239: + U.S. housing bubble. + There were housing bubbles in + the United Kingdom, + +On line 7239: + housing bubble. There + were housing bubbles in the + United Kingdom, Spain, + +On line 7239: + the United Kingdom, + Spain, Australia, France and Ireland, + some more pronounced than + +On line 7239: + United Kingdom, Spain, + Australia, France and Ireland, some + more pronounced than in + +On line 7239: + Spain, Australia, France and + Ireland, some more pronounced than + in the United States. + +On line 7239: + and Ireland, some more + pronounced than in the United + States. Some nations with + +On line 7239: + more pronounced than in + the United States. Some nations + with housing bubbles + +On line 7239: + the United States. Some + nations with housing bubbles + relied little on + +On line 7239: + nations with housing + bubbles relied little on + American-style mortgage + +On line 7239: + American-style mortgage + securitization. A + good explanation + +On line 7239: + explanation of + the U.S. housing bubble should + also take into + +On line 7239: + housing bubble should + also take into account + its parallels in + +On line 7239: + also take into + account its parallels in + other nations. This + +On line 7239: + take into account + its parallels in other + nations. This leads us + +On line 7239: + its parallels in + other nations. This leads us + to explanations + +On line 7239: + other nations. This + leads us to explanations + broader than just U.S. + +On line 7241: + nations. This leads us + to explanations broader + than just U.S. housing + +On line 7241: + than just U.S. housing + policy, regulation, + or supervision. + +On line 7241: + that while failures in + U.S. securitization + markets may be an + +On line 7241: + markets may be an + essential cause, we must look + for other things that + +On line 7241: + be an essential + cause, we must look for other + things that went wrong as + +On line 7241: + an essential cause, + we must look for other things + that went wrong as well. + +On line 7243: + essential cause, we + must look for other things that + went wrong as well. Large + +On line 7243: + cause, we must look for + other things that went wrong as + well. Large financial + +On line 7243: + must look for other + things that went wrong as well. Large + financial firms failed + +On line 7243: + other things that went + wrong as well. Large financial + firms failed in Iceland, + +On line 7243: + that went wrong as well. + Large financial firms failed in + Iceland, Spain, Germany, + +On line 7243: + financial firms failed + in Iceland, Spain, Germany, and + the United Kingdom, + +On line 7243: + firms failed in Iceland, + Spain, Germany, and the United + Kingdom, among others. + +On line 7243: + Iceland, Spain, Germany, + and the United Kingdom, among + others. Not all of + +On line 7243: + Spain, Germany, and the + United Kingdom, among others. + Not all of these firms + +On line 7243: + the United Kingdom, + among others. Not all of these + firms bet solely on + +On line 7243: + United Kingdom, among + others. Not all of these firms + bet solely on U.S. + +On line 7243: + among others. Not all + of these firms bet solely on + U.S. housing assets, + +On line 7243: + others. Not all of + these firms bet solely on U.S. + housing assets, and + +On line 7249: + these firms bet solely + on U.S. housing assets, and + DISSENTING STATEMENT + +On line 7251: + U.S. housing assets, + and DISSENTING STATEMENT they + operated in + +On line 7251: + regulatory + and supervisory regimes + than U.S. commercial + +On line 7251: + supervisory + regimes than U.S. commercial and + investment banks. In + +On line 7251: + banks. In many cases + these European systems have + stricter regulation + +On line 7251: + In many cases these + European systems have stricter + regulation than + +On line 7251: + European systems + have stricter regulation than + the United States, and + +On line 7251: + stricter regulation + than the United States, and still + they faced financial + +On line 7251: + regulation than + the United States, and still they + faced financial firm + +On line 7251: + the United States, and + still they faced financial firm + failures similar + +On line 7251: + they faced financial + firm failures similar to + those in the United + +On line 7251: + faced financial firm + failures similar to those + in the United States. + +On line 7253: + failures similar + to those in the United States. + These facts tell us that + +On line 7253: + those in the United + States. These facts tell us that our + explanation for + +On line 7253: + States. These facts tell us + that our explanation for + the credit bubble + +On line 7253: + These facts tell us that + our explanation for the + credit bubble should + +On line 7253: + our explanation + for the credit bubble should + focus on factors + +On line 7253: + credit bubble should + focus on factors common + to both the United + +On line 7253: + bubble should focus + on factors common to both + the United States and + +On line 7253: + focus on factors + common to both the United + States and Europe, that + +On line 7253: + common to both the + United States and Europe, that + the credit bubble + +On line 7253: + both the United States + and Europe, that the credit + bubble is likely + +On line 7253: + and Europe, that the + credit bubble is likely + an essential cause + +On line 7253: + credit bubble is + likely an essential cause + of the U.S. housing + +On line 7253: + bubble is likely + an essential cause of the + U.S. housing bubble, + +On line 7253: + an essential cause + of the U.S. housing bubble, + and that U.S. housing + +On line 7253: + of the U.S. housing + bubble, and that U.S. housing + policy is by + +On line 7253: + housing bubble, and + that U.S. housing policy + is by itself an + +On line 7253: + and that U.S. housing + policy is by itself + an insufficient + +On line 7253: + policy is by + itself an insufficient + explanation of + +On line 7253: + explanation of + the crisis. Furthermore, any + explanation that + +On line 7253: + explanation that + relies too heavily on + a unique element + +On line 7253: + heavily on a + unique element of the U.S. + regulatory + +On line 7253: + element of the + U.S. regulatory or + supervisory + +On line 7253: + supervisory + system is likely to be + insufficient to + +On line 7253: + system is likely + to be insufficient to + explain why the same + +On line 7253: + be insufficient + to explain why the same thing + happened in parts of + +On line 7253: + standards up our list + of causes, and it moves the + differences between + +On line 7253: + of causes, and it + moves the differences between + the regulation + +On line 7253: + causes, and it moves + the differences between the + regulation of + +On line 7253: + moves the differences + between the regulation + of U.S. commercial + +On line 7255: + of U.S. commercial + and investment banks down that + list. Applying these + +On line 7255: + and investment banks + down that list. Applying these + international + +On line 7255: + international + comparisons directly to + the majority’s + +On line 7255: + directly to the + majority’s conclusions + provokes these questions: + +On line 7257: + these questions: If the + political influence + of the financial + +On line 7257: + of the financial + sector in Washington was + an essential cause + +On line 7257: + in Washington was + an essential cause of the + crisis, how does that + +On line 7257: + an essential cause + of the crisis, how does that + explain similar + +On line 7259: + Belgium, the Netherlands, + France, Spain, Switzerland, Ireland, and + Denmark1 How can the + +On line 7259: + the Netherlands, France, Spain, + Switzerland, Ireland, and Denmark1 + How can the "runaway + +On line 7259: + housing bubbles in + Spain, Australia, and the United + Kingdom, countries with + +On line 7259: + in Spain, Australia, and + the United Kingdom, countries + with mortgage finance + +On line 7261: + different than that + in the United States1 How can + the corporate and + +On line 7261: + in the United States1 + How can the corporate and + regulatory + +On line 7261: + the corporate and + regulatory structures + of investment banks + +On line 7261: + of investment banks + explain the decisions of + many U.S. commercial + +On line 7261: + banks, several large + American university + endowments, and some + +On line 7261: + public employee + pension funds, not to mention + a number of large + +On line 7261: + pension funds, not to + mention a number of large + and midsize German + +On line 7261: + not to mention a + number of large and midsize + German banks, to take + +On line 7261: + mention a number + of large and midsize German + banks, to take on too + +On line 7261: + a number of large + and midsize German banks, to + take on too much U.S. + +On line 7263: + of large and midsize + German banks, to take on too + much U.S. housing risk1 + +On line 7265: + and midsize German + banks, to take on too much U.S. + housing risk1 How did + +On line 7265: + German banks, to take + on too much U.S. housing risk1 + How did former Fed + +On line 7265: + banks, to take on too + much U.S. housing risk1 How did + former Fed Chairman + +On line 7265: + take on too much U.S. + housing risk1 How did former + Fed Chairman Alan Greenspan’s + +On line 7265: + housing risk1 How did + former Fed Chairman Alan Greenspan’s + "deregulatory + +On line 7267: + precipitate bank + regulatory failures + across Europe1 Not all + +On line 7267: + Europe1 Not all of + these factors identified by + the majority + +On line 7267: + factors identified + by the majority were + irrelevant; they + +On line 7267: + the majority + were irrelevant; they were + just not essential. + +On line 7269: + majority were + irrelevant; they were just + not essential. The + +On line 7269: + current financial + and economic crisis in + the United States." By + +On line 7269: + international + parallels, emphasizing + only arguments + +On line 7269: + arguments for greater + regulation, failing to + prioritize the + +On line 7269: + causes and effects, + the majority’s report + is unbalanced and + +On line 7269: + the majority’s + report is unbalanced and + leads to incorrect + +On line 7271: + leads to incorrect + conclusions about what caused the + crisis. We begin + +On line 7271: + conclusions about what + caused the crisis. We begin + our explanation + +On line 7271: + caused the crisis. We + begin our explanation + by briefly describing + +On line 7271: + crisis. We begin + our explanation by briefly + describing the stages + +On line 7275: + explanation by + briefly describing the stages of + the crisis. KEITH + +On line 7275: + briefly describing the + stages of the crisis. KEITH + HENNESSEY, DOUGLAS HOLTZ-EAKIN, + +On line 7275: + stages of the crisis. + KEITH HENNESSEY, DOUGLAS HOLTZ-EAKIN, + STAGES OF THE CRISIS + +On line 7277: + the crisis. KEITH + HENNESSEY, DOUGLAS HOLTZ-EAKIN, STAGES OF + THE CRISIS As of + +On line 7277: + OF THE CRISIS As + of December the United + States is still in an + +On line 7277: + As of December + the United States is still in + an economic slump + +On line 7277: + of December the + United States is still in an + economic slump caused + +On line 7277: + United States is still + in an economic slump caused + by a financial + +On line 7277: + States is still in an + economic slump caused by a + financial crisis + +On line 7277: + itself in August + and ended in early The + primary features + +On line 7277: + primary features + of that financial crisis + were a financial + +On line 7277: + of that financial + crisis were a financial + shock in September + +On line 7277: + financial crisis + were a financial shock in + September and a + +On line 7277: + and panic triggered + a severe contraction in + lending and hiring + +On line 7277: + triggered a severe + contraction in lending and + hiring beginning + +On line 7279: + a recession that + began in December and + continued until + +On line 7279: + June and from which we + are only now beginning + to recover. While + +On line 7279: + and from which we are + only now beginning to + recover. While this + +On line 7279: + the recession is + technically accurate, + it obscures a more + +On line 7279: + it obscures a more + important chronology that + connects financial + +On line 7279: + developments with + the broader economy. We + describe recent U.S. + +On line 7281: + U.S. macroeconomic + history in five stages: A + series of foreshocks + +On line 7281: + five stages: A series + of foreshocks beginning in + August followed by + +On line 7281: + foreshocks beginning + in August followed by an + economic slowdown + +On line 7281: + slowdown and then a + mild recession through August + as liquidity + +On line 7281: + mild recession through + August as liquidity + problems emerged and three + +On line 7283: + institutions failed; + A severe financial shock + in September in + +On line 7283: + severe financial + shock in September in which + ten large financial + +On line 7283: + shock in September + in which ten large financial + institutions failed, + +On line 7283: + failed, nearly failed, or + changed their institutional + structure; triggering + +On line 7285: + structure; triggering + A financial panic and + the beginning of + +On line 7285: + financial panic + and the beginning of a + large contraction in + +On line 7285: + the beginning of + a large contraction in the + real economy + +On line 7285: + a large contraction + in the real economy + in the last few months + +On line 7285: + large contraction in + the real economy in + the last few months of + +On line 7287: + in the last few months + of followed by The end of + the financial shock, + +On line 7287: + of followed by The + end of the financial shock, + panic, and rescue + +On line 7287: + of the financial + shock, panic, and rescue at + the beginning of + +On line 7289: + and rescue at the + beginning of followed by + A continued and + +On line 7289: + of followed by A + continued and deepening + contraction in the + +On line 7289: + contraction in the + real economy and the + beginning of the + +On line 7291: + of the financial + recovery and rebuilding + period. As of + +On line 7291: + period. As of + December the United States + is still in the last + +On line 7291: + still in the last stage. + The financial system is + still recovering + +On line 7291: + in the last stage. The + financial system is still + recovering and + +On line 7291: + financial system + is still recovering and + being restructured, + +On line 7291: + still recovering + and being restructured, and + the U.S. economy + +On line 7291: + restructured, and the + U.S. economy struggles to + return to sustained + +On line 7291: + economy struggles + to return to sustained strong + growth. The remainder + +On line 7291: + sustained strong growth. The + remainder of our comments + focuses on the + +On line 7291: + growth. The remainder + of our comments focuses + on the financial + +On line 7291: + remainder of our + comments focuses on the + financial crisis + +On line 7291: + comments focuses + on the financial crisis + in the first three stages + +On line 7291: + on the financial + crisis in the first three stages + by examining + +On line 7291: + crisis in the first + three stages by examining + its ten essential + +On line 7291: + in the first three stages + by examining its ten + essential causes. + +On line 7293: + by examining + its ten essential causes. + THE TEN ESSENTIAL + +On line 7295: + essential causes. + THE TEN ESSENTIAL CAUSES + OF THE FINANCIAL + +On line 7297: + causes, global and + domestic, are essential + to explaining the + +On line 7297: + and domestic, are + essential to explaining + the financial and + +On line 7299: + to explaining the + financial and economic + crisis. I. Credit + +On line 7299: + crisis. I. Credit + bubble. Starting in the late + 1990s, China, other + +On line 7299: + bubble. Starting in + the late 1990s, China, other + large developing + +On line 7299: + the late 1990s, China, + other large developing + countries, and the big + +On line 7299: + China, other large + developing countries, and + the big oil-producing + +On line 7301: + nations built up large + capital surpluses. They + loaned these savings to + +On line 7301: + loaned these savings to + the United States and Europe, + causing interest + +On line 7301: + the United States and + Europe, causing interest + rates to fall. Credit + +On line 7301: + rates to fall. Credit + spreads narrowed, meaning that the + cost of borrowing + +On line 7301: + to fall. Credit spreads + narrowed, meaning that the cost + of borrowing to + +On line 7301: + cost of borrowing + to finance risky investments + declined. A credit + +On line 7301: + investments declined. + A credit bubble formed in + the United States and + +On line 7301: + declined. A credit + bubble formed in the United + States and Europe, the + +On line 7301: + in the United States + and Europe, the most notable + manifestation + +On line 7301: + and Europe, the most + notable manifestation + of which was increased + +On line 7309: + in high-risk mortgages. + U.S. monetary policy + may have contributed + +On line 7309: + high-risk mortgages. U.S. + monetary policy may + have contributed to + +On line 7309: + policy may have + contributed to the credit + bubble but did not + +On line 7311: + may have contributed + to the credit bubble but + did not cause it. II. + +On line 7311: + contributed to the + credit bubble but did not + cause it. II. Housing + +On line 7311: + credit bubble but + did not cause it. II. Housing + bubble. Beginning + +On line 7311: + bubble but did not + cause it. II. Housing bubble. + Beginning in the + +On line 7311: + did not cause it. II. + Housing bubble. Beginning + in the late 1990s and + +On line 7311: + in the late 1990s and + accelerating in the + 2000s, there was a large + +On line 7311: + accelerating + in the 2000s, there was a large + and sustained housing + +On line 7311: + 2000s, there was a large + and sustained housing bubble + in the United States. + +On line 7311: + there was a large and + sustained housing bubble in + the United States. The + +On line 7311: + housing bubble in + the United States. The bubble + was characterized + +On line 7311: + the United States. The + bubble was characterized + both by national + +On line 7311: + characterized both + by national increases + in house prices well above + +On line 7311: + in house prices well above + the historical trend and + by rapid regional + +On line 7311: + the historical + trend and by rapid regional + boom-and-bust cycles in + +On line 7311: + regional boom-and-bust + cycles in California, + Nevada, Arizona, and + +On line 7311: + and Florida. Many + factors contributed to the + housing bubble, the + +On line 7311: + contributed to the + housing bubble, the bursting + of which created + +On line 7311: + housing bubble, the + bursting of which created + enormous losses for + +On line 7311: + the bursting of which + created enormous losses + for homeowners and + +On line 7313: + enormous losses for + homeowners and investors. III. + Nontraditional + +On line 7313: + credit spreads, overly + optimistic assumptions about + U.S. housing prices, and + +On line 7313: + housing prices, and flaws + in primary and secondary + mortgage markets led + +On line 7313: + markets led to poor + origination practices and + combined to increase + +On line 7313: + to increase the flow + of credit to U.S. housing + finance. Fueled by + +On line 7313: + flow of credit to + U.S. housing finance. Fueled + by cheap credit, firms + +On line 7313: + of credit to U.S. + housing finance. Fueled by + cheap credit, firms like + +On line 7313: + by cheap credit, firms + like Countrywide, Washington + Mutual, Ameriquest, and + +On line 7313: + firms like Countrywide, + Washington Mutual, Ameriquest, + and HSBC Finance + +On line 7313: + cases deceptive, + in many cases confusing, + and often beyond + +On line 7315: + and often beyond + borrowers’ ability to + repay. At the same + +On line 7315: + to repay. At the + same time, many homebuyers and + homeowners did not + +On line 7315: + At the same time, many + homebuyers and homeowners + did not live up to + +On line 7315: + did not live up to + their responsibilities + to understand the + +On line 7315: + not live up to their + responsibilities to + understand the terms + +On line 7315: + understand the terms + of their mortgages and to make + prudent financial + +On line 7317: + IV. Credit ratings + and securitization. + Failures in credit + +On line 7317: + in credit rating + and securitization + transformed bad mortgages + +On line 7317: + bad mortgages into + toxic financial assets. + Securitizers + +On line 7317: + toxic financial + assets. Securitizers + lowered the credit + +On line 7317: + lowered the credit + quality of the mortgages + they securitized. + +On line 7317: + securities and + their derivatives as safe + investments. Buyers + +On line 7317: + their derivatives + as safe investments. Buyers + failed to look behind + +On line 7317: + derivatives as + safe investments. Buyers failed + to look behind the + +On line 7317: + as safe investments. + Buyers failed to look behind + the credit ratings + +On line 7317: + Buyers failed to look + behind the credit ratings + and do their own due + +On line 7317: + failed to look behind + the credit ratings and do + their own due diligence. + +On line 7317: + to look behind the + credit ratings and do their + own due diligence. These + +On line 7317: + behind the credit + ratings and do their own due + diligence. These factors + +On line 7317: + the credit ratings + and do their own due diligence. + These factors fueled + +On line 7317: + credit ratings and + do their own due diligence. These + factors fueled the + +On line 7317: + ratings and do their + own due diligence. These factors + fueled the creation + +On line 7317: + and do their own due + diligence. These factors fueled + the creation of more + +On line 7317: + own due diligence. These + factors fueled the creation + of more bad mortgages. + +On line 7319: + risk. Managers of many + large and midsize financial + institutions in + +On line 7319: + many large and midsize + financial institutions + in the United States + +On line 7319: + institutions in + the United States amassed enormous + concentrations of + +On line 7319: + housing risk. Some did + this knowingly by betting + on rising housing + +On line 7319: + this knowingly by + betting on rising housing + prices, while others paid + +On line 7319: + prices, while others paid + insufficient attention + to the potential + +On line 7319: + to the potential + risk of carrying large amounts + of housing risk on + +On line 7319: + the potential risk + of carrying large amounts of + housing risk on their + +On line 7319: + risk of carrying + large amounts of housing risk on + their balance sheets. This + +On line 7319: + of housing risk on + their balance sheets. This enabled + large but seemingly + +On line 7319: + their balance sheets. This + enabled large but seemingly + manageable mortgage + +On line 7319: + sheets. This enabled large + but seemingly manageable + mortgage losses to + +On line 7319: + large but seemingly + manageable mortgage losses + to precipitate + +On line 7319: + manageable mortgage + losses to precipitate + the collapse of large + +On line 7319: + mortgage losses to + precipitate the collapse + of large financial + +On line 7321: + precipitate the + collapse of large financial + institutions. VI. + +On line 7321: + of large financial + institutions. VI. Leverage + and liquidity + +On line 7321: + institutions. VI. + Leverage and liquidity + risk. Managers of these + +On line 7321: + liquidity risk. + Managers of these financial + firms amplified this + +On line 7321: + risk. Managers of these + financial firms amplified + this concentrated + +On line 7321: + this concentrated + housing risk by holding too + little capital + +On line 7321: + little capital + relative to the risks they + were carrying on + +On line 7321: + relative to the + risks they were carrying on + their balance sheets. Many + +On line 7321: + to the risks they were + carrying on their balance + sheets. Many placed their firms + +On line 7321: + they were carrying + on their balance sheets. Many placed + their firms on a hair + +On line 7321: + carrying on their + balance sheets. Many placed their firms + on a hair trigger + +On line 7321: + a hair trigger by + relying heavily on + short-term financing + +On line 7321: + short-term financing + in repo and commercial + paper markets for + +On line 7321: + commercial paper + markets for their day-to-day + liquidity. They + +On line 7321: + liquidity. They + placed solvency bets (sometimes + unknowingly) that + +On line 7321: + liquidity bets + that overnight money would always + be available. Both turned + +On line 7321: + bets that overnight money + would always be available. Both + turned out to be bad + +On line 7321: + that overnight money would + always be available. Both turned + out to be bad bets. + +On line 7321: + turned out to be bad + bets. In several cases, + failed solvency bets + +On line 7321: + several cases, + failed solvency bets triggered + liquidity crises, + +On line 7321: + failed solvency bets + triggered liquidity crises, + causing some of the + +On line 7321: + crises, causing some of + the largest financial firms to + fail or nearly fail. + +On line 7321: + causing some of the + largest financial firms to fail + or nearly fail. Firms + +On line 7321: + financial firms to + fail or nearly fail. Firms were + insufficiently + +On line 7321: + fail or nearly fail. + Firms were insufficiently + transparent about their + +On line 7321: + HENNESSEY, DOUGLAS HOLTZ-EAKIN, + kets that made it difficult + for some to access + +On line 7321: + for some to access + additional capital + and liquidity + +On line 7323: + when needed. VII. Risk + of contagion. The risk of + contagion was an + +On line 7323: + Risk of contagion. + The risk of contagion was + an essential cause + +On line 7323: + of contagion. The + risk of contagion was an + essential cause of + +On line 7325: + risk of contagion + was an essential cause of + the crisis. In some + +On line 7325: + financial system + was vulnerable because + policymakers + +On line 7325: + was vulnerable + because policymakers + were afraid of a large + +On line 7325: + afraid of a large firm’s + sudden and disorderly + failure triggering + +On line 7325: + a large firm’s sudden + and disorderly failure + triggering balance-sheet + +On line 7327: + In other cases, + unrelated financial + institutions failed + +On line 7327: + institutions failed + because of a common shock: + they made similar + +On line 7327: + similar failed bets + on housing. Unconnected + financial firms failed + +On line 7327: + failed bets on housing. + Unconnected financial + firms failed for the same + +On line 7327: + financial firms failed + for the same reason and at + roughly the same time + +On line 7327: + firms failed for the same + reason and at roughly the + same time because they + +On line 7327: + for the same reason + and at roughly the same time + because they had the + +On line 7327: + at roughly the same + time because they had the same + problem: large housing + +On line 7327: + the same time because + they had the same problem: large + housing losses. This + +On line 7327: + time because they had + the same problem: large housing + losses. This common + +On line 7327: + problem: large housing + losses. This common shock meant + that the problem was + +On line 7327: + large housing losses. + This common shock meant that the + problem was broader + +On line 7327: + This common shock meant + that the problem was broader + than a single failed + +On line 7327: + common shock meant that + the problem was broader than + a single failed bank–key + +On line 7327: + that the problem was + broader than a single failed + bank–key large financial + +On line 7329: + this common shock. IX. + Financial shock and panic. + In quick succession + +On line 7329: + Financial shock and + panic. In quick succession + in September the + +On line 7329: + restructurings of + ten firms triggered a global + financial panic. + +On line 7329: + ten firms triggered a + global financial panic. + Confidence and trust + +On line 7329: + global financial + panic. Confidence and trust + in the financial + +On line 7329: + financial panic. + Confidence and trust in the + financial system + +On line 7329: + panic. Confidence + and trust in the financial + system began to + +On line 7329: + financial system + began to evaporate as + the health of almost + +On line 7329: + system began to + evaporate as the health of + almost every large + +On line 7329: + of almost every + large and midsize financial + institution in + +On line 7331: + in the United States + and Europe was questioned. X. + Financial crisis + +On line 7331: + Financial crisis + causes economic crisis. + The financial shock + +On line 7331: + causes economic + crisis. The financial shock + and panic caused a + +On line 7331: + The financial shock + and panic caused a severe + contraction in the + +On line 7331: + and panic caused a + severe contraction in the + real economy. + +On line 7331: + severe contraction + in the real economy. + The shock and panic + +On line 7331: + contraction in the + real economy. The shock + and panic ended + +On line 7331: + real economy. + The shock and panic ended + in early Harm to + +On line 7333: + real economy + continues through today. We + now describe these ten + +On line 7333: + We now describe these + ten essential causes of + the crisis in more + +On line 7335: + the crisis in more + detail. THE CREDIT BUBBLE: + GLOBAL CAPITAL + +On line 7337: + detail. THE CREDIT + BUBBLE: GLOBAL CAPITAL + FLOWS, UNDERPRICED RISK, + +On line 7339: + credit bubble in + the United States and Europe. + Credit spreads narrowed + +On line 7339: + the United States and + Europe. Credit spreads narrowed + significantly, + +On line 7339: + Europe. Credit spreads + narrowed significantly, + meaning that the cost + +On line 7339: + cost of borrowing + to finance risky investments + declined relative + +On line 7339: + investments declined + relative to safe assets + such as U.S. Treasury + +On line 7339: + relative to safe + assets such as U.S. Treasury + securities. The + +On line 7339: + safe assets such as + U.S. Treasury securities. + The most notable of + +On line 7339: + assets such as U.S. + Treasury securities. The + most notable of these + +On line 7341: + these risky investments + were high-risk mortgages. The U.S. + housing bubble was + +On line 7341: + were high-risk mortgages. + The U.S. housing bubble was + the most visible + +On line 7341: + bubble was the most + visible effect of the + credit bubble but + +On line 7341: + visible effect + of the credit bubble but + not the only one. + +On line 7341: + and leveraged loans were + all boosted by the surplus + of inexpensive + +On line 7343: + all boosted by the + surplus of inexpensive + credit. There are three + +On line 7343: + explanations for + the credit bubble: global + capital flows, the + +On line 7343: + the credit bubble: + global capital flows, the + repricing of risk, and + +On line 7345: + the repricing of risk, + and monetary policy. + Global capital + +On line 7347: + policy. Global + capital flows Starting in + the late 1990s, China, + +On line 7347: + Global capital + flows Starting in the late 1990s, + China, other large + +On line 7347: + the late 1990s, China, + other large developing + countries, and the big + +On line 7347: + China, other large + developing countries, and + the big oil-producing + +On line 7355: + less than they earned. As + DISSENTING STATEMENT China + and other Asian economies + +On line 7355: + DISSENTING STATEMENT + China and other Asian economies + grew, their savings grew + +On line 7355: + other Asian economies grew, + their savings grew as well. In + addition, boosted + +On line 7355: + their savings grew as + well. In addition, boosted + by high global oil + +On line 7355: + savings grew as well. + In addition, boosted by + high global oil prices, + +On line 7355: + global oil prices, the + largest oil-producing nations built + up large capital + +On line 7355: + nations built up large + capital surpluses and + looked to invest in + +On line 7355: + of inexpensive + capital flowed into the + United States, making + +On line 7357: + United States, making + borrowing inexpensive. + Americans used the + +On line 7357: + making borrowing + inexpensive. Americans + used the cheap credit + +On line 7357: + Americans used the + cheap credit to make riskier + investments than in + +On line 7357: + used the cheap credit + to make riskier investments + than in the past. The + +On line 7357: + the cheap credit to + make riskier investments than + in the past. The same + +On line 7357: + than in the past. The + same dynamic was at work + in Europe. Germany + +On line 7357: + in the past. The same + dynamic was at work in + Europe. Germany saved, + +On line 7357: + dynamic was at + work in Europe. Germany saved, + and its capital + +On line 7357: + in Europe. Germany + saved, and its capital flowed + to Ireland, Italy, Spain + +On line 7357: + Europe. Germany saved, + and its capital flowed to + Ireland, Italy, Spain and + +On line 7359: + to Ireland, Italy, Spain + and Portugal. Fed Chairman + Ben Bernanke describes the + +On line 7359: + Ireland, Italy, Spain and + Portugal. Fed Chairman Ben + Bernanke describes the strong + +On line 7359: + and Portugal. Fed + Chairman Ben Bernanke describes the + strong relationship + +On line 7359: + Ben Bernanke describes the + strong relationship between + financial account + +On line 7359: + financial account + surplus growth (the mirror of + current account deficit + +On line 7359: + mirror of current + account deficit growth) and house price + appreciation: + +On line 7359: + rose had greater house price + appreciation [from to + The relationship + +On line 7359: + relationship is + highly significant, both + statistically + +On line 7359: + statistically + and economically, and + about percent of the + +On line 7359: + about percent of the + variability in house price + appreciation + +On line 7361: + countries is explained."2 + Global imbalances are an + essential cause of + +On line 7361: + Global imbalances + are an essential cause of + the crisis and the + +On line 7361: + crisis and the most + important macroeconomic + explanation. Steady + +On line 7363: + domestic lending, + especially in high-risk + mortgages. The repricing + +On line 7365: + in high-risk mortgages. + The repricing of risk Low-cost + capital can but + +On line 7365: + capital can but + does not necessarily + have to lead to an + +On line 7365: + necessarily + have to lead to an increase + in risky investments. + +On line 7365: + have to lead to an + increase in risky investments. + Increased capital + +On line 7365: + lead to an increase + in risky investments. Increased + capital flows to + +On line 7365: + in risky investments. + Increased capital flows to + the United States and + +On line 7365: + Increased capital + flows to the United States and + Europe cannot alone + +On line 7365: + capital flows to + the United States and Europe + cannot alone explain + +On line 7365: + flows to the United + States and Europe cannot alone + explain the credit + +On line 7365: + the United States and + Europe cannot alone explain + the credit bubble. + +On line 7367: + Europe cannot alone + explain the credit bubble. + We still don’t know whether + +On line 7367: + explain the credit + bubble. We still don’t know whether + the credit bubble + +On line 7367: + bubble. We still don’t + know whether the credit bubble + was the result of + +On line 7367: + was the result of + rational or irrational + behavior. Investors + +On line 7367: + Investors may have been + rational—their preferences may + have changed, making them + +On line 7367: + have changed, making them + willing to accept lower + returns for high-risk + +On line 7369: + willing to accept + lower returns for high-risk + investments. They may + +On line 7369: + lower returns for + high-risk investments. They may + have collectively + +On line 7369: + high-risk investments. + They may have collectively + been irrational—they may + +On line 7369: + may have adopted a + bubble mentality and + assumed that, while they + +On line 7369: + and assumed that, while + they were paying a higher + price for risky assets, + +On line 7369: + assumed that, while they + were paying a higher price + for risky assets, they + +On line 7369: + they were paying a + higher price for risky assets, + they could resell them + +On line 7369: + paying a higher + price for risky assets, they could + resell them later + +On line 7369: + a higher price for + risky assets, they could resell + them later for even + +On line 7369: + higher price for risky + assets, they could resell them + later for even more. + +On line 7369: + price for risky assets, + they could resell them later + for even more. Or they + +On line 7369: + for risky assets, they + could resell them later for + even more. Or they may + +On line 7369: + risky assets, they could + resell them later for even + more. Or they may have + +On line 7369: + more. Or they may have + mistakenly assumed that + the world had gotten + +On line 7369: + assumed that the world + had gotten safer and that the + risk of bad outcomes + +On line 7369: + had gotten safer and + that the risk of bad outcomes + (especially in + +On line 7369: + that the risk of bad + outcomes (especially in + U.S. housing markets) + +On line 7371: + markets) had declined. + For some combination of + these reasons, over a + +On line 7371: + of these reasons, over + a period of many years + leading up to the + +On line 7371: + over a period + of many years leading up to + the crisis, investors + +On line 7371: + a period of + many years leading up to the + crisis, investors grew + +On line 7371: + of many years leading + up to the crisis, investors + grew willing to pay + +On line 7371: + many years leading up + to the crisis, investors grew + willing to pay more + +On line 7371: + leading up to the + crisis, investors grew willing + to pay more for risky + +On line 7371: + up to the crisis, + investors grew willing to pay + more for risky assets. + +On line 7371: + the crisis, investors + grew willing to pay more for + risky assets. When the + +On line 7371: + grew willing to pay + more for risky assets. When the + housing bubble burst + +On line 7371: + more for risky assets. + When the housing bubble burst + and the financial + +On line 7371: + for risky assets. When + the housing bubble burst and + the financial shock + +On line 7371: + risky assets. When the + housing bubble burst and the + financial shock hit, + +On line 7371: + housing bubble burst + and the financial shock hit, + investors everywhere + +On line 7371: + bubble burst and the + financial shock hit, investors + everywhere reassessed + +On line 7371: + and the financial + shock hit, investors everywhere + reassessed what return + +On line 7371: + financial shock hit, + investors everywhere reassessed + what return they would + +On line 7371: + investors everywhere + reassessed what return they would + demand for a risky + +On line 7371: + demand for a risky + investment, and therefore what + price they were willing + +On line 7371: + a risky investment, + and therefore what price they were + willing to pay for + +On line 7371: + therefore what price they + were willing to pay for a + risky asset. Credit + +On line 7371: + price they were willing + to pay for a risky asset. + Credit spreads for all + +On line 7371: + were willing to pay + for a risky asset. Credit + spreads for all types of + +On line 7371: + willing to pay for + a risky asset. Credit spreads + for all types of risk + +On line 7371: + to pay for a risky + asset. Credit spreads for all + types of risk around the + +On line 7371: + all types of risk around + the world increased suddenly + and sharply, and the prices + +On line 7371: + types of risk around the + world increased suddenly and + sharply, and the prices of + +On line 7371: + of risk around the world + increased suddenly and sharply, + and the prices of risky + +On line 7371: + around the world increased + suddenly and sharply, and the + prices of risky assets + +On line 7371: + increased suddenly + and sharply, and the prices of risky + assets plummeted. + +On line 7371: + suddenly and sharply, + and the prices of risky assets + plummeted. This was + +On line 7371: + sharply, and the prices of + risky assets plummeted. This + was most evident + +On line 7371: + and the prices of risky + assets plummeted. This was + most evident in + +On line 7371: + assets plummeted. + This was most evident in + but not limited + +On line 7371: + plummeted. This was + most evident in but not + limited to the + +On line 7371: + was most evident + in but not limited to + the U.S. market for + +On line 7371: + nontraditional + mortgages. The credit bubble + burst and caused tremendous + +On line 7373: + mortgages. The credit + bubble burst and caused tremendous + damage. Monetary + +On line 7375: + caused tremendous damage. + Monetary policy The + Federal Reserve + +On line 7375: + Federal Reserve + significantly affects + the availability + +On line 7375: + the availability + and price of capital. This + leads some to argue + +On line 7375: + availability and + price of capital. This leads + some to argue that + +On line 7375: + price of capital. + This leads some to argue that + the Fed contributed + +On line 7375: + of capital. This + leads some to argue that the + Fed contributed to + +On line 7375: + capital. This leads + some to argue that the Fed + contributed to the + +On line 7375: + leads some to argue + that the Fed contributed to + the increased demand + +On line 7375: + some to argue that + the Fed contributed to the + increased demand for + +On line 7375: + argue that the Fed + contributed to the increased + demand for risky in-KEITH + +On line 7375: + Fed contributed to + the increased demand for risky + in-KEITH HENNESSEY, DOUGLAS + +On line 7375: + contributed to the + increased demand for risky in-KEITH + HENNESSEY, DOUGLAS HOLTZ-EAKIN, + +On line 7375: + increased demand for + risky in-KEITH HENNESSEY, DOUGLAS HOLTZ-EAKIN, + vestments by keeping + +On line 7375: + DOUGLAS HOLTZ-EAKIN, vestments + by keeping interest rates + too low for too long. + +On line 7375: + vestments by keeping + interest rates too low for + too long. Critics of + +On line 7375: + too long. Critics of + Fed policy argue that, + beginning under + +On line 7375: + under Chairman Greenspan + and continuing under + Chairman Bernanke, the Fed + +On line 7375: + and continuing + under Chairman Bernanke, the Fed + kept rates too low for + +On line 7375: + Chairman Bernanke, the Fed + kept rates too low for too long + and created a + +On line 7375: + kept rates too low for + too long and created a + bubble in housing. + +On line 7377: + too low for too long + and created a bubble + in housing. Dr. John + +On line 7377: + low for too long and + created a bubble in + housing. Dr. John B. + +On line 7377: + long and created + a bubble in housing. Dr. + John B. Taylor is + +On line 7377: + and created a + bubble in housing. Dr. John + B. Taylor is a + +On line 7377: + bubble in housing. + Dr. John B. Taylor is a + proponent of this + +On line 7377: + housing. Dr. John B. + Taylor is a proponent + of this argument. + +On line 7377: + of this argument. + He argues that the Fed set + interest rates too + +On line 7377: + He argues that the + Fed set interest rates too + low in and that these + +On line 7377: + argues that the Fed + set interest rates too low + in and that these low + +On line 7377: + Fed set interest + rates too low in and that these + low rates fueled the + +On line 7377: + interest rates too + low in and that these low rates + fueled the housing + +On line 7377: + rates too low in and + that these low rates fueled the + housing bubble as + +On line 7377: + low in and that these + low rates fueled the housing + bubble as measured + +On line 7377: + low rates fueled the + housing bubble as measured + by housing starts. He + +On line 7377: + the housing bubble + as measured by housing starts. + He suggests that this + +On line 7377: + bubble as measured + by housing starts. He suggests + that this Fed-created + +On line 7377: + by housing starts. He + suggests that this Fed-created + housing bubble was + +On line 7377: + He suggests that this + Fed-created housing bubble + was the essential + +On line 7377: + housing bubble was + the essential cause of the + financial crisis. + +On line 7377: + the essential cause + of the financial crisis. + He further argues + +On line 7377: + essential cause of + the financial crisis. He + further argues that, + +On line 7377: + of the financial + crisis. He further argues + that, had federal + +On line 7377: + financial crisis. + He further argues that, had + federal funds rates + +On line 7377: + He further argues + that, had federal funds rates + instead followed the + +On line 7377: + that, had federal + funds rates instead followed the + path recommended + +On line 7377: + had federal funds + rates instead followed the path + recommended by + +On line 7377: + rates instead followed + the path recommended by + the Taylor Rule (a + +On line 7377: + Rule (a monetary + policy formula for + setting the funds rate), + +On line 7377: + funds rate), the housing + boom and subsequent bust would + have been much smaller. + +On line 7377: + rate), the housing boom + and subsequent bust would have + been much smaller. He + +On line 7377: + boom and subsequent + bust would have been much smaller. + He also applies + +On line 7377: + and subsequent bust + would have been much smaller. He + also applies this + +On line 7377: + bust would have been much + smaller. He also applies + this analysis to + +On line 7377: + smaller. He also + applies this analysis to + European economies and + +On line 7377: + also applies this + analysis to European + economies and concludes that + +On line 7377: + this analysis to + European economies and concludes + that similar forces + +On line 7379: + European economies and + concludes that similar forces + were at play. Current + +On line 7379: + economies and concludes that + similar forces were at play. + Current Fed Chairman + +On line 7379: + similar forces were + at play. Current Fed Chairman + Bernanke and former Fed + +On line 7379: + at play. Current Fed + Chairman Bernanke and former Fed + Chairman Greenspan disagree + +On line 7379: + Taylor’s analysis. + Chairman Bernanke argues that the + Taylor Rule is a + +On line 7379: + Chairman Bernanke argues + that the Taylor Rule is a + descriptive rule of + +On line 7379: + that the Taylor Rule + is a descriptive rule of + thumb, but that "simple + +On line 7379: + is a descriptive + rule of thumb, but that "simple + policy rules" are + +On line 7379: + rule of thumb, but that + "simple policy rules" are + insufficient for + +On line 7379: + "simple policy + rules" are insufficient for + making monetary + +On line 7379: + making monetary + policy decisions.3 He + further argues that, + +On line 7379: + the construction of + the particular Taylor + Rule, the monetary + +On line 7379: + the particular + Taylor Rule, the monetary + policy stance of + +On line 7379: + Rule, the monetary + policy stance of the Fed + may not have diverged + +On line 7379: + policy stance of + the Fed may not have diverged + significantly + +On line 7379: + may not have diverged + significantly from its + historical path. + +On line 7379: + significantly + from its historical path. + Former Chairman Greenspan + +On line 7379: + its historical + path. Former Chairman Greenspan adds + that the connection + +On line 7379: + that the connection + between short-term interest + rates and house prices is + +On line 7379: + connection between + short-term interest rates and + house prices is weak—that + +On line 7379: + interest rates and + house prices is weak—that even if + the Fed’s target for + +On line 7379: + house prices is weak—that + even if the Fed’s target for + overnight lending between + +On line 7379: + prices is weak—that even + if the Fed’s target for overnight + lending between banks + +On line 7379: + weak—that even if the + Fed’s target for overnight lending + between banks was too + +On line 7379: + if the Fed’s target + for overnight lending between banks + was too low, this has + +On line 7379: + Fed’s target for overnight + lending between banks was too + low, this has little + +On line 7379: + lending between banks + was too low, this has little + power to explain + +On line 7379: + between banks was too + low, this has little power + to explain why rates + +On line 7379: + was too low, this has + little power to explain + why rates on thirty-year + +On line 7379: + low, this has little + power to explain why rates + on thirty-year mortgages + +On line 7379: + little power to + explain why rates on thirty-year + mortgages were also + +On line 7379: + power to explain + why rates on thirty-year mortgages + were also too low. + +On line 7381: + explain why rates on + thirty-year mortgages were also + too low. This debate + +On line 7383: + policy questions: + How heavily should the Fed + weigh a policy + +On line 7383: + heavily should the + Fed weigh a policy rule + in its decisions + +On line 7383: + weigh a policy + rule in its decisions to + set interest rates1 + +On line 7383: + a policy rule + in its decisions to set + interest rates1 Should + +On line 7383: + set interest rates1 + Should monetary policy + be mostly rule-based or + +On line 7385: + be mostly rule-based or + mostly discretionary1 If the + Fed thinks an asset + +On line 7385: + discretionary1 If the + Fed thinks an asset bubble + is developing, + +On line 7387: + it use monetary + policy to try to pop + or prevent it1 Were + +On line 7387: + policy to try + to pop or prevent it1 Were + interest rates too + +On line 7389: + to try to pop or + prevent it1 Were interest + rates too low in Did + +On line 7389: + or prevent it1 Were + interest rates too low in + Did too-low federal + +On line 7389: + rates too low in Did + too-low federal funds rates cause + or contribute to + +On line 7389: + too low in Did too-low + federal funds rates cause or + contribute to the + +On line 7389: + too-low federal funds + rates cause or contribute to + the housing bubble1 + +On line 7391: + federal funds rates + cause or contribute to the + housing bubble1 This + +On line 7391: + cause or contribute + to the housing bubble1 This + debate is complex + +On line 7391: + contribute to the + housing bubble1 This debate + is complex and thus + +On line 7391: + the housing bubble1 + This debate is complex and + thus far unresolved. + +On line 7391: + housing bubble1 This + debate is complex and thus + far unresolved. Loose + +On line 7391: + complex and thus far + unresolved. Loose monetary + policy does not + +On line 7391: + policy does not + necessarily lead to + smaller credit spreads. + +On line 7391: + necessarily + lead to smaller credit spreads. + There are open questions + +On line 7391: + smaller credit spreads. + There are open questions about the + link between short-term + +On line 7391: + There are open questions + about the link between short-term + interest rates and + +On line 7391: + link between short-term + interest rates and house price + appreciation, + +On line 7391: + interest rates and + house price appreciation, + whether housing starts are + +On line 7391: + housing starts are the + best measure of the housing + bubble, the timing + +On line 7391: + are the best measure + of the housing bubble, the + timing of housing + +On line 7391: + bubble, the timing + of housing price increases + relative to the + +On line 7391: + timing of housing + price increases relative + to the interest + +On line 7391: + in the European + comparison, and whether the + magnitude of the + +On line 7391: + the magnitude of + the bubble can be explained + by the gap between + +On line 7391: + magnitude of the + bubble can be explained by + the gap between the + +On line 7391: + can be explained by + the gap between the Taylor + Rule prescription and + +On line 7391: + by the gap between + the Taylor Rule prescription + and historic rates. At + +On line 7391: + the gap between the + Taylor Rule prescription and + historic rates. At the + +On line 7391: + between the Taylor + Rule prescription and historic + rates. At the same time, + +On line 7391: + Rule prescription and + historic rates. At the same time, + many observers argue + +On line 7391: + historic rates. At the + same time, many observers argue + that Taylor is right + +On line 7391: + At the same time, many + observers argue that Taylor + is right that short-term + +On line 7391: + observers argue that + Taylor is right that short-term + interest rates were + +On line 7391: + that Taylor is right + that short-term interest rates + were too low during + +On line 7391: + Taylor is right that + short-term interest rates were + too low during this + +On line 7391: + were too low during + this period, and therefore + that his argument + +On line 7391: + too low during this + period, and therefore that + his argument is + +On line 7393: + his argument is + at least plausible if not + provable. We conclude + +On line 7393: + least plausible if + not provable. We conclude that + global capital + +On line 7393: + provable. We conclude + that global capital flows + and risk repricing caused + +On line 7393: + global capital + flows and risk repricing caused the + credit bubble, and + +On line 7393: + flows and risk repricing + caused the credit bubble, and + we consider them + +On line 7393: + did not by itself + cause the credit bubble, nor + was it essential + +On line 7393: + not by itself cause + the credit bubble, nor was + it essential to + +On line 7393: + the credit bubble, + nor was it essential to + causing the crisis. + +On line 7395: + was it essential + to causing the crisis. The + Commission should have + +On line 7395: + and energy on + exploring these questions about + global capital + +On line 7403: + thousands of staff hours + on investigation, and + not nearly enough on + +On line 7407: + investigation + and analysis. Conclusions: + The credit bubble + +On line 7407: + credit bubble was + an essential cause of the + financial crisis. + +On line 7409: + an essential cause + of the financial crisis. + Global capital + +On line 7409: + of the financial + crisis. Global capital + flows lowered the price + +On line 7411: + price of capital + in the United States and much + of Europe. Over time, + +On line 7411: + in the United States + and much of Europe. Over time, + investors lowered the + +On line 7411: + United States and much + of Europe. Over time, investors + lowered the return + +On line 7411: + and much of Europe. + Over time, investors lowered the + return they required + +On line 7411: + of Europe. Over time, + investors lowered the return + they required for risky + +On line 7413: + time, investors lowered + the return they required for + risky investments. Their + +On line 7413: + they required for risky + investments. Their preferences + may have changed, they may + +On line 7413: + for risky investments. + Their preferences may have changed, + they may have adopted + +On line 7413: + risky investments. Their + preferences may have changed, they + may have adopted an + +On line 7413: + preferences may have + changed, they may have adopted an + irrational bubble + +On line 7413: + irrational bubble + mentality, or they may + have mistakenly + +On line 7413: + mentality, or + they may have mistakenly + assumed that the world + +On line 7415: + inflated prices for + risky assets. U.S. monetary + policy may have + +On line 7415: + prices for risky assets. + U.S. monetary policy + may have contributed + +On line 7415: + for risky assets. U.S. + monetary policy may + have contributed to + +On line 7415: + policy may have + contributed to the credit + bubble but did not + +On line 7417: + may have contributed + to the credit bubble but + did not cause it. THE + +On line 7417: + contributed to the + credit bubble but did not + cause it. THE HOUSING + +On line 7419: + credit bubble but + did not cause it. THE HOUSING + BUBBLE The housing + +On line 7419: + bubble but did not + cause it. THE HOUSING BUBBLE + The housing bubble + +On line 7419: + cause it. THE HOUSING + BUBBLE The housing bubble + had two components: + +On line 7419: + BUBBLE The housing + bubble had two components: + the actual homes + +On line 7419: + had two components: + the actual homes and the + mortgages that financed + +On line 7419: + the actual homes + and the mortgages that financed + them. We look briefly at + +On line 7419: + actual homes and + the mortgages that financed them. + We look briefly at each + +On line 7419: + homes and the mortgages + that financed them. We look briefly + at each component + +On line 7419: + and the mortgages that + financed them. We look briefly at + each component and + +On line 7419: + that financed them. We + look briefly at each component + and its possible + +On line 7421: + at each component + and its possible causes. + There was a housing + +On line 7421: + component and its + possible causes. There was + a housing bubble + +On line 7421: + a housing bubble + in the United States—the + price of U.S. housing + +On line 7421: + United States—the + price of U.S. housing increased + by more than could be + +On line 7421: + States—the price of + U.S. housing increased by more + than could be explained + +On line 7421: + price of U.S. housing + increased by more than could be + explained by market + +On line 7421: + increased by more than + could be explained by market + developments. This + +On line 7421: + than could be explained + by market developments. + This included both + +On line 7421: + could be explained by + market developments. This + included both a + +On line 7425: + Nevada, Arizona, and + Florida. Conventional + wisdom is that a + +On line 7425: + a bubble is hard + to spot while you’re in one, and + painfully obvious + +On line 7425: + to spot while you’re in + one, and painfully obvious + after it has burst. + +On line 7425: + in one, and painfully + obvious after it has + burst. Even after the + +On line 7425: + obvious after + it has burst. Even after the + U.S. housing bubble + +On line 7425: + after it has burst. + Even after the U.S. housing + bubble burst, there is + +On line 7425: + burst. Even after the + U.S. housing bubble burst, there + is no consensus + +On line 7425: + Even after the U.S. + housing bubble burst, there is + no consensus on + +On line 7427: + U.S. housing bubble + burst, there is no consensus + on what caused it. While + +On line 7427: + housing bubble burst, + there is no consensus on + what caused it. While we + +On line 7427: + bubble burst, there is + no consensus on what caused + it. While we still don’t + +On line 7427: + no consensus on + what caused it. While we still don’t + know the relative + +On line 7427: + what caused it. While we + still don’t know the relative + importance of the + +On line 7427: + While we still don’t know + the relative importance + of the possible + +On line 7427: + importance of the + possible causes of the + housing bubble, we + +On line 7429: + Florida, Nevada, + and parts of California + all experienced + +On line 7429: + that far exceeded + the national average. + More people fueled + +On line 7429: + far exceeded the + national average. More + people fueled more + +On line 7431: + More people fueled + more demand for houses. Land + use restrictions. In + +On line 7431: + people fueled more + demand for houses. Land use + restrictions. In some + +On line 7431: + for houses. Land use + restrictions. In some areas, + local zoning rules + +On line 7431: + use restrictions. In + some areas, local zoning + rules and other land + +On line 7431: + restrictions. In some + areas, local zoning rules + and other land use + +On line 7431: + some areas, local + zoning rules and other land + use restrictions, as + +On line 7431: + restrictions, as well + as natural barriers + to building, made it + +On line 7431: + well as natural + barriers to building, made + it hard to build new + +On line 7431: + to building, made it + hard to build new houses to + meet increased demand + +On line 7431: + made it hard to build + new houses to meet increased + demand resulting + +On line 7431: + new houses to meet + increased demand resulting + from population + +On line 7431: + demand resulting + from population growth. When + supply is constrained + +On line 7431: + population growth. + When supply is constrained and + demand increases, + +On line 7433: + supply is constrained + and demand increases, prices + go up. Over-optimism. + +On line 7433: + driving up prices, shared + expectations of future + price increases can + +On line 7433: + shared expectations + of future price increases + can generate booms. + +On line 7433: + expectations of + future price increases can + generate booms. This + +On line 7435: + explanation of + a bubble. Easy financing. + Nontraditional + +On line 7435: + Nontraditional + (and higher risk) mortgages made + it easier for + +On line 7435: + made it easier + for potential homebuyers + to borrow enough to + +On line 7435: + it easier for + potential homebuyers to + borrow enough to buy + +On line 7435: + to borrow enough to + buy more expensive homes. This + doesn’t mean they could + +On line 7435: + buy more expensive + homes. This doesn’t mean they could + afford those homes or + +On line 7435: + expensive homes. This + doesn’t mean they could afford + those homes or future + +On line 7435: + doesn’t mean they could + afford those homes or future + mortgage payments in + +On line 7435: + mean they could afford + those homes or future mortgage + payments in KEITH + +On line 7435: + could afford those homes + or future mortgage payments + in KEITH HENNESSEY, + +On line 7435: + those homes or future + mortgage payments in KEITH + HENNESSEY, DOUGLAS HOLTZ-EAKIN, + +On line 7435: + or future mortgage + payments in KEITH HENNESSEY, + DOUGLAS HOLTZ-EAKIN, the long + +On line 7435: + payments in KEITH + HENNESSEY, DOUGLAS HOLTZ-EAKIN, the long + run, but only that + +On line 7435: + in KEITH HENNESSEY, + DOUGLAS HOLTZ-EAKIN, the long run, but + only that someone + +On line 7435: + HENNESSEY, DOUGLAS HOLTZ-EAKIN, + the long run, but only that + someone was willing + +On line 7435: + long run, but only + that someone was willing to + provide the initial + +On line 7437: + only that someone + was willing to provide the + initial loan. Mortgage + +On line 7437: + had insufficient + incentive to encourage + borrowers to get + +On line 7439: + sustainable mortgages. + Some combination of the + first two factors may + +On line 7439: + Some combination + of the first two factors may + apply in parts of + +On line 7439: + the first two factors + may apply in parts of the + Sand States, but these don’t + +On line 7439: + factors may apply + in parts of the Sand States, but + these don’t explain the + +On line 7439: + in parts of the Sand + States, but these don’t explain the + nationwide increase + +On line 7441: + the Sand States, but these + don’t explain the nationwide + increase in prices. The + +On line 7441: + in prices. The closely + related and nationwide + mortgage bubble was + +On line 7441: + most significant + manifestation of a + more generalized + +On line 7441: + manifestation + of a more generalized + credit bubble in + +On line 7441: + credit bubble in + the United States and Europe. + Mortgage rates were low + +On line 7441: + in the United States + and Europe. Mortgage rates were + low relative to + +On line 7441: + the United States and + Europe. Mortgage rates were low + relative to the + +On line 7441: + and Europe. Mortgage + rates were low relative to + the risk of losses, + +On line 7441: + Europe. Mortgage rates + were low relative to the + risk of losses, and + +On line 7441: + were low relative + to the risk of losses, and + risky borrowers, who + +On line 7441: + low relative to + the risk of losses, and risky + borrowers, who in + +On line 7441: + the risk of losses, + and risky borrowers, who in + the past would have been + +On line 7441: + risk of losses, and + risky borrowers, who in the + past would have been turned + +On line 7441: + of losses, and risky + borrowers, who in the past + would have been turned down, + +On line 7441: + borrowers, who in + the past would have been turned down, + found it possible + +On line 7441: + past would have been turned + down, found it possible to + obtain a mortgage.4 + +On line 7443: + found it possible + to obtain a mortgage.4 In + addition to the + +On line 7443: + the credit bubble, + the proliferation of + nontraditional + +On line 7443: + nontraditional + mortgage products was a key + cause of this surge in + +On line 7443: + mortgage products was + a key cause of this surge in + mortgage lending. Use + +On line 7443: + products was a key + cause of this surge in mortgage + lending. Use of these + +On line 7443: + was a key cause of + this surge in mortgage lending. + Use of these products + +On line 7443: + key cause of this surge + in mortgage lending. Use of + these products increased + +On line 7443: + this surge in mortgage + lending. Use of these products + increased rapidly from + +On line 7443: + lending. Use of these + products increased rapidly from + the early part of + +On line 7443: + these products increased + rapidly from the early part + of the decade through There + +On line 7443: + increased rapidly from + the early part of the decade + through There was a steady + +On line 7443: + lowered the credit + quality of the mortgages + they would accept, and + +On line 7443: + rating agencies that + overrated the subsequent + securities and + +On line 7443: + that overrated the + subsequent securities + and derivatives). + +On line 7443: + increase in mortgages + that required little to no + documentation. + +On line 7445: + documentation. + As house prices rose, declining + affordability + +On line 7445: + affordability + would normally have constrained + demand, but lenders and + +On line 7445: + lenders and borrowers + increasingly relied on + nontraditional + +On line 7445: + products to paper + over this affordability + issue. These mortgage + +On line 7445: + to paper over this + affordability issue. + These mortgage products + +On line 7445: + These mortgage products + included interest-only + adjustable rate mortgages + +On line 7445: + products included + interest-only adjustable rate + mortgages (ARMs), pay-option + +On line 7445: + monthly payments, and + negative amortization + products in which the + +On line 7445: + products in which the + initial payment did not even + cover interest + +On line 7445: + in which the initial + payment did not even cover + interest costs. These + +On line 7445: + initial payment did + not even cover interest + costs. These exotic + +On line 7445: + payment did not even + cover interest costs. These + exotic mortgage + +On line 7445: + cover interest + costs. These exotic mortgage + products would often + +On line 7445: + interest costs. These + exotic mortgage products + would often result + +On line 7445: + exotic mortgage + products would often result + in significant + +On line 7445: + products would often + result in significant + reductions in the + +On line 7445: + with even a standard + ARM. Not surprisingly, they + were the mortgages of + +On line 7445: + even a standard ARM. + Not surprisingly, they were + the mortgages of choice + +On line 7445: + a standard ARM. Not + surprisingly, they were the + mortgages of choice for + +On line 7447: + borrowers focused + on minimizing initial + monthly payments. Fed + +On line 7447: + on minimizing + initial monthly payments. Fed + Chairman Bernanke sums up + +On line 7447: + Fed Chairman Bernanke sums + up the situation this + way: "At some point, both + +On line 7447: + Chairman Bernanke sums up + the situation this way: + "At some point, both lenders + +On line 7447: + situation this + way: "At some point, both lenders and + borrowers became + +On line 7447: + way: "At some point, both + lenders and borrowers became + convinced that house prices + +On line 7447: + lenders and borrowers + became convinced that house prices + would only go up. + +On line 7447: + became convinced that + house prices would only go up. + Borrowers chose, and + +On line 7447: + prices would only go + up. Borrowers chose, and were + extended, mortgages + +On line 7447: + up. Borrowers chose, + and were extended, mortgages + that they could not be + +On line 7447: + that they could not be + expected to service in + the longer term. They were + +On line 7447: + not be expected + to service in the longer term. + They were provided + +On line 7447: + be expected to + service in the longer term. They + were provided these + +On line 7447: + in the longer term. They + were provided these loans on + the expectation + +On line 7447: + the longer term. They were + provided these loans on the + expectation that + +On line 7447: + provided these loans + on the expectation that + accumulating + +On line 7447: + the expectation + that accumulating home + equity would soon + +On line 7447: + mortgages. For a time, + rising house prices became a + self-fulfilling + +On line 7447: + house prices became a + self-fulfilling prophecy, + but ultimately, + +On line 7447: + but ultimately, + further appreciation + could not be sustained + +On line 7449: + explanation posits + a relationship between + the surge in housing + +On line 7449: + a relationship + between the surge in housing + prices and the surge in + +On line 7449: + between the surge in + housing prices and the surge in + mortgage lending. There + +On line 7449: + the surge in housing + prices and the surge in mortgage + lending. There is not + +On line 7449: + in housing prices and + the surge in mortgage lending. + There is not yet a + +On line 7449: + prices and the surge in + mortgage lending. There is not + yet a consensus + +On line 7449: + the surge in mortgage + lending. There is not yet a + consensus on which + +On line 7449: + mortgage lending. There + is not yet a consensus + on which was the cause + +On line 7449: + lending. There is not + yet a consensus on which + was the cause and which + +On line 7449: + a consensus on + which was the cause and which the + effect. They appear + +On line 7449: + the cause and which the + effect. They appear to have + been mutually + +On line 7451: + effect. They appear + to have been mutually + reinforcing. In + +On line 7451: + reinforcing. In + understanding the growth of + nontraditional + +On line 7451: + to determine the + relative importance of + causal factors, but again + +On line 7451: + importance of causal + factors, but again we can at + least list those that are + +On line 7451: + of causal factors, but + again we can at least list those + that are important: + +On line 7453: + factors, but again we + can at least list those that are + important: Nonbank + +On line 7453: + again we can at least + list those that are important: + Nonbank mortgage lenders + +On line 7453: + can at least list those + that are important: Nonbank + mortgage lenders like New + +On line 7453: + that are important: + Nonbank mortgage lenders like New + Century and Ameriquest + +On line 7453: + at the state level. + Weak disclosure standards and + underwriting rules + +On line 7459: + rules made it easy for + irresponsible lenders to + issue DISSENTING + +On line 7461: + irresponsible + lenders to issue DISSENTING + STATEMENT mortgages that + +On line 7461: + DISSENTING STATEMENT + mortgages that would probably + never be repaid. + +On line 7461: + probably never + be repaid. Federally + regulated bank + +On line 7463: + brokers were paid for + new originations but did + not ultimately + +On line 7463: + new originations + but did not ultimately + bear the losses on + +On line 7463: + not ultimately + bear the losses on poorly + performing mortgages. + +On line 7463: + losses on poorly + performing mortgages. Mortgage + brokers therefore had + +On line 7463: + performing mortgages. + Mortgage brokers therefore had + an incentive to + +On line 7465: + information about + borrowers. Many borrowers + neither understood + +On line 7465: + neither understood + the terms of their mortgage nor + appreciated + +On line 7465: + terms of their mortgage + nor appreciated the + risk that home values + +On line 7465: + of their mortgage nor + appreciated the risk + that home values could + +On line 7465: + risk that home values + could fall significantly, + while others borrowed + +On line 7465: + that home values could + fall significantly, while + others borrowed too + +On line 7465: + others borrowed too + much and bought bigger houses + than they could ever + +On line 7465: + much and bought bigger + houses than they could ever + reasonably expect + +On line 7465: + bigger houses than + they could ever reasonably + expect to afford. + +On line 7467: + houses than they could + ever reasonably expect + to afford. All these + +On line 7467: + reasonably expect + to afford. All these factors + were supplemented + +On line 7467: + were supplemented + by government policies, many + of which had been in + +On line 7467: + homeownership but + created hidden costs to + taxpayers and the + +On line 7467: + created hidden + costs to taxpayers and the + economy. Elected + +On line 7467: + costs to taxpayers + and the economy. Elected + officials of both + +On line 7467: + and the economy. + Elected officials of both + parties pushed housing + +On line 7467: + Elected officials + of both parties pushed housing + subsidies too far. + +On line 7469: + of both parties pushed + housing subsidies too far. + The Commission heard + +On line 7469: + mortgage fraud problems. + Excruciating anecdotes + showed that mortgage fraud + +On line 7469: + mortgage fraud increased + substantially during the + housing bubble. There + +On line 7469: + the housing bubble. + There is no question that this + fraud did tremendous harm. + +On line 7469: + housing bubble. There + is no question that this fraud + did tremendous harm. But + +On line 7469: + There is no question + that this fraud did tremendous harm. + But while that fraud is + +On line 7469: + (like Florida), the + Commission was unable to + measure the impact + +On line 7471: + the impact of fraud + relative to the overall + housing bubble. The + +On line 7471: + fraud relative to + the overall housing bubble. + The explosion of + +On line 7471: + housing bubble. The + explosion of legal but + questionable lending + +On line 7471: + for the creation of + so many bad mortgages. Lending + standards were lax enough + +On line 7471: + creation of so many + bad mortgages. Lending standards + were lax enough that lenders + +On line 7471: + so many bad mortgages. + Lending standards were lax enough + that lenders could remain + +On line 7471: + bad mortgages. Lending + standards were lax enough that lenders + could remain within + +On line 7471: + Lending standards were + lax enough that lenders could remain + within the law but + +On line 7471: + were lax enough that lenders + could remain within the law + but still generate + +On line 7471: + lax enough that lenders could + remain within the law but + still generate huge + +On line 7471: + could remain within + the law but still generate + huge volumes of bad + +On line 7471: + within the law but + still generate huge volumes + of bad mortgages. It + +On line 7471: + but still generate + huge volumes of bad mortgages. + It is likely that + +On line 7471: + still generate huge + volumes of bad mortgages. It + is likely that the + +On line 7471: + huge volumes of bad + mortgages. It is likely that + the housing bubble + +On line 7471: + housing bubble and + the crisis would have occurred + even if there had been + +On line 7471: + and the crisis would + have occurred even if there had + been no mortgage fraud. + +On line 7471: + the crisis would have + occurred even if there had been + no mortgage fraud. We + +On line 7471: + occurred even if there + had been no mortgage fraud. We + therefore classify + +On line 7471: + even if there had been + no mortgage fraud. We therefore + classify mortgage + +On line 7471: + had been no mortgage + fraud. We therefore classify + mortgage fraud not as + +On line 7471: + classify mortgage + fraud not as an essential + cause of the crisis + +On line 7471: + mortgage fraud not as + an essential cause of the + crisis but as a + +On line 7471: + an essential cause + of the crisis but as a + contributing factor + +On line 7471: + the crisis but as + a contributing factor and + a deplorable effect + +On line 7471: + crisis but as a + contributing factor and a + deplorable effect of + +On line 7473: + contributing factor + and a deplorable effect of + the bubble. Even if + +On line 7473: + bubble. Even if the + number of fraudulent loans + was not substantial + +On line 7473: + Even if the number + of fraudulent loans was not + substantial enough to + +On line 7473: + of fraudulent loans + was not substantial enough to + have a large impact + +On line 7473: + fraudulent loans was + not substantial enough to have + a large impact on + +On line 7473: + was not substantial + enough to have a large impact + on the bubble, the + +On line 7473: + substantial enough to + have a large impact on the + bubble, the increase + +On line 7473: + have been a leading + indicator of deeper + structural problems in + +On line 7477: + in the late 1990s and + accelerating in the + 2000s, there was a large + +On line 7477: + accelerating + in the 2000s, there was a large + and sustained housing + +On line 7477: + 2000s, there was a large + and sustained housing bubble + in the United States. + +On line 7477: + there was a large and + sustained housing bubble in + the United States. The + +On line 7477: + housing bubble in + the United States. The bubble + was characterized + +On line 7477: + the United States. The + bubble was characterized + both by national + +On line 7477: + characterized both + by national increases + in house prices well above + +On line 7477: + house prices well above the + historical trend and by + more rapid regional + +On line 7477: + historical trend + and by more rapid regional + boom-and-bust cycles in + +On line 7477: + trend and by more rapid + regional boom-and-bust cycles + in California, + +On line 7477: + regional boom-and-bust + cycles in California, + Nevada, Arizona, and + +On line 7481: + primarily by + the broader credit bubble. + The causes of the + +On line 7481: + the broader credit + bubble. The causes of the + housing bubble are + +On line 7481: + population growth, + land use restrictions, bubble + psychology, and + +On line 7483: + land use restrictions, + bubble psychology, and + easy financing. The + +On line 7483: + the mortgage bubble + and its relationship to + the housing bubble + +On line 7483: + relationship to + the housing bubble KEITH + HENNESSEY, DOUGLAS HOLTZ-EAKIN, + +On line 7483: + underwriting rules + for bank and nonbank mortgage + lenders alike, the way in + +On line 7483: + for bank and nonbank + mortgage lenders alike, the way in + which mortgage brokers + +On line 7483: + mortgage lenders alike, the + way in which mortgage brokers + were compensated, + +On line 7483: + way in which mortgage + brokers were compensated, + borrowers who bought + +On line 7483: + mortgage brokers were + compensated, borrowers + who bought too much house + +On line 7483: + who bought too much house + and didn’t understand or + ignored the terms of + +On line 7483: + much house and didn’t + understand or ignored the + terms of their mortgages, + +On line 7483: + didn’t understand + or ignored the terms of their + mortgages, and elected + +On line 7483: + or ignored the terms + of their mortgages, and elected + officials who over + +On line 7483: + of their mortgages, and + elected officials who over + years piled on layer + +On line 7483: + mortgages, and elected + officials who over years piled + on layer upon + +On line 7483: + elected officials + who over years piled on layer + upon layer of + +On line 7483: + who over years piled on + layer upon layer of + government housing + +On line 7485: + subsidies. Mortgage + fraud increased substantially, + but the evidence + +On line 7485: + substantially, but + the evidence gathered by + the Commission does + +On line 7485: + but the evidence + gathered by the Commission + does not show that it + +On line 7487: + enough to conclude that + it was an essential cause. + TURNING BAD MORTGAGES + +On line 7487: + conclude that it was + an essential cause. TURNING + BAD MORTGAGES INTO + +On line 7487: + an essential cause. + TURNING BAD MORTGAGES INTO + TOXIC FINANCIAL + +On line 7489: + TURNING BAD MORTGAGES + INTO TOXIC FINANCIAL + ASSETS The mortgage + +On line 7489: + ASSETS The mortgage + securitization process + turned mortgages into + +On line 7489: + government-sponsored + enterprises (GSEs) Fannie + Mae and Freddie Mac, + +On line 7489: + capital to flow + from investors to homebuyers. + Without it, mortgage + +On line 7489: + to flow from investors + to homebuyers. Without it, + mortgage lending would + +On line 7489: + homebuyers. Without + it, mortgage lending would be + limited to banks + +On line 7489: + Without it, mortgage + lending would be limited + to banks and other + +On line 7489: + mortgage lending would + be limited to banks and + other portfolio + +On line 7489: + be limited to + banks and other portfolio + lenders, supported by + +On line 7489: + to banks and other + portfolio lenders, supported + by traditional + +On line 7489: + makes homeownership + more affordable. It also + can diversify + +On line 7489: + different types of + lenders. If everything else is + working properly, + +On line 7489: + everything else is + working properly, these are + good things. Everything + +On line 7489: + working properly, + these are good things. Everything + else was not working + +On line 7491: + else was not working + properly. Some focus their + criticism on the + +On line 7491: + working properly. + Some focus their criticism + on the form of these + +On line 7491: + obligations (CDOs) were + engineered from different + bundled payment streams + +On line 7493: + bundled payment streams + from mortgage-backed securities. + Some argue that the + +On line 7493: + securities. Some + argue that the conversion + of a bundle of + +On line 7493: + Some argue that the + conversion of a bundle + of simple mortgages + +On line 7493: + debt obligation, was + a problem. They argue that + complex financial + +On line 7493: + argue that complex + financial derivatives + caused the crisis. We + +On line 7493: + derivatives caused + the crisis. We conclude that + the details of this + +On line 7493: + caused the crisis. We + conclude that the details of + this engineering + +On line 7493: + to understanding + the essential causes of + the crisis. If the + +On line 7493: + of the crisis. If + the system works properly, + reconfiguring + +On line 7493: + reconfiguring + streams of mortgage payments has + little effect. The + +On line 7493: + mortgage payments has + little effect. The total + amount of risk in a + +On line 7493: + payments has little + effect. The total amount of + risk in a mortgage + +On line 7493: + little effect. The + total amount of risk in a + mortgage is unchanged + +On line 7493: + effect. The total + amount of risk in a mortgage + is unchanged if the + +On line 7493: + total amount of risk + in a mortgage is unchanged + if the pieces are put + +On line 7493: + risk in a mortgage + is unchanged if the pieces are + put together in + +On line 7493: + in a mortgage is + unchanged if the pieces are put + together in a + +On line 7493: + is unchanged if the + pieces are put together in + a different way. + +On line 7495: + in a different + way. Unfortunately, the + system did not work + +On line 7495: + Unfortunately, + the system did not work as + it should have. There were + +On line 7495: + the system did not + work as it should have. There were + several flaws in + +On line 7497: + made things worse. Fannie + Mae and Freddie Mac, as well + as Countrywide and + +On line 7497: + credit quality + standards of the mortgages they + securitized.6 A + +On line 7497: + of the mortgages they + securitized.6 A mortgage-backed + security was + +On line 7497: + securitized.6 A + mortgage-backed security was + therefore "worse" during + +On line 7497: + were generally + of poorer quality. This + turned a bad mortgage + +On line 7497: + quality. This turned + a bad mortgage into a + worse security. + +On line 7499: + mortgage into a + worse security. Mortgage + originators took + +On line 7499: + worse security. + Mortgage originators took + advantage of these + +On line 7499: + originators took + advantage of these lower + credit quality + +On line 7499: + standards and the easy + flow of credit to relax + the underwriting + +On line 7499: + flow of credit to + relax the underwriting + discipline in the + +On line 7499: + the underwriting + discipline in the loans they + issued. As long as + +On line 7499: + discipline in the + loans they issued. As long as + they could resell a + +On line 7499: + the loans they issued. + As long as they could resell + a mortgage to the + +On line 7499: + As long as they could + resell a mortgage to the + secondary market, they + +On line 7499: + as they could resell + a mortgage to the secondary + market, they didn’t + +On line 7499: + resell a mortgage + to the secondary market, they + didn’t care about its + +On line 7507: + complexity of + housing-related assets and + the many steps between + +On line 7507: + assets and the many + steps between the borrower + and final investor + +On line 7507: + the many steps between + the borrower and final + investor increased the + +On line 7507: + the importance of + credit rating agencies and + made independent + +On line 7507: + made independent + risk assessment by investors + more difficult. In + +On line 7507: + independent risk + assessment by investors more + difficult. In this + +On line 7507: + more difficult. In + this respect, complexity + did contribute to + +On line 7507: + difficult. In this + respect, complexity did + contribute to the + +On line 7507: + did contribute to + the problem, but the other + problems listed here + +On line 7507: + the problem, but the + other problems listed here + are more important. + +On line 7509: + optimistic ratings + to the CDOs built from mortgage-backed + securities.7 By + +On line 7509: + securities.7 By + erroneously rating these + bundles of mortgage-backed + +On line 7509: + rating these bundles + of mortgage-backed security + payments too highly, + +On line 7509: + bundles of mortgage-backed + security payments too + highly, the credit + +On line 7511: + financial assets. + Borrowers, originators, + securitizers, + +On line 7511: + rating agencies, and + the ultimate buyers of + the securities + +On line 7511: + the securities + into which the risky mortgages + were packaged all failed + +On line 7511: + were packaged all failed + to exercise prudence and + perform due diligence + +On line 7511: + due diligence in their + respective transactions. In + particular, CDO + +On line 7513: + credit ratings. Many + financial institutions + chose to make highly + +On line 7513: + concentrated bets + on housing prices. While in some + cases they did that + +On line 7513: + bets on housing prices. + While in some cases they did + that with whole loans, they + +On line 7513: + on housing prices. While + in some cases they did that + with whole loans, they were + +On line 7513: + housing prices. While in + some cases they did that with + whole loans, they were able + +On line 7513: + some cases they did + that with whole loans, they were able + to more easily + +On line 7513: + cases they did that + with whole loans, they were able to + more easily and + +On line 7513: + that with whole loans, they + were able to more easily + and efficiently + +On line 7513: + with whole loans, they were + able to more easily and + efficiently do + +On line 7515: + domestically + and internationally, + gave pref-erential + +On line 7515: + to highly rated + debt, further empowering + the rating agencies + +On line 7515: + highly rated debt, + further empowering the + rating agencies and + +On line 7517: + desirability + of mortgage-backed structured products. + There is a way that + +On line 7517: + of mortgage-backed structured + products. There is a way that + housing bets can be + +On line 7517: + structured products. There + is a way that housing bets + can be magnified + +On line 7517: + products. There is a + way that housing bets can be + magnified using + +On line 7517: + housing bets can be + magnified using a form + of derivative. + +On line 7517: + magnified using + a form of derivative. + A synthetic CDO + +On line 7517: + of derivative. + A synthetic CDO is a + security whose + +On line 7517: + A synthetic CDO + is a security whose + payments mimic that + +On line 7517: + a security + whose payments mimic that of + a CDO that contains + +On line 7517: + whose payments mimic + that of a CDO that contains + real mortgages. This + +On line 7517: + that of a CDO that + contains real mortgages. This + is a "side bet" that + +On line 7517: + a CDO that contains + real mortgages. This is a + "side bet" that allows + +On line 7517: + that contains real + mortgages. This is a "side bet" + that allows you to + +On line 7517: + real mortgages. This + is a "side bet" that allows + you to assume the + +On line 7517: + mortgages. This is a + "side bet" that allows you to + assume the same risk + +On line 7517: + This is a "side bet" + that allows you to assume + the same risk as if + +On line 7517: + is a "side bet" that + allows you to assume the + same risk as if you + +On line 7517: + "side bet" that allows + you to assume the same risk + as if you held pieces + +On line 7517: + bet" that allows you + to assume the same risk as + if you held pieces of + +On line 7517: + to assume the same + risk as if you held pieces of + actual mortgages. + +On line 7517: + risk as if you held + pieces of actual mortgages. + To the extent that + +On line 7517: + if you held pieces of + actual mortgages. To the + extent that investors + +On line 7517: + to increase their bets + on housing, they were able to + use synthetic CDOs. + +On line 7517: + increase their bets on + housing, they were able to use + synthetic CDOs. The + +On line 7517: + bets on housing, they + were able to use synthetic + CDOs. The risks in these + +On line 7517: + they were able to use + synthetic CDOs. The risks in + these synthetic CDOs, + +On line 7517: + use synthetic CDOs. + The risks in these synthetic + CDOs, however, are + +On line 7517: + CDOs. The risks in these + synthetic CDOs, however, + are zero-sum, since + +On line 7517: + CDOs, however, are + zero-sum, since for every + investor making a + +On line 7517: + are zero-sum, since + for every investor making + a bet that housing + +On line 7517: + for every investor + making a bet that housing + performance will fall + +On line 7517: + investor making a + bet that housing performance + will fall there must be + +On line 7517: + making a bet that + housing performance will fall + there must be other + +On line 7517: + a bet that housing + performance will fall there must + be other investors + +On line 7517: + housing performance + will fall there must be other + investors with equal-sized + +On line 7517: + performance will fall + there must be other investors + with equal-sized bets in + +On line 7519: + with equal-sized bets in + the opposite direction. + These are related + +On line 7519: + equal-sized bets in the + opposite direction. These + are related but + +On line 7519: + These are related + but different problems. While + many involve the word + +On line 7519: + many involve the word + "derivative," it is a + mistake to bundle + +On line 7519: + "derivative," it + is a mistake to bundle + them together and + +On line 7519: + is a mistake to + bundle them together and + say, "Derivatives + +On line 7519: + them together and + say, "Derivatives or CDOs + caused the crisis." In + +On line 7519: + together and say, + "Derivatives or CDOs caused + the crisis." In each + +On line 7519: + say, "Derivatives + or CDOs caused the crisis." In + each case, we assign + +On line 7519: + each case, we assign + responsibility for + the failures to the + +On line 7519: + and institutions + rather than to the financial + instruments they used. + +On line 7523: + used. Conclusions: Rather + than "derivatives and CDOs + caused the financial + +On line 7523: + than "derivatives + and CDOs caused the financial + crisis," it is more + +On line 7525: + accurate to say: + Securitizers lowered + credit quality + +On line 7527: + quality standards; + Mortgage originators took + advantage of this + +On line 7531: + investors and others + failed to perform sufficient + due diligence; KEITH + +On line 7533: + arbitrage toward + lower capital standards; + Some investors used these + +On line 7533: + lower capital + standards; Some investors used these + securities to + +On line 7533: + standards; Some investors + used these securities to + concentrate rather than + +On line 7535: + diversify risk; + and Others used synthetic + CDOs to amplify + +On line 7537: + used synthetic CDOs + to amplify their housing + bets. The dangerous + +On line 7537: + to amplify their + housing bets. The dangerous + imprecision of + +On line 7537: + their housing bets. The + dangerous imprecision + of the term "shadow + +On line 7537: + bets. The dangerous + imprecision of the term + "shadow banking" Part + +On line 7537: + "shadow banking" Part + II of the majority’s + report begins with + +On line 7537: + report begins with + an extensive discussion + of the failures of + +On line 7537: + of the failures of + the "shadow banking system," + which it defines as + +On line 7537: + the failures of the + "shadow banking system," which + it defines as a + +On line 7537: + it defines as a + "financial institutions + and activities + +On line 7537: + institutions and + activities that in some + respects parallel + +On line 7537: + respects parallel + banking activities but + are subject to less + +On line 7537: + report suggests that + the shadow banking system + was a cause of the + +On line 7537: + the shadow banking + system was a cause of the + financial crisis. + +On line 7539: + system was a cause + of the financial crisis. + "Shadow banking" is + +On line 7539: + was a cause of the + financial crisis. "Shadow + banking" is a term + +On line 7539: + financial crisis. + "Shadow banking" is a term + used to represent + +On line 7539: + "Shadow banking" is + a term used to represent + a collection of + +On line 7539: + issues within the + financial system. Indeed, + "shadow banking" can + +On line 7539: + "shadow banking" can + refer to any financial + activity that + +On line 7539: + can refer to any + financial activity + that transforms short-term + +On line 7539: + to any financial + activity that transforms + short-term borrowing + +On line 7539: + activity that + transforms short-term borrowing + into long-term lending + +On line 7539: + lending without a + government backstop. This term + can therefore include + +On line 7539: + can therefore include + financial instruments and + institutions as + +On line 7543: + as diverse as: The + tri-party repo market; + Structured Investment + +On line 7545: + other off-balance-sheet + entities used to increase + leverage; Fannie Mae + +On line 7547: + to increase leverage; + Fannie Mae and Freddie Mac; + Credit default swaps; + +On line 7549: + monoline insurers, + commercial paper, money + market mutual + +On line 7549: + commercial paper, + money market mutual + funds, and investment + +On line 7551: + market mutual + funds, and investment banks. As + discussed in other + +On line 7551: + mutual funds, and + investment banks. As discussed + in other parts of + +On line 7551: + funds, and investment + banks. As discussed in other + parts of this paper, + +On line 7551: + and investment banks. + As discussed in other parts + of this paper, some + +On line 7551: + investment banks. As + discussed in other parts of + this paper, some of + +On line 7551: + banks. As discussed in + other parts of this paper, + some of these items were + +On line 7551: + other parts of this + paper, some of these items were + important causes + +On line 7551: + paper, some of these + items were important causes + of the crisis. No + +On line 7551: + some of these items were + important causes of the + crisis. No matter + +On line 7551: + crisis. No matter + what their individual + roles in causing or + +On line 7551: + roles in causing or + contributing to the crisis, + however, they are + +On line 7551: + or contributing to + the crisis, however, they + are undoubtedly + +On line 7551: + however, they are + undoubtedly different. + It is a mistake + +On line 7551: + is a mistake to + group these issues and problems + together. Each should + +On line 7551: + to group these issues + and problems together. Each + should be considered + +On line 7551: + group these issues and + problems together. Each should + be considered on + +On line 7551: + problems together. + Each should be considered on + its merits, rather than + +On line 7551: + be considered on + its merits, rather than painting + a poorly defined + +On line 7551: + considered on its + merits, rather than painting a + poorly defined swath + +On line 7551: + rather than painting a + poorly defined swath of the + financial sector + +On line 7551: + poorly defined swath + of the financial sector + with a common brush + +On line 7551: + defined swath of the + financial sector with a + common brush of "too + +On line 7553: + a common brush of + "too little regulation." + BIG BANK BETS AND WHY + +On line 7553: + common brush of "too + little regulation." BIG + BANK BETS AND WHY BANKS + +On line 7555: + brush of "too little + regulation." BIG BANK BETS + AND WHY BANKS FAILED The + +On line 7555: + BETS AND WHY BANKS FAILED + The story so far involves + significant lost + +On line 7555: + FAILED The story so + far involves significant + lost housing wealth and + +On line 7555: + wealth and diminished + values of securities + financing those homes. + +On line 7555: + Yet even larger past + wealth losses did not bring the + global financial + +On line 7555: + wealth losses did not + bring the global financial + system to its knees. + +On line 7555: + global financial + system to its knees. The key + differences in this + +On line 7555: + system to its knees. + The key differences in this + case were leverage and + +On line 7555: + The key differences + in this case were leverage and + risk concentration. + +On line 7555: + and highly leveraged + financial institutions + in the United States + +On line 7555: + institutions in + the United States and much of + Europe. This leverage + +On line 7555: + Europe. This leverage + magnified the effect of + a housing loss on + +On line 7555: + housing loss on a + financial institution’s + capital reserve, + +On line 7555: + capital reserve, + and the concentration meant + these losses occurred + +On line 7563: + these losses occurred + in parallel. DISSENTING + STATEMENT In effect, + +On line 7563: + STATEMENT In effect, + many of the largest financial + institutions in + +On line 7563: + the largest financial + institutions in the world, + along with hundreds of + +On line 7563: + institutions in + the world, along with hundreds of + smaller ones, bet the + +On line 7563: + in the world, along with + hundreds of smaller ones, bet + the survival of their + +On line 7563: + hundreds of smaller + ones, bet the survival of their + institutions on + +On line 7563: + ones, bet the survival + of their institutions on + housing prices. Some did + +On line 7563: + their institutions + on housing prices. Some did this + knowingly; others + +On line 7565: + on housing prices. Some + did this knowingly; others + not. Many investors made + +On line 7565: + housing prices. Some did + this knowingly; others not. + Many investors made three + +On line 7565: + did this knowingly; + others not. Many investors made + three bad assumptions + +On line 7565: + knowingly; others + not. Many investors made three bad + assumptions about U.S. + +On line 7567: + investors made three bad + assumptions about U.S. housing + prices. They assumed: A + +On line 7567: + probability + that housing prices would decline + significantly; + +On line 7569: + different regions, + so that a local housing + bubble bursting in + +On line 7569: + a local housing + bubble bursting in Nevada + would not happen at + +On line 7569: + bubble bursting in + Nevada would not happen at + the same time as one + +On line 7569: + bursting in Nevada + would not happen at the same + time as one bursting + +On line 7569: + would not happen at + the same time as one bursting + in Florida; and + +On line 7571: + not happen at the + same time as one bursting in + Florida; and A + +On line 7571: + the same time as one + bursting in Florida; and + A relatively + +On line 7571: + Florida; and A + relatively low level + of strategic defaults, + +On line 7571: + defaults, in which an + underwater homeowner + voluntarily + +On line 7573: + mortgage. When housing + prices declined nationally + and quite severely + +On line 7573: + certain areas, these + flawed assumptions, magnified + by other problems + +On line 7573: + by other problems + described in previous steps, + created enormous + +On line 7573: + problems described in + previous steps, created + enormous financial + +On line 7573: + created enormous + financial losses for firms + exposed to housing + +On line 7573: + enormous financial + losses for firms exposed to + housing investments. + +On line 7575: + of the financial + and economic crisis was + appallingly bad risk + +On line 7575: + appallingly bad risk + management by the leaders + of some of the largest + +On line 7575: + bad risk management + by the leaders of some of + the largest financial + +On line 7575: + by the leaders of + some of the largest financial + institutions in + +On line 7575: + of some of the largest + financial institutions + in the United States + +On line 7575: + institutions in + the United States and Europe. + Each failed firm that the + +On line 7575: + States and Europe. Each + failed firm that the Commission + examined failed in + +On line 7575: + Each failed firm that the + Commission examined failed + in part because its + +On line 7577: + because its leaders + poorly managed risk. Based on + testimony from + +On line 7577: + poorly managed risk. + Based on testimony from + the executives + +On line 7577: + on testimony + from the executives of + several of the + +On line 7577: + of the largest failed firms + and the Commission staff ’s + investigative work, + +On line 7577: + and the Commission + staff ’s investigative work, + we can group common + +On line 7577: + the Commission staff + ’s investigative work, we + can group common risk + +On line 7577: + ’s investigative + work, we can group common risk + management failures + +On line 7577: + can group common risk + management failures into + several classes: + +On line 7579: + management failures + into several classes: + Concentration of + +On line 7579: + risk. Firm managers bet + massively on one type of + asset, counting on + +On line 7579: + massively on one + type of asset, counting on + high rates of return + +On line 7579: + of asset, counting + on high rates of return while + comforting themselves + +On line 7579: + high rates of return + while comforting themselves that + their competitors were + +On line 7581: + same. Insufficient + capital. Some of the failed + institutions were + +On line 7581: + capital. Some of + the failed institutions were + levered or higher. + +On line 7583: + failed institutions + were levered or higher. This + meant that every of + +On line 7585: + was financed with of + equity capital and + of debt. This made these + +On line 7585: + and of debt. This made + these firms enormously profitable + when things were going + +On line 7585: + of debt. This made these + firms enormously profitable when + things were going well, + +On line 7585: + debt. This made these firms + enormously profitable when things + were going well, but + +On line 7585: + were going well, but + incredibly sensitive + to even a small loss, + +On line 7585: + but incredibly + sensitive to even a small + loss, as a percent + +On line 7585: + to even a small loss, + as a percent decline in + the market value + +On line 7585: + even a small loss, as + a percent decline in the + market value of + +On line 7585: + a percent decline + in the market value of + these assets would leave + +On line 7585: + percent decline in + the market value of these + assets would leave them + +On line 7585: + assets would leave them + technically insolvent. + In some cases, this + +On line 7585: + them technically + insolvent. In some cases, + this increased leverage + +On line 7585: + In some cases, this + increased leverage was direct + and transparent. In + +On line 7585: + this increased leverage + was direct and transparent. + In other cases, + +On line 7585: + increased leverage was + direct and transparent. In + other cases, firms + +On line 7585: + In other cases, + firms used Structured Investment + Vehicles, asset-backed + +On line 7585: + conduits, and other + off-balance-sheet entities to + try to have it both + +On line 7585: + other off-balance-sheet + entities to try to have + it both ways: further + +On line 7585: + it both ways: further + increasing their leverage while + appearing not to + +On line 7585: + financial sector + and creates a financial + accident waiting + +On line 7585: + sector and creates + a financial accident + waiting to happen. + +On line 7585: + firms should have had much + larger capital cushions + and/or mechanisms + +On line 7585: + and/or mechanisms + for contingent capital + upon which to draw + +On line 7587: + markets. Just as each + lacked sufficient capital + cushions, in each case + +On line 7587: + each lacked sufficient + capital cushions, in each + case the failing firm’s + +On line 7587: + each case the failing + firm’s liquidity cushion + ran out within days. + +On line 7587: + case the failing firm’s + liquidity cushion ran + out within days. The + +On line 7587: + firm’s liquidity + cushion ran out within days. + The failed firms appear + +On line 7587: + out within days. The + failed firms appear to have based + their liquidity + +On line 7587: + failed firms appear to + have based their liquidity + strategies on the flawed + +On line 7587: + strategies on the flawed + assumption that both the firm + and KEITH HENNESSEY, + +On line 7587: + the flawed assumption + that both the firm and KEITH + HENNESSEY, DOUGLAS HOLTZ-EAKIN, + +On line 7587: + that both the firm and + KEITH HENNESSEY, DOUGLAS HOLTZ-EAKIN, + these funding markets + +On line 7587: + would always be healthy + and functioning smoothly. By + failing to provide + +On line 7587: + smoothly. By failing + to provide sufficiently + for disruptions in + +On line 7589: + put their firm’s survival + on a hair trigger. Poor risk + management systems. + +On line 7589: + survival on a hair + trigger. Poor risk management + systems. A number + +On line 7589: + on a hair trigger. + Poor risk management systems. + A number of firms + +On line 7589: + a hair trigger. Poor + risk management systems. A + number of firms were + +On line 7589: + of firms were unable + to easily aggregate + their housing risks across + +On line 7589: + their housing risks across + various business lines. Once + the market began + +On line 7589: + risks across various + business lines. Once the market + began to decline, + +On line 7589: + various business + lines. Once the market began + to decline, those firms + +On line 7589: + lines. Once the market + began to decline, those firms + that understood their + +On line 7589: + began to decline, + those firms that understood their + total exposure + +On line 7589: + to decline, those firms + that understood their total + exposure were able + +On line 7589: + that understood their + total exposure were able + to effectively + +On line 7589: + total exposure + were able to effectively + sell or hedge their risk + +On line 7589: + exposure were able + to effectively sell or + hedge their risk before + +On line 7589: + to effectively + sell or hedge their risk before + the market turned down + +On line 7589: + effectively sell + or hedge their risk before the + market turned down too + +On line 7589: + hedge their risk before + the market turned down too far. + Those that didn’t were + +On line 7589: + their risk before the + market turned down too far. Those + that didn’t were stuck + +On line 7589: + market turned down too + far. Those that didn’t were stuck + with toxic assets + +On line 7589: + that didn’t were stuck + with toxic assets in a + disintegrating + +On line 7591: + with toxic assets + in a disintegrating + market. Solvency + +On line 7593: + heard testimony + from the former heads of Bear + Stearns, Lehman, Citigroup, + +On line 7593: + testimony from + the former heads of Bear Stearns, + Lehman, Citigroup, and + +On line 7593: + from the former heads + of Bear Stearns, Lehman, Citigroup, + and AIG, among others. + +On line 7593: + the former heads of + Bear Stearns, Lehman, Citigroup, and + AIG, among others. A + +On line 7593: + Lehman, Citigroup, and + AIG, among others. A common + theme pervaded the + +On line 7593: + and AIG, among others. + A common theme pervaded + the testimony + +On line 7593: + AIG, among others. A + common theme pervaded the + testimony of + +On line 7595: + the testimony + of these witnesses: We were + solvent before the + +On line 7595: + of these witnesses: + We were solvent before the + liquidity run + +On line 7597: + solvent before the + liquidity run started. + Someone (unnamed) spread + +On line 7597: + liquidity run + started. Someone (unnamed) spread + bad information + +On line 7597: + information and + started an unjustified + liquidity run. + +On line 7599: + happened, given enough + time we would have recovered + and returned to a + +On line 7599: + enough time we would have + recovered and returned to + a position of + +On line 7601: + have recovered and + returned to a position + of strength. Therefore, the + +On line 7601: + and returned to a + position of strength. Therefore, + the firm failed because + +On line 7601: + to a position + of strength. Therefore, the firm failed + because we ran out + +On line 7601: + position of strength. + Therefore, the firm failed because + we ran out of time, + +On line 7601: + of strength. Therefore, the + firm failed because we ran out + of time, and it’s not + +On line 7601: + strength. Therefore, the firm + failed because we ran out of + time, and it’s not my + +On line 7601: + Therefore, the firm failed + because we ran out of time, + and it’s not my fault. + +On line 7603: + the firm failed because + we ran out of time, and it’s + not my fault. In each + +On line 7603: + firm failed because we + ran out of time, and it’s not + my fault. In each case, + +On line 7603: + because we ran out + of time, and it’s not my fault. + In each case, experts + +On line 7603: + of time, and it’s not + my fault. In each case, experts + and regulators + +On line 7603: + each case, experts and + regulators contested + the former CEO’s "we + +On line 7603: + and regulators + contested the former CEO’s + "we were solvent" claim. + +On line 7603: + CEO’s "we were solvent" + claim. Technical issues make + it difficult to + +On line 7603: + "we were solvent" claim. + Technical issues make it + difficult to prove + +On line 7603: + difficult to prove + otherwise, especially + because the answer + +On line 7603: + to prove otherwise, + especially because the + answer depends on + +On line 7603: + because the answer + depends on when solvency + is measured. After + +On line 7603: + answer depends on + when solvency is measured. + After a few days + +On line 7603: + when solvency is + measured. After a few days + of selling assets + +On line 7603: + measured. After a + few days of selling assets + at fire-sale prices during + +On line 7603: + few days of selling + assets at fire-sale prices during + a liquidity + +On line 7603: + at fire-sale prices during + a liquidity run, a + highly leveraged firm’s + +On line 7603: + a liquidity + run, a highly leveraged firm’s + balance sheet will look + +On line 7603: + leveraged firm’s balance + sheet will look measurably worse. + In each case, whether or + +On line 7603: + firm’s balance sheet will + look measurably worse. In each + case, whether or not the + +On line 7603: + balance sheet will look + measurably worse. In each case, + whether or not the firm + +On line 7603: + measurably worse. In + each case, whether or not the firm + was technically + +On line 7603: + or not the firm was + technically solvent, the + evidence strongly + +On line 7603: + that those pulling back from + doing business with the firm + were not irrational. + +On line 7603: + pulling back from doing + business with the firm were not + irrational. In each + +On line 7603: + business with the firm + were not irrational. In each + of the cases we + +On line 7603: + were not irrational. + In each of the cases we + examined, there were + +On line 7603: + each of the cases + we examined, there were huge + financial losses + +On line 7603: + examined, there were + huge financial losses that + at a minimum + +On line 7603: + financial losses + that at a minimum placed + the firm’s solvency + +On line 7605: + each case, the CEO was + willing to admit that he + had poorly managed + +On line 7605: + to admit that he + had poorly managed his firm’s + liquidity risk, + +On line 7605: + had poorly managed + his firm’s liquidity risk, + but unwilling to + +On line 7605: + admit that his firm + was insolvent or nearly + so. In each case the + +On line 7605: + was insolvent or + nearly so. In each case the + CEO’s claims were highly + +On line 7605: + nearly so. In each + case the CEO’s claims were highly + unpersuasive. These + +On line 7605: + each case the CEO’s claims + were highly unpersuasive. + These firm managers knew + +On line 7605: + case the CEO’s claims were + highly unpersuasive. These + firm managers knew or + +On line 7605: + managers knew or should + have known that they were risking + the solvency and + +On line 7605: + have known that they were + risking the solvency and + therefore the survival + +On line 7605: + that they were risking + the solvency and therefore + the survival of their + +On line 7605: + they were risking the + solvency and therefore the + survival of their firms. + +On line 7609: + the survival of their + firms. Conclusions: Managers of + many large and midsize + +On line 7609: + many large and midsize + financial institutions + in the United States + +On line 7609: + housing risk on their + balance sheets. In doing so + they turned a building + +On line 7609: + risk on their balance + sheets. In doing so they turned + a building housing + +On line 7609: + sheets. In doing so + they turned a building housing + crisis into a + +On line 7609: + they turned a building + housing crisis into a + subsequent crisis + +On line 7609: + failing financial + institutions. Some did this + knowingly; others, + +On line 7611: + knowingly; others, + unknowingly. Managers of + the largest financial + +On line 7621: + placed their firms on a + hair trigger by becoming + dependent upon + +On line 7621: + short-term financing + from commercial paper and + repo markets for + +On line 7621: + commercial paper + and repo markets for their + day-to-day funding. + +On line 7621: + paper and repo + markets for their day-to-day + funding. They placed failed + +On line 7621: + repo markets for + their day-to-day funding. They + placed failed solvency + +On line 7621: + failed solvency bets + that their housing investments + were solid, and failed + +On line 7621: + bets that their housing + investments were solid, and + failed liquidity + +On line 7621: + were solid, and failed + liquidity bets that overnight + money would always + +On line 7621: + liquidity bets + that overnight money would always + be there no matter + +On line 7621: + that overnight money would + always be there no matter + what. In several + +On line 7621: + money would always + be there no matter what. In + several cases, + +On line 7621: + be there no matter + what. In several cases, + failed solvency bets + +On line 7621: + several cases, + failed solvency bets triggered + liquidity crises, + +On line 7621: + failed solvency bets + triggered liquidity crises, + causing some of the + +On line 7621: + crises, causing some of + the largest financial firms to + fail or nearly fail. + +On line 7623: + the largest financial + firms to fail or nearly fail. + "Investment banks caused + +On line 7625: + "Investment banks caused + the crisis" A persistent + debate among members + +On line 7625: + the Commission was + the relative importance + of a firm’s legal + +On line 7625: + Commission was the + relative importance of + a firm’s legal form + +On line 7625: + of a firm’s legal + form and regulatory + regime in the failures + +On line 7625: + a firm’s legal form + and regulatory regime + in the failures of + +On line 7625: + firm’s legal form and + regulatory regime in + the failures of large + +On line 7625: + institutions. For + example, Commissioners + agreed that investment + +On line 7625: + Commissioners agreed + that investment bank holding + companies were too + +On line 7625: + agreed that investment + bank holding companies were + too lightly (barely) + +On line 7625: + too lightly (barely) + regulated by the SEC + leading up to the + +On line 7625: + regulated by + the SEC leading up to the + crisis and that the + +On line 7625: + the SEC leading up + to the crisis and that the + Consolidated + +On line 7625: + regulation of + these firms failed. As a result, + no regulator + +On line 7625: + these firms failed. As a + result, no regulator + could force these firms to + +On line 7625: + failed. As a result, + no regulator could force + these firms to strengthen + +On line 7625: + As a result, no + regulator could force these + firms to strengthen their + +On line 7625: + no regulator + could force these firms to strengthen + their capital or + +On line 7625: + or liquidity + buffers. There was agreement among + Commissioners that + +On line 7625: + contributing factor + to the failure of these firms. + The Commission split, + +On line 7625: + to the failure of + these firms. The Commission split, + however, on whether + +On line 7625: + however, on whether + the relatively weaker + regulation of + +On line 7625: + the relatively + weaker regulation of + investment banks was + +On line 7627: + cause of the crisis. + Institutional structure + and differential + +On line 7627: + Institutional + structure and differential + regulation of + +On line 7627: + various types of + financial institutions + were less important + +On line 7627: + were less important + in causing the crisis than + common factors that + +On line 7627: + regulatory + regimes. Investment banks failed in + the United States, and + +On line 7627: + Investment banks failed + in the United States, and so + did many commercial + +On line 7627: + the United States, and + so did many commercial banks, + large and small, despite + +On line 7627: + United States, and so + did many commercial banks, large + and small, despite a + +On line 7627: + many commercial banks, + large and small, despite a stronger + regulatory + +On line 7627: + and small, despite a + stronger regulatory and + supervisory + +On line 7627: + supervisory + regime. Wachovia, for example, + was a large insured + +On line 7627: + depository + institution supervised + by the Fed, OCC, and + +On line 7627: + by the Fed, OCC, and + FDIC. Yet it experienced + a liquidity + +On line 7627: + the Fed, OCC, and FDIC. + Yet it experienced a + liquidity run + +On line 7627: + experienced a + liquidity run that led + to its near failure + +On line 7627: + failure and prompted + the first-ever invocation + of the FDIC’s systemic + +On line 7627: + of the FDIC’s systemic + risk exception. Insurance + companies failed as + +On line 7629: + well, notably AIG and + the monoline bond insurers. + Banks with different + +On line 7629: + bond insurers. Banks + with different structures and + operating in + +On line 7629: + to be rescued in + the United Kingdom, Germany, + Iceland, Belgium, the + +On line 7629: + Belgium, the Netherlands, + France, Spain, Switzerland, Ireland, and + Denmark. Some of these + +On line 7629: + the Netherlands, France, Spain, + Switzerland, Ireland, and Denmark. + Some of these nations + +On line 7629: + these nations had far + stricter regulatory and + supervisory + +On line 7629: + regulatory + and supervisory regimes + than the United States. + +On line 7629: + than the United States. + The bad loans in the United + Kingdom, Ireland, and + +On line 7629: + United States. The bad + loans in the United Kingdom, + Ireland, and Spain were + +On line 7629: + States. The bad loans in + the United Kingdom, Ireland, + and Spain were financed + +On line 7629: + The bad loans in the + United Kingdom, Ireland, and + Spain were financed by + +On line 7629: + Spain were financed by + federally-regulated + lenders–not by "shadow + +On line 7631: + by "shadow banks." Rather + than attributing the crisis + principally to + +On line 7631: + Rather than attributing + the crisis principally + to differences in + +On line 7631: + than attributing the + crisis principally to + differences in the + +On line 7633: + more sense to look for + common factors: Different + types of financial + +On line 7633: + to look for common + factors: Different types of + financial firms in + +On line 7633: + factors: Different + types of financial firms in + the United States and + +On line 7633: + types of financial + firms in the United States and + Europe made highly + +On line 7635: + financial firms in + the United States and Europe + poorly managed their + +On line 7635: + in the United States + and Europe poorly managed + their solvency and + +On line 7635: + and Europe poorly + managed their solvency and + liquidity risk. + +On line 7639: + their solvency and + liquidity risk. KEITH + HENNESSEY, DOUGLAS HOLTZ-EAKIN, + +On line 7639: + liquidity risk. + KEITH HENNESSEY, DOUGLAS HOLTZ-EAKIN, + TWO TYPES OF SYSTEMIC + +On line 7641: + FAILURE Government + policymakers were afraid + of large firms’ sudden + +On line 7641: + policymakers + were afraid of large firms’ sudden + and disorderly + +On line 7641: + were afraid of large firms’ + sudden and disorderly + failure and chose to + +On line 7641: + large firms’ sudden and + disorderly failure and + chose to intervene + +On line 7641: + as a result. At + times, intervention itself + contributed to fear + +On line 7641: + times, intervention + itself contributed to fear + and uncertainty + +On line 7641: + contributed to fear + and uncertainty about the + stability of + +On line 7641: + uncertainty about + the stability of the + financial system. + +On line 7641: + the stability + of the financial system. + These interventions + +On line 7641: + of the financial + system. These interventions + responded to two + +On line 7645: + two types of systemic + failure. Systemic failure type + one: contagion We + +On line 7647: + begin by defining + contagion and too big to + fail. If financial + +On line 7647: + contagion and too + big to fail. If financial + firm X is a large + +On line 7647: + too big to fail. If + financial firm X is a + large counterparty + +On line 7647: + financial firm X + is a large counterparty + to other firms, X’s + +On line 7647: + firm X is a large + counterparty to other + firms, X’s sudden and + +On line 7647: + large counterparty + to other firms, X’s sudden + and disorderly + +On line 7649: + weaken the finances + of those other firms and cause + them to fail. We call + +On line 7649: + the finances of those + other firms and cause them to + fail. We call this the + +On line 7649: + other firms and cause + them to fail. We call this the + risk of contagion, + +On line 7649: + them to fail. We call + this the risk of contagion, + when, because of a + +On line 7649: + direct financial + link between firms, the failure + of one causes the + +On line 7649: + causes the failure + of another. Financial + firm X is too big + +On line 7649: + X is too big to + fail if policymakers + fear contagion so + +On line 7649: + is too big to fail + if policymakers fear + contagion so much + +On line 7649: + policymakers + fear contagion so much that + they are unwilling + +On line 7649: + fear contagion so + much that they are unwilling + to allow it to + +On line 7649: + contagion so much + that they are unwilling to + allow it to go + +On line 7649: + so much that they are + unwilling to allow it + to go bankrupt in + +On line 7649: + are unwilling to + allow it to go bankrupt + in a sudden and + +On line 7649: + to allow it to + go bankrupt in a sudden + and disorderly + +On line 7649: + and disorderly + fashion. Policymakers + make this judgment in + +On line 7649: + in large part based on + how much counterparty risk + other firms have to + +On line 7649: + much counterparty + risk other firms have to the + failing firm, along with + +On line 7649: + risk other firms have + to the failing firm, along with + a judgment about the + +On line 7649: + have to the failing + firm, along with a judgment about + the likelihood and + +On line 7651: + may also act if + they worry about the effects + of a failed firm on + +On line 7651: + also act if they + worry about the effects of + a failed firm on a + +On line 7651: + they worry about the + effects of a failed firm on + a particular + +On line 7651: + effects of a failed + firm on a particular + financial market + +On line 7651: + a failed firm on a + particular financial + market in which that + +On line 7651: + a particular + financial market in which + that firm is a large + +On line 7653: + financial market + in which that firm is a large + participant. The + +On line 7653: + in which that firm is + a large participant. The + determination + +On line 7653: + large participant. + The determination of + too big to fail rests + +On line 7653: + participant. The + determination of too + big to fail rests in + +On line 7653: + fail rests in the minds + of the policymakers + who must decide whether + +On line 7653: + rests in the minds of + the policymakers who + must decide whether to + +On line 7653: + in the minds of the + policymakers who must + decide whether to "bail + +On line 7653: + policymakers + who must decide whether to "bail + out" a failing firm. + +On line 7653: + must decide whether to + "bail out" a failing firm. They + may be more likely + +On line 7653: + decide whether to "bail + out" a failing firm. They may + be more likely to + +On line 7653: + whether to "bail out" a + failing firm. They may be more + likely to act if + +On line 7653: + "bail out" a failing + firm. They may be more likely + to act if they are + +On line 7653: + failing firm. They may + be more likely to act if + they are uncertain + +On line 7653: + firm. They may be more + likely to act if they are + uncertain about the + +On line 7653: + are uncertain about + the size of counterparty + credit risk or about + +On line 7653: + of counterparty + credit risk or about the health + of an important + +On line 7653: + credit risk or about + the health of an important + financial market, + +On line 7653: + of an important + financial market, or if + broader market or + +On line 7653: + if broader market + or economic conditions + make them more risk averse. + +On line 7655: + broader market or + economic conditions make + them more risk averse. This + +On line 7655: + conditions make them + more risk averse. This logic can + explain the actions + +On line 7655: + risk averse. This logic + can explain the actions of + policymakers8 + +On line 7655: + explain the actions + of policymakers8 in + several cases + +On line 7657: + cases in In March, + the Fed facilitated + JPMorgan’s purchase of Bear + +On line 7657: + facilitated + JPMorgan’s purchase of Bear Stearns by + providing a bridge + +On line 7657: + purchase of Bear Stearns + by providing a bridge loan + and loss protection + +On line 7657: + by providing a + bridge loan and loss protection + on a pool of Bear’s + +On line 7657: + loss protection on + a pool of Bear’s assets. While + policymakers + +On line 7657: + policymakers + were concerned about the failure + of Bear Stearns itself + +On line 7657: + the failure of Bear + Stearns itself and its direct + effects on other + +On line 7657: + Stearns itself and its + direct effects on other + firms, their decision + +On line 7657: + direct effects on + other firms, their decision + to act was heightened + +On line 7657: + effects on other + firms, their decision to act + was heightened by their + +On line 7657: + firms, their decision + to act was heightened by their + uncertainty about + +On line 7657: + to act was heightened + by their uncertainty about + potential broader + +On line 7657: + uncertainty about + potential broader market + instability + +On line 7657: + potential broader + market instability + and the potential + +On line 7657: + instability + and the potential impact + of Bear Stearns’ sudden + +On line 7657: + potential impact + of Bear Stearns’ sudden failure + on the tri-party + +On line 7659: + of Bear Stearns’ sudden + failure on the tri-party + repo market. In + +On line 7659: + tri-party repo + market. In September, the + Federal Housing + +On line 7659: + In September, the + Federal Housing Finance + Agency (FHFA) put + +On line 7659: + (FHFA) put Fannie + Mae and Freddie Mac into + conservatorship. + +On line 7659: + Mae and Freddie Mac + into conservatorship. + Policymakers + +On line 7661: + Policymakers + in effect promised that "the line + would be drawn between + +On line 7661: + in effect promised that + "the line would be drawn between + debt and equity," + +On line 7661: + effect promised that "the + line would be drawn between debt + and equity," such + +On line 7661: + "the line would be drawn + between debt and equity," + such that equity + +On line 7661: + would be drawn between + debt and equity," such that + equity holders + +On line 7661: + debt and equity," + such that equity holders + were wiped out but GSE + +On line 7661: + and equity," such + that equity holders were + wiped out but GSE debt + +On line 7661: + equity," such that + equity holders were wiped + out but GSE debt would + +On line 7661: + such that equity + holders were wiped out but GSE + debt would be worth cents + +On line 7661: + equity holders + were wiped out but GSE debt would + be worth cents on the + +On line 7661: + holders were wiped out + but GSE debt would be worth cents + on the dollar. They + +On line 7661: + were wiped out but GSE + debt would be worth cents on the + dollar. They made this + +On line 7661: + but GSE debt would be + worth cents on the dollar. They + made this decision + +On line 7661: + debt would be worth cents + on the dollar. They made this + decision because + +On line 7661: + dollar. They made this + decision because banking + regulators (and + +On line 7661: + treated Fannie and + Freddie debt as equivalent + to Treasuries. A bank + +On line 7661: + and Freddie debt as + equivalent to Treasuries. A + bank cannot hold all + +On line 7661: + as equivalent to + Treasuries. A bank cannot hold + all of its assets + +On line 7661: + of its assets in + debt issued by General + Electric or AT&T, but + +On line 7661: + in debt issued by + General Electric or AT&T, + but can hold it all + +On line 7661: + Electric or AT&T, but + can hold it all in Fannie + or Freddie debt. The + +On line 7661: + AT&T, but can hold it + all in Fannie or Freddie + debt. The same is true + +On line 7661: + but can hold it all + in Fannie or Freddie debt. + The same is true for + +On line 7661: + can hold it all in + Fannie or Freddie debt. The + same is true for many + +On line 7661: + it all in Fannie + or Freddie debt. The same is + true for many other + +On line 7661: + Fannie or Freddie + debt. The same is true for many + other investors in + +On line 7661: + debt. The same is true + for many other investors in + the United States and + +On line 7661: + The same is true for + many other investors in the + United States and around + +On line 7661: + many other investors + in the United States and around + the world–they assumed that + +On line 7661: + other investors in + the United States and around the + world–they assumed that GSE + +On line 7661: + the United States and + around the world–they assumed that GSE + debt was perfectly + +On line 7661: + United States and around + the world–they assumed that GSE debt + was perfectly safe + +On line 7661: + the world–they assumed that + GSE debt was perfectly safe + and so they weighted + +On line 7661: + world–they assumed that GSE + debt was perfectly safe and + so they weighted it + +On line 7661: + assumed that GSE debt + was perfectly safe and so + they weighted it too + +On line 7661: + debt was perfectly + safe and so they weighted it + too heavily in + +On line 7661: + was perfectly safe + and so they weighted it too + heavily in their + +On line 7669: + DISSENTING STATEMENT + this counterparty risk faced + by many financial + +On line 7669: + this counterparty + risk faced by many financial + institutions meant + +On line 7669: + by many financial + institutions meant that any + write-down of GSE debt + +On line 7669: + institutions meant + that any write-down of GSE debt + would trigger a chain + +On line 7669: + that any write-down of + GSE debt would trigger a chain + of failures throughout + +On line 7669: + any write-down of GSE + debt would trigger a chain of + failures throughout the + +On line 7669: + debt would trigger a + chain of failures throughout the + financial system. + +On line 7669: + of failures throughout + the financial system. In + addition, GSE debt + +On line 7669: + addition, GSE debt + was used as collateral + in short-term lending + +On line 7669: + GSE debt was used as + collateral in short-term + lending markets, and + +On line 7669: + as collateral + in short-term lending markets, + and by extension, + +On line 7669: + collateral in + short-term lending markets, and + by extension, their + +On line 7669: + in short-term lending + markets, and by extension, + their failure would have + +On line 7669: + lending markets, and + by extension, their failure + would have led to a + +On line 7669: + and by extension, + their failure would have led to + a sudden massive + +On line 7669: + would have led to a + sudden massive contraction + of credit beyond + +On line 7669: + massive contraction + of credit beyond what did + occur. Finally, + +On line 7669: + occur. Finally, + mortgage markets depended + so heavily on + +On line 7671: + effectively halt + the creation of new mortgages. + All three reasons led + +On line 7671: + the creation of new + mortgages. All three reasons led + policymakers + +On line 7671: + policymakers + to conclude that Fannie Mae + and Freddie Mac were + +On line 7673: + that Fannie Mae and + Freddie Mac were too big to + fail. In September, + +On line 7673: + too big to fail. In + September, the Federal + Reserve, with support + +On line 7673: + fail. In September, + the Federal Reserve, with + support from Treasury, + +On line 7673: + Federal Reserve, + with support from Treasury, "bailed + out" AIG, preventing + +On line 7673: + AIG, preventing it + from sudden disorderly + failure. They took this + +On line 7673: + this action because + AIG was a huge seller of + credit default swaps + +On line 7673: + was a huge seller + of credit default swaps to + a number of large + +On line 7673: + seller of credit + default swaps to a number + of large financial + +On line 7673: + of credit default + swaps to a number of large + financial firms, and + +On line 7673: + swaps to a number + of large financial firms, and + they were concerned that + +On line 7673: + to a number of + large financial firms, and they + were concerned that an + +On line 7673: + a number of large + financial firms, and they were + concerned that an AIG + +On line 7673: + of large financial + firms, and they were concerned that + an AIG default would + +On line 7673: + financial firms, and + they were concerned that an AIG + default would trigger + +On line 7673: + they were concerned that + an AIG default would trigger + mandatory write-downs + +On line 7673: + an AIG default would + trigger mandatory write-downs + on those firms’ balance + +On line 7673: + those firms’ balance sheets, + forcing counterparties to + scramble to replace + +On line 7673: + balance sheets, forcing + counterparties to scramble + to replace hedges in + +On line 7673: + counterparties to + scramble to replace hedges in + a distressed market + +On line 7673: + scramble to replace + hedges in a distressed market + and potentially + +On line 7673: + and potentially + triggering a cascade of + failures. AIG also + +On line 7673: + cascade of failures. + AIG also had important + lines of business in + +On line 7673: + had important lines + of business in insuring + consumer and business + +On line 7673: + consumer and business + activities that would have + been threatened by a + +On line 7673: + been threatened by a + failure of AIG’s financial + products division + +On line 7673: + decision to aid + AIG was also influenced + by the extremely + +On line 7675: + institutional + failures in prior days and + weeks. In November, + +On line 7675: + In November, the + Federal Reserve, FDIC, and + Treasury provided + +On line 7675: + Treasury provided + assistance to Citigroup. + Regulators feared + +On line 7675: + feared that the failure + of Citigroup, one of the + nation’s largest banks, would + +On line 7675: + would both undermine + confidence the financial + system gained after + +On line 7675: + system gained after + TARP and potentially lead + to the failures of + +On line 7679: + to the failures of + Citi’s major counterparties. + Conclusion: The risk + +On line 7679: + risk of contagion + was an essential cause of + the crisis. In some + +On line 7679: + financial system + was vulnerable because + policymakers + +On line 7679: + was vulnerable + because policymakers + were afraid of a large + +On line 7679: + afraid of a large firm’s + sudden and disorderly + failure triggering + +On line 7679: + a large firm’s sudden + and disorderly failure + triggering balance-sheet + +On line 7681: + allow them to fail + suddenly. Systemic failure + type two: a common + +On line 7683: + suddenly. Systemic + failure type two: a common + shock If contagion + +On line 7683: + failure type two: a + common shock If contagion + is like the flu, then + +On line 7683: + two: a common shock + If contagion is like the + flu, then a common + +On line 7683: + a common shock If + contagion is like the flu, + then a common shock + +On line 7683: + flu, then a common + shock is like food poisoning. + A common factor + +On line 7683: + common shock is like + food poisoning. A common + factor affects a + +On line 7683: + like food poisoning. + A common factor affects + a number of firms + +On line 7683: + food poisoning. A + common factor affects a + number of firms in + +On line 7683: + A common factor + affects a number of firms + in the same way, and + +On line 7683: + factor affects a + number of firms in the same + way, and they all get + +On line 7683: + affects a number + of firms in the same way, and + they all get sick at + +On line 7683: + a number of firms + in the same way, and they all + get sick at the same + +On line 7683: + number of firms in + the same way, and they all get + sick at the same time. + +On line 7683: + of firms in the same + way, and they all get sick at + the same time. In a + +On line 7683: + in the same way, and + they all get sick at the same + time. In a common + +On line 7683: + the same way, and they + all get sick at the same time. + In a common shock, + +On line 7683: + same way, and they all + get sick at the same time. In + a common shock, the + +On line 7683: + they all get sick at + the same time. In a common + shock, the failure of + +On line 7683: + all get sick at the + same time. In a common shock, + the failure of one + +On line 7683: + get sick at the same + time. In a common shock, the + failure of one firm + +On line 7683: + the same time. In a + common shock, the failure of + one firm may inform + +On line 7683: + time. In a common + shock, the failure of one firm + may inform us about + +On line 7683: + In a common shock, + the failure of one firm may + inform us about the + +On line 7683: + shock, the failure of + one firm may inform us about + the breadth or depth of + +On line 7683: + the failure of one + firm may inform us about the + breadth or depth of the + +On line 7683: + one firm may inform + us about the breadth or depth of + the problem, but the + +On line 7683: + inform us about the + breadth or depth of the problem, + but the failure of + +On line 7683: + us about the breadth or + depth of the problem, but the + failure of one firm + +On line 7683: + the breadth or depth of + the problem, but the failure + of one firm does not + +On line 7683: + breadth or depth of the + problem, but the failure of + one firm does not cause + +On line 7683: + of the problem, but + the failure of one firm does + not cause the failure + +On line 7683: + the problem, but the + failure of one firm does not + cause the failure of + +On line 7685: + the failure of one + firm does not cause the failure + of another. The + +On line 7685: + one firm does not cause + the failure of another. + The common factor + +On line 7685: + firm does not cause the + failure of another. The + common factor in + +On line 7685: + not cause the failure + of another. The common + factor in this case + +On line 7685: + of another. The + common factor in this case + was concentrated + +On line 7685: + factor in this case + was concentrated losses + on housing-related + +On line 7685: + was concentrated + losses on housing-related + assets in large and + +On line 7685: + on housing-related + assets in large and midsize + financial firms in + +On line 7685: + assets in large and + midsize financial firms in + the United States and + +On line 7689: + in the United States + and some in Europe. KEITH + HENNESSEY, DOUGLAS HOLTZ-EAKIN, + +On line 7689: + and some in Europe. + KEITH HENNESSEY, DOUGLAS HOLTZ-EAKIN, + These losses wiped out + +On line 7689: + HOLTZ-EAKIN, These losses wiped + out capital throughout the + financial sector. + +On line 7689: + financial sector. + Policymakers were not + just dealing with a + +On line 7689: + Policymakers + were not just dealing with a + single insolvent + +On line 7689: + were not just dealing + with a single insolvent + firm that might transmit + +On line 7689: + not just dealing with + a single insolvent firm + that might transmit its + +On line 7691: + firm that might transmit + its failure to others. They + were dealing with a + +On line 7691: + transmit its failure + to others. They were dealing + with a scenario in + +On line 7691: + to others. They were + dealing with a scenario in + which many large, midsize, + +On line 7691: + large, midsize, and small + financial institutions + took large losses at + +On line 7693: + institutions took + large losses at roughly the + same time. Conclusion: + +On line 7695: + roughly the same time. + Conclusion: Some financial + institutions failed + +On line 7695: + time. Conclusion: Some + financial institutions + failed because of a + +On line 7695: + institutions failed + because of a common shock: + they made similar + +On line 7695: + similar failed bets + on housing. Unconnected + financial firms were + +On line 7695: + failed bets on housing. + Unconnected financial + firms were failing for + +On line 7695: + financial firms were + failing for the same reason + and at roughly the + +On line 7695: + were failing for the + same reason and at roughly + the same time because + +On line 7695: + failing for the same + reason and at roughly the + same time because they + +On line 7695: + for the same reason + and at roughly the same time + because they had the + +On line 7695: + and at roughly the + same time because they had the + same problem of large + +On line 7695: + the same time because + they had the same problem of + large housing losses. + +On line 7695: + same time because they + had the same problem of large + housing losses. This + +On line 7695: + because they had the + same problem of large housing + losses. This common + +On line 7695: + had the same problem + of large housing losses. This + common shock meant the + +On line 7695: + same problem of large + housing losses. This common + shock meant the problem + +On line 7695: + housing losses. This + common shock meant the problem + was broader than a + +On line 7695: + This common shock meant + the problem was broader than + a single failed bank–key + +On line 7695: + common shock meant the + problem was broader than a + single failed bank–key large + +On line 7695: + meant the problem was + broader than a single failed + bank–key large financial + +On line 7697: + this common shock. We + examine two frequently + debated topics + +On line 7697: + shock. We examine + two frequently debated + topics about the events + +On line 7699: + debated topics + about the events of September + "The government should + +On line 7701: + events of September + "The government should not have + bailed out Some argue + +On line 7701: + of September "The + government should not have bailed + out Some argue that + +On line 7701: + "The government should + not have bailed out Some argue + that no firm is too + +On line 7701: + government should not + have bailed out Some argue that + no firm is too big + +On line 7701: + should not have bailed out + Some argue that no firm is + too big to fail, and + +On line 7701: + not have bailed out Some + argue that no firm is too + big to fail, and that + +On line 7701: + argue that no firm + is too big to fail, and that + policymakers + +On line 7703: + is too big to fail, + and that policymakers + erred when they "bailed out" + +On line 7703: + too big to fail, and + that policymakers erred + when they "bailed out" Bear + +On line 7703: + big to fail, and that + policymakers erred when + they "bailed out" Bear Stearns, + +On line 7703: + policymakers + erred when they "bailed out" Bear Stearns, + Fannie and Freddie, + +On line 7703: + they "bailed out" Bear Stearns, + Fannie and Freddie, AIG, and + later Citigroup. + +On line 7703: + out" Bear Stearns, Fannie + and Freddie, AIG, and later + Citigroup. In our + +On line 7703: + and Freddie, AIG, and + later Citigroup. In our + view, this misses the + +On line 7703: + later Citigroup. + In our view, this misses the + basic arithmetic of + +On line 7703: + were presented, for + example, with the news that + "AIG is about to fail" + +On line 7703: + for example, with + the news that "AIG is about to + fail" and counseled that + +On line 7703: + example, with the + news that "AIG is about to fail" + and counseled that its + +On line 7703: + with the news that "AIG + is about to fail" and counseled + that its sudden and + +On line 7703: + "AIG is about to fail" + and counseled that its sudden + and disorderly + +On line 7703: + and counseled that its + sudden and disorderly + failure might trigger + +On line 7703: + and disorderly + failure might trigger a chain + reaction. Given + +On line 7703: + preceding failures + of Fannie Mae and Freddie + Mac, the Merrill Lynch + +On line 7703: + Mae and Freddie Mac, + the Merrill Lynch merger, Lehman’s + bankruptcy, and the + +On line 7703: + Reserve Primary + Fund breaking the buck, market + confidence was on + +On line 7703: + Fund breaking the buck, + market confidence was on + a knife’s edge. A chain + +On line 7703: + market confidence + was on a knife’s edge. A chain + reaction could cause + +On line 7703: + on a knife’s edge. A + chain reaction could cause a + run on the global + +On line 7703: + chain reaction could + cause a run on the global + financial system. + +On line 7703: + cause a run on the + global financial system. + They feared not just a + +On line 7703: + run on the global + financial system. They feared + not just a run on + +On line 7703: + global financial + system. They feared not just a + run on a bank, but + +On line 7703: + system. They feared not + just a run on a bank, but + a generalized + +On line 7703: + just a run on a + bank, but a generalized + panic that might crash + +On line 7703: + on a bank, but a + generalized panic that + might crash the entire + +On line 7703: + might crash the entire + system–that is, the risk of an + event comparable + +On line 7705: + is, the risk of an + event comparable to the + Great Depression. For + +On line 7705: + the risk of an event + comparable to the Great + Depression. For a + +On line 7705: + comparable to + the Great Depression. For a + policymaker, + +On line 7705: + the Great Depression. + For a policymaker, + the calculus is + +On line 7705: + policymaker, + the calculus is simple: + if you bail out AIG + +On line 7705: + the calculus is + simple: if you bail out AIG + and you’re wrong, you will + +On line 7705: + you bail out AIG and + you’re wrong, you will have wasted + taxpayer money + +On line 7705: + AIG and you’re wrong, you + will have wasted taxpayer + money and provoked + +On line 7705: + you’re wrong, you will have + wasted taxpayer money + and provoked public + +On line 7705: + wasted taxpayer + money and provoked public + outrage. If you don’t + +On line 7705: + taxpayer money + and provoked public outrage. + If you don’t bail out + +On line 7705: + money and provoked + public outrage. If you don’t + bail out AIG and you’re + +On line 7705: + and provoked public + outrage. If you don’t bail out + AIG and you’re wrong, the + +On line 7705: + outrage. If you don’t + bail out AIG and you’re wrong, the + global financial + +On line 7705: + If you don’t bail out + AIG and you’re wrong, the global + financial system + +On line 7705: + bail out AIG and you’re + wrong, the global financial + system collapses. + +On line 7705: + AIG and you’re wrong, the + global financial system + collapses. It should + +On line 7705: + global financial + system collapses. It should + be easy to see why + +On line 7705: + system collapses. + It should be easy to see why + policymakers + +On line 7705: + It should be easy to + see why policymakers + favored action–there + +On line 7705: + be easy to see why + policymakers favored + action–there was a + +On line 7705: + policymakers + favored action–there was a + chance of being wrong + +On line 7705: + favored action–there + was a chance of being wrong + either way, and the + +On line 7705: + action–there was a + chance of being wrong either + way, and the costs of + +On line 7705: + chance of being wrong + either way, and the costs of + being wrong without + +On line 7705: + being wrong either + way, and the costs of being + wrong without action + +On line 7705: + either way, and the + costs of being wrong without + action were far greater + +On line 7705: + way, and the costs of + being wrong without action + were far greater than the + +On line 7705: + the costs of being + wrong without action were far + greater than the costs of + +On line 7705: + being wrong without + action were far greater than the + costs of being wrong + +On line 7707: + far greater than the costs + of being wrong with action. + "Bernanke, Geithner, + +On line 7707: + greater than the costs of + being wrong with action. "Bernanke, + Geithner, and + +On line 7709: + of being wrong with + action. "Bernanke, Geithner, + and Paulson should not + +On line 7709: + wrong with action. "Bernanke, + Geithner, and Paulson + should not have chosen + +On line 7711: + Geithner, and + Paulson should not have chosen + to let Lehman fail" This + +On line 7711: + and Paulson should not + have chosen to let Lehman fail" + This is probably + +On line 7711: + Paulson should not have + chosen to let Lehman fail" This + is probably the + +On line 7711: + have chosen to let + Lehman fail" This is probably + the most frequently + +On line 7711: + This is probably + the most frequently discussed + element of the + +On line 7711: + the most frequently + discussed element of the + financial crisis. + +On line 7711: + discussed element + of the financial crisis. + To make this case one + +On line 7713: + make this case one must + argue: Bernanke, Geithner, + and Paulson had a + +On line 7713: + one must argue: Bernanke, + Geithner, and Paulson + had a legal and + +On line 7713: + Bernanke, Geithner, + and Paulson had a legal + and viable option + +On line 7713: + had a legal and + viable option available to + them other than Lehman + +On line 7715: + option available to + them other than Lehman filing + bankruptcy. They knew + +On line 7715: + them other than Lehman + filing bankruptcy. They knew + they had this option, + +On line 7715: + filing bankruptcy. + They knew they had this option, + considered it, and + +On line 7723: + considered it, and + rejected it. DISSENTING + STATEMENT They were wrong + +On line 7723: + it, and rejected + it. DISSENTING STATEMENT They + were wrong to do so. + +On line 7725: + and rejected it. + DISSENTING STATEMENT They were + wrong to do so. They + +On line 7725: + DISSENTING STATEMENT + They were wrong to do so. They + had a reason for + +On line 7725: + They were wrong to do + so. They had a reason for + choosing to allow + +On line 7725: + wrong to do so. They + had a reason for choosing + to allow Lehman to + +On line 7725: + to do so. They had + a reason for choosing to + allow Lehman to fail. + +On line 7727: + They had a reason + for choosing to allow Lehman + to fail. We have yet + +On line 7727: + had a reason for + choosing to allow Lehman to + fail. We have yet to + +On line 7727: + choosing to allow + Lehman to fail. We have yet to + find someone who can + +On line 7727: + Lehman to fail. We have + yet to find someone who can + make a plausible + +On line 7727: + to fail. We have yet + to find someone who can make + a plausible case + +On line 7727: + fail. We have yet to + find someone who can make a + plausible case on + +On line 7727: + yet to find someone + who can make a plausible + case on all four counts. + +On line 7727: + to find someone who + can make a plausible case + on all four counts. We + +On line 7727: + find someone who can + make a plausible case on + all four counts. We think + +On line 7727: + someone who can make + a plausible case on all + four counts. We think that + +On line 7727: + four counts. We think that + these three policymakers + would have saved Lehman if + +On line 7727: + counts. We think that these + three policymakers would + have saved Lehman if they + +On line 7727: + We think that these three + policymakers would have + saved Lehman if they thought + +On line 7727: + policymakers + would have saved Lehman if they thought + they had a legal + +On line 7727: + would have saved Lehman if + they thought they had a legal + and viable option + +On line 7727: + have saved Lehman if they + thought they had a legal and + viable option to + +On line 7727: + Lehman if they thought they + had a legal and viable + option to do so. + +On line 7727: + they had a legal + and viable option to do + so. In hindsight, we + +On line 7727: + and viable option + to do so. In hindsight, we + also think they were + +On line 7727: + option to do so. + In hindsight, we also think + they were right at the + +On line 7727: + do so. In hindsight, + we also think they were right + at the time–they did not + +On line 7727: + so. In hindsight, we + also think they were right at + the time–they did not have + +On line 7727: + we also think they + were right at the time–they did not + have a legal and + +On line 7727: + they were right at the + time–they did not have a legal + and viable option + +On line 7727: + were right at the time–they + did not have a legal and + viable option to + +On line 7727: + at the time–they did not + have a legal and viable + option to save Lehman. + +On line 7729: + not have a legal + and viable option to save + Lehman. Many prominent + +On line 7729: + and viable option + to save Lehman. Many prominent + public officials + +On line 7729: + have accused these three + of making a mistake. These + critics usually + +On line 7729: + mistake. These critics + usually argue that these + three should have saved Lehman. + +On line 7731: + critics usually + argue that these three should have + saved Lehman. When asked what + +On line 7731: + usually argue + that these three should have saved Lehman. + When asked what else they + +On line 7731: + argue that these three + should have saved Lehman. When asked what + else they could have done, + +On line 7731: + these three should have saved + Lehman. When asked what else they could + have done, the critic’s + +On line 7731: + should have saved Lehman. When + asked what else they could have done, + the critic’s usual + +On line 7731: + Lehman. When asked what else + they could have done, the critic’s + usual response is, + +On line 7731: + asked what else they could + have done, the critic’s usual + response is, "I don’t + +On line 7731: + else they could have done, + the critic’s usual response + is, "I don’t know, but + +On line 7731: + have done, the critic’s + usual response is, "I don’t + know, but surely they + +On line 7731: + the critic’s usual + response is, "I don’t know, but + surely they could have + +On line 7731: + usual response is, + "I don’t know, but surely they + could have done something. + +On line 7731: + response is, "I don’t + know, but surely they could have + done something. They chose + +On line 7731: + don’t know, but surely + they could have done something. They + chose not to and caused + +On line 7731: + know, but surely they + could have done something. They chose + not to and caused the + +On line 7731: + surely they could have + done something. They chose not to + and caused the crisis." + +On line 7731: + could have done something. + They chose not to and caused the + crisis." Those who want + +On line 7731: + something. They chose not + to and caused the crisis." Those + who want to label + +On line 7731: + chose not to and caused + the crisis." Those who want to + label Lehman’s failure + +On line 7731: + crisis." Those who want + to label Lehman’s failure a + policy mistake + +On line 7731: + who want to label + Lehman’s failure a policy + mistake are obliged to + +On line 7731: + label Lehman’s failure + a policy mistake are + obliged to suggest an + +On line 7733: + mistake are obliged to + suggest an alternate course + of action. The Fed’s + +On line 7733: + obliged to suggest an + alternate course of action. + The Fed’s assistance + +On line 7733: + alternate course of + action. The Fed’s assistance + for Bear Stearns, and FDIC + +On line 7733: + course of action. The + Fed’s assistance for Bear Stearns, + and FDIC and Treasury’s + +On line 7733: + for Bear Stearns, and FDIC + and Treasury’s assistance for + Wachovia, followed a + +On line 7733: + for Wachovia, followed + a pattern. In each case, the + failing firm or the + +On line 7733: + followed a pattern. + In each case, the failing firm + or the government + +On line 7733: + a pattern. In each + case, the failing firm or the + government found a + +On line 7733: + each case, the failing + firm or the government found + a buyer, and the + +On line 7733: + failing firm or the + government found a buyer, + and the government + +On line 7733: + found a buyer, and + the government subsidized + the purchase. In the + +On line 7733: + a buyer, and the + government subsidized the + purchase. In the case + +On line 7733: + and the government + subsidized the purchase. In + the case of Bear Stearns, + +On line 7733: + the case of Bear Stearns, + the government subsidized + the purchase, and in + +On line 7733: + case of Bear Stearns, the + government subsidized the + purchase, and in the + +On line 7733: + and in the case of + Wachovia, the government made + clear that assistance + +On line 7733: + the case of Wachovia, + the government made clear that + assistance would be + +On line 7733: + the government made + clear that assistance would be + available if it were + +On line 7733: + be available if it + were needed. The specific + mechanics of the + +On line 7733: + it were needed. The + specific mechanics of + the subsidy differed + +On line 7733: + mechanics of the + subsidy differed between the + two cases, but in + +On line 7733: + the subsidy differed + between the two cases, but + in each bailout the key + +On line 7733: + differed between the + two cases, but in each bailout + the key condition + +On line 7733: + two cases, but in + each bailout the key condition + was the presence of + +On line 7733: + cases, but in each + bailout the key condition was + the presence of a + +On line 7735: + key condition was + the presence of a willing + buyer. Lehman had no + +On line 7735: + was the presence of + a willing buyer. Lehman had + no willing buyer. + +On line 7735: + the presence of a + willing buyer. Lehman had no + willing buyer. Bank + +On line 7735: + a willing buyer. + Lehman had no willing buyer. + Bank of America + +On line 7735: + willing buyer. Lehman + had no willing buyer. Bank + of America bought + +On line 7735: + willing buyer. Bank + of America bought Merrill + Lynch instead, and no + +On line 7735: + of America bought + Merrill Lynch instead, and no + other American + +On line 7735: + other American + financial institution + was willing or able + +On line 7735: + institution was + willing or able to step up. + For months, government + +On line 7735: + willing or able to + step up. For months, government + officials had tried + +On line 7735: + able to step up. For + months, government officials + had tried and failed to + +On line 7735: + For months, government + officials had tried and failed + to facilitate + +On line 7735: + of "Lehman weekend," the + most viable candidate was + the British bank Barclays. + +On line 7735: + "Lehman weekend," the most + viable candidate was the + British bank Barclays. To + +On line 7735: + the British bank Barclays. + To make the purchase, Barclays + needed either a + +On line 7735: + To make the purchase, + Barclays needed either a + shareholder vote, which + +On line 7735: + needed either a + shareholder vote, which would take + several weeks to + +On line 7735: + a shareholder vote, + which would take several weeks + to execute, or + +On line 7735: + shareholder vote, which + would take several weeks to + execute, or the + +On line 7735: + would take several + weeks to execute, or the + permission of their + +On line 7735: + weeks to execute, + or the permission of their + regulator. They + +On line 7735: + or the permission + of their regulator. They + could get neither in + +On line 7735: + the permission of + their regulator. They could + get neither in the + +On line 7735: + permission of their + regulator. They could get + neither in the time + +On line 7737: + their regulator. + They could get neither in the + time available. Lehman was + +On line 7737: + They could get neither + in the time available. Lehman was + therefore facing an + +On line 7737: + therefore facing an + imminent liquidity + run without a path + +On line 7739: + liquidity run + without a path to success. + There was no buyer. + +On line 7739: + path to success. There + was no buyer. There was the + possibility + +On line 7739: + was no buyer. There + was the possibility + that Barclays might be + +On line 7739: + no buyer. There was + the possibility that + Barclays might be a + +On line 7739: + might be a buyer, + some weeks in the future. Bernanke, + Geithner, and + +On line 7739: + in the future. Bernanke, + Geithner, and Paulson + were then confronted + +On line 7739: + Geithner, and + Paulson were then confronted + with the question of + +On line 7739: + and Paulson were then + confronted with the question + of whether to provide + +On line 7739: + confronted with the + question of whether to provide + an effectively + +On line 7739: + question of whether to + provide an effectively + uncapped loan to Lehman + +On line 7739: + whether to provide an + effectively uncapped loan + to Lehman to supplant + +On line 7741: + its disappearing + liquidity while Lehman searched + for a buyer. This + +On line 7741: + liquidity while + Lehman searched for a buyer. This + loan would have to come + +On line 7741: + while Lehman searched for a + buyer. This loan would have to + come from the Fed, since + +On line 7741: + searched for a buyer. + This loan would have to come from + the Fed, since before + +On line 7741: + for a buyer. This + loan would have to come from the + Fed, since before the + +On line 7741: + This loan would have to + come from the Fed, since before + the enactment of + +On line 7741: + loan would have to come + from the Fed, since before the + enactment of the + +On line 7741: + no authority + to provide such financing. + The law limits the + +On line 7741: + authority to + provide such financing. The + law limits the Fed + +On line 7741: + such financing. The + law limits the Fed in these + cases. The Fed can + +On line 7741: + The law limits the + Fed in these cases. The Fed + can only provide + +On line 7741: + Fed in these cases. + The Fed can only provide + secured loans. They were + +On line 7741: + these cases. The Fed + can only provide secured + loans. They were able to + +On line 7741: + cases. The Fed can + only provide secured loans. + They were able to make + +On line 7741: + The Fed can only + provide secured loans. They were + able to make this work + +On line 7741: + can only provide + secured loans. They were able to + make this work for Bear + +On line 7741: + provide secured loans. + They were able to make this work + for Bear Stearns and AIG + +On line 7741: + secured loans. They were + able to make this work for Bear + Stearns and AIG because + +On line 7741: + loans. They were able to + make this work for Bear Stearns and + AIG because there were + +On line 7741: + able to make this work + for Bear Stearns and AIG because + there were sufficient + +On line 7741: + for Bear Stearns and AIG + because there were sufficient + unencum-bered assets + +On line 7741: + and AIG because there + were sufficient unencum-bered + assets to serve as + +On line 7741: + there were sufficient + unencum-bered assets to serve + as collateral. + +On line 7741: + collateral. Fed + officials argue that Lehman + had insufficient + +On line 7741: + officials argue + that Lehman had insufficient + un-pledged assets to + +On line 7741: + had insufficient + un-pledged assets to secure + the loan it would have + +On line 7741: + un-pledged assets to + secure the loan it would have + needed to survive. + +On line 7741: + assets to secure + the loan it would have needed + to survive. Former + +On line 7741: + the loan it would have + needed to survive. Former + Lehman executives + +On line 7743: + to provide credit. + Was there another option1 + The Fed leaders would + +On line 7743: + provide credit. Was + there another option1 The + Fed leaders would have + +On line 7743: + Was there another + option1 The Fed leaders would + have had to direct + +On line 7743: + another option1 + The Fed leaders would have had + to direct the staff + +On line 7743: + The Fed leaders would + have had to direct the staff + to re-evaluate + +On line 7743: + Fed leaders would have + had to direct the staff to + re-evaluate in + +On line 7743: + had to direct the + staff to re-evaluate in + a more optimistic + +On line 7743: + to direct the staff + to re-evaluate in a + more optimistic way + +On line 7743: + direct the staff to + re-evaluate in a more + optimistic way the + +On line 7743: + to re-evaluate + in a more optimistic way + the analysis of + +On line 7743: + re-evaluate in + a more optimistic way the + analysis of Lehman’s + +On line 7743: + optimistic way the + analysis of Lehman’s balance + sheet to justify + +On line 7743: + analysis of Lehman’s + balance sheet to justify + a secured loan. They + +On line 7743: + of Lehman’s balance sheet + to justify a secured + loan. They then would have + +On line 7743: + Lehman’s balance sheet to + justify a secured loan. + They then would have had + +On line 7743: + sheet to justify + a secured loan. They then would + have had to decide + +On line 7743: + to justify a + secured loan. They then would have + had to decide to + +On line 7743: + have had to decide + to provide liquidity + support to KEITH + +On line 7743: + support to KEITH + HENNESSEY, DOUGLAS HOLTZ-EAKIN, Lehman for + an indefinite + +On line 7743: + HENNESSEY, DOUGLAS HOLTZ-EAKIN, + Lehman for an indefinite + time period while + +On line 7743: + an indefinite + time period while Lehman searched + for a buyer. That + +On line 7743: + searched for a buyer. + That asset revaluation + would later have come + +On line 7743: + the likely large and + potentially uncapped cost + to the taxpayer. + +On line 7743: + uncapped cost to the + taxpayer. In the meantime, + other creditors + +On line 7743: + taxpayer. In the + meantime, other creditors + to Lehman could have cashed + +On line 7743: + the meantime, other + creditors to Lehman could have + cashed out at cents on + +On line 7743: + other creditors + to Lehman could have cashed out at + cents on the dollar, + +On line 7743: + creditors to Lehman + could have cashed out at cents on + the dollar, leaving + +On line 7743: + to Lehman could have cashed + out at cents on the dollar, + leaving taxpayers + +On line 7743: + could have cashed out at + cents on the dollar, leaving + taxpayers holding + +On line 7743: + out at cents on the + dollar, leaving taxpayers + holding the bag for + +On line 7743: + cents on the dollar, + leaving taxpayers holding + the bag for losses. + +On line 7745: + leaving taxpayers + holding the bag for losses. + Fed Chairman Bernanke, his + +On line 7745: + holding the bag for + losses. Fed Chairman Bernanke, his + general counsel + +On line 7745: + bag for losses. Fed + Chairman Bernanke, his general + counsel Scott Alvarez, + +On line 7745: + losses. Fed Chairman + Bernanke, his general counsel + Scott Alvarez, and New + +On line 7745: + Bernanke, his general + counsel Scott Alvarez, and New + York Fed general + +On line 7745: + general counsel + Scott Alvarez, and New York Fed + general counsel + +On line 7745: + Scott Alvarez, and New + York Fed general counsel + Thomas C. Baxter Jr. + +On line 7745: + Alvarez, and New York + Fed general counsel Thomas + C. Baxter Jr. all + +On line 7745: + York Fed general + counsel Thomas C. Baxter Jr. + all argued in sworn + +On line 7745: + Jr. all argued in + sworn testimony that this + option would not have + +On line 7745: + option would not have + been legal. Bernanke suggested + that it also would + +On line 7745: + have been legal. Bernanke + suggested that it also + would have been unwise + +On line 7745: + suggested that it + also would have been unwise + because, in effect, + +On line 7745: + that it also would + have been unwise because, in + effect, the Fed would + +On line 7745: + also would have been + unwise because, in effect, + the Fed would have been + +On line 7745: + been unwise because, + in effect, the Fed would have + been providing an + +On line 7745: + in effect, the Fed + would have been providing an + open-ended commitment + +On line 7745: + have been providing + an open-ended commitment to + allow Lehman to shop + +On line 7745: + shop for a buyer. + Bernanke testified that such a + loan would merely waste + +On line 7745: + Bernanke testified that + such a loan would merely waste + taxpayer money + +On line 7745: + a loan would merely + waste taxpayer money for + an outcome that was + +On line 7745: + loan would merely waste + taxpayer money for an + outcome that was quite + +On line 7745: + taxpayer money + for an outcome that was quite + unlikely to change. + +On line 7747: + for an outcome that + was quite unlikely to change. + Based on their actions + +On line 7747: + an outcome that was + quite unlikely to change. Based + on their actions to + +On line 7747: + outcome that was quite + unlikely to change. Based on + their actions to deal + +On line 7747: + was quite unlikely + to change. Based on their actions + to deal with other + +On line 7747: + unlikely to change. + Based on their actions to deal + with other failing + +On line 7747: + to change. Based on their + actions to deal with other + failing financial + +On line 7747: + actions to deal with + other failing financial + institutions in + +On line 7747: + policymakers + would have taken any available + option they thought was + +On line 7747: + would have taken any + available option they thought was + legal and viable. + +On line 7747: + taken any available + option they thought was legal + and viable. This was + +On line 7747: + available option they + thought was legal and viable. + This was an active + +On line 7747: + option they thought was + legal and viable. This was + an active team that + +On line 7747: + thought was legal and + viable. This was an active + team that was in all + +On line 7747: + legal and viable. + This was an active team that + was in all cases + +On line 7747: + and viable. This was + an active team that was in + all cases erring on + +On line 7747: + viable. This was an + active team that was in all + cases erring on the + +On line 7747: + This was an active + team that was in all cases + erring on the side of + +On line 7747: + team that was in all + cases erring on the side of + intervention to + +On line 7747: + all cases erring on + the side of intervention + to reduce the risk + +On line 7747: + cases erring on the + side of intervention to + reduce the risk of + +On line 7747: + to reduce the risk + of catastrophic outcomes. + Fed Chairman Bernanke said + +On line 7747: + reduce the risk of + catastrophic outcomes. Fed + Chairman Bernanke said that + +On line 7747: + of catastrophic + outcomes. Fed Chairman Bernanke said + that he "was very, very + +On line 7747: + outcomes. Fed Chairman + Bernanke said that he "was very, very + confident that Lehman’s + +On line 7747: + Bernanke said that he "was + very, very confident that Lehman’s + demise was going to + +On line 7747: + said that he "was very, + very confident that Lehman’s demise + was going to be + +On line 7747: + that he "was very, very + confident that Lehman’s demise was + going to be a + +On line 7747: + very, very confident + that Lehman’s demise was going to + be a catastrophe."9 + +On line 7747: + very confident that + Lehman’s demise was going to be + a catastrophe."9 We + +On line 7747: + confident that Lehman’s + demise was going to be a + catastrophe."9 We find + +On line 7747: + demise was going to + be a catastrophe."9 We find + it implausible + +On line 7747: + was going to be + a catastrophe."9 We find it + implausible to + +On line 7747: + be a catastrophe."9 + We find it implausible + to conclude that they + +On line 7747: + a catastrophe."9 We + find it implausible to + conclude that they would + +On line 7747: + it implausible + to conclude that they would have + broken pattern on + +On line 7747: + to conclude that they + would have broken pattern on + this one case at such + +On line 7747: + conclude that they would + have broken pattern on this + one case at such an + +On line 7747: + have broken pattern + on this one case at such an + obviously risky + +On line 7747: + on this one case at + such an obviously risky + moment if they had + +On line 7747: + one case at such an + obviously risky moment + if they had thought they + +On line 7747: + an obviously + risky moment if they had thought + they had another + +On line 7749: + risky moment if they + had thought they had another + option. Some find it + +On line 7749: + they had thought they had + another option. Some find + it inconceivable + +On line 7749: + it inconceivable + that policymakers could + be confronted with + +On line 7749: + inconceivable that + policymakers could be + confronted with a + +On line 7749: + policymakers + could be confronted with a + situation in + +On line 7749: + be confronted with + a situation in which + there was no legal + +On line 7749: + confronted with a + situation in which there + was no legal and + +On line 7749: + a situation + in which there was no legal + and viable course of + +On line 7749: + there was no legal + and viable course of action + to avoid financial + +On line 7751: + and viable course of + action to avoid financial + catastrophe. In this + +On line 7751: + course of action to + avoid financial catastrophe. + In this case, that is + +On line 7751: + of action to avoid + financial catastrophe. In + this case, that is what + +On line 7753: + to avoid financial + catastrophe. In this case, that + is what happened. THE + +On line 7753: + catastrophe. In this + case, that is what happened. THE + SHOCK AND THE PANIC + +On line 7755: + happened. THE SHOCK AND + THE PANIC Conventional + wisdom is that the + +On line 7755: + SHOCK AND THE PANIC + Conventional wisdom is + that the failure of + +On line 7755: + is that the failure + of Lehman Brothers triggered the + financial panic. + +On line 7755: + Brothers triggered the + financial panic. This is + because Lehman’s failure + +On line 7755: + financial panic. + This is because Lehman’s failure + was unexpected + +On line 7755: + the debate about whether + government officials could + have saved Lehman is so + +On line 7757: + about whether government + officials could have saved Lehman + is so intense. The + +On line 7757: + could have saved Lehman is + so intense. The focus on + Lehman’s failure is too + +On line 7757: + Lehman is so intense. + The focus on Lehman’s failure + is too narrow. The + +On line 7757: + is so intense. The + focus on Lehman’s failure is + too narrow. The events + +On line 7757: + The focus on Lehman’s + failure is too narrow. The + events of September + +On line 7757: + too narrow. The events + of September were a chain + of one firm failure + +On line 7757: + of September were + a chain of one firm failure + after another: + +On line 7759: + a chain of one firm + failure after another: + Sunday, September + +On line 7759: + of one firm failure + after another: Sunday, + September FHFA + +On line 7759: + after another: + Sunday, September FHFA + put Fannie Mae and + +On line 7759: + Sunday, September + FHFA put Fannie Mae and + Freddie Mac into + +On line 7759: + FHFA put Fannie + Mae and Freddie Mac into + conservatorship. + +On line 7761: + Mae and Freddie Mac + into conservatorship. + This was followed by + +On line 7761: + This was followed by + "Lehman weekend at the New York + Fed," which was in fact + +On line 7761: + by "Lehman weekend at + the New York Fed," which was in + fact broader than just + +On line 7761: + "Lehman weekend at the + New York Fed," which was in fact + broader than just Lehman. + +On line 7761: + at the New York Fed," + which was in fact broader than + just Lehman. At the end + +On line 7761: + the New York Fed," which + was in fact broader than just + Lehman. At the end of + +On line 7761: + New York Fed," which was + in fact broader than just Lehman. + At the end of that + +On line 7761: + Fed," which was in fact + broader than just Lehman. At the + end of that weekend, + +On line 7761: + was in fact broader + than just Lehman. At the end of + that weekend, Bank of + +On line 7761: + broader than just Lehman. + At the end of that weekend, + Bank of America + +On line 7761: + than just Lehman. At the + end of that weekend, Bank of + America had agreed + +On line 7761: + end of that weekend, + Bank of America had agreed + to buy Merrill Lynch, + +On line 7761: + of that weekend, Bank + of America had agreed to + buy Merrill Lynch, Lehman + +On line 7761: + that weekend, Bank of + America had agreed to buy + Merrill Lynch, Lehman was + +On line 7761: + Bank of America + had agreed to buy Merrill Lynch, + Lehman was filing for + +On line 7763: + buy Merrill Lynch, Lehman + was filing for bankruptcy, + and AIG was on the + +On line 7763: + Merrill Lynch, Lehman was + filing for bankruptcy, and + AIG was on the verge + +On line 7763: + Lehman was filing for + bankruptcy, and AIG was on + the verge of failure. + +On line 7765: + bankruptcy, and AIG + was on the verge of failure. + Monday, September + +On line 7765: + was on the verge of + failure. Monday, September + Lehman filed for Chapter + +On line 7767: + Tuesday, September + the Reserve Primary Fund, + a money market + +On line 7769: + a money market + mutual fund, "broke the buck" + after facing an + +On line 7769: + mutual fund, "broke + the buck" after facing an + investor run. Its net + +On line 7769: + "broke the buck" after + facing an investor run. Its + net asset value + +On line 7771: + an investor run. Its + net asset value declined + below meaning that + +On line 7771: + net asset value + declined below meaning that + an investment in + +On line 7771: + below meaning that + an investment in the fund + had actually + +On line 7771: + an investment in + the fund had actually + lost money. This is + +On line 7771: + investment in the + fund had actually lost + money. This is a + +On line 7771: + a money market + fund. On the same day, the Fed + approved an billion + +On line 7771: + market fund. On the + same day, the Fed approved an + billion emergency + +On line 7771: + fund. On the same day, + the Fed approved an billion + emergency loan to + +On line 7771: + day, the Fed approved + an billion emergency loan + to AIG to prevent + +On line 7771: + the Fed approved an + billion emergency loan to + AIG to prevent it + +On line 7771: + billion emergency + loan to AIG to prevent it + from sudden failure. + +On line 7779: + from sudden failure. + DISSENTING STATEMENT Thursday, + September the Bush + +On line 7779: + DISSENTING STATEMENT + Thursday, September the Bush + Administration, + +On line 7779: + Thursday, September + the Bush Administration, + supported by Fed + +On line 7779: + appropriate funds + for a new Troubled Asset + Relief Program (TARP) + +On line 7781: + Relief Program (TARP) + to recapitalize banks. + Friday, September + +On line 7783: + September the Fed + agreed to accept Goldman Sachs + and Morgan Stanley + +On line 7783: + accept Goldman Sachs + and Morgan Stanley as bank + holding companies, + +On line 7783: + and Morgan Stanley + as bank holding companies, + putting them under the + +On line 7783: + Morgan Stanley as + bank holding companies, putting + them under the Fed’s + +On line 7783: + putting them under the + Fed’s regulatory purview. + After this, there were + +On line 7783: + After this, there were + no large standalone investment + banks remaining in + +On line 7783: + were no large standalone + investment banks remaining + in the United States. + +On line 7787: + and later sold it + to JPMorgan. Monday, September + the TARP bill failed to + +On line 7787: + later sold it to + JPMorgan. Monday, September the + TARP bill failed to pass + +On line 7787: + it to JPMorgan. Monday, + September the TARP bill failed + to pass the House of + +On line 7787: + September the TARP + bill failed to pass the House of + Representatives, + +On line 7787: + bill failed to pass the + House of Representatives, + and the FDIC agreed to + +On line 7787: + to pass the House of + Representatives, and the + FDIC agreed to provide + +On line 7789: + Citigroup. Wednesday, + October the Senate passed + a revised TARP bill. + +On line 7789: + revised TARP bill. Two + days later, the House passed it, + and the President + +On line 7789: + days later, the House + passed it, and the President + signed it into law. + +On line 7789: + later, the House passed + it, and the President signed + it into law. Wells + +On line 7789: + House passed it, and the + President signed it into + law. Wells Fargo, rather + +On line 7789: + the President signed + it into law. Wells Fargo, + rather than Citigroup, + +On line 7789: + President signed it + into law. Wells Fargo, rather + than Citigroup, bought + +On line 7791: + it into law. Wells + Fargo, rather than Citigroup, + bought Wachovia. As the + +On line 7791: + law. Wells Fargo, rather + than Citigroup, bought Wachovia. + As the month progressed, + +On line 7791: + than Citigroup, bought + Wachovia. As the month progressed, + interbank lending + +On line 7791: + As the month progressed, + interbank lending rates soared, + indicating the + +On line 7791: + indicating the + heightened fear and threatening + a complete freeze of + +On line 7793: + and threatening a + complete freeze of lending. The + financial panic + +On line 7793: + panic was triggered + and then amplified by the + close succession of + +On line 7793: + and then amplified + by the close succession of + these events, and not just + +On line 7793: + then amplified by + the close succession of these + events, and not just by + +On line 7793: + amplified by the + close succession of these events, + and not just by Lehman’s + +On line 7793: + the close succession + of these events, and not just by + Lehman’s failure. Lehman was + +On line 7793: + close succession of + these events, and not just by Lehman’s + failure. Lehman was the + +On line 7793: + these events, and not just + by Lehman’s failure. Lehman was the + most unexpected + +On line 7793: + events, and not just by + Lehman’s failure. Lehman was the most + unexpected bad + +On line 7793: + failure. Lehman was the + most unexpected bad news + in that succession, + +On line 7793: + most unexpected + bad news in that succession, + but it’s a mistake + +On line 7793: + unexpected bad + news in that succession, but + it’s a mistake to + +On line 7793: + succession, but it’s + a mistake to attribute the + panic entirely + +On line 7793: + mistake to attribute + the panic entirely to + Lehman’s failure. There was + +On line 7793: + Lehman’s failure. There was + growing realization by + investors that mortgage + +On line 7793: + realization by + investors that mortgage losses + were concentrated + +On line 7793: + investors that mortgage + losses were concentrated + in the financial + +On line 7793: + that mortgage losses + were concentrated in the + financial system, + +On line 7797: + system, but nobody + knew precisely where they lay. + Conclusion: In quick + +On line 7797: + restructuring of + ten firms triggered a global + financial panic. + +On line 7797: + ten firms triggered a + global financial panic. + Confidence and trust + +On line 7797: + global financial + panic. Confidence and trust + in the financial + +On line 7797: + financial panic. + Confidence and trust in the + financial system + +On line 7797: + panic. Confidence + and trust in the financial + system began to + +On line 7797: + financial system + began to evaporate as + the health of almost + +On line 7797: + system began to + evaporate as the health of + almost every large + +On line 7797: + of almost every + large and midsize financial + institution in + +On line 7799: + institution in + the United States and Europe + was questioned. We briefly + +On line 7799: + in the United States + and Europe was questioned. We + briefly discuss two of + +On line 7799: + the United States and + Europe was questioned. We briefly + discuss two of these + +On line 7801: + States and Europe was + questioned. We briefly discuss two + of these failures. The + +On line 7801: + Europe was questioned. + We briefly discuss two of these + failures. The Reserve + +On line 7803: + We briefly discuss two + of these failures. The Reserve + Primary Fund The + +On line 7803: + of these failures. The + Reserve Primary Fund The + role of the Reserve + +On line 7803: + mutual fund faced + escalating redemption + requests and had to + +On line 7803: + faced escalating + redemption requests and had + to take losses from + +On line 7803: + redemption requests + and had to take losses from + its holdings of Lehman + +On line 7803: + to take losses from + its holdings of Lehman debt. On + Tuesday, September + +On line 7803: + its holdings of Lehman + debt. On Tuesday, September + it broke the buck in + +On line 7803: + holdings of Lehman debt. + On Tuesday, September it + broke the buck in a + +On line 7803: + it broke the buck in + a disorganized manner. + Investors who withdrew + +On line 7803: + a disorganized + manner. Investors who withdrew + early recouped cents + +On line 7803: + manner. Investors who + withdrew early recouped cents + on the dollar, with + +On line 7803: + who withdrew early + recouped cents on the dollar, + with the remaining + +On line 7803: + recouped cents on the + dollar, with the remaining + investors bearing the + +On line 7803: + cents on the dollar, + with the remaining investors + bearing the losses. + +On line 7803: + the dollar, with the + remaining investors bearing + the losses. This spread + +On line 7803: + remaining investors + bearing the losses. This spread + fear among investors that + +On line 7803: + spread fear among investors + that other similarly + situated funds + +On line 7803: + situated funds + might follow. By the middle + of the following + +On line 7803: + the middle of the + following week, prime money + market mutual + +On line 7805: + prime money market + mutual fund investors had + withdrawn billion. When + +On line 7805: + had withdrawn billion. + When the SEC was unable to + reassure market + +On line 7805: + began to convert + their holdings to Treasuries and + cash. Corporations + +On line 7805: + Corporations that + had relied on commercial + paper markets for + +On line 7805: + short-term financing + suddenly had to draw down + their backstop lines of + +On line 7805: + suddenly had to + draw down their backstop lines of + credit. No one had + +On line 7805: + had to draw down their + backstop lines of credit. No + one had expected + +On line 7805: + credit. No one had + expected these corporate + lines of credit to + +On line 7809: + would have to pull back + on other activities. + The role of Fannie + +On line 7809: + have to pull back on + other activities. The + role of Fannie Mae + +On line 7809: + Mae and Freddie Mac + in causing the crisis The + government-sponsored + +On line 7809: + government-sponsored + enterprises Fannie Mae + and Freddie Mac were + +On line 7809: + and Freddie Mac were + elements of the crisis + in several ways: + +On line 7811: + were elements of + the crisis in several + ways: They were part of + +On line 7811: + elements of the + crisis in several ways: + They were part of the + +On line 7811: + They were part of the + securitization process + that lowered mortgage + +On line 7813: + that lowered mortgage + credit quality standards. + As large financial + +On line 7813: + credit quality + standards. As large financial + institutions whose + +On line 7813: + As large financial + institutions whose failures + risked contagion, they + +On line 7813: + the too big to fail + problem. Policymakers + were unwilling to + +On line 7815: + unwilling to let + them fail because: Financial + institutions around + +On line 7815: + because: Financial + institutions around the world + bore significant + +On line 7815: + institutions around + the world bore significant + counterparty risk + +On line 7815: + bore significant + counterparty risk to them + through holdings of GSE + +On line 7817: + counterparty risk + to them through holdings of GSE + debt; Certain funding + +On line 7817: + to them through holdings + of GSE debt; Certain funding + markets depended + +On line 7817: + through holdings of GSE + debt; Certain funding markets + depended on the + +On line 7817: + of GSE debt; Certain + funding markets depended + on the value of + +On line 7817: + debt; Certain funding + markets depended on the + value of their debt; + +On line 7821: + depended on their + continued existence. They + were by far the most + +On line 7821: + on their continued + existence. They were by far + the most expensive + +On line 7821: + existence. They were + by far the most expensive + institutional + +On line 7821: + the most expensive + institutional failures + to the taxpayer + +On line 7823: + to the taxpayer + and are an ongoing cost. + There is vigorous + +On line 7823: + taxpayer and are + an ongoing cost. There is + vigorous debate + +On line 7823: + an ongoing cost. + There is vigorous debate + about how big a role + +On line 7823: + ongoing cost. There + is vigorous debate about + how big a role these + +On line 7823: + There is vigorous + debate about how big a role + these two firms played in + +On line 7823: + to "private label" + securitizers. There is + also vigorous + +On line 7823: + securitizers. + There is also vigorous + debate about why these + +On line 7823: + also vigorous + debate about why these two firms + got involved in this + +On line 7823: + debate about why these + two firms got involved in this + problem. We think both + +On line 7823: + about why these two firms + got involved in this problem. + We think both questions + +On line 7823: + why these two firms got + involved in this problem. We + think both questions are + +On line 7823: + got involved in this + problem. We think both questions + are less important + +On line 7823: + problem. We think both + questions are less important + than the multiple + +On line 7823: + We think both questions + are less important than the + multiple points of + +On line 7823: + are less important + than the multiple points of + contact Fannie Mae + +On line 7823: + than the multiple + points of contact Fannie Mae + and Freddie Mac had + +On line 7823: + the multiple points + of contact Fannie Mae and + Freddie Mac had with + +On line 7823: + contact Fannie Mae + and Freddie Mac had with the + financial system. + +On line 7825: + enormous portfolios + of housing-related assets, + and the issuers of + +On line 7825: + of housing-related + assets, and the issuers of + debt that was treated + +On line 7825: + debt that was treated + like government debt by the + financial system. + +On line 7825: + financial system. + Fannie Mae and Freddie Mac + did not by themselves + +On line 7825: + Freddie Mac did not + by themselves cause the crisis, + but they contributed + +On line 7825: + by themselves cause the + crisis, but they contributed + significantly + +On line 7827: + but they contributed + significantly in a + number of ways. THE + +On line 7829: + number of ways. THE + SYSTEM FREEZING Following + the shock and panic, + +On line 7829: + with escalating + frictions. Some funding markets + collapsed entirely. + +On line 7829: + Some funding markets + collapsed entirely. Others + experienced a + +On line 7829: + entirely. Others + experienced a rapid blowout + in spreads following + +On line 7829: + stabilized slowly + as the panic subsided + and the government + +On line 7829: + panic subsided + and the government stepped in + to backstop markets + +On line 7829: + and the government + stepped in to backstop markets + and firms. We highlight + +On line 7829: + the government stepped + in to backstop markets and + firms. We highlight three + +On line 7829: + stepped in to backstop + markets and firms. We highlight + three funding markets + +On line 7831: + funds market where banks + loan excess reserves to one + another overnight. Even + +On line 7837: + excess reserves to + one another overnight. Even large + DISSENTING STATEMENT + +On line 7839: + one another overnight. + Even large DISSENTING STATEMENT + banks were unable to + +On line 7839: + another overnight. Even + large DISSENTING STATEMENT banks + were unable to get + +On line 7839: + DISSENTING STATEMENT + banks were unable to get overnight + loans, compounding an + +On line 7839: + loans, compounding an + increasingly restricted + ability to raise + +On line 7841: + September repo + rates increased substantially, + and haircuts ballooned. + +On line 7843: + mortgages were no longer + acceptable collateral. + Commercial paper. + +On line 7843: + no longer acceptable + collateral. Commercial + paper. The failure + +On line 7843: + Commercial paper. + The failure of Lehman and the + Reserve Primary + +On line 7843: + The failure of Lehman + and the Reserve Primary + Fund breaking the buck + +On line 7843: + failure of Lehman and + the Reserve Primary Fund + breaking the buck sparked + +On line 7843: + Lehman and the Reserve + Primary Fund breaking the + buck sparked a run on + +On line 7843: + Reserve Primary + Fund breaking the buck sparked a + run on prime money + +On line 7843: + Fund breaking the buck + sparked a run on prime money + market mutual + +On line 7843: + sparked a run on prime + money market mutual + funds. Money market + +On line 7843: + funds. Money market + mutual funds withdrew from + investing in the + +On line 7843: + market mutual + funds withdrew from investing + in the commercial + +On line 7843: + investing in the + commercial paper market, + leading to a rapid + +On line 7843: + in the commercial + paper market, leading to + a rapid increase in + +On line 7843: + commercial paper + market, leading to a rapid + increase in funding + +On line 7843: + market, leading to + a rapid increase in funding + costs for financial + +On line 7843: + a rapid increase in + funding costs for financial + and nonfinancial + +On line 7845: + commercial paper. + The inability to find + funding, financial + +On line 7845: + The inability + to find funding, financial + firm deleveraging, and + +On line 7845: + markets for other + kinds of debt collapsed rapidly + in and still have not + +On line 7845: + other kinds of debt + collapsed rapidly in and still + have not recovered + +On line 7845: + kinds of debt collapsed + rapidly in and still have not + recovered fully, + +On line 7845: + collapsed rapidly in + and still have not recovered + fully, cutting off + +On line 7845: + in and still have not + recovered fully, cutting + off a substantial + +On line 7845: + recovered fully, + cutting off a substantial + source of financing + +On line 7845: + a substantial source + of financing for credit + cards, car loans, student + +On line 7845: + substantial source of + financing for credit cards, + car loans, student loans, + +On line 7845: + of financing for + credit cards, car loans, student + loans, and small business + +On line 7847: + credit cards, car loans, + student loans, and small business + loans. Decreased credit + +On line 7847: + student loans, and small + business loans. Decreased credit + availability, the + +On line 7847: + housing bubble, and + additional wealth losses + from a declining + +On line 7847: + additional wealth + losses from a declining + stock market led to + +On line 7847: + a sharp contraction + in consump-tion and output + and an increase in + +On line 7849: + and an increase in + unemployment. Real GDP + contracted at an + +On line 7849: + in unemployment. + Real GDP contracted at + an annual rate + +On line 7849: + contracted at an + annual rate of percent + in the third quarter + +On line 7851: + at an annual + rate of percent in the third + quarter of percent + +On line 7851: + annual rate of + percent in the third quarter + of percent in the + +On line 7851: + rate of percent in + the third quarter of percent + in the fourth quarter, + +On line 7851: + of percent in the + third quarter of percent in + the fourth quarter, and + +On line 7851: + the third quarter of + percent in the fourth quarter, + and percent in the + +On line 7851: + of percent in the + fourth quarter, and percent in + the first quarter of + +On line 7851: + percent in the fourth + quarter, and percent in the + first quarter of The + +On line 7851: + the fourth quarter, and + percent in the first quarter + of The economic + +On line 7851: + percent in the first + quarter of The economic + contraction in the + +On line 7851: + the first quarter of + The economic contraction + in the fourth quarter + +On line 7851: + first quarter of The + economic contraction in + the fourth quarter of + +On line 7851: + contraction in the + fourth quarter of was the worst + in nearly three decades. + +On line 7851: + the fourth quarter of + was the worst in nearly three + decades. Firms and households + +On line 7851: + fourth quarter of was + the worst in nearly three decades. + Firms and households that + +On line 7851: + quarter of was the + worst in nearly three decades. Firms + and households that had + +On line 7851: + worst in nearly three + decades. Firms and households that had + not previously + +On line 7851: + in nearly three decades. + Firms and households that had not + previously been + +On line 7851: + not previously + been directly affected + by the financial + +On line 7851: + new investments, while + families put spending plans + on hold. After the + +On line 7851: + while families put + spending plans on hold. After + the panic began, + +On line 7851: + spending plans on hold. + After the panic began, + the rate at which the + +On line 7851: + on hold. After the + panic began, the rate at + which the economy + +On line 7851: + After the panic + began, the rate at which the + economy shed jobs + +On line 7851: + panic began, the + rate at which the economy + shed jobs jumped, going + +On line 7851: + began, the rate at + which the economy shed jobs + jumped, going from an + +On line 7851: + which the economy + shed jobs jumped, going from an + average of jobs + +On line 7851: + shed jobs jumped, going + from an average of jobs + lost per month in the + +On line 7851: + jobs jumped, going from + an average of jobs lost + per month in the first + +On line 7851: + jumped, going from an + average of jobs lost per + month in the first three + +On line 7851: + from an average + of jobs lost per month in the + first three quarters of + +On line 7851: + an average of + jobs lost per month in the first + three quarters of to + +On line 7851: + average of jobs + lost per month in the first three + quarters of to an + +On line 7851: + of jobs lost per month + in the first three quarters of + to an average + +On line 7851: + jobs lost per month in + the first three quarters of to + an average of + +On line 7851: + lost per month in the + first three quarters of to an + average of over + +On line 7851: + the first three quarters + of to an average of + over jobs lost per month + +On line 7851: + first three quarters of + to an average of over + jobs lost per month in + +On line 7851: + three quarters of to + an average of over jobs + lost per month in the + +On line 7851: + quarters of to an + average of over jobs lost + per month in the fourth + +On line 7851: + to an average + of over jobs lost per month in + the fourth quarter of + +On line 7851: + an average of + over jobs lost per month in the + fourth quarter of and + +On line 7851: + average of over + jobs lost per month in the fourth + quarter of and the + +On line 7851: + of over jobs lost per + month in the fourth quarter of + and the first quarter + +On line 7851: + over jobs lost per month + in the fourth quarter of and + the first quarter of + +On line 7851: + jobs lost per month in + the fourth quarter of and the + first quarter of The + +On line 7851: + the first quarter of + The economy continued + to lose jobs through most + +On line 7851: + first quarter of The + economy continued to + lose jobs through most of + +On line 7853: + lose jobs through most of + with the unemployment rate + peaking at percent + +On line 7853: + in October and + remaining above percent for + the rest of and the + +On line 7853: + and remaining above + percent for the rest of and + the first eleven months of + +On line 7855: + above percent for the + rest of and the first eleven months + of While the shock and + +On line 7855: + the rest of and the + first eleven months of While the shock + and panic therefore + +On line 7855: + and the first eleven months + of While the shock and panic + therefore appear to + +On line 7855: + months of While the shock + and panic therefore appear + to have ended in + +On line 7855: + and panic therefore + appear to have ended in + early the harm to + +On line 7855: + therefore appear to + have ended in early the + harm to the real + +On line 7855: + real economy + continues through today. Firms + and families are + +On line 7855: + Firms and families + are still deleveraging and are + uncertain about both + +On line 7855: + are still deleveraging + and are uncertain about both + future economic + +On line 7855: + deleveraging and are + uncertain about both future + economic growth and + +On line 7855: + are uncertain about + both future economic growth + and the direction + +On line 7855: + uncertain about both + future economic growth and + the direction of + +On line 7855: + future economic + growth and the direction of + future policy. + +On line 7855: + and the direction + of future policy. The + final tragedy of the + +On line 7855: + final tragedy of the + financial and economic + crisis is that the + +On line 7855: + crisis is that the + needed recovery is slow + and looks to be so + +On line 7855: + is that the needed + recovery is slow and looks + to be so for a + +On line 7857: + needed recovery + is slow and looks to be so + for a while longer. NOTES + +On line 7859: + recovery is slow + and looks to be so for a + while longer. NOTES A vote + +On line 7859: + and looks to be so + for a while longer. NOTES A vote + of the Commission + +On line 7859: + looks to be so for + a while longer. NOTES A vote of + the Commission on + +On line 7859: + NOTES A vote of the + Commission on December + limited dissenters + +On line 7859: + of the Commission + on December limited + dissenters to nine pages + +On line 7859: + No limits apply + to the official version + submitted to the + +On line 7859: + to the official + version submitted to the + President and the + +On line 7861: + version submitted + to the President and the + Congress. Ben S. Bernanke, + +On line 7861: + Congress. Ben S. Bernanke, + "Monetary Policy and + the Housing Bubble," + +On line 7861: + S. Bernanke, "Monetary + Policy and the Housing + Bubble," Speech at the + +On line 7861: + Policy and the + Housing Bubble," Speech at the + Annual Meeting + +On line 7861: + Housing Bubble," Speech + at the Annual Meeting + of the American + +On line 7863: + Georgia, January + (www.federalreserve.gov/ + newsevents/speech/bernanke20100103a.htm). + +On line 7869: + newsevents/speech/bernanke20100103a.htm). + Ibid. KEITH HENNESSEY, DOUGLAS + HOLTZ-EAKIN, "Risky borrowers" + +On line 7869: + Ibid. KEITH HENNESSEY, + DOUGLAS HOLTZ-EAKIN, "Risky borrowers" + does not mean poor. While + +On line 7869: + not mean poor. While many + risky borrowers were low-income, + a borrower with + +On line 7869: + many risky borrowers + were low-income, a borrower + with unproven income + +On line 7871: + vacation home was + also risky. Bernanke, "Monetary + Policy and the + +On line 7871: + was also risky. Bernanke, + "Monetary Policy and + the Housing Bubble." + +On line 7871: + the motivations + of the different types of + securitizers + +On line 7871: + the different types + of securitizers in + lowering credit + +On line 7871: + think that both types of + securitizers were in + part responsible + +On line 7871: + securitizers + were in part responsible + and that these debates + +On line 7871: + part responsible + and that these debates are less + important than the + +On line 7871: + less important than + the existence of lower + standards and how this + +On line 7871: + the existence of + lower standards and how this + problem fits into + +On line 7871: + lower standards and + how this problem fits into + the broader context. + +On line 7873: + by credit rating + agencies was an essential + cause of the crisis, + +On line 7873: + rating agencies was + an essential cause of the + crisis, it is less + +On line 7873: + was an essential + cause of the crisis, it is + less clear why they did + +On line 7873: + an essential cause + of the crisis, it is less + clear why they did this. + +On line 7873: + hypotheses include: + bad analytic models + that failed to account + +On line 7873: + bad analytic + models that failed to account + for correlated + +On line 7873: + models that failed to + account for correlated + housing price declines + +On line 7873: + that failed to account + for correlated housing + price declines across wide + +On line 7873: + industry model + that encouraged the rating + agencies to skew their + +On line 7873: + that encouraged the + rating agencies to skew their + ratings upward to + +On line 7873: + rating agencies to + skew their ratings upward to + generate business, + +On line 7873: + their ratings upward + to generate business, and + a lack of market + +On line 7873: + a lack of market + competition due to their + government-induced + +On line 7875: + competition due + to their government-induced + oligopoly. In most + +On line 7875: + government-induced + oligopoly. In most cases + during the crisis, + +On line 7875: + the crisis, the three + key policymakers were + Treasury Secretary + +On line 7875: + Treasury Secretary + Henry Paulson, Federal + Reserve Chairman Ben + +On line 7875: + Secretary Henry + Paulson, Federal Reserve + Chairman Ben Bernanke, and + +On line 7875: + Paulson, Federal + Reserve Chairman Ben Bernanke, and + Federal Reserve + +On line 7875: + Chairman Ben Bernanke, and + Federal Reserve Bank of + New York President + +On line 7875: + New York President + Timothy Geithner. + Other officials + +On line 7875: + FHFA Director + Jim Lockhart’s GSE actions and + FDIC Chairman Sheila Bair’s + +On line 7875: + GSE actions and FDIC + Chairman Sheila Bair’s extension + of temporary loan + +On line 7875: + FDIC Chairman Sheila Bair’s + extension of temporary + loan guarantees to + +On line 7875: + Bair’s extension of + temporary loan guarantees + to bank borrowing + +On line 7875: + the fall of During + the financial recovery + and rebuilding stage + +On line 7875: + fall of During the + financial recovery and + rebuilding stage that + +On line 7875: + in early the three + key policymakers were + Treasury Secretary + +On line 7875: + Treasury Secretary + Timothy Geithner, + Fed Chairman Ben Bernanke, + +On line 7877: + Summers. Ben S. Bernanke, + testimony before the + FCIC, Hearing on Too + +On line 7883: + Federal Reserve, + September transcript, p. F + I NA N C IA + +On line 7883: + Reserve, September + transcript, p. F I NA N + C IA L C R + +On line 7883: + September transcript, + p. F I NA N C IA + L C R I S + +On line 7885: + transcript, p. F I + NA N C IA L C R + I S I S I + +On line 7885: + p. F I NA N + C IA L C R I S + I S I N Q + +On line 7885: + F I NA N C + IA L C R I S I + S I N Q U + +On line 7885: + I NA N C IA + L C R I S I S + I N Q U I + +On line 7885: + NA N C IA L + C R I S I S I + N Q U I RY + +On line 7885: + N C IA L C + R I S I S I N + Q U I RY C + +On line 7885: + C IA L C R + I S I S I N Q + U I RY C OM + +On line 7885: + IA L C R I + S I S I N Q U + I RY C OM M + +On line 7885: + L C R I S + I S I N Q U I + RY C OM M I + +On line 7885: + C R I S I + S I N Q U I RY + C OM M I S + +On line 7885: + R I S I S + I N Q U I RY C + OM M I S S + +On line 7885: + I S I S I + N Q U I RY C OM + M I S S I + +On line 7885: + S I S I N + Q U I RY C OM M + I S S I O + +On line 7885: + I S I N Q + U I RY C OM M I + S S I O N + +On line 7887: + S I N Q U + I RY C OM M I S + S I O N D + +On line 7887: + I N Q U I + RY C OM M I S S + I O N D I + +On line 7887: + N Q U I RY + C OM M I S S I + O N D I S + +On line 7887: + Q U I RY C + OM M I S S I O + N D I S S + +On line 7887: + U I RY C OM + M I S S I O N + D I S S E + +On line 7887: + I RY C OM M + I S S I O N D + I S S E N + +On line 7887: + RY C OM M I + S S I O N D I + S S E N T + +On line 7887: + C OM M I S + S I O N D I S + S E N T I + +On line 7887: + OM M I S S + I O N D I S S + E N T I N + +On line 7887: + M I S S I + O N D I S S E + N T I N G + +On line 7887: + I S S I O + N D I S S E N + T I N G S + +On line 7887: + S S I O N + D I S S E N T + I N G S TAT + +On line 7887: + S I O N D + I S S E N T I + N G S TAT E + +On line 7887: + I O N D I + S S E N T I N + G S TAT E M + +On line 7887: + O N D I S + S E N T I N G + S TAT E M E + +On line 7887: + N D I S S + E N T I N G S + TAT E M E N + +On line 7887: + D I S S E + N T I N G S TAT + E M E N T + +On line 7889: + S S E N T + I N G S TAT E M + E N T PETER + +On line 7889: + S E N T I + N G S TAT E M E + N T PETER J. + +On line 7891: + I N G S TAT + E M E N T PETER + J. WALLISON ARTHUR + +On line 7891: + N G S TAT E + M E N T PETER J. + WALLISON ARTHUR F. + +On line 7893: + TAT E M E N + T PETER J. WALLISON + ARTHUR F. BURNS FELLOW + +On line 7893: + E M E N T + PETER J. WALLISON ARTHUR + F. BURNS FELLOW IN + +On line 7893: + WALLISON ARTHUR F. + BURNS FELLOW IN FINANCIAL + POLICY STUDIES + +On line 7895: + ARTHUR F. BURNS FELLOW + IN FINANCIAL POLICY + STUDIES AMERICAN + +On line 7910: + INSTITUTE Contact: + pwallison@aei.org INTRODUCTION + Why a Dissent1 Th + +On line 7912: + Why a Dissent1 Th + e question I have been most + frequently asked about + +On line 7912: + Th e question I + have been most frequently asked + about the Financial + +On line 7912: + question I have been + most frequently asked about the + Financial Crisis + +On line 7912: + most frequently asked + about the Financial Crisis + Inquiry Commission + +On line 7912: + Financial Crisis + Inquiry Commission (the "FCIC" + or the "Commission") + +On line 7912: + Commission (the "FCIC" + or the "Commission") is why + Congress bothered to + +On line 7912: + or the "Commission") + is why Congress bothered to + authorize it at + +On line 7912: + why Congress bothered + to authorize it at all. + Without waiting for + +On line 7912: + authorize it at + all. Without waiting for the + Commission’s insights + +On line 7912: + it at all. Without + waiting for the Commission’s + insights into the + +On line 7912: + all. Without waiting + for the Commission’s insights + into the causes + +On line 7912: + for the Commission’s + insights into the causes + of the fi nancial + +On line 7912: + Commission’s insights + into the causes of the + fi nancial crisis, + +On line 7912: + insights into the + causes of the fi nancial + crisis, Congress passed + +On line 7912: + into the causes + of the fi nancial crisis, + Congress passed and the + +On line 7912: + causes of the fi + nancial crisis, Congress passed + and the President + +On line 7912: + of the fi nancial + crisis, Congress passed and the + President signed the + +On line 7912: + Congress passed and the + President signed the Dodd-Frank Act + (DFA), far reaching and + +On line 7912: + Act (DFA), far reaching + and highly consequential + regulatory + +On line 7912: + and the President + acted without seeking to + understand the true + +On line 7912: + without seeking to + understand the true causes + of the wrenching events + +On line 7912: + of the President’s + chief of staff —"Never let a + good crisis go to + +On line 7912: + the President’s chief + of staff —"Never let a good + crisis go to waste." + +On line 7912: + chief of staff —"Never + let a good crisis go to + waste." Although the FCIC’s + +On line 7912: + of staff —"Never let + a good crisis go to waste." + Although the FCIC’s work + +On line 7912: + —"Never let a good + crisis go to waste." Although + the FCIC’s work was not + +On line 7912: + let a good crisis + go to waste." Although the FCIC’s + work was not the full + +On line 7912: + go to waste." Although + the FCIC’s work was not the full + investigation + +On line 7912: + FCIC’s work was not the + full investigation to + which the American + +On line 7912: + which the American + people were entitled, it + has served a useful + +On line 7912: + American people + were entitled, it has served + a useful purpose + +On line 7912: + useful purpose by + focusing attention again + on the fi nancial + +On line 7912: + attention again on + the fi nancial crisis and + whether—with some distance + +On line 7912: + fi nancial crisis + and whether—with some distance from + it—we can draw a more + +On line 7912: + crisis and whether—with + some distance from it—we can draw + a more accurate + +On line 7912: + some distance from it—we + can draw a more accurate + assessment than the + +On line 7912: + from it—we can draw a + more accurate assessment + than the media did + +On line 7912: + it—we can draw a more + accurate assessment than + the media did with + +On line 7912: + a more accurate + assessment than the media + did with what is oft + +On line 7912: + assessment than the + media did with what is oft + en called the "fi rst + +On line 7912: + media did with what + is oft en called the "fi rst + draft of history." + +On line 7912: + did with what is oft + en called the "fi rst draft of + history." To avoid + +On line 7912: + is oft en called the + "fi rst draft of history." + To avoid the next fi + +On line 7912: + en called the "fi rst + draft of history." To avoid + the next fi nancial + +On line 7912: + the "fi rst draft of + history." To avoid the next + fi nancial crisis, + +On line 7912: + history." To avoid + the next fi nancial crisis, + we must understand + +On line 7912: + the next fi nancial + crisis, we must understand + what caused the one from + +On line 7912: + fi nancial crisis, + we must understand what caused + the one from which we + +On line 7912: + nancial crisis, we + must understand what caused the + one from which we are + +On line 7912: + must understand what + caused the one from which we are + now slowly emerging, + +On line 7912: + understand what caused + the one from which we are now + slowly emerging, and + +On line 7912: + caused the one from which + we are now slowly emerging, + and take action to + +On line 7912: + the one from which we + are now slowly emerging, and + take action to avoid + +On line 7912: + one from which we are + now slowly emerging, and take + action to avoid the + +On line 7912: + we are now slowly + emerging, and take action to + avoid the same mistakes + +On line 7912: + now slowly emerging, + and take action to avoid the + same mistakes in the + +On line 7912: + and take action to + avoid the same mistakes in the + future. If there is + +On line 7912: + action to avoid the + same mistakes in the future. + If there is doubt that + +On line 7912: + avoid the same mistakes + in the future. If there is + doubt that these lessons are + +On line 7912: + is doubt that these lessons + are important, consider + the ongoing eff + +On line 7912: + doubt that these lessons are + important, consider the + ongoing eff orts + +On line 7912: + lessons are important, + consider the ongoing + eff orts to amend the + +On line 7912: + ongoing eff orts + to amend the Community + Reinvestment Act of + +On line 7912: + eff orts to amend the + Community Reinvestment + Act of (CRA). Late in + +On line 7912: + the Community + Reinvestment Act of (CRA). Late + in the last session + +On line 7912: + Reinvestment Act of + (CRA). Late in the last session + of the 111th Congress, + +On line 7912: + Act of (CRA). Late in + the last session of the 111th + Congress, a group of + +On line 7912: + Congress, a group of + Democratic congressmembers + introduced HR Th + +On line 7914: + group of Democratic + congressmembers introduced + HR Th is bill, which + +On line 7914: + Th is bill, which was + lauded by House Financial + Services Committee + +On line 7914: + bill, which was lauded + by House Financial Services + Committee Chairman + +On line 7914: + by House Financial + Services Committee Chairman + Barney Frank as his + +On line 7914: + Services Committee + Chairman Barney Frank as his + "top priority" + +On line 7914: + Barney Frank as his + "top priority" in the + lame duck session of + +On line 7914: + "top priority" + in the lame duck session of + that Congress, would have + +On line 7914: + duck session of that + Congress, would have extended + the CRA to all "U.S. + +On line 7914: + of that Congress, would + have extended the CRA to + all "U.S. nonbank fi + +On line 7914: + have extended the + CRA to all "U.S. nonbank fi + nancial companies," + +On line 7914: + to all "U.S. nonbank + fi nancial companies," and + thus would apply, to + +On line 7914: + all "U.S. nonbank fi + nancial companies," and thus + would apply, to even + +On line 7914: + thus would apply, to + even more of the national + economy, the same + +On line 7914: + the same government + social policy mandates + responsible for + +On line 7914: + social policy + mandates responsible for + the mortgage meltdown + +On line 7914: + responsible for + the mortgage meltdown and the + fi nancial crisis. + +On line 7914: + the mortgage meltdown + and the fi nancial crisis. + Fortunately, the + +On line 7914: + and the fi nancial + crisis. Fortunately, the + bill was not acted + +On line 7914: + fi nancial crisis. + Fortunately, the bill was + not acted upon. + +On line 7914: + it is unlikely + that supporters of H.R. will + have the power to + +On line 7914: + is unlikely that + supporters of H.R. will have + the power to adopt + +On line 7914: + of H.R. will have the + power to adopt similar + legislation in + +On line 7914: + the power to adopt + similar legislation + in the next Congress, + +On line 7914: + to adopt similar + legislation in the next + Congress, but in the + +On line 7914: + in the next Congress, + but in the future other + lawmakers with views + +On line 7914: + Congress, but in the + future other lawmakers + with views similar + +On line 7914: + lawmakers with views + similar to Barney Frank’s + may seek to mandate + +On line 7914: + with views similar + to Barney Frank’s may seek to + mandate similar + +On line 7914: + to Barney Frank’s may + seek to mandate similar + requirements. At that + +On line 7914: + may seek to mandate + similar requirements. At + that time, the only + +On line 7914: + the government’s use + of private entities for + social policy + +On line 7914: + social policy + purposes will be a full + understanding of + +On line 7914: + purposes will be + a full understanding of + how these policies were + +On line 7914: + of how these policies + were connected to the fi + nancial crisis of + +On line 7916: + were connected to + the fi nancial crisis of + Like Congress and the + +On line 7916: + majority erred + in assuming that it knew + the causes of the + +On line 7916: + in assuming that + it knew the causes of the + fi nancial crisis. + +On line 7916: + the causes of the + fi nancial crisis. Instead + of pursuing a + +On line 7916: + of pursuing a + thorough study, the Commission’s + majority used + +On line 7916: + a thorough study, the + Commission’s majority + used its extensive + +On line 7916: + used its extensive + statutory investigative + authority to + +On line 7916: + seek only the facts + that supported its initial + assumptions—that the + +On line 7916: + facts that supported + its initial assumptions—that + the crisis was caused + +On line 7916: + that supported its + initial assumptions—that the + crisis was caused by + +On line 7916: + the crisis was caused + by "deregulation" or lax + regulation, greed + +On line 7916: + by "deregulation" + or lax regulation, greed + and recklessness on + +On line 7916: + "deregulation" or + lax regulation, greed and + recklessness on Wall + +On line 7916: + regulation, greed + and recklessness on Wall Street, + predatory lending + +On line 7916: + recklessness on Wall + Street, predatory lending in + the mortgage market, + +On line 7916: + fi nancial system + addicted to excessive + risk-taking. Th e + +On line 7916: + system addicted + to excessive risk-taking. + Th e Commission + +On line 7918: + not seriously + investigate any other + cause, and did not eff + +On line 7918: + investigate any + other cause, and did not eff + ectively connect + +On line 7928: + nancial crisis. Th + e majority’s report + covers in detail + +On line 7930: + e majority’s + report covers in detail + many elements of + +On line 7930: + many elements of + the economy before the + fi nancial crisis + +On line 7930: + elements of the + economy before the fi + nancial crisis that + +On line 7930: + economy before + the fi nancial crisis that + the authors did not + +On line 7930: + fi nancial crisis + that the authors did not like, + but generally + +On line 7930: + nancial crisis that + the authors did not like, but + generally failed + +On line 7930: + the authors did not + like, but generally failed + to show how practices + +On line 7930: + authors did not like, + but generally failed to + show how practices that + +On line 7930: + but generally + failed to show how practices that + had gone on for many + +On line 7930: + generally failed + to show how practices that had + gone on for many years + +On line 7930: + to show how practices + that had gone on for many years + suddenly caused a + +On line 7930: + had gone on for many + years suddenly caused a world-wide + fi nancial crisis. + +On line 7930: + gone on for many years + suddenly caused a world-wide fi + nancial crisis. In + +On line 7930: + nancial crisis. In + the end, the majority’s + report turned out to + +On line 7930: + crisis. In the end, + the majority’s report + turned out to be a + +On line 7930: + the majority’s + report turned out to be a + just so story about + +On line 7930: + turned out to be a + just so story about the fi + nancial crisis, rather + +On line 7930: + to be a just so + story about the fi nancial + crisis, rather than a + +On line 7930: + a just so story + about the fi nancial crisis, + rather than a report + +On line 7930: + just so story about + the fi nancial crisis, rather + than a report on + +On line 7930: + so story about the + fi nancial crisis, rather than + a report on what + +On line 7930: + story about the fi + nancial crisis, rather than a + report on what caused + +On line 7930: + about the fi nancial + crisis, rather than a report + on what caused the fi + +On line 7930: + fi nancial crisis, + rather than a report on what + caused the fi nancial + +On line 7932: + crisis, rather than a + report on what caused the fi + nancial crisis. What + +On line 7932: + rather than a report + on what caused the fi nancial + crisis. What Caused the + +On line 7932: + report on what caused + the fi nancial crisis. What + Caused the Financial + +On line 7932: + on what caused the fi + nancial crisis. What Caused the + Financial Crisis1 + +On line 7934: + nancial crisis. What + Caused the Financial Crisis1 + George Santayana is oft + +On line 7934: + Caused the Financial + Crisis1 George Santayana is oft + en quoted for the + +On line 7934: + Crisis1 George Santayana + is oft en quoted for the + aphorism that "Th ose + +On line 7934: + Santayana is oft en + quoted for the aphorism that + "Th ose who cannot + +On line 7936: + oft en quoted for + the aphorism that "Th ose who + cannot remember + +On line 7936: + the aphorism that "Th + ose who cannot remember + the past are condemned + +On line 7936: + aphorism that "Th ose + who cannot remember the + past are condemned to + +On line 7936: + remember the past + are condemned to repeat it." + Looking back on the + +On line 7936: + the past are condemned + to repeat it." Looking back + on the fi nancial + +On line 7936: + condemned to repeat + it." Looking back on the fi + nancial crisis, we + +On line 7936: + it." Looking back on + the fi nancial crisis, we + can see why the study + +On line 7936: + Looking back on the + fi nancial crisis, we can + see why the study of + +On line 7936: + on the fi nancial + crisis, we can see why the + study of history + +On line 7936: + fi nancial crisis, + we can see why the study of + history is oft + +On line 7936: + we can see why the + study of history is oft + en so contentious and + +On line 7936: + can see why the study + of history is oft en + so contentious and why + +On line 7936: + study of history + is oft en so contentious and + why revisionist + +On line 7938: + why revisionist + histories are so easy to + construct. Th ere are + +On line 7938: + histories are so + easy to construct. Th ere are + always many factors + +On line 7940: + easy to construct. Th + ere are always many factors + that could have caused an + +On line 7940: + Th ere are always + many factors that could have caused + an historical + +On line 7940: + ere are always many + factors that could have caused an + historical event; + +On line 7942: + many factors that could + have caused an historical + event; the diffi cult + +On line 7942: + factors that could have + caused an historical event; + the diffi cult task + +On line 7942: + an historical + event; the diffi cult task is + to discern which, among + +On line 7942: + historical event; + the diffi cult task is to + discern which, among a + +On line 7944: + were the signifi cant + ones—the ones without which + history would have + +On line 7944: + cant ones—the ones + without which history would + have been diff erent. + +On line 7944: + history would have + been diff erent. Using this + standard, I believe + +On line 7944: + diff erent. Using + this standard, I believe that + the sine qua non of + +On line 7944: + erent. Using this + standard, I believe that the + sine qua non of the + +On line 7944: + standard, I believe + that the sine qua non of the + fi nancial crisis + +On line 7944: + that the sine qua non + of the fi nancial crisis + was U.S. government + +On line 7944: + sine qua non of the + fi nancial crisis was U.S. + government housing + +On line 7944: + of the fi nancial + crisis was U.S. government + housing policy, + +On line 7944: + fi nancial crisis + was U.S. government housing + policy, which led + +On line 7944: + was U.S. government + housing policy, which led + to the creation of + +On line 7944: + government housing + policy, which led to the + creation of million + +On line 7944: + housing policy, + which led to the creation of + million subprime and + +On line 7944: + policy, which led + to the creation of million + subprime and other + +On line 7944: + to the creation of + million subprime and other + risky loans—half of all + +On line 7944: + of million subprime + and other risky loans—half of + all mortgages in the + +On line 7944: + subprime and other + risky loans—half of all mortgages + in the United States— + +On line 7946: + of all mortgages in + the United States— which were ready + to default as soon + +On line 7946: + all mortgages in the + United States— which were ready to + default as soon as + +On line 7946: + in the United States— + which were ready to default as + soon as the massive + +On line 7946: + the United States— which + were ready to default as soon + as the massive 1997-2007 + +On line 7946: + to default as soon + as the massive 1997-2007 housing + bubble began to + +On line 7946: + soon as the massive + 1997-2007 housing bubble began + to defl ate. If + +On line 7946: + as the massive 1997-2007 + housing bubble began to + defl ate. If the + +On line 7946: + 1997-2007 housing bubble + began to defl ate. If + the U.S. government + +On line 7946: + began to defl + ate. If the U.S. government + had not chosen this + +On line 7946: + U.S. government had + not chosen this policy + path—fostering the + +On line 7948: + fi nancial crisis + of would never have occurred. + Initiated by + +On line 7948: + of would never have + occurred. Initiated by + Congress in and pressed + +On line 7948: + never have occurred. + Initiated by Congress + in and pressed by HUD + +On line 7948: + Initiated by + Congress in and pressed by HUD + in both the Clinton + +On line 7948: + pressed by HUD in both + the Clinton and George W. Bush + Administrations, + +On line 7948: + the Clinton and George + W. Bush Administrations, + the U.S. government’s + +On line 7948: + Administrations, + the U.S. government’s housing + policy sought to + +On line 7948: + government’s housing + policy sought to increase + home ownership in + +On line 7948: + policy sought to + increase home ownership in + the United States through + +On line 7948: + in the United States + through an intensive eff ort + to reduce mortgage + +On line 7948: + standards. In pursuit + of this policy, HUD used + (i) the aff ordable + +On line 7948: + In pursuit of this + policy, HUD used (i) the + aff ordable housing + +On line 7948: + of this policy, + HUD used (i) the aff ordable + housing requirements + +On line 7948: + policy, HUD used + (i) the aff ordable housing + requirements imposed + +On line 7948: + HUD used (i) the aff + ordable housing requirements + imposed by Congress + +On line 7948: + (i) the aff ordable + housing requirements imposed + by Congress in on + +On line 7948: + government-sponsored + enterprises (GSEs) Fannie + Mae and Freddie Mac, + +On line 7948: + enterprises (GSEs) + Fannie Mae and Freddie Mac, + (ii) its control over + +On line 7948: + (GSEs) Fannie Mae and + Freddie Mac, (ii) its control + over the policies of + +On line 7948: + and Freddie Mac, (ii) + its control over the policies + of the Federal + +On line 7948: + of the Federal + Housing Administration + (FHA), and (iii) a "Best + +On line 7948: + Federal Housing + Administration (FHA), and + (iii) a "Best Practices + +On line 7948: + (iii) a "Best Practices + Initiative" for subprime lenders + and mortgage banks, to + +On line 7948: + Practices Initiative" + for subprime lenders and mortgage + banks, to encourage + +On line 7948: + lenders and mortgage banks, + to encourage greater subprime + and other high risk + +On line 7948: + banks, to encourage + greater subprime and other high + risk lending. HUD’s key + +On line 7948: + to encourage greater + subprime and other high risk + lending. HUD’s key role + +On line 7948: + and other high risk + lending. HUD’s key role in the + growth of subprime and + +On line 7948: + risk lending. HUD’s key + role in the growth of subprime + and other high risk + +On line 7948: + key role in the growth + of subprime and other high + risk mortgage lending + +On line 7948: + role in the growth of + subprime and other high risk + mortgage lending is + +On line 7948: + the growth of subprime + and other high risk mortgage + lending is covered + +On line 7948: + subprime and other + high risk mortgage lending is + covered in detail + +On line 7948: + and other high risk + mortgage lending is covered + in detail in Part + +On line 7950: + mortgage lending is + covered in detail in Part + III. Ultimately, + +On line 7950: + covered in detail + in Part III. Ultimately, + all these entities, + +On line 7950: + in detail in Part + III. Ultimately, all these + entities, as well + +On line 7950: + Ultimately, all + these entities, as well as + insured banks covered + +On line 7950: + entities, as well + as insured banks covered by + the CRA, were compelled + +On line 7950: + as well as insured + banks covered by the CRA, were + compelled to compete + +On line 7950: + insured banks covered + by the CRA, were compelled to + compete for mortgage + +On line 7950: + covered by the CRA, + were compelled to compete for + mortgage borrowers + +On line 7950: + compelled to compete + for mortgage borrowers who + were at or below + +On line 7950: + mortgage borrowers + who were at or below the + median income + +On line 7950: + were at or below + the median income in + the areas in which + +On line 7950: + at or below the + median income in the + areas in which they + +On line 7952: + areas in which they + lived. Th is competition + caused underwriting + +On line 7954: + is competition + caused underwriting standards + to decline, increased + +On line 7954: + competition caused + underwriting standards to + decline, increased the + +On line 7954: + caused underwriting + standards to decline, increased + the numbers of weak + +On line 7954: + standards to decline, + increased the numbers of weak + and high risk loans far + +On line 7954: + to decline, increased + the numbers of weak and high + risk loans far beyond + +On line 7954: + decline, increased the + numbers of weak and high risk + loans far beyond what + +On line 7954: + the numbers of weak + and high risk loans far beyond + what the market would + +On line 7954: + weak and high risk loans + far beyond what the market + would produce without + +On line 7954: + risk loans far beyond + what the market would produce + without government + +On line 7954: + far beyond what the + market would produce without + government infl + +On line 7954: + market would produce + without government infl + uence, and contributed + +On line 7954: + without government + infl uence, and contributed + importantly to + +On line 7954: + uence, and contributed + importantly to the growth + of the 1997-2007 housing + +On line 7956: + to the growth of the + 1997-2007 housing bubble. When the + bubble began to + +On line 7956: + 1997-2007 housing bubble. + When the bubble began to + defl ate in mid-2007, + +On line 7956: + the bubble began + to defl ate in mid-2007, the + low quality and + +On line 7956: + bubble began to + defl ate in mid-2007, the low + quality and high + +On line 7956: + defl ate in mid-2007, + the low quality and high + risk loans engendered + +On line 7956: + low quality and + high risk loans engendered by + government policies + +On line 7956: + risk loans engendered + by government policies failed + in unprecedented + +On line 7960: + ect of these defaults + was exacerbated by + the fact that few if + +On line 7960: + of these defaults was + exacerbated by the + fact that few if any + +On line 7962: + exacerbated + by the fact that few if any + investors— including + +On line 7962: + Freddie Mac had been + acquiring large numbers of + subprime and other + +On line 7962: + had been acquiring + large numbers of subprime and + other high risk loans + +On line 7962: + numbers of subprime + and other high risk loans in + order to meet HUD’s + +On line 7962: + subprime and other + high risk loans in order to + meet HUD’s aff ordable + +On line 7962: + and other high risk + loans in order to meet HUD’s + aff ordable housing + +On line 7962: + other high risk loans + in order to meet HUD’s aff + ordable housing goals. + +On line 7964: + the unexpected + delinquencies and defaults that + began to appear + +On line 7964: + mid-2007, investors fl ed + the multi-trillion dollar + market for mortgage-backed + +On line 7966: + MBS backed by subprime + and other risky loans—to fractions + of their former prices. + +On line 7966: + required fi nancial + institutions to write down + the value of their + +On line 7966: + institutions to + write down the value of their + assets—reducing + +On line 7968: + causing great investor + and creditor unease. Th + e mechanism by + +On line 7968: + by which the defaults + and delinquencies on subprime + and other high risk + +On line 7968: + were transmitted to + the fi nancial system as + a whole is covered + +On line 7968: + transmitted to the + fi nancial system as a + whole is covered in + +On line 7968: + fi nancial system + as a whole is covered in + detail in Part II. + +On line 7970: + a whole is covered + in detail in Part II. In + this environment, + +On line 7970: + whole is covered in + detail in Part II. In this + environment, the + +On line 7970: + detail in Part II. + In this environment, the + government’s rescue + +On line 7970: + this environment, + the government’s rescue of + Bear Stearns in March of + +On line 7970: + rescue of Bear Stearns + in March of temporarily + calmed investor fears but + +On line 7970: + Bear Stearns in March of + temporarily calmed investor + fears but created + +On line 7970: + temporarily calmed + investor fears but created + a signifi cant moral + +On line 7970: + calmed investor fears but + created a signifi cant + moral hazard; investors + +On line 7970: + fears but created + a signifi cant moral hazard; + investors and other + +On line 7970: + and other market + participants reasonably + believed aft er the + +On line 7970: + er the rescue of + Bear that all large fi nancial + institutions would + +On line 7970: + Bear that all large fi + nancial institutions would + also be rescued + +On line 7970: + all large fi nancial + institutions would also + be rescued if they + +On line 7972: + if they encountered + fi nancial diffi culties. + However, when Lehman + +On line 7972: + when Lehman Brothers—an + investment bank even larger + than Bear—was allowed + +On line 7972: + Bear—was allowed to + fail, market participants + were shocked; suddenly, + +On line 7972: + participants were + shocked; suddenly, they were forced + to consider the + +On line 7972: + were shocked; suddenly, + they were forced to consider + the fi nancial health + +On line 7972: + shocked; suddenly, they + were forced to consider the + fi nancial health of + +On line 7972: + suddenly, they were + forced to consider the fi + nancial health of their + +On line 7972: + forced to consider + the fi nancial health of their + counterparties, many + +On line 7972: + fi nancial health of + their counterparties, many of + which appeared weakened + +On line 7972: + nancial health of their + counterparties, many of which + appeared weakened by + +On line 7972: + their counterparties, + many of which appeared weakened + by losses and the + +On line 7972: + many of which appeared + weakened by losses and the + capital writedowns + +On line 7972: + appeared weakened by + losses and the capital + writedowns required by + +On line 7972: + by losses and the + capital writedowns required + by mark-to-market + +On line 7974: + capital writedowns + required by mark-to-market + accounting. Th is + +On line 7974: + writedowns required by + mark-to-market accounting. + Th is caused a halt + +On line 7974: + by mark-to-market + accounting. Th is caused a + halt to lending and + +On line 7974: + accounting. Th is + caused a halt to lending and + a hoarding of cash—a + +On line 7976: + is caused a halt to + lending and a hoarding of + cash—a virtually + +On line 7980: + panic that we know + as the fi nancial crisis + of Weren’t Th ere + +On line 7980: + as the fi nancial + crisis of Weren’t Th ere + Other Causes of + +On line 7982: + ere Other Causes + of the Financial Crisis1 + Many other causes + +On line 7982: + Other Causes of + the Financial Crisis1 Many + other causes of + +On line 7982: + of the Financial + Crisis1 Many other causes + of the fi nancial + +On line 7982: + Financial Crisis1 + Many other causes of the + fi nancial crisis + +On line 7982: + fi nancial crisis + have been cited, including + some in the report + +On line 7982: + nancial crisis have + been cited, including some + in the report of + +On line 7982: + the report of the + Commission’s majority, + but for the reasons + +On line 7982: + but for the reasons + outlined below none of them + alone—or all in + +On line 7984: + explanation of + the crisis. Low interest + rates and a fl ow + +On line 7984: + of the crisis. Low + interest rates and a fl + ow of funds from abroad. + +On line 7984: + interest rates and + a fl ow of funds from abroad. + Claims that various + +On line 7984: + of funds from abroad. Claims + that various policies or + phenomena—such + +On line 7984: + various policies + or phenomena—such as + low interest rates + +On line 7984: + phenomena—such + as low interest rates in + the early 2000s or + +On line 7984: + as low interest + rates in the early 2000s or + fi nancial fl ows + +On line 7984: + low interest rates + in the early 2000s or fi + nancial fl ows from + +On line 7984: + early 2000s or fi + nancial fl ows from abroad—were + responsible for + +On line 7984: + fi nancial fl ows + from abroad—were responsible + for the growth of the + +On line 7984: + housing bubble, do + not adequately explain + either the bubble + +On line 7984: + not adequately + explain either the bubble + or the destruction + +On line 7984: + explain either the + bubble or the destruction + that occurred when the + +On line 7984: + the bubble or the + destruction that occurred when + the bubble defl + +On line 7986: + or the destruction + that occurred when the bubble + defl ated. Th + +On line 7988: + the bubble defl + ated. Th e U.S. has had + housing bubbles in + +On line 7988: + had housing bubbles + in the past—most recently + in the late 1970s and + +On line 7988: + housing bubbles in + the past—most recently in + the late 1970s and late + +On line 7988: + the late 1970s and late + 1980s—but when these bubbles defl + ated they did not + +On line 7988: + 1970s and late 1980s—but when + these bubbles defl ated + they did not cause a + +On line 7988: + and late 1980s—but when these + bubbles defl ated they + did not cause a fi + +On line 7988: + 1980s—but when these bubbles + defl ated they did not + cause a fi nancial + +On line 7988: + these bubbles defl + ated they did not cause a + fi nancial crisis. + +On line 7990: + housing bubbles in + the 2000s, some even larger than + the U.S. bubble, but + +On line 7990: + bubbles in the 2000s, + some even larger than the U.S. + bubble, but when their + +On line 7990: + in the 2000s, some even + larger than the U.S. bubble, + but when their bubbles + +On line 7990: + 2000s, some even larger + than the U.S. bubble, but when + their bubbles defl + +On line 7990: + larger than the U.S. + bubble, but when their bubbles + defl ated the + +On line 7990: + than the U.S. bubble, + but when their bubbles defl + ated the housing + +On line 7990: + U.S. bubble, but when + their bubbles defl ated + the housing losses + +On line 7990: + bubble, but when their + bubbles defl ated the + housing losses were + +On line 7990: + their bubbles defl + ated the housing losses + were small. Only in + +On line 7990: + the housing losses + were small. Only in the U.S. + did the defl ation + +On line 7990: + housing losses were + small. Only in the U.S. did + the defl ation of + +On line 7990: + were small. Only in + the U.S. did the defl ation + of the most recent + +On line 7990: + Only in the U.S. + did the defl ation of the + most recent housing + +On line 7990: + did the defl ation + of the most recent housing + bubble cause a fi + +On line 7990: + defl ation of the + most recent housing bubble + cause a fi nancial + +On line 7990: + of the most recent + housing bubble cause a fi + nancial meltdown and + +On line 7990: + housing bubble cause + a fi nancial meltdown and + a serious fi + +On line 7990: + cause a fi nancial + meltdown and a serious + fi nancial crisis. + +On line 7992: + and a serious + fi nancial crisis. Th e + reason for this is + +On line 7992: + fi nancial crisis. + Th e reason for this is + that only in the + +On line 7992: + nancial crisis. Th + e reason for this is that + only in the U.S. + +On line 7992: + Th e reason for + this is that only in the + U.S. did subprime and + +On line 7992: + reason for this is + that only in the U.S. did + subprime and other + +On line 7992: + that only in the + U.S. did subprime and other + risky loans constitute + +On line 7992: + only in the U.S. + did subprime and other risky + loans constitute half + +On line 7992: + constitute half of + all outstanding mortgages when + the bubble defl + +On line 7992: + the bubble defl + ated. It wasn’t the size + of the bubble that + +On line 7992: + ated. It wasn’t + the size of the bubble that + was the key; it was + +On line 7992: + wasn’t the size of + the bubble that was the key; + it was its content. + +On line 7994: + size of the bubble + that was the key; it was its + content. Th e 1997-2007 + +On line 7994: + bubble that was the + key; it was its content. Th + e 1997-2007 U.S. housing + +On line 7994: + that was the key; it + was its content. Th e 1997-2007 + U.S. housing bubble + +On line 7994: + was the key; it was + its content. Th e 1997-2007 U.S. + housing bubble was + +On line 7996: + was its content. Th + e 1997-2007 U.S. housing bubble + was in a class by + +On line 7996: + content. Th e 1997-2007 + U.S. housing bubble was in + a class by itself. + +On line 7996: + a class by itself. + Nevertheless, demand by + investors for the high + +On line 7996: + by investors for the + high yields off ered by subprime + loans stimulated + +On line 7996: + investors for the high + yields off ered by subprime loans + stimulated the + +On line 7996: + off ered by subprime + loans stimulated the growth + of a market for + +On line 7996: + loans stimulated + the growth of a market for + securities backed + +On line 7998: + growth of a market + for securities backed by + these loans. Th is was + +On line 7998: + of a market for + securities backed by these + loans. Th is was an + +On line 7998: + these loans. Th is was + an important element + in the fi nancial + +On line 7998: + in the fi nancial + crisis, although the number + of mortgages in this + +On line 7998: + although the number + of mortgages in this market + was considerably + +On line 7998: + in this market was + considerably smaller than + the number fostered + +On line 7998: + the number fostered + directly by government + policy. Without + +On line 7998: + policy. Without + the huge number of defaults + that arose out of U.S. + +On line 7998: + the huge number of + defaults that arose out of U.S. + housing policy, + +On line 7998: + number of defaults + that arose out of U.S. housing + policy, defaults + +On line 7998: + that arose out of U.S. + housing policy, defaults + among the mortgages in + +On line 7998: + housing policy, + defaults among the mortgages in + the private market + +On line 7998: + the mortgages in the + private market would not have + caused a fi nancial + +On line 8000: + market would not have + caused a fi nancial crisis. + Deregulation or + +On line 8000: + caused a fi nancial + crisis. Deregulation or + lax regulation. + +On line 8000: + regulation or + deregulation as a cause + of the fi nancial + +On line 8000: + deregulation as + a cause of the fi nancial + crisis are also + +On line 8000: + a cause of the fi + nancial crisis are also + defi cient. First, no + +On line 8000: + of the fi nancial + crisis are also defi + cient. First, no signifi + +On line 8000: + crisis are also + defi cient. First, no signifi + cant deregulation + +On line 8000: + deregulation of + fi nancial institutions + occurred in the last + +On line 8006: + occurred in the last + years. Th e repeal of a + Dissenting Statement + +On line 8008: + the last years. Th e + repeal of a Dissenting + Statement portion of + +On line 8008: + years. Th e repeal + of a Dissenting Statement + portion of the Glass-Steagall + +On line 8008: + portion of the Glass-Steagall + Act, frequently cited as + an example of + +On line 8008: + Glass-Steagall Act, frequently + cited as an example + of deregulation, + +On line 8008: + an example of + deregulation, had no role + in the fi nancial + +On line 8010: + in the fi nancial + crisis.1 Th e repeal was + accomplished through the + +On line 8012: + nancial crisis.1 Th + e repeal was accomplished + through the Gramm-Leach-Bliley Act of + +On line 8012: + Th e repeal was + accomplished through the Gramm-Leach-Bliley Act + of which allowed banks + +On line 8012: + accomplished through the + Gramm-Leach-Bliley Act of which allowed banks + to affi liate + +On line 8012: + through the Gramm-Leach-Bliley Act of + which allowed banks to affi + liate for the fi + +On line 8014: + Act of which allowed + banks to affi liate for + the fi rst time since + +On line 8014: + of which allowed banks + to affi liate for the + fi rst time since the + +On line 8014: + which allowed banks to + affi liate for the fi + rst time since the New + +On line 8014: + to affi liate + for the fi rst time since the + New Deal with fi rms + +On line 8014: + liate for the fi + rst time since the New Deal with + fi rms engaged in + +On line 8014: + fi rst time since the + New Deal with fi rms engaged + in underwriting + +On line 8014: + rst time since the New + Deal with fi rms engaged in + underwriting or + +On line 8014: + fi rms engaged in + underwriting or dealing + in securities. + +On line 8018: + in securities. + Th ere is no evidence, + however, that any + +On line 8022: + trouble because of + a securities affi + liate. Th e banks + +On line 8022: + a securities + affi liate. Th e banks + that suff ered losses + +On line 8022: + affi liate. Th + e banks that suff ered losses + because they held low + +On line 8022: + e banks that suff ered + losses because they held low + quality mortgages + +On line 8022: + losses because they + held low quality mortgages + or MBS were engaged + +On line 8022: + permitted by Glass-Steagall; + the investment banks that got + into trouble—Bear Stearns, Lehman + +On line 8022: + the investment banks + that got into trouble—Bear Stearns, Lehman + and Merrill Lynch—were + +On line 8022: + investment banks that + got into trouble—Bear Stearns, Lehman and + Merrill Lynch—were not + +On line 8024: + got into trouble—Bear Stearns, + Lehman and Merrill Lynch—were not + affi liated + +On line 8024: + and Merrill Lynch—were + not affi liated with + large banks, although they + +On line 8024: + Merrill Lynch—were not + affi liated with large + banks, although they had + +On line 8026: + liated with large + banks, although they had small bank + affi liates that + +On line 8026: + large banks, although they + had small bank affi liates + that do not appear + +On line 8026: + banks, although they had + small bank affi liates that + do not appear to + +On line 8026: + although they had small + bank affi liates that do + not appear to have + +On line 8026: + had small bank affi + liates that do not appear + to have played any role + +On line 8026: + affi liates that + do not appear to have played + any role in mortgage + +On line 8026: + liates that do not + appear to have played any role + in mortgage lending + +On line 8026: + appear to have played + any role in mortgage lending + or securities + +On line 8026: + any role in mortgage + lending or securities + trading. Moreover, the + +On line 8026: + Federal Deposit + Insurance Corporation + Improvement Act of + +On line 8026: + the regulation + of banks and savings and loan + institutions (S&Ls) + +On line 8026: + and savings and loan + institutions (S&Ls) aft er + the S&L debacle + +On line 8026: + institutions (S&Ls) + aft er the S&L debacle + in the late 1980s and + +On line 8026: + (S&Ls) aft er the S&L + debacle in the late 1980s + and early 1990s, and + +On line 8026: + debacle in the + late 1980s and early 1990s, and + it is noteworthy + +On line 8026: + late 1980s and early + 1990s, and it is noteworthy + that FDICIA—the most stringent + +On line 8026: + 1980s and early 1990s, + and it is noteworthy that + FDICIA—the most stringent bank + +On line 8026: + that FDICIA—the most stringent + bank regulation since the + adoption of deposit + +On line 8026: + bank regulation + since the adoption of deposit + insurance—failed to + +On line 8034: + banking business. Th + e large investment banks—Bear, Lehman, + Merrill, Goldman Sachs + +On line 8034: + e large investment + banks—Bear, Lehman, Merrill, Goldman Sachs + and Morgan Stanley—all + +On line 8036: + and Morgan Stanley—all + encountered diffi culty + in the fi nancial + +On line 8036: + Stanley—all encountered + diffi culty in the fi + nancial crisis, and + +On line 8036: + and the Commission + majority’s report lays + much of the blame for + +On line 8036: + lays much of the blame + for this at the door of the + Securities and + +On line 8036: + for this at the door + of the Securities and + Exchange Commission + +On line 8036: + at the door of the + Securities and Exchange + Commission (SEC) for + +On line 8036: + Commission (SEC) for + failing adequately to + supervise them. It + +On line 8036: + them. It is true that + the SEC’s supervisory + process was weak, but many + +On line 8036: + It is true that the + SEC’s supervisory process + was weak, but many banks + +On line 8036: + is true that the SEC’s + supervisory process was + weak, but many banks and + +On line 8036: + supervisory + process was weak, but many banks and + S&Ls—stringently regulated + +On line 8036: + process was weak, but many + banks and S&Ls—stringently regulated + under FDICIA—also failed. Th + +On line 8036: + weak, but many banks and + S&Ls—stringently regulated under + FDICIA—also failed. Th is casts + +On line 8036: + but many banks and S&Ls—stringently + regulated under FDICIA—also + failed. Th is casts doubt + +On line 8038: + S&Ls—stringently regulated + under FDICIA—also failed. Th is casts + doubt on the claim that + +On line 8038: + under FDICIA—also failed. Th + is casts doubt on the claim that + if investment banks + +On line 8038: + casts doubt on the claim + that if investment banks had + been regulated + +On line 8038: + doubt on the claim that + if investment banks had been + regulated like + +On line 8038: + that if investment + banks had been regulated + like commercial banks— + +On line 8040: + if investment banks + had been regulated like + commercial banks— or + +On line 8040: + been regulated + like commercial banks— or had + been able to off er + +On line 8040: + like commercial banks— + or had been able to off er + insured deposits like + +On line 8040: + or had been able to + off er insured deposits like + commercial banks—they + +On line 8040: + er insured deposits + like commercial banks—they would + not have encountered + +On line 8040: + insured deposits like + commercial banks—they would not + have encountered fi + +On line 8044: + have encountered fi + nancial diffi culties. Th + e reality + +On line 8044: + diffi culties. Th + e reality is that + the business model + +On line 8046: + e reality + is that the business model + of the investment + +On line 8046: + reality is + that the business model of + the investment banks + +On line 8046: + the business model + of the investment banks was + quite diff erent from + +On line 8046: + of the investment + banks was quite diff erent from + banking; it was to + +On line 8046: + investment banks was + quite diff erent from banking; + it was to fi nance + +On line 8046: + quite diff erent from + banking; it was to fi nance + a short-term trading + +On line 8046: + banking; it was to + fi nance a short-term trading + business with short-term + +On line 8046: + fi nance a short-term + trading business with short-term + liabilities + +On line 8046: + trading business with + short-term liabilities + such as repurchase + +On line 8046: + business with short-term + liabilities such as + repurchase agreements + +On line 8046: + liabilities + such as repurchase agreements + (oft en called repos). + +On line 8048: + en called repos). Th + is made them especially + vulnerable in + +On line 8048: + in the panic that + occurred in but it is not + evidence that the + +On line 8048: + that occurred in but + it is not evidence that + the existence of + +On line 8048: + that the existence + of investment banks, or the + quality of their + +On line 8048: + of investment banks, + or the quality of their + regulation, was + +On line 8048: + or the quality + of their regulation, was + a cause of the fi + +On line 8048: + quality of their + regulation, was a cause + of the fi nancial + +On line 8050: + regulation, was + a cause of the fi nancial + crisis. Failures of + +On line 8050: + was a cause of the + fi nancial crisis. Failures + of risk management. + +On line 8050: + a cause of the fi + nancial crisis. Failures of + risk management. Claims + +On line 8050: + fi nancial crisis. + Failures of risk management. + Claims that there was a + +On line 8050: + crisis. Failures of + risk management. Claims that there + was a general + +On line 8050: + Claims that there was a + general failure of risk + management in fi + +On line 8050: + management in fi + nancial institutions or + excessive leverage + +On line 8050: + excessive leverage + or risk-taking are part of + what might be called a + +On line 8050: + or risk-taking are + part of what might be called a + "hindsight narrative." + +On line 8050: + part of what might be + called a "hindsight narrative." + With hindsight, it is + +On line 8050: + of what might be called + a "hindsight narrative." With + hindsight, it is easy + +On line 8050: + be called a "hindsight + narrative." With hindsight, it + is easy to condemn + +On line 8050: + "hindsight narrative." + With hindsight, it is easy to + condemn managers for + +On line 8050: + With hindsight, it is + easy to condemn managers for + failing to see the + +On line 8050: + is easy to condemn + managers for failing to see + the dangers of the + +On line 8050: + managers for failing + to see the dangers of the + housing bubble or + +On line 8050: + to see the dangers + of the housing bubble or + the underpricing + +On line 8050: + see the dangers of + the housing bubble or the + underpricing of + +On line 8050: + the housing bubble + or the underpricing of + risk that now looks so + +On line 8050: + housing bubble or + the underpricing of risk + that now looks so clear. + +On line 8050: + the underpricing + of risk that now looks so clear. + However, the FCIC + +On line 8050: + of risk that now looks + so clear. However, the FCIC + interviewed hundreds + +On line 8050: + clear. However, the + FCIC interviewed hundreds of + fi nancial experts, + +On line 8052: + fi nancial experts, + including senior offi + cials of major banks, + +On line 8052: + including senior + offi cials of major banks, + bank regulators + +On line 8054: + of major banks, bank + regulators and investors. + It is not clear that + +On line 8054: + regulators and + investors. It is not clear that + any of them—including + +On line 8054: + investors. It is not + clear that any of them—including + the redoubtable Warren + +On line 8054: + is not clear that any + of them—including the redoubtable + Warren Buff ett—were + +On line 8056: + the redoubtable Warren + Buff ett—were suffi ciently + confi dent about an + +On line 8056: + Warren Buff ett—were + suffi ciently confi dent + about an impending + +On line 8056: + Buff ett—were suffi + ciently confi dent about an + impending crisis + +On line 8056: + ciently confi dent + about an impending crisis + that they put real + +On line 8056: + confi dent about an + impending crisis that they + put real money + +On line 8056: + about an impending + crisis that they put real + money behind their + +On line 8056: + impending crisis + that they put real money + behind their judgment. + +On line 8056: + that they put real + money behind their judgment. + Human beings have + +On line 8056: + money behind their + judgment. Human beings have + a tendency to + +On line 8056: + their judgment. Human + beings have a tendency + to believe that things + +On line 8056: + to believe that things + will continue to go in + the direction they + +On line 8056: + believe that things will + continue to go in the + direction they are + +On line 8056: + things will continue + to go in the direction + they are going, and + +On line 8056: + will continue to + go in the direction they + are going, and are + +On line 8056: + continue to go + in the direction they are + going, and are good + +On line 8056: + in the direction + they are going, and are good + at explaining why + +On line 8056: + the direction they + are going, and are good at + explaining why this + +On line 8056: + are going, and are + good at explaining why this + must be so. Blaming + +On line 8056: + going, and are good + at explaining why this must + be so. Blaming the + +On line 8056: + good at explaining + why this must be so. Blaming + the crisis on the + +On line 8056: + why this must be so. + Blaming the crisis on the + failure to foresee + +On line 8056: + must be so. Blaming + the crisis on the failure + to foresee it is + +On line 8056: + be so. Blaming the + crisis on the failure to + foresee it is facile + +On line 8056: + Blaming the crisis + on the failure to foresee + it is facile and of + +On line 8056: + the crisis on the + failure to foresee it is + facile and of little + +On line 8056: + on the failure to + foresee it is facile and of + little value for + +On line 8056: + foresee it is facile + and of little value for + policymakers, + +On line 8056: + of little value + for policymakers, who + cannot legislate + +On line 8060: + that virtually + all participants in the + fi nancial system + +On line 8060: + virtually all + participants in the fi + nancial system failed + +On line 8060: + all participants + in the fi nancial system + failed to foresee this + +On line 8060: + in the fi nancial + system failed to foresee this + crisis—as they failed to + +On line 8060: + fi nancial system + failed to foresee this crisis—as + they failed to foresee + +On line 8060: + foresee this crisis—as + they failed to foresee every + other crisis—does + +On line 8060: + this crisis—as they failed + to foresee every other + crisis—does not tell + +On line 8060: + they failed to foresee + every other crisis—does + not tell us anything + +On line 8060: + to foresee every + other crisis—does not tell + us anything about why + +On line 8060: + other crisis—does + not tell us anything about why + this crisis occurred + +On line 8060: + not tell us anything + about why this crisis occurred + or what we should do + +On line 8060: + tell us anything about + why this crisis occurred or + what we should do to + +On line 8060: + anything about why this + crisis occurred or what we + should do to prevent + +On line 8060: + about why this crisis + occurred or what we should do + to prevent the next + +On line 8062: + crisis occurred or + what we should do to prevent + the next one. See, e.g., + +On line 8062: + occurred or what we + should do to prevent the next + one. See, e.g., Peter + +On line 8062: + See, e.g., Peter J. + Wallison, "Deregulation + and the Financial + +On line 8070: + and structured products. + Securitization—oft en + pejoratively + +On line 8070: + the "originate to + distribute process"—has also + been blamed for the fi + +On line 8070: + distribute process"—has + also been blamed for the fi + nancial crisis. But + +On line 8070: + fi nancial crisis. + But securitization + is only a means + +On line 8070: + nancial crisis. But + securitization is + only a means of + +On line 8070: + means of fi nancing. + If securitization + was a cause of the + +On line 8070: + of fi nancing. If + securitization was + a cause of the fi + +On line 8070: + was a cause of the + fi nancial crisis, so was + lending. Are we then + +On line 8070: + of the fi nancial + crisis, so was lending. Are + we then to condemn + +On line 8070: + fi nancial crisis, + so was lending. Are we then + to condemn lending1 + +On line 8072: + nancial crisis, so + was lending. Are we then to + condemn lending1 For + +On line 8072: + lending. Are we then + to condemn lending1 For decades, + without serious + +On line 8072: + has been used to fi + nance car loans, credit card loans + and jumbo mortgages + +On line 8072: + been used to fi nance + car loans, credit card loans and + jumbo mortgages that + +On line 8072: + to fi nance car loans, + credit card loans and jumbo + mortgages that were not + +On line 8072: + loans, credit card loans + and jumbo mortgages that were + not eligible + +On line 8072: + credit card loans and + jumbo mortgages that were not + eligible for + +On line 8072: + and jumbo mortgages + that were not eligible + for acquisition + +On line 8072: + jumbo mortgages that + were not eligible for + acquisition by + +On line 8072: + eligible for + acquisition by Fannie + Mae and Freddie Mac. + +On line 8074: + for acquisition + by Fannie Mae and Freddie + Mac. Th e problem + +On line 8074: + acquisition by + Fannie Mae and Freddie Mac. + Th e problem was + +On line 8076: + Th e problem was + not securitization + itself, it was the + +On line 8076: + weak and high risk loans + that securitization + fi nanced. Under the + +On line 8076: + the category + of securitization, + it is necessary + +On line 8076: + category of + securitization, it + is necessary to + +On line 8076: + to mention the role + of collateralized debt + obligations, known as + +On line 8078: + collateralized + debt obligations, known as CDOs. + Th ese instruments + +On line 8078: + debt obligations, known + as CDOs. Th ese instruments + were "toxic assets" + +On line 8078: + ese instruments were + "toxic assets" because they + were ultimately + +On line 8078: + assets" because they + were ultimately backed by + the subprime mortgages + +On line 8078: + ultimately backed + by the subprime mortgages that + began to default + +On line 8078: + the subprime mortgages + that began to default in + huge numbers when the + +On line 8078: + in huge numbers when + the bubble defl ated, + and it was diffi + +On line 8080: + huge numbers when the + bubble defl ated, and + it was diffi cult + +On line 8080: + the bubble defl + ated, and it was diffi + cult to determine + +On line 8080: + ated, and it was + diffi cult to determine + where those losses would + +On line 8080: + was diffi cult to + determine where those losses + would ultimately + +On line 8080: + where those losses would + ultimately settle. CDOs, + accordingly, for + +On line 8080: + accordingly, for + all their dramatic content, + were just another + +On line 8080: + all their dramatic + content, were just another + example of the + +On line 8080: + of the way in which + subprime and other high risk + loans were distributed + +On line 8080: + way in which subprime + and other high risk loans were + distributed throughout + +On line 8080: + subprime and other + high risk loans were distributed + throughout the world’s fi + +On line 8080: + and other high risk + loans were distributed throughout + the world’s fi nancial + +On line 8082: + distributed throughout + the world’s fi nancial system. + Th e question still + +On line 8082: + the world’s fi nancial + system. Th e question still + remains why so many + +On line 8082: + fi nancial system. + Th e question still remains + why so many weak loans + +On line 8084: + nancial system. Th + e question still remains why + so many weak loans were + +On line 8084: + Th e question still + remains why so many weak loans + were created, not + +On line 8084: + still remains why so + many weak loans were created, + not why a system + +On line 8084: + remains why so many + weak loans were created, not + why a system that + +On line 8086: + Credit default swaps + and other derivatives. + Despite a diligent + +On line 8088: + search, the FCIC never + uncovered evidence that + unregulated + +On line 8088: + derivatives, and + particularly credit + default swaps (CDS), was + +On line 8088: + (CDS), was a signifi + cant contributor to the + fi nancial crisis + +On line 8088: + was a signifi cant + contributor to the fi + nancial crisis through + +On line 8090: + contributor to + the fi nancial crisis through + "interconnections". + +On line 8092: + nancial crisis through + "interconnections". Th e + only company + +On line 8094: + only company + known to have failed because of + its CDS obligations + +On line 8094: + company known to + have failed because of its CDS + obligations was AIG, + +On line 8094: + to have failed because + of its CDS obligations was + AIG, and that fi rm + +On line 8094: + failed because of its + CDS obligations was AIG, and + that fi rm appears + +On line 8094: + because of its CDS + obligations was AIG, and that + fi rm appears to + +On line 8094: + was AIG, and that fi + rm appears to have been an + outlier. Blaming + +On line 8096: + that fi rm appears + to have been an outlier. + Blaming CDS for the + +On line 8096: + appears to have been + an outlier. Blaming CDS + for the fi nancial + +On line 8096: + Blaming CDS for the + fi nancial crisis because + one company did + +On line 8096: + fi nancial crisis + because one company did + not manage its risks + +On line 8096: + crisis because one + company did not manage + its risks properly + +On line 8096: + like blaming lending + generally when a bank + fails. Like everything + +On line 8096: + generally when + a bank fails. Like everything + else, derivatives + +On line 8096: + fails. Like everything + else, derivatives can be + misused, but there is + +On line 8096: + else, derivatives + can be misused, but there is + no evidence that + +On line 8096: + derivatives can + be misused, but there is no + evidence that the + +On line 8096: + be misused, but there + is no evidence that the + "interconnections" + +On line 8098: + generally. For + example, Lehman Brothers was + a major player + +On line 8098: + major player in + the derivatives market, + but the Commission + +On line 8098: + but the Commission + found no indication that + Lehman’s failure to meet + +On line 8098: + the Commission found + no indication that Lehman’s + failure to meet its + +On line 8098: + cant losses to any + other fi rm, including + those that had written + +On line 8098: + to any other fi + rm, including those that had + written CDS on Lehman + +On line 8100: + rm, including those + that had written CDS on Lehman + itself. Predatory + +On line 8102: + written CDS on Lehman + itself. Predatory lending. + Th e Commission’s + +On line 8102: + CDS on Lehman itself. + Predatory lending. Th e + Commission’s report + +On line 8102: + itself. Predatory + lending. Th e Commission’s + report also blames + +On line 8104: + report also blames + predatory lending for the + large build-up of subprime + +On line 8104: + predatory lending + for the large build-up of subprime + and other high risk + +On line 8104: + lending for the large + build-up of subprime and other + high risk mortgages in + +On line 8104: + for the large build-up of + subprime and other high risk + mortgages in the fi + +On line 8104: + large build-up of subprime + and other high risk mortgages + in the fi nancial + +On line 8104: + subprime and other + high risk mortgages in the fi + nancial system. Th + +On line 8106: + and other high risk + mortgages in the fi nancial + system. Th is might + +On line 8106: + mortgages in the fi + nancial system. Th is might + be a plausible + +On line 8106: + nancial system. Th + is might be a plausible + explanation if + +On line 8106: + there were evidence + that predatory lending was + so widespread as to + +On line 8106: + were evidence that + predatory lending was so + widespread as to have + +On line 8106: + predatory lending + was so widespread as to have + produced the volume + +On line 8106: + was so widespread as + to have produced the volume + of high risk loans that + +On line 8106: + so widespread as to + have produced the volume of + high risk loans that were + +On line 8106: + to have produced the + volume of high risk loans that + were actually + +On line 8106: + volume of high risk + loans that were actually + originated. In + +On line 8108: + unscrupulous lenders take + advantage of unwitting + borrowers. Th is + +On line 8108: + take advantage of + unwitting borrowers. Th + is undoubtedly + +On line 8108: + borrowers. Th is + undoubtedly occurred, but + it also appears + +On line 8108: + loans were predatory + borrowers, or engaged in + mortgage fraud, because + +On line 8108: + took advantage of + low mortgage underwriting + standards to benefi + +On line 8108: + standards to benefi + t from mortgages they knew they + could not pay unless + +On line 8108: + to benefi t from + mortgages they knew they could not + pay unless rising + +On line 8108: + t from mortgages they + knew they could not pay unless + rising housing prices + +On line 8108: + mortgages they knew they + could not pay unless rising + housing prices enabled + +On line 8108: + they knew they could not + pay unless rising housing + prices enabled them to + +On line 8108: + knew they could not pay + unless rising housing prices + enabled them to sell + +On line 8108: + pay unless rising + housing prices enabled them to + sell or refi nance. + +On line 8108: + housing prices enabled + them to sell or refi nance. + Th e Commission + +On line 8110: + to sell or refi + nance. Th e Commission was + never able to shed + +On line 8110: + or refi nance. Th + e Commission was never + able to shed any light + +On line 8110: + refi nance. Th e + Commission was never able + to shed any light on + +On line 8110: + Th e Commission + was never able to shed any + light on the extent + +On line 8110: + e Commission was + never able to shed any light + on the extent to + +On line 8110: + was never able to + shed any light on the extent + to which predatory + +On line 8110: + light on the extent + to which predatory lending + occurred. Substantial + +On line 8110: + the extent to which + predatory lending occurred. + Substantial portions + +On line 8110: + predatory lending + occurred. Substantial portions + of the Commission + +On line 8110: + activities by + some lenders and mortgage brokers, + but without giving + +On line 8110: + some lenders and mortgage + brokers, but without giving + any indication + +On line 8110: + brokers, but without + giving any indication + of how many such loans + +On line 8110: + of how many such loans + were originated. Further, + the majority’s + +On line 8110: + acknowledge that most + of the buyers for subprime + loans were government + +On line 8110: + of the buyers for + subprime loans were government + agencies or private + +On line 8110: + private companies + complying with government + aff ordable housing + +On line 8116: + with government aff + ordable housing requirements. + Dissenting Statement + +On line 8120: + Agreement1 Aft er the + majority’s report is + published, many people + +On line 8120: + report is published, + many people will lament that it + was not possible + +On line 8120: + was not possible + to achieve a bipartisan + agreement on the facts. + +On line 8120: + possible to achieve + a bipartisan agreement + on the facts. It may + +On line 8120: + a bipartisan + agreement on the facts. It may + be a surprise that + +On line 8120: + agreement on the facts. + It may be a surprise that + I am asking the + +On line 8120: + facts. It may be a + surprise that I am asking + the same question. If + +On line 8120: + a surprise that I + am asking the same question. + If the Commission’s + +On line 8120: + am asking the same + question. If the Commission’s + investigation + +On line 8120: + If the Commission’s + investigation had been + an objective and + +On line 8120: + an objective and + thorough investigation, + many of the points I + +On line 8120: + investigation, + many of the points I raise in + this dissent would have + +On line 8120: + of the points I raise + in this dissent would have been + known to the other + +On line 8120: + would have been known to + the other commissioners + before reading this + +On line 8120: + before reading this + dissent, and perhaps would have + been infl uential + +On line 8120: + and perhaps would have + been infl uential with them. + Similarly, I + +On line 8120: + been infl uential + with them. Similarly, I + might have found facts that + +On line 8120: + infl uential with + them. Similarly, I might + have found facts that changed + +On line 8120: + them. Similarly, + I might have found facts that changed + my own view. But the + +On line 8120: + found facts that changed my + own view. But the Commission’s + investigation + +On line 8120: + But the Commission’s + investigation was not + structured or carried + +On line 8120: + investigation + was not structured or carried + out in a way that + +On line 8120: + or carried out in + a way that could ever have + garnered my support + +On line 8120: + that could ever have + garnered my support or, I + believe, the support + +On line 8120: + ever have garnered + my support or, I believe, + the support of the + +On line 8122: + members. One glaring + example will illustrate + the Commission’s lack + +On line 8124: + the Commission’s lack + of objectivity. In + March Edward Pinto, + +On line 8124: + Commission’s lack of + objectivity. In March + Edward Pinto, a + +On line 8124: + objectivity. + In March Edward Pinto, a + resident fellow + +On line 8124: + at the American + Enterprise Institute (AEI) + who had served as chief + +On line 8128: + served as chief credit + offi cer at Fannie Mae, + provided to the + +On line 8128: + credit offi cer + at Fannie Mae, provided + to the Commission + +On line 8128: + staff a 70-page, fully + sourced memorandum on the + number of subprime + +On line 8128: + sourced memorandum + on the number of subprime + and other high risk + +On line 8128: + on the number of + subprime and other high risk + mortgages in the fi + +On line 8128: + number of subprime + and other high risk mortgages + in the fi nancial + +On line 8128: + nancial crisis. In + that memorandum, Pinto + recorded that he had + +On line 8128: + that memorandum, + Pinto recorded that he had + found over million such + +On line 8128: + Pinto recorded that + he had found over million such + mortgages (his later + +On line 8128: + recorded that he had + found over million such mortgages + (his later work showed + +On line 8128: + later work showed that + there were approximately + million).2 Since there are + +On line 8128: + million).2 Since there are + about million mortgages in the + U.S., Pinto’s research + +On line 8128: + about million mortgages + in the U.S., Pinto’s research + indicated that, + +On line 8128: + in the U.S., Pinto’s + research indicated that, + as the fi nancial + +On line 8128: + U.S., Pinto’s research + indicated that, as the + fi nancial crisis + +On line 8128: + indicated that, + as the fi nancial crisis + began, half of all + +On line 8128: + as the fi nancial + crisis began, half of all + U.S. mortgages were of + +On line 8128: + of inferior + quality and liable to + default when housing + +On line 8128: + liable to default + when housing prices were no longer + rising. In August, + +On line 8128: + rising. In August, + Pinto supplemented his + initial research with + +On line 8128: + initial research with + a paper documenting + the eff orts of the + +On line 8132: + Th is research raised + important questions about the + role of government + +On line 8132: + important questions + about the role of government + housing policy + +On line 8132: + government housing + policy in promoting + the high risk mortgages + +On line 8132: + housing policy + in promoting the high risk + mortgages that played such + +On line 8132: + in promoting the + high risk mortgages that played such + a key role in both + +On line 8132: + promoting the high + risk mortgages that played such a + key role in both the + +On line 8132: + high risk mortgages that + played such a key role in both + the mortgage meltdown + +On line 8132: + risk mortgages that played + such a key role in both the + mortgage meltdown and + +On line 8132: + played such a key role + in both the mortgage meltdown + and the fi nancial + +On line 8132: + a key role in both + the mortgage meltdown and the + fi nancial panic + +On line 8132: + key role in both the + mortgage meltdown and the fi + nancial panic that + +On line 8132: + in both the mortgage + meltdown and the fi nancial + panic that followed. + +On line 8132: + fi nancial panic + that followed. Any objective + investigation + +On line 8132: + investigation + of the causes of the fi + nancial crisis would + +On line 8132: + of the causes of + the fi nancial crisis would + have looked carefully + +On line 8132: + the causes of the + fi nancial crisis would have + looked carefully at + +On line 8132: + causes of the fi + nancial crisis would have looked + carefully at this + +On line 8132: + fi nancial crisis + would have looked carefully at + this research, exposed + +On line 8132: + nancial crisis would + have looked carefully at this + research, exposed it + +On line 8132: + crisis would have looked + carefully at this research, + exposed it to the + +On line 8132: + have looked carefully + at this research, exposed it + to the members of + +On line 8132: + looked carefully at + this research, exposed it to + the members of the + +On line 8132: + this research, exposed + it to the members of the + Commission, taken + +On line 8132: + the members of the + Commission, taken Pinto’s + testimony, and + +On line 8132: + testimony, and + tested the accuracy + of Pinto’s research. + +On line 8132: + the accuracy + of Pinto’s research. But the + Commission took none + +On line 8132: + of Pinto’s research. + But the Commission took none + of these steps. Pinto’s + +On line 8132: + But the Commission + took none of these steps. Pinto’s + research was never + +On line 8132: + took none of these steps. + Pinto’s research was never + made available to the + +On line 8132: + steps. Pinto’s research + was never made available to + the other members + +On line 8132: + Pinto’s research was + never made available to the + other members of + +On line 8132: + research was never + made available to the other + members of the FCIC, + +On line 8132: + never made available + to the other members of + the FCIC, or even to + +On line 8132: + the other members + of the FCIC, or even to the + commissioners who + +On line 8132: + of the FCIC, or even + to the commissioners who + were members of the + +On line 8132: + who were members of + the subcommittee charged with + considering the + +On line 8132: + considering the + role of housing policy + in the fi nancial + +On line 8134: + housing policy + in the fi nancial crisis. + Accordingly, the + +On line 8134: + ignores hypotheses + about the causes of the fi + nancial crisis that + +On line 8134: + of the fi nancial + crisis that any objective + investigation + +On line 8134: + would have considered, + while focusing solely on + theories that have + +On line 8138: + currency but far + less plausibility. Th + is is not the way + +On line 8138: + is not the way a + serious and objective + inquiry should have been + +On line 8138: + way a serious + and objective inquiry should + have been carried out, + +On line 8138: + a serious and + objective inquiry should have + been carried out, but + +On line 8138: + inquiry should have been + carried out, but that is how + the Commission used + +On line 8138: + been carried out, but + that is how the Commission + used its resources and + +On line 8138: + carried out, but that + is how the Commission used + its resources and its + +On line 8140: + but that is how the + Commission used its resources + and its mandate. Th + +On line 8142: + Commission used its + resources and its mandate. Th + ere were many other + +On line 8144: + and its mandate. Th + ere were many other defi + ciencies. Th e scope + +On line 8144: + mandate. Th ere were + many other defi ciencies. + Th e scope of the + +On line 8144: + ere were many other + defi ciencies. Th e scope + of the Commission’s + +On line 8144: + many other defi + ciencies. Th e scope of the + Commission’s work was + +On line 8146: + defi ciencies. Th + e scope of the Commission’s + work was determined + +On line 8146: + ciencies. Th e scope + of the Commission’s work was + determined by a + +On line 8146: + the Commission’s work + was determined by a list + of public hearings + +On line 8146: + Commission’s work was + determined by a list of + public hearings that + +On line 8146: + was determined by + a list of public hearings + that was handed to + +On line 8146: + determined by a + list of public hearings that + was handed to us + +On line 8146: + of public hearings + that was handed to us in + early December + +On line 8148: + handed to us in + early December At that + point the Commission + +On line 8148: + to us in early + December At that point the + Commission members + +On line 8148: + early December + At that point the Commission + members had never + +On line 8148: + December At that + point the Commission members + had never discussed + +On line 8148: + had never discussed + the possible causes of + the crisis, and we + +On line 8148: + never discussed the + possible causes of the + crisis, and we were + +On line 8148: + possible causes + of the crisis, and we were + never told why those + +On line 8148: + were never told why + those particular subjects + were important or + +On line 8148: + never told why those + particular subjects were + important or were + +On line 8148: + those particular + subjects were important or + were chosen as the + +On line 8148: + or were chosen as + the key issues for a set + of hearings that would + +On line 8148: + were chosen as the + key issues for a set of + hearings that would form + +On line 8148: + as the key issues + for a set of hearings that + would form the backbone + +On line 8148: + key issues for a + set of hearings that would form + the backbone Edward + +On line 8148: + set of hearings that + would form the backbone Edward + Pinto, "Triggers of + +On line 8150: + memo), http://www.aei.org/paper/100174. + Edward Pinto, "Government + Housing Policies in + +On line 8156: + Financial Crisis: + A Forensic Study," http//ww.aei.org/docLib/Government-Housing-Policies-Financial-Crisis-Pinto-102110.pdf. Peter + J. Wallison of + +On line 8156: + A Forensic Study," http//ww.aei.org/docLib/Government-Housing-Policies-Financial-Crisis-Pinto-102110.pdf. + Peter J. Wallison of + all the Commission’s + +On line 8158: + Wallison of all + the Commission’s work. Th e + Commission members + +On line 8158: + Commission’s work. Th + e Commission members did + not get together + +On line 8160: + Commission members + did not get together to + discuss or decide + +On line 8160: + not get together + to discuss or decide on + the causes of the + +On line 8160: + get together to + discuss or decide on the + causes of the fi + +On line 8160: + the causes of the + fi nancial crisis until + July, well aft er + +On line 8160: + of the fi nancial + crisis until July, well + aft er it was too + +On line 8160: + fi nancial crisis + until July, well aft er + it was too late to + +On line 8160: + July, well aft er + it was too late to direct + the activities + +On line 8162: + it was too late to + direct the activities + of the staff Th e + +On line 8162: + late to direct the + activities of the staff + Th e Commission + +On line 8162: + activities of + the staff Th e Commission + interviewed hundreds + +On line 8164: + of witnesses, and + the majority’s report + is full of statements + +On line 8164: + witnesses, and the + majority’s report is + full of statements such + +On line 8164: + the majority’s + report is full of statements + such as "Smith told the + +On line 8166: + report is full of + statements such as "Smith told the + FCIC that…." However, + +On line 8166: + is full of statements + such as "Smith told the FCIC that…." + However, unless + +On line 8166: + statements such as "Smith + told the FCIC that…." However, + unless the meeting + +On line 8166: + as "Smith told the FCIC + that…." However, unless the + meeting was public, + +On line 8166: + However, unless + the meeting was public, the + commissioners were + +On line 8166: + commissioners were + not told that an interview + would occur, did not + +On line 8166: + an interview would + occur, did not know who was + being interviewed, + +On line 8166: + occur, did not know + who was being interviewed, + were not encouraged + +On line 8166: + interviewed, were not + encouraged to attend, and + of course did not have + +On line 8166: + and of course did not + have an opportunity + to question these sources + +On line 8166: + of course did not have + an opportunity to + question these sources or + +On line 8166: + to question these sources + or understand the contexts + in which the quoted + +On line 8166: + or understand the + contexts in which the quoted + statements were made. Th + +On line 8168: + the contexts in which + the quoted statements were made. + Th e Commission + +On line 8168: + is notably lacking + in their report; opinions in + general are not + +On line 8168: + their report; opinions + in general are not worth + much, especially + +On line 8168: + report; opinions in + general are not worth much, + especially in + +On line 8168: + in general are + not worth much, especially + in hindsight and when + +On line 8172: + for challenge. Th e + Commission’s authorizing + statute required that the + +On line 8172: + Th e Commission’s + authorizing statute required + that the Commission + +On line 8172: + statute required that the + Commission report on or + before December + +On line 8174: + Commission report + on or before December + Th e original + +On line 8174: + December Th e + original plan was for us + to start seeing draft + +On line 8176: + original plan was + for us to start seeing draft + s of the report + +On line 8176: + plan was for us to + start seeing draft s of the + report in April. We + +On line 8176: + us to start seeing + draft s of the report in + April. We didn’t see + +On line 8176: + to start seeing draft + s of the report in April. + We didn’t see any + +On line 8176: + start seeing draft s + of the report in April. We + didn’t see any draft + +On line 8176: + the report in April. + We didn’t see any draft s + until November. + +On line 8176: + We didn’t see any + draft s until November. + We were then given + +On line 8176: + didn’t see any draft + s until November. We + were then given an + +On line 8176: + We were then given + an opportunity to + submit comments in + +On line 8176: + submit comments in + writing, but never had an + opportunity + +On line 8176: + but never had an + opportunity to go + over the wording as + +On line 8176: + opportunity + to go over the wording as + a group or to know + +On line 8176: + wording as a group + or to know whether our comments + were accepted. We + +On line 8176: + or to know whether our + comments were accepted. We + received a complete + +On line 8176: + know whether our comments + were accepted. We received + a complete copy of + +On line 8176: + whether our comments were + accepted. We received a + complete copy of the + +On line 8176: + were accepted. We + received a complete copy of + the majority’s + +On line 8176: + received a complete + copy of the majority’s + report, for the fi + +On line 8176: + a complete copy of + the majority’s report, + for the fi rst time, + +On line 8176: + complete copy of the + majority’s report, for + the fi rst time, on + +On line 8178: + the majority’s + report, for the fi rst time, + on December It + +On line 8178: + the fi rst time, on + December It was almost + double-spaced pages long. + +On line 8180: + time, on December + It was almost double-spaced + pages long. Th e date + +On line 8180: + on December It + was almost double-spaced pages + long. Th e date for + +On line 8182: + double-spaced pages long. + Th e date for approval of + the report was eight + +On line 8182: + pages long. Th e date + for approval of the report + was eight days later, + +On line 8182: + long. Th e date for + approval of the report was + eight days later, on + +On line 8182: + for approval of the + report was eight days later, + on December Th + +On line 8184: + the report was eight + days later, on December + Th at is not the + +On line 8184: + report was eight days + later, on December Th + at is not the way + +On line 8184: + was eight days later, + on December Th at is + not the way to achieve + +On line 8184: + eight days later, on + December Th at is not + the way to achieve a + +On line 8184: + on December Th + at is not the way to achieve + a bipartisan + +On line 8186: + at is not the way + to achieve a bipartisan + report, or the full + +On line 8186: + not the way to achieve + a bipartisan report, + or the full agreement + +On line 8186: + the way to achieve a + bipartisan report, or + the full agreement of + +On line 8186: + a bipartisan + report, or the full agreement + of any group that takes + +On line 8188: + the full agreement of + any group that takes the issues + seriously. Th + +On line 8190: + of any group that takes + the issues seriously. + Th is dissenting + +On line 8190: + dissenting statement + is organized as follows: + Part I summarizes + +On line 8190: + is organized as + follows: Part I summarizes + the main points of the + +On line 8190: + as follows: Part I + summarizes the main points of + the dissent. Part II + +On line 8190: + Part I summarizes + the main points of the dissent. + Part II describes how + +On line 8190: + I summarizes the + main points of the dissent. Part + II describes how the + +On line 8190: + the dissent. Part II + describes how the failure of + subprime and other + +On line 8190: + how the failure of + subprime and other high risk + mortgages drove the growth + +On line 8190: + failure of subprime + and other high risk mortgages + drove the growth of the + +On line 8190: + subprime and other + high risk mortgages drove the growth + of the bubble and + +On line 8190: + and other high risk + mortgages drove the growth of the + bubble and weakened + +On line 8190: + high risk mortgages drove + the growth of the bubble and + weakened fi nancial + +On line 8190: + bubble and weakened + fi nancial institutions + around the world when these + +On line 8190: + around the world when these + mortgages began to default. + Part III outlines in + +On line 8190: + world when these mortgages + began to default. Part III + outlines in detail + +On line 8190: + mortgages began to + default. Part III outlines in + detail the housing + +On line 8190: + began to default. + Part III outlines in detail + the housing policies + +On line 8190: + outlines in detail + the housing policies of the + U.S. government that + +On line 8190: + the housing policies + of the U.S. government that + were primarily + +On line 8190: + approximately + one half of all U.S. mortgages + in were subprime or + +On line 8190: + one half of all U.S. + mortgages in were subprime or + otherwise of low + +On line 8190: + all U.S. mortgages in + were subprime or otherwise + of low quality. + +On line 8190: + U.S. mortgages in were + subprime or otherwise of + low quality. Part + +On line 8190: + or otherwise of + low quality. Part IV is + a brief conclusion. + +On line 8196: + low quality. Part + IV is a brief conclusion. + Dissenting Statement + +On line 8202: + were many contributing + factors, the housing bubble + of 1997-2007 would not have + +On line 8202: + contributing factors, + the housing bubble of 1997-2007 + would not have reached its + +On line 8202: + factors, the housing + bubble of 1997-2007 would not have + reached its dizzying heights + +On line 8202: + bubble of 1997-2007 would + not have reached its dizzying heights + or lasted as long, + +On line 8202: + 1997-2007 would not have reached + its dizzying heights or lasted + as long, nor would the + +On line 8202: + would not have reached its + dizzying heights or lasted as + long, nor would the fi + +On line 8202: + have reached its dizzying + heights or lasted as long, nor + would the fi nancial + +On line 8202: + its dizzying heights or + lasted as long, nor would the + fi nancial crisis + +On line 8202: + lasted as long, nor + would the fi nancial crisis + of have ensued, but + +On line 8202: + as long, nor would the + fi nancial crisis of have + ensued, but for the + +On line 8202: + would the fi nancial + crisis of have ensued, but + for the role played by + +On line 8202: + nancial crisis of + have ensued, but for the role + played by the housing + +On line 8202: + played by the housing + policies of the United States + government over the + +On line 8202: + housing policies of + the United States government + over the course of two + +On line 8204: + by the middle of + there were approximately + million subprime and + +On line 8204: + million subprime and + Alt-A mortgages in the U.S. fi + nancial system—half of + +On line 8204: + outstanding—with an + aggregate value of over + trillion.4 Th ese were + +On line 8206: + over trillion.4 Th ese + were unprecedented numbers, + far higher than at + +On line 8206: + trillion.4 Th ese were + unprecedented numbers, far + higher than at any + +On line 8206: + were unprecedented + numbers, far higher than at + any time in the past, + +On line 8206: + in the past, and the + losses associated + with the delinquency + +On line 8206: + with the delinquency + and default of these mortgages + fully account for + +On line 8206: + these mortgages fully + account for the weakness and + disruption of the + +On line 8206: + fully account for + the weakness and disruption + of the fi nancial + +On line 8206: + and disruption of + the fi nancial system that + has become known as + +On line 8206: + disruption of the + fi nancial system that has + become known as the + +On line 8206: + of the fi nancial + system that has become known + as the fi nancial + +On line 8206: + fi nancial system + that has become known as the + fi nancial crisis. + +On line 8208: + nancial system that + has become known as the fi + nancial crisis. Most + +On line 8208: + that has become known + as the fi nancial crisis. + Most subprime and Alt-A + +On line 8208: + as the fi nancial + crisis. Most subprime and Alt-A + mortgages are high risk + +On line 8208: + fi nancial crisis. + Most subprime and Alt-A mortgages + are high risk loans. A + +On line 8208: + Most subprime and Alt-A + mortgages are high risk loans. A + subprime mortgage is + +On line 8208: + Alt-A mortgages are high + risk loans. A subprime mortgage + is a loan to a + +On line 8208: + are high risk loans. A + subprime mortgage is a loan + to a borrower + +On line 8208: + risk loans. A subprime + mortgage is a loan to a + borrower who has + +On line 8208: + is a loan to a + borrower who has blemished + credit, usually + +On line 8208: + borrower who has + blemished credit, usually + signifi ed by a + +On line 8208: + has blemished credit, + usually signifi ed by + a FICO credit + +On line 8208: + credit, usually + signifi ed by a FICO + credit score lower + +On line 8208: + signifi ed by a + FICO credit score lower + than Typically, + +On line 8208: + has failed in Unless + otherwise indicated, + all estimates for + +On line 8208: + indicated, all + estimates for the number + of subprime and Alt-A + +On line 8208: + estimates for the + number of subprime and Alt-A + mortgages outstanding, + +On line 8208: + number of subprime + and Alt-A mortgages outstanding, + as well as the use + +On line 8208: + outstanding, as well + as the use of specifi c + terms such as loan to + +On line 8208: + well as the use of + specifi c terms such as loan + to value ratios + +On line 8208: + specifi c terms such + as loan to value ratios + and delinquency rates, + +On line 8208: + as loan to value + ratios and delinquency rates, + come from research done + +On line 8208: + rates, come from research + done by Edward Pinto, a + resident fellow + +On line 8208: + Institute. Pinto + is also a consultant + to the housing fi + +On line 8208: + consultant to the + housing fi nance industry + and a former chief + +On line 8208: + the housing fi nance + industry and a former + chief credit offi + +On line 8208: + industry and a + former chief credit offi + cer of Fannie Mae. + +On line 8208: + former chief credit + offi cer of Fannie Mae. + Much of this work is + +On line 8210: + chief credit offi + cer of Fannie Mae. Much of + this work is posted + +On line 8210: + credit offi cer + of Fannie Mae. Much of this + work is posted on + +On line 8210: + of Fannie Mae. Much + of this work is posted on + both my and Pinto’s + +On line 8210: + Mae. Much of this work + is posted on both my and + Pinto’s scholar pages + +On line 8210: + is posted on both + my and Pinto’s scholar pages + at AEI as follows: + +On line 8210: + posted on both my + and Pinto’s scholar pages at + AEI as follows: http://www.aei.org/docLib/Pinto-Sizing-Total-Exposure.pdf, + +On line 8210: + and Pinto’s scholar + pages at AEI as follows: http://www.aei.org/docLib/Pinto-Sizing-Total-Exposure.pdf, + which accounts for all + +On line 8210: + scholar pages at AEI + as follows: http://www.aei.org/docLib/Pinto-Sizing-Total-Exposure.pdf, which accounts + for all million high + +On line 8212: + AEI as follows: http://www.aei.org/docLib/Pinto-Sizing-Total-Exposure.pdf, + which accounts for all million + high risk loans; http://www.aei.org/docLib/ Pinto-Sizing-Total-Federal-Contributions.pdf, + +On line 8212: + as follows: http://www.aei.org/docLib/Pinto-Sizing-Total-Exposure.pdf, which + accounts for all million high + risk loans; http://www.aei.org/docLib/ Pinto-Sizing-Total-Federal-Contributions.pdf, which + +On line 8212: + http://www.aei.org/docLib/Pinto-Sizing-Total-Exposure.pdf, which accounts for + all million high risk loans; http://www.aei.org/docLib/ + Pinto-Sizing-Total-Federal-Contributions.pdf, which covers the + +On line 8212: + for all million high + risk loans; http://www.aei.org/docLib/ Pinto-Sizing-Total-Federal-Contributions.pdf, which covers + the portion of these + +On line 8212: + all million high risk + loans; http://www.aei.org/docLib/ Pinto-Sizing-Total-Federal-Contributions.pdf, which covers the + portion of these loans + +On line 8212: + high risk loans; http://www.aei.org/docLib/ Pinto-Sizing-Total-Federal-Contributions.pdf, + which covers the portion of + these loans that were held + +On line 8212: + risk loans; http://www.aei.org/docLib/ Pinto-Sizing-Total-Federal-Contributions.pdf, which + covers the portion of these + loans that were held or + +On line 8212: + Pinto-Sizing-Total-Federal-Contributions.pdf, which covers the + portion of these loans that were + held or guaranteed + +On line 8212: + loans that were held or + guaranteed by federal + agencies and the four + +On line 8212: + held or guaranteed + by federal agencies and + the four large banks that + +On line 8212: + or guaranteed by + federal agencies and the + four large banks that made + +On line 8212: + federal agencies + and the four large banks that made + these loans under CRA; + +On line 8214: + the four large banks that + made these loans under CRA; and + http:// www.aei.org/docLib/Pinto-High-LTV-Subprime-Alt-A.pdf, which covers + +On line 8214: + four large banks that made + these loans under CRA; and http:// + www.aei.org/docLib/Pinto-High-LTV-Subprime-Alt-A.pdf, which covers the + +On line 8214: + made these loans under + CRA; and http:// www.aei.org/docLib/Pinto-High-LTV-Subprime-Alt-A.pdf, which covers + the acquisition + +On line 8214: + these loans under CRA; + and http:// www.aei.org/docLib/Pinto-High-LTV-Subprime-Alt-A.pdf, which covers the + acquisition of + +On line 8214: + http:// www.aei.org/docLib/Pinto-High-LTV-Subprime-Alt-A.pdf, which covers + the acquisition of these + loans by government + +On line 8216: + government agencies + from the early 1990s. Th e + information in + +On line 8216: + from the early 1990s. + Th e information in + these memoranda + +On line 8216: + the early 1990s. Th + e information in these + memoranda is + +On line 8216: + e information + in these memoranda is + fully cited to + +On line 8220: + is fully cited + to original sources. Th ese + memoranda were + +On line 8220: + to original sources. + Th ese memoranda were + the data exhibits + +On line 8220: + original sources. Th + ese memoranda were the + data exhibits to + +On line 8220: + data exhibits to + a Pinto memorandum + submitted to the + +On line 8220: + in January and + revised and updated in + March (collectively, + +On line 8222: + "Triggers memo"). One of + the confusing elements + of any study of the + +On line 8222: + of the confusing + elements of any study of + the mortgage markets + +On line 8222: + elements of any + study of the mortgage markets + is the fact that the + +On line 8222: + of any study of the + mortgage markets is the fact + that the key defi + +On line 8222: + study of the mortgage + markets is the fact that the + key defi nitions + +On line 8222: + mortgage markets is + the fact that the key defi + nitions have never + +On line 8222: + key defi nitions + have never been fully agreed + upon. For many years, + +On line 8222: + nitions have never + been fully agreed upon. For + many years, Fannie Mae + +On line 8222: + agreed upon. For many + years, Fannie Mae treated as + subprime loans only + +On line 8222: + For many years, Fannie + Mae treated as subprime loans + only those that it + +On line 8222: + Fannie Mae treated + as subprime loans only those + that it purchased from + +On line 8222: + Mortgage Finance, a + common source of data on + the mortgage market, + +On line 8222: + of data on the + mortgage market, treated and + recorded as subprime + +On line 8222: + market, treated and + recorded as subprime only + those loans reported + +On line 8222: + recorded as subprime + only those loans reported + as subprime by the + +On line 8222: + Fannie and Freddie. + Other loans were recorded as + prime, even if they had + +On line 8222: + and Freddie. Other + loans were recorded as prime, even + if they had credit + +On line 8222: + Freddie. Other loans + were recorded as prime, even if + they had credit scores + +On line 8222: + recorded as prime, even + if they had credit scores that + would have classifi + +On line 8222: + as prime, even if they + had credit scores that would have + classifi ed them + +On line 8222: + if they had credit + scores that would have classifi + ed them as subprime. + +On line 8222: + credit scores that would + have classifi ed them as + subprime. However, + +On line 8222: + have classifi ed + them as subprime. However, + a FICO credit + +On line 8222: + classifi ed them + as subprime. However, a + FICO credit score + +On line 8222: + score of less than is + generally regarded + as a subprime loan, + +On line 8222: + is generally + regarded as a subprime + loan, no matter how + +On line 8222: + regarded as a + subprime loan, no matter how + originated. Th + +On line 8222: + how originated. + Th at is the standard, for + example, used by + +On line 8226: + at is the standard, + for example, used by the + Offi ce of the + +On line 8226: + for example, used + by the Offi ce of the + Comptroller of the + +On line 8226: + used by the Offi + ce of the Comptroller of + the Currency. In + +On line 8226: + by the Offi ce + of the Comptroller of the + Currency. In this + +On line 8226: + Comptroller of the + Currency. In this statement + and in Pinto’s work + +On line 8226: + the Currency. In + this statement and in Pinto’s + work on this issue, + +On line 8226: + Currency. In this + statement and in Pinto’s work + on this issue, loans + +On line 8226: + and in Pinto’s work + on this issue, loans that are + classifi ed as + +On line 8226: + work on this issue, + loans that are classifi ed + as subprime by their + +On line 8226: + subprime loans, and loans + to borrowers with FICO + scores of less than are + +On line 8226: + loans to borrowers + with FICO scores of less than + are called subprime by + +On line 8226: + with FICO scores of + less than are called subprime by + characteristic. + +On line 8226: + Fannie and Freddie + reported only a very + small percentage of + +On line 8226: + reported only + a very small percentage of + their loans as subprime, + +On line 8226: + only a very small + percentage of their loans as + subprime, so in eff + +On line 8226: + small percentage of + their loans as subprime, so in + eff ect the subprime + +On line 8226: + percentage of their + loans as subprime, so in eff + ect the subprime loans + +On line 8226: + loans as subprime, so + in eff ect the subprime loans + acquired by Fannie + +On line 8226: + eff ect the subprime + loans acquired by Fannie and + Freddie should be added + +On line 8226: + others in order + to derive something closer + to the number and + +On line 8226: + to derive something + closer to the number and + principal amount of + +On line 8226: + something closer to + the number and principal + amount of the subprime + +On line 8226: + principal amount of + the subprime loans outstanding + in the fi nancial + +On line 8226: + amount of the subprime + loans outstanding in the fi + nancial system at + +On line 8226: + loans outstanding in + the fi nancial system at + any given time. One + +On line 8226: + outstanding in the + fi nancial system at any + given time. One of + +On line 8226: + given time. One of + the important elements + of Edward Pinto’s + +On line 8226: + of Edward Pinto’s + work was to show that Fannie + and Freddie, for many + +On line 8226: + Edward Pinto’s work + was to show that Fannie and + Freddie, for many years + +On line 8226: + Pinto’s work was to + show that Fannie and Freddie, + for many years prior + +On line 8226: + work was to show that + Fannie and Freddie, for many + years prior to the + +On line 8226: + show that Fannie and + Freddie, for many years prior + to the fi nancial + +On line 8226: + Fannie and Freddie, + for many years prior to the + fi nancial crisis, + +On line 8226: + Freddie, for many years + prior to the fi nancial + crisis, were buying + +On line 8226: + for many years prior + to the fi nancial crisis, + were buying loans that + +On line 8226: + many years prior to + the fi nancial crisis, were + buying loans that should + +On line 8226: + prior to the fi + nancial crisis, were buying + loans that should have been + +On line 8226: + fi nancial crisis, + were buying loans that should have + been classifi ed + +On line 8226: + nancial crisis, were + buying loans that should have been + classifi ed as + +On line 8226: + were buying loans that + should have been classifi ed + as subprime because + +On line 8226: + buying loans that should + have been classifi ed as + subprime because of + +On line 8226: + been classifi ed + as subprime because of the + borrowers’ credit + +On line 8226: + as subprime because + of the borrowers’ credit + scores and not simply + +On line 8226: + not simply because + they were originated by + subprime lenders. Fannie + +On line 8226: + were originated + by subprime lenders. Fannie and + Freddie did not do + +On line 8226: + subprime lenders. Fannie + and Freddie did not do this + until aft er they + +On line 8226: + Fannie and Freddie + did not do this until aft + er they were taken + +On line 8226: + and Freddie did not + do this until aft er they + were taken over by + +On line 8226: + Freddie did not do + this until aft er they were + taken over by the + +On line 8226: + not do this until + aft er they were taken over + by the federal + +On line 8228: + by the federal + government. Th is lack of + disclosure on the + +On line 8228: + disclosure on the + part of the GSEs appears to + have been a factor + +On line 8228: + of the GSEs appears + to have been a factor in + the failure of many + +On line 8228: + been a factor in + the failure of many market + observers to foresee + +On line 8228: + many market observers + to foresee the potential + severity of the + +On line 8238: + defl ated in + Dissenting Statement the past + to meet other fi + +On line 8238: + Dissenting Statement + the past to meet other fi + nancial obligations. + +On line 8238: + to meet other fi + nancial obligations. Before + changes in government + +On line 8238: + nancial obligations. + Before changes in government + policy in the + +On line 8238: + changes in government + policy in the early + 1990s, most borrowers + +On line 8238: + in the early 1990s, + most borrowers with FICO + scores below did not + +On line 8238: + 1990s, most borrowers + with FICO scores below did + not qualify as + +On line 8238: + most borrowers with + FICO scores below did not + qualify as prime + +On line 8238: + FICO scores below + did not qualify as prime + borrowers and had + +On line 8240: + qualify as prime + borrowers and had diffi + culty obtaining + +On line 8242: + had diffi culty + obtaining mortgage credit + other than through the + +On line 8242: + culty obtaining + mortgage credit other than + through the Federal + +On line 8242: + obtaining mortgage + credit other than through the + Federal Housing + +On line 8242: + credit other than + through the Federal Housing + Administration + +On line 8242: + through the Federal + Housing Administration + (FHA), the government’s + +On line 8244: + a relatively + small number of specialized + subprime lenders. An Alt-A + +On line 8244: + specialized subprime + lenders. An Alt-A mortgage is one + that is defi cient + +On line 8244: + lenders. An Alt-A mortgage + is one that is defi cient + by its terms. It may + +On line 8244: + An Alt-A mortgage is + one that is defi cient by + its terms. It may have + +On line 8244: + Alt-A mortgage is one + that is defi cient by its + terms. It may have an + +On line 8244: + one that is defi + cient by its terms. It may have + an adjustable rate, lack + +On line 8244: + cient by its terms. It + may have an adjustable rate, lack + documentation + +On line 8244: + may have an adjustable + rate, lack documentation + about the borrower, + +On line 8244: + an adjustable rate, lack + documentation about the + borrower, require + +On line 8244: + require payment of + interest only, or be + made to an investor + +On line 8244: + interest only, + or be made to an investor + in rental housing, not + +On line 8246: + key defi ciency + in many Alt-A mortgages is a + high loan-to-value + +On line 8246: + in many Alt-A mortgages + is a high loan-to-value + ratio—that is, a + +On line 8246: + a low downpayment. + A low downpayment for a + home may signify + +On line 8246: + low downpayment. A + low downpayment for a home + may signify the + +On line 8246: + A low downpayment + for a home may signify + the borrower’s lack + +On line 8246: + low downpayment for + a home may signify the + borrower’s lack of + +On line 8246: + home may signify + the borrower’s lack of fi + nancial resources, and + +On line 8246: + the borrower’s lack + of fi nancial resources, and + this lack of "skin in + +On line 8246: + borrower’s lack of + fi nancial resources, and this + lack of "skin in the + +On line 8246: + lack of fi nancial + resources, and this lack of "skin + in the game" oft en + +On line 8246: + fi nancial resources, + and this lack of "skin in the + game" oft en means a + +On line 8246: + and this lack of "skin + in the game" oft en means a + reduced borrower + +On line 8246: + in the game" oft en + means a reduced borrower + commitment to the + +On line 8246: + en means a reduced + borrower commitment to + the home. Until they + +On line 8246: + to the home. Until + they became subject to HUD’s + aff ordable housing + +On line 8246: + Until they became + subject to HUD’s aff ordable + housing requirements, + +On line 8246: + subject to HUD’s aff + ordable housing requirements, + beginning in the + +On line 8246: + in the early 1990s, + Fannie and Freddie seldom + acquired loans with these + +On line 8246: + early 1990s, Fannie + and Freddie seldom acquired + loans with these defi + +On line 8248: + and Freddie seldom + acquired loans with these defi + ciencies. Given the + +On line 8248: + acquired loans with these + defi ciencies. Given the + likelihood that large + +On line 8248: + ciencies. Given the + likelihood that large numbers + of subprime and Alt-A + +On line 8248: + likelihood that large + numbers of subprime and Alt-A + mortgages would default + +On line 8248: + would default once the + housing bubble began to + defl ate in mid- + +On line 8248: + eff ects for the U.S. + economy and fi nancial + system—the key question + +On line 8248: + the U.S. economy + and fi nancial system—the key + question for the FCIC + +On line 8248: + economy and fi + nancial system—the key question + for the FCIC was to + +On line 8248: + fi nancial system—the + key question for the FCIC was + to determine why, + +On line 8248: + key question for the + FCIC was to determine why, + beginning in the + +On line 8248: + for the FCIC was to + determine why, beginning + in the early 1990s, + +On line 8248: + deteriorate + so signifi cantly that it + was possible to + +On line 8248: + it was possible + to create million subprime + and Alt-A mortgages. Th + +On line 8250: + was possible to + create million subprime and + Alt-A mortgages. Th e + +On line 8252: + and Alt-A mortgages. Th + e Commission never made + a serious study + +On line 8252: + Alt-A mortgages. Th e + Commission never made a + serious study of + +On line 8252: + Th e Commission + never made a serious + study of this question, + +On line 8252: + Commission never + made a serious study of + this question, although + +On line 8252: + made a serious + study of this question, although + understanding why + +On line 8252: + study of this question, + although understanding why + and how this happened + +On line 8252: + this question, although + understanding why and how + this happened must be + +On line 8252: + understanding why + and how this happened must be + viewed as one of the + +On line 8252: + and how this happened + must be viewed as one of the + central questions of + +On line 8252: + this happened must be + viewed as one of the central + questions of the fi + +On line 8252: + be viewed as one of + the central questions of the + fi nancial crisis. + +On line 8254: + viewed as one of the + central questions of the fi + nancial crisis. From + +On line 8254: + the central questions + of the fi nancial crisis. + From the beginning, + +On line 8254: + central questions of + the fi nancial crisis. From + the beginning, the + +On line 8254: + was limited to + validating the standard + narrative about the + +On line 8254: + validating the + standard narrative about the + fi nancial crisis—that + +On line 8254: + crisis—that it was caused + by deregulation or lack + of regulation, + +On line 8254: + by deregulation + or lack of regulation, + weak risk management, + +On line 8254: + were either never + considered or were treated + only superfi + +On line 8254: + only superfi + cially. In criticizing + the Commission, this + +On line 8254: + In criticizing + the Commission, this statement + is not intended + +On line 8254: + criticizing the + Commission, this statement is + not intended to + +On line 8254: + the Commission, this + statement is not intended + to criticize the + +On line 8254: + is not intended + to criticize the staff which + worked diligently and + +On line 8254: + not intended to + criticize the staff which worked + diligently and eff + +On line 8254: + criticize the staff + which worked diligently and eff + ectively under + +On line 8256: + diligently and eff + ectively under diffi + cult circumstances, and + +On line 8256: + cult circumstances, and + did extraordinarily + fi ne work in the + +On line 8258: + in the limited + areas they were directed + to cover. Th e + +On line 8258: + were directed to + cover. Th e Commission’s + failures were failures + +On line 8260: + Commission’s failures + were failures of management. + Government Policies + +On line 8260: + failures were failures + of management. Government + Policies Resulted + +On line 8266: + Resulted in an + Unprecedented Number of + Risky Mortgages Th ree + +On line 8266: + were primarily + responsible for the growth + of subprime and Alt-A + +On line 8266: + responsible for + the growth of subprime and Alt-A + mortgages in the U.S. + +On line 8266: + the growth of subprime + and Alt-A mortgages in the U.S. + economy between + +On line 8266: + Alt-A mortgages in the + U.S. economy between and + and for the decline + +On line 8266: + mortgages in the U.S. + economy between and and + for the decline in + +On line 8266: + and for the decline + in mortgage underwriting + standards that ensued. + +On line 8270: + decline in mortgage + underwriting standards that + ensued. Th e GSEs’ + +On line 8272: + ensued. Th e GSEs’ + Aff ordable Housing Mission. + Th e fact that high + +On line 8272: + e GSEs’ Aff ordable + Housing Mission. Th e fact + that high risk mortgages + +On line 8274: + Housing Mission. Th + e fact that high risk mortgages + formed almost half of + +On line 8274: + Th e fact that high + risk mortgages formed almost half + of all U.S. mortgages + +On line 8274: + e fact that high risk + mortgages formed almost half of + all U.S. mortgages by + +On line 8274: + mortgages formed almost + half of all U.S. mortgages by + the middle of was + +On line 8274: + almost half of all + U.S. mortgages by the middle + of was not a chance + +On line 8274: + of all U.S. mortgages + by the middle of was not + a chance event, nor did + +On line 8274: + all U.S. mortgages by + the middle of was not a + chance event, nor did it + +On line 8274: + U.S. mortgages by the + middle of was not a chance + event, nor did it just + +On line 8274: + by the middle of + was not a chance event, nor did + it just happen that + +On line 8274: + the middle of was + not a chance event, nor did it + just happen that banks + +On line 8274: + middle of was not + a chance event, nor did it just + happen that banks and + +On line 8274: + of was not a chance + event, nor did it just happen + that banks and other + +On line 8274: + not a chance event, nor + did it just happen that banks + and other mortgage + +On line 8274: + and other mortgage + originators decided + on their own to off + +On line 8274: + decided on their + own to off er easy credit + terms to potential + +On line 8274: + er easy credit terms + to potential homebuyers + beginning in the + +On line 8276: + terms to potential + homebuyers beginning in + the 1990s. In Congress + +On line 8276: + beginning in the + 1990s. In Congress enacted + Title XIII of + +On line 8276: + the 1990s. In Congress + enacted Title XIII + of the Housing and + +On line 8276: + Act), legislation + intended to give low and + Public Law 102-550, Stat. + +On line 8280: + give low and Public + Law 102-550, Stat. H.R. enacted + October Peter + +On line 8282: + October Peter + J. Wallison moderate + income7 borrowers + +On line 8282: + moderate income7 + borrowers better access + to mortgage credit + +On line 8282: + income7 borrowers + better access to mortgage + credit through Fannie + +On line 8282: + borrowers better + access to mortgage credit + through Fannie Mae and + +On line 8282: + better access to + mortgage credit through Fannie + Mae and Freddie Mac. + +On line 8284: + access to mortgage + credit through Fannie Mae and + Freddie Mac. Th is + +On line 8284: + to mortgage credit + through Fannie Mae and Freddie + Mac. Th is eff ort, + +On line 8284: + credit through Fannie + Mae and Freddie Mac. Th is + eff ort, probably + +On line 8284: + Mae and Freddie Mac. + Th is eff ort, probably + stimulated by + +On line 8284: + Mac. Th is eff ort, + probably stimulated + by a desire to + +On line 8284: + became a set of + regulations that required + Fannie and Freddie + +On line 8284: + Freddie to reduce + the mortgage underwriting + standards they used when + +On line 8284: + reduce the mortgage + underwriting standards they + used when acquiring + +On line 8284: + when acquiring loans + from originators. As the + Senate Committee + +On line 8284: + from originators. + As the Senate Committee + report said at the + +On line 8286: + Senate Committee + report said at the time, "Th + e purpose of [the + +On line 8286: + report said at the + time, "Th e purpose of [the + aff ordable housing] + +On line 8286: + at the time, "Th e + purpose of [the aff ordable + housing] goals is to + +On line 8286: + e purpose of [the + aff ordable housing] goals is + to facilitate + +On line 8286: + purpose of [the aff + ordable housing] goals is to + facilitate the + +On line 8286: + aff ordable housing] + goals is to facilitate + the development + +On line 8286: + ordable housing] goals + is to facilitate the + development in + +On line 8286: + Mae and Freddie Mac + of an ongoing business + eff ort that will be + +On line 8286: + Freddie Mac of an + ongoing business eff ort + that will be fully + +On line 8286: + ongoing business + eff ort that will be fully + integrated in + +On line 8286: + eff ort that will be + fully integrated in + their products, cultures + +On line 8290: + racial minorities and + inner-city residents."8 + Th e GSE Act, and + +On line 8290: + and inner-city + residents."8 Th e GSE Act, + and its subsequent + +On line 8290: + residents."8 Th e + GSE Act, and its subsequent + enforcement by HUD, + +On line 8290: + e GSE Act, and its + subsequent enforcement by + HUD, set in motion + +On line 8290: + and its subsequent + enforcement by HUD, set in + motion a series + +On line 8290: + motion a series + of changes in the structure of + the mortgage market + +On line 8290: + series of changes in + the structure of the mortgage + market in the U.S. + +On line 8290: + particularly + the gradual degrading + of traditional + +On line 8290: + Accordingly, in + this dissenting statement, I + will refer to the + +On line 8290: + in this dissenting + statement, I will refer to + the subprime and Alt-A + +On line 8290: + will refer to the + subprime and Alt-A mortgages that + were acquired because + +On line 8290: + to the subprime and + Alt-A mortgages that were acquired + because of the aff + +On line 8290: + and Alt-A mortgages that + were acquired because of the + aff ordable housing + +On line 8290: + Alt-A mortgages that were + acquired because of the aff + ordable housing AH + +On line 8290: + were acquired because + of the aff ordable housing + AH goals, as well as + +On line 8290: + of the aff ordable + housing AH goals, as well as + other subprime and + +On line 8290: + as well as other + subprime and Alt-A mortgages, as + non-traditional + +On line 8292: + and Alt-A mortgages, as + non-traditional mortgages, + or NTMs Th e GSE + +On line 8292: + Th e GSE Act was + a radical departure + from the original + +On line 8292: + departure from the + original conception of + the GSEs as managers + +On line 8292: + the GSEs as managers + of a secondary market in + prime mortgages. Fannie + +On line 8292: + GSEs as managers of + a secondary market in prime + mortgages. Fannie Mae + +On line 8292: + a secondary market + in prime mortgages. Fannie Mae + was established as + +On line 8292: + secondary market in + prime mortgages. Fannie Mae was + established as a + +On line 8292: + prime mortgages. Fannie + Mae was established as a + government agency + +On line 8292: + Mae was established + as a government agency + in the New Deal era + +On line 8292: + was established as + a government agency in + the New Deal era to + +On line 8292: + established as a + government agency in the + New Deal era to buy + +On line 8292: + as a government + agency in the New Deal era + to buy mortgages from + +On line 8292: + government agency + in the New Deal era to buy + mortgages from banks and + +On line 8292: + agency in the New + Deal era to buy mortgages from + banks and other loan + +On line 8292: + New Deal era to buy + mortgages from banks and other + loan originators, + +On line 8292: + mortgages from banks and + other loan originators, + providing them with + +On line 8292: + banks and other loan + originators, providing + them with new funds with + +On line 8292: + them with new funds with + which to make additional + mortgages. In it was + +On line 8292: + funds with which to make + additional mortgages. In + it was authorized + +On line 8292: + government-sponsored + enterprise (GSE)9—a shareholder-owned + company with a + +On line 8292: + mission to maintain + a liquid secondary market + in mortgages. Freddie + +On line 8292: + a liquid secondary + market in mortgages. Freddie + Mac was chartered by + +On line 8292: + in mortgages. Freddie + Mac was chartered by Congress + as another GSE + +On line 8292: + mortgages. Freddie Mac + was chartered by Congress as + another GSE in + +On line 8292: + another GSE in + Fannie and Freddie carried + out this mission eff + +On line 8292: + Fannie and Freddie + carried out this mission eff + ectively until + +On line 8292: + Freddie carried out + this mission eff ectively + until the early + +On line 8292: + 1990s, and in the process + established conservative + lending standards for + +On line 8292: + willing to purchase, + including such elements + as downpayments of + +On line 8292: + as downpayments of + to percent, and minimum + credit standards for + +On line 8294: + of to percent, and + minimum credit standards + for borrowers. Th + +On line 8296: + GSE Act, however, + created a new "mission" + for Fannie Mae and + +On line 8296: + Mae and Freddie Mac—a + responsibility to + support aff ordable + +On line 8296: + to establish and + administer what was in + eff ect a mortgage + +On line 8296: + administer what + was in eff ect a mortgage + quota system in + +On line 8296: + what was in eff ect + a mortgage quota system + in which a certain + +On line 8296: + eff ect a mortgage + quota system in which a + certain percentage + +On line 8296: + a mortgage quota + system in which a certain + percentage of all + +On line 8296: + quota system in + which a certain percentage + of all Fannie and + +On line 8296: + system in which a + certain percentage of all + Fannie and Freddie + +On line 8296: + in which a certain + percentage of all Fannie + and Freddie mortgage + +On line 8296: + certain percentage + of all Fannie and Freddie + mortgage purchases + +On line 8296: + percentage of all + Fannie and Freddie mortgage + purchases had to + +On line 8296: + of all Fannie and + Freddie mortgage purchases + had to be loans to + +On line 8296: + and Freddie mortgage + purchases had to be loans + to low-and- moderate + +On line 8296: + had to be loans to + low-and- moderate income (LMI) + borrowers—defi + +On line 8296: + borrowers—defi + ned as persons with income + at or below the + +On line 8296: + ned as persons with + income at or below the + median income + +On line 8296: + at or below the + median income in a + particular area + +On line 8296: + median income + in a particular area + or to borrowers + +On line 8298: + living in certain + low income communities. + Th e AH goals put + +On line 8298: + certain low income + communities. Th e AH + goals put Fannie and + +On line 8298: + AH goals put Fannie + and Freddie into direct + competition with + +On line 8298: + and Freddie into + direct competition with + the FHA, which was then + +On line 8298: + competition with + the FHA, which was then and is + today an agency + +On line 8298: + which was then and is + today an agency within + HUD that functions as + +On line 8298: + HUD that functions as + the federal government’s + principal subprime + +On line 8300: + as percent of area + median income (AMI) and + moderate income + +On line 8300: + of area median + income (AMI) and moderate + income as percent + +On line 8300: + median income + (AMI) and moderate income + as percent of AMI. + +On line 8302: + moderate income + as percent of AMI. Report + of the Committee + +On line 8302: + as percent of AMI. + Report of the Committee + on Banking Housing + +On line 8302: + of AMI. Report of + the Committee on Banking + Housing and Urban + +On line 8302: + the Committee on + Banking Housing and Urban + Aff airs, United States + +On line 8302: + Housing and Urban + Aff airs, United States Senate + to accompany + +On line 8302: + Aff airs, United States + Senate to accompany + S. Report 102-282, May + +On line 8304: + to accompany + S. Report 102-282, May pp. 34-5. + Fannie and Freddie + +On line 8304: + S. Report 102-282, May + pp. 34-5. Fannie and Freddie + were considered to + +On line 8304: + Report 102-282, May pp. + 34-5. Fannie and Freddie were + considered to be + +On line 8304: + May pp. 34-5. Fannie + and Freddie were considered + to be government + +On line 8304: + government sponsored + enterprises because they + had been chartered by + +On line 8304: + because they had been + chartered by Congress and were + given various + +On line 8304: + chartered by Congress + and were given various + privileges (such as + +On line 8304: + exemption from the + Securities Act of and + the Securities + +On line 8304: + Securities Act + of and the Securities + Exchange Act of and + +On line 8304: + the Securities + Exchange Act of and a line + of credit at the + +On line 8304: + Exchange Act of and + a line of credit at the + Treasury that signaled + +On line 8304: + of and a line of + credit at the Treasury that + signaled a special + +On line 8304: + a line of credit + at the Treasury that signaled + a special degree + +On line 8304: + line of credit at + the Treasury that signaled a + special degree of + +On line 8304: + capital markets + (which continued to call them + "Agencies") assumed that + +On line 8304: + (which continued to + call them "Agencies") assumed that + in the event of fi + +On line 8304: + to call them "Agencies") + assumed that in the event of + fi nancial diffi + +On line 8306: + "Agencies") assumed that + in the event of fi nancial + diffi culties the + +On line 8306: + that in the event of + fi nancial diffi culties + the government would + +On line 8306: + in the event of fi + nancial diffi culties the + government would stand + +On line 8306: + fi nancial diffi + culties the government would + stand behind them. Th + +On line 8308: + diffi culties the + government would stand behind + them. Th is implied + +On line 8310: + government would stand + behind them. Th is implied + government backing + +On line 8310: + behind them. Th is + implied government backing + gave them access to + +On line 8310: + them. Th is implied + government backing gave them + access to funding + +On line 8310: + government backing + gave them access to funding + that was lower cost + +On line 8310: + access to funding + that was lower cost than any + AAA borrower and + +On line 8310: + that was lower cost + than any AAA borrower and + oft en only a + +On line 8310: + was lower cost than + any AAA borrower and oft + en only a few + +On line 8310: + any AAA borrower + and oft en only a few + basis points over the + +On line 8316: + basis points over the + applicable Treasury rate. + Dissenting Statement + +On line 8320: + Over the next years, HUD + consistently enhanced and + enlarged the AH goals. + +On line 8320: + HUD consistently + enhanced and enlarged the AH + goals. In the GSE Act, + +On line 8320: + enlarged the AH goals. + In the GSE Act, Congress had + initially specifi + +On line 8320: + the GSE Act, Congress + had initially specifi ed + that percent of the + +On line 8320: + GSE Act, Congress had + initially specifi ed that + percent of the GSEs’ + +On line 8322: + initially specifi + ed that percent of the GSEs’ + mortgage purchases + +On line 8322: + ed that percent of + the GSEs’ mortgage purchases + meet the AH goals. Th + +On line 8324: + that percent of the + GSEs’ mortgage purchases meet + the AH goals. Th is + +On line 8324: + percent of the GSEs’ + mortgage purchases meet the + AH goals. Th is was + +On line 8324: + of the GSEs’ mortgage + purchases meet the AH goals. + Th is was increased + +On line 8324: + mortgage purchases + meet the AH goals. Th is was + increased to percent + +On line 8326: + purchases meet the + AH goals. Th is was increased + to percent in and + +On line 8326: + meet the AH goals. Th + is was increased to percent + in and percent in + +On line 8326: + the AH goals. Th is + was increased to percent in + and percent in By + +On line 8326: + AH goals. Th is was + increased to percent in and + percent in By the + +On line 8326: + Th is was increased + to percent in and percent + in By the main LMI + +On line 8326: + is was increased to + percent in and percent in + By the main LMI goal + +On line 8326: + to percent in and + percent in By the main LMI + goal was percent, and + +On line 8326: + and percent in By + the main LMI goal was percent, + and a special aff + +On line 8326: + By the main LMI goal + was percent, and a special + aff ordable subgoal + +On line 8326: + the main LMI goal was + percent, and a special aff + ordable subgoal had + +On line 8326: + LMI goal was percent, + and a special aff ordable + subgoal had been added + +On line 8326: + aff ordable subgoal + had been added requiring that + percent of the loans + +On line 8326: + subgoal had been added + requiring that percent of + the loans acquired by + +On line 8326: + added requiring that + percent of the loans acquired + by the GSEs be made + +On line 8326: + that percent of the + loans acquired by the GSEs be + made to borrowers + +On line 8326: + percent of the loans + acquired by the GSEs be made + to borrowers who + +On line 8326: + acquired by the GSEs + be made to borrowers who + were at or below + +On line 8326: + by the GSEs be made + to borrowers who were at + or below percent + +On line 8326: + the GSEs be made to + borrowers who were at or + below percent of + +On line 8326: + to borrowers who + were at or below percent + of area median + +On line 8326: + were at or below + percent of area median + income (AMI). Table + +On line 8326: + or below percent + of area median income + (AMI). Table page shows + +On line 8326: + below percent of + area median income (AMI). + Table page shows that + +On line 8326: + (AMI). Table page shows + that Fannie and Freddie met + the goals in almost + +On line 8326: + page shows that Fannie + and Freddie met the goals in + almost every year + +On line 8330: + and Freddie met the + goals in almost every year + between and Th ere + +On line 8330: + the goals in almost + every year between and Th + ere is very little + +On line 8330: + in almost every + year between and Th ere is + very little data + +On line 8330: + year between and Th + ere is very little data + available concerning + +On line 8330: + ere is very little + data available concerning + Fannie and Freddie’s + +On line 8330: + concerning Fannie + and Freddie’s acquisitions + of subprime and Alt-A + +On line 8330: + Fannie and Freddie’s + acquisitions of subprime + and Alt-A loans in the + +On line 8330: + acquisitions of + subprime and Alt-A loans in the + early 1990s, so it + +On line 8330: + of subprime and Alt-A + loans in the early 1990s, so + it is diffi cult + +On line 8330: + subprime and Alt-A loans + in the early 1990s, so it + is diffi cult to + +On line 8330: + loans in the early + 1990s, so it is diffi cult + to estimate the + +On line 8330: + in the early 1990s, + so it is diffi cult to + estimate the GSEs’ + +On line 8332: + so it is diffi + cult to estimate the GSEs’ + year-by-year acquisitions + +On line 8332: + it is diffi cult + to estimate the GSEs’ year-by-year + acquisitions of + +On line 8332: + acquisitions of + these loans immediately + aft er the AH goals + +On line 8332: + er the AH goals went + into eff ect. However, + Pinto estimates + +On line 8332: + these purchases at + approximately trillion + (see Table page As + +On line 8332: + approximately + trillion (see Table page As + shown in Table page + +On line 8332: + (see Table page As + shown in Table page on June + immediately + +On line 8332: + Table page on June + immediately prior + to the onset of + +On line 8332: + onset of the fi + nancial crisis, the GSEs held + or had guaranteed + +On line 8332: + of the fi nancial + crisis, the GSEs held or had + guaranteed million + +On line 8332: + nancial crisis, the + GSEs held or had guaranteed + million subprime and + +On line 8332: + crisis, the GSEs held + or had guaranteed million + subprime and Alt-A loans. + +On line 8334: + the GSEs held or had + guaranteed million subprime + and Alt-A loans. Th is + +On line 8334: + or had guaranteed + million subprime and Alt-A loans. + Th is was percent + +On line 8334: + guaranteed million + subprime and Alt-A loans. Th is + was percent of their + +On line 8336: + and Alt-A loans. Th is + was percent of their total + mortgage exposure + +On line 8336: + was percent of their + total mortgage exposure + of million loans, which + +On line 8336: + the million mortgages + outstanding in the U.S. on + that date. Fannie and + +On line 8336: + far the dominant + players in the U.S. mortgage + market before the + +On line 8336: + players in the U.S. + mortgage market before the + fi nancial crisis + +On line 8336: + set the standards for + the rest of the mortgage fi + nancing industry. + +On line 8340: + standards for the rest + of the mortgage fi nancing + industry. Th e + +On line 8340: + rest of the mortgage + fi nancing industry. Th + e Community + +On line 8340: + Reinvestment Act. In + the regulations under + the Community + +On line 8340: + the regulations + under the Community + Reinvestment Act (CRA)10 + +On line 8340: + Reinvestment Act (CRA)10 + were tightened. As initially + adopted in the CRA + +On line 8340: + banks and S&Ls reach out + to low-income borrowers in + communities they + +On line 8342: + new regulations, + made eff ective in for the + fi rst time required + +On line 8342: + made eff ective in + for the fi rst time required + insured banks and S&Ls + +On line 8342: + in for the fi rst + time required insured banks and + S&Ls to demonstrate that + +On line 8342: + for the fi rst time + required insured banks and S&Ls + to demonstrate that they + +On line 8342: + required insured banks + and S&Ls to demonstrate that they + were actually + +On line 8342: + communities and + to low-income borrowers.11 A + qualifying CRA + +On line 8342: + low-income borrowers.11 + A qualifying CRA loan + was one made to a + +On line 8342: + A qualifying + CRA loan was one made to a + borrower at or + +On line 8342: + CRA loan was one made + to a borrower at or + below percent of + +On line 8342: + was one made to a + borrower at or below + percent of the AMI, + +On line 8342: + to a borrower + at or below percent of + the AMI, and thus was + +On line 8342: + percent of the AMI, + and thus was similar to + the loans that Fannie + +On line 8342: + the AMI, and thus was + similar to the loans that + Fannie and Freddie + +On line 8342: + thus was similar + to the loans that Fannie and + Freddie were required + +On line 8342: + similar to the + loans that Fannie and Freddie + were required to buy + +On line 8342: + the loans that Fannie + and Freddie were required to + buy under HUD’s AH + +On line 8342: + loans that Fannie and + Freddie were required to buy + under HUD’s AH goals. + +On line 8344: + Fannie and Freddie + were required to buy under + HUD’s AH goals. In the + +On line 8344: + Freddie were required + to buy under HUD’s AH goals. + In the National + +On line 8344: + HUD’s AH goals. In the + National Community + Reinvestment Coalition + +On line 8344: + organization + for community activist + organizations, + +On line 8344: + organizations, + reported that between and + banks that were seeking + +On line 8344: + approval for mergers + committed in agreements with + community groups + +On line 8346: + community groups + to make over trillion in CRA + loans.12 A substantial + +On line 8346: + over trillion in CRA + loans.12 A substantial portion + of these commitments + +On line 8346: + loans.12 A substantial + portion of these commitments + appear to have been + +On line 8346: + appear to have been + converted into mortgage + loans, and thus would have + +On line 8346: + have been converted + into mortgage loans, and thus + would have contributed + +On line 8346: + into mortgage loans, + and thus would have contributed + substantially to + +On line 8346: + loans, and thus would have + contributed substantially + to the number of + +On line 8346: + substantially to + the number of subprime and + other high risk loans + +On line 8346: + to the number of + subprime and other high risk + loans outstanding in + +On line 8346: + subprime and other + high risk loans outstanding in + For this reason, they + +On line 8346: + and other high risk + loans outstanding in For this + reason, they deserved + +On line 8348: + in Part III, this was + not done. Accordingly, the + GSE Act put Fannie + +On line 8348: + Part III, this was not + done. Accordingly, the GSE + Act put Fannie and + +On line 8348: + done. Accordingly, + the GSE Act put Fannie and + Freddie, FHA, and the + +On line 8348: + GSE Act put Fannie + and Freddie, FHA, and the banks + that were seeking CRA + +On line 8348: + Act put Fannie and + Freddie, FHA, and the banks that + were seeking CRA loans + +On line 8348: + FHA, and the banks that + were seeking CRA loans into + competition for + +On line 8348: + were seeking CRA loans + into competition for + the same mortgages—loans + +On line 8348: + same mortgages—loans to + borrowers at or below + the applicable + +On line 8350: + borrowers at or + below the applicable + AMI. HUD’s Best Practices + +On line 8350: + at or below the + applicable AMI. HUD’s Best + Practices Initiative. + +On line 8350: + Practices Initiative. + In HUD added another group + to this list when it + +On line 8350: + Initiative. In HUD + added another group to this + list when it set up + +On line 8350: + HUD added another + group to this list when it set + up a "Best Practices + +On line 8350: + group to this list when + it set up a "Best Practices + Initiative," to which + +On line 8350: + list when it set up + a "Best Practices Initiative," + to which members of + +On line 8350: + when it set up a + "Best Practices Initiative," to + which members of the + +On line 8350: + up a "Best Practices + Initiative," to which members + of the Mortgage Pub.L. + +On line 8350: + Initiative," to which + members of the Mortgage Pub.L. + 95-128, Title VIII + +On line 8364: + was explicitly + intended to encourage + a reduction in + +On line 8364: + to increase access + by low income borrowers + to mortgage credit. + +On line 8364: + to mortgage credit. + Countrywide was by far the + largest member of this + +On line 8364: + credit. Countrywide + was by far the largest member + of this group and by + +On line 8364: + was by far the largest + member of this group and by + the early 2000s was + +On line 8364: + member of this group + and by the early 2000s was + also competing, + +On line 8364: + of this group and by + the early 2000s was also + competing, along with + +On line 8364: + and by the early + 2000s was also competing, + along with others, for + +On line 8364: + by the early 2000s + was also competing, along + with others, for the + +On line 8364: + the early 2000s was + also competing, along with + others, for the same + +On line 8364: + also competing, + along with others, for the same + NTMs sought by Fannie + +On line 8364: + along with others, for + the same NTMs sought by Fannie + and Freddie, FHA, and + +On line 8364: + with others, for the + same NTMs sought by Fannie and + Freddie, FHA, and the + +On line 8364: + for the same NTMs sought + by Fannie and Freddie, FHA, + and the banks under + +On line 8364: + the same NTMs sought by + Fannie and Freddie, FHA, and + the banks under the + +On line 8366: + NTMs sought by Fannie + and Freddie, FHA, and the banks + under the CRA With + +On line 8366: + and Freddie, FHA, and + the banks under the CRA With + all these entities + +On line 8366: + the banks under the + CRA With all these entities + seeking the same loans, + +On line 8366: + under the CRA With + all these entities seeking + the same loans, it was + +On line 8366: + all these entities + seeking the same loans, it was + not likely that all + +On line 8366: + seeking the same loans, + it was not likely that all + of them would fi nd + +On line 8366: + it was not likely + that all of them would fi nd + enough borrowers who + +On line 8366: + was not likely that + all of them would fi nd enough + borrowers who could + +On line 8366: + of them would fi nd + enough borrowers who could meet + the traditional + +On line 8366: + the traditional + mortgage lending standards that + Fannie and Freddie + +On line 8366: + Fannie and Freddie + had established. It also + created ideal + +On line 8366: + had established. It + also created ideal + conditions for a + +On line 8366: + created ideal + conditions for a decline + in underwriting + +On line 8366: + conditions for a + decline in underwriting + standards, since every + +On line 8366: + for a decline in + underwriting standards, since + every one of these + +On line 8366: + since every one of + these competing entities + was seeking NTMs not + +On line 8366: + every one of these + competing entities was + seeking NTMs not for + +On line 8366: + of these competing + entities was seeking NTMs + not for purposes + +On line 8366: + was seeking NTMs not + for purposes of profi t + but in order to + +On line 8366: + seeking NTMs not for + purposes of profi t but + in order to meet + +On line 8366: + for purposes of + profi t but in order to + meet an obligation + +On line 8366: + but in order to + meet an obligation imposed + by the government. + +On line 8366: + in order to meet + an obligation imposed by + the government. Th + +On line 8368: + order to meet an + obligation imposed by the + government. Th e + +On line 8368: + meet an obligation + imposed by the government. + Th e obvious + +On line 8368: + obligation imposed + by the government. Th e + obvious way to + +On line 8368: + by the government. + Th e obvious way to + meet this obligation + +On line 8368: + the government. Th + e obvious way to meet + this obligation was + +On line 8370: + e obvious way + to meet this obligation was + simply to reduce + +On line 8372: + 1990s, traditional + underwriting standards had + come to be seen as + +On line 8372: + standards had come to + be seen as an obstacle + to home ownership + +On line 8372: + had come to be seen + as an obstacle to home + ownership by LMI + +On line 8372: + as an obstacle + to home ownership by LMI + families. In a + +On line 8372: + ownership by LMI + families. In a Senate + Banking Committee + +On line 8372: + Banking Committee + hearing, Gail Cincotta, a + highly respected + +On line 8372: + will respond to the + most conservative standards + unless [Fannie Mae + +On line 8372: + most conservative + standards unless [Fannie Mae + and Freddie Mac] are + +On line 8372: + and Freddie Mac] are + aggressive and convincing + in their eff orts to + +On line 8374: + eff orts to expand + historically narrow + underwriting."13 In + +On line 8374: + historically + narrow underwriting."13 In + this light, it appears + +On line 8374: + appears that Congress + set out deliberately + in the GSE Act not + +On line 8374: + that Congress set out + deliberately in the + GSE Act not only + +On line 8374: + deliberately + in the GSE Act not only + to change the culture + +On line 8374: + GSE Act not only + to change the culture of the + GSEs, but also to + +On line 8374: + Act not only to + change the culture of the GSEs, + but also to set + +On line 8374: + not only to change + the culture of the GSEs, but + also to set up + +On line 8374: + change the culture of + the GSEs, but also to set + up a mechanism + +On line 8374: + the culture of the + GSEs, but also to set up + a mechanism that + +On line 8374: + culture of the GSEs, + but also to set up a + mechanism that would + +On line 8374: + standards over time, so + that home ownership would be + more accessible + +On line 8374: + that home ownership + would be more accessible + to LMI borrowers. + +On line 8374: + home ownership would + be more accessible to + LMI borrowers. For + +On line 8374: + For example, the + legislation directed + the GSEs to study "Th + +On line 8376: + that—(A) establish a + downpayment requirement for + mortgagors of percent + +On line 8376: + mortgagors of percent + or less;14 (B) allow the use + of cash on hand as + +On line 8376: + of percent or less;14 + (B) allow the use of cash + on hand as a source + +On line 8376: + percent or less;14 (B) + allow the use of cash on + hand as a source of + +On line 8376: + less;14 (B) allow the + use of cash on hand as a + source of downpayments; + +On line 8376: + (B) allow the use + of cash on hand as a source + of downpayments; and + +On line 8376: + allow the use of + cash on hand as a source of + downpayments; and (C) + +On line 8376: + cash on hand as a + source of downpayments; and (C) + approve borrowers + +On line 8376: + hand as a source of + downpayments; and (C) approve + borrowers who have + +On line 8376: + source of downpayments; + and (C) approve borrowers + who have a credit + +On line 8376: + borrowers who have + a credit history of + delinquencies if the + +On line 8376: + who have a credit + history of delinquencies + if the borrower + +On line 8376: + delinquencies if the + borrower can demonstrate a + satisfactory + +On line 8376: + the 12-month period + ending on the date of the + application for + +On line 8376: + ending on the date + of the application for + the mortgage."15 None of + +On line 8376: + the application + for the mortgage."15 None of these + elements was part + +On line 8376: + for the mortgage."15 None + of these elements was part + of traditional + +On line 8378: + understood at the + time. I have been unable to + fi nd any studies + +On line 8378: + at the time. I have + been unable to fi nd any + studies by Fannie + +On line 8378: + I have been unable + to fi nd any studies by + Fannie or Freddie + +On line 8378: + unable to fi nd + any studies by Fannie or + Freddie in response + +On line 8378: + studies by Fannie + or Freddie in response to + this congressional + +On line 8378: + in response to this + congressional direction, + but HUD treated these + +On line 8378: + but HUD treated these + cues as a mandate to use + the AH goals as a + +On line 8378: + use the AH goals as + a mechanism for eroding + the traditional + +On line 8378: + a mechanism for + eroding the traditional + standards. HUD was very + +On line 8378: + standards. HUD was very + explicit about this, as shown + in Part II. In the + +On line 8378: + was very explicit + about this, as shown in Part II. + In the end, the goal + +On line 8378: + very explicit about + this, as shown in Part II. In + the end, the goal was + +On line 8378: + about this, as shown in + Part II. In the end, the goal + was accomplished by + +On line 8378: + in Part II. In the + end, the goal was accomplished + by gradually + +On line 8378: + was accomplished by + gradually expanding + the requirements and + +On line 8378: + by gradually + expanding the requirements + and enlarging the + +On line 8378: + the requirements and + enlarging the AH goals over + succeeding years, so + +On line 8378: + and enlarging the + AH goals over succeeding years, + so that the only + +On line 8378: + enlarging the AH + goals over succeeding years, so + that the only way + +On line 8378: + goals over succeeding + years, so that the only way + Fannie and Freddie + +On line 8378: + succeeding years, so + that the only way Fannie + and Freddie could meet + +On line 8378: + so that the only + way Fannie and Freddie could + meet the AH goals was + +On line 8378: + that the only way + Fannie and Freddie could meet + the AH goals was by + +On line 8378: + Freddie could meet the + AH goals was by purchasing + increasing numbers + +On line 8378: + meet the AH goals was + by purchasing increasing + numbers of subprime + +On line 8378: + Because the GSEs were + the dominant players in + the mortgage market, + +On line 8378: + dominant players + in the mortgage market, their + purchases also + +On line 8378: + that were subject to + government control—FHA and the banks + Allen Fishbein, "Filling + +On line 8378: + government control—FHA and + the banks Allen Fishbein, "Filling + the Half-Empty Glass: Th e + +On line 8382: + the GSEs’ minimum + downpayment was percent, and + was accompanied + +On line 8384: + underwriting. Th + e congressional request + was to break through that + +On line 8386: + e congressional + request was to break through that + limitation. GSE + +On line 8394: + limitation. GSE + Act, Section 1354(a). Dissenting + Statement under CRA—to + +On line 8394: + Statement under CRA—to + reach deeper into subprime + lending in order + +On line 8394: + lending in order + to fi nd the mortgages they + needed to comply + +On line 8394: + in order to fi + nd the mortgages they needed + to comply with their + +On line 8394: + order to fi nd + the mortgages they needed to + comply with their own + +On line 8394: + fi nd the mortgages + they needed to comply with + their own government + +On line 8394: + to comply with their + own government requirements. + Th is was also + +On line 8394: + comply with their own + government requirements. Th + is was also true + +On line 8396: + also true of the + mortgage banks—the largest of which + was Countrywide—that + +On line 8396: + mortgage banks—the largest + of which was Countrywide—that + were bound to promote + +On line 8396: + Countrywide—that were + bound to promote aff ordable + housing through HUD’s Best + +On line 8396: + bound to promote aff + ordable housing through HUD’s Best + Practices Initiative. + +On line 8398: + promote aff ordable + housing through HUD’s Best Practices + Initiative. By the + +On line 8398: + ordable housing through + HUD’s Best Practices Initiative. + By the result of + +On line 8398: + through HUD’s Best Practices + Initiative. By the result + of these government + +On line 8398: + By the result of + these government programs was + an unprecedented + +On line 8398: + subprime and other + high risk mortgages in the U.S. + fi nancial system. + +On line 8398: + mortgages in the U.S. + fi nancial system. Table + shows which agencies or + +On line 8398: + fi nancial system. + Table shows which agencies or + fi rms were holding + +On line 8398: + system. Table shows + which agencies or fi rms were + holding the credit + +On line 8398: + which agencies or fi + rms were holding the credit + risk of these mortgages- + +On line 8400: + agencies or fi rms + were holding the credit risk + of these mortgages- -or + +On line 8400: + rms were holding the + credit risk of these mortgages- + -or had distributed + +On line 8400: + holding the credit + risk of these mortgages- -or had + distributed it to + +On line 8400: + credit risk of these + mortgages- -or had distributed + it to investors through + +On line 8400: + risk of these mortgages- + -or had distributed it to + investors through mortgage-backed + +On line 8402: + fi nancial crisis + began. As Table makes clear, + government agencies, + +On line 8402: + crisis began. As + Table makes clear, government + agencies, or private + +On line 8402: + or had guaranteed + million of the NTM loans that + were outstanding at + +On line 8404: + million of the NTM + loans that were outstanding at + this point. By contrast, + +On line 8404: + the NTM loans that were + outstanding at this point. By + contrast, about million + +On line 8404: + that were outstanding + at this point. By contrast, about + million NTMs had been + +On line 8404: + about million NTMs had + been distributed to investors + through the issuance of + +On line 8404: + had been distributed + to investors through the issuance + of private mortgage-backed + +On line 8404: + to investors through the + issuance of private mortgage-backed + securities, or + +On line 8404: + issuance of private + mortgage-backed securities, or + PMBS,16 primarily + +On line 8408: + private issuers such + as Countrywide and other + subprime lenders. Th e + +On line 8408: + as Countrywide and + other subprime lenders. Th e + fact that the credit + +On line 8408: + other subprime lenders. + Th e fact that the credit + risk of two-thirds of all + +On line 8408: + subprime lenders. Th e + fact that the credit risk of + two-thirds of all the NTMs + +On line 8408: + lenders. Th e fact that + the credit risk of two-thirds of + all the NTMs in the + +On line 8408: + Th e fact that the + credit risk of two-thirds of all + the NTMs in the fi + +On line 8408: + fact that the credit + risk of two-thirds of all the NTMs + in the fi nancial + +On line 8408: + the credit risk of + two-thirds of all the NTMs in the + fi nancial system + +On line 8408: + credit risk of two-thirds + of all the NTMs in the fi + nancial system was + +On line 8408: + risk of two-thirds of all + the NTMs in the fi nancial + system was held by + +On line 8408: + all the NTMs in the + fi nancial system was held + by the government + +On line 8408: + the NTMs in the fi + nancial system was held by + the government or + +On line 8408: + fi nancial system + was held by the government + or by entities + +On line 8408: + by the government + or by entities acting + under government + +On line 8408: + government or by + entities acting under + government control + +On line 8408: + or by entities + acting under government + control demonstrates the + +On line 8408: + entities acting + under government control + demonstrates the central + +On line 8408: + the central role of + the government’s policies in + the development + +On line 8408: + central role of the + government’s policies in the + development of + +On line 8408: + the development + of the 1997-2007 housing bubble, + the mortgage meltdown + +On line 8408: + development of + the 1997-2007 housing bubble, the + mortgage meltdown that + +On line 8408: + of the 1997-2007 housing + bubble, the mortgage meltdown + that occurred when the + +On line 8408: + the mortgage meltdown + that occurred when the bubble + defl ated, and + +On line 8408: + fi nancial crisis + and recession that ensued. + Similarly, the + +On line 8408: + Similarly, the + fact that only million NTMs + were held by investors + +On line 8408: + million NTMs were held + by investors and fi nancial + institutions in + +On line 8408: + held by investors and + fi nancial institutions + in the form of PMBS + +On line 8408: + by investors and fi + nancial institutions in + the form of PMBS shows + +On line 8408: + institutions in + the form of PMBS shows that this + group of NTMs were less + +On line 8408: + in the form of PMBS + shows that this group of NTMs were + less important as + +On line 8408: + the form of PMBS shows + that this group of NTMs were less + important as a + +On line 8408: + PMBS shows that this group + of NTMs were less important + as a cause of the + +On line 8408: + shows that this group of + NTMs were less important as + a cause of the fi + +On line 8408: + this group of NTMs were + less important as a cause + of the fi nancial + +On line 8408: + as a cause of the + fi nancial crisis than the + government’s role. Th + +On line 8412: + report focuses + almost entirely on the + million PMBS, and is + +On line 8412: + focuses almost + entirely on the million + PMBS, and is thus an + +On line 8412: + almost entirely + on the million PMBS, and is + thus an example + +On line 8412: + entirely on the + million PMBS, and is thus an + example of its + +On line 8412: + million PMBS, and is + thus an example of its + determination + +On line 8416: + the government’s role + in the fi nancial crisis. + Table Entity + +On line 8436: + Mac million trillion + FHA and other Federal* + million trillion CRA + +On line 8444: + HUD Programs million + trillion Total Federal + Government million + +On line 8448: + Total Federal + Government million trillion + Other (including + +On line 8450: + Government million + trillion Other (including + subprime and million + +On line 8454: + Other (including + subprime and million trillion + Alt-A PMBS issued by + +On line 8456: + subprime and million + trillion Alt-A PMBS issued by + Countrywide, Wall Street + +On line 8456: + million trillion Alt-A + PMBS issued by Countrywide, + Wall Street and others) + +On line 8466: + Administration, + Federal Home Loan Banks and + others. To be sure, + +On line 8466: + Federal Home Loan + Banks and others. To be sure, + the government’s eff + +On line 8466: + Loan Banks and others. + To be sure, the government’s + eff orts to increase + +On line 8466: + Banks and others. To + be sure, the government’s eff + orts to increase home + +On line 8466: + eff orts to increase + home ownership through the AH + goals succeeded. Home + +On line 8466: + home ownership through + the AH goals succeeded. Home + ownership rates in + +On line 8466: + the U.S. increased from + approximately percent + in (where it had been + +On line 8468: + in (where it had been + for years) to over percent in + Almost everyone + +On line 8468: + it had been for years) + to over percent in Almost + everyone in and + +On line 8468: + to over percent in + Almost everyone in and + out of government + +On line 8468: + percent in Almost + everyone in and out of + government was pleased + +On line 8468: + Almost everyone + in and out of government + was pleased with this—a long + +On line 8468: + everyone in and + out of government was pleased + with this—a long term goal + +On line 8468: + out of government + was pleased with this—a long term goal + In the process known as + +On line 8468: + goal In the process known + as securitization, + securities backed + +On line 8468: + a pool of mortgages + (mortgage-backed securities, or + MBS) and issued by + +On line 8468: + of mortgages (mortgage-backed + securities, or MBS) and + issued by private + +On line 8468: + securities, or + MBS) and issued by private + sector fi rms were + +On line 8468: + or MBS) and issued + by private sector fi rms + were known as private + +On line 8470: + issued by the GSEs + or Ginnie Mae) or private + MBS (PMBS). See Edward + +On line 8470: + or Ginnie Mae) or + private MBS (PMBS). See Edward + Pinto’s analysis + +On line 8470: + private MBS (PMBS). See + Edward Pinto’s analysis + in Exhibit to + +On line 8470: + See Edward Pinto’s + analysis in Exhibit + to the Triggers Memo, + +On line 8474: + Exhibit to the + Triggers Memo, April p.4. http://www.aei.org/ + docLib/Pinto-Sizing-Total-Federal-Contributions.pdf. Census Bureau + +On line 8480: + Triggers Memo, April p.4. + http://www.aei.org/ docLib/Pinto-Sizing-Total-Federal-Contributions.pdf. Census Bureau + data. Peter J. + +On line 8482: + http://www.aei.org/ docLib/Pinto-Sizing-Total-Federal-Contributions.pdf. Census + Bureau data. Peter J. + Wallison of U.S. + +On line 8482: + data. Peter J. + Wallison of U.S. housing + policy—until the + +On line 8482: + J. Wallison of + U.S. housing policy—until + the true costs became + +On line 8482: + Wallison of U.S. + housing policy—until the + true costs became clear + +On line 8482: + the true costs became + clear with the collapse of the + housing bubble in + +On line 8484: + costs became clear with + the collapse of the housing + bubble in Th en + +On line 8484: + with the collapse of + the housing bubble in Th + en an elaborate + +On line 8484: + the collapse of the + housing bubble in Th en + an elaborate process + +On line 8484: + the housing bubble + in Th en an elaborate + process of shift ing the + +On line 8484: + housing bubble in + Th en an elaborate process + of shift ing the blame + +On line 8484: + bubble in Th en + an elaborate process of shift + ing the blame began. + +On line 8486: + elaborate process of + shift ing the blame began. The + Great Housing Bubble + +On line 8488: + ing the blame began. + The Great Housing Bubble and + Its Effects Figure + +On line 8488: + Housing Bubble and + Its Effects Figure below, + based on the data + +On line 8488: + Its Effects Figure + below, based on the data + of Robert J. Shiller, shows + +On line 8488: + below, based on the + data of Robert J. Shiller, shows + the dramatic growth + +On line 8488: + data of Robert J. + Shiller, shows the dramatic growth + of the 1997-2007 housing + +On line 8488: + of Robert J. Shiller, shows + the dramatic growth of the + 1997-2007 housing bubble + +On line 8488: + Robert J. Shiller, shows the + dramatic growth of the 1997-2007 + housing bubble in + +On line 8488: + the dramatic growth + of the 1997-2007 housing bubble + in the United States. + +On line 8488: + dramatic growth of + the 1997-2007 housing bubble in + the United States. By + +On line 8488: + of the 1997-2007 housing + bubble in the United States. + By mid-2007, home prices in + +On line 8488: + 1997-2007 housing bubble + in the United States. By mid-2007, + home prices in the U.S. + +On line 8488: + housing bubble in + the United States. By mid-2007, home + prices in the U.S. had + +On line 8488: + home prices in the U.S. + had increased substantially + for ten years. Th e + +On line 8488: + prices in the U.S. had + increased substantially for + ten years. Th e growth + +On line 8490: + ten years. Th e growth + in real dollar terms had + been almost percent, + +On line 8490: + years. Th e growth in + real dollar terms had been + almost percent, ten + +On line 8490: + e growth in real + dollar terms had been almost + percent, ten times greater + +On line 8490: + in real dollar + terms had been almost percent, + ten times greater than any + +On line 8490: + been almost percent, + ten times greater than any other + housing bubble in + +On line 8490: + any other housing + bubble in modern times. As + discussed below, there + +On line 8490: + bubble in modern + times. As discussed below, there + is good reason to + +On line 8490: + in modern times. As + discussed below, there is good + reason to believe + +On line 8490: + discussed below, there + is good reason to believe + that the 1997-2007 bubble + +On line 8490: + to believe that the + 1997-2007 bubble grew larger and + extended longer in + +On line 8490: + previous bubbles + because of the government’s + housing policies, which + +On line 8490: + increased the demand + for housing by funneling + more money into + +On line 8490: + demand for housing + by funneling more money + into the housing + +On line 8490: + by funneling more + money into the housing + market than would have + +On line 8490: + more money into + the housing market than would + have been available if + +On line 8490: + and the government + had not promoted the growth + of subprime lending. + +On line 8498: + lending. Figure Th + e Bubble According to + Shiller Th at the 1997-2007 + +On line 8498: + Shiller Th at the 1997-2007 + bubble lasted about twice as + long as the prior + +On line 8498: + at the 1997-2007 bubble + lasted about twice as long as + the prior housing + +On line 8498: + bubble lasted about + twice as long as the prior + housing bubbles is + +On line 8498: + lasted about twice as + long as the prior housing + bubbles is signifi + +On line 8498: + about twice as long as + the prior housing bubbles + is signifi cant in + +On line 8498: + in itself. Mortgage + quality declines as a + housing bubble grows + +On line 8498: + quality declines + as a housing bubble grows + and originators + +On line 8498: + a housing bubble + grows and originators try + to structure mortgages + +On line 8498: + housing bubble grows + and originators try to + structure mortgages that + +On line 8498: + and originators + try to structure mortgages that + will allow buyers + +On line 8498: + originators try + to structure mortgages that will + allow buyers to + +On line 8498: + to structure mortgages + that will allow buyers to + meet monthly payments + +On line 8498: + structure mortgages that + will allow buyers to meet + monthly payments for + +On line 8498: + will allow buyers + to meet monthly payments for + more expensive homes; + +On line 8498: + allow buyers to + meet monthly payments for more + expensive homes; the + +On line 8498: + monthly payments for + more expensive homes; the fact + that the most recent + +On line 8498: + more expensive homes; + the fact that the most recent + bubble was so long-lived + +On line 8498: + the fact that the most + recent bubble was so long-lived + was an important + +On line 8498: + recent bubble was + so long-lived was an important + element in its + +On line 8500: + destructiveness when + it defl ated. Why did + this bubble last so + +On line 8500: + it defl ated. + Why did this bubble last so + long1 Housing bubbles + +On line 8500: + ated. Why did this + bubble last so long1 Housing + bubbles defl ate + +On line 8500: + this bubble last so + long1 Housing bubbles defl + ate when delinquencies + +On line 8500: + bubble last so long1 + Housing bubbles defl ate + when delinquencies and + +On line 8500: + long1 Housing bubbles + defl ate when delinquencies + and defaults begin + +On line 8500: + bubbles defl ate + when delinquencies and defaults + begin to appear + +On line 8500: + and defaults begin + to appear in unusual + numbers. Investors and + +On line 8500: + that the risks of a + collapse are mounting. One by + one, investors cash in + +On line 8500: + are mounting. One by + one, investors cash in and leave. + Eventually, the + +On line 8500: + by one, investors cash + in and leave. Eventually, + the bubble tops out, + +On line 8500: + one, investors cash in + and leave. Eventually, the + bubble tops out, those + +On line 8500: + leave. Eventually, + the bubble tops out, those who + are still in the game + +On line 8500: + Eventually, the + bubble tops out, those who are + still in the game run + +On line 8500: + the bubble tops out, + those who are still in the game + run for the doors, and + +On line 8500: + bubble tops out, those + who are still in the game run + for the doors, and a + +On line 8500: + tops out, those who are + still in the game run for the + doors, and a defl + +On line 8500: + out, those who are still + in the game run for the doors, + and a defl ation + +On line 8500: + those who are still in + the game run for the doors, and + a defl ation in + +On line 8500: + who are still in the + game run for the doors, and a + defl ation in prices + +On line 8500: + still in the game run + for the doors, and a defl + ation in prices sets in. + +On line 8500: + run for the doors, and + a defl ation in prices sets + in. Generally, + +On line 8500: + for the doors, and a + defl ation in prices sets in. + Generally, in + +On line 8500: + a defl ation in + prices sets in. Generally, + in the past, this process + +On line 8500: + defl ation in prices + sets in. Generally, in + the past, this process took + +On line 8500: + ation in prices sets in. + Generally, in the past, + this process took three or + +On line 8500: + in. Generally, + in the past, this process took three + or four years. In the + +On line 8500: + Generally, in + the past, this process took three or + four years. In the case + +On line 8500: + the past, this process took + three or four years. In the case + of the most recent + +On line 8500: + this process took three or + four years. In the case of the + most recent bubble, + +On line 8500: + process took three or four + years. In the case of the most + recent bubble, it + +On line 8500: + three or four years. In + the case of the most recent + bubble, it took ten. + +On line 8502: + four years. In the case + of the most recent bubble, + it took ten. Th e + +On line 8502: + In the case of the + most recent bubble, it took + ten. Th e reason + +On line 8502: + the case of the most + recent bubble, it took ten. + Th e reason for + +On line 8502: + most recent bubble, + it took ten. Th e reason + for this longevity is + +On line 8502: + recent bubble, it + took ten. Th e reason for + this longevity is that + +On line 8508: + it took ten. Th e + reason for this longevity is + that one Dissenting + +On line 8508: + ten. Th e reason + for this longevity is that one + Dissenting Statement + +On line 8510: + longevity is that one + Dissenting Statement major + participant in + +On line 8510: + Dissenting Statement + major participant in + the market was not + +On line 8510: + participant in + the market was not in it + for profi t and was + +On line 8510: + in the market was + not in it for profi t and + was not worried about + +On line 8510: + the market was not + in it for profi t and was + not worried about the + +On line 8510: + market was not in + it for profi t and was not + worried about the risks + +On line 8510: + not in it for profi + t and was not worried about + the risks to itself + +On line 8510: + in it for profi t + and was not worried about the + risks to itself or + +On line 8510: + it for profi t and + was not worried about the risks + to itself or to + +On line 8510: + for profi t and was + not worried about the risks to + itself or to those + +On line 8510: + not worried about the + risks to itself or to those + it was controlling. + +On line 8510: + worried about the risks + to itself or to those it + was controlling. It + +On line 8510: + itself or to those + it was controlling. It was + the U.S. government, + +On line 8510: + by making mortgage + credit available to low and + moderate income + +On line 8510: + moderate income + borrowers—and requiring + the agencies and fi + +On line 8510: + institutions it + controlled or could infl uence + through regulation + +On line 8510: + regulation to + keep pumping money into + housing long aft er + +On line 8510: + keep pumping money + into housing long aft er + the bubble, left to + +On line 8512: + er the bubble, left + to itself, would have defl + ated. Economists + +On line 8512: + debating whether the + Fed’s monetary policy + in the early 2000s + +On line 8512: + the Fed’s monetary + policy in the early + 2000s caused the bubble + +On line 8512: + in the early 2000s + caused the bubble by keeping + interest rates too + +On line 8512: + 2000s caused the bubble + by keeping interest rates + too low for too long. + +On line 8514: + rates too low for too + long. Naturally enough, Ben + Bernanke and Alan Greenspan have + +On line 8514: + long. Naturally + enough, Ben Bernanke and Alan Greenspan have + argued that the Fed + +On line 8514: + enough, Ben Bernanke and Alan + Greenspan have argued that the Fed + was not at fault. On + +On line 8514: + Ben Bernanke and Alan Greenspan + have argued that the Fed was + not at fault. On the + +On line 8514: + Alan Greenspan have argued + that the Fed was not at fault. + On the other hand, + +On line 8514: + Greenspan have argued that + the Fed was not at fault. On + the other hand, John + +On line 8514: + that the Fed was not + at fault. On the other hand, + John Taylor, author + +On line 8514: + the Fed was not at + fault. On the other hand, John + Taylor, author of + +On line 8514: + On the other hand, + John Taylor, author of the + Taylor rule, contends + +On line 8514: + Taylor rule, contends + that the Fed’s violation + of the Taylor rule + +On line 8514: + rule, contends that the + Fed’s violation of the + Taylor rule was the + +On line 8514: + Fed’s violation + of the Taylor rule was the + principal cause of + +On line 8516: + of the Taylor rule + was the principal cause of + the bubble. Raghuram + +On line 8516: + principal cause of + the bubble. Raghuram Rajan, + a professor at + +On line 8516: + the bubble. Raghuram + Rajan, a professor at + the Chicago Booth School + +On line 8516: + Raghuram Rajan, a + professor at the Chicago + Booth School of Business, + +On line 8516: + professor at the + Chicago Booth School of Business, + argues that the Fed’s + +On line 8516: + the Chicago Booth School + of Business, argues that the + Fed’s low interest + +On line 8516: + Chicago Booth School of + Business, argues that the Fed’s + low interest rates + +On line 8516: + of Business, argues + that the Fed’s low interest + rates caused the bubble, + +On line 8516: + Business, argues that + the Fed’s low interest rates + caused the bubble, but + +On line 8516: + argues that the Fed’s + low interest rates caused the + bubble, but that the + +On line 8516: + low interest rates + caused the bubble, but that the + Fed actually + +On line 8516: + bubble, but that the + Fed actually followed + this policy in + +On line 8516: + Fed actually + followed this policy in + order to combat + +On line 8516: + rather than defl ation.19 + Other theories blame huge + infl ows of funds + +On line 8516: + Other theories + blame huge infl ows of funds + from emerging markets + +On line 8516: + blame huge infl ows + of funds from emerging markets + or from countries that + +On line 8516: + huge infl ows of + funds from emerging markets or + from countries that were + +On line 8516: + of funds from emerging + markets or from countries that + were recycling the + +On line 8516: + or from countries that + were recycling the dollars + they received from trade + +On line 8516: + that were recycling + the dollars they received from + trade surpluses with + +On line 8516: + were recycling the + dollars they received from trade + surpluses with the + +On line 8516: + dollars they received + from trade surpluses with the + U.S. Th ese debates, + +On line 8518: + from trade surpluses + with the U.S. Th ese debates, + however, may be + +On line 8518: + with the U.S. Th ese + debates, however, may be + missing the point. It + +On line 8518: + U.S. Th ese debates, + however, may be missing + the point. It doesn’t + +On line 8518: + debates, however, + may be missing the point. It + doesn’t matter where + +On line 8518: + however, may be + missing the point. It doesn’t + matter where the funds + +On line 8518: + may be missing the + point. It doesn’t matter where + the funds that built the + +On line 8518: + missing the point. It + doesn’t matter where the funds + that built the bubble + +On line 8518: + where the funds that built + the bubble actually + originated; the + +On line 8518: + why they were transformed + into the NTMs that were prone + to failure as soon + +On line 8518: + transformed into the + NTMs that were prone to failure + as soon as the great + +On line 8518: + into the NTMs that + were prone to failure as soon + as the great bubble + +On line 8518: + the NTMs that were prone + to failure as soon as the + great bubble defl + +On line 8520: + great bubble defl + ated. Figure illustrates + clearly that the 1997-2007 + +On line 8520: + illustrates clearly + that the 1997-2007 bubble was built + on a foundation + +On line 8520: + that the 1997-2007 bubble + was built on a foundation + of million subprime + +On line 8520: + the 1997-2007 bubble was + built on a foundation of + million subprime and + +On line 8520: + on a foundation + of million subprime and Alt-A + mortgages and shows the + +On line 8520: + Alt-A mortgages and shows + the relationship between + the cumulative + +On line 8520: + mortgages and shows the + relationship between the + cumulative growth + +On line 8520: + the relationship + between the cumulative + growth in the dollar + +On line 8520: + the cumulative + growth in the dollar amount of + NTMs and the growth of + +On line 8520: + cumulative growth + in the dollar amount of NTMs + and the growth of the + +On line 8520: + growth in the dollar + amount of NTMs and the growth of + the bubble over time. + +On line 8520: + in the dollar amount + of NTMs and the growth of the + bubble over time. It + +On line 8520: + dollar amount of NTMs + and the growth of the bubble + over time. It includes + +On line 8520: + amount of NTMs and the + growth of the bubble over time. + It includes both GSE + +On line 8520: + of NTMs and the growth + of the bubble over time. It + includes both GSE and + +On line 8520: + of the bubble over + time. It includes both GSE and + CRA contributions + +On line 8520: + the bubble over time. + It includes both GSE and CRA + contributions to + +On line 8520: + time. It includes both + GSE and CRA contributions + to the number of + +On line 8520: + contributions to + the number of outstanding + NTMs above the normal + +On line 8520: + normal baseline of + percent,20 and estimated + CRA lending under + +On line 8520: + lending under the + merger-related commitments + of the four large banks—Bank + +On line 8520: + the merger-related + commitments of the four large + banks—Bank of America, + +On line 8520: + commitments of the + four large banks—Bank of America, + Wells Fargo, Citibank and + +On line 8520: + of the four large banks—Bank + of America, Wells Fargo, + Citibank and JPMorgan Chase—that, with + +On line 8520: + the four large banks—Bank of + America, Wells Fargo, Citibank + and JPMorgan Chase—that, with their + +On line 8520: + of America, Wells + Fargo, Citibank and JPMorgan Chase—that, with + their predecessors, + +On line 8520: + Citibank and JPMorgan Chase—that, with + their predecessors, made most + of the commitments. + +On line 8520: + and JPMorgan Chase—that, with their + predecessors, made most of + the commitments. As + +On line 8520: + their predecessors, + made most of the commitments. + As noted above, these + +On line 8520: + above, these commitments + were made in connection with + applications to + +On line 8522: + approvals of mergers + or acquisitions. Th e + dollar amounts involved + +On line 8522: + or acquisitions. + Th e dollar amounts involved + were taken from a + +On line 8522: + Th e dollar amounts + involved were taken from a + report by the NCRC,21 + +On line 8522: + involved were taken + from a report by the NCRC,21 + and adjusted for + +On line 8522: + report by the NCRC,21 + and adjusted for announced + loans and likely rates + +On line 8522: + NCRC,21 and adjusted + for announced loans and likely + rates of lending. Th + +On line 8524: + and adjusted for + announced loans and likely rates + of lending. Th e + +On line 8524: + for announced loans and + likely rates of lending. Th + e cumulative + +On line 8526: + Bernanke testimony + before the FCIC, September + Alan Greenspan, in "Th e + +On line 8528: + September Alan Greenspan, + in "Th e Crisis," Second + Draft March Taylor, in + +On line 8528: + Draft March Taylor, in + testimony before the + FCIC on October + +On line 8528: + before the FCIC on + October John B. Taylor, + Getting Off Track, Hoover + +On line 8528: + on October John + B. Taylor, Getting Off Track, + Hoover Institution + +On line 8528: + October John B. + Taylor, Getting Off Track, Hoover + Institution Press, + +On line 8528: + Taylor, Getting Off + Track, Hoover Institution Press, + and Raghuram Rajan, + +On line 8528: + Institution Press, + and Raghuram Rajan, Fault Lines: + How Hidden Fractures + +On line 8530: + and Raghuram Rajan, + Fault Lines: How Hidden Fractures + Still Th reaten the + +On line 8530: + Raghuram Rajan, Fault + Lines: How Hidden Fractures Still + Th reaten the World + +On line 8532: + the World Economy, + Princeton University Press, + pp. 108-110. It appears + +On line 8532: + Economy, Princeton + University Press, pp. 108-110. + It appears that the + +On line 8532: + University Press, + pp. 108-110. It appears that the + GSEs’ normal intake + +On line 8532: + 108-110. It appears that + the GSEs’ normal intake of + mortgages included + +On line 8532: + GSEs’ normal intake + of mortgages included about + percent that were made + +On line 8532: + mortgages included + about percent that were made to + borrowers who were + +On line 8532: + about percent that were + made to borrowers who were + at or below the + +On line 8532: + made to borrowers + who were at or below the + median income + +On line 8532: + were at or below + the median income in + the area in which they + +On line 8532: + at or below the + median income in the + area in which they lived + +On line 8532: + income in the area + in which they lived and were thus + eligible for + +On line 8532: + area in which they lived + and were thus eligible + for AH credit. It + +On line 8532: + in which they lived and + were thus eligible for + AH credit. It was + +On line 8532: + eligible for + AH credit. It was only + when the AH goals rose + +On line 8532: + for AH credit. It + was only when the AH goals + rose above this level, + +On line 8532: + was only when the + AH goals rose above this level, + beginning in that + +On line 8532: + when the AH goals rose + above this level, beginning + in that government + +On line 8532: + in that government + policy required the GSEs + to acquire more AH + +On line 8532: + policy required + the GSEs to acquire more AH + qualifying loans + +On line 8532: + GSEs to acquire more + AH qualifying loans than + they would have purchased + +On line 8532: + to acquire more AH + qualifying loans than they + would have purchased as + +On line 8532: + AH qualifying + loans than they would have purchased + as a matter of + +On line 8532: + qualifying loans + than they would have purchased as + a matter of course. + +On line 8532: + loans than they would have + purchased as a matter of + course. In the case of + +On line 8532: + they would have purchased + as a matter of course. In + the case of the CRA + +On line 8532: + as a matter of + course. In the case of the CRA + contributions, the + +On line 8532: + of course. In the case + of the CRA contributions, + the baseline is and + +On line 8532: + the case of the CRA + contributions, the baseline + is and includes the + +On line 8532: + CRA contributions, + the baseline is and includes + the commitments made + +On line 8532: + contributions, the + baseline is and includes the + commitments made by + +On line 8532: + the baseline is and + includes the commitments made + by the four largest banks + +On line 8532: + made by the four largest + banks and their predecessors + listed in the NCRC + +On line 8532: + the four largest banks and + their predecessors listed + in the NCRC report, + +On line 8532: + their predecessors + listed in the NCRC report, + adjusted for the + +On line 8532: + listed in the NCRC + report, adjusted for the + loans actually + +On line 8532: + report, adjusted + for the loans actually + announced by the banks + +On line 8532: + adjusted for the + loans actually announced + by the banks aft er + +On line 8534: + er that date. In the + National Community + Reinvestment Coalition + +On line 8534: + In the National + Community Reinvestment + Coalition published a + +On line 8534: + Coalition published a + report on principal amount + of CRA loans that banks + +On line 8534: + amount of CRA loans that + banks had committed to make + in connection with + +On line 8534: + committed to make + in connection with merger + applications. Th + +On line 8536: + make in connection + with merger applications. + Th e report claimed + +On line 8536: + in connection with + merger applications. Th + e report claimed that + +On line 8536: + that these commitments + exceeded trillion. Th e + original report + +On line 8536: + exceeded trillion. + Th e original report + was removed from the + +On line 8538: + Th e original + report was removed from the + NCRC’s website, but can + +On line 8540: + s/report-silver-brown.pdf. A + portion of these commitments + were in fact fulfi + +On line 8540: + of these commitments + were in fact fulfi lled through + CRA qualifying + +On line 8540: + these commitments were + in fact fulfi lled through CRA + qualifying loans. + +On line 8540: + in fact fulfi lled + through CRA qualifying loans. + A full discussion + +On line 8540: + fact fulfi lled through + CRA qualifying loans. A + full discussion of + +On line 8540: + fulfi lled through CRA + qualifying loans. A full + discussion of these + +On line 8540: + CRA qualifying + loans. A full discussion of + these commitments and + +On line 8540: + qualifying loans. + A full discussion of these + commitments and the + +On line 8540: + A full discussion + of these commitments and the + number of loans made + +On line 8540: + discussion of these + commitments and the number + of loans made pursuant + +On line 8540: + of these commitments + and the number of loans made + pursuant to them is + +On line 8540: + commitments and the + number of loans made pursuant + to them is contained + +On line 8540: + and the number of + loans made pursuant to them is + contained in Section + +On line 8548: + Section III. Peter + J. Wallison production + line also includes + +On line 8548: + almost trillion in + NTM lending by Countrywide + Financial under + +On line 8552: + Financial under + HUD’s Best Practices Initiative.22 + Figure Th e Eff + +On line 8552: + Practices Initiative.22 + Figure Th e Eff ect of + Government Policies + +On line 8552: + Figure Th e Eff + ect of Government Policies + on the Growth of the + +On line 8552: + Th e Eff ect of + Government Policies on the + Growth of the Bubble + +On line 8552: + ect of Government + Policies on the Growth of the + Bubble It is not + +On line 8552: + Government Policies + on the Growth of the Bubble + It is not true that + +On line 8552: + on the Growth of the + Bubble It is not true that + every bubble--even a + +On line 8552: + the Bubble It is + not true that every bubble--even + a large bubble-- has + +On line 8552: + Bubble It is not + true that every bubble--even a + large bubble-- has the + +On line 8552: + not true that every + bubble--even a large bubble-- has + the potential to + +On line 8552: + a large bubble-- has + the potential to cause a + fi nancial crisis + +On line 8552: + large bubble-- has the + potential to cause a fi + nancial crisis when + +On line 8552: + the potential to + cause a fi nancial crisis + when it defl ates. + +On line 8552: + potential to cause + a fi nancial crisis when + it defl ates. Th + +On line 8554: + cause a fi nancial + crisis when it defl ates. + Th is is clear in + +On line 8554: + fi nancial crisis + when it defl ates. Th is + is clear in Table + +On line 8554: + when it defl ates. + Th is is clear in Table + below, prepared by + +On line 8556: + ates. Th is is clear + in Table below, prepared + by Professor Dwight + +On line 8556: + Th is is clear in + Table below, prepared by + Professor Dwight Jaff + +On line 8556: + in Table below, + prepared by Professor Dwight + Jaff ee of the Haas + +On line 8556: + below, prepared by + Professor Dwight Jaff ee of + the Haas Business School + +On line 8556: + by Professor Dwight + Jaff ee of the Haas Business + School at U.C. Berkley. Th + +On line 8556: + Professor Dwight Jaff + ee of the Haas Business School + at U.C. Berkley. Th e + +On line 8556: + Dwight Jaff ee of the + Haas Business School at U.C. Berkley. + Th e table shows + +On line 8558: + Jaff ee of the Haas + Business School at U.C. Berkley. Th + e table shows that + +On line 8558: + the Haas Business School + at U.C. Berkley. Th e table + shows that in other + +On line 8558: + Th e table shows + that in other developed + countries—many of which + +On line 8558: + shows that in other + developed countries—many of + which also had large + +On line 8558: + of which also had + large bubbles during the 1997-2007 + period—the losses + +On line 8558: + large bubbles during + the 1997-2007 period—the losses + associated + +On line 8558: + mortgage delinquencies + and defaults when these bubbles + defl ated were + +On line 8558: + and defaults when these + bubbles defl ated were + far lower than the + +On line 8558: + these bubbles defl + ated were far lower than + the losses suff ered + +On line 8558: + defl ated were + far lower than the losses + suff ered in the U.S. + +On line 8558: + far lower than the + losses suff ered in the U.S. + when the 1997-2007 defl + +On line 8560: + than the losses suff + ered in the U.S. when the 1997-2007 + defl ated. See + +On line 8566: + suff ered in the U.S. + when the 1997-2007 defl ated. + See note Dissenting + +On line 8566: + in the U.S. when the + 1997-2007 defl ated. See note + Dissenting Statement + +On line 8576: + Western Europe and + the United States Month Impaired + or Foreclosures Year + +On line 8580: + and the United States + Month Impaired or Foreclosures + Year Arrears Doubtful + +On line 8618: + Year Arrears Doubtful + Belgium Denmark France Ireland + Italy Portugal Spain + +On line 8640: + Belgium Denmark France + Ireland Italy Portugal Spain + Sweden UK U.S. All + +On line 8648: + Denmark France Ireland + Italy Portugal Spain Sweden + UK U.S. All Loans U.S. + +On line 8664: + Italy Portugal Spain + Sweden UK U.S. All Loans U.S. + Prime U.S. Subprime Source: + +On line 8664: + Sweden UK U.S. All + Loans U.S. Prime U.S. Subprime Source: + European Mortgage + +On line 8668: + for U.S. Data. Th + e underlying reasons + for the outcomes in + +On line 8668: + e underlying + reasons for the outcomes in + Professor Jaff ee’s + +On line 8668: + for the outcomes in + Professor Jaff ee’s data + were provided in + +On line 8668: + in Professor Jaff + ee’s data were provided + in testimony + +On line 8668: + Banking Committee + in September by Dr. Michael + Lea, Director of + +On line 8668: + in September by + Dr. Michael Lea, Director of + the Corky McMillin Center + +On line 8668: + September by Dr. + Michael Lea, Director of the + Corky McMillin Center for + +On line 8668: + Michael Lea, Director + of the Corky McMillin Center for + Real Estate at + +On line 8668: + Director of the + Corky McMillin Center for Real + Estate at San Diego + +On line 8668: + Corky McMillin Center for + Real Estate at San Diego + State University: + +On line 8672: + Real Estate at + San Diego State University: + Th e default and + +On line 8672: + University: Th + e default and foreclosure + experience of + +On line 8672: + Th e default and + foreclosure experience + of the U.S. market + +On line 8672: + experience of + the U.S. market has been far + worse than in other + +On line 8672: + the U.S. market has + been far worse than in other + countries. Serious + +On line 8672: + market has been far + worse than in other countries. + Serious default + +On line 8672: + been far worse than in + other countries. Serious + default rates remain + +On line 8672: + worse than in other + countries. Serious default + rates remain less than + +On line 8672: + than percent in all + other countries and less than + percent in Australia + +On line 8672: + other countries and + less than percent in Australia + and Canada. Of the + +On line 8672: + and less than percent + in Australia and Canada. Of + the countries in this + +On line 8672: + Of the countries in + this survey only Ireland, + Spain and the UK have + +On line 8672: + the countries in this + survey only Ireland, Spain + and the UK have seen + +On line 8672: + this survey only + Ireland, Spain and the UK have + seen a signifi cant + +On line 8672: + Ireland, Spain and the + UK have seen a signifi cant + increase in mortgage + +On line 8672: + Spain and the UK have + seen a signifi cant increase + in mortgage default + +On line 8672: + seen a signifi cant + increase in mortgage default + during the crisis. + +On line 8676: + signifi cant increase + in mortgage default during + the crisis. Th ere + +On line 8676: + for this result. First + sub-prime lending was rare or + non-existent outside + +On line 8678: + sub-prime lending was + rare or non-existent outside + of the U.S. Th e + +On line 8678: + lending was rare or + non-existent outside of the + U.S. Th e only + +On line 8678: + rare or non-existent + outside of the U.S. Th e + only country with + +On line 8680: + U.S. Th e only + country with a signifi cant + subprime share was the + +On line 8680: + e only country + with a signifi cant subprime + share was the UK (a + +On line 8680: + only country with + a signifi cant subprime share + was the UK (a peak + +On line 8680: + with a signifi cant + subprime share was the UK (a + peak of percent of + +On line 8680: + signifi cant subprime + share was the UK (a peak of + percent of mortgages + +On line 8680: + subprime share was the + UK (a peak of percent of + mortgages in Subprime + +On line 8680: + was the UK (a peak + of percent of mortgages in + Subprime accounted + +On line 8680: + percent of mortgages + in Subprime accounted for + percent of mortgages + +On line 8680: + mortgages in Subprime + accounted for percent of + mortgages in Canada, + +On line 8680: + mortgages in Canada, + less than percent in Australia + and negligible + +On line 8680: + less than percent in + Australia and negligible + proportions elsewhere. + +On line 8682: + elsewhere. …[T]here was far + less "risk layering" or off + ering limited + +On line 8682: + less "risk layering" + or off ering limited + documentation + +On line 8682: + ering limited + documentation loans to + subprime borrowers + +On line 8682: + documentation + loans to subprime borrowers + with little or no + +On line 8684: + or no downpayment. + Th ere was little "no doc" + lending…the proportion + +On line 8684: + downpayment. Th ere + was little "no doc" lending…the + proportion of loans + +On line 8684: + Th ere was little + "no doc" lending…the proportion + of loans with little + +On line 8684: + ere was little "no + doc" lending…the proportion of + loans with little or + +On line 8684: + was little "no doc" + lending…the proportion of loans + with little or no + +On line 8684: + lending…the proportion + of loans with little or no + downpayment was less + +On line 8684: + of loans with little + or no downpayment was less + than the U.S. and the + +On line 8684: + with little or no + downpayment was less than the + U.S. and the decline + +On line 8684: + or no downpayment + was less than the U.S. and the + decline in house prices + +On line 8684: + downpayment was less + than the U.S. and the decline + in house prices in most + +On line 8684: + was less than the U.S. + and the decline in house prices + in most countries was + +On line 8684: + than the U.S. and the + decline in house prices in most + countries was also + +On line 8684: + U.S. and the decline + in house prices in most countries + was also less…[L]oans in + +On line 8684: + in house prices in most + countries was also less…[L]oans in + other developed + +On line 8684: + prices in most countries + was also less…[L]oans in other + developed countries + +On line 8684: + was also less…[L]oans in + other developed countries + are with recourse and + +On line 8684: + other developed + countries are with recourse and + lenders routinely go + +On line 8686: + routinely go aft + er borrowers for defi + ciency judgments.24 Th + +On line 8688: + aft er borrowers + for defi ciency judgments.24 + Th e fact that the + +On line 8688: + for defi ciency + judgments.24 Th e fact that the + destructiveness of + +On line 8688: + judgments.24 Th e fact + that the destructiveness of + the 1997-2007 bubble came + +On line 8688: + Th e fact that the + destructiveness of the 1997-2007 + bubble came from its + +On line 8688: + destructiveness of + the 1997-2007 bubble came from its + composition—the + +On line 8688: + the 1997-2007 bubble came + from its composition—the + number of NTMs it + +On line 8688: + its size is also + illustrated by data + on foreclosure starts + +On line 8688: + starts published by the + Mortgage Bankers Dwight M. Jaff ee, + "Reforming the U.S. + +On line 8688: + the Mortgage Bankers Dwight + M. Jaff ee, "Reforming the + U.S. Mortgage Market + +On line 8688: + Mortgage Bankers Dwight M. + Jaff ee, "Reforming the U.S. + Mortgage Market Th + +On line 8688: + Jaff ee, "Reforming + the U.S. Mortgage Market Th + rough Private Market + +On line 8690: + rough Private Market + Incentives," Paper prepared + for presentation + +On line 8690: + Paper prepared for + presentation at "Past, Present + and Future of the + +On line 8690: + presentation at + "Past, Present and Future of the + Government Sponsored + +On line 8690: + Government Sponsored + Enterprises," Federal + Reserve Bank of St. + +On line 8692: + Reserve Bank of St. + Louis, Nov Table Dr. Michael J. + Lea, testimony + +On line 8692: + Table Dr. Michael J. + Lea, testimony before + the Subcommittee + +On line 8692: + Lea, testimony + before the Subcommittee + on Security + +On line 8692: + on Security + and International Trade + and Finance of the + +On line 8702: + Association + (MBA).25 Th is data allows + a comparison + +On line 8702: + is data allows + a comparison between + the foreclosure starts + +On line 8702: + data allows a + comparison between the + foreclosure starts that + +On line 8702: + a comparison + between the foreclosure starts + that have thus far come + +On line 8702: + the foreclosure starts + that have thus far come out of + the 1997-2007 bubble and + +On line 8702: + foreclosure starts that + have thus far come out of the + 1997-2007 bubble and the + +On line 8702: + starts that have thus far + come out of the 1997-2007 bubble + and the foreclosure + +On line 8702: + that have thus far come + out of the 1997-2007 bubble and + the foreclosure starts + +On line 8702: + have thus far come out + of the 1997-2007 bubble and the + foreclosure starts in + +On line 8702: + come out of the 1997-2007 + bubble and the foreclosure + starts in the two most + +On line 8702: + of the 1997-2007 bubble + and the foreclosure starts in + the two most recent + +On line 8702: + 1997-2007 bubble and the + foreclosure starts in the two + most recent housing + +On line 8702: + and the foreclosure + starts in the two most recent + housing bubbles (1977-1979 + +On line 8702: + foreclosure starts in + the two most recent housing + bubbles (1977-1979 and 1985-1989) + +On line 8704: + the two most recent + housing bubbles (1977-1979 and 1985-1989) + shown in Figure Aft + +On line 8704: + most recent housing + bubbles (1977-1979 and 1985-1989) shown in + Figure Aft er the + +On line 8704: + bubbles (1977-1979 and 1985-1989) + shown in Figure Aft er the + housing bubble that + +On line 8704: + (1977-1979 and 1985-1989) shown in + Figure Aft er the housing + bubble that ended + +On line 8704: + 1985-1989) shown in Figure + Aft er the housing bubble + that ended in when + +On line 8704: + Figure Aft er the + housing bubble that ended + in when almost all + +On line 8704: + Aft er the housing + bubble that ended in when + almost all mortgages + +On line 8704: + the housing bubble + that ended in when almost + all mortgages were prime + +On line 8704: + housing bubble that + ended in when almost all + mortgages were prime loans + +On line 8704: + bubble that ended + in when almost all mortgages + were prime loans of the + +On line 8704: + in when almost all + mortgages were prime loans of the + traditional type, + +On line 8704: + all mortgages were prime + loans of the traditional + type, foreclosure starts + +On line 8704: + mortgages were prime loans + of the traditional type, + foreclosure starts in + +On line 8704: + the traditional + type, foreclosure starts in the + ensuing downturn + +On line 8704: + type, foreclosure starts + in the ensuing downturn + reached a high point of + +On line 8704: + in the ensuing + downturn reached a high point of + only percent in + +On line 8704: + ensuing downturn + reached a high point of only + percent in Aft er + +On line 8704: + reached a high point of + only percent in Aft er + the next bubble, which + +On line 8704: + high point of only + percent in Aft er the next + bubble, which ended + +On line 8704: + of only percent + in Aft er the next bubble, + which ended in and + +On line 8704: + only percent in + Aft er the next bubble, which + ended in and in + +On line 8704: + percent in Aft er + the next bubble, which ended + in and in which a + +On line 8704: + er the next bubble, + which ended in and in which + a high proportion + +On line 8704: + the next bubble, which + ended in and in which a + high proportion of + +On line 8704: + which ended in and + in which a high proportion + of the loans were the + +On line 8704: + and in which a high + proportion of the loans were + the traditional + +On line 8704: + proportion of the + loans were the traditional + type, foreclosure starts + +On line 8704: + the traditional + type, foreclosure starts reached a + high of percent in + +On line 8704: + type, foreclosure starts + reached a high of percent in + However, aft er + +On line 8704: + starts reached a high of + percent in However, aft + er the collapse of + +On line 8704: + a high of percent + in However, aft er the + collapse of the 1997-2007 + +On line 8704: + in However, aft + er the collapse of the 1997-2007 + bubble—in which half of + +On line 8704: + aft er the collapse + of the 1997-2007 bubble—in which half + of all mortgages were + +On line 8704: + er the collapse of + the 1997-2007 bubble—in which half of + all mortgages were NTMs—foreclosure + +On line 8704: + the collapse of the + 1997-2007 bubble—in which half of all + mortgages were NTMs—foreclosure starts + +On line 8704: + bubble—in which half of + all mortgages were NTMs—foreclosure starts reached + the unprecedented + +On line 8704: + all mortgages were NTMs—foreclosure + starts reached the unprecedented + level (thus far) of + +On line 8704: + were NTMs—foreclosure starts reached the + unprecedented level (thus + far) of percent in + +On line 8704: + the unprecedented + level (thus far) of percent + in And this was true + +On line 8704: + level (thus far) of + percent in And this was true + despite numerous + +On line 8704: + percent in And this + was true despite numerous + government and bank + +On line 8706: + orts to prevent or + delay foreclosures. All the + foregoing data + +On line 8706: + delay foreclosures. + All the foregoing data + is signifi cant for + +On line 8706: + signifi cant for a + proper analysis of the + role of government + +On line 8706: + proper analysis + of the role of government + policy and NTMs + +On line 8706: + role of government + policy and NTMs in the + fi nancial crisis. + +On line 8706: + policy and NTMs + in the fi nancial crisis. + What it suggests is + +On line 8706: + in the fi nancial + crisis. What it suggests is + that whatever eff + +On line 8706: + What it suggests is + that whatever eff ect low + interest rates or + +On line 8706: + is that whatever + eff ect low interest rates + or money fl ows + +On line 8706: + that whatever eff + ect low interest rates or + money fl ows from + +On line 8706: + ect low interest + rates or money fl ows from + abroad might have had in + +On line 8706: + rates or money fl + ows from abroad might have had in + creating the great + +On line 8706: + ows from abroad might have + had in creating the great + U.S. housing bubble, + +On line 8706: + from abroad might have had + in creating the great U.S. + housing bubble, the + +On line 8706: + had in creating + the great U.S. housing bubble, + the defl ation of + +On line 8706: + in creating the + great U.S. housing bubble, the + defl ation of that + +On line 8706: + the great U.S. housing + bubble, the defl ation of + that bubble need not + +On line 8706: + bubble, the defl + ation of that bubble need not + have been destructive. + +On line 8706: + ation of that bubble + need not have been destructive. + It wasn’t just the + +On line 8706: + of that bubble need + not have been destructive. It + wasn’t just the size + +On line 8706: + bubble need not have + been destructive. It wasn’t + just the size of the + +On line 8706: + have been destructive. + It wasn’t just the size of + the bubble; it was + +On line 8706: + It wasn’t just the + size of the bubble; it was + also the content. + +On line 8708: + the bubble; it was + also the content. Th e + enormous delinquency + +On line 8708: + also the content. + Th e enormous delinquency + rates in the U.S. (see + +On line 8708: + the content. Th e + enormous delinquency rates in + the U.S. (see Table + +On line 8708: + delinquency rates in + the U.S. (see Table below) + were not replicated + +On line 8708: + developed countries + did not have the numbers of + NTMs that were present in + +On line 8708: + countries did not have + the numbers of NTMs that were + present in the U.S. fi + +On line 8708: + have the numbers of + NTMs that were present in the U.S. + fi nancial system + +On line 8708: + the numbers of NTMs + that were present in the U.S. fi + nancial system when + +On line 8708: + that were present in the + U.S. fi nancial system when + the bubble defl + +On line 8710: + nancial system when + the bubble defl ated. + As shown in later + +On line 8710: + As shown in later + sections of this dissent, these + mortgage defaults were + +On line 8710: + these mortgage defaults + were translated into huge + housing price declines + +On line 8710: + translated into + huge housing price declines and + from there—through the PMBS they + +On line 8710: + from there—through the PMBS they + were holding—into actual + or apparent fi + +On line 8710: + they were holding—into + actual or apparent + fi nancial weakness + +On line 8710: + or apparent fi + nancial weakness in the banks + and other fi rms + +On line 8710: + weakness in the banks + and other fi rms that held + these securities. + +On line 8712: + and other fi rms + that held these securities. + Accordingly, if + +On line 8712: + these securities. + Accordingly, if the 1997-2007 + housing bubble had + +On line 8712: + Accordingly, if + the 1997-2007 housing bubble had + not been seeded with + +On line 8712: + been seeded with an + unprecedented number of + NTMs, it is likely + +On line 8712: + it is likely that + the fi nancial crisis would + never have occurred. + +On line 8718: + government adopted + aff ordable housing policies, + mortgages of this kind + +On line 8718: + mortgages of this kind + constituted only a + small portion of all + +On line 8718: + kind constituted + only a small portion of + all housing loans in + +On line 8720: + a conventional + mortgage—generally had + a fi xed rate, oft + +On line 8720: + fi xed rate, oft en + for or years, a downpayment + of to percent, and + +On line 8720: + xed rate, oft en for + or years, a downpayment of + to percent, and was + +On line 8720: + rate, oft en for or + years, a downpayment of to + percent, and was made + +On line 8720: + en for or years, a + downpayment of to percent, + and was made to a + +On line 8720: + years, a downpayment + of to percent, and was made + to a borrower + +On line 8720: + a downpayment of + to percent, and was made to + a borrower who + +On line 8720: + downpayment of to + percent, and was made to a + borrower who had + +On line 8720: + of to percent, and + was made to a borrower + who had a job, a + +On line 8720: + to percent, and was + made to a borrower who + had a job, a steady + +On line 8720: + and was made to a + borrower who had a job, + a steady income and + +On line 8720: + a borrower who + had a job, a steady income + and a good credit + +On line 8720: + borrower who had + a job, a steady income and + a good credit record. + +On line 8720: + had a job, a steady + income and a good credit + record. Before the GSE + +On line 8720: + steady income and a + good credit record. Before the + GSE Act, even subprime + +On line 8720: + income and a good + credit record. Before the GSE + Act, even subprime loans, + +On line 8720: + and a good credit + record. Before the GSE Act, even + subprime loans, although + +On line 8720: + record. Before the GSE + Act, even subprime loans, although + made to borrowers + +On line 8720: + Before the GSE Act, + even subprime loans, although made + to borrowers with + +On line 8720: + Act, even subprime loans, + although made to borrowers + with impaired credit, + +On line 8720: + made to borrowers + with impaired credit, oft en + involved substantial + +On line 8720: + involved substantial + downpayments or existing + equity in homes.27 + +On line 8722: + equity in homes.27 + Table shows the delinquency + rates of the NTMs that + +On line 8722: + homes.27 Table shows the + delinquency rates of the NTMs + that were outstanding + +On line 8724: + delinquency rates of + the NTMs that were outstanding + on June Th e grayed + +On line 8724: + rates of the NTMs that + were outstanding on June Th + e grayed area contains + +On line 8724: + were outstanding on + June Th e grayed area contains + virtually all + +On line 8726: + on June Th e grayed + area contains virtually + all the NTMs. Th e + +On line 8726: + e grayed area contains + virtually all the NTMs. + Th e contrast in + +On line 8728: + virtually all + the NTMs. Th e contrast in + quality, based on + +On line 8728: + all the NTMs. Th e + contrast in quality, based + on delinquency rates, + +On line 8728: + in quality, based + on delinquency rates, between + these loans and Fannie + +On line 8728: + quality, based on + delinquency rates, between these + loans and Fannie and + +On line 8728: + on delinquency rates, + between these loans and Fannie + and Freddie prime loans + +On line 8728: + rates, between these loans + and Fannie and Freddie prime + loans in lines and is + +On line 8728: + between these loans and + Fannie and Freddie prime loans + in lines and is clear. + +On line 8730: + these loans and Fannie + and Freddie prime loans in lines + and is clear. Mortgage + +On line 8730: + loans and Fannie and + Freddie prime loans in lines and + is clear. Mortgage Bankers + +On line 8730: + Freddie prime loans in + lines and is clear. Mortgage Bankers + Association + +On line 8732: + Survey. See Pinto, + "Government Housing Policies + in the Lead-Up to the + +On line 8732: + Pinto, "Government + Housing Policies in the Lead-Up + to the Financial + +On line 8732: + "Government Housing + Policies in the Lead-Up to the + Financial Crisis: + +On line 8732: + Housing Policies in + the Lead-Up to the Financial + Crisis: A Forensic + +On line 8742: + November p.58, http://www.aei.org/docLib/Government-Housing-Policies-Financial-Crisis-Pinto-102110.pdf. + Id., p.42. Dissenting Statement + Table Delinquency + +On line 8742: + Dissenting Statement + Table Delinquency rates on + nontraditional + +On line 8750: + Delinquency Rate Days + and in Foreclosure) High Rate + Subprime (including + +On line 8758: + (including Fannie/ + million Freddie private MBS + holdings) Option Arm + +On line 8766: + Freddie private MBS + holdings) Option Arm million + Alt-A (inc. Fannie/Freddie/FHLBs million† + +On line 8768: + private MBS holdings) + Option Arm million Alt-A (inc. + Fannie/Freddie/FHLBs million† private + +On line 8768: + holdings) Option Arm + million Alt-A (inc. Fannie/Freddie/FHLBs million† + private MBS holdings) + +On line 8770: + Option Arm million + Alt-A (inc. Fannie/Freddie/FHLBs million† private + MBS holdings) Fannie + +On line 8772: + million Alt-A (inc. Fannie/Freddie/FHLBs + million† private MBS holdings) + Fannie Subprime/Atl-A/Nonprime million + +On line 8776: + Alt-A (inc. Fannie/Freddie/FHLBs million† + private MBS holdings) Fannie + Subprime/Atl-A/Nonprime million Freddie + +On line 8778: + million† private MBS + holdings) Fannie Subprime/Atl-A/Nonprime million + Freddie Subprime/Alt-A/Nonprime million + +On line 8784: + holdings) Fannie Subprime/Atl-A/Nonprime + million Freddie Subprime/Alt-A/Nonprime million + Government million + +On line 8792: + Freddie Subprime/Alt-A/Nonprime million + Government million Subtotal + of Loans million Non-Agency + +On line 8794: + Government million + Subtotal of Loans million Non-Agency + Jumbo Prime million + +On line 8808: + Jumbo Prime million + Non-Agency Conforming Prime Fannie + Prime million Freddie + +On line 8814: + Non-Agency Conforming Prime + Fannie Prime million Freddie + Prime million Total + +On line 8818: + Prime million Freddie + Prime million Total of Loans + million Includes an + +On line 8818: + Loans million Includes + an estimated million + subprime (FICO<660) that + +On line 8818: + an estimated + million subprime (FICO<660) that + were (i) not high rate + +On line 8818: + subprime (FICO<660) that + were (i) not high rate and (ii) + non-prime CRA and HUD Best + +On line 8818: + (FICO<660) that were (i) + not high rate and (ii) non-prime CRA + and HUD Best Practices + +On line 8818: + were (i) not high rate + and (ii) non-prime CRA and HUD Best + Practices Initiative + +On line 8818: + not high rate and (ii) + non-prime CRA and HUD Best Practices + Initiative loans. Th + +On line 8820: + non-prime CRA and HUD Best + Practices Initiative loans. Th + ese are included + +On line 8820: + and HUD Best Practices + Initiative loans. Th ese are + included in the + +On line 8820: + Practices Initiative + loans. Th ese are included + in the "CRA and HUD + +On line 8820: + Initiative loans. Th + ese are included in the + "CRA and HUD Programs" + +On line 8824: + are included in + the "CRA and HUD Programs" line + in Table Excludes + +On line 8826: + and HUD Programs" line + in Table Excludes Fannie + subprime/Alt-A/nonprime. Excludes Freddie + +On line 8826: + HUD Programs" line in + Table Excludes Fannie subprime/Alt-A/nonprime. + Excludes Freddie subprime/Alt-A/nonprime. + +On line 8828: + in Table Excludes + Fannie subprime/Alt-A/nonprime. Excludes Freddie + subprime/Alt-A/nonprime. Excludes loans owned + +On line 8828: + Fannie subprime/Alt-A/nonprime. Excludes + Freddie subprime/Alt-A/nonprime. Excludes loans owned + or securitized + +On line 8832: + and conforming prime + counted together. Total + delinquency data + +On line 8834: + counted together. + Total delinquency data + sources: Lender Processing + +On line 8834: + together. Total + delinquency data sources: Lender + Processing Services, + +On line 8834: + Total delinquency + data sources: Lender Processing + Services, LPS Mortgage + +On line 8836: + Processing Services, + LPS Mortgage Monitor, June + Based on Fannie Mae + +On line 8836: + Mortgage Monitor, + June Based on Fannie Mae 2Q + Credit Supplement. + +On line 8836: + June Based on Fannie + Mae 2Q Credit Supplement. + Converted from a + +On line 8836: + Converted from a + serious delinquency rate + days in foreclosure) + +On line 8836: + in foreclosure) to + an estimated Total + Delinquency Rate days + +On line 8836: + an estimated + Total Delinquency Rate days + and in foreclosure). + +On line 8838: + Total Delinquency + Rate days and in foreclosure). + Based on Freddie Mac + +On line 8838: + foreclosure). Based on + Freddie Mac 2Q Financial + Results Supplement. + +On line 8838: + Converted from a + serious delinquency rate + days in foreclosure) + +On line 8838: + in foreclosure) to + an estimated Total + Delinquency Rate days + +On line 8838: + an estimated + Total Delinquency Rate days + and in foreclosure). + +On line 8840: + Total Delinquency + Rate days and in foreclosure). + The Origin and Growth + +On line 8842: + in foreclosure). The + Origin and Growth of Subprime + PMBS It was only + +On line 8842: + Origin and Growth of + Subprime PMBS It was only + in that the market + +On line 8842: + Growth of Subprime PMBS + It was only in that the + market for subprime + +On line 8842: + Subprime PMBS It was + only in that the market + for subprime PMBS—that is + +On line 8842: + was only in that + the market for subprime PMBS—that + is private mortgage-backed + +On line 8842: + securities backed + by subprime loans or other + NTMs—reached billion. In that + +On line 8842: + backed by subprime loans + or other NTMs—reached billion. In + that year, the top fi + +On line 8842: + by subprime loans or + other NTMs—reached billion. In that + year, the top fi ve + +On line 8842: + loans or other NTMs—reached + billion. In that year, the top + fi ve issuers were + +On line 8842: + other NTMs—reached billion. + In that year, the top fi ve + issuers were GMAC-RFC + +On line 8842: + NTMs—reached billion. In that + year, the top fi ve issuers + were GMAC-RFC billion), + +On line 8842: + billion. In that year, + the top fi ve issuers were + GMAC-RFC billion), Lehman + +On line 8842: + In that year, the top + fi ve issuers were GMAC-RFC + billion), Lehman billion), + +On line 8842: + year, the top fi ve + issuers were GMAC-RFC billion), + Lehman billion), CS First + +On line 8842: + issuers were GMAC-RFC + billion), Lehman billion), CS First + Boston billion), Bank + +On line 8844: + First Boston billion), + Bank of America billion) + and Ameriquest billion).29 Th + +On line 8846: + Boston billion), Bank + of America billion) and + Ameriquest billion).29 Th e + +On line 8846: + Bank of America + billion) and Ameriquest billion).29 Th + e issuances of PMBS + +On line 8848: + and Ameriquest billion).29 Th + e issuances of PMBS that year + totaled billion, of + +On line 8848: + Th e issuances of + PMBS that year totaled billion, + of which billion in + +On line 8848: + e issuances of PMBS + that year totaled billion, of + which billion in PMBS + +On line 8848: + issuances of PMBS that + year totaled billion, of which + billion in PMBS were + +On line 8848: + PMBS that year totaled + billion, of which billion in + PMBS were issued by + +On line 8848: + year totaled billion, + of which billion in PMBS were + issued by Wall Street + +On line 8848: + issued by Wall Street + fi nancial institutions. + In subsequent years, + +On line 8848: + In subsequent years, + as the market grew, Wall Street + institutions fell + +On line 8848: + as the market grew, + Wall Street institutions fell + behind the major + +On line 8848: + market grew, Wall Street + institutions fell behind + the major subprime + +On line 8848: + institutions fell + behind the major subprime + issuers, so that by + +On line 8848: + behind the major + subprime issuers, so that by + 2005—the biggest year for + +On line 8848: + issuers, so that by + 2005—the biggest year for subprime + PMBS issuance—only Lehman + +On line 8848: + by 2005—the biggest year + for subprime PMBS issuance—only + Lehman was among the top + +On line 8848: + 2005—the biggest year for + subprime PMBS issuance—only Lehman + was among the top fi + +On line 8848: + year for subprime PMBS + issuance—only Lehman was among the + top fi ve issuers + +On line 8848: + issuance—only Lehman was + among the top fi ve issuers + and Wall Street issuers + +On line 8848: + Lehman was among the top + fi ve issuers and Wall Street + issuers as a group + +On line 8848: + fi ve issuers and + Wall Street issuers as a group + were only percent + +On line 8848: + ve issuers and Wall + Street issuers as a group were + only percent of + +On line 8848: + Wall Street issuers as + a group were only percent + of the billion in + +On line 8848: + issuers as a group + were only percent of the + billion in total + +On line 8848: + a group were only + percent of the billion in + total PMBS issuance + +On line 8848: + were only percent + of the billion in total + PMBS issuance in that + +On line 8848: + only percent of + the billion in total PMBS + issuance in that year.30 + +On line 8854: + that year.30 Id., Figure + Inside Mortgage Finance, Th + e Mortgage Market + +On line 8860: + e Mortgage Market + Statistical Annual—Vol. II, p143. + Id., p.140. Peter J. + +On line 8864: + Statistical Annual—Vol. + II, p143. Id., p.140. Peter J. + Wallison One of + +On line 8864: + Annual—Vol. II, p143. Id., p.140. + Peter J. Wallison One + of the many myths about + +On line 8864: + p143. Id., p.140. Peter + J. Wallison One of the + many myths about the fi + +On line 8864: + J. Wallison One + of the many myths about the fi + nancial crisis is + +On line 8864: + One of the many myths + about the fi nancial crisis + is that Wall Street banks + +On line 8864: + of the many myths about + the fi nancial crisis is + that Wall Street banks led + +On line 8864: + the many myths about the + fi nancial crisis is that + Wall Street banks led the + +On line 8864: + many myths about the fi + nancial crisis is that Wall + Street banks led the way + +On line 8864: + about the fi nancial + crisis is that Wall Street banks + led the way into + +On line 8864: + fi nancial crisis + is that Wall Street banks led the + way into subprime + +On line 8864: + crisis is that Wall + Street banks led the way into + subprime lending and + +On line 8864: + is that Wall Street banks + led the way into subprime + lending and the GSEs + +On line 8864: + Wall Street banks led the + way into subprime lending + and the GSEs followed. + +On line 8864: + Street banks led the way + into subprime lending and + the GSEs followed. Th + +On line 8864: + way into subprime + lending and the GSEs followed. + Th e Commission + +On line 8866: + GSEs followed. Th e + Commission majority’s + report adopts this idea + +On line 8866: + Th e Commission + majority’s report adopts + this idea as a way + +On line 8866: + this idea as a way + of explaining why Fannie + and Freddie acquired + +On line 8866: + idea as a way of + explaining why Fannie and + Freddie acquired so + +On line 8868: + of explaining why + Fannie and Freddie acquired + so many NTMs. Th is + +On line 8868: + Fannie and Freddie + acquired so many NTMs. Th is + notion simply does + +On line 8868: + and Freddie acquired + so many NTMs. Th is notion + simply does not align + +On line 8868: + acquired so many NTMs. + Th is notion simply does + not align with the facts. + +On line 8868: + NTMs. Th is notion + simply does not align with the + facts. Not only were + +On line 8868: + is notion simply + does not align with the facts. Not + only were Wall Street + +On line 8868: + does not align with the + facts. Not only were Wall Street + institutions small + +On line 8868: + the facts. Not only + were Wall Street institutions + small factors in the + +On line 8868: + only were Wall Street + institutions small factors + in the subprime PMBS + +On line 8868: + Street institutions + small factors in the subprime + PMBS market, but well + +On line 8868: + small factors in the + subprime PMBS market, but well + before Fannie and + +On line 8868: + much bigger players + than the entire PMBS market + in the business of + +On line 8868: + than the entire PMBS + market in the business of + acquiring NTM and + +On line 8868: + PMBS market in the + business of acquiring NTM + and other subprime + +On line 8868: + in the business of + acquiring NTM and other + subprime loans. Table + +On line 8868: + acquiring NTM and + other subprime loans. Table + page shows that Fannie + +On line 8868: + loans. Table page shows + that Fannie and Freddie had + already acquired at + +On line 8868: + shows that Fannie and + Freddie had already acquired + at least billion in + +On line 8868: + Fannie and Freddie + had already acquired at least + billion in NTMs by + +On line 8868: + had already acquired + at least billion in NTMs by + Obviously, the + +On line 8868: + at least billion in + NTMs by Obviously, the + GSEs did not have to + +On line 8868: + billion in NTMs by + Obviously, the GSEs did + not have to follow + +On line 8868: + Obviously, the + GSEs did not have to follow + anyone into NTM + +On line 8868: + GSEs did not have to + follow anyone into NTM + or subprime lending; + +On line 8868: + that market before + Table also shows that in + when the entire PMBS + +On line 8868: + Table also shows + that in when the entire PMBS + market was billion, + +On line 8868: + also shows that in + when the entire PMBS market + was billion, Fannie + +On line 8868: + when the entire PMBS + market was billion, Fannie + and Freddie acquired + +On line 8868: + billion, Fannie and + Freddie acquired billion in + whole subprime mortgages + +On line 8868: + whole subprime mortgages + and billion in other NTMs, + demonstrating again that + +On line 8868: + mortgages and billion + in other NTMs, demonstrating + again that the GSEs were + +On line 8868: + billion in other + NTMs, demonstrating again that the + GSEs were no strangers to + +On line 8868: + demonstrating again that + the GSEs were no strangers to risky + lending well before + +On line 8868: + GSEs were no strangers to + risky lending well before the + PMBS market began + +On line 8868: + were no strangers to risky + lending well before the PMBS + market began to + +On line 8870: + lending well before + the PMBS market began to + develop. Further + +On line 8870: + develop. Further + evidence about which fi rms + were fi rst into + +On line 8870: + Further evidence + about which fi rms were fi rst + into subprime or + +On line 8870: + into subprime or + NTM lending is provided + by Fannie’s 10-K. Th + +On line 8872: + or NTM lending is + provided by Fannie’s 10-K. + Th is disclosure + +On line 8872: + by Fannie’s 10-K. Th + is disclosure document + reports that percent + +On line 8874: + percent of Fannie’s + credit obligations (either + in portfolio or + +On line 8874: + or guaranteed) had + FICO credit scores below + as of December + +On line 8874: + FICO credit scores + below as of December + percent at the end + +On line 8874: + credit scores below + as of December percent + at the end of and + +On line 8874: + scores below as of + December percent at the + end of and percent + +On line 8874: + as of December + percent at the end of and + percent at the end + +On line 8874: + December percent + at the end of and percent + at the end of So + +On line 8874: + percent at the end + of and percent at the end + of So Fannie and + +On line 8874: + at the end of and + percent at the end of So + Fannie and Freddie + +On line 8874: + of and percent at + the end of So Fannie and + Freddie were active + +On line 8874: + end of So Fannie + and Freddie were active and + major buyers of + +On line 8874: + and major buyers + of subprime loans in years when + the PMBS market had + +On line 8874: + of subprime loans in + years when the PMBS market had + total issuances of + +On line 8874: + in years when the PMBS + market had total issuances + of only billion + +On line 8874: + the PMBS market had + total issuances of only + billion and billion + +On line 8874: + total issuances of + only billion and billion + In other words, it + +On line 8874: + billion and billion + In other words, it would be + more accurate to + +On line 8874: + other words, it would + be more accurate to say + that Wall Street followed + +On line 8874: + words, it would be more + accurate to say that Wall + Street followed Fannie + +On line 8874: + be more accurate + to say that Wall Street followed + Fannie and Freddie + +On line 8874: + accurate to say + that Wall Street followed Fannie + and Freddie into + +On line 8874: + that Wall Street followed + Fannie and Freddie into + subprime lending rather + +On line 8874: + Street followed Fannie + and Freddie into subprime + lending rather than vice + +On line 8874: + Fannie and Freddie + into subprime lending rather + than vice versa. At + +On line 8874: + and Freddie into + subprime lending rather than vice + versa. At the same + +On line 8874: + lending rather than vice + versa. At the same time, the + GSEs’ purchases of + +On line 8874: + vice versa. At the + same time, the GSEs’ purchases + of subprime whole loans + +On line 8874: + At the same time, the + GSEs’ purchases of subprime + whole loans throughout the + +On line 8874: + the same time, the GSEs’ + purchases of subprime whole + loans throughout the 1990s + +On line 8874: + GSEs’ purchases of + subprime whole loans throughout the + 1990s stimulated + +On line 8874: + loans throughout the 1990s + stimulated the growth of + the subprime lending + +On line 8874: + lending industry, + which ultimately became + the mainstay of the + +On line 8874: + which ultimately + became the mainstay of the + subprime PMBS market + +On line 8876: + became the mainstay + of the subprime PMBS market + in the 2000s. was the + +On line 8876: + the mainstay of the + subprime PMBS market in the + 2000s. was the biggest + +On line 8876: + of the subprime PMBS + market in the 2000s. was the + biggest year for PMBS + +On line 8876: + subprime PMBS market + in the 2000s. was the biggest + year for PMBS subprime + +On line 8876: + PMBS market in the + 2000s. was the biggest year for + PMBS subprime issuances, + +On line 8876: + market in the 2000s. + was the biggest year for PMBS + subprime issuances, and + +On line 8876: + 2000s. was the biggest + year for PMBS subprime issuances, + and Ameriquest billion) and + +On line 8876: + year for PMBS subprime + issuances, and Ameriquest billion) and + Countrywide billion) + +On line 8876: + subprime issuances, and + Ameriquest billion) and Countrywide + billion) were the two + +On line 8876: + and Ameriquest billion) and + Countrywide billion) were the + two largest issuers in + +On line 8878: + billion) were the two + largest issuers in the top Th + ese numbers were still + +On line 8878: + largest issuers in the + top Th ese numbers were still + small in relation + +On line 8878: + issuers in the top + Th ese numbers were still small + in relation to + +On line 8878: + top Th ese numbers + were still small in relation + to what Fannie and + +On line 8878: + ese numbers were still + small in relation to what + Fannie and Freddie + +On line 8878: + small in relation + to what Fannie and Freddie + had been buying since + +On line 8878: + relation to what + Fannie and Freddie had been + buying since data + +On line 8878: + Fannie and Freddie + had been buying since data + became available in + +On line 8880: + and Freddie had been + buying since data became + available in Th e + +On line 8880: + had been buying since + data became available in + Th e total in + +On line 8880: + buying since data + became available in Th e + total in Table + +On line 8882: + in Th e total + in Table for Fannie and + Freddie between and + +On line 8882: + Table for Fannie + and Freddie between and is + approximately + +On line 8882: + and Freddie between + and is approximately + trillion for subprime + +On line 8882: + approximately + trillion for subprime loans and + over trillion for all + +On line 8884: + subprime loans and over + trillion for all NTMs as a + group. Because subprime + +On line 8884: + and over trillion for + all NTMs as a group. Because + subprime PMBS were rich + +On line 8884: + trillion for all NTMs + as a group. Because subprime + PMBS were rich in NTM + +On line 8884: + as a group. Because + subprime PMBS were rich in NTM + loans eligible + +On line 8884: + subprime PMBS were rich + in NTM loans eligible + for credit under + +On line 8884: + were rich in NTM loans + eligible for credit + under HUD’s AH goals, + +On line 8884: + eligible for + credit under HUD’s AH goals, + Fannie and Freddie + +On line 8884: + credit under HUD’s + AH goals, Fannie and Freddie + were also the largest + +On line 8884: + AH goals, Fannie and + Freddie were also the largest + individual + +On line 8884: + Freddie were also + the largest individual + purchasers of subprime + +On line 8884: + were also the largest + individual purchasers + of subprime PMBS from + +On line 8884: + of subprime PMBS from + to acquiring percent of + the total issuances, + +On line 8884: + subprime PMBS from to + acquiring percent of the + total issuances, or + +On line 8884: + acquiring percent + of the total issuances, or + billion.32 In Table + +On line 8884: + total issuances, or + billion.32 In Table above, which + organizes mortgages + +On line 8884: + billion.32 In Table + above, which organizes mortgages + by delinquency rate, + +On line 8884: + above, which organizes + mortgages by delinquency rate, + these purchases are + +On line 8884: + delinquency rate, these + purchases are included + in line which had the + +On line 8884: + rate, these purchases + are included in line which + had the highest rate + +On line 8884: + these purchases are + included in line which had + the highest rate of + +On line 8886: + are included in + line which had the highest rate + of delinquency. Th + +On line 8888: + included in line + which had the highest rate of + delinquency. Th ese + +On line 8888: + subprime—designated + as subprime by the lender when + originated—and thus had + +On line 8888: + as subprime by the + lender when originated—and thus had + low FICO scores and + +On line 8888: + had low FICO scores + and usually a higher + interest rate than + +On line 8888: + and usually a + higher interest rate than + prime loans; many also + +On line 8888: + higher interest + rate than prime loans; many also + had low downpayments + +On line 8888: + interest rate than + prime loans; many also had low + downpayments and were + +On line 8888: + rate than prime loans; many + also had low downpayments + and were subject to + +On line 8888: + prime loans; many also + had low downpayments and were + subject to other + +On line 8888: + many also had low + downpayments and were subject + to other defi + +On line 8890: + were responsible + for both the poor quality + of the subprime and + +On line 8890: + responsible for + both the poor quality of + the subprime and Alt-A + +On line 8890: + poor quality of + the subprime and Alt-A mortgages + that backed the PMBS and + +On line 8890: + quality of the + subprime and Alt-A mortgages that + backed the PMBS and for + +On line 8890: + of the subprime and + Alt-A mortgages that backed the PMBS + and for the enormous + +On line 8890: + the subprime and Alt-A + mortgages that backed the PMBS and + for the enormous size + +On line 8890: + mortgages that backed the + PMBS and for the enormous size + to which this market + +On line 8890: + that backed the PMBS and + for the enormous size to which + this market grew. Th + +On line 8892: + backed the PMBS and for + the enormous size to which this + market grew. Th is + +On line 8892: + and for the enormous + size to which this market grew. + Th is was true not + +On line 8892: + the enormous size to + which this market grew. Th is + was true not only + +On line 8892: + which this market grew. + Th is was true not only + because Fannie and + +On line 8892: + market grew. Th is + was true not only because + Fannie and Freddie + +On line 8894: + Th is was true not + only because Fannie and + Freddie 10-K, Table + +On line 8894: + was true not only + because Fannie and Freddie + 10-K, Table p.84 http://www.sec.gov/Archives/edgar/data/310522/000095013303001151/ + +On line 8898: + because Fannie and + Freddie 10-K, Table p.84 http://www.sec.gov/Archives/edgar/data/310522/000095013303001151/ + w84239e10vk.htm#031. See Table of + +On line 8898: + Fannie and Freddie + 10-K, Table p.84 http://www.sec.gov/Archives/edgar/data/310522/000095013303001151/ w84239e10vk.htm#031. See + Table of "High LTV, + +On line 8898: + Freddie 10-K, Table + p.84 http://www.sec.gov/Archives/edgar/data/310522/000095013303001151/ w84239e10vk.htm#031. See Table of + "High LTV, Subprime and + +On line 8898: + http://www.sec.gov/Archives/edgar/data/310522/000095013303001151/ w84239e10vk.htm#031. See Table + of "High LTV, Subprime and Alt-A + Originations Over + +On line 8898: + of "High LTV, Subprime + and Alt-A Originations Over + the Period 1992-2007 + +On line 8898: + "High LTV, Subprime and + Alt-A Originations Over the + Period 1992-2007 and + +On line 8898: + Alt-A Originations + Over the Period 1992-2007 and + Fannie, Freddie, FHA + +On line 8898: + Over the Period + 1992-2007 and Fannie, Freddie, FHA + and VA’s Role" found at + +On line 8898: + the Period 1992-2007 + and Fannie, Freddie, FHA and + VA’s Role" found at http://www.aei.org/docLib/Pinto-High-LTV-Subprime-Alt-A.pdf. + +On line 8904: + and Fannie, Freddie, + FHA and VA’s Role" found at http://www.aei.org/docLib/Pinto-High-LTV-Subprime-Alt-A.pdf. + Dissenting Statement + +On line 8906: + FHA and VA’s Role" found + at http://www.aei.org/docLib/Pinto-High-LTV-Subprime-Alt-A.pdf. Dissenting Statement + stimulated the + +On line 8906: + at http://www.aei.org/docLib/Pinto-High-LTV-Subprime-Alt-A.pdf. Dissenting + Statement stimulated the + growth of that market + +On line 8906: + Dissenting Statement + stimulated the growth of + that market through their + +On line 8906: + stimulated the + growth of that market through their + purchases of PMBS, + +On line 8906: + growth of that market + through their purchases of PMBS, + but also because + +On line 8906: + of that market through + their purchases of PMBS, but + also because the + +On line 8906: + through their purchases + of PMBS, but also because + the huge infl ow + +On line 8906: + their purchases of + PMBS, but also because the + huge infl ow of + +On line 8906: + of PMBS, but also + because the huge infl ow + of government or + +On line 8906: + of government or + government-directed funds + into the housing + +On line 8906: + into the housing + market turned what would have been + a normal housing + +On line 8906: + market turned what would + have been a normal housing + bubble into a + +On line 8906: + turned what would have been + a normal housing bubble + into a bubble + +On line 8906: + a normal housing + bubble into a bubble + of unprecedented + +On line 8906: + bubble into a + bubble of unprecedented + size and duration. + +On line 8908: + into a bubble + of unprecedented size and + duration. Th is + +On line 8910: + and duration. Th + is encouraged and enabled + unprecedented growth + +On line 8910: + is encouraged and + enabled unprecedented growth + in the PMBS market + +On line 8912: + the PMBS market in + two ways. First, the gradual + increase of the AH + +On line 8912: + market in two ways. + First, the gradual increase + of the AH goals, the + +On line 8912: + of the AH goals, the + competition between the + GSEs and the FHA, the + +On line 8912: + the competition + between the GSEs and the FHA, + the eff ect of HUD’s + +On line 8912: + GSEs and the FHA, the + eff ect of HUD’s Best Practices + Initiative, and bank + +On line 8912: + the eff ect of HUD’s + Best Practices Initiative, and + bank lending under + +On line 8912: + eff ect of HUD’s Best + Practices Initiative, and bank + lending under the + +On line 8912: + the CRA, assured a + continuing fl ow of + funds into weaker + +On line 8912: + continuing fl + ow of funds into weaker + and weaker mortgages. + +On line 8916: + ow of funds into + weaker and weaker mortgages. + Th is had the eff + +On line 8916: + funds into weaker + and weaker mortgages. Th is + had the eff ect of + +On line 8916: + weaker and weaker + mortgages. Th is had the eff + ect of extending + +On line 8916: + and weaker mortgages. + Th is had the eff ect of + extending the life + +On line 8916: + is had the eff ect + of extending the life of + the housing bubble + +On line 8916: + had the eff ect of + extending the life of the + housing bubble as + +On line 8916: + extending the life + of the housing bubble as + well as increasing + +On line 8918: + the housing bubble + as well as increasing its + size. Th e growth of + +On line 8918: + housing bubble as + well as increasing its size. + Th e growth of the + +On line 8918: + bubble as well as + increasing its size. Th e + growth of the bubble + +On line 8918: + increasing its size. + Th e growth of the bubble + in turn disguised the + +On line 8918: + size. Th e growth of + the bubble in turn disguised + the weakness of the + +On line 8918: + of the bubble in + turn disguised the weakness of + the subprime mortgages + +On line 8918: + the bubble in turn + disguised the weakness of the + subprime mortgages it + +On line 8918: + disguised the weakness + of the subprime mortgages it + contained; as housing + +On line 8918: + the weakness of the + subprime mortgages it contained; + as housing prices rose, + +On line 8918: + subprime mortgages it + contained; as housing prices rose, + subprime borrowers + +On line 8918: + mortgages it contained; + as housing prices rose, subprime + borrowers who might + +On line 8918: + contained; as housing + prices rose, subprime borrowers + who might otherwise + +On line 8918: + borrowers who might + otherwise have defaulted + were able to refi + +On line 8918: + were able to refi + nance their mortgages, using the + equity that had + +On line 8918: + the equity that + had developed in their homes + solely through rising + +On line 8918: + had developed in + their homes solely through rising + home prices. Without the + +On line 8918: + in their homes solely + through rising home prices. Without + the continuous + +On line 8918: + home prices. Without the + continuous infusion + of government or + +On line 8918: + have begun showing + up within a year or two, + bringing the subprime + +On line 8918: + showing up within + a year or two, bringing the + subprime PMBS market + +On line 8918: + up within a year + or two, bringing the subprime + PMBS market to a + +On line 8918: + within a year or + two, bringing the subprime PMBS + market to a halt. + +On line 8918: + year or two, bringing + the subprime PMBS market to + a halt. Instead, the + +On line 8918: + market to a halt. + Instead, the bubble lasted + ten years, permitting + +On line 8918: + Instead, the bubble + lasted ten years, permitting + that market to grow + +On line 8918: + bubble lasted ten + years, permitting that market + to grow until it + +On line 8918: + years, permitting that + market to grow until it + reached almost trillion. + +On line 8920: + to grow until it + reached almost trillion. Second, + as housing prices rose + +On line 8920: + grow until it reached + almost trillion. Second, as + housing prices rose in + +On line 8920: + reached almost trillion. + Second, as housing prices rose + in the bubble, it + +On line 8920: + Second, as housing + prices rose in the bubble, it + was necessary for + +On line 8920: + was necessary for + borrowers to seek riskier + mortgages so they could + +On line 8920: + borrowers to seek + riskier mortgages so they could + aff ord the monthly + +On line 8920: + mortgages so they could + aff ord the monthly payments + on more expensive + +On line 8920: + so they could aff ord + the monthly payments on more + expensive homes. Th + +On line 8922: + aff ord the monthly + payments on more expensive + homes. Th is gave rise + +On line 8922: + the monthly payments + on more expensive homes. Th + is gave rise to new + +On line 8922: + monthly payments on + more expensive homes. Th is + gave rise to new and + +On line 8922: + on more expensive + homes. Th is gave rise to new + and riskier forms of + +On line 8922: + homes. Th is gave rise + to new and riskier forms of + mortgage debt, such as + +On line 8922: + is gave rise to new + and riskier forms of mortgage + debt, such as option + +On line 8922: + gave rise to new and + riskier forms of mortgage debt, + such as option ARMs + +On line 8922: + and riskier forms of + mortgage debt, such as option + ARMs (resulting in + +On line 8922: + such as option ARMs + (resulting in negative + amortization) and + +On line 8922: + ARMs (resulting in + negative amortization) + and interest-only + +On line 8922: + and interest-only + mortgages. Mortgages of this kind + could be suitable for + +On line 8922: + mortgages. Mortgages of + this kind could be suitable for + some borrowers, but + +On line 8922: + of this kind could be + suitable for some borrowers, + but not for those who + +On line 8922: + could be suitable for + some borrowers, but not for + those who were only + +On line 8922: + some borrowers, but + not for those who were only + eligible for + +On line 8922: + those who were only + eligible for subprime + loans. Nevertheless, + +On line 8922: + loans. Nevertheless, + subprime loans were necessary + for PMBS, because they + +On line 8922: + for PMBS, because they + generally bore higher + interest rates and + +On line 8922: + they generally + bore higher interest rates + and thus could support + +On line 8922: + generally bore + higher interest rates and + thus could support the + +On line 8922: + higher interest + rates and thus could support the + yields that investors were + +On line 8922: + could support the yields + that investors were expecting. + As subprime loans were + +On line 8922: + yields that investors were + expecting. As subprime loans + were originated, + +On line 8922: + As subprime loans were + originated, Fannie and + Freddie were willing + +On line 8922: + Fannie and Freddie + were willing consumers of those + that might meet the AH + +On line 8922: + Freddie were willing + consumers of those that might meet + the AH goals; moreover, + +On line 8922: + were willing consumers + of those that might meet the AH + goals; moreover, because + +On line 8922: + willing consumers of + those that might meet the AH goals; + moreover, because of + +On line 8922: + of those that might meet + the AH goals; moreover, because + of their lower cost + +On line 8922: + those that might meet the + AH goals; moreover, because of + their lower cost of + +On line 8922: + that might meet the AH + goals; moreover, because of their + lower cost of funds, + +On line 8922: + the AH goals; moreover, + because of their lower cost + of funds, they were able + +On line 8922: + goals; moreover, because + of their lower cost of funds, + they were able to buy + +On line 8922: + moreover, because of + their lower cost of funds, they + were able to buy the + +On line 8922: + of their lower cost + of funds, they were able to buy + the "best of the worst," + +On line 8922: + their lower cost of + funds, they were able to buy the + "best of the worst," the + +On line 8922: + funds, they were able to + buy the "best of the worst," the + highest quality + +On line 8922: + were able to buy the + "best of the worst," the highest + quality among the + +On line 8922: + buy the "best of the + worst," the highest quality + among the NTMs on off + +On line 8922: + the "best of the worst," + the highest quality among + the NTMs on off er. + +On line 8922: + "best of the worst," the + highest quality among the + NTMs on off er. Th + +On line 8924: + highest quality + among the NTMs on off er. Th + ese factors—the need + +On line 8926: + among the NTMs on off + er. Th ese factors—the need + for higher yielding + +On line 8926: + the NTMs on off er. + Th ese factors—the need for + higher yielding loans + +On line 8926: + on off er. Th ese + factors—the need for higher + yielding loans and the + +On line 8926: + Th ese factors—the + need for higher yielding loans + and the ability + +On line 8926: + ese factors—the need + for higher yielding loans and + the ability of + +On line 8926: + for higher yielding + loans and the ability of + Fannie and Freddie + +On line 8926: + yielding loans and the + ability of Fannie and + Freddie to pay up + +On line 8926: + and the ability + of Fannie and Freddie to + pay up for the loans + +On line 8926: + the ability of + Fannie and Freddie to pay + up for the loans they + +On line 8926: + pay up for the loans + they wanted—drove private sector + issuers further out + +On line 8926: + they wanted—drove private + sector issuers further out + on the risk curve as + +On line 8926: + issuers further out + on the risk curve as they sought + to meet the demands + +On line 8926: + on the risk curve as + they sought to meet the demands + of investors who were + +On line 8926: + they sought to meet the + demands of investors who were + seeking exposure + +On line 8928: + demands of investors + who were seeking exposure + to subprime PMBS. From + +On line 8928: + to subprime PMBS. From + the investors’ perspective, as + long as the bubble + +On line 8928: + subprime PMBS. From the + investors’ perspective, as long + as the bubble kept + +On line 8928: + PMBS. From the investors’ + perspective, as long as the + bubble kept growing, + +On line 8928: + investors’ perspective, + as long as the bubble kept + growing, PMBS were off + +On line 8928: + perspective, as long + as the bubble kept growing, + PMBS were off ering + +On line 8928: + were off ering the + high yields associated + with risk but were not + +On line 8928: + ering the high yields + associated with risk + but were not showing + +On line 8934: + who testifi ed + before the Commission agreed + that the fi nancial + +On line 8934: + the Commission agreed + that the fi nancial crisis + was initiated + +On line 8934: + Commission agreed that + the fi nancial crisis was + initiated by + +On line 8934: + fi nancial crisis + was initiated by the + mortgage meltdown that + +On line 8934: + the mortgage meltdown + that began when the housing + bubble began to + +On line 8934: + that began when the + housing bubble began to + defl ate in None + +On line 8934: + of these witnesses, + however, including the + academics consulted + +On line 8934: + by the Commission, + the representatives of + the rating agencies, + +On line 8934: + the Commission, the + representatives of the + rating agencies, the + +On line 8936: + representatives + of the rating agencies, the + offi cers of fi + +On line 8936: + rating agencies, the + offi cers of fi nancial + institutions that + +On line 8936: + offi cers of fi + nancial institutions that + were ultimately + +On line 8936: + institutions and + even the renowned investor Warren + Buff ett,33 seems to have + +On line 8936: + investor Warren Buff + ett,33 seems to have understood + the dimensions See + +On line 8940: + dimensions See Buff + ett, testimony before + the FCIC, June Peter + +On line 8942: + ett, testimony + before the FCIC, June Peter + J. Wallison of + +On line 8942: + before the FCIC, June + Peter J. Wallison of + the NTM problem or + +On line 8942: + Wallison of the + NTM problem or recognized + its signifi cance + +On line 8942: + of the NTM problem + or recognized its signifi + cance before the + +On line 8946: + Th e Commission + majority’s report notes + that "there were warning + +On line 8948: + that "there were warning + signs." Th ere always are if + one searches for them; + +On line 8948: + "there were warning signs." + Th ere always are if one + searches for them; they + +On line 8948: + warning signs." Th ere + always are if one searches + for them; they are most + +On line 8948: + Th ere always are + if one searches for them; they + are most visible + +On line 8948: + ere always are if + one searches for them; they are + most visible in + +On line 8948: + if one searches for + them; they are most visible + in hindsight, in which + +On line 8948: + one searches for them; + they are most visible in + hindsight, in which the + +On line 8948: + for them; they are most + visible in hindsight, in + which the Commission + +On line 8948: + which the Commission + majority, and many of + the opinions it cites + +On line 8948: + majority, and + many of the opinions it cites + for this proposition, + +On line 8948: + many of the opinions + it cites for this proposition, + happily engaged. + +On line 8948: + opinions it cites for + this proposition, happily + engaged. However, + +On line 8948: + engaged. However, + as Michael Lewis’s acclaimed book, Th + e Big Short, showed so + +On line 8950: + However, as Michael + Lewis’s acclaimed book, Th e Big + Short, showed so vividly, + +On line 8950: + Lewis’s acclaimed book, Th + e Big Short, showed so vividly, + very few people in + +On line 8950: + acclaimed book, Th e + Big Short, showed so vividly, very + few people in the + +On line 8950: + Th e Big Short, showed + so vividly, very few people + in the fi nancial + +On line 8950: + e Big Short, showed so + vividly, very few people in + the fi nancial world + +On line 8952: + the fi nancial world + were actually willing + to bet money— even + +On line 8952: + fi nancial world were + actually willing to + bet money— even at + +On line 8952: + to bet money— even + at enormously favorable + odds—that the bubble + +On line 8954: + favorable odds—that + the bubble would burst with huge + losses. Most seem to + +On line 8954: + odds—that the bubble + would burst with huge losses. Most + seem to have assumed + +On line 8954: + the bubble would burst + with huge losses. Most seem to + have assumed that NTMs + +On line 8954: + bubble would burst with + huge losses. Most seem to have + assumed that NTMs were + +On line 8954: + burst with huge losses. + Most seem to have assumed that + NTMs were present in the + +On line 8954: + with huge losses. Most + seem to have assumed that NTMs + were present in the fi + +On line 8954: + losses. Most seem to + have assumed that NTMs were present + in the fi nancial + +On line 8954: + seem to have assumed + that NTMs were present in the fi + nancial system, but + +On line 8954: + have assumed that NTMs + were present in the fi nancial + system, but not in + +On line 8954: + NTMs were present in the + fi nancial system, but not + in unusually + +On line 8954: + were present in the fi + nancial system, but not in + unusually large + +On line 8956: + nancial system, but + not in unusually large + numbers. Even today, + +On line 8956: + system, but not in + unusually large numbers. + Even today, there are + +On line 8956: + in unusually + large numbers. Even today, there + are few references + +On line 8956: + unusually large + numbers. Even today, there are + few references in + +On line 8956: + numbers. Even today, + there are few references in + the media to the + +On line 8956: + today, there are few + references in the media + to the number of + +On line 8956: + in the media to + the number of NTMs that had + accumulated + +On line 8956: + number of NTMs that + had accumulated in + the U.S. fi nancial + +On line 8956: + the U.S. fi nancial + system before the meltdown + began. Yet this is + +On line 8956: + fi nancial system + before the meltdown began. + Yet this is by far + +On line 8956: + before the meltdown + began. Yet this is by far + the most important + +On line 8956: + the meltdown began. + Yet this is by far the most + important fact about + +On line 8956: + this is by far the + most important fact about the + fi nancial crisis. + +On line 8956: + is by far the most + important fact about the fi + nancial crisis. None + +On line 8956: + most important fact + about the fi nancial crisis. + None of the other + +On line 8956: + about the fi nancial + crisis. None of the other + factors off ered by + +On line 8956: + the other factors + off ered by the Commission + majority to + +On line 8956: + by the Commission + majority to explain + the crisis—lack of + +On line 8956: + majority to + explain the crisis—lack of + regulation, poor + +On line 8956: + regulation, poor + regulatory and risk + management foresight, + +On line 8956: + foresight, Wall Street greed + and compensation policies, + systemic risk caused by + +On line 8956: + and compensation + policies, systemic risk caused by + credit default swaps, + +On line 8956: + credit default swaps, + excessive liquidity + and easy credit—do + +On line 8956: + and easy credit—do + so as plausibly as the + failure of a large + +On line 8956: + so as plausibly + as the failure of a large + percentage of the + +On line 8956: + failure of a large + percentage of the million + NTMs that existed + +On line 8956: + percentage of the + million NTMs that existed + in the fi nancial + +On line 8956: + of the million NTMs + that existed in the fi + nancial system in + +On line 8958: + NTMs that existed + in the fi nancial system + in It appears that + +On line 8958: + existed in the + fi nancial system in It + appears that market + +On line 8958: + fi nancial system + in It appears that market + participants were + +On line 8958: + in It appears that + market participants were + unprepared for the + +On line 8958: + destructiveness of + this bubble’s collapse because + of a chronic lack + +On line 8958: + this bubble’s collapse + because of a chronic lack + of information + +On line 8958: + of a chronic lack + of information about the + composition of + +On line 8958: + of information + about the composition of + the mortgage market. + +On line 8958: + information about + the composition of the + mortgage market. In + +On line 8958: + mortgage market. In + September for example, + aft er the defl + +On line 8958: + for example, aft + er the defl ation of the + bubble had begun, + +On line 8958: + er the defl ation + of the bubble had begun, + and various fi + +On line 8958: + ation of the bubble + had begun, and various + fi nancial fi rms + +On line 8958: + of the bubble had + begun, and various fi + nancial fi rms were + +On line 8960: + Brothers analysts + issued a highly detailed + report entitled + +On line 8960: + analysts issued + a highly detailed report + entitled "Who Owns + +On line 8960: + Owns Residential + Credit Risk1"34 In the tables + associated + +On line 8960: + Credit Risk1"34 In the + tables associated + with the report, they + +On line 8960: + with the report, they + estimated the total + unpaid principal + +On line 8960: + estimated the + total unpaid principal + balance of subprime + +On line 8960: + unpaid principal + balance of subprime and Alt-A + mortgages outstanding + +On line 8960: + balance of subprime + and Alt-A mortgages outstanding + at trillion, about half + +On line 8962: + at trillion, about half + the actual number at + the time. Based on this + +On line 8962: + half the actual + number at the time. Based on + this assessment, when + +On line 8962: + number at the time. + Based on this assessment, when + they applied a stress + +On line 8962: + the time. Based on this + assessment, when they applied + a stress scenario in + +On line 8962: + this assessment, when + they applied a stress scenario + in which housing prices + +On line 8962: + they applied a stress + scenario in which housing prices + declined about percent, + +On line 8962: + a stress scenario in + which housing prices declined about + percent, they still found + +On line 8962: + market under the + ‘stressed’ housing conditions could + be about billion, which + +On line 8962: + about billion, which is + manageable, assuming it + materializes + +On line 8962: + over a fi ve-to + six-year horizon." In the end, of + course, the losses were + +On line 8962: + a fi ve-to six-year + horizon." In the end, of course, + the losses were much + +On line 8962: + six-year horizon." In the + end, of course, the losses were + much larger, and were + +On line 8962: + In the end, of course, + the losses were much larger, + and were recognized + +On line 8962: + accounting almost + immediately, rather than + over a fi ve to + +On line 8962: + immediately, + rather than over a fi ve to + six year period. + +On line 8962: + rather than over a fi + ve to six year period. + But the failure of + +On line 8962: + than over a fi ve + to six year period. But + the failure of these + +On line 8962: + over a fi ve to + six year period. But the + failure of these two + +On line 8962: + failure of these two + analysts to recognize + the sheer size of the + +On line 8962: + these two analysts + to recognize the sheer size + of the subprime and + +On line 8962: + two analysts to + recognize the sheer size of + the subprime and Alt-A + +On line 8962: + to recognize the + sheer size of the subprime and + Alt-A market, even as + +On line 8962: + recognize the sheer + size of the subprime and Alt-A + market, even as late + +On line 8962: + the sheer size of the + subprime and Alt-A market, even + as late as is the + +On line 8962: + of the subprime and + Alt-A market, even as late as + is the important + +On line 8962: + the subprime and Alt-A + market, even as late as is + the important point. + +On line 8964: + market, even as late + as is the important point. + Along with most other + +On line 8964: + even as late as is + the important point. Along with + most other observers, + +On line 8964: + as late as is the + important point. Along with most + other observers, the + +On line 8964: + the important point. + Along with most other observers, + the Lehman analysts + +On line 8964: + important point. Along + with most other observers, the + Lehman analysts were + +On line 8964: + Along with most other + observers, the Lehman analysts + were not aware of the + +On line 8964: + were not aware of the + true composition of the + mortgage market in + +On line 8964: + housing conditions + they applied, they projected + that the GSEs would suff + +On line 8964: + projected that the + GSEs would suff er aggregate + losses of billion + +On line 8964: + suff er aggregate + losses of billion (net of + mortgage insurance + +On line 8964: + losses of billion + (net of mortgage insurance + coverage) and that + +On line 8966: + income would be more + than suffi cient to cover + these losses. Based on + +On line 8966: + be more than suffi + cient to cover these losses. + Based on known losses + +On line 8968: + more than suffi cient + to cover these losses. Based + on known losses and + +On line 8968: + these losses. Based on + known losses and projections + recently made by + +On line 8968: + on known losses and + projections recently made + by the Federal + +On line 8968: + Federal Housing + Finance Agency (FHFA), the + GSEs’ credit losses + +On line 8968: + Agency (FHFA), the + GSEs’ credit losses alone could + total billion—more + +On line 8970: + the Lehman analysts’ + September estimate. Th + e analysts could + +On line 8972: + e analysts could + only make such a colossal + error if they did + +On line 8972: + could only make such + a colossal error if they + did not realize + +On line 8972: + only make such a + colossal error if they did + not realize that + +On line 8972: + a colossal error + if they did not realize + that percent—or trillion—of + +On line 8972: + colossal error if + they did not realize that + percent—or trillion—of the + +On line 8972: + the GSEs’ credit risk + portfolio consisted of + subprime and Alt-A loans + +On line 8972: + subprime and Alt-A loans + (see Table supra) or that these + weak loans would account + +On line 8972: + Alt-A loans (see Table + supra) or that these weak loans would + account for about of + +On line 8972: + (see Table supra) or + that these weak loans would account + for about of the GSEs’ + +On line 8972: + or that these weak loans + would account for about of the + GSEs’ default losses + +On line 8972: + that these weak loans would + account for about of the GSEs’ + default losses over + +On line 8972: + weak loans would account + for about of the GSEs’ default + losses over 2007-34 Vikas + +On line 8972: + account for about of + the GSEs’ default losses over + 2007-34 Vikas Shilpiekandula + +On line 8972: + GSEs’ default losses + over 2007-34 Vikas Shilpiekandula and + Olga Gorodetski, + +On line 8972: + 2007-34 Vikas Shilpiekandula + and Olga Gorodetski, "Who + Owns Resident a + +On line 8972: + Vikas Shilpiekandula and + Olga Gorodetski, "Who Owns + Resident a i + +On line 8972: + Olga Gorodetski, + "Who Owns Resident a i + l Credit Risk1" Lehman + +On line 8974: + "Who Owns Resident + a i l Credit Risk1" Lehman + Brothers Fixed Income + +On line 8974: + a i l Credit + Risk1" Lehman Brothers Fixed Income + U.S. Securitized + +On line 8974: + Brothers Fixed Income + U.S. Securitized Products + Research, September + +On line 8980: + U.S. Securitized + Products Research, September + Dissenting Statement + +On line 8982: + Research, September + Dissenting Statement It is + also instructive + +On line 8982: + Dissenting Statement + It is also instructive + to compare the Lehman + +On line 8982: + the Lehman analysts’ + estimate that the vintage + of subprime loans would + +On line 8982: + of subprime loans would + suff er lifetime losses of + percent under "stressed" + +On line 8982: + would suff er lifetime + losses of percent under + "stressed" conditions to + +On line 8982: + losses of percent + under "stressed" conditions to + other, later, more + +On line 8982: + of percent under + "stressed" conditions to other, + later, more informed + +On line 8982: + later, more informed + estimates. In early for + example, Moody’s made + +On line 8982: + example, Moody’s made + a similar estimate + for the vintage and + +On line 8982: + made a similar + estimate for the vintage + and projected a + +On line 8982: + estimate for the + vintage and projected a + percent loss rate aft + +On line 8982: + and projected a + percent loss rate aft er the + percent decline in + +On line 8982: + a percent loss rate + aft er the percent decline + in housing prices had + +On line 8986: + had actually + occurred.36 Th e Lehman loss rate + projection suggests + +On line 8986: + occurred.36 Th e Lehman + loss rate projection suggests + that the analysts + +On line 8986: + Th e Lehman loss rate + projection suggests that the + analysts did not + +On line 8986: + projection suggests + that the analysts did not + have an accurate + +On line 8986: + that the analysts + did not have an accurate + estimate of the + +On line 8986: + the number of NTMs + actually outstanding + in Indeed, I have + +On line 8986: + in Indeed, I have + not found any studies in the + period before + +On line 8986: + found any studies in + the period before the + fi nancial crisis + +On line 8986: + any studies in the + period before the fi + nancial crisis in + +On line 8988: + period before + the fi nancial crisis in + which anyone— scholar + +On line 8988: + seemed to understand + how many NTMs were in the fi + nancial system at + +On line 8988: + understand how many + NTMs were in the fi nancial + system at the time. + +On line 8988: + many NTMs were in the + fi nancial system at the + time. It was only + +On line 8988: + NTMs were in the fi + nancial system at the time. + It was only aft + +On line 8988: + in the fi nancial + system at the time. It was + only aft er the + +On line 8988: + nancial system at + the time. It was only aft + er the fi nancial + +On line 8988: + system at the time. + It was only aft er the + fi nancial crisis, + +On line 8988: + It was only aft + er the fi nancial crisis, + when my AEI colleague, + +On line 8988: + only aft er the + fi nancial crisis, when my + AEI colleague, Edward + +On line 8988: + AEI colleague, Edward + Pinto, began gathering + this information + +On line 8988: + information from + various unrelated + and disparate sources that + +On line 8988: + unrelated and + disparate sources that the total + number of NTMs in + +On line 8988: + and disparate sources that + the total number of NTMs + in the fi nancial + +On line 8988: + the total number + of NTMs in the fi nancial + markets became clear. + +On line 8988: + of NTMs in the fi + nancial markets became clear. + As a result, all + +On line 8988: + fi nancial markets + became clear. As a result, + all loss projections + +On line 8988: + became clear. As a + result, all loss projections + before Pinto’s work + +On line 8988: + clear. As a result, + all loss projections before + Pinto’s work were bound + +On line 8988: + a result, all loss + projections before Pinto’s + work were bound to be + +On line 8990: + all loss projections + before Pinto’s work were bound + to be faulty. Much of + +On line 8990: + of the Commission + majority’s report, which + criticizes fi rms, + +On line 8990: + criticizes fi rms, + regulators, corporate + executives, risk + +On line 8990: + and ratings agency + analysts for failure to + perceive the losses + +On line 8990: + agency analysts + for failure to perceive the + losses that lay ahead, + +On line 8990: + losses that lay ahead, + is sheer hindsight. It appears + that information + +On line 8990: + hindsight. It appears + that information about the + composition of + +On line 8990: + that information + about the composition of + the mortgage market + +On line 8990: + information about + the composition of the + mortgage market was + +On line 8990: + the composition + of the mortgage market was + simply not known when + +On line 8990: + the mortgage market + was simply not known when the + bubble began to + +On line 8992: + was simply not known + when the bubble began to + defl ate. Th e + +On line 8992: + Commission never + attempted a serious + study of what was known + +On line 8992: + study of what was known + about the composition of + the mortgage market + +On line 8992: + of what was known about + the composition of the + mortgage market in + +On line 8992: + mortgage market in + apparently satisfi + ed simply to blame + +On line 8992: + participants for + failing to understand the + risks that lay before + +On line 8992: + before them, without + trying to understand what + information was + +On line 8996: + information was + actually available. Th + e mortgage market + +On line 8996: + market is studied + constantly by thousands of + analysts, academics, + +On line 8996: + investors. How could all + these people have missed something + as important as + +On line 8996: + all these people have + missed something as important + as the actual + +On line 8996: + as important as + the actual number of + NTMs outstanding1 Most + +On line 8996: + have assumed in the + bubble years that Fannie and + Freddie continued + +On line 8996: + same conservative + underwriting policies they + had previously + +On line 8996: + had previously + pursued. Until Fannie and + Freddie were required + +On line 8998: + Until Fannie and + Freddie were required to meet + HUD’s AH goals, they rarely + +On line 8998: + Fannie and Freddie + were required to meet HUD’s AH + goals, they rarely acquired + +On line 8998: + Freddie were required + to meet HUD’s AH goals, they rarely + acquired subprime or + +On line 8998: + were required to meet + HUD’s AH goals, they rarely acquired + subprime or other + +On line 8998: + rarely acquired subprime + or other low quality + mortgages. Indeed, the + +On line 8998: + mortgages. Indeed, the + very defi nition of a + traditional prime + +On line 8998: + very defi nition + of a traditional prime + mortgage was a loan + +On line 8998: + a traditional + prime mortgage was a loan that + Fannie and Freddie + +On line 8998: + prime mortgage was a + loan that Fannie and Freddie + would buy. Lesser loans + +On line 8998: + mortgage was a loan + that Fannie and Freddie would + buy. Lesser loans were + +On line 8998: + a loan that Fannie + and Freddie would buy. Lesser + loans were rejected, + +On line 8998: + loan that Fannie and + Freddie would buy. Lesser loans + were rejected, and + +On line 8998: + were rejected, and + were ultimately insured + by FHA or made by + +On line 8998: + rejected, and were + ultimately insured by + FHA or made by a + +On line 8998: + were ultimately + insured by FHA or made by + a relatively + +On line 8998: + insured by FHA or + made by a relatively + small group of subprime + +On line 9000: + small group of subprime + originators and investors. + Although anyone who + +On line 9000: + and investors. Although + anyone who followed HUD’s AH + regulations, and + +On line 9000: + who followed HUD’s AH + regulations, and thought through + their implications, + +On line 9000: + regulations, and + thought through their implications, + would have realized + +On line 9000: + implications, would + have realized that Fannie + and Freddie must have + +On line 9000: + would have realized + that Fannie and Freddie must + have been shift ing their + +On line 9000: + must have been shift ing + their buying activities + to low quality + +On line 9000: + have been shift ing their + buying activities to + low quality loans, + +On line 9000: + low quality loans, + few people had incentives + to uncover the + +On line 9000: + quality loans, few + people had incentives to + uncover the new + +On line 9000: + to uncover the + new buying pattern. Investors + believed that there was + +On line 9000: + new buying pattern. + Investors believed that there was + no signifi cant risk + +On line 9000: + believed that there was + no signifi cant risk in MBS + backed by Fannie and + +On line 9000: + was no signifi cant + risk in MBS backed by Fannie + and Freddie, since they + +On line 9000: + no signifi cant risk + in MBS backed by Fannie and + Freddie, since they were + +On line 9000: + risk in MBS backed by + Fannie and Freddie, since they + were thought (correctly, + +On line 9000: + MBS backed by Fannie + and Freddie, since they were thought + (correctly, as it + +On line 9000: + Fannie and Freddie, + since they were thought (correctly, + as it turns out) to + +On line 9000: + In addition, the + GSEs were exempted by law + from having to fi + +On line 9000: + addition, the GSEs + were exempted by law from + having to fi le + +On line 9000: + GSEs were exempted + by law from having to fi + le information + +On line 9000: + were exempted by + law from having to fi le + information with + +On line 9000: + law from having to + fi le information with + the Securities + +On line 9000: + from having to fi + le information with the + Securities and + +On line 9000: + le information + with the Securities and + Exchange Commission + +On line 9000: + free from disclosure + obligations and questions from + analysts about the + +On line 9002: + about the quality + of their mortgages. When Fannie + voluntarily + +On line 9002: + mortgages. When Fannie + voluntarily began + fi ling reports with + +On line 9002: + ling reports with the + SEC in it disclosed Fannie + Mae, Second Quarter + +On line 9002: + SEC in it disclosed + Fannie Mae, Second Quarter + Credit Supplement, + +On line 9004: + Credit Supplement, + http://www.fanniemae.com/ir/pdf/sec/2010/ + q2credit_summary.pdf. + +On line 9006: + q2credit_summary.pdf. + "Moody’s Projects Losses of Almost + Half of Original + +On line 9006: + "Moody’s Projects Losses of + Almost Half of Original + Balance from Subprime + +On line 9006: + Losses of Almost + Half of Original Balance + from Subprime Mortgage + +On line 9012: + mortgages had FICO + scores of less than 660—the common + defi nition of + +On line 9012: + scores of less than 660—the + common defi nition of + a subprime loan. Th + +On line 9014: + defi nition of + a subprime loan. Th ere are + occasionally + +On line 9016: + a subprime loan. Th + ere are occasionally + questions about whether a + +On line 9016: + the appropriate + dividing line between prime + and subprime loans. Th + +On line 9018: + Th e federal + bank regulators use as + the dividing line,37 + +On line 9018: + e federal bank + regulators use as the + dividing line,37 and + +On line 9018: + bank regulators + use as the dividing line,37 + and in the credit + +On line 9018: + dividing line,37 and + in the credit supplement + it published for the + +On line 9018: + and in the credit + supplement it published for + the fi rst time with + +On line 9018: + published for the fi + rst time with its 10-K, Fannie + included loans with + +On line 9018: + the fi rst time with + its 10-K, Fannie included + loans with FICO scores + +On line 9018: + rst time with its 10-K, + Fannie included loans with + FICO scores below + +On line 9018: + below to disclose + its exposure to loans that + were other than prime. + +On line 9018: + its exposure to + loans that were other than prime. + As of December + +On line 9018: + loans that were other + than prime. As of December + borrowers with a + +On line 9018: + other than prime. As + of December borrowers + with a FICO of + +On line 9018: + As of December + borrowers with a FICO + of less than had a + +On line 9018: + with a FICO of + less than had a serious + delinquency rate about + +On line 9018: + of less than had a + serious delinquency rate + about four times that for + +On line 9018: + had a serious + delinquency rate about four times + that for borrowers + +On line 9018: + delinquency rate about + four times that for borrowers + with a FICO equal + +On line 9018: + about four times that for + borrowers with a FICO + equal to or greater than + +On line 9018: + that for borrowers + with a FICO equal to or + greater than compared to + +On line 9018: + borrowers with a + FICO equal to or greater than + compared to Fannie + +On line 9018: + with a FICO equal + to or greater than compared to + Fannie did not point + +On line 9018: + FICO equal to or + greater than compared to Fannie + did not point out in + +On line 9018: + equal to or greater than + compared to Fannie did not + point out in its fi + +On line 9018: + or greater than compared + to Fannie did not point out + in its fi ling that + +On line 9018: + greater than compared to + Fannie did not point out in + its fi ling that a + +On line 9018: + compared to Fannie + did not point out in its fi + ling that a FICO + +On line 9018: + to Fannie did not + point out in its fi ling that + a FICO score of + +On line 9018: + Fannie did not point + out in its fi ling that a + FICO score of less + +On line 9018: + did not point out in + its fi ling that a FICO + score of less than was + +On line 9018: + out in its fi ling + that a FICO score of less + than was considered + +On line 9018: + in its fi ling that + a FICO score of less than + was considered a + +On line 9018: + a FICO score of + less than was considered a + subprime loan. Although + +On line 9018: + score of less than was + considered a subprime loan. + Although at the end + +On line 9018: + than was considered + a subprime loan. Although at + the end of Fannie + +On line 9018: + was considered a + subprime loan. Although at the + end of Fannie was + +On line 9018: + subprime loan. Although + at the end of Fannie was + exposed to billion + +On line 9018: + Although at the end + of Fannie was exposed to + billion in subprime + +On line 9018: + Fannie was exposed + to billion in subprime loans + it reported in + +On line 9018: + billion in subprime + loans it reported in its + 10-K (not fi led with + +On line 9018: + in subprime loans it + reported in its 10-K (not + fi led with the SEC + +On line 9018: + loans it reported + in its 10-K (not fi led with + the SEC until May + +On line 9018: + it reported in + its 10-K (not fi led with the + SEC until May that: + +On line 9020: + reported in its + 10-K (not fi led with the SEC + until May that: "Th + +On line 9022: + its 10-K (not fi led + with the SEC until May that: + "Th e percentage + +On line 9022: + 10-K (not fi led with + the SEC until May that: "Th + e percentage of + +On line 9022: + (not fi led with the + SEC until May that: "Th e + percentage of our + +On line 9022: + SEC until May that: + "Th e percentage of our + single-family + +On line 9022: + "Th e percentage + of our single-family + mortgage credit book + +On line 9022: + mortgage credit book + of business consisting of + subprime mortgage loans + +On line 9022: + business consisting + of subprime mortgage loans or + structured Fannie Mae + +On line 9022: + of subprime mortgage + loans or structured Fannie Mae + MBS backed by subprime + +On line 9022: + Fannie Mae MBS backed + by subprime mortgage loans was + not material + +On line 9022: + by subprime mortgage + loans was not material + as of December + +On line 9024: + material as + of December 2005."[emphasis + supplied]39 Fannie was + +On line 9024: + as of December + 2005."[emphasis supplied]39 Fannie + was able to make this + +On line 9024: + 2005."[emphasis supplied]39 + Fannie was able to make this + statement because it + +On line 9024: + Fannie was able to + make this statement because it + defi ned subprime + +On line 9024: + was able to make this + statement because it defi + ned subprime loans as + +On line 9024: + this statement because + it defi ned subprime loans + as loans it purchased + +On line 9024: + statement because it + defi ned subprime loans as + loans it purchased from + +On line 9024: + because it defi + ned subprime loans as loans it + purchased from subprime + +On line 9026: + defi ned subprime + loans as loans it purchased from + subprime lenders. Th us, + +On line 9026: + ned subprime loans as + loans it purchased from subprime + lenders. Th us, in its + +On line 9026: + subprime loans as loans + it purchased from subprime lenders. + Th us, in its 10-K + +On line 9026: + loans it purchased from + subprime lenders. Th us, in its + 10-K report, Fannie + +On line 9028: + lenders. Th us, in its + 10-K report, Fannie stated: + "Subprime mortgage loans + +On line 9028: + 10-K report, Fannie + stated: "Subprime mortgage loans + are typically + +On line 9028: + originated by + lenders specializing in these + loans or by subprime + +On line 9028: + lenders specializing + in these loans or by subprime + divisions of large + +On line 9028: + divisions of large + lenders, using processes unique + to subprime loans. In + +On line 9028: + of large lenders, using + processes unique to subprime + loans. In reporting + +On line 9028: + unique to subprime loans. + In reporting our subprime + exposure, we have + +On line 9028: + loans. In reporting + our subprime exposure, we + have classifi ed + +On line 9028: + exposure, we have + classifi ed mortgage loans + as subprime if the + +On line 9028: + we have classifi + ed mortgage loans as subprime + if the mortgage loans + +On line 9028: + have classifi ed + mortgage loans as subprime if + the mortgage loans are + +On line 9028: + ed mortgage loans as + subprime if the mortgage loans + are originated + +On line 9028: + if the mortgage loans + are originated by one + of these specialty + +On line 9028: + the mortgage loans are + originated by one of + these specialty lenders + +On line 9028: + are originated + by one of these specialty + lenders or a subprime + +On line 9028: + specialty lenders or + a subprime division of + a large lender."40[emphasis + +On line 9028: + division of a + large lender."40[emphasis supplied] Th + e credit scores on + +On line 9030: + a large lender."40[emphasis + supplied] Th e credit scores + on these loans, and the + +On line 9030: + e credit scores on + these loans, and the riskiness + associated + +On line 9030: + and the riskiness + associated with these + credit scores, were not + +On line 9030: + as late as its 10-K + report, Fannie was able to + make the following + +On line 9030: + as its 10-K report, + Fannie was able to make the + following statements, + +On line 9030: + report, Fannie was + able to make the following + statements, even though it + +On line 9030: + was able to make the + following statements, even though + it is likely that + +On line 9030: + following statements, + even though it is likely that + at that point it held + +On line 9030: + likely that at that + point it held or guaranteed + enough subprime loans to + +On line 9030: + held or guaranteed + enough subprime loans to drive the + company into + +On line 9030: + enough subprime loans to + drive the company into + insolvency if + +On line 9032: + substantial number + of these loans were to default: + Subprime mortgage loans, + +On line 9032: + loans were to default: + Subprime mortgage loans, whether held + in our portfolio + +On line 9032: + Subprime mortgage loans, + whether held in our portfolio + or backing Fannie + +On line 9032: + in our portfolio + or backing Fannie Mae MBS, + represented less + +On line 9034: + of and [emphasis + supplied] We estimate that + subprime mortgage loans + +On line 9034: + [emphasis supplied] + We estimate that subprime + mortgage loans held in + +On line 9034: + We estimate that + subprime mortgage loans held in + our portfolio or + +On line 9034: + that subprime mortgage + loans held in our portfolio + or subprime mortgage + +On line 9034: + subprime mortgage loans + held in our portfolio or + subprime mortgage loans + +On line 9034: + mortgage loans held in + our portfolio or subprime + mortgage loans backing + +On line 9034: + loans, represented + approximately of our + single-family + +On line 9034: + approximately + of our single-family + mortgage credit book + +On line 9034: + of business as of + December compared with and + as of December + +On line 9038: + ese statements could have + lulled market participants + and others—including + +On line 9040: + participants and + others—including Offi ce + of Comptroller of + +On line 9040: + and others—including + Offi ce of Comptroller + of the Currency, + +On line 9040: + of Comptroller of + the Currency, Federal + Reserve, Federal + +On line 9042: + Federal Deposit + Insurance Corporation, + and Offi ce of + +On line 9044: + Offi ce of Th + rift Supervision advised + in its "Expanded + +On line 9044: + rift Supervision + advised in its "Expanded + Guidance for Subprime + +On line 9044: + in its "Expanded + Guidance for Subprime Lending + Programs", published in + +On line 9044: + "Expanded Guidance + for Subprime Lending Programs", + published in http://www.federalreserve.gov/Boarddocs/SRletters/2001/sr0104a1.pdf that + +On line 9046: + for Subprime Lending + Programs", published in http://www.federalreserve.gov/Boarddocs/SRletters/2001/sr0104a1.pdf that + "the term ‘subprime’ refers + +On line 9046: + in http://www.federalreserve.gov/Boarddocs/SRletters/2001/sr0104a1.pdf that "the term + ‘subprime’ refers to the credit + characteristics + +On line 9046: + borrowers. Subprime + borrowers typically + have weakened credit + +On line 9046: + Subprime borrowers + typically have weakened + credit histories + +On line 9046: + typically have + weakened credit histories + that include payment + +On line 9046: + that include payment + delinquencies and possibly + more severe problems + +On line 9046: + payment delinquencies + and possibly more severe + problems such as charge-off + +On line 9046: + problems such as charge-off + s, judgments, and bankruptcies." + A FICO score of + +On line 9046: + as charge-off s, judgments, + and bankruptcies." A FICO + score of or below + +On line 9046: + charge-off s, judgments, and + bankruptcies." A FICO score + of or below was + +On line 9046: + and bankruptcies." A + FICO score of or below + was evidence of + +On line 9046: + A FICO score of + or below was evidence + of "relatively + +On line 9046: + FICO score of or + below was evidence of + "relatively high + +On line 9046: + was evidence of + "relatively high default + probability." + +On line 9048: + "relatively high + default probability." + Derived from Table + +On line 9050: + probability." + Derived from Table Fannie + Mae, 10-K report, fi + +On line 9052: + Derived from Table + Fannie Mae, 10-K report, fi + led May Fannie Mae, + +On line 9052: + from Table Fannie + Mae, 10-K report, fi led May + Fannie Mae, Form 10K, + +On line 9054: + Mae, 10-K report, fi + led May Fannie Mae, Form 10K, + pp. and Fannie Mae, + +On line 9054: + 10-K report, fi led + May Fannie Mae, Form 10K, pp. + and Fannie Mae, Form + +On line 9054: + report, fi led May + Fannie Mae, Form 10K, pp. and + Fannie Mae, Form 10K, + +On line 9056: + led May Fannie Mae, + Form 10K, pp. and Fannie Mae, + Form 10K, p.129. Fannie + +On line 9056: + May Fannie Mae, Form + 10K, pp. and Fannie Mae, Form + 10K, p.129. Fannie Mae, + +On line 9056: + Fannie Mae, Form 10K, + pp. and Fannie Mae, Form 10K, + p.129. Fannie Mae, Form + +On line 9062: + pp. and Fannie Mae, + Form 10K, p.129. Fannie Mae, Form + 10K, p.130. Dissenting + +On line 9062: + Fannie Mae, Form 10K, + p.129. Fannie Mae, Form 10K, p.130. + Dissenting Statement + +On line 9064: + Fannie Mae, Form 10K, + p.130. Dissenting Statement the + Lehman analysts—into + +On line 9064: + Lehman analysts—into + believing that Fannie and + Freddie did not hold + +On line 9064: + and Freddie did not + hold or had not guaranteed + substantial numbers + +On line 9064: + did not hold or had + not guaranteed substantial + numbers of high risk + +On line 9064: + had not guaranteed + substantial numbers of high + risk loans, and thus that + +On line 9064: + substantial numbers + of high risk loans, and thus that + there were many fewer + +On line 9064: + numbers of high risk + loans, and thus that there were many + fewer such loans in + +On line 9064: + of high risk loans, and + thus that there were many fewer + such loans in the fi + +On line 9064: + risk loans, and thus that + there were many fewer such loans + in the fi nancial + +On line 9064: + and thus that there were + many fewer such loans in the + fi nancial system + +On line 9064: + thus that there were many + fewer such loans in the fi + nancial system than + +On line 9064: + there were many fewer + such loans in the fi nancial + system than in fact + +On line 9064: + fewer such loans in + the fi nancial system than + in fact existed. + +On line 9066: + such loans in the fi + nancial system than in fact + existed. Of course, + +On line 9066: + fi nancial system + than in fact existed. Of + course, in the early + +On line 9066: + nancial system than + in fact existed. Of course, + in the early 2000s + +On line 9066: + system than in fact + existed. Of course, in the + early 2000s there was + +On line 9066: + existed. Of course, + in the early 2000s there was + no generally + +On line 9066: + in the early 2000s + there was no generally + understood defi + +On line 9066: + no generally + understood defi nition + of the term "subprime," + +On line 9066: + of the term "subprime," + so Fannie and Freddie could + defi ne it as + +On line 9066: + "subprime," so Fannie + and Freddie could defi ne + it as they liked, and + +On line 9066: + Freddie could defi + ne it as they liked, and the + assumption that the + +On line 9066: + defi ne it as + they liked, and the assumption + that the GSEs only + +On line 9066: + ne it as they liked, + and the assumption that the + GSEs only made prime + +On line 9066: + it as they liked, and + the assumption that the GSEs + only made prime loans + +On line 9066: + and the assumption + that the GSEs only made prime + loans continued to + +On line 9066: + the assumption that + the GSEs only made prime loans + continued to be + +On line 9066: + that the GSEs only + made prime loans continued to + be supported by + +On line 9066: + the GSEs only made + prime loans continued to be + supported by their + +On line 9066: + prime loans continued + to be supported by their + public disclosures. + +On line 9066: + continued to be + supported by their public + disclosures. So when + +On line 9066: + to be supported + by their public disclosures. + So when Fannie and + +On line 9066: + supported by their + public disclosures. So when + Fannie and Freddie + +On line 9066: + public disclosures. + So when Fannie and Freddie + reported their loan + +On line 9066: + So when Fannie and + Freddie reported their loan + acquisitions to + +On line 9066: + Freddie reported + their loan acquisitions to + various mortgage + +On line 9066: + aggregators they + did not report those mortgages + as subprime or Alt-A, + +On line 9066: + industry practice + by placing virtually + all the GSEs’ loans in + +On line 9066: + Fannie and Freddie’s + peculiar and self-serving + loan classifi cation + +On line 9066: + and self-serving loan + classifi cation methods, the + recipients of + +On line 9066: + loan classifi cation + methods, the recipients + of information + +On line 9066: + recipients of + information about the GSEs’ + mortgage positions + +On line 9066: + about the GSEs’ mortgage + positions simply seemed to + assume that all these + +On line 9066: + mortgage positions + simply seemed to assume that + all these mortgages were + +On line 9066: + positions simply + seemed to assume that all these + mortgages were prime loans, + +On line 9066: + seemed to assume that + all these mortgages were prime loans, + as they had always + +On line 9066: + to assume that all + these mortgages were prime loans, as + they had always been + +On line 9066: + assume that all these + mortgages were prime loans, as they + had always been in + +On line 9066: + all these mortgages were + prime loans, as they had always + been in the past, and + +On line 9066: + these mortgages were prime + loans, as they had always been + in the past, and added + +On line 9066: + mortgages were prime loans, + as they had always been in + the past, and added them + +On line 9066: + were prime loans, as they + had always been in the past, + and added them to the + +On line 9066: + as they had always + been in the past, and added them + to the number of + +On line 9066: + they had always been + in the past, and added them to + the number of prime + +On line 9066: + had always been in + the past, and added them to the + number of prime loans + +On line 9066: + been in the past, and + added them to the number of + prime loans outstanding. + +On line 9066: + prime loans outstanding. + Accordingly, by there were + approximately + +On line 9066: + Accordingly, by + there were approximately + million more NTMs in + +On line 9066: + approximately + million more NTMs in the fi + nancial system—and + +On line 9066: + million more NTMs in + the fi nancial system—and + million fewer prime + +On line 9066: + more NTMs in the fi + nancial system—and million + fewer prime loans—than most + +On line 9066: + in the fi nancial + system—and million fewer + prime loans—than most market + +On line 9068: + prime loans—than most market + participants realized. + Appendix shows that + +On line 9068: + Appendix shows that + the levels of delinquency + and default would be + +On line 9068: + that the levels of + delinquency and default would + be percent higher + +On line 9068: + be percent higher + than expected if there were + million NTMs in the + +On line 9068: + than expected if + there were million NTMs in the + fi nancial system + +On line 9068: + there were million NTMs + in the fi nancial system + instead of million + +On line 9068: + million NTMs in the + fi nancial system instead + of million prime loans. + +On line 9068: + in the fi nancial + system instead of million + prime loans. Appendix + +On line 9068: + fi nancial system + instead of million prime loans. + Appendix shows that + +On line 9068: + system instead of + million prime loans. Appendix + shows that the levels + +On line 9068: + percent higher than + expected if the feedback + eff ect of mortgage + +On line 9068: + expected if the + feedback eff ect of mortgage + delinquencies—causing + +On line 9068: + feedback eff ect of + mortgage delinquencies—causing + lower housing prices, + +On line 9068: + eff ect of mortgage + delinquencies—causing lower + housing prices, in a + +On line 9068: + delinquencies—causing + lower housing prices, in a + downward spiral—were + +On line 9068: + housing prices, in a + downward spiral—were taken + into account. Th + +On line 9070: + prices, in a downward + spiral—were taken into + account. Th ese diff + +On line 9070: + downward spiral—were + taken into account. Th + ese diff erences in + +On line 9070: + ese diff erences in + projected losses could have + misled the rating + +On line 9070: + the rating agencies + into believing that, even + if the bubble were + +On line 9070: + into believing + that, even if the bubble were + to defl ate, the + +On line 9070: + if the bubble were + to defl ate, the losses + on mortgage failures + +On line 9070: + the bubble were to + defl ate, the losses on + mortgage failures would + +On line 9070: + ate, the losses on + mortgage failures would not be + so substantial as + +On line 9070: + on mortgage failures + would not be so substantial + as to have a more + +On line 9070: + mortgage failures would + not be so substantial as + to have a more than + +On line 9070: + failures would not be + so substantial as to have + a more than local + +On line 9070: + so substantial as + to have a more than local + eff ect and would not + +On line 9070: + as to have a more + than local eff ect and would + not adversely aff + +On line 9070: + to have a more than + local eff ect and would not + adversely aff ect + +On line 9070: + than local eff ect + and would not adversely aff + ect the AAA tranches + +On line 9070: + local eff ect and + would not adversely aff ect + the AAA tranches in + +On line 9074: + the AAA tranches in + MBS securitizations. + Th e Commission + +On line 9074: + never looked into + this issue, or attempted + to determine what + +On line 9074: + to be the number + of subprime and other NTMs + outstanding in the + +On line 9074: + possible in the + Commission’s public hearings, + I asked analysts + +On line 9074: + Commission’s public + hearings, I asked analysts + and other market + +On line 9074: + many NTMs they believed + were outstanding before the + fi nancial crisis + +On line 9074: + fi nancial crisis + occurred. It was clear from the + responses that none + +On line 9074: + occurred. It was clear + from the responses that none + of the witnesses + +On line 9074: + the responses that + none of the witnesses had + ever considered + +On line 9074: + ever considered + that question, and it appeared + that none suspected + +On line 9074: + that question, and it + appeared that none suspected + that the number was + +On line 9074: + that none suspected + that the number was large enough + to substantially + +On line 9074: + none suspected that + the number was large enough to + substantially aff + +On line 9074: + that the number was + large enough to substantially + aff ect losses aft + +On line 9074: + the number was large + enough to substantially aff + ect losses aft er + +On line 9074: + number was large enough + to substantially aff ect + losses aft er the + +On line 9076: + ect losses aft er + the collapse of the bubble. + It was only on + +On line 9076: + er the collapse of + the bubble. It was only + on November aft + +On line 9076: + the collapse of the + bubble. It was only on + November aft er + +On line 9076: + of the bubble. It + was only on November + aft er Fannie had + +On line 9076: + the bubble. It was + only on November aft + er Fannie had been + +On line 9076: + It was only on + November aft er Fannie + had been taken over + +On line 9076: + November aft er + Fannie had been taken over + by the federal + +On line 9076: + been taken over by + the federal government, + that the company + +On line 9076: + government, that the + company admitted in + its 10-Q report for + +On line 9076: + in its 10-Q report + for the third quarter of that + it had classifi + +On line 9076: + its 10-Q report for + the third quarter of that it + had classifi ed + +On line 9076: + 10-Q report for the + third quarter of that it had + classifi ed as + +On line 9076: + for the third quarter + of that it had classifi + ed as subprime or + +On line 9076: + the third quarter of + that it had classifi ed + as subprime or Alt-A + +On line 9076: + third quarter of that + it had classifi ed as + subprime or Alt-A loans + +On line 9076: + it had classifi + ed as subprime or Alt-A loans + only those loans that + +On line 9076: + Alt-A originators, + and not loans that were subprime + or Alt-A because of + +On line 9076: + originators, and + not loans that were subprime or + Alt-A because of their + +On line 9076: + loans that were subprime + or Alt-A because of their risk + characteristics. + +On line 9076: + Alt-A because of their + risk characteristics. Even + then Fannie wasn’t + +On line 9078: + its classifi cation + criteria, Fannie stated, + "[H]owever, we have + +On line 9078: + criteria, Fannie + stated, "[H]owever, we have + other loans with some + +On line 9078: + "[H]owever, we have + other loans with some features + that are similar + +On line 9078: + other loans with some + features that are similar + to Alt-A and subprime + +On line 9078: + loans with some features + that are similar to Alt-A + and subprime loans that + +On line 9078: + with some features that + are similar to Alt-A and + subprime loans that we + +On line 9078: + are similar to + Alt-A and subprime loans that we + have not classifi + +On line 9078: + similar to Alt-A + and subprime loans that we have + not classifi ed + +On line 9078: + and subprime loans that + we have not classifi ed + as Alt-A or subprime + +On line 9078: + loans that we have not + classifi ed as Alt-A or + subprime because they + +On line 9078: + not classifi ed + as Alt-A or subprime because + they do not meet our + +On line 9078: + subprime because they + do not meet our classifi + cation criteria."43 Th + +On line 9080: + cation criteria."43 Th + is hardly described the true + nature of Fannie’s + +On line 9084: + is hardly described + the true nature of Fannie’s + obligations. On the + +On line 9084: + nature of Fannie’s + obligations. On the issue + of the number of + +On line 9084: + the issue of the + number of NTMs outstanding + before the crisis + +On line 9084: + outstanding before + the crisis the Commission + studiously averted + +On line 9084: + before the crisis + the Commission studiously + averted its eyes, and + +On line 9092: + Wallison never + addresses the question. HUD’s + role in pressing for + +On line 9092: + for a reduction + in mortgage underwriting + standards escaped the + +On line 9092: + standards escaped the + FCIC’s attention entirely, + the GSEs’ AH goals are + +On line 9092: + the FCIC’s attention + entirely, the GSEs’ AH goals + are mentioned only + +On line 9092: + entirely, the GSEs’ + AH goals are mentioned only + in passing, CRA is + +On line 9092: + the GSEs’ AH goals are + mentioned only in passing, + CRA is defended, + +On line 9092: + mentioned only in + passing, CRA is defended, + and neither HUD’s Best + +On line 9092: + CRA is defended, + and neither HUD’s Best Practices + Initiative nor FHA’s + +On line 9092: + and neither HUD’s Best + Practices Initiative nor FHA’s + activities are + +On line 9092: + Practices Initiative + nor FHA’s activities are + mentioned at all. No + +On line 9092: + Initiative nor FHA’s + activities are mentioned + at all. No reason + +On line 9092: + activities are + mentioned at all. No reason + is advanced for the + +On line 9092: + mentioned at all. No + reason is advanced for the + accumulation + +On line 9092: + reason is advanced + for the accumulation + of subprime loans in + +On line 9092: + of subprime loans in + the bubble other than the + idea—implicit in the + +On line 9092: + idea—implicit in the + majority’s report—that + it was profi table. + +On line 9092: + it was profi table. + In sum, the majority’s + report is Hamlet + +On line 9092: + profi table. In sum, + the majority’s report + is Hamlet without + +On line 9092: + table. In sum, the + majority’s report is + Hamlet without the + +On line 9092: + the majority’s + report is Hamlet without + the prince of Denmark. + +On line 9094: + Hamlet without the + prince of Denmark. Indeed, the + Commission’s entire + +On line 9094: + Commission’s entire + investigation seemed to + be directed at + +On line 9094: + investigation + seemed to be directed at + minimizing the + +On line 9094: + to be directed + at minimizing the role + of NTMs and the role + +On line 9094: + be directed at + minimizing the role of + NTMs and the role of + +On line 9094: + minimizing the + role of NTMs and the role of + government housing + +On line 9094: + role of NTMs and the + role of government housing + policy. In this + +On line 9094: + role of government + housing policy. In this + telling, the NTMs were a + +On line 9094: + government housing + policy. In this telling, the + NTMs were a "trigger" + +On line 9094: + housing policy. + In this telling, the NTMs were a + "trigger" for the fi + +On line 9094: + policy. In this + telling, the NTMs were a "trigger" + for the fi nancial + +On line 9094: + In this telling, the NTMs + were a "trigger" for the fi + nancial crisis, but + +On line 9094: + telling, the NTMs were a + "trigger" for the fi nancial + crisis, but once the + +On line 9094: + NTMs were a "trigger" + for the fi nancial crisis, + but once the collapse + +On line 9094: + were a "trigger" for + the fi nancial crisis, but + once the collapse of + +On line 9094: + a "trigger" for the + fi nancial crisis, but once + the collapse of the + +On line 9094: + for the fi nancial + crisis, but once the collapse + of the bubble had + +On line 9094: + fi nancial crisis, + but once the collapse of the + bubble had occurred + +On line 9094: + but once the collapse + of the bubble had occurred + the "weaknesses and + +On line 9096: + of the fi nancial + system— which had been there all + along—caused the crisis. + +On line 9098: + fi nancial system— + which had been there all along—caused + the crisis. Th ese + +On line 9100: + regulation of + the so-called "shadow banking + system" and over-the-counter + +On line 9100: + the so-called "shadow + banking system" and over-the-counter + derivatives, the + +On line 9100: + banking system" and + over-the-counter derivatives, the + overly generous + +On line 9100: + their baleful presence + hadn’t been noted until + the unprecedented + +On line 9100: + hadn’t been noted + until the unprecedented + number of subprime + +On line 9100: + been noted until + the unprecedented number + of subprime and Alt-A + +On line 9100: + noted until the + unprecedented number of + subprime and Alt-A loans, + +On line 9104: + Conclusion What is + surprising about the many views + of the causes of + +On line 9104: + is surprising about + the many views of the causes + of the fi nancial + +On line 9104: + the many views of the + causes of the fi nancial + crisis that have been + +On line 9104: + views of the causes + of the fi nancial crisis + that have been published + +On line 9104: + of the causes of + the fi nancial crisis that + have been published since + +On line 9104: + the causes of the + fi nancial crisis that have + been published since the + +On line 9104: + causes of the fi + nancial crisis that have been + published since the Lehman + +On line 9104: + been published since the + Lehman bankruptcy, including + the Commission’s own + +On line 9104: + the Lehman bankruptcy, + including the Commission’s + own inquiry, is the + +On line 9104: + (i) a general + agreement that the bubble and + the mortgage meltdown + +On line 9104: + the bubble and the + mortgage meltdown that followed + its defl ation were + +On line 9104: + precipitating + causes—sometimes characterized + as the "trigger"—of the + +On line 9104: + characterized as + the "trigger"—of the fi nancial + crisis, and (ii) a + +On line 9104: + the "trigger"—of the fi + nancial crisis, and (ii) a + seemingly studious + +On line 9104: + how it came to be + that mortgage underwriting + standards declined to + +On line 9104: + declined to the point + that the bubble contained so + many NTMs that were ready + +On line 9104: + to the point that the + bubble contained so many NTMs + that were ready to fail + +On line 9104: + point that the bubble + contained so many NTMs that were + ready to fail as soon + +On line 9104: + the bubble contained + so many NTMs that were ready to + fail as soon as the + +On line 9104: + so many NTMs that were + ready to fail as soon as the + bubble began to + +On line 9104: + NTMs that were ready to + fail as soon as the bubble + began to defl + +On line 9104: + ready to fail as soon + as the bubble began to + defl ate. Instead + +On line 9104: + the bubble began + to defl ate. Instead of + thinking through what would + +On line 9104: + report—pivoted + immediately to blame + the "weaknesses and + +On line 9104: + blame the "weaknesses + and vulnerabilities" + of the free market + +On line 9104: + the "weaknesses and + vulnerabilities" of + the free market or + +On line 9106: + considering whether + any system could have survived + such a blow. One of + +On line 9106: + whether any system could + have survived such a blow. One + of the most striking + +On line 9106: + have survived such a + blow. One of the most striking + examples of this + +On line 9106: + such a blow. One of + the most striking examples + of this approach was + +On line 9106: + of the most striking + examples of this approach + was presented by + +On line 9106: + examples of this + approach was presented by + Larry Summers, the + +On line 9106: + head of the White House + economic council and one + of the President’s + +On line 9106: + economic council + and one of the President’s + key advisers. In + +On line 9106: + the President’s key + advisers. In a private + interview with a + +On line 9106: + advisers. In a + private interview with a + few of the members + +On line 9106: + private interview + with a few of the members + of the Commission + +On line 9106: + interview with a + few of the members of the + Commission (I was + +On line 9106: + with a few of the + members of the Commission + (I was not informed + +On line 9106: + few of the members + of the Commission (I was + not informed of the + +On line 9106: + of the Commission + (I was not informed of the + interview), Summers + +On line 9106: + was not informed of + the interview), Summers was + asked whether the mortgage + +On line 9106: + asked whether the mortgage + meltdown was the cause of the + fi nancial crisis. + +On line 9106: + mortgage meltdown was + the cause of the fi nancial + crisis. His response + +On line 9106: + meltdown was the cause + of the fi nancial crisis. + His response was that + +On line 9106: + fi nancial crisis. + His response was that the fi + nancial crisis was + +On line 9106: + His response was that + the fi nancial crisis was + like a forest fi + +On line 9106: + response was that the + fi nancial crisis was like + a forest fi re + +On line 9106: + nancial crisis was + like a forest fi re and + the mortgage meltdown + +On line 9106: + like a forest fi + re and the mortgage meltdown + like a "cigarette + +On line 9106: + a forest fi re + and the mortgage meltdown like + a "cigarette butt" + +On line 9106: + forest fi re and + the mortgage meltdown like a + "cigarette butt" thrown + +On line 9106: + re and the mortgage + meltdown like a "cigarette + butt" thrown into a + +On line 9106: + the mortgage meltdown + like a "cigarette butt" thrown + into a very dry + +On line 9106: + "cigarette butt" thrown + into a very dry forest. + Was the cigarette + +On line 9106: + into a very dry + forest. Was the cigarette + butt, he asked, the cause + +On line 9106: + a very dry forest. + Was the cigarette butt, he + asked, the cause of the + +On line 9106: + dry forest. Was the + cigarette butt, he asked, the + cause of the forest + +On line 9106: + Was the cigarette + butt, he asked, the cause of the + forest fi re, or + +On line 9106: + cigarette butt, he + asked, the cause of the forest + fi re, or was it + +On line 9106: + butt, he asked, the cause + of the forest fi re, or + was it the tinder + +On line 9106: + he asked, the cause of + the forest fi re, or was + it the tinder dry + +On line 9106: + of the forest fi + re, or was it the tinder + dry condition of + +On line 9106: + the forest fi re, + or was it the tinder dry + condition of the + +On line 9106: + fi re, or was it + the tinder dry condition + of the forest144 Th + +On line 9106: + re, or was it the + tinder dry condition of + the forest144 Th e + +On line 9106: + it the tinder dry + condition of the forest144 + Th e Commission + +On line 9108: + the forest144 Th e + Commission majority + adopted the idea that + +On line 9108: + Th e Commission + majority adopted the + idea that it was the + +On line 9108: + the idea that it was + the tinder-dry forest. Th eir + central argument + +On line 9110: + the tinder-dry forest. + Th eir central argument + is that the mortgage + +On line 9110: + crisis because of + the "vulnerabilities" + inherent in the + +On line 9110: + inherent in the + U.S. fi nancial system at + the time—the absence FCIC, + +On line 9116: + at the time—the absence + FCIC, Summers interview, p.77. + Dissenting Statement + +On line 9118: + Summers interview, + p.77. Dissenting Statement of + regulation, lax + +On line 9118: + regulation, lax + regulation, predatory + lending, greed on Wall + +On line 9118: + ineff ective risk + management, and excessive + leverage, among other + +On line 9118: + excessive leverage, + among other factors. One of + the majority’s + +On line 9118: + among other factors. + One of the majority’s + singular notions + +On line 9120: + factors. One of the + majority’s singular + notions is that years + +On line 9120: + notions is that years + of deregulation" had "stripped + away key safeguards" against + +On line 9120: + deregulation" had + "stripped away key safeguards" against a + crisis; this ignores + +On line 9120: + "stripped away key safeguards" + against a crisis; this ignores + completely that in + +On line 9120: + against a crisis; this + ignores completely that in + in the wake of the + +On line 9120: + ignores completely + that in in the wake of the + S&L crisis, Congress + +On line 9120: + in the wake of the + S&L crisis, Congress adopted + the FDIC Improvement + +On line 9120: + the wake of the S&L + crisis, Congress adopted the + FDIC Improvement Act, + +On line 9120: + S&L crisis, Congress + adopted the FDIC Improvement + Act, which was by far + +On line 9120: + Congress adopted the + FDIC Improvement Act, which was + by far the toughest + +On line 9120: + Improvement Act, which + was by far the toughest bank + regulatory + +On line 9120: + by far the toughest + bank regulatory law + since the advent of + +On line 9120: + law since the advent + of deposit insurance and + was celebrated + +On line 9120: + since the advent of + deposit insurance and was + celebrated at + +On line 9120: + insurance and was + celebrated at the time + of its enactment + +On line 9120: + of its enactment + as fi nally giving the + regulators the + +On line 9120: + nally giving the + regulators the power + to put an end to + +On line 9124: + the regulators + the power to put an end + to bank crises. Th e + +On line 9124: + the power to put + an end to bank crises. Th e + forest metaphor turns out + +On line 9124: + to put an end to + bank crises. Th e forest metaphor + turns out to be an + +On line 9124: + end to bank crises. Th + e forest metaphor turns out to + be an excellent + +On line 9124: + to bank crises. Th e + forest metaphor turns out to be + an excellent way + +On line 9124: + forest metaphor turns out + to be an excellent way + to communicate + +On line 9124: + be an excellent + way to communicate the + diff erence between + +On line 9124: + an excellent way + to communicate the diff + erence between the + +On line 9124: + to communicate + the diff erence between the + Commission’s report + +On line 9124: + erence between the + Commission’s report and this + dissenting statement. + +On line 9124: + dissenting statement. + What Summers characterized + as a "cigarette + +On line 9124: + a "cigarette butt" + was million high risk NTMs with + a total value + +On line 9124: + "cigarette butt" was + million high risk NTMs with a + total value over + +On line 9124: + was million high risk + NTMs with a total value + over trillion. Let’s use + +On line 9124: + million high risk NTMs + with a total value over + trillion. Let’s use a + +On line 9124: + high risk NTMs with a + total value over trillion. + Let’s use a little + +On line 9124: + NTMs with a total + value over trillion. Let’s use + a little common + +On line 9124: + value over trillion. + Let’s use a little common + sense here: trillion in + +On line 9124: + over trillion. Let’s use + a little common sense here: + trillion in high risk + +On line 9124: + Let’s use a little + common sense here: trillion in + high risk loans was not + +On line 9124: + trillion in high risk + loans was not a "cigarette + butt;" they were more like + +On line 9124: + risk loans was not a + "cigarette butt;" they were more + like an exploding + +On line 9124: + "cigarette butt;" they + were more like an exploding + gasoline truck in that + +On line 9124: + butt;" they were more like + an exploding gasoline truck + in that forest. Th + +On line 9126: + they were more like an + exploding gasoline truck in + that forest. Th e + +On line 9126: + like an exploding + gasoline truck in that forest. + Th e Commission’s + +On line 9126: + exploding gasoline + truck in that forest. Th e + Commission’s report + +On line 9126: + truck in that forest. + Th e Commission’s report + blames the conditions + +On line 9126: + in that forest. Th + e Commission’s report blames + the conditions in + +On line 9126: + that forest. Th e + Commission’s report blames the + conditions in the + +On line 9126: + Th e Commission’s + report blames the conditions + in the fi nancial + +On line 9126: + Commission’s report + blames the conditions in the + fi nancial system; + +On line 9126: + the conditions in + the fi nancial system; I + blame million subprime + +On line 9126: + conditions in the + fi nancial system; I blame + million subprime and + +On line 9126: + fi nancial system; + I blame million subprime and + Alt-A mortgages—half of + +On line 9126: + nancial system; I + blame million subprime and Alt-A + mortgages—half of all + +On line 9126: + blame million subprime + and Alt-A mortgages—half of all + mortgages outstanding + +On line 9126: + and Alt-A mortgages—half + of all mortgages outstanding + in the U.S. in 2008—and + +On line 9126: + Alt-A mortgages—half of + all mortgages outstanding in + the U.S. in 2008—and a + +On line 9126: + outstanding in the + U.S. in 2008—and a number that + appears to have been + +On line 9126: + in the U.S. in 2008—and + a number that appears to + have been unknown to + +On line 9126: + the U.S. in 2008—and a + number that appears to have + been unknown to most + +On line 9126: + 2008—and a number that + appears to have been unknown + to most if not all + +On line 9126: + number that appears + to have been unknown to most + if not all market + +On line 9126: + to have been unknown + to most if not all market + participants at + +On line 9126: + at the time. No fi + nancial system, in my view, + could have survived the + +On line 9126: + time. No fi nancial + system, in my view, could have + survived the failure + +On line 9126: + fi nancial system, + in my view, could have survived + the failure of large + +On line 9126: + system, in my view, + could have survived the failure + of large numbers of + +On line 9126: + in my view, could have + survived the failure of large + numbers of high risk + +On line 9126: + view, could have survived + the failure of large numbers + of high risk mortgages + +On line 9126: + could have survived the + failure of large numbers of + high risk mortgages once + +On line 9126: + large numbers of high + risk mortgages once the bubble + began to defl + +On line 9126: + of high risk mortgages + once the bubble began to + defl ate, and no + +On line 9126: + risk mortgages once the + bubble began to defl + ate, and no market + +On line 9126: + bubble began to + defl ate, and no market + could have avoided a + +On line 9126: + began to defl + ate, and no market could have + avoided a panic + +On line 9126: + to defl ate, and + no market could have avoided + a panic when it + +On line 9126: + ate, and no market + could have avoided a panic + when it became clear + +On line 9126: + and no market could + have avoided a panic when + it became clear that + +On line 9126: + no market could have + avoided a panic when it + became clear that the + +On line 9126: + could have avoided a + panic when it became clear + that the number of + +On line 9126: + avoided a panic + when it became clear that the + number of defaults + +On line 9126: + when it became clear + that the number of defaults + and delinquencies among + +On line 9126: + it became clear that + the number of defaults and + delinquencies among these + +On line 9126: + clear that the number + of defaults and delinquencies + among these mortgages far + +On line 9126: + and delinquencies among + these mortgages far exceeded + anything that even the + +On line 9130: + Th is conclusion + has signifi cant policy + implications. If + +On line 9130: + If in fact the fi + nancial crisis was caused by + government housing + +On line 9130: + nancial crisis was + caused by government housing + policies, then the Dodd-Frank + +On line 9130: + crisis was caused by + government housing policies, + then the Dodd-Frank Act was + +On line 9130: + caused by government + housing policies, then the Dodd-Frank + Act was legislative + +On line 9130: + government housing + policies, then the Dodd-Frank Act was + legislative overreach + +On line 9130: + policies, then the Dodd-Frank + Act was legislative overreach + and unnecessary. + +On line 9134: + was to reduce or + eliminate the government’s + involvement in the + +On line 9134: + or eliminate the + government’s involvement in + the residential + +On line 9134: + mortgage markets, not + to impose signifi cant new + regulation on + +On line 9134: + impose signifi cant + new regulation on the + fi nancial system. + +On line 9140: + new regulation + on the fi nancial system. + Th e balance of + +On line 9140: + regulation on + the fi nancial system. Th + e balance of this + +On line 9140: + nancial system. Th + e balance of this statement + will outline (i) how + +On line 9140: + Th e balance of + this statement will outline (i) + how the high levels + +On line 9140: + e balance of this + statement will outline (i) how + the high levels of + +On line 9140: + outline (i) how the + high levels of delinquency + and default among the + +On line 9140: + default among the NTMs + were transmitted as losses + to the fi nancial + +On line 9140: + were transmitted as + losses to the fi nancial + system, and (ii) how + +On line 9140: + as losses to the + fi nancial system, and (ii) + how the government + +On line 9140: + fi nancial system, + and (ii) how the government + policies summarized + +On line 9140: + summarized above caused + the accumulation of + an unprecedented + +On line 9144: + an unprecedented + number of NTMs in the U.S. + and around the globe. II. + +On line 9146: + in the U.S. and around + the globe. II. HOW MILLION NTMS + PRECIPITATED + +On line 9146: + globe. II. HOW MILLION + NTMS PRECIPITATED A + FINANCIAL CRISIS + +On line 9148: + CRISIS Although the + Commission never defi + ned the fi nancial + +On line 9148: + ned the fi nancial + crisis it was supposed to + investigate, it + +On line 9148: + to investigate, + it is necessary to do + so in order to + +On line 9148: + investigate, it + is necessary to do so + in order to know + +On line 9148: + it is necessary + to do so in order to + know where to start and + +On line 9148: + is necessary to + do so in order to know + where to start and stop. + +On line 9148: + necessary to do + so in order to know where + to start and stop. If, + +On line 9148: + do so in order + to know where to start and stop. + If, for example, + +On line 9148: + so in order to + know where to start and stop. If, + for example, the + +On line 9148: + in order to know + where to start and stop. If, for + example, the fi + +On line 9148: + know where to start and + stop. If, for example, the + fi nancial crisis + +On line 9148: + where to start and stop. + If, for example, the fi + nancial crisis is + +On line 9148: + If, for example, + the fi nancial crisis is + still continuing, + +On line 9148: + for example, the + fi nancial crisis is still + continuing, then + +On line 9148: + continuing, then + the eff ect of government + policies such as the + +On line 9148: + then the eff ect of + government policies such as + the Troubled Asset + +On line 9148: + ect of government + policies such as the Troubled + Asset Repurchase + +On line 9148: + government policies + such as the Troubled Asset + Repurchase Program + +On line 9148: + policies such as the + Troubled Asset Repurchase + Program (TARP) should be + +On line 9148: + the Troubled Asset + Repurchase Program (TARP) should + be evaluated. + +On line 9150: + Repurchase Program + (TARP) should be evaluated. + However, it seems + +On line 9150: + be evaluated. + However, it seems clear that + Congress wanted the + +On line 9150: + seems clear that Congress + wanted the Commission to + concentrate on what + +On line 9150: + the Commission to + concentrate on what caused the + unprecedented events + +On line 9150: + concentrate on what + caused the unprecedented events + that occurred largely + +On line 9150: + the unprecedented + events that occurred largely in + the fall of and for + +On line 9150: + unprecedented events + that occurred largely in the + fall of and for this + +On line 9150: + largely in the fall + of and for this purpose Ben + Bernanke’s defi nition + +On line 9150: + the fall of and for + this purpose Ben Bernanke’s defi + nition of the fi + +On line 9150: + for this purpose Ben + Bernanke’s defi nition of the + fi nancial crisis + +On line 9150: + this purpose Ben Bernanke’s + defi nition of the fi + nancial crisis seems + +On line 9150: + defi nition of + the fi nancial crisis seems + most appropriate: + +On line 9154: + nancial crisis seems + most appropriate: Th e + credit boom began + +On line 9154: + most appropriate: + Th e credit boom began + to unravel in + +On line 9154: + Th e credit boom + began to unravel in + early when problems + +On line 9154: + credit boom began + to unravel in early + when problems surfaced + +On line 9154: + surfaced with subprime + mortgages—mortgages off ered to + less-creditworthy + +On line 9154: + mortgages—mortgages off + ered to less-creditworthy + borrowers—and house + +On line 9154: + less-creditworthy + borrowers—and house prices in + parts of the country + +On line 9154: + house prices in parts of + the country began to fall. + Mortgage delinquencies + +On line 9154: + the country began + to fall. Mortgage delinquencies + and defaults rose, and + +On line 9154: + country began to + fall. Mortgage delinquencies and + defaults rose, and the + +On line 9154: + and the downturn in + house prices intensifi ed, + trends that continue + +On line 9154: + downturn in house prices + intensifi ed, trends that + continue today. + +On line 9154: + today. Investors, stunned + by losses on assets they + had believed to be + +On line 9154: + stunned by losses on + assets they had believed to + be safe, began to + +On line 9154: + losses on assets + they had believed to be safe, + began to pull back + +On line 9154: + on assets they had + believed to be safe, began + to pull back from a + +On line 9154: + they had believed to + be safe, began to pull back + from a wide range of + +On line 9154: + believed to be safe, + began to pull back from a + wide range of credit + +On line 9154: + to be safe, began + to pull back from a wide range + of credit markets, + +On line 9154: + be safe, began to + pull back from a wide range of + credit markets, and + +On line 9154: + severe losses on + mortgages and other loans—cut + back their lending. Th + +On line 9156: + mortgages and other + loans—cut back their lending. Th + e crisis deepened + +On line 9158: + crisis deepened [in + September when the failure + or near-failure of + +On line 9158: + September when the + failure or near-failure of + several major + +On line 9158: + when the failure or + near-failure of several + major fi nancial + +On line 9158: + major fi nancial + fi rms caused many fi nancial + and credit markets + +On line 9158: + nancial fi rms caused + many fi nancial and credit + markets to freeze up."45 + +On line 9160: + caused many fi nancial + and credit markets to freeze + up."45 In other words, + +On line 9160: + many fi nancial and + credit markets to freeze up."45 + In other words, the + +On line 9160: + credit markets to + freeze up."45 In other words, the + fi nancial crisis + +On line 9160: + freeze up."45 In other + words, the fi nancial crisis + was the result of + +On line 9160: + up."45 In other words, + the fi nancial crisis was + the result of the + +On line 9160: + words, the fi nancial + crisis was the result of + the losses suff ered + +On line 9160: + losses suff ered by + fi nancial institutions + around the world when U.S. + +On line 9160: + U.S. mortgages began + to fail in large numbers; the + crisis became more + +On line 9160: + in large numbers; the + crisis became more severe + in September when + +On line 9160: + the crisis became + more severe in September + when the failure of + +On line 9160: + in September when + the failure of several + major fi nancial + +On line 9160: + several major + fi nancial fi rms—which held + or were thought to hold + +On line 9160: + major fi nancial + fi rms—which held or were thought + to hold large amounts of + +On line 9160: + to hold large amounts of + mortgage-related assets—caused many + fi nancial markets + +On line 9162: + nancial markets to + freeze up. Th is summary + encapsulates a + +On line 9162: + to freeze up. Th is + summary encapsulates + a large number of + +On line 9162: + a large number of + interconnected events, but + it makes clear that the + +On line 9162: + interconnected + events, but it makes clear that the + underlying cause + +On line 9162: + events, but it makes clear + that the underlying cause + of the fi nancial + +On line 9162: + it makes clear that the + underlying cause of the + fi nancial crisis + +On line 9162: + underlying cause + of the fi nancial crisis + was a rapid decline + +On line 9162: + of the fi nancial + crisis was a rapid decline + in the value of + +On line 9162: + crisis was a rapid + decline in the value of + one specifi c and + +On line 9162: + a rapid decline in + the value of one specifi + c and widely held + +On line 9162: + c and widely held + asset: U.S. residential + mortgages. Th e next + +On line 9162: + widely held asset: + U.S. residential mortgages. + Th e next question + +On line 9164: + U.S. residential + mortgages. Th e next question + is how, exactly, + +On line 9164: + mortgages. Th e next + question is how, exactly, + these delinquencies and + +On line 9164: + next question is how, + exactly, these delinquencies + and losses caused the + +On line 9164: + is how, exactly, + these delinquencies and losses + caused the fi nancial + +On line 9168: + caused the fi nancial + crisis. Th e following + discussion will show + +On line 9168: + nancial crisis. Th + e following discussion + will show that it was + +On line 9168: + Th e following + discussion will show that it + was not all mortgages + +On line 9168: + will show that it was + not all mortgages and mortgage-backed + securities that + +On line 9168: + was not all mortgages + and mortgage-backed securities + that were the source of + +On line 9168: + not all mortgages and + mortgage-backed securities that + were the source of the + +On line 9168: + mortgages and mortgage-backed + securities that were the + source of the crisis, + +On line 9168: + securities that + were the source of the crisis, + but primarily + +On line 9170: + were the source of the + crisis, but primarily + NTMs— including PMBS + +On line 9170: + but primarily + NTMs— including PMBS backed by + NTMs. Traditional + +On line 9170: + were generally + prime mortgages, did not suff er + substantial losses + +On line 9170: + prime mortgages, did not + suff er substantial losses + at the outset of + +On line 9170: + mortgages, did not suff + er substantial losses at + the outset of the + +On line 9170: + suff er substantial + losses at the outset of + the mortgage meltdown, + +On line 9170: + at the outset of + the mortgage meltdown, although + as the fi nancial + +On line 9170: + the mortgage meltdown, + although as the fi nancial + crisis turned into + +On line 9170: + although as the fi + nancial crisis turned into + a recession and + +On line 9170: + crisis turned into + a recession and housing + prices continued to + +On line 9170: + a recession and + housing prices continued to + fall, losses among prime + +On line 9170: + prices continued to + fall, losses among prime mortgages + began to approach + +On line 9170: + fall, losses among prime + mortgages began to approach + the level of prime + +On line 9170: + prime mortgages began + to approach the level of + prime mortgage losses + +On line 9170: + mortgages began to + approach the level of prime + mortgage losses that + +On line 9170: + approach the level + of prime mortgage losses that + had occurred in past + +On line 9170: + mortgage losses that + had occurred in past housing + crises. However, those + +On line 9170: + that had occurred in + past housing crises. However, + those levels were far + +On line 9170: + in past housing crises. + However, those levels were + far lower than the + +On line 9170: + crises. However, those + levels were far lower than + the losses on NTMs, + +On line 9170: + those levels were far + lower than the losses on + NTMs, which reached levels + +On line 9170: + losses on NTMs, which + reached levels of delinquency + and default between + +On line 9170: + NTMs, which reached levels + of delinquency and default + between and percent + +On line 9170: + of delinquency and + default between and percent + (depending on the + +On line 9170: + default between and + percent (depending on the + characteristics + +On line 9170: + the loans in question) + because the loans involved were + weaker as a class + +On line 9170: + in question) because + the loans involved were weaker + as a class than in + +On line 9170: + question) because the + loans involved were weaker as + a class than in any + +On line 9170: + were weaker as a + class than in any previous + housing crisis. Th + +On line 9172: + a class than in any + previous housing crisis. + Th e fact that they + +On line 9172: + in any previous + housing crisis. Th e fact + that they were also + +On line 9172: + Th e fact that they + were also far larger in + number than any Speech + +On line 9172: + that they were also + far larger in number than + any Speech at Morehouse + +On line 9172: + also far larger + in number than any Speech at + Morehouse College, April + +On line 9180: + in number than any + Speech at Morehouse College, April + Dissenting Statement + +On line 9184: + housing price declines + that fueled the fi nancial + crisis. How Failures + +On line 9186: + declines that fueled + the fi nancial crisis. How + Failures Among NTMs were + +On line 9188: + were Transmitted to + the Financial System When + the housing bubble + +On line 9188: + the housing bubble + began to defl ate in + mid-2007, delinquency rates + +On line 9188: + began to defl + ate in mid-2007, delinquency rates + among NTMs began to + +On line 9188: + to defl ate in + mid-2007, delinquency rates among NTMs + began to increase + +On line 9188: + mortgages were weak and + high risk, their delinquency rates + were relatively + +On line 9190: + delinquency rates were + relatively low. Th is + was a consequence + +On line 9190: + low. Th is was a + consequence of the bubble + itself, which infl + +On line 9190: + consequence of the + bubble itself, which infl + ated housing prices + +On line 9190: + the bubble itself, + which infl ated housing + prices so that homes could + +On line 9190: + bubble itself, which + infl ated housing prices + so that homes could be + +On line 9190: + itself, which infl + ated housing prices so that + homes could be sold with + +On line 9190: + which infl ated + housing prices so that homes could + be sold with no loss + +On line 9190: + ated housing prices + so that homes could be sold with + no loss in cases + +On line 9190: + so that homes could be + sold with no loss in cases + where borrowers could + +On line 9190: + that homes could be sold + with no loss in cases where + borrowers could not + +On line 9190: + sold with no loss in + cases where borrowers could + not meet their mortgage + +On line 9190: + loss in cases where + borrowers could not meet their + mortgage obligations. + +On line 9190: + borrowers could not + meet their mortgage obligations. + Alternatively, + +On line 9190: + mortgage obligations. + Alternatively, rising + housing prices—coupled with + +On line 9190: + Alternatively, + rising housing prices—coupled with + liberal appraisal + +On line 9190: + liberal appraisal + rules—created a form of + free equity in + +On line 9190: + rules—created a + form of free equity in + a home, allowing + +On line 9190: + of free equity + in a home, allowing the + home to be refi + +On line 9190: + free equity in + a home, allowing the home + to be refi nanced + +On line 9190: + a home, allowing + the home to be refi nanced + easily, perhaps + +On line 9190: + even at a lower + interest rate. However, + rising housing prices + +On line 9190: + However, rising + housing prices eventually + reached the point where even + +On line 9190: + rising housing prices + eventually reached the point + where even easy credit + +On line 9190: + eventually reached + the point where even easy credit + terms could no longer keep + +On line 9190: + reached the point where even + easy credit terms could no longer + keep the good times rolling, + +On line 9190: + the point where even easy + credit terms could no longer keep + the good times rolling, and + +On line 9190: + where even easy credit + terms could no longer keep the good + times rolling, and at that + +On line 9190: + even easy credit terms + could no longer keep the good times + rolling, and at that point + +On line 9190: + easy credit terms could + no longer keep the good times rolling, + and at that point the + +On line 9190: + terms could no longer keep + the good times rolling, and at that + point the bubble fl + +On line 9190: + no longer keep the good + times rolling, and at that point the + bubble fl attened + +On line 9190: + keep the good times rolling, + and at that point the bubble + fl attened and weak + +On line 9190: + rolling, and at that point + the bubble fl attened and + weak mortgages became + +On line 9190: + that point the bubble + fl attened and weak mortgages + became exposed for + +On line 9190: + weak mortgages became + exposed for what they were. As + Warren Buff ett has + +On line 9190: + became exposed for + what they were. As Warren Buff + ett has said, when the + +On line 9190: + exposed for what they + were. As Warren Buff ett has + said, when the tide goes + +On line 9190: + for what they were. As + Warren Buff ett has said, when + the tide goes out, you + +On line 9190: + they were. As Warren + Buff ett has said, when the tide + goes out, you can see + +On line 9190: + were. As Warren Buff + ett has said, when the tide goes + out, you can see who’s + +On line 9190: + Warren Buff ett has + said, when the tide goes out, you + can see who’s swimming + +On line 9192: + Buff ett has said, when + the tide goes out, you can see + who’s swimming naked. Th + +On line 9194: + ett has said, when the + tide goes out, you can see who’s + swimming naked. Th e + +On line 9194: + said, when the tide goes + out, you can see who’s swimming + naked. Th e role of + +On line 9194: + when the tide goes out, + you can see who’s swimming naked. + Th e role of the + +On line 9194: + goes out, you can see + who’s swimming naked. Th e role + of the government’s + +On line 9194: + who’s swimming naked. Th + e role of the government’s + housing policy + +On line 9194: + government’s housing + policy is crucial at + this point. As discussed + +On line 9194: + housing policy + is crucial at this point. As + discussed earlier, + +On line 9194: + is crucial at this + point. As discussed earlier, + if the government + +On line 9194: + crucial at this point. + As discussed earlier, if + the government had + +On line 9194: + the government had + not been directing money + into the mortgage + +On line 9194: + not been directing + money into the mortgage + markets in order + +On line 9194: + money into the + mortgage markets in order + to foster growth in + +On line 9194: + the mortgage markets + in order to foster growth + in home ownership, + +On line 9194: + mortgage markets in + order to foster growth in + home ownership, NTMs + +On line 9194: + order to foster + growth in home ownership, NTMs + in the bubble would + +On line 9194: + in home ownership, + NTMs in the bubble would have + begun to default + +On line 9194: + NTMs in the bubble + would have begun to default + relatively soon + +On line 9196: + originated. Th + e continuous infl + ow of government + +On line 9196: + e continuous + infl ow of government + or government-backed + +On line 9196: + government-backed funds, + however, kept the bubble + growing—not only + +On line 9196: + growing—not only + in size but over time—and this + tended to suppress + +On line 9196: + only in size but + over time—and this tended to + suppress the signifi + +On line 9196: + tended to suppress + the signifi cant delinquencies + and defaults that had + +On line 9196: + and defaults that had + brought previous bubbles to + an end in only + +On line 9196: + defaults that had brought + previous bubbles to an + end in only three + +On line 9198: + previous bubbles + to an end in only three + or four years. Th at + +On line 9198: + bubbles to an end + in only three or four years. + Th at explains why + +On line 9198: + end in only three + or four years. Th at explains + why PMBS based on NTMs + +On line 9198: + in only three or + four years. Th at explains why + PMBS based on NTMs could + +On line 9200: + three or four years. Th + at explains why PMBS based on + NTMs could become so + +On line 9200: + Th at explains why + PMBS based on NTMs could become + so numerous and + +On line 9200: + at explains why PMBS + based on NTMs could become so + numerous and so + +On line 9200: + why PMBS based on NTMs + could become so numerous + and so risky without + +On line 9200: + on NTMs could become + so numerous and so risky + without triggering + +On line 9200: + so numerous and + so risky without triggering + the delinquencies and + +On line 9200: + and so risky without + triggering the delinquencies + and defaults that caused + +On line 9200: + without triggering + the delinquencies and defaults + that caused earlier + +On line 9200: + the delinquencies and + defaults that caused earlier + bubbles to defl + +On line 9200: + earlier bubbles + to defl ate within a + shorter period. + +On line 9200: + defl ate within + a shorter period. With + losses few and time + +On line 9200: + time to continue + originations, Countrywide + and others were able + +On line 9200: + others were able to + securitize subprime PMBS + in increasingly + +On line 9200: + billion) to billion) + without engendering the + substantial increase + +On line 9200: + in delinquencies that + would ordinarily have + alarmed investors and brought + +On line 9200: + delinquencies that would + ordinarily have alarmed + investors and brought the + +On line 9200: + ordinarily + have alarmed investors and brought the + bubble to a halt.46 + +On line 9202: + have alarmed investors and + brought the bubble to a halt.46 + Indeed, the absence + +On line 9202: + brought the bubble to + a halt.46 Indeed, the absence + of delinquencies had + +On line 9202: + the bubble to a + halt.46 Indeed, the absence of + delinquencies had the + +On line 9202: + to a halt.46 Indeed, + the absence of delinquencies + had the opposite + +On line 9202: + a halt.46 Indeed, the + absence of delinquencies had + the opposite eff + +On line 9202: + of delinquencies had + the opposite eff ect. As + investors around the world + +On line 9202: + had the opposite + eff ect. As investors around the + world saw housing prices + +On line 9202: + the opposite eff + ect. As investors around the world + saw housing prices rise + +On line 9202: + opposite eff ect. + As investors around the world saw + housing prices rise in + +On line 9202: + ect. As investors around + the world saw housing prices rise + in the U.S. without + +On line 9202: + As investors around the + world saw housing prices rise in + the U.S. without any + +On line 9202: + world saw housing prices + rise in the U.S. without any + signifi cant losses + +On line 9202: + housing prices rise in + the U.S. without any signifi + cant losses even among + +On line 9202: + the U.S. without any + signifi cant losses even among + subprime and other + +On line 9202: + signifi cant losses + even among subprime and other + high-yielding loans, they + +On line 9202: + even among subprime and + other high-yielding loans, they + were encouraged to + +On line 9202: + other high-yielding + loans, they were encouraged to + buy PMBS that—although rated + +On line 9202: + high-yielding loans, they + were encouraged to buy PMBS + that—although rated AAA—still off + +On line 9202: + they were encouraged + to buy PMBS that—although rated AAA—still + off ered attractive + +On line 9202: + were encouraged to + buy PMBS that—although rated AAA—still off + ered attractive yields. + +On line 9202: + encouraged to buy + PMBS that—although rated AAA—still off ered + attractive yields. In + +On line 9202: + buy PMBS that—although rated + AAA—still off ered attractive yields. + In other words, as + +On line 9202: + PMBS that—although rated AAA—still + off ered attractive yields. In + other words, as shown + +On line 9202: + ered attractive yields. + In other words, as shown in + Figure government + +On line 9202: + as shown in Figure + government housing policies—AH goals + imposed on the GSEs, + +On line 9202: + Figure government + housing policies—AH goals imposed on + the GSEs, the decline + +On line 9202: + government housing + policies—AH goals imposed on the GSEs, + the decline in FHA + +On line 9202: + policies—AH goals imposed on + the GSEs, the decline in FHA + lending standards, HUD’s + +On line 9202: + imposed on the GSEs, + the decline in FHA lending + standards, HUD’s pressure + +On line 9202: + the GSEs, the decline + in FHA lending standards, HUD’s + pressure for reduced + +On line 9202: + standards, HUD’s pressure + for reduced underwriting + standards among mortgage + +On line 9202: + pressure for reduced + underwriting standards among + mortgage bankers, and CRA + +On line 9204: + mortgage bankers, and CRA + requirements for insured banks— + by encouraging + +On line 9204: + for insured banks— by + encouraging the growth of + the bubble, increased + +On line 9204: + encouraging the + growth of the bubble, increased + the worldwide demand + +On line 9204: + growth of the bubble, + increased the worldwide demand + for subprime PMBS. Th + +On line 9206: + bubble, increased the + worldwide demand for subprime + PMBS. Th en, in mid-2007, + +On line 9206: + worldwide demand for + subprime PMBS. Th en, in mid-2007, + the bubble began + +On line 9206: + subprime PMBS. Th en, + in mid-2007, the bubble began + to defl ate, with + +On line 9214: + e Mortgage Market + Statistical Annual—Volume II, MBS + database. Peter J. + +On line 9220: + Annual—Volume II, MBS database. + Peter J. Wallison The + Defaults Begin Th + +On line 9222: + MBS database. Peter + J. Wallison The Defaults + Begin Th e best + +On line 9222: + J. Wallison The + Defaults Begin Th e best + summary of how + +On line 9222: + The Defaults Begin + Th e best summary of + how the defl ation + +On line 9222: + Defaults Begin Th + e best summary of how + the defl ation of + +On line 9222: + e best summary + of how the defl ation of + the housing bubble + +On line 9222: + best summary of + how the defl ation of the + housing bubble led + +On line 9222: + how the defl ation + of the housing bubble led + to the fi nancial + +On line 9222: + defl ation of the + housing bubble led to the + fi nancial crisis + +On line 9222: + housing bubble led + to the fi nancial crisis + was contained in the + +On line 9222: + fi nancial crisis + was contained in the prepared + testimony that + +On line 9222: + testimony that + FDIC chair Sheila Bair delivered + to the FCIC in a + +On line 9224: + Bair delivered to + the FCIC in a September + hearing: Starting in + +On line 9224: + to the FCIC in a + September hearing: Starting + in mid global fi + +On line 9224: + to experience + serious liquidity + challenges related + +On line 9224: + prices fell, recently + originated subprime and + non-traditional + +On line 9226: + mortgage loans began + to default at record rates. Th + ese developments + +On line 9226: + default at record rates. + Th ese developments led + to growing concerns + +On line 9228: + ese developments + led to growing concerns about + the value of fi + +On line 9228: + securities and + related derivative + instruments held by + +On line 9228: + held by major fi + nancial institutions in + the U.S. and around the + +On line 9230: + major fi nancial + institutions in the U.S. + and around the world. Th + +On line 9234: + institutions in + the U.S. and around the world. Th + e diffi culty + +On line 9234: + the U.S. and around the + world. Th e diffi culty + in determining + +On line 9234: + U.S. and around the world. + Th e diffi culty in + determining the + +On line 9234: + diffi culty in + determining the value + of mortgage-related + +On line 9234: + determining the + value of mortgage-related + assets and, therefore, + +On line 9234: + assets and, therefore, + the balance-sheet strength of large banks + and non-bank fi nancial + +On line 9234: + of large banks and non-bank + fi nancial institutions + ultimately led + +On line 9234: + these institutions + to become wary of lending + to one another, + +On line 9234: + institutions to + become wary of lending to + one another, even + +On line 9234: + to become wary of + lending to one another, + even on a short-term + +On line 9234: + to one another, + even on a short-term basis.47 + [emphasis supplied] + +On line 9236: + even on a short-term + basis.47 [emphasis supplied] + All the important + +On line 9236: + basis.47 [emphasis + supplied] All the important + elements of what + +On line 9236: + All the important + elements of what happened + are in Chairman Bair’s + +On line 9236: + elements of what + happened are in Chairman Bair’s + succinct statement: (i) + +On line 9236: + are in Chairman Bair’s + succinct statement: (i) in mid + the markets began + +On line 9236: + succinct statement: (i) + in mid the markets began + to experience + +On line 9236: + because of concerns + about the credit quality + of NTMs; (ii) housing + +On line 9236: + of concerns about the + credit quality of NTMs; + (ii) housing prices fell; + +On line 9236: + NTMs; (ii) housing prices + fell; NTMs began to default + at record rates; (iii) it + +On line 9236: + (ii) housing prices fell; + NTMs began to default at + record rates; (iii) it was + +On line 9238: + prices fell; NTMs began + to default at record rates; (iii) + it was diffi cult + +On line 9238: + fell; NTMs began to + default at record rates; (iii) it + was diffi cult to + +On line 9238: + to default at record + rates; (iii) it was diffi cult + to determine the + +On line 9238: + record rates; (iii) it was + diffi cult to determine + the value of MBS, + +On line 9240: + it was diffi cult + to determine the value + of MBS, and thus the + +On line 9240: + was diffi cult to + determine the value of + MBS, and thus the fi + +On line 9240: + of MBS, and thus the + fi nancial condition of + the institutions + +On line 9240: + MBS, and thus the fi + nancial condition of the + institutions that + +On line 9240: + nancial condition + of the institutions that + held them; and, (iv) fi + +On line 9240: + condition of the + institutions that held them; + and, (iv) fi nally, + +On line 9240: + institutions that + held them; and, (iv) fi nally, + as a consequence + +On line 9240: + consequence of this + uncertainty—especially + aft er the failure + +On line 9240: + of Lehman—fi nancial + institutions would not lend + to one another. + +On line 9244: + one another. Th + at phenomenon was the + fi nancial crisis. + +On line 9244: + another. Th at + phenomenon was the fi + nancial crisis. Th + +On line 9246: + at phenomenon + was the fi nancial crisis. + Th e following + +On line 9246: + was the fi nancial + crisis. Th e following + discussion will show + +On line 9246: + nancial crisis. Th + e following discussion + will show how each of + +On line 9246: + show how each of these + steps operated to bring + down the fi nancial + +On line 9250: + To understand the + transmission mechanism, it + is necessary to + +On line 9250: + mechanism, it is + necessary to distinguish + between PMBS, on the + +On line 9250: + it is necessary + to distinguish between PMBS, + on the one hand, and + +On line 9250: + is necessary to + distinguish between PMBS, on + the one hand, and the + +On line 9250: + the one hand, and the + MBS that were distributed by + government agencies + +On line 9250: + and the MBS that were + distributed by government + agencies such as FHA/Ginnie + +On line 9250: + that were distributed + by government agencies such + as FHA/Ginnie Mae and the + +On line 9250: + were distributed by + government agencies such as + FHA/Ginnie Mae and the GSEs + +On line 9250: + government agencies + such as FHA/Ginnie Mae and the GSEs + (referred to jointly + +On line 9250: + agencies such as FHA/Ginnie + Mae and the GSEs (referred to + jointly as "Agencies" + +On line 9250: + such as FHA/Ginnie Mae and + the GSEs (referred to jointly + as "Agencies" in this + +On line 9250: + and the GSEs (referred + to jointly as "Agencies" in + this section). As shown + +On line 9250: + the GSEs (referred to + jointly as "Agencies" in this + section). As shown in + +On line 9250: + (referred to jointly + as "Agencies" in this section). + As shown in Table + +On line 9250: + as "Agencies" in this + section). As shown in Table + by the million NTMs + +On line 9252: + this section). As shown + in Table by the million + NTMs in the U.S. fi + +On line 9252: + shown in Table by + the million NTMs in the U.S. + fi nancial system + +On line 9252: + in Table by the + million NTMs in the U.S. fi + nancial system were + +On line 9252: + the million NTMs in + the U.S. fi nancial system + were held as (i) whole + +On line 9252: + NTMs in the U.S. fi + nancial system were held as + (i) whole mortgages, (ii) + +On line 9252: + fi nancial system + were held as (i) whole mortgages, + (ii) MBS guaranteed + +On line 9252: + nancial system were + held as (i) whole mortgages, (ii) + MBS guaranteed by + +On line 9252: + as (i) whole mortgages, + (ii) MBS guaranteed by the + GSEs, or insured or + +On line 9252: + (i) whole mortgages, (ii) + MBS guaranteed by the GSEs, + or insured or held + +On line 9252: + whole mortgages, (ii) MBS + guaranteed by the GSEs, or + insured or held by + +On line 9252: + MBS guaranteed by + the GSEs, or insured or held + by a government + +On line 9252: + the GSEs, or insured + or held by a government + agency or a bank + +On line 9252: + or insured or held + by a government agency + or a bank under + +On line 9252: + insured or held by + a government agency or + a bank under the + +On line 9252: + by a government + agency or a bank under + the CRA, or (iii) as + +On line 9252: + agency or a bank + under the CRA, or (iii) as + PMBS securitized + +On line 9252: + under the CRA, or + (iii) as PMBS securitized + by private fi rms + +On line 9252: + PMBS securitized + by private fi rms such as + Countrywide. Th e + +On line 9254: + by private fi rms + such as Countrywide. Th e + million NTMs had an + +On line 9254: + such as Countrywide. + Th e million NTMs had an + aggregate unpaid + +On line 9254: + Th e million NTMs + had an aggregate unpaid + principal balance + +On line 9254: + had an aggregate + unpaid principal balance + of more than trillion, + +On line 9254: + aggregate unpaid + principal balance of more + than trillion, and the + +On line 9254: + more than trillion, and + the portion represented + by PMBS consisted + +On line 9254: + than trillion, and the + portion represented by + PMBS consisted of + +On line 9254: + by PMBS consisted + of million mortgages with an + aggregate unpaid + +On line 9254: + of million mortgages + with an aggregate unpaid + principal balance + +On line 9254: + mortgage delinquencies + and defaults multiplied in + the U.S. fi nancial + +On line 9254: + were transmitted to + fi nancial institutions + through their holdings of + +On line 9254: + transmitted to fi + nancial institutions through + their holdings of PMBS. + +On line 9254: + institutions through + their holdings of PMBS. How did + this happen, and what + +On line 9254: + through their holdings of + PMBS. How did this happen, and + what role was played by + +On line 9254: + this happen, and what + role was played by government + housing policy1 + +On line 9256: + government housing + policy1 Both Agency MBS + and PMBS pass through to + +On line 9256: + housing policy1 + Both Agency MBS and PMBS pass + through to investors the + +On line 9256: + and PMBS pass through to + investors the principal and + interest received + +On line 9256: + the principal and + interest received on the + mortgages in a pool + +On line 9256: + interest received + on the mortgages in a pool + that backs an issue + +On line 9256: + on the mortgages in + a pool that backs an issue + of securities; + +On line 9256: + the mortgages in a + pool that backs an issue of + securities; the + +On line 9256: + that backs an issue + of securities; the diff + erence between them + +On line 9256: + securities; the + diff erence between them is + the way they protect + +On line 9256: + diff erence between + them is the way they protect + investors against credit + +On line 9256: + the way they protect + investors against credit risk—i.e., the + possibility + +On line 9256: + investors against credit + risk—i.e., the possibility + of losses in the + +On line 9256: + possibility + of losses in the event that + the mortgages in the + +On line 9256: + losses in the event + that the mortgages in the pool + begin to default. + +On line 9260: + in the event that the + mortgages in the pool begin + to default. Th e + +On line 9260: + the mortgages in the + pool begin to default. Th + e Agencies insure + +On line 9260: + mortgages in the pool + begin to default. Th e + Agencies insure or + +On line 9260: + in the pool begin + to default. Th e Agencies + insure or place a + +On line 9260: + begin to default. + Th e Agencies insure or + place a guarantee + +On line 9260: + to default. Th e + Agencies insure or place a + guarantee on all + +On line 9260: + Agencies insure or + place a guarantee on all + the securities + +On line 9260: + place a guarantee + on all the securities + issued by a pool + +On line 9260: + guarantee on all + the securities issued + by a pool they or + +On line 9260: + "Systemically + Important Institutions + and the Issue of + +On line 9260: + and the Issue of + ‘Too-Big-to-Fail,’" Testimony to the + FCIC, September p.3. + +On line 9266: + ‘Too-Big-to-Fail,’" Testimony + to the FCIC, September p.3. + Dissenting Statement + +On line 9270: + securities are + rated or considered to + be AAA. PMBS rely + +On line 9270: + or considered to + be AAA. PMBS rely on a + classifi cation and + +On line 9270: + be AAA. PMBS rely + on a classifi cation and + subordination + +On line 9270: + classifi cation and + subordination system + known as "tranching" to + +On line 9270: + subordination + system known as "tranching" to + provide some investors + +On line 9270: + known as "tranching" to + provide some investors in the + pool with a degree + +On line 9270: + provide some investors + in the pool with a degree + of assurance that + +On line 9270: + in the pool with a + degree of assurance that + they will not suff er + +On line 9270: + pool with a degree + of assurance that they will + not suff er losses + +On line 9270: + of assurance that + they will not suff er losses + because of mortgage + +On line 9270: + er losses because + of mortgage defaults. In the + tranching system, diff + +On line 9270: + of mortgage defaults. + In the tranching system, diff + erent classes of + +On line 9270: + system, diff erent + classes of securities + are issued by the + +On line 9272: + erent classes of + securities are issued + by the pool. Th e + +On line 9272: + securities are + issued by the pool. Th e + rights of some classes + +On line 9272: + issued by the pool. + Th e rights of some classes + to receive payments + +On line 9274: + Th e rights of some + classes to receive payments + of principal and + +On line 9274: + classes to receive + payments of principal and + interest from the + +On line 9274: + receive payments of + principal and interest + from the mortgages in + +On line 9274: + and interest from + the mortgages in the pool are + subordinated + +On line 9274: + mortgages in the pool + are subordinated to + the rights of other + +On line 9274: + the superior + classes are more likely to + receive payment even + +On line 9274: + are more likely to + receive payment even if there + are some defaults among + +On line 9274: + to receive payment + even if there are some defaults + among the mortgages in + +On line 9274: + receive payment even + if there are some defaults among + the mortgages in the + +On line 9278: + even if there are some + defaults among the mortgages in + the pool. Th rough this + +On line 9278: + are some defaults among + the mortgages in the pool. Th + rough this mechanism, + +On line 9278: + the mortgages in the + pool. Th rough this mechanism, + approximately + +On line 9278: + rough this mechanism, + approximately percent + of an issue of + +On line 9280: + approximately + percent of an issue of + PMBS could be rated + +On line 9280: + rated AAA or AA, + even if the underlying + mortgages are NTMs that + +On line 9280: + AAA or AA, even if + the underlying mortgages + are NTMs that have a + +On line 9280: + that have a higher + rate of delinquency than prime + loans. In theory, + +On line 9280: + have a higher rate + of delinquency than prime loans. + In theory, for + +On line 9280: + rate of delinquency + than prime loans. In theory, + for example, if + +On line 9280: + of delinquency than + prime loans. In theory, for + example, if the + +On line 9280: + In theory, for + example, if the historic + rates of loss on a + +On line 9280: + for example, if + the historic rates of loss on + a pool of NTMs is, + +On line 9280: + example, if the + historic rates of loss on a + pool of NTMs is, say, + +On line 9280: + the historic rates of + loss on a pool of NTMs is, + say, fi ve percent, + +On line 9280: + historic rates of loss + on a pool of NTMs is, say, + fi ve percent, then + +On line 9280: + loss on a pool of + NTMs is, say, fi ve percent, + then those losses will + +On line 9280: + on a pool of NTMs + is, say, fi ve percent, then + those losses will be + +On line 9280: + of NTMs is, say, fi + ve percent, then those losses + will be absorbed by + +On line 9280: + NTMs is, say, fi ve + percent, then those losses will + be absorbed by the + +On line 9280: + fi ve percent, then + those losses will be absorbed + by the ten percent + +On line 9280: + ve percent, then those + losses will be absorbed by + the ten percent of + +On line 9280: + ten percent of the + securities holders who + are in the classes + +On line 9280: + holders who are in + the classes rated lower + than AAA or AA. Of + +On line 9280: + are in the classes + rated lower than AAA or + AA. Of course, if the + +On line 9280: + the classes rated + lower than AAA or AA. Of + course, if the losses + +On line 9280: + rated lower than + AAA or AA. Of course, if the + losses are greater than + +On line 9280: + losses are greater than + anticipated—exactly + what happened as the + +On line 9280: + what happened as the + recent bubble began to + defl ate—they will + +On line 9280: + the recent bubble + began to defl ate—they + will reach into the + +On line 9280: + began to defl + ate—they will reach into the + higher classes and + +On line 9280: + into the higher + classes and substantially + reduce their value.48 + +On line 9280: + the higher classes + and substantially reduce + their value.48 It is + +On line 9280: + higher classes and + substantially reduce their + value.48 It is not + +On line 9280: + and substantially + reduce their value.48 It is + not clear whether, in or + +On line 9280: + reduce their value.48 + It is not clear whether, in or + mortgage delinquencies + +On line 9280: + whether, in or mortgage + delinquencies and defaults had + actually caused + +On line 9280: + had actually + caused cash losses in the AAA + tranches of PMBS, but + +On line 9280: + losses in the AAA + tranches of PMBS, but the rate + at which delinquencies + +On line 9280: + tranches of PMBS, but + the rate at which delinquencies + and defaults among NTMs + +On line 9280: + but the rate at which + delinquencies and defaults among + NTMs were occurring + +On line 9280: + and defaults among NTMs + were occurring throughout the + fi nancial system + +On line 9280: + defaults among NTMs were + occurring throughout the fi + nancial system was + +On line 9284: + a matter of great + concern to investors. Th is + means that investors in + +On line 9286: + is means that investors + in PMBS and government-backed + Agency MBS had diff + +On line 9286: + that investors in PMBS + and government-backed Agency + MBS had diff erent + +On line 9286: + and government-backed + Agency MBS had diff erent + experiences when + +On line 9286: + Agency MBS had diff + erent experiences when + the bubble began + +On line 9288: + began to defl + ate. Th ose who invested + in Agency MBS did + +On line 9288: + defl ate. Th ose + who invested in Agency + MBS did not suff er + +On line 9288: + ose who invested + in Agency MBS did not suff + er losses (the U.S. + +On line 9288: + in Agency MBS did + not suff er losses (the U.S. + government has thus + +On line 9288: + not suff er losses + (the U.S. government has thus + far protected all + +On line 9288: + (the U.S. government + has thus far protected all + investors in Agency + +On line 9288: + government has thus + far protected all investors + in Agency MBS), while + +On line 9288: + far protected all + investors in Agency MBS), while + those who invested + +On line 9288: + investors in Agency + MBS), while those who invested + in PMBS were exposed + +On line 9288: + Agency MBS), while those + who invested in PMBS were + exposed to losses + +On line 9288: + who invested in + PMBS were exposed to losses + if the losses on + +On line 9288: + invested in PMBS + were exposed to losses if + the losses on the + +On line 9288: + PMBS were exposed to + losses if the losses on + the underlying + +On line 9288: + if the losses on + the underlying mortgages + were so great that they + +On line 9288: + the underlying + mortgages were so great that they + threatened to invade + +On line 9288: + were so great that they + threatened to invade the AAA + and AA classes. Even + +On line 9288: + great that they threatened + to invade the AAA and AA + classes. Even if no + +On line 9288: + threatened to invade + the AAA and AA classes. Even + if no cash losses + +On line 9288: + AAA and AA classes. + Even if no cash losses had + actually been + +On line 9288: + if no cash losses + had actually been suff + ered, the holders of + +On line 9288: + no cash losses had + actually been suff ered, + the holders of PMBS + +On line 9288: + had actually + been suff ered, the holders of + PMBS would see a sharp + +On line 9288: + the holders of PMBS + would see a sharp decline in + the market value + +On line 9288: + holders of PMBS would + see a sharp decline in the + market value of + +On line 9288: + a sharp decline in + the market value of their + holdings as investors—shocked + +On line 9288: + the market value + of their holdings as investors—shocked + by the large number + +On line 9288: + market value of + their holdings as investors—shocked by + the large number of + +On line 9288: + as investors—shocked by the + large number of defaults on + mortgages—fl ed the + +On line 9288: + the large number of + defaults on mortgages—fl ed + the asset-backed market. + +On line 9288: + mortgages—fl ed the + asset-backed market. So when we + look for the direct + +On line 9288: + asset-backed market. So + when we look for the direct + eff ect of mortgage + +On line 9288: + market. So when we + look for the direct eff ect + of mortgage failures + +On line 9288: + when we look for the + direct eff ect of mortgage + failures on the fi + +On line 9288: + look for the direct + eff ect of mortgage failures + on the fi nancial + +On line 9288: + direct eff ect of + mortgage failures on the fi + nancial condition + +On line 9288: + mortgage failures on + the fi nancial condition + of various fi + +On line 9288: + nancial condition + of various fi nancial + institutions in + +On line 9288: + institutions in + the fi nancial crisis we + should look only to + +On line 9288: + in the fi nancial + crisis we should look only + to the PMBS, not the + +On line 9288: + nancial crisis we + should look only to the PMBS, + not the MBS issued + +On line 9288: + crisis we should look + only to the PMBS, not the + MBS issued by the + +On line 9290: + should look only to + the PMBS, not the MBS issued + by the Agencies. In + +On line 9290: + to the PMBS, not the + MBS issued by the Agencies. + In addition, the + +On line 9290: + by the Agencies. In + addition, the default and + delinquency ratios + +On line 9290: + delinquency ratios + on the loans underlying + the PMBS were higher + +On line 9290: + ratios among the loans + held or guaranteed by the + Agencies. Many of the + +On line 9290: + among the loans held or + guaranteed by the Agencies. + Many of the loans which + +On line 9290: + held or guaranteed + by the Agencies. Many of the + loans which backed the PMBS + +On line 9290: + or guaranteed by + the Agencies. Many of the loans + which backed the PMBS were + +On line 9290: + guaranteed by the + Agencies. Many of the loans which + backed the PMBS were the + +On line 9290: + backed the PMBS were the + self-denominated + subprime loans (that is, + +On line 9290: + made by subprime lenders + explicitly to subprime + borrowers) and were + +On line 9290: + lenders explicitly + to subprime borrowers) and + were classifi ed + +On line 9290: + explicitly to + subprime borrowers) and were + classifi ed in + +On line 9290: + classifi ed in + the worst-performing categories + in Table In part, + +On line 9290: + of the NTMs held or + guaranteed by the Agencies + was due to the fact + +On line 9290: + or guaranteed by + the Agencies was due to the + fact that the Agencies + +On line 9290: + guaranteed by the + Agencies was due to the fact + that the Agencies were + +On line 9290: + the Agencies was due + to the fact that the Agencies + were not buying for + +On line 9290: + that the Agencies were + not buying for economic + purposes—to make profi + +On line 9290: + were not buying for + economic purposes—to make + profi ts—but only + +On line 9290: + ts—but only to + meet government requirements + such as the AH goals. + +On line 9292: + to meet government + requirements such as the AH + goals. Th ey did not + +On line 9292: + such as the AH goals. + Th ey did not want or need + the higher-yielding and + +On line 9292: + as the AH goals. Th + ey did not want or need the + higher-yielding and thus + +On line 9292: + Th ey did not want + or need the higher-yielding and + thus more risky mortgages + +On line 9292: + ey did not want or + need the higher-yielding and thus + more risky mortgages that + +On line 9292: + did not want or need + the higher-yielding and thus more + risky mortgages that backed + +On line 9292: + not want or need the + higher-yielding and thus more risky + mortgages that backed the + +On line 9292: + need the higher-yielding + and thus more risky mortgages that + backed the PMBS, because + +On line 9292: + the higher-yielding and + thus more risky mortgages that backed + the PMBS, because they + +On line 9292: + higher-yielding and thus + more risky mortgages that backed the + PMBS, because they did + +On line 9292: + thus more risky mortgages + that backed the PMBS, because they + did not need higher + +On line 9292: + more risky mortgages that + backed the PMBS, because they did + not need higher yields + +On line 9292: + risky mortgages that backed + the PMBS, because they did not + need higher yields in + +On line 9292: + backed the PMBS, because + they did not need higher yields + in order to sell + +On line 9292: + the PMBS, because they + did not need higher yields in + order to sell their + +On line 9292: + because they did not + need higher yields in order + to sell their MBS. In + +On line 9292: + did not need higher + yields in order to sell their + MBS. In addition, + +On line 9292: + need higher yields in + order to sell their MBS. In + addition, because + +On line 9292: + order to sell their + MBS. In addition, because + of their lower cost + +On line 9292: + to sell their MBS. In + addition, because of their + lower cost funding, + +On line 9292: + MBS. In addition, + because of their lower cost + funding, the Agencies + +On line 9292: + addition, because + of their lower cost funding, + the Agencies could pay + +On line 9292: + of their lower cost + funding, the Agencies could pay + more for the NTMs they + +On line 9292: + lower cost funding, + the Agencies could pay more for + the NTMs they bought and + +On line 9292: + the Agencies could pay + more for the NTMs they bought and + thus could acquire the + +On line 9292: + Agencies could pay more + for the NTMs they bought and thus + could acquire the "best + +On line 9292: + pay more for the NTMs + they bought and thus could acquire + the "best of the worst." + +On line 9292: + more for the NTMs they + bought and thus could acquire the + "best of the worst." A + +On line 9292: + the NTMs they bought and + thus could acquire the "best of + the worst." A thorough + +On line 9292: + thus could acquire the + "best of the worst." A thorough + description of the + +On line 9292: + the "best of the worst." + A thorough description of + the tranching system, + +On line 9292: + "best of the worst." A + thorough description of the + tranching system, and + +On line 9292: + the worst." A thorough + description of the tranching + system, and many more + +On line 9292: + thorough description + of the tranching system, and + many more details about + +On line 9292: + and many more details + about various methods of + protecting senior + +On line 9292: + protecting senior + tranches, is contained in Gary + B. Gorton, Slapped By + +On line 9292: + tranches, is contained + in Gary B. Gorton, Slapped By + the Invisible + +On line 9292: + in Gary B. Gorton, + Slapped By the Invisible + Hand: Th e Panic + +On line 9292: + Gary B. Gorton, Slapped + By the Invisible Hand: + Th e Panic of + +On line 9294: + Gorton, Slapped By the + Invisible Hand: Th e + Panic of Oxford + +On line 9294: + Invisible Hand: + Th e Panic of Oxford + University Press, + +On line 9298: + Hand: Th e Panic + of Oxford University + Press, pp. 82-113. Peter + +On line 9298: + Th e Panic of + Oxford University Press, + pp. 82-113. Peter J. + +On line 9304: + Wallison PMBS are + Connected to All Other + NTMs Th rough Housing + +On line 9306: + PMBS are Connected + to All Other NTMs Th rough + Housing Prices But this + +On line 9306: + Connected to All + Other NTMs Th rough Housing + Prices But this does not + +On line 9306: + All Other NTMs Th + rough Housing Prices But this does + not mean that only + +On line 9306: + Other NTMs Th rough + Housing Prices But this does not + mean that only the + +On line 9306: + NTMs Th rough Housing + Prices But this does not mean that + only the failure + +On line 9306: + rough Housing Prices But + this does not mean that only + the failure of the + +On line 9306: + Housing Prices But this + does not mean that only the + failure of the PMBS + +On line 9306: + not mean that only + the failure of the PMBS was + responsible for + +On line 9306: + failure of the PMBS + was responsible for the + fi nancial crisis. + +On line 9306: + responsible for + the fi nancial crisis. In + a sense, all mortgages + +On line 9306: + nancial crisis. In + a sense, all mortgages are linked + to one another + +On line 9306: + a sense, all mortgages + are linked to one another + through housing prices, and + +On line 9306: + mortgages are linked to + one another through housing + prices, and housing prices + +On line 9306: + one another through + housing prices, and housing prices + in turn are highly + +On line 9306: + and housing prices in + turn are highly sensitive + to delinquencies and + +On line 9308: + highly sensitive + to delinquencies and defaults + on mortgages. Th is + +On line 9308: + on mortgages. Th is + is a characteristic + of mortgages that is + +On line 9308: + mortgages. Th is is + a characteristic of + mortgages that is not + +On line 9308: + credit card holder + defaults on his obligations + it has little eff + +On line 9308: + card holder defaults + on his obligations it has + little eff ect on + +On line 9308: + on his obligations + it has little eff ect on + other credit card + +On line 9308: + obligations it has + little eff ect on other + credit card holders, + +On line 9308: + it has little eff + ect on other credit card + holders, but if a + +On line 9308: + on a mortgage the + resulting foreclosure has + an eff ect on the + +On line 9308: + has an eff ect on + the value of all homes in + the vicinity and + +On line 9308: + an eff ect on the + value of all homes in the + vicinity and thus + +On line 9308: + value of all homes + in the vicinity and thus + on the quality + +On line 9308: + of all homes in the + vicinity and thus on the + quality of all + +On line 9308: + in the vicinity + and thus on the quality + of all mortgages on + +On line 9308: + the vicinity and + thus on the quality of + all mortgages on those + +On line 9308: + vicinity and thus + on the quality of all + mortgages on those homes. + +On line 9310: + on the quality + of all mortgages on those homes. + Accordingly, the + +On line 9310: + all mortgages on those + homes. Accordingly, the PMBS + were intimately + +On line 9310: + homes. Accordingly, + the PMBS were intimately + connected—through housing + +On line 9310: + housing prices—to the + NTMs securitized by the + Agencies. Because there + +On line 9310: + NTMs securitized + by the Agencies. Because there + were so many more NTMs + +On line 9310: + securitized by + the Agencies. Because there were + so many more NTMs held + +On line 9310: + the Agencies. Because + there were so many more NTMs held + or securitized + +On line 9310: + Agencies. Because there + were so many more NTMs held or + securitized by + +On line 9310: + there were so many more + NTMs held or securitized + by the Agencies (see + +On line 9310: + so many more NTMs held + or securitized by the + Agencies (see Table + +On line 9310: + or securitized + by the Agencies (see Table + their unprecedented + +On line 9310: + by the Agencies (see + Table their unprecedented + numbers—even + +On line 9310: + numbers—even + in cases where they had a + lower average + +On line 9310: + in cases where they + had a lower average + rate of delinquency + +On line 9310: + cases where they had + a lower average rate + of delinquency and + +On line 9310: + average rate of + delinquency and default than + the NTMs that backed the + +On line 9310: + of delinquency and + default than the NTMs that backed + the PMBS—was the major + +On line 9310: + than the NTMs that backed + the PMBS—was the major source of + downward pressure on + +On line 9310: + NTMs that backed the PMBS—was + the major source of downward + pressure on housing + +On line 9310: + the PMBS—was the major + source of downward pressure on + housing prices throughout + +On line 9310: + pressure on housing + prices throughout the United States. + Weakening housing + +On line 9310: + housing prices throughout + the United States. Weakening + housing prices, in turn, + +On line 9310: + Weakening housing + prices, in turn, caused more mortgage + defaults, among both NTMs + +On line 9310: + prices, in turn, caused more + mortgage defaults, among both NTMs + in general and + +On line 9310: + mortgage defaults, among + both NTMs in general and + the particular + +On line 9310: + general and the + particular NTMs that were + the collateral + +On line 9310: + particular NTMs + that were the collateral + for PMBS. In other + +On line 9310: + the collateral + for PMBS. In other words, the + NTMs underlying + +On line 9310: + collateral for + PMBS. In other words, the NTMs + underlying the + +On line 9310: + for PMBS. In other + words, the NTMs underlying + the PMBS were weakened + +On line 9310: + PMBS. In other words, + the NTMs underlying the + PMBS were weakened by + +On line 9310: + In other words, the + NTMs underlying the PMBS + were weakened by the + +On line 9310: + PMBS were weakened by + the delinquencies and defaults + among the much larger + +On line 9310: + the delinquencies and + defaults among the much larger + number of mortgages + +On line 9310: + defaults among the much + larger number of mortgages + held or guaranteed + +On line 9310: + among the much larger + number of mortgages held or + guaranteed as MBS + +On line 9312: + number of mortgages + held or guaranteed as MBS + by the Agencies. In + +On line 9312: + held or guaranteed + as MBS by the Agencies. In + reality, then, + +On line 9312: + MBS by the Agencies. + In reality, then, the + losses on the PMBS + +On line 9312: + In reality, + then, the losses on the PMBS + were much higher than + +On line 9312: + reality, then, + the losses on the PMBS were + much higher than they + +On line 9312: + then, the losses on + the PMBS were much higher than + they would have been if + +On line 9312: + the losses on the + PMBS were much higher than they + would have been if the + +On line 9312: + on the PMBS were much + higher than they would have been + if the government’s + +On line 9312: + PMBS were much higher + than they would have been if the + government’s housing + +On line 9312: + higher than they would + have been if the government’s + housing policies had + +On line 9312: + than they would have been + if the government’s housing + policies had not brought + +On line 9312: + would have been if the + government’s housing policies + had not brought into + +On line 9312: + had not brought into + being million other NTMs + that were failing in + +On line 9312: + NTMs that were failing + in unprecedented numbers. + Th ese failures drove + +On line 9312: + that were failing in + unprecedented numbers. Th + ese failures drove down + +On line 9314: + in unprecedented + numbers. Th ese failures drove + down housing prices by + +On line 9314: + drove down housing prices + by percent--an unprecedented + decline—which multiplied + +On line 9316: + the PMBS. Finally, + the funds that the government + directed into + +On line 9316: + the housing market + in pursuit of its social + policies enlarged the + +On line 9316: + in pursuit of its + social policies enlarged the + housing bubble and + +On line 9316: + its social policies + enlarged the housing bubble + and extended it + +On line 9320: + enlarged the housing + bubble and extended it + in time. Th e longer + +On line 9320: + the housing bubble + and extended it in time. + Th e longer housing + +On line 9320: + it in time. Th e + longer housing bubbles grow, the + riskier the mortgages + +On line 9320: + Th e longer housing + bubbles grow, the riskier the + mortgages they contain; + +On line 9320: + longer housing bubbles + grow, the riskier the mortgages + they contain; lenders are + +On line 9320: + grow, the riskier the + mortgages they contain; lenders are + constantly trying + +On line 9320: + mortgages they contain; + lenders are constantly trying + to fi nd ways to + +On line 9320: + lenders are constantly + trying to fi nd ways to + keep monthly mortgage + +On line 9320: + to fi nd ways to + keep monthly mortgage payments + down while borrowers + +On line 9320: + fi nd ways to keep + monthly mortgage payments down + while borrowers are + +On line 9320: + growing, the risks that + were building within it were + obscured. Borrowers + +On line 9320: + were building within + it were obscured. Borrowers + who would otherwise + +On line 9320: + building within it + were obscured. Borrowers who + would otherwise have + +On line 9320: + Borrowers who would + otherwise have defaulted + on their loans, bringing + +On line 9320: + who would otherwise + have defaulted on their loans, + bringing an end to + +On line 9320: + have defaulted on + their loans, bringing an end to + the bubble, were able + +On line 9320: + defaulted on their + loans, bringing an end to the + bubble, were able to + +On line 9320: + their loans, bringing an + end to the bubble, were able + to use the rising + +On line 9320: + loans, bringing an end + to the bubble, were able to + use the rising home + +On line 9320: + bringing an end to + the bubble, were able to use + the rising home prices + +On line 9320: + end to the bubble, + were able to use the rising + home prices to refi + +On line 9320: + to the bubble, were + able to use the rising home + prices to refi nance, + +On line 9320: + bubble, were able to + use the rising home prices to + refi nance, sometimes + +On line 9320: + the rising home prices + to refi nance, sometimes at + lower interest + +On line 9320: + refi nance, sometimes + at lower interest rates. + With delinquency rates + +On line 9320: + rates relatively + low, investors did not have a + reason to exit + +On line 9320: + low, investors did not + have a reason to exit + the mortgage markets, + +On line 9320: + investors did not have + a reason to exit the + mortgage markets, and + +On line 9320: + reason to exit + the mortgage markets, and the + continuing fl + +On line 9320: + the mortgage markets, + and the continuing fl + ow of funds into + +On line 9320: + continuing fl + ow of funds into mortgages + allowed the bubble + +On line 9320: + ow of funds into + mortgages allowed the bubble + to extend for an + +On line 9320: + mortgages allowed the + bubble to extend for an + unprecedented years. + +On line 9322: + to extend for an + unprecedented years. Th is + in turn enabled the + +On line 9322: + an unprecedented + years. Th is in turn enabled + the PMBS market to + +On line 9322: + unprecedented years. + Th is in turn enabled the + PMBS market to grow + +On line 9324: + years. Th is in turn + enabled the PMBS market to + grow to enormous size + +On line 9324: + is in turn enabled + the PMBS market to grow to + enormous size and thus + +On line 9324: + turn enabled the PMBS + market to grow to enormous + size and thus to have + +On line 9324: + PMBS market to grow + to enormous size and thus to + have a more calamitous + +On line 9324: + market to grow to + enormous size and thus to have + a more calamitous eff + +On line 9324: + to grow to enormous + size and thus to have a more + calamitous eff ect when + +On line 9324: + to enormous size and + thus to have a more calamitous + eff ect when it fi + +On line 9324: + and thus to have a + more calamitous eff ect when it + fi nally collapsed. + +On line 9324: + thus to have a more + calamitous eff ect when it fi + nally collapsed. If + +On line 9324: + more calamitous eff ect + when it fi nally collapsed. + If the government + +On line 9324: + fi nally collapsed. + If the government policies + that provided a + +On line 9324: + If the government + policies that provided a + continuing source + +On line 9324: + continuing source + of funding for the bubble + had not been pursued, + +On line 9324: + of funding for the + bubble had not been pursued, + it is doubtful that + +On line 9324: + the bubble had not + been pursued, it is doubtful + that there would have been + +On line 9324: + bubble had not been + pursued, it is doubtful that + there would have been a + +On line 9324: + not been pursued, it + is doubtful that there would have + been a PMBS market + +On line 9324: + is doubtful that there + would have been a PMBS market + remotely as large + +On line 9324: + that there would have been + a PMBS market remotely + as large as the one + +On line 9324: + there would have been a + PMBS market remotely as + large as the one that + +On line 9324: + been a PMBS market + remotely as large as the + one that developed, + +On line 9324: + remotely as large + as the one that developed, + or that—when the housing + +On line 9324: + one that developed, + or that—when the housing bubble + collapsed—the losses to + +On line 9324: + collapsed—the losses to + fi nancial institutions + would have been as great. + +On line 9326: + would have been as great. + PMBS, as Securities, are + Vulnerable to + +On line 9326: + are Vulnerable + to Investor Sentiment In + addition to their + +On line 9326: + Investor Sentiment + In addition to their link + to the Agencies’ NTMs + +On line 9326: + In addition to + their link to the Agencies’ NTMs + through housing prices, PMBS + +On line 9328: + addition to their + link to the Agencies’ NTMs through + housing prices, PMBS were + +On line 9328: + link to the Agencies’ + NTMs through housing prices, PMBS were + particularly + +On line 9328: + NTMs through housing prices, + PMBS were particularly + vulnerable to + +On line 9328: + particularly + vulnerable to changes in + investor sentiment + +On line 9332: + vulnerable to + changes in investor sentiment + about mortgages. Th e + +On line 9334: + of the crisis. Th + ere are many reasons for the + popularity + +On line 9340: + ere are many reasons + for the popularity + Dissenting Statement + +On line 9342: + example, the Basel + regulations provided + that mortgages held in + +On line 9342: + Basel regulations + provided that mortgages held + in the form of MBS—presumably + +On line 9342: + that mortgages held in + the form of MBS—presumably because of + their superior + +On line 9342: + their superior + liquidity compared to + whole mortgages—required + +On line 9342: + mortgages—required a + bank to hold only percent + risk-based capital, while + +On line 9342: + bank to hold only + percent risk-based capital, while + whole mortgages required + +On line 9344: + whole mortgages required + risk-based capital backing of + four percent. Th is + +On line 9344: + mortgages required risk-based + capital backing of four + percent. Th is made + +On line 9346: + Th is made all forms + of MBS, including PMBS, much + less expensive to + +On line 9346: + is made all forms of + MBS, including PMBS, much less + expensive to hold + +On line 9346: + of MBS, including + PMBS, much less expensive to + hold than whole mortgages. + +On line 9346: + MBS, including PMBS, + much less expensive to hold + than whole mortgages. In + +On line 9346: + much less expensive + to hold than whole mortgages. In + addition, mortgages + +On line 9346: + hold than whole mortgages. + In addition, mortgages in + securitized form + +On line 9346: + form could be traded + more easily, and used more + readily as a + +On line 9346: + easily, and used + more readily as a source + of liquidity + +On line 9346: + readily as a + source of liquidity through + repurchase agreements. + +On line 9348: + of the benefi ts + of securitized mortgages + are also detriments + +On line 9348: + the benefi ts of + securitized mortgages are + also detriments when + +On line 9348: + of securitized + mortgages are also detriments + when certain mortgage + +On line 9348: + mortgages are also + detriments when certain mortgage + market conditions + +On line 9348: + are also detriments + when certain mortgage market + conditions prevail. + +On line 9348: + detriments when certain + mortgage market conditions + prevail. If housing + +On line 9348: + when certain mortgage + market conditions prevail. + If housing values + +On line 9348: + on whole mortgages are + recognized only slowly + in bank fi nancial + +On line 9348: + recognized only + slowly in bank fi nancial + statements and will be + +On line 9348: + only slowly in + bank fi nancial statements and + will be recognized + +On line 9348: + slowly in bank fi + nancial statements and will be + recognized even more + +On line 9348: + fi nancial statements + and will be recognized even + more slowly in the + +On line 9348: + the larger market. + PMBS, however, are far more + vulnerable to + +On line 9348: + PMBS, however, are + far more vulnerable to + swings in sentiment + +On line 9348: + however, are far + more vulnerable to swings + in sentiment than + +On line 9348: + more vulnerable + to swings in sentiment than + whole mortgages held on + +On line 9348: + vulnerable to + swings in sentiment than whole + mortgages held on bank + +On line 9348: + sentiment than whole + mortgages held on bank balance + sheets. First, because they + +On line 9348: + mortgages held on bank + balance sheets. First, because they + are more easily + +On line 9348: + held on bank balance + sheets. First, because they are more + easily traded, + +On line 9348: + sheets. First, because they + are more easily traded, + PMBS values can be + +On line 9348: + First, because they are + more easily traded, PMBS + values can be more + +On line 9348: + information about + the underlying mortgages + than whole mortgages in + +On line 9348: + the underlying + mortgages than whole mortgages in + the same principal + +On line 9348: + than whole mortgages in + the same principal amount. PMBS + markets tend to be + +On line 9348: + the same principal + amount. PMBS markets tend to be + thin, because PMBS pools + +On line 9348: + same principal amount. + PMBS markets tend to be thin, + because PMBS pools diff + +On line 9348: + markets tend to be + thin, because PMBS pools diff er + from one another. + +On line 9348: + thin, because PMBS pools + diff er from one another. + If investors believe + +On line 9348: + because PMBS pools diff + er from one another. If + investors believe that + +On line 9348: + PMBS pools diff er from + one another. If investors + believe that mortgages + +On line 9348: + one another. If + investors believe that mortgages + in general are + +On line 9348: + If investors believe + that mortgages in general + are declining in + +On line 9348: + and delinquencies, they + may abandon the market for + all PMBS, causing the + +On line 9348: + they may abandon the + market for all PMBS, causing + the general PMBS + +On line 9348: + the market for all + PMBS, causing the general + PMBS price level to + +On line 9348: + market for all PMBS, + causing the general PMBS + price level to fall + +On line 9350: + PMBS price level to + fall precipitously. For + example, in his + +On line 9350: + the Invisible + Hand, Professor Gary Gorton + of Yale notes that the + +On line 9350: + Invisible Hand, + Professor Gary Gorton of + Yale notes that the ABX + +On line 9350: + Yale notes that the ABX + index, initially published + in late for the fi + +On line 9350: + that the ABX index, + initially published in late + for the fi rst time + +On line 9350: + index, initially + published in late for the fi + rst time gave investors + +On line 9350: + published in late for + the fi rst time gave investors + a picture of how + +On line 9350: + late for the fi rst + time gave investors a picture + of how others saw + +On line 9350: + for the fi rst time + gave investors a picture of + how others saw the + +On line 9350: + rst time gave investors + a picture of how others + saw the value of + +On line 9350: + time gave investors a + picture of how others saw + the value of a + +On line 9350: + a picture of how + others saw the value of + a selected group + +On line 9352: + how others saw the + value of a selected + group of PMBS pools. Th + +On line 9354: + saw the value of + a selected group of PMBS + pools. Th e index + +On line 9354: + the value of a + selected group of PMBS pools. + Th e index showed + +On line 9354: + a selected group + of PMBS pools. Th e index + showed steeply declining + +On line 9354: + of PMBS pools. Th e + index showed steeply declining + values, which caused many + +On line 9354: + pools. Th e index + showed steeply declining values, + which caused many investors + +On line 9354: + Th e index showed + steeply declining values, which + caused many investors to + +On line 9354: + showed steeply declining + values, which caused many investors + to withdraw from the + +On line 9354: + which caused many investors + to withdraw from the market. + Gorton observed: "I + +On line 9354: + to withdraw from the + market. Gorton observed: "I + view the ABX indices + +On line 9354: + observed: "I view the + ABX indices as revealing + hitherto unknown + +On line 9354: + hitherto unknown + information, namely, the + aggregated view + +On line 9354: + aggregated view + that subprime was worth signifi + cantly less…It is not + +On line 9354: + that subprime was worth + signifi cantly less…It is not + clear whether the housing + +On line 9354: + signifi cantly less…It + is not clear whether the housing + bubble was burst by + +On line 9354: + less…It is not clear whether + the housing bubble was burst + by the ability + +On line 9354: + is not clear whether the + housing bubble was burst by + the ability to + +On line 9354: + the housing bubble + was burst by the ability + to short the subprime + +On line 9354: + by the ability + to short the subprime housing + market or whether house + +On line 9354: + ability to short + the subprime housing market + or whether house prices were + +On line 9354: + to short the subprime + housing market or whether house + prices were going down + +On line 9354: + the subprime housing + market or whether house prices were + going down and the + +On line 9354: + market or whether house + prices were going down and the + implications of + +On line 9354: + were going down and + the implications of this + were aggregated + +On line 9354: + going down and the + implications of this were + aggregated and + +On line 9354: + the implications + of this were aggregated + and revealed by the + +On line 9354: + implications of + this were aggregated and + revealed by the ABX + +On line 9358: + indices"49 Whatever + the underlying reason, + as shown in Figure + +On line 9358: + as shown in Figure + this seems to be exactly + what happened in the + +On line 9358: + shown in Figure this + seems to be exactly what + happened in the fi + +On line 9358: + Figure this seems to + be exactly what happened + in the fi nancial + +On line 9360: + what happened in the + fi nancial crisis. Th e + result was a crash + +On line 9360: + in the fi nancial + crisis. Th e result was + a crash in the MBS + +On line 9362: + fi nancial crisis. + Th e result was a crash + in the MBS market + +On line 9362: + nancial crisis. Th + e result was a crash in + the MBS market as + +On line 9362: + Th e result was + a crash in the MBS market + as investors fl ed + +On line 9362: + e result was a + crash in the MBS market as + investors fl ed what + +On line 9362: + a crash in the MBS + market as investors fl ed + what looked like major + +On line 9362: + the MBS market as + investors fl ed what looked like + major oncoming + +On line 9362: + market as investors + fl ed what looked like major + oncoming losses. + +On line 9364: + investors fl ed what + looked like major oncoming + losses. Gorton, Slapped + +On line 9364: + fl ed what looked like + major oncoming losses. + Gorton, Slapped by the + +On line 9364: + major oncoming + losses. Gorton, Slapped by the + Invisible Hand, + +On line 9370: + losses. Gorton, Slapped + by the Invisible Hand, + note pp.121-123. Peter J. + +On line 9376: + note pp.121-123. Peter J. + Wallison Figure Th e + MBS market reacts + +On line 9380: + MBS market reacts + to the bubble’s defl ation + Source: Th ompson Reuters + +On line 9380: + market reacts to + the bubble’s defl ation Source: + Th ompson Reuters Debt + +On line 9380: + the bubble’s defl + ation Source: Th ompson Reuters Debt + Capital Markets + +On line 9380: + defl ation Source: Th + ompson Reuters Debt Capital + Markets Review, Fourth + +On line 9380: + ation Source: Th ompson + Reuters Debt Capital Markets + Review, Fourth Quarter + +On line 9380: + Th ompson Reuters Debt + Capital Markets Review, + Fourth Quarter available + +On line 9386: + profound adverse eff + ect on the liquidity + of all fi nancial + +On line 9386: + that were exposed to + PMBS. As noted above, one of + the benefi ts of + +On line 9386: + noted above, one of + the benefi ts of holding + PMBS, especially + +On line 9386: + the benefi ts of + holding PMBS, especially + those with AAA ratings, + +On line 9386: + ts of holding PMBS, + especially those with AAA + ratings, was that they + +On line 9386: + PMBS, especially + those with AAA ratings, was that + they were readily + +On line 9386: + those with AAA ratings, + was that they were readily + marketable. As such, they + +On line 9386: + they were considered + sound and secure investments, + carried on balance + +On line 9386: + considered sound and + secure investments, carried + on balance sheets at + +On line 9386: + secure investments, + carried on balance sheets at + par and suitable to + +On line 9386: + investments, carried + on balance sheets at par and + suitable to serve as + +On line 9386: + on balance sheets at + par and suitable to serve as + collateral for + +On line 9386: + par and suitable to + serve as collateral for + short term fi nancing + +On line 9386: + and suitable to serve + as collateral for short + term fi nancing through + +On line 9386: + as collateral + for short term fi nancing through + repurchase agreements, + +On line 9386: + agreements, or "repos." + In a repo transaction, + a borrower sells + +On line 9386: + a borrower sells + a security to a + lender with an option + +On line 9386: + borrower sells a + security to a lender + with an option to + +On line 9386: + a security + to a lender with an option + to repurchase it + +On line 9386: + security to + a lender with an option to + repurchase it at + +On line 9386: + lender with an option + to repurchase it at a + price that provides the + +On line 9386: + with an option to + repurchase it at a price + that provides the lender + +On line 9386: + to repurchase it + at a price that provides the + lender with a return + +On line 9386: + provides the lender with + a return appropriate + for a secured loan. + +On line 9388: + appropriate for + a secured loan. Th e lender + assumes that if its + +On line 9388: + for a secured loan. + Th e lender assumes that if + its counterparty + +On line 9388: + lender assumes that if + its counterparty defaults + the collateral + +On line 9388: + assumes that if its + counterparty defaults the + collateral can + +On line 9388: + collateral can + be sold. Accordingly, if + the collateral + +On line 9388: + high quality and + liquidity, it loses + much of its value + +On line 9388: + liquidity, it + loses much of its value + for both capital + +On line 9388: + loses much of its + value for both capital + and liquidity + +On line 9390: + not actually + suff ered losses. Th is is + what happened to AAA-rated + +On line 9390: + actually suff + ered losses. Th is is what + happened to AAA-rated PMBS + +On line 9392: + suff ered losses. Th + is is what happened to AAA-rated + PMBS as housing prices + +On line 9392: + ered losses. Th is + is what happened to AAA-rated PMBS + as housing prices fi + +On line 9392: + losses. Th is is + what happened to AAA-rated PMBS as + housing prices fi rst + +On line 9392: + is is what happened + to AAA-rated PMBS as housing prices + fi rst leveled off + +On line 9392: + is what happened to + AAA-rated PMBS as housing prices fi + rst leveled off and + +On line 9392: + what happened to AAA-rated + PMBS as housing prices fi rst + leveled off and then + +On line 9392: + AAA-rated PMBS as housing + prices fi rst leveled off and + then began to fall + +On line 9392: + PMBS as housing prices + fi rst leveled off and then + began to fall in + +On line 9392: + housing prices fi rst + leveled off and then began + to fall in and as + +On line 9392: + prices fi rst leveled + off and then began to fall + in and as mortgage + +On line 9392: + leveled off and then + began to fall in and as + mortgage delinquencies + +On line 9392: + off and then began + to fall in and as mortgage + delinquencies rolled in + +On line 9392: + began to fall in + and as mortgage delinquencies + rolled in at rates no + +On line 9392: + to fall in and as + mortgage delinquencies rolled in + at rates no one had + +On line 9392: + in at rates no one + had expected. As discussed + more fully below, + +On line 9392: + at rates no one had + expected. As discussed more + fully below, when + +On line 9392: + had expected. As + discussed more fully below, + when AAA-rated PMBS became + +On line 9392: + discussed more fully + below, when AAA-rated PMBS became + unmarketable they lost + +On line 9392: + fully below, when + AAA-rated PMBS became unmarketable + they lost their value + +On line 9392: + lost their value for + liquidity purposes, + making it diffi + +On line 9396: + themselves using these + assets as collateral + for repos. Th is + +On line 9398: + repos. Th is was + the liquidity challenge + to which Chairman Bair + +On line 9402: + Chairman Bair referred + in her testimony. Th + e near-failure of + +On line 9402: + her testimony. + Th e near-failure of Bear + Stearns in March was an + +On line 9402: + example of how + the unexpected collapse + of the PMBS market + +On line 9402: + of the PMBS market + could cause a substantial loss + of liquidity + +On line 9402: + the PMBS market could + cause a substantial loss of + liquidity by + +On line 9402: + ultimately its + inability to survive + the resulting loss + +On line 9402: + inability to + survive the resulting loss + in market confi + +On line 9404: + resulting loss in + market confi dence. Th e + FCIC staff ’s review + +On line 9406: + staff ’s review of + the liquidity problems + of Bear Stearns showed that + +On line 9406: + ’s review of the + liquidity problems of + Bear Stearns showed that the + +On line 9406: + the liquidity + problems of Bear Stearns showed that + the loss of the PMBS + +On line 9406: + of Bear Stearns showed that + the loss of the PMBS market + was the single event + +On line 9406: + Bear Stearns showed that the + loss of the PMBS market was + the single event that + +On line 9406: + Stearns showed that the loss + of the PMBS market was the + single event that was + +On line 9406: + that the loss of the + PMBS market was the single + event that was crippling + +On line 9406: + the loss of the PMBS + market was the single event + that was crippling for + +On line 9406: + PMBS market was the + single event that was crippling + for Bear, because it + +On line 9406: + the single event that + was crippling for Bear, because + it eliminated + +On line 9406: + single event that was + crippling for Bear, because it + eliminated a + +On line 9406: + was crippling for Bear, + because it eliminated + a major portion + +On line 9406: + for Bear, because it + eliminated a major + portion of the fi + +On line 9406: + eliminated a + major portion of the fi + rm’s liquidity + +On line 9408: + major portion of + the fi rm’s liquidity + Dissenting Statement + +On line 9410: + rm’s liquidity + Dissenting Statement pool—AAA-rated PMBS—as + a useful source of + +On line 9410: + Dissenting Statement + pool—AAA-rated PMBS—as a useful source of + repo fi nancing. + +On line 9410: + Statement pool—AAA-rated PMBS—as a + useful source of repo fi + nancing. According + +On line 9410: + pool—AAA-rated PMBS—as a useful + source of repo fi nancing. + According to the + +On line 9410: + source of repo fi + nancing. According to the + Commission staff ’s + +On line 9410: + prepared for hearings + on May and percent of Bear’s + short term funding was + +On line 9410: + for hearings on May + and percent of Bear’s short term + funding was secured + +On line 9410: + on May and percent + of Bear’s short term funding was + secured and only + +On line 9410: + and percent of Bear’s + short term funding was secured + and only percent + +On line 9410: + short term funding was + secured and only percent + unsecured. "As of + +On line 9410: + secured and only + percent unsecured. "As of + January the FCIC + +On line 9412: + of January the + FCIC staff reported, billion + of Bear Stearns’ repo + +On line 9412: + FCIC staff reported, + billion of Bear Stearns’ repo + collateral was + +On line 9412: + billion of Bear Stearns’ + repo collateral was + composed of agency + +On line 9412: + of Bear Stearns’ repo + collateral was composed + of agency (Fannie + +On line 9412: + was in non-agency + securitized asset backed + securities [i.e., + +On line 9414: + securities [i.e., + PMBS], and billion was in whole + loans."50 Th e Agency + +On line 9414: + and billion was in + whole loans."50 Th e Agency MBS + was unaff ected + +On line 9414: + billion was in whole + loans."50 Th e Agency MBS was + unaff ected by + +On line 9414: + loans."50 Th e Agency + MBS was unaff ected by + the collapse of the + +On line 9414: + Th e Agency MBS + was unaff ected by the + collapse of the PMBS + +On line 9414: + was unaff ected + by the collapse of the PMBS + market, and could still + +On line 9414: + by the collapse of + the PMBS market, and could still + be used for funding. + +On line 9416: + the collapse of the + PMBS market, and could still be + used for funding. Th + +On line 9418: + collapse of the PMBS + market, and could still be used + for funding. Th us, + +On line 9418: + the PMBS market, and + could still be used for funding. + Th us, about percent + +On line 9418: + PMBS market, and could + still be used for funding. Th + us, about percent of + +On line 9418: + market, and could still + be used for funding. Th us, + about percent of Bear’s + +On line 9418: + could still be used for + funding. Th us, about percent + of Bear’s readily + +On line 9418: + be used for funding. + Th us, about percent of Bear’s + readily available + +On line 9418: + about percent of Bear’s + readily available sources of + funding consisted + +On line 9418: + readily available + sources of funding consisted + of PMBS that became + +On line 9418: + consisted of PMBS + that became unusable for + repo fi nancing + +On line 9418: + of PMBS that became + unusable for repo fi + nancing when the PMBS + +On line 9420: + fi nancing when the + PMBS market disappeared. Th + e loss of this source + +On line 9420: + nancing when the PMBS + market disappeared. Th e + loss of this source of + +On line 9420: + market disappeared. + Th e loss of this source of + liquidity put + +On line 9420: + loss of this source of + liquidity put the fi + rm in serious + +On line 9420: + liquidity put + the fi rm in serious + jeopardy; rumors swept + +On line 9420: + put the fi rm in + serious jeopardy; rumors + swept the market about + +On line 9420: + serious jeopardy; + rumors swept the market about + Bear’s condition, and + +On line 9420: + the market about Bear’s + condition, and clients began + withdrawing funds. Bear’s + +On line 9422: + about Bear’s condition, + and clients began withdrawing + funds. Bear’s offi cers + +On line 9422: + Bear’s condition, and + clients began withdrawing funds. + Bear’s offi cers told + +On line 9422: + condition, and clients + began withdrawing funds. Bear’s + offi cers told the + +On line 9422: + began withdrawing + funds. Bear’s offi cers told the + Commission that the + +On line 9422: + Bear’s offi cers told + the Commission that the fi + rm was profi table + +On line 9422: + offi cers told the + Commission that the fi rm + was profi table in + +On line 9422: + Commission that the + fi rm was profi table in + its fi rst quarter—the + +On line 9422: + that the fi rm was + profi table in its fi rst + quarter—the quarter in + +On line 9422: + quarter—the quarter in + which it failed; ironically + they also told the + +On line 9422: + ironically they + also told the Commission’s + staff that they had moved + +On line 9424: + short term funding from + commercial paper to MBS + because they believed + +On line 9424: + commercial paper + to MBS because they believed + that collateral-backed + +On line 9424: + to MBS because they + believed that collateral-backed + funding would be more + +On line 9424: + because they believed + that collateral-backed funding + would be more stable. + +On line 9424: + would be more stable. + In the week beginning March + according to the + +On line 9424: + the week beginning + March according to the FCIC + staff report, Bear had + +On line 9424: + week beginning March + according to the FCIC staff + report, Bear had over + +On line 9424: + March according to + the FCIC staff report, Bear had + over billion in cash + +On line 9424: + the FCIC staff report, + Bear had over billion in cash + reserves, but by March + +On line 9424: + Bear had over billion + in cash reserves, but by March + the liquidity + +On line 9424: + had over billion in + cash reserves, but by March the + liquidity pool + +On line 9424: + in cash reserves, but + by March the liquidity + pool had fallen to + +On line 9424: + reserves, but by March + the liquidity pool had + fallen to billion.51 + +On line 9424: + fallen to billion.51 + It was clear that Bear—solvent + and profi table or + +On line 9424: + to billion.51 It was + clear that Bear—solvent and profi + table or not—could + +On line 9424: + clear that Bear—solvent + and profi table or not—could + not survive a run + +On line 9424: + that Bear—solvent and + profi table or not—could not + survive a run that + +On line 9424: + and profi table or + not—could not survive a run + that was fueled by + +On line 9424: + table or not—could + not survive a run that was + fueled by fear and + +On line 9424: + not survive a run + that was fueled by fear and + uncertainty about + +On line 9424: + that was fueled by + fear and uncertainty about + its liquidity + +On line 9424: + was fueled by fear + and uncertainty about its + liquidity and + +On line 9424: + uncertainty about + its liquidity and the + possibility + +On line 9424: + liquidity and + the possibility of + its insolvency. + +On line 9426: + its insolvency. + Parenthetically, it + should be noted that + +On line 9426: + should be noted that + the Commission’s staff focused + on Bear because the + +On line 9426: + business model of + investment banks, which relied + on relatively + +On line 9426: + on relatively + high leverage and repo or + other short term fi + +On line 9428: + other short term fi + nancing, was inherently + unstable. Th e + +On line 9428: + was inherently + unstable. Th e need to + rescue Bear was thought + +On line 9430: + unstable. Th e + need to rescue Bear was thought + to be evidence + +On line 9430: + need to rescue Bear + was thought to be evidence + of this fact. Clearly, + +On line 9430: + to rescue Bear was + thought to be evidence of + this fact. Clearly, the + +On line 9430: + rescue Bear was thought + to be evidence of this + fact. Clearly, the fi + +On line 9430: + to be evidence + of this fact. Clearly, the fi + ve independent + +On line 9430: + of this fact. Clearly, + the fi ve independent + investment banks—Bear, Lehman + +On line 9430: + ve independent + investment banks—Bear, Lehman Brothers, + Merrill Lynch, Morgan + +On line 9430: + investment banks—Bear, Lehman + Brothers, Merrill Lynch, Morgan + Stanley and Goldman + +On line 9430: + Merrill Lynch, Morgan + Stanley and Goldman Sachs—were + badly damaged in + +On line 9430: + Lynch, Morgan Stanley + and Goldman Sachs—were badly + damaged in the fi + +On line 9430: + fi nancial crisis. + Only two of them remain + independent fi + +On line 9430: + Only two of them + remain independent fi + rms, and those two are + +On line 9430: + rms, and those two are + now regulated as bank + holding companies + +On line 9430: + now regulated + as bank holding companies + by the Federal + +On line 9430: + holding companies + by the Federal Reserve. + Nevertheless, it + +On line 9430: + by the Federal + Reserve. Nevertheless, it + is not clear that the + +On line 9430: + it is not clear that + the investment banks fared any + worse than the much more + +On line 9430: + and Freddie which were + also regulated more + stringently than the + +On line 9430: + more stringently than + the investment banks but not + as stringently as + +On line 9430: + stringently than the + investment banks but not as + stringently as banks. + +On line 9432: + investment banks but + not as stringently as banks. + Th e investment + +On line 9432: + not as stringently + as banks. Th e investment + banks did not pass the + +On line 9432: + as stringently as + banks. Th e investment banks + did not pass the test + +On line 9432: + the test created + by the mortgage meltdown and + the subsequent fi + +On line 9432: + mortgage meltdown and + the subsequent fi nancial + crisis, but neither + +On line 9432: + the subsequent fi + nancial crisis, but neither + did a large number + +On line 9434: + nancial crisis, but + neither did a large number + of insured banks— IndyMac, + +On line 9434: + a large number of + insured banks— IndyMac, Washington + Mutual (WaMu) and + +On line 9434: + of insured banks— IndyMac, + Washington Mutual (WaMu) + and Wachovia, to name + +On line 9434: + banks— IndyMac, Washington + Mutual (WaMu) and Wachovia, + to name the largest—that + +On line 9434: + largest—that were much more + heavily regulated + and, in addition, + +On line 9434: + and, in addition, + off ered insured deposits and + had access to the + +On line 9434: + in addition, off + ered insured deposits and had + access to the Fed’s + +On line 9434: + ered insured deposits + and had access to the Fed’s + discount window if + +On line 9434: + had access to the + Fed’s discount window if they + needed emergency + +On line 9434: + Fed’s discount window + if they needed emergency + funds to deal with runs. + +On line 9434: + discount window if + they needed emergency funds + to deal with runs. Th + +On line 9436: + to deal with runs. Th + e view of the Commission + majority, that + +On line 9436: + Th e view of the + Commission majority, + that investment banks—as + +On line 9438: + to the fi nancial + crisis, seems misplaced for this + reason. Th ey are + +On line 9438: + fi nancial crisis, + seems misplaced for this reason. + Th ey are better + +On line 9438: + crisis, seems misplaced + for this reason. Th ey are + better classifi + +On line 9438: + seems misplaced for this + reason. Th ey are better + classifi ed not + +On line 9438: + reason. Th ey are + better classifi ed not + as contributors + +On line 9440: + better classifi + ed not as contributors + to the fi nancial + +On line 9440: + classifi ed not + as contributors to the + fi nancial crisis + +On line 9440: + as contributors + to the fi nancial crisis + but as victims of + +On line 9440: + contributors to + the fi nancial crisis but + as victims of the + +On line 9440: + nancial crisis but + as victims of the panic + that ensued aft er + +On line 9440: + as victims of the + panic that ensued aft er + the housing bubble + +On line 9440: + of the panic that + ensued aft er the housing + bubble and the PMBS + +On line 9440: + panic that ensued + aft er the housing bubble + and the PMBS market + +On line 9440: + that ensued aft er + the housing bubble and the + PMBS market collapsed. + +On line 9442: + ensued aft er the + housing bubble and the PMBS + market collapsed. Bear + +On line 9442: + aft er the housing + bubble and the PMBS market + collapsed. Bear went down + +On line 9442: + the housing bubble + and the PMBS market collapsed. + Bear went down because + +On line 9442: + housing bubble and + the PMBS market collapsed. Bear + went down because the + +On line 9442: + and the PMBS market + collapsed. Bear went down because + the delinquencies and + +On line 9442: + unprecedentedly + large number of NTMs caused the + collapse of the PMBS + +On line 9442: + large number of NTMs + caused the collapse of the PMBS + market; this destroyed + +On line 9442: + the collapse of the + PMBS market; this destroyed the + FCIC, "Investigative + +On line 9448: + Findings on Bear Stearns + (Preliminary Draft April p.16. + Id., p.45. Peter J. + +On line 9450: + Id., p.45. Peter J. + Wallison usefulness of + AAA-rated PMBS as assets + +On line 9450: + usefulness of AAA-rated + PMBS as assets that Bear and + others relied on + +On line 9450: + PMBS as assets that + Bear and others relied on + for both capital + +On line 9450: + as assets that Bear + and others relied on for + both capital and + +On line 9450: + and others relied + on for both capital and + liquidity, and + +On line 9450: + for both capital + and liquidity, and thus + raised questions about the + +On line 9450: + both capital and + liquidity, and thus raised + questions about the fi + +On line 9450: + and liquidity, + and thus raised questions about the + fi rm’s ability + +On line 9450: + liquidity, and + thus raised questions about the fi + rm’s ability to + +On line 9450: + thus raised questions about + the fi rm’s ability to + meet its obligations. + +On line 9450: + ability to meet + its obligations. Investment + banks like Bear Stearns were + +On line 9450: + meet its obligations. + Investment banks like Bear Stearns + were not commercial + +On line 9450: + banks like Bear Stearns were + not commercial banks; instead + of using short term + +On line 9450: + were not commercial + banks; instead of using short + term deposits to hold + +On line 9450: + not commercial banks; + instead of using short term + deposits to hold long + +On line 9450: + instead of using + short term deposits to hold long + term assets—the + +On line 9450: + short term deposits to + hold long term assets—the + hallmark of a bank— + +On line 9452: + hallmark of a bank— + their business model relied + on short-term funding + +On line 9452: + a bank— their business + model relied on short-term + funding to carry + +On line 9452: + their business model + relied on short-term funding + to carry the short + +On line 9452: + model relied on + short-term funding to carry + the short term assets + +On line 9452: + relied on short-term + funding to carry the short + term assets of a + +On line 9452: + to carry the short + term assets of a trading + business. Contrary to + +On line 9452: + short term assets of + a trading business. Contrary + to the views of the + +On line 9452: + business. Contrary to + the views of the Commission + majority, there + +On line 9452: + majority, there + is nothing inherently + wrong with that business + +On line 9452: + inherently wrong + with that business model, but + it could not survive + +On line 9452: + that business model, + but it could not survive an + unprecedented fi + +On line 9452: + could not survive an + unprecedented fi nancial + panic as severe + +On line 9452: + unprecedented fi + nancial panic as severe + as that which followed + +On line 9452: + as that which followed + the collapse in value of + an asset class as + +On line 9452: + that which followed the + collapse in value of an + asset class as large + +On line 9452: + followed the collapse + in value of an asset + class as large and as + +On line 9452: + collapse in value + of an asset class as large + and as liquid as + +On line 9454: + an asset class as + large and as liquid as AAA-rated + subprime PMBS. Mortgage + +On line 9454: + class as large and as + liquid as AAA-rated subprime PMBS. + Mortgage Defaults at + +On line 9454: + large and as liquid + as AAA-rated subprime PMBS. Mortgage + Defaults at Record Rates + +On line 9454: + as AAA-rated subprime PMBS. + Mortgage Defaults at Record Rates + Created Balance + +On line 9454: + Mortgage Defaults at + Record Rates Created Balance + Sheet Losses Chairman + +On line 9454: + Record Rates Created + Balance Sheet Losses Chairman + Bair also pointed + +On line 9454: + also pointed to + the relationship between + the decline in the + +On line 9454: + the relationship + between the decline in the + value of PMBS and + +On line 9454: + between the decline + in the value of PMBS and + "the balance sheet strength" + +On line 9454: + balance sheet strength" of + fi nancial institutions + that held these assets. + +On line 9454: + held these assets. Adding + to liquidity-based losses, + balance sheet writedowns + +On line 9454: + the loss transmission + mechanism. Securitized + assets held by fi + +On line 9454: + assets held by fi + nancial institutions are + subject to the rules + +On line 9454: + held by fi nancial + institutions are subject + to the rules of fair + +On line 9454: + institutions are + subject to the rules of fair + value accounting, + +On line 9454: + subject to the rules + of fair value accounting, + and must be marked to + +On line 9454: + to the rules of fair + value accounting, and must + be marked to market + +On line 9454: + rules of fair value + accounting, and must be marked + to market under + +On line 9454: + accounting, and must + be marked to market under + certain circumstances. + +On line 9456: + to market under + certain circumstances. Th us, + banks and other fi + +On line 9458: + circumstances. Th us, + banks and other fi nancial + institutions that + +On line 9458: + institutions that + are holding securitized + mortgages in the form + +On line 9458: + be subject to large + accounting losses—but not + necessarily + +On line 9460: + Accordingly, once + large numbers of delinquencies + and losses started + +On line 9460: + up in the mortgage + markets generally and + in the mortgage pools + +On line 9460: + the mortgage markets + generally and in the + mortgage pools that backed + +On line 9460: + generally and + in the mortgage pools that backed + the PMBS, it was not + +On line 9460: + and in the mortgage + pools that backed the PMBS, it was + not necessary for + +On line 9460: + in the mortgage pools + that backed the PMBS, it was not + necessary for all + +On line 9460: + pools that backed the PMBS, + it was not necessary for + all the losses to + +On line 9460: + that backed the PMBS, it + was not necessary for all + the losses to be + +On line 9460: + was not necessary + for all the losses to be + realized before + +On line 9460: + all the losses to + be realized before the + PMBS lost substantial + +On line 9460: + before the PMBS lost + substantial value. All that + was necessary was + +On line 9460: + substantial value. + All that was necessary was + that the market for + +On line 9462: + these assets become + seriously impaired. Th + is is exactly + +On line 9462: + consequences for fi + nancial institutions that + held PMBS but also + +On line 9466: + that made them appear + unstable and possibly + insolvent. Th ese + +On line 9466: + insolvent. Th ese + mark-to-market capital + losses could be greater + +On line 9466: + anticipated. + As one Federal Reserve + study put it, "Th e + +On line 9468: + As one Federal + Reserve study put it, "Th e + fi nancial turmoil…put + +On line 9468: + Reserve study put it, + "Th e fi nancial turmoil…put + downward pressure on + +On line 9468: + study put it, "Th e + fi nancial turmoil…put downward + pressure on prices of + +On line 9468: + "Th e fi nancial + turmoil…put downward pressure on + prices of structured fi + +On line 9468: + pressure on prices of + structured fi nance products across + the whole spectrum of + +On line 9468: + on prices of structured + fi nance products across the whole + spectrum of [asset-backed] + +On line 9468: + fi nance products across + the whole spectrum of [asset-backed] + securities, even + +On line 9468: + across the whole spectrum + of [asset-backed] securities, + even those with only + +On line 9468: + spectrum of [asset-backed] + securities, even those with + only minimal + +On line 9468: + securities, even + those with only minimal + ties to the riskiest + +On line 9468: + minimal ties to + the riskiest underlying + assets…[I]n addition to + +On line 9468: + underlying assets…[I]n + addition to discounts from + higher expected + +On line 9468: + large mark-to-market + discounts are generated + by uncertainty + +On line 9468: + are generated + by uncertainty about the + quality of the + +On line 9468: + the quality of + the underlying assets, + by illiquidity, + +On line 9468: + quality of the + underlying assets, by + illiquidity, and + +On line 9468: + the underlying + assets, by illiquidity, + and by price volatility…Th is + +On line 9470: + and by price volatility…Th is + illiquidity discount is + the main reason why + +On line 9470: + in most similar + analyses, is larger than the + expected credit + +On line 9470: + credit default rates + on underlying assets."52 + In other words, the + +On line 9472: + the spread refl ects + only anticipated + credit losses. As + +On line 9472: + refl ects only + anticipated credit + losses. As shown so + +On line 9472: + anticipated + credit losses. As shown so + dramatically + +On line 9472: + dramatically + in Figure the collapse of + the market for PMBS + +On line 9474: + Figure the collapse + of the market for PMBS was + a seminal event + +On line 9474: + of the market for + PMBS was a seminal event + in the history + +On line 9474: + the market for PMBS + was a seminal event in + the history of + +On line 9474: + market for PMBS was + a seminal event in the + history of the + +On line 9474: + a seminal event + in the history of the + fi nancial crisis. + +On line 9474: + seminal event in + the history of the fi + nancial crisis. Even + +On line 9474: + in the history + of the fi nancial crisis. + Even though delinquencies + +On line 9474: + the history of + the fi nancial crisis. Even + though delinquencies had + +On line 9474: + nancial crisis. Even + though delinquencies had only + just begun to show + +On line 9474: + Even though delinquencies + had only just begun to + show up in mortgage + +On line 9474: + though delinquencies had + only just begun to show + up in mortgage pools, + +On line 9474: + only just begun + to show up in mortgage pools, + the absence of a + +On line 9474: + begun to show up + in mortgage pools, the absence + of a functioning + +On line 9474: + in mortgage pools, the + absence of a functioning + Daniel Beltran, Laurie + +On line 9474: + pools, the absence of + a functioning Daniel Beltran, + Laurie Pounder and Charles + +On line 9476: + of a functioning + Daniel Beltran, Laurie Pounder and + Charles Th omas, "Foreign + +On line 9476: + Daniel Beltran, Laurie + Pounder and Charles Th omas, "Foreign + Exposure to Asset-Backed + +On line 9476: + Pounder and Charles Th omas, + "Foreign Exposure to Asset-Backed + Securities of + +On line 9476: + "Foreign Exposure + to Asset-Backed Securities of + U.S. Origin," Board of + +On line 9476: + Governors of the + Federal Reserve System, + International + +On line 9476: + Federal Reserve + System, International + Finance Discussion + +On line 9484: + Discussion Papers + August pp. 11-14. Dissenting + Statement market meant + +On line 9484: + pp. 11-14. Dissenting + Statement market meant that PMBS + simply could not be + +On line 9484: + Dissenting Statement + market meant that PMBS simply + could not be sold at + +On line 9484: + Statement market meant + that PMBS simply could not be + sold at anything but + +On line 9484: + market meant that PMBS + simply could not be sold at + anything but distress + +On line 9486: + meant that PMBS simply + could not be sold at anything + but distress prices. Th + +On line 9488: + that PMBS simply could + not be sold at anything but + distress prices. Th e + +On line 9488: + could not be sold at + anything but distress prices. Th + e inability + +On line 9488: + inability of + fi nancial institutions + to liquidate their + +On line 9488: + to liquidate their + PMBS assets at anything like + earlier values + +On line 9488: + accounting rules, and + was the crux of the crisis. + In eff ect, a whole + +On line 9488: + eff ect, a whole class + of assets—involving almost + trillion—came to be + +On line 9488: + of assets—involving + almost trillion—came to be + called "toxic assets" + +On line 9488: + almost trillion—came + to be called "toxic assets" + in the media, and + +On line 9488: + trillion—came to be + called "toxic assets" in the + media, and had to + +On line 9488: + to be called "toxic + assets" in the media, and + had to be written + +On line 9488: + had to be written + down substantially on the + balance sheets of fi + +On line 9488: + the balance sheets of + fi nancial institutions + around the world. Although + +On line 9488: + balance sheets of fi + nancial institutions around + the world. Although this + +On line 9488: + sheets of fi nancial + institutions around the world. + Although this made fi + +On line 9488: + world. Although this made + fi nancial institutions + look weaker than they + +On line 9488: + they actually + were, the PMBS they held, despite + being unmarketable + +On line 9488: + were, the PMBS they held, + despite being unmarketable + at that point, were in + +On line 9488: + held, despite being + unmarketable at that point, were + in many cases still + +On line 9488: + unmarketable at that + point, were in many cases still + fl owing cash at + +On line 9488: + were in many cases + still fl owing cash at close + to expected rates. + +On line 9488: + still fl owing cash + at close to expected rates. + Instead of a slow + +On line 9488: + owing cash at close + to expected rates. Instead + of a slow decline + +On line 9490: + to expected rates. + Instead of a slow decline + in value— which would + +On line 9490: + rates. Instead of a + slow decline in value— which + would have occurred if + +On line 9490: + Instead of a slow + decline in value— which would + have occurred if whole + +On line 9490: + a slow decline in + value— which would have occurred + if whole mortgages were + +On line 9490: + decline in value— + which would have occurred if whole + mortgages were held on + +On line 9490: + value— which would have + occurred if whole mortgages were + held on bank balance + +On line 9490: + which would have occurred + if whole mortgages were held on + bank balance sheets and + +On line 9490: + and gradually + deteriorated in + quality—the loss of + +On line 9490: + in quality—the loss + of marketability of these + securities caused + +On line 9490: + of marketability + of these securities caused + a crash in value. + +On line 9492: + marketability of + these securities caused a + crash in value. Th + +On line 9494: + in value. Th e + Commission majority + did not discuss the + +On line 9494: + discuss the signifi + cance of mark-to-market + accounting in its + +On line 9494: + signifi cance of + mark-to-market accounting + in its report. Th + +On line 9496: + in its report. Th + is was a serious lapse, + given the views of + +On line 9498: + report. Th is was + a serious lapse, given + the views of many that + +On line 9498: + a serious lapse, + given the views of many that + accounting policies + +On line 9498: + given the views of + many that accounting policies + played an important + +On line 9498: + the views of many that + accounting policies played an + important role in + +On line 9498: + an important role + in the fi nancial crisis. + Many commentators + +On line 9498: + important role in + the fi nancial crisis. Many + commentators have + +On line 9498: + in the fi nancial + crisis. Many commentators + have argued that the + +On line 9498: + nancial crisis. Many + commentators have argued + that the resulting + +On line 9498: + commentators have + argued that the resulting + impairment charges to + +On line 9498: + that the resulting + impairment charges to balance + sheets reduced the GAAP + +On line 9498: + impairment charges to + balance sheets reduced the GAAP + equity of fi + +On line 9498: + sheets reduced the GAAP + equity of fi nancial + institutions and, + +On line 9498: + making them appear + fi nancially weaker than + they actually + +On line 9498: + they actually + were if viewed on the basis + of the cash fl ows + +On line 9498: + actually were + if viewed on the basis of + the cash fl ows they + +On line 9498: + were if viewed on the + basis of the cash fl ows + they were receiving.53 + +On line 9502: + viewed on the basis + of the cash fl ows they were + receiving.53 Th e + +On line 9502: + of the cash fl ows + they were receiving.53 Th e + investor panic that + +On line 9502: + cash fl ows they were + receiving.53 Th e investor + panic that began + +On line 9502: + unanticipated + and unprecedented losses + started to appear + +On line 9502: + started to appear + among NTMs generally and + in the PMBS mortgage + +On line 9502: + to appear among NTMs + generally and in the + PMBS mortgage pools now + +On line 9502: + generally and + in the PMBS mortgage pools now + spread to fi nancial + +On line 9504: + losses. Th is process + was succinctly described in + an analysis of + +On line 9504: + process was succinctly + described in an analysis + of fair value or + +On line 9504: + analysis of fair + value or mark-to-market + accounting in the + +On line 9504: + of fair value or + mark-to-market accounting + in the fi nancial + +On line 9504: + accounting in the + fi nancial crisis issued + by the Institute + +On line 9506: + organization + of the world’s largest banks and fi + nancial fi rms: [O]ft + +On line 9508: + nancial fi rms: [O]ft + en-dramatic write-downs of + sound assets required + +On line 9508: + implementation + of fair-value accounting + adversely aff ect + +On line 9508: + adversely aff ect + market sentiment, in turn + leading to further + +On line 9508: + market sentiment, + in turn leading to further + write-downs, margin calls + +On line 9508: + write-downs, margin calls + and capital impacts in + a downward spiral + +On line 9508: + capital impacts + in a downward spiral that + may lead to large-scale + +On line 9508: + a downward spiral + that may lead to large-scale fi + re-sales of assets, and + +On line 9508: + large-scale fi re-sales of + assets, and destabilizing, + pro-cyclical feedback + +On line 9508: + re-sales of assets, and + destabilizing, pro-cyclical + feedback eff ects Th + +On line 9510: + and destabilizing, + pro-cyclical feedback eff ects + Th ese damaging + +On line 9510: + to the conversion + of liquidity problems + into solvency + +On line 9510: + of liquidity + problems into solvency + problems.54 [emphasis + +On line 9512: + into solvency + problems.54 [emphasis in the + original] At least + +On line 9512: + problems.54 [emphasis + in the original] At least + one study attempted + +On line 9512: + in the original] + At least one study attempted + to assess the eff + +On line 9512: + the original] At + least one study attempted to + assess the eff ect + +On line 9512: + one study attempted + to assess the eff ect of + this on fi nancial + +On line 9512: + Parisi-Capone estimated + the mark-to-market losses + on MBS backed by both + +On line 9512: + estimated the + mark-to-market losses on + MBS backed by both prime + +On line 9512: + the mark-to-market + losses on MBS backed by both + prime loans and NTMs. Th + +On line 9514: + losses on MBS backed + by both prime loans and NTMs. Th + eir estimate was + +On line 9514: + by both prime loans and + NTMs. Th eir estimate was + slightly over trillion, + +On line 9514: + prime loans and NTMs. Th + eir estimate was slightly + over trillion, of which + +On line 9514: + loans and NTMs. Th eir + estimate was slightly over + trillion, of which U.S. + +On line 9514: + over trillion, of which + U.S. banks and investment banks + were estimated + +On line 9514: + trillion, of which U.S. + banks and investment banks were + estimated to + +On line 9514: + banks and investment + banks were estimated to + have lost billion on + +On line 9514: + and investment banks + were estimated to have + lost billion on a + +On line 9518: + have lost billion on + a mark-to-market basis.55 + Th is would be a + +On line 9518: + a mark-to-market + basis.55 Th is would be a + dramatic loss if + +On line 9518: + Th is would be a + dramatic loss if all of + it were realized. + +On line 9520: + dramatic loss if + all of it were realized. + In the U.S. banking + +On line 9520: + loss if all of it + were realized. In the U.S. + banking system had + +On line 9520: + it were realized. + In the U.S. banking system + had total assets + +On line 9520: + were realized. In + the U.S. banking system had + total assets of + +On line 9520: + In the U.S. banking + system had total assets + of trillion; the fi + +On line 9520: + system had total + assets of trillion; the fi + ve largest investment + +On line 9520: + had total assets + of trillion; the fi ve largest + investment banks had + +On line 9520: + assets of trillion; + the fi ve largest investment + banks had FCIC Draft Staff + +On line 9520: + of trillion; the fi + ve largest investment banks had + FCIC Draft Staff Report, + +On line 9520: + trillion; the fi ve + largest investment banks had FCIC + Draft Staff Report, "Th + +On line 9522: + investment banks had + FCIC Draft Staff Report, "Th e + Role of Accounting + +On line 9522: + Report, "Th e Role + of Accounting During the + Financial Crisis," + +On line 9524: + Finance, "IIF Board of + Directors - Discussion + Memorandum on + +On line 9524: + of Directors - + Discussion Memorandum + on Valuation + +On line 9526: + Memorandum on + Valuation in Illiquid + Markets," April p.1. Nouriel + +On line 9526: + on Valuation + in Illiquid Markets," April p.1. + Nouriel Roubini and Elisa + +On line 9526: + Valuation in + Illiquid Markets," April p.1. Nouriel + Roubini and Elisa Parisi-Carbone, + +On line 9526: + in Illiquid Markets," + April p.1. Nouriel Roubini and Elisa + Parisi-Carbone, "Total Trillion + +On line 9526: + Markets," April p.1. Nouriel + Roubini and Elisa Parisi-Carbone, "Total + Trillion Projected + +On line 9526: + April p.1. Nouriel Roubini + and Elisa Parisi-Carbone, "Total Trillion + Projected Loan and + +On line 9526: + Projected Loan and + Securities Losses in + U.S. Trillion of Which + +On line 9526: + and Securities + Losses in U.S. Trillion of + Which Borneby U.S. Banks/Brokers," + +On line 9532: + Banks/Brokers," RGE Monitor, + January p.8. Peter J. + Wallison total + +On line 9532: + Wallison total + assets of trillion.56 If we + assume that the banks + +On line 9532: + of trillion.56 If we + assume that the banks had a + leverage ratio of + +On line 9532: + we assume that the + banks had a leverage ratio + of about 15-to-1 in and + +On line 9532: + assume that the banks + had a leverage ratio of + about 15-to-1 in and the + +On line 9532: + banks had a leverage + ratio of about 15-to-1 in and + the investment banks + +On line 9532: + ratio of about 15-to-1 + in and the investment banks + about 30-to-1, that would mean + +On line 9532: + of about 15-to-1 in and + the investment banks about 30-to-1, + that would mean that the + +On line 9532: + 30-to-1, that would mean that + the equity capital + position of the + +On line 9532: + industry as a + whole would be about billion and + the same number for + +On line 9532: + a whole would be about + billion and the same number + for the investment + +On line 9532: + would be about billion + and the same number for the + investment banks would + +On line 9532: + and the same number + for the investment banks would + be about billion, for + +On line 9532: + the same number for + the investment banks would be + about billion, for a + +On line 9532: + the investment banks + would be about billion, for a + total of billion. + +On line 9532: + about billion, for a + total of billion. Under + these circumstances, the + +On line 9532: + total of billion. + Under these circumstances, the + collapse of the PMBS + +On line 9534: + of billion. Under + these circumstances, the collapse + of the PMBS market + +On line 9534: + billion. Under these + circumstances, the collapse of + the PMBS market alone + +On line 9534: + of the PMBS market + alone reduced the capital + positions of U.S. + +On line 9534: + positions of U.S. + banks and investment banks by + approximately + +On line 9536: + a mark-to-market + basis. Th is does not mean + that any actual + +On line 9536: + basis. Th is does + not mean that any actual + losses were suff ered, + +On line 9536: + Th is does not mean + that any actual losses + were suff ered, only + +On line 9536: + is does not mean that + any actual losses were + suff ered, only that + +On line 9536: + does not mean that any + actual losses were suff + ered, only that the + +On line 9536: + actual losses + were suff ered, only that the + assets concerned might + +On line 9536: + were suff ered, only + that the assets concerned might + have to be written + +On line 9536: + suff ered, only that + the assets concerned might have + to be written down + +On line 9536: + ered, only that the + assets concerned might have to + be written down or + +On line 9536: + the assets concerned + might have to be written down + or could not be sold + +On line 9536: + assets concerned might + have to be written down or + could not be sold for + +On line 9536: + concerned might have to + be written down or could not + be sold for the price + +On line 9536: + have to be written + down or could not be sold for + the price at which they + +On line 9536: + to be written down + or could not be sold for the + price at which they were + +On line 9536: + down or could not be + sold for the price at which they + were previously + +On line 9536: + sold for the price at + which they were previously + carried on the fi + +On line 9536: + price at which they were + previously carried on + the fi rm’s balance + +On line 9538: + fi rm’s balance sheet. + In addition, Roubini and + Parisi-Capone estimated + +On line 9538: + rm’s balance sheet. In + addition, Roubini and Parisi-Capone + estimated that + +On line 9538: + addition, Roubini + and Parisi-Capone estimated that + U.S. commercial and + +On line 9538: + loss of billion on + unsecuritized subprime + and Alt-A mortgages.57 Th + +On line 9542: + and Alt-A mortgages.57 Th + ey also estimated + that mark-to- market + +On line 9542: + market losses for + fi nancial institutions + outside the U.S. would + +On line 9542: + the U.S. would be about + percent of U.S. losses, so + there was likely to + +On line 9542: + would be about percent + of U.S. losses, so there was + likely to be a + +On line 9542: + about percent of U.S. + losses, so there was likely + to be a major + +On line 9542: + of U.S. losses, so + there was likely to be a + major eff ect on + +On line 9542: + losses, so there was + likely to be a major + eff ect on banks and + +On line 9542: + so there was likely + to be a major eff ect + on banks and other + +On line 9542: + there was likely to + be a major eff ect on + banks and other fi + +On line 9542: + likely to be a + major eff ect on banks and + other fi nancial + +On line 9542: + major eff ect on + banks and other fi nancial + institutions around + +On line 9542: + banks and other fi + nancial institutions around + the world—depending, + +On line 9542: + institutions around + the world—depending, of course, + on their capital + +On line 9542: + the world—depending, + of course, on their capital + position at the + +On line 9542: + at the time the PMBS + market stopped functioning. I + am not aware of any + +On line 9542: + time the PMBS market + stopped functioning. I am not + aware of any data + +On line 9542: + any data showing + the mark-to-market eff ect + of the collapse of + +On line 9542: + data showing the + mark-to-market eff ect of + the collapse of the + +On line 9542: + the mark-to-market + eff ect of the collapse of + the PMBS market on + +On line 9542: + of the PMBS market + on other U.S. fi nancial + institutions, but + +On line 9542: + on other U.S. fi + nancial institutions, but + it can be assumed + +On line 9542: + that they also suff + ered similar losses in + proportion to their + +On line 9542: + suff ered similar + losses in proportion to + their holdings of PMBS. + +On line 9544: + in proportion to + their holdings of PMBS. Losses + of this magnitude + +On line 9544: + proportion to their + holdings of PMBS. Losses of + this magnitude would + +On line 9544: + their holdings of PMBS. + Losses of this magnitude + would certainly be + +On line 9544: + PMBS. Losses of this + magnitude would certainly + be enough—when combined + +On line 9544: + of this magnitude + would certainly be enough—when + combined with other + +On line 9544: + with other losses + on securities and loans + not related to + +On line 9544: + on securities + and loans not related to + mortgages—to call into + +On line 9544: + not related to + mortgages—to call into question + the stability + +On line 9544: + mortgages—to call into + question the stability + of a large number + +On line 9544: + call into question + the stability of a + large number of banks, + +On line 9544: + the stability + of a large number of banks, + investment banks and + +On line 9544: + of a large number + of banks, investment banks and + other fi nancial + +On line 9544: + of banks, investment + banks and other fi nancial + institutions in + +On line 9544: + banks and other fi + nancial institutions in + the U.S. and around the + +On line 9544: + in the U.S. and around + the world. However, there was + one other factor + +On line 9544: + the U.S. and around the + world. However, there was one + other factor that + +On line 9544: + world. However, there + was one other factor that + exacerbated + +On line 9544: + one other factor + that exacerbated the + adverse eff ect of + +On line 9544: + exacerbated + the adverse eff ect of the + loss of a market + +On line 9546: + ect of the loss of + a market for PMBS. Although + accounting rules did + +On line 9546: + loss of a market + for PMBS. Although accounting + rules did not require + +On line 9546: + of a market for + PMBS. Although accounting rules + did not require all + +On line 9546: + a market for PMBS. + Although accounting rules did + not require all PMBS + +On line 9546: + Although accounting + rules did not require all PMBS + to be written down, + +On line 9546: + accounting rules did + not require all PMBS to be + written down, investors + +On line 9546: + not require all PMBS + to be written down, investors + and counterparties + +On line 9546: + require all PMBS to + be written down, investors and + counterparties did + +On line 9546: + to be written down, + investors and counterparties + did not know which fi + +On line 9546: + written down, investors + and counterparties did not + know which fi nancial + +On line 9546: + and counterparties + did not know which fi nancial + institutions were + +On line 9546: + did not know which fi + nancial institutions were + holding the weakest + +On line 9546: + know which fi nancial + institutions were holding + the weakest assets + +On line 9546: + institutions were + holding the weakest assets + and how much of their + +On line 9546: + holding the weakest + assets and how much of their + assets would have to + +On line 9546: + weakest assets and + how much of their assets would + have to be written + +On line 9546: + assets and how much + of their assets would have to + be written down over + +On line 9546: + much of their assets + would have to be written down + over time. Whatever + +On line 9546: + of their assets would + have to be written down over + time. Whatever that + +On line 9546: + their assets would have + to be written down over time. + Whatever that amount, + +On line 9546: + have to be written + down over time. Whatever that + amount, it would reduce + +On line 9546: + to be written down + over time. Whatever that amount, + it would reduce their + +On line 9546: + it would reduce their + capital positions at + a time when investors + +On line 9548: + were anxious about their + stability. Th is was + the balance sheet eff + +On line 9548: + their stability. + Th is was the balance sheet + eff ect that was the + +On line 9548: + stability. Th + is was the balance sheet eff + ect that was the third + +On line 9550: + eff ect that was the + third element of Chairman + Bair’s summary. To + +On line 9550: + the third element + of Chairman Bair’s summary. + To summarize, then, + +On line 9550: + third element of + Chairman Bair’s summary. To + summarize, then, the + +On line 9550: + summarize, then, the + following are the steps through + which the government’s + +On line 9550: + which the government’s + housing policies transmitted + losses—through PMBS—to the + +On line 9550: + institutions: (i) + the million NTMs acquired or + guaranteed by the + +On line 9550: + Agencies were major + contributors to the growth + of the bubble and + +On line 9550: + contributors to + the growth of the bubble and + its extension in + +On line 9550: + to the growth of the + bubble and its extension + in time; (ii) the growth + +On line 9550: + growth of the bubble + and its extension in time; + (ii) the growth of the + +On line 9550: + the bubble and its + extension in time; (ii) the + growth of the bubble + +On line 9550: + and its extension + in time; (ii) the growth of the + bubble suppressed the + +On line 9550: + extension in time; + (ii) the growth of the bubble + suppressed the losses + +On line 9550: + growth of the bubble + suppressed the losses that would + ordinarily + +On line 9550: + the losses that would + ordinarily have brought + the development + +On line 9550: + ordinarily + have brought the development + of NTM-backed PMBS to a + +On line 9550: + the development + of NTM-backed PMBS to a halt; (ii) + competition for + +On line 9550: + of NTM-backed PMBS to a + halt; (ii) competition for + NTMs drove subprime lenders + +On line 9550: + PMBS to a halt; (ii) + competition for NTMs drove + subprime lenders further + +On line 9550: + competition for + NTMs drove subprime lenders further + out the risk curve to + +On line 9550: + NTMs drove subprime lenders + further out the risk curve to + fi nd high-yielding + +On line 9550: + subprime lenders further + out the risk curve to fi nd + high-yielding mortgages + +On line 9550: + out the risk curve to + fi nd high-yielding mortgages + to securitize, + +On line 9550: + fi nd high-yielding + mortgages to securitize, + especially when + +On line 9550: + to securitize, + especially when these loans + did not appear to + +On line 9550: + loans did not appear + to be producing losses + commensurate with + +On line 9550: + to be producing + losses commensurate with + their risk; (iv) when the + +On line 9550: + producing losses + commensurate with their risk; + (iv) when the bubble + +On line 9550: + commensurate with + their risk; (iv) when the bubble + fi nally burst, the + +On line 9550: + with their risk; (iv) when + the bubble fi nally burst, + the unprecedented + +On line 9550: + the unprecedented + number of delinquencies and + defaults among all NTMs—the + +On line 9550: + majority of + which were held or guaranteed + by the Agencies—caused + +On line 9550: + held or guaranteed + by the Agencies—caused investors + to Timothy F. + +On line 9550: + to Timothy F. + Geithner, "Reducing + Systemic Risk in a + +On line 9550: + in a Dynamic + Financial System," Remarks + at the Economic + +On line 9550: + Financial System," + Remarks at the Economic + Club of New York, June + +On line 9550: + System," Remarks at + the Economic Club of New + York, June available at + +On line 9554: + New York, June available + at http://www.ny.frb.org/newsevents/speeches/2008/ + tfg080609.html. Nouriel Roubini and + +On line 9554: + York, June available at + http://www.ny.frb.org/newsevents/speeches/2008/ tfg080609.html. + Nouriel Roubini and Elisa + +On line 9560: + Projected Loan and + Securities Losses," p.7. + Dissenting Statement + +On line 9562: + Statement fl ee the + PMBS market, reducing the + liquidity of + +On line 9562: + accounting required + these institutions to write + down the value of + +On line 9562: + these institutions + to write down the value of + the PMBS they held, as + +On line 9562: + institutions to + write down the value of the + PMBS they held, as well + +On line 9562: + they held, as well as + their other mortgage-related + assets, reducing + +On line 9562: + assets, reducing + their capital positions + and raising further + +On line 9564: + their stability + and solvency. Government + Actions Create a + +On line 9566: + Actions Create a + Panic More than any other + phenomenon, the + +On line 9566: + Panic More than any + other phenomenon, the + fi nancial crisis + +On line 9566: + creditor panic. + In the classic study, Manias, + Panics and Crashes: + +On line 9566: + In the classic study, + Manias, Panics and Crashes: + A History of + +On line 9566: + study, Manias, Panics + and Crashes: A History + of Financial Crises, + +On line 9566: + Manias, Panics and + Crashes: A History of + Financial Crises, Charles + +On line 9566: + Financial Crises, Charles + Kindleberger and Robert Aliber + make a distinction + +On line 9566: + Kindleberger and Robert + Aliber make a distinction + between a remote + +On line 9566: + and Robert Aliber make + a distinction between a + remote cause and a + +On line 9566: + make a distinction + between a remote cause and + a proximate cause + +On line 9566: + between a remote + cause and a proximate cause + of a panic: "Causa + +On line 9566: + proximate cause of + a panic: "Causa remota + of any crisis is + +On line 9566: + of a panic: "Causa + remota of any crisis + is the expansion + +On line 9566: + of any crisis is + the expansion of credit + and speculation, + +On line 9566: + any crisis is the + expansion of credit and + speculation, while + +On line 9566: + the expansion of + credit and speculation, + while causa proxima + +On line 9566: + and speculation, + while causa proxima is some + incident that saps + +On line 9566: + while causa proxima + is some incident that saps + the confi dence of + +On line 9566: + causa proxima is + some incident that saps the + confi dence of the + +On line 9566: + some incident that + saps the confi dence of the + system and induces + +On line 9566: + confi dence of the + system and induces investors + to sell commodities, + +On line 9566: + system and induces + investors to sell commodities, + stocks, real estate, + +On line 9566: + real estate, bills + of exchange, or promissory + notes and increase their + +On line 9566: + bills of exchange, or + promissory notes and increase + their money holdings."58 + +On line 9566: + notes and increase their + money holdings."58 In the great + fi nancial panic + +On line 9566: + holdings."58 In the great + fi nancial panic of it + is reasonably clear + +On line 9566: + fi nancial panic + of it is reasonably clear + that the remote cause + +On line 9566: + nancial panic of + it is reasonably clear that + the remote cause was + +On line 9566: + it is reasonably + clear that the remote cause was + the build-up of NTMs in + +On line 9566: + is reasonably clear + that the remote cause was the + build-up of NTMs in the + +On line 9566: + reasonably clear that + the remote cause was the build-up + of NTMs in the fi + +On line 9566: + that the remote cause + was the build-up of NTMs in the + fi nancial system, + +On line 9568: + was the build-up of NTMs + in the fi nancial system, + primarily— as + +On line 9568: + in the fi nancial + system, primarily— as + I have shown in this + +On line 9568: + I have shown in this + analysis—as a result of + government housing + +On line 9568: + in this analysis—as + a result of government + housing policy. + +On line 9570: + policy. Th is + unprecedented increase in + weak and risky assets + +On line 9570: + weak and risky assets + set the fi nancial system + up for a crisis + +On line 9570: + and risky assets set + the fi nancial system up + for a crisis of + +On line 9570: + risky assets set the + fi nancial system up for + a crisis of some + +On line 9570: + assets set the fi + nancial system up for a + crisis of some kind. + +On line 9572: + set the fi nancial + system up for a crisis + of some kind. Th e + +On line 9572: + fi nancial system + up for a crisis of some + kind. Th e event that + +On line 9572: + nancial system up + for a crisis of some kind. + Th e event that turned + +On line 9572: + up for a crisis + of some kind. Th e event that + turned a potential + +On line 9572: + a crisis of some + kind. Th e event that turned a + potential crisis + +On line 9572: + of some kind. Th e + event that turned a potential + crisis into a + +On line 9572: + kind. Th e event that + turned a potential crisis + into a full-fl + +On line 9572: + into a full-fl + edged panic—the proximate + cause of the panic—was + +On line 9572: + the panic—was also + the government’s action: the + rescue of Bear Stearns + +On line 9572: + action: the rescue + of Bear Stearns in March and the + subsequent failure + +On line 9572: + rescue of Bear Stearns + in March and the subsequent + failure to rescue + +On line 9572: + Bear Stearns in March and + the subsequent failure to + rescue Lehman Brothers + +On line 9572: + subsequent failure + to rescue Lehman Brothers six + months later. In terms + +On line 9572: + rescue Lehman Brothers + six months later. In terms of + its ultimate cost + +On line 9572: + six months later. In + terms of its ultimate cost + to the public, this + +On line 9572: + months later. In terms + of its ultimate cost to + the public, this was + +On line 9572: + later. In terms of + its ultimate cost to the + public, this was one + +On line 9572: + ultimate cost to + the public, this was one of + the great policy + +On line 9572: + the public, this was + one of the great policy + errors of all time, + +On line 9572: + was one of the great + policy errors of all + time, and the reasons + +On line 9572: + policy errors + of all time, and the reasons + for the misjudgments + +On line 9572: + of all time, and the + reasons for the misjudgments + that led to it have + +On line 9572: + time, and the reasons + for the misjudgments that led + to it have not yet + +On line 9572: + and the reasons for + the misjudgments that led to + it have not yet been + +On line 9572: + for the misjudgments + that led to it have not yet + been fully explored. + +On line 9574: + the misjudgments that + led to it have not yet been + fully explored. Th + +On line 9576: + that led to it have + not yet been fully explored. + Th e lesson taught + +On line 9576: + led to it have not + yet been fully explored. Th + e lesson taught by + +On line 9576: + to it have not yet + been fully explored. Th e + lesson taught by the + +On line 9576: + not yet been fully + explored. Th e lesson taught + by the rescue of + +On line 9576: + been fully explored. + Th e lesson taught by the + rescue of Bear was + +On line 9576: + e lesson taught by + the rescue of Bear was that + all large fi nancial + +On line 9576: + the rescue of Bear + was that all large fi nancial + institutions—and + +On line 9576: + was that all large fi + nancial institutions—and + especially those + +On line 9578: + rescued. Th e moral + hazard introduced by this + one act irreparably + +On line 9578: + Th e moral hazard + introduced by this one act + irreparably changed the + +On line 9578: + hazard introduced + by this one act irreparably + changed the position + +On line 9578: + introduced by this + one act irreparably changed the + position of Lehman + +On line 9578: + one act irreparably + changed the position of Lehman + Brothers and every + +On line 9578: + irreparably changed the + position of Lehman Brothers + and every other + +On line 9578: + changed the position + of Lehman Brothers and every + other large fi rm + +On line 9578: + position of Lehman + Brothers and every other + large fi rm in the + +On line 9578: + and every other + large fi rm in the world’s fi + nancial system. From + +On line 9578: + large fi rm in the + world’s fi nancial system. From + that time forward, (i) + +On line 9578: + fi rm in the world’s + fi nancial system. From that + time forward, (i) the + +On line 9578: + the world’s fi nancial + system. From that time forward, + (i) the critical + +On line 9578: + fi nancial system. + From that time forward, (i) the + critical need for + +On line 9578: + that time forward, (i) + the critical need for more + capital became + +On line 9578: + the critical need + for more capital became + less critical; the + +On line 9578: + for more capital + became less critical; the + likelihood of a + +On line 9578: + a government bailout + would reassure creditors, + so there was no need + +On line 9578: + government bailout would + reassure creditors, so + there was no need to + +On line 9578: + bailout would reassure + creditors, so there was no + need to dilute the + +On line 9578: + there was no need to + dilute the shareholders any + further by raising + +On line 9578: + further by raising + additional capital; + (ii) fi rms such as + +On line 9578: + (ii) fi rms such as + Lehman, that might have been saved through + an acquisition + +On line 9578: + fi rms such as Lehman, + that might have been saved through an + acquisition by + +On line 9578: + Lehman, that might have been + saved through an acquisition + by a larger fi + +On line 9578: + that might have been saved + through an acquisition by + a larger fi rm + +On line 9578: + might have been saved through + an acquisition by a + larger fi rm or + +On line 9578: + an acquisition + by a larger fi rm or + an infusion of + +On line 9578: + acquisition by + a larger fi rm or an + infusion of fresh + +On line 9578: + by a larger fi + rm or an infusion of + fresh capital by + +On line 9578: + a larger fi rm + or an infusion of fresh + capital by a + +On line 9578: + or an infusion + of fresh capital by a + strategic investor, drove + +On line 9578: + infusion of fresh + capital by a strategic + investor, drove harder + +On line 9578: + of fresh capital + by a strategic investor, drove + harder bargains with + +On line 9578: + drove harder bargains + with potential acquirers; + (iii) the potential + +On line 9578: + themselves waited for + the U.S. government to pick + up some of the cost, + +On line 9578: + waited for the U.S. + government to pick up some + of the cost, as it + +On line 9578: + U.S. government to + pick up some of the cost, as + it had with Bear—an + +On line 9578: + government to pick + up some of the cost, as it + had with Bear—an off + +On line 9578: + pick up some of the + cost, as it had with Bear—an + off er that never + +On line 9578: + up some of the cost, + as it had with Bear—an off + er that never came + +On line 9578: + some of the cost, as + it had with Bear—an off er + that never came in + +On line 9578: + of the cost, as it + had with Bear—an off er that + never came in Lehman’s + +On line 9578: + cost, as it had with + Bear—an off er that never + came in Lehman’s case; and + +On line 9578: + it had with Bear—an + off er that never came in + Lehman’s case; and (iv) the + +On line 9578: + with Bear—an off er + that never came in Lehman’s case; + and (iv) the Reserve + +On line 9578: + Bear—an off er that + never came in Lehman’s case; and + (iv) the Reserve Fund, + +On line 9578: + never came in Lehman’s + case; and (iv) the Reserve Fund, + a money market + +On line 9578: + in Lehman’s case; and (iv) + the Reserve Fund, a money + market mutual + +On line 9578: + the Reserve Fund, a + money market mutual + fund, apparently + +On line 9578: + fund, apparently + assuming that Lehman would be + rescued, decided + +On line 9578: + it held; instead, with + devastating results for + the money market + +On line 9578: + the money market + fund industry, it waited + to be bailed out on + +On line 9578: + money market fund + industry, it waited to + be bailed out on the + +On line 9578: + fund industry, it + waited to be bailed out on + the assumption that + +On line 9578: + it waited to be + bailed out on the assumption + that Lehman would be saved. + +On line 9580: + waited to be bailed + out on the assumption that + Lehman would be saved. But + +On line 9580: + to be bailed out on + the assumption that Lehman would + be saved. But Lehman was + +On line 9580: + be bailed out on the + assumption that Lehman would be + saved. But Lehman was not + +On line 9580: + on the assumption + that Lehman would be saved. But Lehman + was not saved, and its + +On line 9580: + that Lehman would be saved. + But Lehman was not saved, and its + creditors were not + +On line 9580: + be saved. But Lehman was + not saved, and its creditors + were not bailed out. At + +On line 9580: + saved. But Lehman was not + saved, and its creditors were + not bailed out. At a + +On line 9580: + But Lehman was not saved, + and its creditors were not + bailed out. At a time + +On line 9580: + Lehman was not saved, and + its creditors were not bailed + out. At a time when + +On line 9580: + was not saved, and its + creditors were not bailed out. + At a time when large + +On line 9580: + its creditors were + not bailed out. At a time when + large mark-to-market + +On line 9580: + not bailed out. At a + time when large mark-to-market + losses among U.S. fi + +On line 9580: + out. At a time when + large mark-to-market losses + among U.S. fi nancial + +On line 9580: + At a time when large + mark-to-market losses among + U.S. fi nancial fi + +On line 9580: + large mark-to-market + losses among U.S. fi nancial + fi rms raised questions + +On line 9580: + questions about which large + fi nancial institutions + were insolvent or + +On line 9580: + institutions were + insolvent or unstable, + the demise of Lehman was + +On line 9580: + were insolvent or + unstable, the demise of Lehman + was a major shock. + +On line 9580: + or unstable, the + demise of Lehman was a major + shock. It overturned all + +On line 9580: + unstable, the demise + of Lehman was a major shock. + It overturned all the + +On line 9580: + the demise of Lehman was + a major shock. It overturned + all the rational + +On line 9580: + a major shock. It + overturned all the rational + expectations about + +On line 9580: + It overturned all the + rational expectations + about government Charles + +On line 9580: + government Charles P. + Kindleberger and Robert Aliber, + Manias, Panics, and + +On line 9580: + Manias, Panics, and + Crashes: A History of + Financial Crises, 5th + +On line 9580: + A History of + Financial Crises, 5th edition, + John Wiley Sons, Inc., + +On line 9584: + of Financial Crises, + 5th edition, John Wiley Sons, + Inc., p.104. Peter J. + +On line 9586: + John Wiley Sons, Inc., + p.104. Peter J. Wallison + policies that market + +On line 9586: + Wallison policies + that market participants + had developed aft + +On line 9586: + had developed aft + er the Bear rescue. With no + certainty about who + +On line 9586: + er the Bear rescue. + With no certainty about who + was strong or who was + +On line 9586: + the Bear rescue. With + no certainty about who was + strong or who was weak, + +On line 9586: + Bear rescue. With no + certainty about who was strong + or who was weak, there + +On line 9586: + no certainty about + who was strong or who was weak, + there was a headlong + +On line 9586: + certainty about who + was strong or who was weak, there + was a headlong rush + +On line 9586: + was strong or who was + weak, there was a headlong rush + to U.S. government + +On line 9586: + to U.S. government + securities. Banks—afraid that their + counterparties would + +On line 9586: + securities. Banks—afraid + that their counterparties would + want a return of + +On line 9586: + their counterparties + would want a return of their + investments or their + +On line 9586: + would want a return + of their investments or their + corporate customers + +On line 9586: + of their investments + or their corporate customers + would draw on lines of + +On line 9586: + or their corporate + customers would draw on lines of + credit—began to + +On line 9586: + customers would draw on + lines of credit—began to + hoard cash. Banks wouldn’t + +On line 9586: + would draw on lines of + credit—began to hoard cash. + Banks wouldn’t lend to + +On line 9586: + of credit—began + to hoard cash. Banks wouldn’t lend + to other banks, even + +On line 9586: + credit—began to + hoard cash. Banks wouldn’t lend to + other banks, even overnight. + +On line 9588: + even overnight. As Chairman + Bair suggested, that was the + fi nancial crisis. + +On line 9588: + Bair suggested, that + was the fi nancial crisis. + Everything aft er + +On line 9588: + fi nancial crisis. + Everything aft er that was + simply cleaning up + +On line 9592: + er that was simply + cleaning up the mess. Th is + analysis lays the + +On line 9592: + simply cleaning up + the mess. Th is analysis + lays the principal + +On line 9592: + cleaning up the mess. + Th is analysis lays the + principal cause of + +On line 9592: + is analysis lays + the principal cause of the + fi nancial crisis + +On line 9592: + the principal cause + of the fi nancial crisis + squarely at the feet + +On line 9592: + the unprecedented + number of NTMs that were brought + into the U.S. fi + +On line 9592: + number of NTMs that + were brought into the U.S. fi + nancial markets by + +On line 9592: + were brought into the + U.S. fi nancial markets by + government housing + +On line 9594: + government housing + policy. Th ese weak and + high risk loans helped to + +On line 9596: + policy. Th ese + weak and high risk loans helped to + build the bubble, and + +On line 9596: + ese weak and high risk + loans helped to build the bubble, + and when the bubble + +On line 9596: + and high risk loans helped + to build the bubble, and when + the bubble defl + +On line 9596: + loans helped to build the + bubble, and when the bubble + defl ated they + +On line 9596: + the bubble, and when + the bubble defl ated + they defaulted in + +On line 9598: + they defaulted in + unprecedented numbers. Th + is threatened losses + +On line 9598: + losses in the PMBS + that were held by fi nancial + institutions in + +On line 9598: + PMBS that were held by + fi nancial institutions + in the U.S. and around + +On line 9598: + that were held by fi + nancial institutions in + the U.S. and around the + +On line 9598: + in the U.S. and around + the world, impairing both their + liquidity and + +On line 9602: + stability. Th + e accumulation of + million subprime and + +On line 9602: + accumulation + of million subprime and Alt-A + mortgages was not a + +On line 9602: + of million subprime + and Alt-A mortgages was not a + random event, or even + +On line 9602: + Alt-A mortgages was not + a random event, or even the + result of major + +On line 9602: + was not a random + event, or even the result of + major forces such as + +On line 9602: + a random event, or + even the result of major + forces such as global + +On line 9602: + random event, or even + the result of major forces + such as global fi + +On line 9602: + forces such as global + fi nancial imbalances or + excessively low + +On line 9602: + excessively low + interest rates. Instead, these + loans and the bubble + +On line 9602: + rates. Instead, these loans + and the bubble to which they + contributed were the + +On line 9602: + and the bubble to + which they contributed were the + direct consequence + +On line 9602: + which they contributed + were the direct consequence + of something far more + +On line 9606: + standards so that more + people could buy homes. While this + process was going on, + +On line 9606: + more people could buy + homes. While this process was going + on, everyone was + +On line 9606: + people could buy homes. + While this process was going on, + everyone was pleased. + +On line 9606: + homes. While this process was + going on, everyone was + pleased. Homeownership + +On line 9606: + on, everyone was + pleased. Homeownership in the + U.S. actually + +On line 9606: + everyone was pleased. + Homeownership in the U.S. + actually grew + +On line 9606: + pleased. Homeownership + in the U.S. actually + grew to the highest + +On line 9606: + U.S. actually + grew to the highest level + ever recorded. But + +On line 9606: + grew to the highest + level ever recorded. But + the result was a + +On line 9606: + But the result was + a fi nancial catastrophe + from which the U.S. has + +On line 9606: + the result was a + fi nancial catastrophe from + which the U.S. has still + +On line 9606: + result was a fi + nancial catastrophe from which + the U.S. has still not + +On line 9616: + which the U.S. has still + not recovered. Dissenting + Statement III. THE U.S. + +On line 9616: + still not recovered. + Dissenting Statement III. THE + U.S. GOVERNMENT’S ROLE + +On line 9618: + Dissenting Statement + III. THE U.S. GOVERNMENT’S ROLE + IN FOSTERING THE + +On line 9620: + THE U.S. GOVERNMENT’S + ROLE IN FOSTERING THE GROWTH + OF THE NTM MARKET + +On line 9622: + U.S. GOVERNMENT’S ROLE + IN FOSTERING THE GROWTH OF + THE NTM MARKET Th + +On line 9624: + GOVERNMENT’S ROLE IN + FOSTERING THE GROWTH OF THE + NTM MARKET Th e + +On line 9624: + ROLE IN FOSTERING + THE GROWTH OF THE NTM MARKET + Th e preceding + +On line 9624: + FOSTERING THE GROWTH + OF THE NTM MARKET Th e + preceding section + +On line 9624: + OF THE NTM MARKET + Th e preceding section + of this dissenting + +On line 9624: + NTM MARKET Th e + preceding section of this + dissenting statement + +On line 9624: + Th e preceding + section of this dissenting + statement described the + +On line 9624: + preceding section + of this dissenting statement + described the damage + +On line 9624: + of this dissenting + statement described the damage + that was done to the + +On line 9624: + statement described the + damage that was done to the + fi nancial system + +On line 9624: + number of defaults + and delinquencies that occurred + among the million NTMs + +On line 9624: + and delinquencies that + occurred among the million NTMs + that were present there in + +On line 9624: + among the million NTMs + that were present there in Given + the damage they caused, + +On line 9624: + the million NTMs that + were present there in Given the + damage they caused, the + +On line 9624: + that were present there in + Given the damage they caused, + the most important + +On line 9624: + present there in Given + the damage they caused, the most + important question + +On line 9624: + Given the damage + they caused, the most important + question about the fi + +On line 9624: + the damage they caused, + the most important question + about the fi nancial + +On line 9624: + the most important + question about the fi nancial + crisis is why so + +On line 9624: + important question + about the fi nancial crisis + is why so many low + +On line 9624: + question about the fi + nancial crisis is why so + many low quality + +On line 9624: + about the fi nancial + crisis is why so many low + quality mortgages + +On line 9624: + Another way to + state this question is to ask + why mortgage standards + +On line 9624: + question is to ask + why mortgage standards declined + so substantially + +On line 9624: + why mortgage standards + declined so substantially + before and during + +On line 9624: + so substantially + before and during the 1997-2007 + bubble, allowing + +On line 9624: + before and during + the 1997-2007 bubble, allowing + so many NTMs to be + +On line 9628: + so many NTMs to be + created. Th is massive + and unprecedented + +On line 9628: + standards had to have + a cause—some factor that was + present during the 1990s + +On line 9628: + to have a cause—some + factor that was present during + the 1990s and thereaft + +On line 9628: + a cause—some factor + that was present during the 1990s + and thereaft er that + +On line 9628: + cause—some factor that + was present during the 1990s and + thereaft er that was + +On line 9628: + factor that was present + during the 1990s and thereaft + er that was not present + +On line 9628: + that was present during + the 1990s and thereaft er that + was not present in any + +On line 9628: + during the 1990s and + thereaft er that was not present + in any earlier + +On line 9628: + thereaft er that was + not present in any earlier + period. Part III + +On line 9628: + that was not present in + any earlier period. + Part III addresses + +On line 9628: + was not present in any + earlier period. Part + III addresses this + +On line 9632: + III addresses this + fundamental question. Th + e conventional + +On line 9632: + e conventional + explanation for the fi + nancial crisis is + +On line 9632: + explanation for + the fi nancial crisis is + the one given by + +On line 9632: + for the fi nancial + crisis is the one given + by Fed Chairman Bernanke + +On line 9632: + fi nancial crisis + is the one given by Fed + Chairman Bernanke in the + +On line 9632: + crisis is the one + given by Fed Chairman Bernanke + in the same speech at + +On line 9632: + is the one given + by Fed Chairman Bernanke in the + same speech at Morehouse + +On line 9632: + one given by Fed + Chairman Bernanke in the same speech + at Morehouse College + +On line 9632: + by Fed Chairman Bernanke + in the same speech at Morehouse + College quoted at + +On line 9632: + Bernanke in the same speech + at Morehouse College quoted + at the outset of + +On line 9632: + in the same speech at + Morehouse College quoted at + the outset of Part + +On line 9634: + the outset of Part + II: Saving infl ows from + abroad can be benefi + +On line 9634: + outset of Part II: + Saving infl ows from abroad + can be benefi cial + +On line 9634: + of Part II: Saving + infl ows from abroad can be + benefi cial if the + +On line 9634: + II: Saving infl + ows from abroad can be benefi + cial if the country + +On line 9634: + Saving infl ows + from abroad can be benefi cial + if the country that + +On line 9634: + infl ows from abroad + can be benefi cial if the + country that receives + +On line 9634: + be benefi cial if + the country that receives those + infl ows invests + +On line 9634: + infl ows invests + them well. Unfortunately, + that was not always + +On line 9634: + ows invests them well. + Unfortunately, that was + not always the case + +On line 9634: + Unfortunately, + that was not always the case + in the United States + +On line 9634: + was not always the + case in the United States and + some other countries. + +On line 9634: + some other countries. + Financial institutions + reacted to the + +On line 9634: + countries. Financial + institutions reacted + to the surplus of + +On line 9634: + to the surplus of + available funds by competing + aggressively for + +On line 9634: + of available funds by + competing aggressively + for borrowers, and, + +On line 9634: + aggressively for + borrowers, and, in the years + leading up to the + +On line 9634: + for borrowers, and, + in the years leading up to + the crisis, credit + +On line 9634: + borrowers, and, in + the years leading up to the + crisis, credit to + +On line 9634: + in the years leading + up to the crisis, credit + to both households and + +On line 9634: + up to the crisis, + credit to both households and + businesses became + +On line 9634: + and easy to obtain. + One important consequence + was a housing boom + +On line 9634: + easy to obtain. One + important consequence was + a housing boom in + +On line 9634: + consequence was a + housing boom in the United + States, a boom that was + +On line 9634: + was a housing boom + in the United States, a boom + that was fueled in + +On line 9634: + a housing boom in + the United States, a boom that + was fueled in large + +On line 9634: + housing boom in the + United States, a boom that was + fueled in large part + +On line 9634: + boom in the United + States, a boom that was fueled + in large part by a + +On line 9634: + in the United States, + a boom that was fueled in + large part by a rapid + +On line 9634: + States, a boom that was + fueled in large part by a + rapid expansion of + +On line 9634: + was fueled in large + part by a rapid expansion + of mortgage lending. + +On line 9634: + of this lending was + poorly done, involving, for + example, little + +On line 9634: + done, involving, for + example, little or no + down payment by the + +On line 9636: + little or no down + payment by the borrower + or insuffi cient + +On line 9636: + ability to make + the monthly payments. Lenders may + have become careless + +On line 9636: + to make the monthly + payments. Lenders may have become + careless because they, + +On line 9636: + the monthly payments. + Lenders may have become careless + because they, like many + +On line 9636: + payments. Lenders may have + become careless because they, + like many people at + +On line 9636: + Lenders may have become + careless because they, like many + people at the time, + +On line 9636: + careless because they, + like many people at the time, + expected that house + +On line 9636: + like many people at + the time, expected that house + prices would continue + +On line 9636: + many people at the + time, expected that house prices + would continue to + +On line 9636: + time, expected that + house prices would continue to + rise--thereby allowing + +On line 9636: + up equity in + their homes--and that credit would + remain easily + +On line 9636: + credit would remain + easily available, so that + borrowers would be + +On line 9636: + easily available, + so that borrowers would be + able to refi nance + +On line 9636: + to refi nance if + necessary. Regulators + did not do enough to + +On line 9636: + nance if necessary. + Regulators did not do + enough to prevent poor + +On line 9636: + did not do enough to + prevent poor lending, in part + because many of the + +On line 9636: + do enough to prevent + poor lending, in part because + many of the worst loans + +On line 9636: + enough to prevent poor + lending, in part because many + of the worst loans were + +On line 9636: + prevent poor lending, + in part because many of the + worst loans were made by + +On line 9636: + poor lending, in part + because many of the worst loans + were made by fi rms + +On line 9636: + in part because many + of the worst loans were made by + fi rms subject to + +On line 9636: + because many of the + worst loans were made by fi rms + subject to little + +On line 9636: + many of the worst loans + were made by fi rms subject + to little or no + +On line 9636: + worst loans were made by + fi rms subject to little + or no federal + +On line 9636: + to little or no + federal regulation. + [Emphasis supplied]59 + +On line 9638: + or no federal + regulation. [Emphasis + supplied]59 In other + +On line 9638: + supplied]59 In other + words, the liquidity in + the world fi nancial + +On line 9638: + In other words, the + liquidity in the world + fi nancial market + +On line 9638: + market caused U.S. banks + to compete for borrowers + by lowering their + +On line 9638: + banks to compete for + borrowers by lowering + their underwriting + +On line 9638: + by lowering their + underwriting standards for + mortgages and other + +On line 9638: + Unregulated + originators made bad loans. + One has to ask: is + +On line 9638: + originators made + bad loans. One has to ask: is + it plausible that + +On line 9638: + made bad loans. One has + to ask: is it plausible + that banks would compete + +On line 9638: + bad loans. One has to + ask: is it plausible that + banks would compete for + +On line 9638: + plausible that banks + would compete for borrowers + by lowering their + +On line 9638: + banks would compete for + borrowers by lowering + their mortgage standards1 + +On line 9638: + their mortgage standards1 + Mortgage originators—whether + S&Ls, commercial banks, + +On line 9640: + been competing for + years. Th at competition + involved off ering + +On line 9640: + most benefi ts to + potential borrowers. It + did not, however, + +On line 9650: + Dissenting Statement + or involve the weakening + of underwriting + +On line 9650: + the weakening of + underwriting standards. Th + ose standards—what made + +On line 9652: + the traditional + U.S. mortgage—were generally + or year amortizing + +On line 9652: + traditional U.S. + mortgage—were generally or + year amortizing loans + +On line 9652: + amortizing loans to + homebuyers who could provide + a downpayment of + +On line 9652: + homebuyers who could + provide a downpayment of + at least 10-to-20 percent + +On line 9652: + who could provide a + downpayment of at least 10-to-20 + percent and had good + +On line 9652: + a downpayment of + at least 10-to-20 percent and had + good credit records, jobs + +On line 9652: + downpayment of at + least 10-to-20 percent and had good + credit records, jobs and + +On line 9652: + least 10-to-20 percent and + had good credit records, jobs and + steady incomes. Because + +On line 9652: + 10-to-20 percent and had + good credit records, jobs and steady + incomes. Because of + +On line 9652: + had good credit records, + jobs and steady incomes. Because + of its inherent + +On line 9652: + jobs and steady incomes. + Because of its inherent + quality, this loan + +On line 9652: + incomes. Because of + its inherent quality, + this loan was known as + +On line 9652: + of its inherent + quality, this loan was known + as a prime mortgage. + +On line 9656: + quality, this loan + was known as a prime mortgage. + Th ere were subprime + +On line 9656: + was known as a prime + mortgage. Th ere were subprime + loans and subprime lenders, + +On line 9656: + as a prime mortgage. + Th ere were subprime loans and + subprime lenders, but in + +On line 9656: + mortgage. Th ere were + subprime loans and subprime lenders, + but in the early + +On line 9656: + ere were subprime loans + and subprime lenders, but in the + early 1990s subprime + +On line 9656: + subprime lenders, but in + the early 1990s subprime lenders + were generally + +On line 9656: + early 1990s subprime + lenders were generally niche + players that made loans + +On line 9656: + were generally + niche players that made loans to + people who could not + +On line 9656: + niche players that made + loans to people who could not + get traditional + +On line 9656: + people who could not + get traditional mortgage + loans; the number of + +On line 9656: + loans; the number of + loans they generated was + relatively small + +On line 9656: + generated was + relatively small and bore + higher than normal + +On line 9656: + relatively small + and bore higher than normal + interest rates to + +On line 9656: + small and bore higher + than normal interest rates + to compensate for + +On line 9656: + and bore higher than + normal interest rates to + compensate for the + +On line 9656: + normal interest + rates to compensate for the + risks of default. In + +On line 9656: + rates to compensate + for the risks of default. In + addition, mortgage + +On line 9656: + the risks of default. + In addition, mortgage bankers + and others relied + +On line 9656: + risks of default. In + addition, mortgage bankers and + others relied on + +On line 9656: + addition, mortgage + bankers and others relied on + FHA insurance for + +On line 9656: + and others relied + on FHA insurance for loans + with low downpayments, + +On line 9656: + on FHA insurance + for loans with low downpayments, + impaired credit and + +On line 9656: + insurance for loans + with low downpayments, impaired + credit and high debt + +On line 9656: + with low downpayments, + impaired credit and high debt + ratios. Until the + +On line 9656: + downpayments, impaired + credit and high debt ratios. + Until the 1990s, these + +On line 9656: + credit and high debt + ratios. Until the 1990s, these + NTMs were never more + +On line 9656: + and high debt ratios. + Until the 1990s, these NTMs were + never more than a + +On line 9656: + debt ratios. Until + the 1990s, these NTMs were never + more than a fraction + +On line 9656: + ratios. Until the + 1990s, these NTMs were never more + than a fraction of + +On line 9656: + these NTMs were never + more than a fraction of the + total number of + +On line 9656: + were never more than + a fraction of the total + number of mortgages + +On line 9656: + more than a fraction + of the total number of + mortgages outstanding. + +On line 9658: + a fraction of the + total number of mortgages + outstanding. Th e + +On line 9658: + the total number + of mortgages outstanding. Th + e reason that low + +On line 9658: + e reason that low + underwriting standards were + not generally + +On line 9658: + not generally + used is simple. Low standards + would result in large + +On line 9658: + in large losses when + these mortgages defaulted, and + very few lenders wanted + +On line 9658: + large losses when these + mortgages defaulted, and very + few lenders wanted to + +On line 9658: + mortgages defaulted, + and very few lenders wanted to + hold such mortgages. In + +On line 9658: + lenders wanted to hold + such mortgages. In addition, + Fannie and Freddie + +On line 9658: + addition, Fannie + and Freddie were the buyers + for most middle class + +On line 9658: + were the buyers for + most middle class mortgages in + the United States, and + +On line 9658: + the buyers for most + middle class mortgages in the + United States, and they + +On line 9658: + middle class mortgages + in the United States, and they + were conservative + +On line 9658: + the United States, and + they were conservative in + their approach. Unless + +On line 9658: + United States, and they + were conservative in their + approach. Unless an + +On line 9658: + were conservative + in their approach. Unless an + originator made + +On line 9658: + originator made + a traditional mortgage + it was unlikely + +On line 9658: + it was unlikely + that Fannie or Freddie or + another secondary + +On line 9662: + another secondary + market buyer could be found + for it. Th is is + +On line 9662: + market buyer could + be found for it. Th is is + common sense. If you + +On line 9662: + buyer could be found + for it. Th is is common + sense. If you produce + +On line 9662: + for it. Th is is + common sense. If you produce + an inferior + +On line 9662: + If you produce an + inferior product—whether it’s + a household cleaner, + +On line 9662: + or a loan—people + soon recognize the lack of + quality and you + +On line 9662: + soon recognize the + lack of quality and you + are out of business. + +On line 9662: + recognize the lack + of quality and you are + out of business. Th + +On line 9664: + lack of quality + and you are out of business. + Th is was not the + +On line 9664: + and you are out of + business. Th is was not the + experience with + +On line 9666: + business. Th is was + not the experience with + mortgages, which became + +On line 9666: + Th is was not the + experience with mortgages, + which became weaker + +On line 9666: + experience with + mortgages, which became weaker + and riskier as the + +On line 9666: + mortgages, which became + weaker and riskier as the + 1990s and 2000s progressed. + +On line 9666: + which became weaker + and riskier as the 1990s and + 2000s progressed. Why did + +On line 9666: + became weaker and + riskier as the 1990s and 2000s + progressed. Why did this + +On line 9666: + weaker and riskier + as the 1990s and 2000s progressed. + Why did this happen1 + +On line 9668: + and riskier as the + 1990s and 2000s progressed. Why did + this happen1 In its + +On line 9668: + as the 1990s and 2000s + progressed. Why did this happen1 + In its report, the + +On line 9668: + did this happen1 In + its report, the Commission + majority seemed + +On line 9668: + In its report, the + Commission majority + seemed to assume that + +On line 9668: + of mortgages controlled + the quality of mortgages. + Much is made in the + +On line 9668: + so-called "originate + to distribute" idea, where an + originator is + +On line 9668: + to distribute" idea, + where an originator is + not supposed to care + +On line 9668: + distribute" idea, where + an originator is not + supposed to care about + +On line 9668: + an originator + is not supposed to care about + the quality of + +On line 9668: + originator is + not supposed to care about the + quality of the + +On line 9668: + is not supposed to + care about the quality of + the mortgages because + +On line 9668: + not supposed to care + about the quality of the + mortgages because they + +On line 9668: + about the quality + of the mortgages because they + would eventually + +On line 9668: + the quality of + the mortgages because they would + eventually be + +On line 9672: + be sold off Th e + originator, it is said, + has no "skin in the + +On line 9674: + e motivation + for making poor quality + mortgages in this telling + +On line 9674: + quality mortgages + in this telling is to earn fees, + not only on the + +On line 9674: + in this telling is to + earn fees, not only on the + origination but + +On line 9674: + not only on the + origination but in each + of the subsequent + +On line 9678: + upside down. Mortgage + originators could make all + the low quality + +On line 9678: + originators could + make all the low quality + mortgages they wanted, + +On line 9678: + the low quality + mortgages they wanted, but they + wouldn’t earn a dime + +On line 9678: + quality mortgages + they wanted, but they wouldn’t + earn a dime unless + +On line 9678: + mortgages they wanted, + but they wouldn’t earn a dime + unless there was a + +On line 9678: + they wanted, but they + wouldn’t earn a dime unless + there was a buyer. + +On line 9680: + earn a dime unless + there was a buyer. Th e + real question, then, + +On line 9680: + dime unless there was + a buyer. Th e real + question, then, is why + +On line 9680: + was a buyer. Th + e real question, then, is + why there were buyers + +On line 9682: + a buyer. Th e + real question, then, is why + there were buyers for + +On line 9682: + e real question, + then, is why there were buyers + for inferior + +On line 9682: + then, is why there were + buyers for inferior + mortgages and this, as + +On line 9682: + why there were buyers + for inferior mortgages + and this, as it turns + +On line 9682: + there were buyers for + inferior mortgages and + this, as it turns out, + +On line 9682: + for inferior + mortgages and this, as it turns + out, is the same as + +On line 9682: + mortgages and this, as + it turns out, is the same as + asking why mortgage + +On line 9682: + the same as asking + why mortgage underwriting + standards, beginning + +On line 9682: + Professor Raghuram + Rajan notes in Fault Lines, "[A]s + brokers came to know + +On line 9682: + Raghuram Rajan notes + in Fault Lines, "[A]s brokers came + to know that someone + +On line 9682: + Rajan notes in Fault + Lines, "[A]s brokers came to know + that someone out there + +On line 9682: + Fault Lines, "[A]s brokers + came to know that someone out + there was willing to + +On line 9682: + Lines, "[A]s brokers came + to know that someone out there + was willing to buy + +On line 9682: + while, the problems were + hidden by growing house prices + and low defaults—easy + +On line 9682: + problems were hidden + by growing house prices and low + defaults—easy credit + +On line 9682: + by growing house prices + and low defaults—easy credit + masked the problems caused + +On line 9682: + growing house prices and + low defaults—easy credit masked + the problems caused by + +On line 9682: + defaults—easy credit + masked the problems caused by easy + credit—until house + +On line 9682: + masked the problems caused + by easy credit—until house + prices stopped rising and + +On line 9682: + the problems caused by + easy credit—until house prices + stopped rising and the + +On line 9682: + problems caused by easy + credit—until house prices stopped + rising and the fl + +On line 9682: + easy credit—until + house prices stopped rising and the + fl ood of defaults + +On line 9682: + credit—until house + prices stopped rising and the fl + ood of defaults burst + +On line 9684: + house prices stopped rising + and the fl ood of defaults + burst forth."60 Who were these + +On line 9684: + stopped rising and the + fl ood of defaults burst forth."60 + Who were these buyers1 + +On line 9684: + fl ood of defaults + burst forth."60 Who were these buyers1 + Table reporting + +On line 9684: + burst forth."60 Who were these + buyers1 Table reporting + the number of NTMs + +On line 9684: + these buyers1 Table + reporting the number of + NTMs outstanding on + +On line 9684: + outstanding on June + identifi ed government + agencies and private + +On line 9684: + agencies and private + organizations required + by the government + +On line 9684: + organizations + required by the government + to acquire, hold or + +On line 9684: + securitize NTMs + as responsible for two-thirds + Raghuram G. Rajan, + +On line 9688: + as responsible + for two-thirds Raghuram G. Rajan, + Fault Lines, p.44. Peter + +On line 9688: + responsible for + two-thirds Raghuram G. Rajan, Fault + Lines, p.44. Peter J. + +On line 9690: + for two-thirds Raghuram G. + Rajan, Fault Lines, p.44. Peter + J. Wallison of + +On line 9690: + G. Rajan, Fault Lines, + p.44. Peter J. Wallison + of these mortgages, about + +On line 9692: + Lines, p.44. Peter J. + Wallison of these mortgages, + about million. Th e + +On line 9692: + J. Wallison of + these mortgages, about million. Th + e table also + +On line 9694: + the private sector + as the securitizer + of the remaining + +On line 9694: + private sector as + the securitizer of + the remaining one-third, + +On line 9694: + remaining one-third, about + million loans. In other words, + if we are looking + +On line 9694: + loans. In other words, + if we are looking for the + buyer of the NTMs + +On line 9694: + other words, if we + are looking for the buyer + of the NTMs that were + +On line 9694: + are looking for the + buyer of the NTMs that were + being created + +On line 9694: + buyer of the NTMs + that were being created + by originators + +On line 9694: + being created + by originators at the + local level, the + +On line 9694: + by originators + at the local level, the + government’s policies + +On line 9694: + the local level, + the government’s policies would + seem to be the most + +On line 9698: + sector certainly + played a role, but it was a + subordinate one. + +On line 9698: + private sector did + was respond to demand—that’s what + the private sector + +On line 9698: + matter. Of its own + volition, it created + a demand that would + +On line 9698: + own volition, it + created a demand that + would not otherwise + +On line 9702: + have been there. Th e + deterioration in + mortgage standards did + +On line 9702: + to the Commission + majority’s apparent + view—because banks and + +On line 9702: + suddenly started + to make defi cient loans; nor + was it because of + +On line 9704: + cient loans; nor was it + because of insuffi cient + regulation at + +On line 9706: + Fannie and Freddie, + mortgage banks and insured banks + of all kinds into + +On line 9706: + Freddie, mortgage banks + and insured banks of all kinds + into competing + +On line 9706: + and insured banks of + all kinds into competing + buyers. All of them + +On line 9706: + of all kinds into + competing buyers. All of + them needed NTMs in + +On line 9706: + into competing + buyers. All of them needed + NTMs in order to + +On line 9706: + NTMs in order to + meet various government + requirements. Fannie + +On line 9706: + Freddie were subject + to increasingly stringent + aff ordable housing + +On line 9706: + to increasingly + stringent aff ordable housing + requirements; FHA was + +On line 9706: + stringent aff ordable + housing requirements; FHA was + tasked with insuring + +On line 9706: + aff ordable housing + requirements; FHA was tasked with + insuring loans to + +On line 9706: + requirements; FHA was + tasked with insuring loans to + low-income borrowers + +On line 9706: + tasked with insuring + loans to low-income borrowers + that would not be made + +On line 9706: + insuring loans to + low-income borrowers that would + not be made unless + +On line 9706: + low-income borrowers + that would not be made unless + insured; banks and S&Ls + +On line 9706: + that would not be made + unless insured; banks and S&Ls + were required by CRA + +On line 9706: + made unless insured; + banks and S&Ls were required by + CRA to show that they + +On line 9706: + unless insured; banks + and S&Ls were required by CRA + to show that they were + +On line 9706: + insured; banks and S&Ls + were required by CRA to show + that they were also + +On line 9706: + and S&Ls were required + by CRA to show that they were + also making loans + +On line 9706: + were required by CRA + to show that they were also + making loans to the + +On line 9706: + by CRA to show that + they were also making loans + to the same group of + +On line 9706: + loans to the same group + of borrowers; mortgage bankers + who signed up for the + +On line 9706: + to the same group of + borrowers; mortgage bankers who + signed up for the HUD + +On line 9706: + group of borrowers; + mortgage bankers who signed up for + the HUD Best Practices + +On line 9706: + mortgage bankers who signed + up for the HUD Best Practices + Initiative and the + +On line 9706: + the HUD Best Practices + Initiative and the Clinton + administration’s + +On line 9706: + were required to make + the same kind of loans. Profi t + had nothing to do + +On line 9706: + required to make the + same kind of loans. Profi t had + nothing to do with + +On line 9706: + same kind of loans. Profi + t had nothing to do with + the motivations + +On line 9706: + kind of loans. Profi t + had nothing to do with the + motivations of + +On line 9706: + t had nothing to + do with the motivations + of these fi rms; they + +On line 9706: + had nothing to do + with the motivations of + these fi rms; they were + +On line 9706: + these fi rms; they were + responding to government + direction. Under + +On line 9706: + should be no surprise + that underwriting standards + declined, as all of + +On line 9710: + In testimony + before the House Financial + Services Committee + +On line 9710: + Committee on April + Shaun Donovan, Secretary of + Housing and Urban + +On line 9710: + Development, said + in reference to the GSEs: + "Seeing their market + +On line 9710: + in reference to + the GSEs: "Seeing their market + share decline [between + +On line 9710: + reference to the + GSEs: "Seeing their market share + decline [between and + +On line 9712: + the GSEs: "Seeing their + market share decline [between + and as a result + +On line 9712: + "Seeing their market + share decline [between and as + a result of [a] + +On line 9712: + share decline [between + and as a result of [a] + change of demand, the + +On line 9712: + decline [between and + as a result of [a] change + of demand, the GSEs + +On line 9712: + as a result of + [a] change of demand, the GSEs + made the decision + +On line 9712: + a result of [a] + change of demand, the GSEs made + the decision to + +On line 9712: + result of [a] change + of demand, the GSEs made the + decision to widen + +On line 9712: + [a] change of demand, + the GSEs made the decision + to widen their focus + +On line 9712: + change of demand, the + GSEs made the decision to + widen their focus from + +On line 9712: + of demand, the GSEs + made the decision to widen + their focus from safer + +On line 9712: + demand, the GSEs made + the decision to widen their + focus from safer prime + +On line 9712: + made the decision + to widen their focus from safer + prime loans and begin + +On line 9712: + decision to widen + their focus from safer prime loans + and begin chasing + +On line 9712: + underwriting and + risk management standards along + the way. Th is would + +On line 9714: + and risk management + standards along the way. Th is + would be a fateful + +On line 9714: + standards along the way. + Th is would be a fateful + decision that not + +On line 9714: + the way. Th is would + be a fateful decision + that not only proved + +On line 9714: + would be a fateful + decision that not only + proved disastrous for + +On line 9716: + companies themselves + –but ultimately also + for the American + +On line 9718: + Earlier, in a + "Report to Congress on the + Root Causes of the + +On line 9718: + in a "Report to + Congress on the Root Causes + of the Foreclosure + +On line 9718: + "Report to Congress + on the Root Causes of the + Foreclosure Crisis," + +On line 9718: + on the Root Causes + of the Foreclosure Crisis," + in January HUD + +On line 9720: + Foreclosure Crisis," + in January HUD declared + "Th e serious + +On line 9720: + in January HUD + declared "Th e serious + fi nancial troubles + +On line 9722: + "Th e serious + fi nancial troubles of the + GSEs that led to their + +On line 9722: + fi nancial troubles + of the GSEs that led to their + being placed into + +On line 9722: + of the GSEs that led + to their being placed into + conservatorship + +On line 9722: + to their being placed + into conservatorship + by the Federal + +On line 9722: + to the fact that the + GSEs were, indeed, overexposed + to unduly risky + +On line 9722: + mortgage investments. + However, the evidence + suggests that the GSEs’ + +On line 9724: + suggests that the GSEs’ + decisions to purchase or + guarantee non-prime loans + +On line 9724: + or guarantee non-prime + loans was motivated much + more by eff orts to + +On line 9724: + guarantee non-prime loans + was motivated much more + by eff orts to chase + +On line 9724: + was motivated + much more by eff orts to chase + market share and profi + +On line 9724: + much more by eff orts + to chase market share and profi + ts than by the need + +On line 9724: + more by eff orts to + chase market share and profi ts + than by the need to + +On line 9724: + orts to chase market + share and profi ts than by the + need to satisfy + +On line 9724: + need to satisfy + federal regulators." + [emphasis supplied] + +On line 9726: + Finger-pointing in + Washington is endemic + when problems occur, + +On line 9726: + is endemic when + problems occur, and Report + to Congress on the + +On line 9726: + when problems occur, + and Report to Congress on + the Root Causes of + +On line 9726: + problems occur, and + Report to Congress on the + Root Causes of the + +On line 9726: + Report to Congress + on the Root Causes of the + Foreclosure Crisis + +On line 9726: + Congress on the Root + Causes of the Foreclosure + Crisis January + +On line 9736: + individuals + are constantly trying to + fi nd scapegoats for + +On line 9736: + constantly trying + to fi nd scapegoats for their + own bad decisions, + +On line 9736: + to fi nd scapegoats + for their own bad decisions, + but HUD’s eff ort to + +On line 9736: + fi nd scapegoats for + their own bad decisions, but + HUD’s eff ort to blame + +On line 9736: + scapegoats for their own + bad decisions, but HUD’s eff + ort to blame Fannie + +On line 9736: + bad decisions, but + HUD’s eff ort to blame Fannie + and Freddie for the + +On line 9736: + ort to blame Fannie + and Freddie for the decline + in underwriting + +On line 9736: + and Freddie for the + decline in underwriting + standards sets a new + +On line 9736: + for the decline in + underwriting standards sets + a new standard for + +On line 9738: + standard for running + from responsibility. + Contrast the statement + +On line 9738: + Contrast the statement + quoted above with this statement + by HUD in when it + +On line 9738: + statement quoted above + with this statement by HUD in + when it was signifi + +On line 9738: + quoted above with this + statement by HUD in when it + was signifi cantly + +On line 9738: + with this statement by + HUD in when it was signifi + cantly increasing + +On line 9738: + statement by HUD in + when it was signifi cantly + increasing Fannie + +On line 9738: + HUD in when it was + signifi cantly increasing + Fannie and Freddie’s + +On line 9738: + goals: Lower-income and + minority families + have made major gains + +On line 9738: + and minority + families have made major + gains in access to + +On line 9738: + families have made + major gains in access to + the mortgage market + +On line 9738: + have made major gains + in access to the mortgage + market in the 1990s. + +On line 9738: + gains in access to + the mortgage market in the + 1990s. A variety + +On line 9738: + in access to the + mortgage market in the 1990s. + A variety of + +On line 9738: + market in the 1990s. + A variety of reasons + have accounted for + +On line 9738: + A variety of + reasons have accounted for + these gains, including + +On line 9738: + including improved + housing aff ordability, + enhanced enforcement + +On line 9738: + more fl exible + mortgage underwriting, and + stepped-up enforcement of + +On line 9738: + underwriting, and + stepped-up enforcement of the Fair + Housing Act. But most + +On line 9738: + stepped-up enforcement of + the Fair Housing Act. But most + industry observers + +On line 9738: + observers believe that + one factor behind these gains + has been the improved + +On line 9738: + behind these gains has + been the improved performance + of Fannie Mae and + +On line 9738: + improved performance + of Fannie Mae and Freddie + Mac under HUD’s aff + +On line 9738: + of Fannie Mae and + Freddie Mac under HUD’s aff + ordable lending goals. + +On line 9738: + aff ordable lending + goals. HUD’s recent increases + in the goals for 2001-03 + +On line 9738: + ordable lending goals. + HUD’s recent increases in + the goals for 2001-03 will + +On line 9738: + increases in the + goals for 2001-03 will encourage + the GSEs to further + +On line 9738: + in the goals for 2001-03 + will encourage the GSEs to + further step up their + +On line 9738: + 2001-03 will encourage + the GSEs to further step up + their support for aff + +On line 9738: + to further step up + their support for aff ordable + lending.62 [emphasis + +On line 9740: + aff ordable lending.62 + [emphasis supplied] Or this + statement in when HUD + +On line 9740: + [emphasis supplied] + Or this statement in when HUD + was again increasing + +On line 9740: + this statement in when + HUD was again increasing the + aff ordable housing + +On line 9740: + statement in when HUD + was again increasing the aff + ordable housing goals + +On line 9740: + again increasing the + aff ordable housing goals for + Fannie and Freddie: + +On line 9742: + and Freddie: Millions + of Americans with less than + perfect credit or + +On line 9742: + of Americans with + less than perfect credit or + who cannot meet some + +On line 9742: + Americans with less + than perfect credit or who + cannot meet some of + +On line 9742: + perfect credit or + who cannot meet some of the + tougher underwriting + +On line 9742: + who cannot meet some + of the tougher underwriting + requirements of the + +On line 9742: + meet some of the tougher + underwriting requirements + of the prime market + +On line 9742: + requirements of the + prime market for reasons such + as inadequate + +On line 9742: + documentation, + limited downpayment or + cash reserves, or the + +On line 9742: + downpayment or cash + reserves, or the desire to + take more cash out in + +On line 9742: + or cash reserves, or + the desire to take more cash + out in a refi + +On line 9742: + to take more cash out + in a refi nancing than + conventional loans + +On line 9742: + out in a refi + nancing than conventional + loans allow, rely + +On line 9742: + refi nancing than + conventional loans allow, + rely on subprime + +On line 9742: + conventional loans + allow, rely on subprime + lenders for access to + +On line 9742: + allow, rely on + subprime lenders for access to + mortgage fi nancing. + +On line 9742: + rely on subprime + lenders for access to mortgage + fi nancing. If the + +On line 9742: + access to mortgage + fi nancing. If the GSEs reach + deeper into the + +On line 9742: + fi nancing. If the + GSEs reach deeper into the + subprime market, more + +On line 9742: + the GSEs reach deeper + into the subprime market, + more borrowers will + +On line 9742: + into the subprime + market, more borrowers will + benefi t from the + +On line 9742: + subprime market, more + borrowers will benefi t + from the advantages + +On line 9744: + liberal mortgage + fi nancing has contributed + to the increase in + +On line 9744: + has contributed to + the increase in demand for + housing. During the + +On line 9744: + to the increase in + demand for housing. During + the 1990s, lenders have been + +On line 9744: + demand for housing. + During the 1990s, lenders have been + encouraged by HUD + +On line 9744: + housing. During the + 1990s, lenders have been encouraged + by HUD and banking + +On line 9744: + encouraged by HUD + and banking regulators + to increase lending + +On line 9744: + by HUD and banking + regulators to increase + lending to low-income + +On line 9744: + regulators to + increase lending to low-income + and minority + +On line 9746: + government-sponsored + enterprises (GSE) housing + goals and fair lending + +On line 9746: + (GSE) housing goals and + fair lending laws have strongly + encouraged mortgage + +On line 9746: + goals and fair lending + laws have strongly encouraged + mortgage brokers and + +On line 9746: + fair lending laws have + strongly encouraged mortgage + brokers and lenders to + +On line 9746: + strongly encouraged + mortgage brokers and lenders to + market to low-income + +On line 9746: + mortgage brokers and + lenders to market to low-income + and minority + +On line 9746: + lenders to market to + low-income and minority + borrowers. Sometimes + +On line 9746: + or simply little + savings for a down payment. + Lenders have responded + +On line 9746: + savings for a down + payment. Lenders have responded + with low down payment + +On line 9746: + a down payment. Lenders + have responded with low down + payment loan products + +On line 9746: + have responded with + low down payment loan products + and automated + +On line 9746: + low down payment loan + products and automated + underwriting, which + +On line 9746: + has allowed them to + more carefully determine + the risk of the loan.64 + +On line 9748: + the risk of the loan.64 + [emphasis supplied] Despite + the recent eff ort + +On line 9748: + the loan.64 [emphasis + supplied] Despite the recent + eff ort by HUD to + +On line 9748: + [emphasis supplied] + Despite the recent eff ort + by HUD to deny + +On line 9748: + supplied] Despite the + recent eff ort by HUD to + deny its own role + +On line 9748: + the recent eff ort + by HUD to deny its own + role in fostering + +On line 9748: + recent eff ort by + HUD to deny its own role + in fostering the + +On line 9748: + by HUD to deny + its own role in fostering + the growth of subprime + +On line 9748: + HUD to deny its + own role in fostering the + growth of subprime and + +On line 9748: + deny its own role + in fostering the growth of + subprime and other + +On line 9748: + fostering the growth + of subprime and other high + risk mortgage lending, + +On line 9748: + mortgage lending, there + is strong—indeed irrefutable—evidence + that, beginning in + +On line 9748: + in the early 1990s, + HUD led an ultimately + successful eff ort + +On line 9748: + successful eff ort + to lower underwriting + standards in every + +On line 9748: + eff ort to lower + underwriting standards in + every area of the + +On line 9748: + standards in every + area of the mortgage market + where HUD had or could + +On line 9748: + in every area of + the mortgage market where HUD + had or could obtain + +On line 9748: + area of the mortgage + market where HUD had or could + obtain infl uence. + +On line 9748: + administration + and extended almost to + the end of the Bush + +On line 9748: + to the end of the + Bush administration. It + involved FHA, which was + +On line 9748: + involved FHA, which was + under the direct control + of HUD; Fannie Mae + +On line 9748: + under the direct + control of HUD; Fannie Mae + and Freddie Mac, which + +On line 9748: + direct control of + HUD; Fannie Mae and Freddie + Mac, which were subject + +On line 9748: + HUD; Fannie Mae and + Freddie Mac, which were subject + to HUD’s aff ordable + +On line 9748: + Mac, which were subject + to HUD’s aff ordable housing + regulations; and + +On line 9748: + to HUD’s aff ordable + housing regulations; and + the mortgage banking + +On line 9750: + pursue HUD’s Issue + Brief: HUD’s Aff ordable Housing + Goals for Fannie Mae + +On line 9750: + Brief: HUD’s Aff ordable + Housing Goals for Fannie Mae + and Freddie Mac, p.5. + +On line 9752: + ordable Housing Goals + for Fannie Mae and Freddie + Mac, p.5. Final Rule, + +On line 9754: + Goals for Fannie Mae + and Freddie Mac, p.5. Final + Rule, http://fdsys.gpo.gov/fdsys/pkg/FR-2004-11-02/pdf/04-24101.pdf. HUD PDR, May + +On line 9754: + for Fannie Mae and + Freddie Mac, p.5. Final Rule, + http://fdsys.gpo.gov/fdsys/pkg/FR-2004-11-02/pdf/04-24101.pdf. HUD PDR, May HUD + +On line 9754: + Mae and Freddie Mac, + p.5. Final Rule, http://fdsys.gpo.gov/fdsys/pkg/FR-2004-11-02/pdf/04-24101.pdf. HUD PDR, + May HUD Contract C-OPC-21895, + +On line 9754: + and Freddie Mac, p.5. + Final Rule, http://fdsys.gpo.gov/fdsys/pkg/FR-2004-11-02/pdf/04-24101.pdf. HUD PDR, May + HUD Contract C-OPC-21895, Task + +On line 9754: + Mac, p.5. Final Rule, + http://fdsys.gpo.gov/fdsys/pkg/FR-2004-11-02/pdf/04-24101.pdf. HUD PDR, May HUD Contract + C-OPC-21895, Task Order CHI-T0007, + +On line 9754: + Final Rule, http://fdsys.gpo.gov/fdsys/pkg/FR-2004-11-02/pdf/04-24101.pdf. HUD + PDR, May HUD Contract C-OPC-21895, Task + Order CHI-T0007, "Recent + +On line 9754: + Rule, http://fdsys.gpo.gov/fdsys/pkg/FR-2004-11-02/pdf/04-24101.pdf. HUD PDR, May + HUD Contract C-OPC-21895, Task Order + CHI-T0007, "Recent House Price + +On line 9754: + http://fdsys.gpo.gov/fdsys/pkg/FR-2004-11-02/pdf/04-24101.pdf. HUD PDR, May HUD + Contract C-OPC-21895, Task Order CHI-T0007, + "Recent House Price Trends + +On line 9754: + CHI-T0007, "Recent House Price + Trends and Homeownership Aff + ordability", p.85. + +On line 9760: + Aff ordability", + p.85. Peter J. Wallison + policies out of fear + +On line 9760: + policies out of fear + that they would be brought under + the Community + +On line 9760: + that they would be brought + under the Community + Reinvestment Act through + +On line 9760: + not subject to HUD’s + jurisdiction, the new tighter + CRA regulations + +On line 9760: + CRA regulations + that became eff ective in + led to a process in + +On line 9760: + regulations that + became eff ective in led + to a process in which + +On line 9760: + became eff ective + in led to a process in which + community groups + +On line 9760: + led to a process in + which community groups could + obtain commitments + +On line 9760: + which community + groups could obtain commitments + for substantial amounts + +On line 9760: + community groups + could obtain commitments for + substantial amounts of + +On line 9760: + obtain commitments + for substantial amounts of CRA-qualifying + mortgages and other + +On line 9760: + amounts of CRA-qualifying mortgages + and other loans to subprime + borrowers when banks + +On line 9760: + and other loans to + subprime borrowers when banks + were applying for + +On line 9762: + subprime borrowers + when banks were applying for + merger approvals.66 By + +On line 9762: + banks were applying + for merger approvals.66 By HUD + believed it had achieved + +On line 9762: + for merger approvals.66 + By HUD believed it had achieved + the "revolution" + +On line 9762: + merger approvals.66 By + HUD believed it had achieved the + "revolution" it + +On line 9762: + By HUD believed it + had achieved the "revolution" + it was looking for: + +On line 9762: + HUD believed it had + achieved the "revolution" it + was looking for: Over + +On line 9762: + believed it had achieved + the "revolution" it was + looking for: Over the + +On line 9762: + the "revolution" + it was looking for: Over the + past ten years, there has + +On line 9762: + "revolution" it + was looking for: Over the past + ten years, there has been + +On line 9762: + was looking for: Over + the past ten years, there has been + a ‘revolution + +On line 9762: + looking for: Over the + past ten years, there has been a + ‘revolution in + +On line 9762: + past ten years, there has + been a ‘revolution in + aff ordable lending’ + +On line 9762: + ten years, there has been + a ‘revolution in aff + ordable lending’ that + +On line 9764: + historically + underserved households. Fannie + Mae and Freddie Mac + +On line 9764: + households. Fannie Mae + and Freddie Mac have been a + substantial part of + +On line 9764: + and Freddie Mac have + been a substantial part of + this ‘revolution + +On line 9764: + Freddie Mac have been + a substantial part of this + ‘revolution in + +On line 9764: + a substantial part + of this ‘revolution in + aff ordable lending’. + +On line 9764: + ‘revolution in + aff ordable lending’. During + the mid-to-late 1990s, they + +On line 9764: + mid-to-late 1990s, they added + fl exibility to + their underwriting + +On line 9764: + guidelines, introduced + new low-downpayment products, + and worked to expand + +On line 9764: + and worked to expand + the use of automated + underwriting in + +On line 9764: + evaluating the + creditworthiness of loan + applicants. HMDA + +On line 9764: + creditworthiness + of loan applicants. HMDA + data suggest that + +On line 9764: + of loan applicants. + HMDA data suggest that + the industry and + +On line 9764: + to low income and + minority families + increased at much faster + +On line 9764: + and minority + families increased at much + faster rates than loans to + +On line 9768: + nonminority + families.67[emphasis supplied] + Th is turned out to + +On line 9768: + Th is turned out to + be an immense error of + policy. By even + +On line 9768: + an immense error + of policy. By even the + strongest supporters + +On line 9768: + policy. By even + the strongest supporters of + aff ordable housing + +On line 9768: + By even the strongest + supporters of aff ordable + housing as enforced + +On line 9768: + strongest supporters + of aff ordable housing as + enforced by HUD had + +On line 9770: + as enforced by HUD + had recognized their error. + In an interview + +On line 9770: + enforced by HUD had + recognized their error. In + an interview on + +On line 9770: + had recognized their + error. In an interview + on Larry Kudlow’s + +On line 9770: + In an interview + on Larry Kudlow’s CNBC + television program + +On line 9770: + and previously + the strongest congressional + advocate for aff + +On line 9770: + advocate for aff + ordable housing—conceded + that he had erred: "I + +On line 9770: + he had erred: "I hope + by next year we’ll have abolished + Fannie and Freddie + +On line 9770: + erred: "I hope by next + year we’ll have abolished Fannie + and Freddie it was + +On line 9770: + "I hope by next year + we’ll have abolished Fannie and + Freddie it was a + +On line 9770: + year we’ll have abolished + Fannie and Freddie it was + a great mistake to + +On line 9770: + was a great mistake + to push lower-income people + into housing they + +On line 9770: + great mistake to push + lower-income people into + housing they couldn’t + +On line 9770: + to push lower-income + people into housing they + couldn’t aff ord and + +On line 9770: + lower-income people + into housing they couldn’t + aff ord and couldn’t + +On line 9770: + into housing they + couldn’t aff ord and couldn’t + really handle + +On line 9770: + couldn’t aff ord and + couldn’t really handle + once they had it." He + +On line 9770: + aff ord and couldn’t + really handle once they + had it." He then added, + +On line 9770: + couldn’t really + handle once they had it." He + then added, "I had been + +On line 9770: + had it." He then added, + "I had been too sanguine about + Fannie and Freddie."68 + +On line 9772: + then added, "I had been + too sanguine about Fannie and + Freddie."68 The Decline + +On line 9772: + had been too sanguine + about Fannie and Freddie."68 The + Decline of Mortgage + +On line 9776: + Freddie."68 The Decline + of Mortgage Underwriting + Standards Before the + +On line 9776: + Standards Before the + enactment of the GSE Act + in and HUD’s adoption + +On line 9776: + enactment of the + GSE Act in and HUD’s adoption + of a policy + +On line 9778: + review by Fannie + Mae of loans from October + to January over + +On line 9778: + loans from October + to January over percent + had LTV ratios of + +On line 9778: + to January over + percent had LTV ratios of + percent or less, while + +On line 9778: + over percent had LTV + ratios of percent or less, + while only percent + +On line 9778: + ratios of percent + or less, while only percent + had LTV ratios of + +On line 9778: + or less, while only + percent had LTV ratios of + to percent.69 High risk + +On line 9778: + only percent had + LTV ratios of to percent.69 + High risk lending was + +On line 9778: + of to percent.69 High + risk lending was confi ned + primarily to + +On line 9778: + lending was confi + ned primarily to FHA + (which was controlled by + +On line 9778: + ned primarily + to FHA (which was controlled by + HUD) and specialized + +On line 9778: + (which was controlled by + HUD) and specialized subprime + lenders who oft en sold + +On line 9778: + was controlled by HUD) + and specialized subprime lenders + who oft en sold the + +On line 9780: + who oft en sold the + mortgages they originated + to FHA. What caused these + +On line 9782: + majority, Steve + Cocheo, "Fair-lending pressure builds," ABA + Banking Journal, vol. + +On line 9786: + Cocheo, "Fair-lending pressure + builds," ABA Banking Journal, vol. + http://www.questia. com/googleScholar.qst1docId=5001707340. See + +On line 9788: + NCRC, CRA Commitments, + Federal Register,vol. + No. November Rules + +On line 9792: + and Regulations, + p.63585, http://fdsys.gpo. gov/fdsys/pkg/FR-2004-11-02/pdf/04-24101.pdf Larry + Kudlow, "Barney Frank + +On line 9792: + p.63585, http://fdsys.gpo. gov/fdsys/pkg/FR-2004-11-02/pdf/04-24101.pdf + Larry Kudlow, "Barney Frank + Comes Home to the Facts," + +On line 9792: + gov/fdsys/pkg/FR-2004-11-02/pdf/04-24101.pdf Larry Kudlow, + "Barney Frank Comes Home to the + Facts," GOPUSA, August + +On line 9792: + Kudlow, "Barney Frank + Comes Home to the Facts," GOPUSA, + August available at + +On line 9802: + in author’s fi les. + Dissenting Statement echoing + Chairman Bernanke, seems to + +On line 9802: + fi les. Dissenting + Statement echoing Chairman Bernanke, + seems to believe that + +On line 9802: + Chairman Bernanke, seems to + believe that the impetus + was competition + +On line 9804: + originators, and + the desire for profi t. Th + e majority’s + +On line 9804: + the desire for profi + t. Th e majority’s + report off ers no + +On line 9806: + off ers no other + explanation. However, + there is no diffi + +On line 9808: + there is no diffi + culty fi nding the source + of the reductions + +On line 9808: + of the reductions + in mortgage underwriting + standards for Fannie + +On line 9808: + Fannie and Freddie, + or for the originators + for whom they were the + +On line 9808: + and Freddie, or for + the originators for whom + they were the buyers. + +On line 9808: + Freddie, or for the + originators for whom they + were the buyers. HUD + +On line 9808: + the buyers. HUD made + clear in numerous statements + that its policy—in + +On line 9810: + cally intended + to reduce underwriting + standards. Th e GSE + +On line 9812: + enabled HUD to put + Fannie and Freddie into + competition with + +On line 9812: + Fannie and Freddie + into competition with + FHA, and vice versa, + +On line 9812: + FHA, and vice versa, + creating what became a + contest to lower + +On line 9812: + became a contest + to lower mortgage standards. + As the Fannie Mae + +On line 9812: + to lower mortgage + standards. As the Fannie Mae + Foundation noted + +On line 9814: + in a report, "FHA + loans constituted the largest + share of Countrywide’s + +On line 9818: + Freddie Mac began + accepting loans with higher + LTVs [loan-to-value + +On line 9818: + loans with higher LTVs + [loan-to-value ratios] and + greater underwriting + +On line 9820: + underwriting fl + exibilities."70 Under + the GSE Act, the HUD + +On line 9820: + the GSE Act, the HUD + Secretary was authorized + to establish aff + +On line 9820: + HUD Secretary was + authorized to establish + aff ordable housing + +On line 9820: + aff ordable housing + goals for Fannie and Freddie. + Congress required that + +On line 9820: + goals for Fannie and + Freddie. Congress required that + these goals include a + +On line 9820: + Fannie and Freddie. + Congress required that these goals + include a low and + +On line 9820: + Congress required that + these goals include a low and + moderate income + +On line 9820: + these goals include a + low and moderate income + goal and a special + +On line 9820: + goals include a low + and moderate income goal + and a special aff + +On line 9820: + and a special aff + ordable goal (discussed below), + both of which could be + +On line 9820: + ordable goal (discussed + below), both of which could be + adjusted in the + +On line 9820: + (discussed below), both + of which could be adjusted + in the future. Among + +On line 9820: + both of which could be + adjusted in the future. + Among the factors the + +On line 9820: + be adjusted in + the future. Among the factors + the secretary was + +On line 9820: + adjusted in the + future. Among the factors the + secretary was to + +On line 9820: + in the future. Among + the factors the secretary + was to consider + +On line 9820: + the future. Among the + factors the secretary was + to consider in + +On line 9820: + to consider in + establishing the goals were + national housing + +On line 9820: + national housing + needs and "the ability of + the enterprises + +On line 9820: + "the ability of + the enterprises [Fannie + and Freddie] to lead + +On line 9820: + ability of the + enterprises [Fannie and + Freddie] to lead the + +On line 9820: + the enterprises + [Fannie and Freddie] to lead + the industry in + +On line 9824: + Th e Act also + established an interim + aff ordable housing + +On line 9824: + of percent for the + two-year period beginning + January Under + +On line 9824: + of the GSEs’ mortgage + purchases had to be aff + ordable housing loans, + +On line 9824: + purchases had to + be aff ordable housing loans, + defi ned as loans + +On line 9824: + to be aff ordable + housing loans, defi ned as + loans to borrowers + +On line 9824: + aff ordable housing + loans, defi ned as loans to + borrowers at or + +On line 9824: + housing loans, defi + ned as loans to borrowers + at or below the + +On line 9826: + to borrowers at + or below the AMI.71 Further, + the Act established + +On line 9826: + borrowers at or + below the AMI.71 Further, the + Act established a + +On line 9826: + the AMI.71 Further, the + Act established a "special + aff ordable" goal to + +On line 9826: + AMI.71 Further, the Act + established a "special aff + ordable" goal to meet + +On line 9828: + Act established a + "special aff ordable" goal to + meet the "unaddressed + +On line 9828: + aff ordable" goal to + meet the "unaddressed needs of, + and aff ordable to, + +On line 9828: + meet the "unaddressed + needs of, and aff ordable to, + low-income families + +On line 9828: + of, and aff ordable + to, low-income families in + low-income areas and + +On line 9828: + low-income families + in low-income areas and very + low-income families." + +On line 9830: + low-income areas and + very low-income families." Th + is category + +On line 9830: + families." Th is + category was defi + ned as follows: "(i) + +On line 9830: + is category + was defi ned as follows: + "(i) percent shall be + +On line 9830: + was defi ned as + follows: "(i) percent shall be + mortgages of low-income + +On line 9830: + ned as follows: "(i) + percent shall be mortgages of + low-income families + +On line 9830: + follows: "(i) percent + shall be mortgages of low-income + families who live + +On line 9830: + shall be mortgages of + low-income families who live + in census tracts in + +On line 9830: + low-income families + who live in census tracts in + which the median + +On line 9830: + families who live + in census tracts in which the + median income + +On line 9830: + census tracts in which + the median income does + not exceed percent + +On line 9830: + median income + does not exceed percent of + the area median + +On line 9830: + exceed percent of + the area median income; + and (ii) percent shall + +On line 9830: + the area median + income; and (ii) percent shall + be mortgages of very + +On line 9830: + (ii) percent shall be + mortgages of very low income + families," which were + +On line 9830: + be mortgages of very + low income families," which + were later defi + +On line 9830: + mortgages of very low + income families," which were + later defi ned + +On line 9830: + income families," + which were later defi ned + as percent of AMI.72 + +On line 9830: + of AMI.72 Although the + GSE Act initially required + that the GSEs spend on + +On line 9830: + Although the GSE Act + initially required that the + GSEs spend on special + +On line 9830: + GSE Act initially + required that the GSEs spend on + special aff ordable + +On line 9830: + initially required + that the GSEs spend on special + aff ordable mortgages + +On line 9830: + required that the GSEs + spend on special aff ordable + mortgages "not less than + +On line 9830: + that the GSEs spend on + special aff ordable mortgages + "not less than percent + +On line 9830: + GSEs spend on special + aff ordable mortgages "not less + than percent of the + +On line 9830: + special aff ordable + mortgages "not less than percent + of the dollar amount + +On line 9830: + aff ordable mortgages + "not less than percent of the + dollar amount of the + +On line 9830: + "not less than percent + of the dollar amount of the + mortgage purchases + +On line 9830: + than percent of the + dollar amount of the mortgage + purchases by the + +On line 9830: + of the dollar amount + of the mortgage purchases + by the [GSEs] for the + +On line 9830: + amount of the mortgage + purchases by the [GSEs] for + the previous year," + +On line 9830: + for the previous + year," HUD raised this requirement + substantially in + +On line 9830: + raised this requirement + substantially in later + years. Ultimately, + +On line 9830: + substantially in + later years. Ultimately, + it became the most + +On line 9832: + Ultimately, it + became the most diffi cult + aff ordable housing + +On line 9834: + housing AH burden + for Fannie and Freddie to + meet. Finally, the + +On line 9834: + Fannie and Freddie + to meet. Finally, the GSEs + were directed to: + +On line 9834: + meet. Finally, the + GSEs were directed to: "(A) + assist primary + +On line 9834: + GSEs were directed + to: "(A) assist primary + lenders to make housing + +On line 9834: + directed to: "(A) + assist primary lenders to + make housing credit + +On line 9834: + assist primary + lenders to make housing credit + available in areas + +On line 9834: + depository + institutions to meet their + obligations under + +On line 9834: + institutions to + meet their obligations under + the Community + +On line 9834: + meet their obligations + under the Community + Reinvestment Act of + +On line 9836: + the Community + Reinvestment Act of Th ere + will be more on the + +On line 9836: + Reinvestment Act of + Th ere will be more on the + CRA and its eff ect + +On line 9838: + Th ere will be more + on the CRA and its eff ect + on the quality + +On line 9838: + ere will be more on + the CRA and its eff ect on + the quality of + +On line 9838: + on the CRA and its + eff ect on the quality + of mortgages later + +On line 9838: + the CRA and its eff + ect on the quality of + mortgages later in + +On line 9840: + mortgages later in + this section. Congress also + made clear in the act + +On line 9840: + this section. Congress + also made clear in the act + that its intention + +On line 9840: + also made clear in + the act that its intention + was to call into + +On line 9840: + made clear in the act + that its intention was to + call into question + +On line 9840: + clear in the act that + its intention was to call + into question the + +On line 9840: + that its intention + was to call into question + the high quality + +On line 9840: + the high quality + underwriting guidelines of + the time. It did so + +On line 9840: + guidelines of the time. + It did so by directing + Fannie and Freddie + +On line 9842: + Fannie and Freddie + to "examine— Fannie Mae + Foundation, "Making + +On line 9842: + "examine— Fannie + Mae Foundation, "Making New + Markets: Case Study of + +On line 9856: + GSE Act, Section Id., + Section Id., Section Peter + J. Wallison Th + +On line 9858: + Section Id., Section + Peter J. Wallison Th + e extent to which + +On line 9858: + mortgages for houses + in mixed-use, urban center, and + predominantly + +On line 9858: + predominantly + minority neighborhoods + and for housing for + +On line 9862: + low-and moderate-income + families; Th e standards + employed by private + +On line 9862: + families; Th e + standards employed by private + mortgage insurers + +On line 9862: + standards employed by + private mortgage insurers + and the extent to + +On line 9862: + employed by private + mortgage insurers and the + extent to which such + +On line 9862: + by private mortgage + insurers and the extent + to which such standards + +On line 9862: + mortgage insurers + and the extent to which such + standards inhibit + +On line 9868: + described in paragraph + and Th e implications + of implementing + +On line 9870: + of implementing + underwriting standards that— + (A) establish a + +On line 9870: + (A) establish a + downpayment requirement for + mortgagors of percent + +On line 9870: + mortgagors of percent + or less; (B) allow the use + of cash on hand as + +On line 9870: + of percent or less; + (B) allow the use of cash + on hand as a source + +On line 9870: + percent or less; (B) + allow the use of cash on + hand as a source of + +On line 9870: + less; (B) allow the + use of cash on hand as a + source of downpayments; + +On line 9870: + (B) allow the use + of cash on hand as a source + of downpayments; and + +On line 9870: + allow the use of + cash on hand as a source of + downpayments; and (C) + +On line 9870: + cash on hand as a + source of downpayments; and (C) + approve borrowers + +On line 9870: + hand as a source of + downpayments; and (C) approve + borrowers who have + +On line 9870: + source of downpayments; + and (C) approve borrowers + who have a credit + +On line 9870: + borrowers who have + a credit history of + delinquencies if the + +On line 9870: + who have a credit + history of delinquencies + if the borrower + +On line 9870: + delinquencies if the + borrower can demonstrate a + satisfactory + +On line 9870: + the 12-month period + ending on the date of the + application for + +On line 9872: + ending on the date + of the application for + the mortgage."74 I could + +On line 9872: + the application + for the mortgage."74 I could not + fi nd a record of + +On line 9872: + for the mortgage."74 I + could not fi nd a record of + reports by Fannie + +On line 9872: + could not fi nd a + record of reports by Fannie + and Freddie required + +On line 9872: + record of reports by + Fannie and Freddie required + under this section + +On line 9872: + reports by Fannie + and Freddie required under + this section of the + +On line 9872: + Fannie and Freddie + required under this section + of the act, but it + +On line 9872: + and Freddie required + under this section of the + act, but it would have + +On line 9872: + required under this + section of the act, but it + would have been fairly + +On line 9872: + under this section + of the act, but it would have + been fairly clear to + +On line 9872: + of the act, but it + would have been fairly clear to + both companies, and + +On line 9872: + the act, but it would + have been fairly clear to both + companies, and to + +On line 9872: + would have been fairly + clear to both companies, and + to HUD, what Congress + +On line 9872: + been fairly clear to + both companies, and to HUD, + what Congress wanted + +On line 9872: + fairly clear to both + companies, and to HUD, what + Congress wanted in + +On line 9872: + both companies, and + to HUD, what Congress wanted + in asking for these + +On line 9872: + to HUD, what Congress + wanted in asking for these + studies. Prevailing + +On line 9872: + studies. Prevailing + underwriting standards were + inhibiting mortgage + +On line 9872: + fi nancing for low + and moderate income (LMI) + families, and would + +On line 9872: + families, and would + have to be substantially + relaxed in order + +On line 9872: + and would have to be + substantially relaxed in + order to meet the + +On line 9872: + be substantially + relaxed in order to meet + the goals of the Act. + +On line 9872: + order to meet the + goals of the Act. Whatever + the motivation, + +On line 9872: + the Act. Whatever + the motivation, HUD set + out to assure that + +On line 9872: + set out to assure + that downpayment requirements + were substantially + +On line 9872: + were substantially + reduced (eventually they + reached zero) and past + +On line 9872: + (eventually they + reached zero) and past credit + history became + +On line 9872: + much less important + issue when mortgages were made + (permitting subprime + +On line 9872: + issue when mortgages + were made (permitting subprime + mortgages to become + +On line 9872: + when mortgages were made + (permitting subprime mortgages + to become far more + +On line 9874: + (permitting subprime + mortgages to become far more + common). Until HUD + +On line 9874: + to become far more + common). Until HUD enforced + the temporary AH + +On line 9874: + common). Until HUD + enforced the temporary AH + goals originally + +On line 9874: + the temporary AH + goals originally put in + place by the GSE Act. + +On line 9874: + temporary AH goals + originally put in place + by the GSE Act. With + +On line 9874: + goals originally + put in place by the GSE Act. + With the exception + +On line 9874: + originally put + in place by the GSE Act. With + the exception of + +On line 9874: + put in place by the + GSE Act. With the exception + of the special aff + +On line 9874: + place by the GSE Act. + With the exception of the + special aff ordable + +On line 9874: + With the exception + of the special aff ordable + requirements, which were + +On line 9874: + of the special aff + ordable requirements, which were + small at this point, these + +On line 9874: + special aff ordable + requirements, which were small at + this point, these goals were + +On line 9874: + requirements, which were + small at this point, these goals were + not burdensome. In + +On line 9874: + were small at this point, + these goals were not burdensome. + In the ordinary + +On line 9874: + small at this point, these + goals were not burdensome. In + the ordinary course + +On line 9874: + at this point, these goals + were not burdensome. In the + ordinary course of + +On line 9874: + were not burdensome. + In the ordinary course of + their business, the GSEs + +On line 9874: + not burdensome. In + the ordinary course of their + business, the GSEs seem + +On line 9874: + In the ordinary + course of their business, the GSEs + seem to have bought enough + +On line 9874: + ordinary course of + their business, the GSEs seem to + have bought enough mortgages + +On line 9874: + their business, the GSEs + seem to have bought enough mortgages + made to borrowers + +On line 9874: + seem to have bought enough + mortgages made to borrowers + below the AMI to + +On line 9874: + bought enough mortgages made + to borrowers below the + AMI to qualify + +On line 9874: + enough mortgages made to + borrowers below the AMI + to qualify for + +On line 9874: + borrowers below + the AMI to qualify for + the percent AH goal. + +On line 9874: + AMI to qualify + for the percent AH goal. In + however, HUD raised + +On line 9874: + the percent AH goal. + In however, HUD raised the + LMI goal to percent, + +On line 9874: + In however, HUD + raised the LMI goal to percent, + applicable to + +On line 9874: + HUD raised the LMI goal + to percent, applicable + to and to percent + +On line 9874: + raised the LMI goal to + percent, applicable to + and to percent for + +On line 9874: + to and to percent + for subsequent years. In terms + of its eff ect on + +On line 9874: + for subsequent years. + In terms of its eff ect on + Fannie and Freddie, + +On line 9874: + In terms of its eff + ect on Fannie and Freddie, + HUD’s most important + +On line 9874: + terms of its eff ect + on Fannie and Freddie, HUD’s + most important move + +On line 9874: + of its eff ect on + Fannie and Freddie, HUD’s most + important move at + +On line 9874: + ect on Fannie and + Freddie, HUD’s most important + move at this time was + +On line 9874: + Fannie and Freddie, + HUD’s most important move at + this time was to set + +On line 9874: + most important move + at this time was to set a + Special Aff ordable + +On line 9874: + at this time was to + set a Special Aff ordable + goal (low and very low + +On line 9874: + time was to set a + Special Aff ordable goal (low + and very low income + +On line 9874: + set a Special Aff + ordable goal (low and very low + income borrowers) + +On line 9874: + and very low income + borrowers) of percent, which + increased to percent + +On line 9874: + income borrowers) + of percent, which increased to + percent in Eff orts + +On line 9874: + percent, which increased + to percent in Eff orts to + fi nd loans to low + +On line 9874: + increased to percent + in Eff orts to fi nd loans + to low or very low + +On line 9874: + to percent in Eff + orts to fi nd loans to low + or very low income + +On line 9874: + in Eff orts to fi + nd loans to low or very low + income borrowers + +On line 9874: + orts to fi nd loans + to low or very low income + borrowers percent + +On line 9874: + nd loans to low or + very low income borrowers + percent and percent + +On line 9874: + to low or very low + income borrowers percent + and percent of AMI, + +On line 9874: + income borrowers + percent and percent of AMI, + respectively) that + +On line 9874: + percent and percent + of AMI, respectively) that + did not involve high + +On line 9874: + and percent of AMI, + respectively) that did not + involve high risks would + +On line 9876: + AMI, respectively) + that did not involve high risks + would prove diffi cult. + +On line 9876: + respectively) that + did not involve high risks would + prove diffi cult. As + +On line 9876: + involve high risks would + prove diffi cult. As early + as November even + +On line 9878: + would prove diffi cult. + As early as November + even before the eff + +On line 9878: + prove diffi cult. As + early as November even + before the eff ect + +On line 9878: + cult. As early as + November even before the + eff ect of these new + +On line 9878: + as November even + before the eff ect of these + new and higher goals, + +On line 9878: + even before the eff + ect of these new and higher + goals, Fannie’s staff had + +On line 9878: + ect of these new and + higher goals, Fannie’s staff had + already recognized + +On line 9878: + already recognized + that Fannie’s Community + Homebuyer Program + +On line 9878: + Homebuyer Program + (CHBP), which featured a percent + loan-to-value (LTV) + +On line 9878: + signifi cant rates of + serious delinquency that + exceeded Fannie’s + +On line 9878: + rates of serious + delinquency that exceeded + Fannie’s expected + +On line 9878: + exceeded Fannie’s + expected rates by 26percent + in origination + +On line 9878: + expected rates by + 26percent in origination + year percent in and + +On line 9878: + rates by 26percent in + origination year percent + in and percent in + +On line 9880: + origination year + percent in and percent in + In continuing + +On line 9880: + its eff orts to erode + underwriting standards in + order to increase + +On line 9882: + entitled "Th e + National Homeownership + Strategy: Partners + +On line 9882: + Strategy: Partners + in the American Dream." Th + e Strategy was + +On line 9884: + American Dream." Th + e Strategy was prepared + by HUD, "under the + +On line 9884: + Th e Strategy + was prepared by HUD, "under + the direction of + +On line 9884: + was prepared by HUD, + "under the direction of + Secretary Henry + +On line 9884: + by HUD, "under the + direction of Secretary + Henry G. Cisneros, + +On line 9886: + Secretary Henry + G. Cisneros, in response Id., + Section 1354(a). Fannie + +On line 9886: + Henry G. Cisneros, + in response Id., Section 1354(a). + Fannie Mae, "Opening + +On line 9886: + Section 1354(a). Fannie + Mae, "Opening Doors with Fannie + Mae’s Community + +On line 9886: + Mae, "Opening Doors with + Fannie Mae’s Community + Lending Products," p.3. + +On line 9888: + Mae’s Community + Lending Products," p.3. Fannie + Mae, Memo from Credit + +On line 9888: + Lending Products," p.3. + Fannie Mae, Memo from Credit + Policy Staff to + +On line 9888: + Fannie Mae, Memo from + Credit Policy Staff to + Credit Policy + +On line 9898: + to a request from + President Clinton."77 Th e + fi rst paragraph of + +On line 9898: + President Clinton."77 + Th e fi rst paragraph of + Chapter stated: "Th + +On line 9902: + e purpose of the + National Homeownership + Strategy is to + +On line 9904: + housing industry + organizations." Th e + Strategy paper + +On line 9904: + Strategy paper + then noted that "industry + representatives + +On line 9904: + representatives + agreed to the formation of + working groups to help + +On line 9904: + help develop the + National Homeownership + Strategy" and made + +On line 9904: + clear that one of its + purposes was to increase + homeownership by + +On line 9904: + mortgage insurers, + and other members of the + partnership should work + +On line 9904: + partnership should work + collaboratively to + reduce homebuyer + +On line 9904: + fi nancing with high + loan-to-value ratios should + generally be + +On line 9904: + should generally + be associated with + enhanced homebuyer + +On line 9904: + enhanced homebuyer + counseling and, where available, + supplemental sources + +On line 9904: + supplemental sources + of downpayment assistance."78 + According to a + +On line 9904: + sources of downpayment + assistance."78 According to + a HUD summary, + +On line 9904: + According to a + HUD summary, the purpose + of the Strategy + +On line 9904: + the purpose of the + Strategy was to make fi + nancing "more available, + +On line 9904: + of the Strategy + was to make fi nancing "more + available, aff ordable, + +On line 9904: + Strategy was to + make fi nancing "more available, + aff ordable, and fl + +On line 9906: + It continued: Th + e inability (either + real or perceived) + +On line 9906: + real or perceived) + of many younger families to + qualify for a + +On line 9906: + perceived) of many younger + families to qualify + for a mortgage is + +On line 9906: + recognized as a + very serious barrier + to homeownership. + +On line 9910: + to a number of + initiatives designed to: Cut + transaction costs through + +On line 9910: + transaction costs through + streamlined regulations and + technological + +On line 9914: + Reduce downpayment + requirements and interest + costs by making terms + +On line 9914: + by making terms more + fl exible, providing + subsidies to low- + +On line 9914: + and moderate-income + families, and creating + incentives to save + +On line 9916: + incentives to save + for homeownership. Increase + the availability + +On line 9916: + for homeownership. + Increase the availability + of alternative + +On line 9916: + availability of + alternative fi nancing + products in housing + +On line 9916: + alternative fi + nancing products in housing + markets throughout the + +On line 9916: + nancing products in + housing markets throughout the + country.80 [emphasis + +On line 9916: + products in housing + markets throughout the country.80 + [emphasis supplied] + +On line 9918: + [emphasis supplied] + Reductions in downpayments, + the area on which HUD + +On line 9918: + and the National + Homeownership Strategy, + are especially + +On line 9918: + Table below, based + on a large sample of loans + from the 1990s, shows the + +On line 9918: + on a large sample + of loans from the 1990s, shows the + risk relationships + +On line 9918: + of loans from the 1990s, + shows the risk relationships + between downpayments + +On line 9918: + particularly + instructive to note that when + low downpayments (i.e., + +On line 9918: + instructive to note + that when low downpayments (i.e., + high LTVs) are combined + +On line 9918: + low downpayments (i.e., + high LTVs) are combined with low + FICO scores (subprime + +On line 9918: + high LTVs) are combined + with low FICO scores (subprime + loans) the expected + +On line 9918: + For example, when + a loan with a FICO score + below is combined + +On line 9918: + loan with a FICO + score below is combined with + a downpayment of + +On line 9918: + with a FICO score + below is combined with a + downpayment of fi + +On line 9918: + below is combined + with a downpayment of fi + ve percent, the risk + +On line 9918: + with a downpayment + of fi ve percent, the risk + of default is times + +On line 9918: + a downpayment of + fi ve percent, the risk of + default is times greater + +On line 9918: + of fi ve percent, + the risk of default is times + greater than it would be + +On line 9918: + fi ve percent, the + risk of default is times greater + than it would be if + +On line 9918: + ve percent, the risk + of default is times greater than + it would be if the + +On line 9918: + the risk of default + is times greater than it would be + if the downpayment + +On line 9918: + risk of default is + times greater than it would be if + the downpayment were + +On line 9920: + is times greater than it + would be if the downpayment + were percent. HUD, "Th + +On line 9922: + times greater than it would + be if the downpayment were + percent. HUD, "Th e + +On line 9922: + it would be if the + downpayment were percent. HUD, + "Th e National + +On line 9922: + percent. HUD, "Th e + National Homeownership + Strategy: Partners + +On line 9930: + Chapter Action Th + e term "fl exible" has + a special meaning + +On line 9930: + term "fl exible" + has a special meaning when + HUD uses it. See + +On line 9930: + "fl exible" has + a special meaning when HUD + uses it. See note + +On line 9932: + it. See note supra. HUD, + Urban Policy Brief No.2, + August available at + +On line 9938: + August available at + http://www.huduser.org/publications/txt/ + hdbrf2.txt. Peter J. + +On line 9942: + hdbrf2.txt. Peter J. + Wallison Table High LTVs + enhance the risk of + +On line 9960: + Column Row FICO + Score LTV 71-80% LTV 81-90% LTV 91-95% + LTV Relation of + +On line 9964: + Score LTV 71-80% LTV 81-90% + LTV 91-95% LTV Relation of + Column to Column + +On line 9978: + 71-80% LTV 81-90% LTV 91-95% + LTV Relation of Column + to Column Row times + +On line 9980: + LTV 81-90% LTV 91-95% LTV + Relation of Column to + Column Row times Row + +On line 9994: + 91-95% LTV Relation + of Column to Column Row + times Row 620-679 times Row + +On line 9996: + LTV Relation of + Column to Column Row times + Row 620-679 times Row 680-720 + +On line 10022: + Column to Column + Row times Row 620-679 times Row 680-720 + times Row times Despite + +On line 10022: + times Row 620-679 times Row + 680-720 times Row times Despite these + obvious dangers, + +On line 10022: + times Row 680-720 times Row + times Despite these obvious + dangers, HUD saw the + +On line 10022: + times Row times Despite + these obvious dangers, HUD + saw the erosion of + +On line 10022: + requirements imposed + by the private sector as + one of the keys to + +On line 10022: + sector as one of + the keys to the success of + its strategy to + +On line 10022: + to the success of + its strategy to increase + home ownership through + +On line 10022: + the success of its + strategy to increase home + ownership through the + +On line 10022: + of its strategy + to increase home ownership + through the "partnership" + +On line 10022: + its strategy to + increase home ownership through + the "partnership" it + +On line 10022: + through the "partnership" + it had established with the + mortgage fi nancing + +On line 10022: + it had established + with the mortgage fi nancing + community: "Th + +On line 10030: + access to suffi + cient funds for a downpayment. + While members of the + +On line 10030: + suffi cient funds for + a downpayment. While members + of the partnership + +On line 10030: + While members of the + partnership have already made + signifi cant strides in + +On line 10030: + of the partnership + have already made signifi cant + strides in reducing + +On line 10030: + the partnership have + already made signifi cant strides + in reducing this + +On line 10030: + already made signifi + cant strides in reducing this + barrier to home + +On line 10030: + signifi cant strides in + reducing this barrier + to home purchase, more + +On line 10030: + in reducing this + barrier to home purchase, + more must be done. In + +On line 10030: + this barrier to + home purchase, more must be done. + In only percent + +On line 10030: + barrier to home + purchase, more must be done. In + only percent of + +On line 10030: + home purchase, more must + be done. In only percent + of home mortgages were + +On line 10030: + purchase, more must be + done. In only percent of + home mortgages were made + +On line 10030: + with less than percent + downpayment. By August low + downpayment mortgage + +On line 10030: + downpayment mortgage + loans had increased to percent."82 + [emphasis supplied] + +On line 10032: + loans had increased to + percent."82 [emphasis supplied] + HUD’s policy was + +On line 10032: + percent."82 [emphasis + supplied] HUD’s policy was + highly successful + +On line 10032: + highly successful + in achieving the goals it sought. + In only one in + +On line 10032: + in achieving the goals + it sought. In only one in + homebuyers bought a + +On line 10032: + the goals it sought. In + only one in homebuyers + bought a home with a + +On line 10032: + sought. In only one + in homebuyers bought a home + with a downpayment + +On line 10032: + In only one in + homebuyers bought a home with + a downpayment of + +On line 10032: + in homebuyers bought + a home with a downpayment + of percent or less, + +On line 10032: + homebuyers bought a + home with a downpayment of + percent or less, but + +On line 10032: + bought a home with a + downpayment of percent or + less, but by one in + +On line 10032: + a downpayment of + percent or less, but by one + in seven buyers + +On line 10032: + percent or less, but + by one in seven buyers + was providing a + +On line 10032: + by one in seven + buyers was providing a + downpayment at that + +On line 10032: + seven buyers was + providing a downpayment + at that level, and + +On line 10032: + was providing a + downpayment at that level, + and by the number + +On line 10032: + downpayment at that + level, and by the number + was less than one in + +On line 10032: + at that level, and + by the number was less than + one in three. Th e + +On line 10032: + by the number was + less than one in three. Th e + gradual increase + +On line 10034: + less than one in three. + Th e gradual increase + in LTVs and CLTVs (fi + +On line 10034: + than one in three. Th + e gradual increase in + LTVs and CLTVs (fi rst + +On line 10034: + one in three. Th e + gradual increase in LTVs + and CLTVs (fi rst and + +On line 10034: + Th e gradual + increase in LTVs and CLTVs (fi + rst and second loans + +On line 10034: + gradual increase + in LTVs and CLTVs (fi rst and + second loans combined + +On line 10034: + increase in LTVs and + CLTVs (fi rst and second loans + combined to produce + +On line 10034: + LTVs and CLTVs (fi rst + and second loans combined to + produce a lower + +On line 10034: + (fi rst and second + loans combined to produce a + lower downpayment) + +On line 10034: + lower downpayment) + under HUD’s policies is shown + in Figure Note the + +On line 10034: + under HUD’s policies + is shown in Figure Note the + date when HUD began + +On line 10034: + HUD’s policies is shown + in Figure Note the date when + HUD began to have + +On line 10034: + policies is shown in + Figure Note the date when HUD + began to have some + +On line 10034: + is shown in Figure + Note the date when HUD began + to have some infl + +On line 10034: + shown in Figure Note + the date when HUD began to + have some infl uence + +On line 10034: + in Figure Note the + date when HUD began to have + some infl uence over + +On line 10034: + Figure Note the date + when HUD began to have some + infl uence over the + +On line 10034: + date when HUD began + to have some infl uence over + the downpayments that + +On line 10034: + when HUD began to + have some infl uence over the + downpayments that the + +On line 10034: + to have some infl + uence over the downpayments that + the GSEs would accept. + +On line 10036: + have some infl uence + over the downpayments that the + GSEs would accept. Th + +On line 10038: + some infl uence over + the downpayments that the GSEs + would accept. Th at + +On line 10038: + infl uence over the + downpayments that the GSEs would + accept. Th at HUD’s + +On line 10038: + over the downpayments + that the GSEs would accept. Th + at HUD’s AH goals were + +On line 10038: + the downpayments that + the GSEs would accept. Th at + HUD’s AH goals were the + +On line 10038: + would accept. Th at + HUD’s AH goals were the reason + Fannie increased its + +On line 10038: + increased its high LTV + (low downpayment) lending is + clearly described in + +On line 10040: + clearly described in + a Fannie presentation + to HUD assistant + +On line 10040: + presentation to + HUD assistant secretary + Albert Trevino on + +On line 10040: + Albert Trevino on + January "Analyses of the + market demonstrate the + +On line 10040: + January "Analyses + of the market demonstrate the + greatest barrier + +On line 10040: + the market demonstrate + the greatest barrier to + home ownership for + +On line 10040: + market demonstrate the + greatest barrier to home + ownership for most + +On line 10040: + greatest barrier + to home ownership for most + renters are related + +On line 10040: + barrier to home + ownership for most renters are + related to wealth—the + +On line 10040: + home ownership for + most renters are related to + wealth—the lack of money + +On line 10040: + ownership for most + renters are related to wealth—the + lack of money for + +On line 10040: + renters are related + to wealth—the lack of money for + a downpayment…our + +On line 10042: + grown considerably. + It is a key part of our + strategy to serve + +On line 10042: + a key part of our + strategy to serve low-income + and minority + +On line 10044: + strategy to serve + low-income and minority + borrowers." Th e + +On line 10044: + to serve low-income and + minority borrowers." + Th e fi gure that + +On line 10044: + and minority + borrowers." Th e fi gure + that accompanied + +On line 10046: + borrowers." Th e + fi gure that accompanied + that statement showed that + +On line 10046: + Th e fi gure that + accompanied that statement + showed that Fannie’s home + +On line 10046: + that accompanied + that statement showed that Fannie’s + home purchase loans over + +On line 10046: + showed that Fannie’s home + purchase loans over percent LTV + had increased from one + +On line 10046: + home purchase loans over + percent LTV had increased from + one percent in to + +On line 10046: + loans over percent LTV + had increased from one percent + in to percent in + +On line 10048: + LTV had increased from + one percent in to percent + in "Deconstructing + +On line 10048: + had increased from one + percent in to percent in + "Deconstructing the + +On line 10048: + in to percent in + "Deconstructing the Subprime + Debacle Using + +On line 10048: + of Underwriting + Quality and Economic + Conditions: A First + +On line 10048: + Conditions: A First + Look," by Anderson, Capozza, + and Van Order, found + +On line 10056: + and America’s + Homebuyers," Presentation + to HUD Assistant + +On line 10068: + Percentage of Home + Purchase Volume with an LTV + or CLTV (Includes FHA + +On line 10068: + Purchase Volume with + an LTV or CLTV (Includes FHA + and Conventional + +On line 10070: + or CLTV (Includes FHA + and Conventional Loans*) and + Combined Foreclosure + +On line 10070: + Combined Foreclosure + Start Rate for Conventional + and Government Loans + +On line 10072: + for Conventional + and Government Loans *Fannie‘s + percentage of home + +On line 10072: + and Government Loans + *Fannie‘s percentage of home + purchase loans with an + +On line 10072: + *Fannie‘s percentage + of home purchase loans with an + LTV or CLTV used as + +On line 10072: + percentage of home + purchase loans with an LTV or + CLTV used as the proxy + +On line 10072: + purchase loans with an + LTV or CLTV used as the proxy + for conventional + +On line 10074: + used as the proxy for + conventional loans. Sources: FHA + Actuarial + +On line 10074: + conventional loans. + Sources: FHA Actuarial + Study, and HUD"s Offi + +On line 10076: + HUD"s Offi ce of + Policy Development + and Research - Profi + +On line 10078: + ce of Policy + Development and Research + - Profi les of GSE + +On line 10078: + Development and + Research - Profi les of GSE + Mortgage Purchases + +On line 10078: + Research - Profi les + of GSE Mortgage Purchases + in and in 2001-2004, and + +On line 10078: + - Profi les of GSE + Mortgage Purchases in and + in 2001-2004, and in 2005-2007, + +On line 10080: + and in 2001-2004, and in + 2005-2007, and Fannie’s 10-K. Compiled + by Edward Pinto. + +On line 10082: + in 2001-2004, and in 2005-2007, + and Fannie’s 10-K. Compiled by + Edward Pinto. Th + +On line 10084: + Fannie’s 10-K. Compiled + by Edward Pinto. Th e + close relationship + +On line 10084: + low downpayments and + delinquencies and defaults on + mortgages is shown in + +On line 10084: + on mortgages is shown + in Figure which compares the + increase in percent + +On line 10084: + is shown in Figure + which compares the increase in + percent (or greater) CLTV + +On line 10084: + compares the increase + in percent (or greater) CLTV or + LTV mortgages to the + +On line 10084: + increase in percent + (or greater) CLTV or LTV mortgages + to the increase in + +On line 10084: + (or greater) CLTV or LTV + mortgages to the increase in + the foreclosure start + +On line 10084: + LTV mortgages to the + increase in the foreclosure + start rate on all loans + +On line 10084: + to the increase in + the foreclosure start rate on + all loans published by + +On line 10084: + the increase in the + foreclosure start rate on all + loans published by the + +On line 10084: + in the foreclosure + start rate on all loans published + by the Mortgage Bankers + +On line 10084: + start rate on all loans + published by the Mortgage Bankers + Association. + +On line 10088: + Delinquency Survey, + FHA Actuarial Study, + and HUD s Offi + +On line 10092: + s Offi ce of + Policy Development + and Research - Profi + +On line 10092: + ce of Policy + Development and Research + - Profi les of GSE + +On line 10092: + Development and + Research - Profi les of GSE + Mortgage Purchases + +On line 10092: + Research - Profi les + of GSE Mortgage Purchases + in and in 2001-2004, and + +On line 10092: + - Profi les of GSE + Mortgage Purchases in and + in 2001-2004, and in 2005-2007, + +On line 10092: + and in 2001-2004, and in + 2005-2007, SMR’s "Piggyback Mortgage + Lending," and Fannie’s + +On line 10092: + 2005-2007, SMR’s "Piggyback + Mortgage Lending," and Fannie’s + 10-K. Fannie is used + +On line 10092: + Mortgage Lending," and + Fannie’s 10-K. Fannie is used + as the proxy on the + +On line 10092: + used as the proxy on + the conventional market. + Compiled by Edward + +On line 10096: + the conventional + market. Compiled by Edward + Pinto. Peter J. + +On line 10100: + market. Compiled by + Edward Pinto. Peter J. + Wallison In HUD + +On line 10100: + by Edward Pinto. + Peter J. Wallison In + HUD also ruled that + +On line 10100: + Pinto. Peter J. + Wallison In HUD also + ruled that Fannie and + +On line 10100: + J. Wallison In + HUD also ruled that Fannie + and Freddie could get + +On line 10100: + Wallison In HUD + also ruled that Fannie and + Freddie could get AH + +On line 10100: + In HUD also ruled + that Fannie and Freddie could + get AH credit for + +On line 10100: + ruled that Fannie and + Freddie could get AH credit + for buying PMBS that + +On line 10100: + and Freddie could get + AH credit for buying PMBS + that were backed by loans + +On line 10100: + Freddie could get AH + credit for buying PMBS that + were backed by loans to + +On line 10100: + could get AH credit + for buying PMBS that were backed + by loans to low-income + +On line 10100: + credit for buying + PMBS that were backed by loans to + low-income borrowers.84 + +On line 10100: + for buying PMBS that + were backed by loans to low-income + borrowers.84 Th is + +On line 10100: + PMBS that were backed by + loans to low-income borrowers.84 + Th is provided + +On line 10102: + that were backed by loans + to low-income borrowers.84 Th + is provided an + +On line 10102: + lenders to create pools + of subprime mortgages that were + likely to be AH + +On line 10104: + of subprime mortgages + that were likely to be AH + goals-rich. Th ese were + +On line 10104: + that were likely to + be AH goals-rich. Th ese were + then sold through Wall Street + +On line 10104: + to be AH goals-rich. + Th ese were then sold through Wall + Street underwriters + +On line 10106: + be AH goals-rich. Th + ese were then sold through Wall Street + underwriters to + +On line 10106: + ese were then sold through + Wall Street underwriters to + Fannie and Freddie, + +On line 10106: + Fannie and Freddie, + which became the largest buyers + of these high risk PMBS + +On line 10108: + Freddie, which became + the largest buyers of these high + risk PMBS between and + +On line 10110: + which became the largest + buyers of these high risk PMBS + between and Th ese + +On line 10110: + the largest buyers of + these high risk PMBS between and + Th ese PMBS pools were + +On line 10110: + largest buyers of these + high risk PMBS between and Th + ese PMBS pools were not + +On line 10110: + buyers of these high + risk PMBS between and Th ese + PMBS pools were not bought + +On line 10110: + of these high risk PMBS + between and Th ese PMBS pools + were not bought for profi + +On line 10110: + high risk PMBS between + and Th ese PMBS pools were not + bought for profi t. As + +On line 10110: + PMBS between and Th + ese PMBS pools were not bought for + profi t. As Adolfo + +On line 10110: + ese PMBS pools were not + bought for profi t. As Adolfo + Marzol, Fannie’s Chief + +On line 10110: + pools were not bought for + profi t. As Adolfo Marzol, + Fannie’s Chief Credit + +On line 10110: + not bought for profi t. + As Adolfo Marzol, Fannie’s + Chief Credit Offi + +On line 10112: + bought for profi t. As + Adolfo Marzol, Fannie’s Chief + Credit Offi cer, + +On line 10112: + profi t. As Adolfo + Marzol, Fannie’s Chief Credit + Offi cer, noted + +On line 10112: + Marzol, Fannie’s Chief + Credit Offi cer, noted + to Fannie CEO Dan + +On line 10112: + Offi cer, noted + to Fannie CEO Dan Mudd in + a memorandum, + +On line 10112: + to Fannie CEO Dan + Mudd in a memorandum, + "large private label + +On line 10112: + Fannie CEO Dan Mudd + in a memorandum, "large + private label [PMBS] + +On line 10112: + CEO Dan Mudd in a + memorandum, "large private + label [PMBS] volumes + +On line 10112: + memorandum, "large + private label [PMBS] volumes + were necessary to + +On line 10112: + "large private label + [PMBS] volumes were necessary + to achieve challenging + +On line 10112: + to achieve challenging + minority lending goals + and housing goals."86 Th + +On line 10114: + goals."86 Th ere is a + strong possibility that + by creating a + +On line 10114: + by creating a + market for PMBS backed by NTMs + Fannie and Freddie + +On line 10114: + market for PMBS backed + by NTMs Fannie and Freddie + enabled Wall Street—which had + +On line 10114: + backed by NTMs Fannie + and Freddie enabled Wall Street—which + had previously + +On line 10114: + enabled Wall Street—which had + previously focused on + securitizing + +On line 10114: + securitizing + prime jumbo loans—to get its start + in developing + +On line 10114: + prime jumbo loans—to get + its start in developing + an underwriting + +On line 10114: + in developing + an underwriting business + in PMBS based on NTMs. + +On line 10116: + developing an + underwriting business in + PMBS based on NTMs. HUD + +On line 10116: + PMBS based on NTMs. HUD + pursued these policies throughout + the balance of the + +On line 10116: + these policies throughout + the balance of the Clinton + administration + +On line 10116: + Bush. Ultimately, + they would lead to the mortgage + meltdown in as vast + +On line 10116: + they would lead to the + mortgage meltdown in as vast + numbers of mortgages + +On line 10116: + lead to the mortgage + meltdown in as vast numbers + of mortgages with low + +On line 10116: + meltdown in as vast + numbers of mortgages with low + or no downpayments + +On line 10116: + mortgages with low or + no downpayments and other + non-traditional + +On line 10116: + no downpayments and + other non-traditional + features suff used the + +On line 10116: + features suff used the + fi nancial system. But in + June, the dangers in + +On line 10116: + fi nancial system. + But in June, the dangers in + HUD’s policies were not + +On line 10116: + system. But in June, + the dangers in HUD’s policies + were not recognized. + +On line 10116: + HUD’s policies were not + recognized. As President + Clinton said in a + +On line 10116: + It will not require + legislation. It will not + add more federal + +On line 10116: + legislation. It + will not add more federal + programs or grow the + +On line 10116: + programs or grow the + Federal bureaucracy."87 + Th e lesson here + +On line 10118: + Th e lesson here + is that the government can + accomplish a lot + +On line 10118: + the government can + accomplish a lot of its + goals without growing, + +On line 10118: + accomplish a lot + of its goals without growing, + as long as it has + +On line 10118: + a lot of its goals + without growing, as long as + it has the power + +On line 10118: + as long as it has + the power to enlist the + private sector. Th + +On line 10120: + has the power to + enlist the private sector. + Th at does not mean, + +On line 10120: + enlist the private + sector. Th at does not mean, + however, as we + +On line 10120: + private sector. Th + at does not mean, however, + as we have all now + +On line 10122: + sector. Th at does + not mean, however, as we + have all now learned, that + +On line 10122: + not mean, however, + as we have all now learned, that + the taxpayers will + +On line 10122: + mean, however, as + we have all now learned, that the + taxpayers will not + +On line 10122: + as we have all now + learned, that the taxpayers will + not ultimately + +On line 10122: + we have all now learned, + that the taxpayers will not + ultimately be + +On line 10124: + that the taxpayers + will not ultimately be + faced with the costs. Th + +On line 10126: + the taxpayers will + not ultimately be faced + with the costs. Th e + +On line 10126: + taxpayers will not + ultimately be faced with + the costs. Th e next + +On line 10126: + not ultimately + be faced with the costs. Th e + next signifi cant move + +On line 10126: + ultimately be + faced with the costs. Th e next + signifi cant move in + +On line 10126: + be faced with the costs. + Th e next signifi cant move + in the AH goals was + +On line 10126: + faced with the costs. Th + e next signifi cant move in + the AH goals was made + +On line 10126: + the costs. Th e next + signifi cant move in the AH + goals was made under + +On line 10126: + in the AH goals was + made under HUD Secretary + Andrew Cuomo, and + +On line 10126: + Andrew Cuomo, and + it was a major step. On + July HUD issued + +On line 10126: + Cuomo, and it was + a major step. On July + HUD issued a press + +On line 10126: + it was a major + step. On July HUD issued + a press release with + +On line 10126: + was a major step. + On July HUD issued a + press release with the + +On line 10126: + step. On July HUD + issued a press release with + the heading "Cuomo + +On line 10126: + a press release with + the heading "Cuomo Announces + Action to Provide + +On line 10126: + the heading "Cuomo + Announces Action to Provide + trillion in Mortgages + +On line 10126: + Action to Provide + trillion in Mortgages for Aff + ordable Housing for + +On line 10126: + to Provide trillion + in Mortgages for Aff ordable + Housing for Million + +On line 10126: + trillion in Mortgages + for Aff ordable Housing for + Million Families."88 + +On line 10126: + in Mortgages for Aff + ordable Housing for Million + Families."88 Th e + +On line 10126: + Aff ordable Housing + for Million Families."88 Th + e release began: + +On line 10128: + Housing for Million + Families."88 Th e release + began: "Housing and + +On line 10128: + the nation’s two largest + housing fi nance companies + to buy trillion in + +On line 10128: + largest housing fi nance + companies to buy trillion + in mortgages over the + +On line 10128: + fi nance companies + to buy trillion in mortgages + over the next years to + +On line 10128: + companies to buy + trillion in mortgages over the + next years to provide + +On line 10128: + to buy trillion in + mortgages over the next years to + provide aff ordable + +On line 10128: + trillion in mortgages + over the next years to provide + aff ordable housing + +On line 10128: + over the next years to + provide aff ordable housing + for about million low-and + +On line 10130: + for about million low-and + moderate-income families." + Th is was followed + +On line 10132: + families." Th is + was followed by a quote from + President Clinton + +On line 10132: + was followed by a + quote from President Clinton + to emphasize the + +On line 10132: + quote from President + Clinton to emphasize the + importance of the + +On line 10132: + the importance of + the initiative: "During the + last six and a half + +On line 10132: + importance of the + initiative: "During the last + six and a half years, + +On line 10132: + and a half years, my + Administration has put + tremendous emphasis + +On line 10132: + and making housing + more aff ordable for all Americans…Today, + the homeownership + +On line 10132: + making housing more + aff ordable for all Americans…Today, the + homeownership rate + +On line 10132: + ordable for all Americans…Today, + the homeownership rate is + at an all-time + +On line 10132: + homeownership rate + is at an all-time high, + with more than percent + +On line 10134: + their homes. Today, we + take another signifi cant + step." Th e release + +On line 10134: + homes. Today, we take + another signifi cant step." + Th e release then + +On line 10134: + another signifi + cant step." Th e release then + pointed out that the + +On line 10134: + signifi cant step." Th + e release then pointed out + that the AH goals would + +On line 10134: + release then pointed + out that the AH goals would be + substantially raised + +On line 10134: + out that the AH goals + would be substantially raised + and that "[u]nder the + +On line 10134: + the AH goals would be + substantially raised and that + "[u]nder the higher + +On line 10134: + substantially raised + and that "[u]nder the higher + goals, Fannie Mae and + +On line 10134: + raised and that "[u]nder + the higher goals, Fannie Mae + and Freddie Mac will + +On line 10134: + and that "[u]nder the + higher goals, Fannie Mae and + Freddie Mac will buy + +On line 10134: + higher goals, Fannie + Mae and Freddie Mac will buy + an additional + +On line 10134: + Mae and Freddie Mac + will buy an additional + billion in mortgages + +On line 10134: + Freddie Mac will buy + an additional billion + in mortgages that will + +On line 10134: + an additional + billion in mortgages that will + be used to provide + +On line 10134: + billion in mortgages + that will be used to provide + aff ordable housing + +On line 10134: + mortgages that will be + used to provide aff ordable + housing for million + +On line 10134: + that will be used to + provide aff ordable housing + for million more low-and + +On line 10134: + for million more low-and + moderate-income families + over the next years. Th + +On line 10136: + low-and moderate-income + families over the next years. + Th ose new mortgages + +On line 10136: + families over the + next years. Th ose new mortgages + and families are + +On line 10136: + the next years. Th ose + new mortgages and families + are over and above the + +On line 10136: + Th ose new mortgages + and families are over and + above the trillion in + +On line 10138: + and families are + over and above the trillion in + mortgages for http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626.html. See + +On line 10140: + are over and above the + trillion in mortgages for http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626.html. + See Footnote Fannie + +On line 10140: + trillion in mortgages + for http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626.html. See Footnote Fannie + Mae, internal memo, + +On line 10140: + for http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626.html. See Footnote + Fannie Mae, internal memo, + Adolfo Marzol to + +On line 10140: + See Footnote Fannie + Mae, internal memo, Adolfo + Marzol to Dan Mudd, + +On line 10140: + Mae, internal memo, + Adolfo Marzol to Dan Mudd, + "RE: Private Label + +On line 10140: + Adolfo Marzol to + Dan Mudd, "RE: Private Label + Securities," March + +On line 10142: + "RE: Private Label + Securities," March William J. + Clinton, Remarks on + +On line 10144: + on the National + Homeownership Strategy, + June HUD Press Release, + +On line 10152: + Release, HUD No. 99-131, + July Dissenting Statement + million families + +On line 10152: + HUD No. 99-131, July + Dissenting Statement million + families that would + +On line 10152: + families that would + have been generated if + the current goals had + +On line 10154: + the current goals had + been retained." Th e release + also noted that + +On line 10154: + been retained." Th e + release also noted that + "Fannie Mae Chairman + +On line 10154: + also noted that + "Fannie Mae Chairman Franklin D. + Raines joined Cuomo at + +On line 10154: + noted that "Fannie + Mae Chairman Franklin D. Raines joined + Cuomo at the news + +On line 10154: + "Fannie Mae Chairman + Franklin D. Raines joined Cuomo at + the news conference + +On line 10154: + Mae Chairman Franklin D. + Raines joined Cuomo at the news + conference in which + +On line 10154: + D. Raines joined Cuomo + at the news conference in + which Cuomo announced + +On line 10154: + Raines joined Cuomo at + the news conference in which + Cuomo announced the + +On line 10156: + the HUD action. Raines + committed Fannie Mae to + reaching HUD’s increased + +On line 10156: + committed Fannie + Mae to reaching HUD’s increased + Aff ordable Housing + +On line 10160: + substantial increase + in the AH goals was expressed + in HUD’s discussion + +On line 10160: + in the AH goals was + expressed in HUD’s discussion + of the rule-making: + +On line 10160: + HUD’s discussion of + the rule-making: "To fulfi + ll the intent of + +On line 10160: + discussion of the + rule-making: "To fulfi ll + the intent of [the + +On line 10160: + of the rule-making: + "To fulfi ll the intent + of [the GSE Act], the + +On line 10160: + the rule-making: "To + fulfi ll the intent of + [the GSE Act], the GSEs + +On line 10160: + ll the intent of + [the GSE Act], the GSEs should lead + the industry in + +On line 10160: + of [the GSE Act], the + GSEs should lead the industry + in ensuring that + +On line 10160: + lead the industry + in ensuring that access + to mortgage credit + +On line 10160: + the industry in + ensuring that access to + mortgage credit is + +On line 10160: + in ensuring that + access to mortgage credit + is made available for + +On line 10160: + mortgage credit is + made available for very low-, low- + and moderate-income + +On line 10160: + for very low-, low- and + moderate-income families + and residents of + +On line 10160: + recognizes that, to + lead the mortgage industry + over time, the GSEs will + +On line 10160: + to lead the mortgage + industry over time, the GSEs + will have to stretch to + +On line 10160: + mortgage industry + over time, the GSEs will have to + stretch to reach certain + +On line 10160: + industry over time, + the GSEs will have to stretch to + reach certain goals and + +On line 10160: + over time, the GSEs will + have to stretch to reach certain + goals and close the gap + +On line 10160: + the GSEs will have to + stretch to reach certain goals and + close the gap between + +On line 10160: + GSEs will have to stretch + to reach certain goals and close + the gap between the + +On line 10160: + have to stretch to reach + certain goals and close the gap + between the secondary + +On line 10160: + stretch to reach certain + goals and close the gap between + the secondary mortgage + +On line 10160: + certain goals and close + the gap between the secondary + mortgage market and + +On line 10160: + close the gap between + the secondary mortgage market + and the primary + +On line 10160: + the secondary mortgage + market and the primary + mortgage market. Th + +On line 10164: + is consistent with + Congress’ recognition that ‘the + enterprises will + +On line 10164: + Congress’ recognition + that ‘the enterprises will + need to stretch their eff + +On line 10164: + recognition that ‘the + enterprises will need to + stretch their eff orts to + +On line 10170: + to stretch their eff orts + to achieve’ the goals."89 [emphasis + supplied] Th e new + +On line 10170: + their eff orts to achieve’ + the goals."89 [emphasis supplied] + Th e new AH goals + +On line 10170: + orts to achieve’ the goals."89 + [emphasis supplied] Th e + new AH goals announced + +On line 10170: + the goals."89 [emphasis + supplied] Th e new AH goals + announced in were not + +On line 10170: + supplied] Th e new + AH goals announced in were not + fi nally issued + +On line 10170: + AH goals announced in + were not fi nally issued + until October + +On line 10172: + announced in were not + fi nally issued until + October Th eir + +On line 10172: + were not fi nally + issued until October + Th eir specifi cs + +On line 10172: + Th eir specifi cs + were stunning and drove Fannie + and Freddie into + +On line 10172: + eir specifi cs were + stunning and drove Fannie and + Freddie into a + +On line 10172: + were stunning and drove + Fannie and Freddie into + a new and far more + +On line 10172: + and drove Fannie and + Freddie into a new and + far more challenging + +On line 10172: + Fannie and Freddie + into a new and far more + challenging era. Th + +On line 10174: + Freddie into a + new and far more challenging + era. Th e basic + +On line 10174: + into a new and + far more challenging era. Th + e basic goal, an + +On line 10174: + far more challenging + era. Th e basic goal, an + LMI requirement of + +On line 10176: + era. Th e basic + goal, an LMI requirement of + percent, was raised to + +On line 10176: + e basic goal, an + LMI requirement of percent, + was raised to percent, + +On line 10176: + basic goal, an LMI + requirement of percent, was + raised to percent, and + +On line 10176: + LMI requirement of + percent, was raised to percent, + and the special aff + +On line 10176: + of percent, was raised + to percent, and the special + aff ordable goal was + +On line 10176: + percent, was raised to + percent, and the special aff + ordable goal was raised + +On line 10176: + raised to percent, and + the special aff ordable goal + was raised from percent + +On line 10176: + to percent, and the + special aff ordable goal was + raised from percent to + +On line 10176: + ordable goal was raised + from percent to percent. As + a result, percent + +On line 10176: + percent to percent. + As a result, percent of + the increase in goals + +On line 10176: + a result, percent + of the increase in goals was + concentrated in + +On line 10176: + of the increase in + goals was concentrated in + the low-and very-low income + +On line 10176: + the low-and very-low income + category—where the risks + were the greatest. A + +On line 10176: + category—where + the risks were the greatest. A + HUD memo summarized + +On line 10178: + risks were the greatest. + A HUD memo summarized the + new rules:90 For each year + +On line 10178: + were the greatest. A + HUD memo summarized the new + rules:90 For each year from + +On line 10178: + the greatest. A HUD + memo summarized the new rules:90 + For each year from through + +On line 10178: + greatest. A HUD memo + summarized the new rules:90 For + each year from through the + +On line 10180: + HUD memo summarized + the new rules:90 For each year from + through the goals are: Low- + +On line 10180: + memo summarized the + new rules:90 For each year from through + the goals are: Low- and + +On line 10180: + the new rules:90 For each + year from through the goals are: Low- + and moderate-income + +On line 10180: + new rules:90 For each year + from through the goals are: Low- and + moderate-income goal. + +On line 10180: + year from through the goals + are: Low- and moderate-income + goal. At least percent + +On line 10180: + from through the goals are: + Low- and moderate-income goal. + At least percent of + +On line 10180: + through the goals are: Low- + and moderate-income goal. At + least percent of the + +On line 10180: + the goals are: Low- and + moderate-income goal. At least + percent of the dwelling + +On line 10180: + and moderate-income + goal. At least percent of the + dwelling units fi nanced by + +On line 10180: + moderate-income goal. + At least percent of the dwelling + units fi nanced by each + +On line 10180: + least percent of the + dwelling units fi nanced by each GSE’s + mortgage purchases + +On line 10180: + units fi nanced by each + GSE’s mortgage purchases should + be for families + +On line 10180: + fi nanced by each GSE’s + mortgage purchases should be + for families with + +On line 10180: + mortgage purchases + should be for families with + incomes no greater than + +On line 10180: + be for families + with incomes no greater than area + median income + +On line 10180: + with incomes no greater + than area median income + (AMI), defi ned as + +On line 10180: + than area median + income (AMI), defi ned as + median income + +On line 10180: + (AMI), defi ned as + median income for the + metropolitan + +On line 10180: + median income + for the metropolitan + area or nonmetropolitan + +On line 10182: + nonmetropolitan county. + Th e corresponding goal + was percent for 1997-2000. + +On line 10184: + corresponding goal + was percent for 1997-2000. Special + aff ordable goal. At + +On line 10184: + goal was percent for + 1997-2000. Special aff ordable goal. + At least percent of + +On line 10184: + was percent for 1997-2000. + Special aff ordable goal. At + least percent of the + +On line 10184: + for 1997-2000. Special aff + ordable goal. At least percent + of the dwelling units fi + +On line 10184: + Special aff ordable + goal. At least percent of the + dwelling units fi nanced by + +On line 10184: + aff ordable goal. At + least percent of the dwelling units + fi nanced by each GSE’s + +On line 10184: + least percent of the + dwelling units fi nanced by each GSE’s + mortgage purchases + +On line 10184: + units fi nanced by each + GSE’s mortgage purchases should + be for very low-income + +On line 10184: + by each GSE’s mortgage + purchases should be for very + low-income families + +On line 10184: + purchases should be + for very low-income families + (those with incomes no + +On line 10184: + be for very low-income + families (those with incomes + no greater than percent + +On line 10184: + low-income families + (those with incomes no greater than + percent of AMI) or + +On line 10184: + with incomes no greater + than percent of AMI) or for + low-income families + +On line 10184: + than percent of AMI) + or for low-income families + (those with incomes no + +On line 10184: + percent of AMI) or + for low-income families (those + with incomes no greater + +On line 10184: + AMI) or for low-income + families (those with incomes + no greater than percent + +On line 10184: + low-income families + (those with incomes no greater than + percent of LMI) in + +On line 10184: + families (those with + incomes no greater than percent + of LMI) in low-income + +On line 10184: + (those with incomes no + greater than percent of LMI) in + low-income areas. Th + +On line 10184: + greater than percent of + LMI) in low-income areas. Th + e corresponding + +On line 10186: + than percent of LMI) + in low-income areas. Th e + corresponding goal + +On line 10186: + in low-income areas. + Th e corresponding goal + was percent for 1997-2000. + +On line 10188: + goal was percent for + 1997-2000. Underserved areas goal. + At least percent of + +On line 10188: + was percent for 1997-2000. + Underserved areas goal. At + least percent of the + +On line 10188: + for 1997-2000. Underserved + areas goal. At least percent + of the dwelling units fi + +On line 10188: + Underserved areas + goal. At least percent of the + dwelling units fi nanced by + +On line 10188: + least percent of the + dwelling units fi nanced by each GSE’s + mortgage purchases + +On line 10188: + fi nanced by each GSE’s + mortgage purchases should be + for units located + +On line 10188: + units located in + underserved areas. Research + by HUD and others + +On line 10188: + underserved areas. + Research by HUD and others + has demonstrated that + +On line 10188: + HUD and others has + demonstrated that low-income and + high-minority + +On line 10188: + high-minority + census tracts have high mortgage + denial rates and low + +On line 10188: + tracts have high mortgage + denial rates and low mortgage + origination rates, + +On line 10188: + rates and low mortgage + origination rates, and this + forms the basis for + +On line 10188: + origination rates, + and this forms the basis for + HUD’s defi nition + +On line 10188: + this forms the basis + for HUD’s defi nition of + underserved areas. + +On line 10188: + HUD’s defi nition + of underserved areas. Th + e corresponding + +On line 10188: + defi nition of + underserved areas. Th e + corresponding goal + +On line 10190: + underserved areas. + Th e corresponding goal + was percent for 1997-2000. + +On line 10192: + e corresponding + goal was percent for 1997-2000. HUD’s + new and more stringent + +On line 10192: + corresponding goal + was percent for 1997-2000. HUD’s new + and more stringent AH + +On line 10192: + goal was percent for + 1997-2000. HUD’s new and more stringent + AH goal requirements + +On line 10192: + 1997-2000. HUD’s new and more + stringent AH goal requirements + immediately + +On line 10192: + stimulated strong + interest at the GSEs for + CRA loans, substantial + +On line 10192: + interest at the + GSEs for CRA loans, substantial + portions of which were + +On line 10192: + at the GSEs for CRA + loans, substantial portions of + which were likely to + +On line 10192: + the GSEs for CRA loans, + substantial portions of which + were likely to be + +On line 10192: + substantial portions + of which were likely to be + goals-qualifying. + +On line 10194: + which were likely to + be goals-qualifying. Th + is is evident + +On line 10194: + were likely to be + goals-qualifying. Th is + is evident in + +On line 10194: + goals-qualifying. + Th is is evident in + a speech by Fannie’s + +On line 10196: + is is evident + in a speech by Fannie’s Vice + Chair, Jamie Gorelick, to + +On line 10196: + is evident in + a speech by Fannie’s Vice Chair, + Jamie Gorelick, to an + +On line 10200: + HUD, Offi ce of + Policy Development + and Research, Issue + +On line 10208: + Research, Issue Brief + No. January p.3. Peter + J. Wallison just + +On line 10208: + No. January p.3. + Peter J. Wallison just + aft er HUD announced + +On line 10208: + Wallison just aft + er HUD announced the latest + increase in the AH + +On line 10208: + aft er HUD announced + the latest increase in the + AH goals for the GSEs: + +On line 10208: + er HUD announced the + latest increase in the AH + goals for the GSEs: Your + +On line 10208: + the latest increase + in the AH goals for the GSEs: + Your CRA business is + +On line 10208: + latest increase in + the AH goals for the GSEs: Your + CRA business is very + +On line 10208: + in the AH goals for + the GSEs: Your CRA business is + very important to + +On line 10208: + the AH goals for the + GSEs: Your CRA business is very + important to us. + +On line 10208: + for the GSEs: Your CRA + business is very important + to us. Since we have + +On line 10208: + Your CRA business is + very important to us. Since + we have done nearly + +On line 10208: + done nearly billion + in specially targeted + CRA business—all with + +On line 10208: + CRA business—all with + depositories like yours. + But that is just the + +On line 10208: + depositories + like yours. But that is just the + beginning. Before + +On line 10208: + yours. But that is just + the beginning. Before the + decade is over, Fannie + +On line 10208: + But that is just the + beginning. Before the decade + is over, Fannie Mae + +On line 10208: + beginning. Before + the decade is over, Fannie Mae + is committed to + +On line 10208: + decade is over, Fannie + Mae is committed to fi + nance over billion in + +On line 10208: + fi nance over billion + in specially targeted + CRA business and over + +On line 10210: + and over billion in + CRA business altogether… + We want your CRA loans + +On line 10210: + We want your CRA loans + because they help us meet our + housing goals… We will + +On line 10210: + your CRA loans because + they help us meet our housing + goals… We will buy them + +On line 10210: + CRA loans because they + help us meet our housing goals… + We will buy them from + +On line 10210: + loans because they help + us meet our housing goals… We + will buy them from your + +On line 10210: + they help us meet our + housing goals… We will buy them + from your portfolios, + +On line 10210: + purchase CRA mortgages + you make right at the point of + origination... You + +On line 10210: + you make right at the + point of origination... You + can originate CRA + +On line 10210: + make right at the point + of origination... You can + originate CRA loans + +On line 10210: + of origination... + You can originate CRA loans + for our purchase with + +On line 10210: + origination... You + can originate CRA loans for + our purchase with one + +On line 10210: + can originate CRA + loans for our purchase with one + of our CRA-friendly products, + +On line 10210: + originate CRA loans + for our purchase with one of + our CRA-friendly products, like + +On line 10210: + loans for our purchase + with one of our CRA-friendly products, + like our percent down + +On line 10210: + our purchase with one + of our CRA-friendly products, like our + percent down Fannie + +On line 10210: + with one of our CRA-friendly + products, like our percent down + Fannie Or we have + +On line 10210: + of our CRA-friendly products, + like our percent down Fannie + Or we have special + +On line 10210: + down Fannie Or we + have special community + lending products with + +On line 10214: + "CRA your way".91 Th e + percent level in the new + HUD regulations + +On line 10214: + percent level in + the new HUD regulations + was a turning point. + +On line 10214: + level in the new + HUD regulations was a + turning point. Fannie + +On line 10214: + HUD regulations + was a turning point. Fannie + and Freddie had to + +On line 10214: + regulations was + a turning point. Fannie and + Freddie had to stretch + +On line 10214: + was a turning point. + Fannie and Freddie had to + stretch a bit to reach + +On line 10214: + Fannie and Freddie + had to stretch a bit to reach + the previous goal + +On line 10214: + to stretch a bit to + reach the previous goal of + percent, but percent + +On line 10214: + a bit to reach the + previous goal of percent, + but percent was a + +On line 10214: + reach the previous + goal of percent, but percent + was a signifi cant + +On line 10214: + previous goal of + percent, but percent was a + signifi cant challenge. + +On line 10214: + goal of percent, but + percent was a signifi cant + challenge. As Dan Mudd + +On line 10214: + percent, but percent + was a signifi cant challenge. + As Dan Mudd told the + +On line 10214: + was a signifi cant + challenge. As Dan Mudd told the + Commission, Fannie + +On line 10214: + Fannie Mae’s mission + regulator, HUD, imposed + ever-higher housing + +On line 10216: + ever-higher housing + goals that were very diffi cult + to meet during my + +On line 10218: + were very diffi cult + to meet during my tenure + as CEO [2005-2008]. Th e + +On line 10218: + very diffi cult to + meet during my tenure as + CEO [2005-2008]. Th e HUD + +On line 10218: + diffi cult to meet + during my tenure as CEO + [2005-2008]. Th e HUD goals + +On line 10220: + cult to meet during + my tenure as CEO [2005-2008]. Th + e HUD goals greatly + +On line 10220: + during my tenure + as CEO [2005-2008]. Th e HUD goals + greatly impacted + +On line 10220: + my tenure as CEO + [2005-2008]. Th e HUD goals greatly + impacted Fannie + +On line 10220: + as CEO [2005-2008]. Th e + HUD goals greatly impacted + Fannie Mae’s business, + +On line 10220: + [2005-2008]. Th e HUD goals + greatly impacted Fannie + Mae’s business, as a + +On line 10220: + deal of time, resources, + energy, and personnel + were dedicated + +On line 10220: + were dedicated + to fi nding ways to meet + these goals. HUD increased + +On line 10220: + dedicated to + fi nding ways to meet these + goals. HUD increased the + +On line 10220: + fi nding ways to + meet these goals. HUD increased the + goals aggressively + +On line 10220: + nding ways to meet + these goals. HUD increased the goals + aggressively over + +On line 10220: + these goals. HUD increased + the goals aggressively over + time to the point where + +On line 10220: + goals. HUD increased the + goals aggressively over time + to the point where they + +On line 10220: + goals aggressively + over time to the point where they + exceeded the mark, + +On line 10220: + over time to the point + where they exceeded the mark, + requiring Fannie + +On line 10220: + exceeded the mark, + requiring Fannie Mae to + place greater emphasis + +On line 10220: + requiring Fannie + Mae to place greater emphasis + on purchasing loans + +On line 10220: + purchasing loans to + underserved areas. Fannie + Mae had to devote + +On line 10220: + loans to underserved + areas. Fannie Mae had to + devote a great deal + +On line 10220: + Mae had to devote + a great deal of resources to + running its business + +On line 10220: + great deal of resources + to running its business to + satisfy HUD’s goals + +On line 10220: + resources to running + its business to satisfy + HUD’s goals and subgoals.92 + +On line 10222: + running its business + to satisfy HUD’s goals and + subgoals.92 Mudd’s point + +On line 10222: + satisfy HUD’s goals + and subgoals.92 Mudd’s point can + be illustrated + +On line 10222: + and subgoals.92 Mudd’s + point can be illustrated + with simple arithmetic. + +On line 10222: + subgoals.92 Mudd’s point + can be illustrated with + simple arithmetic. At + +On line 10222: + be illustrated + with simple arithmetic. At the + percent level, for + +On line 10222: + had to acquire a + goal-qualifying loan. Although + about percent of prime + +On line 10222: + a goal-qualifying + loan. Although about percent of + prime loans were likely + +On line 10222: + goal-qualifying loan. + Although about percent of prime + loans were likely to + +On line 10222: + Although about percent + of prime loans were likely to + be goal-qualifying + +On line 10222: + prime loans were likely + to be goal-qualifying in + any event (because they + +On line 10222: + loans were likely to + be goal-qualifying in any + event (because they were + +On line 10222: + were likely to be + goal-qualifying in any event + (because they were made + +On line 10222: + be goal-qualifying + in any event (because they were + made to borrowers + +On line 10222: + goal-qualifying in + any event (because they were made + to borrowers at + +On line 10222: + in any event (because + they were made to borrowers + at or below the + +On line 10222: + borrowers at or + below the applicable + AMI), most prime loans were + +On line 10222: + at or below the + applicable AMI), most prime + loans were not. Subprime + +On line 10224: + applicable AMI), + most prime loans were not. Subprime + and other NTM loans + +On line 10224: + AMI), most prime loans were + not. Subprime and other NTM + loans were goals-rich, but + +On line 10224: + most prime loans were not. + Subprime and other NTM loans + were goals-rich, but not + +On line 10224: + were not. Subprime and + other NTM loans were goals-rich, + but not every such + +On line 10224: + Subprime and other + NTM loans were goals-rich, but not + every such loan was + +On line 10224: + was goal-qualifying. + Accordingly, in order + to meet a percent + +On line 10224: + Accordingly, in + order to meet a percent + goal, the GSEs had to + +On line 10224: + in order to meet + a percent goal, the GSEs had + to purchase ever + +On line 10224: + to meet a percent + goal, the GSEs had to purchase + ever larger amounts + +On line 10224: + goal, the GSEs had to + purchase ever larger amounts + of goals-rich NTMs in + +On line 10224: + ever larger amounts + of goals-rich NTMs in order + to acquire suffi + +On line 10226: + of goals-rich NTMs in + order to acquire suffi + cient quantities of + +On line 10226: + order to acquire + suffi cient quantities of + goals-qualifying + +On line 10230: + loans. Th us, in a + presentation to HUD in + Fannie argued that + +On line 10230: + presentation to + HUD in Fannie argued that + to meet a percent + +On line 10230: + in Fannie argued + that to meet a percent LMI + goal (which was under + +On line 10230: + goal (which was under + consideration by HUD + at the time) it would + +On line 10230: + HUD at the time) it + would have to acquire percent + more subprime loans than + +On line 10230: + at the time) it would + have to acquire percent more + subprime loans than the + +On line 10230: + time) it would have to + acquire percent more subprime + loans than the goal in + +On line 10230: + would have to acquire + percent more subprime loans than + the goal in order + +On line 10230: + acquire percent more + subprime loans than the goal in + order to capture + +On line 10230: + subprime loans than the + goal in order to capture + enough goal-qualifying + +On line 10230: + goal in order to + capture enough goal-qualifying + loans.93 Moreover, with the + +On line 10230: + with the special aff + ordable category at + percent in the GSEs + +On line 10230: + special aff ordable + category at percent + in the GSEs had to + +On line 10230: + category at + percent in the GSEs had to + acquire large numbers + +On line 10230: + in the GSEs had to + acquire large numbers of NTM + loans from borrowers + +On line 10230: + GSEs had to acquire + large numbers of NTM loans from + borrowers who were + +On line 10230: + numbers of NTM loans + from borrowers who were at + or below percent + +On line 10230: + from borrowers who + were at or below percent + of the AMI. Th is + +On line 10232: + of the AMI. Th is + requirement drove Fannie and + Freddie even further + +On line 10232: + Th is requirement + drove Fannie and Freddie even + further into risk + +On line 10232: + Freddie even further + into risk territory + in search of loans that + +On line 10232: + even further into + risk territory in search + of loans that would meet + +On line 10232: + further into risk + territory in search of + loans that would meet this + +On line 10234: + risk territory + in search of loans that would meet + this subgoal. Jamie S. + +On line 10234: + in search of loans that + would meet this subgoal. Jamie S. + Gorelick, Remarks at + +On line 10238: + Presented in the + FCIC’s June letter, Answer to + Question How infl + +On line 10238: + letter, Answer to + Question How infl uential + were HUD’s aff ordable + +On line 10238: + Answer to Question + How infl uential were HUD’s + aff ordable housing + +On line 10238: + Question How infl + uential were HUD’s aff ordable + housing guidelines in + +On line 10238: + How infl uential + were HUD’s aff ordable housing + guidelines in Fannie + +On line 10238: + uential were HUD’s aff + ordable housing guidelines in + Fannie Mae’s purchase + +On line 10238: + guidelines in Fannie + Mae’s purchase of subprime and + Alt-A loans1 Were Alt-A loans + +On line 10238: + Fannie Mae’s purchase + of subprime and Alt-A loans1 Were + Alt-A loans "goals-rich"1 Were + +On line 10238: + subprime and Alt-A loans1 + Were Alt-A loans "goals-rich"1 Were Alt-A + loans net positive + +On line 10240: + Alt-A loans "goals-rich"1 Were + Alt-A loans net positive for + housing goals1 Fannie + +On line 10240: + loans net positive + for housing goals1 Fannie Mae, + "Discussion of HUD’s + +On line 10248: + development, June + Dissenting Statement Most of + what was going on + +On line 10248: + Dissenting Statement + Most of what was going on + here was under the + +On line 10248: + of what was going + on here was under the radar, + even for specialists + +On line 10248: + what was going on + here was under the radar, even + for specialists in + +On line 10248: + was going on here + was under the radar, even for + specialists in the + +On line 10248: + on here was under + the radar, even for specialists + in the housing fi + +On line 10248: + here was under the + radar, even for specialists in + the housing fi nance + +On line 10248: + was under the radar, + even for specialists in the + housing fi nance fi + +On line 10248: + for specialists in + the housing fi nance fi eld, + but not everyone + +On line 10248: + specialists in the + housing fi nance fi eld, but + not everyone missed + +On line 10248: + housing fi nance fi + eld, but not everyone missed + it. In a paper + +On line 10248: + fi nance fi eld, but + not everyone missed it. In + a paper published + +On line 10248: + nance fi eld, but not + everyone missed it. In a + paper published in + +On line 10250: + paper published in + fi nancial analyst Josh + Rosner recognized + +On line 10250: + Rosner recognized + the deterioration + in mortgage standards + +On line 10250: + standards although he + did not recognize how many + loans were subject to + +On line 10250: + did not recognize + how many loans were subject to + this problem: Over the + +On line 10250: + not recognize how + many loans were subject to this + problem: Over the past + +On line 10250: + many loans were subject + to this problem: Over the past + decade Fannie Mae and + +On line 10250: + past decade Fannie Mae + and Freddie Mac have reduced + required down payments + +On line 10250: + required down payments + on loans that they purchase in + the secondary market. + +On line 10252: + loans that they purchase + in the secondary market. Th + ose requirements have + +On line 10252: + secondary market. Th + ose requirements have declined + from to to and in + +On line 10252: + Th ose requirements + have declined from to to and + in the past few months + +On line 10252: + have declined from to + to and in the past few months + Fannie Mae announced + +On line 10252: + from to to and in + the past few months Fannie Mae + announced that it would + +On line 10252: + to and in the past + few months Fannie Mae announced + that it would follow + +On line 10252: + in the past few months + Fannie Mae announced that it + would follow Freddie + +On line 10252: + few months Fannie Mae + announced that it would follow + Freddie Mac’s recent + +On line 10252: + announced that it would + follow Freddie Mac’s recent + move into the down + +On line 10252: + would follow Freddie + Mac’s recent move into the + down payment mortgage + +On line 10252: + market. Although they + are buying low down payment + loans, those loans must be + +On line 10252: + are buying low down + payment loans, those loans must be + insured with ‘private + +On line 10252: + payment loans, those loans + must be insured with ‘private + mortgage insurance’ + +On line 10252: + loans, those loans must be + insured with ‘private mortgage + insurance’ (PMI). On + +On line 10252: + must be insured with + ‘private mortgage insurance’ + (PMI). On homes with PMI, + +On line 10252: + insured with ‘private + mortgage insurance’ (PMI). On + homes with PMI, even the + +On line 10252: + with ‘private mortgage + insurance’ (PMI). On homes with + PMI, even the closing + +On line 10252: + mortgage insurance’ + (PMI). On homes with PMI, even the + closing costs can now + +On line 10252: + PMI, even the closing + costs can now be borrowed through + unsecured loans, gift + +On line 10254: + can now be borrowed + through unsecured loans, gift s + or subsidies. Th + +On line 10256: + now be borrowed through + unsecured loans, gift s or + subsidies. Th is + +On line 10256: + unsecured loans, gift + s or subsidies. Th is + means that not only + +On line 10256: + s or subsidies. + Th is means that not only + can the buyer put + +On line 10256: + subsidies. Th is + means that not only can the + buyer put zero + +On line 10256: + Th is means that not + only can the buyer put + zero dollars down + +On line 10256: + not only can the + buyer put zero dollars + down to purchase a + +On line 10256: + buyer put zero + dollars down to purchase a + new house but also + +On line 10256: + put zero dollars + down to purchase a new house + but also that the + +On line 10256: + down to purchase a + new house but also that the + mortgage can fi nance + +On line 10258: + new house but also + that the mortgage can fi nance + the closing costs…. [I]t + +On line 10258: + mortgage can fi nance + the closing costs…. [I]t appears + a large portion of + +On line 10258: + the closing costs…. [I]t + appears a large portion of + the housing sector’s + +On line 10258: + costs…. [I]t appears a + large portion of the housing + sector’s growth in the + +On line 10258: + a large portion of + the housing sector’s growth in + the 1990’s came from the + +On line 10258: + in the 1990’s came from + the easing of the credit + underwriting process….Th + +On line 10260: + from the easing of + the credit underwriting + process….Th e virtuous + +On line 10262: + to greater leverage has + the potential to become + a vicious cycle + +On line 10262: + greater leverage has the + potential to become a + vicious cycle of + +On line 10262: + the potential to + become a vicious cycle + of lower home prices + +On line 10262: + vicious cycle of + lower home prices due to an + accelerating + +On line 10266: + Th e last increase + in the AH goals occurred in + when HUD raised the LMI + +On line 10266: + e last increase in + the AH goals occurred in when + HUD raised the LMI goal + +On line 10266: + last increase in the + AH goals occurred in when HUD + raised the LMI goal to + +On line 10266: + AH goals occurred in + when HUD raised the LMI goal to + percent for percent + +On line 10266: + when HUD raised the LMI + goal to percent for percent + for percent for and + +On line 10266: + LMI goal to percent + for percent for percent for + and percent for Again, + +On line 10266: + goal to percent for + percent for percent for and + percent for Again, the + +On line 10266: + and percent for Again, + the percentage increases + in the special aff + +On line 10266: + special aff ordable + category outstripped the + general LMI goal, + +On line 10268: + Freddie to acquire + additional risky NTMs. Th + is category + +On line 10268: + additional risky + NTMs. Th is category + increased from percent + +On line 10270: + to percent over the + period. In the release + that accompanied + +On line 10270: + period. In the + release that accompanied + the increases, HUD + +On line 10274: + HUD declared: Millions + of Americans with less than + perfect credit or + +On line 10274: + of Americans with + less than perfect credit or + who cannot meet some + +On line 10274: + Americans with less + than perfect credit or who + cannot meet some of + +On line 10274: + perfect credit or + who cannot meet some of the + tougher underwriting + +On line 10274: + who cannot meet some + of the tougher underwriting + requirements of the + +On line 10274: + meet some of the tougher + underwriting requirements + of the prime market + +On line 10274: + requirements of the + prime market for reasons such + as inadequate + +On line 10274: + documentation, + limited downpayment or + cash reserves, or the + +On line 10274: + downpayment or cash + reserves, or the desire to + take more cash out in + +On line 10274: + or cash reserves, or + the desire to take more cash + out in a refi + +On line 10274: + to take more cash out + in a refi nancing than + conventional loans + +On line 10274: + out in a refi + nancing than conventional + loans allow, rely + +On line 10274: + refi nancing than + conventional loans allow, + rely on subprime + +On line 10274: + conventional loans + allow, rely on subprime + lenders for access to + +On line 10274: + allow, rely on + subprime lenders for access to + mortgage fi nancing. + +On line 10274: + rely on subprime + lenders for access to mortgage + fi nancing. If the + +On line 10274: + access to mortgage + fi nancing. If the GSEs reach + deeper into the + +On line 10274: + fi nancing. If the + GSEs reach deeper into the + subprime market, more + +On line 10274: + the GSEs reach deeper + into the subprime market, + more borrowers will + +On line 10274: + into the subprime + market, more borrowers will + benefi t from the + +On line 10274: + subprime market, more + borrowers will benefi t + from the advantages + +On line 10274: + greater stability + and standardization create.96 + [emphasis supplied] + +On line 10276: + and standardization + create.96 [emphasis supplied] + Fannie did indeed + +On line 10276: + create.96 [emphasis + supplied] Fannie did indeed + reach deeper into + +On line 10276: + supplied] Fannie did + indeed reach deeper into + the subprime market, + +On line 10276: + indeed reach deeper + into the subprime market, + confi rming in + +On line 10276: + reach deeper into + the subprime market, confi + rming in a March + +On line 10276: + the subprime market, + confi rming in a March + presentation to + +On line 10276: + confi rming in + a March presentation to + HUD, "Higher goals force + +On line 10276: + March presentation + to HUD, "Higher goals force us + deeper into FHA + +On line 10276: + HUD, "Higher goals force + us deeper into FHA and + subprime."97According to HUD data, + +On line 10276: + "Higher goals force us + deeper into FHA and subprime."97According + to HUD data, as + +On line 10276: + us deeper into + FHA and subprime."97According to HUD data, + as a result of + +On line 10276: + deeper into FHA + and subprime."97According to HUD data, as + a result of the + +On line 10276: + FHA and subprime."97According to HUD + data, as a result of + the AH goals Fannie + +On line 10276: + Mae’s acquisitions + of goal-qualifying loans (which + were primarily + +On line 10276: + were primarily + subprime and Alt-A) increased (i) + for very low income + +On line 10276: + Alt-A) increased (i) for + very low income borrowers + from percent of their + +On line 10276: + for very low income + borrowers from percent of + their acquisitions + +On line 10276: + their acquisitions + in to percent in (ii) for + special aff ordable + +On line 10276: + special aff ordable + borrowers from percent in + to percent in and + +On line 10276: + ordable borrowers + from percent in to percent + in and (iii) for less + +On line 10276: + to percent in and + (iii) for less than median + income borrowers + +On line 10276: + includes the other + two categories) from percent + in to percent in + +On line 10278: + two categories) from + percent in to percent in + Josh Rosner, "Housing + +On line 10278: + in to percent in + Josh Rosner, "Housing in the + New Millennium: + +On line 10278: + to percent in Josh + Rosner, "Housing in the New + Millennium: A + +On line 10278: + New Millennium: + A Home Without Equity + is Just a Rental With + +On line 10278: + Millennium: A + Home Without Equity is + Just a Rental With Debt," + +On line 10290: + p.29. http://fdsys.gpo.gov/fdsys/pkg/FR-2004-11-02/pdf/04-24101.pdf, p.63601. Fannie + Mae, "Th e HUD Housing Goals", + March HUD, Offi ce + +On line 10290: + http://fdsys.gpo.gov/fdsys/pkg/FR-2004-11-02/pdf/04-24101.pdf, p.63601. Fannie Mae, + "Th e HUD Housing Goals", March + HUD, Offi ce of + +On line 10290: + Housing Goals", March HUD, + Offi ce of Policy + Development and + +On line 10290: + HUD, Offi ce of + Policy Development + and Research, Profi les + +On line 10294: + Research, Profi les of + GSE Mortgage Purchases, 1992-2000, + 2001-2004, and 2005-2007. Peter + +On line 10298: + and 2005-2007. Peter J. + Wallison By Fannie and + Freddie were suffi + +On line 10302: + Fannie and Freddie + were suffi ciently in need + of subprime loans to + +On line 10302: + Freddie were suffi + ciently in need of subprime + loans to meet the AH + +On line 10302: + were suffi ciently + in need of subprime loans to + meet the AH goals that + +On line 10302: + suffi ciently in + need of subprime loans to meet + the AH goals that their + +On line 10302: + ciently in need of + subprime loans to meet the AH + goals that their CEOs, as + +On line 10302: + of subprime loans to + meet the AH goals that their CEOs, + as the following + +On line 10302: + meet the AH goals that + their CEOs, as the following + account shows, went to + +On line 10302: + goals that their CEOs, as + the following account shows, + went to a meeting + +On line 10302: + that their CEOs, as the + following account shows, went + to a meeting of + +On line 10302: + following account + shows, went to a meeting of + mortgage bankers to ask + +On line 10302: + meeting of mortgage + bankers to ask for more subprime + loan production: Th + +On line 10304: + ask for more subprime + loan production: Th e top + executives of + +On line 10304: + top executives + of Freddie Mac and Fannie + Mae [Richard Syron and + +On line 10304: + executives of + Freddie Mac and Fannie Mae + [Richard Syron and Franklin + +On line 10304: + of Freddie Mac and + Fannie Mae [Richard Syron and + Franklin Raines] made no bones + +On line 10304: + and Franklin Raines] made no + bones about their interest in + buying loans made to + +On line 10304: + made no bones about their + interest in buying loans + made to borrowers + +On line 10304: + made to borrowers + formerly considered the + province of nonprime + +On line 10304: + province of nonprime + and other niche lenders. …Fannie + Mae Chairman and [CEO] + +On line 10304: + nonprime and other + niche lenders. …Fannie Mae Chairman + and [CEO] Franklin Raines told + +On line 10304: + and other niche lenders. + …Fannie Mae Chairman and [CEO] + Franklin Raines told mortgage + +On line 10304: + niche lenders. …Fannie Mae + Chairman and [CEO] Franklin Raines told + mortgage bankers in San + +On line 10304: + Mae Chairman and [CEO] + Franklin Raines told mortgage bankers in + San Francisco that + +On line 10304: + Chairman and [CEO] Franklin + Raines told mortgage bankers in San + Francisco that his + +On line 10304: + San Francisco that + his company’s lender-customers + ‘need to learn the best + +On line 10304: + Francisco that his + company’s lender-customers ‘need + to learn the best from + +On line 10304: + that his company’s + lender-customers ‘need to learn the + best from the subprime + +On line 10304: + lender-customers ‘need to + learn the best from the subprime + market and bring the + +On line 10304: + ‘need to learn the best + from the subprime market and + bring the best from the + +On line 10304: + to learn the best from + the subprime market and bring + the best from the prime + +On line 10304: + the subprime market + and bring the best from the prime + market into [the + +On line 10304: + and bring the best from + the prime market into [the + subprime market].’ He + +On line 10304: + the best from the prime + market into [the subprime + market].’ He off ered + +On line 10304: + from the prime market + into [the subprime market].’ + He off ered praise for + +On line 10304: + prime market into + [the subprime market].’ He off + ered praise for nonprime + +On line 10304: + market into [the + subprime market].’ He off ered + praise for nonprime lenders + +On line 10304: + into [the subprime + market].’ He off ered praise for + nonprime lenders that, he + +On line 10304: + [the subprime market].’ + He off ered praise for nonprime + lenders that, he said, ‘are + +On line 10304: + subprime market].’ He + off ered praise for nonprime lenders + that, he said, ‘are some + +On line 10304: + market].’ He off ered + praise for nonprime lenders that, he + said, ‘are some of the + +On line 10304: + ered praise for nonprime + lenders that, he said, ‘are some of + the best marketers in + +On line 10304: + praise for nonprime lenders + that, he said, ‘are some of the + best marketers in fi + +On line 10304: + lenders that, he said, ‘are + some of the best marketers in + fi nancial services.’… + +On line 10304: + that, he said, ‘are some + of the best marketers in fi + nancial services.’… We + +On line 10304: + said, ‘are some of the + best marketers in fi nancial + services.’… We have to + +On line 10304: + of the best marketers + in fi nancial services.’… We + have to push products + +On line 10304: + the best marketers in + fi nancial services.’… We have + to push products and + +On line 10304: + fi nancial services.’… + We have to push products and + opportunities + +On line 10304: + opportunities + to people who have lesser + credit quality," + +On line 10304: + to people who have + lesser credit quality," + he said.99 [emphasis + +On line 10306: + credit quality," + he said.99 [emphasis supplied] + Accordingly, by + +On line 10306: + he said.99 [emphasis + supplied] Accordingly, by + when HUD put new and + +On line 10306: + [emphasis supplied] + Accordingly, by when HUD + put new and tougher AH + +On line 10306: + Accordingly, by + when HUD put new and tougher AH + goals into eff ect, + +On line 10306: + when HUD put new and + tougher AH goals into eff ect, + Fannie and Freddie + +On line 10306: + new and tougher AH goals + into eff ect, Fannie and + Freddie were using + +On line 10306: + tougher AH goals into + eff ect, Fannie and Freddie + were using every + +On line 10306: + eff ect, Fannie and + Freddie were using every + available resource to + +On line 10306: + Fannie and Freddie + were using every available + resource to meet the + +On line 10306: + the goals, including + subprime loans, Alt-A loans and the + purchase of PMBS. Some + +On line 10306: + including subprime + loans, Alt-A loans and the purchase + of PMBS. Some observers, + +On line 10306: + subprime loans, Alt-A loans + and the purchase of PMBS. Some + observers, including + +On line 10306: + of PMBS. Some observers, + including the Commission’s + majority, have + +On line 10306: + majority, have + claimed that the GSEs bought NTM loans + and PMBS for profi t—that + +On line 10306: + have claimed that the GSEs + bought NTM loans and PMBS for profi + t—that these instruments + +On line 10306: + claimed that the GSEs bought + NTM loans and PMBS for profi t—that + these instruments did + +On line 10306: + that the GSEs bought NTM + loans and PMBS for profi t—that these + instruments did not + +On line 10306: + NTM loans and PMBS for + profi t—that these instruments did + not assist Fannie + +On line 10306: + loans and PMBS for profi + t—that these instruments did not + assist Fannie and + +On line 10306: + PMBS for profi t—that these + instruments did not assist + Fannie and Freddie + +On line 10306: + t—that these instruments + did not assist Fannie and + Freddie in meeting + +On line 10306: + instruments did not + assist Fannie and Freddie + in meeting the AH + +On line 10306: + not assist Fannie + and Freddie in meeting the + AH goals and therefore + +On line 10306: + assist Fannie and + Freddie in meeting the AH + goals and therefore must + +On line 10306: + Fannie and Freddie + in meeting the AH goals and + therefore must have been + +On line 10306: + in meeting the AH + goals and therefore must have been + acquired because they + +On line 10306: + AH goals and therefore + must have been acquired because + they were profi table. + +On line 10306: + therefore must have been + acquired because they were profi + table. However, + +On line 10306: + data in Table + furnished to the Commission + by Fannie Mae shows + +On line 10306: + Table furnished to + the Commission by Fannie + Mae shows that all three + +On line 10306: + to the Commission + by Fannie Mae shows that all + three categories of + +On line 10306: + the Commission by + Fannie Mae shows that all three + categories of NTMs—subprime + +On line 10306: + by Fannie Mae shows + that all three categories of + NTMs—subprime loans (i.e., loans to + +On line 10306: + Mae shows that all three + categories of NTMs—subprime loans (i.e., + loans to borrowers + +On line 10306: + categories of NTMs—subprime + loans (i.e., loans to borrowers + with FICO scores less + +On line 10306: + of NTMs—subprime loans (i.e., loans + to borrowers with FICO + scores less than Alt-A loans + +On line 10306: + NTMs—subprime loans (i.e., loans to + borrowers with FICO scores + less than Alt-A loans and + +On line 10306: + loans to borrowers + with FICO scores less than Alt-A + loans and PMBS (called PLS + +On line 10306: + to borrowers with + FICO scores less than Alt-A loans + and PMBS (called PLS for + +On line 10306: + with FICO scores less + than Alt-A loans and PMBS (called PLS + for "Private Label + +On line 10306: + than Alt-A loans and PMBS + (called PLS for "Private Label + Securities" in + +On line 10308: + (called PLS for "Private + Label Securities" in + the table)— fulfi + +On line 10308: + Securities" in + the table)— fulfi lled the + AH goals or subgoals + +On line 10308: + the table)— fulfi + lled the AH goals or subgoals + for the years and in + +On line 10308: + table)— fulfi lled + the AH goals or subgoals for + the years and in the + +On line 10308: + lled the AH goals or + subgoals for the years and in + the percentages shown + +On line 10310: + or subgoals for the + years and in the percentages + shown below. (Bolded + +On line 10310: + goal.) Table also + shows, signifi cantly, that the + gradual increase + +On line 10310: + also shows, signifi + cantly, that the gradual + increase in Fannie’s + +On line 10310: + signifi cantly, that + the gradual increase in + Fannie’s purchases + +On line 10310: + NTMs closely followed + the gradual increase in + the goals between and + +On line 10312: + closely followed the + gradual increase in the + goals between and Neil + +On line 10312: + gradual increase + in the goals between and Neil + Morse, "Looking for New + +On line 10312: + Neil Morse, "Looking for + New Customers," Mortgage Banking, + December It may + +On line 10312: + New Customers," Mortgage + Banking, December It may + be signifi cant that + +On line 10312: + be signifi cant that + the chairman of Freddie Mac + at the time, Leland + +On line 10312: + cant that the chairman + of Freddie Mac at the time, + Leland Brendsel, did + +On line 10312: + of Freddie Mac at + the time, Leland Brendsel, did + not attend the press + +On line 10312: + at the time, Leland + Brendsel, did not attend the + press conference or + +On line 10312: + not attend the press + conference or pledge support + for HUD’s new goals. Raines + +On line 10312: + conference or pledge + support for HUD’s new goals. Raines + must have forgotten + +On line 10312: + HUD’s new goals. Raines must + have forgotten his pledge to + Secretary Cuomo + +On line 10312: + have forgotten his + pledge to Secretary Cuomo + and his speech to the + +On line 10312: + pledge to Secretary + Cuomo and his speech to the + mortgage bankers when he + +On line 10312: + Secretary Cuomo + and his speech to the mortgage + bankers when he wrote in + +On line 10312: + Cuomo and his speech + to the mortgage bankers when he + wrote in a letter + +On line 10312: + and his speech to the + mortgage bankers when he wrote in + a letter to Th + +On line 10312: + to the mortgage bankers + when he wrote in a letter + to Th e Wall Street + +On line 10312: + mortgage bankers when he + wrote in a letter to Th + e Wall Street Journal + +On line 10312: + when he wrote in a + letter to Th e Wall Street + Journal on August + +On line 10316: + wrote in a letter + to Th e Wall Street Journal + on August "Th e + +On line 10316: + in a letter to + Th e Wall Street Journal on + August "Th e facts + +On line 10316: + letter to Th e + Wall Street Journal on August + "Th e facts about the + +On line 10316: + Wall Street Journal on + August "Th e facts about the + fi nancial collapse + +On line 10316: + fi nancial collapse + of Fannie and Freddie are + pretty clear and a + +On line 10316: + collapse of Fannie + and Freddie are pretty clear + and a matter of + +On line 10318: + are pretty clear and + a matter of public record. + Th e company + +On line 10318: + of public record. Th + e company managers, their + regulator and + +On line 10318: + Th e company + managers, their regulator + and the Treasury have + +On line 10318: + company managers, + their regulator and the + Treasury have all said + +On line 10318: + their regulator + and the Treasury have all said + that the losses which + +On line 10318: + Treasury have all said + that the losses which crippled + the companies were + +On line 10318: + that the losses which + crippled the companies were + caused by the purchase + +On line 10318: + losses which crippled + the companies were caused by + the purchase of loans + +On line 10318: + the companies were + caused by the purchase of loans + with lower credit + +On line 10318: + caused by the purchase + of loans with lower credit + standards between and + +On line 10320: + the purchase of loans + with lower credit standards + between and Th e + +On line 10320: + of loans with lower + credit standards between and + Th e companies + +On line 10320: + credit standards in + order to regain market + share aft er Wall Street + +On line 10320: + standards in order + to regain market share aft + er Wall Street began + +On line 10320: + order to regain + market share aft er Wall Street + began to defi + +On line 10320: + regain market share + aft er Wall Street began to + defi ne market + +On line 10320: + market share aft er + Wall Street began to defi + ne market credit + +On line 10324: + credit standards in + Dissenting Statement Table + Nontraditional + +On line 10324: + Dissenting Statement + Table Nontraditional + Mortgages and the Aff + +On line 10326: + Nontraditional + Mortgages and the Aff ordable + Housing Goals Year Low + +On line 10328: + Mortgages and the Aff + ordable Housing Goals Year Low + Moderate Special + +On line 10340: + ordable Underserved + Income Base Goal Base Goal Base + Goal Actual* Goal + +On line 10348: + Goal Base Goal Base Goal + Actual* Goal Actual* + Goal Actual* Goal + +On line 10534: + Goal Actual* Goal + Actual* Goal Credit Score + Originations Alt-A + +On line 10534: + Goal Actual* Goal + Credit Score Originations + Alt-A Originations + +On line 10750: + Score Originations + Alt-A Originations PLS Backed + by Subprime of unit + +On line 10750: + Originations Alt-A + Originations PLS Backed by + Subprime of unit fi + +On line 10750: + Originations PLS + Backed by Subprime of unit fi + nanced that qualifi + +On line 10752: + Backed by Subprime of + unit fi nanced that qualifi + ed for base goals. Not + +On line 10752: + of unit fi nanced that + qualifi ed for base goals. + Not included in + +On line 10752: + qualifi ed for + base goals. Not included in + housing goals scoring + +On line 10754: + ed for base goals. Not + included in housing goals + scoring in Table + +On line 10754: + goals. Not included + in housing goals scoring in + Table also shows + +On line 10754: + housing goals scoring + in Table also shows that + ordinary subprime + +On line 10754: + scoring in Table + also shows that ordinary + subprime loans, Alt-A loans + +On line 10754: + in Table also + shows that ordinary subprime + loans, Alt-A loans and PMBS + +On line 10756: + Table also shows + that ordinary subprime loans, + Alt-A loans and PMBS backed + +On line 10756: + shows that ordinary + subprime loans, Alt-A loans and PMBS + backed by subprime loans + +On line 10756: + ordinary subprime + loans, Alt-A loans and PMBS backed by + subprime loans were not + +On line 10758: + loans, Alt-A loans and PMBS + backed by subprime loans were not + always suffi cient + +On line 10758: + loans and PMBS backed by + subprime loans were not always + suffi cient to meet + +On line 10758: + PMBS backed by subprime + loans were not always suffi + cient to meet the AH + +On line 10758: + backed by subprime loans + were not always suffi cient + to meet the AH goals. + +On line 10758: + by subprime loans were + not always suffi cient to + meet the AH goals. For + +On line 10760: + loans were not always + suffi cient to meet the AH + goals. For Fannie Mae, + +On line 10760: + suffi cient to meet + the AH goals. For Fannie Mae, + disk produced for FCIC, + +On line 10760: + meet the AH goals. For + Fannie Mae, disk produced for + FCIC, April Th roughout + +On line 10760: + produced for FCIC, April + Th roughout this analysis, + I have not discussed + +On line 10762: + I have not discussed + the GSEs’ compliance with the + "Underserved Base Goal," + +On line 10762: + the GSEs’ compliance + with the "Underserved Base Goal," + which is included + +On line 10762: + GSEs’ compliance with + the "Underserved Base Goal," which + is included in + +On line 10762: + compliance with the + "Underserved Base Goal," which is + included in this + +On line 10762: + with the "Underserved + Base Goal," which is included + in this table. Th + +On line 10762: + the "Underserved Base + Goal," which is included in + this table. Th e + +On line 10764: + Goal applied mostly + to minorities and involved + a diff erent set + +On line 10764: + applied mostly to + minorities and involved a + diff erent set of + +On line 10764: + a diff erent set + of lending decisions than + the LMI goal and the + +On line 10768: + decisions than the + LMI goal and the Special Aff + ordable Goal. Peter + +On line 10770: + Special Aff ordable + Goal. Peter J. Wallison + this reason, Fannie + +On line 10770: + ordable Goal. Peter + J. Wallison this reason, + Fannie developed + +On line 10770: + J. Wallison this + reason, Fannie developed + special categories + +On line 10770: + Fannie developed + special categories of loans + in which the fi rm + +On line 10770: + developed special + categories of loans in which + the fi rm waived some + +On line 10770: + categories of loans + in which the fi rm waived some + of its regular + +On line 10770: + to supplement what + they were getting from higher + quality NTMs. Th + +On line 10772: + they were getting from + higher quality NTMs. Th + e two principal + +On line 10772: + higher quality + NTMs. Th e two principal + categories were My + +On line 10774: + My Community + Mortgage (MCM) and Expanded + Approval (EA). In many + +On line 10774: + (MCM) and Expanded + Approval (EA). In many cases, + these two categories + +On line 10774: + Expanded Approval + (EA). In many cases, these two + categories enabled + +On line 10774: + Approval (EA). In many + cases, these two categories + enabled Fannie to + +On line 10774: + (EA). In many cases, + these two categories enabled + Fannie to meet the + +On line 10774: + many cases, these two + categories enabled Fannie + to meet the AH goals, + +On line 10774: + these two categories + enabled Fannie to meet the + AH goals, but at the + +On line 10774: + categories enabled + Fannie to meet the AH goals, + but at the cost of + +On line 10774: + enabled Fannie to + meet the AH goals, but at the + cost of much higher + +On line 10774: + meet the AH goals, but + at the cost of much higher + delinquency rates than + +On line 10774: + goals, but at the cost + of much higher delinquency + rates than occurred among + +On line 10774: + at the cost of much + higher delinquency rates than + occurred among higher + +On line 10774: + higher delinquency + rates than occurred among higher + quality NTMs they + +On line 10774: + rates than occurred among + higher quality NTMs they + acquired. As the years + +On line 10774: + occurred among higher + quality NTMs they acquired. + As the years progressed + +On line 10774: + higher quality + NTMs they acquired. As the years + progressed and the AH + +On line 10774: + NTMs they acquired. As + the years progressed and the AH + goals increased, Fannie + +On line 10774: + they acquired. As the + years progressed and the AH goals + increased, Fannie had + +On line 10774: + progressed and the AH + goals increased, Fannie had to + acquire increasing + +On line 10774: + goals increased, Fannie + had to acquire increasing + numbers of loans in + +On line 10774: + in these categories, + and as shown in Table these + increasing numbers + +On line 10776: + Loans Produced Higher + Delinquency Rates at Fannie + Mae Goals by Vintage + +On line 10780: + Delinquency Rates at + Fannie Mae Goals by Vintage + Loan Count Serious + +On line 10784: + Goals by Vintage Loan + Count Serious Delinquency + Rate Prior EA/MCM + +On line 10800: + Rate Prior EA/MCM + Housing Goals EA/MCM Housing + Goals EA/MCM Housing + +On line 10808: + EA/MCM Housing Goals + EA/MCM Housing Goals EA/MCM + Housing Goals EA/MCM + +On line 10808: + Housing Goals EA/MCM + Housing Goals EA/MCM Housing + Goals EA/MCM Housing + +On line 10814: + EA/MCM Housing Goals + EA/MCM Housing Goals EA/MCM + Housing Goals Just how + +On line 10814: + EA/MCM Housing Goals + EA/MCM Housing Goals Just how + desperate Fannie + +On line 10814: + EA/MCM Housing Goals + Just how desperate Fannie + and Freddie were to + +On line 10814: + Just how desperate + Fannie and Freddie were to + meet their AH goals is + +On line 10814: + desperate Fannie + and Freddie were to meet their + AH goals is revealed + +On line 10814: + Fannie and Freddie + were to meet their AH goals is + revealed by Fannie’s + +On line 10814: + Freddie were to meet + their AH goals is revealed by + Fannie’s behavior + +On line 10814: + were to meet their AH + goals is revealed by Fannie’s + behavior in As + +On line 10814: + AH goals is revealed + by Fannie’s behavior in + As reported in + +On line 10814: + goals is revealed by + Fannie’s behavior in As + reported in the + +On line 10814: + Fannie’s behavior + in As reported in the + American Banker on + +On line 10816: + As reported in + the American Banker on May + "A House Financial + +On line 10816: + the American Banker + on May "A House Financial + Services Committee + +On line 10816: + "A House Financial + Services Committee report + shared with lawmakers + +On line 10818: + Services Committee + report shared with lawmakers + Th ursday accused + +On line 10818: + shared with lawmakers + Th ursday accused Fannie + Mae and Freddie Mac + +On line 10818: + with lawmakers Th + ursday accused Fannie Mae + and Freddie Mac of + +On line 10818: + Th ursday accused + Fannie Mae and Freddie Mac + of engaging over + +On line 10818: + and Freddie Mac of + engaging over several + years in a series + +On line 10818: + several years in + a series of dubious + transactions to meet + +On line 10818: + transactions to meet + their aff ordable-housing goals…Th + e report cited + +On line 10820: + e report cited + several large transactions + entered into by + +On line 10820: + under which sellers + were allowed to repurchase + loans without recourse. + +On line 10820: + without recourse. For + example, it said that in + September Fannie + +On line 10820: + example, it said + that in September Fannie + bought the option to + +On line 10820: + that in September + Fannie bought the option to + buy up to billion + +On line 10820: + up to billion of + multifamily mortgage + loans from Washington + +On line 10820: + multifamily + mortgage loans from Washington + Mutual, Inc., for + +On line 10820: + million, the report + said. Under the agreement, the + GSE permitted WaMu + +On line 10820: + Under the agreement, + the GSE permitted WaMu to + repurchase the loans…’ + +On line 10820: + the GSE permitted + WaMu to repurchase the loans…’ + Th is was the largest + +On line 10822: + WaMu to repurchase + the loans…’ Th is was the largest + multifamily + +On line 10822: + the loans…’ Th is was + the largest multifamily + transaction ever + +On line 10822: + by Fannie Mae and + was critical for Fannie + Mae to reach the aff + +On line 10822: + and was critical + for Fannie Mae to reach the + aff ordable-housing + +On line 10822: + was critical for + Fannie Mae to reach the aff + ordable-housing goals, + +On line 10822: + for Fannie Mae to + reach the aff ordable-housing + goals, the report said."102 + +On line 10824: + Fannie Mae to reach + the aff ordable-housing goals, + the report said."102 A + +On line 10824: + of what happened here + is contained in WaMu’s 10-K for + Freddie had engaged + +On line 10824: + is contained in WaMu’s + 10-K for Freddie had engaged + in a similar + +On line 10824: + contained in WaMu’s 10-K + for Freddie had engaged in + a similar but + +On line 10824: + in a similar + but larger transaction with + WaMu in reported + +On line 10824: + a similar but + larger transaction with WaMu + in reported as + +On line 10824: + larger transaction + with WaMu in reported as + follows in WaMu’s 10-K + +On line 10824: + transaction with WaMu + in reported as follows + in WaMu’s 10-K dated + +On line 10824: + in reported as + follows in WaMu’s 10-K dated + December Other + +On line 10824: + income increased in + compared with partially due + to fees paid to the + +On line 10824: + due to fees paid to + the Company [WaMu] by the + Federal Home Loan + +On line 10824: + the Federal Home + Loan Mortgage Corporation + ("FHLMC" or Freddie Mac"). + +On line 10824: + Federal Home Loan + Mortgage Corporation ("FHLMC" + or Freddie Mac"). Th + +On line 10826: + Freddie Mac"). Th e + Company received million + in nonrefundable + +On line 10828: + Company received + million in nonrefundable + fees to induce the + +On line 10828: + of the benefi cial + interest in those loans in + the form of mortgage-backed + +On line 10828: + those loans in the form + of mortgage-backed securities + issued by Freddie + +On line 10828: + the form of mortgage-backed + securities issued by + Freddie Mac. Since the + +On line 10828: + issued by Freddie + Mac. Since the Company has + the unilateral + +On line 10828: + right to collapse the + securities aft er one + year, the Company + +On line 10828: + securities aft + er one year, the Company + has eff ectively + +On line 10828: + year, the Company + has eff ectively retained + control over the loans. + +On line 10828: + has eff ectively + retained control over the loans. + Accordingly, the + +On line 10828: + retained control over + the loans. Accordingly, the + assets continue + +On line 10828: + control over the loans. + Accordingly, the assets + continue to be + +On line 10828: + loans. Accordingly, + the assets continue to + be accounted for + +On line 10828: + Accordingly, the + assets continue to be + accounted for and + +On line 10828: + assets continue + to be accounted for and + reported as loans. + +On line 10830: + to be accounted + for and reported as loans. + Th is transaction + +On line 10830: + be accounted for + and reported as loans. Th + is transaction was + +On line 10830: + for and reported + as loans. Th is transaction + was undertaken + +On line 10830: + and reported as + loans. Th is transaction was + undertaken by + +On line 10830: + is transaction was + undertaken by Freddie + Mac in order to + +On line 10830: + was undertaken + by Freddie Mac in order + to facilitate + +On line 10830: + by Freddie Mac in + order to facilitate + fulfi lling its aff + +On line 10830: + to facilitate + fulfi lling its aff ordable + housing goals as set + +On line 10830: + fulfi lling its aff + ordable housing goals as set + by the Department + +On line 10832: + and Freddie were both + paying holders of mortgages + to temporarily + +On line 10832: + holders of mortgages + to temporarily transfer + to them possession + +On line 10832: + to temporarily + transfer to them possession + of goal-qualifying + +On line 10832: + to them possession + of goal-qualifying loans that + the GSEs could use to + +On line 10832: + of goal-qualifying + loans that the GSEs could use to + satisfy the AH + +On line 10832: + loans that the GSEs could + use to satisfy the AH + goals for the year Aft + +On line 10832: + that the GSEs could use + to satisfy the AH goals + for the year Aft er + +On line 10832: + the GSEs could use to + satisfy the AH goals for + the year Aft er the + +On line 10832: + use to satisfy + the AH goals for the year Aft + er the end of the + +On line 10832: + to satisfy the + AH goals for the year Aft er + the end of the year, + +On line 10832: + satisfy the AH + goals for the year Aft er the + end of the year, the + +On line 10832: + the AH goals for the + year Aft er the end of the + year, the seller had + +On line 10832: + AH goals for the year + Aft er the end of the year, + the seller had an + +On line 10832: + the year Aft er the + end of the year, the seller + had an Fannie Mae, + +On line 10832: + year Aft er the end + of the year, the seller had + an Fannie Mae, "GSE + +On line 10832: + end of the year, the + seller had an Fannie Mae, + "GSE Credit Losses," + +On line 10834: + to House Financial + Services Committee, April Rob + Blackwell, "Two GSEs Cut + +On line 10834: + Financial Services + Committee, April Rob Blackwell, + "Two GSEs Cut Corners + +On line 10834: + Services Committee, + April Rob Blackwell, "Two GSEs Cut + Corners to Hit Goals, + +On line 10834: + Committee, April Rob + Blackwell, "Two GSEs Cut Corners + to Hit Goals, Report + +On line 10834: + Blackwell, "Two GSEs Cut + Corners to Hit Goals, Report + Says," American Banker, + +On line 10840: + Corners to Hit Goals, + Report Says," American Banker, + May p.1. Dissenting + +On line 10840: + to Hit Goals, Report + Says," American Banker, May p.1. + Dissenting Statement + +On line 10842: + Says," American Banker, + May p.1. Dissenting Statement + absolute right to + +On line 10842: + May p.1. Dissenting + Statement absolute right to + reacquire these loans. Th + +On line 10844: + Dissenting Statement + absolute right to reacquire + these loans. Th ere can + +On line 10844: + Statement absolute + right to reacquire these loans. Th + ere can be little + +On line 10844: + absolute right to + reacquire these loans. Th ere can + be little doubt, then, + +On line 10844: + to reacquire these loans. + Th ere can be little doubt, + then, that as early + +On line 10846: + reacquire these loans. Th + ere can be little doubt, then, + that as early as + +On line 10846: + these loans. Th ere can + be little doubt, then, that as + early as Fannie + +On line 10846: + ere can be little + doubt, then, that as early as + Fannie and Freddie + +On line 10846: + little doubt, then, that + as early as Fannie and + Freddie were under + +On line 10846: + early as Fannie + and Freddie were under so + much pressure to fi + +On line 10846: + much pressure to fi + nd the subprime or other + loans that they needed + +On line 10846: + pressure to fi nd + the subprime or other loans + that they needed to + +On line 10846: + that they needed to + meet their aff ordable housing + obligations that they + +On line 10846: + meet their aff ordable + housing obligations that they + were willing to pay + +On line 10846: + housing obligations + that they were willing to pay + substantial sums to + +On line 10848: + substantial sums to + window-dress their reports to + HUD. The Affordable + +On line 10850: + their reports to HUD. + The Affordable Housing Goals + were the Sole Reason + +On line 10850: + reports to HUD. The + Affordable Housing Goals were + the Sole Reason That + +On line 10850: + Affordable Housing + Goals were the Sole Reason That + the GSEs’ Acquired So + +On line 10852: + were the Sole Reason + That the GSEs’ Acquired So Many + NTMs Up to this point, + +On line 10852: + the Sole Reason That + the GSEs’ Acquired So Many NTMs + Up to this point, we + +On line 10852: + Sole Reason That the + GSEs’ Acquired So Many NTMs Up + to this point, we have + +On line 10852: + Reason That the GSEs’ + Acquired So Many NTMs Up to + this point, we have seen + +On line 10852: + That the GSEs’ Acquired + So Many NTMs Up to this point, + we have seen that HUD’s + +On line 10852: + Acquired So Many NTMs + Up to this point, we have seen + that HUD’s policy + +On line 10852: + So Many NTMs Up to + this point, we have seen that HUD’s + policy was to + +On line 10852: + HUD’s policy was + to reduce underwriting + standards in order + +On line 10852: + standards in order + to make mortgage credit more + readily available + +On line 10852: + make mortgage credit + more readily available to + low-income borrowers, + +On line 10852: + low-income borrowers, + and that Fannie and Freddie + not only took the + +On line 10852: + Fannie and Freddie + not only took the AH goals + seriously but + +On line 10852: + not only took the + AH goals seriously but + were willing to go + +On line 10852: + only took the AH + goals seriously but were + willing to go to + +On line 10852: + goals seriously + but were willing to go to + extraordinary + +On line 10852: + but were willing to + go to extraordinary + lengths to make sure that + +On line 10852: + were willing to go + to extraordinary lengths + to make sure that they + +On line 10852: + willing to go to + extraordinary lengths to + make sure that they met + +On line 10854: + extraordinary + lengths to make sure that they met + them. Nevertheless, + +On line 10854: + to make sure that they + met them. Nevertheless, it + seems to have become + +On line 10854: + make sure that they met + them. Nevertheless, it seems + to have become an + +On line 10854: + them. Nevertheless, + it seems to have become an + accepted idea in + +On line 10856: + seems to have become + an accepted idea in some + quarters— including + +On line 10856: + an accepted idea + in some quarters— including + in the Commission + +On line 10856: + including in the + Commission majority’s + report—that Fannie + +On line 10856: + in the Commission + majority’s report—that + Fannie and Freddie + +On line 10856: + report—that Fannie + and Freddie bought large numbers + of subprime and Alt-A + +On line 10856: + Fannie and Freddie + bought large numbers of subprime + and Alt-A loans between + +On line 10856: + and Freddie bought large + numbers of subprime and Alt-A + loans between and in + +On line 10856: + bought large numbers of + subprime and Alt-A loans between + and in order to + +On line 10856: + of subprime and Alt-A + loans between and in order + to recover the + +On line 10856: + Alt-A loans between and + in order to recover + the market share they + +On line 10856: + loans between and in + order to recover the + market share they had + +On line 10856: + to recover the + market share they had lost to + subprime lenders such as + +On line 10856: + the market share they + had lost to subprime lenders such + as Countrywide or + +On line 10856: + market share they had + lost to subprime lenders such as + Countrywide or Wall + +On line 10856: + had lost to subprime + lenders such as Countrywide or + Wall Street, or to make + +On line 10856: + lost to subprime lenders + such as Countrywide or Wall + Street, or to make profi + +On line 10856: + to subprime lenders such + as Countrywide or Wall Street, + or to make profi ts. + +On line 10856: + such as Countrywide + or Wall Street, or to make profi + ts. Although there is + +On line 10856: + as Countrywide or + Wall Street, or to make profi ts. + Although there is no + +On line 10856: + ts. Although there is + no evidence whatever + for this belief—and a + +On line 10856: + Although there is no + evidence whatever for + this belief—and a great + +On line 10856: + for this belief—and a + great deal of evidence to + the contrary—it has + +On line 10856: + of evidence to + the contrary—it has become + another urban + +On line 10856: + the contrary—it has + become another urban + myth, repeated so + +On line 10856: + become another + urban myth, repeated so + oft en in books, blogs + +On line 10856: + repeated so oft + en in books, blogs and other + media that it has + +On line 10856: + so oft en in books, + blogs and other media that + it has attained a + +On line 10856: + oft en in books, blogs + and other media that it + has attained a kind + +On line 10856: + en in books, blogs and + other media that it has + attained a kind of + +On line 10856: + and other media + that it has attained a kind + of reality.103 + +On line 10858: + other media that + it has attained a kind of + reality.103 Th + +On line 10860: + it has attained a + kind of reality.103 Th + e formulations + +On line 10860: + has attained a kind + of reality.103 Th e + formulations of + +On line 10860: + of reality.103 + Th e formulations of + the idea vary a bit. + +On line 10860: + reality.103 Th + e formulations of the + idea vary a bit. As + +On line 10860: + e formulations + of the idea vary a bit. As + noted earlier, + +On line 10862: + the idea vary a bit. + As noted earlier, HUD + has claimed— absurdly, + +On line 10862: + idea vary a bit. As + noted earlier, HUD has + claimed— absurdly, in + +On line 10862: + earlier, HUD has + claimed— absurdly, in light of + its earlier eff + +On line 10862: + has claimed— absurdly, + in light of its earlier + eff orts to reduce + +On line 10862: + absurdly, in light + of its earlier eff orts + to reduce mortgage + +On line 10864: + to reduce mortgage + underwriting standards— that + the GSEs were "chasing + +On line 10864: + GSEs were "chasing the + nonprime market" or "chasing + market share and profi + +On line 10864: + nonprime market" or + "chasing market share and profi + ts," principally + +On line 10866: + "chasing market share + and profi ts," principally + between and Th e + +On line 10868: + this is another + example of private greed + doing harm, but it + +On line 10870: + private greed doing + harm, but it is clear that HUD + was simply trying + +On line 10870: + doing harm, but it + is clear that HUD was simply + trying to evade its + +On line 10870: + trying to evade its + own culpability for + using the AH goals + +On line 10870: + goals to degrade the + GSEs’ mortgage underwriting + standards over the year + +On line 10872: + between and Th e + Commission majority + also adopted a + +On line 10872: + also adopted a + version of this idea in its + report, blaming the + +On line 10872: + a version of this + idea in its report, blaming + the GSEs’ loosening + +On line 10872: + version of this idea + in its report, blaming the + GSEs’ loosening of + +On line 10872: + GSEs’ loosening of + their underwriting standards + on a desire to + +On line 10872: + loosening of their + underwriting standards on + a desire to please + +On line 10872: + on a desire to + please stock market analysts + and investors, as well + +On line 10872: + a desire to please + stock market analysts and + investors, as well as + +On line 10872: + to please stock market + analysts and investors, as + well as to increase + +On line 10872: + market analysts + and investors, as well as to + increase management + +On line 10872: + and investors, as well + as to increase management + compensation. None + +On line 10872: + well as to increase + management compensation. + None of HUD’s statements + +On line 10872: + increase management + compensation. None of HUD’s + statements about its eff + +On line 10872: + make it into the + Commission majority’s + report, which relied + +On line 10872: + on the idea that the + GSEs’ underwriting standards + were reduced by their + +On line 10872: + GSEs’ underwriting + standards were reduced by their + desire to "follow + +On line 10872: + standards were reduced + by their desire to "follow + Wall Street and other + +On line 10872: + were reduced by their + desire to "follow Wall Street + and other lenders in + +On line 10872: + by their desire to + "follow Wall Street and other + lenders in [the] rush for + +On line 10872: + desire to "follow + Wall Street and other lenders in + [the] rush for fool’s gold." + +On line 10874: + to "follow Wall Street + and other lenders in [the] rush + for fool’s gold." Th ese + +On line 10874: + "follow Wall Street and + other lenders in [the] rush for + fool’s gold." Th ese claims + +On line 10874: + Wall Street and other + lenders in [the] rush for fool’s gold." + Th ese claims place the + +On line 10874: + Street and other lenders + in [the] rush for fool’s gold." Th + ese claims place the blame + +On line 10874: + and other lenders in + [the] rush for fool’s gold." Th ese + claims place the blame for + +On line 10874: + lenders in [the] rush for + fool’s gold." Th ese claims place the + blame for Fannie and + +On line 10874: + [the] rush for fool’s gold." + Th ese claims place the blame for + Fannie and Freddie’s + +On line 10874: + Th ese claims place the + blame for Fannie and Freddie’s + insolvency—and the + +On line 10874: + the blame for Fannie + and Freddie’s insolvency—and + the huge number of + +On line 10874: + blame for Fannie and + Freddie’s insolvency—and the + huge number of low + +On line 10874: + the huge number of + low quality mortgages in + the U.S. fi nancial + +On line 10874: + the U.S. fi nancial + system immediately + prior to the fi + +On line 10874: + fi nancial system + immediately prior + to the fi nancial + +On line 10874: + immediately + prior to the fi nancial + crisis—on the fi + +On line 10874: + prior to the fi + nancial crisis—on the fi + rms’ managements. Th + +On line 10876: + rms’ managements. Th + ey absolve the government, + particularly + +On line 10880: + e GSEs’ managements + made plenty of mistakes—and + won’t be defended + +On line 10880: + mistakes—and won’t be + defended here—but taking + risks to compete for + +On line 10880: + defended here—but + taking risks to compete for + market share was not + +On line 10880: + here—but taking risks + to compete for market share + was not something they + +On line 10880: + risks to compete for + market share was not something + they actually + +On line 10880: + market share was not + something they actually + did. Because of the + +On line 10880: + they actually + did. Because of the AH goals, + Fannie and See, e.g., + +On line 10880: + did. Because of the + AH goals, Fannie and See, e.g., + Barry Ritholtz, "Get Me + +On line 10880: + AH goals, Fannie and + See, e.g., Barry Ritholtz, "Get Me + ReWrite!" in Bailout Nation, + +On line 10880: + goals, Fannie and See, + e.g., Barry Ritholtz, "Get Me ReWrite!" + in Bailout Nation, Bailouts, + +On line 10880: + See, e.g., Barry Ritholtz, + "Get Me ReWrite!" in Bailout Nation, + Bailouts, Credit, Real + +On line 10880: + "Get Me ReWrite!" in Bailout + Nation, Bailouts, Credit, Real + Estate, Really, + +On line 10880: + Nation, Bailouts, Credit, + Real Estate, Really, + Really Bad Calls, + +On line 10880: + Believe that Fannie + and Freddie Caused the Crash" Beat + the Press Blog, Center + +On line 10880: + and Freddie Caused the + Crash" Beat the Press Blog, Center + for Economic and + +On line 10880: + Crash" Beat the Press Blog, + Center for Economic and + Policy Research + +On line 10892: + Wallison Freddie + were major buyers of NTMs + well before Wall Street + +On line 10892: + Freddie were major + buyers of NTMs well before + Wall Street fi rms and + +On line 10892: + major buyers of + NTMs well before Wall Street fi + rms and the subprime + +On line 10892: + buyers of NTMs well + before Wall Street fi rms and + the subprime lenders who + +On line 10892: + before Wall Street fi + rms and the subprime lenders who + came to dominate + +On line 10892: + rms and the subprime + lenders who came to dominate + the business entered + +On line 10892: + and the subprime lenders + who came to dominate the + business entered the + +On line 10892: + subprime lenders who came + to dominate the business + entered the subprime + +On line 10892: + to dominate the + business entered the subprime + PMBS market in any + +On line 10892: + the business entered + the subprime PMBS market in + any signifi cant way. + +On line 10892: + entered the subprime + PMBS market in any signifi + cant way. Moreover, the + +On line 10892: + PMBS market in any + signifi cant way. Moreover, the + GSEs did not (indeed, + +On line 10892: + did not (indeed, could + not) appreciably increase + their purchases of + +On line 10892: + not (indeed, could not) + appreciably increase their + purchases of NTMs + +On line 10892: + not) appreciably + increase their purchases of + NTMs during the years + +On line 10892: + their purchases of + NTMs during the years and when + they had lost market + +On line 10892: + purchases of NTMs + during the years and when they + had lost market share + +On line 10892: + NTMs during the years + and when they had lost market + share to the real + +On line 10892: + during the years and + when they had lost market share + to the real PMBS + +On line 10892: + the years and when they + had lost market share to the + real PMBS issuers, + +On line 10892: + share to the real + PMBS issuers, Countrywide and + other subprime lenders. + +On line 10896: + Th e following + discussion addresses each + of the claims about the + +On line 10898: + addresses each of + the claims about the GSEs’ motives + in turn, and in the + +On line 10898: + each of the claims about + the GSEs’ motives in turn, and + in the end will show + +On line 10898: + of the claims about the + GSEs’ motives in turn, and in + the end will show that + +On line 10898: + the claims about the GSEs’ + motives in turn, and in the + end will show that the + +On line 10898: + about the GSEs’ motives + in turn, and in the end will + show that the only + +On line 10898: + motives in turn, and + in the end will show that the + only plausible + +On line 10898: + in turn, and in the + end will show that the only + plausible motive + +On line 10898: + end will show that the + only plausible motive + for their actions was + +On line 10898: + show that the only + plausible motive for their + actions was their eff + +On line 10898: + plausible motive + for their actions was their eff + ort to comply with + +On line 10900: + for their actions was + their eff ort to comply with + HUD’s AH goals. Did the + +On line 10900: + their actions was their + eff ort to comply with HUD’s + AH goals. Did the GSEs + +On line 10900: + was their eff ort to + comply with HUD’s AH goals. Did + the GSEs acquire NTMs + +On line 10900: + to comply with HUD’s + AH goals. Did the GSEs acquire + NTMs to "compete for + +On line 10900: + HUD’s AH goals. Did the + GSEs acquire NTMs to "compete + for market share" with + +On line 10900: + AH goals. Did the GSEs + acquire NTMs to "compete for + market share" with Wall + +On line 10900: + Did the GSEs acquire + NTMs to "compete for market + share" with Wall Street or + +On line 10900: + GSEs acquire NTMs to + "compete for market share" with + Wall Street or others1 + +On line 10904: + NTMs to "compete for + market share" with Wall Street or + others1 Th e idea + +On line 10904: + for market share" with + Wall Street or others1 Th e + idea that Fannie and + +On line 10904: + or others1 Th e + idea that Fannie and Freddie + were newcomers to + +On line 10904: + others1 Th e idea + that Fannie and Freddie were + newcomers to the + +On line 10904: + e idea that Fannie + and Freddie were newcomers + to the purchase of + +On line 10904: + idea that Fannie and + Freddie were newcomers to + the purchase of NTMs + +On line 10904: + were newcomers to + the purchase of NTMs between + and and reduced their + +On line 10904: + to the purchase of + NTMs between and and reduced + their underwriting + +On line 10904: + NTMs between and and + reduced their underwriting + standards so they could + +On line 10904: + and and reduced their + underwriting standards so + they could compete for + +On line 10904: + their underwriting + standards so they could compete + for market share with + +On line 10904: + standards so they could + compete for market share with + Wall Street or others, + +On line 10904: + so they could compete + for market share with Wall Street + or others, is wrong. + +On line 10904: + they could compete for + market share with Wall Street or + others, is wrong. As + +On line 10904: + compete for market + share with Wall Street or others, + is wrong. As shown in + +On line 10904: + for market share with + Wall Street or others, is wrong. + As shown in Table + +On line 10904: + market share with Wall + Street or others, is wrong. As + shown in Table the + +On line 10904: + Street or others, is + wrong. As shown in Table the + GSEs’ acquisition + +On line 10904: + or others, is wrong. + As shown in Table the GSEs’ + acquisition of + +On line 10904: + in Table the GSEs’ + acquisition of subprime + loans and other NTMs + +On line 10904: + GSEs’ acquisition + of subprime loans and other + NTMs began in the + +On line 10904: + acquisition of + subprime loans and other NTMs + began in the 1990s, + +On line 10904: + of subprime loans and + other NTMs began in the + 1990s, when they fi rst + +On line 10904: + other NTMs began + in the 1990s, when they fi rst + became subject to + +On line 10904: + NTMs began in the + 1990s, when they fi rst became + subject to the AH + +On line 10904: + in the 1990s, when they + fi rst became subject to + the AH goals. Research + +On line 10904: + the 1990s, when they fi + rst became subject to the + AH goals. Research shows + +On line 10904: + 1990s, when they fi rst + became subject to the AH + goals. Research shows that, + +On line 10904: + became subject to + the AH goals. Research shows that, + in contravention + +On line 10904: + the AH goals. Research + shows that, in contravention + of their earlier + +On line 10904: + goals. Research shows that, + in contravention of their + earlier standards, + +On line 10904: + in contravention + of their earlier standards, + the GSEs began to + +On line 10904: + earlier standards, + the GSEs began to acquire + high loan-to-value + +On line 10904: + high loan-to-value + (LTV) mortgages in shortly aft + er the enactment + +On line 10904: + loan-to-value (LTV) + mortgages in shortly aft er + the enactment of + +On line 10904: + mortgages in shortly + aft er the enactment of + the GSE Act and the + +On line 10904: + the GSE Act and the + imposition of the AH + goals, and by 2001—before + +On line 10904: + imposition of + the AH goals, and by 2001—before + the PMBS market reached + +On line 10904: + at least billion in + NTMs, including over billion + in subprime loans.104 Far + +On line 10904: + least billion in NTMs, + including over billion in + subprime loans.104 Far from + +On line 10904: + in NTMs, including + over billion in subprime loans.104 + Far from following + +On line 10904: + NTMs, including over + billion in subprime loans.104 Far + from following Wall + +On line 10904: + billion in subprime + loans.104 Far from following Wall + Street or anyone else + +On line 10904: + in subprime loans.104 Far + from following Wall Street or + anyone else into + +On line 10904: + from following Wall + Street or anyone else into + subprime loans between + +On line 10904: + anyone else into + subprime loans between and the + GSEs had become the + +On line 10904: + the GSEs had become + the largest buyers of subprime + and other NTMs many + +On line 10904: + GSEs had become the + largest buyers of subprime and + other NTMs many years + +On line 10904: + the largest buyers of + subprime and other NTMs many + years before the PMBS + +On line 10904: + subprime and other + NTMs many years before the PMBS + market began to + +On line 10904: + NTMs many years before + the PMBS market began to + develop. Given + +On line 10904: + PMBS market began + to develop. Given these + facts, it would be more + +On line 10904: + Given these facts, it + would be more accurate to + say that Wall Street and + +On line 10904: + facts, it would be more + accurate to say that Wall + Street and the subprime + +On line 10904: + accurate to say + that Wall Street and the subprime + lenders who later came + +On line 10904: + say that Wall Street and + the subprime lenders who later + came to dominate + +On line 10904: + that Wall Street and the + subprime lenders who later came + to dominate the + +On line 10904: + came to dominate + the PMBS market followed the + GSEs into subprime + +On line 10904: + market followed the + GSEs into subprime lending. + Table does not show + +On line 10904: + signifi cant increase + in the GSEs’ acquisition + of NTMs from to and + +On line 10904: + cant increase in the + GSEs’ acquisition of NTMs + from to and the amount + +On line 10904: + increase in the GSEs’ + acquisition of NTMs from + to and the amount of + +On line 10904: + GSEs’ acquisition + of NTMs from to and the amount + of subprime PMBS they + +On line 10904: + of NTMs from to and + the amount of subprime PMBS they + acquired during this + +On line 10904: + acquired during this + period actually + decreased. Th is is + +On line 10906: + decreased. Th is is + consistent with the fact—outlined + below—that the GSEs did + +On line 10906: + is is consistent + with the fact—outlined below—that the + GSEs did not make any + +On line 10906: + consistent with the + fact—outlined below—that the GSEs did + not make any special + +On line 10906: + fact—outlined below—that the + GSEs did not make any special + eff ort to compete + +On line 10906: + make any special eff + ort to compete for market + share during these years. + +On line 10908: + ort to compete for + market share during these years. + Pinto, "Government + +On line 10908: + compete for market + share during these years. Pinto, + "Government Housing + +On line 10908: + market share during + these years. Pinto, "Government + Housing Policies in + +On line 10908: + in the Lead-up to + the Financial Crisis: A + Forensic Study," Chart p.148, + +On line 10914: + to the Financial + Crisis: A Forensic Study," Chart + p.148, http://www.aei.org/docLib/Government-Housing-Policies-Financial-Crisis-Pinto-102110.pdf. Dissenting + +On line 10914: + Financial Crisis: + A Forensic Study," Chart p.148, http://www.aei.org/docLib/Government-Housing-Policies-Financial-Crisis-Pinto-102110.pdf. + Dissenting Statement + +On line 10916: + Crisis: A Forensic + Study," Chart p.148, http://www.aei.org/docLib/Government-Housing-Policies-Financial-Crisis-Pinto-102110.pdf. Dissenting + Statement Table GSE + +On line 10916: + Dissenting Statement + Table GSE Purchases of + Subprime and Alt-A loans + +On line 10916: + Statement Table GSE + Purchases of Subprime and + Alt-A loans in billions + +On line 10948: + of Subprime and Alt-A + loans in billions 1997-2007 Subprime + PMBS Subprime loans** Alt-A + +On line 10948: + Subprime and Alt-A loans + in billions 1997-2007 Subprime PMBS + Subprime loans** Alt-A PMBS + +On line 10950: + Alt-A loans in billions + 1997-2007 Subprime PMBS Subprime loans** + Alt-A PMBS Unk. Unk, Unk. + +On line 10950: + loans in billions 1997-2007 + Subprime PMBS Subprime loans** Alt-A + PMBS Unk. Unk, Unk. Unk. + +On line 10964: + billions 1997-2007 Subprime + PMBS Subprime loans** Alt-A PMBS Unk. + Unk, Unk. Unk. Unk. Alt-A + +On line 10964: + Subprime PMBS Subprime + loans** Alt-A PMBS Unk. Unk, Unk. Unk. + Unk. Alt-A loans*** Unk. Unk, + +On line 10964: + PMBS Subprime loans** Alt-A + PMBS Unk. Unk, Unk. Unk. Unk. Alt-A + loans*** Unk. Unk, Unk. Unk. + +On line 10964: + Subprime loans** Alt-A PMBS + Unk. Unk, Unk. Unk. Unk. Alt-A loans*** + Unk. Unk, Unk. Unk. Unk. + +On line 10974: + loans** Alt-A PMBS Unk. Unk, + Unk. Unk. Unk. Alt-A loans*** Unk. Unk, + Unk. Unk. Unk. High LTV + +On line 10990: + Alt-A PMBS Unk. Unk, Unk. + Unk. Unk. Alt-A loans*** Unk. Unk, Unk. + Unk. Unk. High LTV loans**** + +On line 10992: + Unk. Unk, Unk. Unk. Unk. + Alt-A loans*** Unk. Unk, Unk. Unk. Unk. + High LTV loans**** Total***** + +On line 10998: + Unk. Unk. Unk. Alt-A loans*** + Unk. Unk, Unk. Unk. Unk. High LTV + loans**** Total***** *Total + +On line 10998: + Alt-A loans*** Unk. Unk, Unk. + Unk. Unk. High LTV loans**** Total***** + *Total purchases + +On line 10998: + Unk. Unk, Unk. Unk. Unk. + High LTV loans**** Total***** *Total + purchases of PMBS + +On line 10998: + Unk. Unk. High LTV loans**** + Total***** *Total purchases + of PMBS for 1997-2001 are + +On line 10998: + 1997-2001 are known. Subprime + purchases for these years were + estimated based + +On line 11000: + constituted of + total PMBS purchases in + **Loans where borrower’s + +On line 11002: + PMBS purchases in + **Loans where borrower’s FICO + Fannie and Freddie + +On line 11002: + **Loans where borrower’s + FICO Fannie and Freddie + used their various + +On line 11002: + FICO Fannie and + Freddie used their various + aff ordable housing + +On line 11002: + their various aff + ordable housing programs and + individual + +On line 11002: + individual + lender variance programs (many times + in conjunction with + +On line 11002: + lender variance programs + (many times in conjunction with + their automated + +On line 11002: + systems once these came + into general use in + the late-1990s) to approve + +On line 11002: + once these came into + general use in the late-1990s) + to approve loans with + +On line 11002: + they generally + did not classify these loans + as Alt-A. Classifi + +On line 11002: + generally did + not classify these loans as + Alt-A. Classifi cation + +On line 11002: + did not classify + these loans as Alt-A. Classifi + cation as Alt-A started + +On line 11002: + not classify these + loans as Alt-A. Classifi cation + as Alt-A started in + +On line 11002: + classify these loans + as Alt-A. Classifi cation as + Alt-A started in the + +On line 11002: + as Alt-A. Classifi + cation as Alt-A started in the + early-1990s. Th ere is + +On line 11004: + cation as Alt-A started + in the early-1990s. Th ere is + an unknown number + +On line 11004: + as Alt-A started in + the early-1990s. Th ere is an + unknown number of + +On line 11004: + in the early-1990s. Th + ere is an unknown number + of additional + +On line 11004: + the early-1990s. Th ere + is an unknown number of + additional loans + +On line 11004: + ere is an unknown + number of additional + loans that had higher + +On line 11004: + unknown number of + additional loans that had + higher debt ratios, + +On line 11006: + expanded seller + contributions, etc. Th e + volume of these loans + +On line 11006: + contributions, etc. + Th e volume of these loans + is not included. + +On line 11008: + e volume of these + loans is not included. ****Loans + with an original + +On line 11008: + volume of these loans + is not included. ****Loans with + an original LTV + +On line 11008: + not included. ****Loans + with an original LTV or + original combined + +On line 11008: + an original LTV + or original combined LTV + (given industry + +On line 11010: + estimate loans with + CLTV.>90% is unavailable prior + to Amounts for 2003-2007 are + +On line 11010: + unavailable prior + to Amounts for 2003-2007 are grossed up + by to account for + +On line 11010: + to Amounts for 2003-2007 are + grossed up by to account for + the impact of loans + +On line 11010: + Amounts for 2003-2007 are grossed + up by to account for the + impact of loans with + +On line 11010: + 2003-2007 are grossed up by + to account for the impact + of loans with a CLTV + +On line 11012: + are grossed up by to + account for the impact of + loans with a CLTV Th + +On line 11014: + to account for the + impact of loans with a CLTV + Th ese estimates + +On line 11014: + of loans with a CLTV + Th ese estimates are based + on disclosures by + +On line 11014: + Th ese estimates + are based on disclosures by + Fannie and Freddie + +On line 11014: + estimates are based + on disclosures by Fannie + and Freddie that at + +On line 11014: + based on disclosures + by Fannie and Freddie that + at the end of their + +On line 11014: + that at the end of + their total exposures to + loans with an LTV or + +On line 11014: + at the end of their + total exposures to loans + with an LTV or CLTV + +On line 11014: + end of their total + exposures to loans with an + LTV or CLTV was and + +On line 11014: + CLTV was and percent + respectively higher than + their exposure to + +On line 11014: + than their exposure + to loans with an LTV Fannie + reports on p. of + +On line 11014: + exposure to loans + with an LTV Fannie reports + on p. of its 10-K + +On line 11014: + to loans with an LTV + Fannie reports on p. of + its 10-K that of its + +On line 11014: + with an LTV Fannie + reports on p. of its 10-K + that of its entire + +On line 11014: + LTV Fannie reports + on p. of its 10-K that of + its entire book had + +On line 11014: + Fannie reports on + p. of its 10-K that of its + entire book had an + +On line 11014: + p. of its 10-K that + of its entire book had an + original combined + +On line 11014: + of its entire book + had an original combined + LTV Its Original + +On line 11014: + its entire book had + an original combined LTV + Its Original LTV + +On line 11014: + Its Original LTV + percentage (without counting + the impact of any + +On line 11014: + negotiated) + is Freddie reports on p60 + of its Q2:2008 Q that + +On line 11014: + is Freddie reports + on p60 of its Q2:2008 Q that + of its portfolio + +On line 11014: + Freddie reports on + p60 of its Q2:2008 Q that of + its portfolio had + +On line 11014: + on p60 of its Q2:2008 + Q that of its portfolio + had an original + +On line 11014: + of its Q2:2008 Q that + of its portfolio had an + original combined + +On line 11014: + its portfolio had + an original combined LTV + Its OLTV percentage + +On line 11016: + 2nd) is While Fannie + and Freddie purchased only + the fi rst mortgage, + +On line 11016: + is While Fannie and + Freddie purchased only the + fi rst mortgage, these + +On line 11016: + Fannie and Freddie + purchased only the fi rst + mortgage, these loans had + +On line 11016: + and Freddie purchased + only the fi rst mortgage, + these loans had the same + +On line 11016: + purchased only the + fi rst mortgage, these loans had + the same or higher + +On line 11016: + these loans had the same + or higher incidence of + default as a loan + +On line 11016: + the same or higher + incidence of default as + a loan with an LTV + +On line 11018: + higher incidence + of default as a loan with + an LTV of *****Since loans + +On line 11018: + of default as a + loan with an LTV of *****Since loans + may have more than one + +On line 11018: + loan with an LTV of + *****Since loans may have more than one + characteristic, + +On line 11018: + *****Since loans may have more + than one characteristic, + they may appear in + +On line 11018: + loans may have more than + one characteristic, they + may appear in more + +On line 11018: + may have more than one + characteristic, they may + appear in more than + +On line 11018: + characteristic, + they may appear in more than + one category. + +On line 11020: + appear in more than + one category. Totals + are not adjusted + +On line 11020: + one category. + Totals are not adjusted + to take this into + +On line 11024: + are not adjusted + to take this into account. + Th e claim that the + +On line 11024: + not adjusted to + take this into account. Th + e claim that the GSEs + +On line 11024: + into account. Th + e claim that the GSEs loosened + their underwriting + +On line 11024: + e claim that the GSEs + loosened their underwriting + standards in order + +On line 11024: + the GSEs loosened their + underwriting standards in + order to compete + +On line 11024: + standards in order + to compete specifi cally + with "Wall Street" can be + +On line 11024: + order to compete + specifi cally with "Wall Street" + can be easily + +On line 11024: + specifi cally with + "Wall Street" can be easily + dismissed—unless the + +On line 11024: + dismissed—unless the + Commission majority + and others who have + +On line 11024: + others who have made + this statement are including + Countrywide (which was + +On line 11024: + Countrywide (which was + based in California) or + other subprime lenders + +On line 11024: + lenders in the term "Wall + Street." Assuming, however, + that the Commission + +On line 11024: + that the Commission + majority and other + commentators have + +On line 11024: + majority and + other commentators have + been using the term + +On line 11024: + commentators have + been using the term Wall Street + to apply to the + +On line 11024: + have been using the + term Wall Street to apply to + the commercial and + +On line 11024: + the term Wall Street to + apply to the commercial + and investment banks + +On line 11024: + to apply to the + commercial and investment + banks that operate + +On line 11024: + and investment banks + that operate in the fi + nancial markets of + +On line 11024: + that operate in + the fi nancial markets of + New York, the data + +On line 11024: + operate in the + fi nancial markets of New + York, the data shows + +On line 11024: + fi nancial markets + of New York, the data shows + that Wall Street was not + +On line 11024: + nancial markets of + New York, the data shows that + Wall Street was not a + +On line 11024: + markets of New York, + the data shows that Wall Street + was not a signifi + +On line 11024: + the data shows that + Wall Street was not a signifi + cant participant + +On line 11024: + data shows that Wall + Street was not a signifi cant + participant in + +On line 11024: + Wall Street was not a + signifi cant participant + in the subprime PMBS + +On line 11024: + was not a signifi + cant participant in the + subprime PMBS market + +On line 11024: + cant participant + in the subprime PMBS market + between and or at + +On line 11024: + in the subprime PMBS + market between and or at + any time before or + +On line 11024: + subprime PMBS market + between and or at any time + before or aft er + +On line 11024: + PMBS market between + and or at any time before + or aft er those dates. + +On line 11024: + market between and + or at any time before or + aft er those dates. Th + +On line 11024: + between and or at + any time before or aft er + those dates. Th e top + +On line 11024: + and or at any time + before or aft er those dates. + Th e top fi ve + +On line 11024: + at any time before + or aft er those dates. Th e + top fi ve players + +On line 11026: + any time before or + aft er those dates. Th e top + fi ve players in + +On line 11026: + time before or aft + er those dates. Th e top fi + ve players in were + +On line 11026: + or aft er those dates. + Th e top fi ve players + in were subprime lenders + +On line 11026: + aft er those dates. Th + e top fi ve players in + were subprime lenders Ameriquest + +On line 11026: + dates. Th e top fi + ve players in were subprime + lenders Ameriquest billion) and + +On line 11028: + ve players in were + subprime lenders Ameriquest billion) and + Countrywide billion), + +On line 11028: + in were subprime lenders + Ameriquest billion) and Countrywide + billion), followed by + +On line 11028: + RFC billion), and New + Century billion). Other + than Lehman, some other + +On line 11028: + and New Century + billion). Other than Lehman, some + other Wall Street fi + +On line 11028: + Century billion). + Other than Lehman, some other + Wall Street fi rms were + +On line 11028: + billion). Other than + Lehman, some other Wall Street fi + rms were scattered through + +On line 11028: + Other than Lehman, some + other Wall Street fi rms were + scattered through the list + +On line 11028: + than Lehman, some other + Wall Street fi rms were scattered + through the list of the + +On line 11028: + Lehman, some other Wall + Street fi rms were scattered through + the list of the top + +On line 11028: + some other Wall Street + fi rms were scattered through the + list of the top but + +On line 11028: + other Wall Street fi + rms were scattered through the list + of the top but were + +On line 11028: + fi rms were scattered + through the list of the top but + were not signifi cant + +On line 11028: + were scattered through the + list of the top but were not + signifi cant players + +On line 11028: + through the list of the + top but were not signifi cant + players as a group. + +On line 11030: + list of the top but + were not signifi cant players + as a group. In the + +On line 11030: + the top but were not + signifi cant players as a + group. In the biggest + +On line 11030: + but were not signifi + cant players as a group. In + the biggest year for + +On line 11030: + cant players as a + group. In the biggest year for + subprime issuances, the + +On line 11030: + group. In the biggest + year for subprime issuances, the + fi ve leaders were + +On line 11030: + In the biggest year + for subprime issuances, the fi + ve leaders were the + +On line 11030: + the biggest year for + subprime issuances, the fi ve + leaders were the same, + +On line 11030: + for subprime issuances, + the fi ve leaders were the + same, and the total + +On line 11030: + subprime issuances, the + fi ve leaders were the same, + and the total for + +On line 11030: + issuances, the fi ve + leaders were the same, and the + total for all Wall + +On line 11030: + leaders were the same, + and the total for all Wall + Street institutions + +On line 11030: + and the total for + all Wall Street institutions + was billion, or about + +On line 11032: + the total for all + Wall Street institutions was + billion, or about Id. + +On line 11038: + or about Id. Peter + J. Wallison percent of + the billion issued + +On line 11038: + about Id. Peter J. + Wallison percent of the + billion issued that + +On line 11038: + Wallison percent + of the billion issued that + year.106 In Lehman had dropped + +On line 11038: + the billion issued + that year.106 In Lehman had dropped out + of the top fi ve + +On line 11038: + billion issued that + year.106 In Lehman had dropped out of + the top fi ve and + +On line 11038: + that year.106 In Lehman had + dropped out of the top fi ve + and Countrywide had + +On line 11038: + had dropped out of the + top fi ve and Countrywide + had taken over the + +On line 11038: + of the top fi ve + and Countrywide had taken + over the leadership + +On line 11038: + the top fi ve and + Countrywide had taken over + the leadership among + +On line 11038: + and Countrywide had + taken over the leadership + among the issuers, but + +On line 11038: + had taken over the + leadership among the issuers, + but Wall Street’s share had + +On line 11038: + over the leadership + among the issuers, but Wall Street’s + share had not signifi + +On line 11038: + leadership among the + issuers, but Wall Street’s share had + not signifi cantly + +On line 11038: + among the issuers, but + Wall Street’s share had not signifi + cantly changed. By the + +On line 11038: + issuers, but Wall Street’s + share had not signifi cantly + changed. By the middle + +On line 11038: + but Wall Street’s share had + not signifi cantly changed. By + the middle of the + +On line 11038: + Wall Street’s share had not + signifi cantly changed. By the + middle of the PMBS + +On line 11038: + share had not signifi + cantly changed. By the middle + of the PMBS market + +On line 11038: + signifi cantly changed. + By the middle of the PMBS + market had declined + +On line 11038: + cantly changed. By the + middle of the PMBS market + had declined to such + +On line 11038: + By the middle of + the PMBS market had declined + to such a degree + +On line 11038: + the middle of the + PMBS market had declined to + such a degree that + +On line 11038: + middle of the PMBS + market had declined to such + a degree that the + +On line 11038: + the PMBS market had + declined to such a degree + that the market share + +On line 11038: + market had declined + to such a degree that the + market share numbers + +On line 11038: + market share numbers + were meaningless. However, + in that year the GSEs’ + +On line 11038: + However, in that + year the GSEs’ market share in + NTMs increased because + +On line 11038: + in that year the GSEs’ + market share in NTMs increased + because they had to + +On line 11038: + the GSEs’ market share + in NTMs increased because they + had to continue + +On line 11038: + market share in NTMs + increased because they had to + continue buying + +On line 11038: + increased because they + had to continue buying + NTMs—even though others had + +On line 11038: + had to continue + buying NTMs—even though others had + defaulted or left + +On line 11038: + had defaulted or + left the business—in order to + comply with the AH + +On line 11038: + the business—in order + to comply with the AH goals. + Accordingly, if + +On line 11038: + to comply with the + AH goals. Accordingly, if + Fannie had ever + +On line 11038: + Accordingly, if + Fannie had ever loosened + its lending standards + +On line 11038: + Fannie had ever + loosened its lending standards + to compete with some + +On line 11038: + ever loosened its + lending standards to compete + with some group, that group + +On line 11038: + loosened its lending + standards to compete with some + group, that group was not + +On line 11038: + its lending standards + to compete with some group, that + group was not Wall Street. + +On line 11040: + lending standards to + compete with some group, that group + was not Wall Street. Th + +On line 11042: + standards to compete + with some group, that group was not + Wall Street. Th e next + +On line 11042: + to compete with some + group, that group was not Wall Street. + Th e next question + +On line 11042: + compete with some group, + that group was not Wall Street. Th + e next question is + +On line 11042: + with some group, that group + was not Wall Street. Th e next + question is whether the + +On line 11042: + that group was not Wall + Street. Th e next question is + whether the GSEs loosened + +On line 11042: + group was not Wall Street. + Th e next question is whether + the GSEs loosened their + +On line 11042: + standards to compete + with Countrywide, Ameriquest and the + other subprime lenders + +On line 11042: + Countrywide, Ameriquest and + the other subprime lenders who + were the dominant + +On line 11042: + the other subprime + lenders who were the dominant + players in the PMBS + +On line 11042: + were the dominant + players in the PMBS market + between and Again, the + +On line 11042: + dominant players + in the PMBS market between + and Again, the answer + +On line 11042: + players in the PMBS + market between and Again, the + answer seems clearly + +On line 11042: + in the PMBS market + between and Again, the answer + seems clearly to be + +On line 11044: + market between and + Again, the answer seems clearly + to be no. Th e + +On line 11044: + between and Again, the + answer seems clearly to be + no. Th e subprime + +On line 11044: + Again, the answer seems + clearly to be no. Th e + subprime PMBS market + +On line 11044: + answer seems clearly + to be no. Th e subprime + PMBS market was very + +On line 11044: + clearly to be no. + Th e subprime PMBS market + was very small until + +On line 11046: + to be no. Th e + subprime PMBS market was very + small until when for + +On line 11046: + Th e subprime PMBS + market was very small until + when for the fi rst + +On line 11046: + subprime PMBS market + was very small until when for + the fi rst time it + +On line 11046: + market was very small + until when for the fi rst + time it exceeded + +On line 11046: + was very small until + when for the fi rst time it + exceeded billion + +On line 11046: + when for the fi rst + time it exceeded billion + and reached billion in + +On line 11046: + the fi rst time it + exceeded billion and reached + billion in subprime + +On line 11046: + time it exceeded + billion and reached billion in + subprime PMBS issuances.107 + +On line 11046: + billion in subprime + PMBS issuances.107 Yet, Table shows + that in alone the GSEs + +On line 11046: + subprime PMBS issuances.107 + Yet, Table shows that in alone + the GSEs bought billion + +On line 11046: + issuances.107 Yet, Table + shows that in alone the GSEs bought + billion in subprime + +On line 11046: + Yet, Table shows that + in alone the GSEs bought billion + in subprime loans, more + +On line 11046: + Table shows that in + alone the GSEs bought billion in + subprime loans, more than + +On line 11046: + that in alone the GSEs + bought billion in subprime loans, + more than the total + +On line 11046: + in alone the GSEs bought + billion in subprime loans, more + than the total amount + +On line 11046: + billion in subprime + loans, more than the total amount + securitized by + +On line 11046: + more than the total + amount securitized by all + the subprime lenders and + +On line 11046: + amount securitized + by all the subprime lenders and + others combined in + +On line 11050: + the subprime lenders and + others combined in that year. + Th e discussion + +On line 11050: + e discussion of + internal documents that + follows will focus + +On line 11052: + follows will focus + almost exclusively on + Fannie Mae. Th e + +On line 11052: + it was from Fannie + that the Commission received + the most complete set + +On line 11052: + was from Fannie that + the Commission received the + most complete set of + +On line 11054: + the most complete set + of internal documents. + By the early 2000s, + +On line 11054: + set of internal + documents. By the early + 2000s, Countrywide had + +On line 11054: + By the early 2000s, + Countrywide had succeeded + in creating an + +On line 11054: + 2000s, Countrywide had + succeeded in creating + an integrated + +On line 11054: + and underwriting + NTMs through PMBS. Other subprime + lenders, as noted above, + +On line 11054: + underwriting NTMs + through PMBS. Other subprime lenders, + as noted above, were + +On line 11054: + NTMs through PMBS. Other + subprime lenders, as noted above, + were also major + +On line 11054: + Other subprime lenders, + as noted above, were also + major issuers, but + +On line 11054: + lenders, as noted above, + were also major issuers, + but they sold their PMBS + +On line 11054: + as noted above, were + also major issuers, but + they sold their PMBS through + +On line 11054: + were also major + issuers, but they sold their PMBS + through Wall Street fi rms + +On line 11054: + issuers, but they sold + their PMBS through Wall Street fi rms + that were functioning + +On line 11054: + their PMBS through Wall Street + fi rms that were functioning + as underwriters. + +On line 11056: + PMBS through Wall Street fi + rms that were functioning as + underwriters. Th + +On line 11058: + underwriters. Th + e success of Countrywide + and other subprime + +On line 11058: + other subprime lenders + as distributors of NTMs + through PMBS was troubling + +On line 11058: + as distributors + of NTMs through PMBS was troubling + to Fannie for two + +On line 11058: + through PMBS was troubling + to Fannie for two reasons. + First, Countrywide had + +On line 11058: + PMBS was troubling to + Fannie for two reasons. First, + Countrywide had been + +On line 11058: + for two reasons. First, + Countrywide had been Fannie’s + largest supplier of + +On line 11058: + First, Countrywide had + been Fannie’s largest supplier + of subprime mortgages; + +On line 11058: + Countrywide had been + Fannie’s largest supplier of + subprime mortgages; the + +On line 11058: + the fact that it could + now securitize mortgages + it formerly sold + +On line 11058: + fact that it could now + securitize mortgages it + formerly sold to + +On line 11058: + now securitize + mortgages it formerly sold + to Fannie meant that + +On line 11058: + it formerly sold + to Fannie meant that Fannie + would have more diffi + +On line 11060: + to Fannie meant that + Fannie would have more diffi + culty fi nding + +On line 11060: + Fannie would have more + diffi culty fi nding + subprime mortgages that + +On line 11060: + would have more diffi + culty fi nding subprime + mortgages that were AH + +On line 11060: + culty fi nding + subprime mortgages that were AH + goals-eligible. + +On line 11060: + subprime mortgages that + were AH goals-eligible. + In addition, the + +On line 11060: + goals-eligible. + In addition, the GSEs knew + that their support in + +On line 11060: + In addition, the + GSEs knew that their support in + Congress depended + +On line 11062: + support in Congress + depended heavily on + meeting the AH goals + +On line 11062: + Congress depended + heavily on meeting the + AH goals and "leading + +On line 11062: + on meeting the AH + goals and "leading the market" + in lending to low + +On line 11062: + goals and "leading the + market" in lending to low + income borrowers. + +On line 11062: + "leading the market" + in lending to low income + borrowers. In and + +On line 11062: + administration + and a growing number of + Republicans in + +On line 11062: + growing number of + Republicans in Congress + were calling for tighter + +On line 11062: + of Republicans + in Congress were calling for + tighter regulation + +On line 11062: + Republicans in + Congress were calling for tighter + regulation of + +On line 11062: + Congress were calling + for tighter regulation of + Fannie and Freddie, + +On line 11062: + were calling for tighter + regulation of Fannie + and Freddie, and the + +On line 11062: + regulation of + Fannie and Freddie, and the + GSEs needed allies + +On line 11062: + Fannie and Freddie, + and the GSEs needed allies + in Congress to hold + +On line 11062: + Freddie, and the GSEs + needed allies in Congress + to hold this off Th + +On line 11064: + and the GSEs needed + allies in Congress to hold + this off Th e fact + +On line 11064: + needed allies in + Congress to hold this off Th + e fact that subprime + +On line 11064: + allies in Congress + to hold this off Th e fact + that subprime lenders were + +On line 11064: + Congress to hold this + off Th e fact that subprime + lenders were taking an + +On line 11066: + off Th e fact that + subprime lenders were taking an + increasing market + +On line 11066: + fact that subprime lenders + were taking an increasing + market share in these + +On line 11066: + lenders were taking an + increasing market share in + these years—suggesting that + +On line 11066: + increasing market + share in these years—suggesting that + the GSEs were no longer + +On line 11066: + in these years—suggesting + that the GSEs were no longer the + most important sources + +On line 11066: + these years—suggesting that + the GSEs were no longer the most + important sources of + +On line 11066: + the GSEs were no longer + the most important sources of + low income mortgage + +On line 11066: + the most important + sources of low income mortgage + credit—was thus a + +On line 11066: + low income mortgage + credit—was thus a matter + of great concern to + +On line 11066: + credit—was thus a + matter of great concern to + Fannie’s management. + +On line 11066: + of great concern to + Fannie’s management. Without + strong support among the + +On line 11066: + Fannie’s management. + Without strong support among the + Democrats in Congress, there + +On line 11066: + management. Without + strong support among the Democrats in + Congress, there was a + +On line 11066: + Without strong support + among the Democrats in Congress, there + was a signifi cant + +On line 11066: + strong support among the + Democrats in Congress, there was a + signifi cant chance that + +On line 11066: + Democrats in Congress, there + was a signifi cant chance that + the Republican + +On line 11066: + was a signifi cant + chance that the Republican + Congress would enact + +On line 11068: + regulatory + legislation. Th is was + expressed at Fannie + +On line 11068: + legislation. Th + is was expressed at Fannie + as concern about a + +On line 11070: + is was expressed at + Fannie as concern about a + loss of "relevance," + +On line 11070: + Fannie as concern + about a loss of "relevance," + and provoked wide-ranging + +On line 11070: + and provoked wide-ranging + consideration within + the fi rm about how + +On line 11070: + consideration + within the fi rm about how + they could regain their + +On line 11070: + within the fi rm + about how they could regain their + leadership role in + +On line 11070: + rm about how they could + regain their leadership role + in low-income lending. + +On line 11072: + although Fannie had + strong reasons for wanting to + compete for market + +On line 11072: + reasons for wanting + to compete for market share + with Countrywide and + +On line 11072: + for market share with + Countrywide and others, it + did not have either + +On line 11072: + did not have either + the operational Inside + Mortgage Finance, Th + +On line 11074: + the operational + Inside Mortgage Finance, Th + e Mortgage Market + +On line 11076: + e Mortgage Market + Statistical Annual—Volume II, pp. + and Inside Mortgage + +On line 11086: + capacity to + do so. In the end, Fannie + was unable to take + +On line 11086: + to do so. In the + end, Fannie was unable to + take any signifi cant + +On line 11086: + the end, Fannie was + unable to take any signifi + cant action during + +On line 11086: + unable to take any + signifi cant action during + the key years and that + +On line 11086: + take any signifi cant + action during the key years + and that would regain + +On line 11086: + signifi cant action + during the key years and that + would regain market + +On line 11086: + action during the + key years and that would regain + market share from the + +On line 11086: + during the key years + and that would regain market + share from the subprime + +On line 11086: + the key years and that + would regain market share from + the subprime lenders or + +On line 11086: + and that would regain + market share from the subprime + lenders or anyone else. + +On line 11088: + would regain market + share from the subprime lenders or + anyone else. Th ey + +On line 11088: + market share from the + subprime lenders or anyone else. + Th ey reduced their + +On line 11088: + the subprime lenders or + anyone else. Th ey reduced + their underwriting + +On line 11090: + necessary to keep + pace with the increasing AH + goals, but not to go + +On line 11090: + the increasing AH + goals, but not to go signifi + cantly beyond those + +On line 11092: + AH goals, but not to + go signifi cantly beyond + those requirements. In + +On line 11092: + goals, but not to go + signifi cantly beyond those + requirements. In a + +On line 11092: + go signifi cantly + beyond those requirements. In + a key memo dated + +On line 11092: + those requirements. In + a key memo dated June (the + "Crossroads" memo), Tom Lund, + +On line 11092: + a key memo dated + June (the "Crossroads" memo), Tom Lund, + Executive Vice + +On line 11092: + Lund, Executive + Vice President for Single + Family Business, + +On line 11092: + Vice President for + Single Family Business, + addressed the question + +On line 11092: + Single Family + Business, addressed the question + of Fannie’s loss of + +On line 11092: + Business, addressed the + question of Fannie’s loss of + market share and how + +On line 11092: + addressed the question + of Fannie’s loss of market + share and how this share + +On line 11092: + question of Fannie’s + loss of market share and how + this share position + +On line 11092: + of Fannie’s loss of + market share and how this share + position could be + +On line 11092: + loss of market share + and how this share position + could be regained. Th + +On line 11092: + of market share and + how this share position could + be regained. Th e + +On line 11092: + market share and how + this share position could be + regained. Th e date + +On line 11094: + share and how this share + position could be regained. + Th e date of this + +On line 11094: + position could be + regained. Th e date of this + memo is important. + +On line 11094: + regained. Th e date + of this memo is important. + It shows that even in + +On line 11094: + e date of this memo + is important. It shows that + even in the middle + +On line 11094: + date of this memo is + important. It shows that even + in the middle of + +On line 11094: + is important. It + shows that even in the middle + of there was still a + +On line 11094: + It shows that even in + the middle of there was still + a debate going + +On line 11094: + shows that even in the + middle of there was still a + debate going on + +On line 11094: + even in the middle + of there was still a debate + going on within + +On line 11094: + the middle of there + was still a debate going + on within Fannie + +On line 11094: + middle of there was + still a debate going on + within Fannie about + +On line 11094: + of there was still a + debate going on within + Fannie about whether to + +On line 11094: + was still a debate + going on within Fannie + about whether to compete + +On line 11094: + debate going on + within Fannie about whether to + compete for market + +On line 11094: + going on within + Fannie about whether to compete + for market share with + +On line 11094: + within Fannie about + whether to compete for market + share with Countrywide + +On line 11094: + Fannie about whether to + compete for market share with + Countrywide and the + +On line 11094: + for market share with + Countrywide and the other + subprime issuers. No + +On line 11094: + Countrywide and the + other subprime issuers. No + such competition + +On line 11094: + competition had + actually begun. Lund + starts the discussion + +On line 11094: + begun. Lund starts the + discussion in the memo by + saying "We are at + +On line 11094: + starts the discussion + in the memo by saying "We + are at a strategic + +On line 11094: + by saying "We are + at a strategic crossroad…[his + ellipses] We face two + +On line 11094: + are at a strategic + crossroad…[his ellipses] We face + two stark choices: Stay + +On line 11094: + crossroad…[his ellipses] + We face two stark choices: Stay + the Course [or] Meet the + +On line 11094: + ellipses] We face two + stark choices: Stay the Course [or] + Meet the Market Where + +On line 11094: + two stark choices: Stay + the Course [or] Meet the Market + Where the Market Is". + +On line 11094: + choices: Stay the Course + [or] Meet the Market Where the + Market Is". "Staying + +On line 11094: + Stay the Course [or] Meet + the Market Where the Market + Is". "Staying the course" + +On line 11094: + the Course [or] Meet the + Market Where the Market Is". + "Staying the course" meant + +On line 11094: + [or] Meet the Market + Where the Market Is". "Staying + the course" meant trying + +On line 11094: + Meet the Market Where + the Market Is". "Staying the + course" meant trying to + +On line 11094: + Is". "Staying the course" + meant trying to maintain the + mortgage quality + +On line 11094: + followed up to that + point (except as necessary + to meet HUD’s AH goals). + +On line 11094: + to that point (except + as necessary to meet HUD’s + AH goals). "Meeting the + +On line 11094: + HUD’s AH goals). "Meeting + the market" meant competing + with Countrywide and + +On line 11094: + the AH goals required, + but also by acquiring + much riskier mortgages + +On line 11094: + AH goals required, but + also by acquiring much + riskier mortgages than + +On line 11094: + required, but also + by acquiring much riskier + mortgages than Fannie—which + +On line 11094: + by acquiring much + riskier mortgages than Fannie—which + specialized in fi + +On line 11094: + riskier mortgages than + Fannie—which specialized in fi + xed rate mortgages—had + +On line 11094: + Fannie—which specialized + in fi xed rate mortgages—had + been buying up to + +On line 11098: + time. Th ese riskier + potential acquisitions + would have included + +On line 11098: + acquisitions would + have included much larger + numbers of Option + +On line 11098: + numbers of Option + ARMs (involving negative + amortization) and + +On line 11100: + (or "layered") risks with + which Fannie had no prior + experience. Th + +On line 11102: + with which Fannie had + no prior experience. + Th us, Lund noted + +On line 11102: + which Fannie had no + prior experience. Th + us, Lund noted that + +On line 11102: + price..[and] a value + proposition for subprime." His + conclusion was as + +On line 11102: + value proposition + for subprime." His conclusion + was as stark as the + +On line 11102: + was as stark as the + choice: "Realistically, + we are not in a + +On line 11104: + the Market’ today." + "Th erefore," Lund continued, + "we recommend that + +On line 11104: + Market’ today." "Th + erefore," Lund continued, "we + recommend that we: + +On line 11104: + "we recommend that + we: Pursue a ‘Stay the Course’ + strategy and test + +On line 11104: + that we: Pursue a + ‘Stay the Course’ strategy and + test whether market changes + +On line 11104: + we: Pursue a ‘Stay + the Course’ strategy and test + whether market changes are + +On line 11104: + test whether market changes + are cyclical vs secular."108 + [emphasis supplied] + +On line 11106: + In the balance of + the Crossroads memo, Lund notes that + subprime and Alt-A loans + +On line 11106: + of the Crossroads memo, + Lund notes that subprime and Alt-A + loans are driving the + +On line 11106: + Crossroads memo, Lund notes + that subprime and Alt-A loans are + driving the "leakage" + +On line 11106: + Lund notes that subprime + and Alt-A loans are driving the + "leakage" of "goals rich" + +On line 11106: + that subprime and Alt-A + loans are driving the "leakage" + of "goals rich" products + +On line 11106: + subprime and Alt-A loans + are driving the "leakage" of + "goals rich" products to + +On line 11106: + loans are driving the + "leakage" of "goals rich" products + to PMBS issuers. He + +On line 11106: + driving the "leakage" + of "goals rich" products to PMBS + issuers. He points out + +On line 11106: + of "goals rich" products + to PMBS issuers. He points out + the severity of + +On line 11106: + "goals rich" products to + PMBS issuers. He points out the + severity of the + +On line 11106: + to PMBS issuers. He + points out the severity of + the loss of market + +On line 11106: + PMBS issuers. He points + out the severity of the + loss of market share, + +On line 11106: + issuers. He points out + the severity of the loss + of market share, but + +On line 11106: + out the severity + of the loss of market share, + but never suggests + +On line 11106: + the severity of + the loss of market share, but + never suggests that + +On line 11106: + the loss of market + share, but never suggests that + this changes his view that + +On line 11106: + of market share, but + never suggests that this changes + his view that Fannie + +On line 11106: + Fannie was unequipped + to compete with Countrywide + and others at that + +On line 11106: + that time. According + to an internal FCIC staff + investigation, + +On line 11106: + to an internal + FCIC staff investigation, + dated March other + +On line 11106: + internal FCIC staff + investigation, dated + March other senior + +On line 11110: + (Executive Vice + President and Chief Business + Offi cer), Kenneth + +On line 11110: + Vice President for + Housing and Community + Development), and + +On line 11110: + Business)—all concurred + that Fannie should follow Lund’s + recommendation + +On line 11116: + Fannie should follow + Lund’s recommendation to + "stay the course." Th ere + +On line 11116: + recommendation + to "stay the course." Th ere is + no indication + +On line 11116: + to "stay the course." Th + ere is no indication + in any of Fannie’s + +On line 11116: + course." Th ere is no + indication in any of + Fannie’s documents + +On line 11116: + indication in + any of Fannie’s documents + aft er June that Lund’s + +On line 11116: + er June that Lund’s "Stay + the Course" recommendation + was ever changed or + +On line 11116: + Freddie were supposed + to have begun to acquire + large numbers of NTMs + +On line 11116: + begun to acquire + large numbers of NTMs (beyond + what was required to + +On line 11116: + large numbers of NTMs + (beyond what was required to + meet the AH goals) in + +On line 11116: + of NTMs (beyond what + was required to meet the AH + goals) in order to + +On line 11116: + to meet the AH goals) + in order to compete with + Countrywide or (in + +On line 11116: + AH goals) in order + to compete with Countrywide + or (in some telling) Wall + +On line 11116: + goals) in order to + compete with Countrywide or + (in some telling) Wall Street. + +On line 11120: + order to compete + with Countrywide or (in some + telling) Wall Street. Th us, + +On line 11120: + with Countrywide or + (in some telling) Wall Street. Th us, + in June one year aft + +On line 11120: + Countrywide or (in + some telling) Wall Street. Th us, in + June one year aft er + +On line 11120: + (in some telling) Wall Street. + Th us, in June one year aft + er the Lund Crossroads + +On line 11120: + some telling) Wall Street. Th + us, in June one year aft er + the Lund Crossroads memo, + +On line 11120: + telling) Wall Street. Th us, + in June one year aft er the + Lund Crossroads memo, Stephen + +On line 11120: + Wall Street. Th us, in + June one year aft er the Lund + Crossroads memo, Stephen B. + +On line 11122: + Th us, in June one + year aft er the Lund Crossroads + memo, Stephen B. Ashley, + +On line 11122: + us, in June one year + aft er the Lund Crossroads memo, + Stephen B. Ashley, then + +On line 11122: + in June one year aft + er the Lund Crossroads memo, Stephen + B. Ashley, then the + +On line 11122: + year aft er the Lund + Crossroads memo, Stephen B. Ashley, + then the chairman of + +On line 11122: + er the Lund Crossroads + memo, Stephen B. Ashley, then the + chairman of the board, + +On line 11122: + Crossroads memo, Stephen B. + Ashley, then the chairman of + the board, told Fannie’s + +On line 11122: + memo, Stephen B. Ashley, + then the chairman of the board, + told Fannie’s senior + +On line 11122: + then the chairman of + the board, told Fannie’s senior + executives: is + +On line 11122: + the board, told Fannie’s + senior executives: is + a Tom Lund, "Single + +On line 11122: + "Single Family + Guarantee Business: Facing + Strategic Crossroads" June + +On line 11128: + Crossroads" June Peter + J. Wallison transition + year. To be sure, there + +On line 11128: + transition year. To + be sure, there are still issues + to resolve. Th e + +On line 11128: + To be sure, there are + still issues to resolve. Th + e consent order + +On line 11128: + be sure, there are still + issues to resolve. Th e + consent order with + +On line 11130: + there are still issues + to resolve. Th e consent + order with OFHEO [among + +On line 11130: + issues to resolve. + Th e consent order with + OFHEO [among other things, + +On line 11130: + demanding. And from + a strategy standpoint, it + is clear that until + +On line 11130: + strategy standpoint, + it is clear that until we + have eliminated + +On line 11130: + have eliminated + operations and control + weaknesses, taking + +On line 11130: + weaknesses, taking + on more risk or opening new + lines of business will + +On line 11130: + more risk or opening + new lines of business will be + viewed dimly by our + +On line 11130: + viewed dimly by our + regulators."109 [emphasis + supplied] So, again, we + +On line 11132: + have confi rmation + that Fannie’s top offi cials + did not believe that + +On line 11132: + confi rmation that + Fannie’s top offi cials did + not believe that the + +On line 11134: + Fannie’s top offi + cials did not believe that the + fi rm was in any + +On line 11134: + cials did not believe + that the fi rm was in any + position—in the + +On line 11134: + that the fi rm was + in any position—in the + middle of 2006—to take + +On line 11134: + fi rm was in any + position—in the middle + of 2006—to take on the + +On line 11134: + any position—in + the middle of 2006—to take on + the additional + +On line 11134: + position—in the + middle of 2006—to take on the + additional risk + +On line 11134: + of 2006—to take on the + additional risk that would + be necessary s + +On line 11134: + the additional + risk that would be necessary + s to compete with + +On line 11134: + be necessary s + to compete with Countrywide + and other subprime + +On line 11134: + necessary s to + compete with Countrywide and + other subprime lenders + +On line 11134: + with Countrywide and + other subprime lenders that were + selling PMBS backed by + +On line 11134: + other subprime lenders + that were selling PMBS backed by + subprime and other + +On line 11136: + that were selling PMBS + backed by subprime and other + NTMs. Moreover, there is + +On line 11136: + were selling PMBS backed + by subprime and other NTMs. + Moreover, there is very + +On line 11136: + that Fannie either + never tried or was never + fi nancially able + +On line 11136: + or was never fi + nancially able to compete + for market share with + +On line 11136: + fi nancially able + to compete for market share + with Countrywide and + +On line 11136: + able to compete for + market share with Countrywide + and other subprime + +On line 11136: + share with Countrywide + and other subprime lenders from + to For example, + +On line 11136: + with Countrywide and + other subprime lenders from to + For example, set + +On line 11136: + and other subprime + lenders from to For example, + set out below are + +On line 11136: + For example, set + out below are Fannie’s key + fi nancial data, + +On line 11136: + fi nancial data, + published by OFHEO, its former + regulator, in + +On line 11138: + by OFHEO, its former + regulator, in early + Table Fannie Mae + +On line 11138: + regulator, in + early Table Fannie Mae + Financial Highlights + +On line 11164: + Earnings Performance: + Net Income billions) -2.1 Net + Interest Income + +On line 11176: + Net Income billions) + -2.1 Net Interest Income + billions) Guarantee + +On line 11200: + billions) Guarantee + Fees billions) Net Interest + margin Average + +On line 11234: + Return on Common + Equity -8.3 Dividend + Payout Ratio N/M + +On line 11236: + Dividend Payout + Ratio N/M Table shows that + Fannie’s average + +On line 11236: + period from to + To understand the signifi + cance of this, it + +On line 11236: + to To understand + the signifi cance of this, + it is necessary + +On line 11236: + To understand the + signifi cance of this, it + is necessary to + +On line 11236: + the signifi cance + of this, it is necessary + to understand the + +On line 11236: + signifi cance of + this, it is necessary to + understand the way + +On line 11236: + it is necessary + to understand the way the + mortgage business works. + +On line 11236: + mortgage business works. + Most of Fannie’s guarantee + business—the business + +On line 11236: + that competed with + securitizations of + PMBS by Countrywide + +On line 11236: + by Countrywide and + others—was done with wholesale + sellers of mortgage + +On line 11236: + others—was done with + wholesale sellers of mortgage + pools. In these deals, the + +On line 11236: + wholesale sellers of + mortgage pools. In these deals, the + wholesaler or issuer, + +On line 11236: + mortgage pools. In these + deals, the wholesaler or issuer, + a Countrywide or + +On line 11236: + these deals, the wholesaler + or issuer, a Countrywide + or a Wells Fargo, + +On line 11236: + deals, the wholesaler or + issuer, a Countrywide or + a Wells Fargo, would + +On line 11236: + Countrywide or a + Wells Fargo, would assemble + a pool of mortgages + +On line 11236: + or a Wells Fargo, + would assemble a pool of + mortgages and look for + +On line 11236: + a pool of mortgages + and look for a guaranty + mechanism that would + +On line 11236: + mortgages and look for + a guaranty mechanism + that would off er the + +On line 11236: + for a guaranty + mechanism that would off er + the best pricing. In + +On line 11236: + that would off er the + best pricing. In the case of + a Fannie MBS, the + +On line 11236: + would off er the best + pricing. In the case of a + Fannie MBS, the key + +On line 11236: + er the best pricing. + In the case of a Fannie + MBS, the key issue + +On line 11236: + the best pricing. In + the case of a Fannie MBS, + the key issue was + +On line 11236: + best pricing. In the + case of a Fannie MBS, the + key issue was the + +On line 11236: + pricing. In the case + of a Fannie MBS, the key + issue was the GSEs’ + +On line 11236: + case of a Fannie + MBS, the key issue was the + GSEs’ guarantee fee, + +On line 11236: + key issue was the + GSEs’ guarantee fee, because + that determined how + +On line 11236: + issue was the GSEs’ + guarantee fee, because that + determined how much + +On line 11236: + the GSEs’ guarantee + fee, because that determined + how much of the profi + +On line 11236: + GSEs’ guarantee fee, + because that determined how + much of the profi t + +On line 11236: + how much of the profi + t the issuer would be able + to retain. In the + +On line 11236: + much of the profi t + the issuer would be able to + retain. In the case + +On line 11236: + profi t the issuer + would be able to retain. In + the case of a PMBS + +On line 11236: + the issuer would be + able to retain. In the case + of a PMBS issue, + +On line 11236: + issuer would be able + to retain. In the case of + a PMBS issue, it + +On line 11236: + able to retain. In + the case of a PMBS issue, + it was the amount and + +On line 11236: + to retain. In the + case of a PMBS issue, it + was the amount and cost + +On line 11236: + retain. In the case + of a PMBS issue, it was + the amount and cost of + +On line 11236: + the case of a PMBS + issue, it was the amount and + cost of the credit + +On line 11236: + a PMBS issue, it + was the amount and cost of the + credit enhancement + +On line 11236: + issue, it was the + amount and cost of the credit + enhancement needed + +On line 11236: + was the amount and cost + of the credit enhancement + needed to attain + +On line 11236: + amount and cost of the + credit enhancement needed + to attain a AAA + +On line 11236: + credit enhancement + needed to attain a AAA + rating for a large + +On line 11236: + needed to attain + a AAA rating for a large + percentage of the + +On line 11236: + a AAA rating for + a large percentage of the + securities backed + +On line 11236: + a large percentage + of the securities backed + by the mortgage pool. + +On line 11238: + large percentage of + the securities backed by + the mortgage pool. Th + +On line 11240: + percentage of the + securities backed by the + mortgage pool. Th e + +On line 11240: + the securities + backed by the mortgage pool. Th + e issuer had a + +On line 11240: + securities backed + by the mortgage pool. Th e + issuer had a choice + +On line 11240: + the mortgage pool. Th + e issuer had a choice of + securitizing + +On line 11240: + e issuer had a + choice of securitizing + through Fannie, Freddie + +On line 11240: + issuer had a choice + of securitizing through + Fannie, Freddie or + +On line 11242: + Freddie or one of + the Wall Street underwriters. + Th us, if Fannie + +On line 11242: + or one of the Wall + Street underwriters. Th us, + if Fannie wanted + +On line 11242: + one of the Wall Street + underwriters. Th us, if + Fannie wanted to + +On line 11242: + Street underwriters. + Th us, if Fannie wanted + to compete with the + +On line 11244: + Th us, if Fannie + wanted to compete with the + private issuers for + +On line 11244: + if Fannie wanted + to compete with the private + issuers for subprime + +On line 11244: + wanted to compete + with the private issuers for + subprime and other + +On line 11244: + to compete with the + private issuers for subprime + and other loans there + +On line 11244: + the private issuers + for subprime and other loans + there was only one + +On line 11244: + private issuers for + subprime and other loans there + was only one way + +On line 11244: + and other loans there + was only one way to do + it—by reducing + +On line 11244: + was only one way + to do it—by reducing + its guarantee fees + +On line 11244: + only one way to + do it—by reducing its + guarantee fees (called + +On line 11244: + (called "G-fees" at Fannie + and Freddie) and in this way + making itself a + +On line 11244: + Freddie) and in this + way making itself a more + attractive outlet + +On line 11244: + in this way making + itself a more attractive + outlet than using + +On line 11244: + way making itself + a more attractive outlet + than using a Wall + +On line 11244: + making itself a + more attractive outlet than + using a Wall Street + +On line 11244: + a more attractive + outlet than using a Wall + Street underwriter. + +On line 11246: + than using a Wall + Street underwriter. Th e + fact that Fannie does + +On line 11246: + using a Wall Street + underwriter. Th e fact + that Fannie does not + +On line 11246: + Street underwriter. + Th e fact that Fannie does + not appear to have + +On line 11246: + underwriter. Th + e fact that Fannie does not + appear to have done + +On line 11246: + fact that Fannie does + not appear to have done so + is strong evidence + +On line 11246: + that Fannie does not + appear to have done so is + strong evidence that + +On line 11246: + not appear to have + done so is strong evidence + that it never tried + +On line 11246: + appear to have done + so is strong evidence that + it never tried to + +On line 11246: + have done so is strong + evidence that it never + tried to compete for + +On line 11246: + evidence that it + never tried to compete for + share with Countrywide + +On line 11246: + compete for share with + Countrywide and the other + subprime issuers aft + +On line 11246: + with Countrywide and + the other subprime issuers + aft er the date of + +On line 11246: + Countrywide and the + other subprime issuers aft + er the date of the + +On line 11246: + the other subprime + issuers aft er the date of + the Crossroads memo in + +On line 11250: + subprime issuers aft + er the date of the Crossroads + memo in June Th e + +On line 11250: + issuers aft er the + date of the Crossroads memo in + June Th e OFHEO fi + +On line 11250: + aft er the date of + the Crossroads memo in June Th + e OFHEO fi nancial + +On line 11250: + date of the Crossroads + memo in June Th e OFHEO fi + nancial summary + +On line 11250: + the Crossroads memo in + June Th e OFHEO fi nancial + summary also + +On line 11250: + June Th e OFHEO fi + nancial summary also + shows that Fannie in + +On line 11250: + nancial summary + also shows that Fannie in + reality had + +On line 11250: + shows that Fannie in + reality had very Stephen + B. Ashley Fannie + +On line 11250: + reality had + very Stephen B. Ashley Fannie + Mae Chairman, remarks + +On line 11250: + Ashley Fannie Mae + Chairman, remarks at senior + management meeting, + +On line 11252: + remarks at senior + management meeting, June OFHEO, + "Mortgage Markets and + +On line 11252: + management meeting, + June OFHEO, "Mortgage Markets and + the Enterprises + +On line 11258: + OFHEO, "Mortgage Markets + and the Enterprises in + pp. 33-34. Dissenting + +On line 11260: + Its net income and + its return on equity + were all declining + +On line 11260: + equity were all + declining quickly during + this period, and + +On line 11260: + declining quickly + during this period, and + a cut in its G-fees + +On line 11260: + this period, and + a cut in its G-fees would have + hastened this decline. + +On line 11262: + a cut in its G-fees + would have hastened this decline. + Finally, there are + +On line 11262: + would have hastened this + decline. Finally, there are + Fannie’s own reports + +On line 11262: + hastened this decline. + Finally, there are Fannie’s + own reports about its + +On line 11262: + Finally, there are + Fannie’s own reports about its + acquisitions of + +On line 11262: + own reports about its + acquisitions of subprime + loans. According to + +On line 11262: + acquisitions of + subprime loans. According to + Fannie’s 10-K reports + +On line 11262: + restated, covered + periods through and Fannie’s + acquisition of + +On line 11262: + periods through and + Fannie’s acquisition of + subprime loans barely + +On line 11264: + acquisition of + subprime loans barely increased + from through Th ese are + +On line 11266: + subprime loans barely + increased from through Th ese are + the numbers: Table + +On line 11266: + barely increased from + through Th ese are the numbers: + Table Fannie Mae’s + +On line 11266: + from through Th ese are + the numbers: Table Fannie + Mae’s Acquisition + +On line 11266: + through Th ese are the + numbers: Table Fannie Mae’s + Acquisition of + +On line 11266: + the numbers: Table + Fannie Mae’s Acquisition + of Subprime Loans, 2004-2007 + +On line 11298: + Mae’s Acquisition + of Subprime Loans, 2004-2007 FICO + FICO 620-<660 Th ese + +On line 11298: + FICO 620-<660 Th ese + percentages are consistent + with Fannie’s eff ort + +On line 11298: + Th ese percentages + are consistent with Fannie’s + eff ort to comply + +On line 11298: + ese percentages are + consistent with Fannie’s eff + ort to comply with + +On line 11298: + are consistent with + Fannie’s eff ort to comply + with the gradual + +On line 11298: + Fannie’s eff ort to + comply with the gradual + increase in the AH + +On line 11298: + ort to comply with + the gradual increase in + the AH goals during + +On line 11298: + to comply with the + gradual increase in the + AH goals during the + +On line 11298: + gradual increase + in the AH goals during the + years through they are not + +On line 11298: + increase in the AH + goals during the years through they + are not consistent + +On line 11298: + goals during the years + through they are not consistent + with an eff ort to + +On line 11298: + years through they are not + consistent with an eff ort + to substantially + +On line 11298: + to substantially + increase its purchases of + subprime mortgages in + +On line 11298: + its purchases of + subprime mortgages in order + to compete with fi + +On line 11298: + subprime mortgages in + order to compete with fi + rms like Countrywide + +On line 11298: + mortgages in order + to compete with fi rms like + Countrywide that were + +On line 11298: + order to compete + with fi rms like Countrywide + that were growing their + +On line 11298: + to compete with fi + rms like Countrywide that were + growing their market + +On line 11298: + Countrywide that were + growing their market share through + securitizing + +On line 11298: + growing their market + share through securitizing + subprime and other + +On line 11300: + subprime and other + loans. Finally, Fannie’s 10-K + (which, as restated + +On line 11300: + Fannie’s 10-K (which, as + restated and fi led in + May also covered + +On line 11300: + (which, as restated + and fi led in May also + covered and contains + +On line 11300: + covered and contains + a statement similar to + that made in confi + +On line 11300: + contains a statement + similar to that made in + confi rming that + +On line 11300: + similar to that + made in confi rming that + the GSE made no eff + +On line 11300: + that made in confi + rming that the GSE made no + eff ort to compete + +On line 11300: + confi rming that + the GSE made no eff ort to + compete for subprime + +On line 11300: + eff ort to compete + for subprime loans (except as + necessary to meet + +On line 11300: + compete for subprime + loans (except as necessary + to meet the AH goals), + +On line 11300: + subprime loans (except + as necessary to meet the + AH goals), and that in + +On line 11300: + as necessary to + meet the AH goals), and that in + fact it lost market + +On line 11300: + necessary to meet + the AH goals), and that in fact + it lost market share + +On line 11300: + meet the AH goals), and + that in fact it lost market + share by declining + +On line 11300: + the AH goals), and that + in fact it lost market share + by declining to + +On line 11300: + AH goals), and that in + fact it lost market share by + declining to do + +On line 11300: + that in fact it lost + market share by declining + to do so in and + +On line 11302: + it lost market share + by declining to do so + in and [I]n recent + +On line 11302: + lost market share by + declining to do so in + and [I]n recent years, + +On line 11302: + by declining to + do so in and [I]n recent + years, an increasing + +On line 11302: + [I]n recent years, an + increasing proportion of + single-family + +On line 11302: + single-family + mortgage loan originations + has consisted of + +On line 11302: + as interest-only + mortgages, negative-amortizing + mortgages and sub-prime + +On line 11302: + sub-prime mortgages, and + demand for traditional + 30-year fi xed-rate mortgages + +On line 11302: + mortgages has decreased. + We did not participate + in large amounts of these + +On line 11302: + in large amounts of these + non-traditional mortgages + in and because we + +On line 11302: + non-traditional + mortgages in and because we + determined that the + +On line 11302: + we determined that + the pricing off ered for these + mortgages oft en off + +On line 11302: + that the pricing off + ered for these mortgages oft en + off ered insuffi + +On line 11302: + the pricing off ered + for these mortgages oft en off + ered insuffi cient + +On line 11302: + ered for these mortgages + oft en off ered insuffi + cient compensation + +On line 11302: + for these mortgages oft + en off ered insuffi cient + compensation for + +On line 11304: + associated + with these mortgages. Th ese trends + and our decision + +On line 11306: + these mortgages. Th ese + trends and our decision not + to participate + +On line 11306: + mortgages. Th ese trends + and our decision not to + participate in + +On line 11306: + in large amounts of these + non-traditional mortgages + contributed to a + +On line 11306: + non-traditional + mortgages contributed to a + signifi cant loss in + +On line 11306: + issuers during this + period, with our market + share decreasing from + +On line 11306: + this period, with + our market share decreasing + from in to in in + +On line 11306: + period, with our + market share decreasing from + in to in in and + +On line 11308: + losing market share + to Countrywide and others + in and Fannie did + +On line 11308: + share to Countrywide + and others in and Fannie + did not attempt to + +On line 11308: + and others in and + Fannie did not attempt to + acquire unusual + +On line 11308: + did not attempt to + acquire unusual numbers + of subprime loans in + +On line 11308: + acquire unusual + numbers of subprime loans in + order to regain + +On line 11308: + unusual numbers + of subprime loans in order + to regain this share. + +On line 11308: + numbers of subprime + loans in order to regain + this share. Instead, it + +On line 11308: + to regain this share. + Instead, it continued to + acquire only the + +On line 11308: + it continued to + acquire only the subprime + and other NTM loans + +On line 11308: + acquire only the + subprime and other NTM loans + that were necessary + +On line 11308: + only the subprime + and other NTM loans that were + necessary to meet + +On line 11308: + subprime and other + NTM loans that were necessary + to meet the AH goals. + +On line 11308: + and other NTM loans + that were necessary to meet + the AH goals. Th at + +On line 11308: + other NTM loans that + were necessary to meet the + AH goals. Th at the + +On line 11310: + were necessary to + meet the AH goals. Th at the + AH goals were Fannie’s + +On line 11310: + necessary to meet + the AH goals. Th at the AH + goals were Fannie’s sole + +On line 11310: + goals. Th at the AH + goals were Fannie’s sole motive + for acquiring NTMs + +On line 11310: + Th at the AH goals + were Fannie’s sole motive for + acquiring NTMs is + +On line 11310: + AH goals were Fannie’s + sole motive for acquiring + NTMs is shown by the + +On line 11310: + goals were Fannie’s sole + motive for acquiring NTMs + is shown by the fi + +On line 11310: + NTMs is shown by the + fi rm’s actions aft er the + PMBS market collapsed + +On line 11310: + is shown by the fi + rm’s actions aft er the PMBS + market collapsed in + +On line 11310: + rm’s actions aft er + the PMBS market collapsed in + At that point, Fannie’s + +On line 11310: + market collapsed in + At that point, Fannie’s market + share began to rise + +On line 11310: + At that point, Fannie’s + market share began to rise + as Countrywide and + +On line 11310: + share began to rise + as Countrywide and others + could not continue + +On line 11310: + began to rise as + Countrywide and others could + not continue to + +On line 11310: + not continue to + issue PMBS. Nevertheless, + despite the losses + +On line 11310: + subprime loans that were + beginning to show up in + the markets, Fannie + +On line 11310: + that were beginning + to show up in the markets, + Fannie continued + +On line 11310: + beginning to show + up in the markets, Fannie + continued to buy + +On line 11310: + to show up in the + markets, Fannie continued + to buy NTMs until + +On line 11310: + up in the markets, + Fannie continued to buy + NTMs until they were + +On line 11310: + Fannie continued + to buy NTMs until they were + taken over by the + +On line 11312: + taken over by the + government in Fannie Mae, + 10-K. Th ese totals + +On line 11312: + Fannie Mae, 10-K. Th + ese totals do not include + Fannie’s purchases + +On line 11314: + ese totals do not + include Fannie’s purchases + of subprime PMBS. http://www.fanniemae.com/ir/pdf/sec/2004/2004_form10K.pdf;jsessionid=N3RRJCZPD5SOVJ2FQSH + +On line 11316: + not include Fannie’s + purchases of subprime PMBS. + http://www.fanniemae.com/ir/pdf/sec/2004/2004_form10K.pdf;jsessionid=N3RRJCZPD5SOVJ2FQSH SFGI, p.141 and + +On line 11316: + Fannie’s purchases + of subprime PMBS. http://www.fanniemae.com/ir/pdf/sec/2004/2004_form10K.pdf;jsessionid=N3RRJCZPD5SOVJ2FQSH SFGI, + p.141 and Fannie’s 10-K, + +On line 11330: + p.127. Fannie Mae, 10-K, + p.37. Peter J. Wallison + September Th e + +On line 11330: + Mae, 10-K, p.37. Peter + J. Wallison September + Th e reason for + +On line 11330: + 10-K, p.37. Peter J. + Wallison September Th + e reason for this + +On line 11330: + e reason for this + nearly reckless behavior + is obvious—they + +On line 11330: + reckless behavior + is obvious—they were still + subject to the AH + +On line 11330: + obvious—they were + still subject to the AH goals, + which were increasing + +On line 11330: + still subject to the + AH goals, which were increasing + through this period. + +On line 11330: + subject to the AH + goals, which were increasing through + this period. If + +On line 11330: + which were increasing + through this period. If they + had only acquired + +On line 11330: + were increasing through + this period. If they had + only acquired these + +On line 11330: + through this period. + If they had only acquired + these NTMs to compete + +On line 11330: + this period. If + they had only acquired these + NTMs to compete with + +On line 11330: + If they had only + acquired these NTMs to compete + with Countrywide and + +On line 11330: + acquired these NTMs to + compete with Countrywide and + others for market + +On line 11330: + these NTMs to compete + with Countrywide and others + for market share the + +On line 11330: + with Countrywide and + others for market share the + competition was + +On line 11330: + for market share the + competition was already + over; their competitors + +On line 11330: + competition was + already over; their competitors + had abandoned the fi + +On line 11332: + was already over; their + competitors had abandoned the + fi eld. But the fact + +On line 11332: + their competitors had + abandoned the fi eld. But the + fact is that Fannie + +On line 11332: + fi eld. But the fact + is that Fannie did not—or + could not—increase its + +On line 11332: + is that Fannie did + not—or could not—increase its + market share between + +On line 11332: + Fannie did not—or + could not—increase its market + share between and shows + +On line 11332: + could not—increase its + market share between and shows + without question that + +On line 11332: + market share between + and shows without question that + market share was not + +On line 11332: + question that market + share was not the reason they + had acquired so many + +On line 11332: + market share was not + the reason they had acquired + so many NTMs by the + +On line 11332: + was not the reason + they had acquired so many NTMs + by the time they failed + +On line 11332: + not the reason they + had acquired so many NTMs by + the time they failed in + +On line 11334: + the time they failed in + September Beleaguered by + accounting problems, + +On line 11334: + failed in September + Beleaguered by accounting + problems, suff ering + +On line 11334: + evaluate the risks + of the new kinds of mortgages + they would have to buy, + +On line 11334: + the risks of the new + kinds of mortgages they would have + to buy, Fannie had + +On line 11334: + risks of the new kinds + of mortgages they would have to + buy, Fannie had no + +On line 11334: + new kinds of mortgages + they would have to buy, Fannie + had no option but + +On line 11334: + kinds of mortgages they + would have to buy, Fannie had + no option but to + +On line 11334: + of mortgages they would + have to buy, Fannie had no + option but to stay + +On line 11334: + they would have to buy, + Fannie had no option but + to stay the course they + +On line 11334: + have to buy, Fannie + had no option but to stay + the course they had been + +On line 11334: + had no option but + to stay the course they had been + following for years. + +On line 11336: + but to stay the course + they had been following for + years. Th e NTMs they + +On line 11336: + to stay the course they + had been following for years. + Th e NTMs they bought + +On line 11336: + the course they had been + following for years. Th e + NTMs they bought during + +On line 11336: + following for years. + Th e NTMs they bought during + the period from + +On line 11336: + years. Th e NTMs they + bought during the period + from to were acquired + +On line 11336: + Th e NTMs they bought + during the period from + to were acquired to + +On line 11336: + NTMs they bought during + the period from to were + acquired to comply + +On line 11336: + the period from + to were acquired to comply + with the AH goals and + +On line 11336: + period from to + were acquired to comply with + the AH goals and not + +On line 11336: + from to were acquired + to comply with the AH goals + and not to increase + +On line 11336: + to were acquired to + comply with the AH goals and + not to increase their + +On line 11336: + acquired to comply + with the AH goals and not to + increase their market + +On line 11336: + to comply with the + AH goals and not to increase + their market share—as + +On line 11336: + comply with the AH + goals and not to increase their + market share—as much + +On line 11336: + AH goals and not to + increase their market share—as + much as Fannie might + +On line 11336: + increase their market + share—as much as Fannie might + have preferred to do + +On line 11336: + market share—as much + as Fannie might have preferred + to do so. Fannie’s + +On line 11336: + have preferred to do + so. Fannie’s market share fi + nally did increase + +On line 11336: + to do so. Fannie’s + market share fi nally did + increase in when the + +On line 11336: + so. Fannie’s market + share fi nally did increase + in when the asset-backed + +On line 11336: + nally did increase + in when the asset-backed market + collapsed, Countrywide + +On line 11336: + did increase in when + the asset-backed market collapsed, + Countrywide weakened, + +On line 11336: + in when the asset-backed + market collapsed, Countrywide + weakened, and neither + +On line 11336: + weakened, and neither + Countrywide nor anyone else + could continue to + +On line 11336: + else could continue + to securitize mortgages. + In a report to + +On line 11336: + could continue to + securitize mortgages. In + a report to the + +On line 11336: + of directors on + October Mudd reported + that Fannie’s market + +On line 11336: + Mudd reported that + Fannie’s market share, which was + percent of the whole + +On line 11336: + that Fannie’s market + share, which was percent of the + whole market at the + +On line 11336: + market share, which was + percent of the whole market + at the beginning + +On line 11336: + share, which was percent + of the whole market at the + beginning of had + +On line 11338: + of the whole market + at the beginning of had + risen to percent.113 Th + +On line 11340: + the whole market at + the beginning of had risen + to percent.113 Th at + +On line 11340: + whole market at the + beginning of had risen to + percent.113 Th at leaves + +On line 11340: + at the beginning + of had risen to percent.113 Th + at leaves one other + +On line 11340: + Fannie and Freddie + were buying NTMs because they + were profi table. Th + +On line 11342: + buying NTMs because + they were profi table. Th at + issue is addressed + +On line 11342: + NTMs because they were + profi table. Th at issue + is addressed in the + +On line 11342: + because they were profi + table. Th at issue is + addressed in the next + +On line 11342: + they were profi table. + Th at issue is addressed + in the next section. + +On line 11344: + were profi table. Th + at issue is addressed in + the next section. Did + +On line 11344: + Th at issue is + addressed in the next section. + Did Fannie acquire + +On line 11344: + addressed in the next + section. Did Fannie acquire + NTMs because these loans + +On line 11346: + section. Did Fannie + acquire NTMs because these loans + were profi table1 From + +On line 11346: + Did Fannie acquire + NTMs because these loans were profi + table1 From time to + +On line 11346: + NTMs because these loans + were profi table1 From time to + time, commentators + +On line 11346: + because these loans were + profi table1 From time to time, + commentators on + +On line 11346: + table1 From time to + time, commentators on the + GSEs have suggested + +On line 11348: + time, commentators + on the GSEs have suggested + that the GSEs’ real + +On line 11348: + GSEs have suggested + that the GSEs’ real motive + for acquiring NTMs + +On line 11348: + have suggested that + the GSEs’ real motive for + acquiring NTMs was + +On line 11348: + that the GSEs’ real + motive for acquiring NTMs + was not that they had + +On line 11348: + real motive for + acquiring NTMs was not that + they had to comply + +On line 11350: + acquiring NTMs was + not that they had to comply + with the AH goals, but + +On line 11350: + NTMs was not that they + had to comply with the AH + goals, but that they were + +On line 11350: + not that they had to + comply with the AH goals, but + that they were seeking + +On line 11350: + they had to comply + with the AH goals, but that they + were seeking the profi + +On line 11350: + had to comply with + the AH goals, but that they were + seeking the profi ts + +On line 11350: + comply with the AH + goals, but that they were seeking + the profi ts these risky + +On line 11350: + the AH goals, but that + they were seeking the profi ts + these risky loans produced. + +On line 11350: + AH goals, but that they + were seeking the profi ts these + risky loans produced. Th + +On line 11350: + goals, but that they were + seeking the profi ts these risky + loans produced. Th is + +On line 11352: + they were seeking the + profi ts these risky loans produced. + Th is could have been + +On line 11352: + were seeking the profi + ts these risky loans produced. Th + is could have been true + +On line 11352: + seeking the profi ts + these risky loans produced. Th is + could have been true in + +On line 11352: + the profi ts these risky + loans produced. Th is could have + been true in the 1990s, + +On line 11352: + profi ts these risky loans + produced. Th is could have been + true in the 1990s, but + +On line 11352: + these risky loans produced. + Th is could have been true in + the 1990s, but aft er + +On line 11352: + risky loans produced. Th + is could have been true in the + 1990s, but aft er the + +On line 11352: + produced. Th is could + have been true in the 1990s, but + aft er the major + +On line 11352: + Th is could have been + true in the 1990s, but aft er + the major increase + +On line 11352: + is could have been true + in the 1990s, but aft er the + major increase in + +On line 11352: + have been true in the + 1990s, but aft er the major + increase in the AH + +On line 11352: + true in the 1990s, but + aft er the major increase + in the AH goals in + +On line 11354: + the 1990s, but aft er + the major increase in the + AH goals in Fannie + +On line 11354: + aft er the major + increase in the AH goals in + Fannie began to + +On line 11354: + AH goals in Fannie + began to recognize that + complying with the + +On line 11354: + to recognize that + complying with the goals was + reducing the fi + +On line 11354: + complying with the + goals was reducing the fi + rm’s profi tability. + +On line 11354: + was reducing the + fi rm’s profi tability. By + Fannie was asking + +On line 11354: + rm’s profi tability. + By Fannie was asking for + relief from the goals. + +On line 11358: + relief from the goals. + Th e following table, + drawn from a FHFA + +On line 11358: + Th e following + table, drawn from a FHFA + publication, shows + +On line 11358: + table, drawn from a + FHFA publication, shows + the applicable + +On line 11358: + publication, shows + the applicable AH goals + over the period + +On line 11358: + the applicable + AH goals over the period + from through and the GSEs’ + +On line 11360: + the period from + through and the GSEs’ success in + meeting them. Fannie + +On line 11360: + success in meeting + them. Fannie Mae, Minutes of + a Meeting of the + +On line 11368: + Board of Directors, + October p.18. Dissenting + Statement Table GSEs’ + +On line 11400: + Success in Meeting + Aff ordable Housing Goals, 1996-2007 + Low Mod Housing Goals + +On line 11402: + Aff ordable Housing + Goals, 1996-2007 Low Mod Housing Goals + Fannie Actual + +On line 11458: + Low Mod Housing Goals + Fannie Actual Freddie + Actual Special + +On line 11574: + Actual Freddie + Actual Underserved Goal + Fannie Actual + +On line 11630: + Fannie Actual + Freddie Actual As the + table shows, Fannie + +On line 11630: + Freddie exceeded + the AH goals virtually + each year, but not by + +On line 11630: + exceeded the AH + goals virtually each year, + but not by signifi + +On line 11632: + goals virtually + each year, but not by signifi + cant margins. Th ey + +On line 11632: + each year, but not by + signifi cant margins. Th ey + simply kept pace with + +On line 11632: + signifi cant margins. + Th ey simply kept pace with + the increases in + +On line 11634: + simply kept pace with + the increases in the goals + as these requirements + +On line 11634: + the increases in + the goals as these requirements + came into force over + +On line 11634: + increases in the + goals as these requirements came + into force over the + +On line 11634: + in the goals as these + requirements came into force + over the years. Th is + +On line 11634: + as these requirements + came into force over the years. + Th is alone suggests + +On line 11634: + these requirements came + into force over the years. Th + is alone suggests that + +On line 11636: + into force over the + years. Th is alone suggests that + they did not increase + +On line 11636: + suggests that they did + not increase their purchases + in order to earn + +On line 11636: + they did not increase + their purchases in order + to earn profi ts. If + +On line 11636: + did not increase their + purchases in order to + earn profi ts. If that + +On line 11636: + their purchases in + order to earn profi ts. If + that was their purpose + +On line 11636: + to earn profi ts. If + that was their purpose they would + have substantially + +On line 11636: + that was their purpose + they would have substantially + exceeded the goals, + +On line 11636: + purpose they would have + substantially exceeded + the goals, since their fi + +On line 11636: + the goals, since their fi + nancial advantages (low fi + nancing costs and low + +On line 11636: + fi nancing costs and + low capital requirements) + allowed them to pay + +On line 11636: + to pay more for the + mortgages they wanted than any + of their competitors. + +On line 11636: + more for the mortgages + they wanted than any of their + competitors. As HUD + +On line 11636: + mortgages they wanted + than any of their competitors. + As HUD noted in + +On line 11638: + they wanted than any + of their competitors. As HUD + noted in "Because + +On line 11638: + their competitors. As + HUD noted in "Because the + GSEs have a funding + +On line 11638: + in "Because the GSEs + have a funding advantage + over other market + +On line 11640: + their competitors and + increase their market share."115 As + early as there were + +On line 11640: + As early as there + were clear concerns at Fannie + about how the percent + +On line 11640: + early as there were + clear concerns at Fannie about + how the percent LMI + +On line 11640: + were clear concerns at + Fannie about how the percent + LMI goal—which HUD had + +On line 11640: + at Fannie about how + the percent LMI goal—which HUD + had signaled as its + +On line 11640: + Fannie about how the + percent LMI goal—which HUD had + signaled as its next + +On line 11640: + about how the percent + LMI goal—which HUD had signaled + as its next move—would + +On line 11640: + how the percent LMI + goal—which HUD had signaled as + its next move—would be + +On line 11642: + percent LMI goal—which + HUD had signaled as its next + move—would be met. In + +On line 11642: + LMI goal—which HUD had + signaled as its next move—would + be met. In a June + +On line 11642: + had signaled as its + next move—would be met. In a + June memorandum,116 + +On line 11642: + signaled as its next + move—would be met. In a June + memorandum,116 four + +On line 11642: + move—would be met. In + a June memorandum,116 four + Fannie staff members + +On line 11642: + be met. In a June + memorandum,116 four Fannie + staff members proposed + +On line 11642: + memorandum,116 four + Fannie staff members proposed + three categories of + +On line 11642: + members proposed three + categories of rules changes that + would enable Fannie + +On line 11642: + categories of rules + changes that would enable Fannie + to meet the goals more + +On line 11642: + of rules changes that would + enable Fannie to meet the + goals more easily: + +On line 11642: + enable Fannie to + meet the goals more easily: + (i) persuade HUD to + +On line 11642: + goals more easily: + (i) persuade HUD to change the + goals accounting (what + +On line 11642: + more easily: (i) + persuade HUD to change the goals + accounting (what goes + +On line 11642: + HUD to change the goals + accounting (what goes into + the numerator + +On line 11642: + (ii) enter other + businesses where the pickings + might be goals-rich, such + +On line 11642: + businesses where the + pickings might be goals-rich, such + as manufactured + +On line 11642: + might be goals-rich, such + as manufactured housing + and, signifi cantly, + +On line 11642: + be goals-rich, such as + manufactured housing and, + signifi cantly, Alt-A + +On line 11642: + as manufactured + housing and, signifi cantly, + Alt-A and subprime ("Eff + +On line 11642: + and, signifi cantly, + Alt-A and subprime ("Eff orts to + expand into Alt-A + +On line 11642: + Alt-A and subprime ("Eff + orts to expand into Alt-A + and A-markets (the + +On line 11642: + ("Eff orts to expand + into Alt-A and A-markets + (the highest grade of + +On line 11642: + Alt-A and A-markets + (the highest grade of subprime + lending) should also + +On line 11642: + (the highest grade of + subprime lending) should also + yield incremental + +On line 11642: + subprime lending) should + also yield incremental + business that will have + +On line 11642: + business that will have + a salutary eff ect on our + low-and moderate-income + +On line 11642: + a salutary eff ect + on our low-and moderate-income + score"); and (iii) persuade + +On line 11642: + salutary eff ect on + our low-and moderate-income score"); + and (iii) persuade HUD + +On line 11642: + eff ect on our low-and + moderate-income score"); and (iii) + persuade HUD to adopt + +On line 11642: + moderate-income score"); + and (iii) persuade HUD to adopt + diff erent methods + +On line 11644: + and (iii) persuade HUD + to adopt diff erent methods + of goals scoring. By + +On line 11644: + persuade HUD to adopt + diff erent methods of goals + scoring. By Fannie + +On line 11644: + diff erent methods + of goals scoring. By Fannie + was eff ectively + +On line 11644: + erent methods of + goals scoring. By Fannie was + eff ectively in + +On line 11644: + of goals scoring. By + Fannie was eff ectively + in competition + +On line 11644: + was eff ectively + in competition with banks + that were required to + +On line 11644: + eff ectively in + competition with banks that + were required to make + +On line 11644: + competition with + banks that were required to make + mortgage loans under + +On line 11644: + banks that were required + to make mortgage loans under + CRA to roughly the + +On line 11644: + that were required to + make mortgage loans under CRA + to roughly the same + +On line 11644: + to make mortgage loans + under CRA to roughly the + same population + +On line 11644: + low-income borrowers + targeted in HUD’s AH goals. + Rather than selling their + +On line 11644: + targeted in HUD’s + AH goals. Rather than selling their + CRA loans to Fannie + +On line 11644: + in HUD’s AH goals. Rather + than selling their CRA loans to + Fannie and Freddie, + +On line 11644: + goals. Rather than selling + their CRA loans to Fannie and + Freddie, banks and S&Ls + +On line 11644: + selling their CRA loans + to Fannie and Freddie, banks + and S&Ls had begun + +On line 11644: + CRA loans to Fannie + and Freddie, banks and S&Ls had + begun to retain + +On line 11644: + Fannie and Freddie, + banks and S&Ls had begun to + retain the loans in + +On line 11644: + Freddie, banks and S&Ls + had begun to retain the + loans in portfolio. + +On line 11644: + begun to retain + the loans in portfolio. In + a presentation + +On line 11644: + loans in portfolio. + In a presentation in + November Barry + +On line 11644: + Barry Zigas, a + Senior Vice President of + Fannie, noted that + +On line 11644: + Zigas, a Senior + Vice President of Fannie, + noted that "Our own + +On line 11644: + "Our own anecdotal + evidence suggests that this + increase [in banks’ and + +On line 11650: + -65142. Bell, Kinney, Kunde + and Weech, through Zigas and Marks + internal memo Frank + +On line 11652: + and Weech, through Zigas + and Marks internal memo Frank + Raines, "RE: HUD Housing + +On line 11652: + Weech, through Zigas and + Marks internal memo Frank Raines, + "RE: HUD Housing Goals + +On line 11656: + Marks internal memo + Frank Raines, "RE: HUD Housing Goals + Options," June Peter + +On line 11660: + Housing Goals Options," + June Peter J. Wallison + S&Ls’ holding loans in + +On line 11660: + Options," June Peter + J. Wallison S&Ls’ holding + loans in portfolio] + +On line 11660: + J. Wallison S&Ls’ + holding loans in portfolio] + is due in part to + +On line 11660: + S&Ls’ holding loans in + portfolio] is due in part + to below-market + +On line 11662: + is due in part to + below-market CRA products."117 + In other words, banks + +On line 11662: + to below-market + CRA products."117 In other words, + banks and S&Ls subject + +On line 11662: + below-market CRA + products."117 In other words, banks + and S&Ls subject to + +On line 11662: + In other words, banks + and S&Ls subject to CRA were + making mortgage loans + +On line 11662: + and S&Ls subject to + CRA were making mortgage loans + at below market + +On line 11662: + at below market + interest rates, and thus could + not sell them without + +On line 11664: + interest rates, and + thus could not sell them without + taking losses. Th + +On line 11666: + and thus could not sell + them without taking losses. + Th is was troubling + +On line 11666: + thus could not sell them + without taking losses. Th + is was troubling for + +On line 11666: + not sell them without + taking losses. Th is was + troubling for Fannie + +On line 11666: + them without taking + losses. Th is was troubling + for Fannie because + +On line 11666: + taking losses. Th + is was troubling for Fannie + because it meant that + +On line 11666: + Th is was troubling + for Fannie because it meant + that in order to + +On line 11666: + for Fannie because + it meant that in order to + capture these loans they + +On line 11666: + because it meant that + in order to capture these + loans they would have to + +On line 11666: + meant that in order + to capture these loans they would + have to increase what + +On line 11666: + that in order to + capture these loans they would have + to increase what they + +On line 11666: + to capture these loans + they would have to increase what + they were willing to + +On line 11666: + capture these loans they + would have to increase what they + were willing to pay + +On line 11666: + loans they would have to + increase what they were willing + to pay for these loans. + +On line 11666: + would have to increase + what they were willing to pay + for these loans. Doing + +On line 11666: + have to increase what + they were willing to pay for + these loans. Doing so + +On line 11666: + to increase what they + were willing to pay for these + loans. Doing so would + +On line 11666: + what they were willing + to pay for these loans. Doing + so would underprice + +On line 11666: + they were willing to + pay for these loans. Doing so + would underprice the + +On line 11666: + were willing to pay + for these loans. Doing so would + underprice the risks + +On line 11666: + to pay for these loans. + Doing so would underprice + the risks they would be + +On line 11666: + these loans. Doing so + would underprice the risks they + would be assuming. + +On line 11668: + loans. Doing so would + underprice the risks they would + be assuming. It + +On line 11668: + would underprice the + risks they would be assuming. + It is important + +On line 11668: + underprice the risks + they would be assuming. It + is important to + +On line 11668: + assuming. It is + important to recognize + what was happening. + +On line 11668: + recognize what was + happening. Fannie, and the + banks and S&Ls under + +On line 11668: + what was happening. + Fannie, and the banks and S&Ls + under CRA, were now + +On line 11668: + Fannie, and the banks + and S&Ls under CRA, were now + competing for the + +On line 11668: + banks and S&Ls under + CRA, were now competing for + the same kinds of NTMs, + +On line 11668: + and S&Ls under CRA, + were now competing for the + same kinds of NTMs, and + +On line 11668: + S&Ls under CRA, were + now competing for the same + kinds of NTMs, and were + +On line 11668: + were now competing + for the same kinds of NTMs, and + were doing so by + +On line 11668: + so by lowering + their mortgage underwriting + standards and adding fl + +On line 11668: + subsidies. Simply + as a result of supply + and demand, all of + +On line 11668: + as a result of + supply and demand, all of + the participants + +On line 11668: + and demand, all of + the participants in this + competition were + +On line 11670: + to pay higher prices + for these increasingly risky + mortgages. Th e banks + +On line 11670: + higher prices for these + increasingly risky mortgages. + Th e banks and S&Ls + +On line 11670: + these increasingly + risky mortgages. Th e banks and + S&Ls that acquired these + +On line 11670: + increasingly risky + mortgages. Th e banks and S&Ls + that acquired these loans + +On line 11670: + risky mortgages. Th e + banks and S&Ls that acquired these + loans could not sell them, + +On line 11670: + e banks and S&Ls that + acquired these loans could not sell + them, without taking + +On line 11670: + S&Ls that acquired these + loans could not sell them, without + taking a loss, when + +On line 11670: + acquired these loans could + not sell them, without taking + a loss, when market + +On line 11670: + loans could not sell them, + without taking a loss, when + market interest + +On line 11670: + not sell them, without + taking a loss, when market + interest rates were + +On line 11670: + without taking a + loss, when market interest + rates were higher than + +On line 11670: + taking a loss, when + market interest rates were + higher than the rates + +On line 11670: + a loss, when market + interest rates were higher + than the rates on the + +On line 11670: + market interest + rates were higher than the rates + on the mortgages. Th + +On line 11672: + interest rates were + higher than the rates on the + mortgages. Th is is + +On line 11672: + rates were higher than + the rates on the mortgages. Th + is is the fi rst + +On line 11672: + than the rates on the + mortgages. Th is is the fi + rst indication + +On line 11672: + mortgages. Th is is + the fi rst indication + in the documents + +On line 11672: + Th is is the fi + rst indication in the + documents that the + +On line 11672: + indication in + the documents that the FCIC + received from Fannie + +On line 11672: + the documents that + the FCIC received from Fannie + that competition + +On line 11672: + documents that the + FCIC received from Fannie that + competition for + +On line 11672: + the FCIC received from + Fannie that competition + for subprime loans among + +On line 11672: + that competition + for subprime loans among the GSEs, + banks, S&Ls, and FHA was + +On line 11672: + loans among the GSEs, banks, + S&Ls, and FHA was causing the + underpricing of + +On line 11672: + and FHA was causing + the underpricing of risk—one + of the principal + +On line 11672: + principal causes + of the mortgage meltdown and + thus the fi nancial + +On line 11674: + nancial crisis. In + January Fannie began + planning for how to + +On line 11674: + January Fannie + began planning for how to + confront HUD before + +On line 11674: + planning for how to + confront HUD before the next + round of increases + +On line 11674: + for how to confront + HUD before the next round of + increases in the + +On line 11674: + HUD before the next + round of increases in the + AH goals, expected + +On line 11674: + before the next round + of increases in the AH + goals, expected to + +On line 11674: + round of increases + in the AH goals, expected + to occur in In + +On line 11674: + of increases in + the AH goals, expected to + occur in In an + +On line 11674: + goals, expected to + occur in In an "Action + Plan for the Housing + +On line 11674: + occur in In an + "Action Plan for the Housing + Goals Rewrite," dated + +On line 11674: + In an "Action Plan + for the Housing Goals Rewrite," + dated January + +On line 11674: + "Action Plan for the + Housing Goals Rewrite," dated + January Fannie + +On line 11674: + for the Housing Goals + Rewrite," dated January + Fannie staff reviewed + +On line 11674: + number of options, + and concluded that "Fannie + should strongly oppose: + +On line 11674: + and concluded that + "Fannie should strongly oppose: + goals increases and + +On line 11676: + "Fannie should strongly + oppose: goals increases and + new subgoals." (Slide In + +On line 11676: + goals increases and + new subgoals." (Slide In March as + Fannie prepared for + +On line 11676: + and new subgoals." (Slide + In March as Fannie prepared + for new increases + +On line 11676: + new subgoals." (Slide In + March as Fannie prepared for + new increases in + +On line 11676: + subgoals." (Slide In March + as Fannie prepared for new + increases in the + +On line 11676: + In March as Fannie + prepared for new increases + in the AH goals, its + +On line 11676: + Fannie prepared for + new increases in the AH + goals, its staff prepared + +On line 11676: + new increases in + the AH goals, its staff prepared + a presentation, + +On line 11676: + the AH goals, its staff + prepared a presentation, + perhaps for HUD or + +On line 11676: + perhaps for HUD or + for policy defense in + public forums. Th + +On line 11678: + or for policy + defense in public forums. + Th e apparent + +On line 11678: + policy defense + in public forums. Th e + apparent purpose + +On line 11678: + defense in public + forums. Th e apparent + purpose was to show + +On line 11678: + in public forums. + Th e apparent purpose + was to show that the + +On line 11678: + public forums. Th + e apparent purpose was + to show that the goals + +On line 11680: + that the goals should not + be increased signifi cantly + in Slide stated: In + +On line 11680: + signifi cantly in + Slide stated: In Fannie Mae + exceeded all our + +On line 11680: + in Slide stated: In + Fannie Mae exceeded all + our goals for the 9th + +On line 11680: + stated: In Fannie + Mae exceeded all our goals + for the 9th straight year. + +On line 11680: + exceeded all our + goals for the 9th straight year. But + it was probably + +On line 11680: + goals for the 9th straight + year. But it was probably + the most challenging + +On line 11680: + the most challenging + environment we’ve ever + faced. Meeting the goals + +On line 11680: + environment we’ve + ever faced. Meeting the goals + required heroic 4th + +On line 11680: + ever faced. Meeting + the goals required heroic 4th + quarter eff orts on + +On line 11680: + faced. Meeting the goals + required heroic 4th quarter + eff orts on the part + +On line 11680: + goals required heroic + 4th quarter eff orts on the + part of many across the + +On line 11680: + heroic 4th quarter + eff orts on the part of many + across the company. + +On line 11684: + the part of many across + the company. Vacations + were cancelled. Th e + +On line 11684: + across the company. + Vacations were cancelled. Th + e midnight oil burned. + +On line 11684: + were cancelled. Th e + midnight oil burned. Moreover, the + challenge freaked out the + +On line 11684: + Th e midnight oil + burned. Moreover, the challenge freaked + out the business side + +On line 11684: + e midnight oil burned. + Moreover, the challenge freaked out + the business side of + +On line 11684: + out the business side + of the house. Especially + because the tenseness + +On line 11684: + because the tenseness + around meeting the goals meant that + we considered not + +On line 11684: + we considered not + doing deals—not fulfi lling + our liquidity + +On line 11684: + our liquidity + function—and did deals at risks + and prices we would not + +On line 11684: + function—and did deals + at risks and prices we would not + have otherwise done.119 + +On line 11684: + at risks and prices we + would not have otherwise done.119 + [emphasis supplied] + +On line 11686: + not have otherwise + done.119 [emphasis supplied] By + September it was + +On line 11686: + becoming clear that + continuing increases + in the AH goals were + +On line 11686: + in the AH goals were + having a major adverse + eff ect on Fannie’s + +On line 11686: + having a major + adverse eff ect on Fannie’s + profi tability. In + +On line 11686: + adverse eff ect on + Fannie’s profi tability. In + a memorandum + +On line 11686: + tability. In a + memorandum to Brian + Graham (another + +On line 11688: + memorandum to + Brian Graham (another + Fannie offi cial), + +On line 11690: + Market Research and + Policy Development, + wrote: "Meeting the goals + +On line 11692: + diffi cult markets + imposes signifi cant costs + on the Company + +On line 11692: + imposes signifi + cant costs on the Company + and potentially + +On line 11692: + as much for housing + goals attainment as for the + economics of the + +On line 11694: + goals attainment as + for the economics of the + transaction."120 In a + +On line 11694: + for the economics + of the transaction."120 In a + June presentation + +On line 11694: + of the transaction."120 + In a June presentation + entitled "Costs and + +On line 11700: + Housing Goals Rewrite," + January Fannie Mae, "Th + e HUD Housing Goals," + +On line 11702: + Fannie Mae, "Th e + HUD Housing Goals," March Fannie + Mae internal memo, + +On line 11702: + HUD Housing Goals," March + Fannie Mae internal memo, + Paul Weech to Brian + +On line 11702: + Goals," March Fannie Mae + internal memo, Paul Weech to + Brian Graham, "RE: + +On line 11708: + Graham, "RE: Mission + Legislation," September + Dissenting Statement + +On line 11710: + Dissenting Statement + Activities,"121 the authors + noted in slide that + +On line 11710: + Activities,"121 the + authors noted in slide that + AH goal costs had risen + +On line 11710: + the authors noted + in slide that AH goal costs had + risen from in to in + +On line 11710: + authors noted in + slide that AH goal costs had risen + from in to in Slide + +On line 11710: + in slide that AH goal + costs had risen from in to in + Slide is entitled: + +On line 11710: + that AH goal costs had + risen from in to in Slide is + entitled: "Meeting + +On line 11710: + costs had risen from in + to in Slide is entitled: + "Meeting Future HUD + +On line 11710: + in to in Slide is + entitled: "Meeting Future + HUD Goals Appear Quite + +On line 11710: + HUD Goals Appear Quite + Daunting and Potentially + Costly" and reports, + +On line 11710: + Appear Quite Daunting + and Potentially Costly" + and reports, "Based on + +On line 11710: + and Potentially + Costly" and reports, "Based on + experience where + +On line 11710: + Costly" and reports, + "Based on experience where + goal acquisition + +On line 11710: + goal acquisition + costs (relative to Fannie + Mae model fees) cost + +On line 11710: + costs (relative to + Fannie Mae model fees) cost + between per goals unit + +On line 11710: + Mae model fees) cost + between per goals unit in the + fi rst quarter to + +On line 11710: + cost between per goals + unit in the fi rst quarter + to per unit in the + +On line 11710: + between per goals unit + in the fi rst quarter to + per unit in the fourth + +On line 11710: + per goals unit in the + fi rst quarter to per unit + in the fourth quarter, + +On line 11710: + unit in the fi rst + quarter to per unit in the + fourth quarter, meeting + +On line 11710: + fi rst quarter to + per unit in the fourth quarter, + meeting the shortfall + +On line 11710: + quarter to per unit + in the fourth quarter, meeting + the shortfall could cost + +On line 11710: + in the fourth quarter, + meeting the shortfall could cost + the company $6.5-$36.5 + +On line 11710: + meeting the shortfall + could cost the company $6.5-$36.5 + million to purchase + +On line 11710: + the shortfall could cost + the company $6.5-$36.5 million + to purchase suffi + +On line 11712: + shortfall could cost the + company $6.5-$36.5 million to + purchase suffi cient + +On line 11714: + purchase suffi cient + units." Th e presentation + concludes (slide "Cost of + +On line 11714: + suffi cient units." Th + e presentation concludes + (slide "Cost of mission + +On line 11716: + (slide "Cost of mission + activities— explicit + and implicit—over + +On line 11718: + likely averaged + approximately million + per year." Earlier, + +On line 11718: + approximately + million per year." Earlier, + I noted the eff + +On line 11718: + per year." Earlier, + I noted the eff orts of + Fannie and Freddie + +On line 11718: + I noted the eff + orts of Fannie and Freddie + to window-dress their + +On line 11718: + noted the eff orts + of Fannie and Freddie to + window-dress their records + +On line 11718: + eff orts of Fannie + and Freddie to window-dress + their records for HUD by + +On line 11718: + window-dress their records + for HUD by temporarily + acquiring loans that + +On line 11718: + their records for HUD by + temporarily acquiring + loans that would comply + +On line 11720: + that would comply with + the AH goals, while giving the + seller the option + +On line 11720: + AH goals, while giving + the seller the option to + reacquire the loans at + +On line 11720: + giving the seller + the option to reacquire the + loans at a later + +On line 11720: + seller the option + to reacquire the loans at a + later time. In we + +On line 11720: + option to reacquire + the loans at a later time. + In we begin to + +On line 11720: + to reacquire the loans + at a later time. In we + begin to see eff + +On line 11720: + loans at a later + time. In we begin to see + eff orts by Fannie’s + +On line 11720: + at a later time. + In we begin to see eff + orts by Fannie’s staff + +On line 11720: + a later time. In + we begin to see eff orts + by Fannie’s staff to + +On line 11720: + time. In we begin + to see eff orts by Fannie’s + staff to accomplish + +On line 11720: + In we begin to + see eff orts by Fannie’s staff + to accomplish the + +On line 11720: + we begin to see + eff orts by Fannie’s staff to + accomplish the same + +On line 11720: + eff orts by Fannie’s + staff to accomplish the same + window-dressing in + +On line 11720: + same window-dressing + in another way--delaying + acquisitions of + +On line 11720: + acquisitions of + non-goal-eligible loans so + Fannie can meet the + +On line 11720: + non-goal-eligible + loans so Fannie can meet the + AH goals in that year; + +On line 11720: + loans so Fannie can + meet the AH goals in that year; + we also see the + +On line 11720: + so Fannie can meet + the AH goals in that year; we + also see the fi + +On line 11720: + can meet the AH goals + in that year; we also see + the fi rst eff orts + +On line 11720: + meet the AH goals in + that year; we also see the + fi rst eff orts to + +On line 11720: + goals in that year; we + also see the fi rst eff + orts to calculate + +On line 11720: + goal-compliance on + Fannie’s profi tability. In + a presentation + +On line 11720: + profi tability. In + a presentation dated + September Barry + +On line 11722: + Barry Zigas, the + key Fannie offi cial on + aff ordable housing, + +On line 11724: + key Fannie offi + cial on aff ordable housing, + outlined a "business + +On line 11724: + offi cial on aff + ordable housing, outlined a + "business deferral + +On line 11724: + cial on aff ordable + housing, outlined a "business + deferral option." + +On line 11724: + option." Under that + initiative, Fannie would ask + seven major lenders + +On line 11724: + initiative, Fannie + would ask seven major lenders + to defer until + +On line 11728: + goal computation + and thus bring Fannie nearer + to goal compliance + +On line 11728: + computation and + thus bring Fannie nearer to + goal compliance in + +On line 11728: + and thus bring Fannie + nearer to goal compliance + in the 4th quarter + +On line 11728: + bring Fannie nearer + to goal compliance in the + 4th quarter of Th + +On line 11728: + Fannie nearer to + goal compliance in the 4th + quarter of Th e + +On line 11728: + compliance in the + 4th quarter of Th e cost + of the deferral + +On line 11730: + quarter of Th e + cost of the deferral alone + was estimated + +On line 11732: + of the deferral + alone was estimated at + $30-$38 million.122 In a + +On line 11732: + entitled "Update + on Fannie Mae’s Housing Goals + Performance,"123 Fannie + +On line 11732: + noted several + "Undesirable Tradeoff s + Necessary to Meet + +On line 11734: + included signifi + cant additional credit + risk, and negative + +On line 11734: + risk, and negative + returns ("Deal economics are + well below target + +On line 11734: + economics are well + below target returns; some + deals are producing + +On line 11734: + "G-fees may not cover + expected losses"). One of + the most noteworthy + +On line 11734: + "Liquidity to + Questionable Products: Buying + exotic product + +On line 11734: + product encourages + continuation of risky + lending; many products + +On line 11734: + continuation + of risky lending; many products + present with signifi cant + +On line 11734: + of risky lending; many + products present with signifi cant + risk-layering; consumers + +On line 11734: + present with signifi cant + risk-layering; consumers are at + risk of payment shock + +On line 11734: + at risk of payment + shock and loss of equity; + potential need to + +On line 11736: + our responsible + lending policies to get goals + business." Much of the + +On line 11736: + lending policies to + get goals business." Much of the + narrative about the + +On line 11736: + get goals business." Much + of the narrative about the + fi nancial crisis + +On line 11736: + goals business." Much of + the narrative about the fi + nancial crisis posits + +On line 11736: + of the narrative + about the fi nancial crisis + posits that unscrupulous + +On line 11736: + the narrative about + the fi nancial crisis posits + that unscrupulous and + +On line 11736: + that unscrupulous and + unregulated mortgage + originators tricked + +On line 11736: + unregulated + mortgage originators tricked + borrowers into + +On line 11738: + originators tricked + borrowers into taking + on bad mortgages. Th + +On line 11740: + into taking on + bad mortgages. Th e idea that + predatory lending + +On line 11740: + bad mortgages. Th e + idea that predatory lending + was a major source + +On line 11740: + mortgages. Th e idea + that predatory lending was + a major source of + +On line 11740: + idea that predatory + lending was a major source + of the NTMs in the + +On line 11740: + a major source of + the NTMs in the fi nancial + system in is a + +On line 11740: + source of the NTMs in + the fi nancial system in + is a signifi cant + +On line 11740: + in the fi nancial + system in is a signifi + cant element of + +On line 11740: + element of the + Commission majority’s + report, although the + +On line 11740: + the Commission was + never able to provide any + data to support + +On line 11742: + able to provide any + data to support this point. + Th is Fannie slide + +On line 11742: + provide any data + to support this point. Th is + Fannie slide suggests + +On line 11742: + to support this point. + Th is Fannie slide suggests + that loans later dubbed + +On line 11742: + point. Th is Fannie + slide suggests that loans later + dubbed "predatory" might + +On line 11742: + slide suggests that loans + later dubbed "predatory" might + actually have + +On line 11742: + dubbed "predatory" might + actually have been made + to comply with the + +On line 11744: + might actually + have been made to comply with + the AH goals. Th is + +On line 11744: + with the AH goals. Th + is possibility is + suggested, too, in + +On line 11746: + possibility + is suggested, too, in a + message sent in to + +On line 11746: + too, in a message + sent in to Freddie’s CEO, Richard + Syron, by Freddie’s + +On line 11746: + a message sent in + to Freddie’s CEO, Richard Syron, + by Freddie’s chief risk + +On line 11746: + sent in to Freddie’s + CEO, Richard Syron, by Freddie’s + chief risk manager, + +On line 11746: + in to Freddie’s CEO, + Richard Syron, by Freddie’s chief + risk manager, David + +On line 11746: + CEO, Richard Syron, by + Freddie’s chief risk manager, + David Andrukonis, when + +On line 11746: + chief risk manager, + David Andrukonis, when Syron + was considering + +On line 11746: + risk manager, David + Andrukonis, when Syron was + considering whether + +On line 11746: + David Andrukonis, when + Syron was considering + whether to authorize + +On line 11746: + considering whether + to authorize a "Ninja" + (no income/no jobs/no + +On line 11746: + to authorize a + "Ninja" (no income/no jobs/no + assets) product that + +On line 11746: + "Ninja" (no income/no + jobs/no assets) product that + he ultimately + +On line 11746: + assets) product that + he ultimately approved. + Andrukonis argued + +On line 11746: + he ultimately + approved. Andrukonis argued + against authorizing + +On line 11746: + approved. Andrukonis + argued against authorizing + Freddie’s purchase: "Th + +On line 11750: + for the perception + and reality Fannie + Mae, "Costs and Benefi + +On line 11750: + the perception and + reality Fannie Mae, + "Costs and Benefi ts + +On line 11752: + "Costs and Benefi ts + of Mission Activities, + Project Phineas," June Barry + +On line 11754: + Zigas, "Housing Goals + and Minority Lending," + September Fannie + +On line 11754: + "Update on Fannie + Mae’s Housing Goals Performance," + Presentation to + +On line 11760: + U.S. Department of + Housing and Development, + October Peter + +On line 11762: + J. Wallison of + predatory lending, with this + product is great."124 But + +On line 11762: + product is great."124 But + the product was approved by + Freddie, probably + +On line 11762: + product was approved + by Freddie, probably for + the reason stated + +On line 11762: + Freddie, probably + for the reason stated by + another Freddie + +On line 11764: + another Freddie + employee: "Th e Alt-A [(low + doc/no doc)] business + +On line 11766: + doc/no doc)] business + makes a contribution to + our HUD goals."125 On May + +On line 11766: + a contribution + to our HUD goals."125 On May a + Fannie staff memo to + +On line 11766: + our HUD goals."125 On May + a Fannie staff memo to the + Single Family + +On line 11766: + memo to the Single + Family Business Credit + Committee revealed + +On line 11766: + Committee revealed + the serious credit and + fi nancial problems + +On line 11766: + acquiring subprime + mortgages to meet the AH goals. + Th e memo describes + +On line 11768: + mortgages to meet the + AH goals. Th e memo describes + the competitive + +On line 11768: + "product enhancements + from Freddie Mac, FHA, Alt-A and + subprime lenders have all + +On line 11768: + and subprime lenders have + all contributed to increased + competition for + +On line 11768: + have all contributed + to increased competition + for goals rich loans…On the + +On line 11768: + rich loans…On the issue + of seller contributions + [in which the seller + +On line 11768: + loans…On the issue of + seller contributions [in + which the seller of + +On line 11768: + issue of seller + contributions [in which the + seller of the home + +On line 11768: + contributions [in + which the seller of the home + pays cash expenses + +On line 11768: + which the seller of + the home pays cash expenses + for the buyer] even + +On line 11768: + the seller of the + home pays cash expenses for + the buyer] even FHA + +On line 11768: + seller of the home + pays cash expenses for the + buyer] even FHA has + +On line 11768: + FHA has expanded + their guidelines by allowing + contributions for + +On line 11768: + for LTVs up to that + can be used toward closing, + prepaid expenses, + +On line 11768: + up to that can be + used toward closing, prepaid + expenses, discount + +On line 11768: + used toward closing, + prepaid expenses, discount + points and other fi + +On line 11768: + prepaid expenses, + discount points and other fi + nancing concessions."126 + +On line 11772: + expenses, discount + points and other fi nancing + concessions."126 Th e + +On line 11772: + points and other fi + nancing concessions."126 Th e + memorandum is + +On line 11772: + nancing concessions."126 + Th e memorandum is + eye-opening for what + +On line 11772: + e memorandum + is eye-opening for what it + says about the credit + +On line 11772: + memorandum is + eye-opening for what it says + about the credit risks + +On line 11772: + is eye-opening for + what it says about the credit + risks Fannie had to + +On line 11772: + eye-opening for what + it says about the credit risks + Fannie had to take + +On line 11772: + for what it says about + the credit risks Fannie had + to take in order + +On line 11772: + what it says about the + credit risks Fannie had to + take in order to + +On line 11772: + says about the credit + risks Fannie had to take in + order to get the + +On line 11772: + credit risks Fannie + had to take in order to + get the goals-rich loans + +On line 11772: + to take in order + to get the goals-rich loans it + needed to meet HUD’s + +On line 11772: + to get the goals-rich + loans it needed to meet HUD’s + AH requirements for + +On line 11772: + loans it needed to + meet HUD’s AH requirements for + Table below shows + +On line 11772: + needed to meet HUD’s + AH requirements for Table + below shows the costs + +On line 11772: + HUD’s AH requirements + for Table below shows the + costs of NTMs in terms + +On line 11772: + AH requirements for + Table below shows the costs + of NTMs in terms of + +On line 11772: + for Table below + shows the costs of NTMs in terms + of the guarantee + +On line 11772: + Table below shows + the costs of NTMs in terms of + the guarantee fee + +On line 11772: + the costs of NTMs in + terms of the guarantee fee + (G-fee) "gap." (In order + +On line 11772: + costs of NTMs in terms + of the guarantee fee (G-fee) + "gap." (In order to + +On line 11772: + of the guarantee + fee (G-fee) "gap." (In order to + determine whether a + +On line 11772: + (G-fee) "gap." (In order + to determine whether a loan + contributed to a + +On line 11772: + loan contributed to + a return on equity, + Fannie used a G-fee + +On line 11772: + to a return on + equity, Fannie used a + G-fee pricing model + +On line 11772: + pricing model that + took into account credit + risk as well as a + +On line 11772: + took into account + credit risk as well as a + number of other + +On line 11772: + account credit risk + as well as a number of + other factors; a + +On line 11772: + credit risk as well + as a number of other + factors; a G-fee "gap" + +On line 11772: + risk as well as a + number of other factors; + a G-fee "gap" was the + +On line 11772: + as a number of + other factors; a G-fee "gap" + was the diff erence + +On line 11772: + number of other + factors; a G-fee "gap" was the + diff erence between + +On line 11772: + factors; a G-fee "gap" + was the diff erence between + the G-fees required by + +On line 11772: + was the diff erence + between the G-fees required by + the pricing model + +On line 11772: + the G-fees required by + the pricing model for a + particular loan + +On line 11772: + the pricing model + for a particular loan + to contribute to + +On line 11772: + pricing model for + a particular loan to + contribute to a + +On line 11772: + to contribute to + a return on equity + and a loan that did + +On line 11772: + contribute to a + return on equity and + a loan that did not.) + +On line 11774: + on equity and + a loan that did not.) Th e + table in this memo + +On line 11774: + and a loan that did + not.) Th e table in this + memo shows the results + +On line 11776: + a loan that did not.) + Th e table in this memo + shows the results for + +On line 11776: + loan that did not.) Th + e table in this memo shows + the results for three + +On line 11776: + Th e table in + this memo shows the results for + three subprime products + +On line 11776: + shows the results for + three subprime products under + consideration, + +On line 11776: + three subprime products + under consideration, + a year fi xed rate + +On line 11776: + consideration, + a year fi xed rate mortgage + (FRM), a year ARM, and + +On line 11776: + a year fi xed rate + mortgage (FRM), a year ARM, and + and year fi xed rate + +On line 11776: + fi xed rate mortgage + (FRM), a year ARM, and and year + fi xed rate mortgages. + +On line 11776: + xed rate mortgage (FRM), + a year ARM, and and year fi + xed rate mortgages. For + +On line 11776: + (FRM), a year ARM, and + and year fi xed rate mortgages. + For simplicity, + +On line 11776: + a year ARM, and and + year fi xed rate mortgages. For + simplicity, this + +On line 11776: + and year fi xed rate + mortgages. For simplicity, + this analysis will + +On line 11776: + For simplicity, + this analysis will discuss + only the year fi + +On line 11776: + this analysis will + discuss only the year fi + xed rate product. Th + +On line 11776: + will discuss only + the year fi xed rate product. + Th e table shows + +On line 11776: + discuss only the + year fi xed rate product. Th + e table shows that + +On line 11778: + the year fi xed rate + product. Th e table shows + that the base product, + +On line 11778: + fi xed rate product. + Th e table shows that the + base product, the year + +On line 11778: + xed rate product. Th + e table shows that the base + product, the year FRM, + +On line 11778: + Th e table shows + that the base product, the year + FRM, with a zero + +On line 11778: + that the base product, + the year FRM, with a zero + downpayment should be + +On line 11778: + the year FRM, with a + zero downpayment should be + priced according to + +On line 11778: + zero downpayment + should be priced according to + the model at a + +On line 11778: + model at a G-fee + of basis points. However, + the memo reports that + +On line 11778: + the memo reports that + Fannie is actually + buying loans like that + +On line 11778: + reports that Fannie + is actually buying + loans like that at a + +On line 11778: + is actually + buying loans like that at a + price consistent with + +On line 11778: + buying loans like that + at a price consistent with + an annual fee + +On line 11778: + consistent with an + annual fee of basis + points, producing a + +On line 11778: + an annual fee + of basis points, producing + a gap (or loss from + +On line 11778: + annual fee of + basis points, producing a + gap (or loss from the + +On line 11778: + fee of basis points, + producing a gap (or loss + from the model) of + +On line 11778: + points, producing a + gap (or loss from the model) + of basis points. Th + +On line 11778: + producing a gap + (or loss from the model) of + basis points. Th e + +On line 11780: + a gap (or loss from + the model) of basis points. + Th e reason the + +On line 11780: + gap (or loss from the + model) of basis points. Th + e reason the gap + +On line 11780: + from the model) of + basis points. Th e reason + the gap is so large + +On line 11780: + model) of basis + points. Th e reason the gap + is so large is shown + +On line 11780: + of basis points. Th + e reason the gap is so + large is shown in the + +On line 11780: + points. Th e reason + the gap is so large is shown + in the table: the + +On line 11780: + the gap is so large + is shown in the table: the + anticipated + +On line 11782: + on that zero-down + mortgage was percent. Th e + table then goes on + +On line 11782: + zero-down mortgage + was percent. Th e table + then goes on to look + +On line 11782: + mortgage was percent. + Th e table then goes on + to look at other + +On line 11784: + then goes on to look + at other possible loan + alternatives, with + +On line 11784: + other possible + loan alternatives, with the + following results: + +On line 11786: + results: Freddie Mac, + internal email, Donna Cogswell + on behalf of David + +On line 11786: + Mac, internal email, + Donna Cogswell on behalf of + David Andrukonis to + +On line 11786: + email, Donna Cogswell on + behalf of David Andrukonis + to Dick Syron, "RE: + +On line 11786: + on behalf of David + Andrukonis to Dick Syron, + "RE: No Income/No Asset + +On line 11788: + Dick Syron, "RE: No + Income/No Asset (NINA) Mortgages," + September Freddie + +On line 11788: + Income/No Asset (NINA) + Mortgages," September Freddie + Mac, internal email + +On line 11788: + Mortgages," September + Freddie Mac, internal email + from Mike May to Dick + +On line 11788: + September Freddie + Mac, internal email from Mike + May to Dick Syron, + +On line 11788: + Mac, internal email + from Mike May to Dick Syron, + "FW: FINAL NINA + +On line 11788: + internal email from + Mike May to Dick Syron, "FW: + FINAL NINA Memo," + +On line 11790: + October Fannie + Mae, internal memo, Single + Family Business + +On line 11790: + Mae, internal memo, + Single Family Business + Product Management + +On line 11790: + Single Family + Business Product Management + and Development + +On line 11790: + Development to + Single Family Business + Credit Committee, + +On line 11790: + Single Family + Business Credit Committee, + "RE: PMD Proposal + +On line 11790: + Committee, "RE: PMD + Proposal for Increasing + Housing Goal Loans," May + +On line 11796: + PMD Proposal for + Increasing Housing Goal Loans," + May p.6. Dissenting + +On line 11798: + Table Fannie Mae + Took Losses on Higher Risk + Mortgages Necessary + +On line 11798: + Losses on Higher + Risk Mortgages Necessary to + Meet the Aff ordable + +On line 11798: + Higher Risk Mortgages + Necessary to Meet the Aff + ordable Housing Goals + +On line 11800: + Necessary to Meet + the Aff ordable Housing Goals + Individual + +On line 11812: + analysis for "base" + MCM Model Fee Average + Gap enhancement-not + +On line 11824: + Gap enhancement-not + layered) Default Base: LTV, MI + -68.50 Interest First + +On line 11840: + Interest First (IF) + -91.50 Seller Contribution + (SC) -77.50 Temporary + +On line 11854: + Contribution (SC) + -77.50 Temporary B/D (BD) -80.50 + Zero Down (ZD) -68.50 + +On line 11856: + (SC) -77.50 Temporary + B/D (BD) -80.50 Zero Down (ZD) + -68.50 Manufactured + +On line 11864: + B/D (BD) -80.50 Zero + Down (ZD) -68.50 Manufactured + Housing (MH) -189.50 From + +On line 11864: + Zero Down (ZD) -68.50 + Manufactured Housing (MH) + -189.50 From this report, + +On line 11864: + Housing (MH) -189.50 From + this report, it is clear that + in order to meet + +On line 11864: + -189.50 From this report, + it is clear that in order + to meet the AH goals + +On line 11864: + this report, it is + clear that in order to meet + the AH goals Fannie + +On line 11864: + report, it is clear + that in order to meet the + AH goals Fannie had + +On line 11864: + it is clear that in + order to meet the AH goals + Fannie had to pay + +On line 11864: + clear that in order + to meet the AH goals Fannie + had to pay up for + +On line 11864: + in order to meet + the AH goals Fannie had to + pay up for goals-rich + +On line 11864: + the AH goals Fannie + had to pay up for goals-rich + mortgages, taking a + +On line 11864: + had to pay up for + goals-rich mortgages, taking a + huge credit risk along + +On line 11868: + for goals-rich mortgages, + taking a huge credit risk + along the way. Th e + +On line 11868: + mortgages, taking a + huge credit risk along the way. + Th e dismal fi + +On line 11868: + a huge credit risk + along the way. Th e dismal + fi nancial results + +On line 11868: + huge credit risk along + the way. Th e dismal fi + nancial results that + +On line 11868: + way. Th e dismal + fi nancial results that were + developing at + +On line 11868: + were developing + at Fannie as a result + of the AH goals were + +On line 11868: + at Fannie as a + result of the AH goals were + also described in + +On line 11868: + result of the AH + goals were also described in + Fannie’s 10-K report + +On line 11868: + of the AH goals were + also described in Fannie’s + 10-K report for which + +On line 11868: + also described in + Fannie’s 10-K report for which + anticipated + +On line 11868: + losses of revenue + and higher credit losses + as a result of + +On line 11868: + credit losses as + a result of acquiring + the mortgages required + +On line 11870: + of acquiring the + mortgages required by the AH + goals: [W]e have made, and + +On line 11870: + the mortgages required + by the AH goals: [W]e have made, + and continue to + +On line 11870: + mortgages required by + the AH goals: [W]e have made, and + continue to make, + +On line 11870: + goals: [W]e have made, and + continue to make, signifi + cant adjustments to + +On line 11870: + and continue to + make, signifi cant adjustments + to our mortgage loan + +On line 11870: + cant adjustments to + our mortgage loan sourcing and + purchase strategies in + +On line 11870: + to our mortgage loan + sourcing and purchase strategies + in an eff ort to + +On line 11870: + mortgage loan sourcing + and purchase strategies in an + eff ort to meet HUD’s + +On line 11870: + and purchase strategies + in an eff ort to meet HUD’s + increased housing goals + +On line 11870: + in an eff ort to + meet HUD’s increased housing goals + and new subgoals. Th + +On line 11872: + an eff ort to meet + HUD’s increased housing goals and + new subgoals. Th ese + +On line 11872: + new subgoals. Th ese + strategies include entering + into some purchase + +On line 11872: + than our typical + transactions. We have also + relaxed some of our + +On line 11872: + our investments in + higher-risk mortgage loan products + that are more likely + +On line 11872: + likely to serve the + borrowers targeted by + HUD’s goals and subgoals, + +On line 11872: + HUD’s goals and subgoals, + which could increase our credit + losses. [emphasis + +On line 11872: + and subgoals, which could + increase our credit losses. + [emphasis supplied]128 + +On line 11876: + "lower expected + returns" were reported in + February in a + +On line 11876: + in a document + the FCIC received from Fannie, + which noted that for + +On line 11876: + a document the + FCIC received from Fannie, which + noted that for the + +On line 11876: + the FCIC received from + Fannie, which noted that for + the "cash fl ow cost" + +On line 11876: + noted that for the + "cash fl ow cost" of meeting + the housing goals was + +On line 11876: + for the "cash fl ow + cost" of meeting the housing + goals was million while + +On line 11876: + the "cash fl ow cost" + of meeting the housing goals + was million while the + +On line 11876: + goals was million while + the "opportunity cost" + was million.129 In a + +On line 11876: + cost" was million.129 In + a report to HUD on the + AH goals, dated April + +On line 11876: + In a report to + HUD on the AH goals, dated + April Fannie described + +On line 11876: + a report to HUD + on the AH goals, dated April + Fannie described these + +On line 11876: + HUD on the AH goals, + dated April Fannie described + these costs as follows: + +On line 11876: + the AH goals, dated + April Fannie described these costs + as follows: "Th e + +On line 11876: + AH goals, dated April + Fannie described these costs as + follows: "Th e largest + +On line 11876: + dated April Fannie + described these costs as follows: + "Th e largest costs [of + +On line 11878: + April Fannie described + these costs as follows: "Th e + largest costs [of meeting + +On line 11878: + Fannie described these + costs as follows: "Th e largest + costs [of meeting the + +On line 11878: + described these costs as + follows: "Th e largest costs [of + meeting the goals] are + +On line 11878: + follows: "Th e largest + costs [of meeting the goals] are + opportunity + +On line 11878: + [of meeting the goals] + are opportunity costs + of foregone revenue. + +On line 11878: + meeting the goals] are + opportunity costs of + foregone revenue. In + +On line 11878: + opportunity + costs of foregone revenue. In + opportunity + +On line 11878: + foregone revenue. In + opportunity cost was + about million, whereas + +On line 11878: + opportunity + cost was about million, whereas + the cash fl ow cost + +On line 11878: + cost was about million, + whereas the cash fl ow cost + was about million. If + +On line 11878: + whereas the cash fl + ow cost was about million. If + opportunity + +On line 11878: + cost was about million. + If opportunity cost + was our shareholders + +On line 11878: + was about million. If + opportunity cost was + our shareholders would + +On line 11878: + opportunity + cost was our shareholders would + be indiff erent + +On line 11878: + was our shareholders + would be indiff erent to + the deal. Th e cash + +On line 11880: + our shareholders would + be indiff erent to the + deal. Th e cash fl + +On line 11880: + shareholders would be + indiff erent to the deal. + Th e cash fl ow + +On line 11880: + indiff erent to + the deal. Th e cash fl ow + cost is the implied + +On line 11880: + erent to the deal. + Th e cash fl ow cost is + the implied out of + +On line 11880: + the deal. Th e cash + fl ow cost is the implied + out of pocket cost."130 + +On line 11882: + deal. Th e cash fl + ow cost is the implied out + of pocket cost."130 By + +On line 11882: + Th e cash fl ow + cost is the implied out of + pocket cost."130 By this + +On line 11882: + fl ow cost is the + implied out of pocket cost."130 + By this time, "Alignment + +On line 11882: + cost is the implied + out of pocket cost."130 By this + time, "Alignment Meetings"—in + +On line 11882: + is the implied out + of pocket cost."130 By this time, + "Alignment Meetings"—in which + +On line 11882: + time, "Alignment Meetings"—in + which Fannie staff considered + how they would meet the + +On line 11882: + "Alignment Meetings"—in which + Fannie staff considered how + they would meet the AH + +On line 11882: + Meetings"—in which Fannie + staff considered how they would + meet the AH goals—were + +On line 11882: + staff considered how + they would meet the AH goals—were + taking place almost + +On line 11882: + they would meet the AH + goals—were taking place almost + monthly (according + +On line 11882: + meet the AH goals—were + taking place almost monthly + (according to the + +On line 11882: + goals—were taking place + almost monthly (according + to the frequency + +On line 11882: + taking place almost + monthly (according to the + frequency with which + +On line 11882: + monthly (according + to the frequency with which + presentations to + +On line 11882: + frequency with which + presentations to Alignment + meetings occur in + +On line 11882: + presentations to + Alignment meetings occur in + the documentary + +On line 11882: + meetings occur in + the documentary record). In + an Alignment Meeting + +On line 11882: + documentary record). + In an Alignment Meeting on + June on a "Housing + +On line 11882: + an Alignment Meeting + on June on a "Housing Goals + Forecast," three plans were + +On line 11882: + Meeting on June on + a "Housing Goals Forecast," three + plans were considered + +On line 11882: + "Housing Goals Forecast," + three plans were considered for + meeting the AH goals, + +On line 11882: + Goals Forecast," three plans + were considered for meeting + the AH goals, even Id., + +On line 11882: + Forecast," three plans were + considered for meeting the + AH goals, even Id., p.8. + +On line 11884: + plans were considered + for meeting the AH goals, even + Id., p.8. Fannie Mae, + +On line 11884: + were considered for + meeting the AH goals, even Id., + p.8. Fannie Mae, 10-K, + +On line 11886: + for meeting the AH + goals, even Id., p.8. Fannie Mae, + 10-K, p.146. Fannie Mae, + +On line 11886: + AH goals, even Id., p.8. + Fannie Mae, 10-K, p.146. Fannie + Mae, "Business Update," + +On line 11886: + Fannie Mae, 10-K, p.146. + Fannie Mae, "Business Update," + presentation. "Cash + +On line 11886: + Mae, "Business Update," + presentation. "Cash fl ow + cost" equals expected + +On line 11886: + minus expected + loss. Expected revenue is + what will be received + +On line 11886: + Expected revenue + is what will be received in + G-fees; expected loss + +On line 11886: + be received in G-fees; + expected loss includes G&A + and credit losses. + +On line 11886: + actually charged + minus the model fee—the fee + that Fannie’s model + +On line 11886: + model fee—the fee that + Fannie’s model would impose + to guarantee a + +On line 11886: + that Fannie’s model + would impose to guarantee + a mortgage of the + +On line 11886: + Fannie’s model would + impose to guarantee a + mortgage of the same + +On line 11886: + mortgage of the same + quality in order to + earn a fair market + +On line 11886: + the same quality + in order to earn a fair + market return on + +On line 11888: + in order to earn + a fair market return on + capital. Fannie + +On line 11888: + fair market return + on capital. Fannie Mae, + "Housing Goals Briefi ng + +On line 11892: + capital. Fannie + Mae, "Housing Goals Briefi ng for + HUD," April Peter J. + +On line 11894: + Mae, "Housing Goals Briefi + ng for HUD," April Peter J. + Wallison though half + +On line 11894: + Goals Briefi ng for HUD," + April Peter J. Wallison + though half the year was + +On line 11894: + for HUD," April Peter + J. Wallison though half the + year was already gone. + +On line 11894: + HUD," April Peter J. + Wallison though half the year + was already gone. One + +On line 11894: + J. Wallison though + half the year was already gone. + One of the plans was + +On line 11894: + gone. One of the plans + was forecast to result in + opportunity + +On line 11894: + forecast to result + in opportunity costs + of million, while the + +On line 11894: + two plans resulted + in opportunity costs + of million.131 In a + +On line 11894: + of million.131 In a + Forecast meeting on July + a "Plan to Meet Base + +On line 11894: + Forecast meeting on + July a "Plan to Meet Base + Goals," which probably + +On line 11894: + meeting on July + a "Plan to Meet Base Goals," which + probably meant the + +On line 11894: + July a "Plan to + Meet Base Goals," which probably + meant the topline LMI goal + +On line 11894: + "Plan to Meet Base Goals," + which probably meant the topline + LMI goal including + +On line 11894: + to Meet Base Goals," which + probably meant the topline LMI + goal including all + +On line 11894: + which probably meant + the topline LMI goal including + all subgoals, was placed + +On line 11894: + probably meant the + topline LMI goal including all + subgoals, was placed at + +On line 11894: + meant the topline LMI goal + including all subgoals, was + placed at billion for + +On line 11896: + goal including all + subgoals, was placed at billion + for Finally, in + +On line 11896: + all subgoals, was placed + at billion for Finally, + in a December + +On line 11896: + to Brian Montgomery, + Assistant Secretary of + Housing, Fannie CEO + +On line 11896: + of Housing, Fannie + CEO Daniel Mudd asked that, in light + of the fi nancial + +On line 11896: + Housing, Fannie CEO + Daniel Mudd asked that, in light of + the fi nancial and + +On line 11896: + of the fi nancial + and economic conditions + then prevailing in + +On line 11896: + the fi nancial and + economic conditions then + prevailing in the + +On line 11896: + prevailing in the + country—particularly + the absence of a + +On line 11896: + absence of a PMBS + market and the increasing + number of mortgage + +On line 11896: + a PMBS market and + the increasing number of + mortgage delinquencies + +On line 11898: + increasing number + of mortgage delinquencies and + defaults— HUD’s AH goals + +On line 11898: + goals for be declared + "infeasible." He noted + that HUD also has + +On line 11898: + "infeasible." He + noted that HUD also has + an obligation to + +On line 11898: + He noted that HUD + also has an obligation + to "consider the + +On line 11898: + an obligation to + "consider the fi nancial + condition of the + +On line 11898: + to "consider the + fi nancial condition of + the enterprise when + +On line 11900: + en he continued: + "Fannie Mae submits that the + company took all + +On line 11900: + "Fannie Mae submits + that the company took all + reasonable actions + +On line 11900: + that the company + took all reasonable actions + to meet the subgoals + +On line 11900: + the company took + all reasonable actions to + meet the subgoals that + +On line 11900: + company took all + reasonable actions to meet + the subgoals that were + +On line 11900: + reasonable actions + to meet the subgoals that were + both fi nancially + +On line 11900: + to meet the subgoals + that were both fi nancially + prudent and likely + +On line 11900: + nancially prudent + and likely to contribute + to the achievement of + +On line 11900: + contribute to the + achievement of the subgoals….In Fannie + Mae relaxed certain + +On line 11900: + Mae relaxed certain + underwriting standards and + purchased some higher + +On line 11900: + standards and purchased + some higher risk mortgage loan + products in an eff + +On line 11900: + purchased some higher + risk mortgage loan products in + an eff ort to meet + +On line 11900: + higher risk mortgage + loan products in an eff ort + to meet the housing + +On line 11902: + mortgage loan products + in an eff ort to meet the + housing goals. Th e + +On line 11902: + products in an eff + ort to meet the housing goals. + Th e company + +On line 11904: + the housing goals. Th + e company continued + to purchase higher + +On line 11904: + housing goals. Th e + company continued to + purchase higher risk + +On line 11904: + purchase higher risk + loans into and believes these + eff orts to acquire + +On line 11904: + eff orts to acquire + goals-rich loans are partially + responsible for + +On line 11904: + responsible for + increasing credit losses."133 + [emphasis supplied] + +On line 11908: + statement confi rms + two facts that are critical + on the question of + +On line 11908: + rms two facts that are + critical on the question + of why Fannie (and + +On line 11908: + are critical on + the question of why Fannie + (and Freddie) acquired + +On line 11908: + critical on the + question of why Fannie (and + Freddie) acquired so + +On line 11908: + the question of why + Fannie (and Freddie) acquired + so many high risk loans + +On line 11908: + Fannie (and Freddie) + acquired so many high risk loans + in and earlier + +On line 11908: + (and Freddie) acquired + so many high risk loans in and + earlier years: fi + +On line 11908: + so many high risk loans + in and earlier years: fi + rst, the companies + +On line 11908: + many high risk loans in + and earlier years: fi rst, + the companies were + +On line 11908: + in and earlier + years: fi rst, the companies + were trying to meet + +On line 11908: + and earlier years: + fi rst, the companies were + trying to meet the + +On line 11908: + rst, the companies + were trying to meet the AH + goals established by + +On line 11908: + the companies were + trying to meet the AH goals + established by HUD + +On line 11908: + were trying to meet + the AH goals established by + HUD and not because + +On line 11908: + trying to meet the + AH goals established by HUD + and not because these + +On line 11908: + to meet the AH goals + established by HUD and not + because these loans were + +On line 11908: + AH goals established + by HUD and not because these + loans were profi table. + +On line 11908: + goals established by + HUD and not because these loans + were profi table. It + +On line 11908: + HUD and not because + these loans were profi table. It + also shows that the + +On line 11908: + not because these loans + were profi table. It also + shows that the eff orts + +On line 11908: + because these loans were + profi table. It also shows + that the eff orts of + +On line 11908: + were profi table. It + also shows that the eff orts + of HUD and others— + +On line 11910: + of HUD and others— + including the Commission + majority in + +On line 11910: + blame the managements + of Fannie and Freddie for + purchasing the loans + +On line 11910: + Fannie and Freddie + for purchasing the loans that + ultimately dragged + +On line 11910: + purchasing the loans + that ultimately dragged them + to insolvency + +On line 11912: + ultimately dragged + them to insolvency is + misplaced. Finally, + +On line 11912: + to insolvency + is misplaced. Finally, in + a July report, + +On line 11912: + insolvency is + misplaced. Finally, in a + July report, the + +On line 11912: + misplaced. Finally, + in a July report, the + Federal Housing + +On line 11912: + July report, the + Federal Housing Finance + Agency (FHFA, the + +On line 11912: + new regulator, + replacing OFHEO), noted that + Fannie and Freddie + +On line 11912: + Fannie and Freddie + both followed the practice of + cross-subsidizing + +On line 11912: + followed the practice + of cross-subsidizing the + subprime and Alt-A loans + +On line 11914: + cross-subsidizing + the subprime and Alt-A loans that + they acquired: Although + +On line 11914: + they acquired: Although + Fannie Mae and Freddie Mac + consider model-derived + +On line 11914: + Although Fannie Mae + and Freddie Mac consider + model-derived estimates + +On line 11914: + their guarantees on + some mortgages using higher + returns they expect + +On line 11914: + returns they expect + to earn on guarantees of + other loans. In both + +On line 11914: + earn on guarantees + of other loans. In both and + cross-subsidization + +On line 11914: + other loans. In both + and cross-subsidization in + single-family + +On line 11914: + single-family + guarantee fees charged by the + Enterprises was + +On line 11914: + categories. In each + case, there were cross-subsidies + from mortgages that posed + +On line 11914: + lower credit risk + on average to loans that + posed higher credit + +On line 11916: + on average to + loans that posed higher credit + risk. Th e greatest + +On line 11916: + risk. Th e greatest + estimated subsidies + generally went + +On line 11920: + went to the highest-risk + mortgages.134 Th e higher risk + mortgages were the ones + +On line 11920: + highest-risk mortgages.134 Th + e higher risk mortgages were + the ones most needed + +On line 11920: + higher risk mortgages + were the ones most needed by + Fannie and Freddie + +On line 11920: + risk mortgages were the + ones most needed by Fannie + and Freddie to meet + +On line 11920: + mortgages were the ones + most needed by Fannie and + Freddie to meet the + +On line 11920: + ones most needed by + Fannie and Freddie to meet + the AH goals. Needless + +On line 11920: + needed by Fannie + and Freddie to meet the AH + goals. Needless to say, + +On line 11920: + Fannie and Freddie + to meet the AH goals. Needless + to say, there is no + +On line 11920: + and Freddie to meet + the AH goals. Needless to say, + there is no need to + +On line 11920: + the AH goals. Needless + to say, there is no need to + cross-subsidize the + +On line 11920: + to say, there is no + need to cross-subsidize the + G-fees of loans that are + +On line 11920: + there is no need to + cross-subsidize the G-fees of + loans that are acquired + +On line 11920: + cross-subsidize the + G-fees of loans that are acquired + because they are profi + +On line 11922: + loans that are acquired + because they are profi table. + Accordingly, both + +On line 11922: + because they are profi + table. Accordingly, both + market share and profi + +On line 11922: + tability must be + excluded as reasons that + Fannie (and Freddie) + +On line 11922: + reasons that Fannie + (and Freddie) acquired subprime + and Alt-A loans between + +On line 11922: + Fannie (and Freddie) + acquired subprime and Alt-A loans + between and Fannie + +On line 11924: + "Housing Goals Forecast," + Alignment Meeting, June Fannie + Mae, Forecast Meeting, + +On line 11926: + Alignment Meeting, June + Fannie Mae, Forecast Meeting, + July slide Fannie + +On line 11926: + Fannie Mae, Forecast + Meeting, July slide Fannie + Mae letter, Daniel Mudd + +On line 11926: + Meeting, July slide + Fannie Mae letter, Daniel Mudd + to Asst. Secretary + +On line 11926: + July slide Fannie + Mae letter, Daniel Mudd to Asst. + Secretary Brian + +On line 11926: + Mae letter, Daniel Mudd + to Asst. Secretary Brian + Montgomery, December + +On line 11928: + to Asst. Secretary + Brian Montgomery, December + p.6. FHFA, Fannie + +On line 11928: + Montgomery, December + p.6. FHFA, Fannie Mae and + Freddie Mac Single + +On line 11934: + Single Family + Guarantee Fees in and p.33. + Dissenting Statement + +On line 11938: + Dissenting Statement + Th e only remaining + motive—and the valid + +On line 11938: + only remaining + motive—and the valid one—was the + eff ect of the AH + +On line 11940: + motive—and the valid + one—was the eff ect of the AH + goals imposed by HUD. + +On line 11942: + the valid one—was the eff + ect of the AH goals imposed + by HUD. In aft er + +On line 11942: + valid one—was the eff ect + of the AH goals imposed by + HUD. In aft er its + +On line 11942: + one—was the eff ect of + the AH goals imposed by HUD. + In aft er its takeover + +On line 11942: + the eff ect of the + AH goals imposed by HUD. In + aft er its takeover by + +On line 11942: + eff ect of the AH + goals imposed by HUD. In aft + er its takeover by the + +On line 11942: + the AH goals imposed + by HUD. In aft er its takeover + by the government, + +On line 11942: + goals imposed by HUD. + In aft er its takeover by the + government, Fannie + +On line 11942: + aft er its takeover by + the government, Fannie Mae + fi nally published + +On line 11942: + er its takeover by the + government, Fannie Mae fi + nally published a + +On line 11942: + government, Fannie + Mae fi nally published a + credit supplement + +On line 11942: + fi nally published + a credit supplement to + its 10-K, which contained + +On line 11942: + nally published a + credit supplement to its + 10-K, which contained an + +On line 11942: + credit supplement + to its 10-K, which contained an + accounting of its + +On line 11944: + an accounting of + its subprime and Alt-A credit + exposure. Th e + +On line 11946: + reproduced below + in order to provide a + picture of the kinds + +On line 11946: + order to provide + a picture of the kinds of + loans Fannie acquired + +On line 11946: + provide a picture + of the kinds of loans Fannie + acquired in order + +On line 11946: + a picture of the + kinds of loans Fannie acquired + in order to meet + +On line 11946: + picture of the kinds + of loans Fannie acquired in + order to meet the + +On line 11946: + of the kinds of loans + Fannie acquired in order + to meet the AH goals. + +On line 11946: + kinds of loans Fannie + acquired in order to meet + the AH goals. Loans may + +On line 11946: + loans Fannie acquired + in order to meet the AH + goals. Loans may appear + +On line 11946: + Fannie acquired in + order to meet the AH goals. + Loans may appear in + +On line 11946: + acquired in order + to meet the AH goals. Loans may + appear in more than + +On line 11946: + to meet the AH goals. + Loans may appear in more than + one category, + +On line 11946: + meet the AH goals. Loans + may appear in more than one + category, so + +On line 11946: + Loans may appear in + more than one category, + so the table does + +On line 11946: + may appear in more + than one category, so + the table does not + +On line 11946: + category, so + the table does not reveal + Fannie’s total net + +On line 11946: + so the table does + not reveal Fannie’s total + net exposure to + +On line 11946: + the table does not + reveal Fannie’s total net + exposure to each + +On line 11946: + not reveal Fannie’s + total net exposure to + each category, + +On line 11946: + net exposure to + each category, nor does + it include Fannie’s + +On line 11946: + each category, + nor does it include Fannie’s + holdings of non-Fannie MBS + +On line 11946: + nor does it include + Fannie’s holdings of non-Fannie MBS + or PMBS, for which it + +On line 11946: + it include Fannie’s + holdings of non-Fannie MBS or PMBS, + for which it did not + +On line 11946: + of non-Fannie MBS or PMBS, + for which it did not have loan + level data. Note + +On line 11946: + PMBS, for which it did + not have loan level data. + Note the reference + +On line 11946: + for which it did not + have loan level data. Note + the reference to + +On line 11946: + not have loan level + data. Note the reference + to billion in the + +On line 11946: + level data. Note + the reference to billion + in the column for + +On line 11946: + Note the reference + to billion in the column + for subprime loans. As + +On line 11946: + to billion in the + column for subprime loans. As + noted earlier, + +On line 11946: + column for subprime + loans. As noted earlier, + Fannie classifi + +On line 11946: + for subprime loans. As + noted earlier, Fannie + classifi ed as + +On line 11946: + noted earlier, + Fannie classifi ed as + subprime only those + +On line 11946: + earlier, Fannie + classifi ed as subprime + only those loans that + +On line 11946: + Fannie classifi + ed as subprime only those + loans that it purchased + +On line 11946: + only those loans that + it purchased from subprime lenders. + However, Fannie + +On line 11946: + loans that it purchased + from subprime lenders. However, + Fannie included + +On line 11946: + However, Fannie + included loans with FICO + scores of less than in + +On line 11946: + Fannie included + loans with FICO scores of less + than in the table, + +On line 11946: + loans with FICO scores + of less than in the table, + indicating that + +On line 11946: + scores of less than in + the table, indicating + that they are not prime + +On line 11946: + of less than in the + table, indicating that + they are not prime loans + +On line 11946: + they are not prime loans + but without classifying + them formally as + +On line 11948: + classifying them + formally as subprime. In + a later credit + +On line 11948: + as subprime. In a + later credit supplement, + fi led in August + +On line 11948: + credit supplement, + fi led in August Fannie + eliminated the + +On line 11948: + fi led in August + Fannie eliminated the + duplications among + +On line 11948: + the duplications + among the loans in Table and + reported that as + +On line 11948: + loans in Table and + reported that as of June + it held the credit + +On line 11948: + reported that as + of June it held the credit + risk on NTMs with a + +On line 11948: + as of June it held + the credit risk on NTMs with + a total unpaid + +On line 11948: + it held the credit + risk on NTMs with a total + unpaid principal + +On line 11948: + the credit risk on + NTMs with a total unpaid + principal amount of + +On line 11950: + risk on NTMs with a + total unpaid principal + amount of trillion. Th + +On line 11952: + a total unpaid + principal amount of trillion. + Th e average + +On line 11952: + principal amount of + trillion. Th e average + loan amount was for a + +On line 11952: + amount of trillion. Th + e average loan amount was + for a total of + +On line 11952: + Th e average + loan amount was for a total + of million NTM loans.135 + +On line 11954: + e average loan + amount was for a total of + million NTM loans.135 Th + +On line 11956: + loan amount was for a + total of million NTM loans.135 + Th is number does + +On line 11956: + total of million + NTM loans.135 Th is number does + not include Fannie’s + +On line 11956: + million NTM loans.135 Th + is number does not include + Fannie’s holdings of + +On line 11956: + Th is number does + not include Fannie’s holdings + of subprime PMBS as + +On line 11956: + is number does not + include Fannie’s holdings of + subprime PMBS as to + +On line 11956: + not include Fannie’s + holdings of subprime PMBS as + to which it does not + +On line 11990: + J. Wallison g + o b n rmin s m o + an s. Ju nf tio + +On line 11992: + Wallison g o + b n rmin s m o an + s. Ju nf tio rm + +On line 11996: + g o b n rmin + s m o an s. Ju nf + tio rm 10-K. o Lo + +On line 11998: + o b n rmin s + m o an s. Ju nf tio + rm 10-K. o Lo an + +On line 12000: + n rmin s m o + an s. Ju nf tio rm 10-K. + o Lo an siness. + +On line 12002: + rmin s m o an + s. Ju nf tio rm 10-K. o + Lo an siness. C + +On line 12004: + s m o an s. + Ju nf tio rm 10-K. o Lo + an siness. C u + +On line 12006: + m o an s. Ju + nf tio rm 10-K. o Lo an + siness. C u o + +On line 12022: + an s. Ju nf tio + rm 10-K. o Lo an siness. + C u o t lo + +On line 12024: + s. Ju nf tio rm + 10-K. o Lo an siness. C + u o t lo f + +On line 12024: + Ju nf tio rm 10-K. + o Lo an siness. C u + o t lo f b + +On line 12026: + nf tio rm 10-K. o + Lo an siness. C u o + t lo f b e + +On line 12028: + tio rm 10-K. o Lo + an siness. C u o t + lo f b e k + +On line 12028: + rm 10-K. o Lo an + siness. C u o t lo + f b e k o + +On line 12030: + Lo an siness. C + u o t lo f b e + k o dministra + +On line 12032: + an siness. C u + o t lo f b e k + o dministra o + +On line 12034: + siness. C u o + t lo f b e k o + dministra o im + +On line 12036: + u o t lo f + b e k o dministra + o im s siness + +On line 12038: + o t lo f b + e k o dministra o + im s siness o + +On line 12040: + t lo f b e + k o dministra o im + s siness o u + +On line 12042: + lo f b e k + o dministra o im s + siness o u bpr + +On line 12048: + o dministra o + im s siness o u bpr + an ae’s F vernmen + +On line 12050: + dministra o im + s siness o u bpr an + ae’s F vernmen g + +On line 12056: + im s siness o + u bpr an ae’s F vernmen + g A Su Lo it + +On line 12056: + s siness o u + bpr an ae’s F vernmen g + A Su Lo it b + +On line 12058: + siness o u bpr + an ae’s F vernmen g A + Su Lo it b f + +On line 12060: + o u bpr an ae’s + F vernmen g A Su Lo + it b f B o + +On line 12062: + u bpr an ae’s F + vernmen g A Su Lo it + b f B o o + +On line 12070: + an ae’s F vernmen + g A Su Lo it b f + B o o ed k + +On line 12072: + ae’s F vernmen g + A Su Lo it b f B + o o ed k usin + +On line 12074: + F vernmen g A + Su Lo it b f B o + o ed k usin o + +On line 12076: + vernmen g A Su + Lo it b f B o o + ed k usin o o + +On line 12080: + g A Su Lo it + b f B o o ed k + usin o o o udes + +On line 12080: + A Su Lo it b + f B o o ed k usin + o o o udes g + +On line 12082: + Su Lo it b f + B o o ed k usin o + o o udes g e + +On line 12082: + Lo it b f B + o o ed k usin o o + o udes g e cr + +On line 12084: + b f B o o + ed k usin o o o udes + g e cr annie + +On line 12084: + f B o o ed + k usin o o o udes g + e cr annie M + +On line 12084: + B o o ed k + usin o o o udes g e + cr annie M F + +On line 12086: + o o ed k usin + o o o udes g e cr + annie M F s + +On line 12088: + ed k usin o o + o udes g e cr annie + M F s it B + +On line 12090: + k usin o o o + udes g e cr annie M + F s it B o + +On line 12092: + usin o o o udes + g e cr annie M F + s it B o t-A + +On line 12094: + o o o udes g + e cr annie M F s + it B o t-A an + +On line 12096: + o udes g e cr + annie M F s it B + o t-A an rtgag + +On line 12100: + g e cr annie + M F s it B o t-A + an rtgag Al ed + +On line 12102: + e cr annie M + F s it B o t-A an + rtgag Al ed Lo + +On line 12104: + M F s it B + o t-A an rtgag Al ed + Lo ederal H + +On line 12120: + F s it B o + t-A an rtgag Al ed Lo + ederal H hich + +On line 12122: + o t-A an rtgag + Al ed Lo ederal H + hich incl efer t + +On line 12124: + t-A an rtgag Al + ed Lo ederal H hich + incl efer t e + +On line 12126: + rtgag Al ed Lo + ederal H hich incl + efer t e Cr d + +On line 12130: + ed Lo ederal + H hich incl efer t e + Cr d nal mo es, + +On line 12130: + Lo ederal H + hich incl efer t e Cr + d nal mo es, r + +On line 12132: + ederal H hich + incl efer t e Cr d + nal mo es, r n + +On line 12138: + H hich incl efer + t e Cr d nal mo es, + r n V th T + +On line 12140: + hich incl efer t + e Cr d nal mo es, r + n V th T ss, + +On line 12140: + incl efer t e + Cr d nal mo es, r n + V th T ss, w + +On line 12144: + t e Cr d nal + mo es, r n V th T + ss, w tio rtgag + +On line 12146: + e Cr d nal mo + es, r n V th T ss, + w tio rtgag A), + +On line 12146: + Cr d nal mo es, + r n V th T ss, w + tio rtgag A), the + +On line 12146: + d nal mo es, r + n V th T ss, w tio + rtgag A), the F + +On line 12150: + mo es, r n V + th T ss, w tio rtgag + A), the F o s + +On line 12150: + es, r n V th + T ss, w tio rtgag A), + the F o s wi + +On line 12152: + r n V th T + ss, w tio rtgag A), the + F o s wi sine + +On line 12154: + n V th T ss, + w tio rtgag A), the F + o s wi sine ven + +On line 12156: + V th T ss, w + tio rtgag A), the F o + s wi sine ven it + +On line 12156: + th T ss, w tio + rtgag A), the F o s + wi sine ven it loss + +On line 12160: + ss, w tio rtgag + A), the F o s wi sine + ven it loss an a + +On line 12162: + w tio rtgag A), + the F o s wi sine ven + it loss an a o + +On line 12164: + tio rtgag A), the + F o s wi sine ven it + loss an a o O + +On line 12166: + rtgag A), the F + o s wi sine ven it loss + an a o O u + +On line 12170: + A), the F o s + wi sine ven it loss an a + o O u n L + +On line 12172: + the F o s wi + sine ven it loss an a o + O u n L atio + +On line 12174: + F o s wi sine + ven it loss an a o O + u n L atio C + +On line 12176: + o s wi sine ven + it loss an a o O u + n L atio C ed + +On line 12178: + sine ven it loss an + a o O u n L atio + C ed Original + +On line 12178: + ven it loss an a + o O u n L atio C + ed Original L + +On line 12180: + it loss an a o + O u n L atio C ed + Original L R + +On line 12184: + a o O u n + L atio C ed Original + L R FI nal M + +On line 12192: + o O u n L + atio C ed Original L + R FI nal M f + +On line 12192: + O u n L atio + C ed Original L R + FI nal M f b + +On line 12194: + u n L atio C + ed Original L R FI + nal M f b airs + +On line 12194: + n L atio C ed + Original L R FI nal + M f b airs (V + +On line 12198: + C ed Original + L R FI nal M f b + airs (V ly co tio + +On line 12200: + ed Original L + R FI nal M f b airs + (V ly co tio k + +On line 12200: + Original L R + FI nal M f b airs (V + ly co tio k o + +On line 12204: + L R FI nal M + f b airs (V ly co tio + k o tal cr V + +On line 12206: + R FI nal M f + b airs (V ly co tio k + o tal cr V o + +On line 12208: + FI nal M f b + airs (V ly co tio k o + tal cr V o s + +On line 12208: + nal M f b airs + (V ly co tio k o tal + cr V o s Aff + +On line 12210: + M f b airs (V + ly co tio k o tal cr + V o s Aff mi + +On line 12212: + f b airs (V ly + co tio k o tal cr V + o s Aff mi o + +On line 12214: + b airs (V ly co + tio k o tal cr V o + s Aff mi o th + +On line 12216: + airs (V ly co tio + k o tal cr V o s + Aff mi o th T + +On line 12218: + (V ly co tio k + o tal cr V o s Aff + mi o th T o + +On line 12220: + ly co tio k o + tal cr V o s Aff mi + o th T o n + +On line 12222: + co tio k o tal + cr V o s Aff mi o + th T o n ven + +On line 12224: + tio k o tal cr + V o s Aff mi o th + T o n ven tn + +On line 12226: + k o tal cr V + o s Aff mi o th T + o n ven tn s + +On line 12226: + o tal cr V o + s Aff mi o th T o + n ven tn s wi + +On line 12228: + tal cr V o s + Aff mi o th T o n + ven tn s wi tio + +On line 12230: + cr V o s Aff + mi o th T o n ven + tn s wi tio no + +On line 12232: + V o s Aff mi + o th T o n ven tn + s wi tio no it + +On line 12232: + o s Aff mi o + th T o n ven tn s + wi tio no it b + +On line 12234: + Aff mi o th T + o n ven tn s wi tio + no it b le-fa + +On line 12236: + mi o th T o + n ven tn s wi tio no + it b le-fa an + +On line 12238: + o th T o n + ven tn s wi tio no it + b le-fa an Ra + +On line 12242: + th T o n ven + tn s wi tio no it b + le-fa an Ra o + +On line 12246: + o n ven tn s + wi tio no it b le-fa + an Ra o etera g + +On line 12248: + n ven tn s wi + tio no it b le-fa an + Ra o etera g n + +On line 12248: + ven tn s wi tio + no it b le-fa an Ra + o etera g n o + +On line 12250: + tn s wi tio no + it b le-fa an Ra o + etera g n o L + +On line 12252: + s wi tio no it + b le-fa an Ra o etera + g n o L ed + +On line 12254: + no it b le-fa + an Ra o etera g n o + L ed Original + +On line 12254: + it b le-fa an + Ra o etera g n o L + ed Original L + +On line 12256: + b le-fa an Ra + o etera g n o L ed + Original L ily + +On line 12262: + an Ra o etera g + n o L ed Original + L ily C f V + +On line 12264: + Ra o etera g n + o L ed Original L + ily C f V tio + +On line 12266: + o etera g n o + L ed Original L ily + C f V tio e + +On line 12266: + etera g n o L + ed Original L ily C + f V tio e cr + +On line 12268: + g n o L ed + Original L ily C f + V tio e cr f + +On line 12272: + L ed Original + L ily C f V tio e + cr f sin d t + +On line 12272: + ed Original L + ily C f V tio e cr + f sin d t o + +On line 12274: + Original L ily + C f V tio e cr f + sin d t o n + +On line 12280: + L ily C f V + tio e cr f sin d t + o n am rma th + +On line 12282: + ily C f V tio + e cr f sin d t o + n am rma th o + +On line 12284: + f V tio e cr + f sin d t o n am + rma th o rtgag + +On line 12286: + V tio e cr f + sin d t o n am rma + th o rtgag nce + +On line 12286: + tio e cr f sin + d t o n am rma th + o rtgag nce o + +On line 12288: + e cr f sin d + t o n am rma th o + rtgag nce o le-F + +On line 12290: + f sin d t o + n am rma th o rtgag + nce o le-F s wi + +On line 12292: + sin d t o n + am rma th o rtgag nce + o le-F s wi g + +On line 12294: + d t o n am + rma th o rtgag nce o + le-F s wi g an + +On line 12296: + t o n am rma + th o rtgag nce o le-F + s wi g an a + +On line 12298: + o n am rma th + o rtgag nce o le-F s + wi g an a ala + +On line 12300: + n am rma th o + rtgag nce o le-F s wi + g an a ala r + +On line 12302: + rma th o rtgag + nce o le-F s wi g an + a ala r inf o + +On line 12304: + th o rtgag nce + o le-F s wi g an a + ala r inf o O + +On line 12306: + rtgag nce o le-F + s wi g an a ala r + inf o O artmen + +On line 12310: + nce o le-F s wi + g an a ala r inf o + O artmen in L + +On line 12312: + o le-F s wi g + an a ala r inf o O + artmen in L t. + +On line 12316: + s wi g an a + ala r inf o O artmen + in L t. o C + +On line 12318: + wi g an a ala + r inf o O artmen in + L t. o C ly + +On line 12318: + g an a ala r + inf o O artmen in L + t. o C ly mo + +On line 12320: + an a ala r inf + o O artmen in L t. + o C ly mo ep + +On line 12322: + a ala r inf o + O artmen in L t. o + C ly mo ep FI + +On line 12324: + ala r inf o O + artmen in L t. o C + ly mo ep FI f + +On line 12330: + inf o O artmen + in L t. o C ly mo + ep FI f S re. + +On line 12332: + o O artmen in + L t. o C ly mo ep + FI f S re. al + +On line 12332: + O artmen in L + t. o C ly mo ep FI + f S re. al b + +On line 12334: + artmen in L t. + o C ly mo ep FI f + S re. al b mi + +On line 12338: + in L t. o C + ly mo ep FI f S re. + al b mi p ltuu + +On line 12340: + L t. o C ly + mo ep FI f S re. al + b mi p ltuu th + +On line 12342: + o C ly mo ep + FI f S re. al b mi + p ltuu th le-fa + +On line 12344: + ly mo ep FI f + S re. al b mi p ltuu + th le-fa rinci + +On line 12348: + S re. al b mi + p ltuu th le-fa rinci + ncemen siness. F + +On line 12350: + al b mi p ltuu + th le-fa rinci ncemen + siness. F s wi + +On line 12358: + p ltuu th le-fa + rinci ncemen siness. F + s wi g gric u + +On line 12362: + th le-fa rinci + ncemen siness. F s wi + g gric u an O + +On line 12366: + ncemen siness. F + s wi g gric u an O + teristics o o + +On line 12372: + F s wi g gric + u an O teristics o + o C f b L + +On line 12374: + s wi g gric u + an O teristics o o + C f b L aid + +On line 12374: + wi g gric u an + O teristics o o C + f b L aid p + +On line 12376: + g gric u an O + teristics o o C f + b L aid p FI + +On line 12380: + an O teristics + o o C f b L aid + p FI f A p + +On line 12382: + O teristics o + o C f b L aid p + FI f A p it + +On line 12388: + o o C f b + L aid p FI f A p + it enha o k + +On line 12390: + o C f b L + aid p FI f A p it + enha o k arac + +On line 12392: + f b L aid p + FI f A p it enha + o k arac t o + +On line 12394: + b L aid p FI + f A p it enha o + k arac t o o + +On line 12396: + L aid p FI f + A p it enha o k + arac t o o h + +On line 12398: + aid p FI f A + p it enha o k arac + t o o h f + +On line 12398: + p FI f A p + it enha o k arac t + o o h f the + +On line 12398: + FI f A p it + enha o k arac t o + o h f the sin + +On line 12402: + A p it enha + o k arac t o o h + f the sin ed f + +On line 12402: + p it enha o + k arac t o o h f + the sin ed f un + +On line 12404: + it enha o k + arac t o o h f the + sin ed f un o + +On line 12406: + enha o k arac + t o o h f the sin + ed f un o e + +On line 12408: + o k arac t o + o h f the sin ed f + un o e o s + +On line 12410: + k arac t o o + h f the sin ed f un + o e o s it + +On line 12410: + arac t o o h + f the sin ed f un o + e o s it C + +On line 12412: + t o o h f + the sin ed f un o e + o s it C it + +On line 12412: + o o h f the + sin ed f un o e o + s it C it b + +On line 12414: + h f the sin ed + f un o e o s it + C it b encies, + +On line 12414: + f the sin ed f + un o e o s it C + it b encies, such + +On line 12414: + the sin ed f un + o e o s it C it + b encies, such as + +On line 12414: + sin ed f un o + e o s it C it b + encies, such as the + +On line 12416: + f un o e o + s it C it b encies, + such as the D e + +On line 12416: + un o e o s + it C it b encies, such + as the D e o + +On line 12418: + o e o s it + C it b encies, such as + the D e o an + +On line 12420: + e o s it C + it b encies, such as the + D e o an ed + +On line 12422: + o s it C it + b encies, such as the D + e o an ed tag + +On line 12426: + C it b encies, + such as the D e o an + ed tag artmen tag + +On line 12428: + it b encies, such + as the D e o an ed + tag artmen tag ther + +On line 12428: + b encies, such as + the D e o an ed tag + artmen tag ther cr + +On line 12434: + such as the D e + o an ed tag artmen tag + ther cr ed terest-Only Lo + +On line 12436: + as the D e o + an ed tag artmen tag ther + cr ed terest-Only Lo ep + +On line 12438: + the D e o an + ed tag artmen tag ther cr + ed terest-Only Lo ep ts + +On line 12438: + D e o an ed + tag artmen tag ther cr ed + terest-Only Lo ep ts ag + +On line 12440: + e o an ed tag + artmen tag ther cr ed terest-Only + Lo ep ts ag d + +On line 12442: + an ed tag artmen + tag ther cr ed terest-Only Lo ep + ts ag d o In + +On line 12444: + ed tag artmen tag + ther cr ed terest-Only Lo ep ts + ag d o In e + +On line 12444: + tag artmen tag ther + cr ed terest-Only Lo ep ts ag + d o In e cr + +On line 12462: + artmen tag ther cr + ed terest-Only Lo ep ts ag d + o In e cr n + +On line 12464: + tag ther cr ed terest-Only + Lo ep ts ag d o In + e cr n es: Cr + +On line 12466: + ther cr ed terest-Only Lo + ep ts ag d o In e + cr n es: Cr ercen + +On line 12468: + cr ed terest-Only Lo ep + ts ag d o In e cr + n es: Cr ercen r + +On line 12468: + ed terest-Only Lo ep ts + ag d o In e cr n + es: Cr ercen r i + +On line 12470: + terest-Only Lo ep ts ag + d o In e cr n es: + Cr ercen r i ercen + +On line 12472: + Lo ep ts ag d + o In e cr n es: Cr + ercen r i ercen t + +On line 12472: + ep ts ag d o + In e cr n es: Cr ercen + r i ercen t o + +On line 12474: + ts ag d o In + e cr n es: Cr ercen r + i ercen t o e + +On line 12474: + ag d o In e + cr n es: Cr ercen r i + ercen t o e a + +On line 12476: + d o In e cr + n es: Cr ercen r i ercen + t o e a g + +On line 12478: + o In e cr n + es: Cr ercen r i ercen t + o e a g d + +On line 12478: + In e cr n es: + Cr ercen r i ercen t o + e a g d the + +On line 12478: + e cr n es: Cr + ercen r i ercen t o e + a g d the D + +On line 12480: + n es: Cr ercen r + i ercen t o e a g + d the D rtgag + +On line 12482: + es: Cr ercen r i + ercen t o e a g d + the D rtgag e- + +On line 12484: + Cr ercen r i ercen + t o e a g d the + D rtgag e- s + +On line 12488: + i ercen t o e + a g d the D rtgag + e- s eatur n + +On line 12490: + ercen t o e a + g d the D rtgag e- + s eatur n urs + +On line 12492: + t o e a g + d the D rtgag e- s + eatur n urs tiv + +On line 12494: + e a g d the + D rtgag e- s eatur + n urs tiv as a + +On line 12494: + a g d the D + rtgag e- s eatur n + urs tiv as a p + +On line 12498: + d the D rtgag + e- s eatur n urs tiv + as a p rtizin an + +On line 12500: + the D rtgag e- + s eatur n urs tiv as + a p rtizin an t + +On line 12500: + D rtgag e- s + eatur n urs tiv as a + p rtizin an t F + +On line 12502: + e- s eatur n + urs tiv as a p rtizin an + t F t as a + +On line 12502: + s eatur n urs + tiv as a p rtizin an t + F t as a p + +On line 12504: + eatur n urs tiv + as a p rtizin an t F + t as a p ega + +On line 12508: + n urs tiv as a + p rtizin an t F t as + a p ega Lo m + +On line 12508: + urs tiv as a p + rtizin an t F t as a + p ega Lo m a + +On line 12510: + tiv as a p rtizin + an t F t as a p + ega Lo m a eco + +On line 12512: + as a p rtizin an + t F t as a p ega + Lo m a eco ly + +On line 12512: + a p rtizin an t + F t as a p ega Lo + m a eco ly mo + +On line 12514: + p rtizin an t F + t as a p ega Lo m + a eco ly mo N + +On line 12516: + rtizin an t F t + as a p ega Lo m a + eco ly mo N uc + +On line 12518: + an t F t as + a p ega Lo m a eco + ly mo N uc Amo + +On line 12520: + t F t as a + p ega Lo m a eco ly + mo N uc Amo d + +On line 12522: + t as a p ega + Lo m a eco ly mo N + uc Amo d lated + +On line 12536: 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G + +On line 12562: + ro rogra ncemen + k le-fa o g o .S. + G ey P lender r + +On line 12564: + rogra ncemen k + le-fa o g o .S. G + ey P lender r re + +On line 12566: + ncemen k le-fa + o g o .S. G ey P + lender r re calc ties + +On line 12568: + k le-fa o g + o .S. G ey P lender r + re calc ties P y + +On line 12568: + le-fa o g o + .S. G ey P lender r re + calc ties P y K + +On line 12570: + o g o .S. G + ey P lender r re calc ties + P y K s a + +On line 12572: + g o .S. G ey + P lender r re calc ties P + y K s a li + +On line 12574: + o .S. G ey P + lender r re calc ties P y + K s a li nce + +On line 12576: + .S. G ey P lender + r re calc ties P y K + s a li nce it + +On line 12576: + ey P lender r re + calc ties P y K s a + li nce it enha + +On line 12578: + r re calc ties P + y K s a li nce it + enha verall + +On line 12580: + calc ties P y K + s a li nce it enha + verall B an + +On line 12624: + y K s a li + nce it enha verall + B an aci O o + +On line 12626: + K s a li nce + it enha verall B + an aci O o y + +On line 12626: + s a li nce it + enha verall B an + aci O o y the + +On line 12628: + li nce it enha + verall B an aci O + o y the U ed + +On line 12632: + enha verall + B an aci O o y the + U ed sura r the + +On line 12634: + verall B an + aci O o y the U ed + sura r the sin fi + +On line 12636: + B an aci O o + y the U ed sura r the + sin fi le b b + +On line 12638: + an aci O o y + the U ed sura r the sin + fi le b b ty + +On line 12638: + aci O o y the + U ed sura r the sin fi + le b b ty F + +On line 12640: + O o y the U + ed sura r the sin fi le + b b ty F o + +On line 12642: + o y the U ed + sura r the sin fi le b + b ty F o ro + +On line 12644: + y the U ed sura + r the sin fi le b b + ty F o ro g + +On line 12644: + the U ed sura r + the sin fi le b b ty + F o ro g L + +On line 12646: + U ed sura r the + sin fi le b b ty F + o ro g L ed + +On line 12648: + ed sura r the sin + fi le b b ty F o + ro g L ed th + +On line 12648: + sura r the sin fi + le b b ty F o ro + g L ed th cr + +On line 12650: + r the sin fi le + b b ty F o ro g + L ed th cr l + +On line 12650: + the sin fi le b + b ty F o ro g L + ed th cr l ino + +On line 12652: + sin fi le b b + ty F o ro g L ed + th cr l ino uni + +On line 12654: + fi le b b ty + F o ro g L ed th + cr l ino uni o + +On line 12656: + le b b ty F + o ro g L ed th cr + l ino uni o es + +On line 12656: + b b ty F o + ro g L ed th cr l + ino uni o es f + +On line 12658: + b ty F o ro + g L ed th cr l ino + uni o es f it + +On line 12658: + ty F o ro g + L ed th cr l ino uni + o es f it P + +On line 12660: + F o ro g L + ed th cr l ino uni o + es f it P sur + +On line 12662: + o ro g L ed + th cr l ino uni o es + f it P sur rmin + +On line 12664: + ro g L ed th + cr l ino uni o es f + it P sur rmin s + +On line 12664: + g L ed th cr + l ino uni o es f it + P sur rmin s wi + +On line 12666: + L ed th cr l + ino uni o es f it P + sur rmin s wi p + +On line 12668: + ed th cr l ino + uni o es f it P sur + rmin s wi p ed + +On line 12670: + th cr l ino uni + o es f it P sur rmin + s wi p ed o + +On line 12672: + cr l ino uni o + es f it P sur rmin s + wi p ed o r + +On line 12672: + l ino uni o es + f it P sur rmin s wi + p ed o r in + +On line 12674: + ino uni o es f + it P sur rmin s wi p + ed o r in mm + +On line 12676: + uni o es f it + P sur rmin s wi p ed + o r in mm an + +On line 12678: + o es f it P + sur rmin s wi p ed o + r in mm an atio + +On line 12680: + es f it P sur + rmin s wi p ed o r + in mm an atio nf + +On line 12682: + f it P sur rmin + s wi p ed o r in + mm an atio nf o + +On line 12684: + it P sur rmin s + wi p ed o r in mm + an atio nf o it + +On line 12684: + P sur rmin s wi + p ed o r in mm an + atio nf o it loss + +On line 12686: + sur rmin s wi p + ed o r in mm an atio + nf o it loss nce + +On line 12690: + rmin s wi p ed + o r in mm an atio nf + o it loss nce o + +On line 12692: + s wi p ed o + r in mm an atio nf o + it loss nce o ed + +On line 12694: + wi p ed o r + in mm an atio nf o it + loss nce o ed k + +On line 12696: + p ed o r in + mm an atio nf o it loss + nce o ed k l + +On line 12696: + ed o r in mm + an atio nf o it loss nce + o ed k l lo + +On line 12698: + o r in mm an + atio nf o it loss nce o + ed k l lo o + +On line 12700: + r in mm an atio + nf o it loss nce o ed + k l lo o ue + +On line 12700: + in mm an atio nf + o it loss nce o ed k + l lo o ue R + +On line 12702: + mm an atio nf o + it loss nce o ed k l + lo o ue R ae + +On line 12702: + an atio nf o it + loss nce o ed k l lo + o ue R ae Cr + +On line 12704: + atio nf o it loss + nce o ed k l lo o + ue R ae Cr o + +On line 12706: + nf o it loss nce + o ed k l lo o ue + R ae Cr o al + +On line 12708: + o it loss nce o + ed k l lo o ue R + ae Cr o al d + +On line 12708: + it loss nce o ed + k l lo o ue R ae + Cr o al d C + +On line 12710: + loss nce o ed k + l lo o ue R ae Cr + o al d C atio + +On line 12712: + nce o ed k l + lo o ue R ae Cr o + al d C atio o + +On line 12712: + o ed k l lo + o ue R ae Cr o al + d C atio o C + +On line 12714: + ed k l lo o + ue R ae Cr o al d + C atio o C teed + +On line 12714: + k l lo o ue + R ae Cr o al d C + atio o C teed o + +On line 12716: + l lo o ue R + ae Cr o al d C atio + o C teed o n + +On line 12718: + lo o ue R ae + Cr o al d C atio o + C teed o n f + +On line 12718: + o ue R ae Cr + o al d C atio o C + teed o n f al + +On line 12720: + ue R ae Cr o + al d C atio o C teed + o n f al sura + +On line 12722: + R ae Cr o al + d C atio o C teed o + n f al sura f + +On line 12722: + ae Cr o al d + C atio o C teed o n + f al sura f cr + +On line 12724: + Cr o al d C + atio o C teed o n f + al sura f cr it + +On line 12724: + o al d C atio + o C teed o n f al + sura f cr it B + +On line 12726: + al d C atio o + C teed o n f al sura + f cr it B o-V + +On line 12728: + d C atio o C + teed o n f al sura f + cr it B o-V b + +On line 12730: + C atio o C teed + o n f al sura f cr + it B o-V b n + +On line 12732: + atio o C teed o + n f al sura f cr it + B o-V b n ed + +On line 12734: + o C teed o n + f al sura f cr it B + o-V b n ed ue + +On line 12734: + C teed o n f + al sura f cr it B o-V + b n ed ue R + +On line 12736: + teed o n f al + sura f cr it B o-V b + n ed ue R g + +On line 12736: + o n f al sura + f cr it B o-V b n + ed ue R g a + +On line 12738: + n f al sura f + cr it B o-V b n ed + ue R g a e + +On line 12738: + f al sura f cr + it B o-V b n ed ue + R g a e o + +On line 12740: + al sura f cr it + B o-V b n ed ue R + g a e o an-t + +On line 12742: + sura f cr it B + o-V b n ed ue R g + a e o an-t m + +On line 12744: + f cr it B o-V + b n ed ue R g a + e o an-t m ra + +On line 12746: + cr it B o-V b + n ed ue R g a e + o an-t m ra e + +On line 12746: + it B o-V b n + ed ue R g a e o + an-t m ra e in + +On line 12748: + B o-V b n ed + ue R g a e o an-t + m ra e in o + +On line 12750: + o-V b n ed ue + R g a e o an-t m + ra e in o u + +On line 12752: + b n ed ue R + g a e o an-t m ra + e in o u nce + +On line 12752: + n ed ue R g + a e o an-t m ra e + in o u nce o + +On line 12754: + ed ue R g a + e o an-t m ra e in + o u nce o tag + +On line 12756: + R g a e o + an-t m ra e in o u + nce o tag annie + +On line 12756: + g a e o an-t + m ra e in o u nce + o tag annie M + +On line 12758: + a e o an-t m + ra e in o u nce o + tag annie M s)* + +On line 12760: + e o an-t m ra + e in o u nce o tag + annie M s)* nal + +On line 12762: + m ra e in o + u nce o tag annie M + s)* nal Cr o-val + +On line 12764: + ra e in o u + nce o tag annie M s)* + nal Cr o-val usin + +On line 12766: + e in o u nce + o tag annie M s)* nal + Cr o-val usin n + +On line 12768: + in o u nce o + tag annie M s)* nal Cr + o-val usin n et + +On line 12770: + nce o tag annie + M s)* nal Cr o-val usin + n et L d J + +On line 12772: + o tag annie M + s)* nal Cr o-val usin n + et L d J tio + +On line 12774: + tag annie M s)* + nal Cr o-val usin n et + L d J tio atio + +On line 12776: + annie M s)* nal + Cr o-val usin n et L + d J tio atio nce + +On line 12782: + s)* nal Cr o-val + usin n et L d J tio + atio nce o an-t ala + +On line 12784: + nal Cr o-val usin + n et L d J tio atio + nce o an-t ala ark + +On line 12786: + Cr o-val usin n + et L d J tio atio nce + o an-t ala ark n + +On line 12788: + o-val usin n et + L d J tio atio nce o + an-t ala ark n re + +On line 12790: + n et L d J + tio atio nce o an-t ala ark + n re gua rtgag + +On line 12792: + L d J tio atio + nce o an-t ala ark n re + gua rtgag illio + +On line 12794: + d J tio atio nce + o an-t ala ark n re gua + rtgag illio o + +On line 12798: + tio atio nce o an-t + ala ark n re gua rtgag + illio o ven ala + +On line 12800: + nce o an-t ala ark + n re gua rtgag illio + o ven ala ue R + +On line 12806: + o an-t ala ark n + re gua rtgag illio o + ven ala ue R a + +On line 12808: + an-t ala ark n re + gua rtgag illio o ven + ala ue R a ercen + +On line 12810: + ala ark n re gua + rtgag illio o ven ala + ue R a ercen on + +On line 12814: + n re gua rtgag + illio o ven ala ue R + a ercen on atio o + +On line 12816: + gua rtgag illio + o ven ala ue R a ercen + on atio o M al + +On line 12818: + rtgag illio o + ven ala ue R a ercen on + atio o M al es + +On line 12822: + illio o ven ala + ue R a ercen on atio o + M al es es s + +On line 12824: + o ven ala ue R + a ercen on atio o M al + es es s a al + +On line 12824: + ven ala ue R a + ercen on atio o M al es + es s a al b + +On line 12826: + ala ue R a ercen + on atio o M al es es + s a al b al + +On line 12826: + ue R a ercen on + atio o M al es es s + a al b al B + +On line 12830: + R a ercen on atio + o M al es es s a + al b al B ss + +On line 12832: + a ercen on atio o + M al es es s a al + b al B ss ss + +On line 12836: + ercen on atio o M + al es es s a al b + al B ss ss le + +On line 12836: + on atio o M al + es es s a al b al + B ss ss le F + +On line 12838: + atio o M al es + es s a al b al B + ss ss le F p + +On line 12840: + o M al es es + s a al b al B ss + ss le F p nce + +On line 12840: + M al es es s + a al b al B ss ss + le F p nce (b + +On line 12842: + al es es s a + al b al B ss ss le + F p nce (b p + +On line 12844: + es es s a al + b al B ss ss le F + p nce (b p ate + +On line 12846: + es s a al b + al B ss ss le F p + nce (b p ate O + +On line 12848: + s a al b al + B ss ss le F p nce + (b p ate O ue + +On line 12848: + a al b al B + ss ss le F p nce (b + p ate O ue R + +On line 12850: + al b al B ss + ss le F p nce (b p + ate O ue R o + +On line 12852: + b al B ss ss + le F p nce (b p ate + O ue R o o + +On line 12854: + al B ss ss le + F p nce (b p ate O + ue R o o ark-t + +On line 12856: + B ss ss le F + p nce (b p ate O ue + R o o ark-t o-V + +On line 12858: + ss ss le F p + nce (b p ate O ue R + o o ark-t o-V C + +On line 12860: + ss le F p nce + (b p ate O ue R o + o ark-t o-V C es + +On line 12862: + le F p nce (b + p ate O ue R o o + ark-t o-V C es es + +On line 12864: + F p nce (b p + ate O ue R o o ark-t + o-V C es es an + +On line 12866: + p nce (b p ate + O ue R o o ark-t o-V + C es es an ural + +On line 12866: + nce (b p ate O + ue R o o ark-t o-V C + es es an ural H + +On line 12868: + (b p ate O ue + R o o ark-t o-V C es + es an ural H ry + +On line 12868: + p ate O ue R + o o ark-t o-V C es es + an ural H ry mo + +On line 12870: + ate O ue R o + o ark-t o-V C es es an + ural H ry mo ab + +On line 12872: + O ue R o o + ark-t o-V C es es an ural + H ry mo ab ala + +On line 12874: + ue R o o ark-t + o-V C es es an ural H + ry mo ab ala ily + +On line 12874: + R o o ark-t o-V + C es es an ural H ry + mo ab ala ily C + +On line 12876: + o o ark-t o-V C + es es an ural H ry mo + ab ala ily C y + +On line 12876: + o ark-t o-V C es + es an ural H ry mo ab + ala ily C y R + +On line 12878: + ark-t o-V C es es + an ural H ry mo ab ala + ily C y R al + +On line 12880: + o-V C es es an + ural H ry mo ab ala ily + C y R al ss + +On line 12882: + C es es an ural + H ry mo ab ala ily C + y R al ss ss + +On line 12884: + es es an ural H + ry mo ab ala ily C y + R al ss ss rime + +On line 12886: + es an ural H ry + mo ab ala ily C y R + al ss ss rime o + +On line 12888: + an ural H ry mo + ab ala ily C y R al + ss ss rime o it + +On line 12888: + ural H ry mo ab + ala ily C y R al ss + ss rime o it L + +On line 12890: + H ry mo ab ala + ily C y R al ss ss + rime o it L it + +On line 12890: + ry mo ab ala ily + C y R al ss ss rime + o it L it L + +On line 12892: + mo ab ala ily C + y R al ss ss rime o + it L it L o + +On line 12894: + ab ala ily C y + R al ss ss rime o it + L it L o T + +On line 12896: + ala ily C y R + al ss ss rime o it L + it L o T p + +On line 12898: + ily C y R al + ss ss rime o it L it + L o T p am + +On line 12900: + y R al ss ss + rime o it L it L o + T p am rinci + +On line 12902: + R al ss ss rime + o it L it L o T + p am rinci e + +On line 12902: + rime o it L it + L o T p am rinci + e Original L + +On line 12904: + o it L it L + o T p am rinci e + Original L e + +On line 12908: + it L o T p + am rinci e Original + L e M an-t e + +On line 12908: + L o T p am + rinci e Original L + e M an-t e FI + +On line 12912: + T p am rinci + e Original L e M + an-t e FI t lo + +On line 12914: + p am rinci e + Original L e M an-t + e FI t lo as + +On line 12916: + e Original L + e M an-t e FI t lo + as a p al B + +On line 12918: + Original L e + M an-t e FI t lo as + a p al B o-V + +On line 12924: + L e M an-t e + FI t lo as a p al + B o-V o d ed + +On line 12926: + e M an-t e FI + t lo as a p al B + o-V o d ed ed + +On line 12928: + M an-t e FI t + lo as a p al B o-V + o d ed ed b + +On line 12930: + e FI t lo as + a p al B o-V o d + ed ed b rinci + +On line 12932: + FI t lo as a + p al B o-V o d ed + ed b rinci p + +On line 12934: + t lo as a p + al B o-V o d ed ed + b rinci p uenc + +On line 12936: + lo as a p al + B o-V o d ed ed b + rinci p uenc it + +On line 12938: + a p al B o-V + o d ed ed b rinci + p uenc it L it + +On line 12938: + p al B o-V o + d ed ed b rinci p + uenc it L it L + +On line 12940: + al B o-V o d + ed ed b rinci p uenc + it L it L ears + +On line 12940: + B o-V o d ed + ed b rinci p uenc it + L it L ears 2005-2007 + +On line 12942: + o-V o d ed ed + b rinci p uenc it L + it L ears 2005-2007 d + +On line 12942: + o d ed ed b + rinci p uenc it L it + L ears 2005-2007 d <660n + +On line 12946: + ed b rinci p + uenc it L it L ears 2005-2007 + d <660n u rima + +On line 12948: + b rinci p uenc + it L it L ears 2005-2007 d + <660n u rima ed + +On line 12950: + rinci p uenc it + L it L ears 2005-2007 d <660n + u rima ed gle-F + +On line 12954: + uenc it L it L + ears 2005-2007 d <660n u rima + ed gle-F aid P p + +On line 12956: + it L it L ears + 2005-2007 d <660n u rima ed + gle-F aid P p p + +On line 12958: + L ears 2005-2007 d <660n + u rima ed gle-F aid P + p p verag + +On line 12960: + ears 2005-2007 d <660n u + rima ed gle-F aid P p + p verag an-t + +On line 12964: + u rima ed gle-F + aid P p p verag + an-t verag ed + +On line 12966: + rima ed gle-F aid + P p p verag an-t + verag ed ed + +On line 12972: + p p verag + an-t verag ed ed ark + L verag nce + +On line 12974: + p verag an-t + verag ed ed ark L + verag nce r + +On line 12976: + an-t verag ed + ed ark L verag nce + r the R rinci + +On line 12978: + verag ed ed + ark L verag nce r + the R rinci in + +On line 12986: + ark L verag + nce r the R rinci in + n elinq n Y A + +On line 12988: + L verag nce + r the R rinci in n + elinq n Y A o + +On line 12990: + verag nce r + the R rinci in n elinq + n Y A o A + +On line 12996: + r the R rinci + in n elinq n Y A o + A A o-o aid p + +On line 12998: + the R rinci in + n elinq n Y A o A + A o-o aid p ec + +On line 12998: + R rinci in n + elinq n Y A o A A + o-o aid p ec f + +On line 12998: + rinci in n elinq + n Y A o A A o-o + aid p ec f S + +On line 13002: + in n elinq n Y + A o A A o-o aid p + ec f S te e + +On line 13002: + n elinq n Y A + o A A o-o aid p ec + f S te e U + +On line 13004: + elinq n Y A o + A A o-o aid p ec f + S te e U tio + +On line 13006: + n Y A o A + A o-o aid p ec f S + te e U tio ress + +On line 13008: + Y A o A A + o-o aid p ec f S te + e U tio ress ted + +On line 13010: + A o A A o-o + aid p ec f S te e + U tio ress ted ted + +On line 13012: + o A A o-o aid + p ec f S te e U + tio ress ted ted o-M + +On line 13014: + A A o-o aid p + ec f S te e U tio + ress ted ted o-M ted + +On line 13016: + A o-o aid p ec + f S te e U tio ress + ted ted o-M ted al + +On line 13016: + p ec f S te + e U tio ress ted ted o-M + ted al Residence + +On line 13020: + ec f S te e + U tio ress ted ted o-M ted + al Residence a + +On line 13022: + f S te e U + tio ress ted ted o-M ted al + Residence a p + +On line 13026: + e U tio ress ted + ted o-M ted al Residence + a p t-A, S p + +On line 13028: + U tio ress ted ted + o-M ted al Residence a + p t-A, S p f + +On line 13028: + tio ress ted ted o-M + ted al Residence a p + t-A, S p f D + +On line 13030: + ress ted ted o-M ted + al Residence a p t-A, + S p f D aid + +On line 13030: + ted ted o-M ted al + Residence a p t-A, S + p f D aid P + +On line 13034: + ted al Residence + a p t-A, S p f D + aid P us D h + +On line 13036: + al Residence a + p t-A, S p f D aid + P us D h h + +On line 13038: + Residence a p + t-A, S p f D aid P + us D h h h + +On line 13040: + a p t-A, S p + f D aid P us D h + h h it Enha + +On line 13042: + p t-A, S p f + D aid P us D h h + h it Enha A) + +On line 13042: + t-A, S p f D + aid P us D h h h + it Enha A) o + +On line 13044: + S p f D aid + P us D h h h it + Enha A) o n + +On line 13046: + f D aid P us + D h h h it Enha + A) o n udes p + +On line 13048: + D aid P us D + h h h it Enha A) + o n udes p p + +On line 13050: + aid P us D h + h h it Enha A) o + n udes p p O + +On line 13052: + P us D h h + h it Enha A) o n + udes p p O O + +On line 13054: + us D h h h + it Enha A) o n udes + p p O O ed-ra + +On line 13056: + D h h h it + Enha A) o n udes p + p O O ed-ra f + +On line 13058: + h h it Enha + A) o n udes p p O + O ed-ra f Cr f + +On line 13058: + h it Enha A) + o n udes p p O O + ed-ra f Cr f Q3 + +On line 13058: + it Enha A) o + n udes p p O O ed-ra + f Cr f Q3 Cr + +On line 13060: + Enha A) o n + udes p p O O ed-ra f + Cr f Q3 Cr f + +On line 13060: + A) o n udes p + p O O ed-ra f Cr f + Q3 Cr f Q4 Cr + +On line 13062: + o n udes p p + O O ed-ra f Cr f Q3 + Cr f Q4 Cr f + +On line 13062: + n udes p p O + O ed-ra f Cr f Q3 Cr + f Q4 Cr f Cr + +On line 13064: + p p O O ed-ra + f Cr f Q3 Cr f Q4 + Cr f Cr vernmen + +On line 13066: + p O O ed-ra f + Cr f Q3 Cr f Q4 Cr + f Cr vernmen xp + +On line 13068: + O O ed-ra f Cr + f Q3 Cr f Q4 Cr f + Cr vernmen xp s + +On line 13068: + O ed-ra f Cr f + Q3 Cr f Q4 Cr f Cr + vernmen xp s o + +On line 13072: + f Cr f Q3 Cr + f Q4 Cr f Cr vernmen + xp s o n are + +On line 13072: + Cr f Q3 Cr f + Q4 Cr f Cr vernmen xp + s o n are o + +On line 13074: + Cr f Q4 Cr f + Cr vernmen xp s o n + are o verag + +On line 13076: + f Q4 Cr f Cr + vernmen xp s o n are + o verag eig + +On line 13084: + Cr vernmen xp s + o n are o verag + eig eig ark-t eig C + +On line 13086: + vernmen xp s o + n are o verag eig + eig ark-t eig C C + +On line 13088: + xp s o n are + o verag eig eig ark-t + eig C C rinci + +On line 13090: + s o n are o + verag eig eig ark-t eig + C C rinci ondo/C + +On line 13098: + o verag eig + eig ark-t eig C C rinci + ondo/C ed o cl A + +On line 13100: + verag eig eig + ark-t eig C C rinci ondo/C + ed o cl A U + +On line 13106: + eig ark-t eig C C + rinci ondo/C ed o cl A + U Sh A Serio + +On line 13108: + C C rinci ondo/C + ed o cl A U Sh A + Serio Origina + +On line 13112: + ed o cl A U + Sh A Serio Origina + W Original L + +On line 13114: + o cl A U Sh + A Serio Origina W + Original L W + +On line 13120: + U Sh A Serio + Origina W Original + L W M W FI + +On line 13126: + Serio Origina + W Original L W M + W FI FI Fix P + +On line 13136: + W Original L + W M W FI FI Fix P + C Cr o o o + +On line 13138: + Original L W + M W FI FI Fix P C + Cr o o o o + +On line 13144: + L W M W FI + FI Fix P C Cr o o + o o Al U E + +On line 13148: + W M W FI FI + Fix P C Cr o o o + o Al U E G + +On line 13150: + M W FI FI Fix + P C Cr o o o o + Al U E G (FH + +On line 13152: + W FI FI Fix P + C Cr o o o o Al + U E G (FH In + +On line 13158: + Fix P C Cr o + o o o Al U E G + (FH In Dissenting + +On line 13158: + C Cr o o o + o Al U E G (FH In + Dissenting Statement + +On line 13160: + o o o Al U + E G (FH In Dissenting + Statement Freddie Mac. + +On line 13160: + noted earlier, + in its limited review + of the role of the + +On line 13160: + earlier, in its + limited review of the + role of the GSEs in + +On line 13160: + the role of the GSEs + in the fi nancial crisis, + the Commission spent + +On line 13160: + role of the GSEs in + the fi nancial crisis, the + Commission spent most + +On line 13160: + in the fi nancial + crisis, the Commission spent + most of its time and + +On line 13160: + nancial crisis, the + Commission spent most of its + time and staff resources + +On line 13160: + Commission spent most + of its time and staff resources + on a review of + +On line 13160: + most of its time and + staff resources on a review + of Fannie Mae, and + +On line 13160: + of its time and staff + resources on a review of + Fannie Mae, and for + +On line 13160: + and staff resources on + a review of Fannie Mae, + and for that reason + +On line 13160: + staff resources on a + review of Fannie Mae, and + for that reason this + +On line 13160: + review of Fannie + Mae, and for that reason this + dissent focuses + +On line 13160: + not substantially + diff erent at Freddie Mac. + In a document + +On line 13160: + at Freddie Mac. In + a document dated June + entitled "Cost of + +On line 13160: + In a document + dated June entitled "Cost + of Freddie Mac’s Aff + +On line 13160: + June entitled "Cost + of Freddie Mac’s Aff ordable + Housing Mission," a + +On line 13160: + "Cost of Freddie Mac’s + Aff ordable Housing Mission," + a report to the + +On line 13160: + Housing Mission," a + report to the Business Risk + Committee, of the + +On line 13160: + were made that show the + experience of Freddie + was no diff erent + +On line 13162: + was no diff erent + than Fannie’s: Our housing goals + compliance required + +On line 13162: + subsidy prior to + but since then subsidies have + averaged million + +On line 13164: + since then subsidies + have averaged million per + year. Higher credit + +On line 13164: + then subsidies have + averaged million per year. + Higher credit risk + +On line 13170: + baseline) aff ordable + single-family loans, but + not enough to fully + +On line 13170: + single-family + loans, but not enough to fully + off set their higher + +On line 13170: + loans, but not enough to + fully off set their higher + incremental risk. + +On line 13174: + to fully off set + their higher incremental + risk. Goal-qualifying + +On line 13174: + loans accounted for + the disproportionate share + of our realized + +On line 13174: + of our realized + losses that was predicted + by our models. (slide + +On line 13176: + was predicted by + our models. (slide In Freddie + Mac failed two subgoals, + +On line 13176: + predicted by our + models. (slide In Freddie Mac + failed two subgoals, but + +On line 13176: + our models. (slide In + Freddie Mac failed two subgoals, + but compliance was + +On line 13176: + In Freddie Mac failed + two subgoals, but compliance + was subsequently + +On line 13176: + Freddie Mac failed two + subgoals, but compliance was + subsequently deemed + +On line 13176: + was subsequently + deemed infeasible by the + regulator due + +On line 13176: + regulator due + to economic conditions. + In Freddie Mac failed + +On line 13176: + Mac failed six goals and + subgoals, fi ve of which were + deemed infeasible. + +On line 13176: + deemed infeasible. + No enforcement action was + taken regarding + +On line 13176: + enforcement action + was taken regarding the + sixth missed goal because + +On line 13176: + action was taken + regarding the sixth missed goal + because of our fi + +On line 13176: + regarding the sixth + missed goal because of our fi + nancial condition. + +On line 13180: + missed goal because of + our fi nancial condition. + (slide Goal-qualifying + +On line 13180: + goal because of our + fi nancial condition. (slide + Goal-qualifying loans + +On line 13180: + nancial condition. + (slide Goal-qualifying loans tend + to be higher risk. + +On line 13180: + higher risk. Lower + household income correlates + with various risk + +On line 13180: + income correlates + with various risk factors + such as less wealth, less + +On line 13184: + ratios, or lower + credit scores. (slide Targeted + aff ordable loans have + +On line 13184: + lower credit scores. + (slide Targeted aff ordable + loans have much higher + +On line 13184: + (slide Targeted aff + ordable loans have much higher + expected default + +On line 13184: + ordable loans have much + higher expected default + probabilities... + +On line 13184: + expected default + probabilities... Over one-half + of targeted aff + +On line 13184: + one-half of targeted + aff ordable loans have higher + expected default + +On line 13184: + aff ordable loans have + higher expected default + probabilities + +On line 13184: + higher expected + default probabilities + than the highest of + +On line 13186: + than the highest of + non-goal-qualifying loans. (Slide + Th e use of the + +On line 13186: + non-goal-qualifying + loans. (Slide Th e use of the + aff ordable housing + +On line 13186: + Th e use of the + aff ordable housing goals to + force a reduction + +On line 13186: + e use of the aff + ordable housing goals to force + a reduction in + +On line 13188: + major policy + error committed by HUD + in two successive + +On line 13188: + error committed + by HUD in two successive + administrations, + +On line 13188: + in two successive + administrations, and must + be recognized as + +On line 13188: + must be recognized + as such if we are ever + to understand what + +On line 13188: + be recognized as + such if we are ever to + understand what caused + +On line 13188: + as such if we are + ever to understand what + caused the fi nancial + +On line 13188: + if we are ever + to understand what caused the + fi nancial crisis. + +On line 13188: + to understand what + caused the fi nancial crisis. + Ultimately, the + +On line 13188: + caused the fi nancial + crisis. Ultimately, the + AH goals extended + +On line 13188: + AH goals extended + the housing bubble, infused + it with weak and high + +On line 13188: + goals extended the + housing bubble, infused it + with weak and high risk + +On line 13188: + bubble, infused it + with weak and high risk NTMs, caused + the insolvency + +On line 13188: + weak and high risk NTMs, + caused the insolvency of + Fannie and Freddie, + +On line 13188: + Fannie and Freddie, + and—together with other + elements of U.S. + +On line 13188: + elements of U.S. + housing policy—was the + principal cause of + +On line 13190: + the principal cause + of the fi nancial crisis + itself. When Congress + +On line 13190: + Congress enacted + the Housing and Economic + Recovery Act of + +On line 13192: + (HERA), it transferred the + responsibility for + administering + +On line 13192: + administering + the aff ordable housing goals + from HUD to FHFA. + +On line 13192: + aff ordable housing + goals from HUD to FHFA. In + FHFA modifi + +On line 13192: + from HUD to FHFA. + In FHFA modifi ed + and simplifi ed + +On line 13192: + HUD to FHFA. In + FHFA modifi ed and + simplifi ed the + +On line 13192: + modifi ed and + simplifi ed the AH goals, + and eliminated + +On line 13192: + of their most troubling + elements. As Fannie had + noted, if the AH + +On line 13194: + troubling elements. + As Fannie had noted, if + the AH goals exceed + +On line 13194: + noted, if the AH + goals exceed the number of + goals-eligible + +On line 13194: + goals-eligible + borrowers in the market, + they were being forced + +On line 13194: + the market, they were + being forced to allocate + credit, taking it + +On line 13194: + were being forced to + allocate credit, taking + it from the middle + +On line 13194: + allocate credit, + taking it from the middle + class and providing + +On line 13194: + it from the middle + class and providing it to + low-income borrowers. + +On line 13194: + the middle class and + providing it to low-income + borrowers. In eff + +On line 13194: + class and providing + it to low-income borrowers. + In eff ect, there was + +On line 13194: + and providing it + to low-income borrowers. In + eff ect, there was a + +On line 13194: + borrowers. In eff + ect, there was a confl ict + between their mission + +On line 13194: + In eff ect, there was + a confl ict between their + mission to advance + +On line 13194: + there was a confl + ict between their mission to + advance aff ordable + +On line 13194: + confl ict between + their mission to advance aff + ordable housing and + +On line 13194: + mission to advance + aff ordable housing and their + mission to maintain + +On line 13194: + advance aff ordable + housing and their mission to + maintain a liquid + +On line 13194: + aff ordable housing + and their mission to maintain + a liquid secondary + +On line 13194: + and their mission to + maintain a liquid secondary + mortgage Freddie Mac, + +On line 13194: + mission to maintain + a liquid secondary mortgage + Freddie Mac, "Cost of + +On line 13194: + maintain a liquid + secondary mortgage Freddie Mac, + "Cost of Freddie Mac’s + +On line 13200: + Committee, Board of + Directors, June Peter J. + Wallison market + +On line 13202: + Wallison market + for most mortgages in the U.S. + Th e new FHFA + +On line 13202: + for most mortgages in + the U.S. Th e new FHFA + rule does not require + +On line 13202: + most mortgages in the + U.S. Th e new FHFA rule + does not require the + +On line 13204: + mortgages in the U.S. + Th e new FHFA rule does + not require the GSEs + +On line 13204: + the U.S. Th e new + FHFA rule does not require + the GSEs to purchase + +On line 13204: + FHFA rule does not + require the GSEs to purchase + more qualifying + +On line 13204: + the GSEs to purchase + more qualifying loans than + the percentage of + +On line 13204: + GSEs to purchase more + qualifying loans than the + percentage of the + +On line 13204: + more qualifying + loans than the percentage of + the total market + +On line 13204: + qualifying loans + than the percentage of the + total market that + +On line 13204: + than the percentage + of the total market that + these loans constitute.137 + +On line 13206: + the percentage of + the total market that these + loans constitute.137 Th + +On line 13208: + percentage of the + total market that these loans + constitute.137 Th is + +On line 13208: + the total market + that these loans constitute.137 Th + is does not solve all + +On line 13208: + total market that + these loans constitute.137 Th is + does not solve all the + +On line 13208: + market that these loans + constitute.137 Th is does not + solve all the major + +On line 13208: + these loans constitute.137 + Th is does not solve all the + major problems with + +On line 13208: + constitute.137 Th is + does not solve all the major + problems with the AH + +On line 13208: + Th is does not solve + all the major problems with + the AH goals. In the + +On line 13208: + is does not solve all + the major problems with the + AH goals. In the sense + +On line 13208: + does not solve all the + major problems with the AH + goals. In the sense that + +On line 13208: + solve all the major + problems with the AH goals. In + the sense that the goals + +On line 13208: + the major problems + with the AH goals. In the sense + that the goals enable + +On line 13208: + major problems with + the AH goals. In the sense that + the goals enable the + +On line 13208: + with the AH goals. In + the sense that the goals enable + the government to + +On line 13208: + In the sense that the + goals enable the government + to direct where a + +On line 13208: + inherently a + form of government credit + allocation. More + +On line 13208: + form of government + credit allocation. More + signifi cantly, the + +On line 13208: + More signifi cantly, + the competition among the + GSEs, FHA and the banks + +On line 13208: + signifi cantly, the + competition among the GSEs, + FHA and the banks that + +On line 13208: + competition among + the GSEs, FHA and the banks that + are required under + +On line 13208: + the GSEs, FHA and the + banks that are required under + the CRA to fi nd + +On line 13208: + GSEs, FHA and the banks + that are required under the + CRA to fi nd and + +On line 13208: + and the banks that are + required under the CRA to + fi nd and acquire + +On line 13208: + banks that are required + under the CRA to fi nd + and acquire the same + +On line 13208: + required under the + CRA to fi nd and acquire + the same kind of loans + +On line 13208: + the CRA to fi nd + and acquire the same kind of + loans will continue + +On line 13208: + CRA to fi nd and + acquire the same kind of loans + will continue to + +On line 13208: + the same kind of loans + will continue to cause the + same underpricing + +On line 13208: + same kind of loans will + continue to cause the same + underpricing of + +On line 13208: + will continue to + cause the same underpricing + of risk on these loans + +On line 13208: + continue to cause + the same underpricing of + risk on these loans that + +On line 13208: + of risk on these loans + that eventually brought about + the mortgage meltdown + +On line 13208: + risk on these loans that + eventually brought about the + mortgage meltdown and + +On line 13208: + that eventually + brought about the mortgage meltdown + and the fi nancial + +On line 13210: + brought about the mortgage + meltdown and the fi nancial + crisis. Th is is + +On line 13210: + the mortgage meltdown + and the fi nancial crisis. + Th is is discussed + +On line 13210: + mortgage meltdown and + the fi nancial crisis. Th + is is discussed in + +On line 13210: + meltdown and the fi + nancial crisis. Th is is + discussed in the next + +On line 13210: + and the fi nancial + crisis. Th is is discussed + in the next section + +On line 13210: + fi nancial crisis. + Th is is discussed in the + next section and the + +On line 13212: + crisis. Th is is + discussed in the next section + and the section on + +On line 13212: + Th is is discussed + in the next section and the + section on the CRA. + +On line 13216: + the section on the + CRA. Competition Between + the GSEs and FHA for + +On line 13218: + the GSEs and FHA for + Subprime and Alt-A Mortgages One + of the important + +On line 13218: + and FHA for Subprime + and Alt-A Mortgages One of the + important facts about + +On line 13218: + and Alt-A Mortgages One + of the important facts about + HUD’s management of + +On line 13218: + Alt-A Mortgages One of + the important facts about HUD’s + management of the + +On line 13218: + of the important + facts about HUD’s management of + the AH goals was that + +On line 13218: + the important facts + about HUD’s management of the + AH goals was that it + +On line 13218: + important facts about + HUD’s management of the AH + goals was that it placed + +On line 13218: + HUD’s management of + the AH goals was that it placed + Fannie and Freddie + +On line 13218: + Fannie and Freddie + in direct competition + with FHA, an agency + +On line 13218: + Freddie in direct + competition with FHA, an + agency within HUD. + +On line 13220: + competition with + FHA, an agency within HUD. + Th is was already + +On line 13222: + Fannie documents + cited above. Fannie treated + this as a confl + +On line 13222: + documents cited + above. Fannie treated this as + a confl ict of + +On line 13222: + cited above. Fannie + treated this as a confl + ict of interest + +On line 13222: + above. Fannie treated + this as a confl ict of + interest at HUD, + +On line 13222: + treated this as a + confl ict of interest + at HUD, but there is + +On line 13222: + this as a confl + ict of interest at HUD, + but there is a strong + +On line 13222: + as a confl ict + of interest at HUD, but + there is a strong case + +On line 13222: + a confl ict of + interest at HUD, but there + is a strong case that + +On line 13222: + interest at HUD, + but there is a strong case that + this competition + +On line 13222: + but there is a strong + case that this competition + is exactly what + +On line 13222: + there is a strong case + that this competition is + exactly what HUD + +On line 13222: + this competition + is exactly what HUD and + Congress wanted. It + +On line 13222: + is exactly what + HUD and Congress wanted. It + is important to + +On line 13222: + Congress wanted. It + is important to recall + the context in which + +On line 13222: + It is important + to recall the context in + which the GSE Act was + +On line 13222: + the context in which + the GSE Act was enacted + in In Congress had + +On line 13222: + which the GSE Act was + enacted in In Congress + had enacted the + +On line 13222: + enacted in In + Congress had enacted the + Federal Credit + +On line 13222: + in In Congress had + enacted the Federal + Credit Reform Act.138 + +On line 13222: + Credit Reform Act.138 + One of its purposes was + to capture in the + +On line 13222: + purposes was to + capture in the government’s + budget the risks to + +On line 13222: + to capture in the + government’s budget the risks + to the government + +On line 13222: + government’s budget + the risks to the government + associated + +On line 13222: + to the government + associated with loan + guarantees, and in + +On line 13222: + associated + with loan guarantees, and in + eff ect it placed a + +On line 13222: + with loan guarantees, + and in eff ect it placed a + loose budgetary limit + +On line 13222: + loan guarantees, and + in eff ect it placed a loose + budgetary limit on + +On line 13222: + and in eff ect it + placed a loose budgetary limit + on FHA guarantees. + +On line 13222: + in eff ect it placed + a loose budgetary limit on + FHA guarantees. For + +On line 13222: + eff ect it placed a + loose budgetary limit on FHA + guarantees. For those + +On line 13222: + placed a loose budgetary + limit on FHA guarantees. + For those in Congress + +On line 13222: + loose budgetary limit + on FHA guarantees. For those + in Congress and at + +On line 13222: + budgetary limit on + FHA guarantees. For those in + Congress and at HUD + +On line 13222: + FHA guarantees. For + those in Congress and at HUD + who favored increased + +On line 13222: + those in Congress and + at HUD who favored increased + mortgage lending to + +On line 13222: + communities, this + consequence of the FCRA may + have been troubling. What + +On line 13222: + consequence of the + FCRA may have been troubling. What + had previously + +On line 13222: + have been troubling. What + had previously been a + free way to extend + +On line 13222: + had previously + been a free way to extend + support to groups who + +On line 13222: + been a free way to + extend support to groups who + were not otherwise + +On line 13222: + extend support to + groups who were not otherwise + eligible for + +On line 13222: + to groups who were not + otherwise eligible + for conventional + +On line 13222: + downpayment and the + indicia of willingness + and ability to + +On line 13222: + the indicia of + willingness and ability + to pay—now appeared to + +On line 13222: + pay—now appeared to be + potentially restricted. + Requiring the GSEs + +On line 13222: + be potentially + restricted. Requiring the + GSEs to take up the + +On line 13222: + Requiring the GSEs + to take up the mantle of + aff ordable housing + +On line 13222: + the GSEs to take up + the mantle of aff ordable + housing would have looked + +On line 13222: + take up the mantle + of aff ordable housing would + have looked at the time + +On line 13222: + up the mantle of + aff ordable housing would have + looked at the time like + +On line 13222: + the mantle of aff + ordable housing would have looked + at the time like a + +On line 13222: + aff ordable housing + would have looked at the time like + a solution, since + +On line 13222: + would have looked at the + time like a solution, since + Fannie and Freddie + +On line 13224: + funds in the private + markets and were off -budget + entities. Looked at + +On line 13224: + markets and were off + -budget entities. Looked at + from this perspective, + +On line 13224: + and were off -budget + entities. Looked at from this + perspective, it would + +On line 13224: + -budget entities. + Looked at from this perspective, + it would make sense for + +On line 13224: + entities. Looked at + from this perspective, it would + make sense for Congress + +On line 13226: + from this perspective, + it would make sense for Congress + and HUD to place the + +On line 13226: + this perspective, it + would make sense for Congress and + HUD to place the GSEs + +On line 13226: + perspective, it would + make sense for Congress and HUD + to place the GSEs and + +On line 13226: + sense for Congress and + HUD to place the GSEs and FHA + in competition, + +On line 13226: + for Congress and HUD + to place the GSEs and FHA in + competition, just + +On line 13226: + HUD to place the GSEs + and FHA in competition, + just as it made sense + +On line 13226: + to place the GSEs and + FHA in competition, just + as it made sense to + +On line 13226: + place the GSEs and FHA + in competition, just as + it made sense to put + +On line 13226: + in competition, + just as it made sense to put + Fannie and Freddie + +On line 13226: + just as it made sense + to put Fannie and Freddie + in competition + +On line 13226: + as it made sense to + put Fannie and Freddie in + competition with + +On line 13226: + to put Fannie and + Freddie in competition + with one another + +On line 13226: + Fannie and Freddie + in competition with one + another for aff + +On line 13226: + in competition + with one another for aff + ordable loans. With all + +On line 13226: + ordable loans. With all + three entities competing + for the same kinds of + +On line 13226: + all three entities + competing for the same kinds + of loans, and with HUD’s + +On line 13226: + competing for the + same kinds of loans, and with HUD’s + control of both FHA’s + +On line 13226: + the same kinds of loans, + and with HUD’s control of both + FHA’s lending standards + +On line 13226: + same kinds of loans, and + with HUD’s control of both FHA’s + lending standards and + +On line 13226: + of loans, and with HUD’s + control of both FHA’s lending + standards and the GSEs’ + +On line 13226: + with HUD’s control of + both FHA’s lending standards and + the GSEs’ aff ordable + +On line 13226: + control of both FHA’s + lending standards and the GSEs’ + aff ordable housing + +On line 13226: + reducing mortgage + underwriting standards, as + a means of making + +On line 13226: + income borrowers, + provides ample evidence + of HUD’s motives for + +On line 13228: + Goals; Enterprise Book-Entry + Procedures; Final Rule, CFR + Parts and Federal + +On line 13230: + Parts and Federal + Register, September p.55892. + Title V of the + +On line 13230: + p.55892. Title V of + the Congressional Budget + Act of Under the + +On line 13230: + Title V of the + Congressional Budget Act + of Under the FCRA, + +On line 13230: + Act of Under the + FCRA, HUD must estimate the + annual cost of + +On line 13230: + HUD must estimate + the annual cost of FHA’s + credit subsidy for + +On line 13230: + the annual cost + of FHA’s credit subsidy for + budget purposes. + +On line 13232: + FHA’s credit subsidy + for budget purposes. Th + e credit subsidy + +On line 13232: + credit subsidy for + budget purposes. Th e + credit subsidy is + +On line 13232: + subsidy for budget + purposes. Th e credit + subsidy is the net + +On line 13238: + receipts reduced by + its estimated payments. + Dissenting Statement + +On line 13240: + its estimated + payments. Dissenting Statement + Established in now + +On line 13240: + payments. Dissenting + Statement Established in now + a part of HUD and + +On line 13240: + Statement Established + in now a part of HUD and + administered by + +On line 13240: + now a part of HUD + and administered by the + Federal Housing + +On line 13240: + and administered + by the Federal Housing + Administrator + +On line 13240: + by the Federal + Housing Administrator + (who is also the + +On line 13240: + (who is also the + Assistant Secretary of + Housing), FHA insures + +On line 13240: + insures percent of + an eligible mortgage. + It was established + +On line 13240: + It was established + to provide fi nancing to + people who could not + +On line 13240: + provide fi nancing + to people who could not meet + the standards for a + +On line 13240: + to people who could + not meet the standards for a + bank-originated + +On line 13240: + not meet the standards + for a bank-originated + conventional loan. + +On line 13242: + bank-originated + conventional loan. Th e + loans it insured had + +On line 13242: + conventional loan. + Th e loans it insured had + a maximum LTV + +On line 13242: + loan. Th e loans it + insured had a maximum + LTV of percent in + +On line 13242: + e loans it insured + had a maximum LTV of + percent in Th is + +On line 13242: + it insured had a + maximum LTV of percent + in Th is went to + +On line 13244: + had a maximum + LTV of percent in Th is + went to percent in + +On line 13244: + a maximum LTV + of percent in Th is went + to percent in and + +On line 13244: + LTV of percent in + Th is went to percent in + and percent in With + +On line 13244: + of percent in Th + is went to percent in and + percent in With its + +On line 13244: + in Th is went to + percent in and percent in + With its maximum + +On line 13244: + its maximum LTV + remaining at percent, FHA + maintained average + +On line 13244: + percent, FHA maintained + average FICO scores for + its borrowers just + +On line 13244: + for its borrowers + just below from to During + this period, the + +On line 13244: + just below from to + During this period, the + average FICO + +On line 13244: + from to During this + period, the average + FICO score for a + +On line 13244: + this period, the + average FICO score for + a conventional + +On line 13244: + average FICO + score for a conventional + subprime borrower + +On line 13244: + began to increase + its percentage of loans with + low downpayments. Th + +On line 13246: + its percentage of + loans with low downpayments. Th + is had the predictable + +On line 13246: + percentage of loans + with low downpayments. Th is + had the predictable eff + +On line 13246: + low downpayments. Th + is had the predictable eff ect + on its delinquency + +On line 13248: + downpayments. Th is + had the predictable eff ect on + its delinquency rates, + +On line 13248: + is had the predictable + eff ect on its delinquency + rates, as shown in the + +On line 13248: + had the predictable eff + ect on its delinquency rates, + as shown in the fi + +On line 13248: + the predictable eff ect + on its delinquency rates, as + shown in the fi gure + +On line 13248: + on its delinquency + rates, as shown in the fi gure + below prepared by + +On line 13248: + delinquency rates, as + shown in the fi gure below + prepared by Edward + +On line 13248: + rates, as shown in the + fi gure below prepared by + Edward Pinto with + +On line 13248: + shown in the fi gure + below prepared by Edward + Pinto with data + +On line 13248: + the fi gure below + prepared by Edward Pinto + with data from FHA, + +On line 13248: + below prepared by + Edward Pinto with data + from FHA, the FDIC, and + +On line 13248: + prepared by Edward + Pinto with data from FHA, + the FDIC, and the MBA: + +On line 13250: + by Edward Pinto + with data from FHA, the FDIC, + and the MBA: Figure + +On line 13252: + Pinto with data + from FHA, the FDIC, and the MBA: + Figure Despite its + +On line 13252: + and the MBA: Figure + Despite its reductions in + required downpayments, + +On line 13252: + market share vis-a vis + the GSEs began to decline. + According to GAO + +On line 13252: + vis the GSEs began + to decline. According to + GAO data, in FHA’s + +On line 13252: + began to decline. + According to GAO data, + in FHA’s market share + +On line 13252: + in FHA’s market share + among lower-income borrowers + was percent while the + +On line 13252: + FHA’s market share among + lower-income borrowers was + percent while the GSEs’ + +On line 13252: + was percent while the + GSEs’ share was percent. By FHA’s + share was percent, while + +On line 13252: + percent while the GSEs’ + share was percent. By FHA’s share + was percent, while the + +On line 13252: + share was percent. By + FHA’s share was percent, while the + GSEs’ share was percent. + +On line 13252: + was percent. By FHA’s + share was percent, while the GSEs’ + share was percent. It + +On line 13252: + share was percent, while + the GSEs’ share was percent. It + appears that early + +On line 13252: + percent. It appears + that early on Fannie Mae + deliberately + +On line 13252: + borrowers with its + Community Homebuyer + Program (CHBP). In a + +On line 13252: + its Community + Homebuyer Program (CHBP). In + a memorandum + +On line 13252: + Homebuyer Program + (CHBP). In a memorandum + prepared in Fannie’s + +On line 13254: + Credit Policy + group compared Fannie’s then-proposed + CHBP program to FHA’s + +On line 13254: + group compared Fannie’s + then-proposed CHBP program to FHA’s + requirements under + +On line 13254: + then-proposed CHBP program + to FHA’s requirements under + its 1-to-4 family + +On line 13254: + to FHA’s requirements + under its 1-to-4 family + loan program (Section + +On line 13254: + 1-to-4 family loan + program (Section 203(b)) and showed + that most of Fannie’s + +On line 13254: + 203(b)) and showed that most + of Fannie’s requirements were + competitive or + +On line 13256: + competitive or + better. Kerry D. Vandell, + "FHA Restructuring + +On line 13256: + "FHA Restructuring + Proposals: Alternatives + and Implications," + +On line 13256: + Alternatives and + Implications," Fannie Mae + Housing Policy + +On line 13258: + 308-309 GAO, "Federal + Housing Administration: + Decline in Agency’s + +On line 13258: + "Federal Housing + Administration: Decline + in Agency’s Market + +On line 13258: + in Agency’s Market + Share Was Associated + with Product and Process + +On line 13258: + Process Developments + of Other Mortgage Market + Participants," GAO-07-645, + +On line 13262: + of Other Mortgage + Market Participants," GAO-07-645, + June pp. and Peter + +On line 13266: + June pp. and Peter + J. Wallison FHA also + appears to have tried + +On line 13266: + J. Wallison FHA + also appears to have tried + to lead the GSEs. In + +On line 13266: + FHA also appears + to have tried to lead the GSEs. + In 1999—just before the + +On line 13266: + also appears to + have tried to lead the GSEs. In + 1999—just before the AH + +On line 13266: + to have tried to lead + the GSEs. In 1999—just before the + AH goals for Fannie + +On line 13266: + have tried to lead the + GSEs. In 1999—just before the AH + goals for Fannie and + +On line 13266: + to lead the GSEs. In + 1999—just before the AH goals for + Fannie and Freddie + +On line 13266: + GSEs. In 1999—just before + the AH goals for Fannie and + Freddie were to be + +On line 13266: + before the AH goals + for Fannie and Freddie were + to be raised—FHA almost + +On line 13266: + AH goals for Fannie + and Freddie were to be raised—FHA + almost doubled its + +On line 13266: + and Freddie were to + be raised—FHA almost doubled its + originations of + +On line 13266: + to be raised—FHA almost + doubled its originations + of loans with LTVs equal + +On line 13266: + raised—FHA almost doubled + its originations of loans + with LTVs equal to or + +On line 13266: + almost doubled its + originations of loans with + LTVs equal to or greater + +On line 13266: + originations of + loans with LTVs equal to or greater + than percent, going + +On line 13266: + loans with LTVs equal to + or greater than percent, going + from percent in to + +On line 13266: + equal to or greater than + percent, going from percent + in to percent in + +On line 13266: + than percent, going + from percent in to percent + in It also off + +On line 13266: + percent, going from + percent in to percent in + It also off ered + +On line 13266: + from percent in to + percent in It also off + ered additional + +On line 13266: + It also off ered + additional concessions + on underwriting + +On line 13266: + standards in order + to attract subprime business. + Th e following + +On line 13268: + to attract subprime + business. Th e following + is from a Quicken + +On line 13268: + from a Quicken ad + in January (emphasis + in the original),142 + +On line 13268: + a Quicken ad in + January (emphasis in + the original),142 which + +On line 13268: + (emphasis in the + original),142 which is likely + to have been based on + +On line 13268: + the original),142 which + is likely to have been based + on an FHA program + +On line 13268: + original),142 which is + likely to have been based on + an FHA program as + +On line 13268: + is likely to have + been based on an FHA program + as it existed + +On line 13268: + likely to have been + based on an FHA program as + it existed in + +On line 13270: + been based on an FHA + program as it existed + in Borrowers can + +On line 13270: + FHA program as it + existed in Borrowers + can purchase with a + +On line 13270: + as it existed + in Borrowers can purchase + with a minimum + +On line 13270: + it existed in + Borrowers can purchase with + a minimum down + +On line 13270: + in Borrowers can + purchase with a minimum + down payment. Without + +On line 13270: + payment. Without FHA + insurance, many families + can’t aff ord the homes + +On line 13270: + FHA insurance, many + families can’t aff ord the + homes they want because + +On line 13270: + families can’t aff + ord the homes they want because + down payments are a + +On line 13270: + aff ord the homes they + want because down payments are + a major roadblock. + +On line 13270: + ord the homes they want + because down payments are a + major roadblock. FHA + +On line 13270: + because down payments + are a major roadblock. FHA + down payments range from + +On line 13270: + a major roadblock. + FHA down payments range from to + of the sale price and + +On line 13270: + major roadblock. FHA + down payments range from to of + the sale price and are + +On line 13270: + FHA down payments range + from to of the sale price and + are signifi cantly + +On line 13270: + of the sale price and + are signifi cantly lower + than the minimum + +On line 13270: + the sale price and are + signifi cantly lower than + the minimum that + +On line 13270: + are signifi cantly + lower than the minimum + that many lenders require + +On line 13272: + for conventional + or sub-prime loans. With FHA loans, + borrowers need as + +On line 13272: + or sub-prime loans. With + FHA loans, borrowers need as + little as of the + +On line 13272: + FHA loans, borrowers + need as little as of the + "total funds" required. + +On line 13272: + need as little as + of the "total funds" required. + In addition to + +On line 13272: + as little as of + the "total funds" required. In + addition to the + +On line 13272: + as of the "total + funds" required. In addition + to the funds needed + +On line 13272: + of the "total funds" + required. In addition to + the funds needed for + +On line 13272: + "total funds" required. + In addition to the funds + needed for the down + +On line 13272: + In addition to + the funds needed for the down + payment, borrowers + +On line 13272: + the funds needed for + the down payment, borrowers + also have to pay + +On line 13272: + needed for the down + payment, borrowers also + have to pay closing + +On line 13272: + payment, borrowers + also have to pay closing + costs, prepaid fees for + +On line 13272: + to pay closing costs, + prepaid fees for insurance + and interest, as + +On line 13272: + costs, prepaid fees for + insurance and interest, + as well as escrow + +On line 13272: + interest, as well + as escrow fees which include + mortgage insurance, + +On line 13272: + as escrow fees which + include mortgage insurance, + hazard insurance, + +On line 13272: + mortgage insurance, + hazard insurance, and months + worth of property + +On line 13272: + insurance, hazard + insurance, and months worth of + property taxes. + +On line 13274: + hazard insurance, + and months worth of property + taxes. A FHA-insured home + +On line 13274: + insurance, and months + worth of property taxes. + A FHA-insured home loan can + +On line 13274: + A FHA-insured home loan can + be structured so borrowers + don’t pay more than of + +On line 13274: + FHA-insured home loan can be + structured so borrowers don’t + pay more than of the + +On line 13274: + loan can be structured + so borrowers don’t pay more + than of the total + +On line 13274: + don’t pay more than of + the total out-of-pocket funds, + including the down + +On line 13276: + than of the total + out-of-pocket funds, including + the down payment. Th + +On line 13278: + e combined total + of out-of-pocket funds can be + a gift or loan from + +On line 13278: + of out-of-pocket funds + can be a gift or loan from + family members. + +On line 13278: + be a gift or loan + from family members. FHA + allows homebuyers + +On line 13278: + to use gift s from + family members and non-profi + t groups to cover + +On line 13278: + family members + and non-profi t groups to cover + their down payment and + +On line 13278: + to cover their down + payment and additional + closing costs and fees. + +On line 13278: + their down payment and + additional closing costs + and fees. In fact, even + +On line 13278: + and additional + closing costs and fees. In fact, + even a gift or a + +On line 13278: + closing costs and fees. + In fact, even a gift or a + personal loan from + +On line 13278: + fees. In fact, even a + gift or a personal loan + from a relative + +On line 13278: + In fact, even a gift + or a personal loan from + a relative is + +On line 13280: + from a relative + is acceptable. FHA’s credit + requirements are fl + +On line 13280: + is acceptable. FHA’s + credit requirements are fl + exible. Compared + +On line 13280: + Compared to credit + requirements established by + many lenders for other + +On line 13280: + credit requirements + established by many lenders for + other types of home + +On line 13280: + established by many + lenders for other types of home + loans, FHA focuses + +On line 13280: + other types of home + loans, FHA focuses only + on a borrower’s + +On line 13280: + types of home loans, FHA + focuses only on a + borrower’s last 12-24 + +On line 13280: + loans, FHA focuses + only on a borrower’s + last 12-24 month credit + +On line 13280: + a borrower’s last + 12-24 month credit history. + In addition, there + +On line 13280: + borrower’s last 12-24 + month credit history. In + addition, there is + +On line 13280: + credit history. + In addition, there is no + minimum FICO + +On line 13280: + In addition, there + is no minimum FICO + score - mortgage bankers + +On line 13280: + addition, there is + no minimum FICO score + - mortgage bankers look + +On line 13280: + minimum FICO + score - mortgage bankers look at + each application + +On line 13280: + - mortgage bankers look + at each application on + a case-by-case basis. + +On line 13280: + mortgage bankers look at + each application on a + case-by-case basis. It + +On line 13280: + application on + a case-by-case basis. It is + also perfectly + +On line 13282: + with NO established + credit to receive a loan + with this program. FHA + +On line 13282: + established credit + to receive a loan with this + program. FHA permits + +On line 13282: + credit to receive + a loan with this program. FHA + permits borrowers + +On line 13282: + to receive a loan + with this program. FHA permits + borrowers to have + +On line 13282: + allow borrowers + to have of their gross income + attributed to their + +On line 13282: + to have of their gross + income attributed to their + new monthly mortgage + +On line 13282: + income attributed + to their new monthly mortgage + payment combined with + +On line 13282: + to their new monthly + mortgage payment combined with + existing debt. FHA + +On line 13282: + payment combined with + existing debt. FHA program + allows borrowers + +On line 13282: + existing debt. FHA + program allows borrowers + to carry and in + +On line 13282: + FHA program allows + borrowers to carry and + in some circumstances, + +On line 13284: + to carry and in + some circumstances, even more. It + is important to + +On line 13284: + in some circumstances, + even more. It is important + to remember that + +On line 13284: + some circumstances, even + more. It is important to + remember that is + +On line 13284: + is important to + remember that is the year + that HUD was planning + +On line 13284: + remember that is + the year that HUD was planning + a big step-up in the + +On line 13284: + that is the year that + HUD was planning a big step-up + in the AH goals for + +On line 13284: + is the year that HUD + was planning a big step-up in + the AH goals for the + +On line 13284: + the year that HUD was + planning a big step-up in the + AH goals for the GSEs—from + +On line 13284: + that HUD was planning + a big step-up in the AH goals + for the GSEs—from percent + +On line 13284: + HUD was planning a + big step-up in the AH goals for + the GSEs—from percent LMI + +On line 13284: + was planning a big + step-up in the AH goals for the + GSEs—from percent LMI to + +On line 13284: + a big step-up in the + AH goals for the GSEs—from percent + LMI to percent, with + +On line 13284: + big step-up in the AH + goals for the GSEs—from percent LMI + to percent, with even + +On line 13284: + special aff ordable + category that would be + most competitive + +On line 13286: + category that + would be most competitive + with FHA. Th e last + +On line 13286: + Th e last major + increase in the percent of + FHA’s loans with LTVs equal + +On line 13286: + last major increase + in the percent of FHA’s loans + with LTVs equal to or + +On line 13286: + major increase in + the percent of FHA’s loans with + LTVs equal to or greater + +On line 13286: + in the percent of + FHA’s loans with LTVs equal to or + greater than percent had + +On line 13286: + percent of FHA’s loans + with LTVs equal to or greater than + percent had occurred + +On line 13286: + of FHA’s loans with LTVs + equal to or greater than percent + had occurred in the + +On line 13286: + FHA’s loans with LTVs equal + to or greater than percent had + occurred in the year + +On line 13286: + with LTVs equal to or + greater than percent had occurred + in the year before + +On line 13286: + LTVs equal to or greater + than percent had occurred in + the year before the + +On line 13286: + equal to or greater than + percent had occurred in the + year before the GSE + +On line 13286: + greater than percent had + occurred in the year before + the GSE Act imposed + +On line 13286: + percent had occurred + in the year before the GSE + Act imposed the AH + +On line 13286: + in the year before + the GSE Act imposed the AH + goals on Fannie and + +On line 13286: + year before the GSE + Act imposed the AH goals on + Fannie and Freddie, + +On line 13286: + the GSE Act imposed + the AH goals on Fannie and + Freddie, and in eff + +On line 13286: + AH goals on Fannie + and Freddie, and in eff ect + directed them to + +On line 13286: + Fannie and Freddie, + and in eff ect directed + them to consider + +On line 13286: + ect directed them + to consider downpayments + of percent or less. + +On line 13286: + directed them to + consider downpayments of + percent or less. In + +On line 13286: + loans Integrated + Financial Engineering, + "Actuarial + +On line 13286: + of the Federal + Housing Administration + Mutual Mortgage + +On line 13286: + Mutual Mortgage + Insurance Fund (Excluding + HECMs) for Fiscal Year + +On line 13286: + Fund (Excluding HECMs) + for Fiscal Year prepared for + U.S. Department of + +On line 13290: + To Off er FHA Home + Mortgages Nationally On + Th e Internet + +On line 13290: + er FHA Home Mortgages + Nationally On Th e + Internet With HUDś + +On line 13290: + Nationally On + Th e Internet With HUDś + approval, Intuit + +On line 13290: + Intuit expands + home ownership nationwide, + off ering consumers + +On line 13290: + off ering consumers + widest variety of home loan + options", January + +On line 13300: + Dissenting Statement + equal to or greater than percent + rose suddenly from + +On line 13300: + equal to or greater than + percent rose suddenly from + percent to percent.143 + +On line 13302: + or greater than percent + rose suddenly from percent + to percent.143 Again, FHA, + +On line 13302: + rose suddenly from + percent to percent.143 Again, FHA, + under the control + +On line 13302: + percent to percent.143 + Again, FHA, under the control + of HUD, appears to + +On line 13302: + to percent.143 Again, FHA, + under the control of HUD, + appears to be off + +On line 13302: + the control of HUD, + appears to be off ering + competition to + +On line 13302: + HUD, appears to be + off ering competition + to the GSEs that would + +On line 13302: + appears to be off + ering competition to + the GSEs that would lead + +On line 13302: + to be off ering + competition to the GSEs + that would lead them to + +On line 13302: + that would lead them to + reduce their underwriting + standards. Since FHA is + +On line 13302: + standards. Since FHA is + a government agency, its + actions cannot be + +On line 13302: + is a government + agency, its actions cannot + be explained by a + +On line 13302: + its actions cannot + be explained by a profi t + motive. Instead, it + +On line 13302: + explained by a profi + t motive. Instead, it seems + clear that FHA reduced + +On line 13302: + a profi t motive. + Instead, it seems clear that FHA + reduced its lending + +On line 13302: + t motive. Instead, + it seems clear that FHA reduced + its lending standards + +On line 13302: + motive. Instead, it + seems clear that FHA reduced its + lending standards as + +On line 13302: + Instead, it seems clear + that FHA reduced its lending + standards as part of + +On line 13302: + it seems clear that FHA + reduced its lending standards + as part of a HUD + +On line 13302: + that FHA reduced its + lending standards as part of + a HUD policy + +On line 13302: + reduced its lending + standards as part of a HUD + policy to lead + +On line 13302: + lending standards as + part of a HUD policy + to lead Fannie and + +On line 13302: + standards as part of + a HUD policy to lead + Fannie and Freddie + +On line 13302: + as part of a HUD + policy to lead Fannie + and Freddie in the + +On line 13302: + HUD policy to + lead Fannie and Freddie in + the same direction. + +On line 13304: + policy to lead + Fannie and Freddie in the + same direction. Th + +On line 13306: + the same direction. + Th e result of Fannie’s + competition with + +On line 13306: + result of Fannie’s + competition with FHA in + high LTV lending is + +On line 13306: + in high LTV lending + is shown in the following + fi gure, which compares + +On line 13306: + high LTV lending is + shown in the following fi + gure, which compares the + +On line 13306: + fi gure, which compares + the respective shares of FHA + and Fannie in the + +On line 13306: + the respective shares + of FHA and Fannie in the + category of + +On line 13306: + of FHA and Fannie + in the category of + loans with LTVs equal to + +On line 13306: + FHA and Fannie in + the category of loans + with LTVs equal to or + +On line 13306: + and Fannie in the + category of loans with + LTVs equal to or greater + +On line 13306: + with LTVs equal to or + greater than percent, including + Fannie loans with a + +On line 13306: + equal to or greater than + percent, including Fannie + loans with a combined + +On line 13306: + or greater than percent, + including Fannie loans with + a combined LTV equal + +On line 13306: + percent, including + Fannie loans with a combined + LTV equal to or greater + +On line 13308: + Fannie loans with a + combined LTV equal to or greater + than percent. Figure + +On line 13310: + LTV equal to or greater + than percent. Figure Whether a + conscious policy + +On line 13310: + GSEs and FHA ensued + immediately aft er + the GSEs were given + +On line 13312: + GSEs were given their + aff ordable housing mission + in Th e fact that + +On line 13312: + were given their aff + ordable housing mission in + Th e fact that FHA, + +On line 13312: + in Th e fact that + FHA, an agency controlled by + HUD, substantially + +On line 13312: + increased the LTVs it + would accept in (just before + the GSEs were given + +On line 13312: + (just before the GSEs + were given their aff ordable + housing mission) and + +On line 13312: + were given their aff + ordable housing mission) and + again in (just before + +On line 13312: + (just before the GSEs + were required to increase their + aff ordable housing + +On line 13312: + before the GSEs were + required to increase their aff + ordable housing eff + +On line 13312: + the GSEs were required + to increase their aff ordable + housing eff orts) is + +On line 13312: + to increase their aff + ordable housing eff orts) is + further evidence + +On line 13312: + the interest of + creating competition + between FHA and the + +On line 13316: + Th e eff ect was + to drive down underwriting + standards, which HUD had + +On line 13318: + standards, which HUD had + repeatedly described as + its goal. Enlisting + +On line 13322: + and Subprime Lenders in + Affordable Housing In HUD + began a program + +On line 13322: + Lenders in Affordable + Housing In HUD began a + program to enlist + +On line 13322: + Affordable Housing + In HUD began a program + to enlist other + +On line 13322: + began a program + to enlist other members + of the mortgage fi + +On line 13322: + year, GAO, "Federal + Housing Administration: + Decline in Agency’s + +On line 13322: + "Federal Housing + Administration: Decline + in Agency’s Market + +On line 13322: + in Agency’s Market + Share Was Associated + with Product and Process + +On line 13322: + Process Developments + of Other Mortgage Market + Participants," GAO-07-645, + +On line 13326: + of Other Mortgage + Market Participants," GAO-07-645, + June pp. and Peter + +On line 13328: + pp. and Peter J. + Wallison the Mortgage Bankers + Association + +On line 13328: + nancing fi rms not + otherwise regulated + by the federal + +On line 13328: + regulated by + the federal government + and not subject to + +On line 13328: + not subject to HUD’s + legal authority—agreed to + join a HUD program + +On line 13332: + a HUD program called + the "Best Practices Initiative."144 + Th e circumstances + +On line 13332: + Initiative."144 Th e + circumstances surrounding this + agreement are somewhat + +On line 13332: + Th e circumstances + surrounding this agreement are + somewhat obscure, but + +On line 13332: + somewhat obscure, but + at least one contemporary + account suggests that + +On line 13332: + obscure, but at least + one contemporary account + suggests that the MBA + +On line 13332: + one contemporary + account suggests that the MBA + signed up to avoid an + +On line 13332: + account suggests that + the MBA signed up to avoid an + eff ort by HUD to + +On line 13332: + suggests that the MBA + signed up to avoid an eff ort + by HUD to cover + +On line 13332: + that the MBA signed up + to avoid an eff ort by HUD + to cover mortgage + +On line 13332: + the MBA signed up to + avoid an eff ort by HUD to + cover mortgage bankers + +On line 13332: + signed up to avoid an + eff ort by HUD to cover + mortgage bankers under + +On line 13332: + eff ort by HUD to + cover mortgage bankers under + the Community + +On line 13332: + cover mortgage bankers + under the Community + Reinvestment Act (CRA), + +On line 13332: + up to that point had + only applied only to + government-insured + +On line 13334: + applied only to + government-insured banks. In + mid-September the Mortgage Bankers + +On line 13334: + government-insured + banks. In mid-September the Mortgage Bankers + Association + +On line 13336: + agreement with HUD. Th + e agreement consisted of + two parts: MBA’s agreement + +On line 13336: + HUD. Th e agreement + consisted of two parts: MBA’s + agreement to work on + +On line 13336: + consisted of two + parts: MBA’s agreement to work on + fair-lending issues in + +On line 13336: + two parts: MBA’s agreement + to work on fair-lending issues + in consultation + +On line 13336: + parts: MBA’s agreement to + work on fair-lending issues in + consultation with + +On line 13336: + fair-lending issues in + consultation with HUD and + a model best-practices + +On line 13336: + mortgage banks could use + to devise their own agreements + with HUD. Th e fi + +On line 13336: + use to devise their + own agreements with HUD. Th e + fi rst such agreement, + +On line 13338: + to devise their own + agreements with HUD. Th e fi + rst such agreement, signed + +On line 13338: + own agreements with HUD. + Th e fi rst such agreement, + signed by Countrywide + +On line 13338: + fi rst such agreement, + signed by Countrywide Funding + Corp., the nation’s largest + +On line 13338: + such agreement, signed by + Countrywide Funding Corp., the + nation’s largest mortgage + +On line 13338: + Countrywide Funding + Corp., the nation’s largest mortgage + bank, is summarized + +On line 13338: + Corp., the nation’s largest + mortgage bank, is summarized + [below]. Many have seen + +On line 13338: + nation’s largest mortgage + bank, is summarized [below]. + Many have seen the MBA + +On line 13338: + largest mortgage bank, is + summarized [below]. Many have + seen the MBA agreement + +On line 13338: + summarized [below]. + Many have seen the MBA agreement + as a preemptive + +On line 13338: + preemptive strike against + congressional murmurings + that mortgage banks should + +On line 13338: + against congressional + murmurings that mortgage banks + should be pulled under + +On line 13340: + mortgage banks should be + pulled under the umbrella + of the CRA.145 As the + +On line 13340: + be pulled under the + umbrella of the CRA.145 As + the fi rst member + +On line 13340: + umbrella of the + CRA.145 As the fi rst member + of the MBA to sign, + +On line 13340: + of the CRA.145 As the + fi rst member of the MBA + to sign, Countrywide + +On line 13340: + seen as assisting + low-income mortgage lending, and + it became one of + +On line 13340: + and it became one + of a relatively small + group of subprime lenders + +On line 13340: + it became one of + a relatively small group + of subprime lenders who + +On line 13340: + became one of a + relatively small group of + subprime lenders who were + +On line 13340: + subprime lenders who were + to prosper enormously as + Fannie and Freddie + +On line 13340: + who were to prosper + enormously as Fannie and + Freddie began to + +On line 13340: + Fannie and Freddie + began to look for sources of + the subprime loans that + +On line 13340: + Freddie began to + look for sources of the subprime + loans that would enable + +On line 13340: + began to look for + sources of the subprime loans that + would enable them to + +On line 13340: + look for sources of the + subprime loans that would enable + them to meet the AH + +On line 13340: + sources of the subprime + loans that would enable them to + meet the AH goals. By + +On line 13340: + of the subprime loans + that would enable them to meet + the AH goals. By there + +On line 13340: + the subprime loans that + would enable them to meet the + AH goals. By there were + +On line 13340: + subprime loans that would + enable them to meet the AH + goals. By there were MBA + +On line 13340: + would enable them to + meet the AH goals. By there were + MBA signatories + +On line 13340: + enable them to meet + the AH goals. By there were MBA + signatories to + +On line 13340: + meet the AH goals. By + there were MBA signatories + to HUD’s Best Practices + +On line 13340: + goals. By there were MBA + signatories to HUD’s Best + Practices Initiative, + +On line 13340: + signatories to + HUD’s Best Practices Initiative, + which was described as + +On line 13344: + to HUD’s Best Practices + Initiative, which was described + as follows: Th e + +On line 13344: + Practices Initiative, + which was described as follows: + Th e companies + +On line 13344: + e companies and + associations that sign + "Best Practices" Agreements + +On line 13344: + associations + that sign "Best Practices" Agreements + not only commit + +On line 13344: + Fair Housing Act, but + also make a concerted + eff ort to exceed + +On line 13344: + concerted eff ort + to exceed those requirements. + In general, the + +On line 13344: + ort to exceed those + requirements. In general, + the signatories + +On line 13344: + the signatories + agree to administer a + review process for loan + +On line 13344: + review process for loan + applications to ensure + that all applicants + +On line 13344: + all applicants have + every opportunity + to qualify for + +On line 13346: + to qualify for + a mortgage. Th ey also + assent to making + +On line 13348: + a mortgage. Th ey + also assent to making + loans of any size so + +On line 13348: + also assent to + making loans of any size so + that all borrowers + +On line 13348: + assent to making + loans of any size so that all + borrowers may be + +On line 13348: + making loans of any + size so that all borrowers + may be served and to + +On line 13348: + loans of any size so + that all borrowers may be + served and to provide + +On line 13348: + that all borrowers + may be served and to provide + information on + +On line 13348: + may be served and to + provide information on + all loan programs for + +On line 13348: + served and to provide + information on all loan + programs for which an + +On line 13350: + loan programs for which + an applicant qualifi + es…. Th e results + +On line 13350: + programs for which an + applicant qualifi es…. + Th e results of + +On line 13352: + Th e results of + the initiative are promising. + As lenders discover + +On line 13352: + e results of the + initiative are promising. As + lenders discover new, + +On line 13352: + the initiative are + promising. As lenders discover + new, untapped markets, + +On line 13352: + untapped markets, their + minority and low-income + loans applications + +On line 13352: + minority and + low-income loans applications + and originations + +On line 13352: + loans applications + and originations have risen. + Consequently, the + +On line 13352: + and originations + have risen. Consequently, the + homeownership rate + +On line 13354: + and minority + groups has increased throughout the + nation.146 Countrywide + +On line 13356: + was by far the most + important participant + in the HUD program. + +On line 13356: + the most important + participant in the HUD + program. Under that + +On line 13356: + participant in + the HUD program. Under that + program, it made a + +On line 13356: + dollar commitment" + to lend to minority + and low income HUD’s + +On line 13356: + and low income HUD’s + Best Practices Initiative was + described this way by + +On line 13356: + Practices Initiative + was described this way by HUD: + "Since HUD has signed Fair + +On line 13356: + was described this way + by HUD: "Since HUD has signed Fair + Lending Best Practices + +On line 13356: + this way by HUD: "Since + HUD has signed Fair Lending Best + Practices (FLBP) Agreements + +On line 13356: + by HUD: "Since HUD has + signed Fair Lending Best Practices + (FLBP) Agreements with lenders + +On line 13356: + HUD: "Since HUD has signed + Fair Lending Best Practices (FLBP) + Agreements with lenders across + +On line 13356: + has signed Fair Lending + Best Practices (FLBP) Agreements with + lenders across the nation + +On line 13356: + signed Fair Lending Best + Practices (FLBP) Agreements with lenders + across the nation that + +On line 13356: + partnerships that are + considered on the leading + edge. Th e Agreements + +On line 13356: + that are considered + on the leading edge. Th e + Agreements not only + +On line 13356: + considered on the + leading edge. Th e Agreements + not only off er + +On line 13358: + not only off er + an opportunity to + increase low-income and + +On line 13358: + increase low-income and + minority lending but + they incorporate + +On line 13358: + opportunity + principles into mortgage + lending standards. Th + +On line 13358: + principles into + mortgage lending standards. Th + ese banks and mortgage + +On line 13360: + lending standards. Th + ese banks and mortgage lenders, as + represented by + +On line 13360: + ese banks and mortgage + lenders, as represented by + Countrywide Home Loans, + +On line 13360: + as represented + by Countrywide Home Loans, Inc., + serve as industry + +On line 13360: + Home Loans, Inc., serve as + industry leaders in their + communities by + +On line 13362: + a commitment to + affi rmatively further + fair lending." Available + +On line 13370: + ABA Banking Journal, + vol. http://www. questia.com/googleScholar.qst1docId=5001707340. HUD, "Building + Communities and + +On line 13370: + vol. http://www. questia.com/googleScholar.qst1docId=5001707340. HUD, + "Building Communities and + New Markets for the + +On line 13378: + Markets for the 21st + Century," FY Report p.75, + http:// www.huduser.org/publications/polleg/98con/NewMarkets.pdf. Dissenting + +On line 13380: + http:// www.huduser.org/publications/polleg/98con/NewMarkets.pdf. Dissenting + Statement families, which in + part it fulfi lled + +On line 13380: + Statement families, + which in part it fulfi lled + by selling subprime + +On line 13380: + it fulfi lled by + selling subprime and other + NTMs to Fannie and + +On line 13380: + by selling subprime + and other NTMs to Fannie + and Freddie. In a + +On line 13380: + subprime and other + NTMs to Fannie and Freddie. + In a report, the + +On line 13380: + and other NTMs to + Fannie and Freddie. In a + report, the Fannie + +On line 13380: + report, the Fannie + Mae Foundation noted: "FHA + loans constituted + +On line 13380: + Mae and Freddie Mac + began accepting loans with + higher LTVs and greater + +On line 13380: + began accepting + loans with higher LTVs and greater + underwriting fl + +On line 13380: + loans with higher LTVs + and greater underwriting fl + exibilities."147 + +On line 13380: + underwriting fl + exibilities."147 In late + a few months before + +On line 13380: + exibilities."147 + In late a few months before + its rescue by Bank + +On line 13380: + its rescue by Bank + of America, Countrywide + reported that it + +On line 13380: + Bank of America, + Countrywide reported that + it had made billion + +On line 13386: + element of the + vast increase in NTMs between + and was the role of + +On line 13386: + of the vast increase + in NTMs between and was the + role of the CRA.149 Th + +On line 13388: + the vast increase in + NTMs between and was the role + of the CRA.149 Th e + +On line 13388: + vast increase in NTMs + between and was the role of + the CRA.149 Th e act, + +On line 13388: + CRA.149 Th e act, which + is applicable only + to federally + +On line 13390: + to federally + insured depository + institutions, was + +On line 13390: + institutions, was + originally adopted in + Its purpose in part + +On line 13390: + was originally + adopted in Its purpose in + part was to "require + +On line 13390: + authority when + examining fi nancial + institutions to + +On line 13390: + when examining + fi nancial institutions + to encourage such + +On line 13390: + to encourage such + institutions to help meet + the credit needs of + +On line 13390: + credit needs of the + local communities in + which they are chartered + +On line 13390: + which they are chartered + consistent with the safe and + sound operations + +On line 13392: + the Act authorized + the bank regulators to + withhold approvals for + +On line 13392: + withhold approvals for + such transactions as mergers + and acquisitions + +On line 13392: + and acquisitions + and branch network expansion + if the applying + +On line 13392: + acquisitions and + branch network expansion if + the applying bank + +On line 13394: + satisfactory + CRA rating. CRA did not have + a substantial eff + +On line 13394: + rating. CRA did not + have a substantial eff ect + on subprime lending + +On line 13394: + have a substantial + eff ect on subprime lending + in the years aft er + +On line 13394: + a substantial eff + ect on subprime lending in + the years aft er its + +On line 13394: + er its enactment + until the regulations + under the act were + +On line 13394: + enactment until + the regulations under + the act were tightened + +On line 13394: + the act were tightened + in Th e regulations + required insured banks + +On line 13394: + mortgages that they would + not otherwise have made. In + this sense, the CRA and + +On line 13394: + not otherwise have + made. In this sense, the CRA and + Fannie and Freddie’s + +On line 13394: + made. In this sense, the + CRA and Fannie and Freddie’s + AH goals are cut from + +On line 13394: + In this sense, the CRA + and Fannie and Freddie’s AH + goals are cut from the + +On line 13394: + this sense, the CRA and + Fannie and Freddie’s AH goals + are cut from the same + +On line 13396: + the CRA and Fannie + and Freddie’s AH goals are cut + from the same cloth. Th + +On line 13398: + CRA and Fannie and + Freddie’s AH goals are cut from + the same cloth. Th ere + +On line 13398: + Fannie and Freddie’s + AH goals are cut from the same + cloth. Th ere were two + +On line 13398: + Freddie’s AH goals are + cut from the same cloth. Th ere + were two very distinct + +On line 13398: + cut from the same cloth. + Th ere were two very distinct + applications of + +On line 13398: + cloth. Th ere were two + very distinct applications + of the CRA. Th e + +On line 13398: + Th ere were two very + distinct applications of + the CRA. Th e fi + +On line 13398: + were two very distinct + applications of the CRA. + Th e fi rst, and + +On line 13400: + one with the broadest + applicability, is + a requirement that + +On line 13400: + a requirement that + all insured banks make CRA loans + in their respective + +On line 13400: + all insured banks make + CRA loans in their respective + assessment areas. + +On line 13400: + banks make CRA loans in + their respective assessment + areas. When the Act + +On line 13400: + in their respective + assessment areas. When the + Act is defended, + +On line 13400: + assessment areas. + Banks (usually privately) + complain that they are + +On line 13400: + privately) complain + that they are required by the + regulators to + +On line 13400: + that they are required + by the regulators to + make imprudent loans + +On line 13400: + they are required by + the regulators to make + imprudent loans to + +On line 13400: + the regulators + to make imprudent loans to + comply with CRA. One + +On line 13400: + to make imprudent + loans to comply with CRA. One + example is the + +On line 13400: + loans to comply with + CRA. One example is the + following statement + +On line 13400: + bank in a report + to its shareholders: Under + the umbrella of + +On line 13400: + in a report to + its shareholders: Under the + umbrella of the + +On line 13400: + to its shareholders: + Under the umbrella of + the Community + +On line 13400: + umbrella of the + Community Reinvestment + Act (CRA), a tremendous + +On line 13400: + Reinvestment Act (CRA), + a tremendous amount of pressure + was put on banks by + +On line 13402: + neighborhoods. Th e + regulators were very heavy + handed regarding + +On line 13402: + regulators were + very heavy handed regarding + this issue. I will + +On line 13402: + were very heavy handed + regarding this issue. I + will not dwell on it + +On line 13402: + handed regarding + this issue. I will not dwell + on it here but they + +On line 13402: + this issue. I will + not dwell on it here but they + required [redacted name] + +On line 13402: + not dwell on it here + but they required [redacted name] + to change its mortgage + +On line 13402: + on it here but they + required [redacted name] to change + its mortgage lending + +On line 13402: + [redacted name] to change + its mortgage lending practices + to meet certain CRA + +On line 13402: + lending practices to + meet certain CRA goals, even though + we argued the changes + +On line 13402: + certain CRA goals, even + though we argued the changes were + risky and imprudent.150 + +On line 13404: + CRA goals, even though we + argued the changes were risky and + imprudent.150 On the + +On line 13404: + though we argued the + changes were risky and imprudent.150 + On the other hand, + +On line 13404: + we argued the changes + were risky and imprudent.150 On + the other hand, the + +On line 13404: + the other hand, the + regulators defend the + act and their actions + +On line 13404: + defend the act and + their actions under it, and + particularly + +On line 13404: + their actions under + it, and particularly + any claim that the CRA + +On line 13404: + actions under it, + and particularly any + claim that the CRA had + +On line 13404: + claim that the CRA had + a role in the fi nancial + crisis. Th e most + +On line 13406: + CRA had a role in + the fi nancial crisis. Th + e most frequently + +On line 13406: + a role in the fi + nancial crisis. Th e most + frequently cited + +On line 13406: + nancial crisis. Th + e most frequently cited + defense is a speech + +On line 13406: + defense is a speech + by former Fed Governor + Randall Kroszner on + +On line 13406: + Kroszner on Fannie + Mae Foundation, "Making New + Markets: Case Study of + +On line 13408: + "Questions and Answers + from Countrywide about Lending," + December available + +On line 13422: + December in which + he said in pertinent part: + Only percent of + +On line 13422: + said in pertinent + part: Only percent of all + the higher-priced loans [those + +On line 13422: + in pertinent part: + Only percent of all the + higher-priced loans [those that + +On line 13422: + part: Only percent + of all the higher-priced loans [those + that were considered + +On line 13422: + Only percent of + all the higher-priced loans [those that + were considered CRA + +On line 13422: + of all the higher-priced + loans [those that were considered + CRA loans because they + +On line 13422: + all the higher-priced loans + [those that were considered CRA + loans because they bore + +On line 13422: + the higher-priced loans [those + that were considered CRA loans + because they bore high + +On line 13422: + high interest rates + associated with their + riskier character] + +On line 13422: + associated + with their riskier character] + were extended by + +On line 13422: + lenders to lower-income + borrowers or neighborhoods + in their assessment + +On line 13422: + or neighborhoods in + their assessment areas, the + local geographies + +On line 13422: + assessment areas, + the local geographies that + are the primary + +On line 13422: + geographies that are + the primary focus for + CRA evaluation + +On line 13424: + result undermines + the assertion by critics + of the potential + +On line 13424: + the assertion by + critics of the potential + for a substantial + +On line 13424: + the potential for + a substantial role for the + CRA in the subprime + +On line 13424: + a substantial role + for the CRA in the subprime + crisis. [emphasis + +On line 13428: + for the CRA in the + subprime crisis. [emphasis + supplied] Th ere are + +On line 13428: + CRA in the subprime + crisis. [emphasis supplied] + Th ere are two points + +On line 13428: + the subprime crisis. + [emphasis supplied] Th ere + are two points in this + +On line 13428: + crisis. [emphasis + supplied] Th ere are two points + in this statement that + +On line 13428: + [emphasis supplied] + Th ere are two points in this + statement that require + +On line 13428: + Th ere are two points + in this statement that require + elaboration. First, + +On line 13428: + points in this statement + that require elaboration. + First, it assumes that + +On line 13428: + in this statement that + require elaboration. First, + it assumes that all + +On line 13428: + elaboration. First, + it assumes that all CRA loans + are high-priced loans. Th + +On line 13430: + it assumes that all + CRA loans are high-priced loans. Th + is is incorrect. + +On line 13430: + assumes that all CRA + loans are high-priced loans. Th is + is incorrect. Many + +On line 13432: + CRA loans are high-priced + loans. Th is is incorrect. + Many banks, in order + +On line 13432: + loans are high-priced loans. + Th is is incorrect. Many + banks, in order to + +On line 13432: + are high-priced loans. Th + is is incorrect. Many banks, + in order to be + +On line 13432: + high-priced loans. Th is + is incorrect. Many banks, in + order to be sure + +On line 13432: + is is incorrect. + Many banks, in order to be + sure of obtaining + +On line 13432: + is incorrect. Many + banks, in order to be sure + of obtaining the + +On line 13432: + banks, in order to + be sure of obtaining the + necessary number + +On line 13432: + sure of obtaining + the necessary number of + loans to attain a + +On line 13432: + of loans to attain + a satisfactory CRA + rating, subsidized + +On line 13432: + satisfactory + CRA rating, subsidized the + loans by making them + +On line 13432: + rating, subsidized + the loans by making them at + lower interest + +On line 13432: + subsidized the loans + by making them at lower + interest rates than + +On line 13434: + interest rates than + their risk characteristics + would warrant. Th is + +On line 13434: + characteristics + would warrant. Th is is true, + in part, because CRA + +On line 13436: + warrant. Th is is + true, in part, because CRA loans + are generally + +On line 13436: + true, in part, because + CRA loans are generally + loans to low income + +On line 13436: + loans to low income + individuals; as such, + they are more likely + +On line 13436: + individuals; + as such, they are more likely + than loans to middle + +On line 13436: + as such, they are more + likely than loans to middle + income borrowers + +On line 13436: + they are more likely + than loans to middle income + borrowers to be + +On line 13436: + likely than loans to + middle income borrowers + to be subprime and + +On line 13436: + than loans to middle + income borrowers to be + subprime and Alt-A loans + +On line 13436: + to middle income + borrowers to be subprime + and Alt-A loans and thus + +On line 13436: + income borrowers + to be subprime and Alt-A loans + and thus sought aft er + +On line 13436: + borrowers to be + subprime and Alt-A loans and thus + sought aft er by FHA, + +On line 13436: + to be subprime and + Alt-A loans and thus sought aft er + by FHA, Fannie and + +On line 13436: + subprime and Alt-A loans + and thus sought aft er by FHA, + Fannie and Freddie + +On line 13436: + Alt-A loans and thus sought + aft er by FHA, Fannie and + Freddie and subprime + +On line 13436: + and thus sought aft er + by FHA, Fannie and Freddie + and subprime lenders such + +On line 13436: + thus sought aft er by + FHA, Fannie and Freddie and + subprime lenders such as + +On line 13436: + er by FHA, Fannie + and Freddie and subprime lenders + such as Countrywide; + +On line 13436: + by FHA, Fannie and + Freddie and subprime lenders such + as Countrywide; this + +On line 13436: + Freddie and subprime + lenders such as Countrywide; this + competition is + +On line 13436: + this competition + is another reason why + their rates are likely + +On line 13436: + competition is + another reason why their + rates are likely to + +On line 13436: + another reason + why their rates are likely to + be lower than their + +On line 13436: + their rates are likely + to be lower than their risk + characteristics. + +On line 13436: + lending under CRA + in their assessment areas + has probably not + +On line 13436: + in their assessment + areas has probably not + had a major eff + +On line 13436: + assessment areas + has probably not had a + major eff ect on + +On line 13436: + has probably not + had a major eff ect on + the overall presence + +On line 13436: + probably not had + a major eff ect on the + overall presence of + +On line 13436: + had a major eff + ect on the overall presence + of subprime loans in + +On line 13436: + a major eff ect + on the overall presence of + subprime loans in the + +On line 13436: + ect on the overall + presence of subprime loans in + the U.S. fi nancial + +On line 13436: + the overall presence + of subprime loans in the U.S. + fi nancial system, + +On line 13436: + overall presence of + subprime loans in the U.S. fi + nancial system, it + +On line 13436: + presence of subprime + loans in the U.S. fi nancial + system, it is not + +On line 13436: + loans in the U.S. fi + nancial system, it is not + the element about + +On line 13436: + fi nancial system, + it is not the element + about CRA that raises + +On line 13436: + nancial system, it + is not the element about + CRA that raises the + +On line 13436: + system, it is not + the element about CRA that + raises the concerns + +On line 13436: + concerns about how CRA + operated to increase + the presence of NTMs + +On line 13436: + CRA operated + to increase the presence of + NTMs in the housing + +On line 13436: + presence of NTMs in + the housing bubble and in + the U.S. fi nancial + +On line 13438: + the U.S. fi nancial + system generally. Th + ere is another + +On line 13438: + fi nancial system + generally. Th ere is + another route through + +On line 13440: + generally. Th + ere is another route through + which CRA’s role in the + +On line 13440: + ere is another + route through which CRA’s role in the + fi nancial crisis + +On line 13440: + CRA’s role in the fi + nancial crisis likely to + be considerably + +On line 13442: + be considerably + more signifi cant. In the Riegle-Neal + Interstate Banking + +On line 13442: + more signifi cant. In + the Riegle-Neal Interstate Banking + and Branching Effi + +On line 13444: + the Riegle-Neal Interstate + Banking and Branching Effi + ciency Act for the + +On line 13444: + Interstate Banking + and Branching Effi ciency + Act for the fi rst + +On line 13444: + Banking and Branching + Effi ciency Act for the + fi rst time allowed + +On line 13444: + and Branching Effi + ciency Act for the fi rst + time allowed banks to + +On line 13444: + Effi ciency Act + for the fi rst time allowed + banks to merge across state + +On line 13444: + rst time allowed banks + to merge across state lines under + federal law (as + +On line 13444: + law (as distinct from + interstate compacts). Under + these circumstances, the + +On line 13444: + compacts). Under these + circumstances, the enforcement + provisions of the + +On line 13444: + these circumstances, the + enforcement provisions of + the CRA, which required + +On line 13444: + to federal bank + regulators for merger + approvals. In a speech, + +On line 13444: + bank regulators + for merger approvals. In a + speech, Fed Chairman Ben + +On line 13444: + regulators for + merger approvals. In a speech, + Fed Chairman Ben Bernanke + +On line 13444: + for merger approvals. + In a speech, Fed Chairman Ben + Bernanke stated that aft + +On line 13444: + merger approvals. In + a speech, Fed Chairman Ben Bernanke + stated that aft er + +On line 13444: + a speech, Fed Chairman + Ben Bernanke stated that aft er + the enactment of + +On line 13444: + speech, Fed Chairman Ben + Bernanke stated that aft er the + enactment of the + +On line 13444: + Bernanke stated that aft + er the enactment of the + Riegle-Neal legislation, + +On line 13444: + stated that aft er + the enactment of the Riegle-Neal + legislation, "As + +On line 13444: + the enactment of + the Riegle-Neal legislation, "As + public scrutiny + +On line 13444: + comment process to protest + bank applications on CRA + grounds. In instances of + +On line 13444: + bank applications + on CRA grounds. In instances of + highly contested + +On line 13444: + applications, the + Federal Reserve Board and + other agencies held + +On line 13444: + Federal Reserve + Board and other agencies held + public meetings to + +On line 13444: + other agencies held + public meetings to allow + the public and the + +On line 13444: + held public meetings + to allow the public and + the applicants to + +On line 13444: + the public and the + applicants to comment on + the lending records of + +On line 13444: + and the applicants + to comment on the lending + records of the banks in + +On line 13444: + to comment on the + lending records of the banks in + question. In response + +On line 13444: + on the lending records + of the banks in question. In + response to these new + +On line 13444: + lending records of the + banks in question. In response + to these new pressures, + +On line 13444: + In response to these + new pressures, banks began to + devote more resources + +On line 13444: + to these new pressures, + banks began to devote more + resources to their CRA + +On line 13444: + pressures, banks began + to devote more resources to + their CRA programs."152 Th + +On line 13446: + devote more resources + to their CRA programs."152 Th is + modest description, + +On line 13446: + more resources to their + CRA programs."152 Th is modest + description, although + +On line 13446: + to their CRA programs."152 + Th is modest description, + although accurate + +On line 13446: + CRA programs."152 Th is + modest description, although + accurate as far + +On line 13446: + modest description, + although accurate as far + as it goes, does not + +On line 13446: + description, although + accurate as far as it + goes, does not fully + +On line 13446: + although accurate + as far as it goes, does not + fully describe the + +On line 13446: + accurate as far + as it goes, does not fully + describe the eff ect + +On line 13446: + as far as it goes, + does not fully describe the + eff ect of the law + +On line 13446: + far as it goes, does + not fully describe the eff + ect of the law and + +On line 13446: + as it goes, does not + fully describe the eff ect + of the law and the + +On line 13446: + not fully describe + the eff ect of the law and + the application + +On line 13446: + fully describe the + eff ect of the law and the + application process + +On line 13446: + the eff ect of the + law and the application + process on bank lending + +On line 13446: + ect of the law and + the application process on + bank lending practices. + +On line 13448: + of the law and the + application process on bank + lending practices. In + +On line 13448: + the application + process on bank lending practices. + In the umbrella + +On line 13448: + process on bank lending + practices. In the umbrella + organization + +On line 13450: + groups," the National + Community Reinvestment + Coalition, published a + +On line 13450: + published a report + entitled "CRA Commitments" + which recounted the + +On line 13450: + which recounted the + substantial success of its + members in using + +On line 13450: + provided by the + bank application process to + obtain trillions of + +On line 13450: + to obtain trillions + of dollars in CRA lending + commitments from banks + +On line 13450: + of dollars in CRA + lending commitments from banks + that had applied to + +On line 13450: + lending commitments + from banks that had applied to + Randall Kroszner, Speech + +On line 13450: + commitments from banks + that had applied to Randall + Kroszner, Speech at the + +On line 13454: + December Ben S. + Bernanke, "Th e Community + Reinvestment Act: Its + +On line 13454: + Ben S. Bernanke, "Th e + Community Reinvestment + Act: Its Evolution + +On line 13460: + Reinvestment Act: Its + Evolution and New Challenges," + March p2. Dissenting + +On line 13462: + Evolution and New + Challenges," March p2. Dissenting + Statement federal + +On line 13462: + Dissenting Statement + federal regulators + for merger approvals. + +On line 13466: + merger approvals. Th + e opening section of the + report states (bolded + +On line 13468: + report states (bolded + language in the original):153 + Since the passage of + +On line 13468: + states (bolded language + in the original):153 Since the + passage of CRA in + +On line 13468: + the original):153 Since + the passage of CRA in lenders + and community + +On line 13468: + the passage of CRA + in lenders and community + organizations + +On line 13470: + income neighborhoods. + Lenders and community groups + will oft en sign these + +On line 13470: + neighborhoods. Lenders and + community groups will oft + en sign these agreements + +On line 13470: + en sign these agreements + when a lender has submitted + an application + +On line 13470: + sign these agreements when + a lender has submitted an + application to + +On line 13472: + merge with another + institution or expand + its services. Lenders must + +On line 13472: + institution or + expand its services. Lenders must + seek the approval of + +On line 13472: + services. Lenders must seek + the approval of federal + regulators for + +On line 13472: + seek the approval of + federal regulators + for their plans to merge + +On line 13474: + regulators for + their plans to merge or change their + services. Th e four + +On line 13474: + for their plans to merge + or change their services. Th e + four federal fi + +On line 13474: + e four federal + fi nancial institution + regulatory + +On line 13474: + regulatory + agencies will scrutinize the + CRA records of lenders and + +On line 13474: + scrutinize the CRA + records of lenders and will assess + the likely future + +On line 13474: + the likely future + community reinvestment + performance of lenders. + +On line 13476: + performance of lenders. + Th e application process, + therefore, provides an + +On line 13478: + process, therefore, provides + an incentive for lenders to + sign CRA agreements with + +On line 13478: + an incentive for + lenders to sign CRA agreements with + community groups + +On line 13478: + for lenders to sign CRA + agreements with community + groups that will improve + +On line 13478: + to sign CRA agreements + with community groups that + will improve their CRA + +On line 13478: + will improve their CRA + performance. Recognizing + the important role + +On line 13484: + extension of the + public comment period + during its merger + +On line 13484: + period during + its merger application + process upon a joint + +On line 13484: + during its merger + application process upon + a joint request by + +On line 13484: + joint request by a + bank and community group. + In its commentary + +On line 13484: + request by a bank + and community group. In + its commentary to + +On line 13484: + and community + group. In its commentary to + Regulation Y, + +On line 13484: + In its commentary + to Regulation Y, the + Board indicates that + +On line 13484: + its commentary to + Regulation Y, the Board + indicates that this + +On line 13484: + to Regulation + Y, the Board indicates that + this procedure was + +On line 13484: + Regulation Y, + the Board indicates that this + procedure was added + +On line 13484: + the Board indicates + that this procedure was added + to facilitate + +On line 13484: + that this procedure + was added to facilitate + discussions between + +On line 13484: + to facilitate + discussions between banks and + community groups + +On line 13484: + discussions between + banks and community groups + regarding programs + +On line 13484: + community groups + regarding programs that help + serve the convenience + +On line 13484: + programs that help serve + the convenience and needs of + the community. + +On line 13484: + the convenience and + needs of the community. + In its Corporate + +On line 13486: + community. In + its Corporate Manual, + the Offi ce of + +On line 13486: + In its Corporate + Manual, the Offi ce + of the Comptroller + +On line 13486: + of the Comptroller + of the Currency states that + it will not off er + +On line 13486: + the Comptroller of + the Currency states that it + will not off er the + +On line 13486: + of the Currency + states that it will not off er + the expedited + +On line 13486: + states that it will not + off er the expedited + application process + +On line 13486: + process to a lender that + does not intend to honor + a CRA agreement made + +On line 13486: + to a lender that does + not intend to honor a + CRA agreement made by + +On line 13486: + a lender that does not + intend to honor a CRA + agreement made by the + +On line 13486: + intend to honor + a CRA agreement made by the + institution that + +On line 13486: + a CRA agreement made + by the institution that + it is acquiring. + +On line 13488: + CRA agreement made by + the institution that it + is acquiring. See + +On line 13488: + agreement made by the + institution that it is + acquiring. See Note + +On line 13492: + the institution + that it is acquiring. See + Note supra. Peter J. + +On line 13496: + acquiring. See Note + supra. Peter J. Wallison + In its report, the + +On line 13496: + Note supra. Peter J. + Wallison In its report, + the NCRC listed all + +On line 13496: + J. Wallison In + its report, the NCRC listed + all commitments and + +On line 13502: + summary list of + year-by-year commitments: Table Year + Annual Dollars + +On line 13698: + millions) millions) Th + e size of these commitments, + which far outstrip the + +On line 13698: + millions) Th e size + of these commitments, which far + outstrip the CRA loans + +On line 13698: + Th e size of these + commitments, which far outstrip + the CRA loans made in + +On line 13698: + of these commitments, + which far outstrip the CRA loans + made in assessment + +On line 13698: + commitments, which far + outstrip the CRA loans made in + assessment areas, + +On line 13698: + which far outstrip the + CRA loans made in assessment + areas, suggests the + +On line 13698: + areas, suggests the + potential signifi cance + of the CRA as a + +On line 13698: + signifi cance of + the CRA as a cause of the + fi nancial crisis. + +On line 13698: + the CRA as a cause + of the fi nancial crisis. + It is noteworthy + +On line 13698: + CRA as a cause of + the fi nancial crisis. It + is noteworthy that + +On line 13698: + as a cause of the + fi nancial crisis. It is + noteworthy that the + +On line 13698: + of the fi nancial + crisis. It is noteworthy + that the Commission + +On line 13698: + noteworthy that the + Commission majority + was not willing even + +On line 13698: + was not willing even + to consider the signifi + cance of the NCRC’s + +On line 13698: + cance of the NCRC’s + numbers. In connection with + its only hearing + +On line 13698: + In connection with + its only hearing on the + housing issue, and + +On line 13698: + its only hearing + on the housing issue, and + before any research + +On line 13698: + the housing issue, + and before any research had + been done on the NCRC + +On line 13700: + issue, and before + any research had been done on + the NCRC statements, the + +On line 13700: + any research had been + done on the NCRC statements, the + Commission published + +On line 13700: + had been done on the + NCRC statements, the Commission + published a report + +On line 13700: + on the NCRC statements, + the Commission published a + report absolving + +On line 13700: + absolving CRA of + any responsibility + for the fi nancial + +On line 13704: + fi nancial crisis.154 + FCIC, "Th e Community + Reinvestment Act and + +On line 13704: + crisis.154 FCIC, "Th e + Community Reinvestment + Act and the Mortgage + +On line 13706: + Act and the Mortgage + Crisis." Preliminary Staff + Report, http:// www.fcic.gov/reports/pdfs/2010-0407-Preliminary_Staff _Report_-_CRA_and_the_Mortgage_Crisis. + +On line 13716: + Staff Report, http:// www.fcic.gov/reports/pdfs/2010-0407-Preliminary_Staff + _Report_-_CRA_and_the_Mortgage_Crisis. pdf. Dissenting Statement + To understand CRA’s + +On line 13716: + Report, http:// www.fcic.gov/reports/pdfs/2010-0407-Preliminary_Staff _Report_-_CRA_and_the_Mortgage_Crisis. + pdf. Dissenting Statement To + understand CRA’s role + +On line 13716: + fi nancial crisis, + the relevant statistic is + the trillion in bank + +On line 13716: + nancial crisis, the + relevant statistic is the + trillion in bank CRA + +On line 13716: + relevant statistic + is the trillion in bank CRA + lending commitments + +On line 13716: + is the trillion in + bank CRA lending commitments + that the NCRC cited + +On line 13716: + the trillion in bank + CRA lending commitments that + the NCRC cited in + +On line 13716: + trillion in bank CRA + lending commitments that the + NCRC cited in its + +On line 13720: + commitments that the + NCRC cited in its report. + (Th is document + +On line 13720: + NCRC cited in its + report. (Th is document + and others that are + +On line 13720: + in its report. (Th + is document and others + that are relevant + +On line 13720: + its report. (Th is + document and others that + are relevant to + +On line 13720: + is document and + others that are relevant + to this discussion + +On line 13720: + are relevant to + this discussion were removed + from the NCRC website, + +On line 13720: + this discussion were + removed from the NCRC website, + www.ncrc.org, aft er + +On line 13720: + www.ncrc.org, aft er + they received publicity + but can still be found + +On line 13720: + aft er they received + publicity but can still + be found on the web155). + +On line 13720: + but can still be found + on the web155). One important + question is whether the + +On line 13720: + cooperated + with community groups by + withholding approvals + +On line 13720: + with community + groups by withholding approvals + of applications + +On line 13720: + community groups + by withholding approvals of + applications for + +On line 13720: + applications for + mergers and acquisitions + until an agreement + +On line 13720: + satisfactory + to the community groups + had been arranged. It + +On line 13720: + the community + groups had been arranged. It is + not diffi cult to + +On line 13722: + arranged. It is not + diffi cult to imagine that + the regulators + +On line 13722: + not want the severe + criticism from Congress that + would have followed their + +On line 13722: + community groups + in reaching agreements with and + getting commitments + +On line 13722: + reaching agreements with + and getting commitments from + banks that had applied + +On line 13722: + banks that had applied + for these approvals. In statements + in connection with + +On line 13722: + approvals. In statements + in connection with mergers + it has approved the + +On line 13722: + with mergers it has + approved the Fed has said that + commitments by the + +On line 13722: + approved the Fed has + said that commitments by the + bank participants + +On line 13722: + that commitments by + the bank participants about + future CRA lending + +On line 13722: + bank participants + about future CRA lending have + no infl uence on + +On line 13722: + participants about + future CRA lending have no + infl uence on the + +On line 13722: + future CRA lending + have no infl uence on the + approval process. A Fed + +On line 13722: + CRA lending have no + infl uence on the approval + process. A Fed offi + +On line 13724: + have no infl uence + on the approval process. A Fed + offi cial also + +On line 13724: + infl uence on the + approval process. A Fed offi + cial also told the + +On line 13724: + on the approval process. + A Fed offi cial also + told the Commission’s + +On line 13724: + the approval process. A + Fed offi cial also told + the Commission’s staff + +On line 13724: + approval process. A Fed + offi cial also told the + Commission’s staff that + +On line 13724: + A Fed offi cial + also told the Commission’s + staff that the Fed did + +On line 13724: + cial also told the + Commission’s staff that the Fed + did not consider + +On line 13724: + Commission’s staff that + the Fed did not consider + these commitments in + +On line 13724: + that the Fed did not + consider these commitments + in connection with + +On line 13724: + in connection with + merger applications. Th + e Commission did + +On line 13726: + did not attempt to + verify this statement, but + accepted it at + +On line 13726: + to verify this + statement, but accepted it + at face value from + +On line 13728: + it at face value + from a Fed staff offi cial. + Nevertheless, there + +On line 13728: + Fed staff offi cial. + Nevertheless, there remains + no explanation + +On line 13728: + Nevertheless, there + remains no explanation + for why banks have been + +On line 13728: + explanation for + why banks have been making these + enormous commitments + +On line 13728: + making these enormous + commitments in connection + with mergers, but not + +On line 13728: + enormous commitments + in connection with mergers, + but not otherwise. + +On line 13732: + in connection with + mergers, but not otherwise. + Th e largest of the + +On line 13732: + with mergers, but not + otherwise. Th e largest of + the commitments, in + +On line 13732: + not otherwise. Th + e largest of the commitments, + in terms of dollars, + +On line 13732: + otherwise. Th e + largest of the commitments, in + terms of dollars, were + +On line 13732: + of the commitments, + in terms of dollars, were made + by four banks or their + +On line 13732: + the commitments, in + terms of dollars, were made by + four banks or their predecessors—Bank + +On line 13732: + commitments, in terms + of dollars, were made by four + banks or their predecessors—Bank of + +On line 13732: + in terms of dollars, + were made by four banks or their + predecessors—Bank of America, + +On line 13732: + terms of dollars, were + made by four banks or their predecessors—Bank + of America, JPMorgan + +On line 13732: + of dollars, were made + by four banks or their predecessors—Bank of + America, JPMorgan Chase, + +On line 13732: + were made by four banks + or their predecessors—Bank of America, + JPMorgan Chase, Citibank, and Wells + +On line 13732: + by four banks or their + predecessors—Bank of America, JPMorgan Chase, + Citibank, and Wells Fargo—in + +On line 13732: + Citibank, and Wells Fargo—in + connection with mergers or + acquisitions as + +On line 13744: + Wallison Table + Announced CRA Commitments in + Connection with a + +On line 13744: + Table Announced CRA + Commitments in Connection + with a Merger or + +On line 13744: + CRA Commitments in + Connection with a Merger + or Acquisition + +On line 13744: + Connection with a + Merger or Acquisition + by Four Largest Banks and + +On line 13748: + Four Largest Banks and Th + eir Predecessors Final + bank Acquired or merged + +On line 13760: + announcement of a + CRA commitment Wells Fargo + First Union acquired by + +On line 13764: + a CRA commitment + Wells Fargo First Union acquired + by Wachovia b.) SouthTrust + +On line 13772: + by Wachovia b.) SouthTrust + acquired by b.) Wachovia JPMorgan + Chemical merges with + +On line 13778: + by b.) Wachovia JPMorgan + Chemical merges with m.) Chase + Manufacturers + +On line 13780: + Chemical merges with + m.) Chase Manufacturers + Hanover NBD acquired by + +On line 13792: + Savings acquired by + b.) Washington Mutual + Dime acquired by b.) + +On line 13796: + Dime acquired by b.) + Washington Mutual Bank + One acquired by JPMorgan + +On line 13800: + by b.) Washington + Mutual Bank One acquired + by JPMorgan Chase b.) Bank + +On line 13802: + Mutual Bank One + acquired by JPMorgan Chase b.) Bank + of Continental + +On line 13802: + acquired by JPMorgan Chase + b.) Bank of Continental + acquired by Bank of + +On line 13802: + JPMorgan Chase b.) Bank of + Continental acquired by + Bank of America + +On line 13808: + acquired by Bank of + America b.) America + Bank of America + +On line 13812: + b.) America Bank + of America (acquired by + NationsBank, b.) which kept the + +On line 13812: + America Bank of + America (acquired by NationsBank, + b.) which kept the Bank + +On line 13812: + America (acquired + by NationsBank, b.) which kept the Bank + of America name). + +On line 13816: + by NationsBank, b.) which kept + the Bank of America name). + Bank of Boston b.) + +On line 13818: + b.) which kept the Bank + of America name). Bank of + Boston b.) acquired + +On line 13824: + of America name). + Bank of Boston b.) acquired + by Fleet Fleet b.) Citibank + +On line 13828: + name). Bank of Boston + b.) acquired by Fleet Fleet b.) + Citibank Travelers b.) + +On line 13830: + Bank of Boston b.) + acquired by Fleet Fleet b.) Citibank + Travelers b.) b.) + +On line 13836: + acquired by Fleet Fleet + b.) Citibank Travelers b.) b.) + Cal Fed b.) Compiled + +On line 13836: + b.) Citibank Travelers + b.) b.) Cal Fed b.) Compiled + by Edward Pinto + +On line 13836: + Citibank Travelers b.) + b.) Cal Fed b.) Compiled by + Edward Pinto from + +On line 13836: + b.) b.) Cal Fed b.) + Compiled by Edward Pinto + from the NCRC report + +On line 13836: + Compiled by Edward + Pinto from the NCRC report + CRA Commitments, found + +On line 13842: + enormous size of the + commitments reported by + NCRC, the key questions + +On line 13842: + of the commitments + reported by NCRC, the key + questions are: (i) how + +On line 13842: + key questions are: (i) + how many of these commitments + were actually + +On line 13842: + of these commitments + were actually fulfi + lled by the banks that + +On line 13842: + these commitments were + actually fulfi lled + by the banks that made + +On line 13842: + were actually + fulfi lled by the banks that + made them, (ii) where are + +On line 13842: + fulfi lled by the + banks that made them, (ii) where are + these loans today, and + +On line 13842: + lled by the banks that + made them, (ii) where are these loans + today, and (iii) how + +On line 13842: + the banks that made them, + (ii) where are these loans today, + and (iii) how are these + +On line 13842: + banks that made them, (ii) + where are these loans today, and + (iii) how are these loans + +On line 13842: + them, (ii) where are these + loans today, and (iii) how are + these loans performing1 + +On line 13844: + loans today, and (iii) + how are these loans performing1 + Currently, in light + +On line 13846: + of this issue, there + are only partial answers + to these questions. Were + +On line 13846: + this issue, there are + only partial answers to + these questions. Were the + +On line 13848: + to these questions. Were + the loans actually made1 + Th e banks that made + +On line 13848: + these questions. Were the + loans actually made1 Th + e banks that made these + +On line 13850: + e banks that made these + commitments apparently + came under pressure + +On line 13850: + came under pressure + from community groups to + fulfi ll them. In + +On line 13850: + from community + groups to fulfi ll them. In + an interview by + +On line 13850: + community groups + to fulfi ll them. In an + interview by Brad + +On line 13850: + groups to fulfi ll + them. In an interview by + Brad Bondi of the + +On line 13850: + interview by Brad + Bondi of the Commission’s + staff Josh Silver of + +On line 13850: + Brad Bondi of the + Commission’s staff Josh Silver + of the NCRC noted + +On line 13850: + Commission’s staff Josh + Silver of the NCRC noted + that community + +On line 13850: + Silver of the NCRC + noted that community + groups did follow up + +On line 13852: + groups did follow up + these commitments. Bondi: Who + follows up…to make + +On line 13852: + up these commitments. + Bondi: Who follows up…to + make sure that these banks + +On line 13852: + commitments. Bondi: + Who follows up…to make sure + that these banks honor + +On line 13852: + follows up…to make + sure that these banks honor their + voluntary agreements + +On line 13852: + that these banks honor + their voluntary agreements or + their unilateral + +On line 13860: + Dissenting Statement + Silver: Actually part + of some of these CRA + +On line 13860: + Actually part + of some of these CRA agreements + was meeting with the + +On line 13860: + part of some of these + CRA agreements was meeting with + the bank two or three + +On line 13860: + of some of these CRA + agreements was meeting with the + bank two or three times + +On line 13860: + of these CRA agreements + was meeting with the bank two + or three times a year + +On line 13860: + these CRA agreements was + meeting with the bank two or + three times a year and + +On line 13860: + was meeting with the + bank two or three times a year + and actually + +On line 13860: + bank two or three times + a year and actually + going through, ‘Here’s what + +On line 13860: + or three times a year + and actually going + through, ‘Here’s what you’ve + +On line 13860: + three times a year and + actually going through, + ‘Here’s what you’ve promised. + +On line 13860: + and actually + going through, ‘Here’s what you’ve + promised. Here’s what you’ve + +On line 13862: + through, ‘Here’s what you’ve + promised. Here’s what you’ve loaned.’ Th + at would happen on + +On line 13862: + ‘Here’s what you’ve promised. + Here’s what you’ve loaned.’ Th at + would happen on a + +On line 13862: + what you’ve promised. Here’s + what you’ve loaned.’ Th at would + happen on a one-on-one + +On line 13862: + promised. Here’s what you’ve + loaned.’ Th at would happen on + a one-on-one basis with + +On line 13862: + Here’s what you’ve loaned.’ + Th at would happen on a + one-on-one basis with the + +On line 13862: + what you’ve loaned.’ Th + at would happen on a one-on-one + basis with the banks + +On line 13862: + would happen on a + one-on-one basis with the banks and + the community + +On line 13862: + one-on-one basis with the + banks and the community + organizations.156 + +On line 13864: + Nevertheless, when + the Commission staff asked the + four largest banks (Bank of + +On line 13864: + when the Commission + staff asked the four largest banks (Bank + of America, Citibank, + +On line 13864: + the Commission staff + asked the four largest banks (Bank of + America, Citibank, JPMorgan + +On line 13864: + asked the four largest banks + (Bank of America, Citibank, JPMorgan + Chase and Wells Fargo) + +On line 13864: + the four largest banks (Bank + of America, Citibank, JPMorgan Chase + and Wells Fargo) for + +On line 13864: + (Bank of America, + Citibank, JPMorgan Chase and Wells Fargo) + for data on whether + +On line 13864: + of America, Citibank, + JPMorgan Chase and Wells Fargo) for + data on whether the + +On line 13864: + Citibank, JPMorgan Chase and Wells + Fargo) for data on whether + the merger-related + +On line 13864: + data on whether the + merger-related commitments + were fulfi lled and + +On line 13864: + the merger-related + commitments were fulfi lled + and in what amount, most + +On line 13864: + amount, most of the banks + supplied only limited + information. Th + +On line 13866: + banks supplied only + limited information. + Th ey contended + +On line 13868: + that they did not have + the information or that + it was too diffi + +On line 13870: + they did not have the + information or that it + was too diffi cult + +On line 13870: + the information + or that it was too diffi + cult to get, and the + +On line 13870: + or that it was too + diffi cult to get, and the + information they + +On line 13872: + too diffi cult to + get, and the information + they supplied was sketchy + +On line 13872: + diffi cult to get, + and the information they + supplied was sketchy at + +On line 13874: + cult to get, and the + information they supplied + was sketchy at best. In + +On line 13874: + the information + they supplied was sketchy at best. + In some cases, the + +On line 13874: + best. In some cases, + the information supplied + to the Commission + +On line 13874: + In some cases, the + information supplied to + the Commission by + +On line 13874: + to the Commission + by the banks, in letters from + their counsel, refl + +On line 13874: + banks, in letters from + their counsel, refl ected + fewer loans than they + +On line 13874: + than they had claimed in + press releases to have made + in fulfi llment + +On line 13874: + they had claimed in press + releases to have made in + fulfi llment of + +On line 13874: + press releases to + have made in fulfi llment + of their commitments. + +On line 13874: + releases to have + made in fulfi llment of + their commitments. Th + +On line 13874: + have made in fulfi + llment of their commitments. + Th e press release + +On line 13876: + in fulfi llment + of their commitments. Th e + press release amounts were + +On line 13876: + fulfi llment of + their commitments. Th e press + release amounts were JPMorgan + +On line 13876: + of their commitments. + Th e press release amounts were + JPMorgan Chase (including + +On line 13876: + their commitments. Th + e press release amounts were JPMorgan + Chase (including WaMu, + +On line 13876: + e press release amounts + were JPMorgan Chase (including WaMu, + billion), Citi billion), + +On line 13876: + release amounts were JPMorgan + Chase (including WaMu, billion), + Citi billion), and Bank + +On line 13876: + JPMorgan Chase (including + WaMu, billion), Citi billion), and + Bank of America + +On line 13876: + billion), and Bank of + America billion), totaled + trillion in CRA loans + +On line 13876: + Bank of America + billion), totaled trillion in + CRA loans between and + +On line 13876: + America billion), + totaled trillion in CRA loans + between and and had + +On line 13876: + totaled trillion in + CRA loans between and and had + been presented to + +On line 13876: + in CRA loans between + and and had been presented + to the Commission + +On line 13876: + CRA loans between and + and had been presented to + the Commission by + +On line 13876: + to the Commission + by Edward Pinto in the + Triggers memo.157 No Wells + +On line 13876: + the Triggers memo.157 No + Wells Fargo press releases + could be found, but in + +On line 13876: + memo.157 No Wells Fargo + press releases could be found, + but in response to + +On line 13876: + but in response to + questions from the Commission + Wells provided a + +On line 13876: + from the Commission + Wells provided a great deal + of data in spread + +On line 13876: + the Commission Wells + provided a great deal of + data in spread sheets + +On line 13876: + Wells provided a + great deal of data in spread + sheets that could not be + +On line 13876: + great deal of data + in spread sheets that could not be + interpreted or + +On line 13876: + in spread sheets that could + not be interpreted or + understood without + +On line 13876: + further discussion + with representatives of + the bank. However, + +On line 13876: + terminated the + investigation of the + merger-related CRA + +On line 13876: + in August before + the necessary data could + be gathered. For this + +On line 13876: + could be gathered. For + this reason, the Wells data + could not be unpacked, + +On line 13876: + this reason, the Wells + data could not be unpacked, + interpreted in + +On line 13876: + Wells data could not + be unpacked, interpreted + in discussion with + +On line 13876: + data could not be + unpacked, interpreted in + discussion with Wells + +On line 13878: + interpreted in + discussion with Wells offi + cials, and analyzed. + +On line 13880: + discussion with Wells + offi cials, and analyzed. + Aft er I protested + +On line 13880: + Aft er I protested + the limited eff orts of + the Commission on + +On line 13880: + er I protested the + limited eff orts of the + Commission on this + +On line 13880: + the Commission on + this issue in October + the Commission made + +On line 13880: + Commission on this + issue in October the + Commission made a + +On line 13880: + on this issue in + October the Commission + made a belated + +On line 13880: + attempt to restart the + investigation of the + merger-related CRA + +On line 13880: + merger-related CRA + commitments in November. + However, only + +On line 13880: + only one bank had + responded by the deadline + for submission of + +On line 13880: + had responded by + the deadline for submission + of this dissenting + +On line 13880: + submission of this + dissenting statement. As with + the bank responses, + +On line 13880: + dissenting statement. + As with the bank responses, + additional work + +On line 13880: + additional work + was required to understand + the information + +On line 13880: + to understand the + information received, and + there was no time, and + +On line 13880: + the information + received, and there was no time, + and no Commission + +On line 13880: + received, and there was + no time, and no Commission + staff to follow up. + +On line 13882: + and there was no time, + and no Commission staff to + follow up. As a + +On line 13882: + was no time, and no + Commission staff to follow + up. As a result + +On line 13882: + Commission staff to + follow up. As a result + of the dilatory + +On line 13882: + up. As a result + of the dilatory nature + of the Commission’s + +On line 13882: + of the dilatory + nature of the Commission’s + investigation, + +On line 13882: + of the Commission’s + investigation, it was + impossible to + +On line 13882: + investigation, + it was impossible to + determine how many + +On line 13882: + was impossible + to determine how many loans + were actually + +On line 13882: + impossible to + determine how many loans were + actually made + +On line 13882: + actually made + under their merger-related + CRA commitments by + +On line 13884: + by the four banks and + their predecessors. Th is + in turn impeded + +On line 13884: + the four banks and their + predecessors. Th is in + turn impeded any + +On line 13884: + their predecessors. + Th is in turn impeded + any eff ort to fi + +On line 13884: + predecessors. Th + is in turn impeded any + eff ort to fi nd + +On line 13884: + turn impeded any + eff ort to fi nd out where + these loans are today + +On line 13884: + impeded any eff + ort to fi nd out where these + loans are today and + +On line 13884: + ort to fi nd out + where these loans are today and + hence their delinquency + +On line 13884: + to fi nd out where + these loans are today and hence + their delinquency rates. + +On line 13884: + fi nd out where these + loans are today and hence their + delinquency rates. It + +On line 13884: + these loans are today + and hence their delinquency rates. + It appears that in + +On line 13884: + loans are today and + hence their delinquency rates. It + appears that in many + +On line 13884: + today and hence their + delinquency rates. It appears + that in many instances + +On line 13884: + It appears that in + many instances the Commission + management constrained + +On line 13884: + that in many instances + the Commission management + constrained the staff in + +On line 13884: + and interviews and + by preventing the staff from + following up with + +On line 13884: + by preventing the + staff from following up with + the institutions + +On line 13884: + preventing the staff + from following up with the + institutions that + +On line 13884: + staff from following + up with the institutions + that failed to respond + +On line 13886: + that failed to respond + adequately to requests + for data. Where are + +On line 13886: + adequately to + requests for data. Where are + these mortgages today1 + +On line 13886: + for data. Where are + these mortgages today1 Where these + loans are today must + +On line 13886: + these mortgages today1 + Where these loans are today must + necessarily + +On line 13886: + be a matter of + speculation. Some of the + banks told the FCIC staff + +On line 13886: + of speculation. + Some of the banks told the FCIC + staff that they do not + +On line 13886: + Some of the banks told + the FCIC staff that they do not + distinguish between + +On line 13886: + banks told the FCIC staff + that they do not distinguish + between CRA loans and + +On line 13886: + the FCIC staff that they + do not distinguish between + CRA loans and other + +On line 13886: + FCIC staff that they do + not distinguish between CRA + loans and other loans, + +On line 13886: + staff that they do not + distinguish between CRA loans + and other loans, and + +On line 13886: + do not distinguish + between CRA loans and other + loans, and so could not + +On line 13886: + distinguish between + CRA loans and other loans, and + so could not provide + +On line 13886: + CRA loans and other + loans, and so could not provide + this information. + +On line 13886: + loans, and so could not + provide this information. + Under the GSE Act, + +On line 13886: + so could not provide + this information. Under + the GSE Act, Fannie + +On line 13886: + could not provide this + information. Under the + GSE Act, Fannie and + +On line 13886: + this information. + Under the GSE Act, Fannie + and Freddie had an + +On line 13886: + the GSE Act, Fannie + and Freddie had an affi + rmative obligation + +On line 13888: + and Freddie had an + affi rmative obligation + to help banks to meet + +On line 13888: + rmative obligation + to help banks to meet their CRA + obligations, and they + +On line 13888: + to help banks to meet + their CRA obligations, and they + undoubtedly served + +On line 13888: + their CRA obligations, + and they undoubtedly served + as a buyer for + +On line 13888: + CRA obligations, and + they undoubtedly served as + a buyer for the + +On line 13888: + obligations, and they + undoubtedly served as a + buyer for the loans + +On line 13888: + they undoubtedly + served as a buyer for the + loans made by the largest + +On line 13888: + undoubtedly served + as a buyer for the loans + made by the largest banks + +On line 13888: + a buyer for the + loans made by the largest banks and + their predecessors + +On line 13888: + by the largest banks and + their predecessors pursuant + to Interview of + +On line 13888: + the largest banks and their + predecessors pursuant to + Interview of Josh + +On line 13888: + their predecessors + pursuant to Interview of + Josh Silver of the + +On line 13888: + Josh Silver of the + National Community + Reinvestment Coalition, + +On line 13890: + of the National + Community Reinvestment + Coalition, June Edward + +On line 13890: + Coalition, June Edward + Pinto, Exhibit to the + Triggers memo, dated + +On line 13890: + June Edward Pinto, + Exhibit to the Triggers + memo, dated April http://www.aei.org/docLib/ + +On line 13896: + Pinto, Exhibit + to the Triggers memo, dated + April http://www.aei.org/docLib/ Pinto-Sizing-Total-Federal-Contributions.pdf. Peter + +On line 13898: + to the Triggers memo, + dated April http://www.aei.org/docLib/ Pinto-Sizing-Total-Federal-Contributions.pdf. Peter + J. Wallison the + +On line 13898: + memo, dated April http://www.aei.org/docLib/ + Pinto-Sizing-Total-Federal-Contributions.pdf. Peter J. Wallison + the commitments. In + +On line 13898: + dated April http://www.aei.org/docLib/ Pinto-Sizing-Total-Federal-Contributions.pdf. + Peter J. Wallison the + commitments. In a + +On line 13898: + http://www.aei.org/docLib/ Pinto-Sizing-Total-Federal-Contributions.pdf. Peter J. + Wallison the commitments. + In a press release + +On line 13898: + In a press release + in for example, Fannie + reported that it + +On line 13898: + in for example, + Fannie reported that it + had acquired billion + +On line 13898: + reported that it + had acquired billion in CRA + loans, about billion of + +On line 13898: + had acquired billion + in CRA loans, about billion of + which occurred in Th + +On line 13900: + acquired billion in + CRA loans, about billion of which + occurred in Th is + +On line 13900: + billion in CRA loans, + about billion of which occurred + in Th is amounted + +On line 13902: + percent of Fannie’s + AH acquisitions for that + year. In the Triggers + +On line 13902: + acquisitions for + that year. In the Triggers memo, + based on his research, + +On line 13902: + In the Triggers memo, + based on his research, Pinto + estimated that + +On line 13902: + based on his research, + Pinto estimated that + Fannie and Freddie + +On line 13902: + his research, Pinto + estimated that Fannie + and Freddie purchased + +On line 13902: + estimated that + Fannie and Freddie purchased + about percent of all + +On line 13902: + and Freddie purchased + about percent of all CRA loans + over the period + +On line 13902: + Freddie purchased about + percent of all CRA loans over + the period from + +On line 13902: + about percent of all + CRA loans over the period + from to and that, of + +On line 13902: + percent of all CRA + loans over the period from + to and that, of the + +On line 13902: + of all CRA loans over + the period from to and + that, of the balance, + +On line 13902: + all CRA loans over the + period from to and that, + of the balance, about + +On line 13902: + the period from + to and that, of the balance, + about 10-15 percent were + +On line 13902: + from to and that, of + the balance, about 10-15 percent + were insured by FHA, + +On line 13902: + to and that, of the + balance, about 10-15 percent were + insured by FHA, 10-15 + +On line 13904: + that, of the balance, + about 10-15 percent were insured + by FHA, 10-15 percent + +On line 13904: + of the balance, about + 10-15 percent were insured by + FHA, 10-15 percent were + +On line 13904: + the balance, about 10-15 + percent were insured by FHA, + 10-15 percent were sold + +On line 13904: + about 10-15 percent were + insured by FHA, 10-15 percent + were sold to Wall Street, + +On line 13904: + percent were insured + by FHA, 10-15 percent were sold + to Wall Street, and the + +On line 13904: + insured by FHA, 10-15 + percent were sold to Wall Street, + and the rest remain + +On line 13904: + by FHA, 10-15 percent + were sold to Wall Street, and the + rest remain on the + +On line 13904: + FHA, 10-15 percent were + sold to Wall Street, and the rest + remain on the books + +On line 13904: + percent were sold to + Wall Street, and the rest remain + on the books of the + +On line 13904: + were sold to Wall Street, + and the rest remain on the + books of the banks that + +On line 13904: + and the rest remain + on the books of the banks that + originated the + +On line 13904: + on the books of the + banks that originated the + loans.159 Many of these loans + +On line 13904: + the books of the banks + that originated the loans.159 + Many of these loans are + +On line 13904: + that originated + the loans.159 Many of these loans are + likely unsaleable in + +On line 13904: + the loans.159 Many of these + loans are likely unsaleable in + the secondary market + +On line 13904: + likely unsaleable in + the secondary market because + they were made at rates + +On line 13904: + market because they + were made at rates that did not + compensate for risk + +On line 13904: + they were made at rates + that did not compensate for + risk or lacked mortgage + +On line 13904: + insurance—again, the + competition for these loans + among the GSEs, FHA and + +On line 13904: + GSEs, FHA and the banks + operating under CRA + requirements inevitably + +On line 13904: + inevitably raised their prices + and thus underpriced their risk. + To sell these loans, the + +On line 13904: + and thus underpriced + their risk. To sell these loans, the + banks holding them would + +On line 13904: + thus underpriced their + risk. To sell these loans, the banks + holding them would have + +On line 13904: + their risk. To sell these + loans, the banks holding them would + have to take losses, + +On line 13904: + risk. To sell these loans, + the banks holding them would have + to take losses, which + +On line 13904: + To sell these loans, the + banks holding them would have to + take losses, which many + +On line 13904: + sell these loans, the banks + holding them would have to take + losses, which many are + +On line 13904: + the banks holding them + would have to take losses, which + many are unwilling + +On line 13904: + banks holding them would + have to take losses, which many + are unwilling to + +On line 13904: + holding them would have + to take losses, which many are + unwilling to do. + +On line 13906: + take losses, which many + are unwilling to do. What + are the delinquency + +On line 13906: + losses, which many are + unwilling to do. What are + the delinquency rates1 + +On line 13906: + are unwilling to + do. What are the delinquency + rates1 Under the Home + +On line 13906: + Mortgage Disclosure + Act HMDA), banks are required + to provide data + +On line 13906: + Act HMDA), banks are + required to provide data + to the Fed from which + +On line 13906: + required to provide + data to the Fed from which + the delinquency rates + +On line 13906: + data to the Fed + from which the delinquency rates + on loans that have high + +On line 13906: + the Fed from which the + delinquency rates on loans that + have high interest + +On line 13906: + rates on loans that have + high interest rates can be + calculated. It + +On line 13906: + have high interest + rates can be calculated. + It was assumed that + +On line 13906: + high interest rates + can be calculated. It + was assumed that these + +On line 13906: + interest rates can + be calculated. It was + assumed that these were + +On line 13906: + be calculated. + It was assumed that these were + the loans that might bear + +On line 13906: + assumed that these were + the loans that might bear watching + as potentially + +On line 13906: + Fannie and Freddie, + FHA, Countrywide and other + subprime lenders and banks + +On line 13906: + FHA, Countrywide and + other subprime lenders and banks + under CRA are all + +On line 13906: + and other subprime + lenders and banks under CRA are + all seeking the same + +On line 13906: + subprime lenders and banks + under CRA are all seeking + the same loans—roughly + +On line 13906: + lenders and banks under + CRA are all seeking the same + loans—roughly speaking, + +On line 13906: + CRA are all seeking + the same loans—roughly speaking, + loans to borrowers + +On line 13906: + are all seeking the + same loans—roughly speaking, loans + to borrowers at + +On line 13906: + all seeking the same + loans—roughly speaking, loans to + borrowers at or + +On line 13906: + the same loans—roughly + speaking, loans to borrowers + at or below the + +On line 13906: + loans—roughly speaking, + loans to borrowers at or + below the AMI—it is + +On line 13906: + loans to borrowers + at or below the AMI—it is + likely that these loans + +On line 13906: + at or below the + AMI—it is likely that these loans + when actually + +On line 13906: + or below the AMI—it + is likely that these loans when + actually made + +On line 13906: + likely that these loans + when actually made will + bear concessionary + +On line 13906: + when actually + made will bear concessionary + interest rates so + +On line 13906: + bear concessionary + interest rates so that their + rate spread is not be + +On line 13906: + their rate spread is not + be reportable under HMDA. + It’s just supply and + +On line 13906: + It’s just supply and + demand. Accordingly, the + banks that made CRA loans + +On line 13906: + supply and demand. + Accordingly, the banks that + made CRA loans pursuant + +On line 13906: + Accordingly, the + banks that made CRA loans pursuant + to their commitments + +On line 13906: + banks that made CRA loans + pursuant to their commitments + have no obligation + +On line 13906: + made CRA loans pursuant + to their commitments have no + obligation to record + +On line 13906: + obligation to record + and report their delinquency + rates, and as noted + +On line 13906: + delinquency rates, and + as noted above several + of the large banks that + +On line 13906: + rates, and as noted + above several of the large + banks that made major + +On line 13906: + above several of + the large banks that made major + commitments recorded + +On line 13906: + the large banks that made + major commitments recorded + by the NCRC told FCIC + +On line 13906: + banks that made major + commitments recorded by the + NCRC told FCIC staff that + +On line 13906: + major commitments + recorded by the NCRC told FCIC + staff that they don’t keep + +On line 13906: + commitments recorded + by the NCRC told FCIC staff that + they don’t keep records about + +On line 13906: + by the NCRC told FCIC + staff that they don’t keep records about + the performance of + +On line 13906: + the NCRC told FCIC staff + that they don’t keep records about the + performance of CRA + +On line 13906: + FCIC staff that they don’t + keep records about the performance + of CRA loans apart from + +On line 13906: + that they don’t keep records + about the performance of CRA + loans apart from other + +On line 13906: + don’t keep records about the + performance of CRA loans apart + from other mortgages. + +On line 13908: + about the performance + of CRA loans apart from other + mortgages. However, + +On line 13908: + performance of CRA + loans apart from other mortgages. + However, in the + +On line 13908: + of CRA loans apart from + other mortgages. However, + in the past few years, + +On line 13908: + loans apart from other + mortgages. However, in the + past few years, Bank of + +On line 13908: + mortgages. However, + in the past few years, Bank of + America has been + +On line 13908: + America has been + reporting the performance + of CRA loans in its + +On line 13908: + has been reporting + the performance of CRA loans + in its annual + +On line 13908: + the performance of + CRA loans in its annual + report to the SEC + +On line 13908: + of CRA loans in its + annual report to the + SEC on form 10-K. For + +On line 13908: + in its annual + report to the SEC on form + 10-K. For example, + +On line 13908: + annual report + to the SEC on form 10-K. For + example, the bank’s + +On line 13908: + to the SEC on form + 10-K. For example, the bank’s + 10-K for contained the + +On line 13908: + 10-K. For example, + the bank’s 10-K for contained the + following statement: + +On line 13908: + bank’s 10-K for contained + the following statement: "At + December our CRA + +On line 13912: + of nonperforming + residential mortgage loans. + Th is portfolio + +On line 13912: + Th is portfolio + also comprised percent of + residential net + +On line 13914: + our residential + mortgage portfolio carries + risk mitigation + +On line 13914: + mortgage portfolio + carries risk mitigation + protection, only + +On line 13914: + risk mitigation + protection, only a small + portion of our CRA + +On line 13914: + small portion of our + CRA portfolio is covered + by this protection."160 + +On line 13914: + portion of our CRA + portfolio is covered by + this protection."160 Th + +On line 13916: + CRA portfolio is + covered by this protection."160 + Th is could be an + +On line 13916: + Th is could be an + approximation for the + delinquency rate on + +On line 13916: + approximation + for the delinquency rate on + the merger-related + +On line 13916: + for the delinquency + rate on the merger-related + CRA loans that the four + +On line 13916: + the delinquency rate + on the merger-related CRA + loans that the four banks + +On line 13916: + delinquency rate on + the merger-related CRA loans + that the four banks made + +On line 13916: + the merger-related + CRA loans that the four banks made + in fulfi lling their + +On line 13916: + the four banks made in + fulfi lling their commitments, + but without defi + +On line 13916: + lling their commitments, + but without defi nitive + information on + +On line 13916: + but without defi + nitive information on + the number of loans + +On line 13918: + of loans made and the + banks’ current holdings it is + impossible to + +On line 13918: + banks’ current holdings + it is impossible to + make this estimate + +On line 13918: + current holdings it + is impossible to make + this estimate with + +On line 13918: + is impossible + to make this estimate with + any confi dence. In + +On line 13918: + impossible to + make this estimate with any + confi dence. In a + +On line 13918: + counsel, another + bank reported serious + delinquency rates on + +On line 13918: + made pursuant to its + merger-related commitments + ranging from percent + +On line 13920: + largest sample showing + a percent delinquency rate. + "Fannie Mae Passes + +On line 13920: + showing a percent + delinquency rate. "Fannie Mae + Passes Halfway Point + +On line 13920: + Mae Passes Halfway + Point in Trillion American + Dream Commitment; Leads + +On line 13920: + Trillion American + Dream Commitment; Leads Market + in Bringing Housing + +On line 13920: + Dream Commitment; Leads + Market in Bringing Housing + Boom to Underserved + +On line 13932: + mi_m0EIN/is_2003_March_18/ai_98885990/pg_3/1tag=content;col1. Triggers memo, p.47. + Bank of America, 10-K, p.57. + Dissenting Statement + +On line 13934: + America, 10-K, p.57. + Dissenting Statement Further + investigation + +On line 13934: + Dissenting Statement + Further investigation + of this issue is + +On line 13934: + of this issue is + necessary, including on + the role of the bank + +On line 13934: + the role of the bank + regulators, in order + to determine what + +On line 13934: + bank regulators, + in order to determine + what eff ect, if any, + +On line 13934: + regulators, in + order to determine what + eff ect, if any, the + +On line 13934: + eff ect, if any, the + merger-related commitments + to make CRA loans might + +On line 13934: + the merger-related + commitments to make CRA loans + might have had on the + +On line 13934: + commitments to make + CRA loans might have had on the + number of NTMs in + +On line 13934: + to make CRA loans might + have had on the number of + NTMs in the U.S. fi + +On line 13934: + CRA loans might have had + on the number of NTMs in + the U.S. fi nancial + +On line 13934: + might have had on the + number of NTMs in the U.S. + fi nancial system + +On line 13934: + on the number of + NTMs in the U.S. fi nancial + system before the + +On line 13934: + NTMs in the U.S. fi + nancial system before the + fi nancial crisis. + +On line 13942: + Th is dissenting + statement argues that the U.S. + government’s housing + +On line 13942: + housing policies were + the major contributor + to the fi nancial + +On line 13944: + fi nancial crisis + of Th ese policies fostered + the development + +On line 13944: + nancial crisis of + Th ese policies fostered the + development of + +On line 13944: + development of + a massive housing bubble + between and and the + +On line 13944: + a massive housing + bubble between and and the + creation of million + +On line 13944: + bubble between and + and the creation of million + subprime and Alt-A loans, + +On line 13944: + between and and the + creation of million subprime + and Alt-A loans, many of + +On line 13944: + and and the creation + of million subprime and Alt-A + loans, many of which were + +On line 13944: + and the creation of + million subprime and Alt-A loans, + many of which were ready + +On line 13944: + of million subprime + and Alt-A loans, many of which were + ready to default as + +On line 13944: + million subprime and + Alt-A loans, many of which were ready + to default as soon + +On line 13944: + and Alt-A loans, many of + which were ready to default as + soon as the housing + +On line 13944: + loans, many of which were + ready to default as soon as + the housing bubble + +On line 13944: + ready to default as + soon as the housing bubble + began to defl + +On line 13944: + default as soon as + the housing bubble began + to defl ate. Th + +On line 13946: + soon as the housing + bubble began to defl + ate. Th e losses + +On line 13946: + bubble began to + defl ate. Th e losses + associated + +On line 13948: + defl ate. Th e + losses associated + with these weak and high + +On line 13948: + ate. Th e losses + associated with these + weak and high risk loans + +On line 13948: + weak and high risk loans + caused either the real or + apparent weakness + +On line 13948: + apparent weakness + of the major fi nancial + institutions around + +On line 13948: + of the major fi + nancial institutions around + the world that held these + +On line 13948: + held these mortgages—or + PMBS backed by these mortgages—as + investments or as + +On line 13948: + of regulation, + predatory lending or the + other factors that + +On line 13948: + predatory lending + or the other factors that + were cited in the + +On line 13948: + the report of the + FCIC’s majority were not + determinative + +On line 13952: + determinative + factors. Th e policy + implications of + +On line 13952: + implications of + this conclusion are signifi + cant. If the crisis + +On line 13952: + If the crisis could + have been prevented simply + by eliminating + +On line 13952: + the crisis could have + been prevented simply by + eliminating or + +On line 13952: + by eliminating + or changing the government + policies and programs + +On line 13952: + were primarily + responsible for the fi + nancial crisis, then + +On line 13952: + responsible for + the fi nancial crisis, then + there was no need for + +On line 13952: + for the fi nancial + crisis, then there was no need + for the Dodd-Frank Wall Street + +On line 13952: + fi nancial crisis, + then there was no need for the + Dodd-Frank Wall Street Reform + +On line 13952: + nancial crisis, then + there was no need for the Dodd-Frank + Wall Street Reform and + +On line 13952: + crisis, then there was + no need for the Dodd-Frank Wall Street + Reform and Consumer + +On line 13952: + there was no need for + the Dodd-Frank Wall Street Reform and + Consumer Protection + +On line 13952: + no need for the Dodd-Frank + Wall Street Reform and Consumer + Protection Act of + +On line 13952: + Wall Street Reform and + Consumer Protection Act of + adopted by Congress + +On line 13952: + Consumer Protection + Act of adopted by Congress + in July and oft + +On line 13952: + Act of adopted by + Congress in July and oft + en cited as one + +On line 13952: + Congress in July + and oft en cited as one + of the important + +On line 13952: + in July and oft + en cited as one of the + important achievements + +On line 13958: + regulation that + the Dodd-Frank Act imposes on + the U.S. economy + +On line 13958: + Dodd-Frank Act imposes + on the U.S. economy will + almost certainly + +On line 13958: + imposes on the + U.S. economy will almost + certainly have a + +On line 13958: + the U.S. economy + will almost certainly have + a major adverse + +On line 13958: + U.S. economy will + almost certainly have a + major adverse eff + +On line 13958: + almost certainly + have a major adverse eff + ect on economic + +On line 13958: + certainly have a + major adverse eff ect on + economic growth and + +On line 13958: + a major adverse + eff ect on economic growth + and job creation in + +On line 13958: + major adverse eff + ect on economic growth and + job creation in the + +On line 13958: + ect on economic + growth and job creation in the + United States during + +On line 13958: + growth and job creation + in the United States during + the balance of this + +On line 13958: + and job creation in + the United States during the + balance of this decade. + +On line 13958: + in the United States + during the balance of this + decade. If this was the + +On line 13958: + United States during + the balance of this decade. If + this was the price that + +On line 13958: + during the balance + of this decade. If this was the + price that had to be + +On line 13958: + the balance of this + decade. If this was the price that + had to be paid for + +On line 13958: + of this decade. If this + was the price that had to be + paid for preventing + +On line 13958: + that had to be paid + for preventing another + fi nancial crisis + +On line 13958: + had to be paid for + preventing another fi + nancial crisis then + +On line 13958: + fi nancial crisis + then perhaps it’s one that will + have to be borne. But + +On line 13958: + nancial crisis then + perhaps it’s one that will have + to be borne. But if + +On line 13958: + crisis then perhaps + it’s one that will have to be + borne. But if it was + +On line 13958: + it’s one that will have + to be borne. But if it was + not necessary to + +On line 13958: + to be borne. But if + it was not necessary to + prevent another + +On line 13958: + borne. But if it was + not necessary to prevent + another crisis—and + +On line 13958: + not necessary to + prevent another crisis—and + it would not have been + +On line 13958: + prevent another + crisis—and it would not have been + necessary if the + +On line 13958: + crisis—and it would not + have been necessary if the + crisis was caused by + +On line 13958: + it would not have been + necessary if the crisis + was caused by actions + +On line 13958: + necessary if the + crisis was caused by actions + of the government + +On line 13958: + crisis was caused by + actions of the government + itself—then the Dodd-Frank Act + +On line 13958: + by actions of the + government itself—then the Dodd-Frank + Act seriously + +On line 13960: + government itself—then + the Dodd-Frank Act seriously + overreached. Finally, + +On line 13960: + Act seriously + overreached. Finally, if the + principal cause of + +On line 13960: + Finally, if the + principal cause of the fi + nancial crisis was + +On line 13960: + the principal cause + of the fi nancial crisis + was ultimately + +On line 13960: + principal cause of + the fi nancial crisis was + ultimately the + +On line 13960: + was ultimately + the government’s involvement + in the housing fi + +On line 13960: + ultimately the + government’s involvement in + the housing fi nance + +On line 13960: + in the housing fi + nance system, housing fi nance + policy in the + +On line 13968: + the future should be + adjusted accordingly. + Dissenting Statement + +On line 13972: + Dissenting Statement + Hypothetical Losses + in Two Scenarios + +On line 13974: + Hypothetical + Losses in Two Scenarios + (No feedback) Scenario + +On line 13974: + in Two Scenarios + (No feedback) Scenario is what + was known to market + +On line 13974: + was known to market + professional during the + 2nd half of Scenario + +On line 13974: + of Scenario is the + actual condition of + the mortgage market. + +On line 13982: + trillion; Losses on + Prime=1.2%% (assumes foreclosure rate + severity); Losses + +On line 13988: + Average size of + mortgage: Losses in Scenario + Number of mortgages: + +On line 13990: + mortgage: Losses in + Scenario Number of mortgages: + million Prime=40 million + +On line 13992: + million Subprime/Alt-A million + PMBS million FHA/VA=5.2 million) + Aggregate Value: + +On line 13994: + million PMBS million + FHA/VA=5.2 million) Aggregate + Value: Prime trillion + +On line 13996: + Aggregate Value: + Prime trillion X million); Subprime/Alt-A=$2.25 + trillion X million) + +On line 13996: + Value: Prime trillion + X million); Subprime/Alt-A=$2.25 trillion X + million) Losses on + +On line 14000: + billion trillion prime + X billion trillion subprime/Alt-A X + billion Overall loss + +On line 14002: + X billion trillion + subprime/Alt-A X billion Overall loss + percentage: Losses + +On line 14004: + X billion Overall + loss percentage: Losses in + Scenario Number of + +On line 14010: + Scenario Number of + mortgages: million Prime: million + Subprime/Alt-A: Original subprime/Alt-A: + +On line 14012: + of mortgages: million + Prime: million Subprime/Alt-A: Original + subprime/Alt-A: million Other + +On line 14012: + mortgages: million Prime: + million Subprime/Alt-A: Original subprime/Alt-A: + million Other subprime/Alt-A: + +On line 14012: + million Prime: million + Subprime/Alt-A: Original subprime/Alt-A: million + Other subprime/Alt-A: million + +On line 14012: + Subprime/Alt-A: Original subprime/Alt-A: + million Other subprime/Alt-A: million + F&F (excludes million + +On line 14012: + million Other subprime/Alt-A: + million F&F (excludes million + already counted in + +On line 14012: + million F&F (excludes + million already counted in + PMBS) million other + +On line 14012: + million other loans + not securitized (mostly + held by the large banks)) + +On line 14014: + not securitized + (mostly held by the large banks)) + Aggregate Value: + +On line 14018: + Aggregate Value: + Prime= trillion X million); Subprime/Alt-A + trillion X million) + +On line 14018: + Value: Prime= trillion + X million); Subprime/Alt-A trillion X + million) Losses on + +On line 14018: + million) Losses on + foreclosures: billion trillion + X billion trillion + +On line 14020: + foreclosures: billion + trillion X billion trillion + X billion) Overall + +On line 14020: + trillion X billion + trillion X billion) Overall + loss percentage: for + +On line 14022: + trillion X billion) + Overall loss percentage: for + an increase of Note: + +On line 14022: + billion) Overall loss + percentage: for an increase + of Note: No allowance + +On line 14022: + for an increase of + Note: No allowance for feedback + eff ect—that is, fall + +On line 14022: + an increase of Note: + No allowance for feedback eff + ect—that is, fall in + +On line 14022: + of Note: No allowance + for feedback eff ect—that is, + fall in home prices as + +On line 14022: + Note: No allowance for + feedback eff ect—that is, fall + in home prices as a + +On line 14022: + allowance for feedback + eff ect—that is, fall in home + prices as a result + +On line 14022: + feedback eff ect—that + is, fall in home prices as a + result of larger + +On line 14022: + eff ect—that is, fall + in home prices as a result + of larger number + +On line 14022: + ect—that is, fall in + home prices as a result of + larger number of + +On line 14022: + in home prices as a + result of larger number + of foreclosures in + +On line 14022: + result of larger + number of foreclosures in + Scenario With feedback + +On line 14022: + of larger number + of foreclosures in Scenario + With feedback eff ect, + +On line 14030: + eff ect, losses would + Dissenting Statement be even + larger in Scenario + +On line 14030: + Dissenting Statement + be even larger in Scenario + because a larger + +On line 14030: + larger in Scenario + because a larger number + of foreclosures would + +On line 14030: + because a larger + number of foreclosures would + drive down housing prices + +On line 14030: + a larger number + of foreclosures would drive down + housing prices further + +On line 14032: + foreclosures would drive + down housing prices further and + faster. Th is feedback + +On line 14032: + would drive down housing + prices further and faster. Th is + feedback eff ect will + +On line 14032: + housing prices further + and faster. Th is feedback eff + ect will likely cause + +On line 14032: + prices further and faster. + Th is feedback eff ect will + likely cause total + +On line 14034: + is feedback eff ect + will likely cause total fi + rst mortgage losses + +On line 14034: + feedback eff ect will + likely cause total fi rst + mortgage losses to + +On line 14034: + eff ect will likely + cause total fi rst mortgage + losses to approach + +On line 14034: + likely cause total + fi rst mortgage losses to + approach trillion or + +On line 14034: + rst mortgage losses + to approach trillion or of + outstanding fi rst + +On line 14040: + Hypothetical + Losses in Two Scenarios + (with feedback) Scenario + +On line 14040: + in Two Scenarios + (with feedback) Scenario is what + was known to market + +On line 14040: + was known to market + professional during the + 2nd half of Scenario + +On line 14040: + of Scenario is the + actual condition of + the mortgage market. + +On line 14050: + Scenario Losses on + prime=1.2%% (assumes foreclosure rate + severity); Losses + +On line 14052: + subprime Alt-A=14% ((assumes + foreclosure rate severity); + Losses on FHA/VA=5.25% + +On line 14052: + Losses on FHA/VA=5.25% + (assumes foreclosure rate and + severity) Scenario + +On line 14056: + subprime Alt-A=25% (assumes + foreclosure rate severity); + Losses on FHA/VA + +On line 14056: + (assumes foreclosure + rate severity); Losses on + FHA/VA unknown subprime/Alt-A=15% + +On line 14058: + unknown subprime/Alt-A=15% (assumes + foreclosure rate severity) + Average size of + +On line 14060: + (assumes foreclosure + rate severity) Average + size of mortgage: Prime: + +On line 14062: + Average size of + mortgage: Prime: trillion/39 million) + Subprime/Alt-A/FHA/VA: trillion/13 million + +On line 14062: + size of mortgage: Prime: + trillion/39 million) Subprime/Alt-A/FHA/VA: trillion/13 + million Losses in + +On line 14062: + mortgage: Prime: trillion/39 + million) Subprime/Alt-A/FHA/VA: trillion/13 million + Losses in Scenario + +On line 14064: + Prime: trillion/39 million) + Subprime/Alt-A/FHA/VA: trillion/13 million Losses + in Scenario Number + +On line 14064: + trillion/39 million) Subprime/Alt-A/FHA/VA: + trillion/13 million Losses in + Scenario Number of + +On line 14064: + million) Subprime/Alt-A/FHA/VA: trillion/13 + million Losses in Scenario + Number of mortgages: + +On line 14064: + Subprime/Alt-A/FHA/VA: trillion/13 million + Losses in Scenario Number + of mortgages: million + +On line 14066: + million Losses in + Scenario Number of mortgages: + million Prime=40 million + +On line 14070: + Scenario Number of + mortgages: million Prime=40 million + Subprime/Alt-A=7.7 million PMBS FHA, + +On line 14070: + of mortgages: million + Prime=40 million Subprime/Alt-A=7.7 million PMBS + FHA, and VA=5.2 million + +On line 14072: + million Prime=40 million + Subprime/Alt-A=7.7 million PMBS FHA, and VA=5.2 + million Aggregate + +On line 14074: + Subprime/Alt-A=7.7 million PMBS FHA, + and VA=5.2 million Aggregate + Value: Prime trillion + +On line 14076: + Aggregate Value: + Prime trillion X million); Subprime/Alt-A=$1.7 + trillion X million) + +On line 14078: + million); Subprime/Alt-A=$1.7 trillion + X million) FHA/VA= billion + ($130,000x5.2 million) Total + +On line 14078: + trillion X million) + FHA/VA= billion ($130,000x5.2 million) + Total expected + +On line 14078: + FHA/VA= billion ($130,000x5.2 + million) Total expected + foreclosures: million + +On line 14082: + foreclosures: million + X million X million X + million) Losses on + +On line 14084: + billion trillion prime + X billion trillion subprime/Alt-A X + billion billion X + +On line 14084: + X billion trillion + subprime/Alt-A X billion billion X + billion) Overall loss + +On line 14094: + X billion) Overall + loss percentage: Dissenting + Statement Losses in + +On line 14096: + Dissenting Statement + Losses in Scenario Number + of mortgages: million + +On line 14098: + Statement Losses in + Scenario Number of mortgages: + million Prime: million + +On line 14104: + million Original + subprime/Alt-A: million FHA/VA: million + Other subprime/Alt-A: million + +On line 14104: + subprime/Alt-A: million FHA/VA: + million Other subprime/Alt-A: million + F&F (excludes million + +On line 14104: + million Other subprime/Alt-A: + million F&F (excludes million + already counted in + +On line 14104: + million F&F (excludes + million already counted in + PMBS), million other + +On line 14104: + million other loans + not securitized (mostly + held by the large banks)) + +On line 14106: + not securitized + (mostly held by the large banks)) + Aggregate Value: + +On line 14110: + Value: Prime= trillion + X million); Original Subprime/Alt-A + trillion X million) + +On line 14112: + trillion X million) + FHA/VA= billion ($130,000x5.2 million) + Other subprime/Alt-A: trillion + +On line 14112: + FHA/VA= billion ($130,000x5.2 + million) Other subprime/Alt-A: trillion + ($154,000X13 million Total + +On line 14112: + million X million=0.95 + million, X million=3.5 million, + X million=3.9 million) + +On line 14112: + million=0.95 million, X + million=3.5 million, X million=3.9 + million) Losses on + +On line 14112: + million=3.5 million, X + million=3.9 million) Losses on + foreclosures: billion + +On line 14112: + million) Losses on + foreclosures: billion trillion + X billion trillion + +On line 14112: + foreclosures: billion + trillion X billion trillion + X billion billion + +On line 14112: + billion trillion X + billion trillion X billion + billion X billion + +On line 14112: + trillion X billion + trillion X billion billion + X billion trillion + +On line 14114: + billion trillion X + billion billion X billion + trillion X billion) + +On line 14116: + trillion X billion + billion X billion trillion + X billion) Overall + +On line 14116: + billion X billion + trillion X billion) Overall + loss percentage: for + +On line 14120: + billion) Overall loss + percentage: for an increase + of APPENDIX A: + +On line 14122: + percentage: for an + increase of APPENDIX A: + GLOSSARY Italicized + +On line 14128: + ABX.HE A series + of derivatives indices + constructed from the + +On line 14128: + constructed from the + prices of credit default swaps + that each reference + +On line 14128: + subprime mortgage–backed + securities; akin to an + index like the Dow + +On line 14128: + securities; akin + to an index like the Dow + Jones Industrial + +On line 14130: + to an index like + the Dow Jones Industrial + Average. adjustable-rate + +On line 14132: + whose interest rate + changes periodically + over time. affordable + +On line 14132: + affordable housing + goals Goals originally set + by the Department + +On line 14132: + Goals originally + set by the Department of + Housing and Urban + +On line 14132: + Housing and Urban + Development (now by the + Federal Housing + +On line 14132: + Development (now + by the Federal Housing + Finance Agency) for + +On line 14132: + Federal Housing + Finance Agency) for Fannie + Mae and Freddie Mac + +On line 14132: + Finance Agency) for + Fannie Mae and Freddie Mac + to allocate a + +On line 14132: + for Fannie Mae and + Freddie Mac to allocate + a specified part + +On line 14132: + and Freddie Mac to + allocate a specified + part of their mortgage + +On line 14132: + Mac to allocate + a specified part of their + mortgage business to + +On line 14134: + mortgage business to + serve low- and moderate-income + borrowers. ARM see + +On line 14138: + rate securities. + asset-backed commercial paper + Short-term debt secured + +On line 14140: + asset-backed commercial + paper Short-term debt secured + by assets. asset-backed + +On line 14140: + paper Short-term debt + secured by assets. asset-backed + security Debt + +On line 14140: + secured by assets. + asset-backed security Debt + instrument secured + +On line 14140: + instrument secured + by assets such as mortgages, + credit card loans or + +On line 14140: + secured by assets + such as mortgages, credit card + loans or auto loans. + +On line 14142: + by assets such as + mortgages, credit card loans or + auto loans. auction + +On line 14142: + mortgages, credit card + loans or auto loans. auction + rate securities + +On line 14142: + auto loans. auction + rate securities Long-term bonds + whose interest rate + +On line 14142: + rate securities + Long-term bonds whose interest rate + may be reset at + +On line 14142: + interest rate may + be reset at regular + short-term intervals + +On line 14146: + holding company + Company that controls a + bank. broker-dealer A + +On line 14146: + that controls a bank. + broker-dealer A firm, often + the subsidiary of an + +On line 14146: + a bank. broker-dealer + A firm, often the subsidiary + of an investment + +On line 14146: + bank. broker-dealer A + firm, often the subsidiary of + an investment bank, + +On line 14146: + broker-dealer A firm, + often the subsidiary of an + investment bank, that + +On line 14146: + A firm, often the + subsidiary of an investment + bank, that buys and sells + +On line 14146: + the subsidiary of an + investment bank, that buys and + sells securities + +On line 14148: + itself and others. + capital Assets minus + liabilities; + +On line 14148: + owns minus what it + owes. Regulators often + require financial + +On line 14150: + minimum levels + of capital. Capital + Purchase Program TARP + +On line 14150: + program providing + financial assistance to + 700-plus U.S. financial + +On line 14150: + through the purchase of + senior preferred shares in the + corporations on + +On line 14150: + of senior preferred + shares in the corporations + on standardized terms. + +On line 14152: + senior preferred shares + in the corporations on + standardized terms. CDO + +On line 14152: + the corporations + on standardized terms. CDO see + collateralized + +On line 14154: + on standardized terms. + CDO see collateralized + debt obligation. CDO + +On line 14154: + standardized terms. CDO + see collateralized debt + obligation. CDO squared + +On line 14154: + collateralized + debt obligation. CDO squared CDO + that holds other CDOs. + +On line 14156: + obligation. CDO squared + CDO that holds other CDOs. CDS + see credit default + +On line 14158: + CDO squared CDO that holds + other CDOs. CDS see credit + default swap. CFTC see + +On line 14158: + holds other CDOs. CDS + see credit default swap. CFTC + see Commodity + +On line 14160: + see Commodity + Futures Trading Commission. + collateralized + +On line 14162: + the riskier portions + of mortgage-backed securities. + commercial paper + +On line 14164: + created by the + Federal Reserve in to + purchase three-month + +On line 14166: + federal agency + that regulates trading in + futures and options. + +On line 14176: + depository + institutions to make loans + and provide services + +On line 14178: + Securities and + Exchange Commission program + created in and + +On line 14178: + Exchange Commission + program created in and + terminated in + +On line 14178: + terminated in + that provided voluntary + supervision for + +On line 14182: + bank conglomerates. + Counterparty A party + to a contract. CP + +On line 14184: + a contract. CP see + commercial paper. CPP see + Capital Purchase + +On line 14186: + CP see commercial + paper. CPP see Capital + Purchase Program. CRA + +On line 14188: + A type of credit + derivative allowing + a purchaser of + +On line 14188: + purchaser of the + swap to transfer loan default + risk to a seller + +On line 14188: + transfer loan default + risk to a seller of the + swap. The seller agrees + +On line 14188: + loan default risk to + a seller of the swap. The + seller agrees to pay + +On line 14188: + to a seller of + the swap. The seller agrees to + pay the purchaser + +On line 14188: + a seller of the + swap. The seller agrees to pay + the purchaser if + +On line 14188: + seller of the swap. + The seller agrees to pay the + purchaser if a + +On line 14188: + the swap. The seller + agrees to pay the purchaser + if a default event + +On line 14188: + The seller agrees to + pay the purchaser if a + default event occurs. + +On line 14188: + pay the purchaser + if a default event occurs. + The purchaser does + +On line 14188: + the purchaser if + a default event occurs. The + purchaser does not + +On line 14188: + if a default event + occurs. The purchaser does + not need to own the + +On line 14190: + purchaser does not + need to own the loan covered + by the swap. credit + +On line 14190: + does not need to own + the loan covered by the swap. + credit enhancement + +On line 14190: + by the swap. credit + enhancement Insurance or + other protection + +On line 14190: + other protection + that may be purchased for a + loan or pool of loans + +On line 14190: + that may be purchased + for a loan or pool of loans + to offset losses + +On line 14190: + may be purchased for + a loan or pool of loans to + offset losses in + +On line 14190: + purchased for a loan + or pool of loans to offset + losses in the event + +On line 14190: + a loan or pool of + loans to offset losses in + the event of default. + +On line 14192: + or pool of loans to + offset losses in the event + of default. credit + +On line 14192: + offset losses in + the event of default. credit + loss Loss from delayed + +On line 14192: + losses in the event + of default. credit loss Loss + from delayed payments + +On line 14192: + the event of default. + credit loss Loss from delayed + payments or defaults + +On line 14192: + of default. credit + loss Loss from delayed payments + or defaults on loans. + +On line 14194: + loans. credit rating + agency Private company + that evaluates the + +On line 14194: + of securities + and provides ratings on those + securities; the + +On line 14194: + and provides ratings + on those securities; the + largest are Fitch Ratings, + +On line 14194: + provides ratings on + those securities; the largest + are Fitch Ratings, Moody’s + +On line 14194: + those securities; + the largest are Fitch Ratings, Moody’s + Investors Service, and + +On line 14196: + are Fitch Ratings, Moody’s + Investors Service, and Standard + Poor’s. credit risk Risk + +On line 14196: + Moody’s Investors Service, + and Standard Poor’s. credit risk + Risk to a lender that + +On line 14196: + Investors Service, and + Standard Poor’s. credit risk Risk + to a lender that a + +On line 14196: + Standard Poor’s. credit + risk Risk to a lender that a + borrower will fail + +On line 14196: + credit risk Risk to + a lender that a borrower + will fail to repay + +On line 14196: + risk Risk to a lender + that a borrower will fail + to repay the loan. + +On line 14198: + Risk to a lender that + a borrower will fail to + repay the loan. CSE + +On line 14198: + a borrower will + fail to repay the loan. CSE + Consolidated + +On line 14198: + Consolidated + Supervised Entity (see + Consolidated + +On line 14200: + of a borrower’s + ability to repay a + loan, generally + +On line 14200: + calculated by + dividing the borrower’s + monthly debt payments + +On line 14202: + borrower’s monthly + debt payments by gross monthly + income. delinquency + +On line 14202: + debt payments by gross + monthly income. delinquency + rate The number of + +On line 14202: + income. delinquency + rate The number of loans for + which borrowers fail + +On line 14202: + rate The number of + loans for which borrowers fail + to make timely loan + +On line 14202: + number of loans for + which borrowers fail to make + timely loan payments + +On line 14206: + for enforcement of + laws and administration + of justice, led by + +On line 14206: + enforcement of laws + and administration of + justice, led by the + +On line 14208: + by the attorney + general. Department of + Treasury Treasury of + +On line 14208: + of the federal + government; prints and mints all + currency and coins, + +On line 14208: + government; prints and + mints all currency and coins, + collects federal + +On line 14208: + mints all currency + and coins, collects federal + taxes, manages U.S. + +On line 14208: + U.S. government debt + instruments, supervises + national banks and + +On line 14208: + Its mission includes + protecting the integrity + of the financial + +On line 14210: + depository + institution Financial + institution, such + +On line 14210: + institution, such + as a commercial bank, thrift + (savings and loan), or + +On line 14210: + thrift (savings and loan), + or credit union, that accepts + deposits, including + +On line 14210: + or credit union, that + accepts deposits, including + deposits insured by + +On line 14212: + insured by the FDIC. + derivative Financial + contract whose price is + +On line 14212: + price is determined + (derived) from the value of + an underlying + +On line 14212: + from the value of + an underlying asset, + rate, index, or event. + +On line 14214: + an underlying + asset, rate, index, or event. + Fannie Mae Nickname + +On line 14214: + asset, rate, index, + or event. Fannie Mae Nickname + for the Federal + +On line 14214: + or event. Fannie Mae + Nickname for the Federal + National Mortgage + +On line 14218: + mortgage market. FCIC + Financial Crisis Inquiry + Commission. FDIC see + +On line 14218: + Financial Crisis + Inquiry Commission. FDIC see + Federal Deposit + +On line 14220: + Federal Deposit + Insurance Corporation. + Federal Deposit + +On line 14220: + Deposit Insurance + Corporation. Federal + Deposit Insurance + +On line 14220: + examining and + supervising some of those + institutions, and + +On line 14220: + supervising some + of those institutions, and + shutting down failing + +On line 14222: + Federal Housing + Administration Part of + the Department of + +On line 14222: + Administration + Part of the Department of + Housing and Urban + +On line 14224: + government-sponsored + enterprises; created + by the Housing and + +On line 14224: + by the Housing and + Economic Recovery Act + of as successor + +On line 14224: + as successor to + the Office of Federal + Housing Enterprise + +On line 14224: + Federal Housing + Enterprise Oversight and the + Federal Housing + +On line 14224: + Housing Enterprise + Oversight and the Federal + Housing Finance Board. + +On line 14226: + Federal Housing + Finance Board. Federal Open + Market Committee + +On line 14226: + Market Committee + Its members are the Board of + Governors of the + +On line 14226: + Its members are the + Board of Governors of the + Federal Reserve + +On line 14230: + Glossary System and + certain of the presidents + of the Federal + +On line 14230: + System and certain + of the presidents of the + Federal Reserve + +On line 14230: + of the presidents + of the Federal Reserve + Banks; oversees market + +On line 14230: + market conditions + and implements monetary + policy through such + +On line 14232: + such means as setting + interest rates. Federal + Reserve Bank of New + +On line 14232: + setting interest + rates. Federal Reserve Bank + of New York One of + +On line 14232: + regulating bank + holding companies in New + York State and nearby + +On line 14234: + holding companies + in New York State and nearby + areas. Federal + +On line 14234: + companies in New + York State and nearby areas. + Federal Reserve + +On line 14234: + in New York State and + nearby areas. Federal + Reserve U.S. central + +On line 14234: + York State and nearby + areas. Federal Reserve + U.S. central banking + +On line 14234: + areas. Federal + Reserve U.S. central banking + system created + +On line 14234: + Federal Reserve + U.S. central banking system + created in in + +On line 14234: + Reserve U.S. central + banking system created + in in response to + +On line 14234: + panics, consisting + of the Federal Reserve + Board in Washington, + +On line 14234: + consisting of the + Federal Reserve Board in + Washington, DC, and + +On line 14234: + of the Federal + Reserve Board in Washington, + DC, and Federal + +On line 14234: + Federal Reserve + Board in Washington, DC, and + Federal Reserve + +On line 14234: + Board in Washington, + DC, and Federal Reserve + Banks around the country; + +On line 14234: + in Washington, DC, + and Federal Reserve Banks + around the country; its + +On line 14234: + DC, and Federal + Reserve Banks around the country; + its mission is to + +On line 14234: + is to implement + monetary policy through + such means as setting + +On line 14234: + policy through such + means as setting interest + rates, supervising + +On line 14240: + Federal Housing + Finance Agency. FICO score + A measure of a + +On line 14242: + money laundering, + terroristfinancing, and + other financial + +On line 14244: + other financial + crimes. FinCEN see Financial Crimes + Enforcement Network. + +On line 14246: + FinCEN see Financial + Crimes Enforcement Network. FOMC + see Federal Open + +On line 14248: + foreclosure Legal + process whereby a mortgage lender + gains ownership of + +On line 14248: + whereby a mortgage + lender gains ownership of the + real property + +On line 14248: + a mortgage lender gains + ownership of the real + property secur-ing + +On line 14250: + defaulted mortgage. + Freddie Mac Nickname for the + Federal Home Loan + +On line 14250: + Mac Nickname for the + Federal Home Loan Mortgage + Corporation (FHLMC), + +On line 14252: + financing for the + home mortgage market. Ginnie + Mae Nickname for the + +On line 14252: + for the home mortgage + market. Ginnie Mae Nickname + for the Government + +On line 14252: + market. Ginnie Mae + Nickname for the Government + National Mortgage + +On line 14254: + pools of VA and FHA + mortgages. Glass-Steagall Act Banking Act + of creating the + +On line 14254: + FHA mortgages. Glass-Steagall Act + Banking Act of creating + the FDIC to insure + +On line 14254: + Glass-Steagall Act Banking Act + of creating the FDIC to + insure bank deposits; + +On line 14254: + the FDIC to insure + bank deposits; prohibited + commercial banks from + +On line 14254: + from underwriting + or dealing in most types of + securities, barred + +On line 14254: + securities, barred + banks from affiliating + with securities + +On line 14254: + affiliating + with securities firms, and + introduced other + +On line 14254: + with securities + firms, and introduced other + banking reforms. In + +On line 14254: + firms, and introduced + other banking reforms. In + the Gramm-Leach-Bliley Act repealed + +On line 14254: + reforms. In the Gramm-Leach-Bliley + Act repealed the provisions + of the Glass-Steagall Act that + +On line 14254: + Gramm-Leach-Bliley Act repealed the + provisions of the Glass-Steagall Act + that prohibited + +On line 14254: + provisions of the + Glass-Steagall Act that prohibited + affiliations + +On line 14256: + corporation, such + as Fannie Mae and Freddie + Mac, created by + +On line 14256: + such as Fannie Mae + and Freddie Mac, created + by the federal + +On line 14256: + Mac, created by + the federal government + to pursue certain + +On line 14258: + its charter. Gramm-Leach-Bliley Act + legislation that lifted + certain remaining + +On line 14260: + certain remaining + restrictions established by + the Glass-Steagall Act. GSE see + +On line 14262: + difference between + the value of an asset + and the amount borrowed + +On line 14264: + between the value + of an asset and the amount + borrowed against it. hedge + +On line 14264: + of an asset and + the amount borrowed against it. hedge + In finance, a way + +On line 14264: + an asset and the + amount borrowed against it. hedge In + finance, a way to + +On line 14264: + amount borrowed against it. + hedge In finance, a way to + reduce exposure + +On line 14264: + hedge In finance, a + way to reduce exposure + or risk by taking + +On line 14264: + In finance, a way + to reduce exposure or + risk by taking on + +On line 14264: + finance, a way to + reduce exposure or risk + by taking on a + +On line 14266: + by taking on a + new financial contract. hedge + fund A privately + +On line 14266: + offered investment + vehicle exempted from + most regulation + +On line 14266: + exempted from most + regulation and oversight; + generally open + +On line 14270: + investors. HOEPA see Home + Ownership and Equity + Protection Act. Home + +On line 14270: + see Home Ownership + and Equity Protection + Act. Home Ownership + +On line 14270: + Home Ownership and + Equity Protection Act. + Home Ownership and + +On line 14270: + Act. Home Ownership + and Equity Protection + Act federal law + +On line 14270: + Home Ownership and + Equity Protection Act + federal law that + +On line 14270: + Federal Reserve + new responsibility + to address abusive + +On line 14272: + address abusive and + predatory mortgage lending + practices. Housing and + +On line 14272: + including measures + to reform and regulate + the GSEs; created + +On line 14276: + hybrid CDO A CDO + backed by collateral found + in both cash CDOs and + +On line 14278: + found in both cash CDOs + and synthetic CDOs. illiquid + assets Assets that + +On line 14280: + Assets that cannot + be easily or quickly + sold. interest-only + +On line 14280: + be easily or + quickly sold. interest-only + loan Loan that allows + +On line 14280: + interest-only loan + Loan that allows borrowers + to pay interest + +On line 14288: + until the end of + the loan term. Appendix A: + Glossary leverage A + +On line 14288: + the end of the loan + term. Appendix A: Glossary + leverage A measure + +On line 14288: + term. Appendix A: + Glossary leverage A measure + of how much debt is + +On line 14288: + A: Glossary leverage + A measure of how much debt + is used to purchase + +On line 14288: + leverage A measure + of how much debt is used to + purchase assets; for + +On line 14288: + is used to purchase + assets; for example, a + leverage ratio of + +On line 14290: + to purchase assets; + for example, a leverage + ratio of means that + +On line 14290: + a leverage ratio + of means that of assets were + purchased with of debt + +On line 14292: + that of assets were + purchased with of debt and of + capital. LIBOR + +On line 14292: + purchased with of debt + and of capital. LIBOR + London Interbank + +On line 14292: + with of debt and of + capital. LIBOR London + Interbank Offered + +On line 14292: + capital. LIBOR + London Interbank Offered + Rate, an interest + +On line 14292: + London Interbank + Offered Rate, an interest + rate at which banks are + +On line 14292: + Interbank Offered + Rate, an interest rate at + which banks are willing + +On line 14292: + an interest rate + at which banks are willing to + lend to each other + +On line 14292: + interest rate at + which banks are willing to lend + to each other in + +On line 14292: + banks are willing to + lend to each other in the + London interbank + +On line 14292: + willing to lend to + each other in the London + interbank market. + +On line 14294: + interbank market. + liquidity Holding cash + and/or assets that + +On line 14296: + can be quickly and + easily converted to + cash. liquidity + +On line 14296: + liquidity put + A contract allowing one + party to compel + +On line 14296: + contract allowing + one party to compel the + other to buy an + +On line 14296: + compel the other + to buy an asset under + certain circumstances. + +On line 14296: + to buy an asset + under certain circumstances. + It ensures that there + +On line 14298: + ratio Ratio of + the amount of a mortgage to + the value of the + +On line 14298: + the value of the + house, typically expressed + as a percentage. + +On line 14298: + percentage. "Combined" + loan-to-value includes all + debt secured by the + +On line 14300: + all debt secured by + the house, including second + mortgages. LTV ratio + +On line 14300: + the house, including + second mortgages. LTV ratio + see loan-to-value + +On line 14302: + mortgages. LTV ratio + see loan-to-value ratio. + mark-to-market The + +On line 14302: + mark-to-market The + process by which the reported + amount of an asset + +On line 14302: + amount of an asset + is adjusted to reflect + the market value. + +On line 14304: + is adjusted to + reflect the market value. + monoline Insurance + +On line 14304: + reflect the market + value. monoline Insurance + company, such as + +On line 14304: + monoline Insurance + company, such as AMBAC + and MBIA, whose single + +On line 14304: + company, such as + AMBAC and MBIA, whose single + line of business is + +On line 14304: + as AMBAC and MBIA, + whose single line of business + is to guarantee + +On line 14304: + whose single line of + business is to guarantee + financial products. + +On line 14306: + is to guarantee + financial products. mortgage + servicer Company + +On line 14306: + financial products. + mortgage servicer Company + that acts as an agent + +On line 14308: + modifications, + settlements, and foreclosure + proceedings. mortgage + +On line 14308: + evaluating the + credit characteristics + of a mortgage and + +On line 14310: + security Debt + instrument secured by a + pool of mortgages, whether + +On line 14310: + instrument secured + by a pool of mortgages, whether + residential or + +On line 14314: + net asset value. + negative amortization + loan Loan that allows + +On line 14314: + Loan that allows a + borrower to make monthly + payments that do not + +On line 14314: + a borrower to + make monthly payments that do + not fully cover + +On line 14314: + borrower to make + monthly payments that do not + fully cover the + +On line 14314: + monthly payments that + do not fully cover the + interest payment, + +On line 14314: + fully cover the + interest payment, with the + unpaid interest + +On line 14316: + unpaid interest + added to the principal of + the loan. net asset + +On line 14316: + interest added to + the principal of the loan. + net asset value + +On line 14316: + asset minus any + associated costs; for + financial assets, + +On line 14316: + associated + costs; for financial assets, + typically changes + +On line 14318: + costs; for financial + assets, typically changes + each trading day. net + +On line 14318: + changes each trading day. + net charge-off rate Ratio of loan + losses to total + +On line 14320: + charge-off rate Ratio of + loan losses to total loans. + non-agency mortgage-backed + +On line 14320: + sponsored by private + companies other than a + government-sponsored + +On line 14320: + companies other + than a government-sponsored + enterprise (such as + +On line 14320: + government-sponsored + enterprise (such as Fannie + Mae or Freddie Mac); + +On line 14320: + as Fannie Mae or + Freddie Mac); also known as + private-label mortgage-backed + +On line 14322: + private-label mortgage-backed + securities. notional + amount A measure of + +On line 14322: + the outstanding amount + of over-the-counter derivatives + contracts, based on the + +On line 14322: + contracts, based on the + amount of the underlying + referenced assets. + +On line 14324: + on the amount of the + underlying referenced + assets. novation + +On line 14324: + referenced assets. + novation A process by which + counterparties may + +On line 14326: + which counterparties + may transfer derivatives + positions. OCC see + +On line 14326: + positions. OCC see + Office of the Comptroller + of the Currency. + +On line 14328: + the Comptroller of + the Currency. Office of + Federal Housing + +On line 14328: + Housing Enterprise + Oversight Created in to + oversee financial + +On line 14328: + Enterprise Oversight + Created in to oversee + financial soundness + +On line 14328: + Oversight Created + in to oversee financial + soundness of Fannie + +On line 14328: + Created in to + oversee financial soundness + of Fannie Mae and + +On line 14328: + Mae and Freddie Mac; + its responsibilities + were assumed in by + +On line 14328: + and Freddie Mac; its + responsibilities were + assumed in by its + +On line 14330: + its successor, the + Federal Housing Finance + Agency. Office of + +On line 14330: + Federal Housing + Finance Agency. Office of + the Comptroller of + +On line 14330: + supervises all + national banks and certain + branches and agencies + +On line 14330: + national banks and + certain branches and agencies + of foreign banks in + +On line 14330: + and certain branches + and agencies of foreign banks + in the United States. + +On line 14332: + of foreign banks in + the United States. Office of + Thrift Supervision + +On line 14332: + that regulates all + federally chartered and + many state-chartered savings + +On line 14332: + state-chartered savings and + loans/thrift institutions and their + holding companies. + +On line 14334: + loans/thrift institutions + and their holding companies. + OFHEO see Office of + +On line 14336: + Housing Enterprise + Oversight. originate-to-distribute + When lenders make loans with + +On line 14338: + opposed to holding + the loans through maturity. + originate-to-hold When + +On line 14338: + lenders make loans with the + intention of holding them + through maturity, + +On line 14338: + of holding them through + maturity, as opposed + to selling them to + +On line 14338: + maturity, as + opposed to selling them to + other financial + +On line 14338: + opposed to selling + them to other financial + institutions or + +On line 14344: + investors. Appendix + A: Glossary origination + Process of making a + +On line 14344: + a loan, including + underwriting, closing, and + providing the funds. + +On line 14348: + and providing the + funds. OTS see Office of Thrift + Supervision. par + +On line 14348: + funds. OTS see Office + of Thrift Supervision. par + Face value of a + +On line 14348: + OTS see Office of + Thrift Supervision. par Face + value of a bond. + +On line 14350: + Face value of a + bond. payment-option adjustable-rate + mortgage (also called + +On line 14350: + mortgage (also called + payment ARM or option ARM) + Mortgages that allow + +On line 14350: + Mortgages that allow + borrowers to pick the amount + of payment each month, + +On line 14350: + allow borrowers + to pick the amount of payment + each month, possibly + +On line 14350: + borrowers to pick + the amount of payment each month, + possibly low enough + +On line 14350: + to pick the amount of + payment each month, possibly + low enough to increase + +On line 14352: + possibly low enough + to increase the principal + balance. PDCF see + +On line 14354: + balance. PDCF see + Primary Dealer Credit + Facility. PLS + +On line 14356: + pooling Combining + and packaging a group of + loans to be held by + +On line 14356: + packaging a group + of loans to be held by a + single entity. + +On line 14358: + of loans to be held + by a single entity. + Primary Dealer + +On line 14358: + Program established + by the Federal Reserve + in March that allowed + +On line 14358: + in March that allowed + eligible companies + to borrow cash overnight + +On line 14362: + overnight to finance their + securities. principal + Amount borrowed. private + +On line 14362: + on the payment of + a mortgage provided by + a private firm at + +On line 14362: + by a private firm + at additional cost to + the borrower to + +On line 14364: + the lender. private-label + mortgage-backed securities see + non-agency mortgage-backed + +On line 14366: + non-agency mortgage-backed + securities. repurchase + agreement (repo) A + +On line 14366: + agreement (repo) A + method of secured lending where + the borrower sells + +On line 14366: + A method of secured + lending where the borrower + sells securities + +On line 14366: + the borrower sells + securities to the lender + as collateral + +On line 14366: + as collateral + and agrees to repurchase them + at a higher price + +On line 14366: + to repurchase them + at a higher price within + a short period, + +On line 14366: + at a higher price + within a short period, + often within one + +On line 14368: + higher price within + a short period, often + within one day. SEC + +On line 14368: + a short period, + often within one day. SEC + see Securities + +On line 14370: + Commission. section + Section of the Federal + Reserve Act under + +On line 14370: + of the Federal + Reserve Act under which the + Federal Reserve + +On line 14370: + Reserve Act under + which the Federal Reserve + may make secured loans + +On line 14370: + may make secured loans + to nondepository + institutions, such + +On line 14372: + under "unusual + and exigent" circumstances. + Securities and + +On line 14372: + protecting investors + by enforcing federal + securities laws, + +On line 14372: + regulating stock + and security options + exchanges and other + +On line 14372: + exchanges and other + electronic securities + markets, the issuance + +On line 14372: + other electronic + securities markets, the + issuance and sale of + +On line 14372: + markets, the issuance + and sale of securities, + broker-dealers, other + +On line 14374: + Process of pooling debt + assets such as mortgages, car + loans, and credit card + +On line 14374: + debt assets such as + mortgages, car loans, and credit + card debt into a + +On line 14374: + mortgages, car loans, and + credit card debt into a + separate legal + +On line 14374: + loans, and credit card + debt into a separate + legal entity + +On line 14374: + separate legal + entity that then issues + a new financial + +On line 14374: + that then issues a + new financial instrument + or security + +On line 14374: + then issues a new + financial instrument or + security for + +On line 14376: + or security + for sale to investors. shadow + banking Financial + +On line 14376: + for sale to investors. + shadow banking Financial + institutions and + +On line 14376: + institutions and + activities that in some + respects parallel + +On line 14376: + respects parallel + banking activities but + are subject to less + +On line 14378: + include mutual + funds, investment banks, and hedge + funds. short sale The sale + +On line 14378: + funds, investment banks, + and hedge funds. short sale The sale + of a home for less + +On line 14378: + investment banks, and + hedge funds. short sale The sale of + a home for less than + +On line 14378: + banks, and hedge funds. short + sale The sale of a home for + less than the amount owed + +On line 14378: + and hedge funds. short sale + The sale of a home for less + than the amount owed on + +On line 14378: + hedge funds. short sale The + sale of a home for less than + the amount owed on the + +On line 14378: + short sale The sale of + a home for less than the amount + owed on the mortgage. + +On line 14380: + sale The sale of a + home for less than the amount owed + on the mortgage. short + +On line 14380: + sale of a home for + less than the amount owed on the + mortgage. short selling + +On line 14380: + a home for less than + the amount owed on the mortgage. + short selling To sell + +On line 14380: + home for less than the + amount owed on the mortgage. short + selling To sell a + +On line 14380: + less than the amount owed + on the mortgage. short selling + To sell a borrowed + +On line 14380: + on the mortgage. short + selling To sell a borrowed + security in + +On line 14380: + selling To sell a + borrowed security in + the expectation + +On line 14380: + security in + the expectation of a + decline in value. + +On line 14384: + decline in value. + SIV see structured investment + vehicle. special + +On line 14384: + purpose vehicle + Entity created to + fulfill a narrow + +On line 14384: + fulfill a narrow + or temporary objective; + typically holds + +On line 14384: + holds a portfolio + of assets such as mortgage-backed + securities or + +On line 14388: + advantages. SPV see + special purpose vehicle. + structured investment + +On line 14388: + structured investment + vehicle Leveraged special + purpose vehicle, + +On line 14388: + vehicle Leveraged + special purpose vehicle, + funded through medium-term + +On line 14388: + purpose vehicle, + funded through medium-term notes and + asset-backed commercial + +On line 14388: + vehicle, funded + through medium-term notes and asset-backed + commercial paper, + +On line 14388: + through medium-term notes and + asset-backed commercial paper, + that invested in + +On line 14390: + in highly rated + securities. synthetic + CDO A CDO that holds + +On line 14390: + synthetic CDO A + CDO that holds credit default + swaps that reference + +On line 14390: + holds credit default + swaps that reference assets + (rather than holding cash + +On line 14390: + swaps that reference + assets (rather than holding cash + assets), allowing + +On line 14390: + reference assets + (rather than holding cash assets), + allowing investors + +On line 14390: + (rather than holding cash + assets), allowing investors + to make bets for or + +On line 14390: + holding cash assets), + allowing investors to make + bets for or against those + +On line 14390: + assets), allowing + investors to make bets for or + against those referenced + +On line 14390: + allowing investors + to make bets for or against those + referenced assets. + +On line 14392: + investors to make bets + for or against those referenced + assets. systemic risk + +On line 14392: + bets for or against those + referenced assets. systemic + risk In financial + +On line 14392: + referenced assets. + systemic risk In financial + terms, that which poses + +On line 14392: + assets. systemic risk + In financial terms, that which + poses a threat to + +On line 14392: + risk In financial + terms, that which poses a threat + to the financial + +On line 14392: + financial terms, that + which poses a threat to the + financial system. + +On line 14394: + terms, that which poses + a threat to the financial + system. systemic risk + +On line 14394: + financial system. + systemic risk exception Clause + in the Federal + +On line 14394: + Deposit Insurance + Corporation Improvement + Act (FDICIA) under + +On line 14394: + Act (FDICIA) under + which the FDIC may commit its + funds to rescue a + +On line 14396: + may commit its funds + to rescue a financial + institution. TAF + +On line 14396: + funds to rescue a + financial institution. + TAF see Term Auction + +On line 14398: + TAF see Term Auction + Facility. TALF see Term + Asset-Backed Securities + +On line 14398: + Facility. TALF + see Term Asset-Backed Securities + Loan Facility. + +On line 14406: + Facility. TARP + see Troubled Asset Relief + Program. Appendix + +On line 14408: + see Troubled Asset + Relief Program. Appendix + A: Glossary Term Asset-Backed + +On line 14408: + Loan Facility + Federal Reserve program, + supported by TARP + +On line 14408: + by TARP funds, to aid + securitization of + asset-based loans such as + +On line 14408: + of asset-based loans such + as auto loans, student loans, + and small business loans. + +On line 14410: + asset-based loans such as + auto loans, student loans, and + small business loans. Term + +On line 14410: + and small business loans. + Term Auction Facility + Program in which the + +On line 14414: + made up to billion + in Treasury securities + available to banks or + +On line 14414: + billion in Treasury + securities available to + banks or broker/dealers + +On line 14414: + or broker/dealers that + traded directly with the + Federal Reserve. + +On line 14416: + directly with the + Federal Reserve. tranche From + the French, meaning a + +On line 14416: + Federal Reserve. + tranche From the French, meaning a + slice; used to refer + +On line 14416: + From the French, meaning + a slice; used to refer to + the different types + +On line 14416: + the French, meaning a + slice; used to refer to the + different types of + +On line 14416: + to refer to the + different types of mortgage-backed + securities and + +On line 14416: + different types of + mortgage-backed securities and + CDO bonds that provide + +On line 14416: + CDO bonds that provide + specified priorities + and amounts of returns: + +On line 14416: + returns and therefore + the lowest risk/interest rate; + mezzanine tranches + +On line 14416: + levels of risk/return; + and "equity" (also known + as "residual" or + +On line 14416: + or "first loss") tranches + typically receive any + remaining cash flows. + +On line 14418: + any remaining cash + flows. Troubled Asset Relief + Program Government + +On line 14418: + flows. Troubled Asset + Relief Program Government + program to address + +On line 14418: + Government program + to address the financial + crisis, signed into + +On line 14418: + in October to + purchase or insure up to + billion in assets + +On line 14418: + purchase or insure + up to billion in assets + and equity from + +On line 14422: + Condition in which + a business does not have enough + capital to meet + +On line 14422: + in which a business + does not have enough capital + to meet its needs, or + +On line 14422: + which a business does + not have enough capital to + meet its needs, or to + +On line 14422: + a business does not + have enough capital to meet + its needs, or to meet + +On line 14422: + business does not have + enough capital to meet its + needs, or to meet its + +On line 14424: + entity. Write-downs + Reducing the value of + an asset as it + +On line 14424: + Write-downs Reducing + the value of an asset + as it is carried + +On line 14424: + the value of an + asset as it is carried + on a firm’s balance + +On line 14424: + of an asset as + it is carried on a firm’s + balance sheet because + +On line 14424: + it is carried on + a firm’s balance sheet because + the market value + +On line 14424: + is carried on a + firm’s balance sheet because the + market value has + +On line 14430: + the market value + has fallen. APPENDIX B: + LIST OF HEARINGS AND + +On line 14432: + APPENDIX B: LIST + OF HEARINGS AND WITNESSES + Public Meeting of + +On line 14438: + October Martin + Baily, Senior Fellow in + Economic Studies, + +On line 14438: + School of Management, + Massachusetts Institute + of Technology + +On line 14440: + S. Scott, Nomura + Professor and Director + of the Program on + +On line 14442: + Graduate School of + Arts and Sciences (Department + of Economics) and + +On line 14442: + Economics) and the + School of International + and Public Affairs + +On line 14442: + International + and Public Affairs John B. + Taylor, Mary and Robert + +On line 14442: + and Public Affairs + John B. Taylor, Mary and Robert + Raymond Professor + +On line 14442: + John B. Taylor, Mary + and Robert Raymond Professor + of Economics and + +On line 14442: + B. Taylor, Mary and + Robert Raymond Professor of + Economics and the + +On line 14442: + Mary and Robert Raymond + Professor of Economics + and the Bowen H. and + +On line 14442: + Raymond Professor + of Economics and the Bowen + H. and Janice Arthur + +On line 14442: + of Economics and + the Bowen H. and Janice Arthur + McCoy Senior Fellow + +On line 14442: + Economics and the + Bowen H. and Janice Arthur McCoy + Senior Fellow at + +On line 14442: + H. and Janice Arthur + McCoy Senior Fellow at the + Hoover Institution, + +On line 14442: + Zingales, Robert C. McCormack + Professor of Entrepreneurship + and Finance and the + +On line 14442: + C. McCormack Professor + of Entrepreneurship and Finance + and the David G. Booth + +On line 14442: + of Entrepreneurship and + Finance and the David G. Booth + Faculty Fellow, + +On line 14442: + Finance and the David + G. Booth Faculty Fellow, + University of + +On line 14442: + G. Booth Faculty + Fellow, University of + Chicago Booth School of + +On line 14442: + Faculty Fellow, + University of Chicago + Booth School of Business + +On line 14442: + University of + Chicago Booth School of Business + Roundtable Discussion, + +On line 14444: + of Business Roundtable + Discussion, Washington, DC, + November David A. + +On line 14444: + Roundtable Discussion, + Washington, DC, November + David A. Moss, The John + +On line 14444: + David A. Moss, The John + G. McLean Professor, Harvard + Business School Carmen + +On line 14444: + Carmen M. Reinhart, + Professor of Economics + and Director of + +On line 14446: + International + Economics, University + of Maryland Public + +On line 14448: + of Maryland Public + Hearing, Washington, DC, Day + January Session + +On line 14448: + January Session + Financial Institution + Representatives + +On line 14450: + of the Board and Chief + Executive Officer, + Goldman Sachs Group, Inc. + +On line 14454: + of the Board and Chief + Executive Officer, + JPMorgan Chase Co. John J. + +On line 14454: + Chief Executive + Officer, JPMorgan Chase Co. John + J. Mack, Chairman of + +On line 14456: + Chase Co. John J. Mack, + Chairman of the Board, Morgan + Stanley Brian T. + +On line 14456: + John J. Mack, Chairman + of the Board, Morgan Stanley + Brian T. Moynihan, + +On line 14456: + of the Board, Morgan + Stanley Brian T. Moynihan, + Chief Executive + +On line 14456: + Chief Executive + Officer and President, + Bank of America + +On line 14456: + President, Bank of + America Corporation + Session Financial + +On line 14458: + Michael Mayo, Managing + Director and Financial + Services Analyst, + +On line 14460: + Services Analyst, + Calyon Securities + (USA) Inc. J. Kyle Bass, + +On line 14462: + Kyle Bass, Managing + Partner, Hayman Advisors, + LP Peter J. Solomon, + +On line 14462: + Hayman Advisors, + LP Peter J. Solomon, Founder and + Chairman, Peter J. + +On line 14462: + Peter J. Solomon, Founder + and Chairman, Peter J. Solomon + Company Session + +On line 14462: + Solomon, Founder and Chairman, + Peter J. Solomon Company + Session Financial + +On line 14462: + and Chairman, Peter + J. Solomon Company Session + Financial Crisis + +On line 14462: + Company Session + Financial Crisis Impacts + on the Economy + +On line 14470: + Financial Crisis + Impacts on the Economy + Appendix B: List + +On line 14470: + Crisis Impacts on + the Economy Appendix + B: List of Hearings + +On line 14472: + B: List of Hearings + and Witnesses Mark Zandi, + Chief Economist and + +On line 14472: + Chief Economist and + Co-founder, Moody’s Economy.com + Kenneth T. Rosen, Chair, + +On line 14472: + Moody’s Economy.com + Kenneth T. Rosen, Chair, Fisher + Center for Real + +On line 14472: + Kenneth T. Rosen, Chair, + Fisher Center for Real + Estate and Urban + +On line 14472: + Estate and Urban + Economics, University + of California, + +On line 14474: + Policy Counsel, + Center for Responsible + Lending C. R. "Rusty" + +On line 14474: + for Responsible + Lending C. R. "Rusty" Cloutier, + President and Chief + +On line 14476: + Community Bankers + Association Public + Hearing, Washington, + +On line 14476: + Association + Public Hearing, Washington, + DC, Day January + +On line 14478: + Washington, DC, Day + January Session Current + Investigations + +On line 14478: + Investigations + into the Financial Crisis—Federal + Officials Eric + +On line 14478: + Eric H. Holder + Jr., Attorney General, + U.S. Department of + +On line 14478: + of Justice Sheila C. + Bair, Chairman, U.S. Federal + Deposit Insurance + +On line 14478: + Federal Deposit + Insurance Corporation + Mary L. Schapiro, Chairman, + +On line 14478: + L. Schapiro, Chairman, U.S. + Securities and Exchange + Commission Session + +On line 14478: + the Financial Crisis—State + and Local Officials Lisa + Madigan, Attorney + +On line 14482: + of Illinois John W. + Suthers, Attorney General, + State of Colorado Denise + +On line 14482: + Illinois John W. Suthers, + Attorney General, State + of Colorado Denise Voigt + +On line 14482: + State of Colorado Denise + Voigt Crawford, Commissioner, + Texas Securities + +On line 14482: + of Colorado Denise Voigt + Crawford, Commissioner, Texas + Securities Board, + +On line 14482: + and President, North + American Securities + Administrators + +On line 14484: + Administrators + Association, Inc. Glenn + Theobald, Chief Counsel, Miami-Dade + +On line 14486: + Alvarez Mortgage Fraud + Task Force Forum to Explore + the Causes of the + +On line 14486: + Task Force Forum to + Explore the Causes of the + Financial Crisis, + +On line 14486: + Financial Crisis, + American University + Washington College + +On line 14488: + Washington College + of Law, Washington, DC, Day + February Session + +On line 14488: + Bobins Professor of + Economics, University + of Chicago Session + +On line 14492: + Household Finances and + Financial Literacy + Annamaria Lusardi, + +On line 14492: + Research Forum to + Explore the Causes of the + Financial Crisis, + +On line 14492: + Financial Crisis, + American University + Washington College + +On line 14494: + Washington College + of Law, Washington, DC, Day + February Session + +On line 14494: + Washington, DC, Day + February Session Mortgage + Lending Practices and + +On line 14494: + Lending Practices and + Securitization Chris + Mayer, Paul Milstein + +On line 14494: + of Real Estate, + Columbia University; + Visiting Scholar + +On line 14494: + Visiting Scholar + at the Federal Reserve + Bank of New York and + +On line 14494: + at the Federal + Reserve Bank of New York and + Research Associate + +On line 14494: + Federal Reserve + Bank of New York and Research + Associate at the + +On line 14494: + Reserve Bank of New + York and Research Associate + at the National + +On line 14494: + Bank of New York and + Research Associate at the + National Bureau + +On line 14496: + Booth Professor of + Banking, Finance, and Real + Estate; Co-chair, Fisher + +On line 14496: + Banking, Finance, and + Real Estate; Co-chair, Fisher + Center for Real + +On line 14496: + Finance, and Real + Estate; Co-chair, Fisher Center + for Real Estate + +On line 14496: + Real Estate; Co-chair, + Fisher Center for Real + Estate and Urban + +On line 14496: + Estate and Urban + Economics, University + of California, + +On line 14496: + and Other Complex + Financial Instruments Markus + Brunnermeier, Edwards + +On line 14496: + Complex Financial + Instruments Markus Brunnermeier, + Edwards S. Sanford + +On line 14496: + Brunnermeier, Edwards + S. Sanford Professor of + Economics, Princeton + +On line 14496: + Economics, Princeton + University Appendix + B: List of Hearings + +On line 14500: + Appendix B: List + of Hearings and Witnesses + Session Firm Structure + +On line 14502: + Session Firm Structure + and Risk Management Anil Kashyap, + Edward Eagle Brown + +On line 14502: + Edward Eagle Brown + Professor of Economics + and Finance and Richard + +On line 14502: + and Finance and Richard + N. Rosett Faculty Fellow, + University of + +On line 14506: + Banking Gary Gorton, + Professor of Finance, School + of Management, Yale + +On line 14506: + School of Management, + Yale University Public + Hearing on Subprime + +On line 14506: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 14506: + Enterprises (GSEs), + Rayburn House Office Building, + Room Washington, DC, + +On line 14508: + Rayburn House Office + Building, Room Washington, DC, + Day April Session The + +On line 14510: + DC, Day April Session + The Federal Reserve Alan + Greenspan, Former Chairman, + +On line 14510: + Day April Session The + Federal Reserve Alan Greenspan, + Former Chairman, Board + +On line 14510: + Federal Reserve + Alan Greenspan, Former Chairman, Board + of Governors of + +On line 14510: + Greenspan, Former Chairman, + Board of Governors of the + Federal Reserve + +On line 14512: + Origination and + Securitization Richard + Bitner, Managing + +On line 14512: + Confessions of a + Subprime Lender: An Insider’s + Tale of Greed, Fraud, and + +On line 14512: + of a Subprime Lender: + An Insider’s Tale of Greed, + Fraud, and Ignorance + +On line 14512: + a Subprime Lender: An + Insider’s Tale of Greed, Fraud, + and Ignorance Richard + +On line 14512: + Insider’s Tale of + Greed, Fraud, and Ignorance Richard + Bowen, Former Senior + +On line 14512: + Bowen, Former Senior + Vice President and Business + Chief Underwriter, + +On line 14512: + Former Senior Vice + President and Business Chief + Underwriter, CitiMortgage, + +On line 14514: + Vice President and + Business Chief Underwriter, + CitiMortgage, Inc. Patricia + +On line 14516: + Session Citigroup + Subprime-Related Structured Products and Risk + Management Murray + +On line 14516: + Former Managing + Director, Independent + Risk, Citigroup, Inc. + +On line 14520: + Inc. David C. Bushnell, + Former Chief Risk Officer, + Citigroup, Inc. Nestor + +On line 14520: + Bushnell, Former Chief + Risk Officer, Citigroup, + Inc. Nestor Dominguez, Former + +On line 14520: + Citigroup, Inc. Nestor + Dominguez, Former Co-head, Global + Collateralized + +On line 14520: + Dominguez, Former Co-head, + Global Collateralized + Debt Obligations, Citi + +On line 14522: + Maheras, Former Co-chief + Executive Officer, + Citi Markets Banking + +On line 14522: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 14522: + Enterprises (GSEs), + Rayburn House Office Building, + Room Washington, DC, + +On line 14524: + House Office Building, + Room Washington, DC, Day April + Session Citigroup + +On line 14524: + Room Washington, DC, + Day April Session Citigroup + Senior Management + +On line 14526: + Session Citigroup + Senior Management Charles O. + Prince, Former Chairman + +On line 14526: + Senior Management + Charles O. Prince, Former Chairman + of the Board and Chief + +On line 14528: + of the Board and Chief + Executive Officer, + Citigroup, Inc. Robert + +On line 14528: + Chief Executive + Officer, Citigroup, Inc. + Robert Rubin, Former + +On line 14528: + Citigroup, Inc. Robert + Rubin, Former Chairman of + the Executive + +On line 14532: + Inc. Session Office + of the Comptroller of the + Currency John C. + +On line 14532: + the Comptroller of + the Currency John C. Dugan, + Comptroller, Office + +On line 14532: + the Currency John + C. Dugan, Comptroller, Office + of the Comptroller + +On line 14532: + Currency John C. + Dugan, Comptroller, Office of + the Comptroller of + +On line 14532: + C. Dugan, Comptroller, + Office of the Comptroller + of the Currency + +On line 14532: + Comptroller, Office + of the Comptroller of the + Currency John D. + +On line 14532: + Comptroller of the + Currency John D. Hawke Jr., + Former Comptroller, + +On line 14532: + D. Hawke Jr., Former + Comptroller, Office of the + Comptroller of the + +On line 14532: + Former Comptroller, + Office of the Comptroller + of the Currency + +On line 14532: + Comptroller, Office + of the Comptroller of the + Currency Public + +On line 14532: + of the Comptroller + of the Currency Public + Hearing on Subprime + +On line 14532: + Comptroller of the + Currency Public Hearing + on Subprime Lending + +On line 14532: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 14532: + Enterprises (GSEs), + Rayburn House Office building, + Room Washington, DC, + +On line 14534: + House Office building, + Room Washington, DC, Day April + Session Fannie Mae + +On line 14536: + Room Washington, DC, + Day April Session Fannie Mae + Robert J. Levin, Former + +On line 14536: + Fannie Mae Robert J. + Levin, Former Executive + Vice President and + +On line 14536: + Executive Vice + President and Chief Business + Officer, Fannie + +On line 14536: + Fannie Mae Daniel H. + Mudd, Former President and + Chief Executive + +On line 14536: + President and Chief + Executive Officer, + Fannie Mae Session + +On line 14536: + Housing Enterprise + Oversight James Lockhart, Former + Director, Office + +On line 14540: + Appendix B: List + of Hearings and Witnesses + Public Hearing on + +On line 14542: + Room Washington DC, + Day May Session Investment + Banks and the Shadow + +On line 14542: + Session Investment + Banks and the Shadow Banking + System Paul Friedman, + +On line 14542: + Investment Banks and + the Shadow Banking System + Paul Friedman, Former + +On line 14542: + the Shadow Banking + System Paul Friedman, Former + Senior Managing + +On line 14542: + System Paul Friedman, + Former Senior Managing + Director, Bear Stearns + +On line 14542: + Bear Stearns Samuel Molinaro + Jr., Former Chief Financial + Officer and Chief + +On line 14542: + Co-chief Operating + Officer, Bear Stearns Session + Investment Banks and + +On line 14542: + Officer, Bear Stearns + Session Investment Banks and + the Shadow Banking + +On line 14542: + Session Investment + Banks and the Shadow Banking + System James E. Cayne, + +On line 14542: + Investment Banks and + the Shadow Banking System + James E. Cayne, Former + +On line 14542: + Banks and the Shadow + Banking System James E. Cayne, + Former Chairman and + +On line 14542: + Banking System James + E. Cayne, Former Chairman and + Chief Executive + +On line 14542: + Bear Stearns Alan D. Schwartz, + Former Chief Executive + Officer, Bear Stearns + +On line 14542: + D. Schwartz, Former Chief + Executive Officer, + Bear Stearns Session SEC + +On line 14542: + Chief Executive + Officer, Bear Stearns Session + SEC Regulation + +On line 14542: + Officer, Bear Stearns + Session SEC Regulation + of Investment Banks + +On line 14544: + Regulation of + Investment Banks Charles Christopher + Cox, Former Chairman, + +On line 14544: + Investment Banks Charles + Christopher Cox, Former Chairman, + U.S. Securities + +On line 14544: + Former Chairman, U.S. + Securities and Exchange + Commission William H. + +On line 14544: + Securities and + Exchange Commission William H. + Donaldson, Former + +On line 14544: + Commission William H. + Donaldson, Former Chairman, + U.S. Securities + +On line 14544: + Former Chairman, U.S. + Securities and Exchange + Commission H. David + +On line 14544: + U.S. Securities + and Exchange Commission H. + David Kotz, Inspector + +On line 14544: + Commission H. David + Kotz, Inspector General, + U.S. Securities + +On line 14544: + U.S. Securities + and Exchange Commission Erik + R. Sirri, Former + +On line 14544: + R. Sirri, Former + Director Division of + Trading Markets, U.S. + +On line 14546: + Trading Markets, U.S. + Securities and Exchange + Commission Public + +On line 14548: + Washington DC, Day + May Session Perspective on + the Shadow Banking + +On line 14550: + Henry M. Paulson + Jr., Former Secretary, U.S. + Department of the + +On line 14552: + Department of the + Treasury; Former President, + Federal Reserve + +On line 14554: + Reserve Bank of New + York Session Institutions + Participating + +On line 14558: + Chief Executive + Officer, GE Capital + Mark S. Barber, Vice + +On line 14558: + GE Capital Mark + S. Barber, Vice President + and Deputy Treasurer, + +On line 14558: + Capital Mark S. + Barber, Vice President and + Deputy Treasurer, GE + +On line 14560: + Capital Paul A. + McCulley, Managing Director, + PIMCO Steven R. Meier, + +On line 14560: + A. McCulley, Managing + Director, PIMCO Steven R. + Meier, Chief Investment + +On line 14560: + Director, PIMCO + Steven R. Meier, Chief Investment + Officer, State Street + +On line 14560: + Street Public Hearing + on Credibility of + Credit Ratings, the + +On line 14560: + Credit Ratings, the + Investment Decisions Made + Based on Those Ratings, + +On line 14560: + Based on Those Ratings, + and the Financial Crisis, + The New School Arnhold + +On line 14560: + on Those Ratings, and + the Financial Crisis, The + New School Arnhold Hall, + +On line 14560: + New School Arnhold Hall, + Theresa Lang Community + Student Center, West + +On line 14560: + Arnhold Hall, Theresa + Lang Community Student + Center, West 13th Street, + +On line 14560: + Lang Community + Student Center, West 13th Street, + 2nd Floor, New York, NY, + +On line 14564: + West 13th Street, 2nd Floor, + New York, NY, June Session The + Ratings Process Eric + +On line 14564: + Street, 2nd Floor, New York, + NY, June Session The Ratings + Process Eric Kolchinsky, + +On line 14564: + Kolchinsky, Former Team + Managing Director, US + Derivatives, Moody’s + +On line 14564: + Nicolas S. Weill, Group + Managing Director, Moody’s + Investors Service Gary + +On line 14564: + Gary Witt, Former Team + Managing Director, US + Derivatives, Moody’s + +On line 14564: + US Derivatives, + Moody’s Investors Service Session + Credit Ratings and + +On line 14566: + McDaniel, Chairman and Chief + Executive Officer, + Moody’s Corporation + +On line 14568: + President and Chief + Operating Officer, + Moody’s Investors Service + +On line 14570: + Mark Froeba, Former + Senior Vice President, US + Derivatives, Moody’s + +On line 14574: + Appendix B: List + of Hearings and Witnesses + Public Hearing on + +On line 14574: + Public Hearing on + the Role of Derivatives + in the Financial + +On line 14574: + Hearing on the Role + of Derivatives in the + Financial Crisis, + +On line 14578: + Room Washington, DC, + Day June Session Overview of + Derivatives Michael + +On line 14578: + of Derivatives + Michael Greenberger, Professor, + University of + +On line 14580: + Chair Professor of + Finance, University of + Maryland Michael Masters, + +On line 14582: + Officer, Masters + Capital Management, LLC + Session American + +On line 14582: + Session American + International Group, Inc. + and Derivatives + +On line 14584: + International + Group, Inc. Financial Products + Robert E. Lewis, Senior + +On line 14584: + Group, Inc. Financial + Products Robert E. Lewis, Senior + Vice President and + +On line 14584: + Products Robert E. Lewis, + Senior Vice President and + Chief Risk Officer, + +On line 14584: + President and Chief + Risk Officer, American + International + +On line 14590: + and Derivatives + Craig Broderick, Managing + Director, Head of + +On line 14592: + Credit, Market, and + Operational Risk, Goldman + Sachs Group, Inc. Gary D. + +On line 14592: + and Operational + Risk, Goldman Sachs Group, Inc. Gary + D. Cohn, President + +On line 14592: + Operational Risk, + Goldman Sachs Group, Inc. Gary D. + Cohn, President and + +On line 14592: + Goldman Sachs Group, Inc. + Gary D. Cohn, President and + Chief Operating + +On line 14592: + President and Chief + Operating Officer, + Goldman Sachs Group, Inc. + +On line 14594: + Chief Operating + Officer, Goldman Sachs Group, + Inc. Public Hearing + +On line 14594: + Goldman Sachs Group, Inc. + Public Hearing on the Role + of Derivatives + +On line 14594: + Public Hearing on + the Role of Derivatives + in the Financial + +On line 14594: + Hearing on the Role + of Derivatives in the + Financial Crisis, + +On line 14596: + Office Building, Room + Washington DC, Day July + Session American + +On line 14596: + Washington DC, Day + July Session American + International + +On line 14596: + Session American + International Group, Inc. + and Goldman Sachs Group, + +On line 14598: + Inc. and Goldman Sachs + Group, Inc. Steven J. Bensinger, Former + Executive Vice + +On line 14598: + Sachs Group, Inc. Steven J. + Bensinger, Former Executive + Vice President and + +On line 14598: + Group, Inc. Steven J. Bensinger, + Former Executive Vice + President and Chief + +On line 14602: + International + Group, Inc. Financial Services + Elias F. Habayeb, Former + +On line 14602: + Financial Services + Elias F. Habayeb, Former Senior + Vice President and + +On line 14604: + International + Group, Inc. Financial Services + David Lehman, Managing + +On line 14604: + Group, Inc. Financial + Services David Lehman, Managing + Director, Goldman + +On line 14604: + Goldman Sachs Group, Inc + David Viniar, Executive Vice + President and Chief + +On line 14604: + Vice President and + Chief Financial Officer, + Goldman Sachs Group, Inc. + +On line 14608: + Supervisors and + Regulators Eric R. + Dinallo, Former + +On line 14608: + Former Managing + Director for Complex and + International + +On line 14614: + Washington DC, Day + September Session Wachovia + Corporation Scott + +On line 14614: + Alvarez, General + Counsel, Board of Governors + of the Federal + +On line 14614: + General Counsel, + Board of Governors of the + Federal Reserve + +On line 14614: + Board of Governors + of the Federal Reserve + System John H. Corston, + +On line 14614: + Governors of the + Federal Reserve System + John H. Corston, Acting + +On line 14614: + John H. Corston, Acting + Deputy Director, Division + of Supervision + +On line 14614: + H. Corston, Acting Deputy + Director, Division of + Supervision and + +On line 14614: + of Supervision + and Consumer Protection, U.S. + Federal Deposit + +On line 14616: + Federal Deposit + Insurance Corporation + Robert K. Steel, Former + +On line 14616: + Deposit Insurance + Corporation Robert K. Steel, + Former President + +On line 14618: + and Executive + Vice President, Federal + Reserve Bank of New + +On line 14624: + Federal Reserve + Bank of New York Appendix + B: List of Hearings + +On line 14626: + Appendix B: List + of Hearings and Witnesses + Richard S. "Dick" Fuld Jr., + +On line 14626: + List of Hearings and + Witnesses Richard S. "Dick" Fuld + Jr., Former Chairman + +On line 14628: + Partner, Weil, Gotshal + Manges, LLP Barry L. Zubrow, Chief + Risk Officer, JPMorgan + +On line 14630: + LLP Barry L. Zubrow, + Chief Risk Officer, JPMorgan Chase + Co. Public Hearing + +On line 14630: + Barry L. Zubrow, Chief + Risk Officer, JPMorgan Chase Co. + Public Hearing on + +On line 14630: + Chief Risk Officer, + JPMorgan Chase Co. Public Hearing + on Too Big to Fail: + +On line 14630: + JPMorgan Chase Co. Public + Hearing on Too Big to Fail: + Expectations and + +On line 14632: + Room Washington DC, + Day September Session The + Federal Reserve + +On line 14634: + September Session + The Federal Reserve Ben + S. Bernanke, Chairman, Board + +On line 14634: + Federal Reserve + Ben S. Bernanke, Chairman, Board of + Governors of the + +On line 14634: + Reserve Ben S. Bernanke, + Chairman, Board of Governors + of the Federal + +On line 14634: + Ben S. Bernanke, Chairman, + Board of Governors of the + Federal Reserve + +On line 14634: + Board of Governors + of the Federal Reserve + System Session The + +On line 14634: + of the Federal + Reserve System Session The + Federal Deposit + +On line 14636: + Federal Deposit + Insurance Corporation + Sheila C. Bair, Chairman, + +On line 14636: + Federal Deposit + Insurance Corporation + Public Hearing on + +On line 14636: + the Impact of the + Financial Crisis—Greater Bakersfield, + Kern County Board of + +On line 14636: + the Financial Crisis—Greater + Bakersfield, Kern County Board + of Supervisors + +On line 14646: + City Councilwoman, + Ward Session Local Banking + Arnold Cattani, Chairman, + +On line 14648: + Ward Session Local + Banking Arnold Cattani, Chairman, + Mission Bank Steve Renock, + +On line 14648: + Local Banking Arnold + Cattani, Chairman, Mission Bank + Steve Renock, President + +On line 14648: + Banking Arnold Cattani, + Chairman, Mission Bank Steve Renock, + President and CEO, + +On line 14648: + Chairman, Mission Bank + Steve Renock, President and CEO, + Kern Schools Federal + +On line 14648: + Mission Bank Steve Renock, + President and CEO, Kern Schools + Federal Credit + +On line 14648: + Steve Renock, President + and CEO, Kern Schools Federal + Credit Union D. Linn + +On line 14648: + President and CEO, + Kern Schools Federal Credit + Union D. Linn Wiley, + +On line 14648: + Union D. Linn Wiley, + Vice Chairman, CVB Financial + Corporation and + +On line 14648: + Citizens Business + Bank Session Residential + and Community + +On line 14650: + and Community + Real Estate Gregory + D. Bynum, President, + +On line 14650: + Gregory D. Bynum, + President, Gregory D. + Bynum and Associates, + +On line 14652: + Gregory D. Bynum + and Associates, Inc. Warren + Peterson, Warren + +On line 14656: + Inc. Session Local + Housing Market Gary Crabtree, + Principal Owner, + +On line 14656: + Housing Market Gary + Crabtree, Principal Owner, + Affiliated + +On line 14656: + Crabtree, Principal + Owner, Affiliated + Appraisers Lloyd Plank, + +On line 14656: + Affiliated + Appraisers Lloyd Plank, Lloyd E. + Plank Real Estate + +On line 14658: + Appraisers Lloyd Plank, + Lloyd E. Plank Real Estate + Consultants Session + +On line 14658: + Lloyd Plank, Lloyd E. Plank + Real Estate Consultants + Session Foreclosures + +On line 14658: + Lloyd E. Plank Real + Estate Consultants Session + Foreclosures and Loan + +On line 14658: + Estate Consultants + Session Foreclosures and Loan + Modifications + +On line 14666: + Preferred Jeannie McDermott, + Small Business Owner Session + Forum for Public + +On line 14674: + Public Comment James + Stephen Urner Marvin Dean Marie + Vasile Public Hearing + +On line 14674: + Stephen Urner Marvin + Dean Marie Vasile Public Hearing + on the Impact of + +On line 14674: + Urner Marvin Dean + Marie Vasile Public Hearing on + the Impact of the + +On line 14674: + Dean Marie Vasile Public + Hearing on the Impact of + the Financial Crisis—State + +On line 14674: + the Impact of the + Financial Crisis—State of Nevada, + University of + +On line 14674: + Financial Crisis—State of + Nevada, University of + Nevada, Las Vegas, + +On line 14676: + Las Vegas, Student + Union Building, Las Vegas, NV, + September Session + +On line 14676: + Student Union Building, + Las Vegas, NV, September + Session Economic + +On line 14676: + September Session + Economic Analysis of + the Impact of the + +On line 14676: + Session Economic + Analysis of the Impact + of the Financial + +On line 14676: + Analysis of the + Impact of the Financial + Crisis on Nevada + +On line 14676: + of the Impact of + the Financial Crisis on + Nevada Jeremy Aguero, + +On line 14678: + Applied Analysis + Session The Impact of the + Financial Crisis + +On line 14678: + Session The Impact + of the Financial Crisis + on Businesses of + +On line 14678: + of the Financial + Crisis on Businesses of + Nevada Steve Hill, Founder, + +On line 14678: + Financial Crisis + on Businesses of Nevada + Steve Hill, Founder, Silver + +On line 14678: + on Businesses of + Nevada Steve Hill, Founder, Silver + State Materials + +On line 14680: + Immediate Past + Chairman, Las Vegas Chamber + of Commerce William E. + +On line 14680: + Chairman, Las Vegas + Chamber of Commerce William E. + Martin, Vice Chairman + +On line 14680: + Las Vegas Chamber + of Commerce William E. Martin, + Vice Chairman and Chief + +On line 14680: + Vice Chairman and Chief + Executive Officer, + Service 1st Bank of + +On line 14684: + List of Hearings and + Witnesses Wally Murray, + President and Chief + +On line 14684: + President and Chief + Executive Officer, + Greater Nevada Credit + +On line 14684: + Philip G. Satre, Chairman, + International Gaming + Technology (IGT); + +On line 14686: + Technology (IGT); + Chairman, NV Energy, Inc. + Session The Impact + +On line 14686: + NV Energy, Inc. + Session The Impact of the + Financial Crisis + +On line 14686: + Session The Impact + of the Financial Crisis + on Nevada Real + +On line 14686: + Bogden, United States + Attorney, State of Nevada + Gail Burks, President + +On line 14686: + President and Chief + Executive Officer, + Nevada Fair Housing + +On line 14686: + Officer, Nevada + Fair Housing Center Brian + Gordon, Principal, + +On line 14686: + Fair Housing Center + Brian Gordon, Principal, + Applied Analysis + +On line 14688: + Session The Impact + of the Financial Crisis + on Nevada Public + +On line 14688: + of the Financial + Crisis on Nevada Public + and Community + +On line 14688: + Crisis on Nevada + Public and Community + Services Andrew Clinger, + +On line 14690: + Counties David Fraser, + Executive Director, + Nevada League of Cities + +On line 14692: + School District Session + Forum for Public Comment + Public Hearing on + +On line 14692: + Forum for Public + Comment Public Hearing on + the Impact of the + +On line 14692: + of the Financial + Crisis—Miami, Florida, Florida + International + +On line 14692: + International + University, Modesto A. Madique + Campus, Miami, + +On line 14694: + Modesto A. Madique Campus, + Miami, FL, September + Session Overview of + +On line 14696: + September Session + Overview of Mortgage Fraud William + K. Black, Associate + +On line 14696: + Mortgage Fraud William K. + Black, Associate Professor + of Economics and + +On line 14698: + of Economics and + Law, University of Missouri–Kansas + City Ann Fulmer, Vice + +On line 14698: + Missouri–Kansas City Ann Fulmer, + Vice President of Business + Relations, Interthinx; + +On line 14700: + Fraud Prevention and + Awareness Coalition Henry N. + Pontell, Professor + +On line 14706: + Mortgage Fraud Task Force, + Miami-Dade Police Department Jack + Rubin, Senior Vice + +On line 14706: + Jack Rubin, Senior + Vice President, JPMorgan Chase Bank + Ellen Wilcox, Special Agent, + +On line 14706: + Bank Ellen Wilcox, Special + Agent, Florida Department + of Law Enforcement + +On line 14706: + Enforcement Session + The Regulation, Oversight, + and Prosecution + +On line 14706: + The Regulation, + Oversight, and Prosecution + of Mortgage Fraud in + +On line 14706: + Regulation, State + of Florida Wilfredo + A. Ferrer, United + +On line 14706: + Ferrer, United States + Attorney, Southern District + of Florida R. + +On line 14706: + of Florida R. + Scott Palmer, Special Counsel and + Chief of the Mortgage + +On line 14706: + Florida R. Scott + Palmer, Special Counsel and Chief + of the Mortgage Fraud + +On line 14706: + Palmer, Special Counsel + and Chief of the Mortgage Fraud + Task Force, Office of + +On line 14706: + Special Counsel and + Chief of the Mortgage Fraud Task + Force, Office of the + +On line 14706: + Mortgage Fraud Task Force, + Office of the Attorney + General, State of + +On line 14706: + Task Force, Office of + the Attorney General, + State of Florida + +On line 14708: + General, State of + Florida Public Hearing + on the Impact of + +On line 14708: + Florida Public + Hearing on the Impact of + the Financial Crisis—Sacramento, + +On line 14708: + the Financial Crisis—Sacramento, + California Department + of Education, + +On line 14710: + of Education, + Sacramento, CA, September + Session Overview of + +On line 14710: + September Session + Overview of the Sacramento + Housing and Mortgage + +On line 14710: + Session Overview of + the Sacramento Housing and + Mortgage Markets and + +On line 14710: + of the Sacramento + Housing and Mortgage Markets + and the Impact of + +On line 14712: + the Impact of the + Financial Crisis on the + Region Mark Fleming, + +On line 14712: + Financial Crisis + on the Region Mark Fleming, + Chief Economist, CoreLogic + +On line 14716: + Fraud and Predatory + Lending in the Sacramento + Region Karen J. Mann, + +On line 14716: + Sacramento Region + Karen J. Mann, President and + Chief Appraiser, Mann + +On line 14716: + J. Mann, President + and Chief Appraiser, Mann and + Associates Real + +On line 14716: + and Chief Appraiser, + Mann and Associates Real + Estate Appraisers + +On line 14718: + Mann and Associates + Real Estate Appraisers + Consultants Thomas C. + +On line 14718: + Estate Appraisers + Consultants Thomas C. Putnam, + President, Putnam + +On line 14720: + President, Putnam + Housing Finance Consulting + Appendix B: List + +On line 14722: + Appendix B: List + of Hearings and Witnesses + Kevin Stein, Associate + +On line 14722: + Kevin Stein, Associate + Director, California + Reinvestment Coalition + +On line 14722: + Attorney, Eastern + District of California + Session The Mortgage + +On line 14722: + Session The Mortgage + Securitization Chain: + From Sacramento to + +On line 14722: + Vicki Beal, Senior + Vice President, Transaction + Management, Clayton + +On line 14724: + Professor of Law, + Chapman University School + of Law D. Keith + +On line 14724: + University School + of Law D. Keith Johnson, + Former President + +On line 14726: + Mutual’s Long Beach + Mortgage Session The Impact + of the Financial + +On line 14726: + Financial Crisis + on Sacramento Neighborhoods + and Families Pam + +On line 14726: + and Families Pam + Canada, Chief Executive + Officer, NeighborWorks Home + +On line 14728: + Center–Sacramento Region Mona Tawatao, + Regional Counsel, Legal + Services of Northern + +On line 14728: + Regional Counsel, + Legal Services of Northern + California Bruce + +On line 14732: + Credit Union Public + Testimony Presented + Allen Carpenter Lovie + +On line 14740: + Allen Carpenter Lovie + M. Hollis Nia Lavulo NOTES + Unless otherwise + +On line 14742: + data come from the + sources listed below. Board of + Governors of the + +On line 14742: + from the sources listed + below. Board of Governors + of the Federal + +On line 14742: + sources listed below. + Board of Governors of the + Federal Reserve + +On line 14742: + Board of Governors + of the Federal Reserve + System, Flow of Funds + +On line 14742: + Governors of the + Federal Reserve System, + Flow of Funds Reports: + +On line 14742: + international + capital flows, and the size + and activity + +On line 14742: + and activity + of various financial + sectors Bureau of + +On line 14742: + Economic output + (GDP), spending, wages, and sector + profit Bureau of + +On line 14742: + (GDP), spending, wages, and + sector profit Bureau of + Labor Statistics: + +On line 14742: + profit Bureau of + Labor Statistics: Labor + market statistics + +On line 14748: + origination of + mortgages, issuance of mortgage-backed + securities and + +On line 14748: + mortgages, issuance of + mortgage-backed securities and + values outstanding + +On line 14748: + issuance of mortgage-backed + securities and values + outstanding Markit + +On line 14750: + outstanding Markit + Group: ABX-HE index Mortgage Bankers + Association + +On line 14752: + Mortgage delinquency + and foreclosure rates 10-Ks, 10-Qs, + and proxy statements filed + +On line 14752: + foreclosure rates 10-Ks, + 10-Qs, and proxy statements filed with + the Securities + +On line 14752: + and proxy statements filed + with the Securities and + Exchange Commission: + +On line 14754: + Company-specific + information Many of the + documents cited + +On line 14754: + information Many + of the documents cited + on the following + +On line 14754: + of the documents + cited on the following + pages, along with other + +On line 14754: + pages, along with other + materials, are available + on www.fcic.gov. + +On line 14763: + Prince, testimony + before the FCIC, Hearing on + Subprime Lending and + +On line 14763: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 14763: + Government-Sponsored Enterprises + (GSEs), day session Citigroup + Senior Management, + +On line 14765: + p. Warren Buffett, + testimony before the + FCIC, Hearing on the + +On line 14765: + the FCIC, Hearing on + the Credibility of + Credit Ratings, the + +On line 14765: + Credit Ratings, the + Investment Decisions Made + Based on Those Ratings, + +On line 14765: + Those Ratings, and the + Financial Crisis, session + Credit Ratings and + +On line 14765: + Credit Ratings and + the Financial Crisis, June + transcript, p. Warren + +On line 14767: + FCIC, May Lloyd Blankfein, + testimony before the + First Public Hearing + +On line 14767: + the FCIC, day panel + Financial Institution + Representatives, + +On line 14769: + transcript, p. Ben S. + Bernanke, closed-door session with FCIC, + November Ben S. + +On line 14769: + Bernanke, closed-door session + with FCIC, November Ben S. + Bernanke, testimony + +On line 14769: + November Ben S. + Bernanke, testimony before + the FCIC, Hearing on + +On line 14769: + Financial Crisis, + day session The Federal + Reserve, September + +On line 14771: + Reserve, September + transcript, p. Alan Greenspan, written + testimony for + +On line 14771: + p. Alan Greenspan, written + testimony for the FCIC, + Subprime Lending and + +On line 14771: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 14779: + Enterprises (GSEs), + day session The Federal + Reserve, April p. Notes + +On line 14781: + (GSEs), day session The + Federal Reserve, April p. + Notes to Chapter Richard + +On line 14781: + Reserve, April p. Notes + to Chapter Richard C. Breeden, + interview by FCIC, + +On line 14781: + p. Notes to Chapter + Richard C. Breeden, interview + by FCIC, October + +On line 14783: + Notes to Chapter Richard + C. Breeden, interview by + FCIC, October Paul + +On line 14783: + to Chapter Richard C. + Breeden, interview by FCIC, + October Paul A. + +On line 14783: + Breeden, interview + by FCIC, October Paul A. + McCulley, testimony + +On line 14783: + October Paul A. + McCulley, testimony before + the FCIC, Hearing on + +On line 14783: + McCulley, testimony + before the FCIC, Hearing on + the Shadow Banking + +On line 14785: + the Financial Crisis—Greater + Bakersfield, session Local + Banking, September + +On line 14787: + the Impact of the + Financial Crisis—State of Nevada, + session The Impact + +On line 14787: + Financial Crisis—State of + Nevada, session The Impact + of the Financial + +On line 14787: + session The Impact + of the Financial Crisis + on Businesses of + +On line 14787: + of the Financial + Crisis on Businesses of + Nevada, September + +On line 14787: + Financial Crisis + on Businesses of Nevada, + September transcript, + +On line 14789: + on Businesses of + Nevada, September transcript, + p. Inside Mortgage + +On line 14789: + Nevada, September + transcript, p. Inside Mortgage + Finance, The Mortgage + +On line 14789: + September transcript, + p. Inside Mortgage Finance, + The Mortgage Market + +On line 14789: + The Mortgage Market + Statistical Annual, + vol. The Primary + +On line 14789: + Annual, vol. The + Primary Market Inside + Mortgage Finance, p. + +On line 14789: + Primary Market + Inside Mortgage Finance, p. + "Mortgage Product by + +On line 14789: + Finance, p. "Mortgage + Product by Origination." + Data provided + +On line 14789: + p. "Mortgage Product + by Origination." Data + provided to the + +On line 14789: + by Origination." + Data provided to the + FCIC by National + +On line 14789: + Data provided + to the FCIC by National + Association + +On line 14789: + Association + of Realtors: national + home price data from + +On line 14789: + sales of existing + homes, comparing second-quarter + and second-quarter the + +On line 14791: + and second-quarter the + national peak in prices. Core-based + statistical area + +On line 14791: + the national peak + in prices. Core-based statistical + area house prices for Sacramento–Arden–Arcade–Roseville + +On line 14791: + national peak in + prices. Core-based statistical area + house prices for Sacramento–Arden–Arcade–Roseville CA + +On line 14793: + CoreLogic data. Data + provided by CoreLogic, Home Price + Index for Urban + +On line 14793: + Data provided + by CoreLogic, Home Price Index for + Urban Areas. FCIC + +On line 14793: + CoreLogic, Home Price Index + for Urban Areas. FCIC staff + calculated house + +On line 14793: + Urban Areas. FCIC + staff calculated house price + growth from January + +On line 14793: + calculated house + price growth from January to + peak of each market. + +On line 14793: + growth from January + to peak of each market. Prices + increased at least in + +On line 14793: + January to peak + of each market. Prices increased + at least in cities, at + +On line 14793: + peak of each market. + Prices increased at least in cities, + at least in cities, at + +On line 14793: + of each market. Prices + increased at least in cities, at + least in cities, at least + +On line 14793: + market. Prices increased + at least in cities, at least in + cities, at least in cities, + +On line 14793: + Prices increased at least + in cities, at least in cities, at + least in cities, at least + +On line 14793: + increased at least in + cities, at least in cities, at least + in cities, at least in + +On line 14793: + at least in cities, at + least in cities, at least in cities, + at least in cities, and + +On line 14793: + least in cities, at least + in cities, at least in cities, at + least in cities, and more + +On line 14793: + in cities, at least in + cities, at least in cities, at least + in cities, and more than + +On line 14793: + cities, at least in cities, + at least in cities, at least in + cities, and more than in + +On line 14793: + at least in cities, at + least in cities, at least in cities, + and more than in cities. + +On line 14795: + cities, at least in cities, + at least in cities, and more than + in cities. Updated + +On line 14795: + least in cities, at least + in cities, and more than in cities. + Updated data + +On line 14795: + at least in cities, and + more than in cities. Updated + data provided + +On line 14795: + in cities, and more than + in cities. Updated data + provided by James + +On line 14795: + in cities. Updated + data provided by James + Kennedy and Alan Greenspan, whose + +On line 14795: + Updated data + provided by James Kennedy and + Alan Greenspan, whose data + +On line 14797: + James Kennedy and Alan Greenspan, + whose data originally + appeared in "Sources and + +On line 14797: + Alan Greenspan, whose data + originally appeared in + "Sources and Uses of + +On line 14797: + in "Sources and Uses + of Equity Extracted + from Homes," Finance and + +On line 14799: + Series, Federal + Reserve Board, 2007-20 (March "Mortgage + Originations Rise + +On line 14799: + Board, 2007-20 (March "Mortgage + Originations Rise in First + Half of Demand for + +On line 14799: + Originations Rise + in First Half of Demand for + Interest Only, + +On line 14799: + Half of Demand for + Interest Only, Option + ARM and Alt-A Products + +On line 14799: + Interest Only, + Option ARM and Alt-A Products + Increases," Mortgage + +On line 14799: + Increases," Mortgage + Bankers Association press + release, October + +On line 14801: + Association + press release, October In + the weekly wage of + +On line 14801: + release, October + In the weekly wage of New + York investment banker + +On line 14801: + the weekly wage of + New York investment banker was + of the average + +On line 14801: + New York investment + banker was of the average + privately employed + +On line 14803: + of the average + privately employed worker, + Federal Reserve + +On line 14803: + privately employed + worker, Federal Reserve + Survey of Consumer + +On line 14803: + Federal Reserve + Survey of Consumer Finances, + tabulated by + +On line 14807: + by FCIC. Angelo + Mozilo, interview by FCIC, + September Michael Mayo, + +On line 14807: + September Michael Mayo, + testimony before the + First Public Hearing + +On line 14809: + Financial Market + Participants, January + transcript, p. "Mortgage + +On line 14809: + January transcript, + p. "Mortgage Originations + Rise in First Half of + +On line 14811: + in First Half of MBA + press release, October Yuliya + Demyanyk and Yadav + +On line 14811: + ARMs: Popular Loans, + Poor Performance," Federal + Reserve Bank of St. + +On line 14813: + Loans, Poor Performance," + Federal Reserve Bank of + St. Louis, Bridges (Spring Ann + +On line 14813: + St. Louis, Bridges (Spring Ann + Fulmer, vice president of + Business Relations, + +On line 14813: + Bridges (Spring Ann Fulmer, + vice president of Business + Relations, Interthinx + +On line 14813: + vice president of + Business Relations, Interthinx + (session Overview of + +On line 14813: + Business Relations, + Interthinx (session Overview of + Mortgage Fraud), and Ellen + +On line 14813: + Mortgage Fraud), and Ellen + Wilcox, special agent, Florida + Department of Law + +On line 14813: + and Ellen Wilcox, special + agent, Florida Department + of Law Enforcement + +On line 14813: + Fraud in Miami), + testimony before the + FCIC, Hearing on the + +On line 14815: + FCIC, Hearing on the + Impact of the Financial + Crisis— Miami, + +On line 14817: + Michael Calhoun, Center + for Responsible Lending, + interview by FCIC, + +On line 14819: + for Responsible + Lending, interview by FCIC, + September Faith Schwartz, + +On line 14821: + meeting, Thursday, March + Federal Reserve Board, "Mean + Value of Mortgages + +On line 14821: + Value of Mortgages + or Home-Equity Loans for Families + with Holdings," in SCF + +On line 14821: + Mortgages or Home-Equity Loans + for Families with Holdings," + in SCF Chartbook, June + +On line 14821: + for Families with + Holdings," in SCF Chartbook, June + tables updated + +On line 14823: + tables updated + to February Christopher Cruise, + interview by FCIC, + +On line 14827: + Cruise, interview by + FCIC, August Ibid. Robert Kuttner, + interview by FCIC, + +On line 14829: + FCIC, August Ibid. Robert + Kuttner, interview by FCIC, + August Timothy + +On line 14829: + FCIC, Hearing on the + Shadow Banking System, day + session Perspective + +On line 14829: + System, day session + Perspective on the Shadow + Banking System, May + +On line 14831: + Perspective on the + Shadow Banking System, May + transcript, p. James Ryan, + +On line 14831: + the Shadow Banking + System, May transcript, p. James + Ryan, chief marketing + +On line 14831: + System, May transcript, + p. James Ryan, chief marketing + officer at CitiFinancial + +On line 14831: + transcript, p. James Ryan, + chief marketing officer + at CitiFinancial and John Schachtel, + +On line 14831: + Ryan, chief marketing + officer at CitiFinancial and John + Schachtel, executive + +On line 14831: + officer at CitiFinancial + and John Schachtel, executive + vice president of + +On line 14833: + of CitiFinancial, interview + by FCIC, February These points + were made to the FCIC + +On line 14833: + CitiFinancial, interview by + FCIC, February These points were + made to the FCIC by + +On line 14833: + FCIC, February These + points were made to the FCIC by + consumer advocates: + +On line 14833: + were made to the FCIC + by consumer advocates: e.g., + Kevin Stein, associate + +On line 14833: + Kevin Stein, associate + director, California + Reinvestment Coalition, + +On line 14833: + the Hearing on the + Impact of the Financial + Crisis—Sacramento, session Mortgage + +On line 14833: + Fraud and Predatory + Lending in the Sacramento + Region, September + +On line 14833: + Predatory Lending + in the Sacramento Region, + September Gail Burks, + +On line 14833: + in the Sacramento + Region, September Gail Burks, + president and CEO, + +On line 14833: + Region, September + Gail Burks, president and CEO, + Nevada Fair Housing + +On line 14833: + September Gail Burks, + president and CEO, Nevada + Fair Housing Center, + +On line 14833: + president and CEO, + Nevada Fair Housing Center, + at the Hearing on + +On line 14833: + Nevada Fair Housing + Center, at the Hearing on + the Impact of the + +On line 14833: + Housing Center, at + the Hearing on the Impact + of the Financial + +On line 14833: + the Impact of the + Financial Crisis—State of Nevada, + session The Impact + +On line 14833: + Financial Crisis—State of + Nevada, session The Impact + of the Financial + +On line 14833: + Nevada, session The + Impact of the Financial + Crisis on Nevada + +On line 14833: + session The Impact + of the Financial Crisis + on Nevada Real + +On line 14833: + of the Financial + Crisis on Nevada Real + Estate, September + +On line 14841: + June October March + October June October + Notes to Chapter Bob + +On line 14843: + Chapter Bob Gnaizda, + interview by FCIC, March James + Rokakis, interview by + +On line 14845: + interview by FCIC, + March James Rokakis, interview by + FCIC, November Ibid. + +On line 14847: + James Rokakis, interview + by FCIC, November Ibid. Fed + Governor Edward + +On line 14847: + by FCIC, November + Ibid. Fed Governor Edward + M. Gramlich, "Tackling + +On line 14847: + Ibid. Fed Governor + Edward M. Gramlich, "Tackling + Predatory Lending: + +On line 14847: + Edward M. Gramlich, + "Tackling Predatory Lending: + Regulation and + +On line 14855: + Stein, testimony + before the FCIC, transcript, pp. + U.S. Department of + +On line 14855: + FCIC, transcript, pp. U.S. + Department of the Treasury + and U.S Department + +On line 14857: + Mortgage Lending" (June + Federal Reserve Board press + release, December + +On line 14859: + Federal Reserve + Board press release, December + Sheila C. Bair, written + +On line 14859: + Sheila C. Bair, written + testimony for the FCIF, + First Public Hearing + +On line 14859: + Public Hearing of + the FCIC, day panel Current + Investigations + +On line 14859: + day panel Current + Investigations into + the Financial Crisis—Federal + +On line 14863: + January Sheila C. + Bair, testimony before + the FCIC, First Public + +On line 14863: + Bair, testimony + before the FCIC, First Public + Hearing of the FCIC, + +On line 14863: + before the FCIC, First + Public Hearing of the FCIC, + day panel Current + +On line 14863: + Public Hearing of + the FCIC, day panel Current + Investigations + +On line 14863: + day panel Current + Investigations into + the Financial Crisis—Federal + +On line 14867: + January transcript, + p. Sheila C. Bair, interview + by FCIC, March Mortgage + +On line 14867: + March Mortgage Market + Statistical Annual, + "Top B&C Lenders in "Top + +On line 14871: + "Top B&C Lenders in Ibid., + "Subprime Origination by + State in and "Subprime + +On line 14873: + State in and "Subprime + Originations by State in + Stein, testimony + +On line 14875: + Stein, testimony + before the FCIC, September + transcript, p. Gail Burks, + +On line 14877: + transcript, p. Gail Burks, + interview by FCIC, August + Lisa Madigan, written + +On line 14877: + interview by FCIC, + August Lisa Madigan, written + testimony for + +On line 14877: + August Lisa Madigan, + written testimony for + the FCIC, First Public + +On line 14877: + Lisa Madigan, written + testimony for the FCIC, + First Public Hearing + +On line 14877: + Public Hearing of + the FCIC, day panel Current + Investigations + +On line 14877: + day panel Current + Investigations into + the Financial Crisis—State + +On line 14879: + p. "Home Mortgage Lender + settled ‘Predatory Lending’ + Charges," Federal Trade + +On line 14881: + B&C Lenders in Madigan, + written testimony for + the FCIC, January + +On line 14883: + in Madigan, written + testimony for the FCIC, + January pp. Ed + +On line 14883: + testimony for + the FCIC, January pp. Ed + Parker, interview + +On line 14885: + the FCIC, January + pp. Ed Parker, interview + by FCIC, May Prentiss + +On line 14885: + FCIC, January pp. + Ed Parker, interview by + FCIC, May Prentiss Cox, + +On line 14885: + interview by FCIC, + May Prentiss Cox, interview + by FCIC, October + +On line 14893: + FCIC, October Cox, + interview; Madigan, written + testimony for + +On line 14893: + interview; Madigan, + written testimony for + the FCIC, January + +On line 14895: + testimony for + the FCIC, January p. Cox, + interview. Madigan, + +On line 14897: + John D. Hawke Jr. and + John C. Dugan, written statements + for the FCIC, Hearing + +On line 14897: + D. Hawke Jr. and John + C. Dugan, written statements for + the FCIC, Hearing on + +On line 14897: + Jr. and John C. Dugan, + written statements for the FCIC, + Hearing on Subprime + +On line 14897: + John C. Dugan, written + statements for the FCIC, Hearing + on Subprime Lending + +On line 14897: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 14897: + Government-Sponsored Enterprises + (GSEs), day session Office of + the Comptroller of + +On line 14897: + Enterprises (GSEs), + day session Office of the + Comptroller of the + +On line 14897: + day session Office + of the Comptroller of the + Currency, April pp. + +On line 14897: + the Comptroller of + the Currency, April pp. and + pp. respectively. + +On line 14903: + testimony for + the FCIC, January pp. Cox, + interview. Mortgage + +On line 14907: + by Product." Nonprime + Alt-A and subprime combined. Marc + S. Savitt, interview + +On line 14907: + Product." Nonprime Alt-A + and subprime combined. Marc S. + Savitt, interview by + +On line 14909: + and subprime combined. + Marc S. Savitt, interview by + FCIC, November Rob + +On line 14909: + Savitt, interview by + FCIC, November Rob Barry, + Matthew Haggman, and Jack + +On line 14909: + interview by FCIC, + November Rob Barry, Matthew + Haggman, and Jack Dolan, + +On line 14909: + by FCIC, November + Rob Barry, Matthew Haggman, and + Jack Dolan, "Ex-convicts + +On line 14909: + "Ex-convicts active + in mortgage fraud," Miami + Herald, January + +On line 14911: + on the Impact of + the Financial Crisis—Miami, session + The Regulation, + +On line 14911: + The Regulation, + Oversight, and Prosecution + of Mortgage Fraud in + +On line 14913: + Prosecution of + Mortgage Fraud in Miami, + September p. Savitt, + +On line 14915: + of Mortgage Fraud in + Miami, September p. + Savitt, interview. Gary + +On line 14917: + on the Impact of + the Financial Crisis— Greater + Bakersfield, session + +On line 14927: + Market, September + p. Ibid. Notes to Chapter Gary + Crabtree, interview + +On line 14927: + September p. Ibid. + Notes to Chapter Gary Crabtree, + interview by FCIC, + +On line 14927: + Ibid. Notes to Chapter + Gary Crabtree, interview by + FCIC, August Crabtree, + +On line 14927: + FCIC, August Crabtree, + written testimony for + the FCIC, September + +On line 14929: + testimony for + the FCIC, September pp. "FBI + Warns of Mortgage Fraud + +On line 14929: + "FBI Warns of Mortgage + Fraud ‘Epidemic’ from Terry + Frieden," CNN news report, + +On line 14931: + Fraud ‘Epidemic’ from + Terry Frieden," CNN news report, + September Kirstin Downey, + +On line 14931: + from Terry Frieden," CNN + news report, September Kirstin + Downey, "FBI Vows to Crack + +On line 14931: + Terry Frieden," CNN news + report, September Kirstin Downey, + "FBI Vows to Crack Down + +On line 14931: + report, September + Kirstin Downey, "FBI Vows to Crack Down + on Mortgage Fraud; Hot + +On line 14931: + "FBI Vows to Crack Down + on Mortgage Fraud; Hot Real + Estate Market Drives + +On line 14933: + Says," Washington Post, + February Financial Crimes + Enforcement Network, + +On line 14933: + "Mortgage Loan Fraud: An + Industry Assessment Based + upon Suspicious + +On line 14935: + Enforcement Network, + "Annual Report: Fiscal + Year FinCEN response to + +On line 14937: + October William K. + Black, written testimony + for the FCIC, Hearing + +On line 14939: + FCIC, Hearing on the + Impact of the Financial + Crisis— Miami, + +On line 14939: + of the Financial + Crisis— Miami, session + Overview of Mortgage + +On line 14939: + Crisis— Miami, + session Overview of Mortgage + Fraud, September p. + +On line 14949: + transcript, p. Ibid., p. + Ruhi Maker, interview by + FCIC, October Kirstin + +On line 14949: + Maker, interview + by FCIC, October Kirstin Downey, + "Many Buyers Opt for + +On line 14949: + FCIC, October Kirstin + Downey, "Many Buyers Opt for Risky + Mortgages," Washington + +On line 14951: + Downey, "Many Buyers Opt + for Risky Mortgages," Washington + Post, May "After the + +On line 14951: + "Many Buyers Opt for + Risky Mortgages," Washington Post, + May "After the Fall: + +On line 14951: + Opt for Risky Mortgages," + Washington Post, May "After + the Fall: Soaring house + +On line 14951: + Washington Post, May + "After the Fall: Soaring house + prices have given a + +On line 14951: + May "After the Fall: + Soaring house prices have given + a huge boost to the + +On line 14951: + Fall: Soaring house prices + have given a huge boost to + the world economy. + +On line 14951: + Soaring house prices have + given a huge boost to the + world economy. What + +On line 14951: + have given a huge + boost to the world economy. + What happens when they + +On line 14951: + given a huge boost + to the world economy. What + happens when they drop1" + +On line 14953: + the world economy. + What happens when they drop1" The + Economist, June Fed + +On line 14953: + What happens when they + drop1" The Economist, June Fed + Chairman Alan Greenspan, "The + +On line 14953: + drop1" The Economist, + June Fed Chairman Alan Greenspan, "The + Economic Outlook," + +On line 14957: + the Joint Economic + Committee, 109th Cong., 1st sess., + June Ibid. Fed Chairman + +On line 14957: + Cong., 1st sess., June Ibid. + Fed Chairman Ben S. Bernanke, "The + Economic Outlook," + +On line 14959: + the Joint Economic + Committee, U.S. Congress, 110th + Cong., 1st sess., March Sheila + +On line 14959: + 110th Cong., 1st sess., March + Sheila Canavan, comments during + of the Federal + +On line 14961: + October transcript, + p. David Leonhardt, "Be Warned: Mr. + Bubble’s Worried Again," + +On line 14961: + p. David Leonhardt, "Be + Warned: Mr. Bubble’s Worried Again," + New York Times, August + +On line 14963: + Leonhardt, "Be Warned: Mr. + Bubble’s Worried Again," New York + Times, August Raghuram + +On line 14963: + Bubble’s Worried Again," + New York Times, August Raghuram + Rajan, interview + +On line 14963: + Worried Again," New York + Times, August Raghuram Rajan, + interview by FCIC, + +On line 14963: + New York Times, August + Raghuram Rajan, interview + by FCIC, November + +On line 14967: + Times, August Raghuram + Rajan, interview by FCIC, + November Ibid. Ibid. + +On line 14969: + Rajan, interview + by FCIC, November Ibid. Ibid. + Raghuram G. Rajan, + +On line 14969: + interview by FCIC, + November Ibid. Ibid. Raghuram + G. Rajan, Fault Lines: + +On line 14969: + by FCIC, November + Ibid. Ibid. Raghuram G. Rajan, + Fault Lines: How Hidden + +On line 14969: + November Ibid. Ibid. + Raghuram G. Rajan, Fault Lines: + How Hidden Fractures + +On line 14969: + Ibid. Ibid. Raghuram G. + Rajan, Fault Lines: How Hidden + Fractures Still Threaten + +On line 14969: + Raghuram G. Rajan, + Fault Lines: How Hidden Fractures + Still Threaten The World + +On line 14969: + Rajan, Fault Lines: How + Hidden Fractures Still Threaten + The World Economy + +On line 14969: + Fault Lines: How Hidden + Fractures Still Threaten The World + Economy (Princeton: + +On line 14969: + Still Threaten The World + Economy (Princeton: Princeton + University Press, + +On line 14971: + Economy (Princeton: + Princeton University Press, + p. Susan M. Wachter, + +On line 14973: + Wachter, interview by + FCIC, October Mark Klipsch, + quoted in "Blizzard + +On line 14977: + FCIC, Hearing on the + Impact of the Financial + Crisis— Miami, + +On line 14981: + FCIC, Hearing on the + Impact of the Financial + Crisis— Sacramento, + +On line 14981: + Fraud and Predatory + Lending in the Sacramento + Region, September + +On line 14983: + Predatory Lending + in the Sacramento Region, + September Mortgage + +On line 14985: + Annual, vol. The + Secondary Market, p. "Non-Agency MBS + Issuance by Type," and + +On line 14985: + Secondary Market, p. + "Non-Agency MBS Issuance by Type," and + FCIC staff estimates + +On line 14985: + Market, p. "Non-Agency MBS + Issuance by Type," and FCIC staff + estimates based on + +On line 14985: + "Non-Agency MBS Issuance by + Type," and FCIC staff estimates + based on analysis + +On line 14985: + MBS Issuance by Type," + and FCIC staff estimates based + on analysis of + +On line 14985: + Issuance by Type," and + FCIC staff estimates based on + analysis of Moody’s + +On line 14987: + FCIC staff estimates + based on analysis of Moody’s + SFDRS data. Jamie + +On line 14987: + estimates based on + analysis of Moody’s SFDRS + data. Jamie Dimon, + +On line 14987: + Moody’s SFDRS data. + Jamie Dimon, testimony + before the FCIC, First + +On line 14987: + the FCIC, day panel + Financial Institution + Representatives, + +On line 14991: + transcript, p. Madelyn + Antoncic, interview by + FCIC, July Anton + +On line 14991: + R. Valukas, Report of + Examiner, In re Lehman + Brothers Holdings Inc., + +On line 14991: + of Examiner, + In re Lehman Brothers Holdings + Inc., et al., Chapter + +On line 14993: + Examiner, In + re Lehman Brothers Holdings Inc., + et al., Chapter Case + +On line 14993: + In re Lehman Brothers + Holdings Inc., et al., Chapter + Case No. 08-13555 (JMP), (Bankr. + +On line 14993: + Lehman Brothers Holdings + Inc., et al., Chapter Case No. + 08-13555 (JMP), (Bankr. S.D.N.Y.), + +On line 14993: + Brothers Holdings Inc., + et al., Chapter Case No. 08-13555 + (JMP), (Bankr. S.D.N.Y.), March + +On line 14993: + Holdings Inc., et al., + Chapter Case No. 08-13555 (JMP), (Bankr. + S.D.N.Y.), March with n. + +On line 14995: + Inc., et al., Chapter + Case No. 08-13555 (JMP), (Bankr. S.D.N.Y.), + March with n. Richard Bowen, + +On line 14995: + Chapter Case No. 08-13555 + (JMP), (Bankr. S.D.N.Y.), March with n. + Richard Bowen, interview + +On line 14995: + Case No. 08-13555 (JMP), (Bankr. + S.D.N.Y.), March with n. Richard Bowen, + interview by FCIC, + +On line 14995: + (JMP), (Bankr. S.D.N.Y.), March + with n. Richard Bowen, interview + by FCIC, February + +On line 14997: + (Bankr. S.D.N.Y.), March with + n. Richard Bowen, interview by + FCIC, February Richard + +On line 14997: + S.D.N.Y.), March with n. + Richard Bowen, interview by FCIC, + February Richard Bowen, + +On line 14997: + Richard Bowen, interview + by FCIC, February Richard Bowen, + email to Robert Rubin, + +On line 14997: + Bowen, interview by + FCIC, February Richard Bowen, email + to Robert Rubin, David + +On line 15001: + Rubin, David Bushnell, + Gary Crittenden, and Bonnie + Howard, November Notes + +On line 15005: + on Subprime Lending + and Securitization + and Government-Sponsored Entities + +On line 15005: + Subprime Lending and + Securitization and + Government-Sponsored Entities (GSEs), + +On line 15005: + and Government-Sponsored Entities + (GSEs), day session Citigroup + Senior Management, + +On line 15007: + Citigroup Senior + Management, April transcript, p. + Brad S. Karp, counsel + +On line 15007: + Brad S. Karp, counsel + for Citigroup, letter to + FCIC, November in + +On line 15007: + to FCIC, November + in response to FCIC request + of September for + +On line 15007: + of September for + information regarding + Richard Bowen’s November + +On line 15011: + Bowen’s November email, + p. Bowen, interview. J. Kyle + Bass, testimony + +On line 15011: + p. Bowen, interview. + J. Kyle Bass, testimony + before the FCIC, First + +On line 15011: + interview. J. Kyle + Bass, testimony before + the FCIC, First Public + +On line 15011: + Bass, testimony + before the FCIC, First Public + Hearing of the FCIC, + +On line 15013: + Financial Market + Participants, January + transcript, pp. Herbert + +On line 15013: + transcript, pp. Herbert + M. Sandler, "Comment on Joint + ANPR for Proposed + +On line 15013: + Herbert M. Sandler, + "Comment on Joint ANPR for + Proposed Revision + +On line 15013: + M. Sandler, "Comment + on Joint ANPR for Proposed + Revision to the + +On line 15013: + the Existing Risk-based + Capital Rule," letter to + Federal Reserve + +On line 15013: + the Comptroller of + the Currency, Federal + Deposit Insurance + +On line 15013: + Federal Deposit + Insurance Corporation, + and Office of Thrift + +On line 15015: + and Office of Thrift + Supervision, January + Lewis Ranieri, interview + +On line 15017: + January Lewis Ranieri, + interview by FDIC, July + Angelo Mozilo, + +On line 15017: + Angelo Mozilo, + email to Eric Sieracki, + April re: 1Q2006 Earnings. + +On line 15019: + Earnings. Angelo + Mozilo, email to David Sambol, + April subject: sub-prime + +On line 15021: + Mozilo, email to David + Sambol, April subject: sub-prime + seconds. David Sambol, + +On line 15021: + email to David Sambol, + April subject: sub-prime seconds. + David Sambol, email to + +On line 15021: + Sambol, April subject: + sub-prime seconds. David Sambol, + email to Angelo + +On line 15021: + April subject: sub-prime + seconds. David Sambol, email to + Angelo Mozilo, + +On line 15021: + David Sambol, email to + Angelo Mozilo, April re: + Sub-prime seconds (cc + +On line 15021: + Angelo Mozilo, + April re: Sub-prime seconds (cc + Kurland, McMurray, and Bartlett). + +On line 15023: + (cc Kurland, McMurray, and + Bartlett). Angelo Mozilo, email + to David Sambol, April + +On line 15023: + to David Sambol, April + subject: re: Sub-prime seconds + (cc Kurland, McMurray, and + +On line 15025: + subject: re: Sub-prime + seconds (cc Kurland, McMurray, and + Bartlett). Sabeth Siddique, + +On line 15025: + Sub-prime seconds (cc + Kurland, McMurray, and Bartlett). Sabeth + Siddique, interview + +On line 15025: + seconds (cc Kurland, + McMurray, and Bartlett). Sabeth Siddique, + interview by FCIC, + +On line 15025: + Kurland, McMurray, and Bartlett). + Sabeth Siddique, interview + by FCIC, September + +On line 15027: + McMurray, and Bartlett). Sabeth + Siddique, interview by FCIC, + September "Survey + +On line 15027: + Federal Reserve + document obtained by FCIC, + produced November + +On line 15029: + produced November + pp. Susan Bies, interview + by FDIC, October + +On line 15031: + FDIC, October John + Dugan, testimony before + the FCIC, Hearing on + +On line 15031: + Dugan, testimony + before the FCIC, Hearing on + Subprime Lending and + +On line 15031: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 15031: + Government-Sponsored Enterprises + (GSEs), day session Office of + the Comptroller of + +On line 15031: + Enterprises (GSEs), + day session Office of the + Comptroller of the + +On line 15033: + of the Currency, + April transcript, Sabeth Siddique, + interviews by FCIC, + +On line 15037: + FCIC, September and + October Bies, interview. + Mortgage Insurance + +On line 15037: + interview. Mortgage + Insurance Companies of + America, quoted + +On line 15037: + Mortgage Insurance + Companies of America, + quoted in Kirstin Downey, + +On line 15037: + quoted in Kirstin Downey, + "Insurers Want Action on + Risky Mortgages; Firms Want + +On line 15039: + Mortgages; Firms Want More + Loan Restrictions," Washington + Post, August William A. + +On line 15039: + More Loan Restrictions," + Washington Post, August William + A. Sampson, Mortgage + +On line 15039: + A. Sampson, Mortgage + Insurance Companies of + America, "MICA + +On line 15039: + before the Senate + Subcommittee on Housing + and Transportation and + +On line 15039: + Subcommittee on + Housing and Transportation and + the Subcommittee + +On line 15043: + September Siddique, + interviews, October and + September Consumer + +On line 15049: + June transcript. Siddique, + interview, October Bies, + interview. There is + +On line 15049: + Siddique, interview, + October Bies, interview. + There is no central + +On line 15049: + interview. There is + no central clearinghouse to + calculate structured + +On line 15049: + finance assets. The + FCIC’s estimate is based on + the amount of structured + +On line 15049: + is based on the amount + of structured finance assets + rated by Moody’s along + +On line 15049: + unrated agency + RMBS, along with an estimate + for structured finance + +On line 15049: + agency RMBS, along with + an estimate for structured + finance assets not + +On line 15049: + with an estimate + for structured finance assets + not rated by Moody’s, + +On line 15049: + finance assets not + rated by Moody’s, using as + sources Fannie Mae and + +On line 15049: + not rated by Moody’s, + using as sources Fannie Mae + and Freddie Mac, Bloomberg, + +On line 15049: + by Moody’s, using as + sources Fannie Mae and Freddie + Mac, Bloomberg, American + +On line 15049: + Moody’s, using as sources + Fannie Mae and Freddie Mac, + Bloomberg, American CoreLogic + +On line 15049: + sources Fannie Mae and + Freddie Mac, Bloomberg, American + CoreLogic Loan Performance, + +On line 15049: + Bloomberg, American CoreLogic + Loan Performance, Fitch Ratings, + Moody’s, S&P, Thomson Reuters, + +On line 15049: + American CoreLogic Loan + Performance, Fitch Ratings, Moody’s, + S&P, Thomson Reuters, and + +On line 15051: + CoreLogic Loan Performance, + Fitch Ratings, Moody’s, S&P, Thomson + Reuters, and SIFMA. Alan + +On line 15051: + Loan Performance, Fitch + Ratings, Moody’s, S&P, Thomson Reuters, + and SIFMA. Alan Greenspan, + +On line 15051: + Fitch Ratings, Moody’s, S&P, + Thomson Reuters, and SIFMA. Alan + Greenspan, testimony + +On line 15051: + Reuters, and SIFMA. Alan + Greenspan, testimony before + the FCIC, Hearing on + +On line 15051: + Greenspan, testimony + before the FCIC, Hearing on + Subprime Lending and + +On line 15051: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 15051: + Enterprises (GSEs), + day session The Federal + Reserve, April transcript, + +On line 15053: + Federal Reserve, + April transcript, p. Mortgage Bankers + Association, + +On line 15053: + news release, second + quarter, Second-quarter figures + were an improvement + +On line 15055: + Mark Zandi, written + testimony for the FCIC, + First Public Hearing + +On line 15055: + the FCIC, day panel + Financial Crisis Impacts + on the Economy, + +On line 15057: + Financial Crisis + Impacts on the Economy, + January pp. Dean + +On line 15057: + on the Economy, + January pp. Dean Baker, + interview by FCIC, + +On line 15059: + Warren Peterson, + testimony before the + FCIC, Hearing on the + +On line 15061: + on the Impact of + the Financial Crisis— Greater + Bakersfield, session + +On line 15061: + and Community + Real Estate, September + transcript, pp. Warren + +On line 15067: + transcript, pp. Warren + Peterson, interview by + FCIC, August Notes to + +On line 15076: + of Systemic Risk in + the Financial Crisis, day + session September + +On line 15078: + session September + p. Alan Greenspan, "The Evolution + of Banking in a + +On line 15078: + Greenspan, "The Evolution + of Banking in a Market + Economy," remarks + +On line 15078: + of Banking in a + Market Economy," remarks + at the Annual + +On line 15078: + Market Economy," + remarks at the Annual + Conference of the + +On line 15080: + Private Enterprise + Education, Arlington, + Virginia, April Charles Calomiris + +On line 15080: + Virginia, April Charles Calomiris + and Gary Gorton, "The Origins + of Banking Panics: + +On line 15080: + and Gary Gorton, "The + Origins of Banking Panics: + Models, Facts, and Bank + +On line 15080: + Origins of Banking + Panics: Models, Facts, and Bank + Regulation," in + +On line 15080: + Models, Facts, and Bank + Regulation," in Calomiris, U.S. + Bank Deregulation + +On line 15080: + Regulation," in + Calomiris, U.S. Bank Deregulation + in Historical + +On line 15080: + in Historical + Perspective (Cambridge: Cambridge + University Press, + +On line 15080: + Perspective (Cambridge: + Cambridge University Press, + pp. Prior to the + +On line 15080: + University Press, + pp. Prior to the end of + the Civil War, banks + +On line 15080: + pp. Prior to the + end of the Civil War, banks + issued notes instead + +On line 15080: + to the end of the + Civil War, banks issued notes + instead of holding + +On line 15080: + end of the Civil + War, banks issued notes instead + of holding deposits. + +On line 15080: + of the Civil War, + banks issued notes instead of + holding deposits. Runs + +On line 15080: + War, banks issued notes + instead of holding deposits. + Runs on that system + +On line 15080: + issued notes instead + of holding deposits. Runs on + that system occurred + +On line 15080: + instead of holding + deposits. Runs on that system + occurred in and (ibid., + +On line 15082: + of holding deposits. + Runs on that system occurred + in and (ibid., pp. R. + +On line 15082: + deposits. Runs on that + system occurred in and (ibid., + pp. R. Alton Gilbert, + +On line 15082: + Runs on that system + occurred in and (ibid., pp. R. + Alton Gilbert, "Requiem + +On line 15082: + occurred in and (ibid., + pp. R. Alton Gilbert, "Requiem + for Regulation + +On line 15082: + pp. R. Alton Gilbert, + "Requiem for Regulation + Q: What It Did and + +On line 15082: + Alton Gilbert, "Requiem + for Regulation Q: What + It Did and Why It + +On line 15082: + for Regulation + Q: What It Did and Why It + Passed Away," Federal + +On line 15082: + Q: What It Did and + Why It Passed Away," Federal + Reserve Bank of St. + +On line 15082: + Did and Why It Passed + Away," Federal Reserve Bank + of St. Louis Review + +On line 15082: + and Why It Passed Away," + Federal Reserve Bank of + St. Louis Review no. + +On line 15084: + Reserve Bank of St. + Louis Review no. (February + FCIC, "Preliminary + +On line 15084: + no. (February FCIC, + "Preliminary Staff Report: + Shadow Banking and + +On line 15084: + FCIC, "Preliminary + Staff Report: Shadow Banking + and the Financial + +On line 15088: + Staff Report: Shadow + Banking and the Financial + Crisis," May pp. Arthur + +On line 15088: + Shadow Banking and + the Financial Crisis," May + pp. Arthur E. Wilmarth Jr., + +On line 15088: + Financial Crisis," + May pp. Arthur E. Wilmarth Jr., "The + Transformation of + +On line 15088: + May pp. Arthur E. Wilmarth + Jr., "The Transformation of + the U.S. Financial + +On line 15088: + Arthur E. Wilmarth Jr., "The + Transformation of the U.S. + Financial Services + +On line 15088: + Financial Services + Industry, Competition, + Consolidation, + +On line 15090: + Frederic S. Mishkin, + "Asymmetric Information + and Financial Crises: + +On line 15090: + Financial Markets + and Financial Crises, ed. R. + Glenn Hubbard (Chicago: + +On line 15090: + and Financial Crises, + ed. R. Glenn Hubbard (Chicago: + University of + +On line 15090: + ed. R. Glenn Hubbard + (Chicago: University of + Chicago Press, p. Wilmarth, + +On line 15090: + of Chicago Press, p. + Wilmarth, "The Transformation of + the U.S. Financial + +On line 15092: + Financial Services + Industry, p. Federal + Reserve Board Flow of + +On line 15092: + Services Industry, + p. Federal Reserve Board + Flow of Funds Release, + +On line 15094: + table L.208. Accessed + December Kenneth Garbade, + "The Evolution of + +On line 15094: + December Kenneth + Garbade, "The Evolution of + Repo Contracting + +On line 15094: + Federal Reserve + Bank of New York Economic + Policy Review + +On line 15094: + Federal Reserve + Bank of New York uses the + repo market: it + +On line 15094: + of New York uses + the repo market: it sets + interest rates by + +On line 15094: + uses the repo + market: it sets interest + rates by borrowing + +On line 15094: + the repo market: + it sets interest rates by + borrowing Treasuries + +On line 15094: + it sets interest + rates by borrowing Treasuries + from and lending them + +On line 15094: + sets interest rates + by borrowing Treasuries from + and lending them to + +On line 15094: + rates by borrowing + Treasuries from and lending them + to securities + +On line 15094: + from and lending them + to securities firms, many + of which are units of + +On line 15096: + to securities + firms, many of which are units of + commercial banks. Alan + +On line 15096: + firms, many of which are + units of commercial banks. Alan + Blinder, interview + +On line 15096: + of which are units of + commercial banks. Alan Blinder, + interview by FCIC, + +On line 15096: + units of commercial + banks. Alan Blinder, interview + by FCIC, September + +On line 15098: + of commercial banks. + Alan Blinder, interview by + FCIC, September Paul + +On line 15098: + interview by FCIC, + September Paul Volcker, + interview by FCIC, + +On line 15098: + by FCIC, September + Paul Volcker, interview + by FCIC, October + +On line 15100: + FCIC, September Paul + Volcker, interview by + FCIC, October Fed + +On line 15100: + "International + Financial Risk Management," + remarks before the + +On line 15102: + Foreign Relations, + November Richard C. Breeden, + interview by FCIC, + +On line 15104: + November Richard C. + Breeden, interview by FCIC, + October Wilmarth, "The + +On line 15104: + Breeden, interview + by FCIC, October Wilmarth, "The + Transformation of + +On line 15104: + by FCIC, October + Wilmarth, "The Transformation of + the U.S. Financial + +On line 15104: + October Wilmarth, "The + Transformation of the U.S. + Financial Services + +On line 15104: + Transformation of + the U.S. Financial Services + Industry, p. and + +On line 15106: + the U.S. Financial + Services Industry, p. and + n. Thereafter, banks were + +On line 15106: + Services Industry, + p. and n. Thereafter, banks were + only required to + +On line 15106: + Industry, p. and + n. Thereafter, banks were only + required to lend on + +On line 15106: + and n. Thereafter, banks + were only required to lend + on collateral + +On line 15106: + n. Thereafter, banks were + only required to lend on + collateral and + +On line 15106: + only required to + lend on collateral and + set terms based upon + +On line 15106: + required to lend on + collateral and set terms + based upon what the + +On line 15106: + terms based upon what + the market was offering. + They also could not + +On line 15106: + based upon what the + market was offering. They + also could not lend + +On line 15106: + what the market was + offering. They also could + not lend more than of + +On line 15106: + was offering. They + also could not lend more than + of their capital + +On line 15106: + also could not lend + more than of their capital + to one subsidiary or + +On line 15106: + could not lend more than + of their capital to one + subsidiary or more than + +On line 15106: + lend more than of their + capital to one subsidiary + or more than to all + +On line 15106: + their capital to + one subsidiary or more than to + all subsidiaries. Order + +On line 15106: + or more than to all + subsidiaries. Order Approving + Applications to + +On line 15106: + Dealing in Certain + Securities," Federal + Reserve Bulletin no. + +On line 15106: + Reserve Bulletin no. + (Jul. "Revenue Limit on Bank-Ineligible + Activities of + +On line 15106: + Bank-Ineligible Activities + of Subsidiaries of Bank Holding + Companies Engaged + +On line 15106: + of Subsidiaries of Bank + Holding Companies Engaged + in Underwriting + +On line 15108: + in Securities," + Federal Register no. + (Dec. Julie L. Williams and + +On line 15108: + no. (Dec. Julie L. Williams + and Mark P. Jacobsen, "The + Business of Banking: + +On line 15108: + Julie L. Williams and Mark + P. Jacobsen, "The Business + of Banking: Looking + +On line 15108: + L. Williams and Mark P. + Jacobsen, "The Business of + Banking: Looking to + +On line 15110: + of Banking: Looking + to the Future," Business Lawyer + (May Fed Chairman Alan + +On line 15110: + Banking: Looking to + the Future," Business Lawyer (May + Fed Chairman Alan Greenspan, + +On line 15110: + Financial Services, + H.R. the Financial Services + Competitiveness + +On line 15110: + H.R. the Financial + Services Competitiveness + Act of 105th Cong., 1st + +On line 15110: + Financial Services + Competitiveness Act of + 105th Cong., 1st sess., May + +On line 15114: + 105th Cong., 1st sess., May + FCIC staff calculations. FCIC + staff calculations. + +On line 15116: + Cong., 1st sess., May FCIC + staff calculations. FCIC staff + calculations. FCIC + +On line 15116: + staff calculations. + FCIC staff calculations. FCIC + staff calculations + +On line 15116: + calculations. FCIC + staff calculations using + First American/CoreLogic, National + +On line 15116: + staff calculations + using First American/CoreLogic, National + HPI Single-Family Combined (SFC). + +On line 15118: + before showed no year-over-year + national house price decline. + First American/CoreLogic, National + +On line 15118: + national house price + decline. First American/CoreLogic, National + HPI Single-Family Combined (SFC). + +On line 15120: + First American/CoreLogic, National + HPI Single-Family Combined (SFC). For a + general overview + +On line 15120: + HPI Single-Family Combined (SFC). + For a general overview + of the banking and + +On line 15120: + Single-Family Combined (SFC). For + a general overview of + the banking and thrift + +On line 15120: + For a general + overview of the banking and + thrift crisis of the + +On line 15120: + of the banking and + thrift crisis of the 1980s, see + FDIC, History of + +On line 15120: + the banking and thrift + crisis of the 1980s, see FDIC, + History of the + +On line 15120: + and thrift crisis of + the 1980s, see FDIC, History + of the Eighties: Lessons + +On line 15120: + thrift crisis of the + 1980s, see FDIC, History of + the Eighties: Lessons for + +On line 15120: + crisis of the 1980s, + see FDIC, History of the + Eighties: Lessons for the + +On line 15120: + of the 1980s, see FDIC, + History of the Eighties: + Lessons for the Future, + +On line 15120: + Lessons for the Future, + vol. An Examination + of the Banking Crises + +On line 15120: + for the Future, vol. + An Examination of + the Banking Crises of + +On line 15120: + the Future, vol. An + Examination of the + Banking Crises of the + +On line 15120: + Examination + of the Banking Crises of the + 1980s and Early 1990s + +On line 15120: + Crises of the 1980s and + Early 1990s (Washington, DC: + Federal Deposit + +On line 15120: + 1980s and Early 1990s + (Washington, DC: Federal + Deposit Insurance + +On line 15128: + and federally + insured banks with billion in + assets and savings + +On line 15128: + savings and loans with + billion in assets either + closed or received FDIC + +On line 15128: + closed or received FDIC + or FSLIC assistance. See + Federal Deposit + +On line 15128: + Federal Deposit + Insurance Corp., Managing + the Crisis: The FDIC + +On line 15132: + (Aug. pp. William K. Black, + Associate Professor of + Economics and Law, + +On line 15132: + the Impact of the + Financial Crisis, session + Overview of Mortgage + +On line 15132: + Financial Crisis, + session Overview of Mortgage + Fraud, September p. + +On line 15132: + September p. And + see Kitty Calavita, Henry + N. Pontell, and Robert + +On line 15132: + p. And see Kitty + Calavita, Henry N. Pontell, + and Robert H. Till-man, + +On line 15132: + Calavita, Henry N. + Pontell, and Robert H. Till-man, + Big Money Crime: Fraud + +On line 15132: + N. Pontell, and Robert + H. Till-man, Big Money Crime: + Fraud and Politics + +On line 15132: + Pontell, and Robert H. + Till-man, Big Money Crime: Fraud + and Politics in + +On line 15132: + Till-man, Big Money + Crime: Fraud and Politics in + the Savings and Loan + +On line 15134: + University of + California Press, p. FDIC, + History of the + +On line 15134: + of California + Press, p. FDIC, History of + the Eighties: Lessons for + +On line 15134: + California Press, + p. FDIC, History of the + Eighties: Lessons for the + +On line 15136: + p. FDIC, History + of the Eighties: Lessons for the + Future, U.S. Treasury + +On line 15136: + Financial System: + Recommendations for Safer, + More Competitive + +On line 15136: + Recommendations + for Safer, More Competitive + Banks" (February p. + +On line 15138: + Subcommittee on + Economic Stabilization + of the Committee + +On line 15138: + Stabilization of + the Committee on Banking, + Finance, and Urban + +On line 15138: + Finance, and Urban + Affairs on the "Economic + Implications of + +On line 15144: + History of the + Eighties: Lessons for the Future, + George G. Kaufman, "Too + +On line 15144: + the Eighties: Lessons for + the Future, George G. Kaufman, + "Too Big to Fail in + +On line 15144: + Eighties: Lessons for the + Future, George G. Kaufman, "Too + Big to Fail in U.S. + +On line 15144: + Lessons for the Future, + George G. Kaufman, "Too Big to + Fail in U.S. Banking: + +On line 15144: + for the Future, George + G. Kaufman, "Too Big to Fail + in U.S. Banking: Quo + +On line 15144: + the Future, George G. + Kaufman, "Too Big to Fail in + U.S. Banking: Quo Vadis1" + +On line 15144: + George G. Kaufman, "Too + Big to Fail in U.S. Banking: + Quo Vadis1" in Too Big + +On line 15144: + G. Kaufman, "Too Big + to Fail in U.S. Banking: Quo + Vadis1" in Too Big to + +On line 15144: + Kaufman, "Too Big to + Fail in U.S. Banking: Quo Vadis1" + in Too Big to Fail: + +On line 15144: + "Too Big to Fail in + U.S. Banking: Quo Vadis1" in Too + Big to Fail: Policies + +On line 15144: + Big to Fail in U.S. + Banking: Quo Vadis1" in Too Big + to Fail: Policies and + +On line 15144: + Fail in U.S. Banking: + Quo Vadis1" in Too Big to Fail: + Policies and Practices + +On line 15144: + Quo Vadis1" in Too Big + to Fail: Policies and Practices + in Government Bailouts, + +On line 15144: + Vadis1" in Too Big to + Fail: Policies and Practices in + Government Bailouts, ed. + +On line 15144: + Big to Fail: Policies + and Practices in Government + Bailouts, ed. Benton E. + +On line 15144: + to Fail: Policies and + Practices in Government Bailouts, + ed. Benton E. Gup + +On line 15146: + Bailouts, ed. Benton E. + Gup (Westport, CT: Praeger, p. FCIC, + "Preliminary Staff + +On line 15148: + hearing before the + House Committee on Banking, + Housing, and Urban + +On line 15159: + on Banking, Housing, + and Urban Affairs). Ibid., pp. + Chapter Federal + +On line 15159: + and Urban Affairs). + Ibid., pp. Chapter Federal + National Mortgage + +On line 15163: + to Escape Attempt + at Tighter Regulation," Wall + Street Journal, June and + +On line 15163: + Escape Attempt at + Tighter Regulation," Wall Street + Journal, June and Stephen + +On line 15163: + Tighter Regulation," + Wall Street Journal, June and Stephen + Labaton, "Power + +On line 15163: + Wall Street Journal, June + and Stephen Labaton, "Power + of the Mortgage Twins: + +On line 15163: + Journal, June and Stephen + Labaton, "Power of the + Mortgage Twins: Fannie + +On line 15163: + and Stephen Labaton, + "Power of the Mortgage Twins: + Fannie and Freddie + +On line 15165: + Armando Falcon + Jr., written testimony + for the FCIC, Hearing + +On line 15165: + Falcon Jr., written + testimony for the FCIC, + Hearing on Subprime + +On line 15165: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 15165: + Government-Sponsored Enterprises + (GSEs), day session Office of + Federal Housing + +On line 15167: + Federal Housing + Enterprise Oversight, April p. + Wayne Passmore, "The GSE + +On line 15167: + Housing Enterprise + Oversight, April p. Wayne Passmore, + "The GSE Implicit + +On line 15167: + Enterprise Oversight, + April p. Wayne Passmore, "The GSE + Implicit Subsidy + +On line 15167: + April p. Wayne Passmore, + "The GSE Implicit Subsidy + and the Value of + +On line 15167: + Ambiguity," + Federal Reserve Board Staff + Working Paper See + +On line 15169: + Estimates of the + Subsidies to the Housing + GSEs," April Federal + +On line 15169: + the Housing GSEs," April + Federal Housing Finance + Agency, Report to + +On line 15171: + Federal Housing + Finance Agency, Report to + Congress, pp. Fannie + +On line 15171: + Report to Congress, + pp. Fannie Mae Charter Act + of §309(h), codified + +On line 15171: + Charter Act of §309(h), + codified at U.S.C. §1723a(h). The + Federal Housing + +On line 15171: + Federal Housing + Enterprises Financial + Safety and Soundness + +On line 15171: + Safety and Soundness + Act repealed this provision + and replaced it with + +On line 15171: + and replaced it with + more elaborate provisions. + Currently, the GSEs + +On line 15171: + with more elaborate + provisions. Currently, the + GSEs typically + +On line 15171: + Currently, the GSEs + typically define low- + and moderate-income + +On line 15171: + borrowers as those + with income at or below + median income + +On line 15171: + with income at or + below median income + for a given area. + +On line 15179: + on the National + Homeownership Strategy," + June President George + +On line 15179: + June President George + W. Bush, "President’s Remarks + to the National + +On line 15179: + W. Bush, "President’s + Remarks to the National + Association + +On line 15181: + Center, Columbus, Ohio, + October Andrew Cuomo, + interview by FCIC, + +On line 15183: + October Andrew + Cuomo, interview by FCIC, + December Daniel Mudd, + +On line 15183: + FCIC, December Daniel + Mudd, testimony before + the FCIC, Hearing on + +On line 15183: + Mudd, testimony + before the FCIC, Hearing on + Subprime Lending and + +On line 15183: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 15191: + Government-Sponsored Enterprises + (GSEs), day session Fannie Mae, + April transcript, pp. Notes + +On line 15191: + Enterprises (GSEs), + day session Fannie Mae, April + transcript, pp. Notes to + +On line 15193: + day session Fannie + Mae, April transcript, pp. Notes to + Chapter Richard Syron, + +On line 15193: + Mae, April transcript, pp. + Notes to Chapter Richard Syron, + interview by FCIC, + +On line 15195: + pp. Notes to Chapter + Richard Syron, interview by + FCIC, August Senate + +On line 15195: + Chapter Richard Syron, + interview by FCIC, August + Senate Lobbying + +On line 15197: + Act Database (www.senate.gov/legislative/Public_Disclosure/ LDA_reports.htm); + figures on employees and + PACs compiled by the + +On line 15197: + (www.senate.gov/legislative/Public_Disclosure/ LDA_reports.htm); figures on + employees and PACs compiled + by the Center for + +On line 15197: + by the Center for + Responsive Politics from + Federal Elections + +On line 15201: + April p. James Lockhart, + written testimony for + the FCIC, Hearing on + +On line 15201: + James Lockhart, written + testimony for the FCIC, + Hearing on Subprime + +On line 15201: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 15201: + Government-Sponsored Enterprises + (GSEs), day session Office of + Federal Housing + +On line 15205: + Martinez, interview + by FCIC, September June E. + O’Neill, remarks before + +On line 15205: + by FCIC, September + June E. O’Neill, remarks before + the Conference on + +On line 15205: + June E. O’Neill, remarks + before the Conference on + Appraising Fannie + +On line 15207: + Federal Housing + Finance Agency, Report to + Congress, tables and + +On line 15209: + to Congress, tables + and Lawrence Lindsey, interview + by FCIC, September + +On line 15211: + Congress, tables and + Lawrence Lindsey, interview by + FCIC, September Jim + +On line 15213: + Financial Markets + Association (SIFMA), + US ABS Outstanding. + +On line 15217: + US ABS Outstanding. + Scott Patterson, interview + by FCIC, August Gillian + +On line 15217: + ABS Outstanding. Scott + Patterson, interview by + FCIC, August Gillian Tett, + +On line 15217: + interview by FCIC, + August Gillian Tett, Fool’s Gold: How + the Bold Dream of a + +On line 15217: + by FCIC, August Gillian + Tett, Fool’s Gold: How the Bold Dream + of a Small Tribe at + +On line 15217: + FCIC, August Gillian Tett, + Fool’s Gold: How the Bold Dream of + a Small Tribe at J. + +On line 15217: + August Gillian Tett, Fool’s + Gold: How the Bold Dream of a + Small Tribe at J. P. + +On line 15217: + Gillian Tett, Fool’s Gold: How + the Bold Dream of a Small Tribe + at J. P. Morgan + +On line 15217: + Tett, Fool’s Gold: How the + Bold Dream of a Small Tribe at + J. P. Morgan Was + +On line 15217: + the Bold Dream of a + Small Tribe at J. P. Morgan + Was Corrupted by + +On line 15217: + Bold Dream of a Small + Tribe at J. P. Morgan Was + Corrupted by Wall + +On line 15217: + a Small Tribe at J. + P. Morgan Was Corrupted + by Wall Street Greed and + +On line 15217: + at J. P. Morgan + Was Corrupted by Wall Street + Greed and Unleashed a + +On line 15217: + Was Corrupted by + Wall Street Greed and Unleashed a + Catastrophe (New York: + +On line 15219: + Greed and Unleashed a + Catastrophe (New York: Free Press, + pp. Emmanuel Derman, + +On line 15219: + Catastrophe (New York: + Free Press, pp. Emmanuel Derman, + interview by FCIC, + +On line 15223: + FCIC, May Volcker, + interview. Vincent Reinhart, + interview by FCIC, + +On line 15225: + interview. Vincent + Reinhart, interview by FCIC, + September Lindsey, + +On line 15227: + futures contract is + a bilateral contract + in which one party, + +On line 15227: + a bilateral + contract in which one party, + the long position, + +On line 15227: + contract in which one + party, the long position, + is compensated + +On line 15227: + the long position, + is compensated if the + price or index or + +On line 15227: + long position, is + compensated if the price + or index or rate + +On line 15227: + is compensated + if the price or index or + rate underlying + +On line 15227: + compensated if + the price or index or rate + underlying the + +On line 15227: + the price or index + or rate underlying the + contract rises while + +On line 15227: + rate underlying + the contract rises while the + other party, the + +On line 15227: + the contract rises + while the other party, the + short position, is + +On line 15227: + the short position, + is compensated if it + goes down. An options + +On line 15227: + is compensated + if it goes down. An options + contract grants the right + +On line 15227: + goes down. An options + contract grants the right but not + the obligation to + +On line 15227: + contract grants the right + but not the obligation to + purchase or sell a + +On line 15227: + commodity or + financial instrument at + a particular + +On line 15227: + instrument at a + particular price in the + future; the option + +On line 15227: + particular price + in the future; the option + holder derives a + +On line 15227: + price in the future; + the option holder derives + a benefit if + +On line 15227: + in the future; the + option holder derives a + benefit if the + +On line 15227: + the option holder + derives a benefit if + the price moves in his + +On line 15227: + a benefit if + the price moves in his or her + favor. In a swaps + +On line 15227: + if the price moves in + his or her favor. In a + swaps contract, the two + +On line 15227: + his or her favor. + In a swaps contract, the two + parties exchange streams + +On line 15227: + In a swaps contract, + the two parties exchange streams + of payments based on + +On line 15229: + different benchmarks. + Securities options are + regulated by + +On line 15231: + Trading Commission, + Exemption for Certain Swap + Agreements, Final Rule, + +On line 15233: + Swap Agreements, Final + Rule, Federal Registrar + (January Brooksley + +On line 15233: + the House Committee + on Banking and Financial + Services, 105th Cong., 2nd + +On line 15235: + 2nd sess., July GAO, + "Financial Derivatives: + Actions Needed to + +On line 15237: + System," GGD-94-133 (Report + to Congressional Requesters), + May Commodity + +On line 15237: + Trading Commission, + "Division of Enforcement" + (www.cftc.gov/anr/an-renf98.htm). + +On line 15239: + Statement by Treasury + Secretary Robert E. Rubin, + Federal Reserve + +On line 15239: + Treasury Secretary + Robert E. Rubin, Federal + Reserve Board Chairman + +On line 15239: + Secretary Robert E. + Rubin, Federal Reserve + Board Chairman Alan Greenspan, + +On line 15239: + Rubin, Federal + Reserve Board Chairman Alan Greenspan, + and Securities + +On line 15239: + Chairman Alan Greenspan, and + Securities and Exchange + Commission Chairman + +On line 15241: + Commission Chairman + Arthur Levitt," Treasury Department + press release, May Fed + +On line 15241: + May Fed Chairman Alan + Greenspan, "The Regulation of + OTC Derivatives," + +On line 15241: + the House Committee + on Banking and Financial + Services, 105th Cong., 2nd + +On line 15243: + 2nd sess., July GAO, + "Long-Term Capital Management: + Regulators Need + +On line 15243: + GAO, "Long-Term Capital + Management: Regulators + Need to Focus Greater + +On line 15243: + Need to Focus Greater + Attention on Systemic Risk," + GAO/GGD-00-3 (Report to + +On line 15243: + Greater Attention on + Systemic Risk," GAO/GGD-00-3 (Report + to Congressional + +On line 15243: + Systemic Risk," GAO/GGD-00-3 + (Report to Congressional + Requesters), October + +On line 15243: + Risk," GAO/GGD-00-3 (Report + to Congressional Requesters), + October pp. The + +On line 15243: + to Congressional + Requesters), October pp. The + notional amount of + +On line 15243: + Requesters), October + pp. The notional amount of + OTC derivatives + +On line 15243: + of such contracts. Its + calculation is based on + the value of the + +On line 15243: + Its calculation + is based on the value of + the underlying + +On line 15243: + the underlying + instrument, commodity, + index, or rate that + +On line 15243: + or rate that the swap + is based on. It therefore may + be of limited + +On line 15243: + rate that the swap is + based on. It therefore may be + of limited use + +On line 15243: + that the swap is based + on. It therefore may be of + limited use in + +On line 15243: + based on. It therefore + may be of limited use + in measuring the + +On line 15243: + limited use in + measuring the potential + exposure of the + +On line 15243: + use in measuring + the potential exposure + of the parties to + +On line 15243: + in measuring the + potential exposure of + the parties to the + +On line 15243: + of the parties to + the contracts. For example, + an interest rate + +On line 15243: + the parties to the + contracts. For example, an + interest rate swap + +On line 15243: + to the contracts. For + example, an interest + rate swap based on changes + +On line 15243: + For example, an + interest rate swap based on + changes in interest + +On line 15243: + interest rate swap + based on changes in interest + rate on a million + +On line 15243: + interest rate on + a million loan would likely + involve only a + +On line 15243: + on a million loan + would likely involve only + a small percentage + +On line 15243: + a million loan would + likely involve only a + small percentage of + +On line 15245: + a small percentage + of the million notional + amount. On the other + +On line 15245: + small percentage of + the million notional amount. + On the other hand, + +On line 15245: + percentage of the + million notional amount. On + the other hand, price + +On line 15245: + million notional + amount. On the other hand, price + changes on an oil swap + +On line 15245: + notional amount. On + the other hand, price changes on + an oil swap based on + +On line 15245: + amount. On the other + hand, price changes on an oil swap + based on million worth + +On line 15245: + On the other hand, + price changes on an oil swap based + on million worth of + +On line 15245: + the other hand, price + changes on an oil swap based on + million worth of oil + +On line 15245: + hand, price changes on an + oil swap based on million worth + of oil could be even + +On line 15245: + price changes on an oil + swap based on million worth of + oil could be even more + +On line 15245: + changes on an oil swap + based on million worth of oil + could be even more than + +On line 15245: + on an oil swap based + on million worth of oil could + be even more than the + +On line 15245: + swap based on million + worth of oil could be even more + than the notional + +On line 15245: + based on million worth + of oil could be even more than + the notional amount, + +On line 15245: + worth of oil could be + even more than the notional + amount, depending on + +On line 15245: + of oil could be even + more than the notional amount, + depending on the + +On line 15245: + be even more than the + notional amount, depending + on the volatility + +On line 15245: + amount, depending on + the volatility in oil prices. + For credit default + +On line 15245: + depending on the + volatility in oil prices. For + credit default swaps, + +On line 15245: + the volatility in + oil prices. For credit default + swaps, which are discussed + +On line 15245: + volatility in oil + prices. For credit default swaps, + which are discussed in + +On line 15245: + For credit default + swaps, which are discussed in more + detail later in + +On line 15245: + detail later in + this volume, the notional + amount is usually + +On line 15245: + notional amount is + usually a close measure + of the potential + +On line 15245: + a close measure of + the potential financial + exposure of the + +On line 15249: + exposure of the + issuer or seller of the + swap. Notes to Chapter + +On line 15253: + of the issuer or + seller of the swap. Notes to + Chapter Fed Chairman + +On line 15253: + issuer or seller + of the swap. Notes to Chapter + Fed Chairman Alan Greenspan, + +On line 15253: + Management," prepared + testimony before the + House Committee on + +On line 15253: + the House Committee + on Banking and Financial + Services, 105th Cong., 2nd + +On line 15255: + Financial Services, + 105th Cong., 2nd sess., October + Fed Chairman Alan Greenspan, + +On line 15255: + Services, 105th Cong., 2nd + sess., October Fed Chairman + Alan Greenspan, "Financial + +On line 15255: + Fed Chairman Alan Greenspan, + "Financial Derivatives," + remarks before the + +On line 15255: + Futures Industry + Association, Boca + Raton, Florida, + +On line 15257: + Florida, March "Over-the-Counter + Derivatives Markets and + the Commodity + +On line 15257: + the Commodity + Exchange Act," report of the + President’s Working + +On line 15257: + Exchange Act," report + of the President’s Working + Group on Financial + +On line 15257: + Act," report of the + President’s Working Group on + Financial Markets, + +On line 15257: + of the President’s + Working Group on Financial + Markets, November + +On line 15259: + Markets, November + Gross market value is the + current price at which + +On line 15259: + Gross market value + is the current price at which + the outstanding swaps + +On line 15259: + is the current price + at which the outstanding swaps + contract can be sold + +On line 15259: + sold or replaced on + the market. As such, that amount + reflects the current + +On line 15259: + the market. As such, + that amount reflects the current + amount owing on a + +On line 15259: + such, that amount reflects + the current amount owing on + a contract but does + +On line 15259: + that amount reflects the + current amount owing on a + contract but does not + +On line 15259: + reflects the current + amount owing on a contract + but does not reflect + +On line 15259: + a contract but does + not reflect the possible + future exposure + +On line 15261: + future exposure + on these generally long-term + instruments. Bank for + +On line 15263: + Greenspan, testimony + before the FCIC, Hearing on + Subprime Lending and + +On line 15263: + on Subprime Lending + and Securitization + and Government-Sponsored Entities + +On line 15263: + Subprime Lending and + Securitization and + Government-Sponsored Entities (GSEs), + +On line 15263: + Government-Sponsored Entities (GSEs), + day session The Federal + Reserve, April transcript, + +On line 15265: + on Subprime Lending + and Securitization + and Government-Sponsored Entities + +On line 15265: + Subprime Lending and + Securitization and + Government-Sponsored Entities (GSEs), + +On line 15265: + and Government-Sponsored Entities + (GSEs), day session Citigroup + Senior Management, + +On line 15267: + Senior Management, + April transcript, pp. Lawrence Summers, + interview by FCIC, + +On line 15269: + April transcript, pp. Lawrence + Summers, interview by FCIC, + May Daniel K. Tarullo, + +On line 15269: + Summers, interview + by FCIC, May Daniel K. Tarullo, + Banking on Basel: The + +On line 15269: + interview by FCIC, + May Daniel K. Tarullo, Banking + on Basel: The Future + +On line 15271: + International + Economics, p. Final Rule—Amendment + to Regulations + +On line 15271: + p. Final Rule—Amendment to + Regulations H and Y," + Federal Reserve + +On line 15275: + on Basel, pp. For more + on derivatives, see FCIC, + "Preliminary Staff + +On line 15275: + on derivatives, + see FCIC, "Preliminary Staff + Report: Overview on + +On line 15277: + June Warren Buffett, + testimony before the + FCIC, Hearing on the + +On line 15277: + the FCIC, Hearing on + the Credibility of + Credit Ratings, the + +On line 15277: + Credit Ratings, the + Investment Decisions Made + Based on Those Ratings, + +On line 15277: + Those Ratings, and the + Financial Crisis, session + Credit Ratings and + +On line 15279: + Credit Ratings and + the Financial Crisis, June + transcript, pp. Eric + +On line 15279: + Financial Crisis, + June transcript, pp. Eric R. + Dinallo, former + +On line 15279: + Department, written + testimony for the FCIC, + Hearing on the Role + +On line 15279: + testimony for + the FCIC, Hearing on the Role + of Derivatives + +On line 15279: + the FCIC, Hearing on + the Role of Derivatives + in the Financial + +On line 15279: + Hearing on the Role + of Derivatives in the + Financial Crisis, + +On line 15279: + Supervisors and + Regulators, July p. + Rochelle Katz, State of New + +On line 15279: + and Regulators, + July p. Rochelle Katz, State of + New York Insurance + +On line 15279: + July p. Rochelle Katz, + State of New York Insurance + Department, letter + +On line 15279: + Rochelle Katz, State of New + York Insurance Department, + letter to Bertil Lundqvist, + +On line 15279: + New York Insurance + Department, letter to Bertil + Lundqvist, Skadden, Arps, Slate, + +On line 15281: + Bertil Lundqvist, Skadden, Arps, + Slate, Meagher Flom, LLP, June Data + provided by AIG + +On line 15281: + Arps, Slate, Meagher Flom, LLP, + June Data provided by + AIG to the FCIC, CDS + +On line 15281: + Flom, LLP, June Data + provided by AIG to the + FCIC, CDS notional + +On line 15283: + provided by AIG + to the FCIC, CDS notional + balances at year-end. Bank + +On line 15283: + International + Settlements, semiannual + OTC derivatives + +On line 15285: + CDS in September + was estimated to be + trillion at a time + +On line 15285: + estimated to + be trillion at a time when + there was about trillion + +On line 15285: + be trillion at a + time when there was about trillion + of private-sector + +On line 15285: + trillion at a time + when there was about trillion of + private-sector debt + +On line 15285: + was about trillion of + private-sector debt (written + testimony for + +On line 15285: + of private-sector + debt (written testimony + for the FDIC, July + +On line 15285: + private-sector debt + (written testimony for + the FDIC, July p. + +On line 15287: + the FDIC, July p. + "AIGFP also participates + as a dealer in + +On line 15287: + FDIC, July p. "AIGFP + also participates as + a dealer in a + +On line 15287: + wide variety of + financial derivatives + transactions" (AIG, Form + +On line 15287: + p. AIG’s notional + derivatives outstanding + were trillion at the + +On line 15287: + were trillion at the + end of including trillion + of interest rate + +On line 15287: + trillion at the end + of including trillion of + interest rate swaps, + +On line 15287: + trillion of credit + derivatives, trillion of + currency swaps, and + +On line 15289: + staff calculations + using data from Office + of the Comptroller + +On line 15289: + using data from + Office of the Comptroller + of the Currency; + +On line 15291: + the Comptroller of + the Currency; call reports. + Data provided + +On line 15297: + call reports. Data + provided to the FCIC by + Goldman Sachs. Chapter + +On line 15300: + Data provided + to the FCIC by Goldman Sachs. + Chapter Public Law + +On line 15300: + the FCIC by Goldman + Sachs. Chapter Public Law 103-328, + September Before + +On line 15300: + Sachs. Chapter Public + Law 103-328, September Before + the legislation, + +On line 15300: + Chapter Public Law + 103-328, September Before the + legislation, some + +On line 15300: + legislation, some + states had voluntarily + opened themselves up to + +On line 15300: + up to out-of-state + banks. FDIC, History of the + Eighties: Lessons for the + +On line 15300: + out-of-state banks. FDIC, + History of the Eighties: + Lessons for the Future, + +On line 15300: + Lessons for the Future, + vol. An Examination + of the Banking Crises + +On line 15300: + for the Future, vol. + An Examination of + the Banking Crises of + +On line 15300: + the Future, vol. An + Examination of the + Banking Crises of the + +On line 15300: + Examination + of the Banking Crises of the + 1980s and Early 1990s + +On line 15300: + of the Banking Crises + of the 1980s and Early 1990s + (Washington, DC: FDIC, + +On line 15302: + Crises of the 1980s and + Early 1990s (Washington, DC: + FDIC, p. These were the + +On line 15302: + the 1980s and Early + 1990s (Washington, DC: FDIC, p. + These were the largest banks + +On line 15302: + 1980s and Early 1990s + (Washington, DC: FDIC, p. These + were the largest banks as + +On line 15302: + DC: FDIC, p. These were + the largest banks as of See FCIC, + "Preliminary Staff + +On line 15306: + August p. Data + from SNL Financial (www.snl.com/). + Public Law 104-208, sec. + +On line 15306: + from SNL Financial + (www.snl.com/). Public Law 104-208, sec. + codified as U.S.C. + +On line 15306: + (www.snl.com/). Public Law + 104-208, sec. codified as U.S.C. + law in effect as + +On line 15308: + 104-208, sec. codified + as U.S.C. law in effect as + of January Arthur + +On line 15308: + sec. codified as + U.S.C. law in effect as of + January Arthur Levitt, + +On line 15308: + U.S.C. law in effect + as of January Arthur Levitt, + interview by FCIC, + +On line 15314: + as of January + Arthur Levitt, interview by FCIC, + October Notes to + +On line 15316: + Arthur Levitt, interview + by FCIC, October Notes to + Chapter John D. Hawke + +On line 15316: + interview by FCIC, + October Notes to Chapter + John D. Hawke and John + +On line 15316: + October Notes to + Chapter John D. Hawke and John + Dugan, testimony + +On line 15316: + John D. Hawke and John + Dugan, testimony before + the FCIC, Hearing on + +On line 15316: + Dugan, testimony + before the FCIC, Hearing on + Subprime Lending and + +On line 15316: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 15316: + Government-Sponsored Enterprises + (GSEs), day session Office of + the Comptroller of + +On line 15316: + Enterprises (GSEs), + day session Office of the + Comptroller of the + +On line 15318: + the Comptroller of + the Currency, April transcript, + pp. Fed Vice Chairman + +On line 15318: + Comptroller of the + Currency, April transcript, pp. + Fed Vice Chairman Roger + +On line 15318: + the Currency, April + transcript, pp. Fed Vice Chairman + Roger W. Ferguson + +On line 15318: + transcript, pp. Fed Vice + Chairman Roger W. Ferguson + Jr., "The Future of + +On line 15318: + Vice Chairman Roger W. + Ferguson Jr., "The Future + of Financial Services—Revisited," + +On line 15318: + W. Ferguson Jr., + "The Future of Financial + Services—Revisited," remarks at the + +On line 15318: + of Financial Services—Revisited," + remarks at the Future of + Financial Services + +On line 15318: + Financial Services + Conference, University + of Massachusetts, + +On line 15320: + Fed Chairman Alan Greenspan, + "Government Regulation + and Derivative + +On line 15320: + Regulation and + Derivative Contracts," speech + at the Financial + +On line 15320: + at the Financial + Markets Conference of the + Federal Reserve + +On line 15320: + Markets Conference + of the Federal Reserve + Bank of Atlanta, Coral + +On line 15322: + Bank of Atlanta, Coral + Gables, Florida, February + Richard Spillenkothen, "Notes on the + +On line 15322: + Coral Gables, Florida, + February Richard Spillenkothen, "Notes on + the performance of + +On line 15322: + Richard Spillenkothen, "Notes on the + performance of prudential + supervision in + +On line 15322: + years preceding the + financial crisis by a + former director + +On line 15322: + former director + of banking supervision + and regulation + +On line 15324: + and regulation + at the Federal Reserve + Board to May p. See + +On line 15324: + regulation at + the Federal Reserve Board + to May p. See U.S. + +On line 15324: + at the Federal + Reserve Board to May p. See + U.S. Department of + +On line 15324: + to May p. See U.S. + Department of the Treasury, + Modernizing the + +On line 15324: + Department of the + Treasury, Modernizing the + Financial System + +On line 15324: + System (February + pp. XIX-5, XIX-6, "the existence + of fewer agencies + +On line 15324: + of arbitrary or + inflexible behavior. + Agency pluralism, + +On line 15324: + behavior. Agency + pluralism, on the other + hand, may be useful, + +On line 15324: + Agency pluralism, + on the other hand, may be + useful, since it can + +On line 15324: + pluralism, on the + other hand, may be useful, + since it can bring to + +On line 15324: + other hand, may be + useful, since it can bring to + bear on general + +On line 15324: + useful, since it can + bring to bear on general + bank supervision + +On line 15324: + bank supervision + the different perspectives + and experiences + +On line 15324: + supervision the + different perspectives and + experiences of + +On line 15324: + and experiences + of each regulator, and + it subjects each one, + +On line 15324: + experiences of + each regulator, and it + subjects each one, where + +On line 15324: + each regulator, + and it subjects each one, where + consultation and + +On line 15324: + and it subjects each + one, where consultation and + coordination + +On line 15324: + where consultation + and coordination are + required, to the checks + +On line 15326: + required, to the checks + and balances of the others’ + opinion." Fed Chairman + +On line 15326: + the others’ opinion." + Fed Chairman Alan Greenspan, statement + before the Senate + +On line 15326: + opinion." Fed Chairman + Alan Greenspan, statement before the + Senate Committee + +On line 15326: + Greenspan, statement before + the Senate Committee on + Banking, Housing, and + +On line 15326: + on Banking, Housing, + and Urban Affairs, 103rd Cong., + 2nd sess., March reprinted + +On line 15326: + Banking, Housing, and + Urban Affairs, 103rd Cong., 2nd + sess., March reprinted in + +On line 15326: + and Urban Affairs, + 103rd Cong., 2nd sess., March reprinted + in the Federal + +On line 15326: + 103rd Cong., 2nd sess., March + reprinted in the Federal + Reserve Bulletin, May + +On line 15330: + Governors of the + Federal Reserve System, + F.Supp. (D.D.C. Kathleen Day, + +On line 15330: + Federal Reserve + System, F.Supp. (D.D.C. Kathleen Day, + "Reinventing the Bank; + +On line 15330: + Reserve System, F.Supp. + (D.D.C. Kathleen Day, "Reinventing + the Bank; With Depression-Era Law + +On line 15330: + Day, "Reinventing the + Bank; With Depression-Era Law about to Be + Rewritten, the Future + +On line 15330: + Depression-Era Law about to Be + Rewritten, the Future Remains + Unclear," Washington + +On line 15334: + in "The Making of + a Law," ABA Banking Journal, + December The two-year + +On line 15334: + December The two-year + exemption is contained in + section 4(a)(2) of the + +On line 15334: + The two-year exemption + is contained in section 4(a)(2) + of the Bank Holding + +On line 15334: + in section 4(a)(2) of + the Bank Holding Company + Act. The Fed could have + +On line 15334: + of the Bank Holding + Company Act. The Fed could + have granted up to + +On line 15334: + Company Act. The + Fed could have granted up to + three one-year extensions + +On line 15334: + Fed could have granted + up to three one-year extensions + of that exemption. + +On line 15336: + could have granted up + to three one-year extensions of + that exemption. FCIC + +On line 15336: + have granted up to + three one-year extensions of that + exemption. FCIC staff + +On line 15336: + three one-year extensions + of that exemption. FCIC staff + computations based + +On line 15336: + of that exemption. + FCIC staff computations based + on data from the + +On line 15336: + includes insurance + companies, commercial banks, + securities and + +On line 15336: + securities and + investment firms, finance and + credit companies, + +On line 15338: + bankers and brokers. U.S. + Department of the Treasury, + Modernizing the + +On line 15338: + Department of the + Treasury, Modernizing the + Financial System + +On line 15338: + System (February + Fed Chairman Alan Greenspan, "H.R. the + Financial Services + +On line 15338: + Fed Chairman Alan Greenspan, + "H.R. the Financial Services + Competitiveness + +On line 15338: + the House Committee + on Banking and Financial + Services, 105th Cong., 1st + +On line 15340: + 105th Cong., 1st sess., May + Katrina Brooker, "Citi’s + Creator, Alone with His + +On line 15340: + May Katrina + Brooker, "Citi’s Creator, Alone with + His Regrets," New York + +On line 15342: + Brooker, "Citi’s Creator, + Alone with His Regrets," New York + Times, January John + +On line 15342: + Alone with His Regrets," + New York Times, January John + Reed, interview by + +On line 15342: + with His Regrets," New + York Times, January John Reed, + interview by FCIC, + +On line 15344: + Times, January John + Reed, interview by FCIC, March + FDIC Institution + +On line 15344: + Reed, interview by + FCIC, March FDIC Institution + Directory; SNL + +On line 15346: + Directory; SNL + Financial. Fed Governor + Laurence H. Meyer, + +On line 15346: + Implications of + Financial Modernization + Legislation for + +On line 15346: + Legislation for + Bank Supervision," remarks + at the Symposium + +On line 15348: + Women in Housing + and Finance, Washington, D.C., + December Ben S. + +On line 15348: + Housing and Finance, + Washington, D.C., December + Ben S. Bernanke, written + +On line 15348: + Ben S. Bernanke, written + testimony before the + FCIC, Hearing on Too + +On line 15348: + Financial Crisis, + day session The Federal + Reserve, September + +On line 15350: + Reserve, September + p. Patricia A. McCoy et + al., "Systemic Risk through + +On line 15352: + Review Fed Chairman + Alan Greenspan, "Lessons from the Global + Crises," remarks before + +On line 15352: + Chairman Alan Greenspan, "Lessons + from the Global Crises," remarks + before the World Bank + +On line 15352: + Alan Greenspan, "Lessons from the + Global Crises," remarks before + the World Bank Group and + +On line 15354: + DC, September David + A. Marshall, "The Crisis of + and the Role of the + +On line 15354: + "The Crisis of and + the Role of the Central Bank," + Federal Reserve + +On line 15354: + of the Central Bank," + Federal Reserve Bank of + Chicago, Economic + +On line 15356: + Chicago, Economic + Perspectives (1Q Commercial + and industrial + +On line 15356: + at all commercial + banks, monthly, seasonally + adjusted, from the + +On line 15356: + from the Federal + Reserve Board of Governors + H.8 release; FCIC staff + +On line 15356: + staff calculation + of average change in loans + outstanding over any + +On line 15356: + of average change + in loans outstanding over any + two consecutive + +On line 15356: + average change in + loans outstanding over any two + consecutive months + +On line 15358: + in loans outstanding + over any two consecutive + months in and Franklin R. + +On line 15358: + outstanding over any + two consecutive months in + and Franklin R. Edwards, + +On line 15358: + consecutive months + in and Franklin R. Edwards, "Hedge + Funds and the Collapse + +On line 15366: + Management," Journal + of Economic Perspectives + Notes to Chapter "Hedge + +On line 15366: + "Hedge Funds, Leverage, and + the Lessons of Long-Term Capital + Management," Report + +On line 15366: + of Long-Term Capital + Management," Report of the + President’s Working + +On line 15366: + Management," Report + of the President’s Working + Group on Financial + +On line 15368: + President’s Working + Group on Financial Markets, + April p. Edwards, "Hedge + +On line 15368: + Group on Financial + Markets, April p. Edwards, "Hedge + Funds and the Collapse + +On line 15368: + Financial Markets, + April p. Edwards, "Hedge Funds and + the Collapse of Long-Term + +On line 15370: + and the Collapse of + Long-Term Capital Management," + pp. and Bloomberg. Ibid., pp. + +On line 15370: + the Collapse of Long-Term + Capital Management," pp. + and Bloomberg. Ibid., pp. Roger + +On line 15370: + of Long-Term Capital + Management," pp. and Bloomberg. Ibid., + pp. Roger Lowenstein, When + +On line 15370: + Management," pp. and + Bloomberg. Ibid., pp. Roger Lowenstein, When + Genius Failed: The Rise + +On line 15370: + pp. and Bloomberg. Ibid., pp. + Roger Lowenstein, When Genius Failed: + The Rise and Fall of + +On line 15370: + and Bloomberg. Ibid., pp. Roger + Lowenstein, When Genius Failed: The + Rise and Fall of Long-Term + +On line 15370: + pp. Roger Lowenstein, When + Genius Failed: The Rise and Fall + of Long-Term Capital + +On line 15370: + Genius Failed: The Rise + and Fall of Long-Term Capital + Management (New York: + +On line 15370: + The Rise and Fall of + Long-Term Capital Management + (New York: Random House, + +On line 15370: + Rise and Fall of Long-Term + Capital Management (New + York: Random House, pp. + +On line 15372: + York: Random House, pp. + "Hedge Funds, Leverage, and the Lessons + of Long-Term Capital + +On line 15374: + "Hedge Funds, Leverage, and + the Lessons of Long-Term Capital + Management," pp. William + +On line 15374: + of Long-Term Capital + Management," pp. William J. McDonough, + president of the + +On line 15374: + Management," pp. William + J. McDonough, president of the + Federal Reserve + +On line 15374: + McDonough, president of + the Federal Reserve Bank + of New York, statement + +On line 15374: + the House Committee + on Banking and Financial + Services, 105th Cong., 2nd + +On line 15376: + Financial Services, + 105th Cong., 2nd sess., October + GAO, "Long-Term Capital + +On line 15376: + sess., October GAO, + "Long-Term Capital Management: + Regulators Need + +On line 15376: + GAO, "Long-Term Capital + Management: Regulators + Need to Focus Greater + +On line 15376: + Need to Focus Greater + Attention on Systemic Risk," + GAO/GGD-00-3 (Report to + +On line 15376: + Greater Attention on + Systemic Risk," GAO/GGD-00-3 (Report + to Congressional + +On line 15376: + Systemic Risk," GAO/GGD-00-3 + (Report to Congressional + Requesters), October + +On line 15378: + Risk," GAO/GGD-00-3 (Report + to Congressional Requesters), + October p. "Hedge + +On line 15378: + to Congressional + Requesters), October p. "Hedge + Funds, Leverage, and the + +On line 15380: + and the Lessons of Long-Term + Capital Management," pp. + Lowenstein, When Genius + +On line 15382: + of Long-Term Capital + Management," pp. Lowenstein, When + Genius Failed, pp. McDonough, + +On line 15382: + Lowenstein, When Genius + Failed, pp. McDonough, statement before + the House Committee + +On line 15382: + the House Committee + on Banking and Financial + Services, October + +On line 15384: + Brimmer, "Distinguished + Lecture on Economics in + Government: Central + +On line 15384: + on Economics in + Government: Central Banking + and Systemic Risks in + +On line 15384: + Government: Central + Banking and Systemic Risks in + Capital Markets," + +On line 15384: + Central Banking and + Systemic Risks in Capital + Markets," Journal of + +On line 15384: + Markets," Journal of + Economic Perspectives, no. + (Spring (lecture by a + +On line 15384: + no. (Spring (lecture by + a former Fed governor, + analyzing the + +On line 15384: + interventions in + and and concluding that the + Fed had consciously + +On line 15384: + and and concluding + that the Fed had consciously + assumed a "strategic + +On line 15384: + concluding that the + Fed had consciously assumed + a "strategic role as + +On line 15384: + Fed had consciously + assumed a "strategic role as + the ultimate source + +On line 15384: + assumed a "strategic + role as the ultimate source + of liquidity + +On line 15384: + as the ultimate + source of liquidity in + the economy at + +On line 15384: + the ultimate source + of liquidity in the + economy at large"); + +On line 15384: + of liquidity + in the economy at large"); + Keith Garbade, "The + +On line 15384: + Federal Reserve + Bank of New York Economic + Policy Review + +On line 15386: + Reserve Bank of New + York Economic Policy + Review (May Harvey + +On line 15390: + interview by FCIC, + September Fed Chairman Alan + Greenspan, "Do efficient + +On line 15390: + Fed Chairman Alan Greenspan, + "Do efficient financial + markets mitigate + +On line 15390: + financial markets + mitigate financial crises1" + remarks before the + +On line 15390: + Conference of the + Federal Reserve Bank of + Atlanta, October + +On line 15396: + "Hedge Funds, Leverage, and + the Lessons of Long-Term Capital + Management," p. Ibid. + +On line 15400: + and the Lessons of Long-Term + Capital Management," p. + Ibid. Ibid. Philip Goldstein, + +On line 15400: + of Long-Term Capital + Management," p. Ibid. Ibid. Philip + Goldstein, et al. v. + +On line 15400: + Management," p. Ibid. + Ibid. Philip Goldstein, et al. v. + SEC, Opinion, Case No. + +On line 15400: + Ibid. Ibid. Philip Goldstein, + et al. v. SEC, Opinion, Case + No. 04-1434 (D.C. Cir. June + +On line 15402: + Ibid. Philip Goldstein, et + al. v. SEC, Opinion, Case No. + 04-1434 (D.C. Cir. June Time, + +On line 15402: + Opinion, Case No. 04-1434 + (D.C. Cir. June Time, February + Bob Woodward, Maestro: + +On line 15402: + No. 04-1434 (D.C. Cir. June + Time, February Bob Woodward, + Maestro: Greenspan’s Fed and + +On line 15402: + June Time, February + Bob Woodward, Maestro: Greenspan’s Fed + and the American + +On line 15402: + Time, February Bob + Woodward, Maestro: Greenspan’s Fed and + the American Boom + +On line 15402: + Bob Woodward, Maestro: + Greenspan’s Fed and the American + Boom (New York: Simon + +On line 15406: + Board of Governors + of the Federal Reserve + System, Federal + +On line 15406: + Governors of the + Federal Reserve System, + Federal Reserve + +On line 15406: + Federal Reserve + Statistical Release Z.1: + Flow of Funds Accounts + +On line 15406: + Flow of Funds Accounts + of the United States, 4th Qtr. + p. (Table L.213, line + +On line 15406: + of Funds Accounts of + the United States, 4th Qtr. p. + (Table L.213, line 4th + +On line 15406: + of the United States, + 4th Qtr. p. (Table L.213, line + 4th Qtr. p. (Table + +On line 15406: + the United States, 4th + Qtr. p. (Table L.213, line 4th + Qtr. p. (Table L.213, + +On line 15406: + United States, 4th Qtr. + p. (Table L.213, line 4th Qtr. + p. (Table L.213, line + +On line 15408: + 4th Qtr. p. (Table + L.213, line 4th Qtr. p. (Table + L.213, line SEC Chairman + +On line 15408: + Qtr. p. (Table L.213, + line 4th Qtr. p. (Table L.213, + line SEC Chairman William + +On line 15408: + p. (Table L.213, line + 4th Qtr. p. (Table L.213, line + SEC Chairman William H. + +On line 15408: + L.213, line 4th Qtr. p. + (Table L.213, line SEC Chairman + William H. Donaldson, + +On line 15408: + SEC Chairman William H. + Donaldson, "Testimony + Concerning Global + +On line 15408: + Settlement," before + the Senate Committee on + Banking, Housing and + +On line 15410: + on Banking, Housing + and Urban Affairs, 108th Cong., + 1st sess., May SEC, "SEC + +On line 15410: + Banking, Housing and + Urban Affairs, 108th Cong., 1st + sess., May SEC, "SEC Fact + +On line 15410: + Housing and Urban + Affairs, 108th Cong., 1st sess., May + SEC, "SEC Fact Sheet on + +On line 15410: + and Urban Affairs, + 108th Cong., 1st sess., May SEC, "SEC + Fact Sheet on Global + +On line 15410: + Affairs, 108th Cong., 1st + sess., May SEC, "SEC Fact Sheet on + Global Analyst + +On line 15410: + 108th Cong., 1st sess., May + SEC, "SEC Fact Sheet on Global + Analyst Research + +On line 15410: + sess., May SEC, "SEC Fact + Sheet on Global Analyst + Research Settlements," + +On line 15410: + Research Settlements," + April Financial Industry + Regulatory + +On line 15410: + Regulatory + Authority news release, + "NASD Fines Piper Jaffray + +On line 15412: + news release, "NASD Fines + Piper Jaffray Million for IPO + Spinning," July Arthur + +On line 15412: + Piper Jaffray Million + for IPO Spinning," July Arthur + E. Wilmarth Jr., "Conflicts + +On line 15412: + Jaffray Million for + IPO Spinning," July Arthur E. + Wilmarth Jr., "Conflicts of + +On line 15412: + Wilmarth Jr., "Conflicts of + Interest and Corporate + Governance Failures + +On line 15412: + Governance Failures + at Universal Banks During + the Stock Market Boom + +On line 15412: + Banks During the Stock + Market Boom of the 1990s: The + Cases of Enron + +On line 15412: + the Stock Market Boom + of the 1990s: The Cases of + Enron and WorldCom," George + +On line 15414: + Theory Working + Paper Fed Chairman Alan Greenspan, + "International + +On line 15414: + "International + Financial Risk Management," + remarks before the + +On line 15416: + Services—Revisited." Spillenkothen, "Notes on the + performance of prudential + supervision in + +On line 15418: + the years preceding + the financial crisis," p. + "First the Put; Then the + +On line 15418: + years preceding the + financial crisis," p. "First + the Put; Then the Cut1" + +On line 15424: + crisis," p. "First the + Put; Then the Cut1" Economist, + December p. Notes + +On line 15424: + "First the Put; Then the + Cut1" Economist, December + p. Notes to Chapter + +On line 15426: + the Put; Then the Cut1" + Economist, December p. + Notes to Chapter Fed + +On line 15426: + p. Notes to Chapter + Fed Chairman Alan Greenspan, "Risk and + Uncertainty in + +On line 15426: + at the Meetings of + the American Economic + Association, + +On line 15426: + Diego, California, + January See also Fed + Governor Ben S. + +On line 15426: + S. Bernanke, "Asset-Price ‘Bubbles’ + and Monetary Policy," + remarks before the + +On line 15428: + Association + of Business Economics, New + York, October Fed + +On line 15428: + Economics, New York, + October Fed Chairman Alan + Greenspan, "Reflections on + +On line 15428: + York, October Fed + Chairman Alan Greenspan, "Reflections + on Central Banking," + +On line 15428: + Alan Greenspan, "Reflections + on Central Banking," remarks + at a symposium + +On line 15428: + symposium sponsored + by the Federal Reserve + Board of Kansas City, + +On line 15430: + Federal Reserve + Board of Kansas City, Jackson + Hole, Wyoming, August Lawrence + +On line 15430: + Board of Kansas City, + Jackson Hole, Wyoming, August Lawrence + Lindsey, interview + +On line 15430: + Kansas City, Jackson + Hole, Wyoming, August Lawrence Lindsey, + interview by FCIC, + +On line 15432: + Hole, Wyoming, August Lawrence + Lindsey, interview by FCIC, + September The NYSE + +On line 15432: + Lindsey, interview + by FCIC, September The NYSE + decided in to + +On line 15432: + by FCIC, September + The NYSE decided in to + allow members to + +On line 15432: + The NYSE decided + in to allow members to + be publicly traded. + +On line 15432: + NYSE decided in + to allow members to be + publicly traded. See + +On line 15432: + to allow members + to be publicly traded. See + Andrew von Norden + +On line 15434: + be publicly traded. + See Andrew von Norden - + flycht, "The Demise of + +On line 15434: + the Professional + Partnership1 The Emergence and + Diffusion of Publicly-Traded + +On line 15436: + Peter Solomon, written + testimony for the FCIC, + First Public Hearing + +On line 15436: + testimony for + the FCIC, First Public Hearing + of FCIC, day panel + +On line 15436: + the FCIC, First Public + Hearing of FCIC, day panel + Financial Market + +On line 15438: + Financial Market + Participants, January + p. Brian R. Leach, + +On line 15440: + p. Brian R. Leach, + interview by FCIC, March p. + Jian Cai, Kent Cherny, and + +On line 15440: + R. Leach, interview + by FCIC, March p. Jian Cai, Kent + Cherny, and Todd Milbourn, + +On line 15440: + by FCIC, March p. Jian + Cai, Kent Cherny, and Todd Milbourn, + "Compensation and + +On line 15440: + Jian Cai, Kent Cherny, and + Todd Milbourn, "Compensation + and Risk Incentives + +On line 15440: + Cai, Kent Cherny, and Todd + Milbourn, "Compensation and + Risk Incentives in + +On line 15440: + Banking and Finance," + Federal Reserve Bank of + Cleveland Economic + +On line 15442: + Frydman and Raven + E. Saks, "Historical Trends + in Executive + +On line 15444: + "Compensation and + Risk Incentives in Banking + and Finance." Goldman + +On line 15444: + Risk Incentives in + Banking and Finance." Goldman + Sachs, and 10-K; Morgan + +On line 15444: + Banking and Finance." + Goldman Sachs, and 10-K; Morgan + Stanley, 10-K; Merrill + +On line 15444: + and Finance." Goldman + Sachs, and 10-K; Morgan Stanley, + 10-K; Merrill Lynch, and + +On line 15446: + Finance." Goldman Sachs, + and 10-K; Morgan Stanley, 10-K; + Merrill Lynch, and 10-K. + +On line 15448: + Sachs, and 10-K; Morgan + Stanley, 10-K; Merrill Lynch, and + 10-K. "Gutfreund’s Pay + +On line 15448: + Stanley, 10-K; Merrill + Lynch, and 10-K. "Gutfreund’s Pay + Is Cut," New York Times, + +On line 15448: + Merrill Lynch, and 10-K. + "Gutfreund’s Pay Is Cut," New + York Times, December + +On line 15452: + Is Cut," New York Times, + December Merrill Lynch, Proxy + Statement," p. Goldman + +On line 15452: + December Merrill + Lynch, Proxy Statement," p. Goldman + Sachs, "Proxy Statement for + +On line 15452: + Lynch, Proxy Statement," p. + Goldman Sachs, "Proxy Statement for + Annual Meeting + +On line 15454: + of Shareholders," March + p. Blankfein received base salary + and a year-end bonus of + +On line 15456: + p. Blankfein received + base salary and a year-end bonus of + million. Lehman Brothers, + +On line 15456: + received base salary and + a year-end bonus of million. Lehman + Brothers, "Proxy Statement + +On line 15456: + base salary and a year-end + bonus of million. Lehman Brothers, + "Proxy Statement for Year-end + +On line 15456: + salary and a year-end bonus + of million. Lehman Brothers, "Proxy + Statement for Year-end p. + +On line 15456: + year-end bonus of million. + Lehman Brothers, "Proxy Statement for + Year-end p. JP Morgan + +On line 15456: + bonus of million. Lehman + Brothers, "Proxy Statement for Year-end + p. JP Morgan Chase, + +On line 15458: + Brothers, "Proxy Statement + for Year-end p. JP Morgan Chase, + Proxy Statement," p. New + +On line 15458: + Year-end p. JP Morgan + Chase, Proxy Statement," p. New York + State Office of the + +On line 15458: + p. JP Morgan Chase, + Proxy Statement," p. New York State + Office of the State + +On line 15458: + Chase, Proxy Statement," p. + New York State Office of the + State Comptroller, "New + +On line 15458: + Proxy Statement," p. New + York State Office of the State + Comptroller, "New York + +On line 15458: + York State Office of + the State Comptroller, "New York + City Securities + +On line 15458: + the State Comptroller, + "New York City Securities + Industry Bonus Pool," + +On line 15458: + Industry Bonus Pool," + February The bonus pool is + for securities + +On line 15458: + The bonus pool is for + securities industry + (NAICS employees who + +On line 15458: + for securities + industry (NAICS employees + who work in New York + +On line 15460: + (NAICS employees who + work in New York City. "Banks Set + for Record Pay, Top Firms + +On line 15460: + employees who work + in New York City. "Banks Set for + Record Pay, Top Firms on + +On line 15460: + who work in New York + City. "Banks Set for Record Pay, Top + Firms on Pace to Award + +On line 15460: + in New York City. "Banks + Set for Record Pay, Top Firms on + Pace to Award Billion + +On line 15460: + New York City. "Banks Set + for Record Pay, Top Firms on Pace + to Award Billion for + +On line 15460: + York City. "Banks Set for + Record Pay, Top Firms on Pace to + Award Billion for Up + +On line 15460: + City. "Banks Set for Record + Pay, Top Firms on Pace to Award + Billion for Up WSJ + +On line 15460: + Set for Record Pay, Top + Firms on Pace to Award Billion + for Up WSJ Study Finds," + +On line 15460: + for Record Pay, Top Firms + on Pace to Award Billion for + Up WSJ Study Finds," WSJ.com, + +On line 15460: + Top Firms on Pace to + Award Billion for Up WSJ Study + Finds," WSJ.com, January + +On line 15462: + Firms on Pace to Award + Billion for Up WSJ Study Finds," + WSJ.com, January Sandy + +On line 15462: + Award Billion for Up + WSJ Study Finds," WSJ.com, January + Sandy Weill, interview + +On line 15462: + Billion for Up WSJ + Study Finds," WSJ.com, January Sandy + Weill, interview by + +On line 15464: + Finds," WSJ.com, January + Sandy Weill, interview by FCIC, + October Lord Adair + +On line 15464: + Sandy Weill, interview + by FCIC, October Lord Adair + Turner, interview + +On line 15464: + interview by FCIC, + October Lord Adair Turner, + interview by FCIC, + +On line 15464: + by FCIC, October + Lord Adair Turner, interview + by FCIC, November + +On line 15466: + FCIC, October Lord + Adair Turner, interview by + FCIC, November Ben + +On line 15466: + October Lord Adair + Turner, interview by FCIC, + November Ben S. + +On line 15466: + Turner, interview + by FCIC, November Ben S. + Bernanke, testimony + +On line 15466: + November Ben S. + Bernanke, testimony before + the FCIC, Hearing on + +On line 15466: + Financial Crisis, + day session The Federal + Reserve, September + +On line 15468: + p. Testimony + of Armando Falcon Jr., + former director + +On line 15468: + Federal Housing + Enterprise Oversight, written + testimony for + +On line 15468: + Enterprise Oversight, + written testimony for + the FCIC, Hearing on + +On line 15468: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 15468: + Government-Sponsored Enterprises + (GSEs), day session Office of + Federal Housing + +On line 15470: + Federal Housing + Enterprise Oversight, April pp. + Sheila C. Bair, written + +On line 15470: + Enterprise Oversight, + April pp. Sheila C. Bair, written + testimony for + +On line 15470: + April pp. Sheila C. Bair, + written testimony for + the FCIC, First Public + +On line 15470: + Sheila C. Bair, written + testimony for the FCIC, + First Public Hearing + +On line 15470: + Public Hearing of + the FCIC, day panel Current + Investigations + +On line 15470: + day panel Current + Investigations into + the Financial Crisis—Federal + +On line 15472: + the Financial Crisis—Federal + Officials, January p. + Mary L. Schapiro, written + +On line 15472: + Mary L. Schapiro, written + testimony for the FCIC, + First Public Hearing + +On line 15472: + Public Hearing of + the FCIC, day panel Current + Investigations + +On line 15472: + day panel Current + Investigations into + the Financial Crisis—Federal + +On line 15474: + the Financial Crisis—Federal + Officials, January p.18. + Bloomberg LLC, Financial + +On line 15474: + for JPM, Citigroup, + Bank of America, Goldman + Sachs, and Lehman Brothers. + +On line 15476: + Citigroup, Bank of + America, Goldman Sachs, and + Lehman Brothers. Fannie + +On line 15476: + America, Goldman + Sachs, and Lehman Brothers. Fannie + Mae, SEC filings 10-K + +On line 15476: + Sachs, and Lehman Brothers. + Fannie Mae, SEC filings 10-K + and 10-Q; see the 10-K, + +On line 15476: + Brothers. Fannie Mae, + SEC filings 10-K and 10-Q; see + the 10-K, p. Total + +On line 15476: + SEC filings 10-K and + 10-Q; see the 10-K, p. Total + Assets and Fannie + +On line 15478: + 10-K and 10-Q; see the + 10-K, p. Total Assets and + Fannie Mae MBS held + +On line 15478: + 10-Q; see the 10-K, p. + Total Assets and Fannie + Mae MBS held by Third + +On line 15478: + the 10-K, p. Total + Assets and Fannie Mae MBS + held by Third Parties; + +On line 15478: + Total Assets and + Fannie Mae MBS held by Third + Parties; Federal + +On line 15478: + Assets and Fannie + Mae MBS held by Third Parties; + Federal Housing + +On line 15478: + held by Third Parties; + Federal Housing Finance + Agency, Report to + +On line 15480: + Federal Housing + Finance Agency, Report to + Congress, pp. FCIC staff + +On line 15482: + staff calculations. + SNL Financial Database and + SEC public filings. + +On line 15500: + John Snow, interview + by FCIC, October Ibid. Notes + to Chapter Chapter + +On line 15503: + Snow, interview by + FCIC, October Ibid. Notes to + Chapter Chapter Gail + +On line 15503: + Chapter Chapter Gail + Burks, written testimony + for the FCIC, Hearing + +On line 15503: + the Impact of the + Financial Crisis—State of Nevada, + session The Impact + +On line 15503: + Financial Crisis—State of + Nevada, session The Impact + of the Financial + +On line 15503: + Nevada, session The + Impact of the Financial + Crisis on Nevada + +On line 15503: + session The Impact + of the Financial Crisis + on Nevada Real + +On line 15503: + of the Financial + Crisis on Nevada Real + Estate, September + +On line 15505: + Financial Crisis + on Nevada Real Estate, + September p. Tom + +On line 15505: + Crisis on Nevada + Real Estate, September + p. Tom C. Putnam, + +On line 15505: + p. Tom C. Putnam, + president, Putnam Housing + Finance Consulting, + +On line 15505: + Finance Consulting, + written testimony for + the FCIC, Hearing on + +On line 15505: + FCIC, Hearing on the + Impact of the Financial + Crisis—Sacramento, session Mortgage + +On line 15505: + Fraud and Predatory + Lending in the Sacramento + Region, September + +On line 15507: + Predatory Lending + in the Sacramento Region, + September pp. Board + +On line 15507: + in the Sacramento + Region, September pp. Board + of Governors of + +On line 15507: + Board of Governors + of the Federal Reserve + System, Federal + +On line 15507: + Governors of the + Federal Reserve System, + Federal Reserve + +On line 15507: + Federal Reserve + Statistical Release Z.1: + Flow of Funds Accounts + +On line 15507: + of Funds Accounts of + the United States, release date, + December Table + +On line 15507: + United States, release + date, December Table L.1: + Credit Market Debt + +On line 15507: + Table L.1: Credit + Market Debt Outstanding, and + Table L.126: Issuers + +On line 15507: + L.1: Credit Market + Debt Outstanding, and Table + L.126: Issuers of Asset-Backed + +On line 15507: + Debt Outstanding, and + Table L.126: Issuers of Asset-Backed + Securities (ABS) + +On line 15507: + Asset-Backed Securities + (ABS) Jim Callahan, interview + by FCIC, October + +On line 15509: + Securities (ABS) + Jim Callahan, interview by + FCIC, October Lewis + +On line 15509: + Callahan, interview + by FCIC, October Lewis Ranieri, + former vice chairman + +On line 15509: + by FCIC, October + Lewis Ranieri, former vice chairman + of Salomon Brothers, + +On line 15509: + Lewis Ranieri, former vice + chairman of Salomon Brothers, + interview by FCIC, + +On line 15511: + chairman of Salomon + Brothers, interview by FCIC, + July Federal + +On line 15511: + of Salomon Brothers, + interview by FCIC, July + Federal Deposit + +On line 15511: + Brothers, interview + by FCIC, July Federal + Deposit Insurance + +On line 15511: + Deposit Insurance + Corporation, "Managing + the Crisis: The FDIC + +On line 15517: + Crisis: The FDIC and + RTC Experience" (August + pp. Ibid., Ibid., pp. The + +On line 15517: + RTC Experience" + (August pp. Ibid., Ibid., pp. The + figures throughout this + +On line 15517: + (August pp. Ibid., Ibid., + pp. The figures throughout this + discussion of CMLTI + +On line 15517: + Ibid., pp. The figures + throughout this discussion of + CMLTI 2006-NC2 are FCIC staff + +On line 15517: + calculations, based + on analysis of loan-level + data from Blackbox + +On line 15517: + on analysis of + loan-level data from Blackbox + Inc. and Standard Poor’s; + +On line 15517: + of loan-level data + from Blackbox Inc. and Standard + Poor’s; Moody’s PDS database; + +On line 15517: + loan-level data from + Blackbox Inc. and Standard Poor’s; + Moody’s PDS database; Moody’s + +On line 15517: + data from Blackbox + Inc. and Standard Poor’s; Moody’s PDS + database; Moody’s CDO EMS + +On line 15517: + from Blackbox Inc. and + Standard Poor’s; Moody’s PDS database; + Moody’s CDO EMS database; + +On line 15517: + PDS database; Moody’s CDO + EMS database; and Citigroup, + Fannie Mae Term Sheet, + +On line 15519: + Fannie Mae Term Sheet, + CMLTI 2006-NC2, September pp. See + also Brad S. Karp, + +On line 15519: + Mae Term Sheet, CMLTI 2006-NC2, + September pp. See also + Brad S. Karp, counsel + +On line 15519: + Brad S. Karp, counsel + for Citigroup, letter to + FCIC, November p. + +On line 15519: + S. Karp, counsel for + Citigroup, letter to FCIC, + November p. pp. + +On line 15519: + Citigroup, letter + to FCIC, November p. pp. + All ratings of its + +On line 15519: + November p. pp. + All ratings of its tranches + are as given by + +On line 15521: + of its tranches are + as given by Standard Poor’s. + Technically, this + +On line 15521: + given by Standard + Poor’s. Technically, this deal + had two unrated + +On line 15521: + Poor’s. Technically, + this deal had two unrated + tranches below the + +On line 15521: + tranches below the + equity tranche, also held + by Citigroup and + +On line 15523: + the equity tranche, + also held by Citigroup + and the hedge fund. Fed + +On line 15523: + tranche, also held by + Citigroup and the hedge fund. + Fed Chairman Ben S. + +On line 15523: + fund. Fed Chairman Ben + S. Bernanke, "The Community + Reinvestment Act: Its + +On line 15523: + New Challenges," speech at + the Community Affairs + Research Conference, + +On line 15523: + the Community + Affairs Research Conference, + Washington, D.C., March + +On line 15527: + Research Conference, + Washington, D.C., March Ibid. See + Glenn Canner and Wayne + +On line 15527: + Glenn Canner and Wayne + Passmore, "The Community + Reinvestment Act and + +On line 15527: + Reinvestment Act and + the Profitability of Mortgage-Oriented + Banks," Working Paper, + +On line 15527: + the Profitability + of Mortgage-Oriented Banks," Working Paper, + Federal Reserve + +On line 15527: + of Mortgage-Oriented Banks," Working + Paper, Federal Reserve + Board, March Under the + +On line 15527: + and moderate-income + borrowers have income that + is at most of area + +On line 15529: + have income that is + at most of area median + income. Fed Chairman + +On line 15529: + Alan Greenspan, "Economic + Development in Low- and + Moderate-Income Communities," + +On line 15529: + Communities," speech + at Community Forum + on Community + +On line 15533: + John Dugan, interview + by FCIC, March Lawrence B. Lindsey, + interview by FCIC, + +On line 15535: + by FCIC, March Lawrence B. + Lindsey, interview by FCIC, + September Souphala + +On line 15535: + Lindsey, interview + by FCIC, September Souphala + Chomsisengphet and + +On line 15535: + by FCIC, September + Souphala Chomsisengphet and + Anthony Pennington-Cross, "The + +On line 15535: + "The Evolution of + the Subprime Mortgage Market," + Federal Reserve + +On line 15537: + Reserve Bank of St. + Louis Review no. (January/February Southern + Pacific Funding + +On line 15537: + of St. Louis Review + no. (January/February Southern Pacific + Funding Corp, Form 8-K, + +On line 15539: + Pacific Funding + Corp, Form 8-K, September The + top list is as of + +On line 15539: + Funding Corp, Form 8-K, + September The top list is + as of according + +On line 15539: + as of according + to FCIC staff calculations + using data from + +On line 15539: + using data from + the following sources: Inside + Mortgage Finance, The + +On line 15539: + from the following + sources: Inside Mortgage Finance, + The Mortgage Market + +On line 15539: + The Mortgage Market + Statistical Annual, + vol. The Primary + +On line 15539: + Annual, vol. The + Primary Market (Bethesda, + Md.: Inside Mortgage + +On line 15539: + Md.: Inside Mortgage + Finance Publications, p. + "Top B&C Lenders in Thomas + +On line 15539: + "Top B&C Lenders in Thomas + E. Foley, "Alternative + Financial Ratios + +On line 15539: + for the Effects of + Securitization: Tools + for Analysis," Moody’s + +On line 15539: + for Analysis," Moody’s + Investor Services, September + p. and Moody’s Investor + +On line 15541: + Research, October + "FDIC Announces Receivership of + First National Bank + +On line 15541: + Announces Receivership + of First National Bank of + Keystone, Keystone, West + +On line 15541: + Receivership of First + National Bank of Keystone, + Keystone, West Virginia," + +On line 15541: + of First National + Bank of Keystone, Keystone, West + Virginia," Federal + +On line 15541: + National Bank of + Keystone, Keystone, West Virginia," + Federal Deposit + +On line 15541: + Federal Deposit + Insurance Corporation + and Office of the + +On line 15541: + Deposit Insurance + Corporation and Office + of the Comptroller + +On line 15541: + Corporation and + Office of the Comptroller + of the Currency + +On line 15541: + of the Comptroller + of the Currency joint press + release, September + +On line 15543: + Comptroller of the + Currency joint press release, + September FCIC staff + +On line 15543: + the Currency joint + press release, September FCIC + staff calculations + +On line 15545: + staff calculations + using data from Inside + MBS ABS. See Marc Savitt, + +On line 15545: + using data from + Inside MBS ABS. See Marc Savitt, + interview by FCIC, + +On line 15547: + Inside MBS ABS. See + Marc Savitt, interview by FCIC, + November Henry + +On line 15547: + Marc Savitt, interview + by FCIC, November Henry + Cisneros, interview + +On line 15547: + interview by FCIC, + November Henry Cisneros, + interview by FCIC, + +On line 15547: + by FCIC, November + Henry Cisneros, interview + by FCIC, October + +On line 15549: + November Henry + Cisneros, interview by FCIC, + October Glenn Loney, + +On line 15549: + Cisneros, interview + by FCIC, October Glenn Loney, + interview by FCIC, + +On line 15551: + FCIC, October Glenn + Loney, interview by FCIC, April + Senate Committee + +On line 15551: + Loney, interview by + FCIC, April Senate Committee + on Banking, Housing, + +On line 15551: + interview by FCIC, + April Senate Committee on + Banking, Housing, and + +On line 15551: + Regulatory + Improvement Act of 103rd Cong., + 1st sess., October + +On line 15555: + Improvement Act of + 103rd Cong., 1st sess., October + S. Rep. p. Ibid., p. + +On line 15561: + of 103rd Cong., 1st sess., + October S. Rep. p. Ibid., + p. Notes to Chapter + +On line 15565: + 1st sess., October + S. Rep. p. Ibid., p. Notes to + Chapter U.S.C. 1639(h) Loans + +On line 15565: + S. Rep. p. Ibid., p. + Notes to Chapter U.S.C. 1639(h) Loans + were subject to HOEPA + +On line 15565: + p. Notes to Chapter + U.S.C. 1639(h) Loans were subject to + HOEPA only if they + +On line 15565: + Notes to Chapter U.S.C. + 1639(h) Loans were subject to HOEPA + only if they hit + +On line 15565: + 1639(h) Loans were subject + to HOEPA only if they hit + the interest rate + +On line 15565: + only if they hit + the interest rate trigger + or fee trigger: i.e., + +On line 15565: + the interest rate + trigger or fee trigger: i.e., + if the annual + +On line 15565: + fee trigger: i.e., if + the annual percentage + rate for the loan was + +On line 15565: + trigger: i.e., if the + annual percentage rate + for the loan was more + +On line 15565: + rate for the loan was + more than percentage points above + the yield on Treasury + +On line 15565: + a comparable + maturity or if the + total charges paid by + +On line 15565: + maturity or + if the total charges paid by + the borrower at + +On line 15565: + if the total charges + paid by the borrower at + or before closing + +On line 15565: + borrower at or + before closing exceeded + or of the loan amount, + +On line 15565: + or before closing + exceeded or of the loan + amount, whichever was greater. + +On line 15565: + closing exceeded + or of the loan amount, whichever + was greater. See Senate + +On line 15565: + loan amount, whichever was + greater. See Senate Committee + on Banking, Housing, + +On line 15565: + amount, whichever was greater. + See Senate Committee on + Banking, Housing, and + +On line 15569: + on Banking, Housing, + and Urban Affairs, S. Rep. + p. Ibid., p. Board of + +On line 15569: + Housing, and Urban + Affairs, S. Rep. p. Ibid., p. + Board of Governors + +On line 15569: + and Urban Affairs, + S. Rep. p. Ibid., p. Board of + Governors of the + +On line 15569: + Affairs, S. Rep. p. + Ibid., p. Board of Governors + of the Federal + +On line 15569: + S. Rep. p. Ibid., p. + Board of Governors of the + Federal Reserve + +On line 15569: + Governors of the + Federal Reserve System + and Department of + +On line 15569: + Federal Reserve + System and Department of + Housing and Urban + +On line 15569: + Housing and Urban + Development, "Joint Report + Concerning Reform + +On line 15571: + the Real Estate + Settlement Procedures Act" + (July p. Griffith + +On line 15571: + Estate Settlement + Procedures Act" (July p. + Griffith L. Garwood, + +On line 15571: + and Community + Affairs, Board of Governors + of the Federal + +On line 15571: + Governors of the + Federal Reserve System, + "To the Officers + +On line 15571: + Federal Reserve + System, "To the Officers + and Managers in Charge + +On line 15571: + Reserve System, "To + the Officers and Managers + in Charge of Consumer + +On line 15571: + in Charge of Consumer + Affairs Examination + and Consumer Complaint + +On line 15573: + GAO, "Large Bank Mergers: + Fair Lending Review Could Be + Enhanced with Better + +On line 15573: + Fair Lending Review + Could Be Enhanced with Better + Coordination," + +On line 15573: + Could Be Enhanced with + Better Coordination," + GAO/GGD-00–16 (Report to + +On line 15575: + Honorable Bernard Sanders, + House of Representatives), + November p. Fed + +On line 15575: + Representatives), + November p. Fed and HUD, + "Joint Report," pp. I–XXVII. + +On line 15577: + November p. Fed + and HUD, "Joint Report," pp. I–XXVII. + Griffith L. Garwood, + +On line 15577: + p. Fed and HUD, "Joint + Report," pp. I–XXVII. Griffith L. + Garwood, director, + +On line 15577: + and Community + Affairs, Board of Governors + of the Federal + +On line 15577: + Governors of the + Federal Reserve System, + memorandum to + +On line 15577: + Federal Reserve + System, memorandum to + the Committee on + +On line 15577: + memorandum to + the Committee on Consumer + and Community + +On line 15577: + concerning the Board’s + Report to the Congress on + the Truth in Lending + +On line 15577: + the Board’s Report to + the Congress on the Truth in + Lending and Real + +On line 15577: + the Congress on the + Truth in Lending and Real + Estate Settlement + +On line 15577: + Truth in Lending and + Real Estate Settlement + Procedures Acts," April + +On line 15579: + Estate Settlement + Procedures Acts," April p. Board + of Governors of + +On line 15579: + Board of Governors + of the Federal Reserve + System, Federal + +On line 15579: + Governors of the + Federal Reserve System, + Federal Deposit + +On line 15579: + of the Federal + Reserve System, Federal + Deposit Insurance + +On line 15579: + Deposit Insurance + Corporation, Office of + the Comptroller of + +On line 15579: + Comptroller of the + Currency, and Office of + Thrift Supervision, + +On line 15579: + Thrift Supervision, + "Interagency Guidance + on Subprime Lending" + +On line 15583: + on Subprime Lending" + (March p. Ibid., pp. quotation, + p. U.S. Department + +On line 15583: + Subprime Lending" (March + p. Ibid., pp. quotation, p. + U.S. Department of + +On line 15583: + quotation, p. U.S. + Department of the Treasury + and U.S. Department + +On line 15587: + president and chief + executive officer, + Nevada Fair Housing + +On line 15587: + Fair Housing Center, + Inc., testimony before + the FCIC, Hearing on + +On line 15587: + Housing Center, Inc., + testimony before the + FCIC, Hearing on the + +On line 15587: + Inc., testimony + before the FCIC, Hearing on + the Impact of the + +On line 15587: + the Impact of the + Financial Crisis—State of Nevada, + session The Impact + +On line 15587: + Financial Crisis—State of + Nevada, session The Impact + of the Financial + +On line 15587: + Nevada, session The + Impact of the Financial + Crisis on Nevada + +On line 15587: + session The Impact + of the Financial Crisis + on Nevada Real + +On line 15587: + of the Financial + Crisis on Nevada Real + Estate, September + +On line 15587: + Financial Crisis + on Nevada Real Estate, + September transcript, + +On line 15587: + on Nevada Real + Estate, September transcript, + p. 242–43.See also Kevin + +On line 15587: + Kevin Stein, associate + director, California + Reinvestment Coalition, + +On line 15587: + Reinvestment Coalition, + written testimony for + the FCIC, Hearing on + +On line 15587: + FCIC, Hearing on the + Impact of the Financial + Crisis—Sacramento, session Mortgage + +On line 15587: + Fraud and Predatory + Lending in the Sacramento + Region, September + +On line 15587: + Predatory Lending + in the Sacramento Region, + September pp. See + +On line 15587: + Sacramento Region, + September pp. See also + his testimony + +On line 15587: + September pp. See + also his testimony + at the same hearing, + +On line 15587: + pp. See also his + testimony at the same + hearing, transcript, pp. + +On line 15587: + his testimony + at the same hearing, transcript, + pp. See Diane E. + +On line 15587: + at the same hearing, + transcript, pp. See Diane E. + Thompson, of counsel, + +On line 15587: + hearing, transcript, pp. + See Diane E. Thompson, of + counsel, National + +On line 15587: + counsel, National + Consumer Law Center, Inc., and + Margot F. Saunders, + +On line 15587: + National Consumer + Law Center, Inc., interview + by FCIC, September + +On line 15589: + Inc., interview by + FCIC, September Diane E. + Thompson and Margot + +On line 15589: + Thompson and Margot + F. Saunders, both of counsel, + National Consumer + +On line 15589: + Margot F. Saunders, + both of counsel, National + Consumer Law Center, + +On line 15591: + National Consumer + Law Center, interview by + FCIC, September Gary + +On line 15591: + Center, interview + by FCIC, September Gary Gensler, + interview by FCIC, + +On line 15593: + September Gary Gensler, + interview by FCIC, May Sheila + Bair, testimony + +On line 15593: + interview by FCIC, + May Sheila Bair, testimony + before the FCIC, First + +On line 15593: + Bair, testimony + before the FCIC, First Public + Hearing of the FCIC, + +On line 15593: + before the FCIC, First + Public Hearing of the FCIC, + day panel Current + +On line 15593: + Public Hearing of + the FCIC, day panel Current + Investigations + +On line 15593: + day panel Current + Investigations into + the Financial Crisis—Federal + +On line 15597: + January transcript, + p. Sheila Bair, interview by + FCIC, March Sandra F. + +On line 15597: + Bair, interview by + FCIC, March Sandra F. Braunstein, + interview by FCIC, + +On line 15601: + by FCIC, April pp. Bair, + interview. Treasury and HUD, + "Curbing Predatory + +On line 15610: + Lending," p. Chapter + Figures represented the + compound average + +On line 15610: + p. Chapter Figures + represented the compound + average growth rate + +On line 15610: + average growth rate + and FCIC staff calculations + from CoreLogic National + +On line 15610: + staff calculations + from CoreLogic National Home Price + Index, Single-Family Combined + +On line 15610: + CoreLogic National Home + Price Index, Single-Family Combined (SCF); + CoreLogic Loan Performance + +On line 15610: + National Home Price + Index, Single-Family Combined (SCF); CoreLogic + Loan Performance HPI + +On line 15612: + CoreLogic Loan Performance + HPI August Inside Mortgage + Finance, The Mortgage + +On line 15612: + The Mortgage Market + Statistical Annual, + vol. The Primary + +On line 15612: + Annual, vol. The + Primary Market (Bethesda, + Md.: Inside Mortgage + +On line 15612: + vol. The Primary + Market (Bethesda, Md.: Inside + Mortgage Finance, p. + +On line 15612: + Primary Market + (Bethesda, Md.: Inside Mortgage + Finance, p. "Mortgage + +On line 15612: + (Bethesda, Md.: Inside + Mortgage Finance, p. "Mortgage + Originations by + +On line 15612: + Mortgage Finance, p. + "Mortgage Originations by + Product." Federal + +On line 15612: + Finance, p. "Mortgage + Originations by Product." + Federal Reserve + +On line 15612: + Originations by + Product." Federal Reserve + Board press release, May + +On line 15620: + Product." Federal + Reserve Board press release, May + Notes to Chapter Fed + +On line 15620: + press release, May Notes + to Chapter Fed Governor + Ben S. Bernanke, "The Great + +On line 15620: + Notes to Chapter Fed + Governor Ben S. Bernanke, "The + Great Moderation," + +On line 15620: + Ben S. Bernanke, "The Great + Moderation," remarks at + the meetings of the + +On line 15620: + Association, + Washington, D.C., February + See also Olivier + +On line 15620: + D.C., February See + also Olivier Blanchard and + John Simon, "The Long + +On line 15620: + See also Olivier + Blanchard and John Simon, "The + Long and Large Decline + +On line 15620: + and John Simon, "The + Long and Large Decline in U.S. + Output Volatility," + +On line 15620: + Simon, "The Long and + Large Decline in U.S. Output + Volatility," Brookings + +On line 15620: + Long and Large Decline + in U.S. Output Volatility," + Brookings Papers on + +On line 15624: + Brookings Papers on + Economic Activity, + no. Fed Governor + +On line 15624: + Activity, no. + Fed Governor Ben S. Bernanke, + "Deflation: Making + +On line 15624: + Governor Ben S. + Bernanke, "Deflation: Making Sure + ‘It’ Doesn’t Happen + +On line 15624: + "Deflation: Making + Sure ‘It’ Doesn’t Happen Here," + remarks before the + +On line 15624: + Here," remarks before + the National Economists + Club, Washington, D.C., + +On line 15626: + D.C., November FCIC + staff calculations from Board + of Governors of + +On line 15626: + November FCIC staff + calculations from Board of + Governors of the + +On line 15626: + calculations from + Board of Governors of the + Federal Reserve + +On line 15626: + Rate release, 3-month AA + Nonfinancial Commercial + Paper Rate, WCPN3M + +On line 15628: + U.S. Department of + Treasury, Daily Treasury Yield + Curve Rates, to Present. This + +On line 15628: + Yield Curve Rates, to Present. + This example assumes that + the homeowner is + +On line 15628: + Curve Rates, to Present. This + example assumes that the + homeowner is able + +On line 15628: + Present. This example + assumes that the homeowner + is able to come up + +On line 15628: + example assumes + that the homeowner is able + to come up with a + +On line 15628: + that the homeowner + is able to come up with a + larger down payment + +On line 15628: + is able to come up + with a larger down payment + to cover of the + +On line 15628: + up with a larger + down payment to cover of + the higher-priced home. Here, + +On line 15628: + with a larger down + payment to cover of the + higher-priced home. Here, the + +On line 15628: + payment to cover + of the higher-priced home. Here, the + difference would be + +On line 15630: + the higher-priced home. Here, + the difference would be about + Federal Housing + +On line 15630: + Agency, "Data on + the Risk Characteristics + and Performance of + +On line 15630: + and Performance of + Single-Family Mortgages Originated + from through and Financed + +On line 15630: + Performance of Single-Family + Mortgages Originated from + through and Financed in + +On line 15630: + and Financed in the + Secondary Market" (September + Table 2a: Share of + +On line 15630: + Table 2a: Share of + Single-Family Mortgages Originated + from through and Acquired + +On line 15630: + from through and Acquired + by the Enterprises or + Finances with Private-Label MBS + +On line 15630: + and Acquired by the + Enterprises or Finances + with Private-Label MBS by Loan-to-Value + +On line 15630: + MBS by Loan-to-Value Ratio + and Borrower FICO Score + at Origination, + +On line 15630: + by Loan-to-Value Ratio and + Borrower FICO Score at + Origination, Adjustable-Rate + +On line 15630: + Origination, Adjustable-Rate + Mortgages, p. Prime borrowers + are defined as those + +On line 15630: + Adjustable-Rate Mortgages, p. Prime + borrowers are defined as + those whose mortgages are + +On line 15630: + Prime borrowers are + defined as those whose mortgages + are financed by the + +On line 15630: + defined as those whose + mortgages are financed by the + government-sponsored + +On line 15632: + mortgages are financed + by the government-sponsored + enterprises. Yuliya + +On line 15632: + government-sponsored + enterprises. Yuliya Demyanyk + and Otto Van Hemert, + +On line 15632: + enterprises. Yuliya + Demyanyk and Otto Van Hemert, + "Understanding the + +On line 15632: + Hemert, "Understanding + the Subprime Mortgage Crisis" + (December table + +On line 15632: + (December table + Loan Characteristics at + Origination for + +On line 15634: + Origination for + Different Vintages, p. FCIC + staff calculations + +On line 15634: + Different Vintages, + p. FCIC staff calculations + from CoreLogic/First American, + +On line 15634: + CoreLogic/First American, Home + Price Index for Single-Family Combined + State HPI data, last + +On line 15634: + Price Index for Single-Family + Combined State HPI data, last + updated August + +On line 15634: + for Single-Family Combined State + HPI data, last updated + August and CoreLogic State + +On line 15634: + State HPI data, last + updated August and CoreLogic + State Home Price Index, + +On line 15634: + updated August + and CoreLogic State Home Price Index, + provided to the + +On line 15634: + August and CoreLogic State + Home Price Index, provided + to the FCIC by CoreLogic. + +On line 15634: + to the FCIC by CoreLogic. + Staff calculations of all + annual growth rates + +On line 15634: + calculations of + all annual growth rates are + compound annual + +On line 15634: + annual growth rates + are compound annual growth + rates from January + +On line 15638: + Rates for the US to + Present. Brian K. Bucks, Arthur B. + Kennickell, and Kevin + +On line 15638: + to Present. Brian K. + Bucks, Arthur B. Kennickell, and + Kevin B. Moore, "Recent + +On line 15638: + Present. Brian K. Bucks, + Arthur B. Kennickell, and Kevin + B. Moore, "Recent Changes + +On line 15638: + Brian K. Bucks, Arthur + B. Kennickell, and Kevin B. + Moore, "Recent Changes in + +On line 15638: + Arthur B. Kennickell, + and Kevin B. Moore, "Recent Changes + in US Family + +On line 15638: + Kennickell, and Kevin + B. Moore, "Recent Changes in US + Family Finances: + +On line 15638: + B. Moore, "Recent Changes + in US Family Finances: + Evidence from the + +On line 15638: + Survey of Consumer + Finances," Federal Reserve + Bulletin Tables 8A + +On line 15638: + of Consumer Finances," + Federal Reserve Bulletin + Tables 8A and 8B, + +On line 15638: + Finances," Federal + Reserve Bulletin Tables 8A + and 8B, pp. A20–A23, A8. + +On line 15640: + 8A and 8B, pp. A20–A23, + A8. Congressional Budget + Office, "Housing Wealth + +On line 15640: + A8. Congressional + Budget Office, "Housing Wealth + and Consumer Spending," + +On line 15640: + Office, "Housing Wealth + and Consumer Spending," Background + Paper, January + +On line 15642: + and Consumer Spending," + Background Paper, January + p. Mortgages may have + +On line 15644: + p. Mortgages may have + been refinanced more than once + in that year. FCIC staff + +On line 15644: + have been refinanced + more than once in that year. FCIC + staff calculations + +On line 15644: + been refinanced more + than once in that year. FCIC staff + calculations with + +On line 15644: + than once in that year. + FCIC staff calculations with + updated data + +On line 15644: + updated data + provided by Alan Greenspan and + James Kennedy, whose data + +On line 15644: + Alan Greenspan and James Kennedy, + whose data originally + appeared in "Sources and + +On line 15644: + James Kennedy, whose data + originally appeared in + "Sources and Uses of + +On line 15644: + in "Sources and Uses + of Equity Extracted + from Homes," Finance and + +On line 15646: + Discussion Series, + Federal Reserve Board, 2007-20 + (March CBO, "Housing Wealth + +On line 15646: + Federal Reserve + Board, 2007-20 (March CBO, "Housing Wealth + and Consumer Spending," + +On line 15648: + 2007-20 (March CBO, "Housing + Wealth and Consumer Spending," p. + Fed Chairman Alan Greenspan, + +On line 15648: + (March CBO, "Housing Wealth + and Consumer Spending," p. Fed + Chairman Alan Greenspan, "The + +On line 15648: + and Consumer Spending," + p. Fed Chairman Alan Greenspan, "The + Economic Outlook," + +On line 15650: + the Congress," prepared + testimony before the + House Committee on + +On line 15650: + House Committee on + Financial Services, 108th Cong., + 2nd sess., February + +On line 15656: + Bart McDade, interview + by FCIC, April Presentation + to the Lehman Board of + +On line 15656: + Presentation to + the Lehman Board of Directors, + March Lehman had also + +On line 15656: + of Directors, March + Lehman had also acquired three + international + +On line 15660: + lenders during this time + period. New Century, + 10-K, March p. Final + +On line 15660: + this time period. + New Century, 10-K, March p. + Final Report of + +On line 15660: + Century, 10-K, March + p. Final Report of Michael + J. Missal, Bankruptcy + +On line 15660: + p. Final Report + of Michael J. Missal, Bankruptcy + Court Examiner, + +On line 15660: + Final Report of + Michael J. Missal, Bankruptcy Court + Examiner, in + +On line 15660: + J. Missal, Bankruptcy + Court Examiner, in RE: + New Century TRS + +On line 15660: + Court Examiner, + in RE: New Century TRS + Holdings, Chapter Case + +On line 15662: + Chapter Case No. 07-10416 + (KJC), (Bankr. D.Del.), February p + New Century, 10-K, + +On line 15662: + (Bankr. D.Del.), February + p New Century, 10-K, April + p. New Century, + +On line 15662: + D.Del.), February p + New Century, 10-K, April p. + New Century, 10-K, + +On line 15662: + February p New + Century, 10-K, April p. New + Century, 10-K, March + +On line 15664: + p New Century, + 10-K, April p. New Century, + 10-K, March p. Rankings + +On line 15664: + New Century, 10-K, + April p. New Century, 10-K, + March p. Rankings from + +On line 15666: + quoted in Erick + Bergquist, "Under Scrutiny, Ameriquest + Details Procedures," + +On line 15674: + from Mortgage Market + Statistical Annual, + Notes to Chapter Lewis + +On line 15676: + Annual, Notes to + Chapter Lewis Ranieri, interview + by FCIC, July James + +On line 15676: + M. Lacko and Janis + K. Pappalardo, "The Effect + of Mortgage Broker + +On line 15678: + Commission Bureau + of Economics Staff Report + (February p. Jay + +On line 15678: + the Impact of the + Financial Crisis—State of Nevada, + session The Impact + +On line 15678: + Financial Crisis—State of + Nevada, session The Impact + of the Financial + +On line 15678: + Nevada, session The + Impact of the Financial + Crisis on Nevada + +On line 15678: + session The Impact + of the Financial Crisis + on Nevada Real + +On line 15678: + of the Financial + Crisis on Nevada Real + Estate, September + +On line 15678: + Financial Crisis + on Nevada Real Estate, + September transcript, + +On line 15680: + Crisis on Nevada + Real Estate, September + transcript, p. Brian + +On line 15680: + on Nevada Real + Estate, September transcript, + p. Brian Bucks and + +On line 15680: + September transcript, + p. Brian Bucks and Karen Pence, + "Do Borrowers Know + +On line 15680: + Brian Bucks and Karen + Pence, "Do Borrowers Know Their + Mortgage Terms1" Journal + +On line 15680: + "Do Borrowers Know + Their Mortgage Terms1" Journal of + Urban Economics + +On line 15682: + Mortgage Terms1" Journal + of Urban Economics Michael + Calhoun and Julia + +On line 15686: + Capability," + report prepared for the FCIC, + February p. FCIC + +On line 15686: + report prepared for + the FCIC, February p. FCIC + staff estimates based + +On line 15686: + the FCIC, February + p. FCIC staff estimates based + on analysis of + +On line 15686: + estimates based on + analysis of Blackbox, S&P, + and IP Recovery, + +On line 15686: + Blackbox, S&P, and IP + Recovery, provided by + Antje Berndt, Burton + +On line 15686: + and IP Recovery, + provided by Antje Berndt, + Burton Hollifield, + +On line 15686: + Burton Hollifield, + and Patrik Sandas, in their + paper, "The Role of + +On line 15686: + and Patrik Sandas, + in their paper, "The Role of + Mortgage Brokers in + +On line 15686: + in their paper, "The + Role of Mortgage Brokers in + the Subprime Crisis," + +On line 15686: + their paper, "The Role + of Mortgage Brokers in the + Subprime Crisis," April + +On line 15688: + of Mortgage Brokers + in the Subprime Crisis," April + William C. Apgar and + +On line 15688: + Mortgage Brokers in + the Subprime Crisis," April William + C. Apgar and Allen + +On line 15688: + Subprime Crisis," April + William C. Apgar and Allen J. + Fishbein, "The Changing + +On line 15688: + and Allen J. Fishbein, + "The Changing Industrial + Organization + +On line 15688: + Organization + of Housing Finance and the + Changing Role of Community-Based + +On line 15688: + of Housing Finance + and the Changing Role of Community-Based + Organizations," + +On line 15688: + and the Changing Role + of Community-Based Organizations," + working paper (Joint + +On line 15688: + Changing Role of Community-Based + Organizations," working + paper (Joint Center + +On line 15688: + Organizations," + working paper (Joint Center + for Housing Studies, + +On line 15688: + paper (Joint Center + for Housing Studies, Harvard + University, May + +On line 15690: + University, May + p. Herb Sandler, interview + by FCIC, September + +On line 15694: + Brokers (August pp. + Jamie Dimon, testimony + before the FCIC, First + +On line 15694: + before the FCIC, First + Public Hearing of the FCIC, + panel Financial + +On line 15694: + of the FCIC, panel + Financial Institution + Representatives, + +On line 15698: + summary of the + National Appraisal Survey, + p. Dennis J. Black, + +On line 15698: + p. Dennis J. Black, + written testimony for + the FCIC, Hearing on + +On line 15700: + FCIC, Hearing on the + Impact of the Financial + Crisis— Miami, + +On line 15704: + FCIC, Hearing on the + Impact of the Financial + Crisis— Sacramento, + +On line 15704: + Fraud and Predatory + Lending in the Sacramento + Region, September + +On line 15706: + Predatory Lending + in the Sacramento Region, + September p. Gary + +On line 15708: + on the Impact of + the Financial Crisis— Greater + Bakersfield, session + +On line 15710: + Market, September + transcript, p. Complaint, People + of the State of New + +On line 15710: + September transcript, + p. Complaint, People of the + State of New York v. + +On line 15710: + of New York v. First + American Corporation + and First American + +On line 15710: + Corporation and + First American eAppraiseIT (N.Y. Sup. + Ct. November pp. + +On line 15712: + First American eAppraiseIT + (N.Y. Sup. Ct. November pp. + Martin Eakes, quoted + +On line 15712: + Sup. Ct. November + pp. Martin Eakes, quoted in + Richard A. Oppel Jr. + +On line 15712: + Ct. November pp. + Martin Eakes, quoted in Richard + A. Oppel Jr. and + +On line 15712: + Martin Eakes, quoted + in Richard A. Oppel Jr. and + Patrick McGeehan, "Along with a + +On line 15712: + Eakes, quoted in Richard + A. Oppel Jr. and Patrick McGeehan, + "Along with a Lender, Is + +On line 15712: + in Richard A. Oppel + Jr. and Patrick McGeehan, "Along with a + Lender, Is Citigroup + +On line 15712: + A. Oppel Jr. and + Patrick McGeehan, "Along with a Lender, Is + Citigroup Buying + +On line 15712: + Jr. and Patrick McGeehan, "Along + with a Lender, Is Citigroup + Buying Trouble1" New + +On line 15712: + Patrick McGeehan, "Along with a + Lender, Is Citigroup Buying + Trouble1" New York Times, + +On line 15714: + Trouble1" New York Times, + October Pam Flaherty, + quoted in Erick + +On line 15714: + York Times, October + Pam Flaherty, quoted in + Erick Bergquist, "Judging + +On line 15716: + Settles FTC Charges against + the Associates Record-Setting Million + for Subprime Lending + +On line 15716: + the Associates Record-Setting + Million for Subprime Lending + Victims," Federal + +On line 15716: + Million for Subprime + Lending Victims," Federal + Trade Commission press + +On line 15722: + Loan Abuse," The New York + Times, May Federal Reserve + Board internal staff + +On line 15722: + Board internal staff + document, "The Problem of + Predatory Lending," + +On line 15724: + Predatory Lending," + December pp. Federal + Reserve Board, Morning + +On line 15724: + Lending," December + pp. Federal Reserve Board, + Morning Session of + +On line 15724: + Reserve Board, Morning + Session of Public Hearing + on Home Equity + +On line 15724: + Board, Morning Session + of Public Hearing on Home + Equity Lending, + +On line 15724: + Equity Lending, + July opening remarks by + Governor Gramlich, + +On line 15726: + opening remarks by + Governor Gramlich, p. Scott + Alvarez, interview + +On line 15728: + Governor Gramlich, + p. Scott Alvarez, interview + by FCIC, March Alan Greenspan, + +On line 15728: + Alvarez, interview + by FCIC, March Alan Greenspan, written + testimony for + +On line 15728: + by FCIC, March Alan Greenspan, + written testimony for + the FCIC, Hearing on + +On line 15728: + March Alan Greenspan, written + testimony for the FCIC, + Hearing on Subprime + +On line 15728: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 15730: + (GSEs), day one, session + The Federal Reserve, April + p. Alan Greenspan, quoted + +On line 15730: + day one, session The + Federal Reserve, April p. + Alan Greenspan, quoted in + +On line 15730: + Federal Reserve, + April p. Alan Greenspan, quoted in + David Faber, And Then the + +On line 15730: + Reserve, April p. Alan + Greenspan, quoted in David Faber, And + Then the Roof Caved In: + +On line 15730: + p. Alan Greenspan, quoted + in David Faber, And Then the Roof + Caved In: How Wall Street’s + +On line 15730: + Alan Greenspan, quoted in + David Faber, And Then the Roof Caved + In: How Wall Street’s Greed + +On line 15730: + Greenspan, quoted in David + Faber, And Then the Roof Caved In: + How Wall Street’s Greed and + +On line 15730: + David Faber, And Then the + Roof Caved In: How Wall Street’s Greed + and Stupidity + +On line 15730: + Faber, And Then the Roof + Caved In: How Wall Street’s Greed and + Stupidity Brought + +On line 15730: + Roof Caved In: How Wall + Street’s Greed and Stupidity + Brought Capitalism + +On line 15730: + Caved In: How Wall Street’s + Greed and Stupidity Brought + Capitalism to + +On line 15730: + Stupidity Brought + Capitalism to Its Knees + (Hoboken, N.J.: Wiley, + +On line 15732: + Capitalism to + Its Knees (Hoboken, N.J.: Wiley, + pp. "Truth in Lending," + +On line 15736: + Lending," Federal + Register no. (December + (quotation), Notes to + +On line 15740: + (quotation), Notes to + Chapter Robert B. Avery, Glenn + B. Canner, and Robert + +On line 15740: + Notes to Chapter Robert + B. Avery, Glenn B. Canner, + and Robert E. Cook, "New + +On line 15740: + Robert B. Avery, Glenn + B. Canner, and Robert E. Cook, + "New Information + +On line 15740: + B. Canner, and Robert + E. Cook, "New Information + Reported under + +On line 15740: + and Robert E. Cook, "New + Information Reported + under HMDA and + +On line 15740: + under HMDA and + Its Application in Fair + Lending Enforcement," + +On line 15740: + Its Application + in Fair Lending Enforcement," + Federal Reserve + +On line 15744: + by FCIC, March Sheila Bair, + testimony before the + FCIC, Hearing on Too + +On line 15744: + of Systemic Risk in + the Financial Crisis, day + session Federal + +On line 15744: + Federal Deposit + Insurance Corporation, + September transcript, + +On line 15746: + Deposit Insurance + Corporation, September + transcript, p. Dolores + +On line 15746: + September transcript, + p. Dolores Smith and Glenn Loney, + memorandum to + +On line 15746: + p. Dolores Smith and + Glenn Loney, memorandum to + Governor Edward + +On line 15748: + of Nonbank Subsidiaries + of Bank Holding Companies," + August GAO, "Consumer + +On line 15748: + Agencies Face Challenges + in Combating Predatory + Lending," GAO (Report + +On line 15756: + FCIC, April Transcript pp. + Greenspan, interview. Ibid. Edward + M. Gramlich, "Booms and + +On line 15756: + April Transcript pp. Greenspan, + interview. Ibid. Edward M. + Gramlich, "Booms and Busts: + +On line 15756: + pp. Greenspan, interview. + Ibid. Edward M. Gramlich, "Booms + and Busts: The Case of + +On line 15756: + Gramlich, "Booms and Busts: + The Case of Subprime Mortgages," + Federal Reserve + +On line 15756: + The Case of Subprime + Mortgages," Federal Reserve + Bank of Kansas City + +On line 15756: + Mortgages," Federal + Reserve Bank of Kansas City + Economic Review + +On line 15758: + Bank of Kansas City + Economic Review Edward + Gramlich, quoted in + +On line 15758: + Economic Review + Edward Gramlich, quoted in + Greg Ip, "Did Greenspan Add + +On line 15758: + quoted in Greg Ip, + "Did Greenspan Add to Subprime Woes1 + Gramlich Says Ex-Colleague Blocked + +On line 15758: + in Greg Ip, "Did Greenspan + Add to Subprime Woes1 Gramlich + Says Ex-Colleague Blocked Crackdown + +On line 15758: + Greg Ip, "Did Greenspan Add + to Subprime Woes1 Gramlich Says + Ex-Colleague Blocked Crackdown On + +On line 15758: + Add to Subprime Woes1 + Gramlich Says Ex-Colleague Blocked Crackdown + On Predatory Lenders + +On line 15758: + Woes1 Gramlich Says Ex-Colleague + Blocked Crackdown On Predatory + Lenders Despite Growing + +On line 15758: + Says Ex-Colleague Blocked Crackdown + On Predatory Lenders Despite + Growing Concerns," Wall + +On line 15758: + On Predatory Lenders + Despite Growing Concerns," Wall + Street Journal, June See + +On line 15758: + Lenders Despite Growing + Concerns," Wall Street Journal, June + See also Edmund + +On line 15758: + Growing Concerns," Wall + Street Journal, June See also + Edmund L. Andrews, + +On line 15758: + Street Journal, June See + also Edmund L. Andrews, + "Fed Shrugged as Subprime + +On line 15758: + also Edmund L. + Andrews, "Fed Shrugged as Subprime + Crisis Spread," New York + +On line 15758: + L. Andrews, "Fed Shrugged + as Subprime Crisis Spread," New + York Times, December + +On line 15760: + as Subprime Crisis + Spread," New York Times, December + Patricia McCoy and + +On line 15760: + York Times, December + Patricia McCoy and Margot + Saunders, quoted in + +On line 15760: + Patricia McCoy and + Margot Saunders, quoted in + Binyamin Appelbaum, "Fed + +On line 15760: + in Binyamin Appelbaum, + "Fed Held Back as Evidence + Mounted on Subprime + +On line 15762: + Mounted on Subprime + Loan Abuses," Washington Post, + September GAO, "Large + +On line 15762: + Subprime Loan Abuses," + Washington Post, September + GAO, "Large Bank Mergers: + +On line 15762: + Abuses," Washington + Post, September GAO, "Large Bank + Mergers: Fair Lending + +On line 15762: + GAO, "Large Bank Mergers: + Fair Lending Review Could be + Enhanced with Better + +On line 15762: + Fair Lending Review + Could be Enhanced with Better + Coordination," + +On line 15762: + Could be Enhanced with + Better Coordination," + GAO/GDD-00-16 (Report to the + +On line 15762: + GAO/GDD-00-16 (Report to the + Honorable Maxine Waters + and Honorable Bernard + +On line 15762: + Maxine Waters and + Honorable Bernard Sanders, House of + Representatives), + +On line 15764: + Agencies Face Challenges + in Combating Predatory + Lending." "Federal + +On line 15764: + Predatory Lending." + "Federal and State Agencies + Announce Pilot Project + +On line 15764: + Announce Pilot Project + to Improve Supervision + of Subprime Mortgage + +On line 15764: + Supervision of + Subprime Mortgage Lenders," Joint press + release (Fed Reserve + +On line 15764: + Mortgage Lenders," Joint press + release (Fed Reserve Board, OTC, + FTC, Conference of + +On line 15766: + Lending," pp. "Higher-priced + mortgage loans" are defined in + the regulations + +On line 15766: + offer rates for a + comparable transaction" + (as published by the + +On line 15766: + a comparable + transaction" (as published by + the Fed) by at least + +On line 15766: + published by the Fed) + by at least for first-lien loans or + for subordinate-lien + +On line 15768: + at least for first-lien loans + or for subordinate-lien loans. + Alvarez, interview. + +On line 15770: + for first-lien loans or for + subordinate-lien loans. Alvarez, + interview. Raphael W. + +On line 15770: + for subordinate-lien + loans. Alvarez, interview. Raphael + W. Bostic, Kathleen C. + +On line 15770: + Raphael W. Bostic, Kathleen + C. Engel, Patricia A. + McCoy, Anthony Pennington-Cross, + +On line 15770: + W. Bostic, Kathleen C. + Engel, Patricia A. McCoy, + Anthony Pennington-Cross, and + +On line 15770: + Engel, Patricia + A. McCoy, Anthony Pennington-Cross, and + Susan M. Wachter, "State + +On line 15770: + McCoy, Anthony Pennington-Cross, + and Susan M. Wachter, "State and + Local Anti-Predatory Lending + +On line 15770: + and Susan M. Wachter, + "State and Local Anti-Predatory Lending + Laws: The Effect of + +On line 15770: + "State and Local Anti-Predatory + Lending Laws: The Effect of + Legal Enforcement + +On line 15774: + Turmoil: Causes and + Consequences," testimony + before the Senate + +On line 15776: + Housing, and Urban + Affairs, 110th Cong., 1st sess., March + p. (Exhibit B), + +On line 15776: + Affairs, 110th Cong., 1st + sess., March p. (Exhibit B), + using data from + +On line 15778: + Lisa Madigan, written + testimony for the FCIC, + First Public Hearing + +On line 15778: + Public Hearing of + the FCIC, day panel Current + Investigations + +On line 15778: + day panel Current + Investigations into + the Financial Crisis—State + +On line 15782: + Reinvestment Coalition, + "CRA Commitments" Josh Silver, + NCRC, interview by + +On line 15784: + NCRC, interview by + FCIC, June Data references + based on Reginald Brown, + +On line 15784: + by FCIC, June Data + references based on Reginald + Brown, counsel for Bank + +On line 15784: + counsel for Bank of + America, letter to FCIC, + June p. Jessica + +On line 15784: + America, letter + to FCIC, June p. Jessica + Carey, counsel for JPMorgan + +On line 15784: + letter to FCIC, June + p. Jessica Carey, counsel + for JPMorgan Chase, letter + +On line 15784: + p. Jessica Carey, + counsel for JPMorgan Chase, letter + to FCIC, December + +On line 15784: + counsel for JPMorgan Chase, + letter to FCIC, December + Brad Karp, counsel for + +On line 15784: + FCIC, December Brad + Karp, counsel for Citigroup, + letter to FCIC, March + +On line 15784: + Brad Karp, counsel for + Citigroup, letter to FCIC, + March in response to + +On line 15784: + letter to FCIC, March + in response to FCIC request; + Wells Fargo public + +On line 15784: + FCIC, March in response + to FCIC request; Wells Fargo + public commitments + +On line 15784: + in response to FCIC + request; Wells Fargo public + commitments data + +On line 15784: + to FCIC request; Wells + Fargo public commitments + data provided + +On line 15784: + request; Wells Fargo + public commitments data + provided by Wells + +On line 15784: + public commitments + data provided by Wells + Fargo to the FCIC. + +On line 15786: + data provided + by Wells Fargo to the FCIC. + Karp, letter to FCIC, + +On line 15786: + by Wells Fargo to + the FCIC. Karp, letter to FCIC, + March in response to + +On line 15786: + Wells Fargo to the + FCIC. Karp, letter to FCIC, March + in response to FCIC + +On line 15788: + FCIC. Karp, letter to + FCIC, March in response to FCIC + request. Carey, letter + +On line 15788: + letter to FCIC, March + in response to FCIC request. + Carey, letter to FCIC, + +On line 15788: + FCIC, March in response + to FCIC request. Carey, letter + to FCIC, December + +On line 15788: + March in response to + FCIC request. Carey, letter to + FCIC, December p. + +On line 15788: + in response to FCIC + request. Carey, letter to FCIC, + December p. Brad + +On line 15788: + to FCIC request. Carey, + letter to FCIC, December + p. Brad Karp, counsel + +On line 15788: + request. Carey, letter + to FCIC, December p. Brad + Karp, counsel for JP + +On line 15788: + to FCIC, December + p. Brad Karp, counsel for JP + Morgan, letter to + +On line 15788: + December p. Brad + Karp, counsel for JP Morgan, + letter to FCIC, May + +On line 15794: + p. Brad Karp, counsel + for JP Morgan, letter to + FCIC, May p. Notes to + +On line 15794: + Karp, counsel for JP + Morgan, letter to FCIC, May + p. Notes to Chapter + +On line 15796: + Morgan, letter to + FCIC, May p. Notes to Chapter + FCIC calculation + +On line 15796: + FCIC, May p. Notes to + Chapter FCIC calculation + based on Federal + +On line 15796: + p. Notes to Chapter + FCIC calculation based on + Federal Housing + +On line 15796: + Agency, "Data on + the Risk Characteristics + and Performance of + +On line 15796: + and Performance of + Single-Family Mortgages Originated + in and Financed in + +On line 15796: + Performance of Single-Family + Mortgages Originated in + and Financed in the + +On line 15796: + all loans purchased or + securitized by the GSEs + or in private-label + +On line 15798: + data provided + by Wells Fargo covered of + loans. "Orders Issued + +On line 15798: + Issued Under the + Bank Holding Company Act," + Federal Reserve + +On line 15800: + no. (April "Statement of + the Federal Financial + Supervisory + +On line 15800: + the Community + Reinvestment Act," Federal + Register (April This + +On line 15800: + Questions and Answers + Regarding Community + Reinvestment; Notice," + +On line 15800: + Answers Regarding + Community Reinvestment; + Notice," Federal + +On line 15802: + Reinvestment; Notice," + Federal Register (March + Glenn Loney, interview + +On line 15806: + Disclosure; Final + Rules," Federal Register + no. (May Division + +On line 15806: + and Community + Affairs, memorandum to + Board of Governors, + +On line 15808: + memorandum to + Board of Governors, August + Federal Reserve + +On line 15808: + "Order Approving + the Merger of Bank Holding + Companies," August + +On line 15812: + Lloyd Brown, interview + by FCIC, February Andrew + Plepler, interview + +On line 15812: + interview by FCIC, + February Andrew Plepler, + interview by FCIC, + +On line 15814: + February Andrew + Plepler, interview by FCIC, + July Assuming + +On line 15814: + Plepler, interview + by FCIC, July Assuming + AAA tranche AA tranche A + +On line 15814: + interview by FCIC, + July Assuming AAA tranche + AA tranche A tranche BBB + +On line 15816: + July Assuming + AAA tranche AA tranche A tranche BBB + tranche and equity + +On line 15816: + Assuming AAA tranche + AA tranche A tranche BBB tranche and + equity tranche See + +On line 15816: + AAA tranche AA tranche A + tranche BBB tranche and equity + tranche See Goldman Sachs, + +On line 15816: + and equity tranche + See Goldman Sachs, "Effective + Regulation: Part + +On line 15818: + Another Meltdown," + March p. David Jones, interview + by FCIC, October + +On line 15818: + David Jones, interview + by FCIC, October See David + Jones, "Emerging Problems + +On line 15818: + Jones, interview by + FCIC, October See David Jones, + "Emerging Problems with + +On line 15818: + FCIC, October See + David Jones, "Emerging Problems with + the Basel Capital + +On line 15818: + "Emerging Problems with + the Basel Capital Accord: + Regulatory + +On line 15818: + Regulatory + Capital Arbitrage and + Related Issues," + +On line 15820: + FCIC, Hearing on the + Shadow Banking System, day + session Perspective + +On line 15820: + System, day session + Perspective on the Shadow + Banking System, May + +On line 15828: + the Shadow Banking + System, May transcript, p. Jones, + interview. Chapter + +On line 15831: + System, May transcript, + p. Jones, interview. Chapter + For example, an + +On line 15831: + p. Jones, interview. + Chapter For example, an + Alt-A loan may have no + +On line 15831: + no or limited + documentation of the + borrower’s income, + +On line 15831: + income, may have a + high loan-to-value ratio + (LTV), or may be for + +On line 15833: + or may be for an + investor-owned property. Inside + Mortgage Finance, The + +On line 15833: + be for an investor-owned + property. Inside Mortgage + Finance, The Mortgage + +On line 15833: + The Secondary Market + (Bethesda, MD: Inside Mortgage + Finance, p. "Mortgage + +On line 15833: + Issuance" (showing Wall + St. securitizing a + third more than Fannie + +On line 15833: + securitizing + a third more than Fannie and + Freddie); p. "Non-Agency MBS + +On line 15833: + and Freddie); p. "Non-Agency + MBS Issuance by Type." FCIC staff + calculations from + +On line 15833: + "Non-Agency MBS Issuance by + Type." FCIC staff calculations + from to (for growth in + +On line 15833: + Issuance by Type." FCIC + staff calculations from to + (for growth in private + +On line 15835: + staff calculations + from to (for growth in private + label MBS). Charles O. + +On line 15835: + from to (for growth in + private label MBS). Charles O. + Prince, interview by + +On line 15837: + private label MBS). + Charles O. Prince, interview by + FCIC, March John Taylor, + +On line 15837: + interview by FCIC, + March John Taylor, interview + by FCIC, September + +On line 15839: + September William A. + Fleckenstein and Frederick + Sheeham, Greenspan’s Bubbles: + +On line 15839: + William A. Fleckenstein + and Frederick Sheeham, Greenspan’s + Bubbles: The Age of + +On line 15841: + Age of Ignorance + at the Federal Reserve + (New York: McGraw-Hill, p. Alan + +On line 15841: + of Ignorance at + the Federal Reserve (New + York: McGraw-Hill, p. Alan Greenspan, + +On line 15841: + Ignorance at the + Federal Reserve (New York: + McGraw-Hill, p. Alan Greenspan, "The + +On line 15841: + at the Federal + Reserve (New York: McGraw-Hill, p. Alan + Greenspan, "The Fed Didn’t + +On line 15841: + Federal Reserve + (New York: McGraw-Hill, p. Alan Greenspan, "The + Fed Didn’t Cause the + +On line 15841: + (New York: McGraw-Hill, p. Alan + Greenspan, "The Fed Didn’t Cause the + Housing Bubble," Wall + +On line 15843: + Greenspan, "The Fed Didn’t + Cause the Housing Bubble," Wall + Street Journal, March See + +On line 15843: + Housing Bubble," Wall + Street Journal, March See also + Ben Bernanke, "Monetary + +On line 15843: + Street Journal, March See + also Ben Bernanke, "Monetary + Policy and the + +On line 15843: + See also Ben Bernanke, + "Monetary Policy and + the Housing Bubble," + +On line 15843: + Ben Bernanke, "Monetary + Policy and the Housing + Bubble," speech at the + +On line 15843: + Policy and the + Housing Bubble," speech at the + Annual Meeting + +On line 15843: + Housing Bubble," speech + at the Annual Meeting + of the American + +On line 15845: + January Alan Greenspan, + testimony before the + Senate Committee + +On line 15845: + on Banking, Housing, + and Urban Affairs, 109th Cong., + 1st sess., February + +On line 15847: + Banking, Housing, and + Urban Affairs, 109th Cong., 1st + sess., February Fed + +On line 15847: + and Urban Affairs, + 109th Cong., 1st sess., February + Fed Chairman Ben S. + +On line 15847: + Urban Affairs, 109th + Cong., 1st sess., February Fed + Chairman Ben S. Bernanke, + +On line 15847: + 1st sess., February + Fed Chairman Ben S. Bernanke, "The + Global Saving Glut + +On line 15847: + Fed Chairman Ben S. + Bernanke, "The Global Saving Glut + and the U.S. Current + +On line 15847: + Global Saving Glut + and the U.S. Current Account + Deficit," remarks at the + +On line 15849: + Economics, Richmond, + Virginia, March Frederic Mishkin, + interview by FCIC, + +On line 15849: + Richmond, Virginia, March + Frederic Mishkin, interview + by FCIC, October + +On line 15851: + Gourinchas, written + testimony for the FCIC, + Forum to Explore + +On line 15851: + testimony for + the FCIC, Forum to Explore + the Causes of the + +On line 15851: + the FCIC, Forum to + Explore the Causes of the + Financial Crisis, + +On line 15857: + February pp. Paul + Krugman, interview by FCIC, + October Notes to + +On line 15861: + Krugman, interview + by FCIC, October Notes to + Chapter Ellen Schloemer, + +On line 15861: + interview by FCIC, + October Notes to Chapter + Ellen Schloemer, Wei Li, + +On line 15861: + by FCIC, October + Notes to Chapter Ellen Schloemer, + Wei Li, Keith Ernst, + +On line 15861: + FCIC, October Notes + to Chapter Ellen Schloemer, Wei + Li, Keith Ernst, and + +On line 15861: + Wei Li, Keith Ernst, + and Kathleen Keest, "Losing Ground: + Foreclosures in the + +On line 15861: + Ernst, and Kathleen Keest, + "Losing Ground: Foreclosures in + the Subprime Market + +On line 15861: + Ground: Foreclosures in + the Subprime Market and Their + Cost to Homeowners," + +On line 15861: + Cost to Homeowners," + Center for Responsible + Lending, December + +On line 15863: + p. Mortgage Market + Statistical Annual, + vol. The Primary + +On line 15865: + Primary Market, + p. "Mortgage Originations + by Product." Christopher + +On line 15865: + Market, p. "Mortgage + Originations by Product." + Christopher Mayer, Karen + +On line 15865: + by Product." Christopher + Mayer, Karen Pence, and Shane M. + Sherlund, "The Rise in + +On line 15865: + Karen Pence, and Shane M. + Sherlund, "The Rise in Mortgage + Defaults," Journal of + +On line 15867: + p. Mortgage Market + Statistical Annual, + "Non-Agency MBS Issuance by + +On line 15873: + for First Lien Guidance," + November Inside Mortgage + Finance. Countrywide, + +On line 15873: + November Inside + Mortgage Finance. Countrywide, + Form 10-K, p. Form 10-K, + +On line 15873: + Countrywide, Form 10-K, + p. Form 10-K, p. (showing the + growth in Countrywide’s + +On line 15875: + (showing the growth in + Countrywide’s originations). + Angelo Mozilo, + +On line 15875: + Angelo Mozilo, + email to Sambol and Kurland + re: Sub-prime Seconds. + +On line 15875: + Sub-prime Seconds. See + also Angelo Mozilo, + email to Sambol, Bartlett, + +On line 15875: + also Angelo + Mozilo, email to Sambol, Bartlett, + and Sieracki, re: + +On line 15875: + to Sambol, Bartlett, and + Sieracki, re: "Reducing + Risk, Reducing Cost," + +On line 15875: + and Sieracki, re: + "Reducing Risk, Reducing + Cost," May Angelo + +On line 15879: + by FCIC. September + David Sambol, interview by + FCIC, September See + +On line 15879: + interview by FCIC, + September See Countrywide, + Investor Conference + +On line 15879: + Investor Conference + Call, January transcript, p. + See also Jody Shenn, + +On line 15881: + to Boost Purchase Share," + American Banker, January + Patricia Lindsay, + +On line 15881: + Patricia Lindsay, + written testimony for + the FCIC, hearing on + +On line 15881: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 15883: + Origination and + Securitization, April + p. Andrew Davidson, + +On line 15889: + 110th Cong., 1st sess., June + Email and data attachment + from former Golden + +On line 15889: + Cong., 1st sess., June Email + and data attachment from + former Golden West + +On line 15889: + to FCIC, subject: "re: + Golden West Estimated + Volume of Adjustable + +On line 15891: + Volume of Adjustable + Rate Mortgage Originations," + December Herbert + +On line 15893: + I," August Exhibits + and in Senate Permanent + Subcommittee on + +On line 15893: + exhibits, Wall Street and + the Financial Crisis: The + Role of High Risk Home + +On line 15893: + and the Financial + Crisis: The Role of High Risk + Home Loans, 111th Cong., 2nd + +On line 15893: + Financial Crisis: + The Role of High Risk Home Loans, + 111th Cong., 2nd sess., April + +On line 15893: + The Role of High Risk + Home Loans, 111th Cong., 2nd sess., April + (hereafter cited as + +On line 15893: + Risk Home Loans, 111th Cong., + 2nd sess., April (hereafter cited + as PSI Documents), + +On line 15893: + Home Loans, 111th Cong., 2nd + sess., April (hereafter cited as + PSI Documents), PDF + +On line 15893: + Loans, 111th Cong., 2nd sess., + April (hereafter cited as PSI + Documents), PDF pp. + +On line 15893: + 2nd sess., April (hereafter + cited as PSI Documents), + PDF pp. available at + +On line 15895: + April (hereafter cited + as PSI Documents), PDF pp. + available at http://hsgac.senate.gov/public/_files/Financial_Crisis/041310Exhibits.pdf. PSI + +On line 15895: + as PSI Documents), + PDF pp. available at http://hsgac.senate.gov/public/_files/Financial_Crisis/041310Exhibits.pdf. PSI + Documents, Exhibits + +On line 15899: + PDF pp. available at + http://hsgac.senate.gov/public/_files/Financial_Crisis/041310Exhibits.pdf. PSI Documents, Exhibits + and pp. Ibid., pp. Ibid., + +On line 15899: + pp. available at http://hsgac.senate.gov/public/_files/Financial_Crisis/041310Exhibits.pdf. + PSI Documents, Exhibits and + pp. Ibid., pp. Ibid., p. + +On line 15901: + available at http://hsgac.senate.gov/public/_files/Financial_Crisis/041310Exhibits.pdf. PSI + Documents, Exhibits and pp. + Ibid., pp. Ibid., p. Ibid., + +On line 15903: + Ibid., pp. Ibid., p. Ibid., + p. Washington Mutual, + "Option ARM Credit + +On line 15905: + "Option ARM Credit + Risk," August PSI Document + Exhibit p. PSI + +On line 15905: + Credit Risk," August + PSI Document Exhibit + p. PSI Documents + +On line 15905: + Exhibit p. PSI + Documents Exhibit p. + showing average + +On line 15909: + Document listing + Countrywide originations + by quarter from to + +On line 15909: + listing Countrywide + originations by quarter + from to provided + +On line 15911: + a maximum CLTV + of and minimum FICO + of and July Loan + +On line 15911: + of and minimum + FICO of and July Loan + Program Guide (showing + +On line 15911: + minimum FICO + of and July Loan Program + Guide (showing FICO). + +On line 15915: + FICO). Countrywide + Loan Program Guide, dated March + Federal Reserve, + +On line 15917: + Guidance," November + pp. Angelo Mozilo, email + to Carlos Garcia + +On line 15917: + Angelo Mozilo, + email to Carlos Garcia (cc: + Stan Kurland), Subject: + +On line 15923: + to Carlos Garcia + (cc: Stan Kurland), Subject: "Bank + Assets," August Notes + +On line 15925: + Stan Kurland), Subject: + "Bank Assets," August Notes to + Chapter Angelo + +On line 15925: + Angelo Mozilo, + email to Carlos Garcia (cc: + Kurland), subject: "re: + +On line 15925: + to Carlos Garcia + (cc: Kurland), subject: "re: Fw: + Bank Assets," August + +On line 15927: + Garcia (cc: Kurland), + subject: "re: Fw: Bank Assets," + August Countrywide, + +On line 15927: + (cc: Kurland), subject: + "re: Fw: Bank Assets," August + Countrywide, Form 10-K, + +On line 15927: + subject: "re: Fw: Bank + Assets," August Countrywide, + Form 10-K, p. Form 10-K, + +On line 15927: + "re: Fw: Bank Assets," + August Countrywide, Form 10-K, + p. Form 10-K, p. F-45. + +On line 15931: + p. Form 10-K, p. F-45. + See Washington Mutual, + Form 10-K, p. John Stumpf, + +On line 15931: + F-45. See Washington + Mutual, Form 10-K, p. John + Stumpf, interview by + +On line 15933: + Stumpf, interview by + FCIC, September Countrywide, + Form 10-K, p. F-45; Form + +On line 15933: + interview by FCIC, + September Countrywide, Form + 10-K, p. F-45; Form 10-K, + +On line 15935: + 10-K, p. F-45; Form 10-K, + p. Washington Mutual, + Form 10-K, p. Form 10-K, + +On line 15935: + p. F-45; Form 10-K, p. + Washington Mutual, Form + 10-K, p. Form 10-K, p. + +On line 15937: + p. Form 10-K, p. Kevin + Stein, testimony before + the FCIC, Sacramento + +On line 15937: + the FCIC, Sacramento + Hearing on the Impact of + the Financial Crisis–San + +On line 15937: + the Impact of the + Financial Crisis–San Francisco, + day session Mortgage + +On line 15937: + Fraud and Predatory + Lending in the Sacramento + Region, September + +On line 15937: + Predatory Lending + in the Sacramento Region, + September transcript, + +On line 15939: + in the Sacramento + Region, September transcript, + p. Mona Tawatao, in ibid., + +On line 15941: + Region, September + transcript, p. Mona Tawatao, in ibid., + p. Real Estate + +On line 15941: + p. Mona Tawatao, in ibid., + p. Real Estate Lending + Standards, Federal + +On line 15945: + of the Comptroller + of the Currency, Board of + Governors of the + +On line 15945: + of the Currency, + Board of Governors of the + Federal Deposit + +On line 15945: + Deposit Insurance + Corporation, Office of + Thrift Supervision, + +On line 15947: + Standards: Final Rule," + SR January Office of + the Comptroller of + +On line 15947: + Rule," SR January + Office of the Comptroller + of the Currency, + +On line 15947: + January Office + of the Comptroller of the + Currency, Board of + +On line 15947: + of the Comptroller + of the Currency, Board of + Governors of the + +On line 15947: + of the Currency, + Board of Governors of the + Federal Deposit + +On line 15947: + Deposit Insurance + Corporation, Office of + Thrift Supervision, + +On line 15949: + Lending," October + Final Report of Michael J. + Missal, Bankruptcy Court + +On line 15949: + Final Report of + Michael J. Missal, Bankruptcy Court + Examiner, In + +On line 15949: + J. Missal, Bankruptcy + Court Examiner, In RE: + New Century TRS + +On line 15949: + Court Examiner, + In RE: New Century TRS + Holdings, Chapter Case + +On line 15951: + No. 07-10416 (KJC), (Bankr. D.Del.), + February pp. Yuliya Demyanyk + and Otto Van Hemert, + +On line 15951: + D.Del.), February pp. + Yuliya Demyanyk and Otto Van + Hemert, "Understanding + +On line 15951: + February pp. Yuliya + Demyanyk and Otto Van Hemert, + "Understanding the + +On line 15955: + Sandler, interview. + CoreLogic loan performance data + for subprime and Alt-A + +On line 15955: + CoreLogic loan performance + data for subprime and Alt-A + loans, and CoreLogic total + +On line 15955: + subprime and Alt-A loans, + and CoreLogic total outstanding + loans servicer data + +On line 15957: + data provided + to the FCIC. Christopher Mayer, + Karen Pence, and Shane M. + +On line 15957: + provided to the + FCIC. Christopher Mayer, Karen Pence, + and Shane M. Sherlund, + +On line 15957: + to the FCIC. Christopher + Mayer, Karen Pence, and Shane M. + Sherlund, "The Rise in + +On line 15957: + FCIC. Christopher Mayer, + Karen Pence, and Shane M. Sherlund, + "The Rise in Mortgage + +On line 15957: + Karen Pence, and Shane M. + Sherlund, "The Rise in Mortgage + Defaults," Journal of + +On line 15959: + no. (Winter William Black, + testimony for the FCIC, + Miami Hearing + +On line 15959: + testimony for + the FCIC, Miami Hearing + on the Impact of + +On line 15959: + on the Impact of + the Financial Crisis, day + session Overview of + +On line 15961: + session Overview of + Mortgage Fraud, September p. + Richard Bowen, interview + +On line 15961: + Overview of Mortgage + Fraud, September p. Richard Bowen, + interview by FCIC, + +On line 15965: + the FCIC, January + p. This particular deal + would be described as + +On line 15965: + FCIC, January p. + This particular deal would + be described as an + +On line 15965: + credit enhancement + structure; see Gary Gorton, "The + Panic of paper + +On line 15965: + paper presented + at the Federal Reserve + Bank of Kansas City’s + +On line 15965: + presented at the + Federal Reserve Bank of + Kansas City’s Jackson + +On line 15967: + Kansas City’s Jackson + Hole Conference, August p. + FCIC staff estimates + +On line 15967: + Conference, August + p. FCIC staff estimates based + on analysis of + +On line 15967: + staff estimates based + on analysis of data + from BlackBox, S&P, and Bloomberg. + +On line 15967: + estimates based on + analysis of data from + BlackBox, S&P, and Bloomberg. The + +On line 15967: + based on analysis + of data from BlackBox, S&P, and + Bloomberg. The prospective loan + +On line 15967: + on analysis of + data from BlackBox, S&P, and Bloomberg. + The prospective loan pool + +On line 15967: + from BlackBox, S&P, and Bloomberg. + The prospective loan pool for this + deal originally + +On line 15967: + The prospective loan pool + for this deal originally + contained mortgages. Eight + +On line 15967: + deal originally + contained mortgages. Eight of these + had been dropped from the + +On line 15967: + contained mortgages. Eight + of these had been dropped from the + pool by the time the + +On line 15967: + mortgages. Eight of these + had been dropped from the pool by + the time the bonds were + +On line 15967: + Eight of these had been + dropped from the pool by the time + the bonds were issued. + +On line 15967: + these had been dropped from + the pool by the time the bonds + were issued. Therefore, + +On line 15967: + had been dropped from the + pool by the time the bonds were + issued. Therefore, these + +On line 15967: + the pool by the time + the bonds were issued. Therefore, + these estimates may + +On line 15967: + the bonds were issued. + Therefore, these estimates may + differ slightly from + +On line 15967: + may differ slightly + from those reported in the + deal prospectus because + +On line 15967: + differ slightly from + those reported in the deal + prospectus because these + +On line 15967: + from those reported + in the deal prospectus because + these estimates are + +On line 15967: + those reported in + the deal prospectus because these + estimates are based + +On line 15967: + in the deal prospectus + because these estimates are + based on a pool of + +On line 15969: + deal prospectus because + these estimates are based on + a pool of loans. Ibid. + +On line 15971: + on a pool of loans. + Ibid. Federal Register + (January The rules + +On line 15971: + loans. Ibid. Federal + Register (January The + rules were issued in + +On line 15971: + rules were issued in + proposed form at Federal + Register (August + +On line 15975: + Comptroller of the + Currency John Hawke, remarks + before Women in + +On line 15975: + Currency John Hawke, + remarks before Women in + Housing and Finance, + +On line 15975: + Women in Housing + and Finance, Washington, D.C., + February attached + +On line 15975: + Housing and Finance, + Washington, D.C., February + attached to OCC News + +On line 15975: + Finance, Washington, + D.C., February attached to + OCC News Release 2002-10, + +On line 15977: + February attached + to OCC News Release 2002-10, p. + John Hawke, quoted in + +On line 15977: + OCC News Release 2002-10, + p. John Hawke, quoted in Jess + Bravin and Paul Beckett, + +On line 15977: + Release 2002-10, p. John + Hawke, quoted in Jess Bravin and + Paul Beckett, "Friendly + +On line 15977: + Hawke, quoted in Jess + Bravin and Paul Beckett, "Friendly + Watchdog: Federal + +On line 15977: + Watchdog: Federal + Regulator Often Helps + Banks Fighting Consumers," + +On line 15979: + Fighting Consumers," Wall + Street Journal, January Oren + Bar-Gill and Elizabeth + +On line 15979: + Bar-Gill and Elizabeth + Warren, "Making Credit Safer," + University of + +On line 15981: + University of + Pennsylvania Law Review + 182-83, 192-94. See Watters + +On line 15981: + Pennsylvania Law + Review 182-83, 192-94. See Watters + v. Wachovia Bank NA, + +On line 15983: + 182-83, 192-94. See Watters + v. Wachovia Bank NA, U.S. John + Dugan, testimony + +On line 15983: + Bank NA, U.S. John Dugan, + testimony before the + FCIC, Public Hearing + +On line 15983: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 15983: + Government-Sponsored Enterprises + (GSEs), day session Office of + the Comptroller of + +On line 15983: + Enterprises (GSEs), + day session Office of the + Comptroller of the + +On line 15985: + the FCIC, day panel + Investigations into + the Financial Crisis—State + +On line 15993: + Local Officials, + January transcript, p. Notes + to Chapter John D. + +On line 15993: + Chapter John D. Hawke + Jr., written testimony + for the FCIC, Public + +On line 15993: + D. Hawke Jr., written + testimony for the FCIC, + Public Hearing on + +On line 15993: + testimony for + the FCIC, Public Hearing on + Subprime Lending and + +On line 15993: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 15993: + Government-Sponsored Enterprises + (GSEs), day session Office of + the Comptroller of + +On line 15993: + Enterprises (GSEs), + day session Office of the + Comptroller of the + +On line 15993: + day session Office + of the Comptroller of the + Currency, April p. + +On line 15995: + of the Comptroller + of the Currency, April p. + Citigroup Warehouse + +On line 15995: + of the Currency, + April p. Citigroup Warehouse + Lines of Credit with + +On line 15995: + Currency, April p. + Citigroup Warehouse Lines of + Credit with Mortgage + +On line 15995: + Citigroup Warehouse + Lines of Credit with Mortgage + Originators, in + +On line 15997: + by Citigroup; staff + calculations. Charles O. Prince, + interview by FCIC, + +On line 15999: + staff calculations. + Charles O. Prince, interview by + FCIC, March Moody’s Special + +On line 15999: + Prince, interview by + FCIC, March Moody’s Special Report, + "The ABCP Market in + +On line 15999: + interview by FCIC, + March Moody’s Special Report, "The + ABCP Market in the + +On line 15999: + FCIC, March Moody’s Special + Report, "The ABCP Market in + the Third Quarter of + +On line 16001: + Market in the Third + Quarter of February Moody’s + Review and Outlook: + +On line 16001: + the Third Quarter of + February Moody’s Review and + Outlook: US Asset-backed + +On line 16003: + Commercial Paper, + February Moody’s ABCP Reviews + of Park Granada and + +On line 16005: + February Moody’s ABCP + Reviews of Park Granada and + Park Sienna. Moody’s + +On line 16005: + Park Granada and Park + Sienna. Moody’s ABCP Program + Review: Park Granada, + +On line 16007: + Sienna. Moody’s ABCP + Program Review: Park Granada, + July Letters from + +On line 16007: + ABCP Program Review: + Park Granada, July Letters + from the American + +On line 16007: + Forum (November + and State St. Bank (November + to the Office of + +On line 16009: + to the Office of + Thrift Supervision. Darryll + Hendricks, interview + +On line 16011: + Thrift Supervision. + Darryll Hendricks, interview + by FCIC, August Citi + +On line 16013: + Citi August Loan Sale. + Correspondence between Citi + and New Century + +On line 16013: + FCIC staff estimates + from prospectus and Citigroup + production dated + +On line 16015: + production dated + November Citi August Loan + Sale. Fannie Mae Term + +On line 16017: + dated November + Citi August Loan Sale. Fannie + Mae Term Sheet. For the + +On line 16017: + Mae Term Sheet. For the + more than institutional + investors around the world, + +On line 16017: + investors around the world, + see Citigroup letter to + the FCIC re Senior + +On line 16017: + million figure is + based on FCIC staff estimates + that, in turn, were based + +On line 16017: + is based on FCIC staff + estimates that, in turn, were + based on analysis + +On line 16017: + estimates that, in + turn, were based on analysis + of Moody’s PDS database. + +On line 16019: + that, in turn, were based + on analysis of Moody’s PDS + database. See Brad S. + +On line 16019: + based on analysis + of Moody’s PDS database. See Brad + S. Karp, counsel for + +On line 16019: + of Moody’s PDS database. + See Brad S. Karp, counsel for + Citigroup, letter + +On line 16019: + database. See Brad S. + Karp, counsel for Citigroup, + letter to FCIC, about + +On line 16019: + S. Karp, counsel for + Citigroup, letter to FCIC, + about senior investors, + +On line 16019: + Citigroup, letter + to FCIC, about senior investors, + October p. See + +On line 16019: + to FCIC, about senior + investors, October p. See + also Eric S. + +On line 16019: + about senior investors, + October p. See also + Eric S. Goldstein, + +On line 16019: + investors, October + p. See also Eric S. + Goldstein, counsel for + +On line 16019: + October p. See + also Eric S. Goldstein, + counsel for JPMorgan Chase + +On line 16019: + See also Eric + S. Goldstein, counsel for JPMorgan + Chase Co., letter to + +On line 16019: + also Eric S. + Goldstein, counsel for JPMorgan Chase + Co., letter to FCIC, + +On line 16021: + Chase Co., letter to + FCIC, November Citigroup + letter to the FCIC, + +On line 16023: + to FCIC, November + Citigroup letter to the + FCIC, November See, + +On line 16023: + Citigroup letter + to the FCIC, November See, + e.g., Simon Kennedy, "BNP + +On line 16023: + letter to the FCIC, + November See, e.g., Simon + Kennedy, "BNP Suspends Funds + +On line 16023: + FCIC, November See, + e.g., Simon Kennedy, "BNP Suspends + Funds Amid Credit-Market Turmoil," + +On line 16027: + S. Karp, letter to + FCIC, about mezzanine investors, + November p. The + +On line 16027: + FCIC, about mezzanine + investors, November p. The + equity tranches + +On line 16027: + investors, November + p. The equity tranches + were not offered for + +On line 16027: + November p. The + equity tranches were not + offered for public + +On line 16027: + p. The equity + tranches were not offered for + public sale but were + +On line 16027: + equity tranches + were not offered for public + sale but were retained + +On line 16029: + were not offered for + public sale but were retained + by Citigroup. FCIC + +On line 16029: + for public sale but + were retained by Citigroup. + FCIC staff estimates + +On line 16029: + public sale but were + retained by Citigroup. FCIC + staff estimates from + +On line 16029: + FCIC staff estimates + from prospectus and Citigroup + production dated + +On line 16033: + Lindsay, interview + by FCIC, March PSI Documents, + Exhibit 59a: "Long + +On line 16033: + 59a: "Long Beach Mortgage + Production, Incentive Plan + and Exhibit 60a + +On line 16033: + and Exhibit 60a + (quoting page of WaMu Home Loans + Product Strategy + +On line 16033: + (quoting page of WaMu + Home Loans Product Strategy + PowerPoint presentation). + +On line 16035: + Product Strategy + PowerPoint presentation). John M. + Quigley, "Compensation + +On line 16035: + PowerPoint presentation). + John M. Quigley, "Compensation + and Incentives in + +On line 16035: + presentation). John + M. Quigley, "Compensation and + Incentives in the + +On line 16035: + "Compensation and + Incentives in the Mortgage + Business," Economists’ + +On line 16035: + Incentives in the + Mortgage Business," Economists’ + Voices (The Berkeley + +On line 16037: + Berkeley Electronic + Press, October p. Barclays + Capital, Bear Stearns, + +On line 16037: + Press, October p. + Barclays Capital, Bear Stearns, + BNP Paribas, Citigroup, + +On line 16037: + Barclays Capital, + Bear Stearns, BNP Paribas, Citigroup, + Deutsche Bank, Goldman Sachs, + +On line 16037: + Capital, Bear Stearns, + BNP Paribas, Citigroup, Deutsche Bank, + Goldman Sachs, HSBC, + +On line 16037: + Paribas, Citigroup, Deutsche + Bank, Goldman Sachs, HSBC, JPMorgan, + Lehman Brothers, Morgan + +On line 16039: + Lehman Brothers, Morgan + Stanley, and UBS. Figures are + average top-tier + +On line 16039: + Morgan Stanley, and + UBS. Figures are average + top-tier pay worldwide + +On line 16039: + average top-tier + pay worldwide in mortgages and + MBS sales and trading. + +On line 16039: + top-tier pay worldwide + in mortgages and MBS sales and + trading. See Options + +On line 16039: + worldwide in mortgages + and MBS sales and trading. See + Options Group, Global + +On line 16039: + mortgages and MBS sales + and trading. See Options Group, + Global Financial + +On line 16039: + Report" (November + pp. and Options Group, Global + Financial Market + +On line 16043: + pp. See Merrill Lynch, + Proxy Statement, p. See FCIC staff + analysis of Moody’s + +On line 16043: + Lynch, Proxy Statement, p. + See FCIC staff analysis of + Moody’s Form 10-Ks for years + +On line 16043: + Proxy Statement, p. See + FCIC staff analysis of Moody’s + Form 10-Ks for years and + +On line 16045: + Statement, p. See FCIC + staff analysis of Moody’s Form + 10-Ks for years and See + +On line 16045: + analysis of Moody’s + Form 10-Ks for years and See FCIC + staff calculations + +On line 16045: + Form 10-Ks for years and + See FCIC staff calculations + based on Moody’s Form 10-Ks + +On line 16045: + 10-Ks for years and See + FCIC staff calculations based + on Moody’s Form 10-Ks for + +On line 16045: + for years and See FCIC + staff calculations based on + Moody’s Form 10-Ks for years + +On line 16047: + years and See FCIC staff + calculations based on Moody’s + Form 10-Ks for years "Moody’s + +On line 16047: + calculations based + on Moody’s Form 10-Ks for years "Moody’s + Expands Moody’s Mortgage + +On line 16047: + on Moody’s Form 10-Ks for + years "Moody’s Expands Moody’s Mortgage + Metrics to Include + +On line 16047: + Form 10-Ks for years "Moody’s + Expands Moody’s Mortgage Metrics + to Include Subprime + +On line 16047: + Mortgages," September + FCIC staff estimate based on + analysis of Moody’s + +On line 16049: + estimate based on + analysis of Moody’s SFDRS + and PDS databases. The + +On line 16049: + on analysis of + Moody’s SFDRS and PDS databases. + The ratings from the + +On line 16049: + analysis of Moody’s + SFDRS and PDS databases. The + ratings from the three + +On line 16049: + Moody’s SFDRS and PDS + databases. The ratings from the + three agencies measure + +On line 16049: + databases. The ratings + from the three agencies measure + slightly different + +On line 16049: + The ratings from the + three agencies measure slightly + different credit + +On line 16049: + Fitch base their ratings + on the probability + that a borrower + +On line 16049: + base their ratings on + the probability that + a borrower will + +On line 16049: + a borrower will + default; Moody’s bases its ratings + on the expected + +On line 16049: + default; Moody’s bases its + ratings on the expected + loss to the investor. + +On line 16049: + Moody’s bases its ratings + on the expected loss to + the investor. Despite + +On line 16049: + bases its ratings on + the expected loss to the + investor. Despite such + +On line 16049: + the expected loss + to the investor. Despite such + differences, investors + +On line 16049: + the investor. Despite + such differences, investors and + regulators tend + +On line 16049: + differences, investors + and regulators tend to + view the ratings as + +On line 16049: + and regulators + tend to view the ratings as + roughly equivalent. + +On line 16049: + divided into + two categories: investment + grade securities + +On line 16049: + grade securities + are rated BBB- to AAA, + while securities + +On line 16049: + also referred to + as junk (for S&P; similar + levels for Moody’s are + +On line 16049: + referred to as junk + (for S&P; similar levels + for Moody’s are Baa to + +On line 16051: + to as junk (for S&P; + similar levels for Moody’s + are Baa to triple-A). Richard + +On line 16051: + (for S&P; similar + levels for Moody’s are Baa to + triple-A). Richard Cantor and + +On line 16051: + Moody’s are Baa to triple-A). + Richard Cantor and Frank Packer, + "The Credit Rating + +On line 16051: + to triple-A). Richard Cantor + and Frank Packer, "The Credit + Rating Industry," + +On line 16051: + Richard Cantor and Frank + Packer, "The Credit Rating + Industry," FRBNY + +On line 16051: + and Frank Packer, "The + Credit Rating Industry," + FRBNY Quarterly + +On line 16051: + Packer, "The Credit + Rating Industry," FRBNY + Quarterly Review + +On line 16057: + Rating Industry," + FRBNY Quarterly Review + (Summer–Fall Notes to Chapter + +On line 16059: + Industry," FRBNY + Quarterly Review (Summer–Fall Notes + to Chapter Andrew + +On line 16059: + FRBNY Quarterly + Review (Summer–Fall Notes to Chapter + Andrew J. Donahue, + +On line 16059: + Donahue, director, + Division of Investment + Management, SEC, "Speech + +On line 16059: + Staff: Opening Remarks + before the Commission Open + Meeting," Washington, + +On line 16059: + the Commission Open + Meeting," Washington, DC, June + See also Lawrence J. + +On line 16059: + also Lawrence J. White, + "Markets: The Credit Rating + Agencies," Journal of + +On line 16065: + the FCIC, Hearing on + the Credibility of + Credit Ratings, the + +On line 16065: + Credit Ratings, the + Investment Decisions Made + Based on Those Ratings, + +On line 16065: + Based on Those Ratings, + and the Financial Crisis, + session The Ratings + +On line 16065: + Those Ratings, and the + Financial Crisis, session + The Ratings Process, June + +On line 16065: + and the Financial + Crisis, session The Ratings + Process, June transcript, pp. + +On line 16067: + Financial Crisis, + session The Ratings Process, June + transcript, pp. See U.S.C. + +On line 16069: + Crisis, session The + Ratings Process, June transcript, pp. + See U.S.C. 78o-7(c)(2). Jerome S. + +On line 16069: + See U.S.C. 78o-7(c)(2). Jerome S. + Fons, testimony before + the House Committee + +On line 16069: + U.S.C. 78o-7(c)(2). Jerome S. Fons, + testimony before the + House Committee on + +On line 16069: + the House Committee + on Oversight and Government + Reform, 110th Cong., 2nd + +On line 16073: + on the Impact of + the Financial Crisis— Greater + Bakersfield, session + +On line 16075: + transcript, p. Gary Witt, + testimony before the + FCIC, Hearing on the + +On line 16075: + the FCIC, Hearing on + the Credibility of + Credit Ratings, the + +On line 16075: + Credit Ratings, the + Investment Decisions Made + Based on Those Ratings, + +On line 16075: + Based on Those Ratings, + and the Financial Crisis, + session The Ratings + +On line 16075: + Those Ratings, and the + Financial Crisis, session + The Ratings Process, June + +On line 16075: + and the Financial + Crisis, session The Ratings + Process, June transcript, p. + +On line 16077: + Crisis, session The + Ratings Process, June transcript, p. + Moody’s Investors Service, + +On line 16077: + Moody’s Investors Service, + "Introducing Moody’s Mortgage + Metrics: Subprime Just + +On line 16079: + Subprime Just Became + More Transparent," September + David Teicher, Moody’s + +On line 16079: + Moody’s Investors Service, + interview by FCIC, May "Moody’s + Mortgage Metrics: A + +On line 16079: + interview by FCIC, + May "Moody’s Mortgage Metrics: A + Model Analysis + +On line 16085: + interview. Jay Siegel, + testimony before the + FCIC, Hearing on the + +On line 16085: + the FCIC, Hearing on + the Credibility of + Credit Ratings, the + +On line 16085: + Credit Ratings, the + Investment Decisions Made + Based on Those Ratings, + +On line 16085: + Based on Those Ratings, + and the Financial Crisis, + session The Ratings + +On line 16085: + Those Ratings, and the + Financial Crisis, session + The Ratings Process, June + +On line 16085: + and the Financial + Crisis, session The Ratings + Process, June transcript, p. + +On line 16087: + Financial Crisis, + session The Ratings Process, June + transcript, p. Roger Stein, + +On line 16087: + Crisis, session The + Ratings Process, June transcript, p. + Roger Stein, interview + +On line 16087: + session The Ratings + Process, June transcript, p. Roger Stein, + interview by FCIC, + +On line 16089: + June transcript, p. Roger + Stein, interview by FCIC, May + Moody’s Investors Service, + +On line 16089: + Stein, interview by + FCIC, May Moody’s Investors Service, + "Introducing Moody’s + +On line 16089: + FCIC, May Moody’s Investors + Service, "Introducing Moody’s + Mortgage Metrics." Stein, + +On line 16093: + interview. Jerome Fons, + interview by FCIC, April Moody’s + Rating Committee + +On line 16095: + Rating Committee + Memorandum, August FCIC + staff estimates based + +On line 16097: + FCIC staff estimates + based on analysis of Moody’s + PDS database. Invoice + +On line 16097: + staff estimates based + on analysis of Moody’s PDS + database. Invoice from + +On line 16097: + on analysis of + Moody’s PDS database. Invoice from + Moody’s Investors Service + +On line 16097: + analysis of Moody’s + PDS database. Invoice from Moody’s + Investors Service to + +On line 16097: + Moody’s Investors Service + to Susan Mills, Citigroup + Global Markets Inc., + +On line 16101: + New Issue Billing Form, + Citigroup Mortgage Loan Trust + 2006-NC2, September FCIC + +On line 16101: + Citigroup Mortgage + Loan Trust 2006-NC2, September FCIC + staff estimates based + +On line 16101: + Trust 2006-NC2, September + FCIC staff estimates based on + analysis of Moody’s + +On line 16101: + FCIC staff estimates + based on analysis of Moody’s + SFDRS data as + +On line 16101: + estimates based on + analysis of Moody’s SFDRS + data as of April + +On line 16103: + based on analysis + of Moody’s SFDRS data as + of April Chris Cox, SEC + +On line 16103: + analysis of Moody’s + SFDRS data as of April + Chris Cox, SEC chairman, + +On line 16103: + before the Senate + Banking Committee, 109th Cong., + 2nd sess., June "Freddie + +On line 16103: + the Senate Banking + Committee, 109th Cong., 2nd sess., + June "Freddie Mac, Four + +On line 16103: + sess., June "Freddie Mac, + Four Former Executives + Settle SEC Action + +On line 16103: + Settle SEC Action + Relating to Multi-Billion Dollar + Accounting Fraud," SEC + +On line 16103: + Action Relating + to Multi-Billion Dollar Accounting + Fraud," SEC press release, + +On line 16105: + Accounting Fraud," SEC + press release, September James + Lockhart, director, + +On line 16109: + the chart). OFHEO Special + Examination Report, + December In OFHEO + +On line 16109: + Examination + Report, December In OFHEO + issued its final + +On line 16109: + Examination + of Fannie Mae. OFHEO said that + management engaged + +On line 16109: + of Fannie Mae. OFHEO + said that management engaged + in numerous acts + +On line 16109: + Fannie Mae. OFHEO said + that management engaged in + numerous acts of + +On line 16109: + acts of misconduct, + involving well over a dozen + different forms of + +On line 16109: + principles. As in + the case of Freddie, OFHEO said + Fannie’s management + +On line 16109: + case of Freddie, OFHEO + said Fannie’s management sought + to hit ambitious + +On line 16109: + ambitious earnings-per-share + targets that were linked to their + own compensation. + +On line 16111: + that were linked to their + own compensation. Donald + Bisenius, interview + +On line 16111: + own compensation. + Donald Bisenius, interview + by FCIC, September + +On line 16119: + third-quarter OFHEO Special + Examination Report, + September pp. Ibid., + +On line 16121: + Examination + Report, September pp. Ibid., + pp. OFHEO, Report to + +On line 16125: + Report, September + pp. Ibid., pp. OFHEO, Report to + Congress," June p. Notes + +On line 16129: + Report to Congress," + June p. Notes to Chapter Alan + Greenspan, testimony + +On line 16129: + Notes to Chapter Alan + Greenspan, testimony before + the FCIC, Hearing on + +On line 16129: + Greenspan, testimony + before the FCIC, Hearing on + Subprime Lending and + +On line 16129: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 16129: + Enterprises (GSEs), + day session The Federal + Reserve, April transcript, + +On line 16131: + Reserve, April transcript, + p. FHFA, "Mortgage Market + Note: Goals of Fannie + +On line 16131: + p. FHFA, "Mortgage + Market Note: Goals of Fannie + Mae and Freddie Mac + +On line 16131: + Market Note: Goals of + Fannie Mae and Freddie Mac + in the Context of + +On line 16131: + and Freddie Mac in + the Context of the Mortgage + Market: February + +On line 16133: + "FCIC calculations." + FHFA, Report to Congress, + pp. BlackRock Solutions, + +On line 16133: + Report to Congress, + pp. BlackRock Solutions, "Fannie + Mae’s Strategy and + +On line 16137: + December Robert Levin, + interview by FCIC, March Mark + Winer, interview + +On line 16139: + FCIC, March Mark Winer, + interview by FCIC, March John + Weicher, former + +On line 16139: + interview by FCIC, + March John Weicher, former + FHA commissioner, + +On line 16139: + March John Weicher, + former FHA commissioner, + interview by FCIC, + +On line 16147: + interview by FCIC, + March Letter from Robert Levin to + FCIC, June p. Chapter + +On line 16150: + by FCIC, March Letter + from Robert Levin to FCIC, June p. + Chapter Joe Donovan, + +On line 16150: + March Letter from Robert + Levin to FCIC, June p. Chapter + Joe Donovan, Credit + +On line 16150: + Levin to FCIC, June p. + Chapter Joe Donovan, Credit + Suisse, quoted in + +On line 16150: + Chapter Joe Donovan, + Credit Suisse, quoted in + Michael Gregory, "The + +On line 16152: + staff calculations, + using data from the U.S. + Census, data in + +On line 16152: + using data from + the U.S. Census, data in + Moody’s CDO PDS database, + +On line 16152: + U.S. Census, data + in Moody’s CDO PDS database, and + data in Moody’s CDO + +On line 16152: + and data in Moody’s + CDO Enhanced Monitoring + Service database. The + +On line 16154: + characteristics + that identified them as ABS + CDOs. Scott Eichel, quoted + +On line 16154: + identified them as + ABS CDOs. Scott Eichel, quoted in + Allison Pyburn, + +On line 16154: + them as ABS CDOs. Scott + Eichel, quoted in Allison + Pyburn, "CDO Machine1 + +On line 16154: + Allison Pyburn, + "CDO Machine1 Managers, Mortgage + Companies, Happy + +On line 16158: + interview by FCIC, + March Jian Hu, "Assessing the + Credit Risk of CDOs + +On line 16158: + Jian Hu, "Assessing + the Credit Risk of CDOs Backed + by Structured Finance + +On line 16158: + Analysts’ Challenges + and Solutions," Journal of + Structured Finance no. + +On line 16160: + Solutions," Journal + of Structured Finance no. Wing + Chau, interview by + +On line 16162: + of Structured Finance + no. Wing Chau, interview by + FCIC, November CDOs + +On line 16162: + Structured Finance no. + Wing Chau, interview by FCIC, + November CDOs that + +On line 16162: + Wing Chau, interview + by FCIC, November CDOs that + bought relatively + +On line 16162: + by FCIC, November + CDOs that bought relatively + senior tranches of + +On line 16162: + November CDOs that + bought relatively senior + tranches of mortgage-backed + +On line 16162: + bought relatively + senior tranches of mortgage-backed + securities were + +On line 16162: + senior tranches of + mortgage-backed securities were + known as high-grade; + +On line 16162: + tranches of mortgage-backed + securities were known as + high-grade; those that + +On line 16162: + as high-grade; those + that bought the BBB-rated and other + junior tranches were + +On line 16162: + that bought the BBB-rated and + other junior tranches were + known as mezzanine. + +On line 16164: + Donovan, quoted in + Gregory, "The ‘"What If ’s’ + in ABS CDOs." Laurie + +On line 16164: + "The ‘"What If ’s’ in + ABS CDOs." Laurie Goodman et + al., Subprime Mortgage + +On line 16166: + NJ: John Wiley, p. + Hu, "Assessing the Credit + Risk of CDOs Backed by + +On line 16166: + p. Hu, "Assessing + the Credit Risk of CDOs Backed + by Structured Finance + +On line 16166: + the Credit Risk of + CDOs Backed by Structured Finance + Securities," p. + +On line 16168: + CDOs Backed by Structured + Finance Securities," p. + Exhibit Issuance + +On line 16168: + Issuance dropped in to + billion and virtually + disappeared in FCIC + +On line 16168: + FCIC staff estimates + based on data provided + by Moody’s CDO Enhanced + +On line 16170: + provided by Moody’s + CDO Enhanced Monitoring + System (EMS). FCIC staff + +On line 16170: + by Moody’s CDO Enhanced + Monitoring System (EMS). + FCIC staff estimates + +On line 16172: + FCIC staff estimates + based on analysis of Moody’s + CDO EMS database. Nestor + +On line 16172: + staff estimates based + on analysis of Moody’s CDO + EMS database. Nestor Dominguez, + +On line 16172: + based on analysis + of Moody’s CDO EMS database. Nestor + Dominguez, interview by + +On line 16172: + on analysis of + Moody’s CDO EMS database. Nestor Dominguez, + interview by FCIC, + +On line 16174: + interview by FCIC, + September Michael Lamont, + interview by FCIC, + +On line 16174: + by FCIC, September + Michael Lamont, interview + by FCIC, September + +On line 16176: + FCIC, September Michael + Lamont, interview by + FCIC, September Chris + +On line 16176: + FCIC, September Chris + Ricciardi, interview + by FCIC, September + +On line 16180: + by FCIC, September + Lamont, interview. FCIC + staff calculations + +On line 16182: + CDO manager and + underwriter survey. Mark + Adelson, interview + +On line 16184: + Adelson, interview + by FCIC, October FCIC staff + calculations. Our + +On line 16184: + by FCIC, October + FCIC staff calculations. Our + estimate assumes + +On line 16184: + of of the total + value of the deal—that is, the + lowest normally + +On line 16184: + the total value + of the deal—that is, the lowest + normally earned in + +On line 16184: + of the deal—that is, the + lowest normally earned in + the industry—applied + +On line 16184: + the mortgage-focused + multisector CDOs in the + FCIC database. It does + +On line 16184: + multisector CDOs + in the FCIC database. It does + not include other + +On line 16184: + FCIC database. It does + not include other income, + such as interest + +On line 16184: + database. It does not + include other income, such + as interest on + +On line 16184: + as interest on + equity tranches retained + by the managers. CDO + +On line 16184: + equity tranches + retained by the managers. CDO + managers responding + +On line 16184: + to the FCIC survey + reported management fees + ranging from as low + +On line 16184: + survey reported + management fees ranging from + as low as to as + +On line 16186: + from as low as to + as high as "Summary of + Key Fee Provisions + +On line 16186: + as low as to as + high as "Summary of Key + Fee Provisions for + +On line 16186: + low as to as high + as "Summary of Key Fee + Provisions for Cash + +On line 16186: + "Summary of Key + Fee Provisions for Cash CDOs + as of January + +On line 16186: + Fee Provisions for + Cash CDOs as of January + prepared by Moody’s for + +On line 16188: + for Cash CDOs as of + January prepared by Moody’s + for the FCIC. FCIC Hedge + +On line 16188: + as of January + prepared by Moody’s for the FCIC. + FCIC Hedge Fund Survey. + +On line 16188: + January prepared + by Moody’s for the FCIC. FCIC Hedge + Fund Survey. See FCIC + +On line 16188: + prepared by Moody’s for + the FCIC. FCIC Hedge Fund Survey. + See FCIC website for + +On line 16188: + by Moody’s for the FCIC. + FCIC Hedge Fund Survey. See FCIC + website for details. + +On line 16190: + for the FCIC. FCIC Hedge + Fund Survey. See FCIC website + for details. FCIC staff + +On line 16190: + FCIC Hedge Fund Survey. + See FCIC website for details. + FCIC staff estimates + +On line 16190: + Hedge Fund Survey. See + FCIC website for details. FCIC + staff estimates based + +On line 16190: + Fund Survey. See FCIC + website for details. FCIC staff + estimates based on + +On line 16192: + Bloomberg LLC, Financial + Analyst Function; Bear Stearns + Companies Inc., Form + +On line 16192: + Analyst Function; + Bear Stearns Companies Inc., Form + 10-K, for the fiscal + +On line 16192: + Stearns Companies Inc., + Form 10-K, for the fiscal year + ended November + +On line 16202: + Report," October + p. Notes to Chapter Moody’s, Kleros + Real Estate CDO + +On line 16202: + October p. Notes + to Chapter Moody’s, Kleros Real + Estate CDO III, Ltd., + +On line 16202: + Notes to Chapter Moody’s, + Kleros Real Estate CDO III, + Ltd., CDO EMS Data, + +On line 16202: + to Chapter Moody’s, Kleros + Real Estate CDO III, Ltd., + CDO EMS Data, last + +On line 16202: + Kleros Real Estate + CDO III, Ltd., CDO EMS Data, + last updated May + +On line 16202: + Real Estate CDO + III, Ltd., CDO EMS Data, last + updated May 2008.The + +On line 16202: + last updated May + 2008.The following discussion + of CMLTI 2006-NC2 relies + +On line 16202: + updated May 2008.The + following discussion of + CMLTI 2006-NC2 relies on + +On line 16202: + of CMLTI 2006-NC2 relies + on FCIC staff estimates based + on analysis of + +On line 16202: + CMLTI 2006-NC2 relies on + FCIC staff estimates based on + analysis of Moody’s + +On line 16208: + Moody’s CDO EMS database. + Ricciardi, interview. + For example, Kleros + +On line 16208: + example, Kleros III + tranches were in Buckingham + CDO, Buckingham CDO + +On line 16208: + were in Buckingham + CDO, Buckingham CDO II, and + Buckingham CDO III, + +On line 16208: + Buckingham CDO II, + and Buckingham CDO III, all + deals underwritten + +On line 16210: + and Buckingham CDO + III, all deals underwritten + by Barclays. Adelson, + +On line 16214: + underwritten by + Barclays. Adelson, interview. + Chau, interview. James + +On line 16214: + interview. James Grant, + "Up the Capital Structure" + (December in Mr. + +On line 16214: + Capital Structure" + (December in Mr. Market + Miscalculates: The + +On line 16214: + Miscalculates: The + Bubble Years and Beyond (Mount + Jackson, VA: Axios + +On line 16222: + (POPS), January Dan + Sparks, interview by FCIC, June + Dominguez, interview. The + +On line 16222: + Dan Sparks, interview + by FCIC, June Dominguez, interview. + The ratio of the + +On line 16222: + Sparks, interview by + FCIC, June Dominguez, interview. The + ratio of the book + +On line 16222: + The ratio of the + book value of assets to + equity ranged from + +On line 16222: + of the book value + of assets to equity + ranged from to times for + +On line 16222: + the book value of + assets to equity ranged + from to times for all + +On line 16222: + value of assets + to equity ranged from to + times for all SIVs; the + +On line 16222: + to equity ranged + from to times for all SIVs; the + average was times. + +On line 16222: + from to times for all + SIVs; the average was times. + Moody’s Investors Service, + +On line 16222: + to times for all SIVs; + the average was times. Moody’s + Investors Service, "Moody’s + +On line 16222: + SIVs; the average + was times. Moody’s Investors Service, + "Moody’s Special Report: + +On line 16222: + the average was + times. Moody’s Investors Service, "Moody’s + Special Report: Moody’s + +On line 16224: + Structured Investment + Vehicles," January p. + Mark Klipsch, quoted + +On line 16224: + Mark Klipsch, quoted + in Colleen Marie O’Connor, "Drought of CDO + Collateral Tops + +On line 16226: + Asset Management, + Collateral Manager + Presentation; Ralph + +On line 16226: + Presentation; Ralph + Cioffi, interview by FCIC, + October Bear Stearns + +On line 16226: + Cioffi, interview + by FCIC, October Bear Stearns + High-Grade Structured Credit + +On line 16226: + by FCIC, October + Bear Stearns High-Grade Structured Credit + Strategies Master Fund, + +On line 16226: + Fund, Ltd., financial + statements for the year ended + December (total + +On line 16226: + statements for the year + ended December (total + assets were Bear Stearns + +On line 16226: + ended December + (total assets were Bear Stearns + High-Grade Structured Credit + +On line 16226: + Fund, Ltd., financial + statements for the year ended + December (total + +On line 16228: + statements for the year + ended December (total + assets were James Cayne, + +On line 16228: + for the year ended + December (total assets + were James Cayne, written + +On line 16228: + December (total + assets were James Cayne, written + testimony for + +On line 16228: + assets were James Cayne, + written testimony for + the FCIC, Hearing on + +On line 16228: + FCIC, Hearing on the + Shadow Banking System, day + session Investment + +On line 16228: + Banking System, day + session Investment Banks and + the Shadow Banking + +On line 16232: + AIMA’s Illustrative + Questionnaire for Due Diligence + of Bear Stearns High Grade + +On line 16232: + Due Diligence of Bear + Stearns High Grade Structured Credit + Strategies Fund; Bank of + +On line 16232: + of Bear Stearns High Grade + Structured Credit Strategies Fund; + Bank of America + +On line 16232: + Strategies Fund; Bank of + America presentation + to Merrill Lynch’s Board + +On line 16232: + Merrill Lynch’s Board of + Directors, "Bear Steams Asset + Management: What Went + +On line 16234: + Board of Directors, + "Bear Steams Asset Management: + What Went Wrong." Bear Stearns + +On line 16234: + of Directors, "Bear + Steams Asset Management: What + Went Wrong." Bear Stearns High-Grade + +On line 16234: + ended December + Financial Statements, Bear Stearns + High-Grade Structured Credit + +On line 16234: + Fund, Ltd., financial + statements for the year ended + December BSAM fund + +On line 16234: + statements for the year + ended December BSAM fund + chart prepared by JP + +On line 16236: + using data from + FCIC survey of hedge funds. The + hedge funds responding + +On line 16236: + FCIC survey of hedge + funds. The hedge funds responding + to the survey had + +On line 16236: + survey of hedge funds. + The hedge funds responding to + the survey had a + +On line 16236: + hedge funds. The hedge funds + responding to the survey + had a total of + +On line 16238: + had a total of + trillion in investments. IMF, + Global Financial + +On line 16240: + Report, April Table + page "Typical ‘Haircut’ or + Initial Margin." Alan + +On line 16240: + "Typical ‘Haircut’ + or Initial Margin." Alan Schwartz, + interview by FCIC, + +On line 16242: + ‘Haircut’ or Initial + Margin." Alan Schwartz, interview + by FCIC, April Cioffi, + +On line 16242: + Initial Margin." Alan + Schwartz, interview by FCIC, April + Cioffi, interview. + +On line 16248: + Schwartz, interview by + FCIC, April Cioffi, interview. + Ibid. Ibid. Bear Stearns High-Grade + +On line 16248: + by FCIC, April Cioffi, + interview. Ibid. Ibid. Bear Stearns + High-Grade Structured Credit + +On line 16248: + stating that "the fund + is subject to conflicts of + interest." Bear Stearns + +On line 16248: + "the fund is subject + to conflicts of interest." + Bear Stearns High-Grade Structured + +On line 16248: + interest." Bear Stearns + High-Grade Structured Credit Strategies + Enhanced Leverage Fund, + +On line 16248: + High-Grade Structured Credit + Strategies Enhanced Leverage Fund, + L.P., Preliminary + +On line 16250: + stating that Klio I + collateral includes RMBS + and ABS and CDOs, Klio + +On line 16252: + and ABS and CDOs, Klio + II collateral includes + RMBS and ABS and CDOs, + +On line 16252: + ABS and CDOs, Klio II + collateral includes RMBS + and ABS and CDOs, and + +On line 16252: + RMBS and ABS and CDOs, + and Klio III collateral + includes RMBS and ABS + +On line 16252: + ABS and CDOs, and Klio + III collateral includes + RMBS and ABS and CDOs; + +On line 16252: + III collateral + includes RMBS and ABS and CDOs; + Cioffi, interview. + +On line 16254: + includes RMBS and ABS + and CDOs; Cioffi, interview. + Everquest Financial + +On line 16254: + RMBS and ABS and CDOs; + Cioffi, interview. Everquest + Financial Ltd., Form + +On line 16266: + produced by Paul, Weiss, + Rifkind, Wharton Garrison, LLP. + Notes to Chapter Matt + +On line 16266: + Garrison, LLP. Notes + to Chapter Matt Tannin, Bear + Stearns, email to Bella + +On line 16266: + Tannin, Bear Stearns, email + to Bella Borg-Brenner, Stillwater + Capital, March Greg + +On line 16266: + Stearns, email to Bella + Borg-Brenner, Stillwater Capital, + March Greg Quental, Bear + +On line 16266: + email to Bella Borg-Brenner, + Stillwater Capital, March + Greg Quental, Bear Stearns, + +On line 16266: + Greg Quental, Bear Stearns, + email to Andrew Donnellan, + Bear Stearns, et al., June + +On line 16268: + Quental, Bear Stearns, email + to Andrew Donnellan, Bear + Stearns, et al., June Charles + +On line 16268: + Andrew Donnellan, + Bear Stearns, et al., June Charles Prince, + interview by FCIC, + +On line 16270: + Bear Stearns, et al., June + Charles Prince, interview by FCIC, + March Regulators + +On line 16270: + Stearns, et al., June Charles + Prince, interview by FCIC, March + Regulators in + +On line 16270: + Prince, interview by + FCIC, March Regulators in + Japan and the United + +On line 16270: + Regulators in + Japan and the United Kingdom + also came down on + +On line 16270: + Japan and the United + Kingdom also came down on + the company in + +On line 16272: + Kingdom also came + down on the company in + and In September + +On line 16272: + on the company + in and In September Japan’s + Financial Services + +On line 16272: + Citibank’s ability to + operate branches in Japan + because of the bank’s + +On line 16272: + operate branches + in Japan because of the bank’s + participation + +On line 16272: + Japan because of the + bank’s participation in + alleged illegal + +On line 16272: + country, and in the + following year the United + Kingdom’s Financial + +On line 16272: + Kingdom’s Financial + Services Authority fined + Citigroup million + +On line 16272: + Citigroup million + for engaging in a bond + trading scheme labeled + +On line 16272: + engaging in a + bond trading scheme labeled "Dr. + Evil" by Citigroup + +On line 16272: + Evil" by Citigroup + bond traders. Financial Services + Agency, Government + +On line 16272: + Citigroup bond traders. + Financial Services Agency, + Government of Japan, + +On line 16272: + Financial Services + Agency, Government of Japan, + "Administrative + +On line 16272: + Agency, Government + of Japan, "Administrative + Actions on Citibank, N.A. + +On line 16272: + Government of Japan, + "Administrative Actions + on Citibank, N.A. Japan Branch," + +On line 16274: + David Reilly, "Moving + the Market: Citigroup to + Take Million Hit in + +On line 16274: + Reilly, "Moving the + Market: Citigroup to Take + Million Hit in ‘Dr. + +On line 16274: + "Moving the Market: + Citigroup to Take Million + Hit in ‘Dr. Evil’ Case," + +On line 16274: + Citigroup to Take + Million Hit in ‘Dr. Evil’ Case," + Wall Street Journal, June + +On line 16276: + Take Million Hit in + ‘Dr. Evil’ Case," Wall Street Journal, + June Prince, interview. + +On line 16278: + Million Hit in ‘Dr. + Evil’ Case," Wall Street Journal, June + Prince, interview. Robert + +On line 16278: + Wall Street Journal, June + Prince, interview. Robert Rubin, + interview by FCIC, + +On line 16280: + Prince, interview. Robert + Rubin, interview by FCIC, + March Dominguez, interview + +On line 16280: + Rubin, interview + by FCIC, March Dominguez, interview + by FCIC, March The CDO + +On line 16280: + interview by FCIC, + March Dominguez, interview by FCIC, + March The CDO desk earned + +On line 16280: + March Dominguez, interview + by FCIC, March The CDO desk earned + revenues of million + +On line 16280: + interview by FCIC, + March The CDO desk earned revenues + of million in Paul, + +On line 16280: + FCIC, March The CDO desk + earned revenues of million in + Paul, Weiss, Citigroup’s + +On line 16280: + million in Paul, Weiss, + Citigroup’s counsel, letter + to FCIC, March in re + +On line 16280: + Citigroup’s counsel, + letter to FCIC, March in re + the FCIC’s second and + +On line 16280: + letter to FCIC, March + in re the FCIC’s second and + third supplemental + +On line 16280: + Interrogatory + No. Janice Warne, interview + by FCIC, February + +On line 16280: + by FCIC, February + Paul, Weiss, Citigroup’s counsel, + letter to FCIC, March + +On line 16280: + February Paul, Weiss, + Citigroup’s counsel, letter + to FCIC, March "Response + +On line 16280: + to FCIC, March "Response + to Interrogatory No. + Paul, Weiss, Citigroup’s + +On line 16284: + to FCIC, March "Response + to Interrogatory No. + Moody’s Investors Service, + +On line 16284: + FCIC, March "Response to + Interrogatory No. Moody’s + Investors Service, "CDOs + +On line 16284: + Interrogatory + No. Moody’s Investors Service, "CDOs + with Short-Term Tranches: Moody’s + +On line 16284: + Investors Service, "CDOs + with Short-Term Tranches: Moody’s Approach + to Rating Prime-1 CDO + +On line 16284: + "CDOs with Short-Term Tranches: + Moody’s Approach to Rating Prime-1 + CDO Notes," February + +On line 16284: + with Short-Term Tranches: Moody’s + Approach to Rating Prime-1 CDO + Notes," February p. + +On line 16286: + Approach to Rating + Prime-1 CDO Notes," February p. + Citigroup Inc., Form + +On line 16286: + Rating Prime-1 CDO Notes," + February p. Citigroup + Inc., Form 10-K, for the + +On line 16286: + CDO Notes," February + p. Citigroup Inc., Form 10-K, + for the fiscal year + +On line 16286: + p. Citigroup Inc., + Form 10-K, for the fiscal year + ended December + +On line 16288: + ended December + filed February p. Everquest + Financial Ltd., Form + +On line 16296: + p. Dominguez, interview, + March Ibid.; Warne, interview. Dominguez, + interview, March Warne, + +On line 16298: + Warne, interview. GCIB + Capital Markets Approval + Committee, Coventree + +On line 16298: + Committee, Coventree + Capital, "Liquidity + Put Option," draft as + +On line 16300: + Put Option," draft as + of December p. Ron Frake, + interview by FCIC, + +On line 16302: + of December p. + Ron Frake, interview by FCIC, + March "Formal Agreement" + +On line 16302: + interview by FCIC, + March "Formal Agreement" between + the Comptroller of + +On line 16302: + March "Formal Agreement" + between the Comptroller of + the Currency and + +On line 16304: + Comptroller of the + Currency and Citibank, July + Moody’s Investors Service, + +On line 16304: + of the Currency + and Citibank, July Moody’s Investors + Service, "CDOs with Short-Term + +On line 16304: + Currency and Citibank, + July Moody’s Investors Service, + "CDOs with Short-Term Tranches." + +On line 16304: + and Citibank, July Moody’s + Investors Service, "CDOs with Short-Term + Tranches." Ibid.; Bank of + +On line 16304: + period ended + September p. Floyd Norris, + "As Bank Profits Grew, + +On line 16304: + p. Floyd Norris, "As + Bank Profits Grew, Warning Signs + Went Unheeded," New + +On line 16304: + Floyd Norris, "As Bank + Profits Grew, Warning Signs Went + Unheeded," New York + +On line 16306: + Profits Grew, Warning + Signs Went Unheeded," New York + Times, November Dominguez, + +On line 16308: + Signs Went Unheeded," + New York Times, November Dominguez, + interview, March Paul, + +On line 16308: + York Times, November + Dominguez, interview, March Paul, Weiss, + Citigroup’s counsel, + +On line 16308: + Dominguez, interview, March + Paul, Weiss, Citigroup’s counsel, + letter to FCIC, June + +On line 16308: + Paul, Weiss, Citigroup’s + counsel, letter to FCIC, June + "Responses of Nestor + +On line 16310: + counsel, letter to + FCIC, June "Responses of Nestor + Dominguez," p. OCC, "Subprime + +On line 16310: + FCIC, June "Responses + of Nestor Dominguez," p. OCC, "Subprime + CDO Valuation + +On line 16310: + June "Responses of + Nestor Dominguez," p. OCC, "Subprime CDO + Valuation and + +On line 16310: + p. OCC, "Subprime CDO + Valuation and Oversight + Review—Conclusion Memorandum," + +On line 16310: + Valuation and + Oversight Review—Conclusion Memorandum," + Memorandum from + +On line 16310: + Memorandum from + Michael Sullivan, RAD, and Ron + Frake, NBE, to John Lyons, + +On line 16310: + Sullivan, RAD, and + Ron Frake, NBE, to John Lyons, Examiner-in-Charge, + Citibank, NA, January + +On line 16314: + Frake, NBE, to John Lyons, + Examiner-in-Charge, Citibank, NA, January p. + Ibid. Tobias Brushammar + +On line 16314: + NBE, to John Lyons, Examiner-in-Charge, + Citibank, NA, January p. Ibid. + Tobias Brushammar et + +On line 16314: + Citibank, NA, January + p. Ibid. Tobias Brushammar et + al., memorandum + +On line 16314: + NA, January p. + Ibid. Tobias Brushammar et al., + memorandum to + +On line 16314: + Ibid. Tobias Brushammar + et al., memorandum to + Nestor Dominguez et al., "Re: + +On line 16314: + Liquidity Put + Valuation," October + pp. "Liquidity + +On line 16316: + "Liquidity Put + Discussion," pt. produced by + Citi. "Liquidity + +On line 16318: + "Liquidity Put + Discussion," produced by Citi. + Data provided + +On line 16318: + Discussion," produced + by Citi. Data provided + by Moody’s to the FCIC. + +On line 16322: + by Moody’s to the FCIC. + Gary Gorton, interview by + FCIC, May AIG, 10-K, p. + +On line 16322: + the FCIC. Gary Gorton, + interview by FCIC, May AIG, + 10-K, p. Assets are + +On line 16322: + AIG, 10-K, p. Assets + are assigned a "risk weighting" + or percentage that + +On line 16322: + 10-K, p. Assets are + assigned a "risk weighting" or + percentage that is + +On line 16322: + are assigned a "risk + weighting" or percentage that + is then multiplied + +On line 16322: + is then multiplied + by capital requirement + to determine the + +On line 16322: + then multiplied by + capital requirement to + determine the amount + +On line 16324: + determine the amount + of risk-based capital. AIG, CDS + notional balances + +On line 16324: + capital. AIG, CDS + notional balances at year-end + through Q1, provided + +On line 16326: + balances at year-end through + Q1, provided to the FCIC. + The total would reach + +On line 16326: + through Q1, provided + to the FCIC. The total would + reach billion by (ibid.). + +On line 16332: + Q1, provided to + the FCIC. The total would reach + billion by (ibid.). Notes + +On line 16334: + the FCIC. The total + would reach billion by (ibid.). Notes + to Chapter Gene Park, + +On line 16334: + would reach billion by + (ibid.). Notes to Chapter Gene Park, + interview by FCIC, + +On line 16336: + (ibid.). Notes to Chapter + Gene Park, interview by FCIC, + May Craig Broderick, + +On line 16336: + May Craig Broderick, + testimony before the + FCIC, Hearing on the + +On line 16336: + the FCIC, Hearing on + the Role of Derivatives + in the Financial + +On line 16336: + Hearing on the Role + of Derivatives in the + Financial Crisis, + +On line 16336: + of Derivatives + in the Financial Crisis, + day session Goldman + +On line 16336: + Derivatives in + the Financial Crisis, day + session Goldman Sachs + +On line 16340: + session Goldman Sachs + Group, Inc. and Derivatives, + June transcript, pp. Moody’s, + +On line 16340: + pp. Moody’s, "CDOs with Short-Term + Tranches"; AIG, "Information + Pertaining to the + +On line 16344: + provided to the + FCIC. Park, interview. AIG, CDS + notional balances + +On line 16346: + FCIC. Park, interview. + AIG, CDS notional balances + at year-end, through Q1. Alan + +On line 16346: + Park, interview. AIG, + CDS notional balances at + year-end, through Q1. Alan Frost, + +On line 16346: + AIG, CDS notional + balances at year-end, through Q1. Alan + Frost, interview by + +On line 16348: + year-end, through Q1. Alan Frost, + interview by FCIC, May AIG + Financial Products + +On line 16348: + Alan Frost, interview + by FCIC, May AIG Financial + Products Corp. Deferred + +On line 16350: + Products Corp. Deferred + Compensation Plan, March p. + Joseph Cassano, email to + +On line 16350: + Compensation Plan, + March p. Joseph Cassano, email to + All Users, re: Special + +On line 16350: + March p. Joseph Cassano, + email to All Users, re: Special + Compensation Plan, + +On line 16356: + provided by AIG + to the FCIC. AIG, Form 8-K, filed + May "Fact Sheet on AIGFP," + +On line 16356: + by AIG to the FCIC. + AIG, Form 8-K, filed May "Fact Sheet + on AIGFP," provided + +On line 16356: + AIG to the FCIC. AIG, + Form 8-K, filed May "Fact Sheet on + AIGFP," provided by + +On line 16356: + to the FCIC. AIG, Form + 8-K, filed May "Fact Sheet on AIGFP," + provided by Hank + +On line 16356: + AIG, Form 8-K, filed May + "Fact Sheet on AIGFP," provided + by Hank Greenberg, p. + +On line 16358: + Form 8-K, filed May "Fact + Sheet on AIGFP," provided by + Hank Greenberg, p. AIG, + +On line 16358: + 8-K, filed May "Fact Sheet + on AIGFP," provided by Hank + Greenberg, p. AIG, CDS + +On line 16358: + on AIGFP," provided + by Hank Greenberg, p. AIG, CDS + notional balances + +On line 16360: + by Hank Greenberg, p. + AIG, CDS notional balances + at year-end. Gene Park, email + +On line 16360: + Hank Greenberg, p. AIG, + CDS notional balances at + year-end. Gene Park, email to + +On line 16360: + Greenberg, p. AIG, CDS + notional balances at year-end. + Gene Park, email to Joseph + +On line 16360: + AIG, CDS notional + balances at year-end. Gene Park, email + to Joseph Cassano, re: + +On line 16360: + notional balances + at year-end. Gene Park, email to Joseph + Cassano, re: "CDO of + +On line 16360: + balances at year-end. Gene + Park, email to Joseph Cassano, re: + "CDO of ABS Approach + +On line 16360: + at year-end. Gene Park, email + to Joseph Cassano, re: "CDO of + ABS Approach Going + +On line 16360: + year-end. Gene Park, email to + Joseph Cassano, re: "CDO of ABS + Approach Going Forward—Message + +On line 16360: + to Joseph Cassano, re: + "CDO of ABS Approach Going + Forward—Message to the Dealer + +On line 16362: + Forward—Message to the Dealer + Community," February + Henry M. Paulson + +On line 16362: + Henry M. Paulson + Jr., testimony before + the FCIC, Hearing on + +On line 16362: + Jr., testimony + before the FCIC, Hearing on + the Shadow Banking + +On line 16362: + FCIC, Hearing on the + Shadow Banking System, day + session Perspective + +On line 16362: + System, day session + Perspective on the Shadow + Banking System, May + +On line 16364: + Perspective on the + Shadow Banking System, May + transcript, p. Henry + +On line 16364: + Henry M. Paulson + Jr., written testimony + for the FCIC, Hearing + +On line 16364: + FCIC, Hearing on the + Shadow Banking System, day + session Perspective + +On line 16364: + System, day session + Perspective on the Shadow + Banking System, May + +On line 16366: + Perspective on the + Shadow Banking System, May + p. Goldman Sachs, and + +On line 16366: + the Shadow Banking + System, May p. Goldman Sachs, + and 10-K (appendix + +On line 16366: + May p. Goldman Sachs, + and 10-K (appendix 5a to + Goldman’s March letter + +On line 16366: + Goldman Sachs, and 10-K + (appendix 5a to Goldman’s + March letter to the + +On line 16368: + 10-K (appendix 5a + to Goldman’s March letter to + the FCIC). Appendix + +On line 16368: + (appendix 5a to + Goldman’s March letter to the + FCIC). Appendix 5c + +On line 16368: + letter to the FCIC). + Appendix 5c to Goldman’s + March letter to the + +On line 16370: + the FCIC). Appendix + 5c to Goldman’s March letter + to the FCIC. Goldman’s + +On line 16370: + FCIC). Appendix 5c + to Goldman’s March letter to + the FCIC. Goldman’s March + +On line 16370: + 5c to Goldman’s March + letter to the FCIC. Goldman’s + March letter to the + +On line 16370: + March letter to the + FCIC. Goldman’s March letter to + the FCIC, p. (subprime + +On line 16372: + letter to the FCIC, + p. (subprime securities). + "Protection Bought by + +On line 16372: + the FCIC, p. (subprime + securities). "Protection + Bought by GS," spreadsheet + +On line 16372: + "Protection Bought by + GS," spreadsheet provided by + Goldman Sachs to the + +On line 16372: + spreadsheet provided + by Goldman Sachs to the FCIC. + Specifically, IKB + +On line 16372: + by Goldman Sachs to + the FCIC. Specifically, IKB + purchased million of + +On line 16372: + FCIC. Specifically, + IKB purchased million of Class + A notes, million of + +On line 16372: + Specifically, IKB + purchased million of Class A + notes, million of Class + +On line 16372: + purchased million of + Class A notes, million of Class + B notes, and million + +On line 16372: + million of Class A + notes, million of Class B notes, + and million of Class + +On line 16374: + Class A notes, million + of Class B notes, and million + of Class C notes on + +On line 16374: + A notes, million of + Class B notes, and million of + Class C notes on June + +On line 16374: + notes, million of Class + B notes, and million of Class + C notes on June TCW + +On line 16374: + B notes, and million + of Class C notes on June TCW + purchased million of + +On line 16374: + and million of Class + C notes on June TCW purchased + million of Class A + +On line 16374: + C notes on June TCW + purchased million of Class A + notes in January + +On line 16374: + purchased million of + Class A notes in January + and Wachovia purchased + +On line 16374: + notes in January + and Wachovia purchased million + of Class A notes in + +On line 16374: + in January and + Wachovia purchased million of + Class A notes in March + +On line 16376: + purchased million of + Class A notes in March See ibid., + Exhibit FCIC staff + +On line 16376: + of Class A notes in + March See ibid., Exhibit FCIC + staff calculations + +On line 16376: + Class A notes in March + See ibid., Exhibit FCIC staff + calculations based + +On line 16376: + ibid., Exhibit FCIC + staff calculations based on + data provided + +On line 16378: + data provided + by Goldman Sachs. "Protection + Bought by GS," spreadsheet. + +On line 16380: + Bought by GS," spreadsheet. + FCIC calculations based on + data provided + +On line 16382: + FCIC calculations + based on data provided + by Goldman Sachs. FCIC + +On line 16382: + calculations based + on data provided by + Goldman Sachs. FCIC staff + +On line 16384: + FCIC staff analysis + based on data provided + by Goldman Sachs. Sparks, + +On line 16386: + Sachs. Sparks, interview. + Of course, in theory the + net impact on the + +On line 16386: + theory the net + impact on the financial + system is not greater, + +On line 16386: + the net impact on + the financial system is + not greater, because there + +On line 16386: + net impact on the + financial system is not + greater, because there is + +On line 16386: + on the financial + system is not greater, because + there is a winner + +On line 16386: + system is not greater, + because there is a winner + for every loser + +On line 16390: + every loser in + the derivatives market. + Sparks, interview. From + +On line 16390: + the derivatives + market. Sparks, interview. From + Goldman Sachs data + +On line 16390: + Goldman Sachs data + provided to the FCIC in + a handout titled + +On line 16390: + provided to the + FCIC in a handout titled + "Amplification" + +On line 16390: + FCIC in a handout + titled "Amplification" + and quoted at the + +On line 16390: + and quoted at the + FCIC’s Hearing on the Role of + Derivatives in + +On line 16390: + the FCIC’s Hearing on + the Role of Derivatives + in the Financial + +On line 16390: + Hearing on the Role + of Derivatives in the + Financial Crisis, + +On line 16390: + of Derivatives + in the Financial Crisis, + day session Goldman + +On line 16390: + Derivatives in + the Financial Crisis, day + session Goldman Sachs + +On line 16392: + Goldman Sachs Group, Inc. + and Derivatives, June FCIC + staff analysis based + +On line 16392: + Derivatives, June + FCIC staff analysis based on + data provided + +On line 16394: + FCIC staff analysis + based on data provided + by Goldman Sachs. Lloyd + +On line 16394: + data provided + by Goldman Sachs. Lloyd Blankfein, + chairman of the board + +On line 16394: + chief executive + officer, Goldman Sachs Group, + interview by FCIC, + +On line 16394: + officer, Goldman + Sachs Group, interview by FCIC, + June Sparks, interview. + +On line 16396: + Group, interview by + FCIC, June Sparks, interview. Gary + Cohn, testimony + +On line 16396: + Sparks, interview. Gary + Cohn, testimony before + the FCIC, Hearing on + +On line 16396: + interview. Gary Cohn, + testimony before the + FCIC, Hearing on the + +On line 16396: + the FCIC, Hearing on + the Role of Derivatives + in the Financial + +On line 16396: + Hearing on the Role + of Derivatives in the + Financial Crisis, + +On line 16396: + of Derivatives + in the Financial Crisis, + day session Goldman + +On line 16396: + Derivatives in + the Financial Crisis, day + session Goldman Sachs + +On line 16400: + Parkinson, interview. + Michael Greenberger, before the + FCIC, Hearing on the + +On line 16400: + Greenberger, before + the FCIC, Hearing on the Role + of Derivatives + +On line 16400: + the FCIC, Hearing on + the Role of Derivatives + in the Financial + +On line 16400: + Hearing on the Role + of Derivatives in the + Financial Crisis, + +On line 16400: + of Derivatives + in the Financial Crisis, + day session Overview + +On line 16400: + Derivatives in + the Financial Crisis, day + session Overview of + +On line 16400: + in the Financial + Crisis, day session Overview + of Derivatives, + +On line 16406: + "Summary of Key + Provisions for Cash CDOs as + of January Gary + +On line 16406: + for Cash CDOs as of + January Gary Witt, written + testimony for + +On line 16406: + of January Gary + Witt, written testimony + for the FCIC, Hearing + +On line 16406: + January Gary Witt, + written testimony for + the FCIC, Hearing on + +On line 16406: + for the FCIC, Hearing + on Credibility of + Credit Ratings, the + +On line 16406: + Credit Ratings, the + Investment Decisions Made + Based on Those Ratings, + +On line 16406: + on Those Ratings, and + the Financial Crisis, day + session The Ratings + +On line 16416: + Crisis, day session + The Ratings Process, June pp. Notes + to Chapter Ibid., Gary + +On line 16416: + The Ratings Process, June + pp. Notes to Chapter Ibid., Gary + Witt, testimony + +On line 16416: + to Chapter Ibid., Gary + Witt, testimony before + the FCIC, Hearing on + +On line 16416: + Witt, testimony + before the FCIC, Hearing on + Credibility + +On line 16416: + Credit Ratings, the + Investment Decisions Made + Based on those Ratings, + +On line 16416: + on those Ratings, and + the Financial Crisis, day + session The Ratings + +On line 16418: + Financial Crisis, + day session The Ratings Process, + June transcript, pp. Moody’s + +On line 16418: + Service, "Moody’s Approach + to Rating Multisector + CDOs," September p. + +On line 16426: + FCIC, June p. Gary Witt, + follow-up interview by FCIC, + May Witt, interview, + +On line 16428: + p. Gary Witt, follow-up + interview by FCIC, May Witt, + interview, April For + +On line 16428: + follow-up interview + by FCIC, May Witt, interview, + April For example, + +On line 16428: + Witt, interview, April + For example, Moody’s assumed + that borrowers with + +On line 16428: + For example, Moody’s + assumed that borrowers with + different credit + +On line 16428: + that borrowers with + different credit ratings + would not default at + +On line 16428: + credit ratings would + not default at the same time. + The agency split the + +On line 16428: + would not default at + the same time. The agency split + the securities + +On line 16428: + time. The agency split + the securities into + three subcategories + +On line 16428: + The agency split the + securities into three + subcategories based + +On line 16428: + average FICO + score of the underlying + mortgages: prime (FICO + +On line 16428: + prime (FICO greater than + midprime (FICO between and + and subprime (FICO + +On line 16428: + (FICO between and + and subprime (FICO under + Creating three FICO-based + +On line 16428: + and subprime (FICO + under Creating three FICO-based + subcategories rather + +On line 16428: + Creating three FICO-based + subcategories rather than the + traditional two + +On line 16428: + FICO-based subcategories + rather than the traditional + two (prime and subprime) + +On line 16428: + subprime) resulted + in lower correlation + assumptions, because + +On line 16428: + securities in + different subcategories + were assumed to be + +On line 16428: + correlated. "Moody’s + Revisits Its Assumptions + Regarding Structured + +On line 16428: + Regarding Structured + Finance Default (and Asset) + Correlations for + +On line 16428: + Finance Default (and + Asset) Correlations for + CDOs," June pp. Gary Witt, + +On line 16430: + Gary Witt, interview + by FCIC, May Hedi Katz, "U.S. + Subprime RMBS in CDOs," + +On line 16430: + by FCIC, May Hedi + Katz, "U.S. Subprime RMBS in CDOs," + Fitch Special Report, + +On line 16430: + FCIC, May Hedi Katz, + "U.S. Subprime RMBS in CDOs," Fitch + Special Report, April + +On line 16430: + Katz, "U.S. Subprime RMBS + in CDOs," Fitch Special Report, + April p. Sten Bergman, "CDO + +On line 16430: + Quality," Standard + Poor’s Global Credit Portal + RatingsDirect, November p. + +On line 16432: + Poor’s Global Credit + Portal RatingsDirect, November p. + Ingo Fender and + +On line 16432: + p. Ingo Fender + and Janet Mitchell, "Structured Finance: + Complexity, Risk + +On line 16432: + Mitchell, "Structured Finance: + Complexity, Risk and the + Use of Ratings," BIS + +On line 16432: + Complexity, Risk + and the Use of Ratings," BIS + Quarterly Review + +On line 16434: + of CDO managers and + underwriters about the process + of creating and + +On line 16434: + and underwriters + about the process of creating + and marketing CDOs. + +On line 16436: + underwriters about + the process of creating and + marketing CDOs. Moody’s + +On line 16436: + rated triple-A between + and retained their original + rating years later, + +On line 16438: + original rating + years later, were downgraded, + and were withdrawn. Kyle + +On line 16438: + were withdrawn. Kyle Bass, + testimony to the House + Financial Services + +On line 16438: + Government Sponsored + Enterprises, Hearing on + the Role of Credit + +On line 16442: + Policy Special + Comment, March p. Moody’s Investors + Service, "Announcement: + +On line 16442: + Comment, March p. Moody’s + Investors Service, "Announcement: + Moody’s Updates Its Key + +On line 16442: + Moody’s Investors Service, + "Announcement: Moody’s Updates Its + Key Assumptions for + +On line 16444: + Its Key Assumptions + for Rating Structured Finance + CDOs," December Ben + +On line 16444: + Key Assumptions for + Rating Structured Finance CDOs," + December Ben Bernanke, + +On line 16444: + for Rating Structured + Finance CDOs," December Ben + Bernanke, closed-door session + +On line 16446: + Ann Rutledge, email to + FCIC, November Ann Rutledge + is a principal + +On line 16446: + Rutledge, email to FCIC, + November Ann Rutledge is + a principal in + +On line 16446: + FCIC, November Ann + Rutledge is a principal + in R&R Consulting, + +On line 16446: + a principal in + R&R Consulting, a coauthor + of Elements of + +On line 16446: + in R&R Consulting, + a coauthor of Elements + of Structured Finance + +On line 16446: + Moody’s Investor Service. + She and co-principal Sylvain + Raines first spoke to the + +On line 16446: + Investor Service. She + and co-principal Sylvain Raines + first spoke to the FCIC + +On line 16448: + She and co-principal + Sylvain Raines first spoke to the + FCIC on April From Moody’s + +On line 16448: + co-principal Sylvain + Raines first spoke to the FCIC on + April From Moody’s "Structured + +On line 16448: + spoke to the FCIC on + April From Moody’s "Structured Finance: + Special Report," the + +On line 16450: + Special Report," the + following page headlines: U.S. + CDO Review Preview: + +On line 16450: + Levels Driven by + Resecuritization CDOs + and CLOs," February + +On line 16450: + and CLOs," February + U.S. CDO Review: Looking Ahead + to Record Year Follows + +On line 16450: + CLOs," February U.S. + CDO Review: Looking Ahead to + Record Year Follows Record + +On line 16450: + February U.S. CDO + Review: Looking Ahead to Record + Year Follows Record Year," + +On line 16450: + CDO Review: Looking + Ahead to Record Year Follows Record + Year," February U.S. + +On line 16450: + Review: Looking Ahead + to Record Year Follows Record Year," + February U.S. CDO + +On line 16450: + to Record Year Follows + Record Year," February U.S. CDO + Outlook and Review: + +On line 16450: + Year Follows Record Year," + February U.S. CDO Outlook + and Review: Issuance + +On line 16450: + February U.S. CDO + Outlook and Review: Issuance + Down in Triggered by + +On line 16452: + Issuance Expected + in March Moody’s annual gross + revenues for ABS CDO + +On line 16452: + Expected in March + Moody’s annual gross revenues + for ABS CDO ratings + +On line 16452: + Moody’s annual gross + revenues for ABS CDO ratings + was in in in in + +On line 16452: + May See also Moody’s + Corporation 10-K, p. and + Moody’s Corporation, + +On line 16456: + Corporation, 10-K. + Witt, testimony before + the FCIC, June transcript, + +On line 16458: + FCIC, June transcript, p. + Witt, written testimony + for the FCIC, June p. + +On line 16458: + June transcript, p. Witt, + written testimony for + the FCIC, June p. Witt, + +On line 16460: + for the FCIC, June p. + Witt, interview, April Eric + Kolchinsky, interview + +On line 16464: + April Eric Kolchinsky, + interview by FCIC, April Witt, + interview, April FCIC + +On line 16464: + interview by FCIC, + April Witt, interview, April FCIC + staff estimates based + +On line 16464: + April Witt, interview, + April FCIC staff estimates based + on analysis of + +On line 16464: + Witt, interview, April + FCIC staff estimates based on + analysis of Moody’s + +On line 16470: + FCIC staff estimates + based on analysis of Moody’s + CDO EMS database. Notes + +On line 16470: + staff estimates based + on analysis of Moody’s CDO + EMS database. Notes to + +On line 16472: + on analysis of + Moody’s CDO EMS database. Notes to + Chapter Yuri Yoshizawa, + +On line 16472: + Moody’s CDO EMS database. + Notes to Chapter Yuri Yoshizawa, + interview by FCIC, + +On line 16474: + by FCIC, May The chart + was labeled "Derivatives + (America)." Brian + +On line 16476: + (America)." Brian + Clarkson, interview by FCIC, + May Harvey Goldschmid, + +On line 16476: + Clarkson, interview + by FCIC, May Harvey Goldschmid, + interview by FCIC, + +On line 16478: + interview by FCIC, + March Annette Nazareth, interview + by FCIC, April Office + +On line 16478: + April Office of Thrift + Supervision, letter to + the SEC, February + +On line 16480: + letter to the SEC, + February Lehman Brothers, Inc., + letter to the SEC, + +On line 16480: + SEC, February Lehman + Brothers, Inc., letter to the + SEC, March J.P. Morgan + +On line 16480: + Brothers, Inc., letter + to the SEC, March J.P. Morgan + Chase Co., letter to + +On line 16480: + Inc., letter to the + SEC, March J.P. Morgan Chase Co., + letter to the SEC, + +On line 16480: + to the SEC, March J.P. + Morgan Chase Co., letter to + the SEC, February + +On line 16480: + SEC, March J.P. Morgan + Chase Co., letter to the SEC, + February Deutsche Bank + +On line 16480: + Chase Co., letter to + the SEC, February Deutsche Bank + A.G. and Deutsche Bank Secs., + +On line 16480: + letter to the SEC, + February Deutsche Bank A.G. and + Deutsche Bank Secs., letter + +On line 16480: + the SEC, February + Deutsche Bank A.G. and Deutsche Bank Secs., + letter to the SEC, + +On line 16482: + Deutsche Bank A.G. and Deutsche + Bank Secs., letter to the SEC, + February Harvey + +On line 16482: + Bank Secs., letter to + the SEC, February Harvey + Goldschmid, interview + +On line 16482: + letter to the SEC, + February Harvey Goldschmid, + interview by FCIC, + +On line 16484: + February Harvey + Goldschmid, interview by FCIC, + April Closed meeting of + +On line 16484: + Goldschmid, interview + by FCIC, April Closed meeting of + the Securities + +On line 16484: + FCIC, April Closed meeting + of the Securities and + Exchange Commission, + +On line 16486: + Closed meeting of the + Securities and Exchange + Commission, April In + +On line 16486: + the Securities + and Exchange Commission, April + In the Division + +On line 16486: + Securities and + Exchange Commission, April In + the Division of + +On line 16486: + Markets. For the sake + of simplicity, throughout + this report it is + +On line 16486: + of simplicity, + throughout this report it is + referred to as the + +On line 16488: + is referred to as + the Division of Market + Regulation. Erik + +On line 16488: + the Division of + Market Regulation. Erik + Sirri, interview + +On line 16488: + Regulation. Erik + Sirri, interview by FCIC, + April Although there are + +On line 16488: + interview by FCIC, + April Although there are more than + SEC examiners, + +On line 16488: + April Although there are + more than SEC examiners, + collectively they + +On line 16488: + more than registered + representatives) as well + as other market + +On line 16490: + representatives) + as well as other market + participants. Michael + +On line 16490: + as well as other + market participants. Michael + Macchiaroli, interview + +On line 16490: + as other market + participants. Michael Macchiaroli, + interview by FCIC, + +On line 16492: + participants. Michael + Macchiaroli, interview by FCIC, + March The monitors + +On line 16492: + interview by FCIC, + March The monitors met with + senior business and + +On line 16492: + March The monitors + met with senior business and + risk managers at each + +On line 16492: + The monitors met + with senior business and risk + managers at each CSE + +On line 16492: + with senior business + and risk managers at each CSE + firm every month about + +On line 16492: + and risk managers at + each CSE firm every month about + general concerns + +On line 16492: + each CSE firm every + month about general concerns + and risks the firms were + +On line 16492: + firm every month about + general concerns and risks + the firms were seeing. + +On line 16492: + general concerns + and risks the firms were seeing. + Written reports of + +On line 16492: + Written reports of + these meetings were given to + the director of + +On line 16492: + addition, the CSE + monitors met quarterly + with the treasury and + +On line 16492: + met quarterly with + the treasury and financial + control functions of + +On line 16492: + with the treasury and + financial control functions + of each CSE firm to + +On line 16494: + of each CSE firm to + discuss liquidity and + funding issues. Erik + +On line 16494: + CSE firm to discuss + liquidity and funding + issues. Erik Sirri, + +On line 16494: + issues. Erik Sirri, + written testimony for + the FCIC, Hearing on + +On line 16494: + Banking System, day + session SEC Regulation + of Investment Banks, + +On line 16496: + Banks, May Internal + SEC memorandum, Re: "CSE + Examination + +On line 16496: + SEC memorandum, + Re: "CSE Examination + of Bear Stearns Co. Inc.," + +On line 16498: + Co. Inc.," November + Securities and Exchange + Commission, Office + +On line 16498: + Commission, Office + of Inspector General, + "SEC’s Oversight of Bear + +On line 16502: + No. 446-A, September + pp. Michael Macchiaroli, interview + by FCIC, April Robert Seabolt, + +On line 16502: + 446-A, September pp. + Michael Macchiaroli, interview by + FCIC, April Robert Seabolt, email + +On line 16502: + September pp. Michael + Macchiaroli, interview by FCIC, + April Robert Seabolt, email to + +On line 16502: + Macchiaroli, interview + by FCIC, April Robert Seabolt, email to + James Giles, Steven Spurry, and + +On line 16504: + and Matthew Eichner, + October Matt Eichner, + interview by FCIC, + +On line 16508: + Entity Program," + p. Goldschmid, interview. GAO, + "Financial Markets + +On line 16508: + "Financial Markets + Regulation: Financial + Crisis Highlights Need + +On line 16508: + to Improve Oversight + of Leverage at Financial + Institutions," GAO-09-739 + +On line 16508: + Institutions," GAO-09-739 + (Report to Congressional + Committees), July + +On line 16512: + Reform," remarks at + the National Economists + Club, Washington, D.C., + +On line 16518: + First Public Hearing + of the Financial Crisis + Inquiry Commission, + +On line 16518: + of the Financial + Crisis Inquiry Commission, + day panel Current + +On line 16518: + day panel Current + Investigations into + the Financial Crisis—Federal + +On line 16520: + transcript, p. The Fed + remained the supervisor + of JP Morgan at + +On line 16520: + supervisor of + JP Morgan at the holding + company level. + +On line 16524: + by FCIC, October + Federal Reserve System, + "Financial Holding + +On line 16533: + "Financial Holding + Company Project," January + p. Chapter Warren + +On line 16533: + Holding Company + Project," January p. Chapter + Warren Peterson, + +On line 16533: + Warren Peterson, + written testimony for + the FCIC, Hearing on + +On line 16535: + on the Impact of + the Financial Crisis— Greater + Bakersfield, session + +On line 16537: + September pp. Gary + Crabtree, principal owner, + Affiliated + +On line 16537: + Crabtree, principal + owner, Affiliated + Appraisers, written + +On line 16545: + Market, September + p. Notes to Chapter Lloyd Plank, + Lloyd E. Plank Real + +On line 16545: + September p. Notes + to Chapter Lloyd Plank, Lloyd E. + Plank Real Estate + +On line 16545: + p. Notes to Chapter + Lloyd Plank, Lloyd E. Plank Real + Estate Consultants, + +On line 16545: + to Chapter Lloyd Plank, + Lloyd E. Plank Real Estate + Consultants, written + +On line 16545: + Lloyd E. Plank Real + Estate Consultants, written + testimony for + +On line 16545: + Estate Consultants, + written testimony for + the FCIC, Hearing on + +On line 16547: + Market, September + p. CoreLogic Single Family + Combined (SFC) Home Price + +On line 16547: + September p. CoreLogic + Single Family Combined + (SFC) Home Price Index, + +On line 16547: + Family Combined + (SFC) Home Price Index, data + accessed August FCIC + +On line 16549: + (SFC) Home Price Index, + data accessed August FCIC + calculation of + +On line 16549: + accessed August FCIC + calculation of change from + January to April + +On line 16551: + FCIC calculation + of change from January to + April peak. Professor + +On line 16551: + calculation of + change from January to April + peak. Professor Robert + +On line 16551: + change from January + to April peak. Professor Robert + Shiller, Historical + +On line 16553: + Final Report of + Michael J. Missal, Bankruptcy Court + Examiner, In + +On line 16553: + J. Missal, Bankruptcy + Court Examiner, In RE: + New Century TRS + +On line 16553: + Court Examiner, + In RE: New Century TRS + Holdings, Chapter Case + +On line 16555: + Chapter Case No. 07-10416 + (KJC), (Bankr. D.Del), February pp. + (hereafter Missal). Ibid., p. + +On line 16557: + No. 07-10416 (KJC), (Bankr. D.Del), + February pp. (hereafter Missal). + Ibid., p. Nomura + +On line 16559: + from Boca Raton: + Coverage from Selected + Sessions of ABS East + +On line 16559: + Raton: Coverage + from Selected Sessions of + ABS East September + +On line 16561: + Sessions of ABS East + September pp. Alan Greenspan, "The + Economic Outlook," + +On line 16563: + the Joint Economic + Committee, 109th Cong., 1st sess., + June Christopher Mayer, + +On line 16563: + June Christopher Mayer, + written testimony for + the FCIC, Forum to + +On line 16563: + testimony for + the FCIC, Forum to Explore + the Causes of the + +On line 16563: + the FCIC, Forum to + Explore the Causes of the + Financial Crisis, + +On line 16563: + Explore the Causes + of the Financial Crisis, + day session Mortgage + +On line 16563: + of the Financial + Crisis, day session Mortgage + Lending Practices and + +On line 16565: + pp. Antonio Fatás, + Prakash Kannan, Pau Rabanal, and + Alasdair Scott, "Lessons for + +On line 16567: + chapter James MacGee, "Why + Didn’t Canada’s Housing Market + Go Bust1" Federal + +On line 16567: + James MacGee, "Why Didn’t + Canada’s Housing Market Go Bust1" + Federal Reserve + +On line 16567: + Federal Reserve + Bank of Cleveland. Economic + Comment (December + +On line 16569: + Economic Comment + (December Morris A. Davis, + Andreas Lehnert, and + +On line 16569: + (December Morris + A. Davis, Andreas Lehnert, and + Robert F. Martin, "The + +On line 16569: + Lehnert, and Robert F. + Martin, "The Rent-Price Ratio for + the Aggregate Stock + +On line 16569: + F. Martin, "The Rent-Price + Ratio for the Aggregate + Stock of Owner-Occupied Housing," + +On line 16569: + "The Rent-Price Ratio for + the Aggregate Stock of Owner-Occupied + Housing," Federal + +On line 16569: + the Aggregate Stock + of Owner-Occupied Housing," Federal + Reserve Board Working + +On line 16571: + Housing," Federal + Reserve Board Working Paper, + May p. Price data + +On line 16571: + Federal Reserve + Board Working Paper, May p. + Price data from CoreLogic + +On line 16571: + Reserve Board Working + Paper, May p. Price data + from CoreLogic CSBA Home + +On line 16571: + Price data from CoreLogic + CSBA Home Price Index, Single-Family + Combined. Rent data + +On line 16571: + from CoreLogic CSBA Home + Price Index, Single-Family Combined. Rent + data is Bureau + +On line 16571: + Index, Single-Family Combined. + Rent data is Bureau of + Labor Statistics, + +On line 16571: + Equivalent Rent for + Primary Residence; all + index figures are + +On line 16571: + all index figures + are adjusted so that Jan. + Methods follow from + +On line 16571: + are adjusted so + that Jan. Methods follow from + Federal Reserve + +On line 16571: + Jan. Methods follow + from Federal Reserve Bank + of San Francisco + +On line 16571: + of San Francisco + Economic Letter, "House Prices + and Fundamental + +On line 16573: + Realtors Housing + Affordability Index, + accessed from Bloomberg as + +On line 16573: + Affordability + Index, accessed from Bloomberg as + composite Index + +On line 16573: + Index, accessed from + Bloomberg as composite Index + (HOMECOMP). The index + +On line 16573: + accessed from Bloomberg as + composite Index (HOMECOMP). + The index began + +On line 16575: + could not exceed of + the median family + monthly income. More + +On line 16575: + the methodology + can be found at National + Association + +On line 16579: + Chairman Phil Angelides, + December p. Kristopher S. + Gerardi, Christopher + +On line 16579: + Angelides, December + p. Kristopher S. Gerardi, + Christopher L. Foote, and + +On line 16579: + L. Foote, and Paul S. + Willen, "Reasonable People Did + Disagree: Optimism + +On line 16579: + "Reasonable People + Did Disagree: Optimism and + Pessimism about the U.S. + +On line 16579: + and Pessimism about the + U.S. Housing Market Before + the Crash," Federal + +On line 16579: + Market Before the + Crash," Federal Reserve Bank + of Boston Public + +On line 16581: + Public Policy + Discussion Paper No. 10-5, + August Donald L. + +On line 16581: + August Donald L. + Kohn, "Monetary Policy + and Asset Prices," speech + +On line 16581: + L. Kohn, "Monetary + Policy and Asset Prices," + speech delivered at + +On line 16581: + European Central + Bank Colloquium held in + honor of Otmar + +On line 16583: + honor of Otmar + Issing, Frankfurt, Germany, March + Richard A. Brown, "Rising + +On line 16583: + of Otmar Issing, + Frankfurt, Germany, March Richard A. + Brown, "Rising Risks in + +On line 16585: + Board of Governors, + memorandum from Josh Gallin + and Andreas Lehnert + +On line 16587: + memorandum from + Josh Gallin and Andreas Lehnert + to Vice Chairman [Roger] + +On line 16587: + Josh Gallin and Andreas + Lehnert to Vice Chairman [Roger] + Ferguson, "Talking + +On line 16587: + Andreas Lehnert to + Vice Chairman [Roger] Ferguson, + "Talking Points on House + +On line 16589: + to Vice Chairman [Roger] + Ferguson, "Talking Points on + House Prices," May p. Missal, + +On line 16591: + May p. Missal, p. William + Black, testimony before + the FCIC, Hearing on + +On line 16591: + p. Missal, p. William Black, + testimony before the + FCIC, Hearing on the + +On line 16591: + Black, testimony + before the FCIC, Hearing on + the Impact of the + +On line 16591: + the Impact of the + Financial Crisis—Miami, Florida, + session Overview of + +On line 16591: + Overview of Mortgage + Fraud, September transcript, p. + and email from William Black + +On line 16593: + December Reply + of Attorney General + Lisa Madigan (Illinois) + +On line 16595: + Financial Services + Subcommittee on Housing + and Community + +On line 16595: + Subcommittee on + Housing and Community + Opportunity, + +On line 16595: + and Community + Opportunity, 108th Cong., + 2nd sess., October + +On line 16605: + Wilfredo Ferrer, + testimony before the + FCIC, Hearing on the + +On line 16607: + FCIC, Hearing on the + Impact of the Financial + Crisis— Miami, + +On line 16607: + Florida, session + The Regulation, Oversight, + and Prosecution + +On line 16607: + The Regulation, + Oversight, and Prosecution + of Mortgage Fraud in + +On line 16607: + Prosecution of + Mortgage Fraud in Miami, + September transcript, + +On line 16609: + the Impact of the + Financial Crisis—Miami, Florida, + session Overview of + +On line 16615: + interview by FCIC, + May David Gussmann, interview + by FCIC, March William H. + +On line 16615: + Gussmann, interview + by FCIC, March William H. Brewster, + interview by FCIC, + +On line 16617: + by FCIC, March William H. + Brewster, interview by FCIC, + October Henry + +On line 16619: + FCIC, Hearing on the + Impact of the Financial + Crisis— Miami, + +On line 16621: + of the Inspector + General, "The Internal + Effects of the FBI’s + +On line 16625: + September p. Chris + Swecker, interview by FCIC, + March Patrick Crowley, MortgageDaily.com, + +On line 16627: + Swecker, interview + by FCIC, March Patrick Crowley, MortgageDaily.com, + November Swecker, + +On line 16627: + Swecker, statement to + the House Financial Services + Subcommittee on + +On line 16627: + Financial Services + Subcommittee on Housing + and Community + +On line 16627: + Subcommittee on + Housing and Community + Opportunity, + +On line 16629: + Opportunity, + October William Black, written + testimony for + +On line 16629: + October William Black, + written testimony for + the FCIC, September + +On line 16631: + the FCIC, September + p. Francisco San Pedro, + interview by FCIC, + +On line 16637: + OCC, letter to Bank + of America, June Darcy + Parmer, interview by + +On line 16637: + letter to Bank of + America, June Darcy Parmer, + interview by FCIC, + +On line 16639: + of America, June + Darcy Parmer, interview by + FCIC, June FinCEN, "Mortgage + +On line 16639: + "Mortgage Loan Fraud: An + Industry Assessment Based + on SAR Analysis," + +On line 16641: + Assessment Based on + SAR Analysis," November + pp. Swecker, statement + +On line 16641: + Financial Services + Subcommittee on Housing + and Community + +On line 16641: + Subcommittee on + Housing and Community + Opportunity, + +On line 16647: + April–June p. DOJ, letter + from Assistant Attorney + General Ronald Welch + +On line 16649: + Ronald Welch to the FCIC, + April pp. October p. Robert + Mueller, interview by + +On line 16649: + Welch to the FCIC, April + pp. October p. Robert Mueller, + interview by FCIC, + +On line 16657: + Report," pp. Richard Spillenkothen, + interview by FCIC, March Michael + J. Mukasey, interview + +On line 16657: + interview by FCIC, + March Michael J. Mukasey, interview + by FCIC, October + +On line 16659: + Mukasey, interview by + FCIC, October DOJ response + to FCIC request, April + +On line 16659: + interview by FCIC, + October DOJ response to + FCIC request, April see + +On line 16659: + by FCIC, October + DOJ response to FCIC request, + April see also DOJ + +On line 16661: + to FCIC request, April + see also DOJ response to + FCIC request, April William + +On line 16661: + FCIC request, April see + also DOJ response to FCIC + request, April William Black, + +On line 16661: + FCIC request, April William + Black, testimony before + the FCIC, September + +On line 16663: + Black, testimony + before the FCIC, September + transcript, p. Swecker, + +On line 16665: + of Law Enforcement, + testimony before the + FCIC, Hearing on the + +On line 16665: + p. "Participant + in Million Mortgage Fraud Scheme + Convicted by Polk + +On line 16667: + press release, August + Tenth Judicial Circuit in + and for Polk County, + +On line 16667: + Circuit in and for + Polk County, Florida, State + of Florida vs. + +On line 16667: + Florida, State of + Florida vs. Scott Almeida, + et al., OSWP No. + +On line 16667: + of Florida vs. + Scott Almeida, et al., OSWP + No. 2005-0256-TPA; July + +On line 16667: + Florida vs. Scott + Almeida, et al., OSWP No. + 2005-0256-TPA; July see + +On line 16669: + Scott Almeida, et al., + OSWP No. 2005-0256-TPA; July + see paragraphs and Wilcox, + +On line 16671: + the FCIC, September + transcript, pp. Gary Gorton, "The + Panic of paper + +On line 16671: + paper presented + at the Federal Reserve + Bank of Kansas City, + +On line 16671: + presented at the + Federal Reserve Bank of + Kansas City, Jackson + +On line 16671: + Kansas City, Jackson + Hole Conference, "Maintaining + Stability in + +On line 16673: + of Subprime Mortgage + Credit," Federal Reserve + Bank of New York Staff + +On line 16673: + Credit," Federal + Reserve Bank of New York Staff + Report No. March pp. + +On line 16675: + Federal Reserve + Bank of New York Staff Report + No. March pp. Raymond + +On line 16675: + Reserve Bank of New + York Staff Report No. March pp. + Raymond McDaniel, quoted + +On line 16675: + Bank of New York Staff + Report No. March pp. Raymond + McDaniel, quoted in the + +On line 16675: + York Staff Report No. + March pp. Raymond McDaniel, quoted + in the transcript of + +On line 16675: + Staff Report No. March + pp. Raymond McDaniel, quoted in + the transcript of Moody’s + +On line 16675: + No. March pp. Raymond + McDaniel, quoted in the transcript + of Moody’s Managing + +On line 16675: + McDaniel, quoted in the + transcript of Moody’s Managing + Director’s Town Hall + +On line 16679: + of Moody’s Managing + Director’s Town Hall Meeting, + September Notes to + +On line 16683: + president and chief + operating officer + of Clayton Holdings, + +On line 16685: + Inc., interview by + FCIC, September Frank Filipps, + interview by FCIC, + +On line 16687: + by FCIC, September + Frank Filipps, interview by + FCIC, August Vicki + +On line 16687: + FCIC, September Frank + Filipps, interview by FCIC, + August Vicki Beal, + +On line 16687: + FCIC, August Vicki + Beal, testimony before + the FCIC, Hearing on + +On line 16687: + August Vicki Beal, + testimony before the + FCIC, Hearing on the + +On line 16687: + Beal, testimony + before the FCIC, Hearing on + the Impact of the + +On line 16687: + session The Mortgage + Securitization Chain: + From Sacramento to + +On line 16689: + Sacramento to Wall + Street, September transcript, pp. + Beal, testimony + +On line 16689: + also Martha Coakley, + Massachusetts Attorney + General, comment + +On line 16689: + regarding asset-backed + securities, Release No. + 33-9117; 34-61858; File No. S7-08-10, + +On line 16691: + No. S7-08-10, August p. + Beal, testimony before + the FCIC, September + +On line 16693: + D. Keith Johnson, + testimony before the + FCIC, Hearing on the + +On line 16695: + FCIC, Hearing on the + Impact of the Financial + Crisis— Sacramento, + +On line 16695: + session The Mortgage + Securitization Chain: + From Sacramento to + +On line 16699: + transcript, pp. Ibid., p. + Beal, testimony before + the FCIC, September + +On line 16701: + Beal, testimony + before the FCIC, September + transcript, p. John J. + +On line 16701: + September transcript, + p. John J. Goggins, senior + vice president and + +On line 16701: + p. John J. Goggins, + senior vice president and + general counsel, + +On line 16701: + Goggins, senior vice + president and general + counsel, Moody’s, letter + +On line 16705: + Times Misconstruing + Commission Testimony," + September Johnson, + +On line 16711: + the FCIC, September + transcript, p. Tony Peterson, + interview by FCIC, + +On line 16713: + president in charge + of mortgage acquisition + due diligence, Deutsche Bank, + +On line 16713: + in charge of mortgage + acquisition due diligence, + Deutsche Bank, interview + +On line 16713: + acquisition due + diligence, Deutsche Bank, interview + by FCIC, July William + +On line 16713: + due diligence, Deutsche Bank, + interview by FCIC, July + William Collins Buell VI, head + +On line 16713: + Deutsche Bank, interview + by FCIC, July William Collins Buell + VI, head of mortgage + +On line 16713: + by FCIC, July William + Collins Buell VI, head of mortgage + acquisition, JP + +On line 16713: + Collins Buell VI, head of + mortgage acquisition, JP + Morgan, interview + +On line 16713: + VI, head of mortgage + acquisition, JP Morgan, + interview by FCIC, + +On line 16715: + acquisition, JP + Morgan, interview by FCIC, + September Richard M. + +On line 16715: + September Richard M. + Bowen, written testimony + for the FCIC, Hearing + +On line 16715: + Richard M. Bowen, written + testimony for the FCIC, + Hearing on Subprime + +On line 16715: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 16719: + FCIC, February FCIC + correspondence with Richard M. + Bowen. Inside Mortgage + +On line 16719: + correspondence with + Richard M. Bowen. Inside Mortgage + Finance, The Mortgage + +On line 16719: + The Secondary Market + (Bethesda, MD: Inside Mortgage + Finance, p. FCIC staff + +On line 16719: + Market (Bethesda, MD: + Inside Mortgage Finance, p. + FCIC staff estimate + +On line 16719: + (Bethesda, MD: Inside + Mortgage Finance, p. FCIC staff + estimate based on + +On line 16719: + Mortgage Finance, p. + FCIC staff estimate based on + analysis of Moody’s + +On line 16721: + FCIC staff estimate + based on analysis of Moody’s + CDO EMS database. See, + +On line 16721: + staff estimate based + on analysis of Moody’s CDO + EMS database. See, for + +On line 16721: + based on analysis + of Moody’s CDO EMS database. See, + for example, James + +On line 16721: + on analysis of + Moody’s CDO EMS database. See, for + example, James C. + +On line 16721: + EMS database. See, for + example, James C. Treadway + Jr., "An Overview of + +On line 16721: + for example, James + C. Treadway Jr., "An Overview + of Rule and Some Thoughts + +On line 16721: + example, James C. + Treadway Jr., "An Overview of + Rule and Some Thoughts About + +On line 16721: + James C. Treadway Jr., + "An Overview of Rule and Some + Thoughts About the Future," + +On line 16721: + Rule and Some Thoughts About + the Future," remarks to the + thirteenth annual + +On line 16723: + Association, + Hot Springs, Virginia, October + Shelley Parratt and + +On line 16723: + October Shelley + Parratt and Paula Dubberly, + interview by the + +On line 16725: + interview by the + FCIC, October C.F.R. Part 229.1111(a)(3), + "Pool Assets," revised + +On line 16727: + FCIC, October C.F.R. + Part 229.1111(a)(3), "Pool Assets," revised + as of April See Part + +On line 16727: + October C.F.R. Part + 229.1111(a)(3), "Pool Assets," revised as + of April See Part V + +On line 16727: + Part 229.1111(a)(3), "Pool Assets," + revised as of April See Part + V of complaint filed + +On line 16727: + filed by Cambridge Place + Investment Management Inc., + dated July in + +On line 16727: + Management, Inc., v. + Morgan Stanley Co., Inc., Case + No. 10-27841, p. (hereafter + +On line 16727: + Morgan Stanley Co., + Inc., Case No. 10-27841, p. (hereafter + Cambridge Complaint), and + +On line 16727: + Stanley Co., Inc., Case + No. 10-27841, p. (hereafter Cambridge + Complaint), and Part V + +On line 16727: + Inc., Case No. 10-27841, p. + (hereafter Cambridge Complaint), and + Part V of complaint + +On line 16727: + No. 10-27841, p. (hereafter + Cambridge Complaint), and Part V + of complaint filed by + +On line 16727: + Cambridge Complaint), and + Part V of complaint filed by + Federal Home Loan + +On line 16727: + V of complaint filed + by Federal Home Loan Bank + of Chicago, dated + +On line 16727: + County, Illinois (Chancery + Division), Federal Home + Loan Bank of Chicago + +On line 16727: + Federal Home Loan + Bank of Chicago v. Banc of + America Funding + +On line 16727: + Bank of Chicago v. + Banc of America Funding + Corp. et al., Case No. + +On line 16727: + of Chicago v. Banc + of America Funding Corp. + et al., Case No. 10CH450B3, + +On line 16727: + Chicago v. Banc of + America Funding Corp. et + al., Case No. 10CH450B3, p. + +On line 16729: + America Funding + Corp. et al., Case No. 10CH450B3, p. + Cambridge Complaint, pp. + +On line 16733: + Corp. et al., Case No. + 10CH450B3, p. Cambridge Complaint, pp. + Bowen, interview. D. + +On line 16733: + No. 10CH450B3, p. Cambridge + Complaint, pp. Bowen, interview. + D. Keith Johnson, + +On line 16733: + pp. Bowen, interview. + D. Keith Johnson, former + president and chief + +On line 16733: + president and chief + operating officer, + Clayton Holdings, Inc., + +On line 16733: + chief operating + officer, Clayton Holdings, + Inc., interview by + +On line 16735: + officer, Clayton + Holdings, Inc., interview by + FCIC, June A QIB was + +On line 16735: + Inc., interview by + FCIC, June A QIB was defined + under Rule 144A to + +On line 16735: + FCIC, June A QIB was + defined under Rule 144A to + include "entities, + +On line 16735: + A QIB was defined + under Rule 144A to include + "entities, acting + +On line 16735: + defined under Rule + 144A to include "entities, + acting for its own + +On line 16735: + under Rule 144A to + include "entities, acting + for its own account + +On line 16735: + Rule 144A to include + "entities, acting for its + own account or the + +On line 16735: + include "entities, + acting for its own account + or the accounts of + +On line 16735: + "entities, acting + for its own account or the + accounts of other + +On line 16735: + acting for its own + account or the accounts of + other qualified + +On line 16735: + buyers, that in the + aggregate owns and invests + on a discretionary + +On line 16735: + on a discretionary + basis at least million in + securities of + +On line 16735: + of issuers that are + not affiliated with + the entity." See + +On line 16735: + issuers that are not + affiliated with the + entity." See C.F.R. + +On line 16737: + affiliated + with the entity." See C.F.R. + 230.144A, "Private Resale + +On line 16737: + with the entity." + See C.F.R. 230.144A, "Private Resale + of Securities + +On line 16737: + the entity." See + C.F.R. 230.144A, "Private Resale of + Securities to + +On line 16737: + See C.F.R. 230.144A, "Private + Resale of Securities + to Institutions." + +On line 16741: + of Securities + to Institutions." Notes to + Chapter Dennis Voigt + +On line 16741: + to Chapter Dennis + Voigt Crawford, testimony + before the FCIC, First + +On line 16741: + before the FCIC, First + Public Hearing of the FCIC, + day session Current + +On line 16741: + Public Hearing of + the FCIC, day session Current + Investigation + +On line 16741: + day session Current + Investigation into + the Financial Crisis—State + +On line 16743: + Local Officials, + January p. Richard Breeden, + interview by FCIC, + +On line 16743: + interview by FCIC, + October See Public Law + (Oct. Rule 144A contained + +On line 16743: + by FCIC, October + See Public Law (Oct. Rule 144A + contained provisions + +On line 16743: + See Public Law (Oct. + Rule 144A contained provisions + that ensured it did + +On line 16743: + Public Law (Oct. Rule + 144A contained provisions that + ensured it did not + +On line 16743: + (Oct. Rule 144A contained + provisions that ensured it + did not expand to + +On line 16743: + not expand to the + securities markets in + which retail investors + +On line 16745: + retail investors did + participate. Federal + Reserve Board, SR "Risk-Focused + +On line 16747: + Supervision of + Large Complex Institutions," + October Alan Greenspan, + +On line 16747: + Evolution of Bank + Supervision," speech before + the American Bankers + +On line 16747: + Supervision," speech + before the American Bankers + Association, + +On line 16749: + Arizona, October + Eugene Ludwig, interview + by FCIC, September + +On line 16751: + by FCIC, September + Federal Reserve Bank of + New York, "Report on + +On line 16751: + Reserve Bank of New + York, "Report on Systemic Risk + and Supervision," + +On line 16753: + "Report on Systemic + Risk and Supervision," Draft + of August p. Rich + +On line 16753: + Supervision," Draft + of August p. Rich Spillenkothen, "Notes + on the performance + +On line 16753: + Rich Spillenkothen, "Notes on the + performance of prudential + supervision in + +On line 16753: + years preceding the + financial crisis by a + former director + +On line 16753: + former director + of banking supervision + and regulation + +On line 16755: + and regulation + at the Federal Reserve + Board to May Susan + +On line 16755: + regulation at + the Federal Reserve Board + to May Susan Bies, + +On line 16755: + at the Federal + Reserve Board to May Susan + Bies, interview by + +On line 16757: + Reserve Board to May + Susan Bies, interview by + FCIC, October Bernanke, + +On line 16757: + interview by FCIC, + October Bernanke, letter to + the FCIC, December + +On line 16761: + the FCIC, December + John Snow, interview by FCIC, + October Office + +On line 16761: + John Snow, interview + by FCIC, October Office + of the Comptroller + +On line 16761: + Snow, interview by + FCIC, October Office of + the Comptroller of + +On line 16761: + interview by FCIC, + October Office of the + Comptroller of the + +On line 16761: + by FCIC, October + Office of the Comptroller + of the Currency, + +On line 16761: + October Office + of the Comptroller of the + Currency, Board of + +On line 16761: + of the Comptroller + of the Currency, Board of + Governors of the + +On line 16761: + of the Currency, + Board of Governors of the + Federal Deposit + +On line 16761: + Deposit Insurance + Corporation, Office of + Thrift Supervision, + +On line 16761: + Thrift Supervision, + and National Credit Union + Administration, + +On line 16763: + Management Guidance + for Home Equity Lending," + May Mortgage Market + +On line 16771: + Implications for + Guidance," PowerPoint, November Bies, + interview. Office + +On line 16771: + PowerPoint, November Bies, + interview. Office of the + Comptroller of the + +On line 16771: + interview. Office + of the Comptroller of the + Currency, Board of + +On line 16771: + of the Comptroller + of the Currency, Board of + Governors of the + +On line 16771: + of the Currency, + Board of Governors of the + Federal Deposit + +On line 16771: + Deposit Insurance + Corporation, Office of + Thrift Supervision, + +On line 16771: + Thrift Supervision, + and National Credit Union + Administration, + +On line 16773: + Products," Federal + Register (December Paul + Smith, American Bankers + +On line 16773: + Smith, American Bankers + Association, letter + to the Federal + +On line 16773: + Association, + letter to the Federal + Deposit Insurance + +On line 16773: + Federal Deposit + Insurance Corporation, + Board of Governors + +On line 16773: + Board of Governors + of the Federal Reserve + System, Office of + +On line 16773: + of the Federal + Reserve System, Office of + Thrift Supervision, + +On line 16773: + Supervision, and + Office of the Comptroller + of the Currency, + +On line 16775: + the Currency, March + p. Letter from American + Financial Services + +On line 16777: + from the American + Bankers Association (March + p. the American + +On line 16777: + Financial Services + Association (March p. + and Indymac Bank + +On line 16779: + Association + (March p. and Indymac Bank + (March p. The Housing + +On line 16779: + (March p. The Housing + Policy Council of the + Financial Services + +On line 16779: + Policy Council + of the Financial Services + Roundtable, letter to + +On line 16779: + of the Financial + Services Roundtable, letter to + the Office of Thrift + +On line 16781: + to the Office of + Thrift Supervision, March p. + Siddique, interview. + +On line 16783: + Thrift Supervision, + March p. Siddique, interview. + Binyamin Appelbaum and + +On line 16783: + Supervision, March + p. Siddique, interview. Binyamin + Appelbaum and Ellen + +On line 16783: + Appelbaum and Ellen + Nakashima, "Banking Regulator + Played Advocate Over + +On line 16783: + Played Advocate Over + Enforcer: Agency Let Lenders Grow + Out of Control, Then + +On line 16783: + Over Enforcer: Agency + Let Lenders Grow Out of Control, + Then Fail," Washington + +On line 16783: + Enforcer: Agency Let + Lenders Grow Out of Control, Then + Fail," Washington Post, + +On line 16785: + Let Lenders Grow Out of + Control, Then Fail," Washington + Post, November Bies, + +On line 16787: + of Control, Then Fail," + Washington Post, November + Bies, interview. See, + +On line 16787: + Fail," Washington Post, + November Bies, interview. + See, e.g. "Countrywide + +On line 16787: + See, e.g. "Countrywide + Seeks to Become Savings Bank; + The Mortgage Lender Says + +On line 16787: + e.g. "Countrywide Seeks + to Become Savings Bank; The + Mortgage Lender Says It + +On line 16787: + Become Savings Bank; + The Mortgage Lender Says It Is + Planning to Apply + +On line 16787: + Mortgage Lender Says It + Is Planning to Apply to + Convert Its Charter + +On line 16787: + Says It Is Planning + to Apply to Convert Its + Charter So It Will + +On line 16787: + Apply to Convert + Its Charter So It Will Be + Regulated by + +On line 16787: + Charter So It Will + Be Regulated by One + Federal Agency + +On line 16787: + Be Regulated + by One Federal Agency + instead of Two," Los + +On line 16789: + instead of Two," Los + Angeles Times, November + based on Bloomberg, Reuters. Kim + +On line 16791: + based on Bloomberg, Reuters. Kim + Sherer, interview by FCIC, + August Countrywide, + +On line 16791: + Bloomberg, Reuters. Kim Sherer, + interview by FCIC, August + Countrywide, "Briefing + +On line 16791: + interview by FCIC, + August Countrywide, "Briefing + Paper: Meeting with + +On line 16799: + Chapter Angelo + Mozilo, email to John McMurray (cc + Dave Sambol, Carlos + +On line 16799: + to John McMurray (cc Dave + Sambol, Carlos Garcia), re: + Pay Options, August + +On line 16799: + Carlos Garcia), re: + Pay Options, August John McMurray, + email to Angelo + +On line 16799: + Pay Options, August + John McMurray, email to Angelo + Mozilo (cc Kevin Bartlett, + +On line 16799: + email to Angelo + Mozilo (cc Kevin Bartlett, Carlos + Garcia, Dave Sambol, + +On line 16799: + Angelo Mozilo + (cc Kevin Bartlett, Carlos Garcia, + Dave Sambol, re: Pay + +On line 16801: + (cc Kevin Bartlett, Carlos + Garcia, Dave Sambol, re: Pay + Options, August The + +On line 16801: + Bartlett, Carlos Garcia, + Dave Sambol, re: Pay Options, + August The cost of + +On line 16801: + Garcia, Dave Sambol, + re: Pay Options, August The + cost of borrowing + +On line 16801: + August The cost of + borrowing is reflected + by credit spreads, the + +On line 16801: + cost of borrowing + is reflected by credit + spreads, the portion of + +On line 16801: + is reflected by + credit spreads, the portion of + interest rates that + +On line 16801: + of interest rates + that compensate investors for + credit risk. Credit + +On line 16801: + compensate investors + for credit risk. Credit spreads + are the interest + +On line 16801: + credit risk. Credit + spreads are the interest rates + that investors require + +On line 16801: + above the so-called risk-free + interest rate, usually + measured in terms of + +On line 16801: + measured in terms of + Treasuries or interest rate + swaps with similar + +On line 16805: + Loan Syndication + Trading Association, + "The US Loan Market + +On line 16807: + Association, + "The US Loan Market Today," + presentation. Loan + +On line 16807: + Loan Syndication + Trading Association, + "Financial Reform + +On line 16807: + Association, + "Financial Reform and the + Leveraged Loan Market," + +On line 16809: + "Financial Reform + and the Leveraged Loan Market," + presentation. Ibid., + +On line 16809: + and the Leveraged Loan + Market," presentation. Ibid., + Loan Syndication + +On line 16809: + presentation. Ibid., + Loan Syndication Trading + Association, + +On line 16809: + Loan Syndication + Trading Association, + "Challenges Facing CLOs + +On line 16813: + April Michael Flaherty + and Dena Aubin, "For Private + Equity Market, + +On line 16815: + Equity Market, + All Eyes on First Data," Reuters, + September SEC, "Risk + +On line 16815: + Market, All Eyes on + First Data," Reuters, September + SEC, "Risk Management + +On line 16817: + Charles Prince, quoted in + "Citigroup chief stays bullish on + buyouts," Financial + +On line 16817: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 16817: + Government-Sponsored Enterprises + (GSEs), day session Citigroup + Senior Management, + +On line 16819: + Citigroup Senior + Management, April transcript, pp. + Roben Farzad, Matthew Goldstein, + +On line 16819: + Senior Management, + April transcript, pp. Roben Farzad, Matthew + Goldstein, David Henry, + +On line 16819: + April transcript, pp. Roben + Farzad, Matthew Goldstein, David Henry, + and Christopher Palmeri, "Not + +On line 16819: + transcript, pp. Roben Farzad, + Matthew Goldstein, David Henry, and + Christopher Palmeri, "Not So + +On line 16821: + Goldstein, David Henry, + and Christopher Palmeri, "Not So Smart," + Busi-nessWeek, September Joseph + +On line 16821: + Smart," Busi-nessWeek, September + Joseph Gyourko, "Understanding + Commercial Real + +On line 16821: + Commercial Real + Estate: Just How Different + from Housing Is It1" + +On line 16821: + Real Estate: Just + How Different from Housing + Is It1" NBER Working + +On line 16821: + How Different from + Housing Is It1" NBER Working + Paper National + +On line 16823: + Economic Research, + February pp. CRE Finance + Council, Compendium + +On line 16823: + CRE Finance Council, + Compendium of Statistics, + November Exhibits + +On line 16825: + Council, Compendium + of Statistics, November + Exhibits Joe Keohane, + +On line 16827: + Exhibits Joe Keohane, + "Heartbreak Hotels," Portfolio, + November "Hilton Debt + +On line 16829: + Commercial Mortgage + Alert, February Tom Marano, + interview by FCIC, + +On line 16831: + Alert, February Tom + Marano, interview by FCIC, + April Jeff Mayer and + +On line 16831: + FCIC, April Jeff Mayer + and Tom Marano, "Fixed Income + Overview," Bear Stearns, March + +On line 16833: + Overview," Bear Stearns, March + p. Gyourko, "Understanding + Commercial Real + +On line 16833: + Stearns, March p. Gyourko, + "Understanding Commercial + Real Estate: Just + +On line 16833: + Commercial Real + Estate: Just How Different + from Housing Is It1" + +On line 16835: + Real Estate: Just + How Different from Housing + Is It1" p. New York + +On line 16835: + How Different from + Housing Is It1" p. New York + Federal Reserve + +On line 16835: + Housing Is It1" p. + New York Federal Reserve + Bank, "Maiden Lane LLC + +On line 16835: + Federal Reserve + Bank, "Maiden Lane LLC Holdings + as of Anton R. + +On line 16835: + Lane LLC Holdings as + of Anton R. Valukas, Report + of Examiner, + +On line 16835: + LLC Holdings as of + Anton R. Valukas, Report of + Examiner, In + +On line 16835: + of Anton R. Valukas, + Report of Examiner, + In re Lehman Brothers + +On line 16835: + R. Valukas, Report of + Examiner, In re Lehman + Brothers Holdings Inc., + +On line 16835: + of Examiner, + In re Lehman Brothers Holdings + Inc., et al., Chapter + +On line 16837: + Examiner, In + re Lehman Brothers Holdings Inc., + et al., Chapter Case + +On line 16837: + In re Lehman Brothers + Holdings Inc., et al., Chapter + Case No. 08-13555 (JMP), (Bankr. + +On line 16837: + Lehman Brothers Holdings + Inc., et al., Chapter Case No. + 08-13555 (JMP), (Bankr. S.D.N.Y.), + +On line 16837: + Brothers Holdings Inc., + et al., Chapter Case No. 08-13555 + (JMP), (Bankr. S.D.N.Y.), March + +On line 16837: + Holdings Inc., et al., + Chapter Case No. 08-13555 (JMP), (Bankr. + S.D.N.Y.), March (hereafter + +On line 16837: + Inc., et al., Chapter + Case No. 08-13555 (JMP), (Bankr. S.D.N.Y.), + March (hereafter cited + +On line 16837: + et al., Chapter Case + No. 08-13555 (JMP), (Bankr. S.D.N.Y.), March + (hereafter cited as + +On line 16839: + Chapter Case No. 08-13555 + (JMP), (Bankr. S.D.N.Y.), March (hereafter + cited as Valukas). Ibid., + +On line 16841: + Case No. 08-13555 (JMP), (Bankr. + S.D.N.Y.), March (hereafter cited + as Valukas). Ibid., Madelyn + +On line 16841: + (JMP), (Bankr. S.D.N.Y.), March + (hereafter cited as Valukas). Ibid., + Madelyn Antoncic, + +On line 16841: + as Valukas). Ibid., Madelyn + Antoncic, "Lehman Brothers Risk + Management," August + +On line 16847: + by FCIC, July Valukas, + Antoncic, interview. Valukas, + Jody Shenn, "Lehman Said to + +On line 16847: + interview. Valukas, Jody + Shenn, "Lehman Said to Return to + Mortgage Market through + +On line 16847: + Jody Shenn, "Lehman Said to + Return to Mortgage Market + through Aurora Unit + +On line 16849: + to Mortgage Market + through Aurora Unit (Update + Bloomberg, October SEC, + +On line 16849: + Mortgage Market through + Aurora Unit (Update Bloomberg, + October SEC, "Risk + +On line 16849: + Bloomberg, October SEC, + "Risk Management Reviews of + Consolidated + +On line 16851: + May July August + September October Erik + Sirri, interview + +On line 16857: + Sirri, interview + by FCIC, April Valukas, nn. Valukas, The + People of the State + +On line 16857: + interview by FCIC, + April Valukas, nn. Valukas, The People + of the State of New + +On line 16857: + by FCIC, April Valukas, nn. + Valukas, The People of the State + of New York v. Ernst + +On line 16857: + FCIC, April Valukas, nn. Valukas, + The People of the State of + New York v. Ernst Young + +On line 16857: + April Valukas, nn. Valukas, The + People of the State of New + York v. Ernst Young LLP + +On line 16857: + nn. Valukas, The People + of the State of New York v. + Ernst Young LLP (N.Y. Sup. + +On line 16857: + Valukas, The People of + the State of New York v. Ernst + Young LLP (N.Y. Sup. Ct. + +On line 16857: + The People of the + State of New York v. Ernst Young + LLP (N.Y. Sup. Ct. filed + +On line 16857: + People of the State + of New York v. Ernst Young LLP + (N.Y. Sup. Ct. filed Dec. + +On line 16859: + the State of New York + v. Ernst Young LLP (N.Y. Sup. Ct. + filed Dec. Ronald Marcus, + +On line 16859: + New York v. Ernst Young + LLP (N.Y. Sup. Ct. filed Dec. Ronald + Marcus, interview + +On line 16859: + v. Ernst Young LLP (N.Y. + Sup. Ct. filed Dec. Ronald Marcus, + interview by FCIC, + +On line 16861: + LLP (N.Y. Sup. Ct. filed + Dec. Ronald Marcus, interview + by FCIC, July See + +On line 16861: + (N.Y. Sup. Ct. filed Dec. + Ronald Marcus, interview by + FCIC, July See Ronald + +On line 16861: + Sup. Ct. filed Dec. Ronald + Marcus, interview by FCIC, + July See Ronald S. + +On line 16861: + filed Dec. Ronald Marcus, + interview by FCIC, July + See Ronald S. Marcus, + +On line 16861: + Marcus, interview + by FCIC, July See Ronald S. + Marcus, OTS, "Report + +On line 16861: + FCIC, July See Ronald + S. Marcus, OTS, "Report of + Examination + +On line 16861: + Marcus, OTS, "Report + of Examination Lehman + Brothers Holdings Inc.," + +On line 16871: + pp. Notes to Chapter + David Sambol, interview by + FCIC, September See + +On line 16871: + by FCIC, September + See Countrywide Financial + Corporation, Form + +On line 16871: + Form 10-K, February + p. See also Fannie Mae, + "Single-Family Conventional + +On line 16871: + "Single Family + Guarantee Business: Facing + Strategic Crossroads," June + +On line 16877: + Crossroads," June Ibid. Daniel + Mudd, interview by FCIC, March + "Single Family + +On line 16877: + Mudd, interview by + FCIC, March "Single Family + Guarantee Business: + +On line 16877: + "Single Family + Guaranty Business Strategic + Review Summary," + +On line 16877: + Guaranty Business + Strategic Review Summary," + PowerPoint presentation, + +On line 16879: + Review Summary," + PowerPoint presentation, July + Citigroup, "Project Phineas: + +On line 16879: + PowerPoint presentation, + July Citigroup, "Project Phineas: + Presentation to + +On line 16881: + Board of Directors," + executive summary, + July and "Single + +On line 16885: + by Fannie Mae. Tom + Lund, interview by FCIC, March + Christopher Dickerson + +On line 16885: + Lund, interview by + FCIC, March Christopher Dickerson + to James B. Lockhart + +On line 16885: + interview by FCIC, + March Christopher Dickerson to + James B. Lockhart III, + +On line 16885: + James B. Lockhart III, + "Proposed Appointment of the + Federal Housing + +On line 16885: + "Proposed Appointment + of the Federal Housing + Finance Agency as + +On line 16885: + of the Federal + Housing Finance Agency as + Conservator for + +On line 16887: + Association," + memorandum, September + p. Fannie Mae, 3Q + +On line 16889: + 3Q Form 10-Q, p. at + Fannie Mae, Form 10K, pp. By + December Freddie + +On line 16889: + p. at Fannie Mae, + Form 10K, pp. By December + Freddie reported + +On line 16889: + December Freddie + reported capital of + billion; billion in + +On line 16889: + of billion; billion + in loans to borrowers with + FICO scores below + +On line 16889: + billion in loans to + borrowers with FICO scores + below billion in + +On line 16889: + below billion in + high LTV; and billion in loans + for non-owner-occupied + +On line 16889: + high LTV; and billion + in loans for non-owner-occupied + homes. Federal Home + +On line 16889: + LTV; and billion in + loans for non-owner-occupied homes. + Federal Home Loan + +On line 16891: + ended December + February p. Richard Syron, + interview by FCIC, + +On line 16899: + by FCIC, September + Saksena, interview. "OFHEO, + SEC Reach Settlement + +On line 16899: + interview. "OFHEO, SEC + Reach Settlement with Fannie + Mae; Penalty Imposed," + +On line 16901: + Enterprise Oversight + press release, May "Freddie Mac + Voluntarily + +On line 16901: + Retained Portfolio," + Federal Home Loan Mortgage + Corporation press + +On line 16903: + Federal Home Loan + Mortgage Corporation press + release, August OFHEO, + +On line 16903: + press release, August + OFHEO, Report of the Special + Examination + +On line 16903: + OFHEO, Report of the + Special Examination + of Fannie Mae, May + +On line 16907: + James Lockhart, written + testimony for the FCIC, + Hearing on Subprime + +On line 16907: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 16907: + Government-Sponsored Enterprises + (GSEs), day session Office of + Federal Housing + +On line 16911: + Federal Housing + Enterprise Oversight, April p. + Ibid., p. Robert J. Levin, + +On line 16911: + Enterprise Oversight, + April p. Ibid., p. Robert J. Levin, + Board of Director + +On line 16911: + April p. Ibid., p. Robert + J. Levin, Board of Director + Presentation, PowerPoint + +On line 16911: + Robert J. Levin, Board of + Director Presentation, + PowerPoint presentation, + +On line 16913: + PowerPoint presentation, + January Minutes of the + February meeting + +On line 16913: + meeting of the Board + of Directors of Fannie + Mae (approved on April + +On line 16915: + Board of Directors + of Fannie Mae (approved on + April Stephen B. Ashley, + +On line 16915: + (approved on April Stephen + B. Ashley, Chairman Fannie + Mae, remarks prepared + +On line 16915: + B. Ashley, Chairman + Fannie Mae, remarks prepared + for delivery at + +On line 16915: + remarks prepared for + delivery at the Senior + Management Meeting, + +On line 16915: + delivery at the + Senior Management Meeting, + Cambridge, Maryland, June + +On line 16917: + Senior Management + Meeting, Cambridge, Maryland, June + Fannie Mae, "Notes to + +On line 16917: + Management Meeting, + Cambridge, Maryland, June Fannie + Mae, "Notes to Single + +On line 16917: + National Mortgage + Association, Form 10-K, + for the fiscal year + +On line 16917: + Association, + Form 10-K, for the fiscal year + ended December + +On line 16919: + fiscal year ended + December filed August FCIC + staff estimates based + +On line 16921: + data provided + by Fannie Mae. Federal + National Mortgage + +On line 16921: + National Mortgage + Association, "Form DEF + 14A," November p. + +On line 16923: + National Mortgage + Association, Form 10-K, + May p. OFHEO, Report + +On line 16923: + OFHEO, Report of the + Special Examination + for Fannie Mae, May + +On line 16925: + Fannie Mae, May p. + Federal Home Loan Mortgage + Corporation, Form + +On line 16925: + Federal Home Loan + Mortgage Corporation, Form + 10-K, for the fiscal + +On line 16925: + 10-K, for the fiscal + year ended December filed + June pp. Federal + +On line 16925: + for the fiscal year + ended December filed June + pp. Federal Home + +On line 16925: + Federal Home Loan + Mortgage Corporation, Form + 10-K, for the fiscal + +On line 16929: + for the fiscal year + ended December filed March + pp. Notes to Chapter + +On line 16933: + ended December + filed March pp. Notes to Chapter + Federal Home Loan + +On line 16933: + pp. Notes to Chapter + Federal Home Loan Mortgage + Corporation, Proxy + +On line 16933: + Federal Home Loan + Mortgage Corporation, Proxy + Statement and Notice + +On line 16933: + Federal Home Loan + Mortgage Corporation, Proxy + Statement and Notice + +On line 16933: + Statement and Notice + of Annual Meeting of + Stockholders (July + +On line 16937: + (July Summary + Compensation Table, p. + (for figures). Ibid. OFHEO, + +On line 16937: + p. (for figures). Ibid. + OFHEO, Report of the Special + Examination + +On line 16937: + OFHEO, Report of the + Special Examination + for Fannie Mae, May + +On line 16945: + Examination + for Fannie Mae, May pp. Ibid., + p Ibid. Ibid., pp. Ibid. + +On line 16947: + Fannie Mae, May pp. + Ibid., p Ibid. Ibid., pp. Ibid. Mark + Winer, interview + +On line 16947: + Mae, May pp. Ibid., p + Ibid. Ibid., pp. Ibid. Mark Winer, + interview by FCIC, + +On line 16949: + p Ibid. Ibid., pp. Ibid. + Mark Winer, interview by + FCIC, March Todd Hempstead, + +On line 16949: + pp. Ibid. Mark Winer, + interview by FCIC, March Todd + Hempstead, interview + +On line 16951: + interview by FCIC, + March Todd Hempstead, interview + by FCIC, March Daniel Mudd, + +On line 16951: + FCIC, March Todd Hempstead, + interview by FCIC, March Daniel + Mudd, interview by + +On line 16953: + interview by FCIC, + March Daniel Mudd, interview by + FCIC, March Dickerson + +On line 16953: + Daniel Mudd, interview + by FCIC, March Dickerson to + Lockhart, Fannie Mae + +On line 16955: + conservatorship + memo, September p. Minutes + of a Meeting of + +On line 16955: + memo, September p. + Minutes of a Meeting of + the Fannie Mae Board + +On line 16955: + p. Minutes of a + Meeting of the Fannie Mae + Board of Directors, + +On line 16957: + the Fannie Mae Board + of Directors, April Minutes + of a Meeting of + +On line 16957: + Fannie Mae Board of + Directors, April Minutes of + a Meeting of the + +On line 16957: + Board of Directors, + April Minutes of a Meeting + of the Fannie Mae + +On line 16957: + of Directors, April + Minutes of a Meeting of + the Fannie Mae Board + +On line 16957: + April Minutes of a + Meeting of the Fannie Mae + Board of Directors, + +On line 16959: + Fannie Mae Board of + Directors, May Federal + National Mortgage + +On line 16959: + National Mortgage + Association, Form 10-K, + for the fiscal year + +On line 16959: + Association, + Form 10-K, for the fiscal year + ended December + +On line 16961: + 10-K, for the fiscal + year ended December p. + FCIC staff estimate + +On line 16961: + for the fiscal year + ended December p. FCIC + staff estimate based + +On line 16963: + staff estimate based + on data provided by + Fannie Mae. "Deepen + +On line 16965: + Fannie Mae Strategic + Plan, Enrico Dallavecchia, email + to Daniel Mudd, "Budget + +On line 16965: + Enrico Dallavecchia, + email to Daniel Mudd, "Budget and + strategic investments," + +On line 16967: + Daniel Mudd, "Budget and + strategic investments," July + Enrico Dallavecchia, + +On line 16967: + strategic investments," + July Enrico Dallavecchia, + email to Michael Williams, "RE:," + +On line 16967: + investments," July + Enrico Dallavecchia, email to + Michael Williams, "RE:," July + +On line 16969: + July Enrico + Dallavecchia, email to Michael Williams, "RE:," + July Daniel Mudd, email + +On line 16969: + Michael Williams, "RE:," July + Daniel Mudd, email to Enrico + Dallavecchia, "RE: Budget + +On line 16969: + July Daniel Mudd, email + to Enrico Dallavecchia, "RE: + Budget and strategic + +On line 16971: + strategic investments," + July Enrico Dallavecchia, + interview by FCIC, + +On line 16973: + interview by FCIC, + March Freddie Mac, "Freddie Mac’s + Business Strategy, + +On line 16975: + Business Strategy, + Board of Directors Meeting," + March pp. Freddie Mac, + +On line 16975: + Strategy, Board of + Directors Meeting," March pp. + Freddie Mac, "Freddie + +On line 16975: + Board of Directors + Meeting," March pp. Freddie Mac, + "Freddie Mac’s Business + +On line 16977: + Business Strategy, + Board of Directors Meeting," + March pp. OFHEO, Report + +On line 16977: + March pp. OFHEO, Report + of Examination for + the Federal Home + +On line 16977: + pp. OFHEO, Report of + Examination for the + Federal Home Loan + +On line 16981: + Federal Home Loan + Mortgage Corporation, pp. + Federal Housing + +On line 16981: + "Mortgage Market Note + The Housing Goals of Fannie + Mae and Freddie Mac + +On line 16981: + Note The Housing Goals + of Fannie Mae and Freddie + Mac in the Context + +On line 16981: + The Housing Goals of + Fannie Mae and Freddie Mac + in the Context of + +On line 16983: + to Provide Trillion + in Mortgages for Affordable + Housing for Million + +On line 16983: + Trillion in Mortgages + for Affordable Housing for + Million Families," + +On line 16983: + Housing for Million + Families," Department of + Housing and Urban + +On line 16989: + Mudd, interview. Robert + Levin, interview by FCIC, March + "HUD Finalizes Rule + +On line 16989: + interview. Robert Levin, + interview by FCIC, March "HUD + Finalizes Rule on + +On line 16989: + Robert Levin, interview + by FCIC, March "HUD Finalizes + Rule on New Housing + +On line 16989: + Levin, interview by + FCIC, March "HUD Finalizes Rule + on New Housing Goals + +On line 16989: + interview by FCIC, + March "HUD Finalizes Rule on + New Housing Goals for + +On line 16989: + Finalizes Rule on + New Housing Goals for Fannie + Mae and Freddie Mac," + +On line 16989: + on New Housing Goals + for Fannie Mae and Freddie + Mac," Department of + +On line 16989: + for Fannie Mae and + Freddie Mac," Department of + Housing and Urban + +On line 16991: + release, November + Mudd, testimony before + the FCIC, Hearing on + +On line 16991: + Mudd, testimony + before the FCIC, Hearing on + Subprime Lending and + +On line 16991: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 16995: + Government-Sponsored Enterprises + (GSEs), day session: Fannie Mae, + April transcript, pp. See + +On line 16995: + session: Fannie Mae, + April transcript, pp. See FHFA, + "Annual Report + +On line 16995: + April transcript, pp. See + FHFA, "Annual Report + to Congress pp. The + +On line 16997: + for mortgage assets + outstanding MBS guaranteed. + Total assets MBS + +On line 17001: + Total assets MBS + are slightly greater. OFHEO, Report + to Congress," April Robert + +On line 17001: + MBS are slightly greater. + OFHEO, Report to Congress," April + Robert Levin, interview + +On line 17001: + are slightly greater. OFHEO, + Report to Congress," April Robert + Levin, interview by + +On line 17001: + Congress," April Robert Levin, + interview by FCIC, March Robert + Levin, testimony + +On line 17001: + Levin, testimony + before the FCIC, Hearing on + Subprime Lending and + +On line 17001: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 17003: + Government-Sponsored Enterprises + (GSEs), day session Fannie Mae, + April transcript, pp. Tom + +On line 17003: + Enterprises (GSEs), + day session Fannie Mae, April + transcript, pp. Tom Lund, + +On line 17003: + day session Fannie + Mae, April transcript, pp. Tom Lund, + interview by FCIC, + +On line 17005: + April transcript, pp. Tom + Lund, interview by FCIC, March + Dallavecchia, interview. + +On line 17007: + interview by FCIC, + March Dallavecchia, interview. Todd + Hempstead, interview + +On line 17009: + Hempstead, interview + by FCIC, March Kenneth Bacon, + interview by FCIC, + +On line 17015: + by FCIC, March Kenneth + Bacon, interview by FCIC, + March Notes to Chapter + +On line 17019: + Notes to Chapter Stephen + Ashley, interview by FCIC, + March Levin, interview. + +On line 17021: + Chapter Stephen Ashley, + interview by FCIC, March Levin, + interview. Mike Quinn, + +On line 17021: + Ashley, interview + by FCIC, March Levin, interview. + Mike Quinn, interview + +On line 17021: + interview by FCIC, + March Levin, interview. Mike Quinn, + interview by FCIC, + +On line 17023: + Levin, interview. Mike + Quinn, interview by FCIC, March + Ashley, interview. + +On line 17025: + Quinn, interview by + FCIC, March Ashley, interview. + Armando Falcon, + +On line 17025: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 17025: + Government-Sponsored Enterprises + (GSEs), day session Office of + Federal Housing + +On line 17027: + Oversight, April transcript, + pp. .written testimony, + p. Lockhart, written + +On line 17027: + FCIC, April p. Lockhart, + testimony before the + FCIC, April transcript, pp. + +On line 17031: + the FCIC, April transcript, + pp. James Lockhart, interview + by FCIC, March Edward + +On line 17031: + FCIC, April transcript, pp. + James Lockhart, interview by + FCIC, March Edward DeMarco, + +On line 17031: + by FCIC, March Edward + DeMarco, interview by FCIC, March + Maria Fernandez (with + +On line 17031: + DeMarco, interview by + FCIC, March Maria Fernandez (with + Alfred Pollard, Chris + +On line 17031: + Alfred Pollard, Chris + Dickerson, Jeffrey Spohn, and + Jamie Newell), interview + +On line 17033: + Dickerson, Jeffrey + Spohn, and Jamie Newell), interview + by FCIC, March Mike Price + +On line 17033: + Jeffrey Spohn, and Jamie + Newell), interview by FCIC, March + Mike Price (with Janice + +On line 17033: + Newell), interview by + FCIC, March Mike Price (with Janice + Kuhl, Paul Manchester, + +On line 17033: + FCIC, March Mike Price (with + Janice Kuhl, Paul Manchester, + Charlotte Reid, Alfred + +On line 17033: + Mike Price (with Janice + Kuhl, Paul Manchester, Charlotte + Reid, Alfred Pollard, + +On line 17033: + Price (with Janice Kuhl, + Paul Manchester, Charlotte Reid, + Alfred Pollard, and + +On line 17033: + Manchester, Charlotte + Reid, Alfred Pollard, and Kevin + Shee-han), interview by + +On line 17035: + interview by FCIC, + February Department of + Housing and Urban + +On line 17035: + the Federal Home + Loan Mortgage Corporation + (Freddie Mac) for the + +On line 17035: + and Amendments to HUD’s + Regulation of Fannie + Mae and Freddie Mac," + +On line 17037: + no. Nov. FHFA, "The + Housing Goals of Fannie Mae + and Freddie Mac in + +On line 17037: + "The Housing Goals of + Fannie Mae and Freddie Mac + in the Context of + +On line 17039: + in the Context of + the Mortgage Market." Daniel Mudd, + letter to Brian + +On line 17041: + to Brian Montgomery + re affordable housing goals, + December "Deepen + +On line 17043: + Montgomery, Federal + Housing Commissioner, to + Daniel Mudd, Fannie Mae, + +On line 17043: + Daniel Mudd, Fannie Mae, + typed letter, April Brian D. + Montgomery, Federal + +On line 17043: + Federal Housing + Commissioner, to Richard F. + Syron, Fannie Mae, + +On line 17045: + Commissioner, to + Richard F. Syron, Fannie Mae, + typed letter, April "Cost + +On line 17045: + to Richard F. Syron, + Fannie Mae, typed letter, April + "Cost of Freddie Mac’s + +On line 17045: + typed letter, April "Cost + of Freddie Mac’s Affordable + Housing Mission," PowerPoint + +On line 17045: + "Cost of Freddie Mac’s + Affordable Housing Mission," + PowerPoint presentation, + +On line 17049: + Affordable Housing + Mission," PowerPoint presentation, + June pp. Freddie’s net + +On line 17049: + presentation, June + pp. Freddie’s net income was + billion in billion + +On line 17049: + Freddie’s net income + was billion in billion in + billion in billion + +On line 17049: + income was billion + in billion in billion in + billion in net loss + +On line 17049: + billion in billion + in billion in billion in + net loss of billion + +On line 17049: + billion in billion + in billion in net loss of + billion in and net + +On line 17049: + in billion in net + loss of billion in and net + loss of billion in + +On line 17049: + net loss of billion + in and net loss of billion + in Federal Home + +On line 17049: + loss of billion in + and net loss of billion in + Federal Home Loan + +On line 17049: + loss of billion in + Federal Home Loan Mortgage + Corporation, Form + +On line 17049: + Federal Home Loan + Mortgage Corporation, Form + 10-K, for the fiscal + +On line 17051: + Data and Other + Operating Measures, p. + (for figures). "Cost and + +On line 17051: + p. (for figures). "Cost + and Benefits of Mission + Activities: Project + +On line 17051: + and Benefits of + Mission Activities: Project + Phineas," presentation, + +On line 17057: + January "Fannie + Mae’s Housing Goals," Audit Team + briefing, May "Fannie + +On line 17057: + "Fannie Mae’s Housing + Goals," Audit Team briefing, May + "Fannie Mae Board of + +On line 17057: + Housing Goals," Audit + Team briefing, May "Fannie Mae + Board of Directors + +On line 17059: + Management Report," + PowerPoint presentation, July + "Cost of Freddie Mac’s + +On line 17059: + PowerPoint presentation, + July "Cost of Freddie Mac’s + Affordable Housing + +On line 17059: + "Cost of Freddie Mac’s + Affordable Housing Mission," + PowerPoint presentation, + +On line 17070: + Affordable Housing + Mission," PowerPoint presentation, + June pp. Chapter Gary + +On line 17070: + PowerPoint presentation, + June pp. Chapter Gary Gorton, + interview by FCIC, + +On line 17072: + Chapter Gary Gorton, + interview by FCIC, May Lewis + Ranieri, interview by + +On line 17074: + interview by FCIC, + May Lewis Ranieri, interview by + FCIC, July Complaint, + +On line 17074: + Lewis Ranieri, interview + by FCIC, July Complaint, SEC + v. Goldman Sachs Co. + +On line 17074: + Ranieri, interview by + FCIC, July Complaint, SEC v. + Goldman Sachs Co. and + +On line 17074: + FCIC, July Complaint, + SEC v. Goldman Sachs Co. and + Fabrice Tourre (S.D.N.Y. + +On line 17076: + SEC v. Goldman Sachs + Co. and Fabrice Tourre (S.D.N.Y. + April Office of the + +On line 17076: + Sachs Co. and Fabrice + Tourre (S.D.N.Y. April Office of + the Comptroller of + +On line 17076: + Co. and Fabrice Tourre + (S.D.N.Y. April Office of the + Comptroller of the + +On line 17076: + (S.D.N.Y. April Office + of the Comptroller of the + Currency, Treasury; + +On line 17076: + Treasury; Office of + Thrift Supervision, Treasury; + Board of Governors + +On line 17076: + Thrift Supervision, + Treasury; Board of Governors + of the Federal + +On line 17076: + Board of Governors + of the Federal Reserve + System; Federal + +On line 17076: + Governors of the + Federal Reserve System; + Federal Deposit + +On line 17076: + of the Federal + Reserve System; Federal + Deposit Insurance + +On line 17076: + Federal Deposit + Insurance Corporation; + and Securities + +On line 17078: + (Notice of final + interagency statement), + January Wing Chau, + +On line 17078: + interagency + statement), January Wing Chau, + interview by FDIC, + +On line 17080: + interview by FDIC, + November FCIC, Survey of + CDO Managers, Schedule + +On line 17080: + by FDIC, November + FCIC, Survey of CDO Managers, + Schedule A and B + +On line 17080: + FCIC, Survey of CDO + Managers, Schedule A and B + (1st production served + +On line 17080: + CDO Managers, Schedule + A and B (1st production + served on managers, 2nd + +On line 17090: + to Chapter As two + market observers would later + write, "Starting in CDOs + +On line 17090: + two market observers + would later write, "Starting in + CDOs and CDO investors + +On line 17090: + observers would later + write, "Starting in CDOs and CDO + investors became the + +On line 17090: + write, "Starting in CDOs + and CDO investors became the + dominant class of + +On line 17090: + CDO investors became + the dominant class of agents + pricing credit risk + +On line 17090: + the dominant class + of agents pricing credit risk + on sub-prime mortgage + +On line 17090: + dominant class of + agents pricing credit risk on + sub-prime mortgage loans. + +On line 17090: + agents pricing credit + risk on sub-prime mortgage loans. + In the absence of + +On line 17090: + absence of restraints, + lenders started originating + unreasonably risky + +On line 17090: + unreasonably risky + loans in late and continued + to do so into + +On line 17090: + and continued to + do so into Mark Adelson + and David Jacob, "The + +On line 17090: + to do so into + Mark Adelson and David Jacob, + "The Sub-prime Problem: + +On line 17090: + into Mark Adelson + and David Jacob, "The Sub-prime + Problem: Causes and + +On line 17090: + and David Jacob, "The + Sub-prime Problem: Causes and + Lessons," January p. + +On line 17092: + and Lessons," January + p. Scott Simon, quoted in + Allison Pyburn, + +On line 17094: + p. Armand Pastine, + quoted in ibid. According + to the FCIC database, + +On line 17094: + Pastine, quoted in + ibid. According to the FCIC + database, PIMCO did + +On line 17094: + in ibid. According + to the FCIC database, PIMCO + did manage one more + +On line 17094: + ibid. According to + the FCIC database, PIMCO did + manage one more new + +On line 17094: + FCIC database, PIMCO + did manage one more new CDO, + Costa Bella CDO, + +On line 17094: + did manage one more + new CDO, Costa Bella CDO, + which was issued in + +On line 17096: + more new CDO, Costa + Bella CDO, which was issued + in December Source + +On line 17096: + Bella CDO, which was + issued in December Source + on downgrades: Bloomberg. Source + +On line 17096: + which was issued in + December Source on downgrades: + Bloomberg. Source on events on + +On line 17096: + December Source on + downgrades: Bloomberg. Source on events on + default: Moody’s Investors + +On line 17098: + Source on downgrades: Bloomberg. + Source on events on default: Moody’s + Investors Service, "Moody’s + +On line 17098: + downgrades: Bloomberg. Source on + events on default: Moody’s Investors + Service, "Moody’s downgrades + +On line 17098: + Bloomberg. Source on events on + default: Moody’s Investors Service, + "Moody’s downgrades ratings + +On line 17098: + default: Moody’s Investors + Service, "Moody’s downgrades ratings + of Notes issued by + +On line 17098: + Moody’s Investors Service, + "Moody’s downgrades ratings of Notes + issued by Maxim + +On line 17098: + Service, "Moody’s downgrades + ratings of Notes issued by + Maxim High Grade CDO + +On line 17098: + "Moody’s downgrades ratings + of Notes issued by Maxim + High Grade CDO I, Ltd.," + +On line 17098: + downgrades ratings of + Notes issued by Maxim High + Grade CDO I, Ltd.," April + +On line 17100: + of Notes issued by + Maxim High Grade CDO I, Ltd.," + April and "Moody’s downgrades + +On line 17100: + issued by Maxim + High Grade CDO I, Ltd.," April and + "Moody’s downgrades ratings + +On line 17100: + High Grade CDO I, Ltd.," + April and "Moody’s downgrades ratings + of Notes issued by + +On line 17100: + CDO I, Ltd.," April and + "Moody’s downgrades ratings of Notes + issued by Maxim + +On line 17100: + April and "Moody’s downgrades + ratings of Notes issued by + Maxim High Grade CDO + +On line 17100: + "Moody’s downgrades ratings + of Notes issued by Maxim + High Grade CDO II, Ltd.," + +On line 17100: + downgrades ratings of + Notes issued by Maxim High + Grade CDO II, Ltd.," April + +On line 17102: + of Notes issued by + Maxim High Grade CDO II, Ltd.," + April ACA Capital, + +On line 17102: + issued by Maxim + High Grade CDO II, Ltd.," April ACA + Capital, 10-K, p. + +On line 17104: + High Grade CDO II, Ltd.," + April ACA Capital, 10-K, p. + "ISDA Publishes + +On line 17104: + CDO II, Ltd.," April ACA + Capital, 10-K, p. "ISDA + Publishes Template + +On line 17104: + April ACA Capital, + 10-K, p. "ISDA Publishes + Template for Credit + +On line 17104: + Capital, 10-K, p. + "ISDA Publishes Template + for Credit Default + +On line 17104: + Publishes Template + for Credit Default Swaps on + Asset-Backed Securities + +On line 17104: + for Credit Default + Swaps on Asset-Backed Securities + with Pay As You Go + +On line 17104: + Default Swaps on Asset-Backed + Securities with Pay As + You Go Settlement," + +On line 17104: + Securities with + Pay As You Go Settlement," + International + +On line 17106: + Under the terms of + the pay-as-you-go swap, if the + referenced mortgage-backed + +On line 17106: + the pay-as-you-go swap, + if the referenced mortgage-backed + security does + +On line 17106: + if the referenced + mortgage-backed security does + not receive the full + +On line 17106: + principal payments, + the pay-as-you-go protection + seller is required + +On line 17106: + seller is required + to pay the buyer the amount + of the shortfall. For + +On line 17106: + of the shortfall. For + long investors—the protection + provider under the swap—the + +On line 17106: + For long investors—the + protection provider under the + swap—the advantage was + +On line 17106: + provider under the swap—the + advantage was the leverage + embedded in the + +On line 17106: + the swap—the advantage + was the leverage embedded + in the trade: they did + +On line 17106: + swap—the advantage was + the leverage embedded in + the trade: they did not + +On line 17106: + advantage was the + leverage embedded in the + trade: they did not have + +On line 17106: + leverage embedded + in the trade: they did not have + to come up with the + +On line 17106: + embedded in the + trade: they did not have to come + up with the cash up + +On line 17106: + in the trade: they did + not have to come up with the + cash up front for the + +On line 17106: + they did not have to + come up with the cash up front + for the principal + +On line 17106: + did not have to come + up with the cash up front for + the principal amount + +On line 17106: + not have to come up + with the cash up front for the + principal amount of + +On line 17106: + come up with the cash + up front for the principal + amount of the bond; they + +On line 17106: + with the cash up front + for the principal amount of + the bond; they simply + +On line 17106: + the cash up front for + the principal amount of the + bond; they simply agreed + +On line 17106: + cash up front for the + principal amount of the bond; + they simply agreed to + +On line 17106: + principal amount of + the bond; they simply agreed to + receive quarterly + +On line 17106: + the bond; they simply + agreed to receive quarterly + swap fees in return + +On line 17106: + bond; they simply agreed + to receive quarterly swap + fees in return for + +On line 17106: + quarterly swap fees + in return for accepting + the risk of loss if + +On line 17110: + a shortfall. Laura + Schwartz, interview by FCIC, May + Laurie S. Goodman, + +On line 17110: + Schwartz, interview by + FCIC, May Laurie S. Goodman, + Shumin Li, Douglas J. + +On line 17110: + by FCIC, May Laurie + S. Goodman, Shumin Li, Douglas + J. Lucas, Thomas A. + +On line 17110: + Laurie S. Goodman, + Shumin Li, Douglas J. Lucas, + Thomas A. Zimmerman, + +On line 17110: + S. Goodman, Shumin Li, + Douglas J. Lucas, Thomas A. + Zimmerman, and Frank + +On line 17112: + Derivatives (Frank + J. Fabozzi Series) (Hoboken, NJ: + John Wiley, p. Greg + +On line 17112: + Series) (Hoboken, NJ: + John Wiley, p. Greg Lippmann, + interview by FCIC, + +On line 17114: + interview by FCIC, + May FCIC staff estimates based + on analysis of + +On line 17116: + FCIC staff estimates + based on analysis of Moody’s + CDO EMS database. FCIC + +On line 17116: + staff estimates based + on analysis of Moody’s CDO + EMS database. FCIC Hedge + +On line 17116: + estimates based on + analysis of Moody’s CDO EMS + database. FCIC Hedge Fund + +On line 17116: + based on analysis + of Moody’s CDO EMS database. FCIC + Hedge Fund Survey. From + +On line 17116: + analysis of Moody’s + CDO EMS database. FCIC Hedge Fund + Survey. From July + +On line 17116: + FCIC Hedge Fund Survey. + From July through December + several hedge funds + +On line 17116: + in mortgage-related + CDO equity tranches and + almost billion of + +On line 17116: + tranches and almost + billion of short positions + in mortgage-related + +On line 17116: + mortgage-related CDO + equity tranche issuance. Please + see FCIC website for + +On line 17116: + Please see FCIC website + for more information about + the hedge fund survey. + +On line 17116: + see FCIC website for + more information about the + hedge fund survey. Note: + +On line 17116: + FCIC website for more + information about the hedge + fund survey. Note: the + +On line 17116: + information about + the hedge fund survey. Note: the + FCIC did not survey + +On line 17116: + the hedge fund survey. + Note: the FCIC did not survey + hedge funds that fully + +On line 17116: + Note: the FCIC did not + survey hedge funds that fully + liquidated or + +On line 17116: + not survey hedge funds + that fully liquidated + or closed. These funds may + +On line 17116: + survey hedge funds that + fully liquidated or + closed. These funds may have + +On line 17116: + hedge funds that fully + liquidated or closed. These + funds may have purchased + +On line 17116: + or closed. These funds may + have purchased substantial "long + only" positions + +On line 17120: + FCIC Hedge Fund Survey. + See FCIC website for details. + Rabobank’s counsel, letter + +On line 17120: + Hedge Fund Survey. See + FCIC website for details. Rabobank’s + counsel, letter to + +On line 17120: + See FCIC website for + details. Rabobank’s counsel, letter + to Judge Fried of the + +On line 17120: + website for details. + Rabobank’s counsel, letter to Judge + Fried of the Supreme Court + +On line 17120: + details. Rabobank’s counsel, + letter to Judge Fried of the + Supreme Court of NY, May + +On line 17122: + Rabobank’s counsel, letter + to Judge Fried of the Supreme Court + of NY, May Norma + +On line 17122: + counsel, letter to + Judge Fried of the Supreme Court of + NY, May Norma Flow + +On line 17122: + letter to Judge Fried + of the Supreme Court of NY, May + Norma Flow of Funds, + +On line 17122: + Fried of the Supreme Court + of NY, May Norma Flow of + Funds, information + +On line 17124: + Norma Flow of Funds, + information provided + by Merrill Lynch. Steven + +On line 17124: + Funds, information + provided by Merrill Lynch. + Steven Ross, email to FCIC, + +On line 17126: + by Merrill Lynch. Steven + Ross, email to FCIC, December + See letter from Rabobank’s + +On line 17126: + Steven Ross, email to FCIC, + December See letter from + Rabobank’s counsel, letter + +On line 17126: + to FCIC, December + See letter from Rabobank’s counsel, + letter to Judge Fried, + +On line 17126: + See letter from Rabobank’s + counsel, letter to Judge Fried, + May the letter was + +On line 17126: + Rabobank’s counsel, letter + to Judge Fried, May the letter + was never filed with + +On line 17126: + counsel, letter to + Judge Fried, May the letter was + never filed with the + +On line 17126: + to Judge Fried, May the + letter was never filed with + the court because the + +On line 17126: + Fried, May the letter + was never filed with the court + because the case was + +On line 17128: + was never filed with + the court because the case was + settled. Document + +On line 17132: + Lynch. Information + provided by Merrill Lynch, + December Complaint, + +On line 17134: + Goldman Sachs Co. and + Fabrice Tourre. Ira Wagner, + interview by FCIC, + +On line 17136: + and Fabrice Tourre. Ira + Wagner, interview by + FCIC, April Alan Roseman, + +On line 17136: + Tourre. Ira Wagner, + interview by FCIC, April Alan + Roseman, interview + +On line 17142: + Schwartz, interview. John + Paulson, interview by FCIC, + October "Goldman + +On line 17142: + interview by FCIC, + October "Goldman Sachs to + Pay Record Million to + +On line 17142: + "Goldman Sachs to Pay + Record Million to Settle SEC + Charges Related to + +On line 17142: + Pay Record Million to + Settle SEC Charges Related + to Subprime Mortgage + +On line 17142: + SEC Charges Related + to Subprime Mortgage CDO," SEC + press release, July + +On line 17144: + Charges Related to + Subprime Mortgage CDO," SEC press + release, July Jamie + +On line 17144: + Subprime Mortgage CDO," + SEC press release, July Jamie + Mai and Ben Hockett, + +On line 17146: + July Jamie Mai and + Ben Hockett, interview by + FCIC, April Sihan Shu, + +On line 17146: + interview by FCIC, + April Sihan Shu, interview + by FCIC, September + +On line 17148: + Shu, interview by + FCIC, September Steven Eisman, + interview by FCIC, + +On line 17150: + FCIC, September Steven + Eisman, interview by FCIC, + April James Grant, "Inside + +On line 17150: + Eisman, interview + by FCIC, April James Grant, "Inside + the Mortgage Machine," + +On line 17150: + Mortgage Machine," in + Mr. Market Miscalculates: + The Bubble Years and + +On line 17150: + Miscalculates: The + Bubble Years and Beyond (Mount + Jackson, VA: Axios, + +On line 17160: + Eisman, interview. + Notes to Chapter Michael Burry, + interview by FCIC, + +On line 17166: + Paulson, interview. + Burry, interview. FCIC Hedge + Fund Survey. See FCIC + +On line 17166: + Burry, interview. + FCIC Hedge Fund Survey. See FCIC + website for details. + +On line 17168: + Hedge Fund Survey. See + FCIC website for details. John + Geanakoplos, written + +On line 17168: + Geanakoplos, written + testimony for the FCIC, + Forum to Explore + +On line 17168: + testimony for + the FCIC, Forum to Explore + the Causes of the + +On line 17168: + the FCIC, Forum to + Explore the Causes of the + Financial Crisis, + +On line 17168: + Financial Crisis, + day session Risk Taking and + Leverage, February + +On line 17170: + Taking and Leverage, + February p. OCC, "Subprime + CDO Valuation + +On line 17170: + p. OCC, "Subprime CDO + Valuation and Oversight + Review—Conclusion Memorandum," + +On line 17170: + Valuation and + Oversight Review—Conclusion Memorandum," + memorandum from + +On line 17170: + memorandum from + Michael Sullivan, RAD, and Ron + Frake, NBE, to John Lyons, + +On line 17170: + Sullivan, RAD, and + Ron Frake, NBE, to John Lyons, Examiner-in-Charge, + Citibank, NA, January + +On line 17170: + Frake, NBE, to John Lyons, + Examiner-in-Charge, Citibank, NA, January p. + Paul, Weiss, Citigroup’s + +On line 17170: + to John Lyons, Examiner-in-Charge, Citibank, + NA, January p. Paul, Weiss, + Citigroup’s counsel, + +On line 17170: + NA, January p. + Paul, Weiss, Citigroup’s counsel, + letter to FCIC, June + +On line 17170: + Paul, Weiss, Citigroup’s + counsel, letter to FCIC, June + "Responses of Nestor + +On line 17172: + letter to FCIC, June + "Responses of Nestor Dominguez." Richard + Bookstaber, interview + +On line 17174: + "Responses of Nestor + Dominguez." Richard Bookstaber, interview + by FCIC, May "RMBS and + +On line 17174: + Bookstaber, interview + by FCIC, May "RMBS and Citi-RMBS as + a Percentage of + +On line 17174: + a Percentage of + Citi-CDO Portfolio Notionals," + produced by Citi for + +On line 17176: + by Citi for the FCIC. + Federal Reserve Bank of + New York, Federal + +On line 17176: + Federal Reserve + Bank of New York, Federal + Reserve Board, Office + +On line 17176: + New York, Federal + Reserve Board, Office of the + Comptroller of the + +On line 17178: + with Firms," November + p. FCIC staff estimates, based + on analysis of + +On line 17178: + Firms," November p. + FCIC staff estimates, based on + analysis of Moody’s + +On line 17180: + FCIC staff estimates, + based on analysis of Moody’s + CDO EMS database. Paul, + +On line 17180: + staff estimates, based + on analysis of Moody’s CDO + EMS database. Paul, Weiss, + +On line 17180: + on analysis of + Moody’s CDO EMS database. Paul, Weiss, + Citigroup’s counsel, + +On line 17180: + Moody’s CDO EMS database. + Paul, Weiss, Citigroup’s counsel, + letter to FCIC, March + +On line 17180: + EMS database. Paul, Weiss, + Citigroup’s counsel, letter + to FCIC, March in re + +On line 17180: + FCIC, March in re the + FCIC’s second supplemental + request, "Response to + +On line 17180: + request, "Response to + Interrogatory no. Paul, + Weiss, letter to FCIC, + +On line 17180: + Weiss, letter to FCIC, + March updated response to + interrogatory + +On line 17182: + interrogatory + no. p. Nestor Dominguez, interview + by FCIC, March Paul, Weiss, + +On line 17186: + interview by FCIC, + March Paul, Weiss, letter of March + pp. Board Analyst + +On line 17186: + Weiss, letter of March + pp. Board Analyst Profile + for Citigroup Inc., + +On line 17186: + letter of March pp. + Board Analyst Profile for + Citigroup Inc., April + +On line 17188: + pp. Board Analyst + Profile for Citigroup Inc., + April SEC staff (Sam Forstein, + +On line 17188: + Analyst Profile + for Citigroup Inc., April SEC + staff (Sam Forstein, Tim McGarey, + +On line 17188: + for Citigroup Inc., + April SEC staff (Sam Forstein, Tim McGarey, + Mary Ann Gadziala, Kim Mavis, + +On line 17188: + Citigroup Inc., April + SEC staff (Sam Forstein, Tim McGarey, Mary + Ann Gadziala, Kim Mavis, Bob + +On line 17188: + Inc., April SEC staff (Sam + Forstein, Tim McGarey, Mary Ann Gadziala, Kim + Mavis, Bob Sollazo, + +On line 17188: + April SEC staff (Sam Forstein, + Tim McGarey, Mary Ann Gadziala, Kim Mavis, + Bob Sollazo, Suzanne + +On line 17188: + SEC staff (Sam Forstein, Tim + McGarey, Mary Ann Gadziala, Kim Mavis, Bob + Sollazo, Suzanne McGovern, + +On line 17188: + Tim McGarey, Mary Ann Gadziala, + Kim Mavis, Bob Sollazo, Suzanne + McGovern, and Chris Easter), + +On line 17188: + Ann Gadziala, Kim Mavis, Bob + Sollazo, Suzanne McGovern, and Chris + Easter), interview + +On line 17188: + Sollazo, Suzanne McGovern, + and Chris Easter), interview + by FCIC, February + +On line 17190: + Comptroller of the + Currency, memorandum, + Examination + +On line 17192: + (CRM), January p. + Ronald Frake, Comptroller of the + Currency, letter + +On line 17192: + Frake, Comptroller of + the Currency, letter to + Geoffrey Coley, + +On line 17196: + York Operations + Review, May p. Federal + Reserve Bank of New + +On line 17196: + May p. Federal + Reserve Bank of New York Bank + Supervision Group, + +On line 17196: + Bank Supervision + Group, "Operations Review + Report," December + +On line 17198: + Group, "Operations + Review Report," December + Federal Reserve + +On line 17198: + Report," December + Federal Reserve Bank of + New York, "Summary + +On line 17200: + Findings," Citigroup + Inc., January 2004–December + April Citigroup Inc., + +On line 17204: + a reduction that + had been implemented when + the issues began + +On line 17204: + reduction that had + been implemented when the + issues began and + +On line 17206: + and then added a raise. + Citigroup, Proxy Statement, p. + Comptroller of the + +On line 17206: + a raise. Citigroup, + Proxy Statement, p. Comptroller + of the Currency, + +On line 17206: + p. Comptroller of + the Currency, letter to + Citigroup CEO Vikram + +On line 17208: + Federal Reserve + Bank of New York, letter to + Vikram Pandit and the + +On line 17208: + Reserve Bank of New + York, letter to Vikram Pandit + and the Board of the + +On line 17208: + of New York, letter + to Vikram Pandit and the Board + of the Directors + +On line 17208: + New York, letter to + Vikram Pandit and the Board of + the Directors of + +On line 17208: + to Vikram Pandit and + the Board of the Directors + of Citigroup, April + +On line 17208: + Vikram Pandit and the + Board of the Directors of + Citigroup, April pp. + +On line 17210: + and the Board of the + Directors of Citigroup, + April pp. Timothy + +On line 17210: + FCIC, Hearing on the + Shadow Banking System, day + session Perspective + +On line 17210: + System, day session + Perspective on the Shadow + Banking System, May + +On line 17212: + Perspective on the + Shadow Banking System, May + transcript, p. Gene Park, + +On line 17212: + the Shadow Banking + System, May transcript, p. Gene + Park, interview by + +On line 17214: + System, May transcript, + p. Gene Park, interview by + FCIC, May Andrew Forster, + +On line 17214: + May transcript, p. Gene + Park, interview by FCIC, May + Andrew Forster, email to + +On line 17214: + Gene Park, interview + by FCIC, May Andrew Forster, email + to Gary Gorton, Alan + +On line 17214: + Park, interview by + FCIC, May Andrew Forster, email to + Gary Gorton, Alan Frost, + +On line 17214: + interview by FCIC, + May Andrew Forster, email to Gary + Gorton, Alan Frost, et + +On line 17214: + by FCIC, May Andrew + Forster, email to Gary Gorton, Alan + Frost, et al., July + +On line 17216: + FCIC, May Andrew Forster, + email to Gary Gorton, Alan Frost, + et al., July Park, + +On line 17218: + email to Gary Gorton, + Alan Frost, et al., July Park, + interview. Gorton, + +On line 17218: + Gorton, Alan Frost, et + al., July Park, interview. + Gorton, interview. + +On line 17222: + interview. Gorton, + interview. Park, interview. + Gene Park, email to Joseph + +On line 17232: + Park, interview. Notes + to Chapter Data supplied + by AIG. The CDO—RFC + +On line 17232: + interview. Notes to + Chapter Data supplied by + AIG. The CDO—RFC CDO + +On line 17232: + to Chapter Data + supplied by AIG. The CDO—RFC + CDO III Ltd.—was + +On line 17232: + supplied by AIG. The + CDO—RFC CDO III Ltd.—was + subprime and RMBS Home + +On line 17232: + AIG. The CDO—RFC CDO + III Ltd.—was subprime and + RMBS Home Equity, + +On line 17232: + according to the + AIG credit committee. A + review by FCIC staff + +On line 17232: + to the AIG credit + committee. A review by + FCIC staff showed that the + +On line 17232: + credit committee. + A review by FCIC staff showed + that the remaining + +On line 17232: + A review by FCIC + staff showed that the remaining + designated as + +On line 17238: + (Financial Figures + are as of June August p. + Park, interview. Joseph + +On line 17238: + of June August p. + Park, interview. Joseph Cassano, + interview by FCIC, + +On line 17240: + Park, interview. Joseph + Cassano, interview by FCIC, + June Park, interview. + +On line 17242: + Cassano, interview + by FCIC, June Park, interview. + Dow Kim, interview + +On line 17242: + interview by FCIC, + June Park, interview. Dow Kim, + interview by FCIC, + +On line 17244: + June Park, interview. + Dow Kim, interview by FCIC, + September Stanley + +On line 17244: + Dow Kim, interview + by FCIC, September Stanley + O’Neal, interview by + +On line 17244: + Kim, interview by + FCIC, September Stanley O’Neal, + interview by FCIC, + +On line 17246: + by FCIC, September + Stanley O’Neal, interview by + FCIC, September Kim, + +On line 17248: + interview by FCIC, + September Kim, interview. + FCIC staff estimates + +On line 17250: + staff estimates based + on analysis of Moody’s CDO + EMS database. Complaint, + +On line 17250: + on analysis of + Moody’s CDO EMS database. Complaint, + Coöperatieve Centrale + +On line 17250: + Moody’s CDO EMS database. + Complaint, Coöperatieve Centrale + Raiffeisen=Boerenleenbank v. Merrill Lynch, + +On line 17252: + EMS database. Complaint, + Coöperatieve Centrale Raiffeisen=Boerenleenbank v. + Merrill Lynch, No. (N.Y.S. + +On line 17252: + Complaint, Coöperatieve + Centrale Raiffeisen=Boerenleenbank v. Merrill Lynch, + No. (N.Y.S. June paragraph + +On line 17256: + Merrill Lynch, No. (N.Y.S. + June paragraph Kim, interview. + FCIC analysis based + +On line 17256: + (N.Y.S. June paragraph Kim, + interview. FCIC analysis + based on Moody’s CDO EMS + +On line 17258: + based on Moody’s CDO EMS + database. Presentation to + Merrill Lynch and Co. + +On line 17258: + Moody’s CDO EMS database. + Presentation to Merrill + Lynch and Co. Board of + +On line 17258: + Presentation to + Merrill Lynch and Co. Board of + Directors, "Leveraged + +On line 17262: + "Leveraged Finance and + Mortgage/CDO Review," October p. + Chau, interview. FCIC + +On line 17262: + Review," October + p. Chau, interview. FCIC staff + analysis of Moody’s + +On line 17264: + p. Chau, interview. + FCIC staff analysis of Moody’s + CDO EMS database. FCIC + +On line 17264: + Chau, interview. FCIC + staff analysis of Moody’s CDO + EMS database. FCIC staff + +On line 17264: + FCIC staff analysis + of Moody’s CDO EMS database. FCIC + staff estimates based + +On line 17264: + staff analysis of + Moody’s CDO EMS database. FCIC staff + estimates based on + +On line 17264: + Moody’s CDO EMS database. + FCIC staff estimates based on + Moody’s CDO EMS database. + +On line 17264: + EMS database. FCIC staff + estimates based on Moody’s CDO + EMS database. Data + +On line 17264: + FCIC staff estimates + based on Moody’s CDO EMS database. + Data supplied by + +On line 17264: + estimates based on + Moody’s CDO EMS database. Data + supplied by Merrill + +On line 17266: + information not + provided for Robeco High + Grade CDO I. FCIC staff + +On line 17266: + not provided for + Robeco High Grade CDO I. FCIC + staff analysis of + +On line 17266: + Robeco High Grade CDO + I. FCIC staff analysis of + Moody’s CDO EMS database. + +On line 17268: + High Grade CDO I. FCIC + staff analysis of Moody’s CDO + EMS database. Data + +On line 17268: + staff analysis of + Moody’s CDO EMS database. Data + supplied by Merrill + +On line 17270: + EMS database. Data + supplied by Merrill Lynch. FCIC + staff analysis of + +On line 17270: + supplied by Merrill + Lynch. FCIC staff analysis of + Moody’s CDO EMS database. + +On line 17270: + Merrill Lynch. FCIC staff + analysis of Moody’s CDO EMS + database. The total + +On line 17270: + FCIC staff analysis + of Moody’s CDO EMS database. The + total value of + +On line 17270: + Moody’s CDO EMS database. + The total value of Baa + tranches issued by + +On line 17270: + total value of + Baa tranches issued by CDOs + in the FCIC database + +On line 17270: + Baa tranches issued + by CDOs in the FCIC database + was million in and + +On line 17270: + issued by CDOs in + the FCIC database was million + in and billion in + +On line 17270: + the FCIC database was + million in and billion in + Aa tranches, billion + +On line 17272: + in and billion in + A tranches, million in and + billion in FCIC staff + +On line 17272: + A tranches, million + in and billion in FCIC staff + telephone discussion + +On line 17272: + and billion in FCIC + staff telephone discussion with + SEC staff, September + +On line 17274: + billion in FCIC staff + telephone discussion with SEC + staff, September FCIC + +On line 17274: + telephone discussion + with SEC staff, September FCIC + staff analysis of + +On line 17276: + SEC staff, September + FCIC staff analysis of Moody’s + CDO EMS database. Chau, + +On line 17276: + CDO EMS database. Chau, + interview; for number of + the CDOs he managed, + +On line 17276: + he managed, FCIC staff + analysis of Moody’s Enhanced + CDO Monitoring + +On line 17280: + December produced + by AIG. Presentation to + the Merrill Lynch Board, + +On line 17280: + Mortgage/CDO Review," p. Jeff + Kronthal, former head of + Merrill Lynch’s Global + +On line 17280: + Lynch’s Global Credit, + Real Estate and Structured + Products, interview + +On line 17280: + Real Estate and + Structured Products, interview + by FCIC, September + +On line 17282: + Estate and Structured + Products, interview by FCIC, + September Al Yoon, + +On line 17282: + Products, interview + by FCIC, September Al Yoon, + "Merrill’s Own Subprime + +On line 17282: + interview by FCIC, + September Al Yoon, "Merrill’s + Own Subprime Warnings + +On line 17282: + by FCIC, September + Al Yoon, "Merrill’s Own Subprime + Warnings Unheeded," + +On line 17284: + Al Yoon, "Merrill’s Own + Subprime Warnings Unheeded," + Reuters, October SEC, + +On line 17284: + Own Subprime Warnings + Unheeded," Reuters, October + SEC, "Risk Management + +On line 17284: + Reuters, October SEC, + "Risk Management Reviews of + Consolidated + +On line 17288: + memo to Erik Sirri + and others, February p. + Ibid., p. Yoon, "Merrill’s + +On line 17288: + to Erik Sirri and + others, February p. Ibid., + p. Yoon, "Merrill’s Own + +On line 17288: + Sirri and others, + February p. Ibid., p. Yoon, + "Merrill’s Own Subprime + +On line 17288: + February p. Ibid., + p. Yoon, "Merrill’s Own Subprime + Warnings Unheeded." + +On line 17290: + Own Subprime Warnings + Unheeded." Kim, interview. + Senate Permanent + +On line 17290: + Subcommittee on + Investigations, Fishtail, + Bacchus, Sundance, and + +On line 17290: + Investigations, + Fishtail, Bacchus, Sundance, and + Slapshot: Four Enron + +On line 17290: + by U.S. Financial + Institutions, 107th Cong., 2nd + sess., January S-Prt + +On line 17292: + Practices" (Notice of + final interagency + statement), January + +On line 17292: + (Notice of final + interagency statement), + January (see n. + +On line 17294: + interagency + statement), January (see n. + above). Office of the + +On line 17294: + statement), January + (see n. above). Office of the + Comptroller of the + +On line 17294: + (see n. above). Office + of the Comptroller of the + Currency, Treasury; + +On line 17294: + Treasury; Office of + Thrift Supervision, Treasury; + Board of Governors + +On line 17294: + Thrift Supervision, + Treasury; Board of Governors + of the Federal + +On line 17294: + Board of Governors + of the Federal Reserve + System; Federal + +On line 17294: + Governors of the + Federal Reserve System; + Federal Deposit + +On line 17294: + of the Federal + Reserve System; Federal + Deposit Insurance + +On line 17294: + Federal Deposit + Insurance Corporation; + and Securities + +On line 17304: + statement with request + for public comments),May Ibid., pp. Notes + to Chapter John C. + +On line 17304: + for public comments),May Ibid., + pp. Notes to Chapter John C. + Dugan, Comptroller of + +On line 17304: + public comments),May Ibid., pp. + Notes to Chapter John C. Dugan, + Comptroller of the + +On line 17304: + Notes to Chapter John + C. Dugan, Comptroller of the + Currency, written + +On line 17304: + C. Dugan, Comptroller + of the Currency, written + testimony for + +On line 17304: + of the Currency, + written testimony for + the FCIC, Hearing on + +On line 17304: + Currency, written + testimony for the FCIC, + Hearing on Subprime + +On line 17304: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 17304: + Government-Sponsored Enterprises + (GSEs), day session Office of + the Comptroller of + +On line 17304: + Enterprises (GSEs), + day session Office of the + Comptroller of the + +On line 17306: + Practices" (Notice of + final interagency + statement), January + +On line 17308: + (Notice of final + interagency statement), + January p. Basel + +On line 17308: + p. Basel Committee + on Banking Supervision: + Joint Forum, "Credit + +On line 17308: + Basel Committee on + Banking Supervision: Joint + Forum, "Credit Risk + +On line 17308: + "Credit Risk Transfer," + Bank for International + Settlements, March pp. + +On line 17316: + pp. SEC, Office of + Compliance Inspections and + Examinations, + +On line 17318: + the FCIC, Hearing on + the Credibility of + Credit Ratings, the + +On line 17318: + Credit Ratings, the + Investment Decisions Made + Based on Those Ratings, + +On line 17318: + Those Ratings, and the + Financial Crisis, session + Credit Ratings and + +On line 17320: + Credit Ratings and + the Financial Crisis, June + transcript, p. Warren + +On line 17320: + interview by FCIC, + May Buffett, testimony + before the FCIC, June + +On line 17320: + by FCIC, May Buffett, + testimony before the + FCIC, June transcript, p. + +On line 17322: + the FCIC, June transcript, + p. Eric Kolchinsky, written + testimony for + +On line 17322: + p. Eric Kolchinsky, + written testimony for + the FCIC, Hearing on + +On line 17322: + for the FCIC, Hearing + on the Credibility + of Credit Ratings, + +On line 17322: + the FCIC, Hearing on + the Credibility of + Credit Ratings, the + +On line 17322: + Credit Ratings, the + Investment Decisions Made + Based on Those Ratings, + +On line 17322: + Based on Those Ratings, + and the Financial Crisis, + session The Ratings + +On line 17322: + Those Ratings, and the + Financial Crisis, session + The Ratings Process, June + +On line 17324: + and the Financial + Crisis, session The Ratings + Process, June p. Brian + +On line 17324: + Financial Crisis, + session The Ratings Process, June + p. Brian Clarkson, + +On line 17324: + Crisis, session The + Ratings Process, June p. Brian + Clarkson, interview + +On line 17324: + session The Ratings + Process, June p. Brian Clarkson, + interview by FCIC, + +On line 17326: + Ratings Process, June p. + Brian Clarkson, interview + by FCIC, May Gary Witt, + +On line 17326: + p. Brian Clarkson, + interview by FCIC, May Gary + Witt, interview by + +On line 17326: + interview by FCIC, + May Gary Witt, interview by + FCIC, April John Rutherford + +On line 17326: + Gary Witt, interview + by FCIC, April John Rutherford was + the president and + +On line 17326: + Witt, interview by + FCIC, April John Rutherford was the + president and CEO + +On line 17326: + April John Rutherford was + the president and CEO of + Moody’s Corporation + +On line 17326: + John Rutherford was the + president and CEO of Moody’s + Corporation from + +On line 17326: + the president and + CEO of Moody’s Corporation + from the time of its + +On line 17326: + president and CEO + of Moody’s Corporation from + the time of its spin-off + +On line 17326: + Corporation from + the time of its spin-off from Dun + Bradstreet in until + +On line 17326: + the time of its spin-off + from Dun Bradstreet in until + he retired from the + +On line 17326: + time of its spin-off from + Dun Bradstreet in until he + retired from the firm + +On line 17328: + spin-off from Dun Bradstreet + in until he retired from + the firm in Jerome Fons, + +On line 17328: + Bradstreet in until + he retired from the firm in + Jerome Fons, interview + +On line 17330: + he retired from the + firm in Jerome Fons, interview + by FCIC, April Raymond + +On line 17330: + retired from the firm + in Jerome Fons, interview by + FCIC, April Raymond McDaniel, + +On line 17332: + interview by FCIC, + April Raymond McDaniel, interview + by FCIC, May Clarkson, + +On line 17332: + by FCIC, April Raymond + McDaniel, interview by FCIC, May + Clarkson, interview. + +On line 17336: + McDaniel, interview by + FCIC, May Clarkson, interview. + Ibid. McDaniel, interview. + +On line 17338: + Clarkson, interview. + Ibid. McDaniel, interview. Raymond + McDaniel, testimony + +On line 17338: + interview. Raymond + McDaniel, testimony before + the FCIC, Hearing on + +On line 17338: + the FCIC, Hearing on + the Credibility of + Credit Ratings, the + +On line 17338: + Credit Ratings, the + Investment Decisions Made + Based on Those Ratings, + +On line 17338: + Those Ratings, and the + Financial Crisis, session + Credit Ratings and + +On line 17340: + Credit Ratings and + the Financial Crisis, June + transcript, pp. Scott McCleskey, + +On line 17340: + and the Financial + Crisis, June transcript, pp. Scott + McCleskey, interview by + +On line 17342: + June transcript, pp. Scott + McCleskey, interview by FCIC, April + Clarkson, interview. + +On line 17346: + McCleskey, interview by + FCIC, April Clarkson, interview. + Witt, interview. Mark + +On line 17346: + the FCIC, Hearing on + the Credibility of + Credit Ratings, the + +On line 17346: + Credit Ratings, the + Investment Decisions Made + Based on Those Ratings, + +On line 17346: + Based on Those Ratings, + and the Financial Crisis, + session The Credit + +On line 17346: + Those Ratings, and the + Financial Crisis, session + The Credit Rating + +On line 17348: + The Credit Rating + Agency Business Model, June + transcript, p. Clarkson, + +On line 17350: + transcript, p. Clarkson, + interview; McDaniel, interview. + Witt, interview; Gary + +On line 17350: + Witt, interview; Gary + Witt, testimony before + the FCIC, Hearing on + +On line 17350: + interview; Gary Witt, + testimony before the + FCIC, Hearing on the + +On line 17350: + the FCIC, Hearing on + the Credibility of + Credit Ratings, the + +On line 17350: + Credit Ratings, the + Investment Decisions Made + Based on those Ratings, + +On line 17350: + Based on those Ratings, + and the Financial Crisis, + Session The Credit + +On line 17350: + those Ratings, and the + Financial Crisis, Session + The Credit Rating + +On line 17352: + The Credit Rating + Agency Business Model, June + transcript, p. Brian + +On line 17352: + Brian Clarkson, email + to Ed Bankole, Pramila Gupta, + Michael Kanef, Andrew Kriegler, + +On line 17352: + Clarkson, email to Ed + Bankole, Pramila Gupta, Michael Kanef, + Andrew Kriegler, Sam Pil-cer, + +On line 17352: + Bankole, Pramila Gupta, + Michael Kanef, Andrew Kriegler, Sam Pil-cer, + Andrew Silver, and + +On line 17352: + Andrew Kriegler, Sam Pil-cer, + Andrew Silver, and Linda + Stesney, subject: "June + +On line 17352: + Kriegler, Sam Pil-cer, Andrew + Silver, and Linda Stesney, + subject: "June YTD AFG + +On line 17354: + AFG by analyst.xls," + July William May, email to Gus + Harris, subject: "RE: + +On line 17354: + analyst.xls," July + William May, email to Gus Harris, + subject: "RE: BES and + +On line 17356: + William May, email to Gus + Harris, subject: "RE: BES and + PEs," January Yuri + +On line 17356: + Gus Harris, subject: + "RE: BES and PEs," January + Yuri Yoshizawa, email to + +On line 17356: + and PEs," January + Yuri Yoshizawa, email to direct + report managing + +On line 17356: + Yuri Yoshizawa, email to + direct report managing + directors, subject: + +On line 17358: + directors, subject: + "3Q Market Coverage-CDO," October + Clarkson, interview. + +On line 17362: + October Clarkson, + interview. McDaniel, interview. + Witt, testimony + +On line 17362: + McDaniel, interview. Witt, + testimony before the + FCIC, June transcript, pp. + +On line 17364: + June transcript, pp. Moody’s + Investors Service: Managing + Director’s Town Hall + +On line 17364: + Service: Managing + Director’s Town Hall Meeting, + September transcript, + +On line 17366: + Director’s Town Hall + Meeting, September transcript, + pp. Witt, interview. + +On line 17374: + policy issues + at Moody’s suggested by the + subprime/liquidity + +On line 17374: + ratings committee + to external pressures was + shown in the constant + +On line 17374: + pressures was shown in + the constant proportion debt + obligation (CPDO) + +On line 17374: + shown in the constant + proportion debt obligation + (CPDO) scandal in + +On line 17378: + obligation (CPDO) + scandal in Europe. Ibid., p. + David Teicher, project + +On line 17378: + scandal in Europe. + Ibid., p. David Teicher, project + manager at Moody’s, + +On line 17378: + Europe. Ibid., p. David + Teicher, project manager + at Moody’s, interview + +On line 17380: + project manager at + Moody’s, interview by FCIC, May + Standard Poor’s, "Credit + +On line 17380: + Moody’s, interview by + FCIC, May Standard Poor’s, "Credit + FAQ: The Basics of + +On line 17380: + FCIC, May Standard Poor’s, + "Credit FAQ: The Basics of + Credit Enhancement + +On line 17382: + the FCIC, Hearing on + the Credibility of + Credit Ratings, the + +On line 17382: + Credit Ratings, the + Investment Decisions Made + Based on Those Ratings, + +On line 17382: + Based on Those Ratings, + and the Financial Crisis, + session The Credit + +On line 17382: + Those Ratings, and the + Financial Crisis, session + The Credit Rating + +On line 17386: + Business Model, June + transcript, p. Witt, interview. + Clarkson, interview. + +On line 17392: + p. Eric Kolchinsky, + testimony before the + FCIC, Hearing on the + +On line 17392: + the FCIC, Hearing on + the Credibility of + Credit Ratings, the + +On line 17392: + Credit Ratings, the + Investment Decisions Made + Based on Those Ratings, + +On line 17392: + Based on Those Ratings, + and the Financial Crisis, + session The Ratings + +On line 17392: + Those Ratings, and the + Financial Crisis, session + The Ratings Process, June + +On line 17392: + and the Financial + Crisis, session The Ratings + Process, June transcript, pp. + +On line 17394: + Crisis, session The + Ratings Process, June transcript, pp. + E Kolchinsky, email to + +On line 17394: + The Ratings Process, June + transcript, pp. E Kolchinsky, email + to Y Fu and Y + +On line 17394: + Process, June transcript, pp. + E Kolchinsky, email to Y Fu + and Y Yoshizawa, May + +On line 17396: + Fu and Y Yoshizawa, + May Kolchinsky, testimony + before the FCIC, June + +On line 17396: + Yoshizawa, May Kolchinsky, + testimony before the + FCIC, June transcript, pp. + +On line 17398: + before the FCIC, June + transcript, pp. Eric Kolchinsky, + interview by FCIC, + +On line 17400: + FCIC, June transcript, pp. + Eric Kolchinsky, interview + by FCIC, April FCIC staff + +On line 17400: + pp. Eric Kolchinsky, + interview by FCIC, April FCIC + staff estimates, based + +On line 17400: + interview by FCIC, + April FCIC staff estimates, based + on analysis of + +On line 17402: + estimates, based on + analysis of Moody’s SFDRS + database. Riachra O’Driscoll, + +On line 17402: + analysis of Moody’s + SFDRS database. Riachra O’Driscoll, + email to Yuri Yoshizawa, + +On line 17402: + database. Riachra O’Driscoll, + email to Yuri Yoshizawa, subject: + "Magnolia Class Ds," + +On line 17404: + "Magnolia Class Ds," + April Kimball, memorandum, + "Credit policy + +On line 17406: + p. SEC, Office of + Compliance Inspections and + Examinations, + +On line 17415: + Moody’s Investors Services, + Inc.," p. Chapter William Dudley, + interview by FCIC, + +On line 17417: + Inc.," p. Chapter William + Dudley, interview by FCIC, + October Inside + +On line 17417: + Dudley, interview + by FCIC, October Inside + Mortgage Finance, The + +On line 17417: + interview by FCIC, + October Inside Mortgage + Finance, The Mortgage + +On line 17417: + The Secondary Market + (Bethesda, Md.: Inside Mortgage + Finance, p. "Non-Agency MBS + +On line 17417: + Market (Bethesda, Md.: + Inside Mortgage Finance, p. + "Non-Agency MBS Issuance by + +On line 17417: + (Bethesda, Md.: Inside + Mortgage Finance, p. "Non-Agency MBS + Issuance by Type." FCIC + +On line 17417: + Mortgage Finance, p. + "Non-Agency MBS Issuance by Type." FCIC + staff estimates based + +On line 17417: + "Non-Agency MBS Issuance by + Type." FCIC staff estimates based + on Moody’s CDO Enhanced + +On line 17419: + Issuance." Ben S. Bernanke, + chairman of the Federal + Reserve, letter to + +On line 17421: + Reserve, letter to + Phil Angelides, chairman of the + FCIC, December Mark + +On line 17421: + Phil Angelides, chairman + of the FCIC, December Mark + Zandi, Celia Chen, and + +On line 17421: + chairman of the FCIC, + December Mark Zandi, Celia + Chen, and Brian Carey, + +On line 17421: + FCIC, December Mark + Zandi, Celia Chen, and Brian + Carey, "Housing at the + +On line 17421: + Mark Zandi, Celia Chen, + and Brian Carey, "Housing at + the Tipping Point," Moody’s + +On line 17421: + Chen, and Brian Carey, + "Housing at the Tipping Point," + Moody’s Economy.com, + +On line 17423: + Moody’s Economy.com, + October pp. CoreLogic Home Price + Index, Single-Family Combined + +On line 17427: + staff calculations, + January to January. + CoreLogic Census Bureau + +On line 17427: + CoreLogic Census Bureau + Statistical Area (CBSA) + Home Price Index, FCIC + +On line 17427: + Statistical Area + (CBSA) Home Price Index, FCIC + staff calculations. + +On line 17429: + Home Price Index, FCIC + staff calculations. Data + provided by Mark + +On line 17429: + provided by Mark + Fleming, chief economist for + CoreLogic, in his written + +On line 17429: + FCIC, Hearing on the + Impact of the Financial + Crisis—Sacramento, session Overview + +On line 17429: + of the Financial + Crisis—Sacramento, session Overview of the + Sacramento Housing + +On line 17429: + Crisis—Sacramento, session Overview + of the Sacramento Housing + and Mortgage Markets + +On line 17429: + session Overview of + the Sacramento Housing and + Mortgage Markets and + +On line 17429: + of the Sacramento + Housing and Mortgage Markets + and the Impact of + +On line 17429: + the Impact of the + Financial Crisis on the + Region, September + +On line 17431: + Financial Crisis + on the Region, September + figures Mark Fleming, + +On line 17431: + figures Mark Fleming, + testimony before the + FCIC, Hearing on the + +On line 17431: + FCIC, Hearing on the + Impact of the Financial + Crisis—Sacramento, session Overview + +On line 17431: + of the Financial + Crisis—Sacramento, session Overview of the + Sacramento Housing + +On line 17431: + Crisis—Sacramento, session Overview + of the Sacramento Housing + and Mortgage Markets + +On line 17431: + session Overview of + the Sacramento Housing and + Mortgage Markets and + +On line 17431: + of the Sacramento + Housing and Mortgage Markets + and the Impact of + +On line 17431: + the Impact of the + Financial Crisis on the + Region, September + +On line 17433: + Financial Crisis + on the Region, September + transcript, p. Mortgage + +On line 17435: + Delinquency Survey, + data provided to the + FCIC. Ibid., with FCIC staff + +On line 17437: + data provided + to the FCIC. Ibid., with FCIC staff + calculations. FCIC + +On line 17437: + calculations. FCIC + staff analysis, "Analysis + of housing data," + +On line 17437: + of housing data," + July The underlying + data come from CoreLogic + +On line 17439: + FCIC by staff at the + Federal Reserve. Subprime + and Alt-A mortgages are + +On line 17439: + Reserve. Subprime and + Alt-A mortgages are defined as + those included in + +On line 17439: + and Alt-A mortgages are + defined as those included + in subprime or Alt-A + +On line 17439: + mortgages purchased or + guaranteed by Fannie Mae + or Freddie Mac. FHA + +On line 17439: + or Freddie Mac. FHA + mortgages included mortgages + insured by the FHA + +On line 17441: + included mortgages + insured by the FHA or VA. + FCIC staff analysis. + +On line 17449: + insured by the FHA + or VA. FCIC staff analysis. + Notes to Chapter A + +On line 17449: + by the FHA or VA. + FCIC staff analysis. Notes to + Chapter A recent + +On line 17449: + FCIC staff analysis. + Notes to Chapter A recent + analysis published + +On line 17449: + Notes to Chapter A + recent analysis published + by FHFA comes to + +On line 17449: + by FHFA comes to + very similar conclusions. + See "Data on the + +On line 17449: + FHFA comes to very + similar conclusions. See + "Data on the Risk + +On line 17449: + See "Data on the + Risk Characteristics and + Performance of Single-Family + +On line 17449: + and Performance of + Single-Family Mortgages Originated + from through and Financed + +On line 17449: + Performance of Single-Family + Mortgages Originated from + through and Financed in + +On line 17451: + and Financed in the + Secondary Market," September + FCIC staff analysis, + +On line 17451: + September FCIC staff + analysis, "Analysis of + housing data and + +On line 17451: + of housing data + and comparison with Ed + Pinto’s analysis," + +On line 17451: + provided by the + Federal Reserve, Fannie + Mae and Freddie Mac + +On line 17451: + Freddie Mac mortgages + with a FICO score below + had an average + +On line 17451: + Mac mortgages with a + FICO score below had an + average rate of + +On line 17451: + with a FICO score + below had an average + rate of serious + +On line 17451: + an average rate + of serious delinquency + of in In public + +On line 17451: + the GSEs stated that + the average serious + delinquency rates for + +On line 17451: + that the average + serious delinquency rates + for loans with FICO + +On line 17451: + delinquency rates for + loans with FICO scores less than + in their guarantee + +On line 17451: + loans with FICO scores + less than in their guarantee + books was Fannie Mae + +On line 17451: + FICO scores less than + in their guarantee books was + Fannie Mae Credit + +On line 17453: + Credit Supplement, + p. Freddie Mac Fourth Quarter + Financial Results + +On line 17453: + p. Freddie Mac Fourth + Quarter Financial Results + Supplement, March p. + +On line 17455: + p. In the sample + data provided by the + Federal Reserve, + +On line 17455: + provided by the + Federal Reserve, Fannie + Mae and Freddie Mac + +On line 17455: + Federal Reserve, + Fannie Mae and Freddie Mac + mortgages with LTVs above + +On line 17455: + Mae and Freddie Mac + mortgages with LTVs above had an + average rate of + +On line 17455: + an average rate + of serious delinquency + of in In public + +On line 17455: + the GSEs stated that + the average serious + delinquency rates for + +On line 17455: + that the average + serious delinquency rates + for loans with LTVs above + +On line 17455: + for loans with LTVs above + in their guarantee books was + Fannie Mae Credit + +On line 17457: + Credit Supplement, + p. Freddie Mac Fourth Quarter + Financial Results + +On line 17457: + p. Freddie Mac Fourth + Quarter Financial Results + Supplement, March p. + +On line 17459: + Federal Agency + Contributions to Subprime + and Alt-A Loans in U.S. + +On line 17459: + Contributions to + Subprime and Alt-A Loans in U.S. + First Mortgage Market + +On line 17459: + Subprime and Alt-A Loans + in U.S. First Mortgage Market + as of Exhibit + +On line 17459: + in U.S. First Mortgage + Market as of Exhibit + with corrections through + +On line 17459: + of Exhibit with + corrections through October + (www.aei.org/docLib/PintoFCICTriggersMemo.pdf). The million loans + +On line 17459: + with corrections through + October (www.aei.org/docLib/PintoFCICTriggersMemo.pdf). The million + loans include million + +On line 17459: + total of million + mortgages in subprime or Alt-A + pools, which Pinto calls + +On line 17459: + FICO scores below + which he labels "subprime by + characteristic." + +On line 17459: + he labels "subprime + by characteristic." He + also adds million + +On line 17459: + characteristic." + He also adds million loans + at the GSEs that are + +On line 17459: + interest-only loans, + negative amortization + loans, or loans with an + +On line 17459: + loans with an LTV—including any + second mortgage—greater than which + he collectively + +On line 17459: + second mortgage—greater + than which he collectively + refers to as "Alt-A by + +On line 17459: + refers to as "Alt-A by + characteristic." The last + addi-tions include + +On line 17459: + characteristic." + The last addi-tions include + an estimated + +On line 17459: + The last addi-tions + include an estimated + million loans insured + +On line 17459: + addi-tions include + an estimated million + loans insured by the + +On line 17459: + an estimated + million loans insured by the + FHA and VA with an + +On line 17461: + million loans insured + by the FHA and VA with an + LTV greater than out of + +On line 17461: + insured by the FHA + and VA with an LTV greater than + out of a total + +On line 17461: + the FHA and VA with + an LTV greater than out of a + total of roughly + +On line 17461: + and VA with an LTV + greater than out of a total + of roughly million + +On line 17461: + VA with an LTV greater + than out of a total of + roughly million FHA + +On line 17461: + an LTV greater than out + of a total of roughly + million FHA and VA + +On line 17461: + out of a total + of roughly million FHA and + VA loans—and million loans + +On line 17461: + of a total of + roughly million FHA and VA + loans—and million loans in + +On line 17461: + of roughly million + FHA and VA loans—and million loans + in bank portfolios + +On line 17461: + roughly million FHA + and VA loans—and million loans in + bank portfolios that + +On line 17461: + and VA loans—and million + loans in bank portfolios that + are inferred to have + +On line 17461: + VA loans—and million loans + in bank portfolios that are + inferred to have his + +On line 17461: + million loans in bank + portfolios that are inferred + to have his defined + +On line 17461: + Credit Supplement, + p. Freddie Mac Fourth Quarter + Financial Results + +On line 17463: + Results Supplement, + March Edward Pinto, "Yes, the + CRA Is Toxic," City + +On line 17465: + March Edward Pinto, + "Yes, the CRA Is Toxic," City + Journal, Autumn Neil + +On line 17465: + CRA Is Toxic," City + Journal, Autumn Neil Bhutta + and Glenn Canner, "Did + +On line 17465: + Toxic," City Journal, + Autumn Neil Bhutta and Glenn + Canner, "Did the CRA + +On line 17465: + City Journal, Autumn + Neil Bhutta and Glenn Canner, + "Did the CRA Cause the + +On line 17465: + Glenn Canner, "Did the + CRA Cause the Mortgage Market + Meltdown1" Federal + +On line 17465: + the Mortgage Market + Meltdown1" Federal Reserve + Board of Governors, + +On line 17465: + Meltdown1" Federal + Reserve Board of Governors, + March The authors use + +On line 17465: + Federal Reserve + Board of Governors, March The + authors use the Home + +On line 17465: + Board of Governors, + March The authors use the Home + Mortgage Disclosure + +On line 17465: + The authors use the + Home Mortgage Disclosure Act + data, which cover + +On line 17465: + use the Home Mortgage + Disclosure Act data, which + cover roughly of + +On line 17465: + which cover roughly + of the mortgage market in + the United States—see Robert + +On line 17465: + cover roughly of + the mortgage market in the + United States—see Robert B. + +On line 17465: + the mortgage market + in the United States—see Robert B. + Avery, Kenneth P. + +On line 17467: + the United States—see Robert + B. Avery, Kenneth P. Brevoort, + and Glenn B. Canner, + +On line 17467: + B. Avery, Kenneth + P. Brevoort, and Glenn B. Canner, + "Opportunities + +On line 17467: + in Using HMDA + Data," Journal of Real + Estate Research no. + +On line 17469: + California: The + Performance of CRA Lending + During the Subprime + +On line 17469: + Performance of CRA + Lending During the Subprime + Meltdown," November + +On line 17469: + Lending During the + Subprime Meltdown," November + working paper to + +On line 17469: + the Subprime Meltdown," + November working paper + to be presented + +On line 17469: + November working + paper to be presented + at the Federal + +On line 17469: + to be presented + at the Federal Reserve + System Conference + +On line 17471: + and Mortgage Markets, + Washington, DC, December + FCIC, "Preliminary + +On line 17471: + DC, December FCIC, + "Preliminary Staff Report: + The Mortgage Crisis," + +On line 17475: + Crisis," April Bank of + America response letter + to FCIC, August John + +On line 17475: + America response + letter to FCIC, August John + Reed, interview by + +On line 17477: + to FCIC, August John + Reed, interview by FCIC, March + Lewis Ranieri, interview + +On line 17477: + FCIC, August John Reed, + interview by FCIC, March Lewis + Ranieri, interview by + +On line 17479: + interview by FCIC, + March Lewis Ranieri, interview by + FCIC, July Nicolas + +On line 17479: + Lewis Ranieri, interview + by FCIC, July Nicolas Weill, + interview by FCIC, + +On line 17483: + FCIC, July Nicolas + Weill, interview by FCIC, May + Ibid. Nicolas Weill, email + +On line 17483: + July Nicolas Weill, + interview by FCIC, May Ibid. + Nicolas Weill, email to + +On line 17483: + Weill, interview by + FCIC, May Ibid. Nicolas Weill, email + to Raymond McDaniel and + +On line 17485: + Ibid. Nicolas Weill, email + to Raymond McDaniel and Brian + Clarkson, July Moody’s + +On line 17485: + email to Raymond McDaniel + and Brian Clarkson, July + Moody’s Investors Service, + +On line 17485: + and Brian Clarkson, + July Moody’s Investors Service, + "Early Defaults Rise + +On line 17487: + Report, January + pp. Moody’s Investors Service, "Moody’s + Downgrades Subprime First-lien + +On line 17491: + Research Announcement," + July Weill, interview. FCIC + staff estimates, based + +On line 17493: + staff estimates, based + on analysis of Blackbox + data. Data on + +On line 17493: + on analysis of + Blackbox data. Data on + Bear Stearns provided + +On line 17493: + data. Data on + Bear Stearns provided by JP + Morgan to the FCIC. + +On line 17497: + Data on Bear Stearns + provided by JP Morgan + to the FCIC. Notes to + +On line 17501: + Bear Stearns provided + by JP Morgan to the FCIC. + Notes to Chapter Moody’s + +On line 17501: + provided by JP + Morgan to the FCIC. Notes to + Chapter Moody’s Investors + +On line 17501: + by JP Morgan to + the FCIC. Notes to Chapter Moody’s + Investors Service, "Moody’s + +On line 17501: + Morgan to the FCIC. + Notes to Chapter Moody’s Investors + Service, "Moody’s Downgrades + +On line 17501: + to the FCIC. Notes to + Chapter Moody’s Investors Service, + "Moody’s Downgrades billion + +On line 17501: + Notes to Chapter Moody’s + Investors Service, "Moody’s Downgrades + billion of Subprime + +On line 17501: + Chapter Moody’s Investors + Service, "Moody’s Downgrades billion + of Subprime First-Lien RMBS + +On line 17501: + Investors Service, "Moody’s + Downgrades billion of Subprime + First-Lien RMBS and Affirms + +On line 17501: + Service, "Moody’s Downgrades + billion of Subprime First-Lien RMBS + and Affirms billion + +On line 17501: + Downgrades billion of + Subprime First-Lien RMBS and Affirms + billion Aaa’s and Aa’s," + +On line 17503: + Report, October + pp. FCIC staff estimates, based + on analysis of + +On line 17505: + based on analysis + of Blackbox data. FCIC staff + estimates, based on + +On line 17505: + of Blackbox data. + FCIC staff estimates, based on + analysis of Moody’s + +On line 17505: + FCIC staff estimates, + based on analysis of Moody’s + SFDRS data as + +On line 17505: + estimates, based on + analysis of Moody’s SFDRS + data as of April + +On line 17507: + based on analysis + of Moody’s SFDRS data as + of April Moody’s Investors + +On line 17507: + analysis of Moody’s + SFDRS data as of April + Moody’s Investors Service, + +On line 17507: + Service, "The Impact + of Subprime Residential + Mortgage-Backed Securities + +On line 17507: + Mortgage-Backed Securities + on Moody’s-Rated Structured Finance CDOs: + A Preliminary + +On line 17509: + Special Comment, March + p. Yuri Yoshizawa, email to Noel + Kirnon and Raymond McDaniel, + +On line 17509: + p. Yuri Yoshizawa, email + to Noel Kirnon and Raymond McDaniel, + cc Eric Kolchinsky, + +On line 17513: + Kolchinsky, subject: "CSFB + Pipeline information," March + Moody’s Investors Service, + +On line 17513: + Moody’s Investors Service, + "First Quarter U.S. CDO Review: + Climbing the Wall of + +On line 17515: + Report, May p. Richard + Michalek, testimony before + the FCIC, Hearing on + +On line 17515: + the FCIC, Hearing on + the Credibility of + Credit Ratings, the + +On line 17515: + Credit Ratings, the + Investment Decisions Made + Based on Those Ratings, + +On line 17515: + Based on Those Ratings, + and the Financial Crisis, + session The Credit + +On line 17515: + Those Ratings, and the + Financial Crisis, session + The Credit Rating + +On line 17517: + Model, June transcript, + pp. MCO Strategic Plan Overview," + presentation by + +On line 17521: + complaint, Chronology + Prepared by Eric Kolchinsky. + FCIC staff estimates + +On line 17521: + Chronology Prepared + by Eric Kolchinsky. FCIC staff + estimates based on + +On line 17521: + Prepared by Eric + Kolchinsky. FCIC staff estimates + based on analysis + +On line 17521: + by Eric Kolchinsky. + FCIC staff estimates based on + analysis of Moody’s + +On line 17521: + estimates based on + analysis of Moody’s SFDRS; + FCIC, "Preliminary + +On line 17521: + analysis of Moody’s + SFDRS; FCIC, "Preliminary + Staff Report: Credit + +On line 17521: + of Moody’s SFDRS; FCIC, + "Preliminary Staff Report: + Credit Ratings and + +On line 17521: + FCIC, "Preliminary + Staff Report: Credit Ratings + and the Financial + +On line 17523: + Staff Report: Credit + Ratings and the Financial + Crisis," June Eric + +On line 17523: + and the Financial + Crisis," June Eric Kolchinsky, + interview by FCIC, + +On line 17531: + Credit Ratings and + the Financial Crisis," pp. + Bingham McCutchen, Fannie + +On line 17531: + Financial Crisis," + pp. Bingham McCutchen, Fannie Mae + counsel, letter to + +On line 17531: + Bingham McCutchen, Fannie + Mae counsel, letter to FCIC, + September (hereafter + +On line 17531: + Mae counsel, letter + to FCIC, September (hereafter + "Bingham Letter"); O’Melveny + +On line 17531: + to FCIC, September + (hereafter "Bingham Letter"); O’Melveny + Meyers LLP, Freddie + +On line 17531: + Meyers LLP, Freddie + Mac counsel, letter to FCIC, + September (hereafter + +On line 17531: + Freddie Mac counsel, + letter to FCIC, September + (hereafter "O’Melveny Letter"). + +On line 17533: + counsel, letter to + FCIC, September (hereafter "O’Melveny + Letter"). Federal + +On line 17533: + the Enterprises’ + Financial Performance: Third + Quarter tables and + +On line 17535: + Quarter tables and + Raymond Romano, interview + by FCIC, September + +On line 17535: + tables and Raymond + Romano, interview by FCIC, + September Bingham + +On line 17539: + Bingham Letter, Tab + Tab "Repurchase Collections + by Top Ten Sellers/Servicers." O’Melveny + +On line 17541: + Tab Tab "Repurchase + Collections by Top Ten Sellers/Servicers." + O’Melveny letter. "Bank of + +On line 17541: + Collections by Top + Ten Sellers/Servicers." O’Melveny letter. "Bank of + America announces + +On line 17541: + Ten Sellers/Servicers." O’Melveny letter. + "Bank of America announces + fourth-quarter actions with + +On line 17541: + O’Melveny letter. "Bank of + America announces fourth-quarter + actions with respect + +On line 17541: + "Bank of America + announces fourth-quarter actions with + respect to its home + +On line 17541: + America announces + fourth-quarter actions with respect + to its home loans and + +On line 17541: + fourth-quarter actions with + respect to its home loans and + insurance business," + +On line 17541: + respect to its home + loans and insurance business," + Bank of America + +On line 17543: + January Mortgage + Insurance Companies of + America, Fact Book + +On line 17543: + Mortgage Insurance + Companies of America, + Fact Book and Member + +On line 17545: + (Insurance in Force) + p Documents produced for + the FCIC by United + +On line 17545: + the FCIC by United + Guaranty Residential + Insurance, MGIC, + +On line 17545: + United Guaranty + Residential Insurance, + MGIC, Genworth, RMIC, + +On line 17547: + Insurance, MGIC, + Genworth, RMIC, Triad, PMI, and + Radian. FCIC staff + +On line 17547: + Genworth, RMIC, Triad, + PMI, and Radian. FCIC staff + calculations based + +On line 17547: + PMI, and Radian. + FCIC staff calculations based + on productions from + +On line 17547: + calculations based + on productions from Fannie + and Freddie. Figures + +On line 17547: + on productions from + Fannie and Freddie. Figures + are for Alt-A, option + +On line 17547: + Fannie and Freddie. + Figures are for Alt-A, option + ARM Alt-A, and subprime + +On line 17549: + Freddie. Figures are + for Alt-A, option ARM Alt-A, and + subprime loans. FHFA, + +On line 17549: + ARM Alt-A, and subprime + loans. FHFA, "Conservator’s + Report: Third Quarter + +On line 17549: + subprime loans. FHFA, + "Conservator’s Report: Third + Quarter Accounting + +On line 17549: + Accounting changes for + impairments have resulted + in offsetting gains + +On line 17551: + in offsetting gains + of billion. "FHFA Issue + Subpoenas for PLS + +On line 17551: + for PLS Documents," + Federal Housing Finance + Agency news release, + +On line 17553: + Federal Housing + Finance Agency news release, + July Covington + +On line 17553: + Finance Agency news + release, July Covington + Burling LLP, Freddie + +On line 17553: + Burling LLP, Freddie + Mac counsel, letter to FCIC, + October see O’Melveny + +On line 17555: + Freddie Mac counsel, + letter to FCIC, October + see O’Melveny Meyers LLP, + +On line 17555: + Mac counsel, letter + to FCIC, October see O’Melveny + Meyers LLP, letter + +On line 17555: + October see O’Melveny + Meyers LLP, letter to FCIC, + dated October + +On line 17559: + Products," Part VII of + a NERA Insights Series, June + p. Defendants Wells + +On line 17559: + of a NERA Insights + Series, June p. Defendants + Wells Fargo Asset + +On line 17559: + Corp. and Wells Fargo + Bank, N.A.’s Notice of Removal, + Charles Schwab Corp. v. BNP + +On line 17559: + and Wells Fargo Bank, + N.A.’s Notice of Removal, Charles + Schwab Corp. v. BNP Paribas + +On line 17559: + Bank, N.A.’s Notice of + Removal, Charles Schwab Corp. v. BNP + Paribas Securities + +On line 17559: + Removal, Charles Schwab Corp. + v. BNP Paribas Securities + Corp, et al., No. cv-10-4030 + +On line 17559: + Charles Schwab Corp. v. BNP + Paribas Securities Corp, et + al., No. cv-10-4030 (N.D. Cal. + +On line 17565: + Paribas Securities + Corp, et al., No. cv-10-4030 (N.D. Cal. + September Notes to + +On line 17567: + Corp, et al., No. cv-10-4030 + (N.D. Cal. September Notes to + Chapter Attorney + +On line 17567: + of Massachusetts, + "Attorney General Martha + Coakley and Goldman + +On line 17567: + Sachs Reach Settlement + Regarding Subprime Lending + Issues," May "Morgan + +On line 17569: + under Settlement + with AG Coakley’s Office," June + Complaint, Cambridge Place + +On line 17569: + AG Coakley’s Office," + June Complaint, Cambridge Place v. + Morgan Stanley et + +On line 17569: + Complaint, Cambridge Place + v. Morgan Stanley et al., + No. 10-2741 (Mass. Super. + +On line 17569: + v. Morgan Stanley + et al., No. 10-2741 (Mass. Super. + Ct. filed July p. + +On line 17571: + Morgan Stanley et + al., No. 10-2741 (Mass. Super. Ct. + filed July p. Sarah + +On line 17571: + et al., No. 10-2741 (Mass. + Super. Ct. filed July p. + Sarah Johnson, "How Far + +On line 17571: + (Mass. Super. Ct. filed + July p. Sarah Johnson, "How + Far Can Fair Value + +On line 17571: + Ct. filed July p. + Sarah Johnson, "How Far Can Fair + Value Go1" CFO.com, May + +On line 17573: + p. Sarah Johnson, "How + Far Can Fair Value Go1" CFO.com, + May Vikas Shilpiekandula + +On line 17573: + Sarah Johnson, "How Far + Can Fair Value Go1" CFO.com, May + Vikas Shilpiekandula and + +On line 17573: + Far Can Fair Value + Go1" CFO.com, May Vikas Shilpiekandula + and Olga Gorodetsky, + +On line 17573: + Can Fair Value Go1" + CFO.com, May Vikas Shilpiekandula and + Olga Gorodetsky, "Who + +On line 17573: + Olga Gorodetsky, "Who + Owns Residential Credit + Risk1" Lehman Brothers Fixed + +On line 17573: + Brothers Fixed Income, + U.S. Securitized Products + Research, September + +On line 17575: + U.S. Securitized + Products Research, September + Moody’s Investor Service, + +On line 17575: + Research, September + Moody’s Investor Service, "Default + Loss Rates of Structured + +On line 17577: + Comment, September + Ben Bernanke, closed-door session with + the FCIC, November + +On line 17579: + session with the FCIC, + November Vikas Shilpiekandula + and Olga Gorodetsky, + +On line 17579: + Olga Gorodetsky, "Who + Owns Residential Credit + Risk1," September p. + +On line 17579: + Owns Residential + Credit Risk1," September p. + The Lehman analysts + +On line 17579: + Lehman analysts pegged + ultimate subprime and Alt-A + losses at billion. + +On line 17579: + ultimate subprime + and Alt-A losses at billion. + Those forecasts were based, + +On line 17579: + and Alt-A losses at + billion. Those forecasts were based, + the analysts said, + +On line 17579: + billion. Those forecasts + were based, the analysts said, + on a scenario in + +On line 17579: + Those forecasts were based, + the analysts said, on a + scenario in which house + +On line 17579: + analysts said, on + a scenario in which house prices + fell an average + +On line 17579: + a scenario in which + house prices fell an average + of across the country. + +On line 17579: + scenario in which house + prices fell an average of + across the country. For + +On line 17579: + across the country. For + the securitization + figures, see Inside + +On line 17581: + Policy," Global + Financial Stability + Report, October + +On line 17581: + October p. IMF, + "Containing Systemic Risks and + Restoring Financial + +On line 17583: + Global Financial + Stability Report, April + FCIC staff estimates, + +On line 17583: + FCIC staff estimates, + based on Moody’s Investor Service, + "Default Loss Rates of + +On line 17583: + estimates, based on + Moody’s Investor Service, "Default + Loss Rates of Structured + +On line 17585: + and analysis of + Moody’s Structured Finance Default + Risk Service. Ben Bernanke, + +On line 17585: + Risk Service. Ben Bernanke, + testimony before the + FCIC, Hearing on Too + +On line 17585: + Financial Crisis, + day session The Federal + Reserve, September + +On line 17594: + staff calculations + using data in worksheets + Markit ABX.HE. 06-1 + +On line 17594: + using data in + worksheets Markit ABX.HE. 06-1 + prices and ABX.HE. 06-2 + +On line 17596: + in worksheets Markit + ABX.HE. 06-1 prices and ABX.HE. + 06-2 prices, produced by + +On line 17596: + ABX.HE. 06-1 prices and + ABX.HE. 06-2 prices, produced by + Markit; Nomura + +On line 17596: + Research, CDO/CDS Update + The figures refer to the + BBB- index of + +On line 17598: + BBB- index of + the ABX.HE. 06-2. Nomura + Fixed Income Research, + +On line 17600: + CDO/CDS Update p. SEC, + "Risk Management Reviews of + Consolidated + +On line 17602: + memo to Erik Sirri + and others, January Jim + Chanos, interview by + +On line 17602: + to Erik Sirri and + others, January Jim Chanos, + interview by FCIC, + +On line 17604: + others, January + Jim Chanos, interview by FCIC, + October SEC, "Risk + +On line 17604: + Jim Chanos, interview + by FCIC, October SEC, "Risk + Management Reviews + +On line 17604: + FCIC, October SEC, + "Risk Management Reviews of + Consolidated + +On line 17608: + March Henry Paulson, + quoted in Julie Haviv, "Bernanke + Allays Subprime Fears + +On line 17610: + Haviv, "Bernanke Allays + Subprime Fears as Beazer Faces + Probe," Reuters, March David Viniar, + +On line 17610: + "Bernanke Allays Subprime + Fears as Beazer Faces Probe," Reuters, + March David Viniar, written + +On line 17610: + Fears as Beazer Faces + Probe," Reuters, March David Viniar, written + testimony, Wall + +On line 17610: + Financial Crisis: + The Role of Investment Banks, + Senate Permanent + +On line 17612: + Subcommittee on + Investigation, 111th Cong., + 2nd sess., April pp. Michael + +On line 17612: + Investigation, + 111th Cong., 2nd sess., April pp. Michael + Dinias, email to David Viniar + +On line 17612: + 111th Cong., 2nd sess., April + pp. Michael Dinias, email to David Viniar + and Craig Broderick, + +On line 17612: + pp. Michael Dinias, email to + David Viniar and Craig Broderick, + December Senate + +On line 17612: + email to David Viniar and + Craig Broderick, December + Senate Permanent + +On line 17614: + pp. Daniel Sparks, email to + Tom Montag and Richard Ruzika, + December Senate + +On line 17614: + email to Tom Montag + and Richard Ruzika, December + Senate Permanent + +On line 17616: + Gasvoda, email to Genevieve + Nestor and others, December + Senate Permanent + +On line 17620: + Investigations, + Exhibit Stacy Bash-Polley, email + to Michael Swenson and + +On line 17620: + Exhibit Stacy + Bash-Polley, email to Michael Swenson and + others, December + +On line 17628: + Investigations, + Exhibit Notes to Chapter + Tetsuya Ishikawa, email to + +On line 17628: + to Chapter Tetsuya + Ishikawa, email to Darryl Herrick, + October Senate + +On line 17628: + Tetsuya Ishikawa, email to + Darryl Herrick, October + Senate Permanent + +On line 17630: + Investigations, + Exhibit 170d. Fabrice Tourre, + email to Jonathan Egol and + +On line 17634: + Investigations, + Exhibit Fabrice Tourre, email + to Marine Serres, + +On line 17634: + Exhibit Fabrice + Tourre, email to Marine Serres, + January Senate + +On line 17634: + Fabrice Tourre, email to + Marine Serres, January + Senate Permanent + +On line 17640: + using data from + GS Synthetic CDOs," produced + by Goldman Sachs. Gretchen + +On line 17640: + from GS Synthetic + CDOs," produced by Goldman Sachs. + Gretchen Morgenson and + +On line 17640: + GS Synthetic CDOs," + produced by Goldman Sachs. Gretchen + Morgenson and Louise + +On line 17640: + produced by Goldman + Sachs. Gretchen Morgenson and Louise + Story, "Banks Bundled + +On line 17640: + by Goldman Sachs. Gretchen + Morgenson and Louise Story, + "Banks Bundled Bad Debt, + +On line 17640: + Sachs. Gretchen Morgenson + and Louise Story, "Banks Bundled + Bad Debt, Bet Against It + +On line 17640: + Gretchen Morgenson and + Louise Story, "Banks Bundled Bad + Debt, Bet Against It and + +On line 17640: + Morgenson and Louise + Story, "Banks Bundled Bad Debt, + Bet Against It and Won," + +On line 17640: + and Louise Story, "Banks + Bundled Bad Debt, Bet Against It + and Won," New York Times, + +On line 17642: + "Banks Bundled Bad Debt, + Bet Against It and Won," New York + Times, December Lloyd + +On line 17642: + York Times, December + Lloyd Blankfein, testimony + before the FCIC, First + +On line 17642: + the FCIC, First Public + Hearing of the FCIC, first day, + panel Financial + +On line 17642: + FCIC, first day, panel + Financial Institution + Representatives, + +On line 17644: + January transcript, + pp. "Goldman Sachs Clarifies + Various Media + +On line 17644: + transcript, pp. "Goldman + Sachs Clarifies Various + Media Reports of + +On line 17644: + Various Media + Reports of Aspect of FCIC + Hearing," Goldman Sachs + +On line 17646: + Hearing," Goldman Sachs + press release, January Gary + Cohn, testimony + +On line 17646: + January Gary Cohn, + testimony before the + FCIC, Hearing on the + +On line 17646: + the FCIC, Hearing on + the Role of Derivatives + in the Financial + +On line 17646: + Hearing on the Role + of Derivatives in the + Financial Crisis, + +On line 17646: + of Derivatives + in the Financial Crisis, + day session Goldman + +On line 17646: + Derivatives in + the Financial Crisis, day + session Goldman Sachs + +On line 17648: + session Goldman Sachs + Group, Inc. and Derivatives, + June transcript, p. Michael + +On line 17648: + Michael Swenson, opening + statement, Hearing on Wall Street + and the Financial + +On line 17648: + statement, Hearing on + Wall Street and the Financial + Crisis: The Role of + +On line 17648: + on Wall Street and the + Financial Crisis: The Role + of Investment Banks, + +On line 17648: + Financial Crisis: + The Role of Investment Banks, + Senate Permanent + +On line 17650: + pp. Complaint, Basis + Yield Alpha Fund v. Goldman + Sachs Group, Inc., et al. + +On line 17650: + Basis Yield Alpha + Fund v. Goldman Sachs Group, Inc., + et al. (S.D.N.Y. June + +On line 17654: + January transcript, + p. Craig Broderick, written + testimony for + +On line 17654: + p. Craig Broderick, + written testimony for + the FCIC, Hearing on + +On line 17654: + Broderick, written + testimony for the FCIC, + Hearing on the Role + +On line 17654: + testimony for + the FCIC, Hearing on the Role + of Derivatives + +On line 17654: + the FCIC, Hearing on + the Role of Derivatives + in the Financial + +On line 17654: + Hearing on the Role + of Derivatives in the + Financial Crisis, + +On line 17654: + of Derivatives + in the Financial Crisis, + day session Goldman + +On line 17654: + Derivatives in + the Financial Crisis, day + session Goldman Sachs + +On line 17656: + Goldman Sachs Group, Inc. + and Derivatives, June p. + Craig Broderick, email + +On line 17656: + and Derivatives, + June p. Craig Broderick, email + to Alan Rapfogel + +On line 17656: + Derivatives, June + p. Craig Broderick, email to + Alan Rapfogel and + +On line 17656: + p. Craig Broderick, + email to Alan Rapfogel and + others, May Senate + +On line 17658: + Exhibit High Grade + Risk Analysis, April p. High + Grade—Enhanced Leverage Q&/A, June + +On line 17658: + High Grade—Enhanced Leverage Q&/A, + June stating "the percentage + of underlying + +On line 17658: + collateral in + our investment grade structures + collateralized + +On line 17660: + our investment grade + structures collateralized + by "sub-prime" mortgages + +On line 17660: + by "sub-prime" mortgages + is approximately On + the March investor call, + +On line 17660: + "sub-prime" mortgages is + approximately On the + March investor call, Matthew + +On line 17660: + approximately + On the March investor call, Matthew + Tannin told investors + +On line 17660: + On the March investor + call, Matthew Tannin told investors + that "most of the CDOs + +On line 17660: + the March investor call, + Matthew Tannin told investors that + "most of the CDOs that + +On line 17660: + March investor call, Matthew + Tannin told investors that "most + of the CDOs that we + +On line 17660: + call, Matthew Tannin told + investors that "most of the CDOs + that we purchased are + +On line 17660: + Tannin told investors + that "most of the CDOs that we + purchased are backed in + +On line 17660: + told investors that "most + of the CDOs that we purchased + are backed in some form + +On line 17660: + investors that "most of + the CDOs that we purchased are + backed in some form by + +On line 17660: + that "most of the CDOs + that we purchased are backed in + some form by subprime" + +On line 17662: + are backed in some form + by subprime" (Conference Call + transcript, pp. Email from + +On line 17662: + Call transcript, pp. Email + from matt.tannin@gmail.com to + matt.tannin@gmail.com, + +On line 17664: + matt.tannin@gmail.com, + November Matthew Tannin, Bear + Stearns, email to Chavanne + +On line 17666: + Tannin, Bear Stearns, email + to Chavanne Klaus, MEAG New York, + March BSAM Conference + +On line 17666: + to Chavanne Klaus, MEAG + New York, March BSAM Conference + Call, April transcript, p. + +On line 17668: + Chavanne Klaus, MEAG New + York, March BSAM Conference Call, + April transcript, p. Matt + +On line 17668: + MEAG New York, March BSAM + Conference Call, April transcript, + p. Matt Tannin, Bear + +On line 17668: + BSAM Conference Call, + April transcript, p. Matt Tannin, + Bear Stearns, email to Klaus + +On line 17668: + Call, April transcript, p. + Matt Tannin, Bear Stearns, email to + Klaus Chavanne, MEAG New + +On line 17668: + April transcript, p. Matt + Tannin, Bear Stearns, email to Klaus + Chavanne, MEAG New York, + +On line 17668: + Matt Tannin, Bear Stearns, + email to Klaus Chavanne, MEAG New + York, March Matthew Tannin, + +On line 17668: + Tannin, Bear Stearns, email + to Klaus Chavanne, MEAG New York, + March Matthew Tannin, email + +On line 17668: + Bear Stearns, email to Klaus + Chavanne, MEAG New York, March Matthew + Tannin, email to Steven + +On line 17668: + to Klaus Chavanne, MEAG + New York, March Matthew Tannin, email + to Steven Van Solkema, + +On line 17668: + Klaus Chavanne, MEAG New + York, March Matthew Tannin, email to + Steven Van Solkema, March + +On line 17668: + Matthew Tannin, email to + Steven Van Solkema, March Complaint, + SEC v. Cioffi, No. + +On line 17668: + Tannin, email to Steven + Van Solkema, March Complaint, SEC + v. Cioffi, No. Civ. + +On line 17670: + to Steven Van Solkema, + March Complaint, SEC v. Cioffi, + No. Civ. (E.D.N.Y. June + +On line 17670: + Steven Van Solkema, March + Complaint, SEC v. Cioffi, No. + Civ. (E.D.N.Y. June p. + +On line 17672: + March Complaint, SEC v. + Cioffi, No. Civ. (E.D.N.Y. June + p. Jim Crystal, Bear + +On line 17672: + v. Cioffi, No. Civ. + (E.D.N.Y. June p. Jim Crystal, + Bear Stearns, email to Ralph + +On line 17672: + No. Civ. (E.D.N.Y. June + p. Jim Crystal, Bear Stearns, email + to Ralph Cioffi (and + +On line 17672: + (E.D.N.Y. June p. Jim + Crystal, Bear Stearns, email to Ralph + Cioffi (and others), + +On line 17672: + June p. Jim Crystal, + Bear Stearns, email to Ralph Cioffi + (and others), March Ralph + +On line 17672: + Crystal, Bear Stearns, email + to Ralph Cioffi (and others), + March Ralph Cioffi, Bear + +On line 17672: + Bear Stearns, email to Ralph + Cioffi (and others), March Ralph + Cioffi, Bear Stearns, email + +On line 17672: + email to Ralph Cioffi + (and others), March Ralph Cioffi, + Bear Stearns, email to Ken + +On line 17672: + to Ralph Cioffi (and + others), March Ralph Cioffi, Bear + Stearns, email to Ken Mak, + +On line 17672: + Cioffi (and others), + March Ralph Cioffi, Bear Stearns, email + to Ken Mak, Bear Stearns, + +On line 17674: + March Ralph Cioffi, Bear + Stearns, email to Ken Mak, Bear Stearns, + March Warren Spector, + +On line 17674: + March Warren Spector, + testimony before the + FCIC, Hearing on the + +On line 17674: + FCIC, Hearing on the + Shadow Banking System, day + session Investment + +On line 17674: + Banking System, day + session Investment Banks and + the Shadow Banking + +On line 17674: + session Investment + Banks and the Shadow Banking + System, May transcript, + +On line 17676: + Banks and the Shadow + Banking System, May transcript, + pp. Information + +On line 17676: + Banking System, May + transcript, pp. Information + provided to FCIC + +On line 17680: + counsel to Bank of + America, September Ibid. + Alan Schwartz, interview + +On line 17680: + September Ibid. Alan + Schwartz, interview by FCIC, April + Notably, as one of + +On line 17680: + April Notably, as one + of only two tri-party + repo clearing banks, + +On line 17680: + one of only two + tri-party repo clearing + banks, JP Morgan had + +On line 17680: + tri-party repo + clearing banks, JP Morgan had + more information + +On line 17680: + banks, JP Morgan had + more information about BSAM’s + lending obligations + +On line 17680: + more information + about BSAM’s lending obligations + than did most other + +On line 17680: + lending obligations + than did most other market + participants or + +On line 17680: + than did most other + market participants or + regulators. As + +On line 17680: + this superior + market knowledge later put + JP Morgan in a + +On line 17680: + put JP Morgan in + a position to step in + and purchase Bear Stearns + +On line 17680: + in a position + to step in and purchase Bear + Stearns virtually + +On line 17680: + a position to + step in and purchase Bear Stearns + virtually overnight. + +On line 17682: + step in and purchase + Bear Stearns virtually overnight. + Email from Goldman to + +On line 17682: + in and purchase Bear + Stearns virtually overnight. Email + from Goldman to Bear, + +On line 17682: + and purchase Bear Stearns + virtually overnight. Email from + Goldman to Bear, April + +On line 17684: + Stearns virtually + overnight. Email from Goldman to Bear, + April Steven Van Solkema, + +On line 17684: + virtually overnight. + Email from Goldman to Bear, April + Steven Van Solkema, Bear + +On line 17684: + overnight. Email from Goldman + to Bear, April Steven Van Solkema, + Bear Stearns, internal + +On line 17684: + Email from Goldman to + Bear, April Steven Van Solkema, Bear + Stearns, internal email, + +On line 17684: + to Bear, April Steven Van + Solkema, Bear Stearns, internal + email, Summary of + +On line 17684: + Van Solkema, Bear Stearns, + internal email, Summary + of CDO Analysis + +On line 17690: + Summary of CDO + Analysis Using Credit + Model, April Notes to + +On line 17692: + of CDO Analysis + Using Credit Model, April + Notes to Chapter Matt + +On line 17692: + Analysis Using + Credit Model, April Notes to + Chapter Matt Tannin, + +On line 17692: + Credit Model, April + Notes to Chapter Matt Tannin, + Bear Stearns, email from Gmail + +On line 17692: + Model, April Notes to + Chapter Matt Tannin, Bear Stearns, + email from Gmail account + +On line 17692: + April Notes to Chapter + Matt Tannin, Bear Stearns, email from + Gmail account to Ralph + +On line 17692: + Chapter Matt Tannin, + Bear Stearns, email from Gmail account + to Ralph Cioffi, Bear + +On line 17692: + Matt Tannin, Bear Stearns, + email from Gmail account to Ralph + Cioffi, Bear Stearns, at + +On line 17692: + Bear Stearns, email from Gmail + account to Ralph Cioffi, Bear + Stearns, at his Hotmail + +On line 17692: + email from Gmail account + to Ralph Cioffi, Bear Stearns, at + his Hotmail account, + +On line 17692: + from Gmail account to + Ralph Cioffi, Bear Stearns, at his + Hotmail account, April + +On line 17694: + to Ralph Cioffi, Bear + Stearns, at his Hotmail account, + April BSAM Conference + +On line 17694: + Ralph Cioffi, Bear Stearns, + at his Hotmail account, April + BSAM Conference Call, + +On line 17694: + Cioffi, Bear Stearns, at + his Hotmail account, April BSAM + Conference Call, April + +On line 17696: + Stearns, at his Hotmail + account, April BSAM Conference + Call, April transcript. Iris + +On line 17696: + his Hotmail account, + April BSAM Conference Call, April + transcript. Iris Semic, email + +On line 17696: + April BSAM Conference + Call, April transcript. Iris Semic, email + to Matthew Tannin et + +On line 17696: + BSAM Conference Call, + April transcript. Iris Semic, email to + Matthew Tannin et al., + +On line 17696: + Conference Call, April + transcript. Iris Semic, email to Matthew + Tannin et al., May + +On line 17698: + Call, April transcript. Iris + Semic, email to Matthew Tannin et + al., May Robert Ervin, email + +On line 17698: + April transcript. Iris Semic, + email to Matthew Tannin et al., + May Robert Ervin, email to + +On line 17698: + transcript. Iris Semic, email + to Matthew Tannin et al., May + Robert Ervin, email to Ralph + +On line 17698: + Iris Semic, email to Matthew + Tannin et al., May Robert Ervin, + email to Ralph Cioffi + +On line 17698: + email to Matthew Tannin + et al., May Robert Ervin, email to + Ralph Cioffi et al., + +On line 17698: + to Matthew Tannin et + al., May Robert Ervin, email to Ralph + Cioffi et al., May + +On line 17698: + Tannin et al., May + Robert Ervin, email to Ralph Cioffi + et al., May email from + +On line 17698: + et al., May Robert Ervin, + email to Ralph Cioffi et al., + May email from Goldman + +On line 17700: + May email from Goldman + (ficc-ops-cdopricing) to + rervin@bear.com, May BSAM + +On line 17700: + rervin@bear.com, May BSAM + Pricing Committee minutes, + June Robert Ervin, email to + +On line 17700: + Pricing Committee + minutes, June Robert Ervin, email to + Greg Quental et al., + +On line 17700: + Robert Ervin, email to Greg + Quental et al., May showing + that losses for the + +On line 17700: + to Greg Quental et + al., May showing that losses + for the High Grade fund + +On line 17700: + Greg Quental et al., + May showing that losses for + the High Grade fund would + +On line 17700: + Quental et al., May + showing that losses for the + High Grade fund would be + +On line 17700: + et al., May showing + that losses for the High Grade + fund would be if BSAM + +On line 17700: + al., May showing that + losses for the High Grade fund + would be if BSAM used + +On line 17700: + showing that losses + for the High Grade fund would be + if BSAM used the prices + +On line 17700: + losses for the High + Grade fund would be if BSAM used + the prices Lehman’s repo + +On line 17700: + for the High Grade fund + would be if BSAM used the prices + Lehman’s repo desk was + +On line 17700: + Grade fund would be if + BSAM used the prices Lehman’s repo + desk was using, rather + +On line 17700: + fund would be if BSAM + used the prices Lehman’s repo desk + was using, rather than + +On line 17700: + would be if BSAM used + the prices Lehman’s repo desk was + using, rather than 11.45%—the + +On line 17700: + BSAM used the prices Lehman’s + repo desk was using, rather + than 11.45%—the loss without + +On line 17700: + the prices Lehman’s repo + desk was using, rather than 11.45%—the + loss without Lehman’s marks. + +On line 17702: + prices Lehman’s repo desk + was using, rather than 11.45%—the loss + without Lehman’s marks. Email + +On line 17702: + desk was using, rather + than 11.45%—the loss without Lehman’s marks. + Email from "BSAM Hedge Fund + +On line 17702: + using, rather than 11.45%—the + loss without Lehman’s marks. Email from + "BSAM Hedge Fund Product + +On line 17702: + than 11.45%—the loss without + Lehman’s marks. Email from "BSAM Hedge Fund + Product Management + +On line 17702: + loss without Lehman’s marks. + Email from "BSAM Hedge Fund Product + Management (Generic)," + +On line 17702: + Lehman’s marks. Email from "BSAM + Hedge Fund Product Management + (Generic)," May produced + +On line 17702: + Email from "BSAM Hedge Fund + Product Management (Generic)," + May produced by JP + +On line 17704: + Management (Generic)," + May produced by JP Morgan. + BSAMFCIC-e0000013. An untitled + +On line 17704: + May produced by JP + Morgan. BSAMFCIC-e0000013. An untitled + chart produced by JPMorgan + +On line 17704: + by JP Morgan. BSAMFCIC-e0000013. + An untitled chart produced + by JPMorgan shows losses + +On line 17704: + JP Morgan. BSAMFCIC-e0000013. An + untitled chart produced by + JPMorgan shows losses would + +On line 17704: + less; NAV estimate + reconciliation chart, + produced by JPMorgan, shows + +On line 17706: + shows losses would have + been almost million less. BSAM + Pricing Committee + +On line 17708: + Committee minutes, + June Ralph Cioffi, interview + by FCIC, October + +On line 17712: + interview by FCIC, + October Ralph Cioffi, email + to John Geissinger, June Schwartz, + +On line 17712: + by FCIC, October + Ralph Cioffi, email to John Geissinger, + June Schwartz, interview. + +On line 17714: + FCIC, October Ralph + Cioffi, email to John Geissinger, June + Schwartz, interview. Ibid. + +On line 17716: + Ralph Cioffi, email to + John Geissinger, June Schwartz, interview. + Ibid. Ibid.; CSE Program + +On line 17716: + interview. Ibid. Ibid.; + CSE Program Memorandum + to Erik Sirri and + +On line 17718: + to Erik Sirri and + others through Matthew Eichner, + July CSE Program + +On line 17720: + Eichner, July + CSE Program Memorandum, + July CSE Program + +On line 17720: + July Merrill Lynch + analysis, "Bear Stearns Asset + Mgm’t: What Went Wrong"; Paul + +On line 17720: + analysis, "Bear Stearns + Asset Mgm’t: What Went Wrong"; Paul + Friedman, interview + +On line 17720: + Asset Mgm’t: What Went + Wrong"; Paul Friedman, interview + by FCIC, April While most + +On line 17720: + Mgm’t: What Went Wrong"; Paul + Friedman, interview by FCIC, + April While most of the + +On line 17720: + Went Wrong"; Paul Friedman, + interview by FCIC, April While + most of the Bear Stearns + +On line 17720: + FCIC, April While most of + the Bear Stearns executives + interviewed by FCIC + +On line 17720: + most of the Bear Stearns + executives interviewed + by FCIC staff did not + +On line 17720: + did not recall the + percentage discount at which + the collateral + +On line 17720: + percentage discount + at which the collateral + seized by Merrill Lynch + +On line 17720: + collateral seized + by Merrill Lynch was auctioned, + they did believe that + +On line 17720: + did believe that it + was significant (e.g., Robert + Upton, interview + +On line 17722: + was significant + (e.g., Robert Upton, interview + by FCIC, April "While the + +On line 17722: + significant (e.g., + Robert Upton, interview by + FCIC, April "While the High + +On line 17722: + interview by FCIC, + April "While the High Grade fund was + not in default/had + +On line 17722: + April "While the High Grade + fund was not in default/had + not missed any margin + +On line 17722: + "While the High Grade fund + was not in default/had not + missed any margin calls, + +On line 17722: + default/had not missed + any margin calls, creditors + were cutting off its + +On line 17722: + missed any margin calls, + creditors were cutting off + its liquidity + +On line 17722: + haircuts or not rolling + repo facilities." Bear + Stearns Packet dated + +On line 17722: + dated May meeting + held on June produced by the + Securities and + +On line 17722: + held on June produced + by the Securities and + Exchange Commission, + +On line 17722: + the Securities + and Exchange Commission, p. + Upton, interview. + +On line 17726: + Mary Kay Scucci, April + Friedman, interview; Warren + Spector, interview + +On line 17726: + Scucci, April Friedman, + interview; Warren Spector, + interview by FCIC, + +On line 17728: + FCIC, March Sam Molinaro, + interview by FCIC, April Thomas + Marano, interview + +On line 17728: + interview by FCIC, + April Thomas Marano, interview + by FCIC, April Spector, + +On line 17728: + interview by FCIC, + April Spector, interview (on + Marano’s being sent + +On line 17730: + Spector, interview + (on Marano’s being sent to + Marin). Fed Chairman Ben + +On line 17730: + (on Marano’s being + sent to Marin). Fed Chairman Ben + S. Bernanke, letter to + +On line 17730: + Marano’s being sent + to Marin). Fed Chairman Ben S. + Bernanke, letter to FCIC + +On line 17730: + to Marin). Fed Chairman + Ben S. Bernanke, letter to FCIC + Chairman Phil Angelides, + +On line 17730: + Chairman Ben S. Bernanke, + letter to FCIC Chairman Phil + Angelides, December + +On line 17732: + Ben S. Bernanke, letter + to FCIC Chairman Phil Angelides, + December James Cayne, + +On line 17732: + to FCIC Chairman Phil + Angelides, December James Cayne, + interview by FCIC, + +On line 17734: + Consolidated + Supervised Entities," memo + to Erik Sirri and + +On line 17734: + to Erik Sirri and + others, August p. SEC, "Risk + Management Reviews + +On line 17734: + Consolidated + Supervised Entities," memo + to Erik Sirri and + +On line 17738: + p. both produced by + SEC. Marano, interview. Bill + Jamison, internal + +On line 17740: + internal email, June + produced by Federated. + JPMorgan, Directors Risk + +On line 17740: + Federated. JPMorgan, + Directors Risk Policy + Committee, "Worldwide + +On line 17740: + Committee, "Worldwide + Securities Services Risk + Review," September + +On line 17742: + the downgrades, see Moody’s + Investor Service, "Announcement: + Moody’s Downgrades Subprime + +On line 17742: + Service, "Announcement: + Moody’s Downgrades Subprime First-Lien RMBS," + July Standard Poor’s, + +On line 17742: + Moody’s Downgrades Subprime + First-Lien RMBS," July Standard Poor’s, + "S&PCorrect: U.S. Subprime RMBS + +On line 17744: + U.S. First-Lien Subprime RMBS + Classes Downgraded," July + p. Glenn Costello, "U.S. + +On line 17744: + Subprime RMBS Classes + Downgraded," July p. Glenn + Costello, "U.S. Subprime + +On line 17744: + Downgraded," July + p. Glenn Costello, "U.S. Subprime + Rating Surveillance + +On line 17744: + p. Glenn Costello, "U.S. + Subprime Rating Surveillance + Update," Fitch Ratings, + +On line 17744: + Costello, "U.S. Subprime + Rating Surveillance Update," + Fitch Ratings, July + +On line 17746: + Rating Surveillance + Update," Fitch Ratings, July + FCIC, "Preliminary + +On line 17746: + Update," Fitch Ratings, + July FCIC, "Preliminary + Staff Report: Credit + +On line 17746: + Ratings, July FCIC, + "Preliminary Staff Report: + Credit Ratings and + +On line 17746: + FCIC, "Preliminary + Staff Report: Credit Ratings + and the Financial + +On line 17748: + Staff Report: Credit + Ratings and the Financial + Crisis," June p. Steven + +On line 17748: + Credit Ratings and + the Financial Crisis," June + p. Steven Eisman and + +On line 17748: + Financial Crisis," + June p. Steven Eisman and Tom + Warrack, Standard Poor’s + +On line 17750: + transcript, p. Andrew + Forster, telephone conversation, + July transcript, pp. + +On line 17758: + transcript, pp. Notes to + Chapter Martin Sullivan, + interview by FCIC, + +On line 17758: + Martin Sullivan, + interview by FCIC, June Steve + Bensinger, interview by + +On line 17758: + by FCIC, June Steve Bensinger, + interview by FCIC, June Robert + Lewis, interview by + +On line 17758: + Bensinger, interview by + FCIC, June Robert Lewis, interview + by FCIC, June Kevin McGinn, + +On line 17758: + by FCIC, June Robert Lewis, + interview by FCIC, June Kevin + McGinn, interview by + +On line 17758: + Lewis, interview by + FCIC, June Kevin McGinn, interview + by FCIC, June Andrew + +On line 17758: + interview by FCIC, + June Kevin McGinn, interview by + FCIC, June Andrew Forster, + +On line 17758: + Forster, Elias Habayeb, and Steve + Bensinger, testimony before + the FCIC, Hearing on + +On line 17758: + Elias Habayeb, and Steve Bensinger, + testimony before the + FCIC, Hearing on the + +On line 17758: + the FCIC, Hearing on + the Role of Derivatives + in the Financial + +On line 17758: + Hearing on the Role + of Derivatives in the + Financial Crisis, + +On line 17758: + Derivatives in + the Financial Crisis, day + session American + +On line 17758: + session American + International Group, Inc. + and Goldman Sachs Group, + +On line 17758: + International + Group, Inc. and Goldman Sachs Group, + Inc., July transcript, + +On line 17760: + Inc. and Goldman Sachs + Group, Inc., July transcript, pp. + Clarence K. Lee, former + +On line 17760: + former managing + director for Complex and + International + +On line 17760: + Thrift Supervision, + testimony before the + FCIC, Hearing on the + +On line 17760: + the FCIC, Hearing on + the Role of Derivatives + in the Financial + +On line 17760: + Hearing on the Role + of Derivatives in the + Financial Crisis, + +On line 17760: + Financial Crisis, + day session Derivatives: + Supervisors and + +On line 17762: + and Regulators, + July transcript, pp. Alan Frost, + interview by FCIC, + +On line 17764: + transcript, pp. Alan Frost, + interview by FCIC, May Joseph + Cassano, interview + +On line 17766: + Cassano, interview + by FCIC, June "Information + Pertaining to the + +On line 17766: + June "Information + Pertaining to the Multi-Sector CDS + Portfolio," produced + +On line 17766: + Pertaining to the + Multi-Sector CDS Portfolio," produced + by AIG, with FCIC staff + +On line 17768: + staff calculations. + Andrew Davilman, email to Alan + Frost, subject: "Sorry + +On line 17768: + Andrew Davilman, email + to Alan Frost, subject: "Sorry + to bother you on"; + +On line 17768: + to Alan Frost, subject: + "Sorry to bother you on"; + Frost, email to Davilman, + +On line 17768: + Frost, subject: "Sorry + to bother you on"; Frost, email + to Davilman, subject: + +On line 17768: + subject: "Sorry to + bother you on"; Frost, email to + Davilman, subject: "Re: + +On line 17768: + "Sorry to bother + you on"; Frost, email to Davilman, + subject: "Re: Sorry + +On line 17768: + bother you on"; Frost, + email to Davilman, subject: "Re: + Sorry to bother + +On line 17768: + you on"; Frost, email to + Davilman, subject: "Re: Sorry + to bother you on"; + +On line 17768: + to Davilman, subject: + "Re: Sorry to bother you + on"; Davilman, email to + +On line 17768: + Davilman, subject: "Re: + Sorry to bother you on"; + Davilman, email to Frost, + +On line 17768: + subject: "Re: Sorry + to bother you on"; Davilman, + email to Frost, subject: + +On line 17768: + Sorry to bother + you on"; Davilman, email to Frost, + subject: "Re: Sorry + +On line 17768: + on"; Davilman, email to + Frost, subject: "Re: Sorry to + bother you on"—all + +On line 17772: + to AIG Financial + Products Corp., July produced + by Goldman Sachs. AIG + +On line 17772: + by Goldman Sachs. AIG + hedges, January 2006–December + produced by Goldman + +On line 17774: + 2006–December produced + by Goldman Sachs. Andrew Forster, + interview by FCIC, + +On line 17776: + produced by Goldman + Sachs. Andrew Forster, interview + by FCIC, June Daniel Sparks, + +On line 17776: + Goldman Sachs. Andrew + Forster, interview by FCIC, June + Daniel Sparks, interview + +On line 17778: + Daniel Sparks, interview + by FCIC, May "Valuation + Pricing Related + +On line 17778: + Pricing Related + to Initial Collateral + Calls on Transactions + +On line 17780: + Calls on Transactions + with AIG," produced by Goldman + Sachs. Jon Liebergall and + +On line 17780: + Transactions with AIG," + produced by Goldman Sachs. Jon + Liebergall and Andrew + +On line 17780: + with AIG," produced by + Goldman Sachs. Jon Liebergall and + Andrew Forster, telephone + +On line 17780: + Liebergall and Andrew + Forster, telephone conversation, + July transcript, pp. + +On line 17782: + transcript, pp. David Viniar, + written testimony for + the FCIC, Hearing on + +On line 17782: + pp. David Viniar, written + testimony for the FCIC, + Hearing on the Role + +On line 17782: + testimony for + the FCIC, Hearing on the Role + of Derivatives + +On line 17782: + the FCIC, Hearing on + the Role of Derivatives + in the Financial + +On line 17782: + Hearing on the Role + of Derivatives in the + Financial Crisis, + +On line 17782: + Derivatives in + the Financial Crisis, day + session American + +On line 17782: + session American + International Group, Inc. + and Goldman Sachs Group, + +On line 17795: + Athan, email to Andrew + Forster, August Chapter Henry + Paulson, quoted in + +On line 17795: + Forster, August Chapter + Henry Paulson, quoted in + Kevin Carmichael and Peter + +On line 17795: + quoted in Kevin Carmichael + and Peter Cook, "Paulson Says + Subprime Rout Doesn’t + +On line 17797: + Rout Doesn’t Threaten + Economy," Bloomberg, July Moody’s + Investors Service, "Moody’s + +On line 17797: + Moody’s Investors Service, + "Moody’s ABCP Program Index: CP + Outstanding as of + +On line 17797: + ABCP Program Index: + CP Outstanding as of Moody’s + Investors Service, "Moody’s + +On line 17797: + CP Outstanding as + of Moody’s Investors Service, "Moody’s + Performance Overview: + +On line 17797: + Moody’s Investors Service, + "Moody’s Performance Overview: Rhineland + Funding Capital + +On line 17799: + Overview: Rhineland Funding + Capital Corporation," + June As noted, in + +On line 17799: + capital charge for + liquidity puts equal to + of the base or Staff + +On line 17799: + for liquidity + puts equal to of the base or + Staff of Bundesanstalt + +On line 17799: + liquidity puts + equal to of the base or Staff + of Bundesanstalt fur + +On line 17799: + by FCIC, September + See also Office of the + Comptroller of the + +On line 17801: + Treatment," August For + example, Citigroup would + have held million in + +On line 17801: + in liquidity + put exposure that it had + accumulated + +On line 17801: + exposure that it + had accumulated on + CDOs it had issued. + +On line 17803: + accumulated + on CDOs it had issued. IKB, + Annual Report, + +On line 17805: + CDOs it had issued. + IKB, Annual Report, June + p. Securities + +On line 17805: + it had issued. IKB, + Annual Report, June p. + Securities Fraud + +On line 17805: + Securities Fraud + Complaint, Securities and + Exchange Commission + +On line 17807: + Sachs Co. and Fabrice + Tourre, no. 10-CV-3229 (S.D.N.Y. April p. + IKB staff, interview + +On line 17807: + Co. and Fabrice Tourre, + no. 10-CV-3229 (S.D.N.Y. April p. IKB + staff, interview by + +On line 17807: + and Fabrice Tourre, no. + 10-CV-3229 (S.D.N.Y. April p. IKB staff, + interview by FCIC, + +On line 17807: + interview by FCIC, + August Securities and + Exchange Commission + +On line 17807: + Securities and + Exchange Commission (plaintiff) + v. Goldman Sachs Co. + +On line 17807: + v. Goldman Sachs Co. + and Fabrice Tourre (defendants), + Securities Fraud + +On line 17807: + United States District + Court, Southern District of New + York, April at paragraph + +On line 17809: + York, April at paragraph + "Preliminary results for + the first quarter April-30 + +On line 17811: + the first quarter April-30 + June IKB press release, July + IKB staff, interview; + +On line 17811: + first quarter April-30 June + IKB press release, July IKB + staff, interview; IKB, + +On line 17811: + IKB staff, interview; + IKB, clarification of + interview by FCIC, + +On line 17811: + interview by FCIC, + November IKB, restated + Annual Report, + +On line 17813: + by FCIC, November + IKB, restated Annual + Report, p. Steven Meier, + +On line 17813: + Report, p. Steven Meier, + testimony before the + FCIC, Hearing on the + +On line 17813: + Meier, testimony + before the FCIC, Hearing on + the Shadow Banking + +On line 17821: + Banking System, May + transcript, p. Notes to Chapter + Angelo Mozilo, + +On line 17823: + LA-03370-A, November pp. + Angelo Mozilo, email to + Lyle Gramley, member + +On line 17823: + Board of Countrywide + Financial Corporation + (cc Michael Perry, chief + +On line 17825: + chief executive + officer, IndyMac Bank), August + Eric Sieracki, + +On line 17825: + officer, IndyMac Bank), + August Eric Sieracki, + quoted in Mark DeCambre, + +On line 17827: + Mark DeCambre, "Countrywide + Defends Liquidity," TheStreet.com, + August "Minutes of + +On line 17827: + TheStreet.com, August "Minutes + of a Special Telephonic + Meeting of the Board + +On line 17829: + Fed Chairman Ben Bernanke, + letter to FCIC Chairman Phil + Angelides, December + +On line 17831: + Reserve Staff, memo to + Board of Governors of the + Federal Reserve + +On line 17831: + Board of Governors + of the Federal Reserve + System, "Background on + +On line 17835: + Ibid., pp. Countrywide + Financial Corporation, + Form 8-K, Exhibit + +On line 17835: + Corporation, Form + 8-K, Exhibit filed August + See also "Minutes + +On line 17835: + See also "Minutes + of a Special Telephonic + Meeting of the Boards + +On line 17835: + Boards of Directors + of Countrywide Financial + Corporation and + +On line 17837: + Corporation and + Countrywide Bank, FSB," August + Angelo Mozilo, + +On line 17837: + Countrywide Bank, FSB," + August Angelo Mozilo, + interview by FCIC, + +On line 17839: + August Angelo + Mozilo, interview by FCIC, + September Kenneth + +On line 17839: + Mozilo, interview + by FCIC, September Kenneth + Bruce, "Liquidity + +On line 17839: + September Kenneth + Bruce, "Liquidity Is the + Achilles Heel," Merrill Lynch + +On line 17839: + Bruce, "Liquidity + Is the Achilles Heel," Merrill Lynch + Analyst Report, + +On line 17843: + August p. Mozilo, + interview; the article, + by E. Scott Reckard and + +On line 17843: + article, by E. + Scott Reckard and Annette Haddad, + was titled "Credit + +On line 17843: + Scott Reckard and Annette + Haddad, was titled "Credit + Crunch Imperils Lender: + +On line 17843: + was titled "Credit + Crunch Imperils Lender: Worries + Grow about Countrywide’s + +On line 17845: + Angelo Mozilo, + quoted in "One on One with + Angelo Mozilo, + +On line 17845: + Mozilo, quoted in + "One on One with Angelo + Mozilo, Chairman and + +On line 17845: + quoted in "One on + One with Angelo Mozilo, + Chairman and CEO of + +On line 17845: + CEO of Countrywide + Financial," Nightly Business + Report, PBS, August + +On line 17845: + Financial," Nightly + Business Report, PBS, August + transcript; and in "CEO + +On line 17845: + transcript; and in "CEO + Exclusive: Countrywide CEO, + Pt. The Call, CNBC, + +On line 17845: + in "CEO Exclusive: + Countrywide CEO, Pt. The Call, + CNBC, interview + +On line 17845: + Countrywide CEO, Pt. + The Call, CNBC, interview + by Maria Bartiromo, + +On line 17847: + interview by Maria + Bartiromo, August transcript, + p. Sebastian Boyd, + +On line 17847: + Bartiromo, August + transcript, p. Sebastian Boyd, + "BNP Paribas Freezes Funds as + +On line 17847: + August transcript, p. + Sebastian Boyd, "BNP Paribas Freezes + Funds as Loan Losses + +On line 17849: + Boyd, "BNP Paribas Freezes Funds + as Loan Losses Roil Markets," + Bloomberg, August "BNP Paribas + +On line 17849: + as Loan Losses Roil + Markets," Bloomberg, August "BNP Paribas + Investment Partners + +On line 17849: + Markets," Bloomberg, August + "BNP Paribas Investment Partners + Temporally [sic] + +On line 17849: + Investment Partners + Temporally [sic] Suspends + the Calculation + +On line 17849: + Temporally [sic] + Suspends the Calculation + of the Net Asset + +On line 17849: + the Calculation + of the Net Asset Value + of the following + +On line 17849: + Calculation of + the Net Asset Value of + the following funds: + +On line 17849: + Asset Value of + the following funds: Parvest + Dynamic ABS, BNP + +On line 17849: + the following funds: + Parvest Dynamic ABS, BNP + Paribas ABS EURIBOR + +On line 17851: + Dynamic ABS, BNP + Paribas ABS EURIBOR and BNP + Paribas ABS EONIA," BNP + +On line 17851: + ABS EURIBOR and + BNP Paribas ABS EONIA," BNP Paribas + press release, August + +On line 17853: + EURIBOR and BNP + Paribas ABS EONIA," BNP Paribas press + release, August Paul + +On line 17853: + ABS EONIA," BNP Paribas + press release, August Paul A. + McCulley, testimony + +On line 17853: + August Paul A. McCulley, + testimony before the + FCIC, Hearing on the + +On line 17853: + McCulley, testimony + before the FCIC, Hearing on + the Shadow Banking + +On line 17855: + Banking System, May + pp. Daniel M. Covitz, Nellie Liang, + and Gustavo A. + +On line 17855: + Daniel M. Covitz, Nellie + Liang, and Gustavo A. Suarez, + "The Evolution of + +On line 17855: + M. Covitz, Nellie Liang, + and Gustavo A. Suarez, "The + Evolution of a + +On line 17855: + and Gustavo A. + Suarez, "The Evolution of a + Financial Crisis: + +On line 17855: + Suarez, "The Evolution + of a Financial Crisis: + Panic in the Asset-Backed + +On line 17855: + of a Financial + Crisis: Panic in the Asset-Backed + Commercial Paper + +On line 17855: + Crisis: Panic in + the Asset-Backed Commercial Paper + Market," August p. + +On line 17857: + the Asset-Backed Commercial + Paper Market," August p. + Ibid., figure panel + +On line 17859: + Facilitate the + Orderly Functioning of + Financial Markets," + +On line 17863: + August Henry Tabe, + Moody’s Investors Service, "SIVs: An + Oasis of Calm in + +On line 17863: + Moody’s Investors Service, + "SIVs: An Oasis of Calm in + the Sub-prime Maelstrom: + +On line 17863: + "SIVs: An Oasis of + Calm in the Sub-prime Maelstrom: + Structured Investment + +On line 17867: + Report, July p. + Ibid. Henry Tabe, interview + by FCIC, October + +On line 17869: + Liquidity: The + Path Toward Credit Market + Nor-malization," Moody’s + +On line 17869: + Path Toward Credit + Market Nor-malization," Moody’s + International + +On line 17875: + p. Information + provided to the FCIC by + Deloitte LLP’s counsel, + +On line 17877: + provided to the + FCIC by Deloitte LLP’s counsel, + August Moody’s Rating + +On line 17877: + LLP’s counsel, August + Moody’s Rating Action, "Sigma + Finance," September + +On line 17877: + September Henry + Tabe, The Unravelling of + Structured Investment + +On line 17879: + Kent]: Thoth Capital, + p. The SEC indicated + it is aware of at + +On line 17879: + Thoth Capital, p. + The SEC indicated it + is aware of at least + +On line 17879: + indicated it + is aware of at least money + market funds that were + +On line 17879: + it is aware of at + least money market funds that + were supported by + +On line 17879: + that were supported + by affiliates because + of SIV investments. + +On line 17879: + were supported by + affiliates because of + SIV investments. See + +On line 17879: + by affiliates + because of SIV investments. + See Securities + +On line 17879: + SIV investments. See + Securities and Exchange + Commission, "Money + +On line 17879: + Securities and + Exchange Commission, "Money + Fund Reform" (Proposed + +On line 17883: + Exchange Commission, + "Money Fund Reform" (Proposed + rule), June p. n. Notes + +On line 17887: + "Money Fund Reform" + (Proposed rule), June p. n. Notes + to Chapter Christopher + +On line 17887: + Reform" (Proposed rule), + June p. n. Notes to Chapter + Christopher Condon and + +On line 17887: + (Proposed rule), June p. + n. Notes to Chapter Christopher + Condon and Rachel Layne, + +On line 17887: + rule), June p. n. Notes + to Chapter Christopher Condon + and Rachel Layne, "GE Bond + +On line 17887: + June p. n. Notes to + Chapter Christopher Condon and + Rachel Layne, "GE Bond Fund + +On line 17887: + n. Notes to Chapter + Christopher Condon and Rachel Layne, + "GE Bond Fund Investors + +On line 17887: + to Chapter Christopher + Condon and Rachel Layne, "GE Bond + Fund Investors Cash Out + +On line 17887: + Condon and Rachel Layne, + "GE Bond Fund Investors Cash Out + After Losses from + +On line 17887: + and Rachel Layne, "GE Bond + Fund Investors Cash Out After + Losses from Subprime," + +On line 17889: + Fund Investors Cash Out + After Losses from Subprime," + Bloomberg, November The + +On line 17889: + Out After Losses + from Subprime," Bloomberg, November + The identity of + +On line 17889: + After Losses from + Subprime," Bloomberg, November The + identity of the + +On line 17889: + The identity of + the investor has never been + publicly disclosed. See + +On line 17889: + disclosed. See Shannon + D. Harrington and Sree Vidya + Bhaktavatsalam, "Bank + +On line 17889: + D. Harrington and + Sree Vidya Bhaktavatsalam, "Bank + of America to + +On line 17889: + "Bank of America + to Liquidate Billion Cash + Fund," Bloomberg, December + +On line 17889: + of America to + Liquidate Billion Cash Fund," + Bloomberg, December See + +On line 17889: + Billion Cash Fund," Bloomberg, + December See also Michael + M. Grynbaum, "Mortgage + +On line 17889: + Fund," Bloomberg, December + See also Michael M. Grynbaum, + "Mortgage Crisis Forces + +On line 17889: + See also Michael M. + Grynbaum, "Mortgage Crisis Forces + the Closing of a + +On line 17889: + M. Grynbaum, "Mortgage + Crisis Forces the Closing of + a Fund," New York Times, + +On line 17889: + "Mortgage Crisis Forces + the Closing of a Fund," New + York Times, December + +On line 17891: + the Closing of a + Fund," New York Times, December + Rich Rokus, portfolio + +On line 17891: + Times, December Rich + Rokus, portfolio manager + at Marshall Money + +On line 17891: + at Marshall Money + Market Funds, interview by + Crane Data, Money + +On line 17891: + Crane Data, Money + Fund Intelligence, June Crane + Data, Money Fund + +On line 17893: + Fund Intelligence, + January Credit Suisse + Institutional + +On line 17893: + January Credit + Suisse Institutional + Money Market Fund, + +On line 17895: + December Note p. + Florida Legislature, + Office of Program + +On line 17895: + Note p. Florida + Legislature, Office of + Program Policy + +On line 17895: + Program Policy + Analysis and Government + Accountability, + +On line 17899: + Memorandum, March + p. SBA report, "Update on + Sub-Prime Mortgage Meltdown + +On line 17908: + Bloomberg Professional, + Write downs and Credit Losses + vs. Capital Raised + +On line 17908: + data reported + for second half of Write-downs + are for losses to + +On line 17908: + for second half of + Write-downs are for losses to + holdings in structured + +On line 17908: + half of Write-downs are + for losses to holdings in + structured finance and + +On line 17910: + are for losses to + holdings in structured finance + and mortgages. Roy C. + +On line 17910: + holdings in structured + finance and mortgages. Roy C. + Smith, Paper Fortune$: + +On line 17910: + structured finance and + mortgages. Roy C. Smith, Paper + Fortune$: Modern Wall + +On line 17910: + finance and mortgages. + Roy C. Smith, Paper Fortune$: + Modern Wall Street: Where + +On line 17910: + and mortgages. Roy C. + Smith, Paper Fortune$: Modern + Wall Street: Where It’s Been + +On line 17910: + mortgages. Roy C. Smith, + Paper Fortune$: Modern Wall + Street: Where It’s Been and + +On line 17910: + Roy C. Smith, Paper + Fortune$: Modern Wall Street: Where + It’s Been and Where It’s + +On line 17910: + Smith, Paper Fortune$: + Modern Wall Street: Where It’s Been + and Where It’s Going + +On line 17910: + Fortune$: Modern Wall + Street: Where It’s Been and Where It’s + Going (New York: St. + +On line 17910: + Modern Wall Street: Where + It’s Been and Where It’s Going + (New York: St. Martin’s + +On line 17912: + Wall Street: Where It’s Been + and Where It’s Going (New York: + St. Martin’s p. Bloomberg + +On line 17912: + and Where It’s Going + (New York: St. Martin’s p. Bloomberg + Historical Prices + +On line 17912: + (New York: St. Martin’s + p. Bloomberg Historical Prices + Index December + +On line 17912: + St. Martin’s p. Bloomberg + Historical Prices Index + December CGS1U5; + +On line 17912: + Historical Prices + Index December CGS1U5; + CBSC1U5; and CLEH1U5. + +On line 17912: + Index December + CGS1U5; CBSC1U5; and CLEH1U5. + Figures refer to + +On line 17912: + December CGS1U5; + CBSC1U5; and CLEH1U5. Figures + refer to credit + +On line 17912: + CGS1U5; CBSC1U5; and + CLEH1U5. Figures refer to + credit default swaps + +On line 17912: + CBSC1U5; and CLEH1U5. + Figures refer to credit + default swaps on five-year + +On line 17912: + and CLEH1U5. Figures + refer to credit default + swaps on five-year senior + +On line 17914: + refer to credit + default swaps on five-year senior + debt. Presentation + +On line 17914: + default swaps on five-year + senior debt. Presentation + to Merrill Lynch Co. + +On line 17914: + debt. Presentation + to Merrill Lynch Co. Board of + Directors, "Leveraged + +On line 17918: + "Leveraged Finance and + Mortgage/CDO Review," October p. + Presentation to + +On line 17920: + Presentation to + Merrill board, October p. + Dow Kim, interview + +On line 17922: + interview by FCIC, + September Presentation + to Merrill Board of + +On line 17922: + by FCIC, September + Presentation to Merrill + Board of Directors, + +On line 17924: + Presentation to + Merrill Board of Directors, + October p. Ibid., + +On line 17926: + pp. Presentation + to Merrill Lynch Risk Oversight + Committee, "Market + +On line 17928: + Update," September + p. Merrill Lynch, 1Q Earnings + Call transcript, April p. + +On line 17930: + Lynch, 1Q Earnings Call + transcript, April p. Merrill Lynch, + 2Q Earnings Release, + +On line 17932: + April p. Merrill Lynch, + 2Q Earnings Release, July + p. Merrill Lynch, 2Q + +On line 17932: + 2Q Earnings Release, + July p. Merrill Lynch, 2Q + Earnings Call transcript, + +On line 17932: + Release, July p. + Merrill Lynch, 2Q Earnings Call + transcript, July pp. + +On line 17934: + July p. Merrill + Lynch, 2Q Earnings Call transcript, + July pp. Merrill + +On line 17942: + Ibid. Kim, interview. + Stanley O’Neal, interview by + FCIC, September "ABS + +On line 17946: + "ABS CDO Update" by + Dale Lattanzio, July p. O’Neal, + interview. Merrill + +On line 17946: + Dale Lattanzio, July + p. O’Neal, interview. Merrill + Lynch, 3Q Earnings Call + +On line 17946: + p. O’Neal, interview. + Merrill Lynch, 3Q Earnings Call + transcript, October + +On line 17948: + interview. Merrill + Lynch, 3Q Earnings Call transcript, + October pp. SEC + +On line 17950: + chronology, Merrill + Lynch specific, p. Nancy + Moran and Rodney Yap, + +On line 17950: + p. Nancy Moran and + Rodney Yap, "O’Neal Ranks No. on + Payout List, Group Says: + +On line 17950: + and Rodney Yap, "O’Neal + Ranks No. on Payout List, Group + Says: Table (Update1)," + +On line 17950: + Rodney Yap, "O’Neal Ranks + No. on Payout List, Group Says: + Table (Update1)," Bloomberg, + +On line 17952: + Ranks No. on Payout + List, Group Says: Table (Update1)," + Bloomberg, November Kim + +On line 17952: + List, Group Says: Table + (Update1)," Bloomberg, November Kim + interview; Merrill + +On line 17954: + Bloomberg, November Kim + interview; Merrill Lynch, Proxy + Statement, April p. Charles + +On line 17954: + interview; Merrill + Lynch, Proxy Statement, April p. Charles + Prince, interview by + +On line 17954: + Lynch, Proxy Statement, April + p. Charles Prince, interview by + FCIC, March Robert Rubin, + +On line 17958: + Rubin, interview + by FCIC, March Prince, interview. + Moody’s Investors Service, + +On line 17960: + Prince, testimony + before the FCIC, Hearing on + Subprime Lending and + +On line 17960: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 17960: + Government-Sponsored Enterprises + (GSEs), day session Citigroup + Senior Management, + +On line 17968: + Citigroup Senior + Management, April transcript, p. + Notes to Chapter Prince, + +On line 17970: + April transcript, p. Notes + to Chapter Prince, interview. + Tobias Brushammar, James + +On line 17970: + Hua, Graham Jackson, + and Subra Viswanathan, Citigroup + memorandum to + +On line 17970: + memorandum to + Nestor Dominguez, Janice Warne, Michael Raynes, + and Jo-Anne Williams, subject: + +On line 17970: + Nestor Dominguez, Janice Warne, + Michael Raynes, and Jo-Anne Williams, subject: + Liquidity Put + +On line 17970: + Warne, Michael Raynes, and Jo-Anne + Williams, subject: Liquidity + Put Valuation, + +On line 17972: + Xanthos, interview + by Financial Industry + Regulatory + +On line 17974: + (FINRA), March Susan + Mills, testimony before + the FCIC, hearing on + +On line 17974: + Mills, testimony + before the FCIC, hearing on + Subprime Lending and + +On line 17974: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 17978: + Murray Barnes, former + managing director of + Independent Risk, + +On line 17980: + March Notes on Senior + Supervisors’ Meeting with + Firms, meeting between + +On line 17980: + Firms, meeting between + Citigroup and Federal + Reserve Bank of New + +On line 17980: + Federal Reserve + Bank of New York, Federal + Reserve Board, Office + +On line 17980: + New York, Federal + Reserve Board, Office of the + Comptroller of the + +On line 17982: + Japan FSA, November + p. Janice Warne, interview + by FCIC, February + +On line 17982: + FSA, November p. + Janice Warne, interview by + FCIC, February Nestor + +On line 17984: + by FCIC, February + Nestor Dominguez, interview by FCIC, + March Dominguez, interview. + +On line 17986: + FCIC, February Nestor + Dominguez, interview by FCIC, March + Dominguez, interview. Nestor + +On line 17986: + February Nestor Dominguez, + interview by FCIC, March Dominguez, + interview. Nestor Dominguez, + +On line 17986: + Dominguez, interview by + FCIC, March Dominguez, interview. Nestor + Dominguez, testimony + +On line 17986: + Dominguez, interview. Nestor + Dominguez, testimony before + the FCIC, Hearing on + +On line 17986: + Dominguez, testimony + before the FCIC, Hearing on + Subprime Lending and + +On line 17986: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 17986: + Government-Sponsored Enterprises + (GSEs), day session Citigroup + Subprime-Related Structured Products + +On line 17986: + Enterprises (GSEs), + day session Citigroup Subprime-Related + Structured Products and + +On line 17988: + Structured Products and + Risk Management, April transcript, + pp. Barnes, interview. + +On line 17992: + Risk Management, April + transcript, pp. Barnes, interview. + Ibid. Notes on Senior + +On line 17996: + staff calculations. + Prince, testimony before + the FCIC, April transcript, + +On line 17996: + calculations. Prince, + testimony before the + FCIC, April transcript, p. + +On line 17998: + the FCIC, April transcript, + p. David Bushnell, interview + by FCIC, April Bushnell, + +On line 18000: + interview by FCIC, + April Bushnell, interview. Ellen + "Bebe" Duke, Citigroup + +On line 18004: + Risk, interview by + FCIC, March Barnes, interview. James + Xanthos, interview + +On line 18004: + Xanthos, interview + by Financial Industry + Regulatory + +On line 18008: + Regulatory + Authority (FINRA), March + Barnes, interview. Prince, + +On line 18010: + March Barnes, interview. + Prince, interview. Robert Rubin, + former chairman of + +On line 18010: + Prince, interview. Robert + Rubin, former chairman of + the Executive + +On line 18010: + the Executive + Committee and adviser, + interview by FCIC, + +On line 18012: + FCIC, March Thomas Maheras, + former co-CEO of Citi Markets + Banking, interview + +On line 18012: + Thomas Maheras, former + co-CEO of Citi Markets Banking, + interview by FCIC, + +On line 18014: + co-CEO of Citi Markets + Banking, interview by FCIC, + March Prince, interview. + +On line 18020: + Business and Subprime + Exposure, June p. Paul, Weiss, + Citigroup’s counsel, + +On line 18020: + Subprime Exposure, + June p. Paul, Weiss, Citigroup’s + counsel, response to + +On line 18024: + Q&A transcript, July + Complaint, Securities and + Exchange Commission + +On line 18026: + Exchange Commission + v. Citigroup Inc., 1:10-cv-01277 (D.D.C), + July Federal + +On line 18026: + v. Citigroup Inc., + 1:10-cv-01277 (D.D.C), July Federal + Reserve Board of New + +On line 18026: + Inc., 1:10-cv-01277 (D.D.C), July + Federal Reserve Board of + New York, letter to + +On line 18026: + Federal Reserve + Board of New York, letter to + Vikram Pandit and the + +On line 18026: + Reserve Board of New + York, letter to Vikram Pandit + and the Board of the + +On line 18026: + of New York, letter + to Vikram Pandit and the Board + of the Directors + +On line 18026: + New York, letter to + Vikram Pandit and the Board of + the Directors of + +On line 18026: + to Vikram Pandit and + the Board of the Directors + of Citigroup, April + +On line 18026: + Vikram Pandit and the + Board of the Directors of + Citigroup, April p. + +On line 18028: + Citigroup, April p. + Dominguez, testimony before + the FCIC, April transcript, + +On line 18030: + Maheras, interview, + and testimony before + the FCIC, Hearing on + +On line 18030: + and testimony + before the FCIC, Hearing on + Subprime Lending and + +On line 18030: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 18030: + Government-Sponsored Enterprises + (GSEs), day session Citigroup + Subprime-Related Structured Products + +On line 18030: + Enterprises (GSEs), + day session Citigroup Subprime-Related + Structured Products and + +On line 18046: + Prince, interview; Charles + Prince, email to Robert Rubin, re, + September A.M. (on + +On line 18046: + Charles Prince, email to Robert + Rubin, re, September A.M. + (on Thomas Maheras and + +On line 18046: + email to Robert Rubin, + re, September A.M. (on Thomas + Maheras and super + +On line 18048: + re, September A.M. + (on Thomas Maheras and super + seniors). Robert Rubin, + +On line 18048: + Maheras and super + seniors). Robert Rubin, email to + Charles Prince, September + +On line 18048: + and super seniors). + Robert Rubin, email to Charles Prince, + September P.M.; Charles + +On line 18048: + seniors). Robert Rubin, + email to Charles Prince, September + P.M.; Charles Prince, email to + +On line 18048: + Rubin, email to Charles + Prince, September P.M.; Charles Prince, + email to Robert Rubin, + +On line 18050: + Prince, September P.M.; + Charles Prince, email to Robert Rubin, + September P.M. Robert + +On line 18050: + Charles Prince, email to Robert + Rubin, September P.M. Robert + Rubin, interview + +On line 18050: + email to Robert Rubin, + September P.M. Robert Rubin, + interview by FCIC, + +On line 18052: + September P.M. Robert + Rubin, interview by FCIC, + March Prince, interview. + +On line 18056: + Rubin, interview + by FCIC, March Prince, interview. + Ibid. Citigroup, "Risk + +On line 18056: + Prince, interview. Ibid. + Citigroup, "Risk Management + Review: An Update + +On line 18056: + Review: An Update + to the Corporate Audit + and Risk Management + +On line 18062: + Earnings Call transcript, + October Prince, interview. + Paul, Weiss, Citigroup’s + +On line 18062: + interview. Paul, Weiss, + Citigroup’s counsel, letter + to FCIC in re the + +On line 18062: + Paul, Weiss, Citigroup’s + counsel, letter to FCIC in + re the FCIC’s second + +On line 18062: + Citigroup’s counsel, + letter to FCIC in re the + FCIC’s second and third + +On line 18062: + the FCIC’s second and + third supplemental requests, + March Citigroup, Proxy + +On line 18062: + third supplemental + requests, March Citigroup, Proxy + Statement for fiscal + +On line 18064: + for fiscal year March + p. Federal Reserve Board + of New York, letter + +On line 18064: + fiscal year March p. + Federal Reserve Board of + New York, letter to + +On line 18064: + Federal Reserve + Board of New York, letter to + Vikram Pandit and the + +On line 18064: + of New York, letter + to Vikram Pandit and the Board + of Directors of + +On line 18064: + to Vikram Pandit and + the Board of Directors of + Citigroup, April p. + +On line 18066: + Board of Directors + of Citigroup, April p. FCIC + staff calculations + +On line 18066: + of Directors of + Citigroup, April p. FCIC staff + calculations from + +On line 18066: + of Citigroup, April + p. FCIC staff calculations + from Citigroup proxy + +On line 18066: + staff calculations + from Citigroup proxy statements + (information for + +On line 18066: + from Citigroup proxy + statements (information for + and information + +On line 18066: + Paul, Weiss (on behalf + of Citigroup), letter to + FCIC, March "Response to + +On line 18068: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 18068: + Government-Sponsored Enterprises + (GSEs), day session Citigroup + Senior Management, + +On line 18070: + Citigroup Senior + Management, April transcript, pp. + John Reed, interview + +On line 18072: + transcript, pp. John Reed, + interview by FCIC, March AIG, + Earnings Call credit + +On line 18072: + John Reed, interview + by FCIC, March AIG, Earnings Call + credit supplement, + +On line 18072: + interview by FCIC, + March AIG, Earnings Call credit + supplement, August + +On line 18074: + Earnings Call credit + supplement, August Joseph St. + Denis, letter to + +On line 18074: + supplement, August + Joseph St. Denis, letter to + House Committee on + +On line 18074: + to House Committee + on Oversight and Government + Reform, U.S. House of + +On line 18078: + p. Joseph St. Denis, + interview by FCIC, April Gene + Park, interview by + +On line 18080: + by FCIC, April Gene Park, + interview by FCIC, May Jake + Sun, interview by + +On line 18082: + Park, interview by + FCIC, May Jake Sun, interview + by FCIC, June Alan Frost, + +On line 18082: + by FCIC, May Jake Sun, + interview by FCIC, June Alan + Frost, interview by + +On line 18084: + Alan Frost, interview + by FCIC, May Pierre Micottis, + interview by FCIC, + +On line 18090: + 3Q07 review of AIG’s + super-senior CDS portfolio, + November p. Joseph + +On line 18092: + November p. Joseph + Cassano, interview by FCIC, + June Park, interview. + +On line 18094: + Cassano, interview + by FCIC, June Park, interview. + Goldman’s submissions + +On line 18094: + interview by FCIC, + June Park, interview. Goldman’s + submissions to the + +On line 18094: + interview. Goldman’s + submissions to the FCIC on + its valuation + +On line 18094: + its valuation + and pricing related to + collateral calls + +On line 18094: + pricing related + to collateral calls made + to AIG are available + +On line 18094: + collateral calls + made to AIG are available on + Goldman Sachs’s website + +On line 18100: + Andrew Forster, telephone + call to Jon Liebergall, July + transcript. PricewaterhouseCooper, memo to + +On line 18100: + Forster, telephone call to + Jon Liebergall, July transcript. + PricewaterhouseCooper, memo to AIGFP 2Q + +On line 18100: + call to Jon Liebergall, + July transcript. PricewaterhouseCooper, memo to + AIGFP 2Q review files, + +On line 18100: + Jon Liebergall, July + transcript. PricewaterhouseCooper, memo to AIGFP 2Q + review files, August + +On line 18102: + July transcript. PricewaterhouseCooper, + memo to AIGFP 2Q review files, + August Andrew Forster, + +On line 18102: + transcript. PricewaterhouseCooper, memo to + AIGFP 2Q review files, August + Andrew Forster, email to + +On line 18102: + to AIGFP 2Q review + files, August Andrew Forster, email + to Joseph Cassano and + +On line 18102: + AIGFP 2Q review files, + August Andrew Forster, email to + Joseph Cassano and Pierre + +On line 18102: + to Joseph Cassano and + Pierre Micottis, November + enclosing marks from + +On line 18104: + and Pierre Micottis, + November enclosing marks + from Merrill Lynch, AIG, + +On line 18104: + enclosing marks from + Merrill Lynch, AIG, Earnings Call + credit supplement, + +On line 18106: + Lynch, AIG, Earnings Call + credit supplement, August + pp. These estimates + +On line 18106: + Earnings Call credit + supplement, August pp. These + estimates are based + +On line 18106: + estimates are based + on Federal Reserve Bank + of New York, "Maiden + +On line 18106: + of New York, "Maiden + Lane III Quarterly Holdings + Report," January + +On line 18106: + Report," January + This probably isn’t a + complete list of their + +On line 18106: + a complete list of + their positions, because not + all CDO tranches are + +On line 18106: + complete list of their + positions, because not all + CDO tranches are part + +On line 18106: + positions, because + not all CDO tranches are part + of the Maiden Lane + +On line 18106: + not all CDO tranches + are part of the Maiden Lane + III portfolio. Of + +On line 18106: + all CDO tranches are + part of the Maiden Lane III + portfolio. Of the + +On line 18106: + III portfolio. Of + the securities listed + in that document, + +On line 18106: + portfolio. Of the + securities listed in + that document, FCIC + +On line 18106: + the securities + listed in that document, + FCIC staff found data + +On line 18106: + in that document, + FCIC staff found data on in + Moody’s CDO EMS database + +On line 18106: + that document, FCIC + staff found data on in Moody’s + CDO EMS database and + +On line 18106: + document, FCIC staff + found data on in Moody’s CDO + EMS database and Bloomberg. + +On line 18106: + data on in Moody’s + CDO EMS database and Bloomberg. For + those securities, + +On line 18106: + CDO EMS database and + Bloomberg. For those securities, + suffered a downgrade + +On line 18106: + downgrade and became + materially impaired + (i.e., were downgraded + +On line 18106: + (i.e., were downgraded + to Ca/C). Of the initially + rated Aaa, suffered + +On line 18106: + downgraded to Ca/C). + Of the initially rated + Aaa, suffered downgrades + +On line 18108: + suffered downgrades and + became materially + impaired. Alan Frost, email + +On line 18114: + Andrew Forster, August + Cassano, interview. Frost, email + to Forster, August Tom + +On line 18114: + Forster, August Cassano, + interview. Frost, email to Forster, + August Tom Athan, email + +On line 18114: + Cassano, interview. + Frost, email to Forster, August Tom + Athan, email to Andrew + +On line 18114: + interview. Frost, email + to Forster, August Tom Athan, email + to Andrew Forster, cc + +On line 18114: + Forster, August Tom Athan, + email to Andrew Forster, cc Adam + Budnick, September + +On line 18116: + email to Andrew Forster, + cc Adam Budnick, September + Joseph Cassano, email to + +On line 18116: + to Andrew Forster, cc + Adam Budnick, September Joseph + Cassano, email to Elias + +On line 18122: + Budnick, September + Joseph Cassano, email to Elias Habayeb, + November Notes to + +On line 18124: + Joseph Cassano, email to + Elias Habayeb, November Notes to + Chapter Minutes of + +On line 18124: + Elias Habayeb, November + Notes to Chapter Minutes of + the meeting of the + +On line 18124: + Habayeb, November Notes + to Chapter Minutes of the + meeting of the AIG + +On line 18124: + to Chapter Minutes + of the meeting of the AIG + Audit Committee, + +On line 18126: + of the AIG Audit + Committee, November p. + Andrew Forster, email to + +On line 18126: + Audit Committee, + November p. Andrew Forster, + email to Joseph Cassano, + +On line 18128: + email to Joseph Cassano, + subject: GS Prices vs Others, + November Goldman, + +On line 18128: + Cassano, subject: GS + Prices vs Others, November + Goldman, submission + +On line 18128: + subject: GS Prices vs + Others, November Goldman, + submission to the + +On line 18128: + Others, November + Goldman, submission to the + FCIC, "Valuation + +On line 18128: + Goldman, submission + to the FCIC, "Valuation + Pricing Related + +On line 18128: + Pricing Related + to Initial Collateral + Calls on Transactions + +On line 18130: + with AIG," pp. Based on + staff analysis of data + provided to the + +On line 18130: + includes all tranches + of the ABX.HE 06-2. TABX is + constructed based on + +On line 18130: + constructed based on + the reference obligations + for the 06-2 and 07-1 + +On line 18130: + on the reference + obligations for the 06-2 and + 07-1 BBB and BBB- + +On line 18130: + obligations for the + 06-2 and 07-1 BBB and BBB- + tranches of the ABX. + +On line 18132: + 06-2 and 07-1 BBB and + BBB- tranches of the ABX. + Cassano, interview. + +On line 18134: + 07-1 BBB and BBB- + tranches of the ABX. Cassano, + interview. Andrew + +On line 18134: + BBB- tranches of + the ABX. Cassano, interview. + Andrew Forster, email to + +On line 18134: + tranches of the ABX. + Cassano, interview. Andrew + Forster, email to Alan Frost, + +On line 18134: + of the ABX. Cassano, + interview. Andrew Forster, email + to Alan Frost, August + +On line 18136: + Cassano, interview. + Andrew Forster, email to Alan Frost, + August Tim Ryan, PricewaterhouseCooper, + +On line 18136: + Andrew Forster, email to + Alan Frost, August Tim Ryan, PricewaterhouseCooper, + interview by FCIC, + +On line 18138: + Alan Frost, August Tim + Ryan, PricewaterhouseCooper, interview by FCIC, + June SEC staff briefing + +On line 18138: + Frost, August Tim Ryan, + PricewaterhouseCooper, interview by FCIC, June + SEC staff briefing of + +On line 18138: + August Tim Ryan, PricewaterhouseCooper, + interview by FCIC, June SEC + staff briefing of FCIC + +On line 18140: + Ryan, PricewaterhouseCooper, interview + by FCIC, June SEC staff briefing + of FCIC staff, June Joseph + +On line 18140: + interview by FCIC, + June SEC staff briefing of FCIC + staff, June Joseph Cassano, + +On line 18140: + June SEC staff briefing + of FCIC staff, June Joseph Cassano, + email to Andrew Forster, + +On line 18140: + SEC staff briefing of + FCIC staff, June Joseph Cassano, email + to Andrew Forster, Pierre + +On line 18140: + of FCIC staff, June Joseph + Cassano, email to Andrew Forster, + Pierre Micottis, James + +On line 18140: + Joseph Cassano, email to + Andrew Forster, Pierre Micottis, + James Bridgwater, and + +On line 18140: + to Andrew Forster, Pierre + Micottis, James Bridgwater, + and Peter Robinson, + +On line 18140: + Forster, Pierre Micottis, + James Bridgwater, and Peter + Robinson, subject: Fw: + +On line 18142: + of meeting at AIGFP, + October See also PwC + audit team, memo re + +On line 18142: + at AIGFP, October + See also PwC audit team, + memo re 3Q07 review + +On line 18142: + AIGFP, October See + also PwC audit team, memo + re 3Q07 review of + +On line 18142: + also PwC audit + team, memo re 3Q07 review of + AIG’s super-senior CDS + +On line 18144: + 3Q07 review of AIG’s + super-senior CDS portfolio, + November pp. AIG, + +On line 18144: + of AIG’s super-senior + CDS portfolio, November + pp. AIG, 3Q Earnings + +On line 18144: + AIG’s super-senior CDS + portfolio, November pp. + AIG, 3Q Earnings Call + +On line 18146: + pp. AIG, 3Q Earnings + Call transcript, November pp. + PwC audit team memo, + +On line 18146: + AIG, 3Q Earnings Call + transcript, November pp. PwC + audit team memo, p. + +On line 18148: + Earnings Call transcript, + November pp. PwC audit + team memo, p. Goldman + +On line 18148: + memo, p. Goldman Sachs + International, to AIG + Financial Products + +On line 18152: + Dooley, November + attaching memo from Andrew + Forster, "Collateral + +On line 18154: + attaching memo from + Andrew Forster, "Collateral + Call Status." Andrew + +On line 18154: + Status." Andrew Forster, + "Collateral Call Status," + memo prepared for Joe + +On line 18156: + "Collateral Call + Status," memo prepared for Joe + Cassano. Joe Cassano, + +On line 18156: + Status," memo prepared + for Joe Cassano. Joe Cassano, + email to Bill Dooley, + +On line 18156: + memo prepared for Joe + Cassano. Joe Cassano, email to + Bill Dooley, subject: + +On line 18156: + Cassano. Joe Cassano, + email to Bill Dooley, subject: + Collateral Calls, + +On line 18158: + Calls, November Joe + Cassano, email to Bill Dooley, + subject: GS call back, + +On line 18160: + Cassano, email to Bill + Dooley, subject: GS call back, + November Goldman + +On line 18162: + Financial Products + Corp., margin call, November + PwC audit team, memo, + +On line 18162: + Products Corp., margin + call, November PwC audit + team, memo, November + +On line 18164: + call, November PwC + audit team, memo, November + p. PricewaterhouseCooper, notes of a + +On line 18164: + memo, November p. + PricewaterhouseCooper, notes of a meeting to + discuss super-senior + +On line 18164: + meeting to discuss + super-senior valuations + and collateral + +On line 18166: + disputes, November + p. produced by PwC. Andrew + Forster, interview by + +On line 18168: + Forster, interview by + FCIC, June Martin Sullivan, + interview by FDIC, + +On line 18170: + by FCIC, June Martin + Sullivan, interview by + FDIC, June PwC, notes of + +On line 18170: + Martin Sullivan, + interview by FDIC, June PwC, + notes of meeting of + +On line 18172: + interview by FDIC, + June PwC, notes of meeting of + November p. Ibid., + +On line 18174: + by FDIC, June PwC, notes + of meeting of November + p. Ibid., p. Kevin McGinn, + +On line 18174: + FDIC, June PwC, notes of + meeting of November p. + Ibid., p. Kevin McGinn, email + +On line 18174: + PwC, notes of meeting + of November p. Ibid., p. + Kevin McGinn, email to Paul + +On line 18174: + notes of meeting of + November p. Ibid., p. Kevin + McGinn, email to Paul Narayanan, + +On line 18178: + Paul Narayanan, November + Sullivan, interview. AIG + Investor Conference + +On line 18180: + Investor Conference + Call, December transcript, pp. + Joseph Cassano, email to + +On line 18180: + December transcript, + pp. Joseph Cassano, email to Michael + Sherwood and David Viniar, + +On line 18180: + Cassano, email to Michael + Sherwood and David Viniar, subject: + CDO Valuations, + +On line 18182: + Sherwood and David Viniar, + subject: CDO Valuations, + January Andrew + +On line 18182: + CDO Valuations, + January Andrew Davilman, + interview by FCIC, + +On line 18184: + by FCIC, June David Lehman, + interview by FCIC, June "AIG/Goldman + Sachs Collateral + +On line 18184: + interview by FCIC, + June "AIG/Goldman Sachs Collateral + Call Timeline," available + +On line 18188: + on FCIC website at + http://fcic.gov/ hearings/pdfs/2010–0701-AIG-Goldman-supporting-docs.pdf. PricewaterhouseCooper, memo + to AIG workpaper + +On line 18188: + http://fcic.gov/ hearings/pdfs/2010–0701-AIG-Goldman-supporting-docs.pdf. + PricewaterhouseCooper, memo to AIG workpaper + files, February pp. + +On line 18190: + hearings/pdfs/2010–0701-AIG-Goldman-supporting-docs.pdf. PricewaterhouseCooper, memo to AIG + workpaper files, February + pp. PricewaterhouseCooper, notes on a + +On line 18190: + to AIG workpaper + files, February pp. PricewaterhouseCooper, notes + on a February + +On line 18192: + Martin Sullivan, + testimony before the + FCIC, Hearing on the + +On line 18192: + the FCIC, Hearing on + the Role of Derivatives + in the Financial + +On line 18192: + Hearing on the Role + of Derivatives in the + Financial Crisis, + +On line 18192: + Derivatives in + the Financial Crisis, day + session American + +On line 18192: + session American + International Group, Inc. + and Derivatives, + +On line 18196: + International + Group, Inc. and Derivatives, + June transcript, p. PricewaterhouseCooper, + +On line 18198: + PricewaterhouseCooper, notes on the AIG + Audit Committee meeting, + February p. Joseph + +On line 18198: + the FCIC, Hearing on + the Role of Derivatives + in the Financial + +On line 18198: + Hearing on the Role + of Derivatives in the + Financial Crisis. + +On line 18198: + Derivatives in + the Financial Crisis. day + session American + +On line 18198: + session American + International Group, Inc. + and Derivatives, + +On line 18200: + Thrift Supervision, + letter to AIG General + Counsel and Board, March + +On line 18206: + Counsel and Board, March + William Dudley, interview by + FCIC, October Notes + +On line 18210: + Dudley, interview + by FCIC, October Notes to + Chapter Adam B. Ashcraft, + +On line 18210: + interview by FCIC, + October Notes to Chapter + Adam B. Ashcraft, Morten L. + +On line 18210: + by FCIC, October + Notes to Chapter Adam B. Ashcraft, + Morten L. Bech, and W. + +On line 18210: + FCIC, October Notes + to Chapter Adam B. Ashcraft, Morten + L. Bech, and W. Scott + +On line 18210: + October Notes to + Chapter Adam B. Ashcraft, Morten L. + Bech, and W. Scott Frame, + +On line 18210: + to Chapter Adam B. + Ashcraft, Morten L. Bech, and W. Scott + Frame, "The Federal + +On line 18210: + Chapter Adam B. Ashcraft, + Morten L. Bech, and W. Scott Frame, + "The Federal Home + +On line 18210: + Ashcraft, Morten L. Bech, and + W. Scott Frame, "The Federal + Home Loan Bank System: + +On line 18210: + Morten L. Bech, and W. + Scott Frame, "The Federal Home + Loan Bank System: The + +On line 18210: + L. Bech, and W. Scott + Frame, "The Federal Home Loan + Bank System: The Lender + +On line 18210: + Bech, and W. Scott Frame, + "The Federal Home Loan Bank + System: The Lender of + +On line 18210: + "The Federal Home + Loan Bank System: The Lender of + Next to Last Resort1" + +On line 18210: + Loan Bank System: The + Lender of Next to Last Resort1" + Federal Reserve + +On line 18210: + Lender of Next to Last + Resort1" Federal Reserve + Bank of New York Staff + +On line 18210: + Next to Last Resort1" + Federal Reserve Bank of + New York Staff Reports, + +On line 18210: + Federal Reserve + Bank of New York Staff Reports, + no. (November p. + +On line 18212: + Bank of New York Staff + Reports, no. (November p. + Federal Reserve + +On line 18212: + Federal Reserve + Board, "October Senior Loan + Officer Opinion + +On line 18214: + Bank Lending Practices," + October Frederic Mishkin, + interview by FCIC, + +On line 18214: + Practices," October + Frederic Mishkin, interview + by FCIC, October + +On line 18222: + by FCIC, October + Dudley, interview. Ibid. Ibid. + Standard Poor’s, "Detailed + +On line 18222: + October Dudley, + interview. Ibid. Ibid. Standard + Poor’s, "Detailed Results + +On line 18222: + Dudley, interview. + Ibid. Ibid. Standard Poor’s, "Detailed + Results of Subprime + +On line 18222: + interview. Ibid. Ibid. + Standard Poor’s, "Detailed Results + of Subprime Stress Test + +On line 18224: + of Subprime Stress Test + of Financial Guarantors," + RatingsDirect, February Alan + +On line 18228: + memo to Erik Sirri + and others, November p. + Roseman, interview, + +On line 18230: + others, November + p. Roseman, interview, May + SEC, "Risk Management + +On line 18230: + Roseman, interview, + May SEC, "Risk Management of + Consolidated + +On line 18232: + memo to Erik Sirri + and others, January p. + Bill Lockyer, State + +On line 18232: + to Erik Sirri and + others, January p. Bill + Lockyer, State of + +On line 18232: + others, January + p. Bill Lockyer, State of + California Debt + +On line 18232: + p. Bill Lockyer, + State of California Debt + Affordability + +On line 18232: + Report: Making the + Municipal Bond Market + Work for Taxpayers + +On line 18232: + Municipal Bond + Market Work for Taxpayers + in Turbulent Times + +On line 18232: + Bond Market Work for + Taxpayers in Turbulent + Times (October p. + +On line 18234: + for Taxpayers in + Turbulent Times (October + p. John J. McConnell and + +On line 18234: + Times (October p. + John J. McConnell and Alessio Saretto, + "Auction Failures and + +On line 18234: + p. John J. McConnell and + Alessio Saretto, "Auction Failures + and the Market for + +On line 18234: + "Auction Failures and + the Market for Auction Rate + Securities" (The + +On line 18234: + and the Market for + Auction Rate Securities" + (The Krannert School of + +On line 18236: + School of Management, + Purdue University, April + p. Erik R. Sirri, + +On line 18236: + Sirri, director + of Trading and Markets, U.S. + Securities and + +On line 18238: + Exchange Commission, + "Municipal Bound Turmoil: + Impact on Cities, Towns + +On line 18238: + States," testimony + before the House Financial + Services Committee, + +On line 18240: + the House Financial + Services Committee, 110th Cong., + 2nd sess., March Georgetown + +On line 18240: + 2nd sess., March Georgetown + University, "Annual + Financial Report, + +On line 18242: + Financial Report, + p. Jacqueline Doherty, "The + Sad Story of Auction-Rate + +On line 18244: + "The Sad Story of + Auction-Rate Securities, Barrons, + May "SEC Finalizes + +On line 18244: + Sad Story of Auction-Rate + Securities, Barrons, May + "SEC Finalizes ARS + +On line 18244: + Auction-Rate Securities, + Barrons, May "SEC Finalizes + ARS Settlements with + +On line 18244: + May "SEC Finalizes + ARS Settlements with Bank of + America, RBC, and + +On line 18244: + Settlements with Bank + of America, RBC, and Deutsche + Bank," SEC press release, + +On line 18253: + America, RBC, and + Deutsche Bank," SEC press release, June + Chapter "Prime Asset," + +On line 18253: + RBC, and Deutsche Bank," SEC + press release, June Chapter "Prime + Asset," Upper HedgeWorld + +On line 18253: + SEC press release, June + Chapter "Prime Asset," Upper + HedgeWorld Prime Brokerage + +On line 18253: + Asset," Upper HedgeWorld + Prime Brokerage League Table, + accessible at + +On line 18253: + accessible at + Gregory Zuckerman, "Hedge + Funds, Once a Windfall, + +On line 18253: + Zuckerman, "Hedge Funds, + Once a Windfall, Contribute + to Bear’s Downfall," Wall + +On line 18253: + Funds, Once a Windfall, + Contribute to Bear’s Downfall," + Wall Street Journal, March + +On line 18255: + Contribute to Bear’s + Downfall," Wall Street Journal, March + Jeff Mayer and Thomas + +On line 18255: + to Bear’s Downfall," Wall + Street Journal, March Jeff Mayer + and Thomas Marano, "Fixed + +On line 18255: + Wall Street Journal, March + Jeff Mayer and Thomas Marano, + "Fixed Income Overview," + +On line 18255: + Street Journal, March Jeff + Mayer and Thomas Marano, "Fixed + Income Overview," March + +On line 18255: + Jeff Mayer and Thomas + Marano, "Fixed Income Overview," + March p. produced by + +On line 18257: + Marano, "Fixed Income + Overview," March p. produced by + JP Morgan. Inside + +On line 18257: + March p. produced by + JP Morgan. Inside Mortgage + Finance, The Mortgage + +On line 18259: + The Secondary Market + (Bethesda, MD: Inside Mortgage + Finance, pp. FCIC staff + +On line 18259: + Market (Bethesda, MD: + Inside Mortgage Finance, pp. + FCIC staff estimates, + +On line 18259: + (Bethesda, MD: Inside + Mortgage Finance, pp. FCIC staff + estimates, based on + +On line 18259: + Mortgage Finance, pp. + FCIC staff estimates, based on + Moody’s CDO EMS database. + +On line 18259: + FCIC staff estimates, + based on Moody’s CDO EMS database. + Different numbers + +On line 18259: + based on Moody’s CDO EMS + database. Different numbers + are provided in + +On line 18259: + database. Different + numbers are provided in + Jeff Mayer and Thomas + +On line 18259: + are provided in + Jeff Mayer and Thomas Marano, + "Fixed Income Overview," + +On line 18259: + provided in Jeff + Mayer and Thomas Marano, "Fixed + Income Overview," March + +On line 18261: + Jeff Mayer and Thomas + Marano, "Fixed Income Overview," + March p. Samuel Molinaro, + +On line 18261: + and Thomas Marano, "Fixed + Income Overview," March p. Samuel + Molinaro, interview + +On line 18261: + Marano, "Fixed Income + Overview," March p. Samuel Molinaro, + interview by FCIC, + +On line 18261: + March p. Samuel Molinaro, + interview by FCIC, April Michael + Alix, interview + +On line 18263: + interview by FCIC, + April Michael Alix, interview + by FCIC, April SEC, "Risk + +On line 18267: + Colby and others, + May Robert Upton, interview + by FCIC, April SEC, "Risk + +On line 18271: + to Erik Sirri and + others, March Ibid. Bear Stearns, "Fitch + Presentation," PowerPoint + +On line 18273: + others, March Ibid. Bear + Stearns, "Fitch Presentation," PowerPoint + slides, August Upton, + +On line 18275: + slides, August Upton, + interview. Bear Stearns, Form 10-K + for the year ended + +On line 18275: + Upton, interview. + Bear Stearns, Form 10-K for the year + ended November + +On line 18275: + Bear Stearns, Form 10-K for + the year ended November + filed January pp. + +On line 18281: + Standard Poor’s, Global + Credit Portal RatingsDirect, "Research + Update: Bear Stearns Cos. + +On line 18283: + Credit Portal RatingsDirect, + "Research Update: Bear Stearns Cos. + Inc. Outlook Revised + +On line 18283: + "Research Update: Bear + Stearns Cos. Inc. Outlook Revised + to Negative; ‘A+/A-1’ + +On line 18295: + April Notes to Chapter + Matthew Eichner, interview + by FCIC, April Wendy de + +On line 18295: + April Wendy de Monchaux, + interview by FCIC, April Steven + Meyer, interview + +On line 18297: + FCIC, April Steven Meyer, + interview by FCIC, April Mike + Alix, interview + +On line 18301: + interview by FCIC, + April Eichner, interview. + Timeline Regarding + +On line 18303: + Timeline Regarding + Bear Stearns Companies Inc., April + produced by SEC. SEC + +On line 18303: + Regarding Bear Stearns + Companies Inc., April produced + by SEC. SEC Office + +On line 18303: + April produced by SEC. + SEC Office of Inspector + General, Office + +On line 18303: + by SEC. SEC Office + of Inspector General, + Office of Audits, + +On line 18309: + FCIC, Hearing on the + Shadow Banking System, day + session Investment + +On line 18309: + Banking System, day + session Investment Banks and + the Shadow Banking + +On line 18309: + session Investment + Banks and the Shadow Banking + System, May transcript, + +On line 18309: + Investment Banks and + the Shadow Banking System, + May transcript, p. Cayne, + +On line 18309: + Banks and the Shadow + Banking System, May transcript, + p. Cayne, interview. + +On line 18311: + the Shadow Banking + System, May transcript, p. Cayne, + interview. "Changes in + +On line 18311: + System, May transcript, + p. Cayne, interview. "Changes in + Approved Commercial + +On line 18311: + May transcript, p. Cayne, + interview. "Changes in Approved + Commercial Paper + +On line 18311: + p. Cayne, interview. + "Changes in Approved Commercial + Paper List—10/01/2007–12/31/2007" and "Changes + +On line 18315: + New York, "Tri-Party Repo + Infrastructure Reform," white + paper, May p. Seth + +On line 18315: + white paper, May p. + Seth Carpenter, interview + by FCIC, September + +On line 18317: + by FCIC, September + Information provided + by Federated + +On line 18319: + Federated to + the FCIC. Scott Goebel, Kevin Gaffney, and + Norm Lind (Fidelity + +On line 18319: + Goebel, Kevin Gaffney, and Norm + Lind (Fidelity employees), + interview by FCIC, + +On line 18321: + Norm Lind (Fidelity + employees), interview by + FCIC, February Steve + +On line 18321: + by FCIC, February + Steve Meier, executive vice + president State Street + +On line 18323: + interview by FCIC, + March Timeline Regarding the + Bear Stearns Companies + +On line 18323: + Timeline Regarding + the Bear Stearns Companies Inc., + April pp. provided + +On line 18323: + Regarding the Bear + Stearns Companies Inc., April pp. + provided to the + +On line 18325: + Companies Inc., April + pp. provided to the FCIC. + Alan Schwartz, interview + +On line 18327: + pp. provided to + the FCIC. Alan Schwartz, interview + by FCIC, April Lucian + +On line 18327: + provided to the + FCIC. Alan Schwartz, interview by + FCIC, April Lucian A. + +On line 18327: + Schwartz, interview by + FCIC, April Lucian A. Bebchuk + et al., "The Wages of + +On line 18331: + p. SNL Financial. + Thomas Marano, interview by + FCIC, April Paul Friedman, + +On line 18331: + interview by FCIC, + April Paul Friedman, quoted in + William Cohan, House of + +On line 18331: + FCIC, April Paul Friedman, + quoted in William Cohan, House + of Cards: A Tale of + +On line 18331: + Paul Friedman, quoted + in William Cohan, House of Cards: + A Tale of Hubris and + +On line 18331: + in William Cohan, House + of Cards: A Tale of Hubris and + Wretched Excess on + +On line 18331: + Cohan, House of Cards: + A Tale of Hubris and Wretched + Excess on Wall Street + +On line 18331: + House of Cards: A Tale + of Hubris and Wretched Excess + on Wall Street (New York: + +On line 18331: + A Tale of Hubris and + Wretched Excess on Wall Street + (New York: Doubleday, + +On line 18331: + Wretched Excess on + Wall Street (New York: Doubleday, + p. Although Friedman + +On line 18331: + York: Doubleday, p. + Although Friedman acknowledged + to the FCIC making + +On line 18331: + to the FCIC making + the cited statements, and many + others as well, he + +On line 18331: + making the cited + statements, and many others as + well, he attributes them + +On line 18331: + the cited statements, + and many others as well, he + attributes them to anger + +On line 18331: + and many others as + well, he attributes them to anger + and frustration over + +On line 18331: + many others as well, + he attributes them to anger and + frustration over Bear + +On line 18331: + as well, he attributes + them to anger and frustration + over Bear Stearns’s failure. + +On line 18331: + attributes them to anger + and frustration over Bear Stearns’s + failure. Currently, + +On line 18331: + and frustration over + Bear Stearns’s failure. Currently, + Friedman is employed + +On line 18331: + Friedman is employed + at Guggenheim Securities, + Inc., where he works for + +On line 18331: + employed at Guggenheim + Securities, Inc., where he + works for Alan Schwartz, the + +On line 18331: + Securities, Inc., + where he works for Alan Schwartz, the + former president + +On line 18331: + he works for Alan Schwartz, + the former president of + Bear Stearns. Paul Friedman, + +On line 18331: + Alan Schwartz, the former + president of Bear Stearns. Paul + Friedman, interview + +On line 18333: + Bear Stearns. Paul Friedman, + interview by FCIC, April The + Corporate Library, + +On line 18333: + Friedman, interview + by FCIC, April The Corporate + Library, "The Bear Stearns + +On line 18333: + Corporate Library, + "The Bear Stearns Companies Inc.: + Governance Profile," + +On line 18335: + Library, "The Bear Stearns + Companies Inc.: Governance + Profile," June p. Cayne, + +On line 18335: + Bear Stearns Companies + Inc.: Governance Profile," June + p. Cayne, interview. + +On line 18339: + interview. Molinaro, + interview. Cayne, interview; + Schwartz (interview by + +On line 18339: + Schwartz (interview by + FCIC) stated that bonuses for + individual + +On line 18339: + the Compensation + Committee, and the final + recommendation + +On line 18339: + Committee, and the + final recommendation + for bonuses came from + +On line 18341: + recommendation + for bonuses came from the CEO. + Alix, interview. + +On line 18343: + for bonuses came from + the CEO. Alix, interview. + Bear Stearns, Performance + +On line 18343: + Bear Stearns, Performance + Compensation Plan, p. I-1 + (provided to the + +On line 18343: + I-1 (provided to + the FCIC); Alix, interview. + The salary cap had been + +On line 18343: + (provided to the + FCIC); Alix, interview. The + salary cap had been raised + +On line 18343: + to the FCIC); Alix, + interview. The salary cap had + been raised from to in + +On line 18343: + interview. The salary + cap had been raised from to in + (Alix, interview; + +On line 18345: + had been raised from to + in (Alix, interview; Cayne, + interview). Bebchuk + +On line 18345: + from to in (Alix, + interview; Cayne, interview). + Bebchuk et al., "The + +On line 18345: + interview). Bebchuk + et al., "The Wages of Failure," + Table p. Table + +On line 18345: + Bebchuk et al., "The + Wages of Failure," Table p. + Table p. Table + +On line 18345: + et al., "The Wages of + Failure," Table p. Table + p. Table p. The + +On line 18345: + Table p. Table + p. Table p. The budget + authority for + +On line 18347: + authority for + the SEC in was million; in + it was billion. In + +On line 18347: + for the SEC in was + million; in it was billion. + In Alix received + +On line 18347: + in was million; in + it was billion. In Alix + received million in + +On line 18347: + million; in it was + billion. In Alix received + million in total + +On line 18347: + billion. In Alix + received million in total + compensation, Cayne + +On line 18347: + million in total + compensation, Cayne received + more than million in + +On line 18347: + compensation, Cayne + received more than million in + salary and bonus, and Schwartz + +On line 18347: + Cayne received more than + million in salary and bonus, and + Schwartz received more than + +On line 18347: + more than million in + salary and bonus, and Schwartz received + more than million in + +On line 18347: + than million in salary + and bonus, and Schwartz received more + than million in salary + +On line 18347: + million in salary and + bonus, and Schwartz received more than + million in salary and + +On line 18347: + in salary and bonus, and + Schwartz received more than million + in salary and bonus. SNL + +On line 18347: + bonus, and Schwartz received + more than million in salary and + bonus. SNL Financial; + +On line 18347: + in salary and bonus. SNL + Financial; interviews with + Spector and Alix. + +On line 18351: + and Alix. Marano, + interview. Tom Marano, email + to Alan Schwartz and Richie + +On line 18353: + email to Alan Schwartz and + Richie Metrick, February Matthew + Eichner, email to + +On line 18353: + Schwartz and Richie Metrick, + February Matthew Eichner, + email to James Giles et + +On line 18355: + email to James Giles et + al., January Lou Lebedin, + interview by FCIC, + +On line 18359: + al., January Lou + Lebedin, interview by FCIC, + April Notes to Chapter + +On line 18363: + Lebedin, interview + by FCIC, April Notes to Chapter + Timeline Regarding + +On line 18363: + interview by FCIC, + April Notes to Chapter Timeline + Regarding Bear Stearns + +On line 18363: + by FCIC, April Notes to + Chapter Timeline Regarding + Bear Stearns Companies + +On line 18363: + April Notes to Chapter + Timeline Regarding Bear Stearns + Companies Inc., April + +On line 18367: + Stearns Companies Inc., + April produced by SEC. Upton, + interview. Minutes + +On line 18367: + April produced by SEC. + Upton, interview. Minutes + of Special Meeting + +On line 18367: + Upton, interview. + Minutes of Special Meeting + of Bear Stearns Board of + +On line 18369: + Minutes of Special + Meeting of Bear Stearns Board of + Directors, March Pat + +On line 18369: + Special Meeting of + Bear Stearns Board of Directors, + March Pat Lewis, Bear Stearns, + +On line 18369: + Meeting of Bear Stearns + Board of Directors, March Pat + Lewis, Bear Stearns, email to + +On line 18369: + Board of Directors, + March Pat Lewis, Bear Stearns, email to + Matthew Eichner, Steven + +On line 18369: + of Directors, March + Pat Lewis, Bear Stearns, email to Matthew + Eichner, Steven Spurry, + +On line 18369: + March Pat Lewis, Bear Stearns, + email to Matthew Eichner, Steven + Spurry, James Giles, and Kevin + +On line 18369: + Lewis, Bear Stearns, email to + Matthew Eichner, Steven Spurry, James + Giles, and Kevin Silva, + +On line 18369: + Bear Stearns, email to Matthew + Eichner, Steven Spurry, James Giles, + and Kevin Silva, March + +On line 18371: + Matthew Eichner, Steven + Spurry, James Giles, and Kevin Silva, + March Matthew Eichner, + +On line 18371: + Eichner, Steven Spurry, + James Giles, and Kevin Silva, March + Matthew Eichner, email + +On line 18371: + Giles, and Kevin Silva, + March Matthew Eichner, email to + Brian Peters, March + +On line 18373: + Brian Peters, March + David Fettig, "The History + of a Powerful + +On line 18373: + Powerful Paragraph," + Federal Reserve Bank of + Minneapolis, + +On line 18375: + Federal Reserve + Bank of Minneapolis, + June James Embersit, + +On line 18375: + Minneapolis, + June James Embersit, email to + Deborah Bailey, + +On line 18377: + June James Embersit, + email to Deborah Bailey, + March In response to + +On line 18377: + James Embersit, email + to Deborah Bailey, March + In response to the + +On line 18377: + Embersit, email to + Deborah Bailey, March In + response to the FCIC’s + +On line 18377: + Deborah Bailey, + March In response to the FCIC’s + interrogatories, + +On line 18377: + March In response to + the FCIC’s interrogatories, + JP Morgan produced + +On line 18377: + In response to the + FCIC’s interrogatories, JP + Morgan produced a + +On line 18377: + interrogatories, + JP Morgan produced a list + of all payments Bear + +On line 18377: + Morgan produced a + list of all payments Bear Stearns + made to or received + +On line 18377: + produced a list of + all payments Bear Stearns made to + or received from OTC + +On line 18377: + of all payments Bear + Stearns made to or received from + OTC derivatives + +On line 18379: + OTC derivatives + counterparties from March through + March The spreadsheet was + +On line 18379: + from March through March The + spreadsheet was created in + September by Bear + +On line 18379: + in September by + Bear Stearns in response to a + request by the SEC + +On line 18379: + a request by the + SEC Division of Trading + and Markets. The large + +On line 18379: + and Markets. The large + volume of novations away + from Bear Stearns during + +On line 18379: + The large volume of + novations away from Bear Stearns + during the week of + +On line 18379: + Stearns during the week + of March and the previous + week was confirmed by + +On line 18379: + during the week of + March and the previous week + was confirmed by the + +On line 18379: + the previous week + was confirmed by the New York + Federal Reserve + +On line 18379: + confirmed by the New + York Federal Reserve and + International + +On line 18379: + Federal Reserve + and International Swaps + and Derivatives + +On line 18379: + and Derivatives + Association. (New York + Federal Reserve + +On line 18381: + ISDA personnel, + interviews by FCIC, May and + Brian Peters, email + +On line 18381: + interviews by FCIC, + May and Brian Peters, email + to Matthew Eichner, + +On line 18383: + and Brian Peters, + email to Matthew Eichner, March + Stuart Smith, email to + +On line 18383: + Peters, email to Matthew + Eichner, March Stuart Smith, + email to Bear Stearns, March + +On line 18383: + to Matthew Eichner, + March Stuart Smith, email to Bear + Stearns, March Marvin Woolard, + +On line 18383: + Matthew Eichner, March + Stuart Smith, email to Bear Stearns, + March Marvin Woolard, email + +On line 18383: + March Stuart Smith, email + to Bear Stearns, March Marvin Woolard, + email Stuart Smith et + +On line 18383: + Stuart Smith, email to + Bear Stearns, March Marvin Woolard, email + Stuart Smith et al., + +On line 18383: + Smith, email to Bear Stearns, + March Marvin Woolard, email Stuart + Smith et al., March Kyle + +On line 18383: + email to Bear Stearns, March + Marvin Woolard, email Stuart Smith + et al., March Kyle Bass, + +On line 18383: + Stearns, March Marvin Woolard, + email Stuart Smith et al., March + Kyle Bass, interview + +On line 18383: + March Marvin Woolard, email + Stuart Smith et al., March Kyle + Bass, interview by + +On line 18387: + et al., March Kyle Bass, + interview by FCIC, April Bass, + interview. Debby + +On line 18387: + Kyle Bass, interview + by FCIC, April Bass, interview. + Debby LaMoy, email to + +On line 18387: + interview by FCIC, + April Bass, interview. Debby + LaMoy, email to Faina Epshteyn, + +On line 18387: + April Bass, interview. + Debby LaMoy, email to Faina Epshteyn, + March Faina Epshteyn, email to + +On line 18387: + interview. Debby + LaMoy, email to Faina Epshteyn, March Faina + Epshteyn, email to Debby + +On line 18389: + LaMoy, email to Faina Epshteyn, + March Faina Epshteyn, email to Debby + LaMoy, March Marvin Woolard, + +On line 18389: + email to Faina Epshteyn, March + Faina Epshteyn, email to Debby LaMoy, + March Marvin Woolard, email + +On line 18389: + to Faina Epshteyn, March Faina + Epshteyn, email to Debby LaMoy, March + Marvin Woolard, email to + +On line 18389: + Epshteyn, March Faina Epshteyn, email + to Debby LaMoy, March Marvin + Woolard, email to Stuart + +On line 18389: + March Faina Epshteyn, email to + Debby LaMoy, March Marvin Woolard, + email to Stuart Smith + +On line 18389: + Epshteyn, email to Debby + LaMoy, March Marvin Woolard, email to + Stuart Smith et al., + +On line 18391: + LaMoy, March Marvin Woolard, + email to Stuart Smith et al., + March CNBC video, Schwartz + +On line 18391: + March Marvin Woolard, email + to Stuart Smith et al., March + CNBC video, Schwartz and + +On line 18391: + Woolard, email to Stuart + Smith et al., March CNBC video, + Schwartz and CNBC’s David Faber, + +On line 18391: + Stuart Smith et al., + March CNBC video, Schwartz and CNBC’s + David Faber, original + +On line 18393: + March CNBC video, Schwartz + and CNBC’s David Faber, original + air date March Yalman + +On line 18393: + CNBC video, Schwartz and + CNBC’s David Faber, original air + date March Yalman Onaran, + +On line 18393: + video, Schwartz and CNBC’s David + Faber, original air date March + Yalman Onaran, "Bear Stearns + +On line 18393: + David Faber, original + air date March Yalman Onaran, "Bear + Stearns Investor Lewis May + +On line 18393: + air date March Yalman + Onaran, "Bear Stearns Investor Lewis May + Increase His Stake," Bloomberg + +On line 18393: + March Yalman Onaran, "Bear + Stearns Investor Lewis May Increase + His Stake," Bloomberg News, March + +On line 18395: + Yalman Onaran, "Bear Stearns + Investor Lewis May Increase His + Stake," Bloomberg News, March Matthew + +On line 18395: + "Bear Stearns Investor Lewis + May Increase His Stake," Bloomberg News, + March Matthew Eichner, + +On line 18395: + Stearns Investor Lewis May + Increase His Stake," Bloomberg News, March + Matthew Eichner, email + +On line 18395: + May Increase His Stake," + Bloomberg News, March Matthew Eichner, + email to Erik Sirri, + +On line 18395: + Increase His Stake," Bloomberg + News, March Matthew Eichner, email + to Erik Sirri, Robert + +On line 18395: + His Stake," Bloomberg News, March + Matthew Eichner, email to Erik + Sirri, Robert Colby, + +On line 18395: + Matthew Eichner, email + to Erik Sirri, Robert Colby, + and Michael Macchiaroli, March + +On line 18397: + to Erik Sirri, Robert + Colby, and Michael Macchiaroli, March + Minutes of Special + +On line 18397: + Sirri, Robert Colby, + and Michael Macchiaroli, March Minutes + of Special Meeting + +On line 18397: + and Michael Macchiaroli, March + Minutes of Special Meeting + of Bear Stearns Board of + +On line 18397: + Minutes of Special + Meeting of Bear Stearns Board of + Directors, March pp. + +On line 18399: + Meeting of Bear Stearns + Board of Directors, March pp. + Upton, interview. + +On line 18401: + Board of Directors, + March pp. Upton, interview. + Matthew Eichner, email + +On line 18401: + of Directors, March + pp. Upton, interview. Matthew + Eichner, email to + +On line 18401: + Upton, interview. + Matthew Eichner, email to Erik + Sirri, Robert Colby, + +On line 18401: + Matthew Eichner, email + to Erik Sirri, Robert Colby, + and Michael Macchiaroli, March + +On line 18403: + Eichner, email to + Erik Sirri, Robert Colby, and + Michael Macchiaroli, March Alan + +On line 18403: + to Erik Sirri, Robert + Colby, and Michael Macchiaroli, March + Alan Schwartz, interview + +On line 18403: + Sirri, Robert Colby, + and Michael Macchiaroli, March Alan Schwartz, + interview by FCIC; + +On line 18403: + and Michael Macchiaroli, March + Alan Schwartz, interview by FCIC; + Matthew Eichner, email + +On line 18403: + Michael Macchiaroli, March Alan + Schwartz, interview by FCIC; Matthew + Eichner, email to + +On line 18403: + Alan Schwartz, interview + by FCIC; Matthew Eichner, email + to Erik Sirri, Robert + +On line 18403: + interview by FCIC; + Matthew Eichner, email to Erik + Sirri, Robert Colby, + +On line 18403: + Matthew Eichner, email + to Erik Sirri, Robert Colby, + and Michael Macchiaroli, March + +On line 18405: + to Erik Sirri, Robert + Colby, and Michael Macchiaroli, March + Upton, interview. + +On line 18407: + Sirri, Robert Colby, + and Michael Macchiaroli, March Upton, + interview. Minutes + +On line 18407: + and Michael Macchiaroli, March + Upton, interview. Minutes + of Special Meeting + +On line 18407: + Upton, interview. + Minutes of Special Meeting + of Bear Stearns Board of + +On line 18407: + Minutes of Special + Meeting of Bear Stearns Board of + Directors, March ("[Schwartz] + +On line 18407: + Special Meeting of + Bear Stearns Board of Directors, + March ("[Schwartz] said there had + +On line 18407: + of Bear Stearns Board of + Directors, March ("[Schwartz] said there + had been seventeen + +On line 18407: + Directors, March ("[Schwartz] + said there had been seventeen + billion dollars in + +On line 18407: + ("[Schwartz] said there had been + seventeen billion dollars + in cash with a two + +On line 18407: + had been seventeen + billion dollars in cash with + a two billion eight + +On line 18407: + seventeen billion + dollars in cash with a two + billion eight hundred + +On line 18407: + with a two billion + eight hundred million dollar + backstop, unsecured + +On line 18407: + eight hundred million + dollar backstop, unsecured + line. The Board was told + +On line 18407: + backstop, unsecured + line. The Board was told that twelve + to fifteen billion + +On line 18407: + line. The Board was told + that twelve to fifteen billion + dollars had gone out + +On line 18407: + was told that twelve to + fifteen billion dollars had + gone out of TBSCI + +On line 18407: + that twelve to fifteen + billion dollars had gone out + of TBSCI in the + +On line 18407: + billion dollars had + gone out of TBSCI in the + last two days and that + +On line 18407: + dollars had gone out + of TBSCI in the last two + days and that TBSCI + +On line 18407: + gone out of TBSCI + in the last two days and that + TBSCI had received + +On line 18407: + TBSCI in the last + two days and that TBSCI had + received a billion + +On line 18407: + in the last two days + and that TBSCI had received + a billion dollars + +On line 18407: + the last two days and + that TBSCI had received a + billion dollars in + +On line 18409: + margin calls"). Upton, + interview; Goebel, Gaffney, and Lind, + interview; Steven Meier, + +On line 18409: + Upton, interview; + Goebel, Gaffney, and Lind, interview; + Steven Meier, interview + +On line 18409: + interview; Goebel, Gaffney, + and Lind, interview; Steven Meier, + interview by FCIC, + +On line 18409: + interview; Steven Meier, + interview by FCIC, March Michael + Macchiaroli, interview + +On line 18411: + interview by FCIC, + March Michael Macchiaroli, interview + by FCIC, April Christopher + +On line 18411: + by FCIC, April Christopher + Cox, written testimony + for the FCIC, Hearing + +On line 18411: + FCIC, April Christopher Cox, + written testimony for + the FCIC, Hearing on + +On line 18411: + Banking System, day + session SEC Regulation + of Investment Banks, + +On line 18413: + SEC Regulation + of Investment Banks, May p. + Timeline Regarding + +On line 18413: + of Investment Banks, + May p. Timeline Regarding + Bear Stearns Companies + +On line 18413: + Investment Banks, May + p. Timeline Regarding Bear + Stearns Companies Inc., + +On line 18415: + Timeline Regarding + Bear Stearns Companies Inc., April + produced by SEC. Jamie + +On line 18415: + Regarding Bear Stearns + Companies Inc., April produced + by SEC. Jamie Dimon, + +On line 18415: + Bear Stearns Companies + Inc., April produced by SEC. Jamie + Dimon, interview + +On line 18415: + Companies Inc., April + produced by SEC. Jamie Dimon, + interview by FCIC, + +On line 18415: + Inc., April produced by + SEC. Jamie Dimon, interview + by FCIC, October + +On line 18417: + April produced by SEC. + Jamie Dimon, interview by + FCIC, October Alan + +On line 18417: + produced by SEC. Jamie + Dimon, interview by FCIC, + October Alan Schwartz, + +On line 18417: + FCIC, October Alan + Schwartz, testimony before + the FCIC, Hearing on + +On line 18417: + October Alan Schwartz, + testimony before the + FCIC, Hearing on the + +On line 18417: + Schwartz, testimony + before the FCIC, Hearing on + the Shadow Banking + +On line 18417: + FCIC, Hearing on the + Shadow Banking System, day + session Investment + +On line 18417: + Banking System, day + session Investment Banks and + the Shadow Banking + +On line 18417: + session Investment + Banks and the Shadow Banking + System, May transcript, + +On line 18417: + Investment Banks and + the Shadow Banking System, + May transcript, p. Schwartz, + +On line 18417: + Banks and the Shadow + Banking System, May transcript, + p. Schwartz, interview. + +On line 18421: + Banking System, May + transcript, p. Schwartz, interview. + Schwartz., interview. Ibid.; + +On line 18421: + p. Schwartz, interview. + Schwartz., interview. Ibid.; Molinaro, + interview; Alix, + +On line 18423: + Schwartz., interview. Ibid.; + Molinaro, interview; Alix, + interview. John Chrin, + +On line 18423: + Molinaro, interview; + Alix, interview. John Chrin, + interview by FCIC, + +On line 18425: + Chrin, interview by + FCIC, April Dimon, interview + by FCIC, October + +On line 18425: + Dimon, interview + by FCIC, October minutes + of Special Meeting + +On line 18425: + by FCIC, October + minutes of Special Meeting + of Bear Stearns Board of + +On line 18427: + of Directors, March + Federal Reserve, "Report + Pursuant to Section + +On line 18427: + Federal Reserve, + "Report Pursuant to Section + of the Emergency + +On line 18427: + Stabilization Act + of Loan to Facilitate + the Acquisition + +On line 18427: + to Facilitate + the Acquisition of The + Bear Stearns Companies, + +On line 18427: + Facilitate the + Acquisition of The Bear + Stearns Companies, Inc. + +On line 18427: + the Acquisition + of The Bear Stearns Companies, + Inc. by JP Morgan + +On line 18427: + Acquisition of + The Bear Stearns Companies, Inc. + by JP Morgan Co.," + +On line 18427: + Companies, Inc. by + JP Morgan Co.," pp. Ernst Young, + "Project LLC: Summary + +On line 18427: + Co.," pp. Ernst Young, "Project + LLC: Summary of Findings + and Observations + +On line 18433: + LLC: Summary of + Findings and Observations + Report," June p. Notes + +On line 18435: + Report," June p. Notes + to Chapter Contrary to what + is stated in the + +On line 18435: + p. Notes to Chapter + Contrary to what is stated + in the board minutes + +On line 18435: + to Chapter Contrary + to what is stated in the + board minutes (Special + +On line 18435: + Contrary to what is + stated in the board minutes + (Special Meeting of + +On line 18435: + to what is stated + in the board minutes (Special + Meeting of Bear Stearns + +On line 18435: + is stated in the + board minutes (Special Meeting + of Bear Stearns Board of + +On line 18435: + in the board minutes + (Special Meeting of Bear Stearns + Board of Directors, + +On line 18435: + board minutes (Special + Meeting of Bear Stearns Board of + Directors, March p. + +On line 18435: + (Special Meeting of + Bear Stearns Board of Directors, + March p. when FCIC staff + +On line 18435: + of Bear Stearns Board of + Directors, March p. when FCIC + staff interviewed Schwartz + +On line 18435: + of Directors, March + p. when FCIC staff interviewed + Schwartz he said that the + +On line 18435: + Directors, March p. + when FCIC staff interviewed Schwartz + he said that the a + +On line 18435: + March p. when FCIC staff + interviewed Schwartz he said that + the a share price came + +On line 18435: + staff interviewed Schwartz + he said that the a share price + came from JP Morgan, + +On line 18435: + interviewed Schwartz he + said that the a share price came + from JP Morgan, not + +On line 18435: + said that the a share + price came from JP Morgan, not + Paulson. Schwartz also + +On line 18435: + the a share price came + from JP Morgan, not Paulson. + Schwartz also told staff + +On line 18435: + a share price came from + JP Morgan, not Paulson. Schwartz + also told staff that + +On line 18435: + came from JP Morgan, + not Paulson. Schwartz also told + staff that because Bear + +On line 18435: + from JP Morgan, not + Paulson. Schwartz also told staff + that because Bear did + +On line 18435: + Paulson. Schwartz also + told staff that because Bear did + not receive "a lot + +On line 18435: + staff that because Bear + did not receive "a lot of + competing offers," + +On line 18435: + did not receive "a + lot of competing offers," + it had to accept + +On line 18435: + not receive "a lot + of competing offers," it + had to accept JP + +On line 18435: + lot of competing + offers," it had to accept + JP Morgan’s offer + +On line 18437: + it had to accept + JP Morgan’s offer of a + share. Chrin, interview. + +On line 18439: + had to accept JP + Morgan’s offer of a share. + Chrin, interview. Alan + +On line 18439: + Morgan’s offer of + a share. Chrin, interview. Alan + Schwartz, testimony + +On line 18439: + Chrin, interview. Alan + Schwartz, testimony before + the FCIC, Hearing on + +On line 18439: + interview. Alan Schwartz, + testimony before the + FCIC, Hearing on the + +On line 18439: + Schwartz, testimony + before the FCIC, Hearing on + the Shadow Banking + +On line 18439: + FCIC, Hearing on the + Shadow Banking System, day + session Investment + +On line 18439: + Banking System, day + session Investment Banks and + the Shadow Banking + +On line 18439: + session Investment + Banks and the Shadow Banking + System, May transcript, + +On line 18443: + System, May transcript, + p. Macchiaroli, interview. Ben + Bernanke, closed-door session + +On line 18445: + Macchiaroli, interview. + Ben Bernanke, closed-door session with + FCIC, November Ibid. + +On line 18447: + Federal Reserve + Bank of New York, "Actions by + the New York Fed in + +On line 18447: + Reserve Bank of New + York, "Actions by the New York + Fed in Response to + +On line 18447: + New York, "Actions by + the New York Fed in Response + to Liquidity + +On line 18447: + Fed in Response to + Liquidity Pressures in + Financial Markets," + +On line 18449: + Banking, Housing, and + Urban Affairs, 110th Cong., 2nd + sess., April p. Henry + +On line 18449: + Housing, and Urban + Affairs, 110th Cong., 2nd sess., April + p. Henry Paulson, + +On line 18449: + p. Henry Paulson, + testimony before the + FCIC, Hearing on the + +On line 18449: + FCIC, Hearing on the + Shadow Banking System, day + session Perspective + +On line 18449: + System, day session + Perspective on the Shadow + Banking System, May + +On line 18455: + Perspective on the + Shadow Banking System, May + transcript, pp. Chapter + +On line 18458: + Banking System, May + transcript, pp. Chapter David Wong, + interview by FCIC, + +On line 18460: + Wong, interview by + FCIC, October Josh Fineman + and Yalman Onaran, "Lehman’s + +On line 18460: + interview by FCIC, + October Josh Fineman and + Yalman Onaran, "Lehman’s Fuld + +On line 18460: + by FCIC, October + Josh Fineman and Yalman Onaran, + "Lehman’s Fuld Says ‘Worst Is + +On line 18460: + and Yalman Onaran, "Lehman’s + Fuld Says ‘Worst Is Behind Us’ + in Crisis (Update3), + +On line 18460: + Yalman Onaran, "Lehman’s Fuld + Says ‘Worst Is Behind Us’ in + Crisis (Update3), Bloomberg, + +On line 18462: + Says ‘Worst Is Behind + Us’ in Crisis (Update3), Bloomberg, + April Henry Paulson, + +On line 18462: + April Henry Paulson, + testimony before the + FCIC, Hearing on the + +On line 18462: + FCIC, Hearing on the + Shadow Banking System, day + session Perspective + +On line 18462: + System, day session + Perspective on the Shadow + Banking System, May + +On line 18464: + Perspective on the + Shadow Banking System, May + transcript, p. Viral + +On line 18464: + Banking System, May + transcript, p. Viral V. Acharya + and T. Sabri Öncü, "The + +On line 18464: + System, May transcript, + p. Viral V. Acharya and T. + Sabri Öncü, "The Dodd-Frank Wall + +On line 18464: + transcript, p. Viral + V. Acharya and T. Sabri Öncü, "The + Dodd-Frank Wall Street Reform + +On line 18464: + Viral V. Acharya and + T. Sabri Öncü, "The Dodd-Frank Wall Street + Reform and Consumer + +On line 18464: + Acharya and T. Sabri Öncü, + "The Dodd-Frank Wall Street Reform and + Consumer Protection + +On line 18464: + T. Sabri Öncü, "The Dodd-Frank + Wall Street Reform and Consumer + Protection Act and + +On line 18464: + Dodd-Frank Wall Street Reform + and Consumer Protection Act + and a Little Known + +On line 18464: + Protection Act and + a Little Known Corner of + Wall Street: The Repo + +On line 18466: + Wall Street: The Repo + Market," Regulating Wall + Street, July Sandie O’Connor, + +On line 18468: + Street, July Sandie O’Connor, + JP Morgan, interview by + FCIC, March Jamie Dimon, + +On line 18468: + Sandie O’Connor, JP Morgan, + interview by FCIC, March Jamie + Dimon, interview + +On line 18468: + interview by FCIC, + March Jamie Dimon, interview + by FCIC, October + +On line 18470: + Dimon, interview + by FCIC, October Adam Copeland, + Antoine Martin, Michael + +On line 18470: + interview by FCIC, + October Adam Copeland, Antoine + Martin, Michael Walker, + +On line 18470: + Copeland, Antoine Martin, + Michael Walker, "The Tri-Party Repo + Market Before the + +On line 18472: + Michael Walker, "The Tri-Party + Repo Market Before the + Reforms," FRBNY Staff + +On line 18472: + Market Before the + Reforms," FRBNY Staff Report + No. November p. + +On line 18474: + November p. Steven + Meier, testimony before + the FCIC, Hearing on + +On line 18474: + Meier, testimony + before the FCIC, Hearing on + the Shadow Banking + +On line 18476: + the Shadow Banking + System, May transcript, p. William + Dudley, interview + +On line 18476: + System, May transcript, + p. William Dudley, interview + by FCIC, October + +On line 18478: + May transcript, p. William + Dudley, interview by FCIC, + October Darryll + +On line 18478: + Dudley, interview + by FCIC, October Darryll + Hendricks, interview + +On line 18478: + interview by FCIC, + October Darryll Hendricks, + interview by FCIC, + +On line 18480: + by FCIC, October + Darryll Hendricks, interview + by FCIC, August James + +On line 18480: + by FCIC, August James + Cayne, testimony before + the FCIC, Hearing on + +On line 18480: + FCIC, August James Cayne, + testimony before the + FCIC, Hearing on the + +On line 18480: + Cayne, testimony + before the FCIC, Hearing on + the Shadow Banking + +On line 18480: + FCIC, Hearing on the + Shadow Banking System, day + session Investment + +On line 18480: + Banking System, day + session Investment Banks and + the Shadow Banking + +On line 18480: + session Investment + Banks and the Shadow Banking + System, May transcript, + +On line 18482: + Investment Banks and + the Shadow Banking System, + May transcript, p. Seth + +On line 18482: + Banks and the Shadow + Banking System, May transcript, + p. Seth Carpenter, + +On line 18482: + Banking System, May + transcript, p. Seth Carpenter, + interview by FCIC, + +On line 18484: + Federal Reserve, + "Regulatory Reform: + Primary Dealer + +On line 18488: + R. Valukas, Report of + Examiner, In re Lehman + Brothers Holdings Inc., + +On line 18488: + of Examiner, + In re Lehman Brothers Holdings + Inc., et al., Chapter + +On line 18490: + Examiner, In + re Lehman Brothers Holdings Inc., + et al., Chapter Case + +On line 18490: + In re Lehman Brothers + Holdings Inc., et al., Chapter + Case No. 08-13555 (JMP), (Bankr. + +On line 18490: + Lehman Brothers Holdings + Inc., et al., Chapter Case No. + 08-13555 (JMP), (Bankr. S.D.N.Y.), + +On line 18490: + Brothers Holdings Inc., + et al., Chapter Case No. 08-13555 + (JMP), (Bankr. S.D.N.Y.), March + +On line 18490: + et al., Chapter Case + No. 08-13555 (JMP), (Bankr. S.D.N.Y.), March + quotation, (hereafter + +On line 18490: + (JMP), (Bankr. S.D.N.Y.), March + quotation, (hereafter cited + as Valukas; available at + +On line 18500: + Hendricks, interview. + Lucinda Brickler, email to + Patrick Parkinson, July + +On line 18500: + Lucinda Brickler, + email to Patrick Parkinson, July + Lucinda Brickler + +On line 18500: + Patrick Parkinson, July + Lucinda Brickler et al., + memorandum to + +On line 18502: + memorandum to + Timothy Geithner, + July The billion + +On line 18502: + July The billion + figure is noted in Patrick + Parkinson, email to Ben + +On line 18502: + The billion figure + is noted in Patrick Parkinson, + email to Ben Bernanke et + +On line 18502: + billion figure is + noted in Patrick Parkinson, email + to Ben Bernanke et al., + +On line 18502: + figure is noted + in Patrick Parkinson, email to Ben + Bernanke et al., July + +On line 18504: + is noted in Patrick + Parkinson, email to Ben Bernanke et + al., July Brickler + +On line 18504: + email to Ben Bernanke et + al., July Brickler et al., + memorandum, p. + +On line 18506: + al., July Brickler + et al., memorandum, p. + Patrick Parkinson, email to + +On line 18508: + Patrick Parkinson, email to + Lucinda Brickler, July + Patrick Parkinson, email to + +On line 18508: + email to Lucinda + Brickler, July Patrick Parkinson, + email to Ben Bernanke et + +On line 18514: + Brickler, July Patrick + Parkinson, email to Ben Bernanke et + al., July Ibid. Notes + +On line 18518: + Patrick Parkinson, email to + Ben Bernanke et al., July Ibid. + Notes to Chapter Based + +On line 18518: + Parkinson, email to Ben + Bernanke et al., July Ibid. Notes + to Chapter Based on + +On line 18518: + Bernanke et al., July + Ibid. Notes to Chapter Based on + chart in Federal + +On line 18518: + al., July Ibid. Notes + to Chapter Based on chart in + Federal Reserve + +On line 18518: + Ibid. Notes to Chapter + Based on chart in Federal + Reserve Bank of New + +On line 18522: + Largest Securities + Firms, August p. Ibid. Tobias + Adrian, Christopher Burke, + +On line 18522: + Ibid. Tobias Adrian, + Christopher Burke, and James McAndrews, "The + Federal Reserve’s + +On line 18522: + Adrian, Christopher Burke, + and James McAndrews, "The Federal + Reserve’s Primary + +On line 18522: + Christopher Burke, and James + McAndrews, "The Federal Reserve’s + Primary Dealer + +On line 18524: + of New York, Current + Issues in Economics and + Finance no. (August + +On line 18526: + Current Issues in + Economics and Finance no. + (August Erik Sirri, + +On line 18528: + Finance no. (August + Erik Sirri, interview by + FCIC, April p. Fed Chair + +On line 18528: + (August Erik Sirri, + interview by FCIC, April p. + Fed Chair Ben Bernanke, "Lessons + +On line 18528: + interview by FCIC, + April p. Fed Chair Ben Bernanke, "Lessons + from the Failure of + +On line 18530: + the House Financial + Services Committee, 111th Cong., + 2nd sess., April p. Valukas, + +On line 18530: + Services Committee, + 111th Cong., 2nd sess., April p. Valukas, + n. Examiner’s + +On line 18530: + sess., April p. Valukas, n. + Examiner’s Interview + of Timothy F. + +On line 18530: + n. Examiner’s + Interview of Timothy + F. Geithner, + +On line 18534: + of Timothy F. + Geithner, Nov. p. Valukas, + Sirri, interview. + +On line 18536: + Nov. p. Valukas, Sirri, + interview. William Brodows and Til + Schuermann, Federal + +On line 18536: + interview. William Brodows + and Til Schuermann, Federal + Reserve Bank of New + +On line 18536: + Brodows and Til Schuermann, + Federal Reserve Bank of + New York, "Primary + +On line 18538: + Initial Assessment + of CSEs," May slides Federal + Reserve Bank of New + +On line 18546: + Liquidity Stress + Analysis," June p. Ibid., p. + Valukas, Ibid., Christopher Cox, + +On line 18546: + Stress Analysis," June + p. Ibid., p. Valukas, Ibid., Christopher + Cox, statement before + +On line 18546: + Analysis," June p. + Ibid., p. Valukas, Ibid., Christopher Cox, + statement before the + +On line 18546: + p. Ibid., p. Valukas, Ibid., + Christopher Cox, statement before + the House Financial + +On line 18546: + p. Valukas, Ibid., Christopher + Cox, statement before the House + Financial Services + +On line 18546: + Christopher Cox, statement + before the House Financial + Services Committee, + +On line 18546: + Cox, statement before + the House Financial Services + Committee, 111th Cong., + +On line 18548: + the House Financial + Services Committee, 111th Cong., + 2nd sess., April p. Patrick + +On line 18548: + Financial Services + Committee, 111th Cong., 2nd sess., + April p. Patrick Parkinson, + +On line 18548: + Services Committee, + 111th Cong., 2nd sess., April p. Patrick + Parkinson, email to Steven + +On line 18550: + Stability: A + Private Sector Perspective, + The Report of the + +On line 18550: + A Private Sector + Perspective, The Report of + the CRMPG II," July + +On line 18552: + Sector Perspective, + The Report of the CRMPG II," + July Federal + +On line 18552: + The Report of the + CRMPG II," July Federal + Reserve Bank of New + +On line 18552: + Meeting on Credit + Derivatives," September + Federal Reserve + +On line 18552: + Bank of New York, "Third + Industry Meeting Hosted + by the Federal + +On line 18552: + Industry Meeting + Hosted by the Federal + Reserve Bank of New + +On line 18554: + Federal Reserve + Bank of New York," September + See Comptroller of + +On line 18554: + and Derivatives + Activities, First Quarter + Table the figures + +On line 18554: + Activities, First + Quarter Table the figures + in the text are reached + +On line 18554: + First Quarter Table + the figures in the text are + reached by subtracting + +On line 18554: + the text are reached by + subtracting exchange traded + futures and options + +On line 18554: + reached by subtracting + exchange traded futures and + options from total + +On line 18556: + options from total + derivatives. Chris Mewbourne, + interview by FCIC, + +On line 18558: + derivatives. Chris + Mewbourne, interview by FCIC, + July This figure + +On line 18558: + Mewbourne, interview + by FCIC, July This figure + compares with a low + +On line 18558: + interview by FCIC, + July This figure compares + with a low in at + +On line 18558: + by FCIC, July This + figure compares with a low + in at the height of + +On line 18558: + This figure compares + with a low in at the height + of the mortgage boom, + +On line 18558: + figure compares with + a low in at the height of + the mortgage boom, of + +On line 18558: + a low in at the + height of the mortgage boom, of + billion in problem + +On line 18558: + in at the height of + the mortgage boom, of billion + in problem assets. + +On line 18558: + in problem assets. + "Problem" institutions are + those with financial, + +On line 18558: + under the Uniform + Financial Institutions + Rating System. FDIC + +On line 18558: + FDIC reporting for + insured institutions—i.e., + the regulated + +On line 18558: + institutions—i.e., + the regulated banking + and thrift industry + +On line 18558: + Quarterly no. (March + Quarterly Banking Profile: + Second Quarter FDIC + +On line 18558: + Quarterly Banking + Profile: Second Quarter FDIC + Quarterly no. (June + +On line 18560: + Second Quarter FDIC + Quarterly no. (June By the + problem list would swell + +On line 18560: + Quarterly no. (June + By the problem list would swell + to banks, with assets + +On line 18560: + the problem list would + swell to banks, with assets of + billion. Quarterly + +On line 18560: + banks, with assets of + billion. Quarterly Banking + Profile: Fourth Quarter + +On line 18560: + billion. Quarterly + Banking Profile: Fourth Quarter + FDIC Quarterly no. + +On line 18564: + Quarterly Banking + Profile: First Quarter p. Roger + Cole, interview by + +On line 18566: + Quarter p. Roger Cole, + interview by FCIC, August + FCIC interview with + +On line 18566: + Cole, interview by + FCIC, August FCIC interview + with Michael Solomon and Fred + +On line 18566: + interview by FCIC, + August FCIC interview with + Michael Solomon and Fred Phillips-Patrick, + +On line 18566: + by FCIC, August FCIC + interview with Michael Solomon and + Fred Phillips-Patrick, September + +On line 18568: + interview with Michael + Solomon and Fred Phillips-Patrick, September + Federal Reserve + +On line 18568: + with Michael Solomon and Fred + Phillips-Patrick, September Federal + Reserve Bank of New + +On line 18568: + Fred Phillips-Patrick, September + Federal Reserve Bank of + New York, letter to + +On line 18570: + Reserve Bank of New + York, letter to Charles Prince, April + Federal Reserve + +On line 18570: + of New York, letter + to Charles Prince, April Federal + Reserve Bank of New + +On line 18570: + Federal Reserve + Bank of New York, Federal + Reserve Board, Office + +On line 18570: + New York, Federal + Reserve Board, Office of the + Comptroller of the + +On line 18572: + Reserve Board, "FRB New + York Operations Review: + Close Out Report," p. + +On line 18574: + FCIC, Hearing on the + Shadow Banking System, day + session Perspective + +On line 18574: + System, day session + Perspective on the Shadow + Banking System, May + +On line 18576: + the Shadow Banking + System, May transcript, p. Steve + Manzari and Dianne + +On line 18576: + System, May transcript, + p. Steve Manzari and Dianne + Dobbeck, interview by + +On line 18578: + p. Steve Manzari and + Dianne Dobbeck, interview by + FCIC, April Federal + +On line 18578: + Manzari and Dianne + Dobbeck, interview by FCIC, April + Federal Reserve + +On line 18578: + Dobbeck, interview by + FCIC, April Federal Reserve + Board, "Wachovia Case Study," + +On line 18578: + FCIC, April Federal + Reserve Board, "Wachovia Case Study," + November and p. + +On line 18578: + Board, "Wachovia Case Study," + November and p. Angus + McBryde, interview by + +On line 18584: + Study," November and + p. Angus McBryde, interview + by FCIC, July Notes + +On line 18584: + November and p. + Angus McBryde, interview by + FCIC, July Notes to + +On line 18586: + McBryde, interview by + FCIC, July Notes to Chapter + Thompson received a + +On line 18586: + FCIC, July Notes to + Chapter Thompson received a + severance package + +On line 18586: + In addition, he + negotiated himself + three years of office + +On line 18586: + of office space and + a personal assistant + at Wachovia’s expense. + +On line 18586: + expense. Thompson had + previously received more + than million in salary + +On line 18586: + than million in salary + and stock compensation in + and more than million + +On line 18586: + million in salary and + stock compensation in and + more than million in + +On line 18586: + more than million in + his total compensation + from through exceeded + +On line 18588: + exceeded million. + Federal Reserve Bank of + Richmond, letter to + +On line 18588: + Federal Reserve + Bank of Richmond, letter to + Wachovia, July pp. + +On line 18590: + pp. Comptroller of + the Currency, letter to + Wachovia, August with + +On line 18594: + letter, pp. Ibid., pp. + Ibid., letter, p. Report of + Examination, + +On line 18598: + Directors meeting, + April p. Senate Permanent + Subcommittee on + +On line 18598: + Subcommittee on + Investigations, Wall Street + and the Financial + +On line 18598: + Investigations, + Wall Street and the Financial + Crisis: The Role of + +On line 18598: + and the Financial + Crisis: The Role of High Risk + Home Loans, 111th Cong., 2nd + +On line 18598: + Financial Crisis: + The Role of High Risk Home Loans, + 111th Cong., 2nd sess., April + +On line 18598: + Crisis: The Role of + High Risk Home Loans, 111th Cong., 2nd + sess., April Exhibits, p. + +On line 18600: + The Role of High Risk + Home Loans, 111th Cong., 2nd sess., April + Exhibits, p. Senate + +On line 18600: + High Risk Home Loans, 111th + Cong., 2nd sess., April Exhibits, p. + Senate Permanent + +On line 18600: + Subcommittee on + Investigations, Wall Street + and the Financial + +On line 18600: + Investigations, + Wall Street and the Financial + Crisis: Role of the + +On line 18600: + Crisis: Role of the + Bank Regulators, 111th Cong., + 2nd sess., April Exhibits, + +On line 18602: + Bank Regulators, + 111th Cong., 2nd sess., April Exhibits, + p. OTS Regional + +On line 18602: + 111th Cong., 2nd sess., April + Exhibits, p. OTS Regional + Director Darrel + +On line 18604: + Ivie, July Offices + of Inspector General, + Department of the + +On line 18604: + Federal Deposit + Insurance Corporation, + "Evaluation of + +On line 18606: + No. EVAL 10-002, April pp. + FDIC, Confidential Problem + Bank Memorandum, + +On line 18610: + Memorandum to + FDIC Regional Director, + September Treasury + +On line 18612: + Regulatory + Oversight of WaMu," pp. Quoted + in Damian Paletta, + +On line 18612: + WaMu," pp. Quoted in + Damian Paletta, "FDIC Presses + Bank Regulators + +On line 18612: + Damian Paletta, "FDIC + Presses Bank Regulators + to Use Warier Eye," + +On line 18612: + Paletta, "FDIC Presses + Bank Regulators to Use + Warier Eye," Wall Street + +On line 18614: + Bank Regulators + to Use Warier Eye," Wall Street + Journal, August Sheila + +On line 18614: + to Use Warier Eye," + Wall Street Journal, August Sheila + Bair, interview by + +On line 18614: + Use Warier Eye," Wall + Street Journal, August Sheila Bair, + interview by FCIC, + +On line 18616: + Street Journal, August + Sheila Bair, interview by FCIC, + August Treasury and + +On line 18616: + Bair, interview by + FCIC, August Treasury and FDIC + IGs, "Evaluation + +On line 18616: + interview by FCIC, + August Treasury and FDIC IGs, + "Evaluation of + +On line 18618: + Currency, Large Bank + Supervision: Comptroller’s + Handbook, January + +On line 18622: + Handbook, January + p. Cole, interview. Rich Spillenkothen, + "Observations and + +On line 18622: + p. Cole, interview. + Rich Spillenkothen, "Observations and + Perspectives of the + +On line 18622: + and Perspectives of + the Director of Banking + Supervision and + +On line 18622: + of the Director + of Banking Supervision + and Regulation + +On line 18622: + the Director of + Banking Supervision and + Regulation at + +On line 18622: + and Regulation + at the Federal Reserve + Board from to on the + +On line 18622: + Board from to on the + Performance of Prudential + Supervision in + +On line 18622: + Years Preceding the + Financial Crisis," paper + prepared for the FCIC, + +On line 18624: + Financial Crisis," + paper prepared for the FCIC, + May p. Doug Roeder, + +On line 18624: + paper prepared for + the FCIC, May p. Doug Roeder, + interview by FCIC, + +On line 18626: + for the FCIC, May p. + Doug Roeder, interview by + FCIC, August "Treasury + +On line 18626: + May p. Doug Roeder, + interview by FCIC, August + "Treasury Releases + +On line 18626: + FCIC, August "Treasury + Releases Blueprint for Stronger + Regulatory + +On line 18635: + release, March Chapter + Henry Paulson, interview + by FCIC, April Henry + +On line 18635: + March Chapter Henry + Paulson, interview by FCIC, + April Henry Paulson, + +On line 18635: + Paulson, interview + by FCIC, April Henry Paulson, + On The Brink: Inside + +On line 18635: + interview by FCIC, + April Henry Paulson, On The + Brink: Inside the Race + +On line 18635: + by FCIC, April Henry + Paulson, On The Brink: Inside + the Race to Stop the + +On line 18635: + April Henry Paulson, + On The Brink: Inside the Race + to Stop the Collapse + +On line 18635: + Henry Paulson, On + The Brink: Inside the Race to + Stop the Collapse of + +On line 18635: + Brink: Inside the Race + to Stop the Collapse of the + Global Financial + +On line 18635: + the Collapse of the + Global Financial System + (New York: Business Plus, + +On line 18639: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 18639: + Government-Sponsored Enterprises + (GSEs), day session Office of + Federal Housing + +On line 18641: + Housing Enterprise + Oversight, April transcript, p. Daniel + Mudd, letter to James + +On line 18641: + Oversight, April transcript, + p. Daniel Mudd, letter to James + Lockhart, August p. + +On line 18643: + April transcript, p. Daniel + Mudd, letter to James Lockhart, + August p. Ibid., pp. + +On line 18645: + Daniel Mudd, letter to + James Lockhart, August p. Ibid., + pp. Daniel Mudd, letter + +On line 18645: + Mudd, letter to James + Lockhart, August p. Ibid., pp. + Daniel Mudd, letter to + +On line 18645: + James Lockhart, August + p. Ibid., pp. Daniel Mudd, letter + to shareholders, in + +On line 18645: + Daniel Mudd, letter to + shareholders, in Fannie Mae, + Annual Report," + +On line 18649: + Report," p. Thomas Lund, + interview by FCIC, March Robert + Levin, interview by + +On line 18651: + interview by FCIC, + March Robert Levin, interview by + FCIC, March James Lockhart, + +On line 18651: + by FCIC, March Robert Levin, + interview by FCIC, March James + Lockhart, letter to + +On line 18651: + Levin, interview by + FCIC, March James Lockhart, letter + to Daniel Mudd, August + +On line 18651: + interview by FCIC, + March James Lockhart, letter to + Daniel Mudd, August p. + +On line 18653: + James Lockhart, letter + to Daniel Mudd, August p. James + Lockhart, letter to + +On line 18653: + to Daniel Mudd, August + p. James Lockhart, letter to + Senator Charles Schumer, + +On line 18655: + Lockhart, letter to + Senator Charles Schumer, August + James Lockhart, written + +On line 18655: + Senator Charles Schumer, + August James Lockhart, written + testimony for + +On line 18655: + August James Lockhart, + written testimony for + the FCIC, Hearing on + +On line 18655: + James Lockhart, written + testimony for the FCIC, + Hearing on Subprime + +On line 18655: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 18655: + Government-Sponsored Enterprises + (GSEs), day session Office of + Federal Housing + +On line 18663: + Federal Housing + Enterprise Oversight, April pp. + Notes to Chapter Ibid., + +On line 18667: + pp. Notes to Chapter + Ibid., pp. Paulson, interview. + David Nason, Tony Ryan, + +On line 18667: + Notes to Chapter Ibid., + pp. Paulson, interview. David + Nason, Tony Ryan, and + +On line 18667: + Tony Ryan, and Jeremiah + Norton, Treasury officials, + interview by FCIC, + +On line 18669: + Treasury officials, + interview by FCIC, March James + Lockhart, quoted in + +On line 18669: + interview by FCIC, + March James Lockhart, quoted in + Steven Sloan, "Setting an + +On line 18671: + OFHEO Plan, But Wishing + Otherwise," American Banker, + December Fannie + +On line 18671: + Wishing Otherwise," + American Banker, December + Fannie Mae, "Single-Family Book + +On line 18673: + Flexibility + on Fannie Mae, Freddie Mac + Mortgage Portfolios," + +On line 18675: + Mortgage Portfolios," + OFHEO news release, September + p. Lockhart, written + +On line 18677: + for the FCIC, April p. + Ben Bernanke, quoted in Eric + Dash, "Fannie Mae to + +On line 18677: + the FCIC, April p. Ben + Bernanke, quoted in Eric Dash, + "Fannie Mae to Be + +On line 18677: + p. Ben Bernanke, quoted + in Eric Dash, "Fannie Mae + to Be Allowed to + +On line 18677: + Dash, "Fannie Mae to + Be Allowed to Expand Its + Portfolio," New York + +On line 18677: + to Be Allowed to + Expand Its Portfolio," New + York Times, September + +On line 18679: + Portfolio," New York + Times, September Senator + Charles E. Schumer, letter + +On line 18679: + Schumer, letter to OFHEO + Director James B. Lockhart + III, February Schumer + +On line 18679: + OFHEO Director James + B. Lockhart III, February + Schumer continued, "If + +On line 18679: + Director James B. + Lockhart III, February Schumer + continued, "If you + +On line 18679: + Schumer continued, "If + you have decided that you + will be keeping the + +On line 18679: + you have decided + that you will be keeping the + capital surcharge + +On line 18679: + you will be keeping + the capital surcharge in + place I would like an + +On line 18679: + surcharge in place I + would like an explanation + as to why you think + +On line 18679: + place I would like an + explanation as to why + you think upholding + +On line 18679: + capital relief + that could better position + the GSEs to provide + +On line 18679: + position the GSEs + to provide rescue products + for borrowers stuck + +On line 18679: + to provide rescue + products for borrowers stuck + in unaffordable + +On line 18683: + Results," Fannie Mae + press release, February Daniel + Mudd, interview by + +On line 18685: + release, February + Daniel Mudd, interview by FCIC, + March Robert Steel, email to + +On line 18685: + February Daniel Mudd, + interview by FCIC, March Robert + Steel, email to Jeremiah + +On line 18685: + interview by FCIC, + March Robert Steel, email to Jeremiah + Norton, February + +On line 18687: + March Robert Steel, email to + Jeremiah Norton, February + Michael Farrell, email to + +On line 18689: + to Jeremiah Norton, + February Michael Farrell, email + to Robert Steel, March Emails + +On line 18689: + Norton, February + Michael Farrell, email to Robert Steel, + March Emails between Robert + +On line 18689: + Michael Farrell, email to + Robert Steel, March Emails between Robert + K. Steel and Daniel Mudd, + +On line 18689: + Farrell, email to Robert + Steel, March Emails between Robert K. + Steel and Daniel Mudd, March + +On line 18691: + email to Robert Steel, March + Emails between Robert K. Steel and + Daniel Mudd, March Daniel Mudd, + +On line 18691: + to Robert Steel, March Emails + between Robert K. Steel and Daniel + Mudd, March Daniel Mudd, email + +On line 18691: + Steel, March Emails between + Robert K. Steel and Daniel Mudd, March + Daniel Mudd, email to Robert + +On line 18691: + March Emails between Robert + K. Steel and Daniel Mudd, March Daniel + Mudd, email to Robert Levin, + +On line 18691: + Emails between Robert K. + Steel and Daniel Mudd, March Daniel Mudd, + email to Robert Levin, March + +On line 18693: + Robert K. Steel and Daniel + Mudd, March Daniel Mudd, email to Robert + Levin, March "Fannie Mae + +On line 18693: + Daniel Mudd, March Daniel Mudd, + email to Robert Levin, March "Fannie + Mae Insolvency + +On line 18693: + Mudd, March Daniel Mudd, email + to Robert Levin, March "Fannie Mae + Insolvency and + +On line 18693: + email to Robert Levin, March + "Fannie Mae Insolvency + and Its Consequences," + +On line 18693: + and Its Consequences," + p. attachment to email from + Jason Thomas to Robert + +On line 18695: + p. attachment to + email from Jason Thomas to Robert + Steel, March Robert Steel, email + +On line 18695: + attachment to email + from Jason Thomas to Robert Steel, + March Robert Steel, email to + +On line 18695: + to email from Jason + Thomas to Robert Steel, March Robert Steel, + email to David Nason, + +On line 18695: + email from Jason Thomas + to Robert Steel, March Robert Steel, email + to David Nason, Tony + +On line 18695: + from Jason Thomas to + Robert Steel, March Robert Steel, email to + David Nason, Tony Ryan, + +On line 18695: + to Robert Steel, March Robert + Steel, email to David Nason, Tony + Ryan, Jeremiah Norton, + +On line 18695: + Robert Steel, March Robert Steel, + email to David Nason, Tony Ryan, + Jeremiah Norton, and + +On line 18695: + March Robert Steel, email to + David Nason, Tony Ryan, Jeremiah + Norton, and Neel Kashkari, + +On line 18695: + email to David Nason, + Tony Ryan, Jeremiah Norton, and + Neel Kashkari, subject: "re: + +On line 18695: + to David Nason, Tony + Ryan, Jeremiah Norton, and Neel + Kashkari, subject: "re: GSEs," + +On line 18695: + David Nason, Tony Ryan, + Jeremiah Norton, and Neel Kashkari, + subject: "re: GSEs," March + +On line 18699: + Kashkari, subject: "re: GSEs," + March James Lockhart, interview + by FCIC, March Paulson, + +On line 18701: + interview by FCIC, + March Paulson, interview. James + Lockhart, email to Daniel + +On line 18701: + by FCIC, March Paulson, + interview. James Lockhart, email + to Daniel H. Mudd, Robert + +On line 18701: + Paulson, interview. + James Lockhart, email to Daniel H. + Mudd, Robert Steel, and Dick + +On line 18701: + James Lockhart, email to + Daniel H. Mudd, Robert Steel, and Dick + Syron, subject: "Re: + +On line 18701: + to Daniel H. Mudd, Robert + Steel, and Dick Syron, subject: + "Re: announcement draft," + +On line 18701: + Daniel H. Mudd, Robert Steel, + and Dick Syron, subject: "Re: + announcement draft," March + +On line 18705: + Steel, and Dick Syron, + subject: "Re: announcement draft," + March Ibid. "OFHEO, Fannie + +On line 18705: + Dick Syron, subject: + "Re: announcement draft," March Ibid. + "OFHEO, Fannie Mae and + +On line 18705: + "Re: announcement draft," + March Ibid. "OFHEO, Fannie Mae and + Freddie Mac Announce + +On line 18705: + Announce Initiative + to Increase Mortgage Market + Liquidity," OFHEO + +On line 18709: + release, March Paulson, + interview. Joshua Rosner, "OFHEO + Got Rolled," GrahamFisher Weekly + +On line 18711: + Rosner, "OFHEO Got Rolled," + GrahamFisher Weekly Spew, March Donald + Bisenius, interview + +On line 18711: + GrahamFisher Weekly Spew, March + Donald Bisenius, interview + by FCIC, September + +On line 18713: + Bisenius, interview + by FCIC, September "Freddie + Mac CEO Richard Syron + +On line 18713: + interview by FCIC, + September "Freddie Mac CEO + Richard Syron Talks about + +On line 18713: + by FCIC, September + "Freddie Mac CEO Richard Syron + Talks about the Stock Slide," + +On line 18713: + "Freddie Mac CEO Richard + Syron Talks about the Stock Slide," + PBS Nightly Business + +On line 18719: + Mudd, letters to James + Lockhart, August and August + Timothy P. Clark + +On line 18719: + Lockhart, August and + August Timothy P. Clark + (senior adviser, + +On line 18719: + Reserve Board) and Scott + Alvarez (general counsel, + Federal Reserve + +On line 18719: + Alvarez (general + counsel, Federal Reserve + Board), interview by + +On line 18721: + counsel, Federal + Reserve Board), interview by + FCIC, February "Board + +On line 18721: + by FCIC, February + "Board Grants Federal Reserve + Bank of New York the + +On line 18721: + "Board Grants Federal + Reserve Bank of New York the + Authority to + +On line 18721: + Reserve Bank of New + York the Authority to + Lend to Fannie Mae + +On line 18721: + the Authority + to Lend to Fannie Mae and + Freddie Mac Should Such + +On line 18721: + and Freddie Mac Should + Such Lending Prove Necessary," + Federal Reserve + +On line 18725: + press release, July + Alvarez, interview. Treasury + Secretary Henry + +On line 18725: + interview. Treasury + Secretary Henry Paulson, + testimony on + +On line 18725: + Financial Markets + and the Regulatory + Responses to Them, + +On line 18727: + Banking, Housing, and + Urban Affairs, 110th Cong., 2nd + sess., July "Statement + +On line 18727: + Affairs, 110th Cong., 2nd + sess., July "Statement by Daniel + H. Mudd, President + +On line 18727: + sess., July "Statement + by Daniel H. Mudd, President + and CEO," Fannie Mae + +On line 18727: + July "Statement by + Daniel H. Mudd, President and + CEO," Fannie Mae press + +On line 18735: + Clark, interview Mudd, + interview. Clark, interview. + Susan Eckert, Kevin + +On line 18735: + Susan Eckert, Kevin + Bailey, and other OCC staff, + interview by FCIC, + +On line 18741: + Bailey, and other + OCC staff, interview by FCIC, + February Notes to + +On line 18745: + OCC staff, interview + by FCIC, February Notes to + Chapter Ibid. Office + +On line 18745: + interview by FCIC, + February Notes to Chapter + Ibid. Office of the + +On line 18745: + by FCIC, February + Notes to Chapter Ibid. Office + of the Comptroller + +On line 18745: + FCIC, February Notes + to Chapter Ibid. Office of + the Comptroller of + +On line 18745: + February Notes to + Chapter Ibid. Office of the + Comptroller of the + +On line 18745: + Notes to Chapter Ibid. + Office of the Comptroller + of the Currency, + +On line 18745: + Chapter Ibid. Office + of the Comptroller of the + Currency, "Observations—Allowance Process + +On line 18745: + of the Comptroller + of the Currency, "Observations—Allowance Process + and Methodology," + +On line 18745: + of the Currency, + "Observations—Allowance Process and Methodology," + August (last revised + +On line 18749: + H. Mudd (President + and CEO of Fannie Mae), "Re: + Notice of Proposed + +On line 18749: + Proposed Capital + Classification at June + August pp. Christopher + +On line 18749: + letter to Richard F. + Syron (President and CEO + of Freddie Mac), "Re: + +On line 18749: + Syron (President + and CEO of Freddie Mac), "Re: + Notice of Proposed + +On line 18751: + Proposed Capital + Classification at June + August "Draft—Mid-year Letter," + +On line 18751: + Classification + at June August "Draft—Mid-year Letter," + pp. (quotation, p. + +On line 18751: + at June August "Draft—Mid-year + Letter," pp. (quotation, p. + attached to Christopher + +On line 18753: + Dickerson, letter + to Daniel H. Mudd, September + Dickerson to Mudd, + +On line 18753: + letter to Daniel H. + Mudd, September Dickerson + to Mudd, September + +On line 18755: + September with "Draft + Mid Year Letter" attached. "Draft—Mid-year + Letter" (Fannie), pp. + +On line 18759: + "Draft Mid Year Letter" + attached. "Draft—Mid-year Letter" (Fannie), + pp. Ibid., p. Ibid., p. + +On line 18761: + Year Letter" attached. + "Draft—Mid-year Letter" (Fannie), pp. Ibid., + p. Ibid., p. Ibid., pp. + +On line 18763: + Letter" attached. "Draft—Mid-year + Letter" (Fannie), pp. Ibid., p. + Ibid., p. Ibid., pp. "Draft + +On line 18763: + attached. "Draft—Mid-year Letter" + (Fannie), pp. Ibid., p. Ibid., p. + Ibid., pp. "Draft Mid Year + +On line 18763: + "Draft—Mid-year Letter" (Fannie), + pp. Ibid., p. Ibid., p. Ibid., pp. + "Draft Mid Year Letter" + +On line 18763: + (Fannie), pp. Ibid., p. + Ibid., p. Ibid., pp. "Draft Mid Year + Letter" (Freddie), pp. + +On line 18765: + pp. Ibid., p. Ibid., p. + Ibid., pp. "Draft Mid Year Letter" + (Freddie), pp. Ibid., p. + +On line 18767: + p. Ibid., pp. "Draft Mid + Year Letter" (Freddie), pp. Ibid., + p. Mudd, interview. + +On line 18769: + (Freddie), pp. Ibid., p. + Mudd, interview. Christopher H. + Dickerson to James + +On line 18769: + p. Mudd, interview. + Christopher H. Dickerson to + James B. Lockhart III, + +On line 18769: + to James B. Lockhart + III, memorandum, "Proposed + Appointment of the + +On line 18769: + III, memorandum, + "Proposed Appointment of the + Federal Housing + +On line 18769: + "Proposed Appointment + of the Federal Housing + Finance Agency as + +On line 18769: + of the Federal + Housing Finance Agency as + Conservator for + +On line 18769: + the Federal Home + Loan Mortgage Corporation," + September (hereafter + +On line 18769: + conservatorship + memorandum); Christopher H. + Dickerson to James + +On line 18769: + to James B. Lockhart + III, memorandum, Proposed + Appointment of the + +On line 18769: + III, memorandum, + Proposed Appointment of the + Federal Housing + +On line 18769: + Proposed Appointment + of the Federal Housing + Finance Agency as + +On line 18769: + of the Federal + Housing Finance Agency as + Conservator for + +On line 18769: + Association," + September (hereafter Fannie + conservatorship + +On line 18773: + Paulson, On the Brink, + p. Lockhart, testimony + before the FCIC, April + +On line 18773: + the Brink, p. Lockhart, + testimony before the + FCIC, April transcript, p. + +On line 18777: + transcript, p. Paulson, + interview; Paulson, On the + Brink, p. Paulson, On + +On line 18781: + Paulson, On the Brink, + p. Paulson, On the Brink, p. + Lund, interview. Levin, + +On line 18783: + Brink, p. Paulson, On + the Brink, p. Lund, interview. + Levin, interview. Mudd, + +On line 18785: + Levin, interview. Mudd, + interview. FHFA, Fannie + conservatorship + +On line 18785: + interview. FHFA, + Fannie conservatorship + memorandum, pp. + +On line 18791: + conservatorship + memorandum, pp. Syron, + interview. Daniel Mudd, + +On line 18791: + Mudd, testimony + before the FCIC, Hearing on + Subprime Lending and + +On line 18791: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 18793: + Government-Sponsored Enterprises + (GSEs), day session Fannie Mae, + April transcript, p. Paul + +On line 18793: + Enterprises (GSEs), + day session Fannie Mae, April + transcript, p. Paul Nash, + +On line 18793: + day session Fannie + Mae, April transcript, p. Paul Nash, + FDIC, letter to FCIC, + +On line 18793: + Nash, FDIC, letter to + FCIC, providing responses + to follow-up questions + +On line 18793: + FDIC, letter to FCIC, + providing responses to + follow-up questions to + +On line 18793: + questions to Sheila Bair’s + testimony during the + September hearing, + +On line 18797: + September hearing, + p. Paulson, interview. Neel + Kashkari, interview by + +On line 18799: + Kashkari, interview by + FCIC, November Tom Baxter, + interview by FCIC, + +On line 18801: + interview by FCIC, + April Kevin Warsh, interview by + FCIC, October Warsh, + +On line 18803: + interview. Lockhart, + testimony before the + FCIC, April transcript, p. + +On line 18805: + April transcript, p. Staff + of the Federal Reserve + System, Division + +On line 18805: + System, Division + of Banking Supervision + and Regulation, + +On line 18805: + and Regulation, + memorandum to the Board + of Governors, "Stress + +On line 18805: + memorandum to + the Board of Governors, "Stress + Scenarios on Bank + +On line 18805: + Scenarios on Bank + Exposures to Government + Sponsored Enterprise + +On line 18807: + January p. Daniel + Mudd, written testimony + for the FCIC, Hearing + +On line 18807: + p. Daniel Mudd, written + testimony for the FCIC, + Hearing on Subprime + +On line 18807: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 18809: + Government-Sponsored Enterprises + (GSEs), day session Fannie Mae, + April p. John Kerr, Scott + +On line 18809: + Enterprises (GSEs), + day session Fannie Mae, April + p. John Kerr, Scott Smith, + +On line 18809: + day session Fannie + Mae, April p. John Kerr, Scott Smith, + Steve Corona (FHFA + +On line 18809: + Mae, April p. John Kerr, + Scott Smith, Steve Corona (FHFA + examination + +On line 18809: + and Alfred Pollard + (FHFA general counsel), + group interview by + +On line 18819: + interview by FCIC, + March Notes to Chapter Lockhart, + interview. Edward + +On line 18819: + March Notes to Chapter + Lockhart, interview. Edward + DeMarco, interview by + +On line 18823: + interview by FCIC, + March Mudd, interview. Henry + Cisneros, interview + +On line 18823: + March Mudd, interview. + Henry Cisneros, interview + by FCIC, October + +On line 18825: + by FCIC, October + Mudd, testimony before + the FCIC, April transcript, + +On line 18825: + FCIC, October Mudd, + testimony before the + FCIC, April transcript, p. + +On line 18827: + April transcript, p. Robert + Levin, testimony before + the FCIC, Hearing on + +On line 18827: + Levin, testimony + before the FCIC, Hearing on + Subprime Lending and + +On line 18827: + Subprime Lending and + Securitization and + Government-Sponsored Enterprises + +On line 18833: + Enterprises (GSEs), + day session Fannie Mae, April + transcript, p. Chapter + +On line 18836: + day session Fannie + Mae, April transcript, p. Chapter + Joseph Sommer, counsel, + +On line 18836: + Mae, April transcript, p. + Chapter Joseph Sommer, counsel, + Federal Reserve + +On line 18836: + Chapter Joseph Sommer, + counsel, Federal Reserve + Bank of New York, email + +On line 18836: + Joseph Sommer, counsel, + Federal Reserve Bank of + New York, email to Patrick + +On line 18836: + counsel, Federal + Reserve Bank of New York, email + to Patrick M. Parkinson, + +On line 18836: + of New York, email to + Patrick M. Parkinson, deputy research + director, Board of + +On line 18836: + to Patrick M. Parkinson, + deputy research director, Board + of Governors of + +On line 18836: + Patrick M. Parkinson, deputy + research director, Board of + Governors of the + +On line 18836: + research director, + Board of Governors of the + Federal Reserve + +On line 18836: + Board of Governors + of the Federal Reserve + System, et al., "Re: + +On line 18836: + of the Federal + Reserve System, et al., "Re: + another option + +On line 18836: + System, et al., "Re: + another option we should + present re triparty1" + +On line 18838: + another option + we should present re triparty1" + July James Dimon, + +On line 18838: + option we should present + re triparty1" July James + Dimon, interview + +On line 18840: + Dimon, interview + by FCIC, October Barry + Zubrow, testimony + +On line 18840: + October Barry + Zubrow, testimony before + the FCIC, Hearing on + +On line 18840: + of Systemic Risk in + the Financial Crisis, day + session Lehman Brothers, + +On line 18842: + session Lehman Brothers, + September p. Richard S. Fuld + Jr., testimony + +On line 18842: + p. Richard S. Fuld Jr., + testimony before the + FCIC, Hearing on Too + +On line 18842: + of Systemic Risk in + the Financial Crisis, day + session Lehman Brothers, + +On line 18842: + Brothers, September + p. See also Fuld’s written + testimony at + +On line 18844: + p. See also Fuld’s + written testimony at + same hearing, p. Ben + +On line 18844: + same hearing, p. Ben + Bernanke, testimony before + the FCIC, Hearing on + +On line 18844: + hearing, p. Ben Bernanke, + testimony before the + FCIC, Hearing on Too + +On line 18844: + Financial Crisis, + day session The Federal + Reserve, September + +On line 18846: + Reserve, September + transcript, pp. Kenneth D. Lewis, + interview by FCIC, + +On line 18848: + by FCIC, October + Bernanke, testimony before + the FCIC, September + +On line 18848: + FCIC, October Bernanke, + testimony before the + FCIC, September p. + +On line 18850: + FCIC, September p. + Bernanke told the examiner + that the Federal + +On line 18850: + the examiner + that the Federal Reserve, + the SEC, and "markets + +On line 18850: + examiner that + the Federal Reserve, the + SEC, and "markets in + +On line 18850: + that the Federal + Reserve, the SEC, and "markets + in general" viewed + +On line 18850: + Reserve, the SEC, and + "markets in general" viewed + Lehman as the next most + +On line 18850: + Lehman as the next most + vulnerable investment + bank because of its + +On line 18850: + most vulnerable + investment bank because of + its funding model. + +On line 18850: + its funding model. + Anton R. Valukas, Report of + Examiner, In + +On line 18850: + R. Valukas, Report of + Examiner, In re Lehman + Brothers Holdings Inc., + +On line 18850: + Examiner, In + re Lehman Brothers Holdings Inc., + et al., Debtors, Chapter + +On line 18852: + Brothers Holdings Inc., + et al., Debtors, Chapter Case No. + 08-13555 (JMP), (Bankr. S.D.N.Y.), + +On line 18852: + et al., Debtors, Chapter + Case No. 08-13555 (JMP), (Bankr. S.D.N.Y.), + March (hereafter cited + +On line 18852: + al., Debtors, Chapter Case + No. 08-13555 (JMP), (Bankr. S.D.N.Y.), March + (hereafter cited as + +On line 18852: + Chapter Case No. 08-13555 + (JMP), (Bankr. S.D.N.Y.), March (hereafter + cited as Valukas); see + +On line 18852: + Case No. 08-13555 (JMP), (Bankr. + S.D.N.Y.), March (hereafter cited + as Valukas); see also + +On line 18852: + 08-13555 (JMP), (Bankr. S.D.N.Y.), + March (hereafter cited as Valukas); + see also and n. + +On line 18854: + (JMP), (Bankr. S.D.N.Y.), March + (hereafter cited as Valukas); see + also and n. and + +On line 18854: + S.D.N.Y.), March (hereafter + cited as Valukas); see also + and n. and nn. and + +On line 18854: + March (hereafter cited + as Valukas); see also and n. + and nn. and n. and + +On line 18854: + (hereafter cited as + Valukas); see also and n. and + nn. and n. and n. + +On line 18854: + cited as Valukas); see + also and n. and nn. and + n. and n. and and + +On line 18854: + Valukas); see also and + n. and nn. and n. and n. + and and n. Paulson, + +On line 18856: + n. and nn. and n. + and n. and and n. Paulson, + Geithner told + +On line 18856: + and n. and and n. + Paulson, Geithner told + the examiner + +On line 18858: + following Bear Stearns’s + near collapse, he considered + Lehman to be the "most + +On line 18858: + Lehman to be the "most + exposed" investment bank, see + also and n. and + +On line 18858: + be the "most exposed" + investment bank, see also + and n. and n. and + +On line 18858: + exposed" investment + bank, see also and n. and + n. and n. and n. + +On line 18858: + investment bank, see + also and n. and n. and + n. and n. and and + +On line 18858: + also and n. and + n. and n. and n. and and + n. Cox reported + +On line 18858: + n. and n. and n. + and and n. Cox reported + that after Bear Stearns + +On line 18858: + and n. and and n. + Cox reported that after + Bear Stearns collapsed, Lehman + +On line 18858: + n. and and n. Cox + reported that after Bear + Stearns collapsed, Lehman was + +On line 18858: + Cox reported that + after Bear Stearns collapsed, Lehman + was the SEC’s "number + +On line 18858: + Stearns collapsed, Lehman was + the SEC’s "number one focus"; + and n. and p. and + +On line 18858: + collapsed, Lehman was the + SEC’s "number one focus"; and + n. and p. and n. + +On line 18858: + was the SEC’s "number + one focus"; and n. and p. + and n. see also + +On line 18860: + "number one focus"; + and n. and p. and n. see + also Timothy + +On line 18860: + and n. see also + Timothy Geithner, + quoted in Valukas, and + +On line 18862: + also Timothy + Geithner, quoted in + Valukas, and n. Donald + +On line 18862: + quoted in Valukas, and + n. Donald L. Kohn, email to + Bernanke, "Re: Lehman," June Valukas, + +On line 18866: + and n. Donald L. + Kohn, email to Bernanke, "Re: Lehman," June + Valukas, and n. Harvey + +On line 18866: + n. Donald L. Kohn, + email to Bernanke, "Re: Lehman," June Valukas, + and n. Harvey R. + +On line 18866: + Donald L. Kohn, email + to Bernanke, "Re: Lehman," June Valukas, and + n. Harvey R. Miller, + +On line 18866: + Kohn, email to Bernanke, "Re: + Lehman," June Valukas, and n. Harvey + R. Miller, bankruptcy + +On line 18866: + to Bernanke, "Re: Lehman," June + Valukas, and n. Harvey R. Miller, + bankruptcy counsel + +On line 18866: + n. Harvey R. Miller, + bankruptcy counsel for Lehman + Brothers, interview + +On line 18866: + bankruptcy counsel + for Lehman Brothers, interview + by FCIC, August Lehman + +On line 18870: + September p. Erik + R. Sirri, interview by + FCIC, April Paolo R. + +On line 18872: + Paolo R. Tonucci, + interview by FCIC, August + Specifically, Lehman + +On line 18872: + interview by FCIC, + August Specifically, Lehman + drew billion on March + +On line 18872: + Specifically, Lehman + drew billion on March billion + on March and billion + +On line 18872: + drew billion on March + billion on March and billion + on March billion on + +On line 18872: + billion on March and + billion on March billion on + March and and billion + +On line 18872: + on March and billion + on March billion on March and + and billion on April + +On line 18872: + March and billion on + March billion on March and and + billion on April Lehman + +On line 18872: + and billion on April + Lehman Brothers, "Presentation + to the Federal + +On line 18872: + Robert Azerad, vice + president, Lehman Brothers, Q2—Liquidity + Position (June p. + +On line 18872: + Position (June p. + After its bankruptcy, Lehman + drew billion, billion, + +On line 18872: + (June p. After its + bankruptcy, Lehman drew billion, + billion, and billion, + +On line 18872: + bankruptcy, Lehman drew + billion, billion, and billion, + on September and + +On line 18872: + drew billion, billion, + and billion, on September + and until Barclays + +On line 18872: + billion, and billion, + on September and until + Barclays replaced the + +On line 18872: + on September and + until Barclays replaced the + Fed in providing + +On line 18872: + Fed in providing + financing. Valukas, See also + David Weisbrod, senior + +On line 18872: + David Weisbrod, senior + vice president, Treasury and + Securities Services–Risk + +On line 18872: + and Securities + Services–Risk Management, JPMorgan Chase Co., + email to James Dimon + +On line 18872: + Securities Services–Risk + Management, JPMorgan Chase Co., email + to James Dimon et + +On line 18872: + Services–Risk Management, JPMorgan + Chase Co., email to James Dimon + et al., "Re: TriParty Close," + +On line 18874: + JPMorgan Chase Co., email to + James Dimon et al., "Re: TriParty + Close," September Thomas + +On line 18874: + Chase Co., email to James + Dimon et al., "Re: TriParty Close," + September Thomas A. + +On line 18874: + James Dimon et al., + "Re: TriParty Close," September Thomas + A. Russo, former + +On line 18874: + Dimon et al., "Re: + TriParty Close," September Thomas A. + Russo, former vice + +On line 18874: + et al., "Re: TriParty Close," + September Thomas A. Russo, + former vice chairman + +On line 18874: + former vice chairman + and chief legal officer, + Lehman Brothers, email to + +On line 18874: + legal officer, + Lehman Brothers, email to Richard S. + Fuld Jr., forwarding + +On line 18874: + Lehman Brothers, email to + Richard S. Fuld Jr., forwarding + article by John + +On line 18874: + Fuld Jr., forwarding + article by John Brinsley + (originally sent + +On line 18874: + article by John + Brinsley (originally sent + to Russo by Robert + +On line 18874: + to Russo by Robert + Steel), "Paulson Says Investment + Banks Making Progress in + +On line 18874: + by Robert Steel), "Paulson + Says Investment Banks Making + Progress in Raising Funds," + +On line 18874: + Robert Steel), "Paulson Says + Investment Banks Making Progress + in Raising Funds," Bloomberg, + +On line 18874: + Says Investment Banks + Making Progress in Raising Funds," + Bloomberg, June (quoting Robert + +On line 18880: + Banks Making Progress in + Raising Funds," Bloomberg, June (quoting + Robert Steel), June Notes to + +On line 18882: + Progress in Raising Funds," + Bloomberg, June (quoting Robert Steel), June + Notes to Chapter Richard + +On line 18882: + in Raising Funds," Bloomberg, + June (quoting Robert Steel), June Notes + to Chapter Richard S. + +On line 18882: + Raising Funds," Bloomberg, June + (quoting Robert Steel), June Notes to + Chapter Richard S. Fuld + +On line 18882: + June (quoting Robert Steel), + June Notes to Chapter Richard S. + Fuld Jr., interview + +On line 18882: + (quoting Robert Steel), June + Notes to Chapter Richard S. Fuld + Jr., interview by + +On line 18884: + June Notes to Chapter + Richard S. Fuld Jr., interview + by FCIC, April Valukas, and + +On line 18884: + Notes to Chapter Richard + S. Fuld Jr., interview by + FCIC, April Valukas, and nn. + +On line 18884: + to Chapter Richard S. + Fuld Jr., interview by FCIC, + April Valukas, and nn. and + +On line 18884: + Chapter Richard S. Fuld + Jr., interview by FCIC, April + Valukas, and nn. and n. + +On line 18884: + Jr., interview by + FCIC, April Valukas, and nn. and n. + See also Russo, + +On line 18884: + interview by FCIC, + April Valukas, and nn. and n. See + also Russo, email + +On line 18884: + April Valukas, and nn. and + n. See also Russo, email + to Fuld, "Fw: Rumors + +On line 18884: + Valukas, and nn. and n. + See also Russo, email to + Fuld, "Fw: Rumors of + +On line 18884: + and nn. and n. See + also Russo, email to Fuld, + "Fw: Rumors of hedge + +On line 18884: + also Russo, email + to Fuld, "Fw: Rumors of hedge + fund putting together + +On line 18884: + Russo, email to Fuld, + "Fw: Rumors of hedge fund putting + together a group + +On line 18884: + "Fw: Rumors of hedge + fund putting together a group + to have another + +On line 18884: + Rumors of hedge fund + putting together a group to + have another run + +On line 18884: + together a group + to have another run at + Lehman," March (forwarding + +On line 18884: + to have another + run at Lehman," March (forwarding + discussions with SEC + +On line 18886: + discussions with SEC + regarding short sellers). Dan + Chaudoin, Bruce Karpati, and + +On line 18886: + Bruce Karpati, and Stephanie Shuler, + Division of Enforcement, + SEC, interview by + +On line 18886: + Shuler, Division of + Enforcement, SEC, interview + by FCIC, April Mary L. + +On line 18886: + of Enforcement, SEC, + interview by FCIC, April Mary + L. Schapiro, chairman, SEC, + +On line 18886: + interview by FCIC, + April Mary L. Schapiro, chairman, SEC, + written responses + +On line 18888: + to question 13—from FCIC, + asked after the hearing on + January Jesse Eisinger, + +On line 18888: + FCIC, asked after the + hearing on January Jesse + Eisinger, "The Debt Shuffle: + +On line 18888: + after the hearing + on January Jesse Eisinger, "The + Debt Shuffle: Wall Street + +On line 18888: + on January Jesse + Eisinger, "The Debt Shuffle: Wall Street + Cheered Lehman’s Earnings, but + +On line 18888: + January Jesse Eisinger, + "The Debt Shuffle: Wall Street Cheered + Lehman’s Earnings, but There + +On line 18888: + Eisinger, "The Debt Shuffle: + Wall Street Cheered Lehman’s Earnings, but + There Are Questions about + +On line 18888: + "The Debt Shuffle: Wall + Street Cheered Lehman’s Earnings, but There + Are Questions about Its + +On line 18888: + Lehman’s Earnings, but There + Are Questions about Its Balance + Sheet," Portfolio.com, + +On line 18888: + Earnings, but There Are + Questions about Its Balance Sheet," + Portfolio.com, March + +On line 18890: + David Einhorn, Greenlight + Capital, "Private Profits + and Socialized Risk," + +On line 18890: + and Socialized Risk," + speech at Grant’s Spring Investment + Conference, April p. + +On line 18890: + Risk," speech at Grant’s Spring + Investment Conference, April + p. See also David + +On line 18890: + also David Einhorn, + "Accounting Ingenuity," + speech at Ira W. Sohn + +On line 18890: + Einhorn, "Accounting + Ingenuity," speech at Ira + W. Sohn Investment + +On line 18890: + Ingenuity," speech + at Ira W. Sohn Investment + Research Conference, + +On line 18894: + Conference, May pp. + Nell Minow, interview by + FCIC, September Nell + +On line 18894: + the House Committee + on Oversight and Government + Reform, Hearing on + +On line 18896: + Reform, Hearing on + Lehman Brothers, 110th Cong., 2nd sess., + October Kirsten J. + +On line 18896: + on Lehman Brothers, 110th + Cong., 2nd sess., October Kirsten + J. Harlow, email to + +On line 18896: + October Kirsten J. + Harlow, email to Timothy + Geithner et + +On line 18896: + email to Timothy + Geithner et al., "On-Site + Primary Dealer + +On line 18898: + Geithner et + al., "On-Site Primary Dealer + Update: June June William + +On line 18898: + Primary Dealer + Update: June June William Dudley, + email to Timothy + +On line 18900: + email to Timothy + Geithner, Donald Kohn, + and others, June Kirsten + +On line 18900: + Harlow, email to Kevin + D. Coffey, examining + officer, FRBNY, + +On line 18900: + to Kevin D. Coffey, + examining officer, + FRBNY, et al., "On-Site + +On line 18902: + al., "On-Site Primary + Dealer Update: June June Thomas + Fontana, Citigroup, email + +On line 18902: + Thomas Fontana, Citigroup, + email to Christopher M. Foskett, + Citigroup, et al., + +On line 18904: + Tim Clark, Federal + Reserve, email to Kevin Coffey, + Federal Reserve, + +On line 18906: + Reserve, et al., June + Federal Reserve Bank of + New York, "Primary + +On line 18908: + Stress Analysis," June + Based on chart in Federal + Reserve Bank of New + +On line 18910: + Largest Securities + Firms," August p. Federal + Reserve Bank of New + +On line 18912: + and senior trader, + Federated Investors, Inc., + email to Gail Shanley, + +On line 18912: + Investors, Inc., email to + Gail Shanley, Federated + Investors, Inc., et al., + +On line 18912: + Investors, Inc., et al., + "Re: Federated SubCustodial Agreement—JPMC’s + comments," July Charles + +On line 18912: + "Re: Federated + SubCustodial Agreement—JPMC’s comments," July Charles + Witek, Federated + +On line 18912: + comments," July Charles + Witek, Federated Investors, + Inc., email to George V. + +On line 18912: + Witek, Federated + Investors, Inc., email to George V. + Van Schaick, Lehman Brothers, + +On line 18912: + Inc., email to George V. + Van Schaick, Lehman Brothers, et al., + "FW: Federated + +On line 18912: + email to George V. Van + Schaick, Lehman Brothers, et al., "FW: + Federated SubCustodial + +On line 18912: + Van Schaick, Lehman Brothers, + et al., "FW: Federated + SubCustodial Agreement—JPMC’s comments," April + +On line 18912: + Lehman Brothers, et al., + "FW: Federated SubCustodial Agreement—JPMC’s + comments," April Despite + +On line 18912: + Federated SubCustodial + Agreement—JPMC’s comments," April Despite the + FRBNY’s observation, + +On line 18912: + fully terminate + its repo relationships + with Lehman. In fact, as + +On line 18912: + Lehman. In fact, as of + September Federated’s + repo exposure + +On line 18912: + exposure to Lehman + was billion, as reported + in the Commission’s + +On line 18912: + as reported in + the Commission’s Market Risk + Survey of money + +On line 18914: + Survey of money + market mutual funds. Patrick + M. Parkinson, email to + +On line 18914: + market mutual + funds. Patrick M. Parkinson, email to + David Marshall, et al., + +On line 18914: + funds. Patrick M. Parkinson, + email to David Marshall, et al., + July David Marshall, + +On line 18914: + M. Parkinson, email to + David Marshall, et al., July + David Marshall, email to + +On line 18914: + Parkinson, email to David + Marshall, et al., July David + Marshall, email to Patrick + +On line 18914: + to David Marshall, et + al., July David Marshall, email + to Patrick M. Parkinson, + +On line 18916: + David Marshall, email to + Patrick M. Parkinson, July Valukas, + (quoting Timothy + +On line 18916: + July Valukas, (quoting + Timothy Geithner); + see also Bart McDade, + +On line 18916: + (quoting Timothy + Geithner); see also + Bart McDade, president + +On line 18918: + Brothers, interview + by FCIC, April William Dudley, email + to Geithner + +On line 18918: + FCIC, April William Dudley, + email to Geithner et + al., "Re: Lehman Good Bank/Bad + +On line 18918: + April William Dudley, email + to Geithner et al., + "Re: Lehman Good Bank/Bad Bank + +On line 18918: + William Dudley, email to + Geithner et al., "Re: + Lehman Good Bank/Bad Bank idea + +On line 18918: + to Geithner + et al., "Re: Lehman Good Bank/Bad Bank + idea discussed last night," + +On line 18920: + "Re: Lehman Good Bank/Bad Bank + idea discussed last night," July + Patrick M. Parkinson, email + +On line 18920: + Lehman Good Bank/Bad Bank idea + discussed last night," July Patrick + M. Parkinson, email to + +On line 18920: + last night," July Patrick + M. Parkinson, email to Steven Shafran, + Department of the + +On line 18920: + Patrick M. Parkinson, email + to Steven Shafran, Department of + the Treasury, et al., + +On line 18920: + M. Parkinson, email to + Steven Shafran, Department of the + Treasury, et al., "Fw: + +On line 18920: + Steven Shafran, Department + of the Treasury, et al., "Fw: + Gameplan and Status + +On line 18920: + Department of the + Treasury, et al., "Fw: Gameplan + and Status to Date," + +On line 18922: + of the Treasury, et + al., "Fw: Gameplan and Status + to Date," August Patrick + +On line 18922: + the Treasury, et al., + "Fw: Gameplan and Status to + Date," August Patrick M. + +On line 18922: + et al., "Fw: Gameplan + and Status to Date," August + Patrick M. Parkinson, email + +On line 18922: + al., "Fw: Gameplan and + Status to Date," August Patrick + M. Parkinson, email to + +On line 18922: + and Status to Date," + August Patrick M. Parkinson, email + to Steven Shafran, August + +On line 18924: + Patrick M. Parkinson, email + to Steven Shafran, August Patrick M. + Parkinson, email to Arthur + +On line 18924: + to Steven Shafran, August + Patrick M. Parkinson, email to Arthur + Angulo, Theodore Lubke, + +On line 18924: + Patrick M. Parkinson, email + to Arthur Angulo, Theodore Lubke, + Til Schuermann, and William + +On line 18924: + M. Parkinson, email to + Arthur Angulo, Theodore Lubke, Til + Schuermann, and William Brodows, + +On line 18926: + to Arthur Angulo, + Theodore Lubke, Til Schuermann, and William + Brodows, August William Brodows, + +On line 18926: + Arthur Angulo, Theodore + Lubke, Til Schuermann, and William Brodows, + August William Brodows, email + +On line 18926: + Theodore Lubke, Til Schuermann, + and William Brodows, August William Brodows, + email to Patrick Parkinson, + +On line 18926: + Til Schuermann, and William + Brodows, August William Brodows, email to + Patrick Parkinson, August + +On line 18928: + Schuermann, and William Brodows, + August William Brodows, email to Patrick + Parkinson, August Ibid. + +On line 18932: + Brodows, August William Brodows, + email to Patrick Parkinson, August + Ibid. Ibid. Parkinson, email + +On line 18932: + August William Brodows, email + to Patrick Parkinson, August Ibid. + Ibid. Parkinson, email to + +On line 18932: + email to Patrick Parkinson, + August Ibid. Ibid. Parkinson, email + to Steven Shafran, August + +On line 18936: + Patrick Parkinson, August + Ibid. Ibid. Parkinson, email to Steven + Shafran, August Ibid. Steven + +On line 18936: + Parkinson, August Ibid. + Ibid. Parkinson, email to Steven Shafran, + August Ibid. Steven Shafran, + +On line 18936: + Ibid. Ibid. Parkinson, email + to Steven Shafran, August Ibid. Steven + Shafran, email to Patrick M. + +On line 18936: + Parkinson, email to Steven + Shafran, August Ibid. Steven Shafran, email + to Patrick M. Parkinson, + +On line 18938: + to Steven Shafran, August + Ibid. Steven Shafran, email to Patrick M. + Parkinson, August Patrick + +On line 18938: + Ibid. Steven Shafran, email to + Patrick M. Parkinson, August Patrick + M. Parkinson, email to + +On line 18938: + Steven Shafran, email to Patrick + M. Parkinson, August Patrick M. + Parkinson, email to Theodore + +On line 18942: + M. Parkinson, August + Patrick M. Parkinson, email to Theodore + Lubke, September Notes + +On line 18942: + Parkinson, August Patrick + M. Parkinson, email to Theodore Lubke, + September Notes to + +On line 18946: + M. Parkinson, email to + Theodore Lubke, September Notes to + Chapter Emil Cornejo, + +On line 18946: + Emil Cornejo, senior + vice president, Department + of the Treasury, Lehman + +On line 18946: + Department of the + Treasury, Lehman Brothers, email to + Janet Birney, senior + +On line 18946: + Janet Birney, senior + vice president, Department + of the Treasury, Lehman + +On line 18946: + Department of the + Treasury, Lehman Brothers, et al., + "JP Morgan Agenda + +On line 18946: + of the Treasury, Lehman + Brothers, et al., "JP Morgan + Agenda forwarded + +On line 18946: + Treasury, Lehman Brothers, + et al., "JP Morgan Agenda + forwarded for our + +On line 18946: + Brothers, et al., "JP + Morgan Agenda forwarded + for our review. FYI," + +On line 18946: + "JP Morgan Agenda + forwarded for our review. + FYI," September See + +On line 18948: + Agenda, September + Meg McConnell, FRBNY, email to Arthur + Angulo et al., + +On line 18948: + Meg McConnell, FRBNY, email + to Arthur Angulo et al., + "Meeting tomorrow + +On line 18950: + to Arthur Angulo + et al., "Meeting tomorrow + at September Ibid. + +On line 18952: + Arthur Angulo et + al., "Meeting tomorrow at + September Ibid. Patrick + +On line 18952: + "Meeting tomorrow + at September Ibid. Patrick M. + Parkinson, email to Steven + +On line 18952: + at September Ibid. + Patrick M. Parkinson, email to Steven + Shafran, "Re: now I am + +On line 18952: + September Ibid. Patrick + M. Parkinson, email to Steven Shafran, + "Re: now I am on + +On line 18952: + Ibid. Patrick M. Parkinson, + email to Steven Shafran, "Re: now I + am on a conf call," + +On line 18952: + Parkinson, email to Steven + Shafran, "Re: now I am on a + conf call," September + +On line 18954: + email to Steven Shafran, "Re: + now I am on a conf call," + September Henry + +On line 18954: + Shafran, "Re: now I am + on a conf call," September + Henry M. Paulson + +On line 18954: + now I am on a + conf call," September Henry + M. Paulson Jr., On + +On line 18954: + I am on a conf + call," September Henry M. + Paulson Jr., On the + +On line 18954: + conf call," September + Henry M. Paulson Jr., On + the Brink: Inside the + +On line 18954: + September Henry + M. Paulson Jr., On the Brink: + Inside the Race to + +On line 18954: + M. Paulson Jr., On + the Brink: Inside the Race to + Stop the Collapse of + +On line 18954: + Paulson Jr., On the + Brink: Inside the Race to Stop + the Collapse of the + +On line 18954: + Brink: Inside the Race + to Stop the Collapse of the + Global Financial + +On line 18954: + the Collapse of the + Global Financial System + (New York: Business Plus, + +On line 18954: + Rita C. Proctor, + assistant to the chairman, + Board of Governors + +On line 18954: + assistant to the + chairman, Board of Governors + of the Federal + +On line 18954: + Board of Governors + of the Federal Reserve, + email to Donald L. + +On line 18954: + of Governors of + the Federal Reserve, email + to Donald L. Kohn + +On line 18954: + Governors of the + Federal Reserve, email to + Donald L. Kohn et + +On line 18954: + of the Federal + Reserve, email to Donald L. + Kohn et al., "This evening’s + +On line 18954: + to Donald L. Kohn + et al., "This evening’s conference + call will take place at + +On line 18954: + Donald L. Kohn et + al., "This evening’s conference call + will take place at P.M. + +On line 18954: + L. Kohn et al., "This + evening’s conference call will take + place at P.M. instead + +On line 18954: + Kohn et al., "This evening’s + conference call will take place + at P.M. instead of + +On line 18954: + evening’s conference call + will take place at P.M. instead + of P.M.," September + +On line 18956: + conference call will + take place at P.M. instead of + P.M.," September Jim + +On line 18956: + will take place at P.M. + instead of P.M.," September + Jim Wilkinson, email to + +On line 18958: + of P.M.," September + Jim Wilkinson, email to Michele Davis, + September Barry + +On line 18958: + Jim Wilkinson, email to + Michele Davis, September Barry + Zubrow, interview by + +On line 18958: + Wilkinson, email to Michele + Davis, September Barry Zubrow, + interview by FCIC, + +On line 18960: + Michele Davis, September + Barry Zubrow, interview by + FCIC, August Paul, Weiss, + +On line 18960: + Zubrow, interview by + FCIC, August Paul, Weiss, counsel + to Steven Black, letter + +On line 18960: + interview by FCIC, + August Paul, Weiss, counsel to + Steven Black, letter to + +On line 18960: + Weiss, counsel to Steven + Black, letter to FCIC, August + written responses + +On line 18962: + Black, letter to FCIC, + August written responses + to FCIC questions in + +On line 18962: + FCIC, August written + responses to FCIC questions + in email of August + +On line 18964: + written responses + to FCIC questions in email of + August p. John J. + +On line 18964: + responses to FCIC + questions in email of August + p. John J. Hogan, JPMorgan + +On line 18964: + to FCIC questions in + email of August p. John J. + Hogan, JPMorgan Chase Co., email + +On line 18964: + FCIC questions in email + of August p. John J. Hogan, + JPMorgan Chase Co., email to + +On line 18964: + questions in email of + August p. John J. Hogan, JPMorgan + Chase Co., email to Steven + +On line 18964: + in email of August + p. John J. Hogan, JPMorgan Chase Co., + email to Steven D. Black, + +On line 18964: + August p. John J. + Hogan, JPMorgan Chase Co., email to Steven + D. Black, September + +On line 18964: + p. John J. Hogan, JPMorgan + Chase Co., email to Steven D. Black, + September P.M.; Steven + +On line 18964: + Hogan, JPMorgan Chase Co., email + to Steven D. Black, September + P.M.; Steven Black, email to + +On line 18964: + JPMorgan Chase Co., email to + Steven D. Black, September P.M.; + Steven Black, email to John + +On line 18964: + Chase Co., email to Steven + D. Black, September P.M.; Steven + Black, email to John Hogan, + +On line 18964: + D. Black, September + P.M.; Steven Black, email to John Hogan, + September P.M. See + +On line 18964: + P.M.; Steven Black, email to + John Hogan, September P.M. See + also Valukas, and n. + +On line 18966: + John Hogan, September + P.M. See also Valukas, and n. + and Complaint, In re + +On line 18966: + Hogan, September P.M. + See also Valukas, and n. and + Complaint, In re Lehman + +On line 18966: + P.M. See also Valukas, + and n. and Complaint, In re + Lehman Brothers Holdings, + +On line 18966: + See also Valukas, and + n. and Complaint, In re Lehman + Brothers Holdings, Inc., + +On line 18966: + and n. and Complaint, + In re Lehman Brothers Holdings, + Inc., et al., against JPMorgan + +On line 18966: + n. and Complaint, In + re Lehman Brothers Holdings, Inc., + et al., against JPMorgan Chase + +On line 18966: + and Complaint, In re + Lehman Brothers Holdings, Inc., et + al., against JPMorgan Chase Bank, + +On line 18966: + Complaint, In re Lehman + Brothers Holdings, Inc., et al., + against JPMorgan Chase Bank, N.A., + +On line 18966: + In re Lehman Brothers + Holdings, Inc., et al., against JPMorgan + Chase Bank, N.A., Chapter + +On line 18966: + Lehman Brothers Holdings, + Inc., et al., against JPMorgan Chase Bank, + N.A., Chapter Case No. + +On line 18966: + Brothers Holdings, Inc., + et al., against JPMorgan Chase Bank, N.A., + Chapter Case No. 08-13555 + +On line 18966: + Holdings, Inc., et al., + against JPMorgan Chase Bank, N.A., Chapter + Case No. 08-13555 (JMP) (Bankr. + +On line 18966: + Inc., et al., against JPMorgan + Chase Bank, N.A., Chapter Case No. + 08-13555 (JMP) (Bankr. S.D.N.Y. + +On line 18966: + et al., against JPMorgan Chase + Bank, N.A., Chapter Case No. 08-13555 + (JMP) (Bankr. S.D.N.Y. May + +On line 18966: + al., against JPMorgan Chase Bank, + N.A., Chapter Case No. 08-13555 (JMP) + (Bankr. S.D.N.Y. May pp. + +On line 18966: + Bank, N.A., Chapter Case + No. 08-13555 (JMP) (Bankr. S.D.N.Y. May + pp. (hereafter cited + +On line 18966: + N.A., Chapter Case No. + 08-13555 (JMP) (Bankr. S.D.N.Y. May pp. + (hereafter cited as + +On line 18970: + 08-13555 (JMP) (Bankr. S.D.N.Y. + May pp. (hereafter cited as + Lehman Complaint). Ibid. Black + +On line 18972: + as Lehman Complaint). Ibid. + Black responses, August p. + Matthew Rutherford, email to + +On line 18972: + Lehman Complaint). Ibid. Black + responses, August p. Matthew + Rutherford, email to Tony + +On line 18972: + responses, August + p. Matthew Rutherford, email to Tony + Ryan, Department of + +On line 18972: + p. Matthew Rutherford, email + to Tony Ryan, Department of + the Treasury, et al., + +On line 18974: + Department of the + Treasury, et al., September + Mark VanDerWeide, assistant + +On line 18974: + Mark VanDerWeide, assistant + general counsel, Board of + Governors of the + +On line 18974: + general counsel, + Board of Governors of the + Federal Reserve + +On line 18974: + Board of Governors + of the Federal Reserve + System, email to Scott + +On line 18974: + to Scott G. Alvarez, + general counsel, Board of + Governors of the + +On line 18974: + Alvarez, general + counsel, Board of Governors + of the Federal + +On line 18974: + general counsel, + Board of Governors of the + Federal Reserve + +On line 18978: + Mosser, email to William + Dudley et al., "thoughts on Lehman," + September See Michael + +On line 18978: + William Dudley et al., + "thoughts on Lehman," September See + Michael Nelson, counsel + +On line 18978: + Dudley et al., "thoughts + on Lehman," September See Michael + Nelson, counsel and + +On line 18978: + Lehman," September See + Michael Nelson, counsel and vice + president, FRBNY, + +On line 18978: + Nelson, counsel and + vice president, FRBNY, email + to Christine Cumming, + +On line 18980: + questions," September + (attaching game plan), See Patrick + M. Parkinson, email to + +On line 18980: + (attaching game plan), + See Patrick M. Parkinson, email to + Donald Kohn et al., + +On line 18980: + game plan), See Patrick M. + Parkinson, email to Donald Kohn + et al., "Fw: revised + +On line 18980: + Donald Kohn et al., + "Fw: revised Liquidation + Consortium gameplan + +On line 18982: + questions," September + (attaching game plan). Ibid.; Thomas + Baxter, interview + +On line 18984: + (attaching game plan). + Ibid.; Thomas Baxter, interview + by FCIC, August Ken + +On line 18984: + plan). Ibid.; Thomas Baxter, + interview by FCIC, August + Ken Lewis, interview + +On line 18984: + interview by FCIC, + August Ken Lewis, interview + by FCIC, October + +On line 18986: + Ken Lewis, interview + by FCIC, October Susan + McCabe, Goldman Sachs Group, + +On line 18986: + Lewis, interview by + FCIC, October Susan McCabe, + Goldman Sachs Group, Inc., + +On line 18986: + October Susan + McCabe, Goldman Sachs Group, Inc., email + to William Dudley et + +On line 18986: + McCabe, Goldman Sachs Group, + Inc., email to William Dudley et + al., "Hope you have the + +On line 18986: + Goldman Sachs Group, Inc., + email to William Dudley et al., + "Hope you have the Radar + +On line 18986: + Sachs Group, Inc., email to + William Dudley et al., "Hope you + have the Radar screens on + +On line 18986: + email to William Dudley + et al., "Hope you have the Radar + screens on early this + +On line 18986: + William Dudley et al., + "Hope you have the Radar screens on + early this morning," + +On line 18986: + et al., "Hope you have + the Radar screens on early this + morning," September + +On line 18988: + "Hope you have the Radar + screens on early this morning," + September Rita + +On line 18988: + screens on early this + morning," September Rita + C. Proctor, email to + +On line 18988: + morning," September + Rita C. Proctor, email to + Bernanke, "Fw: Financial + +On line 18988: + September Rita + C. Proctor, email to Bernanke, "Fw: + Financial Markets + +On line 18988: + Rita C. Proctor, + email to Bernanke, "Fw: Financial + Markets Conference + +On line 18990: + materials for + the conference call). Hayley + Boesky, vice president, + +On line 18990: + the conference call). + Hayley Boesky, vice president, + Markets Group, FRBNY, + +On line 18990: + president, Markets + Group, FRBNY, email to Meg McConnell + et al., forwarding + +On line 18990: + Group, FRBNY, email to + Meg McConnell et al., forwarding + Louis Bacon, email to + +On line 18990: + email to Meg McConnell et + al., forwarding Louis Bacon, + email to Hayley Boesky, + +On line 18990: + to Meg McConnell et al., + forwarding Louis Bacon, email + to Hayley Boesky, "FW: + +On line 18990: + et al., forwarding + Louis Bacon, email to Hayley + Boesky, "FW: Options for + +On line 18990: + Louis Bacon, email to + Hayley Boesky, "FW: Options for + short-circuiting + +On line 18992: + short-circuiting + the market," September A.M. + Email chain between Jamie + +On line 18992: + market," September + A.M. Email chain between Jamie McAndrews, + Tobias Adrian, Patrick + +On line 18992: + September A.M. Email + chain between Jamie McAndrews, Tobias + Adrian, Patrick Parkinson + +On line 18992: + A.M. Email chain between + Jamie McAndrews, Tobias Adrian, Patrick + Parkinson and Jeff Stehm, + +On line 18992: + chain between Jamie McAndrews, + Tobias Adrian, Patrick Parkinson + and Jeff Stehm, subject + +On line 18992: + and Jeff Stehm, subject + "Fw Default Management Group + Sep 2008.doc," September + +On line 18994: + Sep 2008.doc," September + Hayley Boesky, email to Debby + Perelmuter, senior vice + +On line 18994: + Hayley Boesky, email to + Debby Perelmuter, senior vice + president, FRBNY, + +On line 18994: + Perelmuter, senior vice + president, FRBNY, et al., + "Panic," September + +On line 18996: + president, FRBNY, + et al., "Panic," September + Jane Buyers-Russo, managing + +On line 18996: + email to Paolo R. + Tonucci, "Fw: Letter to Lehman," + Sept. (attaching JPMorgan + +On line 18996: + Tonucci, "Fw: Letter + to Lehman," Sept. (attaching JPMorgan + Chase Co.’s September + +On line 18996: + "Fw: Letter to Lehman," + Sept. (attaching JPMorgan Chase Co.’s + September Notice + +On line 18996: + (attaching JPMorgan Chase + Co.’s September Notice to + Lehman Brothers Holdings + +On line 18998: + September Notice + to Lehman Brothers Holdings Inc.). + Jane Buyers-Russo, email to Bryn + +On line 18998: + Buyers-Russo, email to Bryn Thomas, + executive director, + Broker Dealer Group, + +On line 18998: + Thomas, executive + director, Broker Dealer + Group, JPMorgan Chase Co., et + +On line 18998: + director, Broker + Dealer Group, JPMorgan Chase Co., et + al., "Re: Lehman Brothers + +On line 18998: + Dealer Group, JPMorgan Chase + Co., et al., "Re: Lehman Brothers + TriParty Collateral," + +On line 19000: + Co., et al., "Re: Lehman + Brothers TriParty Collateral," + September Paolo + +On line 19000: + "Re: Lehman Brothers TriParty + Collateral," September + Paolo R. Tonucci, + +On line 19002: + September Paolo + R. Tonucci, interview by + FCIC, August See Valukas, + +On line 19008: + Paolo R. Tonucci, + interview by FCIC, August + See Valukas, and n. Notes + +On line 19008: + Tonucci, interview + by FCIC, August See Valukas, and + n. Notes to Chapter + +On line 19010: + FCIC, August See Valukas, + and n. Notes to Chapter Lehman + Complaint, pp. paragraphs + +On line 19012: + See Valukas, and n. Notes + to Chapter Lehman Complaint, pp. + paragraphs Barry Zubrow, + +On line 19012: + pp. paragraphs Barry + Zubrow, written testimony + for the FCIC, Hearing + +On line 19012: + paragraphs Barry Zubrow, + written testimony for + the FCIC, Hearing on + +On line 19012: + Barry Zubrow, written + testimony for the FCIC, + Hearing on Too Big + +On line 19012: + of Systemic Risk in + the Financial Crisis, day + session Lehman Brothers, + +On line 19014: + session Lehman Brothers, + September p. Richard S. Fuld, + interview by FCIC, + +On line 19016: + Brothers, September + p. Richard S. Fuld, interview + by FCIC, August Lehman + +On line 19016: + September p. Richard + S. Fuld, interview by FCIC, + August Lehman Complaint, + +On line 19018: + Fuld, interview by + FCIC, August Lehman Complaint, p. + paragraph Jim Wilkinson, + +On line 19018: + August Lehman Complaint, + p. paragraph Jim Wilkinson, email + to Abby Aderman, + +On line 19018: + Complaint, p. paragraph + Jim Wilkinson, email to Abby + Aderman, Russell Reynolds + +On line 19018: + to Abby Aderman, + Russell Reynolds Associates, "Re: + Paulson Statement on + +On line 19018: + Reynolds Associates, "Re: + Paulson Statement on Treasury + and FHFA Action + +On line 19020: + Financial Markets + and Taxpayers," September + Kevin M. Warsh, e-mail + +On line 19020: + Board of Governors + of the Federal Reserve + System, September + +On line 19024: + of the Federal + Reserve System, September + Valukas, Harvey R. Miller, + +On line 19026: + Valukas, Harvey R. Miller, + interview by FCIC, August + Tom Baxter, "Speaking + +On line 19026: + Baxter, "Speaking notes: + Financial Community + Meeting," attached to + +On line 19026: + attached to email from + Helen Ay-ala, NYFRB, to Steven Shafron, + Treasure, September + +On line 19028: + to email from Helen + Ay-ala, NYFRB, to Steven Shafron, Treasure, + September Thomas C. + +On line 19028: + Ay-ala, NYFRB, to Steven Shafron, + Treasure, September Thomas C. + Baxter, interview + +On line 19028: + to Steven Shafron, Treasure, + September Thomas C. Baxter, + interview by FCIC, + +On line 19030: + Treasure, September + Thomas C. Baxter, interview + by FCIC, August H. + +On line 19030: + September Thomas C. + Baxter, interview by FCIC, + August H. Rodgin + +On line 19030: + Baxter, interview + by FCIC, August H. Rodgin + Cohen, interview + +On line 19030: + interview by FCIC, + August H. Rodgin Cohen, + interview by FCIC, + +On line 19032: + August H. Rodgin + Cohen, interview by FCIC, + August Parkinson, email + +On line 19032: + H. Rodgin Cohen, + interview by FCIC, August + Parkinson, email to Kohn + +On line 19032: + interview by FCIC, + August Parkinson, email to Kohn + et al., September + +On line 19034: + August Parkinson, email + to Kohn et al., September + Financial Services + +On line 19034: + Authority of + the United Kingdom, "Statement + of the Financial + +On line 19036: + the Lehman bankruptcy + examiner, pp. paragraph + Paulson, On the Brink, + +On line 19038: + examiner, pp. + paragraph Paulson, On the Brink, + p. Patrick M. Parkinson, + +On line 19038: + paragraph Paulson, On + the Brink, p. Patrick M. Parkinson, + email to Lucinda + +On line 19038: + Paulson, On the Brink, + p. Patrick M. Parkinson, email to + Lucinda Brickler, + +On line 19038: + the Brink, p. Patrick M. + Parkinson, email to Lucinda + Brickler, senior vice + +On line 19042: + repo thoughts for this + weekend," September Patrick M. + Parkinson, interview + +On line 19042: + thoughts for this weekend," + September Patrick M. Parkinson, + interview by FCIC, + +On line 19042: + weekend," September + Patrick M. Parkinson, interview + by FCIC, August see + +On line 19042: + September Patrick M. + Parkinson, interview by FCIC, + August see also + +On line 19042: + Parkinson, interview + by FCIC, August see also + Patrick M. Parkinson, email + +On line 19042: + see also Patrick M. + Parkinson, email to Lucinda + Brickler et al., "Re: + +On line 19042: + Patrick M. Parkinson, email + to Lucinda Brickler et + al., "Re: another + +On line 19042: + Brickler et al., "Re: + another option we should + present re triparty1" + +On line 19044: + option we should present + re triparty1" July John + Thain, interview by + +On line 19044: + present re triparty1" + July John Thain, interview + by FCIC, September + +On line 19046: + triparty1" July + John Thain, interview by FCIC, + September Christopher + +On line 19046: + interview by FCIC, + September Christopher Tsuboi, + examiner, bank + +On line 19046: + to Alejandro LaTorre, + assistant vice president, + Credit, Investment + +On line 19046: + president, Credit, + Investment and Payment Risk + Group, FRBNY, "memo re: + +On line 19046: + FRBNY, "memo re: Lehman’s + inter-company default + scenario," September + +On line 19048: + inter-company + default scenario," September + Scott Alvarez, email to + +On line 19048: + Alvarez, email to Ben + Bernanke et al., "Re: Fw: today + at p.m. w/Chairman Bernanke, Vice + +On line 19048: + email to Ben Bernanke et + al., "Re: Fw: today at p.m. + w/Chairman Bernanke, Vice Chairman + +On line 19048: + to Ben Bernanke et al., + "Re: Fw: today at p.m. w/Chairman + Bernanke, Vice Chairman Kohn + +On line 19048: + Ben Bernanke et al., "Re: + Fw: today at p.m. w/Chairman Bernanke, + Vice Chairman Kohn and + +On line 19048: + Fw: today at p.m. + w/Chairman Bernanke, Vice Chairman Kohn and + Others," September + +On line 19050: + w/Chairman Bernanke, Vice Chairman + Kohn and Others," September + Scott Alvarez, email to + +On line 19050: + Bernanke, Vice Chairman Kohn + and Others," September Scott + Alvarez, email to Mark + +On line 19052: + email to Mark VanDerWeide, "Re: + tri-party," September Bart + McDade, interview by + +On line 19054: + September Bart McDade, + interview by FCIC, August + Baxter, interview. + +On line 19056: + interview by FCIC, + August Baxter, interview. + Paulson, On the Brink, + +On line 19058: + the Brink, p. Baxter, + interview; Robert Diamond, + interview by FCIC, + +On line 19058: + Baxter, interview; + Robert Diamond, interview + by FCIC, November + +On line 19062: + interview by FCIC, + November Paulson, On the + Brink, pp. Financial + +On line 19062: + Brink, pp. Financial + Services Authority of + the United Kingdom, + +On line 19062: + Authority of + the United Kingdom, "Statement + of the Financial + +On line 19064: + the Lehman bankruptcy + examiner, p. paragraph + Paulson, On the Brink, + +On line 19064: + p. paragraph Paulson, + On the Brink, pp. See also + Baxter, interview. + +On line 19066: + On the Brink, pp. See + also Baxter, interview. + Baxter, interview. + +On line 19070: + Jim Wilkinson, email to + Jes Staley, September A.M. + Jim Wilkinson, email to + +On line 19070: + Wilkinson, email to Jes + Staley, September A.M. Jim + Wilkinson, email to Jes + +On line 19070: + email to Jes Staley, + September A.M. Jim Wilkinson, + email to Jes Staley, + +On line 19070: + Staley, September + A.M. Jim Wilkinson, email to Jes + Staley, September + +On line 19072: + A.M. Jim Wilkinson, email + to Jes Staley, September + A.M. Paulson, On the + +On line 19072: + Jim Wilkinson, email to + Jes Staley, September A.M. + Paulson, On the Brink, + +On line 19074: + Staley, September + A.M. Paulson, On the Brink, p. + Alistair Darling, + +On line 19074: + A.M. Paulson, On the + Brink, p. Alistair Darling, + quoted in United + +On line 19074: + United Kingdom Press + Association, "Darling + Vetoed Lehman Bros Takeover," + +On line 19078: + H. Rodgin Cohen, + interview by FCIC, August + Bart McDade, interview + +On line 19080: + interview by FCIC, + August Bart McDade, interview + by FCIC, August Alex + +On line 19080: + FCIC, August Bart McDade, + interview by FCIC, August + Alex Kirk, interview + +On line 19080: + interview by FCIC, + August Alex Kirk, interview + by FCIC, August McDade, + +On line 19084: + by FCIC, August McDade, + interview, August Baxter, + interview. Thomas C. + +On line 19084: + interview, August + Baxter, interview. Thomas C. + Baxter, letter to + +On line 19084: + Baxter, letter to + FCIC, October attaching + Exhibit James P. + +On line 19084: + to FCIC, October + attaching Exhibit James + P. Bergin, email to William + +On line 19086: + Kirk, interview. Ibid., + attaching Exhibit Lehman + Brothers Holdings Inc., + +On line 19088: + Holdings Inc., "Minutes + of the Board of Directors, + September p. Ibid., + +On line 19088: + "Minutes of the Board + of Directors, September + p. Ibid., attaching + +On line 19096: + p. Ibid., attaching + Exhibits and Notes to Chapter + On September LBI + +On line 19096: + Exhibits and Notes to + Chapter On September LBI + borrowed billion from + +On line 19096: + and Notes to Chapter + On September LBI borrowed + billion from PDCF + +On line 19096: + LBI borrowed billion + from PDCF against billion of + collateral; on + +On line 19096: + of collateral; + on September LBI borrowed + billion against billion + +On line 19096: + on September LBI + borrowed billion against billion + of collateral; + +On line 19096: + borrowed billion against + billion of collateral; + and on September + +On line 19096: + collateral; and + on September LBI borrowed + billion against billion + +On line 19096: + on September LBI + borrowed billion against billion + of collateral. + +On line 19098: + borrowed billion against + billion of collateral. + See Valukas, and nn. Kirk, + +On line 19102: + collateral. See + Valukas, and nn. Kirk, interview. + Miller, interview. Kirk, + +On line 19104: + See Valukas, and nn. Kirk, + interview. Miller, interview. + Kirk, interview. Miller, + +On line 19104: + Kirk, interview. Miller, + interview. Kirk, interview. + Miller, interview. In + +On line 19104: + Miller, interview. Kirk, + interview. Miller, interview. + In his interview, + +On line 19104: + Miller, interview. In + his interview, Kirk told FCIC + staff that he thought there + +On line 19104: + interview. In his + interview, Kirk told FCIC staff + that he thought there were + +On line 19104: + his interview, Kirk + told FCIC staff that he thought there + were more than million + +On line 19106: + were more than million + derivatives contracts. McDade, + interview, August + +On line 19110: + of Systemic Risk in + the Financial Crisis, day + session Lehman Brothers, + +On line 19114: + Crisis, day session + Lehman Brothers, September p. + Miller, interview. Ibid. + +On line 19118: + Brothers, September + p. Miller, interview. Ibid. Ibid. + Ben S. Bernanke, closed-door + +On line 19118: + September p. Miller, + interview. Ibid. Ibid. Ben S. + Bernanke, closed-door session + +On line 19118: + interview. Ibid. Ibid. + Ben S. Bernanke, closed-door session + with FCIC, November + +On line 19122: + Henry M. Paulson + Jr., written testimony + for the FCIC, Hearing + +On line 19122: + FCIC, Hearing on the + Shadow Banking System, day + session Perspective + +On line 19122: + System, day session + Perspective on the Shadow + Banking System, May + +On line 19124: + the Shadow Banking + System, May p. Miller, written + testimony for + +On line 19124: + System, May p. Miller, + written testimony for + the FCIC, September + +On line 19126: + May p. Miller, written + testimony for the FCIC, + September p. Ibid., + +On line 19130: + p. Ibid., p. Ibid., pp. + Bernanke, testimony before + the FCIC, September + +On line 19132: + Bernanke, testimony + before the FCIC, September + transcript, p. Ben Bernanke, + +On line 19132: + the FCIC, September + transcript, p. Ben Bernanke, email to + Kevin Warsh, member, Board + +On line 19132: + transcript, p. Ben Bernanke, + email to Kevin Warsh, member, Board + of Governors of + +On line 19132: + Bernanke, email to Kevin Warsh, + member, Board of Governors + of the Federal + +On line 19132: + to Kevin Warsh, member, + Board of Governors of the + Federal Reserve + +On line 19132: + Board of Governors + of the Federal Reserve + System, September + +On line 19134: + of the Federal + Reserve System, September + Bernanke, testimony + +On line 19134: + System, September + Bernanke, testimony before + the FCIC, September + +On line 19138: + Bernanke, testimony + before the FCIC, September + p. Ibid., p. Ben Bernanke, + +On line 19138: + Financial Markets," + testimony before the + Senate Committee + +On line 19138: + on Banking, Housing, + and Urban Affairs, 110th Cong., + 2nd sess., September + +On line 19140: + Banking, Housing, and + Urban Affairs, 110th Cong., 2nd + sess., September U.S.C. + +On line 19140: + and Urban Affairs, + 110th Cong., 2nd sess., September + U.S.C. 343(A), as added by + +On line 19140: + Urban Affairs, 110th + Cong., 2nd sess., September U.S.C. + 343(A), as added by act + +On line 19140: + September U.S.C. 343(A), + as added by act of July + Stat. and amended by + +On line 19140: + 343(A), as added by act + of July Stat. and amended + by acts of August + +On line 19140: + as added by act of + July Stat. and amended by + acts of August Stat. + +On line 19140: + of July Stat. and + amended by acts of August + Stat. December Stat. + +On line 19140: + and amended by acts + of August Stat. December + Stat. and July Stat. + +On line 19142: + amended by acts of + August Stat. December Stat. + and July Stat. Scott + +On line 19142: + acts of August Stat. + December Stat. and July + Stat. Scott G. Alvarez + +On line 19142: + "Authority of + the Federal Reserve to + provide extensions + +On line 19142: + Reserve to provide + extensions of credit in + connection with a + +On line 19142: + provide extensions + of credit in connection + with a commercial + +On line 19142: + connection with a + commercial paper funding + facility (CPFF)," + +On line 19144: + commercial paper + funding facility (CPFF)," + March p. Fuld, written + +On line 19146: + March p. Fuld, written + testimony for the FCIC, + September pp. Bernanke, + +On line 19146: + testimony for + the FCIC, September pp. Bernanke, + closed-door session with + +On line 19148: + FCIC, September pp. + Bernanke, closed-door session with FCIC. + Ben S. Bernanke, chairman + +On line 19148: + September pp. Bernanke, + closed-door session with FCIC. Ben + S. Bernanke, chairman of + +On line 19148: + Bernanke, closed-door session + with FCIC. Ben S. Bernanke, chairman + of the Federal + +On line 19148: + with FCIC. Ben S. Bernanke, + chairman of the Federal + Reserve, letter to + +On line 19150: + Reserve, letter to + Phil Angelides, chairman of the + FCIC, December Thain, + +On line 19154: + Phil Angelides, chairman + of the FCIC, December Thain, + interview. Ibid. Ibid. + +On line 19158: + FCIC, December Thain, + interview. Ibid. Ibid. Dimon, + interview. Scott G. + +On line 19158: + Role of Systemic Risk + in the Financial Crisis, + day session Wachovia + +On line 19167: + Baxter, letter to + FCIC, October p. Chapter + Federal Reserve + +On line 19167: + FCIC, October p. + Chapter Federal Reserve + Bank of New York, notes + +On line 19167: + Federal Reserve + Bank of New York, notes about AIG + meeting, September + +On line 19173: + of New York, notes about + AIG meeting, September Ibid. + Ibid. "AIG Commercial + +On line 19173: + Paper Outstanding + Maturities—week of Sept 15th," + September produced + +On line 19175: + Maturities—week of + Sept 15th," September produced + by JPMorgan. American + +On line 19175: + Sept 15th," September + produced by JPMorgan. American + International + +On line 19181: + Group, Inc., Form 10-Q for + the quarterly period + ended June Notes to + +On line 19183: + for the quarterly + period ended June Notes + to Chapter FRBNY, + +On line 19183: + period ended + June Notes to Chapter FRBNY, + notes about AIG meeting. + +On line 19185: + ended June Notes to + Chapter FRBNY, notes about AIG + meeting. Goldman Sachs + +On line 19185: + Chapter FRBNY, notes + about AIG meeting. Goldman Sachs + International, + +On line 19185: + Invoice (margin call) + to AIG Financial Products + Corp., July data + +On line 19185: + to AIG Financial + Products Corp., July data + on collateral + +On line 19185: + July data on + collateral exposures + and multisector + +On line 19185: + CDOs supplied by AIG + (see Timeline of Goldman Sachs/AIG + collateral calls, + +On line 19185: + AIG (see Timeline of + Goldman Sachs/AIG collateral + calls, pp. available at + +On line 19185: + Timeline of Goldman + Sachs/AIG collateral calls, pp. + available at the FCIC + +On line 19187: + available at the FCIC + website at http://fcic.gov/ + hearings/pdfs/2010–0701-AIG-Goldman-supporting-docs.pdf); FRBNY, notes about + +On line 19187: + the FCIC website at + http://fcic.gov/ hearings/pdfs/2010–0701-AIG-Goldman-supporting-docs.pdf); FRBNY, + notes about AIG meeting. + +On line 19189: + http://fcic.gov/ hearings/pdfs/2010–0701-AIG-Goldman-supporting-docs.pdf); + FRBNY, notes about AIG meeting. + Alejandro LaTorre, email + +On line 19189: + FRBNY, notes about AIG + meeting. Alejandro LaTorre, email + to Christine Cumming, + +On line 19189: + to Christine Cumming, + Timothy Geithner, + William Dudley, et al., + +On line 19189: + Cumming, Timothy + Geithner, William Dudley, + et al., "Update on + +On line 19191: + William Dudley, et al., + "Update on AIG," September + FRBNY, notes about AIG + +On line 19193: + et al., "Update on + AIG," September FRBNY, notes + about AIG meeting. Mark + +On line 19195: + Eric Dinallo, + testimony before the + FCIC, Hearing on the + +On line 19195: + the FCIC, Hearing on + the Role of Derivatives + in the Financial + +On line 19195: + Hearing on the Role + of Derivatives in the + Financial Crisis, + +On line 19195: + Financial Crisis, + day session Derivatives: + Supervisors and + +On line 19205: + the FCIC, July pp. + FRBNY, notes about AIG meeting. + Ibid. "Systemic Impact + +On line 19205: + FRBNY, notes about AIG + meeting. Ibid. "Systemic Impact + of AIG Bankruptcy," + +On line 19207: + Alejandro LaTorre to + Timothy Geithner, + September FRBNY, + +On line 19207: + LaTorre to Timothy + Geithner, September + FRBNY, internal + +On line 19207: + September FRBNY, + internal memo about August + meeting with the AIG + +On line 19207: + FRBNY, internal + memo about August meeting with + the AIG team of the + +On line 19207: + internal memo about + August meeting with the AIG + team of the Office + +On line 19209: + meeting with the AIG + team of the Office of Thrift + Supervision. Ibid. + +On line 19211: + team of the Office + of Thrift Supervision. Ibid. + FRBNY, internal + +On line 19217: + August Ibid. Goldman + Sachs, company update on + AIG, August Ira Selig, + +On line 19219: + Ira Selig, email to Kevin + Coffey, "Goldman Report on + AIG," August FRBNY, + +On line 19221: + AIG," August FRBNY, + internal document about + AIG, September Ibid. + +On line 19225: + Ibid. Ibid.; Goldman Sachs, + company update on AIG, + August FRBNY, notes + +On line 19229: + August FRBNY, notes + about AIG meeting, September + Ibid. "AIG Commercial + +On line 19229: + FRBNY, notes about AIG + meeting, September Ibid. "AIG + Commercial Paper + +On line 19231: + Paper Outstanding + Maturities—week of Sept 15th," + September FRBNY, + +On line 19231: + Maturities—week of + Sept 15th," September FRBNY, + notes about AIG meeting, + +On line 19233: + Sept 15th," September + FRBNY, notes about AIG meeting, + September Hayley + +On line 19233: + notes about AIG meeting, + September Hayley Boesky, email + to Bill Dudley et + +On line 19235: + Dudley et al., "AIG + panic," September FRBNY, + emails of September + +On line 19237: + et al., "AIG panic," + September FRBNY, emails of + September and Thomas + +On line 19237: + September FRBNY, + emails of September and Thomas + Baxter, interview + +On line 19239: + of September and + Thomas Baxter, interview by + FCIC, April Robert Willumstad, + +On line 19239: + interview by FCIC, + April Robert Willumstad, interview + by FCIC, November + +On line 19241: + by FCIC, November + Patricia Mosser, email to + Alejandro LaTorre et + +On line 19243: + call, September P.M. + Patricia Mosser, email to + Alejandro Latorre + +On line 19243: + Patricia Mosser, + email to Alejandro Latorre + et al., September + +On line 19245: + et al., September + P.M. FRBNY, internal memo + about AIG, September + +On line 19247: + al., September P.M. + FRBNY, internal memo about + AIG, September Adam + +On line 19247: + internal memo about + AIG, September Adam Ashcraft, email + to Alejandro LaTorre + +On line 19247: + about AIG, September + Adam Ashcraft, email to Alejandro + LaTorre et al., "AIG and + +On line 19247: + AIG, September Adam + Ashcraft, email to Alejandro LaTorre + et al., "AIG and the + +On line 19247: + to Alejandro LaTorre + et al., "AIG and the discount + window," September + +On line 19249: + et al., "AIG and the + discount window," September + Alejandro LaTorre, email + +On line 19249: + the discount window," + September Alejandro LaTorre, + email to Adam Ashcraft et + +On line 19253: + email to Adam Ashcraft et + al., September Ibid. J. C. + Flowers, interview + +On line 19253: + al., September Ibid. + J. C. Flowers, interview + by FCIC, October + +On line 19255: + September Ibid. J. + C. Flowers, interview by + FCIC, October Robert + +On line 19257: + by FCIC, October + Robert Willumstad, interview by + FCIC, November Ibid. + +On line 19259: + interview by FCIC, + November Ibid. Goldman Sachs + International, + +On line 19263: + (Tab of the AIG/Goldman Sachs + collateral call timeline). + Baxter, interview. + +On line 19265: + collateral call + timeline). Baxter, interview. + See Sarah Dahlgren, FRBNY, + +On line 19269: + interview. See Sarah + Dahlgren, FRBNY, interview by + FCIC, April Ibid. Alexander + +On line 19269: + See Sarah Dahlgren, FRBNY, + interview by FCIC, April Ibid. + Alexander J. Psomas, + +On line 19269: + FRBNY, interview + by FCIC, April Ibid. Alexander J. + Psomas, email to NY + +On line 19269: + interview by FCIC, + April Ibid. Alexander J. Psomas, + email to NY Bank Sup + +On line 19269: + April Ibid. Alexander J. + Psomas, email to NY Bank Sup + AIG Monitoring + +On line 19277: + AIG Monitoring + and Analysis, September + Notes to Chapter Fed + +On line 19277: + Fed Chairman Ben Bernanke, + letter to FCIC Chairman Phil + Angelides, December + +On line 19281: + "The AIG Rescue, Its + Impact on Markets, and the + Government’s Exit + +On line 19281: + Impact on Markets, + and the Government’s Exit + Strategy," June p. + +On line 19283: + and the Government’s + Exit Strategy," June p. + Ibid., executive + +On line 19285: + Ibid., executive + summary, pp. Treasury spokesman + Andrew Williams, quoted + +On line 19285: + Treasury spokesman Andrew + Williams, quoted in Hugh Son, "AIG’s + Rescue Had ‘Poisonous’ + +On line 19285: + Andrew Williams, quoted + in Hugh Son, "AIG’s Rescue Had + ‘Poisonous’ Effect, U.S. + +On line 19285: + Williams, quoted in Hugh + Son, "AIG’s Rescue Had ‘Poisonous’ + Effect, U.S. Panel + +On line 19285: + Son, "AIG’s Rescue Had + ‘Poisonous’ Effect, U.S. Panel + Says (Update1)," Bloomberg, June + +On line 19287: + Had ‘Poisonous’ Effect, + U.S. Panel Says (Update1)," Bloomberg, + June Scott M. Polakoff, + +On line 19287: + Effect, U.S. Panel + Says (Update1)," Bloomberg, June Scott M. + Polakoff, "American + +On line 19287: + Says (Update1)," Bloomberg, June + Scott M. Polakoff, "American + International + +On line 19287: + International + Group’s Impact on the Global + Economy: Before, + +On line 19287: + Group’s Impact on the + Global Economy: Before, + during, and after + +On line 19289: + Government Sponsored + Enterprises, 111th Cong., 1st + sess., March John Reich, + +On line 19289: + Enterprises, 111th + Cong., 1st sess., March John Reich, + interview by FCIC, + +On line 19291: + 111th Cong., 1st sess., March + John Reich, interview by + FCIC, May Michael E. Finn, + +On line 19293: + the Congressional + Oversight Panel, May C. K. + Lee, interview by + +On line 19293: + Oversight Panel, May + C. K. Lee, interview by + FCIC, April See also + +On line 19293: + Albinson, managing + director, OTS, and Danièle Nouy, + secrétaire général + +On line 19293: + director, OTS, and + Danièle Nouy, secrétaire général + de la Commission + +On line 19295: + Danièle Nouy, secrétaire + général de la Commission + Bancaire, April OTS, Memo + +On line 19295: + Commission Bancaire, + April OTS, Memo to Commission + Bancaire regarding + +On line 19297: + Bancaire regarding + its supervisory role, + January Reich, + +On line 19299: + January Reich, + interview. Joseph Gonzalez, + interview by FCIC, + +On line 19303: + Reich, interview. + Joseph Gonzalez, interview + by FCIC, May Ibid. OTS, + +On line 19303: + by FCIC, May Ibid. OTS, + Targeted Review of AIG + Financial Products + +On line 19303: + Ibid. OTS, Targeted + Review of AIG Financial + Products Corp., July + +On line 19305: + Targeted Review + of AIG Financial Products + Corp., July AIG/Goldman Sachs + +On line 19305: + of AIG Financial + Products Corp., July AIG/Goldman Sachs + collateral call + +On line 19307: + Sachs collateral + call timeline, p. Brad Waring, + interview by FCIC, + +On line 19320: + interview by FCIC, + May Reich, interview. Ibid. + Chapter John J. Mack, + +On line 19320: + Chapter John J. Mack, + written testimony for + the FCIC, First Public + +On line 19320: + John J. Mack, written + testimony for the FCIC, + First Public Hearing + +On line 19320: + the FCIC, day panel + Financial Institution + Representatives, + +On line 19322: + Representatives, + January p. Jamie Dimon, + interview by FCIC, + +On line 19324: + by FCIC, October + Timothy Geithner, + interview by FCIC, + +On line 19326: + by FCIC, November + Timothy Geithner, + quoted by Robert Schmidt, + +On line 19326: + quoted by Robert Schmidt, + "Geithner Slams Bonuses, + Says Banks Would Have Failed + +On line 19328: + Says Banks Would Have Failed + (Update2)," Bloomberg, December Ben + Bernanke, closed-door session + +On line 19330: + the Fed broadened the + PDCF to match the types of + collateral that + +On line 19330: + the PDCF to match + the types of collateral + that the two major + +On line 19330: + to match the types of + collateral that the two + major clearing banks + +On line 19330: + of collateral + that the two major clearing + banks accepted in + +On line 19330: + collateral that + the two major clearing banks + accepted in the + +On line 19330: + in the tri-party + repo system, including + non-investment-grade + +On line 19330: + had been limited + to investment-grade debt + securities. The + +On line 19330: + securities. The + Fed similarly broadened + the TSLF to include + +On line 19330: + and AAA-rated mortgage-backed and + asset-backed securities. The + Fed also increased + +On line 19330: + securities. The + Fed also increased both the + frequency of TSLF + +On line 19330: + Fed also increased + both the frequency of TSLF + auctions, to weekly + +On line 19330: + both the frequency + of TSLF auctions, to weekly + instead of every + +On line 19330: + frequency of TSLF + auctions, to weekly instead + of every two weeks, + +On line 19330: + of TSLF auctions, to + weekly instead of every + two weeks, and their size. + +On line 19330: + weekly instead of + every two weeks, and their size. + Federal Reserve + +On line 19330: + two weeks, and their size. + Federal Reserve Board press + release, September + +On line 19332: + Goldman Sachs had a + billion balance in TSLF, and + a billion balance + +On line 19332: + Reform: Usage of + Federal Reserve Credit + and Liquidity + +On line 19334: + around derivative + transactions at the time of + bankruptcy. See Debtors’ + +On line 19334: + of bankruptcy. See + Debtors’ Motion for an Order + pursuant to Sections + +On line 19334: + the Bankruptcy Code + to Establish Procedures + for the Settlement + +On line 19334: + Bankruptcy Code to + Establish Procedures for + the Settlement or + +On line 19334: + Procedures for the + Settlement or Assumption + and Assignment of + +On line 19334: + the Settlement or + Assumption and Assignment + of Prepetition + +On line 19334: + of Prepetition + Derivatives Contracts, Lehman + Brothers Holdings Inc., + +On line 19334: + Contracts, Lehman Brothers + Holdings Inc., et al, No. 08-13555 + (Bankr. S.D.N.Y. Nov. p. + +On line 19334: + Brothers Holdings Inc., + et al, No. 08-13555 (Bankr. S.D.N.Y. + Nov. p. See also + +On line 19334: + Holdings Inc., et al, + No. 08-13555 (Bankr. S.D.N.Y. Nov. p. + See also Anton + +On line 19334: + No. 08-13555 (Bankr. S.D.N.Y. + Nov. p. See also Anton + R. Valukas, Report of + +On line 19334: + Nov. p. See also + Anton R. Valukas, Report of + Examiner, In + +On line 19334: + R. Valukas, Report of + Examiner, In re Lehman + Brothers Holdings Inc., + +On line 19334: + of Examiner, + In re Lehman Brothers Holdings + Inc., et al., Chapter + +On line 19334: + Examiner, In + re Lehman Brothers Holdings Inc., + et al., Chapter Case + +On line 19334: + In re Lehman Brothers + Holdings Inc., et al., Chapter + Case No. 08-13555 (JMP), (Bankr. + +On line 19334: + Lehman Brothers Holdings + Inc., et al., Chapter Case No. + 08-13555 (JMP), (Bankr. S.D.N.Y.), + +On line 19334: + Brothers Holdings Inc., + et al., Chapter Case No. 08-13555 + (JMP), (Bankr. S.D.N.Y.), March + +On line 19334: + Inc., et al., Chapter + Case No. 08-13555 (JMP), (Bankr. S.D.N.Y.), + March By November + +On line 19334: + et al., Chapter Case + No. 08-13555 (JMP), (Bankr. S.D.N.Y.), March + By November a + +On line 19334: + (JMP), (Bankr. S.D.N.Y.), March + By November a special + facility to + +On line 19334: + derivatives trades + with Lehman had successfully + terminated most + +On line 19334: + massive unresolved + claims relating to over-the-counter + derivatives in + +On line 19334: + derivatives in + the bankruptcy proceeding: + as of May banks had + +On line 19334: + of May banks had filed + more than billion in claims for + losses related + +On line 19334: + more than billion in + claims for losses related + to derivatives + +On line 19336: + contracts with Lehman. See + Debtors’ Motion for an Order + pursuant to Notes to + +On line 19338: + See Debtors’ Motion for + an Order pursuant to Notes + to Chapter Sections + +On line 19338: + Debtors’ Motion for an + Order pursuant to Notes to + Chapter Sections and + +On line 19338: + Order pursuant to + Notes to Chapter Sections and + of the Bankruptcy + +On line 19338: + pursuant to Notes to + Chapter Sections and of the + Bankruptcy Code to + +On line 19338: + the Bankruptcy Code + to Establish Procedures + for the Settlement + +On line 19338: + Bankruptcy Code to + Establish Procedures for + the Settlement or + +On line 19338: + Procedures for the + Settlement or Assumption + and Assignment of + +On line 19338: + the Settlement or + Assumption and Assignment + of Prepetition + +On line 19338: + of Prepetition + Derivatives Contracts, Lehman + Brothers Holdings Inc., + +On line 19338: + Brothers Holdings Inc., + et al., No. 08-13555 (Bankr. S.D.N.Y. + Nov. [Docket No. p. + +On line 19338: + Inc., et al., No. 08-13555 + (Bankr. S.D.N.Y. Nov. [Docket No. + p. Debtors’ Motion for + +On line 19338: + et al., No. 08-13555 (Bankr. + S.D.N.Y. Nov. [Docket No. p. + Debtors’ Motion for an + +On line 19338: + S.D.N.Y. Nov. [Docket + No. p. Debtors’ Motion for an + Order Approving + +On line 19338: + Order Approving + Consensual Assumption + and Assignment of + +On line 19338: + of Prepetition + Derivatives Contracts, Lehman + Brothers Holdings Inc., + +On line 19338: + Brothers Holdings Inc., + et al., No. 08-13555 (Bankr. S.D.N.Y. + Jan. [Docket No.2561], p. + +On line 19340: + Inc., et al., No. 08-13555 + (Bankr. S.D.N.Y. Jan. [Docket No.2561], + p. Money market + +On line 19340: + et al., No. 08-13555 (Bankr. + S.D.N.Y. Jan. [Docket No.2561], p. + Money market fund + +On line 19340: + No. 08-13555 (Bankr. S.D.N.Y. + Jan. [Docket No.2561], p. Money + market fund holdings + +On line 19340: + S.D.N.Y. Jan. [Docket + No.2561], p. Money market fund + holdings of all types + +On line 19340: + p. Money market + fund holdings of all types of + taxable commercial + +On line 19340: + fund holdings of all + types of taxable commercial + paper decreased from + +On line 19340: + all types of taxable + commercial paper decreased + from billion at the + +On line 19340: + commercial paper + decreased from billion at the + end of August to + +On line 19340: + decreased from billion + at the end of August to + billion at the end + +On line 19340: + the end of August + to billion at the end of + September (data + +On line 19340: + August to billion + at the end of September + (data provided + +On line 19340: + to billion at the + end of September (data + provided by ICI/Crane + +On line 19340: + September (data + provided by ICI/Crane to the + FCIC). BNY Mellon, in + +On line 19340: + by ICI/Crane to the FCIC). + BNY Mellon, in its role as + tri-party clearing + +On line 19340: + BNY Mellon, in its + role as tri-party clearing + bank, reported that + +On line 19340: + role as tri-party + clearing bank, reported that + Treasury-backed repos rose + +On line 19340: + that Treasury-backed repos + rose from billion to billion + of its tri-party + +On line 19340: + rose from billion to + billion of its tri-party + business between March + +On line 19340: + to billion of its + tri-party business between + March and December + +On line 19340: + tri-party business + between March and December + (data provided + +On line 19340: + March and December + (data provided by BNY + Mellon to the FCIC). + +On line 19342: + December (data + provided by BNY Mellon + to the FCIC). Harvey + +On line 19342: + provided by BNY + Mellon to the FCIC). Harvey + Miller, interview by + +On line 19344: + BNY Mellon to the + FCIC). Harvey Miller, interview + by FCIC, August The + +On line 19344: + Miller, interview by + FCIC, August The Reserve Fund, + Semi-annual report + +On line 19346: + Reserve Management + Company Inc., Resrv Partners + Inc., Bruce Bent Sr., Bruce + +On line 19346: + Resrv Partners Inc., Bruce + Bent Sr., Bruce Bent II, and The + Reserve Primary + +On line 19346: + Bent Sr., Bruce Bent II, + and The Reserve Primary + Fund (S.D.N.Y. May p. + +On line 19346: + Sr., Bruce Bent II, and + The Reserve Primary Fund + (S.D.N.Y. May p. (para. + +On line 19346: + II, and The Reserve + Primary Fund (S.D.N.Y. May + p. (para. "Fidelity, + +On line 19346: + Fund (S.D.N.Y. May p. + (para. "Fidelity, BlackRock, Dreyfus, + Reserve Make Big Gains + +On line 19346: + (para. "Fidelity, BlackRock, + Dreyfus, Reserve Make Big Gains + Past Months," Crane Data + +On line 19348: + Past Months," Crane Data + News Archives, September The + Reserve Primary + +On line 19352: + Complaint against Reserve + Management Company Inc., + pp. (paras. p. (para. The + +On line 19352: + Reserve Management + Company Inc., pp. (paras. p. + (para. The Reserve, "The + +On line 19352: + Company Inc., pp. + (paras. p. (para. The Reserve, "The + Primary Fund: Plan + +On line 19352: + p. (para. The Reserve, + "The Primary Fund: Plan of + Liquidation and + +On line 19352: + "The Primary Fund: + Plan of Liquidation and + Distribution of + +On line 19354: + Liquidation and + Distribution of Assets," + December p. SEC + +On line 19354: + and Distribution + of Assets," December p. + SEC Complaint, pp. (paras. + +On line 19354: + Distribution of + Assets," December p. SEC + Complaint, pp. (paras. The + +On line 19354: + December p. SEC + Complaint, pp. (paras. The Reserve, + "The Primary Fund: + +On line 19354: + pp. (paras. The Reserve, + "The Primary Fund: Plan of + Liquidation," p. + +On line 19356: + "The Primary Fund: + Plan of Liquidation," p. + SEC Complaint, p. (para. + +On line 19356: + Primary Fund: Plan + of Liquidation," p. SEC + Complaint, p. (para. The + +On line 19356: + Complaint, p. (para. The + SEC notes that the Primary + Fund likely broke the + +On line 19356: + (para. The SEC notes that + the Primary Fund likely + broke the buck prior + +On line 19356: + The SEC notes that the + Primary Fund likely broke + the buck prior to + +On line 19356: + the buck prior to + A.M. on September because + of the redemption + +On line 19356: + prior to A.M. on + September because of the + redemption requests + +On line 19358: + that owing to an + administrative error, + its NAV should have been + +On line 19358: + administrative + error, its NAV should have been + calculated as + +On line 19358: + error, its NAV should + have been calculated as + between A.M. and P.M. + +On line 19358: + been calculated + as between A.M. and P.M. on + September (pp. paras. + +On line 19362: + as between A.M. and + P.M. on September (pp. paras. + Moody’s Investors Service + +On line 19362: + P.M. on September + (pp. paras. Moody’s Investors Service + articles, "Sponsor + +On line 19362: + Money Market Funds," + August p. "Moody’s Proposes + New Money Market + +On line 19362: + "Moody’s Proposes New + Money Market Fund Rating + Methodology and + +On line 19362: + Money Market Fund + Rating Methodology and + Symbols," September + +On line 19364: + Market Fund Rating + Methodology and Symbols," + September Patrick McCabe + +On line 19364: + September Patrick McCabe + and Michael Palumbo, interview + by FCIC, September + +On line 19370: + and GSE debt—increased + by billion during the same + period. McCabe and + +On line 19370: + by billion during + the same period. McCabe and + Palumbo, interview. + +On line 19372: + same period. McCabe + and Palumbo, interview. FCIC + survey of money + +On line 19372: + of money market + mutual funds. Holdings for + the five firms decreased + +On line 19372: + market mutual + funds. Holdings for the five firms + decreased from billion + +On line 19372: + decreased from billion + to billion from September + to September See + +On line 19374: + FCIC, Hearing on the + Shadow Banking System, day + session Perspective + +On line 19374: + System, day session + Perspective on the Shadow + Banking System, May + +On line 19376: + Perspective on the + Shadow Banking System, May + transcript, p. McCabe and + +On line 19378: + Banking System, May + transcript, p. McCabe and Palumbo, + interview. "Treasury + +On line 19378: + transcript, p. McCabe and + Palumbo, interview. "Treasury + Announces Guaranty + +On line 19378: + p. McCabe and Palumbo, + interview. "Treasury Announces + Guaranty Program + +On line 19378: + Palumbo, interview. + "Treasury Announces Guaranty + Program for Money + +On line 19378: + interview. "Treasury + Announces Guaranty Program + for Money Market + +On line 19378: + for Money Market + Funds," Treasury Department press + release, September + +On line 19378: + M. Paulson Jr. to + make available as necessary + the assets of the + +On line 19378: + Stabilization Fund + (ESF) for up to billion to + guarantee payments + +On line 19378: + guarantee payments + to support money market + mutual funds. The + +On line 19378: + payments to support + money market mutual + funds. The original + +On line 19378: + mutual funds. The + original objective of + the ESF, established + +On line 19378: + objective of the + ESF, established by the Gold + Reserve Act of was + +On line 19378: + the ESF, established + by the Gold Reserve Act of + was to stabilize + +On line 19378: + ESF, established by + the Gold Reserve Act of was + to stabilize the + +On line 19378: + by the Gold Reserve + Act of was to stabilize + the value of the + +On line 19378: + Reserve Act of was + to stabilize the value + of the dollar in + +On line 19378: + was to stabilize + the value of the dollar + in the depths of the + +On line 19378: + of the dollar in + the depths of the Depression. + It authorized the + +On line 19378: + of the Depression. + It authorized the treasury + secretary, with the + +On line 19380: + with the approval of + the president, to "deal in + gold, foreign exchange, + +On line 19380: + the approval of the + president, to "deal in gold, + foreign exchange, and + +On line 19380: + president, to "deal + in gold, foreign exchange, and + other instruments + +On line 19380: + exchange, and other + instruments of credit and + securities" to + +On line 19382: + international + financial stability. + The program was called + +On line 19382: + Commercial Paper + Money Market Mutual + Fund Liquidity + +On line 19384: + Fund Liquidity + Facility (AMLF). Neel Kashkari, + interview by FCIC, + +On line 19386: + Facility (AMLF). + Neel Kashkari, interview by FCIC, + November John Mack, + +On line 19386: + Neel Kashkari, interview + by FCIC, November John Mack, + interview by FCIC, + +On line 19388: + by FCIC, November + John Mack, interview by FCIC, + November New York + +On line 19388: + John Mack, interview + by FCIC, November New York + Federal Reserve, + +On line 19390: + Federal Reserve, + internal email, October + p. David Wong, email to + +On line 19390: + Reserve, internal + email, October p. David Wong, + email to Fed and SEC + +On line 19398: + Wong, email to Fed and + SEC officials, September + Notes to Chapter Jonathan + +On line 19398: + and SEC officials, + September Notes to Chapter + Jonathan Stewart, FRBNY, + +On line 19400: + Notes to Chapter Jonathan + Stewart, FRBNY, internal + email, September One + +On line 19400: + Jonathan Stewart, FRBNY, + internal email, September + One year later, the + +On line 19400: + One year later, the + Senior Supervisors Group—a + cross-agency task force + +On line 19400: + Supervisors Group—a + cross-agency task force looking + back on the causes + +On line 19400: + cross-agency task force + looking back on the causes + of the financial + +On line 19400: + the causes of the + financial crisis—would write, + "Before the crisis + +On line 19400: + investment banks post-Lehman], + many broker-dealers considered + the prime brokerage + +On line 19400: + considered the prime + brokerage business to be + either a source of + +On line 19400: + brokerage business + to be either a source of + liquidity or + +On line 19400: + be either a source + of liquidity or a + liquidity-neutral + +On line 19402: + unanticipated." + Senior Supervisors Group, + "Risk Management Lessons + +On line 19402: + Management Lessons from + the Global Banking Crisis + of October p. + +On line 19404: + of October p. + Jonathan Wood, Whitebox Advisors, + interview by FCIC, + +On line 19406: + p. Jonathan Wood, Whitebox + Advisors, interview by + FCIC, August The FCIC + +On line 19406: + Whitebox Advisors, + interview by FCIC, August + The FCIC surveyed hedge + +On line 19406: + interview by FCIC, + August The FCIC surveyed hedge + funds that survived the + +On line 19406: + FCIC, August The FCIC + surveyed hedge funds that survived + the crisis. Those in + +On line 19406: + The FCIC surveyed hedge + funds that survived the crisis. + Those in the three largest + +On line 19406: + surveyed hedge funds that + survived the crisis. Those in + the three largest quartiles + +On line 19406: + hedge funds that survived + the crisis. Those in the three + largest quartiles ranked by + +On line 19406: + funds that survived the + crisis. Those in the three largest + quartiles ranked by size + +On line 19406: + survived the crisis. + Those in the three largest quartiles + ranked by size received + +On line 19406: + the crisis. Those in + the three largest quartiles ranked by + size received investor + +On line 19406: + Those in the three largest + quartiles ranked by size received + investor redemption + +On line 19406: + the three largest quartiles + ranked by size received investor + redemption requests + +On line 19406: + ranked by size received + investor redemption requests + averaging of + +On line 19406: + investor redemption + requests averaging of + their assets in the + +On line 19406: + of their assets in + the fourth quarter of (the first + available redemption + +On line 19406: + the fourth quarter of + (the first available redemption + date after the Lehman + +On line 19410: + date after the Lehman + bankruptcy). IFSL Research, + "Hedge Funds April David Wong, + +On line 19410: + the Lehman bankruptcy). + IFSL Research, "Hedge Funds April + David Wong, treasurer + +On line 19410: + IFSL Research, "Hedge + Funds April David Wong, treasurer + of Morgan Stanley, + +On line 19410: + Wong, treasurer of + Morgan Stanley, interview + by FCIC, October + +On line 19416: + interview by FCIC, + October Mack, interview. + Wong, interview. Patrice + +On line 19416: + FCIC, October Mack, + interview. Wong, interview. + Patrice Maher (Morgan + +On line 19416: + Stanley), email to William + Brodows (Federal Reserve BNY) + et al., September + +On line 19416: + Reserve BNY) et al., + September with data in + an attachment. Hedge + +On line 19416: + al., September with + data in an attachment. + Hedge fund values are + +On line 19416: + in an attachment. + Hedge fund values are the Prime + Brokerage Outflows + +On line 19418: + Hedge fund values are + the Prime Brokerage Outflows + (NY+International). Wong, interview. + +On line 19420: + fund values are the + Prime Brokerage Outflows (NY+International). + Wong, interview. Matthew + +On line 19422: + Wong, interview. Matthew + Eichner, internal email, + September Angela + +On line 19424: + Angela Miknius, email to + NY Bank Sup, September Amy + G. White, internal + +On line 19424: + Miknius, email to NY Bank + Sup, September Amy G. White, + internal NYFBR + +On line 19426: + September Amy G. + White, internal NYFBR email, + September Morgan + +On line 19426: + "Liquidity and + Financing Activity: + "Liquidity and + +On line 19426: + "Liquidity and + Financing Activity: + "Liquidity and + +On line 19426: + "Liquidity and + Financing Activity: + reports to the New + +On line 19428: + Federal Reserve. + Morgan Stanley Corporate + Treasury, "Meeting with + +On line 19428: + Federal Reserve: + September attachment to + Morgan Stanley email + +On line 19428: + in attachment to + Morgan Stanley email to NYFRB, + September Amy White, + +On line 19428: + to Morgan Stanley + email to NYFRB, September Amy + White, internal NYFRB + +On line 19428: + Morgan Stanley email + to NYFRB, September Amy White, + internal NYFRB emails, + +On line 19430: + to NYFRB, September + Amy White, internal NYFRB emails, + September and Lloyd + +On line 19430: + emails, September and + Lloyd Blankfein, testimony + before the FCIC, First + +On line 19430: + the FCIC, day panel + Financial Institution + Representatives, + +On line 19434: + Representatives, + January transcript, pp. Bernanke, + closed-door session. Thomas + +On line 19434: + January transcript, + pp. Bernanke, closed-door session. Thomas + Baxter, interview + +On line 19436: + Bernanke, closed-door session. + Thomas Baxter, interview by + FCIC, April The switch to + +On line 19436: + closed-door session. Thomas + Baxter, interview by FCIC, + April The switch to bank + +On line 19436: + session. Thomas Baxter, + interview by FCIC, April The + switch to bank holding + +On line 19436: + Baxter, interview + by FCIC, April The switch to bank + holding company + +On line 19436: + interview by FCIC, + April The switch to bank holding + company status + +On line 19436: + by FCIC, April The switch + to bank holding company + status required a + +On line 19436: + April The switch to bank + holding company status + required a simple + +On line 19436: + switch to bank holding + company status required + a simple charter + +On line 19436: + company status + required a simple charter + change. Both Morgan and + +On line 19436: + required a simple + charter change. Both Morgan and + Goldman already owned + +On line 19436: + a simple charter + change. Both Morgan and Goldman + already owned banks that + +On line 19436: + change. Both Morgan and + Goldman already owned banks that + they had chartered as + +On line 19436: + and Goldman already + owned banks that they had chartered + as industrial + +On line 19436: + Goldman already owned + banks that they had chartered as + industrial loan + +On line 19436: + owned banks that they had + chartered as industrial + loan companies, a + +On line 19436: + as industrial + loan companies, a type of + bank that is allowed + +On line 19436: + industrial loan + companies, a type of bank + that is allowed to + +On line 19436: + companies, a type + of bank that is allowed to + accept FDIC-insured deposits + +On line 19436: + supervision over + the bank’s parent or other + affiliated + +On line 19442: + Risk: Getting Started," + last updated November + Mack, interview. Mack, + +On line 19448: + Wong, interview. Amy + G. White, internal FRBNY + email, September It + +On line 19448: + interview. Amy G. + White, internal FRBNY email, + September It should + +On line 19448: + G. White, internal + FRBNY email, September It + should be borne in mind + +On line 19448: + internal FRBNY + email, September It should be + borne in mind that lack + +On line 19448: + email, September It + should be borne in mind that lack + of regulation + +On line 19448: + September It should + be borne in mind that lack of + regulation of + +On line 19448: + be borne in mind that + lack of regulation of + this market rendered + +On line 19448: + borne in mind that lack + of regulation of this + market rendered it + +On line 19450: + market rendered it + extremely opaque. Shortcomings + in transparency, lack + +On line 19450: + it extremely opaque. + Shortcomings in transparency, + lack of reporting + +On line 19450: + transparency, lack of + reporting requirements, and + limited data + +On line 19450: + lack of reporting + requirements, and limited + data collection + +On line 19450: + limited data + collection by third parties + make it difficult + +On line 19450: + collection by third + parties make it difficult + to document and + +On line 19450: + it difficult to + document and describe the + various market + +On line 19452: + crisis. Michael Masters, + testimony before the + FCIC, Hearing on the + +On line 19452: + the FCIC, Hearing on + the Role of Derivatives + in the Financial + +On line 19452: + Hearing on the Role + of Derivatives in the + Financial Crisis, + +On line 19452: + of Derivatives + in the Financial Crisis, + day session Overview + +On line 19452: + Derivatives in + the Financial Crisis, day + session Overview of + +On line 19452: + in the Financial + Crisis, day session Overview + of Derivatives, + +On line 19456: + release, December + "OTC derivatives market + activity in + +On line 19456: + "OTC derivatives + market activity in + the second half of + +On line 19456: + activity in + the second half of Bank of + International + +On line 19462: + International + Settlements press release, May + p. Notes to Chapter + +On line 19464: + release, May p. Notes + to Chapter "Triennial + and Regular OTC + +On line 19464: + OTC Derivatives + Market Statistics," Bank of + International + +On line 19468: + Moody’s, "Moody’s downgrades WaMu + Ratings; outlook negative," + September "OTS Fact + +On line 19470: + OTS 08–046A, September + p. Jamie Dimon, interview + by FCIC, October + +On line 19472: + 08–046A, September p. + Jamie Dimon, interview by + FCIC, October Sheila + +On line 19472: + September p. Jamie + Dimon, interview by FCIC, + October Sheila Bair, + +On line 19472: + FCIC, October Sheila + Bair, testimony before + the FCIC, Hearing on + +On line 19472: + October Sheila Bair, + testimony before the + FCIC, Hearing on Too + +On line 19472: + of Systemic Risk in + the Financial Crisis, day + session Federal + +On line 19472: + Federal Deposit + Insurance Corporation, + September exchange + +On line 19472: + Deposit Insurance + Corporation, September + exchange between Bair + +On line 19474: + exchange between Bair + and Commissioner Douglas + Holtz-Eakin, pp. Scott Alvarez, + +On line 19474: + Holtz-Eakin, pp. Scott Alvarez, + testimony before the + FCIC, Hearing on Too + +On line 19474: + Role of Systemic Risk + in the Financial Crisis, + day Session Wachovia + +On line 19478: + p. Kashkari, interview. + Greg Feldberg, "Wachovia Case Study," + presentation at + +On line 19478: + Greg Feldberg, "Wachovia + Case Study," presentation at + LBO Supervision + +On line 19478: + Georgia, p. These rules, + embodied in section 23A + of the Federal + +On line 19478: + in section 23A of + the Federal Reserve Act, + limit the support + +On line 19478: + limit the support + that a depository + institution can + +On line 19478: + corporate structure; + they are aimed at protecting + FDIC-insured depositors + +On line 19478: + depositors from + activities that occur + outside of the bank + +On line 19478: + activities that + occur outside of the bank + itself. Exemptions + +On line 19478: + occur outside of + the bank itself. Exemptions + have the effect of + +On line 19478: + outside of the bank + itself. Exemptions have the + effect of funding + +On line 19478: + assets within the + federal safety net of + insured deposits; they + +On line 19480: + bank liquidity) + during times of market stress. + Robert Steel, interview + +On line 19482: + times of market stress. + Robert Steel, interview by FCIC, + August Scott Alvarez, + +On line 19482: + market stress. Robert Steel, + interview by FCIC, August + Scott Alvarez, written + +On line 19482: + interview by FCIC, + August Scott Alvarez, written + testimony for + +On line 19482: + August Scott Alvarez, + written testimony for + the FDIC, September + +On line 19484: + Scott Alvarez, written + testimony for the FDIC, + September p. Robert + +On line 19484: + p. Robert Steel, written + testimony before the + FCIC, Hearing on Too + +On line 19484: + Role of Systemic Risk + in the Financial Crisis, + day session Wachovia + +On line 19490: + interview by FCIC, + August Sheila Bair, interview + by FCIC, August Richard + +On line 19490: + Sheila Bair, interview + by FCIC, August Richard Westerkamp, + Federal Reserve + +On line 19490: + August Richard Westerkamp, + Federal Reserve Bank of + Richmond, interview + +On line 19492: + interview by FCIC, + August Wachovia was unable + to roll billion of + +On line 19492: + August Wachovia was + unable to roll billion of + asset-backed commercial + +On line 19492: + Wachovia was unable + to roll billion of asset-backed + commercial paper + +On line 19492: + to roll billion of + asset-backed commercial paper + that Friday; James Wigand + +On line 19492: + asset-backed commercial + paper that Friday; James Wigand + and Herbert Held, memo + +On line 19492: + paper that Friday; + James Wigand and Herbert Held, memo + to the FDIC Board of + +On line 19492: + Friday; James Wigand and + Herbert Held, memo to the FDIC + Board of Directors, + +On line 19492: + Herbert Held, memo to + the FDIC Board of Directors, + September p. On + +On line 19494: + John Corston, acting deputy + director, Division of + Supervision and + +On line 19494: + Role of Systemic Risk + in the Financial Crisis, + day Session Wachovia + +On line 19498: + Rich Westerkamp, email to + FCIC, November Westerkamp said + that the estimate + +On line 19498: + Westerkamp, email to FCIC, + November Westerkamp said that + the estimate of + +On line 19498: + November Westerkamp + said that the estimate of + early redemption + +On line 19498: + the estimate of + early redemption requests + was based on a phone + +On line 19498: + early redemption + requests was based on a phone + conversation with + +On line 19498: + phone conversation + with officials in Wachovia’s + treasury department, + +On line 19498: + in Wachovia’s treasury + department, describing their + conversations with + +On line 19498: + their conversations + with investors; the figures were + never verified. + +On line 19502: + investors; the figures + were never verified. Bair, + interview. Robert Steel, + +On line 19502: + figures were never + verified. Bair, interview. + Robert Steel, interview + +On line 19504: + interview. Robert Steel, + interview by FCIC, August + Bair, interview; Steel, + +On line 19504: + Steel, interview by + FCIC, August Bair, interview; + Steel, interview; FDIC + +On line 19504: + interview by FCIC, + August Bair, interview; Steel, + interview; FDIC staff, + +On line 19504: + by FCIC, August Bair, + interview; Steel, interview; + FDIC staff, interview + +On line 19512: + testimony for + the FCIC, September p. Steel, + interview. Ibid. Wigand + +On line 19512: + the FCIC, September + p. Steel, interview. Ibid. Wigand + and Held, memo to the + +On line 19512: + FCIC, September p. + Steel, interview. Ibid. Wigand and + Held, memo to the FDIC + +On line 19512: + September p. Steel, + interview. Ibid. Wigand and Held, + memo to the FDIC board, + +On line 19512: + p. Steel, interview. + Ibid. Wigand and Held, memo to the + FDIC board, September + +On line 19512: + Steel, interview. Ibid. + Wigand and Held, memo to the FDIC + board, September pp. + +On line 19514: + Wigand and Held, memo to + the FDIC board, September pp. + Federal Reserve + +On line 19514: + memo to the FDIC board, + September pp. Federal + Reserve staff, memo to + +On line 19514: + FDIC board, September + pp. Federal Reserve staff, + memo to the Board of + +On line 19516: + NA," September p. + John A. Beebe, Market Risk Team + Leader, Federal + +On line 19516: + Beebe, Market Risk Team + Leader, Federal Reserve + Bank of Richmond, memo + +On line 19518: + Burns, VP-LCBO, "Wachovia + Large Funds Providers," September pp. + Federal Reserve + +On line 19518: + "Wachovia Large Funds Providers," + September pp. Federal + Reserve staff, memo to + +On line 19518: + Funds Providers," September + pp. Federal Reserve staff, + memo to the Board of + +On line 19520: + Risk Exception for + Wachovia Bank, NA," September + p. Bair, interview; + +On line 19520: + Bank, NA," September + p. Bair, interview; minutes + of the telephonic + +On line 19520: + September p. Bair, + interview; minutes of the + telephonic meeting + +On line 19520: + Federal Deposit + Insurance Corporation + Board of Directors, + +On line 19524: + Corporation Board + of Directors, September + p. Notes to Chapter + +On line 19530: + September p. Notes + to Chapter Bair, interview. + FDIC memo to the FDIC + +On line 19530: + to the FDIC Board of + Directors, p. Corston, written + testimony for + +On line 19530: + Directors, p. Corston, + written testimony for + the FDIC, September + +On line 19532: + the FDIC, September + p. Specifically, under + Wachovia’s proposal, + +On line 19532: + p. Specifically, + under Wachovia’s proposal, + the FDIC would provide + +On line 19532: + would provide credit + protection on billion of + loans, while Wachovia would + +On line 19532: + billion of loans, while + Wachovia would absorb the first + billion in losses + +On line 19532: + of loans, while Wachovia + would absorb the first billion + in losses and the + +On line 19532: + loans, while Wachovia would + absorb the first billion in + losses and the FDIC + +On line 19532: + incur losses on + the balance of the billion. + To offset that risk, + +On line 19532: + on the balance of + the billion. To offset that + risk, Wachovia proposed + +On line 19532: + the balance of the + billion. To offset that risk, + Wachovia proposed that + +On line 19532: + To offset that risk, + Wachovia proposed that the FDIC + receive billion in + +On line 19532: + risk, Wachovia proposed + that the FDIC receive billion + in preferred stock and + +On line 19532: + proposed that the FDIC + receive billion in preferred + stock and warrants on + +On line 19532: + that the FDIC receive + billion in preferred stock and + warrants on common + +On line 19532: + FDIC receive billion + in preferred stock and warrants + on common shares (FDIC + +On line 19532: + receive billion in + preferred stock and warrants on + common shares (FDIC memo + +On line 19532: + billion in preferred + stock and warrants on common + shares (FDIC memo to the + +On line 19532: + in preferred stock and + warrants on common shares (FDIC + memo to the FDIC Board + +On line 19532: + warrants on common + shares (FDIC memo to the FDIC Board + of Directors, p. + +On line 19534: + shares (FDIC memo to the + FDIC Board of Directors, p. + The FDIC board has five + +On line 19534: + memo to the FDIC Board + of Directors, p. The FDIC + board has five members: + +On line 19534: + to the FDIC Board of + Directors, p. The FDIC board + has five members: the + +On line 19534: + of Directors, p. + The FDIC board has five members: + the comptroller of + +On line 19534: + Directors, p. The + FDIC board has five members: the + comptroller of the + +On line 19534: + p. The FDIC board has + five members: the comptroller + of the currency, + +On line 19534: + The FDIC board has five + members: the comptroller of + the currency, the + +On line 19534: + of the currency, + the director of OTS, and + three other members + +On line 19534: + the director of + OTS, and three other members + appointed by the + +On line 19534: + OTS, and three other + members appointed by the + president. In Too + +On line 19534: + the president. In + Too Big to Fail: The Inside + Story of How Wall + +On line 19534: + Too Big to Fail: The + Inside Story of How Wall + Street and Washington + +On line 19534: + to Fail: The Inside + Story of How Wall Street and + Washington Fought to + +On line 19534: + Story of How Wall + Street and Washington Fought to + Save the Financial + +On line 19534: + of How Wall Street and + Washington Fought to Save the + Financial System + +On line 19534: + Street and Washington + Fought to Save the Financial + System from Crisis—and + +On line 19534: + Washington Fought to + Save the Financial System + from Crisis—and Themselves + +On line 19534: + Save the Financial + System from Crisis—and Themselves + (New York: Viking, Andrew + +On line 19534: + Financial System + from Crisis—and Themselves (New York: + Viking, Andrew Ross Sorkin + +On line 19534: + System from Crisis—and + Themselves (New York: Viking, Andrew + Ross Sorkin (p. wrote that + +On line 19534: + from Crisis—and Themselves + (New York: Viking, Andrew Ross Sorkin + (p. wrote that before + +On line 19534: + Crisis—and Themselves (New + York: Viking, Andrew Ross Sorkin (p. + wrote that before the + +On line 19534: + (New York: Viking, Andrew + Ross Sorkin (p. wrote that before + the September FDIC + +On line 19534: + York: Viking, Andrew Ross + Sorkin (p. wrote that before the + September FDIC board + +On line 19534: + Ross Sorkin (p. wrote that + before the September FDIC + board meeting, New York + +On line 19534: + wrote that before the + September FDIC board meeting, + New York Federal + +On line 19534: + September FDIC board + meeting, New York Federal + Reserve Governor + +On line 19534: + Reserve Governor + Geithner and other + officials had a + +On line 19534: + Geithner and + other officials had a + conference call with + +On line 19534: + other officials + had a conference call with + Bair (Paulson recused + +On line 19534: + had a conference + call with Bair (Paulson recused + himself) during which + +On line 19534: + call with Bair (Paulson + recused himself) during which + Geithner urged + +On line 19534: + which Geithner + urged Bair to help Citigroup + acquire Wachovia by + +On line 19534: + acquire Wachovia by + guaranteeing some of its + potential losses. + +On line 19534: + potential losses. + Geithner argued that + allowing the FDIC + +On line 19534: + that allowing the + FDIC to take over Wachovia would + have the effect of + +On line 19534: + take over Wachovia would + have the effect of wiping + out shareholders and + +On line 19534: + over Wachovia would have + the effect of wiping out + shareholders and bond + +On line 19534: + would have the effect + of wiping out shareholders + and bond holders, which, + +On line 19534: + have the effect of + wiping out shareholders and + bond holders, which, he + +On line 19534: + shareholders and bond + holders, which, he was convinced, + would only spook the + +On line 19536: + and bond holders, which, + he was convinced, would only + spook the markets. He + +On line 19536: + bond holders, which, he + was convinced, would only spook + the markets. He was + +On line 19536: + holders, which, he was + convinced, would only spook the + markets. He was still + +On line 19536: + he was convinced, would + only spook the markets. He + was still furious + +On line 19536: + convinced, would only + spook the markets. He was still + furious with Bair + +On line 19536: + spook the markets. He + was still furious with Bair + for the way she had + +On line 19536: + markets. He was still + furious with Bair for the + way she had abruptly + +On line 19536: + was still furious + with Bair for the way she had + abruptly taken over + +On line 19538: + Federal Deposit + Insurance Corporation + Board of Directors + +On line 19540: + September transcript, + pp. Minutes of telephonic + meeting of the FDIC + +On line 19542: + telephonic meeting + of the FDIC board, September + p. Ibid.; the billion + +On line 19542: + meeting of the FDIC + board, September p. Ibid.; the + billion figure is + +On line 19542: + board, September p. + Ibid.; the billion figure is + as of September + +On line 19542: + September p. Ibid.; + the billion figure is as + of September (FDIC + +On line 19542: + the billion figure + is as of September (FDIC + staff, memo to the Board + +On line 19542: + billion figure is + as of September (FDIC staff, + memo to the Board of + +On line 19542: + as of September + (FDIC staff, memo to the Board of + Directors, subject: + +On line 19542: + staff, memo to the Board + of Directors, subject: "Third + Quarter CFO Report + +On line 19542: + Directors, subject: + "Third Quarter CFO Report to + the Board," November + +On line 19544: + Report to the Board," + November p. Minutes of + telephonic meeting + +On line 19544: + the Board," November + p. Minutes of telephonic + meeting of the FDIC + +On line 19546: + telephonic meeting + of the FDIC board, September + p. Bair, interview. + +On line 19548: + board, September p. + Bair, interview. Steel, written + testimony for + +On line 19548: + Bair, interview. Steel, + written testimony for + the FCIC, September + +On line 19548: + testimony for + the FCIC, September p. On + the board’s vote and the + +On line 19548: + September p. On + the board’s vote and the agreement + in principle, see + +On line 19548: + On the board’s vote and + the agreement in principle, + see Steel, interview; + +On line 19548: + the board’s vote and the + agreement in principle, see + Steel, interview; see + +On line 19548: + in principle, see + Steel, interview; see also + Affidavit of Robert + +On line 19548: + see Steel, interview; + see also Affidavit of + Robert K. Steel, dated + +On line 19548: + Affidavit of Robert + K. Steel, dated October + filed in Wachovia Corp. + +On line 19548: + Robert K. Steel, dated + October filed in Wachovia + Corp. v. Citigroup, + +On line 19548: + filed in Wachovia Corp. + v. Citigroup, Inc., Case No. + 08-cv-085093-SAS (S.D.N.Y.), pp. and + +On line 19548: + Corp. v. Citigroup, + Inc., Case No. 08-cv-085093-SAS (S.D.N.Y.), pp. + and exhibit A. + +On line 19550: + v. Citigroup, Inc., + Case No. 08-cv-085093-SAS (S.D.N.Y.), pp. and + exhibit A. Fed + +On line 19550: + 08-cv-085093-SAS (S.D.N.Y.), pp. and + exhibit A. Fed Chairman + Ben Bernanke, letter to + +On line 19550: + and exhibit A. + Fed Chairman Ben Bernanke, letter + to FCIC Chairman Phil + +On line 19550: + Fed Chairman Ben Bernanke, + letter to FCIC Chairman Phil + Angelides, December + +On line 19552: + Chairman Phil Angelides, + December Wachtell, Lipton, Rosen + Katz, on behalf of + +On line 19552: + Wachtell, Lipton, Rosen Katz, + on behalf of Wells, letter + to Division of + +On line 19552: + Katz, on behalf of + Wells, letter to Division + of Corporation + +On line 19554: + to Division of + Corporation Finance, SEC, + November p. Richard + +On line 19556: + SEC, November p. + Richard Kovacevich, interview + by FCIC, August Bair, + +On line 19558: + p. Richard Kovacevich, + interview by FCIC, August + Bair, interview. Steel, + +On line 19560: + by FCIC, August Bair, + interview. Steel, interview. + Bair, interview. In + +On line 19560: + Bair, interview. Steel, + interview. Bair, interview. + In his interview, + +On line 19560: + Bair, interview. In + his interview, Treasury’s Kashkari + told the FCIC that he + +On line 19560: + In his interview, + Treasury’s Kashkari told the FCIC that + he disagreed. He felt + +On line 19560: + disagreed. He felt that + the highest priority + was to transfer the + +On line 19560: + priority was + to transfer the risk of banks’ + troubled assets from + +On line 19560: + was to transfer the + risk of banks’ troubled assets + from the financial + +On line 19560: + transfer the risk of + banks’ troubled assets from the + financial system + +On line 19560: + banks’ troubled assets + from the financial system + to the government. + +On line 19560: + FDIC-assisted acquisition + would have removed potential + losses on billion + +On line 19560: + billion of assets + from the financial system + by transferring those + +On line 19560: + from the financial + system by transferring those + potential losses + +On line 19562: + without Government + Assistance," Wells Fargo press + release, October + +On line 19564: + release, October + Rich Delmar, Treasury Office + of the Inspector + +On line 19564: + Treasury Office of + the Inspector General, + interview by FCIC, + +On line 19566: + M. Thorson, "Inquiry + Regarding IRS Notice 2008-83," + September pp. Richard + +On line 19568: + 2008-83," September pp. + Richard Levy, interview by FCIC, + August "Statement by + +On line 19568: + Richard Levy, interview + by FCIC, August "Statement by + Secretary Henry + +On line 19570: + release, September + Senators Christopher J. Dodd + and Richard C. Shelby, + +On line 19570: + Senators Christopher + J. Dodd and Richard C. Shelby, + remarks before the + +On line 19570: + J. Dodd and Richard C. + Shelby, remarks before the + Senate Committee + +On line 19570: + Banking, Housing, and + Urban Affairs, Turmoil in + U.S. Credit Markets: + +On line 19570: + Affairs, Turmoil in + U.S. Credit Markets: Recent + Actions Regarding + +On line 19574: + before the Senate + Banking Committee, Turmoil + in the U.S. Credit + +On line 19574: + the Senate Banking + Committee, Turmoil in the + U.S. Credit Markets, + +On line 19574: + Banking Committee, + Turmoil in the U.S. Credit + Markets, transcript, p. + +On line 19576: + Turmoil in the U.S. + Credit Markets, transcript, p. + Fed Chairman Ben Bernanke, + +On line 19576: + the Joint Economic + Committee, 110th Cong., 2nd sess., + September transcript. + +On line 19584: + Committee, 110th Cong., + 2nd sess., September transcript. + Notes to Chapter Fed + +On line 19584: + Bernanke, testimony + before the House Financial + Services Committee, + +On line 19584: + Financial Services + Committee, The Future of + Financial Services: + +On line 19584: + Services Committee, + The Future of Financial + Services: Exploring + +On line 19584: + Financial Services: + Exploring Solutions for + the Market Crisis, + +On line 19584: + Services: Exploring + Solutions for the Market + Crisis, September + +On line 19586: + the Market Crisis, + September transcript, p. Mel + Martinez, interview + +On line 19586: + September transcript, + p. Mel Martinez, interview + by FCIC, September + +On line 19588: + FCIC, September The + TARP legislation, drafted + as the Emergency + +On line 19588: + as the Emergency + Economic Stabilization + Act of was coupled + +On line 19588: + acts, including the + Energy Improvement and + Extension Act of + +On line 19588: + Tax Extenders and + Alternative Minimum + Tax Relief Act of + +On line 19588: + and Alternative + Minimum Tax Relief Act + of the Paul Wellstone + +On line 19588: + Tax Relief Act of + the Paul Wellstone and Pete + Domenici Mental Health + +On line 19588: + of the Paul Wellstone + and Pete Domenici Mental + Health Parity and + +On line 19588: + Domenici Mental Health + Parity and Addiction + Equity Act of + +On line 19588: + Health Parity and + Addiction Equity Act + of and the Heartland + +On line 19588: + originally said + that the deposit insurance + cap would revert to + +On line 19588: + deposit insurance + cap would revert to at the + beginning of but + +On line 19588: + cap would revert to + at the beginning of but + later extended + +On line 19588: + at the beginning + of but later extended + the deadline through the + +On line 19588: + the beginning of + but later extended the + deadline through the end + +On line 19590: + later extended + the deadline through the end of + The quotation is + +On line 19590: + the deadline through the + end of The quotation is + part of the formal + +On line 19590: + through the end of The + quotation is part of the + formal title of + +On line 19590: + The quotation is + part of the formal title + of Public Law 110-343, + +On line 19590: + quotation is part + of the formal title of + Public Law 110-343, of + +On line 19590: + formal title of + Public Law 110-343, of which the + TARP legislation— + +On line 19592: + Public Law 110-343, of + which the TARP legislation— + officially named + +On line 19592: + officially named + the Emergency Economic + Stabilization Act + +On line 19592: + named the Emergency + Economic Stabilization + Act of 2008—is a part. + +On line 19594: + Act of 2008—is a part. + "Board Announces Creation of the + Commercial Paper + +On line 19594: + Term Funding Markets," + Federal Reserve Board press + release, October + +On line 19596: + CPFF complemented + the Fed’s other commercial + paper program, the + +On line 19596: + which was created + shortly after the Reserve + Primary Fund broke + +On line 19596: + shortly after the + Reserve Primary Fund broke + the buck. While the AMLF + +On line 19596: + Reserve Primary + Fund broke the buck. While the AMLF + targeted money + +On line 19596: + Fund broke the buck. While + the AMLF targeted money + market mutual + +On line 19596: + the buck. While the AMLF + targeted money market + mutual funds, the + +On line 19598: + the AMLF targeted + money market mutual + funds, the CPFF aimed to + +On line 19598: + targeted money + market mutual funds, the + CPFF aimed to create + +On line 19598: + market mutual + funds, the CPFF aimed to create + liquidity for + +On line 19600: + "Commercial Paper + Funding Facility (CPFF)." + Ken Lewis from Bank of + +On line 19600: + (CPFF)." Ken Lewis from Bank + of America, Robert Kelly + from BNY Mellon, Vikram + +On line 19600: + from BNY Mellon, Vikram + Pandit from Citigroup, Lloyd + Blankfein from Goldman, + +On line 19600: + Blankfein from Goldman, + Jamie Dimon from JP Morgan, + John Thain from Merrill, + +On line 19600: + Goldman, Jamie Dimon + from JP Morgan, John Thain from + Merrill, John Mack from + +On line 19600: + Jamie Dimon from JP + Morgan, John Thain from Merrill, + John Mack from Morgan + +On line 19600: + from JP Morgan, John + Thain from Merrill, John Mack from + Morgan Stanley, Ronald + +On line 19600: + Morgan, John Thain from + Merrill, John Mack from Morgan + Stanley, Ronald Logue from + +On line 19600: + John Thain from Merrill, + John Mack from Morgan Stanley, + Ronald Logue from State Street, + +On line 19600: + Thain from Merrill, John + Mack from Morgan Stanley, Ronald + Logue from State Street, and + +On line 19600: + from Merrill, John Mack + from Morgan Stanley, Ronald Logue + from State Street, and Richard + +On line 19600: + John Mack from Morgan + Stanley, Ronald Logue from State Street, + and Richard Kovacevich + +On line 19600: + from Morgan Stanley, + Ronald Logue from State Street, and Richard + Kovacevich from Wells. + +On line 19602: + Richard Kovacevich from + Wells. Paulson, testimony + before the FCIC, May + +On line 19602: + FCIC, May transcript, p. + Former assistant treasury + secretary Phillip Swagel + +On line 19602: + Former assistant + treasury secretary Phillip Swagel + argued, "There is no + +On line 19602: + treasury secretary + Phillip Swagel argued, "There is no + authority in + +On line 19602: + Phillip Swagel argued, "There + is no authority in + the United States to + +On line 19602: + Swagel argued, "There is + no authority in the + United States to force + +On line 19602: + accept government + capital" ("The Financial + Crisis: An Inside + +On line 19602: + Brookings Papers on + Economic Activity, + conference draft, Spring + +On line 19604: + conference draft, Spring + pp. Henry Paulson, On The + Brink: Inside the Race + +On line 19604: + draft, Spring pp. Henry + Paulson, On The Brink: Inside + the Race to Stop the + +On line 19604: + pp. Henry Paulson, + On The Brink: Inside the Race + to Stop the Collapse + +On line 19604: + Henry Paulson, On + The Brink: Inside the Race to + Stop the Collapse of + +On line 19604: + Brink: Inside the Race + to Stop the Collapse of the + Global Financial + +On line 19604: + the Collapse of the + Global Financial System + (New York: Business Plus, + +On line 19608: + Guarantee Program + consisted of two programs, + the Temporary Debt + +On line 19608: + consisted of two + programs, the Temporary Debt + Guarantee Program + +On line 19608: + of two programs, the + Temporary Debt Guarantee + Program (TDGP) and the + +On line 19608: + and the Transaction + Account Guarantee Program + (TAGP). The TDGP at its + +On line 19608: + Transaction Account + Guarantee Program (TAGP). The + TDGP at its highest + +On line 19608: + Account Guarantee + Program (TAGP). The TDGP at its + highest point in May + +On line 19608: + Program (TAGP). The TDGP + at its highest point in May + guaranteed billion + +On line 19608: + its highest point in + May guaranteed billion in + outstanding senior + +On line 19608: + guaranteed billion + in outstanding senior debt; + see "FDIC Announces Plan + +On line 19608: + senior debt; see "FDIC + Announces Plan to Free Up Bank + Liquidity," FDIC + +On line 19608: + Bank Liquidity," + FDIC press release, October + The TAGP guaranteed + +On line 19608: + release, October + The TAGP guaranteed billion + in deposits at the + +On line 19610: + The TAGP guaranteed + billion in deposits at the + end of "Factsheet on + +On line 19610: + billion in deposits + at the end of "Factsheet on + Capital Purchase + +On line 19610: + deposits at the end + of "Factsheet on Capital + Purchase Program," FinancialStability.gov, + +On line 19614: + November Paulson, + testimony before the + FCIC, May transcript, p. + +On line 19620: + Congress," February + p. Congressional Oversight + Panel, "September + +On line 19620: + Panel, "September + Oversight Report: Assessing + the TARP on the Eve + +On line 19620: + "September Oversight + Report: Assessing the TARP + on the Eve of Its + +On line 19624: + Retrospective," p. + "Taxpayers Receive Billion + in Proceeds Today + +On line 19624: + "Taxpayers Receive + Billion in Proceeds Today + from Final Sale of + +On line 19624: + Billion in Proceeds + Today from Final Sale of + Treasury Department + +On line 19624: + Today from Final + Sale of Treasury Department + Citigroup Common + +On line 19624: + Citigroup Common + Stock," Treasury Department press + release, December + +On line 19632: + Treasury Department + press release, December Notes + to Chapter Office + +On line 19632: + to Chapter Office + of the Special Inspector + General for the + +On line 19632: + the Troubled Asset + Relief Program, "Quarterly + Report to Congress," + +On line 19632: + October table + p. (obligation figures as + of October and + +On line 19632: + as of October + and expenditure figures + as of September + +On line 19634: + of October and + expenditure figures as + of September The + +On line 19634: + and expenditure + figures as of September + The money market + +On line 19634: + as of September + The money market funding + is through the Asset-backed + +On line 19634: + The money market + funding is through the Asset-backed + Commercial Paper + +On line 19634: + is through the Asset-backed + Commercial Paper Money + Market Mutual + +On line 19634: + Commercial Paper + Money Market Mutual + Fund Liquidity + +On line 19636: + Fund Liquidity + Facility (AMLF); FCIC staff + calculations. Board + +On line 19636: + Facility (AMLF); + FCIC staff calculations. Board + of Governors of + +On line 19636: + staff calculations. + Board of Governors of the + Federal Reserve + +On line 19636: + Governors of the + Federal Reserve System, + "Regulatory + +On line 19638: + Securities (MBS) + Purchase Program." The Fed had + created the first + +On line 19638: + Program." The Fed had + created the first Maiden + Lane vehicle in + +On line 19638: + created the first + Maiden Lane vehicle in + March to take billion + +On line 19638: + the first Maiden Lane + vehicle in March to take + billion in assets + +On line 19638: + vehicle in March + to take billion in assets + off the balance sheet + +On line 19638: + March to take billion + in assets off the balance + sheet of Bear Stearns, as + +On line 19638: + billion in assets + off the balance sheet of Bear + Stearns, as described in + +On line 19638: + in assets off the + balance sheet of Bear Stearns, as + described in chapter + +On line 19638: + off the balance sheet + of Bear Stearns, as described in + chapter See "AIG RMBS + +On line 19638: + Bear Stearns, as described + in chapter See "AIG RMBS LLC + Facility: Terms + +On line 19638: + Terms and Conditions," + December "AIG Discloses + Counterparties to + +On line 19638: + Counterparties to + CDS, GIA and Securities + Lending Transactions," + +On line 19638: + AIG press release, March + Attachment D: Payments to + AIG Securities + +On line 19640: + of New York, "Maiden + Lane III: Transaction Overview"; + Federal Reserve + +On line 19640: + Federal Reserve + and Treasury Department press + release, November + +On line 19640: + release, November + "AIG CDO LLC Facility: + Terms and Conditions," + +On line 19640: + Facility: Terms + and Conditions," Federal + Reserve Bank of New + +On line 19640: + Terms and Conditions," + Federal Reserve Bank of + New York press release, + +On line 19640: + Federal Reserve + Bank of New York press release, + December FRBNY, + +On line 19640: + Reserve Bank of New + York press release, December + FRBNY, "Maiden Lane + +On line 19640: + FRBNY, "Maiden Lane + Transactions." billion was paid + to counterparties + +On line 19640: + Transactions." billion + was paid to counterparties + and billion was paid + +On line 19640: + billion was paid to + counterparties and billion + was paid to AIGFP as + +On line 19640: + to counterparties + and billion was paid to AIGFP + as an adjustment + +On line 19640: + counterparties and + billion was paid to AIGFP as + an adjustment to + +On line 19646: + January transcript, + pp. Data provided to + Goldman Sachs to the + +On line 19648: + transcript, pp. Data + provided to Goldman Sachs + to the FCIC. David Viniar, + +On line 19648: + Sachs to the FCIC. David + Viniar, testimony before + the FCIC, Hearing on + +On line 19648: + to the FCIC. David Viniar, + testimony before the + FCIC, Hearing on the + +On line 19648: + the FCIC, Hearing on + the Role of Derivatives + in the Financial + +On line 19648: + Hearing on the Role + of Derivatives in the + Financial Crisis, + +On line 19648: + Derivatives in + the Financial Crisis, day + session American + +On line 19648: + session American + International Group, Inc. + and Goldman Sachs Group, + +On line 19648: + International + Group, Inc. and Goldman Sachs Group, + Inc., July transcript, + +On line 19650: + Group, Inc. and Goldman + Sachs Group, Inc., July transcript, + p. Goldman Sachs, email + +On line 19650: + Inc. and Goldman Sachs + Group, Inc., July transcript, p. + Goldman Sachs, email to + +On line 19652: + Sachs Group, Inc., July + transcript, p. Goldman Sachs, email + to FCIC, July Ibid.; + +On line 19652: + email to FCIC, July + Ibid.; and data provided + by Goldman Sachs to + +On line 19652: + to FCIC, July Ibid.; + and data provided by + Goldman Sachs to the + +On line 19654: + to the FCIC. SIGTARP, + "Factors Affecting Efforts + to Limit Payments + +On line 19654: + Affecting Efforts + to Limit Payments to AIG + Counterparties," pp. + +On line 19656: + said counterparties + insisted on coverage + because concessions + +On line 19656: + in contravention + of their fiduciary duty + to their shareholders"; + +On line 19656: + contravention of + their fiduciary duty to + their shareholders"; they + +On line 19656: + obligations, given + the government assistance; + costs already incurred + +On line 19656: + already incurred to + protect against a possible + AIG default "would be + +On line 19656: + AIG default "would be + exacerbated if they + were paid less than par + +On line 19656: + exacerbated + if they were paid less than par + value"; and they were + +On line 19656: + if they were paid less + than par value"; and they were + "contractually + +On line 19656: + "contractually + entitled" to receive the + par value of the + +On line 19658: + par value of the + credit default swap contracts. + "In other words, the + +On line 19658: + the credit default + swap contracts. "In other words, + the decision to + +On line 19658: + words, the decision + to acquire a controlling + interest in one + +On line 19658: + in one of the world’s + most complex and most troubled + corporations was + +On line 19658: + world’s most complex and + most troubled corporations + was done with almost + +On line 19658: + most complex and most + troubled corporations was + done with almost no + +On line 19658: + of the terms of the + transaction or the impact + that those terms might have + +On line 19658: + the transaction or + the impact that those terms might + have on the future + +On line 19658: + transaction or the + impact that those terms might have + on the future of + +On line 19660: + the impact that those + terms might have on the future + of AIG" (ibid., p. Ibid., + +On line 19660: + that those terms might have + on the future of AIG" (ibid., + p. Ibid., summary, + +On line 19660: + those terms might have on + the future of AIG" (ibid., p. + Ibid., summary, p. + +On line 19662: + on the future of + AIG" (ibid., p. Ibid., summary, + p. Congressional + +On line 19662: + p. Ibid., summary, + p. Congressional Oversight + Panel, "June Oversight + +On line 19662: + Panel, "June Oversight + Report: The AIG Rescue, Its + Impact on Markets, + +On line 19662: + "June Oversight Report: + The AIG Rescue, Its Impact + on Markets, and the + +On line 19662: + The AIG Rescue, Its + Impact on Markets, and the + Government’s Exit + +On line 19662: + Impact on Markets, + and the Government’s Exit + Strategy," June pp. + +On line 19664: + and the Government’s + Exit Strategy," June pp. + Suzanne Kapner, "US + +On line 19664: + pp. Suzanne Kapner, + "US Congressional Panel + Attacks AIG Rescue," + +On line 19664: + "US Congressional + Panel Attacks AIG Rescue," + Financial Times, June + +On line 19666: + Panel Attacks AIG + Rescue," Financial Times, June + Baxter, interview. + +On line 19668: + Attacks AIG Rescue," + Financial Times, June Baxter, + interview. Sarah Dahlgren, + +On line 19668: + Rescue," Financial + Times, June Baxter, interview. + Sarah Dahlgren, interview + +On line 19668: + Financial Times, June + Baxter, interview. Sarah Dahlgren, + interview by FCIC, + +On line 19670: + Baxter, interview. + Sarah Dahlgren, interview by FCIC, + April SIGTARP, "Factors + +On line 19670: + Sarah Dahlgren, interview + by FCIC, April SIGTARP, "Factors + Affecting Efforts + +On line 19670: + by FCIC, April SIGTARP, + "Factors Affecting Efforts + to Limit Payments + +On line 19670: + Affecting Efforts + to Limit Payments to AIG + Counterparties," p. + +On line 19672: + Counterparties," p. + Timothy Geithner, + quoted in Jody Shenn, + +On line 19672: + quoted in Jody Shenn, + Bob Ivry, and Alan Katz, "AIG 100-Cents + Fed Deal Driven by + +On line 19672: + Shenn, Bob Ivry, and Alan + Katz, "AIG 100-Cents Fed Deal Driven + by France Belied by + +On line 19672: + Bob Ivry, and Alan Katz, + "AIG 100-Cents Fed Deal Driven by + France Belied by French + +On line 19672: + Ivry, and Alan Katz, "AIG + 100-Cents Fed Deal Driven by France + Belied by French Banks," + +On line 19674: + interview by FCIC, + April Michael Alix, Federal + Reserve Bank of New + +On line 19674: + FCIC, April Michael Alix, + Federal Reserve Bank of + New York, interview + +On line 19678: + New York, interview + by FCIC, April Dahlgren, interview. + Baxter, interview. + +On line 19680: + Observations on + Assistance Provided AIG," + GAO-09–4907 (Testimony: + +On line 19680: + Provided AIG," GAO-09–4907 + (Testimony: Before the + Subcommittee on + +On line 19680: + House Committee on + Financial Services), March p. + Federal Reserve + +On line 19682: + Federal Reserve + press release, September AIG, + "What AIG Owes the US + +On line 19682: + Reserve press release, + September AIG, "What AIG Owes + the US Government," + +On line 19688: + AIG, "What AIG Owes the + US Government," updated + September Notes to + +On line 19690: + the US Government," + updated September Notes + to Chapter Edward + +On line 19690: + September Notes to + Chapter Edward J. Kelly + III, interview by + +On line 19692: + to Chapter Edward + J. Kelly III, interview + by FCIC, March Roger Cole, + +On line 19692: + Edward J. Kelly + III, interview by FCIC, March + Roger Cole, interview + +On line 19694: + interview by FCIC, + March Roger Cole, interview by + FCIC, August Kelly, + +On line 19694: + by FCIC, March Roger Cole, + interview by FCIC, August + Kelly, interview. + +On line 19696: + Kelly, interview. + James R. Wigand and Herbert J. + Held, memorandum + +On line 19696: + and Herbert J. Held, + memorandum to the FDIC + Board of Directors, + +On line 19700: + Kelly, interview. + Mark D. Richardson, email to John + H. Corston, Jason C. + +On line 19700: + interview. Mark D. + Richardson, email to John H. Corston, + Jason C. Cave, et + +On line 19700: + Mark D. Richardson, email + to John H. Corston, Jason C. + Cave, et al., subject: + +On line 19700: + D. Richardson, email to + John H. Corston, Jason C. Cave, + et al., subject: "RE: + +On line 19700: + Richardson, email to John + H. Corston, Jason C. Cave, et + al., subject: "RE: CONFIDENTIAL—Citigroup—Deterioration + +On line 19700: + John H. Corston, Jason + C. Cave, et al., subject: "RE: + CONFIDENTIAL—Citigroup—Deterioration of Stock Price and + +On line 19700: + H. Corston, Jason C. + Cave, et al., subject: "RE: CONFIDENTIAL—Citigroup—Deterioration + of Stock Price and CDS + +On line 19700: + Corston, Jason C. Cave, + et al., subject: "RE: CONFIDENTIAL—Citigroup—Deterioration of + Stock Price and CDS Spreads," + +On line 19700: + Cave, et al., subject: + "RE: CONFIDENTIAL—Citigroup—Deterioration of Stock Price and CDS + Spreads," November Mark + +On line 19700: + et al., subject: "RE: + CONFIDENTIAL—Citigroup—Deterioration of Stock Price and CDS Spreads," + November Mark D. + +On line 19700: + "RE: CONFIDENTIAL—Citigroup—Deterioration of Stock Price + and CDS Spreads," November Mark + D. Richardson, email, to + +On line 19700: + CONFIDENTIAL—Citigroup—Deterioration of Stock Price and + CDS Spreads," November Mark D. + Richardson, email, to John + +On line 19700: + Stock Price and CDS Spreads," + November Mark D. Richardson, + email, to John H. Corston, + +On line 19700: + CDS Spreads," November + Mark D. Richardson, email, to John + H. Corston, Jason C. + +On line 19700: + Spreads," November Mark + D. Richardson, email, to John H. + Corston, Jason C. Cave, + +On line 19700: + November Mark D. + Richardson, email, to John H. Corston, + Jason C. Cave, et + +On line 19700: + Mark D. Richardson, email, + to John H. Corston, Jason C. + Cave, et al., subject: + +On line 19700: + D. Richardson, email, to + John H. Corston, Jason C. Cave, + et al., subject: "11-21-08 + +On line 19700: + Richardson, email, to John + H. Corston, Jason C. Cave, et + al., subject: "11-21-08 Citi + +On line 19700: + John H. Corston, Jason + C. Cave, et al., subject: "11-21-08 + Citi Liquidity + +On line 19700: + H. Corston, Jason C. + Cave, et al., subject: "11-21-08 Citi + Liquidity call + +On line 19702: + Cave, et al., subject: + "11-21-08 Citi Liquidity call + notes," November Wigand + +On line 19702: + et al., subject: "11-21-08 + Citi Liquidity call notes," + November Wigand and + +On line 19702: + Citi Liquidity + call notes," November Wigand and + Held, November memo + +On line 19702: + Liquidity call + notes," November Wigand and Held, + November memo to + +On line 19702: + November Wigand and + Held, November memo to the + FDIC board regarding + +On line 19704: + Held, November memo + to the FDIC board regarding + Citigroup, p. Bernanke, + +On line 19704: + memo to the FDIC board + regarding Citigroup, p. + Bernanke, closed-door session. + +On line 19706: + closed-door session. Arthur + J. Murton, email to John V. + Thomas, Michael H. Krimminger, + +On line 19706: + J. Murton, email to + John V. Thomas, Michael H. Krimminger, + et al., subject: "RE: + +On line 19706: + to John V. Thomas, Michael + H. Krimminger, et al., subject: + "RE: Proposed Conduit," + +On line 19706: + Thomas, Michael H. Krimminger, + et al., subject: "RE: Proposed + Conduit," November + +On line 19706: + H. Krimminger, et al., + subject: "RE: Proposed Conduit," + November Michael H. + +On line 19706: + et al., subject: "RE: + Proposed Conduit," November + Michael H. Krimminger, email + +On line 19706: + subject: "RE: Proposed + Conduit," November Michael H. + Krimminger, email to Arthur + +On line 19706: + Conduit," November + Michael H. Krimminger, email to Arthur + J. Murton, John V. + +On line 19706: + Michael H. Krimminger, email + to Arthur J. Murton, John V. + Thomas, et al., subject: + +On line 19706: + H. Krimminger, email to + Arthur J. Murton, John V. Thomas, + et al., subject: "RE: + +On line 19706: + to Arthur J. Murton, + John V. Thomas, et al., subject: + "RE: Proposed Conduit," + +On line 19706: + Murton, John V. Thomas, + et al., subject: "RE: Proposed + Conduit," November + +On line 19708: + the Troubled Asset + Relief Program, 111th Cong., 2nd + sess., March transcript, p. + +On line 19710: + Relief Program, 111th + Cong., 2nd sess., March transcript, p. + Kelly, interview. + +On line 19712: + 2nd sess., March transcript, + p. Kelly, interview. GAO, + "Federal Deposit + +On line 19712: + transcript, p. Kelly, + interview. GAO, "Federal + Deposit Insurance + +On line 19712: + Regulators’ Use + of Systemic Risk Exception + Raises Moral Hazard + +On line 19712: + Hazard Concerns and + Opportunities Exist + to Clarify the + +On line 19712: + the Provision," GAO-10–100 + (Report to Congressional + Committees), April p. + +On line 19714: + to Congressional + Committees), April p. Wigand and + Held, memo to the FDIC + +On line 19716: + Held, memo to the FDIC + board regarding Citigroup, + pp. Department of + +On line 19716: + memo to the FDIC board + regarding Citigroup, pp. + Department of the + +On line 19716: + the Treasury response + to Congressional Oversight + Panel, Questions for + +On line 19716: + Panel, Questions for + the Record, p. Citigroup and + the Troubled Asset + +On line 19718: + p. Citigroup and + the Troubled Asset Relief + Program, March p. "Joint + +On line 19718: + the Troubled Asset + Relief Program, March p. "Joint + Statement by Treasury, + +On line 19718: + Relief Program, March + p. "Joint Statement by Treasury, + Federal Reserve, + +On line 19718: + Statement by Treasury, + Federal Reserve, and the + FDIC on Citigroup," + +On line 19722: + on Citigroup." In + total, Citigroup received + almost billion in + +On line 19722: + from the November + government assistance. Half + of the capital + +On line 19722: + Treasury’s billion TARP + investment in Citigroup + preferred stock; billion + +On line 19722: + stock; billion of the + capital benefits were + derived from a change + +On line 19722: + of the capital + benefits were derived from + a change in the risk + +On line 19722: + were derived from a + change in the risk weighting of + the ring-fenced assets. In + +On line 19722: + risk weighting of the + ring-fenced assets. In addition, + Citigroup issued + +On line 19722: + of the ring-fenced assets. + In addition, Citigroup + issued Treasury and + +On line 19722: + Citigroup issued + Treasury and the FDIC billion + in preferred stock as + +On line 19722: + issued Treasury and + the FDIC billion in preferred + stock as payment for + +On line 19722: + and the FDIC billion + in preferred stock as payment + for the guarantee + +On line 19722: + the FDIC billion in + preferred stock as payment for + the guarantee on + +On line 19722: + in preferred stock as + payment for the guarantee + on the ring fence; the + +On line 19722: + as payment for the + guarantee on the ring fence; + the result, after + +On line 19722: + for the guarantee + on the ring fence; the result, + after accounting + +On line 19722: + guarantee on the + ring fence; the result, after + accounting for the + +On line 19722: + on the ring fence; the + result, after accounting + for the insurance + +On line 19722: + ring fence; the result, + after accounting for the + insurance feature + +On line 19722: + after accounting + for the insurance feature + of the arrangement, + +On line 19722: + accounting for the + insurance feature of the + arrangement, was a + +On line 19722: + insurance feature + of the arrangement, was a + billion increase in + +On line 19724: + billion increase in + capital for Citigroup. + Kelly, interview. + +On line 19726: + Citigroup. Kelly, + interview. The warrants gave + the government the + +On line 19726: + The warrants gave the + government the right to buy + million shares at a + +On line 19726: + gave the government + the right to buy million shares + at a share; at the + +On line 19726: + the government the + right to buy million shares at + a share; at the time, + +On line 19726: + government the right + to buy million shares at a + share; at the time, the + +On line 19726: + right to buy million + shares at a share; at the time, + the stock was trading + +On line 19726: + to buy million shares + at a share; at the time, the + stock was trading at + +On line 19726: + shares at a share; at + the time, the stock was trading + at (Congressional + +On line 19726: + the stock was trading + at (Congressional Oversight + Panel, "November + +On line 19726: + Report: Guarantees + and Contingent Payments in + TARP and Related + +On line 19728: + TARP and Related + Programs," November pp. FDIC + Board of Directors + +On line 19728: + Related Programs," + November pp. FDIC Board of + Directors meeting, + +On line 19728: + Programs," November + pp. FDIC Board of Directors + meeting, closed session, + +On line 19732: + Year Retrospective," + October p. "Taxpayers + receive billion in + +On line 19732: + "Taxpayers receive + billion in proceeds today + from final sale of + +On line 19732: + billion in proceeds + today from final sale of + Treasury Department + +On line 19732: + today from final + sale of Treasury Department + Citigroup common + +On line 19732: + Citigroup common + stock," Treasury Department press + release, December + +On line 19734: + Reports Third Quarter + Net Loss from Continuing + Operations of + +On line 19734: + of Billion," Merrill + Lynch press release, October + p. Merrill Lynch, 3Q + +On line 19736: + Federal Reserve + System, "Order Approving + Bank of America + +On line 19736: + Approving Bank of + America Corporation + Acquisition of + +On line 19736: + an Industrial + Loan Company," November + pp. To approve such + +On line 19736: + Industrial Loan + Company," November pp. + To approve such a + +On line 19736: + such a proposal, + the Bank Holding Company + Act requires the Fed + +On line 19736: + a proposal, the + Bank Holding Company Act + requires the Fed to + +On line 19736: + determine that a + transaction "can reasonably + be expected to + +On line 19736: + be expected to + produce benefits to the + public, such as greater + +On line 19736: + produce benefits + to the public, such as greater + convenience, increased + +On line 19736: + to the public, such + as greater convenience, increased + competition, or + +On line 19736: + convenience, increased + competition, or gains in + efficiency, that + +On line 19736: + competition, or + gains in efficiency, that + outweigh possible + +On line 19736: + adverse effects, such + as undue concentration + of resources, decreased + +On line 19736: + concentration of + resources, decreased or unfair + competition." U.S.C. + +On line 19738: + of resources, decreased + or unfair competition." + U.S.C. 1843(j)(2)(A). Timothy + +On line 19738: + resources, decreased or + unfair competition." U.S.C. + 1843(j)(2)(A). Timothy J. + +On line 19738: + competition." U.S.C. + 1843(j)(2)(A). Timothy J. Mayopoulous, + former general + +On line 19738: + 1843(j)(2)(A). Timothy J. + Mayopoulous, former general + counsel of Bank of + +On line 19738: + Committee, Bank of + America and Merrill Lynch: + How Did a Private + +On line 19738: + Merrill Lynch: How Did + a Private Deal Turn into + a Federal Bailout1 + +On line 19738: + Did a Private Deal + Turn into a Federal + Bailout1 Part IV, 111th Cong., + +On line 19738: + a Private Deal Turn + into a Federal Bailout1 + Part IV, 111th Cong., 1st + +On line 19746: + Investigation: + Bank of America–Merrill Lynch, February + p. available from House + +On line 19746: + p. available from House + Committee on Oversight and + Government Reform + +On line 19746: + the Subcommittee + on Domestic Policy, + Bank of America + +On line 19746: + Subcommittee on + Domestic Policy, Bank + of America and + +On line 19746: + Policy, Bank of + America and Merrill Lynch: + How Did A Private + +On line 19746: + Merrill Lynch: How Did + A Private Deal Turn into + a Federal Bailout1 + +On line 19746: + Did A Private Deal + Turn into a Federal + Bailout1 111th Cong., 1st sess., + +On line 19746: + A Private Deal Turn + into a Federal Bailout1 + 111th Cong., 1st sess., June + +On line 19748: + Bailout1 111th Cong., 1st sess., + June Bank of America, 4Q + Earnings Call transcript, + +On line 19748: + 1st sess., June Bank of + America, 4Q Earnings Call + transcript, January + +On line 19752: + Earnings Call transcript, + January p. Ibid., pp. John + Thain, interview by + +On line 19754: + interview by FCIC, + September Complaint, SEC v. + Bank of America + +On line 19754: + September Complaint, + SEC v. Bank of America + (S.D.N.Y. Jan. Final + +On line 19754: + America (S.D.N.Y. + Jan. Final Consent Judgment + As to Defendant + +On line 19754: + Jan. Final Consent + Judgment As to Defendant + Bank of America + +On line 19756: + to Defendant Bank + of America (S.D.N.Y. Feb. + Ken Lewis, interview + +On line 19756: + Defendant Bank of + America (S.D.N.Y. Feb. Ken + Lewis, interview by + +On line 19758: + America (S.D.N.Y. + Feb. Ken Lewis, interview by + FCIC, October Lewis, + +On line 19758: + the Subcommittee + on Domestic Policy, + Bank of America + +On line 19758: + Subcommittee on + Domestic Policy, Bank + of America and + +On line 19758: + Policy, Bank of + America and Merrill Lynch: + How Did a Private + +On line 19758: + Merrill Lynch: How Did + a Private Deal Turn into + a Federal Bailout1 + +On line 19758: + Did a Private Deal + Turn into a Federal + Bailout1 Part III, 111th Cong., + +On line 19758: + a Private Deal Turn + into a Federal Bailout1 + Part III, 111th Cong., 1st + +On line 19758: + Deal Turn into a + Federal Bailout1 Part III, 111th + Cong., 1st sess., July + +On line 19760: + Federal Bailout1 Part + III, 111th Cong., 1st sess., July + p. Paulson, written + +On line 19760: + the Subcommittee + on Domestic Policy, + Bank of America + +On line 19760: + Subcommittee on + Domestic Policy, Bank + of America and + +On line 19760: + Policy, Bank of + America and Merrill Lynch: + How Did a Private + +On line 19760: + Merrill Lynch: How Did + a Private Deal Turn into + a Federal Bailout1 + +On line 19760: + Did a Private Deal + Turn into a Federal + Bailout1 Part II, 111th Cong., + +On line 19760: + a Private Deal Turn + into a Federal Bailout1 + Part II, 111th Cong., 1st + +On line 19760: + Deal Turn into a + Federal Bailout1 Part II, 111th + Cong., 1st sess., June p. + +On line 19762: + a Federal Bailout1 + Part II, 111th Cong., 1st sess., June + p. Lewis, interview. + +On line 19764: + Federal Bailout1 Part + II, 111th Cong., 1st sess., June p. + Lewis, interview. Thain, + +On line 19766: + II, 111th Cong., 1st sess., + June p. Lewis, interview. Thain, + interview Paulson, + +On line 19768: + Oversight Committee, + July pp. Chairman Ben Bernanke, + email to General + +On line 19768: + Committee, July + pp. Chairman Ben Bernanke, email to + General Counsel + +On line 19768: + July pp. Chairman + Ben Bernanke, email to General + Counsel Scott Alvarez, + +On line 19768: + pp. Chairman Ben Bernanke, + email to General Counsel + Scott Alvarez, "Re: Fw: + +On line 19768: + Chairman Ben Bernanke, email + to General Counsel Scott + Alvarez, "Re: Fw: BAC," + +On line 19768: + Alvarez, "Re: Fw: BAC," + December available from House + Oversight Committee, + +On line 19768: + December available + from House Oversight Committee, + Bank of America + +On line 19768: + Committee, Bank of + America and Merrill Lynch: + How Did a Private + +On line 19768: + Merrill Lynch: How Did + a Private Deal Turn into + a Federal Bailout1 + +On line 19768: + Did a Private Deal + Turn into a Federal + Bailout1 Part II, June p. + +On line 19770: + Bailout1 Part II, June p. + Representative Edolphus + Towns, in ibid., p. Lewis, + +On line 19772: + Representative + Edolphus Towns, in ibid., p. Lewis, + interview. Minutes + +On line 19772: + Towns, in ibid., p. Lewis, + interview. Minutes of a + Special Meeting of + +On line 19772: + interview. Minutes + of a Special Meeting of + Board of Directors + +On line 19772: + a Special Meeting + of Board of Directors of + Bank of America + +On line 19774: + June p. Minutes of + a Special Meeting of the + Bank of America + +On line 19774: + p. Minutes of a + Special Meeting of the Bank + of America board, + +On line 19774: + Special Meeting of + the Bank of America board, + December available + +On line 19776: + of America board, + December available in ibid., + p. Lewis, interview. + +On line 19778: + December available + in ibid., p. Lewis, interview. + See Department of + +On line 19778: + Ending November + November In addition + to drawing on these + +On line 19778: + funds, it was also + a "substantial user" of + the Fed’s various + +On line 19778: + user" of the Fed’s + various liquidity + programs. The holding + +On line 19778: + the Fed’s various + liquidity programs. The + holding company + +On line 19778: + programs. The holding + company and its subsidiaries + had already borrowed + +On line 19778: + holding company + and its subsidiaries had already + borrowed billion through + +On line 19778: + company and its + subsidiaries had already borrowed + billion through the Term + +On line 19778: + had already borrowed + billion through the Term Auction + Facility. It + +On line 19778: + billion through the Term + Auction Facility. It + had also borrowed + +On line 19778: + Commercial Paper + Funding Facility and + billion under the + +On line 19778: + Facility and + billion under the FDIC’s debt + guarantee program. + +On line 19778: + billion under the + FDIC’s debt guarantee program. + And newly acquired + +On line 19778: + borrowed another + billion from the Fed’s two Bear + Stearns–era repo-support + +On line 19778: + billion from the Fed’s + two Bear Stearns–era repo-support + programs. Yet despite + +On line 19778: + from the Fed’s two Bear + Stearns–era repo-support programs. + Yet despite Bank of + +On line 19778: + would experience + liquidity problems if + the fourth-quarter earnings + +On line 19780: + the fourth-quarter earnings + were weak. The amount of FDIC-guaranteed debt + that can be issued + +On line 19780: + fourth-quarter earnings were + weak. The amount of FDIC-guaranteed debt that + can be issued by + +On line 19780: + weak. The amount of FDIC-guaranteed + debt that can be issued by + each eligible + +On line 19780: + be issued by each + eligible entity, + or its cap, is based + +On line 19780: + each eligible + entity, or its cap, is + based on the amount of + +On line 19780: + entity, or its + cap, is based on the amount of + senior unsecured + +On line 19780: + cap, is based on the + amount of senior unsecured + debt outstanding as + +On line 19780: + is based on the amount + of senior unsecured debt + outstanding as of + +On line 19780: + the amount of senior + unsecured debt outstanding + as of September + +On line 19782: + debt outstanding as + of September FRB and OCC + staff, memorandum + +On line 19782: + outstanding as of + September FRB and OCC staff, + memorandum to + +On line 19782: + September FRB and + OCC staff, memorandum to + Rick Cox, FDIC, subject: + +On line 19784: + Financial Market + Participants," January + p. Sheila C. Bair, FDIC + +On line 19784: + FDIC Chairman, written + testimony before the + House Committee on + +On line 19784: + the Subcommittee + on Domestic Policy, + Bank of America + +On line 19784: + Subcommittee on + Domestic Policy, Bank + of America and + +On line 19784: + Policy, Bank of + America and Merrill Lynch: + How Did a Private + +On line 19784: + Merrill Lynch: How Did + a Private Deal Turn into + a Federal Bailout1 + +On line 19784: + Did a Private Deal + Turn into a Federal + Bailout1 Part V, 110th Cong., + +On line 19784: + a Private Deal Turn + into a Federal Bailout1 + Part V, 110th Cong., 1st + +On line 19786: + Bailout1 Part V, 110th Cong., + 1st sess., December p. FRB + and OCC staff memo to + +On line 19786: + Part V, 110th Cong., 1st + sess., December p. FRB and + OCC staff memo to Rick + +On line 19786: + V, 110th Cong., 1st sess., + December p. FRB and OCC + staff memo to Rick Cox, + +On line 19786: + December p. FRB + and OCC staff memo to Rick Cox, + "Bank of America + +On line 19786: + and OCC staff memo to + Rick Cox, "Bank of America + Corporation (BAC) + +On line 19786: + Mitchell Glassman, Sandra + Thompson, Arthur Murton, and John + Thomas, memorandum + +On line 19786: + Thompson, Arthur Murton, + and John Thomas, memorandum + to the FDIC Board of + +On line 19786: + Murton, and John Thomas, + memorandum to the FDIC + Board of Directors, + +On line 19786: + Board of Directors, + subject: Bank of America, + etc., January pp. + +On line 19796: + December p. Notes + to Chapter Glassman et al., + memo to the FDIC board, + +On line 19796: + p. Notes to Chapter + Glassman et al., memo to the + FDIC board, January + +On line 19796: + to Chapter Glassman + et al., memo to the FDIC board, + January p. They + +On line 19796: + Glassman et al., memo + to the FDIC board, January + p. They agreed to this + +On line 19796: + al., memo to the FDIC + board, January p. They agreed + to this split because + +On line 19796: + memo to the FDIC board, + January p. They agreed to + this split because of + +On line 19796: + board, January p. + They agreed to this split because + of the assets for + +On line 19796: + January p. They + agreed to this split because of + the assets for the + +On line 19796: + p. They agreed to this + split because of the assets + for the ring fence were + +On line 19796: + They agreed to this split + because of the assets for + the ring fence were from + +On line 19796: + depository + institutions and were not. + See closed meeting of + +On line 19796: + See closed meeting of + the FDIC Board of Directors, + January transcript, + +On line 19798: + Board of Directors, + January transcript, p. Closed + meeting of the FDIC + +On line 19798: + Closed meeting of the + FDIC board, January transcript, + p. According to + +On line 19798: + meeting of the FDIC + board, January transcript, p. + According to the + +On line 19800: + January transcript, + p. According to the FDIC + staff, "Liquidity + +On line 19800: + p. According to + the FDIC staff, "Liquidity + pressure may increase + +On line 19800: + and the volume of + counterparty transactions + involved. Without a + +On line 19800: + to fund ongoing + operations. [Economic + developments] point + +On line 19800: + financial market + turmoil of recent months and + impaired economic + +On line 19800: + turmoil of recent + months and impaired economic + performance that could + +On line 19800: + performance that could + be expected to worsen + further if BAC and + +On line 19800: + be expected to + worsen further if BAC and + its insured subsidiaries + +On line 19800: + worsen further if + BAC and its insured subsidiaries + were allowed to failed. + +On line 19800: + business and consumer + confidence." Glassman et al., + memo to the FDIC board, + +On line 19800: + consumer confidence." + Glassman et al., memo to the + FDIC board, January + +On line 19809: + Glassman et al., memo + to the FDIC board, January + pp. Chapter Brian + +On line 19809: + testimony for + the FCIC, First Public Hearing + of the Financial + +On line 19809: + First Public Hearing + of the Financial Crisis + Inquiry Commission, + +On line 19811: + January p. Clarence + Williams, written testimony + for the FCIC, Hearing + +On line 19813: + FCIC, Hearing on the + Impact of the Financial + Crisis— Sacramento, + +On line 19813: + Financial Crisis— + Sacramento, session Impact + of the Financial + +On line 19815: + September p. and + testimony before the + FCIC, transcript, pp. Ed + +On line 19815: + and testimony + before the FCIC, transcript, pp. + Ed Lazear, interview + +On line 19817: + the FCIC, transcript, pp. + Ed Lazear, interview by FCIC, + November Jeannie + +On line 19817: + Ed Lazear, interview + by FCIC, November Jeannie + McDermott, testimony + +On line 19817: + November Jeannie + McDermott, testimony before + the FCIC, Hearing on + +On line 19817: + McDermott, testimony + before the FCIC, Hearing on + the Impact of the + +On line 19819: + on the Impact of + the Financial Crisis— Greater + Bakersfield, session + +On line 19819: + Bakersfield, session + Forum for Public Comment, + September transcript, + +On line 19821: + session Forum for + Public Comment, September + transcript, pp. Marie Vasile, + +On line 19821: + for Public Comment, + September transcript, pp. Marie + Vasile, testimony + +On line 19821: + September transcript, + pp. Marie Vasile, testimony + before the FCIC, in + +On line 19821: + transcript, pp. Marie Vasile, + testimony before the + FCIC, in ibid., transcript, + +On line 19823: + before the FCIC, in + ibid., transcript, pp. "National + Delinquency Survey," + +On line 19823: + FCIC, in ibid., transcript, + pp. "National Delinquency + Survey," Mortgage Bankers + +On line 19825: + Fourth Quarter March p. + Third Quarter November p. + CoreLogic, "U.S. Housing and + +On line 19825: + November p. CoreLogic, + "U.S. Housing and Mortgage Trends: + August November + +On line 19827: + August November + p. Jeremy Aguero, principal + analyst, Applied + +On line 19827: + Applied Analysis, + written testimony for + the FCIC, Hearing on + +On line 19827: + the Impact of the + Financial Crisis—State of Nevada, + session Economic + +On line 19827: + Financial Crisis—State of + Nevada, session Economic + Analysis of the + +On line 19827: + of Nevada, session + Economic Analysis of + the Impact of the + +On line 19827: + session Economic + Analysis of the Impact + of the Financial + +On line 19827: + Analysis of the + Impact of the Financial + Crisis on Nevada, + +On line 19827: + of the Impact of + the Financial Crisis on + Nevada, September + +On line 19829: + Financial Crisis + on Nevada, September p. + Mauricio Soto, "How + +On line 19831: + available at www.urban.org/url.cfm1ID=901206. Steven + K. Paulson, "Auditors Say + Colorado Pension Plan + +On line 19833: + Associated + Press, August Charles S. Johnson, + "Montana Pension Funds + +On line 19833: + Press, August Charles S. + Johnson, "Montana Pension Funds + Growing but Haven’t Made + +On line 19833: + S. Johnson, "Montana + Pension Funds Growing but Haven’t + Made Up Losses," The + +On line 19835: + Funds Growing but Haven’t + Made Up Losses," The Billings Gazette, + May The Conference + +On line 19835: + Growing but Haven’t Made + Up Losses," The Billings Gazette, May + The Conference Board + +On line 19835: + Made Up Losses," The + Billings Gazette, May The Conference + Board news release, May + +On line 19837: + Up Losses," The Billings + Gazette, May The Conference Board + news release, May The + +On line 19837: + The Billings Gazette, May The + Conference Board news release, + May The Conference + +On line 19839: + May The Conference + Board news release, December + Gregory D. Bynum, + +On line 19839: + Gregory D. Bynum, + testimony before the + FCIC, Hearing on the + +On line 19839: + Bynum, testimony + before the FCIC, Hearing on + the Impact of the + +On line 19841: + on the Impact of + the Financial Crisis— Greater + Bakersfield, session + +On line 19843: + and Community + Real Estate, September + transcript, p. Board of + +On line 19843: + Board of Governors + of the Federal Reserve + System, October + +On line 19843: + Governors of the + Federal Reserve System, + October Senior + +On line 19845: + Business and Non-business + Filings by Year Jeff Agosta, + conference call with + +On line 19851: + "Annual Business + and Non-Business Filings by Year Board + of Governors of + +On line 19851: + Non-Business Filings by Year + Board of Governors of the + Federal Reserve + +On line 19851: + Governors of the + Federal Reserve System, + July Senior Loan + +On line 19851: + Federal Reserve + System, July Senior Loan + Officer Opinion + +On line 19853: + Practices, August p. + Liz Moyer, "Revolver at the + Heads," Forbes, October + +On line 19855: + Murillo Campello, John + R. Graham, and Campbell R. + Harvey, "The Real + +On line 19863: + Crisis," Journal of + Financial Economics Notes + to Chapter Board of + +On line 19863: + Economics Notes to + Chapter Board of Governors + of the Federal + +On line 19863: + Board of Governors + of the Federal Reserve + System, January + +On line 19863: + Governors of the + Federal Reserve System, + January Senior + +On line 19865: + Survey, fourth-quarter p. + Elizabeth Duke, governor, + Federal Reserve + +On line 19865: + "Small Business Lending," + testimony before the + House Committee on + +On line 19865: + the House Committee + on Financial Services and + Committee on Small + +On line 19869: + Business Economic + Trends," December p. Ben Bernanke, + "Restoring the Flow of + +On line 19869: + p. Ben Bernanke, "Restoring + the Flow of Credit to Small + Business," speaking at + +On line 19869: + Flow of Credit to + Small Business," speaking at the + Federal Reserve + +On line 19869: + Federal Reserve + Meeting Series: "Addressing + the Financing Needs + +On line 19871: + Financing Needs of + Small Businesses," Washington, + DC, July C. R. + +On line 19871: + of Small Businesses," + Washington, DC, July C. + R. "Rusty" Cloutier, past + +On line 19871: + C. R. "Rusty" Cloutier, + past chairman, Independent + Community Bankers + +On line 19871: + the FCIC, day panel + Financial Crisis Impacts + on the Economy, + +On line 19871: + Financial Crisis + Impacts on the Economy, + January transcript, + +On line 19873: + Federal Reserve + Statistical Release, E.2 + Survey of Terms of + +On line 19875: + E.2 Survey of Terms + of Business Lending, E.2 Chart + Data: "Commercial + +On line 19875: + of Business Lending, + E.2 Chart Data: "Commercial + and Industrial + +On line 19875: + Business Lending, E.2 + Chart Data: "Commercial and + Industrial Loan + +On line 19875: + Data: "Commercial + and Industrial Loan Rates + Spreads over Intended + +On line 19875: + and Industrial + Loan Rates Spreads over Intended + Federal Funds Rate, + +On line 19875: + Spreads over Intended + Federal Funds Rate, by Loan + Size," spread for all sizes. + +On line 19877: + Federal Funds Rate, + by Loan Size," spread for all sizes. + William J. Dennis Jr., + +On line 19877: + by Loan Size," spread for + all sizes. William J. Dennis Jr., + "Small Business Credit + +On line 19877: + Loan Size," spread for all + sizes. William J. Dennis Jr., "Small + Business Credit in + +On line 19877: + spread for all sizes. William + J. Dennis Jr., "Small Business + Credit in a Deep + +On line 19877: + sizes. William J. Dennis + Jr., "Small Business Credit in + a Deep Recession," + +On line 19877: + a Deep Recession," + National Federation + of Independent + +On line 19881: + interview by FCIC, + August Board of Governors + of the Federal + +On line 19881: + Board of Governors + of the Federal Reserve + System, Senior Loan + +On line 19881: + of the Federal + Reserve System, Senior Loan + Officer Opinion + +On line 19883: + Opinion Survey on + Bank Lending Practices, April Board + of Governors of + +On line 19883: + Lending Practices, April + Board of Governors of the + Federal Reserve + +On line 19883: + Board of Governors + of the Federal Reserve + System, Senior Loan + +On line 19883: + of the Federal + Reserve System, Senior Loan + Officer Opinion + +On line 19885: + Opinion Survey on + Bank Lending Practices, July + Emily Maltby, "Small + +On line 19885: + Bank Lending Practices, + July Emily Maltby, "Small + Biz Loan Failure Rate + +On line 19885: + Emily Maltby, "Small + Biz Loan Failure Rate Hits CNN + Money, February + +On line 19885: + Biz Loan Failure Rate + Hits CNN Money, February + "SBA Losses Climb in + +On line 19885: + Rate Hits CNN Money, + February "SBA Losses Climb + in Coleman Report + +On line 19887: + CEO, GE Capital, + testimony before the + FCIC, Hearing on the + +On line 19889: + the Shadow Banking + System, May transcript, p. GE, + Annual Report, + +On line 19891: + Banking System, May + transcript, p. GE, Annual + Report, p. Mark S. + +On line 19891: + System, May transcript, + p. GE, Annual Report, + p. Mark S. Barber, + +On line 19891: + p. Mark S. Barber, + testimony before the + FCIC, Hearing on the + +On line 19895: + International + Financial Statistics, World + Tables: Exports, World + +On line 19897: + Exports, World Exports. + Jane Levere, "Office Deals, Months + Apart, Show Market’s Move," + +On line 19897: + Jane Levere, "Office + Deals, Months Apart, Show Market’s Move," + New York Times, August + +On line 19899: + "Office Deals, Months Apart, + Show Market’s Move," New York Times, + August National + +On line 19899: + Show Market’s Move," New + York Times, August National + Association + +On line 19899: + Commercial Real + Estate Quarterly Market + Survey, December + +On line 19901: + Estate Quarterly + Market Survey, December + pp. Brian Gordon, + +On line 19901: + Applied Analysis, + testimony before the + FCIC, Hearing on the + +On line 19901: + the Impact of the + Financial Crisis—State of Nevada, + session The Impact + +On line 19901: + Financial Crisis—State of + Nevada, session The Impact + of the Financial + +On line 19901: + Nevada, session The + Impact of the Financial + Crisis on Nevada + +On line 19901: + session The Impact + of the Financial Crisis + on Nevada Real + +On line 19901: + of the Financial + Crisis on Nevada Real + Estate, September + +On line 19901: + Financial Crisis + on Nevada Real Estate, + September transcript, + +On line 19903: + Crisis on Nevada + Real Estate, September + transcript, p. Anton + +On line 19903: + on Nevada Real + Estate, September transcript, + p. Anton Troianovski, + +On line 19903: + Estate, September + transcript, p. Anton Troianovski, + "High Hopes as Builders Bet + +On line 19903: + transcript, p. Anton + Troianovski, "High Hopes as Builders Bet + on Skyscrapers," Wall Street + +On line 19903: + Troianovski, "High Hopes as + Builders Bet on Skyscrapers," Wall Street + Journal, September + +On line 19905: + Builders Bet on Skyscrapers," + Wall Street Journal, September + Ibid.; Gregory Bynum, + +On line 19905: + Ibid.; Gregory Bynum, + president, Gregory D. + Bynum Associates, Inc., + +On line 19905: + D. Bynum Associates, + Inc., testimony before + the FCIC, Hearing on + +On line 19905: + Bynum Associates, Inc., + testimony before the + FCIC, Hearing on the + +On line 19905: + Inc., testimony + before the FCIC, Hearing on + the Impact of the + +On line 19907: + Federal Deposit + Insurance Commission, "Failed + Bank List," January + +On line 19909: + Bank List," January + February Oversight Report, + "Commercial Real + +On line 19909: + February Oversight + Report, "Commercial Real + Estate Losses and + +On line 19911: + TreppWire, "CMBS Delinquency + Rate Nears Up BPs in August + after Leveling + +On line 19911: + Rate Nears Up BPs in + August after Leveling + in July, Rate Now + +On line 19911: + after Leveling + in July, Rate Now Monthly + Delinquency Report, + +On line 19913: + in July, Rate Now + Monthly Delinquency Report, + September p. Allen + +On line 19913: + Monthly Delinquency + Report, September p. Allen + Kenney, "CRE Mortgage + +On line 19913: + Delinquency Report, + September p. Allen Kenney, + "CRE Mortgage Default + +On line 19913: + September p. Allen + Kenney, "CRE Mortgage Default + Rate to Double by + +On line 19913: + Kenney, "CRE Mortgage + Default Rate to Double by + REIT.com, June See also + +On line 19915: + "CRE Mortgage Default + Rate to Double by REIT.com, June + See also "Default + +On line 19915: + Mortgage Default Rate + to Double by REIT.com, June See + also "Default Rates + +On line 19915: + Rate to Double by + REIT.com, June See also "Default + Rates Reach 16-Year High," Globe + +On line 19915: + to Double by REIT.com, + June See also "Default Rates + Reach 16-Year High," Globe St., + +On line 19917: + REIT.com, June See also + "Default Rates Reach 16-Year High," Globe + St., February Ibid. + +On line 19917: + "Default Rates Reach 16-Year + High," Globe St., February Ibid. + Green Street Advisors, + +On line 19917: + February Ibid. Green + Street Advisors, "Commercial + Property Values + +On line 19925: + Notes to Chapter "Moody’s/REAL + Commercial Property Price + Indices, December + +On line 19925: + Indices, December + Moody’s Investors Service Special + Report, December + +On line 19925: + Moody’s Investors Service + Special Report, December + Moody’s Investors Service, + +On line 19929: + Losses," February + Oversight Report, February + pp. Dr. Kenneth T. + +On line 19929: + pp. Dr. Kenneth T. + Rosen, chairman, Fisher Center + for Real Estate + +On line 19929: + Dr. Kenneth T. Rosen, + chairman, Fisher Center for + Real Estate and + +On line 19929: + Real Estate and + Economics, University + of California + +On line 19929: + in testimony + before the FCIC, First Public + Hearing of the FCIC, + +On line 19929: + the FCIC, day panel + Financial Crisis Impacts + on the Economy, + +On line 19931: + Crisis Impacts on + the Economy, January + Elizabeth McNichol, Phil + +On line 19933: + on the Impact of + the Financial Crisis—Sacramento, session + The Impact of the + +On line 19933: + the Financial Crisis—Sacramento, + session The Impact of the + Financial Crisis + +On line 19935: + September transcript, + p. Sujit CanagaRetna, interview + by FCIC, November + +On line 19937: + November McNichol, Oliff, + and Johnson, "States Continue + to Feel Recession’s + +On line 19937: + "NCSL Fiscal Brief: + Projected State Revenue Growth + in FY and Beyond," + +On line 19937: + State Revenue Growth in + FY and Beyond," National + Conference of State + +On line 19937: + in FY and Beyond," + National Conference of + State Legislatures, + +On line 19941: + Analyst’s Office, + "The Budget: California’s + Fiscal Outlook." Kaiser + +On line 19943: + the Uninsured, "Hoping + for Economic Recovery, + Preparing for Health + +On line 19943: + Medicaid Spending, + Coverage and Policy + Trends," September pp. + +On line 19945: + pp. National League + of Cities, "Recession’s Effects + Intensify in + +On line 19947: + Intensify in + Cities," October Christopher W. + Hoene and Michael A. Pagano, + +On line 19947: + October Christopher + W. Hoene and Michael A. Pagano, "City + Fiscal Conditions + +On line 19947: + W. Hoene and Michael A. + Pagano, "City Fiscal Conditions + in National League + +On line 19947: + Hoene and Michael A. Pagano, + "City Fiscal Conditions in + National League of + +On line 19949: + Fiscal Conditions + in National League of Cities, + October p. Ibid., + +On line 19951: + in National League + of Cities, October p. Ibid., + pp. Alan S. Blinder + +On line 19951: + National League of + Cities, October p. Ibid., pp. + Alan S. Blinder and + +On line 19951: + of Cities, October + p. Ibid., pp. Alan S. Blinder + and Mark Zandi, "How + +On line 19951: + Cities, October p. + Ibid., pp. Alan S. Blinder and + Mark Zandi, "How the + +On line 19951: + October p. Ibid., + pp. Alan S. Blinder and Mark + Zandi, "How the Great + +On line 19951: + p. Ibid., pp. Alan S. + Blinder and Mark Zandi, "How + the Great Recession + +On line 19951: + pp. Alan S. Blinder + and Mark Zandi, "How the Great + Recession Was Brought + +On line 19953: + Was Brought to an End," + Moody’s Analytics, July + p. Donald L. Kohn, + +On line 19953: + Brought to an End," Moody’s + Analytics, July p. + Donald L. Kohn, vice + +On line 19953: + Donald L. Kohn, vice + chairman, Federal Reserve + Board of Governors, + +On line 19953: + Actions during the + Financial Crisis and Lessons + for the Future," speech + +On line 19953: + Crisis and Lessons for + the Future," speech at Carleton + University, Ot-tawa, + +On line 19955: + for the Future," speech + at Carleton University, + Ot-tawa, Canada, May U.S. + +On line 19957: + p. Congressional + Budget Office, "Report on + the Troubled Asset + +On line 19957: + Office, "Report on + the Troubled Asset Relief + Program," November + +On line 19959: + the Troubled Asset + Relief Program," November + White House Office of + +On line 19959: + November White House + Office of Management and + Budget, FY2011 Budget + +On line 19961: + Receipts, Outlays, and + Surpluses or Deficits Total + Budget Deficit. FDIC, "Failed + +On line 19963: + Surpluses or Deficits + Total Budget Deficit. FDIC, "Failed + Bank List." "Quarterly + +On line 19963: + Total Budget Deficit. + FDIC, "Failed Bank List." "Quarterly + Banking Profile: Third + +On line 19963: + Budget Deficit. FDIC, "Failed + Bank List." "Quarterly Banking + Profile: Third Quarter + +On line 19963: + Bank List." "Quarterly + Banking Profile: Third Quarter + FDIC Quarterly no. + +On line 19965: + no. FDIC, "Quarterly + Banking Profile: First Quarter + FDIC Quarterly no. + +On line 19967: + no. and "Quarterly + Banking Profile: First Quarter + FDIC Quarterly no. + +On line 19967: + Banking Profile: First + Quarter FDIC Quarterly no. + Board of Governors + +On line 19967: + Profile: First Quarter + FDIC Quarterly no. Board of + Governors of the + +On line 19967: + FDIC Quarterly no. + Board of Governors of the + Federal Reserve + +On line 19967: + Board of Governors + of the Federal Reserve + System, Profit and + +On line 19967: + Governors of the + Federal Reserve System, + Profit and Balance + +On line 19967: + Federal Reserve + System, Profit and Balance + Sheet Developments + +On line 19967: + System, Profit and + Balance Sheet Developments + at U.S. Commercial + +On line 19967: + Profit and Balance + Sheet Developments at U.S. + Commercial Banks in + +On line 19969: + Sheet Developments + at U.S. Commercial Banks in + FDIC, Statistics on + +On line 19969: + at U.S. Commercial + Banks in FDIC, Statistics on + Depository + +On line 19969: + Income and Expense, + All Commercial Banks—Assets more than + $1B—National, Standard Report + +On line 19969: + All Commercial Banks—Assets + more than $1B—National, Standard Report + (reports issued on + +On line 19969: + more than $1B—National, Standard + Report (reports issued on + and Profit is logged + +On line 19971: + Income and Expense, + All Commercial Banks—Assets less than + $100M and Assets $100M + +On line 19971: + Commercial Banks—Assets less + than $100M and Assets $100M to + $1B; Standard Report + +On line 19971: + than $100M and Assets + $100M to $1B; Standard Report + (reports issued on + +On line 19971: + $100M to $1B; Standard + Report (reports issued on + and Profit is logged + +On line 19971: + logged as "Net income + attributable to bank." "Wall + Street Bonuses Rose Sharply + +On line 19971: + Bonuses Rose Sharply in + New York State Comptroller Thomas + P. DiNapoli press release, + +On line 19971: + Sharply in New York State + Comptroller Thomas P. DiNapoli press + release, February + +On line 19973: + Comptroller Thomas P. + DiNapoli press release, February + N.Y. State Comptroller + +On line 19973: + release, February + N.Y. State Comptroller Thomas P. + DiNapoli, "Economic Trends + +On line 19973: + Comptroller Thomas P. + DiNapoli, "Economic Trends in New + York State," October + +On line 19985: + "Economic Trends in + New York State," October Notes + to Chapter Chapter + +On line 19988: + York State," October + Notes to Chapter Chapter FCIC + calculations based + +On line 19988: + to Chapter Chapter + FCIC calculations based on + estimates from Hope + +On line 19990: + FCIC calculations + based on estimates from Hope + Now and Moodys.com. Mortgage + +On line 19990: + calculations based + on estimates from Hope Now + and Moodys.com. Mortgage Bankers + +On line 19990: + on estimates from + Hope Now and Moodys.com. Mortgage Bankers + Association + +On line 19990: + Survey (the source for + the rest of the delinquency + and foreclosure rates + +On line 19990: + for the rest of the + delinquency and foreclosure + rates in this chapter). + +On line 19992: + Gordon, Center for + Responsible Lending, "HAMP, + Servicer Abuses, and + +On line 19992: + COP Hearing on TARP + Foreclosure Mitigation + Programs, 111th Cong., 2nd + +On line 19992: + 2nd sess., October + pp. CRL testimony based + on Rod Dubitsky, + +On line 19992: + October pp. CRL + testimony based on Rod + Dubitsky, Larry + +On line 19992: + testimony based + on Rod Dubitsky, Larry + Yang, Stevan Stevanovic, + +On line 19992: + Million Foreclosures + Expected," Credit Suisse + (December and Jan + +On line 19992: + Expected," Credit + Suisse (December and Jan + Hatzius and Michael A. + +On line 19992: + Jan Hatzius and Michael + A. Marschoun, "Home Prices and Credit + Losses: Projections + +On line 19992: + and Credit Losses: + Projections and Policy + Options," Goldman Sachs + +On line 19994: + Options," Goldman Sachs + Global Economics Paper + (January p. "RealtyTrac + +On line 19994: + Global Economics + Paper (January p. "RealtyTrac + Year-End Report Shows Record + +On line 19994: + (January p. "RealtyTrac + Year-End Report Shows Record Million + U.S. Properties with + +On line 19994: + Year-End Report Shows Record + Million U.S. Properties with + Foreclosure Filings + +On line 19994: + U.S. Properties with + Foreclosure Filings in 2009—An + Increase of Percent + +On line 19994: + Foreclosure Filings + in 2009—An Increase of Percent + from and Percent from + +On line 19996: + of Percent from and + Percent from RealtyTrac, January + "Delinquencies and Loans + +On line 19996: + and Percent from RealtyTrac, + January "Delinquencies and + Loans in Foreclosure + +On line 19996: + "Delinquencies and Loans + in Foreclosure Decrease, but + Foreclosure Starts Rise + +On line 19996: + Loans in Foreclosure + Decrease, but Foreclosure Starts + Rise in Latest MBA + +On line 19996: + Foreclosure Starts Rise + in Latest MBA National + Delinquency Survey," + +On line 19998: + release, November + Mark Fleming, chief economist, + CoreLogic, testimony + +On line 19998: + chief economist, CoreLogic, + testimony before the + FCIC, Hearing on the + +On line 19998: + CoreLogic, testimony + before the FCIC, Hearing on + the Impact of the + +On line 19998: + FCIC, Hearing on the + Impact of the Financial + Crisis—Sacramento, session Overview + +On line 19998: + of the Financial + Crisis—Sacramento, session Overview of the + Sacramento Housing + +On line 19998: + Crisis—Sacramento, session Overview + of the Sacramento Housing + and Mortgage Markets + +On line 19998: + session Overview of + the Sacramento Housing and + Mortgage Markets and + +On line 19998: + of the Sacramento + Housing and Mortgage Markets + and the Impact of + +On line 19998: + the Impact of the + Financial Crisis on the + Region, September + +On line 20000: + Financial Crisis + on the Region, September + transcript, p. FCIC staff + +On line 20000: + September transcript, + p. FCIC staff estimates based + on analysis of + +On line 20002: + FCIC staff estimates + based on analysis of BlackBox + data. Laurie S. + +On line 20002: + estimates based on + analysis of BlackBox data. + Laurie S. Goodman, + +On line 20002: + analysis of BlackBox + data. Laurie S. Goodman, + senior managing + +On line 20002: + S. Goodman, senior + managing director, Amherst + Securities Group + +On line 20002: + Private Sector and + Government Response to the + Mortgage Foreclosure + +On line 20002: + Government Response + to the Mortgage Foreclosure + Crisis," 111th Cong., 1st + +On line 20004: + 1st sess., December + p. The index declined from + in April to in March + +On line 20004: + sess., December p. + The index declined from in + April to in March a + +On line 20006: + The index declined + from in April to in March a + decline of "New CoreLogic + +On line 20006: + declined from in April + to in March a decline of + "New CoreLogic Data Shows + +On line 20006: + Quarterly Decline + in Negative Equity," + CoreLogic Inc., December + +On line 20008: + the second quarter + of Jim Rokakis, treasurer of + Cuyahoga County, Ohio, + +On line 20010: + and in "Ohio County + Foreclosure Filings Cuyahoga + County," Policy + +On line 20014: + Ohio. Rokakis, interview. + The United States Conference + of Mayors, "Impact + +On line 20014: + Rokakis, interview. The + United States Conference of + Mayors, "Impact of + +On line 20014: + of Mayors, "Impact + of the Mortgage Foreclosure + Crisis on Vacant + +On line 20014: + Crisis on Vacant + and Abandoned Properties in + Cities: A 77-City Survey," + +On line 20016: + Vacant and Abandoned + Properties in Cities: A 77-City + Survey," June pp. Guy + +On line 20016: + Cities: A 77-City Survey," + June pp. Guy Cecala, prepared + testimony for + +On line 20016: + June pp. Guy Cecala, + prepared testimony for + the Congressional + +On line 20016: + COP Hearing on TARP + Foreclosure Mitigation + Programs, 111th Cong., 2nd + +On line 20018: + 2nd sess., October + p. John Taylor, interview + by FCIC, October + +On line 20024: + Jersey Housing and + Mortgage Financing Agency, + approved September + +On line 20026: + Housing and Mortgage + Financing Agency, approved + September Kirsten Keefe, + +On line 20026: + Financing Agency, + approved September Kirsten Keefe, + presentation to + +On line 20026: + approved September + Kirsten Keefe, presentation to + the meeting of the + +On line 20028: + testimony to + the Senate Committee on + Banking, Housing, and + +On line 20028: + Banking, Housing, and + Urban Affairs, Problems in + Mortgage Servicing + +On line 20028: + Mortgage Servicing + from Modification to + Foreclosure, 111th Cong., + +On line 20028: + Modification + to Foreclosure, 111th Cong., 2nd + sess., November p. + +On line 20030: + to Foreclosure, 111th + Cong., 2nd sess., November p. + See, for example, + +On line 20030: + November p. See, + for example, National + Consumer Law Center, + +On line 20030: + Consumer Law Center, + "Why Servicers Foreclose When They + Should Modify and + +On line 20030: + "Why Servicers Foreclose + When They Should Modify and + Other Puzzles of + +On line 20038: + Puzzles of Servicer + Behavior," October Notes + to Chapter Joseph H. + +On line 20038: + Notes to Chapter Joseph + H. Evers, Office of the + Comptroller of the + +On line 20038: + COP Hearing on TARP + Foreclosure Mitigation + Programs, 111th Cong., 2nd + +On line 20038: + 2nd sess., October + pp. The OCC reported that + mortgage servicers have + +On line 20038: + mortgage servicers have + modified loans since early + By the end of the + +On line 20038: + have modified loans + since early By the end of + the second quarter + +On line 20038: + modified loans since + early By the end of the + second quarter of + +On line 20038: + since early By the + end of the second quarter + of more than of the + +On line 20038: + end of the second + quarter of more than of the + modifications + +On line 20038: + quarter of more than + of the modifications + were seriously + +On line 20038: + modifications + were seriously delinquent; + were in the process of + +On line 20038: + were seriously + delinquent; were in the process of + foreclosure; and had + +On line 20038: + of foreclosure; and + had completed foreclosure. + The OCC examined + +On line 20038: + foreclosure. The OCC + examined modified loans + that were or more days + +On line 20038: + The OCC examined + modified loans that were or + more days delinquent that + +On line 20038: + that were or more days + delinquent that were modified + during the second + +On line 20038: + or more days delinquent + that were modified during + the second quarter + +On line 20038: + more days delinquent that + were modified during the + second quarter of + +On line 20038: + that were modified + during the second quarter + of to determine + +On line 20038: + modification, + of loans were delinquent by two + or more months; at nine + +On line 20038: + delinquent by two or + more months; at nine months after + modification, + +On line 20038: + more months; at nine months + after modification, + were in arrears; at + +On line 20038: + at nine months after + modification, were in + arrears; at six months, + +On line 20038: + in arrears; at six + months, and at three months after + a loan change, nearly + +On line 20038: + arrears; at six months, + and at three months after a + loan change, nearly were + +On line 20038: + at six months, and at + three months after a loan change, + nearly were delinquent. + +On line 20038: + months, and at three months + after a loan change, nearly + were delinquent. The OCC + +On line 20038: + three months after a + loan change, nearly were delinquent. + The OCC noted that + +On line 20038: + months after a loan + change, nearly were delinquent. The + OCC noted that more + +On line 20038: + OCC noted that more + recent modifications + have performed better + +On line 20042: + COP Hearing on TARP + Foreclosure Mitigation + Programs, 111th Cong., 2nd + +On line 20044: + Programs, 111th Cong., 2nd + sess., October p. David J. + Grais, partner with Grais + +On line 20044: + sess., October p. + David J. Grais, partner with Grais + Ellsworth LLP, interview + +On line 20044: + October p. David + J. Grais, partner with Grais Ellsworth + LLP, interview by + +On line 20044: + David J. Grais, partner + with Grais Ellsworth LLP, interview + by FCIC, November + +On line 20046: + interview by FCIC, + November Calculation + by Laurie Goodman, + +On line 20046: + Amherst Securities. + See PowerPoint presentation to + the Grais and Ellsworth LLP + +On line 20046: + the Grais and Ellsworth LLP + conference "Robosigners and + Other Servicing + +On line 20046: + Servicing Failures: + Protecting the Rights of RMBS + Investors," October + +On line 20050: + Investors," October + (http://video.remotecounsel.com/ + mediasite/Viewer/1peid=12e6411377a744b9a9f2eefd1093871c1d). Grais, interview. + +On line 20054: + Financial Services + Committee, December See + Deposition of + +On line 20054: + See Deposition + of Jeffrey Stephan, GMAC Mortgage + LLC v. Ann M. Neu + +On line 20054: + Deposition of + Jeffrey Stephan, GMAC Mortgage LLC + v. Ann M. Neu a/k/a + +On line 20054: + of Jeffrey Stephan, GMAC + Mortgage LLC v. Ann M. Neu + a/k/a Ann Michelle Perez, No. + +On line 20054: + Stephan, GMAC Mortgage LLC + v. Ann M. Neu a/k/a Ann Michelle + Perez, No. CA040805XXXX MB (Fla. + +On line 20054: + GMAC Mortgage LLC v. + Ann M. Neu a/k/a Ann Michelle Perez, + No. CA040805XXXX MB (Fla. Cir. + +On line 20054: + Mortgage LLC v. Ann + M. Neu a/k/a Ann Michelle Perez, No. + CA040805XXXX MB (Fla. Cir. Ct. + +On line 20054: + LLC v. Ann M. Neu + a/k/a Ann Michelle Perez, No. CA040805XXXX MB + (Fla. Cir. Ct. Dec. pp. + +On line 20056: + v. Ann M. Neu a/k/a + Ann Michelle Perez, No. CA040805XXXX MB (Fla. + Cir. Ct. Dec. pp. See, + +On line 20056: + Ann M. Neu a/k/a Ann + Michelle Perez, No. CA040805XXXX MB (Fla. Cir. + Ct. Dec. pp. See, for + +On line 20056: + a/k/a Ann Michelle Perez, No. + CA040805XXXX MB (Fla. Cir. Ct. Dec. pp. + See, for example, + +On line 20056: + Ann Michelle Perez, No. CA040805XXXX + MB (Fla. Cir. Ct. Dec. pp. See, + for example, Dwayne + +On line 20056: + CA040805XXXX MB (Fla. Cir. Ct. + Dec. pp. See, for example, + Dwayne Ransom Davis and + +On line 20056: + MB (Fla. Cir. Ct. Dec. + pp. See, for example, Dwayne + Ransom Davis and Melisa + +On line 20056: + Cir. Ct. Dec. pp. See, + for example, Dwayne Ransom + Davis and Melisa Davis v. + +On line 20056: + See, for example, + Dwayne Ransom Davis and Melisa Davis + v. Countrywide Home + +On line 20056: + for example, Dwayne + Ransom Davis and Melisa Davis v. + Countrywide Home Loans, + +On line 20056: + Davis and Melisa Davis v. + Countrywide Home Loans, Inc.; Bank + of America, N.A.; + +On line 20056: + v. Countrywide Home + Loans, Inc.; Bank of America, + N.A.; BAC GP LLC; and + +On line 20056: + Countrywide Home Loans, + Inc.; Bank of America, N.A.; + BAC GP LLC; and BAC + +On line 20056: + Bank of America, + N.A.; BAC GP LLC; and BAC Home + Loans Servicing, LP, + +On line 20056: + of America, N.A.; + BAC GP LLC; and BAC Home Loans + Servicing, LP, 1:10-cv-01303-JMS-DML + +On line 20058: + BAC GP LLC; and BAC + Home Loans Servicing, LP, 1:10-cv-01303-JMS-DML + (S.D. Ind. October + +On line 20062: + Stability and + Foreclosure Mitigation," + November p. See, + +On line 20062: + p. See, e.g., Mortg. Elec. + Registry Sys. v. Johnston, No. + 420-6-09 Rdcv (Rutland + +On line 20064: + Rdcv (Rutland Co. + Vt. Super. Ct. Oct. holding + that MERS did not have + +On line 20064: + did not have standing + to initiate foreclosure + because the note and + +On line 20066: + foreclosure because + the note and mortgage had been + separated. The + +On line 20066: + the note and mortgage + had been separated. The + Honorable F. Dana + +On line 20066: + F. Dana Winslow, written + testimony before the + House Committee on + +On line 20066: + House Committee on + the Judiciary, Foreclosed + Justice: Causes and + +On line 20066: + Justice: Causes and + Effects of the Foreclosure + Crisis, 111th Cong., 2nd + +On line 20066: + and Effects of the + Foreclosure Crisis, 111th Cong., + 2nd sess., December + +On line 20068: + Crisis, 111th Cong., 2nd + sess., December pp. Order, + Objection to Claims + +On line 20068: + 2nd sess., December + pp. Order, Objection to + Claims of Citibank, N.A. 4-6-10, + +On line 20068: + sess., December pp. + Order, Objection to Claims + of Citibank, N.A. 4-6-10, (Bankr. + +On line 20068: + Order, Objection + to Claims of Citibank, N.A. 4-6-10, (Bankr. + E.D. Cal. May p. The + +On line 20068: + Objection to Claims + of Citibank, N.A. 4-6-10, (Bankr. E.D. Cal. + May p. The order + +On line 20068: + to Claims of Citibank, N.A. + 4-6-10, (Bankr. E.D. Cal. May p. The + order cites In re + +On line 20068: + Citibank, N.A. 4-6-10, (Bankr. E.D. + Cal. May p. The order cites + In re Foreclosure + +On line 20068: + 4-6-10, (Bankr. E.D. Cal. May + p. The order cites In re + Foreclosure Cases, + +On line 20068: + p. The order cites + In re Foreclosure Cases, + F. Supp. 2d (S.D. Oh. + +On line 20068: + The order cites In + re Foreclosure Cases, F. + Supp. 2d (S.D. Oh. In + +On line 20068: + order cites In re + Foreclosure Cases, F. Supp. + 2d (S.D. Oh. In re + +On line 20068: + In re Foreclosure + Cases, F. Supp. 2d (S.D. Oh. + In re Vargas, B.R. + +On line 20070: + Foreclosure Cases, + F. Supp. 2d (S.D. Oh. In re + Vargas, B.R. (Bankr. C.D. + +On line 20070: + Cases, F. Supp. 2d + (S.D. Oh. In re Vargas, B.R. + (Bankr. C.D. Cal. Landmark + +On line 20070: + F. Supp. 2d (S.D. Oh. + In re Vargas, B.R. (Bankr. C.D. + Cal. Landmark Nat’l Bank + +On line 20070: + Supp. 2d (S.D. Oh. In + re Vargas, B.R. (Bankr. C.D. Cal. + Landmark Nat’l Bank v. + +On line 20070: + Oh. In re Vargas, + B.R. (Bankr. C.D. Cal. Landmark Nat’l + Bank v. Kesler, P.3d (Kan. + +On line 20070: + In re Vargas, B.R. + (Bankr. C.D. Cal. Landmark Nat’l Bank + v. Kesler, P.3d (Kan. LaSalle + +On line 20070: + re Vargas, B.R. (Bankr. + C.D. Cal. Landmark Nat’l Bank v. + Kesler, P.3d (Kan. LaSalle Bank + +On line 20070: + Vargas, B.R. (Bankr. C.D. + Cal. Landmark Nat’l Bank v. Kesler, + P.3d (Kan. LaSalle Bank v. + +On line 20070: + (Bankr. C.D. Cal. Landmark + Nat’l Bank v. Kesler, P.3d (Kan. LaSalle + Bank v. Lamy, N.Y.S.2d (N.Y. + +On line 20070: + C.D. Cal. Landmark Nat’l + Bank v. Kesler, P.3d (Kan. LaSalle Bank + v. Lamy, N.Y.S.2d (N.Y. Sup. + +On line 20070: + Cal. Landmark Nat’l Bank + v. Kesler, P.3d (Kan. LaSalle Bank v. + Lamy, N.Y.S.2d (N.Y. Sup. Ct. + +On line 20072: + Landmark Nat’l Bank v. + Kesler, P.3d (Kan. LaSalle Bank v. Lamy, + N.Y.S.2d (N.Y. Sup. Ct. Winslow, + +On line 20072: + Nat’l Bank v. Kesler, P.3d + (Kan. LaSalle Bank v. Lamy, N.Y.S.2d (N.Y. + Sup. Ct. Winslow, written + +On line 20072: + Sup. Ct. Winslow, written + testimony before the + House Committee on + +On line 20074: + the House Committee + on the Judiciary, pp. + See John T. Kemp v. + +On line 20074: + pp. See John T. Kemp + v. Countrywide Home Loans, Inc., + Case No. 08-18700-JHW (D. N.J.), + +On line 20074: + See John T. Kemp v. + Countrywide Home Loans, Inc., Case + No. 08-18700-JHW (D. N.J.), pp. + +On line 20076: + v. Countrywide Home + Loans, Inc., Case No. 08-18700-JHW (D. N.J.), + pp. Grais, interview. + +On line 20078: + Countrywide Home Loans, + Inc., Case No. 08-18700-JHW (D. N.J.), pp. + Grais, interview. Adam + +On line 20078: + Case No. 08-18700-JHW (D. N.J.), + pp. Grais, interview. Adam J. + Levitin, associate + +On line 20078: + pp. Grais, interview. + Adam J. Levitin, associate + professor of law, + +On line 20078: + Levitin, associate + professor of law, Georgetown + University Law + +On line 20078: + University Law + Center, testimony to + Senate Committee + +On line 20078: + Banking, Housing, and + Urban Affairs, Problems in + Mortgage Servicing + +On line 20078: + Mortgage Servicing + from Modification to + Foreclosure, 111th Cong., + +On line 20078: + Modification + to Foreclosure, 111th Cong., 2nd + sess., November p. + +On line 20080: + 2nd sess., November + p. Congressional Oversight + Panel, "November + +On line 20080: + p. Congressional + Oversight Panel, "November + Oversight Report," pp. + +On line 20082: + Panel, "November + Oversight Report," pp. Katherine + Porter, professor of + +On line 20082: + Oversight Report," pp. + Katherine Porter, professor of + law, University + +On line 20084: + COP Hearing on TARP + Foreclosure Mitigation + Programs, October + +On line 20086: + p. Levitin, written + testimony before the + Senate Committee + +On line 20088: + Banking, Housing, and + Urban Affairs, p. Erika + Poethig, written + +On line 20088: + Urban Affairs, p. + Erika Poethig, written + testimony for + +On line 20088: + Poethig, written + testimony for the House + Subcommittee on + +On line 20088: + Subcommittee on + Housing and Community + Opportunity, + +On line 20088: + and Community + Opportunity, Impact + of the Foreclosure + +On line 20088: + Opportunity, + Impact of the Foreclosure + Crisis on Public + +On line 20088: + Foreclosure Crisis + on Public and Affordable + Housing in the Twin + +On line 20088: + Crisis on Public + and Affordable Housing in + the Twin Cities, 111th Cong., + +On line 20088: + Affordable Housing + in the Twin Cities, 111th Cong., 2nd + sess., January p. + +On line 20096: + Twin Cities, 111th Cong., 2nd + sess., January p. Notes to + Chapter National + +On line 20096: + sess., January p. + Notes to Chapter National + Association + +On line 20096: + Chapter National + Association for the + Education of + +On line 20096: + Association + for the Education of + Homeless Children and + +On line 20096: + and Youth (NAEHCY) and + First Focus, "A Critical + Moment: Child and Youth + +On line 20096: + and First Focus, "A + Critical Moment: Child and + Youth Homelessness in + +On line 20096: + Moment: Child and Youth + Homelessness in Our Nation’s + Schools," July p. In + +On line 20096: + Youth Homelessness in + Our Nation’s Schools," July p. + In early NAEHCY + +On line 20096: + Homelessness in Our + Nation’s Schools," July p. In + early NAEHCY and + +On line 20096: + In early NAEHCY + and First Focus conducted + a survey of school + +On line 20096: + Focus conducted + a survey of school districts. + When they were asked the + +On line 20096: + school districts. When they + were asked the reasons for the + increased enrollment + +On line 20096: + economic downturn, + attributed it to greater school + and community + +On line 20098: + Dr. Heath Morrison, + testimony before the + FCIC, Hearing on the + +On line 20100: + on the Impact of + the Financial Crisis— State + of Nevada, session + +On line 20100: + the Impact of the + Financial Crisis— State of + Nevada, session The + +On line 20100: + Nevada, session The + Impact of the Financial + Crisis on Nevada + +On line 20100: + session The Impact + of the Financial Crisis + on Nevada Public + +On line 20100: + of the Financial + Crisis on Nevada Public + and Community + +On line 20100: + Crisis on Nevada + Public and Community + Services, September + +On line 20100: + on Nevada Public + and Community Services, + September transcript, + +On line 20102: + transcript, pp. Gail Burks, + testimony before the + FCIC, Hearing on the + +On line 20102: + Burks, testimony + before the FCIC, Hearing on + the Impact of the + +On line 20102: + the Impact of the + Financial Crisis—State of Nevada, + session The Impact + +On line 20102: + Financial Crisis—State of + Nevada, session The Impact + of the Financial + +On line 20102: + Nevada, session The + Impact of the Financial + Crisis on Nevada + +On line 20102: + session The Impact + of the Financial Crisis + on Nevada Real + +On line 20102: + of the Financial + Crisis on Nevada Real + Estate, September + +On line 20102: + Financial Crisis + on Nevada Real Estate, + September transcript, + +On line 20104: + Crisis on Nevada + Real Estate, September + transcript, pp. Karen Mann, + +On line 20104: + September transcript, + pp. Karen Mann, president and + chief appraiser, Mann + +On line 20104: + Karen Mann, president + and chief appraiser, Mann and + Associates Real + +On line 20104: + and chief appraiser, + Mann and Associates Real + Estate Appraisers + +On line 20104: + Mann and Associates + Real Estate Appraisers + Consultants, written + +On line 20104: + FCIC, Hearing on the + Impact of the Financial + Crisis—Sacramento, session Mortgage + +On line 20104: + Fraud and Predatory + Lending in the Sacramento + Region, September + +On line 20104: + Predatory Lending + in the Sacramento Region, + September p. oral + +On line 20104: + in the Sacramento + Region, September p. oral + testimony, p. + +On line 20106: + Region, September + p. oral testimony, p. + Dawn Hunt, homeowner + +On line 20106: + September p. oral + testimony, p. Dawn Hunt, + homeowner in Cape + +On line 20106: + testimony, p. + Dawn Hunt, homeowner in Cape + Coral, FL, interview + +On line 20106: + Dawn Hunt, homeowner + in Cape Coral, FL, interview + by FCIC, December + +On line 20108: + Hunt, homeowner in + Cape Coral, FL, interview by + FCIC, December Zip + +On line 20108: + homeowner in Cape + Coral, FL, interview by FCIC, + December Zip code + +On line 20108: + Coral, FL, interview + by FCIC, December Zip code + default, foreclosures + +On line 20108: + interview by FCIC, + December Zip code default, + foreclosures and REO, + +On line 20108: + by FCIC, December + Zip code default, foreclosures + and REO, S&P Global + +On line 20108: + December Zip code + default, foreclosures and REO, + S&P Global Data + +On line 20116: + RMBS database, July + Hunt, interview. 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